Sun, Mar 23, 2014 - Page 9 News List

The global economy’s story risks

The impact of positive economy-related narratives can shape people’s confidence, thinking and behavior

By Robert Shiller

Illustration: June Hsu

Fluctuations in the world’s economies are largely due to the stories we hear and tell about them. These popular, emotionally relevant narratives sometimes inspire us to go out and spend, start businesses, build new factories and office buildings, and hire employees; at other times, they put fear in our hearts and impel us to sit tight, save our resources, curtail spending and reduce risk. They either stimulate our “animal spirits” or muffle them.

Visiting Japan on a speaking tour, I am struck by the positive impact of the economy-related stories on people’s thinking and behavior, and also by how fragile that change is.

Since Japanese Prime Minister Shinzo Abe assumed office in December 2012 and launched his program of monetary and fiscal stimulus and structural reform, the impact on Japanese confidence has been profound.

According to the IMF, the output gap — the difference between actual and potential GDP — narrowed from minus-3.6 percent in 2011 to minus-0.9 percent last year.

Most of the rest of the world lacks a comprehensive, easily understood narrative of positive change similar to Japan’s “Abenomics.” The output gap for the world’s major advanced economies, as calculated by the IMF, remains disappointing, at minus-3.2 percent last year, which is less than half-way back to normal from 2009, the worst year of the global financial crisis, when the gap was minus-5.3 percent.

We seem to be at the mercy of our narratives. Ever since 2009, most of us have just been waiting for some story to turn our hearts aglow with hope and confidence — and to reinvigorate our economies.

Think of the story of the real-estate boom in the US and other countries in the first half of the 2000s. This was a story not of a “bubble;” rather, the boom was a triumph of capitalist enterprise in a new millennium.

These stories were so powerful because a huge number of people were psychologically — and financially — invested in them.

Most families owned a house, so they were automatically participating in the boom. Many homeowners, eager to participate even more in the boom and feel like savvy capitalists, bought more expensive houses than they normally would.

With the abrupt end of the boom in 2006, that ego-boosting story also ended. We were not all investing geniuses after all. It was just a bubble, we learned. Our confidence in ourselves, and hence in our futures, took a hit, discouraging economic risk-taking.

Then the financial crisis erupted, scaring the entire world. A story of opportunity and riches turned into one of corrupt mortgage lenders, overleveraged financial institutions, dim-witted experts and captured regulators.

The economy was careening like a rudderless ship, and the sharp operators who had duped us into getting on board — call them the 1 percent — were slipping away in the only lifeboats.

By early 2009, the plunge in stock markets around the world reached its nadir, and fear of a deep depression, the University of Michigan Consumer Sentiment Survey said, was at its highest level since the second oil crisis in the early 1980s.

Stories of the Great Depression of the 1930s were recalled from our dimmest memories — or from our parents’ and grandparents’ memories — and retold.

To understand why economic recovery (if not that of the stock market) has remained so weak since 2009, we need to identify which stories have been affecting popular psychology.

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