Professor Robert Shiller: 


Economics and management


Won a Nobel Prize in 2013

Explaining for us

Current economic and financial outlook


“People are driven by talk, narratives, stories. And they don’t look at data independently.”


The Politic: Professor Shiller, thank you very much for taking the time. I’d like to begin by asking a very general question about the U.S. economy. Do you find that the U.S. economy currently is strong, and to what extent can the current administration and President Trump take credit for that? 

Robert Shiller: People often like to use medical analogies. When you ask is the economy strong, I would ask, “Is it serving different interests well?” It’s not necessarily summarized by one word, “strong.”

But it is true, that the usual measure of strength, which is GDP growth, is improving. I think that are problems going forward. Demographically, we have a lot of baby boomers retiring, so it’s not going to be super high GDP growth rates. I think the economy is serving people better and better. We are healthy, we have fun. As long as nothing disrupts that, we are fine. America is already great, we don’t need to be made great again.

As for recent political initiatives, are there any particular initiatives that you think [allow President Trump to take some credit] for the present state of the U.S. economy? Or is that too early to tell?

I think that there’s so many different perspectives. Trump likes to describe his success in terms of the stock market, because that’s gone up. That’s a very unreliable measure of economic success. And even if you do use that, most of the increases of stock prices since 2008, or 2009 when Obama took office, were under Obama.

It’s possible that he would have a good effect, though, by establishing a pro-business atmosphere. It might inspire people to go into business more. Again, what does that mean for the welfare of everyone? It’s hard to say. But I don’t want to write him off—he’s one of the rare breed of business-oriented presidents. And it might—let’s hope—it might work out well.

Speaking of the stock market, early [in February], the U.S. stock market, as well as other international markets, saw one of the most turbulent weeks in years. Naturally, there’s a lot of discussion of what the contributing factors were. Are there any underlying issues that you find worrisome on the longer term?

I believe that the general public—I should say “I know,” I do questionnaire survey data—the general public thinks the market is highly priced. Just as they also did in the year 2000, when there was a major peak in the market. So, I think also that the market is highly priced. So, there is a chance that there’ll be a turning point.

One way of interpreting what happened between January and February, early February of 2018, is that the market—when people were noticing a decline in the market, and some of them thinking, “This is it, the public is finally waking up to the overpricing, so I better get out.” On the other hand, other people were thinking “this is a buying opportunity.“ And it’s kind of a tug-of-war between those, and this time it has been coming back up. But I think that any event like that leaves scars on the psych—here, I’m giving a medical analogy—but people are a little shaken by that.

The bizarre thing about the stock mark is: “What drives it?” The fundamental driver is, “What do I think that other people are thinking?” And, if I think that other people are coming into the market, I want to come in ahead, before them. It’s like cutting in ahead in a line, somewhere. People love the opportunity to do that. Especially on big days, like we saw between the end of January, early February of 2018.

What aspects of the current economic and financial landscape do you think receives too little attention in comparison to how important it is? And conversely, what do you think receives too much attention?

That’s a good question. I’m writing a book right now called Narrative Economics. The theme of my book will be—in another year or so, when it comes out—that people are driven by talk, narratives, stories. And they don’t look at data independently; they don’t. Most people. They just listen to “what’s the story now.” And it seems to me they ignore some really important things and focus on things that were put before them by news media that were trying to stimulate their excitement and boost their news sales.

So, things that are really important are ignored. I give examples that seem oddly, to me, important. We have inflation-indexed bonds that promise a real payment. But there’s no talk, hardly any talk of them. If you’re investing for the long term, you might want to guarantee the real value of your investment. We could—you never know—we could get some crazy Federal Reserve Board that would make inflation really high and would wipe out the value of your debt. Nobody thinks about that. The problem is solved: you just buy inflation-indexed debt. It’s not talked about.

Another that is personally important to me is that there’s no real futures market for the biggest asset class of all, which is real estate. I worked with the Chicago Mercantile Exchange, in 2006, to set up a futures market for single family homes, based on the Case-Shiller, S&P CoreLogic Case-Shiller Home Price Indices, and they’ve been going now for a dozen years. But not much talk. And recently, they’ve been right, they’ve been forecasting increases in home-prices ever since 2012, and they have been right on track.

So why don’t people look at them, why don’t people hedge the value of their homes? Why don’t builders hedge, when they are building properties, against a downturn in the housing market? That’s another example that there’s just no narrative, no popular narrative, about these markets that are important. And it’s all focused on the stock market.

Incidentally, it wasn’t always like that either. The stock market became the narrative in 1929. Remember what happened in 1929? That is given really exaggerated importance in the national and international narrative. Everyone in the world knows about 1929. It’s that important. It’s only important because other people think it’s important. It’s in the narrative because you have heard other people talk about it, you assume that it’s important again.

Interesting. One issue—that one could worry would be crowded out by these more popular narratives—is the issue of regulation. And we now have the 2007-2008 crisis almost a decade behind us. What were the most welcome political and institutional changes that arose? Are we seeing retrenchment that worries you? And what are the areas where there is still the most to be desired?

Well, there are so many changes that have been made. Generally, for the good, in response. The Dodd-Frank Act, for example. But the Dodd-Frank Act, in its printed version, is over 800 pages long. And it’s not complete, a lot of what it did was call for studies and regulatory response. So, look, it’s very difficult to summarize.

But I’ll give you some examples of things that happened since the financial crisis that interest me. One of them is in the UK. Prime Minister [David] Cameron set up the Behavioral Insights Team, which tried to bring behavioral insights into public policy. They were nicknamed the “Nudge Unit.”

Then, President Obama did that, too. It was called the Social and Behavioral Sciences Team in the Obama administration. And they did a number of things to encourage people to make the right decisions, “nudge” them to make the right decisions. Under Trump, gone.

Also, in the UK, the Behavioral Insights Team was privatized. Maybe it’s still running, but it’s not officially a part of the government. So, it’s not been a uniform improvement. Another example is the Consumer Financial Protection Bureau that was started with Elizabeth Warren’s impetus, started again at the time of Dodd-Frank. Now, President Trump is starting to short-change the organization, it’s not going to be what it was before.