‘Raise people’s morale to improve economy’

April 2nd, 2009 - 1:39 pm ICT by IANS  

Lehman Brothers Toronto, April 2 (IANS) Governments should work more on raising people’s morale rather than relying on stimulus packages, says world renowned economist and Yale University professor Robert Shiller.
“Governments are the most important (agent) to do that. The problem is they have to do it in a consistent way without over-stimulating optimism,” said Shiller during a weekend business lecture at Canada’s University of Western Ontario.

Rated among the top 100 economists in the world, Schiller said if people can be made believe that there is an end to the current economic situation, rather than being overwhelmed by the magnitude of it, the communal psyche will improve and the economy will rebound.

Speaking on the theme of “Animal Spirits: How Human Psychology caused the Current Economic Crisis,” Shiller said businesses are reacting to the financial crisis with layoffs, hiring freezes and spending cuts.

This has dampened what he called “animal spirits” among consumers.

“Animal spirits, we think, is the big driver of the economy, maybe responsible for most of the fluctuations that we see,” he said.

Unlike most economists who link the current crisis to decisions of investment banks, Schiller said that “economies are driven by (people’s) stories.”

Explaining this, he said most people do not even know about banks like Bear Stearns and Lehman Brothers whose collapse triggered the current crisis.

But when “your neighbour just lost his job and they are closing the factory down, there is a switch in your mind that gets turned on that ‘hey these are bad times.’

“When lots of people make that switch, it becomes a self-fulfilling prophecy,” leading to the kind of the crisis the world is witnessing now, he said.

This self-fulfilling prophesy, he added, has contributed to personal spending cuts, investment withdrawals and fretting about the economic future.

But “we just really don’t know the future. There are a lot of people pretending to know the future and they make careers of pretending to do that, but you know they are show people. Nobody knows,” he said.

With people hoping no silver lining in the current crisis and businesses struggling to survive, the only way to turn the tide is for governments to increase people’s morale, he said.

“I am worried about this crisis and I think we can do something about it…(but) it is going to take a long time,” he said, adding that it will take five to ten years of legal work to fix regulatory mechanisms and the vulnerability of the economy.

Known for incisive economic forecasts, Shiller had brought out his bestselling book “Irrational Exuberance” about speculative bubbles just before the March 2000 dot.com burst.

In the second edition of the book in 2005, he had warned about the American real estate bubble bursting any time and triggering a financial crisis.

Last month, Schiller published his new book “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” with Nobel Prize winner George Akerlof.

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