Robert Shiller's Wacky Spending Recommendation

Last Tuesday's Wall Street Journal featured an editorial by Yale economist Robert Shiller entitled, "Animal Spirits Depend on Trust." It may well be the wackiest, nuttiest piece yet in defense of the pork-laden "stimulus" bill now rolling through the Democratic-controlled Congress.

Shiller begins by stating,

"President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen."

It's hard to believe that anyone could criticize this massive spending bill as being too small. But Shiller does just that. In order to justify his premise, Shiller then launches into a refresher on- what else- Keynesian economics. Referring to Keynes major work, The General Theory ..., Shiller writes,

"But lost in the economics textbooks, and all but lost in the thousands of pages of the technical economics literature, is this other message of Keynes regarding why the economy fluctuates as much as it does. Animal spirits offer an explanation for why we get into recessions in the first place -- for why the economy fluctuates as it does. It also gives some hints regarding what we need to do now to get out of the current crisis.

A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey the message that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people's somewhat rash, impulsive decision-making is not discovered."

What Shiller fails to note is that nobody has ever demonstrated that artificial, government-funded spending of a specialized or short-term nature, can restore 'animal spirits.' I would venture to suggest that only private capital can do that. As I wrote here recently, Paul Samuelson's genius in devising the accelerator-multiplier theory was recognizing what natural rhythms of economic cycles must occur, and how, for growth to return to an economy.

Never the less, Shiller continues,

"The danger at this point is that if the actions we take are not aggressive enough to have a substantial, visible impact on the economy, then confidence will continue to plummet. The Obama administration estimated its initial $775 billion stimulus package would shave about 1.8% off the unemployment rate from what it would otherwise be. Even so, by the time any package takes full effect the unemployment rate may be substantially higher than it is today.

So what must we do to revive our animal spirits and economic growth? We must be certain that programs to solve the current financial and economic crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal that is currently on the table, government action is also needed to take the place of the credit markets that seemingly worked so well when animal spirits were high. The Treasury and the Federal Reserve not only need a fiscal target, they also need a credit target. This should not be a dollar number, but rather a target for how the credit markets should behave. The goal should be that those who would normally receive credit in times of full employment can once again find it easy to do so, at rates with realistic risk premiums."

Surely, this is very scary stuff. Can you imagine the mediocre civil servants at Treasury setting 'credit targets?' My God! This is sounding like the last Soviet 7-year plan.

Rather than such meddling in capital markets raising public confidence, it almost certainly will destroy such confidence. The current, badly-implemented and conceived TARP program, which, by the way, Shiller lauds, has caused investors to step back from bank equities, since it's not clear what will happen next with Federal intervention.

Shiller concludes his loopy editorial with this stunning piece of advice,

"In due course our animal spirits will once again turn positive, but we would rather that happen this year or the next rather than five or 10 years from now. There is only one way to speed this process: greatly expand governmental support of credit markets and pass a much larger fiscal stimulus plan than is now proposed."

Honestly, it's hard to believe someone stupid enough to write this is a professor at any major US university. If pulling out of recessions were really as simple as government spending a few hundred billions, we'd have done that in the past, and could point to it as a success.

But you can't. Because it has never happened. Economic cycles have to wait for those 'animal spirits' which so fascinated Keynes to naturally recover. Not be fooled by some trumped-up government printing press activity.

In the current situation, what we would see, were Shiller's raving to be implemented, is much higher inflation and interest rates, as buyers of US dollars and Treasuries correctly viewed the implicit devaluation of US government dollar-denominated obligations.

Let's hope nobody takes Shiller seriously, and that he visits his university's medical center to get the appropriate medication that will control this type of lunacy in the future.