Sunday, June 29, 2008
Robert Shiller opines on the impact of the current economic stimulus and the likelihood that more, perhaps much more, stimulus will be needed in this NY Times op-ed piece:
Fuzzy as this picture may seem, there is unfortunately even more uncertainty about the rebates’ effects. Much of the recent dynamics of the economy are not captured in Keynes’s theory, in Fair’s Model, or in any conventional econometric model.For all his wisdom as a courageous lone voice of reason while the late, great housing bubble was still inflating, often times it's easy to forget that Dr. Shiller is, after all, an economist.
For example, these models have not taken account of the reasons for the peculiar lending dynamics in the subprime mortgage market, or of the state of financial institutions’ balance sheets and the confidence that the public has in these institutions. Nor have they taken account of the vagaries of speculative asset markets, mistakes by securities rating agencies and the problems of bond insurers.
THE economy is too complex to capture all these things in any single model. In trying to steer the economy, we are necessarily trying to steer something we don’t properly understand.
We simply do not have the means to quantify all the issues related to the rebates. But the models we do have suggest that the overall effects of the rebates are modest at best.
The reality of the subprime situation, augmented by the energy crisis, at least suggests that we’d better get ready for another round of rebates. There is little talk of it now, but we should be putting in place another stimulus package like the current one, and stand ready for another after that, and another.
As such, his view that better models might enable Keynesian remedies to not only cure the economy's current ills but to perpetuate life as we know it for generations to come, when there is ample evidence that the wheels are now in the process of falling off, is, at best, conventional and optimistic.
At worst, this view is naive.
This week's cartoon from The Economist: