The ghost in the recovery machine, by Robert J Shiller, Commentary, Project Syndicate: The International Monetary Fund’s October World Economic Outlook proclaimed that, “Strong public policies have fostered a rebound of industrial production, world trade, and retail sales”. The IMF, along with many national leaders, seem ready to give full credit to these policies for engineering what might be the end of the global economic recession.
National leaders and international organisations do deserve substantial credit... But one also suspects that world leaders have been too quick to claim so much credit for their policies. After all, recessions generally tend to come to an end on their own, even before there were government stabilisation policies. ...
Economic theorists long ago developed models that describe how recessions end on their own. ... Some of these factors, rather than just the actions taken by governments and multilateral organisations, plausibly played a role in the current economic improvement. Unpredictable human psychology also plays a role. Such factors, indeed, matter very much for the economic outlook, and for judging the success of the recovery programme.
One can start with the stock-market turnaround since March of this year, which has been stunning. ... Moreover, this same sharp turnaround occurred in many countries – and for many assets, including oil prices, gold, and, in some countries, residential real estate.
Any solid understanding of the causes of this turnaround is likely to prove elusive. ... A market boom, once started, can continue for a while as a sort of social epidemic, and can foster inspiring “new era” stories that are spread by news media and word of mouth. The stories themselves help magnify the boom, becoming part of the feedback that sustains it.
The agreements reached at recent G-20 meetings stand as one of these stories, for they suggest a new era of international co-operation and economic professionalism – a narrative that has probably been exaggerated in the psychology of recovery.
The G-20 story is particularly salient in the developing world, for the international recognition that the G-20’s expanded role has given to developing countries is highly resonant psychologically.
Beyond that, stories of highly profitable banks paying huge bonuses to their executives have also inspired people to think that things are not so bad in the business world. Anger at these profits and bonuses only tends to increase the contagion of the story.
But any such speculative boom is inherently unstable... It was, in fact, an excessive speculative boom in the stock market and the housing market that got us into this financial mess in the first place.
To be sure, governments and multilateral institutions made some reasonable attempts to restore confidence. But they did not “engineer” a recovery. They got lucky, and the G-20, as well as the governments that instituted stimulus packages, are currently in a honeymoon period of apparent success.
Where our still-ailing world economy goes from here is as uncertain as the speculative markets that played such an important role in both the financial crisis and the recovery. We can only wish that formulating economic policy were as clear-cut as, say, mechanical engineering. It is not: a host of poorly understood natural cyclical factors play a role, and so do the vagaries of human psychology.
He may not want to give much credit to policy, but I would not have wanted to go through this crisis without the aggressive monetary and fiscal policy measures that policymakers put into place (and given the state of the labor market, even more was and is needed).