Robert J. Shiller: Can Talk of a Depression Lead to One?

Roundup: Historians' Take

[Robert J. Shiller is professor of economics at Yale and chief economist at MacroMarkets LLC. He and George A. Akerlof are the authors of “Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism” (Princeton University Press).]

PEOPLE everywhere are talking about the Great Depression, which followed the October 1929 stock market crash and lasted until the United States entered World War II. It is a vivid story of year upon year of despair.

This Depression narrative, however, is not merely a story about the past: It has started to inform our current expectations.

According to the Reuters-University of Michigan Survey of Consumers earlier this month, nearly two-thirds of consumers expected that the present downturn would last for five more years. President Obama, in his first press conference, evoked the Depression in warning of a “negative spiral” that “becomes difficult for us to get out of” and suggested the possibility of a “lost decade,” as in Japan in the 1990s.

He said Congress needed to pass an economic stimulus package — as it ultimately did — to prevent this calamity.

The attention paid to the Depression story may seem a logical consequence of our economic situation. But the retelling, in fact, is a cause of the current situation — because the Great Depression serves as a model for our expectations, damping what John Maynard Keynes called our “animal spirits,” reducing consumers’ willingness to spend and businesses’ willingness to hire and expand. The Depression narrative could easily end up as a self-fulfilling prophecy.

The popular response to vivid accounts of past depressions is partly psychological, but it has a rational base. We have to look at past episodes because economic theory, lacking the physical constants of the hard sciences, has never offered a complete account of the mechanics of depressions.

The Great Depression does appear genuinely relevant. The bursting of twin bubbles in the stock and real estate markets, accompanied by huge failures of financial institutions and a drop in confidence, has no more recent example than that of the 1930s....

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Vernon Clayson - 2/28/2009

I was born during the so-called "Great Depression" but other than hearing adults talk about the hard times had little knowledge of the period. I certainly had no familiarity with banks failing, we didn't have one locally,and it's doubtful that my parents ever had sufficient money to even have open account. What money they scraped up doing whatever menial job they could find went to living day by day, there was no slush fund to deposit. As nearly as I can tell this was a common experience for many of the nation's people. If, as the story goes, bankers and other financiers leapt from tall bulldings to their deaths, it had nothing to do with hardscrabble types like my parents and others, they strove to eat and keep a roof over their heads. Few looked directly to FDR and his commissariat for relief and there is the major difference between then and now, somehow the masses have come to believe that only the president himself can lead us out of the wilderness, i.e., out of the current circumstances. I hesitate to call it a recession or a depression as this situation was contrived, over at least the last three quarters of a century, to change our culture from limited republican government to socialist big government. WWII slowed the process, as did the tenure of Ronald Reagan, but it has continued apace. The liberals and socialists have found the man in Obama to be the face of their biggest step to a socialist takeover of the US. The hysteria associated with his every word and step can be likened to that of any number of dictators, all we lack is the huge military parades, and the orgy of candlelit adulation from massed crowds.