Robert Shiller, "The risk of a double-dip recession hasn’t abated"

By on May 16, 2010

Robert J. Shiller, professor of economics and finance at Yale, feels there are still risks to the economy which rest on the whims of confidence.

In fact, there is still a real risk of a double-dip recession, though it can’t be quantified by the statistical models that economists use for forecasts. Instead, the danger stems from the weakness and vulnerability of confidence — whose decline could bring markets down, further stress balance sheets and cause cuts in consumption, investment and local government expenditures.

Ultimately, the risk resides largely in social psychology. It is the fear of fear itself, of which Franklin D. Roosevelt famously spoke.

Shiller defines his view of a double-dip:

I use a definition of a double-dip recession that doesn’t emphasize the short term. Instead, I see it as beginning with a recession in which unemployment rises to a high level and then falls at a disappointingly slow rate. Before employment returns to normal, there is a second recession. As long as economic recovery isn’t complete, that’s a double-dip recession, even if there are years between the declines.

Under that definition, there has been only one serious double-dip recession in the last century — and it was serious indeed. It started with the 1929-33 recession, which was followed by a recession in 1937-38. Between those declines, the unemployment rate never moved below 12.2 percent. Those two recessions, four years apart, are now typically lumped together as one event, the Great Depression.

Shiller continues with an indicator he has developed:

Since 1989, I have been compiling the Buy-on-Dips Stock Market Confidence Index, now produced by the Yale School of Management. It shows that confidence to buy on market dips has been declining steadily for individual investors since 2009. (The measure is holding steady for institutional investors.) Will individuals continue to support the market, which is now highly priced?

SMA Comment: Professor Shiller is right that confidence plays a role in economic performance, however, the larger influence is likely the lack balance and mal-investments that occur in a boom. Due to misguided Federal Reserve interest rate policies and the wrongheaded government subsidy of the housing industry, a massive misallocation of resources occurred from 2000-2007. It may take two recessions to fully correct this problem. Government intervention has simply delayed what is inevitable and will likely exacerbate the pain.

Source: The N. Y. Times
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