Say it ain't so!
Economists are extremely bad at predicting turning points.
Ben Bernanke, Congressional hearing, November 10, 2007
It's surprising how strong the residential, single-family home market looks right now. It makes me think it's hard to predict animal spirits.
Robert Shiller, Wall Street Journal, September 30, 2009
Gosh, there goes another cherished illusion!
John Fyten, who for some reason has never been quizzed either by Congress or the Wall Street Journal, October 17, 2009
You find humility in the most unlikely places.
The unguarded admissions I've quoted above may be a blow to those of us who base our purchasing decisions entirely on the predictions of all-seeing economists. Or at least build our rationalizations for our purchasing decisions entirely on the guesses of economists who tell us what we already think and would like to hear. Which seems to be pretty much the same thing.
But full marks to Robert Shiller, who manages to sneak a subtle plug for his latest best-seller, "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism", into a Wall Street Journal interview. Which tells you why he's Robert Shiller and we're not.
So what are "animal spirits"? According to an opinion piece Shiller wrote for the WSJ earlier this year, "The term 'animal spirits,' popularized by John Maynard Keynes in his 1936 book 'The General Theory of Employment, Interest and Money,' is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people."
Since Keynes died sixty-three years ago, we'll never know if he was willing to take "animal spirits" this far, but it's a catchy phrase in an Edwardian English public school sort of way. Besides, the important thing is that when Shiller says "animal spirits", he links himself to Keynes, The Master, and to a seminal work often quoted if seldom read. Which tells you why he's Robert Shiller and we're not. (Although anyone who avoids Keynes is missing one of the most readable of economists.)
"Animal spirits" also gives us insight into the contrast the economist likes to draw between his or her "rational", "scientific" world and the elemental, instinctual behavior of the marketplace. But if economics is "rational" and "scientific", why can anyone pick and choose an economic theory to suit his needs and fit his thinking? Since when can scientific truth be served smorgasbord-style?
What's startling about Shiller's admission, however droll it was intended to be, is that it pinpoints the fatal flaw not only in the economist's attempt to predict the future but also to explain the past: people don't think like mathematical models. Which explains the typical economist's typically droll attitude toward the public's "irrational" behavior, an attitude that makes a handy trap door to disappear through when his predicting act falls flat.
So what does all this mean in real time?
It means that today buyers throw themselves at entry-level homes despite Shiller's prediction that prices will stagnate for years. Buyers do so, not because their agents told them "now is a great time to buy", but because they don't have to be told "now is a great time to buy". Wanted to own your own home for the past five years but been priced out? Now is a great time to buy. Want a Blue-Light-Special they're-rolling-back-prices deal on a starter home? Now is a great time to buy. Want a home loan at a rock-bottom rate? Now is a great time to buy.
Primitive "animal spirits" or simple common sense? Perhaps it takes a little of the latter to know the difference.