Nobel Prize-winning economist Robert Shiller explains how compelling stories are what really shape our economy — from bitcoin to Trump's presidency - Business Insider UK - Canada News Media
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Nobel Prize-winning economist Robert Shiller explains how compelling stories are what really shape our economy — from bitcoin to Trump's presidency – Business Insider UK

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  • Robert Shiller is a Nobel Prize-winning economist, a professor at Yale University, and the author of “Narrative Economics: How Stories Go Viral and Drive Major Economic Events.
  • Shiller explains how compelling stories can impact actual economic outcomes. 
  • Shiller says the mysterious story of Satoshi Nakamoto was what really drove the price and popularity of bitcoin. 
  • He also says the Laffer curve became an important part of tax policy because of the powerful story, not because of an actual basis in economics. 
  • Shiller says this is the one place where he will gladly praise President Trump. According to Shiller, Trump is great at reading audiences, experimenting with narratives, and he is never boring. 
  • The Nobel Prize winner explains that these stories matter just as much as or more than the truth. And that these narrative disruptions make it very difficult to make long-term economic predictions. 

Robert Shiller sat down with Business Insider during the World Economic Forum in Davos, Switzerland to discuss his most recent book and how it applies to the current economic landscape. Following is a transcript of the video. 

Silverstein: So, your new book “Narrative Economics” is a topic that you’ve been interested in for a very long time. Can you explain to me what narrative economics is?

Shiller: A lot of people think about narratives these days, it’s a new trend. But they tend not to be economists or financial analysts. Maybe they think about it, but they don’t research it. I think that major economic events, successes and failures alike, are typically driven by stories that went viral. And we don’t have a deep understanding of events until we understand, we start studying the narratives.

Silverstein: And can you give me examples of something recent that happened because of a narrative, a strong narrative?

Shiller: Yeah. OK, the, the Great Recession. We named it the Great Recession in honor of another narrative, which is the Great Depression. Now you would think that people would be forgetting about the Great Depression. That was 1929 and well into the ’30s. Like 10 years of economic slowdown. But it’s a long time ago. You think people are forgetting about it. But they’re not. And in fact, in the early 2000s, references to that exploded. I count, I count these things, how often they come back in the news media.

So, and then we named it the Great Recession. It’s obviously a reference to the Great Depression. And so people became scared and they stopped spending. They didn’t stop spending, but they cut back. You know they think, should we go on a cruise this year? Well, maybe not. You know, I feel a little unsettled. It’s going to cost a lot of money. If people cut back on their consumption enough that we have a recession. And these stories impact the economy in a way that otherwise wouldn’t necessarily be happening. Yeah. A lot of economists seem to think, want to think, that it must be something about technology, or productivity, or maybe what the central bank did. But I think it’s, it’s more generated in people’s minds.

Silverstein: And what’s so strong about the bitcoin story?

Shiller: Oh yeah, I use that as Chapter 1 of my book. It’s an example of how good stories create economic events. And in the case where — I think it’s clearly traceable to the story. Now I’m not going to even comment on whether bitcoin is a good idea or not. It doesn’t matter. I’m just looking at the story.

The story was that a man named Satoshi Nakamoto had an invention which he promulgated on the internet around 2008. And, it’s the greatest, most wonderful invention in a long, long time. It ties into stories about anarchism. Anarchists don’t like government. Well, bitcoin didn’t ask anybody’s permission. They didn’t go to any regulator to start their bitcoin. And it’s not even tied to a country. It’s international. We’re all cosmopolitans now. It just seems like a good story.

And then they put a little mystery into it. Satoshi Nakamoto has never been spotted by anyone who tells us about these things. How could it be? He’s one of the most famous people in the world now. And yet no one has met him. So maybe he doesn’t exist. Maybe there is a committee, maybe it’s a conspiracy. Who knows? But somebody wrote a nice paper that was, it just has an excitement. I can see people transform. When I bring it up in my class, my students react, they wake up when I bring up bitcoin.

Silverstein: How do you separate out the story from what’s real? And how much can the story affect what becomes real?

Shiller: It isn’t a single story, every telling of the story is a little different. There’s a core idea in the story. And, how do you tell whether it’s a real story or not? That takes work. And in the case of bitcoin, it’s kind of difficult to think through it. It’s not — it’s impressive. It’s not easy. But you can work at it. The problem is, if you reach a decision about bitcoin one way or the other, it’ll never get out, because it can’t compete with the narrative quality of the original story.

Silverstein: Can you tell me about the Laffer curve, something that I think a lot of people take to be fact, but you say that a lot of the strength from it comes from this very simple story?

Shiller: Yes, so I’ll tell you a story. In 1974, an economist named Art Laffer was having dinner at the Two Continents restaurant, a nice restaurant in Washington DC. And he was having it with Donald Rumsfeld, who was the secretary of defense for the United States — really big shot guy — and Dick Cheney, who would soon become vice president of the United States. So a bunch of the — and also Jude Wanniski, who is a writer for the Wall Street Journal who wrote the story up.

laffer curve

Dr. Arthur Laffer, Economist and professor at University of Southern California, with “Laffer Curve” on blackboard, Feb. 23, 1981.

AP Photo


And in that story, Art Laffer draws a diagram on a napkin, called the Laffer curve, which illustrates, I won’t get into the details, but supposedly illustrates dramatically how taxes can hurt incentives and destroy the economy. And that even if you, if you actually cut taxes, you may collect more taxes even though you cut, because people will be so much more affluent, they’ll be working and producing. Nice story. It went viral. But not in 1974. It wasn’t until in 1978, when Jude Wanniski wrote a book, a best-selling book called “The Way the World Works,” and he tells this story about the dinner. And afterwards, people want to know the whole story. They ask about the napkin. The napkin is a visual image that enhances the story.

And there it is. It’s now many years later — the Laffer curve went through a typical epidemic. It expanded right after 1978. And everyone was talking about the Laffer curve. Same time as Rubik’s cube came out. That was another, another such fad. Laffer curve and Rubik’s cube were both around that time. They both faded somewhat. But they’re both still here. And Laffer is coming back. It has an internal dynamic like that of a disease. I’m not calling it a disease.

Silverstein: How much does narratives impact how the Fed communicates or how the president communicates? How much does that impact the economy?

Shiller: The people who take positions like Fed or Treasury Secretary become intuitive narrative economists even though they weren’t taught any of that in grad school, because it’s so obvious that the narrative matters.

northern rock

Customers queue to enter a branch of Northern Rock in Kingston, Surrey, southern England.


Reuters/Alessia Pierdomenico



So for example, when the Northern Rock bank failed in the UK in 2008, the Chancellor of the Exchequer and the head of the Bank of England reacted immediately because they didn’t want, it looked like it was a story about a bank run. This bank was failing and depositors were worried that they wouldn’t get all of their money out. There was deposit insurance, but it was only up to a small amount. And people who had their life savings, planning for retirement, panicked, they thought, maybe I’ll lose all of it. And so they rushed to the bank, and of course it’s a self-fulfilling prophecy. The bank can’t pay out all this money at once.

They immediately rescued the Northern Rock bank and paid off all the depositors. So, the reason they did that is they didn’t want the narrative to get started. They knew that in the past it was rumor and stories that people went to many different banks and asked for their money right away.

Silverstein: And what about Trump? Is he good at this? Has he been able to —

Shiller: This is one place where I can be lavish in my praise of Donald Trump. He is very good at narratives. He’s very good at judging audiences. He experiments. This is a way, the way you launch narratives. You never know whether it will go well. He listens to the audience. He creates a whole story. The story of him at his rally, which is spread by word of mouth. It’s a visceral thing. Most of these people had never gone to a presidential speech before. And if they did it would’ve been boring. He’d be talking about statistics on the national deficit or something like that. Trump is not boring, really not boring. And it started a word of mouth thing that was huge.

Silverstein: And how much has this increase, or is it the same, with social media? Is the impact of narratives bigger or faster, or can we just see it more?

Shiller: Well, the impact of narratives is bigger with social media. But I have to say, I think the mistake people make is more often underestimating how important narratives were long ago. So we have the Latin word rumor, that has the same meaning as it does today. What is a rumor? It’s a contagious narrative, right? Which is not fact-checked by anyone, it’s just out there. So they knew about this thousands of years ago, and it was a factor thousands of years ago. But yes, it is bigger today. We’re living in a world with expanded information technology and ability to communicate. And to communicate with like-minded people. To find each other. Maybe they had computer dating and maybe that helped people find their spouse. But it’s much bigger now. They’re not just, it’s finding someone who has the same political views as you that you can talk with.

Silverstein: And you talk about how difficult it is to predict economic performance in the long term. Is that because of how much narratives play a part?

Shiller: It’s hard to predict whether a new movie which hasn’t been shown yet will be a success. Notoriously hard. The director might have had successful movies in the past, he has famous actors and actresses, but nothing seemed to click this time. It’s when you put the movie in front of the audience and you start to listen to the word of mouth.

Silverstein: And how does that relate to, like, GDP estimates two years out?

Shiller: So when you talk about, oh, yeah, they’re not very good at forecasting GDP two years out because the disturbances are, I think, narrative-based. And they don’t generally systematically study them. And unfortunately, it does require some human judgment at this time anyway, to understand the importance of narratives.

Silverstein: Is there one big narrative that is happening right now that you think we should be paying attention to or that’s dislocating something?

Shiller: Well, a narrative that comes to mind is the artificial intelligence revolution. And we have many stories of neat things. Like your smart speaker, I guess like Amazon Echo that you have. It’s kind of, it does seem like the the new world. Something really fundamental has changed. But I don’t think it has scared us yet profoundly because we don’t have high unemployment. So people think, well, but the economy is strong so, not worry about it now. But I think if we do have another recession, that narrative could come roaring back and become again an obstacle to recovery.

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How the new coronavirus could send shockwaves through the world economy – Global News

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An international outbreak of respiratory illness sparked by a novel coronavirus has spread from its origins in central China to at least 11 countries, with more than 1,200 confirmed cases — including a presumed case in Canada — and over 40 deaths.


READ MORE:
Travel sector feeling hit of coronavirus, but impact so far falls short of SARS

Like previous outbreaks, including the SARS virus 17 years ago, the flu-like disease poses a risk to economies around the world as fear and confusion lead to abrupt changes in behaviour, decreased economic activity and a ripple effect across sectors that threatens everything from productivity to consumer prices.

The Severe Acute Respiratory Syndrome pandemic of 2003 cost the Chinese economy up to US$20 billion, according to the Asian Development Bank, as travel warnings and transit shutdowns discouraged consumption, foreign tourists stayed away and local residents stopped going out.






3:11
Coronavirus outbreak: London’s Lunar New Year celebrations overshadowed by virus fears


Coronavirus outbreak: London’s Lunar New Year celebrations overshadowed by virus fears

“The travel and tourism sectors were most obviously hit, although that ripples through the entire economy,” said Richard Smith, a professor of health economics at the University of Exeter Medical School.

Story continues below advertisement

“But many effects are short-lived during an outbreak as once the panic is over people go back to business as usual.”

Chinese authorities clamped down on mass transit during the SARS outbreak, hampering commutes, shopping runs and social outings. The national securities regulatory commission closed stock and futures markets in Shanghai and Shenzhen for two weeks to prevent viral transmission. And Beijing ordered movie theatres, internet cafes and other venues to shut down temporarily while hotels, conference centres, restaurants and galleries saw visitors almost disappear completely.


READ MORE:
Coronavirus risk remains low in Canada despite first presumptive case: Health officials

China’s response to the current crisis appears to be swifter, and the disease less virulent, but the country now boasts a far more extensive high-speed rail network than it did in 2003, and its economy is six times larger, upping the risk of transmission and the repercussions of an epidemic.

“China is the engine of the global economy, churning out goods,” said German health economist Fred Roeder.

Its critical role in international shipping may be thrown into disarray as authorities begin to hold back some ships from entering the port at Wuhan, a key hub on the Yangtze River.

“If they cannot leave it creates huge delays in the supply chain and value chain of businesses all across the world,” Roeder said. “It could actually hit the latest generation of smartphone if ports are shutting down.”

Story continues below advertisement

Manufacturing could also feel the crunch as supply chains stall, he said.

Roeder has felt firsthand the disruptive power of a pandemic. In the summer of 2003 the teenage Berliner was eagerly gearing up for a United Nations youth conference that would take him to Taipei, but the event was cancelled a few days beforehand due to SARS.


READ MORE:
Here’s what you need to know about Canada’s first ‘presumptive’ coronavirus case

The epidemic also sparked layoffs and time away from work. At one point Singapore Airlines asked its 6,600 cabin crew to take unpaid leave. Children stayed home from school, prompting more parents to shirk their job duties and further reducing productivity, said AltaCorp Capital analyst Chris Murray.

“I was losing guys left, right and centre as people were quarantined,” recalled Murray, based in Toronto — the epicentre of the SARS pandemic outside of Asia. The disease infected 438 Canadians in total and caused 44 deaths in the Toronto area.






2:33
How airports are screening for the coronavirus


How airports are screening for the coronavirus

The economic damage culminated with World Health Organization’s one-week travel advisory for the city in April 2003, costing the Canadian economy an estimated $5.25 billion that year.

The outbreak of H1N1, or swine flu, in 2009 also sparked work “dislocations,” Murray said. “It went from, `Maybe it’ll be okay,’ to sheer panic.”






6:01
Is Canada doing enough to protect Canadians from the coronavirus outbreak?


Is Canada doing enough to protect Canadians from the coronavirus outbreak?

Freelancers and gig economy workers such as musicians or ride-hail drivers may feel the pinch more acutely, since they can’t rely on a steady wage when demand shrinks.

Story continues below advertisement

“It’s something that unfortunately has happened before in a similar way and it tends to affect areas like retail,” said Carolyn Wilkins, senior deputy governor of the Bank of Canada, said this week.


READ MORE:
Coronavirus death toll rises to 56 in China as U.S. prepares to evacuate citizens

“People don’t go out, they don’t fly in planes, they don’t do as much tourism to the affected areas,” she said.

The fallout makes workers ranging from servers to wholesale bakers to non-unionized hotel staff more vulnerable. Meanwhile spending or investment plans by larger companies may have to be delayed, said Roeder.






1:40
New coronavirus’ ability to spread getting stronger say Chinese officials


New coronavirus’ ability to spread getting stronger say Chinese officials

It is not clear how lethal the new coronavirus is or even whether it is as dangerous as the ordinary flu, which kills about 3,500 people every year in Canada alone.

“Still, we should be extremely worried about the economic effects of this,” Roeder said, calling on Chinese authorities to work transparently with Western governments and disease control experts to mitigate the crisis.

“At the end of the day, it hits the entire economy. No one benefits from this.”

© 2020 The Canadian Press

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How a coronavirus epidemic in China could ripple through the global economy – CityNews Vancouver

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An international outbreak of respiratory illness sparked by a novel coronavirus has spread from its origins in central China to at least 11 countries, with more than 1,200 confirmed cases — including a presumed case in Canada — and over 40 deaths.

Like previous outbreaks, including the SARS virus 17 years ago, the flu-like disease poses a risk to economies around the world as fear and confusion lead to abrupt changes in behaviour, decreased economic activity and a ripple effect across sectors that threatens everything from productivity to consumer prices.

The Severe Acute Respiratory Syndrome pandemic of 2003 cost the Chinese economy up to US$20 billion, according to the Asian Development Bank, as travel warnings and transit shutdowns discouraged consumption, foreign tourists stayed away and local residents stopped going out.

“The travel and tourism sectors were most obviously hit, although that ripples through the entire economy,” said Richard Smith, a professor of health economics at the University of Exeter Medical School.

“But many effects are short-lived during an outbreak as once the panic is over people go back to business as usual.”

Chinese authorities clamped down on mass transit during the SARS outbreak, hampering commutes, shopping runs and social outings. The national securities regulatory commission closed stock and futures markets in Shanghai and Shenzhen for two weeks to prevent viral transmission. And Beijing ordered movie theatres, internet cafes and other venues to shut down temporarily while hotels, conference centres, restaurants and galleries saw visitors almost disappear completely.

China’s response to the current crisis appears to be swifter, and the disease less virulent, but the country now boasts a far more extensive high-speed rail network than it did in 2003, and its economy is six times larger, upping the risk of transmission and the repercussions of an epidemic.

“China is the engine of the global economy, churning out goods,” said German health economist Fred Roeder.

Its critical role in international shipping may be thrown into disarray as authorities begin to hold back some ships from entering the port at Wuhan, a key hub on the Yangtze River.

“If they cannot leave it creates huge delays in the supply chain and value chain of businesses all across the world,” Roeder said. “It could actually hit the latest generation of smartphone if ports are shutting down.”

Manufacturing could also feel the crunch as supply chains stall, he said.

Roeder has felt firsthand the disruptive power of a pandemic. In the summer of 2003 the teenage Berliner was eagerly gearing up for a United Nations youth conference that would take him to Taipei, but the event was cancelled a few days beforehand due to SARS.

The epidemic also sparked layoffs and time away from work. At one point Singapore Airlines asked its 6,600 cabin crew to take unpaid leave. Children stayed home from school, prompting more parents to shirk their job duties and further reducing productivity, said AltaCorp Capital analyst Chris Murray.

“I was losing guys left, right and centre as people were quarantined,” recalled Murray, based in Toronto — the epicentre of the SARS pandemic outside of Asia. The disease infected 438 Canadians in total and caused 44 deaths in the Toronto area.

The economic damage culminated with World Health Organization’s one-week travel advisory for the city in April 2003, costing the Canadian economy an estimated $5.25 billion that year.

The outbreak of H1N1, or swine flu, in 2009 also sparked work “dislocations,” Murray said. “It went from, ‘Maybe it’ll be okay,’ to sheer panic.”

Freelancers and gig economy workers such as musicians or ride-hail drivers may feel the pinch more acutely, since they can’t rely on a steady wage when demand shrinks.

“It’s something that unfortunately has happened before in a similar way and it tends to affect areas like retail,” said Carolyn Wilkins, senior deputy governor of the Bank of Canada, said this week. 

“People don’t go out, they don’t fly in planes, they don’t do as much tourism to the affected areas,” she said.

The fallout makes workers ranging from servers to wholesale bakers to non-unionized hotel staff more vulnerable. Meanwhile spending or investment plans by larger companies may have to be delayed, said Roeder.

It is not clear how lethal the new coronavirus is or even whether it is as dangerous as the ordinary flu, which kills about 3,500 people every year in Canada alone.

“Still, we should be extremely worried about the economic effects of this,” Roeder said, calling on Chinese authorities to work transparently with Western governments and disease control experts to mitigate the crisis.

“At the end of the day, it hits the entire economy. No one benefits from this.”

This report by The Canadian Press was first published Jan. 25, 2020.

Christopher Reynolds, The Canadian Press

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How coronavirus is beginning to hit China's economy – CNBC

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A Chinese passenger that just arrived on the last bullet train from Wuhan to Beijing is checked for a fever by a health worker at a Beijing railway station on January 23, 2020 in Beijing, China.

Kevin Frayer | Getty Images

BEIJING — Preliminary data show the scale at which the coronavirus outbreak is affecting the Chinese economy.

At a special press conference on Sunday, Chinese officials indicated the disease will remain an issue for the near future.

The immediate impact was visible in a drop in the flow of passengers. In an effort to prevent the virus from spreading, the government has encouraged people to stay at home, cancelled major public events and restricted travel for tens of millions.

Travel plunges

Overall travel on Saturday, the first day of the Lunar New Year, dropped 28.8% from a year ago, said Liu Xiaoming, vice minister of transport. Specifically, he noted declines of:

41.6% in civil air travel

41.5% in rail travel

25% for road transport.

On Sunday, China Railway Chengdu also announced it would halt several high-speed train routes — including some to Shanghai — for the next few days, into early February.

‘Severe shortage’ of medical supplies

Chinese authorities have stressed the need for locals to wear face masks, and have even imposed fines in some places for those in public spaces who do not wear one. Other items, such as virus testing kits and protective suits, are also understocked.

“We face a severe shortage of supplies given the demand,” Wang Jiangping, vice minister of industry and information technology, said Sunday, according to an official translation of his Mandarin-language remarks.

Wang noted a particular shortage of protective suits and face masks, especially in Wuhan. For example, Wang said about 100,000 protective suits are needed a day, but daily production capacity is at best in the low tens of thousands.

In an effort to meet these medical supply needs, Wang said 40% of overall production capacity is now back online, despite the Lunar New Year holiday.

Health care members make first aid to people as they cover their faces with sanitary masks after the first cases of coronavirus have been confirmed in Hong Kong.

Miguel Candela | Getty Images

Authorities also said Sunday that to improve medical conditions, they are drawing on inventory from the surrounding area, and working to add more hospital beds and medical staff.

China’s Ministry of Finance added in an online statement Sunday that various levels of finance ministries have issued 11.2 billion yuan ($1.6 billion) in subsidies for medical care, equipment purchases and other efforts to control the epidemic.

But the latest developments indicate these disruptions to regular economic activity may just be the beginning of a longer-term situation.

Beijing city said Sunday that local schools, from kindergartens to universities, will postpone resumption of the school year until further notice, according to state media. Based on the original Lunar New Year holiday calendar, Chinese were set to return to work on Jan. 31.

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