Sunday, May 7, 2000
This Week with Sam Donaldson and Cokie Roberts
(This is an unedited, uncorrected transcript.)
Interview with ROBERT SHILLER
COKIE ROBERTS Despite the ups and downs in the stock market, consumer confidence remains high. Apparently the public’s convinced the economy will remain strong, and most of the experts agree. A dissenting voice comes from Robert Shiller, professor at Yale and author of “Irrational Exuberance.” He’s here with us in our studio, along with George Will. George.
GEORGE WILL Professor Shiller, the country today is neurologically wired to the stock market. Talk about stocks is as ubiquitous as talk about baseball. And you, I gather, think that this is irrational. Your book raises two questions. Is the exuberance today irrational, and is irrational exuberance a bad thing? Your view, I gather, is that the run up of the stock market is not based on a rational assessment that earnings are going to grow fast enough to produce profit sufficient to justify share prices. Is that right?
ROBERT SHILLER Usually when the stock market either goes way up or go ways — goes way down it hasn’t been because of a rational assessment. But at the — at the moment we’re in what might be described as the biggest stock market boom in US history. And...
GEORGE WILL So are you saying it’s always irrational to some extent, but this is a difference of degree or a difference of kind?
ROBERT SHILLER It’s a difference of degree. There’s a con — confluence of factors that have changed public thinking and encouraged them to exaggerate the importance of news on — in predicting future earnings. What’s really happened is not that there has become—come some new evidence that earnings are going to be higher in the future. Instead, appearances have changed.
GEORGE WILL Shortly before Alan Greenspan made his famous December, 1996, pronouncement that we should be careful about irrational exuberance, you met with him. Did you plant the idea?
ROBERT SHILLER Well I certainly said the market was irrational. I didn’t use the term ‘irrational exuberance.’
GEORGE WILL At that point the Dow average was about 6400. That was 4,100 points ago.
ROBERT SHILLER Right.
GEORGE WILL If people had heeded you, they’d have lost a lot of money.
ROBERT SHILLER I gave forecasts for five or 10-year horizons at that time. But it is true. I didn’t expect the economy to be as strong as it has. I don’t think you should judge me on one mistake — you call it a mistake. And there’s a tendency for people to think that their gurus should know exactly the future.
GEORGE WILL But you’re undaunted. You’re still saying how — that the market could go into a steady decline and the decline could be — cut it in half, the equivalent in value of all the American housing stock.
ROBERT SHILLER That’s right.
GEORGE WILL That’s still your view?
ROBERT SHILLER That’s right. The — the — unfortunately, the way the public sequentially judges people’s arguments is they feel that people who were wrong recently, underestimating the strength of the market, are discredited. When as a matter of fact, they’re all the more relevant and important, because the market has gotten more out of line since then. It’s got to correct itself.
GEORGE WILL A defender of Trotsky once said, ‘Proof of Trotsky’s far-sightedness is that none of his predictions have come true yet.’ Is that your view?
ROBERT SHILLER Well, it’s starting to come true. NASDAQ is down a little bit. It seems like public attitudes might be changing, but it’s — it’s so hard to say. It could be going up from here. I’m not saying in the short run it’s not going to go up to 12,000 on the Dow or that sort of thing.
GEORGE WILL You’re not just trying to correct public attitude. You’re trying to correct your own profession somewhat. Economists like to postulate — because it’s convenient for their models — rational economic behavior by individuals with ample information. The question is, is there not such a thing as creative irrational exuberance that lowers the cost of capitol when people are throwing money onto the market, and it gives the country a useful sense of possibilities? Is that fair?
ROBERT SHILLER Well, I believe entrepreneurial spirit is very important. I wish it were more evenly distributed through time. Yeah, there are people who say that recessions are a good thing. They’re cleansing of the economy. There — there are some very important considerations, though, about this. And that is the inequality that’s generated. Some people, if there is a correction, are going to be really hurt.
GEORGE WILL But those are, what, the owners of some of these high-flying NASDAQ tech stocks?
ROBERT SHILLER Well, also lots of people are putting all of their retirement savings in stock market. And there are people who are borrowing against their homes to invest in the stock market. So when they retire, they won’t have their home, either. And there are some serious problems that some people are going to face.
GEORGE WILL One presidential candidate, George W. Bush, suggests voluntary private Social Security accounts. People would invest their money on their own. Pat Moynihan, a great defender of Social Security, says that’s conceivable, perhaps a good idea. Are you saying that’s inherently a bad thing because people are generally subject to irrationality?
ROBERT SHILLER I think it’s bad timing to propose this. It seems to be another reaction to the market to propose it now. But it’s not — the — what I’ve heard about the Bush plan, it doesn’t seem like a bad thing at all. He wants to encourage people to save more. And there’s good — effectivly, that’s what it is. It’s like Clinton proposed these USA accounts. You know a lot of people are aware of the fact that Americans are not saving very much. And any plan that encourages that is probably a good thing.
GEORGE WILL Presumably, people with these Social Security private accounts would be in the market for the long run, and in the long run the tendency is up.
ROBERT SHILLER No. Depends on what...
GEORGE WILL It’s not up?
ROBERT SHILLER Depends on what you call the long run. Ten, 20 years...
GEORGE WILL Yes.
ROBERT SHILLER ...that’s not — that’s not up.
GEORGE WILL It’s not up?
ROBERT SHILLER It could.
GEORGE WILL But isn’t...
ROBERT SHILLER You know, it could.
GEORGE WILL Isn’t the historic average about...
ROBERT SHILLER It’s very risky.
GEORGE WILL Isn’t it about a 15 percent growth?
ROBERT SHILLER You’re — you’re — see, we have to remember that we are emerging form the most successful century — the US was the most successful country, economically, in the world in the last century, and it had a wonderful run. People seem to think that it has to do the same thing in the next century, and I would say no.
GEORGE WILL So you’re saying the future is going to be like the past or not like the past?
ROBERT SHILLER It’s going to be like the past, probably, in the sense that the price is going to come down. But, yeah, what economic growth will be probably, you know, over the next 20, 30 years — probably not quite as good as we’ve seen recently, but probably fine. The issue is the pricing of the market. It’s gotten over-priced and some people are betting on that, heavily.
GEORGE WILL It is always so. Thank you for being with us.
ROBERT SHILLER Pleasure.