Of shrinks and the stimulus: psychology key to understanding, solving economic mess

BY ANDREW KALLOCH

In August 2007, as the stock market was still reveling in the halcyon days of Dow 13,000, the gregarious CNBC talking-head Jim Cramer ’84, pilloried the ivory tower insulation of Ben Bernanke’s Federal Reserve Board. “He [Bernanke] has no idea how bad it is out there. He has no idea! He has no idea,” Cramer screamed. The outburst, like many Cramer clips, became an internet sensation. For his part, Bernanke, a Harvard-educated economist, played it cool.

Beneath the carefully crafted calm of Uncle Ben was a truth few economists, Cramer and Bernanke included, were prepared to acknowledge: that the causes of and solutions to the economic malaise America and the world was entering could not be determined by the science of economics alone. Modeling, cost-benefit analyses, unemployment, GDP growth, productivity, business investment, and other metrics of economic activity were mere reflections of a far more powerful (and more mysterious) master: the human mind.

This month, George Akerlof and Robert Shiller, professors of economics at UC-Berkeley and Yale respectively, will publish Animal Spirits: How Human Psychology Drives the Economy. The professors argue that the economy is ultimately a result of human impulses far beyond the purview of even the most erudite economists. Thus, Shiller stated, in order for any government stimulus package to be effective, it must be “large enough, and targeted broadly enough, to impact public confidence.” In order to determine what policies will inspire public confidence in the most efficient manner, we must undertake a more interdisciplinary understanding of economics.

Previously, I made the claim that an interdisciplinary study of law would infuse the field with different approaches to solving the world’s resource distribution problems. Law, as a powerful tool for social change, belongs to the people from whom its authority emanates. Thus, it is only natural (and proper) for the institutions that act as stewards of the legal tradition to analyze the potentialities of law from perspectives as diverse as the people themselves. That effort is not only redeeming from a democratic perspective-as it reminds those of us insulated by influence and arrogance to acknowledge that great ideas can come from “small” people-but it is also the most efficient and effective way of producing quality law.

The same need for interdisciplinary study applies to economics and its application to public policy. On Monday, the government reported that the personal saving rate rose to its highest point in six years during the final quarter of 2008-2.9 percent. Some reacted to this news with the same tired economic rhetoric. “Consumers are rational,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez, an economic consulting firm, told the New York Times, “They respond to incentives and conditions.” Shapiro’s blanket claim about consumer rationality is flat out wrong.

Yes, consumers will respond to price fluctuations and improvements in quality. But if we needed any additional proof that consumers are irreversibly flawed by the frailties of the human condition, we need not look farther than the catastrophic miscalculations consumers and bankers made as the housing bubble approached its apex.

Building bridges, expanding broadband, cutting capital gains taxes, and investing in our schools may put more money into the pockets of Americans and increase job growth. However, those investments alone cannot recreate the trust that is essential to a healthy economy. As columnist Amity Shlaes noted this week, unemployment remained at double-digit levels five years after the start of the New Deal, prompting “A new sense of futility” among Americans. New Deal public works spending did have a short-term effect that should not be discounted. However, federal spending was hardly enough to renew confidence in the future and ignite sustainable, private-sector growth.

If the President is to avoid the pitfalls of Roosevelt’s New Deal, he will need fewer supposedly brilliant economic minds at his roundtable and more behavioral psychologists, anthropologists, and American consumers. The creation of a $1 trillion stimulus plan is not a purely academic exercise. It requires an understanding of real-world fears, an acknowledgment of animal spirits, and a realization that economies are made of men in their image-irrational, over-exuberant, and impassioned.

Andrew L. Kalloch is a 3L and Editor-in-Chief of the Harvard Law Record

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