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Yale economist downplays effects of war

Although the primary concern for Americans in recent months has been the potential war with Iraq, Robert Shiller, Stanley Resor Professor of Economics at Yale University, said that the possibility of war is minor in comparison to the lasting effects of the March 2000 stock market bubble burst.

"Perhaps the most extraordinary event in the past 10 years is related to the stock market bubble," Shiller said in a speech to a group of professors and students Monday afternoon. "It's the sharpest drop in U.S. history. It really means something."

In his speech, part of the Johnson Lecture series, Shiller discussed the origins of the stock market bubble, the current real estate bubble and the outlook of the world economy.

Shiller, who is the author of Beyond Irrational Exuberance, a book which predicted the 2000 decline in the stock market, said that the impetus for the bubble burst is often misunderstood.

The international drop in stock markets in 2000 is often attributed to Millennium euphoria, but Shiller said the Millennium played a "relatively small role in bursting the bubble." He believes the potential economic results of a war with Iraq are equally as small.

"In [1990-91] the stock market didn't do much," Shiller said, citing the last U.S. conflict in Iraq.

Rather, he argued that bubble bursts have continued to occur naturally throughout the stock market's evolution and compared the pattern of the 2000 bubble burst to that of the 1920s and 30s. "Recently we've seen a classic bubble burst pattern that you can find other places in history," Shiller said. "It's bigger than what's going on with Saddam."

He attributed much of the variation in the stock market to psychological factors and consumer and investor confidence levels. "The stock market has deceived us at every turn.... [It] makes no sense," Shiller said. "It is driven by psychology. Confidence and the stock market are closely related."

Shiller divides causes for the bubble bursts into precipitating and amplifying factors and says that no one thing, such as the development of the Internet, can cause such a dramatic change.

"History is complicated," Shiller said. "Big events are merely a confluence of little events. There is no simple story."

Shiller said that although technology such as the Internet contributed to the bubble, the invention's impact was not quite as substantial as investors made it out to be.

"People look at new technology like the Internet and cell phones, and we think that they've changed our lives," Shiller said. "We think our productivity will go up because we have more time. We think things will be better in the future and so we invest. But we're not entering a new era."

Shiller attributes most of the bubble to an amplification of smaller factors. In the past decade American savings have dropped to under two percent, and Shiller says this is because many young Americans have the impression that they are going to become millionaires.

"If you think you're going to be a millionaire, why save now?" Shiller asked.

Shiller went on to discuss the upward trend in real estate values since 2000 and the potential for a real estate bubble, which he said will also eventually burst.

Shiller concluded with his forecast for the economy, saying, "The overall sense of optimism in our economy is down. If people are going to work hard and succeed, they must have a good view of the future.... I think it is very likely that we [will] have a double dip recession in 2003 or 2004."


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