Animal Spirits

Conor Clarke has an interview today with George Akerlof, co-author (with Robert Shiller) of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. One of the things Akerlof says is this:

What are the implications of your theory for the sort of fiscal policy we should be pursuing?

Well, one of the things is that one of the roles of the government is to offset the animal spirits. So that when animal spirits are high — and people are too trusting and they engage in investment projects that they shouldn’t engage in — one of the roles of the government is to offset them. More should have been done to curb the over-exuberance and excesses in the housing market. That’s one.

Felix Salmon comments:

This is much bigger than the idea that it’s the job of central bankers to identify bubbles and gently deflate them before they get too big. For one thing, it draws no clear distinction between fiscal policy and monetary policy; instead, it looks at the animal spirits of the country as a whole, and tries to keep them on a relatively even keel.

….On an individual level, it’s really important to examine one’s own biases as pitilessly as possible; on a national level, I see the job of entities such as Paul Volcker’s Economic Recovery Advisory Board to be one of gauging the level of animal spirits across the country — something that all central bankers do by nature, which is one reason that Volcker is a good choice to head it.

I am totally on board with this.  In fact, I’m basically on board with nearly any idea that’s based on taking away the punch bowl in boom times and spiking it in bad times.

Still, this is not as easy as it sounds, is it?  We would need some kind of Animal Spirits Index to make it work.  And as far as I know, even in retrospect, we don’t have one.  Economic expansions always end eventually, but nobody has ever been able to consistently predict ahead of time when things have started to get out of hand.  So while I love the concept, it needs some serious meat on its bones before it can become an actual policy instrument.  Unfortunately, I’m not optimistic that anyone can do that.

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