Value Added


Robert Shiller Suggests a New Deal-Style Solution to Unemployment

Steven Goldberg

This Yale economist, who has a fine record as a prognosticator, says we need massive federal jobs programs to get the economy moving.



If you had acted on two of Robert Shiller’s important calls over the past decade, you’d probably have more money than you do now. His 2000 book, Irrational Exuberance, warned that stocks were dangerously overpriced. A 43% decline in Standard & Poor’s 500-stock index began the month it was published. A 2005 edition of the same book warned of a bubble in housing prices. Well, you know what happened next.

A Yale University economist, Shiller is now worried about joblessness remaining high for many years -- and he advocates New Deal–style programs as a solution. “We have to create jobs, just like Franklin D. Roosevelt did,” he says. Shiller cites FDR’s Civilian Conservation Corps, which paid three million unemployed young men to do unskilled manual labor in conservation and the development of natural resources during the Great Depression.

Shiller also advocates resuming a federal revenue-sharing program that sent tens of billions of dollars to states and local governments from 1972 through 1987, with few strings attached. “States and local governments are shutting down important activities,” Shiller says. Because revenue sharing supported diverse activities, he says, the program didn’t fall into the trap of spending on the wrong things or focusing too much on a couple of “grand projects.”

Shiller’s proposals come at a time when Republicans are opposing new programs on the grounds that more spending would expand already-huge federal budget deficits and could eventually cause a collapse of the dollar.

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Shiller argues that the debt concerns are misplaced. He agrees that the federal government needs to dramatically slow the increase in spending on health and welfare programs to put the deficit on a sustainable, long-term path. “But I don’t think dollar problems are imminent, and it would be better to stimulate the economy and put people to work than to let this prolonged period of economic weakness continue,” he says.

Fears of a double-dip recession

Shiller is more worried than most economists about a double-dip recession. He first raised his concerns in May, when the economic recovery still appeared to be gaining strength. He puts the odds of the economy falling back into recession anytime soon at less than 50/50. But he adds that a double dip “could happen in a couple of years, before we’re healed.” (The National Bureau of Economic Research, the arbiter of economic cycles in the U.S. said on September 20 that the recession that started late in 2007 ended in June 2009.)

Shiller worries that the causes of long-term joblessness haven’t been adequately addressed. Currently, a record-high 4.3% of the workforce has been unemployed for more than six months. In every recession since World War II, except the 1980 downturn, that figure dropped below 1% before another recession hit. “I’m somewhat pessimistic about the economy for the next ten years,” he says. “I think we’ll have growth, but it won’t be up to old standards.” The unemployment rate is currently 9.6%.

What about stocks? Shiller tracks price-earnings ratios by averaging earnings over the preceding ten years. Based on that methodology, U.S. stocks trade at 20 times earnings, a high figure. Cost-cutting, some of it unsustainable, has boosted earnings lately, he says. Shiller says you shouldn’t avoid stocks, but “you shouldn’t invest too much” in them, either.

With yields so low, he says, bonds “are very iffy.” He prescribes a balanced portfolio, including U.S. stocks and a big helping of foreign stocks, as well as bonds and commodities.

Shiller’s name has become synonymous with the housing bust, largely because of the Case-Shiller Home Price index, which he helped develop. He’s not sure which way home prices will go now, but he thinks the worst is over: “I wouldn’t hold off on buying a home if you’re a long-term buyer. Even if prices fall 10%, you’ll be locking in low mortgage rates today.”

Known for his accurate calls, Shiller is loath to make many predictions just now. “I don’t have a lot of certainty about the future except when things are at extremes,” he says. For now, Shiller doesn’t see any bubbles.

Steven T. Goldberg (bio) is an investment adviser.



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