The Yale economics professor says disruptions like the Great Depression can often be traced to a pessimistic idea, like the fear that the economy’s best days are behind us. The spread of coronavirus is different because it’s real—it is causing people to stay home and avoid going out, which is causing the gears of commerce to stop turning. Shiller says the coronavirus’s affect on the US economy is something we haven’t quite seen before.
Quartz spoke with Shiller about record low interest rates, the 1918 influenza pandemic, and secular stagnation. The conversation was edited and condensed for clarity.
Quartz: You’ve written about the importance of narratives in causing economic downturns. How does that factor in right now?
Shiller: It is too soon to say, but I think it is likely to affect markets. We are talking about major disruptions to our everyday activity—peoples’ hoarding, which is very obvious, but also they’re pulling back. They’re not going out, they’re trying to avoid contagion. That creates anxieties and it also creates real income falls for many people and for companies.
This is a very unusual situation. People didn’t anticipate that anything like this could happen just a few months ago. The idea that, in this modern time, we could actually have a serious epidemic and that the government would be struggling to contain it.
What measures are most effective at supporting the economy during a disruption like this one?
It’s hard to be effective at a time like this when the source of the problem is real. In 1933 when Roosevelt took office, he said there is “no plague of locusts,” referring to the Depression. He was referring to a biblical story about a plague of locusts that came and destroyed a crop. There was no pandemic—no pandemic of insects or of viruses. But now there is. This is really different.
How should policy makers and investors be analyzing this situation, especially with US interest rates at record lows?
It’s hard to analyze it because we’ve never been here before. This term structure of interest rates depressed below 1% is just unknown in history. Even during the Great Depression, the lowest long-term bond yields got was around 2%. So we are just in uncharted territory. I don’t know how to bring historical insights into where we are right now.
We have to fight this virus. If there’s any kind of fiscal policy that should be entertained, it should focus first on what we can do to hit this epidemic.
As to why interest rates are so low, are central banks’ swollen balance sheets part of the explanation?
Well that’s what quantitative easing was supposed to do, it was supposed to raise prices of bonds and lower yields. It has had some effect in that direction. But the sudden change in recent weeks is not due to that. It’s due to the coronavirus.
Do you think these low interest rates can make asset bubbles more likely by encouraging risk taking?
Historically the stock market hasn’t correlated very much with interest rates. There are cases—interest rates were very high in the late 70s, early 80s, and the stock market was very low. So that makes sense. But at other times they don’t really correlate that much.
The narrative keeps changing. Right now we have a unique narrative in US history. The other example that comes close is the 1918 influenza pandemic, but that wasn’t exactly the same narrative because it came right before the Armistice in World War I. So the peak month for talk about the influenza pandemic was October 1918. And the Armistice was signed in November 1918.
So there was a recession, but the stock market didn’t take a big hit back then. The narrative was different. The overriding narrative then was the war. So we don’t really have another example.
With interest rates declining, do you think the US is becoming more like Japan or Europe?
There has been a narrative about that. I call it the secular stagnation narrative. It started around 2011 with Larry Summers. It has been a factor. The secular stagnation is a fear that from now on, or for a very long time, we’re going to be stagnated. And that low interest rates are a sign of that.
That is another narrative. It hasn’t been talked about as much under Donald Trump’s regime because the economy has started to look strong. Our unemployment rate has been so low that it doesn’t seem to confirm the traditional secular stagnation narrative.
What are your thoughts on secular stagnation narrative?
Well we’ve seen interest rates low for some time now. And there might be some merit to it. I tend to think of it as a story though. The term secular stagnation arose first in the Great Depression. That’s how you have a Great Depression, when people think that this is going to last forever. Especially around 1938 when Alvin Hansen coined the term secular stagnation, it seemed like we can’t get out of it.
But that’s not the focal point of attention right now. The focal point of attention is at this moment the coronavirus. So these low interest rates are sign of fear, right now—fear of a virus.
Do you think monetary policy has been asymmetric—quick to stimulate the economy when it slows, but reluctant to normalize after growth resumes?
Interest rates should go back up to more normal levels, and when we had unemployment rates so low, they could well have done that. But their policy hasn’t been disastrous. The real disaster has come in with this virus, I have to say.