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What Would Robert Shiller Do?
Justin Fox is the business and economics columnist for Time magazine. He also writes the "Curious Capitalist" blog at Time.com.
Before joining Time in January 2007, Fox spent more than a decade at sister publication, Fortune. At Fortune, he covered a wide variety of topics related to economics, finance, and international business. In 2000 and 2001, he was the magazine's Europe editor, based in London.
Earlier in his career, Justin worked at several newspapers, including American Banker and the Birmingham News. He has a B.A. in international affairs from Princeton.
Fox is a Young Global Leader of the World Economic Forum. His first book, The Myth of the Rational Market, will be published by Collins in 2008.
Question: What motivated Robert Shiller’s unique economic views?
Justin Fox: Shiller, in a lot of ways, was a pretty conventional economist. He was trained at MIT in the late 60’s and early 70’s. His dissertation adviser was Franco Modigliani, who accidentally coauthored a couple of papers that led the way to the rise of rational market finance and economics. So it wasn’t like he was being educated by a bunch of hippies out in an Ashram or something. He was getting a very mathematical, conventional economic education. But at the same time, as told in the book, this idea rose simultaneously—and there was a lot of cross pollination at MIT in Chicago, but in MIT, there was always this sense of “Here is this great model for understanding how the market works, and we totally agree that the market is pretty hard to outsmart. We don’t know that it’s smart, but it is hard for other people to outsmart, but we we’re not sure that means that it is all working perfectly.” Whereas in Chicago, it became a project to show how great markets were and how much better they were than any government bureaucrat. So, all along, in MIT, from the beginning, it was this weird co-existence of this very rationalist theory of how the world worked coupled with this understanding, and a lot of classroom discussion about how the world didn’t work quite the way it was described in the mathematical models in the classroom.
So you see you [have] people coming out of MIT, and Shiller’s classmate, Robert Merton, a Nobel Prize winner—sort of a high priest for a while of this rationalist finance—was there at the same time, and came out with a very different world view. So Shiller came out with this conventional training, but he sensed that all these theories and models weren’t entirely right. He had a lot of computer skills and empirical skills and so he started during the 70’s to just try to test some of these theories about market behavior against the data, and initially he was looking at bond prices and didn’t come up with anything all that is explosive, but then starting [in] the late 70’s, he started looking at stock prices, and was trying to come up with measure [of] whether they reflected the fundamental value of the stocks themselves. He just compared stock prices to subsequent dividend payments, and found that the dividend payments were a lot less volatile than the stock price movement. And that [was] not proof of anything, a lot of people argued, all companies tried to keep their dividends [steady], therefore it shouldn’t mean that much. But other people did similar examinations of earnings, comparing [them] with stock prices, and basically the lesson was there [was] a lot of unexplained volatility in the stock market.
Later on, other people, including the pretty conventional finance scholars like Richard Roll of UCLA, basically confirmed Shiller’s observation, and so then Shiller actually went and paid attention to real estate for about ten years. But when he came back to paying attention to the stock market again in the middle-late 90’s, it was with this idea that [there was] this period when prices went off in directions that had less to do with anything going on with the fundamentals than [with] mood swings. That led him by the late 90’s to be this really prominent doubter about the bull market of those days. And then he came out with—he totally admits this was luck—the most spectacularly timed book of all time. In March 2000, he published Irrational Exuberance, and March 2001 is exactly when that exuberance started to tail off and end.
Question: What is Shiller’s take on the current crisis?
Justin Fox: So he wrote Irrational Exuberance in 2000, and then he went back to paying attention to real estate. And then wrote a new version of the ebook that came out in 2005, making the point that, “Wow! Real estate prices had gone really crazy by historical standards, and we can probably expect sometime in the next few years a collapse in real estate prices.” And so he is now even more of a guru than ever before, because he really did it at some level predict what happened. Not the details, not the timing, but he—at a time when conventional wisdom was that the real estate market was not a big danger—he was saying it [was] everyday.
What’s interesting about Shiller is his lesson that he takes from all this is not that we somehow need to shut down markets or regulate them vastly more. However, I think he will be in favor of some more regulation. But he seems to think that if we only had even more financial products, if we’re all buying and selling real estate derivatives betting that our house prices might fall, then we would have been better off. So it sort off comes back around to that MIT belief in markets and conventional economics in the end. And so he’s very often paired with Nasem Taleb, an options trader turned bomb-throwing market philosopher. And Shiller comes across as the conservative or the moderate in all these discussions now.
Question: Does the crisis disprove Shiller’s belief in the power of developed economies?
Justin Fox: His belief is continued growth of the financial system is a good thing: we just have these shakeouts where we figure out what doesn’t work. I guess my one caveat to that is, after he said that, I went back, and was trying to look at it—because finance people always bring this up—and there’s a lot of comparative global research showing that countries with better developed financials do better than those without them. But [that’s] mostly research about developing countries, and it sort of stands to reason that a country where nobody has a bank account is not going to progress as fast economically as one with their banks and loans available. But I think once you get to a well-developed economy with big financial system, I’m sure there’s some point of diminishing returns, and it’s pretty clear we reached that in the US over the past decade: where you get a financial system that sort of takes on a dynamic of its own and it is no longer serving the economy as a whole, but it’s just kind of turning towards it’s own path and sucking off lots of money from the system. I imagine we will start getting a lot of research now about whether there is any way to tell what’s that one point where financial system has gotten too big. And I don’t think Shiller would disagree [with] that. He just, in the end, still believes in finance and [that] it can do good things for the people.
Recorded on: June 30, 2009
Time Magazine’s Justin Fox explains how famed economist Robert Shiller’s background led to his prescient economic views, and tells us how Shiller reacts to the economic crisis.
What conditions of the new normal were already appreciated widely?<p>First, we understand that higher education is unique among industries. Some industries are governed by markets. Others are run by governments. Most operate under the influence of both markets and governments. And then there's higher education. Higher education as an "industry" involves public, private, and for-profit universities operating at small, medium, large, and now massive scales. Some higher education industry actors are intense specialists; others are adept generalists. Some are fantastically wealthy; others are tragically poor. Some are embedded in large cities; others are carefully situated near farms and frontiers.</p> <p>These differences demonstrate just some of the complexities that shape higher education. Still, we understand that change in the industry is underway, and we must be active in directing it. Yet because of higher education's unique (and sometimes vexing) operational and structural conditions, many of the lessons from change management and the science of industrial transformation are only applicable in limited or highly modified ways. For evidence of this, one can look at various perspectives, including those that we have offered, on such topics as <a href="https://www.insidehighered.com/digital-learning/blogs/rethinking-higher-education/lessons-disruption" target="_blank">disruption</a>, <a href="https://www.nytimes.com/2020/02/20/education/learning/education-technology.html" target="_blank">technology management</a>, and so-called "<a href="https://www.insidehighered.com/sites/default/server_files/media/Excerpt_IHESpecialReport_Growing-Role-of-Mergers-in-Higher-Ed.pdf" target="_blank">mergers and acquisitions</a>" in higher education. In each of these spaces, the "market forces" and "market rules" for higher education are different than they are in business, or even in government. This has always been the case and it is made more obvious by COVID-19.</p> <p>Second, with so much excitement about innovation in higher education, we sometimes lose sight of the fact that students are—and should remain—the core cause for innovation. Higher education's capacity to absorb new ideas is strong. But the ideas that endure are those designed to benefit students, and therefore society. This is important to remember because not all innovations are designed with students in mind. The recent history of innovation in higher education includes several cautionary tales of what can happen when institutional interests—or worse, <a href="https://www.insidehighered.com/news/2016/02/09/apollos-new-owners-seek-fresh-start-beleaguered-company" target="_blank">shareholder</a> interests—are placed above student well-being.</p>
Photo: Getty Images<p>Third, it is abundantly apparent that universities must leverage technology to increase educational quality and access. The rapid shift to delivering an education that complies with social distancing guidelines speaks volumes about the adaptability of higher education institutions, but this transition has also posed unique difficulties for colleges and universities that had been slow to adopt digital education. The last decade has shown that online education, implemented effectively, can meet or even surpass the quality of in-person <a href="https://link-springer-com.ezproxy1.lib.asu.edu/article/10.1007/s10639-019-10027-z" target="_blank">instruction</a>.</p><p>Digital instruction, broadly defined, leverages online capabilities and integrates adaptive learning methodologies, predictive analytics, and innovations in instructional design to enable increased student engagement, personalized learning experiences, and improved learning outcomes. The ability of these technologies to transcend geographic barriers and to shrink the marginal cost of educating additional students makes them essential for delivering education at scale.</p><p>As a bonus, and it is no small thing given that they are the core cause for innovation, students embrace and enjoy digital instruction. It is their preference to learn in a format that leverages technology. This should not be a surprise; it is now how we live in all facets of life.</p><p>Still, we have only barely begun to conceive of the impact digital education will have. For example, emerging virtual and augmented reality technologies that facilitate interactive, hands-on learning will transform the way that learners acquire and apply new knowledge. Technology-enabled learning cannot replace the traditional college experience or ensure the survival of any specific college, but it can enhance student learning outcomes at scale. This has always been the case, and it is made more obvious by COVID-19.</p>
What conditions of the new normal were emerging suspicions?<p>Our collective thinking about the role of institutional or university-to-university collaboration and networking has benefitted from a new clarity in light of COVID-19. We now recognize more than ever that colleges and universities must work together to ensure that the American higher education system is resilient and sufficiently robust to meet the needs of students and their families.</p> <p>In recent weeks, various commentators have suggested that higher education will face a wave of institutional <a href="https://www.businessinsider.com/scott-galloway-predicts-colleges-will-close-due-to-pandemic-2020-5" target="_blank">closures</a> and consolidations and that large institutions with significant online instruction capacity will become dominant.</p> <p>While ASU is the largest public university in the United States by enrollment and among the most well-equipped in online education, we strongly oppose "let them fail" mindsets. The strength of American higher education relies on its institutional diversity, and on the ability of colleges and universities to meet the needs of their local communities and educate local students. The needs of learners are highly individualized, demanding a wide range of options to accommodate the aspirations and learning styles of every kind of student. Education will become less relevant and meaningful to students, and less responsive to local needs, if institutions of higher learning are allowed to fail. </p> <p>Preventing this outcome demands that colleges and universities work together to establish greater capacity for remote, distributed education. This will help institutions with fewer resources adapt to our new normal and continue to fulfill their mission of serving students, their families, and their communities. Many had suspected that collaboration and networking were preferable over letting vulnerable colleges fail. COVID-19's new normal seems to be confirming this.</p>
Photo by Joshua Lott/Getty Images<p>A second condition of the new normal that many had suspected to be true in recent years is the limited role that any one university or type of university can play as an exemplar to universities more broadly. For decades, the evolution of higher education has been shaped by the widespread imitation of a small number of elite universities. Most public research universities could benefit from replicating Berkeley or Michigan. Most small private colleges did well by replicating Williams or Swarthmore. And all universities paid close attention to Harvard, Princeton, MIT, Stanford, and Yale. It is not an exaggeration to say that the logic of replication has guided the evolution of higher education for centuries, both in the US and abroad.</p><p>Only recently have we been able to move beyond replication to new strategies of change, and COVID-19 has confirmed the legitimacy of doing so. For example, cases such as <a href="https://www.washingtonpost.com/education/2020/03/10/harvard-moves-classes-online-advises-students-stay-home-after-spring-break-response-covid-19/" target="_blank">Harvard's</a> eviction of students over the course of less than one week or <a href="https://www.nhregister.com/news/coronavirus/article/Mayor-New-Haven-asks-for-coronavirus-help-Yale-15162606.php" target="_blank">Yale's apparent reluctance</a> to work with the city of New Haven, highlight that even higher education's legacy gold standards have limits and weaknesses. We are hopeful that the new normal will include a more active and earnest recognition that we need many types of universities. We think the new normal invites us to rethink the very nature of "gold standards" for higher education.</p>
A graduate student protests MIT's rejection of some evacuation exemption requests.
Photo: Maddie Meyer/Getty Images<p>Finally, and perhaps most importantly, we had started to suspect and now understand that America's colleges and universities are among the many institutions of democracy and civil society that are, by their very design, incapable of being sufficiently responsive to the full spectrum of modern challenges and opportunities they face. Far too many higher education outcomes are determined by a student's family income, and in the context of COVID-19 this means that lower-income students, first-generation students and students of color will be disproportionately afflicted. And without new designs, we can expect postsecondary success for these same students to be as elusive in the new normal, as it was in the <a href="http://pellinstitute.org/indicators/reports_2019.shtml" target="_blank">old normal</a>. This is not just because some universities fail to sufficiently recognize and engage the promise of diversity, this is because few universities have been designed from the outset to effectively serve the unique needs of lower-income students, first-generation students and students of color.</p>
Where can the new normal take us?<p>As colleges and universities face the difficult realities of adapting to COVID-19, they also face an opportunity to rethink their operations and designs in order to respond to social needs with greater agility, adopt technology that enables education to be delivered at scale, and collaborate with each other in order to maintain the dynamism and resilience of the American higher education system.</p> <p>COVID-19 raises questions about the relevance, the quality, and the accessibility of higher education—and these are the same challenges higher education has been grappling with for years. </p> <p>ASU has been able to rapidly adapt to the present circumstances because we have spent nearly two decades not just anticipating but <em>driving</em> innovation in higher education. We have adopted a <a href="https://www.asu.edu/about/charter-mission-and-values" target="_blank">charter</a> that formalizes our definition of success in terms of "who we include and how they succeed" rather than "<a href="https://www.washingtonpost.com/opinions/2019/10/17/forget-varsity-blues-madness-lets-talk-about-students-who-cant-afford-college/" target="_blank">who we exclude</a>." We adopted an entrepreneurial <a href="https://president.asu.edu/read/higher-logic" target="_blank">operating model</a> that moves at the speed of technological and social change. We have launched initiatives such as <a href="https://www.instride.com/how-it-works/" target="_blank">InStride</a>, a platform for delivering continuing education to learners already in the workforce. We developed our own robust technological capabilities in ASU <a href="https://edplus.asu.edu/" target="_blank">EdPlus</a>, a hub for research and development in digital learning that, even before the current crisis, allowed us to serve more than 45,000 fully online students. We have also created partnerships with other forward-thinking institutions in order to mutually strengthen our capabilities for educational accessibility and quality; this includes our role in co-founding the <a href="https://theuia.org/" target="_blank">University Innovation Alliance</a>, a consortium of 11 public research universities that share data and resources to serve students at scale. </p> <p>For ASU, and universities like ASU, the "new normal" of a post-COVID world looks surprisingly like the world we already knew was necessary. Our record breaking summer 2020 <a href="https://asunow.asu.edu/20200519-sun-devil-life-summer-enrollment-sets-asu-record" target="_blank">enrollment</a> speaks to this. What COVID demonstrates is that we were already headed in the right direction and necessitates that we continue forward with new intensity and, we hope, with more partners. In fact, rather than "new normal" we might just say, it's "go time." </p>
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