Is enonomic performance mostly about telling macro stories effectively?

The behavioral impressions and biases are not just limited to micro behavior. They seem to be aggregating to macro level as well.

Robert Shiller in his recent piece says much of Japan’s recent revival is based on a powerful economic narrative:

Fluctuations in the world’s economies are largely due to the stories we hear and tell about them. These popular, emotionally relevant narratives sometimes inspire us to go out and spend, start businesses, build new factories and office buildings, and hire employees; at other times, they put fear in our hearts and impel us to sit tight, save our resources, curtail spending, and reduce risk. They either stimulate our “animal spirits” or muffle them.

Visiting Japan on a speaking tour, I am struck by the positive impact of the economy-related stories on people’s thinking and behavior, and also by how fragile that change is. Since Prime Minister Shinzo Abe assumed office in December 2012 and launched his program of monetary and fiscal stimulus and structural reform, the impact on Japanese confidence has been profound. According to the International Monetary Fund, the output gap – the difference between actual and potential GDP – narrowed from -3.6% in 2011 to -0.9% in 2013.

Most of the rest of the world lacks a comprehensive, easily understood narrative of positive change similar to Japan’s “Abenomics.” The output gap for the world’s major advanced economies, as calculated by the IMF, remains disappointing, at -3.2% in 2013, which is less than half-way back to normal from 2009, the worst year of the global financial crisis, when the gap was -5.3%.

We seem to be at the mercy of our narratives. Ever since 2009, most of us have just been waiting for some story to turn our hearts aglow with hope and confidence – and to reinvigorate our economies.

Surprisingly, Prof Shiller seems to be supporting this need for narrative:

I had the pleasure of meeting with Abe on this trip. He sticks to the script, telling a story of taking aggressive and definitive action against an economic malaise that has plagued Japan for decades. He inspires confidence; I felt it immediately.

Abe is also described as reviving national patriotism, even nationalism. Though I heard none of this from him in my meeting, I think it may be a central part of his story, too. Nationalism, after all, is intrinsically bound up with individual identity. It creates a story for each member of the nation, a story about what he or she can do as part of a successful country. Some of Abe’s most controversial steps, such as visiting the Yasukuni Shrine despite Chinese and Korean objections, only increase the story’s impact.

Still, it is not easy for national leaders, even those with Abe’s talents, to manage such stories, just as it is hard for film producers to make a blockbuster every time. No leader can consistently shape the narratives that affect the economy. But that does not rule out the need to try.

The problem has been too much of narrative over the years and very little action. All that seems to matter is getting someone who can talk to helm the economic policy making.  Rest does not seem to matter. But then as we have seen recently (and will see it in future as well), what matters is action as well. Infact less of narrative and more of proper work is needed to build things over a long term.

But yes over a short term, narrative helps but then soon people realise emperor had no clothes…

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