Noted economist Robert J. Shiller believes American businesses expect too much. "This is the process of economic growth," says Shiller. "We've seen a GDP growth of approximately 3-1/2 percent per year over all of this last century -- compare 2000 with 1900, when people were riding horses, using oil lamps and living on farms," he argues. "We've had spectacular economic growth, and I think in the coming decade we might do approximately the same -- which is wonderful. But it's not more wonderful.

"We have to understand economic growth has always been a slow process. We don't want to get ahead of the curve -- that's what happened in the 1990s," adds the Stanley B. Resor Professor of Economics at Yale University and author of the 1996 best-seller Irrational Exuberance.

Shiller says today's economic condition was spurred by bubbles in the world's stock markets, which soared in 1999, peaked in 2000 and then dropped. "There was too much excess, too much enthusiasm and over-investment," he says. It was a period of experimentation, where many new ideas were tried. The aftermath resulted in excess capacity, and while all the ideas were not discredited, emerging from the period of overconfidence has ushered in an era of reluctance. "A lot of plans have been on hold, and that contributes to the slow period the world economy has been in."

The tendency in the '90s to think "revolutionary-type" thinking, he explains, is the same process that brought Communism -- that we are going to smash the old and come out with all-together new things. But, he insists, "We're not smashing the old -- we are building on it." And, to Shiller, the "New Economy" wasn't so new, since he says every decade enters a new economy. "For centuries the economy has been continually changing, and the cumulative transformation has been enormous," he says, with information technology and globalization the drivers.

How, then, is the dollar's value in the global economy impacted by connectivity? Shiller says the U.S. dollar was something of a bubble itself, and its drop in value both helps and hurts companies, and means different things for different groups. For exporters, it might be great now, but the future is uncertain. The dollar's strength a few years ago, he says, was due to a tremendous belief in the U.S. growth engine. The U.S. economy was the model at the center of the booming global stock markets. Factors describing the dollar's path are more complex, and "It's very hard to predict where it will go."

However, he notes, the global economy goes far beyond just the dollar's impact, citing the current era an "amazing time" for less-developed countries. "We've seen spectacular periods of economic growth in both China and India. Those two countries together, with about 2 billion people -- about seven times the U.S.'s 300 million -- have to mean a lot for our future; it's a big issue facing the U.S."

Indeed, Shiller warns, people in different positions are going to have very different outcomes; it's an underlying theme of his latest book, The New Financial Order (Princeton University Press, 2003). "We are already seeing the beginnings of it, and it's going to happen more -- with a vengeance." While some people in the U.S. and other advanced countries will get really rich, others will be left behind. This will be an increasing tension.

Shiller asserts this trend towards increasing income inequality is seen in recent data. "Even the so-called 'recession or business-cycle data' are influenced by globalization and the new technology that is fostering it," he notes. The jobless recovery -- if it is a recovery at all -- is partly due to globalization and new technology, as firms lay off people to cut costs (2 million U.S. jobs have been lost since 2000). "I don't think we'll just see a recovery and everything will be fine again. The concerns people are expressing about globalization noticeably stirring up things and creating havoc within our country are legitimate," he says.

One reason for U.S. job loss is due to outsourcing abroad. While not a new phenomenon, the search to cut costs during the last few years' dismal economic environment have driven outsourcing to exponential growth -- starting with back office and call center jobs, and now to knowledge worker and analyst levels. And, while many extol the cost benefits, there is little or no response to the question: What about the loss of U.S. jobs? Shiller argues, "It's not talked about because people have no solutions."

He says he heard U.S. Commerce Secretary Donald Evans express "glib optimism," saying, 'We need economic growth, and that [outsourcing] will generate new jobs for Americans.' Evans, he says, like others, is just denying the likely impact and wants to tell inspirational stories.

"You can say that globalization or new technology generates jobs for Americans -- we have Americans selling Japanese cars! [but] I object to this attitude that it's as if economic theory says these processes can only make everyone better off -- that a rising tide lifts all boats. It doesn't. And, this is not a tide; this is a turmoil that the global economy is going through."

This begs the question: Should U.S. companies be outsourcing jobs to foreign countries? The capitalistic system that the U.S. exemplifies is increasingly admired and copied around the world, says Shiller. The system works very well, he says, if you tell companies, "We're going to define some rules of ethical behavior, and within those rules, you should just maximize profits," that system seems to promote economic growth because it's a good objective. The other side of that notion, he adds: business is a battleground, with winners and losers.

So, what motivates companies to, say, move headquarters to avoid taxes? "The U.S. system of laws has very clear rules -- you don't ever bump into those. There is also a gray area, where the laws are not so clear. Companies sometimes do things they think are motivated by their good interpretation of what the law is, or ought to be, rather than the letter of the law," he says. Reading the law too literally has been a source of problems for some, he adds. "Enron apparently didn't break any laws, but read them in a very cynical way."

Ultimately, he says, one of America's strengths is its business community's sense of ethics and sense of the purpose of the laws. Most people -- with some at Enron excluded -- are driven by a sense of integrity.

So, to the question of should companies outsource when it costs American jobs, Shiller says that in the present environment, they should -- to maximize profits. But it has to be a source of national debate: What are we going to do about this problem?

The spate of corporate scandals, Shiller says, has not changed his view of the health of the U.S. system. "This country really is the model for the world in many ways, even though they may hate us in some ways." Another strength, he sees, is the way the U.S. openly displays its problems and constructively deals with them.

Following the 1929 stock market crash, the Roosevelt Administration created the Securities and Exchange Commission. The SEC has always tried to help businesses do business in a constructive and ethical way, without presenting unnecessary obstacles, he says. "We regulate things, and we react to these things by surveillance, government and more -- such as the listing rules of institutions such as the New York Stock Exchange."

Enacting the Sarbanes-Oxley legislation, Shiller believes, will make the U.S. stronger, just as it emerged stronger from the 1929 debacle. When Regulation Fair Disclosure (Reg FD) was enacted, he says, many finance executives were against it, but he applauded it. "I'm sure it places burdens on people, and could have some negative consequences as well -- as some are afraid to say anything, due to not saying it correctly -- but overall, it is a good thing," he argues. "Markets in many other countries are not trustworthy, and exhibit outright fraud and manipulative behavior. This country has to be a model, and some nuisances have to be accepted."

Along with its high-visibility status, however, the U.S. is dealing with an unusually full plate of economic challenges and risks in this new century -- or so it seems. "There have always been risks for businesses," says Shiller. "Look at a list of businesses in existence 50 years ago and you'll see huge turnover -- a great majority are either gone, changed names or been integrated into others."

Conversely, he believes risk to individuals is not as prominent in our minds as it should be. One reason is the media focus on trivia, and Shiller believes both individual and business risk will worsen based on his "winner-take-all" concept. The idea is that technology concentrates economic advantages on the best people and ignores others.

For example, the 19th Century invention of the phonograph catapulted a few of the best singers to stardom, earning them millions of dollars selling millions of records, while ordinary singers lost jobs. A similar thing happened with motion pictures, where stage actors lost out; TV did wonders for superstar athletes.

As information technology accelerates, a general presumption is that it will create equality, but Shiller sees this winner-take-all effect happening in other professions, where people will be able to sell their services to millions of people.

He's dismayed -- "It won't raise all boats" -- and envisions an increasingly unequal society for both advanced and less-developed countries.

Shiller is a unique sort of economist; he's both a full-time academic and a capitalist/entrepreneur (he's started two businesses and serves as a board member and advisor) who voices deep concern for the economic well-being of people around the globe. And, while much discussed in this article relates to the U.S. condition, he's quick to credit certain best practices of other countries, such as the United Kingdom, and thinks the European Union has a great future.

He believes strongly that through financial innovation, the U.S. can do more to disperse risk and control hazards for businesses and individuals. The principles in his newest book describe using IT and globalization to diversify and spread risk in a variety of new ways, making it more affordable and offering new opportunities.

He concedes his ideas are "radical" -- in terms of being unfamiliar -- and there will be skeptics, but he says some ideas already "have small beginnings."

Basically, he wants to expand the institutions of capitalism. "One thing capitalist countries have learned is that risk is a difficult problem that has to be handled with complicated contracts and institutions," he explains. For example, the insurance and banking industries support and protect people and businesses against a variety of risks and losses. Insurance now covers a limited array of risk, which Shiller thinks can be dramatically expanded due to better IT and through a process of economic development.

One concept is "livelihood insurance," which ensures careers, "the most important source of wealth to an individual until they retire." Currently, disability insurance partially protects employees unable to work due to a disabling event. But what of those who lose their job to someone in China, or lose a job to a machine?

For lenders, he encourages income-contingent loans, as opposed to the current fixed interest rates -- especially for home mortgages. Loans in less-developed countries could be tied to the GDP in that country, so if the country falters, it would pay less; if successful, it would pay more.

Shiller wants to utilize technology to develop an array of huge global markets. "There should be a market for each country -- for occupational incomes, for the professions of law, medicine and for real estate -- city-by-city," he says. Indeed, he's currently working in one of his businesses on developing such a real estate-investment product.

The problem, Shiller says, is that if you live in a risky world, you tend to pull back and not want adventure; if it's dangerous outside, you stay home. So people don't take risks in creative or imaginative ways. He gets peaceful-looking talking about his new financial order -- one with better risk management.

"We can't imagine such a world, because it hasn't happened yet," he says. "But when people are individually more protected, they will be more venturesome with their lives. And, this will yield untold benefits."

So, do today's CFOs have to worry about deflation and not inflation? "There is a tendency to think that we've solved problems and they are gone forever," says Shiller. "The low inflation we've seen recently does reflect some improvement in monetary policy and central banking, in other countries as well," he continues. "But we are too ready to accept that problems of the past are gone."

Return to Financial Executive

FEI's flagship publication, Financial Executive magazine, has won another award -- an Eastern Regional gold (first place) award from the American Society of Business Press Editors (ASBPE) in their annual competition. FE won in the editorial division for its March 2002 special section on "Best Practices." This is the fourth juried award FE has won in the past two years. The award was presented in Boston on Monday, June 9.