Don’t dismiss the psychological impact of poor economic growth and increasingly weighty economic sanctions.
Yale professor Robert Shiller is out with a new essay at Project Syndicate called “Parallels to 1937” that tackles the issue of how an economic malaise can impact the psychology of citizens.
The Nobel prize winning economist examines the international dynamics currently at play in Europe.
Shiller writes that it took 8 years after the stock-market crash of 1929 for any real economic recovery to take place, and while the situation isn’t quite as bad today, there are several psychological impacts from Europe’s recent economic malaise that could plague the continent’s population.
“Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. And such fears can have severe consequences,” Shiller writes.
Shiller notes that economic growth — as measured by per capita real GDP — in current European flash points Ukraine and Russia was 52% and 46%, respectively, from 2002 through 2007. Last year, those numbers were 0.2% and 1.3%, respectively, and Shiller writes that, “The discontent generated by such disappointment may help to explain Ukrainian separatists’ anger, Russians’ discontent, and Russian President Vladimir Putin’s decision to annex Crimea and to support the separatists.”
And as it tends to be for Shiller, author of the best-selling book “Irrational Exuberance,” many of the problems facing citizens in Ukraine, Russia, and the whole European continent can be rooted in psychology.
“Some will doubt the importance of economic growth. Maybe, many say, we are too ambitious and ought to enjoy a higher quality of life with more leisure. Maybe they are right.
But the real issue is self-esteem and the social-comparison processes that psychologist Leon Festinger observed as a universal human trait. Though many will deny it, we are always comparing ourselves with others, and hoping to climb the social ladder. People will never be happy with newfound opportunities for leisure if it seems to signal their failure relative to others.”
And away from the eastern part of the continent, economic data this summer has shown that the Eurozone economy is still mired in mediocrity at best, and teetering on the brink of depression at worst.
In a report to clients on Thursday, economists at BNP Paribas looked at Europe’s “Great Deterioration,” noting that labour productivity has declined on the continent for the last five decades.
For Shiller, this indicates a clear need for Europe, and the world, to end sanctions and integrate Russia and Ukraine into the world economy, writing that, “A satisfactory resolution of the current conflict requires nothing less.”