Shiller praises Piketty’s contribution to a debate – and responds

Thomas Piketty’s impressive and much-discussed book Capital in the Twenty-First Century has brought considerable attention to the problem of rising economic inequality. But it is not strong on solutions. As Piketty admits, his proposal – a progressive global tax on capital (or wealth) – “would require a very high and no doubt unrealistic level of international cooperation.”

We should not be focusing on quick solutions. The really important concern for policymakers everywhere is to prevent disasters – that is, the outlier events that matter the most. And, because inequality tends to change slowly, any disaster probably lies decades in the future.

That disaster – a return to levels of inequality not seen since the late nineteenth to early twentieth century – is amply described in Piketty’s book. In this scenario, a tiny minority becomes super-rich – not, for the most part, because they are smarter or work harder than everyone else, but because fundamental economic forces capriciously redistribute incomes.

In The New Financial Order: Risk in the 21st Century, I proposed “inequality insurance” as a way to avert disaster. Despite the similarity of their titles, my book is very different from Piketty’s. Mine openly advocates innovative scientific finance and insurance, both private and public, to reduce inequality, by quantitatively managing all of the risks that contribute to it. And I am more optimistic about my plan to prevent disastrous inequality than Piketty is about his.

Inequality insurance would require governments to establish very long-term plans to make income-tax rates automatically higher for high-income people in the future if inequality worsens significantly, with no change in taxes otherwise. I called it inequality insurance because, like any insurance policy, it addresses risks beforehand. Just as one must buy fire insurance before, not after, one’s house burns down, we have to deal with the risk of inequality before it becomes much worse and creates a powerful new class of entitled rich people who use their power to consolidate their gains…

Piketty’s book makes an invaluable contribution to our understanding of the dynamics of contemporary inequality. He has identified a serious risk to our society. Policymakers have a responsibility to implement a workable way to insure against it.

Here in America, we’re saddled with policymakers who are convinced their first responsibility is to be re-elected immediately followed by becoming a lobbyist for the corporations and other power-hungry entities they’re supposed to be keeping an eye on.

Thomas Piketty’s book and Bob Shiller’s tome complement each other well. Yes, I endorse reading both and those of you who think they can’t enjoy modern economics must only have a problem with the pleasures of learning.

Both men represent a school of thought that has never left modern investigations of political economy. Every nation’s economy is only as successful in how it treats all of us – not just the oligarchs. Retrograde examples from Reagan onward excepted of course.

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13 comments

  1. Pennybags

    “Piketty findings undercut by errors” (5/23/14) http://www.ft.com/intl/cms/s/2/e1f343ca-e281-11e3-89fd-00144feabdc0.html#axzz32a5PY5rG According to the Financial Times’ economics editor data underpinning Picketty’s “Capital in the Twenty-First Century” includes transcription errors, unexplained statistical modifications, “cherry picking” of sources”, also issues concern sourcing and definitional problems” and some numbers that appear simply to be constructed out of thin air.

    • keaneo

      Ol’ Rupert’s ideological slash and burn at the Wall Street Journal is nothing compared to what he did at the FT.

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