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.

19 thoughts on “Shiller praises Piketty’s contribution to a debate – and responds

    • Usual suspect says:

      Thomas Piketty has just refused the award of the Légion d’Honneur. Meanwhile Nobel laureate Joseph Stiglitz says Piketty gets income inequality wrong “…I think most readers of Thomas Piketty’s book (Capital in the Twenty-First Century) get the impression that the accumulation of wealth – savings – is responsible for the rise in inequality and that there is, therefore, in a way,a link between the growth of the economy – the accumulation of capital – on the one hand and inequality and wealth. My paper begins with the observation that in fact, you cannot explain what has happened to the wealth/income ratio by that analysis. A closer look at what has gone on suggests that a large fraction of the increase in wealth is an increase in the value of {urban} land, not in the amount of capital goods.”

  1. Pennybags says:

    “Piketty findings undercut by errors” (5/23/14) 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 says:

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

  2. Working stiff says:

    “Bill Gates’ net worth hits $90B, proving Thomas Piketty’s point” (8/23/16) “Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size. Note, in particular, that once a fortune passes a certain threshold, size effects due to economies of scale in the management of the portfolio and opportunities for risk are reinforced by the fact that nearly all the income on this capital can be plowed back into investment. An individual with this level of wealth can easily live magnificently on an amount equivalent to only a few tenths of percent of his capital each year, and he can therefore reinvest nearly all of his income. This is a basic but important economic mechanism, with dramatic consequences for the long-term dynamics of accumulation and distribution of wealth. Money tends to reproduce itself.”
    Thomas Piketty, “Capital in the 21st Century” [ ]

  3. Update says:

    French economist and best-selling author Thomas Piketty is to join the team of left-wing candidate Benoit Hamon in the run-up to France’s presidential election. Reportedly Piketty will advise Hamon on subjects relating to the “European budget treaty”.
    A professor with the London School of Economics, Piketty is the author of best-selling book “Capital in the Twenty-First Century”, which depicts wealth concentrations and distribution over the past 250 years.
    Thomas Piketty’s “Capital”, summarised in four paragraphs

  4. Eat the Rich says:

    Thomas Piketty, the French economist whose 2013 bestseller Capital in the 21st Century awoke upscale Americans to the shocking news that their economic system was not working for everyone, has written a new paper exposing more uncomfortable truths.
    Piketty’s new essay, called “Brahmin Left vs. Merchant Right”, studied electoral trends in three Western countries – France, Britain and the U.S. – dating back to the 1940s.
    …Piketty just puts numbers behind an observation that anyone covering recent American presidential elections could have made: That huge pluralities of voters on both sides of the aisle feel unrepresented and even insulted, and increasingly see both major parties as tools of the very rich.
    His belief is that a major reordering of the political landscape is coming. It will be based less on traditional notions of right and left, and more along the lines of what he describes as “globalists (high-education, high-income) vs. nativists (low- education, low-income).
    …Papers like Piketty’s are a warning that if the intellectuals in both parties don’t come up with a real plan for dealing with the income disparity problem before someone smarter than Donald Trump takes it on, they’re screwed. Forget nativists vs. globalists. Think poor vs. rich. Think 99 to 1. While Washington waits with bated breath for the results of the Mueller probe, it’s the other mystery – how do we fix this seemingly unfixable economic system – that is keeping the rest of the country awake at night.”
    Matt Taibbi, Rolling Stone April 1, 2018

  5. Ceteris Paribus says:

    Billionaire wealth reached record high levels amid the COVID-19 pandemic, a report by UBS and PwC found, as a rally in stock prices and gains in technology and healthcare helped the wealth of the world’s richest break the $10 trillion mark.
    A report from Swiss bank UBS revealed that billionaires did “extremely well” during the COVID-19 pandemic, increasing their wealth more than a quarter to $10.2 trillion at the height of the crisis.
    The world’s super-rich currently hold the greatest concentration of wealth since the US Gilded Age at the turn of the 20th century, when families like the Vanderbilts, Rockefellers, and Carnegies controlled vast fortunes.
    UBS/PwC Billionaires Report:

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