Robert Shiller Argues That Rising Inequality In The US Was A Major Cause Of The Recent Crisis, And Little Is Being Done To Address It → Washingtons Blog
Robert Shiller Argues That Rising Inequality In The US Was A Major Cause Of The Recent Crisis, And Little Is Being Done To Address It - Washingtons Blog

Monday, January 24, 2011

Robert Shiller Argues That Rising Inequality In The US Was A Major Cause Of The Recent Crisis, And Little Is Being Done To Address It

I have previously argued at some length that rising inequality is one of the main causes of the economic crisis.

Famed Yale economist Robert Shiller agrees.

As the Browser reports:
Yale economist Robert Shiller argues that rising inequality in the US was a major cause of the recent crisis, and little is being done to address it.
Shiller gave The Browser a reading list of books which explain the economic crisis, including former IMF chief economist Raghuram G. Rajan's book Fault Lines, which gives several causes for the current crisis, explaining:
The first of them is political, and the politics that lead to rising inequality. That’s been a trend in recent years in most nations of the world. Inequality has been getting worse, particularly in the US, but also in Europe and Asia and many other places. One thing that this has done is it has encouraged governments, who are aware of the resentment caused by the rising inequality, to try to take some kind of steps to make it more politically acceptable. He gives other examples as well, but historically, that has often taken the form of stimulating credit: instead of fixing the problems of the poor, lending money to them. He has a chapter entitled ‘Let them eat credit’.

The US in particular has stimulated the housing market, it has subsidised lending to people, which drove up home prices in an unsustainable way. And there wasn’t that much concern about, or understanding of, the sustainability of this. That’s his first fault line
Shiller notes:
I think inequality is a huge emerging problem, and that our society has to think about dealing with it in a constructive and real way – not through ‘Let them eat credit,’ not through wishful thinking. We have to understand how we get inequality and what we can do about it.
Shiller then discusses Winner-Take-All Politics: How Washington Made the Rich Richer and Turned its Back on the Middle Class, by Paul Pierson and Jacob Hacker:
This is a new book – it just came out. It’s about rising inequality and it traces back to fundamental causes. I like books that get back to ultimate causes and that think like social scientists about these causes. The question is, ‘Why is inequality getting worse in so many different countries?’ This book particularly focuses on the US. The traditional answer is – well, there are a number of traditional answers, but the most prominent among them is this idea that in a modern economy there is a skill bias in technical change. Our computers and communications have led to a winner-take-all society, where only the really smart can make money. Everyone else is technologically obsolete, with all these computers that are replacing people. It is, I think, a very important theory.

But Hacker and Pierson point out that it doesn’t really fit the recent data. In the US, we’ve seen a rapid concentration of wealth at the extreme high end. The top tenth of a per cent of the top hundredth of a per cent of the population is getting wealthy very fast. They point out that this is not true in Europe, and yet the economies are very similar and growing at similar rates. If the technology is the same, why would there be a difference at the extreme high end? And they argue that the answer is really political. There have been political changes in the US that allow the extreme high end to garner more wealth. Ultimately, it represents a failure of our society to take account of the fact that the extreme high end can lobby and can organise for its own interests, and we’ve let it happen.
The interviewer asks:
So you feel inequality is central to what has gone on and that we really need to address that?
Shiller responds:
Yes – and there is very little concrete talk about addressing it. It’s a very difficult problem. You might think that in a system of majority voting, the middle class and the poor would dominate and would prevent this kind of inequality from developing. But it hasn’t been that way – it’s been even less so that way lately, especially in the US. And once again, we have to attribute that to some change in our zeitgeist, in our way of thinking about what people view as important. That’s an underlying theme in all of these works, going back to Adam Smith. I don’t think he uses the word inequality very much – but it is about poverty and the alleviation of poverty. In Adam Smith, of course, the wealthy tend to be the kings and lords…


  1. Shiller has figured this out already? Astonishing. Maybe in a few weeks he'll be reading Reich, and in another he'll be reading David Harvey's The Enigma of Capital, and he'll come to realize that money makes us behave in ways that utterly counterproductive (that is, by investing our money [something we do to become richer and thus more secure] in our direct competitors such as China and the Asian countries more generally). I don't begrudge them their wealth, but that issue is orthogonal to the fact that our allowing ourselves to fund them in order to make short-term profits is not something that is good for our own country. Yet we do so anyway, because we want "interest" -- that is, we want to be better off in the future for free. Homo economicus indeed.
    No offense, I don't mind the fact that you try to substantiate your posts by linking to other articles, or articles by authorities in the field, but it seems to me that economists are not the best experts to quote on things that pertain to economic organization and creating a healthy social environment in which to live.

  2. Inequality is the result of economic rent — land rent, monopoly rent, and financial rent. Economic rent is the surplus in excess of the factors of production, and it is income (flow) and wealth (stock) extraction. Being non-productive it is inefficient and should be discouraged by being taxed away. That is what progressive taxation is for, not redistribution, as the class warriors would have it. Progressive taxation incentivizes productive investment and discourages parasitical rent-seeking.

  3. The inequality is a result, not a cause , of the crisis. I mean the crisis carries inequality, first of all because the benefits of a money expansion is addressed to the first of the chain (see Von Mises and Austrian economic cycle theory). The last, the consumers, are the damaged.

  4. ospinBoson is right. Many other economists have seen these limits of the free market, including the very well known critics of classical liberals and marxists. Yet the help your country instead of the Chinese is not very correct short or long term.
    I think it is good to mention these things every once in a while as we tend to forget them. The risk of not admitting these limits of capital and not struggling to find solutions for them is to get into a situation when marxist slogans will restart working on a large part of the population...
    @Tom Hickey - how can you only tax the parasitical rent and not the salary? Progressive? in a globalized world?

  5. “Inequality” in a Democratic Representative Republic where government is “for and by the People”, how can this be?

    Economics is the allocation and distribution of resources and is political by nature. Economics can be whatever you want it to be, it can be Free or Totalitarian. For example, Communist China/ American corporations’ economics is Totalitarian and Chinese slave labor is impossible to compete with unless you have your own slaves. Ha. Ha.

    Our economic crisis is a political crisis as we move from Democracy to multinational corporate Fascism and world governance. Is this the Free Main Street American economy you want it to be? If not, who is to blame? You? -- or the bribed corruption of Congress, the complete corruption and breakdown of the Department of Justice, the arrival of Fascist Homeland Security or the Department of Defense and CIA unending Wars?

    America is in a political, economic crisis and without the rule of law to bring those responsible to Justice, revolution is the only way to regain our Democracy and equality.

  6. There are three simple steps to address the inequality:
    1) Set up gallows in front of Goldman Sachs and let the masked man do his important work.
    2) Legalize DDT and saturate Wall Street to get rid of the cockroaches.
    3) Create a new currency that will be exchanged one for one up to $500K and 1 to 100 for above $500K. The only exceptions to this exchange would be retirement funds.


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