The Wonk Room

Shiller: Income Inequality Is A Problem That Could Be ‘Bigger Than This Whole Financial Crisis’

Yesterday, economist Robert Shiller — co-creator of the Case-Shiller housing price index and a professor at Yale — appeared on CNN to discuss Wall Street’s bonus bonanza and its implications for economic policy. Shiller is of the opinion that the bonuses are indicative of America’s greater problems with income inequality, which he feels will be become “bigger than this whole financial crisis” if left unaddressed:

To me, I would hope that this would spur public discussion about the structural problem that inequality, economic inequality, has been worsening in the United States and in other countries for 30 years. And it’s gotten really — especially at the high end — it’s gotten really off…This, I think, is potentially the big problem which is bigger than this whole financial crisis. If these trends that we’ve seen for 30 years now in inequality continue for another 30 years, we’re going to look like — it’s going to create resentment and hostility. It’s not a country that — we could turn into a country that even the rich would rather not be in. [...]

And I think we ought to think about — I have a proposal. I’ve talked about this in my other, some of my books. I have proposed that the government should index the tax system to inequality.

Watch it:

The income gap in America is at an all-time high, with the wealthiest 10 percent of Americans earning 11.4 times the amount made by those living near or below the poverty line in 2008. And most of that wealth is concentrated at the very top, as between 1979 and 2006, the inflation-adjusted after-tax income of the richest 1 percent of households increased by 256 percent (compared to 21 percent for families in the middle income quintile and 11 percent for the bottom). In 2007, the last year for which data is available, executives and other highly compensated employees received more than one-third of all pay in the U.S.

As The New York Times’ David Leonhardt pointed out, in recent years “the wealthy have received both the largest pretax raises and the largest tax cuts.” Under Shiller’s “Rising Tide Tax System,” tax rates would “automatically adjust along with levels of income inequality.” If the incomes of the middle class and the poor were growing faster than those of the rich, tax rates on the rich would fall. If the incomes of the rich were growing faster, their tax rates would rise.

I don’t see much of a chance of anything resembling Shiller’s plan making an appearance in Congress anytime soon. However, the surtax in the House’s health reform bill — which is still causing all manner of consternation — would help to address some of the inequality, by increasing taxes on the very wealthiest to pay, in part, for a bill that would rein in health care costs for everybody.