RatcliffeBlog - Mitch Thinking Out Loud

Sharing Risk: The Next Big...

Sharing Risk: The Next Big Social Movement

I've been writing about using Xpertweb to provide risk-sharing and financial instruments for risk-sharing in markets for a while. Now, Robert Schiller, an economist at Yale who pioneered behavioral economics has come out with a new book, The New Financial Order: Risk in the 21st Century, that deals with this topic in immense detail. He has an interview in the most recent Milken Institute Review (registration required and it's a PDF). Check out this idea, inequality insurance, it's world-shaking:

The idea of inequality insurance is inspired by other sorts of insur-ance – but also by research in psychology. Any policy to deal with inequality, which evolved over a long period of time, has to involve enduring changes to our system. I want to restructure tax policy as inequality policy, redefining taxation in terms of income distribution rather than tax rates. Instead of legislating rates and brackets, we would target the acceptable level of inequality and automatically adjust rates to meet the target.

Interviewer: So an individual could still get rich in this system?

Robert Schiller:The progressivity of the tax system would be adjusted automatically to preserve the desired income distribution, the acceptable degree of inequality. Individuals who worked hard or got lucky could still propel themselves to the top of the heap.

Such a system would be fundamentally different than the current one. Once we collectively defined the acceptable limits of inequality, there wouldn’t be much left to fight about in terms of tax policy. Such a system, I think, would have a good chance of enduring for many years. Tax rates would change frequently, but the targeted degree of inequality wouldn’t.

As a practical matter, what amounts to insurance would allow us to make sure that inequality did not get any worse than it is today. If markets pushed the economy toward greater inequality, tax policy would push back. But politicians wouldn’t have the problem of explaining why tax rates changed.

You can imagine systems where groups with common interests, such as a shared profession (doctor, carpenter, artist) got together and created a financial alliance that distributed risk across the entire profession, even providing for retirement funding. This is a very important idea and one worth a deep look. This can all be tied to the ideas in my Emergentism model, so that society organizes itself to eliminate inequality through distributed self-organizing networks.