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Bridging the Wealth Gap with Obama.
November 9, 2008 12:09 PM

In today's NY Times' Business section, there are half-a-dozen economists weighing in on how the new administration should tackle our financial woes. Robert Shiller, economics professor from Yale, addresses one of our most intractable problems that has slowly led us down this path of destruction - income inequality. The graph below shows how the median wage has underperformed under Bush:

Says Shiller,

Indeed, there has been a significant, decades-long trend toward greater inequality that needs to be corrected. The president-elect needs to seize the opportunity and to do something really effective to prevent inequality from getting much worse.

He then outlines various solutions that a President Obama can undertake to address this systemic problem:

The best way to battle gratuitous inequality is to make our financial institutions better embody the true principles of risk management. Financial theory is all about incentives for people to work effectively, and diversifying against random shocks by sharing them among many investors. At its essence, finance is really more about helping and sharing than "beating the market."

It may seem paradoxical to try to lessen inequality by relying on the institutions that are most blamed today, but it is only through these institutions that inequality reduction can really work well in a capitalist economy. Enhanced financial institutions could serve the real purpose that financial theory proposes: serving the people.

He lays out three steps we can take beginning in January:

1) To improve the information infrastructure, we need to subsidize financial advice for the common man. The crisis we are in is largely due to investor ignorance. Some emergency measures, like the Hope Now Alliance, have been set up essentially to offer such help, but these will presumably be dismantled after the crisis, and they are not well designed for serving investors’ broad needs. We need some permanent subsidies to get the full scope of financial advice out to the people.

2) Second, we need to broaden financial markets to improve risk management. We need sophisticated systems that will act as insurance plans against unexpected risks. The government could lead the way to a historic development of financial infrastructure.

3) Third, we need to change retail financial institutions, notably those that grant and service mortgages. Recent government policy has encouraged workouts for defaulting mortgages — again an impromptu, after-the-fact measure. These workouts should have been spelled out in the original of what I have called a "continuous workout mortgage." Then workouts could be systematic, automatic and free-market, with costs priced into the original mortgage rate.

Although these points are a bit general, it is encouraging to finally have a president in office who will listen to experts such as Robert Shiller. Bring back the experts!!

Some of the other economists with columns in today's Times (Sunday Business Section) can be read hear. Check 'em out!

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