[FORUM]Some radical distribution ideasWhen the world is chaotic and unstable, following a dream described by an eccentric economics professor could give us some comfort.
Robert J. Shiller, a professor at Yale University, recommended a Web site, www.MyRich Uncle.com, for fun. When students don’t have enough money for college tuition, they can log on to this site and apply for assistance. On this site, their eligibility and the size of a stipend is determined depending on their prospective college, major and past scholastic performance.
What is unusual about this site is the way the loans are paid back. Unlike the usual school loan system with fixed interest rates, this site asks students to repay according to their income level after graduation. They are usually required to repay two to three percent of their income for a certain period after they get a job.
Under this loan system, some students may repay far less than they borrowed but the opposite can also happen. When the repayment is linked to their future income, the risk of their going bankrupt is much reduced. This can be a good guide to us, troubled with credit card companies facing bankruptcy, the proliferation of bad credit risks and the debts of farm households.
Professor Shiller argued that we should solve the problems of the 21st century with six ideas he suggested, including this loan system. Thanks to his exact prediction of the puncture of the bubble in the U. S. stock market in his book “Irrational Exuberance” three years ago, Mr. Shiller has become so famous that his name is mentioned together with that of Alan Greenspan, the chairman of the Federal Reserve Board, whenever people talk about stocks. He warns this time that we are unaware of the tremendous risks we may face in the 21st century and are neglecting to prepare for them.
In his new book “The New Financial Order: Risk in the 21st Century” published last spring, he shows how people can avoid economic risks with the help of new financial techniques and information technology.
Three ideas can be applied to the private sector, and the other three to the public sector. First, securities companies should develop “macro markets” where indexes linked to macroeconomic indicators that reflect the overall risks of the economy, such as the growth rate, are publicly traded. He says also that insurance companies should sell comprehensive livelihood insurance and insurance against rising housing prices in addition to life insurance.
He also wants banks to come up with a loan system linked to income. The government, Mr. Shiller says, should develop a tax system where rates are adjusted in such a manner that income distribution stops getting worse. It should also pursue a social insurance system ― in which intergenerational risks are shared fairly ― and international conventions for risk management.
In Professor Shiller’s “wonderful new world,” individuals would build a network with people around the world as well as with their neighbors to share risk. Like grief, risk is indeed reduced when it is shared with many people. In this world, no economic uncertainty about the future would discourage people from doing boldly and decisively what they want to. As there would be more opportunities for realizing their potential, the lives of the entire human race would be better and more prosperous. Of course, many people are skeptical about this grand dream and, in particular, doubts about moral hazards and the problem of selecting a manager for a pan-global system.
In retrospect, we have experienced oil price fluctuations and other political crises but were satisfied with high economic growth, so we ignored risk management.
Only after the foreign exchange crisis was people’s awareness about risk heightened, so that now many people are greatly worried and uncertain about their future. A world should be built where, freed from risk, people could enjoy life and live according to their value.
Despite the controversy over their feasibility, it is time we gained some insights from Mr. Shiller’s drastic ideas.
* The writer is the director of the JoongAng Ilbo Economic Research Institute.
by Ro Sung-tae