Janet Yellen on Economic Inequality

Speeches by government officials on economic inequality are rare. You recall the speech President Obama delivered some time ago in which he said it was the defining issue of our time. We haven’t heard a word from him since, let alone any major policy changes to remedy the situation.

But Janet Yellen, Chairman of the Federal Reserve, spoke out forcefully on this issue last week (10/17/14). In her speech to the Federal Reserve Bank of Boston she said:

"The extent of and continuing increase in inequality in the United States greatly concerns me. … It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity."

From all accounts this is the first time a Chairman of the Federal Reserve devoted an entire speech to economic inequality in this country. In 2007 when he was Chairman, Ben Bernanke did talk about the issue but lamely concluded,

“I will not draw any firm conclusions about the extent to which policy should attempt to offset inequality in economic outcomes; that determination inherently depends on values and social trade-offs and is thus properly left to the political process.” Talk about passing the buck.

In contrast, Yellen identified a number of areas that called for action. She said it was the Federal Reserve’s responsibility to do all it could to promote economic opportunities in this country, called for efforts to reduce the enormous debt students incur in attending college, as well as promoting early education and affordable higher education. She noted that mobility is lower in the United States than most other advanced countries and urged the creation of new businesses that would give individuals a chance of moving up.

All in all, a very concrete set of proposals, an impressive statement from the Chairman of the Federal Reserve. Let’s hope it isn’t Yellen’s last word on this issue. She obviously cares about the problem, so I don’t think it will be.

Yellen alluded to the possibility that income inequality could be a significant factor in the overall weakness in the economy. According to Neil Irwin (Times, 10/17/14) the logic of this conjecture goes like this:

"The wealthy tend to save a large proportion of their income, whereas middle and low- income people spend almost all that they earn. Because a rising share of income is going to the wealthy, spending—and hence aggregate demand—is rising more slowly than it would if there were more even distribution of income."

If true, this hypothesis provides additional support for using fiscal policy and congressional action to lessen the extent of economic inequality in this country. The benefits are clear. Other than fiscal policy, the likelihood of congressional action now is virtually nil, an outcome that is deeply distressing to this writer and I imagine to Yellen too.