Janet Yellen, who served as Federal Reserve Chair in Barack Obama’s second term, raised eyebrows at the time when she talked about how wealth inequality had increased during and leading up to the Obama administration.
“The extent of and continuing increase in inequality in the United States greatly concern me,” Yellen said at a 2014 conference sponsored by the Federal Reserve Bank of Boston. “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.”
In her speech, entitled “Perspectives on Inequality and Opportunity from the Survey of Consumer Finance,” Yellen talked about the rising debt loads poor students must incur to get a college education, a slowdown in small-business formation, and trends in inheritances, among other issues.
At the time, talking about inequality was considered downright radical for the country’s economist-in-chief by the cautious standards of central bankers, New York Times reported. The Fed chair generally tries to steer as far away from “contentious political debates” as possible. Nothing about Yellen’s statements “would seem unusual coming from a left-leaning politician or any number of professional commentators,” the Times reported.
“By speaking out on the issue of inequality, has Fed Chair Janet Yellen risked appearing as a ‘partisan hack’? That is certainly the view for some on the right,” Richard V. Reeves wrote for Brookings.
By comparison, former Fed Chairman Ben Bernanke (2006 to 2014) said in a 2007 speech to the Great Omaha Chamber of Commerce, “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.”
In her inequality speech, Yellen talked about “stagnant living standards for the majority.”
She argued that there are four building blocks of opportunity in the U.S. She cited seven years of data following the start of the financial crisis from 2007 to 2014, based on the Federal Reserve’s triennial Survey of Consumer Finances.
Education, especially the resources available to children in their most formative years, is one of the four building blocks of opportunity in the U.S., Yellen said.
The gap in wealth between families with children at the bottom and the top has been growing steadily over the past 24 years, but that pace has accelerated recently, Yellen said. Median wealth for families with children in the lower half of the wealth distribution fell from $13,000 in 2007 to $8,000 in 2013, after adjusting for inflation, a loss of 40 percent. The next 45 percent of households with children also saw their median wealth fall dramatically — by one-third in real terms–from $344,000 in 2007 to $229,000 in 2013. The top 5 percent of families with children saw their median wealth fall 9 percent, from $3.5 million in 2007 to $3.2 million in 2013, after inflation.
Yellen talked a lot about teachers. Higher-quality teachers raise the educational attainment and the future earnings of students, she said. Better-quality teachers can help equalize some of the disadvantages in opportunity faced by students from lower-income households, but research shows that, due in part to inequality in teacher pay, the best teachers tend to migrate to schools in higher-income areas.
Even in districts where teacher pay is uniform based on experience, more experienced and better-performing teachers migrate to schools and classrooms with more-advantaged students, Yellen said.
Yellen identified college as her second building block of opportunity — or more specifically, “higher education that students and their families can afford” By one measure, she said the median annual earnings of full-time workers with a four-year bachelor’s degree are 79 percent higher than the median for those with only a high school diploma.
However, the burden of higher education debt has long been higher for families with lower net worth, and this disparity has grown much wider in the past couple of decades, Yellen said. The large and growing burden of paying for higher education may make it harder for many young people to take advantage of the opportunity higher education offers.
More than half of the top 5 percent of households have a share in a private business but only 3 percent of the bottom half of households hold equity in a private business. It is a big share of wealth for those few. The average amount of this wealth is close to $20,000, 60 percent of the average net worth for these households, Yellen said.
“It has become harder to start and build businesses,” she said. “A slowdown in business formation may threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth.”
Owning a business is risky, and most new businesses close within a few years. But research shows that business ownership is associated with higher levels of economic mobility, Yellen said.
Inheritances are a significant source of economic opportunity for a sizable minority below the top that receive one, Yellen said.
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Half of the top 5 percent of households by wealth reported receiving an inheritance at some time, but a considerable number of others did as well — almost 30 percent of the next 45 percent and 12 percent of the bottom 50 percent. The average inheritance reported by those in the top 5 percent was $1.1 million. By comparison, $183,000 was average among the next 45 percent and $68,000 was the inheritance amount reported among the bottom half of households.
The distribution of income and wealth in the U.S. has been widening more or less steadily for several decades — more than in most advanced countries, Yellen said. This trend paused during the Great Recession because of larger wealth losses for those at the top and because increased safety-net spending helped offset some income losses for those below. But widening inequality resumed in the recovery. As the stock market rebounded, wage growth and the healing of the labor market were slow, she said. The increase in home prices had not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.
Income inequality narrowed for 40 years following the Great Depression, Yellen said. The past several decades have seen the most sustained rise in inequality. By some estimates, she said, income and wealth inequality are near their highest levels in the past 100 years and probably higher than for much of American history before then.
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