Speaking in Boston last week, Federal Reserve Chair Janet Yellen announced that “the extent of and continuing increase in inequality in the United States greatly concern” her. “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.”
Well. I think it is appropriate to ask whether the Fed chair should be expressing concern over whether income inequality is un-American. And to answer: No. The Fed chair shouldn’t sound like a left-leaning politician opining about hot-button political issues.
After nodding towards the (correct) argument that inequality of outcomes can contribute to economic growth, Yellen — who, despite this misstep, I forecast will be an outstanding Fed chair — focuses on how inequality is a growing threat to opportunity. “To the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality,” she said.
In such circumstances, society faces difficult questions of how best to fairly and justly promote equal opportunity. My purpose today is not to provide answers to these contentious questions, but rather to provide a factual basis for further discussion.
To her credit, she didn’t explicitly provide answers. But she came too close for comfort.
On at least one occasion her “factual basis” needs to be checked. Yellen’s assertion that “the past few decades of widening inequality can be summed up as […] stagnant living standards for the majority” is quite debatable. According to the nonpartisan Congressional Budget Office (CBO), average real after-tax household income grew by nearly 40 percent from 1979 to 2007 for the broad middle class.
It’s not that Yellen is wrong, but rather that she is relying on a different definition of income than the CBO, using a different data source, and looking over a different period of time.
Politicians and advocates on both sides of the inequality debate pick income definitions, time periods, and statistical measures — which show different things happening to middle-class incomes — to bolster their side of the argument. I don’t think that’s what Yellen is doing, but she should have left less room for doubt by presenting a more holistic picture of what’s been happening to middle-class incomes and by sounding less like a left-leaning politician.
To facilitate “further discussion,” Yellen examines “four building blocks of opportunity,” two of which she describes as “cornerstones.” One is resources for kids in their “most formative” years:
Public funding of education is another way that governments can help offset the advantages some households have in resources available for children. One of the most consequential examples is early childhood education. Research shows that children from lower-income households who get good-quality pre-Kindergarten education are more likely to graduate from high school and attend college as well as hold a job and have higher earnings, and they are less likely to be incarcerated or receive public assistance.
As Yellen surely knows, expanding access to pre-K is a contentious political issue. (And its wisdom is debated by economists as well.) In addition to being one of her cornerstones of opportunity, it is also a cornerstone of the Democrat Party’s policy agenda and is extremely unpopular among the GOP.
She was very careful not to explicitly endorse expanding pre-K. But by praising its virtues – and detailing how access “remains limited,” “gains in enrollment have stalled since 2010, as has growth in funding” – she comes too close.
Yellen also mentioned two other “building blocks” of opportunity: entrepreneurship and inheritances. She spoke very positively of the former, arguing that owning a business is likely “a significant source of economic opportunity for many families below the very top in income and wealth.” And she seems to have joined other top economists in leaning away from the Piketty hypothesis that inheritances are a serious source of concern. Republicans will like both of these points.
But even by focusing on income inequality she has waded into politically choppy waters. What President Obama once called “the defining issue of our time” is still a polarizing subject, despite the fact that Democrats have been backing away from it, in part for political reasons. Like many conservatives, income inequality isn’t on my list of the top problems facing the country. But it is a live issue for progressives, many of whom still share the president’s earlier sentiment. By expressing her “great concern” over the issue, Yellen is putting herself squarely in the progressive camp.
This is a problem because the credibility of the Fed and its independence from politics are deeply important to the ability of the economy to function, especially during a downturn; we don’t want markets confused as to whether the Fed is pushing a partisan agenda. This one speech won’t threaten either, of course, but if it is the beginning of a pattern then the Fed will face increasing scrutiny from congressional Republicans.
Indeed, the fire is already burning. Last month the Republican-led House of Representatives passed a bill to audit the Fed for the second time in three years. The 2012 Republican Party platform included a recommendation for a commission to study a return to the gold standard, of which the Republican nominee in New Jersey’s Senate race is in favor. If Yellen continues to sound like a left-leaning politician, the political pressure on the Fed will mount, and the ability of the Fed to operate independent of politics will be threatened. If those threats are realized, everyone loses.
About a year and a half after he was elected pope, Benedict XVI — formerly a professor of theology and a top Vatican official — gave a speech at his former university in which he quoted an unfavorable remark about Islam uttered by a 14th-century Byzantine emperor. Street protests erupted across the Muslim world. The Holy Father learned quickly that there are things a theologian and cardinal can say that a pope shouldn’t. It seems that Janet Yellen — formerly a professor of economics and top Fed official — still must learn that part of the loneliness of the throne is often not lending voice to thought.