income-inequality

In a widely publicized speech last Friday, Janet Yellen tackled the subject of wealth inequality in the U.S. head on. The Federal Reserve Chairwoman noted that wealth inequality is at a level that “greatly” concerns her. The wealthiest five per cent of the American population holds 63 per cent of the wealth, while the lower 50% of all U.S. households combined holds only one per cent, according to the Fed Survey of Consumer Finances, she said in her speech.

“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,” Yellen said. “It is appropriate to ask whether this trend is compatible with values rooted in our nation’s history.”

Janet Yellen addressed the topic, yet did not propose any policy changes. She did, however, pinpoint a few reasons why U.S. economic mobility is lower than in other industrialized nations. Primary and secondary education is funded on the local, rather than national, level, which means that property taxes influence the quality of schools. In a wealthier neighborhood, higher property taxes means better education and more opportunities, while a lower-income neighborhood’s property taxes contributes to educational stagnation. Providing more resources for children was one of four “building blocks” she proposed as a way of tackling the growing wealth inequality in the country. The other three include affordable higher education, business ownership and inheritances.

Though not a direct statement on where Federal Reserve monetary policy is headed, Yellen’s address did indicate to astute market watchers that low interest rates are likely to stay low for a while to come. If Yellen believes that starting a business could help low-income Americans rise to or stay in the middle class, it would be beneficial for borrowing rates to be accessible. By keeping interest rates low, the Federal Reserve can subtly signal to the job-creating community that the U.S. government has small business in mind, ideally sparking private sector growth in the hands of the little guys, and not just big business.

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By keeping interest rates low, the Federal Reserve can in theory help lower unemployment, but in order to affect real wages and not just joblessness, these low interest rates must last for a significant period of time. Economic expansion has to last long enough for workers at the bottom to stay at full employment, receive benefits and enjoy wage increases. In other words, interest rates have to be low for long enough that the economy can stabilize and redistribute wealth.

Considering Yellen’s investment in reducing wealth inequality in the United States, it would be a pretty good guess that future monetary policy from the Federal Reserve will support long-term employment and economic growth. Even though the economy has seen a recovery recently, Yellen’s stance indicates that she wants to see the U.S. economy escape from the bubble-burst cycle it has been on. The Federal Reserve does not control facets of government like public schooling and housing taxes, but what it can do, it probably will do: keep interest rates low to stimulate growth for the lower socio-economic half of the population.

 

Sources:

http://www.bloomberg.com/news/2014-10-17/yellen-greatly-concerned-by-widening-u-s-inequality.html, http://www.sfgate.com/business/bottomline/article/Janet-Yellen-s-stark-view-of-income-inequality-5835533.php, http://www.washingtonpost.com/posteverything/wp/2014/10/20/yes-the-federal-reserve-can-reduce-inequality/

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WSJ