Federal Reserve Chairwoman Janet Yellen’s unprecedented speech on income inequality harbingers worrisome policy prescriptions by a central bank created to serve limited functions. Her wide-ranging critique of America’s economic and education systems could well position her as the monetary equivalent of activist judges who legislate from the bench. This would be anathema to a system of limited government.
“The extent of and continuing increase in inequality in the United States greatly concern me,” Yellen said in Boston remarks reminiscent of the junior senator from Massachusetts, Democrat Elizabeth Warren. Yellen continued, “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.”
As The New York Times’ Neil Irwin points out, her soliloquy is unusual compared to traditional Fed chief behavior as a public figure “who generally tries to steer as far away from contentious political debates as possible.” Irwin contrasts Yellen’s remarks with her predecessor Ben Bernanke, who said in a 2007 speech that public policy addressing economic inequality “inherently depends on values and social trade-offs and is thus properly left to the political process.”
In her speech, Yellen completely ignored her sole job descriptions: controlling interest rates and money supply. Instead, she touched on a hodge-podge of factors she believes drives income inequality, from family vacations to kids’ nutrition. And as The Wall Street Journal highlights, Yellen failed to address the argument over whether the Fed’s bond buying and zero-interest-rate policies have exacerbated inequality by pushing up prices of assets “primarily held by wealthier Americans,” such as stocks.
“My purpose today is not to provide answers to these contentious questions, but rather to provide a factual basis for further discussion,” Yellen intoned. Yet her facts are disputable.
By comparing prior decades of income distribution with today’s, Yellen is comparing apples and oranges. It is incredibly difficult to compare today’s labor force with that of the 1950s, when America’s economic infrastructure allowed it to tower over war-ravaged competitors, and before millions of unskilled immigrants entered the workforce, exerting downward pressure on wages, particularly at the lower end. Women entering the workforce also drove down wages through further competition.
In terms of scholarly content, Yellen’s speech was all over the map. Strangely, while Yellen describes income inequality as a major problem, she acknowledges that the most solid recent research shows economic mobility in the United States has been stable in the last several decades. She pays homage to the Great Gatsby curve, ignoring how it has been effectively debunked by Manhattan Institute scholar Scott Winship and others. And while Yellen and her husband once researched out-of-wedlock births, in her Boston speech she failed to address this significant factor holding back social mobility. This is a glaring omission.
In her praise of pre-kindergarten as a panacea to social ills, Yellen footnotes a program known as the Perry Project, a highly confined social experiment whose effects have yet to be reproduced on a broader scale. And she ignores many other academic studies (effectively summarized by Brookings Institution scholar Russ Whitehurst) showing that pre-kindergarten has limited, lasting effects on academic outcomes. She says low-income schools should pay higher salaries to attract more effective teachers, yet makes no mention of how teacher union contracts and ironclad tenure policies make it nearly impossible to fire bad teachers and incentivize good ones.
Identifying rising college costs as a contributor to inequality, Yellen cites data showing lower-income families are spending a greater proportion of their incomes on education debt than in eras past. But she ignores the federally subsidized lending binge that has caused student debt to mushroom out of control.
This has done a special disservice to lower-income families, who could consider many other career pathways, including vocational training. Instead, myopic “college or bust” lending policies encourage students to take on tens of thousands of dollars in college debt, leading to high student loan default rates (highest among community college and for-profit college students, most typically low-income), when they could have better focused their energies elsewhere in the new economy.
Yellen bemoans a slowdown in new business creation, calling it a source of income inequality as fewer entrepreneurs are bootstrapping themselves up the economic ladder. Surely as an economist she should recognize that government regulations and taxes are a driving factor behind the slowdown, including constricted lending to would-be startups. Yet she does not.
Rather than straying outside her purview, Yellen could have addressed the need for greater transparency at her own shop, a cause with bi-partisan support. Or she could have admitted that a plan for the Fed to go directly into the debit card business is an ill-conceived example of government overreach.
“I have only just touched the surface of the important topic of economic opportunity,” she said in closing her sermon. Let’s hope that is indeed the case and Yellen’s politicized rhetoric is an ephemeral flash in the pan.
