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NRO’s domestic-policy blog, by Reihan Salam.

Does Janet Yellen Think Inequality Is Holding Back Our Economy? Not Really



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During Federal Reserve chairman Janet Yellen’s inaugural testimony before Congress today, a number of members were interested in asking her about economic inequality. Jim Pethokoukis chides the chairman for saying that she’s “very concerned” about the issue, when there are so many other economic problems she ought to highlight — problems for the working class that he does an apt job of limning.

But I’m not sure she deserves a great deal of criticism: In fact, her testimony and other work suggests that the issues Jim highlights are the problem, and that she’s “very concerned” about inequality because it reflects a number of them. There was a telling moment when Gwen Moore, a Wisconsin Democrat, asked Yellen whether she thought inequality presented a threat to future economic growth, and what tools the Fed had to fix that. Yellen said the Fed’s toolbox is suitable for moderating recessions and stimulating recoveries, not fixing larger economic trends — and didn’t answer Moore’s other question at all.

She wasn’t willing to go out there and say that inequality isn’t a driver of our future economic problems; she didn’t affirm it, either. The economic consensus is fairly clear that income inequality per se doesn’t present an economic problem, but one doesn’t necessarily expect Yellen to make any daring pronouncements about still debatable, and politically contentious, topics.

An earlier questioner raised a different worry, telling Yellen many of his colleagues had “moral” concerns about inequality, and asking her whether she was concerned as well. She didn’t exactly shy away, calling it “one of the most important issues” and “one of the most disturbing trends” facing the U.S. But she quickly noted that, though some have argued the weak recovery can be attributed to high inequality, “we don’t have certainty about that.”

So why did she say she’s so concerned? She might be morally unsettled by high inequality, which is arguably an unhelpful and distracting answer for a Fed chairman to make before Congress. But it’s pretty clear she’s saying she’s concerned by the causes, not the effects, of inequality. That is, the problem is that inequality is rising because middle- and lower-class wage and jobs growth hasn’t been great, not because the latter is causing the former or any other particular problems.

“Rising inequality is partly the result of a weak job market that we’re trying to address, but there are deep and disturbing longer-term and structural trends,” she said, noting “a rising disparity between the wages earned by more- and less-skilled workers, shifts in global competition, that have diminished the jobs of less-educated people.”

I wouldn’t quibble with any of this, and I don’t think Jim Pethokoukis would either — these don’t have to be disturbing trends because they deepen inequality which then has some other negative effect, but because they are unfortunate per se. Yellen said something pretty similar in her congressional testimony before she was appointed, and these are the issues that Yellen raises, under the heading of “inequality,” in a 2006 San Francisco Fed speech.

There’s some debate over how much of rising inequality has to do with weak income growth among the lower and middle classes, productivity gains bunching at the top of the skill and income distribution, the financialization of our economy, etc. I suspect some on the right who strenuously object that inequality is not an economic problem per se would disagree with Yellen about which explanations are most important, which should be addressed, how much inequality has increased, how badly the middle class has stagnated, etc. Further, she probably disagrees with people like Jim and me about what we should do about working-class and low-skilled stagnation.

But they’d likely agree with her on the fundamental point, that we ought to be concerned about actual economic challenges for the working class (rather than the fact that they happen to increase inequality which then somehow makes the economy more fragile or lethargic overall).

She didn’t make that incredibly clear during her testimony, of course. It might have been a good opportunity to remind inequality-obsessed congressional Democrats that we should be focused on driving economic growth among the 99 percent rather than worrying about it among the 1 percent — but she didn’t offer their views much intellectual credence, either.



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