At her Senate confirmation hearing on Thursday, Janet Yellen, the nominee to replace Ben Bernanke as chair of the Federal Reserve after he steps down from his current term, discussed the rising trend of income inequality and the threat it poses to the economy.
This is a very serious problem, it’s not a new problem, it’s a problem that really goes back to the 1980s, in which we have seen a huge rise in income inequality… For many, many years the middle and those below the middle [have been] actually losing absolutely. And frankly a disproportionate share of the gains, it’s not that we haven’t had pretty strong productivity growth for much of this time in the country, but a disproportionate share of those gains have gone to the top ten percent and even the top one percent. So this is an extremely difficult and to my mind very worrisome problem.
She noted that there are many causes for rising income inequality, pointing to technology, globalization, and the decline of unions. “The solutions involve a multitude of things, including education, maybe early childhood education, job training, other things,” she said. While the Federal Reserve can’t change all of those problems, she argued, what it can do is try to bring about a strong economic recovery that creates jobs and gives people more opportunities to rise up the ladder.
But she also slammed Congress for getting in the Fed’s way when it comes to bolstering the economy and creating growth that can lead to jobs, with austerity through budget cuts hurting the Fed’s monetary efforts to support the recovery.
Fiscal policy has been working at cross purposes to monetary policy. I certainly recognize the importance of the objective of putting the U.S. debt, deficit and debt, on a sustainable path… But some of the near-term reductions in spending that we have seen have certainly detracted from the momentum of the economy and from demand, making it harder for the fed to get the economy moving, making our task more difficult.
She argued that instead of slashing spending now, Congress could focus on medium-term deficit reduction without “subtracting from impetus that we need to keep a fragile recovery moving forward.”
Yellen is right that income inequality has been growing at an alarming rate. Since the 1970s, the richest 20 percent of Americans have seen income grow much faster than for the bottom 20 percent, and their incomes are now eight times higher than at the bottom. But things have accelerated in the years after the recession. Over the past three years, the top earners saw income grow by 5 percent while everyone else saw it decline. The top 10 percent of Americans took half of the country’s income home last year, the largest amount on record. Meanwhile, the bottom 60 percent of earners have seen a “lost decade” in wage growth, with compensation falling or stagnating. This inequality has many causes: the decline of unions, different tax treatment for investment income, and deregulating Wall Street among them.
And she’s also right that American austerity measures aren’t helping the economy grow. Sequestration, the automatic budget cuts that went into effect in March, has hurt growth and gets worse next year. Without those cuts, the budget outlook would look much better and the economy could add as much as 1.2 percent to GDP growth and 1.6 million jobs.