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Rising income inequality could harm USA, says Fed chief

Paul J. Richards/AFP: Archive picture of Fed boss Janet Yellen

Federal Reserve chief Janet Yellen warned Friday that the gap between the rich and poor in the United States is widening and has reached a near 100-year high.


In a speech at a conference on inequality in Boston, the Fed chair did not mention monetary policy nor the current turmoil in financial markets.

Instead, she focused on the widening wealth disparity and how that impacts economic opportunity.

"By some estimates, income and wealth inequality are near their highest levels in the past hundred years," Yellen said, noting the gap has grown steadily over recent decades, despite a brief pause during the 2008 crisis.

During the recession, the worst since the Great Depression of the 1930s, the richest Americans lost money, and increased government spending helped offset losses for the less wealthy.

"But widening inequality resumed in the recovery, as the stock market rebounded," Yellen said, noting that "wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset."

The Fed chief said that wide wealth disparities can make it harder for the poor to move up the income ladder, and also warned of the burden of student loan debt, which quadrupled between 2004 and 2014.

"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," she said.

Falling living standards

Yellen said "some degree of inequality" is natural and indeed "arguably contributes to economic growth, because it creates incentives to work hard, get an education, save, invest, and undertake risk."

However, that same inequality can limit access to economic resources for those lower on the ladder, "thereby perpetuating a trend of increasing inequality."

Yellen offered no remedies for decreasing the rich-poor gap, but welcomed discussion on ways to better promote "equality of economic opportunity."

She said two "cornerstones of opportunity" are resources availabile to children and access to higher education, but added that ownership of a family business and inherited wealth can also be important sources of economic opportunity.

"For families below the top, public funding plays an important role in providing resources to children that influence future levels of income and wealth," Yellen said, citing programs like unemployment, welfare, and early childhood education.

She said college degrees also offer a net benefit, despite escalating tuition costs that have contributed to a dramatic increase in student loan debt -- the outstanding balance quadrupled from $260 billion in 2004 to $1.1 trillion this year.

This debt is disproportionately, and increasingly, affecting poorer families and may put college and graduate degrees out of reach for some, she said.

Globally, the gap between the haves and have-nots has reached levels not seen since the 1820s, the OECD said earlier this month, in a report that looked at trends in health, education, inequality, the environment and personal security.

The report said, however, that overall well-being has improved over the past 200 years, despite the enormous increase in income inequality, in part because factors like life expectancy and literacy, which have risen dramatically over the last 200 years.

Yellen said that the trend in recent years in the United States has seen "stagnant or falling living standards for many families."


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