11/21/2014
Chair Janet Yellen on Income Inequality, Part I
Federal Reserve Chair Janet L. Yellen gave a speech on “Economic Opportunity and Inequality” in Boston, Mass., Oct. 17, 2014. It’s certainly been a key topic these days and over the next two “Wall Street History” pieces, I want to cover some of her major points.
[Excerpts]
Chair Yellen:
The extent of and continuing increase in inequality in the United States greatly concerns me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then. It is no secret that 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. 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.
Some degree of inequality in income and wealth, of course, would occur even with completely equal opportunity because variations in effort, skill, and luck wll produce variations in outcomes. Indeed, some variation in outcomes arguably contributes to economic growth because it creates incentives to work hard, get an education, save, invest, and undertake risk. However, to the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality. Such a link is suggested by the “Great Gatsby Curve,” the finding that, among advanced economies, greater income inequality is associated with diminished intergenerational mobility. In such circumstances, society faces difficult questions of how best to fairly and justly promote equal opportunity....
[Referring to the Federal Reserve’s triennial Survey of Consumer Finances (SCF), the latest of which was conducted in 2013 and released in September...]
Since the survey began in its current form in 1989, the SCF has shown a rise in the concentration of income in the top few percent of households. By definition, of course, the share of all income held by the rest, the vast majority of households, has fallen by the same amount. This concentration was the result of income and living standards rising much more quickly for those at the top. After adjusting for inflation, the average income of the top 5 percent of households grew by 38 percent from 1989 to 2013. By comparison, the average real income of the other 95 percent of households grew less than 10 percent. Income inequality narrowed slightly during the Great Recession, as income fell more for the top than for others, but resumed widening in the recovery, and by 2013 it had nearly returned to the pre-recession peak.
The distribution of wealth is even more unequal than that of income, and the SCF shows that wealth inequality has increased more than income inequality since 1989. The wealthiest 5 percent of American households held 54 percent of all wealth reported in the 1989 survey. Their share rose to 61 percent in 2010 and reached 63 percent in 2013. By contrast, the rest of those in the top half of the wealth distribution – families that in 2013 had a net worth between $81,000 and $1.9 million – held 43 percent of wealth in 1989 and only 36 percent in 2013.
The lower half of households by wealth held just 3 percent of wealth in 1989 and only 1 percent in 2013. To put that in perspective, the average net worth of the lower half of the distribution, representing 62 million households, was $11,000 in 2013. About one-fourth of these families reported zero wealth or negative net worth, and a significant fraction of those said they were “underwater” on their home mortgages, owing more than the value of the home. This $11,000 average is 50 percent lower than the average wealth of the lower half of families in 1989, adjusted for inflation. Average real wealth rose gradually for these families for most of those years, then dropped sharply after 2007. Average wealth also grew steadily for the “next 45” percent of households before the crisis but didn’t fall nearly as much afterward. Those next 45 households saw their wealth, measured in 2013 dollars, grow from an average of $323,000 in 1989 to $516,000 in 2007 and then fall to $424,000 in 2013, a net gain of about one-third over 24 years. Meanwhile, the average real wealth of families in the top 5 percent has nearly doubled, on net – from $3.6 million in 1989 to $6.8 million in 2013.
Source: federalreserve.gov
Next Wall Street History in two weeks. Part II of Chair Yellen’s speech on income inequality and economic opportunity.
Brian Trumbore
