Income / Wealth Gap

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http://online.wsj.com/articles/feds-yell...1413549684

Janet Yellen Decries Widening Income Inequality
Central Bank Chief Says Wealth Disparity Could Be Impeding Economic Mobility


Federal Reserve Chairwoman Janet Yellen speaks during a visit with a coalition that provides employment services in Chelsea, Mass., on Thursday. MICHAEL DWYER/ASSOCIATED PRESS
By PEDRO NICOLACI DA COSTA
Updated Oct. 17, 2014 7:22 p.m. ET
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BOSTON—Federal Reserve Chairwoman Janet Yellen said rising inequality of wealth and income in the U.S. was impeding the economic mobility at the heart of American values.

“The extent and continuing increase in inequality in the United States greatly concern me,” Ms. Yellen said to a conference on economic opportunity and inequality sponsored by the Federal Reserve Bank of Boston. “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.”

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She noted that the disparity in wealth and income in the U.S. has grown wider for several decades, pausing during the recession and resuming its rise during the recovery as the stock market rebounded but the job market remained weak.

In addition, recent gains in home prices haven’t “fully restored the housing wealth lost by the large majority of households for which it is their primary asset,” she said.

The lower half of U.S. households ranked by wealth held just 1% of total wealth last year, down from 3% in 1989, Ms. Yellen said.

“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,” she said.

Ms. Yellen didn’t address Fed critics’ arguments that the central banks’ bond buys and zero-interest-rate policies have contributed to inequality by bolstering prices of assets such as stocks, which are primarily held by wealthier Americans.

The Fed counters its policies are aimed at boosting the overall economy, and thus helps lower-income Americans who are more likely to have high levels of debt.

Ms. Yellen didn’t address two topics more typical of a Fed chief’s speech, the outlook for the U.S. economy or interest rates. It marked her first speech as chairwoman focused exclusively on inequality.

“I think she broke new ground in terms of a Fed chair looking at such a serious socioeconomic issue with that degree of rigor,” said Karim Basta, chief economist at III Associates, an investment adviser, who attended the conference.

Inequality has generated increasing discussion since the financial crisis and recession. The Occupy Wall Street movement highlighted the issue in 2011, and it gained renewed attention this year with debates over economist Thomas Piketty’s best-selling book, “Capital in the Twenty-First Century.”

Write to Pedro Nicolaci da Costa at pedro.dacosta@wsj.com

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Joe Hockey says monetary policy exhausted, made ‘rich richer’
PUBLISHED: 7 HOURS 54 MINUTES AGO | UPDATE: 7 HOURS 49 MINUTES AGO

“Loose monetary policy has done its work and unfortunately made the rich richer through rising asset values,” Joe Hockey says. Photo: Daniel Munoz
JACOB GREBER Economics correspondent

Treasurer Joe Hockey has declared the ability of official interest rate cuts to spur economic growth has been exhausted, having mainly had the effect so far of making rich people richer.

Speaking as the Abbott government opened the prospect of changes to the goods and services tax, Mr Hockey said the only mechanism to generate fresh jobs and economic activity was to undertake domestic reforms.

He said the alternative of ramping up government spending was also limited because most countries around the world did not have the money or ability to “put it on the credit card for ever”.

“Loose monetary policy has done its work and unfortunately made the rich richer through rising asset values,” Mr Hockey said during question time in Parliament on Monday after returning from a three-week visit to Washington and China.

The remarks come as the Reserve Bank of Australia prepares to hold its second-last board meeting for 2014 in just over a week’s time. Economists widely anticipate the board will keep the official cash rate at a record-low 2.5 per cent.

Ultra-low central bank interest rates and quantitative easing in the US, Japan and increasingly Europe are helping push bond and equity markets to record levels, even as underlying signs of economic growth remain disappointing.

Global institutions such as the International Monetary Fund this month sharply downgraded their outlook for global growth, amid renewed concerns about the capacity of Europe to shake off its post global financial crisis economic deterioration as well as slower growth in China.

“Loose monetary policy has effectively been exhausted as a lever to stimulate economic growth on a global basis,” he said.

“Loose fiscal policy, that is governments spending hand over fist, is limited because they haven’t got the money to be able to continue to do that and put it on the credit card forever.

The “only option” to generate growth in future was through structural reform. “That means having a more competitive world with deregulated labour markets,” reduced barriers to trade and budget reform, Mr Hockey said. “That is the only way you can do it now.”

In Europe, countries that have undertaken structural reforms, such as Spain, Ireland, Germany and Italy to some degree are starting to see benefits, he said.

“Countries that have not undertaken structural change, such as France, have been left behind.”

Mr Hockey said there were “head winds” in the economy, but none that Australia could not cope with.

“The fact is you can still sail successfully into head winds and still exceed the pace of other sailing boats,” he said.

While Europe remains a “challenge,” the Treasurer highlighted the US for successfully dealing with the Federal Reserve’s move to taper its bond-buying program, while also showing signs of “starting to grow quite well”.

“The Chinese economy’s growth, at around 7.3 per cent, is still strong, certainly off a much bigger base than was previously the case when growth was higher.

“The fact is that China is the second-biggest economy in the world. It is our biggest trading partner and growth will continue to be strong in China.”

The Australian Financial Review

BY JACOB GREBER
Jacob covers economics from our Sydney and Canberra newsrooms.

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Equality at risk in the West, says Rupert Murdoch
THE AUSTRALIAN OCTOBER 28, 2014 12:00AM

Paul Kelly

Editor-At-Large
Sydney
IN a confronting message to the world’s leading ministers and central bankers, Rupert Murdoch has warned their policies have caused a “massive shift” in ­societies to benefit the super-rich with a legacy of social polarisation.

In the News Corp executive chairman’s speech to the G20 meeting this month — now available for the first time — he told global decision-makers the consequence of their policies had been “greater inequality” in Western society.

Speaking at the dinner in the Library of Congress building in Washington, Mr Murdoch said “the ladder of generational progress” was now at risk in the developed world and that a moment of “great global reckoning” had ­arrived. He said that, since the 2008 global financial crisis, leaders had made the mistake of responding to the domestic “political outcry” instead of devising long-term structural reforms to restore economic confidence, investment and innovation. The upshot was the sacrifice of a generation of young people.

“It is at moments of great reckoning that great leaders are fashioned,” he told guests including US Federal Reserve chairwoman Janet Yellen, European Central Bank president Mario Draghi and senior economic ministers from the top 20 nations, including Joe Hockey who organised the invitation to Mr Murdoch. It was the first time an outsider had addressed the G20 meeting.

Mr Murdoch said “the verdict was still out” on the great quantitative easing experiment — under which central banks put more money into economies by buying securities — “but we ­already know that one result has been greater inequality”.

“In America, the most highly paid 1 per cent now pay 46 per cent of all income tax,” Mr Murdoch said. “In Britain, the top 1 per cent pay 28 per cent of all income tax. That is a massive shift from what our society looked like 30 years ago. We should all be concerned about this polarisation which was never the intent of policy but is certainty a consequence.

“Quantitative easing has increased the price of assets, such as stocks and real estate, and that has helped first and foremost those who already have assets. Meanwhile, the lack of any real wage increase for middle-income workers means growing societal divisions and resentment.

“This is one of the core lessons of my professional life — I have seen many politicians who have the best of intentions but who ­deliver the worst of outcomes.”

With the global economy still struggling after the 2008-09 ­crisis, Mr Murdoch told economic decision-makers their prescriptions fell far short of the optimum economic and social ­results.

The significance of his nine-page speech is his argument about the limits to both monetary and fiscal policy and the imperative for a new approach based upon the need “for government to get out of the way”. Mr Murdoch called for: labour market reform; lower and more competitive corporate taxes; a crackdown on multinationals — naming Google — for not paying taxes where they make their profits; a rethink on excessive bank regulation, warning “you would have to be mad to join the board of a bank these days”; and recognition that high taxes and over-regulation were damaging economic growth and the public interest.

The October 9 dinner was hosted by Mr Hockey since Australia is the G20 host nation this year. Reports after the event said the speech was broadly appreciated by those in attendance. In the current global context, Mr Murdoch’s message is highly provocative. It conflicts with the domestic policies of many nations, not least Australia where the populist ­denial about the need for structural reform is intense. Mr Murdoch said he was still an optimist — if the right choices were taken.

He was confident because the world was shifting “from an industrial society to an information society”. The information revolution sweeping all societies would create new opportunities for entrepreneurs and private-sector growth.

The policy priorities he advocated were education and immigration reform, infrastructure investment and cheap energy. Mr Murdoch said cheap gas in the US had decreased manufacturing costs and lifted US manufacturing exports by 6 per cent. But his message to global leaders was that the results weren’t good enough — economic growth was weak, unemployment was too high and family incomes were inadequate.

He said growth in the eurozone was “basically static”. While the US was held up as a “bright spot” the reality was different. Real US median income was lower than 15 years ago and its 63 per cent ­employment participation was at the lowest level in 35 years.

“This has an enormous impact on quality of life for American families,” he said. “Today many Americans who have jobs aren’t satisfied with them. They would like to work longer hours or find higher-wage jobs with growth ­potential, but there just aren’t enough opportunities.”

Mr Murdoch said much of the burden of failed policy was falling on young people.

The lack of opportunity for the next generation was “especially troubling” along with the “inevitable social and political upheavals to come”. This was because the unemployment rate for people under 25 years in the US was 13 per cent and in the eurozone was 23 per cent. It was twice as high in Spain and Greece and parts of France and Italy.

The chief of News Corporation, ultimate owner of The Australian, told European and US leaders in the intimate setting of the dinner that many of their policies were a “tremendous disincentive to innovation and risk-taking”. He confronted them saying high taxes and overregulation “goes to ­extremes in many European countries and several US states”.

He said an “easier” problem to tackle was that posed by Google in Australia. “Google harvests nearly $1 billion annually in Australia — by pirating the copyrights of local taxpayers,” Mr Murdoch said.

“While I am sure they are not the only offenders, as the chairman of a company that is continuously financially wounded by that piracy, I feel quite justified in calling them out by name.”

On company tax, he quoted former president Bill Clinton saying the current system, notably in the US, was “crazy”. Action had to be taken to make corporate tax rates more competitive.

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Yellen touches a raw nerve by pointing out nature of US recovery
THOMAS ADAMS THE AUSTRALIAN NOVEMBER 01, 2014 12:00AM

Janet Yellen
Federal Reserve Chairman Janet Yellen set off a firestorm of controversy over a speech that touched on rising economic inequality in the US. Source: AP
EARLIER this month Janet Yellen, the chairwoman of the Federal Reserve, set off a firestorm of controversy over a speech that touched on rising economic inequality in the US. The Fed is traditionally understood to have a “dual mandate” of ensuring “maximum employment” and “stable prices”.

Thus, for a Fed chair to deliver a speech on inequality would seem part and parcel of her job description, given that both employment and purchasing power are constituent elements of how we measure economic inequality.

Yellen’s speech was fairly modest in both its analysis and its proposals. She repeated some basic economic facts that any observer paying even a modicum of attention should be familiar with. As Yellen put it, “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”.

To remedy this trend, she suggested more resources for early childhood education, better access to university degrees, and policies that would increase business ownership while arguing that more people receiving more inheritances would boost economic opportunity. Simple statistical facts and widely accepted and uncontroversial policy prescriptions, yet by the outcry that greeted her speech in some quarters of the American media one would think Yellen had suggested that there is in fact a Santa Claus.

Michael Strain suggested in The New York Times that Yellen was going outside her job description and wading into “fundamentally moral concerns”. Meanwhile, in Forbes, Stephen Moore christened Yellen, a long-time business school professor, as America’s “class warrior in chief”. At the American Enterprise Institute, James Pethokoukis chided Yellen for even discussing inequality, suggesting her rhetoric would delegitimise the institution of the Fed.

What does this dust-up though have to say about the outlook of the American economy, in both the short and long term?

By now the nature of the American recovery from the global financial crisis of 2008 is in sharp relief. Stock prices have more than recovered, housing prices are generally on the rise across the US, and GDP is at an all-time high. As was clear to those who paid attention to Japan nearly two decades ago, the Fed’s policies and the increase in the monetary supply has not led to large growth in inflation.

Such indicators mask the deeply uneven nature of the American recovery. Since 2002, six years before the crash, the real wages for the bottom 70 per cent of Americans have remained stagnant. This is of course the key background to Yellen’s speech. Even as most markets have made more or less full recoveries, the distribution of this recovery has continued to be skewed away from most Americans.

Economies at all scales and levels are not abstract things but operate in a real world where politics and policies shape them. In the American context, the spectrum of political possibility is so narrowed as to suggest that these economic trends — rising markets, low inflation, and stagnant wages — will continue for the foreseeable future. This is where Yellen’s speech and its controversy come in.

The backlash that has greeted her simple remarks and modest solutions speaks to the incredible narrowing of acceptable economic policy in the US. The likelihood that Republicans will take control of the Senate and thus both chambers of congress during next week’s midterm elections means that the final two years of Barack Obama’s presidency will produce little in terms of economic policy that would affect any of these trends. In the unlikely event that Democrats retain control of the Senate, the previous four years of divided congress have made clear that any dramatic shifts in the policies that have produced this kind of recovery are unthinkable.

The difference between Republicans and Democrats on these issues is narrow and mostly of degree.

Even if one party or the other has control of congress and the presidency come January 2017, this direction in economic policy will likely continue. Both parties have made clear their attachment to growing markets and low-level inflation as the most important indicators of economic recovery.

While Democrats pay lip service to ending wage stagnation and economic inequality, the kinds of demand-side programs and redistributive policies that would actually put a dent in these trends are nearly as outside their realm of thinking as that of Republicans.

Some of this is the result of the kind of political defeat that allows an economist to be labelled a class warrior for advocating small business growth and praising the importance of inheritances. More of it comes from the long-term transition of the Democratic Party into a party that accepts that the indicators of recovery can be found in the valuation of stock portfolios.

As long as this trend continues, and there is no foreseeable political force attempting to curb it, American economic recovery will look quite stable for some but quite stagnant for others.

Thomas Adams is a lecturer at the US Studies Centre at the University of Sydney.