Fed Chair Yellen: “U.S. Inequality Widened Over Past Decades”

wireIn a speech on Friday at the Conference on Economic Opportunity and Inequality in Boston, Fed Chair Janet Yellen said the rise of inequality in the United States has widened over the past decade at a greater level than in most advanced countries.

Yellen offered some research showing that U.S. household wages have fallen, outstanding college student debt has risen, public education is uneven, and  fewer opportunities are available to build wealth through business creation.

Citing research from the Federal Reserve’s Survey of Consumer Finances (SCF), Yellen reported that since 1989, America has witnessed a rise in the concentration of income in the top few percent of U.S. households.

“After adjusting for inflation, the average income of the top 5 percent of households grew by 38 percent from 1989 to 2013,” Yellen said.

“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, ” Yellen added.

Weak Incomes and Widening Inequality

Yellen acknowledged that the past several decades of widening inequality has often involved stagnant or falling living standards for many families.

According to the survey Yellen cited, families at the bottom of the income distribution saw continued declines in average real incomes between 2010 and 2013, extending the trend  between the 2007 and 2010 taken during the Great Recession.

The survey also showed that families in the middle to upper-middle income brackets (between the 40th and 90th percentiles) saw little change in average real incomes between 2010 and 2013 and failed to recover the financial losses between 2007 and 2010.

Only families at the very top of the income distribution saw widespread income gains between 2010 and 2013 during a period of time when mean and median incomes were still below 2007 levels.

Yellen explained that Americans have witnessed the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression of the 1930’s and 1940’s.

“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,” Yellen said.

While offering no silver bullet to reverse the trend of inequality in America, Yellen addressed four sources of economic opportunity or “building blocks” that have been operating in American society to further gains in income and wealth.

The four sources include having resources available for children, affordable higher education, business ownership, and building wealth through inheritances.

High College Student Debt And Low Home Ownership

Some of the challenges facing the U.S. economy include falling home ownership rates and rising student debt, especially among younger Americans and millennials.

According to the U.S. Census Bureau, America’s home ownership rate fell to 64.7 percent in the second quarter of 2014, the lowest level in 19 years.

As the cost of higher education grows and personal incomes for the majority of Americans remains stagnant, student debt becomes a heavy burden and impacts spending levels across the economy.

“Outstanding student loan debt quadrupled from $260 billion in 2004 to $1.1 trillion this year, ” Yellen said.

Yellen explained that the cost of college tuition is rising at a faster pace than income wealth, hitting lower income Americans the hardest.

“College costs have risen much faster than income for the large majority of households since 2001 and have become especially burdensome for households in the bottom half of the earnings distribution” Yellen admitted.

“Rising college costs, the greater numbers of students pursuing higher education, and the recent trends in income and wealth have led to a dramatic increase in student loan debt” Yellen said.

With a growing distribution of wealth at the top, average Americans in lower economic brackets are faced with the growing reality of carrying heavy student debt, making it more difficult for Americans to qualify for home mortgages as lending requirements tighten from lenders.

The financial crisis that began in 2007 and lasted through the lowest point of 2009 was responsible for the destruction of nearly $20 trillion worth of financial assets owned by U.S. households and cost 9 million jobs, according to a study The Financial Crisis And The Great Recession from Tufts University.

As U.S. employment continues to improve and bounce back to pre-recession levels, helped in large part by the U.S. Federal Reserve keeping interest rates at historic lows as the housing market slowly recovers, more Americans are looking for higher wages to create wealth and lessen the impact from the $20 trillion that was lost during the financial crisis.

But the median income for Americans remained flat at $ 51,900 in 2013 compared to 2012.

Yellen said that as wage inequality resumed in the recovery, “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.”

Uneven Public Schools

Yellen cited research from the Survey of Consumer Finances showing that a gap in wealth between families with children at the bottom and the top of the distribution has grown steadily over the past 24 years and accelerated recently.

The United States is one of the few advanced economies in which public education spending is often lower for students in lower-income households than for students in higher-income household.

“Half of U.S. public school funding comes from local property taxes, a much higher share than in other advanced countries, and thus the inequalities in housing wealth and income I have described enhance the ability of more-affluent school districts to spend more on public schools” Yellen said.

Yellen said that research shows that, for a variety of reasons, including inequality in teacher pay, the best teachers tend to migrate to and concentrate in schools in higher-income areas.

Weaker Business Ownership

Yellen reported that research studies show that business ownership is associated with higher levels of economic mobility and can be a vital source of opportunity for many households to improve their economic circumstances.

Yellen noted that it has become harder over the past decades to start and build businesses.

“The pace of new business creation has gradually declined over the past couple of decades, and the number of new firms declined sharply from 2006 through 2009” Yellen said.

Yellen explained that a decline in business formation is concern because it “may serve to depress the pace of productivity, real wage growth, and employment.”

-Johnathan Schweitzer      schweitz31@gmail.com

Johnathan1Johnathan Schweitzer is a Seattle-based writer focusing on topics related to finance, politics, and technology

 

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