Better ideas needed to deal with inequality

  • By James McCusker
  • Thursday, October 23, 2014 12:45pm
  • Business

Some years ago, a visit to a local filling station’s convenience store to pay for gasoline revealed single cigarettes were for sale there. Buying cigarettes one at a time was common in hard-pressed third world countries but not here in the United States.

Janet Yellen is concerned about income and wealth distribution here in our country. The gap between rich and poor is the largest it has been in a hundred years. As the chairwoman of the Federal Reserve Board, we might think that she was in a position to do something about it. We would be wrong, though.

That’s not to say that her thoughts, analysis and perspective on the issue are unimportant or somehow unwelcome. The opposite is true. We have come to count on the Federal Reserve for its clear voice on the economy — standing out from the kazoo chorale of political noise makers assembled in the nation’s capital.

Part of the reason for this clear voice is that the Federal Reserve’s powers are limited to the financial markets. It is that very limitation that allows, and actually forces, the Fed to take a broader view of the economy. This is very unusual in Washington, D.C., which resembles Hollywood in many ways, except that the occupants of one are camera-ready while the occupants of the other are camera-hungry. There is a big difference.

When the Fed looks at our economy it knows that there is more to it than interest rates, bond trading, repo agreements, and credit default swaps. Our economy depends on these things to function effectively, just as we depend on the oil and gasoline to propel our cars and keep the parts moving smoothly. They are important, even critical, elements, certainly, but there is more to the story.

The perspective of the Fed is evident in Yellen’s recent address in Boston on income inequality. She begins with a brief history of income distribution in our country and notes that for two generations following the 1930s Depression the gap between rich and poor narrowed. Then we hit the 1970s and began to move in the opposite direction. The rich got richer and the poor were increasingly left out of the game.

As the economy proceeded in that direction, the size of the group “left out” increased even further, and began to include the middle class along with the poor. That trend has continued through to the present time.

Economic research indicates that there is a connection between income inequality and is called “inter-generational mobility.” What that boils down to is that wealthy parents are able to give their kids opportunities that other kids do not enjoy. This leads to economic success for the plutocrats’ kids and diminished chances for all the rest.

Income inequality is, without doubt, raising difficult questions for a free society. The first is, should we do something about it? The second is, can we do something about it? And if the answers to the first two are “yes,” what, exactly, can we do about it that won’t clash with our values, won’t wreck the economy, and won’t create a monster in the basement laboratory?

It is out of the Fed’s realm to provide society’s answers to these questions and, in truth, they go beyond analytical economics as well. Instead, Yellen provides facts and analysis that might be useful in finding the answers and coming to a decision. She focuses her attention on what she identifies as “four sources of economic opportunity in America.” They are: (1) the resources available for children; (2) affordable higher education; (3) business ownership; and (4) inheritance.

This is not an all-inclusive list of sources, certainly, and is not intended as such, but as Yellen notes, they are significant and should not be ignored.

It says something about our economy and our society today that government is so deeply involved — and controlling — in all four of these sources. Whether we are looking toward causes or solutions, the government is center stage and that becomes a problem by itself.

Economic opportunity is an essential element of our country’s values, and its sources, then, are critical to our future. It is difficult to imagine our values unchanged and the promise of America fulfilled, though, if our economy continues to move along its current trajectory. This path leads to a very different future — as a high tech banana republic.

That is what worries many economists and the solutions proposed thus far are worrisome, too. We need better economic analysis and fresh ideas if we are going to deal with this problem before it deals with us. The Federal Reserve’s interest in this issue is a good start, and a good sign.

James McCusker is a Bothell economist, educator and consultant. He also writes a column for The Herald Business Journal.

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