North America has been lacking for central bank chiefs with a flair for freelancing on topics seemingly unrelated to central banking since Mark Carney bolted Canada for the Bank of England – that is, until Friday, when U.S. Federal Reserve Chair Janet Yellen delivered an unusual speech in Boston.
Rather than talk about interest rates or economic growth – the norm for a central banker – she took up the cause of income inequality in the U.S., whose "extent and continuing increase … greatly concern me," she said. In a line destined to become one of Ms. Yellen's signature quotes, she stated: "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 will label her an activist, a socialist or – even worse in some circles – a Democrat. But Ms. Yellen is a central banker, and like many of her peers, she is troubled by the chronically sluggish recovery that has followed the Great Recession. A growing number of commentators, including House of Debt authors Atif Mian and Amir Sufi, are pointing to income inequality as a hindrance to economic recovery – a view Ms. Yellen now appears to be favouring.
But aside from trying to shape the public debate, there's little she can do to help those whose plight she is now championing. Notably lacking from her remarks was any acknowledgment of what role the Fed had played in widening that gap in the first place.
Ms. Yellen rolled out a few facts that will be of no surprise to economic researchers or anyone sympathetic to the Occupy movement (including Mr. Carney) that peaked a few years back: The top 5 per cent of households in America have seen their share of wealth increase to 63 per cent of the national total in 2013 from 54 per cent in 1989, according to Fed surveys, while the bottom half have seen their take collapse from an already measly 3 per cent to just 1 per cent.
The average net worth of the bottom half – 62 million households – was just $11,000 (U.S.) in 2013, 50 per cent lower than the average in 1989, adjusting for inflation. One quarter of them had "zero wealth or negative net worth," she said.
The Fed chief had no proposed solutions to offer but intended only "to provide a factual basis for further discussion." She indeed raised some troubling points: the suffering from the subprime mortgage meltdown and subsequent Great Recession has been disproportionately borne by America's economically disadvantaged, who were easy prey for lenders who promised them home ownership they couldn't really afford. Much of what wealth they have is tied up in their homes, which are worth less than they were in 2007.
Meanwhile, low interest rates (Ms. Yellen's domain) have spurred huge gains in stock markets since the depths of the recession, but just 2 per cent of financial assets are held by the bottom half of Americans (compared to 4 per cent 25 years ago). That means they haven't benefited to the extent that richer Americans have. Many poorer Americans lack for good-quality educational opportunities for their kids, Ms. Yellen said in her furthest reach from the central banking script – while a lack of job opportunities and rising education costs have resulted in an almost quadrupling of the amount of student debt over the past decade, to $1.1-trillion.
While delinquencies are on the wane for credit cards and mortgages, close to 11 per cent of student loan repayments are 90 or more days in arrears – potentially creating an army of work force entrants hindered from the outset by bad credit histories.
It's hard to see where Ms. Yellen is going with this. The Fed is ramping down its injections of money into the financial system and plans to halt them completely – which has buoyed stock markets but done little to nothing to raise up the economic plight of those in the bottom half, as slow-growing revenues have forced companies to tighten their belts, slowing wage growth and new hiring.
But when the Fed's money spigot shuts and an expected rise in interest rates follow, it could stall the economic growth that would bring more jobs and opportunities for the poor.
As for other changes she seems to favour – including more equitable spending on public education and a better financial equation for those seeking a college education – there is not much she can do as a central banker.
Maybe she should run for president instead – that job will be open in two years. Of course, the President of the Economically Divided, Gridlocked States of America is little more capable of fixing the country's inequality issues than its top central banker.