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Did Janet Yellen Make a Huge Mistake by Talking About Inequality?
That’s the question raised in a new Washington Post column by AEI economist Mike Strain. Or as the click-friendly headline puts it: “Janet Yellen is in danger of becoming a partisan hack: The Federal Reserve chair shouldn’t be picking a side in political debates.” Keep in mind Strain is no reflexive Yellen critic. As he writes, “I forecast Yellen will be an outstanding Fed chair.” But he doesn’t much like how Yellen, first, presented an incomplete analysis of how middle-class incomes have been doing the past three decades, and, second, came close to advocating expanded preschool funding, a contentious issue both politically and economically. Strain:
But even by focusing on income inequality she has waded into politically choppy waters. … Like many conservatives, income inequality isn’t on my list of the top problems facing the country. But it is a live issue for progressives, many of whom still share the president’s earlier sentiment. By expressing her “great concern” over the issue, Yellen is putting herself squarely in the progressive camp. … If Yellen continues to sound like a left-leaning politician, the political pressure on the Fed will mount, and the ability of the Fed to operate independent of politics will be threatened. If those threats are realized, everyone loses.
Strain is correct. Also, left-liberals/progressives underestimate just how deep and wide Fed hostility is on the right. It’s not just the Ron Paul crowd. I recall speaking before a group of preppy, college-age Republicans who almost to a person thought the Fed should be flat-out abolished. Getting involved in the pre-kindergarten debate — an issue likely to be a big one in 2016 — isn’t going to help the Fed’s reputation with GOPers, conservatives, and libertarians. But it did not surprise me that Yellen spoke on inequality. The theory of “secular stagnation” being advanced by center-left economist Larry Summers — Yellen’s former rival for the Fed job — partly blames the economy’s extended poor performance on rising inequality’s affect on consumer demand. This from a Summers’ interview with New York Times reporter Annie Lowrey:
I asked Mr. Summers what was behind secular stagnation, and he said he was still thinking through all of its causes. But globalization, automation, income inequality and changes in corporate finance might be important factors, he said. Income is now more concentrated in the hands of the rich. Those well-off households tend to save and invest higher proportions of their earnings than middle-class or low-income families do. That might mean, on aggregate, less spending and less demand across the economy for a given level of income.
I call this the left’s “unified theory” of what’s wrong with America. It’s a version of secular stagnation theory (one that focuses more on demand than supply factors) that connects inequality with economic stagnation — and provides a plausible pro-growth justification for government redistribution of wealth and income. And guess what? Yellen just might be a secular stagnationist:From a Reuters report last summer:
The world’s central bankers will cut interest rates to zero more often if economists are correct in thinking that many nations have entered a prolonged period of stagnation, U.S. Federal Reserve Chair Janet Yellen said on Wednesday.
Asked about the future of monetary policy at a conference hosted by the International Monetary Fund, Yellen brought up the possibility that “secular stagnation” would make it more likely overnight interest rates would again scrape against the so-called zero lower bound.
And inequality might be a topic Yellen returns to again.
Published in General
I guess “secular stagnation” is the politically correct term for deflation. In a almost zero percent interest environment where the central banks have been printing money for more than two years a no growth economy is in reality deflation. We don’t have nominal deflation yet, but when we do it will be clear the Fed Chairwoman has no clothes on. Now there is a truly scary thought.
What did Yellen say, exactly? The Fed’s been saying that inequality is a problem and education is the answer for years (actually, their argument is that inequality is due to a shortage of skilled workers; make more skilled workers and the problem will take care of itself). They’ve never advocated for redistribution as such (central banks have no illusions as to the effectiveness of simplistic redistribution, not when they’re the ones who have to clean up the resulting inflationary mess. )
To make progress—any, in any direction—we first have to drop the fiction that the Fed is independent of politics. To even hint at such a thing is so profoundly ignorant of the history of the creation of the Fed I don’t even know where to begin in penetrating it. You can throw your hands up in horror at the observation; you can rail against the Ron Paul faction, and even the rest of the GOP, all you want. But this is the fact of the matter. Start by acknowledging that the existing of a central bank is a political issue and always has been. Start by discussing Hamilton vs. Jefferson, move on to Jackson and Biddle. Start by conceding that the Fed is the 4th central bank the US has ever had, and the question of central banking’s legitimacy has always been an issue in American politics.
Quit pretending the question is a settled, hell, an obvious one. It only manages to make you look both like a fool and insulting at the same time.
Gödel, I completely disagree. I don’t think the Fed’s been a political institution since Arthur Burns shoved America off an inflationary cliff in the 1970s. That was a very dramatic lesson that still resonates heavily with the FOMC today. True, the Fed has been politically active in the past. One of the early Fed chairs even advocated for redistributive taxation in the 1930s. But right now they’re scared spitless the political authorities will come down hard on them, and they have been since at least the early 2000s.
It doesn’t help when people blame the Fed for mistakes in fiscal policy. For example, the Fed was unable to prevent the housing bubble for the simple reason that fiscal, not monetary, policy was behind the investment boom. Higher U.S. deficits had raised the U.S. risk premium above that of other “safe” developed nations, which in turn pushed the U.S. current account deficit through the roof. There was literally nothing the Fed could have done to stop this; in such a situation raising short-term interest rates will actually cause long-term rates to fall, rendering monetary policy powerless.