Federal Reserve Chair Janet Yellen, speaking in Boston Friday, said the gap between rich and poor has widened dramatically in the past 25 years, but she said opportunities remain to bridge the income and wealth gap that has divided the nation.
Yellen, who opened the Conference on Economic Opportunity and Inequality at the Federal Reserve Bank of Boston, said early childhood education and other programs targeted to children, affordable higher education, and increased business ownership could help restore upward mobility, which has stalled in the United States.
And one more thing: Do what the rich do, and pass on the wealth.
Yellen said an inheritance is routine for the wealthiest families, but increasing the practice among those in lower echelons of the income scale would provide support to future generations with the potential to shrink the wealth divide.
“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 in prepared remarks. “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.”
Yellen did not address the recent turmoil in the stock market or growing uncertainty about the global economy. Her speech tightly focused on economic inequality and potential remedies. While inequality has gained more media attention in recently years, the Boston Fed has a long tradition of research on the topic, citing it as a problem in a report 15 years ago.
Much of its recent research and programming has centered on the fallout of the recent housing and foreclosure crisis on US households, the impact of race in mortgage lending, and ways to help cities create economic opportunities that boost employment.
Boston Fed president Eric S. Rosengren said in opening remarks that the mission of the Federal Reserve system is to “serve all American people” including those who can’t find jobs or are working part time when they want full-time work.
“Those are important questions as we think about the amount of slack in the American economy right now,” he said. Yellen pointed to data, adjusted for inflation, showing that the average income of the top 5 percent of households grew by 38 percent from 1989 to 2013, while the average income of the other 95 percent rose less than 10 percent.
The distribution of wealth is more unequal, she said. The wealthiest 5 percent held 54 percent of all reported wealth in the United States in 1989, 61 percent in 2010, and 63 percent in 2013. The rest of those in the top half of US wealth distribution — families with a net income of $81,000 to $1.9 million — saw their share drop from 43 percent in 1989 to 36 percent in 2013.
Yellen did note one bright spot: Rebounding home prices in 2013 and 2014 restored a good deal of value lost during the recession, with the largest gains for homeowners at the bottom. Home equity represents a large share of the wealth for many middle- and lower-income families.
While America is thought of as a nation of opportunities, Yellen cited research showing that economic mobility — or the ability of an individual or a generation to improve their wealth — is lower than in most advanced countries.
Education funding through property taxes enhances inequality since wealthier communities have greater resources, she said. She said high-quality teachers, who tend to migrate to wealthier districts, can help equalize disparities.
“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 households,” she said. “Some countries strive for more or less equal funding, and others actually require higher funding in schools serving students from lower-income families.”
Similarly, the median annual earnings for full-time workers with a four-year college degree are 79 percent higher than for those with a high-school diploma. She said the large and growing burden of paying for college poses concerns
While many in the top half of earners have ownership shares in some form of business, a very few in the bottom half — just 3 percent — own businesses. Another concern: the decline in the pace of US business creation.
“That slowdown in business formation may threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth,” she said.