October 28, 2014 | Commentary on Federal Reserve, Economy, Economic Growth, Recession and Recovery

Janet Yellen: Class Warrior

We learned last week that new Federal Reserve Chair Janet Yellen is not so much our nation’s central banker as class warrior in chief.  In a widely publicized speech Ms. Yellen parroted all of the left’s talking points on the divide between rich and poor.  “The extent of and continuing increase in inequality in the United States greatly concern me,” she lectured.  “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.”

Actually, that’s a factually dubious claim given that the 1980s and 1990s saw wide gains for the middle class and even those at the bottom of the income pyramid.  Middle income families saw a  more than 30%  inflation-adjusted rise in income in those years. From 1982-1997 those who started out as poor actually saw faster income gains than those who started out as rich, according the U.S. Treasury Department study on income mobility.  Upward mobility defined that era of broad-based  prosperity.

Ms. Yellen also failed to note that the income gap is widening today because this has been the slowest recovery from a recession since the 1930s. Compared the other economic recoveries since 1960, Our national output is about $1.6 trillion (in inflation-adjusted dollars) behind; and compared to the Reagan recovery in the 1980s, we’re now $2.2 trillion behind, according to the Joint Economic Committee of Congress.

Ms. Yellen never mentions that Obamanomics has made inequality much worse.  Almost all of the income gains under Barrack Obama have gone to the top 5% in income.

Her silence on this point shouldn’t be too surprising because she has supported most of Obama’s economic policies.  She has also been a cheerleader of the Fed’s easy money policies which have benefited those at the top and almost no one else.  She never spoke out against the nearly $8 trillion in debt spending since the end of 2008, the big tax increase on investment in 2013, the expansion of welfare benefits, and other policies that have backfired.  One could argue the best way to reduce inequality is to repeal everything that President Obama has done since he entered office.

The real estate bust also exacerbated inequality, she concludes.  “Since housing accounts for a larger share of wealth for those in the bottom half of the wealth distribution, their overall wealth is affected more by changes in home prices,” she says. “Homeowners in the bottom half of households by wealth reported 61 percent less home equity in 2013 than in 2007. The next 45 percent reported a 29 percent loss of housing wealth, and the top 5 lost 20 percent.”  Again, this is because of federal housing policies at FHA, Fannie Mae, and Freddie Mac that encouraged mortgages to people who couldn’t afford them.

Ms. Yellen conveniently failed to mention the role the Federal Reserve that she runs played in allowing unqualified borrowers easy access to mortgage loans to purchase homes at prices inflated by the Federal Reserve’s monetary policies.

According to Ms. Yellen, “Public funding of education is another way that governments can help offset the advantages some households have in resources available for children.” But if money were the answer the problem, districts in Washington, D.C., Chicago, Los Angeles, and NYC would be leading the way in performance. After all, these districts spend more than the national average. Why do they have some of the worst schools with the highest dropout rates?

Yellen is correct to point out the failures of our public education system. Young adults from economically challenged backgrounds are certainly being deprived of opportunities which could propel them forward.  School choice programs to allow the poor and minorities better education options are working and should be expanded, but Ms. Yellen dared not take on the teacher unions.

It wasn’t all bad. At one point she noted:  “it appears that it has become harder to start and build businesses.” That’s for sure. The United States has steadily dropped in the rankings of economic freedom, as our colleagues at the Heritage Foundation has documented.

But Ms. Yellen ignored most of the ideas that truly will ignite growth and raise incomes for the poor.  Marriage, the dignity of work, income tax cuts to promote investment here, cutting our corporate tax, replacing welfare with work, preparing our workers with the skills they need to fill millions of unfilled jobs. These are the “values rooted in our nation’s history,” to borrow a phrase from the Fed chief, that could allow the poor to rise up.

This might have been an occasion for Ms. Yellen to use her new perch as Fed chief to boldly challenge the whole litany of tired liberal talking points on inequality. She could have warned that when we focus on economic fairness and not growth, we get neither – as the Obama years have demonstrated.

That’s so disappointing because we’ve tried all of these ideas for five years, and we still have record income inequality.   The nation’s Fed chief ought to be a loud and clear voice for growth – not class envy.

 - Stephen Moore is chief economist at the Heritage Foundation.

 - Joel Griffith is a senior research associate at Heritage.

About the Author

Joel Griffith Research Associate
Project for Economic Growth

Stephen Moore Distinguished Visiting Fellow
Project for Economic Growth

Originally appeared in Forbes