Janet Yellen´s Inequality Speech Revealed a “Closet Conservative”

Richard V. Reeves

By speaking out on the issue of inequality, has Fed Chair Janet Yellen risked appearing as a ‘partisan hack’? That is certainly the view for some on the right. (For a nuanced version of the argument see AEI’s Michael Strain here – for a more polemical treatment, Diana Furchgott-Roth here.)

No doubt there are some political risks here. But was she supposed to remain silent on inequality for her entire tenure? For the Chair of the nation’s most powerful economic institution to ignore one of most powerful economic trends of our time would be close to a dereliction of duty.

Arguments are raging over the extent and shape of inequality. No question, we need to be extremely careful with the numbers. When Chair Yellen talked about ‘stagnant living standards for the majority’, my eyebrows were not the only ones that went up (I was in Boston for the same conference). A lot depends on the measures adopted, but household incomes have been rising across the distribution, albeit slowly, and especially slowly in the middle.

However, this passage did give me the opportunity to point out how different labels can be applied to a flat trend. As a basic rule, describe a flat trend it as ‘stable’ if you like it, and ‘stagnant’ if you don’t – both are accurate, but convey very different meanings. Yellen would also have done much better to avoid mentioning the ‘Great Gatsby Curve,’ showing a purported link between income inequality and intergenerational mobility, now widely disputed (including in a paper by Boston Fed economists presented the following day).

So, we can nit-pick at some of Yellen’s statements, wring our hands over whether she should even mention inequality, and play guessing games about her real motives (all good fun), but we should not miss the real story of her speech: in substance, it offered more to the right than to the left.

Yellen argued that there are four ‘building blocks’ of opportunity in the United States:

The first two will appeal more to Democrats, of course. Yellen also mentioned the value of a quality early years education. This annoyed some on the right. But the second pair – business ownership and inheritance – is pretty close to the Republican talking points. They are also more controversial in terms of being positive contributions to opportunity.

Business ownership is so concentrated at the top of income distribution that it does not typically feature in discussions of equal opportunity (or at least, not in a good way). But Yellen has insisted that income from business ownership stretches down the distribution, and matters for more than just the elite:

“One reason to be concerned about the apparent decline in new business formation is that it may serve to depress the pace of productivity, real wage growth, and employment. Another reason is that a 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,” Yellen said in her Boston speech.

This is a provocative position. If anything, researchers looking at inequality tend to find that business ownership exacerbates inequality by providing economic benefits, tax breaks and wealth to the few, not to the many. But at least one attendee agreed with Yellen that the role of small businesses is too often overlooked in discussions of inequality, especially for certain racial groups such as African Americans and Asian Americans.

Yellen then ruffled liberal feathers even more by praising the role of inherited wealth as a building block of opportunity. Again, she insisted that inherited wealth is not an elite concern, stating that “the additive effect of bequests…is significant for the millions of households below the top 5 that receive them.”

What? Anybody would think that Chair Yellen has not read Piketty. As it happens, I think she is flat wrong on this point. Inherited wealth – and, more importantly, strategic transfers of wealth between generations – is a large, and looming danger to the idea of equal opportunity. The freedom of the children of the affluent to receive large sums of money is one that only conservatives celebrate.

Yellen’s conservative critics did not read her speech closely enough. Sure, she highlighted the problem of inequality framed in terms of the struggles of those in the middle; and yes, she nodded to Democrat favorites like pre-K education. However, the more innovative sections of her speech – claiming business ownership and inherited wealth as positive contributions to an opportunity society – were manna for the right. This was a speech that was very liberal in tone but very conservative in content: blue on the outside, red in the middle. Maybe the right should pipe down.