Taking the Fed to the Woodshed
Written by Steven Hansen
The Federal Reserve, in conjunction with other branches of government, flooded the financial system beginning in 2008 with liquidity - all while throwing life preservers in various forms to big business and too-big-to-fail banks. My position is that there was little choice with the associated uncertainty at that time - but five years has now passed with little remedial action to repair the damages of the 2008 actions to the middle class - even though the too-big-to-fail is repaired and the 0.1% are as good as ever.
In general, both monetary and fiscal policy of the USA is based on the concept of trickle up or trickle down. What is good for business is good for Joe Sixpack because business creates jobs (trickle down). And creation of social safety nets using redistributed money from the better off classes make sure there is a floor to how bad off a family can be (trickle up).
A graph showing inflation adjusted income (below) shows the growing divide between average and median incomes (when the average is above the median it shows higher income people are biasing the results). Please note that I have indexed per capita to household incomes as FRED does not exact comparable indexes - however, visually the results are similar. Note this graph below shows median families are no better off today than they were in 1990. The middle class does not seem to be enjoying the effects of trickling.
..... This trend paused during the Great Recession because of larger wealth losses for those at the top of the distribution and because increased safety-net spending helped offset some income losses for those below the top. But widening inequality resumed in the recovery, as the stock market rebounded, wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.
The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then. 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. 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 degree of inequality in income and wealth, of course, would occur even with completely equal opportunity because variations in effort, skill, and luck will produce variations in outcomes. Indeed, some variation in outcomes arguably contributes to economic growth because it creates incentives to work hard, get an education, save, invest, and undertake risk .....
Chair Yellen suggests four building blocks:
.... The first of these cornerstones I would describe more fully as "resources available to children in their most formative years."
.... The second is higher education that students and their families can afford.
.... The third building block of opportunity, as shown by the SCF, is ownership of a private business. This usually means ownership and sometimes direct management of a family business.
.... The fourth source of opportunity is inherited wealth. As one would expect, inheritances are concentrated among the wealthiest families, but the SCF indicates they may also play an important role in the opportunities available to others.
There was little I would debate in this speech except that I do not believe higher education should be only college / university - but trade skills as well. Educated people who have never ran work do not understand that the skills needed include trade skills. However, the small business building block deserves some extra commentary. Here is Chair Yellen's take on small business:
While business wealth is highly concentrated at the top of the distribution, it also represents a significant component of wealth for some other households. Figure 11 shows that slightly more than half of the top 5 percent of households have a share in a private business. The average value of these holdings is nearly $4 million. Only 14 percent of families in the next 45 have ownership in a private business, but for those that do, this type of wealth constitutes a substantial portion of their assets--the average amount of this business equity is nearly $200,000, representing more than one-third of their net worth. Only 3 percent of the bottom half of households hold equity in a private business, but it is a big share of wealth for those few. The average amount of this wealth is close to $20,000, 60 percent of the average net worth for these households.
Owning a business is risky, and most new businesses close within a few years. But research shows that business ownership is associated with higher levels of economic mobility. However, it appears that it has become harder to start and build businesses. The pace of new business creation has gradually declined over the past couple of decades, and the number of new firms declined sharply from 2006 through 2009. The latest SCF shows that the percentage of the next 45 that own a business has fallen to a 25-year low, and equity in those businesses, adjusted for inflation, is at its lowest point since the mid-1990s. 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.
The biggest reason for small business is that small business is the growth engine for employment. Small and medium sized business historically create over 75% jobs when using the ADP data. Here is a chart showing the respective occurrences of business ownership in other economies.
The USA trends suggest that it is slipping from an entrepreneurial economy to an economy of big business. Could it be that the regulations, permits and fees imposed on small business make the possibility of starting a business beyond the reach (or capacity) of most in the middle class? I continue to be baffled why small business is not exempt from many (most? all?) the regulations, permits, and fees imposed on a willing big business community to constrain ease of market place entry.
The Chair of the Federal Reserve is a position of some power. If there is a problem, pointing the problem out is not enough. After all, employment is specifically in the Federal Reserve's mandate. It is time to stop talking about it and start fixing it.