Daniel Tarullo outlines long-term challenges for the US economy (Part 4 of 6)
Rising inequality and stagnant economic mobility in the U.S.
Daniel Tarullo is a member of the Board of Governors of the Federal Reserve. Other members include Janet Yellen (Chairwoman), Jeremy Stein, and Jerome Powell. The Federal Reserve uses monetary policy as its tool to achieve its dual mandate of maximum employment and price stability. The Fed has kept the Fed Funds rate near zero to boost the recovery. As the economy recovers, inflationary pressures rise, prompting the Fed to increase interest rates. An increase in interest rates would hamper the bond market (BND) and bond ETFs such as the 20+ Year Treasury Bond ETF (TLT), iShares Barclays 1-3 Year Treasury Bond Fund (SHY), iShares Barclays 7-10 Year Treasury Bond Fund (IEF), and iShares Barclays 3–7 Year Treasury Bond Fund (IEI).
Daniel Tarullo delivered a speech on “Longer-Term challenges for the American economy” at the Hyman Minsky conference on the state of U.S. and Global economies held in Washington, DC, on April 9. The first longer-term challenge he mentioned was the drop in the pace of productivity growth in the U.S. The next challenge he developed was the rising income inequality and stagnant economic mobility in the U.S.
The concern that has attracted the widest media attention was the rising income equality in the U.S. While income inequality is rising, Tarullo says, “Over the past two decades the process has been characterized by what some have called polarization, with those at the top of the distribution accumulating a significantly larger share of income, those at the bottom of the distribution experiencing modest relative gains, and those in the middle of the income distribution falling further behind in relative terms.”
Tarullo quoted Congressional Budget Office’s report “Trends in distribution of household income between 1979 and 2007.” According to the report, the income of the top 1% richest households grew 275% between 1979 and 2007, while that for the next 19% grew 65% over the same time. The middle income group’s (the 20th percentile to the 80th percentile) income grew just under 40% during the same period, while that for the low income group grew just 18%. While the income of the highest earners dropped significantly during the financial crisis, they’re the biggest gainers from the ongoing recovery. So the crisis hasn’t changed the trajectory of inequality.
The households in the middle and lower income groups have experienced only modest improvement in their household-size-adjusted real wage, while households in the top quartile saw an over-70% increase in their real household-size-adjusted income levels.
The polarization of income levels, Tarullo feels, “has been mirrored in the types of jobs we are creating.” He explains, “Since the 1990s, job gains have been concentrated at the upper and lower ends of the earnings distribution. There have been healthy gains in employment in highly paid occupations, such as computer and information systems managers, and a rise in low-paid jobs, such as home health-care workers, but growth has been much slower in occupations with earnings in the middle of the distribution, such as machinists.”
One possible explanation economists generally give is that technological changes and globalization have led to a decline in middle-class jobs. Technological changes and globalization have resulted in a large increase for some professionals, including athletes, musicians, and top executives. Some economists have also noted that the major share of top earners is concentrated in industries such as law and finance, suggesting that deregulation, corporate governance, and tax policy may have also played a role in the trend toward rising inequality.
Economic mobility hasn’t increased to mitigate higher inequality
“Economic mobility” refers to the scope for the next generation to move up or down the income level over the previous generation. While income inequality in the United States has increased, as we explained in this series, economic mobility hasn’t increased. This argument is supported by tax data that shows that a child born in the 1990s had about the same chance of moving up in the income distribution as a child born in the 1970s.
Despite a long-held view of the United States as a land of opportunity, our country actually falls short of other developed countries in economic mobility. Tarullo quoted the example of the United Kingdom, where 30% of sons with low-income parents end up being low-income themselves compared to the over 40% in the U.S. This lack of economic mobility widens income inequality, as the rich become richer while the poor stay poor.
To learn more about Tarullo’s take on monetary policy’s role in tackling longer-term issues, read on to the next part of this series.
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