As the Federal reserve debates when and how to unwind its emergency measures for propping up the economyand as the markets try to guess which metrics will trigger the decision to start taperingit's worth noting that aggregate U.S. economic data provides an increasingly detached view of how the recovery is playing out for many Americans.
With more wealth now concentrated among the wealthiest, Fed Gov. Sarah Bloom Raskin has been urging economists to take stock of what's happening everywhere else on the income spectrum. In speeches this year, she has suggested that the trends in income disparity, paired with burgeoning constraints on upward mobility, could undermine the country's economic strength overall. That's a view President Obama echoed in a July New York Times interview, just days before he announced he would appoint Raskin to the No. 2 post at the Treasury Department.
Raskin, who was still awaiting Senate confirmation at press time, spoke this summer with American Banker Magazine's Heather Landy about the troubling trends she sees stemming from income disparityand why she believes it's within the Fed's mandate to address them.
Q:When did you start thinking about income inequality in terms of its macroeconomic impact?
The crisis was painful for almost everybody, but it was particularly painful for those whose wages had been stagnating and who didn't have a cushion to help with the blow. When I came here, I saw the way a macroeconomist usually looks at this set of issues is by looking at the macroeconomic datathe big trends, the aggregate numbers. I was craving an understanding of what was happening under the macro data. What was the macro data possibly hiding? What distinctions would possibly get washed out? Because when you do an average, you essentially have an average person or an average household which may not really exist if we're now in a society where we have more disparity or more heterogeneity.
That's how I became really interested in how the heterogeneity itself might be affecting both the depth of the crisis and also our ability to grow out of it.
Q:And when did you start to sense that this perhaps was an issue the Fed could address?
The traditional views of looking at income inequality lead you into tax policy or redistribution, which are issues that are dealt with by Congress, dealt with in fiscal policy, and that clearly is not the realm I am in. I wanted to understand it through monetary policy.
Monetary policy works not through redistribution but through interest rates, which affect how households manage to put together portfolios of wealth, and how they build themselves into drivers that can move the economy in one direction or another. So I became very interested in what was going on at the household level.
Q:Was income or wealth disparity a macro issue prior to the crisis?
The trends definitely were in place beforehand, and moving in a direction in which we were seeing a real hollowing out of the middle class and people moving more to the extremes. And if you compare what was going on in the U.S. prior to the crisis versus what was going on in European countries or in other countries, we were leading the path to more dramatic extremes and a besieged middle class.
So this is a significant structural change in our economy that has been underway for a number of years. A lot of people who were concentrated in the lower and moderate income levels ... used the wealth that they had from their homes as a source of paying for college or opening a business or doing other things that normally would be [funded] with higher wages. And when the crisis hit, that form of wealth was wiped out.
Q:So was the Fed specifically trying to address this in its response?
The Federal Reserve did specifically work to address the fallout from the housing market collapse, which had massive repercussions for the entire economy. And when we've constructed policy here, I've wanted to do it with an eye toward understanding people's composition of wealth, housing being an important piece. I think this was highlighted in a lot of the actions that were taken regarding purchases of mortgage-backed securities. The FOMC has explicitly embraced this notion that housing wealth is an important component of a household's balance sheet.
Q:Can banks play a role in easing the income gap's effects, perhaps from a financial inclusion standpoint?
We want a financial system that's innovative, one that is actually dealing with people as we find them, in all different kinds of niches, all different socioeconomic groups. This is why I've been fascinated, for example, by community banks that set up shop in rural areas. It's very interesting to me how they serve. It's this adaptability and flexibility that I love to hear about.
You want to be in a market economy that's vibrant enough that it can actually meet the needs of the different, diverse groups that we have, in a way that keeps them financially included.
Q:Can the Fed help foster more of that through its policymaking?
From a regulatory policy standpoint we obviously want to be very sensitive to what impact regulation might have on the ability to innovate. We want a financial system that's innovative, one that is actually dealing with people's needs for capital and loans.
It's a mindset; it's staying open to the importance of creating a regulatory environment that continues to bring forth mechanisms by which different population groups get access to the system.
From the monetary policy side, we want to stay sensitive to different effects of interest rates on access to credit.
Q:What about critics who say the Fed is overstepping its bounds even just discussing income inequality, that this is not part of the mandate?
Well, I think we want to make sure that we are honestly approaching very difficult economic problems.
Our mandate is to maximize employment in the context of price stability and financial stability, and this is a very, very challenging mandate and it's important to consider many features of the economy, including income inequality.
The impact of income inequality on the economy isn't clear cut, so I welcome anybody whose research and analysis can help think through these linkages. I want their voices as part of the debate. We don't want to be a close-minded institution intellectually. And I think our mandate is important enough and difficult enough that we want to make sure we're creating an environment for people to put forth their best ideas.
Q:Do you have the support of your fellow board members on that?
I can't speak for everybody, but certainly everyone is on board with moving us toward our mandate and being able to create maximum employment in the context of price stability. To do this, we have to stay open to the idea that there could be structural changes in the economy. And income inequality, wealth inequality, is a structural change that is undoubtedly in place. It's an empirical reality.
Q:You once, out of curiosity, stopped by a job fair at a community college near your home and found the quality of the jobs available to be disappointing. How did your findings there shape your thinking about the broader macro environment?
That visit confirmed what the economists are telling us. The way people go about getting jobs has changed. There is a lot of demand out there for good jobs and we're not yet at a place where firms are creating jobs in such a way that necessarily leads to what people are looking for.
Now there is a phenomenon where people have a series of part-time jobs that they bring together for themselves. Some people I talk to say, "This is great. I'm my own boss, I'm master of my destiny and I can choose what I want." For people who have work-life balance issues, or [otherwise want to] construct their own set of jobs, fine. There are other people, however, who are not doing that by choice, who are now forced into situations where they have to layer jobs together and it's causing great hardship.
They don't have benefits. They don't even have sick days. They have childcare needs but the childcare doesn't match the times when they have to work one of these jobs. They're doing it by necessity, not by choice. It's important that we see the differences there, because they have different ramifications for how our economy is going to grow.
Q:What lasting economic effects do you think we'll see if the income gap problem persists, or worsens?
The biggest fear for me is that we create a society where inequality has torn the social fabric, and doesn't permit mobility, that we shut off the ability to move yourself [into better circumstances].
Once we thwart mobility, it gets very hard to then address disparities and inequality more generally.
That, I think, is the worst picture that emerges from this. And then we also won't have really robust growth, because if you [hamstring] the people who otherwise would be buying things and fueling the creation of other demand, you're going to slow things down generally.
Q: Fed Vice Chair Janet Yellen and former FDIC Chairman Sheila Bair also have spoken out about the wealth gap. Is it a coincidence that it's three prominent women who are putting a spotlight on this issue?
I'm not sure. I don't think it's essentially a gender issue; I think it's an economic issue, and lots of economists are focused on it. James Galbraith has done a lot on this, Joe Stiglitz has done a lot. So I think we're seeing this as an interest that's not confined to men or women. But maybe there's a particular sensitivity that women have to questions of inequality because still to this day we're not getting the same parity in the workplace in terms of salary. I want economic policy to be a realm that opens up opportunity for men and women alike.
Q:Does having rates near zero hurt people who are on the lower end of the income spectrum?
For households that have debt and are deleveraging, low interest rates are a benefit. That said, low rates could dissuade some people from saving, particularly those whose saving is done in traditional savings or checking accounts. That's a problem. We want to stay very aware of that.
The macro justification for a low-rate environment essentially is that it's going to lift the entire economy, it's going to provide support for growth and for people to actually get jobsjobs that are sustaining. But at the micro level, yes, I certainly understand the difficulty this places on some people in the short term.
Q:Is the Fed rethinking its models to better reflect the stress found underneath the aggregate numbers?
I think that we are all sensitive here to structural change in the economy, and income inequality is such a structural change that has been underway for a number of years. And while I can't speak for the entire board, I know that we are all very interested in what impact structural change has on the ability to create broad prosperity for Americans.
