Home > upward income redistribution > What Yellen didn’t say

What Yellen didn’t say

from David Ruccio




The other day, I reported that Fed chair Janet Yellen said a great deal about existing levels of economic inequality at the Conference on Economic Opportunity and Inequality in Boston.

Neil Irwin [ht: ra] reminds us there’s a great deal Yellen didn’t say. She didn’t, for example, say anything about the aspects of the inequality puzzle that have a close tie-in to the policies of the Federal Reserve.

there is a growing body of evidence — far from proven, but certainly gaining traction — that income inequality could be a significant force behind disappointing overall economic growth over the last 15 years.

The story goes like this: The wealthy tend to save a large proportion of their income, whereas middle and lower-income people spend almost all of what they earn. Because a rising share of income is going to the wealthy, spending — and hence aggregate demand — is rising more slowly than it would if there were more even distribution of income. Skyrocketing debt levels papered over this disconnect in the mid-2000s, but now we could be feeling its effect.

If true, this would help account for why the economy has notched mediocre growth since the turn of the century, with the exception being a brief period of the housing bubble.

Yellen also didn’t have anything to say about the economic opportunities that have allowed the gains of a tiny minority at the top to be captured in the first place. Top 1 percent incomes and corporate profits have to come from somewhere. They’re created during the course of producing goods and services—in the United States and around the world. But the workers who did all that producing only get to keep part of the value they create, in the form of wages and salaries; the rest—call it the surplus—is appropriated by their employers, who keep some in the form of corporate profits and then distribute the rest to their owners and top managers. Those employers, owners, and managers spend some of that income and plow the rest into the ownership of various forms of wealth. It’s no wonder, then, that—given the economic opportunities they’ve been provided within current economic arrangements—the distribution of both income and wealth has been getting more and more unequal.

That’s what Janet Yellen didn’t say.

  1. chdwr
    October 21, 2014 at 10:07 pm

    Economists are nascent profit making Distributists, the philosophy and policies of which have been around for nearly a century, but obscured by both false economic orthodoxy and self interest within the niche business model of Consumer Finance. Hopefully the Wisdom of Distributism crashes home to economists before conventional economic “wisdom”, the frustrations of regional populations, the diminishing profits of businesses and political demagogues all coalesce into a world conflagration. The clock is ticking.

  2. Alex Casanas
    October 25, 2014 at 11:45 pm

    Reblogged this on Zagonomics and commented:
    This piece on income inequality comes from the Real-World Economics Review Blog. It’s a short piece about where income inequality comes from, and why growing income inequality is slowing economic growth.

  3. October 26, 2014 at 9:52 am

    A question you might hear from capitalists is how to redistribute incomes while keeping the economy dynamic. For example if lower and middle wages are high and hiring and firing is hard that may create firms that are only good in stable conditions.

    An answer, in my view, is democratising ownership of firms so that everyone in the firm shares in the profits. Instead of treating junior and middle employees as expendable while granting shares to managers, give everyone an allocation of shares over time. Or tax the firm’s shares and collect a portion of their profits in a social fund.

    The outcome that we want, I think, is to allow impressive mega-firms to exist assuming they’re a net contributor of good (it’s debatable) but tap the flow of profits at the top and redistribute it more equally.

    • chdwr
      October 26, 2014 at 7:34 pm

      While I applaud the effort to resolve the basic problem of scarcity of individual incomes in ratio to prices simultaneously produced….this scheme is far too complicated and still doesn’t get the job done…because it still relies upon money to be multipli injected and circulated within the economy….when doing so always results in the rate of flow of prices exceeding the rate of flow of individual incomes….so the holy grail of economics, i.e. equilibrium, is still not attained, and so neither is the individual nor the system set free.

      It IS a monetary economy, and in a monetary economy adequate individual income/money is freedom for both the individual and the system, and when injecting money into the system FIRST cannot create an equilibrium it is folly not to GIVE the individual a modicum money FIRST, creating a virtual equilibrium and then lowering prices to the consumer via a discount to consumers which is fully rebated back to participating retail merchants….to maintain it.

      The false economic orthodoxy of market equilibrium worship and the equally false financial orthodoxy that monetary inflation will result from directly distributing credit to the individual FIRST, be…you know what. It is time to intelligently and effectively confront the dominating monopolistic powers of the business model of Finance…particularly in the area of consumer finance. The economic Wisdom and truthfully effective policy of monetary grace the free economic gift to the individual is above and more important than any orthodoxy.

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