Chair Yellen Is Right: Income and Wealth Inequality Hurts Economic Mobility

Fed Chair Janet Yellen gave a speech this week, ”Perspectives on Inequality and Opportunity from the Survey of Consumer Finances”, and she deserves our applause for speaking some truths about social mobility and income inequality that are frequently overlooked. I am going to focus on one aspect of her speech in particular—the relationship between income and wealth inequality and opportunity.

First, there was no mincing of words as to what has happened:

“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.”

I appreciate both the straightforward description of the rise of both income and wealth inequality, and the explicit connection between these growing inequalities and the threat this poses to future generations’ upward mobility and opportunity. Our current economic discourse on these matters is very confused. Let’s be clear on our terms. When we talk about social mobility, or ”opportunity,” we are talking about the ability of the members of the next generation who are starting at the bottom of the income ladder (i.e. growing up poor) to climb that ladder and be better off than their parents in either an absolute sense (having more money) or a relative one (ranking higher in the income distribution, such as being in the middle or the top fifth rather than the bottom fifth). Income inequality, meanwhile, is how far apart the rungs on the income ladder are, and whether the incomes produced over the next ten or twenty years are narrowly or widely shared. Conservatives seem to only be concerned with facilitating opportunity or social mobility, and consider income inequality itself not a worthy focus of policy—presumably because markets have produced these outcomes and markets know best. Some on the center-left also seem to want to focus solely on social mobility, because they think ”income inequality” polls poorly. Or perhaps they want to help the poor, and feel that we can do so without addressing income inequality more generally, which would involve tackling the oversized income gains of the top one percent (after all, one must raise campaign funds from them). Along these lines, various reporters have noted the Obama administration backing away from making ”income inequality” a key issue and shifting to a focus on opportunity or mobility.

Is this tenable, deciding to focus on the upward mobility of today’s poor children without any focus on the incomes and wealth of their parents and the circumstances of their lives—where they live, in what housing, with what safety, and so on? Janet Yellen would say no, you cannot address social mobility without also addressing income inequality. As she noted this week, “to the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality.” Later in the speech, she pointed out “that economic mobility and income inequality among advanced countries are negatively correlated.”

She’s saying that today’s poverty limits the upward mobility of those growing up in poverty, which surely makes sense, besides being validated by reams of research. It is great to teach children “grit”, to instruct them to avoid having children in their teens, to provide the best teachers and schooling possible. At the same time, children’s lived experiences matter and frequently limit their ability to advance educationally. Success in school is not as easy for someone who frequently changes schools, has no one to help them with homework, has few role models of success, has more exposure to lead and asbestos, has untreated vision, ear, dental or other health problems, lives in a chaotic and frequently unsafe environment where stress is high and choice (and the experience of choosing) must be limited, spends afternoons and summers hanging out rather than attending a high quality after-school program and  summer camp, is not provided tutors when struggling and has parents with little literacy themselves so is read to infrequently (if at all),  is engaged in less complex conversation at home, and has limited access to books.

Acknowledging that income inequality and poverty greatly affect schooling success does not mean we should not invest in schools, early childhood education, and good teachers. Rather, it means we need to take income disadvantage into account as we provide compensatory education programs for low income children, providing them and their families with the needed social services and medical supports (health clinics in schools, for instance), providing after-school and summer programs, and providing quality early childhood educational experiences so that the inequalities we observe in kindergarten can be reduced. Acknowledging that income inequality and poverty greatly affect schooling success also means we need to improve the circumstances of poor children’s lives by moving them out of poverty and providing stable, adequate housing, health and safe environments. We should be bold enough to acknowledge that if we fail to improve these circumstances, having “high expectations” for disadvantaged children’s success is little more than self-delusion and posturing.

Besides, does it really make sense to be concerned about how fast someone can climb the income ladder but have no concern with what it means to live on the lower or middle rungs? After all, some people are always going to end up on the bottom and middle rungs. Seems to me that we should also be concerned that low and moderate income families have a decent life, which means we must be concerned with their incomes, which means, in effect, the wages they earn on their jobs.

Tackling income inequality necessarily moves us into some issues that many seem to want to avoid. One is that we will need to restrain the income growth of the top one percent, which primarily means getting executive pay and the size and pay of the financial sector under control. After all, if the top one percent keeps receiving twenty-to-twenty-five percent of all income (rather than the ten percent share in the late 1970s) there is much less available for low and middle-income families. The other is that we will need to focus on generating broad-based wage growth. Wages provide the vast majority of the incomes of the broad middle class, and the bottom fifth of households receive about seventy percent of their income from wages and the wage-related safety net (i.e. the EITC). Generating broad-based wage growth is how we can lift people out of poverty and build middle class incomes. (That is why EPI launched our new initiative, Raising America’s Pay.)