Janet Yellen should keep off the inequality topic

Janet Yellen’s remarks were ill-judged, in my view, and invite attacks on the institution of the Fed and the independence of monetary policy. They also don’t do a great service to the cause of doing something about inequality.

1. She reveals what is in the US lexicon a political position on a politically contentious topic. Those on the right will paint her as looking like an overtly liberal appointee to a job that was supposed to be reserved for technocrats.

2. The effect of 1 is to reduce the credibility of her interventions on topics that are closer to home. If, for example, she chose to make the point that, in the face of the weakening global economy, monetary policy, with unconventional instruments strained to the maximum, could do with a helping hand from fiscal policy, this would look more like partisan harping on the part of the Democrats, and be less likely to have any effect.

3. Revealing her politics makes it more likely that the next appointee will be chosen more for political acceptability than macroeconomic and monetary expertise. If the Republicans were to win some subsequent Presidential election when the post falls free, it raises the chance of a revenge appointment – of an ideologue.  Reading this back, it sounds as though I presume that past appointments were free of politics.  Clearly not, but doing the right thing can help keep the appointment as apolitical as possible.

4. Once the appointment becomes thus more politicised, potential candidates might then seek to compete by offering cooperation, eroding the independence of monetary and financial stability from the electoral cycle.

5. The intervention could reduce the room for manoeuvre of the Fed at a time when the US economy could ill afford this. Unmasked as a liberal, other Fed counter-cyclical policies might come to be viewed as a liberal conspiracy to subvert the joyous workings of capitalism. This view has already taken hold in the extremes of US discourse, but it could gain wider acceptance. Central banks around the world, the Fed included, are already accused of overreach, intervening where they hadn’t previously, much. So this is not the time to try to appropriate the right to comment on matters of redistribution.

6. Inequality is not irrelevant to monetary policy. There are well worked through arguments about how increases in income directed towards the already well off will generate smaller in creases in spending than those directed at the poor.   (The rich already have enough, and will stash more of an increase in income.)  And changes in inequality might, using similar arguments, be thought to change the natural rate of interest, currently presumed to be very low, and restricting the Fed’s freedom of movement. But Ms Yellen’s interventions were not on these terms. And given the heated nature of political fighting in Congress, I would have thought that even broaching this aspect ought to have been done in as technical and neutral way as possible.  Instead, her remarks draw emotional connections with the topic of what constituted the founding mission of the US’s constitutional visionaries.   From the point of view of monetary policy today, it’s pretty irrelevant how much less unequal US society was 30 or 40 years ago.

7. Ms Yellen will be perceived by some to be unqualified to speak on the topic. Her citing inheritance as a force for good on inequality was pretty peculiar.  Inheritance is an opportinuty for the person who gets one, sure.  But, if it were possible to do it, and without hurting incentives, collecting inheritances and handing them out more equally as a subsidy would seem to do a better job!  If fighting inequality is a priority, and you think you have to limit your airtime carefully, and choose your interventions, would you think that a Fed chair speech is a good occasion to fight the battle? Not me.

8. At such a critical time for monetary policy, with continuous scrutiny of every Fed utterance for clues about the exit strategy from loose policy, and how and whether it would be modified to take account of the recent worsening global climate, it seems odd to consume scarce airtime by talking off topic like this. Making the same point that I directed at Andy Haldane’s speech on the economics of volunteering, I’d say it was better to keep to the more mundane task of continually refining and repeating the message about monetary instruments. After all, some will argue that this is what their tax dollars are going to the Fed for.

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5 Responses to Janet Yellen should keep off the inequality topic

  1. erik says:

    not to mention the corrosive effects of qe on the very question she has expressed concern about.

    • Tony Yates says:

      That’s an argument. Personally I think, to the extent that it works at all to moderate the business cycle, it reduces inequality, since unemployment, the main cost of recessions, falls almost entirely on the low-skilled and therefore low paid. Although asset prices would no doubt have been lower in the absence of QE – though it’s hard to tell how much, and how much was due to the subsiding of panic following the fiscal stimulus – the effect of this on the wealthy is far outweighed by the benefits of the much reduced unemployment.

  2. Pingback: Why Janet Yellen And The Federal Reserve Should Be Concerned About Inequality - Jonathan H. Todd

  3. Tony, this seems oddly precious. What is the “inequality topic”? There is an empirical question to do with measuring inequality of resources, well-being and opportunity. And there are policy choices about how to rank these issues in our social preferences. The latter are overtly political issues. To the extent that Yellen expresses any value judgement, it is merely to assume that inequality of opportunity matters. Is that even contentious? Not in American culture. Regarding the Federal Reserve’s independence, if it is so fragile that politically sensitive issues cannot be discussed in a neutral and objective way, we should really be worried. Fortunately, this is not so. One of the many advantages of America’s cumbersome and supposedly “dysfunctional” political system is that important things are very, very difficult to change.

    A more defendable concern is Mario Draghi’s advocacy of labour market deregulation, which correctly taints the ECB with an overtly political agenda. Labour laws should be domain of democratically elected politicians. An empirical and objective survey of the implications for well-being, inequality, growth, and inflation would be entirely legitimate. Sadly, such a valuable contribution is never forthcoming. Perhaps because the conclusions are far from clear-cut.

    • Tony Yates says:

      That there should be ‘inequality of opportunity’ in the States isn’t contentious. But that recent developments threaten it most certainly is. And exactly what that means is also contentious. And even to the extent that people agreed that this value is threatened, there is no consensus on what to do about it. For exmample, many on the right believe that public education hinders rather than helping. Many on the right also believe in the overwhelming benefits of leaving free the incentives to get very rich and pass that on.

      I think much about the US system is delicate. Like Supreme Court approval processes. And the Fed chair appointment is likewise delicate too. You don’t have to go very far back to see a time when the Fed was completely subservient to the Treasury. I think it’s perfectly possible to get back there. And Yellen’s remarks, which really reaped no gain for the Fed, contribute greatly to getting us back there with hyper-political, patrongage appointments, where Fed Chairs feel they owe the President.

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