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Yellen’s Declaration Of Non-Independence

For as long as I can remember, every Federal Reserve chairman, of either party, has fought vigorously to defend the Fed’s independence from the political arms of government.

And for good reason. The president and legislators face elections every two to six years, and have trouble thinking beyond the next campaign. But since the United States is a going concern that expects to stay open for business indefinitely, we want our central bank to maximize our economic performance over the long term, with the lightest possible demands for short-term results.

Congress has set out these short-term demands very explicitly: The Fed has a dual mandate, enshrined in American law, to try to achieve full employment while maintaining price stability. In contrast, take for example the mandate of Germany’s central bank, which is essentially only to maintain price stability - a policy it has tried to export to the European Central Bank ever since joining the eurozone.

Of course, the definitions of “full employment” and “price stability” are somewhat fluid. The Fed typically defines full employment as an unemployment rate in the range of 5 to 6 percent, and price stability, for now, is seen as an inflation rate around 2 percent. However they are defined, though, these are the two goals with which an effective Fed chair normally concerns him- or herself, because these are the benchmarks for maximizing the country’s economic performance in the long term.

The deal is pretty simple. The Fed’s job is to create the biggest possible pie. Elected officials get to decide how the pie should be distributed and consumed.

Yet Federal Reserve Chair Janet Yellen’s recent speech, “Perspectives on Inequality and Opportunity From the Survey of Consumer Finances,” betrayed a lack of appreciation for this straightforward division of labor and the sensible policies behind it.

Yellen declared that “the extent and continuing increase in inequality in the United States greatly concern” her. She characterized inequality as a threat to “opportunity,” and offered four “building blocks” for increasing the latter. Whether her solutions are wise or otherwise is not the biggest issue. The largest problem is that by focusing on income inequality at all, Yellen drags the central bank from an area that is clearly its purview into one that is much more political and, as a result, one that ties the Fed to the fortunes of the Democrats whose views she implicitly endorses.

In so doing, Yellen encourages political backlash from Republicans, the most extreme of whom already disapprove of many Fed policies. Such a backlash is in nobody’s best interest.

Yellen’s remarks buy into a Democratic propaganda line that somehow opportunities were ever equally distributed in American society in the past and are less equally distributed today, and that this alleged lack of opportunity is a long-term threat to the country’s prosperity.

When was this equal opportunity nirvana of which she speaks? Was it in the years after World War II, when women who had flocked to American factories were sent home to make room for returning war veterans? Was it the decades after the turn of the 20th century, when only a small fraction of Americans even aspired to college and leading universities imposed quotas on Jews and other recent immigrants, and when Jim Crow reigned in the South? Was it the decades after the Civil War, otherwise known as the Gilded Age, when the gilding was enjoyed almost exclusively by those whom today’s progressives would call robber barons? Or does Yellen’s reference go all the way back to the plantation economy that gave rise to so many of our Founding Fathers? Does she believe colonial America was the one in which opportunity was equal for all?

The phrase “equal opportunity” meaningfully entered our lexicon about 50 years ago, as a reflection of the new rules barring discrimination against women, racial minorities and other protected groups. It did not reflect any kind of national policy to attempt to achieve a mythical world in which the circumstances of a person’s birth have no impact on that person’s life. The concept merely meant that whatever the circumstances of one’s birth, no doors were summarily closed to one by default.

It is also worth noting that the Fed has embarked on its own major wealth distribution program for most of the past decade. It is what I call the war on savers: rock-bottom interest rates penalizing those who have accumulated wealth and benefitting, at least in theory, those both in and out of government who wish to borrow and spend it. Unfortunately, Yellen’s Fed and the administration that backed her promotion have made it so risky and cumbersome for borrowers outside of government to secure loans that the war on savers has ended up benefitting primarily the government itself and those with enough wealth to enjoy the post-crash rebound in stock and home prices. Thus the Fed has substantially contributed to exactly the income inequality that Yellen bemoans.

Yellen’s comments indicate that she understands neither the role of the Federal Reserve nor her own. It is not unreasonable to expect our central bank’s leader to understand history as well as economics and to refrain from presenting nonsensical campaign talking points, whose aim is to fire up a party’s base, as though those points are grounded either in economic theory or in historical fact, when neither is the case.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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14 Responses to "Yellen’s Declaration Of Non-Independence"

  • Ron Cee
    October 29, 2014 - 9:50 am

    As with every other appointee of this administration, the appointment is made with the expectation that appointee will not serve the oath of office he/she took; rather they will serve the Democrat Party and its lackeys.

  • Drew Palmer
    October 29, 2014 - 10:13 am

    Excellent article. I had hoped that Yellen’s comments were intended to provide rationalization for reversing the “war on savers,” but perhaps you are correct that she has indeed been co-opted by redistributive liberalism.

  • Bob Meijer
    October 29, 2014 - 10:13 am

    This Op Ed’s points are well taken — but misdirected. Its fundamental fallacy is theat the FR serves the real economy — a premise that has no basis in fact. In truth, The entire efficacy of FR easing remains, at minimum, highly debatable.

    On the negative side, it clearly inflates bubble, redirects (essentially free) capital to entirely unproductive commodity, currency, junk bond and (financial) asset) speculation — and is demonstrably ineffective at boosting employment wages as a percentage of GDP — see http://research.stlouisfed.org… .

    A longitudinal look at the y/y growth in GDP per unit of y/y growth in credit seriously challenges even the claim that “FR easing” boosts GDP — see y/y growth in GDP per unit credit growth on http://research.stlouisfed.org

    The ONLY reliable effects, of assorted QE and ZIRP exertions,has been to hugely increase FIRE industry profits, on “free money,” to record highs, as as percentage of all US (after tax) corporate profits — see http://research.stlouisfed.org…. There’s little or no evidence that these massively subsidized profits are of any benefit to employment wages — or the rest of the real economy.

    • Bill Lewis
      October 29, 2014 - 11:28 am

      That’s great, but you are missing the point. Yellen has politicized her office, which needs to remain party neutral not only for economic stability but for public opinion. What the Fed policies actually do/do not do is largely immaterial to public perception of same.

      • Paul Brosseau
        October 29, 2014 - 11:34 am

        Yellen has not politicized her office. The author of the article has politicized Yellens policies because they likely do not provide benefit to him.

        • Patrick Powers
          October 29, 2014 - 12:14 pm

          Exactly, this is absurd that there is any political bias to what Yellen is saying or doing. The author takes it as a political bias because he has one and is applying that lens to her.

          Since full employment is the goal, her idea is more money in the hands of more people will likely increase employment due to our large service based economy. You can disagree with that point, but please don’t bring politics into the matter, as it is irrelevant.

  • John Casler
    October 29, 2014 - 10:24 am

    Exceptionally well-penned perspective. Nice article.

  • James Erb
    October 29, 2014 - 10:55 am

    Great article! As an older American, l feel more and more disadvantaged by super low interest rates which punish savers who are seeking a safe haven for their retirement funds. This is primarily caused by Federal reserve policy.

  • Elliot J. Stamler
    October 29, 2014 - 10:59 am

    While I commend Mr. Elkin for writing a very intelligent and thoughtful column I must disagree. Along with economy there is POLITICAL economy. To ignore the latter and focus only on the former which is what I take is his advice and the nexus of his criticism of Chairman Yellen is, certainly at this time in history, dangerous and extremely short-sighted. Growing income inequality and lack of economic opportunity, unabated, has resulted in revolution, violent, disruptive and often monstrously totalitarian. A sullen and poor population growing ever more bitterly resentful of the very few growing ever more wealthy and more powerful with money-backed power over the political instruments of government is a prescription for an EXPLOSION. Mr. Elkin is the one rather than Dr. Yellen who does not understand history. The French, Russian and German National Socialist revolutions were all generated by exactly the kind of economic circumstances Mr. Elkin says Dr. Yellen should be ignoring–and which he ignores too, disparaging the very idea that it is extant or if it is remediable. Societies pursuing Mr. Elkin’s attitude wind up giving us the likes of Stalin, Hitler, Mao Zedong, and Robespierre. And millions of corpses as the dividend. Janet Yellen is right and deserves our commendation and attention!!!

  • Shane Kenyon
    October 29, 2014 - 11:24 am

    Having a perspecitve on income distribution across society one way or the other is inded political, but the way you write your article belies the fact that you have a right leaning opinion on the subject.

    In addition, for a CPA I’d expect a more statistical deep-dive into the comments on wealth distrubution instead of straw-man references to Jim Crow and WWII unfair treament of women workers. Its fascinating these days to see right leaning commentators coopt left themes to make their points.

    So in conclusion, if I were you I’d take the advice you seem to be giving Yellen, stick to the numbers and leave the politics to other. Either that, or use the actual numbers to inform your political opinion and arrive at rational policy decisions that will raise all boats, not just benefit those who have already accumulated wealth (in the form of money).

  • Sierra Tango
    October 29, 2014 - 11:32 am

    The Fed and the system they are in charge of is in charge of creating debt. Since debt is not money and incurs interest. It has a way of making the masses that borrow them poor over time and a few that do get to collect them as money even more rich over time. That is the income inequality. Because the system the Fed runs, runs on debt and debt runs on interest. Those who issue it can foreclose on America. Those who borrow it get a lifetime of higher cost of living to service that debt. That debt spent as money makes the few even richer. But the masses are stuck with higher taxes and higher fees and more cutting back in expenses to pay down debt. Paying off the interest can only be done by borrowing more debt. The cycle does not end. The Fed is at the apex of this inequality. It can only balloon. Until it pops. But when it pops the masses are foreclosed on even more.

  • Paul Brosseau
    October 29, 2014 - 11:33 am

    I find the article, as opposed to Yellen’s comments, to be political in nature but cleverly cloaked in financial jargon.

    At no time did Yellen declare non-independence. That is the opinion of the author. As head of the FR it is Yellen’s job to be aware of the consequences of financial policy. She may not bury her head in the sand and pretend she has no responsibility for those consequences.

    The author is likely a beneficiary of the current status quo and would prefer that it not be changed. Yellen is not the only one concerned about the lopsided nature of the US economy especially after the fiscal disaster that was the Bush Administration.

    Conservatives like to compare running the government to running a business. I know of no business CEO whose first act of leadership at the head of a company would be to slash income and increase both short and long term debt. Unless that CEO had another agenda in mind to simply loot the company of the cash value of its assets and then get out of town before the sheriff arrives. Yet that is exactly what Dubbya did in his first year in office.

    If we see a resurgence of right wing conservative financial values after this mid-term election then god help us. People seem to have such short term memories. Right wing republican economic policies were at the heart of the Great Recession. Not only the crashing of the economy but the subsequent powerless position of the US government to deal with the crisis with any response other than more massive long term debt.

    Money earned through investment needs to be taxed at a similar rate, if not higher, than money earned through actual work. Until then people who already have money will be able to keep it out of circulation and away from the actual economy. Punishing people who work for a living by taxing them at a higher rate than people who simply already have money is not ethically or morally supportable. It is, however, really nice if you already have money.

  • Danish Amin
    October 29, 2014 - 11:36 am

    If speaking out against inequality, especially against inequality in opportunity is somehow a Democratic rather than a Republican thing. Then Yellen may not be the problem. Just because something wasn’t achieved before, doesn’t mean you can’t speak in favor of it now. MLK Jr. did that (not comparing Yellen to MLK obviously). Also, this old line of Fed’s or Democrat’s war on savers is getting old, as is the dogmatic rants about inflation, which is what apparently causes this war on savers. Inflation has not only been low but it has been historically stable in last few years under this “administration.” But you’re correct in Fed to a degree has for years (way before Yellen) widened the income inequality gap. However, the first step towards it would be to address the problem as Yellen does, and not to avoid it completely.

    I guess you can’t expect anything better or more sensible out of someone who sees a contradiction in Justice Ginsburg going to see an Opera (to which the author disagrees with, heck, maybe Ginsburg disagrees with it even more) that pushes the freedom of speech to some extent and then being against a political process where (on the name of political speech) candidates can be bought out for large stacks of cash.

  • Michael Cook
    October 29, 2014 - 11:39 am

    Disagree with the premise of the opinion the Income Inequality is a political (partisan) issue. This is directly tied to the Employment goal. When a college graduate can’t find an appropriate job other than in Foodservice, which in turn displaces a lesser educated person who now doesn’t have a job, this is an employment issue.
    This is a global issue, not just a US issue. While some of the employment issue is related to automation, it is not the only cause.
    BTW, why can’t “savers” invest in the stock market and benefit as others? Nobody is forcing them to hold CD’s.