Furchtgott-Roth: Yellen Should Focus on Growth Instead of Income Inequality

Federal Reserve Chair Janet Yellen has expressed "great concern" about the increase of income inequality.

Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute for Policy Research, thinks that was a mistake.

"It would have been far better for those on the bottom of the economic heap if Yellen had spoken about how to increase economic growth" instead, Furchtgott-Roth writes in an article for MarketWatch.

"Specifically, why have the Fed's near-zero interest rates and quantitative easing left us with 2 percent growth and a Carter-era labor-force participation rate? More growth means more jobs and higher mobility."

The labor-force participation rate was 62.7 percent in September, a 36-year low.

Furchtgott-Roth cites five factors that have boosted income inequality but shouldn't worry Yellen.

• Women moved into the workforce in record numbers in the 1980s. "Unless Yellen is suggesting that the government randomly assign spouses [since many meet their significant other in the workplace or school], or that America goes back to one major earner per household, as was the case after World War II, increasing income inequality is here to stay," she argues.
• The size of households has changed since 1980, which contributes to perceived inequality. "With the increased prevalence of divorce, delayed marriage, and longer life expectancy, there are more households composed of one person, or non-family households. These households tend to be in the bottom quintile," Furchtgott-Roth explains.
• The Tax Reform Act of 1986 resulted in a movement of income away from corporate tax returns to individual income tax returns. "All data series on individual incomes show a jump in income after 1987, but these data are not truly comparable with data from prior years, and do not indicate a real increase in inequality."
• Many analyses of income inequality use income before taxes are subtracted and transfers are added. There are not "are not realistic measures of inequality because top earners pay substantial taxes and low-income earners get transfers," she states.
• People move around the income distribution during their life cycle. "Income inequality is only a problem if people cannot move up."

To be sure, Yellen isn't the only one who puts an emphasis on income inequality. "I consider income inequality the most dangerous part of what's going on in the United States," former Federal Reserve Chairman Alan Greenspan said in a speech earlier this year.

"You can see the deteriorating impact of that on our current political system, and you cannot talk about politics without talking about its impact on the economy."

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