The Australian

By Thomas Adams

Earlier this month Janet Yellen, the chairwoman of the Federal Reserve, set off a firestorm of controversy over a speech that touched on rising economic inequality in the US. The Fed is traditionally understood to have a “dual mandate” of ensuring “maximum employment” and “stable prices”.

Thus, for a Fed chair to deliver a speech on inequality would seem part and parcel of her job description, given that both employment and purchasing power are constituent elements of how we measure economic inequality.

Yellen’s speech was fairly modest in both its analysis and its proposals. She repeated some basic economic facts that any observer paying even a modicum of attention should be familiar with. As Yellen put it, “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”.

To remedy this trend, she suggested more resources for early childhood education, better access to university degrees, and policies that would increase business ownership while arguing that more people receiving more inheritances would boost economic opportunity. Simple statistical facts and widely accepted and uncontroversial policy prescriptions, yet by the outcry that greeted her speech in some quarters of the American media one would think Yellen had suggested that there is in fact a Santa Claus.

Michael Strain suggested in The New York Times that Yellen was going outside her job description and wading into “fundamentally moral concerns”. Meanwhile, in Forbes, Stephen Moore christened Yellen, a long-time business school professor, as America’s “class warrior in chief”. At the American Enterprise Institute, James Pethokoukis chided Yellen for even discussing inequality, suggesting her rhetoric would delegitimise the institution of the Fed.

What does this dust-up though have to say about the outlook of the American economy, in both the short and long term?

By now the nature of the American recovery from the global financial crisis of 2008 is in sharp relief. Stock prices have more than recovered, housing prices are generally on the rise across the US, and GDP is at an all-time high. As was clear to those who paid attention to Japan nearly two decades ago, the Fed’s policies and the increase in the monetary supply has not led to large growth in inflation.

Such indicators mask the deeply uneven nature of the American recovery. Since 2002, six years before the crash, the real wages for the bottom 70 per cent of Americans have remained stagnant. This is of course the key background to Yellen’s speech. Even as most markets have made more or less full recoveries, the distribution of this recovery has continued to be skewed away from most Americans.

Economies at all scales and levels are not abstract things but operate in a real world where politics and policies shape them. In the American context, the spectrum of political possibility is so narrowed as to suggest that these economic trends — rising markets, low inflation, and stagnant wages — will continue for the foreseeable future. This is where Yellen’s speech and its controversy come in.

The backlash that has greeted her simple remarks and modest solutions speaks to the incredible narrowing of acceptable economic policy in the US. The likelihood that Republicans will take control of the Senate and thus both chambers of congress during next week’s midterm elections means that the final two years of Barack Obama’s presidency will produce little in terms of economic policy that would affect any of these trends. In the unlikely event that Democrats retain control of the Senate, the previous four years of divided congress have made clear that any dramatic shifts in the policies that have produced this kind of recovery are unthinkable.

The difference between Republicans and Democrats on these issues is narrow and mostly of degree.

Even if one party or the other has control of congress and the presidency come January 2017, this direction in economic policy will likely continue. Both parties have made clear their attachment to growing markets and low-level inflation as the most important indicators of economic recovery.

While Democrats pay lip service to ending wage stagnation and economic inequality, the kinds of demand-side programs and redistributive policies that would actually put a dent in these trends are nearly as outside their realm of thinking as that of Republicans.

Some of this is the result of the kind of political defeat that allows an economist to be labelled a class warrior for advocating small business growth and praising the importance of inheritances. More of it comes from the long-term transition of the Democratic Party into a party that accepts that the indicators of recovery can be found in the valuation of stock portfolios.

As long as this trend continues, and there is no foreseeable political force attempting to curb it, American economic recovery will look quite stable for some but quite stagnant for others.

This article was originally published at The Australian