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Fed Gov. Raskin: Wealth, Income Distribution a Subject Ripe for Deeper Research

Fed Gov RaskinBecause of the Great Recession's punishing effects on lower- and middle-income households, and given the role that income and wealth inequality might have played in the financial crisis, macroeconomists should more deeply explore wealth and income distribution, Federal Reserve Governor Sarah Bloom Raskin said in an April 18 speech in New York.

"Traditionally, the distribution of wealth and income has not been a primary consideration in the way most macroeconomists think about business cycles," Raskin said at the Hyman P. Minsky Conference on the State of the U.S. and World Economies. "But if inequality played a role in the financial crisis, if it contributed to the severity of the recession, and if its effects create a lingering economic headwind today, then perhaps our thinking, and our macroeconomic models, should be adjusted."

The Great Recession hit low- and middle-income Americans hardest mainly because most of their wealth is tied up in a house, and house values plummeted during the 2007–09 downturn, Raskin said. Moreover, lower- and middle-income individuals and households were more likely to suffer an economic shock such as losing a job. When they experienced a shock, they had less financial cushion than higher-income households to withstand the shock, she remarked.

Contributing to the conversation
In her talk, Raskin examined the question of whether available macroeconomic indicators show that income and wealth inequality is harming the nation's economy. She set out to focus particularly, she noted, on contributing to the conversation about how disparities in income and wealth could help researchers and policymakers better understand the financial crisis and recovery.

She noted that widening income and wealth inequality has been a notable structural change in the U.S. economy since the late 1970s. Between 1979 and 2007, inflation-adjusted, pretax income for a household in the top 1 percent of earners more than doubled, while income for a household in the middle of the income distribution climbed less than 20 percent, according to the Congressional Budget Office. This change, she said, is a "dramatic departure" from three prior decades of broadly rising incomes and shared prosperity.

An area "ripe for research"
"It strikes me that macroeconomists are far from a comprehensive understanding of how wealth and income inequality may affect business cycle dynamics. My remarks today are given only in the spirit of describing how that relationship might be further explored," Raskin said. She later added: "I believe that, given the wide income and wealth disparities in the United States, this area is ripe for more research."

April 25, 2013


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