Yellen warns of widening income inequality

WASHINGTON — Federal Reserve Chair Janet Yellen said Friday that the last several decades have seen the most sustained rise in income inequality in a century.

In a speech to a Boston conference on economic opportunity, Yellen said this problem is of great concern to her and she pointed to increased education and ownership of small businesses as two ways to deal with the problem.

“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,” Yellen said in her remarks to a conference on economic opportunity sponsored by the Federal Reserve Bank of Boston.

“Society faces difficult questions of how best to fairly and justly promote equal opportunity,” Yellen said. But she said she did not plan to offer solutions to these “contentious questions” but instead used her remarks to describe the landscape of inequality as it exists today.

She did talk about such factors as early childhood education, affordable higher education, business ownership and inheritances as “building blocks” that could be used by Americans to boost wealth.

“In focusing on these four building blocks, I do not mean to suggest that they account for all economic opportunity, but I do believe they are all significant sources opportunity for individuals and their families to improve their economic circumstances,” Yellen said.

In her Boston speech, Yellen made no comments on the current state of the economy or on the future course of interest rates.

The Fed next meets on Oct. 28-29 and many economists believe the recent financial market turbulence and downgrades to economic prospects around the globe increase the likelihood that the central bank will not start raising its key short-term interest rate until next summer. That rate has been at a record low near zero since December 2008.

— Resources Available for Children

For most families, “public funding plays an important role in providing resources to children that influence future levels of income and wealth,” Yellen said. In particular, she expressed support for government-subsidized early childhood education, which has been shown to improve outcomes for lower-income children. But gains in enrollment and funding have stalled since 2010 due to budget cuts made in the wake of the Great Recession.

— Affordable Higher Education

Since 2001, college costs have risen far faster than income has in most U.S. families. That has resulted in a dramatic rise in student loan debt, which has quadrupled from $260 billion in 2004 to $1.1 trillion this year. “Higher education has been and remains a potent source of economic opportunity in America, but I fear the large and growing burden of paying for it may make it harder for many young people to take advantage of the opportunity higher education offers,” Yellen said.

— Business Ownership

Building a business has “long been an important part of the American dream,” Yellen said. Business ownership is a significant source of wealth and can be an important way for households to move up economically. But data show that it has become harder for many families to start businesses, and the pace of new business creation has fallen in recent decades. “One reason to be concerned about the apparent decline in new business formation is that it may serve to depress the pace of productivity, real wage growth and employment,” she said.

— Inheritances

While large inheritances play a big role in the top 5 percent of households, they are also common among households below the top, Yellen said. “Considering the overall picture of limited resources for most families that I have described today, I think the effects of inheritances for the sizable minority below the top that receive one are likely a significant source of economic opportunity,” Yellen said.