Dinner

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wanted to say if there is anyone else you want to see, feel free. We'll see you at Sofitel at 7:45. On Oct 17, 2014 9:46 PM, "Sandler, Herbert" <[email protected]> wrote: > Thanks. > Are we still on for dinner on Monday? > Just had dinner with Bob Solow who sends regards and Gordon Berlin of MDRC > Had lunch with Shelby who out of the blue asked for an update on WCEG and > wanted to know more. She says she may want to do some funding. I told > Heather. > > Sent from my iPad > > Begin forwarded message: > > *From:* "Podesta, John" <[email protected]> > *Date:* October 17, 2014 at 6:41:08 PM EDT > *To:* "'[email protected]'" <[email protected]> > *Subject:* *Fw: Yellen on inequality* > > > > *From*: Costa, Kristina > *Sent*: Friday, October 17, 2014 03:34 PM > *To*: Podesta, John > *Subject*: Yellen on inequality > > > On a totally different note, but heartening to see regardless, Janet > Yellen gave a great speech at the Boston Fed today on inequality and > growth. Pasting below a short story from the NYT on the speech, and the > text itself, in case you have a free minute to skim. > > > > > > > http://www.nytimes.com/2014/10/18/upshot/what-janet-yellen-said-and-didnt-say-about-inequality.html > > What Janet Yellen Said, and Didn’t Say, About Inequality > > OCT. 17, 2014 > > Neil Irwin > > > > If there was any doubt that Janet Yellen would be a different type of > Federal Reserve chair, her speech Friday in Boston removed it. > > > > Her speech had the dry title of “Perspectives on Inequality and > Opportunity From the Survey of Consumer Finances,” which seems almost > intended to play down some of the conclusions she reached. By the cautious > standards of central bankers, they are downright radical. > > > > “The extent of and continuing increase in inequality in the United States > greatly concern me,” Ms. Yellen said at a conference sponsored by the > Federal Reserve Bank of Boston. “I think it is appropriate to ask whether > this trend is compatible with values rooted in our nation’s history, among > them the high value Americans have traditionally placed on equality of > opportunity.” > > > > Nothing about those statements would seem unusual coming from a > left-leaning politician or any number of professional commentators. What > makes them unusual is hearing them from the nation’s economist-in-chief, > who generally tries to steer as far away from contentious political debates > as possible. > > > > Consider, for example, the approach the last Fed chief took when he gave a > speech on the same topic. Instead of raising the possibility that a > widening gap between rich and poor could be contrary to American values, > here’s what Ben Bernanke said in a 2007 speech to the Great Omaha Chamber > of Commerce: “I will not draw any firm conclusions about the extent to > which policy should attempt to offset inequality in economic outcomes; that > determination inherently depends on values and social trade-offs and is > thus properly left to the political process.” > > > > Ms. Yellen’s speech is a thorough airing of some of the latest research on > how much inequality has widened in recent years and why. In the course of > 4,300 words, she explores the role of rising debt loads poor students must > incur to get a college education, a slowdown in small-business formation, > and trends in inheritances, among other issues. > > > > But in many ways the issues she leaves out are more instructive. In > particular, she stays away from the aspects of the inequality puzzle that > have a close tie-in to the policies of the Federal Reserve. > > > > First, there is a growing body of evidence — far from proven, but > certainly gaining traction — that income inequality could be a significant > force behind disappointing overall economic growth over the last 15 years. > > > > The story goes like this: The wealthy tend to save a large proportion of > their income, whereas middle and lower-income people spend almost all of > what they earn. Because a rising share of income is going to the wealthy, > spending — and hence aggregate demand — is rising more slowly than it would > if there were more even distribution of income. Skyrocketing debt levels > papered over this disconnect in the mid-2000s, but now we could be feeling > its effect. > > > > If true, this would help account for why the economy has notched mediocre > growth since the turn of the century, with the exception being a brief > period of the housing bubble. > > > > Continue reading the main storyContinue reading the main storyContinue > reading the main story > > It would also have big implications for Fed policy. It would imply that, > under the current economic arrangement, the nation’s potential economic > growth is lower than it might otherwise be. Which implies that it would be > dangerous for the Fed to try to seek growth much faster than that using > monetary policy, as doing so might unleash inflation, financial bubbles or > both. > > > > A second area in which monetary policy interacts with inequality — and > which Ms. Yellen also leaves unaddressed — is the role of the Fed’s easy > money policies in encouraging inequality. > > > > For the last five years of economic expansion, Congress has been unwilling > to use fiscal policy to try to encourage faster growth. That has left the > Fed as the only game in town, and the Bernanke Fed again and again turned > to quantitative easing and ultralow interest rate policies to try to shock > the economy into speedier expansion. (Ms. Yellen was the No. 2 official at > the Fed for most of this time, and helped engineer the policies). > > > > But this has contributed to an imbalanced form of growth in the United > States. Many of the first-order effects of the Fed’s bond buying have been, > for example, to drive up the stock market and to help lower mortgage rates. > Because stocks are disproportionately owned by the wealthy and the upper > middle class have been in best position to refinance their mortgages, the > benefits of Fed policy for middle and low-income workers have been more > indirect. > > > > It is unclear what that means for the proper course of monetary policy. If > quantitative easing policies led to stronger overall growth that are the > reason employers are adding more jobs, then the trickle-down benefits for > ordinary workers are still meaningful. But Ms. Yellen did not address in > her speech whether she agrees with the premise that a Fed-driven economic > recovery has contributed to inequality, and if so what it implies for her > agency. > > > > It seems like Ms. Yellen offered this speech as a way to use her bully > pulpit to cast public attention on an issue she cares about deeply, > deliberately avoiding areas where inequality intersects with the policy > areas under which she has direct control. And it is true that the future of > inequality in the United States is surely shaped more by decisions on the > levels of certain taxes and the size of the social welfare state more than > by anything that the Fed does. > > > > Perhaps in future appearances, Ms. Yellen will give us a sense not just of > what is wrong with inequality, but what it might mean for the policies over > which she has some control. > > > > > > ----- > > http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm > > > Chair Janet L. Yellen At the Conference on Economic Opportunity and > Inequality, Federal Reserve Bank of Boston, Boston, Massachusetts October > 17, 2014 > > *Perspectives on Inequality and Opportunity from the Survey of Consumer > Finances* > > The distribution of income and wealth in the United States has been > widening more or less steadily for several decades, to a greater extent > than in most advanced countries.1 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn1>This > trend paused during the Great Recession because of larger wealth losses for > those at the top of the distribution and because increased safety-net > spending helped offset some income losses for those below the top. But > widening inequality resumed in the recovery, as the stock market rebounded, > wage growth and the healing of the labor market have been slow, and the > increase in home prices has not fully restored the housing wealth lost by > the large majority of households for which it is their primary asset. > > The extent of and continuing increase in inequality in the United States > greatly concern me. The past several decades have seen the most sustained > rise in inequality since the 19th century after more than 40 years of > narrowing inequality following the Great Depression. By some estimates, > income and wealth inequality are near their highest levels in the past > hundred years, much higher than the average during that time span and > probably higher than for much of American history before then.2 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn2> 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. I think it is appropriate to > ask whether this trend is compatible with values rooted in our nation's > history, among them the high value Americans have traditionally placed on > equality of opportunity. > > Some degree of inequality in income and wealth, of course, would occur > even with completely equal opportunity because variations in effort, skill, > and luck will produce variations in outcomes. Indeed, some variation in > outcomes arguably contributes to economic growth because it creates > incentives to work hard, get an education, save, invest, and undertake > risk. However, to the extent that opportunity itself is enhanced by access > to economic resources, inequality of outcomes can exacerbate inequality of > opportunity, thereby perpetuating a trend of increasing inequality. Such a > link is suggested by the "Great Gatsby Curve," the finding that, among > advanced economies, greater income inequality is associated with diminished > intergenerational mobility.3 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn3> In > such circumstances, society faces difficult questions of how best to fairly > and justly promote equal opportunity. My purpose today is not to provide > answers to these contentious questions, but rather to provide a factual > basis for further discussion. I am pleased that this conference will focus > on equality of economic opportunity and on ways to better promote it. > > In my remarks, I will review trends in income and wealth inequality over > the past several decades, then identify and discuss four sources of > economic opportunity in America--think of them as "building blocks" for the > gains in income and wealth that most Americans hope are within reach of > those who strive for them. The first two are widely recognized as important > sources of opportunity: resources available for children and affordable > higher education. The second two may come as more of a surprise: business > ownership and inheritances. Like most sources of wealth, family ownership > of businesses and inheritances are concentrated among households at the top > of the distribution. But both of these are less concentrated and more > broadly distributed than other forms of wealth, and there is some basis for > thinking that they may also play a role in providing economic opportunities > to a considerable number of families below the top. > > 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 of opportunity for individuals and their families to > improve their economic circumstances. > > *Income and Wealth Inequality in the Survey of Consumer Finances* > I will start with the basics about widening inequality, drawing heavily on > a trove of data generated by the Federal Reserve's triennial Survey of > Consumer Finances (SCF), the latest of which was conducted in 2013 and > published last month.4 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn4> The > SCF is broadly consistent with other data that show widening wealth and > income inequality over the past several decades, but I am employing the SCF > because it offers the added advantage of specific detail on income, wealth, > and debt for each of 6,000 households surveyed.5 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn5> This > detail from family balance sheets provides a glimpse of the relative access > to the four sources of opportunity I will discuss. > > While the recent trend of widening income and wealth inequality is clear, > the implications for a particular family partly depend on whether that > family's living standards are rising or not as its relative position > changes. There have been some times of relative prosperity when income has > grown for most households but inequality widened because the gains were > proportionally larger for those at the top; widening inequality might not > be as great a concern if living standards improve for most families. That > was the case for much of the 1990s, when real incomes were rising for most > households. At other times, however, inequality has widened because income > and wealth grew for those at the top and stagnated or fell for others. And > at still other times, inequality has widened when incomes were falling for > most households, but the declines toward the bottom were proportionally > larger. Unfortunately, the past several decades of widening inequality has > often involved stagnant or falling living standards for many families. > > Since the survey began in its current form in 1989, the SCF has shown a > rise in the concentration of income in the top few percent of households, > as shown in figure 1.6 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn6> By > definition, of course, the share of all income held by the rest, the vast > majority of households, has fallen by the same amount.7 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn7> This > concentration was the result of income and living standards rising much > more quickly for those at the top. After adjusting for inflation, the > average income of the top 5 percent of households grew by 38 percent from > 1989 to 2013, as we can see in figure 2. By comparison, the average real > income of the other 95 percent of households grew less than 10 percent. > Income inequality narrowed slightly during the Great Recession, as income > fell more for the top than for others, but resumed widening in the > recovery, and by 2013 it had nearly returned to the pre-recession peak.8 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn8> > > The distribution of wealth is even more unequal than that of income, and > the SCF shows that wealth inequality has increased more than income > inequality since 1989. As shown in figure 3, the wealthiest 5 percent of > American households held 54 percent of all wealth reported in the 1989 > survey. Their share rose to 61 percent in 2010 and reached 63 percent in > 2013. By contrast, the rest of those in the top half of the wealth > distribution--families that in 2013 had a net worth between $81,000 and > $1.9 million--held 43 percent of wealth in 1989 and only 36 percent in 2013. > > The lower half of households by wealth held just 3 percent of wealth in > 1989 and only 1 percent in 2013. To put that in perspective, figure 4 shows > that the average net worth of the lower half of the distribution, > representing 62 million households, was $11,000 in 2013.9 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn9> About > one-fourth of these families reported zero wealth or negative net worth, > and a significant fraction of those said they were "underwater" on their > home mortgages, owing more than the value of the home.10 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn10> > This $11,000 average is 50 percent lower than the average wealth of the > lower half of families in 1989, adjusted for inflation. Average real wealth > rose gradually for these families for most of those years, then dropped > sharply after 2007. Figure 5 shows that average wealth also grew steadily > for the "next 45" percent of households before the crisis but didn't fall > nearly as much afterward. Those next 45 households saw their wealth, > measured in 2013 dollars, grow from an average of $323,000 in 1989 to > $516,000 in 2007 and then fall to $424,000 in 2013, a net gain of about > one-third over 24 years. Meanwhile, the average real wealth of families in > the top 5 percent has nearly doubled, on net--from $3.6 million in 1989 to > $6.8 million in 2013. > > Housing wealth--the net equity held by households, consisting of the value > of their homes minus their mortgage debt--is the most important source of > wealth for all but those at the very top.11 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn11> > It accounted for three-fifths of wealth in 2013 for the lower half of > families and two-fifths of wealth for the next 45. But housing wealth was > only one-fifth of total wealth for the top 5 percent of families. The share > of housing in total net worth for all three groups has not changed much > since 1989. > > Since housing accounts for a larger share of wealth for those in the > bottom half of the wealth distribution, their overall wealth is affected > more by changes in home prices. Furthermore, homeowners in the bottom half > have been more highly leveraged on their homes, amplifying this difference. > As a result, while the SCF shows that all three groups saw proportionally > similar increases and subsequent declines in home prices from 1989 to 2013, > the effects on net worth were greater for those in the bottom half of > households by wealth. Foreclosures and the dramatic fall in house prices > affected many of these families severely, pushing them well down the wealth > distribution. Figure 6 shows that homeowners in the bottom half of > households by wealth reported 61 percent less home equity in 2013 than in > 2007. The next 45 reported a 29 percent loss of housing wealth, and the top > 5 lost 20 percent. > > Fortunately, rebounding housing prices in 2013 and 2014 have restored a > good deal of the loss in housing wealth, with the largest gains for those > toward the bottom. Based on rising home prices alone and not counting > possible changes in mortgage debt or other factors, Federal Reserve staff > estimate that between 2013 and mid-2014, average home equity rose 49 > percent for the lowest half of families by wealth that own homes.12 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn12> > The estimated gains are somewhat less for those with greater wealth.13 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn13> > Homeowners in the bottom 50, which had an average overall net worth of > $25,000 in 2013, would have seen their net worth increase to an average of > $33,000 due solely to home price gains since 2013, a 32 percent increase. > > Another major source of wealth for many families is financial assets, > including stocks, bonds, mutual funds, and private pensions.14 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn14> > Figure 7 shows that the wealthiest 5 percent of households held nearly > two-thirds of all such assets in 2013, the next 45 percent of families held > about one-third, and the bottom half of households, just 2 percent. This > figure may look familiar, since the distribution of financial wealth has > concentrated at the top since 1989 at rates similar to those for overall > wealth, which we saw in figure 3.15 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn15> > > > Those are the basics on wealth and income inequality from the SCF. Other > research tells us that inequality tends to persist from one generation to > the next. For example, one study that divides households by income found > that 4 in 10 children raised in families in the lowest-income fifth of > households remain in that quintile as adults.16 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn16> > Fewer than 1 in 10 children of families at the bottom later reach the > top quintile. The story is flipped for children raised in the > highest-income households: When they grow up, 4 in 10 stay at the top and > fewer than 1 in 10 fall to the bottom. > > Research also indicates that economic mobility in the United States has > not changed much in the last several decades; that mobility is lower in the > United States than in most other advanced countries; and, as I noted > earlier, that economic mobility and income inequality among advanced > countries are negatively correlated.17 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn17> > > > *Four Building Blocks of Opportunity* > An important factor influencing intergenerational mobility and trends in > inequality over time is economic opportunity. While we can measure overall > mobility and inequality, summarizing opportunity is harder, which is why I > intend to focus on some important sources of opportunity--the four building > blocks I mentioned earlier. > > Two of those are so significant that you might call them "cornerstones" of > opportunity, and you will not be surprised to hear that both are largely > related to education. The first of these cornerstones I would describe more > fully as "resources available to children in their most formative years." > The second is higher education that students and their families can afford. > > Two additional sources of opportunity are evident in the SCF. They affect > fewer families than the two cornerstones I have just identified, but enough > families and to a sufficient extent that I believe they are also important > sources of economic opportunity. > > The third building block of opportunity, as shown by the SCF, is ownership > of a private business.18 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn18> > This usually means ownership and sometimes direct management of a family > business. The fourth source of opportunity is inherited wealth. As one > would expect, inheritances are concentrated among the wealthiest families, > but the SCF indicates they may also play an important role in the > opportunities available to others. > > *Resources Available for Children* > For households with children, family resources can pay for things that > research shows enhance future earnings and other economic outcomes--homes > in safer neighborhoods with good schools, for example, better nutrition and > health care, early childhood education, intervention for learning > disabilities, travel and other potentially enriching experiences.19 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn19> > Affluent families have significant resources for things that give > children economic advantages as adults, and the SCF data I have cited > indicate that many other households have very little to spare for this > purpose. These disparities extend to other household characteristics > associated with better economic outcomes for offspring, such as > homeownership rates, educational attainment of parents, and a stable family > structure.20 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn20> > > > According to the SCF, the gap in wealth between families with children at > the bottom and the top of the distribution has been growing steadily over > the past 24 years, but that pace has accelerated recently. Figure 8 shows > that the median wealth for families with children in the lower half of the > wealth distribution fell from $13,000 in 2007 to $8,000 in 2013, after > adjusting for inflation, a loss of 40 percent.21 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn21> > These wealth levels look small alongside the much higher wealth of the > next 45 percent of households with children. But these families also saw > their median wealth fall dramatically--by one-third in real terms--from > $344,000 in 2007 to $229,000 in 2013. The top 5 percent of families with > children saw their median wealth fall only 9 percent, from $3.5 million in > 2007 to $3.2 million in 2013, after inflation. > > For families below the top, public funding plays an important role in > providing resources to children that influence future levels of income and > wealth. Such funding has the potential to help equalize these resources and > the opportunities they confer. > > Social safety-net spending is an important form of public funding that > helps offset disparities in family resources for children. Spending for > income security programs since 1989 and until recently was fairly stable, > ranging between 1.2 and 1.7 percent of gross domestic product (GDP), with > higher levels in this range related to recessions. However, such spending > rose to 2.4 percent of GDP in 2009 and 3 percent in 2010.22 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn22> > Researchers estimate that the increase in the poverty rate because of > the recession would have been much larger without the effects of income > security programs.23 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn23> > > > Public funding of education is another way that governments can help > offset the advantages some households have in resources available for > children. One of the most consequential examples is early childhood > education. Research shows that children from lower-income households who > get good-quality pre-Kindergarten education are more likely to graduate > from high school and attend college as well as hold a job and have higher > earnings, and they are less likely to be incarcerated or receive public > assistance.24 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn24> > Figure 9 shows that access to quality early childhood education has > improved since the 1990s, but it remains limited--41 percent of children > were enrolled in state or federally supported programs in 2013. Gains in > enrollment have stalled since 2010, as has growth in funding, in both cases > because of budget cuts related to the Great Recession. These cuts have > reduced per-pupil spending in state-funded programs by 12 percent after > inflation, and access to such programs, most of which are limited to > lower-income families, varies considerably from state to state and within > states, since local funding is often important.25 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn25>In > 2010, the United States ranked 28th out of 38 advanced countries in the > share of four-year-olds enrolled in public or private early childhood > education.26 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn26> > > > Similarly, the quality and the funding levels of public education at the > primary and secondary levels vary widely, and this unevenness limits public > education's equalizing effect. The United States is one of the few advanced > economies in which public education spending is often lower for students in > lower-income households than for students in higher-income households.27 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn27> > Some countries strive for more or less equal funding, and others > actually require higher funding in schools serving students from > lower-income families, expressly for the purpose of reducing inequality in > resources for children. > > A major reason the United States is different is that we are one of the > few advanced nations that funds primary and secondary public education > mainly through subnational taxation. Half of U.S. public school funding > comes from local property taxes, a much higher share than in other advanced > countries, and thus the inequalities in housing wealth and income I have > described enhance the ability of more-affluent school districts to spend > more on public schools. Some states have acted to equalize spending to some > extent in recent years, but there is still significant variation among and > within states. Even after adjusting for regional differences in costs and > student needs, there is wide variation in public school funding in the > United States.28 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn28> > > > Spending is not the only determinant of outcomes in public education. > Research shows that higher-quality teachers raise the educational > attainment and the future earnings of students.29 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn29> > Better-quality teachers can help equalize some of the disadvantages in > opportunity faced by students from lower-income households, but here, too, > there are forces that work against raising teacher quality for these > students. Research shows that, for a variety of reasons, including > inequality in teacher pay, the best teachers tend to migrate to and > concentrate in schools in higher-income areas.30 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn30> > Even within districts and in individual schools, where teacher pay is > often uniform based on experience, factors beyond pay tend to lead more > experienced and better-performing teachers to migrate to schools and to > classrooms with more-advantaged students.31 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn31> > > > *Higher Education that Families Can Afford* > For many individuals and families, higher education is the other > cornerstone of economic opportunity. The premium in lifetime earnings > because of higher education has increased over the past few decades, > reflecting greater demand for college-educated workers. By one measure, the > median annual earnings of full-time workers with a four-year bachelor's > degree are 79 percent higher than the median for those with only a high > school diploma.32 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn32> > The wage premium for a graduate degree is significantly higher than the > premium for a college degree. Despite escalating costs for college, the net > returns for a degree are high enough that college still offers a > considerable economic opportunity to most people.33 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn33> > > > Along with other data, the SCF shows that most students and their families > are having a harder time affording college. College costs have risen much > faster than income for the large majority of households since 2001 and have > become especially burdensome for households in the bottom half of the > earnings distribution. > > Rising college costs, the greater numbers of students pursuing higher > education, and the recent trends in income and wealth have led to a > dramatic increase in student loan debt. Outstanding student loan debt > quadrupled from $260 billion in 2004 to $1.1 trillion this year. Sorting > families by wealth, the SCF shows that the relative burden of education > debt has long been higher for families with lower net worth, and that this > disparity has grown much wider in the past couple decades. Figure 10 shows > that from 1995 to 2013, outstanding education debt grew from 26 percent of > average yearly income for the lower half of households to 58 percent of > income.34 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn34> > The education debt burden was lower and grew a little less sharply for > the next 45 percent of families and was much lower and grew not at all for > the top 5 percent.35 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn35> > > > 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. > > *Opportunities to Build Wealth through Business Ownership* > For many people, the opportunity to build a business has long been an > important part of the American dream. In addition to housing and financial > assets, the SCF shows that ownership of private businesses is a significant > source of wealth and can be a vital source of opportunity for many > households to improve their economic circumstances and position in the > wealth distribution. > > While business wealth is highly concentrated at the top of the > distribution, it also represents a significant component of wealth for some > other households.36 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn36> > Figure 11 shows that slightly more than half of the top 5 percent of > households have a share in a private business. The average value of these > holdings is nearly $4 million. Only 14 percent of families in the next 45 > have ownership in a private business, but for those that do, this type of > wealth constitutes a substantial portion of their assets--the average > amount of this business equity is nearly $200,000, representing more than > one-third of their net worth. Only 3 percent of the bottom half of > households hold equity in a private business, but it is a big share of > wealth for those few.37 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn37> > The average amount of this wealth is close to $20,000, 60 percent of the > average net worth for these households.38 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn38> > > > Owning a business is risky, and most new businesses close within a few > years. But research shows that business ownership is associated with higher > levels of economic mobility.39 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn39> > However, it appears that it has become harder to start and build > businesses. The pace of new business creation has gradually declined over > the past couple of decades, and the number of new firms declined sharply > from 2006 through 2009.40 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn40> > The latest SCF shows that the percentage of the next 45 that own a > business has fallen to a 25-year low, and equity in those businesses, > adjusted for inflation, is at its lowest point since the mid-1990s. 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.41 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn41> > Another reason is that a slowdown in business formation may threaten > what I believe likely has been a significant source of economic opportunity > for many families below the very top in income and wealth. > > *Inheritances* > Along with other economic advantages, it is likely that large inheritances > play a role in the fairly limited intergenerational mobility that I > described earlier.42 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn42> > But inheritances are also common among households below the top of the > wealth distribution and sizable enough that I believe they may well play a > role in helping these families economically. > > Figure 12 shows that half of the top 5 percent of households by wealth > reported receiving an inheritance at some time, but a considerable number > of others did as well--almost 30 percent of the next 45 percent and 12 > percent of the bottom 50. Inheritances are concentrated at the top of the > wealth distribution but less so than total wealth. Just over half of the > total value of inheritances went to the top 5 percent and 40 percent went > to households in the next 45. Seven percent of inheritances were shared > among households in the bottom 50 percent, a group that together held only > 1 percent of all wealth in 2013.43 > <http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm#fn43> > > > The average inheritance reported by those in the top 5 percent who had > received them was $1.1 million. That amount dwarfs the $183,000 average > among the next 45 percent and the $68,000 reported among the bottom half of > households. But compared with the typical wealth of these households, the > additive effect of bequests of this size is significant for the millions of > households below the top 5 that receive them. > > The average age for receiving an inheritance is 40, when many parents are > trying to save for and secure the opportunities of higher education for > their children, move up to a larger home or one in a better neighborhood, > launch a business, switch careers, or perhaps relocate to seek more > opportunity. 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. > > *Conclusion* > In closing, let me say that, with these examples, I have only just touched > the surface of the important topic of economic opportunity, and I look > forward to learning more from the work presented at this conference. As I > noted at the outset, research about the causes and implications of > inequality is ongoing, and I hope that this conference helps spur further > study of economic opportunity and its effects on economic mobility. Using > the SCF and other sources, I have tried to offer some observations about > how access to four specific sources of opportunity may vary across > households, but I cannot offer any conclusions about how much these factors > influence income and wealth inequality. I do believe that these are > important questions, and I hope that further research will help answer them. > > > >