Mr. Greenspan remarks on income inequality  (Central Bank Articles and Speeches, 28 Aug 98)
Central bank: fed | Type: speech | Date: 1998-08-28

Mr. Greenspan remarks on income inequality Remarks by Chairman of the Board of Governors of the US Federal Reserve System, Mr. Alan Greenspan, at a symposium sponsored by Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming on 28/8/98.

## Income Inequality: Issues and Policy OptionsI am pleased once again to open this annual symposium.

At the outset, I wish to Tom Hoenig and his staff for assembling a highly capable group of experts to inform us and to discussion on an important issue in the world economy.

The study of income inequality - its c consequences, and its potential policy implications - has a long history in economics, althoug always had a high profile among researchers and policymakers.

To borrow a phrase from Prof Atkinson, income distribution in recent years has been 'brought in from the cold.' In part, tha has resulted from the experience of many industrialized economies with widening earnings inequ the 1980s and 1990s.

It has been heightened by interest in the consequences of economic ch developing, newly industrialized, and transition economies.The experience of industrialized countries, including the United States, with income inequality has spawned a great deal of research on the functioning of labor markets sources of shifts in the demand for various types of skills, on the supply responses of workers efficacy of government efforts to intervene in the operation of labor markets.

A number of have contributed importantly to this work will be participating in this conference.

One sto emerged from that body of research is now familiar: Rising demand for those workers who hav skills to effectively harness new technologies has been outpacing supply, and, thus, the compe those workers has been increasing more rapidly than for the lesser skilled segment of the workf this supply-demand gap has been an important source of widening earnings inequality is now accepted within the economics profession.

However, the considerable diversity of experiences countries as well as the finding that earnings inequality has also increased within groups of similar measured skills and experience suggest that we may need to look deeper than skil technological change if we are to fully understand widening wage dispersion.

In particular, private and public institutions influenced inequality over the past two decades?

What roles played by growing international trade and the evolving ways in which production is organized? the participants in this symposium are well-equipped to speak to these issues, and we should l more about the causes of widening inequality during the next two days.In discussing the extent to which large portions of the population are not re benefits of economic growth, I hope that the participants at this conference will not stop wit of trends in earnings - or, for that matter, even trends in income more broadly defined.

Ultima interested in the question of relative standards of living and economic well-being.

Thus, we n examine trends in the distribution of wealth, which, more fundamentally than earnings or represents a measure of the ability of households to consume.

And we will even want to cons distribution of consumption, which likely has the advantage of smoothing through transitor affecting particular individuals or households for just a year or two.Among these more comprehensive measures, data for the United States from the Fede Reserve's Survey of Consumer Finances suggest that inequality in household wealth - that is worth - was somewhat higher in 1989 than at the time of our earlier survey in 1963.

Subseque 1992 and 1995 surveys - and here our data are statistically more comparable from survey to su they were earlier - showed that wealth inequality remained little changed in terms of the broad 1 Nonetheless, that stability masks considerable churning among the subgroups.

One particularly change was an apparent rise in the share of wealth held by the wealthiest families at the expe wealthy families; most of the change occurred within the top 10 percent of the distribution.Moreover, our research using the survey suggests that conclusions about the distr of wealth are sensitive - although to a lesser degree than income - to the state of the ecoinstitutional arrangements for saving.

For instance, among the wealthiest ½ percent of ho business assets, which tend to be quite cyclical, are particularly important.

At the othe distribution, owned principal residences, the values of which are not as sensitive to bus conditions, are a typical household's most important asset.

Another interesting finding is expand the definition of wealth to include estimates of Social Security and pension wea distribution among U.S. households becomes much more even. 2 This finding suggests that, in addition to factors influencing private wealth accumulation, the evolution of institutional arrangements that has taken place over the last two decades may have played an important role in affecting the distribution of wealth over time.What about the effect of the recent rise in stock and bond market values?

The view is that the growth in mutual funds and other financial investment avenues has allowed in further down in the wealth distribution to take advantage of the strength in equity markets.

C figures show that households lower in the income distribution are now more likely to own stoc decade ago. 3 However, between the 1992 and 1995 surveys, the spread of stock ownership and the r prices did not lead to a rise in the share of stock and mutual fund assets owned by the bottom of the wealth distribution.

Although their dollar holdings rose rapidly, the increases were no those for households at the top of the wealth distribution.

If patterns of equity ownersh changed much since 1995, the steep rise in stock prices over the past several years would further increase in the concentration of net worth.

This influence could be offset, to some continued broadening in the ownership of equities, particularly through tax-deferred savings Moreover, some additional offset may have occurred through rising house prices, an important middle class families.

Our 1998 survey, which is now in the field, will yield a clearer read how wealth concentration has changed and on the relative importance of different assets in thatDespite our best efforts to measure trends in income and wealth, I believe th those measures - by themselves - cannot yield a complete answer to the question of trends in m economic well-being.

In the United States, we observe a noticeable difference between trend dispersion of holdings of claims to goods and services - that is, income and wealth - and tr dispersion of actual consumption, the bottom-line determinant of material well-being.

Ultimate interested in whether households have the means to meet their needs for goods and for s including those such as education and medical care, that build and maintain human capital.Using data from the Consumer Expenditure Survey that the U.S.

Bureau of Lab Statistics conducts, researchers have found that inequality in consumption, when measured by outlays, is less than inequality in income. 4 These findings are not surprising.

As is well known, consumers tend to maintain their levels of consumption in the face of temporary fluctuations Variations in asset holdings and debt typically act as buffers to changes in income.

Thus, c patterns tend to look more like patterns in income that have been averaged over several years that should remind us of the pitfalls of reading too much into any year-to-year change in our economic well-being.The BLS's consumer expenditure data suggest a rise in inequality over the 1 comparable to that shown by the Census family income figures.

However, during the first hal 1990s, inequality partially receded for consumer expenditures while for income it continued to 1).

The consumption data used in these calculations include only what individuals purchase di of their incomes and accumulated savings.

Recently, researchers have extended the analysis usin complete and more theoretically appealing measure of consumption that includes the indirect services from the stock of durable goods that they already own - houses, vehicles, and major a 5 As one might expect, although this measure of consumption has a profile somewhat similar to t in the current expenditure data over the 1980s and the first half of the 1990s, it shows still inequality overall and a clearer pattern of consumption smoothing during the 1981-83 recession.The information available from the Consumer Expenditure Survey can be used calculate another interesting measure of the well-being of households:

changes in inequali ownership of consumer durables.

The BLS staff has updated tabulations of these data that theyfor me several years ago (table 2).

Of course, ownership rates for household durables clearl income.

But for a number of goods - for example, dishwashers, clothes dryers, microwaves, an vehicles - the distribution of ownership rates by income decile has become more equal over timeEven though we may be able to develop an array of measures of current and past t in inequality - such as those that I have described and potentially others that may be pres symposium - we will likely still face considerable uncertainty about how to interpret those me about what the future may hold for the trend and the distribution of economic well-being.Wealth has always been created, virtually by definition, when individuals us growing knowledge, in conjunction with an expanding capital stock, to produce goods and serv value.

The process of wealth creation in the United States has evolved in a number of import Over the last century, we have learned how to be more efficient in meeting the needs of consu thus we have moved from producing essentials to the production of more discretionary good services.

Moreover, these goods and services have been, over time, increasingly less constrai limits of physical bulk.

More recently, we have found ways to unbundle the particular charact each good and service to maximize its value to each individual.

That striving to expand the satisfying the particular needs of individuals has resulted in a shift toward value created exploitation of ideas and concepts and away from the more straightforward utilization of resources and manual labor.

The new thrust has led to structural changes in the way that we or production and the distribution of goods and services.

It has increased the demand for, compensation of, workers who have the ability to create, analyze, and transform information interact effectively with others.

Most important, it has accorded particularly high value to t of advanced computer and telecommunications technologies to the generation of economic wealth.At the same time, however, the consequences of technological advances and t implications for the creation of wealth have become increasingly unpredictable.

We have found cannot forecast with any precision which particular technology or synergies of technologies significantly to our knowledge and to our ability to gain from that knowledge.

Even i technological change were to occur at a steady rate, variations in our capacity to absorb advances would likely lead to an uneven rate of increase - over time and across individuals expanded investment in knowledge: Supplies of appropriately skilled workers can vary.

In some the initial choices in the exploitation of advances may turn out to be sub-optimal.

In other c potential of advances may be realized only after extensive improvements or after complem innovations in other fields of science.As we consider the causes and consequences of inequality, we should also be mi that, over time, the relationship of economic growth, increases in standards of living, and th of wealth has evolved differently in various political and institutional settings.

Thus, ge about the past and the future may be hard to make, particularly in the current dynamic and environment of economic change.

We need to ask, for example, whether we should be concerned the degree of income inequality if all groups are experiencing relatively rapid gains in their though those rates of gain may differ.

And, we cannot ignore what is happening to the level income while looking at trends in the distribution.

In this regard, our goal as central bank clear: We must pursue monetary conditions in which stable prices contribute to maximizing sus long-run growth.

Such disciplined policies will offer the best underpinnings for identifying o to channel growing knowledge, innovation, and capital investment into the creation of wealt turn, will lift living standards as broadly as possible.

Moreover, as evidenced by this sustaining a healthy economy and a stable financial system naturally permits us to take the ti efforts on addressing the distributional issues facing our society and on other challenging is remain out in the cold.

## Table 1'GINI COEFFICIENTS' FOR U.S. CONSUMER EXPENDITURES AND INCOME|

| Consumption | Income ||------|---------------|----------|| 1980 | .290 | || 1981 | .285 | || 1982 | .302 | || 1983 | .305 | || 1984 | .312 | || 1985 | .319 | || 1986 | .327 | || 1987 | .328 | || 1988 | .323 | || 1989 | .325 | || 1990 | .328 | || 1991 | .320 | || 1992 | .329 | || 1993 | .320 | || 1994 | .318 | || 1995 | .317 | || 1996 | n.a.

| |.369.380.382.383.389.392.393.395.401.396.397.404.429.426.421.425Source : Consumer expenditure data are from the Consumer Expenditure Survey, U.S. Bureau of Labor Statistics.

Incom are for families as of March of the following year from the Current Population Survey, U.S. Census Bureau.

## Table 2

## 'GINI COEFFICIENTS' FOR OWNERSHIP RATES OF SELECTED CONSUMER DURABLES(By income decile).28

.07.29 .23.17 .12.26 .21.09 .07.06 .07.08 .09.01 .01.01 .01| | 1980 | ||-------------------|--------|-----|| Microwave ovens | | .28 || Dishwashers | | || Clothes dryers | | || Garbage disposals | | .26 || Motor vehicles | | || Freezers | | || Clothes washers | | .08 || Refrigerators | | || Stoves | | |Source :

Based on tabulations from the Consumer Expenditure Survey, U.S.

Bureau of Labor Statistics.

Note:

The coefficient is defined as one minus twice the area under the cumulative probability distribution (CPD).

The Ginis co do not have the properties of a 'true' Gini coefficient.

For example, a true Gini must lie between zero and on calculated here could be negative if low-income individuals had a higher ownership rate than high- income individuals.

U percent ownership.

The percent ownership rates by decile are transformed into a discrete probability distribution.

The formula is: pi = ri /3ri the sum is over i = 1 to 10 where pi is the fraction of all households that own the durable good who decile i or ri is the actual ownership rate for the ith decile.

By construction, the sum of the pi=s is equal to o that have ownership rates that are relatively equal across deciles, regardless of the level of the ownership rate, distributions are fairly flat with values for pi close to 0.1.

For goods that are more concentrated among the affl ds, the probability distributions tend to rise across the income deciles..365

## Footnotes1 Arthur B.

Kennickell and R.

Louise Woodburn, 'Consistent Weight Design for the 1989, 1992 1995 SCFs, and the Distribution of Wealth,' manuscript, August 1997.- 2 Arthur B.

Kennickell and Annika E.

Sunden, 'Pensions, Social Security, and the Distribu Wealth,' Finance and Economics Discussion Series, 1997-55, Board of Governors of the Fed Reserve System, November 1997.- 3 Martha Starr-McClure, 'Stock Market Wealth and Consumer Spending,' Finance and Economics Discussion Series, 1998-20, Board of Governors of the Federal Reserve System, April 1998.- 4 These results were originally reported in Report on the American Workforce, U.S.

Departm Labor, 1995 and will appear in David S.

Johnson and Stephanie Shipp, ' Inequality and the B Cycle: A Consumption Viewpoint,' forthcoming, Journal of Empirical Economics.

David S.

Johnson the U.S. Bureau of Labor Statistics provided the updated data shown in table 1.- 5 David S.

Johnson and Timothy M.

Smeeding, 'Measuring Trends in Inequality and Individuals Families: Income and Consumption,' mimeo., March 1998.