Fed’s Raskin Asks Economists to Pay More Attention to the Poor

MarketWatch, April 18, 2013. All Rights Reserved.

If economists focused more research on the experiences of  less-advantaged households, they might gain new insight on the current struggles of the U.S. economy, said Federal Reserve Governor Sarah Bloom Raskin on Thursday.

“It strikes me that macroeconomists are far from a comprehensive understanding of how wealth and income inequality may affect business cycle dynamics,” Raskin said in a speech on the economy sponsored the Levy Economics Institute of Bard College.

For the sake of simplicity, the typical economic model focuses on “representative” households that focus on average gauges of wealth.

While this might work in certain circumstances, it creates blind spots in research in the wake of the financial crisis, Raskin said.

With real-wage growth stagnant, in the early years of the 2000s, many households had pinned their hopes on advancement on higher home prices, Raskin said. As a result, they were most vulnerable to the rapid decline in house prices and the contraction of credit that followed.

“I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker,” Raskin said.

“The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth,” she noted.

At the moment, it is not part of the Fed’s mandate to address inequality. The distribution of wealth and income has not been a primary consideration in the way most macroeconomists think about business cycles. But if it’s effects are hurting the economy, perhaps our thinking should be adjusted, Raskin said.