Forum Post: Bernanke: Fixing income gap will take education

http://www.usatoday.com/money/economy/fed/2007-02-06-bernanke-education_x.htm

By Sue Kirchhoff, USA TODAY

WASHINGTON — Globalization isn't the main cause of rising U.S. income inequality, and attacking the problem by imposing barriers to trade and technology would "do far more harm than good," Federal Reserve Chairman Ben Bernanke said Tuesday. A better way to address the gap between lower- and higher-income Americans — and to ease the sometimes "painful dislocations" of free markets — would be to improve training and education or alter current policies to let workers keep health care and pension benefits when they change jobs, Bernanke told the Greater Omaha Chamber of Commerce.

Bernanke cautioned that without steps to smooth the effects of a changing economy, people could "become less willing to accept the dynamism that is so essential to economic progress." But the Fed chief, who sat at a table with billionaire investor Warren Buffett, stressed that determining the proper balance between free markets and social policy was a job for politicians, not the Fed.

"Although we Americans strive to provide equality of economic opportunity, we do not guarantee equality of economic outcomes, nor should we," Bernanke said. "That said, we also believe that no one should be allowed to slip too far down the economic ladder."

His remarks come as Democrats, who now control Congress, are building an agenda around inequality and middle-class economic concerns. Their initiatives include raising the minimum wage, limiting CEO pay, boosting college aid, making it easier to form unions and addressing labor and trade concerns.

"Despite the growing economy and skyrocketing corporate profits, the typical American family has actually seen its income decrease," says Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee.

President Bush acknowledged recently that income inequality is a problem, but Democrats differ with his economic remedies, which include a focus on tax cuts.

In his speech, Bernanke noted that even though average living standards have risen considerably in recent decades, wealth distribution has become more skewed. The wealthiest fifth of households received 42% of after-tax income in 1979, a figure that rose to 50% in 2004. The share of those in the bottom fifth dropped to 5% from 7%.

There are many reasons for the trend, Bernanke said, including the fact that wages for better-educated workers have risen faster than for their lesser-educated counterparts. Technology seems to have improved the efficiency of highly skilled workers more than of less-skilled workers. The decline of unions has altered pay patterns.

But he warned that erecting barriers to globalized trade would undermine key sources of economic growth and rising living standards. And in any case, Bernanke said, globalization, including trade and immigration, isn't the main culprit.

"Overall, I read the available evidence as favoring the view that the influence of globalization on inequality has been moderate and almost surely less important than the effects of skill-biased technological change," he said.