Is there a skills gap at the Fed?

February 6, 2012

Ask most economists why the distribution of wealth in the United States has become so unequal over the last three decades and they will likely offer a two word answer: skills gap. They point out that Americans with a college education have a lower jobless rate than those without one, and that better-educated workers make more money than their counterparts.

Yet as regional Federal Reserve presidents disclosed their personal asset holdings for the first time ever, the figures showed a gaping range: from the tens of thousands to the tens of millions.

The report showed the wealthiest officials, Richard Fisher and William Dudley of the Dallas and New York Feds respectively, made millions working the financial industry – Fisher running a hedge fund and Dudley as chief U.S. economist and partner at Goldman Sachs. It would be tough to argue that the two are any more skilled than the career PhD Fed economists who were at the bottom of the list.

James Galbraith of the University of Texas at Austin LBJ School said in response to an email request for comment:

The Fed data show one of two things: either the skills gap is bunk, or the profession of economics (which invented the notion of a skills gap) does not impart valuable skills. Either way, the news for the economists is not good.

In 2007, inequality reached levels not seen since the Great Depression – the first of many hyperbolic comparisons to the 1930s that would soon follow with the onset of a massive financial crisis. In February of that year, Fed Chairman Bernanke gave his only speech ever directly on the topic of inequality. Here is how he described the “skills gap”:

A key observation is that, over the past few decades, the real wages of workers with more years of formal education have increased more quickly than those of workers with fewer years of formal education. … To a significant extent, to explain increasing inequality we must explain why the economic return to education and to the development of skills more generally has continued to rise.

Some economists, however, say this notion just doesn’t hold water. They point, among other things, to a large wealth gap among college graduates themselves, suggesting other forces are at play. Instead, these experts say, the country’s unequal distribution of wealth can be traced to an explosion of profits and compensation in the financial sector coupled with favorable tax treatments for the very wealth following the Bush tax cuts – which Bernanke supported as head of the president’s Council for Economic Advisers.

Dean Baker, co-director of the liberal Center for Economic and Policy Research:

It seems that the Fed has internally produced the same sort of wealth/income gap as the rest of the country with the people with backgrounds in finance being the big winners. As with the rest of the country, it is hard to believe that the people with backgrounds in finance on the Fed are the most capable, they are just the most highly rewarded.

Bernanke was pressed about the issue of inequality in Congressional testimony in July 2007. Asked about the role of tax policies that allow high-earners in the financial sector to claim their earnings as capital gains – thereby paying only a 15 percent rate – Bernanke dismissed them as a cause of inequality.

Instead, he again harkened back to the skills gap idea with a reference to technology:

Tax policy is not the major factor. The major factors are technological change, and to a lesser extent globalization.

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