Income Inequality in the U.S. Means Princes Don’t Go After Cinderellas

You can tax the rich, you can educate the poor, but there is another way to reduce the nation’s growing income inequality: Marry your scullery maid.

Granted, this is not something that President Obama is likely to suggest when he delivers his State of the Union address on Tuesday. But a new working paper from the National Bureau of Economic Research says that Americans increasingly engage in what economists call “positive assortative mating” â€" meaning they marry someone who is about the same as they are. Princes do not tend to go after Cinderellas.

The paper’s authors, led by Jeremy Greenwood at the University of Pennsylvania, mined census data from 1960 to 2005 and found that people’s tendency to marry someone of the same education level as their own increased steeply. After taking into account the increases in the education levels for men and women that have occurred between 1960 and 2005, the odds of a college-educated male marrying a college-educated female rose by 12 percentage points.

They then looked at the effect of this self-selection on income inequality. In 1960, they found, a couple without high school degrees would have made 77 percent of the mean household income. But if the woman without a high school degree married a man with a college degree, their household would have made 124 percent of the average.

In 2005, a woman with post-college education married to a man without a high school degree would have had a household income 92 percent of average. But if she married a man with a similar level of education to her own, they would have been making more than twice the average income.

The authors compared their marriage model to a measure of inequality known as the Gini coefficient â€" the higher the Gini coefficient, the greater the inequality in a given society. From 1960 to 2005, the Gini coefficient in the United States increased to 0.43, from 0.34, representing the dropping share of income controlled by poor families.

If people married completely randomly in 1960, instead of following the pattern they did, the Gini coefficient would have remained about the same. But if people married randomly in 2005 (or if they followed the preferences of couples in 1960) the Gini coefficient â€" and thus income inequality for the society at large â€" would have been significantly lower.

Not only are people more apt to marry someone similar to themselves today, but their choices also matter more to society. That’s because a far greater share of women work today than before.

Before, it didn’t matter so much whom you married if your household was going to have only one income, Mr. Greenwood said. “Plus, the higher educated women earn a lot more now relative to what they did in 1960, so that makes sorting more important in 2005,” he said.

Profits Up, Wages Down: What Economics Has to Say

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

It won’t surprise many readers to learn that in recent years profits have been doing a whole lot better than most workers’ wages.

We just learned that for the fourth year in a row, the real median weekly earnings for full-time workers fell slightly. The orange bars show the real, or inflation-adjusted, changes in these medians since 2007. The blue bars show nominal growth, which as you can see, has slowed in response to the weak job market. Interestingly, the only year of substantial growth in the real median was 2009, a year when nominal wage growth actually decelerated. The reason for the earnings gain was thus deflation: prices actually fell slightly that year (the Consumer Price Index was down 0.4 percent). That’s definitely not how we want to make real earnings grow.

Source: Bureau of Labor Statistics

Profits, on the other hand, have been putting on a show. As a share of national income, corporate profits were 14.6 percent in the third quarter of 2013, the most recent quarter for which we have data. In the history of these data going back to 1947, there was only one quarter higher than that â€" the last quarter of 2011. The equity indexes may have gotten whacked last Friday, but for 2013 the Standard & Poor’s 500-stock index was up 27 percent, its strongest showing in 16 years.

The two inverse trends are related. Profits are revenues minus costs, and with growth actually pretty tepid in recent years, at least in advanced economies, profits have been pushed more by squeezing costs, of which labor is usually the largest, than by particularly buff revenues. As a Goldman Sachs analysis put it last week, “the strength [of profits] is directly related to the weakness in hourly wages” and “profits are likely to accelerate in 2014 as G.D.P. and productivity growth recovers but wage growth picks up only gradually.”

Let’s unpack all of this.

It’s not unusual for profits to recover before wages, especially given the increase in global trade, wherein multinationals can sell to wherever the growth is, while relatively immobile labor has to wait for domestic demand to return. But based on the official dating of the expansion, as of this January it’s 55 months old, solidly middle-aged given that the average length of the last five expansions is 76 months (this calculation ignores the short 12-month expansion in 1981-82 to avoid a negative bias to the average).

The simple economic theory of wage formation would argue that workers must be getting increasingly unproductive. That is, if you’ve studied this corner of economics, you may recall the assertion that your hourly wage is equal to your “marginal product,” meaning the dollar value your work adds to the firm’s output. Now, this theory applies to the average worker, so it entertains differences in real wage trends across the wage scale, explaining them by referring to differences in the marginal product of the losers versus the winners.

But there are a lot of problems with the theory. First, even at the average, in recent years real compensation has grown more slowly than productivity. This dynamic, by the way, is behind the historically large decline in labor’s share of national income, a trend that is wholly inconsistent with conventional marginal product theory (which assumes constant income shares for labor and capital or profits).

Second, as the Economic Policy Institute recently pointed out â€" and it has carefully tracked the “real” wage story for decades â€" even in the lowest fifth of the wage scale, workers have become more highly educated. The institute’s analysis reveals that since the late 1960s, the share of low-wage workers with at least some college has increased from 17 percent to 46 percent.

Now, it could of course be the case that employers’ skill demands are just outpacing the educational upgrading that has occurred. But while such upgrading is extremely and especially important in generating upward mobility for less-advantaged children, as I pointed out in a recent post, economists are increasingly recognizing that inequality and wage stagnation cannot be explained by unmet skill demands alone.

This next chart is quite revealing in this regard. It plots unit labor costs against unit profit costs. That is, one of the things implied by all of the above is that accounting for productivity growth (which embodies the skill of the labor force), profits have outpaced workers’ earnings. These unit labor cost and profit measures offer precisely that â€" the growth of wages and profits, net of productivity’s growth (for technical reasons regarding the treatment of interest income, the data are published only for nonfinancial corporations, but including finance would probably strengthen the results). Compensation net of productivity is up a measly 10.5 percent since 2000, while profits net of productivity have doubled. And remember, that’s average compensation. Median compensation has done even worse relative to poductivity.

Source: Bureau of Labor Statistics

Stagnant wage growth is an extremely deep problem. It is a primary root of the inequality problem and it strikes at the heart of what has historically defined the American social contract: study, work hard, play by the rules and you’ll have the opportunity to get ahead.

If we’re ever going to do anything about it, we must see beyond the marginal product theory, which leads policy makers to exclusively promote more education (again, that’s a crucial part of the solution). Fortunately, there’s much better economic theorizing about wage formation that introduces the crucial concept of bargaining power (Robert E. Hall and Alan B. Krueger provide a useful summary).

In some of these models â€" the ones that make sense to me â€" the tautness of the job market is a key factor as employers and potential workers hash out an agreement on wages (or not â€" some negotiations fail). The employer would like to offer just enough to make the hire, and if there’s a line outside her door, that amount goes down. For the worker, it’s the opposite. As Professors Hall and Krueger note, “the job seekers’ bargaining position … is much stronger if the next job prospect is easy to find.”

The economist Lawrence Katz, an important thinker is this debate because of his deep contributions to the literature on education as a wage determinant, agrees: “The only moments we’ve had of broadly shared prosperity have been in tight labor markets.”

Absent more individual and collective bargaining power for the vast majority of workers who lack it, some of whom have college degrees, we will be hard pressed to turn these wage trends around. Such power is not the only determinant of wages, but it may well be the most important and the one most sorely lacking.

Q&A: A Voice for an Activist Fed

The Federal Reserve is often described as if it were a person - just one person - but it actually makes decisions by committee, and that committee is in flux. Only six of the 12 officials who voted on policy last January will still be voting when the Federal Open Market Committee holds its first meeting of 2014 this week.

Tim Gruber for The New York Times Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis.

Two new voters are likely to define the extremes of the debate as the committee charts the Fed’s continuing effort to revive the economy.

One is Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, perhaps the last official who wants the Fed to expand its efforts to reduce unemployment. Meanwhile, Richard Fisher, president of the Federal Reserve Bank of Dallas, is pressing for a faster retreat.

Mr. Kocherlakota and Mr. Fisher sat for separate interviews with The New York Times to talk about monetary policy and the economy this month before the media blackout that precedes each Fed meeting.

A transcript of Mr. Kocherlakota’s comments, edited for clarity, follows. Mr. Fisher’s interview is in a separate post.

Q.

Do you think the Fed made a mistake in December when it announced a $10 billion reduction in its monthly purchases of Treasuries and mortgage-backed securities?

A.

My view of what happened in December is that the committee rotated from one set of tools to another, from asset purchases - reducing the flow by $10 billion per meeting unless there is a material change to the outlook - and on the other hand a strengthening of the qualitative forward guidance. On net, my assessment was that left the level of accommodation unchanged. I think that’s consistent with what the chairman said in the press conference and the limited market reaction to the statement.

I felt at the time and I continue to feel that that level of accommodation is unduly low given the outlook for prices and employment. But we have a lot of tools. The observation that we don’t have enough accommodation doesn’t necessarily have anything to do with asset purchases. It does mean that we should be thinking about other things to do.

Q.

You have called for the Fed to further strengthen its forward guidance.

A.

There’s certainly a need for more clarity about what’s going to happen when the unemployment rate falls below 6.5 percent. In September 2012 I advocated forward guidance [setting an unemployment rate threshold of 5.5 percent so long as inflation remained below 2.25 percent], and I’m still in favor of that. It hasn’t received a lot of, as much support as I would like from my colleagues.

Q.

Is the unemployment rate still the best measuring stick for the Fed to use? It is falling in large part because people are leaving the labor force.

A.

I think internally as an organization we should certainly be looking at lots of different measures. People are very aware of the idea that there’s a broader problem - that friends would like to work more hours - but the way we’ve communicated as an organization, and talked to Congress over the years, has always been through that one metric.

And also, we’ve always tied the inflation rate to this one metric. I still feel that the unemployment rate, I feel more confidence about where that’s going to be, somewhere between 5 and 6 percent, when inflation is 2 percent. That’s pretty good as an estimate. You ask me what is the long-run employment-to-population ratio consistent with 2 percent inflation? The uncertainty is getting much larger. And the problem with unemployment as a metric is really not so important right now. Even if we were a single-mandate bank [focused solely on inflation] it would be clear that we should do more.

Q.

You’ve given a speech several times this fall arguing that this is a “time of testing” for the Fed. That phrase is a reference to former Fed Chairman Paul Volcker’s call to arms in the early 1980s. Then the issue was inflation. Now you say it’s unemployment. Yet none of your colleagues at the Fed seem to share your sense of urgency. Why not?

A.

As this goes on, there’s a temptation to think of this problem as being beyond what we as monetary policy makers can address. And the reason I feel strongly that there is something we can do about this, is the behavior of inflation. The fact that inflation has remained as low as it has tells us that there is more we can do. One thing I did not address in that speech is how much more we can do. I’ll be frank. I don’t know the answer. But as long as the outlook for inflation remains low, that means there is more we can do and more that we should be doing. And when we don’t do more, given how low inflation is, that pushes downward on everyone’s expectations of how fast the economy is going to be growing.

Q.

Do you think your current position reflects the zeal sometimes shown by the converted?

A.

It’s not a religious issue. It’s simply a question of meeting our goals. For me it’s all about, we’ve been given these goals, what do we have to do to get to these goals?

Q.

Is your advocacy also, in effect, a critique of the Fed’s actions to date?

A.

I think that’s going to be a question that people will be struggling with. I meant it more as, what should we do moving forward? We shouldn’t let the persistence of the problem lead us to the conclusion that we shouldn’t do more. The last four years have been challenging for me; it’s been a learning process in terms of what’s available in terms of tools and in terms of what should be done. Speaking for myself, maybe others could have done better, but there’s been an evolution in my own thinking.

Q.

Some of your colleagues say that the cost of the Fed’s campaign is rising. Specifically, they are concerned that the Fed is destabilizing financial markets. Do you disagree?

A.

I do not see those risks as material for our considerations about why the level of accommodation is where it is.

Q.

Really? That wasn’t a factor in the December decision to taper?

A.

I’m just reading the statement. And the statement does not say something material about the reason we are not providing more accommodation being financial stability concerns. And I’ll say that we’ve spent a lot more time and energy in the Federal Reserve system than we did, monitoring the financial stability side. At this stage I don’t think those risks are sufficiently material. As we get closer to full employment and target inflation, the downside risks start to matter more because you’re doing so well on the modal outlook. That’s something we have to take into account when we get closer to normal times.

Q.

You referenced the evolution of your views. You were a critic of the Fed’s stimulus campaign for several years after you became president of the Minneapolis Fed in 2009. Then in September 2012 you announced that you had changed your mind. Why?

A.

On the micro side, my concern was that there were significant impediments to employment that monetary policy could not address. I still have those concerns. But what gave rise to the shifting of the weight I put on those concerns was that there’s just been a ton of work done on the impediments to unemployment growth, nicely summarized in Ed Lazear’s Jackson Hole speech. And at the macro level, coming out of 2011, I had been forecasting high inflation and that was failing to materialize, and I had to come back and think to myself, “What’s special about me that I would think that?” And it became clearer that my outlook for accelerating inflation was just not consistent with what’s going on in the world. So I started putting more weight on the low-demand forces in retarding unemployment.

Q.

Many observers were surprised that an economist would abandon a theory simply because it didn’t fit the facts. How did you reach a point where the theory seemed impossible to defend?

A.

It’s a little embarrassing to say this, but you make a speech in August of 2010 and it inspires a whole quantity of work where people say, “This is what Kocherlakota says and we will now show in this paper that Kocherlakota was wrong.” There’s a number of ways that people can react to that, and I reacted in the only way that a sensible person can, which is to update.

It seemed I was wrong enough to make that judgment. I was not trying to find the best way to save my intellectual pedigree. I was trying to do the best job possible.

Q.

You once told an interviewer that you like change more than most people. Do you think that played a role in your willingness to change your mind?

A.

Certainly over the course of my academic career I worked in a number of different areas. I’ve worked with Neil Wallace, a premier monetary theorist, but also Luigi Pistaferri, a top empirical labor person. I’ve enjoyed that and I got a lot out of that. I’m not unique in that. But I’ve enjoyed working in a range of subject areas.

Even the act of taking this position was probably a change that â€" I have embraced it, I enjoy it immensely â€" a lot of people might not feel the same about that.

Q.

You’ve also said that a few other economists were influential in your shift, including Chairman Bernanke; Charles Evans, the president of the Federal Reserve Bank of Chicago; and Ivan Werning, a professor of economics at M.I.T.

A.

My thinking was shaped by a number of people. I’ve talked to Chairman Bernanke about a number of elements about monetary policy, and he’s been an influence on my thinking more generally. I liked the way President Evans formulated a very concrete way to deal with the problem [by calling for the Fed to tie policy to a threshold unemployment rate]. And Werning formulated the issue as being not about generating high inflation, but about formulating expectations of better times to come. Having the recovery’s back, so to speak.

Q.

In reading your speeches, I’m struck that you haven’t really found a new explanation for the persistence of high unemployment. You’re basically focusing on inflation instead.

A.

The inflation side is really critical in this - it’s the lack of tension in the mandates that gives you the safety to draw the policy conclusions that I’ve drawn.

From a policy point of view I don’t think those questions [about the labor market] are that material because the outlook for inflation remains low. If the outlook was different, rising above 2 percent, then the discussion for the labor market becomes critical.

Q.

Why haven’t we seen even slower inflation?

A.

I think the answer is, anchoring has proven stronger than we thought it was, but that almost just describes the phenomenon in different words.

Inflation now is about what you’d think, this is all very loose, but it’s about right right now, given the amount of slack in the labor markets.

Why inflation was as high as it was given how high unemployment was, I think you just have to say that inflation was better anchored. But I do think that some of these acceleration models have not worked well in this time frame.

Q.

You referenced your jump from academic life to the Fed in 2009. Why did you decide to become a policy maker?

A.

2008 was really the answer to that. In the fall of 2008 as the events were unfolding I was just struck by the fact that things were happening that I didn’t really understand, and it seemed to me as well that these were events that were challenging for policy makers. But given my years of study, I didn’t know the answers, but my way of asking questions could be of help. I wanted to help and I felt that I could be of help.

Q.

Have you in fact made a difference?

A.

Others can probably do a better job in assessing that. I’ve enjoyed interacting with my colleagues tremendously. I hope I’m helpful to them. I try to be helpful. I find the work as rewarding as can be. I enjoy going to the meetings, I enjoy trying to explain the thinking of the committee. One of the things I didn’t appreciate as fully before I took the job is the hunger to understand economics that’s out there among people.

Q.

This is your second turn as a voting member of the F.O.M.C. Last time, in 2011, you dissented twice. Under what circumstances would you once again register a dissent?

A.

I have a high bar for dissent. The issue for me is what actions and communications can I undertake to encourage or facilitate the committee making better decisions. If that involves my dissenting, then I’ll do it. If it doesn’t, then I won’t.

The Endless Interview Process

In my “It’s the Economy“ on Sunday, I mentioned that the job application process has dragged on and on for many Americans. This is a subject I wrote about last year. I’ve heard anecdotes about very long hoop-jumping processes, and so I asked Glassdoor, a site that collects user-submitted information on hiring at different companies, to check for any discernible trends in the duration of the job application gantlet.

The numbers are, again, user-submitted and not from a randomized, scientific survey, so take them with a grain of salt. But Glassdoor generally found that within the universe of their users, the average interview process has risen from 13 days in 2009 in 23 days in 2013.

Glassdoor

The numbers differed substantially by company and by sector (for example, the number of days of the interview process is typically longer for biotech than for retail). Some of these differentials could likely be explained by regulations, culture, market conditions and other factors. Within any given sector, though, the hiring process seems to have become more elongated in recent years.

Average number of days of entire interview process, based on at least 100 interview reviews per year per sector. Source: Glassdoor.

Another chart, last updated about a year ago, shows how long job vacancies across the economy remained unfilled, based on data from the Bureau of Labor Statistics.

It’s not clear why companies are taking so long to hire, given the abundance of available workers; dragging your feet and conducting more interviews is not only frustrating for applicants, but also expensive for employers, who must devote managers’ time and other resources in this vetting process.

Some economists have argued that there is a growing “skills gap” between what workers have and what employees need. If that were true, though, we’d expect to see wages being bid up, and so far wages have remained relatively stagnant across the economy.

Another theory is that in an uncertain economy, companies are really, really worried about making a mistake and do not feel pressure to fill openings right away so long as they can still dump more work onto their existing staff members. As a result, employers exercise more exhaustive screening and vetting processes until they’re confident they’ve found their “purple squirrel,” H.R. jargon for an impossibly perfect, overqualified candidate usually willing to work for peanuts. Meanwhile, the costs that companies incur by making the hiring process more involved remain relatively hidden.

Q&A: An Advocate for a Quicker Taper

As the voting membership of the Federal Reserve’s policy-making committee, the Federal Open Market Committee, turns over at a meeting this week, one of the new votes will be cast by Richard W. Fisher, president of the Federal Reserve Bank of Dallas.

Jose Luis Magana/Reuters Richard W. Fisher, president of the Federal Reserve Bank of Dallas.

In pressing for a faster retreat from the Fed’s bond-buying effort to stimulate the economy, he represents one extreme in a debate that will test the ability of the incoming chief, Janet L. Yellen, to unite the committee after she succeeds the current chairman, Ben S. Bernanke.

Mr. Fisher sat for an interview this month to discuss monetary policy and the economy before the media blackout that precedes each Fed meeting â€" as did another new voter, Narayana Kocherlakota of the Minneapolis Fed, who backs continued stimulus.

A transcript of the interview with Mr. Fisher, edited for clarity, follows.

Q.

You said after the Federal Reserve’s December decision to reduce its monthly bond purchases by $10 billion that the reduction should have been twice as large. Would you like to see a $20 billion cut at the Fed’s January meeting?

A.

I was pleased with the decision at the December meeting. It was a move in the right direction. I think that’s the key. The economy is doing better and the benefits that we get from [asset purchases], relative to the costs, are diminishing. I was not unhappy. It was the change in direction that was important.

Q.

And in January? What would you do if you were in charge?

A.

If I were put in charge, I would abdicate immediately. I would worry for the nation.

But I think it’s a matter of feel. I think there’s an enormous amount of excess reserves, that the amount has never been this high in history, and basically I think the gas tank is full. The issue is, when will businesses step on the accelerator and use that gas to propel the economy forward? They are starting to do so at a greater speed. They are still being held back, but not because they don’t have sufficient fuel.

Having gone down this path, which I believe was not necessary, of adding these last few gallons in the tank, and if you’re going to withdraw that stimulus, how do you do so without creating market havoc? I think you have to go meeting by meeting but my desire as soon as is practicable is to get down to zero. In my view the minimum I would want to see would be $10 billion a meeting, but that would be a minimum.

Herb Kelleher [chairman emeritus of Southwest Airlines and the former chairman of the Federal Reserve Bank of Dallas] is the single largest consumer of Wild Turkey bourbon in the world, and we were talking and we agreed that you can’t go from Wild Turkey to cold turkey overnight. You can get tremors if you just cut it off entirely. I think we need to be cautious but we need to proceed in this direction.

Q.

Did you agree with the decision to issue stronger forward guidance â€" to tell investors the Fed intends to keep short-term interest rates near zero “well past the time” that the unemployment rate falls below the Fed’s current threshold of 6.5 percent?

A.

If you think of somebody like me sitting at that table, the principal desire I had was to see us reduce the rate of accumulation of these [asset purchases], and if you think in terms of what you wanted to get out of the meeting versus what you had to pay for it, in my own little mind, for me, that was a cost that I was willing to pay in order to get a reduction in the rate of asset purchases. Some people were advocating that we might move the threshold. We did not, so I was happy with that.

Q.

You have highlighted the decline in the unemployment rate as evidence that the economy is gaining strength. But a lot of the drop has happened because people are dropping out of the work force.

A.

We’re close to 6.5 percent; I’m happy with that. I’m not happy with the fact that we have so many people that have dropped out of the work force but there’s a limit to which monetary policy can have an impact there. I’m of the firm belief that monetary policy can only impact cyclical unemployment, which is a very important point. Whatever mismatches we have because of people that have dropped out of the work force, we cannot affect structural unemployment.

What I worry most about is that everybody is looking to the central bank of the United States to solve their problems. We get things done and we do so with comity, not comedy. There’s none of the kind of angst that Congress creates. But because we work smoothly under Ben’s leadership, and I believe we’ll continue to do so under Janet’s, I’m deeply worried that it will become commonplace to believe that the Fed will solve your problems. It can’t.

Q.

Surely some part of the decline in labor force participation is cyclical? We’ve seen, for example, little recovery in the rate of employment among men ages 25 to 54.

A.

This crude number that we have of unemployment is a crude thing, but after listening to all the discussion we’ve had around that table, about gradations or submeasurements, I’ve concluded that the best we can do in terms of looking at a marker is the unemployment rate.

Q.

You make a point of talking with a long list of chief executives about the health of the economy. What are you hearing lately?

A.

What I’m hearing is a better mood than I’ve heard before. If I could summarize what I’ve heard, the mentality that still prevails is the drive to increase the productivity of their work forces and also to drive down the costs of operating their businesses. Another thing I’m hearing is that the fourth quarter was pretty good; December was stronger than people expected. And the third thing I’m hearing is that they would like clarity about taxes and federal spending and regulation â€" particularly the health care initiative. I hear an enormous disdain for the current administration and for the Congress. I haven’t heard in over a year plus that they need cheaper money or more access to money. There’s not one business leader, woman or man, large or small, public or private that says we need more monetary accommodation.

Q.

Some of your colleagues say they see no evidence of the kind of overheating in financial markets that could threaten the stability of the financial system. You disagree. Why are people looking at the same markets and drawing such different conclusions?

A.

Fischer Black used to say that things look much more efficient on the banks of the Charles than they do on the banks of the Hudson. My background is different. I came out of the markets. I’m proud that I’m not an economist. I bring a different perspective and I think that perspective is important here. There’s a lot of money out there chasing few good companies. There’s too much money out there. The weak operators are priced beyond their value. Over time, something has to give.

Q.

You are notable among critics of the Fed’s stimulus campaign for having avoided any warnings about the risk of short-term inflation.

A.

I have not been worried about short-term inflation. What I am worried about is, what do we do when we see a pickup in the velocity of money? I want to make sure that it is not a problem long term.

Q.

You had a memorable line in a recent speech describing your concern that the Fed’s enormous balance sheet would make it harder to keep inflation under control: “The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat.” Do you doubt that the Fed has the necessary tools?

A.

Our New York desk is first-rate. The talent pool, the capacity to execute, no problem. It’s really a question of whether we’ll be conscious of â€" and when I say we, there are a lot of people that won’t be there going forward â€" the question is whether future policy makers will be cowed by potential criticism.

Q.

You dissented twice during your last turn as a voting member of the F.O.M.C. in 2011. How do you decide when to disagree publicly?

A.

When I was asked to take this job, I went to see Alan Greenspan and I said, ‘Now that I’m in the inner sanctum, what do you require?’ And he said, ‘Just speak the truth, Richard.’ And that’s exactly what I do.

The last thing I do before I dissent is I pray. I admire my colleagues so much, but when you are feeling that you can’t support what is proffered. … You don’t do it easily. I’ve never done it to be a pain. You do it to disagree. And I always say a little prayer before I cast my vote. This is a solemn responsibility.

Q.

What do you pray for?

A.

To help me make the right decision. And to be fair-minded.

Q.

I’ve heard other F.O.M.C. participants say that they would only dissent as a means of influencing the debate â€" that is, they see dissent as a tool, not a matter of principle.

A.

I think it’s a little bit of both. You want to condition things to the degree that you can. But you’d have to be vainglorious to think that your dissent is going to have to become the subject of intense interest. There’s no one who’s vainglorious at that table. But it also is a question of how many dissents there are. I think every Fed chairman needs to remember that Paul Volcker was voted down by his committee, and Paul Volcker is the Moses of central banking.

Q.

Do you think that you have been influential in shaping the course of policy?

A.

I speak my mind and I’m encouraged to do so and that’s gratifying enough.

Q.

You will turn 65 this year, the mandatory retirement age. …

A.

Some people expect me to resign by midyear. No way! I’m very happy with the fact that I get along with my colleagues. Sometimes I win the arguments and sometimes I don’t. This is a very refined game that we’re involved in and I feel that I’ve had an influence to a degree and I’m comfortable. Absolutely. Why wouldn’t I be? It’s the greatest privilege in the world to be in this group. I’ve done a lot of things in my lifetime, I’ve served in two administrations. I’ve never had a job that was as fulfilling as this one. And then the last thing you need to understand is that I do run a bank. The presidents of the regional reserve banks operate businesses. That’s my background and I love it. We run a big vault operation and two-thirds of U.S. currency is printed in Fort Worth, Texas, and we run the vaults and big cash operation. I like that business side of what I do. It’s not just the F.O.M.C., and particularly in my case, I love the business of running a centralbank division, which is the Federal Reserve Bank of Dallas. People forget that. I love both aspects.

Q.

We’ve talked about your disagreements with Ben Bernanke. Assess his legacy.

A.

The thing I admire most about Ben Bernanke, and I think Janet will be the same, is that he really goes all the way around the table, not just with the voters, he lets everyone speak however long they wish to, and he listens and respects whatever he hears at the table. When I contact him, he gets back to me in minutes. Unless he’s there â€" then he picks up the phone. He is a good captain.

Whether you are for QE3 or not, the issue here is, when the peanut butter hit the fan, who stepped up to the plate? Bernanke had just taken the job. He did know a great deal about the Depression, but he had to step up and take command when everything else was dysfunctional in the U.S. government. He led all of us. We had intense meeting after meeting â€" how do you deal with this implosion of the financial system and the threat of the destruction of the global economy? The way he handled the crisis was brilliant. If you come from academia, to understand market operations and to learn as quickly as he did, I just admire the way that he was able to grip all of this.

Another aspect of Ben that I find remarkable: In a town where everybody is power-crazy, he has retained his humility. I will give you a specific example â€" my wife was a trustee of Blair House, and they have receptions over there and my wife couldn’t be with us one evening and they asked if I could take Anna, Bernanke’s wife, as my date. She had never seen Blair House before. And at the end a giant limousine pulls up and another trustee asked Anna if she would like a ride home and she says, ‘I took the Metro to get here and I’ll take the Metro to get back.’ This is the most powerful economic policy maker in the world and his wife travels by Metro! That’s why I love these people. They have not let their heads be turned. He’s an example of the way that public servants conduct themselves. Time will, of course, judge whether we went too far or didn’t do enough or whatever it may be. But the fact that he has kept his humility â€" I admire him enormously.

Q.

What changes do you expect under Janet Yellen?

A.

The economy is in a different place. To the extent that we’re shifting gears here, that’s where you’ll see the change. It’s really because of the different circumstances.

I think there’s a little too much discussion of whatever personal biases she brings to the table. This is not Janet Yellen now. This is the chairman of the Fed. Everybody looks at her and says this is the way that things are going to go. It doesn’t work like that. She’s now a leader who has to bring consensus to the table. I personally think she’ll do it very well.

Q.

A growing share of your colleagues on the F.O.M.C. are former academics and career public servants. You are unusual in having significant experience in the financial industry. Does that trend concern you?

A.

I worry about it a little bit. I’d certainly like to see some bankers on the Board of Governors and right now we don’t have one. And amongst the presidents, the only two that were bankers are me and Dennis Lockhart [the president of the Federal Reserve Bank of Atlanta]. I think you need to have a mix. We are increasingly preoccupied with market stability and how markets operate. As we unwind what we have created here, however long it takes, whatever the pace is, we have to be market-sensitive. It’s helpful to have people understand how market operators and bankers think. We’ve got to have some of those at the table.

The Business of Paid Family Leave

Nancy Folbre is professor emerita of economics at the University of Massachusetts, Amherst.

“Never in the history of the world has any measure been brought in here so insidiously designed so as to prevent business recovery, to enslave workers, and to prevent any possibility of the employers providing work for the people.”

Thus did Representative John Taber, Republican of New York, condemn the Social Security Act of 1935.

Rhetorical attacks on paid family leave proposals have been less grandiloquent. But in 2007, Randel Johnson, a vice president of the U.S. Chamber of Commerce, proclaimed that the business community would wage “all-out war” against it.

The recently proposed federal legislation that aims to provide paid family leave to most American workers would be financed like Social Security, with a small payroll tax (less than half of 1 percent, or average of about $2 a week). It would be administered by the Social Security Administration.

“Family leave insurance” would be a more accurate description than “paid family leave,” because employees would be paying much of the cost themselves.

Like state-level programs currently operating in California, New Jersey and Delaware, the federal program would extend the existing disability insurance model to help defray the costs of family care for children, elderly and sick family members.

The United States is one of the few countries in the world that fails to provide such insurance, and strong opposition to it is still voiced by many influential members of the business community.

As with the Social Security Act, this opposition seems, in retrospect, misplaced.

The Family and Medical Leave Act of 1993, which guarantees unpaid family leave for a significant portion of American workers, initially aroused fears of malingering. These fears proved exaggerated. Relatively few companies reported any adverse consequences. Many enjoyed the benefits of reduced worker turnover.

When California’s paid family leave was signed into law in 2002, the state Chamber of Commerce labeled it a “job-killer.” But there is no evidence that it reduced employment or discouraged companies from locating in the state.

The California experience holds significant consequences for the national debate. A new book by Ruth Milkman and Eileen Appelbaum, “Unfinished Business: Paid Family Leave in California and the Future of U.S. Work-Family Policy.” summarizes many positive effects on children’s health, fathers’ involvement and maternal earnings.

Their research also offers strong evidence of minimal impact on businesses - even on the small companies considered especially vulnerable to regulatory burden.

The authors’ research incorporated two telephone surveys of a representative sample of California employers before and after the legislation was implemented (each including more than 250 establishments), several surveys of workers between 2003 and 2011, and interviews with human resource managers at about 20 different workplaces to learn how they adjusted to new procedures.

Nine of 10 employers reported either positive or no effects on their establishments, perhaps because the majority compensated for paid leaves by temporarily assigning the work to other employees. In other words, workers themselves bore much of the burden.

Yet only 10 percent of workers in 2004 and 6 percent in 2010 reported a negative impact, and the biggest positive effect that employers reported was improved employee morale.

Perhaps this is because both women and men know that, over their life on the job, they face a high probability of taking time off from paid employment to care for themselves or their aging parents, even if they don’t have young children. In other words, they appreciate the benefits of social insurance.

As do most intelligent people. Which is why, as a prescient article in Forbes explained two years ago, even card-carrying capitalists should support paid family leave.

Financial Reform Remains a Work in Progress

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz professor of entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

Of all the arguments put forward by big banks and their allies in recent years against financial reform, the line that surfaced last week was arguably the most strange. Wall Street has been reformed, according to this view: There was a great battle, and we (the big banks) lost. There is, consequently, nothing more to do.

In contrast to that position, I suggest that the decisive battles lie ahead. Some regulatory changes are in the works, but these are relatively limited and all would be easily reversible if attitudes change.

The dangers to the global economy posed by very large banks are more clearly understood by a handful of people in policy-making circles. On the other hand, many influential people in Washington refuse even to discuss how to measure the extent to which undercapitalized megabanks contribute to the risk of serious crisis, as well as the true cost of such crises.

Megabanks’ lobbyists and other representatives certainly remain hard at work. At a House Financial Services Committee hearing last week, they continued to push back against the Volcker Rule. The charge, as so often in the last five years, was led by the Securities Industry and Financial Markets Association, known as Sifma, which represents many companies in the securities industry, but which always seems to have the interests of the biggest closest to heart.

The chairman of Sifma is Jim Rosenthal, chief operating officer of Morgan Stanley; the vice chairman is John Rogers, executive vice president at Goldman Sachs, and so on.

The president and chief executive of Sifma is Kenneth E. Bentsen Jr., who previously served in the House of Representatives and was a member of the House Financial Services Committee. While in Congress, Mr. Bentsen was a Democrat, but at the hearing last week he seemed more closely in tune with the Republicans.

Mr. Bentsen and most Republicans asserted that the Volcker Rule did not involve sufficient consideration of the potential costs, despite a comment period and rule-making process that over three and a half years involved close to 20,000 letters from and more than 100 meetings with the industry. The implication from Republican members of Congress was that the rule should be scrapped or substantially scaled back.

For much of the hearing, the Republican majority projected onto a screen the total value of our national debt (using the total value of federal government debt outstanding).

I made the point that the recent increase in government spending (and decline in revenue) is almost entirely because of the way the financial sector imploded and damaged the rest of the private sector in 2007-8. In January 2008, the Congressional Budget Office projected that total government debt in private hands - the best measure of what the government owes - would fall to $5.1 trillion by 2018 (23 percent of gross domestic product). As of January 2010, the C.B.O. projected that over the next eight years debt would rise to $13.7 trillion (over 65 percent of G.D.P.), a difference of $8.6 trillion.

Of the change in the C.B.O. baseline, 57 percent is because of decreased tax revenues resulting from the financial crisis and recession; 17 percent to increases in discretionary spending, some of it the stimulus package necessitated by the financial crisis (and because the “automatic stabilizers” in the United States are relatively weak); and another 14 percent to increased interest payments on the debt - because the United States now has more debt.

I was disappointed, although not entirely surprised, that no one on the Republican side wanted to talk about how these enormous fiscal costs were the result of excessive risk-taking by what were then very large financial institutions and what have now become very large banks.

Spencer Bachus, Republican of Alabama and chairman emeritus of the committee, did assure me that proprietary trading - the kind of concentrated risk-taking that is the focus of the Volcker Rule - had nothing to do with the deep nature of the crisis and the very difficult subsequent recovery.

Unfortunately, he did not appear inclined to discuss the details of what went wrong in 2007-8 at Citigroup, Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns or Goldman Sachs - or what the more recent London Whale experience at JPMorgan Chase should teach us about the continuing risks of allowing insured banks to gamble in complex derivatives that management does not fully understand.

Sifma and others at the hearing warned of dire consequences from the Volcker Rule, but they could point to nothing of macroeconomic consequence by way of concrete impact. (There was some unintentional impact on community banks from the rule as proposed in December, but this was addressed by further changes last week - and the hearing made it plain that there is bipartisan agreement on avoiding any such difficulties. For more details on the issues, see my written testimony.)

This is a big year for financial reform discussions. The Federal Reserve needs to propose and adopt further important rules, including those governing how big banks finance themselves. The Government Accountability Office must issue a report that details the subsidies currently received by too-big-to-fail banks. And another midterm election can affect the general tenor of the debate and who controls the legislative agenda.

But make no mistake about it. Washington or Main Street did not win any big battles against the largest and most powerful financial companies. The early skirmishes are over, and the lines are now more clearly drawn.

As Dennis Kelleher of the pro-reform group Better Markets put it,

Wall Street went to war against Washington and financial reform; it has had many significant victories and, yes, some defeats; but, most importantly, Wall Street’s war continues unabated with no end in sight. Wall Street’s too-big-to-fail banks simply have too much money at stake, literally hundreds of billions if not trillions of dollars, to stop fighting.

Anyone who thinks financial reform is over should read Mr. Kelleher’s full article.

The big conflict lies ahead, and it will be long and drawn out. As memories of the last crisis recede, will regulators continue to carry out financial reforms in a sensible manner or, as in so many instances in the past, will they relax and let the big banks return to their most dangerous ways?