WASHINGTON — For anyone listening closely Thursday to Federal Reserve Governor Sarah Bloom Raskin and Richmond Federal Reserve President Bank Jeffrey Lacker there seemed to be something of an optimism deficit evident underneath their outlook for better times ahead.
Raskin related income and wealth disparities, an approach not typical in macroeconomic analysis, to the weakness of the recovery.
Lacker looked at declining labor participation, linking it to what he sees as the nation's low-growth prospects despite massive quantitative easing.
Both saw trends that began well before the financial crisis and which show no signs of disappearing any time soon, continually trimming the amount of economic improvement the nation can expect.
Raskin first focused on the implications of the often-cited income inequality statistics showing "between 1979 and 2007, inflation-adjusted, pretax income for a household in the top 1 percent more than doubled, while, in contrast, income for a household in the middle of the income distribution increased less than 20 percent."
She cited the lack of "definitive" statistics illustrating how those on the less advantaged end of the income curve might alter their spending.
She then drilled down to even less cheery numbers, the inequality of wealth in the United States, "showing the top one-fifth of families ranked by income owned 72 percent of the total wealth in the economy in 2010, whereas families in the bottom one-fifth of the income distribution together owned only 3 percent of total wealth in 2010."
To pile on, she cited how housing assets, the ones that deteriorated so sharply in the financial crisis, are central to the net worth of those in the middle and lower half of the income distribution. "The ratio of their home values to total net worth was near 70 percent," she said.
As house prices fell, their mortgage debt became an even bigger proportion of their net worth, imposing the pain of the crisis disproportionately. In the years leading up to the crisis, these homeowners borrowed faster than their wages increased.
"It seems quite plausible to me," Raskin said, "that stagnant wages and rising inequality, in combination with the relaxation of underwriting standards, led to an increase in the use of credit unsupported by greater income.
What was striking was not only that Raskin was highlighting a very negative pre-crisis trend made much worse when the crisis hit, but she was pointing out that none of the trend's fundamentals are significantly improving.
"Now we are nearly four years into the recovery, which has been weak," she said. "In my view, this same confluence of factors has also contributed to the tepid recovery."
Absent in Raskin's remarks were indications that anything having to do with income and wealth inequality and the vulnerability of wealth to house prices is going to change any time soon. Some factors, in fact, may be deteriorating.
"To make matters worse," she said, "there is also some evidence to suggest that the factors that contributed to the rise in inequality and the stagnation of wages in the bottom half of the income distribution, such as technological change that favors those with a college education and globalization, are still at play in the recovery - and perhaps may have accelerated."
Raskin continued, "About two-thirds of all job losses in the recession were in middle-wage occupations - such as manufacturing, skilled construction, and office administration jobs - but these occupations have accounted for less than one-fourth of subsequent job growth."
In addition, she said, "Wage gains have remained more muted than is typical during a recovery."
"Indeed, while average wages have continued to increase (albeit slowly) on an annual basis for persons who have remained employed, the average wage for new hires has declined since 2010," she noted.
Raskin said her particular analytic approach is not typical. "My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models."
"The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their 'realized shocks,' closer to the front and center of the macroeconomic adjustment process," she said.
"The effects of increasing income and wealth disparities - specifically, the stagnating wages and sharp increase in household debt in the years leading up to the crisis, combined with the rapid decline in house prices and contraction in credit that followed - may have resulted in dynamics that differ from historical experience and which are therefore not well captured by aggregate models," Raskin continued.
The low interest rates engineered by the Fed "will help the economy to gain traction," she said, "and the resulting expansion in employment will likely improve income levels at the bottom of the distribution."
"However," she warned, "given the long-standing trends toward greater income and wealth inequalities it is unlikely that cyclical improvements in the labor markets will do much to reverse these trends."
In an extended interview earlier in the day on CNBC, Lacker also took a long-term trend that began at the beginning of the last decade, long before the financial crisis, and extrapolated its continuing dampening effect on a recovering economy. That trend is the labor participation rate, a declining chart line that has gone from well above 66% to just above 63% in a decade.
The ratio between the labor force and the overall size of the national population in the second half of the last century had increased significantly largely because more women got jobs.
Now, Lacker said, what looks like a continuing growth rate around 2% may not have the labor market fuel to recover to its higher pre-crisis levels.
"The longer we go around this trend, the more it looks like the trend is 2%" growth, Lacker said. That may be all that can be expected. "I'm thinking we're about at potential right now," he said.
"At the beginning of the expansion people expected us to go back to that previous trend line," he went on. "Instead we're forming a new trend line that's down below that, parallel to that. Now the growth rate's a little lower."
Why? "A big part of that is labor force participation which has tailed off significantly." And if a lot of the trend of lower participation is structural instead of cyclical, it's not about to show much improvement regardless of how much quantitative easing the Fed throws at it.
"It's hard at this point to divine how much of that is cyclical, how much is broader trends," Lacker said. "I think the longer we go since the recession the less likely the low rate of labor force participation represents cyclical" influences.
"It's hard to say where unemployment is going to go," he continued. "That decision (whether to enter the labor force) is affected by a whole bunch of things, things like disability insurance, unemployment insurance benefits and the like."
"Labor markets are struggling," he said. "and I think we have some skills challenges but I think there's broader challenges having to do just with the climate of investment."
"The participation rate reflects a lot of diverse choices," Lacker said. "I think, what I was trying to say, the farther you go from the recession, the less likely it is that it's just a purely cyclical phenomenon and the more respect you have to give to the notion it's a deeper and going to be a longer lasting trend."
"I don't think it's just the Baby Boomers," he continued. "I think you see this in 20-year-olds that are spending more time getting education, spending less time in the labor force. People in the 30s and the 40s where's participation's off as well. So I think there's some broader run trends going on right now."
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