'Let's not vilify the rich,' says St. Louis economist

2011-02-27T00:25:00Z 2012-12-23T14:09:33Z 'Let's not vilify the rich,' says St. Louis economistBY TODD C. FRANKEL • tfrankel@post-dispatch.com 314-340-8110 stltoday.com

ST. LOUIS • A Starbucks in a late-morning lull seemed like a good place to watch income inequality in action.

Three baristas, making perhaps $8 to $12 an hour, stood ready to make drinks ranging from a $1.65 single espresso to a large peppermint mocha for $5.15. Customers in the downtown St. Louis coffee shop ranged from attorneys in crisp suits, earning maybe $100 to $300 an hour, to tourists and students, to a reporter and an economist, sitting along a far wall.

The economist was Thomas A. Garrett, assistant vice president at the St. Louis Federal Reserve. He agreed to meet me here, over coffee and near his office, to talk about income inequality and how, in his view, the rich getting richer doesn't make the poor any poorer.

He wrote an article for a Fed publication in October 2008 titled, "U.S. Income Inequality: It's not so bad." A self-described free-market economist, he argued that income inequality signals that the economy is working, that the most productive workers make the most money.

He pointed to flaws in how income data are used and how people move through different income levels over a lifetime.

And, he wrote, the real problem is poverty. It doesn't matter how much more one worker earns than another. What matters is that someone is poor.

The long-standing political debate over income inequality is heating up again as the nation emerges - unequally - from the Great Recession. Corporate profits and the stock markets have soared. But wages remain flat and unemployment stubbornly high.

Battles such as the heated one in Wisconsin over the governor's attempt to weaken public unions and cut their benefits are, on some level, about income inequality. So are flare-ups over executive compensation.

There's no debate that the rich have gotten richer. The middle class is losing ground. And the poor? Still poor. Some studies say current levels of income inequality echo the late 1920s and the Gilded Age.

But does income inequality matter? Should we even care?

Some economists think it's a problem. And other people see income inequality as un-American. It doesn't seem right that the top 5 percent of U.S. households claims an ever-larger share of the nation's wealth. Meanwhile, the middle class sees its slice of the pie shrink.

So when a barista earns so much less than an attorney - an income gap that has only grown in recent years, just as it has between those at the top of the economic ladder and everyone else - Garrett sees no problem.

"I would say it gives the barista more of an incentive to become an attorney," he said.

What follows is an edited transcript of our conversation.

Does income inequality matter?

It's just a statistical distribution. The ill is that there are poor people. There are no inherent effects of having an unequal distribution of income. My point is, the social ills that are the result of having a low income are not because other people have more. It's because those at the bottom don't have enough income. The resource pie is not fixed. If I make more than you, it's not that I've taken it from you.

But doesn't severe income inequality say there is something wrong with the U.S. economy?

No. I guess I'd argue that it actually shows that it's working.

America wasn't better off when, in the middle of the 20th century, the degree of income inequality was lower?

The problem is, when you start going back in history, the diversification of the work force was much less. It was once just agricultural and manufacturing. Well, now we have services, IT and many others. The diversification of our economy has grown. When that happens, resources are going to flow to those most valued sectors, which are going to result in differences in wages. So you can't compare wages now with 100 years ago, or 50 years ago, because it's not the same economy.

Should the middle class be able to afford a decent house and the typical trappings of the American dream?

They should be able to afford it, but it doesn't mean it should be given to them. So those are two different things. And that's what I get at with my paper. We don't want to vilify the top 1 percent and give stuff to the bottom. We want to raise them up, so that on their own maybe one day they'll get to the top 1 percent.

What is the ideal income distribution?

I don't know. Shrink it. Make it bigger. What's that going to do? What effect would that have? Whenever it's talked about, it's always there are people who make a lot and there are people who make a little. But that's not because of people up here, at the top. It's because these people's incomes are too low. So let's help them get up, keeping in mind the benefits of having people who can earn $1 million a year, $2 million a year, by starting businesses, creating jobs. Because one group will work for the other group.

But you understand the emotional response of many people that severe income inequality is wrong?

Yes.

And if you weren't a free-market economist, you might have a different reaction?

Right.

Let's look at this in terms of housing. The top 5 percent's income growth has so vastly outpaced the growth of all U.S. incomes that the middle class essentially has been priced out of certain neighborhoods, such as Clayton. This pricing-out wasn't so stark a generation ago. Is that a problem?

The problem isn't the rich person. It's that this person's income hasn't gone up fast enough, which is why they can't live in Clayton. That's how markets work. Big screen TVs. Vacations. Yachts. There's nothing inherently wrong with that. You can say it's not fair. But there's nothing socially wrong with that.

Why did you write the 2008 paper?

The main point I wanted to make is that income inequality and poverty are often confused as the same thing. That confusion is used to justify policies, like anti-poverty policies: that we have all these rich people, and we have to do something to help the poor. No. We have to help the poor because they are poor.

But someone has to pay for those policies.

Exactly. And the rich will pay through taxes. But let's not vilify the rich, where there's this class warfare, where the rich pay for everything without people realizing the benefits of having rich people.

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