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Do the rich deserve what they get?

Do the rich deserve what they get?

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ST. LOUIS • It was late morning at the coffee shop, and the professor wanted to talk about rich people.

Mark Rank usually focuses his attention on the low end of the income charts, on poverty. As a professor of social welfare at Washington University, he's considered a top academic expert on that topic and social justice.

But he was moved to join a reporter here, at a back table of Kayak's Coffee across the street from his school, to talk about income inequality because of an interview in last Sunday's Post-Dispatch with Thomas A. Garrett, a St. Louis Federal Reserve vice president and economist. Garrett wrote a paper titled, "U.S. Income Inequality: It's Not So Bad," which argues that the rich getting richer doesn't make the poor any poorer.

It doesn't matter, Garrett argues, that the distance between the rich and everyone else, from the middle class on down, stands at its widest point since the 1920s Gilded Age. "My point is, the social ills that are the result of having a low income are not because other people have more," he says. "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."

The interview spurred an outpouring from readers — hundreds of online comments, plus e-mails, phone calls and letters to the editor. Some agreed with Garrett. Some disagreed, sometimes in angry tones. People on both sides seemed to have their views colored by the recent economic turmoil and the nation's political response to it.

Rank believes growing income inequality is a problem the country cannot brush off.

"The idea of America," Rank said, "is being undermined by these dynamics."

What follows is an edited transcript of our conversation.

Does income inequality matter?

Yes. As you have greater inequality, you have a greater and greater risk of distorting democracy. If only a small group of people hold more and more resources and money, they're really able to put a lot of pressure on the system to play out their agenda alone. So widening inequality really is detrimental to the principles of democracy. It comes down to, do we want to live in a society where an ever-smaller group lives behind gated walls and security protecting them from the rest of us, what might be called the Brazilian effect? That's where we're headed.

But shouldn't wealth confer some advantage? People have earned it.

Certainly they are entitled to it. The question is to what extent we feel the level of inequality is reasonable. Because if you let it play out completely on its own, you're going to wind up with a smaller and smaller group of haves and a growing group of have-nots. So it's not about stopping people from passing on wealth to the next generation or earning a high income. But it's about what is right in terms of redistribution.

So you favor some redistribution?

Yes.

You mean by taxes? As in, the rich should pay even more?

Right. It's progressive taxation, which we have now. But if you look at the rates, they have come down really substantially. The top rate was 70 percent in the 1960s. Now, it's 35 percent. I think there needs to be a little bit more asked of the people at the top. As long as the money is going to be spent effectively — on education, for example — I think they would be willing to contribute more.

But don't they deserve to keep their money?

Here's another way of thinking about what they deserve: In 1980, the average CEO earned around 42 times what the average worker earned. Today, the average CEO earns over 400 times that.

Now are you going to make the argument that today's CEO is 10 times better than the average CEO in the past? I don't think so. We have been rewarding only the top end. So basically all the economic gains over the last 30 years have been concentrated at the top 20 percent — and really the top five and one percent of household incomes. There's a really skewed picture. It goes against the sense of America's strength being a strong middle class. What we're doing is hollowing out the middle class.

But are those gains at the top coming at the expense of the middle class?

I think it's related. Tax policy has really benefited those at the top. It hasn't benefited those in the bottom or even the middle. Other policy decisions have benefited only the top end of the income distribution. Everyone else is taking a smaller slice of the nation's income pie, except for the top 20 percent. That's primarily where the economic gains have gone. I don't think that's smart policy. The idea of a rising tide lifts all boats — why should it just lift the yachts?

Some people will say this sounds un-American.

I'd say I'm a pragmatist. Capitalism has good sides and bad sides. That's a more realistic approach. If you just let capitalism runs its course, it can be extremely destructive. That's where I think you do need some regulation, some government policies.

But wouldn't higher taxes undercut the desire to produce more? To hire more workers?

If you have extreme taxation on the top end, yes, you might have that effect. But I think you can still have high motivation to earn and still increase that tax rate to some extent. Again, we used to have a tax rate of 70 percent at the top end, and the economy was doing remarkably well. People weren't saying, "Hey, I'm not going to work."

What is the right amount of inequality?

I can't tell you what that is. Other countries do it better. Germany. Other Western European countries. If you look at all other developed countries, we are the outlier on wealth inequality, income inequality and poverty.

So how did it reach this point?

It's this idea of the American Dream. We are a land of optimists. People say they are not sure they want to do those things to cut back on the top end because they may be there one day. But the reality is, most of them won't.

So has something fundamental changed?

There used to be an informal contract between workers and employers. And the idea was, we are in this together. So that as an employer I want to provide you with a decent wage, decent benefits so that you can support a family and buy the goods we are producing.

And there seemed to be something wrong with a CEO earning an ungodly amount of money compared to an average worker. That held for a long time. That contract has kind of broken down. It's troubling.

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