St. Louis Fed Study Argues U.S. Income Inequality Is Not So Bad

ST. LOUIS — Many people view income inequality as a social ill, but public policies that seek to redistribute wealth would probably result in lower economic growth for everyone. That's one point emphasized by economist Thomas A. Garrett in the October issue of The Regional Economist, the quarterly journal of business and economic issues published by the Federal Reserve Bank of St. Louis. The publication is also available online at: www.stlouisfed.org/publications/re/default.cfm.

Income statistics in Garrett's analysis show that although the real income of the wealthiest five percent of households rose by 14 percent between 1996 and 2006, and the poorest 20 percent rose by 6 percent. These numbers do not take into account household size, noncash resources received by lower income households, and the tax payments made by wealthier households to fund these transfers. When the inequality statistics take these factors into account, the income share of the wealthiest 20 percent falls by 25 percent and the income share of the poorest 20 percent nearly triples.

And while there are shortcomings in the way income inequality statistics are calculated, Garrett emphasized that some form of inequality will always exist. This being the case, is the reduction in income inequality worthy of public policy?

No," said Garrett. "An individuals ability to largely determine his level of economic well-being encourages innovation and entrepreneurship. Economic studies have documented a positive correlation between entrepreneurship/innovation and overall economic growth.

Garretts analysis suggests that a redistribution of wealth would increase the cost of entrepreneurship and innovationthe result being lower overall economic growth for everyone, regardless of income.

Poverty and income inequality are related, but only the former and not the latter deserves a policy response. Sound economic policy to reduce poverty would lift those out of poverty (increase their productivity) while not reducing the well-being of wealthier individuals. Tools to implement such a policy include investments in education and job training.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, provides payment services to financial institutions and the U.S. government, and promotes community development and financial education.

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