Income Inequality Holding Back US Recovery, S&P Says

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Income inequality is slowing economic growth in the U.S. It’s like trying to drive with the emergency brake on – you can do it (kind of), but it’s very slow going.

“The current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population,” a recent report from credit rating firm Standard & Poor’s said.

S&P cites the rising concentration of income in the top 1 percent of Americans as one of the main reasons that the company cut its growth estimates over the next decade from 2.8 percent to 2.5 percent.

The ever-widening gap between the wealthiest Americans and the rest of the country has not only slowed the recovery efforts post-recession, it also leads to boom-bust cycles and an noncompetitive workforce, and discourages investment and hiring, Time said.

The U.S. Gini coefficient, a widely used measure of income inequality, rose by 20 percent from 1979 to 2010. The nonpartisan Congressional Budget Office showed that after-tax average income ballooned 15.1 percent for the top 1 percent of earners, but grew by less than 1 percent for the bottom 90 percent of earners.

Instead of relying on taxes to narrow the wealth gap, S&P said increasing educational achievement, which has stalled in recent decades, is a way to improve productivity.

“S&P estimates that the U.S. economy would grow annually by an additional half a percentage point — or $105 billion — over the next five years, if the average American worker had completed just one more year of school,” The Associated Press said.

Although economists don’t always agree on how much (or if) the wealth gap impacts economic growth, S&P concluded: “A rising tide lifts all boats … but a lifeboat carrying a few, surrounded by many treading water, risks capsizing.”

What do you think of S&P’s report? Do you agree that income inequality is hurting economic growth in the U.S.? Share your thoughts below or on our Facebook page.

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Comments & discussion

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  • Judy

    I absolutely agree that income inequality is hurting economic growth. I also agree that additional schooling is essential. Conversely, if additional schooling means college, and the costs to attend even a community college having risen so greatly, where is that money to be found? Having gone to high school in the late 1950’s when the fear of communism was rampant, I am reminded of my wonderful World History teacher who said: “It’s not about communists marching down main street. It’s about the elimination of the middle class.” And it took so little time to come to pass.

    • Jake

      How is income inequality hurting economic growth?

      • http://www.moneytalksnews.com/ Stacy Johnson

        Read this story: Ask Stacy: Why Income Inequality Matters to Everyone http://www.moneytalksnews.com/2014/05/06/ask-stacy-why-income-inequality-matters-to-everyone/

        • Jake

          Thanks for the link. I had read the article. The economic basis for income inequality hurting the economy were based on higher CEO pay (which is only a portion of income inequality) causing higher prices and the economic benefit of increasing pay for workers. The second is a valid point, but if we were able to push a magic button to cause the top 1% (those making over $250K per year) to cut their pay in half, then there would be less income inequality, but I don’t believe that it would increase economic growth. If we were to cut everyone’s pay to minimum wage, we would have perfect income inequality, but would wreck the economy. Thus, I don’t think that the income inequality in and of itself is hurting anything. If we want to discuss the objectivity of companies’ board of directors when deciding executive compensation, we can discuss that; if we want to discuss how to create a more productive and prosperous workforce, we can discuss that. While it is true that both of these issues are important and affect both the economy and income inequality, income inequality doesn’t necessarily have a major effect on the health of the economy; they are just affected by some of the same things. I believe fixing income inequality is like a doctor treating a symptom of the disease instead of the cause of the disease itself. Just my $0.02. Stacy, you have an excellent website and do a superb job of moderating comments and keeping emotional conversations civil.

          • http://www.moneytalksnews.com/ Stacy Johnson

            All good points, Jake. Actually, the truth is you’re right. it’s not income inequality that’s potentially damaging the economy. It really doesn’t matter how much CEOs make. What matters is that wages for the 99 percent have stagnated, in my opinion due to competition from cheaper foreign labor. As inflation overcomes wages, more and more Americans are being pushed out of the middle class, and become unable to buy the products they produce. That’s where the economic damage comes in. As for the solution, that’s problematic. Corporations have the obligation to produce at the lowest cost, and capital should be allowed to flow freely worldwide. I’m both a free-market capitalist and consumer advocate, so it’s quite the conundrum in my mind.

  • Jake

    Wow, I can’t believe S&P paid an employee to write that garbage. First of all, it is hard to tell if they are talking about income inequality, or wealth inequality; they seem to use those terms interchangeably, but the two are very different. I know people who make more money than I do, but are deeply in debt; I save my money and hate debt, so therefore I have more wealth, but they have more income. The whole premise of the assertion by S&P is that if some people are receiving income or have accumulated wealth (whichever they are talking about), that means that there is less for the rest of us. This is an absurd statement. Have you ever had a company tell you “we would like to pay you more, but we don’t have any more money in the bank because the rich people are hoarding it in their basements”. This idea would be correct if the wealthy kept their money in cash, but they don’t; they keep it in equities, so the money gets put back into the economy. There is not any rich person or secret society of rich people preventing any one of us from making more money or accumulating more wealth. If we want more money, all we have to do is get more education, work more hours, or change to a better paying job; if we want more wealth, all we have to do is spend less and save more.

  • smokey347

    wait, what do you mean “holding back (the) US recovery”? according to barry the US economy is the best its been since, well the last time he said its the best. apparently the S&P doesn’t pay attention to his speeches.