Income Inequality Holding Back US Recovery, S&P Says

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.