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The actual income gap in the U.S. has been worsening and now is approaching an "extreme" threshold that threatens to hamper long-term economic growth, Standard and Poors said in a report on Monday.

Income inequality leads to extreme economic swings, an uncompetitive workforce, and discourages investment and hiring, per S&P.

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

Already, the huge gap between the haves and have-nots is crimping the U.S. economy, with the agency cutting its 10-year U.S. growth forecast to 2.5 percent, down from its forecast of 2.8 percent five years ago. The wealth gap undermines economic growth by dampening social mobility and creating a less-educated workforce unable to compete in the global economy. Further, given that the most significant driver of the U.S. economy is consumer behavior, more and more consumers having less and less to spend hurts.

"Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring," the report notes. "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."

Figuring out a way to narrow the income gap would help the economy, although policy makers need to "avoid policies and practices that are either too heavy handed or foster an unchecked widening of the wealth gap," the agency writes.

The S&P said in its report that government policies on taxation and government wealth transfers, including Social Security and Medicare, have not significantly reduced income inequality. Many government programs aren’t limited to assisting lower-incoming households and extend to wealthier groups more than they did at their inception, according to the report. The bottom 20% of households received only 36% of transfer payments in 2010, but received 54% in 1979, according to S&P.

S&P said that changes in federal tax policy over the years has exacerbated inequality, as tax rates for top earners have fallen faster than rates for average Americans.

The report suggests that helping Americans gain more education, such as college degrees, could help narrow the gap and expand the economy, given that wages of college grads are double that of high school grads. However, the report also cities growing education debt as a major drag.

While raising the minimum wage would lift 900,000 above the poverty line, the report notes, it also carries a tradeoff, such as the potential for some job losses, the report added. "Some job losses" - a significant caveat as most economists say the most rigorous research shows little evidence of job reductions from a higher minimum wage.

Income inequality has become a hot-topic button this year, thanks in part to the best-selling tome "Capital in the Twenty-First Century" by economist Thomas Piketty. His thesis is that the rate of return on capital, such as stocks or real estate, outpaces that of economic growth. The result is that the wealthiest grasp a growing share of wealth, leading to increasing inequality.

In the U.S, that gap has reached "spectacular" heights, Piketty told CBS MoneyWatch earlier this year.

A recent working paper from a European Central Bank senior economist estimates that America's top 1 percent control between 35 percent to 37 percent of wealth, rather than the 30 percent than had previously been estimated.

Aside from dampening economic growth, wealth inequality also leads to boom/bust cycles, S&P noted. That's because the less affluent will borrow more to keep with the Joneses, a phenomenon seen before the housing crisis. Many Americans not only took out more debt to buy homes, but they also borrowed against their new homes' equity, despite slow income growth.

The key to getting America back on a path to more sustainable growth is boosting the purchasing power of the middle class and drawing people out of poverty, S&P wrote.

Sources:
http://www.motherjones.com/...
http://fortune.com/...
http://thehill.com/...
http://time.com/...
http://www.cbsnews.com/...
Crossposted at Daily Kos, All-en-All, PlanetPOV, Yabberz

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Comment Preferences

  •  Tip Jar (14+ / 0-)

    "It is better to light one candle than curse the darkness." (Adlai Stevenson in praise of Eleanor Roosevelt) (Glowing Candle Avatar Adopted in 1986)

    by murphthesurf3 on Wed Aug 06, 2014 at 08:22:36 PM PDT

  •  The problem with this story (1+ / 0-)
    Recommended by:
    chrisculpepper

    And this is about the third incarnation I've seen here lately, is that Standard & Poor's is really just a mafia front for the Banksters, and so who gives a fuck what they think.

    I mean you can't have it both ways.

    Even Obama's guardian-of-the-too-big-too-fail-realm, attorney general Eric Holder has gone after S&P:

    Attorney General Eric Holder announced today that the Department of Justice has filed a civil lawsuit against the credit rating agency Standard & Poor’s Ratings Services alleging that S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The lawsuit alleges that investors, many of them federally insured financial institutions, lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. The complaint also alleges that S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.  

    “Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis,” said Attorney General Holder.

    Hahahahaha. I mean, if you're too corrupt for Eric Holder....

    Actually, in all seriousness, Holder going after S&P was probably retaliation for their (S&P's) little rating stunt.

    But that doesn't mean the charge aren't true. They very much are. S&P is a fraud. They should be in jail.

    It serves us nothing to go around citing them like they're credible again. They're not. They never will be.

    Otherwise, fantastic diary.

    Cheers.

    •  Quite a set of charges.... (2+ / 0-)
      Recommended by:
      elwior, Mopshell

      Any thoughts on the actually findings?

      I have read a lot in the last two days and there is nary a word of critique even from those who undoubtedly find the findings....uncomfortable.

      "It is better to light one candle than curse the darkness." (Adlai Stevenson in praise of Eleanor Roosevelt) (Glowing Candle Avatar Adopted in 1986)

      by murphthesurf3 on Wed Aug 06, 2014 at 09:04:50 PM PDT

      [ Parent ]

      •  Well, I can't say there isn't some value (2+ / 0-)
        Recommended by:
        elwior, aransdell

        in the message coming from one of the wolves so to speak. There's always value of that kind of headline. "Breaking: Even Republican says Republicans suck"

        It's just almost unbearable seeing people flock to hear the great oracle speak about wealth inequality when that great oracle is a fraud.

        •  The Messenger of this message is the key for me... (0+ / 0-)

          For me, having an oracle dedicated to preserving wealth speak, even in muted tones, about the dangers of wealth disparity means a lot. The messenger, in this case, is delivering a surprising message.

          "It is better to light one candle than curse the darkness." (Adlai Stevenson in praise of Eleanor Roosevelt) (Glowing Candle Avatar Adopted in 1986)

          by murphthesurf3 on Thu Aug 07, 2014 at 10:55:06 AM PDT

          [ Parent ]

      •  I critiqued their study ... (2+ / 0-)
        Recommended by:
        Mopshell, NoBlueSkies

        ...here.

        Don't tell me what you believe, show me what you do and I will tell you what you believe.

        by Meteor Blades on Wed Aug 06, 2014 at 11:23:46 PM PDT

        [ Parent ]

        •  Our reporting is quite similar until.... (2+ / 0-)
          Recommended by:
          SGA, Meteor Blades

          "Not surprisingly, S&P rejects the idea of raising taxes on the wealthy despite the fact a hefty proportion of the inequality gap is a product of more than three decades of repeatedly cutting taxes for those on top. Nowhere does it explain exactly where the tax revenue to provide this additional education would come from. Obviously, not from a tax on capital as proposed by Thomas Piketty in his book, Capital in the Twenty-First Century."

          and

          " 'Defenders of the status quo have no answer to why the U.S. is an outlier in the rate at which income inequality has grown. There is something about the U.S. that is unique, and it's not its markets, which are largely indistinguishable from those of other countries. No, it's the comparatively parsimonious investments the U.S. makes in its citizens. Americans simply do not have equal opportunities. This is more than an ethical or social issue: Underinvestment in human capital leads to lower productivity, which is to say, lower national income. Comparative data show that the U.S. offers less social and economic mobility than do many of its peer countries—a startling rebuke to the mythology of America as the land of opportunity.' "

          So, your critique puts the questions of more equitable tax policy and more opportunity harder than mine.

          For me, having an oracle dedicated to preserving wealth speak, even in muted tones, about the dangers of wealth disparity means a lot. The messenger, in this case, is delivering a surprising message.

          "It is better to light one candle than curse the darkness." (Adlai Stevenson in praise of Eleanor Roosevelt) (Glowing Candle Avatar Adopted in 1986)

          by murphthesurf3 on Thu Aug 07, 2014 at 10:51:05 AM PDT

          [ Parent ]

    •  S&P is issuing this report for the benefit of the (0+ / 0-)

      wealthy overall, so I believe this report is credible despite S&P's shenanigans in other areas because there's no direct financial benefit for them to be anything else but truthful here because their ability to game the system relies on them have accurate information.

      The other stuff you mentioned were things S&P could directly benefit by stating this or that, its not the case here.

  •  Boy There's a Real Cognitive Dissonant Mix of (4+ / 0-)

    reality and neoliberal fantasy in there.

    Booms and depressions come from the rich not the people, they come from the rich accumulating more wealth than the rest of society can use for investment.

    When the rest of the people don't have enough purchasing growth potential, because the rich have sucked up too much wealth and opportunity, there's nothing for the rich to do with their wealth but bet it on the behavior of each other, creating a series of bubbles till like a game of musical chairs something interrupts the music, and everyone falls down.

    In the 1920's and the 2000's the last bubble was the housing market. Over a century before our framers sat down to build a system of government perfectly unaware of all this, it was Dutch tulips.

    It's the job of government through individual taxation and brakes on extremes of market behavior to keep most of the wealth of society out of the hands of the rich. That's simple national security, as basic as keeping the country out of the hands of foreign conquerors.

    Figuring out a way to narrow the income gap would
    --be found in the early to mid 20th century history books of all the advanced democracies.

    And nowhere in the annals of the United States after the Beatles ceased touring.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Wed Aug 06, 2014 at 08:42:50 PM PDT

    •  In general, as I read your comment, you (1+ / 0-)
      Recommended by:
      elwior

      generally agree with what the findings mean.

      "It is better to light one candle than curse the darkness." (Adlai Stevenson in praise of Eleanor Roosevelt) (Glowing Candle Avatar Adopted in 1986)

      by murphthesurf3 on Wed Aug 06, 2014 at 09:06:13 PM PDT

      [ Parent ]

    •  I think of it as the pyramid of wealth being (1+ / 0-)
      Recommended by:
      elwior

      tipped on its point; unstable. The 1% being the tip.

      The only hawk I like is the kind that has feathers. My birding blogs: http://thisskysings.wordpress.com/ and canyonbirds.net

      by cany on Wed Aug 06, 2014 at 09:21:29 PM PDT

      [ Parent ]

    •  Couldn't agree more, Gooserock: (1+ / 0-)
      Recommended by:
      Darth Stateworker
      --be found in the early to mid 20th century history books of all the advanced democracies.

      And nowhere in the annals of the United States after the Beatles ceased touring.

      English usage is sometimes more than mere taste, judgment and education - sometimes it's sheer luck, like getting across the street. E. B. White

      by Youffraita on Wed Aug 06, 2014 at 11:10:22 PM PDT

      [ Parent ]

  •  It only follows that S&P must therefore see risk (1+ / 0-)
    Recommended by:
    elwior

    in policies that enhance income inequality...

    Interesting that today they downgraded Kansas debt - that is going to leave a mark on Brownback...

  •  Let's not credit S&P too much here. (2+ / 0-)
    Recommended by:
    elwior, Meteor Blades

    They didn't exactly come out rah-rahing for redistributionist taxation policies:

    http://thehill.com/...

    What they did is blame much of the inequality on a "lack of education" and the educational system itself - IE:  teachers are to blame.

    Cue Campbell Brown and the Edu-profiteers with more excuses why they think teachers suck.

    What is rarely, if ever, touched on by any of these jackwagons is that our old marginal tax rates handled income inequality not so much by government redistribution, but by forcing employers and the wealth to choose higher taxes or higher compensation for their workers to reduce that tax liability.

    As for their idiotic ideas that more education is the be-all-end-all for all of our problems, that's bullshit.  Practically 50% of the jobs in this nation are jobs that require little to no skill and little to no higher education.  Those jobs don't simply cease to be required simply because more people hold bachelors degrees.  As Judge Smails said in Caddyshack:  "The world needs ditch diggers too."

    The problem isn't that the ditch diggers need more bachelors degrees.  It's that they need to get a higher share of the profit made from digging those ditches.  Those old-school high tax rates caused that to happen.  Low tax rates simply cause excessive profit taking by the rentier class.

    S&P didn't seem to catch that part at all, so they really aren't advising anything different than conventional wisdom that if only everyone had an education, everyone would make more - which is logically impossible given how our economy functions.

    There was no such thing as a "wealthy" hunter-gatherer. It is the creation of human society that has allowed the wealthy to become wealthy. As such, they have an obligation to pay a bit more to sustain that society than the not-so-wealthy.

    by Darth Stateworker on Wed Aug 06, 2014 at 10:10:14 PM PDT

    •  Yes, yes, yes, yes & yes. And while they... (2+ / 0-)
      Recommended by:
      Darth Stateworker, NoBlueSkies

      ...talk—a lot—about boosting education (mixing obvious truths with debunked myths), they don't tell us how to pay for more education without raising taxes (something the authors definitely don't think is a good idea if we're talking about raising taxes on wealthier Americans).

      Don't tell me what you believe, show me what you do and I will tell you what you believe.

      by Meteor Blades on Wed Aug 06, 2014 at 11:27:05 PM PDT

      [ Parent ]

  •  Raising the minimum wage is crucial. (1+ / 0-)
    Recommended by:
    NoBlueSkies

    More money would be plowed back into the LOCAL economy, instead of being hoovered like cocaine up the entitled noses of the plutocrats.

    And that would result in MORE jobs b/c, when the masses have more money to spend, they spend it at restaurants and stores, on cars and computers.

    Don't take my word for it: there have been numerous studies, including one in the Pacific Northwest that compared two adjacent counties. One was in (iirc) Oregon and the other was in (iirc) Idaho. Oregon raised its minimum wage, and its economy improved. Idaho didn't, and its didn't. It was diaried here, with links, but unfortunately I don't have it hotlisted or I would link to it.

    English usage is sometimes more than mere taste, judgment and education - sometimes it's sheer luck, like getting across the street. E. B. White

    by Youffraita on Wed Aug 06, 2014 at 11:07:09 PM PDT

  •  "S&P said that changes in federal tax policy ... (2+ / 0-)
    Recommended by:
    Darth Stateworker, NoBlueSkies

    ...over the years has exacerbated inequality, as tax rates for top earners have fallen faster than rates for average Americans."

    Yep. And then S&P argued that changing tax policy, that is, raising taxes on the wealthy (who have seen mostly tax cuts the past 30+ years) wouldn't be a good idea. See here and here.

    Don't tell me what you believe, show me what you do and I will tell you what you believe.

    by Meteor Blades on Wed Aug 06, 2014 at 11:21:37 PM PDT

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