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:Crossposted at Daily Kos, All-en-All, PlanetPOV, Yabberz