So S&P released a report. Its findings are a surprise to all of us minus everybody who is not an "expert economist" for the traditional media outlets.
Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring. Keynes first showed that income inequality can lead affluent households (Americans included) to increase savings and decrease consumption (1), while those with less means increase consumer borrowing to sustain consumption…until those options run out. When these imbalances can no longer be sustained, we see a boom/bust cycle such as the one that culminated in the Great Recession (2).
Aside from the extreme economic swings, such income imbalances tend to dampen social mobility and produce a less-educated workforce that can't compete in a changing global economy. This diminishes future income prospects and potential long-term growth, becoming entrenched as political repercussions extend the problems.
What's interesting about this new report is that its target demographic is made up of the center-to-right economists you see on TV every day. You know, the ones telling you to consume when you have no money and then yelling at you for using credit cards to consume when you have no money. As
the New York Times points out:
[T]he new S.&P. report is a sign of how worries that income inequality is a factor behind subpar economic growth over the last five years (and really the last 15 years) is going from an idiosyncratic argument made mainly by left-of center economists to something that even the tribe of business forecasters needs to wrestle with.
In the end, S&P stops short of making any sweeping suggestions (i.e. taxing the wealthy, redistributing money) because hey, they ARE Standard & Poor's. But they do point out that at a very basic level, education inequality is a major problem. Here it's explained in a way that only money-lovers can understand.
Alternatively, if we added another year of education to the American workforce from 2014 to 2019, in line with education levels increasing at the rate of educational achievement seen from 1960 to 1965, U.S. potential GDP would likely be $525 billion, or 2.4% higher in five years, than in the baseline. If education levels were increasing at the rate they were 15 years ago, the level of potential GDP would be 1%, or $185 billion higher in five years.