It's nice to see that after 33 years in the making and plenty of research and warnings by Nobel Prize winning economists like Paul Krugman and Joseph Stiglitz, business analysts are finally beginning to appreciate the pernicious effects of rising economic inequality. The Standard & Poor's rating agency has released a new report, How Increasing Income Inequality is Dampening U.S. Economic Growth, And Possible Ways to Change the Tide. It says the "widening gap between the wealthiest Americans and everyone else has made the economy more prone to boom-bust cycles and slowed the 5-year-old recovery from the recession." They have revised their forecast of U.S. economic growth over the next ten years downward from 2.8% per year to 2.5% as a result. S& P chief economist Beth Ann Bovino said that economic disparities have reached extremes that "need to be watched because they're damaging to growth."
The breakthrough in analysis is important because it indicates how the economic discussion may be changing. For years liberals have been calling attention to this very phenomenon, while conservatives and the business community either rejected the reality of growing income inequality or downplayed its negative effect on the economy as a whole. So the fact that a major business organ is now coming to a similar conclusion as the liberal economists is highly significant. The first step in solving a problem is admitting it exists. S & P is a numbers-heavy service, and the analytics are simply getting too obvious to ignore. People without sufficient disposable income to spend are not spending it, especially after the credit crash.
If a greater share of national income were going to the working and middle classes their spending would be able to drive a more robust recovery. Since 96% of national income gains since the recovery began have gone to the top 1%, there are not enough of them to translate those gains into major GDP growth. A low percentage of 1% income gains go into extra spending; most goes into savings or investments, often overseas.
The S & P report recommends increasing educational achievement as a means to boost working and middle class income growth, since additional years of higher or vocational ed are associated with higher income. That would certainly be a good idea, but more direct means, such as increasing the minimum wage, revamping the tax code and bolstering union organizing rights in the retail, service and fast food sectors would also pay more immediate dividends. One can hardly expect a business publication to advocate such steps, at least yet, but now that the discussion is open and on the table and we have some states like Washington and California taking such steps, the experiential data will be coming. And if the numbers confirm the thesis, as the Krugmans and Stiglitzes have been predicting, the S & P's of the world may eventually have to admit the handwriting on the wall on solutions as they now have on income inequality itself.
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