How income inequality hurts the U.S. economy

A new report by Standard & Poor's highlights the growing risks


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Thomas Mucha
August 6, 2014 4:00PM (UTC)
This article originally appeared on GlobalPost.

Global Post Not too long ago research about income inequality was the stuff of nerdy academics and Wall Street economic forecasters.

And, of course, the occasional international news organization.

But as a new study from Standard & Poor's Capital IQ illustrates, the idea has gone mainstream.

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First, the highlights:

S&P economists say rising inequality leads to all sorts of nasty economic problems: political discord, dampened investment, reduced trade, lower employment. Here's how S&P put it in the aptly titled, "How Increasing Income Inequality is Dampening U.S. Economic Growth, And Possible Ways to Change the Tide."

"Keynes first showed that income inequality can lead affluent households to increase savings and decrease consumption, 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."

Or, in plainer English:

Rich people save more of their income. Poorer people have to borrow to buy stuff. When that easy money dries up, crashes happen. Meanwhile, the more affluent use political influence to push policies that maintain their economic advantage, so the problem tends to grow worse.

Why does this matter?

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Because the US economy — still the world's largest — is growing more unequal. That's not good over time. In fact, S&P warns that the US is now "approaching that threshold."

So what's their suggested solution?

In a word, it comes down to education.

That's because median annual wages of a college grad ($57,770 in 2012) are more than double those of a non-grad ($27,670). That same ratio holds for net worth, too.

More broadly, S&P argues that education produces lots of other benefits for the economy, such as higher growth: "Over the next five years, if the American workforce completed just one more year of school, the resulting productivity gains could add about $525 billion, or 2.4 percent, to the level of GDP."

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But like income disparity, there's a self-reinforcing mechansim is in place here, too: college graduation rates for lower-income students are slowing, while a higher percentage of wealthier students is attending college and, in turn, getting the skills, and jobs, that pay more.

And the whole depressing cycle rolls ever forward.

No, the gutting of America's middle will not be an easy, or quick, problem to fix.

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Thomas Mucha

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