the Future of Change

The latest salvo in the inequality wars comes from an unlikely source: the credit rating agency Standard and Poor’s.  In a recent report, S&P’s researchers warn that economic inequality in the United States threatens to dampen economic growth.  Some of their key findings include the following:

• At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold.

• Standard & Poor’s sees extreme income inequality as a drag on long-run economic growth. We’ve reduced our 10-year U.S. growth forecast to a 2.5% rate. We expected 2.8% five years ago.

• With wages of a college graduate double that of a high school graduate, increasing educational attainment is an effective way to bring income inequality back to healthy levels.

• It also helps the U.S economy. 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%, to the level of GDP, relative to the baseline.

They also express concern that “extreme policy measures,” like dramatic increases in taxes on the wealthy, could “backfire” and not produce favorable outcomes.

Others have drawn this connection between economic growth and economic inequality.  John Kenneth Galbraith saw this connection, and considered it one of the chief causes of the Great Depression.  Why inequality is troublesome and could lead to economic recession or worse is that wealthy individuals tend to spend less of their wealth on consumer goods.  When a greater percentage of income is absorbed by a smaller number of the wealthy, less of that money goes back into the economy in ways that spur consumption of consumer goods.   Conversely, when lower- and middle-income people have more income to spend–like through such mechanisms as increases in the minimum wage–they tend to spend more of their income and wealth on consumer goods, strengthening consumption, demand and economic activity.

Perhaps the Standard and Poor’s report will wake up some who, to date, have been unwilling to listen to liberal, anti-inequality economists like Paul Krugman and Thomas Piketty.  When even your friends turn on you, it might be time to rethink long-held beliefs.