TIME Economy

S&P: Income Inequality Is Damaging the Economy

Improved education will have clear benefits for GDP growth, S&P says

Rating agency Standard & Poor’s has become one more emphatic voice blaming the halting post-recession recovery on high income inequality in the United States, as an S&P report out Tuesday claims that unequal wealth distribution is dampening the country’s economic growth.

Rising levels of income inequality in the U.S. is a drag on economic growth, and was a factor that contributed to S&P lowering its growth rating over the next decade from 2.5% to 2.8%, the report said. 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.

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.

The S&P recommended greater education levels as a key means to improve productivity, saying that if the American workforce completed just one more year of school over the next five years, productivity gains could add over $500 billion, or 2.4% to the level of GDP relative to the baseline.

S&P is an American financial research and ratings firm known for its stock market indices, including the S&P 500 and credit ratings on the debt of public and private corporations, as well as nations’ debts.

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