A Risk Of Capsizing

A new report by economists from Standard & Poor's echoes others before it in saying that inequality is hurting U.S. economic growth.

An Important New Report Argues Inequality Is Hurting U.S. Economic Growth, And It Isn’t The First

There are two refrains that we often repeat when describing our philosophy for economic growth: we need an economy that works for everyone, not just the wealthy few; and we need an economy that grows from the middle-out, not the top down. At the heart of both of those beliefs is the demand that our leaders address the growing economic inequality in this country that leaves the richest with an ever-growing share of our nation’s wealth, while squeezing the vast middle class. This inequality doesn’t actually hurt some while helping others — it weakens our overall economy and as a result hurts everyone.

A new report issued by economists at Standard & Poor’s Ratings Services agrees with these dire impacts of inequality. The report, entitled “How Increasing Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide,” concludes that the widening gap between the wealthiest and everyone else is a key reason why our economic recovery is the weakest in the last 50 years. Pushing back against the oft-repeated and dead-wrong trickle-down argument on the right that a rising tide lifts all boats, S&P responds, “A lifeboat carrying a few, surrounded by many treading water, risks capsizing.”

This report is important because it comes from the business forecasting community, focused not on advancing new academic theories but on predicting for clients how the economy is working. It is far from the only voice, however, making the argument that income inequality is hurting economic growth. Here are a few other recent examples:

  • The International Monetary Fund (IMF): In a report issued this February, IMF economists make the argument that continuing to ignore income inequality will harm economic growth. “Lower net inequality is robustly correlated with faster and more durable growth,” they write. It is “a mistake to focus on growth and let inequality take care of itself.”
  • Billionaire Entrepreneur Nick Hanauer: Hanauer, who was the first nonfamily investor in Amazon.com, wrote the most popular article in Politico Magazine history, called “The Pitchforks Are Coming… For Us Plutocrats.” In the piece, he points out inequality doesn’t just hurt the economy, it creates political instability as well: “There is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out,” writes Hanauer. “You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None.”
  • Nobel-Prize Winning Economist Joseph Stiglitz: Stiglitz wrote a whole book on this topic, aptly named “The Price of Inequality: How Today’s Divided Society Endangers Our Future.” One of several reasons he gives for why increasing inequality hurts growth is that it reduces people’s trust in the system. “People are not machines,” Stiglitz writes. “If they feel that they are being treated unfairly, it can be difficult to motivate them.”
  • Economist and Best-Selling Author Thomas Piketty: In his 2014 best-seller Capital in the 21st Century, Piketty explains that wealth concentrating in the hands of a few at the top is not an accident in capitalism, but a feature. Governments need to intervene in order to prevent that concentration from weakening the economy and causing political instability.
  • The Federal Reserve Bank. Sarah Bloom Raskin, who resigned from the Federal Reserve Board of Governors in March to become Deputy Treasury Secretary, believes inequality was the cause of the crisis and the source of the slow recovery: “because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker.”

BOTTOM LINE: The new S&P report that argues income inequality is hurting U.S. economic growth is an important reminder that we need economic policies that make sure everyone pays their fair share to help the economy grow from the middle-out. And it’s far from the only source to make that case: A stronger middle class means more workers, more consumers, and a better economic climate for everyone.

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