Make us your home page
Instagram

Why S&P report on income inequality hurting economy breaks new ground

Is income inequality holding back the United States economy? A new report argues that it is, that an unequal distribution in incomes is making it harder for the nation to recover from the recession and achieve the kind of growth that was commonplace in decades past.

The report is interesting not because it offers some novel analytical approach or crunches previously unknown data. Rather, it has to do with who produced it, which says a lot about how the discussion over inequality is evolving.

Economists at Standard & Poor's Ratings Services are the authors of the straightforwardly titled "How Increasing Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide." The fact that S&P, an apolitical organization that aims to produce reliable research for bond investors and others, is raising alarms about the risks that emerge from income inequality is a small, but important sign of how a debate that has been largely confined to the academic world and left-of-center political circles is becoming more mainstream.

"Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth," the S&P researchers write, "at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population."

To understand why this matters, you have to know a little bit about the many tribes within the world of economics.

There are the academic economists who study the forces shaping the modern economy. Their work is rigorous, but often obscure. Then there are the economists in what can broadly be called the business forecasting community. They wear nicer suits than the academics, and are better at offering a glib, confident analysis of the latest jobs numbers delivered on CNBC or in front of a room full of executives who are their clients. They work for ratings firms like S&P and the economics research departments of all the big banks.

Rather than trying to produce cutting-edge theory, they try to do the practical work of explaining to clients — companies trying to forecast future demand, investors trying to allocate assets — how the economy is likely to evolve.

In that sense, the new S&P report is a sign of how worries that income inequality is a factor behind subpar economic growth over the past five years (and really the past 15 years) is going from an argument made mainly by left-of-center economists to something that even the tribe of business forecasters needs to wrestle with.

I asked Beth Ann Bovino, the chief U.S. economist at S&P, why she and her colleagues took on this topic. "What disturbs me about this recovery, which has been the weakest in 50 years, is how feeble it has been, and we've been asking what are the reasons behind it," she said. "One of the reasons that could explain this pace of very slow growth is higher income inequality. And that also might also explain what happened that led up to the great recession."

Because the affluent tend to save more of what they earn rather than spend it, as more and more of the nation's income goes to people at the top income brackets, there isn't enough demand for goods and services to maintain strong growth, the report argues. High inequality can feed on itself, as the wealthy use their resources to influence the political system toward policies that help maintain that advantage, like low tax rates on high incomes and low estate taxes, and underinvestment in education and infrastructure.

The S&P researchers emphasize the usefulness of investing in education. They find that if the average amount of education of the nation's workforce were to increase at the same rate it did during the middle of the 20th century, over the next five years annual GDP would be 2.4 percent higher.

The S&P report is a sign of where things are shifting. Anyone who wants to explain why the U.S. economy is evolving the way it is needs to at least wrestle with the implications of a more unequal society for the economy as a whole.

Why S&P report on income inequality hurting economy breaks new ground 08/08/14 [Last modified: Friday, August 8, 2014 4:17pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, New York Times.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Founder of Tampa home sharing platform questions Airbnb, NAACP partnership

    Business

    TAMPA — A Tampa rival to Airbnb, which was launched because of discrimination complaints on the dominant home sharing platform, has concerns about the new partnership between Airbnb and NAACP announced this week.

    Rohan Gilkes poses for a portrait at his home and business headquarters in Tampa. 

Innclusive, a Tampa-based start-up, is a home-sharing platform that focuses on providing a positive traveling experience for minorities. [CHARLIE KAIJO | Times]
  2. Appointments at Port Tampa Bay and Tampa General Medical Group highlight this week's Tampa Bay business Movers & Shakers

    Business

    Government

    Port Tampa Bay announced that Jamal Sowell has been named director of special projects. Sowell, a former member of the U.S.Marine Corps, will support internal, external and special projects, assist the executive team with management oversight and serve as a liaison on a variety of port …

    Port Tampa Bay announced this week that Jamal Sowell has been named director of special projects. [Handout photo]
  3. Drones restrictions coming at Tampa Bay area airports

    Airlines

    Starting Sept. 1, Tampa International Airport officials will be enforcing new height restrictions for drones and other unmanned aircraft systems, according to a press release.

    In this February 2017 file photo, a drone flies in Hanworth Park in west London. Starting Sept. 1, Tampa International Airport officials will be enforcing new height restrictions for drones and other unmanned aircraft systems,
[John Stillwell/PA via AP, File]
  4. Gov. Scott backs off boycott of companies doing business in Venezuela

    State Roundup

    TALLAHASSEE — Gov. Rick Scott will ask the Florida Cabinet next month to prohibit the state's investment managers from doing something they already do not do: invest in companies or securities owned or controlled by the Venezuelan government.

    Florida Governor Rick Scott interacts with people as he holds a Venezuelan Freedom Rally at El Arepazo 2 restaurant on July 10 in Miami. [Joe Raedle | Getty Images]
  5. Superior Uniform Group reports $65.6 million in sales for second quarter

    Corporate

    SEMINOLE — Superior Uniform Group Inc. reported sales of $65.6 million in net sales for the second quarter, up a percentage point from the same quarter last year, the Seminole-based company reported Thursday.

    Superior Uniform Group Inc. saw a sales increase for the second quarter, the company reported Thursday. Pictured is Michael Benstock, CEO. | [Courtesy of Superior Uniform Group]