Inequality Is Damaging the U.S. Economy, S&P Study Says

U.S. income inequality is harming U.S. economic growth by excluding large swaths of the population from its cumulative benefits, Standard & Poor’s Ratings Services says in a new report.

Tackling an unusual subject for a credit-rating firm, S&P combines a review of recent studies on inequality with its own analysis to find that the gap in earnings between rich and poor can have lasting economic consequences.

“The current level of income inequality in the U.S. is dampening GDP growth, 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,” the firm said in the report published Tuesday.

Tracing some familiar themes for those studying the issue of inequality, S&P highlights a wide education gap as one fundamental underlying cause of income disparities.

“The findings suggest that last generation’s inequalities will extend into the next generation, with diminished opportunities for upward social mobility,” the report says.

S&P does not outline specific policy measures to address inequality. But it does offer some broad outlines of the types of steps that should be taken to mitigate the problem, which gained attention after the deep 2007-2009 recession that put nearly 9 million Americans out of work.

“Some degree of rebalancing—along with spending in the areas of education, health care, and infrastructure, for example—could help bring under control an income gap that, at its current level, threatens the stability of an economy still struggling to recover,” S&P concludes. “This could take the form of reallocating fiscal resources toward those with a greater propensity to spend, or toward badly needed public resources like roads, ports, and transit.”

Notes on the chart: The study defines “market income” as labor income including wages and salaries, plus employer-paid benefits. The Gini coefficient is a widely used measure of inequality ranging between 0 and 1, with 0 representing perfect equality.

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 PEDRO NICOLACI DA COSTA