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, 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.
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.
Policymakers should take care, however, to avoid policies and practices that are either too heavy handed or foster an unchecked widening of the wealth gap. Extreme approaches on either side would stunt GDP growth and lead to shorter, more fragile expansionary periods.
That said [a consideration of the pros and cons of various approaches], 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. 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. Further, policies that foster job-rich recoveries may help make growth more sustainable, especially given that rising unemployment correlates with rising income concentration. Additionally, effective investments in health and education promote durable growth and equity, strengthening the labor force’s capacity to cope with new technologies.
The challenge now is to find a path toward more sustainable growth, an essential part of which, in our view, is pulling more Americans out of poverty and bolstering the purchasing power of the middle class. A rising tide lifts all boats…but a lifeboat carrying a few, surrounded by many treading water, risks capsizing.
Seems to me that the kinds of redistributive taxes cautiously advocated for by S&P’s economists, if used to fund infrastructure repair and development as well as health and education initiatives, would support a job-rich recovery and provide incentive to work and spend instead of disincentives to work (for the poor) and spend (for the rich).
Of course, there really is what Nick Hanauer had to say. Doing what’s right for themselves, spending instead of hoarding, resulting in higher returns in the long run, won’t just fatten investment portfolios but might be necessary to keep heads off pikes.