Standard & Poor’s: Runaway Inequality Dampens GDP Growth, Leads to Boom/Bust Cycles and Discourages Trade, Investment and Hiring

Inequality Also Dampens Social Mobility, Increases Political Pressure and Produces a Less Competitive Workforce

Standard & Poor’s released a report on inequality today, concluding:

Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring. Keynes first showed that income inequality can lead affluent households (Americans included) to increase savings and decrease consumption (1), while those with less means increase consumer borrowing to sustain consumption…until those options run out. When these imbalances can no longer be sustained, we see a boom/bust cycle such as the one that culminated in the Great Recession (2).

Aside from the extreme economic swings, such income imbalances tend to dampen social mobility and produce a less-educated workforce that can’t compete in a changing global economy. This diminishes future income prospects and potential long-term growth, becoming entrenched as political repercussions extend the problems.

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.

S&P joins many others in concluding that runaway inequality hurts the economy, including:

  • Former U.S. Secretary of Labor and UC Berkeley professor Robert Reich
  • Global economy and development division director at Brookings and former economy minister for Turkey, Kemal Dervi
  • Societe Generale investment strategist and former economist for the Bank of England, Albert Edwards
  • Michael Niemira, chief economist at the International Council of Shopping Centers
  • Former executive director of the Joint Economic Committee of Congress, senior policy analyst in the White House Office of Policy Development, and deputy assistant secretary for economic policy at the Treasury Department, Bruce Bartlett
  • Deputy Division Chief of the Modeling Unit in the Research Department of the IMF, Michael Kumhof

Even the father of free market economics – Adam Smith – didn’t believe that inequality should be a taboo subject.

Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:

Indeed, extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire . And inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America. (More stunning facts.)

Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality.

And yet the powers-that-be in Washington and Wall Street are accelerating the redistribution of wealth from the lower, middle and more modest members of the upper classes to the super-elite.

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  • cettel

    Actually, Marriner S. Eccles ws the first person, in 1932, to present the argument you describe; Adam Smith did not. Rex Tugwell then invited Eccles to Washington and Eccles became Fed Chairman in 1934. He invented the New Deal, but until 1938 FDR was nervous about it because traditional economists (following Adam Smith and others) rejected the theory.
    Empirical economics has by now established overwhelming evidence that Eccles’s theory is true, but the aristocracy control the economics profession, so the old theory (going back actually to the physiocrats in the 1760s) continues today, as if theory doesn’t need to be consistent with even overwhelming empirical evidence.

  • KristiB

    The US Federal Reserve is at the root of all of this. Owned and
    controlled by foreign, psychopathic interests. Our country was allowed
    to be hijacked a century ago and our US military is being used and
    abused solely for these greedy blood thirsty elites.
    They care absolutely nothing about humanityor this planet which should be obvious to
    everybody by now. Ironically today the USA now resembles Nazi Germany
    far more than the Republic of America. This cabal owns and controls all
    aspects of our government, banks and wall street, media, schools, corporations,
    utilities, etc. They are the true axis of evil and are not to ever be
    trusted again! They are war mongers who incite these catastrophic events for their
    own profit and perverse greed for power and sick need of inflicting pain on innocent
    poor people worldwide. Look up the history of the Bush family fortune
    which directly ties to Hitler and the Holocaust. Americans need to wake
    up, grown up and remember who we are as AMERICANS, that our Founding Fathers loved us enough to protect us via the Declaration of Independence, not this feeble US Citizen that we’ve been conditioned to become in order to be exploited as a commodity for others. Do your own research starting with the history of the
    US Federal Reserve which is the biggest fraud in American history. There
    are mass protests being done all over the world by people that are
    informed and refuse to go along to get along with the diabolical plan
    the cabal has in mind for us called the New World Order. Any public
    figure not trying to inform you of this reality is either in on it and
    getting well paid to keep it going, or clueless and therefore worthless.
    Red, blue or purple its all the same! Please take heed of my advice regarding researching the above as
    knowledge is power for the masses and ignorance power for the masters
    which is exactly how they see us, as tax and debt slaves! United we stand, divided we fall! “When people fear their Government you have tyranny, When Government fears ‘We The People’ you have LIBERTY!”