We stand up for a Massachusetts where everyone gets a fair shot, does and pays their fair share, and plays by the same rules.
By Jameson Moore
Standard and Poor’s (the largest and most prominent investment research firm and producers of the S&P 500 stock index) released on Aug. 5 claiming that extreme levels of income inequality is dampening GDP growth in the United States.
This is notable not because it is a new conclusion, but rather because it is the first time that a major business forecasting firm has highlighted income inequality as a major problem for the United States economy.
The report calls for increased and sustained funding in education as one of the safest and most effective ways to reduce inequality.
The report notes that GDP growth has, over the last five years, been lower than projected and draws on a wealth of data to conclude that income inequality is to blame, and could have even more disastrous effects on the U.S. economy in the future. The chief U.S. economist at S&P, when talking to the New York Times, even suggested that very high levels of income inequality may have contributed to the 2008 stock market crash and the slow recovery afterward.
The report also indicates income distribution is the single most important factor in sustained economic growth, beating out trade openness, political institutions, and external debt as the factor most correlated with sustained positive growth.
Essentially, the report is echoing the recent chorus of economic voices on inequality: inequality hurts the economy, while equality helps it.
Perhaps the most important parts of the report are its findings related to education and its impact on the economy. We’ve already covered how important education is for financial success: the average worker with a bachelor’s degree earns 98% more than a worker with only a high school diploma. The S&P report also shows how U.S. education is gradually falling behind that of other developed countries in terms of the percentage of young people with tertiary (college) degrees. While countries like Canada, Japan, Korea, and the U.K. are quickly increasing in degree attainment between generations, young Americans are only earning degrees at a slightly higher rate than previous generations:
There is hope, though. S&P estimates that if the American workforce were to add another year of education on average, potential GDP would increase by $525 billion over five years, a 2.4% increase.
These gains would, in the words of the report, “support higher incomes for all and help government budgets.”
In addition to low-cost measures like financial aid reform and simplification, the S&P report specifically points out universal early education as a larger-scale project that could jump-start the American education system, and economy in turn, noting:
“The Brookings Institution has found that a high-quality universal preschool program, costing about $59 billion, could add $2 trillion in annual U.S. GDP by 2080. This additional growth would generate enough federal revenue to easily cover its costs several times over.”
The report argues overall that investment in education will increase short-term growth, which will then help reduce inequality; in turn, the more efficient distribution of income will help sustain growth over long periods of time. It concludes with a call to work towards sustainable income distribution:
“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.”
Hopefully, this report marks a shift in how the business world perceives inequality: if this issue, once dismissed as a tired progressive talking point, catches on among business and political leaders, positive change will become easier than ever.