S&P: Income inequality slowing economy

The growing gap between the nation’s richest and the poor is actually slowing down the economic recovery, according to new research from Standard & Poor’s.

The rating agency said Tuesday that it had trimmed its economic outlook for the U.S. in part due to the record discrepancy between the wealthy and the poor. Five years ago, the rater anticipated 2.8 percent economic growth, and has now trimmed it to 2.5 percent.

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“At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold,” the agency warned.

Tackling economic inequality has become a common refrain for Democrats and the White House ahead of the midterm election. But S&P cautioned against extreme policy steps to rectify the situation. Changes to the tax code to close the gap between the rich and the poor could have “do more damage than good” by reducing incentive to work and hire, the agency warned. However, S&P did say that changes in federal tax policy over the years has exacerbated inequality, as tax rates for top earners have fallen faster than rates for average Americans.

Rather, S&P said improved access to education was key to U.S. economic growth, estimating that the economy could climb by 0.5 percent more a year if the average American spent one more year in school.

The study also warned that increasing inequality could contribute to boom-and-bust cycles in the economy, as the nation’s poorer rely more and more on increased debt loads to keep up their spending habits.

From 2009 to 2010, the Congressional Budget Office found that after-tax average income for the top one percent climbed 15.1 percent, compared to less than one percent for the bottom 90 percent of Americans. And when real mean household income grew 0.2 percent from 2011 to 2012, the gains were found exclusively in the top fifth of all American earners.