S&P Report Argues that Inequality Hurts the Economy, but the Media Is only Picking Up Part of the Story

In case you, missed it…

The recent report by Standard and Poor’s (S&P), How Income Inequality is Dampening U.S. Economic Growth, is finally bringing the business community into a conversation about the adverse effects of rising inequality on our economy. The report argued that the current level of income inequality in the U.S. is impeding economic growth and it announced that S&P was reducing its 10-year U.S. growth forecast as a result.

The good news: the report was widely covered by the business media (e.g. Wall Street Journal, Fortune, CBS MoneyWatch).  The bad news:  They only picked up part of the story.
Media coverage honed in on the report’s primary remedy to inequality—namely, an investment in education attainment.  But what the media missed was equally important.  The report talks about the need to focus on pulling more people out of poverty and expanding the purchasing power of the middle class; and it discusses the pros and cons of several solutions, such as raising the minimum wage (a recent IMF recommendation).  

On taxes, media coverage focused on S&P’s warning against using the tax code to try to narrow the wealth gap. But what the report actually said was more nuanced.  The report acknowledges that tax expenditures in the individual tax code (deductions, exclusions, preferential rates, and credits) mostly benefit the rich and it cites a recent IMF report that argues, “redistribution need not be detrimental to growth, to the degree that it involves reducing tax expenditures or loopholes that benefit the rich or as part of broader tax reforms…”  Finally, the report draws the conclusion that “redistribution can also occur when taxes finance public investment, or spending on health and education disproportionately benefits the poor…to the benefit of all.”

To make a long story short, S&P—an agency whose primary focus on producing reliable research for the financial industry gives it strong credibility among business leaders—is in alignment with equity advocates who have been arguing that growing inequality is not only contrary to American values, it’s detrimental to economic growth.  

The report even closes with a new twist on an old adage that may resonate with Equity Blog readers:  “A rising tide lifts all boats…but a lifeboat carrying a few, surrounded by many treading water, risks capsizing."

--Heather McCulloch is a PolicyLink Consultant and Manager of the Asset Funders Network/Tax Policy Project