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S&P Acknowledges Role of Income Inequality in Downturn

RP Siegel | Friday August 8th, 2014 | 3 Comments

BalanceThere has been a well-documented trend over the past 50 years to tweak the rules of the economic game to favor those at the top. The movement has been called “trickle-down economics,” among other things. Though it was mostly perpetuated by greed, it was consistently justified as being good medicine for the economy, even if it tasted bitter to those at the bottom, or even to those in the middle who found themselves drifting in that direction.

Now, a new report, issued by mainstream economic authority Standard & Poor’s (S&P), acknowledges, perhaps for the first time, that the extreme level of income inequality in this country is actually hurting the economy. In fact, the revered oracle has actually cut its forecast for economic growth (from 2.8 percent to 2.5 percent) based on these conditions.

The rationale behind this is simple. Consumer spending is responsible for 70 percent of GDP. Poor people don’t have much to spend, but they tend to spend every bit of it. Wealthy people tend to spend a smaller proportion of their incomes. So, as more and more wealth is concentrated in the hands of the very rich, less of it is circulated through the economy. That’s exactly what has been happening. Between 2009-2010, for example, income growth of the top 1 percent was 15 times higher than everyone else. Setting policy that gives those at the bottom more, by adjusting tax rates or increasing wages, will provide more direct benefit to the overall economy than piling ever more into the bulging bank accounts of those at the top.

This has been the subject of some controversy, with those in the investment community claiming that investment, not consumer spending, is the major driver. That idea is now being debunked by S&P, which acknowledges 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.”

Henry Ford understood this logic back in 1914, when he more than doubled the wages of his workers, while shortening the work day from nine to eight hours. Conservatives, even today, would be aghast at such a move, though it proved to be successful. Ford understood that if his workers could afford to buy cars they would, and they did, by the thousands.

This is all very interesting, you say, but what does it have to do with building a more sustainable economy? Actually, it has quite a bit of relevance. For one thing, people who are totally strapped for cash tend to shop for price first. They tend to look at greener or healthier items as a luxury. This phenomenon is a major driver behind the obesity epidemic in this country. Fast food, which is high in fat and sugar, is cheaper than healthy food and it’s all many families can afford. Likewise, low-income people hold on to old cars, even if they are gas-guzzlers, and buy the cheaper incandescent light bulbs even if they use a lot more energy. As long as there is a market for these unhealthy and inefficient items, companies will continue to produce them.

Then there is the Walmart phenomenon. Walmart came into being and then became the largest company in the world by taking advantage of this dynamic. People on dwindling incomes have no choice but to shop where prices are lowest, even if that means buying goods that are almost exclusively made overseas by peasants who are paid pennies on the dollar compared to the American worker. This has decimated the American workforce, closing U.S. factories and driving a positive feedback loop for the continuing downward spiral of the middle class, while boosting profits and stock options for those at the top. Millions of tons of goods are now being shipped from thousands of miles away, produced in countries with little in the way of social or environmental protections.

This all goes to say that if working class people earn a little more, they could make different choices, better choices that would support healthier families, a healthier economy and a healthier society.

Then there is the political dimension. Sadly, our political process has become corrupted by the influence of campaign contributions which candidates need to get their message heard on mainstream media. Today, a small handful of ultra-wealthy individuals are driving an extreme self-serving agenda that they are powering with millions in contributions. Their agenda tends to support the status quo, which was built in a day when profit was the primary factor, and businesses were not asked to take responsibility for the impacts of their actions. Recent laws and Supreme Court decisions have allowed this to continue despite its corrosive impact on our society. These large donations could be countered by small contributions by a large number of people representing the broader society, but many people can’t afford to give even a dollar.

Finally, there is education. The S&P report says that the economy could grow by additional 0.5 percent annually if the average student stayed in school even one more year. But with so many families at or near the poverty line, many young people drop out of school to go to work, in order to help their families meet expenses. This too impacts sustainability, as people who are educated are more likely to appreciate the longer-term perspective entailed by the sustainability journey.

The S&P report is encouraging news that even mainstream economic organizations are beginning to see how things fit together.

Image credit: Michael Coglan: Flickr Creative Commons

RP Siegel, PE, is an author, inventor and consultant. He has written for numerous publications ranging from Huffington Post to Mechanical Engineering. He and Roger Saillant co-wrote the successful eco-thriller Vapor Trails. RP, who is a regular contributor to Triple Pundit and Justmeans, sees it as his mission to help articulate and clarify the problems and challenges confronting our planet at this time, as well as the steadily emerging list of proposed solutions. His uniquely combined engineering and humanities background help to bring both global perspective and analytical detail to bear on the questions at hand.

Follow RP Siegel on Twitter.

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  • TedKidd

    Nicely written Bob

  • yefim goldin

    very primitive. if we compare all factors in act now and 50 years ago like structure of consumed goods, cost of investment , eco spending , education, expanded market, globalization everything is different . You could be a ” The Beatles ” and record only 200.000 copies and earn $1.5 mill or could Justin Bieber and have trough all possible media and distribution options ability to find 200 mill consumers and make $100 mill not even close in his talent to John and Paul

  • andrew

    Let’s put it this way: The Walton kids have more wealth than the bottom 10% – or the bottom 33 MILLION Americans. I promise you, the thirty or so people in the Walton families do NOT spend a million times more on groceries… and if they did they certainly wouldn’t spend a million times more going out to eat. Even considering the doubtless nicer things they buy, they don’t spend a million times more on transportation, housing, or clothes.
    In short, massive wealth concentrated in the hands of a few means the money is removed from the economy as certain as if it had been burned.

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