November 1, 2018
US Inequality is Feeding on Itself
The fact that the richest Americans are grabbing such a big slice of the pie isn’t exactly breaking news.
What is news is that Wall Street is getting nervous about it. Moody’s Investors Service, a private watchdog for the federal government’s fiscal soundness, has concluded that inequality has reached the point that it threatens a system already being strained by increases in the federal debt. But Moody’s also noted that inequality is contributing to slower economic growth, which further aggravates inequality.
The high level of U.S. inequality today “sets us apart” from Canada, Australia, and several European countries, Moody’s said in an October report, “Widening Income Inequality Will Weigh on U.S. Credit Profile.”
Moody’s central concern is how inequality will affect the federal budget. When the economy slows in periods of high inequality, there are more lower-income households requiring support from costly programs like Medicaid. Federal tax revenues also decline during any downturn, leaving less money to pay for these means-tested programs and for social insurance programs like Social Security and Medicare.
The firm’s second concern is that inequality is a drag on the economy. When the middle-class is squeezed, for example, they have less money to buy consumer goods. And when the economy slows down, inequality can increase, as it did in the years after the 2008-2009 recession.
This has played out in a widening wealth gap, Moody’s said. The typical lower and middle-income worker’s net worth – assets minus liabilities – has shrunk since the recession, while net worth rose sharply for the people at the top.
One big reason for widening inequality is the stock market. Even though the market declined sharply this month, the post-recession bull market has beefed up investment portfolios – but only for the 50 percent of Americans who own company shares or stock mutual funds.
A second contribution to a widening wealth gap, post-recession, has been housing. A home is often the most valuable asset people own, so the steep drop in house prices and the spike in foreclosures were big setbacks for people who aspired to build wealth through homeownership. …Learn More