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Neither compassion nor crypto-socialism has spurred Standard & Poor’s to conclude after new research that the growing U.S. wealth gap is problematic. It's all about the ever-more extreme gap's impact on growth. The rating agency says wealth inequality has slowed the economic recovery from the Great Recession. While the top economic tier has done quite well since 2009, move down a few rungs and it's been a different story. As Josh Boak reports:
The widening gap between the wealthiest Americans and everyone else has made the economy more prone to boom-bust cycles and slowed the 5-year-old recovery from the recession.

Economic disparities appear to be reaching extremes that "need to be watched because they're damaging to growth," said Beth Ann Bovino, chief U.S. economist at S&P.

Because of the wealth gap, the rating agency said Tuesday that it has lowered its long-range economic outlook from the 2.8 percent rate of growth it forecast five years ago to 2.5 percent.

Although wealth and income are often mistakenly used interchangeably, as if they described the same thing, the income gap certainly contributes to the wealth gap. In 2012, the top 1 percent of earners averaged $1.3 million, the most recent year for which we have good data. For the top 0.01 percent, average annual income is $30.8 million. For those in that top 0.01 percent, inflation-adjusted average earnings have jumped sevenfold since 1913. For the bottom 90 percent, since 1917, the increase in average earnings has been just threefold. In the past 13 years, growth in earnings for the bottom 90 percent has fallen.

The S&P study says the solution is to improve the nation's educational system. If the average worker had completed just one additional year of education, S&P concludes, it would add $105 billion to the economy each year for the next five years, about half a percentage point in annual gross domestic product. But how would those billions be split up? Even though more education generally leads to higher individual wages, the failure of workers over the past 35 years to capture more than a sliver of the financial benefits of increased productivity shows that S&P has missed the boat.

There's more below the fold.

Not surprisingly, S&P rejects the idea of raising taxes on the wealthy despite the fact a hefty proportion of the inequality gap is a product of more than three decades of repeatedly cutting taxes for those on top. Nowhere does it explain exactly where the tax revenue to provide this additional education would come from. Obviously, not from a tax on capital as proposed by Thomas Piketty in his book, Capital in the Twenty-First Century.

Writing an op-ed for Bloomberg, Edward D. Kleinbard—now a professor at the University of Southern California's Gould School of Law and a Fellow at The Century Foundation and formerly chief of staff of the U.S. Congress’s non-partisan Joint Committee on Taxation—takes a stronger stance than the S&P study:

"Defenders of the status quo have no answer to why the U.S. is an outlier in the rate at which income inequality has grown. There is something about the U.S. that is unique, and it's not its markets, which are largely indistinguishable from those of other countries. No, it's the comparatively parsimonious investments the U.S. makes in its citizens. Americans simply do not have equal opportunities. This is more than an ethical or social issue: Underinvestment in human capital leads to lower productivity, which is to say, lower national income. Comparative data show that the U.S. offers less social and economic mobility than do many of its peer countries—a startling rebuke to the mythology of America as the land of opportunity."
Additional investment in education is certainly one of the key areas of "human capital" needing attention. But, as we have learned the hard way, just getting more schooling or job training will not reduce the income and wealth gaps if done absent adjustments, reforms or upending of other policies, especially tax policies. While even the S&P is now willing to speak the word "inequality," it's proving itself a better describer than prescriber, far away from offering solutions that make much, if any, difference.

Originally posted to Meteor Blades on Tue Aug 05, 2014 at 12:32 PM PDT.

Also republished by Daily Kos.

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