Bastion of Capitalism Issues Report on Income Inequality

Recently there has been a lot of discussion of income inequality, with the work of Thomas Piketty drawing a great deal of attention. Conservatives have derided this research, labeling Piketty and other economists like Paul Krugman pointy-headed liberal Marxist pseudo-voodoo-economists.

Well, another organization has entered the fray with its study on income inequality, and it backs up Piketty's conclusions:

Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring. Keynes first showed that income inequality can lead affluent households (Americans included) to increase savings and decrease consumption (1), while those with less means increase consumer borrowing to sustain consumption…until those options run out. When these imbalances can no longer be sustained, we see a boom/bust cycle such as the one that culminated in the Great Recession (2).

Aside from the extreme economic swings, such income imbalances tend to dampen social mobility and produce a less-educated workforce that can't compete in a changing global economy. This diminishes future income prospects and potential long-term growth, becoming entrenched as political repercussions extend the problems.

Which hyper-liberal organization issued this report? Why, none other than Standard & Poor, the bastion of capitalism that provides financial market data and bond ratings, and issues the S&P 500 and Dow Jones Industrial Average.

Why does S&P say that income inequality is bad?

To be sure, it seems counterintuitive that inequality is associated with less-sustainable growth, since some inequality, by providing incentives to effort and entrepreneurship, may be essential to a functioning market economy. But beyond the risk that inequality may heighten the susceptibility of an economy to booms and busts, it may also spur political instability--thus discouraging investment. Inequality may make it harder for governments to enact policies to prevent--or soften--shocks, such as raising taxes or cutting public spending to avoid a debt crisis. The affluent may exercise disproportionate influence on the political process, or the needs of the less affluent may grow so severe as to make additional cuts to fiscal stabilizers that operate automatically in a downturn politically unviable.

The S&P report doesn't recommend drastically increasing taxes on the wealthy, though it notes that policies like George W. Bush's capital gains and dividend tax cuts have exacerbated inequality. It concludes:

[S]ome degree of rebalancing--along with spending in the areas of education, health care, and infrastructure, for example--could help bring under control an income gap that, at its current level, threatens the stability of an economy still struggling to recover. This could take the form of reallocating fiscal resources toward those with a greater propensity to spend, or toward badly needed public resources like roads, ports, and transit. Further, policies that foster job-rich recoveries may help make growth more sustainable, especially given that rising unemployment correlates with rising income concentration. Additionally, effective investments in health and education promote durable growth and equity, strengthening the labor force's capacity to cope with new technologies.

This is the exactly the policy prescription that Barack Obama has been pushing since 2009, which the Republicans have fought tooth and nail. Not because they really believed it was a bad idea, but because they knew it would work and they could not abide giving the president any kind of victory, even if it meant hurting the country and the people they had sworn to serve.