EconomyNorth America

Wealth gap slowing US economic growth

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The US income gap has been worsening and now is approaching an “extreme” threshold that threatens to harm long-term economic growth, according to new analysis.

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 Great Recession, the rating agency Standard & Poor’s (S&P) reported Monday.

The rising income disparity and concentration of wealth among the top 1 percent of earners has contributed to S&P’s cutting its growth estimates for the US economy. The credit agency estimates that the economy will grow at a 2.5 percent annual pace in the next decade, down from a forecast five years ago of a 2.8 percent rate.

“Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring,” the report notes. “The current level of income inequality in the US is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.”

“What disturbs me about this recovery, which has been the weakest in 50 years, is how feeble it has been, and we’ve been asking what are the reasons behind it,” said Beth Ann Bovino, chief US economist at S&P. “From my research and some of the analysis I saw from others, when you have extreme levels of inequality, it can hurt the economy.”

America’s growing income inequality, which has become a hot button topic in recent years, has reached “spectacular” heights, French economist Thomas Piketty told CBS MoneyWatch earlier this year.

And the rich might actually be wealthier than previously thought. A recent working paper from a European Central Bank senior economist estimates that America’s top 1 percent control between 35 percent to 37 percent of wealth, rather than the 30 percent that had previously been estimated.

High social inequality can also feed on itself, as the wealthy use their resources to influence the political system toward policies that help maintain their advantage, like low tax rates on high incomes and low estate taxes, and underinvestment in education and infrastructure.

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