Aug 5 8:37 PM

Mind the gap: S&P offers sharp economic warning, dull fix

Economics-inclined news shows are all excited today, not so much by the implications of a new study, but by the juxtaposition of message and messenger:

A new analysis suggests the widening gap between rich and poor in America makes the economy more prone to damaging boom-bust cycles and is slowing the long recovery. The source of this analysis? Not a French economist, not Mother Jones or The Nation magazines, but that fixture of Wall Street, Standard & Poor’s.

Indeed, S&P’s chief U.S. economist Beth Ann Bovino says economic differences between high and low need to be watched because, as they reach extremes, “they are damaging to growth.”

The increased concentration of wealth among America’s top 1 percent has led to S&P cutting growth estimates for the U.S. economy. Standard & Poor’s now expects 2.5 percent growth over the next ten years, down from a 2.8-percent estimate five years back.

What’s all this 1 percent talk? Has S&P joined up with Occupy Wall Street rather than performing its usual roll of simply occupying Wall Street?

Nnnnnnot quite.

The S&P report is indeed concerned with the widening gap between the country’s wealthiest and poorest — or, really, between the wealthiest and everybody else. It warns that as more consumers become dependent on debt to continue spending, it exacerbates economic swings. And when the economy starts to improve, people are forced to moderate spending, slowing a recovery.

All fair, but read a little deeper. S&P’s solutions seem more in line with their heritage:

The S&P report advises against using the tax code to try to narrow the gap. Instead, it suggests that greater access to education would help ease wealth disparities.

S&P estimates the economy will grow an additional half-percent ($105 billion) if American workers just completed one more year of school.

But talking about future education and current wealth conflates income inequality with social mobility, according to Lawrence Mishel, president of the Economic Policy Institute, a Washington-based think tank.

Standard & Poor’s is “very right” to characterize the growing disparity between rich and poor as a threat to economic growth, said Mishel. But focusing on education does not address the rapid concentration of wealth on the very top rung of the socio-economic ladder. “It’s a head fake,” he said.

The wage gap between high school- and college-educated workers “has grown very little since the mid-1990s,” noted Mishel. Most of the growth in inequality “occurs among people with the same education.”

As an example, while wages among the top 0.1 percent of earners has quadrupled since 1978, according to Mishel, wages of CEOs in the financial sector are up ten fold.

“The huge pay in the financial sector is not because those people have more education,” said Mishel, it is because of the rapid expansion of that sector.

No new taxes

By contrast, S&P warns, higher taxes reduce the incentive to make more money — a Reagan-esque saw that has consistently been disproven at the macro and micro level — and cause businesses to hire fewer employees, which also goes thud when it bumps up against the data.

“There’s no evidence that higher tax rates are going to be disadvantageous to growth,” said economist Mishel. “If you were going increase all taxes by 50 percent, maybe then,” he added, “but no one is proposing that.”

“It's problematic to say that all the gains of our workforce are going to the top 1 percent, and then say that people should just work better with more education,” said economist Mike Konczal, a fellow with the Roosevelt Institute.

Wages among recent college graduates have been stagnant for ten years. Increasingly, those just out of college have to take jobs that do not require a college degree, or take unpaid internships. That does not speak well to the idea that college degrees are in demand.

At present, one-third of the workforce has a college diploma. If society somehow increased that to half, even more of those people would have to take jobs that did not require their level of education, according to Mishel. How does that improve the wage gap?

And then there’s another paradox.

S&P seems to argue that more people should go to college, but who is going to pay for that?

The cost of college is up about 500 percent since 1985, outpacing broader inflation and far outstripping wage growth for the majority of workers. At the same time, states have had to cut back on aid to higher education.

To pay for school, families have increasingly turned to loans, making student debt the fastest growing segment of a national personal debt crisis. And it is personal debt — building on decades of stagnant wages along with the more recent ballooning of student debt — which S&P itself says has exacerbated the economic volatility and slowed the recovery.

“It is a contradiction to tell people to get more education,” said EPI’s Mishel, “and then tell them to stay out of debt” without also providing robust public financing.

Otherwise, Mishel observed, “It’s a false solution.”

The Roosevelt Institute’s Konczal also wondered how S&P got from A to B. “How are today’s workers going to share in the [future] prosperity of a more educated workforce?”

In the best of possible scenarios, more education could open the door to upward social mobility, but it does not change the current and disturbing trend in wage inequality, where wealth continues to concentrate at the top of the top, while more and more workers fall further behind.

“That detachment is what's going to doom our economy more than asking the rich to pay taxes at a rate they did during the 1950s,” said Konczal.

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