How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide

Source: Standard & Poor’s, Economic Research, August 5, 2014

Overview
∙ At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold.
∙ Standard & Poor’s sees extreme income inequality as a drag on long-run economic growth. We’ve reduced our 10-year U.S. growth forecast to a 2.5% rate. We expected 2.8% five years ago.
∙ With wages of a college graduate double that of a high school graduate, increasing educational attainment is an effective way to bring income inequality back to healthy levels.
∙ It also helps the U.S economy. Over the next five years, if the American workforce completed just one more year of school, the resulting productivity gains could add about $525 billion, or 2.4%, to the level of GDP, relative to the baseline.
∙ A cautious approach to reducing inequality would benefit the economy, but extreme policy measures could backfire.