S&P: Income Inequality and ‘Education Gap’ Hurting Economic Growth

In a new examination of rising income disparity, the ratings agency Standard & Poor's says that current inequality levels are hindering U.S. economic growth, and the firm has cut its forecast accordingly.

"Standard & Poor's sees extreme income inequality as a drag on long-run economic growth," the report says. "We've reduced our 10-year U.S. growth forecast to a 2.5 percent rate. We expected 2.8 percent five years ago."

S&P looked at data from several major institutions, citing, for example, Congressional Budget Office figures on after-tax average income. For the top 1 percent of earners, that income rose 15.1 percent from 2009 to 2010; for the bottom 90 percent, income rose by less than 1 percent, "and fell for many other income groups." One of the primary, negative consequences of high income imbalances is that they lead to "economic swings" and boom-and-bust cycles, a la the Great Recession, according to the report. But another big problem, to which S&P economists devoted much of the report, is the effect of inequality on educational achievement and, by extension, earnings potential.

“There’s a lot of arguments about how to rebalance the economy, and one of the ideas is possibly improving education status,” S&P U.S. chief economist Beth Ann Bovino told International Business Times.

Rates of educational achievement have slowed in the U.S. over the past three decades. The S&P report cites research by Harvard professors Claudia Goldin and Lawrence Katz to this effect: “In 1980, Americans age 30 years or older had 4.7 years more schooling on average than Americans in 1930 -- but Americans in 2005 had only 0.8 years more schooling on average than Americans in 1980.”

“If we were alone in the world, maybe that wouldn’t matter,” Bovino said. But, of course, the U.S. has a lot of competition in the international marketplace, and those competitors are pulling ahead with more college degrees.

For example, in 2011, about 43 percent of Americans aged 25 to 34 held a college degree. By comparison, more than 50 percent of Japanese and Canadians in the same age group had a college degree, and among South Koreans, more than 60 percent had degrees, according to Organization for Economic Cooperation and Development data.

In researching the report, Bovino said she was particularly struck by the link between college achievement and social mobility for the poorest families. “While there is a 45 percent chance that a child born into a poor family will remain [poor] as an adult, chances of staying poor drops to 16 percent if that child finishes college,” the S&P report says.

Then there’s the wage differential for college grads, to the tune of about $30,000: "Occupations that typically require postsecondary education generally paid much higher median wages ($57,770 in 2012) -- more than double those occupations that typically require a high school diploma or less ($27,670 in 2012)."

According to S&P's own calculations, if the U.S. workforce gained just one more year of education on average, U.S. GDP would grow by an additional $525 billion by 2019.

There is a precedent for such a growth level in educational attainment, Bovino noted. From 1960 to 1965, the American workforce gained one year of education. “Back in the '60s, this wouldn’t have been out of the realm, to see the pace of education picking up to those levels,” Bovino said.

To get there would likely require increased investments in college financial aid, and in K-12 education, the report states. To bring many more children into higher education, "the money needs to come from somewhere," Bovino said. "And I guess we’ll have to leave that up to policymakers.”