The idea that the rich are growing richer while the poor get poorer is an ancient one, referenced in Biblical accounts of Christ’s teachings in first-century Palestine and employed in the centuries since by poets and politicians alike.
Usually, the context is negative, as it was in both a Detroit speech by Franklin D. Roosevelt during his 1932 presidential campaign and a 1790 essay by the American lexicographer Noah Webster, who blamed the fall of ancient Rome in the year 476 on a “vast inequality of fortunes.”
More than a thousand years later, such inequality remains a challenge for world governments, particularly in the U.S., where the gap between rich and poor has widened steadily since the mid-1990s and may ultimately undermine the country’s credit rating, according to Moody’s Investors Service, which gauges the risk of both government and corporate debt.
“That disparity results in those that are at the bottom end of income distribution relying more on government programs and government spending,” William Foster, a Moody’s vice president told the Washington Examiner. Occurring in tandem with lower revenue after last year’s tax cuts, that would force the U.S. government, which has $21.6 trillion in debt already, to borrow more to meet its obligations.
Although U.S. debt, guaranteed by the Constitution, is widely regarded as one of the world’s safest investments and Moody’s awards it the firm’s top rating of AAA, that score isn’t written in stone.
Moody’s chief rival, Standard & Poor’s, cut its U.S. credit score to AA, the second-highest level, seven years ago as Congressional deadlock raised the risk that the country would default on some of its obligations. Nations with lower scores are viewed as less likely to repay their debt, so they’re typically charged more to borrow.
While lawmakers ultimately reached an agreement that prevented default in 2011, Standard & Poor’s said the political brinksmanship involved, which including using the threat of default as a bargaining chip, “highlights what we see as America’s governance and policymaking becoming less stable.”
Less stability in the country’s economy and institutions are concerns for Moody’s as well, though the more immediate risk is budgetary.
Last year’s reduction in the top corporate tax rate to 21 percent from 35 percent and increased federal spending since will widen the gap between U.S. revenue and expenditures by $1.6 trillion over the next 10 years, the Congressional Budget Office estimated in April.
Government debt, expected to reach 78 percent of the U.S. economy this year, will mushroom to 96 percent by the end of 2027, and it will become progressively more costly as interest rates climb, the group predicted.
Indeed, the Federal Reserve’s monetary policy committee has raised its benchmark rate three times this year, reaching a range of 2 percent to 2.25 percent, and economists expect another increase before the end of the year — a trend that prompted President Trump to observe last week that the central bank had “gone crazy.”
In Washington, higher borrowing costs are likely to make spending on social safety nets less palatable politically even as demand for government assistance increases.
Retiring House Speaker Paul Ryan, for instance, has long advocated reducing expenditures on so-called entitlement programs like Social Security, but failed to overcome opposition from the Senate and the White House.
So for now, “the result of wealth inequality is probably increased government spending to support those that need these government programs to supplement their household incomes at a time when it’s politically unlikely that there will be offsetting revenue rises through tax increases,” Foster explained.
Quantifying the longer-term effects of inequality is difficult, given the fluidity of U.S. policy and the country’s status as the world’s largest economy. Policymakers have a window of at least five years, if not more, to identify solutions, Moody’s estimates.
“There’s a long fuse on that process,” Foster said. The U.S. has a “very resilient economy that is dynamic, that has tremendous innovation and is extremely diversified,” he said, “so that contributes to a strong basis for growth moving forward.”
A less direct consequence of widening inequality may be increasing political partisanship. The wealth gap in the U.S. was a pivotal issue in the 2016 presidential election, one that President Trump promised to address.
His policies over the past two years have succeeded, the White House says, by reducing taxes and regulation to let businesses add more workers. While the jobless rate has sunk to a 49-year low of 3.7 percent, however, wage growth remains lackluster.
The result is that the U.S. stands out in terms of wealth inequality even in comparison with developed economies like those of the United Kingdom, Canada and Australia.
Using the Ginni coefficient, which ranks income inequality on a scale from zero, where everyone has the same income, to 100, where one person has all of it, the U.S. weighs in at nearly 50. Canada and the U.K. are barely above 30.
While linking the wealth gap definitely to partisanship is problematic, Foster said, the two have increased in tandem. And that trend is likely to continue through the mid-term elections this year and the next presidential race in 2020.
“I’m worried about the place we’re in,” Sen. Elizabeth Warren, a Massachusetts Democrat who has said she would consider running for president in two years, observed at a September discussion on the aftermath of the financial crisis.
The America of the 1950s and ’60s, “where one job would support a family and actually permit them to carry a small amount of debt and put away a substantial amount of their after-tax income in savings” has disappeared, she said. “It has left behind an America where people work harder and harder and take on more and more risk. Families live one bad diagnosis, one pink slip, away from financial calamity and they know it.”
