The U.S. is also hurt by its “relatively shallow social safety net”
Income and wealth inequalities, including wide racial disparities, are keeping the U.S. economy from reaching its potential and pose ongoing “social risk,” according to a report from Moody’s Investors Service.
The report notes that the median net worth of the top 10% of income earners has jumped 200% since 1995 while the bottom 40% have seen a decline.
Wealth and income disparities are both apparent and significant along racial lines, with white households experiencing a 43% increase in net worth between 1995 and 2016 while Black household net worth remained flat.
This inequality is more pronounced in the U.S. compared with other countries, Moody’s said.
“The unequal position of the Black community in the U.S. is a salient and persistent feature of the inequality dynamic that exemplifies and exacerbates credit-relevant social risks,” Moody’s wrote.
These inequalities don’t just hurt members of the Black community, but the U.S. as a whole. Moody’s cites McKinsey & Co. data that shows lowering the racial wealth gap could raise the GDP by 4%-to-6% by 2028 and lift GDP per capita by $4,300.
“A disproportionate share of income vested in wealthier households with a lower marginal propensity to consume lowers aggregate demand,” the Moody’s report said. “A larger share of low-income households less able to accumulate physical and human capital, including through educational attainment, lowers economy-wide labor productivity.”
This is exacerbated by the “relatively shallow social safety net” that the U.S. has, the report says.
High inequality is also driving a lack of good governance. American institutions have weakened in recent years because of increased polarization, Moody’s says.
“And there is a rising tension within the U.S. credit profile arising from the growing need for policymakers to act to contain the ongoing erosion of the sovereign’s fiscal strength, and the inertia with respect to that erosion stemming from increased political polarization,” the report says.
Moody’s notes that the credit risk to the U.S. isn’t immediate, but we’ve seen the social risk in the form of the massive protests in response to the killing of George Floyd in May at the hands of the police. Though issues tied to policing were at the heart of the protests, analysts say other aspects of racial inequality that have been around for a long time were tied to the demonstrations as well.
“While there are indeed many social and economic issues that have contributed to the U.S.’ increased political polarization in recent years, looking ahead, the combination of income and racial inequality is set to be a potent force for further potential polarization and inertia,” Moody’s wrote.