Record Income Inequality = U.S. Credit Downgrade?

Financial FAQs


Graph: MarketWatch

The current debate whether the U.S. will escape the ‘new normal’ of slower economic growth since the Great Recession (when homeowners lost a collective $9 trillion in value) is taking a new turn with Moody’s Investor Services now warning of a credit rating downgrade of U.S. Treasury securities from its AAA rating, something Standard & Poor’s had already done in 2011 when Republicans threatened to shut down the Federal government over their refusal to raise the debt ceiling.

Why the Moody’s downgrade now, when it has kept U.S. sovereign debt at AAA rating? America’s income inequality has worsened since the Great Recession and more pressure will be put on our government to increase so-called transfer payments—especially social security, Medicare, Medicaid, and other government benefits paid to seniors and lower income household just to keep them out of poverty—at a time of record federal debt, said Moody’s.

Only the top 10 percent income earners have seen their incomes increase since the Great Recession. Most American households have seen either flat income growth or an actual decline for the bottom 40 percent of income earners.

In fact, the income declines have been happening since the 1970s, as globalization of the workforce by multi-national U.S. corporations have steadily shipped many of the best paying manufacturing jobs to cheaper countries and regions, while American workers’ salary bargaining rights have been steadily chipped away by more conservative congresses and compliant Republican and Democratic administrations.

Now new evidence has surfaced of another reason for decline in higher-paying jobs—robots, mainly concentrated in manufacturing regions. The Brookings Institute originated a study on the effects of robots replacing mainly manufacturing jobs. To no one’s surprise, most of the robots are concentrated in ‘rust-belt’ manufacturing right-to-work states in the Midwest and South that severely restrict union collective bargaining rights.


Brookings Institute

Brookings’ analysis of data from the International Federation for Robotics determined that more than half of more than 233,000 industrial robots in the country are found in just 10 Midwestern and Southern states, led by Michigan, Ohio, and Indiana. As of 2016, the overall national average for red states” was 2.5 robots per thousand workers. The national average for blue states that mainly vote Democrat was 1.1 per thousand.

Moody’s has become decidedly pessimistic about the future of America’s credit worthiness because it sees little that the U.S. can do to mitigate the increased income inequality, the worst in developed countries “…fiscal consolidation efforts that attempt to reduce the burden of entitlement spending, by hiking payroll taxes or cutting benefits, would ultimately exacerbate inequality,” said Moody’s.

What can be done to reduce the worst household income inequality since 1928, just prior to the Great Depression? The CIA World Factbook ranks the U.S. 39th from the bottom in the distribution of family income based on the Gini Coefficient Index that measures income inequality.

I respectively disagree with Moody’s pessimism about the prospects for improving U.S. credit worthiness. Cutting benefits would certainly harm growth, taking away incomes that increases consumer spending of the bottom 40 percent; spending that in turn increases tax revenues. And states with the political will to restore bargaining rights of union and government workers would restore some of the lost wages that increase tax revenues.

Then there is a need for massive investments in public infrastructure in all the sectors that increase efficiency and labor productivity—from physical structures to education and R&D that sent us to the moon and created the Internet. Studies show they more than pay for themselves, which also increases tax revenues and pays down federal debt.

There is in fact no reason for pessimism if such ‘antidotes’ are applied to America’s ailing fiscal health, and Moody’s as a responsible credit rating agency should be the first to recommend them.

Harlan Green © 2018

Follow Harlan Green on Twitter:

About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Macro Economics, Weekly Financial News and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s