The Economy

Rising Income Gap Threatens U.S. Credit Rating

"Pressures from rising inequality will exacerbate already material fiscal challenges on the horizon," Moody's warns in a report.
Matthew HellerOctober 9, 2018

Rising income inequality threatens the United States’ financial flexibility and creditworthiness at a time of mounting budget deficits, Moody’s Investors Service warns in a new report.

The credit rating agency doesn’t see any immediate, or even medium-term, threat to the U.S. Treasury’s triple-A rating but says the widening income gap could sap the country’s ability to repay its debts because of weaker economic growth and ineffective government institutions.

“Greater [income] inequality tends to be associated with higher levels of corruption and weaker government institutions, which undermine the overall institutional strength of a sovereign’s credit profile,” Moody’s analysts wrote in the report.

They noted that the top 10% of income earners in the U.S. have seen their overall median net worth increase by almost 200% since 1995, while the bottom 40% have experienced a decline in median net worth over the same period.

“Pressures from rising inequality will exacerbate already material fiscal challenges on the horizon,” the report says. “Should inequality go unaddressed, social tensions will continue to rise, leading to a more fractious political landscape that increases political risk, and with it a less predictable policy environment.”

As CBS News reports, “Growing disparity between the country’s richest and poorest citizens has been tracked by everyone from economists to politicians.” Oxfam warned earlier this year that income inequality can have a corrosive impact on social institutions and is linked to political unrest.

The Moody’s report focuses on the U.S. government’s ability to service its rising debt, calling the income gap “a key social consideration that will impact the U.S.’ credit profile through multiple rating factors, including economic, institutional and fiscal strength.”

“Overall, rising inequality will make it more politically difficult to mitigate the U.S.’ adverse fiscal dynamics over the medium term,” Moody’s said, noting that government spending to support lower-income households “is unlikely to be offset by revenue raising measures following recent tax cuts.”

Only one of the three big ratings agencies, Standard & Poor’s, has downgraded the U.S. to “AA+,” citing a 2011 debt ceiling showdown and “political brinkmanship” in Washington.