Rising Inequality Could Become a Credit Problem for the US

“Rising inequality is a key social consideration that will impact the U.S.’ credit profile through multiple rating factors, including economic, institutional and fiscal strength. Fiscal strength is most vulnerable,” the analysts write.

The U.S. is not the alone in experiencing growing inequality among its residents, but the extent of that inequality is greater than that of developed European economies, including Spain, France and Germany, according to the Moody’s report.

“The U.S. stands out for particularly high inequality,” write the analysts, noting that wealth in the U.S. is more concentrated is at the top of the income scale and citing comparisons using the Gini coefficient, which measures national income in relation to population.

Adding to the growing income and wealth gap in the U.S. are “comparatively unaffordable” college costs. The average expected cost of tuition and fees for a four-year bachelor’s degree in the U.S. is around $60,000, equivalent to about 120% of average disposable household income, versus 6% in Germany.

“If left unaddressed, rising inequality of opportunities through high costs and uneven access to education could entail credit-relevant social, economic and fiscal costs for the U.S.,” write Moody’s analysts.

They are not downgrading the U.S. credit outlook but note that the country’s institutional strength, which is a key factor in a country’s credit profile, along with its economic and fiscal strength, though high, is slightly below that of its AAA-rated peers.

“The key difference is that we view fiscal policymaking in the U.S. as less robust than in many AAA-rated peers, and experience in recent years suggests that the U.S.’ legislative and executive branches will be challenged to undertake a pronounced shift in fiscal policy to sustainably address rising fiscal pressure … Rising inequality risks exacerbating these fiscal pressures and intensifying an already polarized political environment.”