Reforming income inequality that threatens U.S. credit profile: Atl Fed, Moody’s

By David Pendered

Income and racial inequality could undermine the U.S. credit profile, a leading Wall Street analyst warns in his sharpest wording yet in a series that dates to 2018.

Meantime, the Atlanta Fed president/CEO continues his call for the central bank to lead in economic reforms intended to promote an inclusive economy.

Raphael Bostic and William Foster are becoming bright lights in the nation’s emerging conversation over the role of economic policy in creating, and addressing, systemic inequality. Bostic heads the Atlanta Federal Reserve. Foster is a vice president and senior credit officer in the sovereign risk group at Moody’s Investors Service.

Bostic has explored the issues in his essay, A Moral and Economic Imperative to End Racism. Bostic elaborated most recently in his July 9 conversation with Howard Gleckman, a senior fellow with the Urban-Brookings Tax Policy Center:

• “If you are an African American whose family, for generations, has been prevented from owning homes or buying into business or doing those things, you’re going to have less wealth. The field [economics] doesn’t really acknowledge and talk about those institutional constrains that have historical arcs that, over time, disadvantage people.
• “We look for a lot of explanations that have a contemporaneous element. But that really causes the field to sort of turn its back on a lot of the more institutional factors that really do shackle groups and prevent them from being as competitive today.”

Bostic predicted that solutions will emerge if the nation realizes a greater understanding of the history that created the current economic structure:

• “In terms of fixing it … in the essay, I spent the first part talking about historical events and historical practices. I think we actually need to know them a lot more. That’s true for African Americans. I think there’s a huge history around the mistreatment of Native Americans. There’s a Supreme Court ruling just this morning about the state of Oklahoma and how the land that should have been for Native Americans was inappropriately reclassified.
• “There’s a lot of history we don’t know, and because we don’t know it, it causes us not to really understand the burdens that people are carrying around and the challenges they face. And, without that understanding, it’s hard to imagine we are going to come up with solutions that appropriately address the real problem.”

Foster, the Wall Street analyst, has warned since 2018 that income and racial inequality could lead to rising social tensions that will influence many types of policy discussions.

Foster oversees a supranational portfolio for Moody’s Investors Service – the U.S., Canada, India, Bolivia and World Bank Group credits.

Strong language was contained in the July 14 Issuer Comment on the Government of the United States, on which Foster was the lead analyst. But a more compelling view was in a related document.

The July 14 Issuer Comment concluded:

• “While there are indeed many social and economic issues that have contributed to the US’ 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.”

The Research Announcement that accompanied the comment observed:

• “While several issues have contributed to increased political polarization in recent years, looking ahead, income and racial inequality are potent forces that may contribute to further polarization and increased social risks, which could ultimately undermine the US credit profile.” [Emphasis supplied.]

A country’s credit profile is similar to that of a consumer’s credit profile. The rating gives investor’s insight on how likely they are to be repaid on a loan, which has an influence on the interest charged on the loan.

Foster has raised caution flags in two previous Issuer Comments on the Government of the United States:

Sept. 27, 2019

• “On Thursday, the US Census Bureau released the results of the 2018 American Community Survey, which revealed that income inequality increased to its highest level in more than 50 years. Without a clear policy response to reduce widening inequality, we expect this trend to persist, ultimately contributing to higher fiscal costs and potentially more elevated political risk in the US….
• “If inequality is left unaddressed, social tensions will continue to rise, leading to an even more fractious political landscape that increases political risk in the US, and with it a less predictable policy environment.”

Oct. 8, 2018

• “Over the past two decades, income and wealth inequality have increased in the US as high- and very high-income households have commanded rising shares of income and wealth. The top 10% of income earners have seen their overall median net worth increase by almost 200% since 1995, while the bottom 40% of income earners have experienced a decline in median net worth over the same period….
• “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.”