If Wall Street fears inequality, Main Street shrugs

As the gap between rich and poor widens in the U.S., so is the gulf between Wall Street and Main Street when it comes to perceiving the danger that shift poses to the American economy.

The financial sector appears increasingly worried over the disparity in wealth and income, with Federal Reserve Chair Janet Yellen recently citing the problem as causing great concern and credit ratings agency Standard & Poor's warning that an "extreme" threshold of inequality is threatening the country's economic future.

As financial analysts and bankers see it, a nation where economic gains are concentrated at the top while most workers face stagnant income will inevitably hamper their ability to take on mortgages, buy cars, attend college and otherwise spend enough to fuel growth.

But shouldn't the rich, with their growing wealth and purchasing power, make up for cut-backs from the middle class? Unfortunately for the economy, the top 1 percent of Americans are more likely to bank their excess funds, rather than spend their wealth on the types of goods and services that keep the American economy rolling along.

"The past several decades of widening inequality has often involved stagnant or falling living standards for many families," Yellen said in a speech earlier this month. While she noted that "some degree of inequality in income and wealth" will happen in any capitalist economy, the growing gap threatens social mobility and opportunity for many Americans.

Financial professionals are also fretting about inequality. In an October report from the Professional Risk Managers' International Association, two-thirds of risk managers at North American financial institutions said growing inequality poses a risk the financial system, while only 14 percent dismissed the gap as a non-issue.

But while Wall Street is increasingly aware of the economic implications of the gap between the very rich and America's middle class and poor, many Americans appear unperturbed. Fewer than half of people say inequality is a big problem for the country, while a full 20 percent regard it as either a minor issue or even of no concern whatsoever, according to the Pew Research Center.

The Pew survey reveals an ideological split between the worriers and the naysayers. Democrats are more likely to cite the country's growing inequality as a major economic challenge, with 59 percent seeing trouble ahead. Only 19 percent of Republicans, meanwhile, say the wealth gap represents a serious economic challenge.

For many Republicans, the wealth gap is seen as a consequence of a meritocracy, where the rich are simply willing to work harder, and therefore end up earning more money, Pew found. Democrats tend to blame the country's education system, wage norms and tax system.

Interestingly, Wall Street isn't necessarily viewing the issue as a political issue, although some prescriptions, such as increasing taxes on the wealthy, can be viewed through ideological lenses. Instead, agencies such as S&P are extrapolating what happens to an economy when the middle-class' debts are equal to its assets, leaving those households with little financial flexibility.

In S&P's view, that outcome will leave the country with lower economic growth. The agency earlier this year cut its 10-year U.S. growth forecast to 2.5 percent, down from a forecast of 2.8 percent five years ago. A less socially mobile and less educated workforce means America is less able to compete in the global economy, the agency said.

Meanwhile, economists Emmanuel Saez of University of California, Berkeley, and Gabriel Zucman of the London School of Economics wrote in a research note on Monday that the decline in the middle-class' fortunes could lead to a "dystopian future." Without a change to the growing income and wealth gap between the top 1 percent and everyone else, "the gains in wealth democratization achieved during the New Deal and the post-war decades could be lost," they wrote.

"While the rich would be extremely rich, ordinary families would own next to nothing, with debts almost as high as their assets," they added.