In her Washington Post column Heather Long takes note of a development in the U. S. economy:
The top 10 percent of earners now drive about half of spending, according to Moody’s, up from 36 percent three decades ago. These people will determine if the U.S. economy avoids a recession. These are households earning $250,000 or more, and they are largely doing just fine, buoyed by strong stock-market gains, mansions and rental properties that have shot up in value in recent years, and a rebound in business dealmaking. The wealthy continue to spend on lavish vacations, parties and events, and that masks the strain that many middle-class and moderate-income families are experiencing.
The “K-shaped” economy is back, where there’s a clear divergence between how the top and the bottom are faring. Businesses understand this. It’s why credit card companies have introduced even more exclusive credit cards this summer with higher fees, all-inclusive resorts are debuting $1,000-a-night experiences, and luxury car brands such as Porsche and Aston Martin have been among the first automakers to raise prices, because their clientele is less likely to push back. Any company that can is trying to go “upmarket” as much as possible in this environment.
I think the implications of this go far beyond the risks of tariffs to consumption on the part of those earning $170,000 per year or more which is the focus of Ms. Long’s column. It means that the upper middle class aren’t saving or investing at the rates they should be. It means that we need a rebalancing of the economy towards greater production and less consumption as I’ve been contending for some time.
It also supports another point I’ve been making for some time: tax policy needs to be more focused than at present. Simply cutting the tax rates of the top 10% of income earners isn’t encouraging them to save or invest as much as needs to be the case. It’s encouraging them to consume.
I didn’t understand this: “it means the upper middle class isn’t saving and investing as much as they should.”
They don’t invest, at least not directly. They trade, purchasing shares on an exchange. Perhaps they have exposure in their portfolios to private equity , and support fresh investment by those firms. But it’s not a huge number.
And perhaps they encourage investment by firms through their consumption, but that would be mostly capacity, not productivity.
In my opinion the issue in tax policy wrt investment revolves around return on capital. That means accelerated depreciation and lower capital gains rates. But that inevitably leads to the most ignorant commentary about taxes and secretaries etc.
If their consumption is rising, their saving is declining. That’s axiomatic.
Depends on income growth.
Steve
I’ve already posted on that. Except within the healthcare sector income growth has not been as rapid as the growth in consumption.
This interesting. Gary Stephens, the British financier, makes exactly the opposite claim. The rich cannot spend all their income on consumption. They are forced to invest in assets, often nonproductive ones like real estate. Moreover, their investments remove spending from the economic sectors, like manufacturing and services, that support working and middle class people, so their incomes go down, while asset prices rise.
Stephens argument seems to describe what is happening. His solution is very high taxes on the incomes of the rich to force income redistribution.
It may be different in the United Kingdom.
There are several problems with his plan. The first is how do you accomplish it? When we had 90%+ top marginal rates it wasn’t producing higher real revenue than at present. High marginal rates do not necessarily translate into higher revenue. They may translate into capital flight.
The other issue is that nowadays “redistribution” seems to mean redistributing from one group of the top 10% of income earners to a different group of the top 10% of income earners. In other words it changes nothing.
That second issue could be changed by redistributing by giving money rather than by paying people to provide services, ostensibly on behalf of the poor. I seem to recall that somebody received a Nobel Award for Economics for demonstrating that actually benefited the poor more.
Is the chart using monetary inflation or price inflation. As long as the monetary base is growing at a similar rate as production capacity, it will have minimal impact. Price inflation is an outcome of supply and demand.
I hate to “beat a dead horse”, but credit creation is also a factor. Lax lending regulations induce increased credit creation, and this increases demand for goods.
Since credit creation is involves leveraging existing cash, this means the people with the most cash are going to profit the most. I am not sure why it is so difficult to understand that monetary inflation must benefit the rich will benefit the most.
So, government debt used to help the poor must help the rich even more. There is no escaping this simple fact. (Actually, tightening lax credit standards would help, but it would also affect the amount of credit available to middle and low income people.)
I think the chart is the natural result of unbridled monetary inflation.
Small business start ups have surged since the pandemic. As we know, it’s not the wealthy that start most small businesses. However, since so much of the nation’s wealth is owned by the wealthy, the top 1% control 31% of the wealth, if they dont invest a lot fo money is likely being used very well.
https://www.forbes.com/sites/mikekappel/2024/08/20/who-are-small-business-owners-in-america-a-snapshot/
Steve
And most of the increase has been in retail. I wonder how many of those start-ups have no employees (or a single employee) and no physical business location?