A lot of strange things start to make more sense — sometimes distressingly so
I was listening to Helen Beetham talk with Audrey Watters on her imperfect offerings podcast, when Audrey mentioned a Bloomberg piece which I’ve excerpted below. Essentially the economy becomes distorted when all of the money is at the top of society and everything is being produced to fit the needs of rich people.
This chimes with what economist Gary Stevenson calls ‘The Squeeze’ which I wrote about recently. While the article is about the US, which is a more unfettered free market economy, the same is also likely to be happening at different rates to other western economies.
The question, of course, is what we do about it. I mean, to be blunt, we can either tax the rich or end up eating them.
Recent economic headlines do not add up to a coherent picture: Since 2020, Americans have spent lavishly on discretionary goods and services, even as the cost of necessities has soared. Consumer debt has ballooned right along with prices, and Americans are now defaulting on their credit cards at rates unseen since the Great Recession. Wages growth has been strong, but inflation has thwarted its ability to help most Americans get ahead. So who’s booking all those first-class airline seats and tables at fancy restaurants? Why are tickets for concerts and major sporting events so expensive and also so sold out?
A recent analysis of consumer spending from Moody’s Analytics, first covered in the Wall Street Journal, provides an answer: Rich people really are just firing a cash cannon into the consumer market. The wealthiest 10% of American households—those making more than $250,000 a year, roughly—are now responsible for half of all US consumer spending and at least a third of the country’s gross domestic product. If you keep that in mind, a lot of strange things start to make more sense—sometimes distressingly so.
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Such a high concentration of financial resources presents a whole host of risks and complications, including general economic fragility. If the extreme spending habits of a small group of people are what’s keeping a large portion of the economy churning, then that group of people also has an outsize ability to bring everyone else down with them.
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When you put a huge proportion of a nation’s total resources in a small number of hands, that distortion also plays out in the everyday economy. Consumer-facing companies want earnings growth and need ways to hold on to their profit margin if components or labor become more expensive. An easy way to do that is by going upmarket to find buyers who are spending freely. You can see how this has played out in the car market: Automakers have pushed to develop more of the big, pricey SUVs that wealthier buyers prefer and devoted fewer resources to smaller, more affordable models. That’s helped push the average sale price of new cars up more than 50% since 2014, according to a Cox Automotive analysis of data from the Bureau of Labor Statistics. The average new car in the US now costs almost $50,000. When the math on producing goods and services only pencils out when you’re selling to the rich, it doesn’t just change the availability of designer handbags or hotel suites; it affects how entire industries organize themselves.
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Letting so many of the country’s economic resources accrue to so few people. risks a lot more than just the economy—it eats away at social cohesion in ways that have leaked into other areas of American life and politics. It breeds distrust and recrimination among individuals and groups of people, as well as toward the systems and institutions we’re supposed to trust to make society work in ways that are at least minimally fair. The end result is a combination of economic fragility and social disaffection that eventually even high earners might not be able to buy their way out of.
Source: Bloomberg
Archive link (no paywall): Archive.is
Image: Boston Public Library