Wealthy May Hold Key to Reviving Stalled Economy
Monday, 16 Aug 2010 12:50 PM
By: Dan Weil
It will be difficult for the economy to rebound strongly without a lot of help from the wealthy.
The richest 5 percent of Americans, as measured by income, are responsible for 37 percent of consumer spending, according to data from Moody’s Analytics, The Wall Street Journal reports.
With consumer spending accounting for about 70 percent of economic activity, that gives the rich a major say in the direction of our economy.
And that influence has risen for at least 20 years. In 1990, the top 5 percent accounted for 25 percent of consumer spending.
That figure rose steadily for years, but dipped in 2008 during the financial crisis before jumping back higher in synch with the stock market rebound last year.
Once the stock market started soaring, the wealthy stopped worrying about the financial crisis and loosened their purse strings, says Mark Zandi, chief economist for Moody’s Analytics.
“I think that pent-up demand was unleashed,” he told the Journal.
But Zandi is concerned about the trend. “I don’t think it’s healthy for the economy to be so dependent on the top 2 percent of the income distribution,” he said.
Renowned economist Arthur Laffer says the key role of the wealthy in generating economic activity justifies tax cuts for them.
“Tax cuts on the poor cost you lots of money. Tax cuts on the rich pay for themselves. Rich people can afford lawyers, accountants, and can defer income,” he told Bloomberg.
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1) You have to realize that as shocking as these figures are, because the rich spend proportionally much less of their income, the actual implied inequality is much worse.
2) The good old days of the post-WOII Golden Era (1950-1973) where characterized by real wages rising in step with labour productivity. We think one of the fundamental reasons the US economy has experienced such a mess is that this link was broken down.
3) Real wages started to lag productivity from the 1980s onwards, leading to a profit surge which led to a stockmarket bonanza that has run into major self-inflicted roadblocks (2001 and 2008).
4) In order to maintain consumption (much of it being highly positional), households embarked on a credit binge helped by rising asset prices. Basically, they used the stock market as a ersatz pension scheme and their houses as an ATM machine.
Now those debts have spiralled out of control and asset prices have collapsed, the average household is in for a long period of restraint. Do we really want an economy which is so heavily skewed and dependent on the rich?