Finally have a moment to collect thoughts today, and wanted to reflect on some interesting inequality discussions in the papers this morning.
Two points, united by one academic study (and it’s one I’ve focused on before in these pages).
First, the NYT reports on evidence of higher inequality—more specifically, a squeezed middle class—in current consumer markets:
As politicians and pundits in Washington continue to spar over whether economic inequality is in fact deepening, in corporate America there really is no debate at all. The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away.
As one consumer analyst puts it:
“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be…You don’t want to be stuck in the middle.”
A figure accompanying the piece shows that the share of consumer spending by the top 5% has increased from 27% in 2002 to 38% in 2012; the top 20% now accounts for 61% of consumer spending, up from 53% in 1992.
I share this not because it’s surprising but because it’s a market test of the inequality problem. In fact, I’m not sure it’s even correct that we’re sparring over whether inequality is “deepening.” Both Obama and Rubio agree it’s a problem, and the debate has moved beyond “is it real” to “what should be done about it.”
Much of what the NYT piece is reporting on comes from the work of Cynamon and Fazzari (C&F), which I was onto a while ago and which I featured in my own analysis of the impact of inequality on growth. As I summarized last summer:
C&F find that as the income shares of the top 5 percent soared relative to the bottom 95 percent, both the debt burden and the spending of the lower-income group grew quickly relative to that of the wealthiest households. The savings rates of the very wealthy increased over the 2000s expansion, while those of the bottom 95 percent fell sharply.
These dynamics drove much stronger consumer spending than one would have expected looking only at median income growth, inflated a huge housing bubble and ensured that once the bubble burst and the deleveraging cycle began, the United States was in for a deep and protracted recession.
So here we have two ways in which inequality is affecting growth. First, through weaker consumer spending, though we shouldn’t assume that the top 20% can’t spend enough to make up for the weaker spending in the middle. However, if you look at C&F’s figure 7, you do see weaker PCE growth (aggregate personal spending) in this relative to past recoveries.
Second, you’ve got the recipe for future bubbles that I described in my CAP piece linked above, where inequality simultaneously leads to cheap credit/underpriced risk and the demand for such credit by families facing stagnant incomes.
In the second piece citing C&F that I saw this AM, Robert Samuelson doesn’t buy that part of the story. That is, he cites the excessive leverage but doesn’t see what inequality had to do with the debt bubble (“Just because households wanted to borrow didn’t mean lenders had to lend”).
It’s certainly true that we’ve had asset bubbles in periods of both low and high inequality. But we haven’t had as many as we do now and there’s compelling theory and some evidence that wealth concentration is implicated as high levels of wealth concentration increases both the supply of (by the wealthy) and demand for (by the non-wealthy) loanable funds.
Moreover, as those funds inflate asset bubbles, the wealth effect juices consumer spending, setting the stage for a painful reversal of that effect when the bubble bursts.
Finally, you might wonder just how operative is all this in today’s economy. After all, we are kinda growing out of the slump, no?
Well, I don’t want to make too much out of one year’s data, but I’ve shown lots of figures like the ones in here or here showing how profits have outpaced middle-incomes and wages in this recovery. But if you look at the most recent year—2010, the first full year of the current recovery—of the very thorough CBO household income data, you clearly see highly skewed pattern of income gains.
Again, just one year but it certainly helps explain the retail results I started with at the top. Now, of course if we could just inflate another asset bubble…