U.S. Economy Is Increasingly Tied to the Rich

The Wall Street Journal

Who cares how the rich spend their money?

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Well, perhaps everyone should these days. Consumer spending accounts for roughly two-thirds of U.S. gross domestic product, or the value of all goods and services produced in the nation. And spending by the rich now accounts for the largest share of consumer outlays in at least 20 years.

According to new research from Moody's Analytics, the top 5% of Americans by income account for 37% of all consumer outlays. Outlays include consumer spending, interest payments on installment debt and transfer payments.

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By contrast, the bottom 80% by income account for 39.5% of all consumer outlays.

It is no surprise, of course, that the rich spend so much, since they earn a disproportionate share of income. According to economists Emmanuel Saez and Thomas Piketty, the top 10% of earners captured about half of all income as of 2007.

What is surprising is just how much or our consumer economy is now dependent on the rich, and how that share has increased as the U.S. emerges from recession. In the third quarter of 1990, the top 5% accounted for 25% of consumer outlays. That held relatively steady until the mid-1990s, when it started inching up past 30%. It dipped in 2003 and again in 2008, but started surging in 2009 amid the greatest bull market rally in history, with the Dow Jones Industrial Average rising nearly 50% in the last nine months of the year.

Mark Zandi, chief economist for Moody's Analytics, cites two main reasons for the increase. First, the wealthy panicked during the financial crisis and stopped spending. When markets rebounded, they came out of their shells and started spending again. "I think that pent-up demand was unleashed," he said. "It was an unusually high rate of spending."

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The second reason is that those people in the middle- and lower-income groups are struggling to pay off debt and stay afloat amid rising unemployment, as Friday's data reminds us. That has crimped their spending.

The data may be a further sign that the U.S. is becoming a plutonomy–an economy dependent on the spending and investing of the wealthy. And plutonomies are far less stable than economies built on more evenly distributed income and mass consumption. "I don't think it's healthy for the economy to be so dependent on the top 2% of the income distribution," Mr. Zandi said. He added that, "In the near term it highlights the fragility of the recovery."

In fact, the recent spending of the wealthy may be unsustainable. Their savings rate has gone from more than 26% in 2008 to a negative 7% in the first quarter of 2010, according to the Moody's Analytics data. They still have lots of savings. But the massive draw on that in the past two years is unlikely to continue at the same pace.

"I think we're already seeing a slowdown in spending by this group," Mr. Zandi says.

And that should be a worry for all of us.

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