Is The Wall Street Journal Concerned About Wealth Distribution?

This graph show shares of US income from 2003.  The distribution is even worse now.

U.S. Economy Is Increasingly Tied to the Rich
by Robert Frank - Wall Street Journal - Sunday, August 1, 2010

Who cares how the rich spend their money?

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.

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.  (Captured is a very good discretion, as opposed to using the word 'earned'.)

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 Industry 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." (Or the markets were manipulated in order to provide the wealthy with more liquid as opposed to paper assets.)

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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The big surprise for me with this article is not it's statistics, but that it's from the Wall Street Journal.  That worries me.  If the big boys are starting to point out our current level of wealth distribution is not good for the rich, then the US is in some serious trouble.

Given my own financial situation at the moment, it's kind of hard for me to generate a great deal of sympathy for the rich.  However, I am not blind to the fact that if the rich fall too far, the chances of me rising are about nil. It angers me though, that this country has blithely walked down this path led by the very people who could very well permanently destroy economy for all of us.  As in all of us in a global sense, not just in a US sense.

There is something about the Wall Street Journal calling the US economy a plutonomy that is mind boggling. Is this the same Wall Street Journal that was all on board with Reaganomics and Bush II's tax cuts and has been a very big shill for the expansion of military spending? 

In reading the comments after the article no one is mentioning a very important facts about how we got to be a plutonomy.  Our defense spending equates to about 25-29% of the total federal budget, but an estimated 38-44% of the total tax revenue.  The number is hard to pin down because other governmental agencies like Homeland Security have their own budgets but also spend a ton on military equipment, development, and training.  Even NASA's budget is almost 50% defense related.  And then no one knows how much is spent on black ops because they aren't subject to much congressional over site.  The estimated over all budget for defense purposes is 1.0 to 1.22 trillion for fiscal year 2010.  This figure includes the Iraq and Afghanistan wars.  So how many people draw a paycheck from all that money, about 5.3 million which is not a very large percentage of the work force, but adding in their dependents it means somewhere around 20% of the US population is dependant on military and defense spending.

Here's the other fact not getting mentioned--global corporations.  For instance, the defense industry employs about three times as many people as Walmart and their estimated budget is about three times Walmart's gross revenues.  Walmart had gross revenues of 406 billion in 2009.  It is hard for me to get my head around the fact that one corporation, Walmart,  is this big.  It is now about one third the total of our entire military industrial complex in terms of share of revenue and employment.  No wonder Walmart can steam roll it's competition, but the fact it's pay scale is no where near a living wage, means it has a hugely detrimental impact on American earning potential.  And this is separate from the whole question of it's global impact.  One could say Walmart itself is a big reason a lot of us have to shop at Walmart.

There is no question that Wall Street speculation and greed is a huge reason we now have a plutonomy, but it isn't the only huge reason.  If the US is going to get serious about addressing this wealth distribution issue, everything needs to be put on the table and that includes virtual monopolies and blank checks for defense spending.  In the meantime payday loan sharks and pawn shops will continue to show bullish growth.  Yippee.