Monday, August 9, 2010

It's the American way

Ever think that America's economic problems run really, really deep?

Here's a look at one hint as to why:

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.

So, we have an economy that is largely based on...buying stuff. Or, rather, it's largely based on rich people buying stuff. So when rich people aren't buying as much stuff as they used to, the economy falters.

Of course, commenters on this WSJ blog piece point out that "the rich" apparently means anybody making about 200,000 dollars a year, and people right around the $200,000 mark insist that they're not rich, no sir, not at all, not compared to all the other people who count their annual income in the millions of dollars. And perhaps there's some truth to that--but whether they think of themselves as "rich" or not, people in this group are among that 5% on top who account for 37% of consumer spending.

The trouble with having so much of our economy based on consumer spending is that in times of economic stress (such as now), people naturally (sanely, logically) cut back on spending. Which, according to economists, only makes things worse--so get out there and max out your credit cards, because It's The American Way!

Like I said above, I'm thinking that we won't be fixing our economic situation anytime soon...


c matt said...

It would seem the sign of a truly strong economy is how much you export vs. import. We haven't been winning that competition for decades.

Rebecca in CA said...

I'd just like to mention something about the $200,000 income...I know Obama in his talk about tax also assured people that the heavy taxing would only happen to people who made 200K or more...but the first thing that entered my mind, was, aren't we talking about many small businesses? That doesn't seem "rich" if you look at what kind of money small business owners need to make in order to return the capital back to the it seems faulty to think of 200K as a marker for wealth when it's probably the most economically useful portion of the middle class we're talking about. Anyway, I know that's totally a side point, but it bugged me...seems like targeting small businesses for extra taxation would be the death of the middle class.

Anonymous said...

Depending on where you live, a good part of that "spending" is necessary. As someone who has about that income, I can assure you that calling me "rich" is absolutely laughable. First, in certain parts of America, you can easily pay $20k per year on taxes for your home like I do and no, it's not a mansion (and it's maybe a third of an acre?). I have four kids; we chose Catholic and private schools. Right now, we pay about $47,000 for tuition, per year, for all four kids. That does not include transportation (the monthly train tickets are another small fortune, and that doesn't include the additional daily subway fare for one of them!)

Sure, we could've stayed in the "old neighborhood" or done with less, stuck with public schools, but you make trade-offs in life. We worked like animals to get ourselves to this point so we would have the options of those kinds of schools for our kids. It made the sweating blood worth it; we do like that we can choose these things, but rich?
Upper middle class, but rich? We can rarely take a vacation, since my husband has to be at his business every day; he doesn't show up, he doesn't make make money. His small business costs a fortune to run, plus he's got employees to pay. We don't know from rich.

JMB said...

Agree with anonymous above, here in NJ a 200K income puts you in the middle sphere. The average property tax in my town in $16K per year, the average house (on one-third to one fourth acre) will set you back $700K. We pay the highest taxes in the nation, and most of us are hit with the AMT to boot. Moreover, our health insurance and car insurance costs are considerable. The only thing that's cheap here is clothing.