Top-heavy spending

Look out below!

It has always been the case that rich folks spend more money than poor folks. That’s what being rich is about. But lately the rich folks’ share of spending has grown. Today the top tenth of American earners are responsible for half of American consumer spending. This is up from a third three decades ago.

The American economy as a whole is chugging along surprisingly well, given the uncertainties and disruptions it has been subject to during the last several years. The primary reason for this is all that consumer spending by the rich. Overall consumption accounts for 70 percent of GDP. The rich’s half means they’re bearing the weight of 35 percent of the economy.

Consumer spending by rich people is different from consumer spending by poor people. Nearly all spending by the poor is nondiscretionary. The rent has to be paid. Groceries have to be purchased. By contrast, rich folks don’t need that second or third house. They can take three vacations rather than six. If something causes them to think the future is going to be less bright than the present, they can easily cut back.

What might that something be?

Rich folks are more invested in the stock market than poor folks. The stock market has been largely responsible for the rapid rise in the wealth of the top tenth during the last decade. On net, nearly all the increase in the stock market has resulted from the boom in shares in the big tech firms, especially those with stakes in artificial intelligence.

More than a few observers think the AI boom is a bubble or will soon become one. Bubbles burst. If tech shares plummet, the portfolios of the rich will take most of the hit.

The schadenfreude among the not-rich will last only until the damage to portfolios spills over into the broader economy as the rich retrench on consumer purchases. The rich will lose more absolutely—on paper—but the rest will feel more pain, as they always do during depressions.

This has happened before. In the 1920s the wealth profile of Americans was more skewed toward the rich than it had ever been. Much of the wealth of the rich reflected gains in the stock market, which hit record highs. The bubble burst in the autumn of 1929. Share prices plunged, making the rich feel comparatively poor. They curtailed consumer spending, causing demand to fall and unemployment to rise.

A depressive cycle set in. Falling demand caused prices to fall, which in ordinary circumstances would have boosted sales. But because much demand was the discretionary spending of the rich, it often depressed sales, as buyers delayed purchases till prices fell further. The cycle carried the country down and down, not reaching bottom for three years and staying near there for seven more.

The 2020s aren’t the 1920s. Much has changed in a century. Yet wealth inequality that crashed the economy when stocks swooned during the earlier decade has been reproduced—indeed magnified—in the present decade.

Maybe things will end better when the current frenzy runs its course. Don’t be surprised if they don’t.