America Is A Plutonomy

Source: Decline of the Empire

I’ve often spoken of the enormous income and wealth inequality here in the United States. It follows that our “consumer” society has become more and more dependent on spending by the rich and well-off because they’ve got most of the money. I was surprised to learn there is a term for societies like ours. America is a Plutonomy, as described in the Wall Street Journal’s U.S. Economy Is Increasingly Tied to the Rich.

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. 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…

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…

[My note: Capitalism, above left. Click to enlarge.]

The data may be “further sign” that America has become a Plutonomy. And the Housing Bubble may have been a “further sign” that the financial system is crooked. Jesus Wept.

It is not at all surprising that our “consumer” economy has become so dependent on the spending by the rich. Apparently it’s a surprise at the Wall Street Journal. Since the mid-90s, the top 5% share of “consumer” outlays has risen from 25% to 37%, which is coincident with the Bubble Era (1995-2007). And with the surge of the stock market since early 2009, that share is rising again, once again demonstrating that the stock market is a playground of the rich.

The term Plutonomy is not new. Michael Lind asked Is America A Plutonomy? in an older article at salon.com.

Has the American economy turned into a “plutonomy”? In 2005, three Citigroup analysts — Ajay Kapur, Niall MacLeod and Narendra Singh — answered yes.

They explained: “Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S … Often these wealth waves involve great complexity, exploited best by the rich and educated of the time.” According to the Citigroup experts, a plutonomic economy is driven by the consumption of the classes, not the masses:

In a plutonomy there is no such animal as ‘the U.S. consumer’ or ‘the UK consumer,’ or indeed the ‘Russian consumer.’ There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the ‘no-rich,’ the multitudinous many, but only accounting for surprisingly small bites of the national pie.

The Citigroup analysts speculated that a plutonomic world economy could be driven by the spending of the world’s rich minority, whose ranks are “swelling from globalized enclaves in the emerging world.”

The data support their analysis. According to Moody’s Analytics, the top 5 percent of American earners are responsible for 35 percent of consumer spending, while the bottom 80 percent engage in only 39.5 percent of consumer outlays.

[My note: The spending share of the top 5% has risen from 35% to 37% since this article was published.]

Meanwhile, the top 20 percent received nearly half of all income generated in the U.S. — 49.4 percent — and the ratio of the income of the top 10 percent of Americans to the poor has risen from 7.69-to-1 in 1968 to 14.5-to-1 in 2010.

Lind tells us that Plutonomies are far less stable than more balanced societies.

But history makes it clear that when economies mutate into plutonomies they become dangerously volatile. Just as a ship with a broad base is more stable than a top-heavy boat, so an economy in which well-paid workers create mass consumer markets for the goods and services they provide is more stable than a top-heavy plutonomy.

Well, no kidding. Since we are so dependent on the spending of the rich to keep us afloat, we must worry that the rich will cut their spending, thus endangering us all. That’s why Zandi speaks of the fragility of “the recovery” in the quote below.

Mark Zandi, chief economist for Moody’s Analytics, cites two main reasons for the increase [in spending by the top 5%]. 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.”

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. That has crimped their spending…

“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.”

[My note: Not healthy? Is the Pope catholic?]

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.

So here we are in 2011, with working Americans taking it up the wazoo, and now we’re supposed to worry about whether wild spending by the rich is unsustainable. Because if they stop spending like there’s no tomorrow, which was made possible by Ben Bernanke & Co., we may not have “a recovery”.

Apparently, we need not worry much about the fact that we live in a society where the top 5% of income earners have most of the money and account for 37% of all “consumer” spending, whereas the bottom 80% of us account for merely 39.5% of that spending. If a sufficient number of people were to start worrying about inequality, there might a revolution in the streets. As we have learned, Plutonomies are notoriously unstable.

But there’s no need to worry about a revolution in the streets. The owners of this country have matters well in hand.

Read more at Decline of the Empire