The Economy of the Rich, by the Rich, and for the Rich

As anyone closely following economic news knows, the American economy lost 4,000 jobs in August, even as analysts had expected job gains of over 100,000--a fact that caused tremors in the markets, even as fed bank presidents played down the results as a temporary aberration from a strong economy.

These assertions of a strong economy are based on a variety of misleading indicators, but principally rest on retail sales and consumer spending. As Atlanta Federal Reserve Bank president Dennis Lockhart said today, the recent bad news

should be evaluated with recently positive reports in retail sales...readings from July show that consumer spending remained strong.

Ignoring for a moment that heavy retail spending by the American consumer is only made possible by increases in consumer debt, it is important to note that consumer spending accounts for 70% of U.S. GDP; if Americans slow their spending significantly, the consequences for the global economy would range from harsh to dire.

The only problem is, consumer spending is propped up almost enitrely by the rich, while the middle class and certainly the impoverished struggle on valiantly in conditions that are little different from those of a recession. This disturbing but unsurpising phenomenon was reported on this Friday in a fantastic article by Daniel Gross in Slate, titled Will the Rich Save the Economy? The full article is fairly short and well worth the read--it's dificult to pull the juiciest parts and still fall within fair use. As Gross says, the incomes of the wealthy have increased dramatically; with those increases have come a concomitant rise in spending at the shopping venues they frequent.

First, the incomes:

And how are the rich doing? Quite well, thank you. Median income has been stagnant lo these many years, as the Census Bureau reported last month, and it is still below the level of 1999. But as David Cay Johnston reported (article purchase required) in the New York Times last month, people making more than $1 million "reaped almost 47 percent of the total income gains in 2005, compared with 2000" and "received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003." Jonathan Chait's excellent new book, The Big Con, smartly argues that such outcomes are the intentional results of economic policies designed to redistribute income upward. (Few members of the Bush economic team will cop to the intent.)

Actually, I can verify this intent with more than just numbers. I had the personal opportunity to hear Commerce Secretary Gutierrez tell an audience of CEOs and CFOs in Washington D.C. (more on this to come in future posts, I promise) last month that he viewed it as the federal government's job to allocate as much capital as possible in their hands in order, ostensibly, to spur investment and growth in the global economy. Most progressives would argue that this upward redistribution of wealth is pure theft by Republicans to reward themselves and their wealthy donors. I am convinced, however, that it goes beyond even that: Republicans, by hollowing out the middle class economy, have created a situation wherein the rich must continue getting richer, or else the entire economic house of cards will collapse on their heads. Consumer spending is the most prominent example of how the rich are the only ones keeping the American economy from sputtering into the ground. After all, even as sales figures from mainstream retailers such as Wal-Mart, JC Penney and Sears have faltered, retailers catering to the wealthy are booming:

At Saks, same-store sales in August were up a stunning 18.2 percent; at Tiffany, same-store U.S. sales rose 17 percent in the second quarter. Indeed, luxury retailers are in an expansive mood. The Wall Street Journal reported earlier this week (subscription required) that "this year, some 30 high-end retailers have opened boutiques in Austin [Texas], including Tiffany & Co., Michael Kors, Ralph Lauren, David Yurman, Louis Vuitton and Burberry." These stores are located in a new mall anchored by Neiman Marcus, where same-store sales rose a healthy 4.6 percent in August. Among the strongest performers: "designer handbags, shoes, designer jewelry, women's fine apparel, and men's."

This phenomenon has been written about extensively, of course. My favorite term for it is Plutonomy: an economy that is driven by and/or that disproportionately benefits wealthy people. In a plutonomy, energy prices or unemployment numbers have muted impact on overall consumer spending, since they don't significantly affect the wealthy. In a plutonomy, retail sales in mainstream stores fall, but consumer spending remains "strong" due to heavy spending on ultra-expensive items and niche investments. In a plutonomy, asset bubbles that fall in the general market continue to rise in the tony markets. Another such example of this plutonomy, as Gross says, is in real estate:

Nationwide, the housing sales market may be a bust. But the Journal reports (subscription required) Friday morning that while many California housing markets suffer, "[e]ye-popping sales are spreading along a 40-mile stretch of southern Santa Barbara County." In July, sales in the area, "the only region of California where the median sales prices surpassed $1 million," rose nearly 28 percent. Publicly held home builders that cater to middle-class buyers are faring poorly. But the very wealthy are still building. This 50,000-square-foot home under construction in West Hartford, Ct., is worth 20 starter homes—and probably more, given the amenities. Or take personal transport. While auto sales are down, "the market for private jets is stronger than it has ever been," said Richard Aboulafia, analyst at the Teal Group. Economically speaking, a Gulfstream G550, which is made in the United States and goes for $48 million, is worth the equivalent of 3,200 Ford Focus coupes, which go for about $15,000 each.

This is the product, of course, of a redistribution of income and economic power from the middle class to the wealthy--a redistribution that has been taking place on massive scales virtually unabated since Reagan, and accelerated under George W. Bush. This trend has been partly due to the pressures of global trade, but mostly due to an intentional scheme of income displacement fostered and brought about by hyper-conservative and corporate ideology. Reagan, Bushes I and II, Norquist, Gringrich, Rove and corporate K-street have conspired each in their own way to create an economy in which Main Street is no longer connected to Wall Street--unless, of course, Wall Street suffers major losses. In that case, Main Street becomes a Brazilified place of increasingly disquiet desperation.

And that is exactly what we are in danger of today. While the American middle class suffers in a recessionary environment, the only things that continue to prop up the house-of-cards economy are the stock market and real estate gains of the wealthy. The stupidity, greed and sheer incompetence of the uber-rich and their Republican allies, however, has resulted in exploitation of the middle class through the very credit and mortgage ponzi schemes that are now causing such fear and even panic in the financial markets. Add poor employment numbers, a declining dollar, an unpopular, expensive and disastrous foreign occuption, huge trade and national deficients, and slow mainstream retail sales to the list of economic downward pressures on the investment markets, and the situation becomes even more precarious.

In the old days, if stocks lost significant value, the country could count on the resilience of the American middle class to absorb Wall Street's shock and excess, take cuts, send more family members into the labor force and rely on savings during periods of income instability. No longer. Now that the entire economy, such as it is, depends on the spending of the very wealthy, it is almost unthinkable to imagine what will take place once the trust find kiddies lose their trust funds and the rich get spooked by evaporating paper wealth. And yet here we are.

But that's what you get when you create an economy of the rich, by the rich, and for the rich.