Reports from the Economic Front

a blog by Marty Hart-Landsberg

Inequality and Capitalism

Capitalism is a dynamic system, driven above all by the private pursuit of profit.  Contemporary business decisions, supported by government polices, have been very successful in generating high rates of profit. They have also led to slow and unstable growth.  One consequence is the now widely recognized problem of income inequality.

Significantly, this income inequality is reshaping our economy in ways likely to be self-reinforcing.  This is highlighted by the concentration of consumer spending in ever fewer hands and the business response.

According to a study discussed in a recent New York Times article,

The top 5 percent of earners accounted for almost 40 percent of personal consumption expenditures in 2012, up from 27 percent in 1992. Largely driven by this increase, consumption among the top 20 percent grew to more than 60 percent over the same period.

Thus, by 2012 the top 5 percent of earners were responsible for approximately the same share of personal consumption expenditure as the bottom 80 percent.

If we focus on the post-recession period, the spending dominance of those at the top is even more striking.  As the article notes, “Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.”  More broadly, the top 20% of households accounted for approximately 90% of the total increase in real consumption spending over the years 2009 to 2012.

Not surprisingly, this trend has triggered major changes in the economy.  In particular, businesses that cater to “middle-income” earners are in decline while those selling to high and low income earners are rapidly expanding:

In Manhattan, the upscale clothing retailer Barneys will replace the bankrupt discounter Loehmann’s, whose Chelsea store closes in a few weeks. Across the country, Olive Garden and Red Lobster restaurants are struggling, while fine-dining chains like Capital Grille are thriving. And at General Electric, the increase in demand for high-end dishwashers and refrigerators dwarfs sales growth of mass-market models. . . .

In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.

“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Mr. Maxwell [head of the global retail and consumer practice at PricewaterhouseCoopers] said. “You don’t want to be stuck in the middle.” . . .

The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.

As for the self-reinforcing nature of this development: luxury spending tends to have the highest profit mark-up, thereby boosting the incomes of those at the top.  And low-end businesses prosper only because they underpin their low prices with ever lower wages.  In sum, structural changes are well underway that, if not opposed, are likely to lock-in this growing income inequality to the detriment of most working people.

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