It's dangerously unstable when 5 percent of
American earners account for 35 percent of all consumer spending
By Michael Lind
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. 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.
At
the same time, however, the top 10 percent of earners received 50
percent of all income, while they accounted for only 22 percent of
spending. Where did the rest of their money go? Much of it went into
speculation in the two waves of the bubble economy between the late
1990s and 2008. Had more of that money been in the hands of the bottom
50 percent, more of it would have been spent on consumer goods,
including manufactured products, and far less would have gone to
gambling on condos in Manhattan and Miami and trendy stocks.
One
was Edward Filene. With his brother Lincoln, Filene had sought to
implement the principles of welfare capitalism in their Boston
department store, where they established a company union, an employee
thrift plan, an insurance plan, a free health program, and a cafeteria.
Filene became a spokesman for the credit union movement in the U.S. and a
champion of progressive causes. Among his legacies are the Century
Foundation and Filene’s Basement, a discount clothing store.
In
his book “Successful Living in This Machine Age” (1932), Filene argued
that the drive for lower wages and the privileging of investment over
consumption had produced chronic overcapacity: “At a time when more
buying was the need of the hour, [capitalists] were still calling upon
the masses to refrain from buying goods, and to invest their savings in
more production; and when industries languished from want of customers,
they advised reducing wages, a process which must result in a further
falling off of sales.” As in the stock bubbles of the 1990s and 2000s,
financial experts in the 1920s urged ordinary Americans to emulate the
rich by gambling in stocks. According to Filene, financial experts
recommended that ordinary people “should better themselves by investing
their savings and drawing either interest or dividends, instead of
having to depend forever upon the wages which they might receive from
week to week.”
To illustrate the self-defeating nature of
excessive savings and investment in a mass production economy, Filene
used the refrigerator industry. In the 1920s, Filene argued, electric
refrigeration had failed to make the transition from elite consumption
to mass consumption, in part because archaic notions of thrift led
workers to invest in the stock market rather than borrow to buy
refrigerators: “And so, instead of buying something which they might use
and enjoy, they become two hundred dollar capitalists. They still have
their dilapidated ice-box, say, but they own a two hundred dollar
interest in some electric refrigeration company.” As a result, “first,
stocks went up” and their rise encouraged more people to buy stocks.
Next, “plants manufacturing electric refrigerators and other things had
plenty of capital for expansion. They expanded, but the sales of
electric refrigerators and other things did not expand in proportion. In
many cases they shrunk …” The result was the Great Depression.
“Consumption was not financed to keep pace with production, and
production had to come down to the level of consumption. The paper
profits, therefore, vanished. Because American business did not see the
true meaning of mass production, it lost the greater total profits which
it might have made, and the American people lost the power to employ
each other.”
“I am not contending, of course,” Filene wrote, “that
this was the only cause of the business depression of 1930-31. But it
is obvious that mass production demands mass buying of goods; and that
if the masses of wage-earners gamble in stocks instead of buying the
things which they want, they gamble not merely with their savings but
with their jobs.” The solution was to recognize that “business progress,
and even business safety, depend principally upon the orderly
maintenance of a high and ever higher standard of living, that is, upon
adequate buying by the masses; and these times demand credit for the
masses just as surely as the times ever demanded adequate credit for
business enterprise.” In the future, financiers “will no longer suggest
that wages be lowered; they will withhold credit, rather, from employers
who either from failure to understand what wages are, or through
failure to adapt methods which would enable them to pay high wages,
persist in keeping wages dangerously low.”
This analysis was
shared by Marriner Eccles, whom Franklin Roosevelt appointed as chairman
of the Federal Reserve, a post he held from 1934 to 1948. In his
memoirs, Eccles argued that insufficient purchasing power by middle- and
low-income Americans was the underlying cause of the Depression: “As
mass production has to be accompanied by mass consumption, mass
consumption, in turn, implies a distribution of wealth — not of existing
wealth, but of wealth as it is currently produced — to provide men with
buying power equal to the amount of goods and services offered by the
nation’s economic machinery. Instead of achieving that kind of
distribution, a giant suction pump had by 1929-30 drawn into a few hands
an increasing portion of currently produced wealth … Had the six
billion dollars, for instance, that were loaned by corporations and
wealthy individuals for stock-market speculation been distributed to the
public as lower prices or higher wages and with less profits to the
corporations and the well-to-do, it would have prevented or greatly
moderated the economic collapse that began at the end of 1929.”
The
Great Recession is not an exact replay of the Great Depression. For one
thing, the problem of industrial overcapacity is now global, with too
many factories producing too many goods in China, Japan and Germany and
not enough consumers in chronic trade deficit countries like the U.S,
Britain, Spain and Greece. 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.
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