TPM Cafe: Opinion

Luxury Goods Are The Only Growth Industries -- And That's Bad

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A New York Times report by Nelson Schwartz shows that the very wealthiest are taking up an-ever larger share of the consumer market, and the business community is responding logically:

As politicians and pundits in Washington continue to spar over whether economic inequality is in fact deepening, in corporate America there really is no debate at all. The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away.

The top 20 percent of earners are doing more than 60 percent of the consumer spending in this country, Schwartz reports, and since the recession, spending by the top 20 percent of households represents 90 percent of the increase in consumer spending since the recession.

A recent Morgan Stanley analysis shows that consumer spending grew in 2013 — but it was driven by high-end durable goods like boats, luggage and watches, and high-end services like air travel and investment advice.

The findings reflect a two-track recovery for the U.S. economy. The wealthy, buoyed by stock market gains and rising real estate prices, were willing and able consumers last year. Households relying on income from wages and salaries were hit harder by higher taxes at the start of the year, tamping down demand.

Yesterday’s CBO report has drawn the most attention because of what it says about the impact of the Affordable Care Act, but there’s a bigger problem getting less discussion. The report shows long-term problems from a weak, slow-growing economy, including lower tax revenues.

William Spriggs has been concerned about this problem for years.

Spriggs, a former Department of Labor economist who now works with the AFL-CIO and teaches at Howard University, says that the relative decline of middle-class consumption doesn't just affect what companies make--it affects how many jobs are available and what kind of jobs they'll be.

"For things like autos and appliances—where typically gains for the middle class means marginal increases in purchases (a second or third car, a trash compactor, and additional freezer for the basement), the rich buy luxury cars or upscale appliances, things with higher profit margins but not the requisite increase in the number of cars or appliances produced that would increase the demand for labor," Spriggs says. (And, of course, a larger number of middle-class households can just buy more total products in the aggregate than can a smaller set of wealthy ones.)

He also notes that wealthy consumers are more likely than middle-class consumers to spend their dollars in places like restaurants and hotels, which have traditionally been lower-wage jobs.

Consumer-goods manufacturing also tends to support other industries, from business services like accounting, to parts and repair, to stores and restaurants patronized by the employees of these middle-class-focused businesses. When the goods-producing jobs get hollowed out, the jobs around them follow.

It's not just the prices of consumer goods where inequality is having an effect, Spriggs says. The richest households "drive the market" for important resources like housing and college education.

Just as with restaurants and manufactured good, Spriggs said, "home construction is dominated by the huge share of the market at the high end. The result is that there aren’t really middle-class home builders any more. This pegs the movement of home prices toward the rate at which high income households see their income grow, not the rate of growth of income at the middle." College tuition is seeing much of the same effect.

The consequences of this development are dangerous, Spriggs says, and contribute to the growing personal debt burden on working households. In both housing and education, “middle-class families are borrowing heavily to keep up with price hikes because of the tilt of the market demand at the high end."

And you only need to look at 2008 to see the dangers of an economy where middle-income people have to use debt to keep up, Spriggs said.

So why hasn’t this very real problem set off alarm bells in Washington and in the business community?

Well, for one thing, while the economy is working really poorly for middle-class consumers and the people who rely on them, it’s working just fine for those at the very highest income levels. After all, they’ve been able to increase their consumer spending.

The trouble with middle-class consumer demand is a result of the trouble with middle-class jobs and wages--and that, in turn, has a lot to do with what Jia Lynn Yang describes as an obsessive focus on maximizing shareholder value as the paramount goal of business.

Together with new competition overseas, the pressure to respond to the short-term demands of Wall Street has paved the way for an economy in which companies are increasingly disconnected from the state of the nation, laying off workers in huge waves, keeping average wages low and threatening to move operations abroad in the face of regulations and taxes.

Increasingly, corporate identity is geared toward shareholder value — and, correspondingly, executive compensation is frequently tied to stock prices. Employees become one more input — one more cost, really — in this calculation, rather than the people who create the company’s value in the first place. The pattern we’re seeing is self-perpetuating.

Pushed by these short-sighted new imperatives, America’s biggest corporations are stockpiling their spare cash or investing in stock buybacks rather than putting it to work creating new customers.

As an employer like Darden Restaurants — owner of Olive Garden and Red Lobster — sees profits falling from their mid-priced outlets, it’s easier for them to shift focus to higher-end restaurants than pay Olive Garden employees enough to afford to eat there.

This is a tough situation when you see it happening at one restaurant chain, but it’s devastating when it’s carried out across the economy. The gap between the dollar-store shoppers and the private-jet-purchasers widens, and the private-jet-purchasers don’t see any reason to do anything different.

And, of course, economic inequality has political consequences. Just as businesses are forced to cater to the preferences of a wealthier clientele, so are politicians. Just look at the $8.7 billion in food stamp cuts that came along with the farm bill. These cuts are more than just unnecessary: at a time when unemployment is still high and the economy is still struggling, they’re cruel. And yet Sen. John Hoeven (R-ND) said that the cuts are “fair to both sides.” (Apparently people who need to eat aren’t considered a “side” here.)

The hollowing-out of the middle class, and the parts of the economy supported by middle-class consumption, didn’t happen by magic or by some force of nature. It happened because of policy decisions at the federal level and by practices in the business community. It’s a choice, and we can choose differently.

We need to start thinking more seriously about what kind of economy we want - because the longer we let these trends continue, the harder they’ll be to reverse.

Seth D. Michaels is a freelance writer in Washington, D.C. He's on twitter as @sethdmichaels.

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Portrait Of Shocked Woman at a clothes shop (Shutterstock)

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