I found an interesting article that attempts to explain the resiliency of the U.S. economy, despite the recent wave of economic challenges that the nation has faced. The concept of a Plutonomy is nothing new but the emphasis of it as an explanation for continued economic expansion is a bit of a stretch, in my opinion. To suggest that the continued consumption of the wealthy is all that matters in the economy and that this upper class is immune to market shocks is an oversimplification of the current economic environment. It is an interesting article, nonetheless:
U.S. resilient despite wealth gap
Friday, October 21, 2005; Posted: 7:27 a.m. EDT (11:27 GMT)
WASHINGTON (Reuters) -- It will be no consolation to poorer U.S. households struggling to make ends meet, but rising U.S. income disparity may explain how the world's biggest economy continues to expand rapidly amid repeated shocks.
For those puzzled at how the United States continues to grow well above historical averages despite blistering fuel price rises, rising debt and interest rates and ballooning national deficits, many economists say one answer lies in the American "plutonomy".
In a "plutonomy", according to Citigroup global strategist Ajay Kapur, economic growth is powered by and largely consumed by the wealthy few. Canada and Britain fall into that category too, he says, the euro zone and Japan much less so.
Spurred by capitalist-friendly governments, technology-driven productivity gains, high immigration and strict property rights and patents, Kapur argues the U.S. plutonomy has mushroomed since the early 1980s.
With huge chunks of national income and wealth increasingly concentrated in a tiny percentage of households at the top, national spending, profits and economic growth are disproportionately dependent on the fortunes of that same group.
And the more there is growth in the economy, profits and the price of assets, such as houses and equity, the relatively richer and more significant this group is in assessing nationwide growth.
In other words, calculating how higher energy costs will affect the economy by simply looking at the impact on 'average' American households can be hugely misleading.
"It is easy to drown in a lake with an 'average' depth of four feet - if one steps into the deeper extremes," Kapur wrote in report released this week.
"There is no average consumer in a 'plutonomy'," he said, adding: "Consensus analysis focusing on the average consumer are flawed from the start."
To be sure, hurricanes Katrina and Rita devastated the lives of millions of poor Americans. Many more now see household budgets squeezed to the limit by the ensuing surge in gasoline and home heating costs.
But the bald facts of rising inequality in America's wealth distribution means the trials of low- and even middle-income families will have only a small impact on gauges of gross domestic product, aggregate spending growth and corporate profits.
Kapur's report highlights consumer finance surveys showing the top one percent of U.S. households -- about 1 million households -- accounted for about 20 percent of overall U.S. income as recently as 2000.
That is only a slightly smaller share than the bottom 60 percent of some 60 million households put together.
And the top one percent also accounts for a third of household net worth, the difference between household assets -- such as equity or houses -- and debts. That is greater than the total held in the bottom 90 percent.
Economists say the decline in equity values since 2000 may have reduced the skew in this 2001 Survey of Consumer Finances, a triennial survey sponsored by the Federal Reserve. Data from the 2004 survey has yet to be released.
The rise in house prices since then will have distributed asset wealth a little wider than the concentration of equity.
But more recent household surveys ram home the point.
The 2003 Consumer Expenditure Survey shows pre-tax average income of the top quintile income group, at $127,146 per annum, just a thousand dollars short of the combined average income of all of the bottom 80 percent.
And it showed the average expenditure of the top 20 percent of households exceeded the total of the lowest 60 percent.
Dean Maki, Head of U.S. Economic Research at Barclays Capital, said spending by this top quintile seems very unlikely to drop substantially in response to higher energy prices.
Maki, co-author of a 2001 Fed study demonstrating the fall in the U.S. savings rate of rich Americans in response to the 1990s equity boom, said the top quintile are now seeing strong income growth, plentiful jobs and housing and equity gains.
"Energy prices represent a substantially smaller share of spending in these households than for poorer Americans," said Maki. "With fundamentals so positive for this group, we believe spending growth by the wealthy should continue to provide some insurance to the overall consumption outlook."
David Kelly, senior economic adviser at Putnam Investments in Boston, reckons debt among poorer households also play a significant part in keeping U.S. consumers seemingly spending beyond their means.
But Maki at Barclays pointed out that a large part of the nationwide debt too is held by the top income quintile and for that group, assets far outweigh debt holdings.
"That's one reason we don't see much of a relationship between aggregate debt burden and consumer spending," he said.
For all the implications of this idea -- and Kapur reckons it goes along way to explaining the wider issues of global economic imbalances -- many feel the reality of the situation should be obvious too all.
"Whatever about the political system, the U.S. economy is not a democracy -- it doesn't count by heads, it counts by dollars," said Putnam's Kelly.
