As the news media have reminded us often, the continuing high unemployment and plans for further layoffs are having a dampening effect on consumer spending, and that is true enough — but what about the other side of consumer spending?
Only about half of U.S. consumption spending comes from households that are directly affected by the job market — from people who work for a living. The other half, approximately, comes from fabulously wealthy households, with annual income around $1 million per year, or more. This side of consumption spending was hit harder by the meltdown in the financial system — witness the drastic decline in the jewelry business — and now shows little sign of a comeback as the immediate sense of crisis is fading.
Some observers have looked at the decline in spending by multi-millionaires and have concluded that the super-rich are suffering along with the rest of us. There are anecdotes from psychologists that bear this out in some cases, but this view doesn’t hold up as a generality. The compromises in lifestyle for a household that cuts its consumption spending from $1,000,000 per year to $100,000 per year, a 90 percent decline, aren’t as obvious or visible as the cutbacks in a household that has to cut its spending from $40,000 per year to $20,000, a 50 percent reduction.
The truth is, the super-rich never needed to spend that much in the first place, and once they get out of that habit, there is no guarantee that they will go back to it. And this is a point of weakness for the U.S. economy, or any economy where the vast majority of income goes to a relatively small class of people. People who are super-rich have less incentive to spend than the rest of do, and they’re can’t easily be persuaded to go out and buy things that they don’t really want. This results in bigger ups and downs in the economy than we might have seen 30 years ago when the super-rich were a relatively small part of the economy.