An increasing gap between the “Haves” and “Have Nots” has economists and analysts concerned about the state of America’s economy.
There’s nothing new about income inequality. But what is particularly concerning is how it’s skyrocketed in the years after the Great Recession. Wages have stagnated on the low to middle end, while asset values grow on the top end, benefiting the investor class.
So herein lies the heart of the problem…
“We have what I call a Barista economy – a low-wage, service-oriented economy and then an economy driven by people who have investible assets. They haven’t been affected as much by this downturn, while the Barista economy has,” according to Madeline Schnapp, Director of Economic Research, Property Radar.
So exactly how wide is this wage gap?
According to Organization for Economic Co-operation and Development (OECD) statistics, the average income of the richest 10% of America is 14 times greater than the poorest 10%. This gaping hole acts as a drag on the U.S. economy.
You see, because the rich have been relatively unaffected by the recession and subsequent sluggish growth, they continue to spend. Their jobs tend to be more secure, and their compensation has outpaced inflation, allowing them to continue to save.
But on the other end of the spectrum, the poor are barely making ends meet, and that curbs their spending power. And when the average person can’t spend, the U.S. economy struggles. In fact, consumer spending accounts for around 65% of U.S. GDP. No consumption growth… No economic growth.
When times are hard, consumers cut back, and this strain is evident in the July retail sales figures, the weakest since the start of the year. Unsurprisingly, many retail stocks, including, Macy’s (M) and Wal-Mart (WMT), have cut their full-year guidance recently.
So, things are not as rosy as many believe, and income inequality is undoubtedly having an impact.
However, are these dynamics all that unexpected?
Monetary policy responses, such as quantitative easing, have boosted financial asset prices, but do little to help improve real wages. One could even argue that income inequality is being driven wider by these policy responses.
The Federal Reserve… Helping the rich get richer since 1913.
Income Research Team