Posts Tagged ‘consumption’

P1-BS611A_TWOTI_16U_20150128171805

As the Wall Street Journal explains,

American spending patterns after the recession underscore why many U.S. businesses are reorienting to serve higher-income households, said Barry Cynamon, of the Federal Reserve Bank of St. Louis.

Since 2009, average per household spending among the top 5% of U.S. income earners—adjusting for inflation—climbed 12% through 2012, the most recent data available. Over the same period, spending by all others fell 1% per household, according to Mr. Cynamon, a visiting scholar at the bank’s Center for Household Financial Stability, and Steven Fazzari of Washington University in St. Louis, who published their research findings last year.

The spending rebound following the recession “appears to be largely driven by the consumption at the top,” Mr. Cynamon said. He and Mr. Fazzari found the wealthiest 5% of U.S. households accounted for around 30% of consumer spending in 2012, up from 23% in 1992.

Indeed, such midtier retailers as J.C. Penney , Sears and Target have slumped. “The consumer has not bounced back with the confidence we were all looking for,” Macy’s chief executive Terry Lundgren told investors last fall.

In luxury retail, meanwhile: “Our customers are confident, feel good about the economy in general and their personal balance sheets specifically,” said Karen Katz, chief executive of Neiman Marcus Group Ltd., last month. Reported 2014 revenues of $4.8 billion for the company are up from $3.6 billion in 2009.

 

I didn’t attend the most recent American Economic Association/Allied Social Sciences Association meetings in Boston. But, according to Chuck Collins, several sessions focused on the sensation of French economist Thomas Piketty and his 2014 book on inequality, Capital in the Twenty-First Century.

As an outsider to academic economics, I was struck by just how compartmentalized and smug the field appears. At one point, [Gregory] Mankiw even put up a slide, “Is Wealth Inequality a Problem?” Any economist who ventures across the disciplinary ramparts will, of course, find a veritable genre of research on the dangerous impacts of extreme inequality.

We now have over two decades of powerful evidence that details how these inequalities are making us sick, undermining our democracy, slowing traditional measures of economic growth, and turning our political system into a plutocracy.

Mankiw, at another point in his presentation, had still more embarrassing comments to make. Piketty, he intoned, must “hate the rich.” Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing.

These clearly well-rehearsed quips, aimed at knee-capping the humble French economist, fell flat. Mankiw’s presentation, entitled “R > G, so what?,” came across as little more than an apologia for concentrated wealth.

And Piketty’s response?

Piketty’s one poke back at the nitpickers came in response to their unanimous support for a progressive consumption tax as an alternative to any other progressive income or wealth tax. “We know something about billionaire consumption,” Piketty observed, “but it is hard to measure some of it. Some billionaires are consuming politicians, others consume reporters, and some consume academics.”

retailers

As in the classic Prisoner’s Dilemma, retailers could “cooperate” with one another—paying higher wages and enjoying higher sales—but they don’t. Instead, they “defect”—and, as a result, pay low wages and undermine consumer spending for all retailers, including themselves.*

That’s one way of interpreting the new report by the Center for American Progress [pdf]:

While many of these companies’ lobbyists and trade associations continue to pro- mote a low-wage agenda, their 10-K statements reveal how low consumer spend- ing levels undermine their stock prices. In fact, 88 percent of top retailers explicitly cite weak consumer spending as a risk factor.

That retailers depend on consumer spending is not a revelation, but that many retailers see flat or declining incomes as a risk factor is: 68 percent of companies point to flat or falling disposable incomes as a risk. Sixty-four percent of these companies that filed 10-Ks in 2006 cited incomes as a risk factor in their most recent 10-K, compared to just 32 percent in 2006.

Joan Robinson—who should have won the Nobel Prize in Economics but didn’t (because, of course, she was a non-neoclassical, woman economist) and can’t (because she’s dead)—understood this “essential paradox of capitalism”:

Each entrepreneur individually gains from a low real wage in terms of his own product, but all suffer from the limited market for commodities which a low real-wage rate entails.

And, of course, Old Nick before her:

Every capitalist knows this about his worker, that he does not relate to him as producer to consumer, and [he therefore] wishes to restrict his consumption, i.e. his ability to exchange, his wage, as much as possible. Of course he would like the workers of other capitalists to be the greatest consumers possible of his own commodity. But the relation of every capitalist to his own workers is the relation as such of capital and labour, the essential relation. But this is just how the illusion arises — true for the individual capitalist as distinct from all the others — that apart from his workers the whole remaining working class confronts him as consumer and participant in exchange, as money-spender, and not as worker.

 

*In the old days, when I taught Principles of Economics, I used to illustrate the Prisoner’s Dilemma with Puccini’s opera Tosca. You know: Scarpia kills Cavaradossi, Tosca in turn kills Scarpia, and then Tosca kills herself.

P1-BM854C_OUTLO_G_20130825172704

The Wall Street Journal uses this chart to illustrate a story on a new report issued by Morgan Stanley on “Inequality and Consumption.”*

Morgan Stanley’s research suggests weaker-than-usual consumption at the lower end of the income ladder helps explain why this economic recovery has been particularly anemic.

“It has taken more than five years for U.S. households to ‘feel’ like they are in recovery,” write economists Ellen Zentner and Paula Campbell in the report, entitled “Inequality and Consumption.”

Before the recession, they say, “the expansion of credit simply delayed the day of reckoning from declining incomes and rising inequality.”

Apparently, economists at Standard & Poor’s and Morgan Stanley have begun to understand the macroeconomic effects of rising inequality, a problem that legions of mainstream academic economists have simply ignored.

 

*I haven’t yet been able to obtain a copy of the report itself. I will write about it as soon as I do.

Update

Here are some other charts from the report (courtesy of Marketwatch):

MW-CU639_gini_c_20140922105451_ZH

MW-CU641_low_wa_20140922105810_ZH

MW-CU643_median_20140922110117_ZH

MW-CU647_con_vs_20140922110839_ZH

profits

The Wall Street Journal reported today that U.S. corporations “posted record profits during the second quarter.”

After-tax corporate profits, without inventory valuation and capital consumption adjustments, rose 6% from the first quarter to a seasonally adjusted annual rate of $1.840 trillion—after two consecutive quarters of declining profits. Profits last quarter were up 4.5% from a year earlier. Thursday’s report included the first profit estimates, which aren’t adjusted for inflation, for the second quarter. . .

As a share of nominal GDP, corporate profits rose last quarter but fell short of an all-time high.

Profits hit a record 10.7% of GDP in the third quarter of 2013, slipping to 10.5% in the fourth quarter and 10.2% in the first quarter. They totaled 10.6% of GDP in the second quarter.

At the same time, consumer spending declined in July. Why?

On the surface, the weak spending figures appear at odds with accelerating job creation. The last six months saw the strongest stretch of payroll gains since 2006. Underpinning those gains, however, was hiring in low-wage fields such as restaurants, retailers and temporary jobs. At the same time, a historically high number of Americans aren’t participating in the labor force or are working part time but would prefer a full-time job. . .

“Higher wages have been slow to appear and gains in the stock market are not enjoyed by all,” said Chris Christopher, an Global Insight economist. “More widespread income gains are needed to get all consumers back on solid footing.”

In other words, it’s still a tale of two recoveries: the best of times for corporate profits, the worst of times for the vast majority of the population.

HiBrowLoBrow_L

As we know, rising inequality, especially the hollowing-out of the middle, has undermined the financial viability of retailers and other merchants of consumption that, during the postwar period, catered to the middle-class—and boosted the prospects of particular lines and whole businesses that target those at the tiny top and growing bottom of the distribution of income. As the New York Times reported in February,

In Manhattan, the upscale clothing retailer Barneys will replace the bankrupt discounter Loehmann’s, whose Chelsea store closes in a few weeks. Across the country, Olive Garden and Red Lobster restaurants are struggling, while fine-dining chains like Capital Grille are thriving. And at General Electric, the increase in demand for high-end dishwashers and refrigerators dwarfs sales growth of mass-market models. . .

Investors have taken notice of the shrinking middle. Shares of Sears and J. C. Penney have fallen more than 50 percent since the end of 2009, even as upper-end stores like Nordstrom and bargain-basement chains like Dollar Tree and Family Dollar Stores have more than doubled in value over the same period.

Now, that same unequal distribution of income seems to be destroying the foundations of the postwar era of middlebrow culture. As A. O. Scott explains,

The middlebrow is robustly represented in “difficult” cable television shows, some of which, curiously enough, fetishize such classic postwar middlebrow pursuits as sex research and advertising. It also thrives in a self-conscious foodie culture in which a taste for folkloric authenticity commingles with a commitment to virtue and refinement.

But in literature and film we hear a perpetual lament for the midlist and the midsize movie, as the businesses slip into a topsy-turvy high-low economy of blockbusters and niches. The art world spins in an orbit of pure money. Museums chase dollars with crude commercialism aimed at the masses and the slavish cultivation of wealthy patrons. Symphonies and operas chase donors and squeeze workers (that is, artists) as the public drifts away.

Universities and colleges, the seedbeds of a cultural ideal consecrated to both excellence and democracy, to citizenship and to knowledge for its own sake, are becoming either hothouses for the new dynastic elite or training centers for the technocratic debt peons of the digital future.

In the hectic heyday of the middlebrow, intellectuals gazed back longingly at earlier dispensations when masterpieces were forged in conditions of inequality by lucky or well-born artists favored by rich or titled patrons.

Social inequality may be returning, but that doesn’t mean that the masterpieces will follow. The highbrows were co-opted or killed off by the middle, and the elitism they championed has been replaced by another kind, the kind that measures all value, cultural and otherwise, in money. It may be time to build a new ladder.

Chart of the day

Posted: 3 February 2014 in Uncategorized
Tags: , ,

consumption-inequality

As the New York Times reports, based on a recent paper by Barry Cynamon and Steven Fazzari [pdf],

In 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption, up from 28 percent in 1995, the researchers found.

Even more striking, the current recovery has been driven almost entirely by the upper crust, according to Mr. Fazzari and Mr. Cynamon. Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.

More broadly, about 90 percent of the overall increase in inflation-adjusted consumption between 2009 and 2012 was generated by the top 20 percent of households in terms of income, according to the study, which was sponsored by the Institute for New Economic Thinking, a research group in New York.

The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.

For example, luxury gambling properties like Wynn and the Venetian in Las Vegas are booming, drawing in more high rollers than regional casinos in Atlantic City, upstate New York and Connecticut, which attract a less affluent clientele who are not betting as much, said Steven Kent, an analyst at Goldman Sachs.

Among hotels, revenue per room in the high-end category, which includes brands like the Four Seasons and St. Regis, grew 7.5 percent in 2013, compared with a 4.1 percent gain for midscale properties like Best Western, according to Smith Travel Research.