Tag Archives: Consumption

Plutonomies

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>   
>   (email exchange)
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>   On Sun, Oct 18, 2009 at 12:01 PM, Russell wrote:
>   

Plutonomies

>   
>   I don’t know if the very wealthy support consumption.
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As a point of logic yes, it can be done, and we’ve been moving in that direction.

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>   I was always under the impression it was the mass of the people
>   not the mass of wealth. Gillian Tett supports your thinking on this.
>   

Yes:

The essential thesis is that plutonomies arise when there are factors such as “disruptive productivity gains, financial innovation, capitalist-friendly governments, overseas conquests and dopamine-heavy immigrants, the rule of law, patent protection and great complexity exploited by the wealthy of the time”.

This description has applied to countries such as the US, UK, Canada and Australia recently: in the US, for example, the top 1 per cent control almost a quarter of the wealth. And that has big implications for consumer spending or global financial flows.

For while economists tend to watch factors such as unemployment to predict consumption, Mr Kapur thinks this can be misleading because it is the elite rich – not the middle class – who tend to drive consumption.

Last year, for example, this elite cut spending and raised saving because their assets plunged in value. However, in the next year, Mr Kapur is expecting plutonomists to make a comeback. As a result, he expects spending to reappear.


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US Consumption and Tax Policy

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Some interesting bits.

Supports my contention that we are seeing real wealth flowing upward and will continue to do so.

Note the distribution of consumption, which has been moving north as well.

Proposed tax policy won’t change any of this- higher incomes will more than offset increased marginal tax rates for the top tax brackets, and consumption will increase.

And yes, an economy can work via aggregate demand coming predominately from the top, with the bottom at subsistence levels. And we are moving in that direction.

Interestingly, as this happens the wealthy are considered ‘good’ when they hire hundreds of service people to take care of their homes, boats, personal fitness, and entertaining, etc. as they are ‘providing jobs.’

This also fits well with the export economy model our leaders are pushing hard to achieve. And the trade numbers are looking like they are succeeding. Notice the trade gap narrowing as standards of living fall.

Interesting research from ML-BAS highlighting the importance of the tax policy debate for US consumption growth and consequently US GDP:

US Consumption (Currently 72% of GDP)

  • Outlook for consumption depends on consumer outlook—on disposable income, wealth, and credit quality.
  • Wealthy (top 10% of earners) have a surprisingly high share of consumption (42%) with the middle class (40-90 percentile) composing 46% of consumption.

The US consumer as a whole is not overleveraged—the middle class is.

  • 200% debt to income and 25% debt to assets ratios are substantially higher than the wealthy’s corresponding ratios of approx. 120% and 8% respectively.

Housing wealth has a bigger impact on consumption than stock market wealth.

Wealthy have weathered the last two years a lot better than the middle class:

  • Retained employment much better.
  • Suffered lower wealth losses
  • Substantially less proportion of assets in housing.

Conclusions:

  • Overleveraged middle class burdened by real estate losses will not help consumption rebound.
  • Lower income segment has a relatively small proportion of income, suffers from a disproportionate share of unemployment which lags GDP out of a recession.
  • Wealthy –with modest leverage, near full employment, and experiencing a faster rebound in their wealth should lead consumption if all else stays the same.
  • However, reliance on government borrowing has increased as a result of addressing the credit crisis as well as the potentially ambitious health care reform bill.
  • Rising taxes (especially the “soak the rich” policies that are on the table) may offset potential consumption growth as the most important determinant of consumption is after tax income.
  • The outlook for tax policy on the top earners may provide a key swing factor to the consumption outlook.


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Falling consumption

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Falling consumption and rising unemployment means the private sector wants to work and get paid, but doesn’t want to spend its earnings on consumer goods.

No problem!

Depending on one’s politics, this allows government to increase spending to employ the idle resources for public purpose, such as infrastructure, etc.

Or alternatively, to cut taxes until consumption resumes. Or some combo of both.

The government spending is not financially constrained. The applicable constraint is the quantity of real resources offered for sale.


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Gasoline demand

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this doesn’t look like the stuff of recession:

FUNDAMENTALS TO SUPPORT

Barclays Capital said gasoline demand indications from the U.S., the world’s largest consumer, have been robust.

“Gasoline is showing the strongest year-on-year growth in demand for January-to-date,” it said in a research note.

“In each of the past six years, February has marked the start of a run of six months of consecutive month-on-month gasoline demand increases, and we have no reason to expect 2008 to break that pattern.”

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