Can we save the middle class?

[NOTE: This is part 2 of a multi-part post. To go to part 1, click here.]


"IN OCTOBER 2005, three Citigroup analysts released a report describing the pattern of growth in the U.S. economy. To really understand the future of the economy and the stock market, they wrote, you first needed to recognize that there was “no such animal as the U.S. consumer,” and that concepts such as “average” consumer debt and “average” consumer spending were highly misleading."


"In fact, they said, America was composed of two distinct groups: the rich and the rest. And for the purposes of investment decisions, the second group didn’t matter; tracking its spending habits or worrying over its savings rate was a waste of time. All the action in the American economy was at the top: the richest 1 percent of households earned as much each year as the bottom 60 percent put together; they possessed as much wealth as the bottom 90 percent; and with each passing year, a greater share of the nation’s treasure was flowing through their hands and into their pockets. It was this segment of the population, almost exclusively, that held the key to future growth and future returns. The analysts, Ajay Kapur, Niall Macleod, and Narendra Singh, had coined a term for this state of affairs: plutonomy."


These are the opening two paragraphs of an article titled "Can the middle class be saved?" by Don Peck in the September issue of The Atlantic. It's a wonderful look inside the American economy, and I would highly recommend your reading the entire article. But, it's about 18 pages, so it is my intention to pass along the relevant highlights.


"In a plutonomy, Kapur and his co-authors wrote, “economic growth is powered by and largely consumed by the wealthy few.” America had been in this state twice before, they noted—during the Gilded Age and the Roaring Twenties. In each case, the concentration of wealth was the result of rapid technological change, global integration, laissez-faire government policy, and “creative financial innovation.”


"According to Gallup, from May 2009 to May 2011, daily consumer spending rose by 16 percent among Americans earning more than $90,000 a year; among all other Americans, spending was completely flat. The consumer recovery, such as it is, appears to be driven by the affluent, not by the masses. Three years after the crash of 2008, the rich and well educated are putting the recession behind them. The rest of America is stuck in neutral or reverse." [Emphasis mine.]


If we have any hope of understanding our economic problems, we need to know more about "the rest of America," because some of the rest are doing pretty well, some so-so and some not well at all. Unfortunately, it's the "not well at all" group that makes up almost 60% of our economy.


Tomorrow, we'll see who's in this group, and you may be surprised.