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Sunday, August 15, 2010

 
Plutonomy Revival

by digby


We've been hearing a lot lately about how we have to coddle the wealthy or they'll hold their breath until they turn blue and then we'll be in real trouble. It seems ridiculous that anyone would listen to this, but it's worth revisiting this Wall Street Journal piece from 2007 to get an idea of where this is coming from:

It’s well known that the rich have an outsized influence on the economy.

The nation’s top 1% of households own more than half the nation’s stocks, according to the Federal Reserve. They also control more than $16 trillion in wealth — more than the bottom 90%.

Yet a new body of research from Citigroup suggests that the rich have other, more-surprising impacts on the economy.

Ajay Kapur, global strategist at Citigroup, and his research team came up with the term “Plutonomy” in 2005 to describe a country that is defined by massive income and wealth inequality. According to their definition, the U.S. is a Plutonomy, along with the U.K., Canada and Australia.

In a series of research notes over the past year, Kapur and his team explained that Plutonomies have three basic characteristics.

1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”

2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.

3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.

Kapur says that once we understand the Plutonomy, we can solve some of the recent mysteries of the American economy. For instance, some economists have been puzzled (especially last year) about why wild swings in oil prices have had only muted effects on consumer spending.

Kapur’s explanation: the Plutonomy. Since the rich don’t care about higher oil prices, and they dominate spending, higher oil prices don’t matter as much to total consumer spending.

The Plutonomy also could explain larger “imbalances” such as the national debt level. The rich are so comfortably rich, Kapur explains, that they have started spending higher shares of their incomes on luxuries. They borrow much larger amounts than the “average consumer,” so they have an exaggerated impact on the nation’s debt levels and savings rates. Yet because the rich still have plenty of wealth and healthy balance sheets, their borrowing shouldn’t be a cause for concern.

In other words, much of the nation’s lower savings rate is due to borrowing by the rich. So we should worry less about the “over-stretched” average consumer.

Finally, the Plutonomy helps explain why companies that serve the rich are posting some of the strongest growth and profits these days.

“The Plutonomy is here, is going to get stronger, its membership swelling” he wrote in one research note. “Toys for the wealthy have pricing power, and staying power.”



Keep in mind that from atop the rubble of the economic meltdown, those very people are once again making big bucks and lobbying strongly for less regulation whiloe they cry about being demonized in the press. (And it is those same people who are telling congressmen, many of whom are also in the upper one percent, that they have plenty of jobs, but the unemployed are too lazy to take them.)

If you think plutonomy is a good idea (or at least a neutral one) then the current housing slump and unemployment crisis are irrelevant to the health of the nation --- as long as the government doesn't expect you to kick in more to keep these people from being forced to accept falling wages and a much lower standard of living. If that happens you might not be able to buy as many jewels and fine art and then the whole thing falls apart.

The writer did offer one little warning about the potential problems that might stem from that:

The author of the piece did offer a teensy little warning back in 2007:

Of course, Kapur says there are risks to the Plutonomy, including war, inflation, financial crises, the end of the technological revolution and populist political pressure.


I might have thought that the destruction of the middle class would be considered a primary risk for social unrest, but perhaps society's winners think they can protect their jewels and mansions by hiring Blackwater these days, so it's not a problem. In any case he brushed off all those potential consequences:

Yet he maintains that the “the rich are likely to keep getting even richer, and enjoy an even greater share of the wealth pie over the coming years.”

All of which means that, like it or not, inequality isn’t going away and may become even more pronounced in the coming years. The best way for companies and businesspeople to survive in Plutonomies, Kapur implies, is to disregard the “mass” consumer and focus on the increasingly rich market of the rich.



It would appear that even in the aftermath of a near cataclysm in the financial sector, they have not changed their minds. But then, why would they? From their perspective, the government did its job by bailing out the big banks and Wall Street to save the economy and everything's back to normal.


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