About the author: Karen Petrou is a managing partner at Federal Financial Analytics and author of Engine of Inequality: The Fed and the Future of Wealth in America.
“Our economy is literally the envy of the world,” President Biden said in his recent State of the Union address. There is some truth to this talk of exceptionalism. However, the US economy appears to be doing better than other advanced economies, thanks in part to data heavily skewed by economic inequality in the US. Here, too, we are exceptional, precisely in the bad way that we are less equal than all other advanced democracies.
Overall numbers show the U.S. economy is outperforming much of the rest of the world. Gross domestic product grew 2.5% in 2023, compared with 1.9% in Japan, 0.5% in the United Kingdom and minus 0.3% – a mild recession – in Germany. The unemployment figures are similar. What these seemingly favorable comparisons miss, however, is how the spending and investments of the few Americans who own so much of America's wealth and receive so much of its income are driving an economy that is leaving almost everyone else further and further behind. Unequal economies are also excessively vulnerable to recessions and financial crises. The apparent strength of the U.S. economy is a fragile platform for growth or, as the White House hopes, political support.
The most recent data measuring global economic inequality is from 2022. It shows that the richest 1% of Americans own nearly 35% of the national wealth and the top 10% own over 70%, leaving only 30% for the remaining 90%. of American households remain. The rich share of US income is also disproportionate: the top 1% of households have 21% of US income, while the top 10% have 48%. That may seem a little better, but the wildly unequal wealth numbers are evidence that the top 10% own far more wealth, in part because they retain a far larger portion of their income, most of which comes from capital gains rather than wages.
The difference between economic inequality in the US and major markets is clear. The income share of the top 1% in the US is almost twice as high as the share of the top 1% in the UK, Germany and Japan. The gap between the U.S. and these countries is not as great as the top 1% in terms of wealth, but the U.S. is also far more unequal on other key measures of wealth and income inequality.
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In the United States, households save, spend, and acquire debt very differently depending on their place on the equity distribution curve. Recognizing this reality has important implications for the conclusions drawn from the idea that consumption drives the U.S. economy. This is the case, but not because all households have the ability to spend on goods and services that stimulate growth. Rather, when you look at the overall data, the economy appears to be growing because some households are able to spend on selected goods – for example, more expensive houses, vacations and luxury goods – and the services that have played a very important role in this as a basis for current GDP data. The total is rising, even though many Americans are not saving, spending only on essentials and often taking on even more debt to achieve this.
Growth in the U.S. is also driven by homeowners, who are disproportionately wealthy due to the unique nature of the U.S. mortgage market. The 30-year fixed-rate mortgage is not standard in other advanced economies. But it has protected home-owning Americans from the high interest rates that central banks around the world have used to curb inflation.
In a fully equal society, aggregated data represents individual experiences. That is, in a nation where the distribution curve is completely flat – not that there is any – every individual would receive the same amount of gross domestic product and be equally employed. Therefore, in countries such as Japan, the UK and Germany, balance sheet indicators better reflect the experiences of many households, even if some always perform significantly better and others significantly worse. In the US, some do much better, everyone else does much worse. Averages instead of medians obscure these differences, and aggregating totals based on a few large numbers makes this even worse.
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This becomes clear when the overall numbers the administration favors in its Bidenomics defense are assessed in light of the actual distribution of economic largesse. As quickly becomes clear, rough numbers belie an economic reality that most Americans don't like at all. February's payroll data looked good, prompting the president to congratulate himself. However, since October 2023, the number of full-time workers has fallen by more than 1.8 million, while the number of part-time workers has increased by over 1.2 million, despite making up only 17% of the workforce.
And what good is a job if it doesn't pay a good salary? The Atlanta Fed's wage growth indicator has been trending downward for nearly a year. The pandemic's big savings boost has largely disappeared for most households. Defaults are increasing as wages fall and interest rates rise. It's no surprise, then, that about 65% of American consumers generally live paycheck to paycheck, paying less or nothing on their credit cards and car loans to make ends meet. These families spend money, but mostly because they also eat and drive.
Looking at the U.S. economy using aggregate data to assess prosperity and resilience is like looking at a lake covered in ice and assuming you can skate on it from one end to the other. Weak points in the ice can quickly plunge you into the depths. This also applies to gaps in an economy characterized by inequality. We know from many years of historical experience that unequal economies are not only more vulnerable to recessions, but also to financial crises. Economic policymakers would do well to remember these hard lessons and shape their policies accordingly. And traders betting that U.S. exceptionalism can drive markets to endless new heights might want to temper their enthusiasm.
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