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Rich People on Spending Sprees May Find One Day That Income Inequality Bites Them in the Wallet

The richer they get, the more blind the 1 percent is to the consequences of their greed.
 
 
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For the past five years, the market for luxury goods has been on a roll, even as the rest of the economy sputtered. Fancy cars are flying off the production lines. Tiffany and Prada are in the pink. Even Big Tobacco is in on the action, doing brisk business in high-end cigars. Consumer spending is up! the latest headlines shout. Rejoice! But wait — if a big chunk of this is driven by sales of luxury goods, is that ultimately a good thing for the economy?

Despite the Great Recession, the U.S. has remained the world’s number-one nation for luxury goods consumption. The 1 percent has never had such fawning attention and splendiferous choices. The stock market returns of 2013 only served to further escalate the spending sprees of the wealthy. That's great for them. But what about the rest of us?

Well, we don't really count, according to the banksters. If you'll recall, back in 2005, the number-crunchers over at Citigroup released a report on the economy that made it all clear. The report announced that there is "no such thing as the U.S. consumer." Notions like "average" consumer and "average" debt were totally irrelevant. America, they explained, actually consisted of two groups: the rich and everybody else. There was no reason to worry about the second group, because what it did just didn't matter much. The richest 1 percent made as much every year as the bottom 60 percent combined. They called the group with all the power the "plutonomy".

"Economic growth is powered by and largedly consumed by the wealthy few," the analysts said. Just like it was in the Gilded Age and the Roaring Twenties. The idea was simple: the rich alone can keep the economy humming. Who cared, in that case, about income inequality? Thinking along those lines, many conservative neoclassical economists over the years have argued that income inequality is actually necessary for growth because it puts money into the hands of capitalists who will do things like create jobs and spend their money, which supposedly helps everyone out eventually. Trickle-down economics, some call it.

Our government officials are tooting the consumer spending horn as the rich are burning up their credit cards. But the rest of us are still cutting back on many things. Socked with high, out-of-pocket healthcare expenses, job insecurity, and disappearing pensions, the middle class has less disposable income. Instead of taking trips, we're taking staycations. We're not spending as much on electronics or new cars. At the lower rungs of the economic ladder, workers are stuck in low-wage hell and struggle merely to survive.

Meanwhile, just as in the Gilded Age and the Roaring Twenties, the richer the rich become, the less they believe is expected of them, and the louder they cry out against paying their share of taxes and call for budget cuts even as the federal deficit continues to shrink (according to the Congressional Budget Office, the government actually ran a $44 billion surplus in December). The rich push policies that only increase income inequality.

If the Citigroup folks were right, then the rich need not worry. The economy will be okay.

But maybe the Citigroup folks were wrong.

Economists who do not subscribe to conservative neoclassical theories are beginning to do research on how income distribution impacts economic growth over the long run. The subject is controversial at this point, and tricky because it's hard to get empirical evidence. But it looks like there could be some problems with the Citigroup theory, particularly as it relates to consumer spending. The rich have contraints on their spending, for one thing. There are only so many Prada bags, cars and fancy cigars one can buy. So if you can't spend it all, what do you do with it? You might just end up saving most of it, which doesn't help the rest of the economy, and might be bad for it in the long run. There are other problems, too. Some of the rich will use the excess money they can't figure out how to spend on speculation, which can destabilize the economy.

Long-term economic growth isn't the only reason we should be worried about income inequality. There are many problems, like social unrest, health crises and the breakdown of democratic institutions that result from the rich and the rest being separated by a wide gulf. But the damage to the economy is something even the rich might stop and think about. They may find that income inequality will eventually come back to bite them in the long run — right in the wallet. 

Lynn Parramore is an AlterNet senior editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of "Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture." She received her Ph.D. in English and cultural theory from NYU. She is the director of AlterNet's New Economic Dialogue Project. Follow her on Twitter @LynnParramore.