By David Dayen

Copyright prospect

We are closing in on the 20th anniversary of one of the most revealing pieces of bank analyst research in recent American history. On October 16, 2005, Citigroup released an “industry note” for investors that started with a bracing statement: “The World is dividing into two blocs—the Plutonomy and the rest.”

Plutonomy is defined as an economy where, well, plutocrats provide the lion’s share of the economic activity and have a distortionary effect on economic statistics. One way to describe it is that if Bill Gates walked into a room with three laborers, the average wealth of all four in the room would be in the billions. But that wouldn’t tell you anything about the circumstances of the non–Bill Gates members of the sample, or how the economy feels to the “average” person in the room. “Consensus analyses that do not tease out the profound impact of the plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts … are flawed from the start,” the note explains.

This was an investor note, and it was primarily focused on finding a “plutonomy” basket of stocks to capitalize on this tendency. (Luxury goods, essentially.) But the researchers at Citigroup provided strong evidence for a continued pulling away of the rich from the rest, which has a lot of explanatory power for the moment we’re in economically today. How, otherwise, to explain the current combination of increased inflation, increased unemployment, and yet also increased consumer spending?

It all makes sense if you remove the averages and tease out who is doing all the buying and who is experiencing all the suffering. Since the pandemic, many have used the term “K-shaped economy” to demonstrate that the richer segments of society have seen their fortunes rise while the poorest fall. But I prefer “plutonomy,” a closer analogue to the idea of a Second Gilded Age.

Politicians keep ignoring a key logical outcome of plutonomy: Even though a small subset of Americans have all the money, they don’t (yet) get to cast all the votes. This explains a kind of permanent miasma among the public, and the tendency for parties in power to shout ineffectually that everyone’s doing fine, if you only look at the mythical “average” consumer.

The top 10 percent have been increasing their overall share of consumer spending for the past three decades, from a little over 35 percent in 1994 to 49.2 percent in the most recent quarter, a new record high according to Moody’s analyst Mark Zandi. Breaking out income earners by level of consumer spending, as Zandi did, shows that while the bottom 80 percent of earners spend at levels consistent with the Consumer Price Index, the top 20 percent spend at staggeringly higher levels. “The U.S. economy is being largely powered by the well-to-do,” he concluded.

The evidence for this is all around us. The unemployment rate is rising, and the unemployment rate for Black Americans is at a four-year high. Weekly unemployment claims announced last week were also in the range of late 2021, when the economy was in its post-pandemic recovery. Manufacturing employment has fallen consistently for the past six months. Consumer sentiment continues to dip into gloomy territory, as people expect weakening personal finances in the future. This has put the Federal Reserve in the impossible position of lowering interest rates, as they did on Wednesday, even as inflation is accelerating.

Consumer spending is being driven by the top 10 or 20 percent, and unemployment, food insecurity, and gloominess are driven by everyone else.

Yet despite these signs of economic pain, retail sales, responsible for close to half of economic growth, jumped 0.6 percent in the past month, with July also revised upwards. The numbers for retail sales also keep rising, unbroken by whatever recklessness or damage Trump administration policies have inflicted on the economy.

How can we hold together the concepts of soft employment numbers, higher inflation, and climbing retail sales? You can search for reasons to explain why U.S. consumers are lying, spending with abandon even as they despise the economic picture. Or you can simply reject the average and look to the differences within the income distribution. If you do, you reveal the K-shape: Consumer spending is being driven by the top 10 or 20 percent, and unemployment, food insecurity, and gloominess are driven by everyone else. Both groups are experiencing inflation, but only the lower-income earners truly feel it. Higher-income folks are happy to spend more money on goods and services, bolstered by fat wallets and stock portfolios.

This is not that novel an analysis—like I said, Citigroup, among many others, figured it out 20 years ago—but it has huge implications. First, on inflation, if the primary buyers of goods and services (the richest 20 percent) are not price-sensitive, there is no reason to moderate prices to ensure that customers have an ability to pay. If inflation is not going to meaningfully reduce volume of sales, you can keep marking up higher. This is consistent with the story of higher corporate earnings, with companies “raising prices when they can.”

The same companies are also finding ways to ditch workers, moving to “human-light” operations, in the bloodless parlance of corporate-speak. Some of this reflects productivity gains from automation, but much is out of the necessity of doing more with less, because investment is seen as folly with Trump changing his mind every few seconds on policies where companies need certainty to invest. CEOs are also drunk on DOGE-ing their workforces, aping what the administration did to its federal workforce this year. The results of grinding remaining employees to the bone are likely to be unsustainable, but the spending appetites of wealthy consumers will conceal this.

Another implication is that the increase in public needs from job loss or poverty is being masked by the plutonomy. Continuing jobless claims have been elevated since May, and my colleague Whitney Wimbish has reported on increasing demand at local food banks around the country. But there’s no appetite for any offers of assistance for these people because aggregate numbers are relatively muted.

While evidence shows that Trump administration policies are dragging on economic growth, pushing up inflation, and obliterating foreign direct investment, they are also, through things like tax cuts for the rich and windfall corporate profits that flow to top executives and major shareholders, exacerbating the very inequality that is hiding these trends. The stagflation (meaning higher unemployment and higher inflation) that is showing up in the data can be explained away by other trends like rising retail sales, which doesn’t reflect the spending considerations of the whole mass of Americans, but rather, a bare sliver of them.

Finally, the plutonomy attaches the viability of the U.S. economy to the stock market. One of the reasons that the top 10 percent feels free to spend is the “wealth effect” from their personal portfolios. If that stops—because the AI bubble collapses, or some other reason—the bottom 80 percent, which is already wary of spending, will not be able to carry the weight.

The K-shaped economy is easy for any opposition party to exploit. It’s hard to defend an economy that only looks good in aggregate, while most people are angry about the situation. That’s especially true now, when the economy’s winners are reveling in their fortunes, when corporate profits are fat, when price increases are driving those profits. Democrats have every ability to highlight the rich pulling away from the rest.

But these trends eclipse political responses, especially the politics of smallness where the only response to anything is ineffective tweaks. The plutonomy ensures higher prices, because price sensitivity is lower at the top. It leads to companies valuing price over sales volume. It makes workers more expendable and layoffs more palatable, because the “U.S. consumer” isn’t as important as the wealthy consumer. And it leads to an economy that runs on asset prices to prop up stock portfolios, meaning that anything disruptive—more supply of housing or other basic needs, public options, an economy focused on workers—is deemed problematic because it will cause the stock numbers to go down.

The plutonomy is the inevitable consequence of 40 years of mostly unbroken policy drift. It will take a lot to wrest it back.