Why the Rich Need the Poor

They’d like to think otherwise, but the rich won’t recover until the rest of America does, too.

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Call it the revenge of the underclass: Even if you live in a gated community, have a bulging bank account, and enjoy bulletproof job security, you cannot escape the woes of the nation's have-nots.

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As America settles into an uneasy period of high unemployment and stagnant growth, an imposing wall is forming between those with good jobs and the right skills, and many others left disenfranchised now that the Great Recession has rearranged America's economic landscape. And that is fueling the most bitter class warfare America has seen in generations. Nearly 15 million Americans are officially unemployed. Another nine million are working less than they want to because of the weak economy, and nearly four million more are barely working or are so discouraged they've given up looking for jobs. That amounts to 29 million Americans whose contribution to the economy has plummeted—a problem that could ultimately reshape politics and government and impact living standards for most Americans.

It's not obvious that this is everybody's problem, since the unemployed and undermployed tend to be the nation's least skilled workers. The unemployment rate among workers with a college degree or higher, for instance, is just 5 percent. Among high-school grads with no college, it's 9.7 percent, and among high-school dropouts it's 13.3 percent. Many of the unemployed are manufacturing and construction workers, or office workers who made a marginal contribution to their company's bottom line when they were working. Nearly 140 million Americans still have jobs, and it's easy for those who survived the Great Recession to credit their own resourcefulness and fault the unemployed for not doing more to help themselves.

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But the comfortable inhabitants of leafy suburbs can no longer decouple their prosperity from the bleak fortunes of those in the unemployment line. It's well known that wealthy Americans have far more disposable income to spend on homes, cars, food, and most other goods and services. That creates the false impression that the wealthy can go it alone, regardless of what's happening to those less fortunate. In reality, there aren't nearly enough wealthy Americans to keep the economy growing or springboard it out of stagnation, and the inherently weak economy is now affecting nearly all consumers, regardless of income.

[See why there's good news in the bad housing numbers.]

Average annual spending by consumers with incomes over $100,000, for example, is about $101,000, according to government data. Consumers with incomes below $70,000 spend only about $34,000 per year. But there are four times as many consumers in that lower income group than in the higher one, and overall, their spending is a lot bigger. Here's a breakdown:

Total annual spending for consumers with incomes below $70,000: $2.8 trillion

For consumers with incomes over $100,000: $2.1 trillion

For consumers with incomes over $150,000 (a subset of the group above): $1 trillion.

The spending that powers the economy, in other words, comes mostly from the middle and lower class, not from the wealthy. BMWs and Mercedes might give the economy luster, but Fords and Chevys make it hum.

The affluent were better insulated from prior recessions because two areas where their wealth tends to be concentrated—housing and the stock market—bounced back quickly from other downturns. Obviously that hasn't happened this time, and that's largely because so many lower-income consumers are in such tough shape. The S&P 500 stock index, for example, is comprised of firms like Wal-Mart, Dell, Johnson & Johnson, Procter & Gamble, PepsiCo, Verizon, and many other firms whose performance is tied to the behavior and spending of ordinary consumers. Big firms have been able to boost profits through deep cuts in payroll and other expenses, which has helped prop up stock prices. But that can't continue much longer. For corporate profits to rise in the future—along with the value of stock portfolios, for those lucky enough to have them—ordinary consumers will have to spend more. If jobs don't materialize, they won't.

[See how to survive a 'zombie economy.']

Housing remains in a deep swoon, with the pace of sales at 1995 levels and prices down by more than 30 percent from the peaks of 2006. Since then, homeowners have lost more than $7 trillion in equity, a decline in net worth that hits wealthy consumers the most, since they're more likely to own expensive property. A pickup in housing—even at the top end of the market—is heavily dependent on a tangible pickup in employment, since that's what it will take for consumers and businesses alike to regain confidence and start investing in big purchases.

It's hard to draw direct cause-and-effect relationships between wealthy and poor consumers, yet big spenders are clearly retrenching like everybody else. Data from Gallup, the polling organization, shows that spending among all income groups has fallen by roughly the same amount since last year, coming in at 5 to 6 percent below 2009 levels. But in April and May, there was a surge in spending among wealthy consumers that has largely evaporated. For a while, it looked like "frugality fatigue" and hopes for a vibrant recovery were finally bringing out the shoppers, led by those with the highest incomes. But lower-income shoppers didn't follow. Instead, discouraging economic news popped that brief bubble of optimism and sent wealthy shoppers back into the bunker with everybody else. "Upper-income people can't wall themselves off," says Dennis Jacobe, Gallup's chief economist. "Everybody knows that if the average consumer is not spending, the economy is going to slow."

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As America muddles along, the pressure on the wealthy will only intensify. President Obama wants to end the Bush-era tax cuts for higher earners, pushing the top two income-tax brackets up a few percentage points to 36 and 39.6 percent. That's still lower than the top rate of 50 percent in the 1970s and '80s, but it will add to an unusual degree of economic stress that the wealthy are already feeling. Obama wants to extend tax cuts for everybody else, which would no doubt deepen the rancor over who should pay for economic stimulus and the unfunded government giveaways of the last 10 years.

The wealthy may be asked to give even more as the nation tries to cope with a tide of socioeconomic refugees it hasn't seen since the 1930s. "The U.S. economy is not structured to have double-digit unemployment," says Jacobe. "We don't have the safety nets or the social programs." Among other things, that's been evident in a series of temporary extensions to unemployment insurance, which typically lasts just 26 weeks. With many unemployed workers on the sidelines for a year or more, Congress has passed several ad hoc extensions to help keep the long-term unemployed from falling into grinding poverty. But opposition is growing to unlimited extensions that keep ratcheting up the national debt, with no permanent solution to the jobless problem.

[See 5 reasons companies still aren't hiring.]

Few Americans favor a "welfare state" with lavish unemployment benefits that might make joblessness more appealing than work. But class warfare that pits high earners against lower ones won't accomplish much either. It's a lousy economy, and putting up more gates won't make it better. Opening a few of them might.