With the U.S. economy expanding and the labor market improving, it isn't clear how well the Democrats' message of a divided America will resonate with voters this fall. But many economists believe the economic recovery has indeed taken two tracks....
Upper-income families, who pay the most in taxes and reaped the largest gains from the tax cuts President Bush championed, drove a surge of consumer spending a year ago that helped to rev up the recovery. Wealthier households also have been big beneficiaries of the stronger stock market, higher corporate profits, bigger dividend payments and the boom in housing.
Lower- and middle-income households have benefited from some of these trends, but not nearly as much. For them, paychecks and day-to-day living expenses have a much bigger effect. Many have been squeezed, with wages under pressure and with gasoline and food prices higher. The resulting two-tier recovery is showing up in vivid detail in the way Americans are spending money.
At high-end Bulgari stores, meanwhile, consumers are gobbling up $5,000 Astrale gold and diamond "cocktail" rings made for the right hand, a spokeswoman says. The Italian company's U.S. revenue was up 22% in the first quarter. Neiman Marcus Group Inc., flourishing on sales of pricey items like $500 Manolo Blahnik shoes, had a 13.5% year-over-year sales rise at stores open at least a year.
By contrast, such "same store" sales at Wal-Mart Stores Inc., retailer for the masses, were up just 2.2% in June. Wal-Mart believes higher gasoline costs are pinching its customers. At Payless ShoeSource Inc., which sells items like $10.99 pumps, June same-store sales were 1% below a year earlier.
"To date, the [recovery's] primary beneficiaries have been upper-income households," concludes Dean Maki, a J.P. Morgan Chase (and former Federal Reserve) economist who has studied the ways that changes in wealth affect spending. In research he sent to clients this month, Mr. Maki said, "Two of the main factors supporting spending over the past year, tax cuts and increases in [stock] wealth, have sharply benefited upper income households relative to others."
Mr. Maki of J.P. Morgan Chase estimates that in terms of dollars saved, the top 20% of households by income got 77% of the benefit of the 2003 tax cuts, and roughly 50% of the 2001 tax cuts. And of stocks held by households, roughly 75% are owned by the top 20% of those households. That made them prime beneficiaries of last year's stock-market rally, although also big sufferers from the stock carnage from 2000 to 2002.
The affluent also benefit more from stock dividends, on which the federal income-tax rate was cut last year retroactive to the start of 2003. Total dividend payments have risen 11% to $3 billion since the end of 2002, estimates Berkeley's Mr. Saez. Higher-income households also are larger beneficiaries of the surge in corporate earnings, which helps to drive dividend and stock returns. The level of corporate profits has risen 42% since the last recession, which ended in the final quarter of 2001. Wage and salary income is up just 6.3% in that time. Meanwhile, housing values have appreciated fastest in the most affluent regions during the past three years, according to research by Fiserv CSW Inc., which tracks home prices.
Many economists say the lopsided recovery is now at a critical juncture. The impetus from new tax cuts has largely passed, and the stock market has lost momentum, two factors that could slow the pace of higher-income people's spending in the months ahead. As a result, the time has come for the recovery either to broaden out to more-modest income groups -- or possibly lose momentum.
Many in this [lower- and middle-income] group are also getting squeezed as health-care costs rise and companies seek to shift the burden to workers. From 2000 to 2003, employees' average annual out-of-pocket expenses for family medical premiums rose 49% to $2,412, according to an employer survey by Kaiser Family Foundation, a nonprofit research group in Menlo Park, Calif.
A 49 percent increase in average family medical premiums from 2000 to 2003, at the same time the uppermost income tier received 50 to 77 percent of the tax "relief"?
I am not anticapitalist, but these statistics are rooted in punitive policies. Why is the American upper class punishing the lower classes for having less?