Can the Rich Save the Economy From High Gas Prices?

Posted: 11 May 2011 07:43 AM PDT

High gas prices matter to the economy. Unless, of course, that economy dominated by the spending of the wealthy.

With oil still hovering near $100 a barrel, higher gas prices threaten the recovery for average American families. But wealthy families barely notice higher gas prices — and since the wealthy now dominate consumer spending, they're likely to keep spending (or if they do cut back it will be for other reasons).

According to Mark Zandi of Moody's Analytics, the top-earning 5% of American households now account for 35.5% of personal outlays, which includes consumer spending, interest payments on installment debt and transfer payments. They didn't used to account for such a large share — before the recession they account for only about a quarter of personal outlays.

This, of course, is due in part to the huge spending drop by the rest of America and the rapid rebound in the salaries and wealth of the wealthy. Yet the wealthy are continuing to outspend the rest of America even on a relative income.

According to Zandi, the top 5% have the lowest savings rate in the country. Their personal savings rate is an astonishingly low 1.4%, compared to between 8% to 10% for the rest of the population. The top earners, in other words, are spending like mad — which is helping the rest of the economy power through the gas prices.

“The affluent's spending on gasoline is not particularly sensitive to changes in gasoline prices, at least not very quickly,” Zandi said. “The affluent are much more likely to lower their saving rate to pay for the higher gasoline prices, and given their affluence they don't have to change their saving very much to pay for it.”

We've been here before, of course. In 2005, Ajay Kapur, the equity strategist now at Deutsche Bank, noticed that higher oil and gas prices were not dragging down the economy. He theorized that the U.S. had become a "plutonomy" dominated by spending of the wealthy and therefore was less vulnerable to higher oil prices.

“For the poorest in society, high gas and petrol prices are a problem," he wrote. "But while they are many in number, they are few in spending power, and their economic influence is just not important enough to offset the economic confidence, well-being and spending of the rich.”

It's cold comfort for the non-wealthy, but it bodes well for sustained spending amidst high gas prices.

How do you think higher gas and oil prices effect the wealthy?