The Manic Spending of the Wealthy |
| The Manic Spending of the Wealthy Posted: 13 May 2011 12:42 PM PDT With the rich back in Bentleys, Birkin bags and Bacons, luxury companies are cheering a recovery. The good times are back, even if prices are a little lower. And with stock markets and wealth soaring, the recession already looks like bad memory unlikely to recur anytime soon. Yet the rebound obscures an uncomfortable truth about the spending of the rich: It has become the most unstable part of our economy. Take a look at the chart below. The red line shows the Dow Jones Luxury Index, which tracks 30 stocks of companies that make or sell luxury products to the affluent and wealthy. The other line is the Dow Jones U.S. Consumer Goods Total Stock Market Index. Put another way, one is the Richistan Index and the other is the Main Street Index. The Richistan Index has been more than twice as volatile than the Main Street Index, with much greater peaks during booms and deeper dives during busts. This is not surprising, of course, given that no one needs a Hermes scarf or a Patek Philipe. What is surprising is the degree of volatility compared to the rest of the country. In a research paper looking at the top earners in the U.S., economists Jonathan A. Parker and Annette Vissing-Jorgensen found that the consumption of the top 5% is more than two and a half times as volatile as the spending of all U.S. households. “Consumption in the current recession has fallen substantially more for high-expenditure households in the current deep recession,” they write. What's the reason? Parker and Vissing-Jorgensen point to the highly cyclical incomes of the wealthy – a point also made recently by the IRS. But there may also be psychological reasons, as the wealthy become more manic in their spending. When times are good, they spend like there's no limit. When times are bad, they go into lockdown mode. Why do you think the spending of the rich is so volatile?
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