America's two-tier economy

 

Gordon L. Weil

Want a new car? 

For $50,000, it’s yours.  That’s the average sticker price of the new models.  Or you can make unending monthly payments of about $1,000.  When you trade it in, you’ll take a loss, because the car’s value will be less than what you still owe.   

But wealthy people can afford a new car and pay in cash.  They have the money to spend on high-cost purchases. 

As their incomes are squeezed by rising costs, many people cannot keep up with monthly auto loan payments.  They risk losing the car and their money.  The rest of the market wants used cars, though that also drives up their prices.  Dealers entice people who can afford new cars to trade in their cars.  They both sell new cars and supply the profitable used-car market.

The result is a two-tier market.  The wealthy drive the latest models, and others drive hand-me-down cars that may include the defects caused by their previous owners.

This economic split appears elsewhere.   The residential real estate market may be sluggish nationally, because many aspiring home owners cannot afford mortgage interest rates and the increased cost of building materials.  Their tight budgets, caused by stagnating wage increases and higher retail prices, put home buying out of sight.

One contributor to increased building materials prices are the Trump-imposed tariffs on Canadian lumber, widely used in home construction.  One Maine lumber dealer reported that its lumber costs increased by 45 percent due to new tariffs.  It is looking for alternatives.

Trump seems to think that if the Fed cuts interest rates, that could help the housing market.  But the Fed sets short-term rates, while mortgages are usually long-term debt.  Besides, lowering rates cannot fully compensate for costlier construction materials.

While the residential market remains slow, the sales of homes over $1 million exist in a parallel universe.  The prices of these homes are increasing steadily, thanks to an affluent core of potential purchasers, intent on upgrading.  They can pay cash, often out of the proceeds from the sale of their previous homes, so mortgage rates do not matter.

As with autos, a two-tier market occurs.  One level is for the wealthy and the other level is for everybody else.

This happens again when it comes to airlines.  Delta and United have found they can profit more by adding business- and first-class seats and reducing the economy cabin.  Packing more people in limited space does not earn them as much as offering greater luxury, even at unusually high fares.

American Airlines and the low-cost carriers like Southwest got the message.  Ultimately there will be more high-priced airline seats with a likely reduction in economy and budget fares. The two-tier economy is being repeated.

How does this split-level economy grow?  The wealthy are gaining more wealth thanks to government policy and their investments.  Their windfall gains go back into the stock market where they add even more wealth.

The record-setting stock market may produce two myths.  The first is that a healthy stock market is a good indicator of a healthy economy.  Trump often backs this belief when the market rises, and doesn’t mention it when the market declines.

The second myth is that the market is in a bubble with unrealistically high prices, and that the bubble will burst.  Maybe, but there is an alternative explanation for both myths.

The stock market may serve significantly as the savings bank of the wealthy.  The top ten percent own about 90 percent of the value of all stocks.  Coupled with their long-term position in an historically increasing stock market, the market may reflect their influence and interests rather than the national economy.

Again, here are two tiers.  The wealthy have a powerful effect on the market and the economy, while others mostly absorb their effects.  Most people are dependent on a political and economic system that is gradually withdrawing support from them by cutting food stamps and health care to tariff increases that forfeit markets and raise costs.

In theory, the wealthy would invest in new production, creating more jobs – the “trickle down” concept.  That theory has been abandoned.  Accumulation of wealth is now deemed a desirable and sufficient economic goal. 

F. Scott Fitzgerald once wrote that the rich, “They are different from you and me.”

To which Ernest Hemingway is said to have responded, “Yes, they have more money.”

The rich aren’t different.  But they enjoy an income tax system that favors them, while other people lose essential government support.  The aversion of the rich to taxes beats caring about the common good. 

The deepest split in the U.S. may not be the partisan divide between the parties, but the growing two-tier economy, steadily widening the income gap between the wealthy and everybody else.