Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Wednesday, January 12, 2011

Does the Middle Class matter? - Continued. Eating the Seed Corn.

On November 8, I did a post on the Middle Class, noting that since the top 5% of earners account for 37% of consumer spending, and thus (since consumers are 70% of the economy) 25% of the whole economy, maybe 95% of the people in the US, don't really matter very much, despite continuing articles railing about the social dispair lurking deep within a dis-enfranchised Middle Class.

Speaking of railing, old Vitus has complained with vehemence about the 20-some percent real unemployment we have.  But the above stats seem solid - so, again, from a purely financial standpoint maybe the middle class is in fact not so terribly important.

Arithmetic: The 20% un/under employed are not contributing at full potential to consuming and thus to GDP. What can we assume? That they are consuming at 50% of normal? So, 20% of the 63% = 12.6% of the non-rich contribution to consuming is only going half throttle.

That's 12.6%*63%*70% = 5.5% of GDP going at half speed. If the un/underemployed could go from 50 to 80% of potential consumption, they would add about 3.3% to GDP (demonstration left to the reader).

One can assume varying ways that 3.3% might be injected into the real economy, but the point is that gradually loosing the Middle Class, which financially means having increasing numbers of un/under employed, subtracts clearly and substantially from the economic pot that the rich feed from today.

The Middle Class is important - they are the seeds of a real recovery.  Most rich, hewing to "conservative" economics (just read Rosenberg or Maldin - who I like!), solemnly bowing at the "free market" alter,  weirdly ignoring the commonweal, are eating their own seed corn.

(Hat tip to CKM for original "37%" link)

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