The US plutonomy and its effects on the capitalist-labor relation

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“They can't possibly spend it," quipped the marketing expert, "although God

knows they're trying, and we thank the good Lord for that."

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Master Thesis Tobias Arbogast:

The US Plutonomy and its Effect on the Capitalist-Labor

Relation

Title: The US Plutonomy and its Effect on the Capitalist-Labor Relation Examination: Master Thesis for the MSc Political Science – Political Theory Student Name: Tobias Arbogast

Student Number: 11252502

Research Project: Alternatives to Capitalism Teacher: Paul Raekstad

Second reader: Michael Onyebuchi Eze Date: June 23rd 2017

Correspondence regarding this thesis should be sent to: tobias.arbogast@gmail.com

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This paper analyses the effect of increasing income and wealthy inequality in the US on the relationship between capital and labor. I propose the thesis that in the US, capitalists are decreasingly economically dependent on labor for their profit-making. In the first part, I examine the ‘plutonomy thesis’ that was put forward by a team of Citigroup analysts in 2005 to describe an economy where growth is largely powered by the wealthy. The plutonomy thesis will be linked to the economics literature on income and wealthy inequality as well as consumption inequality. In a second part, I investigate the consequences thereof for the relationship between capitalists and labor. I show that demand is increasingly divided up with the bulk of increase in demand coming from the consumption of luxury goods by the wealthy. I argue that production correspondingly shifts to cater to this group for profit-making. This in turn entails consequences for workers because luxury good production requires less typical workers than the production of generic goods. I conclude that in the US, capitalists are becoming less dependent on labor, in its capacity as consumer and as worker, for their profit-making.

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1. Introduction

“Americans have so far put up with inequality because they felt they could change their status. They didn't mind others being rich, as long as they had a path to move up as well. The American Dream is all about social mobility in a sense - the idea that anyone can make it”

The comment above by news anchor Fareed Zakaria (Zakaria, 2011) in the context of the famous slogan ‘We are the 99%’ by the Occupy Wall Street movement, illustrates the widespread acceptance, active or passive, of inequality in the US. The blatant inequality in the US seems at the same time incomprehensible as understandable in light of the country’s meritocratic ideals and culturally ingrained high tolerance towards social inequality1. The sheer extremeness of inequality along with recent advances in the research on (the history of) social inequality have led to renewed scholarly and public interest in the subject. Piketty’s unexpectedly popular book Capital in the Twenty-First Century provided a historically and empirically elaborate overview of the phenomenon. Not least the heightened publicity of the life-styles of the nouveau riches and the outrage provoked by hefty bonus payments to financial elites in the wake of the Great Recession have also contributed to a resurgence in the study of the upper end of the social stratum. Having the finger on the pulse, Forbes magazine updated the headlines made by Oxfam in 2014 by explaining that not 85 but 67 individuals own the same net worth as the poorest 3.5 billion people (Moreno, 2014). Of the tiny group of billionaires, 42% are from the US. This country is still the powerhouse of billionaires in the world although developing countries are quickly catching up. For example, even though the number of billionaires in the US shortly dropped after the financial crisis 2008 all-time-high of 470 billionaires, the number is back to the new ‘normal’ rate of increase with a total of 565 billionaires in 2017 (Forbes, 2012; see appendix). The Matthew effect of the rich getting richer (Merton, 1968) seems to be alive and kicking: “For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath” (Matthew 25:29, King James Version). Partly instigated by the substantial amount of public attention, the current global politico-economic system as such is undergoing what has been described as a legitimation crisis of capitalism, or at least of democratic capitalism. The ‘forced marriage arranged between the two’ increasingly seems to come undone (Streeck, 2014, p. 22) and raises doubts to the very future of capitalism.

Of course, skepticism about the future well-being of capitalism was never shared by all parties. This became apparent when in 2005 a team of private equity analysts at financial services corporation Citigroup spoke about the phenomenon of social inequality in a more optimistic fashion. In a report titled

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On this point, see (Marger, 2002, pp. 231-254)

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Plutonomy: buying luxury, explaining global imbalances that was not meant for the public but for investors, the authors talk about the topic in a very casual fashion (Kapur, Macleod, & Singh, 2005). Citigroup went to great length to suppress the report’s distribution on the web (Schmitt, 2011), although the original author later tried to rebut allegations that Citigroup wanted to avoid publicity of the reports (Kapur, Luk, & Samadhiya, 2009). In the report the authors put forward the new concept ‘plutonomy’ as a description of the economy of the Anglo-Saxon advanced capitalist countries. A mix of the two terms ‘plutocracy’ and ‘economy’, the concept aims to capture what the authors see as a new economic system. As they put it, “The World is dividing into two blocs - the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies - economies powered by the wealthy” (Kapur et al., 2005, p. 1). Essentially, the authors emphasize that the changed configuration of income and wealth distribution has lent the wealthy a highly disproportionate weight in the total investment and consumption decisions in the economy. The imbalance has become so pronounced, they argue, that there is no ‘average consumer’ anymore. Instead “[t]here are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take” (Kapur et al., 2005, p. 2). Kapur and colleagues were at pains to emphasize that they refrain from any moral judgment: “We should worry less about what the average consumer – say the 50th percentile – is going to do, when that consumer is (we think) less relevant to the aggregate data than how the wealthy feel and what they are doing. This is simply a case of mathematics, not morality.” (Kapur, Macleod, Singh, Hong, & Seybert, 2006, p. 11). They concluded that investors were best advised to adjust their equity strategy to this new consumer situation and invest in stocks of companies that cater to the wealthy few. In my thesis I put the plutonomy thesis to critical scrutiny and analyze whether the US fulfills the requirements of being a plutonomy. I then proceed to go beyond that question and ask what has implications this has for the relationship between capitalists and labor in the US. More precisely, I assert that since the US is indeed a plutonomy, capitalists will be decreasingly economically dependent on labor for their profit-making.

1.1. Why Study the Plutonomy?

Since the publication of the plutonomy reports, not only has the US witnessed the worst economic crisis since the Great Depression but also a sustained recession following the crisis. Reasons for studying the US plutonomy abound and originate both in politico-economic and academic motives. First and foremost, public demands for a change in the political economy span the whole country when Occupy Wall Street emerged. An examination of the super wealthy is imperative because extreme inequality oftentimes raises questions of legitimacy, fairness and equality with regards to the political and economic order. As has happened after the financial crisis 2008, legitimation crises can erupt when a system fails to deliver the necessary outcomes expected by those to whom it must be or seem legitimate (Fraser, 2015).

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However, there are also more academic reasons for investigating the US plutonomy. For one, there is surprisingly little research on the wealthy compared to the number of studies on the rest of the population. In most cases, conventional macroeconomic analysis indeed focuses on the average consumer, the average worker and so on. However, in an economic system in which the rich direct a very large part of GDP, it is not only instructive but imperative to study this tiny group of economic agents for an appropriate understanding of economic trends. As one prominent author in the field said: “Study the rich and powerful not the poor and powerless: the poor already know what is wrong with their lives” (George, 2015). A comprehensive analysis should look not only at the momentary picture of income and wealth distribution but also at the relationship between the economic behavior of the wealthy and the broader economy, or ‘the rest’. Focusing on the economically better-off is analytically separate from which social groups wield the political power. A closer look at the intersection of economic and political power, however, reveals that especially in the US the two are closely correlated such that on a system level, economic means can oftentimes buy votes (Confessore, Cohen, & Yourish, 2015). Thus, even from a solely political-institutional perspective should we be interested to enquire about plutonomy thesis. In a famous article, Joseph Sitglitz warned of the danger of political polarization should the inequality not stop. In 2011 he wrote: “The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.” (Stiglitz, 2011).

1.2. Brief Summary

The main body of my thesis can be summarized as two distinct but related claims. Firstly, I attempt to prove that the US is indeed a plutonomy by adducing evidence on income and wealth inequality on the one hand and consumption inequality on the other. Secondly, and building up on this, I claim that capitalists are less economically dependent on labor in the US. This second claim will be underpinned by arguing that labor is decreasingly necessary for capitalists as consumer because demand in the US is more and more dominated by demand for luxury goods. And these goods are consumed largely by the wealthy. Labor is postulated to be also less relevant for capitalists in its capacity as worker because luxury goods production is less reliant on a mass of workers. Proving these claims will thus answer my question of what consequences a plutonomy has for the relationship between capitalists and labor. Namely, I argue that given that the US is indeed a plutonomy, capitalists will be decreasingly economically dependent on labor in their profit-making.

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2. Key Definitions

In this chapter I briefly define a number of key concepts used in my thesis. I start off with the plutonomy and proceed to clarify who ‘the rich’, that play such a central role in the plutonomy, actually are. Furthermore, in order to develop my second argument that a plutonomy leads to a decreased economic dependence of capitalists on labor for profit-making, I define what ‘capitalists’ and ‘labor’ stand for in this thesis.

2.1. Plutonomy

It is important to briefly define upfront what is to be understood as plutonomy for the following parts although I engage with the concept of plutonomy in more detail in chapter four. Broadly speaking, plutonomy has been defined by Kapur as a description of an economy “where economic growth is powered by and largely consumed by the wealthy few” (Kapur et al., 2005, p. 1; emphasis added). That is, inequality of wealth and income are so extreme that the mass of people simply do not have the money to fuel the growth in demand. Plutonomy is therefore more than mere inequality in income and wealth but describes how this translates into consumption and demand as well. It describes a situation where the share of the wealthy in national income has increased to such an extent that a good analysis of the economy cannot be based on an ‘average consumer’ anymore but has to focus on the wealthy as the key drivers of demand.

2.2. The ‘Rich’

To anticipate and clear up misunderstandings, the categorization of who ‘the rich’ are is of course not without problems. Nonetheless, there are both good reasons for why it is necessary and tools for how it is empirically possible to delineate a group of the ‘wealthy’. Although a group of, say, the top 1% in terms of income is by no means composed of homogenous individuals, the majority of them do share the common characteristic of very high income. Common taxonomies in this area of research use pre-tax incomes or wealth as classification and then look at deciles or percentiles. Alternatively, as many wealth reports do, one can focus on ‘financial wealth in investable form’ (i.e. ‘non-home’ wealth which can be readily converted into cash). For a given individual, financial wealth denotes the net worth or the total value of her monetary assets less debts and obligations (Di Muzio, 2015a, p. 25). This is a sensible definition given that, on average, wealthy individuals hold a very high share of their assets in financial form (Shorrocks, Davies, Lluberas, & Koutsoukis, 2016, p. 18). Now, obviously a rich person who holds

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her wealth in real estate or gold will have a different relation to and effect on the economy than a rich person who holds her wealth in investable form. Not least consumption can usually be funded only through cash or liquid wealth (of course, except for credit-based consumption). When it comes to analyses of the interaction between the super rich and the broader economy, financial wealth in investable form therefore has some distinct advantages over classifications in terms of, for example, wealth without any qualifications as to what type of wealth. Nonetheless, classifications in relative terms such as the top 5%, 1% or even 0.1% are instructive because they provide insight into the distribution or concentration of income and wealth. Since the focus of my analysis is not to accurately describe these groups of wealthy individuals but rather to elucidate trends in the relationship between the wealthy and ‘the rest’, I will stick to classifications established in financial and economic research. Moreover, in most cases there is a high chance that those who earn high incomes are incidentally also among the top strata in terms of wealth as well as in terms of financial wealth in investable form. Note that when it comes to consumption, the rich use both their inflow of income and existing wealth to fund personal consumption. In the rest of this thesis, I will use the term ‘the wealthy’ or ‘the rich’ to describe the economically very well-off, be it in terms of high income, wealth or both.

2.3. Capitalists and the Profit-motive

Capitalists: In order to argue for the second claim of my thesis, that capitalists in the US are decreasingly economically dependent on labor for their profit-making, I define what I understand as ‘capitalist’ in this thesis. I take the term ‘capitalists’ to loosely stand for those individuals engaged or invested in commodity production who appropriate profits while at the same time being dominant owners of for-profit corporations. This excludes for example many managers who, albeit active in the business of profit-making, do not reap the benefits of it because they have no ownership in the firm. Even more narrowly, in this thesis I take ‘capitalists’ to describe mid-size or large corporations (i.e. ‘big capital’), both individual and institutional, whose overarching goal is profit-maximization. This definition therefore includes for example funds, even if public, that are run for-profit such as pension funds that have investments in different firms. Again, an individual worker who has his pension invested in the pension fund would not count because he weighs little in the overall fund, while the fund itself would count as capitalist. Of course on an individual level, there is substantial conceptual as well as empirical overlap between who constitutes ‘the rich’ and ‘capitalists’. Although not every rich person is a capitalist, every successful capitalist is by definition rich, except if they give away all their wealth and income. Therefore, most successful capitalists are also part of ‘the wealthy’ in their capacity as consumers. Mind that I do not aim to describe a capitalist class as such nor do I contend that ‘the rich’ should be regarded as such.

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The profit-motive: The focus of my definition of ‘capitalist’ can be seen as standing in the tradition of classical political economy. Marx, for one, described the capitalist as the head of the firm as follows: “[…] it is only in so far as the appropriation of ever more wealth in the abstract is the sole driving force behind his operations that he functions as a capitalist […]” (Marx, 1976, p. 254). I assume that capitalists’ relation to labor is such that they generally employ workers only if production is believed to generate a profit. For goods and services, this requires that there be a demand for the commodities they sell. The key function of demand in a capitalist economy, then, is to allow capitalists to realize profits (Toporowski, 2013, p. 36).

2.4. Labor

In this paper, I fully acknowledge that the term ‘labor’ is not without its problems since it is not as homogenous a group as in Marx’s times. Still, I use it to describe a relatively specific group of individuals in their capacity as workers and consumers. In this paper, labor refers to the general body of employees who earn their living through wage labor. Since I am interested in the majority of laborers, it more specifically refers to those who currently hold lower- and middle-income jobs both in the manual or service sector. I also include those individuals who are currently unemployed but are likely to join the work force – if at all – only by taking up low- or middle income jobs. I also use the term to refer to this group of people in their capacity as consumers who influence effective demand in a given economy. Thus, an individual who just lost her low-income job would still count as labor because she contributes to total consumption. I take the two functions of labor in the economy as the main ones in this paper although labor surely also has other functions for the total economy (e.g. tax payer, debtor etc.).

3. Thesis

My thesis will postulate that the US plutonomy leads to a decreased economic dependence of capitalists on labor for their profit making. The defense of this thesis will proceed in two steps: First, in chapter four I attempt to prove my claim that the US is indeed a plutonomy. That is, the first part of this paper will take up the original ‘plutonomy thesis’ put forward by Kapur and subject it to critical scrutiny. To this end, I review the studies that discussed the concept, dissect the concept analytically and link it to the empirical literature that discusses this phenomenon. Evidence on income and wealth inequality on the

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one hand, and consumption inequality on the other will be adduced. I also address a possible objection to the possibility of the disproportionate consumption of the rich.

In a second step in chapter five, I build a theoretical argument in connection with the plutonomy thesis. I claim that the US plutonomy leads to a decreased economic dependence of capitalists on labor. If consumption is increasingly driven by the wealthy, this leads demand in the US economy to divide into an upper and a lower market. Since increases in demand will come mainly from the wealthy, the production of commodities consequently shifts increasingly to catering to this more economically potent group of consumers. This in turn changes the landscape of producers, which becomes similarly divided with a focus on luxury goods. Increased production of luxury goods then has consequences for labor in its capacity as worker. Thus, I show why capitalists no longer depend on the mass of labor to make their profits given that production is geared to luxury goods and the production of these is less reliant on labor.

The specific contribution of my thesis is two-fold and dovetails with the division into an empirical and a theoretical part. On the hand, it reviews the scholarly literature on plutonomy and clarifies confusions about the concept by making analytical distinctions. Importantly, it connects the concept of plutonomy to the economic literature on consumption inequality. To my knowledge, this is the first work to link these two strands of literature. This is done in order to prepare the second theoretical contribution of this paper, which goes beyond the extant analyses of plutonomy and argues for an altered economic relationship between capitalists and labor in the US plutonomy. While with the first part I hope to add to the rather scant literature on the concept of plutonomy an overview that is comparative and a substantiation that is empirical in nature, the second part is intended to provide a theoretical elaboration on the relationship between capital and labor in the US. Although the thesis I put forward in the second part is backed by some evidence, I develop the argument largely theoretically. Owing to the research question I pose, my analysis necessarily blurs neat disciplinary lines and uses theory and research in economics, political economy and political theory. I want to emphasize that throughout this thesis I do not aim to establish mono-causal explanations or recognize clear-cut phenomena. My arguments pertain to trends in the US economy and do not exclude other trends. For example, I briefly discuss the impact of computerization on the economic relationship between capitalists and labor.

3.1. Why the US?

Extreme inequality characterizes many countries in the world but my geographical focus will be on the US. In light of the empirical evidence pointing to the Anglo-Saxon world as the main cases of stark inequality, the scope of this paper will not allow it to go beyond the prime example of inequality and

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plutonomy: the US. On the one hand, I focus on the US because among Anglo-Saxon countries income inequality is most pronounced in the US (Figure 1) and because the US economy’s outlook has a big effects on other countries. On the other hand, this country choice is motivated by data availability reasons. Most studies and wealth reports focus on the US although in recent years emerging markets (especially in Asia) have attracted attention in the wealth management industry. Still, economies that are considered plutonomies by Kapur et al. (2005) are predominantly the Anglo-Saxon countries, where the top one percent’s historical share of income had a U-shaped trajectory in the 20th century (Figure 1).

Figure 1: Income Inequality measured by the top 1% income share of total income

Source: Graph generated with selected countries from World Wealth and Income Database (2017)

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4. The US is a Plutonomy

In this chapter, I defend the claim the US is indeed a plutonomy and is unlikely to cease being one in the near future. First, I introduce the plutonomy thesis as proposed by Kapur. I compare his perspective to the various definitions of plutonomy by scholars who took up the concept. Trying to shed light on why plutonomy is not simply income and wealth inequality, I clarify that its defining characteristic is the association between income and wealth inequality on the one hand and consumption inequality on the other. Having specified this, I review the empirical evidence on both aspects in the case of the US.

4.1. Kapur and Colleagues

As hinted at in the introduction, the plutonomy thesis was put forward as a new and analytically more appropriate way to conceptualize the modern US economy as well as other Anglo-Saxon countries. According to the authors, the thesis entails that analyzing the US economy is best accomplished by considering that it is being powered by the wealthy few2. The main goal of the report was to provide an analysis of current global economic trends capable of informing investors of how they should adapt their portfolios (Kapur et al., 2005). A second goal was to attack the risk premium on equities, grounded in skeptical voices’ predictions of a looming ‘end of the world is nigh’ (p. 25). The original report is based on the following main arguments (I quote at length to convey the frank language used by the team). Firstly, the authors argue that “[t]he world is dividing into two blocs – the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest” (p. 1). Second, they “[…] project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality […]” (p. 2). Thirdly, the contend that “[m]ost ‘Global Imbalances’ […] look less threatening when examined through the prism of plutonomy. The earth is not going to be shaken off its axis, and sucked into the cosmos by these ‘imbalances’. The earth is being held up by the muscular arms of its entrepreneur-plutocrats, like it, or not” (p. 2). Lastly and most importantly for my thesis, they argue that “[i]n a plutonomy there is no such animal as ‘the U.S. consumer’ or ‘the UK consumer’, or indeed the ‘Russian consumer’. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take” (p. 2). Briefly, Kapur and his team assert that the demand of the wealthy (‘plutonomists’ in their jargon) for luxury goods is relatively independent of high prices because

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As pointed out in the introduction, all the reports were suppressed on the web by Citigroup. Especially the most recent report seemed to be lost without a trace and I could only get a copy by getting in touch with various researchers on the topic. I am happy to provide the original documents upon request.

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they can afford such goods regardless of the high prices. The authors conclude their report by arguing that “[t]his is a good time to switch out of stocks that sell to the masses and back to the plutonomy basket” (p. 30). The authors asseverate to have identified a basket of 24 securities, ranging from luxury car maker Porsche to the private banking firm Julius Baer, which will outperform other stocks in the future. Hence, equity investors ought to target those companies whose earnings are mostly generated from wealthy individuals, that is, “[…] buy shares in the companies that make the toys that the Plutonomists enjoy” (p. 25), i.e. luxury products producing firms. More precisely, investors should pick stocks that benefit from the fact that the rich are getting richer. In my thesis I will pick up on this conclusion and show that in the US, one can indeed observe a shift in the share of consumption. The wealthy consume very much and this has as a consequence the segmenting of markets, on which I elaborate in chapter five.

In later reports on the plutonomy thesis, Kapur and his team re-confirmed the conclusion from their first report that “[…] in the search for pricing power, we’d rather be in luxury goods, than low end consumer businesses” (Kapur, Macleod, & Singh, 2006, p. 4). They go on to argue that “[a]s the rich are accounting for an ever larger share of wealth and spending, it is their actions that are dictating economic demand, not the actions of the ‘average’ American (p. 6)”. Thus, the authors see in the plutonomy an explanation for why many seemingly dangerous problems to the economy (e.g. stagnating incomes of the middle-class) did not turn out to fundamentally threaten the health of the economy. I share the authors’ assertion that the US plutonomy leads to a shift in demand. In so doing, I also maintain their focus on luxury producing firms and argue that the increase in demand for luxury goods decreases the economic dependency of capitalists on labor in their profit-maximization.

4.2. Plutonomy in the Literature

Even though the Plutonomy reports were never widely discussed in mainstream media or popular literature3, the concept was quickly taken up in the academic community. Since in the academic literature the plutonomy thesis has sometimes been misrepresented as a normative concept or confused with income and wealth inequality as such, I review the main articles on plutonomy in this section. As pointed out in my definition of plutonomy earlier, although a necessary condition for it, income and wealth inequality are not sufficient to characterize an economy as plutonomy.

A good example to start with is Makdissi and Yazbeck’s definition of plutonomy, which is hard to distinguish from mere income and wealth inequality. They describe plutonomy as “a society where a

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To my knowledge, the only two popular accounts on this topic are Chrystia Freeland’s Plutocrats: The rise of the new global super-rich and the fall of everyone else (Freeland, 2012) and Robert Frank’s Richistan (Frank, 2008).

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large part of the wealth is controlled by an ever-shrinking minority. Thus, measuring plutonomy consists of focusing on the concentration of wealth or income in the hand of the few who are at the top of the distribution” (Makdissi & Yazbeck, 2015, p. 704). Seemingly politicizing the concept, for these authors plutonomy is a complaint of the masses about the stark inequality of income and wealth (p. 706). Other authors stick to the rather imprecise description of plutonomy as an economy that is characterized by a gap between the very top and the rest such that the economy is ‘powered by the wealthy’ (Murray & Peetz, 2014, p. 1). However, again, Murray and Peetz talk about income and wealth inequality at length in their chapter on plutonomy without making clear what is specific about plutonomies as opposed to income and wealth inequality as such. Taylor and Harrison even misrepresent Kapur’s plutonomy thesis by speaking almost exclusively about income and wealthy inequality (Taylor & Harrison, 2008, pp. 200-204). The important point of the non-existence of an ‘average consumer’ is barely mentioned in between their discussion of the potential for revolutions and class warfare. However, even Kapur and colleagues themselves occasionally are inconsistent in their writing on what specifically makes an economy a plutonomy. Referring to the Anglo-Saxon world in their conclusion, they write that “[…] income inequality, [is what] we have called Plutonomy” (Kapur et al., 2005, p. 30).

Nonetheless, there are a number of authors that capture the special character of a plutonomy. More to the point, Hirschman (2011) points to the link between extreme income and wealth inequality and spending. He views the plutonomy as a two-tier economy in which economic activity is increasingly driven by the spending of the wealthy. He characterizes the plutonomy as a plutocracy, in which wealthy elites take up an ever larger share in consumer spending so that ultimately they have outsize purchasing power. Financial journalist Robert Frank also seems to have a better grip on the crucial point that distinguishes plutonomy from mere income and wealth inequality. In his Wall Street Journal article from 2010, he describes a plutonomy as an “[…] economy dependent on the spending and investing of the wealthy” Frank (2010). In their Handbook on Wealth and the Super-Rich, Hay and Beaverstock (2016) identify what they dub ‘economic control’ and ‘consumption power’ as key characteristics of the plutonomy. “Because, by definition, plutonomists dominate national income and savings pools, their decisions to spend or save overwhelm and override the actions of others” (Hay & Beaverstock, 2016, p. 81). Lastly, Di Muzio (2015b) in his book The 1% and the Rest of Us - A Political Economy of Dominant Ownership has provided the most extensive study of the plutonomy and captures the essence of the concept writing that “the multitude has such a low share of overall income in plutonomies that they cannot be key drivers of increasing consumption – particularly for most luxury goods” (p. 500). I suggest that it is this – key drivers of increasing consumption – which captures what Kapur alluded to with his phrase ‘powered by’ the wealthy few.

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Having reviewed the perspective of the original authors of plutonomy in section 4.1 as well as how it has been taken up in the academic literature in this section, it has become clear that the concept was laid out slightly analytically imprecise. There seems to be a gap in the literature as to what and how it precisely explains over and above income and wealth inequality. Furthermore, the connection of income and wealth inequality has almost never been backed up by empirical evidence in the literature. In the following I aim to ameliorate this situation. First, though, I update the data cited by Kapur and his team on income and wealth inequality, arguing that these are indeed empirically observable phenomena in the modern US. Moreover, new wealth accrues mainly to the top such that the situation is not bound too changed any time soon. Next, I elaborate on the other side of the plutonomy coin: consumption inequality. Both income and wealth inequality on the one hand and consumption inequality on the other are crucial to evaluate whether the US is indeed a plutonomy.

4.3. Evidence on Wealth and Income Inequality in the US

Since it is an important aspect of claim that in the US income and wealth have become highly concentrated at the top, this section will survey the most up-to-date evidence on income and wealth inequality in the US. This should serve to underpin the first part of the plutonomy thesis on income and wealth accruing to the top. Consumption inequality will be discussed in section 4.5. Not least, the data on the former two is more abundant and more easily accessible than on consumption inequality. The scope of this paper permits neither to discuss all the aspects of income and wealthy inequality nor the intricacies of measurement. I therefore rely on the most widely recognized studies in the field and what they highlight. The goal of this chapter is to buttress my claim that the US is a plutonomy with the empirical data pertinent to this claim.

4.3.1. Income Inequality in the US

The modern US economy is a prime example where income is a strong force in furthering the concentration of wealth at the top and hence keeping the plutonomy alive and kicking. Methods to investigate it are manifold and often stricken my data availability and measurement problems. The most widely tool to measure income inequality is the Gini coefficient (Gini, 1912), which is a measure of statistical dispersion ranging from 0 for complete equality of values to 1 for complete inequality (e.g. one person receives all income). Since re-distribution through taxes can affect the actual income levels

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significantly, one distinguishes between pre-tax and after-tax coefficients. In 2014, it was estimated that the US had a Gini coefficient for income inequality, after taxes and transfers, of 0.394. This stands against an OECD average of 0.318. Values for the OECD range from Iceland’s 0.244 up to Chile’s 0.465, the United States ranking as the third most unequal among the OECD countries (Organisation of Economic Co-operation and Development, 2014).

The path-breaking research by Thomas Piketty’s book Capital in the Twenty-First Century is one of the most empirically rigorous sources for data on income inequality. His data on income inequality is based on national income. National income is distributed to different parties that can be grouped broadly under income to capital 4 such as profits, rents or dividends and income going to labor, namely wages (Piketty & Goldhammer, 2014, p. 45). In 1913, the United States first instituted a federal income tax, which makes it possible for Piketty to calculate incomes of various wage groups from the US income tax returns. Looking at various deciles or centiles, he compares the share of income going to each in order to shed light on the how extreme inequality is but also to quantify the number of individuals who claim a given portion of income (p. 253). Furthermore, it can be interesting to use the top decile or centile for historical analysis and compare the share of the rich over time. Starting with income inequality in the US, Piketty provides a vivid illustration of the historical trend toward a renewed increase in income inequality (Figure 2). It is clear that the highest income-earners have increased their share in the total income immensely since the 1970s. The drastic asymmetrical distribution even within the top decile strikes one at first glance. Most of the gains went to the top one percent, who increased their share immensely since the 1970s.

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Piketty defines nunhuman capital as “ […]all forms of wealth that individuals (or groups of individuals) can own and that can be transferred or traded through the market on a permanent basis” (p. 46)

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Figure 2: Share of Various Income Groups in Total Income in the US

Source: From Piketty and Goldhammer (2014, p. 292)

Moreover, the gains of the top one percent were mostly due to their income from labor (Figure 3)

Only once one enters the 0.1% of the income hierarchy, does income from capital replace income from labor as the primary source of income. Therefore, excluding their rewards from capital gains does not change the picture significantly because the top percent’s gains come largely from extremely high remunerations, what Piketty calls ‘the rise of supersalaries’ (p. 298) 5.

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This should not be understood to downplay the significance of the contribution to income inequality from growing inequality of capital income. Since the 1980s, it still accounted for one-third of the rise in income inequality in the US. Compared to the 1920s when most of the top 1% of income-earners made their fortunes through incomes from capital as opposed to income from labor, the situation today is different.

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Figure 3: The Share of the Top 1% in Total income in the US

Source: From Piketty and Goldhammer (2014, p. 299)

Income inequality is thus largely driven by a concentration at the very top of the income distribution. These individuals are oftentimes managers with supersized salaries. Importantly, Piketty adds that the rise in income inequality was not accompanied by greater wage mobility over the course of a person’s career. Moreover, in many countries the stark income and wealth inequality seems unlikely to change and even exacerbate. For the US, Piketty argues that it appears to be a trend that has seen only a temporary damper during the Great Recession but besides this going on uninterruptedly. This trend was captured in his analysis of the enormous impact the diverging ratio between investment return (r) and economic growth (g) as summarized by the formula r > g (Piketty & Goldhammer, 2014, p. 25). In essence, if the rate of return on capital exceeds the rate of growth of output and income over a long time, this will lead to divergence in the distribution of wealth. Notably, for Piketty the locus of the problem lies in a regime of slow growth. If no political or other forces intervene, this will cause inequality to increase over time.

Other authors point to different problems as the strongest explanatory factors in the new rise in income inequality. First and foremost among these is the dissociation of the typical worker’s real wage

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from labor productivity in general. Economic growth in terms of productivity was not accompanied by a rise in wages as in previous times. This productivity-pay gap has been observed widely and goes a long way toward explaining the disparities between the top 1% and the rest. It can be measured for example by comparing the growth of economic output with the growth in hourly wages (Figure 4). The trend of labor’s declining share in productivity can for example be measured by the declining ratio of median to average wages, which is likely to be explained by a disproportionate wage growth at the top (Schwellnus, Kappeler, & Pionnier, 2017, p. 19).

Figure 4: Productivity-Wage Gap in the US Since 1950

Source: Economic Policy Institute (2016)

4.3.2. Wealth Inequality in the US

A similarly insightful indicator of economic inequality is wealth inequality. Generally speaking the distribution of wealth is more unequal than the distribution of income (Brandmeir, Grimm, Heise, & Holzhausen, 2011, p. 49). To measure wealth inequality, the OECD uses the ratio between mean and median net wealth. Across the 18 OECD countries that are surveyed in the OECD Wealth Distribution Database mean net wealth is, on average, 2.5 times the median net wealth. In the United States this figure stands at 7 (Murtin & d’Ercole, 2015, p. 4). Again, Piketty surveys historical data to show that the top 1%

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in the US has seen a rise in its share in total wealth in the Neoliberal era, standing now at more than 30% of total wealth (Figure 5).

Figure 5: Wealth Inequality in the US

Source: Piketty and Goldhammer (2014, p. 348)

Saez and Zucman (2016) also provide instructive illustrations of the historical trend toward increasing wealth inequality, a level almost as high as in 1929. They show that wealth concentration has become concentrated to such an extent that the top 0.1% have seen an increase in their share of the wealth from 7% in 1978 to 22% in 2012. It is not surprising then, that the wealth accumulation of this tiny group accounts for nearly half of total wealth accumulation in the US between 1986 and 2012 (p. 521). Similar trends can be gleaned from the Survey of Consumer Finance, part of the Federal Reserve Bank, cited in Domhoff (2014). He explains that in 2010 the top 5% owned a staggering 72% of all financial wealth, and even more astoundingly the tiny group of the top 1% owned 42 % of all financial wealth (p. 64). Another source for data are the Wealth Reports issued by wealth management firm Capgemini. These reports commonly look at ‘High-Net-Worth-Individuals’ (HNWI), defined as individuals with more than US$ 1million in investable or financial assets at their disposal. Typically, primary residence, consumables, collectibles and consumer durables are excluded (Capgemini, 2016, p. 3). In 2015, there were 15.4 million HNWIs in the world of which the largest part is located in North America: 4.8 million HNIWs.

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To give an idea of how wealthy this numerically tiny group already is and might become, Capgemini estimates that “[u]nder the most aggressive growth scenario, global HNWI wealth is projected to surpass US$100 trillion by 2025, nearly triple the 2006 amount” (Capgemini, 2016, p. 5). The North American HNWIs owned $16.6 trillion of financial wealth (Capgemini, 2016, p. 78). Most reports make a further distinction by introducing Ultra-HNWIs. These are individuals with investable assets worth more than $30 million. Echoing Piketty on the significant concentration of wealth even within the top 1%, globally speaking Ultra-HNWIs make up only 1.0% of all HNWIs, but account for roughly 35% of HNWI wealth (Capgemini, 2016, p. 10). In a nutshell, the inequality in the distribution of wealth in the US is highly concentrated to say the least. Considering the historical trend as well as Piketty’s explanation for why this has been the case, it seems probable the situation is going to exacerbate in the near future.

4.4. Income and Wealth Inequality vs. Plutonomy

As emphasized throughout, observing these two phenomena is only one side of the equation of plutonomy. The concentration in income and wealth need not necessarily translate into inequality in consumption although one might expect this without any ameliorating influences. This second and crucial part of the concept – consumption inequality - was barely substantiated empirically by the original Citigroup authors or by any of the academic scholars reviewed on the topic. I argue that it is the conjunction of income and wealth inequality on the one hand and consumption inequality on the other that distinguishes the concept plutonomy from mere income and wealth inequality. More specifically, as pointed out in section 2.1, growth in consumption stems mainly from the wealthy in a plutonomy. If income and wealth inequality is so drastic that, say, the lower 90% in terms of income and wealth barely have money to spend on increasing their consumption, economic growth is more likely to be fuelled by the wealthy. This situation then lends very disproportionate weight to a numerically tiny number of individuals. Total household consumption is therefore disproportionately affected by their consumption preferences and behaviors. By contrast, the share of the majority of the population in total consumption is small in comparison to their actual number. By analogy, in marketing it is common to speak of a 80-20 rule (i.e. 20 % of costumers account for 80% of revenue). This contrasts for example with a society, which albeit characterized by high income and wealth inequality, is still relatively equal in terms of consumption (e.g. through a progressive tax system or the broad provision of credit). In such a society, demand for consumption goods would still be powered by the mass of people and firms would cater to a broader consumer market for their profit-making. In the plutonomy, however, the highly disproportionate share of the wealthy in consumption means that their consumption is relatively speaking far more

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important for total demand. One might say that plutonomy means continued economic growth, through continuing growth in consumption, despite relatively lower consumption of the mass of consumers. Plutonomy thus means some degree of independence in economic growth from consumption equality because the increase in the luxury consumption of wealthy few makes up for the stagnant consumption of the masses. Of course wealthy individuals can consume only a given quantity of basic goods. Their consumption and the increase thereof refer predominantly to the consumption of luxury goods, consumption of which seemingly can always go up (see section 4.5 for an objection).

The preceding discussion of growing income and wealth inequality serves to substantiate the first part of the plutonomy thesis, namely the claim that in the US income and wealth have become highly concentrated at the top. This seems to be a logical precondition for the assertion that a tiny group of wealthy individuals has a disproportionate effect on the rest of the economy. If income and wealth were distributed relatively evenly, the chances that one group in the economy has a high impact through its economic behavior would be small. Given that the opposite is the case in the US, it is a valid assertion that economic growth will be largely powered by the wealthy few.

4.5. Evidence on Consumption Inequality in the US

To begin with, note that in the US it was estimated that in 2016 consumer markets, measured by personal consumption expenditures, accounted for 68% of GDP (US Bureau of Economic Analysis, 2017). Thus, without a doubt personal consumption is a major component in the US economy. It is essential for my thesis to subject Kapur’s inference with regards to inequality in consumption resulting from inequality in income and wealth to critical scrutiny. This proved more difficult than one would expect given the conviction of the Citigroup analysts that the rich also account for the majority in the rise of consumption. Searching for evidence for this inference that inequality in income and wealth leads the wealthy to take on an increasing share in overall consumption, it became clear that in the economic literature this is operationalized as ‘consumption inequality’. This section reviews empirical evidence on how the share in total consumption is divided up between economic groups. Whereas Kapur and colleagues provide no evidence on the differential share in consumption of various income-brackets in their first report, they provide the following data in their third report on plutonomy (Kapur, Macleod, Singh, et al., 2006). Note that The Survey of Consumer Finances, on which it is based, excludes the exceptionally rich.

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Figure 6: Share in Household Consumption of Various Income Groups

Source: Kapur, Macleod, Singh, et al. (2006, p. 11)

The table above also cites the saving rate of the various income brackets in the US. Over the years, the savings rate of plutonomists declined relatively speaking because their net worth (i.e. wealth) increased absolutely speaking. In other words, their net worth as a fraction of their income has increased by 50% over the last 15 years, and hence saving from their income makes little difference to their overall net worth. Kapur, Macleod, Singh, et al. (2006) provide the following example: “[f]or someone whose net worth is 8x their income, a negative savings rate of 5% (assuming a 40% tax rate), would be equivalent to running down 0.4% of their net worth. This is a fraction of the 12.7% annual average increase in the S&P500 price index since 1982 (we have ignored dividends as these are included in income for the purposes of the savings rate calculation) “ (p. 12). Since the ratio of their net worth to income has risen substantially, plutonomists can worry less about saving from income. Put in simple terms, with the plutonomy alive and kicking, the wealthy see their wealth growing steadily and hence can tap more and more their wealth for their consumption without losing out absolutely speaking. Frank (2010) notes that “Their [the wealthy] savings rate has gone from more than 26% in 2008 to a negative 7% in the first quarter of 2010, according to the Moody’s Analytics data”. In the wake of the financial crisis, the saving rates of plutonomists doubled but relaxed over the next years as the wealthy got over the shock of the financial crisis. In fact, they saw their wealth expand through asset inflation caused by quantitative easing measures in the US (Kapur, Samadhiya, & De Silva, 2014, p. 1). “As the rich have been getting richer over the last 20 years or so – both in terms of their share of income and wealth – so too businesses that have been servicing the rich or selling to them have enjoyed a favorable operating backdrop” (p. 13). Similar trends are noted by Robert Frank, author of the Wall Street Journal’s blog The Wealth Report, who also interviewed Kapur in 2011. He cites Moody’s research that top five percent of income-earners in the US account for 37% of all consumer outlays whereas the lower 80% in terms of income barely account for 40% of consumer outlays. Putting these numbers in historical perspective, he goes on to highlight that “[i]n the third quarter of 1990, the top 5% accounted for 25% of consumer

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outlays. That held relatively steady until the mid-1990s, when it started inching up past 30%. It dipped in 2003 and again in 2008, but started surging in 2009 […]” (Frank, 2010).

While the data referred to by Kapur gives an idea of the phenomenon, systematic empirical evidence in support of his inference seems to lack. Although it would probably be the best source for data to support his claim of a disproportionate share in consumption of the wealthy, Kapur never refer to the economics literature on consumption inequality. Therefore, in this paragraph I review some of the most authoritative studies in this field of study and how they relate consumption inequality back to income inequality. The empirical examination of consumption inequality is an intricate undertaking because available data are often times inflicted by measurement errors. The most widely used source of micro-level data on consumption, and at the same time a good example for measurement difficulties, is Consumer Expenditure Survey (CEX). Looking at both the income and consumption of one and the same sample of individuals, Fisher, Johnson, and Smeeding (2013) present evidence from the CEX that income and consumption inequality rose at nearly the same rate in the period between 1985 and 2006. Attanasio and Pistaferri (2014) largely corroborate these findings in their overview of consumption inequality over the last 50 years but note that in the two years after the Great Recession the rate of increase in consumption inequality slowed slightly all the while income inequality continued to rise (p. 125 Panel C). Similarly refining the CEX data, Aguiar and Bils (2015) looked at how rich in contrast to poorer households allocate their income across consumption goods. Specifically, they compared the relative expenditures of high- and low-income households on basic necessities in comparison to luxury goods and corroborate the finding that income inequality has been mirrored by consumption inequality. Although there has been a debate on the size of the correlation between income and consumption inequality with earlier studies pointing to a moderate relation (Heathcote, Perri, & Violante, 2010; Krueger & Perri, 2006), more recent evidence suggests that the two types of inequality have increased at a similar rate. One study employed a variety of techniques to overcome measurement error problems with the CEX and clearly showed that income inequality from 1980 to 2010 was indeed closely associated with consumption inequality over that same period (Attanasio, Hurst, & Pistaferri, 2015). Another authoritative study on the subject was conducted by Cynamon and Fazzari (2015) who show the top 5% income households account for 30% of consumer spending. This constitutes nearly a 50% increase of this group’s share over the last two decades. Although the share of personal consumption expenditures in total GDP generally rose, this trend is, again, largely due to the top 5% increasing their share of total consumer spending. Similarly, the authors argued that the spending rebound after the Great Recession was largely driven by the consumption at the top, a phenomenon noted also by chief analyst at Moody’s Mark Zandi in a written testimony before the Joint Economic Committee. In it, he affirmed that “wealthier U.S.

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household[‘s…] spending counts for a lot; households in the top 20% of the income distribution are responsible for almost 60% of consumer purchasing“ (Zandi, 2012, p. 3). Timiraos and Hudson (2015), repeating Cynamon and Fazzari’s results, explain that “since 2009, average per household spending among the top 5% of U.S. income earners—adjusting for inflation—climbed 12% through 2012, the most recent data available. Over the same period, spending by all others fell 1% per household”. As a matter of fact, such estimates are even likely to underestimate the real consumption inequality because, as Sabelhaus et al. (2013) notes, the CEX is likely to be inflicted by reporting and non-response bias among high-income consumers.

Adducing empirical evidence on consumption inequality, this section showed that inequality in income and wealth also translates into inequality of consumption, or a disproportionate share in consumption of the wealthy. Moreover, as with income and wealth inequality, consumption inequality does not seem to become less but even more pronounced over time. Thus, the modern US economy can be accurately described as a plutonomy because it exhibits both economic trends: income and wealth inequality coupled with consumption inequality.

4.6. Objection: ‘They Can’t Possibly Consume This’

While it goes beyond the scope of this paper to go into what precisely and why the wealthy consume, I want to address a common objection to the claim that the rich can make up for the lack in consumption. A prominent example of this objection was given by the now-famous billionaire Nick Hanauer who became an advocate of progressive taxes and outspoken critic of the rising levels of inequality. Simply put, he argues that a rich person cannot consume much more than an average consumer. After all, you can only wear one pair of pants at a time even if your wardrobe is full of fancy designer pants. It is relatively easy to refute this objection by showing that – as is widely recognized now – the ‘more’ that rich people consume is not to be found in the consumption of basic goods but instead in luxury goods. And luxury goods consumption is mainly explained by quality- and status-sensitivity of those consumers. They might not be able to wear more than one pair of pants at a time but can demand ever more expensive pants and hence increase their consumption qualitatively. In technical terms, luxury goods have a low ratio of functional utility to price but a high ratio of intangible or situational utility to price (Nueno & Quelch, 1998, p. 62). In this regard, conventional microeconomic theory regards luxury goods as anomalies to the theory of general demand. Luxury goods came to be viewed as ‘Veblen goods’ (Veblen, 1899). These are goods that people consume more of the more expensive they get. The effect has been explained by Veblen’s conspicuous consumption theory (Heffetz, 2011). Now, notwithstanding that

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Nick Hanauer somewhat missed the point of how consumption can increase, one might want to slightly modify Nick Hanaur’s objection to make it more powerful. While Hanauer was too quick to jump to a conclusion by making the quantitative limit of basic goods consumption the relevant criteria for why disproportionate consumption by the rich has its limits, there is a point to be made by referring to conspicuous consumption. Even if a rich person can wear ever more expensive clothes or constantly upgrade its luxury travel experiences in order to signal status, this will still be possible for only one ‘act of consumption’ at a time. If rich people demand ever-higher quality to signal ever-more status, they will still be limited in their conspicuous consumption by natural limits. You might buy two gigantic yachts to invite your friends over but you can still be only on one. Nevertheless, even this objection can be refuted in favor of the plutonomy thesis. As shown by Di Muzio (2015a), conspicuous consumption is not about signaling status per se but about signaling it to one’s relevant peer group, ‘differential intra-class competition’ as he puts it (p. 151-161). The rich consumer might be bound quantitatively in its consumption of both basic and luxury goods. However, since the status-signaling is a never-ending race given that standards of comparison adapt to one’s current peer group, a billionaire might want to upgrade his recently bought yacht if his friend just acquired an even more luxurious one. In Di Muzio’s words, the world of the wealthy is not about keeping up with the Joneses about keeping up with the Slims and Gateses of this world (p. 156). Besides, the objection can also be refuted on the grounds that for conspicuous consumption one need not currently consume the product but simply be able to show off. Other reasons for purchasing luxury products even though one might barely be able to consume them are, as one analyst at the Citigroup Symposium put it, “[…] 2) I want to explore, 3) I work hard, and deserve this and 4) I want others to ask me about this, my area of expertise (e.g. become a wine expert)” (Kapur, Macleod, Singh, et al., 2006, p. 15).

One might also criticize the emphasis on US consumption inequality given that the living standard of a majority of Americans has still increased over the last decades. As problematized by Sacerdote (2017, p. 5), “Questions on the level of consumption are difficult because this requires some comparison of prices, quality, and good availability over time. The iPhone of today has more computing power than a 1990s mainframe computer. But is a poor person with an iPhone richer than a person who owned a mainframe 25 years ago?” This is certainly a fair critique to consumption inequality as such albeit beyond the point of what the effect of an unequal distribution in consumption in relative terms is on the prospects for economic growth.

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4.7. Summary

In section 4.3 I showed that both wealth and income inequality are empirical facts in the modern US. Building on this realization, the subsequent section reviewed the evidence on consumption and concludes that it, too, seems to be an empirical reality. In fact, recent evidence suggests that income inequality and consumption inequality are actually closely correlated. Moreover, at present neither of the two phenomena appears likely to reverse substantially anytime soon. Ergo, given how plutonomy was defined at the outset, namely as an economy where growth is powered and consumed mainly by the wealthy, the plutonomy thesis can be confirmed for the US case. The new US economy is driven by polarized consumer spending with the high-income group demanding increasingly luxury goods. The plutonomy thesis proposed by Citigroup analyst Kapur can thus be confirmed empirically for the US case. In what follows, I will argue that the economy in turn adapts to this in terms of demand as well as in terms of the production necessary to satisfy this demand. Specifically, I discuss the effect of plutonomy demand and production bifurcation along with a theoretical discussion of the consequences thereof for the capitalist-labor relation.

5. The Effects of the US Plutonomy on the Relationship between

Capitalists and Labor

In this chapter, I start off from the previously defended assertion that the US currently fulfills all the requirements for being considered a plutonomy. Moreover, I showed that the evidence appears to indicate that this situation seems at the very least likely to stay, more likely though to exacerbate. Here, I ask what the consequences of this situation are for the economic relationship between capitalists and labor. I argue that the plutonomy leads to a decreased economic dependence of capitalists on labor for profit-making. To elaborate this argument, I describe two effects through which I posit this effect to be mediated: demand bifurcation and production bifurcation.

More precisely, I first contend that since in the US plutonomy, consumption, and the growth thereof, is largely powered by the wealthy, demand becomes increasingly divided into an upper market segment servicing the rich and a lower market segment for the rest. Growth in profits will come from the former, which is why firms increasingly cater to the demand of the wealthy. Secondly, the shift in the sources of demand is mirrored in a shift in production. Companies focusing on the demand of the wealthy will adapt their workforce to this production by laying off workers not suited or necessary for this production. Put

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differently, market segmentation in demand leads to market segmentation in production. Demand bifurcation, in turn, makes labor less important as consumer, whereas production bifurcation corresponds to the decreased relevance of labor as workers. From this, I conclude that in the US plutonomy capitalists are becoming less economically dependent on labor for their profit-making.

I briefly want to address two crucial points here. Consumption inequality does not entail that no more profits can be made by selling to low- and middle income consumers. Instead, it means that continued profit-maximization through an increase in demand on the side of consumers is unlikely to come from those individuals, given their wage constraints. Prospects for increasing profits through supplying products for an increasing demand thus focus mainly on the wealthy and hence on the production of luxury goods. After all, Wal-Mart still makes profit but the majority of this profit is unlikely to stem from increased spending by the and middle income consumers. What lower-market producers and retailers instead frequently engage in is a race to the bottom in their production costs instead of raising prices to make more profit or undersell competitors (Foster & McChesney, 2012, pp. 126-127). Secondly, the concept of plutonomy does not include a description of the effect of income, wealth and consumption inequality on production. At most, Kapur’s advice for investors to invest in luxury stocks can be taken to imply that he expects the profits of those firms to grow. My argument, therefore, builds on the plutonomy thesis but goes beyond it. Whereas research on the link between rising income inequality and changes in the labor market has flourished in recent years, the effects of consumption inequality on labor markets has received scant attention. Therefore, my argument is constructed theoretically and building on the little data that is available. Given how important this link potentially is and how significant the impact of consumption on the labor market can be, it is imperative that this gap in the available research be filled. My thesis aspires to give a first impulse for this.

5.1. Demand Bifurcation

In section 4.5, I elaborated on the second crucial characteristic of a plutonomy, which is the assertion that in the US the wealthy indeed account for a disproportionately big share of consumption. It became clear that the wealthy dominate the current consumption distribution as well as the growth in consumption. Taking stock of how consumption is divided up between income-groups is one thing, identifying where growth in demand is likely to come from another. This section will assert that in the US, labor is decreasingly relevant for capitalists in its capacity as consumer to fuel growth of consumption. I proceed by showing how demand has become divided up and the bulk of growth in demand stems from the demand of wealthy consumers for the upper market segment, i.e. luxury goods. If

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I am successful in proving my claim that demand shifts toward the consumption of luxury goods, and that it is the wealthy who consume these, this supports my argument of a decreased dependence of capitalists on labor in the US plutonomy.

Given that I defined labor as those individuals who hold lower- and middle-income jobs, the stagnant real wages of these individuals (see section 4.3.1) are usually not sufficient to substantially boost an increase in demand. Quite in contrast, the wealthy see their incomes and wealth rise steadily. The majority of labor thus cannot fuel an increase in demand, while the wealthy are in a financial position to do so. The economy shifts in response to the low incomes of the masses from mass consumption toward an economy geared toward the wealthy. Wilmers (forthcoming) calls this process of demand becoming divided up the ‘bifurcation of demand’. It describes the phenomenon that the market is increasingly segmented into high quality- and status products on one side and generic goods on the other. Naturally, it is overwhelmingly high-income earners who consume the majority of the former while the rest of workers content themselves with consuming generic goods. Whereas a market that produces mainly for mass consumption is by the same token a market for labor as consumers, a segmented market where demand has become bifurcated does not allow the majority of labor to significantly participate in the consumption of upper-market goods. If consumer spending power shifts to being concentrated among high-income consumers, demand - and by extension the price of - high-quality goods goes up. For lower-quality goods, the opposite is true (Wilmers, forthcoming, p. 11). The shift to a heightened demand of luxury goods in the economy was aptly captured by Matthews (2014). Commenting on the state of consumer spending in the US, he affirms that many generic retailers will probably see a drop in their sales because most consumers simply do not have the incomes to consume more and are wary of debt-financed consumption after the financial crisis. He remarks that “[u]nless your business caters to the richest of the rich, opportunities for real growth are scarce” (Matthews, 2014). Others voice add to this that both companies servicing the luxury and the bottom market segment are winning while the middle is losing (Messina, 2016). In order to survive, companies adapt to a faltering middle-tier while low- and high-end market are booming (Winston, 2015). This situation stands in contrast to other periods such as the last century when a strong middle-class was an important part in keeping up demand for personal consumption goods.

As alluded to in section 4.5, high-income consumers are more willing to pay higher prices for Veblen and high-quality goods because they can signal status through consuming such products (Heffetz, 2011; Veblen, 1899). The increase in demand by the wealthy is thus not driven by a desire to accumulate various basic goods but by the demand for special items, that is, luxury goods (Yeoman, 2011, p. 48). The wealthy clearly consume luxury goods of ever increasing prestige, prices and quality for reasons other than basic need satisfaction. The bifurcation of demand, then, can be explained by evaluating the two