U.S. spending has become more skewed. What does that mean for Americans?

For the 35 years that I’ve been a professional economist, I’ve focused on the big picture. Will the economy suffer a recession? How many jobs will be created? What will unemployment and inflation be?

I’ve never carefully considered what the steadily increasing concentration of income, wealth, and spending among the well-to-do means for the economy. Many Americans have long found this skewing in economic well-being disquieting and unfair, but most economists, like me, have largely ignored it.

That’s not because it isn’t important, but mainly because quantitatively connecting the dots between the skewing and the economy’s performance is hard. And questions of equity and fairness have been left to policymakers, who are presumably better equipped to address them as they reflect their voters’ values.

Of course, being unable to establish a connection doesn’t mean there isn’t one. And because the skewing has become so pronounced, and the direction of travel so worrisome, it can no longer be ignored when considering how the economy is doing and where it is headed.

Behind my about-face are the income, savings, and spending estimates by income group, which my team at Moody’s has recently constructed from Federal Reserve data. They are eye-opening.

Consider that households in the top 10% of the income distribution, making more than $275,000 a year, account for almost half of all spending. We have data from when I started as an economist; back then, this group accounted for just over one-third of spending.

Further illustrating the point, households in the top just over 3% of the income distribution are responsible for one-third of all spending. That’s up from closer to one-fifth when I started my career.

Now consider households in the bottom half of the income distribution, those making less than $75,000 a year. They have only one-sixth of the spending pie, and that share has steadily fallen over the past several decades.

You might be tired of all the statistics, but consider one more. Those households in the bottom 80% of the income distribution, with incomes less than $175,000 a year, have seen no increase in their spending after inflation since the pandemic hit. That is, over the past nearly six years, they’ve seen no increase in their living standards. This stands in contrast to those in the top 20%, who have enjoyed sizable gains.

These numbers go a long way to explain why most Americans feel so down about their finances and the broader economy. Yes, they have a job, and unemployment is low, but their standard of living is stuck, going nowhere.

Also, households in the bottom 80% cannot save much and thus don’t own many stocks and other financial assets. Only about half own their own homes. Many also owe on their credit cards, have student loans, need an auto loan, and have a mortgage. The well-to-do save a lot, have sizable stock portfolios, own their homes, and if they have any debt, it is a fixed-rate mortgage with a low rate.

There is a long list of complex causes for this skewing, which has been long in the making. These include China’s rapid growth as a global manufacturing powerhouse, the decline of unionization, and the fast pace of technological change.

More recently, spending has been skewed by changes to the tax code that favor the well-to-do and the surge in returns on their stocks, housing, and other assets. Then there is the diffusion of artificial intelligence throughout the economy, which is sure to reinforce the skewing.

For an economist, the most immediate concern is how dependent the economy has become on the fortunes of the well-to-do. Consider what might happen if the stock market were to sell off, for whatever reason. This group’s diminished wealth wouldn’t cause them to cut back on their spending, as they have many financial resources, but it might cause them to spend with less gusto. Even this would be tough for the economy to digest.

This skewing is also, at least in part, responsible for the fracturing of our politics. We can’t seem to agree on any economic policies. Whatever policies one of the political parties pursues are quickly unwound when the other party gains control. We are fighting over basic government functions — like funding to remain open and provide basic services, and to pay the interest and principal on the bonds issued to finance the nation’s debt.

This all seems daunting, and it is. This may be nothing more than hubris, but perhaps if more economists focused on understanding the causes of and solutions to the skewing of the income, wealth, and spending distribution, we might make some progress addressing this pernicious problem and its fallout.