The Rich Spend Just Like You and Me
By ANNA BERNASEK
Published: August 6, 2006
THE extensive coverage of the Astor family saga is just the latest example of America’s longstanding fascination with the very rich. But in recent years, the lifestyles of wealthy people have been not only a staple of popular culture but of serious economic research as well.
That’s because the wealthiest families have reaped enormous financial rewards over the last two decades, and their economic and political power has increased markedly. So it’s well worth asking what they are doing with all that money and what effect they are having on the overall economy.
Finding out where those income gains have gone, however, is about as easy as peering at the estates behind the towering hedges of Gin Lane in Southampton. There’s simply no official data on the economic behavior of the very rich. We can’t be sure how much they are saving or consuming, or exactly how they are using their accumulated wealth.
The wealthy are often thought to be big savers and, under President Bush, they have been given significant tax breaks. But what has actually become of their outsized gains in income?
There are some clues.
For discussion’s sake, let’s start by defining the very rich as the top 1 percent of the population. That’s about 1.4 million families, a group that in 2004 had an average real income of nearly $750,000.
According to two economists, Thomas Piketty, at the School for Advanced Studies in Social Sciences in Paris, and Emmanuel Saez, at the University of California, Berkeley, the income of this top 1 percent increased an inflation-adjusted 44 percent from 1994 to 2004, compared with a 10 percent average increase for the rest of the population.
That’s without counting capital gains, a large source of income for this group. Including capital gains, the gap between the top 1 percent and everyone else widened further, totaling a 54 percent increase in real income for the very rich and a 12 percent gain for everyone else.
Tracking what has happened to those income gains first requires examining the two best official data sources: the Consumer Expenditure Survey, conducted by the Bureau of Labor Statistics, and the Survey of Consumer Finances, conducted by the Federal Reserve Board.
The trouble is that the Consumer Expenditure Survey lumps together as “rich” the top third of households, starting at income levels around $70,000 a year. The consumer finance survey is not much better. It includes the top 10 percent of households.
Another approach — to glean information by studying individual economic sectors — runs into similar problems. For instance, official housing sales data lumps homes over $500,000 into a single category. But in many areas of the country today, the starting point for real estate held by the very rich is valued at $3 million or more.
Without precise figures, we have to rely on aggregate measures and anecdotal evidence to paint a picture of what the very rich have been doing with their money.
Start with what, it seems, the very rich have not been doing much of — saving. The national savings rate has declined steadily during the last decade, and every income group has been saving less.
Mark Zandi, chief economist of Moody’s Economy.com, has tried to study the savings rate for the rich. Because concrete official data for the top 1 percent is lacking, Mr. Zandi focused on the top 5 percent — households with an average real income of around $275,000.
He found that the proportion of after-tax income saved in this group fell from 13.6 percent in 1990 to 6.2 percent in the first quarter of this year. And he knows of no reason that the top 1 percent would be notably different in their savings habits.
“The wealth effect is inducing less saving and more consumption by almost everyone, including those at the very top,” Mr. Zandi said.
What can we deduce about what the very rich have been spending their larger income on? By surveying the booming industries that cater to well-heeled consumers, it seems reasonable to conclude that the rich have been buying such things as high-end real estate, yachts and luxury goods like jewelry.
Figures for second-home mortgages soared in the last decade, while real estate sales over $3 million hit record levels. DataQuick, a real estate research group based in San Diego, estimates that the number of properties nationwide that sold for more than $3 million grew 135 percent in the five years to 2005.
And while the rest of the real estate market may be cooling off, sales of luxury properties remain steady. “What I’m hearing from our brokers is that the high end, $10 million plus, has not tailed off like the rest of the market,” said Jim Gillespie, president and chief executive officer of the Coldwell Banker Real Estate Corporation.
Then there’s spending on other luxury goods. Three economists, Jonathan A. Parker and Yacine Ait-Sahalia from Princeton, together with Motohiro Yogo at the Wharton School of the University of Pennsylvania, tried to track the consumption of the wealthy by constructing an index based on domestic sales of luxury retailers such as Tiffany.
Their research indicates that during the 1990’s, the average annual real sales growth of luxury retailers was a strong 11 percent. Unfortunately, their data stops at 2001. But looking at the domestic sales of individual high-end retailers since then, it seems sales have remained robust. For instance, Tiffany reported that domestic sales grew 9 percent in the year ended Jan. 31, 2006, and 10 percent the previous year.
Over the short term, the propensity of the very rich to consume rather than save has helped stimulate the national economy. Led by the wealthy, American consumers have driven growth around the world as well as at home. This may seem like good news, but there’s a catch. Too much consumption and not enough saving could become a significant drag on the domestic economy.
SAVING leads to investment and capital formation, which in turn drive growth and prosperity. Without savings of its own, a nation, to support its living standard, must attract the savings of foreign investors by offering higher interest rates. Higher rates then tend to slow domestic growth.
“It hasn’t been a problem up to this point,” Mr. Zandi said. “But unless higher-income households start to save more, it will be a big concern.”
Mr. Zandi is skeptical that the very rich will change their behavior any time soon. When he pieces the evidence together, he finds that within the top income group, younger wealthy households tend to save less than their older counterparts.
This may suggest the emergence of a more profligate attitude toward consumption and saving among segments of the very rich.
To be sure, some very wealthy people have engaged in acts of great generosity. Brooke Astor has been renowned not just as the doyenne of New York society, but as a philanthropist.
Recently, on a much larger scale, Warren E. Buffett has dedicated the bulk of his fortune to philanthropy, through the Bill and Melinda Gates Foundation.
While philanthropy should be applauded, it can’t replace the basic responsibility we all have of saving and investing in the future of the nation. Time will tell how responsible the very rich have been with all their new wealth.
nytimes.com |
