America’s Economic Divide In Two Stories

What matters for real people is the effect on families.

That’s my generalized assessment of stagflation risk, as communicated briefly in “Stagflation: ‘Why Do I Care?’”

One follow-on question we don’t ask enough is this: What do we mean by “families”?

“Stagflation has historically weighed on not just economic growth but also the growth of household wealth,” Goldman’s David Kostin wrote on Friday evening, adding that household net worth “has grown by a median real rate of 0.5% per quarter since 1960,” but during periods of stagflation, the rate is 0%.

He went on to say that “these periods have also been associated with declining household allocations to equities [while] home prices have typically declined in real terms during stagflation.”

Note what’s implicit: Households own equities and households own homes. If stagflation is an undesirable outcome for people fortunate enough to own assets, what’s it like for families and households who don’t?

I come back to this frequently, because I worry more and more that the fortunate members of society are totally disconnected from the less fortunate, which is pretty much everyone if we’re talking percentages.

Earlier this year, I lamented that apathy had set in for an old friend. She never “made it,” so to speak, but certainly not because she lacked opportunities or an education. She had both. Thanks to a degree from a large university (an SEC school) and, for lack of a more politically correct way to put it, thanks to being the “right” color in a country where race unfortunately still matters when it comes to finding work, she’ll never be in serious economic peril. She won’t be destitute.

But she was displaced by the pandemic, both on the labor front and on the housing front. She doesn’t own a home and, as far as I know anyway, has no financial assets to speak of. So, she didn’t benefit from the surge in home prices since the onset of COVID, nor did she enjoy the vaunted “wealth effect” illustrated so poignantly in the figure (below).

Back in May, she told me she wasn’t interested in returning to a regular work schedule, favoring sporadic weekend shifts at a bar owned by a friend and an under-the-table cash wage earned serving sandwiches a few hours per week.

“Do you know what I’m doing right now?,” she asked, in what would be our final phone call. “Staring at a Charlie Brown tree.”

Apparently, someone in her apartment complex had discarded a potted plant, which she “rescued” (her word) and draped with Christmas lights.

“Do you want a picture?,” she wondered. “That’s ok,” I said.

The point in rekindling that vignette (regular readers will recognize it) is to juxtapose it with the experience of a (now former) neighbor whose family recently moved out after renting a home several doors down for longer than I’ve lived here. The owner, who I don’t know, decided to sell the property, almost surely because it had doubled in value (by my estimates) over the last three or so years.

In stark contrast to the experience of my friend in the southeast, who consistently complained about the logistical hurdles associated with renting in America, especially post-pandemic, my old neighbors found a new rental in less than 24 hours. A quick, moving-day conversation with the head of household was illuminating. As it turns out, finding a rental is relatively straightforward when you can show proof of liquid assets totaling four times the effective annual rent. “They just wanted a bank statement,” he said, casually, as we watched movers load a bed frame. His two daughters sat side by side on the front steps, both glued to iPhone screens. “We could buy again, but she doesn’t want to move back up there,” he added, gesturing at his wife. I assumed “up there” meant the northeast, but I didn’t ask. Their new rental property is even nicer than our neighborhood and it’s a mere nine miles away.

At first, that conversation seemed unremarkable — I’m notoriously uninterested in other people’s lives but I do know from previous conversations that he (the head of household) has a portfolio that’s considerably larger than mine and almost all of it is liquid. But when I thought about it later, it occurred to me that for the vast majority of Americans who don’t own a home, the idea of having four times the annual rent just sitting idly in a random savings account is probably ludicrous. Never mind whatever astronomical monthly sum my neighbors are now paying three communities up the street, the median rent in America is around $1,700, according to Zumper. And it’s gone up (figure below).

While I imagine the requirements for renting less luxurious abodes aren’t as onerous, extrapolating from the above suggests that if an everyday person in America wanted to move into a new rental with no questions asked on short notice, they’d need to present a bank statement showing a balance of roughly $82,000.

Whether that’s an accurate description of the rental market I can’t say. It’s just a thought experiment based on an anecdote. It may be totally spurious or, at best, only loosely applicable. But it resonated with me (on a delay) when I thought about my friend taking in an abandoned houseplant she found at the dumpster of an apartment complex on the outskirts a third-tier city in the American south. The idea of her having $80,000 is plain silly, let alone $80,000 extra dollars just loitering in a savings account, waiting to be presented as proof of affluence.

But let’s leave her aside for a moment and think about the middle class, to which she could have belonged had she made better decisions. Their plight (the plight of the middle class) isn’t much better and it’s getting worse in relative terms. Consider the figure (below), for example.

The middle class owned just 26.6% of America’s national wealth as of June, the latest Fed data showed. That’s the lowest ever and, as you can plainly see, it’s declined steadily since the beginning of the series.

Meanwhile, the top 1%’s share is now 27%. This is the first time the richest Americans’ total wealth has eclipsed that of the middle class.

That the convergence happened four quarters after the pandemic is no coincidence. Again, the value of real estate and corporate equities has exploded over the same period (figure below), and the richest people own the most assets.

Simply put, if you own assets (any assets, really), you’ve enjoyed a windfall.

The juxtaposition sketched above (between, on one side, my old friend, and, on the other, my affluent neighbors and the people from whom they rent) is a microcosm of dynamics that perpetuate the economic divide in America. Taken together, the two vignettes speak to virtually all aspects of a conjuncture that perpetuates a stratified social order which I’d argue is now totally untenable.

My neighbors once owned a home (or so I gathered) but thanks to fortuitous economic circumstances, apparently had the option of selling it (at a profit, one imagines) and moving semi-permanently to a resort island in what sounds like one long, ongoing vacation. When one rental stopped working out, they simply waved around some money and moved up the street. Try not to laugh. The owners of the properties they rent are self-evidently wealthy. All parties involved own assets. And those assets have appreciated at an exponential rate over the past four quarters. My old friend, on the other hand, is asset-poor. Besides that Charlie Brown Christmas tree, anyway.

If the economy slows and hiring momentum in the services sector doesn’t reaccelerate, the country is likely in for at least a year of mild stagflation. Price increases may ultimately prove “transitory,” but it’s obvious that regular people are paying more for the things they need and that they’ll be compelled to do so for another several months at the (very) least.

That matters little to the affluent. Indeed, we miss something important when we talk about “household wealth” in America. For many (most?) Americans, there’s no such thing. They have no “wealth” because they own no assets to speak of. For those folks, stagflation means hoping wages keep pace with rising prices, but in a slow-growth environment, demanding higher wages is perilous because businesses are facing margin compression and falling revenues. As a worker, you have (lots) of bargaining power right now, but when the labor market balances and slow growth sets in, it may well evaporate. At that point, asking for more money when profits are getting squeezed on both sides (i.e., by rising input prices and wages and also by falling revenues) could be tantamount to asking to be fired or replaced with a robot.

The circumstances of i) an average person just trying to make it in America and ii) life as experienced by the affluent, are now so divergent that it’s difficult to see how the two economic classes can possibly communicate with one another, let alone commingle or otherwise interact in ways conducive to civic order.

This will end in some manner of social breakdown. America got a preview of this film in the summer of 2020. Expect the full-length feature to be far more dramatic.

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