The "K" Is Not OK

Four years ago, there was an unexpected and unusual landgrab among economists for letters of the alphabet.? As experts looked beyond the unfolding COVID crisis, they forecast U, V, and L-shaped rebounds. ?I saw something different: a K-Shaped recovery.? Based on the sharp rebound in confidence among those at the top, thanks largely to the work-for-home experience to most white-collar workers, and the ongoing plight of those at the bottom who were not afforded the same opportunity, I foresaw two wildly divergent post-pandemic experiences.

As my two-track outlook became a reality soon thereafter, I had hoped my concerns about widening economic inequality would have influenced policymaker and business leader decision-making.? If it did, the impact was short lived.? Zero-interest rates paired with rapidly rising confidence among those at the top fueled a burst in stock buybacks and a market frenzy across all asset categories. The haves suddenly had much more which, in turn, fostered an extraordinary wealth effect.? For luxury in all its forms – fashion, travel, cars, real estate… – the post-COVID economy has been a golden era, sending companies like LVMH to the top of the charts.

Meanwhile, those at the bottom have not only been left behind as financial assets have soared, but with interest rates rising, they have paid a higher and higher price to stay afloat.? Since 2021, food prices have risen by more than 20%, automobile loan rates have all but doubled, and today, U.S. banks charge over 25% on most credit card balances.

The net result is that behind a supposedly strong and resilient single U.S. economy, there are two: one where those at the top spend like there is no tomorrow, and one where those at the bottom struggle to make it through today.

With few believing that condition will change, we’re now seeing consultants recommend business strategies to capitalize on the divergence.? Writing recently in Inc. Magazine, Dan Furman, VP of Strategy for Crest Capital, offered these words of advice, “If you are on the up part of the K, I would keep doing exactly what you are doing, and perhaps even expand it.? Your company is obviously thriving on the up end of the K, and it may be time to expand what is working: Add another crew. Expand your service area.? Make another version of a successful product at a different price point… But if you are on the other side of the K, then doing what you’ve always done and waiting for a macro recovery is a bad strategy.? Even though the news says the economy is good, if yours isn’t, it’s time to act like you’re in a long recession – because you just might be… Because if you’re on the downside of the K now, the chances of it reversing on its own are fairly low.”

While Mr. Furman’s last line was meant as advice for business owners, I suspect it captures how those at the bottom now feel.? They can’t and won’t recover – ever.

Those at the top would be wise to appreciate that mounting economic hopelessness.? Not only is it likely to fuel financial nihilism, but it is also fertile soil for spontaneous and extreme social and political movements.? In “Me Here Now” mode, those at the bottom will act emotionally and impulsively with little regard for the interests of others or the long-term consequences.? Moreover, those at the top will become easy scapegoats.? Accurate or not, with so much wealth concentrated in so few hands, and the excesses all too obvious, it won’t be hard to point to those who appear to have benefitted from the plight of those at the bottom.

In response to my rising concerns about the perils of soaring economic inequality, those at the top have suggested I am na?ve to worry.? They counter that countries around the world have long existed with disparities far greater without incident.? Moreover, like Mr. Frum, they see plenty of ways to reap further rewards from it.? Between higher equity prices and higher money market bond yields, they see today’s financial markets as a limitless money machine.? They believe those on the arm of the K are all but immune from the challenges now commonly experienced by those below.

To be fair, they have every reason to now believe that.? This has been a second Gilded Age.? At the same time, the current feelings of invulnerability seem eerily familiar.? Financial history suggests that limitless immunity is a natural accompaniment to peaks in the markets.

Either way, while it may look highly resilient, our K-shaped economy isn’t OK.? With extreme confidence highly concentrated atop and mounting hopelessness spreading below, the widening divergence in sentiment, not recession, could be our greatest threat.

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Peter Atwater?is an adjunct lecturer in the Economics Department at William & Mary and the author of The Confidence Map: Charting a Path from Chaos to Clarity.