Spending among the wealthiest American households has plummeted during the coronavirus pandemic, threatening to hamper the U.S. economy's recovery from the worst downturn since the Great Depression.
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Researchers based at Harvard have been tracking spending patterns in the U.S. based on credit card data. According to new findings released this week, more than half of the total decrease in credit-card spending since January has stemmed from the wealthiest households, as of June 10.
"This reduction in spending greatly reduced the revenues of businesses that cater to high-income households in person, notably small businesses in affluent ZIP codes," the report said. "These businesses laid off most of their low-income employees, leading to a surge in unemployment claims in affluent areas."
Conversely, low-income households have largely maintained their same level of spending pre-crisis, with spending among those individuals dropping just 4 percent as of June 10.
Wealthy Americans aren't tightening their purse strings because of a lack of cash. In general, they lost fewer jobs — a recent Federal Reserve report found that 40 percent of total job losses affected individuals earning less than $40,000 — and worried less about day-to-day living expenses like food and gas.
But the outbreak of the virus, and subsequent shutdown of the nation's economy, limited where the rich were able to spend money. They could no longer go to expensive restaurants, the theater or travel and stay in lavish hotels. Meanwhile, spending on luxury goods that don't require in-person contact, like landscaping services or home swimming pools, stayed near pre-crisis levels.
"The fact that spending fell in proportion to the degree of physical exposure required across sectors suggests that the reduction in spending by the rich was driven primarily by health concerns rather than a reduction in income or wealth," the report said.
This differs hugely from past recessions, where service spending was essentially unchanged, the authors of the report, economists Michael Stepner, Raj Chetty, Nathaniel Hendren and John Friedman, wrote.
Small business revenues in the most wealthy ZIP codes in the U.S. plunged by more than 70 percent between March and late April, compared with 30 percent in the least affluent ZIP codes. As a result, small businesses had a much higher rate of closures in high-rent, high-income areas. For instance, in Manhattan's Upper East Side or Palo Alto, California, revenues of non-tradeable goods that require physical interaction — like restaurants and hotels — tumbled by 80 percent.
As businesses lost revenue, they passed the financial shock onto their employees; by and large, it was low-income, hourly workers who bore the brunt of the drop in spending. In the wealthy ZIP codes, more than 65 percent of workers at small businesses were laid off within two weeks after the virus-induced shutdown began. By contrast, in lower-rent ZIP codes, fewer than 30 percent of employees lost their jobs.
"Perhaps because they face higher rates of job loss and worse future employment prospects, low-income individuals working in more affluent areas cut their own spending much more than low-income individuals working in less affluent areas," the report said.
Even as states begin to reopen their economies, spending and employment remain well below the pre-crisis levels, suggesting that until the virus is contained, the economy will be slow to bounce back.
"The only path to full economic recovery in the long run may be to restore consumer confidence by addressing the virus itself," the authors wrote.
That means that traditional methods of stimulating the economy may not be effective in this situation; instead, the authors argued that it could be more "fruitful" for the federal government to provide more social safety nets to reduce hardship among low-income individuals, rather than try to stimulate economic activity.