One way or another, there’s really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can’t spend more unless they make more.
This is a widely held view, and I’m as much in favor of a strong middle class as anyone. Nonetheless, I’d say that in terms of strict economics it’s wrong. There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade — largely supported off of super-salaried Wall Street types — is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people.

* Paul Krugman, 17 dec. 2008

Comments

Well Paul, don’t you think McDonald’s generate more jobs than expensive restaurants. To serve middle class you need to create more jobs than to serve rich.
— Imad Qureshi

Assuming that you’re right, and you can have an economy driven by a small number of super-rich, what does that do to the business cycle?
If the bulk of your economic spending comes from the working class, and the economy hits a rough patch, most people will continue to spend the vast majority of their income. It’s not like they have any choice. This is, I suspect, why food stamps are such an effective economic stimulus–people have to eat.
But if most of your spending is driven by $200 dinners, an economic downturn could lead to a dramatic cutback in spending.
So even if an economy of $200 dinners for a tiny upper class (and Ramen noodles for everyone else) can create full employment in the short term, it might not lead to long-term economic stability.
— Eric

Of course, in a democracy, no one would vote for such a situation. If the quality of life for most people goes down, a new government will come into power. That will happen if the economy goes down, or inequality gets amped up, which is what had been happening in the U.S.
— Chad Okere

No doubt you are correct, but the underlying assumption is that those few are going to spend at the same level as the many would and it was my understanding that that just doesn’t happen in the real world.
— Will McKenna

Can you support the statement that the prosperity of NYC was driven off super-salaried WS types? It seems (on the face of it) unlikely to me that they represented more than a few percentage points of overall spend in NYC, or that this was a significant percentage of the overall increase in spend there.
— Anurag

The obvious reason, since Mr Krugman seems to have forgotten it, is revolution: the dispossessed, deprived lower classes revolt.
Examples in the previous century include the Russian Revolution and the Chinese Revolution. In both cases there were wealthy upper-class elites doing just fine out of the selective application of industrialization, with no broad middle-class or working-class participation in economic advancement. On a broader note, it is tiresome to hear economists assert that economics is solely a matter of mathematical models, each of which is limited by simplifying assumptions to a narrow range of applicability.
Any investigator has to be aware of the limitations of his assumptions; economists famously fail to address this.
— Michael Meo

Can you provide a little more explanation on this? It seems like in most industries, it takes about the same number of workers to serve one customer or produce one product, regardless of how much that customer is paying or the product costs. For example, it doesn’t take five times as many workers to produce a Lexus than a Toyota, and therefore the economy is better served by producing 1,000,000 Toyotas than by producing 200,000 Lexuses. Is this wrong?
— Daniel

Indeed, you are correct as usual. There are countless third world cities supported entirely by the spending of a thin class of hyper-wealthy elites. None are places where you would ever want to live, unless you were certain that you would be among that thin class of hyper-richies.
— John Gear

It’s not enough to suggest that it’s numerically possible that a phenomenally rich small core of spenders can equal a much larger number of smaller spenders.
There’s also the question of what is *likely*, and consumption goes down as a percentage of income / dividends etc. as you’re dealing with richer & richer people.
It’s numerically possible that the super-rich can *volunteer* to pay more taxes than they have to, or make equivalent donations to charity.
But they don’t. And they won’t.
— El Cid

As I am on the left of the political spectrum (and moving further left every year, but I degress…), I believe there are is much social justification for a large and strong middle class. However, Dr. Krugman is correct. Look at Chile in the aftermath of the September 1973 coup. It took many years for the economy to grow, but when all was said and done, almost half of the population had fallen below the poverty level, yet the richest had increased their wealth by more than 80%.
— Chuck

Well, we can debate the finer points of economic theory as our global economy continues its journey downward. However I would simply like for us to consider that this is also about creating an economic system that is rooted in justice, not simply models and theories. The corrupt and bankrupt system we’ve got right now is rooted firmly in inequality and injustice. We can do better than this….
— Rita

It’s what keeps our country peaceful within our own borders. When we’ve had two classes, we’ve had violence and civil war. What? You thought the civil war was about ending slavery?
— LJM

I just got back from NYC and noted an increase in cheap eating places like Pret a Manger. Duncan Donuts seems to be muscling in on Starbucks. NYC is expensive to be sure!
Whether existing jobs are working for the middle class or the upper class the question is how many jobs exist, what do they pay and what is the cost of living.
I have always heard that people on the lower end will be content with their row boat when others have a yacht as long as they can get the rowboat. Marxist economists though say when the disparity gets too high and people can’t get their row boats there will be social instability. China seems to think so.
— David B. Fisher

In this respect economics is like engineering. Any good engineer can design a machine with gears that turn and lights that flash, but the point is to know what the machine is supposed to do.
So, the question to ask is, what is the purpose of an economy? If the purpose of the economy is to allow a tiny minority to live like Pashas while the majority working class live at subsistence level, such a system is undoubtably workable. If, on the other hand, a society determines it ought to “promote the general welfare,” then the system should be designed to that end. Both systems are valid economically in the same way that both clocks and typewriters are both functional engineering.
— Dan Helphrey