How Eroding the Middle Hits Economic Growth

Since my article on Monday about the narrowing of the customer base for midtier restaurants, retailers and other consumer-oriented businesses like hotels and casinos, much of the discussion has focused on what that trend says about whether and how the American middle class is indeed shrinking.

While that issue is important, a less obvious fact is that the shift of income to the wealthiest Americans can reduce consumption over all, according to many economists, and therefore economic growth for everyone â€" poor, middle and rich, too.

Alan B. Krueger, a Princeton economist who was a top economic adviser in the Obama administration from 2009 to 2013, estimates that had the shift in income gains to the wealthiest earners since 1979 been more uniformly distributed, annual consumption would be $400 billion to $500 billion higher today, equal to about 3.5 percent of gross domestic product.

To be sure, some skeptics will say that Mr. Krueger has a dog in the political hunt as a former official in the Obama White House, which has made inequality and opportunity a key talking point. But some economists on Wall Street, hardly a bastion of left-wingers, tend to agree with Mr. Krueger’s take.

Guy Berger, United States economist at RBS, says the divergent trajectory of richer and poorer consumers has most likely sapped the broader growth rate of consumer spending in recent years. That, in turn, is one reason that economic growth since the end of the Great Recession has compared so unfavorably with previous recoveries.

Since the end of 2009, consumer spending has risen by 2.4 percent annually, Mr. Berger noted, compared with nearly 3 percent annually in the middle of the last decade and 5 percent a year in the late 1990s boom.

“It isn’t that we are not back to where we were in the 1990s,” he said. “We’re not even back to where we were in the mid-2000s.”