The Negative Trickle Down Effect of COVID’s (Wealthy) Consumer Spending Pause

Call it the trickle down theory – in reverse.

To be clear: We’re not talking about the economic theory that posits that incenting business and relatively wealthier individuals to spend — chiefly through tax cuts — benefits just about everyone.

What we mean here is: A pullback in spending in the age of the coronavirus, from the top down — and here, yes, we’re talking about high earners here — has had (and will have) a negative trickle-down effect on others with considerably less income at their disposal.

These individuals and families, in fact, depend on wealthier citizens for their livelihoods.

And as the spending is curbed, from the top down, the economic recovery may be pushed out a ways, or even stalled.

In recent research published by the Opportunity Insights, a Harvard research enterprise, high-income households reduced their spending by 17 percent, and low-income households reduced their spending by 4 percent as measured through June 10. Drilling down into types of spending, two-thirds of the total reduction in credit card spending since January had come from that cohort.

By way of contrast, households in the bottom 25 percent of households, as measured by income, kept spending at the same levels as had been seen before the pandemic.

The frugality from the highest earners could jeopardize the speed of the U.S. economy’s recovery, experts warned, because many lower-income jobs depend on that spending.

“The pattern of spending reductions during this recession differs sharply from that of prior recessions, during which spending on services remained essentially unchanged while spending on durable goods (e.g., new appliances or cars) fell sharply,” said the report.

This is a key point: When consumers pull back on spending in the service economy, the people who suffer most immediately (and long term) are the workers who provide those services.

To get a sense of stagnant spending from the affluent can be damaging, consider the fact that, according to the paper, Small business revenues in the most affluent ZIP codes in large cities fell by more than 70 percent between March and late April, as compared with 30 percent in the least affluent ZIP codes. Restaurants and other places where physical interaction is the norm saw revenues slide by 80 percent in locales known for ritzy and the rich, such as the Upper East Side of Manhattan and Palo Alto, California.

And here is the bombshell effect: The data, according to Opportunity Insights, shows that “as businesses lost revenue, they passed the incidence of the shock on to their employees. Low wage hourly workers in small businesses in affluent areas are especially likely to have lost their jobs.” To put some numbers to it, in the highest rent ZIP codes, the study found, more than 65 percent of workers at small businesses were laid off within two weeks of the pandemic hitting; that’s significantly more than the fewer than 30 percent that lost their livelihoods from the low rent locations.

The idea that we can “stimulate” our way out of this situation may not be as easy as it sounds. Opportunity Insights noted that loans to small businesses as part of the Paycheck Protection Program (PPP) also have had “little impact” on employment rates at small businesses to date. Liquidity, it seems, is not enough to bring the jobs back.

“Our analysis suggests that the primary barrier to economic activity is depressed consumer spending due to the threat of COVID-19 itself as opposed to government restrictions on economic activity, inadequate income among consumers, or a lack of liquidity for firms,” said Opportunity Insights. The key, according to the research, is to restore consumer confidence by “addressing the virus itself.”

As noted in this space back in April, health concerns have been top of mind for consumers, who have said that the development of a vaccine is the key the element that would make consumers comfortable getting back to business as usual.

Since a vaccine may be months in the making, the negative trickle-down effect may be poised to continue.