Can Rich People Provide all the Necessary Demand?

If an increasing number of people in America are not capable of doing economically viable work (because they don’t have the “knowledge skills” or the wherewithal to acquire them)–and as a result can’t contribute to the log-rolling exercise that is our economy by spending and providing demand for producers–is it a problem?

Can rich people do all the necessary spending to keep the log rolling? Will they?

It’s a complicated question, but I wanted to get at least a simplistic look at the numbers. So I took a look at the BLS’s Consumer Expenditures in 2007 (PDF), the latest year available (published April 2009), and threw the numbers into a spreadsheet, which you can dowload here (XLS).

Here’s one result. To maintain demand:

If spending by the bottom 69% of households (<$70K income) drops by: 10% 20% 30%
The top 7% of households (>$150K income) must increase spending by: 27% 54% 81%

In this particular example (<$70K vs. >$150K, year 2007), every 1% drop in low-end spending requires a 2.7% increase by high-end households to maintain the same level of demand from producers. (This is a function of the smaller number of households at the high end, ameliorated by the lower spending per household at the low end.)

Now obviously, if income is redistributed similarly, to the high end (as it has been so profoundly since 2001), it will also be concentrated similarly. So maybe that would suffice to effectuate those spending increases by the well off. But saying so with any certainty requires a model that it is beyond my means to produce.

That model would need to consider the following (related) questions:

• What is the relationship between income and spending at different income levels? How do each group’s utility curves (actually algorithms) respond to shifts in income?

• What about wealth, which is also a driver of spending? Higher incomes only slowly expand household wealth.

• What kind of lag times are we talking about? Will the well-off immediately ramp up their spending, or will they wait to build wealth, and make sure the income is a reliable stream?

• What about the investments that the well-off make with what they don’t spend? If producers receive those investments (which have to be paid back), is that as stimulative as sales revenues, which they get to keep?

Pondering these, all four seem to suggest that widely distributed spending (and income) are much more likely to maintain demand than spending by the well off.

I haven’t been able to find empirical research that addresses this question in a satisfying manner. (Yes, lots of theory…) Anyone else?