The Economic Impact of Spending Patterns: Do Poor People Spur More Growth Than the Rich?

The age-old debate continues: does the spending habits of poor and rich individuals have a significant impact on the economy? While it might seem intuitive that those with more disposable income would contribute more to economic growth, research and statistics suggest otherwise. In this article, we will delve into how individuals living just above and below the poverty line contribute to economic growth in the U.S., and how the spending habits of wealthier individuals affect overall economic health.

Spending Patterns and Economic Growth

According to recent data, individuals living just below and just above the poverty line represent one of the largest growing groups of non-essential consumer goods spenders in the U.S. This group, often referred to as the 'poor and working poor', contribute significantly to the sales of non-essential consumer goods, primarily due to the labor-intensive ancillary businesses and required employment that these purchases support. Non-essential consumer goods sales, including items like depreciating assets such as cars, electronics, and high-margin single-use goods like fast food, rank second only to newly constructed residential housing sales.

Characteristics of Non-Essential Consumer Goods Spending

It's important to note that, contrary to popular belief, the spending of low-income individuals is not confined to subsistence products. Top purchases often include depreciating assets and high-margin goods such as cars, electronics, and fast food. For instance, prepaid phones, cash-checking services, high-risk/ high-margin car and electronic sales, and furniture and electronic rentals have emerged as significant sectors. These businesses contribute substantially to the overall economy due to their labor-intensive nature and high employment rates.

Impact on the Economy

These new business sectors employ hundreds of thousands of workers collectively. The GDP contributions from these groups add significantly more to a consumer-based economy like the U.S. than the wealthier but more restrained groups. In contrast, wealthier middle and upper class individuals tend to be more restrained in their spending patterns. Their income typically goes first towards subsistence needs and paying off debt.

Spending on necessities and debt repayment does not contribute significantly to economic growth. When wealthier individuals receive windfalls, they tend to prioritize paying off debt, which has a net-zero or potentially shrinking effect on the economy. Similarly, spending on education, which is analogous to debt repayment, does not stimulate the economy either. Savings have a contractionary effect on the economy by taking money out of circulation.

The very wealthy contribute to economic growth through investments, provided these investments are made in U.S.-based businesses. However, even if investments are made, the economic impact is maximized when they occur in sectors with high employment.

Conclusion

The economic impact of spending patterns is complex and multifaceted. While the 'poor and working poor' contribute significantly to the economy through their high-margin and labor-intensive spending habits, wealthier individuals' spending patterns generally have a more restrained and contractionary effect. Understanding these dynamics can help policymakers and businesses develop strategies to support broader economic growth.