Spend Like It's 2006

Why we need the rich to consume conspicuously

  • Photo-Illustration by Jesse Lenz for TIME

    Thinking about buying a new jet because your old one is burning too much high-priced aviation fuel? Smart idea. Place your deposit — and then get in line. Business-jet makers like Bombardier are back-ordered on some models.

    The real estate market is still a fixer-upper, with prices continuing to fall, according to the S&P;/Case-Shiller Index. Own a place in Las Vegas and you are underwater in the desert. But on the island of Manhattan, top-end properties are moving. One apartment on Fifth Avenue, owned by the 104-year-old recluse daughter of a 19th century copper baron, went on the market after her death. The asking price will be a couple of floors north of $50 million, and 21st century hedge-fund barons are available to buy it.

    While the economy as a whole is as sticky as Arizona asphalt, grinding out incremental gains in jobs, GDP and joy, the view from the upper end of the tax bracket is cheerier — creating some interesting economic distortions. Look at Newt Gingrich. The presidential candidate, whose party demands huge deficit and spending cuts, got blinded by the political sparkle of the third Mrs. Gingrich's diamond necklace, one of a string of buys from Tiffany & Co. that Newt Gingrich got with a $500,000 credit line. You can get a lot of health insurance with that kind of change.

    Try not to resent the fact that rich people have exited the recession and are spending again. The economy needs their activity, the more excessive the better. As Christmas neared in the months following the Lehman Brothers collapse, the financial crowd feared that conspicuous consumption would not be tolerated by the pitchfork-wielding masses. No limos, no lavish parties, no Cristal. So who suffered? Not bankers and traders: it was drivers and cooks and wine shops.

    The lesson of this postrecession is that while cutting debt is a wonderful and worthy thing for many overleveraged Americans, it's spending that does the mending in a recovery. Consumer spending accounts for about 60% of all economic activity. "The ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters," Fed Chairman Ben Bernanke noted.

    We haven't had enough of it in the middle- and lower-middle-class segments. Martha Stewart, a rich person, has put her publishing company, Martha Stewart Living Omnimedia Inc., up for sale because not enough of her aspirational middle-class readers are buying her advice on the perfect lobster roll because they aren't buying lobsters.

    The lack of spending is obvious in retail. At Talbot's, where career women buy sensible clothing, career women have sensibly been holding back. Go down a rung and witness the poor results at Gap, Sears and Walmart as well.

    Compare that with Gingrich's favorite shop, Tiffany, which reported quarterly earnings up 26%, to $81.1 million. Burberry's profits are up 39%. At hotelier Marriott, the company's top-tier Ritz-Carlton flag is outperforming the middle-market flags because its patrons are more confident of their prosperity.

    The wealthiest 5% earn 21.7% of the nation's income but spend proportionately less of it than average folk. That's logical and also explains why the former save more than the latter and thus become wealthier. But their spending is vital. High-end customers account for nearly a third of total discretionary spending, according to Empirical Research Partners. During the recession, the wealthy cut back disproportionately too. Boat sales, for instance, dropped 80%, costing many jobs.

    There's a big case to be made for conspicuous consumption in these debt-reducing times. Can we make a deal, bankers? The country has so little regard for you — Republican Senators excepted — that some extravagant spending will do little to offend anyone further. Business owners and leaders: you've gone out of your way not to hire anyone, a strategy that has created enormous profits. You are going to pocket some of that as bonus money. Why not splurge a bit now? Some new clothes, a boat, a car, perhaps dinner at a nice restaurant this weekend. The rest of the workforce could use a little tip money. And who knows? With your spare change, maybe they'll buy something.