It Doesn't Grow on Trees

From diamonds to the dollar store, the affluent are economizing.

The wealthy may be more like the rest of us than we think, says a report by Iconoculture, which states that the rich are indeed cutting back on their spending, just as the middle and lower classes have been doing. A poll conducted by Unity Marketing revealed a 20 percent decline in luxury spending in the second quarter of 2008. In the five years that it has conducted the poll, Unity reported, the 2008 results demonstrated an all-time low.

If the rich have to cut back, what happens to the rest of us? Will this further slow down the economy? It could.

“There is something called the ‘multiplier effect,’” explains economist Dr. Anthony L. Liuzzo, professor of Business and Economics and Director of the MBA Program at Wilkes University. “If a person spends a $100, the shopkeeper may save $20 and spend $80.”

The next shopkeeper then gets that $80, and now has the means to spend on something else, thus keeping the flow going, and contributing to the economy, Liuzzo explains. “Every dollar that you spend may contribute five dollars to the gross national product,” he adds.

This means that when people are saving money, in this case the wealthy, less money passes through the system. If the rich are saving, that means, Liuzzo says, “That dollar the rich person didn’t spend won’t go through the system multiple times. If people aren’t buying, then people can’t spend. Stores lose money, they cut back, lose employees, and those former employees, who have lost their jobs, don’t spend money.”

If the affluent were to stop buying expensive jewelry, for example, “The jewelry shop owner loses profits, buys a cheaper car, everyone starts saving, and they don’t spend money because they are making less. The shopkeeper doesn’t make the money, and this keeps going through the system,” Liuzzo tells demo dirt.

A vicious circle ensues. “The worse things get, the worse things get,” he adds.

The dismal housing market has also influenced spending, he explains, because people spend according their “perceived wealth.” If the value of your home has gone down, even if you don’t plan on selling it, you may not be as willing to spend freely because you feel you are simply worth less. “If your home was worth $1 million, and is now worth $800,000, you may spend less because our perceived wealth directs our behavior in the marketplace,” Liuzzo explains.

In contrast, when the economy is good, people spend more money, which keeps a good thing going. “When people spend, employers make higher salaries, and they pay out higher salaries to their workers,” and these workers can afford to buy more, and more businesses prosper, Liuzzo says.

The Iconoculture report also says that people will no longer want to purchase for prestige, but that they will now care more about value, durability and quality-for-price. Has Liuzzo seen evidence of this happening already?

“Yes, to an extent. It is almost fashionable now to save money, relative to richer people. For poor or middle class people there is no choice. Rich people will get the expensive jewelry, then go into the dollar store,” he explains. “You will see expensive cars outside of Wal-Mart or Target, and we will see that this holiday season as well. Mid-level department stores like Macy’s, for instance, will be hurting, because people will shop at luxury and discount stores.”

Could changing values also be due to an increasing respect for the environment and a disdain for wastefulness and frivolity, in addition to obvious economic concerns?

“There is not as much concern for the earth as we think,” Liuzzo maintains. “There is an impression that people are environmentally sensitive, but I don’t think their behavior is changing as much as it needs to or as much as we would like to think that it is.”

The economy being as it is right now, Liuzzo explains, means people are feeling a little more self-centered and less altruistic. “People care more about their own interests right now,” he explains. “They may be willing to pay an extra $10 to be green, but not $20 dollars to go green.”

While Liuzzo agrees that the wealthy are cutting back, and that the multiplier effect could further affect the economy, his outlook is positive, overall. “While the downturn is not over yet, it is not a serious downturn,” he says. “Inflation will stabilize, and food prices will go down. We will do just fine.”