Hugo Schwyzer

My splendid cousin Ted, a marketing major at CSU Chico, comments on the increasing recognition that the current economic slowdown impacts the poor and the middle-class more than the wealthy.

I recently made a presentation to my Sales Force Management class, where as I played the newly appointed V.P. of sales. I had to convince the CEO that we needed to switch from the low-end market for wristwatches( this is an arbitrary product that was assigned to me) to the high-end market, like Rolex and Bulova. The premise for my reasoning was mainly the impending recession that our country has fallen into, and that only the high-end market will stay profitable at a constant rate. This poses an interesting question of why do the the consumers with plenty of discretionary income continue to have some cash? How could the recession of an entire economy only hurt the low income citizens?

I’m not an economist; in our family, it’s my wife who manages both our money and, in her business management firm, other people’s as well. But I’m fortunate enough to go back and forth between very different economic worlds quite frequently. My students — and I am close to many of them — are, like so many community college students, economically very vulnerable. Most, however, are not homeowners; perhaps more importantly, most who live at home live in rentals rather than “owned” homes. In an odd way, many have been able to weather the worst aspects of the “credit crunch” because for them and their families, home-ownership is often an as-yet unattained aspiration. Though rents have not come down as fast as house prices, they have stabilized in Los Angeles County as the economy tries to absorb the massive increase in housing stock. Purely anecdotally, this has actually benefitted my students who live in apartments more than those whose parents recently (since, say, the run-up of the early part of the decade) purchased a home. In this sense, the “lower-middle” is getting squeezed more than the “bottom.”

Ted wants to know where the wealthy are getting their money in the midst of a cash-crunch. The answer seems relatively simple: while the American middle class used their homes as piggy-banks, and the poor relied increasingly on credit cards and pay-day loans, the wealthy did what they were told to do by smart financial advisors: diversify, diversify, diversify. We do some charity work with a woman whose net worth is in the upper-nine figures; she has huge investments in oil (which has done splendidly), in global real estate, hedge funds and other commodities. (I’m happy to say that she doesn’t have a major stake in Big Ag commodities!) When one sector goes down, another goes up. That kind of true diversification is beyond the reach of anyone below the upper-middle class.

This woman also has first-rate financial advisors who have a fiduciary responsibility directly to her; she will never be sold a lousy loan product as a consequence. One of the chief advantages of wealth is that it can buy access to excellent advice. Business managers protect the wealthy from unscrupulous cold-callers and boiler-room operators. The cash flow ends up staying pretty constant.

And of course, we’ve developed an increasingly regressive tax system in this country. The wealthy pay a smaller percentage of their income in taxes than at any time in recent memory. Many of the wealthiest people I know make their primary income off dividends, interest income, and capital gains rather than off “earned wage income”. And capital gains are taxed very differently (and sometimes not at all). Many of the very wealthy have no “payroll tax deductions”, which as any working person knows, eat substantially into a paycheck. (Remember the first time you got a paycheck, and saw how much was taken out?)

As many commentators have pointed out, certain things have gotten much cheaper and others have grown far more expensive. Healthcare and education are far less accessible than they were a generation or two ago. Travel and communication have become correspondingly less expensive. When I was first in college, nearly a quarter-century ago, tuition at Berkeley was $675 per semester. A long-distance phone call to my grandmother in Austria was $2 per minute. The cost of the phone call has fallen 90%, but the cost of tuition has gone up 1000%. In 1985, the only cell phones on the market were enormous and expensive, but my college girlfriend got the Pill for $5 a month from the campus hospital. Today, a month’s supply of birth control pills costs more than a basic cell phone. The price of interesting and fun gadgets continues to fall; the price of essentials like good medical care and an affordable education continues to rise. Hence the sense of anxiety in the midst of what seems like plenty.