No wonder the Financial Times is making a fuss about the downturn: our readers are suffering more than most. That, at least, is my conclusion after reading the research of two economists from America’s Northwestern University, Jonathan Parker and Annette Vissing-Jorgensen. Drawing on US data, they found that the biggest spenders are those whose spending fluctuates a lot. The consumption rates of the top 10 per cent of households fluctuate 10 times more than those of the majority – the bottom 80 per cent of households. So a fall in overall consumption is a blip for most people, but a slump for those near the top. (We’re not just talking about Russian oligarchs here: spending of just over twice the average is enough to place you in the top 10 per cent.)
Other economists – again, in the US – have made similar discoveries. Shane Jensen and Stephen Shore examined the oft-made claim that household income (an indicator of spending) is more volatile in modern times. They found that this is actually only true for the rich: the proportion of US national income earned by the rich surged ahead in the booms of the 1980s, 1990s and 2000s, but stuttered or even fell in the recessions that separated them.
My aim is not to sympathise with the well-off: while no doubt it stings to take the kids out of private school or to sell the sports car at a loss, most people never enjoyed such privileges in the first place. But this research highlights a truth often forgotten in the hand-wringing about the downturn: everyone has their own experience of a recession. Some do badly and others do very well indeed. The gloomy averages we usually see reported fail to convey that range of experience.
Lindsey Macmillan, an economist at Bristol University’s Centre for Market and Public Organisation, kindly investigated this question for me. She looked at data from the British Household Panel Survey, which in 1991 began regularly to monitor the experiences of several thousand families. Macmillan found that more than half of households were earning appreciably more in 1993 than in 1991, and that one in six had seen their income rise by more than half during two years of very low average growth. The figures were much the same between 1994 and 1996, when the economy was expanding briskly: in other words, the variability in individual experience completely drowned out the distinction between growth and stagnation in the underlying economy.
For businesses, too, individual circumstances vary greatly. We are used to being regaled with tales of booms in niche markets: the Financial Times has reported success for manufacturers of frozen food, for physiotherapists, and for a company that sells food past its “best before” date. All doubtless true, but even within a sector there will be winners and losers. Jonathan Haskel of Imperial College, who has access to confidential data on business performance, has found that companies in the most productive tenth of UK manufacturers, in any given industry, get five times more output from each worker’s time than the sector’s least productive 10 per cent.
The lesson for any business is to recognise that each customer, client and supplier is having his or her own private experience of the recession and that, for some of them, that experience is surprisingly benign. A business that can distinguish between its struggling and its prospering clients is likely to have an advantage.
The co-author of Freakonomics, Stephen Dubner, recently called my attention to a $975 calf-leather sewing kit, designed to “keep tailoring bills in line”. Evidently, not everybody is suffering in this recession.
Also published at ft.com.