the rich can’t save retail
TRANSCRIPT
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The Rich Can’t Save Retail
Why the Retail Industry Needs a Middle-Out Agenda
By Brendan V. Duke March 2015
WWW.AMERICANPROGRESS.O
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The Rich Can’t Save RetailWhy the Retail Industry Needs a Middle-Out Agenda
By Brendan V. Duke March 2015
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1 Introduction
4 The hourglass retail recovery
6 Clothing and department stores
7 Supercenters and dollar stores
9 The bottom 95 percent is consuming less
11 The rich cannot lead a retail recovery
13 The cost of unequal growth on consumption
15 A middle-out retail agenda
15 Progressive tax reform
16 Student-loan refinancing
17 Fair wages and labor standards
19 Conclusion
20 Endnotes
Contents
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Introduction
Te middle-class squeeze has produced a reail squeeze. Sagnan wages and
increasing coss are no jus huring he naion’s middle class; heir effecs have
now spilled over and are damaging he reail secor as well.
A recen Cener or American Progress repor showed ha he median married
couple wih wo kids in he Unied Saes made he same in 2012 as hey did in
2000 afer adjusing or overall inflaion, bu he growing cos o basic middle-
class securiyeducaion, healh, housing, and reiremenlef he amily wih$5,500 less o spend on oher needs.1 Te Wall Sree Journal similarly repored
ha slow income growh combined wih he growing cos o middle-class securiy
has reduced American spending in he middle 60 percen o he income disribu-
ion on clohing, urniure, appliances, and oher consumer goodseven beore
adjusing or inflaion.2
Tis squeeze on he middle class reduces heir buying power and, as a resul,
hurs he reail secor. Core reail sales per personreail sales minus auo and
gas sales3ook five years afer he end o he Grea Recession o reach heir
December 2006 prerecession peak. As o February 2015, core reail sales per
person sill sood 14 percen below heir prerecession rend, cosing reailers $51
billion in February 2015 alone. Wall Sree gian Morgan Sanley blames poor
consumer spending on meager wage growh:
So, despie he roughly $25 rillion increase in wealh since he recovery om he
financial crisis began, consumer spending remains anemic. op income earners
have benefied om wealh increases bu middle and low-income consumers
coninue o ace srucural liquidiy consrains and unimpressive wage growh.
o lif all boas, urher increases in residenial wealh and acceleraing wage growh are needed.4
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FIGURE 1
Retail's long, slow recovery
Real core retail sales per person, 1992–2014
Note: Dollars are in constant 2014 dollars.
Source: Federal Reserve Bank of St. Louis Economic Database, "Retail Sales and Food Services Excluding Motor Vehicles and PartsDealers"; "Retail Trade: Gasoline Stations"; "Total Population: All Ages including Armed Forces Overseas"; and "Personal ConsumptionExpenditures: Chain-type Price Index," available at http://research.stlouisfed.org/ (last accessed December 2014).
$1,200
$1,000 Real core retail sales per person, 1992–2014
Pre-Great Recession trend
$800
$600
Jan.
1994
Jan.
1992
Jan.
1996
Jan.
1998
Jan.
2014
Jan.
2012
Jan.
2010
Jan.
2008
Jan.
2006
Jan.
2004
Jan.
2002
Jan.
2000
Reailers hemselves have confirmed heir concerns abou poor consumer spend-
ing. Te Cener or American Progress’ previous analysis o reailer U.S. Securiies
and Exchange Commission, or SEC, filings ound ha 68 percen o reailers cie
fla or alling disposable incomes as a risk acor o heir sock pricedouble he
percenage ha cied his risk in 2006.5 When cusomers don’ have money, reail-
ers don’ have cusomers.
Bu no every company’s cusomers are being squeezed: Te op 1 percen has
seen is real income rise by more han 15 percen beween 2009 and 2013,6 and
reailers ha caer o hese consumers have had a successul recovery. Tis repor
finds ha he sales o reailers ha appeal o high-income cusomers, such as
Nordsrom, have grown much more quickly han he sales o reailers ha arge
he middle class, such as he Gap Inc. and arge. Middle-class reailers are now
ollowing he money and rying o capure a larger porion o he 1 percen’s
growing incomes: In 2013, or example, Gap bough luxury chain Inermix,7 and
grocery gian Kroger acquired he high-end chain Harris eeer.8
Bu his is a reail adapaion raher han a reail recovery, which is wha he U.S.economy needs. While some reailers may hrive in an economy where 76 percen
o income growh goes o 1 percen o households,9 he reail secor as a whole
will suffer because he rich canno make up or he alling spending o he middle
class. Tis is because he rich save more han he middle class does, suggesing ha
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a smaller porion o heir income gains ranslae ino reail sales han middle-class
income gains would. Tis repor’s back-o-he-envelope calculaions illusrae how
equal income growh beween 2009 and 2011 could have increased consumer
spending growh by more han $45 billion, 11 percen aser growh compared o
he acual consumer spending growh over ha period.10 Tis is billions o dollars
ha could have been unneled back ino he economy, helping boos he botomlines o he reail secor and speeding up he secor’s recovery.
Te only way he Unied Saes can launch a susained reail recovery is i he
middle class spends more, and or ha we need public policies ha will alleviae
he middle-class squeeze. A middle-ou reail agenda would increase middle-class
disposable incomesand reailers’ salesby raising ake-home pay hrough
implemening progressive ax reorm, reducing he suden-loan burden hrough
refinancing, and boosing workers’ wages hrough air labor sandards. Te reail
indusry should acively suppor hese and oher measures ha will help is mos
imporan cusomershe middle classjumpsar a sel-reinorcing cycle oconsumer spending and hiring.
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The hourglass retail recovery
Reail sales in December 2014 declined by a seasonally adjused 0.9 percen
despie alling gas prices ha many expeced o boos consumer spending.11 Te
New York imes paraphrased PricewaerhouseCoopers’s Seve Barr, saying ha
“lower-income households sill sruggled o spend more despie he lower gas
prices, because any money saved was offse by cos-o-living increases [and]
Sluggish wage growh coninued o limi demand.“12 Bu weak consumer spending
growh has been he sory hroughou he economic recovery.
Figure 2 compares real consumpion spending growh minus healh, gas, gro-
cery, and nonprofi spendingin oher words discreionary spendingin every
economic expansion afer 1960.13 Te curren economic recovery has displayed by
ar he slowes consumpion growh o any economic recovery, which is especially
jarring because spending should in ac grow aser afer a deep recession.
FIGURE 2
Real per-capita discretionary spending growth in post-1960 expansions
Real growth of personal consumption expenditure per capita, minus health, gasoline,grocery, and nonprofit spending
Source: Federal Reserve Bank of St. Louis Economic Database, "Personal Consumption Expenditures"; "Personal consumptionexpenditures: Services: Health care"; "Personal consumption expenditures: Nondurable goods: Gasoline and other energy goods";"Personal consumption expenditures: Services: Final consumption expenditures of nonprofit institutions serving households"; "Personal
consumption expenditures: Nondurable goods: Food and beverages purchased for off-premises consumption"; "Total Population: AllAges including Armed Forces Overseas"; and " Personal Consumption Expenditures: Chain-type Price Index," available athttp://research.stlouisfed.org/ (last accessed December 2014).
1 3 5 7
30%
20%
10%
0
2119171513
Total quarters of expansion
119
First quarter 1961
Fourth quarter 1970
First quarter 1975
First quarter 1991
Fourth quarter 2001
Second quarter 2009
Fourth quarter 1982
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Bu no all reailers have suffered equally because no all Americans have su-
ered equally. Ciigroup made headlines in all 2011 when Te Wall Sree Journal
repored ha i had creaed is “Hourglass Index” consising o 25 companies
“bes posiioned o caer o he highes-income and lowes-income consum-
ers”14 based on he observaion ha high-income households were recovering
and middle-class households were no, hus increasing middle-class purchasesa reailers ha offer seep discouns such as dollar sores. Tis observaion was
no only correc bu also highly profiablehe “index posed a 56.5% reurn or
invesors rom is incepion on Dec. 10, 2009, hrough Sep. 1, 2011. Over he
same period, he Dow Jones Indusrial Average reurned 11%,” according o Te
Wall Sree Journal.15
As he recovery coninued in 2014, so oo did he hourglass economy. In January
2014, Mathew Klein o Bloomberg chared he perormance o luxury, middle-
class, and discoun reail socks since 2006, showing ha middle-class socks
languished while discoun and luxury socks had appreciaed several imes heiroriginal value.16 Nelson Schwarz o Te New York imes similarly repored in
February 2014 ha “he pos-recession realiy is ha he cusomer base or busi-
nesses ha appeal o he middle class is shrinking as he op ier pulls even urher
away.” Schwarz covered he sruggles o Darden Resaurans, he owner o Olive
Garden ha recenly sold Red Lobser o ocus more on is high-end resaurans.
John G. Maxwell, he head o PricewaerhouseCooper’s reail pracice, pu i bes,
saying, “As a reailer or resauran chain, i you’re no a he really high level or he
low level, ha’s a ough place o be. … You don’ wan o be suck in he middle.” 17
Tis repor shows he inequaliy rend among America’s op reailers by compar-
ing he 2010–2013 real U.S. sales growh o some o America’s 50 larges reailers.
Tis analysis is limied o jus wo kinds o reailersclohing and deparmen
sores and supercenerso eliminae cross-secoral comparisons. For insance,
higher sales growh a Whole Foods han a Bes Buy may reflec he srengh o
he grocery sales compared o elecronics sales raher han measuring growing
income inequaliy. Tis repor measures sales growh using U.S. sales as calculaed
by he Naional Reail Federaion in he 2011 and 2014 ediions o is “op 100
Reailers” repor, which esimae U.S. sales in 2010 and 2013 based on daa rom
Kanar Reail. Te Personal Consumpion Expendiure price index was used oadjus he 2010 sales numbers or inflaion.
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Clothing and department stores
Nine clohing and deparmen sores all ino he Naional Reail Federaion’s
2014 “op 100 Reailers Char”:18 Macy’s a 14, Sears a 16, JXwhich owns J
Maxx and Marshall’sa 19, Kohl’s a 22, Gap a 30, Nordsrom a 33, J.C. Penney
a 34, Ross Sores a 41, and L Brandswhich owns he Limied and Vicoria’s
Secre, among ohersa 43.
Tree o hese companies enjoyed double-digi sales growh beween 2010 and
2013: Ross, Nordsrom, and JX.19 Nordsrom is an upscale sore; Ross andJX appeal o shoppers looking o save money by offering heavy discouns. Ross
CEO Michael Balmuh praised his firm’s “errific name brand bargains o oday’s
value-ocused shoppers,”20 while JX calls isel an “off-price reailer” in is own
SEC filing.21 Te hree deparmen sores ha sold less in 2013 han in 2010
were Kohl’s, Sears, and J.C. Penney,22 all midrange deparmen sores argeing
middle-class consumers.23 Te effec o he hourglass recovery is less clear on
Gap and Macy’s: Despie he midrange repuaions o heir namesake brands,
Gap owns higher-end Banana Republic and discouner Old Navy, while Macy’s
owns high-end Bloomingdales.
FIGURE 3
Top clothing and department stores
Real 2010–2013 sales growth
Source: National Retail Federation, "Top 100 Retailers" (2011 and 2014), available at https://nrf.com/resources/annu-
al-retailer-lists/top-100-retailers; Federal Reserve Bank of St. Louis Economic Database, "Personal ConsumptionExpenditures: Chain-type Price Index," available at http://research.stlouisfed.org/ (last accessed December 2014).
RossStores
TJXCompanies
Nordstrom L Brands Macy's Gap
Kohl'sSears
HoldingsJ.C.
Penney
23.14% 21.68%18.28%
7.35% 6.14%4.02%
-2.01%
-28.73%
-36.78%
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Supercenters and dollar stores
Nex, consider reailers where cusomers can buy large quaniies o reail goods
a a discoun or or a low se price“superceners,” such as Walmar, and he
so-called “dollar sores,” such as Dollar Generalha all ino he Naional Reail
Federaion’s “op 100 Reailers Char” in 2014: Walmar a 1, Cosco a 3, arge
a 4, Dollar General a 25, Meijer a 26, BJ’s Wholesale Club a 29, and Family
Dollar Sores a 40.
Again, he higher-end superceners perormed well in he recovery. Cosco’saverage cusomer makes more han $96,000 per year, and he company’s sales
have grown by 20 percen since 2010.24 Similarly, BJ’s Wholesalean Eas Coas
warehouse discounerhas seen is sales grow 13 percen, likely because i serves
a “arge demographic ha is more affluen han average” and is “cusomers are
no as economically challenged as hose o a mass merchan migh be,” according
o is CEO Laura Sen.25
In conras, Walmar and arge26 have had an abysmal ew years, seeing real sales
rise by less han 3 percen beween 2010 and 2013. In ac, boh companies’ real
sales jus kep up wih he populaion growh o 2.1 percen beween 2010 and
2013, suggesing ha individual cusomers were no buying more a hese reail-
ers.27 Criically, hese sores depend on middle-class cusomers: More han hal o
arge and Walmar cusomers make beween $35,000 and $100,000 per year.28
While some have suggesed ha a surging Amazon.com may be aking away sales
rom arge and Walmar,29 hese superceners also ace anoher compeior in his
weak middle-class recoverydollar sores. In 2013, Belus Capial Advisors equi-
ies sraegis Brian Sozzi old Business Insider ha “Dollar sores are winning,
while Wal-Mar is having o cu orders ...Tis sends a srong economic message because dollar sores are geting he middle-income cusomers who can’ afford o
go o Wal-Mar.30 Te Wall Sree Journal similarly repored in 2014:
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Dollar sores have posed a compeiive hrea o oher discoun reailers. rips
o dollar sores have risen since he financial crisis, wih 53% o U.S. shoppers in
2013 saying hey wen o one in he pas monh, up om 48% in 2007, accord-
ing o he consulancy Kanar Reail. Meanwhile, he percenage o U.S. shop-
pers visiing a Wal-Mar a leas once a monh ell o 65% in 2013 om 69% in
2007. Some 39% o shoppers made monhly visis o arge in 2013, down om43% in 2007.31
Te wo bigges dollar soresDollar General and Family Dollarhave seen
explosive sales growh during he recovery, each selling more han 20 percen more
in 2013 han hey did in 2010. McKinsey & Company repored ha “he consumer
mix in he dollar channel is shifing rom almos exclusively low-income o a mix
o low-income, lower-middle class and middle class consumers.”32 Te reason or
he increasing number o middle-class cusomers a dollar sores, explains Dollar
General Chairman and CEO Richard Dreiling, is “ha he economy is creaing
more o our core cusomers … Te middle-income cusomer is geting squeezed.”33
FIGURE 4
Top superstores and dollar stores
Real 2010–2013 sales growth
Source: National Retail Federation, "Top 100 Retailers," (2011 and 2014), available at https://nrf.com/resources/annual-retail-
er-lists/top-100-retailers; Federal Reserve Bank of St. Louis Economic Database, "Personal Consumption Expenditures: Chain-type PriceIndex," available at http://research.stlouisfed.org/ (last accessed December 2014).
CostcoFamily DollarDollarGeneral
BJ's WholesaleClub
Wal-Mart Meijer Target
20.00%
25.08%27.17%
12.89%
2.87% 2.74% 2.56%
Tis analysis shows one way ha unequal income growh affecs corporae
America. Companies ha caer o he richhe only group o consumers expe-
riencing income growh in he recoveryhave seen heir profis grow. Reailers
ha offer seep discouns o squeezed middle-class consumers who are rying o
save money have also profied. Bu reailers suck in he middleno only J.C.Penney bu even Walmarhave sruggled o pos posiive real U.S. sales growh.
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The bottom 95 percent is
consuming less
However, he booming sales o discoun deparmen and dollar sores disguises
he declining overall consumpion o he middle class. Te savings ha hese
reailers provide resul rom lower profi margins and cheaper producs when
compared o middle-ier reailers. When middle-class amilies cu coss by
shopping a dollar sores, heir overall spending will all: Tese amilies will
spend, or example, $1 on deodoran a a dollar sore, insead o $2 or a similar
produc a arge.
A recen paper co-auhored by economiss Seve Fazzari o Washingon Universiy
in Sain Louis and Barry Cynamon a he Federal Reserve Bank o Sain Louis
demonsraes weak U.S. consumpion growh ouside o he rich. Fazzari and
Cynamon show ha consumer spending by he botom 95 percen o households
was growing a a litle more han hal he rae o consumer spending by he op 5
percen beore he Grea Recession. (see Figure 5) Te divergence became even
more pronounced in he recovery, as consumpion by he op 5 percen was well
above is prerecession level 13 percen higherin 2012, he mos recen year
sudied, and had resumed is prerecession rae o growh. Te botom 95 percen’s
consumer spending, on he oher hand, was sill below is prerecession level and
was no increasing. Fazzari and Cynamon ear ha “he demand drag rom rising
inequaliy ha was posponed or decades by botom 95 percen borrowing is now
slowing consumpion growh and will coninue o do so in coming years.”34
Reailers now ace a choice: Follow he money by markeing o he rich or con-
inue o figh over he shrunken pie o he botom 95 percen’s consumpion by
cuting prices, reducing margins, and squeezing ou whaever profi is lef.
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FIGURE 5
Consumption by the bottom 95 percent had not recovered by 2012
Real personal consumption expenditures of bottom 95 percent and top 5 percent
Source: Barry Z. Cynamon and Steven M. Fazzari, "Inequality, the Great Recession, and Slow Recovery" (2014), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2205524.
1990 1992 1994 1996 1998 2000 2002 2004
$9,000
$6,000
$3,000
$0
201220102006 2008
Real consumption, top 5 percent
Pre-recession trend
Real consumption, bottom 95 percent
Unsurprisingly, reailers are moving upscale. Nelson Schwarz o Te New Yorkimes documened in March 2014 how Darden Resauranshe owner o Olive
Garden and hen Red Lobser, which i has since soldwas ocusing more on
is high-end brand Capial Grille, where sales growh has been sellar, and was
redesigning is LongHorn Seakhouse brand o be more upscale.35 Similarly, Gap
shutered one-fifh o is namesake U.S. sores in 2011 ciing poor sales36 bu
bough luxury reailer Inermix in 2013.37 Grocery gian Kroger bough upscale
Harris eeer in 2013 as par o a sraegy o “lowering prices on saples like bread
and milk even as i atracs more affluen shoppers wih iems like dry-aged bee
and exoic cheese.”38
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The rich cannot lead
a retail recovery
Some o hese individual reailers may succeed in an economy where 76 percen
o income growh resides in 1 percen o households.39 Bu he reail secor as
a whole will no recover i middle-class incomes do no recover, no mater how
enormous incomes a he op become. Ta is because he middle class are reail-
ers’ bes cusomers as hey spend a higher percenage o heir incomes han he
rich and are more likely o spend an addiional dollar han o save i. Te rich can-
no make up or declining middle-class spending.
A growing body o academic evidence shows jus how litle he rich spend as a
percenage o heir incomes. Economiss Gabriel Zucman o he London School
o Economics and Emmanuel Saez o Universiy o Caliornia, Berkeley, or
example, show ha he botom 90 percen o households did no save any money
beween 2010 and 2012, while he op 1 percen saved more han 35 percen o is
income.40 Similarly, economiss Chris Carroll, Jiri Slacalek, and Kiichi okuoka o
Johns Hopkins Universiy, he European Cenral Bank, and he Japanese Minisry
o Finance, respecively, esimae ha U.S. households in he op 1 percen o he
wealh disribuion will spend only 25 percen as much o an addiional dollar
as he overall populaion.41 Economiss Karen Dynan, Jonahan Skinner, and
Sephen Zeldeshen, respecively, a he Federal Reserve Board, Darmouh
College, and Columbia Universiyesimaed ha he middle 20 percen spend
almos 90 percen o heir incomes while he op 1 percen spends less han hal.42
Economiss Ai Mian o Princeon Universiy and Amir Sufi o he Universiy
o Chicago show ha households in ZIP codes where he average income is less
han $100,000 will respond o a dollar increase in housing wealh wih an increase
beween 1 cen o 2.5 cens o auo spending while households in ZIP codes
where he average income is more han $100,000 do no have any measurable
increase.43
Cynamon and Fazzari find ha:
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From 1989 hrough 2007, prior o he large changes ha sar wih he Grea
Recession, he average consumpion rae or he botom 95 percen exceeds ha
or he op 5 percen by abou 10 percenage poins. Tis resul provides empirical
suppor or he widely held view ha, oher hings equal, rising inequaliy will
creae a drag on consumpion spending.44
Te exac esimaes vary, bu he message rom he economic lieraure is clear:
Te rich save a much higher racion o heir incomes han he res o he popula-
ion and will spend a lower racion o any addiional dollars. Te combinaion o
he 1 percen’s low spending rae and growing share o income is oxic or reail:
A given level o GDP growh ranslaes ino less reail spending han i did when
income growh was more widely shared. Te rich’s share o reail spending may
increase i i coninues o receive he lion’s share o income gains, bu reail spend-
ing overall will grow very slowly wihou increased spending rom he botom 90
percen o households.
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The cost of unequal growth
on consumption
In 2012, Princeon Universiy economis Alan Krueger esimaed ha he rich’s
growing share o income beween 1979 and 2007 combined wih is low spending
rae reduced overall 2007 consumpion by 5 percen.45 Tis secion uses a similar
mehodology o show how he coninued unequal income growh experienced
during he economic recovery may conribue o he slow consumer spending
growh in his paricular recovery. Tis secion also skeches ou how a more equal
recovery wih broad-based income growh would have affeced consumpion.
Te op 1 percen’s share o afer-ax income ell rom 16.7 percen in 2007 o
11.5 percen in 2009likely driven by he crash in asse pricesbu neverhe-
less remained hisorically high: Te op 1 percen’s share o afer-ax income was
only 7.4 percen in 1979.46 And i has been growing quickly during he recovery,
sanding a 12.6 percen in 2011, he mos recen year or which he Congressional
Budge Office provides income daa ha include axes and ranser paymens.
A he same ime, he botom 80 percen experienced no recovery: Te average
afer-ax incomes o each o he botom our quiniles were essenially fla beween
2009 and 2011, while he op 1 percen’s average income grew 15 percen.47 Tese
divergen 2009–2011 income rends reduced he botom 80 percen’s share o
income by 1.1 percenage poins while increasing he op 1 percen’s share o
income he exac same amoun, while he share o income received by he res o
he op quinile sayed he same.
Following a similar mehodology o Krueger’s, his repor provides a back-o-he-
envelope calculaion o illusrae how much aser consumpion could have grown
beween 2009 and 2011 i he afer-ax incomes o he botom 80 percen and op
1 percen had grown a he same 3.5 percen rae ha overall personal disposable
income did raher han concenraing a he op 1 percen. Like Krueger, CAP pro-duced spending raes implied by savings raes compiled by Dynan, Skinner, and
Zeldes, which show a savings rae o around 10 percen or he botom 80 percen
and a savings rae o around 50 percen or he op 1 percen.48 49
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Tis calculaion implies ha oal real consumpion could have grown $45 bil-
lion aser beween 2009 and 2011 i all quiniles’ afer-ax incomes had grown
a he same 3.5 percen rae han he acual unequal growh. Te U.S. Bureau o
Economic Analysis shows ha real consumpion grew $433 billion over hose wo
years, so an addiional $45 billion in consumer spending would have increased
consumpion growh by 11 percen. And his calculaion only illusraes he resulo unequal income growh over a wo-year periodconsumpion growh would
have been much aser i he botom 80 percen had received he same share o
afer-ax income ha i received in 1979.
Tese calculaions skech ou how he rising concenraion o income in he op 1
percen could dampen consumpion growh by sending an ever-growing share o
income o groups ha have saved money a higher raes. While his may benefi
hedge unds and privae equiy firmswhich manage he money o he very
richi hurs he reail secor as a whole because an ever-increasing amoun o
income is unavailable o hem.
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A middle-out retail agenda
Te srucural challenge acing he U.S. reail indusry is a lack o consumer
demand driven by sagnan middle-class disposable incomes. Individual reailers
canno fix his problem by sreamlining heir supply chains or creaing new adver-
ising sraegies. Wha reailers need is a middle-ou reail agendaa collecion
o public policies ha will boos he disposable incomes o ordinary Americans
who will hen spend a large porion o ha money on reail goods, giving reailers
a reason o hire more workers and raise wages, urher increasing consumer spend-
ing, hus ushering in a v iruous, sel-reinorcing cycle o economic growh.
A comprehensive middle-ou reail agenda would ouch on a wide se o policy
areas, rom comprehensive immigraion reormwhich would boos he wages o
immigran and naive-born workers alike50o healh care cos reducion, which
would also increase wages51. Here are hree policies ha could serve as building
blocks or ha agenda.
Progressive tax reform
Reailers should be he leading voice or progressive ax reormwheher as par
o long-erm defici reducion or reorming upside down ax loopholes ha mosly
benefi he very rich in order o benefi all Americans. Ta is because he rich
have a very low spending rae compared o he middle class and he poor. A ax
hike on he rich will have a much smaller negaive effec on consumpion han a
ax hike on he middle class or poor.
Presiden Barack Obama recenly proposed a $500 second-earner ax credi,
ripling he maximum child care ax credi and providing sudens as much as$2,500 a year o complee college. Tese policies direcly arge he middle-class
squeeze o fla incomes and rising coss and would likely boos reail spending by
giving amilies more disposable income. Te presiden proposed paying or hem
by closing a rus und ax loophole and increasing he capial gains ax rae
policies ha would only affec groups wih very high savings raes.
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Anoher example o pro-reail ax reorm is Presiden Barack Obama’s proposal
o expand he Earned Income ax Credi, or EIC, and eliminae a ax loophole
or invesmen managers.52 Te EIC effecively gives a raise o millions o low-
income workers and pushes hem oward he middle class, bu i currenly does
no apply o enough young or childless workers. Te presiden has proposed o
parially und an expansion o he EIC by eliminaing he carried ineres axloophole ha allows privae equiy and hedge und managers o rea a porion
o heir earnings as invesmen income and hus pay a much lower ax rae han
middle-class amilies.
Eliminaing a ax loophole or Wall Sree managers o und a ax credi or low-
income workers is no only air bu would also boos he reail indusry overall.
Low-income workers will likely spend a subsanial porion o heir ax credi,
while op invesmen managers would barely adjus heir spending based on heir
high savings raes as described above. Te boos in overall consumpion would
make is way ino he pockes o he reail indusry.
Student-loan refinancing
Te combinaion o high deb levels and low incomes is oxic or he economy,
especially or secors o he economy, such as reail, ha depend on consumer
spending, as wo-hirds o Grea Recession job losses were he resul o indebed
households cuting back on spending.53 Te growing burden o suden loans simi-
larly hreaens o dampen consumer spending and reailers’ profis.
Suden-loan deb now ops $1.2 rillion,54 and borrowers are having a harder
ime han ever repaying ha deb: Only 60 percen o borrowers in repaymen
are acually making heir scheduled paymens, and he res are in deermen,
orbearance, or deaul.55 Te sruggle o repay suden loans direcly affecs
reailers. Tere is growing evidence, or example, ha mouning suden-loan
deb prevens Americans rom buying new homes, a rend ha hurs he botom
lines o companies such as Home Depo and Lowe’s.56 Similarly, suden-loan
deb is making i harder or young aduls o move ou o heir parens’ homes,
reducing he sales a companies ha sell household wares such as Bed Bah andBeyond and Williams-Sonoma.57
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More broadly, a dollar ha goes o paying off suden-loan ineres is a dollar ha
reailers do no have he opporuniy o earn. One way ha he ederal govern-
men could ease he burden o suden-loan deb would be o allow borrowers o
refinance heir loans, jus like hey can wih a morgage. Unorunaely, he Senae
rejeced a suden-loan refinance bill las June.58 Reailers should be srong advo-
caes or proposals ha allow borrowers o refinance heir suden loans, herebyreducing heir ineres paymens, increasing heir disposable incomes, and boos-
ing reail spending as a resul.
Fair wages and labor standards
ax reorm and suden-loan refinancing would help Americans wih one aspec o
he middle-class squeeze by reducing heir coss, bu Americans also need a raise
i reailers wan hem o be able o buy more.
One reason behind sagnan median wages is he erosion o labor sandards ha
served as a cornersone o he middle class. In 1969, he ederal minimum wage
guaraneed ha almos no workers made less han hal he median wage. oday,
i only guaranees ha hose workers make 37 percen o he median wage.59
Similarly, in 1975, overime proecions guaraneed ha 65 percen o salaried
workers would receive exra pay or exra work. oday, only 11 percen o hem
have ha guaranee. 60 Te Unied Saes is also he only developed counry wih-
ou paid amily leave lawsa necessiy in a world where women make up hal he
workorce.61
Labor sandards such as hese are criical or economic growh because hey
increase our naion’s qualiy and quaniy o labor; overime laws preven injury
and disabiliy, or example. Bu hey also raise workers’ pay, which in urn raises
reailers’ sales. A $10.10 per hour minimum wage, or example, would increase
GDP by 0.3 percen because o he rise in spending by minimum-wage workers.62
Raising he minimum wage would increase some reailers’ labor coss bu would
also boos demand or heir producs because minimum-wage workers will spend
almos every penny o ha increase. One firm’s wages are oher firms’ sales, and
wihou robus minimum-wage laws, he economy can ener a downward spiral olow demand ha reduces wages, which urher dampens demand.
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Reailers increasingly recognize his logic: Walmar, or example, announced in
February 2015 ha i would raise is lowes wage o $9 in 2015 and $10 in 2016,
and .J. Maxx quickly ollowed sui.63 Gap, IKEA, and Cosco were already slaed
o pay or will soon pay heir employees more han $10 per hour.64 Ye despie he
decisions o some reailers o raise he wages o heir employees, he Unied Saes
sill needs a higher minimum wage: arge Chie Financial Officer John Mulligan,or example, reused o ollow Walmar’s lead, saying i’s “jus no reasonable
… [o provide] an arbirary number ha’s some fla rae ha we’re going o pay
across he counry.”65 Te reail indusry should ollow he lead o Kip indell, Te
Conainer Sore CEO and chairman o he Naional Reail Federaion, or NRF,
who said ha he is “working, rankly, o ge he NRF o maybe moderae is view”
on he minimum wage and ha “i’s unbecoming o speak ou agains raising he
minimum wage.”66
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Conclusion
Reail indusry observers have alked exensively abou he new normal o reail.
Pam Goodellow, he consumer insighs direcor o Biginsighsa markeing
sraegy and consumer behavior firmsummarized his new normal, saying,
“heavy coupon usage, a srong ocus on budges, urher atemps a deb reduc-
ion, argeed spending, price comparisons smar shopping sraegies execued
by well-inormed consumers.”67
Reailers’ new normal is linked direcly o he middle-class squeeze o sagnanincomes and growing coss. A declining disposable income o he middle class
means ha reailers have o compee or a shrinking pie o consumer spending ha
demands heavy discouns. Some reailers may succeed in appealing o he op 1
percenhe group ha saw he sronges income growh even beore he Grea
Recession. Bu ha group’s low spending rae means ha i canno make up he gap
caused by low middle-class spending i middle-class incomes do no grow soon.
I i wans o hrive, he reail indusry needs a hriving middle class. A middle-ou
reail agenda ha includes progressive ax reorm, suden-loan refinancing, and air
labor sandards is he indusry’s bes hope o launch a susainable reail recovery.
Brendan V. Duke is a Policy Analys or American Progress’ Middle-Ou Economics
projec.
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Endnotes
1 Jennifer Erickson, ed. “The Middle-Class Squeeze”(Washington: Center for American Progress, 2014),available at http://www.cdn.americanprogress.org/wp-content/uploads/2014/09/MiddeClassSqueezeReport.pdf.
2 Ryan Knutson and Theo Francis, “Basic Costs SqueezeFamilies,”The Wall Street Journal , December 1, 2014,available at www.wsj.com/articles/americans-reallo-cate-their-dollars-1417476499.
3 Investopedia, “Core Retail Sales,” available at http://www.investopedia.com/terms/core-retail-sales.asp (lastaccessed December 2014).
4 Ellen Zentner and Paula Campbell, “US Economics: In-equality and Consumption” (New York: Morgan Stanley,2014), available at www.morganstanleyfa.com/public/projectfiles/02386f9f-409c-4cc9-bc6b-13574637ec1d.pdf.
5 Brendan Duke and Ike Lee, “Retailer Revelations”(Washington: The Center for American Progress, 2014),available at https://www.americanprogress.org/issues/economy/report/2014/10/13/98040/retailer-revela-tions/.
6 Emmanuel Saez and Thomas Piketty, “Income Inequal-ity in the United States, 1913-1998,”Quarterly Journal ofEconomics 118 (1) (2003): 1–39, available at http://elsa.berkeley.edu/~saez/TabFig2013prel.xls.
7 Gap Inc., “Gap Inc. Acquires Intermix,” Press release,January 3, 2013, available at www.gapinc.com/content/gapinc/html/media/pressrelease/2012/med_pr_Gap_Inc_Acquires_Intermix.html.
8 Jayne O’Donnell and Bowdeya Tweh, “Kroger tobuy Harris Teeter chain in $2.4B deal,” USA Today ,July 9, 2013, available at www.usatoday.com/story/money/business/2013/07/09/kroger-harris-teeter-deal/2501231/.
9 Saez and Piketty, “Income Inequality in the UnitedStates, 1913-1998.”
10 Author’s calculations based on Congressional BudgetOffice, “The Distribution of Household Income andFederal Taxes, 2011 Supplemental Data,” November12, 2014, available at http://www.cbo.gov/publica-tion/49440 (last accessed December 2014); Karen E.Dynan, Jonathan Skin ner, and Stephen P. Zeldes, “Do
The Rich Save More?” Journal of Political Economy 112(2004): 397–444, available at https://www.dartmouth.edu/~jskinner/documents/DynanKEDotheRich.pdf.
11 Sales excluding gasoline still fell 0.3 percent. Hiroko Tabuchi, “Americans Pocketing What They Save onGas, Retail Data Suggests,” The New York Times, January 14, 2014, available at http://www.nytimes.com/2015/01/15/business/retail-sales-dropped-more-than-expected-in-december.html?_r=0.
12 Ibid.
13 The authors excluded 1980’s short year-long expansionsince four quarters of growth are not long enough toprovide a meaningful comparison.
14 Ellen Bryon, “As Middle Class Shrinks, P&G Aims Highand Low,” The Wall Street Journal , September 12, 2011,available at www.wsj.com/news/articles/SB10001424053111904836104576558861943984924.
15 Ibid.
16 Matthew C. Klein, “What Shopping Tells Us About theMiddle-Class Recovery,” Bloomberg View, January28, 2014, available at www.bloombergview.com/articles/2014-01-28/what-shopping-tells-us-about-the-middle-class-recovery.
17 Nelson Schwartz, “The Middle Class Is Steadily Eroding.Just Ask the Business World,” The New York Times, Febru-ary 2, 2014, available at www.nytimes.com/2014/02/03/business/the-middle-class-is-steadily-eroding-just-ask-the-business-world.html?_r=1.
18 National Retail Federation, “Top 100 Retailers Chart2014,” available at https://nrf.com/2014/top100-table (last accessed January 2015).
19 Author’s analysis using National Retail Federation Top100 Retailers Chart from 2011 and 2014, available athttps://nrf.com/resources/annual-retailer-lists/top-100-retailers; Bureau of Labor Statistics, Federal ReserveEconomic Database, “Personal Consumption Expen-ditures: Chain-type Price Index,” available at http://www.research.stlouisfed.org/fred2/series/PCECTPI (lastaccessed January 2015).
20 Gail Hoffer, “TJX, Ross continue discounter dominance,”Retailing Today, July 5, 2012, available at www.retai-lingtoday.com/article/tjx-ross-continue-discounter-dominance.
21 U.S. Securities and Exchanges Commission,Form 10-k TJX Companies, Inc. (2014), avail-able at https://www.sec.gov/Archives/edgar/data/109198/000119312514125980/d650209d10k.htm.
22 Author’s analysis using National Retail Federation Top 100 Retailers Chart from 2011 and 2014; FederalReserve Economic Database, “Personal ConsumptionExpenditures: Chain-type Price Index.”
23 Harris Interactive, “Kohl’s edges jcpenney as thePeople’s Pick in the Harris Poll Customer RelationshipSeries,” Press release, January 11, 2012, available at
http://www.harrisinteractive.com/NewsRoom/Harris-Polls/tabid/447/ctl/ReadCustom%20Default/mid/1508/ArticleId/940/Default.aspx.
24 Danielle Douglas, “Costco drives deeper into Wash-ington area,” The Washington Post , January 22, 2012,available at www.washingtonpost.com/business/capitalbusiness/costco-drives-deeper-into-washington-area/2012/01/19/gIQAASr6IQ_story.html.
25 Susan Reda, “Where Art and Science Meet,” The NationalRetail Federation, April 30, 2012, available at https://nrf.com/news/merchandising/where-art-science-meet.
26 Matt Carmichael, “The Demographic of Retail,” Advertis-ing Age, March 19, 2012, available at http://adage.com/article/adagestat/demographics-retail/233399/.
27 Federal Reserve Bank of St. Louis, “Total Population:
All Ages including Armed Forces Overseas,” availableat www.research.stlouisfed.org/fred2/series/POP (lastaccessed November 2014).
28 Carmichael, “The Demographics of Retail.”
2 9 Ben Brody, “Walmart: ‘Going to a very dark place,’” CNNMoney, August 5, 2014, available at http://www.money.cnn.com/2014/07/30/news/companies/goldman-walmart-downgrade/.
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30 Ashley Lutz, “Budget-Conscious Customers AreAbandoning Wal-Mart For Dollar Stores,” BusinessInsider, September 30, 2013, available at www.busines-sinsider.com/walmart-customers-going-to-dollar-stores-2013-9.
31 Paul Ziobro and Shelly Banjo, “Battle for Poor ShoppersFuels Dollar-Store Deal,” The Wall Street Journal , July 28,2014, available at www.wsj.com/articles/dollar-tree-to-buy-family-dollar-for-74-50-a-share-1406542575.
32 Maggie Lu and Warren Teichner, “Dollar stores: The
next wave of growth in consumer healthcare andbeyond,” McKinsey & Company, May 2013, availableat http://www.mckinseyonmarketingandsales.com/dollar-stores-the-next-wave-of-growth-in-consumer-healthcare-and-beyond.
33 Michael J. de la Merced and Nelson D. Schwartz, “RivalBids for Family Dollar Stores as Retailers Fight to Sellto Working Poor,” The New York Times, August 18, 2014,available at http://dealbook.nytimes.com/2014/08/18/dollar-general-makes-rival-bid-for-family-dollar-stores/.
34 Barry Z. Cynamon and Steven M. Fazzari, “Inequality,the Great Recession, and Slow Recovery.” Working Paper(Federal Reserve Bank of Saint Louis and WashingtonUniversity in St Louis, 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2205524.
35 Schwartz, “The Middle Class Is Steadily Eroding. Just
Ask the Business World.”
36 Anne D’Innocenzio, “Gap To Close A Fifth Of AllNamesake Stores In United States,” The HuffingtonPost, October 13, 2011, available at http://www.huffingtonpost.com/2011/10/13/gap-closing-stores-us-china_n_1009897.html.
37 Gap Inc., “Gap Inc. Acquires Intermix.”
38 Julie Jargon and Annie Gasparro, “Kroger Tastes GoUpscale,” The Wall Street Journal , July 9, 2013, availableat www.wsj.com/articles/SB10001424127887323368704578595310330531012.
39 Saez and Piketty, “Income Inequality in the UnitedStates, 191 3-1998.”
40 Emmanuel Saez and Gabriel Zucman, “Wealth Inequal-
ity in the Un ited States since 1913: Evidence fromCapitalized Income Tax Data.” Working Paper 20625(National Bureau of Economic Research, 2014), avail-able at www.nber.org/papers/w20625.
41 Christopher Carroll and others, “The Distribution ofWealth and the Marginal Propensity to Consume.”Working Paper (University of Delaware, 2014), availableat www.econ2.jhu.edu/people/ccarroll/papers/cst-wMPC/.
42 Dynan, Skinner, and Zeldes, “Do The Rich Save More?”
43 Atif R. Mian and Amir Sufi, “House Price Gains and U.S.Household Spending from 2002 to 2006.” WorkingPaper 20152 (National Bureau of Economic Research,2014), available at http://www.nber.org/papers/w20152.
44 Cynamon and Fazzari, “Inequality, the Great Recession,and Slow Recovery.”
45 Alan B. Krueger, “The Rise and Consequences ofInequality in the United States,” Speech at the Centerfor American Progress, January 12, 2012, available atwww.whitehouse.gov/sites/default/files/krueger_cap_speech_final_remarks.pdf .
46 Congressional Budget Office, “The Distribution ofHousehold Income and Federal Taxes, 2011 Supple-mental Data,” November 12, 2014, available at http://www.cbo.gov/publication/49440(last accessed Decem-ber 2014).
47 Ibid.
48 Dynan, Skinner, and Zeldes, “Do The Rich Save More?”
49 We also use the Dynan, Skinner, and Zeldes savingsrate estimates because they focus on after-tax income,
which is the relevant denominator for estimating theeffect of income inequality on consumption and is av-eraged over six years with the same families to producemore stable savings rates. Their savings rate estimatescome from the mid-1980s but likely understate dif-ferences in savings rates between the 1 percent andthe rest today. Saez and Zucman find that the pre-taxsavings rate of the bottom 90 percent fell from morethan 10 percent in the mid-1980s, turned negative inthe 2000s, and has h overed around 0 percent in therecovery. At the same time, they find that the savingsrate of the top 1 percent stood around 50 percent inthe mid 1980s and h overed between 41 percent and 56percent between 2009 and 2011.
50 Adriana Kugler and Patrick Oakford, “ComprehensiveImmigration Reform Will Benefit American Workers”(Washington: Center for American Progress, 2013),available at http://www.cdn.americanprogress.org/wp-
content/uploads/2013/09/KuglerEmploymentBrief-1.pdf.
51 David Auerbach and Arthur L. Kellerman, “A Decade OfHealth Care Cost Growth Has Wiped Out Real IncomeGains for An Average US Family,” Health Affairs 30 (9)(2011): 1630–1636.
52 Executive Office of the President and U.S. Treasury De-partment, The President’s Proposal to Expand the EarnedIncome Tax Credit (2014), available at www.whitehouse.gov/sites/default/files/docs/eitc_report.pdf .
53 Atif R. Mian and Amir Sufi, “What explains high unem-ployment? The aggregate demand channel.” WorkingPaper 17830 (National Bureau of Economic Research,2012), available at www.nber.org/papers/w17830.
54 Rohit Chopra, “Student Debt Swells, Federal Loans Now
Top a Trillion,” Consumer Financial Protection Bureau,July 17, 2013, available at www.consumerfinance.gov/newsroom/student-debt-swells-federal-loans-now-top-a-trillion/.
55 Carolyn Thompson, “$1 trillion student loan debtwidens US wealth gap,” The Associated Press, March 27,2014, available at http://www.bigstory.ap.org/article/1-trillion-student-loan-debt-widens-us-wealth-gap.
56 Meta Brown and Sydnee Caldwell, “Young Student LoanBorrowers Retreat from Housing and Auto Markets,”
The Federal Reserve Bank of New York, April 17, 2013,available at http://libertystreeteconomics.newyorkfed.org/2013/04/young-student-loan-borrowers-retreat-from-housing-and-auto-markets.html#.VL7hdmSsUvE.
57 Lisa Dettling and Joanne W. Hsu, “Returning to the Nest:Debt and Parental Co-Residence Among Young Adults.”
Working Paper 2014-80 ( Federal Reserve Board Financeand Economics Discussion Series, 2014), available athttp://www.federalreserve.gov/econresdata/feds/2014/files/201480pap.pdf .
58 Ramsey Cox, “Dem Student Loan Bill Fails,”The Hill , June11, 2014, available at http://www.thehill.com/blogs/floor-action/senate/208970-republicans-block-student-loan-bill.
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59 Arindrajit Dube, “Proposal 13: Designing ThoughtfulMinimum Wage Policy at th e State and Local Levels”(Washington: The Hamilton Project, 2014), available athttp://www.hamiltonproject.org/files/downloads_and_links/state_local_minimum_wage_policy_dube.pdf .
60 Heidi Shierholz, “It’s time to update overtime pay rules”(Washington: Economic Policy Institute, 2014) , availableat http://www.epi.org/files/2014/ib381-update-over-time-pay-rules.pdf .
61 Human Rights Watch, “US: Lack of Paid Leave Harms
Workers, Children,” Press release, February 23, 2011,available at www.hrw.org/news/2011/02/23/us-lack-paid-leave-harms-workers-children.
62 Daniel Aaronson and Eric French, “How Does a FederalMinimum Wage Hike Affect Aggregate HouseholdSpending?” (Chicago: The Federal Reserve Bank ofChicago, 2013), available at https://www.chicagofed.org/publications/chicago-fed-letter/2013/august-313.
63 Sapna Maheshwari, “Women’s Group Encourages TargetCustomers To Switch to Wal-Mart,” BuzzFeed, March 10,2015, available at http://www.buzzfeed.com/sapna/tar-get-rejects-minimum-wage-debate-as-unreasonable#.rfYqxYMYZ0.
64 Duke and Lee, “Retailer Revelations.”
65 Maheshwari, “Women’s Group Encourages TargetCustomers To Switch to Wal-Mart.”
66 Lauren Coleman-Lochner and Craig Giammona,
“Minimum-Wage Backers to Get Unlikely Ally FromNRF,” Bloomberg, October 10, 2014, available at http://www.bloomberg.com/news/2014-10-09/nrf-s-next-chair- man-plans-to-push-retailers-toward-minimum-wage.html.
67 Pam Goodfellow, “The New Normal, According ToConsumers,” Forbes, July 31, 2012, available at http://www.forbes.com/sites/prospernow/2012/07/31/the-new-normal-according-to-consumers/.
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