Why the “Rich-cession” Is Another Triumph for Bidenomics

Hello, Royal Swedish Academy of Sciences? Please consider me for next year’s Nobel in economics for what I expect will be quoted widely as Noah’s Law. Noah’s Law posits that when a president is elected at or above the age of 77, his (or her) approval rating is inversely proportional to the health of the economy, or

x = k/y

where x is the president’s approval rating, y is the health of the economy, and k is the constant of proportionality.

Noah’s Law is based on a data set of one, President Joe Biden, which (some sticklers will protest) is insufficient. We may need to see whether former President Donald Trump, age 77, wins back the presidency in November 2024, and, if he does, whether his popularity rises when he wrecks the economy by killing Obamacare and gutting the Inflation Reduction Act. Political commentators more astute than I believe that it won’t, and that indeed the opposite will happen: Trump, if elected, will see his popularity fall proportionate to how low the economy sinks as voters wonder what they were thinking when they returned this jackbooted hooplehead to the White House.

Alternatively, if Biden gets elected to a second term and the economy starts to falter in 2025 or 2026—it could scarcely do much better than it is today—then Biden’s popularity might fall even lower than it is right now.

Either possibility would require the following revision to Noah’s Law:

When a president is elected at or above the age of 77, his (or her) approval rating is inversely proportional to the health of the economy, or

x = k/y

unless

the president is serving a second (not necessarily consecutive) term, in which case his (or her) approval rating will be directly proportional to the health of the economy, or

x = ky

Before I lose you in a cloud of chalk dust, these thoughts are prompted by my discovery that even as Biden’s approval rating falls, the economy is doing even better than I thought, and I already thought it was doing extremely well. I refer not only to Friday’s much-publicized jobs report (about 200,000 jobs created in November as unemployment drifted down to 3.7 percent), and not only to late November’s uptick in consumer confidence after three months of decline, and not only to Cyber Monday’s astonishing 9.6 percent increase in spending compared to one year earlier—all of which suggest that when only 32 percent of those polled think Biden is better able than Trump to manage the economy, they can’t be giving much thought to their own experience. (Paul Krugman has written extensively on this paradox.)

All those statistics show the economy is doing very well. But I have in mind another statistic that shows the economy is doing even better than that—a statistic that, paradoxically, shows one corner of the economy doing poorly. I’m talking about the long-overdue correction to the luxury market. We have entered a luxury recession, which some have taken to calling a “rich-session.” To that I say: Hallelujah.

Way back in January I shared my anxieties about what was then a grotesque spending boom on luxury goods by coupon-clipping trust-fund brats untroubled by what was then a still-bearish stock market. I worried that the highly visible rich-twit binge on Louis Vuitton handbags and Burberry trench coats and Rolex watches would prompt the Federal Reserve to jack interest rates further. You can’t prove me wrong. Four 25 percent rate hikes followed before the Fed called it quits (for now, anyway) in September.

In April a Financial Times headline asked: “Will the Extraordinary Boom in Luxury Goods Ever End?” The stampede to the gilded trough was so great, FT noted, that the world’s wealthiest person was no longer Elon Musk or Jeff Bezos but some French guy named Bernard Arnault who sits atop a family-controlled conglomerate, LVHM, that owns Louis Vuitton, Veuve Clicquot, Christian Dior, Givenchy, Bulgari, Tiffany’s, and a whole bunch of other brands that I’m too much of a peasant to recognize. Arnault’s personal wealth took off like a rocket in 2021 and at this point, according to Forbes, he’s worth $211 billion, or about twice what Warren Buffett has in his piggy bank.

It couldn’t last. In July, under the headline, “Americans Are Buying Less Bling,” The Wall Street Journal’s Nick Kostov reported that although LVHM was still reporting double-digit sales growth elsewhere, in the United States sales were starting to dip. By October, luxury fashion spending in the United States was down 16 percent. In November, the FT’s Lukanyo Mnyanda reported that sales were down 7 percent worldwide for “fine and rare” single-malt whiskies selling for $1,200 a bottle. And on December 8 Bloomberg’s Andy Hoffman reported: “The biggest ever boom in Swiss luxury watches is coming to an end.” Sacre bleu!

Nobody knows why the luxury market went bananas for three years, or why it’s tanking now. Chandler Mount, whose name destined him from birth to become chief executive of something called the Affluent Consumer Research Company, told Forbes that “unprecedented economic challenges, current political disputes, and global instability are shaking consumers’ future predictability.” Is that vague enough for you? Some people say it’s China, which, given that one-sixth of the global population resides there, is always a good guess. But despite China’s faltering economy, it was among the last places for the luxury market to go sour. I think maybe rich people just got in the habit of spending like drunken sailors to keep themselves amused during Covid lockdown and had a hard time regaining control of themselves. Impulse control is a well-documented vice of the rich, with Elon Musk serving as everybody’s favorite recent example.

My larger point is that a thriving luxury market is bad for the economy. Luxury goods are a lousy investment, built on the false assumption that quality is proportionate to price. According to Danny Younis, an Australian ex-stockbroker with expertise in the luxury market, designer handbags sell for 10 to 20 times the cost of making them. Along with “Burgundy, whisky, watches, yachts, jewelery, etc.,” Younis wrote on LinkedIn, “these are Veblen goods,” meaning items of conspicuous consumption as described in Thorstein Veblen’s 1899 classic Theory of the Leisure Class, which was published at the tail end of the Gilded Age.

With conspicuous consumption, demand is based not on value but on price; the higher the price, the greater the demand, because the buyer wants to show everybody how rich he or she is. This is economically wasteful; indeed, the waste is the point, because if you’re so obviously wasting your money then people will conclude you must be very rich indeed. Conspicuous consumption is also highly unstable, because the high-status goods that drive it must change constantly to keep ahead of the Joneses. Ebay is littered with the status symbols of yesteryear. A mink stole used to represent the height of luxury; now you can buy one for a hundred bucks. Antique furniture prized by my parents’ generation is now sneered at by the millennial haute bourgeoisie as “brown furniture.” Even when luxury goods hold their value, they don’t outperform the stock market, where (at least in theory) a rich person’s money is diverted from infantile one-upsmanship to the creation of jobs.

To hear the luxury industry tell it, growth in luxury spending has been driven less by the runup in national income consumed by the top 1 percent than by aspirational spending on the part of middle-class parvenus. That’s an exaggeration, but according to a Bank of America survey, people earning less than $50,000 accounted, in 2021, for fully 39 percent of all spending on luxury goods. That means people (mostly younger people, it appears) are buying stuff they can’t afford, piling up debt in the process. And in fact, credit card debt, which fell throughout 2020, has been climbing like mad since the first quarter of 2021, when it was $770 billion, to $1.08 trillion in the third quarter of 2023.

In sum, an economic soft landing, far from being threatened by the rich-session, is more likely to benefit from it—even before you take into account any temptation the luxury boom created for the Fed to further jack up interest rates. The Rolex-and-Ferrari binge was speculative; it diverted wealth from investment; and it piled up too much debt.

It was also just gross. If people tell pollsters the economy’s in bad shape when in fact it’s in good shape, perhaps one reason is that the luxury boom rubbed their noses in the economic inequality that’s been expanding since the late 1970s and continues unabated. They wouldn’t be wrong to think that however well the economy’s doing now, unabated accumulation by the 1 percent at the expense of everyone else is a long-term recipe for instability. Bad news for trust-fund brats and credit-card companies is therefore bad news only for them. For the rest of us, it’s just another sign that the economy is continuing to grow healthier.