The 80/20 Rule Is Crushing The Economy

In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy that is more than 2/3rds driven by consumption, such an imbalance of the “have” and “have not’s” impedes real economic growth. 

I have often written about the disconnect between Wall Street and Main Street. As shown in the chart below, while asset prices were inflated by continued interventions of monetary policy from the Federal Reserve it only benefitted the small portion of the population with assets invested in the market. Cheap debt, excess liquidity and a buyback spree led to soaring Wall Street and corporate profits, surging executive compensation and rising incomes for those in the top 20%. Unfortunately, the other 80% known as “Main Street” did not receive much benefit. 

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This divide is clearly seen in various data and survey statistics such as the recent survey from Bankrate.com which showed 30 million Americans borrowed from their retirement plans over the last 12-months. Importantly, “baby boomers” were the most likely to take a premature withdrawal as well as incur a tax penalty for doing so. A full 2/3rds of Americans agreed that the effects of the “financial crisis” are still being felt in the way they work, live and spend. 

How can it be that in an environment where Central Bank interventions have fostered surging asset prices, there are 30 million American’s tapping retirement plans to meet current expenses? Of course, the picture is much worse when looking at a variety of measures I discussed previously in “Don’t Blame Boomer’s For Not Retiring:”

“Let’s start with the retirement of the boomer generation. Recent statistics show that the average American is woefully unprepared for retirement. On average, 40% of American families are NOT saving for retirement, and of those who are, it is primarily about one year’s worth of income. Furthermore, important to this particular conversation, one-fourth of those at retirement age postponed retirement with only 18% being confident of having enough saved for retirement.”