Are we in a “richcession”?

Have you heard of the term “richcession”? If you haven’t, you’re not alone. Would it shock you to know that we are most likely currently in a richcession? Here is a little background: A richcession is a term coined by Wall Street Journal reporter Justin Lahart to describe a recession that disproportionately hurts rich people. Typically recessions hurt poor people and the middle class the most, while the wealthy experience “an inconvenience”. However, in a richcession, the wealthy get hit more than usual. Here is a link to a USA Today article that explains this more in depth.

There is some evidence to support the idea we are currently in a richcession. For example, a study by the Federal Reserve Bank of New York found that the wealth of the top 1% of Americans fell by 0.8% in the first quarter of 2023, while the wealth of the bottom 50% of Americans rose by 0.3%. In addition, according to the UBS Global Wealth Report 2022, globally total net private wealth fell by USD 11.3 trillion (–2.4%) to $454.4 trillion at the end of 2022. The number of adults with assets of more than $1 million in the U.S. dropped by 1.8 million to 22.7 million in 2022

However, it is important to note that the richcession is not a universal phenomenon. Some wealthy people are still doing well, and some industries, such as luxury goods, are not being affected by the recession.

It is also worth noting that the richcession is not necessarily a bad thing. It could be seen as a sign that the economy is becoming more equitable, as the wealthy are being forced to tighten their belts just like everyone else. The image below shows the trend of increase income inequality over time. A reversal of this trend could potentially be a benefit to the economy.

There are a few reasons why the richcession can help income inequality:

1. The wealthy are more likely to have assets that can be used to weather a recession, such as stocks, bonds, and real estate. These assets can lose value during a recession, but they are unlikely to lose all of their value. The poor and middle class, on the other hand, are more likely to have their wealth tied up in their homes and in their jobs. If they lose their jobs or their homes, they can lose a significant portion of their wealth.
2. The wealthy are more likely to have access to government assistance during a recession. The government may provide tax breaks, unemployment benefits, and other forms of assistance to help the wealthy stay afloat. The poor and middle class, on the other hand, may not be eligible for this assistance, or they may not be able to access it as easily.
3. The wealthy are more likely to have the resources to invest in themselves and their businesses during a recession. They can afford to take courses, attend conferences, and hire consultants to help them stay ahead of the curve. The poor and middle class, on the other hand, may not have the resources to do this, and they may fall behind.

Overall, the richcession can help income inequality by narrowing the gap between the wealthy and the poor. The wealthy are more likely to weather a typical recession and come out stronger, while the poor and middle class are more likely to be left behind.

Ultimately, whether or not the richcession is a real phenomenon is still up for debate. However, it is a term that is worth keeping an eye on, as it could have a significant impact on the distribution of wealth in the years to come. Since we still aren’t even sure if this is a real thing, that means we have even less of an idea of what may cause it. With that in mind here are some of the factors that could contribute to a richcession:

• Rising interest rates: Higher interest rates make it more expensive for businesses to borrow money, which can lead to layoffs and bankruptcies. This can have a disproportionate impact on the wealthy, who are more likely to own businesses and invest in stocks.
• Inflation: Inflation can erode the value of assets, such as stocks and real estate, which are held by the wealthy.
• Increased taxes: Governments may raise taxes on the wealthy in order to pay for the costs of the recession. This could also make it more difficult for the wealthy to maintain their lifestyles.
• Household wealth for those at the top didn’t grow as much as it did for those at the bottom, percentage-wise, over the course of the pandemic.
• Wealth on the bottom grew as a result of stimulus checks and other government stimulus money as well as wage increases to try to keep up with inflation and attract workers in a historically-tight labor market.
• Income at the top is stagnating because paychecks aren’t rising and the stock market’s decline over the past year is hitting the wealthier especially hard.

It is important to note that the richcession is not a guaranteed event. The economy is complex and there are many factors that can affect it. However, the factors listed above suggest that it is a possibility that should be considered. It is definitely interesting to think about and keep an eye on for the future. What do you think? Is the richcession real and will it have a positive impact on income inequality?

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