Inequality is in the spotlight. Not since Teddy Roosevelt set about busting trusts has this issue gotten people so exercised. But the hullabaloo around inequality is more than just an Occupy rallying cry for the 99%. It’s about whether the consumer marketplace can rally. A newly released report from ratings agency Standard and Poor’s (S&P) made headlines with its conclusion that rising income inequality is a significant drag on the economy, both today and over the next decade.
The S&P analysis is not an indiscriminate censure of inequality. Unequal outcomes are expected and necessary in a thriving market economy, says the report, but when inequality becomes “extreme,” strong growth is unsustainable. Several factors are cited as reasons why, chief among them that middle incomes stagnate when income skews top heavy, thus forcing middle-class consumers to borrow to keep up. This leads inevitably to over-leveraging and economic downturns. The resulting damage to household balance sheets from these boom and bust cycles takes a long time to repair, keeping growth in check.
The bigger issue with inequality mentioned in the report, though, is the well-documented phenomenon of a declining marginal propensity to consume. This is to say that people with lots of money spend less of their next dollar of income than people with less money. It’s the intuitive idea that if you have a lot already, you don’t need more, so you save the next dollar you earn. By contrast, if you don’t have a lot already, you spend the next dollar instead of saving it. Inequality diverts income from middle- and lower-class consumers who would spend it, channeling it instead to the rich who just sock it away. Growth slows because demand is weakened. Princeton economist Alan Krueger estimates that the shift in income gains from the middle to the top since 1979 have reduced annual consumer spending today by $400 billion to $500 billion, or about 3.5 percent of GDP.
Needless to say, economists are divided on whether inequality hurts growth. A number of studies have found evidence of this, including an IMF working paper published earlier this year. Yet, the left-leaning Center for American Progress took a different view of the evidence in its review of the economic literature. The S&P report itself has been criticized as making a weak case for this idea.
But there is no doubt that brand marketers are dealing with a difficult marketplace. The most recent Federal Reserve report on the economic well being of U.S. households noted that despite improvement for some households, “sizable fractions of the population [are] displaying signs of financial stress.” One-third of households say their financial situation today is the same as five years ago and another third say it is worse. Of course, the recovery has been slow in coming, so it’s unsurprising that consumers have yet to catch up. However, little of whatever turnaround has occurred has made its way to middle-class consumers, a reality reflected in the record levels of people reporting pessimism about the country’s long-term economic prospects in the latest Wall Street Journal/NBC News poll.
French economist Thomas Piketty added to the debate about inequality with the English-language release of his much heralded, multi-country, multi-century study of wealth inequality, Capital in the 21st Century. Piketty’s principal thesis – a “connection no one before him has made,” wrote Nobel Prize-winning economist Robert Solow in a favorable book review – is that as long as the rate of return on capital exceeds the growth rate of the economy, extreme inequality of wealth is an inexorable, self-replicating characteristic of unfettered capitalism. Hence, the aspirational middle class that has been the bulwark of the consumer marketplace since the end of WW2 will be increasingly yoked by financial circumstances.
Inequality need not veer off to extremes. Piketty notes that progressive tax policies have been used effectively in past eras to narrow the gap between rich and poor. The S&P report points to greater education as the way to expand opportunities for people to bridge the gap. But actions like these involve government policy not brand marketing.
The bottom line for the consumer marketplace is a long, challenging stretch ahead. In line with its view on inequality and growth, S&P lowered its 10-year U.S. growth forecast from 2.8% to 2.5% per year. Market share price wars always intensify when growth is weak, so brand marketers will look to other markets for strong growth opportunities. But even other markets aren’t fully insulated from distressed U.S. consumers whose weak demand also affects the exports on which these other markets depend.
The best strategy for brand marketers is to invest in brand equity. P&G’s recent announcement it is shedding half its brands is exemplary. On its face, this sounds like P&G is retreating from building equity, but actually, P&G intends to put more focus and resources behind its biggest brands. In making this announcement, CEO A.G. Lafley stressed the need to “adequately communicate” superior product performance and to address the fact that nearly all of its brands remain “under-tried” in a marketplace crowded with discount brands pushing price to distressed middle-class consumers. The only way to win in this situation is with brands that are uniquely differentiated and robustly supported with high-impact marketing.
P&G is battling slow growth by returning to basic brand marketing principles. Differentiation. Share of voice. Scale and concentration of resources. In a marketplace where inequality makes finances foremost with consumers, brands must be ever more top of mind, and that means bigger and better brand marketing.