Peter Atwater, adjunct professor of economics at William & Mary and president of Financial Insyghts, knows a thing or two about the K-shaped economy. Anonymous Twitter user “Ivan the K” introduced the idea of a “K recovering” following the pandemic, a gloomy outlook where some elements of life before COVID would recover, while some will not. Atwater popularized it.
TL;DR
- Economist Peter Atwater warns of widespread "despair" among lower-income citizens due to ignored "feelings aspect."
- Wage growth for lowest earners is at a ten-year low, while highest earners see rapid growth.
- Lower-income individuals may react with "fight, flight, freeze, follow and f-ck it" behaviors.
- High-income earners exhibit overconfidence and risk-taking, while lower-income groups feel helplessness.
Atwater attributes the phrase's origin to Ivan the K, but asserts he was the first to popularize it, releasing a series of pieces in 2020 detailing the widening disparity between the affluent and the less fortunate: White-collar professionals could transition to remote work, whereas blue-collar laborers remained outside the remote work sphere. While the technology sector experienced a faster rebound, the pandemic impacted other industries, pummeled lower-income workers, like service sector employees who faced layoffs or were classified as essential, thereby keeping them tied to their positions.
Economists have frequently discussed the term K-shaped economy recently, as accumulating evidence shows an increasing disparity in the spending and earnings of affluent and less affluent Americans, much like the two separate paths of the letter K. However, Atwater, who claims to have popularized the term, stated that experts have missed a crucial element in their discussions of these diverging financial trajectories, which could lead to significant repercussions.
“They’re missing the feelings aspect to it,” Atwater told Coins2Day. “They’re missing what motivates us to act isn’t the economy, but our feelings about the economy.
“What we have today is a small group of individuals who feel intense certainty paired with relentless power control—and on the other, it is a sea of despair,” he continued. “And that’s the piece that never gets talked about.”
Quantitative economic data strongly suggests an expanding disparity in wealth: The Federal Reserve Bank of Atlanta's figures reveal that wage increases for Americans in the lowest income quartile have seen fallen to its lowest over approximately ten years, whereas those in the highest income brackets are experiencing the most rapid wage growth among all income segments. Concurrently subprime loans are on the rise, signaling increasing financial pressure for a significant number of Americans, as noted in a recent Transunion publication—and similarly, super prime loans are being utilized by individuals with excellent credit ratings. Even the stock market is K-shaped, according to Apollo's chief economist Torsten Slok, who contended that since the year began, earnings projections have surged for The Magnificent Seven but diminished for the remaining 493 companies in the S&P.
Atwater, who researches how confidence influences choices, contends that monitoring consumers' understanding of these data points is equally crucial, as these sentiments also exhibit a K-shaped pattern. Last month, consumer outlook on the economy was divided, with lower-income Americans expressing significantly less confidence than higher earners, as indicated by data from The University of Michigan’s Survey of Consumers. This contrasts with 2022, when the stock market's downturn depressed sentiment for both the highest and lowest income thirds. Even in April, after the announcement of Liberation Day tariffs, Americans from all income brackets reported diminished confidence in the economy's well-being.
Why do feelings matter?
These split sentiments risk driving two wildly different sets of behaviors, both of which make the economy more vulnerable, Atwater argues.
“We need to feel that things are predictable, so that there’s a level of certainty, and we need to have an element of control,” he said. “Knowing that the road is straight ahead is great, but if you don’t know how to drive the car, you’re not going to feel confident behind the wheel.”
According to Atwater, economic insecurity has long been a reality for lower-income Americans, but when these insecurities start to accumulate, many might feel helpless. These individuals react with what the economist refers to as the “Five F’s”: “fight, flight, freeze, follow and f-ck it.”
“At the bottom, this mindset develops where they recognize that they may never win, but that doesn’t mean, ‘I can’t help you lose,’” Atwater said.
Blue-collars workers or pencil-pushing white-collar workers may begin not only to pull back on spending, as retail CEOs are beginning to observe, but they may also begin to sabotage the workplace, Atwell said. Korn Ferry managing consultant Stacy DeCesaro told Coins2Day earlier this year this era of “job hugging” in a low-hire, low-fire labor market may breed workplace resentment as employees feel stuck. This can lead to disengagement, a loss of productivity, and a redux of the Great Resignation.
Meanwhile the top half of the K is likely to engage in equally risky behaviors, Atwater warned: “People are blind to risk when we’re overconfident and when we are invulnerable.”
Not only is a wealth effect driving wealthier Americans to invest more in the stock market—particularly in AI, even as concerns of a bubble grow—but the perceptions of having wealth feel permanent to high-income earners today, Atwater said. According to calculations by Edward Nathan Wolff, an economics professor at New York University, the top 20% of America’s wealthiest households own nearly 93% of all stock. Since ChatGPT’s November 2022 debut, stocks of AI-related companies made up about three-quarters of S&P 500 returns.
“Economists like to say and market people like to say that the stock market isn’t the economy,” Atwater said. “But I think it’s safe to say at this point, the economy is the stock market.”
Claudia Sahm, chief economist at New Century Advisors and a former Federal Reserve economist, cautioned about a K-shaped economy creates more vulnerability in scenarios like a bubble bursting. However, Atwater views the consequences as primarily political. The divisions between the affluent and the less fortunate are expected to intensify, especially if lower-income Americans perceive the wealthy class's continued prosperity as a betrayal. Atwater referenced a 2011 study from The New England Complex Systems Institute, which connected social upheaval in North Africa and the Middle East during the Arab Spring to escalating global food costs. He further suggested that lower-income Americans will increasingly scrutinize those in positions of power.
“This is a crisis of confidence,” Atwater said. “Sadly, those who are in the best position to address it seem at best indifferent, and that does not go unnoticed by those at the bottom.”