The Inequality Story Isn’t What You’ve Heard. Meet the Pac-Man Economy.

(Illustration by Barron’s)

About the author: Alexis Crow is the chief economist at PricewaterhouseCoopers U.S. She is a senior fellow at Columbia Business School and a Young Global Leader in the World Economic Forum.

We are in a Pac-Man-shaped economy.

Much commentary has focused on the separation between the financial fortunes of the rich and the less fortunate. One popular idea is that this trajectory resembles a K, where the upper segment rises while the lower parts of the include distribution declines.

But the recent reality of the economy is more complicated than that. The economic fates of the lower parts have flatlined in recent years rather than outright tumbled. Pac-Man’s narrow mouth shows that more clearly.

Investors and policymakers must figure out how to navigate this uniquely bifurcated economy. Luckily, even amid the challenges within the Pac-Man economy, there are clear opportunities for them.

The U.S. entered the Covid-19 pandemic in a K-shaped economy. Wages for the top parts of the income distribution in the U.S. were on a precipitous rise, driven in part by the bifurcation of wages in a U-shaped labor market. Since the 1970s, employment and wages in middle-class jobs had been declining. The wages of blue collar jobs remained on the lower part of the income spectrum, while the wages of white collar services jobs increased. Wealth, too, remained heavily concentrated in the hands of the richest. In the fourth quarter of 2019, the top 1% owned 52% of all stocks.

This changed in 2020. Policy support and labor market shifts during the pandemic had a rebalancing effect on wealth and incomes for the bottom parts of the income distribution. As a result of elevated household savings rates, stimulus payments, and a tight labor market, real incomes for the bottom 50% of the distribution rose by nearly 12% in 2021. In the U.S. between 2019 and 2021, the Gini coefficient—a method of measuring household income and consumption— dropped by the greatest amount on record, indicating a sharp fall in inequality.

Then, as Russia’s invasion of Ukraine raised the cost of energy and food, inflation eroded these wage gains. The cost of housing hit record highs, compounding the affordability crisis for many lower-income households. Some analysts and economists have been concerned about the cost of living and the implications of a K-shaped economy ever since.

And yet, even in the face of potentially resurgent inflation, tariffs, and a softening labor market, household consumption has remained markedly robust in the U.S.

Part of the reason for the durability of the American consumer is that purchasing power is overwhelmingly skewed toward the top two parts of the income distribution. The top two quintiles cumulatively make up more than 60% of total consumer spending in the U.S. That said, the bottom parts of the income distribution are still spending. According to data from the Federal Reserve, the consumption gap between the bottom and the top earners has actually remained relatively stable over time. Notably, net wealth held by the bottom 50% has more than doubled since the start of the pandemic.

Created with Highcharts 9.0.1Wealth Keeps RisingThe bottom 50% of earners have seen their net worth soar since 2020.Annual change in net wealth for the 1st to 50th wealth percentileSource: Federal Reserve via St. Louis Fed

Created with Highcharts 9.0.1Recessions are shaded2011'15'20'250500,0001,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,000$4,500,000 million

Relatively cheap oil, hovering around $60 per barrel for much of the past year, has also helped keep gas and other prices down for these consumers.

But Pac-Man’s mouth may widen as tariffs raise the cost of staple goods. The administration’s cuts last month to tariffs on items like coffee and beef may help stem immediate price increases, but many other tariffs remain in effect. Tariffs are likely to most heavily impact lower income households, who devote more of their daily expenditure toward these non-discretionary items. And a sharp rise in healthcare costs related to recent policy shifts and non-tariff induced price increases may further exacerbate inequality in consumption. This carries its own policy implications in an increasingly polarized socio-economic landscape.

Businesses and investors must recognize this bifurcation of consumption power, and pay attention to the needs of the lower parts of the distribution. Consumer and tech companies need to offer a flexible range of categories in their product offerings, with a skew toward value and non-discretionary items, especially as inflation in services ex-housing (categories less exposed to tariffs) is on the rise.

The gap can create investment opportunities, such as in developing affordable student housing. Record levels of student debt and concerns about the effects of AI in the labor market have produced a recent uptick in student enrollment in community colleges. That is likely to remain a durable investing theme for real asset investors.

The key arena in which policymakers can make a significant impact is in the development of affordable—indeed, attainable—housing. Historically, this has been one policy on which Democrats and Republicans can agree. It is also a clear fairway for investors pursuing a steady income stream with an eye on impact.

Lastly, policymakers and investors should consider the question: What might disrupt the upward slope of the Pac-Man mouth? A sudden, sharp decline in the Mag 7 stocks would certainly thwart the wealth effect of America’s richest—though perhaps not their income power. Absent any major correction to the white-collar services sector of the labor market akin to that of the 2008-09 global financial crisis, this group’s incomes are unlikely to be substantively dented.

As a defensive position, the top two parts of the income distribution, regardless of their sector of employment, would do well to consider their own portfolio diversification. Individual investors might consider looking more to private markets, despite the stock market’s recent strong performance. The power of compound interest has the potential to generate returns and boost wealth over a long horizon. It should be noted that these opportunities aren’t exclusive to the upper jaw of the Pac-Man mouth.

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