WEBVTT - Why a K-Shaped US Economy Is Raising Red Flags

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>If you squint at enough data about the US economy

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<v Speaker 2>right now, on income and spending and consumer confidence, there's

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<v Speaker 2>a shape that starts to emerge, a letter, the letter K.

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<v Speaker 3>A K shaped economy is the result of a bifurcation

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<v Speaker 3>and consumer confidence.

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<v Speaker 2>Economist Peter Atwater is responsible for popularizing the idea of

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<v Speaker 2>a K shaped economy in twenty twenty during the global

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<v Speaker 2>COVID pandemic.

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<v Speaker 3>We should have hoped for a V shaped recovery coming

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<v Speaker 3>out of COVID, where all ships rose together, even a

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<v Speaker 3>U shaped recovery where there's a delay in the recovery

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<v Speaker 3>but ultimately it all rises together.

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<v Speaker 2>But we didn't get a V. We didn't get a U.

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<v Speaker 2>We didn't even get an L where things stayed bad

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<v Speaker 2>for everyone. Instead we got a K.

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<v Speaker 1>So, if you think about the letter K, it has

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<v Speaker 1>a vertical line, obviously, and then two lines kind of

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<v Speaker 1>diverging from the center of that vertical line.

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<v Speaker 2>That's Bloomberg reporter Katerina Sariva, and the divergence she and

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<v Speaker 2>Peter are talking about is a split in the paths

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<v Speaker 2>of Americans at the top and bottom of the US

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<v Speaker 2>economy with the fortunes of those at the top rising

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<v Speaker 2>and those at the bottom getting worse. That's how the

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<v Speaker 2>economy looked during the recovery from COVID, and it's how

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<v Speaker 2>it looks again now.

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<v Speaker 1>Today, fast forward to twenty twenty five. We're again talking

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<v Speaker 1>about the K shape because we are seeing kind of

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<v Speaker 1>a return to that. We're seeing consumer spending really slow

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<v Speaker 1>down for folks at the lower ends of the income spectrum,

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<v Speaker 1>while rich folks are doing really well.

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<v Speaker 2>And this time around, the two sides of that K

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<v Speaker 2>are getting even farther apart. I'm Sarah Holder, and this

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<v Speaker 2>is the big take from Bloomberg News today on the

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<v Speaker 2>show A Tale of Two Economies. Why the gap between

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<v Speaker 2>America's wealthiest and everyone else is widening, how it's showing

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<v Speaker 2>up in company earnings reports, and what the K shape

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<v Speaker 2>means for the country's overall financial health. Economist Peter Atwater

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<v Speaker 2>studies confidence and how it impacts consumers decision making. That's

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<v Speaker 2>what originally drove him to recognize this K shaped pattern.

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<v Speaker 3>Early on in COVID, I saw as white collar workers

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<v Speaker 3>their confidence immediately popped when they could work from home.

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<v Speaker 3>On the other hand, blue collar workers factory workers, hospital workers.

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<v Speaker 3>Their confidence kept deteriorating. So based on that divergence and confidence,

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<v Speaker 3>I expected that the economy would follow.

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<v Speaker 2>And Bloomberg's Katarina Sariva says it did follow.

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<v Speaker 1>You had one group of people that were kind of

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<v Speaker 1>in the upper echelons of the economy, so think like

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<v Speaker 1>high income earners, people with a lot of wealth, and

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<v Speaker 1>those people were really doing well. The stock market was

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<v Speaker 1>rising a lot already by the end of twenty twenty,

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<v Speaker 1>So people with wealth and people with jobs where they

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<v Speaker 1>could work from home, for example, we're doing really well. Now.

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<v Speaker 1>The other half of the economy really wasn't. We still

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<v Speaker 1>had like eleven million people unemployed at the end of

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<v Speaker 1>twenty twenty. Unemployment rate was above six percent, So for

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<v Speaker 1>anyone who didn't have stocks, for example, maybe didn't own

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<v Speaker 1>a home, things were not going great.

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<v Speaker 2>Eventually, the government rolled out stimulus programs, lockdowns lifted, and

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<v Speaker 2>companies started rehiring workers again.

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<v Speaker 1>And that is especially benefited the lower income folks because

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<v Speaker 1>those were the people that had the most impact from

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<v Speaker 1>the pandemic layoffs. So when you had companies trying to

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<v Speaker 1>hire them again. For a lot of these service industry jobs,

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<v Speaker 1>that had to shutter in the pandemic, you saw big

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<v Speaker 1>wage gains. That has changed now, and in fact, it

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<v Speaker 1>has refersed The largest wage increases right now are for

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<v Speaker 1>the highest income earners.

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<v Speaker 2>Those high earners are also the people who tend to

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<v Speaker 2>be making the most from the stock market.

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<v Speaker 1>It's been just surging this year, so that obviously gives

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<v Speaker 1>people confidence. There's research showing that each additional dollar of

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<v Speaker 1>stock market wealth raises consumption by about five to fifteen cents.

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<v Speaker 1>And then not just the stock market, you know, you

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<v Speaker 1>also have to look at wealth that's been created through

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<v Speaker 1>home ownership, again, something that disproportionately impacts wealthier people, and

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<v Speaker 1>home prices have just increased so much over the past

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<v Speaker 1>five years. That also helps me people feel like they

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<v Speaker 1>can spend more.

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<v Speaker 2>Would you say that there's a capital K shaped economy

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<v Speaker 2>and then there's other lowercase shaped economy sort of playing

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<v Speaker 2>out in other sectors like the housing market.

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<v Speaker 3>Yeah.

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<v Speaker 1>Absolutely, We're really in a moment where it's becoming a

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<v Speaker 1>really popular metaphor, I think, and it's being used across

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<v Speaker 1>a variety of industries. So yeah, you can look at

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<v Speaker 1>home buying where things are going really well for that

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<v Speaker 1>upper part of the market because again, folks are able

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<v Speaker 1>to sell their homes and are able to have more

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<v Speaker 1>wealth through the stock market, so they can go buy

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<v Speaker 1>a bigger home and not as much at the lower edges.

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<v Speaker 1>I've heard it talked about. For example, if you're looking

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<v Speaker 1>at how airlines are performing right now, so you look

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<v Speaker 1>at the legacy carriers like the big American airlines Delta,

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<v Speaker 1>they're doing really well, and they're reporting that high end

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<v Speaker 1>consumers business travelers for example, are spending people are flying internationally,

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<v Speaker 1>even if maybe not as much domestically, right, so they're

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<v Speaker 1>still seeing a lot of revenue from that. And then

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<v Speaker 1>some of the smaller like the low cost carriers in

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<v Speaker 1>some cases like Spirit filing for bankruptcy, really not doing well.

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<v Speaker 1>So it's an interesting dynamic that I think is playing

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<v Speaker 1>out in a lot of different areas.

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<v Speaker 2>You can see a similar trend in the food and

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<v Speaker 2>hospitality industries too.

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<v Speaker 1>So you have some of these fast casual places that

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<v Speaker 1>are a bit more expensive, right, like not the cheapest

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<v Speaker 1>option out there, really not doing well. And then restaurant

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<v Speaker 1>chains like McDonald's reporting that they're doing okay because they're

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<v Speaker 1>getting a lot of these consumers that would be going

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<v Speaker 1>to somewhere like Chipotle or Sweet Green for example, now

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<v Speaker 1>kind of trading down to something like a McDonald's. You're

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<v Speaker 1>also definitely hearing corporations talk about how their luxury consumers

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<v Speaker 1>are really supporting their growth. Hearing this from the hotel chains,

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<v Speaker 1>also hearing this from Ethan Allen, the furniture company any

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<v Speaker 1>that one the higher higher end, they're still seeing a

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<v Speaker 1>robust consumption there, and then that's supporting kind of the

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<v Speaker 1>rest of their business.

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<v Speaker 3>Businesses have found a way to cater to this divergence.

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<v Speaker 2>Economist Peter Atwater again.

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<v Speaker 3>Meanwhile, for those at the bottom, it's becoming a monthly,

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<v Speaker 3>if not now weekly exercise and juggling their finances.

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<v Speaker 2>The Atlanta Fed has reported that some shoppers are shifting

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<v Speaker 2>to liquid or powder laundry detergent instead of using pre

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<v Speaker 2>portion pots so they can ration it out in smaller amounts.

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<v Speaker 2>The grocery chain Kroger has found that lower and middle

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<v Speaker 2>income shoppers are using more coupons and buying cheaper brands.

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<v Speaker 2>People are trying to find ways to spend less. But

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<v Speaker 2>the thing about a K shaped economy is that even

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<v Speaker 2>as the top and bottom are getting further apart, looking

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<v Speaker 2>at the big picture can be misleading because when it

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<v Speaker 2>comes to overall spending or overall growth, the economy looks

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<v Speaker 2>like it's doing okay.

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<v Speaker 1>We had stronger economic growth this year than most people

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<v Speaker 1>thought we would. We have a pretty low unemployment rate

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<v Speaker 1>still right like four point three percent. Things still look

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<v Speaker 1>really good. It's just when you look under the hood,

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<v Speaker 1>you realize that it's really being driven by a small

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<v Speaker 1>number of people. This is important because the US economy,

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<v Speaker 1>we're a consumer economy. Two thirds of economic activity in

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<v Speaker 1>the US is driven by the consumer. So when you

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<v Speaker 1>start to concentrate that in an increasingly smaller number of people,

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<v Speaker 1>it just means you have a more fragile system.

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<v Speaker 2>In the early nineties, the top ten percent of earners

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<v Speaker 2>accounted for about thirty five percent of the country's consumer spending.

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<v Speaker 2>Today they account for nearly fifty percent. And as the

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<v Speaker 2>economy gets more top heavy, it also becomes more fragile.

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<v Speaker 2>What are the consequences that's after the break. We've talked

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<v Speaker 2>a lot about how the current economy is bifurcating, splitting

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<v Speaker 2>with the wealthy and everyone else on separate tracks, moving

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<v Speaker 2>away from each other. The letter K but economist Peter

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<v Speaker 2>Atwater has another image to consider, a Jenga tower.

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<v Speaker 3>I feel like the blocks in the Jenga tower, particularly

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<v Speaker 3>at the very foundation, are being pulled away at the top.

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<v Speaker 3>So much is happening financially, and that would be okay

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<v Speaker 3>if there was some level of robustness at the bottom,

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<v Speaker 3>that if the K really represented strength at the top

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<v Speaker 3>and the bottom. But what we have now is all

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<v Speaker 3>of this oversized activity at the very top. Meanwhile, bel

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<v Speaker 3>it is becoming more and more fragile.

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<v Speaker 2>In October, FED chair Jerome Powell said that this bifurcated

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<v Speaker 2>economy is something he's watching very very carefully, and Peter's

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<v Speaker 2>watching closely too. He believes that if something causes the

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<v Speaker 2>wealthiest consumers to pull back on spending, say a big

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<v Speaker 2>decline in the stock market, it could send the jungle

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<v Speaker 2>blocks toppling.

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<v Speaker 3>We think of these markets as being representative of strength,

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<v Speaker 3>and as a researcher, what I know is that invincible

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<v Speaker 3>markets are incredibly fragile, and as confidence falls, scrutiny will intensify.

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<v Speaker 2>One area that Peter thinks is especially vulnerable to scrutiny

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<v Speaker 2>right now, AI I think.

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<v Speaker 3>What it would take to topple is a relatively small event.

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<v Speaker 3>The challenge is the confidence in AI. Individuals will challenge

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<v Speaker 3>the benefits of all of this AI abstraction and demand immediate,

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<v Speaker 3>tangible results that it does not appear that it can

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<v Speaker 3>yet deliver.

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<v Speaker 2>So what would it take to bolster the Jenga Towers

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<v Speaker 2>foundations and to start narrowing the diverging parts of the

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<v Speaker 2>K It's no easy task. The government shutdown has put

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<v Speaker 2>new immediate strains on lower income Americans, withn benefits on Holt,

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<v Speaker 2>and longer term fixes haven't found much political momentum, at

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<v Speaker 2>least at the federal.

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<v Speaker 1>Level, things like reforming the tax code, looking at things

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<v Speaker 1>like the capital gains tax, which really is very low

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<v Speaker 1>in this country, right, looking at things like the payroll tax,

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<v Speaker 1>estate tax, corporate tax rates. Right, there's a lot of

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<v Speaker 1>ways that you could change tax lat to make it

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<v Speaker 1>more progressive. I think economists would argue, I don't know

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<v Speaker 1>right now how widespread of support there is for doing

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<v Speaker 1>things like that at the federal level. Right. We just

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<v Speaker 1>had a massive tax reform package go through that in

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<v Speaker 1>some ways was kind of the opposite of what we're

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<v Speaker 1>talking about, that was perhaps more helpful to higher income

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<v Speaker 1>and corporations.

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<v Speaker 2>Is a K shaped economy just a euphemism for an

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<v Speaker 2>unequal economy? Is the KY just measuring inequality? Yeah?

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<v Speaker 1>Absolutely. We talked to some economists who noted that inequality

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<v Speaker 1>it's not new for the US economy, right We've had

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<v Speaker 1>widening inequality for decades here. But widening inequality when it

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<v Speaker 1>gets to levels like what we're seeing right now, tends

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<v Speaker 1>to not be good for an economy because what it

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<v Speaker 1>can mean is that you can actually have slower growth,

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<v Speaker 1>and it can even lead to things like social unrest.

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<v Speaker 3>It's not just inequality in terms of an economic sense.

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<v Speaker 3>This is inequality in multiple dimensions at once. Because for

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<v Speaker 3>those at the bottom, they have scarcity in education, in healthcare,

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<v Speaker 3>in childcare, in job opportunity. They have what I call

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<v Speaker 3>stacked vulnerability, where the economic piece is just one more thing.

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<v Speaker 3>And at the same time, those at the top have

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<v Speaker 3>over abundance in everything, power, money, influence, and so it's

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<v Speaker 3>become very difficult for those at the bottom to ignore

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<v Speaker 3>what's happening around them.

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<v Speaker 2>This is the Big Take from Bloomberg News. I'm Sarah Holder.

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<v Speaker 2>Thanks for listening. We'll be back tomorrow