The Income and Wealth Gap

October 3, 2025

Doug Leyendecker

Welcome to This Week’s Leyendecker View

All change is not growth, as all movement is not forward.
– Ellen Glasgow

FAVORITE READS OF THE WEEK

The dawn of the post-literate society
Is making us dumber and dumber and dumber.

Is a tech backlash coming?
Gen Z may turn us around.

FAVORITE VIDEO OF THE WEEK

The male inequality problem is getting worse
Insightful thoughts on the man crisis.

THINKING OUT LOUD

The Income and Wealth Gap
Let’s hope history doesn’t rhyme

News shows up regularly these days about the wealth, income and consumption gaps. Recent headlines note that the top 10% of households may now account for nearly half of discretionary spending. Democrats use this “growing inequality” to campaign for votes from the non-rich. Republicans often suggest income and wealth gaps have always been around. Even if that’s true, do gaps like the ones we see today have a historical precedent? Let’s step back to trace the arc of inequality over the last century.

Before the Great Depression, the American economy was strikingly top-heavy. In the late 1920s, the top 1% of households controlled nearly a quarter of national income. The wealthy disproportionately drove consumer demand. When the Depression struck, both incomes and consumption collapsed, revealing how fragile an economy might be when too much purchasing power is concentrated in too few hands.

A very different pattern emerged in the mid-20th century. After WWII, the US economy dominated the world. Manufacturing soared, unions grew stronger, wages rose, and progressive taxation created what economists have called the “Great Compression.” Income distribution flattened, the top decile’s share of national income fell, and wealth accumulation broadened. Federal Reserve data show that middle-income households increased their net worth, while census statistics demonstrate that real median household income rose steadily.

This broad prosperity translated into broad-based spending. Families across income brackets could buy homes, cars and appliances, fueling suburban growth and a consumer economy based on mass demand.

The cycle turned again in the 1980s. Early computing and internet technologies, combined with free trade agreements, allowed US manufacturing jobs to be exported to cheaper labor market countries. This started hollowing out our blue-collar middle class. Federal Reserve Distributional Financial Accounts suggest the top decile’s share of income has increased steadily since 1989. By contrast, census figures show real median household income stagnating for large stretches, only modestly exceeding its late 1990s peak in recent years.

These changes reshaped consumption again. The Consumption Expenditure Survey’s more recent decile tables show that the top 10% of earners now account for about 23% of all consumer outlays (2017–2022). The top quintile accounts for roughly 39%. The trend seems clear that high-income households’ relative importance in driving demand has increased, particularly in discretionary categories.

In 2022, for instance, affluent households made up 40 to 60% of spending on items like entertainment fees, “other lodging” such as vacation rentals and higher education. Middle- and lower-income families, meanwhile, devote a greater share of budgets to housing, healthcare and food, leaving less room for discretionary consumption. Yet this hasn’t stopped the luxury economy from booming.

What emerges is a portrait of an economy whose cycle has swung back toward wealth concentration. Just as in the 1920s, the affluent today not only command a growing share of income and wealth but also set the pace in discretionary spending. Their consumption decisions can disproportionately sway sectors of the economy. In contrast, the broad-based spending power of the mid-20th century has eroded, replaced with an economy in which growth is increasingly tied to the fortunes of the upper tier.

This matters not just for those whose economic station has stagnated. It matters for all of us. Economies and societies built on broad middle-class demand tend to be more stable, as seen in the postwar decades; whereas economies and societies reliant on the top decile are more volatile. Sound familiar?

If we back away from the trees to view the forest, the driver of periods where income, wealth and consumption gaps widen becomes clear: step-change innovation.

During the middle 1800s to the early 1900s, step-change technologies radically reshaped society. Railroads, airplanes, automobiles, telephones, radios and more fueled significant wealth accumulation for the inventor and investor classes. Today, computing, the internet, tech gadgets and AI have unleashed another round of step change, along with its telltale wealth accumulation for the inventor and investor classes.

Meanwhile, and in both cases, these step-change periods increased productivity, which makes many legacy jobs irrelevant or of much less value. Until a new class of higher-paying jobs appears, wages for the middle and lower classes stagnate or worse.

Even if new jobs close the gap, the damage may have already been done. Too much wealth may have built up in financial assets like public and private securities and real estate, and a crash in one can cascade across all. This is especially true if those assets’ owners leveraged them in pursuit of juiced returns, which creates bubbles that grow only more fragile and carry exponentially greater risk the larger the bubbles get. In these circumstances, even a small black swan can come along and take down the entire economy—the very circumstances that yielded the Great Depression.

Perhaps the question is: Does every step-change innovation period create a serious wealth gap that leads to over-leveraged financial asset bubbles that inject hyper fragility into the system, such that one single economic event, no matter how relatively mild in absolute terms, can take down the entire economy? Is this the natural cycle of step-change innovation? Does every boom economy have its bust? If so, is there anything we can even do about it?

THE RANDOMS

According to the Bureau of Labor Statistics, we spend about five hours a day on leisure activity. Add in eight hours for sleep (that’s the goal, right?) gets us to 13 total hours. Eight hours of work gets us to 21 hours, leaving three hours for life maintenance, like commuting to work, grocery shopping, paying bills and fixing stuff. Did someone forget about the children?

India asked the US to let it buy Iranian oil instead of Russian oil. How is this a shrewd negotiating strategy?

Meta (Facebook) introduced its latest and greatest version of smart glasses. Have you gotten a pair yet? Have you seen the long lines of people waiting to buy them?

Has Wall Street reached the Wizard of Oz stage, or are sophisticated investors convinced Team Trump’s policies will soon result in better than average economic growth?

First Brands filed for bankruptcy, which will cause billions of dollars in investment losses. Is this the first domino of many to fall?

Are we okay with mainstream media using AI-generated images along with their reporting of “the news”?

On the James Comey indictment: If we don’t look into government officials’ possible bad behavior, all we are doing is enabling it and ensuring it will keep happening. If James Comey did no wrong, then he has nothing to be worried about.

Trump seems to be using fear and consequences as a way of inducing better behavior. Make illegal immigrants afraid, and fewer will come. Make trading partners who have been taking advantage of us afraid, and they will give us better deals. Make our sovereign enemies afraid, and they will back-off their mischief-making. Make embedded bureaucrats who are abusing power afraid, and they will stop abusing power. Make pharma companies afraid of the consequences of putting profit above all else, and they will prioritize the public’s interests. Make sanctuary cities afraid of “invasion” from the National Guard more than invasion from illegal aliens. Trump seems to be managing the unruly in much the same way a parent does a child.

What do you think of the theory that Biden let immigrants illegally pour into blue states to offset their population losses and therefore prevent the loss of House of Representative seats?

ECONOMIC NEWS

Economy

Consumer confidence falls
AI is driving up electricity costs
Inflation is worse than reported
Which state is the next California?

Labor

Labor market is deteriorating
US tech workers embrace “996”
The AI jobs crisis is hiding in plain sight

A Little Health Care

People are using tech to self-diagnose
How CRISPR is changing our lives
The healthcare expenditure explosion chart

The Lone Star

Houston getting another new factory
Houston robotic surgery breakthrough
Texas gets its own DOGE

BUSINESS

Finance

There are more US PE funds than McDonald’s
Hedge fund stars now have agents
The evolution of giant PE deals
AI drives the venture capital bus