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Today’s economy is brought to you by… the letter K! Or is it C? Or … well, it depends on who you talk to about how the rich and poor are doing these days.
You’ve probably heard about “the K-shaped economy.” When people talk about it, they generally mean that inequality is widening (and the fortunes of the rich and poor are diverging, so it looks like the right side of the K). Recently, Treasury Secretary Scott Bessent said he was “sick of hearing about this K-shaped economy.” And, he said, he believed the better letter to describe it was a C, which is, shall we say, a more optimistic letter for how lower- and middle-class Americans are faring in today’s economy.
This desire to Sesame Street the economy isn’t a surprise: we’re always looking for ways to shorthand or telegraph the essence of what’s going on in the economy at any given time. But assigning something as basic as a letter to something as complicated as the economy seems way too reductive. Even for Planet Money! So how did we get here?
The story begins back during Covid.
Mike Strain of the American Enterprise Institute says people started talking about a K-shaped economy around 2020, when the effects of the pandemic — and the government’s response — began to show through. It was pretty simple, really:
“ The original usage of the term K-shape meant that the poor were getting poorer at the same time that the rich were getting richer.”
Initially, the term didn’t get much play. Temporary federal relief programs were pumping money into the economy, offsetting a lot of the damage being done by lockdowns and layoffs and business closures. All of which affected poorer Americans most. So while people at the bottom end of the economy were hit hard during Covid, it wasn’t so obvious at first.
But as the government’s stimulus programs began to end, those less wealthy Americans began to feel the pain. Poverty rates cranked up, from 7.8% in 2021 to 12.4% in 2022. At the same time, the richest 10 percent of Americans were getting richer. Government stimulus and interest rate cuts juiced the stock market, which benefited the people who owned most of those stocks: the wealthy.
To a lot of econ watchers, this bifurcation in the fortunes of the haves and the haves-less looked like the letter K. It was appealingly simple. Rich up: poor down. And before long, we started to hear about the K-shaped economy everywhere. Including on NPR. A lot. But Mike Strain says almost as soon as ‘K-shaped’ became a relevant term to describe what was happening in the economy, people began abusing it.
“Over the last few years, different people are using the term in different ways, and some people are using it as just another way of describing inequality, which is different than its original usage,” Strain says. “Inequality can be increasing even if both more affluent and less affluent Americans are seeing their outcomes improve in an absolute sense.”
In other words, it’s possible for poor people to acquire more wealth, and for the gap between rich and poor to widen at the same time. Which is what the trajectory of the wealth gap has been — for the most part —- since at least 1989, as tracked by the Federal Reserve.
Claudia Sahm, an economist at New Century Advisors, says if you focus on incremental movements at the top and bottom ends of a K or whatever you’re missing the forest for the trees. The forest being the chasm between rich and poor that’s clearly shown on that chart. Claudia points out that the top one percent of Americans own fully one third of all the wealth in the country. But the bottom half of all Americans own less than three percent of the wealth. It’s a massive gap that doesn’t change much from cycle to cycle.
But the K is here to stay, it seems. Or the Sesame Streeting of the economy is, at least. Recently Christopher Nassetta, the head of Hilton Hotels, said he sees a C-shaped economy now. Never mind that he was referring to the middle class, who are not at the bottom of the economy, but rather in the middle of it. Nonetheless, his letter was snapped up and repeated by none other than Treasury Secretary Bessent.
To be fair to Bessent, one recent measure does look a little C-shaped: after accounting for inflation, weekly earnings rose at the lower end of the wage scale but fell at the upper end. So maybe a C is appropriate — at least by that measure.
“You look at the average wage of a worker whose highest degree was a high school diploma and the average wage of a worker whose highest degree was a college degree, I think you do see their wage growth converging,” Strain says. “And so you see wage inequality narrowing.”
But there’s a problem here, that you, dear reader, have probably already identified. In talking about the K and the C economies, even in this tiny space, we’re getting our data all mixed up. Are we using wealth or income as the data point to measure the economy? Are we taking into account inflation? And what does that actually have to do with the entirety of the economy anyway? Claudia Sahm says this is a big problem with the alphabetization of the economy, and the question of whether we’re in a K or a C or a whatever…
“Frankly we don’t have very good data to answer this question. Because everybody’s bringing their own data, and it gets really complicated really fast in terms of what’s changing and how much.”
The state of the wealth gap or income disparity is not the best indicator of the economy, Claudia says. There are many, much more relevant and accurate indicators out there. Indicators that are more granular and data-rich; indicators that paint a much clearer picture of where the economy is at today.
The only problem is that all that data and granularity tends to complicate a simple narrative. And that makes it hard to do something simplistic, like assign a letter to the economy. Take the jobs reports that came out last month: they say the unemployment rate is down to 4.1 percent. But they also say jobless claims are up, that businesses are shedding jobs, and hundreds of thousands of people are leaving the workforce.
But in the spirit of adventure, let’s try and give this economy of ours a letter. Not K. Not C. Mike Strain says what he’s seeing is an economy that’s easing slowly; settling down after having been cranked up to a white heat by pandemic stimulus packages. To him, it’s a return to normal.
So what’s the letter for a normal economy? We say it’s a W. Up and down like a yo-yo. Sometimes gentle, and sometimes sharp. Followed by another W. Short for What the hell is coming? And Who the hell knows!
