Thursday, August 14, 2008

It's the Little Things... and the Little People?

Here's one of those random thought train things that went through my head this morning:

I was thinking about someone I know whose business seems to be doing very well. His customers are very wealthy people, sometimes extremely wealthy. With customers that rich, you'd think he'd be unaffected by economic downturns, but there have been times in the past when he's had to lay off employees and cut back. Even rich people do curtail some of their expenses when they see the value of their portfolios declining.
So what about the general phenomenon of the rich getting richer? Some people see it as a good thing because the rich spend money, and that trickles down and creates jobs for the rest of us.

But I was thinking about how many people approach spending and saving. Most people have certain major expenses that they can't give up, even though they may not truly be "necessities" as opposed to just "wants". For some it may be cable TV, or sports tickets, or a gym membership, or a certain size apartment, or having a car. For these people, and I am probably one of them, today's economy doesn't make them think "Yikes, my 401k has dropped by $10,000, I'd better quit my $1,000 a year gym membership!" Instead they think, "Yikes, my 401k has dropped by $10,000, I'd better start buying coffee at the cheap deli instead of Starbucks." We find it easier to approach the sacrifices saving money requires through small increments of change rather than the large ones that would make more of a difference, immediately and in the long run.

So blow this up to a larger scale: if you are a billionaire faced with the threat of having somewhat fewer billions to play with, what kind of cutbacks do you make? Do you sell one of your Gulfstream jets? Or do you lay off a few of the $25,000-$50,000 a year gardeners, chefs, secretaries, masseurs, etc. that you employ, since each of those is just a drop in the bucket compared to your overall expenses and you've got enough other people around to pick up the slack?

This is pure conjecture and stereotype to some extent, but do you think it could be true? Do you think it matters?

8 comments:

Kizz said...

I work as an admin for people in the tax brackets of which you speak. In my experience this sort of economic downturn means curtailing bonuses and raises for employees. Some services like landscaping on multiple houses may also get scrutinized.

Anonymous said...

I work in fundraising for a small non-profit, and though we're holding steady with donations, it has been an extremely stressful year.

It is disheartening to contemplate the number of jobs that are at risk in the non-profit world because (probably more than a few) wealthy people will choose to retain the personal comfort of a private jet while starving non-profits that serve the broader community. Which is not to mention the effects their decisions have on those of us who have chosen to forgo higher salaries in the corporate world in order to work for the common good ...

Susy said...

DH and I own a business that caters to the wealthy (2ndMileProductions.com). We haven't found that the slowing economy is hurting our business. We find that even less-wealthy people are willing to spend the money on us. Perhaps it's because we are in the wedding business and people feel that spending money on weddings is worth it? Not sure.

Scott @ The Passive Dad said...

When I worked for investment firms, I found that the spending was consistent in good times and bad. The brokers would usually just pay out less and blame it on the lower commission rates and syndicate sales. They still went of vacations and flew to Vegas for the weekend, but at the end of the year less went around to the rest of the team.

finance girl said...

I suspect very little is changed, especially if they are way way positive on the balance sheet and cash flow.

I suspect they have money people around them explaining the dips (for those that don't understand economic cycles to begin with), and they just make sure that a certain financial baseline is not in jeopardy.

You can bet if I was ever one of them, ain't no way I'd cut the Jetstream out. The concept of private jet travel is a key bonus to having that kind of money imo....

savings rates said...

I know a few of these people and they haven't really changed their habits either.

They are definitely aware of the economy but are definitely still spending the money they have.

Gord said...

I suspect most of the rich are rich for good reason. The toys probably represent a very small fraction of their wealth. In the downturns, the cash comes out and they buy quality income producing assets. It has been said,"Don't buy your second car until you've bought your second house." -Jim Rohn

pkzcass said...

I don't have any experience with people in these types of tax brackets, but I'd be willing to be that what kizz said is right: they cut employees and salaries but still keep spending on themselves. I've never heard of a CEO foregoing his $15 million/year salary to keep from laying off employees in hard economic times.