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Supply Side Economics Doesn’t Hold Up to Louis Vuitton

Presidio Economics | Wednesday November 2nd, 2011 | 0 Comments


3p is proud to partner with the Presidio Graduate School’s Macroeconomics course on a blogging series about “the economics of sustainability.” This post is part of that series. To follow along, please click here.

By Ryn Longmaid, Meghan French and Sara Brown

Moët Hennessy Louis Vuitton S.A. (LVMH) is a multi-national luxury-goods conglomerate. From French Champagne and distilled spirits to lush, leather handbags and Christian Dior cosmetics, LVMH represents over 50 high-end brands which appeal to consumers’ desire for conspicuous or discretionary spending.

This summer, Vogue’s featured article “What Recession?” highlighted LVMH’s remarkable profits over the past several years. LVMH’s performance is not an anomaly in the US recession, it is a testament to where the bulk of discretionary income resides: in the upper class of the American society. Unfortunately, that money is not trickling down to the domestic economy when it is used to purchase $1,500 handbags made overseas.

Supply-side economists assert that providing tax breaks to the wealthy will incentivize more investment and create more jobs. But what if a significant portion of that increased cash flow is spent on luxury imports? The current proportion of government revenue to GDP is the lowest since 1945, while unemployment remains stubbornly high. Watching luxury brands make record profits in this environment may lead one to conclude that the tax savings the wealthy enjoy are not being spent on job creation and investment here in the United States.

Classic Keynesian economics contends that within the circular flow of money, one individual’s spending is another individual’s earnings. In the case of LVMH this has proven correct: 18,000 new jobs have been created from these better-than-anticipated profits. The problem for Americans is that these jobs have been created abroad. The fact that spending by the rich is not circulating back into the US economy directly (by increasing the flow of money) or indirectly (by creating domestic jobs) was surely a topic of conversation during the recent meeting of LVMH CEO Bernard Arnault and President Obama.

LVMH’s success and the continued economic downturn means one of two things: either spending by those wealthy enough to afford an LVMH product cannot alone lift us out of recession or the success of the world economy hinges on the rich buying more handbags. Seriously, getting money in the hands of the rest of the population means more money circulating through the economy. As Keynesians are well aware,the poor and have a higher marginal propensity to spend and thus create a greater multiplier effect within the economy.

 Ryn, Meghan and Sara are all MBA candidates in Sustainable Management at Presidio Graduate School in San Francisco, CA.


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