More than 49 percent of all consumer spending in the United States is now performed by the top 10 percent of U.S. earners—meaning that nearly half of U.S. consumption originates from around one-tenth of the population, with the rest of the country in relative stagnation.

This pattern has become described as a K-shaped economy: the idea that economic life has stopped reflecting shared experiences and instead reflects divergent ones. Is the so-called Cantillon Effect responsible for this economy? Is the K-shaped economy also a global phenomenon? What are its political effects?

Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: To the extent that there is a single engine of this K-shaped divergence in the U.S. economy, some refer to the so-called Cantillon Effect—the suggestion that the post-financial crisis policy toolkit, when there were zero interest rates plus quantitative easing, has played a big role. What exactly is the Cantillon Effect, and is it responsible for the K-shaped economy that we’re talking about?

Adam Tooze: The Cantillon Effect is an interesting idea. Cantillon was an Irish-French economist who wrote in the founding period of modern economics, so 50 to 70 years before Adam Smith, at the beginning of the 18th century. And it’s a really powerful, important idea, that when an expansion of credit and money happens in an economy, it doesn’t happen in a uniform way. It impacts the economy in particular points. Somebody becomes the first spender of the new credit.

So, if you start with a simple monetary policy framework, maybe a quantity theorem of money—MV equals PT, where M is the money stock—and you expand the money supply, you could think of this as rippling across the entire economy at the same moment, which is obviously a highly unrealistic view. De facto the money hits a particular bit. There is one lot of debtors who get to spend first, and their purchasing power then drives the economy. They are also the prime beneficiaries of that credit shock.

Any monetary policy is also a distributional policy: There’s no such thing as kind of neutral helicopter money that just rains down on society. And in the age of large-scale monetary policy intervention, like the 2010s with quantitative easing, you could see why that would move to the center of the conversation. I have to say I was quite struck that you brought it up.

My sense is that we’re dealing right now with another type of effect, which is also to do with the sectoral logic of monetary policy but is operating in a slightly different way. Because in the Cantillon model, the money comes from the outside, and the question you’re asking is where it hits first. But what we’re actually experiencing right now is what monetary theorists would call endogenously generated credit, which is being generated off the back of a huge surge of investment and confidence and optimism about a particular sector, which then warrants credit creation. In fact, early on, a lot of the AI stuff was funded from cash reserves—but increasingly it’s also being funded by credit creation.

That’s what is driving this lopsided acceleration in the wealth portfolios of the top. It’s really these wealth numbers—top 10 percent of wealth holdings—that [are] the vast majority of wealth in American society, given how concentrated wealth ownership is. The bottom half of the wealth distribution has negative wealth, right? So, the real force is presumably in the much smaller percentage point of people that actually have really substantial portfolios, and they are experiencing an endogenously generated boom.

So then the question, obviously, is if this is endogenous, is it a bubble? You know, it is sustaining itself right now. Can that go on forever? And will the optimism, will the forecasts that warrant these huge valuations and these high levels of investment, be validated by flows of profit in due course? Where are those going to come from? That is the more compelling kind of rationale for the explosion in wealth in the current moment.

CA: We’ve been talking about this K-shaped dynamic mostly in the context of the United States and its economy, but is the K-shaped economy observable elsewhere in the world? On a macro level, is the world as a whole experiencing this K-shaped dynamic, in the sense of is growth in certain regions paired with stagnation in other regions?

AT: I think one can apply and play with this idea in different ways. You could take the K-shaped model that we’re seeing in the U.S. and ask, are other big blocs in the world economy experiencing something similar domestically? About Europe, you’d have to say there just isn’t that much growth, so there’s not that much scope for action. If you look cross-nationally within Europe, there is actually strong evidence right now for convergence: So Eastern Europe is growing more rapidly, Spain is growing rapidly.

But in China, there is quite widespread discussion that mirrors the American discussion about the K-shaped economy. Citi’s economic research outfit that does reporting on China actually used the K-shape analogy to describe what’s going on in China, with the divergence between, on the one hand, new centers of economic growth, not necessarily hugely profitable but at least dynamic and expansive in say, tech, green energy—the sort of stuff I get really excited about; and on the other hand, the continuing slump in real estate, which is also a feature of the American situation that is underplayed.

But looming in the background, many people think the real deadweight on the U.S. economy is the somewhat frozen real estate market. In China, it’s worse, it’s actually deflationary. And there is also the biding problem of youth unemployment and precarious employment in the gig economy in China. So a divergence story has become a big part, in fact, of Western discourse about China.

But I also think you’re absolutely right, one could apply this kind of model to the entire world economy—and the real worry there is the bottom leg. There is a biding concern for the most fragile economies, and we’ve spoken about them in different contexts on the show. We’re talking the weaker players in South Asia, the more fragile economies in Asia, generally in the Middle East, and above all in Africa and sub-Saharan Africa.

They just can’t catch a break right now. I mean, first it was COVID, then it was the 2022 energy price and food price shock, and now another price shock is impacting. And in between that, they had the huge spike in monetary policy tightening, the biggest tightening that we’ve seen since the 1970s, which essentially cut most of them—the lowest income, the more fragile emerging markets—out of global bond markets. So they were making net payments to foreign creditors, and that produces this divergence.

If you look at the [International Monetary Fund’s] IMF’s estimates of bad scenarios for what could be coming down the pike over the summer if the Hormuz Strait remains closed, we see that divergence. Rich countries will find ways of surviving, but those who have limited foreign exchange reserves and high exposure to imports, they will be on the down leg. Those are small parts of the global economy—they barely register. But in terms of population and in terms of significant countries, we’re talking Egypt, Pakistan, Bangladesh, Ethiopia. They’re really stressed. So yes, that K-shaped model can apply to different scales, I think.

CA: Is the K-shaped economy distorting the meaning of economic data as we’ve known it?

AT: I do think this is an important question for analysts and those who follow economic news. It goes to a profound conceptual political-historical question about how we imagine the national economy. It’s only really at the beginning of the 20th century that it becomes the dominant center of political discussion nationally and internationally. Part of that is the construction of the idea of a common experience in which rising tides float all boats and the entire society moves up in a relatively uniform way—obviously structured by inequality, but nevertheless all parts of society moving in one direction or the other, either up or down.

This K-divergence really puts that in question, and it raises analytical questions about the value of numbers that are effectively averages, which almost by necessity obscure these sharply divergent patterns.

There’s a series of instances of this right now. The most dramatic I’ve recently seen is America’s trade data—which is of course gigantic flows, hundreds of billions of dollars. If you look at the overall trade, it looks relatively flat—imports coming down somewhat, unsurprisingly because of tariffs. If you look at non-AI imports, they’ve fallen quite sharply, but that is offset by a spectacular surge in AI-related imports.

So what we’re seeing within the trade data for the U.S., which is a huge slice of GDP, is a sharp divergence between different categories of demand. On the one hand, the investment boom in AI, which is driving huge imports from Taiwan and from South Korea. And on the other hand, what looks like the signs of a slowing economy, or at least one that’s being battered by protectionism. It leads people to start talking to new types of analysts.

One of the things you’ll see in a situation like this is that newspapers, business, and TV will invite banks (Bank of America, notably), credit card companies, Walmart to start explaining what they see in the U.S. economy. They’re the people who are closest to the actual experience of stressed American households, and it’s there that you’re really going to see the impact of increasingly difficult conditions.

So yes, what happens is a kind of diversification of the range of sources of information that you need. On that consumer confidence number that you mentioned, Michigan has been quite vocal about the fact that within an overall fall in consumer confidence is actually an even worse fall on the part of a large slice of the American population offset by the buoyancy of the wealthiest.

Those kind of moves, to question and to ask about distributional issues, become key in analyzing the actual state of the economy. You can’t study the economy independently of the question of distribution, in other words.

CA: It only seems natural to ask what the political effect of this distributional shape is or will be. On the one hand one can imagine that the lower arm of the K responds with anger in the political system. Or does the research suggest that under these circumstances the effect is one more of alienation, kind of a drifting away from politics?

AT: I think this is a chronic problem of U.S. democracy. It’s not for nothing, after all, that nonparticipation in elections is as large as it is. It’s a really dramatic and depressing feature of the American polity. And there’s no question that that’s strongly correlated with social disenfranchisement. That logic is absolutely there.

The more optimistic reading is to introduce another letter of the alphabet. There is also a reading of the U.S. economy right now that says that it has K-shaped dynamics, but the actual outcome is E-shaped, so you have three tiers. There are indeed people who are being increasingly pushed out of the mainstream of consumption and economic growth—though one has to say, that is as yet a tendency. We aren’t seeing a huge surge in unemployment. America’s economy is far away from a recession, let alone a depression, let alone a crisis. That’s not on the agenda here—what we’re seeing is divergent trends.

There is a substantial group of the population in the middle who are struggling and just getting by. Analysts refer to this as the Costco set—so the segment of American society that is highly price-sensitive but nevertheless interested in decent-quality groceries, not desperate—is not struggling, but is really minding the bills. That is the electorate that turned out for [New York City Mayor Zohran] Mamdani. It’s not for nothing that a candidate like that is pushing cost-of-living issues with the ruthless focus that he is, because those are the households that are really bearing this stress. They’re not going to go under, and they will struggle, and they will voice their frustrations through political processes.

And that is to counter the otherwise very gloomy kind of teleology that you’re laying out where divergence leads to essentially a political system that is similarly hierarchical. We’re not at that point in American society yet. And the Republicans must be quite afraid of the likely punishment they’re going to receive in the midterms, precisely as a result of that middle branch of the American social system who are really feeling the pinch.