The Inner Monologue

Politicians ask it. Pollsters ask it. Economists ask it.

“How are you doing?”

It’s a simple question that has become surprisingly difficult to answer.

The unemployment rate may be low. The stock market may be setting records. Inflation may be cooling. Yet one person says things have never been better while another insists the economy is broken.

How can both be right?

The answer may lie in what economists call a K-shaped economy.

Picture the letter K. One branch goes up. The other goes down.

In a K-shaped economy, some people become more prosperous while others struggle, even though they live in the same country and experience the same headlines.

The traditional question—”How is the economy doing?”—is becoming less useful. A better question is:

Which branch of the K are you on?

For much of the twentieth century, economic growth lifted most Americans together. Some rose faster than others, but broadly speaking, workers, retirees, and business owners all moved in the same direction.

Today, the story is different.

If you own stocks, a business, rental property, or substantial retirement investments, economic growth often works for you. When markets rise, your wealth rises. When companies become more productive, your investments benefit.

If your income comes primarily from wages, things can look very different. Food costs rise. Insurance premiums rise. Medical costs rise. Housing costs rise. Your paycheck may increase, but not necessarily as fast as your expenses.

The divide is no longer simply rich versus poor.

It is increasingly about how much of your income is protected.

I call this your Protected Income Percentage.

The calculation is simple:

Protected Income Percentage equals:

(COLA-protected income + investment income) ÷ total income

In plain English, what percentage of your income automatically keeps up with inflation or benefits from economic growth?

Examples of protected income include:

• Social Security
• Military retirement pensions
• Inflation-adjusted pensions
• Investment income
• Business ownership income
• Rental property income

Unprotected income includes:

• Most wages and salaries
• Hourly work
• Gig economy earnings
• Benefits without inflation adjustments

Consider two households earning $80,000 per year.

Household A earns the entire amount from wages.

Household B receives $40,000 from Social Security and military retirement, and $40,000 from investments.

Both households have the same income.

Both may live on the same street.

But they occupy different positions on the K.

When inflation rises, Household B’s income adjusts. When markets rise, Household B’s wealth often rises as well.

Household A must hope for a raise.

The distinction becomes even clearer among retirees.

One retiree may have a paid-off house, Social Security, a pension, and a substantial investment portfolio. Another may have a paid-off house and Social Security but little savings.

Both may appear comfortable today.

Ten years from now, however, the first retiree is likely to have participated in the growth of the broader economy. The second may have merely kept up—or perhaps fallen behind.

This is why the stock market can hit record highs while many Americans feel no richer than before.

They are watching the upper branch of the K climb higher while standing on the lower branch themselves.

So how are you doing?

Forget the headlines for a moment.

Instead, calculate your Protected Income Percentage.

If most of your income comes from wages, you may be more vulnerable to inflation and economic disruption than you realize.

If most of your income comes from inflation-adjusted benefits or appreciating assets, you are probably benefiting from forces that many Americans never experience directly.

The question is not whether the economy is good or bad.

The question is whether the economy is working for you.

And increasingly, the answer depends on which branch of the K you call home.