The Root of our K-Shaped Economy
December 31, 2025
None of the following is original thinking on my part or even empirically derived—it is a logical exercise that comes with a challenge for the economists among us to empirically prove it right or wrong.
Some have called our economy “K-shaped,” which is a shorthand way of saying part of the US economy is thriving while another part is struggling. The letter “K” is just another letter in a long list of letters used to describe economic recoveries—think “U-shaped,” “V-shaped” and “L-shaped.” “K” captures the phenomena that one group—let’s call them the investor class—is seeing their wealth increase, while another group—let’s call them the working class—is seeing their wealth stagnate. I know plenty of people in the investing class whose thinking and sympathies are aligned with the working class, but if your wealth is increasing significantly due to your real estate, 401(k), or stock investments you are squarely in the investor class, even if you work 50-60 hours per week.
Who can argue that 2025 has been a “Year of Magical Investing,” as Jim Cramer of CNBC calls it (Jim Cramer Says ‘The Year of Magical Investing’ Is Over—Here’s What To Do Now), with the S&P 500 increasing 17%, the NASDAQ increasing 21%, the Dow Jones Industrial Average increasing 14%, the price of gold increasing 66%, and the price of silver increasing 170%. Certain individual stocks performed even better than the averages, and all of this cannot be explained away by a weak US Dollar, which is only down 10% against a basket of foreign currencies. There is no question that the investor class grew their household wealth during 2025.
The working class saw its median salary grow by about 5% in 2025 versus 2024. Since I didn’t inflation adjust any of the indices listed above, this 5% growth represents an apples-to-apples comparison. However, on an inflation-adjusted basis, real median annual salaries only grew by 1%-1.5% during 2025 for a group who is often living paycheck-to-paycheck.
At least one study indicates that 34% of Americans don’t put any money away for savings and another 30% save less than 10% of their paychecks (How Much of Each Paycheck Should Go to Savings | SoFi). If 64% of Americans are saving 0%-10% of their paychecks, then the working class aren’t seeing much benefit from a rising stock market.
None of the above is very controversial, and I am not advocating for class warfare where absolutely no one would win. My unproven thesis is this: We have tested the lower limits of interest rates in the post-financial crisis, and we have tested the limits of efficiency gains with the “Walmartification” of consumer staples—both of which have provided relief to the US economy for the investor class and the working class—but we have not tested the limits of government efficiency. If anything, government spending keeps growing, and we keep raising taxes and increasing our deficits to pay for what is arguably the least productive area of our economy.
While interest rates can go below 0% (Japan ends era of negative interest rates. Here’s why | World Economic Forum), thankfully the US hasn’t had to endure them. Nevertheless, we tested very low interest rates for over a decade after the financial crisis and again during COVID. In a low interest rate environment, banks, bond investors, fixed-income households, and first-time home buyers suffer disproportionately. Arbitrarily low interest rates, while great for long-term investors, are not indicative of a healthy economy.
Secondly, Walmart’s scale and bargaining power created a major deflationary force for consumer staples during the first part of the 21st century, which affected the whole economy. Annual household savings credited to the “Walmartification” of consumer prices have been estimated to be more than $700 (Discover Walmart helped keep America's prices low for decades. Now it's leading them higher). Other retailers like Amazon and Alibaba have continued the trend online. This phenomena greatly aided the working class who saw their real wages stagnate during the early part of the 21st century. But consumer price savings have a lower limit, and retailers cannot cut prices to anywhere near zero.
All governments—federal, state, and local—are estimated to be 37% of GDP (22% federal and 15% state and local combined)( Government Spending Details in percent GDP: Federal State Local for 2023 - Charts>). Government spending is dominated by Social Security, Medicare, defense, K-12 education, higher education, local police and fire, and road construction and maintenance. We need all of those things, just like we need lower interest rates and cheaper consumer staples. Yet, I don’t see the level of innovation being applied in the government sector with the same vigor Walmart and the Fed addressed their challenges.
My theory is this: Unchecked government spending is exacerbating the K-shaped economy by disproportionately saddling the working class with taxes that are higher than they can afford. The average American household endures a nearly 25% tax burden (How Much Does the Average American Pay in Taxes? - LegalClarity)—a burden that is at least 2.5x the savings rate of lower income households and one that is more easily borne by the investor class even at higher tax rates.
The only way those divergent K-shaped lines converge is by adopting fiscal government policies that provide tax relief to the working class, while not disincentivizing the investment by the investor class that keeps the economy humming. What money isn’t raised through taxes must be borrowed, which crowds out other borrowers and makes their borrowing costs higher. Lowering taxes without lowering the cost to operate governments just leads to higher budget deficits and increased governmental borrowing, which we don’t want or need. We need to make all government entities more efficient to lower the insidious taxation that seems to creep into every aspect of our lives.
We need more efficient government that brings the total federal, state, and local tax burden below 20% for the average US household—a somewhat arbitrary target, but one that should be tested, just like Walmart tested the lower limits of consumer staples and the Fed tested the lower limits of interest rates. If I am wrong, where else in the economy will we find relief for the working class while generating higher GDP?