The economist who first warned of America's K-shaped recovery says this is his worst fear for the US

• Peter Atwater is worried the K-shaped economy could create a caste system in the US.
• He's worried a "caste effect" could put the American dream further out of reach for many.
• Still, the economist sees the K-shaped divide between high- and low-earners fading eventually.

The economist who first warned the US about the K-shaped economy says he sees the potential for the situation to get worse.

Peter Atwater, the economist who's often credited with popularizing the idea of a K-shaped recovery—in which high earners thrive while lower-income Americans struggle—said one of his biggest concerns about the growing divide between the upper- and lower-income households is that the situation leads to a "caste system," he told Business Insider.

"What sustains a caste system is the absence of rungs in the ladder of upward mobility for the US," Atwater said of such a future. "That could easily be reflected in job and educational opportunities."

The US is already seeing a "caste effect" in various aspects of the American dream, Atwater said, particularly in areas that involve ownership of assets.

Homeownership, for instance, has moved further out of reach for many Americans in recent years. The average annual household income needed to afford the typical home is $116,986, according to a Bankrate study conducted last year. That's above the median household income of $83,730 in 2024, according to US Census data.

Stock ownership is also largely concentrated among the high earners. According to the Fed, the top 10% of Americans by wealth owned around $28 trillion in stocks and mutual fund shares in the third quarter, or around half of all household wealth in those assets. The bottom 50% of Americans, meanwhile, owned just 1% of household wealth in those assets.

Atwater said that one of his biggest concerns was the deteriorating confidence of lower-income people.

The consumer confidence index dropped sharply in January, but the decline in recent years has been particularly stark for Americans earning less than $15,000. The group reported a consumer confidence reading of 55.4 in January, near a five-year low.

That's compared to Americans making over $125,000, who reported a consumer confidence reading of 94.9.

The confidence gap between high- and low-earners is at the core of the K-shaped divide and could be seen as an indicator of whether the economic gap between the two groups will widen, Atwater suggested.

"I think ultimately you end up with just a further divide in economic wealth where those who aren't making progress just fall further and further behind this ownership class," he said. "There comes a point where individuals conclude that, 'hey, additional effort isn't going to change the outcome, so why play the game?'"

The silver lining? Atwater doesn't think the K-shaped economy will stick around forever. Due to factors like the extreme lows in confidence and heightened awareness of affordability struggles, he thinks it's more likely that the K-shaped divide will come undone quickly, with confidence of lower-income Americans either catching up to the high-income group or vice versa.

It's hard to conceptualize how that might happen. Atwater has a few ideas:

• Americans start electing leaders who implement policies to address the income gap. The US is already seeing a move toward this trend via winning campaigns by recently elected officials, like Zohran Mamdani, Atwater said.
• Unrest breaks out. Atwater pointed to past revolutions against rigid class structures, such as the one that overthrew the French monarchy, and said there could be a similar pushback against the US wealth divide.
• The stock market declines and reduces the confidence of high-earning Americans. Should this happen, it could take "just a few months" for the K-shaped divide to reverse, Atwater speculated.

"Given the extreme divide that now exists, I expect it to evaporate quickly," he said.