IANAEconomist either, but it's not too hard. If all your basic needs are being met cheaply, and you have money left over, then you spend it on other things. You hire a hairdresser to cut your hair. You hire a gardener to mow your lawn, painter to paint your house. You spend more money on entertainment and tourism ("spring break" holidays didn't exist as a thing for most people, not so long ago.).
And more things like those get invented, so long as there is enough demand for them. There are new industries that could take off if there was a mass market. Personal trainers. Life coaches. Personal shoppers, interior designers and style consultants. Time management tutors (GTD and the like). Probably many, many other new or currently tiny industries, all of which have this key characteristic: the value of them lies in the human touch, so no robot could ever do them. If lots of people had money, *some* of those ideas would take off.
In our world, though, some clever entrepreneur dreamed up nail bars, because these days a 15-minute manicure is all that most people can afford to spend on themselves as a luxury. Those other things above? We need median income to go up in line with productivity, as it used to do before 1975.
The bulk of the money freed up by cheapening food, clothes, and personal effects has gone into zero-sum competitions. Moving to a neighbourhood with "better schools" for the kids--that is, buying a more expensive house than you would have otherwise.The combination of high demand and a fixed supply just drives up the price of property in those areas. No value is created, except in the lawyers' and agents' fees.--relatively minor and infrequent. (The sellers just trade up, mostly, so the extra money they have just goes into another zero-sum competition for status somewhere else.) Likewise families compete to get their kids into "good universities". If the number of positions is fixed, then the extra money you spend is just going to the gatekeepers -- see below.
This kind of problem, where the value of what you buy lies in the position relative to other people that it gives you (i.e. status), is a never-ending spiral. Not so easily fixed.
Biggest problem. Income and wealth are rapidly concentrating.
Really wealthy people mostly trade already-existing things among themselves, rather than invest in businesses that employ people and craete new things. A better house in a better neighbourhood. A house in the Hamptons, or sell the old one and buy a better one. A pearl necklace once owned by $celebrity, or an artwork by $long_dead_artist. Stocks and bonds. Gold, if they're that way inclined. A third home in some out-of-the-way but safe country, or a "ranch" to go riding on. Those sorts of purchases contribute virtually nothing to the economy, apart from agents' fees, which are one-time expenses and the (low) wages of (a very few) staff. How many people do these purchases employ? Not many, compared to an exercise gym, engineering consultancy, or a movie studio -- investments that actually grow the economy. Sure, rich people do employ some people. Hotel staff, their own personal staff, couturiers, jewellers, etc. But those expenses are very minor compared to their income.
Productivity is good when it increases employment and the real wages of those at the bottom. Wait, it's actually the other way around. If poor people had more income, they would spend more on the things that tend to employ people like themselves. With more money going around entrepreneurs would spot opportunities to sell new mass-market products and services, and employ more people, in a virtuous circle. With money circulating among the rich, entrepreneurs find ways to tap into that. Like Bernie Madoff. Or Goldman Sachs, some employees of which openly called their clients "muppets".
Two exceptions. One, health care. That's labor-intensive, and old rich people will spend *a lot* to stick around, enjoying what they've got. And healthcare is by far the fastest growing employer in the country. Two, security. old rich people will spend a lot on security. Gated communities, body guards, politicians, insurance for their stuff: whatever they can do to cut down the chances that they might lose some status, safety, income, or property. Security isn't *yet* very labor intensive, but that may change...
Right now, the best hope for employment is that having a large household staff becomes a status symbol for rich people. So you can be some rich person's trophy employee.