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The Pandemic Will Reduce Inequality—or Make It Worse

April 29, 2020, 8:00 AM

A recession is no picnic. A financial crisis leaves wounds that last for decades. A pandemic, though, can sow a unique kind of chaos.

The Black Death took a highly stratified medieval society and turned it upside down. With 75 million dead, Europe’s wealthy landowners couldn’t find enough people to tend their fields. When peasants—the essential workers of the day—demanded higher pay, the elites of the 14th century fought back with punitive laws, forced labor, and taxes. Even so, wages for the lowliest workers soared. In rural England, they doubled.

As epidemics go, the novel coronavirus is a relative lightweight—one that has nevertheless killed more than 200,000 people worldwide so far. Yet it’s accomplished something not seen in far deadlier outbreaks of the past: a simultaneous shutdown of much of the world’s commerce. No one can predict the long-term effects of a pandemic hitting an economy this complex and globalized.

For now, the most obvious guide to what comes next isn’t the Black Death, which precipitated the demise of European feudalism, but the Great Recession, which had more or less the opposite effect. In the aftermath of the 2008 financial crisis, inequality soared to heights not seen since the early part of the last century. At first, elites feared that much of their wealth would be wiped out in a globally synchronized market crash, à la 1929. But central banks pumped out trillions of dollars as monetary stimulus, markets recovered, and what followed may have been the best decade in history for the superwealthy.

Wall Street’s savviest investors are already pulling out their 2008 playbooks. The basic idea: Pay discount prices for ailing businesses and other distressed assets now, then cash in later when everything bounces back. In early April, Goldman Sachs Group Inc. said it was considering setting up a $10 billion fund that would make loans to financially strapped companies. Executives at Apollo Global Management Inc. told investors during a March 24 call that the crisis was the private equity firm’s “time to shine.” And in an April 7 appearance on Bloomberg TV, billionaire Steve Schwarzman said his Blackstone Group Inc. was “looking aggressively” at making investments—even as he warned the pandemic could take a $5 trillion bite out of the $21 trillion U.S. economy.

Will the recovery from this crisis, whenever it arrives, be as unequal as the last one? There are reasons to think so. Even as business closings threaten to push U.S. unemployment past the 25% record set during the Great Depression, the stock market has bounced back from its March lows, buoyed by a multistage government rescue effort that is running in the trillions of dollars.

Some billionaires are faring better than others. The personal net worth of Amazon.com Inc. founder Jeff Bezos has increased more than $25 billion in just the two weeks from April 3 to April 17, according to the Bloomberg Billionaires Index, while three heirs of Walmart Inc. founder Sam Walton are collectively more than $6 billion richer than they were at the start of the year.

So far, so 2008.

History is full of surprises, though, and no two crises are alike. Among the many ways 2020 could differ from 2008: This downturn may be worse. The International Monetary Fund predicts the world economy will shrink 3% this year, the most since the Great Depression. And the Great Depression had a very different impact on the world’s rich from the Great Recession.

From 1929 to 1932, the top 0.1%’s share of all U.S. household wealth plunged by a third, and the top 0.01%’s portion fell by half—a funhouse-mirror opposite of their 2007-10 surge, according to estimates by Emmanuel Saez and Gabriel Zucman, a pair of professors at University of California at Berkeley who study economic inequality.

The 1929 Wall Street crash helped create a new economic order in the U.S. called welfare capitalism. With the New Deal, American workers gained a safety net. With World War II, they won leverage with employers and higher wages. The owners of the means of production—well, they didn’t do as well. By 1950 the very richest Americans, the top 0.01%, controlled just 2.3% of the nation’s wealth, less than a quarter of their share in 1929. Meanwhile, the bottom 90% of households had doubled their share.

One wild card, now and in past crises, is government policy. A dozen years after the financial crisis, it’s still galling to many that America’s leaders failed to prevent millions of foreclosures, even as bailout funds propped up the banks that originated mortgages that went toxic. “In 2008 they got away with it in a sense,” says University of Texas professor James Galbraith. “They’re going to find that they can’t stop the pitchforks this time.”

The Federal Reserve’s policies also contributed to widening the wealth divide. Record low interest rates—meant to stimulate borrowing and productive investment—pushed asset values ever higher. Corporate profits soared as the economy recovered much faster than workers’ wages. If you had capital to deploy in the bleak days of late 2008 and early 2009, you were lavishly rewarded. From the depths of the crisis to the beginning of this year, U.S. stocks more than quadrupled.

The rich have advantages in good times and bad. In an economic shock, “the issue of who has liquidity and who has access to credit lines becomes very important,” says Salvatore Morelli, an economist at City University of New York who has spent more than a decade studying how crises affect inequality. “The people who have liquidity jump in and buy those assets,” he says, then profit handily when the economy recovers.

After 2008, fortunes at the top ballooned even as the middle and working classes were hobbled by derailed careers, stagnant pay, and permanent losses on their biggest investments—their homes. From 2009 to 2012, when the economy was supposedly in recovery, the earnings of the bottom 50% of Americans fell 1.5%, while the top 1%’s income rose 21% and the top 0.1%’s earnings jumped 24%. By 2012 the top 0.1% of Americans were earning $6.7 million a year on average and collectively controlled a fifth of U.S. wealth, more than at any point since 1929.

Another increase in inequality may be inevitable. “Any recession, regardless of the cause, hits poor people disproportionately,” says Martin Eichenbaum, a professor of economics at Northwestern University.

Downturns also especially penalize those entering or exiting the job market. Millennials who graduated during the last recession paid a long-lasting penalty for their bad timing. In 2016 the average American under 35 was still earning less than the same age group in 2007, according to the Survey of Consumer Finance. The Federal Reserve Bank of St. Louis found that the median household headed by someone born in the 1980s had 34% less wealth in 2016 than earlier generations held at the same age. Baby boomers approaching retirement will likewise struggle, especially if they lose their jobs and must tap savings early.

In normal times, being laid off can be devastating. Losing your job in a recession, when it’s harder to find another, often means you never recover. A U.S. study covering 1974 to 2008 found men laid off during periods of high unemployment lose out on the equivalent of 2.8 years of lifetime earnings, twice as much as men let go in better times.

What made the Great Recession great was that it waylaid people whether they lost their jobs or not. The main reason is that middle-class Americans have much of their wealth tied up in their homes, and their equity collapsed with the housing bubble. According to University of Bonn researchers in a forthcoming paper in the Journal of Political Economy, the bottom 90% of Americans consistently hold about half of U.S. housing wealth, but they have very little exposure to the markets—the top 10% own about 90% of stocks. When stocks rebound but real estate stagnates, the wealth gap widens.

More than 26 million Americans have filed for unemployment benefits in five weeks, a level of claims that implies a jobless rate of around 20%—twice the last recession’s peak of 10%. And some economists believe a 30% rate is possible. If these job losses sink the housing market again, the damage will be that much worse. Mark Zandi, chief economist for Moody’s Analytics, estimates about 15 million American households with mortgages could stop paying if the economy stays closed through the summer or beyond.

Even if the economy snaps back quickly, the pandemic could create new inequality fault lines, such as a gap between those who have the luxury of working from home and those who cannot. Researchers at the University of Chicago have calculated that 37% of U.S. jobs “can plausibly be performed at home.”

For decades technology has been transforming how people work, benefiting the tech-savvy while pushing millions into precarious gig jobs. The virus-induced recession is accelerating technological change, something we’ve seen in previous downturns. In one 2012 study economists found that since the 1980s, 88% of the job losses in “routine”—or easily automated—positions happened within 12 months of a recession. Even as other occupations bounce back in a recovery, the jobs lost to automation never return. Researchers at Brookings Institution estimate that as many as 36 million U.S. jobs could be at risk if that dynamic plays out once more.

The more the economy is transformed by the virus, the more people will be left behind in a recovery. “There are certain industries that are not going to come back,” says Michael Bordo, an economics professor at Rutgers University. Manufacturing should have an easier time bouncing back than services, he says, while most at risk are business models based on bringing masses of people together, starting with cruise ships.

One potential upside of the pandemic is that, like the Black Death, it may give some of the working poor a leg up. Having realized that grocery clerks, delivery people, and warehouse workers perform vital functions, will we as a society continue to tolerate the low wages and ill treatment many receive at the hands of their employers? For decades, unions have withered as politicians weakened labor laws and companies used aggressive tactics, such as “just in time” shift scheduling, to squeeze out more profits. Could public pressure empower workers to fight back and bargain for a better deal?

On the flip side, it’s not impossible to imagine that some politically connected members of the 1 Percent could find themselves on the wrong side of economic disruptions created by the virus. While a billionaire with a diversified portfolio may fare well, the crisis could shatter millionaires whose fortunes are concentrated in private businesses such as restaurants, retail stores, car dealerships, and hotels. The National Federation of Independent Business, an important constituency for the Republican Party, surveyed its 300,000 small-business members in April and found 90% were feeling a negative impact from Covid-19, and70% had already tried to apply for federal assistance.

Just as they did in 2008, governments and central banks have responded to this crisis with an unprecedented deluge of cash. The question now, as it was then, is who gets the money. The U.S. rescue effort 12 years ago prioritized Wall Street; this time, Main Street isn’t being left out. Congress has authorized a total of $669 billion for loans and grants to small businesses, while more than 150 million Americans are receiving checks of up to $1,200 per adult. Big businesses, meanwhile, face at least some restrictions—arguably symbolic, such as bans on stock buybacks—on what they can do with their bailout money.

The details will matter. “What’s difficult to figure out is exactly how this $2 trillion stimulus bill is going to work out and whose skin is going to get saved and who isn’t,” says Alexander Field, an economist at Santa Clara University. Two weeks after the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed, Congress’s bipartisan Joint Committee on Taxation estimated that a major tax change delivered more than 80% of its benefit to those earning $1 million or more. The provision, costing $135 billion over 10 years, lets rich investors avoid taxes on stock market gains and other income by lifting limits on the deduction of business losses in 2020 and the previous two years—even those that had nothing to do with the coronavirus. “They’re moving taxpayer money to companies who weren’t making money before the crisis,” says Reed College economics professor Kimberly Clausing. “That seems very odd.”

The Paycheck Protection Program for small businesses is also facing criticism. Besides the well-chronicled bottlenecks in disbursing the funds, Bloomberg along with other media have documented instances of hedge funds and private equity firms seeking to tap the funds. “I’m a little bemused, puzzled, and somewhat outraged, I guess, that private equity would be pushing to the front of the line to try to get taxpayer assistance,” hedge fund investor Jim Chanos said in an April 9 interview on Bloomberg Television.

Even if bailouts are administered in ways that don’t do the wealthy and powerful special favors, small businesses and individual workers are inevitably more vulnerable to an extended shutdown than large companies, which can keep operating by turning to the capital markets, refinancing loans, or declaring bankruptcy. “We’re going to see households going into debt very fast,” University of California at Berkeley sociologist Neil Fligstein says.

So far it sounds like a replay of the 2008 financial crisis, right? It doesn’t have to be. Governments could make choices that might prevent the income gap from widening even more—and indeed could cause it to narrow.

Even before the pandemic, Americans had been engaged in a conversation about whether the wealthy and giant corporations pay their fair share of taxes. Democrats running for president largely agreed on the need to close loopholes and raise rates on millionaires. Bernie Sanders and Elizabeth Warren went further with plans to directly tax billionaires’ wealth. These soak-the-rich proposals may find new impetus once the nation begins to grapple with the trillions of dollars in government debt created fighting the coronavirus.

Illustration: Sophy Hollington for Bloomberg Businessweek

If policy moves in that direction, the pandemic may play out less like a financial crisis and more like a war. It’s generally bad news for the superwealthy when an entire economy mobilizes for war: The U.S.’s first income tax was imposed in the Civil War, and the top tax rate hit 77% during World War I and 94% in World War II.

If higher taxes don’t dent inequality, something less predictable might. What some have christened the Lockdown Recession has highlighted the risks inherent in today’s world-spanning supply chains. Globalization has given the upper hand to corporate managers and eroded the bargaining power of workers. What happens to labor dynamics if companies, prodded by governments, begin reversing decades of offshoring and start moving production closer to home?

It may take years if not decades to discern whether the virus opened a new chapter in our economic history. University of California at Davis researchers recently studied 12 pandemics that each killed more than 100,000 people since the 14th century. They found that the economic effects linger about 40 years after the last victim dies.

One pathogen hitting two different places can have very different long-term effects, according to research by Guido Alfani, an economic historian at Bocconi University. A determining factor is how leaders react. In places where the 1918 flu pandemic was mishandled and death rates soared, Alfani found evidence of “permanent negative effects on interpersonal trust” that plagued those societies for decades. That’s why “national governments should make every possible effort to contain the pandemic,” he says, “and also why national politicians should seek cooperation instead of confrontation.”

A lot depends on the outcome of the 2020 election, says Reed College’s Clausing. “It all comes down to how the polity responds to this crisis,” she says. “If they change course, I think the policy changes will be really dramatic. But I also could imagine things don’t go that way, and we limp along and things get worse and more polarizing.”

To contact the author of this story:
Ben Steverman in New York at bsteverman@bloomberg.net

To contact the editor responsible for this story:
Cristina Lindblad at mlindblad1@bloomberg.net

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

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