By Karen Petrou
As the COVID crisis continues, some have speculated that wealth inequality will drop because it did in the 1400s during the Black Death. However, this cure is not only of course considerably worse than the disease, but it’s also no cure. Economic inequality is a cumulative process – the worse off you are, the worse off you get unless something positive reverses this compound effect. Conversely, the better off, the still more comfortable unless something comes along to redistribute your gains, however well or ill gotten. Given how unequal the U.S. was before COVID, it will surely get only more so now, especially if the Fed stays the course with trillions for financial markets and pennies for everyone else.
Why Wealth Inequality Will Only Get Worse
Before March of this year, the top U.S. one percent owned more wealth than the entire bottom 90%. And, although the Fed said as recently as March 15 that the U.S. economy was still in a “good place,” “record employment” was anything but that judged by key measures. Wage “increases” for lower-income workers did little to improve their lot, with these workers holding only 1.9% of U.S. wealth and owing debt of 140% in debt of their scant assets.
Definitive global research on the Fed’s huge portfolio found that the first round in 2009 had beneficial output impact, but all of the later ones did nothing for output and everything for equity prices. Thus, the lasting effect of the Fed’s policy was persistently felt only by the wealthiest for whom financial-asset holdings are the major wealth generator; as we have shown, most equity is owned by the wealthiest households, with debt eating up the majority of wealth even for middle-class homeowners. The middle-class’s share of U.S. wealth is now the lowest it’s been since the Fed started to keep track.
The BIS study occurred when the Fed’s portfolio was hovering around $4 trillion. Now, it’s $6.6 trillion, heading up to at least $9 trillion and likely considerably more given all its huge COVID facilities. A prior blog post decries the inequity of the Fed’s wealth allocation between supporting huge finance and giant companies over struggling households and small businesses. Suffice it here to say that it is what it is and the Fed’s impact on wealth inequality will be at the least what it was and quite likely far worse because of all the years of increasing wealth concentration at the tippy-top.
Income Inequality’s Inexorable Increase
A study of wage increases from the Federal Reserve Bank of New York right before COVID struck concluded that aggregate wage-growth data obscure problems for lower-wage workers in part because focusing on the percentage of wage growth for low-income workers misses the fact that percentage increases may be large but wages are still very, very small. Further, the unemployment numbers on which the Fed relies often overlook workers who left the labor force, get by only on contract work, and saw their wages stagnate or, worse, go downhill. Census data show that U.S. median household income before the 2020 crash rose largely because more households have multiple wage-earners. Two low-wage jobs may seem like more employment, but they in fact reflect the ever-greater struggle of lower-income Americans to make ends meet. U.S. under-employment – i.e., part-time or jobs for which an employee is over-qualified – was the principal U.S. wage generator before 2020. Studies going even more deeply into wage growth found nominal wage growth well below what “full” employment should create, especially for workers who are not college-educated white men.
And, all this was before the crisis hit. Since it has, underlying inequalities not evident even in these grim statistics have also erupted, perhaps most disturbingly in the preponderance of African-Americans and other minorities in low-wage service jobs. Sudden unemployment deprives these workers of whatever health-insurance coverage they may have had and, no matter the personal-health outcome, all these risks sharply undermine family financial security. The longer this lasts, the worse the income inequality.