If You Liked the Last Crisis ….

By Karen Petrou

• New data show that the COVID pandemic is creating even more income inequality than the great financial crisis, which is saying something.
• Wealth inequality is already climbing to unprecedented heights due to Fed intervention and resulting market gains.
• Absent fiscal policy that reduces income inequality and a change in financial policy benefiting wealth equality, post-pandemic inequality could be still more toxic, exacerbating longstanding challenges to macroeconomic growth and increasing financial-crisis risk.

We already know that the 2008 great financial crisis left the U.S. far more unequal in terms of both income and wealth than ever before.  Now, new studies from the IMF and National Bureau of Economic Research (NBER) show that the COVID economic crisis is still more distributionally destructive than the 2008 cataclysm.  Employment numbers – bad as they are – mask steep wage reductions for lower-income workers, demonstrating that – absent policy intervention – U.S. economic inequality may thus go from awful to abysmal, stoking all the anger already evident across the nation and increasing obstacles to rapid, stable recovery.

Data So Far

The IMF analysis assesses the income impact of the COVID crisis from its onset through April, a useful exercise because this was before the CARES Act tempered COVID’s force with the powerful fiscal stimulus programs now set to expire.  Using the Current Population Survey data that lie beneath unemployment reports, the paper confirms that lowest-wage workers experienced the most employment dislocation, with women and Hispanics the most adversely affected in demographic terms.  The lowest-quartile workers are harder hit this time around because the jobs they hold – i.e., those not subject to telework – have been disproportionately damaged in ways not offset by continuing employment in essential sectors. 

The NBER study looked at payroll data that provide more detail on employment and wages than the IMF study’s source and looked at these data up to the end of May.  The paper confirms disproportionate unemployment at the lower end of the wage scale and for women.  More than 37% of workers in the bottom quintile lost jobs as the worst of COVID’s unemployment hit in mid-April; the comparable number for top-quintile workers then was 10%, with these workers recovering jobs more quickly as employment rebounded at higher rates than low-wage workers.  Unlike the Fund paper, these findings do not appear to be sector-specific, but workers at firms with fewer than fifty employees are disproportionately hit from both an employment and wage perspective. 

Importantly, businesses cut worker wages at twice the rate of the Great Recession.  Given that the late-May data reflect an uptick in employment due to some state reopenings and that there is nothing good one can say about how that affected pandemic risk, the NBER study suggests high income-inequality risk beyond that evident in employment-only data.   

The income inequality identified by these data come in concert with sharp rises in wealth inequality due to financial-market ebullience.  Again, we cannot tell how long this will last, but it seems likely to be persistent given the Fed’s unflinching willingness to backstop financial markets with “whatever it takes.”  As a result, both income and wealth inequality may well rise past the already-record levels they achieved in late 2019. 

Growth and Risk

Put simply, economic inequality is very bad for economic growth even if that growth is disproportionately enjoyed by upper-wealth households.  IMF research finds that the most resilient economies are the most equal nations.  Even when external shocks are added to the duration over which growth is assessed, equality still determines growth, a finding corroborated in a global study of developed countries including the U.S. up to 2014.  Another IMF study examining the growth/equality trade-off across many nations over a fifty-year time span finds that, “slow or fragile growth and high inequality seem to be two sides of the same coin, and durable growth at a healthy pace will only be possible if growth itself becomes more inclusive.” 

As we have shown in prior posts, inequality and slow growth not only go hand in hand, but financial crises tag along.  A literature survey of the link between inequality and financial crises demonstrates

 a clear link that is not only a result of correlation, but also causation.  Most of these studies are posited on the instability resulting from large populations of low-income households who must sustain consumption with debt – i.e., countries all too much like the United States.

A study from the Federal Reserve supports the equality/crisis nexus with a comparison of data in the U.S. to an econometric model.  The model – always the construct of the economists who craft them – finds that income inequality stokes secular stagnation (i.e., the slow growth described above), deflation, asset bubbles, and financial crises.

The Importance of Being Equal

Although the Trump Administration is sympathetic to and even supportive of fiscal stimulus, the President has so far stoutly resisted any assertions that the U.S. is economically unequal and his supporters stand with him.  The Fed has increasingly acknowledged the inequality of the American economy but it continues to assert that none of this is its fault.  Even those at the Fed looking for policy remedies are focusing on data – i.e., measurements of Black unemployment – not the structural impact of the Fed’s ongoing focus on financial markets, not the economy as a whole.  However, emerging data show that macroeconomic pain – the proximate cause of the dangerous income inequality detailed above is combining with financial policy’s wealth-inequality effect to create a treacherous platform from which to enter a post-COVID economy.