Thomas Piketty’s controversial bestseller “Capital in the Twenty First Century” reenergized the debate among mainstream economists and the wider public surrounding the causes and consequences of heightened levels of income and wealth inequality. The emergence and later dominance in the last quarter of the 20th century of neo-classical macroeconomics had led to the downplaying of distributional issues and to an emphasis on reducing supply-side constraints. Nobel laureate and University of Chicago economist Robert Lucas, a leading exponent of new-classical macroeconomics, captured the orthodox viewpoint towards distributional issues with the following statement: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. … The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production”.
Recent research, however, has given credence to the notion that welfare costs associated with high levels of inequality are in fact substantial, and that less inequality enhanced the likelihood of attaining faster and more durable economic growth. Economists have also highlighted the role played by equality of opportunity in mediating the relationship between inequality and economic growth. In societies where intergenerational rigidities are prevalent, a rise in inequality will curtail long-term economic growth and limit upward mobility by, for instance, reducing investment in human capital acquisition. A consensus has gradually emerged that structural barriers to upward mobility do exist in the U.S. and that they may be hurting America’s long-term growth prospects. Furthermore, high levels of inequality may give rise to populism and create further growth hurdles (in the form of trade protectionism and immigration restrictions).
Following a surge in interest in determining the complex drivers of income and wealth inequality, we now have a sophisticated understanding of factors that influence economic disparity. Factors highlighted in recent research include: automation and skill-biased technological changes, the race between educational attainment and technological progress, the “winner-take-all” dynamic, the rise of superstar firms, globalization, tax policies and the decline in labor’s bargaining power.
An intriguing twist responsible for the sharp recent increase in wealth inequality is related to the concentration of financial assets among the top 10 percent of American households (the top 10 percent holds more than 80 percent of financial assets in the U.S.) and the relative performance of financial assets vis-à-vis real assets. Since 2009, stock and bond holders have gained tremendously, and this factor has contributed to the enormous wealth gap in the U.S. Meanwhile, the middle- and lower-income families, whose wealth is primarily in the form of housing wealth, have yet to fully recover from the shock of the housing market crash in 2007-08.
The COVID-19 pandemic and its uneven impact on the economy and the broader society has complicated attempts to project the future trajectory of economic inequality. History suggests that major pandemics have a tendency to reduce inequality. In “The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century,” Walter Scheidel makes a persuasive case that, during the course of modern history, inequality fell noticeably only in the aftermath of calamitous events such as “mass-mobilization warfare, transformative revolutions, state collapse, and catastrophic plagues.”
The simple rationale for the observed historical pattern relates to the relative bargaining power of labor vis-à-vis capital or landowners. Sharp population declines in the aftermath of catastrophes improved the relative bargaining power of labor and led to a surge in wages, and this in turn reduced economic inequality. Economic historians, for instance, have highlighted the significant impact of the “Black Death” pandemic on England during the 14th century and the consequent impact on its development trajectory.
Thankfully, due to modern-era health care systems, improved hygiene standards, and communication technologies, casualties from the COVID-19 pandemic are likely to be far lower than in prior worldwide pandemics. Early signs are that the pandemic has the potential to exacerbate rather than lessen economic inequality in the U.S. The stark difference in the impact of the pandemic on the high-skilled white-collar workforce (capable of easily transitioning to remote work) vis-a-vis the low-wage service sector workforce (dependent on face-to-face interaction) is expected to contribute to a widening of economic inequality. We are seeing the bifurcated nature of the pandemic’s impact on the U.S. housing market as well — the wealthy are taking advantage of historically low mortgage rates and buying larger homes while the unemployed and the financially fragile are facing evictions. The V-shaped stock market recovery, aided by the Federal Reserve’s liquidity injections and asset purchases, is also expected to boost wealth inequality.
The one bright spot has been the initial fiscal policy response. The bipartisan CARES Act has limited a potential surge in poverty and provided a significant albeit temporary income boost to poorer households and the unemployed. Going forward, the risk is that some of the temporary layoffs will become permanent and, just as in the aftermath of recent recessions, there will be an increase in job polarization and a disappearance of many routine-type occupations. The COVID-19 pandemic will speed up the deployment of technologies that are likely to aid contactless transactions, autonomous deliveries, e-commerce, telemedicine and remote learning. These trends, in the short to medium term, are likely to further split the job market and widen economic inequality.
Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.