Many Americans wondered whether income inequality would grow during the pandemic, and new data suggest they were right to be concerned. The better question is not whether inequality grew, but why.
The Federal Reserve last month reported American wealth actually increased during 2020, despite one of the steepest economic freefalls in U.S. history. The almost immediate rebound once the strictest lockdowns ended – the so-called V-shaped recovery – more than made Americans whole, at least in the aggregate.
The extraordinary actions by the federal government in 2020, committing some $2.6 trillion (or 12% of gross domestic product) to emergency measures during that fiscal year, will no doubt receive much of the credit. Robust government spending to offset strict government lockdowns made some sense, although subsequent stimulus and bailouts of state and local governments have swung the pendulum toward overcorrection.
But even the early infusions of money might’ve missed their target. Wealth increased the fastest, at 14.5% year over year, among the upper-middle class (those in the second-highest of five income groups, or quintiles). The next highest rate was for the top quintile, at 12.6%. Then came the middle class (9.8%), the lower-middle class (8.9%) and, well behind the others, the lowest quintile at a mere 1.5%.
Might the scattershot approach of the emergency funding, trying to shovel as much money out the door as possible without taking time to determine who really needed assistance, have exacerbated income inequality?
These are vast groups – each quintile represents more than 60 million Americans – and they comprise many different individual experiences. Still, higher-income Americans tended to be better placed to work remotely without missing a paycheck, compared to lower-paid service-industry employees who in some cases are only now returning to work. The gulf between the highest earners and the lowest indicates a potentially flawed policy response.
Comparing 2020 to the previous recession in 2008-09 is instructive. Consider that the bottom quintile last year collectively gained about $50 billion of wealth, almost exactly the same as in 2008-09. But the top quintile this time gained more than $9.8 trillion of wealth – compared to a loss of more than $5.3 trillion last time.
No reasonable person wants to see any group lose wealth. And certainly, there can be benefits when those at the top of the income ladder prosper: more investments, more jobs, higher wages.
I would even argue that, to the extent the emergency response prevented deep losses among the highest-income Americans, it may have made possible the sharp rebound for all. One of the biggest turnarounds for the top quintile was in wealth from private businesses: a gain of about $600 billion this time vs. a loss of some $2.5 trillion last time.
That reversal in fortunes probably saved many Americans’ jobs.
But there’s a difference between policy that prevents an economic collapse, and policy that blithely distributes (borrowed) money regardless of need. The latter, an apt description for the response to the pandemic, led to multitrillion-dollar gains in wealth from real estate and equities for the top income group. Other income groups also saw their homes and stock portfolios rise, as the “stimmy” checks Congress sent so indiscriminately became fodder for day traders and homebuyers.
Unfortunately, round two of government-created inequality is already under way. I’m talking about the steep price increases that threaten to spark a new era of inflation.
Some of the most-discussed price spikes, such as for lumber, are starting to return to earth. But artificially higher wages at restaurants and other small businesses, forced to compete for workers against extra jobless benefits, may lead to inflation that doesn’t retreat nearly as quickly. The lower-wage workers who supposedly benefit from these market distortions will be the very ones spending a disproportionate amount of their new income on everyday staples, and priced out of home ownership.
It’s a good time for Reagan’s reminder: A government big enough to give you everything you want is big enough to take away everything you have.