NewsWire: 6/22/2020
- A new piece in The Economist puts forth an unexpected argument: Could the pandemic lead to reduced inequality? Though low-income workers have borne the brunt of the economic impact so far, history indicates that calamitous shifts such as war and disease can ultimately lead to more egalitarian social policies over the long term. (The Economist)
- NH: The poor have taken the brunt of job losses during the pandemic. A recent paper by the Becker Friedman Institute found that employment among the bottom fifth of the income bracket has fallen by 35%. In contrast, employment among those in the top fifth has fallen by only 9%.
- But The Economist argues that while times of great crisis often hurt the poor first, they inevitably reduce the wealth of the rich. Historian Walter Scheidel has argued that, since the dawn of civilization, only four types of events have reliably reduced wealth inequality: total wars, violent revolutions, state failures, and pandemics. According to Thomas Picketty, from WWI through the end of WW2 the top 1% of America saw its share of income fall from 19% to 14%. This was a period of war, depression, and disease.
- Wealth and income get equalized in such eras for two reasons. The first reason is that the rich always have the most to lose during disasters--from plunging markets, imploding demand, bankruptcies, national insolvency, and (of course) the outright destruction of property. Congress and the Fed have shielded Americans pretty well from these outcomes thus far. But most of the economic and financial damage may not yet be visible.
- The second reason is that governments typically place a high priority on protecting ordinary people from destitution. This may require large income or wealth transfers from the rich to the middle-class and poor. We'll see transfers of income if the income of the wealthy is taxed. We'll see transfers of wealth if assets, net worth, or inheritances are taxed--or if creditors are fleeced through accelerating inflation. Some say we can borrow indefinitely at no cost so long as interest rates remain near-zero. But that can only happen in a scenario in which our economy never grows again, and the endgame of that scenario is a country that none of us would much want to live in. (See "In Debt We Trust.")
- The likelihood of sizable economic redistribution through policy becomes even larger when a disaster occurs in an era of mounting populism. And that's pretty much where we find ourselves today. So, to that extent, The Economist has a good point. Back in the early 1930s, Governor Huey Long of Louisiana--the great "kingfish" himself--used to say, "Every Man a King." But it's hard to make every man a king unless you dethrone most of those who now tower above the average man.
