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  • Writer's pictureMihir Shahi

The Inequality Pandemic

An ignored but crucial impact of the COVID-19 pandemic has been enhanced levels of economic inequality. The waiter who lost their job looks enviously at the billionaires of the world, who have seen their net worth rise by $1.1 trillion during 2020. In this article, I will explain why governments around the world must prioritise reducing inequality as we emerge out of the pandemic.

The impact of the pandemic on inequality

Inequality has risen as the lowest-paid workers are disproportionately represented in sectors that have been hit by lockdown restrictions. In Britain, the lowest earners before the pandemic have lost their jobs at four times the rate of the highest earners, a trend that is found across the world. In the United States, the Bureau of Labour Statistics (2020) estimated that an employee in the bottom fifth of earners was four times more likely to lose their job compared to an earner in the top fifth of income distribution in April 2020. As a result, those at the bottom of the income distribution were at the greatest risk of unemployment due to the economic crisis caused by COVID-19, leading to increased inequality as the poorest have become even poorer.

This contrasts with the experience of the wealthy during the pandemic. The Institute for Fiscal Studies (2020) describes how households in the top quintile of the income distribution in Britain spent nearly a third of their total expenditure on services that have been shut down due to the lockdown. As these services have become harder to consume due to government restrictions, households that haven’t suffered any income fall have gained wealth through saving This suggests that while the poorest in society have struggled with unemployment and poverty, the wealthiest have actually seen their economic standing improve.

Worryingly, the Federal Reserve’s response to the COVID-19 pandemic has heightened wealth inequality. By slashing interest rates and pursuing unprecedented levels of quantitative easing (bond buying), central banks have pushed up asset prices. Given that the main beneficiaries of rising asset prices are the wealthy, who are more likely to invest in the stock market, wealth inequality has risen considerably. The data supports this hypothesis, with the wealthiest 1% of Americans appropriating 75% of all stock market gains during 2019, suggesting that stock market gains since the pandemic would have also disproportionately benefited the wealthy.

Why inequality is a pressing issue

“Poverty is the worst form of violence.” Gandhi’s words ring true now more than ever, with increased inequality due to the pandemic threatening to turn back the clock on 20 years of progress in reducing poverty. The World Bank (2020) suggests that if inequality were to rise globally by 2%, 500 million more people will still be living on less than $5.50 a day in 2030 than if there was no increase in inequality. Consequently, global poverty levels would be higher in 10 years than they were in 2017, with 3.4 billion people living on less than $5.50 a day.

If the increase in poverty does not convince you that inequality is an important problem, perhaps its impact on economic growth will. Although a degree of inequality is desirable for economic growth, high levels of inequality can actually hold back growth. According to the Keynesian theory of consumption, the marginal propensity to consume differs by wealth, with wealthier households having a lower propensity to consume than poorer households. As a result, the growing share of national income that is accruing to the wealthy is not translated into higher consumption, which benefits all, but is instead hoarded by the wealthy. Alan Krueger (2012) estimates that if the $1.1 trillion earned by the top 1% of US households between 1979-2008 had been earned by the bottom 99% instead, the annual consumption would be $440 billion, or 5%, higher. As a result, rising inequality due to the pandemic threatens economic recovery.

Another more interesting justification for the argument that inequality is harmful to all is that it affects our collective quality of life. In the Spirit Level, Wilkinson and Pickett (2009) argue that there is a causal relationship between greater levels of inequality and higher rates of health and social problems due to ‘status anxiety’. The argument is that income inequality is harmful because it places people in a hierarchy which increases status competition, leading to poorer health outcomes. The most startling discovery was that inequality affects the wealthy as well as the less well off through ‘status anxiety’, as the psychosocial impact is measurable across the income distribution. Therefore, given that everyone is negatively affected by greater levels of inequality, surely governments must prioritise addressing the inequality crisis.

What to do?

I do not envy the position that policymakers are in. Given the black hole that governments are facing in their finances, there seems little leftover for welfare policies. However, a good start would be to begin to treat income derived from capital (dividends), the same as regular income. The windfall from the favourable tax treatment of capital overwhelmingly favours the wealthy, and as a result, treating capital gains as ordinary income would help reduce wealth inequality. Overall, inequality will be the defining problem facing governments over the next decade and deserves to be treated as such.

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