The EconomistMay 16th 2020 Finance & economics 67F
or america’spoor, the covid-19 pandemic has delivered a swift
and brutal reversal of fortune. At the start of the year unemploy-
ment was plumbing new lows. Years of wage growth for low-in-
come workers had healed some of the scars left by the global finan-
cial crisis. Already by 2016, the most recent year for which figures
are available, the economic expansion had produced a smaller rise
in American income inequality, after taxes and transfers, than any
expansion since the early 1980s. Between 2016 and 2019 the weekly
earnings of low- and middle-income workers grew at an annual
average pace of 3.8%. Since covid-19 struck, however, a host of eco-
nomic statistics—and legions of pundits—have pointed to a resur-
gence in inequality. Yet if history is a guide, the pandemic could
eventually render the distribution of income more egalitarian.
There are many reasons why the well-heeled might suffer less
in the pandemic. Much of the plunge in asset prices that occurred
in March has since been retraced. In places like New York City and
Los Angeles, covid-19 seems to have hit poorer neighbourhoods
harder. Low-wage earners are often less able to work from home or
maintain social distancing. Interruptions to schooling widen the
gaps in achievement between children from richer backgrounds
and those from poorer families.
Meanwhile, workers on the lower rungs of the income ladder
have borne the brunt of job losses. America’s unemployment rate
rose by roughly ten percentage points, to 14.7%, in April—the high-
est since the Depression. The jobless rate for workers with a college
education went up by nearly six percentage points, to 8.4%; that
for workers without a high-school diploma leapt by just over 14
percentage points, to 21.2%. A new paper published by the Becker
Friedman Institute at the University of Chicago reinforces the
point. Between February and April, find its authors, employment
among workers in the top fifth of the income distribution dropped
by 9%. In the bottom fifth, by contrast, it plunged by 35%.
Were the crisis of unemployment to end as swiftly as it began,
the effects of these uneven job losses on inequality would be limit-
ed, and fleeting. Many jobless workers are earning more in unem-
ployment benefits than they did on the job, thanks to a top-up of
$600 per week enacted by Congress in March. Of the more than
20m Americans who were out of work in April, 78% were reportedtobetemporarilylaidoff.Butthe danger is that temporary job
losses become permanent. The authors of the Becker Friedman pa-
per calculate that active employment—or the number of workers
counted on payrolls—declined by 14% between February and
April. About 40% of that fall occurred at firms that had ceased op-
erations, at least temporarily. Not all will reopen. A new working
paper by Jose Maria Barrero of Instituto Tecnológico Autónomo de
México, Nicholas Bloom of Stanford University and Steven Davis
of the University of Chicago is similarly gloomy, concluding that
42% of pandemic-related job losses will be permanent. Mean-
while, the crush of claimants has overwhelmed some state govern-
ments and slowed the flow of unemployment aid. Top-up benefits
are due to expire in July, when millions will still be jobless.
The most vulnerable workers are therefore likely to be
squeezed hard by the recession. But if history is a guide, those at
the top of the income distribution could yet face a reckoning. Dis-
ruptive global events have often precipitated shifts towards a more
equal distribution of income and wealth. In his influential book,
“Capital in the Twenty-First Century”, Thomas Piketty points out
that high levels of inequality in the late 19th and early 20th centu-
ries were reduced by the calamitous events of the period from 1914
to 1945. In that time the share of income earned by America’s top
1%, for instance, dropped from 19% to 14%. The combination of de-
pression, war, inflation and taxes compressed incomes and laid
waste to vast fortunes. Walter Scheidel, a historian, goes further
still in his book on long-run inequality, “The Great Leveller”. Since
antiquity, he argues, only four forces have ever managed to reduce
inequality in a sustained way: war, revolution, state failure and
pandemic. (The troubles often coincide: a pandemic contributed
to the failure of the Roman empire; another coincided with the end
of the first world war.)
Past crises are a far cry from today’s difficulties. The Black Death
compressed income gaps by dramatically reducing the ratio of
workers to arable land. Even in the worst possible case, covid-19
will kill far fewer than the 30-60% of Europeans felled by bubonic
plague. Stockmarkets could plunge again, but it is very unlikely
that they will match the collapse of nearly 90% that took place be-
tween 1929 and 1932. Yet some comparisons can still be made. The
debts racked up by governments during this pandemic will in
some cases reach heights last seen during the world wars. When
governments eventually balance the books—and especially if they
reduce debt burdens via taxation, financial repression or debt re-
structuring—the wealthy could find themselves footing the bill.Time for a redeal
Furthermore, the crisis could have indirect effects that influence
the trajectory of inequality. In a critique of Mr Piketty’s arguments
published in 2017 Marshall Steinbaum, now of the University of
Utah, argued that the wars and the Depression of the 20th century
mainly led to greater egalitarianism by discrediting ruling elites
and the regressive policies that had enabled the rises in inequality
in the first place. That created space for social democracy to bloom.
Inequality fell not only because of higher taxes but also because of
extensions to the welfare state.
History need not repeat itself. Governments and economic sys-
tems of all kinds have struggled to manage the pandemic effective-
ly and equitably. But it does not take much imagination to see that
if politicians allow the costs of the pandemic to be borne unequal-
ly they could sow the seeds of a transformative populist backlash.
They would do well to heed the lessons of the past. 7Free exchange The great levelling
Although the poorest have so far been hardest hit, the pandemic could eventually lower inequality