Wealth inequality in a post-Covid-19 world

Ian Orton, 04/05/2020

Every black cloud has a silver lining and the Covid-19 pandemic may be no exception in this respect, especially to advocates of greater wealth equality.

According to Walter Scheidel, an Austrian historian who teaches ancient history at Stanford University, but who has developed a secondary specialism as an historian of wealth inequality through the ages, pandemics like Covid-19, are one of the “four horsemen of levelling”. 

Along with mass-mobilisation warfare, transformative revolution and state collapse, lethal pandemics have played a significant role in reducing income and wealth inequality.

But greater equality of income and wealth, especially if brought by one, or all of the “four horsemen” may not be very efficacious from the standpoint of any of the beneficiaries.

“All of us who prize greater economic equality would do well to remember that with the rarest of exceptions it was only ever brought forth in sorrow,” he writes in The Great Leveller: violence and the history of inequality from the Stone Age to the Twentieth First Century.

“Be careful what you wish for.”     

The reality is that far from raising the wealth of most people at the expense of the very rich, attempts to generate greater equality, either accidentally or deliberately, have a habit of making everyone worse-off.

Of course there have been exceptions, the most significant of which took place in the aftermath of World War 2.

The macro-economic and social welfare policies initiated by post-war governments in Europe and America certainly did succeed in producing significant increases in the standard of living enjoyed by most people as well greater equality of income and wealth.

From 1980 onwards, however, and especially during the past decade, inequality, as measured by the gini coefficient has increased significantly. This has aroused much angst and caterwauling among certain segments of the population, not least the liberal left.

The growth in wealth experienced by the top 0.1 percentile has aroused considerable ire for a variety of reasons.

Most of the concerns raised can usually be dismissed as yet another manifestation of the confusions associated with the inability of people to differentiate between absolutes and relatives.

Claims that that the gap between the top 0.1 percent and the 50th percentile in terms of wealth has increased significantly since 2000 (which it has) always seem to overlook the fact that the absolute wealth, however defined, of the latter has nonetheless increased.

Of course mean and median figures translated into real life may produce a different picture. And the reality is that a proportion of the population are always likely to have no net wealth. Some may even have negative wealth.  

The current distribution of wealth in Europe and North America may not have been optimal. But at least it hadn’t appeared to reach a critical stage that could engender both economic efficiency as well as the social fabric.

Whether this is likely to change in a post-Covid-19 world is an impossible question to answer.

In the short-term, as in the immediate aftermath of the global financial crisis, the wealth of the rich and very rich is likely to take a disproportionate hit as significant portions of national economies are effectively closed-down and asset prices fall.

But even here there are likely to be winners as well as losers. Anyone involved with the “world of remote everything” should do well as a result of the attempt to rejig life during the pandemic.

This is reflected in the stockmarket valuations of technology companies. The share prices of Alphabet, Amazon, Facebook and Microsoft, all of whom reported increased earnings during the first quarter, have all increased during the pandemic. Indeed they now account for around 25 percent of the S&P 500 index.

Firms active in the healthcare sector have also done well.

Going forward the rich may benefit disproportionately as a consequence of the latest relaxation of monetary policy.

The huge surge of liquidity unleashed by central banks may end up in the stockmarkets helping to boost, or at least underpin, the prices of financial assets. This will boost the wealth of significant elements of the monied classes even further.

But there will be losers especially if, as in the case of Sir Richard Branson, they are forced to use their own personal wealth to support or bail-out the commercial companies they own or have significant stakes in.

Given the lobbying power of the very rich there is always the risk that could benefit substantially through any post-lockdown largess distributed by governments to keep their economies afloat.

And this will require considerable effort as Mohamed El-Erian, a former long-time chief investment officer at Pimco, the world’s biggest bond manager, points out.

“This [Covid-19] is much bigger than 2008,” he told The New Yorker magazine. 

“2008 was a massive heart attack that happened to the financial markets. You could identify the problem and apply emergency remedies and revive the patient quickly.

“This is not just a financial stop. This is infection all over the body, damage to virtually every limb and organ. The body was already so fragile. Those of us who have had the privilege of studying failed states have seen this before, but not in a big country like the United States, let alone a global economy.”

The financial cost will be colossal. The International Monetary Fund (IMF) estimates that government debt worldwide will rise by $6 trillion by the end of 2020 to $66 trillion, a rise from 103 percent of global GDP to 122 percent.

This is not unprecedented. The UK debt as a proportion of GDP was around double this level at the end of World War 2.

And although it can probably be financed, especially at the prevailing interest rates, it will have to be paid back eventually.

Increased economic growth and an uptick in inflation may carry part of the load. But taxes will also have to be increased at some stage.

If this is the case the prospect of a wealth tax may emerge, especially if there is a perception that the rich and very rich are not paying their share.

In the past wealth taxes have often been difficult to implement and enforce. But this may no longer be the case in the new post-Covid-19 world.

If this is the case then, along with other social welfare measures that may also be introduced to help redress some of the failings identified during the pandemic, inequality within national economies may be reduced.