Pandemic’s Effect on Wealth Gap Unclear Even as US Stocks Reach New Highs

Poverty more meaningful to focus on than wealth and income inequality, says expert
August 26, 2020 Updated: September 1, 2020

News Analysis

As U.S. stocks make new record highs and attention gravitates to the tech titans and their billionaire CEOs making money hand over fist, focus often turns to the wealth gap.

The wealth gap, or wealth inequality, is posited as a major issue of our times. It has also been used as an argument for more wealth redistribution through higher taxes on the rich. 

Yet it’s a complex and highly misunderstood issue subject to key factors such as age differences and changes in people’s income over their lifetime and less so the stock market.

And what is actually happening to the wealth gap during the pandemic is hard to predict, according to an expert on poverty. The immediate impact on inequality—such as how much more total net worth is owned by the top 1 or 5 percent compared to the bottom 10 or 20 percent—is not obvious.

“It’s just very difficult to predict. There’s so many variables that come into play in terms of determining inequality,” Nipissing University economics professor Christopher A. Sarlo told The Epoch Times.

Sarlo says that one must also consider how much income and wealth were lost as the lockdowns took hold and not simply focus on the rebound since the March stock market lows, which is eye-popping in itself and makes for snappy headlines.

“There does not appear to be any interest in explaining how wealth inequality happens. It is as if wealth inequality is an obvious ‘bad’ not requiring any clarification,” according to a 2017 paper by Sarlo for the Fraser Institute.

Wealth is defined as household net worth. Income gets converted into wealth when it is spent on things like homes and stocks.

As an example of one representation of the wealth gap, based on a 2018 Organisation for Economic Cooperation and Development study using 2015 data, in Canada the top 1 percent owned 16.7 percent of household net wealth compared to 12.4 percent owned by the bottom 60 percent.

The wealth gap is considerably larger in the United States where the top 1 percent owned 42.5 percent and the bottom 60 percent owned just 2.4 percent.

“If the population is aging, we’re likely to have a bigger wealth gap. There’s just more people at the top end,” Sarlo said. Most of those who make up the less wealthy are the young that have not had the time to build up wealth.

This is a consequence of the life-cycle hypothesis, which holds that wealth accumulation is a steady, lifelong process. This hypothesis is the dominant explanation for wealth differences, as it likely accounted for 80 to 87 percent of wealth inequality based on 2012 data, according to Sarlo’s paper.

Sarlo also pointed to a notable problem with relying on reported incomes to measure wealth gaps, which is that incomes are not always accurately reported. A 2015 Bank of Canada paper using 1998 and 2004 data found that income under-reporting is pervasive, found in 35 to 50 percent of households, and represents 14 to 19 percent of GDP.

COVID’s Wrinkle

It’s “quite possible” that when the page is turned on the pandemic, it could be seen as an event that exacerbated the wealth gap, according to Steve Ambler, C.D. Howe Institute’s David Dodge Chair in Monetary Policy. He says that income inequality could rise based on wealthier people having jobs that are more amenable to working from home.

“People who are working in sectors where they can more easily work from home … typically people who are already better educated and have higher incomes, so that might in fact exacerbate … income inequalities,” Ambler told The Epoch Times.

In contrast, people in retail, parts of the services industry, and travel and tourism have been hit harder during the pandemic and are less able to work from home by the nature of their work.

But an aspect of the unpredictability of wealth inequality comes from examining what happened to incomes coming out of the financial crisis of a decade ago—as the economy recovered, the rich didn’t necessarily get richer.

In the period just before and in the aftermath (from 2007 to 2017), average income for the top 1 percent declined by 14 percent, while overall average income rose about 5 percent, according to a report by economics professor Michael R. Veall for Policy Options

This contrasts with the period from 1982 to 2007—an era without a shock the magnitude of the financial crisis or the pandemic—when the top 1 percent’s income more than doubled, while average total income rose about 18 percent.

Active Central Banks

Given the impact of the lockdowns, inflation in Canada is running well below the 2 percent target at just 0.1 percent for July.

“It’s going to be quite a while before we get back to 2 percent just because there’s going to be a lot of slack in the economy for the foreseeable future,” Ambler said.

The Bank of Canada is thus committed to making borrowing for households and businesses cheaper to get inflation back to target by buying bonds on a massive scale and holding interest rates near zero. The U.S. Federal Reserve faces a similar situation.

This will continue to fuel elevated stock markets and real estate as investors look for higher returns.

Thus, those who own these investments, have the option of working from home, or are better positioned in other ways to adapt in a post-COVID lockdown world, are expected to continue accumulating wealth as per the life-cycle hypothesis.

But despite the nosedive in March and the deep economic distress, the S&P 500, a broad gauge of the largest U.S. stocks, is now up more than 6 percent in 2020. Canada’s TSX is down about 3 percent for 2020. 

Central bank support and government aid programs have helped the two indexes rebound 54 and 48 percent respectively from their recent lows of March 23. Also, Canadian and U.S. residential real estate saw some of the highest levels of sales ever in July. 

Sarlo says that while measuring inequality and comparisons between rich and poor are interesting, what is more meaningful and deserves more attention is what is happening within the lower income rungs—poverty.

“Who really cares whether inequality is going to 5 percent,” Sarlo said. “The human story here is … why do we have people who are going hungry? Why do we have homeless people?”

He downplays the wealth gap also because it can often be misinterpreted and misused.

“All the focus on inequality is just all about envy. It’s nothing else,” Sarlo said. “It’s just people looking at someone else and seeing them maybe get ahead without factoring in how hard they worked or how intelligent their efforts have been.”

Follow Rahul on Twitter: @RV_ETBiz