How the Pandemic Could Affect Income Inequality

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Wharton’s Benjamin Lockwood talks with Wharton Business Radio on Sirius XM about income inequality in the U.S. in the wake of COVID-19.

President Donald Trump on Friday signed into law an unprecedented $2.2 trillion stimulus package to help keep the economy alive amid the deadly coronavirus outbreak that has shuttered countless businesses and put millions of Americans out of work. The Coronavirus Aid Relief and Economic Security Act, or CARES, contains $560 billion that directly benefits individuals in the form of cash payments of up to $1,200. The legislation also expands unemployment and paid sick/family leave benefits, offers forbearance on federally backed mortgages, waives penalties on some early retirement withdrawals, and offers student loan relief and protections for renters.

The aid package is the largest in U.S. history, dwarfing the $800 billion pumped into the economy by the American Recovery and Reinvestment Act of 2009. That money helped the country emerge from the Great Recession, but the rebound also cracked open a much larger wage gap. Economists say stagnant incomes coupled with rising prices for housing and consumer goods have created more income inequality, shrunk the middle class and left more low-income earners on the margins. The U.S. Bureau of Labor Statistics has determined that 40% of Americans don’t have enough money to cover a $400 emergency bill.

Income inequality was already a concern among academics, lawmakers and citizens alike before the pandemic, so the economic measures being taken now raise complicated questions about what policy will look like on the other side of the coronavirus outbreak. Benjamin Lockwood, Wharton professor of business economics and public policy, joined the Wharton Business Daily radio show on SiriusXM to answer some of those questions. (Listen to the complete podcast above.)

How does this pandemic differ from the Great Recession?

The economic havoc wreaked by the coronavirus pandemic is an outlier, historically speaking. It’s nothing like the Great Recession, the Great Depression, the oil crisis of the late 1970s or the dot-com bust of the late 1990s. Those economic fires were ignited by internal factors, Lockwood said.

“They had to do with something inside the financial sector,” he said. “There was some run-up in asset values that then stopped paying or turned out to be not so valuable, and there was a big financial crash afterwards. That trickles through to the real economy and makes it harder for people to get loans, and people begin getting laid off.”

In contrast, the pandemic is causing external pressure on the economy. It’s not something fundamental about the markets or asset values, so it can’t be fixed through regulation. The best solution, Lockwood said, is to fix the public health crisis first through wider testing for the disease, shelter-in-place orders and other actions designed to contain COVID-19.

The pandemic presents an “unusual situation” for government policy because typical remedies to encourage hiring and consumer spending will not be effective without prioritizing health and safety, he noted.

“Really, it’s getting through this issue and solving the public health crisis itself,” he said. “That will be the best thing for the economy in the long run.”

Will income inequality increase?

For Lockwood, this question is especially important because even though America enjoyed record low unemployment before the pandemic, there were already economic red flags. An increasing number of people — about 40% of the income distribution — were a paycheck away from homelessness, hustling gig jobs without benefits, working without paid sick leave and living in a general state of financial despair.

“Despite how good things looked at the outset, we were actually still pretty fragile in the face of something like this,” Lockwood said.

When low-wage earners, such as restaurant workers, lose their jobs during business closures forced by the pandemic, short-term policies such as the direct cash payments from the stimulus package are helpful. Relief for small business owners in the form of loans also helps in keeping the economy moving. But those measures will not stop the inequality gap from widening in the long run.

“As we get past this initial short-run set of policies, I just want to flag that this will be a powerful argument for doing things that reduce income inequality and that provide a social safety net in the longer term so that our society is better-placed to deal with these kinds of threats,” Lockwood said.

“The nice thing about giving people cash is that then they can choose what thing they want to spend that on.”

Will America embrace universal basic income?

Last year, when former Democratic presidential candidate Andrew Yang floated his idea of giving every American a $1,000 check, some critics saw it as a crazy, impossible idea. But that’s exactly what the CARES Act provides. Lockwood thinks it shows some creative problem-solving on the part of Congress because the direct payments allow individuals to decide where that money is needed most.

“When you have a sudden financial shock like this, it’s actually pretty hard to tell what specific needs different households are going to have,” he said. For some, it might be food or rent. For others, it might be making payments on the car that gets them to and from work.

“Just giving in-kind targeted benefits like food stamps might not be the most useful way to support people,” Lockwood said. “The nice thing about giving people cash is that then they can choose what thing they want to spend that on. And whatever their greatest need is, we trust that they’re going to funnel the cash to that greatest need.”

Lockwood added that he isn’t sure whether this experiment will push America to adopt a more permanent form of universal basic income (UBI), which is defined as a guaranteed fixed payment from the government. It’s long been a controversial topic, although he finds there are arguments that can be made for doing so.

“I often caution people that it doesn’t make a ton of sense to talk about a universal basic income without simultaneously pairing it with the funding side of that. How do you think you’re going to raise the revenues to fund that universal basic income?” he said. “I think just a UBI on its own is kind of an underspecified policy. But in this context, I’m really glad to see this as part of the package that was just passed.”

Should the federal government help cities and states?

The breathtaking loss of employment and related downturn in consumer spending during the pandemic has meant massive losses for cities and states that rely on wage and sales taxes for revenue. The aid package includes nearly $340 billion for state and local governments, mostly for COVID-19 response, education and community assistance. Lockwood thinks the move is an effective fiscal policy because the federal government can borrow at essentially negative interest rates right now and use that money to help prop up cities and states that are suffering.

“Everybody is more exposed to their fragility when a shock like this hits.”

It’s too early to tell what the impact will be on economic policy, but that boost in local aid is something to consider in the long term, Lockwood said. There are other considerations, such as how working from home, which has increased dramatically during the pandemic, could inform the very structure of policy.

“If we’re starting to see a shift toward more people working at home because this was just the push that a business needed to realize that this makes a lot of sense for them in the longer term, that may cause some longer-term changes in which kinds of tax policies, or the balance of rates across different tax policies, are most effective for raising the revenue that we need,” he said.

Will we return to the status-quo?

Lockwood said it is correct for policymakers to focus on short-term fixes right now because large, structural changes “tend to slow things down and gum things up a bit more.” However, there are important lessons to be learned in hindsight about what worked, what didn’t, and what needs to shift.

“I’m hopeful that people kind of put a pin in the things that we are learning from this process and the kinds of creative policies that we’re passing at the moment, and then think about how some of those mechanisms can be built into automatic things that kick in when we face some sort of crisis,” he said.

Returning to his central message about income inequality, Lockwood strongly advocated for strategies that will narrow the gap and put all citizens on better financial footing.

“Everybody is more exposed to their fragility when a shock like this hits,” he said. “The more that we can implement long-term policies that provide strong social safety nets, that provide substantial redistribution and worker protection and so on to help people remain in a strong financial position going into these kinds of crises, that also can be a really powerful thing to think about in the longer term.”

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