Blog: Plagues often reduce inequality. The first pandemic of the digital age will make it worse.4/30/2020
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First, I want to wish you and your loved ones health and safety. It's obviously a scary time, and I hope that you have managed to stay safe these past few months. Many of the issues that not too long ago dominated the news (Democrat primaries anyone?) have been washed over by the coronavirus. It makes sense too. It’s rare to see an issue touch everyone’s lives around the world in such a profound way. And the costs in terms of human lives are staggering. As I write this, there are over 800,000 cases of the virus and about 40,000 deaths. Meanwhile, the US economy seems to be in the midst of its sharpest downturn since the end of the Second World War, ending the longest bull market in American history. In one week, 3.28 million workers filed for unemployment, and this number does not even capture the scale of the damage brought on by the virus—consider all the people who do not qualify for unemployment benefits or don’t know that they do qualify. When it’s all said and done, 30 percent of Americans in the labor force may be unemployed. It’s worth noting here that, as frightening as all of this is, it is ultimately under-resourced communities in developing countries—where people often live in close proximity— that may suffer the most. Times of distress like these are ones that, unfortunately, expose the societal vulnerabilities that emerge from high levels of economic inequality. Low-wage employees, whose work is disproportionately physical, face the difficult choice between exposing themselves to the virus and losing any source of income. America’s low savings rate, the rising costs of housing in many cities, and the lack of health care for many people all compound these problems. Given the unique times we’re all living in, I’ve decided to dedicate this issue of “The Difference Principle” to the coronavirus and the ways it is interacting with American inequality. This month, “Spotlight” will focus on the unique challenges low-wage/low-skill workers face during this pandemic. The “Big Ideas” section will highlight nine pieces that can give us insight into how the pandemic, recession, stimulus, and aftermath of this crisis is affecting economic inclusion. I’ll briefly discuss 15 other pieces in “What Else I’m Reading” and conclude with “From the Bookshelf”, where I’ll discuss Keith Payne’s seminal book—on the health and psychological effects of inequality—“The Broken Ladder”. Finally, I want to send the following resources, which I hope may be helpful as we all grapple with the coronavirus:
Thank you for reading. See you in May. —Julian Sign up for “The Difference Principle” here. To receive emails when I publish my own work, sign up here. If you enjoyed this newsletter, feel free to share it. You can also donate to help keep this newsletter going. Spotlight (In “Spotlight”, we highlight one report or story from the past month that deserves particular attention.) The Problem of Social Security during the Coronavirus Pandemic The economic fallout of the coronavirus will be felt everywhere. In the US, however, the impact of the pandemic will vary across states, reflecting the strength and variation of social security systems. Unfortunately, some states are particularly unprepared to protect their members in the face of a sharp rise in unemployment and a powerful recession. Already, stories of overwhelmed social security programs provide a chilling glimpse into what may happen without a swift government response. Suicide, domestic abuse, and substance abuse hotlines are overwhelmed. In expensive cities, the $1,200 direct government transfer may cover many people’s rent, but little else. And last week’s 3.3 million unemployment insurance claims marked a nearly 1,500% increase from the number filed just three weeks ago. This month, I will highlight this issue by briefly discussing four pieces that can give us a picture of which states possess a social security system equipped to deal with this recession. What should governments—local and federal—be doing to curtail the windfall of this downturn? I’ll begin with a report from the Center on Budget and Policy Priorities on state preparedness for a recession. The situation in short? Not good. The study finds that one-third of all states are unprepared for even a moderate recession. What makes a state unprepared? The authors argue inadequate budget reserves, paltry unemployment insurance systems, inaccessible Medicaid programs, and expensive higher education are indicators that a state will struggle in the months ahead. Among America’s 50 states, Mississippi—a state that refused to adopt any of the 2009 Recovery Act reforms, which provided incentives to modernize unemployment insurance—fared the worst. Indeed, the report points out that unemployment insurance in Mississippi and Nebraska, among other states, barely functions. Florida, South Dakota, New Hampshire, and Louisiana were also among the worst in every category, but the report notes that in 14 states, no more than 40 percent of unemployed workers qualify for benefits. The ability to dish out unemployment insurance (UI) is a particularly important measure to look at not only because it helps directly protect the livelihoods of many of America’s most vulnerable workers; it also automatically injects spending into the economy during a downturn. Unfortunately for many states, the 2008 Great Recession decimated reserves dedicated to UI, which are held in accounts at the U.S. Treasury. A report by the Upjohn Institute finds that if a recession as severe as the average of those occurring since 1975 would occur, 18 states, including New York, California, and Texas, would exhaust their UI reserves and need to borrow. And the Economic Policy Institute finds that UI claims are increasing most rapidly in Nevada, which saw its second-largest increase in claims ever, followed by DC and Washington. So what do we do? Emmanuel Saez and Gabriel Zucman, who I covered last month, are economists on the frontlines of studying inequality, recently drafting the wealth tax proposal Senator Warren would push for in her campaign. They are now advocating a series of reforms the US could take to improve its social security and avoid a worse recession. At the top of the list is protecting American jobs (many banks and policy analysts have made similar calls). As the US sees the swift destruction of a high number of jobs, European governments are protecting employment by subsidizing wages through direct payments to employers. Britain, for example, is supplying workers with 80 percent of their pay each month. By contrast, it is only when American workers are laid off that they can then file for unemployment insurance. Even if UI is generous, Saez and Zucman argue, allowing unemployment to rise—followed by a prolonged period of rehiring when the recession ends—would be inefficient. In addition to proposing something closer to the European approach to dealing with the Coronavirus Recession, Saez and Zucman argue in favor of Covidcare for All—health insurance for COVID-19 related care for all US residents. They conclude by discussing the implications of the pandemic on economic inequality. Most importantly, as low-wage/low-skill workers disproportionately suffer during this downturn, in part because their work rarely can be done at home, many businesses are benefiting. As brick and mortar stores close, companies like Facebook and Amazon are seeing a boom in traffic and sales. They argue that the government should impose excess profit taxes, as it did in a number of cases during periods where companies experienced abnormal profits (e.g. World War II and the Korean War). The conclusion of the four pieces I discussed here is clear. High inequality and the rupturing of many workers’ livelihoods is not an inevitability of the Coronavirus Recession. It is a political choice. Read Center on Budget and Policy Priorities report. Read Economic Policy Institute blog. Read Upjohn Institute report. Read Saez and Zucman. Big Ideas: Coronavirus (“Big Ideas” showcases particularly interesting stories and reports from the past month—organized by subject.) ~ Special Focus: The Pandemic~ Policymakers should embrace a worse recession to save half a million lives As anyone following the coronavirus right now knows, health pandemics involve clear tradeoffs, which policymakers must consider. On the one hand, by implementing rigid social distancing restrictions, countries can save lives. However, this may cause a worse recession, and, as we discussed last month, recessions are associated with enduring damage to health and livelihoods for the people most affected. On the other hand, so the argument goes, policymakers can choose to limit restrictions, allowing for a worse outbreak of the virus (as well as more death) but possibly preventing a severe recession. This report assesses these trade-offs and estimates the optimal combination of recession-stopping and virus-stopping policy. It finds that a limited response to the virus would result in a mild recession but a pandemic peak in which 8.4 percent of the US population is actively afflicted with the virus—this means 215 million infections total and 2.2 million Americans killed. The authors argue against this outcome, favoring instead a sharper recession that reduces the number of Americans killed to 1.7 million and a virus infection peak of 5.1 percent. Read. ~ Special Focus: The Recession~ Three financial firms estimate the impact of the coronavirus How bad will the coming recession be? And what should policymakers do to combat the economic downturn? Here’s a snapshot of what Wall Street is thinking. Goldman Sachs decreased its expectations of US economic growth for 2020 to -3.8% growth, and a chief economist predicts a 24 percent drop in real GDP in the second quarter—2.5 times larger than the previous post-war record. Goldman Sachs predicts that things will improve in the third quarter, depending on the trajectory of the virus; however, they note there is a significant risk the virus will continue to spur recession past the second quarter. Fitch Ratings is somewhat more optimistic—they predict US growth will be 1 percent in 2020 (the pre-virus estimate was 2 percent), although they note their estimate may be upper bound. UBS argues that, since GDP will inevitably fall, the government should focus on saving jobs through wage subsidies. This is a policy Europe is using right now to combat the recession. Read Goldman Sachs. Read Fitch Ratings. Read UBS. Debt: Even before the crisis, Gov. spending was rising faster than revenue During recessions, governments will usually embrace larger deficits in order to boost spending and prevent the economy from collapsing further. This study argues that, even prior to the coronavirus pandemic, the federal budget was on an unsustainable track—prior to the crisis, the Congressional Budget Office (CBO) projected a $1 trillion deficit for the fiscal year 2020. If these trends continue, revenue falling short of spending each year, the CBO estimates that the deficit will increase by nearly $1.6 trillion by 2030. And social security, health, and interest on the debt would make up 93 percent of the total growth in spending, absorbing 127 percent of the expected total growth in revenues. The authors argue that, as the US expands social security to combat the recession, it is even more imperative to get the deficit under control. Read. ~ Special Focus: The Stimulus~ Debatable: Should airlines receive a bailout? What about everyone else? Bailouts are often a contentious issue. In 2008, the US effort to save banks sparked political outrage. This time the coronavirus is threatening the aviation industry, among others. Should the federal government step in to save vulnerable companies? In her column for the Financial Times, Rana Rooroohar argues that individuals and small companies should receive a bailout, not large corporations. She points out that American companies have, in the past few decades, spent their earnings by downsizing and enriching a small number of people, as opposed to reinvesting to improve productivity. The aviation industry, in particular, has seen large margins in recent years, but it has spent much of its money on stock buybacks that consolidate wealth in the hands of rich asset holders. It was ultimately this class of people—asset holders— who benefited most from the post-2008 recovery, Fooroohar argues. Indeed, it was not uncommon for individuals who lost their house because they couldn’t pay their mortgage to see their home hoovered up by the same private equity groups that had received a bailout. This time, money should be spent to provide security for vulnerable individuals (e.g. the three-quarters of New York City students who live at or below the poverty line) and small companies. On the other side of the debate, a report in Brookings argues in favor of bailing out the airline industry, pointing out that airline companies are not responsible for this crisis but are highly capital intensive, would be difficult to rebuild, and employ many workers in geographically concentrated areas. The government should bail out the airline industry, the authors argue, so long as it limits stock buybacks and represents consumer rights groups in negotiations. Read Brookings report. Read the Financial Times column. Congress’s plan for student loan relief mostly helps wealthier borrowers Congress’ approach to student aid assistance in its stimulus package is deeply regressive, a Brookings report finds. Instead of providing relief to particularly vulnerable borrowers, the current plan “showers tax cuts on high-income workers with good jobs who are already paying off their loans, and introduces a perverse new incentive for higher-income families to borrow for college rather than pay out of pocket.” The author of the report estimates that the borrowers in the bottom 40 percent of the income distribution would receive roughly 5 percent of the tax benefits (saving $5 a month). On the other side, the top 20 percent would receive 46 percent of the benefits. Read. What the Federal Reserve is doing to respond to the coronavirus The Federal Reserve has a vital role to play in combating the Coronavirus Recession, just as it did in the 2008 Financial Crisis. This Brookings report is an excellent primer on what the Central Bank is already doing to combat the economic downturn and what it could still do. Among the many measures the Fed has taken, it has cut the Federal Funds Rate to zero, which allows banks to borrow more cheaply from the Fed and from one another. This will also reduce the borrowing costs of mortgages, auto loans, and other loans. It has also resumed quantitative easing (QE)—the purchase of massive amounts of securities—, which was employed during the 2008 Recession. And it has revived other 2008 Crisis programs, such as the Primary Dealer Credit Facility, and begun to support direct loans to large, medium, and small corporations as well as households and consumers (e.g. student loans and credit card loans). There’s still more the Fed can do, the author of this report argues, and a recent article by former Fed Chairs Ben Bernanke and Janet Yellen outline some of the steps it could take. Read. ~ Special Focus: The Virus and Markets~ Low-wage workers whose jobs require personal contact suffer most An excellent article in the Wall Street Journal shows that, as social distancing exacerbates the economic downturn, it is ultimately low skill and low wage individuals—restaurant workers, hotel maids, child-care providers, etc.—who are hurt most because their work cannot be done at home. A study by the Becker Friedman institute found that just 34 percent of jobs could be performed at home, and, unsurprisingly, these tended to be high-skill white-collar occupations. Individuals in low-skill and low wage occupations who are most at risk, the Wall Street Journal article points out, tend to have been later beneficiaries of the economic recovery and the tightening of labor markets, and they tend to be from minority groups and possess fewer years of education. As of this article, over 90 percent of US job cuts tied to the coronavirus were jobs at restaurants and other entertainment and leisure businesses. When workers haven’t been cut, they are forced to make the difficult decision between losing their source of income or possibly exposing themselves to the virus. Read Becker Friedman Institute Study. Read WSJ article. The coronavirus is making a group of powerful firms even more powerful The Economist shows that some powerful corporations are benefiting from the Coronavirus Recession, continuing a historical trend that has seen American firms in the top quartile of its sector see an increase in its share price by an average of 6 percent, while those in the bottom quartile saw a decline by 44 percent. By analyzing 800 American and European firms, The Economist shows that larger and more powerful companies—especially tech firms like Apple and Microsoft—are once again performing better than smaller and medium-sized ones. Share prices fell by a median of 17 percent for the 100 strongest companies, while share prices declined 36 percent for the 100 weakest. Read. The coronavirus is making inequality worse... which makes the virus worse This article in the New York Times makes the case that high levels of inequality in the US are making the coronavirus outbreak worse than it otherwise would be. And, crucially, the coronavirus is also making economic inequality worse, creating a self-reinforcing cycle. High income and wealth disparities are notoriously associated with higher rates of depression and the risk of chronic health conditions, such as diabetes and heart disease, and the coronavirus is 10 times as deadly for people with those pre-existing conditions. Beyond this, as the coronavirus gets worse in the US—due, in part, to the number of people with these conditions and individuals without health care— low-wage workers are especially likely to lose their source of income, risk having their livelihoods destroyed, and may be unable to afford unexpected medical expenses. Read What Else I’m Reading (“What Else I’m Reading” is a very brief rundown of other noteworthy reports and stories.) The hospitality industry is sending as much as 95 percent of its workers on leaves of absence amidst the coronavirus (Wall Street Journal) A helpful briefer by Robert Atkinson of the Information Technology & Innovation Foundation on the economic and social impact of the coronavirus (ITIF) Ezra Klein argues this recession is unprecedented and will become a depression if the government does not significantly increase spending (Vox) A summary of the stimulus bill that was recently enacted (New York Magazine) The stimulus will help many Americans during this pandemic, but many college students and adult dependents have been left out (The Washington Post) A proposal on how to pause the economy during this pandemic and avoid greater economic turmoil (Wall Street Journal) New York Times’ reporter Ben Casselman on why the staggering jobless claims seriously unrepresent the number of people who have lost work or a source of income (Twitter) Many individuals who work too few hours or are in low-pay occupations and will not qualify for unemployment benefits… unless Congress acts (Economic Policy Institute) As the US attempts to protect workers from the economic impact of the coronavirus, Europe is trying to shield workers through wage subsidies that keep workers employed (Wall Street Journal) The coronavirus is spurring a massive labor shift, as people move from occupations that have been shuttered by the pandemic to new ones (Wall Street Journal) The coronavirus is forcing greater recognition of the valuable role teachers play—we should respond by paying them more. (The Hechinger Report) A global pandemic can be a significant leveler of economic inequality (Financial Times) High levels of inequality decrease belief in meritocracy and, as a result, the fairness of that inequality. (Current Opinion in Behavioral Sciences) Despite greater diversity in cities, there is still massive racial segregation, and this will be palpable in the coming census. (The Brookings Institution) A primer on how states can promote more inclusive economic growth by expanding access to affordable housing (The Urban Institute) Access to high-quality early childhood education programs has a significant impact on long-run health outcomes—especially for men—, reducing the risk of heart disease, stroke, cancer, and mortality (NBER) From the Bookshelf (Each month, we highlight one older text that offers valuable insights into inequality.) “The Broken Ladder: How Inequality Affects the Way We Think, Live, and Die”, Keith Payne (2017) In “The Broken Ladder”, the social psychologist Keith Payne discusses the impacts of high levels of economic inequality on health, psychology, and social cohesion. This book is notable because it advances the argument that high levels of inequality are intolerable because they make the “average person feel poorer”, as they experience higher “standards for what we think it is to be normal”. Payne’s point about the changing nature of expectations and requirements to be a societal participant is significant because it illustrates that, while long-run trends in standards of living are important, the relative affluence and material well being of low-income people is inevitably also measured against what tools the wealthiest people have. As Keith Payne shows, it is this phenomenon that results in a world where the poorest people have access to cell phones, TVs, and microwaves, yet still report the subjective experience of “feeling poor”. He comments that “unlike the rigid columns of numbers that make up a bank ledger, status is always a moving target because it is defined by ongoing comparisons to others”. The perception of ourselves as being in weak social standing, Payne argues, can trigger a stress response similar to facing a physical threat. This fight-or-flight trigger improves the human immune system in the short run, but tends to weaken it in the long run, resulting in a rise in general health problems after months, such as chronic diseases (e.g. heart disease)—there is also a correlative increase in obesity and drug and alcohol-related problems. The result of this is a shorter life expectancy for certain low-income individuals. Payne concludes that an assessment of the fair distribution of wealth should consequently consider how high levels of inequality affect health outcomes. Buy. What I’ve Been Working On (A brief summary of projects that I have been working on in the past month.)
Quote of the Month Prior to the Bubonic Plague, a pandemic decimated the Middle East and Europe from 541 to 750 CE. In highly unequal societies like Byzantium, this may have led to a leveling of inequality since workers could demand higher wages. "We have ascertained that, in spite of the punishment inflicted by Our Lord God, persons engaged in trade and literary pursuits, as well as artisans and agriculturalists of different kinds, and sailors, when they should lead better lives, have devoted themselves to the acquisition of gain, and demand double and triple wages and salaries in violation of ancient customs. Hence it has seemed advisable to Us, by means of this Imperial Edict, to forbid all persons to yield to the detestable passion of avarice; in order that no one who is the master of any art or trade, or any merchant of any description, or anyone engaged in agricultural pursuits, may, hereafter, demand as salary or wages more than ancient custom prescribes. " —Byzantine Emperor Justinian, “The Enactments of Justinian: The Novels—CXXII”, 544 CE Thanks for reading! See you in May. That’s a wrap on this edition of “The Difference Principle” “The Difference Principle” runs on late nights, caffeine, and protein-infused bran flakes. If you enjoyed this newsletter, consider donating to help make sure it continues. Any contribution would be greatly appreciated, and both single and recurring donation options are available. Let me know how I’m doing by using this form to submit any comments or feedback! I welcome any suggestions on ways this newsletter can be a greater tool for readers in the future. You can also email me at julianjacobs6@gmail.com with topics or reports you would like me to cover in the future. If you have not already, you may sign up for “The Difference Principle” here. To receive emails when I publish my own work, sign up here. If you enjoyed this newsletter, feel free to share it. |
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