Interview: Walter Scheidel on the coronavirus and why inequality is only ever reduced by disaster5/15/2020  Walter Scheidel (pictured) is a historian at Stanford University as well as the author of eighteen books, including “The Great Leveler”, which presents a history of economic inequality from “the stone age to the twenty-first century”. In the book, which won a number of awards, Scheidel argues that inequality has historically only ever been reduced by “four horsemen”: plague, civil war, mass military mobilization, and government collapse. You can buy “The Great Leveler” here. Listen to the podcast-style edition of this below or on Soundcloud. This interview is scheduled for publication in The Brown University Journal of Philosophy, Politics, and Economics.
The Great Leveler presents this very ambitious thesis that inequality only ever gets reduced by mass military mobilization, plague, civil war, or government collapse. Your previous work dealt with demography, political economy, ancient history, and the classics. Why was a book studying the history of inequality something that you wanted to work on? Walter Scheidel: Well, I should say I’m not much of a classicist. I’ve always considered myself a historian, and even though I specialize in ancient and premodern history, I’ve always been interested in world history and comparative history, more generally. And I guess the short answer is that I wrote this book because nobody had ever tried to write it before, and it would not have been possible even ten or fifteen years earlier because there simply weren’t enough case studies of the pre-modern period to piece together a broad survey of the evolution of income and wealth inequality across hundreds and even thousands of years. And then my more immediate inspiration was Thomas Piketty’s book “Capital in the Twenty-First Century”. I had been familiar with his work already even before this book came out, and when the book actually did come out and was a huge success, I figured that if didn’t sit down now and write the book, then someone else is going to do it. And so, I got going, and I had the thesis already in the back of my mind—Piketty had the same thesis that I did but just for the twentieth century. And what I was trying to do was see if it applied to world history, more generally, and somewhat to my surprise, it turned out this was the case. And because I didn’t run into any obvious counterexamples, I was able to write up a whole book in the course of about two years Do you believe that high levels of inequality might be partially responsible for producing the shocks that ultimately reduce it? Scheidel: What I focused on was the impact of violent shocks on existing levels of inequality. And I think, in that respect, we are on pretty solid ground in that there are long term patterns regardless of what stage of development you are. Whether you are dealing with an agrarian society or an industrial society, the underlying principle and the underlying dynamics assert themselves again and again—it’s this idea that certain types of violent shocks would drive down inequality. Now, it is tempting to think that there could be some sort of homeostatic system where, if inequality goes up and exceeds a certain level, it triggers violent events that then reduce inequality. And then inequality rises again, and you have a never-ending series of cycles. That’s intellectually quite appealing. I don’t think that theory is fully borne out by the evidence that I have been able to put together. I think the evidence is much stronger in terms of a consistent effect of violent shocks on inequality, but not in quite the same way the other way around. Are there certain instances in which inequality is responsible for causing the leveling force that ultimately brought it down? One example that seems to speak to this is the case of Germany prior to the Second World War. The high inequality that took place during that time and the decline in German purchasing power seems to have contributed to the socio-political conditions that would ultimately lead to the Second World War and the leveling that took place then. Scheidel: I’m not familiar with that particular case study. I think that it is perfectly plausible and possible to tease out this conclusion by statistical analysis. Yet, if you look at world history more generally, you become very wary of cherry-picking. It’s easy to identify individual cases where you can observe such a connection. There are very powerful counterexamples that should give us pause, however. So, for instance, if you just looked at France in the late eighteenth century, you could say, ‘of course the French Revolution was driven in part by extremely high levels of inequality’, and that makes perfect sense. Yet then you have to bear in mind that France was surrounded by other countries—Britain, the Netherlands, Spain, Italy, Germany—that were just as unequal as France and had no revolutions. You also have to bear in mind that the revolution in Russia occurred in a country that was not only not very industrialized, contrary to what Marx expected; it was also not very unequal by the standards of the time. The most unequal countries were the only industrialized ones—Britain, for example. The same is true of China when Mao took over. So, once you put all of these individual cases in context, it’s very difficult to say that a particular level of inequality triggers some kind of societal breakdown, ferments revolution, or leads to other kinds of leveling. In your book, you argued that leveling would not have happened without the presence of a violent shock. You conclude, however, by discussing the possibility that we have moved to a point in history where the “four horsemen” are no longer necessary to reduce inequality. What do you think now? Scheidel: I think the evidence supports the belief that violent shocks are necessary to bring about leveling. They may not be sufficient, and they also act as catalysts. So, if you go back a hundred years or over one hundred years, there were already trends on the way in favor of increasing education, unionization of the workforce, the spread of democracy, and certain kinds of progressive taxation. All these things already existed but they got an enormous boost by World War One, the Great Depression, the New Deal, and World War Two. And the counterfactual is to think about if they would have gotten an equally big boost had these shocks not occurred, and I’m very pessimistic about that. It’s not a black and white picture; it’s not to say nothing ever changes in the absence of such shocks. It’s just to say the changes would be far less dramatic, and I think that this is quite easy to substantiate empirically. Now, as for your other question, when I concluded the book, I had to look forward to the future and I came to the conclusion that the traditional four horsemen were dormant right now. We no longer fight mass military mobilization wars; there are no credible revolutionary movements (at least in high-income countries); states are much more stable in most of the world than they used to be; and pandemics, such as the one that we are encountering right now, are nothing like the pandemics of the past that leveled by reducing the workforce and driving up wages. We’ll see the exact opposite in this case with respect to wages. What I neglected to include is that climate change might become a fifth leveling force. I’m sympathetic to that view. It needn’t be a fifth leveling force, but it could revive some of the others. It could lead to conflict, to state breakdown, to more pandemics, and to all kinds of things along those lines. So that’s something I should have perhaps considered more systematically. Otherwise I never really said that you can’t do anything at all in the absence of such violent shocks. I just wanted to remind people how difficult it is, and I think that’s important to bear in mind when we develop policy programs. We can’t just say ‘let’s go back to the way things were in the fifties’, for a number of reasons. We have to be aware when we develop policy initiatives what the structural impediments are and what very special conditions had to be in place in the past to bring about significant leveling. That’s not a call to defeatism. But I think it’s the historian’s job to put those things in perspective, and in this case, I think our job is to remind people over and over again that it’s really hard work to reduce inequality. Are there instances of policy successfully reducing inequality that we can try and mimic in the future? Scheidel: That’s a very good question. I think there are two cases to consider. One is historically Scandinavian countries—not just Denmark, but also Sweden and Norway—, which used to be highly unequal two hundred years ago with extreme inequality in land ownership and so on. And that already started to get a little better in the course of the nineteenth century and early twentieth century. Those countries were not very heavily touched by the world wars. They were in some sense, however, and we see major contractions of inequality during those periods, but that’s clearly only part of the story. So, there is something going on in those countries, in particular, that put them on a trajectory towards lower inequality, and that was amplified and accelerated by the shocks in the first half of the twentieth century. Now, to what extent you can extrapolate from this is a very difficult question because those countries were—especially then— relatively small, not very populous, and they were extremely homogenous in a great many ways—linguistically, ethnically, socially, culturally, and so on. They were the exact opposite in many ways from the United States, which has historically always been very diverse, and there are studies that show that high levels of diversity can obstruct ambitious redistributive programs because there is simply less widespread popular support for those kinds of policies. So, we are talking about apples and oranges. It’s not quite clear to what extent you can transfer some examples and apply them to different kinds of societies. And I think this is where the case of Latin America comes in. Latin America is very interesting. It’s a major outlier because it never experienced a major reduction in inequality; inequality has always been very high because of its colonial past—slavery, plantation economies, for example. It also never experienced any major leveling shocks. It wasn’t really touched by the World Wars. There were hardly any revolutions outside of Cuba. And so, you had status quo for a really long time and not very many changes. And in terms of diversity, some of those societies are more similar to the United States. What you saw there in the first decade of this century was a quite significant trend towards lower inequality in most Latin American countries—such as Brazil—by peaceful means, and that’s very encouraging. It really depended on the concatenation of circumstances that may be hard to replicate—gains from increased investment in education, political changes, a commodities boom in China that shored up certain sectors of the economy. All kinds of things were coming together in just the right way to reduce historically high levels of inequality. As I was writing this book, I was wondering whether this peaceful trend might be sustainable, and there were already clouds on the horizon. There was a major economic downturn a number of years ago. And the trends seemed to have stopped in many countries. With what’s happening right now and will be happening as a result of the current pandemic, we can be pretty sure that this trend is not going to continue or be sustainable in the long term. We will have to wait for a revival of this trend. It strikes me that when you ask scholars what the causes of inequality have been, people who study finance will blame financialization or the democratization of credit. Others will blame trade or technology. And others will blame policy. What do you believe the causes of inequality have been? Scheidel: It’s really like the story of the elephant and the blindfolded men who touch different parts of the elephant, and they try to describe the animal and come up with very different descriptions. In the existing scholarship on the reasons for the increase in inequality from the 1980s onwards, different studies identify different components— as you say, automation, globalization, deregulation, financialization, all kinds of “ations”, the weakening of unions, and the fact that enormous numbers of workers came online with the opening up of China. All of these effects really refashioned the post-war order in ways that revived economic growth, which had been flagging in the 70s, but also led to a higher concentration of income and wealth. And all these many factors have been interacting ever since, and this makes it so much more difficult to address the problem because there are so many different factors that are operational and active now and have been for a generation. So, if you just address globalization, or robots, or tax reform, you would only really touch one part of the elephant, so to speak. And it would be very difficult to implement comprehensive reforms without at the same time transforming the entire economic system that we live in and depend on. It may be possible in theory, but it doesn’t strike me as a very plausible policy goal in the short run. You also argue that major economic transitions (e.g. the Industrial Revolution), often increase in inequality in the “short-run”. Do you think that we’re in the middle of something like this as we embrace digital technology? Scheidel: Yes, I’ve seen this argument a number of times and it makes perfect sense to me. I mean, at the beginning of agriculture, if you have a plow and someone else doesn’t have a plow, then you are better off than the other person. Now if you work in Silicon Valley, then you are well off, and if you don’t, then you are in trouble. So, these transitions—regardless of what they were like and what the specifics were like— certainly have disequalizing potential in the sense that they might make society overall richer, but they reward certain groups disproportionately. And frankly, the current pandemic is an excellent example. There are people who can work from home; their jobs are more secure; they have higher incomes on average. And there are people who do more traditional kinds of work, for lack of a better word, and they are much more heavily exposed to the economic downturn. You have students who can participate in online instruction because they have broadband access and laptops and those who can’t. All these inequalities already existed, but they are now actually amplified and made more painful by the existing crisis. And I think ultimately this is a symptom of the effects of a broader transition towards a more digital economy. When we consider past plagues, do you think that there is anything fundamentally different about the Coronavirus Pandemic? Scheidel: Well, the most obvious difference is that even in a worst-case scenario, the coronavirus is going to kill a far smaller share of the population than pandemics of the past and even than the Spanish Flu did a hundred years ago. And mortality is, of course, concentrated among people in advanced ages and spares most of the active workforce and people who are about to enter the workforce. So, there won’t be any kind of demographic shock or Malthusian reset. Real wages are not going to go up because there won’t be a shortage of wages. In fact, mass unemployment is going to depress wages, if anything. So, we can mercifully forget about this. Nobody wants that kind of pandemic to ever happen again. And frankly, even if it did happen again in some future year, AI and automation would actually absorb some of those effects. We wouldn’t necessarily have to pay people more; we might just automate more, which aging societies are already doing if you look at Japan. So that’s a fundamental difference. In the short run, I think this pandemic is going to increase inequality for all the reasons we touched on and because unemployment is unevenly distributed. This is maybe not that different from earlier pandemics because, in the immediate aftermath of a pandemic, things tend to be quite chaotic. So, the real question is if the current pandemic has the potential to lead to some kind of equalizing change down the line—not tomorrow, but maybe a couple of years from now. That’s a very good question, and I think it depends ultimately on how severe this crisis is going to be because historically, the worse the crisis was, the harder the shocks and the greater the potential for equalizing change was. So if quantitative easing works and scientists come up with a decent vaccine within a year or so, there is a pretty good chance we will return to some modified version of the status quo, at least with the respect to inequality—i.e. that the existing inequalities will survive and maybe even be reinforced, which is what happened in 2008 after the Great Recession. The alternative is that things really get out of control, that creating new money turns out to be insufficient, that there will be a global depression that lasts for a long time, and that the virus turns out to be intractable—it mutates, and all kinds of horrible things happen. And, as a result of this, we may end up with levels of dislocation, misery, and despair that would drive our policymaking in a certain direction, which would be more like what we had in the 1930s, when conditions were so terrible and the social safety net so rudimentary or nonexistent that all kinds of measures had to be taken that would have been considered too radical just a few years before. So, it is quite possible that we find ourselves on the cusp of this sort of change. The ideas are already out there. There was no Bernie Sanders twenty years ago, and much of this will depend on how this is actually going to play out—just how big and disruptive this shock is going to be. Are there specific policies you would like to see implemented? In your NYT op-ed, you called for a new era of progressive policy. Very practically, what are some of your positions? Scheidel: Well, I think outcomes are going to vary quite a lot by country. In the US, we live in a kind of low hanging fruit society, in the sense that inequality is higher than it needs to be and is higher than in other western capitalist countries for a number of reasons specific to the US—the political system, the fiscal structure, the weakness of unions, and so on. So, there are certain things the US could do that would have an effect longer-term on inequality. This includes campaign finance reform; there’s a clear connection between plutocratic influence and certain inequality outcomes. This includes providing better access to health care, improving access to education, protecting and reenabling collective bargaining and unionization. Whether it is tweaking the tax code to make it a bit more progressive and a bit more like what we see in Western Europe. None of these approaches would be radical. It’s not a new deal kind of scenario. It’s not a Green New Deal kind of scenario but it would certainly contribute to a reduction in inequality. It wouldn’t take us back to where we were after World War II, but that’s not to be expected anyways. It would certainly improve the situation. Are there areas of the study of inequality that you believe are under covered by researchers and that you would like to see people work on? Scheidel: Well, that’s actually a very good question. Going back to what we talked about initially, it is still an open question to whether inequality can destabilize society in a systematic way. There have been studies on developing countries (low-income countries)—especially in post-colonial settings in Africa, Asia, and Latin America—that show high levels of inequality are associated with an increased risk of civil war, for instance, or some kind of societal breakdown. It seems that crossing a certain GDP threshold protects more affluent societies from these kinds of dislocations, but that doesn’t mean that inequality can’t lead to less extreme forms of social unrest and problems. And that’s something that has not been as well researched as maybe it should be. And if it could be shown that there is such an effect, that should galvanize policymakers and make them think twice about propping up the existing structures that enable the very high degree of inequality that we see right now.
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I hope you and your loved ones are staying safe. In the previous edition of The Difference Principle, I chose to focus just on the coronavirus. This month, the structure will be returning back to ‘normal’ (whatever that means for a newsletter that is just now publishing its third edition). First, a few quick updates. I’ve received helpful feedback from readers and have made a few changes:
Unemployment may rise to as high as 30 percent. By contrast, this number was 10 percent at the peak of the 2008 Financial Crisis. And in some states, one-fifth of workers are already unemployed. Meanwhile, the International Monetary Fund put out a grim report that stated this recession will feature a fall in output of three percent. This number was less than 1 percent from 2008-2009, making the Coronavirus Recession (or Great Lockdown) the worst recession since the Great Depression. The biggest hit will come in the second quarter, when the US economy is estimated to shrink by $1 trillion, according to the Congressional Budget Office. It’s no surprise that banks are putting aside lots of money in preparation for a big recession and that a Gallup poll finds that 50 percent of Americans now say their financial situation is getting worse— the highest number in Gallup’s polling in two decades. Why are things so bad? After all, the coronavirus is less deadly than the 1918 flu pandemic and so far no deadlier than the 1957 and 1968 pandemics. Much of this has to do with the changing nature of the economy. The shift from an agriculture and industry-based economy, with less close personal contact, to one dominated by services means that more occupations are affected. As high as 47 percent of GDP last year came from services. These are baristas, Yoga instructors, musicians, and so on. One particular way this economic shock is manifesting is in the rise of defaults. Nearly 60 percent of Americans lack the savings or the ability to borrow from friends or family in order to withstand an emergency like this and cover three months of living expenses. It’s consequently little surprise that the housing market is now preparing for a wave of defaults. The Federal Reserve reports that in Dallas “credit quality eroded across most loan types and most bankers expect further deterioration.” In San Francisco, “several banks readied emergency credit lines and expected credit quality to deteriorate as broad economic conditions turn for the worse.” Already, millions of homeowners are skipping their monthly payments and the number of home loans in forbearance is rising. If predictions about an even worse second-quarter meltdown are true, it seems that these trends will continue. The “Spotlight” piece in this newsletter will discuss the problems with American private debt in greater detail. So how is the US responding to this economic crisis? And what does it mean for inequality? First, the Federal Reserve cut interest rates to near zero and is pursuing quantitative easing, among a number of other approaches that you can read about here. The total $2.3 Trillion Injection far exceeds its 2008 rescue. To help out mortgage firms, Fannie Mae and Freddie Mac may soon purchase loans in forbearance, taking those “bad loans” off those firm’s balance sheets. And despite the exhortations of many writers against a corporate bailout of the airline industry, which spent considerable money on stock buybacks throughout the past decade, the US government offered $25 billion in payroll support, another $25 billion in loans for passenger airlines, and more than $10 billion in grants and loans for cargo airlines and aviation contractors. All of this is why it might make sense that stock prices have gone up in some cases all while the economy contracts. Much of the corporate world seems to feel secure that they will be bailed out by the US government no matter what. Unfortunately, the rest of America seems set to both foot the costs of these bailouts (today and in the years to come), and smaller businesses and lower-income individuals are losing out in the stimulus. The rollout of the stimulus dedicated to helping smaller businesses that couldn’t afford to finance themselves through traditional means has been a disaster. More than 80 public-sized companies used up emergency funds that were designated for smaller businesses. Within just days, the first round of money ran out and countless small businesses were shut out from access. On the state level, things ranged from worse to even worse, as many quickly burned through their low levels of unemployment insurance, and many individuals may not get their checks until August. In general, I try hard to be impartial when writing these newsletters in order to give space to the amazing researchers and journalists who can help shed light on the nature of economic inequality. Yet it’s difficult to escape a deeply troubling conclusion about the nature of the US economy. Far from “capitalism” (whatever that means), the American economy practices socialism for a rich asset-holding class and rugged individualistic capitalism for the rest. On that cheery note, here are, once again, some resources to help you pass the time during this quarantine:
Please take care of yourself and those closest to you. Thank you for reading. See you in June. —Julian, writing to you from Ghent, Belgium Forwarded this email? 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 work going. Spotlight A Crisis of Deflation and Debt May Cause Higher Inequality In economics, deflation simply refers to a decline in the prices of goods and services. This reduction in prices is typically associated with a collapse in the supply of money and credit. Deflation can be a consequence of a recession, but deflations are also rare because employers are more likely to fire workers than lower wages. Japan is notable for experiencing a deflation crisis on and off for 20 years. Yet the US hasn’t seen deflation since the Great Depression. A major report out of the Massachusetts Institute of Technology and a number of articles published in the past month show that the US may be on the verge of deflation. This could be catastrophic for economic inequality. First, the MIT piece. The authors summarize their findings with the statement that “supply creates its own excess demand”. What they mean is that a negative supply shock—e.g. the social distancing measures and shuttering of many firms—can cause a demand shock—i.e. A reduction in how much consumers are spending—far greater than the initial supply shock. This is particularly pronounced, the authors find, when shocks are concentrated in certain sectors more than others, as they are with the current shut down. If the MIT article’s predictions are correct, the US will begin to experience deflation. A recent article in the Financial Times explains this in detail. According to Keynesian economic theory, if the collapse in demand falls more than supply, prices will begin to fall, which means the purchasing power of each dollar will be greater. Why does this matter so much? The answer in a word is debt. When deflation occurs, the real value of debt rises, making it harder to pay off. So if I borrowed $10,000 to fund a year at college, a rise in deflation would mean that the real value of that $10,000 is now greater than the $10,000 I initially borrowed. And so that debt has just become harder to pay off. Good thing, then, that the US doesn’t have historically high levels of private debt… Just kidding. This month, the New York Times reported that corporate debt soared over $10 trillion among nonfinancial corporations. The Wall Street Journal reported that millions of credit card users are already missing their payments as the “debt bubble” bursts. Banks will only be able to shoulder this financial burden for so long, and Capital One stated that a rising number of its credit card accounts were already enrolled in a deferral program. For young people, things are particularly grim. Prior to the crisis, roughly 40 percent of students were on track to default on their loans by 2023. Unfortunately, this makes sense — as Rana Foroohar of the Financial Times reports in a column this month, students have been saddled with massive amounts of student debt for degrees that can be worthless and are producing diminishing returns to wages (see Spotlight from last month). The fact that less-wealthy individuals and families are saddled with historically high debt appears incontrovertible. If the real value of that debt increases while people simultaneously losing their source of income, how are they supposed to pay that debt off? Savings would be a start. Unfortunately, the high levels of private debt are matched by low levels of savings—since the 1980s the US has incentivized debt over savings and encouraged the growth of the financial sector. In addition to spurring higher inequality, this economic philosophy is also responsible for a world in which less than 50 percent of Americans have enough savings to survive three months, according to a Wall Street Journal report this month. And oh, by the way, their definition of “savings” includes the possibility of selling assets (e.g. your home and, presumably, also your limbs) to survive as well as an individuals’ abilities to borrow from friends and family, which would probably be limited during a historically bad recession. By contrast, a report this month in the National Bureau of Economic Research showed that the wealthiest Americans had built up a “glut of savings”, rather than spend their excess cash on productive investing, as conservatives argued. Moreover, the study found that the emergence of this glut in savings is causally linked to the dramatic rise in household debt for the bottom 90 percent of US households. All of this is why a Coronavirus Recession in which deflation occurs will spur even higher economic inequality in an already unequal country. So what is to be done? A recent article in Bloomberg argues that “the Fed will not be complacent to the deflationary implications of falling wages, but at the moment it is primarily focused on ensuring smooth functioning in financial markets via a wide array of liquidity programs. The goal of these programs is to prevent a financial meltdown that would only intensify the deflationary pressure.” Unfortunately, it seems that this will not be enough. Nearly all the pieces I have discussed in this month’s “Spotlight” seem to underscore the point that the convergence of debt and deflation could spur a dramatic rise in economic inequality as well as a potential second-wave of this recession. A serious fiscal response and movement for progressive economic redistribution may be essential. If you’re interested in hearing more about this, I have a long-form feature on this topic coming out in a national magazine in the next few months. You can sign up to receive that piece here. Big Ideas ~Business and Finance~ As American incomes take a hit, stress in the housing market will make this recession steeper and longer-lasting In a recent appearance, Former Federal Reserve chairman Ben Bernanke stressed that, though the financial imbalances and risks that ultimately spurred the 2008 financial crisis grew over the course of years, the Coronavirus Recession is unique and perhaps unprecedented in its scope, cause, and severity. Yet just as a spike in mortgage defaults corresponded with the 2008 crisis, we are now in the midst of a spike in missed mortgage payments. As part of the stimulus package, households are able to request forbearance for up to 12 months, and the number of households electing for forbearance has increased—this has hurt mortgage firms, which originate 60 percent of all US mortgages. In the presentation published in the American Enterprise Institute, the author explains that the set up of the housing market and its stressors ensures that the economic recovery from the Coronavirus recession will last longer than optimists think (a V-shaped recovery, and not a U-shaped recovery). The government has extended forbearance for up to 12 months to 93 percent of all mortgage loans (100 percent of single-family mortgage loans). And yet during a steep recession, the author argues that delinquencies will rise despite the stimulus provisions. Meanwhile, the servicers of loans will need to find some way to pay investors. The presentation outlines a number of steps the US could take to address these challenges, warning about the risks of greater economic suffering if bold action is not taken. Read The Coronavirus Recession has caused massive dislocation among small businesses By surveying 5,800 small businesses, this report offers a portrait of how the Coronavirus Recession is affecting US small businesses. In the sample, companies cut their staff by an average of 40 percent, and 43 percent of businesses were completely closed. These small businesses are also financially fragile, with the median company having less than one month of cash on hand. As for the stimulus, 70 percent of respondents stated that they planned to take advantage of aid in the CARES Act. Of the remaining 30 percent that did not apply, most companies cited concerns over administrative complexity and eligibility. The study’s final observations are that companies had ranging opinions on how long the Coronavirus’s economic effects would last. Read ~Education~ Estimating returns on undergraduate and graduate degrees This study provides a comprehensive survey of how both undergraduate and graduate degrees affect future earnings and which degrees see a higher wage premium. The report is particularly interesting because it attempts to estimate what individuals would receive in their preferred profession had they not received the degree. The findings, which are effectively summarized in the figures at the end of the report, unsurprisingly shows that graduate degrees in medicine, law, and businesses-related fields see its members command the highest wages. The humanities, art school, and social work come at the bottom. And while some graduate degrees have particularly diminished returns on wages, BA degrees were all indispensable in spurring higher future earnings. Read ~Macroeconomy~ Previous pandemics have reduced inequality. Will the coronavirus? In the last edition of this newsletter, we discussed Walter Scheidel’s research in “The Great Leveler”, in which he shows that plagues are one of four types of catastrophes that have reduced inequality throughout history. In the past few weeks, a number of pieces have come out that speculate about how the coronavirus will affect the gap between the rich and the poor. One of them is by Walter Scheidel himself. Writing for the New York Times, he makes the case that although pandemics have certainly reduced inequality in the past, many of them did not. First, there are many instances of countries stifling the effects of a plague on redistribution by forcing workers to perform their tasks at pre-crisis wages (e.g. the Mamluks of Egypt). What’s more? When inequality did collapse during a pandemic, it was short-lived and lasted only as long as it took the population to recover. Real and lasting change, Scheidel argues, is ultimately up to policymakers. Meanwhile, writing for the Financial Times, Angus Deaton provides a brief history of how recent developments in health care might limit the effects of the coronavirus on redistribution. You can also check out a blog I wrote on the topic here. I argue that the coronavirus will impact inequality differently to any previous pandemic because of the fundamentally different nature of a digital economy. Read Scheidel. Read Deaton. Read the blog post. Households’ spending habits are sensitive to bad economic news as well as the stimulus. In the “Spotlight” section, we explore the possibility and implications of deflation due to a considerable decline in aggregate demand, brought on in part by a decline in consumer spending. These two pieces are important because they can give us a picture of how both the deluge of bad economic news and the stimulus are affecting consumer spending. The first of these by economists at NBER finds that households’ spending habits appear very sensitive to macroeconomic news, even when the news is not real. Following the announcement of a local unemployment rate reaching a 12-month maximum, consumers in that area reduced their spending by 2 percent and their credit card repayments by 3.6 percent relative to individuals in other places that did not receive the announcement. These effects were even more pronounced among low-income households. How is the stimulus package addressing this? A report in the Becker Friedman Institute finds that each dollar of stimulus money increases consumer spending on average by $0.25-$0.35 within ten days, and this effect is greater in less wealthy households. Read NBER. Read Becker Friedman ~People and Places~ Women work in occupations particularly hurt by social distancing restrictions In past recessions, men’s employment was usually more severely harmed than women’s employment. Yet this report in the National Bureau of Economic Research shows that the Coronavirus Recession and social distancing measures are affecting women’s employment more than a “regular” recession. This is because, the authors explain, women often work in sectors where social distancing measures have been particularly damaging, such as in child care. The report argues that the effects of the crisis on working mothers may also be persistent even after the crisis is over. Yet the authors do note that the breaking of traditional social norms around the division of housework means that more fathers are responsible for child care. This may offset some of the effects of the Coronavirus Recession on gender inequality. Read ~Social Security and Taxation~ Reforming Unemployment insurance Last month, we discussed how many US states were resoundingly unprepared for this recession and the need to dish out more money in unemployment insurance (UI). In this report published in The Brookings Institution, the authors highlight many of the major problems with the UI system prior to the crisis. For instance, the authors show that many states only replaced 36 percent of a production and nonsupervisory worker’s average weekly earnings.Tipped workers—restaurant staff, for example, fared even worse because 52 percent of tips are not reported (Treasury Department figures). Many states had not fully replenished their reserves after the 2008 Financial Crisis, and states like Florida decreased the amount of time someone could receive benefits to just 12 weeks. Since the lockdowns began, the US has made unemployment insurance more generous, but many states are struggling to deal with an overhauled system while simultaneously using old technology to process a deluge of new claims. The report concludes with a series of suggestions about how UI might be permanently improved after the Coronavirus Recession is over. A report in the Upjohn Institute reaches similar conclusions. Read. ~Technology~ Does the US tax code favor automation? Daron Acemoglu and co. are at it again. If you are interested in learning about how automation is affecting workers, I strongly recommend checking out this group’s past work. In this paper, the authors find that the US tax system is biased in favor of capital (labor-saving machines, in this case) and against workers. They argue that this privileging of automation cooked within the US tax system has produced inefficient levels of automation because many automated tasks may displace workers without actually producing significant productivity gains. The end result is that employment is lower than it should be. Acemoglu and co. show that reducing labor taxes or increasing automation taxes, among other suggestions, can increase employment by slightly over four percent. This would also restore automation to its optimal level, boost labor's share of income, and ward against wage stagnation. Read Internet access, the coronavirus, and inequality In April, this newsletter discussed how the effects of social distancing have been particularly damaging to low-wage workers, whose occupations are disproportionately physical. In a recent blog, the Economic Policy Institute shows that low-income students are more likely to face long-term academic disadvantages from the shift to e-learning. The piece argues this is a consequence of the “technology divide”—for example, the fact that a quarter of lower-income eighth graders don’t have access to a computer at home and seven percent don’t even have internet. In a somewhat related report, the National Bureau of Economic Research published a working paper that tracked 20 million mobile devices to learn about peoples' ability to self-isolate and work from home during the global pandemic. They found that wealthier individuals were more likely to have high speed internet and consequently more likely to be able to stay at home. On the other side, consider a report in the New Republic that found millions of Americans were leaving their homes to work jobs that pay $15 an hour. Read Economic Policy Institute. Read NBER What Else I’m Reading The IMF is predicting the worst downturn since the Great Depression (International Monetary Fund) Pandemics, unlike even wars, catalyze persistent macroeconomic effects up to 40 years after they occur (National Bureau of Economic Research) The Great Recession hit smaller communities hardest. This recession is hitting the biggest cities first. (Brookings Institution) The recession is disproportionately hurting rural people, especially those with disabilities. (University of Montana Rural Institute) A primer by Brookings on which workers have already been affected by the Coronavirus Recession. (Brookings Institution) Wealthier New Yorkers are less likely to contract the coronavirus and more likely to have access to testing. (National Bureau of Economic Research) Since the White House announced this “historic public-private partnership,” 63 sites testing sites have opened nationwide. Just eight are in black neighborhoods. (Vox) The 600 dollar bump in unemployment insurance through the CARES Act has widely different purchasing powers by state, showing that equal does not imply equitable. (St. Louis Federal Reserve) The coronavirus disproportionately threatens businesses owned by women and minorities. (Brookings Institution) An excellent survey of major economists on whether to allow the lockdown to continue or to open up the economy. Nearly all supported the idea that a sustained lockdown was preferable to opening up the economy. (University of Chicago Booth School of Business) The impacts of the coronavirus on stock prices have ranged based on 1.) a firm’s reserve cash and debt, 2.) it’s supply chain’s exposure to the virus, 3.) it’s levels of corporate social responsibility, 4.) the level of entrenchment of a firm’s executives. (National Bureau of Economic Research) Some companies spent money on stock buybacks. Now they want a bailout. (New York Times) Private equity is winning the coronavirus crisis. (Vanity Fair) The Fed has given its blessing for banks to pay dividends, which will total $40 billion for the largest lenders this year. (New York Times) During economic booms, corporate fraud increases. This recession will reveal decades of it. (The Economist) 41% of global startups have less than 3 months of cash left. (Venture Beat) Delays in processing unemployment claims are keeping workers from receiving the aid they need. Consider this example from New Jersey (NorthJersey.com). Some workers may not be able to get stimulus checks until August. (AP News) Individuals—mostly lower-income—who do not have automatic payments set up will need file tax returns if they want their stimulus money, creating a barrier to entry. (New York Times) Stimulus Loan rules exclude industries seen as morally questionable, including strip clubs and marijuana shops. (Wall Street Journal) From Subway to Walmart to IHOP—a list of the companies that are and are not offering paid sick days during this pandemic. (New America) Tens of millions of Americans Are risking their lives for less than $15/hr. (New America) States can quickly expand Medicaid to provide coverage and financial security to millions. (Center on Budget and Policy Priorities) Americans are still being evicted during this pandemic. (City Metric) Households’ inability to obtain a mortgage refinance during the coronavirus will limit the ability of homeowners to find security. (The Brookings Institution) Coronavirus bursts the US college education bubble. (Financial Times) The coronavirus is going to explode the achievement gap in education. (Economic Policy Institute) When privileged college graduates marry, they increase inequality. (National Bureau of Economic Research) Emmanuel Macron says we may need to rethink capitalism in response to the coronavirus. (Financial Times) How technological innovation in competing firms affects workers’ wages at other firms. (National Bureau of Economic Research) Relationships and autonomy are the greatest contributors to a “meaningful job”—income comes near the bottom. (Brookings Institution) From the Bookshelf “Crime and Punishment: An Economic Approach”, Gary S. Becker (1974) This study by Gary Becker—a Nobel-prize winning economist—offers a hypothesis about how high levels of inequality might produce a higher crime rate. His argument was that potential criminals might adopt a cost-benefit assessment in which the rewards of breaking the law exceed the threat of punishment. In simple terms, inequality might make crime seem worth it to a greater number of people. I chose to highlight Becker’s study this month because, since this study was written, modern research has come to support Becker’s theory. According to a study by Gallup, which surveyed 148,000 people in 142 countries, more unequal countries have higher rates of crime and perceptions of danger. And research by Daniel Hicks and Joan Hamory, shows that these trends are also true domestically among US states. A 2002 study by the World Bank goes even further, arguing that the correlation between crime and inequality is deeply causal, even controlling for other factors affecting violent crime rates. Read What I’ve Been Working On
Quote of the Month “US universities are world-class. But the system as a whole is in trouble. Cost is a big part of the problem… Soaring tuition fees, worthless degrees and dicey investments made by both universities and the government have become a huge headwind to economic growth and social mobility. If you don’t believe me, take it from the New York Fed, which two years ago called out student debt and the dysfunctions of higher education as problems for the overall US economy. That’s a sad irony, given that a college degree is supposed to increase wealth and productivity. Unfortunately, the US system of higher education — like healthcare, housing, labour markets and so much else in America today — is bifurcated. Those with fancy brand-name degrees from top schools do great. So do many who attend high-quality, low-cost community and state programmes. But millions in the middle get neither a cheap nor a useful education.” —Rana Foorohar, “Coronavirus bursts the US college education bubble”, 2020 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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