Pandemics were one of the “four horsemen” described as reducing economic inequality in Walter Schiedel’s 2017 book “The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-first Century” (the other three being war, revolution and state collapse). COVID-19 has sparked public awareness about the inequalities that already existed in the world but will it be a “great leveller” or will it make inequality worse?
Results from early studies into the economic impact of the pandemic suggest that inequality initially decreased due to plunging share markets and massive government support for workers and businesses.
Estimating the current impact of the pandemic on inequality is difficult, because the data to measure inequality is produced with a significant time lag. However, Helen Hughson argues in Economics Observatory that a certain amount can be inferred by changes in asset prices, expenditure and savings patterns and debt levels. For many countries changes in these indicators suggest that after an initial decline in inequality in the early stages of the pandemic, wealth inequality has continued to grow.
Asset prices spiral upwards
Spurred on by the extremely loose monetary policies of most central banks, asset prices accelerated in 2020. Despite the severe recession in the second quarter of 2020, stock markets recovered quickly and reached new highs in 2021, while house prices have soared. This has been a boon for the super wealthy with billionaires worldwide getting 54 percent richer. Meanwhile many middle-class homeowners have also benefitted, adding tens or hundreds of thousands to their wealth through increasing house prices and record low interest rates. Michael Dauderstädt writes in Social Europe that this new-found wealth is likely to increase income inequality over the medium to long term through the incomes asset-rich owners derive as rent.
Income and savings
The Worldbank estimates that the richest 20 percent of the world on average are expected to recover nearly half of their 2020 losses this year, while the poorest 20 percent on average are expected to further lose 5 percent of their income. For rich countries though, massive stimulus programmes have largely protected their populations against increasing income inequality.
Household savings grew sharply across all OECD countries in 2020 due to a combination of lockdown-related constraints on savings and rent and mortgage deferrals. However, this has not been equally spread. A report from the Bank of England showed the accumulation of savings has been concentrated amongst wealthier households while low-income households were more likely to have run down savings since 2019 rather than increased them.
Savings have also been falling in New Zealand with the latest data showing a household savings ratio at 0.4 percent in the March 2021 (after rising to 14.7 percent in June 2020), down from 1.2 percent in December 2019. Those at the bottom end and those on fixed incomes are also likely to be impacted harder by inflationary pressures on everyday items with inflation running higher than wage growth.
Wealth and Income Inequality prior to COVID-19
New Zealand’s income distribution has been relatively stable for the past 20 years. According to the World Inequality Database NZ’s “middle class” was squeezed sharply at the end of the 1990s but income share today is similar to what it was in 2000. The top 1 percent and top 2 percent income share have both increased marginally while the bottom 50 percent income share is much the same as it was at the beginning of the century.
This is in stark contrast to the USA where the top 10 percent account for almost half of the national income and the bottom 50 percent account for a mere 13 percent:
While some measures like the ratio of high to low household income households appear steady in New Zealand for the past decade, these do not capture disparities in wealth according to Deloitte’s post “The Rising Divide”. In New Zealand’s case wealth disparities are largely due to those who own their own home as opposed to those who don’t. Home ownership rates have declined in New Zealand to 65 percent and are now at the lowest level since 1950s.
Wealth tends to be much more unequally distributed than income and is much more difficult to estimate according to a 2021 working paper from the Institute for Governance and Policy Studies. This is because of the under sampling of the very wealthy and the potential for under-reporting of financial assets. The paper, titled “Wealth Inequality in New Zealand” shows that before the pandemic, the wealthiest 10 percent of asset holders in New Zealand held 59 percent of all wealth while the poorest 50 percent held just 2 percent of wealth, a proportion that did not change much between 2014 and 2018. Their analysis indicates higher levels of wealth inequality in New Zealand than in comparable developed countries.
Ultimately it is the increasing concentration of wealth that will be the most destructive long-term effect of the pandemic. As Josef Stadler, head of UBS’s global family office department said in 2017 “Wealth concentration is as high as in 1905, this is something billionaires are concerned about. The problem is the power of interest on interest — that makes big money bigger and, the question is to what extent is that sustainable and at what point will society intervene and strike back?”