In Bloomberg, a look at wealth inequality and the pandemic with Salvatore Morelli.
Excerpt:
The 1929 Wall Street crash helped create a new economic order in the U.S. called welfare capitalism. With the New Deal, American workers gained a safety net. With World War II, they won leverage with employers and higher wages. The owners of the means of production—well, they didn’t do as well. By 1950 the very richest Americans, the top 0.01%, controlled just 2.3% of the nation’s wealth, less than a quarter of their share in 1929. Meanwhile, the bottom 90% of households had doubled their share.
One wild card, now and in past crises, is government policy. A dozen years after the financial crisis, it’s still galling to many that America’s leaders failed to prevent millions of foreclosures, even as bailout funds propped up the banks that originated mortgages that went toxic. “In 2008 they got away with it in a sense,” says University of Texas professor James Galbraith. “They’re going to find that they can’t stop the pitchforks this time.”
The Federal Reserve’s policies also contributed to widening the wealth divide. Record low interest rates—meant to stimulate borrowing and productive investment—pushed asset values ever higher. Corporate profits soared as the economy recovered much faster than workers’ wages. If you had capital to deploy in the bleak days of late 2008 and early 2009, you were lavishly rewarded. From the depths of the crisis to the beginning of this year, U.S. stocks more than quadrupled.
The rich have advantages in good times and bad. In an economic shock, “the issue of who has liquidity and who has access to credit lines becomes very important,” says Salvatore Morelli, an economist at City University of New York who has spent more than a decade studying how crises affect inequality. “The people who have liquidity jump in and buy those assets,” he says, then profit handily when the economy recovers.
After 2008, fortunes at the top ballooned even as the middle and working classes were hobbled by derailed careers, stagnant pay, and permanent losses on their biggest investments—their homes. From 2009 to 2012, when the economy was supposedly in recovery, the earnings of the bottom 50% of Americans fell 1.5%, while the top 1%’s income rose 21% and the top 0.1%’s earnings jumped 24%. By 2012 the top 0.1% of Americans were earning $6.7 million a year on average and collectively controlled a fifth of U.S. wealth, more than at any point since 1929.
