Have you heard of Jeff Bezos and the bridge? The Amazonian billionaire’s new superyacht, under construction in Rotterdam, the Netherlands, is so large the city may have to partially knock down a historic bridge for it to reach open water. The story has quickly become a metaphor for soaring inequality, and it fuels the perception that billionaires have done very well during the Covid-19 pandemic while ordinary people have suffered.
But is this perception correct? It’s actually a bit complicated. Of course, we don’t need to shed tears for Bezos; and who among us is immune to schadenfreude over Mark Zuckerberg’s recent losses? Moreover, I still believe that a substantial increase in taxes on the rich would be a very good idea.
However, when asking how different groups have fared during the pandemic, it’s important to distinguish between wealth — which is heavily affected by, among other things, stock market fluctuations — and income. I’ve written about this before, but now I can say a bit more thanks to a terrific new statistical tool – Realtime Inequality – developed by economists at Berkeley. This allows us to track changes in the distribution of wealth and income in real time, and it’s extremely enlightening.
Let’s start by talking about wealth.
The wealthy have, in fact, grown considerably richer over the past two years; so, in fact, most Americans, but the gains were particularly large at the top:
These gains were underpinned by rising asset prices. Faster growth at the top likely reflects particularly large gains in the stock market; stocks are disproportionately owned by the wealthy, while much of the wealth of the middle class is in housing:
But here’s the problem with asset prices: although they are partly determined by the income people derive from the assets they own – dividends, rents, etc. – they are also affected by the returns that investors expect from the alternatives. As I tried to explain in a newsletter a few months ago, much of the rise in asset prices actually reflects bad news, a drop in the expected rate of return on new investments.
What if, for example, the value of your stocks has increased due to low interest rates, but the dividends you receive have stagnated or fallen, have you really come out ahead? It’s not that easy of a question to answer.
So what happened to the income of the very rich? It’s up, but not as much as their wealth – and in fact, their earnings are lagging behind those of the bottom half of the population:
Why have low-income Americans experienced relatively large income gains? (starting from a low base – we are still an incredibly unequal society). Part of the answer is government assistance during the pandemic: You can see that income spikes as stimulus checks come out and other programs like the expanded child tax credit — which I hope always, can be restored – have made a big difference.
But that’s not the whole story. Lately, we’ve had a tight labor market, which has led to rising wages, with wages rising much faster for lower-paid workers:
Yes, inflation has eroded these gains in real terms, although the gains for workers at the bottom end seem to have price increases exceeded. The point so far, however, is that a tight labor market appears to reduce wage inequality.
So the simple story that the pandemic has been good for the wealthy and bad for the working class does not hold up. There are, of course, other ways in which the pandemic has had an extremely uneven impact; the past two years have been very different for Americans — mostly highly educated and well paid — who could work from home than for those who couldn’t. But this is another story.
Is there a moral policy in all of this? It is almost certain that the Federal Reserve will raise interest rates in the coming months, in an effort to calm inflation. And it will be right to do so. However, some people will also encourage interest hikes because they tend to lower stock prices, making the rich less wealthy – and this, they imagine, reduces economic inequality.
Well, that’s a bad take, confusing wealth with income inequality. And if you care about the incomes of working-class Americans, you might want the Fed to be cautious about rate hikes lest they hurt the labor market. It turns out that full employment is a really good thing for the lowest-paid workers, and we don’t want to jeopardize that good thing just because we’d like to reduce the paper wealth of billionaires.