A K-Shaped Recovery is a Disaster
Originally published on Jheconomics.com
The pandemic has accelerated two trends. Small businesses, the lifeblood of America, are disappearing faster than ever. Meanwhile, a stock market resting on a few tech behemoths is soaring. If this divergence continues, most Americans will drown in an ocean of debt, while the super-rich fly away in their private jets.
First, the small-business story. There are more than 30 million, representing about half our GDP. But small businesses have been suffering for decades. Between 2007 and the first half of 2019, applications to form new businesses fell 16%. That is a problem: These businesses account for 85% of the new employment in the United States, and about half of the total workforce. With fewer formations, the demand for hiring slows, which means smaller increases in wages for working Americans. Against the backdrop of the multidecade trends of globalization and automation, it is no wonder the median wage of American workers has not moved much since Jimmy Carter’s day. Add to that the decimation of retail and small manufacturing since the Great Recession, and the implications are clear: Empty storefronts, limited new construction, with less supply boosting house prices and blocking the path to affordable home ownership for hard-working Americans.
Then came Covid-19.
Over 155,000 small business have closed since March, according to Yelp’s data analytics. In the second quarter, national GDP shrank by over 30% annualized. And although new applications for unemployment are down from 7 million at their March peak to around 1 million in the latest report, the jobs recovery may be stalling as coronavirus cases continue to rise across much of the country.
The stock market tells a different story. August wrapped up as the best month on record. Both the S&P 500 and the Dow Jones Industrial Average are up over 55% from their March lows and have reached new highs. However, only about half of American families own stocks. And of those that do, the top 10% hold the vast majority.
Where will this all lead?
Economists and investors have been drawn to a description of the recovery as resembling the letter K. Everyone dropped together initially. Now those who hold stocks and high-paying jobs are seeing their wealth grow rapidly (the upward arm), while pretty much everyone else is forced to endure high unemployment, job insecurity, and nonexistent wage growth (the downward arm). But the clinical use of the letter K covers up the human tragedy and its social implications. It does not portend a good future.
If President Donald Trump wins re-election, it can be assumed he will focus on the upward arm of the K, given he views the stock market as a barometer. But if former Vice President Joe Biden wins, will things really be much different? For much of the first term of a possible Biden administration, the main task would be to address the Covid-19 pandemic and its economic fallout. Public finances, stretched by recession and political irresponsibility, leave little latitude for expensive new social programs, although a range will surely be proposed, perhaps partially payed for by higher corporate and individual income taxes. Some deregulation will be reversed. But the effects are more likely to be at the company or industry level, with relatively little impact on broader stock and bond markets. Put another way, as long as the Fed is focused on easy money and low interest rates, equities will be supported, the dollar will be under pressure, and the rich will at least stay rich. And the rest of America?
Since the start of the pandemic, 46 million Americans have spent their emergency savings. Meanwhile, the three richest Americans control more wealth than half of the country. This kind of wealth divide has no precedent in American history, and it gets worse with every economic crisis. After the Great Recession, monetary policy supercharged this inequity trend in its attempt to spur lending. Low interest rates sent demand for equities soaring. Since March, it has gotten even more extreme, with the winners’ wealth going parabolic, as Amazon CEO Jeff Bezos’s $200 billion-and-growing fortune underscores.
Somehow, a nation conceived with ideals of equality for all has become among the most unequal on earth. The more unequal we are, the more likely we are to see another debilitating financial crisis, as Americans borrow more, and in turn are more exposed to economic uncertainties. The more debt we take on, the more fragile our society becomes.
A K-shaped recovery is a disaster. If we do not find the collective political will to change our path, the pandemic may irreparably undermine the “united” part of our states.