Economists fear worsening inequality during recovery

By Niv Elis

• The recovery from the coronavirus recession could look very different for the rich and for the poor, with economists fearing that a rising tide won’t raise all boats equally.

Economists are broadly forming a consensus that a V-shaped rebound — a sharp drop followed by explosive gains — is unlikely. Instead, they see diverging paths for U.S. households leading to what’s called a K-shaped recovery: a widening between the haves and have nots over a longer period of time.

“I think K is an apt description for the recovery that’s unfolding. The pandemic has created big winners and real losers, and that distinction is becoming increasingly clear as the pandemic wears on,” said Mark Zandi, chief economist at Moody’s Analytics.

“Lower income households, people with less education, minorities are getting completely crushed. And higher income, higher net worth households, white people who work in financial services — are doing very well,” he added.

JPMorgan Chase analyst Marko Kolanovic said last week the debate “is now settled, and that we are seeing a ‘K-shaped’ recovery.”

The pandemic has revealed deep inequalities that were already pervasive in the U.S. economy, according to top economists like Federal Reserve Chairman Jerome Powell, head of the central bank since 2018.

“Without question, this event has exacerbated really preexisting disparities in our economy that were already troubling,” he told NPR in a recent interview.

For nearly 40 years, he said, the world’s largest economy has become less equal as educational attainment lagged and technology flourished.

That is a problem for everyone in the country, he said, because it holds the entire economy back.

Dave Wessel, director of the Hutchins Center at the Brookings Institution, said the pandemic is playing on those divisions in stark ways.

Near the top of the list is the fact that people in low-paying service jobs were more likely to lose their jobs than more educated people working in what some refer to as the knowledge economy.

“Anybody who can work from home is doing OK,” Wessel said.

But the drop in interest rates and the monetary response, which many credit as crucial to fighting the worst recession since the Great Depression, had the effect of padding the bank accounts of the wealthiest, inflating asset prices and helping the stock market recover in record time.

“Anybody who holds a lot of stock is doing great, and we know that’s a small set of the economy,” Wessel said.

Similarly, homeowners with good credit have been able to refinance their mortgages, potentially saving hundreds of dollars in monthly payments, even as millions of renters say they are unsure whether they can even make their next monthly payment.

The divide is also showing up in the business world, where some industries are thriving and others collapsing under the weight of the pandemic.

While big, public companies with easy access to cheap capital have been able to upgrade and retool, smaller mom and pop shops without the same resources have floundered.

“Depending on where you sit in the COVID economy, business could be booming or on the brink of bankruptcy,” U.S. Chamber of Commerce President Suzanne Clark wrote last week.

High tech and some retail have thrived as the country adapted to working, learning and communicating from home.

“Yet, the other side of the recovery is bleak. For countless companies in the travel, entertainment, leisure, hospitality and food service industries, there is no end in sight to the economic malaise,” Clark noted.

There is near universal agreement among the experts that one of the key things needed to keep the economy afloat is more support from Congress. It was strong fiscal action in the CARES Act from late March that helped prevent an even deeper recession.

But much of that support expired at the end of July, and Congress has been deadlocked on a path forward.

“When Congress passed the first CARES Act, we thought it would be a short-term problem,” said Wessel. “We thought it would be a bridge to the other side. It turns out the ravine is much longer, the bridge only went halfway, and we’re throwing people over the end.”

Senate Majority Leader Mitch McConnell (R-Ky.) on Tuesday unveiled a scaled-back GOP relief bill that’s aimed at attracting support from conservatives, meaning it has little chance of gaining any Democratic backing.

Congressional Democrats are still hoping to negotiate a larger bill with the Trump administration, though negotiations have moved little as the two sides remain about $1 trillion apart in their positions.

With inaction in Washington, concerns about a K-shaped recovery are becoming part of the Democratic lexicon on the campaign trail.

“Folks have to ask themselves: Is this recovery working for you?” Symone Sanders, a senior adviser for Democratic nominee Joe Biden’s campaign, said in a Fox News interview Sunday.

“It is going well, going up for folks at the top, but for folks who are middle class or below, it is going down,” she added.

Trump campaign communications director Tim Murtaugh brushed aside the notion.

“That’s not the way we view [it] and that’s not the way 10.5 million Americans view it who have returned to work,” he said.

The U.S. labor force has added millions of jobs in the past four months, but the pace of job gains has slowed. The gains have also amounted to less than half of the job losses since the recession began.

The economy contracted at a 31.7 percent annual rate in the second quarter, the biggest decline in the post-World War II era.

Zandi says that without action, the K may give way to the dreaded W, signifying a return to recession.

“If we don’t get any additional support by the end of the year, odds are pretty high we’ll see a double-dip recession and negative employment numbers,” he said.