From the Great Pandemic to the Great Leveling?

Could the Great Pandemic of 2020 and the severe economic downturn it has already spawned serve as a macabre cure for the staggering economic inequalities that have arisen in the United States? After all, Stanford University historian Walter Scheidel, in his 2017 book The Great Leveler, identified pandemics as one of four major types of events that have through history served to reduce the gap between the rich and the poor, with the others being mass-mobilization warfare, revolution and state collapse. French economist Thomas Piketty, whose 2017 book Capital in the Twenty-First Century helped spur greater public awareness of inequality, has pointed to deep economic downturns as a fifth type of leveling event.

Piketty famously argued that the rate of investment returns to the owners of capital typically exceed overall rates of economic growth. As a result, periods of business-as-usual produce growing concentrations of wealth. Incremental reforms, while far preferable to the calamitous leveling forces identified by Scheidel and Piketty, do not appear sufficient to halt, much less reverse, this inexorable tendency toward wealth concentration. Only major disruptions of the status quo (and only certain types of those) serve to redistribute wealth and income in significant measure.

But how does disruption lead to leveling? And what sorts of disruption might challenge this era’s great concentrations of wealth?

Pandemics, according to Scheidel, sometimes produce such severe drops in population as to create labor scarcities. Workers who survive gain greater bargaining power, with which they bid up wages or other sorts of remuneration.

Deep economic downturns can also have a leveling effect. The assets in which the rich place their wealth, including stocks, bonds and precious metals, decline in value. To avert political instability, governments may raise taxes on the wealthy in order to fund an expanded social safety net.

In societies where the political balance between capital and labor is already highly skewed in favor of the former, however, leveling is not guaranteed. The U.S. government, for instance, responded to the 2008 financial crisis by bailing out banks, hedge funds and automobile firms while offering relatively little relief to middle class homeowners who fell underwater on their mortgages. As a result, inequality actually rose, fueling political polarization in the form of the Occupy Movement on the left and the Tea Party Movement on the right.

As economic historians Peter H. Lindert and Jeffrey G. Williamson document, the last era of leveling in American history came between 1917 and 1945. Prior to World War I, inequalities in wealth and income reached levels not seen before and only rivaled since in recent years. This so-called Gilded Age did not last. The three decades from 1917 onward encompassed the influenza pandemic of 1918, two world wars and the Great Depression. In combination, these events greatly eroded the fortunes of the rich and created the political and economic conditions necessary for a mass middle class to emerge during the fifties and sixties.

So what consequences might the current crisis have for inequality in contemporary American society? The direct labor force effects of the pandemic are unlikely to improve the bargaining power of surviving workers. While Scheidel finds that the Black Death of 15th century Europe generated strong leveling forces, it took a population decline of roughly one third to produce this result.

Deaths from the 1918 influenza pandemic amounted to 675,000 Americans. Adjusting for population, deaths from COVID-19 would have to reach more than two million before matching the proportional scale of the 1918 losses. Current projections are far lower. Even if these forecasts prove too optimistic, however, pandemic deaths would be nowhere near the level necessary to create labor shortages large enough to bid up wages in a workforce of 164 million. This is especially true as the current coronavirus targets mainly the elderly and the infirm, rather than those who make up the core of the American labor force.

What about the indirect effects of the pandemic in the form of a dramatic economic downturn? The scale of the economic destruction new unfolding is not yet certain. Much depends upon how quickly or slowly efforts to contain the virus succeed and when Americans can return to something resembling normal patterns of work and consumption.

Already, however, the speed and ferocity of the economic contraction produced by limitations on mobility have been unprecedented. The number of new claims for unemployment benefits in the three weeks prior to April 9, 2020 exceeded 16 million. The previous single-week record was 695,000 in 1982. Even before the current crisis, corporate and consumer debt stood at precarious levels. With reduced cash flow, bankruptcies and home foreclosures will likely skyrocket. Even once the pandemic eases, insecure consumers are likely to spend cautiously. The fact that all three major regional sources of global demand – North America, Europe and East Asia – are experiencing downturns at the same time will make it all the more difficult to jump-start recovery.

With regard to the global economy, noted economist and financial historian Kenneth Rogoff warns: “there is a good chance it will look as bad as anything over the last century and half.”

Whether the current economic crisis leads to leveling, as during the Great Depression, or to greater inequality, as in the 2008 financial crisis, will depend upon three factors.

First, who gets bailed out? If the emphasis is on propping up stock prices and restoring the balance sheets of large corporations, then Americans will face a more rather than less unequal society on the other end of the crisis. But if, as during the Great Depression, a bottom-up approach is taken, then the benefits of recovery will be more broadly spread.

Second, significant leveling will depend upon whether the crisis strengthens the countervailing power of government and labor at the expense of capital. The 1917-1945 period witnessed an enormous expansion of activist government, funded largely by increasingly progressive taxation, and a greatly strengthened union movement capable of bargaining more effectively on behalf of workers. The particular form that such countervailing forces take in today’s context may be different, but unless the power of capital is balanced in some fashion, then no significant leveling will be possible.

Third, and most importantly, the New Deal was more than a series of government programs. It was a product of a profound rethinking of much prior political and economic orthodoxy. Laissez faire capitalism was abandoned in favor of the Keynesian revolution. An analogous refashioning of intellectual and popular ideas about the political economy of inequality will be required today. As the presidential campaigns of Bernie Sanders and Elizabeth Warren illustrate, the intellectual and political basis for transformative change already exists, even if Sanders and Warren themselves will not appear at the head of the presidential ticket in November.

Disruptive and painful crises can sometimes spur needed change. In retrospect, the series of traumatic events that made up the 1917-1945 period in American history ignited profound reforms leading to a golden age of reduced economic inequality following World II.

Perhaps recent events of our time – from the evident failures of government capacity in the face of Hurricane Katrina, to the near-collapse of America’s financial system in 2008, to the humbling inadequacies of our public health system to cope with the current pandemic – will one day be understood as alarm bells that alerted us to the necessity of reversing the concentrations of wealth and power that, however impressive on the surface, serve to hollow out the essential pillars of American political and economic life.

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