We were watching a tragic movie in play mode and then Covid came along and pressed fast-forward. First, it worsened wealth inequality because the response to Covid involved massive Federal Reserve liquidity injections to boost asset prices. And who owns assets? It’s the rich. So if you look at what has happened, the top part of the wealth distribution, people are much better off than they were before Covid. But at the bottom end, that hasn’t happened.
Think of people whose jobs have been displaced by this big step toward digitalization, who have no financial assets to begin with and don’t benefit from what has happened to asset prices. In addition, they are hoping to buy a house and they’ve been priced out of the housing market. So suddenly both the actual and potential wealth and income has declined.
To add to that, if they are unemployed, there’s suddenly a skills mismatch. There are record levels of vacancies that the labor market is not able to match to workers. And then you get what economists called multiple equilibria: one bad outcome, resulting not in mean reversion, but a high likelihood of an even worse outcome.
We already know what it looks like because we’ve had a taste of it. On the economic side, it looks like insufficient aggregate demand, which is a fancy way of saying that as the rich capture more income and more wealth, they spend less of it. The poor tend to consume more. So if the incremental income and wealth all go to the rich, then you’re going to have the problem of demand, which means you’re going to have a problem of growth.
And we’ve already had a period of so-called secular stagnation, and what my colleagues and I call the new normal, where we get low and insufficiently inclusive growth. We know what that looks like. We know the social consequences. It is cultural war. It’s alienation. It’s marginalization. That’s not good for society. It eats away at the fabric of society.
We know what it looks like politically. People will become single-issue voters, and single-issue voters can be captured by all sorts of things. No wonder we’re seeing an increase in populism across the world. And then it means a less equal world. You know, I grew up interested in developing countries, and for decades it was almost an accepted fact—not a hypothesis, almost an accepted fact—that these countries would converge to the advanced economies.
Well guess what? We’re having divergence going on right now. And I suspect this divergence is not short term. So we may live in a less equal world, or to be more blunt, a much more unequal world. And that’s problematic for global economic policy coordination, interdependency, immigration. I mean, I can go on and on. So it is problematic. We’ve had a taste of it and we don’t quite like that taste, but it could become a lot worse.
The American dream is all about capturing these amazing opportunities and being able to go right up the income ladder. There’s a correct notion that inequality can incentivize people to work harder, to do better, but there comes a point when it goes from encouraging people to do good things to actually detracting from not just economic well-being, but social and political well-being.
I don’t think the American dream is dead. I think it’s harder to achieve. If you don’t have the right education to begin with, if you don’t have a set of assets to begin with, you’re looking at a much steeper curve, and that is a real problem for too many people.
The prescription is investing in human and physical infrastructure. It’s about enabling people to do more and to do better. It’s about providing people with transformational opportunities. It starts at a very early age, at pre-K, exposing bright minds to exciting education and opportunities. It continues throughout the middle school, high school, university, making elite universities more accessible to people who deserve to be there but may be held back because they come from the wrong zip code or because their parents have never had an education.
There’s a lot that can be done. It’s about fundamentally asking the question, ‘How do we enable our resources, human and physical, to be more inclusive and more productive?’