One of the most persistent and troubling issues in the US economy is the high level of income and wealth inequality. For decades, the gap between the rich and the poor has been widening, creating social and political tensions and undermining the prospects of economic growth and stability.
However, there is some evidence that this trend may be reversing, at least temporarily, due to the unprecedented fiscal and monetary stimulus in response to the COVID-19 pandemic.
According to a recent report by the Federal Reserve, the share of income held by the top 1% of earners declined from 23.7% in 2019 to 20.9% in 2020, while the share of income held by the bottom 90% of earners increased from 50.9% to 52.8%.
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This is the largest annual decline in income inequality since the Fed started tracking this data in 1989. Similarly, the share of wealth held by the top 1% of households declined from 31.1% in 2019 to 30.4% in 2020, while the share of wealth held by the bottom 90% of households increased from 28.6% to 29.4%. This is also the largest annual decline in wealth inequality since 1989.
What explains this remarkable shift? The main factor is the massive fiscal stimulus that provided direct cash payments, enhanced unemployment benefits, and other forms of income support to millions of Americans who lost their jobs or faced reduced hours and income due to the pandemic. \
These transfers boosted the incomes of low- and middle-income households more than those of high-income households, who were less likely to be affected by the labor market disruptions. Moreover, the stock market rally that benefited wealthy households was partly offset by a surge in home prices that increased the net worth of homeowners, who are more evenly distributed across the income spectrum.
Another factor is the unprecedented monetary stimulus that lowered interest rates and expanded credit availability, especially for mortgages and auto loans. This enabled many households to refinance their existing debts or take on new ones at lower costs, improving their cash flow and balance sheets.
Additionally, some high-income households may have reduced their spending and increased their saving during the pandemic, either out of precaution or due to limited opportunities for consumption, while some low-income households may have increased their spending and reduced their saving due to the income support, they received.
Of course, these changes are not necessarily permanent or indicative of a structural shift in the distribution of income and wealth in the US. As the pandemic subsides and the economy recovers, some of the fiscal and monetary stimulus will be withdrawn or phased out, which could reverse some of the gains made by low- and middle-income households.
Furthermore, some of the underlying drivers of inequality, such as technological change, globalization, education gaps, and tax policies, remain largely unchanged and may continue to exert upward pressure on inequality in the long run.
Therefore, it is too early to celebrate or declare victory over inequality in the US. While the recent data suggest that inequality can be reduced by effective policy interventions, they also highlight the need for sustained and comprehensive efforts to address the root causes and consequences of inequality in a post-pandemic world.