Paul Hennessy/Sipa via AP Images
Volunteers from the Second Harvest Food Bank of Central Florida and local churches distribute food to at-risk residents in Clermont, Florida, November 2020.
Healing is the word of the moment as the dust settles on a divisive election in the United States and the country struggles to contain a second wave of viral infections. Healing economic wounds will also be high on the president-elect’s to-do list. But rampant inequality and widespread insecurity did not start with COVID-19. Decades of declining real wages, insecure employment contracts, and predatory financial practices have turned parts of the country into an economic wasteland with accompanying “deaths of despair.”
A vaccine will likely make it safe for schools and businesses to return to some kind of normality and for travel to resume, but it will not remove the causes of the country’s economic divisions. Indeed, as the recovery from the COVID-19 lockdown begins to falter and politicians diverge over what to do next, there is a growing concern of deepening inequality. African Americans and Latinos have been disproportionately affected by COVID-19, with younger workers, more generally, suffering even more precarious employment.
If “building back better” is to move beyond sloganeering, policymakers—and not just in the United States—will need to take a hard look in the mirror and ask themselves why they failed to deliver on this same promise in the decade after the global financial crisis.
The abrupt turn to fiscal consolidation taken in 2010 once bank balance sheets had stabilized and financial markets had regained their poise—and when President-elect Biden was at the seat of government—is one explanation. And while the Federal Reserve’s open monetary faucet boosted financial rents and rescued asset holders, it did little for households squeezed by low wages and underfunded public services. Income floated upward to the wealthy, while precarity and desperation trickled downward.
For all its destruction of human and economic life, the novel coronavirus has created an opportunity for lasting change.
But the roots of hyperinequality go deeper than the global financial crisis. The drive for flexible labor markets—through falling unionization rates, a lagging minimum wage, and weakening employment regulation—along with the untethering of capital and the ceaseless movement of production around the globe, has strengthened the bargaining power of corporations over workers, suppliers, and also governments, at the local and the national levels.
The result is an increasingly polarized economy, with growing numbers in low-wage, low-productivity jobs while more secure, high-paying jobs are preserved for a diminishing number at the top. Elite jobs are mostly in large corporations, often with extensive international reach, that consolidate their dominant position through technological leadership, scale economies, and the abuse of monopoly power.
This kind of dualistic structure is an abiding feature of developing economies where islands of formal employment are surrounded by a sea of informal activity. But as Peter Temin has shown, its emergence in the United States lies behind a “vanishing middle class,” a growing racial divide, and a slowdown in overall economic performance.
This fissuring of the economy—again with parallels in the developing world—has been made deeper and wider by elite capture of politics and policies that further rig the rules of the economic game. This vicious circle, which Adam Smith warned about centuries ago, goes a long way in explaining the steady decline in the income share of working people. In the United States, after a 50-year descent, the labor share is now back to its 1950s level; if current trends continue, in ten years’ time it will be back to the brink-of-the-abyss level of 1930.
While profits have shot upward, they are increasingly hidden in offshore jurisdictions to minimize tax payments, while those repatriated to headquarters are channeled into buying back the companies’ own shares and boosting dividend payments. This transgressive profit space has received added support from trade agreements and bilateral investment treaties. These, in addition to undermining government oversight, have, research shows, adversely affected wage and productivity growth by promoting cost-cutting at the expense of long-term investment.
THERE IS, HOWEVER, a silver lining. Decades of falling wage shares mean that millions of households are ready to spend more if only they could earn more income. A well-calibrated recovery strategy that combines public spending on goods and services with regulation of predatory corporate behavior and effective redistribution can unleash a virtuous growth circle that improves living standards for the vast majority and strengthens government finances even as it generates resources to boost public services and tackle the environmental catastrophe.
Such a strategy would consist of the following elements:
- a prolonged fiscal expansion with immediate support to employment creation and social services, including a strong component in the care economy;
- public-infrastructure investment to accelerate the energy transition by combining policies to encourage investments in renewables and discourage fossil fuel extraction;
- policies to improve industrial capacity based on raising productivity and greater energy efficiency;
- progressive tax reforms shifting the burden from indirect taxes such as sales and value-added taxes (which are regressive and discourage spending) to direct taxation, especially on high-income earners (whose consumption is relatively unaffected by taxation) and on corporate earnings and rents (with exemptions depending on employment creation).
In our estimate for the United States, an additional $4.5 trillion of government spending over the coming decade—heavily front-loaded in the next two years—could crowd in $8 trillion in private investment and yield an annual growth of 2.7 percent, the same as in the early 1990s. Not only would unemployment begin to fall but the share of wages in total income would rise by some four percentage points over the decade (or by over $2 trillion annually), allowing real improvement of working households’ financial situation. The government’s finances would also improve as strong growth, increasing employment, and a widening tax base gradually bring down public-debt ratios.
A more ambitious Green New Deal, which sustains the investment drive through a concerted shift to renewable energy and the transformation of key complementary sectors, would yield even stronger outcomes. And if all countries embraced similar plans, this could kick-start the energy transition at the global level and bring the Paris targets within sight by the end of the decade.
For all its destruction of human and economic life, the novel coronavirus has created an opportunity for lasting change, in part because it has laid bare the shortcomings of the world that existed before the pathogen made its way around the globe. The macroeconomic conditions are ripe in most advanced economies for a better recovery, while governments have been willing to contemplate a whole raft of taboo-breaking measures to address the pandemic and its economic aftershocks.
In the face of multiple crises, Franklin D. Roosevelt held “to the hope, the belief, the conviction that there is a better life, a better world, beyond the horizon,” and through his taboo-breaking New Deal ushered in an unprecedented era of shared prosperity. That same political conviction to redesign the rules of the economic game in support of working families and a healthy planet can take us over today’s troubled horizon to a better world.
