Why This Crisis is Going to Make Wealth Inequality Even Worse

You could quibble with some of his prescriptions here.

Research into companies who go through bankruptcy proceedings finds employees lose an average of nearly 70% of annual earnings over 7 years when compared to their pre-bankruptcy earnings.

So the idea that employees wouldn’t be hurt if we just let them fail is a story without data to back it up.

But stories resonate more with people than data which is why this video has now been viewed close to 10 million times.

I get why his sentiments struck a nerve. People are angry. They feel abandoned. And they feel like corporate America takes precedent over citizens when it comes to getting help from the government.

A lot of this anger still resonates from the 2008 financial crisis where many (myself included) feel banks were favored over normal people in the bailouts. Don’t get me wrong — the financial system needed saving in 2008. But it was a huge misstep to avoid throwing a bunch of those crooked bankers in jail or at the very least, go after all of the millions in bonus money they made leading up to the crisis.

And the fact that so many homeowners were forced to fend for themselves drove a huge wedge between corporate American and Main Street.

Now many are concerned corporations and the wealthy are getting unfair treatment again.

The problem is the current crisis involves everyone. It’s hard to pick winners and losers in this mess when it was no one’s fault the economy needed to be shut off to slow down the virus. There are going to be companies and individuals who receive government assistance that don’t “deserve” it because they took reckless risks of their own accord.

That’s an argument for another day.

There are going to be certain trends that will be sped up by the onset of this crisis.

My fear is the anger people have right now is only going to get worse when this is all over. One unintended consequence of this crisis is that it’s likely going speed up the wealth divide in this country.

In a follow-up piece to our chat from a couple of weeks ago, William Bernstein wrote about the old JP Morgan quote, “In bear markets, stocks return to their rightful owners”:

Today, the top quintile of the population owns 92% of stock wealth, and the bottom four quintiles own 8%. This discrepancy is likely to grow in the coming decades as the upward distribution of equities towards their “rightful owners” plays out, most of the time gradually, but sometimes in paroxysms.

It should be obvious who will be buying up these equity assets at distressed prices: J. P. Morgan’s “rightful owners,” who sit on large piles of Josephson’s unimpaired capital. Eventually, the bull market will resume, amnesia for the carnage will set in, and stocks’ wealthy “rightful owners” will sell some of their shares back to plan participants at higher prices. This chasm between the amount of that unimpaired capital available to the rich and to the average 401(k) participant will continue to cycle equity-derived wealth ever upward. 

I never thought about the quote this way but it makes sense that the wealthy would be the only ones left to take advantage of depressed stock prices.

Many people will have to stop making retirement contributions altogether. Others will be forced to raid their 401ks to survive. Emergency savings accounts in many cases will be depleted. And this is just those people who went into this crisis with their finances relatively in order.

Those who were already struggling financially are going to be in even worse shape.

Yes, the government is sending out checks and raising unemployment benefits. But those are short-term bridges for most people.

The top 10% of this country owns something on the order of 85% of the financial assets. This group has felt some pain in terms of their portfolio’s performance.

But financial markets will recover eventually and portfolio losses will be recouped by the wealthy. It’s only a question of when. Recovering from a job loss or the loss of a business doesn’t follow the same path as the recovery from a bear market.

Some people will see their finances completely destroyed by this crisis and have to start from scratch. The economic machine and stock market will recover from this recession. People’s personal recessions won’t necessarily follow the same recovery timeline.

I wish I had a prescription for these problems but this is not something that will be fixed during a crisis of this magnitude.

So expect the anger of many on Main Street to be even worse coming out of this crisis than it was coming out of the 2008 financial crisis (even though this is a completely different animal).

Wealth inequality is likely going to get a whole lot worse by the time this thing is over.

Much like the crisis itself, I don’t know how this plays out in terms of how it changes people’s behavior or attitudes.

But this is going to be something our country is going to have to grapple with in the years ahead because this is only going to make the wealth divide worse.