By Bill Alpert
Sept. 4, 2020
The pandemic has accelerated two trends. Small businesses, the lifeblood of America, are disappearing faster than ever. Meanwhile, a stock market resting on a few tech behemoths is soaring. If this divergence continues, most Americans will drown in an ocean of debt, while the superrich fly away in their private jets.
First, the small-business story. There are more than 30 million, representing about half of our gross domestic product. But small businesses have been suffering for decades. From 2007 to the first half of 2019, applications to form new businesses fell 16%. That’s a problem: These businesses account for 85% of the new employment in the U.S., and about half of the total workforce. With fewer formations, the demand for hiring slows, which means smaller increases in wages for working Americans. Against the backdrop of the multidecade trends of globalization and automation, no wonder the median wage of American workers hasn’t moved much since Jimmy Carter’s day. Add to that the decimation of retail and small manufacturing since the 2008-09 recession, and the implications are clear: empty storefronts and limited new construction, with less supply boosting house prices and blocking the path to affordable homeownership for many.
Then came Covid-19.
Over 155,000 small businesses have closed since March, according to Yelp’s data analytics. In the second quarter, national GDP shrank by over 30% annualized. And although new applications for unemployment are down from seven million at their March peak to about one million in the latest report, the jobs recovery may be stalling as coronavirus cases continue to rise in many states.
The stock market tells a different story. August wrapped up as the best month on record. Both the S&P 500 index and the Dow Jones Industrial Average are up over 55% from their March lows and have reached new highs. However, only about half of American families own stocks. And of those that do, the top 10% hold the vast majority.
Where will this all lead?
Economists and investors have been drawn to a description of the recovery as resembling the letter K. Everyone dropped together initially. Now, those who hold stocks and high-paying jobs are seeing their wealth grow rapidly (the upward arm), while pretty much everyone else is forced to endure high unemployment, job insecurity, and nonexistent wage growth (the downward arm). But the clinical use of the letter K covers up the human tragedy. It doesn’t portend a good future.
If President Donald Trump wins re-election, it can be assumed that he will focus on the upward arm of the K, given that he views the stock market as a barometer. But if former Vice President Joe Biden wins, will things really be much different? He would have to focus on the pandemic and its economic fallout. Public finances, stretched by recession and political irresponsibility, leave little latitude. New social programs may be partially paid for by higher corporate and individual income taxes. Some deregulation will be reversed. But the effects are more likely to be at the company or industry level, with relatively little impact on broader stock and bond markets. Put another way, as long as the Federal Reserve is focused on easy money and low interest rates, equities will be supported, the dollar will be under pressure, and the rich will at least stay rich. And the rest of America?
Since the start of the pandemic, 46 million Americans have spent their emergency savings. Meanwhile, the three richest Americans control more wealth than half of the country. This kind of wealth divide has no precedent in American history, and it gets worse with every economic crisis. After the 2008-09 recession, monetary policy supercharged this inequity trend in its attempt to spur lending. Low interest rates sent demand for equities soaring. Since March, it has gotten even more extreme, with the winners’ wealth going parabolic, as Amazon.com CEO Jeff Bezos’ $200 billion-and-growing fortune underscores.
The more unequal we are, the more likely we are to see another debilitating financial crisis, as Americans borrow more and, in turn, are more exposed to economic uncertainties. The more debt we take on, the more fragile our society becomes. A K-shape recovery is a disaster. If we don’t find the collective political will to change our path, the pandemic may irreparably undermine the “united” part of our states.
Alex Friedman and Larry Hatheway are the co-founders of Jackson Hole Economics, and the former chief investment officer and chief economist, respectively, of UBS.
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