n April 2020, Peter R. Orszag, the CEO of Financial Advisory at Lazard, made a prediction in a Bloomberg article.
“The Covid-19 pandemic will likely leave us with an economy in which larger companies play an expanded role, representing a higher share of both employment and revenue,” wrote Orszag, who previously served as President Obama’s Director of the Office of Management and Budget.
It would be the corporate version of the Matthew Effect: the strong would just get stronger. Nearly 15 months later, Federal Reserve economic data show Orszag was right. The strong did get stronger—and much richer.
A great year for the wealthy (especially the 1%)
Newly released data from the Fed show that the top 1 percent of income earners now hold 32.1 percent of all wealth in the United States. That is the highest percentage of wealth the top 1 percent has held since the Fed began publishing the data set in 1989 (see below).
That’s up nearly 20 percent from the period following the 2007-2008 Financial Crisis, and nearly 35 percent from 1990.
This data should not be surprising. A year ago, as small businesses were ravaged by lockdowns, pundits such as Jim Cramer were pointing out that we were witnessing “one of the greatest wealth transfers in history.” While small businesses were dropping “like flies,” the “Mad Money” host observed, the US was witnessing “the first recession where big business … is coming through virtually unscathed, if not going for the gold.”
It wasn’t just the super-rich who got richer, however. As the Wall Street Journal recently reported, data show most Americans got richer in 2020, particularly wealthy households.
“U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades,” the Journal reported. “Many Americans of all stripes paid off credit-card debt, saved more and refinanced into cheaper mortgages. That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion.”
This wealth surge, however, was not evenly dispersed. The wealthiest households—the top 20 percent—accounted for nearly $10 trillion of the $13.5 in new wealth created in 2020, data show.
How this happened is quite clear. To prevent an economic collapse once huge swathes of the economy were closed by government lockdowns, the US borrowed, spent, and lent trillions of dollars.
“[These actions] powered much of the stock market’s unexpected boom,” write WSJ reporters Orla McCaffrey and Shane Shifflett. “Rock- bottom interest rates lured more investors into stocks; workers stuck at home tried their hand at trading and tech giants gained even more ground during the shutdown.”
The result? Wall Street (i.e. the stock market) became the single biggest generator of new household wealth, accounting for close to half of all new wealth. While it’s true the federal government dropped roughly $850 billion in stimulus checks that went to low-income and middle-class families, wealthy Americans were by far the biggest beneficiaries of the spending bonanza.
“The Americans who gained the most during 2020 were the ones who had much more wealth to begin with,” the Journal notes. “Houses, stocks and retirement accounts—which wealthier people are more likely to own—soared in value, and those boosts are likely to endure.”
A Textbook Case of the Cantillon Effect
For people concerned about inequality and basic fairness, the scenario described above is alarming, perhaps even infuriating. But, once again, it shouldn’t be surprising.
More than a quarter millennium ago, Richard Cantillon suggested that printing new money doesn’t impact everyone the same way. The Irish-French economist outlined how price increases impact different economic sectors in different ways depending on when the money reaches each sector.
In a 2018 article on the Cantillon Effect, economist Jessica Schultz explained that those first in line (so to speak) benefit most from sudden cash infusions.
“[The] first sectors to receive the newly created money enjoy higher profits as their pay increases, but general costs are still low,” wrote Schultz, a Predoctoral Fellow at the National Bureau of Economic Research. “On the other hand, the last sectors in which prices rise (where there is more economic friction) face higher costs while still producing at lower prices.”
In the 21st century, the speed with which this happens is astonishing. Schulz offered a hypothetical example of how the financial sector responds to huge injections of cash.
“Let’s say the Fed decides to lower interest rates (by expanding the supply of money in the economy). Soon after the Fed makes its announcement, investors anticipate new earnings from increased investment. In fact, once even a few people get wind of the Fed’s intentions, investors expect prices to rise, whether they rely on algorithms or rumors for their information. Investors flock to the financial markets, hoping to get there first; if they can buy stocks while the prices are still low, they can reap enormous profits once prices rise.
However, the sudden increased demand for stocks in the financial market bids up asset prices, and this happens rapidly. Within minutes—seconds, even—the expected increase in the price level has been factored into the financial markets. The first place where ‘inflation’ is felt is in the financial marketplace.
This means that people who are most invested in the market are the first to benefit from inflation.”
This is precisely what happened in 2020. The people with the most wealth were able to gobble up stocks (and other assets), banking on higher prices later (in the form of inflation). It wasn’t just financial speculation, however.
Tilting the playing field
Many corporations were in the cat bird’s seat in the middle of a recession because their competitors were sidelined by pandemic restrictions. For example, with many small retailers around the country ordered closed because they were deemed “non-essential,” Target set sales records as their market share (and stock price) swelled. In April 2020, Target shares were trading at roughly $ 92.50; as of Wednesday morning, their shares were trading at roughly $242.
With a chance to refinance homes on the Fed’s cheap money, invest in corporations playing on a tilted field, and work from home, it’s not hard to see why wealthier Americans did well—and why many of them were happy to mouth “stay home, stay safe” platitudes.
For Americans with few assets and little wealth, it was a very different story. Besides a meager stimulus check and perhaps some unemployment benefits if they lost their job, these Americans saw little from the unprecedented money printing other than higher prices—which are rising with alacrity.
For these Americans—and there are many of them—the pandemic was not a cornucopia, but one more hurdle in their quest toward the American dream.
“Those who missed out on wealth creation during the pandemic will be less equipped to weather the next major strain on their finances,” the Journal notes. “In 2020, more than a third of adults said they might not be able to cover a sudden $400 expense in cash, according to the Fed.”
Favoring the connected
Economic populists often call for big government to redistribute wealth from the rich to the poor to even the playing field, especially during times of economic crisis.
But big government has demonstrated a clear and pervasive tendency to do the opposite: to reward those with influence and power at the expense of ordinary citizens. This is clearly what happened in 2020.
“When the federal government stepped in with its ‘assistance’ via the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it clearly favored the big, wealthy, and well connected,” author Carol Roth points out in her new book, The War on Small Business.
While small business owners were left to “duke it out” over limited Paycheck Protection Program funding, lawmakers in DC were doling out favors to “friends of government,” notes Roth, a former investment banker. These “friends” included the Kennedy Center—which furloughed its orchestra and staff after receiving $25 million in no “strings” attached funds—as well as colleges with multibillion-dollar endowments (some of which were shamed into giving the money back).
The new Fed data simply bear out the thesis. Following one of the biggest expansions of government in history, the most well-off Americans—the ones with the most influence, wealth, and power—have more wealth than ever, despite a global recession. Meanwhile, the poorest and most vulnerable suffered the most.
Some will naturally blame capitalism for this gross exacerbation of inequality. And in doing so, they’ll miss the irony of it all.
It was not the free market that allowed “the rich get richer, and the poor to get poorer” during an economic crisis created by the state. It was government privilege.
This article originally appeared on Fee.