Economic downturns tend to increase income inequality
Economic disparities in the U.S. were on the rise, even before the coronavirus pandemic. Imagine all of a nation’s pretax annual income added together — from sources like wages, interest, capital gains, food assistance or Social Security transfers. In the United States, for example, the top 1 percent of income earners in 2016 received about 20 percent of that national income, while the bottom 50 percent of earners received 12 percent of the national income. In addition, the income of the median Black household was half that of the median White household. Globally, income inequality has also been high in large countries like India, Brazil or Russia, as well as smaller countries across sub-Saharan Africa and Latin America.
In June, the International Monetary Fund projected the global economy will shrink in 2020 by 4.9 percent. In the second quarter, U.S. GDP contracted at an annual rate of 32.9 percent. This emerging global economic crisis associated with the pandemic is likely to exacerbate the disparity between the percentage of national incomes going to low earners vs. high earners. Notably this is because most low-income occupations cannot be done from home. Poor, uneducated and — to the extent to which poverty overlaps with race — Black or Latino citizens, in particular, are likely to experience downward social mobility in the United States.
Media reports, for instance, point out America’s billionaires are benefiting from both the pandemic itself and the Trump administration’s economic policies in response to the pandemic. Research also shows that, in many countries, the incomes of poorer citizens have not recovered from the 2008 financial crisis.
What does cross-country data analysis reveal about such concerns?
Our recent work on this topic (with Hyunwoo Kim) looks at 66 countries between 1960 and 2010, and shows economic crises drive income inequality. We use data on diverse forms of economic crises — debt, inflation, currency, banking and stock market crises — and show all forms of crises, with the exception of stock market slumps, tend to increase inequality, measured using Gini coefficients, where a higher value indicates high-income individuals receive a larger percentage of the county’s total income.
How does this process work? Directly, the lower economic growth and unemployment spikes that characterize economic crises have a more severe effect on low-skill, low-income individuals. Unemployment spells, especially if prolonged, probably would further erode human capital and damp re-employment wages.
Indirectly, workers, in general, have less bargaining power in an economic crisis. They may agree to wage restraints to restore the profitability of firms and avoid massive layoffs implied by bankruptcies. Importantly, large companies or banks are also more likely to access government bailouts, while individuals or small businesses, due to their large numbers and lack of organization, could miss out on government support. To the contrary, most individuals and small businesses will suffer if and when governments reduce spending in response to resource constraints.
Economic inequality reduces popular support for democracy
Additional work by Houle (some with Michael Miller) finds inequality and downward mobility, in turn, are associated with the deterioration or even the breakdown of democracy. Perhaps most significantly, this research suggests people living in high inequality countries or who experience downward personal mobility are less likely to support democracy and are more susceptible to authoritarian values.
In recent years, multiple democracies, such as in Turkey and Venezuela, collapsed because leaders who came into office through free and fair elections simply refused to leave. Democratic breakdowns in the past typically have involved elites carrying out coups — but now increasingly are driven by populist leaders who adopt anti-elite rhetoric, like Viktor Orbán in Hungary and Andrzej Duda in Poland, These leaders directly depend on the support of the masses both to gain office and to consolidate power by changing the rules of succession, for example through referendums. Thus, decreased support for democracy may encourage voters to choose candidates with weak democratic credentials.
The economic crisis could also harm democracy by fueling political instability. Other studies show inequality and downward mobility breed unrest, often in the forms of riots and anti-government demonstrations. The coronavirus pandemic could end up generating large-scale instability. Inequality could, for example, further fuel the protests associated with the Black Lives Matter movement. Large-scale protests could, in turn, lead to authoritarian responses by governments, as exemplified by the clearing of peaceful protesters in Lafayette Square and the deployment of federal agents in U.S. cities.
In short, the coronavirus-induced rise in inequality is likely to harm democracy worldwide by weakening support for democratic norms and adding to political instability. Of course, there are other scenarios — analysis here in TMC, for instance, explains how policies adopted by European countries to mitigate the consequences of unemployment have been more successful than those of the United States.
Our research results suggest addressing inequality will become an increasingly important component of government pandemic aid packages — including, for instance, expanding access to education and increasing the progressivity of taxation — if we are going to preserve democracy.
Cristina Bodea is associate professor in the Department of Political Science at Michigan State University.
Christian Houle is associate professor in the Department of Political Science at Michigan State University.