By Dr. Alan Greenspan, Senior Economic Advisor

A little-noticed effect of COVID-19 that is not often factored into discussions about the pandemic’s economic dislocations is the loss of confidence among America’s middle class in its own upward mobility, in people’s belief that they—and by extension their children—will do better than their predecessors. Why is this so significant? The hallmark of the U.S. economy following WWII was its burgeoning middle class. As women entered the workforce in increasing numbers, household incomes grew commensurately. While spending power grew, time at home diminished. Entire industries sprung up to help fill the gap. Appliances to assist in household chores, automobiles to hasten our journeys, even “TV dinners” for when there just wasn’t enough time to cook. The economic prosperity of that time gave rise to a consumer society and contributed to the anti-saving propensities of “keeping up with the Joneses” and herd behavior-driven conspicuous consumption. This growing American middle class gave birth to a consumer sector which today accounts for 70 percent of real gross domestic product. Even China’s ruling class, though often dismissive of American capitalism and consumerism as gaudy and profligate, recognizes the importance of a healthy middle class to a stable economy as well as a stable government.

The decline of the American middle class has been fretted over for quite some time, but I believe the COVID-19 pandemic has damaged the psyche of this stalwart segment of the U.S. economy in significant ways that are only beginning to become evident. The two major forces I see causing this are an increase in wealth inequality and, somewhat counterintuitively, a decrease in income inequality caused by the fiscal and monetary policy responses to the pandemic.

The first force, wealth inequality, is inequality in the distribution of assets (for example, homes and equity). The past decade of increases in the money supply following the Great Recession culminated in an additional $6 trillion in money supply (as measured by M2) in the aftermath of the coronavirus response. This has caused price inflation across all asset classes from home values to traditional equity holdings to previously fringe cryptocurrencies. Bloomberg reported in October of last year that the top 1% of U.S. earners held more of the nation’s wealth than the middle 60% of earners. It is a classic case of “the rich getting richer” as their asset holdings balloon in value as an ever-increasing supply of money chases a finite number of investments. It is no surprise that private jet bookings have fared rather well since the pandemic while commercial air travel has descended into a chaos of lost luggage and cancelled flights. I believe the inflation we are experiencing today stems in no small part from this expansion in the money supply and it has begun pricing middle class families out of everything from homes to quality educations.

The second force, income inequality, is inequality in the distribution of income, in this case after-tax income plus government transfer payments. The massive amounts of fiscal stimulus extended by the federal government was no doubt necessary to prevent the complete seizure of the U.S. economy following the decision to lock down. However, reports of able-bodied workers choosing to stay unemployed as businesses reopened because the additional unemployment benefits were nearly as much as their take-home pay points to an unintended distortion in the labor market. The extended duration of these good-faith efforts to shield the truly needy very likely also bred resentment in middle class workers. The fermenting debate over “quiet quitting” no doubt has roots in middle class workers who feel they have had to significantly work harder than some of their compatriots for marginally more pay. Furthermore, while efforts by some businesses to “on-shore” production in recognition of the precariousness of global supply chains may benefit the American middle class to some degree, the pace of wage gains in this inflationary period may persuade more businesses that investments in automation are more beneficial to the future of their businesses and could lead to increasing discontent among middle class workers whose jobs can be automated.

These challenges to the middle class are not wholly novel in and of themselves but I believe the pandemic response has exacerbated some of their effects. The West often brushes aside the prospect of destabilizing inequality as the concern of tyrannical autocracies, but even liberal democracies have experienced the wrath of an apprehensive middle class in the past decade. The shocking result of the Brexit referendum and the surprising ascent of Donald Trump both shared the element of a middle class who felt disenfranchised by the powers that be. As I’ve written before, individuals are demonstrably happier and less stressed as their incomes rise with a rising national economy, and rich people, surveys show, are generally happier than those lower down the income scale. Policy makers should beware a discontented middle class.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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Dr. Alan Greenspan

Dr. Alan Greenspan

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was...
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