BY JAMES PETHOKOUKIS
America’s “K-shaped” recovery is a convenient phenomenon for analysts who focus a lot on income inequality, not to mention those convinced America already suffers from severe “late stage capitalism.” To them, it’s just another example of how during good times and bad, the rich get richer — and the rest fall further behind. The Wall Street Journal offers a neat description of the alphabetical concept:
On the upper arm of the K are well-educated and well-off people, those who can work from home, businesses tied to the digital economy or supplying domestic necessities, and regions such as tech-forward Western cities. On the lower arm are workers with lower wages and fewer credentials, old-line businesses and regions tied to tourism and public gatherings.
That summary suggests the limits of trying to fit this recovery into some broader macro-critique of capitalism. It’s COVID, not capitalism, that’s the problem here. K-shaped, maybe, but C-driven. As Goldman Sachs notes in a new report, the main driver for this have-versus-have-not recovery is that “job losses during the pandemic were highly concentrated in virus-sensitive industries like leisure and hospitality that disproportionately employ low-wage workers.” Specifically, Goldman adds, “the decline in overall labor income was dominated by employment declines for workers earning less than $30/hour.”
In other words, the K-shaped recovery is being driven by the specific nature of this economic shock. That said, a bifurcated expansion is hardly unusual in the initial stages of recovery. For instance: It took a long time in the Not-So-Great Recovery following the Great Recession for strong wage growth to spread to lower-income workers. The good news here, of course, is that the pandemic isn’t permanent. Vaccines are on the way, a development that should eventually drive a recovery in virus-sensitive industries and help lower-income workers.
But Washington shouldn’t wait until the vaccines arrive to do something. And what might that something be? As my AEI colleague Michael Strain recently recommended:
The outlines of a compromise are clear. Another round of PPP, perhaps targeted at even smaller businesses — say, those with less than 300 employees — than in the March Cares Act. Spending for public health measures, including increasing testing. Renewing the Cares Act’s expansions of unemployment insurance benefit duration and eligibility, and supplementing state-provided benefits by a few hundred dollars per week. Offering businesses protection against Covid-19-related lawsuits. Expanding food stamps. Offering grants to state and local governments to avoid layoffs and help schools reopen.
And the faster the better, of course. Goldman economists note the recovery — as well as incomes for lower-earning workers — has been helped by previous fiscal transfers. It would be better not to wait until February for more. But the bank also assumes that’s exactly what will happen, arguing that “the fading fiscal offset raises risks for lower-income households, and the next fiscal package is likely a few months off. We expect the pullback in fiscal transfers to cause a decline in overall disposable income in 2020Q4 that will hit the bottom quintile particularly hard and weigh on consumer spending this winter.”
An unwelcome scenario that can and should be avoided.