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We are seeing wartime-style falls in GDP


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The pandemic and the radical change in wealth distribution to come 

‘The old globalised order is fracturing. We are seeing wartime-style falls in GDP’



Yup. When I emerge from isolating I will be nothing like my old self. For starters I will be fit. I see no reason why I will not do at least one Joe Wicks workout every day for the rest of my life. So certain of this am I that I have been buying exercise gear online and downloading something called RunPod. I will of course be doing a 5km fun run the second I leave the house. This isn’t true, of course.

Sure — if there is any consensus among the large chunk of the global population currently trapped in their houses it is that nothing will ever be the same again, that we will emerge into a different, and possibly better, world. But it probably isn’t so.

I know, and you know, that whatever I like to think now, once the kids are physically back at school I might travel a bit less than I used to. But Joe? No, the real me knows I will go right back to my old routine (wave them off, head for the kitchen, cafetière of strong Lavazza Rosso with a little warm milk, papers, desk) and that I will love it. In our new world, I suspect we will fast revert to our old (and perfectly acceptable) habits.

Those who think the tourism industry will never recover, for example, should note that cruise bookings for 2021 have risen year-on-year over the past month.

One thing I do expect from our pandemic is an acceleration in some trends already under way, be they an increase in working from home, faster digital transformation, faster robotic adoption in the manufacturing sector or the bringing forward of global debt jubilees.

One to watch for in particular is a shift in income distribution from the richest to the poorest. For hints on how this might happen, I’m wondering if we should be looking at the UK in the first half of the 20th century.

In a 2018 paper, “The Comfortable, the Rich and the Super-Rich”, Peter Scott and James T Walker look at British incomes over this period and it isn’t a pretty picture — for the rich at least.

In the 19th century, the UK had higher levels of income inequality than most, something partly explained by “unusually high inequality in wealth” and hence investment income. The richest 1 per cent held about 70 per cent of overall wealth (and received 30 per cent of the income) and the bottom 95 per cent only around 10 per cent.

Then came the shocks of war, the financial policies that supported it, the end of the globalised world of the late 1800s, and some “challenging” times for the super-rich.

In 1911 the richest 1.1 per cent of households (or “tax units” as the Americans say) were rentiers (50 per cent plus of their income was unearned). By 1949 that was 0.026 per cent. Between 1911 and 1949 the income share of the top 1 per cent fell by 62 per cent.

This was partly about inflation, which forced asset holders to sell up to maintain their lifestyles, and partly about falling asset prices, but also about rent controls, which forced residential property sales at low prices, and downward pressure on dividends and interest (the dominant part of unearned income).

There were limits on the buying of overseas securities, penal taxes on dividends, supertaxes on very high incomes and in the 1930s a spate of nasty “conversion issues” that replaced high yielding securities with lower interest ones — the best known being the replacement of the 1917 5 per cent War Loan with 3.5 per cent non-dated stock. Holders didn’t get back their money (which was now practically purchasing power free) until 2015.

None of this is a good way to reduce inequality by the way: if progress is what you are after it is obviously better to look to raise the income of the poor than rush to cut that of the rich.

On the plus side, the decline in income inequality was also about improvements at the low end. The fall in dividends “provided greater scope” for higher wages to be paid, while lower rents and rates cut household expenses and drove the housing boom of the 1930s.

There is also something better to be added to the mix here. Wars have a “levelling tendency” as low status groups become essential to the war effort (and hence acquire a higher status). The result is that policy changes in their favour. It is all sounding a bit familiar, isn’t it?

The old globalised order is fracturing. We are seeing wartime-style falls in GDP, with the third largest contraction in output since 1900, according to Deutsche Bank.

The UK has put in place some dividend controls on the banks and created an environment of moral outrage around others. Look at the fury around Tesco paying a dividend during the business rates holiday.

There is talk of the state taking stakes in crucial companies — good luck getting dividends restarted after that — and of new kinds of low yielding financing options to pay for it all, such as the GDP-linked bond.

Interest rates are going to stay low. Rents might well fall, as Airbnb flats are redeployed to the long-term market at lower prices.

Taxes are bound to go up on those with unearned income. Then there is the levelling tendency. There was already support for a rise in the minimum wage. There’ll be more now: the US research project Hidden Tribes showed 76 per cent of respondents were “more grateful for grocery store staff”. At the same time the Trades Union Congress is agitating for higher worker wages at any companies that get a state bailout. If manufacturers are no longer able or willing regularly to outsource all production to cheap places abroad, labour’s share of returns will surely rise.

With all that in mind you might also look to a new working paper from the San Francisco Federal Reserve: its research on previous European pandemics suggests that interest rates have historically fallen for 20 years afterwards and real wages have risen for 30 years. FT readers will have mixed feelings about all this: they may be glad wages will be rising for the less rich, but not so glad the returns from hard-won wealth will fall.

What can you do? Accept it. Diversify to as many sources of income as you can (dividends are unlikely to fall in cash-rich Japan, for example). And to the extent you can, hang on to your ability to earn.

I’m loath to join the chorus of do-gooders demanding that you use your lockdown to learn new skills or update old ones, but I think it will turn out to be an excellent idea.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. 

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