Pandemic Exacerbating US Wealth Disparity

An already wide gap in wealth disparity among Americans was only magnified and exacerbated by the COVID-19 pandemic, according to a panel discussion at CIO’s virtual conference “Inside the Minds of CIOs.”

The panel, which was moderated by Chief Investment Officer managing editor Christine Giordano, included Carlos Rangel, CIO of W.K. Kellogg Foundation; Mansco Perry, executive director and CIO of the Minnesota State Board of Investment (SBI); and Tim Recker, CIO and treasurer of The James Irvine Foundation.

Along with civil unrest, there is also concern that the wealth disparity negatively affects gross domestic product (GDP). Rangel cited data from the US Bureau of Labor Statistics that showed the median weekly earnings in 2017 for someone with Ph.D. were $1,743, while the median weekly earnings someone with a bachelor’s degree were $1,173, and the median weekly earnings for someone with a high school diploma were $712.

The data look even more stark when wealth is accounted for by race. Black men and women and Hispanic men and women own just pennies to the dollar compared with white men and women. In 2019, the median wealth for white men was $28,900; it was $15,640 for white women. Comparatively, median wealth was $950 for Hispanic men; $300 for Black men; $200 for Black women; and just $100 for Hispanic women.

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Then 2020 rolled around and the COVID-19 pandemic exacerbated wealth and racial disparities. According to data from KKR Global Insights, the unemployment rate for Americans with a high school diploma in January 2020 was 3.8%, while the unemployment rate for Americans with a bachelor’s degree or higher was 2.0%.

But as Rangel pointed out, just four months later in April when lockdowns over the pandemic began, the unemployment rate for high school graduates soared to 17.3%, while the unemployment rate for college graduates and above also rose sharply, but only hit 8.4%.

The situation was even more dire for those with less than a high school diploma, whose unemployment rate during that four-month span nearly quadrupled to 21.2% from 5.5%.

“When you have a shock like COVID hit, it dramatically impacts your ability to respond to a lack of employment,” Rangel said. “So we don’t have a lot of buffers available for part of our society, particularly communities of color, when there are crises.”

Rangel said he’s also concerned that a rise in automation could magnify the wealth disparity, particularly if there is a sudden increase in automation that displaces workers in the US. “One of the concerns that we have is when you look at public expenditure for retraining unemployed workers,” he said.

Rangel cited data that showed that the US spends only 0.1% of its gross domestic product (GDP) on assistance and retraining for unemployed workers, which was 31st out of a group of 32 developed economies, ahead of only Mexico. This is compared with Finland, France, and Sweden, which spend more than 1% of their GDP on retraining, while Denmark allots more than 2% of its GDP toward retraining.

“What happens if all of a sudden we have an increase in automation that displaces workers in the United States?” Rangel asked.

Another sign of the wealth gap in the US can be seen in the distribution of stock ownership. According to Perry, the top 1% of the wealthiest Americans own 53% of stocks, and the next 9% own about 40% of stocks.

Meanwhile the bottom 90% own just 7% of stocks. That means that the top 10% of the wealthiest Americans own 93% of all stocks. Perry also noted that the wealth gap led to a divergence of the economy and the stock markets when the pandemic hit.

“I think we all began to notice this after the pandemic started when both the economy and the stock market were cratering last February and March, but then all of a sudden in April we began to see a significant rebound in the stock market,” while unemployment rates surpassed that of the Great Depression, Perry said. “There truly is a big disconnect between the market and the economy.”

Perry explained that the main reason for this disconnect is that the economy is made up of “pretty much the entire populace whereas the market is made up of very few people within society.”

There is also a disconnect between the market and the economy due to the makeup of the companies represented by the S&P 500. According to Recker, only 10% of companies in the S&P 500 are in industries that are on the decline due to the pandemic. He notes that most of the companies in the index are related to technology and health care, which aren’t as labor-heavy as other industries.

“Small businesses like restaurants are not represented broadly in the financial markets from a market cap point of view,” said Recker, who added that as a result you can end up having stock markets doing exceptionally well while the overall economy struggles.

Recker also said the wealth concentration gap can create both an investment risk and an untapped opportunity for portfolio managers. He pointed out that the most wealth is being generated in technology and innovation.

“We’re in a highly disruptive environment with extreme innovation, so it’s not illogical to expect significant wealth creation for the founders of disruptive companies,” Recker said. “So for an asset owner, if you could identify those companies early that are disruptive it’s obviously an investment opportunity.”

However, Recker added that it does create some risk for portfolios in the short term. For example, if less mature growth companies go public with attractive valuations, there’s a risk for the owners that those values could change materially if the markets decide they want to value more fundamentally based on earnings, rather than growth.

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Tags: Carlos Rangel, Christine Giordano, Mansco Perry III, Minnesota State Board of Investment, The James Irvine Foundation, Tim Recker, W.K. Kellogg Foundation, wealth disparity

Jamie Dimon

Talk about rubbing salt in a wound. Jamie Dimon, JPMorgan Chase’s CEO, is knocking Democratic plans to overturn limits on state and local tax deductions—you know, SALT limits.

At issue is the cap that the 2017 GOP tax cut legislation imposed on how much could be deducted on federal returns. The provision put a $10,000 ceiling on SALT deductions.

Previously, the amount had been essentially unlimited. So if someone paid $80,000 in property taxes, that household could write off the whole amount from what it owed to the Internal Revenue Service. The idea of repealing the cap is to ease the impact of the Biden administration’s proposed federal tax hikes on the wealthy.

But Dimon, in his annual shareholder letter, slammed any move to lift the $10,000 ceiling as a gift to the well-off. In his words, five states—California, Connecticut, Illinois, New Jersey, and New York—“continue to fight for unlimited state and local tax deductions (because those five states reap 40% of the benefit) even though they are aware that over 80% of those deductions will accrue to people earning more than $339,000 a year.”

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You might note that those five are Democratic controlled, high-tax states. In fact, the New York legislature just voted to hike state income taxes on the richest residents markedly, making the state’s rate the highest in the nation.

New York resident Dimon was one of a number of business leaders decrying the state’s action, which could be even more of a pinch given President Joe Biden’s plan to boost federal taxes on those earning more than $400,000 yearly. That’s where Dimon’s reference to $339,000 comes in.

The bank chief pointed to research showing that axing the SALT deduction limitation would overwhelmingly benefit the monied set. By the reckoning of the Tax Policy Center, more than 96% of the benefits of a SALT cap repeal’s benefits would go to the top 20% of earners.

What’s more, the research group estimated that 57% of the benefits would accrue to the top 1%, and a SALT cap repeal would present them with an average $31,000 tax reduction. The organization calculated that a repeal would cost Washington $80 billion yearly in tax receipts.

For Biden, the blast from an influential type like Dimon is no help. The president is trying to knit together his party, which has only a narrow congressional majority, to pass his next big initiative: a $2.3 trillion infrastructure package, which includes the federal tax increases. But the Biden plan does not mention a SALT ceiling abolition.

Some Democrats on Capitol Hill, such as Rep. Tom Suozzi of New York and Rep. Josh Gottheimer of New Jersey, have threatened to withhold their backing for the plan unless the SALT cap is abolished. Democratic governors from seven states (the five mentioned above, plus Oregon and Hawaii) wrote a letter to Biden last week asking him to ax the SALT write-off limit.

The White House thus far hasn’t said much about the SALT topic. At a news conference Monday, administration press secretary Jen Psaki said “this will be all part of the discussion.” Meanwhile, Biden’s planned tax increases haven’t had an bad effect on the stock market, at least up to now.