By Kannan Agarwal

Some have called this pandemic The Great Equaliser. Others think otherwise.

Since the outbreak, the World Economic Forum reports that the combined wealth of US billionaires increased by over US$637 billion to US$3.6 trillion.

Top of the pops is Jeff Bezos, whose personal net worth jumped a whopping 63% during the pandemic and is now worth US$184 billion. In October, Bezos’ digital behemoth Amazon announced a record third-quarter profit of US$6.3 billion with plans to expand its physical fulfilment centres to keep pace with demand. Others on the list include Eric Yuan (Zoom), Mark Zuckerberg (Facebook), Steve Ballmer (Microsoft), and Elon Musk (Tesla and SpaceX).

Then we have the bottom of the pyramid – 81% or 3.3 billion citizens who have had their workplace fully or partially closed according to the International Labour Organization (ILO).

This isn’t about disenfranchisement, an ever-present spectre in every recession. This crisis is different from others as it’s resulted in a windfall for the ultra-rich, the 1%, with no existing redistribution effect for the rest of the 99%.

Digital companies like Amazon, Google, Facebook – which benefited the most from the fallout – have paid zero or negligible levels of income tax for years. Amazon’s 2017 and 2018 tax filings with the US Securities and Exchange Commission show US$0 and hundreds of millions dollars in tax rebates the company received from the government.

After intense backlash from the media and citizens, this year, it declared US$162 million in taxes for 2019. The news was greeted with acerbic headlines – ‘Amazon finally owes federal income taxes this year’ by The Verge media and ‘Jeff Bezos spent more on this house in Beverly Hills than Amazon has paid so far in federal corporate income tax for 2019’ by MarketWatch, a Dow Jones media website.

At first glance, US$162 million seems a lot. Except that it’s a mere 1.2% of the company’s US$13.9 billion pre-tax income. A drop in the ocean, given that the average American pays 14% in income tax…and they don’t have the cash buffer of a Nasdaq company.

Reshape Thinking

In the deepest global recession since World War II, former Federal Reserve Chair and economist Ben Bernanke, in comments to the Washington Post, characterised this trough as “an even more unequal recession than usual”.

“The sectors most deeply affected by Covid disproportionately employ women, minorities and lower-income workers.”

Nowhere is this felt more acutely than in countries where economic inequality was already high before the pandemic hit. In India, where the growth of inequality is the second highest in the world, the rich held 4x more wealth than the bottom 70% of the population. Within five months of the pandemic, Mukesh Ambani, Reliance Group Chairman and Asia’s richest man, had amassed over US$48 billion in net worth, doubling it to over US$80 billion, making him now the fourth richest man in the world.

In contrast, the Indian economy contracted 23.9% in the first quarter of 2020, coupled with ILO predictions that 400 million workers in India’s informal economy will fall deeper into poverty. The following commentary by the Financial Times is reflective not just of India, but almost every country in the world:

“Abhijit Banerjee, the Nobel Prize-winning economist, warns that if millions of households slide into chronic hunger and indebtedness they will be a drag on India’s economy for years.

“There has been a huge income shock to the people who are most illiquid and who will not be able to finance consumption by borrowing,” he says. “If they don’t revive their consumption, this then leads the whole economy to shrink. India should worry about a demand slump. Whenever the economy is allowed to revive, people will not have money to spend.”

Cash transfers work – whether in the form of the furlough deal in the UK, with the government paying a percentage of worker salaries throughout the pandemic, or direct cash transfers into bank accounts such as Malaysia – when applied with longer-term and less obvious means of keeping the economy afloat.

Central banks have been quietly and deftly working the machinery of finance through asset purchases and bond buying to loosen the binds that constrain the economy, keeping confidence levels and markets afloat. What’s changed since the last crisis is that many regulators are now including inequality measures in their policy analysis.

An IMF working paper, Should Inequality Factor into Central Banks’ Decisions?, released this September, captures important dimensions of unequal wealth distribution. Its findings support making inequality an explicit target for monetary policy in tandem with other goals such as targeted unemployment levels and inflation rates.

Its authors Niels-Jakob H Hansen, Alessandro Lin, and Rui C Mano frame their study thus: “Should central banks care about inequality when setting monetary policy? Up until recently this question was a non-starter among policy makers and academics.

“First, inequality is typically outside central banks’ mandates. Second, an early literature showed that inequality of wealth or income did not distort the aggregate transmission of shocks. However, major central bank officials are increasingly discussing distributional issues. At the same time, advances in economic theory have shed light on the role of inequality in the transmission of monetary policy.”

A blog post by the Economics Policy Institute concurs but through the lens of private sector agents. The authors, Heather Boushey and Somin Park from Washington Center for Equitable Growth, wrote: “When Moody’s Analytics’ chief economist Mark Zandi integrated inequality into the Moodys.com macroeconomic forecasting model for the United States, he found that adding inequality to the traditional models — ones that do not take into account economic inequality at all — did not change the short-term forecasts very much. But when he looked at the long-term picture or considered the potential for the system to spin out of control, he concluded that higher inequality increases the likelihood of instability in the financial system.”

‘Shameful Acts’

It is a crucial shift in mindset. Addressing distributional issues at the policy level can mitigate a range of last-mile distribution issues which have plagued this round of disbursements.

Consider the Coronavirus Aid, Relief, and Economic Security (CARES) Act, America’s historic US$2 trillion budget to directly assist millions of citizens as well as businesses.

The emergency distribution was approved by US Congress, which mandated Internal Revenue Services to credit monies direct into individual bank accounts. One oversight though – some 14.4 million Americans are ‘unbanked’, i.e. do not have bank accounts and had to wait weeks or month before they could receive their stimulus cheques by mail. Ooops.

Once that long-awaited stimulus cheques did arrive, over-the-counter consumers were charged anything between 1% and 10% to cash that cheque. One aid recipient told the Associated Press, “They charge you an arm and a leg…You never get your full money. It’s bad, but I have no other choice.”

Data from international agencies and national authorities indicate that the majority of unbanked and underbanked in our midst are likely to be from lower-income households, less-educated, younger, persons of colour, disabled, or households with volatile income.

Additionally, the US government’s Paycheck Protection Program (PPP), a stimulus package designed to extend credit cheaply and directly to small businesses, also faced criticisms when it was distributed. With interest rates set at 1% and the possibility of debt forgiveness if companies abide by employee retention and disbursement criteria, the idea behind PPP was to keep mom-and-pop stores alive, unemployment at manageable levels, and spur local spending.

In April, brickbats were thrown when it was discovered that at least US$250 million in PPP money was disbursed to public listed companies and big businesses, some with market values in excess of US$100 million and were already loss-making before the pandemic. These big businesses only returned PPP monies to government coffers when the media exposed the findings on the back of research produced by JP Morgan and other analysts.

Howard Schultz, former Starbucks chairman and CEO, told CNBC, “I think you’ve seen some pretty shameful acts by some large companies to take advantage of the system” and that government should act “as a backstop for the banks to give every small business and every independent restaurant a bridge to the vaccine. And that is the money and the resources to make it through.”

Myth-buster

The CARES Act and PPP fracas exemplify the uphill battle faced in closing the wealth gap.

+ Firstly, allocating credit is not good enough. Time is of the essence. The immediacy of credit reaching the hands of intended recipients impact cash flow and can either accelerate or decelerate the rate of recovery. Inequality widens when money is available but out of reach because the connecting pieces needed to access that credit are woefully missing. Also, transaction costs such as service charge when cashing out stimulus cheques could (and should) have been waived as part of disbursement instructions coming out of Washington – ‘taxing’ benefits in this manner sends the signal that one is profiteering and reduces the level of disposable income.

+ Secondly, direct cash transfers give people purchasing power, so make sure it gets in their hands. Some argue that unconditionally putting cash in the hands of beneficiaries who are poor will see it squandered on non-essentials such as alcohol. This is refuted in findings by economists such as Johannes Haushofer and Jeremy Shapiro, who show that unconditional money transfers in countries like Kenya had two effects: (1) beneficiaries spent significantly more on food, education, and health; (2) unconditional cash transfers form a social safety net for the poor that can counter rising inequality and social discontent.

+ Thirdly, fintech is not the be-all and end-all solution. Research show that just like banks, fintechs are driven by economics that don’t necessarily enable financial inclusion. This is known as ‘cream skimming’, a metaphor used to describe the business practice of servicing only high-value or low-cost customers, disregarding clients that are less profitable. Like banks, financial technology firms have economic imperatives that make it difficult for them to facilitate meaningful levels of financial inclusion. We recommend reading the 2018 study, FinTech Borrowers: Lax Screening or Cream Skimming?, by Marco Di Maggio and Vincent W Yao for insights into this lesser known aspect of fintech behaviour.

+ Fourthly, most of the unbanked do not have ready access to or are unfamiliar with mobile technologies. The Brookings Institution’s research paper, The Post-pandemic, Socially Conscious Transformation of American Banking in a Digital World, found that in principle, fintechs should make banking more attractive for the unbanked since these technologies have the potential for lowering the costs of banking. In practice however, certain segments of the unbanked – senior citizens, the homeless, urban poor – are likely to be less familiar with mobile banking than the rest of the population. A 2017 Federal Deposit Insurance Corporation survey also points to the lack of sufficient funds, lack of trust in banks, and account fees as the top reasons for why the unbanked opt out of the banking system…and stay that way.

Some out-of-the-box solutions have been proposed:

  • Create a public option for basic banking services. Using existing post offices or the postal system to deliver stripped-down savings accounts, this increases uptake on the deposit side with super-low or no maintenance and overdraft fees, incentivising unbanked or underbanked households to keep an account.
  • Reform your tax system, advises Kristalina Georgieva, managing director of the International Monetary Fund (IMF), when asked on the solution that would give policymakers “the biggest bang for their buck in the near term”. US lawmakers have certainly taken this to heart and straight to the voting floor. Former presidential nominee Senator Bernie Sanders has tabled the Make Billionaires Pay Act – a 60% tax on windfall wealth increases of the richest Americans which will go towards paying for medical expenses for Americans for a year. At last count, the potential taxable sum is US$731 billion accumulated by 467 billionaires or the richest 0.001% America.
  • Stop illicit financial flows to curb. Crisis or no crisis, the European Banking Authority warns that money laundering will continue. Transparency International reports that illicit financial flows drain Africa of US$50 billion annually, funnelled abroad using offshore financial structures with the help of complicit or negligent banks, lawyers, accountants, and real estate agents. Such leakages are a key driver of economic inequalities. As an example, the organisation states that in the aftermath of the 2008 financial crisis, banks laundered drug money amounting to US$352 billion, and professionals such as financial advisers were involved in looting funds for responding to the Ebola crisis. Strengthening the global AML system’s front-line defences is key. For updates on the AML front, read our story, AML Compliance Hanging on a Wire, on page 20.

History’s Bogeyman

Georgieva sums it best: “Inequality holds growth back.”

Speaking via remote interview this October at a Barron’s conference, she estimates that 90% of the world will finish 2020 poorer than when they started, with 90 million more falling into the poverty bracket in addition to the world’s existing 760 million poor.

“We have done research at the IMF that clearly demonstrates that five years after SARS, or H1N1, we would get 5% more unemployment among the poorer part of the population. So if we don’t want to come on the other side of this pandemic weaker, we ought to integrate [an] inclusive approach to growth to the response to the pandemic right now. We must be very mindful that, unfortunately, history tells us pandemics deepen inequality.”

Turning the tide on global inequality requires that we keep our nose to the grindstone and fix the gaps. Finance has a crucial role to play in the redistribution of wealth and ensuring our children inherit a more equitable world.

Question is: Are we all in this together?

Kannan Agarwal is a researcher with Akasaa, a boutique content development and publishing firm with presence in Malaysia, Singapore, and the UK. His focus is digital content and Big Data analytics.