A year ago, the FTSE 100 stock market index hit its lowest point in almost a decade, diminishing the value of assets held mostly by the wealthy. Twelve months on, it is likely that wealth inequality has gone back to where it was or grown wider than before the crisis.
Between the outbreak of the coronavirus pandemic in the UK in March 2020 and the end of the year, two of the richest people in the world both saw their net worth skyrocket. Jeff Bezos, founder of Amazon, became $72 billion richer between 18 March and 31 December 2020. The wealth of Elon Musk, who founded the electric car company Tesla, grew by $129 billion over the same period.
At a time when those already vulnerable and in poverty have suffered disproportionately, such reports have fed the public perception that wealth inequality has grown during the pandemic. But what do we know about the wider story of wealth inequality beyond the ‘über-rich’?
It’s difficult to know what’s happening right now, because any data that allow us to calculate standard inequality measures are produced at a significant lag. But we can make some educated guesses based on how changes in asset prices, expenditure patterns and debt levels will affect different households. Taken together, these suggest that after an initial decrease in the early months of the pandemic, it is most likely that wealth inequality has continued to grow.
What happened early in the pandemic?
Before the pandemic, the richest 1% of people in the UK held around 17% of total wealth (Advani et al, 2020). In the early days of the crisis, inequality may have actually diminished, with stock market losses predominantly affecting the rich. To see this, it’s helpful to understand what types of assets comprise wealth, and how the value of those assets has changed.
Broadly, household wealth is made up of five asset classes: housing; pension; financial; business; and physical (items such as household contents, cars and collectables).
For the majority of the population, if they have any substantial wealth, it is usually held in the form of housing and pensions (Advani et al, 2020). Among the very richest households, financial wealth and business wealth make up a much larger share of the total (see Figure 1).
Figure 1: Composition of wealth, by total wealth
Source: Author's calculations using Office for National Statistics Wealth and Assets Survey 2016-18.
Note: This chart shows the composition of individual total net wealth according to wealth in each of the broad asset categories, and by range of total net wealth. It excludes those with negative net wealth (that is, those who are overall in debt).
Looking at these differences alongside changes in asset prices, we can infer what has happened to wealth inequality. For example, if the value of housing and pensions has increased while financial and business asset values have decreased, inequality is likely to have shrunk.
Indeed, this is a fitting description of the situation during the early days of the pandemic. In particular, as Figure 2 shows, stock markets plummeted when coronavirus first began to take hold in the UK and other advanced economies. After smaller falls in late January and February 2020, the FTSE 100 declined by close to 30% between 4 and 16 March 2020, and remained low in the months that followed.
By contrast, data on house prices suggest that these were broadly flat or, if anything, rising in the first half of 2020 (UK House Price Index, Nationwide). Of course, the stock market crash would also have reduced the value of defined contribution pensions, which are held by many people of varying levels of wealth. But the larger the pension pot, the more there is to lose.
Figure 2: FTSE 100 since 1 January 2020
Source: Financial Times
This suggests that in the first couple of months of the pandemic, wealth inequality may have been slightly reduced, thanks to a reduction in the value of existing financial and business wealth held disproportionately by the wealthiest.
But changes in wealth depend both on shifts in the value of existing wealth and additional savings. And there is growing evidence that UK households have accumulated huge amounts of savings over the past year – perhaps as much as £250 billion (Bank of England chief economist Andy Haldane has described this ‘pent-up’ demand as a ‘coiled spring’).
So as these savings accumulate for those who have been able to put money aside, the gap between wealthier and less wealthy households is likely to have begun to grow again – particularly as many households have experienced falls in their income since before the crisis, making saving difficult or impossible.
How have developments in the past year favoured the wealthy?
Reports abound of the ways in which many Britons have saved money through being stuck at home, including far fewer opportunities to eat out, travel, go to the cinema or enjoy live entertainment. The more you were already spending on these things, the more you’ve probably saved.
As high-income households tend to be high-expenditure households, they will be saving more as a result of these changes. We shouldn’t confuse high income with high wealth – there are people with lots of wealth but little or no income (such as pensioners), and vice versa – but they are, of course, connected. The Bank of England has found that more high-income households and retirees, the groups most likely to be wealthy, have saved money during the pandemic than other types of households.
At the same time, households with less wealth are more likely to be struggling to get by. The same report showed that low-income employed households and the unemployed were more likely to have run down their savings than to have increased them. In addition, debts are rising among households with both new and existing benefits claims as they grapple with increased economic hardship (Welfare at a Social Distance, 2021).
The changes in asset prices outlined earlier have not persisted, limiting the impact on those holding financial wealth. Although the stock market has not completely recovered to its pre-Covid-19 level, it has gradually returned to around the level of early March 2020. At the same time, house prices have continued to rise, growing by almost 7% over the year to February 2021 (Nationwide).
While there are many factors driving both of these developments, an important element connecting the two is quantitative easing: the purchase of government and corporate bonds by the Bank of England, the UK’s central bank.
Quantitative easing has been used to support the economy where interest rates cannot be lowered further and fiscal policy (changes in tax rates or government spending) is not doing enough to right the ship on its own. In the UK, it was first used in the wake of the financial crisis, and several additional rounds were announced last year to support the economy during the pandemic.
While this is a ‘macroeconomic’ (the whole of economy) policy, it has important distributional consequences because of the impact on asset prices. Specifically, it boosts prices of financial assets directly and of housing assets indirectly, by making it cheaper for households to borrow money. As a result, the value of assets that are sensitive to interest rates, including financial assets, pensions and (to a lesser extent) housing, has grown sharply.
In sum, those who already owned these types of assets have had their wealth boosted for no reason other than their happening to have their money in the right place at the right time. This is one of the reasons that the UK Wealth Tax Commission recommended a one-off wealth tax to help reduce government debt in the wake of the pandemic, which has required a steep rise in government spending and borrowing.
That said, not all at the very top have had the same success as Jeff Bezos and Elon Musk. Business wealth also makes up a large share of wealth at the very top end, and the experience of individual businesses during the crisis has been very diverse. Businesses in the travel, live entertainment or hospitality sectors, regardless of their success pre-pandemic, have been hit hard by the lockdowns of the last 12 months.
Indeed, The Times reported that the earnings of many of the UK’s biggest taxpayers fell last year. Although the number of individuals at the top end of the wealth distribution is, by definition, small, there will be differences in how their wealth has changed over the last year. Much of this will depend on whether their wealth is predominantly held in their own businesses, or invested in a range of other businesses (that is, financial wealth).
What can we conclude?
It is hard to measure wealth inequality accurately in ‘real time’ so it may be years before we get a really accurate and detailed picture of the pandemic’s effects. Nevertheless, we can reasonably expect that most (but not all) of those who were towards the top of the wealth distribution before the crisis will be back at least to similar levels of wealth as before the crisis, if not higher.
In contrast, households that did not have much wealth to begin with are unlikely to have grown wealthier. Indeed, debts are rising among many households at the bottom end as they grapple with diminished earnings. Not all measures of wealth inequality are as sensitive to changes at the bottom, but regardless, it seems likely that wealth inequality is similar or worse now than it was before the crisis.
Why should we care?
Much of the research and public discussion about inequality centres on income inequality. Taxation and benefits systems are generally designed to redistribute income rather than wealth.
But consider the difference that owning a house outright and having savings to fall back on might make to a person who loses work. Those with wealth can afford to wait for the dust to settle, while those without wealth must immediately seek work in other (probably lower-paid) fields or take on debt to make ends meet. Wealth confers status and comfort, but also economic advantage – it acts as a buffer for those who fall on hard economic times.
The focus on the increasing wealth of billionaires over the last year speaks to a broader public awareness of the huge disparity in the distribution of economic resources, an inequality that extends much further than income.
Where can I find out more?
- What is quantitative easing? Bank of England article explaining its quantitative easing policies.
- The many ways to measure economic inequality: Pew Research Centre on measuring inequality.
- World Inequality Database: Explore worldwide data on wealth and income inequality.
- The UK Wealth Tax Commission: Evidence papers on the principle and design of a wealth tax.
- The role and design of net wealth taxes: Report in the OECD Tax Policy Studies series.