The Inequality of America’s K-Shaped Recovery

ago to take out something called pandemic insurance. The premiums were around two million dollars a year, which must have seemed a lot of the time, but that policy meant the club could cancel the championships all together and come out ahead with the total pay out of nearly a hundred and fifty million dollars. Well done, that person. Why

do I tell you this? Well I thought of that number recently when I read about the Global Pandemic Insurance Facility, which the World Bank set up a few years ago. That programs also been paying out this year, and the total payments for all of the world's least developed economies will be just over a hundred and ninety million dollars. So that's a hundred and fifty million for twenty two tennis courts in Southwest London for the sixty four poorout

countries in the world. Today's program is about winners and losers in the COVID economy and the case shaped recovery, the phenomenon we're seeing everywhere where. Some of the economy is taking off coming out of this recession, but other parts are still heading down. The director of the London School of Economics, Baroness Minus Chefik, is going to give me the global picture on that in a few minutes. While some countries have done a good job of protecting

the poor in this crisis, some clearly haven't. I'll also be talking to our China Economy editor James Meager about life in China without COVID. They haven't had a case for six weeks. But first we have a report from Bloomberg senior reporter Sean Donald from Cleveland, Ohio, where the gap between winners and losers lately has been very stark. Indeed, six eight seven, Oh bail us one LC versus klais gatingsas hi, I'm as Gatings. How are you God morning?

I'm finding you on September four, nursing assistant Calais Gatherings did something many of us have been doing in this crisis. She dialed into a zoom meeting. Only this one was a little bit more consequential than most. Gathings was joining an online session of the Cleveland Housing Court. She was before Magistrate Mark Wiseman because she was being evicted after falling behind on a nine dollar a month rent on her home in the city's Mount Pleasant neighborhood. It's okay,

it's out of control, oka'n't It's okay? Where would you go if you were evicted? The shelter? I have no where to though. That's why I need a couple of weeks to find somewhere too. I've been looking. I'm sorry to ask all these personal questions, but a new program going on with the with the government that was instituted by the CDC, so for me to find out some of these questions. Did you get a stimulus check? Yeah? Okay,

all right. So around the same time, in a twenty minute drive west of Gaffin's house, tech workers Nathan Hodge and his wife, Erica Schulstad were pondering something rather different. The finishing touches for the four bedroom house in the suburb of Lakewood that they had snapped up in a booming market over the summer. Let's see, so there's a lot of our space, like a nice big back and uh front porch. We made a list to justus like

must have in our house. One of the one of the things we like to say as a Reese Wither June um porch couch. If you want to understand how the US recovery is reinforcing a legacy of inequality that has often been based on race, those two stories are pretty good starting points. The reality is that the gap is growing between the solidly middle class and the working

poor in one of the world's richest economies. In an election year, people talk a lot about political polarization, but an equally consequential and growing economic divide has materialized as well. Think of it as the divide between bread baking America. That's those of us working from home and learning to bake sour dough and breadline America, those who are lining up at food banks and joining the growing ranks of

the food and housing insecure. A lot of that is the result of who has been hit by the COVID crisis. Lower income Americans working for restaurants and hotels and small businesses have borne the brunt of the job losses. Of Americans earning less than forty thousand dollars a year laid off as a result of this year's crisis, according to the Federal Reserve, and many of those jobs aren't coming back as quickly as others. Housing is also playing a

big dividing role in what the economy looks like. Almost half of renters pulled by the US Census Bureau in September said they were likely to be evicted in the next two months. A similar survey found less than twenty percent of homeowners were worried about foreclosure. The shape of the recovery and what that means for the most vulnerable parts of the American population, has a lot to do

with policy choices. The FEDS response to the crisis, cutting policy rates and pouring liquidity into financial markets has brought mortgage rates down to historic laws. That's fuel to boom in home purchases and refinancings. If you are a homeowner or looking to buy and are able to work from home, your personal corner of the economy looks pretty good right now.

That's the current reality and many of Cleveland's pre eminently white suburbs, and for people like Hodge, it's weird that so crazy that you think about like people want more space and interest rates are historically For someone like ga Things, who was laid off from her job at a nursing home and fell behind on the rent, your life looks pretty different, especially when Congress has been deadlocked from most of the past few months on how to roll out

any new assistance for everything. And it's just like I wasn't getting a proof for anything, and then when I went back to work, I'm not working as many as ours. It's just that I just can't keep up with There's too much on my own. Ja Thing's fate that they took four minutes and forty five seconds to decide. The most important decision made by the magistrate was that she wasn't eligible for a national moratorium on evictions that have

been announced two days before. She didn't even know it existed, and the reason she wasn't eligible to magic straight ruled was that she hadn't made a good faith effort to apply for rental assistance, something she also didn't know about. She might have learned about all of these things if she had only known that she was entitled to help

from a free lawyer as well. Judge Mona Scott, who earlier this year became the first black woman to take charge of the Housing Court, says such problems still plagued the eviction process. That's even after the city became one of America's few to enforce a right to counsel for tenants. She sees a crisis building before her. Cleveland is a city that bears the scars of years of housing discrimination against its black residents, and like other US cities, it

also hasn't tackled bigger structural problems. Even is taken up people's pay So we're not really addressing some necessary issues. We're not having these hard conversations. This current economic crisis is also building on the legacy of the last one. Cleveland was one of the epicenters of the subprime mortgage and foreclosure crisis more than a decade ago, and housing activists like Zach Germaniac will tell you that they are

still dealing with the scars. We're one of the most heavily segregated cities in the country and quite Frankly, real estate is really at the centerpiece of that, uh, that tragic history. Hodgen Schulstad saw their new house three hours after the listing went online. They made an offer an hour later, and discovered that there were already a half dozen others. They ended up pleading their case in a letter and raising their bid to ten tho dollars over

the asking price. Importantly, the final price that they paid was more than double what the previous owner paid for it in two thousand and eleven. Julie Weast is a real estate agent who specializes in some of Cleveland's western suburbs. Cleveland's really strong. I mean you're agoing, you know, downtown market people are buying left and right, um, all the way out to the suburbs. You know, it's really the

pandemic has really not flowed anybody down. In some predominantly black zip codes of Cleveland, however, prices have tumbled by a fifth or more over the past year. Activists say that decline is caused in part by another phenomenon born in the last crisis, house flippers and out of town investors. The home gas Things lived in until she had to leave at the end of September is a prime example. In one two year stretch, the house sold seven times,

including four times in just one month last year. It's current owner is an anonymous shell company called b l U s one LLC. But dive into public records and do a little slew thing and you end up talking to tebeau Gallan. He's a French real estate agent and he runs a Miami based company that specializes in selling

Cleveland houses to French investors. Bongeour Devi Nat and found to tours Love is a London certain don't don't connection, says what is great about Cleveland's property market is that you can buy houses cheap and get fantastic cash flow from rent. Gathings home would have gotten your gross and your return of six and you're just a complimentary market or my print. Investors that are looking for um castro and properties. Housing activists don't see it quite the same way.

They argue the out of state investors have actually contributed to the economic decline at Cleveland's East Side neighborhoods at the same time they're inflating rents. Germanic is a housing lawyer who works in the Slavic Village neighborhood, which has seen its own influx of new absentee landlords. He says they are often more focused on cash flow than what's happening to their properties or the community around them. That ends up hitting neighbors who do care, eventually forcing them

to sell into a skewed market. I think a lot of times people find that, you know, the house that they had, you know, put so much time and money in fixing it up. They put on teen tens of thousands of dollars, They read did the roof back in? You know, two thousand three? They you know, all this stuff, and they find out, hey, guess what that that that house that you care so much about is worth fifteen dollars.

The churn certainly hasn't contributed to an appreciation in the price of homes like the one gaff Things was evicted from. It reached a peak value of ninety three thousand dollars in two thousand four, after nearly a thirty years of ownership by just two families, according to property records. By the time Gallon's French investor bought it last year, that value had slumped by a third, which brings us to the current crisis. And how many people worry it isn't

done yet. When it comes to the Cleveland or the broader US housing market, so far, neither have been hip by the wave of evictions many have feared. In Cleveland's case, that is largely due to a rental assistance program that is running out of money. According to Kevin Novak, who runs HN Housing Partners, a community group and developer that oversees the program, I'm not sure that really get through the end of the year with what we have available

for our three months of emergency assistance. UM. It seems to me like this is a crisis that's going to go beyond the end of the year. The national moratorium announced in early September did not come with any new funds for rental assistance, and it did not include any measures to forgive tenants their debts, which means landlords are

watching the past you rent bills pile up. To Judge Scott of the Cleveland Housing Court, the question is not whether or new evictions will come, it's when it's a moratorium. Does not mean your ring, does not mean you don't pay your car now, does not mean you do not pay your gas and light your cell phone bills. It still means that you have to pay these deals, um, because it's not if they come to collect, is when they come and collect. When that new wave of evictions

does come, it will have other consequences as well. One recent study of thousands of evictions in Cleveland found they resulted in not just housing instability, but children missing more school and kids and families that are evicted also being tested less often for lead poisoning, a persistent problem in the city. Meanwhile, homeowners and better off suburbs can look forward to a property market fueled by low interest rates

for some time. The Fed in September indicated it expected not to raise rates until three which is when it expects things to get back to normal in the US economy. But for those hard pressed neighborhoods on the East side of Cleveland, getting back to normal would not be much to celebrate. For them and countless neighborhoods like them in today's America, that would mean just lagging ever further behind.

For Bloomberg News, I'm Sean dar So I'm delighted now to talk about some of the broader issues raised by that piece with Minu Shafik, now Baroness Shafiq, Director the London School of Economics. But I think she's one of few people who before that held very senior positions at the World Bank, the i m F and the Bank of England, where she was Deputy governor most recently. So welcome on the Welcome on Stephanomics. Um what I'm struck by.

And obviously there was a sort of vivid demonstration in that piece of the Tale of Two Cities that this is a recession. I mean, recessions always have an unequal impact on people, but this one it seems rare, even by the standards of recess to have one in which a big chunk of the economy has been hit by this record recession. But actually quite a lot of people on the upper end of the income scale have done better as a result of this recession. They've now got

savings that they didn't expect to have. We've seen soaring savings rates which presumably will go it could well go into their pension pots, all their wealth, and we've actually seen their existing wealth go up because of what's happened to the stock market. Has that been true globally or would you say the only equality was particularly stark in

the US well. Some people have called COVID the Great revealer because it's revealed all of these fundamental inequities and weaknesses in our in our economies, and in our societies. And I often think about the impact of COVID as case shaped. You know, people have debated is it going to be a V shaped, you shaped, L shaped recovered. I think K is the right letter, because you have a sharp drop. And then some things go up and

some things go down. And what we're seeing is that some sectors and some parts of society I'm doing better and others have done much worse. Those that have done worse have tended to be women, the young, and those who are precarious or flexible work. Is the US worse? I think the US is worse for two reasons. One that the safety net in the US is much thinner and got more holes in it than in other countries. And to the US has a higher proportion of its

workforce inflexible work relative to other advanced economies. We had actually quite a significant boost to incomes, even at the lower end as a result of that enormous fiscal support package in the US earlier in the year, but as we know, those higher unemployment benefits, some of which were higher than what people had previously gotten. Wages have run out now and the President has said that he's not going to try and do a deal on a further

stimulus this side of the election. What's the implications of that, do you think? Well, I think the implications for for for the poor in the US are are are devastating. Um, you know, the US has always been on the sort of stingier end of unemployment insurance. In the US, typically if you're unemployed, you get you get insurance for about six months. In continental Europe, it's more typical to get from one to two years of unemployment insurance. Also, the

level at which you're compensated tends to be higher. In the US you get about, you know some typically around half your previous wage. In other parts of the world you're getting a much higher proportion of your previous wage, so you're able to sustain your standard of living. And so the fact that that basic income support will be withdrawn will have very negative consequences for inequality and poverty

in the US. And we've heard the head of the Federal Reserve actually warning about the pace of the recession at the recovery itself facing a threat from that that you could have this sort of double dip that's entirely reduced by by policy. I wonder, I mean, in your in your previous very illustrious jobs, you have spend quite a lot of time advising countries on policies, but developing

and developed. If you're sitting in I don't know, the UK Treasury now or chanceries across across Europe, how does the sort of unevenness of the impact of the virus and the recession affect how you think about the recovery because countries are trying to think about how to help countries grow out of this, but they're still living with COVID.

You know, the initial reaction was to just put a bottom on people, put a floor on people's incomes, and the things like furlough schemes, unemployment insurance, those were always to just keep people supported in the early stages. But I think we're moving to to another stage in which there must be much greater differentiation, and we know that some jobs will disappear permanently. You know, I don't think anyone's going to be ordering new airplanes for major airlines

anytime soon. For example. Uh, and we know, but things like retail, the retail sector will change fundamentally. We were already seeing that starting to happen. We know that's likely to be permanent, and so we can't go against the grain of those big economic structural changes. But we have to We have to basically support people through the transition to move to jobs which are going to be in those parts of the economy that are growing. And other

countries manage this. Uh, you know, I always hold Denmark up as a fantastic example. They spend one point seven percent of GDP on reskilling workers. That's a normal times not even with COVID. Most countries spend that. But it means you're able to get people back into work quickly. They have income support when they lose their jobs, but they're very quickly supported to get back into new jobs through training. We're done in partnership with employers to make

sure that the skills they acquire are relevant. So this is it is a doable thing, but it does require much more serious resources to help people move on then most countries dedicated. Yeah, what's it called is flex security or there is their model. Yeah, so you feel secure and you're you're secure that you're going to have a job, but it's not necessarily going to carry on being the

same job. It's it's frustrating how often Denmarks seems to appear at top of the list on all these all these comparisons I see actually, and I'm sure it's related. They have done pretty well managing the virus and they come very high on the trust in government measures, and of course those two things go together and we are not so then go together in the UK absolutely, and they also ranked top of the list on happiness, so it's sort of you know, it's all a virtuous cycle.

But people, I think that is part of the legacy of COVID is that all of you know, people are carrying too many risks on their own, risks of unemployment, risks of ill health. And one of the solutions to this is to share those risks more widely in society. And it's not just socially desirable, it's also economically more efficient. Of course, if we did come out of this saying look, government needs a look bigger role, not just right now where it's been forced to sort of put flaw under

people's incomes, as you said, but longer term. We need to put back some of those supports for people risk sharing mechanisms that we've taken away over the last few decades.

You know, that's going to cost money. And I just wonder when you hear things like that's the story in Cleveland and other places where the gaps in income but also wealth are very stark um, does it open up the potential to talk about wealth taxes there's a way of paying for the cost of this crisis or the cost of spending we know we have coming down the road. Do you think that's easier now? If we've seen very graphically have some you know, the stock market has kept

going up as people's incomes this year have gone down. No, wealth inequality has gotten very, very extreme, and this has gone up a political agenda. I think you know there are three ways you can tax wealth. One, you can tax it when it gets past to the next generation through inheritance tax. Two you can tax it things like capital gains and dividends, and that's also very common. Most countries have some kind of inheritance tax and some kind

of tax on capital gains. The thing that's really difficult in which people are debating much more now is taxing the stock of wealth which people have accumulated over the course of their lives. There's only four countries in the world that I'm aware of that have that try and do that. Norway, Spain, Switzerland and Colombia. Many other countries

have tried and failed and changed their minds. So Finland, France, Iceland, Luxembourg and Never and Sweden have all attempted to tax the stock of wealth and have found it too difficult, mainly because frankly, the wealthy and their accountants are very good at devating wealth taxes. So you've got lots of

grief and very little revenue. And so while I think politically wealth taxes might be part of the solution to the current fiscal challenges, I think in the end, broad based, fairly designed taxes with few loopholes are much more likely to be able to sustain a sort of generous, effective

social safety in those countries. Mhm, well, we shouldn't. I shouldn't let you go without talking a bit about the rest of the world, about the developing world, because um, the gaps that we're seeing there, particularly in the sort of level of support that governments are able to provide in response to this recession obviously much larger even than we're seeing in most parts of the US. I mean,

I was looking at numbers the other day. I mean that the poorer countries have largely not suffered a lot of COVID deaths. And you know that much much higher population of developing world still seeing a total number of deaths um much lower on the same order as the developed world, but they've got completely hammered by the global downturn. You know, what's what are the priorities? What can the rest of the world, What should the rest of the

world be doing about that? I mean, you're absolutely right. The good news partly because of demographics, because they are younger populations, the death rates have been lower, but the economic consequences have been devastating. The good news on the economic side is that most developing countries are now have mechanisms in place to transfer income to the poorest households

very effectively. So more than a hundred developing countries now have cash transfer schemes where they can get small amounts of money in onto the mobile phone banks bank accounts of poor people very quickly, and so from jip to Ethiopia, to Tanzania to to Peru. Those systems have worked really

pretty well. So the mechanisms have been there. The problem developing countries have is they don't have enough resources to put through the mechanisms, and that brings us really to the problem of the global financial safety net and how for rich countries, you know, there have been literally trillions spent to support the economy during this crisis. For poor countries that just hasn't been possible, and there hasn't been anywhere near and adequate international response in terms of providing

financing to the poorest countries to help them cope. Baroness Chafi, thank you so much for joining Stephanomics pleasure. Thank you, Stephanie m h. We've been talking about inequality in this program and the gaps between the halves and I have not but when it comes to countries, there's now a pretty large gap between the countries that have apparently tamed the virus and those that are now bracing for a second wave. So for this last part of the program this week, I wanted to give you a sense of

how the other half lives. Visiting a place where hundreds of millions of people are going on holiday this week, traveling meeting family, going to the movies, all the things we might dream of doing without a care in the world when this pandemic is finally over. But it's not a dream. It's happening right now this week in China. And here to tell us more is Bloomberg's China Economy editor,

James Mega. James, I guess you should tell us a bit about how special this week is in China, and then what's actually been happening This week is a big holiday week. The first of October this year was this China's National Day, of course, and then it was also the mid Autumn Festival, which is a big it's kind of like Thanksgiving in the US. Families get together, people gather to celebrate the festival. Those two both fell on the same day. And so there's a week long period

of holidays this for the first week of October. And and how as you said, hundreds of millions of people are traveling across the country. People are taking this week after go the movies, go shopping, going holidays, to the beach, that kind of stuff. So it's a massive week for tourism, and it's a massive week for for you know, for for shopping and going out of course, there's been quite a lot of discussion in the States and across Europe about whether or not Christmas is going to be canceled

this year. Certainly a lot of talk about how the limits on numbers and constraints on hospitality, all the things we've grown used to are going to affect our ability to celebrate Christmas or Thanksgiving. But it doesn't seem like those kind of things are impinging. I mean, people are deciding to just go for it. It's been six weeks now and since there was a confirmed case of COVID

on the mainland in China. So people are obviously not concerned that they're going to get sick if they go out, if they go to the movies, if they catch a plane, if they get on a train. They're just not worried that they're going to be sick, and so they feel free and they feel confident that they can do all

of these things. You know, in Europe or American maybe the case there may be restrictions, But even if there was no restrictions, I mean, how confident are people going to be to travel across country to go have Christmas and their parents or their grandparents place, you know, if there's a chance you could die or we get very sick to have that turkey. So the situation in China is now that people are confident that they can do these things and not get ill, and so they're going

out and doing them. You say that people are basically feel like they don't have to fear catching COVID because there's so little around. But do you think there's a risk now when you have so many, hundreds of millions of people getting on trains going to beaches, that we will get a return of the virus in China. I

think some people are concerned. I mean, I've heard that some schools have told parents that if they go on holidays somewhere and there's and there's an outbreak of COVID in that place, when they come back from from their holidays, their kids will have to quarantine at home for two weeks. And so I've heard that many families are not going on holidays just because they don't want to take the risk of having to then quarantine at home again for two weeks and go back to home schooling, which is

everyone now knows is not a great situation. I mean, I've been doing that myself for for a little while, and it's not the best educational experience for for parents or students, and so I think a lot of families maybe are just you know, don't want to take their risks, so they're not traveling. So yeah, the numbers of people who are traveling down on last year. Um, But you know, I think for the most part, people are confident that they can they can go away and then they won't

be there won't be an outbreak. And if there is an outbreak, I mean, China's shown that it has the ability and knows what to do to sort of stop that in its tracks. There was a series of small outbreaks in Beijing up in the north of China earlier this year, and the government very clearly quickly stepped in and squash those and I think if if there is another outbreak after this holiday period, they can do that again.

Do we think this is part of just back to normal for the Chinese economy generally or there as there's still parts that are showing weakness. I mean, in general, we've said that it's been a bit of a two track recovery even in China, and that consumption hasn't got back to where it was but is this perhaps a sign that things are changing. I think in China, I mean,

it's it's definitely still the two track recovery. I mean, obviously, if you're taking if you're going to the beach in China, uh, you know, you're not going to be the poorest people in the country. And a lot of the people who are traveling are those people who may have gone overseas, may have gone to Japan or Thailand or South Korea, and now can't go to those places because you know, they still have cases there and so they're stuck at home, so they're traveling domestically. I think a lot of the

poor people in the country, they're not traveling. You know, they lost their jobs. Maybe they maybe there's only for a few months or six months, but they still lost their job. They didn't have any income for that period, and so they're not obviously going to be able or willing to to sort of spend money now in this period. So there is a recovery, but I think, you know, it's it's the kind of a case shaped recovery that

other people are talking about. The wealthy who were able to work from home for the last six months or whatever are doing okay, and now they're spending and they're out shopping. The poorer people, the people who lost their jobs, that people who are really struggling, they're still going to be struggling and not spending as much. And we're seeing that in the data. Retail sales data is not really coming back at all. So there it is again, the

K shaped recovery. There's a lot of people going on holiday in China this week, but just as we heard earlier in the US, there's a big chunk of the population that isn't celebrating and has been hit pretty hard. Before we go, James, I should say we were interrupted when we first tried to start this interview by someone coming to take your temperature in the hotel you're staying in for two weeks quarantine. Can you explain what's going on?

So my family and I flew back to China about about ten days ago now from Australia, where we've been for the last few months. And prior to flying we had to have a COVID test and then as soon as we arrived at the airport, we had another test. Then we were taken to our hotel. Since then, we've had another COVID test, So now three times people have shoved things up my nose um. And then we also had a blood test to see if we had antibodies for the virus, to indicate whether we had had it

in the past and have recovered. And then every day someone comes to my hotel room and takes the temperature of my my wife, myself, and our two kids, so morning and night. So we're we're in this hotel for for two weeks. So I mean that's an indication of how seriously you know, the government is taking this. Everyone who comes to China has to go through this, Everyone who wants to travel internationally has to do this when

they come back. And I think it's that kind of effort that the government is putting into this to really, you know, control. It is one of the things that is making people now confident that they can go out and they can enjoy themselves. Well, we will be very glad, Blueberg will be glad to have you back in Beijing.

We should say that this was all before you were even going to be allowed to be back in Beijing, but I hope we will talk to you when you are James Mago, thanks very much, Thank you, very much. Thanks for listening to Stephanomics. I should probably go back to that story about Wimbledon, because it's not entirely a happy ending for the All England Lawn Tennis Club. After they had that big payout this year, the head of the club as confirmed that he's not expecting the club

to get pandemic insurance at any price for one. We'll be back next week with more on the k shape recovery around the world and more on the ground reporting an analysis. Remember you can always find us on the Bloomberg Terminal, website, app or wherever you get your podcasts, and for more news and analysis from Bloomberg Economics all the time, follow as Economics on Twitter and you can also find me on at my Stephanomics. This episode was

produced by Magnus Hendrickson. Sean Donand's report from Cleveland, Ohio was based on an article for Bloomberg Business Week, which was edited by Robert Friedman, Christina Lindler. Special thanks to Baroness Minus Chafik of the London School of Economics and James Megan. Lucy Meekan is the executive producer of Stephanomics and the head of Bloomberg podcast is Francesco Levy, m