Even though the vaccines have the potential to reduce the Covid-19 pandemic to manageable levels, the scars will be felt for years to come.
Beyond the tragedy of the loss of human life, deepening inequality is perhaps the worst consequence of the pandemic. Governments around the world will seek to take steps to reduce it, fearing civil unrest.
Unfortunately, central banks will not be able to save the global economy from inflation with the same decisiveness with which they acted to save it from deflation, so taxation will most probably be the policy of choice.
One measure that was taken right at the start of the pandemic by central banks was to cut interest rates and re-start the printing presses (buy assets in the financial markets) to stop the March 2020 market rout.
That was a necessary and welcome intervention; it prevented markets from seizing up and pushing the global economy into a depression.
However, combined with fiscal stimulus packages aimed at restarting the economies, it pushed up the prices of financial assets and house prices all over the world, in particular in the UK. In turn, this has contributed to a widening of the gap between rich and poor.
“The pandemic could exacerbate a longer-run rise in economic inequalities that had already been a concern before the current crisis,” Jens Weidmann, president of the Deutsche Bundesbank, said in a recent speech.
But he played down the idea that central banks had a crucial role in this. Besides reducing interest income from savings, he argued, lower interest rates also reduce interest payments on debt, which helps poorer households in particular.
Moreover, lower interest rates and money printing pushed output, employment and wages higher, something which has benefited those with lower incomes the most, Weidmann argued.
“These higher labour incomes may have allowed households with fewer assets to step up their saving and accumulate more wealth. And indeed, the proportion of households unable to save due to a lack of financial resources has declined, according to our survey,” he said.
All of this sounds good, but the survey he mentioned did not compare the rise in income for the poor with the rise in prices for an essential item such as housing.
In many countries, homes are becoming unaffordable even for those who are not really poor. This is mainly because they have been turned into speculative assets by wealthier people who look for a safe way to park their money.
The trouble is that this is not the only way in which poorer households were affected by the crisis. Inflation, also known as “the cruellest tax”, affects the poor the most – and inflation is on the rise.
We could even see double-digit inflation in the US, according to Lars Christensen, economic analyst and author of the Market Monetarist website.
Central banks will be in no hurry to increase interest rates to counteract price increases, as they have already signalled that they are willing to tolerate much higher inflation for a while.
But even if they were to raise rates, again it would be the poor who would suffer most, because they are likely to have taken on debt at already higher interest rates than the wealthy, and these would increase even more.
The only way to prevent a very bad effect of inflation on the poorest in society would be to introduce additional taxes on the wealthy while offering the poor some sort of fiscal relief.
A wealth tax has come up several times, under various forms. A property tax calculated as a percentage of the property’s market value, updated every year, could also be on the cards in some countries.
Wall Street took a bit of a tumble recently when President Joe Biden spoke of increasing corporation tax, possibly because investors thought this would destabilise companies trying to find their footing after prolonged lockdowns.
But perhaps in time investors will come to the conclusion that rising taxes on the wealthy are better than riots on the streets.