Rising markets and inequality grow from the same root

Covid-19 puts workers under immense strain, while asset owners feel much less pain

Robert Armstrong


It is wrong to dismiss worries about the disconnect between the stock price gains and political unrest © Samuel Corum/Getty



Was the market right all along?

Until last Friday, it looked as if stock markets had lost all track of reality. In the world, we saw spiralling unemployment and political disarray.

In the markets, especially the huge American market, exuberance.

Within finance, the consensus on this disconnect was that the market was pricing in a lot of good news about a fast recovery from the Covid-19 crisis. This is a bit worrisome, but not too bad, because the market is never a simple barometer of the economy. And as for the political issues, the market is amoral, focusing solely on profits. No need for concern there, either.

Then came a much better than expected US jobs report, showing a gain of 2.5m jobs in May.

The consensus was reframed.

The market had not assumed the good news, it knew it was coming, and it has proved itself, once again, to be an amazing economic barometer. It still doesn’t care about justice, of course, so China’s latest crackdown in Hong Kong, a US president threatening to set the military on his citizens and the Brexit shambles remain irrelevant to future market rises.

The new consensus is wrong.

The jobs report was unexpectedly terrific, but the unemployment rate, at 13.3 per cent, remains well above the worst part of the 2008 financial crisis and there are concerns that the numbers were affected by classification errors. Consumer spending has plummeted.

The course of the virus is unknown. We need to see more swallows before we declare it summer.

The market, however, is already acting like it is the fourth of July.

The S&P 500 has risen to within 5 per cent of its all-time high.

Most importantly, it is wrong to dismiss worries about the disconnect between the stock and political unrest. Observers are shocked by the market’s insouciance not because they misunderstand how markets work but because they see it as a symptom of how society works.

Covid-19 has put working- and middle-class people under immense strain, while the asset-owning classes have felt relatively little pain: the big equity drops in March came after a decade of historic increases in asset values. Although the middle-class participates in markets through pensions, this does not offset the imbalance.

In the US, almost 90 per cent of equities are owned by the wealthiest 10 per cent of households, according to the Federal Reserve. Not only do market gains flow overwhelmingly to the wealthiest, but the link also runs in the other direction: inequality contributes to the gravity-defying rise in markets, in a self-reinforcing cycle.

The richest 11 per cent of the world population holding more than 80 per cent of its wealth, Credit Suisse estimates.

This means the rich have a lot of excess savings. There is, after all, only so much anyone can consume. This “savings glut of the rich” (as Atif Mian, Ludwig Straub, and Amir Sufi call it) is a pile of capital that has to go somewhere. The cash flows towards open capital markets, especially America’s.

Ideally, it would then be channelled to productive investment.

But US investment is stagnant, for reasons that are debated. (It could be that slowing innovation means there are fewer good investment opportunities, or that oligopolistic industries have grown lazy, or that management incentives encourage dividends and buybacks over capital spending).

Whatever the reason, instead of spurring investment, the savings are lent to governments, companies and households.

The surge in debt issuance drives long-term interest rates down. The lower rates make future corporate profits more valuable, driving stock prices up. The rich end up with more wealth still, and the cycle repeats.This hurts economic growth, too.

When the rich receive incremental wealth, they generally save rather than spend, which saps demand. Ordinary households and taxpayers meanwhile are stuck paying interest on mounting consumer and government debt.

Even at today’s low rates, that represents another drip-drip transfer of capital from the lower classes to the upper.

If this picture is correct, and if inequality helps fuel the political strains we see across the world today, then those strains are hardly irrelevant to the rise of the stock market. The two grow from the same root.

An unequal and unbalanced global economy should ensure that, for a few years yet, US stocks will remain a good bet. But it should also make investors wonder if, in the long run, political change could reveal their gains to be fool’s gold.

Unlocking the economy will divide societies

The virus picks us off un­evenly, and an effective response must recognise that

Tim Harford


Could we countenance a plan to allow the under-40s back into pubs and restaurants, while the rest of us stick to Zoom and Ocado? © iStock/Getty



It is the end of the beginning: lockdowns after the first wave of coronavirus are being tentatively lifted. It is not a step we are taking with any great confidence of success. Rather, we’re easing the lockdowns because we can’t bear to wait any longer.

That will mean some difficult decisions ahead, in particular about how we look out for each other in a world where our experiences and the risks we face are dramatically diverging.

It is clear enough that the virus could easily rebound: a systematic study conducted by the Office for National Statistics suggested that 100,000 to 200,000 people in England alone were still infected with the virus in early May. The lockdown has merely bought us time.

One hope is that we can now contain the virus through widespread testing, contact tracing and the supported isolation of infected people. One cogent plan for this comes from the Safra Center at Harvard University.

But the UK seems in no position to implement anything like this plan. Boris Johnson, the prime minister, has promised a contact-tracing system by June 1 that will be “world-beating” — an obnoxious synonym for “excellent”. I do not believe him, particularly since his government has repeatedly misrepresented its record on testing.

The Safra Center plan calls for 2 per cent to 6 per cent of the population being tested every day. In the UK, that would be 1.3m to 4m people daily; we are currently testing well under 100,000 a day.For now, then, we are stuck trying to maximise the benefits of reopening while minimising the risk. That suggests drawing bright lines between those who should unlock and those who should not.

We have long accepted that a supermarket is more of a priority than a restaurant, but other dividing lines would be uncomfortable. Would we be happy for London to reopen while Manchester stays closed, or vice versa?

There is a powerful moral case that we should all be going through the same sacrifices at the same time, but if we seek to save the greatest number of lives while destroying the fewest livelihoods, we may have to start drawing distinctions that make us squirm.

The most obvious such distinction would be to ease the lockdown only for the young.

In the five weeks from late March to the start of May, nearly 29,000 people over the age of 65 died from Covid-19 in England and Wales. Only 375 people aged under 45 died in the same period. Late boomers and Gen-Xers like me, aged 45-64, are in the middle: nearly 3,500 of us died.

Could we countenance a plan to allow the under-40s back into pubs and restaurants, while the rest of us stick to Zoom and Ocado? Then if signs of herd immunity emerged, we could send in the reserves — the 40-somethings like me.Is this really a good idea?

I am genuinely unsure. Perhaps the practical objection is insuperable: it might be impossible to protect vulnerable people while allowing the virus to run riot in the young.

But I suspect the real objection is not practical, but moral. Something about sending half the population out while the other half stays indoors feels unfair. That is true even if it is not entirely clear which side of the age divide is worse off — the ones enduring boredom and isolation inside, or the ones facing the virus.

And what of people who find themselves able to drink in public one day, then banned from their own 40th birthday party the next? Clear distinctions on a spreadsheet or graph start to seem absurd in everyday life. And it could be much worse.

Ethnic minorities are at greater risk; are we to advocate whites-only restaurants and whites-only public transport on the grounds that it is not safe for those with dark skin?

The idea is self-evidently repugnant.

Yet the virus does not care about our moral intuitions. It picks us off un­evenly, and an effective response must recognise that. We are going to have to develop a language of social solidarity even as our individual experiences diverge.

Even during the lockdown, many people have continued to experience the freedoms and anxieties of going to work as normal. The very nature of the lockdown means it is easy to forget that other people are leading very different lives.

One doctor friend of mine, on a video call a fortnight ago, asked: “So . . . have the rest of you really just been at home, seeing only your families, for the last six weeks?” Yes. We really have.

We must develop new ethical codes. “Stay at home, protect the NHS” was a start, but over the coming months we must look for principles that offer the same moral force but far more practical subtlety.

“Grandparents: stay home so that your grandchildren can go back to school.”

“Home workers are heroes too,” because they reduce density in the big cities.

We are all in this together.

And yet increasingly, we are all in this separately.

That is a challenge we have yet fully to confront.

Climate Targets and Industry Participation in the Recovery

Though governments around the world are busy confronting the economic and health emergencies brought on by the COVID-19 pandemic, they must not lose sight of the historic opportunity that has presented itself. Now is the time to create the conditions for a society-wide transition to a low-carbon sustainable future.

Henrik Poulsen, Mads Nipper, Lars Fruergaard Jørgensen




COPENHAGEN – The COVID-19 pandemic must not lead governments to lower their climate ambitions. Accelerating the transition to a low-carbon sustainable economy can both drive the recovery and build resilience for the future.

Other countries could look to Denmark for inspiration on climate initiatives that will also contribute to economic recovery. The country is currently taking real action to achieve its target of reducing carbon dioxide emissions by 70% by 2030 and reaching zero net emissions by 2050.

As the CEOs of Danish corporations with a global presence in renewable energy, water technology, and pharmaceuticals, respectively, we have been appointed by the Danish government to chair public-private “climate partnerships” created to pursue climate-policy goals. Our job has been to develop comprehensive roadmaps for reaching emissions-reduction targets within our respective sectors in the most cost-efficient way.

Having chaired these partnerships for the past seven months, we believe governments around the world would benefit greatly both from this model of collaboration and from our specific findings on how to make the manufacturing, energy, and life science and biotech sectors nearly carbon-neutral by 2030. As countries spend trillions of dollars to protect jobs and livelihoods during the pandemic, it is crucial that they shape such stimulus in ways that will ensure a long-term sustainable recovery.

The World Health Organization estimates that the annual capital needed to meet the Paris climate agreement’s emissions-reduction targets amounts to some 1% of global GDP per year. Governments thus should capitalize on the current opening to direct their mid- and long-term recovery plans toward the dual objective of financial stimulus and decarbonization.

Pursuing these goals simultaneously is not merely a moral imperative. It also makes economic sense. Governments urgently need to unlock the private sector’s capacity for innovation and investment, starting with concrete and ambitious emissions-reduction targets for 2030 and 2050. Once such targets are in place, governments should involve businesses in developing sector-specific roadmaps for decarbonization.

The logic of leveraging the private sector is simple. Business leaders are in the best position to identify economically sound carbon-reduction pathways within their own sectors, and they have firsthand knowledge of what is needed from governments to unlock private-sector investments. This is what we call the Danish formula for public-private collaboration.

The analyses we have conducted in our climate partnerships have revealed opportunities for decarbonization that many would have thought impossible just a few years ago. By applying and scaling up existing technologies in a cost-efficient way, the manufacturing, energy, and life science and biotech sectors could become nearly carbon neutral as soon as 2030. In addition, these sectors also provide technologies and services that have the potential to drive emission reductions across other sectors. This includes energy-saving products and services, and replacing fossil fuels with green electricity to decarbonize transportation and other industries.

Hence, our recommendations have global applications, both for countries in a nascent stage of decarbonization and for those that are already well on their way. The first key takeaway is that governments should set ambitious national emissions-reduction targets for each economic sector, thereby providing transparency and long-term certainty for companies and investors.

Second, all countries need to create conditions for a significant increase in renewable-energy production, green electrification, and improved energy efficiency. Green business is good business: wind and solar power are now the cheapest options for two-thirds of the world, and energy efficiency improves economic competitiveness while benefiting consumers.

Third, governments should adjust their regulatory frameworks to maximize investment in innovative technologies – such as heat pumps, renewable hydrogen, and biofuels – through increased public and private research, development, and deployment.

Similarly, public procurement and fiscal policies should be reformed to strengthen incentives that encourage low-carbon activities and investments. And businesses around the world need to take responsibility beyond their own direct emissions, by pushing for similar reductions across their global value chains.

Beyond these broad recommendations, we are keen to share with governments and other businesses insights from our specific action plans on how to decarbonize manufacturing, energy, and life science and biotech as cost-efficiently as possible. We encourage policymakers and industry leaders to build on these lessons as they shape the economic recovery and accelerate the green transition.

Collectively, we need to make sure that the COVID-19 pandemic does not lead us back to the same “business as usual” that brought on the climate crisis in the first place. By applying the model and principles we have enunciated, all societies can do more than just recover; they can make themselves future-fit, too. That is the right approach both environmentally and economically.



Henrik Poulsen is CEO of Ørsted., Mads Nipper is CEO of Grundfos., Lars Fruergaard Jørgensen is CEO of Novo Nordisk.

The Politics of Pandemics: Why Some Countries Respond Better Than Others



The capacity of a state and the degree of economic inequality among its residents will determine how successful it is in coping effectively with a pandemic like COVID-19. Whether it is a democracy or a dictatorship matters relatively less, according to recent research by Wharton management professor Mauro Guillen.

Titled, “The Politics of Pandemics: Democracy, State Capacity, and Economic Inequality,” Guillen’s working paper tracks epidemic outbreaks in 146 countries since 1995. It is the first study to explore the effects of democracy, state capacity, and income inequality on epidemic dynamics.

“In democracies, greater transparency, accountability, and public trust reduce the frequency and lethality of epidemics, shorten response time, and enhance people’s compliance with public health measures,” Guillen wrote in his paper. However, “democracy has no effects on the likelihood and lethality of epidemics.”

According to the paper, inequality increases the frequency and scale of an epidemic, and it undermines people’s compliance with epidemic containment policies such as social distancing and sheltering in place because people at the low end of the socioeconomic scale cannot afford to stay at home—they must go to work.

But strong state and government structures could help offset most of the shortcomings. “State capacity is a bulwark against the occurrence and ill effects of crises and emergencies, while economic inequality exacerbates them,” Guillen wrote.

Takeaways for Governments

“The most important result in my analysis is that you have to have the resources, the capacity and the [requisite] state structures in place to deal with these national emergencies,” said Guillen.

“Countries that score higher in state capacity, because they have more resourceful governments, regardless which party is running it, have fewer of these epidemics. And if they have one, they tend to have fewer deaths and cases.”

The second takeaway from the study is that “for the most part, it doesn’t really matter whether you’re a democracy or a dictatorship,” he added. “But inequality can make the consequences of all of this much, much worse, especially in terms of the number of people affected.”

He explained that a high degree of economic inequality means that people don’t have good nutrition or access to health care, and they don’t have savings or other resources.

“Even during a pandemic, they have to continue working and use public transportation. So they don’t observe social distancing or sheltering-in-place and therefore they become more exposed to the potential consequences of the virus.”
 ‘Mosaic of Experiences’

What interested Guillen about the pandemic is “the mosaic of experiences around the world” — both in the way in which countries are affected by it and how their governments respond. He noted that while the pandemic is global, it is felt in very different ways around the world, and also that it didn’t start in every country at the same time. There is also a wide variation in the responses by governments and by people in different countries.

He said he was “specifically interested in seeing whether politics has anything to do with how effectively countries deal with these kinds of situations or crises.” He also noticed in the debates on the pandemic that “there were some misconceptions about the relative ability of different types of political regimes to intervene.”

Guillen identified “three big debates” around the pandemic. One is about whether democracies do a better job or a worse job than dictatorships in managing health crises. (He clarified that he used the term dictatorships to refer to non-democracies of various types, including those that are totalitarian or authoritarian.)

The second is over whether the governments are prepared with the requisite capacity to deal with health emergencies. The third debate is on how economic inequality makes a country vulnerable to relatively harsher consequences than others that are better off on that score. Guillen decided to delve into the data to bring more clarity to those three debates.

He conducted three studies to ascertain the impact of political regime, state capacity and economic inequality on “epidemic dynamics.” The first reviewed the occurrence and lethality of epidemic outbreaks worldwide between 1990 and 2019.

The second analyzed the speed with which a government-mandated lockdown came into being during COVID-19 “as the most dramatic policy to curb the spread of a contagious disease.” The third study examined people’s compliance with social distancing and sheltering-in-place measures across countries during 60 days of the pandemic.

Guillen also looked at how the form of government interacts with state capacity to cope with a health emergency or with economic inequality. Being a democracy and having state capacity are not always correlated, said Guillen. Some democracies are newly independent countries and relatively poor, and they don’t have strong government programs.

“Over the last 20 years, we’ve seen a lot of these countries — for example, in Africa — becoming democracies. But they lack resources and they lack strong government programs. Those are the most vulnerable, and this is why we see that so many epidemics ravage the developing world.”

It gets worse for poor countries that remain dictatorships. “They face a double whammy because they don’t have resources, and they don’t have strong government programs,” said Guillen. Further, in dictatorships, the population typically does not have much trust in the government and its responses to an epidemic, he added. “That’s the worst of all situations.”

The study found that countries with high population densities are generally more vulnerable to epidemics and have a lower ability to bring them under control. They need to put more systems in place to prevent epidemic outbreaks, said Guillen.

However, some countries that have very high population densities are also very rich — like Japan, Singapore or Holland, Guillen pointed out. “They don’t have epidemics because they compensate with very strong government programs,” he said, adding that they can afford those programs because they are wealthy.

As the COVID-19 pandemic continues its spread, it is far too early to take stock and identify winners and losers among countries. However, South Korea, Taiwan and Singapore are among a few countries stand out for having state capacity and strong government programs in place to deal with such emergencies, said Guillen.

Those countries had strong government programs in public health in particular because they are rich countries, and also because they became wiser after having encountered health emergencies like SARS in the past, he noted. The strength of their state capacity and public health programs mattered more than the form of government, he added.

South Korea, Taiwan and Iceland also showed low economic inequality in Guillen’s research. That buttressed his finding that the greater the economic inequality, the more the likelihood of an epidemic outbreak, and with more consequences than countries with better scores on that measure.

At the other end of the spectrum, inadequate or fragmented state capacity was the reason why countries in Southern Europe like Spain and Italy have suffered heavily in the pandemic. It didn’t seem to matter that they are democracies – their governments have been “completely disorganized” in their response to the pandemic, Guillen said.

“The problem there has been that they don’t have the resources that some of those other countries in Europe had in place.” To boot, the degree of economic inequality in Southern Europe is also higher than in Northern and Central Europe, he noted.

“Being a democracy helps in general, because it’s easier for you as a government to generate trust among the population in order to cope with a pandemic,” said Guillen. “But if you don’t have strong government resources or capabilities, then you’re going to be at a disadvantage.”
Pointers from the Past

Drawing upon previous research by Guillen and other experts, the paper traced the quality of government responses in earlier crises such as the East Asian financial crisis in 1997, the Arab Spring in 2010 and the 2008-2010 global financial crisis.

The outcomes of those crises were mixed. In the East Asian crisis, for instance, South Korea had preexisting ties with its business and financial sectors, which enabled it able to respond more effectively than Thailand did. Semi-authoritarian regimes like Malaysia or dictatorial regimes like Indonesia took action more swiftly, but with less consistency, and with uncertain outcomes due to favoritism and corruption, Guillen’s research showed.

The 2008-2010 global financial crisis primarily affected high-income democracies. Although “several governments on both sides of the Atlantic were defeated at the polls, democracy itself survived and economic growth resumed relatively quickly in most countries,” according to research by Guillen and another study by Stanford University political science professor Larry Diamond.

By contrast, the Arab Spring led to “the downfall of several governments, the overthrow of political regimes, a continued economic slide, and, in some cases, civil war,” Guillen’s paper noted, citing a United Nations survey of 2015-2016.

Who Fares Better: Dictatorships or Democracies?

While democracies fared relatively better than dictatorships in previous crises, they may face different challenges with the COVID-19 pandemic “in terms of the sacrifices that it demands from the population in order to contain it,” Guillen noted in his paper.

Dictatorships can respond “more swiftly and resolutely” in imposing quarantines and enforcing other steps that infringe on individual liberties.

On the other hand, greater transparency in democracies may allow them to respond promptly to a public-health emergency, and secure public trust and collaboration. The paper notes that research by The Economist on epidemics since 1960 found lower mortality rates in democracies than in dictatorships. All considered, Guillen’s research suggests that democracies structurally lend themselves to more effective responses to epidemics than dictatorships.

The upshot from those previous episodes: With democracy, economies have the opportunity to recover after a crisis. Without democracy, economies may continue to slide, favoritism and corruption may rule the day, and governments may fall.
Guillen agreed that governments in democracies face constraints such as the need for building a consensus, or have to make trade-offs in multiparty politics that result in less than optimal policy responses. “That’s one of the potential dysfunctions of democracy,” he said.

“But on the other hand, in a democracy, the government can be voted out,” Guillen continued. “The government wants to have at least majority support among the population, and so it has an interest in delivering a certain standard of well-being to a majority of the population.”

Most dictatorships, however, tend to ensure that they will continue to run the country by allocating subsidies and rents to a few important groups that support it, he added.

Guillen’s research produced some surprises, too. He did expect countries with income inequality to have reduced compliance in social distancing because they would have more people who live “from paycheck to paycheck, who need to go to work.” But he was surprised that democracy didn’t have an effect on social distancing.

He had thought that those measures are easier to implement in democracies where people have more trust in their governments than in dictatorships. “But I didn’t find that effect at all,” he said. “I found no difference between democracies and dictatorships when it came to compliance with social distancing and sheltering-in-place [guidelines].”

International Cooperation

For sure, countries suddenly facing a pandemic cannot overnight fill gaps in government capacity or economic resilience, or economic inequalities among their populations. Here, international cooperation could help overcome shortcomings.

“Every infectious disease outbreak is a problem for the entire world, not just for one country, especially when it becomes a pandemic,” said Guillen. “So, it’s extremely unfortunate that right now very few countries are talking to each other.

Part of this is because we came from a period of turmoil in the world, not knowing what the role of the U.S. was, for example, and having trade wars and other kinds of frictions in the world. It’s unfortunate that the pandemic came the moment when global cooperation on key issues, such as climate change, was at an all-time low.”

That is unfortunate because in a pandemic, it is essential that governments exchange information about the spread of the disease and about what works and doesn’t work in containing the spread of the virus, he noted.

The World Health Organization has been trying to forge international collaborations to try and develop effective therapeutic treatments and a vaccine for COVID-19.

“It is unfortunate that the one organization that we have that can help coordinate global actions in the midst of a pandemic is under attack.”

Things Were Different In 1918, But Comparisons With 2020 Uncover A Crucial Question

My conclusion contrasts with the recent evidence on long-run outcomes (Correia, Luck, and Verner 2020). The challenge in reconciling the two sets of findings is to identify a state variable through which the disturbance of 1918 could have propagated all the way to 1923.

The economy rebounds quickly from these episodes, but only partially, making up only half of the ground lost during the crisis episode, or about four percentage points in these simulations. After the initial bounce, a combination of persistently adverse circumstances produces a protracted output decline, as we can see in the Mexican data after the debt crisis ...and also in line with empirical evidence on the long-term consequences of financial crises in other emerging and advanced economies (Reinhart and Rogoff 2009).  

The international cost of borrowing remains elevated for an extended period, even though spreads revert after the crisis. The productivity decline is sizable and very long-lasting, with technology reaching a level that is below the one at the beginning of the boom. During the post-crisis period, investment and to a lesser extent consumption also stagnate below their pre-crisis levels. As a result, credit flows remain above (below) their pre-crisis level long after the crisis has ended, although the economy is no longer financially constrained."

What Are The Human Implications of The Pandemic

The influenza of 1918 was short-lived and “had a permanent influence not on the collectivities but on the atoms of human society – individuals.” Society as a whole recovered from the 1918 influenza quickly, but individuals who were affected by the influenza had their lives changed forever."