Why wealth inequality feeds into a poverty loop

Rising wealth
inequality feeds into a dangerous loop of recessions and poverty, according to
a study by the Bank of International Settlements (BIS), the central bank to the
world’s central banks. The study called for urgent action to tackle wealth
inequality to stabilise economies.

In course of the
study, BIS looked at 182 recessions across 70 countries. It found that every
six years after a downturn, the bottom 50% remain at least 0.3% the worse while
the top 10% gain 0.7% or higher.

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More unequal
economies are susceptible to deeper recessions which further leads to increased
inequality.

The study found
low-paid workers were more likely to lose their jobs during COVID-19 and now
rising inflation will disproportionately affect poorer households.

“Once inequality
is left to grow unchecked, deeper and deeper recessions demand additional
policy support,” the study stated, noting that less progressive taxes and
social support programmes in some countries have made problems worse.

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The BIS
recommended that governments try to keep inflation in check through “stabilisation
policies” such as subsidies or support payments that help poorer people.

This, because,
deeper recessions cause monetary stimulus to lose traction and then the central
bank needs to take bolder steps to address the undesirable effects of wealth
inequality.

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The rise in
inequality has been a trend since the 1980s. While most of the blame for rising
inequality goes to governments, central banks have also played a role as they
have fuelled big stock market gains with ultra-low interest rates and
asset-buying schemes.

In its latest
annual report, the Bank of International Settlements had said that monetary
policy could not be a way to solve inequality because monetary policy is
neither the main cause of inequality nor the cure for it. Over the last few
years, more and more central banks have become concerned about inequality.