During the outset of the Coronavirus Recession, there was debate on Wall Street over what “shape” the economic recovery was going to be: V, L, U, or W. The American economy ultimately received the “K treatment.” A “K-Shaped” economic recovery refers to an economic recovery unequally benefitting different industries or sectors of the economy. All recessions are unequal, hitting some industries harder than others, however the Coronavirus Recession has accelerated this fact pushing: hospitality, cruise lines, movie theatres, casinos, restaurants, salons, gyms, brick and mortar retail, and airlines into record bankruptcies and restructurings. Jobs in these sectors, particularly low-wage jobs have seen disproportionately higher rates of unemployment, while other industries like technology and consumer staples have been spared.
The disproportionate level of economic pain continues into the divide between small and big businesses. A study by Yelp found that 60% of business closures will be permanent. The main street devastation continues with no end in sight as inconsistent lockdown orders continue with no comprehensive stimulus for small businesses on the brink of failure. Small businesses lacking capital to weather this prolonged storm of shutdown orders and capacity limits have taken on debt to survive, laid off employees, or have closed all together.
Unlike big business, mom and pop operations have a higher failure rate, less reserve capital, and don’t have access to the same liquidity available to large public companies. Big business can easily raise equity or issue bonds to take advantage of record low interest rates, buying back shares and increasing executive compensation while in “distress.” As small businesses continue to fail, market share consolidates in fewer and fewer large companies. The consequence of systemic cronyism and rent seeking is the corruption of free enterprise. As smaller firms have been beaten down, expect a flurry of corporate mergers and acquisitions as larger firms rush to buy their weaker competition.
As the Federal Reserve continues to provide liquidity to an increasingly speculative stock market, they inevitably exaggerate the natural business cycle. Propping up risk assets while leaving main street out to die has widened income inequality to a level not seen since the Roaring Twenties. As America’s middle class gets hollowed out by record job losses and small business closures, America becomes a nation of economic extremes; extreme wealth contrasted with extreme poverty. Privatized gains and socialized losses are unsustainable. The K-shaped economic recovery highlights how structural extreme income and wealth inequality have come to define the Pandemic Recession.