Blog Governments worsened inequality, post-crisis

Governments worsened inequality, post-crisis
Government responses to the financial crisis of 2008 - 2009 have widened the gap between rich and poor, with QE supporting the wealthy, while austerity programs hurt the poor and middle classes, according to former UK Prime Minister John Major and former Dallas Fed President Richard W. Fisher.

Policymakers have drawn the ire of protesters in part because QE has failed to foster job creation, even as it has “decimated” the savings of middle class workers, Fisher said.

“We were victims of that backlash at the central bank,” Fisher said. “How do you incentivize the private sector to take advantage of the massive amount of liquidity we have created?”

Several years of subpar global growth have left many people frustrated, and unable to climb the economic ladder. This includes people left behind by rapid changes in an increasingly globalized economy.  

“We are beginning to see a lot of people -well educated, with university degrees -actually unable to find a job that is commensurate with their abilities,” said Major.

Governments could help stimulate job growth by supporting vocational education, not just academic programs. In the UK, Major also recommends infrastructure spending to encourage corporate investment in areas of high unemployment.

Major noted a distinct rise in inequality in the UK, where incomes in London have skyrocketed, in stark contrast to the rest of the country.

“You could almost say that London is becoming a nation-state of its own,” Major said. “Is it a problem? You bet it is.”

Major added: “The UK government is going to have to send a good deal of its own money out to the regions.”

Middle  and lower income consumers are also facing higher costs for health care and education. With few job prospects, some entire populations are stuck in poverty for generations. Income inequality also contributes to the spread of extremism. 

Globalization has certainly lifted hundreds of millions of people out of poverty. “But it has also concentrated wealth and widened inequality, which has created a great deal of resentment,” Major said. 

“You can see that across Europe as a result of austerity…really rather extreme parties have arisen,” Major said.

Both Major and Fisher came from humble backgrounds to reach great success. But is it harder for someone today to achieve that same rags-to-riches life?

“I rather fancy that in many ways it is.” Major said.

On the other hand, China has made enormous progress in creating opportunities for its people. It still has work to do in terms of human rights, but its economic growth and the scale of its engagements around the world are “truly remarkable”, Major said.

“Forty years ago if you told me where China would be today … I would not have believed it,” Major said.