SIDELINED by homeland security, foreign policy and immigration, the economy is about to become a major topic in the race for the White House. Since the start of the year we have seen precipitous drops in the stock market and oil prices, combined with the threat that a slowing global economy may drag the United States down with it.
While political campaigns are rarely the best forum to achieve policy clarity, the spotlight this year’s race will cast on economic issues will bring some needed debate about two pressing questions: Why is the United States still so economically insecure? And can we shore up that insecurity before the next downturn arrives?
The economy has repeatedly failed to achieve the liftoff that it is capable of. Despite the creation of six million jobs in the last two years, wage growth has been anemic, inequality has worsened and too many Americans lack the agility to adapt to structural changes, including those driven by technological innovations.
The success of the post-recession employment recovery and the uneven growth since then can be attributed to a single factor: After Congress’s initial bailouts to stanch the bloodletting in 2008, the burden of economic policy making fell almost entirely on the Federal Reserve.
Having succeeded in helping the United States and the rest of the world avert a multiyear depression in 2008-9, the Fed pivoted to using unconventional monetary measures to pursue broader objectives. It did so through a combination of zero interest rates and large-scale purchases of securities to repress market volatility and increase asset prices, hoping to encourage consumption and investment.
This worked, to some extent. But it created a sizable wedge between artificially supported asset prices and rather sluggish fundamentals. And ultimately, these tools can buy time only until the political system delivers a broader policy response, which it hasn’t.
Now time is running out.
Thanks to mounting internal contradictions and operational stress, central banks are increasingly unwilling (like the Federal Reserve) or unable (like the People’s Bank of China, the Bank of Japan and, soon, the European Central Bank) to borrow financial returns from the future. As a result, financial volatility is rising.
What follows is up to us. One road — where continued political dysfunction further sidelines a holistic policy response — could lead to recession. The other — a broadening policy response turbocharged by innovation and the productive deployment of corporate cash — could unleash high and inclusive growth.
Assuming that the presidential season clarifies these choices, the campaign’s winner will face another challenge next year: how to deal with a Congress that has failed to handle even its most basic economic functions. Given the outlook for both a shaky global economy and higher financial volatility, the new administration will need to find a way to get Congress to implement measures in four specific areas, some of which already command bipartisan support.
The first covers long-overdue structural reforms. Guided by the administration, Congress needs to overhaul a tax system littered with anti-growth provisions, invest more in infrastructure, expand labor-market retraining and modernize our education system. The lack of such reforms, and the insecurity generated, is one main reason the private sector has held back from spending the enormous cash reserves on its balance sheets; encouraging that money to flow into productive activities, rather than share buybacks, would boost the economy.
America also needs a more responsive fiscal policy. This means, above all, redirecting resources that essentially subsidize the better-off segments of society, including the excessively low taxation of carried interest and other budgetary measures to help reduce the economic drag that inequality creates through reduced consumer demand.
Politicians must also act soon to avert the growing problem of student debt, a major obstacle for the incoming generation of workers. The government needs to increase the transparency of loan disclosures, enlarge steppingstone programs like community colleges, and make it easier for students to pay off their debt without sacrificing career opportunities.
Finally, the United States needs to push for critical reforms in the global finance infrastructure. It took embarrassingly long for the world to agree on modest changes in the governance of the International Monetary Fund, largely because Congress was disengaged. The next steps should include further reallocation of voting power from Europe to developing economies, consistent with today’s global economic realities.
While I.M.F. reform might seem arcane, it could be vital to averting another global crisis — without changes, the fund’s credibility will continue to be questioned, especially in the eyes of emerging economies, undermining global policy cooperation and increasing the risk of currency wars and other damaging coordination failures.
There’s little that is surprising about most of these items. What is surprising is that too few politicians, let alone presidential candidates, seem to grasp the need for them within the first year or so of the next administration. Even then, the risk of another recession will not be eliminated; that’s the nature of business cycles. The point is to reduce the risk as much as possible, in the United States and abroad — and to lay the groundwork for high long-term and inclusive growth.
Mohamed A. El-Erian is the chief economic adviser at Allianz, chairman of President Obama’s Global Development Council and the author of the forthcoming book “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.”
Mohamed A. El-Erian
The New York Times January 21, 2016
Mohamed A. El-Erian is the chief economic adviser at Allianz, chairman of President Obama’s Global Development Council and the author of the forthcoming book “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.”
