Mohammed El-Arian, the CEO of bond giant PIMCO takes to the pages of the Washington Post to make a plea for I’m not sure exactly what:
Policymakers must break this active inertia by implementing a structural vision to accompany their current cyclical focus. Measures are needed to address key issues, which include the change in drivers of growth and employment creation; the high risk of skill erosion and lost labor productivity; financial deleveraging in the private sector; debt overhangs; the uncertain regulatory environment; and the unacceptably high risks facing the most vulnerable segments of society.
Specific measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.
along with skepticism about the effectiveness of additional monetary or fiscal stimulus. Matthew Yglesias quickly erects a straw man to attack:
After all, if there’s a clash between what policies would be good for PIMCO’s investment positions and what policies would be good for the global economy, El-Erian has a responsibility to push for policies that would be good for PIMCO’s investment positions. Is there such a clash? Well, readers of The Washington Post op-ed page have no way of knowing. So what’s the point of publishing it?
which Felix Salmon sets fire to with equal promptness:
The oversimple answer to the question is that El-Erian controls over $1 trillion in assets: if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache. If you care what the bond vigilantes might be thinking, then you can probably get a pretty good sense of it by reading El-Erian’s frequent op-eds.
A better answer is that there simply isn’t a clash between what’s good for the global economy and what’s good for Pimco, which is overwhelmingly a long-only investment house. Pimco’s long-term health is a function of there being a strong global economy which generates lots of savings for Pimco to manage. If you’re running a few million or even a few billion dollars, then you can significantly grow your assets under management by taking bold bets which pay off. If you’re running a trillion dollars, that’s no longer the case. At that point, your assets under management are much more a function of the global savings rate than they are of your own expertise as a fund manager.
I saw the op-ed as a plea to abandon parochial and partisan interests, high-minded but unlikely. Additionally, I think his prescriptions betray a fundamental lack of understanding of the problems we face. Take education, for example. We already spend a trillion dollars a year out of the public purse, most of the spending coming from state and local governments. As with defense, healthcare, and any number of other critical areas, we not only spend more than any other single country on education, we very nearly spend more than all the rest of the countries of the world put together. Far from not spending enough in these areas we’re spending far too much. We’re just not getting a good enough return on our investments.
Our problem is that our spending on defense, healthcare, and education remains targeted in inefficient and ineffectual ways, is unsustainable, and diverts resources from other potentially more productive economic sectors which have far greater potential for producing increased employment. We have already engaged in what is laughingly called healthcare and financial reform, in each case woefully inadequate and more likely to exacerbate the problems we face than solve them. The other countries of the world are focused on their own problems. Don’t expect Germany, China, or Japan to suddenly become good global citizens and become willing to take one for the team. They have their own problems and their own political imperatives.
Blah, blah, blah. Some much tripe. The view expressed just about everyone you quoted is of an economy that is a mechanical construct. “We need a policy that will enhance the structural growth of the economy while at the same time addressing the cyclical fluctuations in a timely manner…”
Nonsense. The economy is more like an organism in my view. This is why a static policy is going to be doomed to failure and why looking at the past is of limited help. We don’t have the economy we had in 1930, but everyone acts like we do by making silly assumptions that allows us to aggregate everything up into a single demand and single supply equation (or IS-LM framework if you prefer).
The truth of the matter is that if the economy is more like an organism and evolves over time (i.e. markets are created, prosper, then die off–buggy whips anyone, how about telegraphs?) then what works at any given time may not work in the future. As such any policy will also have to be dynamic to address the changes in the economy. Such a policy is, given the size and complexity of our economy, going to be damned difficult to determine. Even if we ignore the problems pointed out by Professors Kydland and Prescott and the rather long list of public choice issues the problem is still daunting.
And unfortunately we keep running back to a many who died 64 years ago and who, like many in his time, fell for the wise leader fallacy,
See, if we only had people who are rightly oriented in their own minds and hearts….why moderate planning would be grand. But, I submit that democracy does not give us such people. I’d even go so far as to argue that anyone that wants the kind of power we’ve vested in our various elected leaders is automatically not “rightly oriented in their own minds and hearts to the moral issue.”
Absolutely, but we have created so many vested interests in all of those areas of the economy that any hope of realistic reform is DOA. Seriously Dave, you think we can reform all three of those rather large aspects of government spending and bring matters in hand? Keep in mind that there are not just billions, but trillions of dollars at issue. For defense for example, I’d argue it was the first case of public risk/private profits. And with regards to health care you cannot have any meaningful reform without taking a long hard look at Medicare and as soon as you do that the other side will use that issue to kill you politically. They’ll make you look so bad that Dracula would be a saint by comparison.
I would argue that both attempts at “reform” have been exactly the opposite, they have solidified the status quo. And since the status quo is not sustainable….
Change you can believe in.