June 29, 2010

"Growth Now" vs "Austerity Now"

PIMCO's Mohamed El-Erian, writing recently in the FT, attempts to bridge the divide between the two warrings camps:

The two sides are both right, and wrong. Their impasse will persist until both understand that the debate is incomplete. In particular their discussion takes too narrow an historical perspective, looking excessively to the past experience of industrial countries as opposed to also reflecting that of emerging economies.

As a general rule industrial countries need to adopt both fiscal adjustment and higher medium-term growth as twin policy goals. The balance between the two will vary. Some, like Greece, need immediate fiscal retrenchment. Others, like Germany, the US and Japan have more room for manoeuvre. But no one should pursue just one of these objectives.

To begin to achieve both, countries must quickly implement what were once known in the emerging market lexicon as "second generation structural reforms". Basically these involve enhancing the longer-term responsiveness of western economies that have had their comparative advantages eroded, and now see their populations stranded on the wrong side of significant global changes.

Squaring the circle of growth and fiscal stability needs policies that focus on long-term productivity gains and immediate help for those left behind. This means first enhancing human capital, including retraining parts of the labour force, and increasing labour mobility. Then new emphasis on infrastructure and technology investment is needed, with greater support for scientific advances that promise increased productivity. Finally all nations must begin an honest assessment of the social frictions coming in the next few years. In some countries (like the US) this means an urgent bolstering of social safety nets. [emphasis added]

I post this less for El-Erian's cogent observations generally, to include his apt recycling of "second generation structural reforms" in a non emerging-market context, more for his mention of "social frictions" to intensify in coming years. I suspect this is an issue that merits more attention than it has garnered to date, to include here in the U.S., as El-Erian suggests in his parenthetical.

Posted by Gregory at June 29, 2010 10:04 PM | TrackBack (0)