Should we listen to El-Erian?
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?
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.
The best answer, however, is that it doesn’t really matter who wrote the op-ed: it should stand or fall on its own merits. El-Erian makes the case that we’ve lost the global cooperation and determination to change our ways that we saw 18 months ago: essentially, we’ve wasted our crisis.
An already polarized political environment is becoming even more fractured by real and far less substantive issues. There is virtually no political center that can anchor consensus and enable sustained implementation of policy. Meanwhile, as anti-Washington sentiments rise, interest in a national agenda is increasingly giving way to the election cycle. Internationally, the impressive degree of cross-border coordination seen during the global financial crisis has been reduced to inconsistent — and at times contradictory — national responses.
This worrisome trio of increasingly ineffective national and global policy stances, intense political polarization and growing social pressures speaks to the risk that the economy’s recent soft patch will evolve into something even more troublesome and sinister.
El-Erian has a global perspective, and from that point of view it’s pretty clear that another one-off stimulus package, even if it’s a big one, isn’t going to achieve very much. Instead, the former IMF technocrat is looking for something much more coordinated and strategic, where the G8 construct a vision of where they want to be, and then work out how on earth they’re collectively going to get there from here.
It’s not like El-Erian’s prescriptions are those of a fiscal cheapskate. Quite the opposite: this kind of shopping list comes extremely expensive.
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.
The point is rather that when Republicans can’t agree with Democrats, and Germans can’t agree with Americans, on any of this, the prospects for the global economy dim. And when the world is sick, the US can’t thrive. That’s not a function of who El-Erian is, or whether he’s conflicted. It’s just international geopolitical reality.