Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior
PIMCO CEO Mohamed A. El-Erian gave a speech at the St Louis Fed in which he argued that the Federal Reserve and the ECB were trying to solve the world's problems alone, but they can't and need help from others.
What I take as his key points:
While central banks can -- and have -- stabilized things, there is little they can do on their own to engineer the fundamental realignments that must accommodate seven specific dynamics in advanced economies (something that we will come back to later in discussing the way forward):
- Accommodating the "safe" debt de-leveraging of the private sector by enabling high sustained growth
- Safely de-risking the financial sector
- Clearing or replacing clogged credit pipes
- Achieving a sustainable trajectory for public finances
- Improving the functioning of the labor market
- Compensating for inadequate past investments in human resources, productive capacity and infrastructure
- Adjusting to the ongoing developmental breakout phase in several systemically important emerging countries (including Brazil, China, India, and Indonesia).
To be effective, central banks in advanced economies needed -- and need -- help from other policymaking entities to deal with the twin unfortunate realities of too much debt and too little growth. They must be assisted with the engagement of the healthy balance sheets around the world, and fortunately there are quite a few of them in both the public and private sectors. And this must be done in an internationally coordinated fashion in order to accommodate the new global realities.
El-Erian is attempting to tease apart what monetary policy can and cannot do, yet paradoxically he falls prey to the commonplace conflation of macroeconomic and microeconomic goals.
Put simply, the goal of macro policy is to balance maximum employment against stable prices. This, however, is easily confused with goals relating to growth, prosperity and health of public and private balance sheets.
Because, population and productivity have grown consistently in the capitalist world for the last 300 years or so, the only time that we have experienced strongly negative economic growth -- general declines in prosperity and widespread deterioration in balance sheets -- is during recessions and wars.