El-Erian: Active inertia weakens economic policy responsesMay 13, 2013: 9:04 AM ET
As bad as things are -- especially for the poor, the young, the unemployed, and other vulnerable segments of the economy -- things need to get worse to overcome the enormous active inertia that is now embedded in the political systems and institutions.
By Mohamed El-Erian
FORTUNE -- In Happy Feet, one of my 9-year-old daughter's favorite movies a few years ago, a young penguin (Mumble) takes on the colony's wise elders and finds a way to solve his community's hunger problem. Curiosity and innovative thinking, together with conviction and persistence, enable him to overturn conventional wisdom and the active inertia that had solidified malaise and lost potential.
Over the last five years, central banks have stumbled into the role of wise elders for western economies -- not out of desire or choice, but out of necessity. Assessing a system that persistently failed to deliver jobs and growth, the Federal Reserve has led a growing number of central banks in anchoring a new reality; that of pursuing macroeconomic objectives by pursuing the trio of very low policy interest rates, aggressive forward policy guidance, and seemingly limitless use of the balance sheet to buy securities.
This approach has evolved into a North Star for the western central banking community. Today, they are even guiding institutions, such as the Bank of Japan and the European Central Bank, who had to overcome deeply entrenched resistance to an approach that my former PIMCO colleague, Paul McCulley, described as "responsible irresponsibility." It is also influencing policies in the emerging world.
As hard and as long as they try, central bankers have yet to deliver. Indeed, outcomes have persistently fallen short of their own declared expectations. In response, they have done more of the same (active inertia).
Similar to Happy Feet, the collective seems to have no problem believing in the wise elders even though results consistently disappoint.
Equity investors respond enthusiastically to every central bank action, investing even more at higher prices. Politicians outsource, believing that their economic governance responsibilities can be left to central bankers. Facing hyperactive institutions with printing presses in their basements, bond vigilantes have been subdued into following central banks.
It is possible that the collective belief in central bankers will be validated by cumulative economic healing, the engagement of healthy balance sheets, some exciting innovations, and a more constructive politics. I sure hopes this happens. But it is certainly not a certainty as monetary policy is insufficiently supported by other policy measures. Moreover, the longer the dependence on central banks, the greater the erosion in the eventual effectiveness of their hyperactive policy stance.
Fortunately, a few have stepped up to perform the brave role of Mumble.
Some advocate correcting deficient aggregate demand by using aggressive fiscal stimulus to supplement the current monetary stance. Others are pushing deregulation and the shrinkage of government to "make room" for the private sector. And a third group favors structural reforms to increase productivity, fix market failures, and thus improve growth and employment responsiveness.
To date, and despite an active debate, none is gaining material traction. Even when they do not contradict each other, they are viewed as too partial and certainly not overwhelming enough to overcome political polarization.
In today's world, the role of disruptor needs to be approached in a different way. Rather than focus on the immediate next steps, Mumble should invert the logic, focusing first and foremost on a desirable and feasible three- to five-year vision for the western economies. This would be followed by specifying the first few steps of the journey (rather than every step, which is virtually impossible to do so with sufficient confidence in this "unusually uncertain," fluid and realigning global economy) and the milestones along the way (to ensure accountability and facilitate course corrections as needed).
Such a logic inversion increases the probability of political convergence on a common framework and, as important, popular buy-in. In the process it provides for the leadership needed to spearhead time-consistent policy responses, institutional strengthening, and global policy coordination.
Timing is, of course, as important as content. Here I am less optimistic. It may well be that the system will wait for more serious economic and social disorder before tipping into the required logic inversion.
As bad as things are -- especially for the poor, the young, the unemployed, and other vulnerable segments of the economy -- things need to get worse to overcome the enormous active inertia that is now embedded in the political systems and institutions. This is a dreadful situation. And in the meantime, we will continue to rely on central bankers using imperfect tools and raising hope.
Mohamed A. El-Erian is the CEO and co-chief investment officer of PIMCO. He also chairs the U.S. president's global development council.