National Press Club

Financial experts blame politics for inadequate economic policies

August 21, 2013 | By Lorna Aldrich |

Mohamed El-Erian illustrates the gap between the economy's potential and its performance.

Mohamed El-Erian illustrates the gap between the economy's potential and its performance.

Photo/Image: Alan N. Schlaifer

A panel of financial experts blamed Congressional politics for inadequate policies addressing the underperforming U.S. economy at an Aug. 21 National Press Club Newsmaker.

Mohamed El-Erian, chief executive and chief investment officer of Pacific Investment Management Co., said "the economy is driving in second gear...when this car is capable of being driven in third, fourth or even fifth gear." A better performance is technically, but not politically, possible, he said.

Sheila Bair, former chair of the Federal Deposit Insurance Corporation, and John Taylor, professor of economics at Stanford University, agreed that the Federal Reserve has had to pursue what Taylor called "experimental" policies because Congress has not produced adequate fiscal policies, tax and expenditure policies addressed at improving economic conditions.

Consequently, El-Erian said, the economy is stuck at 2 percent growth and the longer it continues the lower potential growth becomes because problems get embedded in the economy. He cited the 25 percent unemployment rate of 16 to 19 year olds, who are not developing job-related skills, as one source of future problems.

The Fed's policies work indirectly through markets for financial assets raising their prices, which increases their owners' wealth and thus inequality in the economy, El-Erian noted. "So we have this irony that we are using an imperfect policy not by choice but by necessity," he said.

Bair struck a slightly positive note when she said the financial system is safer than it was in the run up to the 2008 financial crisis but is "not as safe as it should be," because proposed regulations have not been finalized. She focused on the importance of requiring banks to hold adequate capital.

Panelists listed developments they would like to see. "We need stronger political leadership; we don't have a fiscal policy," said Bair, who also cited tax reform, investment in infrastructure as opposed to subsidizing housing, education policies to improve the workforce, and immigration reform.

Taylor talked about the rule of law, predictable policies, market incentives, use of cost benefit analysis for government regulation and reform of entitlement programs. He echoed the need for tax reform that could be revenue-neutral if it broadened the tax base, by reducing exemptions, and lowered top rates.