Gridlock=Doom: PIMCO's El-Erian

The popular wisdom goes — especially in certain libertarian circles — that political gridlock can be advantageous for the economy. The thinking is that when political parties are at loggerheads in the Congress. nothing gets done. With government securely ensconced in internecine combat, the private sector can go ahead with its business, unfettered by the constraints of excessive legislation.

Mohammed el Erian
Source: Pimco
Mohammed el Erian

But, this time around, things are far too screwed up for such benign neglect to be beneficial, according to PIMCO CEO Mohammed El-Erian.

In a nutshell, El-Erian's argument is that there is far too much uncertainty in the marketplace right now about the direction of U.S. economic policy. Principally, this uncertainty involves regulatory policy, tax policy, macroeconomic policy, and what many perceive to be the anti-business bias on the part of the current administration. And that's a great deal to be unsure and apprehensive about.

El-Erian argues that this uncertainty is preventing individuals from spending and businesses from expanding. Unemployment is too high, household debt remains elevated, and many still fear losing their homes. And, until we find solutions to these very thorny issues, the economy will continue to languish.

What are the root causes of these troubling issues? The long-term challenges we now face, according to El-Erian, were created by protracted periods of excessive leverage and irrational confidence.Over time, these economic mistakes resulted in structural problems, such as unemployment.

El-Erian argues only way to solve these types of major challenges in the long term is through substantive legislative solutions. What kind of changes are we talking about? Investments in physical and technical infrastructure, job retraining, enhanced economic support for education and scientific research, and a better system of social safety nets.

That's a pretty tall order, as you might imagine. While El-Erian doesn't provide a specific road map for how to get there, he makes it pretty clear that praise of gridlock — and burying our heads in the sand until these major challenges work themselves out — is not an effective method of problem solving.


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