Monday, July 28, 2014
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America at Stall Speed?

NEWPORT BEACH – Judging from the skittishness of both markets and “consensus expectations,” the United States’ economic prospects are confusing. One day, the country is on the brink of a double-dip recession; the next, it is on the verge of a turbo-charged recovery, powered by resilient consumers and US multinationals starting to deploy, at long last, their massive cash reserves. In the process, markets take investors on a wild rollercoaster ride, with the European crisis (riddled with even more confusion and volatility) serving to aggravate their queasiness.

This situation is both understandable and increasingly unsettling for America’s well-being and that of the global economy. It reflects the impact of fundamental (and historic) economic and financial re-alignments, insufficient policy responses, and system-wide rigidities that frustrate structural change. As a result, there are now legitimate questions about the underlying functioning of the US economy and, therefore, its evolution in the months and years ahead.

One way to understand current conditions – and what is needed to improve them – is to consider two events that recently attracted considerable worldwide attention: the launch of Boeing’s Dreamliner passenger jet and the tragic death of Apple’s Steve Jobs.

Let us start with some simple aeronautic dynamics, using an analogy that my PIMCO colleague, Bill Gross, came up with to describe the economic risks facing the American economy. For the Dreamliner to take off, ascend, and maintain a steady altitude, it must do more than move forward. It has to move forward fast enough to exceed critical physical thresholds, which are significantly higher than those for most of Boeing’s other (smaller) planes.

Failure would mean succumbing to a mid-air stall, with tepid forward motion giving way to a sudden loss of altitude. Unless we are convinced of the Dreamliner’s ability to avoid stall speed, it makes no sense to talk about all the ways in which it will enhance the travel experience for millions of people around the world.

America’s economy today risks stall speed. Specifically, the question is not whether it can grow, but whether it can grow fast enough to propel a large economy that, according to the US Federal Reserve, faces “balance-sheet deleveraging, credit constraints, and household and business uncertainty about the economic outlook.” And, remember, it is just over a year since certain US officials were proclaiming the economy’s “summer of recovery” – a view underpinned by the erroneous belief that America was reaching “escape velocity.”

Stall speed is a terrifying risk for an economy like that of the US, which desperately needs to grow robustly. Without rapid growth, there is no way to reverse persistently high and increasingly structural (and therefore protracted) unemployment; safely de-leverage over-indebted balance sheets; and prevent already-disturbing income and wealth inequalities from growing worse.

The private sector alone cannot and will not counter the risk of stall speed. What is desperately needed is better policymaking. Specifically, policymakers must be open and willing to understand the unusual challenges facing the US economy, react accordingly, and possess sufficiently potent policy instruments.

Unfortunately, this has been far from the case in America (and in Europe, where the situation is worse). Moreover, US policymakers in the last few weeks have been more interested in pointing fingers at Europe and China than in recognizing and responding to the paradigm shifts that are at the root of the country’s economic problems and mounting social challenges.

This is where the insights of Steve Jobs, one of the world’s best innovators and entrepreneurs, come in. Jobs did more than navigate paradigm shifts; he essentially created them. He was a master at converting the complicated into the simple; and, rather than being paralyzed by complexity, he found new ways to deconstruct and overcome it. Teamwork was an obligation, not a choice. And he eschewed the search for the single “big bang” in favor of aiming for multiple breakthroughs.

Underlying it all was a willingness to evolve – a drive for perfection through experimentation. Moreover, he excelled at selling to audiences worldwide both his vision and his strategy for realizing it.

So far, America’s economic policymakers have fallen short on all of these fronts. Rather than committing to a comprehensive set of urgently-needed reinforcing measures, they seem obsessed with the futile search for the one “killer app” that will solve all of the country's economic problems. No surprise that they have yet to find it.

Teamwork has repeatedly fallen hostage to turf wars and political bickering. Little has been done to deconstruct structural complexity, let alone win sufficient public support for a medium-term vision, a credible implementation strategy, and a set of measures that is adequate to the task at hand.

The longer the policymaking impasse persists, the greater the stall-speed risk for an economy that already has an unemployment crisis, a large budget deficit, many underwater mortgages, and policy interest rates floored at zero. This is an atmosphere in which unhealthy balance sheets come under even greater pressure, and healthy investors refuse to engage. In the process, the risk of recession remains uncomfortably high, the unemployment crisis deepens, and inequities rise as already-stretched social safety nets prove even more porous.

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