Tuesday, September 2, 2014
7

The American Recovery

NEWPORT BEACH – The United States has gone through an arduous period of intervention and rehabilitation since the global financial crisis in 2008 sent it to the economic equivalent of the emergency room. It moved from the intensive-care unit to the recovery room and, just recently, was discharged from the hospital. The question now is whether the US economy is ready not just to walk, but also to run and sprint. The answer will powerfully influence global economic prospects.

It is easy to forget how critical things were back in the fourth quarter of 2008 and the first quarter of 2009. Having suffered what economists call a “sudden stop,” many parts of the US economy were imploding or had ceased to function – to extend the medical metaphor, even the most vital organs were threatened.

Economic activity collapsed and unemployment surged. Credit stopped flowing. Banks were on the verge of bankruptcy and nationalization. International trade was disrupted. Income and wealth inequalities worsened. And a general sense of fear and uncertainty inhibited the few healthy parts of the economy from engaging in meaningful hiring, investment, and expansion.

Parlous conditions required dramatic measures. And that is what the economy got in the form of unprecedented fiscal stimulus and unthinkable policy activism on the part of the US Federal Reserve.

As they intervened, American policymakers consulted closely with their counterparts around the world, urging them to take supportive steps. And they did, culminating in one of the most successful periods of global policy coordination in history, involving both advanced and emerging economies.

For many, the global economic summit held in London in April 2009 marks the point when the US economy turned the corner. The change was so notable that many policymakers fell into the trap of projecting a quick rebound, especially given America’s prior history of economic dynamism and resilience, only to be humbled by what has proven to be a protracted and complex process of recovery. Even today, that process highlights the scale and scope of the economy’s structural weaknesses.

Having reduced the risk of a relapse into recession, the US economy is able now to move on its own power, though gingerly. The horrific collapse in the labor market has given way to consistent monthly employment gains, albeit less than what is needed for a full recovery. Manufacturing activity has picked up, helped by a surge in exports. The housing sector seems to be finding a tentative bottom (though housing finance remains incoherent). Consumers have better access to credit. And, sensing all of this, companies are beginning to deploy the massive precautionary cash balances that they have accumulated.

With the US still by far the largest economy in the world and the anchor of the international monetary system, its well-being has huge implications everywhere. So, not surprisingly, the US recovery has helped to set a calming and constructive tone – and at a critical juncture, given that Europe is still struggling with a debt crisis on the eurozone periphery, and emerging economies are going through a cyclical slowdown.

Politics is also in play, and in a manner that significantly influences who will lead the world’s superpower after this November’s presidential and congressional elections. The economic improvements already have helped President Barack Obama’s re-election prospects, as has the continuing drama of a drawn-out, divisive, and expensive Republican primary.

The problem is that the sense of relief now can – and probably will – be taken too far. Indeed, today’s good news should not obscure some consequential structural limitations that will require prolonged therapy and caution. After all, the US economy has yet to regain its full strength, is too structurally impaired to sustain any rapid forward movement, and has not yet started to overcome the many distortive side effects of the extreme medicine that it received.

Locking in recovery implies a multi-year program of serious and coordinated reforms that fundamentally improve the way the country educates and trains its citizens, invests in infrastructure and finances other productive outlays and housing, competes in the global economy, and formulates and adheres to a rational budgetary process. Such a program will also require a recovering America to navigate several key challenges in the next few months.

For starters, the economy is not yet in a position to handle the 4-5%-of-GDP “fiscal cliff” that is approaching as all of the hard political decisions that were postponed come into view at the end of this year. The prospect of a disorderly fiscal contraction needs to give way to a more rationally designed approach that avoids undermining the fragile recovery. To accomplish that, the political class must avoid the bickering that almost sent America back into recession in 2011, and that raised major questions about the quality of the country’s economic governance.

Oil prices are not helping. Having already surged on account of Iran-related geopolitical concerns, they are altering American consumers’ behavior, weakening their confidence, aggravating the country’s payments imbalances, and further reducing policymakers’ flexibility.

And then there is Europe, which is yet to overcome decisively its debt and growth problems. Like other countries, the US must continue to strengthen internal firewalls to limit its vulnerability to what is still a complex crisis across the Atlantic.

America’s full recovery is not yet guaranteed. A mix of steadfastness, caution, and good luck is needed for that to happen. And when it does, the country will be in a better position to repay its massive hospital bill.

Read more from our "America's Precarious Recovery" Focal Point.

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  1. CommentedJim Hejl

    AUSTIN - The prognosis for the patient in 2008 was one of protracted, subpar recovery. Everything has unfolded as expected. Recapitalization and deleveraging have occurred. Innovative government programs have been attempted. Politicians have postured. We continue to live on the brink of disaster.

    Thank you, Mr. El-Erian, for politely bringing into focus the issues we are faced with. Perhaps you might more forcefully present the concern, which we all share, that toying with the country’s economic well being for political advantage may snuff out the feeble recovery into which we are trying to breathe life.

    My fear is that your thoughtful language doesn’t urgently convey the direness of the situation. There seem to be many among us who hope that a little more economic pain may be played for political advantage. On the other hand, an ambulatory patient may be only a couple of heartbeats from a massive relapse.

  2. CommentedJonathan Lam

    Gamesmith94134: The American recovery

    I think Procyon Mukherjee gave the best of the short and long term progresses in recovery that “ the world is yet rein in on the absence of effective demand, while supply lines have to grapple with over-capacity”, and “expansionary policies could undermine the long term security of future generation”.

    It was all good when much of the increasing rise of the stock market that many shifted from the bond market, and the merger and acquisition continued. State government had cut education and others, but it raised fees and licenses adding higher cost of the operating business and cutting into the pools of investments. As for many companies, they have already maximized their capacity to growth because of the absence of effective demands; even Apple or HP is paying dividends and buying back its stocks since cash is becoming infinite to merger and acquisition. Did they want to buy royalty of their investors? It was expensive and bad for R&D.It could be a trend since the trade deficit is not improving nor employment is growing at a steadier rate. In my view, the present recovery is just another phenomenon of the reverse in cash flow after the EU debts resolution is not adequate based on its structural innovation; that ECB turn itself into insurer and not guaranteed.

    Perhaps, I am talking of the contraction of the budgetary policies which have already undermined the long term security of future generation. And I saw the ten year bond is coming to above the 2% and the inflation at 3-4%; but the inflation is not stopping yet till the reloading inventories of the goods from offshore like China and India; especially the jump to $106 on oil prices. I do not think the CPI or PPI would be not influenced by the inflation from afar; the ripple effect could be drastic for the redevelopment. Beside, the return of the US forces to America would jolt the unemployment back to 10-12% and the stock market will then suffer in a downfall in the summer or prior the election if the State governments lose its cool in raising taxes and cutting the investments.

    Therefore, I felt that American recovery up-beat is just circumstantial even though the real estate prices are more stable than a year ago; but it is still hard to pin down the bull market. Even many of the brokers cannot tell what is really up, or it was just secular bull market. Eventually, the devaluation or adjustment to price and make lower tax revenues and the State governments would pull the rug off the ground in raising the interest rates to its bonds. So, the intention of the FED to adjust its rates in 2014 may not be sufficient to stop further inflation after the build-up on the inventories from its imports. Once the markets begin to calculate on the interest rates and inflation rate, many see the inequality and imbalance to its currency. Perhaps, the present recovery is so fragile that a simple expose of unemployment or oil prices can crack the stock market which is running on emotions to escapade since “the world is yet rein in on the absence of effective demand, while supply lines have to grapple with over-capacity”.

    Personally, it is the turning point to recovery perceptively only if the interest rate is becoming rational to the reality of the economy, so is the exchange rate relatively to the the currencies of the world under the constraint of interest rate mutation. As much of the cash flow shift to The South, there will be a tight rope to walk for the FED if it only focuses on the liquidity or inflation and not the globalization of all trades.

    Another IPOD 3, I saw the no innovation but gimmicks. What else can they do other than cut price on IPOD2?

    May the Buddha bless you?

  3. CommentedProcyon Mukherjee

    It is truly a commendable job by the government and industry to bring back the economy on course at a time when the rest of the world is yet to rein in on the absence of effective demand, while supply lines have to grapple with over-capacity. The broader picture for America has to be framed with the caution that contraction related policies could deter the prospects of job growth, while expansionary policies could undermine the long term security of future generations that all of us desire. Between these two conflicting pressures the least that we could expect is a return to war mongering and the maximum we could hope for is the alignment of the polity towards goals that are not directed towards narrow self-interests that serve certain specific sections at the cost of the other.

    Procyon Mukherjee

  4. CommentedZsolt Hermann

    Continuing the medical allegory, in my opinion the optimism is unfortunately unfounded.
    The patient was discharged from the hospital injected full of Morphine, and other placebo drugs, but without any attention given to the true illness, which is the false foundation and drive of the whole overproduction/over consumption, constant growth, profit accumulating economy and its supporting political and financial institutions.
    Moreover the American patient is not sick on its own, but just part of a serious contagious plague infecting all the other parts of the system.
    Today the US, Europe are patients running on pain relief drugs, living in inflated, unsustainable bubbles, and the emerging market countries, following the same path running into the same dead end with breakneck speed.
    Two principle points are coming out of this, considering how global and integral we have become, and how we are not in a crisis, but we are in a system failure:
    1. There is no such thing as American recovery, either the whole world economy recovers and works optimally, or we all fail, since as one of the Nobel laureate economists coined it, we are all sitting on the same boat.
    2. There is not even a slight chance for recovery until we find the root of the disease and start to cure that, which is building a completely new human system, based on necessity and resource based economy and mutually responsible and considerate governance with a supra national democratic system.

  5. CommentedLuke Ho-Hyung Lee

    Without first constructing the necessary public infrastructure in the modern information supply chain process, I believe there will be no America’s full recovery, because it will be almost impossible to create enough businesses and jobs to keep consumer spending at the desired level and revitalize the economy, no matter how powerful the economic policies or stimulus plans adopted. They might be able to fend off urgent problems for a time but could also create or accumulate unforeseen abnormalities in the market.

    Please see: “To have Prosperity or to have Decline, it depends on Your Choice” http://goo.gl/AeP9O.

    I believe the lack of info-based public supply chain infrastructure in the market is the real cause of the current economic crisis.

  6. CommentedPaul A. Myers

    Without structural reform, the US economy will stay in a slow-growth mode. Structural reform requires debate about specific measures:

    Infrastructure spending should aim at immediately improving the overall marginal productivity in the economy. Billions should be put into urban transportation infrastructure, waste water facilities, immediate energy saving improvements, etc. Projects like the California train-to-no where should be avoided, postponed, or cancelled.

    Big money should be put into making health care exchanges up and functioning in a matter of months, not years. Accessible low-cost policies should be subsidized and made broadly available. Subsidized policies should aim at facilitating real structural economic changes in the health care economy.

    Social investment should go to community colleges and four-year public colleges with an aim at building skills-based education. Avoid pumping millions into superstar professors at public universities. They have a place and time, but not now. Community college instructors are one of the great bargains of the current epoch. Community college vocational training should reach way back into the secondary and middle school age groups. Admit it: the K-12 education establishment has failed to provide vocational education to America's young. Don't waste time trying to "reform" public middle and high schools. Build new organizational structures.

    Spend public money on building things voters and taxpayers can see.

    Kiss the overseas wars goodbye. Bring the boys home.
    As for Middle East wars: repeat "never again."

  7. CommentedLuke Ho-Hyung Lee

    Without first constructing the necessary public infrastructure in the modern information supply chain process, I believe there will be no America’s full recovery, because it will be almost impossible to create enough businesses and jobs to keep consumer spending at the desired level and revitalize the economy, no matter how powerful the economic policies or stimulus plans adopted. They might be able to fend off urgent problems for a time but could also create or accumulate unforeseen abnormalities in the market.

    Please see: “To have Prosperity or to have Decline, it depends on Your Choice” http://goo.gl/AeP9O.

    I believe the lack of info-based public supply chain infrastructure in the market is the real cause of the current economic crisis.

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