Last week, Mohamed El-Erian, CEO of Pimco and a prominent commentator on international economics, published an op-ed in the Financial Times on what he sees as the false choice between the “growth now” and “austerity now” camps:
Squaring the circle of growth and fiscal stability needs policies that focus on long-term productivity gains and immediate help for those left behind. This means first enhancing human capital, including retraining parts of the labour force, and increasing labour mobility. Then new emphasis on infrastructure and technology investment is needed, with greater support for scientific advances that promise increased productivity. Finally all nations must begin an honest assessment of the social frictions coming in the next few years. In some countries (like the US) this means an urgent bolstering of social safety nets.
As Felix Salmon observes, El-Erian shrewdly identifies the feel-good policy prescriptions — who doesn’t want to enhance human capital? — while leaving the feel-bad policy prescriptions, like hiking taxes and slashing spending, to the imagination.
That said, El-Erian’s broad prescription sounds right to me:
As a general rule industrial countries need to adopt both fiscal adjustment and higher medium-term growth as twin policy goals.
This is the course of action recommended by Jeffrey Sachs, one that has been forcefully condemned by Paul Krugman and his allies.