Shifting the burden

The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse. By Mohamed El-Erian. Random House; 296 pages; $28.

THE past seven years have been an extraordinary period for central bankers. Not only have they cut interest rates to zero (and even below) in the developed world; for the first time in their history central banks have greatly expanded their balance sheets, buying government bonds and other assets. Most economists agree that vigorous action was needed in the wake of the financial crisis in 2007-08 in order to head off a repeat of the Great Depression. Nevertheless, the sheer scale and protracted nature of such monetary stimulus is now a cause for concern among some commentators; have the banks permanently distorted the economy? In December the Federal Reserve made the first, tentative step towards normality, with a quarter-point rate increase.

Mohamed El-Erian, a former IMF economist and executive at the Pimco fund management group, is the latest to sound the alarm. While central banks “averted tremendous human suffering”, he argues that they have failed to generate what the Western world really needs—“the combination of high, durable and inclusive growth together with genuine financial stability”.

Worse still, politicians have come to rely on central bankers to provide the main source of economic stimulus. As a result, Mr El-Erian asserts, they have failed to force through reforms that were badly needed. The long period of easy monetary policy has pushed up asset prices and thus wealth inequality. It has also meant that the appetite for financial risks (market speculation, in other words) is greater than the willingness of businesses to take economic risks by increasing investment.

Other problems include high long-term unemployment, a loss of trust in authority and the failure to co-ordinate economic policy. The global economy is rapidly approaching a T-junction, he argues, where the road heads in two diametrically opposite directions. One will lead to higher growth, reduced financial risk and a lessening of inequality; the other will see all those measures head in the wrong direction.

Mr El-Erian does a good job of describing the problems. But the book falters when he tries to set out his plan for taking the right path away from the T-junction. He cites a number of necessary measures, including revamping the education system, strengthening infrastructure, improving labour competitiveness and flexibility, while simultaneously closing tax loopholes and increasing marginal tax rates on the wealthy in order to reduce inequality. But he only touches on these issues; a lot more detail is needed. Improving education may be a good idea, but it will be a decade or so before today’s schoolchildren have any impact on labour productivity. How will growth be improved in the meantime?

Instead of answering such questions, he launches into a meandering section about the need for new thinking to deal with “bimodal distributions” (his T-junction metaphor). Just when readers want to get into the meat of the debate on economic policy, they are served a chapter called “Translating Awareness into Optionality, Resilience and Agility”. Mr El-Erian is right that employers need to embrace diversity in hiring, but that subject does not belong in a book on central banking.

In a sense, however, the disappointing ending symbolises the state of economic debate. Central banks have provided all the help they can, and the burden of improving long-term growth ought to fall on politicians. But no one can agree on precisely what needs to be done.