The numbers say the stumbling U.S. economy is picking up steam. But there’s good reason to worry.
- By Mohamed A. El-Erian<p> Contributing editor Mohamed A. El-Erian is CEO and co-chief investment officer of global investment management firm Pimco and author of When Markets Collide. </p>
A few weeks ago, I asked a room full of students and their parents to raise their hands if they were anxious about America’s economic future. It’s a question I have asked on several occasions in recent months and once again, virtually every hand in the room shot up.
At first sight, this seems to contradict the scientific data. After all, the University of Michigan’s widely followed measure of consumer sentiment improved again last month, and recent monthly employment numbers have also been pretty good — both signaling that the economy continues to heal. Yet, Americans are hesitant to interpret recent improvements as a sign of long-term recovery, and understandably so.
In part, this is because the effects of the 2008 global financial crisis are still with us, reflected in the 5 million Americans who are long-term unemployed, the millions of other discouraged citizens who have exited the labor force in recent years, the 20 percent of homeowners who are upside down in their mortgages, and the 4 million houses facing a high probability of foreclosure.
There is also something else at play: Americans are rattled by the reckless and previously unthinkable political behavior they have seen in Washington. Be it politicians’ repeated willingness to play Russian roulette with the economy (the fiscal cliff being this year’s sad sequel to the debt ceiling debacle) or last year’s loss of one of the country’s AAA credit ratings, Americans are regularly confronted with destabilizing realities that are hard to comprehend. And the further citizens get pushed away of their comfort zones, the less they trust the institutions of government. Lack of trust, in turn, encourages people to pursue approaches that undermine rather that nurture the collective good.
Moreover, for the first time in over 100 years, our children’s generation risks being worse off than that of their parents. This could mean not only relative deprivation, but also the fracturing of a society built on the notion of continuous improvements in living standards — embedded not only in the popular narrative of the "American dream," but also in mundane constructs like retirement and health insurance plans. But if anxiety about the medium-term economic outlook is understandable, how best can we navigate this uncertain future?
There are several things that each of us can do to improve our outlook and that of our children. At a minimum, these efforts will help us weather a period of uncertainty. And if our politicians get their acts together and stop bickering, they could significantly amplify the country’s economic recovery.
Education is at the foundation of a better outlook. Even with all the complaints about its current state, the data confirms that the more education individuals have, the greater the probability that they will find a job and remain employed. And the numbers are startling: The unemployment rate for dropouts is three times higher than that of college graduates.
But basic education is no longer a guarantee of economic wellbeing and financial stability. Acquiring forward-looking skills, particularly in specialized manufacturing and upper end technology, is a good way to enhance professional competitiveness. And while many schools and universities still lag behind in offering this kind of instruction — and America has yet to revive meaningful vocational training — there is an ever expanding array of online course offerings that can help fill the gap.
The impressive growth of the Internet, and its inspired use, has made this possible for practically anyone. And you don’t have to sit through the increasing number of stuffy lectures available online from reputable universities. Just visit the website of the Khan Academy to see the amazing range of accessible content. To succeed in the world of today and tomorrow, the average citizen also needs to have a broader global perspective, a better understanding of different cultures, and deeper intellectual curiosity about how best to reconcile different perspectives. Again, the Internet is a great help here, and one that can provide a foundation for many that are currently excluded.
Higher productivity and better growth prospects are absolutely necessary for improving the economic outlook. But they are unlikely to be sufficient. Improved financial literacy will also be essential if the next generation is to manage the consequences of the enormous debt they are inheriting. School curriculums have a lot of catch up on here, starting with offering better asset-liability education and more emphasis on how to navigate the confusing financial landscape faced by consumers.
Finally, there is the issue of social awareness. It is depressing to see the extent to which popular narratives have been distorted and oversimplified. The rich and privileged need to stop hiding behind the façade of the American dream. A little bit of hard work is clearly not enough for every citizen to escape poverty. At the same time, however, less well-off segments of society should be careful about placing all the blame on "the system" for being rigged against them. Both views are harmful exaggerations, and both ignore the reality of how interconnected American society is.
But what of our collective future? Individual efforts to enhance human capital will pay big dividends if politicians pivot toward more collaborative behavior. Shared responsibility must become a defined norm, along with shared sacrifice, and fair burden sharing — no small task for politicians motivated by short election cycles.
Many will tell you that the required course correction contravenes some basic notion of atomization that has served the country extremely well throughout its history. Others will add that it’s simply too hard to modify the American selfish gene syndrome that, guided by Adam Smith’s "invisible hand," has delivered superior outcomes.
I am not so sure. And there is reason for you to be equally skeptical.
Recent unthinkables like Congress’s handling of the fiscal cliff should not be treated as noise with little information content. Rather, they should be thought of as a signal that the system is struggling to accommodate some pretty meaningful shifts in the underlying parameters of economic and financial interaction. By better understanding the forces in play — through clear-headed and less dogmatic discussions of the pros and cons of alternative scenarios — we can go a long way in taking better control of our destiny and overcoming what is a debilitating sense of anxiety and helplessness.
Call me naïve, but I believe that we can overcome this issue through better information sharing and clearer advocacy. And in saying this, I draw courage from what happened in my home state on November 6: Californians came together and voted for a higher tax rate in order to provide more funds for education.
As he starts his second term, President Barack Obama has an important opportunity to convert into positive energy the nation’s high level of anxiety about its economic and financial outlook. Let us hope that the political parties can help him by overcoming their pettiness and, thus, enable the nation’s broad-based aspiration for a much better future. If not, our collective anxiety will continue to rise and the payoffs from inspired individualism will fall far short of what is possible, desirable and, indeed, necessary.