The Only Game in Town by Mohamed A. El-Erian

Author:Mohamed A. El-Erian
Language: eng
Format: epub
Publisher: Random House Publishing Group
Published: 2016-01-25T16:00:00+00:00

CHAPTER 20

THE REDUCED-FORM APPROACH TO A GRAND POLICY DESIGN

“Wouldn’t that be nice, Professor? One simple elegant equation to explain everything.”

—THE THEORY OF EVERYTHING

Certainly at first, the ten challenges facing the global economy may appear big but not overwhelming.1 But the ways that they interact with one another can threaten large and durable damage to economic, social, and political stability, increasing the risk of complete policy paralysis. To manage such a risk, the natural inclination on the part of policymakers and other decision makers, including in households and the corporate world, is to formulate a laundry list of solutions.

Such an approach certainly has its appeal. But a long list of required policy areas will not fly in the current political environment, which inhibits agreement and action on even the simplest of things. What is needed instead is a handful that can provide anchors—or, if you prefer battle analogies, air cover—for progressing successfully on design and implementation of a medium-term corrective vision. After all, if you have to undertake a difficult journey, it is virtually impossible to navigate it without a good notion of the destination.

To help us think through what’s required, we will use a rather neat approach that econometricians resort to when dealing with particularly complex problems—the “reduced-form equation.” Rather than seek a full solution—and, in the process, risk analytical paralysis and/or implementation hell—this approach solves for a smaller set of actionable variables. We are not seeking to speak to every element of the problem. Instead, we attempt to encompass enough of them—say 75–90 percent—to find a solution that is both actionable and desirable.

Applying such an approach, it is clear (at least to this author) that advanced economies are in desperate need of the four major policy initiatives mentioned above, though some may well disagree on the exact weights of each. To be truly effective the four would need to be pursued simultaneously; moreover, given the structural fluidity of today’s global economy and the related quest for new growth models, implementation would need to be undertaken with an open mindset—one that is responsive to incoming information and midcourse corrections should they be warranted.

A simple analogy will clarify the point. Imagine a patient who has been released from hospital after being in the intensive care unit and having undergone emergency surgery. The good news is that she is out of immediate danger. But she has yet to fully heal. She can walk, slowly and tentatively, but cannot run as yet.

Full recovery is hindered by such factors as the legacy of an inadequate diet and the lack of exercise. Medicine and time help, but they are not enough. Changes in behavior are also needed.

So it is for the global economy—and advanced countries in particular. While time will continue to heal many (but not all) balance sheets, this is unlikely to prove sufficient to produce high growth let alone enhance potential, and while cyclical rebounds will please many, they will prove frustratingly insufficient if they do not hand off to longer-term inclusive growth

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