Tags: El-Erian | economy | accelerate | Congress

El-Erian: Underachieving Congress May Gum Up Economy's Resurgence

By    |   Sunday, 05 January 2014 11:02 AM

Economic growth will speed up this year to the 2.25-2.75 percent range, but the business expansion is endangered by a dysfunctional and divided Congress, says Pimco CEO Mohamed El-Erian.

"The American economy will improve in 2014, creating more jobs and boosting wages. That is the good news," El-Erian writes on Politico.

"The bad news is that, rather than serve as a springboard for even better performance down the road, this improvement could lull Congress into a false sense of security and continued inaction on key economic legislation," he says.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

And what would that mean for the economy?

"Should this occur, the multi-year outcome could be an even longer (as well as unnecessary) period of below-potential national prosperity, excessive income and wealth inequalities and greater political polarization," El-Erian writes.

The economy grew 4.1 percent in the third quarter, but many experts think that number overstated true growth, as much of it stemmed from increased inventories.

El-Erian says a 3 percent expansion is possible this year. In addition to boosting jobs and wages, GDP growth in 2014 will "reduce the burden of [government] debt and deficits," he says.

"It will also encourage companies to deploy some of their considerable cash balances and record profitability into larger investments in new plant and equipment."

But the downside is that 2014 growth is "unlikely to be strong enough to trigger economic 'escape velocity,'" El-Erian writes. referring to the point at which economic growth becomes self-sustaining without government assistance.

"The longer this growth breakout phase is delayed, the greater the risk that the twin evils of long-term and youth joblessness will become more deeply embedded in the structure of the economy," El-Erian says.

As for Washington, improved 2014 growth will likely do little to bridge the partisan gap over how to deal with the economy, El-Erian says.

"Rather than serve a convergence role, both sides are likely to interpret the pick-up as confirming their prior beliefs about the size and scope of government," he writes.

"With that, Congress could slip deeper into comfortable underachievement, delaying further meaningful legislative initiatives that would rapidly unlock America’s considerable economic potential (including those that already command notable bipartisan support, such as immigration reform)."

Mesirow Financial economist Diane Swonk seems to view the year somewhat like El-
Erian. "2014 could be the breakout year,'' she told USA Today. "This is the year when we're going to find out.''

USA Today writer Tim Mullaney says that among the important questions to be answered for the economy this year is whether it can grow at a 3 to 3.5 percent rate, creating 250,000 jobs a month and slicing unemployment to about 6 percent. The jobless rate was 7 percent in November.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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Economic growth will speed up this year to the 2.25-2.75 percent range, but Congress threatens the progress, says Pimco CEO Mohamed El-Erian.
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2014-02-05
Sunday, 05 January 2014 11:02 AM
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