Obama Appointee Says Obama’s Policies Have Stalled Economy

Income inequality up as a result of ‘policies we’re pursuing to jumpstart the economy’

White House / AP
August 21, 2013

An Obama appointee and the CEO of Pacific Investment told a crowd at the National Press Club that Obama’s economic policies have fostered income inequality and that political squabbling is stalling economic recovery.

Mohamed El-Erian, CEO of Pacific Investment and chairman of the White House Global Development Council, blamed the administration’s reaction to the Great Recession for increasing income inequality. Rather than launching vast infrastructure projects to put people to work, the government has created a larger supply of money using quantitative easing (QE).

The Federal Reserve has flooded America’s largest banks with billions of dollars via this process in the hopes that banks will pump that money into the economy.

This easy money policy has fueled a surging stock market that does not reflect the true value of America’s economic production. It is a sugar high that will have to come down unless something is done, according to El-Erian.

"The reason [inequality] is getting worse is the policies we’re pursuing to jumpstart the economy," he said. "We grew up believing that finance was the next stage in capitalism … [but] we need real economic drivers."

Additionally, El-Erian said the weak recovery will continue without major reforms to the tax code and entitlements, blaming the political environment for the lack of action.

"Politics is the biggest obstacle" to recovery, he said, adding that "complacency" and tolerance for high unemployment would hinder growth.

Sheila Bair, FDIC chairman under President George W. Bush and chairman of the Systemic Risk Council, agreed that three rounds of QE had put the economy on an "unsustainable" path and fueled inequality.

"[QE] benefits those who have financial assets, who are the better off," she said. "You need to produce real growth and services. Fueling growth through [federal inflation] is just not sustainable."

QE isn’t the only way that public policy can distort markets. She emphasized that the numerous special interest carve outs and caveats in the tax code "skew resources to where the government is giving you a tax break, not where it’s healthy."

Stanford Economics professor John Taylor echoed these sentiments, while emphasizing that the United States should rein in the experimental short-term boosts Obama has been using to maintain the shaky recovery.

"We had good monetary policy that worked for 20 years and we got away from that … [markets] need predictability, normal policy," Taylor said. "I see no positive effect on rates from this quantitative easing."

El-Erian said the failure of the weak recovery is evident in the youth unemployment rate, which has bounced around from 40 to 25 percent among the most inexperienced workers, as well as the long-term unemployment rate.

"If you remain unemployed for long, you become unemployable," he said.

"The lack of jobs policy has been astonishing to me," Bair said.

All three experts criticized politicians for failing to achieve structural reforms to the tax code, as well curtailing entitlement costs using bipartisan approaches. Ever-expanding debt, they said, could dry up investments.

"We have persistent debt overhang," El-Erian said. "A debt overhang discourages new capital from coming in—look at what happened to Detroit."

Bair agreed with El-Erian that resolving D.C. dysfunction would go a long way to improving the economy.

"We need stronger political leadership," she said. "Short-termism has set in, in our markets, but also our political system … If you’re in government, you have the responsibility to govern."