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Portfolio > Economy & Markets

PIMCO’s El-Erian Takes Issue With Paul Ryan’s Use of ‘New Normal’

By John Sullivan

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PIMCO CEO Mohamed El-Erian took to the pages of The Washington Post Monday to rebut (sort of) the use of the term “new normal” by Mitt Romney’s vice-presidential pick, Rep. Paul Ryan, to decry the current economic situation.  

“I hear some people say that this is just ‘the new normal,’” Ryan said upon being introduced by Mitt Romney on Saturday. “High unemployment, declining incomes and crushing debt is not a new normal. It’s the result of misguided policies.”

Ryan, R-Wis., is both right and wrong, according to El-Erian, who coined the term “new normal” with PIMCO founder Bill Gross to describe a world of stagnant growth and lower returns in the wake of the global financial crisis of 2008.

“Understanding the difference is essential if his follow-up prediction—that ‘next January, our economy will begin a comeback’—stands any chance of materializing regardless of who prevails in November,” El-Erian, who has a close personal relationship with Michelle Obama, writes.

Ryan is correct that the new normal is a result of “misguided policies,” El-Erian concedes, “Although we have different definitions of misguided.”

For El-Erian, it’s less about the role of government, outsourcing and tax disincentives per se, and more about an economy that must find a way to safely “deleverage.”

“We must overcome the many years during which policymakers lost sight of sustainable drivers of growth and jobs and instead ended up relying on excessive leverage, over-indebtedness and an absurd sense of credit entitlement.”

Yet Ryan may be too hasty in dismissing the extent to which the new normal is becoming embedded in our economy, El-Erian notes. With each passing week, it’s transitioning from a short-term exception into an even more painful multiyear reality.

“The longer Congress continues to dither, the greater the likelihood of cascading structural impediments to growth and job creation,” El-Erian said. “This can be seen in how much harder it is for those who are struggling to maintain even routine activities, while those who are substantially better off have become way too cautious, preferring to self-insure by holding large balances of cash rather than hiring and reinvesting in plants and equipment.”

“If we delay further, I fear that Ryan may prove correct on another point, to both his and my dismay,” El-Erian concludes. “As he remarked Saturday, ‘Sadly, for the first time in our history, we are on a path which will undo [the] legacy. . . that every generation of Americans leaves their children better off.’”

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