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Mohamed el-Erian

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How to Restore Economic Leadership in America

Posted: 08/15/11 06:04 PM ET

It is another hot and humid Washington summer and, understandably, most politicians would rather be on holiday elsewhere. Moreover, with today's technology, they can easily stay in touch while escaping the sweltering weather. But this is not a typical summer given the economic difficulties facing the nation. We need politicians to do more than stay in touch from afar.

In such uncertain times, we look to our elected representatives (and their appointees) to lead, and do so in a visible manner. We expect them to instill confidence. And we want them to lead by example, especially when they talk of "shared sacrifices" and "joint responsibilities."

So, why are our politicians not returning to Washington?

Some claim that, by staying away, they get a better feel for the situation "on the ground." Indeed, after the awful and damaging debt ceiling debacle, members of Congress were encouraged to do so in order for them to hear directly from their constituencies - and thereby get a better understanding of the nation's anger and disappointment.

Others argue that an unscheduled return to Washington would be viewed as sign of desperation -- thus causing more harm than good.

While I understand both arguments, they sound weak given that the American economy is stuck in what economists call a negative feedback loop of deteriorating economic conditions, inadequate policy responses, and volatile markets. Indeed, elsewhere in the world where this situation is admittedly most extreme -- Europe -- politicians are returning to work. Tomorrow there will even be a Franco-German Summit in Paris; and it is the middle of August!

I think the real reason for the hesitation has a lot to do with crude political cost-benefit calculations. Over the last few years, our economy has slipped further away from "first best" solutions. We are not in a world where problems have relatively costless solutions. Instead, we now live in the world of second and third best where most solutions involve costs and imperfections. As such, they are immediately open to political attack.

Not surprisingly, in today's uncertain economy too many politicians would rather react than lead; and they would rather criticize the ideas of others than put forward their own.

America, as a nation, cannot afford for this situation to continue for long. Remember, we are now in the grips of a negative feedback loop. The longer the policy paralysis continues, the bigger the shortfalls in economic performance; and this bigger the shortfall, the more daunting the policy challenges.

It may take too long for politicians to find their mojo. Too many are tempted to hold off decisions until the "national referendum" in the form of the next year's presidential and congressional elections. In the meantime, an already worrisome economic situation will deteriorate further.

An alternative is to change the national economic narrative and, thus, the political dynamics and dialogue. After all, ongoing global economic realignments require a reassessment of the big picture. Rather than endlessly argue on individual measures, let us instead take it from the very top. And do so in five steps:

First, start with a specific destination for the economy defined by transparent metrics for growth, jobs, inflation, financial soundness and, importantly, the key social indicators. I suspect that most can agree on a formulation that is both desirable and feasible.

Second, translate these objectives into clear priorities for lifting the major structural impediments to our economy. Again, I suspect that there would be broad-based accord on key sectors where simultaneous and coordinated actions are needed. (My list would include housing, the labor market, banks, infrastructure and public finances, as well as immediate steps to unleash productive energies.)

Third, put in place a mechanism and quantifiable variables for high frequency assessment of both the implementation of structural reforms and overall progress towards the overall objectives.

Fourth, get the executive and legislative branches to commit to this trio (medium-term objectives, major areas of structural reforms and process for mid-course corrections). In doing so, America would secure the political air cover that is so critical to the successful implementation of measures over a number of years.

Finally, get the technocrats to work out the details and present them as a package for political review and approval. Their focus would be on both immediate measures and those to be implemented over a number of years.

I suspect that this reformulated approach would offer greater prospects for economic improvement. Indeed it could be pursued by the newly formed Congressional super committee, working closely with the Administration. And, by encouraging the coordinated implementation of a package of measures rather than a series of ad hoc steps, it would provide for a whole that is greater the sums of the parts.

Households and businesses will tell you that many seemingly difficult problems have been overcome through the revamping of the solution seeking approach. The US provides a potential case for this. After all, the problems facing the country are much less of an engineering challenge and much more of a political one. By altering the basis of the political discourse, we would stand a better change of making progress on the economics.