El-Erian: Congress can reduce U.S. economic vulnerability

Key policy changes, including infrastructure investment, can buffer U.S. from global weakness.    Inflation fell 0.4 percent in December compared to November, the biggest decline in six years, due to the plunge in oil and gas prices.
   In 2014 as a whole, the Consumer Price Index rose 0.8 percent, far below recent history and the 2 percent target the Federal Reserve has set for starting to raise interest rates. 
   Consumer confidence has reached an 11-year high, but that didn’t translate into greater consumer spending last month. Retail sales actually dipped in December versus the prior month, an outcome some analysts attribute to weak wage growth.
   Meanwhile, U.S. markets are concerned about the European economy and whether recession there will pull down the U.S. recovery. Last week, Switzerland’s central bank made the surprise move of letting the Swiss franc trade freely against the euro, which sent the value of the franc soaring against the euro. The euro has also been weakening against the dollar, which could cut into exports because it costs Europeans more now to buy overseas goods.
   In fact, economists say positive U.S. economic data is tempered by slow growth around the world and the interconnected nature of the global economy. The European Central Bank is expected to announce a major stimulus proposal soon.
   Wage growth in the United States will eventually take place after the 3 million jobs were created in 2014 and with the unemployment rate now down to 5.6 percent, according to Mohamed El-Erian, chief economic advisor at commercial services firm Allianz SE and chairman of the White House’s Global Development Council.
   “It’s a matter of time. Wages will sequentially respond,” he said Friday on Al Jazeera America’s “Real Money” show. “It won’t be like the good old days, but we will see 2 percent plus in wages. And that is going to be a good thing for this economy.”
   Low inflation will also give consumers more spending power, he said.
   Prices going up less rapidly in the United States are “a good thing because it’s good disinflation. It comes from something that puts money in our pocket: lower gas prices,” El-Erian, the former CEO of bond trader PIMCO, said.
   Europe and Japan are in a deflationary spiral, with 16 EU nations falling into negative inflation last year, he noted. 
   Deflation tends to discourage people from spending because they hold off waiting for prices to fall even further, which hurts economic growth.
   El-Erian recommended Congress strengthen U.S. resilience and economic drivers by stepping up infrastructure investment at a time when interest rates are very low, clarifying what corporate tax reform is going to look like because uncertainty is discouraging some from investing, and moving ahead with trade agreements and immigration reform.
   He also called for Congress to act on the minimum wage, saying it’s economically and socially necessary. President Obama has proposed a $10.10 minimum wage, up from $7.25.
   The timing for infrastructure investment is ideal with low interest rates, the economist said.
   “If not now, when? Our budget deficit is below 3 percent. Our borrowing costs are very low. We can borrow 10-year money below 1.8 percent. We can borrow 30-year money below 2.5 percent. And the return on these investments is far in excess of that, both for the nation and individual businesses,” El-Arian said. 
   U.S. energy, transportation, water and other infrastructure is operating inefficiently from neglect, and broadband investment still lags other parts of the world, in terms of reach and system speed.
   Congress is scheduled to debate this session a surface transportation reauthorization bill and ways to prop up the Highway Trust Fund, but questions remain about the willingness of lawmakers to raise the motor fuel tax, or find an alternative revenue source, to support needed maintenance and upgrades to federal highways.
   “If Congress were to deliver on these things then we would enter a higher growth paradigm and it would be sustainable growth,” El-Erian said.