There are exactly seven weeks left before we reach the edge of the fiscal cliff — that’s the moment when taxes would automatically go up and spending would be cut, unless Congress and the White House can reach a deal. It’s easy to get lost in the politics, so we’re going to go far from Washington, out to Newport Beach, California, where you’ll find PIMCO, the world’s largest bond fund. CEO Mohamed El-Erian joined Marketplace Morning Report host Jeremy Hobson to share his concerns about the impending negotiations and dire economic consequences.
Jeremy Hobson: What are your concerns when it comes to the possibility of the United States going over the fiscal cliff?
El-Erian: Concerns are very simple. The design of the fiscal cliff assumed the following: That if you threaten catastrophe — and pushing this country into recession would be catastrophic because we haven’t yet recovered from the previous recession — but if you were to threaten the politicians with catastrophe, you would get them to agree.
But the design ignored two things. First, our political system is so polarized that is very difficult to get the republicans to trust the democrats and the other way around. Second, the assumption was that if we can’t get them to trust each other, citizens would put tremendous pressure on them. But, it’s only now — six weeks from the fiscal cliff — that the country as a whole is starting to focus on this.
Hobson: What would happen to the economy if we went over the fiscal cliff. When you say recession, how serious are we talking about?
El-Erian: We would contract by one to two percent. Our unemployment rate — stuck at 7.9 percent — would go up to at least nine percent. Our long-term unemployed, currently 41 percent of the unemployed, would be unemployed for even longer resulting in greater atrophy. Our youth unemployment, we have 24 percent of 16-19 year-olds out of jobs, would go up. And at that age, if you are unemployed for a while, you become unemployable — meaning a lost generation.
Hobson: But it’s been four years since the financial crisis, if we can’t make cuts like this and raise taxes like this right now, when can we do it?
El-Erian: We must make intelligent cuts. Everybody acknowledges that the fiscal cliff is too blunt an instrument to put us back on track. It was a threat that wasn’t supposed to materialize. So yes, we need fiscal contraction. The only thing I would remind you is that the reason why we are doing fiscal contraction is to get fiscal sustainability. So if you were to do a very blunt four to five percent contraction, which is what the fiscal cliff is, we would undermine economic growth and we would find that you cannot grow out of your debt problems. If you cannot grow out of your debt problems, your debt problems get worse. The extreme being, of course, Greece.
Hobson: Finally, you’ve been mentioned as a possible Treasury Secretary to take over for Tim Geithner in the next Obama Administration. Are you going to do that?
El-Erian: I don’t know where this is coming from, all I can tell you is I’ve got a wonderful job and I’m delighted out here in California.
Hobson: That’s a good political answer, you’re ready for Washington it sounds like. Mohamed El-Erian, CEO of PIMCO, thank you so you much for talking with us.
El-Erian: Thank you, my pleasure.
Earlier this year in May, El-Erian predicted that Greece will end up leaving the eurozone. As finance ministers convene in Brussels today to decide whether Greece will get its next bailout payment, we asked the CEO if he still foresees a Greek exit: