A number of people have asked me my thoughts about this piece by PIMCO founder Bill Gross on inequality, tax reform, and more.
Gross argues that as economic growth has become increasingly concentrated, investment and consumer demand have taken a big hit. But how come profit margins keep growing, given that those two growth cylinders aren’t firing? Because companies are squeezing costs (as opposed to growing revenues) and central banks are aggressively catering the party. One fix would be higher taxation on capital and greater investment in public goods, perhaps through a jointly capitalized public/private infrastructure bank.
I very much like his rap. I could get all crotchety and rant about why I’m supposed to get all excited because some bond-trading billionaire makes a couple of points that I’ve been making for literally 25 years. But my readers well know that I would never go to such an unseemly place. Welcome to my world, Bill. Very glad for your support.
Gross recognizes that “…long-term growth…depends not on balance sheet alchemy and financial wizardry, but investment and the ultimate demand for a company or a country’s ‘products’.” He somewhat confusingly invokes low savings rates as a reason, but clearly that’s not the issue: there’s abundant, cheap capital. What’s missing are projects that would provide investors with a return on investment that would get them off the sidelines (the fact that inflation’s so low also lowers the opportunity cost of sitting on your cash reserves).
His solutions, as noted, are more investment and more demand. Since private investment can’t find much to ring its bells, then we should raise more tax revenue through progressive means (raising taxes on capital) and bring our public goods up to code. That presumably helps on the demand side too, by providing jobs and incomes to those still displaced by the fallout from all that financial wizardry.
It’s a great start, but ultimately if we want to seriously push back on the structural inequality that’s embedded in our economy we’ll need to go beyond the tax code and focus on the primary distribution of market outcomes—the way income and wealth are distributed before taxes and transfers kick in.
Here the solutions are higher minimum wages, the ability to bargain collectively, direct job creation in places and periods of weak labor demand, rebuilding manufacturing which means targeting the trade, not the budget, deficit. At the same time, and granting that this one may stick in Bill’s craw, we must end the shampoo cycle—bubble, bust, repeat—through both rigorous financial market oversight and rules that reduce reckless leveraging.
Finally, Gross’s brief missive further persuades me that global equity markets are overvalued and heading for a fall. I think he’s right that profit margins are propped up by central banks and cost squeezing, as opposed to real growth. Sure, the cost squeeze can go on for a while. And it could—I’d argue “should”—be awhile before the Fed turns. But the minute central banks start to unwind their support, I suspect equity markets will tank. And bond prices will rise. And Gross will add to his fortune.
Funny how that works out.