Gross Domestic Thinking

November 6th, 2013 at 1:51 pm

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.

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7 comments in reply to "Gross Domestic Thinking"

  1. foosion says:

    >>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. >>

    Plus address govt policy which helps the best off at the expense of everyone else, such as too big to fail banking subsidies, our patent and copyright system, etc. These transfer hundreds of billions from the population generally to a select few


  2. Nick Batzdorf says:

    “…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.”

    That right there is the central point I don’t see part of the discussion anywhere.

    There’s a group of advocates – possibly other groups too – who are in favor of greatly expanded ownership of the things that make money (productive capital). They say, for example, the Fed should loan money to big corps. to expand at near-zero interest rates – but part of the deal is that their employees be given shares to be paid for out of the profits. And government contracts should have employee stock ownership as a requirement.

    I can’t poke holes in that idea.

    This is the group I’m talking about. I certainly don’t agree with everything they say, nor do I accept their premise that we’re going to be facing an ever-dwindling supply of jobs (i.e. the jobs may just change). But the part above makes total sense to me as part of the mix (along with, yes, redistribution). http://cesj.org


  3. Karl Kaiser says:

    Bill Gross is a Communist!


  4. RS says:

    “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.”

    Correct me if I’m wrong, but when the Fed reduces support, rates will RISE, which means that bond prices will go DOWN. To be clear, equity markets and bond markets aren’t purely negatively correlated.

    JB is usually pretty spot on with financial markets, but perhaps I’m missing something


    • Jared Bernstein says:

      I’m just saying that if equity markets tank and investors flee to the safety of fixed income securities, that will drive up demand for bonds than thus prices which will reduce bond yields.


  5. smith says:

    One does not need a collective bargaining agreement to restore the 40 hour work week. This was previously accomplished with national legislation, and should be again. A 35 hour work week would produce better results of course, but one step at a time. First end the totally bogus “exempt” status which nearly all office workers are assigned. Then phase in the 35 hour work week over a five year period to ease the transition. This will make people’s lives better, as well as make workers more productive. Most likely there will be health effects too, but that’s an unknown worthy of study. Balancing family life will be easier.
    A huge side effect will be greater opportunity for employment as capital will no longer be able to so easily bully employees into working long hours without pay. Also, say goodbye to unpaid internships with which colleges and businesses collude in a gross unfair labor practice. Colleges get paid for a course that requires no classroom, materials, and little oversight, business gets free labor, employee/student pays for this privilege, excellent training for how employees are treated.
    40 hours * 60 minutes = 2,400 minutes. If 1/4 of employees now spend 24 minutes less time at work, unemployment drops 1/4% (300,000 new jobs). Overall, you wind up either with increased productivity or new employment. In ten years, the four day work week should be at hand.


  6. jim says:

    I think he’s right that profit margins are propped up by central banks and cost squeezing, as opposed to real growth”

    this is very misguided. i dont understand why people think profit margins are mean reverting as there is empirical evidence to the contrary. Lower interest expense has contributed less than 25% versus the 95-04 average to get us to the current 9.5%. the biggest difference is effective tax rate. do you expect companies, who currently earn 1/3 of revenue ex-US to earn less abroad? if so why? id argue that this tax rate would continue to fall as Abe will lower Japan tax rate which US derives 5% of revenue from. Tech and Energy margins have also increased structurally. why should they fall? bill gross is a misanthrope who as Krugman notes has been completely lost since McCulley left his stable. Someone as smart as you should not be citing someone that continually refers to unfunded pension liabilities and aggregates future deficits without referring to future GDP, as well as calling for massive inflation. His bond fund has underperformed woefully. please rethink


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