Someone recently forwarded me Bill Gross’s monthly investment outlook for October, which was surprisingly funny this time around. For whatever reason, he spends the first five paragraphs talking about how grossed out (no pun intended) he is with his own body, and how the bloated and misshapen body of an aging man is an apt metaphor for the present state of the world’s developed economies. It is not every day that I laugh out loud at work while reading an investing newletter.
I don’t always agree with Gross — there’ stuff in this particular newsletter itself which caused me to cringe, including his matter-of-fact assertion that “China and ‘cloud space’ have favored cheaper consumption, but have been decidedly job unfriendly in developed economies if observers were to be honest about it.” In another place, he basically blatantly endorses protectionism as a way to create jobs.
But he makes a point in this month’s letter which is remarkably rare among investment managers, specifically on the very tenuous equilibrium of strong US corporate profits but poor economic outcomes for the American worker. Gross’s ominous conclusion is that ultimately, this will come back to bite capital as well as labor. He writes:
Ultimately, however, both labor and capital suffer as a deleveraging household sector in the throes of a jobless recovery refuses – if only through fear and consumptive exhaustion – to play their historic role in the capitalistic system. This “labor trap” phenomenon – in which consumers stop spending out of fear of unemployment or perhaps negative real wages, shrinking home prices or an overall loss of faith in the American Dream – is what markets or “capital” should now begin to recognize. Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor. Washington, London, Berlin and yes, even Beijing must accept this commonsensical reality alongside several other structural initiatives that seek to rebalance the global economy.
And, later, my favorite line to finish it off:
Karl Marx might have put it this way… “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs.”
Some people ask what the problem with growing income inequality is if the bottom of the income distribution is improving over time, even though not as quickly as the top. After all, shouldn’t we be looking at the rate of progress in absolute terms, not in comparison with others? As for the answer to this question, let’s put aside for a moment the fact that real wages in the US have been stagnant for the past generation for a large segment of the American labor force. Even if the bottom and middle had been moving upwards while the gap between them and the rich were expanding, what’s the problem? The problem is not just one of fairness and ethical norms, which not everyone agrees on. It’s that eventually, society gets so warped that its basic functionality is impaired, and no one including the rich is able to prosper in that environment. It’s like a body on steroids, where the liver and kidneys fail to keep up with the massive growth of the muscles, eventually killing the body itself.
This is a central Baha’i theme — the welfare of each individual is tied to the collective welfare of the entire human race — and is beautifully summarized in Baha’u’llah’s letter to Queen Victoria, one of his many letters written to the prominent heads of state of that era.
Regard the world as the human body which, though at its creation whole and perfect, hath been afflicted, through various causes, with grave disorders and maladies. Not for one day did it gain ease, nay its sickness waxed more severe, as it fell under the treatment of ignorant physicians, who gave full rein to their personal desires and have erred grievously. And if, at one time, through the care of an able physician, a member of that body was healed, the rest remained afflicted as before. (Summons from the Lord of Hosts, p. 90-91)
Let’s treat the whole body, and wake up to the reality that rising inequality is ultimately disastrous for everybody.
2 thoughts on “Bill Gross is surprisingly profound”
First, a word of caution: there’s a tendency to not distinguish between wealth and income. The Baha’i Writings speak to extremes of wealth and poverty, not income. While there is a general correlation between income and wealth, there are exceptions to that correlation.
Second, when it comes to drawing any connections between income disparity and various macroeconomic variables, we have a fairly serious data problem. In 1996, Deininger and Squire made a good bit of headway on this front, and measures based on the Lorenz curve (e.g. the GINI coefficient) are steps in the right direction, but they still fall short.
However, Jamie Galbraith and his colleagues at the University of Texas’ Inequality Project have made enormous headway, and may well have some data that’s amenable to testing a variety of hypotheses regarding relationships between income distribution, GDP growth and unemployment. They’ve recently published a paper, under the title “Inequality, Unemployment and Growth: New Measures for Old Controversies,” that makes for some very interesting possibilities. You can find a draft version of the paper here:
Click to access utip_48.pdf
I’m looking forward to some very important new findings coming out of this work.
A few thoughts:
“Protectionism,” like “redistribution,” is a word that provokes undue backlash. I don’t take a hard stand on Smoot-Hawley beyond asserting that it wasn’t a primary driver of the Great Depression. At the moment, it’s worth reconsidering some U.S. trade agreements. We have the largest single economy in the world, and we shouldn’t provide others access to our consumers without some reasonable belief that they’ll purchase our exports. In particular, a harder line ought be taken with China re: currency manipulation. Maybe floating the yuan wouldn’t have a huge impact on bilateral trade, but it would put U.S. exports at less of a disadvantage to China in trade with third-party markets.
Yes, income and wealth are different things. For the most part, however, they track along the same lines. Those with top incomes are or become the richest, and those with the least income struggle for opportunities.
Of course more capital needs to filter through the lower income brackets. Getting liquidity out of the hands of hoarders and into the hands of those with the highest marginal propensity to consume will increase the velocity of money and thus have a salutary effect on the economy as a whole. Moreover, there are secondary effects of inequality to be considered without even dredging into issues such as fairness and social justice. Think of Tyler Cowen’s “The Great Stagnation.” Yes, the development of consumer goods has slowed. Some of that is due to decreased investment in research as firms focused more myopically on short-term accounting. Another question to ask, though, is what market would’ve existed for new products that may have improved the lives of the masses when those masses were seeing real wage stagnation or worse. Why build a better mouse trap if no one can buy it?