Respectfully Disagreeing with Bill Gross

Story Stream
recent articles

Fixed-income expert Bill Gross wrote a letter recently to Barack Obama, the Democratic Party’s nominee for President of the United States. While there is agreement with Gross’s position that the economy is messy, and that Obama will win in November, the rest of his economic analysis proved wanting and deserves comment.

Gross is correct that Obama will win. John McCain is greatly disliked by a portion of the Republican base, plus he’s running at a time when the vast majority of Americans feel the economy is in trouble; the trouble occurring under a Republican president.

Regarding the economic mess, Gross failed to point out the main reason why that is so. It’s really simple, and is explained by the late John Maynard Keynes who noted that inflation is something “not one man in a million is able to diagnose.” The falling dollar this decade has wiped out paychecks, all the while reducing the investment necessary to increase wages shrunk by the dollar’s collapse. Inflation has always and everywhere made a mess of economies, and it’s greatly harmed the economy this decade in ways the leaders of both major political parties have failed to diagnose. Continued ignorance of the dollar’s debasement means that the economy will remain a problem regardless of November’s winner.

From there, the disagreements were many.

Commenting to Obama on President George W. Bush, Gross wrote that he failed in choosing “to emphasize tax cuts for the rich and excessive consumption for all Americans.” Gross added that in pursuing reduced penalties on the rich, Bush gave people like him “an eight-year lease extension on the ‘high life.’” Gross’s main policy conclusion was that Obama will have to “raise taxes on the rich.”

Sadly, Gross missed the point on taxes. Increased economic effort occurs on the margin, and while it’s likely true that Gross will continue to work even if tax rates move above 50 percent, other successful people will choose to work less or retire altogether. Those not on top will be burned twice. They’ll first lose out for there being less in the way of successful people to work under, and they’ll lose once again for the wealth of the rich being taxed for immediate government consumption over savings. Indeed, it is the rich who have capital, and when we penalize their wealth we put a bull’s eye on the wages of the non-rich who benefit from that money remaining in the private economy.

Gross went on to smack President Bush for promoting “deregulation and free markets when, in fact, the markets and their institutions needed tough love.” While Gross’s vision of Bush as a free-market advocate would certainly shock those who actually believe in free markets, his analysis there once again missed the point.

Indeed, it is through the imposition of free markets that “tough love” is doled out. Free markets penalize those who fail the consumer, all the while rewarding those who give people what they want.

Furthermore, it has to be remembered that economies don’t fail due to economic freedom, but instead recess when governments get in the way. Sure enough, the markets enforced their own rough justice on the U.S. economy thanks to the government’s failure to issue a stable dollar, and they’ll surely be similarly cruel to a President Obama should he tax and spend in the way that Gross suggests he should.

On the energy front, Gross contended that Bush failed to “put forth a coherent energy policy,” but there again he showed an impressive misunderstanding of what is needed from government for the private sector to give people what they want. The simple truth is that back when the dollar had a basic definition of 1/35th of an ounce of gold, oil was cheap, plentiful and always stable in terms of price. With oil everywhere irrespective of country origin for those in the market for same, the only policy a future president would need to implement is one where dollar-price stability is made paramount. The rest will take care of itself thanks to markets; “energy policy” be damned.

Given his constant worrying about housing over the past year, Gross unsurprisingly asked for “some immediate relief to homeowners.” This is laugh-inducing on its face when we consider how much taxpayers already subsidize homeowners (let’s see: Fannie/Freddie, mortgage-interest deductions, zero percent capital gains treatment on sales), but it becomes more troubling when we remember that government efforts to push money into housing keep that capital out of the hands of job-creating businesses and entrepreneurs.

If that’s not enough for Gross, he might dust off some unread history books about the ‘70s; a decade when housing was similarly the top asset class alongside an electorate that was very unhappy about the economy. Note to Gross: housing always goes boom/bust when the dollar is weak as it has been this decade. Furthermore, Gross no doubt knows well from his own career that failure begets success such that we learn from our failures what not to do in the future. Hoping as Gross does for better economic times ahead, the last thing he should want is for responsible taxpayers to subsidize failures in the housing space that will certainly beget similar mistakes down the line.

In proposing his various spending plans which would enable Obama to “produce this nation’s first trillion dollar deficit,” Gross suggested that the spending would “all be paid for by wealthy hedge fund managers, oil companies, or, pray tell, a robust economy that’s creating good jobs at home instead of exporting them abroad.” If we ignore his misunderstanding of the undeniable good that comes from comparative advantage, Gross should at least be reminded of the old Calvin Coolidge adage that high incomes “tend to disappear” when they’re taxed heavily. Indeed, going back to Pericles at least, high earners have successfully found ways to hide their earnings from overly greedy taxmen, so it would be folly for Gross to assume this would be any different under a President Obama.

Somewhat surprisingly, one of Gross’s policy fixes involves “an additional jolt of $500 billion or so of government spending real quick.” This is a surprise when we consider Gross’s low opinion of the Bush economy. One would think he might have picked up on how worthless were the two stimulus packages passed under our current president.

If not, a thought experiment is in order: Gross ought to imagine if instead of going to the government for $500 billion, Americans chose to reach into the pockets of the 500+ billionaires (including Gross) presently in the United States. If we acknowledge the simple truth that theft from savers describes stimulus perfectly, we can then return to basic economic principles and say that economic growth is about one thing and one thing only: work effort. That being the case, the robbery that is stimulus has and will continue to harm, rather than help the economy, and to the extent that it keeps the downtrodden from working to change their circumstances, any future wealth transfers will only serve to retard economic growth.

Gross used Japan’s economic recovery as his model for alleged Keynesian stimulus stateside, but with Japan, Gross misread what actually happened. Japan’s economy didn’t lack for spending, but thanks to protectionist impulses within the political class in the U.S., a punishing deflation was forced on Japan beginning with the Plaza Accord in 1985. Facing either protectionist penalties from Congress or a massive deflation, Japan chose the latter.

Oddly enough, it wasn’t spending that relieved Japan from some of its economic malaise, but instead the aforementioned dollar devaluation of this decade which allowed a deflated Japan to reverse some of the monetary error foisted on it by our government. Unfortunately, so great has been our devaluation that Japan now faces inflationary pressure. So much for governments being the source of economic renewal…

So while Gross has a point about the unfortunate economy of this decade, his solutions would only make things worse. In his letter to Obama, Gross correctly referred to the late President Reagan as a “Republican icon.” Importantly, Reagan intuitively knew that government is never the solution, but frequently the problem.

Reagan in mind, the simple reality is that it is human nature to work and produce until governments create barriers to economy-enhancing work effort. Heavy spending and taxes will only decrease work incentives, so rather than more government, all this economy needs is a strong, stable dollar, low rates of taxation, reduced regulation (no mention of Sarbanes-Oxley in his letter), and trade that can be engaged in freely. The markets will take care of the rest as they always do.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

Show commentsHide Comments

Related Articles