The Three Drivers

Bill Gross, CEO of bond giant PIMCO, is jumping onto the pro-growth dogpile:

Revenue increases may be part of the solution, but even then, at some imbalanced ratio of spending cuts — such as three or four dollars of spending cuts to one dollar of tax hikes — the thesis assumes that markets and economic growth require what in essence is a fiscally contractionary step, reminiscent of International Monetary Fund policies in emerging markets during past decades. We must, the consensus goes, become like Argentina, Brazil and Mexico from the 1980s: Tighten the budget via spending cuts, reduce the deficit and voilá — economic growth will blossom.

But while our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease. Debt has been simply an abused sovereign and private market antidote to sustain it. We and our global market competitors are and have been experiencing a lack of aggregate demand for several decades.

He points to demographics, globalization, and technological innovation as the basis of the inadequate consumption and investment.

If that’s true, how would fiscal stimulus to boost aggregate demand remediate any of those causes? I don’t think it would. It might give a temporary fix to the economy but the brief high would not be self-sustaining. And that, coincidentally, is what we’ve seen.

I agree with his assessment of the drivers but I would phrase them a bit differently. We are spending too much on healthcare which, under our system, goes primarily to the healthcare of the aged. China is not consuming enough. If, rather than hoarding dollars, it were spending them it would go a long way to resolving our trade imbalance with China and would generally boost global economic activity. And high income earners have been successful in shielding themselves from replacement by machines.

3 comments… add one
  • But while our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease.

    Consumption is already a significant factor in GDP, well over 70%. We need more!?!?! The investment part I agree with though.

    Even a basic Solow type growth model shows that future output depends on current investment. Higher current investment means lower current consumption. Plus, last I knew many firms were sitting on big piles of cash. And when a firm invests in a new industrial lathe that has to be built somewhere, and that can put people to work. A new lathe might entail a new lathe operator, which could mean another person is put to work. We don’t need the government to borrow a trillion dollars from the future (which lowers future consumption) but we should be looking for ways to get businesses to invest a trillion dollars.

    And the added benefit is that these businessmen will be looking to invest in areas that will, you know, turn a profit. Profits, just as a reminder, are a social good, not a social bad. And since businesses want them, they’ll work hard to find them. Is it better to have thousands of people working for their own benefit looking for places to invest, or is it better to have a Washington bureaucrat do it…one who might be susceptible to lobbying and other political pressure and who wont really get to benefit from said investments (i.e. there are incentive problems on the part of the bureaucrat).

    [this spot reserved for Drew’s comments :p]

    We are spending too much on healthcare which, under our system, goes primarily to the healthcare of the aged. China is not consuming enough. If, rather than hoarding dollars, it were spending them it would go a long way to resolving our trade imbalance with China and would generally boost global economic activity. And high income earners have been successful in shielding themselves from replacement by machines.

    I agree with this as well. Health care spending on the aged while nice isn’t something that is likely to help with future economic growth. But here we can see the problem, that sounds like a callous statement.* Callous statements are death in politics, even if they are true. So even if it is true, and it is something we should do something about, doing something about it requires a very, very rare creature: a politician willing to fall on his sword for the good of not just the current economy, but the future economy. This creature is so rare I wonder if it exists.

    As for China and spending, I think there is an externality problem there. Sure if they spend they’ll get more “stuff” and boost economic activity which will be good for them, but it will be good for other countries as well. Thus, not all of the benefits will accrue to China. And China is a mercantilist nation. They see trade, IMO, as an extension of foreign policy and as…well…a weapon. At least that is how I see it right now, maybe I’m wrong. But if I’m right China wont spend more. They might be thinking their piles of dollars will allow them to come out of this crisis in a superior position and as such they have no incentive to spend. The exact opposite in fact.

    *Maybe it is callous, but I’ll ask, is it a true statement? If it is, and we keep spending more and more on the aged in regards to health care, then we are allocating more and more of our resources towards ends that wont result in much economic output going forward.

  • Drew Link

    “[this spot reserved for Drew’s comments :p]”

    No need. I think Mr. V has covered it adequately. You know, there is an alternative explanation. All businessmen are idiots. All businessment are just nervous ninnies afraid of their shadows.

    There are of course some who would be delighted with that interpretation. However I – for one – am not prone to delusion. Rather, I think my views, as an owner currently in 5 companies, and someone who literally speaks with hundreds of businsess owners every year, believes in all sincerety that the uncertainty issue is very real, with concerns over already embedded tax increases with ObamaCare, and lord knows what other letent impediments exist given the collective mindset of Obama, Reid and Pelosi. Just today, Obama is out there with his usual “only 3% of the taxpayers” argument. Nobody with an IQ in excess of 70 believes 3%. Try 30% of taxpayers. And so everyone is in their shell.

    Get rid of this guy.

  • Laurie Link

    “Nobody with an IQ in excess of 70 believes 3%. Try 30% of taxpayers.”

    how does one make this leap? and this phrse “collective mindset of Obama” what is that based on? Just to verify that that I understood what point you were making I googled “3% of the tax payers” and did correct a couple of my erroneous beliefs. I learned that these 3% earn only 26% of the income (I thought it was higher) and that a only a very small percent of them pay no income taxes.

    Tax hike on the rich would impact just 3% of taxpayers

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