...against fictions and other tall tales

Sunday 26 June 2011

PIMCO's Bill Gross: Government must take a leading role in job creation

I was pleased to read this week that Bill Gross, co-founder and managing director of the investment giant PIMCO, believes the US federal government should be doing more to address the unemployment problem. According to Gross, "deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem."

Gross's brief also contains some valuable commentary reminiscent of the past insights of the now-retired PIMCO partner Paul McCulley (now with the Global Interdependence Center). Gross's dismissal of the Ricardian equivalence proposition (the notion that budget deficits dampen consumer and investor confidence) and his reference to the ideas of economist Hy Minsky reminded me of this excellent commentary by McCulley.

Also, it's interesting to see Gross giving clear support for more activist fiscal policy measures. In the past, some of Gross's views could have been interpreted as being somewhat dismissive of the effectiveness of Keynesian-type remedies (for instance, see here, p.4).

That being said, if Gross is serious about his plea for more government action, perhaps he should warn the current author of PIMCO's Global Central Bank Focus column, Tony Crescenzi, to ease-off on the anti-inflation rhetoric (see here). First of all, much of what Crescenzi writes in regard to the effects of inflation is not supported by the facts. Secondly, Crescenzi's views on inflation are exactly the type of commentary that opponents of government intervention would use to attack the very proposals now being recommended by Gross.

18 comments:

  1. Excellent reaction to Crescenzi. I like Tony but sometimes he blows the horn like an instrument. According to Miles, you're supposed to make a trumpet sound like a human voice, and the only human voices on the economic stage these days are the millions of unemployed...so scrap 'inflation rhetoric' and create jobs. Davis said that you need strong wind to play the horn; it seems to me that the Barker's sound is loud and clear. Hope North American politicians listen-forget the deficit and give us jobs. If there are no jobs, no one will pay the deficit down. Charlie Parker used to play the way he wanted and knew; cared little for notated music...great public servants have to steer the ship of state through really rough channels to harbour the best way they know-sometimes they have to forget the book. Who cares what the agencies want-their prerequisites for deficit containment and reduction is meaningless-they caused the mess we're in.
    Blow that horn Barker!! Blow that horn! Someone out there with perspective is listening and will hear you.

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  2. To the last commentator-encore! I'm not sure the Bird strayed that much from written scores, but it may be time for the governments to do so. I like your analogies-they have to think out of the box! Good post BARKER !!!

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  3. Indeed, those are great analogies. Similarly, Davis didn't spend much time worrying about what the purists would say about his art. Policymakers should learn from these guys and look beyond the blackboard theory that feeds mainstream remedies. I agree with Anon regarding the agencies: they should take a break for a while and come back once they've taken a cold, hard lesson of humility. Thanks for the vote of confidence and support. BTW, I dig the Barker label!

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  4. I agree with Both commentators. Your insights and reflections warrant appropriate exposure. The analogies from music are beyond my appreciation, however, I concur with the conclusion that deficits are not the problem; unemployment is. Trying my hand at the analogy: Everyone is either playing the wrong note, or misreading the notations.

    You're a memory of Tom Paine.

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  5. Thanks Anon. You're right about deficits no being the problem. In fact, it's the exact opposite. Deficits are facilitating households' desire to save more and repair their balance sheets. How policymakers and economic commentators miss this point is beyond me.

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  6. I like your comment that deficits act as facilitators for households to clean up their act. As you say, repairing burdened balance sheets is a necessary task for the average american. However, saving creates a predicament at this particular moment because it slows down a fundamental: consumer spending. I assume that prioritizing them in a macro context would rank saving as a secondary concern, but for those who are on the edge of their lifelines, spending is not an option.

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  7. I agree with Manfredo's remark. It brings the discussion back to the first Anonymous commentator that for the millions of unemployed,. the deficit rhetoric is gratuitous and misleading. The unemployed don't care what the deficit is or where it's going. they live on a day-to-day 'life-line' that is demotivating and demeans human dignity. There doesn't appear to be an easy formula to prioritizing the issues. Fiscal policy in terms of tax credits is unproductive for the unemployed, and companies on the border of insolvency...long term jobs are the only solution.

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  8. Manfredo, your point is spot on. In my opinion, what we're seeing is public sector deficits adding to private sector purchasing power. This is witnessed by the fact that corporate profits were able to return to normal (and above) quite quickly following the stimulus. This also helped to mitigate the impact on unemployment. Trying to cut the deficit now would only aggravate the problem, as businesses would once again face losses and resort to layoffs. In time, deleveraging facilitated by government deficits will create the conditions for renewed growth and expansion. This was a point made by Abba Lerner. With household debt levels returned to more appropriate levels, consumer spending will resume. For businesses, this will mean attractive investment opportunities. Of course, all this will take several years. But the alternatives (i.e. credit-induced renewal) isn't the answer.

    Welcome Babington! Thanks for your comment. I'm glad you raise the issue of tax-credits. They are absolutely useless in our predicament. At this point, anything short of direct spending is inadequate. Keeping employment levels up is key to getting us out of this mess.

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  9. How much spending is required?

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  10. Goffredo, I actually think that a stimulus of $1.3 trillion would have been sufficient to enable the household sector to return to a more adequate financial position (i.e. as it stood in 1993, before the government and corporate sectors climbed into surplus positions). As you may recall, this amount was proposed by several economists, including Paul Krugman and Christina Romer early on. Since the stimulus consisted of approx. $800B, there is still a need for the US government (and/or businesses) to spend about $500B into investments that would benefit the household sector via additional income.

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  11. Circuit, that 1.3T has been analyzed and rehashed since the original inception. I never thought there was a basis for it. In fact, the 800B, never got out into the economy, through to the households. Parts of it got stuck into corporate Cash, with corporations reluctant to risk further investments in human capital. Instead they bought into equipment and upgrading automata, robotics and technologies. Other portions got shelved by the banking and specfic service sectors to support their respective fragile asset base. Unless the funding gets to the consumer and the consumer decides not to save but to spend, and to additional long term employment
    rather than seasonal and sporadic adaptations to marginal demands, in my opinion the figure is open-ended. I hope you are right.
    Too bad about Romer, she was quite brilliant.

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  12. isn't that the problem: ensuring that it gets out to where it can do the most good quickly, whether it's Krugman, Romer, or anyone else suggesting an amount, unless there is some reasonable probability that it gets funneled back to households, then any amount is insufficient. There is no control mechanism that ensures the desired delivery other than giving it directly to the households in the form of tax rebates for certain income levels or tax credits for pertinent investments at higher income levels. The suggestion that this type of two-tier disparity is unwelcome should be put aside because it would be very difficult and political suicide for Congress to argue that all citizenry should not be subjugated to income categories-business certainly is, and tax rates certainly are in face of the economic collapse of middle class America.

    To the anonymous commentator who mentioned appropriately Tom Paine, I'll add the specific that Paine wrote a series of pamphlets with the highlight title Crisis of... where he analyzed the broader impact of political events on the socio-economic structure and development of America. Ours is a Great Crisis, and we need someone who could put it all together, make some sense of it and offer a solution. I presume that was the purpose of the mention. If not I still appreciate the juxtaposition.

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  13. Goffredo, those are good points you mention. It's true that the stimulus didn't go entirely to the HH sector, however, US federal spending of 2008Q3 did coincide with a significant improvement in the HH sector balance. The additional $500B would have raised HH sector balance to its level of the early 90s. The leakages you address are indeed a problem facing policymakers. Perhaps I'm wrong, but I tend to think that the amounts going to businesses (that is, not to corporate executives) helped to keep unemployment levels from increasing any higher. Also, we can add to your list the fact that both rounds of quantitative easing by the Fed funneled away some 80 billion in interest income from the private sector. As for your comment on Romer, I very much agree with you.

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  14. Manfredo, do you think that the job guarantee program now advocated by Gross would be one such mechanism for ensuring that the funds go directly to households and workers first. I believe it would a significant step in the right direction. And you make a valid point when you suggest that there ought to be differences in the treatment of high vs low income earners/households, especially given the difference between these groups with respect to their propensity to save and consume.

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  15. You know the GOP always reduces tax policy to constitutional status. Unfortunately, heterogeneous taxation is not unconstitutional-so the debates in Congress and academia are non-productive.

    Bill Gross's idea is Great. But the initiative is more complicated than appears. It requires enormous infrastructure to monitor properly. Moreover, apart from its educational roots and other social innovative inbreeds, the idea is Minsky-like. Minsky had proposed similar schemata during the Johnson era. Moreover, apart from the Rights perspective which every lobby and assoc will cater to-and around which jurists have created an industry, we are confronted by millions of unemployed-the figure is staggering, mind-boggling...there may just not be that amount of substantive work available in our time compared to then. The tradeoffs between applying technology and enhancing human dignity etc have never been dealt with at that level. Social Ethics has no optics for this game. ELR status of government is a great notion, keynesian, thoroughly american with historical roots, in line with your other Paine commentators completely Common Sense-it was crucial during the New Deal, but you had an opportunity and horizons that could accommodate and be accommodated by the quality of the then-existing human capital. Contextually, ours is a different and much more skewed playing field and epoch.
    Notwithstanding having qualified the idea, it is without saying that Gross should be a candidate for Secretary of the Treasury. I mean Gross is knowledgeable, the man understands history, he's overall brilliant and politically correct. The man is far from a chooch, like some past SoT, to quote South Boston.

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  16. Manfredo, I'm going to try and figure out why your comments aren't showing. Feel free to use the Anonymous function (but let us know it's you).

    I'll have to think about the oversight issue you raise regarding the ELR. That's an obstacle facing most social programs these days, especially when the program has opponents intent on eliminating it. My understanding is that such a program could be administered fairly efficiently. I would have thought it could be run in a manner similar to providing grants for research and other project-based initiatives. But I take your point that if the program's oversight and monitoring apparatus is too extensive, the program might be a hard sell.

    As for Gross as SoT, the thought never crossed my mind but that would be a real trip, especially given his most recent foray into policy agenda setting.

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  17. Circuit. One of my five top links. I’m not assessing Paul Volcker. Ron Paul says it best-the guy was the smartest of them all(central bankers)- the ones he had met. I itched on that we had misread KP’s remarks on Volcker.

    Having said that, I take exception to your statement that Volcker was responsible for the recession. When Volcker took over as Chair in Aug 79 inflation was already out of control: the CPI had read 13.3% …a second round of oil price increases undermined price stability. Carl Walsh wrote a good summary on the Fed’s lack of direction before Volcker.

    As far as the LDC Debt Crisis, the FDIC has a good write-up on the systemic failure of the excess. Phase I -the early 70’s ending in ’78. The Phase 2, characterized by the accumulation and spillover effects of high debt servicing context was during Volcker’s ’79-’83 term. To say it’s Volcker is true but far-fetched, Yea, rates were high, O/N, LIBORS etc.. but then everything in the US and at the time in the world had roots in the Fed, except the excessive lending to LDC’s and the refinancing of their debt service…these were corporate actions.

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  18. Thanks Jorge. Yes, KP's comment had me thiking. Nice rundown on the LDCs. I'll look into the Carl Walsh and FDIC references.

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