Keith Chrostowski

Guilt about the ‘plight of labor’ suddenly afflicts billionaire bond king

Updated: 2013-11-20T04:37:13Z

By Keith Chrostowski

The Kansas City Star

What sound does a rich guy make when suddenly struck with guilt?

Quack!

At least that’s the word from bond king Bill Gross, the founder and chief investment officer of Pacific Investment Management Co., better known as PIMCO.

Gross’ Investment Outlook column for November is titled “Scrooge McDucks” — playing off the name of the famously flinty uncle of Donald Duck. (The original duck dynasty?)

First, understand that Gross routinely criticizes deficit spending and the Fed’s easy money. He fears inflation, and rising interests rates will eat into the principal of the bonds PIMCO holds.

But in a head-turning admission, the billionaire writes, “I now find my intellectual leanings shifting to the plight of labor.”

And he calls for more tax revenue from the super wealthy: “The era of taxing ‘capital’ at lower rates than ‘labor’ should now end.”

Hear Gross out.

• “I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1 percent pay, consider how much of the national income you’ve been privileged to make.

“In the United States, the share of total pre-tax income accruing to the top 1 percent has more than doubled from 10 percent in the 1970s to 20 percent today.

“Admit that … those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living.”

And here’s a money quote:

• “Acknowledge your good fortune at having … had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, ‘build that,’ you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.”

Gross goes on to slam corporations that protect profits and stock prices by cutting expenses or manipulating the financial side of the balance sheet through, for instance, share buybacks.

• Many companies have “grown earnings and earnings per share accompanied by nearly flatline revenues…. Never have American companies sent a greater share of their sales to the bottom line.”

Similarly, Gross points out that growth in the nominal GDP has slowed dramatically in the last five years. And that wages made by labor — an expense — have also dropped. But over the same period, before-tax profits as a share of the GDP have increased to 14 percent from 10 percent.

• “And here’s a rather incredible kicker to this theoretical comparison. The U.S. economy – thanks to the Fed – has been operating a $1 trillion share buyback program nearly every year since late 2008, buying Treasuries but watching much of that money flow straight into risk assets and common stocks instead of productive plant and equipment.”

• “Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy? The simple answer is that long-term growth for each company, and for all countries, depends not on balance sheet alchemy and financial wizardry, but investment and the ultimate demand for a company or a country’s ‘products.’”

Gross notes that Obama recently said in a speech: “It’s time for folks to … focus on doing everything we can to spur growth and create new, high-quality jobs.”

• “Folks? Ordinary folks, the 99 percent, don’t have money anymore, Mr. President. The rich 1 percent and corporations do. Perhaps your administration could focus some attention these next few weeks and months on an effort to engage foreign investors, corporate America and the 1 percent in investing in the U.S.

“...How about simply a joint effort between government and private enterprise in an infrastructure bank where our third world airports, third world city streets and third world water systems are modernized?”

You can label Gross just another one of those people whose guilt about the plight of labor afflicts them after they become wealthy.

But, as Gross contends, “developed economies work best when inequality of incomes is at a minimum.” The rich are likely to benefit too — maybe end up even wealthier — in what Gross calls a “fair economy” where working people make and spend more.

Whether you agree with Gross or not, I’m sure his column rattled some gilded cages. At least it was a good day’s work.

Quack!

To reach Keith Chrostowski, business editor of The Star, call 816-234-4466 or email chrostowski@kcstar.com. Twitter: @keithc3

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