Taxes

Bill Gross and 'Scrooge McDuck' Economics


Bill Gross, co-chief investment officer of Pacific Investment Management Co. in 2011

Photograph by Scott Eells/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co. in 2011

Bond titan Bill Gross of Pimco has gotten a load of publicity for saying the rich should pay more in taxes, including with Trish Regan on Bloomberg TV.

The problem is that Gross never nails down his argument, which veers from moral to economic and back to moral. He writes in an entertaining but elusive style that jumps from one thought to another, leaving it to the reader to fill in the missing logical links.

The conservative argument for low taxes is pretty straightforward, if harsh. It says that poor and lower-middle-class families tend to spend all their money because they’re living from paycheck to paycheck, so if you give them more aid or cut their taxes, they’ll just consume more. Since rich people have more money than they can possibly spend, they end up saving a higher share of their income. Cutting their taxes increases savings, which goes into investment that raises the nation’s productive capacity and, in the long run, living standards.

Gross doesn’t directly take on this narrative, which was the basis of Mitt Romney’s 2012 presidential campaign. Instead, he jumps from his “Scrooge McDuck” berating of his fellow millionaires and billionaires into a story about a Company X that has increased earnings per share by reducing investment. He goes on to say that the U.S. as a whole is guilty of underinvestment.

While it’s true that the U.S. underinvests, Gross doesn’t demonstrate why raising taxes on the rich would solve the problem. He simply exhorts “the rich 1% and corporations” to invest more. That, he suggests, could be done in cooperation with government. Writes Gross: “If there’s not a profitable new “iGIZMO” or a dynamic biotechnological breakthrough worthy of investment, 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?”

Gross then shifts to a different argument: “Developed economies work best when inequality of incomes are at a minimum.” He doesn’t elaborate on why.

There is a lot of good work on why inequality and social immobility are harmful from the likes of Branko Milanovic of the World Bank; Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics; and Andrew Berg and Jonathan Ostry of the International Monetary Fund. Gross didn’t cite any of it. His latest investment outlook will most likely be cheered by those who already agree with him and ignored by those who don’t.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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