Economy revival? Bond barons say spending is the answer
The message from two influential bond traders is unambiguous: Instead of cutting government spending now, Congress should be spending to create jobs.
Employed people pay taxes, contribute to communities and buy homes, vehicles and appliances. This kind of stimulus is undeniable. Job creation is the ballgame now. Interest rates really can’t go any lower. The Fed did all it can do.
I know this runs counter to what you’re hearing from the Beltway and Tea Party circles, but the logic is simple: Without tackling long-term structural unemployment, there will be no broad economic revival. The middle-class could dip further into despair, feeding a millennial malaise that morphs into a depression.
Nearly lost in a week of relentless deficit yammering and President Obama’s Afghanistan withdrawal plan was a compelling commentary by Bill Gross, the leading bond fund manager by assets.
Starting out as a rant on why a college education isn’t worth the price — a view reflected in this column a few weeks ago — Gross eventually gets to the point. Cutting government spending alone will not create jobs.
“But fiscal balance alone will not likely produce 20 million jobs over the next decade,” Gross writes, “government must take a leading role in job creation.”
Wait a minute. Why is a free-market guy like Bill Gross, manager of the largest bond fund management firm, talking like FDR, whom he lauds for creation of the Civilian Conservation Corps and other job programs?
“The golden days are over, and it’s time our school and jobs ‘daze’ comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall Street as opposed to Main Street.”
One of Gross’s prominent peers, Jeffrey Gundlach of Doubleline Capital, said he’s also deeply concerned about long-term unemployment.
Gundlach estimates total unemployment, including those who’ve stopped looking for work, to be around 20 percent. In a speech before the Innovative Alternative Strategies Conference in Chicago on June 21, he derided the “cubist” collage of government programs that haven’t worked in boosting employment: TARP, QEII, tax cuts, bank bailouts and increased government borrowing.
While predicting that the government will raise its debt ceiling, Gundlach, a former bond fund manager of the year, is pessimistic that the housing market will recover soon, further damaging something “that’s too central to the psyche of the middle class.” Gundlach, however, was less forthcoming than Gross on how government spending could create jobs.
Deep in Gross’s “Investment Outlook,” though, is a call for creating a federal infrastructure bank to repair roads, bridges, water plants and other needed improvements across the country. He also hints at “green economy” measures: “Clean/green energy investments also come to mind, most of which require government funding and a government thrust in order to create millions of jobs.”
So are bond mavens like Gross coming from left field? Where’s the money going to come from when even Senators like Kent Conrad (D-N.D.) are calling for $4 trillion in federal spending cuts?.
Entitlement reform is a horrible buzzword, but becomes more meaningful if you consider that making more income subject to Social Security and Medicare taxes would be a partial fiscal solution. Benefit cuts make no sense when the social safety net is so flimsy as it is.
Then there’s the obscene amount of money Congress is spending on three wars and the post-9/11 “war on terror,” which has already cost American taxpayers $2 trillion over the past decade. The Afghan-Iraq conflicts are $1 trillion fiascoes.
The $113 billion alone earmarked for Afghanistan in 2011 could go a long way toward ending the jobless malaise. If this money was diverted to domestic spending, the liberal Center for American Progress Action fund estimates that would employ more than 5 million teachers, police officers and firefighters, among other social benefits.
Peace means funding jobs in infrastructure that will stimulate the economy. President Obama suggested as much in his Afghan withdrawal speech on June 22.
“We must unleash innovation that creates new jobs and industries, while living within our means,” the president said. “We must rebuild our infrastructure and find new and clean sources of energy.”
The bond market mavens indirectly endorsed what President Obama had to say before he even said it. Maybe the markets may not be right about what’s happening to the economy, but its keenest observers can often say what the politicians are sheepishly avoiding.