Bill Gross :
Income equality is good for business. Raising the minimum wage can lead to higher corporate earnings. Main Street is Wall Street’s best friend.
You would never expect these platitudes to guide a Republican platform, but you should; they are commonsensically true, and it is time to let common sense as opposed to the race for short-term corporate profits guide our economic future.
No heroics
The last time incomes were this unequally distributed, Warren Harding had just been president. A staunch Republican in the Roaring ’20s, he had it right then as he would have had it right now – “America’s present need is not heroics, but healing; not nostrums, but normalcy.”
We have only to ask ourselves what is normal, and what might heal.
Here’s what normal is not:
Record after-tax corporate profits (at 10% of gross domestic product) are not normal, even exceeding levels in the Roaring ’20s.
American wages at 42.5% of GDP vs. a peak of 57.4% in 1970 are not normal.
A national minimum wage of $7.25 per hour is not normal. As Sen. Elizabeth Warren, D-Mass., has pointed out, the wage would be $22 if it kept pace with worker productivity.
All these statistics point to an enduring loss of purchasing power by American workers, relative to inflation and corporate profits. Wall Street can secretly slap itself on the back, but it shouldn’t. It can thrive with a more balanced partnership. It could wither without it.
Capitalism in danger
Corporations might not be eating their seed corn, but they’re not planting it, either. Better to pay it out in the form of higher wages so that increased consumption will stimulate the capitalistic ethic to take risk.
There is no first-mover advantage, however. If healing requires higher wages, the Henry Ford solution must be broad based, but it cannot be voluntary. Minimum-wage law increases, while seemingly anti-capitalistic and undemocratic, might be necessary for the common good – workers and corporations alike.
Healing also requires help from government through tax reform. Corporations complain about the high U.S. corporate tax rate relative to other nations, but corporate tax rates have rarely if ever been lower, and the publicized federal rate for corporations of 35% is offset by domestic and offshore shelters so that companies wind up paying only an effective 21.4% of their pretax income as of 2013. Additionally, wealthy individuals have been allowed to transform their salary and bonuses into carried interest, effectively creating a capital gains tax rate with little if any risk of capital.
Private, public solutions
Numerous international organizations have weighed in on this inequality. For instance, the Organization for Economic Cooperation and Development ranks the U.S. 31 out of 34 in 2012 in terms of gross income inequality, surpassed only by the likes of Turkey and Chile.
Wage inequality, it argues, threatens growth by blocking economic opportunities. One of the OECD’s proposed healing solutions is to promote worker education to assist in learning the skills required by a 21st century economy. Public/private partnerships should be a major strategy.
Solutions, therefore, need not be entirely public or private sector oriented, but as Henry Ford knew and Harding recommended, a return to normalcy and the better balance of several decades ago via a more equal distribution of income is necessary for a vibrant future.
(Bill Gross is the founder and chief investment officer of PIMCO.)
