A friend recently sent me Bill Gross’ May investment letter and I haven’t been able to stop thinking about for days. Now one cannot deny that Bill is a highly intelligent man which is clear when reading his letters. He thinks differently than most and that comes out between the lines. But this latest letter has me more on edge than I normally find myself and for two reasons. First is that I cannot decipher if Bill is actually championing what he is discussing or simply suggesting it is a stark reality that we must accept. Second is that it reveals that even the likes of Bill Gross does not understand free market capitalism.
The gist of the letter was discussing the fact that technology is accelerating the replacement of human capital with software and machines. It is a fact. Bill rightly suggests that if this continues on course (which he believes it will) we will find ourselves in a jobless society. He describes a future where jobs are no longer part of societal life. Bill includes an excerpt from Andy Stern’s Raising the Floor,
“a policymaker – a future President or Prime Minister – must recognize that existing government policies have “built a whole social infrastructure based on the concept of a job, and that concept does not work anymore.” In other words, if income goes to technological robots whatever the form, instead of human beings, our culture will change and if so policies must adapt to those changes.”
To this proposition Bill then proposes a solution,
“What should the policy response be? Retraining and education sound practical and are at the head of every politician’s promised ticket for the yellow brick road, but to be honest folks, I doubt that much of it will be worth the expense. Four years of college for everyone might better prepare them to be a contestant on Jeopardy, but I doubt it’ll create more growth; for the Universities perhaps, but not many good jobs for the students. Instead we should spend money where it’s needed most – our collapsing infrastructure for instance, health care for an aging generation and perhaps on a revolutionary new idea called UBI – Universal Basic Income. If more and more workers are going to be displaced by robots, then they will need money to live on, will they not? And if that strikes you as a form of socialism, I would suggest we get used to it”….
“The question is how high this UBI should be and how to pay for it, not whether it’s coming in the next decade. It is. Strangely, the concept is endorsed more by conservatives than liberals and in Silicon Valley as well. Even with a theoretical $10,000 UBI per eligible citizen, the cost of $1-2 trillion dollars is seen as an income pool to consume many of the high tech products they produce.”
When I first read this it quite literally sent shivers down my spine. An anthology of futuristic Sci-Fi movies flashed through my mind. Not only are we being bombarded with calls for criminalizing physical money – negating our natural rights to private trade and also to private wealth in the sense I can no longer bury my money in a jar in my backyard in preparation for a cataclysmic event – but now we are being told by highly respected financial minds that we need to accept a mandate of being placed on a government allowance program (Universal Basic Income). The amount of which will be decided by a committee of government bureaucrats and corporate lobbyists ensuring it meets the needs for basic survival plus some sufficient amount of discretionary consumption (tied to QoQ earnings growth estimates, no doubt). I can only imagine how proud Jefferson and Madison would be should they see what we’ve done to their American ideology.
Now once the initial shock of what was being proposed by Mr. Gross had worn off, the left side of my brain kicked in. It struck me like a woman scorned that we have deviated so far from free markets at this point that even the top financial minds no longer have any understanding of what is meant by capitalism. It must be true, for anyone who understands capitalism could never have published such a letter. The logic in Mr. Gross’s argument is beyond invalid, in fact, it is so ludicrous it borders on insane. I mean this quite literally. Let me explain.
I have not only written about the fundamental law of capitalism that is the natural bond between profit and labour, I have provided both theoretical and observable quantitative proofs to the law. In a nutshell it goes like this – Investors seek profit, profit requires consumption, consumption requires income, income requires labour, labour requires investment, investment requires profit. If we allow each aspect of this circuit of capitalism to exist without manipulation then the perceived issue of technology replacing rather than complimenting human capital cannot occur. It is impossible because each is a dependent and precedent aspect in the circuit. If you weaken one you weaken all. That (dependent/precedent) circuit is the mechanism by which capitalism (unmolested) naturally creates a balance across these paramtres such that each is optimized (not maximized).
The so called ‘Free’ Trade Agreements are an attempt to circumvent capitalism’s inherent optimizing mechanism for the objective of maximizing profit by weakening labour (and negating the higher risks associated with lower labour cost regions). The technology problem being discussed by Gross and Stern (and others including Kevin Murphy, a MacArthur “Genius” Award recipient and my former Economics Prof from Booth Business School, in the latest issue of the school’s Alum magazine) arises from the very same objective of maximizing rather than optimizing profit.
Specifically, the problem is that of replacing existing labour with lower cost labour while at the same time expecting the consumer to remain strong, which is a necessary condition to achieve the desired goal of profit maximization. Whether it’s poor farmers in China or robots replacing the American workforce it is the same issue. And I recently discussed this problem in an article where I defend Trump’s trade policies. Tariffs on corporations that attempt to take advantage of labour arbitrage created by trade agreements (i.e. agreements that negate the inherent higher risks of the chasing the lower cost labour) simply build back in the inherent risk cost i.e. the tariffs re-establish the true free market costs. However, the trade agreements, while offsetting the risk problem, do not offset the income problem. That requires subsidies.
In the end whether by way of trade agreements or technology, maximizing profits by weakening labour and thus distorting the natural balance of capitalism requires a subsidy to the consumer. This is not up for debate, it is not an argument, it is an absolute logical syllogism. Period. If you weaken labour but do not subsidize the consumer profits actually deteriorate and the maximization strategy will naturally revert back to capitalism’s natural process of optimization. What this suggests is that optimal profit is also maximum sustainable profit.
So let’s take a look at the subsidization process required by the profit maximization strategy as corporations chase cheaper labour resulting in weaker consumers (by way of lower income). The subsidy will look to replenish the lost consumption resulting from the consumer’s lost income. The subsidized consumption becomes a conduit for subsidized profit which is the real and ultimate objective. Yes, we are in fact, subsidizing corporate profits.
Now in theory we know the subsidies can come via welfare (synonymous to Gross’ proposed Universal Basic Income), credit and population growth. Looking at the observable data we see the subsidies did come through consumer credit, welfare and population growth (i.e. 15 million (undocumented) immigrant consumers). The following chart tracks the increasing reliance on welfare and credit for consumption.
NAFTA was signed in 1993. This chart depicts the proportion of personal consumption (PCE) that comes from consumer credit and welfare. You can see that the amount of consumption being subsidized has increased by 40% since the inception of NAFTA. In nominal terms this year PCE is $12.5T. That means the growth in welfare and credit above the 1993 levels allowed for an additional $1.25T in revenues for corporate America this past year.
And so to summarize, if we remove the condition that subsidies are, as Bill Gross appears to be suggesting, a given within our system of ‘free markets’ then the problem he discusses in his latest letter is not in fact a problem. This is why I suggest the logic that Bill is using borders on the insane. The problem he describes is only a problem if you allow the solution he proposes to solve the problem he proposes. The profit maximizing objective attempted via lower cost labour strategies (poor farmers or robots), is impossible if we simply reject the concept of subsidization. Capitalism will naturally optimize each aspect of the capitalism circuit.
*And just to respond in advance to the die hard socialists, rejecting profit subsidies does not preclude social assistance for the purpose of real social assistance.