Inside Financial Services

Bill Gross Is Wrong About Income Inequality

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The opening of Bill Gross’ op-ed, in today’s USAToday:

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. [Emph. added]

Good golly. He’s already not making sense. Since when is it “commonsensically true” that income equality is automatically good for business? I don’t remember reading that in Econ 101. Or that raising the minimum wage is good for business, too? Actually, I remember reading the opposite. And, no, Main Street isn’t Wall Street’s best friend. Lately, the Federal Reserve is.

Gross’s piece is just the latest addition to the rising tide of trendy moaning lately, from President Obama on down, about the problem of income inequality in this country and how it might be fixed. I don’t get it. If income equality really were a good thing in its own right, as the moaners seem to think, they’d all look back on Albania in the 1970s as some sort of economic paradise, while recalling the U.S. economy during the Harding administration (when, as Gross points out, income inequality was as severe as it is now) as something other than “the Roaring Twenties.”

What’s more, the only solution the inequality-phobes can ever seem to come up with to fix their non-problem is always the same: raise the minimum wage. But that would of course involve its own tradeoffs, which I scarcely need to explain. If you raise the minimum wage, wages would indeed rise for some workers, but others would suddenly find themselves priced out of the labor market and so out of a job altogether. That’s not only not good for business, it’s really not good for those workers. Why Bill Gross, of all people, believes that arbitrary government intervention in the labor market will somehow make that market more efficient eludes me.

In fairness to Gross, one gets the sense that he’s conflating income inequality (which, again, is not a problem) with the persistently stagnating real incomes of those at the bottom of the economic ladder (which definitely is). And yet the only solution he can come up with is one that won’t work? That’s it? I don’t have a dog in the immigration fight, for instance, but one would think that stemming the tide—the supply–of illegal workers into this country would have the effect of raising wages for the remaining, legal ones. Or perhaps the government might do more to steer workers into skilled trades, which are often in chronically short supply. Or it might rethink the burden off regulation it’s imposed, such as the employer mandate of the ACA, in order to lower the cost of employing full-time workers.

You may not agree with all these ideas, or even any of them. But if you really do think income inequality is a bad thing, you’d probably welcome a rise in wages at the bottom end of the scale. So would I. But a boost in the minimum wage won’t likely accomplish that. Bill Gross and his fellow inequality worrywarts should be thinking more broadly.

What do you think? Let me know!

2 Responses to “Bill Gross Is Wrong About Income Inequality”

  1. Charlie Montgomery

    Of course you are right on this matter. Economist Thomas Sowell has explained this conundrum, which really isn’t one, in many of his books. Hazlitt devotes an entire chapter to minimum wage laws in “Economics in One Lesson”, noting that somehow labor, which is a commodity, avoided the word price to describe its worth.
    If politicians come up with a wage, say $400 for a 40 hr week, by law this requires that anyone whose labor is not worth $400/week to some employer will not be employed at all but have to live off the taxpayers. So you substitute unemployment for a low wage.

    It is so obvious how the unintended consequences of min. wage laws far exceed the feel good improvements to society.

    Thanks for keeping us abreast of ideas like this one proposed by such a famous investor.


  2. Brian

    Bill Gross’s commentary is confused and confusing. If you increase the welfare state then income inequality will worsen. This is exactly what has happened under the Obama presidency. As for the minimum wage: In search theory models raising the minimum wage can induce workers into the labour force, hence increasing employment. But no one is seriously proposing that the low labour force participation problem will be is caused by low wages.

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