NO LEFT TURN
by Paul Petillo
Managing Editor, BlueCollarDollar.com
July 9, 2008

Doubling the deficit is hardly the kind of attention you want to draw upon yourself while running for the highest office in the land. You are so busy trying to make sure your campaign stays on message, the media gives you a fair break and the other side doesn’t find some reason or another to throw you under the bus.

But adding to the ballooning budget is exactly what bond king Bill Gross of PIMCO would like the next president to do and posthaste. He has no worries when it comes to the Republican presumptive candidate John McCain. His proudly worn mantle as Bush 3.0 suggests, as the moniker does, that Mr. McCain will continue to add to the economic woes that the current White House resident so aptly caused. He will do so by continuing to cut taxes in the face of that deficit, fully fund the war and pander to big business in much the same way.

Barack Obama, the presumptive Democratic nominee is quite another matter and that has Mr. Gross worried. The current stature of the economy is decidedly miserable and the leadership deserves every blame-tossed barb. As Mr. Bush has repeated time and again, “the tax cuts work.” But Mr. Gross has recognized the core issues surrounding the dismal shape of the economy: low interest rates (which led to the housing bubble) and the Ponzi scheme that those interest rates caused.

Now we all know that it was more than just the deficit that put the economy in its current state of affairs. Lack of health insurance, poor job creation, recession, an anemic recovery that followed that downturn that was followed by yet another interest rate forced recession, all took its toll on the pocketbooks of the general populace. This had the net effect of creating a steady depletion in real income for the average family. Mr. Obama would like to put some of that income back in the hands of the lower wage earner by raising taxes on those in the highest brackets.

This would almost assuredly come with a shift in the taxation of capital gains, the single tax break most favored by investors, specifically those at the upper rungs of the investment markets. The average investor tends to buy and hold and those that don’t trade too often to use the current 15% break to their advantage.

Mr. Gross knows that many of his suggestions are easy offerings to sacrifice to the electorate. In an open letter to Mr. Obama, he suggested taking on a more economic approach by driving the deficit to all-time highs.

Often bemoaned among investors related news sources, Democratic presidents tend to be less business friendly. Mr. Gross realizes that and suggests that for the good of the economy, that Obama should ignore the left and move firmly right.

But how exactly does one double the deficit in the best interest of the economy? Mr. Obama could spend Mr. Gross suggests, to cover shortfalls. Those shortfalls are coming from every possible angle so the choice would almost seem as simple as tossing a dart.

Rather than borrow from the Republican playbook by reaching for the tax cut tool, an act of giving future money owed back to the populace masked as a stimulus check, perhaps Mr. Obama could be more creative in his stimulus.

His tax cuts could be much more preemptive. He could eliminate the alternative minimum tax, something the current administration has been unable to do. He could create a national health care system that would, in effect put back the 5% (of the average income) that rising health care costs have taken. He could create a national 401(k) opening accounts valued at $1600 or so for every man, woman and child in the US (doubling the deficit would add another $500 billion – divide that sum by 300 million). He could revisit the Work Projects fostered with great success at the end of the Great Depression.

Many of these have unfathomable price tags, far beyond what we consider do-able but as Mr. Gross has pointed out, such deficit depth would still leave us in better economic shape than the Japanese experienced a decade ago. As Mr. Gross pointed out in his letter, the difficulty will not be in the attempt, but the reaction. Even those who support him now will not be so supportive in the face of economic austerity.

Mr. Obama could change his campaign message to read “no left turns”. When UPS redesigned the routing of trucks to take as few left turns as possible in order to not only save time but fuel, the Republicans, oddly enough didn’t embrace the metaphor. Mr. Obama could and still get elected.

We all know the Democrats are the party on the left but a left turn now would not be in the county’s best interest. But several carefully calculated right turns just might do the trick and save not only the economy, but also the Democratic Party in the process.

I am all for a balanced budget and pay-go rules but they are more examples of leadership prompting the populace to do as they do, not as they say. We have followed the lead of spending with abandon and it has got us in this trouble. But the government could, if done correctly, achieve what we could not as individuals. Unfortunately, as Mr. Gross pointed out, it would not make for a very popular presidency.

In case you missed the letter Bill gross penned, you can read it in its entirety here: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+July+2008.htm

© 2008 Paul Petillo
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Portland, OR USA
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