Ask a former British Labour leader and an Orange County Republican about the future of capitalism, and the answers shouldn't be surprising. Unless those two individuals are Tony Blair and Bill Gross.
Speaking on consecutive days at the Schwab Advisor Services conference last week, Gross was quite the Gloomy Gus about everything, particularly the future of capitalism. Blair, on the other hand, was fuzzy but generally optimistic, though maybe that is to be expected from a lifelong politician.
For Gross, the origin of our current woes dates back all the way to 1980-not to the explosion in subprime lending in 2005 or the Community Reinvestment Act in the early 1990s or the S&L debacle of the late 1980s or some other flashpoint event. In his view, it was in the early 1980s that the U.S. started living beyond its means.
"We borrowed too much, over-consumed and brought consumption forward," Gross said. The U.S., in particular, focused on financial engineering, not real engineering. Gross compared successive U.S. governments from the early 1980s through the present to bad squirrels in the fall who failed to put away enough nuts for the winter.
His argument is not without merit. In the 1980s, the nation nearly tripled its defense budget, while cutting taxes, and started to run what were then huge budget deficits of $300 billion to $400 billion. The result was a boom in the defense industry coupled with a multi-year surge in consumer spending as baby boomers formed households and moved to the suburban McMansions.
The counter-argument is that the tripling of defense spending accelerated the collapse of the Soviet Union that produced the "peace dividend" of the 1990s. Also, the baby boomer consumption boom was an inevitable demographic phenomenon in many ways similar to the post-World War II boom of the 1950s and 1960s.
But Gross' critique extends well beyond excessive consumption and borrowing to the issue of capital allocation. From defense and S&Ls in the 1980s to the dot-com bubble of the 1990s, America displayed a propensity to burn capital in non-productive areas long before the housing boom took off in the last ten years.
Austrian economist Joseph Schumpeter's theory that capitalism required gales of creative destruction and that many business ideas must inevitably fail before true breakthroughs can be realized definitely holds validity. But I've often wondered about-and never seen-any one try to quantify what the cost to society was when the technology industry vaporized trillions in venture capital in dot-com ideas that were as blatantly bogus as the subprime housing boom. Or for that matter, the cost of other boondoggles as well.
Globalization, Gross continued, suddenly has been transformed from a tailwind to a headwind for America. It "used to work well for the U.S. from 1946 [until about five years ago]," he noted. Now in an increasingly global labor market, "the U.S. is at a disadvantage when it comes to job creation."
When it comes to European countries struggling with excessive debt like Greece, Spain, Ireland and Italy, Gross's advice was that they should follow the lead of Iceland and stiff all the foreign banks. So far they don't seem to be taking his advice.
Corporate America may be running record profits, but even there Gross finds little to cheer about. He produced an illuminating statistic that may underscore much of the unease across the nation. In the last three years, the share of GDP going to corporate profits has climbed from 8% to 13%, while the share going to labor has fallen from 66% to 61%.
So deleveraging and demographics are not the only reason consumption is in the doldrums. It will be "difficult for this [growth in profits at the expense of labor] to continue," Gross added. Obviously, at some point, the decline in income will spill over and hurt corporate profits if people don't have the money to purchase their products.
So over the long term, capitalism is a risk, he concluded. It depends upon consumption growth, "not just in terms of profits but in terms of products and invention." Population growth is one key driver of economic growth and with 7 billion people on the planet, limits to the number of people the globe can hold will "eventually constrain growth."
As for Tony Blair, the silver-tongued former prime minister offered some sunny platitudes about our future, but he was short on substance. "It's not productive" to spend as much time assigning blame for our predicament as we have the past several years, he noted.
I'm not so sure about that. If nations don't examine past mistakes, they could be doomed to repeat them. Rarely has an economic disaster witnessed such a convergence of different players who contributed to the crisis. From government agencies to degradated lenders to delusional homebuyers, a rainbow coalition encompassing a large swath of the world can share in the blame for our current misery.
Ooops, did I forget the ratings' agencies? One day after this was posted, Moody's announced it was considering a downgrade for Penn State-talk about kicking an institution when they are down. But I digress.
"The dominant issue is how to get the economy creating jobs," Blair said. What an epiphany?
"We need to realize a vibrant financial sector is a part" of any recovery, he continued. No kidding. But going forward, the financial sector is less likely to play as bit a role in the overall economy.
Blair was on point when he remarked that the world is changing so fast, it's easy for all of us, even Bill Gross, to become a "little defeatist."
He recognized that income inequality is a problem but added that there has to be a way to spread or redistribute the wealth without the use of a welfare-type of system. He didn't say what that way was.
Blair said he sympathized with the insecurity and anger of Occupy Wall Street protesters but claimed some of their ideas would "make things worse, not better."
As for overpaid CEOs, he acknowledged it was a problem. But "I don't know what there answer is," he declared, and "I don't know if government can solve it better than the companies. Government may produce more problems than it solves."
Responsible corporate boards is the obvious answer to that problem, but if you believe we're going to see that any time soon, you might also want to go shopping for a dot.com company.