Remarks in Response to a Bond-Trader’s Case for Dramatically Reducing Federal Debt, in 63 Charts: Part 2

The first post in this series is available at:

Here is an excerpt from that post to re-establish the context; you can skip to the end of the italicized part if you read and recall the initial post:

Jeff Gundlach is the CEO of Doubleline Capital, a Los Angeles-based investment firm. He was previously the star performer for another firm, the Trust Company of the West (TCW), where he managed the Total Return Bond Fund. He left TCW in a very public, law-suit spawning spectacle of mutual accusations of self-interested impropriety. Still, the rapid growth of Doubleline Capital demonstrates that the dubious press has not impacted investors’ faith in him. He has been called the “$70 Billion Man” by Forbes, the “King of Bonds” by Barrons, the “Bond Savant” by Businessweek and one of the “50 Most Influential” investment managers by Bloomberg. Crossing Wall Street has demonstrated a certain awe of him by titling a recent profile “The Mind of Jeffrey Gundlach.” And, indeed, Jeff Gundlach is a very smart guy. He graduated summa cum laude from Dartmouth with a double degree in mathematics and philosophy, and he completed much of the doctoral program in either applied or theoretical mathematics at Yale—it’s reported differently in the sources that I looked at, but in either case, it’s impressive.

To add a certain avant garde cachet to his persona, profiles of him usually mention prominently that he once was the drummer in a rock band initially called Radical Flats and then Thinking Out Loud. Likewise, his departure from TCW was followed quickly by their assertions that a large stash of pornography, sex toys, and drug paraphernalia were found in the offices that he had vacated. Very recently, he was in the broader news again because his mansion was broken into and, in addition to some undisclosed amount of cash, several expensive watches, expensive wines, paintings by such renowned artists as Jasper Johns and Piet Mondrian, and a Porsche Carrera 4S were stolen. Gundlach offered a seven-figure reward for the recovery of the paintings and the car, and the paintings were eventually recovered, but not the car.

Gundlach’s biography is the classic “rags to riches” American success story. According to the profile in Businessweek, he may not have come from poverty, but his family was clearly of somewhat modest means: “his father was a chemist for a company that made wax for bowling alleys and his mother was a housewife.” Although several people in his extended family were successful inventors—“his uncle Robert Gundlach invented the photocopier and his grandfather Emanuel Gundlach formulated a hair tonic popular in the 1950s called Wildroot Cream-Oil”—he has subsequently claimed that the pivotal event in his determined ambition to become a successful investment banker occurred while he was watching an episode of The Lifestyles of the Rich and Famous on a small black-and-white television set and noticed the painful juxtaposition of his own circumstances and the lifestyle being showcased on the television show.

All of this background information is a preliminary to an extended discussion of a much-publicized Powerpoint presentation that Gundlack recently made called “Something for Nothing.” Gundlach is very decidedly a “deficit hawk,” and his presentation essentially reiterates Mitt Romney’s “47 percent “ assertions, but with the help of a plethora of charts and graphs—63 of them to be exact. In this worldview, the dramatic increase in income inequality and the public policies that have exacerbated those trends are not the core of the problem, but they are, instead, only one of many symptoms of the problem of too much government spending. Nowhere in the 63 charts is there a chart showing how much of federal spending is directly or indirectly subsidizing U.S. corporations, with the indirect subsidies including safety-net spending for those in the very low-wage jobs provided for many of America’s most profitable corporations, starting with WalMart and other big-box retailers and McDonald’s and other fast-food restaurant chains, but also including the exponential expansion of the warehousing industry through which all sorts of corporations employ workers through “temp” agencies.

But here I would like to focus on some of the individual graphs in Gundlach’s presentation and point out how they represent an ideological bias, at least as much as they provide a “factual” representation of the issues.

Here is the second graph from Grundlach’s presentation:

Gundlach Chart 02

There are several things that are immediately striking about this chart. The three “entitlement” programs are presented in blue at the bottom of the chart, and Grundlach clearly intends that they be viewed as a single problem. Moreover, that chart very obviously highlights visually that the spending on “entitlement” programs will eventually equal something equivalent to the total federal spending in 2000 and the “historical” average of federal revenues. The graph is arranged so that the interest on the debt is at the top and indicated in a bright yellow that contrasts with the colors of the other bars, visually emphasizing that the interest on the debt is projected to rise even more dramatically than the spending on “entitlement” programs. Still, the implication is very clear that the interest on the debt will rise so dramatically because the spending on “entitlement” programs is unsustainable at the current levels. For the red line serves to draw the eye to the synchronicity in the considerably increasing width of both the blue and yellow bars.

I am sure that Grundlach can provide much supporting data for this chart. But it seems to me that there are several very obvious distortions and misrepresentations in it that serve the argument that the entitlement programs need to be “reformed” in a manner that will “save” them by turning them into something less costly and therefore less of an actual safety net to middle- and lower-income seniors and others who will very much be depending on them.

For one thing, the representation of current defense spending seems very low. I am assuming that the green bar does not include the spending on the wars in Iraq and Afghanistan and on Homeland Security, which have been segregated as distinct budget items in the actual budget. I assume that that spending is being included in the gray bar under “other” spending and that its inclusion there accounts for the relatively recent, dramatic spike in that “other” spending. But those three categories of spending are at least as closely related, if not more so, as Social Security and Medicaid spending.

Segregating the categories of defense spending, and especially doing so with the color coding, serves, of course, to de-emphasize the total spending on defense and therefore the amount of savings that might be made by decreasing those expenditures. Still, if one is projecting out from recent trends, it seems very unlikely that defense spending as a whole is going to decline or even to remain level over the next few decades. When the Cold War ended, there were some reductions in spending on weapons programs and some briefly realized savings. But since the War on Terror began, spending has not just increased but become more dispersed than it was during the Cold War.

Ironically, the Cold War involved the threat of almost immediate annihilation, with thousands of nuclear warheads on Soviet ICBMs aimed at every major American city and every major military or industrial facility. But, geographically, the Cold War never came closer to the continental U.S. than some missile sites in Cuba. In contrast, the War on Terror began with passenger jets being flown into buildings by terrorists armed with box cutters and trained at primitive compounds in Afghanistan. The threat that terrorists might use weapons of mass destruction, including nuclear weapons provided by “rogue” nations, but more likely consisting of “dirty bombs” or chemical or biological agents, is certainly very real, but to this point, that threat has been more projected than actual. The absence of subsequent attacks of those kinds may very well be due to the tremendous spending on Homeland Security and the interminable wars in Afghanistan and Iraq. But when one looks at the actual degree and immediacy of the threats in proportion to the levels of the spending, the spending on the War on Terror becomes harder to justify. The advocates of high defense spending will ask how we can determine with certainty how much spending is enough. The counter argument is to ask whether our spending as much annually on defense as the next 15 to 18 largest militaries in the world is making us, proportionately, that much safer than those nations are–or whether it is simply making us significantly poorer in order to be incrementally safer.

The other major thing worth pointing out about this chart is, of course, that the interest on the debt is not a fixed number. Those on the Far Right are very fond of making analogies between household budgets and the federal budget. So, just as new homeowners are advised that making an extra payment or two on the principle each year will significantly reduce the interest that they will have to pay over the course of a mortgage agreement, the federal government can significantly reduce the future interest on the debt by raising revenues now in order to reduce the current debt. Whatever reduction in debt is realized now will have a multiplied effect on the long-term debt because a major part of those projections is surely compounded debt. So, the argument can be made that every dollar of additional revenue applied to the debt now will save at least several dollars in interest on the debt decades from now. This is, in essence, the argument for pairing carefully targeted cuts in spending with moderate increases in tax rates.

For instance, simply eliminating the income caps on Social Security and Medicare deductions will cover the projected demands on those programs for many decades—for much farther into the future than we can predict with any level of certainty. Even some more modest adjustment of those income caps would make the programs considerably more solvent. Those who oppose any tax increases argue that such increases will have a negligible impact on federal debt, but they also argue that they would represent a massive forced transfer of wealth—“class warfare.” I don’t think that they can have it both ways. In any case, the dramatic increase in the wealth for the top 5% over even the last half-decade make it hard to argue that they cannot afford it.

Eralier this year, WalMart explained its sub-par revenue numbers by explaining that the reinstated payroll taxes had reduced the spending power of many of its shoppers. That “increase” in payroll taxes was estimated at between $600 and $800 per year for the average WalMart customer, a small amount unless your annual income is between $15,000 and $30,000 per year, which is what 40% of working Americans now earn annually. Proportionately, the top 5% can much more easily afford what might superficially seem to be a dramatic increase in their Social Security and Medicare taxes. And consumer spending, which still accounts for three quarters of our GDP, continues to be driven more by the spending of the bottom 90% than by that of the top 10%.

Finally, lost in the endless discussions about peripheral issues related to the Affordable Care Act, such as the initial roll out of the website which has nothing to do with the long-term efficacy of the program, have been the reasons that the legislation was proposed to begin with. For three decades healthcare costs had been increasing by between 10% and 20% per year. Larger and larger numbers of poor Americans—and more and more of the working poor—were unable to afford any health insurance. Those who could afford health insurance were, in effect, subsidizing the emergency care of those without health insurance, and as insurance companies sought to control costs and maintain profits, more and more people who had had serious illnesses or who suffered with chronic conditions were unable to obtain or maintain health insurance coverage. The idea behind the Affordable Care Act is simply that if the number of uninsured Americans can be reduced, that part of the cost, which was being passed on to everyone else, could be reduced and, therefore, increases in healthcare costs could be reduced, and the increasing portion of the GDP being expended on healthcare could be directed to other economic sectors to drive economic growth.

If any of those savings are realized, then the Affordable Care Act will serve as an economic stimulus, rather than an economic drain, increasing growth and therefore federal revenues, rather than simply adding to the long-term debt. At least that was the argument that Republicans made in offering the individual mandate as an alternative to the single-provider, universal coverage that then First Lady Hillary Clinton seemed to be on the verge of proposing. At least that was the argument that the Republicans offered before Obama was willing to accept most of their proposals and, in reaching across the aisle, forced them to denounce their own plan as government overreach and socialism.

One thought on “Remarks in Response to a Bond-Trader’s Case for Dramatically Reducing Federal Debt, in 63 Charts: Part 2

Your comments are welcome. They must be relevant to the topic at hand and must not contain advertisements, degrade others, or violate laws or considerations of privacy. We encourage the use of your real name, but do not prohibit pseudonyms as long as you don’t impersonate a real person.