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The sanctimonious Warren Buffett’s economic illiteracy
Gerard Jackson
Buffett may be brilliant when it comes to picking stocks but in the field of economics he is a blithering buffoon. I have no way of knowing why Buffett has attached his colours to the Democrats, a party whose policies can be summed up in three slogans: raise taxes, raise government spending, regulate the economy. And keep on doing it until the economy sinks into stagnation, at which point they can blame everyone but themselves.
(I know that the Republicans’ spending record has been dismal, but at lease most of them can be made to see the light. This is something that can never be said of Kerry, Kennedy, Pelosi, etc.)
Back in 2003 the brilliant Buffett attacked President Bush’s proposal to cut taxes on corporate dividends. He maliciously asserted that the tax cuts were unfair and economically useless. I thought it was pretty rich that one of America’s wealthiest men should caricature tax cuts for millions of people who are far less fortunate than himself as “unfair”. At time it was estimated that more than 50 per cent of the recipients of the dividend tax cut were senior citizens. Then of course there were the millions of Americans who would benefit through their pension funds. (In Australia and the UK such funds are called superannuation).
What I found troubling was not Buffett’s sanctimonious hypocrisy but the failure of the Republicans to demand that he publicly explain to these people why it was “unfair” for them to receive greater benefits from their savings. And this is from a man who flies around the country in private jets.
To state as he did that the tax cuts would not stimulate the economy smacked of partisan politics as well as economic illiteracy. Now Buffett is noted for buying low and investing for the long-term. A strategy that has served him and his investors extremely well. Can it be that it has completely eluded him that his investment strategy refutes his assertions about tax cuts? This could very well be the case. Irrespective of what today’s economists say, including Buffett’s economic advisors — if he has any — it is savings that fuel economic growth and not consumer spending*.
By making huge investments in shares on behalf of his clients Buffett is actually marshalling their savings and directing them into the production of future goods. It is the return from these successful investments that made Buffett one of world’s wealthiest men. By the same token pensioners who own shares are net savers. If they were not they would have to reduce if not actually dispose of the holdings. It follows that increasing their disposable income by cutting their tax liabilities should increase their savings which, by definition, will help fuel greater economic growth.
Let me put it another way: by ceasing to tax dividends twice and so lower the level of corporate taxation more savings will obviously be available for investment, And it rising per capita investment that raises living standards — not taxation or heavy government spending. Moreover, capital gains are profits. By cutting the capitals gains tax more savings are made available for investment, directing the market to greater production. It therefore follows that if Buffett’s tax advice had been followed America would now be a poorer country — though not Buffett himself. (To some economists, this process validates supply-economics. To others, albeit a few at the moment, it demonstrates Say’s Law of Markets).
The self-righteous Buffett never bothered to explain why the preceding analysis is wrong. Even worse, nearly four years later he is still claiming it doesn’t work. Am I to conclude that he thinks savings have nothing to do with investment and that consumer spending really is the key to economic growth. If that is true then he should be logically consistent and call for a 100 per cent tax on all savings. (This is a policy that Keynes would have sympathised with). Of course, such a tax would completely absorb all returns from investment.
Buffett doesn’t stop at attacking tax cuts. He also launched a verbal broadside against executive pay, saying that “there had been more misdirected compensation in corporate America in the past five years than in the last century”. Maybe so, but I reckon the 1899-1902 and the 1924-29 boom periods would take some beating. The reason I mentioned them is that they shared the same characteristics as the 1990s boom.
In other words, much of what passed as excess in the second half of the 1990s was fuelled by the Fed's criminally loose monetary policy. It was this policy that created the corporate scandals he fiercely condemns and not stock option grants which were merely one of the symptoms of Greenspan’s monetary boom.
During the past decades I have come across a number of people who have done very well for themselves on the share market. What was interesting about them is that they all admitted to being ignorant of economics. A characteristic they apparently share with Buffett. However, there was one particular feature that put them a cut — a very big cut, come to think of it — above Buffett: and that was their awareness that making a lot of money did not make them morally or intellectually superior to the rest of the citizenry. But Buffett is evidently the kind of billionaire who has come to believe that his vast wealth gives him the right to govern others. And if you are that kind of person, then the Democrat Party is just the place for you.
It is my intention to write a more detailed critique of Buffett in the near future.
*Most people do not realize, including economists, that GDP is not equal to gross spending. This is probably why the Bureau of Economic Analysis developed a national income statistic called gross output.
Gerard Jackson is Brookes' Economics Editor
BrookesNews.Com
Monday 9 June 2007