Warren Buffett: Great investor, lousy economist

21 Sep

The Oracle of Omaha is at it again.  Instead of doing what he does best, make money for his shareholders, Mr. Buffett is complaining that rich folks like him do not pay enough taxes to support the welfare-warfare state.  Of course, Mr. Buffett did not say that exactly, but that is the implication of his August 14, New York Times op-ed calling for the federal government to stop “coddling” billionaires like him and raise taxes on the mega rich.  President Obama has taken Buffett’s ideas about taxing the rich to make it a central initiative in his plan to reduce the deficit over the next ten years.

In Buffett’s op-ed he states:  “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

Let us look very closely at Buffett’s assertions.  First, “investors do not shy away from a sensible investment because of the tax rate on the potential gain…potential taxes have never scared them off.”  Buffett makes a monumental error here.  Investors look at the after-tax return of an investment to determine if it is worthwhile.  Would Buffett have been investing since he were 11 years old if the tax rate on capital gains were 100%?  90%?  80%?  In other words, what is the tax rate that would discourage average investors  and other great investors like Buffett from investing in stocks, real estate, etc.?   As long as the after-tax return on investments is greater than the after tax return on relatively risk free assets, T-bills or Treasury bonds, investors will continue to buy stocks, real estate and other risky investments.

Buffett implies that relatively high tax rates on investments did not discourage capital formation and job creation between 1980 and 2000.  The economy boomed because of new technologies, lower marginal tax rates, lower interest rates, deregulation, and decelerating inflation.  However, the Federal Reserve also “goosed” the economy with cheap credit leading to the S&L crisis of the late 1980s and early 1990s and the dot com bust of 2000-2001.

Buffett implies that lower tax rates since 2000 caused less job creation.  Buffett fails again to cite the Federal Reserve’s cheap money policies that drove interest rates to levels that helped ignite the housing boom.  In addition, the federal government’s housing policies encouraged unqualified individuals to purchase “more house” than they could afford.  In short, massive government intervention caused the housing bubble and now we are in a multi-year correction of the excesses that one of Buffett’s best buddies, Fed chairman Ben Bernanke, helped create.

Warren Buffett in calling for “shared sacrifice” is in effect endorsing everything the federal government does:  massive redistribution of income and wealth, some of which flows from low and middle income people to agribusinesses and politically connected corporations like the failed solar panel firm that recently folded; and endless wars that are  draining scarce resources for the military-industrial complex.  In short, Warren Buffett is a big government capitalist who is shielding his wealth from the federal government by donating virtually his whole estate to the Gates Foundation.  Actions that belie his big government philosophy.

Furthermore, if Warren Buffett is the compassionate individual he claims to be than he should call for the abolition of the welfare-warfare state, which destroys wealth, causes untold civilian deaths around the world and is responsible for stagnant living standards in America.

For all his success in the business world, Warren Buffett is one hell of a lousy economist.

One of the great achievements of western civilization is the division of labor, where people specialize in the things they do best.  Warren Buffett is a great investor.  He should leave public policy questions to individuals who understand the failures of big government.  Buffett should go read his late father’s trenchant critiques of the welfare-warfare state.






Comments Off on Warren Buffett: Great investor, lousy economist

Posted in Federal Government, Federal Reserve, Warfare state, Welfare state


Comments are closed.