Thursday, April 3, 2008

The Economic Contours of a Buffett-Obama Administration

The Economic Contours of a Buffett-Obama Administration

Much has been made about Barack Obama's association with Pastor Jeremiah Wright, who represents the identity politics fringe of the Democratic Party. Mainstream Americans ought to be concerned because the Democrats have introduced leftists into staff positions in state legislatures and Congress and funded them in universities. For example, Eliot Spitzer's suggestion of granting drivers' licenses to illegal aliens likely did not spring from the mouth of his latest romantic partner, but rather from staffers whom he introduced into Albany. With associations of the Pastor Wright sort, Mr. Obama seems likely to aim to employ staffers with fringe views. If you liked the idea of granting drivers' licenses to aliens, it is certain that you will love an Obama administration.

An even more important question than identity politics, though, is what a President Obama would do to the economy. Thus, a more important association than Obama-Wright is Obama-Buffett. What clues might this relationship offer about the economic direction that an Obama administration would take? One clue is Mr. Obama's recent recommendation, quoting the authority of Mr. Buffett, to increase the capital gains tax. Mr. Buffett's investment philosophy famously involves buying and holding for the long term, and so would not be hurt and would possibly be helped by higher capital gains taxes. In contrast, traders whose investment approach involves more frequent buying and selling would be hurt. Long term holders infrequently pay capital gains taxes, while frequent traders may pay taxes more frequently. Thus, capital gains taxes would hurt Mr. Buffett's competition more than they would hurt him. That which hurts his competition would likely help him.

An increased capital gains tax would provide an incentive for investors to favor investment in Berkshire Hathaway over buying and selling commodities and stocks. The Federal Reserve Bank has increasingly become involved in timing and influencing the financial markets, increasing the returns to short term traders who respond to Fed moves but potentially harming long term holders because of market unpredictability. Mr. Buffett's Berkshire stock has nevertheless performed modestly, but only modestly, well. An increase in the capital gains tax would likely increase the value of Berkshire Hathaway stock because it would provide incentives for long term holding. Hence, Mr. Obama has already been advocating policies that would prove economically beneficial to Berkshire Hathaway, and quoting Mr. Buffett in doing so.

Mr. Buffett's investments span a wide swath of businesses. He favors domestic businesses over foreign ones. Many of the businesses and stocks that Mr. Buffett's Berkshire Hathaway owns are consumer products, media, financial, insurance, food and retail businesses (Coca Cola, See's Candies, Capital Cities ABC, GEICO, Dairy Queen, reinsurance and small retail). Thus, policies that a Buffett-Obama administration would likely favor would involve support to a broad swath of domestic consumer, financial and real estate-related businesses.

A weak dollar/high inflation policy executed in the name of full employment with increased taxes to Mr. Buffett's competitors and protectionism are the most likely outcomes of a Buffett-backed Obama presidency. High inflation serves Berkshire Hathaway's interests for several reasons. First, inflation reduces real wages and so real labor costs for Berkshire's retail and construction businesses. Second, inflation reduces real debt, and the diverse businesses that Mr. Buffett owns, from house construction to consumer products, carry debt and so benefit from inflation. Third, inflation weakens the dollar. Since Mr. Buffett's businesses tend to be domestic, a weak dollar will help Berkshire because it will make American-made goods relatively cheap. Of course, this will occur in tandem with the average American's becoming poorer due to the same inflation, so while it will help Berkshire Hathaway it will harm American workers. Thus, one can expect that an Obama presidency will harm American workers in the name of helping them.

Since Mr. Buffett's businesses are primarily domestic, protectionism would prove beneficial to them as well. We can expect protectionism from an Obama presidency. This too would harm American workers by making goods more expensive but would prove helpful to Berkshire Hathaway.

One of the fundamental principles of progressive-liberalism is that it emphasizes that low wages are conducive to full employment while it de-emphasizes the benefit that low wages, low interest rates and high inflation provide to owners. Mr. Buffett is a student of John Maynard Keynes, and we can expect the Keynesian inflationary policy to be a pillar of an Obama presidency. The Keynsian argument is that increasing the money supply reduces interest rates and real wages. This stimulates employment, but it also makes workers, savers and pension holders poorer while it improves the position of owners, like Mr. Buffett.

At the margin, the stimulative effect of the Fed's printing money will include the creation of low-wage retail jobs, and this will benefit Berkshire Hathaway, which owns retail businesses. As well, Berkshire Hathaway benefits because low interest rates boost the value of its stock price. Low interest rates cause investors to value future earnings at a higher value. If an investor knows that he is going to receive a dollar in a year, if interest rates are reduced from 10% to 1%, the value of that future dollar is considerably raised in the present. Since the stock market is a mechanism to value future earnings, increasing the supply of money (that is, reducing interest rates) boosts stock market values. Since Berkshire Hathaway emphasizes long term holdings, its value will be especially enhanced. Thus, an Obama Presidency will likely prove to be inflationary through encouraging the Federal Reserve Bank to print money.

An Obama presidency will emphasize taxes that harm small investors and traders who compete with Mr. Buffett. These would include inheritance, capital gains and income taxes. It will reduce interest rates which raise the value of Berkshire Hathaway's holdings and subsidize long term holders. It will reduce the value of the dollar, which will stimulate demand for Berkshire Hathaway's domestic businesses. It will increase protectionism and raise tariffs, especially those which reduce competition to Mr. Buffett's businesses. Mr. Obama will reduce real wages, enhance income inequality and all the while will tell Americans how much he is helping them because he has created a few low-wage jobs for employees of Berkshire Hathaway.

Wednesday, April 2, 2008

Libertarians Rising: The 2007 Annual Report of the Libertarian Party

I received the annual report of the Libertarian Party in the mail a few weeks ago and read it. It is entitled Libertarians Rising: The 2007 Annual Report of the Libertarian Party. The report starts:

"Never before has the mood of the American electorate been so negative to the two-party system..."

As well, it points out that President Bush's approval rating is among the lowest in history, and Congress's is worse.

Interestingly, Bob Barr, the Republican Congressman who was involved in the Clinton impeachment about ten years ago, is now the Region 4 Representative of the Libertarian Party. Barr reports that Privacy International ranks the United States along with China, Russia, Thailand, Taiwan, Malaysia and the UK as "endemic surveillance societies".

I don't really see privacy as a crucial issue. Much of the increase in surveillance is probably targeted at terrorism suspects. The report omits that consideration. The report also omits any plan or coherent strategy for dealing with terrorism. Why bother with reality when you get 2% of the vote? It's more fun to talk about the grave risk due to training firefighters as spies than it is to think carefully about how to fight terrorism.

The report terms the war in Iraq a "disaster". It states:

"There is no doubt that a free and stable Iraq is something from which the world would benefit. However, as Libertarians we believe there are other ways to achieve this goal...So we continue to lose America's finest young men and women in a war that should never have been started..."

I would have preferred to hear a coherent anti-terrorism strategy that is consistent with Libertarian principles. The Libertarians oppose surveillance and oppose the War in Iraq but do not suggest how to eliminate further terrorist attacks, which have not occurred on US soil in seven years. From the 1990s to 2001 there were several terrorist attacks, namely, the World Trade Center I, the Cole, the African Embassy, 9/11. Since 2003 there have been no attacks. The Libertarians not only do not ponder this. They do not discuss any approach to dealing with terrorism.

I do, however, like the LP's position on the national debt. The report notes that:

"2007 saw the national debt reach an all-time record of $9 was reached during a time when the Republican Party, the party that used to at least pay lip service to fiscal conservatism, was in power. As William Redpath, National Chairman of the Libertarian Party put it: The fact that the national debt has risen by more than 800 percent in an era dominated by Republican presidents will be the obituary of fiscal conservatism in the Republican Party."

I happen to agree with Mr. Redpath. I think that the Republican Party has repudiated fiscal conservatism. Unless it does a 180 degree turn and reverse the spending it has initiated in the past 27 years, it has to be known as the biggest government party, although when compared to the Democrats they are "biggest" in the same sense as the McDonald's specialr special: the Republicans are the biggest spenders and the Democrats are the supersized biggest spenders.

The report notes that Congress has illegalized the incandescent light bulb by 2014. The replacements, compact flourescent bulbs, cost six times as much. I agree that this is an inappropriate incursion into private decision making.

The LP notes that its membership has increased 28 percent in 2007. Given the Republican Party's abandonment of limited government rhetoric, this is not surprising. However, there is always the prospect of either of the current Democratic candidates' being elected. What a pleasant thought.

The report ponts out that "59 percent of Americans describe themselves as fiscally conservative and socially liberal." The LP might ask itself why, given this percentage, its vote count is usually around 2%. Perhaps an ounce of reality is worth an additional percentage point of the vote, and a pound might put them in the running.

The report is optimistic. They will be on the ballot in 2008 in at least 48 states. In Texas, 210 Libertarian candidates are running. The LP will hold its convention in Denver in May 2008.

But I won't be there. I attended the 1980 LP convention in Los Angeles when I lived there. I support much that the LP has to say, but they lack realistic defense, counter-terrorism and foreign policies. Also, the LP's cliquishness is a turn-off. I have been told that many of the rank and file believe that the US government was responsible for the 9/11 attacks. This sort of fringe, crackpot element has a loud voice in the LP. They need to focus on a few issues and leave group-think to academics and theology to pastors, priests and rabbis.

Republicans Should Sell Their Berkshire Hathaway Shares

Newsmax reports that Warren Buffett has advised Barack Obama that an increase in the capital gains tax would not harm investment:

"Citing advice from the sage of Omaha, Warren Buffet, Democratic presidential contender Sen. Barack Obama (Ill.) has called for a massive increase in the capital gains tax...No word from the billionaire investor Buffett in reaction to Obama’s policy proposal — aired first on MSNBC by the Democratic presidential contender in an interview with Maria Bariromo – but many other investors are already responding. Currently, the capital gains tax rate is 15 percent."

On November 21, 2005 Newsmax reported that Mr. Buffett had decided to actively back Obama:

"Financial guru Warren Buffett seldom invests interest in politicians, but he’s making an exception for Sen. Barack Obama. 'I’ve got a conviction about him that I don’t get very often,' Buffett said of the Democratic senator from Illinois. 'He has as much potential as anyone I’ve seen to have an important impact over his lifetime on the course that America takes.'"

In 2007 Mr. Buffett hosted an Obama fundraiser in Omaha, according to the International Herald Tribune:

"Buffett had plenty of company Wednesday night at a fundraiser for Democratic presidential candidate Barack Obama — and local organizers say Obama made a valuable investment.

"'I think his stock in Nebraska goes up from here,' said Omaha businessman Harley Schrager, who co-hosted the event with Buffet and others."

I currently hold four Berkshire Hathaway B shares worth about $17,760. They have done modestly well since I bought the first share seven years ago.

The question for me is not whether the stock will go up or down. One reason is that Howard S. Katz's investment portfolio, in which I have put a large share of my portfolio, went up 30% in the past couple of weeks, more than Berkshire has gone up in the past 7 years. There are lots of investment opportunities. The question is whether I wish to hold stock in a firm led by someone who wishes to raise my taxes, who actively supports a candidate with whom I disagree, and whose political activities are, in my view, harmful to the nation's future.

On balance, I do not think that Berkshire Hathaway's prospects justify further association with Mr. Buffett. The firm's investment returns since 2001 simply do not warrant "sucking in my gut" to be associated with him. I am selling my Berkshire stock.

Monday, March 31, 2008

My Letter to Ralph Nader

Dear Mr. Nader:

I saw your interview on Bloomberg television a few days ago and was favorably impressed. However, I do not believe that you identify ultimate causes. You attribute corporate influence to the corporations. But corporations, like human beings, will always be greedy. Hence, you campaign against human nature and do not seriously aim for reform.

In order to eliminate corruption, the power of the state to engage in corruption needs to be limited. Human impulses will not change, but human institutions can be made more or less conducive to moral behavior. Limitations on the ability of corporations to influence the state require a limited state.

Your point about the Bernanke Fed is a good one. However, to limit the Fed's subsidy to big banks and Wall Street would require a limitation on the Fed's ability to create money. Such a limitation existed until 1932, when Roosevelt eliminated the gold standard. If you continue to support the current fiat money system, you continue to support Wall Street, the commercial banks and income inequality.

As your argument stands now, you are supporting corporate corruption. Illogical arguments in favor of the impossible are simply arguments for the status quo. One way to limit corruption is to limit the power of the banking system to subsidize the stock market by transferring value from dollar holders to stock holders. Another way is to limit the power of the federal government.

I would urge you to look for a compromise with the libertarian position and to combine forces with or coopt Ron Paul. There is enough common ground that you could retain your anti-corporate posture but also adopt a libertarian posture that would be compatible with both "right" and "left" positions, which could double or triple your vote count.

Please see my blog here.


Mitchell Langbert

Ben Bernanke Should Resign

The role of chairman of the Federal Reserve Bank ought to involve trust. The public has bestowed control over the nation's money supply to private, profit seeking institutions, the nation's commercial banks, who own the Fed. However, the federal government has retained the power to appoint the Fed officials who control our money supply.

By nature of its ownership structure the Fed poses a threat to the public welfare. The Fed has abused this trust for more than seventy years and should be abolished.

Support to private investment banking interests, such as Bear Stearns, who have performed incompetently, made bad investments and so deserve to be declared bankrupt does not serve the public interest and is evidence of abuse of the public's trust.

Mr. Bernanke has proven that he is morally unfit to serve as the chairman of the nation's most important fiduciary institution. He ought to resign or be removed.