- The Washington Times - Saturday, May 8, 2004

Sen. John Kerry recruited two famous businessmen to what the New York Times described as his “motley team” of economic advisers. Mr. Kerry turned to Steve Jobs of Apple Computer and Warren Buffet of Berkshire Hathaway. (When Mr. Kerry said he was fighting for Jobs, we didn’t realize he meant Steve).

Mr. Buffett is the second-wealthiest man in the world. Steve Jobs just received America’s second-largest executive pay package. Both are amazingly talented at what they do. But what they do not do is economics.

Until now, nobody imagined Steve Jobs had any interest in economics. Mr. Buffett, on the other hand, has sounded off on numerous topics. Unfortunately, Mr. Buffet’s paper trail makes it reasonable to conclude Mr. Kerry approves of his views. And that could prove embarrassing.

One Buffett article the Kerry camp surely enjoyed opposed cutting the dividends tax — “Dividend voodoo” in The Washington Post last May 20. Mr. Buffett argued if Berkshire Hathaway paid $1 billion in dividends, he would get $310 million in tax-free income under the president’s original proposal, and still a good deal even with the final 15 percent tax.

But Mr. Buffett could easily take much more than $310 million out of his $43 billion at any time by selling some shares and paying a 20 percent tax (now 15 percent).

The capital gains tax was reduced in 1997 and 2003 because people like Mr. Buffett who do not have to sell will simply refrain from doing so if the tax is too high. Unfortunately, a higher tax rate on dividends than capital gains encouraged people like Mr. Buffett to vote against paying a dividend, even when the alternative was to risk retained earnings on high-yield euro-denominated bonds.

Reducing the dividends tax to 15 percent was meant largely to encourage companies like Berkshire to pay a dividend. Berkshire collects dividends from stocks in companies it owns, but refuses to pay its own shareholders. And Berkshire’s 21 percent rise last year did not keep pace with the 29 percent rise in the S&P; 500 or the 32 percent average rise among equity mutual funds.

Mr. Buffett’s opinions about the desirability of high taxes on dividends happen to be consistent with maximizing his wealth, but not necessarily that of his second-class, nonvoting shareholders.

Similarly, Mr. Buffett’s famous crusade to compel tech companies to expense a bogus estimate of the cost of stock options is consistent with his aversion to owning tech stocks.

Expensing would make it much harder for companies like Apple to compete against companies like Coca Cola for executives and capital. Mr. Kerry would be wise to keep Mr. Buffett and Mr. Jobs in separate rooms.

Mr. Buffett’s most revealing article appeared in the Nov. 10, 2003, Fortune, titled “America’s growing trade deficit is selling the nation out from under us.” It began with a “wildly fanciful trip” to two islands, Squanderville and Thriftville, both “self-sufficient” until they foolishly started to trade. Then Squanderville began to run trade deficits, which gave Thriftville the Squanderbucks to invest in Squanderville assets.

The U.S. was Thriftville until 1980, says Mr. Buffett. “Since then, however, it’s been all downhill.” But remember what the economy was like in that supposedly wonderful decade before 1980 before you buy into this fable too quickly. And realize the best long-term example of Thriftville is Japan — a country that has lost jobs and stock market wealth for a dozen years.

Mr. Buffett is strangely troubled that the value of foreign-owned assets in the United States exceeds by $2.5 trillion the value of U.S.-owned assets abroad. But whose assets would he rather have — theirs or ours? He boasts of speculating in foreign currencies, but that isn’t investing. Besides, the dollar rose 3 percent last month.

U.S. assets — stocks, bonds and real estate — have risen spectacularly since 1982, the same period when Mr. Buffet thinks everything went downhill. Meanwhile, many foreign assets — such as Japanese stocks and Third World loans — have fallen in value, some to zero.

Some valuable foreign-owned assets include foreign drug companies and auto factories all over the United States. If those U.S. plants employ too many people and become too profitable, Mr. Buffett fears they may end up “paying ever-increasing dividends” to stockholders in companies like Nissan or Bayer. So what? Many Americans own stock in companies like that.

Clyde Prestowitz once wrote a book called “Trading Places: How We Are Trading Our Future With Japan” (I have seen used copies on Amazon for 1 cent). Does Mr. Buffett really want the United States to trade places with Japan (Thriftville)? If so, why doesn’t Berkshire invest in Japanese stocks?

Mr. Buffet shifts from his childish fable to advocating “a tariff called by another name.” This draconian scheme is not a tariff, actually, but a very extreme import quota. It would be illegal to ever again import one dollar more than we exported. Mr. Buffet views this a “tax on consumers,” but more than half of our merchandise imports consist of products essential to U.S. producers — electronic components for U.S.-made computers and scientific equipment; parts for U.S.-made cars; chemicals for textiles and drugs; basic industrial materials such as oil and metals, and so on.

If such inputs could be purchased at all under Mr. Buffett’s plan, their costs would be so much higher than in other countries that the United States could not afford to export anything at world prices. That would require even tighter restrictions on imports. Developing countries hoping to sell to the United States to get the dollars to repay their debts would default and stop trading. With world markets imploding, goods would have to be liquidated far below cost, causing widespread failures of businesses, farms and banks. Mr. Buffett does not think his plan should be compared to the Smoot-Hawley tariff of 1930. He’s right — it’s worse.

Mr. Buffett’s last report to his shareholders cautioned that, “Our country’s dynamism and resiliency have repeatedly made fools of naysayers.” The trouble with politicians using naysayers like Mr. Buffett as economic advisers is such people cannot resist peddling gloom to voters who can read the headlines and see for themselves it’s utter nonsense. As Arnold Schwarzenegger learned, however, it is not so easy to muzzle an outspoken and charming curmudgeon who is worth billions.

If Mr. Kerry is really looking for sound economic guidance, it would be best to ask a real economist. One of the best, and a self-described Clinton Democrat, is Robert Hall of Stanford University. But Mr. Kerry might not grasp his enlightened Harvard-bred views on tax policy. Bob Hall, you see, is the co-author of the Hall-Rabushka flat tax.

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.


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