Economic Wisdom Beyond the Reach of Our Politicians

Warren Buffett cast some real pearls before TV viewers 3/2/11 on the morning CNBC show. Pearl One: Buffett gives great credit to Obama for having assembled the panel headed by Simpson and Bowles to set forth a series of financial policy recommendatons designed to pull America out of its enormous economic hole. The panel worked hard and came up with a sensible plan.

But, as Buffett pointed out, no one is paying this plan any attention; not Obama, and not the Congress. It would seem our leaders prefer a ship navigated by a blind captain.

According to Buffett, our situation can only go in three possible directions. We can raise taxes. We can modify our promises. Or, we can bring down upon ourselves inflation. However, as he noted, inflation is little more than taxation by other means.

Buffett dismissed arguments that our current rate of inflation is quite low by pointing out that a man falling from a 55 floor building suffers few if any ill effects for the first 54 floors. It's the last floor that kills him.

As to promises made to the public sector workers regarding benefits: In Buffett's opinion, a promise is a promise. You've got to keep them. But future benefits have to be pared back. They are now unsustainable.

Not addressed by Buffett is the moral dilemma posed by keeping unreasonable promises made regarding benefits by venal politicians to our older workers and then leaning down heavily on young workers.

As to taxes: There are negative consequences for our economy if we increase taxes. However, he did point out that our 300 highest earners (a group that includes himself) had their effective tax rate fall from around 30% down to 16%. This, in his opinion, was inappropriate.

Buffett also pointed to the problem of allowing CEOs to escape the consequences of their poor decisions. When they make good decisions they benefit inordinately. But, when they make poor decisions, they still walk away with loads of money. Boards of directors very often just don't do their jobs well. We know why. The CEO appoints them. So, of course, they give the CEO a sweet heart deal.

CEOs and companies must be held accountable. The banks were irresponsible with mortgages because Fannie Mae and Freddie Mac assumed all the risk. The banks therefore paid absolutely no attention to whom they were giving their mortgages. Buffett believes it's okay for Fannie and Freddie to assume 20% of the risk in mortgages. (This helps keep down mortgage rates.) But the banks should be in it for 80% of the risk. This would go a long way to keeping them honest.

But, who's listening?