Contra Warren Buffett, America’s best days exists for a tiny elite

Sovereign Man’s Simon Black points out why Warren Buffett is wrong with the latter’s sanguine view of America. (bold mine) 

In his most recent annual report just released yesterday, Mr. Buffet lauds the United States of America, writing:

“Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.”

Such language is typical for Mr. Buffett, he is one of America’s biggest cheerleaders. Again, with good reason.

For one, the unprecedented monetary expansion over the last decades has created a major boon for Mr. Buffet and his net worth. 

His company Berkshire Hathaway has a balance sheet worth $485 billion. 25% of that is simply invested in the stock market with big chunks of Coca Cola and American Express. 

These stock prices have boomed in an era of unprecedented money printing, adding billions to Mr. Buffett’s net worth.

Second, it’s important to note that over 75% of Berkshire’s revenue comes from highly regulated, absurdly profitable, tax advantageous businesses that are simply not accessible to the average guy. 

For example, Mr. Buffett gleefully writes about the $77 billion ‘float’ from his insurance businesses.

This is money that is collected from insurance customers. And while he might have to pay out insurance claims someday, for now he gets to borrow from that kitty at 0% and generate higher returns elsewhere.

On top of this, Mr. Buffett has been able to defer a full $57 billion in tax, indefinitely kicking the can down the road on his IRS bill thanks to industry-specific tax rules.

Again, you and I couldn’t do this because we don’t have access to these special privileges. Warren Buffett does.

Warren Buffett also has special access to lawmakers in the US who clamor to be in his favor.

During the early days of the financial crisis in 2008, for example, Buffett was getting desperate phone calls from the Treasury begging him to make investments in the financial system.

And as a result, he was able to arrange sweetheart deals, brokered by the US government.

It also may just be a wild coincidence that the US government has rejected the Keystone XL pipeline… and Mr. Buffett’s railways just -happen- to be among the prime beneficiaries.

Yes, I think if we all had the special privilege, access, and benefit that Warren Buffett enjoys, we too would all be jumping for joy about America.

But Uncle Warren lives in a different America– the America of the past.

With due deference to his investment acumen, Mr. Buffett should know that no nation in history has been able to -permanently- stand atop the world’s economic mountain. 

Like human beings ourselves, nations also rise, peak, and decline. It is their own life cycle. 

And the America that Mr. Buffett doesn’t acknowledge is the one that is in debt past its eyeballs. 

It is the America that spies on its citizens and threatens people with imprisonment for victimless crimes and administrative transgressions.

It is the America that conjures trillions of paper dollars out of thin air in total desperation, sending the labor force participation rate to multi-decade lows.

It is the new America that exists for a tiny elite at the expense of everyone else.

The above article exposes on what I call as “people up talking their industry” or a prime example of the the agency (principal agent) problem or the invisible conflict of interests between industry participants and their clients and or the public. [I should know I am a part of Mr. Buffett's industry but based on the Philippines.]

The cheerleading of Mr. Buffett on the economy has been designed to bolster Berkshire's financial interests (through implied advertisement) by encouraging the unwitting public to patronize the businesses offered by his companies via the "economy".

The other ramification is that the average investors pile into Berkshire’s stocks thereby pumping up share values and therefore magnify Berkshire's "returns" which will eventually reflect on Mr. Buffett's wealth status.

Of course what Mr. Buffett didn’t say too, which has been lucidly explained by Mr. Black, has been that Berkshire’s “economic moat” or competitive advantage has hardly been due to Ben Graham’s “value investing” but rather to “value” provided by political privileges via rent seeking political entrepreneurship, which meant special access to politicians and their regulations or exemptions in order to protect Berkshire’s interests. In terms of proportionality, 25% in stocks and 75% in rent privileges hardly speaks of value investing. 

In addition, some of the 25% of Berkshire's portfolio also benefits from political cover, as noted above.

The point is that what benefits Mr. Buffett’s Berkshire isn’t largely shared by the public. But Mr. Buffett makes it appear otherwise.

I’d like to add that Berkshire Hathaway is just one of the major recipients of government subsidies. According to a report by Philip Mattera of the taxpayer watch group Good Job First over the last two decades: 

…subsidy awards worth more than $1billion have been given to Warren Buffett’s Berkshire Hathaway by way of its holdings such as Geico, NetJets, Nebraska Furniture Mart, General Re Corporation, Lubrizol Advanced Materials, and Webb Wheel Products.

It’s not just Mr. Buffett though. An increasing number of US companies have become welfare recipients of the US government. About 75% of cumulative disclosed subsidy dollars to the tune of a whopping $110 billion notes PandoDaily.com have gone to 965 large companies where Fortune 500 firms have received receive more than 16,000 subsidies at a total cost of $63 billion. And more US government subsidies have also covered foreign firms. The 10 largest welfare corporate beneficiaries include Boeing, Alcoa, Intel, General Motors, Ford, Fiat, Royal Dutch, Nike, Nissan and Cemer. Mr. Buffett's Berkshire ranks 15th.

Bottom line: Be careful of what industry promoters say. In today’s world where politics has increasingly become a dominant force whether in the US, Asia, Europe, Latam and even in the Philippines, the rose colored-Pollyannaish outlook may all be about promoting the interests of the “tiny elite at the expense of everyone else".

Video: The Difference between Free Markets and Pro-Business Policies

Free markets or laissez faire capitalism has frequently been mistaken as being "pro-business"

In the following video from LearnLiberty.org, Professor Steve Horwitz explains their differences (thanks to Learn Liberty's Tim Hedberg for sending the video)

The following digest from LearnLiberty.org

In this video, Professor Steve Horwitz advocates for free market economic policy. He refutes the often recited claim that "What is good for General Motors is good for America" by explaining that pro-business legislation encourages behavior that is not beneficial to society or the business itself. He suggests that, in a free market, factors such as profit and competition encourage behavior that ultimately benefits society. Professor Horwitz illustrates that pro-business legislation restricts progress and therefore caters to the interests of industry rather than to consumers, whereas "supporters of free markets are ultimately pro-human and pro-people because it is through markets that we get the most innovation and we get the most goods and the cheapest prices."

Confusing Corporatism with Capitalism

Bashing capitalism has been the chic thing to do for people who bear ideological spite on it or for those who advance statism as solution to social ills.

Yet in reality, current crisis has not been laissez faire capitalism but about the nefarious relationship of the welfare-warfare state, their private sector allies and their behind-the-scene guarantors or backers, the central banks. Such political arrangement comes in various nomenclature: state capitalism or corporatism or crony capitalism or economic fascism.

Professors Edmund S. Phelps and Saifedean Ammous at the Project Syndicate explains the difference, (bold emphasis added) [hat tip Peter Boettke]

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on “reckless capitalism” and “lack of regulation,” which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.

In short, capitalism essentially is about serving consumers (or the needs of the masses), while corporatism is about fulfilling the interests of political masters.

Critics of capitalism have been engaged in equivocation by deliberately mangling the definitional context of capitalism.

Nevertheless, pushing for the same state based political solution will bring about the day of reckoning, as the Professors conclude,

The legitimacy of corporatism is eroding along with the fiscal health of governments that have relied on it. If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. Then “capitalism” would again carry its true meaning, rather than the one attributed to it by corporatists seeking to hide behind it and socialists wanting to vilify it.

I am with the professors that given the current direction of policymaking, the top-bottom or centralization based political economic system is likely headed for self-implosion.

And I am hopeful too that capitalism will emerge from their ashes, especially backed by accelerating advances in technology. But as caveat, nothing in life operates in a straight line or that the transition towards a decentralized-capitalist political economy could be messy.

Graphic: Differences and Shared Interests of Occupy Wall Street and the TEA Party

A Venn Diagram showing the differences and shared interests of the Occupy Wall Street and the Tea Party movements

(hat tip Professor Steve Horwitz. Source here)

Occupy Wall Street: Do as I say but NOT as I do

hat tip Prof Mark Perry

The policy of democracies is suicidal. Turbulent mobs demand acts which are contrary to society’s and their own best interests. They return to Parliament corrupt demagogues, adventurers, and quacks who praise patent medicines and idiotic remedies. Democracy has resulted in an upheaval of the domestic barbarians against reason, sound policies, and civilization. The masses have firmly established the dictators in many European countries. They may succeed very soon in America too. The great experiment of liberalism and democracy has proved to be self-liquidating. It has brought about the worst of all tyrannies.

This pertinent quote from the great Ludwig von Mises in Omnipotent Government: The Rise of the Total State and Total War [1944] (hat tip Prof Don Boudreaux)

How Bro. Armin Luisitro’s 12 Year Basic Education Cycle Will Benefit The Big League Schools

The proposal of De La Salle Bro Armin Luistro, the incumbent education secretary, to extend the basic education cycle into 12 year cycle isn’t likely achieve the purported goals. [Sorry, but I have to part ways with my alma mater, assuming DLSU adheres to Bro. Luistro’s stand].

According to the Inquirer.net,

“The current thinking is if you don’t finish with a college degree, there is something missing. But in basic education, the operative term is basic, and what is basic is that they should be able to live a meaningful life, be prepared to start a family, be productively employed,” Luistro said.”

Will an additional 2 years of education guarantee that students will become productively employed? The answer is NO. Instead, what such policy will guarantee is that schools, particularly the elite schools, will be assured of additional revenues.

Yet, isn’t 10 years enough to instill basics?

Table From Alabama Cooperative Extension: What Are Employability Skills?

Many of the employable skills are actually self-learned from actual occupational experiences than from a classroom setting. This includes high-order thinking skills and personal qualities in that come in relation with people relations management.

Adding practical skills to the curriculum will not likely enhance for the simple reason that the students won’t get the desired experience of real work pressures until they get formally employed. Employers will unlikely put pressure on people whom are not committed to them. For instance, at On the Job Training (OJT) with companies, students will merely be given the least sensitive job, and thus, will hardly imbue so-called required skills.

This would be analogous to teaching people how to swim in the swimming pool (controlled setting) when what is needed is how to survive the open seas (variable conditions).

Another example would be competition, you can’t exhaustively teach competitive skills in the classroom or practical class, but from the rigors of the real world.

In addition, Bro. Luisito isn’t dealing with reality but dabbles instead with statistics.

Again from the Inquirer,

``While a large percentage of families could not afford to send their children to college, the current basic education cycle is inadequate in giving students employable skills, Luistro noted.

``Only 16 percent of the student population finish college while 84 percent leave school at different stages, Luistro noted.

Yet, despite this, the Philippines has one of highest educational attainment in Asia that’s according to the ADB’s 2007 Education and structural change in four Asian countries

“Of the four countries studied in this chapter, India is the least educated. Thais are slightly less educated than Indonesians, and Filipinos are the most highly educated. Three of the four countries have aggressively pursued increases in education levels, especially at the secondary level, during the period under consideration. Around 90% of Thai secondary education is privately provided. The corresponding figure is 20% for the Philippines, down from 32% in the mid-1990s, and roughly 40% for India and Indonesia”

You see, the problem isn’t much about employable skills, but about that the lack of investments that spurs the job creation. In short, it’s the lack of jobs.

Let say Bro Luisito can produce many employable skilled workers alright, but absent jobs these employable skilled workers will remain unemployed.

Importantly, I see Bro Luisito protecting the interests of the elites by introducing anti-competitive provisions,

Again from the same inquirer article,

“While not everyone will end up with a degree that is very, very academic, we recognize now more than ever that for nation-building, our high school program should look at [offering] different tracks to be able to address the many needs and gifts of students,” Luistro said, describing this as a “multi-intelligence” approach.

“For instance, certain high schools could specialize in the arts, partner with the Technical Education and Skills Development Authority for technical-vocational courses, or the Philippine Sports Commission to develop a more sports-oriented curriculum.

The new provisions would effectively mandate affiliations with “specialty partners”, thus schools that don’t meet the criteria would be forced out of the playing field. This means that the school big leaguers would be the major beneficiaries from the new law.

Besides where he claims that the new law will “address the many needs and gifts of students” is in contrary to his earlier statement saying that the law will “conform with global standards”. How does uniformity (global standards) harmonize with individuality (many needs and gifts) [unless our children will get transformed into automatons]?

Finally, Bro. Luisito claims that there won’t be added financial burdens.

Of course, he saying this, because he isn’t paying for it. To paraphrase Warren Buffett, this would be like asking a barber if you need a haircut.

Again from the inquirer,

“Luistro dismissed fears that the expanded elementary and high school period in the only country with a 10-year basic education cycle would be a financial burden to parents.”

I have NO direct figures to make a comparison of the inflation of the private primary and secondary school levels.

Table From PIDS: College Fee Structure and Fee Inflation

Nevertheless, the table above from PIDS, gives us some insights on why there have been huge college drop-out rate, as well as, the rate of inflation that encompass private college courses.

Bottom line: in contrast to Bro. Luisitro’s claim, there will be material financial burden to families, be it directly (as above) or indirectly (as below). This will particularly onerous to low income levels.

Graph From The ADB’s Hyun Son Has Inflation Hurt the Poor?

In other words, this would mean additional load for families to sustain the burden of carrying children through additional 2 years of the 12 year basic cycle, which doesn’t guarantee anything but huge revenues for the big league schools.

The other way to say it, is that expect more tuition fee increases for schools to meet such mandates!

Is this the change we’ve been looking for-more politicization of education for the benefit of a few?

Hazards Of Corporatism: The Bankruptcy of Japan Airlines

The unfortunate fate of Japan Airlines (JAL) should be a vivid demonstration of how companies that have been politically privileged, kept afloat and protected (zombie companies) despite continued financial losses, end up being malignantly mismanaged and eventually ran aground on a surfeit debt ($25 bilion).

This from the Wall Street Journal, (bold emphasis mine)

``Marking a fundamental shift to this nation's corporate culture, Japan AirlinesCorp. filed the country's largest-ever bankruptcy petition by a nonfinancial company, kicking off a painful, three-year restructuring that will have lasting effects on hundreds of thousands of people.

``Undone by government ties that propped up excessive spending, the former flag carrier now will significantly shrink its operations. A third of JAL's work force, 15,700 employees, will be axed. Thousands of retail shareholders will be wiped out. And bondholders will likely take a fat reduction to their holdings. Employees at JAL's sprawling group subsidiaries in Japan and abroad also will be affected...

``A pillar of Japan Inc. founded in 1951 to help the country rise from the ashes of World War II, Asia's largest airline by revenue sought court protection from creditors on Tuesday to grapple with a debt load of $25 billion, a level well above its cash flow.

``Much like Washington's takeover of General Motors Co., JAL will be aided by a $10 billion lifeline from its government through capital injections and credit and will spread billions of dollars in losses across an already weak Japanese economy. Bureaucrats strong-armed Japan's banks, the airline's biggest creditors, into forgiving more than $8 billion of JAL's debt. Retirees and employees accepted more than $11 billion in pension cuts, representing a 30% reduction for retirees and a 50% cut for current employees...

Kevin Duffy of Mises Blog aptly enumerates on the decade long sins of JAL which led to this...

From Mr. Duffy (all bold highlights mine),

``For the record, JAL offers a quick primer on how government intervention destroys an economy:

1. State ownership and control. "Though financial profligacy was one cause of JAL's demise, its close ties with the government -- even after it was privatized in 1987 -- effectively crippled the carrier. Pork-barrel aviation policies drawn up by transport bureaucrats caused JAL to fly unprofitable routes for decades."

2. Moral hazard of implicit government backing. The 1987 IPO (and others like it, such as Nippon Telephone & Telegraph) were wildly successful in part because investors felt the government wouldn't allow them to lose money.

3. Bubble behavior. "When Japan Inc. rose to glory in the late 1980s, gobbling up trophy icons such as New York's Rockefeller Center, JAL also spread its tentacles around the world by buying the Essex House in New York and setting up resorts in Hawaii."

4. Endless government lifelines. According to CNBC, JAL was bailed out four times by the Japanese government over the past decade".

For companies that had undergone the same 'bailout' process during this crisis, the JAL experience would seem as the most likely outcome, in the fullness of time.

Will North Korea's Version Of The 'Berlin Wall' Fall In 2010?

[my regular financial market analysis will resume next week]

A ‘capitalist crisis’ had been speciously described as the main cause of the recent global financial crisis centered on the US.

This ‘failure of capitalism’ had been utilized by the progressive persuasion to justify on more regulation and call for an increase in the socialization of many aspects of the economy.

Yet, in spite of the vitriolic rhetoric against a chimerical unadulterated ‘free markets’ [mostly corporatism not free markets], large scale protectionism which used to be an intuitive policy response had not generally occurred.

As we pointed out in Could Asians Be Assimilating On Western Free Market Ideals? , temporary tariffs in 2008, at the crest of the crisis, had been less than the annual average from 2000-2008-where India and the US accounted for most of the protectionist actions.

On the contrary, some emerging markets, as China, have embarked on the direction of freer markets through regional integration [see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone]

Now that the financial crisis seem to have somewhat ebbed with least adverse reactionary policies from most of the world, the table seems to have turned.

This time socialism or its extreme form-communism-as signified by the unfolding events in North Korea, has reportedly been buffeted by a political upheaval; ironically from the emergence of capitalism.

This from the Washington Post, (bold emphasis added) (Hat tip: Mark Perry)

``North Korean leader Kim Jong Il moved early this month to wipe out much of the wealth earned in the past decade in his country's private markets. As part of a surprise currency revaluation, the government sharply restricted the amount of old bills that could be traded for new and made it illegal for citizens to have more than $40 worth of local currency.

``It was an unexplained decision -- the kind of command that for more than six decades has been obeyed without question in North Korea. But this time, in a highly unusual challenge to Kim's near-absolute authority, the markets and the people who depend on them pushed back.

``Grass-roots anger and a reported riot in an eastern coastal city pressured the government to amend its confiscatory policy. Exchange limits have been eased, allowing individuals to possess more cash.

``The currency episode reveals new constraints on Kim's power and may signal a fundamental change in the operation of what is often called the world's most repressive state. The change is driven by private markets that now feed and employ half the country's 23.5 million people, and appear to have grown too big and too important to be crushed, even by a leader who loathes them."

In short, markets have begun to reassert themselves by placing increased pressures on the political dimension of the Kims of North Korea.

In addition, some clues from the same report tell us of the striking difference between what used to work and what hasn't today.

Again from the Washington Post, (bold emphasis added)

``But capitalism seems to have already taken root. U.N. officials estimate that half the calories consumed in North Korea come from food bought in private markets, and that nearly 80 percent of household income derives from buying and selling in the markets, according to a study last year in the Seoul Journal of Economics.

``Private markets are flooding the country with electronics from China and elsewhere.

``Cheap radios, televisions, MP3 devices, DVD players, video cameras and cellphones are seeping into a semi-feudal society, where a trusted elite lives in the capital Pyongyang. Surrounding the elite is a suspect peasantry that is poor, stunted by hunger and spied upon by layers of state security.

``In the past year, the elites in Pyongyang have been granted authorized access to mobile phones -- the number is soon expected to reach 120,000. In the border regions with China, unauthorized mobile phone use has also increased among the trading classes. And unlike most of the mobile phones in Pyongyang, the illegal phones are set up to make international calls.

``Chinese telecom companies have built relay towers near the border, providing strong mobile signals in many nearby North Korean towns, according to the Chosun Ilbo, a Seoul-based daily.

``Those phones have become a new source of real-time reporting to the outside world on events inside North Korea, as networks of informants call in news to Web sites such as the Seoul-based Daily NK and the Buddhist aid group Good Friends."

Get it?

China, who used to be a staunch and a key ally to the success of the Kim's communist regime, appears to be influencing a political shift.

By allowing telecom "relay towers near the border" seems quite a revelation. Prying open North Korea's highly restricted market to trade with China and emancipating North Korean consumers should blend well with China's newfangled strategy to integrate the region.

Lastly, more liberal "blackmarket" communications appears to be providing support for the blossoming free market, as well as a backbone for the political foundation which underpins such dynamic in one of the last remnants of communism.

Since free trade in North Korea appears to have assimilated political legs, it looks like a question of when (and not if) will the transition to a market economy will take hold (this would seem like a 1-3 year event).

From which we ask, Will North Korea's version of the 'Berlin Wall' Fall or the Korean Demilitarized Zone fall in 2010?

Ron Paul On Michael Moore: Corporatism Not Capitalism Is To Blame

Congress Ron Paul responds to Michael Moore's criticism of Capitalism. (Hat tip: Marcaeld)

some noteworthy quotes...

-"it's a fallacy to say that you have a right to someone else's services...

-"you've a responsibility to take care of yourself, but you don't have a right to get something from government because government has nothing and so government has to take it from somebody and give it you, so its a failed policy, it is a form of socialism...

-"But he is complaining about it being part of capitalism, but this has nothing to do with capitalism, this is corporatism. The corporations run things, the drug corporations lobbyist, insurer's lobbyist...We have a system where money and bigness influences the government, but that's corporatism not capitalism.

-example of free market-medical tourism

-"pumping money into the system doesn't improve quality it increases prices"

-you either have government intervention to mess up the markets or you don't. You either believe in freedom and believe voluntary choices...

-"when something is free and you don't have it, it is irrelevant"