The Market Sends a Signal: Short Warren Buffett

The Market Sends a Signal: Short Warren Buffett
By Neal B. Freeman on 9.28.11 @ 6:08AM

As Obama campaign prop, Mr. Buffett has reached well beyond his area of expertise to embrace a bad political idea.

Every publication in the country has squirreled away in its files a canned obituary for Warren Buffett and every one of those notices carries virtually the same lede: "Warren Buffett, widely considered the greatest investor of the modern era, died peacefully last night at his modest home in Omaha, Nebraska."

Mr. Buffett should have left well enough alone.

Mr. Buffett's company, the legendary Berkshire Hathaway, is now experiencing what Mr. Buffett would describe in any other company as a crisis of leadership. After running off one "heir apparent" after another over the last twenty years, Mr. Buffett now sits alone atop the giant Berkshire portfolio with his longtime associate, Charles Munger. Mr. Buffett is 81. Mr. Munger is 87. Every time the two executives appear in public, there is appreciative attention for their market views and, let's be candid, acute attention to the impending actuarial reality. Analysts seem to have concluded that Berkshire Hathaway is experiencing precisely the kind of governance problem that Messrs. Buffett and Munger have never tolerated in any of the dozens of companies they own or co-own.

Berkshire stock closed last week at 66, down from its 52-week high of 88. That's cause for shareholder concern, but no more than transitory concern given Mr. Buffett's stellar record of investor returns. He has a knack, demonstrated repeatedly, for turning small setbacks into large advances and even at 81 he seems capable of doing it again. What's different this time is that Mr. Buffett has taken on a new public role that will not only distract him from the investment business, but will inevitably change perceptions of him among colleagues, investors, and perhaps even obituary writers.

Surprising to some, dismaying to many, the iconic Mr. Buffett has signed on with the Obama re-election effort to serve as a kind of campaign prop. Every time the President demands higher taxes on the rich, Mr. Buffett is cued to leap to his feet and exclaim, "Great idea, Mr. President!" Mr. Buffett plays this role with gusto and shows no sign, as distinguished from his audience, of either fatigue or boredom. (The role of Rich Guy Demanding That His Taxes Be Raised is, of course, a staple of the American political theatre and is usually played in road-company productions by Bill Gates Sr. or some particularly guilt-stricken Rockefeller descendant.)

What's surprising is Mr. Buffett's apparently unquenchable desire for attention at his late stage of life. He seems to exult in media turns as the slightly dotty, ukulele-strumming uncle, a kind of plush-toy version of an animated Fox-TV tycoon. What's dismaying is that Mr. Buffett has reached well beyond his area of expertise to embrace a bad political idea. This Obama-Buffett idea --to soak the rich in the current economic environment -- is so egregiously bad that, remarkably, it appears to be about neither the money nor the principle of the thing. According to a recent Wall Street Journal story, the so-called "Buffett tax" would have hit only 22,000 taxpayers in the most recent year for which data are available. If the taxes on those taxpayers had been doubled -- and assume for the moment that, for the first time in history, the rich would not have mobilized lawyers and accountants to avoid the tax -- the total additional revenue to the government would have been $19 billion. Back in his role as a financial analyst, Mr. Buffett would have scoffed at this "millionaires and billionaires" tax as a serious way to close a trillion-dollar annual deficit.

If it's not about the money, then, it must be about the principle of the thing, right? As far as I can determine, there has been no argument advanced by either President Obama or Mr. Buffett drawn from economic or political principle. They do not bother to contend that the "Buffett tax" will either raise significant revenue or incentivize employers to hire more workers or in any way revive a sick economy. Their argument for the tax-the-rich offensive, rather, has been based on "fairness," which is an emotional rather than an analytical term.

The number that all sides seem to agree on is that the top one percent of earners currently pay 40 percent of all income taxes. It would not be unreasonable to look at that number and say, "Uh oh, that's too high in a society that still pays formal allegiance to the principle of shared responsibility. That's got to be unhealthy for a middle-class economy." President Obama looked at the number and concluded otherwise: to him, 40 percent appears to be intolerably low and the rich should thus be made to "pay their fair share." And what might that be, their "fair share"? Would that be sixty percent? Eighty? One hundred percent? The answer for Obama is that the rich must be made to pay enough so as to give emotional satisfaction to their fellow citizens who pay no income taxes themselves. This is not about economics, remember. This is about the politics of division, the politics of bitterness. Obama is not appealing to our better angels, which is precisely why the angelic Mr. Buffett has been so useful to him.

In the fiscal debate now unfolding in Washington there are two statistical tent poles between which are strung all of the subsidiary arguments about tax policy. At one pole is that stunning 40 percent number. At the other is the fact that fully 50 percent of the 144 million tax filers pay no Federal income tax at all. To me, that is an even more stunning number. What it means is that -- in what we still like to think of as our middle-class society -- half of the middle class (along with a handful of rich guys) pays all of the income taxes while the other half pays none. The Jones family pays, the Smith family doesn't. Forget about economics. By what standard of "fairness" is that fair to the Jones family? President Obama would respond that the folks at the bottom of the ladder deserve a break, but the numbers are clear on this point: the tax filers in the lower half are not, most of them, anywhere near the bottom of the ladder. By definition, they are, most of them, smack dab in the middle and they are in the process of becoming a powerful and self-defining political class. Call them the non-tax-paying class and understand that, almost always, they will support both higher taxes on the other half and increased government services for themselves. Understand, too, that they have centered their natural enemies in the crosshairs of tax policy: not just the few rich but the vastly more numerous savers and scrimpers and people who play by the rules.

Over the course of his first term, and with its implications now marbled through his proposed reforms and early campaign rhetoric, President Obama has made a historic decision to stand for re-election as the representative of the non-tax-paying class. Depending on the outcome of the 2012 election, that decision could play out as farce, one hopes, or as constitutional strain, one fears. Americans have always had a problem with taxation without representation, and, with Obama reinstalled in the White House, the taxpayers would be effectively unrepresented in the Executive branch of the government.

For Mr. Buffett, the prospects are bleaker still. An old man who can't find a way to get off stage is always but a few uncertain steps from a farcical finale. We can only hope that he doesn't take a header into the orchestra pit. But the economic damage has already been done. Year after year for more than a half-century Mr. Buffett has faithfully paid his income taxes. Last year alone, he paid more than $6 million. Imagine if Mr. Buffett had invested those dollars in productive enterprise instead of giving them to President Obama to, oh, prop up the indefensible pension plan for government employees. Think of the jobs that went uncreated, the mortgages unpaid, the medical bills deferred, the college dreams abandoned.

Mr. Buffett claims that he wants to pay higher taxes. The rest of us should want him to pay lower taxes.