Buffett & brains

Is there a strong positive correlation between wealth and intelligence? I would maintain that the answer is no for obvious reasons. I was given comfort in this view by Warren Buffett who is a walking talking example of how people can become very rich without much going on up top. Mr Buffett is obviously an astute investor. For my part, I invested in companies like One Tel and ERG and Intellect (a misnomer) and lost all of my money on these stocks. I have since adopted the Buffett plan of investing my remaining money only in boring blue chip companies and hardly ever selling. It is a simple plan. I am a simple man and should have remembered that from the start.

Anyway back to Mr Buffett. He entered the US Congressional debate on whether the Bush tax cuts which are due to expire at the end of the year should be extended for all or, as President Obama wants, only for those earning less than $250,000 a year.

The third richest man in the world, interviewed on the American ABC, said that extending the Bush tax cuts was the wrong way to steer the economy out of the hole. “People at the high end, people like myself should be paying a lot more taxes … We have it better than we’ve ever had it.” He resisted the claim that taxing the wealthy more would cause them to spend less and further worsen the economy. “The rich are always going to say just give us more money and we’ll just go out and spend more and it will trickle down to the rest of you. That has not worked for the last 10 years and I hope the American public has caught on.”

Where to start on all of this: the ridiculous claim or the ridiculous comments from Buffett?

I will start with the claim that taxing the rich more will cause them to spend less and thereby damage the economy. The rich do not help the economy by spending. This is a Keynesian fiction that has taken on the aura of fact among otherwise intelligent people as well as among the simple minded. The rich help the economy by saving. This is particularly the case now when the Western world saves very little – overcome in part by dragging in savings at a premium from those who do save in China, Japan, and the Middle East.

Saving is needed to fund capital formation. Too little saving means there is less capital formation (real investment). Future prosperity suffers accordingly. The benefit of the rich is that they save. In fact only the rich save very much. The rest of the population builds up credit card debt and dissaves. We need the rich to remain rich, and to save. They do damage when they spend wildly on extravagant multiple mansions and fancy yachts; using up valuable resources. But, fortunately, this doesn’t amount to too much in the overall scheme of things.

Mr Buffett believes that the rich should be paying a lot more taxes and hopes the American public has caught on to the fact that trickle down spending does not work. I safely assume that Mr Buffett, these days, has already met most of his material needs. When he now makes a dollar he saves it. This saving allows the private sector to capture resources and to use them to produce more wealth.

Mr Buffet has options. He could voluntarily give more of his saving to the US Government. He should feel confident, on past evidence, that it would be used far less productively by any government than it would by the private sector. He could give more to the poor. However laudable this is, we know that the poor will spend it, not save it, and therefore there will be less saving, less investment, and less future prosperity. This is not to say that Mr Buffett should not give more to the Government and to the poor. It is simply to say that there will be a cost of doing this.

Mr Buffett and, unfortunately, most media commentators, business luminaries, and left-wing economists, suffer from that dual mental malady called Keynesianism with a touch of money illusion. It shows itself in an acceptance that spending is good and must be encouraged at all costs, and in a view that the rich have stores of money under their beds which could make many people better off if it were only spread around.

I remember my sister unwisely suggesting to my Dad – it would have been the late nineteen fifties – that the government should print more money and give it to the poor. He dismissed her out of hand as an ignoramus. He knew, even as motor mechanic having studied no economics, that money had nothing to do with real wealth. So he had more brains that Mr Buffett on this matter but a lot less wealth, I am sorry to say.

Related text:

For Quadrant subscribers, see a fuller account of the cost of taxing the rich in Peter Smith’s “Taxing the Rich and Spreading the Wealth” published in the March issue.