Arnold Kling  

What Warren Buffett Wants

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Getting to Bet... Opposition to the Bail-Out: St...

He favors the bailout.

Without in any way impugning his motives, let me state the impact on Warren Buffett personally if the bailout is enacted.

Think of the mortgage securities market as the World Series of Poker. In fact, a great book about it is Liar's Poker, by Michael Lewis. Lewis was a trainee at Salomon Brothers, and he learned phrases like "Big Swinging D___," which describes a swaggering, aggressive mortgage banker. Henry Paulson fits the model.

The best players in this World Series of Poker are the folks at Goldman. They hired Fischer Black and other geniuses back when the markets were first getting going. They have typically had the best squad of geeks around.

Buffett just bought a stake in Goldman. That stake would be a lot more valuable if there were actually a poker game--that is, if mortgage securities were still trading. Right now, they're not trading. So Goldman is sitting there ready to play and no one is ready to play with them.

Along comes Uncle Sam, who wants to take a one-hour lesson in poker and then sit down and play in the World Series with $700 billion in chips. And whaddaya know? Warren Buffett thinks Uncle Sam really has to get in the game.


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/913
The author at PrestoPundit in a related article titled WARREN BUFFETT TO THE TAXPAYER writes:
     -- you losers need to ante up a few hundred billion dollars so we can this little poker game going again.... [Tracked on September 28, 2008 10:43 PM]
COMMENTS (14 to date)
duke_of_earl writes:

Here we go, the pigs are at the trough now that it's been roundly agreed that we should take money from the taxpayers...it's time to make the rich richer again. I can't really blame Buffet for taking advantage of the situation.

duke

Tom writes:

I don't know.. I think his motives are pure on this one-- just like when he advocates raising the marginal tax rate on the most wealthy people in America.

People's personal utility functions often include the utility of others, and of society at large. Buffett favors policies that decrease his income. For instance, he could easily boost his pay to hundreds of millions of dollars per year, instead of the $100 000 he gest now. While that would increase his income, it wouldn't increase his personal utility.

From what I can tell, he derives a large amount of personal utility from being (or being known as) the kind of guy who cares more about living in a just, well-functioning society, than simply being wealthy. (You can, of course, argue that a large part of this is due to his immense wealth, but that's besides the point)

So, while he may profit from a bailout, I doubt that's his primary reasoning behind advocating one.

Marc writes:

Buffet made his fortune on federal tax law, he probably sees an opportunity to double it.

Prakhar Goel writes:

@Tom

Buffet has been talking about raising the marginal tax on rich people for a very long time. Yet, as noted by the WSJ on multiple occasions, the federal government provides an easy way of voluntarily giving more in takes. That Buffet does not exercise this option and instead choses instead to sit on his $62 billion implies that his tax position is a PR stunt.

Methinks writes:

Here's a little poker rule to remember - if you can't identify the fish at the table, you are probably the fish. Does government know it's the fish at the table? If it is, then it's willing to be the fish. It has nothing to lose since it's playing with other people's money and has no accountability to the people whose money its playing with. In fact, it'll probably take the biggest cut of the winnings (should there be any - which I doubt) for itself.

Tom writes:

Prakhar Goel-

The fact he isn't directly giving to the Treasury doesn't mean he doesn't actually want taxes to go up. He might think that he can get a better return elsewhere-- that he will be able to create more good by directly giving to charity and to infrastructure projects. If he gives to goverment, a large part of his donation will squander on worthless projects. Think about why Buffett didn't give money to charity until he found someone who could do so with very little overhead (the Bill & Melinda Gates Foundation). Unless he was lying when he announced he was giving away his fortune, he wanted to get as high of return on his money as possible.

Does he think more taxes should be paid? Yes. The ever-increasing national debt will eventually start causing problems, since foreigners will eventually quit buying bonds from America. His additional donation would do little towards fixing the structural sources of this problem. If the deficit were a few dollars a year he might pitch in and fill the hole, but it's multiple times his net worth per year. The problem is bigger than one man. He wants a solution to the underlying problem, but he can't fix it alone. And until the problem is fixed, his money is best spent elsewhere, where it will get a higher return.

However, let's put that aside. I'll assume that I'm wrong about the tax argument. Explain to me how I'm wrong about Buffett being able to raise his salary to a couple hundred millions of dollars a year. Can you think of a reason he wouldn't, besides a mix of self-image/signalling and altruism?

I'm not saying he's violating economic rationality-- just that economic rationality isn't as simple as "everyone will do what immediately profits them most." His personal utility can depend on a number of things besides his personal income. I haven't read anything in the literature that assumes otherwise.

Chuck writes:

"Without in any way impugning his motives"

I don't think you succeeded in this. (Sometimes my browser fails to process sarcasm tags, so maybe I missed that.)

Anyway, I really am very tired of people saying "why doesn't Al Gore stop using a car if he's serious" and "why doesn't Buffet pay more taxes if he's serious".

When someone is identifying a problem that can only be solved by collective action, there is nothing wrong with waiting until the collective acts before you act yourself.

I can do something about a few hungry children in Africa, and that's good because helping one child is an actual outcome. So if I advocate for others to give to hungry children in Africa without doing it myself, that would be hypocrisy.

On the other hand, reducing my carbon output in the absence of action by anyone else is pointless, because it doesn't actually stop global warming all on it's own.

Also pointless would be Warren Buffet voluntarily paying extra taxes to pay down deficits that run hundreds of billions and which add to a debt of trillions. (In fairness to Buffet, I don't think he advocates higher taxes on the rich for a specific purpose so much as advocates that non-progressive taxation, at some point, becomes immoral.)

If I'm not mistaken Buffet has also already committed the vast bulk of his vast fortune to charity.

And finally, don't hate the player, hate the game.

rpl writes:

@Tom writes:


However, let's put that aside. I'll assume that I'm wrong about the tax argument. Explain to me how I'm wrong about Buffett being able to raise his salary to a couple hundred millions of dollars a year. Can you think of a reason he wouldn't, besides a mix of self-image/signalling and altruism?

I thought the reason that Buffett pays such a low effective tax rate is that much of his income comes from capital gains. If so, then paying himself a larger salary would cause him to pay a lot more in taxes than he pays by getting his money through capital gains. The tax rate disparity that he famously spoke of would probably diminish a lot if he took more salary and less capital gains.

Given Buffett's charitable contributions, it's hard to doubt his philanthropic credibility, but his calls for higher taxes while simultaneously taking advantage of opportunities to structure his earnings to minimize his tax liability is puzzling. I suspect that if you asked him about it, he'd have some sort of rationale for why it's to everyone's benefit, in the long run, for him to take advantage of tax shelters. He may be right, but I wouldn't consider him a disinterested analyst on the subject, and I'd apply due skepticism in judging his claim.

That's exactly the point Arnold is making about Buffett's support for the bailout. A lot of people seem to think that Buffett's support, given his reputation as a financial wizard is an argument in favor of the bailout, but Buffett is not a disinterested observer. He may well believe that the country will be better off if the bailout is passed, but he stands to gain personally from it, and so we should be a little skeptical of his analysis, even if we accept his motives as pure.

Chuck writes:

It's not like Buffet is holding the situation hostage or something, refusing to deal until a bailout is inked.

There is nothing wrong with Buffet playing the game by the rules we've all agreed to, even if he thinks the rules are unfair in his favor. (Do we expect pro ball players to correct the ref when he makes a bad call in their favor? Do we even expect our kids to do that?)

The only thing Buffet has done wrong is to be a class traitor.

rpl writes:
When someone is identifying a problem that can only be solved by collective action, there is nothing wrong with waiting until the collective acts before you act yourself.
If you act unilaterally, you can lead by example. You can show that you personally are willing to make the sacrifices required and that they are more endurable than your opponents suppose. Conversely, if you hide behind the collective action excuse, you foment doubts about your sincerity, as people begin to suspect that what you really want is sacrifices for others and status quo for yourself.
In fairness to Buffet, I don't think he advocates higher taxes on the rich for a specific purpose so much as advocates that non-progressive taxation, at some point, becomes immoral.
If you think that something is "immoral," then it seems to me that you should stop doing it, even if others around you continue to do so, right? The existence of a collective action problem doesn't make immoral acts acceptable until the collective changes its mind, does it?

If Buffett thinks the lower rate of taxation on capital gains is bad policy, then I can understand him accepting the lower rate while advocating for raising it, even though acting that way diminishes his credibility. If, however, he thinks that the low capital gains rate is immoral (because of its regressivity), then accepting the lower rate would make him the worst sort of hypocrite.

None of these musings, by the way, change Arnold's original point, which is that when somebody who proclaims a particular policy the morally correct choice stands to profit from that same policy, we should take it with a grain of salt. You don't even have to impugn their motives to do so; people are amazingly good at convincing themselves of things they really want to believe.

cent21 writes:

All true.

But on the other hand, treasury can't go alone on the task of shoring up the market and treasury needs at least one player able to establish reasonable valuations.

And I'd trust Buffet and Gross about as much as anyone to act in the interest of country and world, at least as long as that parallels their corporate interests. I don't really trust the idea of PIMCO getting a contract based simply on bidding "free" if they get to set pricing and have insider information.

But what's a better alternative?

Tom writes:

rpl-

I thought the reason that Buffett pays such a low effective tax rate is that much of his income comes from capital gains."

Buffett gave 85% of his shares to charity. I assume he's going to give away the other 15% on his death. His $46m/yr income mostly comes from returns on his personal savings, doesn't it? I've read that he uses his personal savings for opportunities 'too small' for Berkshire Hathaway. If he cared about maximizing his personal wealth, he could still give all his Berkshire shares to charity, but pay himself a large salary in the mean time.

Further, Buffett hasn't awarded himself any stock options. If he was merely seeking to enhance his personal wealth, stock options would be an effective way to do so.

I'm not saying you can't question his motives-- feel free to. I just don't think Kling's linke of skepticism is particularly instructive.

One could argue that Buffett would do better if the bailout was postponed. He's one of the few cash-rich market participants out there. He can borrow at a very low rate of interest. The longer the market goes on like this, the more companies he'll be able to buy at bargain-basement prices. If anything I'd be concerned that he was supporting a bailout plan he knew to be bad, so as to prolong the crisis and thereby profit.

Jim Glass writes:

Why does Buffett get all the publicity?

Bill Gross, the "Buffett of Bonds" has actually offered to have his staff value the CMOs the Treasury will be buying for free!

One of the chief concerns about the Treasury Department’s $700 billion bailout plan is that the same Wall Street firms that helped create the crisis could make a killing cleaning it up.

William H. Gross, the manager of the country’s largest bond mutual fund, has a solution: he is offering to sort through the toxic assets — free.

“We have a large and brilliant staff that can analyze and has analyzed subprime mortgages that can help the Treasury out,” Mr. Gross, the co-chief investment officer for the Pacific Investment Management Company, said in an interview at the company’s headquarters here.

He added, “And I’d even be willing to say that if the Treasury wanted to use our help, it would come, you know, free and clear.”

Mr. Gross explained his offer as a philanthropic one ... all he wants in return for helping the Treasury Department is for Pimco “to be recognized for the way we’ve seen this crisis coming, and for the way we’ve talked about what’s required.”...

Mr. Gross and Pimco attracted criticism when the Pimco Total Return fund earned more than $1.7 billion on the day the federal government bailed out Fannie Mae and Freddie Mac.

Mr. Gross had been advocating such a move for more than a year, at the same time that he was moving more than 60 percent of his fund’s assets into government-agency bonds. The shift in investment strategy began in earnest shortly after Pimco hired Alan Greenspan, the former Federal Reserve chairman, as an adviser last year...

Do we congratulate Mr Gross on his sense of civic duty?

Or is this a case of: Beware Bond Traders Bearing Gifts.

wcyee writes:

I can't tell - was that a Type C or Type M argument? Or not an argument at all?

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