A Memorable Faux Pas: Warren Buffett Gets His Facts Wrong

Warren Buffet

Warren Buffet

Billionaire investor guru Warren Buffett has come to the defence of the American Dream – the promise of intergenerational upward social mobility enabled by a society that values hard work and knows few, if any, barriers. Usually quite sensible, spirited, and articulate, Mr Buffett on Thursday published a rambling op-ed article in the Wall Street Journal in which he argues, rather unconvincingly, that increasing the currently subpar minimum wage will do little to nothing for America’s working poor.

Mr Buffett’s article starts off reasonably enough, noting that the 400 richest Americans in 1982 boasted a combined net worth of $93bn. Today, that list – compiled by Forbes Magazine, the preferred mouth-piece of the haves and the financially well-heeled – represents a staggering $2.3tn in private wealth – an increase of some 2,400%. Over the same period, average US household income registered but a 180% increase. For all its prowess, the US economy has not managed to lift many out of poverty: while the tide is rising, most boats stay put and only a tiny few catch the upward drift. In 1982, almost 15% of Americans subsisted below the poverty lines versus 14.5% now.

So far, so good. However, Mr Buffett goes on to draw some peculiar conclusions. He doesn’t think that the über-rich are necessarily undeserving and points to, of all people, Sam Walton (1918-1992) as an entrepreneur who more than deserved the $23bn he made during his lifetime.

“The around 1.3 million workers at Walmart’s more than 5,000 US stores receive an average pay of $8.81 an hour which equates to an annual income of $15,576 – well below the federally established poverty level of $22,050.”

Mr Walton was the founder of Walmart and the richest person in the United States between 1982 and 1988. While undoubtedly a businessman of note and perhaps even a genius of sorts, Mr Walton built his retail empire on the backs of his severely (and notoriously) underpaid employees most of whom needed – and still need – different forms of welfare support in order to survive.

The around 1.3 million workers at Walmart’s more than 5,000 US stores receive an average pay of $8.81 an hour which equates to an annual income of $15,576 – well below the federally established poverty level of $22,050. Because most Walmart employees need federal and state handouts in order to make ends meet, American taxpayers are effectively subsidising the Walton family business and adding to its formidable bottom line. In a 2013 study released by the Democratic caucus in the US Congress, a single Walmart store in Wisconsin cost the American taxpayers $900,000 annually in food stamps, home heating assistance, and a host of other aid programmes for the outlet’s 300 underpaid workers. Extrapolating from these numbers, it is not unreasonable to assume that Walmart annually receives close to $4bn in indirect subsidies from the US government.

Meanwhile, the company’s net income stands at $3.34bn for the three months ending April 30, 2015 with President and CEO Douglas McMillon slated to take home well over $19m this year – more than 1,200 times the median pay of his employees.

Yet according to Mr Buffett the plight of America’s working poor is not to be attributed to the country’s excessively rich who have – in his opinion – significantly contributed to the overall well-being of the nation through innovation and with managerial expertise, and need be properly rewarded for their genius.

Rambling on about the mismatch between skills offered and required, Mr Buffett concludes that, rather than increasing the minimum wage, the state should open its coffers even further and expand the Earned Income Tax Credit (EITC) Programme which, at its most basic level, pays a supplemental income to people whose employers do not provide a living wage in return for an honest day’s work.

In other words, Mr Buffett actually suggests the state expand its already formidable subsidy to corporations such as Walmart that operate failing business models which merely extract profit from over-exploited workers. This latter statement may seem rather quaint, it is not: hamburger flippers at McDonald’s restaurants in Australia make on average $14.50 an hour compared to their US counterparts’ paltry $9.90. According to McDonald’s own data, the fast food chain’s 900 or so Australian outlets are as profitable, if not more so, than the company’s US restaurants.

Apparently wholly ignoring reality – or perhaps in the process of losing his grip on it – Mr Buffett concludes his op-ed piece by stating that “America will deliver a decent life for anyone willing to work.” The billionaire investor argues, quite seriously, that any minimum wage hike will distort the country’s market system, “the key element required for growth and prosperity.” Mr Buffett goes on to explain that a higher mandatory minimum wage will “crush many workers only possessing basic skills.”

One is left wondering how little Denmark manages to survive and prosper with a minimum wage set by collective bargaining at $20 / hour, exclusive of pension benefits. Or how Switzerland can remain the world’s most competitive economy (Global Competitiveness Report 2015 as drawn up by the World Economic Forum) by paying unskilled workers between $2,363 and $4,511 monthly depending on the sector.

For all his business acumen, Mr Buffett seems not to consider worker productivity indicative of compensation levels. Statistics from the US Bureau of Labor show that whereas worker productivity has gone up by 253% since 1948, hourly compensation increased by only 113%. The gap largely represents wage monies redistributed to shareholders and the top-echelon managers who did their bidding.

Yet, Mr Buffett stoically dismisses rising inequality as the “inevitable product of an advanced market-based economy.” French economist Thomas Piketty, author of Capital in the Twenty-First Century, agrees. However, in sharp contrast to Mr Buffett, Mr Piketty thinks ahead and wonders what will happen should this trend be allowed to continue unabated. There is, of course, an end point as the rewards of the deserving rich grow ever larger while the crumbs left for the other 99.9% get fewer and farther in between. In order for Mr Buffett’s advanced market-based economy to be sustainable, it must diminish inequality lest the proles become restless and start taking matters into their own hands.

This, Mr Buffett fails to address entirely. His American Dream lies tatters. A recent study, quoted in the New York Times, by Harvard economics professor Raj Chetty and his colleague Emmanuel Saez of the University of California at Berkeley found that in the US the odds of escaping poverty is only half as high as it is in Denmark, Germany, and The Netherlands where upward mobility is built into the social fabric. “In the US, it now matters more who your parents are than it did in the past,” Mr Chetty concluded. So much for the New World.

As the Danish are living their American Dream, the US falls behind ever further: its economic infrastructure crumbling; its trade deficit ballooning to a six year high of $51.4bn in March; its current account in perpetual disarray, its politics fractured, and its workers underpaid. Meanwhile the federal budget deficit of $564bn (2015) is still creeping skywards while the US national debt now stands at $18.7tn – or 102% of GDP and sucking in the world’s savings.

Mr Buffett is, however, no fool and seems to be preparing for yet another meltdown of the failing model. His investment company Berkshire Hathaway has been aggressively dumping shares of companies exposed to retail spending, reducing its overall stake in consumer product stocks by 21% over the past year.

With about 70% of the US economy geared towards consumer spending, Mr Buffett is essentially exiting from the market altogether. Whatever his assessment, the Oracle of Omaha does not stand alone: billionaire investors such as John Paulson (of subprime mortgage fame) and George Soros (who in 1992 singlehandedly broke the Bank of England) are also limiting their exposure to the severely strained US consumer.

In an ominous sign of the times, Mr Buffett seems to have misplaced the most basic of economic tenets: companies cannot sell to people who have no money to spend. Rather than having the federal government bankroll private business – a proposition he could not possibly condone – by supplementing workers’ paltry incomes, Mr Buffett could do worse than espouse a much more straightforward idea: business that go belly-up because their model depends on low pay which does not permit them to fork over a living wage at $15 / hour, should simply be allowed to wither and die. They surely have no place in an advanced market-based economy.

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