An Open Letter to Warren Buffett

 | Aug 22, 2011 | 9:00 AM EDT  | Comments
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Mr. Buffett,

Since you wrote your New York Times op-ed on coddling the rich last week, the airwaves and websites are overflowing with reactions, both supportive and condemning, of your thesis. Although your statements are factually correct -- namely, that high-income earners pay a lower percentage tax rate when payroll taxes are included -- the implications are likely to be a never-ending source of debate. I am not going to enter that fray, other than to say that there seems to be broad agreement on one element of your stance. Whether for economic or philanthropic gain, government is a very poor allocator of resources, and both of those activities are better executed in private hands.

I must say, I was disappointed that your commentary focused strictly on funding government and not on the more urgent issue of how to get our economy growing again. You are occasionally criticized for not voluntarily paying more taxes personally, a critique I will not make here, but I want to point out a far more important example you can set that could play a small yet symbolically important role in our economic recovery.

I have observed that our economy has the capacity to produce far more goods and services than you and your super-rich friends could ever consume. De facto, the elite/super-rich/mega-wealthy/or whatever you want to call them will always consume to their hearts' content then leave the rest of our production for the non-elite/masses/middle class/or whatever you want to call them. Since our economy is running below capacity, the mystery is why we don't start recalling our workers to our factories, start producing more, and distributing it to those same workers that toil away each day.

Stand in a Wal-Mart (WMT) at midnight on the first of the month, and most of the workers there will tell you they aren't buying because they are low on money. There is no shortage of demand for goods, and we could be producing plenty more, if workers were enabled to go buy what they produce.

In the post-war period, demand was fed by rising incomes. But over the last 40 years, incomes for the bottom 90% stagnated, and demand was instead fed by rising use of credit. Our great corporations substituted a sustainable source of demand, wages, with an unsustainable one, rising credit balances that could never be repaid. (This is a fact, because ultimately incomes would have to rise significantly to both pay back debt and sustain consumption.) That the game lasted a full generation is impressive, but the end game came home to roost in a very bad way in 2008.

So in a world in which irresponsible credit creation cannot, or will not, be used to enable the demand of the broad swath of workers, what will we do to get them to show up at Wal-Mart? The alternative is also possible but harsh: We just stop producing and leave people all the poorer. Our society is going to need to shift back to being income-driven rather than credit-driven. That means people at all income levels will need to be paid more, which also means that corporate profit margins will need to recede from the multidecade highs they achieved in recent years. This is not a political statement but simply one of economic fact.

Mr. Buffett, forget about tax rates. You can point the way for corporate America in a much more tangible and effective manner. Immediately, give an across-the-board 10% pay increase to every employee of the Berkshire Hathaway (BRK.A/BRK.B) companies. You worry about the "coddling" of the super-rich. Well, massively high margins and stellar ROEs are every bit as coddling as low tax rates, especially when the vast majority of your employees are struggling to make ends meet. Those employees will gladly show up at Wal-Mart when their paychecks are plumper, driving the demand that CEOs mysteriously cannot find.

Corporate America can survive on healthy profit margins that are a few points lower, while sharing the difference with their labor force. Henry Ford did this 90 years ago when he paid his assembly line workers $5 a day, far above normal daily wages, so that the employees could afford the cars he was producing. Are you as enlightened as Mr. Ford?

Mr. Buffett, please don't email me and call me a socialist, and do not try to impugn any political motives here. I am a fan of getting rich, and am actively pursuing it myself. This is strictly an economic call. The super-rich, the rich, and even the well-to-do are consuming at record levels. If you don't believe that my plan of increasing middle-class incomes can create the demand that will revive our industries, I am happy to hear your alternative. In times gone by, deflation would have come to the rescue, increasing real incomes. But Ben Bernanke has cut off that option. So I await your ideas!

Respectfully,
Gary Dvorchak, CFA

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