Warren Buffett

Cut the Capital Gains Tax and Government Spending to Create Jobs and Promote Technological Advances

by Hans Bader on October 17, 2011

in Deregulate to Stimulate, Economy, Employment, Politics as Usual, Zeitgeist

In today’s Wall Street Journal, Amity Schlaes notes that cuts in the capital gains tax were one of the key factors that paved the way for Steve Jobs and other innovators, and increased the flow of venture capital that created jobs and resulted in technological advances. (Schlaes recently wrote an interesting book about the economic history of the Depression, The Forgotten Man: A New History of the Great Depression.)

I wrote earlier about double standards contained in the capital gains tax, which result in it being higher and more burdensome than people commonly assume; and how it effectively punishes investors for investing during periods of inflation, since the government ignores inflation in calculating the cost of your investment. Moreover, while capital gains are taxable, capital losses often are excluded from consideration, and cannot be taken into account, in calculating your overall income for the year in which they occur; for example, you cannot list more than $3,000 in net capital losses on your tax return, but you have to list all of your net capital gains. That results in a “heads I win, tails you lose” situation in which the government effectively rips off investors. This encourages people to hold cash rather than invest in risky start-up enterprises that could create jobs, since it makes sense to hold cash rather than investing if you think you could lose money on a large scale due to either a depression or a jump in investor risk aversion that cuts the resale value of risky stock (for example, a shift by the investing public away from risky assets during a financial panic, or period of falling public confidence in the economy).

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Taxpayers Absorb Berkshire’s Dumped Bank of America Shares

by Kathryn Ciano on February 15, 2011 · 1 comment

in Economy

Late yesterday afternoon Warren Buffett’s trading conglomerate Berkshire Hathaway dissolved all of its Bank of America shares. Berkshire’s pull-out accounted for 5 million shares — not an enormous amount, but a 100 percent dump nonetheless sends a strong signal to the market.

Berkshire is up $4B this quarter over last — their formula is working. Along with Bank of America, Berkshire dumped shares in Comcast, Nike, Lowe’s, and a few other holdings.

I wrote:

In an interview released last week, the Financial Crisis Inquiry Commission quoted Buffett as criticizing Bank of America for paying a “crazy price” to acquire Merril Lynch in the midst of a financial crisis.

Until an audit subjects the Federal Reserve to transparent decisionmaking, private investments point a clearer path to what paths the public expects will be profitable in the years to come. The Fed may shift interest, but Berkshire Hathaway deals in real dollars.

Cross your fingers for Chevy’s Volt, kids, because BofA is one national investment looking dismal this week.


This is just one more way taxpayers will bear the burden of keeping banks afloat. When Congress first approved TARP last year, Treasury was slated to buy mortgage-backed securities from the banks.

The government ultimately deemed it impossible to assess securities’ values. Instead Treasury used TARP to inject free cash flow into banks by purchasing convertible bank shares — effectively bank stock options.

As banks’ losses mount and real estate prices continue to drop the banks have been unable to push these deadweight securities from their balance sheets. Banks have accepted government cash but have not been able to match that influx with equity.

Banks that do not react to investors’ cues do not adequately protect themselves from further government ownership. Last spring the three big American banks converted government-owned stock from preferred to common. Ostensibly this move protected public resources (tax dollars gov’t used to snatch up bank shares in the first place) by paying less per share but continued to “bail out” the banks stuck absorbing our securities failure.

Government holding isn’t about ownership; it’s about control. When government dollars go to preferred stock, banks monitor what Big G owns and how many dollars are going to and from this significant stockholder. When Big G pulls out of preferred and keeps instead to common, the banks are less attentive to exactly how much the gov’t owns.

The more government hands get involved, all of its influence falls victim to mission creep. When gov’t dollars go to common stock instead of preferred, it’s not like the gov’t pulled out some of its cash to match the lower equity it was purchasing. Instead, the same number of G dollars are still flowing to the banks, but holding many more shares.

The Federal Reserve was invented to counterbalance market shifts and dips. That’s the only enterprise big enough to control for inflation.

When taxpayers have to absorb yet another private investor’s signal that BofA is flailing, that’s not inflation, that’s government failure.

Schumer and Cantwell’s deceptive advertising on shareholder “rights.”

by John Berlau on June 8, 2009

in Bailout Watch, Legal, Nanny State, Politics as Usual

If deceptive labeling of bills in Congess were punishable by regulatory agencies, Sens. Chuck Schumer (D-NY) and Maria Cantwell (D-WA) would be paying a hefty fine.

Their so-called “shareholder bill of rights,” recently introduced in the Senate, would impose a one-size fits all regime on public companies that would limit choices for shareholders, reduce corporate performance, and allow political agendas of pressure groups to trump the interests of ordinary investors. Most egregiously, the bill would make illegal a key feature of the corporate governance structures that have served shareholders very well at companies from Google and Microsoft to Berkshire Hathaway.

The bill would make it illegal for the CEO of a public company to also serve as the chairman of its board. The argument that critics such as the senators and others such as union pension funds make is that the chairman needs to be independent of the CEO for to provide better oversight for shareholders.

A prominent example critics point to is Bank of America CEO Ken Lewis, who made a series of bad calls while also serving as the company’s chairman. At the company’s recent annual meeting, Lewis was removed from his position as chairman, but not CEO, by a shareholder vote.

But this example, like many anecodotes without data, is very selective. There are many examples, by contrast, of some of the best performing companies in America.

For many decades, for instance, Warren Buffett has served as Chairman and CEO of his conglomerate Berkshire Hathaway. Yet Berkshire shareholders have not had much to complain about in terms of the company’s performance.

Simlarly, shareholders have not generally been displeased with Eric Schmidt’s tenure as chairman and CEO of Google since it went public in 2004. Past examples of sucessful stints as chairman and CEO include Bill Gates at Microsoft, where he served in both positions until he retired as CEO at the height of Microsoft’s success in 2000, and Jack Welch at General Electric in the ’80s and ’90s.

Nor is there any real evidence that having a separated chairman and CEO will keep a company from blowing up. Citigroup has had separate individuals in these position since 2004, but as it shareholders (and U.S. taxpayers) are painfully aware of, this hardly improved its corporate governance.

Different governance structuces are appropriate for different companies. A new company in its entrepreneurial stages often wants the same person as chairman and CEO for more of a focus on growth. A more established company may function better by separating these positions. Regardless, a company won’t have effective governance without diligent oversight by boards and shareholders.

The overall lesson from the experience of these companies is that shareholders are perfectly capable of deciding on things like whether the chairman and CEO should be separate, and these matters shouldn’t be dictated to them by the government. The same can be said for the bills other mandates such as “say on pay,” the requirement of an annual non-binding shareholder vote on executive salaries.

“Say on pay” has been on the proxy ballots of many companies, and sharholders have rejected the provision in the vast majority of cases, seeing the process as redundant and a waste of the company’s resources. So why should Schumer-Cantwell now impose ”say on pay” on shareholders who already have said that they didn’t want it.

Schumer-Cantwell also is on a parallel track with the Securities and Exchange Commission to impose “proxy access,” the ultimate corporate governance Trojan horse. Under this mandate, the company — and all of its shareholders — would be forced to subsidize the election campaign of any candidate for the board of directors that as few as one percent of shareholders wish to nominate.

As I have written prevously, “proxy access” lead to all sorts pressure groups, such as union pension funds and “green” foundations, cutting deals with CEOs. A union could, for instance, threaten to run candidates for the board unless the company imposed “card check” or forced unionization among its workers.

These special interest gains would come at the expense of ordinary shareholders, as the company’s performance would likely decline. And a recent survey released by the U.S. Chamber of Commerce showed that a large majority of even union households believe that pension funds should be managed to maximize retirement returns rather than, in the survey’s words, “advance the union’s social and political goals.”

So in the spirit of truth-in-advertising, Schumer and Cantwell should change the name of their legislation to the “Bossing Shareholders Around and Reducing Shareholder Value” bill. Or better yet, withdraw this destructive bill altogether.

Barack Obama v. Warren Buffett on the Economy

by Richard Morrison on March 18, 2009

in Video, Zeitgeist

[youtube:http://www.youtube.com/watch?v=kc21pz5lpzE 285 234]

LibertyWeek 34: Michelle Minton Conquers the World

by Richard Morrison on March 17, 2009

in CEI Projects, Podcast

Your regular hosts Richard Morrison and Cord Blomquist are joined by special guest co-host Michelle Minton for Episode 34 of the LibertyWeek podcast. We begin by finding that Twitter has conquered every aspect of society, the White House is waging war on the economy and New Yorkers are defending themselves against beer taxes. We next investigate the questionable management of the AIG bailout in Scandal Watch and handicap Chicago’s chances for snagging the 2016 summer games in Olympic News.

Congratulations to FreeStateNH (The Free State Project) for winning the honor of Tweet of the Week™!

Buffett Opposes Card Check, but Don’t Forget Binding Arbitration

by Ivan Osorio on March 9, 2009

in Economy, Labor

Rumors of the so-called Employee Free Choice Act (EFCA) being introduced in the current Congress have come and gone — and will come again. Yet the Washington rumor mill being so active on this shows just how big an issue this is. For the unions, it is their number one priority, since they see it as a tool to reverse decades of membership decline. For the business community, it would impose yet another dead-weight cost in the middle of a severe economic slowdown.

EFCA would replace secret ballot union elections with a process known as card check, in which union organizers ask employees to sign union cards out in the open, exposing employees to the kind of high-pressure tactics secret ballots are designed to avoid. Public opposition began to turn against EFCA as this became known among the public. Now Senator Claire McCaskill (D-Mo.) says that Senate Democrats may not have the votes to break a Republican-led filibuster. And former Senator George McGovern has been joined by another prominent Democrat in his opposition to card check, Warren Buffett, who has President Obama’s ear (as the anger in a Center for American Progress response would indicate).

That protecting secret ballots should be popular is no surprise. But that’s not all there is to this bill. As former Labor Department officials Loren Smith and Vincent Vernuccio note, card check isn’t the only noxious element of EFCA. Binding arbitration, which has not received nearly as much attention, would essentially empower federally appointed arbitrators to impose a contract on any newly unionized business.

Once a business is unionized, management and the union have to come to terms on a contract for the unionized workers. This can take months or years as the two parties hammer out their differences.

Under EFCA’s proposed binding arbitration provision, the government would step in after 90 days and “work with” the two parties. All that is needed is one party to “request” the process. After another 30 days, the government would assign the case to an arbitrator (the rules for which would be written by the Obama administration) who would impose wage and benefit terms for the company for the next two years.

Arbitrators generally take a split the baby approach and try to come to a middle ground between the two parties. This means the union can make outrageous demands then stonewall an employer knowing they may not get everything in arbitration but they can, with the help of the government, force the employer into concessions that may not be economically feasible for the company. An example would be a new car company — instead of a regular negation process a union could make outrageous demands and wait for an arbitrator to decide the terms of a contract. Understandably the arbitrator would not want to reinvent the wheel so he would look to other existing contracts in the industry. Soon this company would be shackled with the same type of crippling contract as the Big Three and the UAW.

So, Smith and Vernuccio (correctly) warn, EFCA opponents need to be vigilant of efforts to break up the bill’s component parts into separate bills, which could then pass much more quietly than the highly controversial EFCA.

For more on card check, see here and here.