What Buffett Writes Now Versus Then: Part I

Jim Spence

An op-ed piece by Warren Buffett appeared in the New York Times on Monday August 15th. As a multiple decade follower of Mr. Buffett and his partner Charles Munger, and a dedicated reader of Buffett’s letters to Berkshire Hathaway shareholders, it was to say the least, a fascinating series of contradictions.

Warren Buffett

The first Buffett statement that struck us as strange was this one: “While the poor and middle class fight for us in Afghanistan…..” We are mindful of the fact that many Americans feel our government should not be involved in Afghanistan, Iraq, and Libya, not to mention removing tens of thousands of troops stationed in other places. Many believe there are many policies that can keep America safe at a much lower cost, both in terms of blood and treasure.

Next Buffett opines as follows: “Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.” This statement indicates that most of Buffett’s income was produced by capital gains earned on dollars that had already been taxed at least once.

Buffett adds, “If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.” In using the term, “making money with money,” Buffett is defining a process that provides precious seed capital. Capital deployment creates jobs. There is nothing wrong and everything right about structuring incentives that result in the forming and deployment of capital. In fact, this incentive is preferable to incentives for consumption, especially in the long run. Our problem is not investors earning returns that are too high. It is that they are earning returns that are too low.

Buffett confuses the issues for the reader when he says: “To understand why, you need to examine the sources of government revenue.” Most people understand the revenue “sources,” but not everyone understands the incentive structures that control government revenue sources. Charlie Munger teaches us that the proper structuring of incentives is the key to management. Producing the desired behavior requires a careful consideration of incentives according to Charlie.

Buffett inadvertently explains the flawed incentive structure of government revenues as follows: “Last year about 80 percent of these revenues [the government’s] came from personal income taxes and payroll taxes.” Again, it is critical to recognize that since 51% of all households do not participate in the cost of their government by contributing income taxes, there is insufficient incentive in society for cost-cutting.

Ironically, Buffett has written volumes on the importance of “cost cutting.” Apparently, the only exception Buffett has for writing about the importance of controlling costs is when attempts are made to apply this crucial principle to government. It is also extraordinarily important to point out that in America, payroll tax collections are not escrowed and segregated in retirement accounts as intended by the social security program when it was established. We will continue with part II of this series tomorrow.

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The Week in Review



Jerome Block Jr.

Public Regulatory Commissioner Jerome Block continued to dominate the news pages in New Mexico this week. The string of news stories spelling out all of the dubious behaviors of Block led to a no-confidence vote from his fellow commissioners on Thursday. This followed calls from dozens of people on both sides of the aisle for his resignation. Block is a perfect example of why evaluating candidates carefully is important. Block pockets $90,000 a year from the taxpayers not to mention being reimbursed for untold amounts of “expenses” he believes he deserves. It appears the legislature will consider Block’s impeachment soon. Our stroll through the Sunday morning talk show circuit was revealing within a matter of minutes last week. While reviewing the videos of the talking heads it soon became obvious that the new phrase, “Tea Party Downgrade” would be the Democrat’s pat explanation for why Standard and Poors decided to reduce the U.S. credit rating. Senator Rand Paul of Kentucky quickly responded to the phrase by likening the blaming of the tea parties for the debt downgrade to the idea of pointing the finger at the firemen when they show up at your house to put a fire out. Since our family home burned down ten years ago, and firemen bravely did what they could to keep the terrible night from being a total loss, we made it a point to never blame emergency personnel for providing assistance to us.

On Monday the Dow Jones Industrial Average plunged more than three hundred points in early trading. Then President Obama decided he should make a speech to calm the markets before heading off for a vacation at Martha’s Vineyard. After again reassuring the 51% of American households that don’t pay any federal income taxes that he would continue to fight so they won’t have to bear burdens caused by the 49% who do pay taxes (but don’t pay their fair share), the markets plunged another 300 points. The proverbial phrase “enough said” seems to apply here.
Nearly one third of all letters sent to foreign nationals who were issued driver’s licenses in New Mexico were returned with the explanation “address unknown.” It is the strongest indication yet that there has been widespread fraud associated with New Mexico’s policy of providing the appearance of legitimacy to those in the state illegally. One can only wonder how many voted.

It seems that the University of New Mexico will pay a “consulting” firm to assist in the search for a new president. Many citizens ask why? The answer seems to be, “Because that is what we always do.” Common sense suggests thousands of applicants could be attracted by running a few simple ads. Faculty committees, volunteer community leaders, and regents could go over the applications. Yet somehow consultants can continue to convince university decision-makers only consultants can add the required "value" to the process by inserting a necessary search pacifier. Apparently these consultants will perform their services before “others” make the final call on the new prez. The cost to New Mexico taxpayers for the consulting firm’s debatable contribution to the process is $130,000.

It seems that just about everyone receiving health care in New Mexico makes a co-payment in these transactions. Everyone that is, except those who do not pay for their services at all. In New Mexico people living as far as 235% above the federal poverty level still qualify for Medicaid and do not make a co-pay. And that gap (the one between 100% and 235%) is by definition, the actual dollar value of the disincentive that New Mexico employs to discourage working and/or improving job skills. Until our citizens move far beyond incomes that are 235% of the federal poverty level, the act of "working" to earn more will continue to be punished in this state instead of rewarded. Government has not yet decided that people are not dumb and they can run their calculators. Maybe someday.

Miguel Garcia

Representatives Andy Nunez, Alonzo Baldonado, and Governor Susana Martinez each appeared as our guests on News New Mexico this week. And each chuckled when we played a clip of Rep. Miguel Garcia saying that efforts to reform our driver’s license issuance laws were “divisive." Polls clearly indicate that as many as three out of four New Mexicans favor the reforms promoted by Susana Martinez, John Sanchez, and Dianna Duran (among others). Apparently it is getting very frustrating for Rep. Garcia and most Senate Democrats who find themselves completely unsuccessful in characterizing this particular dispute as a divisive, “Hispanics versus Anglos” show down. After hearing from Nunez, Baldonado, and the Governor this week, we realized Rep. Miguel Garcia only wishes this were a divisive issue.

Bill Richardson

And finally, the remnants of the Richardson legacy are lingering. Current HHS Secretary Sidney Squier was making the rounds in New Mexico gathering input on Medicaid reforms this week. On Wednesday she announced that sloppy accounting in the HHS department including under-reporting and over-billing during the Richardson administration, has revealed an additional $100 million shortfall in the Medicaid budget. Senator John Arthur Smith told the Albuquerque Journal the Medicaid deficit will eat up a substantial portion of the state tax revenues coming in ahead of projections in the spring. When it rains it pours.

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The Week in Review

We began the week with news of a “compromise” on the debt ceiling negotiations out of Washington. After last November’s election that signaled the voters wanted a change in direction, Democrats and Republicans fought for months. When it was all said and done the U.S. “stayed the course” to avoid a so-called financial catastrophe. We had to do it, we were told by White House Press Secretary Jay Carney, because the “markets needed certainty.” The House passed the status quo extension on Monday and the Senate did so on Tuesday. What followed? The financial markets ruined all the Obama birthday fun at mid-week with a stunning repudiation of the status quo. By Friday the Dow had its worst week since 2008 and Standard & Poors downgraded U.S. Treasury debt. Of course the downgrade came over the vociferous objections of the Borrower in Chief.

Harry Reid

By Saturday Senate Majority Leader Harry Reid had a brand new idea. Fresh off a shellacking in last year’s mid-term elections, followed by a successful fight that will keep increasing the mindless spending baseline, Reid wants to raise taxes.
Meanwhile back in the Land of Enchantment, the nurses at St. Vincent Hospital in Santa Fe thought about a strike, but thought better of it at the last minute. They approved an offer from management and kept working. In some ways we were saddened. We were just about to find out whether or not health care was a “right” or merely a service that had to be paid for. For the time being the nurses cleared everything up. We would have hated to see the president order them back to work no matter how bad their contract offer was, because he believes health care is a “right.”
It was almost comical to hear the elected officials from New Mexico talk about how much they hated the debt ceiling extension they voted for. Senators Udall and Bingaman and Representatives Lujan and Heinrich blamed the tea parties for taking the nation “hostage.” These claims are despite the fact the tea parties failed in their attempt to achieve a cut in spending. In the end, all four Democrats hated the bill that passed. Of course while hating it, three of them (Udall, Bingaman, and Heinrich) voted for it.

While Ben Ray Lujan voted no, he did so because there were no tax increases in it. In the meantime, lone wolf Congressman Steve Pearce also voted no. The Pearce no vote was cast because the debt ceiling extension did not come close to anything resembling significant spending cuts.

The polls were not good for the White House this week. 63% of Democrats now say the country is headed the wrong direction. And in a separate poll 69% of Americans believe it is at least somewhat likely that the data related to global warming has been falsified by scientists.

A bombshell was released at mid-week when it was revealed that a Sinaloa Drug Cartel member said that U.S. Dept. of Justice and A.T.F. officials in the federal government allowed tons of cocaine to come into the U.S. in exchange for “information” on rival drug cartels in Mexico. This is a story that won’t go away and we suspect A.G. Eric Holder is squirming somewhere.

Eric Holder

In what has to be one of the more bizarre news items of the year, Sunland Park Mayor Martin Resindez managed to capture the national spotlight for New Mexico. Resendiz, who is running for the Democratic nomination for U.S. House District #3, revealed during a deposition that he signed a large service contract obligating his city, while he was too drunk to understand, or be held responsible for, what he was doing. Did Christmas come early for Steve Pearce?

Martin Resendiz

Not to be outdone by Martin Resindiz, New Mexico Public Regulatory Commissioner Jerome Block seems to have been caught with his hand in the “free gasoline” cookie jar. It seems that Block charged roughly $9,000 worth of gasoline to the PRC. Both Governor Susana Martinez and New Mexico Democratic Party Chairman Javier Gonzales have called for Block to step down. In the meantime, we can stop wondering why El Paso Electric got a dubious rate structure change through the PRC that leaves churches and businesses in their service area in the lurch. There was nobody there to “Block” it.

And finally, an Albuquerque woman, Ana Hernandez, was indicted this week on more than 300 separate counts of providing false residency documents to foreign nationals. It was another good example of how New Mexico uniquely creates tremendous opportunities for all persons in this state illegally to obtain legitimate credentials that provide the appearance of legal status. Governor Martinez took the opportunity to repeat her calls for reforms to the driver’s license issuance system. And those who would thwart the ongoing voter fraud investigations in New Mexico continued to ignore the obvious connections of fraudulent residency document generation, fraudulent obtaining of driver’s licenses, and the widespread potential for the fraudulent casting of votes. We are reminded that requiring those cashing a check or making a credit card purchase to provide an I.D. does not “disenfranchise” them, it protects them from fraud. And requiring voter I.D. accomplishes the same thing. We either move to mandate voter I.D. or introduce bills that make it illegal to require I.D.’s for all other important transactions.

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What is Going Wrong? Here's Fifteen Things

Jim Spence

There are fifteen unaddressed problems in the U.S. that continue to plague the economy. Here they are:

1) Despite the fact that al-Queada has been scattered, the Taliban removed from power, and Osama bin Laden killed, we have seen an expansion of U.S. taxpayer resources spent in Afghanistan with dubious value in return. We have also witnessed a tortuously slow unwinding of the costs of Iraq instead of a speedy withdrawal. And amazingly, President Obama has initiated yet another expensive and seemingly open-ended military conflict, this one in Libya.

2) The U.S. taxpayer continues to pay to maintain military bases all around the world for purposes that are out of date. There are tens of thousands of American troops in Germany and Japan left over in great part from WW II.

3) Obamacare contains nearly three thousand pages of law governing U.S. employers (not global employers). Compliance with Obamacare will drive up the costs for every paycheck signer in the nation. The mandate has changed the thinking patterns regarding the hiring a full time employees. Despite the uninformed denial of its supporters, the overhang of Obamacare is keeping us stuck in the economic mud.

4) The EPA, bolstered by a virtual army of radical environmental lawyers, continues to destroy efforts to make the U.S. independent of foreign energy. The EPA bars oil exploration in ANWR while we encourage offshore drilling in Brazil. Everywhere taxpayers turn, our court systems and our uninformed bureaucrats in Washington are assisting the process of job killing by employing relentless efforts to deny America access to reasonably priced oil.

5) Public policy is trying to make it impossible to maintain and enhance the productive capabilities of coal fired electric plants that produce electricity at a reasonable price. The fiasco involving the Four Corners power plants are a perfect example.
6) Those who are insisting on replacing efficient power plants with unreliable solar and wind at 7 times the cost are in control of policy. New Mexicans are going to pay more for electricity and face more rolling blackouts.
7) The Dodd-Frank law contains two thousand pages of financial system regulations and rules that place government in charge of virtually all lending and credit operations. The result has been a slower and more sluggish credit approval process that is slowing job creation. Read full column here: News New Mexico

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Us versus Them, the Winners and the Losers, And of course, the Wealthy and the Middle Class

We have been perusing the so-called and conservative and progressive websites ever since the Senate passed the raising of the debt ceiling this morning. It is truly amazing how reducing the growth rate of federal government spending (there are no cuts) has been characterized as a “loss” for the middle class and a “win” for the wealthy on sites like "The Nation" and "Progressive."
The dialogue in the analysis pre-supposes that somehow if government is functioning properly, the middle class can benefit from bigger government, while it comes at the “expense” of the wealthy.

The stereotyping of public policy as an “us versus them” battle wherein the middle class benefits from maintaining the upward trajectory of federal government spending is the ultimate false assumption about how economics works. And of course, the suggestion that the choice must be made between the “wealthy” and the “middle class,” is the ultimate presentation of a patently false choice.

Just as the tea parties are characterized as racists and hostage takers, somehow the wealthy and the business owners are portrayed as exploiters of all others, especially those they emply who fall into the so-called "middle class." How sad it is in the second decade of the 21st century that we have not learned the basic lesson that big government only benefits politicians who vote for big government. Everyone else loses…..everyone. Still the progressives sites relentlessly bash and bash the tea parties most of all. I'm not a member of the Tea Party but I have met plenty of them. The great irony is very few are wealthy and almost all of them ARE MEMBERS of the so-called MIDDLE CLASS. Go figure.

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What's Happened in 13 Months

Today we passed a milestone. We are now thirteen months into the News New Mexico project. On day one of News New Mexico (July 1, 2010) we decided to document the amount of debt each taxpaying couple in America has been accumulating since that day. The totals are staggering. In thirteen months, the federal government has borrowed $22,848 for every couple paying income taxes in the U.S. ($11,424 for each individual taxpayer). And since the government actually spends an additional 1.5 times what it borrows, the government is actually spending $57,120 for every taxpaying married couple in the nation ($28,560 for every individual taxpayer). Now some people scoff at those who think about these numbers and suggest government is too big. And with 51% of all American households sitting out the taxpaying and debt service efforts, we can only wonder why those who think we CAN'T keep borrowing and spending like this are branded as nothing but a bunch of crazy social terrorists and racist extremists that don’t care about the “middle class.”

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While Congress Negotiates, Obama Takes Some Time Off to Raise Costs and Kill Automobile Manufacturing Jobs

President Obama's plan to double fuel efficiency standards for cars and light-duty trucks by 2025 received applause from environmentalists who have been pushing against the demands of consumer choice for decades. And why wouldn't they cheer?
During the two-year U.S. borrowing binge, normally "conservation oriented" radical environmentalists have cheered the accumulation of trillions in debt. They have cheered the way the new Obama-led EPA has set about the task of killing the coal industry and driving up the cost of electricity. And along with these job-killing efforts they also cheer the increasing prospects for more rolling blackouts. Blackouts kill jobs too.

Radical environmentalists have also cheered the stonewalling of domestic oil drilling everywhere. And with the blood of dead oil independence still wet on their hands, they call for America to reduce its foreign energy dependence. They have also cheered on wasteful taxpayer subsidies for ethanol, a policy that drives up corn prices and results in absolutely no reduction in net CO-2 emissions. There is so much more. They cheered when hundreds of jets landed in Denmark for a climate change conference to talk about how evil..... jet airplanes are. And they cheered again when every gas guzzling limousine within a hundred miles of Copenhagen had been leased by the most eminent "planet savers" so they could ride back and forth between their five star hotels and the meeting place, and pontificate on the evils of.....well.....of those damned gas guzzlers.
And so it was on Friday when President Barack Obama announced new fuel efficiency standards for cars and light trucks at the Washington Convention Center that nearly everyone in attendance cheered. Hapless automakers, clearly under threats of additional regulatory harassment, had been strong-armed into agreeing to hike the average fuel economy standard to 54.5 miles per gallon over fourteen years. No doubt Obama's limo will get a waiver while all the little people are forced to ride in little cars. Still, there the president stood, in all his glory, having ignored all common sense calls to reign in his base. Since 2009 radicals with his ear have been successful in blocking efforts to produce nearly everything, everything except the most heavily subsidized and inefficient forms of energy known to man. The president smiled and congratulated himself for engineering what he called the, "Single most important step we've ever taken as a nation to reduce our dependence on foreign oil."

With a couple trillion dollars of "stimulus dollars" all but down the drain Obama remains undeterred. With all of that taxpayer money that was central to Obama's big plan to hold unemployment at 8% and then lower it, Obama continued his to assert his historic obliviousness. As he spoke first quarter GDP reports were released that showed growth estimates for the first quarter of 2010 had fallen from a pathetic 1.9%, to an astonishingly sickening reality of .4%. Then later in the day White House Press Secretary Jay Carney had the gall to treat everyone in attendance to some economic tutoring. He did so while he explained why we had to borrow more money because we couldn't afford to have interest rates go up. Never mind the fact that rates were falling like a rock that day right under his ever longer nose.

The White House is right. The U.S. is running out of time. We are running out of the time we Americans and New Mexicans have to put some real authentic BUSINESS PEOPLE in charge of our nation. How many more job-killing policies can we afford? How long do we have to vote to completely discontinue this process of allowing inexperienced and naive social experimenters to destroy the living standards of 300 million-plus Americans in the name of "saving the planet" and "social justice." Not long.

READ MORE - While Congress Negotiates, Obama Takes Some Time Off to Raise Costs and Kill Automobile Manufacturing Jobs

The Week in Review

We began the week with a, “So what else is new,” story. No, it wasn’t about the federal debt ceiling fight. It was a story of the how the oil and gas industry in New Mexico continues to pay a large portion of our bills for us. Amazingly, certain segments of our political system continue to use oil and gas for their cars and trucks, cash oil and gas checks, spend oil and gas revenues, and brand oil and gas as evil. Biting the hand that feeds seems to be a favorite state and national past time.
The news spotlight continues to shine on two district court judges who find themselves under scrutiny in the state. Facing charges of rape in Albuquerque, Judge Pat Murdoch announced his retirement. And facing multiple felony counts in Las Cruces, Judge Michael Murphy was arrested on yet another bribery related charge late in the week. It has not been a good year for the news flow on district judges in the state.

Jan Goodwin

Speaking of bad news flow, the Education Retirement Board (ERB) has crammed twenty years worth of bad news into 2011. Earlier in the year, ERB head Jan Goodwin allowed as to how the ERB had issued a bunch of monthly checks for incorrect amounts all the way back in August of 2010, including one for about a quarter of a million dollars. She conceded she has not recovered all of those funds yet. This week, Goodwin allowed as how the ERB had cost itself over $700,000 when it prematurely terminated the contract of an asset management firm based in New York.

Goodwin said originally the ERB thought the early cancellation would “only” cost the ERB about $88,000. Later she said it was discovered that the ERB would have to pay the terminated firm over $700,000. Nobody, including Goodwin, stepped forward to take the blame for the latest “miscalculation.” In the wake of the latest revelation, many New Mexico-based asset management firms were left to lament how much they don't get paid to NOT manage a portion of the state’s ERB funds. And the state’s revenue coffers were left to lament how much the total cost is of outsourcing asset management services to non-New Mexico firms. It is also good to know UNM and NMSU are training finance students to find jobs in the asset management business.... somewhere else. (Full disclosure requires me to say I work, hire people, and pay all sorts of taxes in New Mexico through my owenership interest in an in-state asset management business.)

The Tea Party AKA the "Boogie Man"

We noticed a change in blame game tactics this week in Washington. It seems the so-called “Tea Party” has become the new boogie man of Democrats. We are told the Dems haven’t passed a budget in more than two years mainly because the “rich” need to be taxed more to save our country. Dems also say the Tea Party is ruining everything. Fortunately for NM House members Martin Heinrich and Ben Ray Lujan, the leader they voted for to guide them in the House in the wake of last November’s electoral wipe out, is still Nancy Pelosi. And former Speaker Pelosi is once again taking her powerful message to the New Mexico people, as well as the rest of the nation. Apparently Nancy, Ben Ray, and Martin want everyone to know they are fighting as hard as they can to keep us on the same path........even if the damn Tea Parties try to get the nation to change directions. Good to know.

Environmentalist radicals seem to have unfettered access to lawyers. And they had another good week in New Mexico. Once again the New Mexico Supreme Court provided the mercenary alarmists with “standing” in an action that will enable them to drive up the price of electricity and save the planet at the same time.

In another item of interest on the planet saving front this week, the City of Las Vegas, NM learned it cannot fix leaks in its water supply because it might disturb the habitat of the creatures that love the muddy mess below Peterson Dam. According to creature sensitive federal officials in the Obama administration, once Peterson Dam started leaking the city’s precious water supply, ownership of the water and control of the way the dam performs somehow magically transferred. Now the water needs of the human beings living in Las Vegas are secondary. The lawyers representing toads, tadpoles, and salamanders claimed the critters are now "owed" the water coming from the leaks. They are entitled to them because……get this…..they are "wetlands."
There was some very bad news for one planet saving “scientist.” This one had decided a few years back that his data proved that polar bears were facing extinction. Turns out he was placed on administrative leave this week in the wake of what looks like serious evidence that he “fudged” his data. Who’d have thought with billions of dollars in climate change research grants on the line that somebody would fudge data?

News late in the week told us what we already knew about the difference between Susana Martinez and Bill Richardson. State government is getting smaller under the leadership of Martinez. Observers believe that the lack of presidential ambition has made it unnecessary for Martinez to hire state employees to help with a huge out-of-state national campaign. The headcount in Santa Fe for those serving the governor’s office as “exempt” employees has already dropped 40% and figures to fall farther. How will she possibly manage?

And finally, the state is providing Medicaid benefits to those in New Mexico living as much as 235% ABOVE the poverty level. Now it looks like the federal government’s matching Medicaid dollars are sure to be reduced. Naturally, an “angry” crowd showed up at an Albuquerque meeting. They demanded New Mexico taxpayers be charged with making up the difference. Unfortunately, according to observers at the meeting, there weren’t many taxpayers at the gathering to argue for more self-reliance and fewer handouts. Most of them were at work pulling the economic wagon that those yelling at the meeting were sitting in.

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