2011: What changes can be made to U.S. economic policy or Federal Reserve policy or tax laws to improve the economy?
AUDIENCE MEMBER: Hi, Charlie and Warren. I’m Michelle from Decatur, Illinois.
Half the U.S. economy seems to be in a sluggish recovery while most foreign economies are showing solid growth numbers.
Are there any significant changes that you think can be made to either current U.S. economic policy or Federal Reserve policy or tax laws to get the economy healthy and growing in the U.S.?
WARREN BUFFETT: Yeah, we’ve really had our foot to the floor in both monetary and fiscal policy.
You know, you’ve seen it, obviously, on the monetary side, with extended period of effectively zero interest rates and actually with the chairman, just the other day saying this is going to go on for an extended period.
And then they asked him what an extended period meant, and he was — he said an extended period. (Laughter)
The — but we — it’s hard to imagine pushing harder on monetary policy than has occurred.
The interesting thing is people think of fiscal policy and they think, well, we had a stimulus bill.
Well, if you think about what stimulus really is, it’s not whether you call something a stimulus bill. If you had something that was called a stimulus bill and you didn’t run a deficit, it would not be, you know, it would not be a stimulus. You’d be —
And if you don’t have anything you call a stimulus bill at all, but you’re spending 10 percent more of your GDP than you’re taking in, you are applying an incredible stimulus — fiscal stimulus — to the economy.
We have a huge fiscal stimulus program going on now, and it’s called taking in 15 percent of GDP and spending 25 percent of GDP. That’s extraordinary.
So, I think that we have used those levers in a way that’s almost unprecedented. And I think it’s been wise, in general, to do what’s done, and I think it was particularly wise what was done in the fall of 2008.
But I think, generally, we have followed the right policies. I think they’re less important than most people think they are.
I think if you did the wrong policies it would really screw things up. But I don’t — I don’t — I think the natural resuscitative powers of capitalism are — will be the biggest factor in taking us out.
And I think you’ve seen that over the last two years and we’re seeing it month by month.
I would say this: residential construction is flatlined at, you know, 500,000 or so units per year.
I think when it comes back, and it will, but it will take — it takes working off a crazy excess inventory we had, and there’s no way to do that except through creating fewer residential units than you create households. That’s how you reduce the oversupply.
When that ends — when part comes back — I think you’re going to see much more of a pick-up in employment than you might think just by looking at construction workers.
I mean, we have Shaw Carpets. You know, I’m sure they’re not counted as construction jobs, but we have thousands fewer people working there because residential construction is where it is.
And we have people at the Furniture Mart and how much carpet they’re selling or houses, so I think there’s a lot of indirect, as well as direct, reservoir of jobs that will be drawn upon, or utilized, when residential construction comes back.
I don’t think I’d measure it just by the number of construction workers that are being employed currently versus, say, four or five years ago.
It will come back. I don’t know when. I said in the annual report I thought you’d be seeing it by the end of the year. I may or may not be right on that, but that would be my best guess, still.
We are creating households faster than we’re creating housing units. And, you know, we lose housing units just — you know, you look at the — with the tornadoes recently.
So there are — that problem will get cured. And I don’t think, when you mention we’re progressing more slowly than other places, certainly in terms of Asia, you know, there’s no question about it, or Brazil, but actually, I think our pace of coming out of this, while it’s been slow compared to the hit we took in 2008 — the American economy was paralyzed — it’s come back quite a distance, and we see that in our businesses.
Now, you know, our peak on railcar loadings were 219,000 one week, I believe, in 2006, but — and our bottom was 150- or 51-thousand. We’ll probably run 190,000, or thereabouts, currently, and that will pick up more as the year goes along.
So it’s come back a significant way. We have certain companies that are setting records that serve basic industries. If you look at TTI, which makes — which distributes — electronic components, has thousands and thousands of customers all over the world — it’s setting new records, and it’s way up in the first quarter and it set a record last year.
If you look at ISCAR, which supplies nothing but basic industry, I mean, nobody buys little carbon cutting tools, you know, to put in their recreation room or anything. This stuff is used, you know, for making big things, and their business is going up and up and up, you know, month by month.
So, the economy is coming back, and when residential construction finally gets this huge overhang largely eliminated I think — I think you’ll see a lot of improvement in the employment picture.
Charlie?
CHARLIE MUNGER: Yeah, the one place that I feel we’re making a huge mistake is not learning enough from the big mess that came from wretched excess in our financial system.
I don’t think we throttled the sin and folly out of that aspect of the economy nearly enough. And I think — if you look at all the panics and depressions in the United States, they all came from financial collapses, usually preceded by perfectly asinine and greedy behavior. And I think that would be a lot to be said for taking an ax to our financial sector and whittling it down to a more constructive size.
WARREN BUFFETT: Tell us more about how you use that ax. (Applause)
CHARLIE MUNGER: Well, Warren, I’ll make myself ridiculous, but I guess I’m so old I’m entitled to do that.
The — I would have the tax system discourage trading. I would have various kinds of Tobin taxes.
I would have securities trading more with the frequency of real estate than the trading by computer algorithms where one person’s computers outwit another person’s computers in what amounts to sort of legalized front running.
I don’t think we need any of that stuff. And I think making heroes out of the people who succeed at it is not good for the fiber of the country, either.
I hate the idea that 25 percent of our best engineers are going into the financial sector.
So, I think it’s crazy what we’ve allowed. (Applause)
And I think the lack of contrition in our financial sector, after the disgraceful stuff they got us into, is perfectly awesome. It makes Dave Sokol look like a hero. (Applause)
WARREN BUFFETT: He’s getting warmed up. (Laughter)
Just as a sidelight, how many of you know that if you trade an S & P future contract — 500 — S&P 500 contract — and you hold it for 10 seconds and you have a profit, that 60 percent of the gain is long-term gain and 40 percent is short-term gain. So, essentially, our Congress has said that this activity should be more lightly taxed, you know, than cleaning washrooms or doing all the things that you people do every day. You get a special tax treatment.
Now that illustrates one of the problems with the tax code, in that there’s a few people that care intensely about having that in there, and the cost of it, in terms of less revenue for the U.S. government, is diffused among a large group, none of whom have enough interest to want to go out and write their Congressman or hire a lobbyist to fight the other way.
But it’s pretty extraordinary that we have decided that that particular form of activity should get 60 percent taxed at a 15 percent maximum rate, even though it may only take 10 or 20 seconds and be just a little flicker on a screen.
CHARLIE MUNGER: And the hedge fund operators of America get a much lower tax rate than the professors of physics or the drivers of taxis. This is demented. (Applause)