Paul Samuelson wrote:
Warren Buffett, the oracle from omaha, is an American icon way up there with Daniel Boone and Honest Abe Lincoln. That’s not because he is just about the richest man in the world. These days, multibillionaires are a dime a dozen. Most of them have been more lucky than smart, averaging in IQ only a bit above Henry Ford, who said, “History is bunk.”
Buffett is that rare exception who made his own fortune as a superlative investor over more than four decades. He professes Will Rogers poses: Shucks, I just spot good companies run by good people and in split seconds we go into partnership together. Sounds simple, doesn’t it? Go try.
Forget now about speculative capital gains and losses. Since 2003, Buffett has turned heretical against present-day globalisation trends. The title of his piece in Fortune magazine (26 October 2003) sums up his protest: ‘America’s Growing Trade Deficit Is Selling the Nation Out from Under Us: Here’s a Way to Fix the Problem — And We Need To Do It Now’.
Most US political protectionists, now and before, used import tariffs to confine production of automobiles in Detroit and not in Japan or Germany. Buffett doesn’t touch directly on American jobs getting outsourced abroad. He focuses his fire on (a) the uncontested fact that when emerging poor economies apply advanced US know-how to their own low-wage, educable workers, they usually generate a trend of ‘export-led growth’; (b) as academic economists have agreed, fast-growing, emerging societies are initially high savers; and (c) the fact that most advanced industrial societies tend to settle down into lower, steady-state saving rates.
From these, we can infer that Japan, China and India would pile up trade surpluses for a long time, which will be recycled into dollar-denominated assets. If Buffett is concerned by this US pathology, he might have written a different Fortune article proposing a taxing mechanism that forces Americans to save as high a fraction of their incomes as citizens of emerging countries. Maybe then free trade sans tariffs or import quotas could be Buffett’s reform scheme?
However, Buffett proposes a new system of import certificates (ICs) issued to would-be US exporters (such as GM or Ford or GE). These ICs are valuable because would-be exporters in China, et al, will need to buy them if their goods are to be allowed into the US. An auction market for ICs between foreign would-be exporters and American would-be exporters will reach theoretical equilibrium only when the US’s trade exports are equal to its trade imports. Ergo, no persistent takeover of US earning assets by dynamic foreigners will continue in the post-Buffett era. Suppose that the US electorate and a Democratic Congress do legislate Buffett’s scheme. Suppose too that we can rule out a lethal financial panic in Chinese and Indian markets attributable to the Buffett scheme. Then:
China-like places will become dependent primarily on their domestic-led growth.
With US real imports substantially aborted, per capita total income may drop. Because consumers will have lost their opportunity to benefit from cheap imports from China and India. At the same time, US trade unions will again become active. Potemkin village auto factories in Detroit and Atlanta will be definite beneficiaries of the Buffett scheme.
Math analysis shows that, depending upon how elastic or inelastic supply-demand relations for goods, US losers could overnight outweigh US winners. Or vice versa. Probably, if and when protectionism surges in 2009-2013, it will rely primarily on traditional import tariffs and quotas.
In self-defence, Buffett might argue that the present state of affairs cannot continue for long; that we’re in a fix similar to that of persons falling off the Empire State Building. They aren’t hurt yet, but the moment of judgement will arrive soon.
An op-ed column is not the place to expound equations of mathematical economics. Consider a cogent analysis of a two-country world, where each place can produce three different goods out of domestic labour, working with producible capital machines. One of those three goods will be machines producible out of labour and machines.
It turns out that in such an idealised model, a growing adverse US trade balance could go on forever while at the same time benefiting net both, the US and China or India.
Since Rome wasn’t built in a day, a scheme like Buffett’s could be introduced only gradually, thereby sparing the global economies sudden, acute financial turmoil.
(Businessworld Issue 1-7 July 2008)
http://www.businessworld.in/content/view/5085/5196
See you on my next post!
Prof. Lic. Fernando Julio Silva, MSc.
July 2008
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