Even Warren Buffett Has Terrible Ideas

By: ispeculatornew
Date posted: 12.08.2011 (6:00 am) | Write a Comment  (4 Comments)

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The other day, a reader sent me a video of Buffett explaining how he would fix within a few minutes, the problem of recurring US government deficits and a growing debt. His idea?

I could end the deficit in 5 minutes” he told CNBC. “You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of congress become ineligible for re-election“.

It’s a terrible, maybe even stupid idea in my opinion. The thought behind it isn’t bad: If we could could give a strong incentive to those members to avoid big deficits, the idea is that they would do everything in their power to keep their job. I do agree that they are generally more worried about their own job than about what is happening to the country so the idea could make sense from an “initial perspective.

Extreme Case Scenarios

The reason the European Union is turning out to be so disfonctional is not because the whole concept is necessarily always flawed. It is however very difficult to make the EU work in unusual circumstances such as a financia/credit/sovereign crises. Such events are unusual but they do happen. It’s not a matter of when or how but rather when they will occur.

Financial Crisis/Crash

You might agree (or not) with the whole bailout that the Obama administration used after arriving to power and the effect that it had on the economy. One thing that you would have to agree with though is that there is no way the US government could have avoided a big deficit in those years. Why? Tough financial times meant less income for individuals and for companies, less capital gains, etc. All of that combined had a dramatic impact on the revenues of the US government. Let’s imagine that the revenues suffered a 5% decline which is certainly possible in difficult economic times.

What To Do Then?

Imagine a government that would face a 5% shortfall in revenues with members of the government losing their jobs on any deficit of 3% or more. Just think about it. They would be stuck with one of two choices:

#1-Stimulating the economy (either through bailouts/subsidies or tax cuts) and ensure the deficit would surpass the 3% cap or
#2-Cut government expenses in order to avoid the defitic breach.

Would you trust the members to do the right thing and say goodbye to their high paying jobs or do you think they would risk putting the economy in even more turmoil in order to save their own jobs? I don’t know about you but I’m not convinced they would only be looking after the interests of the nation.

There Is No Easy Fix

I do have a lot of respect for Buffett but I certianly hope he was joking when he talked about this. The reality is that the issue is not simple enough to be fixed in 5 minutes. I think there are two main things that must be done (also very difficult) in order to fix the system and get our finances back in order:

-Get compromises between the Republicans and Democrats
-Get top politicians to manage with a long term perspective instead of always focusing on the next election.

What are your thoughts? Do you think Buffett was way off on this as I do?

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  1. Comment by CC — December 8, 2011 @ 12:09 pm

    Honestly, you thinking his statement is stupid, is stupid.

    The “5 minutes” reference is not what to focus on. Making stringent rules on balancing budgets is the secondary (not even the primary point).

    His main point is accountability. Europe is a disaster because there are (were) no immediate consequences to the decisions that are made. The U.S. is becoming a disaster because businessmen and government officials are not held accountable. You had a group of people literally bring down the global financial system through greed and knowing no consequence will result of it.

    And no…i’m not an “occupier” or a “lefty”. So don’t play that card as a rebuttal.

  2. Comment by IS — December 8, 2011 @ 2:18 pm

    @CC – Many thanks for your feedback. I do appreciate the issue and the idea behind it… but what would the US government had done in 2008-2010 for example? Cut spending significantly? Raise taxes? How could it have avoided such a deficit when the economy goes off the rails?

  3. Comment by CC — December 9, 2011 @ 10:16 am

    Firstly, I come at you harshly and you respond with kindness? Keep it up…that says a lot (of good things) about your character.

    I don’t think that anything could have been done in those 2-3 years to turn things around. There are too many things that are broken.

    Mr. Buffet’s point is debt is bad. The more debt you have, the less you can do. Just look at any Euro member (macro), or any family who have over-consumed and are slaves to their debt payments (micro). Eliminate debt, and you have freedom.

    Also, I think he’s speaking about times where there are not any major collapses or events. Obviously you need to do something (perhaps print money, or go into large deficit) with an even like 2008. But if you had run things like he’s suggesting in the first place, you wouldn’t have had the issue to begin with.

    I’m not American, but I follow US politics fairly closely. Honestly, it’s sad to see you guys destroy yourselves. America is a great country and there are great people there.

    “Entitlement” is present for some of those at the “bottom” (some genuinely need help). However, “entitlement” is also there for those at the top who feel that they “work hard” so don’t have to pay fair taxes.

    Modern Rome is burning. I sincerely hope you guys can turn it around by using ethical means, before its too late.

  4. Comment by IS — January 15, 2012 @ 5:33 pm

    @CC – Ah, thanks for the good words, I hope the delay in my answer does not change your opinion:)

    I’m sure that is what he meant yes, I have tremendous respect for him. However, I think it was a mistake to not clarify those points as it gives some people the (wrong) idea that this is all a very simple problem to fix

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