Buffett’s Warning
on Economic Gloom
COMPANIES CAN ADJUST BUT INDIVIDUALS ….
On
February 27, Warren Buffett, the folksy billionaire who presides over Berkshire
Hathaway, released his much-anticipated annual letter to
the company’s shareholders. Most of the media
coverage focused on the Oracle of Omaha’s contention that, despite the aura of
decline promulgated by many, the U.S. is actually in very good shape. “For 240
years, it’s been a terrible mistake to bet against America, and now is no time
to start. America’s golden goose of commerce and innovation will continue to
lay more and larger eggs,” he wrote. This is a stance with which I agree.
Welcome to the bandwagon, Mr. Buffett!
But I
found another, less-covered point he made to be more compelling. He attributes
at least part of the generally sour public mood about the U.S. economy to the
divergent fates of companies and individuals as the economy expands. The stock
market has soared and companies have reinvented themselves and found new
markets, but corporate
profits as a percentage of GDP are at a historic high. Moreover, wages have been generally flat. And even with
unemployment low and millions of job openings, people feel a great deal of
insecurity. In a recent
CNN poll, 56 percent of Americans said they feared
their children would be worse off than they are.
Put another way, the age of disruption,
globalization, and rapidly shifting markets has actually been quite good news
for companies at large — and for their owners. But it has been less good news
for many of the people who work at them. And as they approach such challenges,
companies and individuals have substantially different resources and
capabilities at their disposal. In his letter, Buffett pointed out this
dichotomy. “Both capital and labor can pay a terrible price when innovation or
new efficiencies upend their worlds,” Buffett noted. “We need shed no tears for
the capitalists (whether they be private owners or an army of public shareholders).
It’s their job to take care of themselves.”
And they generally do. Companies, even very
large ones, can be very deft and nimble. They can diversify, so they’re not
exposed to the prospects of a single business or a single market. If sales fall,
they can temporarily cut dividends, reduce capital expending, freeze wages,
and, in a pinch, renegotiate debt. When a line of business goes south, they can
sell it — and then use the proceeds to invest in one with better prospects. If
there’s a technological or strategic capability they need to acquire, they can
buy it overnight. If one market shrinks and another looks promising, they can
rapidly deploy resources so that they can participate in that growth. A
100-year-old company can reinvent itself substantially in an instant for a new
era.
Individuals, by contrast, have many fewer
levers to pull. “A long-employed worker faces a different equation,” as Buffett
noted. If you have spent 30 years acquiring skills in a particular profession
or trade and the market dries up, you can’t simply acquire new ones instantly.
It might take years. If a business in Massachusetts closes down but there are
options in the same industry in, say, Malaysia, it is hard for a person simply
to pick up and move there — he’ll face language, citizenship, and legal
barriers. And so the challenges of disruption are more pronounced, and the
opportunities presented by globalization are simply less available, to the
typical worker than to the typical company. In his letter, Buffett highlighted
the fact that a shoe company owned by Berkshire Hathaway moved its production
to Asia, which put 1,600 people out of work. “Many were past the point in life
at which they could learn another trade. We lost our entire investment, which
we could afford, but many workers lost a livelihood they could not replace.”
Too often, leaders are glib about this
dichotomy. Some people would respond to such developments by putting the brakes
on globalization and technology. But, Buffett correctly notes, “the answer in
such disruptions is not the restraining or outlawing of actions that increase
productivity.” We shouldn’t expect companies to take the responsibility for
protecting workers from disruptions over the long term. It’s too much to expect
that, for example, an embattled coal company will have the resources to retrain
its workers for alternate careers if it has to shut its mines.
We shouldn’t expect companies to take the
responsibility for protecting workers from disruptions over the long term.
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The
answer, Buffett says, is for society at large to do a better job building shock
absorbers that protect all people in times of need. “The
solution, rather, is a variety of safety nets aimed at providing a decent life
for those who are willing to work but find their specific talents judged of
small value because of market forces,” he wrote. Buffett singled out the Earned
Income Tax Credit as one such useful policy. But broader efforts to protect
healthcare, to promote lifelong education and training, and to encourage
savings would also be useful.
Of course, such programs have a cost. And
Buffett would be the first to acknowledge that they do. But he’s highlighted an
important point: If you’re not taking into account the impact of your company’s
actions on society at large, you may be contributing to the sour mood.
Daniel Gross
http://www.strategy-business.com/blog/Buffett-s-Warning-on-Economic-Gloom?gko=5a4ad
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