Dear Warren Buffett
Dear Mr. Buffett,
I am an ordinary guy who pays attention and would like to share a few policy ideas with you to hopefully receive your feedback. I read some of your writings and like that you take a helicopter view of issues and are able to simplify complex issues using easy to understand analogies. My favorite was Squanderville vs. Thriftville. Unfortunately, no one listens to ordinary guys like me, which is why I am reaching out to you.
We seriously need a game plan to reintroduce fiscal prudence if and when we return to prosperity. The answer is to give the Fed/Treasury more variable knobs they can turn to steer economic behavior.
Our policy making system has what child psychologists term “Low EQ” (Emotional Quotient). Essentially, low EQ is a lack of temporal maturity where near term gratification trumps long term rational decisions that are in the best interest of our country. Our policy makers are so encumbered by electability that they only seem to act under crisis management. It isn’t that any one politician is guilty or even that they are collectively guilty. The system of politics itself is an entity with a personality and behavioral characteristics. It is the system that has a low EQ and a faulty assessment of risk with the misconceptions of mean reversion during bad times and extrapolated prosperity during good times. Our current risk psyche in a crisis is, “Just get me back to a good place and I am smart enough to immunize myself from future catastrophe.”
I am most concerned with the sequential propping up of our economy. Bush Sr’s recession was saved by the dot com bubble and dubious accounting, which was saved by the real estate boom and cash out refinancing that poured gasoline on consumption, which is now being saved by economic stimulus. While we have advanced in many ways, our way out of our crisis has been quick fix solutions that lack real legs. When times are good, policy makers are reluctant to back fill the holes they’ve dug for themselves and don’t want to make difficult decisions. After all, when times are good, why mess with things? If you are a politician, you take credit for the good times, but you certainly don’t use good times as an opportunity to pay down debt, unless you want to help out your opponent. This mentality creates a serious ratchet effect where we take 1 step forward and 3 steps back.
Group dynamics is where our problems gestate. Individuals and business create both positive and negative economic externalities from their activities. Mr. Squander’s activity impacts the general economic health and should pay for the risk he has saddled onto Mr. Thrift. The key to a solution is to identify and measure the impact of these externalities and either reward or require compensation for the effect of externalities. In addition, to the extent possible, depoliticize economic policy by moving the decisions elsewhere.
The Treasury and the Federal Reserve Bank have very limited power to make adjustments in our economy. What if they had more tools at their disposal to make variable adjustments to the economy? What if in a limited way the Fed and Treasury could turn certain knobs to alter savings, consumer spending, capital requirements, or even taxation? The obvious issue is usurping the Constitutional authority of Congress. However, I think that if a new system is far more rational, it can be sold. (Delusion is a prerequisite for us entrepreneurs.)
Let’s examine one variable for simplicity. Let’s say that there was a national sales tax that the Fed could alter within a strict range of 0 to 2%. Use of proceeds could be general debt reduction (not to be measured in Congressional budgeting). When the economy heats up the Fed could bump sales tax to cool things down while paying off the credit card in times of prosperity. But before we choke on the Constitutional issues, let’s take a peek at other merits.
When the Fed has tools other than monetary policy to slow the economy it can perhaps pinpoint the issue with greater effectiveness. When a consumer is contemplating a major purchase, price hits him right between the eyes. Interest rates are only a roundabout means for getting him to slow down. Most probably don’t even give the interest rate a second thought so long as they can afford the payments with little forethought to the possibility that their economic circumstance could change. Taking a little steam out of an overheated economy might help us to avoid asset bubbles while paying down debt during good times.
By having tools other than interest rates, I suspect that the volatility of interest rates might diminish. Think of what that might mean for the option component of mortgage spreads and the ability of corporations to plan in a more stable rate environment. Wall Street and hedge funds might not be too happy since volatility is a source of trading profits, but that might actually be a populist selling point of such a program.
By using sales tax to slow the economy, the government doesn’t need to raise interest rates that also increase the cost of servicing the national debt. It might actually relieve politicians of the burden voters put upon them to create short term prosperity at any cost. Individually, I think politicians are more fiscally responsible than they vote. I actually think I have some interesting selling points that might appeal to both parties.
There are a number of knobs I would love to see placed at the Fed / Treasury’s disposal.
- National Sales Tax (0-X%)
- Credit card surcharge on increased balances (0-X%)
- Cash out refinance surcharge (0-X%)
- Variable capital requirements for financial institutions based on risk.
- Tax credits you have offered to solve foreign trading imbalances
I’m certain there may be other more effective knobs that the Fed / Treasury may be able to twist and turn to improve the EQ of our American economy. I offer only a conceptual approach to the problem. We don’t live in a static economy and should never rely on static policy or sequentially static policy particularly when electability is a motivator. Instead, we should give independent authority to tweak variables, within a range, to correct the externalities of bad behavior and at the same time reduce our national debt. I would be terribly grateful for your thoughts.
Kind regards,
Kurt Jordan
Ordinary guy
