Warren Buffett’s Annual Letter

Buffett’s annual letter was posted today.

He once again expressed confidence in the future, noting that today’s crop of new babies is the luckiest in history and will live better than their parents, on average.

He explained that increasing productively is the reason for this and also provided very clear examples of productively improvements in the past. At the same time, he acknowledged that the distribution of wealth has lately favored the rich and is likely to remain controversial.

The following are my thoughts, after reading Buffett’s thoughts.

Average living standards are dependent on the output of desired goods and services of the economy per person and not the number of “jobs” as such. Median living standards, and the living standards of the various economic “classes” of people (no income, low income, middle income, high income, rich)  are dependent on both the total output and, importantly, on how the output of the economy is distributed.

Popular opinion can get fixated on jobs, as if producing less with more people is the road to riches. Individual farm workers displaced by tractors early in the last century would not have believed that this was ultimately to their benefit in most cases, although not all individual cases, or that it was unambiguously beneficial to the population and humanity as a whole. The same will apply to workers displaced by technology today. It may be very unfavorable to those individuals displaced at least temporarily, and permanently for some. But technology and productivity improvements will continue to be unambiguously beneficial to average living standards. However, changes in the distribution of wealth may be needed to insure that the benefits are not unfairly concentrated among the richer members of society.

Buffett’s comments on productivity and prosperity with his usual clear examples can be found at pages 7 and 8 and 21 to 23 of his letter. Buffett raised this issue in response to those who believe that our economy is no longer delivering increasing living standards and also in response to criticism of his business partners at 3G (owners of Heinz, Burger King, Tim Hortons and Kraft Foods) who are known to be quite ruthless in slashing jobs when they take over a business. While detractors will seldom be appeased by mere facts, evidence and logic, I think Buffett does a great job of explaining his position on the matter.

Buffett has also come under criticism in regards to the lending and foreclosure practices of his Clayton Homes division. Buffett sets the record on that matter straight at pages 17 to 19.