What Has Warren Buffett Accomplished for the Economy?
What Has Warren Buffett Accomplished for the American Economy Since 1965?
As we approach the 50th anniversary of Warren Buffett’s taking control of Berkshire Hathaway on May 10, 1965 it is timely to look at what he has done for the American economy.
Opinions on what, if anything, Buffett has done for the overall American economy would vary widely. The two bookends of the spectrum of opinion might be something along the lines of the following:
The view of the harsher Buffett bashers and doubters might be: Buffett has done little or nothing for the wider economy. He owns companies and shares in companies that would have existed with or without him. He did not start these companies. Far from contributing to the economy he has simply sucked out billions for himself.
The view of the most devoted Buffett believers and fans might be: Buffett has done a very great deal for the wider American economy. Under his ownership employment at Berkshire has increased from about 2000 in 1965 to about 331,000 today. Berkshire’s revenues have increased from $49 million in 1965 to $182,150 million in 2013. Under Buffett, Berkshire has paid many billions in income tax.
For a realistic view of what Buffett has accomplished for the economy through his control and management of Berkshire we have to recognize that each of the views above has some truth behind it but that each of these two book ends is too extreme.
We can divide Buffett’s activities and economic accomplishments at Berkshire into three main categories:
1. The purchase and relatively passive holding of shares in various companies and also of bonds of corporations and governments.
2. The purchase and particularly the subsequent control, management and (usually) growth of numerous businesses.
3. The allocation of Berkshire’s earnings to selectively reinvest in its controlled companies, to purchase additional controlled companies and to make additional passive investments.
We can look at what, if anything Buffett has accomplished for the economy under each of these categories in turn. In reviewing each of the three categories I will err somewhat to the side of concluding that there was no benefit to the overall economy unless the benefit is relatively clear.
1. The purchase and relatively passive holding of common shares and bonds
My conclusion here is closer to the Buffett basher or doubter view. This passive investment activity itself did not really add anything to the American Economy. It is true that investors as a population contribute to the economy by providing investment capital to businesses. But that basically occurs at the stage where investors provide capital to corporations at their start-up phase or by buying shares in initial public offerings and in subsequent share offerings. But Buffett rarely, if ever had Berkshire invest in initial public offerings or share issues by companies. He mostly bought shares from other investors on the open market.
For example, when Buffett (i.e. Berkshire) bought and held American Express shares, that did not change the economic output of American express. I don’t believe that the purchase and subsequent passive holding of securities by Buffett from other investors can be said to have done anything for the wider American economy.
In any cases where Buffett became an active minority owner and had a material influence on management, I would give credit for that in category 2, where I deal with his management of companies. I would exclude from this passive category his direct cash infusions into companies such as the very large preferred share investments in selected companies during the credit crisis. That activity perhaps fits better in category 3, the selective allocation of capital to various companies.
Some of his bond investments would have been purchased directly from the issuing companies. But, in most cases the bonds would have been purchased by other investors if Buffett had not purchased them and so the fortunes of the issuing companies were not changed and I do not see any clear benefit to the larger economy caused by those bond purchases.
2. The control, management and growth of numerous businesses
To the extent that Buffett had Berkshire purchase private companies and then continued to run those companies in the same way and often with the same managers then it is not apparent that this would be a benefit to the wider economy. However, to the extent that Buffett was able to encourage a culture of efficiency and doing more with less, that is a benefit to the wider economy. I believe this efficiency effect has occurred. Buffett has down-played his influence on his subsidiary companies and it would be very difficult to estimate the magnitude of his benefit to the wider economy through his management process. But it seems clear that there was some benefit to the economy here.
3. The selective allocation and reinvestment of Berkshire’s earnings
I believe Buffett’s selective approach to reinvestment of Berkshire’s earnings did have a very material benefit to the wider economy. In his earliest days controlling Berkshire he was able to harvest profits and cash flows from its original textile operations and begin investing those in securities and in buying an insurance company. This included harvesting some capital by selling some real estate and by reducing inventories and accounts receivable. At that time, other textile operations continued to plow cash flows back into the declining textile industry rather than diversify.
It would have been a waste of economic resources for Berkshire to continue to reinvest cash flows into this fading industry. It was a benefit for the economy to have that cash invested into growing industries. Even where Buffett used the cash to simply buy shares from other investors, rather than invest that cash in more textile equipment, that was beneficial since the seller of the shares then had the cash to spend in the economy. It is not a good thing for the economy if resources are invested into assets that are not needed. For example the American economy would not have benefited if the proverbial buggy whip manufacturers had invested in machines to become more efficient at producing buggy whips as automobiles made horse and buggy transportation obsolete in the early 1900s.
By owning and controlling numerous businesses under Berkshire, Buffett was able to direct profits and cash flows from declining or stable companies towards companies that were both fast-growing and that could derive the most profit from capital investments. Directing scarce capital investments away from less productive uses and towards more productive uses is a benefit to the larger economy.
It is difficult or impossible to estimate the overall positive impact that Buffett has had on the wider economy. It seems clear that there has been some benefit due to efficient management and particularly the efficient allocation of capital to the most productive uses.
But also, undeniably, some of the wealth that Buffett and the other long-time Berkshire share holders have amassed would have simply gone to others in the absence of Buffett.
Some people may cling to the extreme view that Buffett has sucked billions of dollars out of the economy for his own benefit. This is not true. Since Berkshire does not pay a dividend and since Buffett has never sold any share except for charitable purposes, and since furthermore he takes a salary of only $100,000 per year he has in fact consumed NONE of the vast wealth that he owns in Berkshire.
Warren Buffett, through Berkshire Hathaway, has accomplished much for the economy. It’s not an accomplishment that can be easily measured but clearly a great deal has been accomplished.
Shawn Allen, CFA, CMA. MBA, P.Eng.
President, InvestorsFriend Inc.
November 1, 2014