In Warren Buffett’s annual letter to Berkshire Hathaway stockholders he gives us his usual forthright rundown on what he and Charlie Munger have been doing with everyones’ money. He makes the usual slightly eyebrow raising joke or two (this year it’s about his not quite being ready for Tinder) and, again as usual, makes a couple of important points about the passing world outside the company. One interesting side point is that climate change isn’t going to damage Berkshire Hathaway’s profits: insurance premiums are set on an annual basis and so premiums will go up as any damage (or as such damage doesn’t appear they won’t go up) starts to happen. Thus the climate might be a problem for all of us, might be more so for those living in low lying areas, but it’s not going to be one for insurance companies.
But from the point of view of economics and possibly public policy his most striking point is that of course today’s children are going to be better off than their parents:
Warren E. Buffett took aim on Saturday at the “negative drumbeat” of this year’s presidential campaign, saying that the view that children today would not live as well as their parents was “dead wrong.”
In his annual letter to shareholders, the billionaire investor — who has endorsed Hillary Clinton for president — wrote that “the babies being born in America today are the luckiest crop in history.”
In more detail in the letter itself:
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course,
only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not
live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a
staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or
their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did
Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is
certain to continue: America’s economic magic remains alive and well.
Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to
see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers
2% annual growth means the economy doubles in size every 35 years. Buffett adjusts for population growth, demography and so on, but his numbers are absolutely correct. And note what 2% does for our grandchildren: the economy grows fourfold in 70 years at that rate. There’s also no doubt at all that this growth rate is possible. Yes, even in the face of climate change. In fact, the lowest estimate of future economic growth that we use in working out the effects of climate change (yes, this is from the models that the IPCC uses) insists upon the global economy growing five times larger by the end of the century. That’s the lowest by the way, the one that says climate change ain’t gonna be no big thing.
All of this is very similar to Keynes himself of course from near a century ago:
Let us, for the sake of argument, suppose that a hundred years hence we are all
of us, on the average, eight times better off in the economic sense than we are
to-day. Assuredly there need be nothing here to surprise us.
OK, you need a little bit higher than 2% to get that, maybe 3%. But that is what the past century has given us.
The underlying point that is really being made here, by both Buffett and Keynes, is that the consequences of compound productivity improvement are vast. Sure, we might have swings and roundabouts along the way, the business cycle does still and always will exist. But as long as we can keep that basic technological improvement going then the future is going to be very much richer than the past or us now. And if we’re honest about it the only thing that can keep technological improvement from leading to that productivity improvement is our own stupidity. It’s been remarked (and Paul Krugman noted) that the Soviet Union, in all its 70 years of existence, managed not one iota of productivity improvement. The market economies, at the same time, on the other hand were managing that very handy 1.5 to 2% on average over the years.
Our lesson therefore being let’s not copy the Soviets. This doesn’t just mean not being communists, not just our avoiding shooting all the bright people and anyone who disagrees. It also means not abandoning the market system of the economy, that very system that encourages the invention and innovation that leads to that sort of economic growth. A bit more redistribution? Sure, why not, if that’s what everyone wants? A planned and scientific economy: nope, we’ve got to maintain the chaos of the market in order to get that onward advance.