December 7, 2010
Warren Buffett, Robber Baron?
I know that we are all supposed to love Warren Buffett as the Sage of Omaha, businessman and all-around good guy, but I keep reading stories that make me wonder. Here's a story about Warren Buffett, the estate tax, and the life insurance industry.
Did you know that the life insurance lobby is actively lobbying to restore the estate tax?
Why would the life insurance industry care about that? It turns out that ten percent of life insurance industry revenue is related to the estate tax. Wealthy people take out life insurance in order to reduce estate taxes because when you die, your life insurance payout doesn't count as part of your estate.
Did you know that Warren Buffett owns six life insurance companies? Did you know he supports the estate tax? You do now.
Warren Buffett isn't just noted as an owner of life insurance companies and a supporter of the estate tax. He's also noted as a buyer of family businesses. As Dick Patten shows, these two business strategies support each other.
A family business owner or farmer takes out a large life insurance policy which he sinks tens or hundreds of thousands of dollars into each year. When he finally passes away, the life insurance pays out his policy to his family--tax free...Even as Mr. Buffett's insurance companies are "protecting" family businesses from the IRS, he is buying companies that are forced to sell themselves to pay the death tax. Mr. Buffett's ability to buy family businesses at bargain basement prices depends on families being desperate to sell-and nothing produces family businesses desperate to sell quickly like a 55% bill from the IRS on all of the businesses' assets.
Estate taxes must be paid to the U.S. Treasury within a year of the testator's death. In cash.
Back in 1931, the liberal son of an immigrant banker knew what to call this kind of business. Matthew Josephson wrote The Robber Barons to argue that the industrial giants of the 19th century had not created wealth in the right way. They had acted like the feudal barons who for centuries had dominated the mountain passes through the Alps. The great corporations of the Gilded Age "monopolized strategic valley roads or mountain passes through which commerce flowed" just like the old barons-of-the-crags.
Hello, Warren? Isn't your business model exactly the one that so offended young Matthew back in the Great Depression after he got back from a decade living la vie bohème as an ex-pat in Paris? Aren't your businesses sitting at an economic choke-point, exploiting the unintended consequences of bad government economic policy, gouging successful family businesses both coming and going, and exploiting grieving widows?
Matthew Josephson inaugurated the arch, knowing style that liberal John Kenneth Galbraith picked up in the 1950s and that Noam Chomsky does so well today. These writers all appeal to the liberal reader who wants to believe that America is unjust and crude but who doesn't want to be enlightened much by actual knowledge about business and the economy.
That's OK. Let our liberal friends spin their fantasies of conspiratorial robber barons and corporate greed. We have Hernando De Soto with The Other Path and The Mystery of Capital. He shows us how the real robber barons are the leaders of "redistributive combines" of special interests competing for privileges from favor-dispensing politicians and bureaucrats.
And now we have Deirdre McCloskey and her bubbly, one-of-the-girls style. In The Bourgeois Virtues, she argues that whether you like capitalism or not, there are now six times as many humans living today as in 1800, and the average living human consumes eight and a half times as much as people consumed two hundred years ago. Plus capitalism has made us "ethically better people," whereas socialism does the opposite.
It's hard to think of Warren Buffett as a robber baron. He's a jolly chap who just seems to be along for the ride. But the ugly truth is that his businesses benefit from one of the major big-government redistributive programs by which the ruling class makes government big and families small. He's a leader of a "redistributive combine" that wants to keep what it got from the government favor factory. He's one of the chaps sitting by the side of the road taking their cut, courtesy of Uncle Sam.
It would be nice if our liberal friends would be as hard on their green-energy crony capitalists and their high-speed rail robber barons as they would like to be on the white working-class striver trying to buy a small construction business.
But at least Warren Buffett is a nice robber baron. We all like life insurance companies. They are different from health insurance companies.