Hasta la vista, Buffett

Posted: Aug 18, 2003 12:00 AM

There is a long and tragic tradition that runs through American politics in which politicians spend themselves into a fiscal crisis during good economic times and then raise taxes to bail themselves out when a recession hits and revenues plummet. This is precisely what's going on today in Alabama and California.

In both states between 1997 and 2000, state spending increased more than three times faster than the combined rate of inflation and population growth. Not only does government continuously get bigger and more intrusive, politicians on the left forever manipulate the tax system as a mechanism of income redistribution and social engineering in a counterproductive cycle that makes government an ever-growing impediment to economic growth and entrepreneurial risk-taking.

The jury is still out in California whether voters will accept the populist scam this time around or throw liberal Gov. Gray Davis out and replace him with a candidate who understands the need to break the tax-and-spend cycle. In Alabama, it is a conservative Republican governor, former Congressman Bob Riley, who is proposing such massive spending increases, tax hikes and redistribution of the tax burden that Alabama Republican Party Chairman Marty Connors was moved to exclaim, "If a Democrat had proposed this, we would be burning down cities."

Arnold Schwarzenegger is one among three other serious candidates for the California governorship - Sen. Tom McClintock, businessman Bill Simon and former baseball commissioner Peter Ueberroth - who has a chance to reverse this harmful cycle if he wins the California statehouse. But Schwarzenegger will never succeed if he insists on listening to billionaire investor Warren Buffett, whom he recently appointed his economic adviser. He should instead listen to former Treasury Secretary George Schultz, Milton Friedman and Art Laffer.

Buffett is in a long tradition of self-made rich guys who forget how the dynamics of capitalism allowed them to accumulate their money. Secure in their wealth, they recommend policies in the name of "fiscal responsibility" and "fairness" that prevent the poor and middle class from getting rich.

For example, Buffett completely misunderstands the important role employee stock options play in giving workers an ownership interest in up-and-coming companies. He would change the rules by which stock options are accounted for on financial statements in a way that would reserve them for top executives and make it virtually impossible for entrepreneurs to continue giving their workers a piece of the company in exchange for their sweat equity.

In the past, Buffett repeatedly has opposed tax-rate reductions at the federal level, and he even opposed the recently enacted legislation lowering the tax on dividends and capital gains, revealing his almost total lack of understanding of incentive economics. Now he has said California taxes are too low, and his statements suggest he would advise Schwarzenegger to back repeal of Proposition 13, the restriction on property-tax growth that has been a thorn in the side of big-spending California liberals for 25 years.

Schwarzenegger does understand the urgent need to attract businesses that have been leaving in droves in recent years back to California. In a recent Chamber of Commerce poll, 93 percent of companies doing business in California, including the small businesses that employ 82 percent of all California's working people, believe the state is moving in the wrong direction, and 90 percent believe business conditions are worse than two years ago.

Buffett says of Schwarzenegger, "Arnold is a very smart fellow. He has brains and muscle. Some of us have neither." He also once said, "If calculus were required, I'd have to go back to delivering papers. I've never seen any need for algebra, either."

Buffett, as Winston Churchill might have observed, is a very modest fellow with much to be modest about, which is not to demean the Wizard of Wall Street, who is one of the most successful investors of all times. It is merely to point out that being the world's best stock picker doesn't qualify you for much beyond, well, picking stocks. It certainly doesn't qualify one to advise the governor of a state with an economy the size of France. Whether or not Buffett can do algebra, I cannot say, but it is obvious from listening to his ill-conceived pontifications on economic policy over the years that he doesn't understand Adam Smith, much less the Laffer Curve.

On the other hand, Schwarzenegger, who came to America from his native Austria with only $25 in his pocket, does understand Friedman. In fact, he introduced Friedman's television series on the virtues of free markets and small government, "Free to Choose," with these words: "I come from Austria, a socialistic country. ... I felt I had to come to America, where government isn't always breathing down your neck or standing on your shoes." Wouldn't it be a shame if Arnold were elected governor and the first thing he did on the advice of Buffett was to stick his hand in the pockets of California taxpayers?

As a native Californian, my instincts tell me Schwarzenegger will never see the inside of the governor's mansion in Sacramento unless he says hasta la vista to Buffett before Election Day arrives.