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From a conversation between Warren Buffett and Bill Gates, Buffett remarks:

what if you had three percent or something like that of the corporate income tax totally devoted to a fund that would be administered by some representatives of corporate America to be used in intelligent ways for the long-term benefit of society, This group-who think they can run things way better than government-could tackle education, health, etc. or other activities in which government has a large role. And it would have this forced funding of three percent of corporate profits or some sum like that. Ace Greenberg used to insist that all the managing directors of Bear Stearns give four percent to charity, and in December he went around and talked to everyone who hadn’t yet given his four percent. And he told all the Jews that they had to give any shortfall at year end to Catholic Charities, and he told the Catholics they had to give it to the United Jewish Appeal. Well this would be a variation on that. Take three percent-pick a figure-of corporate income. That would be, perhaps, $30 billion a year (you would exempt small companies). If there are things to be done in society that the market system doesn’t naturally lead to, something like this would be a supplement to the invisible hand. It would be a second hand that would come down for society-administered in a business-like manner-and it might be interesting to see what a system like that might produce.

So Mr. Buffett is paying heed to the concerns of the public choice school, but this idea runs into the very same troubles that damn traditional government interventions. The public choice analysis does not deny that unfettered markets may lead to outcomes that, from a utilitarian perspective, are less than socially optimal. What it does do is encourage observers to ask two questions: (1) this policy, as compared to what? and (2) what are the incentives that are facing the individuals and institutions that are supposed to “correct” a purported market failure?

In applying these questions to Mr. Buffett’s proposal, he addesses the first, but not the second. Yes, perhaps a panel of businessmen will manage a public fund better than some bureaucrat (but I would not even grant that), but what about the incentives for the businessmen to get it right. After all, they would still be spending someone else’s money on something other than themselves – never really a guarantee of a good outcome. In addition, what would the consequences be to this select group for not being successful? Surely they are no worse than when bureaucrats get it wrong.

And this all still leaves us with two more major problems:

  1. There is still some committee, some select group – call them what you want – I choose to call them almighty and powerful plutocrats, that will be deciding what projects are worthy and what are not. This is in contrast to the direction of the billions of individual decision makers throughout the global economy.
  2. Even if the 3% fund is used successfully, policymakers never seem to ask the question as to what good might have been accomplished by fostering more growth (by not taking the 3% to begin with). Do we not think that if Microsoft kept an additional 3% of its profits, it wouldn’t do more good for the world than if those profits were taken from them? Wouldn’t more engineers have work, more technicians, and countless other jobs be filled? And what of the products that were never created, or the chances that were never taken? In other words, the single best way to reduce poverty is to make workers more productive – and that requires capital accumulation, in direct contrast to such a tax or fund.

This is not to grant Mr. Gates’ points in the first place. More on that later.

One Response to “Warren and Bill Over Coffee”

  1. Michael says:

    If they can do that with three percent, think of what they can do with four, or maybe ten percent! Oooh, just imagine twenty percent…

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