Warren Buffett's Economic Confusion

The Berkshire Hathaway CEO needs to keep his comments straight about government regulation and economic uncertainty.


Warren Buffett, the CEO of Berkshire Hathaway and one of the richest men in the world, put out his annual letter  to shareholders over the weekend.

It got a lot of press attention, but, as is often the case with Buffett, even in the newspapers that he does not own, the attention was so worshipfully deferential that it ignored a glaring contradiction in the letter.

That contradiction, though, is newsworthy not just for what it says about Buffett, his company, and the press, but for the insight into the broader relationship between business and government.

In one part of this year's letter, Buffett mocks other corporate executives who have complained about "uncertainty." He writes, "There was a lot of hand-wringing last year among CEOs who cried 'uncertainty' when faced with capital-allocation decision… If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you."

This is a somewhat familiar theme for Buffett. It echoes his claim in a November 2012 New York Times op-ed piece that an investor who decides not to invest because taxes are too high exists "only in Grover Norquist's imagination." In that op-ed Buffett wrote, "maybe you'll run into someone with a terrific investment idea, who won't go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him."

At least in those cases Buffett was consistent. But in this year's annual letter, just a few pages past the dismissive comments about CEOs complaining about uncertainty, Buffett offers his own mini-lecture about the need for — sure enough — certainty. In the section of the shareholder letter on "regulated, capital-intensive businesses," Buffett writes, "we are the leader in renewables: first, from a standing start nine years ago, we now account for 6% of the country's wind generation capacity. Second, when we complete three projects now under construction, we will own about 14% of U.S. solar-generation capacity. Projects like these require huge capital investments. Upon completion, indeed, our renewables portfolio will have cost $13 billion. We relish making such commitments if they promise reasonable returns — and on that front, we put a large amount of trust in future regulation… It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects."

Got that? At the beginning of his letter, and in his New York Times op-ed, Buffett ridiculed other CEOs who might let their investment decisions be affected by government tax policy or by uncertainty about such policy. But in the section on investing in solar and wind energy, Buffett says he'll only invest "if" the return is reasonable — and he says that whether the return is reasonable depends on "future regulation" and on whether governments "treat capital providers in a manner that will ensure the continued flow of funds to essential projects."

Buffett or his defenders might try to finesse this contradiction by claiming that he was ridiculing concerns about uncertain tax or overall business conditions, not about uncertain energy regulation. But since the main energy regulation about which there is uncertainty is, in essence, a tax on carbon dioxide emissions, this is a distinction without much of a difference.

Not only is there a contradiction between what Buffett says about uncertainty and investment in one part of the letter and in another part of the letter, there is also a contradiction, or at least a big difference in emphasis, between what he says in the letter and what his company reports to the Securities and Exchange Commission. The Buffett letter makes it sound like Berkshire Hathaway's utility, MidAmerican Energy Company, is mainly in the "green" energy business.

But that's spin. He gives the percentages of MidAmerican wind and solar as part of the country's wind and solar capacity. A more relevant figure would be MidAmerican's wind and solar capacity as part of MidAmerican's overall capacity. MidAmerican boasts more than 22,000 megawatts of owned and contracted generation capacity; the SEC filing  says its wind amounts to 3,697 megawatts, or about 17 percent of the total, and the solar "in operation and under construction" will be 1,271 megawatts, or about 6 percent of the total. As a result, according to the SEC filing, stricter emissions rules wouldn't help MidAmerican they way they might help a purely wind or solar company. Rather, the SEC filing says, "New requirements limiting greenhouse gas emissions could have a material adverse impact on MidAmerican."

In other words, even Warren Buffett, the businessman so rich and so successful he goes around mocking other CEOs for worrying about the uncertainty of taxes or regulations, isn't immune to government actions. Stricter emissions rules could hurt his energy business, but he only wants to invest more in clean energy if "future regulation" makes it worthwhile. A check of the Senate Lobbying records database discloses that MidAmerican — which Berkshire Hathaway owns — spent more than $1.5 million last year lobbying Congress on 41 pieces of legislation, including something called the "Energy Tax Prevention Act." MidAmerican is also a member of the Edison Electric Institute, which spent more than $10 million on its own lobbying activities in 2012.

The next time some lobbyist hired by Buffett shows up in a congressional office to plead his case, maybe the congressman can refer the lobbyist to Buffett's scornful remarks about handwringing, make some dismissive comments about "short-term worries," and offer to find someone else to take the investment off Buffett's hands.