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Warren Buffett explains the root of his success as acting rationally about capital allocation over the long term.  Our elected officials would be wise to take note of this investment advice when building a budget.  By focusing on where to allocate our society's capital over the long term, we can make wiser decisions.

Start with education.  In the 20th century, America allocated more capital to education than any other country in the world.  This investment gave us the most highly educated and innovative workforce in the world, and it explains much of our economic dominance of the past century.  But today, in the second decade of the 21st century, we are falling behind.  The United States ranks 27th out of the 29 most developed countries in the percentage of college students pursuing degrees in science or engineering, and we rank 48th out of 133 developed and developing countries in the quality of our math and science instruction.

Then consider the infrastructure that makes our economy efficient.  In the last century, America allocated more capital to basic infrastructure than the rest of the world combined, which gave us the most extensive and efficient transportation, energy, and telecommunications systems in the world.  But now we are falling behind in sustainable energy technologies that will provide the greatest economic efficiencies in the future.  Our electric grid is based on technology that is more than 100 years old.  The largest and fastest growing wind, solar, biofuels and other sustainable energy industries are in China, India, South Korea and Brazil.

So, what are our elected officials doing?  How are they allocating our capital to ensure that we lead the world in math, science, engineering, energy independence, and economic competitiveness?

They are cutting teacher compensation and benefits, reducing funding for student financial aid, and eliminating modest investments in sustainable energy, while preserving billions of dollars in direct and indirect government subsidies for multinational oil and gas companies and the domestic coal industry.

Rational allocation of capital for the long term?  I think not.  The implications of these capital allocations are clear:
  • Fewer of our best and brightest will choose careers as educators in math, science, and engineering
  • Fewer of our best and brightest will be able to afford advanced degrees in math, science or engineering
  • China, India, South Korea, Brazil, and others will outpace the US in sustainable energy job creation and other high-value job growth
  • The US will continue to remain dependent primarily on fossil fuels, and our economy will suffer from periodic and unpredictable price volatility
To those who say that we must cut spending to reduce deficits, Warren Buffett (and I) would agree completely.  In fact, in recent years Mr. Buffett has invested primarily in foreign companies and in US companies that earn most of their revenues from foreign markets precisely because he fears that government deficits weaken the US economy.  But agreeing to cut spending just begs the question, "Where should we cut?"

One place to start is government subsidies for fossil fuels.  It is a basic tenet of conservative and libertarian economics that investors in a free market can and should decide which industries succeed or fail without government subsidies distorting the price signals.  If oil, gas and coal are the best energy investments for the long term, then there is no need for billions of dollars in direct and indirect government subsidies to these industries.

Cutting all direct and indirect government subsidies for fossil fuels over a five to seven year period would give other energy sources a chance to compete for private investment dollars on a level playing field.  As investors realized the true costs of investing in fossil fuels (such as the cost of private insurance to cover potential nationalization of assets in foreign countries or multi-billion dollar liabilities for deepwater oil drilling), they would seek out less risky and more profitable alternatives.  The mix of energy sources would diversify naturally as investors allocated their capital to the best long-term prospects.  Diversifying the mix of our sources of energy would limit the effects of fossil fuel price volatility on our economy, create jobs in new industries, and make us less dependent on uncontrollable events in unstable areas of the world.

Forget for a moment the
compelling evidence that greenhouse gas emissions could destroy our environment in the next few generations.  Just focus on how capital allocations can impact our future competitiveness as a nation.   Imagine a future where other nations obtain 50% or more of their energy from renewable sources, while the US economy faces constant shocks from ever increasing and volatile fossil fuel prices.  Imagine a future where most of the sustainable energy jobs are outside the United States.  It makes no sense to continue allocating capital to fossil fuels in the form of government subsidies when those fuels put us at a competitive disadvantage in the world economy over the long term.

Cutting all direct and indirect government subsidies for fossil fuels would also reduce the pressure to cut investments in education.  The National Academy of Sciences estimates that we need 10,000 qualified math and science teachers every year to restore our leadership in these subjects over the long term.  But the combination of relatively low compensation and the need to repay large student loan balances deters many from a teaching career.  We should be investing more, not less, in education and student financial aid to ensure that we have the teachers we need to remain the most innovative and competitive economy in the long term.

What would Warren Buffett have to say about all this?  His actions speak louder than any words could.  He has invested in a mix of energy technologies including traditional fossil fuels, an electric vehicle and battery manufacturer in China and the American electric utility with the highest percentage of wind generated power.  He is betting that a diverse mix of energy sources will produce the greatest returns on his investments.  Our politicians would be wise to follow his lead.

John Howley
Woodbridge, New Jersey


 


Comments

J Humphrey
03/06/2011 9:27am

In the short term, the US should start drilling for oil in the US....we are supporting medieval regimes who support terrorism....wind mills were great hundreds of years ago when they powered grist mills....they are inefficient and ugly....Have Americans become lazy and spoiled??? I don't know ....and I don't think govt officials have the answers...

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Shawn Cappellano-Sarvr
03/06/2011 10:29am

This is great article and I have heard this recommendation before about cutting subsidies to the fossil fuel industry. In order for the common voter to pressure their congressman they need more specific information. I believe that you should begin publishing a list of where these subsudies are. Start with the largest ones and work through the list. Many are hidden in larger programs and it is difficult to determine that they are even subsidies.

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03/06/2011 5:01pm

Interesting views from the US perspective but your realities seams to be heavy. US National political incentives and taxes will not go in the direction to b less independent on fossil fuels. Maybe your hope will be on the US cities network. Mayors understand what it means to work in the direction of Sustainability. Green procurement in cities will be an important tool for a better market with long term sustainable development.
Our experience in Sweden and other Nordic countries can be an exellence best practise on how to take step away from fossil fuel dependency. Sweden have already taken a step climbing over the 50 % level of total energy use from renewable energy. Read more in my blog and see the interview with the Mayor of Malmö Ilmar Reepalu and get inspired.
Kaj Embren

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Paul Lester
03/08/2011 9:52am

I agree with Shawn Cappellano-Sarvr, the average tax paying citizen doesn't know & probably don't realize our gov't subsidizes "big oil". A published list of congressional supports for "big oil" subsidies could make a difference. Politians respond responsibly when they know there votes are being watched.

To the question about math & science in school, as a former school board member, I have a definite opinion on that issue. Keep the politians out of education. They do nothing to advance education. They pass non-funded resolutions on cirriculum that do nothing more than take away from core cirriculum - reading, writing, & arithmetic. There pet programs cause teachers to dilute the time available to them on subjects that satisfy there political agenda or supporters. Politicians are the greatest drain on resources. Not the teachers or the educational system. My former school superintendent use to say; "be afraid when congress is in session".

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