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15
Morningstar FundInvestor
March 2016
nor do they work harder than did Americans in
1930
. Rather, they work far more efficiently and thereby
produce far more. This all-powerful trend is certain
to continue: America’s economic magic remains alive
and well.”
Looking ahead, even a lackluster
2%
real
GDP
growth
rate results in a per-capita growth rate of
1
.
2%
,
which, over
25
years, “leads to a gain of
34
.
4%
in real
GDP
per capita.... In turn, that
34
.
4%
gain will
produce a staggering
$19
,
000
increase in real
GDP
per
capita for the next generation,” Buffett writes.
“Were that to be distributed equally, the gain would be
$76
,
000
annually for a family of four.”
American innovation and productivity gains are major
ingredients in the secret sauce. Buffett points to
the history of farming: “Huge increases in physical
[crop] output have been accompanied by a dram-
atic reduction in the number of farm laborers (‘human
input’). Today about three million people work on
farms, a tiny
2%
of our
158
-million-person work force
[versus
40%
of the work force in
1900
, by Buffett’s
numbers]. Thus, improved farming methods have
allowed tens of millions of present-day workers
to utilize their time and talents in other endeavors...
We would not have anything close to the America
we now know had we stifled those improvements
in productivity.”
Those endeavors and innovations in turn enable
dramatic improvements to quality of life, including
advancements in technology, medicine, transpor-
tation, and entertainment. “Rockefeller certainly had
power and fame,” Buffett observes. “He could not,
however, live as well as my neighbors now do.” (When
Buffett talks about “his neighbors,” remember that
he famously lives in the same Omaha, Nebraska, house
that he bought in
1958
.)
But such innovation also has a dark side, Buffett
notes: “A long-employed worker faces a different equa-
tion. When innovation and the market system
interact to produce efficiencies, many workers may
be rendered unnecessary, their talents obsolete.
Some can find decent employment elsewhere; for
others, that is not an option.”
Berkshire’s own businesses have not been immune.
“When low-cost competition drove shoe production
to Asia, our once-prosperous Dexter operation folded,
putting
1
,
600
employees in a small Maine town out
of work,” he recounts. “The same scenario unfolded in
slow-motion at our original New England textile
operation, which struggled for
20
years before expiring.
Many older workers at our New Bedford plant, as a
poignant example, spoke Portuguese and knew little,
if any, English. They had no Plan B.”
Buffett argues that the solution lies not in curbing the
march of productivity, but instead helping those
displaced workers. “Americans would not be living
nearly as well as we do if we had mandated that
11
million people should forever be employed in farm-
ing,” he argues. “The solution, rather, is a variety
of safety nets aimed at providing a decent life for those
who are willing to work but find their specific
talents judged of small value because of market
forces.” Buffett specifically says he would favor
a reformed and expanded Earned Income Tax Credit.
Near the end of his letter, Buffett adds a darker adden-
dum to his generally optimistic outlook. “There
is...one clear, present and enduring danger to Berk-
shire against which Charlie [Munger, Buffett’s
business partner] and I are powerless. That threat to
Berkshire is also the major threat our citizenry
faces: a ‘successful’ (as defined by the aggressor)
cyber, biological, nuclear or chemical attack on
the United States. That is a risk Berkshire shares with
all of American business.”
Buffett further notes that, although the risk of such an
event may be small in any given year, small, ever-
present risks become much more certain over time to
occur at some point. “There is no way for American
corporations or their investors to shed this risk,” Buffett
writes. “If an event occurs in the
U.S.
that leads to
mass devastation, the value of all equity investments
will almost certainly be decimated.”
He concluded, “For
240
years it’s been a terrible mis-
take to bet against America, and now is no time to
start. America’s golden goose of commerce and inno-
vation will continue to lay more and larger eggs.”
K