2003: Are American consumers over leveraged?

AUDIENCE MEMBER: I’m John Bailey (PH) from Boston.

I’d like to ask about our consumer businesses, which means that I have to ask about the consumer in general.

The situation, as I understand it, is that over the last 30 years or so the median consumer has seen his income rise only a little faster than inflation, and much slower than GDP, overall.

Income inequality is at a 400-year high. The present value of lifetime income for the median person has improved slowly. Yet the size of his lifetime liabilities, such as health care, housing, education, and retirement, has ballooned.

The economic net worth, then, of the consumer may be poorer than they think.

To cope, the median guy has put his wife to work, borrowed against the house, and also the credit cards.

So I think this may have some implications for the sustainability of consumer businesses. And seeing that we’ve been buying a number of them recently, how do we think about this problem? And are there any non-obvious risks that we should be considering?

WARREN BUFFETT: The American consumer, overall, is better, but not dramatically better off than 10 years ago. Even somewhat better off than 20 years ago. But you’re quite right in that there’s been considerable inequality, in terms of the progress of people financially during that period.

We don’t have broad ideas about — I mean, we don’t make decisions on what business we buy based on some sweeping future projections about things.

We think America will do pretty well over time. In fact, we’d — we’re quite sure it will do pretty well over time and that our kids will live better than we live. My kids would say that wouldn’t be so difficult. (Laughter)

But the — and the grandchildren will live better. You know, that has been the history of the American economy. The real income per capita grew sevenfold, I believe, in the 20th century. That is huge.

You know, it cost $18, as I remember, to make a three-minute station-to-station call from New York to San Francisco 40 years after the telephone was invented. And at the time the $18 was more than the average weekly wage in the United States.

You know, think if some little kid had picked up the phone on the other end and there went the whole weekly wage while you tried to get, you know, your daughter on the phone, or whatever.

So it — people will be better off in this country decade after decade. But we don’t — we’re not big on being futurologists or anything at Berkshire.

I will tell you this, in terms of our consumer businesses, right now, they’re very soft.

Our furniture and jewelry businesses generally — candy business, businesses dealing with the consumer day by day — are soft, and the first quarter the earnings were down.

WARREN BUFFETT: One of the things you have to think about — and people don’t — they don’t focus on this very much. But you read about GDP, and this is one reason I think — I really think we’ve been in a recession now — not a huge one, but — or not a violent one — but for over two years.

When the government talks about GDP, A, they talk about GDP, we’ll say, going up 2 percent. But of course, the population of the country, you know, goes up something over 1 percent per year. So it’s per capita GDP that counts. And that has gone very close to no place.

But the more important factor, to some extent, is that GDP counts the people that, you know, have you take off your shoes when you go to get on an airplane. You know, it counts extra police. It counts all of these things that don’t really translate into — they translate into goods and services that the country wants, but they are not goods and services — I mean, they’re goods and services we wish we didn’t want. And they — all of that counts the same way.

If there’s a — 20 guards at the airport instead of three guards, that goes into GDP. But does it make you feel any better about how you’re spending your paycheck every month? Probably not.

And when you get into a war, for example, if you drop planes into the ocean, you know, that’s part of GDP, the cost of manufacturing those planes. But it doesn’t do anything for you at your house.

So in terms of what I would call “desirable GDP,” I think my guess is that, on a per capita basis, that has gone no place in the last few years as we’ve diverted resources to other things that don’t really translate to what goes into your house or onto your table.

And the quality of GDP is something that is not really talked about very much when you pick up the economic reports every day.

Charlie?

CHARLIE MUNGER: Yeah, and the type of figures you gave us about inequality tend to obscure a basic and important fact. If the same families were permanently at the top of the economic heap there would be huge resentments about current inequality.

But when the coupon clippers and the DuPont family go down, and somebody creates something like Pampered Chef and comes up, in a real sense, something wonderful is happening in terms of equality, even though at the end it looks like there’s been no progress.

That much churn makes people think the whole system is fairer. (Applause)

WARREN BUFFETT: We prefer not to be part of the churn, though, actually, at this point, I think. (Laughter)

We were much more in favor of churn 30 or 40 years ago. (Laughter)