warren buffett profile pictureBy Chad Sandstedt of Value Investing Lab

I’ve had several people ask me what I think about Warren Buffett’s recent op-ed piece in the New York Times titled Stop Coddling the Super-Rich where he argues for higher tax rates on the super-rich. I personally think Buffett is making the wrong argument. If you changed the name on the financial statements from the United States of America to anything ending with an Inc. he would streamline it faster than he eats an Oreo Blizzard. Here is one of the greatest capital allocators of all time arguing for the most successful sliver of our society to pick up the tab for an inefficient government structure. Instead of simply telling his billionaire counterparts to start writing checks, he should be arguing for a better, more efficient government structure.

Since he became Chairman of the company in 1970, Buffett has employed an ultra-flat management structure for Berkshire Hathaway. If this is how he chooses to run the company he owns 23% of, why not apply the same approach to government? What would government would look like if it were run like Berkshire Hathaway? In a word, unrecognizable.

Corporate Offices = Federal Government
Operating Companies = State and Local Governments
Customers = Taxpayers

Berkshire’s 2010 10-K reported total revenue of $136 billion and 260,000 employees at the end of 2010. The revenue number does not reflect a full year of BNSF railroad operations so the data through the first half of 2011 is a better measure of current revenue at an annualized $142 billion. Of the 260,000 people employed by Berkshire, only 21, including Buffett, work at the corporate office in Omaha (link to source). This ratio is one employee in the corporate office for every 12,400 employees in the operating companies. Using a similar approach with total revenue the ratio is one corporate office employee per $6.8 billion in revenue.

Approach #1 – Employee Ratio

According to the U.S. Census Department there were 16.8 million full-time equivalent employees of state and local governments in 2009 (link to source). Using Berkshire’s ratio of one corporate office employee for every 12,400 employees in the operating companies, the federal government would have just 1,357 employees if it were run like Berkshire Hathaway.

Approach #2 – Revenue Ratio

Over the last 12 months total state and local tax revenue was $1.3 trillion according the the U.S. Census Department (link to source). Using Berkshire’s ratio of one corporate office employee for every $6.8 billion in revenue the federal government would have just 191 employees if it were run like Berkshire Hathaway.

Back to Reality

Excluding military personnel the federal government employed 2.8 million people in 2010 (link to source). I’m not arguing that we should cut the federal government workforce to 191 employees but I do think Mr. Buffett would be better served spending his efforts on arguing for a more efficient government than increased taxes on the super-rich. He should hold his government to the same standard of efficiency that he has for his company.

Mr. Buffett is a master at letting his managers run their operating companies. A similar approach to government would be refreshing. If more of our country’s governance occurred at the state and local levels it would also mandate fiscal responsibility since no state or local government can print their own currency (link to source). Mr. Buffett, you are undoubtedly a great investor, but please hold your government to the same standard as your own company.

Disclosure: I do not own shares of Berkshire Hathaway.