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Portfolio > Economy & Markets

Warren Buffett Falls Into the Confidence Trap

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Warren Buffett, chairman and chief executive of Berkshire Hathaway, is a confident man. Having built one of the greatest businesses in history, and having become one of the world’s richest men in the process, he sees great prosperity in the rear-view mirror, and more of the same ahead.

Speaking at his company’s annual shareholders meeting in Omaha, Buffett said: “Twenty years from now, there’ll be far more output per capita in the United States in real terms than there is now. In 50 years, it’ll be far more.”

Buffett provides an almost perfect illustration of what Cambridge University politics professor David Runciman calls “The Confidence Trap.” Runciman published a book with that title in 2013, in which he explored a neurotic tic of successful democracies: the tendency to muddle through on the assumption that muddling through has historically worked out well for democracies, and probably always will.

“Things look bad,” Runciman wrote, surveying political and economic dysfunction in Europe and the U.S. after the 2008 crash, “but the historical record of democracy suggests that nothing is as bad as it seems. This is why we find it so hard to know how seriously to take the current crisis of democracy.”

In his talk, Buffett didn’t just project a delightfully rosy half-century of U.S. economic gains. He made a point of reassuring shareholders that today’s discordant politics wouldn’t jeopardize tomorrow’s prosperity. “If either Donald Trump or Hillary Clinton becomes president, and one of them is very likely to be, I think Berkshire will continue to do fine,” Buffett said.

The 85-year-old added: “No presidential candidate or president is going to end that. They can shape it in ways that are good or bad, but they can’t end it.”

Buffett has history on his side. The Great War. The Great Depression. World War II. Vietnam. Stagflation. Globalization. The 2008 Crash. Each threatened democracy in its way. None succeeded in puncturing its steady rise and expansion. So the lesson is clear: Neither snow, nor rain, nor heat, nor gloom of Trump can disrupt the U.S. economy on its appointed rounds.

Yet that’s just the sort of analysis of democracy’s capacity that Runciman regards with a hint of dread.

“I think Buffett’s taken the wrong lesson from the last hundred years,” said Runciman, via e-mail. “He seems to think the real story is that economic fundamentals trump (if we’re still allowed to say that) political incompetence. He treats politics as secondary. But politics is primary and it still has the ability to screw everything up. America didn’t prosper over the past century because it was bound to prosper. Things could have gone badly wrong. The success of American democracy was down to a mixture of skill and luck. Luck can run out. So can skill.”

It’s doubtful that Buffett would contend that Berkshire Hathaway would continue to prosper with an incompetent executive at the helm. But for some reason, he thinks dodgy leadership wouldn’t threaten the larger and more complex (if less lauded) enterprise of the United States Government.

“This is one of my bugbears — the twenty-first century view that politics doesn’t really matter, because innovation and enterprise is what counts,” Runciman continued. “That view is just dead wrong. Bad political choices can precipitate wars, financial disasters and ecological catastrophes that no amount of innovation will ever make right. And believing that politics doesn’t matter makes it more likely that we will screw things up: That’s what makes us complacent.”

The temptation to fall into the confidence trap is almost irresistible. Consider American intervention in Vietnam. The war was a series of catastrophic mistakes. Now, Vietnam is eagerly making concessions to join an American-led Pacific trade deal. What doesn’t destroy us seems only to make us more powerful.

Trouble is, the past is an imperfect guarantor of the future. Trump would be by far the most untested and unreliable president in modern history. Maybe everything would turn out fine. But maybe, this time, it wouldn’t. Maybe our faith in democratic resiliency would be misplaced, and our current ill temper, instead of fading, would be dangerously exploited by a mercurial opportunist.

“At some point, that combination of anger and complacency is going to put American democracy at risk, no matter what Buffett says,” Runciman said. “And when American democracy is at risk, then everything else is at risk too.”

Maybe even Berkshire Hathaway.


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