OtherThis is a special presentation of Squawk Box, live from Sun Valley, Idaho. Searching for solutions, avoiding the fiscal cliff. The masterminds behind the most talked about proposal will reunite live on Squawk, Alan Simpson and Erskine Bowles. But first, our newsmaker this half hour, the Oracle of Omaha, Warren Buffett.
Joe KernenWelcome back to Squawk Box here on CNBC, First in Business Worldwide. I'm Joe Kernan, along with Andrew Ross Sorkin. Becky Quick is in Sun Valley, Idaho, with a special guest who will join us for the rest of this show.
Joe KernenYeah, we didn't decide you were at Dollar Mountain, so we don't know where you are. But you have notice. Nothing costs a dollar. Anywhere around that mountain, on that mountain, or in any of the vicinities near the nothing, but it is Dollar Mountain.
Becky QuickNo. Yes, that's right, Joe. You're right. The inappropriately named Dollar Mountain, we are over Sun Valley. this morning and we are here. And as you mentioned, we are joined by a very special guest, Warren Buffett. And Mr. Buffett, thank you for joining us this morning.
WarrenGood to be here. It's great to see you.
Becky QuickAnd we couldn't think of a better time to have you on because there are so many questions about what's been happening with the economy, what's been happening with the jobs picture. Why don't you tell us what you're seeing right now in your businesses?
WarrenWell, I've got a little different story this time. For a couple of years, I've been telling you that everything except residential housing was improving at a moderate rate, not not crue. but not galloping either, but that residential housing was flatlining. And the last two months it's been just sort of the opposite. The general economy in the United States has been more or less flat, and so the growth is tempered down. But the residential housing, we're seeing a pickup, and it's noticeable. It's from a very low base, and it doesn't amount to a whole lot yet, but it's getting better. So you've got kind of got a flip-flop on that.
Becky QuickWell, what happened? When we talked in the past, you had said when housing turned, that would be when the U.S. economy would turn. What happened?
WarrenWell, it hasn't turned that much yet. But it is picking up. But at the same time, the rest of the economy, I would say, is slowing down. It's not hitting downward, but it's not growing at the rate that it was earlier. And then it's kind of interesting in Europe for a year or so in most places. I mean, forget about Greece for the moment, but generally in Europe.
[2:39]
Questioneryou didn't have a big slowdown. You had a lot of worry and all of that. But in the last couple months in Europe, particularly in the last month, it's pretty much across Europe. Things that really started to slip pretty fast. We've heard this from a lot of CEOs who have joined us in the last several weeks. But what business lines in particular do you look at and do you see these things kind of popping us?
WarrenWell, I look at all of the businesses we have, and then I talked to people in other businesses. And it's pretty clear that that's what's going on right now. There are certain figures I can't tell you where I get them. But they, Europe is really, it's headed downward in the last, I don't know, six weeks or so. And it wasn't going that way before. It wasn't doing that well, but it wasn't hitting, it hadn't really hit the skids.
QuestionerIs that because of consumers or because of businesses, confidence? really slowing down and spending slowing down.
WarrenYeah, spending slowing down. And then when spending slows down, business reacts. I mean, they're not seeing the same kind of spending, so they're pulling their horns some.
QuestionerWhat of the things that you can talk about, the numbers that you do see, concern you the most?
WarrenWell, it's pretty general, Becky. I mean, like I say, it hasn't, it has not turned down in the United States. I mean, our freight car lovings are up week by week. I normally get them today, but I'm not home. But last week, you know, they're up. Although the eastern railroads were down moderately, a lot of that's coal. But nevertheless, just across the board, whether you're looking at our retail sales and jewelry or furniture or you name it, yards of carpet are down, our carpet business is better. But on the other hand, if you look at, we're the largest home builder in the country, Clayton Holmes. And that's up. Brick is picking up. But these are from low level. But you are seeing in our real estate brokerage firm, which is the second largest in the country, pending sales are up by a reasonable amount, but from a very low base.
QuestionerWell, with everything else with the, you know, not a reversal, but a slowdown in the growth, what happened? What happened six weeks ago to spook people, to spook businesses?
WarrenI don't know the answer to that. I mean, I just, I know the result. You can argue in Europe, why it was delayed so long. I mean, because Europe has really been, you can see this coming for two, it was two years ago.
[5:14]
QuestionerWe sold all our Spanish and Italian and even French bonds. I mean, we're overly cautious probably, but that was two years ago. So Europe, with all this going on, it, it probably kept it from having any kind of gains, but it didn't, it didn't really seem to sink in. But I would say, last, well, I know the last couple months. And with some acceleration, it's been hitting over there. We've watched the jobs picture and the last unemployment, the last unemployment numbers at 8.2% from that last big government report last Friday. Is that a chicken and egg cycle? I mean, are people watching the jobs number and getting spooked by it, or is the jobs number kind of?
WarrenWell, you're right. I mean, there is some circularity to it. But I don't know the answer. is exactly why it's happening. And I don't know what it'll be three months from now, or six months from now, because three months ago, I didn't know what it would be today. So, and the U.S. economy is doing better than virtually any big economy around the world. I mean, this economy has come back a long way with the exception of housing from where it was a few years ago. And you can see it in corporate profits. But I thought it would take housing. I still think it would take housing coming back significantly to move us generally significantly upward. And I still think that's true. But so far the little pickup in housing has not been near enough to offset whatever is going on in the world generally. The Fed came out with their minutes yesterday and obviously they're concerned about the economy. They say that they could step in to do something else. But I guess the question becomes what would it take to get them to step in and what could they do at that point?
QuestionerYeah, I have my own doubts. I'm sure Chairman Bernanke would disagree with me, and he knows a lot more about it than I do. But I don't, I, you know, when you get, when you have interest rates down to zero, not only here, but in the main, in the major countries in Europe, and you have the, you have a 15-year Treasury inflation protected, so-called tips, security, selling in a negative yield. 15 years, people are willing to put their money out at a minus rate. terms that that's about as far as you can go. Now, you know, you can talk about more easing or that sort of thing. But, you know, the banks are sitting with enormous amounts of money at the Fed. They don't want to be sitting with that money at the Fed.
[7:51]
WarrenI mean, it's bringing them a quarter of a percent or so. You lose money on that money at the Fed, from the bank's standpoint. So they're not happy having that money at the Fed. They just aren't seeing that much demand for loans. So... Although they're picking up a little, I mean, but it's... nothing like people would like to see. I don't see what the Fed does that's dramatic. Does that mean we're in a wait-and-see pattern? To some extent. And it also means that they should be bicycling like crazy at the Fed while while they may, maybe they should be bicycling like crazy like crazy, but while Congress sits there on the sidelines and, you know, and basically squabbles.
QuestionerWhat should Congress be doing at this point? I mean, we're going to talk more. with Simpson and Bowles a little later this morning, but you think that there's something that Congress should be doing right now?
WarrenWell, I think people have a feeling that Congress is inept and sort of paralyzed by the desire of each side to make the other side look bad. So I think that has got to be a factor in general confidence. You know, if you see your government not functioning, it's not really the most, it's not the biggest spur or two. activity that you can imagine. Maybe not a confidence booster, so to speak. So I think it's hard for the Fed to offset the Congress in terms of changing public opinion.
QuestionerOkay. We're going to have more with Warren Buffett in just a moment. Good morning, everybody. Welcome back to a special edition of Squawk Box. We are live in Sun Valley and we are joined by Warren Buffett. And Mr. Buffett, let's get back to what we were talking about with Europe before. The spreads blew back out again. And all of the fixes we thought we'd seen from the ECB. at this point, they seem to be lasting for less and less time, back above 7% for some of these bonds. What's this mean? Where are we had?
WarrenWell, it means that a fundamentally flawed system was designed some years back, and we've been trying to, or they have been trying to patch it during the last couple of years. And it's hard to change a very fundamental, important system with patches, particularly when 17 people have to say, and where the patches should go and what kind of patches you should use. So it's not an easily solved problem.
QuestionerWell, at this point, as you mentioned, it's really hurting the economy there as well, starting to drag down in a major way.
[10:18]
WarrenParticularly in the last few months, yeah. So what's the end result over the next six months or so? Well, 10 years from now, Europe will be working fine, but people will be consuming more there. They'll get it worked out, but there is no obvious answer. And that becomes more and more apparent. as they go along. And like I say, they're trying to put patches on something that's got a lot of leaks. But patches on something that has a lot of leaks, you could have a lot of different solutions to the end of that. Is the euro still going to exist 10 years from now? Europe will. But will the euro? I don't know. I don't know. And I don't think they know. I mean, it certainly can't exist as originally designed. We've found out that they're trying to have a common monetary unit when you don't have somewhat common fiscal policies and cultures and work rules. and all kinds of things. It just doesn't work. And how they'll resolve that, is anybody's guess. Obviously, it depends on who's in charge, who the leaders are. And leaders there seem to get voted out every time a new election comes along. So if there's a constant changing set of players at the table, how is there a good solution? Yeah, I would not know the solution myself. I would not know the solution myself. I mean, Henry Kissinger said a long time ago, you know, if I want to call Europe, what number do I dial? And, you know, essentially that's the problem. I mean, when we had our crisis in 2008, everybody knew the responsibility was on Bernanke and Paulson and with the president behind him. And as long as they knew where they're going, they had the will and the ability to do things that were needed to do. But exactly who has the ability, when you don't have a printing press, I don't have a printing press. It's a different animal.
QuestionerYou know, we've been watching the headlines over the last several weeks, and the manipulation of LIBOR is just the latest in a series of scandals that has to break down the public's trust in what happens with financial institutions, what happens on Wall Street. What do you think about what's happened with LIBOR? And how big a deal is this?
WarrenWell, it's a big deal. It's a big deal. I mean, you've got the base rate for the whole world, including some loans we have in the past. And so the idea that a bunch of traders can start emailing each other or phone each other and play around with that rate is an important thing.
[12:50]
QuestionerAnd, you know, it is not good for the system. Does it shake your confidence in the system?
WarrenWell, I've got a lot of confidence in the system over time. Our system works. You know, we are sitting here at Sun Valley in pretty good circumstances compared to a couple hundred years. years ago. So we're not working any harder than they worked 200 years ago. We're not any smarter, but we live far differently. So our system works over time. But it sure shakes your faith in certain institutions, I'll put it that way, but not the whole system.
OtherI know Andrew's got a question for you as well. I just, before, Andrew's going to talk about J.P. Morgan. I just Warren wanted to quickly ask.
Andrew Ross SorkinBut Bob Diamond, very good executive. I know that in the past, you know, Goldman had some PR and some, you know, some ethics issues. you said, I mean, you wouldn't want, you, I don't think you wanted a blank fine to lose his job. I don't know what you wanted to happen with the officers at Walmart. And I'm wondering whether you thought that this is an overshoot that Diamond is just unceremoniously dumped. And, you know, he wasn't American in London. And, I mean, would you, don't, wouldn't you rather have him stay if you were a Barclay shareholder?
WarrenWell, I'm not a Barclay shareholder, but I don't think he had any choice but to go. But something as big as LIBOR. You know, if it happened, and he wasn't in charge of all of Barclays at that time, but, but there are a lot of things that went on in that trading room that, that, who knows who was aware of what, and I don't know anything specific about it, but that was not, it was not a rogue trader, let's put it that way.
Andrew Ross SorkinYou don't have different opinions based on whether you own shares in the stock, though, right?
WarrenWell, no, not on this, but I may know less about it. I haven't followed, I haven't followed Barclays.
Andrew Ross SorkinAll right. You know, at Solomon, we had, you know, some problems, and they had to go.
Andrew Ross SorkinRight. Warren, talking about trust and a company that you do own a stock in, J.P. Morgan, we're going to hear from Jamie Diamond tomorrow what their earnings are, and we're going to try to hear some more about what happened to that soured trade. Your views on the trade itself, your confidence in the company, your confidence in Mr. Diamond.
WarrenYeah, I think Jamie Diamond is one of the best bankers in the world. And if I had a bank, I like John Stumpf a lot, too well, incidentally, at Wells Fargo.
[15:13]
WarrenBut if I owned a bank at Omaha and I could get Jamie to run it for me, I would feel very happy. And, no, Jamie understands banking, he understands risk. And, you know, it's a significant loss, but you look, you, Jamie Morgan lost. Right. Billions and billions and billions of dollars on loans. I mean, if you've got a couple trillion dollar balance sheet, you're going to have some losses someplace.
QuestionerDo you have any different views as, or? result of this about the vocal rule or some of the regulations that are part of dot frank?
WarrenWell, I do, my partner, Charlie Munger, is more Old Testament than I am on this, but I do think that I think there are good reasons to restrict the activities that banks can be in.
QuestionerSo the activities that led to these losses, you would preclude J.P. Morgan from participating in in the future?
WarrenWell, it's hard to say what those activities. I mean, if they're truly hedging risks, you know, I, there's certainly a lot to be said. If you're running a bank and you want to hedge interest rate risk, hedge foreign exchange risk, I mean, that's perfectly proper. We do it in our energy companies. We have transactions all the time to hedge risk. So if somebody goes off the reservation and starts turning hedging positions into speculative positions, you know, you may have a problem. But that was not policy at JP Morgan. That, you know, that was one fellow who's near as Icon ascertained. that went very, very big in a position that was originally designed as a hedge position, and then he put a hedge on a hedge, and pretty soon he had what they call a Texas hedge.
QuestionerHey, Warren, can we go back to LIBOR for a moment, too? You mentioned that you have some contracts and some things that are based off of LIBOR that have been there. I'm guessing derivatives and some other things that have been in that?
WarrenWell, yeah, we own some auction rate municipalities, for example, that are priced off LIBOR, a couple billion.
QuestionerSo what happens? If LIBOR was manipulated, do you have a case to go back and have a complaint, to have a lawsuit, to have anything that comes up with any of this?
WarrenWell, I think there certainly will be with your lawyers that will think that. And if you can pin down the person that did something to you and they had, and there may well be some kind of a case. I mean, we bought these securities in the market auction rate, you know, municipalities that are tied to LIBOR.
[17:38]
WarrenI have a feeling that for any one entity, the amount might be very, very small. So it's a $3 trillion of things that are priced against this. I mean, the numbers would stagger you. So how big of a problem could this turn out to be down the road? It could turn out to be a big problem, but we don't know what banks did what at this point. But, but, well, go back to our Solomon experience, get one fellow with one, a couple of bond issues. And that caused a lot of trouble. And you get LIBOR, and you're talking about the whole world. Right. And everybody associated with it. Everything is, everything's tied. And, of course, you're in this terrible position. If you have millions of contracts based on LIBOR and one side profits from a given price being out of the line, and the other side loses, you're not going to collect from the fellow that got the benefit. And if you're in the middle of the trade, you're just going to have the people on the losing side of each trade come after you. So it's very asymmetrical for the person that's got a bit of. bunch of trades on it. Okay. So it could be a potentially huge can of worms. It is a cat of worms. It is a can of words. It is a can of words.
Becky QuickOkay. Warren, we're going to have much more in just a moment. We want to thank you for your time. We are in Sand Valley, as you mentioned, and we are joined by our dream lineup this morning. Warren Buffett, who's been with us for the last half hour. And joining us and sitting down with us right now are former Senator Alan Simpson and Erskine Bowles, the former Chief of Staff for President Clinton. These are two gentlemen, we have been hoping to get on the program for an incredibly long time because of Simpson Bowls, Bulls Simpson, and everything that's happening with the fiscal cliff. So gentlemen, we want to thank you very much for agreeing to sit down with us this this morning. Warren Buffett can attest to this, but when we go around and talk to CEOs, it is almost universal among them when they say if they had a chance and could vote for Bulls Simpson or Simpson Bowles, they would put this in immediately and they can't understand. why this hasn't happened already. It's not limited to CEOs either.
WarrenIt's not limited to CEOs. But I think if you poll Fortune 500 CEOs, it'd certainly be 80%. And I wouldn't be surprised it was 90%. They not only think it should be done. I mean, they think these fellows are heroes and so do I.
[19:59]
QuestionerAnd what we'd like to say is, first of all, thank you for the work you've already put into this point and ask you what you think can happen because the fiscal cliff is coming. It's a huge issue. To this point, no one's listened to your advice or taking it up, taking you up on this. How much more desperate of a situation are we now than when you first came out with your proposal?
OtherThese two, here I am. These are the numbers guys. I do the color. Erskine can tell you, but let me tell you, this is a giant among pygmies on this kind of thing. People are not dealing with it. He really strung the original package together with his patience and his brilliance because he's the last guy that ever was involved in balancing the budget. So ship them out a little news. I'm not saying anything. It doesn't get any better. Oh, no.
OtherWell, well, let me say something about these two because they sat down with Republicans and Democrats and they were given a charge to come up with a plan that got it down to 3% of GDP. And they got it down below that. They got a majority of the Republicans to vote for it. They got 11 out of 18. They did exactly what they'd been at. exactly what they'd been asked to do. And they came up with a plan. No plan is perfect. You know, everybody can come up with a little different one, but everybody knows that we need something done, and they did their job, and Congress has not done its job. We've got some hope. You know, it's, I think if I had to tell you the probability, I say the chances are we're going over of a fiscal cliff. And I hate to say it, but I think that's probably right. But we've worked hard to try to try and We worked hard to try to get common sense to overrule politics, and that's a tough thing in Washington, as Al can tell you. But we've been around the Senate and the House. We probably have as many as 45 to 47 senators, equal number of Republicans and Democrats who are in support of our efforts. We've got about 150 House members, again, relatively equal. We put together a CEO fiscal leadership council, which is has over a hundred Fortune 500 CEOs who are actively working to try to influence Congress to do something that makes just plain common sense. And we've got a social media campaign that we're working on where we hope to get about 10 million signatures of people around the country to tell Congress, come on, let's put partisanship aside and let's pull together
[22:33]
Questionerand let's face this enormous fiscal problem that we have coming up. that we have coming up. With all that on your side, why do you think that the odds are we do go over the fiscal cliff?
OtherBecause it's politically painful. It's really tough for these. You get beat. And it's not going to get less, it's not going to get less painful in the future. That's the other thing about it. I mean, you know, if you had some kind of a disease, you might not want to have somebody open you up and cure it. But if you knew it was going to get worse next week, next month, next year, you'd face reality. The problem's real. The solutions are all painful. and there's no easy way out. But I was talking, Warren, a couple of weeks ago, to American University's graduates, and I just threw away what I was supposed to say. And I said, I said, they ought to be mad at us, our generation, for shirking our responsibilities and kicking the can down the road. We've got to face up to this. I mean, this is our generation's problem, and we've got to fix it.
QuestionerSenator, you've been criticized for coming out and speaking your mind on some of these topics. If I could do it with last year, earthiness it would be good. No, no, no, give us some of earthiness. I'm waiting for that.
OtherNo, I know you do. You've been able to me. I've known this fine gentleman for years. He says, tell me that joke about the coast is clear. I do tell it to him, but I do. It's frustrating for me. You're in politics, and I loved it. You're entitled to be called a fool, boob, idiot, screwball, and all that, but never let them distort who you are. And when people are to nail me with being a bigot or, you know, a guy that hates veterans and hates seniors and the cat food commission. That just steams me, and I respond. And they'll say, are you thin skin? I said, hell yes. But I don't, I just, I just punch back, and I've never lost an election because an attack unanswered is an attack believed. And when people lay that stuff on me that's distorting my persona, I fire back and I could do it, but I've got to do it. do it, but I grew up with irrigators and they had a terrible vernacular. Well, what's your joke about the coast is clear? It's very quick. This couple hit the sack. This is a Wyoming story. A couple hits sack. Three in the morning, the phone rings. Guy answers says, how the hell do I know that? That's 2,000 miles from here hangs up.
[24:56]
OtherHis wife said, who was it? He said, I don't know. He said, some nut called and asked if the coast was clear. He's just warming up, folks. Forming, I function. Okay. Believe me.
QuestionerMr. Bowles, you're the numbers guy. Why don't you tell us how bad this problem is when we do go over this fiscal cliff?
OtherOh, look, I think that if we don't get these politicians to come together and we face the most predictable economic crisis in history, I think it's absolutely clear that the fiscal path we're on is not sustainable. And for me, the best analogy is these deficits are like a cancer. And over time, they will destroy the country from within. Here's an easy way to understand it from a math viewpoint. If you take last year 100% of a revenue that came into the country, every nickel, every single dollar that came into the country last year was spent on our what's called mandatory spending and interest on the debt. Mandatory spending is principally the entitlement programs, Medicare, Medicaid, and Social Security. What that means is every single dollar we spent last year on these two wars, national, Defense, Homeland Security, education, infrastructure, high value-added research. Every single dollar was borrowed and half of it was borrowed from foreign countries. That is crazy, crazy. It's a formula for failure in any organization. And right now we are faced with the benefit of incredibly low interest rates. What happens as interest rates start to climb? We're spending right now $250 billion a year on interest at these incredibly low rates. That's more to put it in perspective than we spend at the Department of Commerce, education, energy, homeland security, justice, interior, and state combined. And if interest rates were at the average level in the 1990s or the first decade of this century, we'd be spending over $650 billion.
QuestionerSenator, Warren Buffett has said that part of this is the problem that Congress didn't act on this and didn't pick it up. But the president also didn't act and didn't follow up with what he had set out. Who do you blame for where we are right now?
OtherWell, we try to stay away from the blame game because people will often say, how did we get here? It's easy how we got here. We were told to bring home the bacon for the last 70 years. Go get the highway. Go get me some money. Go get raised this. Do this. Do this. And you got reelected by bringing home the bacon, and now the pig is dead.
[27:28]
OtherBut let me tell you what happened. The president would have been torn to bits. His base would have said, you. You are dealing with entitlements. You're dealing with Medicare. And you promise you'd never hurt we poor seniors and never do anything to all this vulnerable population. Well, you know, that was his promise. And anything he would have done at that time would have been rejected unanimously by Republicans. If he had said, I'm for this, it would have gone to the House or the Senate. And they would have said, well, if he's for this, boy, we're going to nail him and just vote against it for no other reason than that. So in other words, we cannot do politics as usual. This has to be a whole new way of looking at the situation. And one of our members, Dick Durbin, give him a lot of credit. I mean, here were Durbin voted for this and Tom Coburn. Tom Corbyn. Two fine, splendid men with totally different ideology and philosophy and politics. And Durbin kept saying, where's the tipping point? And that's the key. Because when the tipping point comes and the guys who give us money want more money for their money, if inflation will kick in and all these things and interest. And guess who will be hurt the worst? The little guy that everybody talks about day and night. What fakery, what phoniness. Well, I'll tell you what, when we come back, we have to slip in a quick break here, gentlemen. But when we come back, we're going to talk about some solutions, some of the specifics that you laid out and get into some of those details. Welcome back, everybody. Let's get straight back to our conversation with our three newsmakers of the hour. Warren Buffett, Alan Simpson, Erskine Bowles. Gentlemen, we had just been talking about the problems, but let's start talking about some real solutions. What needs to happen. And I know there are a lot of different ways to get to the numbers, but the basic number is, Warren, something you've talked to us about a lot on this program. What do you need to get for revenue? What do you need to get for spending?
WarrenYou know, 2.5% is, if that's average, the GDP, that actually is sustainable. The debt to GDP will not go up over. time and no likelihood with that. And these gentlemen were charged with bringing it down to 3%. And they came in, I think, at 2.2% or something of the sort. So you have to get expenditures, in my view, down to about 21% of GDP,
[29:46]
Otherand you have to get revenues up to 18 and a half or 19. And you could get hundreds of people that could draw up plant thousands that I would accept, he would accept, and they wouldn't all be identical, but it's such an obvious problem. The needed solution is so obvious. And most of the aspects of the solution are pretty obvious to everybody. And they, you know, you can argue around the edges. And the Democrats don't want to talk about reducing expenditure. They want to talk about reform. And the Republicans don't want to talk about revenues. They want to talk about reform. I mean, reform is the cop-out word. We've seen that. I know your plan, gentlemen, had six points or six basic parts that lays out. A huge part of it is tax reform. And people that we've talked to, I think, spin it in different directions. They use tax reform as their code for doing whatever they want to do. Your plan was not revenue neutral. It was to raise revenue and to do that how. What we wanted to do was, first of all, in order to stabilize the debt and get it on a downward path as a percent of GDP, you've got to have at least $4 trillion of deficit reduction. So that's kind of like you're bogie. So if you talk about anything less than that, you're just kidding yourself. What we said is, look, let's take a trillion. that from revenue and $3 trillion from spending cuts and how did we get to revenue? What we said is what makes the most sense is to broaden the base, simplify the code, start off with getting rid of all of these, of this backdoor spending in the tax code. We only raised last year $1.3 trillion in total tax revenue coming into the country. And you know why? we had $1.1 trillion worth of spending in the tax code. You know, it's literally crazy. And if you would eliminate that, okay, you could take rates to 8% up to $70,000, $14% up to $210,000, have a maximum rate of 23%. You could take the corporate rate to 26%. And you could pay for a territorial system, so all of that $1.5 trillion that's captured overseas could be brought back here. And if you just used 8% of that money from eliminating those tax expenditures, so you're using 92% of it to reduce rates, 8% is about $100 billion a year. That over 10 years is $1 trillion. That's where I run $1 trillion of revenue comes from. So, no, it's not revenue neutral by any stretch of imagination. You know, we have to have about a trillion dollars of revenue.
[32:27]
OtherAnd the reason you have to have that is if you take it all out of cuts, you'll truly hurt the disadvantage. or you'll disrupt a very fragile economic recovery, or you won't have enough to invest in education, infrastructure, and high-value-added research, what we need to invest in to grow the economy. Gentlemen, I know Andrew Ross Sorkin has a question as well. Andrew?
Andrew Ross SorkinHey, guys. The question I had, and we had Paul Kruevman on the program yesterday, and there's been, you know, depending on which side of the aisle you come from, you can like this plan and you can say that there, or rather you can dislike this plan and say that the tax guts are too harsh, or they're too much or this or that. He said that this proposal was, quote, regressive. And I'm curious how both of you think about that critique.
OtherWell, you know, Paul Krugman is a little hyper. And when this started for me, he said that I would never saw a spending cut I didn't love or some snide little crack, but I think he needs to rest. He needs some solace. He needs to sit in some valley and someone hold his hands. and hold his hand and say, poor poor deer. Alan, he just getting into ranting. He had a really, really, really tough weekend. I guess he spoke to a Spanish, I guess the guy from the Austrian School of Economics, and it's all over, check it out on the web, but apparently it didn't go so well for the eminent Mr. Krugman with this guy. I don't know. Check it out. You might enjoy it from the sound of your tone. Tom.
OtherJoe, you also might tell him to check the analysis that we had done, and we tried to make sure that as we reform the tax code, we kept it just as progressive as it is today. And how did you do that? How did you insure by going back? I mean, there are things like you get rid of second home mortgage interest deduction. You cap it at $500,000. Those are all things that are designed to help people at the bottom. Actually, if you look at it, Becky, you know, only 27% of the people itemize. itemize. 73% of the people don't even itemize so they don't take advantage of the mortgage interest deduction. And so what we said is, well, you can tell them. 12.5% non-refundable tax credit. That helps the little guy. I mean, Paul Krugman talks about the little guy all day along. The little guy will be wiped out with, and stimulus. I mean, I get a kick out of this. They say, well, we can get ourselves out of this with consumer spending.
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QuestionerWhat consumer is ready to spend in this atmosphere? I mean, this is madness. And a stimulus, you're not going to get a nickels worth of stimulus from either party or they will go home and get cremated. We got a $1.3 trillion stimulus right now. We're spending $1.3 trillion more than we take you in. Yeah, we've got a huge difference to just call that. And these guys are not talking radicalism. I mean, for 50 years after World War II, more or less, revenue was in the 18 and a half or so percent range. And spending was in the 20 and a half percent range. And it really worked quite well. So this is not something the country is. You know, we're not talking about something we've never attained or anything of the sort. It's just that we've drifted into this situation where we're not at getting enough revenue and we've overpromised on expenditure. We've got it. We've got a rich country, but a rich country can over promise it. We've never had less revenue coming into this country since the Korean War. 15.2% of GDP. What? Who is fooling who in this game? It's madness. It's numbers. It's math. We don't do wizardry. We do math.
OtherAll right, gentlemen, we have some more numbers that are coming right after this. jobless claims that are coming up. We'll get you those numbers. And then we'll be back with more with a special conversation from Sun Valley. Stick around. Squawk will be right back.
Becky QuickWe've been talking an awful lot about solutions. And gentlemen, you just heard the jobless claims number better than expected news, 350,000. But if you look at the unemployment picture and the last monthly jobs number, obviously there's some very concerning things happening here. When we have unemployment at 8.2 percent, how much tougher does it take for people to start talking seriously about these measures to try and help us. Austerity is a very tough thing to put on people when you're looking at numbers like this.
WarrenWell, they're talking seriously around the country, where you need to talking seriously is in Washington. I mean, just one example. Everyone knows that you're going to have to change the debt limit. And in my view, if you've got two leaders from each house, they should get it done in five minutes. I mean, it's going to be done. And why spend weeks posturing about that and huffing and puffing and accusing the other side of bad faith and all that. Just just raise it and get on to the next problem.
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QuestionerYou know, I would think that you could get Reed and McConnell and Pelosi and Boehner and they just say, we're going to raise it. So why should we go through the charade of everybody blaming each other about this?
WarrenI've already spin it. Yeah, yeah. It's not. So it is. And so to waste weeks on that and the whole legislation hostage over it. I mean, That's for school kids. And, you know, let's just get down to what needs to be done. I mean, if Berkshire were in trouble financially, you know, Charlie and I and everybody else, the directors, we'd sit down and say, you know, we've got to figure out a plan to get out of this and we'll do it today.
QuestionerIs anything going to happen before this election, gentlemen?
WarrenNo. We thought the easiest thing to do would be to restore solvency to Social Security for 75 years. All of us, all 18, I thought that at one point. And Lord's sake, here came the AARP and the senior groups and the cat food commission. I mean, it's just absolutely stupefying. And then we said take the lowest 20% and give them 125% of poverty, that'll cost some money, and give the older old to 80 to 85 a percent kick a year, and do keep the progressivity and raise the wages subject to the tax. the tax. We did all that stuff and then get nailed by groups who really, really don't care. They are marked, the AARP, I asked their leadership, are the Patriots in here are just marketers. That did not go well that day either. It was just one of those days. We recommended raising to retirement age one year, 40 years from now. We wanted to get people a chance to get ready. You know, it's like, you know, give me a break. You know.
Questioneranything 40 years from that. Yeah, right. I mean, as somebody who could be affected by this, I would even take it sooner than that. I'd say, okay, let me know what I'm getting ready for. Tell me what's coming, rather than having a crisis where you look like Greece all of a sudden, and you've got to pull back the promises you've made to people over 40, 50 years.
WarrenAnd what we did is at the same time, we took care of a truly disadvantage. We raised the minimum payment to 125% of poverty. We gave people between 81 and 86, a 1% bump up because that's when every economist, Republican and Democrat, told us their private pension fund. their private pension funds generally run out. You know, so we tried to do the kinds of things that really made a difference for people
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Otherwho desperately need Social Security, you know, as that's, you know, sounding board for them. And not one person will argue with this number that in the year, if you do nothing, in the year 20 and 33, they moved it up three years in one year, you're going to waddle up to the window and get a check for 27% less. And what is smart about that? And as I say, when we said raise the retirement age to 68 by the year 2050, and the ARP said, how will people ever be able to prepare for that? Well, we said we think they can figure it out. We just know they can. Just try to help them. Andrew's got another question. Sorry, Andrew.
Andrew Ross SorkinHey, guys. This question, I'll start with Warren, but all three gentlemen can jump in. The president recently proposed extending the Bush era tax cuts for those making one. for those making less than $250,000, a number of Democrats, including Senator Schumer and others, have come out and said $250 is the wrong number. It should be $1 million. Warren, you have the Buffett rule. How do you think about this?
WarrenNo, I am generally in favor of making the tax code more progressive. Certainly when the most recent figures for the 400 highest incomes in 2009, incomes that average $200 million. $200 million per taxpayer showed that over half of them paid less than 20% in a combination of income taxes and payroll taxes, which means that they, those over half of them paid less than 23 of the 24 people in our office. The only one lower was me. I think there's some changes needed, but I say let's, if they aren't going to do anything, I'm for doing that. But why not just solve the problem? I mean, why just, why work around the edges? work around the edges. So I am for what these gentlemen propose.
Andrew Ross SorkinRight. Gentlemen, what, Senator Simpson and Mr. Bowles, what do you think about those proposals? There's two proposals out. One is to just extend, the Republicans say, just extend the Bush tax cuts for another year. The president has laid out his proposal. What's the right solution for right now?
OtherWell, between November 6th, when they will do nothing, nothing will be done. Politically, nothing will be done between now November 6th. It's just. and guys will get up and say, we can get this terrible thing resolved without touching precious Medicare, precious Medicaid, precious Social Security, and precious defense. Let me tell you, that that person would be described as a phony that's going to do that in this election.
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OtherWe think, naively enough, that if you have the guts to do something along the lines, what we suggest, the people will reward you. And it won't come now, but in four months, is this. as this thing closes in, man. You know, people are going to say, hey, if I don't do something, they're going to throw me out for sitting here doing this BS and mush that I've been pouring out. Can you imagine sitting at Berkshire and you know you have the equivalent of a $7 trillion economic event hitting in December? You know, that if you do nothing, it'll have an adverse effect on the economy of at least one and a half percent next year, which is enough to throw us a back into recession. And you're not doing anything? They say they can't do anything in an election year, but why pay them? We ought to pay them just for three years out of four. I mean, they're only going to work three years out of four. Yeah, of course, we have election year every two years, too. You know, so it's like crazy.
Andrew Ross SorkinAndrew, I'm sorry. Did I cut you off before?
OtherNo, no, no. Look, the question I had is I completely understand that we have a much bigger tax reform and reform broadly that we need to get to. And I guess I was just trying to understand from both gentlemen, given where we are and that maybe we won't get any movement. If the million dollar number, the $250 number, I know it's peanuts on a relative basis to the bigger scheme where they come out.
Andrew Ross SorkinAndrew, it's not exactly peanuts because the difference between the $250 and the million is about $366 billion. And, you know, we've got to come up, we've got to pay for that some way. You've got to come, that's what, you know, we're always ready to reduce, to reduce revenue, but we're never willing to pay for it anyway. to pay for it anyway. I really think talking about the Bush tax cuts is almost a waste of time. What we should be doing is talking about how do we reform the tax code to broaden the base, simplify the code, take some small portion to reduce the deficit and take most of it to reduce rates so we'll be globally competitive. That's what makes sense. But that's not going to happen between November and January, right?
OtherNo, but what you could do is you could set up a framework between November and January that would call for that. You'd have to have some real specificity, what is it, specificity, you know, clarity. You got a framework. Yeah, I mean, you know, fellas worked on it for 10 months.
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WarrenSo that could be set up at is something to say, here's what we will get to, maybe it doesn't kick in January 1. Becky, one of the things we've done is taken that 67-page report that you've read, and we've now put it in legislative language. Right. Why not have an up-and-down vote on it? No. Well, anybody in the past, in the past could say, I read their 67-page report, but it was a little vague. So if I saw legislative language, I would then get enthused, well, baby, you got it right now, and that's what they have in front of them. And then we say, do what you're supposed to do. If you don't like, take it out, amend something, get in the game. So Erskine has pushed that so beautifully, but if you extend the Bush tax cuts just like that, it's between 3.8 trillion 8 trillion and 4.2 trillion in 10 years added to the pile. I mean, madness. Now you're talking some real money. And if I had been in Congress at that time with what we had to do, and I'm not being a smart alley, I would never, why would you give a tax cut when you're fighting two wars, borrowing money hand over fist, and give a tax cut? I think the American people, when that came up, were reading their newspapers, say, what's going on? Maddena.
Joe KernenWe're going to continue this conversation. this conversation in just a moment. Let's get back to Becky in Sun Valley, Idaho, with our special debt reduction summit. Becky, I came this close to calling it our Debt Reduction Task Force. I love Jonathan. I miss Jonathan Walt, right? It's really kind of a task force, isn't it?
Becky QuickStick with us. Yeah. It is. This is a supersized task force. This is the mother of all task force, you might say, Joe. Let's jump right back into. Let's jump, oh, I don't know if you heard Senator. I don't know if you heard Senator Simpson, he said, father's unknown. We're going to jump right back into this conversation. And gentlemen, we have already talked an awful lot about what needs to happen with tax reform. That's probably one of the hot button tickets. But as we were just talking off camera here, another thing that you mentioned, Erskine, is that you're very concerned that we need to also be doing a lot about cutting spending as well. Why don't you tell us how the plan really would attack that?
QuestionerYeah, we cut spending by about $3 trillion of it. over the next decade. And again, that gets us to the $4 trillion, which is the minimum amount you have to reduce the deficit
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Otherin order to stabilize the debt and get it on a downward path as a percent of GDP. You know, and we don't spare anything. I mean, you're, the problem is so big right now that, you know, you have to, you have to make significant cuts in defense. You have to make significant cuts in entitlement programs. You have to make significant cuts in the spending in the tax code if you're going to produce enough deficit reduction to stabilize the debt.
QuestionerWhat's significant? Are we talking 5%, 10% when it's just for people get their heads around? What's really coming?
OtherAll of it is doable, okay? We spend today about $760 billion a year on defense. Get this one.
QuestionerNo, no, you tell them because, you know, you look.
OtherThis is madness. 750, $750, $700. 60 billion is the USA. And the other countries, major countries of the earth, including Russia and China combined, spend 540 billion. Now, the only thing being hollowed out here is your brain. I mean, this is impossible. Think of it again, 750 for us alone and every other major, all these evil, even, you know, China and Russia combined 540. There's also a situation which is, you know, which is, when you get into this, you see you get savaged. I'm a veteran, I was proud to serve. There is a thing called TRICARE, and it's for military retirees, and give them anything, 2.2 million. There's not a great cohort of them. And some of them have had very little active duty, but they've been in the Guard or the Reserve. They have their own health care plan, and the premium is $470 bucks a year. And no copay takes care of all dependents and costs us $53 billion a year. And Leon is trying to do something with that. And what's he getting from the professional veterans getting his head mashed? Here's how crazy defense is. Just think about this. The U.S. has a treaty with Taiwan that will protect Taiwan if they're invaded by the Chinese. There's only one problem with that. We've got a borrow the money from China to do it. It's crazy. I mean. That was a little tricky there. The entitlements are a big part of what we have to, focus on. And what we've been trying to do is figure out how we can slow the rate of growth in health care to the rate of growth of the economy. The richest country the world has ever seen, $48,000 of GDP per capita. Enormous, but no matter how rich your family is, you can over promise. And that's what we've done. You have to get your
[49:41]
Otherpromises in line with your capacity. And today not only are our promises too big, but our health Our outcomes are not so great. You take health care. We spend twice as much as any other country in the world on health care, whether you talk about it as on a per capita basis or a percent of GDP. And you know, that might be okay if our outcomes were twice as good as anybody else's, but on almost any outcome measure you look at, we rank somewhere between 25th and 50th in things like infant mortality and life expectancy and preventable death. And anybody who doesn't think those 50 million people who don't have health care insurance don't get health care. They're crazy. They get health care. They just get it at the emergency room at five to seven times the cost of being a doctor's office. And you know who pays for it? We do. We pay for it in higher taxes and higher insurance costs. Well, this brings us to the question of whether the health care plan, the health care law, fixes any of this. We've got to slip in another quick break. We'll come back with that, and I know Joe has a question as well. Gentlemen, thank you very much. We'll be back with my question. more with the special conversation from Sun Valley right after this.
OtherLet's get back to Becky and Sun Valley, Idaho for some final thoughts from our special guest.
QuestionerBecky, can I, can I just... I want to ask your question.
Becky QuickYeah, why don't you jump in?
QuestionerOkay, I just want to ask one thing, because we frame the... A lot of Simpson Bulls talk in the... Trying to get the 25% government spending and the 15% in revenue somewhere. For a while, we are at 18 or 19% and it kind of matched up, and it went along pretty far. along pretty well. So we've got to do both. And hopefully, if the economy improves, we won't be at 25%. And the 15% will come up if we don't do anything, but obviously we do need to act. But yesterday, referencing again, this conversation we had with Paul Krugman, I kept asking, what is the acceptable amount of government spending as a percentage of GDP? And Alan Simpson, or even more, I got him to say that 50% was, in some years, in some European countries, once it gets above 50, he'd have a problem with it, but 50% is an... 50, 50, 50. Now, everybody ran with this interview, everybody ran with this interview yesterday because he said our ideas were zombies and he disparaged all of CNBC and our macroeconomics.
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QuestionerNo one led with him saying that 50% was an acceptable level. But he also said he favors a free market welfare state was what he favored. was what he favored. But can you imagine someone saying that 50% is an acceptable level? Run with 21 from this interview. Yeah. Absolutely. No higher than 21?
OtherNo higher than 21?
QuestionerWe can do 21. We can do 21. And, you know, and there'll be certain years in the future, because business is cyclical, you know, when it'll go up a little. That's why you have to get it down there. And it's a little harder now because of the aging of the population to get it to 21. to get it to 21, but you can. You've got to work at it, but you can get it to 21. If you're really serious. But 50, would there be any negative consequences for 50%?
OtherYeah. I know. It's laughable. It's laughable. And yet, it's laughable. And I know. Okay. Can I throw one more out there real quick? Larry Summers two weeks ago wrote an op-ed in the FT. Also came on this broadcast. Talked about, since the cost of a loan right now interest rates are so low, we should move. forward huge infrastructure projects. Spend a lot of money now on projects that we would otherwise have to do over the next 10, 20, 30 years. Given what you've been talking about today, I don't know if you've got a chance to read that or see what he had to say. What did you think?
OtherLook, I'm for spending the money we spend today more wisely. You know, I could give you lots of examples having run a university, having worked in state government, had been worked in the federal government. You know, it's a little bit like this guy who was a Nobel Prize winning scientist. who said his Nobel project was running out of money. He turned to his team and said, hey, we're running out of money. Now we got to start thinking. That's what we got to do. We're running out of money. We got to start thinking. We got to make tough choices, tough political choices. The way to get to 21 is to get to 21. Right. And just do it. We can do it. and the way to get to 18 and a half or 19 is to get to 18 and a half or 19. and you could design a plan, Joe could design a plan. Most people, everybody would have a, be a little unhappy with something, but it would certainly be better than floating along, you know, like we're doing now. We need something done. But the real driver is health care, and it doesn't matter what you call it. Forget the Obamacare label, you call it Elvis Presley Care.
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OtherThere's nothing in it that has cost containment, not a thing. And people say, well, it'll happen, let me tell you, it won't happen, and the reason is very simple. You're going to have pre-existing conditions. conditions of a three-year-old that will live to be 60. One person in the United States weighs more than the other two. You've got diabetes A and B. You got to do some tort reform. You got to do something with docs. You got to do something 10,000 a day turning 65. Got to make hospitals keep one set of books instead of two. Come on. Let's quit fooling each other. This is absolute madness. And this baby is on automatic pilot and will suck up all the discretion budget of the United States. So I say to people, what do you love? Well, I love education. I love this, I love that, I love that. Well, pal, that stuff will be wiped out unless you put the screws to this system. We said 400 billion we'd knock off and not let it go up 1% over GDP a year. Now, what more can you do?
QuestionerGentlemen, in the commercial break, you were joking around, and you asked, is there anybody we haven't insulted yet? Anybody left? We're trying to think of one. We'll get to you. If we have not offended you, please write to this. On a serious note, you mentioned at the beginning of the interview that you were looking for 10 million signatories to sign off, to put some pressure on Washington, to take these plans very seriously. If someone's interested in getting involved, what do they need to do?
OtherFix the Debtcampaign.org. That's where we want people to go. That's where we got our CEO, leadership council. We're bringing in names for people there. But that's what, that is, that is our social media campaign number, but we're going to be launching next week. Fix the Debt, fixthedebt campaign.org. Fix the Debtcampaign.org.
QuestionerWhen you look out across everything that's happening, we started this interview, Erskine, and you said that you think we will go off the fiscal cliff. What happens at that point? at that point?
OtherOh, I think it's, I think if they don't turn around very quickly and fix it shortly thereafter, then I think it could be really a disaster for the country. It's $7 trillion worth of economic events. It'll have an effect of at least one and a half percent decline in GDP next year. You know, that's enough to put us back into recession. And Dick Durbin kept asking you, where's the tipping point?
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QuestionerYou tell us. We don't have to do it. That's the whole, this is not only the most predictable economic crisis history, it's the most It's the most avoidable if we just come together, put partisanship aside, and pull together. We have about 30 seconds left, and Warren, if you look at this from the market's perspective, if we do go off the fiscal cliff, if we don't, how do you weigh all that factor-outism?
WarrenI'm a huge bull on the country. I mean, this country works over time, and we'll do the right thing in the end. We just shouldn't wait till the very end. But I still think the luckiest person that's ever been born in the world is the baby born in the United States today. And I'll stick with it. that and I love owning businesses in the United States. We'll invest $9 billion almost in the United States at Berkshire this year. So I am a bull on America, but I think we have to we have to run it right. That's all. But we, it, it, I don't want anybody to get discouraged about how this world is going to turn out because it can be done. I mean, you've got people like this working on it.
QuestionerAnd gentlemen, we can't thank the three of you enough for joining us this morning and you two gentlemen for all your hard work. Mr. Buffett, Mr. Simpson, Mr. Simpson, Mr. Bowles, thank you very, very much for your time, and we hope to check in with you again soon.