Warren Buffett appeared live on CNBC's Squawk Box this morning, February 27, 2012, for his annual "Ask Warren" three-hour marathon.
This is part two of a transcript of his comments. (Click here for part one.)
BECKY: Let's get back to some of our questions with Warren Buffett this morning. Warren, Joe just mentioned that national average on oil prices climbing to $3.69. Do you worry that higher oil prices, higher prices at the pump could cut off any sort of economic rebound here in the United States?
BUFFETT: Well, they're a minus, but I don't see them stopping things. I mean, you know, I'd rather have them a lot lower. Of course, we had them a lot lower when the — when the panic hit. I mean, oil had been $147 a barrel, you know, prior to Obama coming in.
BUFFETT: And then, when the panic hit, it hit everything. And then oil totally tanked. But, no, I do not think it will derail what's been going on now for almost three years, two and a half years. We've had a steady recovery.
BECKY: Does the price of oil make since given that economic recovery? Or is this something where people are just a little too worried about what's happening in the Middle East? Or is this a situation where you have speculators playing in the commodities markets again?
BUFFETT: You know, I've got no position in oil, so I don't— I don't really have a view. The one thing that's extraordinary in oil, which we've never seen and which has probably caused some people to go broke, is you have this— you have 100-plus dollar oil, $108 oil the other day, whatever it was, with $2.50 for natural gas.
BUFFETT: Nothing like that's ever existed, and I mean, the BTU equivalent, you know, people say that can't happen. So people that have gone long natural gas and short oil are really feeling the pain. I wouldn't be surprised if even the unwinding of some of those positions could cause some of what goes on in both markets, but this is— this is extraordinary. I mean, and you would've said it couldn't happen, but that's like saying before long-term capital management, you know, you couldn't have had 30-year Treasurys and 29 1/2-year Treasurys with 30 basis point spread. You never— you want to be very careful in markets saying something can't happen.
BECKY: In your annual letter, you actually said that you had guessed wrong on where natural gas prices were going to be headed and that was one of the issues that you wish you had done.
BUFFETT: Did I ever? Yeah. Yeah. Like a billion dollars worth plus.
BECKY: Let's get to some questions from viewers. We promised to bring some of those up, and we were just talking about succession at Berkshire. You had a lot of questions that came in both on Twitter and on our own email of people asking more questions about that. One's from Max Rudolph who writes in that while you're very careful generally about how you write your annual report, nowhere has it ever said that the CEO that you have in mind is an internal candidate. It seems to leave open the possibility that a board member could become CEO. Can you comment on that?
BUFFETT: Well, that would not be impossible. I mean, it— I don't think it's going to be the case, but certainly we've got incredible business talent on the board, and they're intimately familiar with Berkshire. I think it's very, very unlikely that we wouldn't have somebody better for the position as a CEO of one of our companies, but if we're on a— I was going to say a train trip, but I'll say a plane trip and the plane went down, we had all of our managers on there, the board would not be a bad place to look. But that isn't going to happen.
BECKY: OK. Another question comes in from Ed Polli in Bridgeport, Ohio, who wants to know if the person that the board has chosen to be your successor, does he know that he's been chosen?
BECKY: OK. Jeff Webb writes in from Washington and he says, "Will it be necessary for the next Berkshire CEO to reside in Omaha. And will the annual shareholder meeting remain in Omaha after" you leave?
BUFFETT: Well, that's a good question. I would certainly hope so, but I won't be around to enforce it. I— well, maybe I will. I've left them all a Ouija board so they can stay in contact with me. I've threatened them in various ways. But I would say that there's every intention of the headquarters of Berkshire being in Omaha 50 years, 100 years from now and that— and it wouldn't make sense for the CEO not to be located where the headquarters are. So I think that's a 99.9 percent answer, yes.
BECKY: All right. David Lund from Ogden, Utah, writes in and points out that when Lou Simpson retired, his portfolio was liquidated.
BECKY: What will happen to your portfolio when you retire?
BUFFETT: Well, I don't know. I mean, that will be for somebody else to decide. But what will happen is that Todd Combs and Ted Weschler, who are already on board now, will be managing the investments, and they will be managing counting the cash. They'll be managing $160 billion, and they're totally capable of doing that. My guess is that they would like some of the things we own very well, but it will be their call. They each, as I mentioned in the annual report, they're managing about 1 3/4 billion now, although that number will go up during 2012. I don't know what they're buying. They don't have to check that with me. They can be buying— each buying the same stock. I think in one case, they've done that. But it's their baby. I mean, I— they are getting paid based on their results and it wouldn't mean anything if I— if I were second-guessing them or they had to get approved by me. So they will buy stocks, and I will find out about it later, even though they work in the same office. And when I'm not there, they will just be managing a whole lot more money, and they're totally capable of doing that.
BECKY: They each have a few billion dollars right now?
BUFFETT: Right now. But that will go— that will even go up during this year.
BECKY: OK. Control room, I'd like to go to number 108, this is a question that came in from Gary Watkins in Atlanta, Georgia. Since you bring up Todd Combs and Ted Weschler, he writes in and says when you're talking about them, you say each of them receives 80 percent of his performance compensation from his own investment results and 20 percent from his partner's. He assumes that this is so they will help each other. Can you elaborate?
BUFFETT: Yeah. Well, that's— the point is, I've seen investment organizations where people are competing with each other. You know.
BUFFETT: And these fellows wouldn't anyway. But I do believe in having compensation systems that reinforce the values that we value.
And we certainly value cooperation among two people doing that sort of thing. So— and both of these fellows agreed with this arrangement. I mean, it made sense to them. So they get paid 80 percent on their own performance and 20 percent on the other person's performance. And performance is defined as doing better than the S&P 500 over a period of time. Todd came on board a year ago, and he did very well the first year, so he has earned a significant amount of performance compensation. Ted didn't participate in that because he wasn't— he didn't come on board till this year. But from this point forward, they will participate with each other.
BECKY: OK. Andrew, you have a question as well?
ANDREW: It's on this topic. Hey, Warren, I'm curious if you imagine bringing on other investment managers still. I think I remember recalling you said something to the effect that you were thinking of two to three to possibly more than that. And I'm wondering have you— have you found the two that you love and that there's no more, or you think that there might be additional?
BUFFETT: I certainly feel no need for any more. I feel terrific with these two, and they could easily handle the whole place. So it may well be that we find a third, but I'm not— I'm not— I'm not thinking about that actively. And if somebody came along that I thought was absolutely terrific and I thought it would add something to the picture, I wouldn't hesitate to do it. And Todd and Ted would not be surprised if I did it. But you may very well be talking to me— I hope you are talking to me five years from now, and it will be Todd and Ted. They're terrific human beings. I mean, these are two fellows who were running, in effect, hedge funds. They were making more money than they can make with Berkshire, and they were getting, A, an entirely different tax treatment. They had a carried interest. So the money that Todd made last year, which was substantial, he would have made that same money if he'd been running his hedge fund. I mean— and he would have gone to work the same time in the morning. He has a couple of assistants. They would have been the same people, he would have been reading the same reports. But he would have been taxed at less than half the rate that he was taxed at because we pay it to him as ordinary income. And otherwise, he would have got it as long-term gain.
BECKY: Doesn't seem fair.
BUFFETT: It's a little crazy, isn't it?
BECKY: Yeah. It gets us to the topic of tax policy, and I know that's a big can of worms that we're opening up this morning, too.
BECKY: You have had a huge role in the discussion around taxes, and you've been someone who's come out very sharply on President Obama's side. In fact, there's the Buffett tax that's now named after you.
BUFFETT: Yeah. Well, that's because Alzheimer's had already been used. I always wanted to have a disease named after me but...
BECKY: What— how do you feel about the turn that this has taken in the national discourse and how it's put you front and center in a very contentious debate?
BUFFETT: Yeah. Well, maybe there's a lot of people— by definition, almost, if you're— if you're into something where the Republicans tend to be on one side and the Democrats on the other side, all you do is you make half the people of the United States mad at you for coming out of the chute. But that's OK. The— you know, the important thing, we've got an important problem in the United States, and a very important problem, and it was man created and it can be solved by man. But it needs analysis, it needs thought, and then it needs action. And to the extent that I can contribute either in the, in the thought or the analysis or the action, you know, I— I'll do it. But it isn't like I've got any magic facts that anyone else doesn't have. I mean, I just go on the Internet and get facts and then— and see where they lead me. But I don't think there's anyone— it's been very interesting to me. Republicans and Democrats know we need more revenue and we need lower expenditures and...
BECKY: But that's not necessarily something they would all agree to. We have plenty of people who come on the show who say that it's not necessarily a matter of bringing in more revenue. You do that by lowering taxes and thereby growing the pie. And that, as a result of growing the pie, you can actually lower people's tax rates and still bring in more money.
BUFFETT: Yeah. Well, the pie is going to grow, and it's going to grow under the present tax rates. It's growing at— I've got a table here that shows the tax rates all back to, back to when I started in business. It's grown when tax rates were in the 30s on capital gains. It's grown when tax rates were 80 percent on ordinary— it's grown under— we have a wonderful market system that works. And so we will have a growing pie. But a growing pie isn't going to solve a deficit that's 9 percent or 8 percent of GDP. It never has and it never will. We— fortunately, the fact that we have a growing pie does mean that we can have like a 2 point or 2 1/2 point gap between revenues and expenditures and have a sustainable economic picture. So, you know, the goal, and it should be taken up promptly, is to get the gap between expenditures and revenues down to a 2 to 3 point gap. That's totally sustainable, growth will work out fine, the economy will grow. Debt, as a percentage of GDP, will not grow if we get into that range. And almost everybody realizes that and almost everybody says some of it has to come from expenditures, some of it has to come from revenues. And then they get to the specifics. And the real problem, of course, the biggest problem you have, probably, because I've talked to Republicans and Democrats on this, they agree on that. But they all want the other guy to go first. The Republicans want the Democrats to go first on expenditures, and the Democrats want the Republicans to go first on revenues. And they just feel there's a tactical advantage in the other guy going first, then they can shoot at his stuff and say how terrible it is. And so now we've gone into this dance where nobody'll get on the dance floor.
JOE: Yeah, Warren, you've seen the figures if you let all the Bush tax cuts expire, which they're going to do anyway. If you don't do anything about that, I don't know how much of the deficit it solves, but it's a large part.
BUFFETT: Large part.
JOE: A large part of that. You don't see that coming from Democrats. They only want to do it on 200 to 250 or whatever it is, which solves very little. Would you by— I mean, is that the best thing to do, to let it, let all of the Bush tax cuts expire or would that add to the income disparity or the fair— would that hurt on the fairness debate that no one under 200 or 250 should shoulder any of the, of the deficit cutting, or does it make sense to just let it go back to the Clinton years for everyone?
BUFFETT: I think if we hired 535 people to run the government and to represent us and that they should not in effect act on a default basis and just say, `Well, we'll just let everything lapse back to where it was.' They would proactively say, `What is the best way to get revenues up to 18 1/2 or 19 percent and what's the best way to get expenditures down to 20 1/2 or thereabouts percent? And let's do it now.' And, you know, this bit about, well, we can't do anything because it's an election year, well, you know, if they're not going to do anything because it's an election year, why are we paying them? They can all go home if it's an election year. We'll just pay them three years out of four if you're only going to work three years out of four. So we've got, you know, we've got a major, major problem, and the idea of putting it on some default setting, you know, it's crazy. I can put it on default setting without hiring 535 guys. So, no, I wouldn't— I would approach it and say, look it, we've got serious propositions out there, we've got Simpson-Bowles, you know. Come up with something and get it for a vote. And if the people want to vote it— Congress wants to vote it down, that's one thing. But just to sit there and say, `Well, we're paralyzed because it's an election year' and then let things drift along till the end of the year when, as you point out, all the stuff expires and the sequester kicks in and, you know, and the payroll tax holiday ends and all of that, I think, I think that's a crazy way to run a government.
BECKY: Warren, you bring up the idea of Simpson-Bowles and, interestingly enough, you're quoted on the front page of The New York Times today in this story about Simpson-Bowles. The Times puts forth this idea that President Obama has actually taken, in their words, huge chunks of this. Let me find where it says, "Mr. Obama has come to adopt most of the major tenets supported by a majority of the commission's members, though his proposals do not go as far." They say that he has quietly put forward Simpson-Bowles. Would you agree with that?
BUFFETT: Well, I haven't read the article and I— but I would say this. Alan Simpson and Erskine Bowles, both of whom I know, I mean, they are high grade people. One's a Republican and one's a Democrat. They disagree on some things. You won't find people of greater integrity. They are smart, they worked, I don't know, for 10 or 11 months. They compromised. They got people with as diverse viewpoints as Tom Coburn of Oklahoma, who's a very high grade guy but has differing views than Dick Durbin, who's also a high grade guy from Illinois. And they got them to sign on. Now, having put that effort forth, they came up with a plan. I would like to see that plan voted on. I mean, what was, what was the reason for sending them out, you know, to beat each other's heads for 10, 11 months. They got 11 out of 18 signatures. I understand that Simpson and Bowles are actually taking their recommendations and crafting it into a legislative bill. I heard that a month ago. I don't know whether for sure that that's true. I would hope that that bill just gets presented. Bring it up next month. Let's see how Congress feels about it. If they don't like it, they can come up with something different. But conscientious, smart, decent people worked for months to come up with something. They were— they were chartered to do it, and I think— I think Congress owes them a vote on that. And I would— I would love to see that put up. And I would say this, I would say that if I wrote a letter to the CEOs of the Fortune 500 companies and said, `Do you want to vote on this now?' I think it would be almost unanimous. I think it would be the same with labor leaders and church leaders, and you name it, up and down the line. That doesn't mean they all agree with it. But the question is, do you think it's better than what we're doing now? I mean, is it an appropriate response to a problem we all recognize we have?
BECKY: And I guess the point being you can't cherry pick the items you like from that and start breaking apart the plan?
BUFFETT: Once you start cherry picking, the whole thing disintegrates. Then K Street comes out, you know, in full force, money pours in, you know, supporting this little thing that helps this person or that person. In the end, we're going to have a code that everybody— you, I, you know, everybody, your all— all your listeners— they're not going to like some part of it. But I can guarantee you they don't like some part of this. And this— and this particular code is leading us down a path that's unsustainable. So why not have a code we don't like that at least is sustainable as opposed to one that's unsustainable?
BECKY: Right. Andrew.
ANDREW: Warren, there's an op-ed in today's Wall Street Journal by Rick Santorum laying out his economic agenda, and he proposes some new tax rates and policies on corporate taxes. He's halving them down to 17 1/2 percent. And on personal, he's doing just two brackets, 10 percent and 28 percent. I'm curious, beyond just the Simpson-Bowles debate, what do you think the right numbers are? What are the right brackets and what is probably the highest— what do you think from a competitive perspective on a corporate basis the highest rate should be?
BUFFETT: Well, the rate— what the rate should be is— are rates that bring in about 18 1/2 or so percent of GDP as revenue. Now, we've had rates like that throughout most of the post-World War II period. You know, we've managed to pull that off. It's not impossible at all. And then we just knocked the heck out of rates, you know, roughly 10 years ago or a little less. So the interesting thing about the corporate rate is the corporate profits as a percentage of GDP last year were the highest or just about the highest in the last 50 years. They were 10 and a fraction percent of GDP. That's higher than we've seen in 50 years. The taxes as a percent— corporate taxes as a percentage of GDP were 1.2 percent, 180 billion. That's just about the lowest we've seen. So our corporate tax rate last year effectively, in terms of taxes paid for the United States, was around 12 percent, which is well below those existing in most of the industrial— industrialized countries around the world. So it is a myth that the American corporations are paying 35 percent or anything like it. Incidentally, you know, it— 1.2 percent of GDP or 12 or so percent, 12 or 13 percent of corporate profits actually paid, you know, that is— that's a rate far, far, far below what we've seen in the United States. I've got a chart here that— can you put that up?
BECKY: There's a chart that we gave you guys.
BUFFETT: OK, yeah.
BECKY: It's— I think it's E1. It's the one you took a still shot of earlier Paul.
BECKY: Yeah, here it is.
BUFFETT: Yeah. Here's...
BECKY: OK, it's on the screen.
BUFFETT: Yeah. Here's the— here's what's happened over the last 60 years. As percentage of GDP. That top blue line is individual income taxes. And you'll notice that they've bounced around but been fairly steady. The yellow line that's accelerated is payroll taxes. Payroll taxes have gone from a very small percentage of GDP up dramatically. At the same time, that red line is corporate taxes as a percentage of GDP, which were over 5 percent, if you go back a long period, and 4 percent, and now, like I say, they were 1.2 percent last year. So corporate taxes are not strangling American competitors.
JOE: But, Warren...
BECKY: Warren, is that because people were able to write off— go ahead. Go ahead, Joe.
JOE: You can— yeah, you can see that the finance— that last drop-off right there...
JOE: ...is the financial crisis. If it were to go back...
JOE: I mean, right?
BUFFETT: No, but if you take 2011, 2011, corporate profits were a record. And...
JOE: But for example— you know, for example, GE, which, you know, is the poster child because, you know, people can conflate what GE did.
JOE: They had, you know, they paid taxes abroad, and they had a lot of tax loss carried forwards, or, you know, from GE Capital and the losses in 2008 and 2009, it reduced the tax bill in those subsequent years, 2010 and '11. So if you were to normalize it on that chart, you normalize it without the financial crisis, it gets back to 4, 5 percent. I mean, using 1.9 per...
BUFFETT: Oh, no, no, no.
JOE: Where does it get back to?
BUFFETT: It doesn't get...
JOE: What does it get back to?
BUFFETT: Well, again, I mean, well, all I can do— you can normalize it all you want but you can go back to 1980 and you haven't had a figure, you know, much above— you've had three a couple times. So you've got all these numbers of 2 and 1 1/2. It does not average anything like 4. When I was in the golden years of American business, and it was pretty good for investing, too, the corporate tax rate was 52 percent in the United States and people paid it. Our tax rate at Berkshire, we didn't have any loss/carry forwards or anything, we didn't have that much foreign income. But our tax rate in terms of taxes paid last year, it was a little higher than the national average. But because of 100 percent write-offs and various other things, our tax rate came down, we paid $2 billion. We paid more than 1 percent of all the corporate taxes in the United States. But our tax rate on US income, you know, got down to taxes paid, got down to 15 or 16 percent. We're still above average.
BECKY: Warren, there are plenty of companies, though, especially small businesses, who we hear from all the time that are paying much higher rates. The way the tax code is set up right now, they are the ones who get saddled with paying these exorbitantly high rates.
BUFFETT: If they're— yeah, well, they can be paying— if they're S corporations and they make a fair amount of money, they will be paying it at 35 percent. Now, they may be getting accelerated appreciation, 100 percent depreciation on things, too. I mean, if they're buying any kind of fixed assets, they really aren't paying at that rate.
BECKY: But if you're somebody who is self-employed and maybe you have a couple of employees working for you, you are in an incredibly difficult position to try and find any loopholes that work for you.
BUFFETT: People making small amounts of money are at a huge disadvantage to people making large amounts of money under our present tax system.
BECKY: Because not only that, they pay their own Social— their own payroll taxes, too.
BUFFETT: They pay payroll.
BECKY: They have to pay 30 plus percent.
BUFFETT: No, no, they— the system— all you got to do is look at, you know, that payroll tax has moved up dramatically and that is not paid by the super rich. My payroll tax, you know, last year was, I guess in 2011 would have been $13,300. It was nothing in relation to my tax liability.
JOE: Warren, as the world gets more competitive, could you argue that maybe— I mean, maybe you don't even think that that's— that that's a fact, that the world's gotten more competitive, but, you know, as we have to compete more with China and a lot of emerging economies with their cheap labor, I mean, there are probably some people would say that we need to— you know, that it's not 1930 or 1940 or 1950 anymore and that, you know, we want our corporations to be the best in the world and the leanest and the quickest to move, and, you know, there could be an argument. I mean, I've seen people argue that corporations shouldn't pay any taxes because their shareholders pay taxes, their employees pay taxes. I mean, do you just dismiss that out of hand or?
BUFFETT: Well, like I say, it was 1.2 percent of GDP.
BUFFETT: And, incidentally, I mean, the place— the place where we are— the very high cost compared to the rest of the world is CEO pay. Our CEO pay is considerably higher than if you look around the rest of the world.
BUFFETT: Nobody ever mentions that in terms of competitiveness. The— you know, we are exporting as a percentage of GDP twice as much as we were back in 1970. Our goods and services have— we've really had a lot of export success. And the other side of it is we like to import a lot, and of course we've been able to print money, which lets us import. So we exchange little pieces of paper for goods from around the world, and that's a lot of fun.
BECKY: You know, Warren, if you don't mind, we're going to slip in a quick break here. But when we come back, we have much more to come from Omaha. Stick around, a special edition of SQUAWK BOX right after this break.
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