CNBC Transcript: Warren Buffett, Alan Simpson, & Erskine Bowles On Fixing the Debt Problem

This is a transcript of Warren Buffett, Alan Simpson, and Erskine Bowles' Sun Valley live interview on CNBC's Squawk Box, July 12, 2012, from 8am to 9am ET.

They discussed why the U.S. needs to address its mounting debt problem and suggested some solutions.

BECKY: We are in Sun 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— 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/Bowles, Bowles/Simpson and everything that's happening with the fiscal cliff. So gentlemen, we wanna thank you very much for agreeing to sit down with us 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 Bowles/Simpson or Simpson/Bowles— they would put this in immediately and they can't understand why this hasn't happened already. Warren—

BUFFETT: That's— not limited to CEOs either. I mean—

BECKY: It's not limited to CEOs.

READ THE TRANSCRIPT OF BUFFETT'S COMMENTS ON THE ECONOMY

BUFFETT: I think if you— I— I— but I think if you polled Fortune 500 CEOs I— I— you know, it'd certainly be 80 percent and not— I wouldn't be surprised if it was 90 percent that— they not only think it should be done, I mean, they think these fellows are heroes and so do I.

BECKY: Yeah. And 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 taken it up— taken you up on this. How much more desperate of a situation are we now than when you first came out with your proposal?

SIMPSON: This— these two— here I am— these are the numbers guys. I do the color. (LAUGH) Now Erskine can tell you— but let me tell ya, this is— this is a giant among pygmies on this kinda thing. This— people are not dealing with it. He— 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 'em out a little news there on the—

BOWLES: I'm not sayin' anything. It doesn't get any better.

SIMPSON: No, no.

BUFFETT: Well, let— let me say something about these two because they— they— they s— sat down with Republicans and Democrats and they were given a charge to come up with a plan that got the— got it done to 3 percent 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 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— you know, they did their job. And— and— Congress has not done its job.

BOWLES: We've got some hope, you know. It's— I think if I had to tell you— the probability, I'd say the chances are we're goin' over the fiscal cliff. And I hate to say it but I think that's probably right. But we've worked hard to try to— to get common sense to overrule politics. And that's a tough thing in Washington, as Al can tell ya. 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've put together a CEO fiscal leadership council which is— has over 100 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 workin' 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, and let's face this— enormous fiscal problem that we have comin' up."

BECKY: With all that on your side why do you think that the odds are we do go over the fiscal cliff?

BOWLES: Because it's politically painful. It's really tough for these—

SIMPSON: You can get beat.

BECKY: If you're— if you're—

BUFFETT: And it's not gonna get less p— it's not gonna less painful in the future. That's the other thing about it. I mean, you know, it's— if you had some kind of a disease (LAUGH) you might not wanna have somebody open ya up, I'm sure. But if you knew it was going to get worse next week, next month, next year, you know, you'd— you'd face reality.

BOWLES: Yeah, the problem's real, the solutions are all painful. And there's no easy way out. And— but I was talkin', 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 oughta be mad at us, at our generation for shirkin' our responsibilities and kickin' the can down the road. We've gotta face up to this. I mean, this is our generation's problem. And we gotta fix it.

BECKY: Senator— you've been criticized for coming out and speaking— your mind on some of these topics. (LAUGH)

SIMPSON: If I could do it with less— earthiness it would be good.

BECKY: Well—

BUFFETT: No, no— give us a little, I'm waitin' for that.

SIMPSON: No, I know you— do you beat— (LAUGH) I've known this fine gentleman for years. He says, "Tell me that joke about the coast is clear." (LAUGH) I do tell it to him. But I— I do— it's frustrating for me. You're in politics— and— and— and I loved it. You're entitled to be called a fool, boob, idiot, screwball, and all that, but never let 'em distort who you are. And when people try to nail me with bein' a bigot or— you know— guy that hates veterans and hates seniors and the Catfood Commission, that just steams me. And I— I respond. And they'll say, "Are you thin-skinned?" I said, "Hell, yes." (LAUGH) But I don't— I— 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 grew up with irrigators. And they had a terrible vernacular.

BECKY: Well, what's— what's your joke about the coast is clear?

SIMPSON: I think— (LAUGH) no, it's very quick. This couple hit the sack. This is a Wyoming story. A couple hit the sack, 3:00 in the morning the phone rings. Guy answers says, "How the hell do I know? That's 2,000 miles from here." Hangs up. His wife says, "Who was it?" He says, "I don't know." He says, "Some nut called and asked if the coast was clear." (LAUGH)

BECKY: Okay.

BUFFETT: He's just warming up, folks.

BECKY: Okay. (LAUGH)

BUFFETT: Believe me.

BECKY: And Mr. 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?

BOWLES: Oh, look, I think the— 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 percent of our revenue 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.

BECKY: And right now we are faced with the benefit of incredibly low interest rates. What happens as interest rates start to climb?

BOWLES: We're— we're spendin' right now $250 billion a year on interest at these incredibly low rates. That's more, to put it in perspective, than we spend if the Department of Commerce, Education, Energy, Homeland Security, Justice, Interior, and State combined. And if interest rates were at their average level in the 1990s or the first decade of this century we'd be spending over $650 billion.

BECKY: Senator— Warren Buffett has— 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?

SIMPSON: Well, we try to stay away from the blame game— because— people will often say, "How do 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— raise this, do this, do this. And you got reelected by bringin' home the bacon— and now the pig is dead.

But let me tell ya what happened. He— the president would've been torn to bits. His base would've said, "You— you— you are dealing with entitlements. You're dealing with Medicare and you promised 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've done at that time would've been rejected unanimously by Republicans. If he had said, "I'm for this," it woulda gone to the House or the Senate and they woulda said, "Well if he's for this, boy, we're gonna nail him and just vote against it for no other reason than that." That was his stick—

BECKY: So, in other words, we cannot do politics as usual? This has to be a whole new way of— of looking at the situation?

SIMPSON: And one of our members Dick Durbin, give him a lotta credit. I mean, here Durbin voted for this and Tom Coburn.

Two— two fine, splendid men with totally different ideology and philosophy on politics. And everyone kept sayin', "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, then inflation will kick in and— and— and— and— and in— 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.

BECKY: Well, I'll tell ya what, when we come back— we have to slip in a quick break here, gentlemen. But when we come back we're gonna talk about some solutions, some of the specifics that you laid out, and— and get into some of those details. Right now though, Andrew, I'll sent it back over to you.

SOLUTIONS

BECKY QUICK: 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 lotta 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—

WARREN BUFFETT: Yeah, yeah—

BECKY: — spending?

BUFFETT: You know, 2 1/2 percent is— if— that's average, the GDP is it— that actually is sustainable. Debt to GDP will not go up over time in— in all likelihood with that. And these gentlemen were charged with bringing it down to 3 percent. And they came— came in I think at 2.2 percent or something of the sort.

So you have to get expenditures, in my view, down to about 21 percent of GDP. And you have to get revenues up to 18 1/2 or 19. And— and you could get hundreds of people that could draw up plans, 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 wanna talk about reducing expenditures, they wanna talk about reform. And the Republicans don't wanna talk about revenues, they wanna talk about reform. (LAUGH) I mean, reform is the— is— is— is the cop out word.

BECKY: We— we've seen that. I know— I know your plan, gentlemen, had six points— or six basic parts that it lays out. A huge part of it is tax reform. And people that we've talked to, I think, spin it in different directions. The— they use tax reform as their code for doing whatever they wanna do. Your plan was not— revenue neutral. It was to raise revenue and to do that how?

BOWLES: What— 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 gotta have at least $4 trillion of deficit reduction. So that's kinda like your bogey. So if you talk about anything less than that you're just kiddin' yourself.

What we said is, look, let's take a trillion of 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 gettin' 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 comin' into the country. And you know why? Because 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 percent up to $70,000, 14 percent up to $210,000, have a maximum rate of 23 percent. You could take the corporate rate to 26 percent 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 percent of that money from eliminating the exposed tax expenditures so you're usin' 92 percent of it to reduce rates, 8 percent is about $100 billion a year. That over ten years is one trillion dollars. That's where I run one trillion dollars of revenue comes from.

So no, it's not revenue neutral by any stretch of the imagination. You know, we have to have about a trillion dollars of revenue. And the reason you have to have that is if you take it all outta cuts you'll truly hurt the disadvantaged, 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.

BECKY: Gentlemen, I knew Andrew Ross Sorkin has a question as well. Andrew?

ANDREW: Hey guys— the question I had— and we had Paul Krugman 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 the— or— or rather, you can dislike this plan and say that the tax cuts are too harsh, or they're too much, or this or that. He— he said that this proposal was, quote, regressive. And I— I'm curious how— how both of you think about that critique.

SIMPSON: Well, you know, Paul Krugman— is a little hyper. (LAUGH) And— when— 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. (LAUGH) He needs— he needs some solace, he needs to sit in Sun Valley and someone hold his hand and say, "Poor, poor dear."

JOE KERNEN: Alan— Alan—

SIMPSON: Because he's just getting into ranting.

JOE: He had a really, really, really tough weekend. I— I guess he— he spoke to the— to— to— to a Spanish— I guess, the guy from the Austrian school of— of Economics. And it's all over. You should check it out the web. But apparently— it didn't go so well— for the eminent— Mr. Krugman— with this guy. He— I don't know. It— check it out. You might— you might enjoy it. It's from— from the sound of your tone.

BOWLES: Yeah— you alm— Joe, you also might tell him to check the— the analysis that we had done. And we tried to make sure that as we reformed the tax code we kept it just as progressive as it is today.

BECKY: And how— how did you do that? How did you ensure by goin' 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.

BOWLES: Actually, if you— if you look at it, Becky, you know, only 27 percent of the people itemize? 73 percent of the people don't even itemize so they don't take advantage of a mortgage interest deduction.

SIMPSON: So we—

BOWLES: And so what we said is— well, you can tell her.

SIMPSON: Give 'em a 12 1/2 percent non-refundable tax credit. That helps the little guy. I mean, Paul Krugman talks about the little guy all day long. The little guy will be wiped out with w— and— and stimulus. I mean, I get a kick out of this. They say, "Well, we can get ourselves out of this with consumer spending." What consumer is ready to spend in this atmosphere? I mean, this is madness.

And a stimulus, you're not gonna get a nickel's worth of stimulus from either party or they will go home and get cremated.

BOWLES: We got a $1.3 trillion stimulus right now. We're spendin' $1.3 trillion more than we take in.

BUFFETT: Yeah, the— we've got a huge difference. Just— call that. And these guys are not talking radicalism. I mean, for— for 50 years after World War II, more or less, revenue was in the 18 1/2 or so percent range. And spending was in the 20 1/2 percent range. And it— and it really worked quite well.

So this is not something the country is— you know, we're— we're not talking about something we've never attained or anything of the sort. It's just that we drifted into this situation where we're not— getting enough revenue. And we've overpromised on expenditure. We've got— we've got a rich country. But a rich country can overpromise.

SIMPSON: We've never had less revenue coming into this country since the Korean War, 15.2 percent of GDP. What— who— who is fooling who in this game? It's madness. It's numbers. It's math. We don't do wizardry, we do math.

BECKY: All 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 will be back with more with this special conversation from Sun Valley. Stick around, Squawk will be right back.