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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.

POLITICAL ROADBLOCKS

BECKY QUICK: We'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— these— measures to try and help us? Austerity is— is a very tough thing to put on people when you're looking at numbers like this.

BUFFETT: Well, they're talking seriously around the country, where— where you need 'em talking seriously is in Washington. Now, that— I mean, just in w— one example, I— everyone knows you're gon— you're gonna have to change the— the debt limit. And— and— and— in my view— if you've got two leaders from each house, they should get it done in five minutes.

I mean, it— it— 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 onto the next problem. (LAUGH) You know, I— I would think that— you could get Reid and McConnell and Pelosi and Boehner and they'd just say, "We— we're gonna raise it. So why should we go through this charade of everybody blaming each other about this— "

ERSKINE BOWLES: They've already spent it. (LAUGHTER)

BUFFETT: Yeah, yeah—

BOWLES: You know, they've already—

BUFFETT: It's— no, it's done. It's— so it is— it— to— and so to waste weeks on that and— and to hold— hold— legislation hostage over it, it— I mean, that— that's— that's for school kids. And— and— you know, the— let's just get the— get down to the needs to be done.

BECKY: And Senator—

BUFFETT: I mean, if— if— if— if Berkshire were in trouble financially, you know, Charlie (LAUGH) and I and everybody else, the directors, we'd sit down and say, "You know what, we gotta figure out a plan to get out of this, and we'll do it today." (LAUGH)

BECKY: Is anything going to happen before this election, gentlemen?

ALAN SIMPSON: No. The— 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—

BOWLES: Yeah.

SIMPSON: And Lord's sake, here came the A.A.R.P. and the senior groups, and the Catfood Commission, I mean, just absolutely stupefying. And what we're— and we've— and then we said, "Take the lowest 20 percent and give 'em 125 percent of poverty," that'll cost some money. And give the older 80 percent to 85 percent kick a year and do it for— keep the progressivity and— and raise the wages subject to the tax.

We did all that stuff, and then get nailed by groups who really, really don't care. They are mar— the A.A.R.P.— I asked their leadership, "Are there patriots in here or just marketers?" That did not go well that day either. (LAUGH) It was just one of those days. (LAUGH)

BOWLES: To— to show you, we recommended raising the retirement age one year, 40 years— from now. We wanted to give people a chance to get ready.

BECKY: Right.

BOWLES: You know, I mean, it's like, you know, give me a break, you know?

BUFFETT: I'm for anything 40 years from now.

BOWLES: Yeah, right. (LAUGHTER)

BECKY: No, and, I mean, as somebody who could be affected by this, I— I would even take it sooner than that. I'd say—

BOWLES: Yeah, sure.

BECKY: — "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 gotta pull back the promises you've made to people over 40, 50 years."

BOWLES: Right, and what we did is the same time we took care of a truly disadvantaged, we raised the minimum payment to 125 percent of poverty, we gave people between 81 and 86 a 1 percent bump-up, because that's when every economist, Republican or Democrat told us their private pension funds general run out. You know, so we tried to do the kinds of things that really made a difference for people who desperately need Social Security, you know, as that s— you know, s— sounding board for them.

SIMPSON: And not one person will— will argue with this number, that in the year— if you do nothing, in the year 2033, they moved it up three years in one year, you're gonna waddle up to the window and get a check for 27 percent less. And what is—

BECKY: If nothing's done—

BOWLES: Yeah.

SIMPSON: What is smart about that— and as I say, when we said, "Raise the retirement age to— to 68 by the year 2050," and the A.A.R.P. said, "How will people ever be able to prepare for that?" Well, we said, "We think they can figure it out." (LAUGHTER) We just know they can. (LAUGHTER) Try to help them do that.

BECKY: Andrew's got another question. Sorry, Andrew?

ANDREW: Hey guys. This question, I'll start with Warren, but— but all three gentlemen can jump in. The president recently proposed extending the Bush era tax cuts— for those making less than $250,000. A number of Democrats, including— Senator Schumer and others have come out and said, "$250,000 is the wrong number. It should be a million dollars." Warren, you have the Buffett rule. How do you think about this?

BUFFETT: Well, I— I am— I am generally in favor of making the— the— the tax code more progressive. Certainly, when the most recent figures for the 400 highest incomes in 2009, incomes that average $200 million per taxpayer, showed that over half of them paid less than 20 percent 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— I— I— I think there's some changes needed. But I say let's— if they are gonna do anything, I'm— I'm for doing that. But— but— why not— why not just solve the problem? I mean, why— why— why just— why— why work around the edges? So I— I— I— I am— I am for what these gentlemen propose.

ANDREW: Right.

BECKY: Gentlemen, I mean, what— Senator Simpson and— and— and Mr. Bowles, what— 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." And the president has laid out his proposal. What's the right solution for right now?

SIMPSON: Well, between November 6th, when they will do nothing, nothing will be done. Politically, nothing will be done between now and November 6th. It's just posturing. 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 gonna do that in this election. We think, naïvely enough, that if you have the guts to do somethin' along the lines what we suggest, that people will reward you. And it won't come now. But in four months, as this thing closes in, man, you know, people are gonna say, "Hey, if I don't do somethin', they're gonna throw me out for sittin' here doin' this B.S. and mush that I've been pourin' out."

BOWLES: Can you imagine sittin' at Berkshire, and you know you have— the equivalent of a $7 trillion economic event hitting in December. You know, but if you do nothing, it will have an adverse effect on the economy of at least 1.5 percent next year, which is enough to throw us back into a recession. And you're not doing anything?

BUFFETT: No, they say—

MALE VOICE: I mean, that's crazy.

BUFFETT: — that you can't do anything in a election year, but wha— why pay 'em— we oughta pay 'em just for three years out of four, I mean, if they're only gonna work (LAUGH) three years out of four. (LAUGH)

BOWLES: Yeah, of course, we have election year every two years, too. You know, (LAUGH) so it's like crazy.

BECKY: Andrew, I'm sorry. Did I cut you off before?

ANDREW: No, no, no. I— I— look, I— I— the— the question I had is I— I completely understand that we have— a much bigger tax reform and— and reform broadly that we need to get to. And I guess I was just tryin' to understand from— from both gentlemen— given where we are, and that maybe we won't get any movement, if— if the million dollar number, or the $250,000 number, I know— I know— I know it's— it's peanuts in a relative basis to the— the bigger scheme, where they come out?

BOWLES: Andrew, it's not exactly peanuts, because the difference between the $250,000 and— the million is about $366 billion. And you know, we've gotta come up— we've gotta pay for that some way. You gotta come— that's what, you know, we're always ready to— to reduce— (LAUGH) to reduce revenue, but we're never willing to— to pay for it any way.

I really think talkin' 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.

BECKY: But that's not gonna happen between November and January, right?

BOWLES: No, 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 s— specicifity— pesis— what is it? Specificity—

BUFFETT: You got— you got— Erskine — you got a framework. I mean, (LAUGH) you know, you fellows worked on it for ten months.

BECKY: So that could be set up— as something to say, "Here's what we will get to," and maybe it doesn't kick in January 1, but—

BOWLES: 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.

BUFFETT: Why not have an up and down—

MALE VOICE: Yeah.

BUFFETT: — down vote on it?

BOWLES: Yeah.

SIMPSON: Well, anybod— anybody in the past could say, "I— 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— and then we say, "Do what you're supposed to do. If you don't like one, take it out. Amend something. Get in the game."

So Erskine has pushed that so beautifully. But if you— if you extend the Bush tax cuts just like that, it's between $3.8 trillion and $4.2 trillion in— in ten years, added to the pile. I mean, madness.

BECKY: Now you're talkin' some real money.

SIMPSON: And— and if I had been in Congress at that time, with what we had to do, and I'm not bein' a smart Alec, I would never— why would you give a tax cut when you're fightin' two wars, borrowin' money hand over fist, and give a tax cut? I think the American people when that came up were reading their newspapers saying, "What's goin' on?" Madness.

BECKY: We're gonna continue this conversation in just a moment, but Andrew, for right now, I'll send it back over to you.

"THIS IS MADNESS"

JOE KERNEN: Let's get back to Becky in Sun Valley, Idaho with our special debt reduction summit. Becky, I— I— I was— I came this close to calling it our "Debt Reduction Task Force." I— I love Jonathan— I miss Jonathan Wald. Right?

BECKY: Oh boy.

JOE: It's— it's really kind of a task force, isn't it?

BECKY: Some things stick with us.

JOE: Yeah.

BECKY: It is. This is a super-sized task force. This is the mother of all task force, you might say, Joe. But let's jump—

SIMPSON: Father's unknown. (Laughs)

BECKY: — into— let's just— oh, I don't know if you heard Senator Simpson. He said, "Fathers unknown." (LAUGH) We're gonna 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 about— a lot about cutting spending, as well. Why don't— why don't you tell us— how the plan really would attack that.

BOWLES: Yeah, we cut spending by about $3 trillion over the next— decade. And again, that's— that gets us to the $4 trillion which is the minimum amount you have to reduce the deficit in 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— 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 the entitlement programs. You have to make significant cuts in the spending in the tax code if you're gonna produce enough deficit reduction to stability the debt.

BECKY: What— what's significant? Are we talking 5 percent, 10 percent? When— just for people to get their heads around. What's really coming?

BOWLES: All— all of it is doable, okay? We spend today about s— $760 billion a year on defense.

SIMPSON: Get this one, this is really important.

BOWLES: No, no, you— you tell 'em 'cause— and you loo—

SIMPSON: No, it— at— it— this is madness. $750, 760 billion is the USA. And the other countries, major countries of the Earth including Russia and China combined spend $540 billion. Now what— 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, when you get into this, you see, you get savaged. I'm a veteran. I was proud to serve. There's a thing called Tri-Care. 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 co-pay. Takes care of all dependents and costs us $53 billion a year. Leon is tryin' to do somethin' with that. And what's he gettin' from the professional vet— veterans? Gettin' his head mashed.

BOWLES: Here's how crazy defense is. Just think about this. The U.S. has a treaty with Taiwan that we'll protect Taiwan if they're invaded by the Chinese. There's only one problem with that. We gotta borrow the money from China to do it. (LAUGH) It's crazy. I mean.

SIMPSON: That's a little tricky there.

BOWLES: The— entitlements are a big part of what we have to focus on. And what we've been tryin' to do is figure out how we can slow the rate of growth— in health care — to the rate of growth of— of the economy.

BUFFETT: The richest country in the world has ever seen, $48,000 of GDP per capita. Enormous. But— but no matter how rich or— your family is, you can overpromise. And that's what we've done. And— and you have to get your promises in line with your— with your capacity.

BOWLES: And today not only are our promises too big, but our outcomes are not so great. You— you take health care. We spend twice as much as any other country in the world on health care. The way we talk about it is— 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 outcome on— an— 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 5 to 7 times the cost of bein' in the doctor's office. And you know who pays for it? We do. We pay for it in higher taxes and higher insurance costs.

BECKY: Well, this brings us to the question of whether the health care plan— the health care law fixes any of this. We've gotta 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 more with this special conversation from Sun Valley right after this.

BUFFETT: 'I'M A HUGE BULL ON THIS COUNTRY"

JOE KERNEN: Get back to— Becky in Sun Valley, Idaho for some final thoughts— from our special guests. Becky, I— can I— can I— just say—

BECKY QUICK: I wanna ask your question. Yeah, why don't you jump in?

JOE: Okay. I just wanna a— ask one thing because we— we frame the Si— all— a lot of Simpson/Bowles talk in the— tryin' to get the 25 percent government spending and the 15 percent in— in revenue somewhere. For a while we were at 18 or 19 percent and they kinda matched up and it— it went along pretty well.

So we gotta do both and hopefully, if the economy improves we won't be at 25 percent. And the 15 percent 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— with Paul Krugman, I kept asking, "What is the— the acceptable amount of— government spending as a percentage of GDP?" And— and Alan Simpson or even Warren, I— I got him to— to say that 50 percent — was— in some European countries— once it gets above 50 he'd have a problem with it. But 50 percent is—

ERSKINE BOWLES: 50 percent?

JOE: Fif— 50. Five, zero. Now everybody ran with this—

BOWLES: Crazy.

JOE: Everybody ran with this interview yesterday because he used— he said ourideas were zombies. And he disparaged all of CNBC and our macro economics. No one led with him saying that 50 percent was an acceptable level. But he also said he fa— he favored— he favors a free market welfare state— was— was what he favored. But can you imagine someone— saying that 50 percent is an acceptable level?

BUFFETT: Run with 21 from this— from this interview.

BOWLES: Yeah. (LAUGH) Absolutely. It's unanimous.

JOE: No— no higher than 21?

SIMPSON: We can do 21.

BUFFETT: We can do— we can do 21. And— and— and you know, and there'll be certain years in the future— yeah, because— business is cyclical. You know, what— when it'll go up or— that— that's why you have to get it down to—

BOWLES: Yeah. And— and it's a little harder now because of aging of the population to get it to 21. But you can. You gotta work at it, but you can get it to 21 if you're really serious about it.

JOE: Would there be any negative consequences for 50 percent? (LAUGH) I know, it's laughable. It's laughable and yet— it's laughable. And— I— I— I know. Okay.

ANDREW ROSS SORKIN: And can— 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— since the cost of a loan, right now interest rates are so low we should move forward, huge infrastructure projects, spend a lotta money now on projects that we would otherwise have to do over the next ten, 20, 30 years. Given what you've been talkin' about today, I don't know if you got a chance to read that or see what he had to say, what did you think?

BOWLES: Look, I'm for— look, I'm for spendin' the money we spend today more wisely. You know— I could give you lots of examples havin' run a university, havin' worked in state government, havin' worked in the federal government. You know, it's a little bit like this guy who was— a Nobel Prize winning scientist, you know, who said— his Nobel Prize— he was runnin' outta money and he turned to his team and said, "Hey, we're runnin' outta money, now we gotta start thinkin'." (LAUGH) And that's what we gotta do. We're running out of money, we have to start thinkin'. We gotta make tough choices, tough political choices.

BUFFETT: The way to get to 21 is to get to 21.

BOWLES: Right. (LAUGH) And just do it. We can do it.

BUFFETT: And the way to— and the way to get 18 1/2 or 19 is to get to 18 1/2 or 19. And— and lot— 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— we need something done.

SIMPSON: But the real driver is— is health care. And it doesn't matter what you call it. Forget the Obamacare label. You call it Elvis Presley Care, there's nothing in it that has cost containment, not a thing. And people say, "Well, it'll happen." Let me tell ya, it won't happen. And the reason is very simple.

You're gonna have pre-existing conditions of a three year old that'll live to be 60. One person in the United States weighs more than the other two. You got diabetes A and B. You gotta do some tort reform. You gotta do somethin' with docs. You gotta do somethin'— 10,000 a day turning 65. Gotta 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 discretionary 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"— 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 one percent over GD— one percent of GDP a year. No. What more can you do?

BECKY: Gentlemen, in the commercial break you were joking around. And you asked, "Is there anybody we haven't insulted yet?" Anybody left?

SIMPSON: Let's see—

BUFFETT: We're— we're tryin' to think of one. (LAUGH) We'll get to you.

SIMPSON: If you— if we have not offended you, please write to this—. (LAUGH)

BECKY: On— on— on a serious note you— you mentioned at the beginning of the interview that you were looking for ten million signatories to sign off to put some pressure on Washington to take these plans very seriously. If someone's invo— and someone's interested in getting involved what do they need to do?

BOWLES: FixTheDebtCampaign.org. That's where we want people to go. That's where we're— got our CEO Fiscal Leadership Council. We're bringin' in names of people there. But that's what— that's what— that is— that is our social media campaign number that we are gonna be launchin' next week. Fix the debt— Fix— FixTheDebtCampaign.org.

BECKY: FixTheDebtCampaign.org? When 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.

BOWLES: Yeah.

BECKY: What happens at that point?

BOWLES: I think it's— I think it's— I think if they don't— 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's— it'll have an effect of at least one and a half percent decline in GDP next year. You know, that's— that's enough to put us back into recession.

SIMPSON: And Dick Durbin kept asking where's the tipping point. You— you tell us where it is.

BOWLES: Yeah, 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 avoidable if we just come together, put partisanship aside, and pull together.

BECKY: We have about 30 seconds left and Warren, if you look at this from the markets perspective, if we do go off the fiscal cliff, if we don't, how— how do you—

BUFFETT: I'm a huge bull on the country. I mean, this country works over time. And we'll do the right thing in the end. It— we just shouldn't w— wait till the very end. But the— I'd still think the luckiest person that's ever been born in the world is a baby born in the United States today. And— and I'll stick with that.

And I love owning businesses in the United States. We'll invest $9 billion almost in the United States in Berkshire this year. So I— I am a bull on America. But I— I think we have to— we have to run it right, that's all. And— but we— it— it— I— I don't want anybody to get discouraged about how— this world is gonna turn out because w— it can be done. I mean, you got people like this working on it.

BECKY: And— and 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. Bowles, thank you very, very much for your time. And we hope to check in with you again soon. Gentlemen, we'll send it back to you in the studio.

Keep up with Warren Buffett on CNBC.com and follow alexcrippen on Twitter.

Email comments to buffettwatch@cnbc.com

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