Buffett Watch

CNBC Transcript: Warren Buffett on Russian Roulette, Tax Breaks for Corporate Jets, and America's Bright Future

CNBC's Becky Quick with Warren Buffett
CNBC

This is a transcript of Warren Buffett's live interview with Becky Quick on CNBC's Squawk Box, Thursday, July 7, 2011.

The transcript is also available here for downloadas a PDF.

CARL QUINTANILLA: We want to go live to Becky in Sun Valley, Idaho, who joins us this morning with a very special guest.  Becky, still dark there? Good morning to you. —

BECKY QUICK:  Good morning, Carl. Good morning, Joe. It's great to see you guys and we do have a very special guest who's joining us this morning. Warren Buffett, who's the chairman and CEO of Berkshire Hathaway has climbed up the mountain to join us this morning and talk a little bit about a lot of the issues that we've been discussing for weeks, if not months at this point. In fact, we were just listening in to what some of what Eric Cantor had to say.

And Warren, probably the best place to start this conversation is what's happening in Washington right now. These discussions over the debt ceiling seem to be front and center, not only for Washington, but for Wall Street as well. How big of an issue is this and how dangerous is it— how dangerous is it really if they don't raise the debt ceiling?

WARREN BUFFETT (Berkshire Hathaway Chairman & CEO): Well, we don't know exactly what'll happen. I mean, but if you gave me a six shooter and stuck a gun in— a bullet in one chamber and said spin it and five times out of six nothing bad's going to happen, but we haven't done this before, so we're not sure what's going to happen if the sixth one's pulled. It's just silly to do and we raised the debt ceiling seven times during the Bush administration and now in this administration, they're using it as a hostage and you really don't have any business by playing Russian roulette to get your way in some other matter. We should be more grown up than that.

BECKY: Although the argument is at this point we're at a very different level. We are facing some massive deficits. We've taken off on some spending in incredibly high amounts over the last couple of years. And if you can take a phrase from Rahm Emanuel, why put a crisis— why waste a good crisis if you can actually get something done that could be, in the longer term, good for the economy?

BUFFETT: Well, whether it would be good for the economy to have— to have policy...

BECKY: Or the nation, I should say.

BUFFETT: ...under conditions like this is another question. I mean, when you have somebody with a gun to your head, you know, do you really come out with the greatest— the most properly reasoned solution to something? And we had— we had— we had debt at 120 percent of GDP, far higher than this after World War II and no one went around threatening we're going to ruin the credit of the United States or something in order to get a better balance of debt to GDP. We just went about our business and people did it in a cooperative way, but they didn't do it by sticking guns at each other's heads.

BECKY: What do you think would happen if we get past this August 2nd deadline or a date when the Treasury really has run out of money? What happens?

BUFFETT: Yeah. And Becky, nobody knows.

BECKY: Yeah.

BUFFETT: I mean, the odds are very good that people would assume we get things straightened out within a few days and that nothing dramatic would happen. On the other hand, you're playing with fire when you don't need to play with fire. And we don't need to tell the rest of the world that any time people in Congress start throwing a tantrum that we're not going to pay our bills. But we're going to pay our bills in the end. Now you've got two ways of paying your bills. You can pay your bills on time and not make a big fuss of it, and you'll have the world regard you on way. And you can pay your bills only at the threat of a gun and the world is going to regard you differently. So it is not— it is not a great pattern to project to the rest of the world.

BECKY: Republicans have argued, a great number of them have argued, that even if we get to that point, the Treasury could decide which bills to pay and which not to pay, that they could go ahead and pay off those who own Treasuries, pay off the bond holders, and find cuts in the government to make sure that they're still, technically, not in default. Is that a proper solution?

BUFFETT: Well, if they don't get an increase in the authorization, they're going to have to spend $4 billion a day less than is coming in. Now who makes that decision as to what 4 billion doesn't get paid, but I will tell you when you don't spend $4 billion a day that you promised to pay, it'll be noticeable. And you'll have— you'll have enormous disruption. I mean, you can pay the interest on the debt and not pay Social Security. You could pay Social Security and not pay the interest on the debt. There's a lot of options, but you are in this country spending about 3.7 trillion a year and you're raising about 2.3 trillion a year and there is no magic that keeps a lot of people from looking for checks in the mail the next day when you've— when you face up to that and can't borrow.

BECKY: I saw something like three million checks go out every day from the US government.

BUFFETT: Yeah.

BECKY: And that even trying to stop the— they'd have to rewrite all the computer code to try to come up with a way to not send out that much money every day.

BUFFETT: Yeah. Well, I hope that they decide to cut Social Security, they pay it alphabetically.

BECKY: Well, there are a lot of people who say that's the problem, though. Why is Social Security not means tested? Why is Medicare not means tested? Why aren't we doing something to solve some of these long-term problems at this point?

BUFFETT: And that's a real question and the question is whether you're better off making decisions on those things at the point of a gun or whether there's enough maturity in a Congress that they face this, just like they faced 120 percent debt of GDP back after World War II. You know, we've got...

BECKY: But these problems— these problems aren't new. These problems aren't problems that have built up over decades and there hasn't been a Congress that's been mature enough or a president that's been mature enough to take this head on.

BUFFETT: I can— I can— I can end the deficit in five minutes.

BECKY: How?

BUFFETT: You just pass a law that says that any time there's a deficit of more than 3 percent of GDP, all sitting members of Congress are ineligible for re-election. Yeah. Yeah. Now you've got the incentives in the right place, right? So it's capable of being done. And they're trying to use the incentive now we're going to blow your brains out, America, you know, in terms of your— of your— in terms of your debt worthiness over time, and that's being used as a threat. A more effective threat would be just to say if you guys can't get it done, we'll get some other guys to get it down. And incidentally, we had— we had Simpson-Bowles, you know, almost eight or 10 months ago.

BECKY: Right.

BUFFETT: It's a perfectly rational start and you had 11 out of 18 sign onto it and then this Congress that seems so concerned about things now, totally ignored that situation, you know.

BECKY: All this people will say it was the president's commission and he ignored it, too, and he went with a plan that handed more money to constituencies to make everybody happy.

BUFFETT: Well, there's plenty of blame to go around.

BECKY: Is there anything that corporate America can do or should be doing to help out?

BUFFETT: Well, I think that corporate American probably should convey the same message I'm conveying, that shame on all of you. I mean, I'm not talking about Republicans or Democrats, that the idea that the credit worthiness of the United States, sure, we'd pay the bills later on and everything. But somebody that's disrupted payment has a different payment history than somebody that's always paid on time. And you know, if you have a habit of paying all your bills late, you know, that will have an effect on how people regard you in the credit market later on. So...

BECKY: Even if it's not— even if it's not the bond holders who are getting the short end of the stick, even if it's other areas of government, whether it be veterans or Social Security?

BUFFETT: I think if you have it— if you're the secretary of the Treasury and you have a choice the day after August 2nd of shorting somebody 4 billion each day and one of the choices is to not send out Social Security checks and the other checks, the other choice is not to make a big payment to the Federal Reserve, which owns a whole bunch of bonds, I think the checks will go to the Social Security people. That's who I would send them to.

BECKY: Why?

BUFFETT: Oh, because I would just figure that those people are more vulnerable than the— if the Federal Reserve, which owns 2 1/2 trillion of federal obligations now does not get a check tomorrow, they can handle it.

BECKY: Mm-hmm.

BUFFETT: They just print more money. But if people all over the country, they spend their Social Security check sometimes, you know, within hours of when they get it. And they're living hand to mouth, don't get it, there's no question in my mind who I'd send the checks to.

BECKY: Although isn't that part of the catastrophic concerns that if you miss a payment to the bond holders, to the Treasury, that you automatically trigger a downgrade? And that's the unknown. If the United States is no longer at a AAA, no argument that Social Security...

BUFFETT: No.

BECKY: The retirees who are waiting on their checks who need this money need this money. But if you trigger a downgrade, that that has all kinds of unforeseen consequences, that that's the big concern?

BUFFETT: That has implications, but I would say if you don't send out Social Security checks, I would— I would hate to think about the credit meeting at S&P and Moody's the next morning.

BECKY: Right.

BUFFETT: You are not AAA— if you're not paying millions and millions and millions of people that range in age from 65 on up, money you promised them, you are not a AAA.

DEFENDING TAX BREAKS FOR CORP JETS

PART TWO - DEFENDING TAX BREAKS FOR CORPORATE JETS

BECKY: You mentioned something at a dinner the other night that you could see if there was almost a deal in place as you get up to August 2nd. What could you do?

BUFFETT: Well, you could have corporations like Berkshire Hathaway voluntarily prepay some of the corporate tax they're going to owe in a few months anyway and if you really knew that was the case, that you just had a one-day gap or a two-day gap, you'd have to be fairly sure of it. I mean, we're going to be paying a lot of taxes, I think, on September 15th and January 15th or December 15th. And individuals are, too, but that's— that'd be too hard to organize. But it would now be— I don't think there'd be a problem in getting a number of corporations to prepay a couple of their quarterly payments if they— if they tell they're doing something patriotic and they really felt that the crisis would be over in a few days, that would be something that would be sensible to do.

VIDEO0:0000:00
Buffett: Battle Over Debt Ceiling is Silly

BECKY: You'd do that, though?

BUFFETT: Yeah. Berkshire Hathaway would do it and I'd make a few phone calls.

BECKY: To?

BUFFETT: It wouldn't be to you. Don't worry.

BECKY: But that— I mean, what kind of money are we talking? What did Berkshire Hathaway pay in taxes last year?

BUFFETT: Well, oh, we perhaps paid $3 billion last year or something like that. But you could do it for a few days. But it would be kind of crazy. On the other hand, it might— it might actually— I'm not suggesting this at all, but it might actually be— have a positive implication for, you know, how corporate America felt about the credit of the United States.

BECKY: Right. There had been some talk last night from Senator Kyl's office, was the word, and from Eric Cantor's office again that the Republicans were potentially looking at the idea of some revenue raisers coming into this equation. At this point, it's been the Republicans saying absolutely no taxes, it's been the Democrats saying no way we're looking at the long-term problems of Medicare and dealing with it at this point. What do you think the most reasonable solution is?

BUFFETT: Well, the most reasonable solution, you have to start with one factor, though. What we have now, we are deficit running 10 percent of GDP. We have an enormous stimulus plan going on. We don't call it stimulus but this is Keynesian stimulus by any definition.

BECKY: Yeah.

BUFFETT: So we are talking about cutting stimulus. That may be quite appropriate in— where this recovery is now but you should realize we're cutting a stimulus plan, not the one that was enacted back then. But we're cutting stimulus when we close the gap, and I think that's due now. But it's— but it is something to consider. But the— in the end it's going to take— it's going to take activity on both sides. There is plenty of room on the— on the revenue side with wealthy people like me. We've never had it so good. I mean, our tax rates have never been lower than this, and we've had it for 10 years, and it's shown in the great disparity of wealth that's occurred in the last decade or so. So that doesn't solve the problem, but it does raise revenue. People say, well, that won't solve it if you just tax the rich. Of course it won't solve it. But nothing by itself is going to solve it. It's going to take a number of steps. And it's going to take steps in terms of changing the terms of Social Security over time and means testing it and doing various things. It's going to require— the biggest thing it's going to require is an attack on medical costs. Not on Medicare. I mean, Medicare is part of it. But we have a system that's taking 2.7 trillion out of the economy, and the very nature of medical costs is the government's going to participate one way or another in a big way. So if our medical costs are 17 percent of GDP, and other countries are 10 percent, that is the biggest problem we have.

BECKY: Warren, when you say tax on the rich, I mean, that's the argument, too. Who's rich? Is it $250,000, as the Obama...

BUFFETT: No, 250— 250,000 isn't rich. But I'm rich.

BECKY: So where do you draw the line? Where would you draw the line?

BUFFETT: Oh, I would— well, you certainly change it on capital gains and dividends. I mean, if you take the 400 richest Americans and the 400 people who paid the greatest income tax— the Treasury's been putting those figures out for 15 years or so. If you go back 15 years, the average income of the 400 top people— the 400 top people's around 45 million. They paid about 27 percent. Now it grew, the most recent figures, to 350 million. That is incredible. And that's nothing like's happened to the rest of the world. The tax then was 16.6. So while they've gotten ungodly richer, the rate has come down 11 points. Now, that is a big tilt in the world. And I would go after the very rich.

BECKY: All right. Joe and Carl I think are back in studio, and Joe has a question too.

JOE: Yeah, it's interesting, Warren, yeah, and you're talking capital gains and dividends. That is a— that's an interesting notion.

I want to go back to when you were talking about corporate taxes and Berkshire, and it made me think, you've got so many different businesses at Berkshire, and there must be so many of the loopholes that either insurance or depreciation for a lot of the companies that you own. I'm wondering if you would be all right, and whether you think it's a good idea to get rid of all loopholes and go to 25 percent. Is that what we should do?

BUFFETT: Well, we certainly should do something that brings the tax rate of the big corporations in America to a— to more of a parity. Now, you know, we pay a fairly high rate compared to most corporations, higher than most. Wal-Mart pays a higher rate than Berkshire does. You know, we pay a higher rate than a good many other companies do, some of whom we own stock in. But the— if you look at what Berkshire gets a benefit from, currently you have— in the current year you have 100 percent depreciation being allowed on capital investment, and that reduces our tax bill in this year quite substantially. Now, we don't have the depreciation in future years. It doesn't change the eventual tax we pay on the— on those assets, but it does— it— or on income that— where we would get depreciation to offset income. It doesn't change that over time, but it does give it to us all up front, which makes a real difference because money— there's a time value to money.

We also get the benefit of owning some tax-exempt bonds and some dividend-paying stocks, and there's a tax— there's a tax differential for income received from corporate dividends because it's already been taxed by the corporations. But the tax law has been shaped not by logic, but by— but by K Street. I mean, over time the...

JOE: Yeah.

BUFFETT: ...the best invest— the best investment most companies could make is not in a bunch of railroad equipment, you know, or a bunch of aircraft...

JOE: Right.

BUFFETT: ...or a bunch of plants. The best investment is obviously in —

BECKY: That was part of the stimulus package.

BUFFETT: Now, that means you don't get a write-off later. Pardon me?

BECKY: That was part of the stimulus plan at that point.

BUFFETT: Yeah, it was— it was— it was— it was a follow on. Yeah, that was— that was a first act back in the stimulus plan.

BECKY: Right.

BUFFETT: But that's the law now. We are going to spend, at Berkshire, $7 billion this year, practically all in the United States, on plant equipment, productive equipment.

BECKY: Mm-hmm.

BUFFETT: And we will get to write off 100 percent— a very high percentage of that. There's a few exemptions for things, but overwhelmingly. So I don't really see where a business aircraft is different than a business locomotive.

BECKY: Yeah, that makes sense. You know, Warren, it's 10 after right now.

JOE: Yeah, so— oh, I'm sorry. Sorry, Beck. I...

BECKY: No, go ahead.

JOE: I was just trying to— so what— I'm trying to figure out, then, Warren, what are you saying, that this is— this is just political theater, that the— I mean, you're discounting it, you don't think it's a good thing to be bringing up the— to continually be throwing in Republicans' faces about the corporate jets, it's just political theater?

BUFFETT: I think— I know what you're trying to get me to say, Joe. But I...

JOE: Well, you already said it.

BUFFETT: I think— I think— I— well, you're trying to get me to repeat it, then. But...

JOE: Well, yeah, no. Actually, what was I was just going to...

BUFFETT: I would say— I would...

JOE: Go ahead.

CARL: Repeat after Joe.

BUFFETT: I would say this. I would say this. The capital gains rate at 15 percent, the— if you buy a future, S&P future in Chicago and it goes up 10 seconds later, you resell it, it's 60 percent long-term capital gain and 40 percent short-term gain. Now, I'm not sure, you know, how anybody can come up with the logic of that.

JOE: Yeah.

BUFFETT: But I certainly know who's in favor of it.

JOE: No, but I...

BUFFETT: I would...

JOE: Actually, I was just leading into because you are a big— you know, you own NetJets, obviously, and you have a— obviously, a horse in the game. But also, I have a lighter thing to just show you, the way you're doing your product placements. I don't know if you've— if you know that part of this, but that's a NetJet. Apparently Vinnie— can you see that, Carl?

CARL: Yes.

JOE:: Vinnie buys a quarter share of a NetJet, Vinnie Chase on "Entourage." And you've got your NetJets in this season's "Entourage," Warren. And I wondered, did you do— how did— how did you swing that?

BUFFETT: No, Joe. Actually, what I've been working on, I've been reading about how successful your daughter is with her book. And I've had no luck with you, but I have a very little starter kit for your daughter because she's going to be rolling in money with these royalties. And if I could just— if you would just give me her phone number, you know, you could ride in her jet.

JOE: Oh, great. Yeah, that's— so we don't have a Squawk jet, but— now, you're going to charge her for the jet, too, for the quarter— what, I got to talk to Dictor about this?

BUFFETT: I'll give— I'll give her a demo ride myself.

JOE: All right.

BECKY: Hey, Warren, we are just two minutes away from ADP, so we're going to have to go to that number when we get it. But very quickly before we do, is the Greek situation solved, or is this just a Band-Aid, the situation we saw last week?

BUFFETT: No, the Greek situation and I would say the European situation is not solved. I mean— and they wouldn't say it's solved. There is a— they've got real problems in Europe. That doesn't mean they can't surmount them. But just yesterday with Portugal, you know, I think— I think their spread's widened out a couple hundred basis points. When you have 17 countries that all have the same currency, and the yields on their bonds are dramatically different, the situation is not solved.

BECKY: What does it mean for the future of the euro?

BUFFETT: It means that they got a lot of work today. And how it comes out is anybody's guess. They linked 17 countries together. It's like 17 people holding hands, and they start walking toward a cliff and some guy on the end is going to go over the cliff and he said it won't make any difference because this guy's going to keep holding my hand. And then you got two of them over the cliff. And the real question is whether the guy in the center, the big heavyweight, decides, you know, that— whether he wants to keep holding hands with this group.

BECKY: You know, you're always risk averse. That's why you did so well during the financial crisis, is you believe in this heavy moat that you built around Berkshire. Do you have exposure to any of the sovereign bonds in Europe?

BUFFETT: Well, we don't have any direct exposure, no. We've written no credit default swaps. We sold— we sold over a billion dollars worth of bonds a year ago in some of these countries abroad because— that's the problem with sovereign bonds. Nobody has to own bonds. And the reason you own them usually is you think they're risk-free. And now people have found out they're not risk-free, and so then they're starting to question whether the second guy in the line or the third guy in the line is also risk-free, and it— contagion's a real problem.

BECKY: A year ago, though, Berkshire sold out of some of these European sovereign bonds as a result of what you saw coming?

BUFFETT: Yes.

BECKY: OK.

We have a number coming up right now. Carl, we'll send it back over to you for ADP.

CARL: All right, thank you very much, Beck. We're going to take a quick break from our conversation with Warren to bring you the release of the ADP number.

WHY CONSTRUCTION IS THE KEY TO RECOVERY

PART THREE: WHY CONSTRUCTION IS THE KEY TO RECOVERY

CARL: So we'll see how the market digests that number, and in the meantime we'll get back our conversation with you and Warren in Sun Valley.

BECKY: All right, Carl, thank you very much. And, Warren, you heard these numbers. It was a better than expected ADP report and the futures are turning a little bit stronger this morning based on this. What do you think's happening in the jobs market right now?