Buffett Watch

CNBC Transcript: Warren Buffett on China, the Economy, and Corporate Jet Tax Breaks (Part 7)

This is part seven of an unofficial transcript of Warren Buffett's three-hour long live appearance on CNBC's Squawk Box this morning, Monday, November 14, 2011.  (Click here for part six.)

Buffett revealed that Berkshire Hathaway has bought almost $11 billion worth of IBM common stock this year.  He also said it is "not clear" that Europe has the will or ability to do "whatever is necessary" to fix its debt problems.

In these sections, Buffett talks about a variety of topics, including China, the U.S. economy, and tax breaks for corporate jets.

JOE: Welcome back. SQUAWK BOX here on CNBC—where's Warren?—first in business—we should just have him in a four box. He's a—he's such a part of—I'm Joe Kernen along with Andrew—oh, there he is—along with Andrew Ross Sorkin—there we go. Becky Quick is in Omaha with Warren Buffett.

BECKY: Mm-hmm.

JOE: We're going to get back to Warren in just a minute.


JOE: Anyway, let's get to Becky.  And we probably should talk to Warren at some point, whenever you want, Becky, about China.

BECKY: Yeah.

JOE: I read, I can't remember where it was, over the weekend—it was either in the weekend Wall Street Journal or The Times that there is—you can't help it, with the social media, 1.3 billion people are finding out more and more about property rights and freedom, and they're trying to figure out ways to censor a lot of this. I saw Gary Locke was over there. He's like a welcoming hero. He comes in there and people—they've—you know, when Huntsman was there, no one did anything.

ANDREW: Right.

JOE: But there's crowds showing up to see Gary Locke, and now the government is issuing all these press reports about `This guy,' you know, `he's a fake. He isn't—he is Chinese, but don't think that this is the way we should be.' And it's causing a lot of angst among the Chinese leadership that an American who is, you know, a couple of generations removed from China, is being so—sort of the adulation he's getting. So I don't know, we got to talk to Warren about whether that's really imploding at some point.

BECKY: Yeah, well, forget about all that. No, just kidding. Now that we've brought it up, why don't we go ahead and start on that? We've got some other stuff to talk to him about, too, and we'll recap some of the ground we've already covered over the last two hours.  But Joe brings up a great point, Warren. When you start looking at what happened with the Arab Spring and you look at China and the country, the way it's been run to this point and the way it's very likely going to change, what do—what do you think? You've spent a lot of time in China recently, too.

BUFFETT: Yeah, well, I—I'm no great expert on it. I—they—they're going to have tensions within China just like we have tensions within this country. We—you know, our income disparities and the widening income disparity may cause a lot of tensions in the United States. Who knows? But China and the United States are going to be the two big factors in the world over the—over decades to come. And they'll be unhappy with some things we do when we tell them they can't buy Unical or something of the sort, and we'll be unhappy with things they do. There's things in our society that took us centuries, really, to get straightened out. I mean, you know, the 19th Amendment passed what, in 1920 or something like that.


BUFFETT: You know, blacks were three-fifths of a person. I mean, we—it took us a lot of time to work out things, and a civil war even in one case. So don't expect the progress of any huge society to be, you know, totally without some bumps here and there. But China and the United States, over time, will largely get along. We largely have the same interests. We both have nuclear bombs...


BUFFETT: ...so it's not in our interest to start getting really furious with each other. And there will be tensions. They'll—we'll want to play the game our way, and they'll want to play the game their way, and we'll both have to give in some cases.

BECKY: You know, I've been to China with you and with Boone Pickens in the past, and common threads for an American businessman going overseas, going to China is that, wow, it's a lot easier to get things done here.

BUFFETT: That's for sure.

BECKY: You can get through regulation quickly. The central planning is a big boost if you're trying to get something done very quickly. If that starts to be affected or impacted by the changes that are taking place in China, is China a less attractive investment area?

BUFFETT: Well, they will have more difficulty with that as they go along. But they do have—when they want to get something done and you get the government and business and labor all on the same page ready to do it, you'll build over there things in the period that would take us three or four times as long. And we've built factories over there and seen it happen.

So, as people get wealthy here, you know, they start casting their eyes about, and they don't get more satisfied. Sometimes they get more dissatisfied. That's happened in the United States. Right now we have six times the GDP per capita, in real terms, as when I was born. Now, I don't know whether people are happier now or more discontent or what than they were in 1930. But people have a way of adjusting very quickly to things becoming better, and then any little tiny adjustment downward they can get quite unhappy about. So they—they'll have—they'll have plenty of strains in their society, we'll have plenty of strains in our society.

BECKY: We should mention while we're talking about China that BYD shares—you may not have seen this yet, but they were up about 26 percent today on news that the Chinese government is making it a little easier for some of these new fuel vehicles that are out there.

BUFFETT: I didn't know that. Hm.

BECKY: Obviously, the BYD has been a very volatile investment, has been up and down and all over the place. Is it a good investment without the government pushing for some of these new-fuel economy—or new fuel vehicles?

BUFFETT: Well, Charlie's the expert on that, my partner Charlie Munger. But he would—I think he would answer that it would be—it would depend on how successful they are in perfecting certain technologies that he—that they're working very hard on. And he thinks that the—Wang Chuanfu, who runs that, is a—is a combination of Edison and Ford and who knows who else. And I—and the fellow has done remarkable things, so there's some—there are probably more remarkable things to be done, and there may be some remarkable things that can't be done, I don't know.

BECKY: Mm-hmm.

BUFFETT: But he—Charlie feels he's a very good bet.

BECKY: Joe, did you want to follow up on the China angle with that, too?

JOE: Oh, I mean, I—there's a couple of answers Warren gives I find a little bit unsatisfying, but I understand what he's saying. I don't know if I'd ever compare the income disparity issues that are front and center in this country with sort of what the Chinese people have to live with on a daily basis, Warren. It seems—but then again, they—it's a totally different culture. It's very—it's impossible for me to really—I've never been there, so I can't put myself in that place. Maybe it is a big a deal—as big a deal. I was thinking, you know, Tiananmen Square and bullets and total censorship and no property rights and 1/10th, maybe, the GDP per capita that we have, I—there's no way that I could ever say that our problems were in any way as bad as what some of the average Chinese have to put up with. That was what I was thinking, Warren, when you said that.

BUFFETT: Yeah, well, and I...(unintelligible).

JOE: I mean, I—seems to really minimize—I mean, sooner or later they're going to have a much bigger—want to have a much bigger say in their own lives than—I mean, we've got our problems, but I just can't imagine you'd say that it's similar to what—our income disparity's equivalent to the absolute human rights disaster in China right now.

BUFFETT: No, but we had our own human rights disasters. I mean...

JOE: Oh, I remember. I know.


JOE: I know. But we're talking about now.

BUFFETT: Yeah. Yeah, and they're—and—well, no, but I—but I would say they're really—they're really coming off 40 years, essentially, of a real history. I mean, for centuries they were stuck in the same place...

JOE: Right.

BUFFETT: ...and they are 40 years—they're 40 years into the life of what I would consider the present Chinese country. And 40 years into our country, you know, we had slavery, we—you know.

JOE: Right.

BUFFETT: We had a—we had a—so I wouldn't expect them to accomplish...

JOE: Right.

BUFFETT: ...in 40 years what it's taken us 200 years to accomplish.

JOE: But they're—but they're—it's being thrust upon them by technology. It—and they—you know, we—back during the Civil War we probably had—how long did it take to get news, you know, travel a couple of hundred miles? I mean, look the way—look what they're dealing with, right? They got 1.2 billion people that are coming right into the 21st century, boom, like that. And I just wonder whether that's a bigger problem for them to try to—to try to manage. But like I said, I think a lot of—a lot of people are happy with the pace of the progress already over there. And it is staggering how—I mean, you can't grow much faster than 10 percent a year.

BUFFETT: No, no. And we were—you know, we were 70 years into our country before we tackled a very big problem, and we tackled it in a very tough way. I—no, I—listen, all countries keep evolving, and I think we've evolved in—obviously in the right way over the years. But it took us a long time to do it in many—in many areas.

BECKY: Mm-hmm.

BUFFETT: Yeah, I changed my...

JOE: But if the Arab—if something like the Arab Spring ever did get started, though, I just don't know—but, you know, whether they—there's so many local, I guess, political officials there that are sort of—have a vested interest. I mean, one of—in that Gary Locke piece, I was amazed. The Chinese people were amazed that he would take a normal car, that he would wait in line to do something.


JOE: These bureaucrats in China are riding around in limos, their kids have Ferraris. I mean, there is still a lot of things that the Chinese people are—for Gary Locke to look like almost a—you know, a paragon of where they'd like to be someday, I mean, that shows that—you know, the entrenched political system over there has still got—I mean, there's going to be a day of reckoning.

BUFFETT: Yeah, well, there was a day of reckoning in—you know, in the South during the civil rights movement, you know, in the '60s, too, and that was 170 years after we started. And there was Bull Connor and—you know, and...

JOE: So where are you—where are you dating China's—I mean, they were—you know, they were a civilization long before we were.

BUFFETT: Yeah, but...

JOE: I mean, you know, you're giving them the benefit of—what, you're—Mao is when they started?

BUFFETT: Yeah, I—they were stuck. It's fascinating. I mean, they were as smart as we were, and they worked as hard and they went no place for centuries while this country, you know, went from nothing to 25 percent of the world GDP. Yeah, but we had a wonderful, wonderful system. There were flaws in it...

JOE: Right.

BUFFETT: ...but there—it was a wonderful system. It was a market system and equality of opportunity, rule of law, all these things we aspired to. And our aspirations led us into reality over time.

JOE: We...

BUFFETT: But they really—the starting point with them is about 35 or 40 years ago.

JOE: Right.

BUFFETT: Before that they were basically a feudal society going no place.

JOE: This Niall Ferguson. I don't know if you got that book yet, "Civilization." But we just had him on talking about this, that for 500 years these crummy little Western countries just led the world when they should have killed us over in...

BUFFETT: Yeah. Right.

JOE: But now they've down—they've downloaded all of our killer apps, science.

BUFFETT: That's exactly right.

JOE: They had all the things that we've done. And now they're going to kick our butts and—because they've downloaded all...

BUFFETT: Well, they—no, I...

JOE: No?

BUFFETT: I believe the first part of that but not the second part, yeah.

JOE: All right, wait, they're—Niall says the only way we can hope to compete is that the one thing that they haven't downloaded, and that's property rights and the rule of law, that that comes back to haunt them. And then on a—on a relative basis we'll still be able to do OK. But they've got some—with the other five they have downloaded, they're going to be a formidable force for the next 50 years, you'd think.

BECKY: Yeah.

JOE: What's up, Andrew?

ANDREW: No, hey, Warren, just on this economic inequality bit—now you're looking at me funny, Joe—I know I was curious...

JOE: Oh, you always say that, that I'm looking...

ANDREW: No, what I was curious about was actually if you had a view and whether you were a supporter, ultimately, of the Occupy Wall Street folks. I think I saw that your son said that he was a supporter of the movement.


ANDREW: I should tell you, by the way, I went down and reported down in Zuccotti Park and asked somebody what they thought of the Buffett rule, and they asked me, `Who is Warren Buffett?' So I...

BUFFETT: Yeah. Well, they probably got a point there. No, I don't—it—that's not a huge factor. I mean, that—I don't even know, you know—I don't think anybody knows precisely what their major points would be or the leadership would be. That isn't what is going to change things. What—but it is a fact that in the last 25 years the Forbes 400 list has had its net worth increase nine for one, nine for one. In the last 15 years, it's increased over three for one. That is not happening with the American people generally, and it's happening during a time when those same rich people have had their tax rates go down, down, down. And I think that when we're talking to 312 million Americans about shared sacrifice and taking away things we promised to them—because we're going to have to do that. We're going to have to bring our expenditures down to 21 percent or so of GDP, and that's going to require a lot of sacrifice around the country, a lot of breaking of promises we've made. And I say that it's time for the ultrarich to share in that sacrifice to some degree. They won't even feel it. I mean, you change the Social Security rule somewhat and millions of people will feel it and they'll really feel it. You change the Medicare rules and millions of people will feel it. You get a minimum tax of 30 or 35 percent on incomes of a million or 10 million or over, truth is those people won't even feel it. But at least the American people, as a whole, will feel somehow that the ultrarich have been asked to participate to a small degree in this overall sacrifice that we're all going to be asked to participate in.

BECKY: Isn't that what Occupy Wall Street is all about, though, this feeling that there's a growing bridge between the haves and the have-nots?

BUFFETT: There—that's one of—that's certainly part of the feeling. But it's very hard to tell...

BECKY: Yeah.

BUFFETT: ...because I never really heard anybody speak out and say, `These are the'—with the civil rights movement, I knew what it was all about.

BECKY: Yeah.

BUFFETT: I'm not sure I know precisely what this...

BECKY: I guess there's not a leadership of Occupy Wall Street in the same sense.


BECKY: There's just this feeling of discontent.

BUFFETT: Yeah, well, I think the American people feel, generally—well, in fact, 76 percent of that in the—in the recent Wall Street Journal/NBC poll, 76 percent feel that it's wrong, what has happened in terms of the tilt in many ways, including the tax law toward the rich.

BECKY: Let's talk some more about what was found in that NBC/Wall Street Journal poll. Also, only 19 percent of those surveyed said that they think the country's headed in the right direction.

BUFFETT: Uh-huh.

BECKY: And 47 percent—or I think it was 40 percent of them said that they think things are going to get worse.


BECKY: The worst is yet to come. And what does that tell you about the American people's sense of what's happening in the economy vs. what you tell us you're seeing in your companies?

BUFFETT: It's really fascinating, Becky, because it—that same poll—if you go back to October of 2008, when it was clear that—you know, we talked about on this—on this program that what was happening in the fashion world was going to hit into the business world huge. At that time, more people thought things were going to get better in six months than worse, in October 2008. Now they think things are going to get worse in the next six months. What has really happened in the last two years, and I'm seeing it in every bit of data I look at, is that the economy has generally kept moving forward. Business after business, you know, Dairy Queens to jet airplanes, it gets better. Except housing is in a depression. Now, you take housing and put it in a depression, not a recession, a depression, and that has a big impact and it—and it has a big psychological impact because everybody—you know, 66 percent of people live in their own homes, you know, and the person next door does if they don't. And then, you know, throw that on top of the unemployment figures...

BECKY: Yeah.

BUFFETT: ...which I think are just disproportionately affected by what's going on in construction, and you can see why people—and then throw in what's happening in Washington, and people are discouraged. They'll get over it. I mean, that is not a permanent condition. But what you're saying does accurately reflect, I think, what the present mood is.

BECKY: You had told us earlier this year that you thought maybe we'd see a turn in housing by the end of this year.


BECKY: You're now saying it's not necessarily there just yet.

BUFFETT: It isn't there yet.

BECKY: So...

BUFFETT: Yeah, I was wrong.

BECKY: ...when do you see the turn at this point? Is it something that happens before a year from now when we're—when we're looking at a presidential election?

BUFFETT: Well, certainly the president hopes so. Yeah. It's—you know every day it's going in the right direction. When it turns, you know, I—obviously I thought you would see the turn by the end of this year, and you haven't. In a sense that's good. I mean, you would not want some artificial program in place that was causing extra housing starts now. That—it would just delay the solution. We don't—the nice thing about it is we're not Japan. We're not Italy.

BECKY: Mm-hmm.

BUFFETT: I mean, Italy has no population growth. We are a country where households are formed daily in significant numbers. There was a slowdown in 2009 because of the first impact of the recession, but households are getting formed every day faster than houses are being constructed. That solves itself. Now, it doesn't solve itself as fast as people would like...

BECKY: Mm-hmm.

BUFFETT: ...but it does solve itself. And the economy, which is good in many areas, will be very good when that—when that imbalance is worked off.

BECKY: OK, we're going to talk more about that. And Joe will also get back to the breaking news of this morning. Warren Buffett sharing with us earlier what he's been buying...

JOE: Yeah.

BECKY: ...not only over the last quarter, but earlier this year. We can talk more about that when we come back, too.

JOE: Great. OK, we'll do that, Beck. Thanks.  Coming up, more from The Oracle.


ANDREW: Let's get back to Becky who is in Omaha with the Oracle of Omaha. Becky:

BECKY: Hey, Andrew, thanks very much. We've been live with Warren Buffettall morning long. We've covered a lot of ground, but one bit of breaking news he gave us this morning is talking about what he's been purchasing over the last quarter and even before that. When the earnings came out, we knew that he had been spending a lot of money on equities and this morning Warren Buffettshared with us what exactly he's been spending, what the big part of that purchase has been. IBM, Big Blue, that's an investment that Buffet's been making and making it very handily. Up to this point he has invested just over $10 billion, 10 point...

BUFFETT: I'm not sure exactly. About probably 10.5, 10.6, something like that.

BECKY: All right, $10.5 or 10.6 billion. He now owns about 5 1/2 percent of the shares outstanding of IBM. And, by the way, this is news not only for our viewers but also for IBM. You have never spoken with IBM about the idea that you've been coming into that stock?

BUFFETT: I haven't talked to any—anybody at IBM whatsoever, or written to them or anything.

BECKY: So you say at this point you're about done, that you've bought what you want to buy at this point?

BUFFETT: I wouldn't be talking otherwise.


BUFFETT: That doesn't mean I want it to go up, though, because we do better if it goes down because they are repurchasing stock all of the time. And if they're going to spend $50 billion, some number that they announce in the next five years buying it, the cheaper they buy it the greater our interest goes up. Very simple. If you're a buyer of stocks, you want those stocks to go down. In fact, if I—if we had enough money coming in and IBM went down we might buy more.

BECKY: For those who have just been joining us over the last few minutes who didn't see in the last hour what you talked about, why don't you explain why you bought in to IBM because this is an unusual purchase. It's something that will come as a surprise.

BUFFETT: Well, I've been reading the annual reports for 50 years, I competed with them 50 years ago. I—but the 2010 report came in on a Saturday, I read it as I always do and instead of reading it through the old ones of glasses lens I read it through a new glasses lens and then I set out to learn more about it. They laid out some very specific things they expected to accomplish. I really compliment the management on that. I don't know of any large company that really has been as specific about what they intend to do and how they intend to do it as IBM. And they did that five years ago when they did it and they've done it since. So they...

BECKY: What are—what are some of the specifics?

BUFFETT: Well, they give you a road map and they spend—you can read dozens and dozens of pagers on—they explain it. You can go to their website and learn about it. But then I went out and—or people in the office did before me, and we looked at our own IT operations through many of our companies. We got lots and lots of companies. I don't—I don't know anything about the IT operations. But basically I was interested in learning how they came to the decisions they did, the stickiness, you know, what they might be doing three years from now or five years from now. And when I got all through I felt that IBM had a very good business and I felt that they had this terrific reverence for shareholders. They tell the—they're honest with their shareholders. They tell their shareholders what they expect...

BECKY: Mm-hmm.

BUFFETT: ...to accomplish. They expect to be held to it. They repurchase shares on a big scale. They do not use those repurchased shares. They go out and issue the same number of shares. They've taken down their overhang by 200 million shares. Now the base is a billion 180. They've done all kinds of things right.

BECKY: Andrew, I head you have a question, too?

JOE: Yeah, Andrew, go ahead.

ANDREW: Hey, Warren, I'm having a little bit of trouble with the IFB, but what is the average price that you paid for those IBM shares?

BUFFETT: Hundred and seventy roughly.

ANDREW: Hundred and seventy?

BUFFETT: Maybe just a touch under.

ANDREW: So it's trading at about 189—189 bucks now. So that's actually—and you started buying, you said, in April?


ANDREW: March. OK.


ANDREW: We had a couple—we had a couple of viewers write in to find out that answer.

BUFFETT: It takes—it takes a...

JOE: Mm-hmm.

ANDREW: So there are people who are...

BUFFETT: It takes—it takes a long time to buy a lot of stock.

BECKY: Yeah. What do you think about the new CEO, Virginia Rometty?

BUFFETT: Well, I don't know her but I've—but I've read things she's said and they are batting a thousand in the last two CEOs they've come up with. So I've got no—and she's been—she's explained these plans that they have for the next five years. I have no reason to be anything other than positive.

BECKY: OK. Why don't we switch gears and talk a little bit about some of the other news that we've been focusing around the Capitol. Jack Abramoff, the disgraced lobbyist, is out with a new book, and he talks about how people on Capitol Hill, specifically congressional staffers, have been trading based on inside information that they know. Now it's not inside information that the SEC would necessarily crack down on, but do you think it's right that congressional staffers be trading on stocks when they know that there are investigations from some of their committees that are going into some of those companies?

BUFFETT: No, obviously it's wrong. I mean, I saw two different "60 Minute" programs.

BECKY: Right.

BUFFETT: One last night that was on this trading. It focused more actually on people in Congress themselves on that one. Abramoff was—I mean, when saw him a week or go or so he was talking about the incredible power of lobbyists. And, of course, that gets into this whole question of why the rich have low taxes. I mean, you know, if there's a class war, you know, we're the ones that are waging it, the rich. And our soldiers are the—are the lobbyists. And the poor have a bunch of little toy soldiers and we've got these guys that have got the ins with the staffers and all that sort of thing.

BECKY: Administration after administration has promised that they would crack down on the lobbyists and lobbyists seem to be as powerful as ever.

BUFFETT: That's right. It serves the interests of the people on both sides.

BECKY: So what can be done?

BUFFETT: People have to get outraged enough that they hold congressional feet to the fire. But this system works for the people involved. It works for the—it works for the wealthy, it works for the special interests, it works for people in Congress and it works for the lobbyists. And it may not work for my cleaning lady, but, you know, what can she do about it?

BECKY: I guess one argument could be that if we actually saw a tax code that didn't have the exemptions that we have now that you'd be looking at a much better situation because the lobbyists are the ones who push for these exemptions and they're pushing on behalf of the powerful corporations and people.

BUFFETT: They're powerful and often rich. But powerful people. Sometimes they're powerful because they control a lot of votes, too.

BECKY: Right.

BUFFETT: I mean, it doesn't have to be money. But it often is money.

BECKY: So is that an argument for a tax code that is stripped down the way Simpson and Bowles laid out?

BUFFETT: Well, it—you can go back to what, you know, Kemp-Roth and all of that, too that we were working on. But it—I think what happened with Simpson-Bowles was an absolute tragedy. I mean, here are two extremely high-grade people, they have somewhat different ideas about government. But they're smart, they're decent, they've got good senses of humor, too. They're good at working with people. They work like the devil for 10 months or something like that. They compromise, they bring in people as far apart as Durbin and Coburn to get them to sign on and then they're totally ignored. I think that's a travesty.

BECKY: Why are we starting over with a new congressional committee?

BUFFETT: Well, because we ignored the last one. You know, Congress basically has said put us in a position where something so unpleasant happens that it'll force us to do something we don't want to do. And the sequester is supposedly that. Now they talk about getting rid of the sequester if it—if action doesn't take place. People are sick of it. And it—it's pretty transparent what takes place. And democracy is messy, though. We will get to the—we will get to the answers eventually. We will not be spending 25 percent of GDP and raising 15 percent of GDP 10 years from now. We'll get there somehow.

But going back to the lobbyist question, you know, everybody in the country is trying to figure out how to have somebody else pay for it. But some of them are better equipped to fight that fight than others and they're the people with money that care and that hire lobbyists.

BECKY: Do we get to that point? You say eventually we'll get to a position where we figure it out and we're not spending 25 percent and bringing in 15 percent of GDP in revenue. Do we get to that position on our own or does it take a crisis like we've seen in Greece or Italy to make the United States government sit up and actually pay attention?

BUFFETT: It probably takes a general feeling in Congress, and maybe in the administration that they've got more to lose by sticking with the old system if nothing happens and stalemate than they have of finally getting something done. In other words, it takes a feeling that incumbents are going to get turned out unless they get some action.

BECKY: We're not there yet.

BUFFETT: I don't know. We may be—we may be getting close. I think that's what incumbents are worried about now.


JOE: Hey, Warren...

BECKY: All right.

JOE: ...listening—I don't know whether we got to take a break—we got to take a break? We don't have to take a break—we do? All right. All right, if we have to, we have to. But, all right, then I'll hold my thought. But it has to do with what you were just talking about. When we come back with more Warren Buffett we will continue this conversation. SQUAWK will be right back.


JOE: Let's get back to Becky and Warren in Omaha. Here's what I was thinking, Warren. Or let's say that we raise revenues, let's say that we do the Buffett tax. I'm getting the feeling, and I don't know, you can answer for me, that you're not necessarily talking about using the increased revenue to expand the size and scope of government to include more social programs or more of a safety net. Would you use most of the increased revenue to pay down the deficit that we're already running? Or are you actually looking at becoming more like Europe in terms of a welfare state and a social safety net?

BUFFETT: Oh, no. We need to reduce the deficit and I probably am for doing it. I don't think the difference between 8 or 9 percent GDP stimulus and 4 percent is that dramatic at this point. Most of the economy is recovering and the other is a matter of time and not stimulus in my view. But no, I—spending's going to have to come down. We are a very, very, very rich family. We have $120,000 of GDP per household in this country. It's fabulous. It's, like I said, it was six times when I was born. But even a rich family can promise too much. I mean, in the end you deal with finite resources and it's easy to promise and you can overpromise and we've overpromised. And that's why I feel terrible, frankly, that for people that will find promises modified and/or broken and I—and I also feel that it's terrible to have a situation like that exist when the rich are paying the lowest tax rates that they've paid in my lifetime. I was paying higher tax rates back in the '50s and '60s when I had very small income. So I—we are not—we're not paying down anything. We may be reducing the size of the deficit. And, incidentally, we can run a 2, 2 1/2 percent of GDP deficit indefinitely and not have GDP go up as a percentage—I mean not have—not have the debt go up as a percentage of GDP. We've done it. We've done it for the last 50 years since World War II. But the numbers we're running now are not sustainable over time. And the only way to change something that's not sustainable is to change it.

JOE: All right, but I mean the 15, 25 you talked about if we go—even if we met at 20, 20 you're talking about...

BUFFETT: We don't have to meet. Yeah, we don't have to meet, Joe.

JOE: Yeah. Right.

BUFFETT: It can be—it can—it can be 18 1/2, 20 1/2, 18 1/2, even 21.

JOE: But it's coming down from 25, Warren. I mean, you're—whatever you're talking...


JOE: ...about you are talking about so that's why a lot of people that say, `look, we're just spending too much' and maybe, you know, both sides do have a point, that it is a spending problem first and foremost that's going to have to come down no matter what.

BUFFETT: It's not only a spending problem, it's a promise problem.

JOE: Right.

BECKY: I mean...

JOE: Right.

BECKY: Right.

BUFFETT: Yeah. But it's—but it's—but it's an income problem, too.

JOE: It is, but...


JOE: ...you know, you've got—but then you come back to...

BUFFETT: It's an important income.

JOE: Yeah.

BUFFETT: It's an important income problem, but there's no question you've got to go up three or three and a half points on the—on the income side and you've got to come down four points or so on the expenditure side and you've got to modify the promises or you'll never get it done on the expenditure side.

BECKY: The Republicans, though, have said that the way they can come about doing this is that, A, we're in a recession that we've been coming out of and eventually as the economy improves that will bring the revenue numbers back up. And B, that if you cut back on some of the taxes that it would actually increase the economy even further. Do you think that that's the case?

BUFFETT: Well, they—it's very interesting. They say if you increase taxes that will hurt the economy, but they say you can cut expenditures without hurting the economy. In other words, they say if you reduce the deficit one way it doesn't hurt, and if you reduce the deficit the other way that you got...

JOE: But—but they're both destimulative. Which—it's probably not a great idea to do both, Warren. In other words, cutting spending and raising taxes are both destimulative. I mean, where would your priority be?

BUFFETT: It depends.

JOE: I mean...

BUFFETT: It depends who you raise them on. It depends who you raise them on.

JOE: Right, right, right.

BUFFETT: I mean, if you—I've got 6 or $7 million in my pocket right now...

BECKY: Really?

BUFFETT: ...just from last—just from last...

JOE: Wow.

BUFFETT: She got more interested.

JOE: Wow.

BUFFETT: Just from last year...

JOE: The baby...

ANDREW: Right.

BUFFETT: ...just from last year in terms of what the Republicans saved me, you know. And I could have paid 34 percent just as easily as 17 percent. The government would have 6 or 7 million more and I had six or seven million less. It wouldn't change one thing I'd be doing.

JOE: Right.

BUFFETT: Our corporations are awash in cash. You know, we have spent...

JOE: Just...

BUFFETT: ...as I said, we spent 10 billion on IBM, we spent 5 billion on B of A, we spent 7 1/2 billion on capital expenditures, a record this year.

JOE: So you do think—do you think corporations are undertaxed in this country, Warren?

BUFFETT: I do not think tax rates are too high on corporations. No, not at all.

JOE: So you would—everybody says bring it down.

BECKY: What about the bigger argument?

JOE: Yeah, everybody says bring down the corporate taxes.

BUFFETT: Yeah, well, listen, I mean, Berkshire would love to have it brought down. I mean, if you bring us down 10 points and we make billions more. But...

ANDREW: Well, what was your tax—your tax rate was 5 percent or something at Berkshire, wasn't it?

BUFFETT: No, no, no, no, no.

JOE: What was it? What was it?

BUFFETT: No. Our—it'll—our accounting tax rate will be probably 32 or 3, something like that.

JOE: What does that mean, accounting tax?

BUFFETT: We don't—well, I mean, I mean, if you look at—if you go back to the back of our annual report and it shows the tax rate calculated. But that allows—that allows for deferred taxes. But our tax rate is...

ANDREW: So the—the effect...

BUFFETT: Our tax rate is probably—it's—if you take the S&P 500, our tax rate would probably be about 7 points higher.

ANDREW: So Warren, just to...

BECKY: Then the average across the S&P 500?


ANDREW: Just to clarify...


ANDREW: ...the effective rate you're saying is about 33?

BUFFETT: Something like that. If you got our annual report there, you can look it up in the back.

ANDREW: OK. We'll take a look.  By the way, just to switch gears because we've got a number of viewers who've asked the question, you talk about what you loaded up on and bought, including IBM, is there anything you've sold in the last quarter?

BUFFETT: Not much. We've—yeah. We may have trimmed a little here and there, but we've had no massive selling of any kind. I like buying better.

BECKY: You know, you go back to the corporate tax rate, though, and for the people who are saying you ought to lower that corporate tax rate, even Simpson-Bowles talked about doing that, but getting rid of a lot of the deductions.


BECKY: It's the same situation. If you can make sure that people are actually paying that rate, is that an effective way of doing it?

BUFFETT: Well, I—obviously...

BECKY: Reducing it, so let's say, 25 percent.

BUFFETT: Yeah. We can come up with a much fairer corporate tax arrangement than we have now. I mean, there's no question about that. But generally speaking, the proposals are you can take the rate down and make it revenue neutral by knocking out all those special things. I have nothing against that. That would—that would benefit Berkshire, frankly, but I will tell you, if it's going to be revenue neutral, it means just as many people are going to have their taxes increased as decreased and the ones that are going to have them increased are going to be flooding the Capitol with lobbyists. I—if it's going to be revenue neutral, I will—you know, that means billions and billions and billions more are going to come from some companies because we're going to pay less at Berkshire.

BECKY: Right.

BUFFETT: That's—that will be hard to pass. And that's why you don't really see much happen on that front.

BECKY: But again, the...

BUFFETT: It would be a desirable—it would be a desirable outcome, but I've got a—I've got a dog in that fight. I mean, that—anything that brings down the rate and gets rid of most of the loopholes, we benefit from.

BECKY: But that argument is the one that's being put forth. Do you think it's possible to get not only a corporate tax rate, but a personal tax rate that gets rid of a lot of those deductions and manages to still bring in revenue? Is that possible in the Washington of today?

BUFFETT: I think it's very tough. I think the people who find—if something's revenue neutral, I think the people who find their taxes going up are going to complain and spend a whole lot more money fighting it than the people on the other side. It may not be impossible, but I'm just saying that that's the reality of sort of the functioning of Washington.

BECKY: But we have simplified the tax code in the past.

BUFFETT: We have.

BECKY: The last time was back in the '80s.


BECKY: Is it possible to do that again?

BUFFETT: It's possible.

BECKY: But you don't sound hopeful.

BUFFETT: Well, I'm not real hopeful, no.


BUFFETT: But for one thing, it needs to raise more revenue, which makes it even more difficult.

BECKY: Right.

BUFFETT: All right. Joe, I think we need to slip in another quick break here, but when we come back we do have more to discuss with Warren.

JOE: Excellent. OK. Great. Coming up, we have more from Warren Buffett. Don't miss Squawk Box tomorrow. Becky's back week continues with Mario Gabelli and BlackRock's Larry Fink.


ANDREW: Let's get back to Becky and Warren Buffett now in Omaha. But before you guys kick it off, I have a quick question for Warren, which is this: A couple of weeks ago Rajat Gupta the Goldman's—former Goldman Sachs board member was charged criminally with tipping off Raj Rajaratnam on what was your investment in Goldman Sachs. And I was curious A, if you knew anything about it either directly or indirectly; and B, your sort of larger view on the fact that a board member at a firm like Goldman Sachs, which you do believe in, potentially might've been tipping off and giving information to others.

BUFFETT: Well, I think that unfortunately people do that and when they do, I hope they get caught and when they get caught, I hope they get prosecuted. It—you know, the system has a lot of temptations in it and people succumb to temptations and the only way that you reduce that kind of activity is you look very hard to find it and then you do something about it when you do find it.

BECKY: Mm-hmm.

ANDREW: I was also curious, real quick, if I could, an update on the David Sokol situation. Has there been any movement, have you heard back? I know at the time, last time we talked about this back in May, you had not heard from the government. Has the government moved on this or talked to you about it all?

BUFFETT: The only time, in June, the SEC, it wasn't—it wasn't formal or informal and it was not a deposition, no court reporter, anything like that. But they asked me to—well, they asked me a lot of questions and—which I gave them the answer to and so I know nothing about what's—what they're doing beyond the fact that they wanted to ascertain certain facts from Berkshire and from me as to what had taken place.

ANDREW: You...

BUFFETT: And we cooperated—we cooperated 100 percent. Like I say, it was—it was not a—it was not a—there was no court reporter, nothing like that.

JOE: Just seeing NetJets...

BECKY: No...

JOE: Seeing NetJets—sorry, Beck, seeing NetJets again, just reminds me of the—you—are you on the record saying that you think it's a bad idea to—for—to get rid of any type of tax breaks for corporate jets, Warren? I mean, you do have a horse in that game, too.

BUFFETT: Yeah. Well, I can say this, we have a—I have a couple of personal NetJets contracts. I get no tax breaks whatsoever. I don't get depreciation, I don't get deduction of the expenses, I don't get anything.

JOE: Yeah.

BUFFETT: And if I have a loss when I sell my interest in the plane, I don't get a—I don't get to deduct the loss or anything of the sort. It's just a personal expenditure. You know, there's 100 percent bonus depreciation that exists this year on really all sorts of assets. I mean, what we're—what we're spending money for on our utility, what we're spending money for on our railroad. And that—I assume that applies to—well, I know it applies to corporate aircraft or any kind of—any kind of aircraft used for business purposes. But I don't—I don't think—I really—in terms of Berkshire, we have a whatever depreciation schedule was allowed and we bought ours when there was normal depreciation, our interest in NetJet and like I say I get no deductions whatsoever on my own personal.

JOE: Yeah. Yeah.

BECKY: Now Warren, you've talked about—oh.

JOE: No, go ahead.

BECKY: You talked about how you—you OK, Joe?

JOE: Yeah, I'm OK. OK. The last time he flew a commercial, still, he never did answer that. He never referenced...

BUFFETT: The last time I flew commercial?

BECKY: Flew a commercial jet.

BUFFETT: It was a long, long time ago. It won't happen again.

JOE: What was the—what was the in-flight—that's what I said, the in-flight movie? The in-flight movie was Charlie Chaplin. It had just come out. It was still in theaters.

BUFFETT: Joe, I tell you, if—once you—once you've flown NetJets, going back to commercial is like going back to holding hands.

JOE: Don't rub—don't rub it in.

BECKY: Yeah, I know. I tweeted about my experience getting here yesterday. I won't repeat it on air. But Warren, you've talked an awful lot about how you're optimistic about this country and where it's headed and you've been putting your money where your mouth is by buying American stocks, but what we've seen with the beginnings of earnings season or with the last earnings season are some pretty concerning notes. When you look at what GM came out with, it talked about the European slowdown and how that's going to be affecting them. Macy's came out and gave guidance that was a little lower than the Street had been expecting for the fourth quarter. And those are things that rippled through the stock market. I know there's a lot of concern out there about the slowdown and what it could mean. What...

BUFFETT: I don't have the faintest idea what the stock market's going to do and I would say this, in the last 75 years, Macy's has probably been disappointed with their sales at least 25 or 50 times and General Motors has seen a slowdown 20 times. It really doesn't make sense in my view to pay attention to that. I mean, the luckiest person in the world, in the history of the world, is the baby that's being born in the United States today.


BUFFETT: So your Kyle is a very, very—you know, that doesn't mean some of them won't be born with bad health or anything, but overall, there's never been a better time to be born than today and there's never been a better place to be born than the United States. And we will have all kinds of problems. We've always had them. Macy's has always had, you know, bad quarters. General Motors...

BECKY: It wasn't even a bad quarter, though. I was just saying that the numbers could be a little below what the Street was expecting.


BECKY: So I guess the question is, are the expectations getting ahead of where we really are?

BUFFETT: Well, I—my—I don't think mine are. I mean, what I see is I see an economy where most of the economy has been recovering quite steadily, although the public opinion hasn't been as steady, but quite steadily for a couple of years now. We should thank Bernanke and Paulson and President Bush and President Obama and Tim Geithner for doing a lot of things that helped us get out of what could've been a terrible, terrible mess. It was a mess.


BUFFETT: But we really were right at the abyss and we had—we had a government that did the right things. Maybe they did some wrong things earlier, maybe they didn't do it perfectly.

BECKY: Mm-hmm.

BUFFETT: But I give them great credit and this country's best days lie ahead, believe me.

BECKY: I know that this is not something you pay attention to on a daily basis or even a weekly or a monthly basis, but the market volatility has increased and you talked a little earlier about how there's always uncertainty out there. But that uncertainty seems to be something that is resonating with the public and with investors right now. Do you see an end to that uncertainty or is this a slightly different period where we're very worried about the headline risk coming out of Europe?

BUFFETT: I wouldn't worry about the headline risk unless I was on leverage.

BECKY: Yeah.

BUFFETT: I mean, if I own a good business privately, am I worried about what the headlines are tomorrow if I've got the best—if I've got the best restaurant in town? If I've got the best dry-cleaning establishment in town? The best auto repair shop in town? I'm not worried about the headlines tomorrow, I'm worried about taking care of my customer.


BUFFETT: And it's the same with big companies. So I don't know what the stock market's going to do and nobody else does, either. I mean, but forget about it. I don't know what farm prices are going to do tomorrow, either, but I know a good farm run by an honest tenant farmer and that there'll be improvements in agriculture, so just own good assets run by decent and honest people and if you can own all of them, you can own all of your own business is wonderful, you own a little piece of it, it's wonderful, but don't pay any—volatility is good for you.


BUFFETT: I mean, if farm prices would vary from X to 3X in a given year, I'd make a lot of money in farming. I just buy when people were depressed. They don't move that much. Stocks overreact all the time and that's why a guy can keep his senses about him can get very rich.

BECKY: You've been doing this for a long time. You're 81 years old now and Whitney...

BUFFETT: You've noticed.

BECKY: Yeah, I did notice. Whitney Tilson came out with a report, I don't know, maybe it was a month or two ago, and said that he thinks there's an 80 percent chance that you'll still be the chairman and CEO of Berkshire in five years and a 50 percent chance that you'll still be doing this 10 years from now.

BUFFETT: I think he's right about the 80 percent chance. I'll have to go look at the figures, but I'm in, you know, I'm in very good health, I love what I do and I'll go gaga someday and they'll yank me out of here.

BECKY: But you feel good and you think that that's a reasonable 80 percent chance that you'll be doing this five years from now?

BUFFETT: Yeah, if I'm lucky, sure.

BECKY: Joe Paterno is somebody else who's been doing his job a very long time.

BUFFETT: Don't bring him up.

BECKY: Well, there was some newspaper reports, I think the AP wrote a story about how, you know, you're one of the few people who's been doing things almost as long as he did. He had a longer tenure than you did and Nebraska beat Penn State over this weekend.

BUFFETT: That's right.

BECKY: Did you watch the game?

BUFFETT: Sure. I enjoyed the game.

BECKY: But it does say something about long tenure.

BUFFETT: Age gets to you at some point.

BECKY: Yeah.

BUFFETT: It gets to different people at different points. I mean, we've had managers that we've had to terminate, you know, in their low 70s.

BECKY: Mm-hmm.

BUFFETT: And others were better in their 70s than they were in their 40s or 50s. It varies enormously and—but obviously, age takes its toll.

BECKY: Right.

BUFFETT: And the question is when it—when it becomes noticeable and as I've told people, I said, you know, my three kids are supposed to come in as a group and say, you know, you’re going gaga, dad. I tell them if only one comes in, they're out of the will, so they have to come in as a group.

BECKY: You brought in new managers to manage some money and that has raised some questions about things, too. You brought in Ted Seides and Todd who was there before, but we haven't talked to you since you brought in Ted.

BUFFETT: Ted Weschler, yeah. Right.

BECKY: Ted—sorry, Ted Weschler.

BUFFETT: Yeah, yeah.

BECKY: And that has people wondering are you looking at people to be running these management or is this just part of building up your bench?

BUFFETT: Well, three or four years ago we said that we were going to build up a management team that would—in investments, that would succeed me and hopefully even be helpful to the CEO in acquisitions and on that sort of thing. And it wasn't any hurry to do it. On the other hand, we had to get about it.

BECKY: Mm-hmm.

BUFFETT: And fortunately, I—we found two guys that are—that are home runs. And I feel terrific about that. That job is done. That doesn't mean we won't add a third, but that job is done. And they will handle—in fact, you'll see some of their purchase—you'll see some of Todd's purchases in the third quarter. Any time there's a $200 million purchase or something like that, that's very likely to be Todd or Ted, that's not me because I look at bigger things. But those fellows have the capability of running the whole portfolio.

BECKY: Mm-hmm.

BUFFETT: And they're getting a piece of it to run now.

BECKY: I feel bad for Rick Perry. Ted Weschler. I'm coming up with things. Guys, we only have a couple of minutes left, so if you have any one-offs that you want to get back to Warren.

ANDREW: Great. Warren, I had a question and Becky touched on it earlier, this idea of the volatility in the market. We have Larry Fink coming on the broadcast tomorrow, he owns iShares and is a big supporter of the ETF business.

BECKY: Mm-hmm.

ANDREW: Do you think that ETFs are ultimately creating some of this volatility? Are they good or bad for the market?

BUFFETT: Well, I don't know about them specifically, but I would think anything that causes people to think they can trade actively in stocks and do better than if they sat on their rear is a terrible mistake. American business has done wonderful, wonderfully for investors over the years, yet many investors have managed to turn in bad performances. You can say to yourself if the Dow started the 20th century at 66 and is now at 12,000, how could anybody lose money? But people do lose money. But they lose money by trying to jump in and out of this and that and think that, you know, they should buy this stock because the earnings are going to surprise on the upside or some crazy thing like that. If they just buy good businesses, they'll do fine. Just like if they bought good farms 30 years ago they do fine or good apartment houses 30 years ago, they do fine. So volatility is your friend, not your enemy. It—as long as it creates cheap prices from time to time and it does.

ANDREW: All right.

BUFFETT: So it—the investing game is simpler than it looks, you know, and if people would read "The Intelligent Investor" in chapter 8, they'd do fine.

ANDREW: Right. One of the other issues that may be creating volatility, people talk about it, is credit default swaps and what role they've played, for example, in Europe with some of the bonds there. And I'm curious, do you believe that credit default swaps should exist? They should be outlawed? What should happen to them?

BUFFETT: Well, they can be a very destructive instrument. I mean, if you think about it, you can't go out and insure my house against fire because you do not have an insurable interest, as they call it in the trade. Because once you insure my house against fire and you may decide that, you know, that maybe dropping a few matches around my lawn might be a good idea. And credit default swaps, if you don't own underlying debt and you buy a credit default swap, you have an interest in that place getting into trouble.

BECKY: Yeah.

BUFFETT: And when a lot of people have an interest in a place getting in trouble, they may start putting out misleading statements about it. I mean, if you had a bank—if you were short the stock of a bank, you might hire—and there wasn't any FDIC, you might go out and hire 100 movie extras to stand in front of that bank.

BECKY: Mm-hmm.

BUFFETT: And in effect, you would create your own reality. Now buying credit default swaps and talking about them and causing the price of credit default swaps to go up creates its own reality to some degree. So I think that they are potentially a very anti-social instrument.

BECKY: Hm. You know we are down to just the last minute or two of time and I know that you have the SEC filings for Berkshire that will come out tonight. You've already told us that IBM is the big purchase that will be revealed in those. Are there other big surprises we might see in those filings?

JOE: One last chance, Warren, come on. Give us something, one.

BUFFETT: There won't be surprises. I've mentioned that we increased our Wells some and you'll probably see a few purchases that Todd—Ted has not gone to work for us yet, but he will be coming in January.


BUFFETT: You'll see a few purchases that Todd has made. And incidentally, he doesn't—he doesn't check with me before making those purchases. He has a block of money and he can do—he can be doing things while we sit here and it's entirely his book.

BECKY: All right. Will you find out what they are when you get back to the office?

BUFFETT: No, no, I—sometimes I find out...

BECKY: Or do you find out when the SEC filings come in?

BUFFETT: I might find out a month later. That's the way it was with Lou Simpson, too, when he worked for us.



BECKY: Well, Warren, we want to thank you very much for being with us for this program. It's been great talking to you.

BUFFETT: Thanks for having me.

JOE: Thank you, Warren.

ANDREW: Thank you.

JOE: Thanks for the brick.

BUFFETT: Thanks.

JOE: Thanks for the brick, too.

ANDREW: A big special thanks to Mr. Buffett.

BUFFETT: Yeah. I'll send you another one. Just give me the size.

JOE: Yeah.

ANDREW: Becky, safe travels back. We'll see you tomorrow.

BECKY: Thanks, guys.

ANDREW: Make sure you join us tomorrow, SQUAWK ON THE STREET is coming up right now.

JOE: See you, Becky.

BECKY: Bye, guys.

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