BUFFETT: Yeah. It— you know, in— I think, you know, we've got major problems. And we're— and I said, we're always going to have problems, so this does not mean I'm bearish on America or anything. But we have a situation in Congress where we have a 10 percent deficit in terms of GDP, and we may be drifting into even larger numbers. I mean, we've made promises that— for the future that are really kind of inconsistent with the revenue streams we'll have. There are three ways of solving that: breaking the promises of modifying them, taxing a whole lot more, or inflating your way out of it. And inflation is the— is the ultimate tax. I mean, it taxes people who don't know they're being taxed. It taxes people who believed in paper money, who believed in their government. It's a particularly— you know, I find it— it's almost a— it's not the way government should be behave, but they do behave that way. Ad it's the easiest thing to do. I mean, we...
BECKY: Do you think we're intentionally doing that right now? Do you...
BUFFETT: Oh, I don't think it's so much intentional, but it's the fact we don't want to do the other things, and so it becomes the default option. And we are doing things— we are following policies that will lead to lots of inflation down the road unless changes are made. And once— inflation is the kind of thing, when it gets started, you don't even— you don't particularly notice it. It's a little like a guy, you know, jumping off a 50-floor— out of a 50-story building. The first 45 stories, he really doesn't notice a lot of change, you know, in his circumstances.
BECKY: Mm-hmm.
BUFFETT: But eventually you hit the ground. And there is no way you can run the kind of deficits we're running and following other policies, and this is true around the world, without it being enormously inflationary. And no politician is going to come out and say we're really going to solve this by making our money worth less. But— I mean, it'd be suicide to do it. But that is— that's the practical effect of the policies that are being followed now. You know, they're not written in stone, they can— they can be changed. But the easier course for governments to follow always is to inflate, and that's why paper money— and I don't disagree with your viewer that wrote in. I mean, paper money generally has a lousy future.
BECKY: Mm-hmm.
BUFFETT: And I, you know, a couple of years ago when people were running to cash, I said, you know, it's the worst thing you can have. I mean, there— the one thing I can guarantee will not work well as an investment is cash.
BECKY: Is cash a worse investment now than it was two years ago?
BUFFETT: It— it's a— no, it's a— it's a little less worse because then the option was to buy so many other assets so cheap.
BECKY: Mm-hmm.
BUFFETT: I mean, you wanted to use cash then. People said cash is king. The ability to use cash then was king, but having the actual cash was the dumbest thing you could do. And— but people run to cash and they run, you know— but paper money is not a good bet. And the more of it that you issue— I mean, there have to be consequences to issuing paper money. There are consequences to the— to the Fed buying lots and lots and lots of securities and giving credits to the banking system in return. If it was all that easy, you know, we'd be doing it all the time.
BECKY: But you sound a little different than you have on this point the last few times we've checked in with you. It sounds like this is a time, maybe an inflection point where you're getting a little uncomfortable with this.
BUFFETT: Yeah, I wrote an op-ed piece in The New York Times and— over a year ago— and I said this is— this is OK now, but it's— but it is morphine, and you've got to get off of it. And we haven't shown much tendency to get off of it so far. I mean, this— you know, the Simpson-Bowles thing came in, and those are two terrific people, they worked hard at it. They got 11 out of 18 votes, you know, and nothing's been heard since. And that's wrong, in my opinion.
BECKY: That disappoint you?
BUFFETT: Yeah.
BECKY: What would you like to see happen? Would you like to see the panel's recommendations be adopted?
BUFFETT: I would like to see something seriously adopted that leaves us in a situation down the road that is tenable in terms of having a money that will retain its value to a very high extent. The fact that inflation now is 1 or 2 percent, you know, doesn't mean anything. I mean, that— you know, I— if you jump off the 50th floor, I mean, at the 45th floor, you know, you should not judge the success of your effort by where you are at that point.
BECKY: But addressing this growing problem, you don't think is something that can wait till after the 2012 elections?
BUFFETT: No, well, then there'll be a 2014 election. I mean, no, I think— I think if you've got a very important problem, whether it's in business, whether it's in your personal life, wherever it may be, you know, you address it promptly.
BECKY: OK. Carl, you have a question, too?
CARL: Yeah. Warren, I mean, we're into some important stuff here now, talking about Simpson-Bowles and what needs to be done. There's also this report out of Goldman that suggests that the 61 billion that the Congress is considering in cuts for the fiscal year could take a couple percentage points off GDP in the— in the second and third quarter, perhaps as many as 700,000 jobs. Whether or not you agree with that, does the momentum that the economy have, is there enough cushion that we can sustain so-called austerity? And what do you make of the UK's situation, where they implemented something tough, and right away their fourth quarter GDP went negative?
BUFFETT: Well, a 10 percent deficit of GDP, changing that in a small way does not lead you to austerity, believe me.
CARL: OK.
BUFFETT: That is a number we haven't had since World War II. And, no, I'm very suspicious of all economic forecasts, including my own, incidentally. No, I think these people who toss out numbers and say this bill, you know, saved us three billion jobs, I think that is total— I just don't think they know what they're talking about. I don't think I— I don't think I know what I'm talking about either when I— it isn't that I think I have a better number, but I can assure you that I've seen so much of that that I'm very skeptical. I think it— no, I think when you give somebody the stature of Alan Simpson and Erskine Bowles, and you put together a first-class committee and they work very, very, very hard to get a compromise that 11 of the 18 sign onto when they have vastly different political beliefs, I think you ought to take it pretty seriously. And the real question isn't the 61 billion now or so, the real question is whether right now you're willing to say, `Here is what we're going to do so that these promises'— where— you've really got to start modifying promises you've made for the future, or you've got to admit you're going to inflate your way into solving those problems. But we really haven't done that.
CARL: So you are not— you...
BECKY: Does that mean...
CARL: I was going to— just a quick follow-up, Becky.
BECKY: Go ahead, Carl.
CARL: You are— you're not worried about spending cuts, shrinking government expenditures, taking a big bite out of GDP, that the more important— the more important motive is the long-term solution, right?
BUFFETT: I think the difference between having 10 percent of GDP as your deficit and 9 percent is not going to be the difference in a recovery going on. But incidentally, I have some thoughts on taxes, too, I mean, in terms of the distribution of— there— if you look at the top level people in the country, people like me, I mean, we are paying our lowest tax rates in a long, long time, at— and, well, really forever. And so I think there actually could be something done on the revenue side, but it would be at the very top levels. I mean, I'm not talking 250,000, I'm talking people of incomes a lot larger than that. But I don't know whether you can actually see this, it's the one thing I brought along. But— well, I guess I brought two things along, since I pulled out the wrong one. Here's a table, the IRS puts it out, and if you go back to 1992...
BECKY: Here, I'll take that.
BUFFETT: If you go back to 1992 at the bottom, you'll find that the— of the 400 top income tax returns filed in the United States, I think the income was around 45 million per person, and now in the last year shown there it's 340 million. Think of that, from 40 million to 340 million, while the average American worker was going no place.
BECKY: I think it's down here.
BUFFETT: Now, if you go to the last page there...
BECKY: The last page?
BUFFETT: Yeah. You'll see the tax rate of those same four— not— of the 400 each year, over on the right-hand side, it starts at around 26 or 28 percent and it works its way steadily down to 16 percent. So while these people were having their incomes on average go from 40 million a year to 340 million a year...
BECKY: (Unintelligible)
BUFFETT: ...their tax rate was going down from 26 to 16. And believe me, that is not the experience of the average American. So there are things that can be done, and in my view should be done, and they will not slow down the American economy at all.
BECKY: You know what? Let me ask a question from the...
JOE: Yeah. Four— that won't be enough— that won't be enough money...
BECKY: Go ahead, Joe.
JOE: ...right, Warren? And you said that. Because they— it's got to— you got to go to the middle class or— if you're going to do it on a— on the revenue side, on the— I mean, it would help a little, but you need to go down to maybe 250,000 or even below that to really make a dent if you don't address the spending side, right?
BUFFETT: Well, you can do tens and tens of billions on people with a million and up— and up of income, but you— but the bigger thing actually over time— but you have to say— you have to do it now. I mean, just saying, `Well, we're going to solve this in five years or 10 years,' yeah...
JOE: We...
BUFFETT: You really have to do something about the promises you've made on spending because we're— it isn't— if it doesn't happen in 2011, it isn't going to happen in 2012 and it isn't going to happen...
JOE: I mean, it's— yeah. It's entitlements, Warren. And there's a— there's a piece today...
BUFFETT: Yeah, sure.
JOE: ...I think it was in Politico, people in this country...
BECKY: Yeah. In the Tarrance Group poll, right?
JOE: Yeah. People still think...
BECKY: The— yeah.
JOE: ...that you can cut waste and save, or they think you can cut defense, that we're spending all the money on defense. And it...
BECKY: Here's the numbers on the...
JOE: Yeah. What is it, Beck?
BECKY: The numbers on that poll that Joe's referencing is a majority of voters incorrectly believe the federal government spends more on defense and foreign aid than it does on Medicare and Social Security.
BUFFETT: Yeah.
BECKY: Sixty-three percent of people they polled thought that. Another 60 percent incorrectly believes problems with federal budgets can be fixed by just eliminating waste, fraud and abuse.
BUFFETT: Yeah.
BECKY: And it's not just casual beliefs on this. Forty percent of them strongly agree with these beliefs. Less than half of them, just 44 percent, believe that Medicare, Social Security are the major source of problems for the federal budget. Only 49 percent disagree. So what— how do politicians deal with poll numbers like that?
BUFFETT: Well, they deal with it by ignoring— essentially ignoring the problem. I mean, it's the same problem you had with state and municipalities on pensions. It was so easy— it was easy for General Motors back in the '60s to promise pensions and health benefits that later, you know, brought the company to bankruptcy. It's— it was easy for state and municipalities, you know, in— when they were negotiating contracts 20 or 30 years ago to put in cost of living adjustments and retirement after 20 years and back-end loading in terms of the last few years of employment. And all of those things and those promises come due so much later, long after the politicians left office, that it's a tremendous problem. But the future does arrive. And when the future arrives and you've made a lot of promises, you're either going to break the promises, you're going to raise taxes dramatically, or you're going to inflate. And basically, I think...
BECKY: So wait a second. Are you on the side of some of the Republican governors right now who are saying, `We can't afford to keep up with the promises we've made, we certainly can't continue these promises down the road,' and, in some cases, as in the case of Scott Walker, saying, `We need to get rid of collective bargaining as a result'?
BUFFETT: Well, I think— I don't want to— I'm not going to say about the collective bargaining. I do think that many states and municipalities— including Omaha, we just have had this— have made promises on benefits that really can't be fulfilled if you continue to keep making them. I think it's— listen, I would identify with the municipal employee who said, `Look, if you made the deal with me. I mean, you know, I came to work here because you said I was going to get this.' So— but I— the one thing I think you do is you quit making new promises. I mean, you may— you may have— be able to fulfill the ones that you've got up to this point, but you say, `Look it, this is going to bust us. And I'm going to make no more new promises.' And, you know, that's a tough thing for a politician to say.
JOE: Warren...
BECKY: What about asking...
JOE: If the public employees at the state and local levels are installing the people that give them the benefits through collective bargaining, maybe that's something you need to change.
BUFFETT: Well, I— yeah, but you could say every constituency sort of votes its own interests. I mean, you know, there— you've got people— you've got the rich capitalists who are trying to keep down the rate on capital gains, and...
JOE: Yeah, but those— but those— yeah, but those companies can go bankrupt. I mean, the private unions are negotiating with...
BUFFETT: Yeah.
JOE: If they get too much, they know that they won't have a job anymore. The others are negotiating— or they're aligned against the taxpayers. The states and the local municipalities can never go bankrupt. So they— you know, that's why there's no reason for them to mitigate their demands, right?
BUFFETT: Well, people are going to make the best deal they can. I mean, when you— you know, when you come up to negotiate your next contract with CNBC, you'll try and make the best deal you can. But you've got to have people on both sides— and hopefully you've got people on both sides that are mathematically intelligent. And, of course, the big problem, you know, with pensions, with postretirement medical care and all of that, is that the guy that makes the promise is not the guy that has to make the payment. Yeah.
JOE: You saw— Welch yesterday, Warren, brought— and it was in the Journal, too, brought up a speech given by Corzine— Governor Corzine in 2006 to the public unions that said, `We are going to fight for a better set of benefits for you.' He was the guy giving the benefits to the public— how do you negotiate with someone who's giving a speech saying, `We're going to give you'— and he knows that that might help him get elected the next time, having the public unions on his side?
BUFFETT: Yeah. Well, I haven't read that speech, but if it says what you said, it was a mistake. It was a big mistake. I— yeah, and not only that, but they use unrealistic assumptions even in determining how much they have to put in the pension funds to meet the obligations. I mean, the pension fund assumptions of most municipalities, in my— in my view are nuts, you know. And— but there's no incentive to change them. I mean, it's much easier to get a friendly actuary than it is to face, you know, an unhappy public.
BECKY: Well, so who's right? Because this has gotten to be such a huge debate, and you have two sides that are painting two very different pictures and using two very different sets of numbers to say how bad of a situation different municipalities, different states are in at this point. Who do we believe? Is there a set of numbers that tells the absolute truth?
BUFFETT: Well, I— actually, I've seen some pretty good numbers on that. But the— I would say that when they have pension assumptions that assuming they're going to earn 8 percent or something like that when bonds are yielding what they are now, you know, that's crazy. And...
BECKY: I told somebody that who deals with pension funds a couple of weeks ago, and they said, `Well, you're just wrong because if you look at where things could go over the next 10 years, you're just wrong.'
BUFFETT: Yeah.
BECKY: What's a safe assumption for pension returns?
BUFFETT: Well, I use— we're required, with our utilities, to use certain pension assumptions I don't want to use. But we've used about as low as— anyway, but I think this. I think that— well, I think it's nonsense, for example, when a company has subsidiaries in Europe and then they have them here, and they have an assumption for their pension fund in Europe that says we're going to earn 4 percent over there and we're going to earn 8 percent in the United States. I would say let's give the money to the United States. The pension fund accounting has been terrible over the years. And many managements, I don't think, understand it very well themselves, and many, you know, in a sense prefer not to understand it. You know, they care about their own pension, too.
We could— we could use a real overhaul of pension assumptions in this country. There's been some of that, but I've been writing about it for years. You know, it— nobody's really got an incentive to do it, you know, that's one of the problems. But...
BECKY: Mm-hmm. But it sounds like you do have some sympathies with some of the Republican governors who are trying to make slashes.
BUFFETT: Well, I have sympathy for anybody that's trying to deal financially today with a whole bunch of promises made by somebody years ago.
BECKY: Yeah.
BUFFETT: But I also have sympathy for the guys that said, `Listen, I took the job because of those promises.'
BECKY: Sure. Right. And 40 years later, these are the promises that were made.
BUFFETT: Yeah.
BECKY: What about the idea of asking state employees to play***(as spoken)***20, 30, 40 percent of their health care costs from here on out?
BUFFETT: Yeah. Well, some of them— actually, there's more contributory payments into pension funds in the— in the public arena than in the private arena. If you look at the old...
BECKY: I mean in health care, in health care situations.
BUFFETT: Yeah, well...
BECKY: There's a lot— that's where some of the sticking points are, too.
BUFFETT: ...that's changing the promise. You know, and I— and it's very tough. But I think we have done that in some of our private plants at Berkshire.
BECKY: Mm-hmm.
BUFFETT: And I think that— but when you're doing it, you're breaking a promise. I mean, people worked for 30 years in an auto plant or something of the sort, and they said you're going to have your health care taken care of when you're— when you're out of here. And then if you say you're going to pay 30 percent of it, that's— that is changing the game somewhat. I think absolutely they ought to change the game on— from this point forward, I mean, in terms of hires they're making and, you know. And if somebody wants to leave the public sector because now they're not going to get benefits from this point forward because they— fine, let them do it. But I— every year that ticks away on this stuff, you know, the obligation gets larger.
CARL: And, Warren, just on that...
BECKY: Mm-hmm. Carl:
CARL: ...I wonder, I mean, the problems we're talking about are so huge, so structural, right, so intractable, how do you reconcile them with the optimism in your letter, and the notion that America's best days are ahead?
BUFFETT: Because...
CARL: Because a lot of the people who read the letter and are skeptical of markets, skeptical of government, say the points you're making prove that we may not actually be able to win this time.
BUFFETT: Oh, we'll win. We'll win. I mean, bear in mind this: You can make promises about what will happen in 2020 to somebody, but you— we can't eat the food that's going to be produced in 2020, we can't use the cars. As long as the economy grows, we will have a larger pie. The problem is we've promised so much of that pie away to different people. But as long as the pie grows, you know, overall the country will do well. We'll have enormous tension between various classes of people. But if you go back to when I was born in 1930, just look at what you could've predicted. You could've predicted, you know, that stocks would go down— from the moment I was born, they'd go down another 75 percent. You could predict 25 percent unemployment. You could predict a surprise attack, you know, that looked like we were going to lose the war in 1941. All of these things happened. And what happened in 1941? You had an economy that'd been kind of moribund through the '40s— or through the '30s, and everybody went back to work and we were turning out battleships, we were turning out planes.
This country has enormous potential, and we will be turning out more goods and services per capita five or 10 years from now than we are now. The problem is whether we've overpromised those to too many parties. The pie will get bigger, and that is a huge advantage over time. And it just means that the members of the family fight over who gets how much of the pie, and maybe part of that pie has been overpromised to people. But the pie getting larger solves a lot of things; and it solved things from a couple hundred years in this country, and it'll continue to do so.
