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YOUR MONEY

A Crisis of America's Own Making?; The Power of the No Tax Pledge; Recovery at Risk; Protecting Your Money

Aired December 29, 2012 - 13:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


ALI VELSHI, CNN ANCHOR: Martin, thank you very much.

What a waste of time. What a colossal waste of time. Once again we're down to the wire, we're waiting for breaking news out of Washington on a matter that has no business being breaking news. This was an entirely anticipated crisis, one that is completely of Washington's creation.

Even at this late moment, Washington is still ready to gamble with your economic future instead of conceding some ground to conclude a deal that possibly saves it.

I'm Ali Velshi. This is YOUR MONEY.

It's a battle of ideological wills in Washington as America moves dangerously close to a fiscal cliff.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We're now at the last minute. And the American people are not going to have any patience for a politically self-inflicted wound to our economy. Not right now.

(END VIDEO CLIP)

VELSHI: Alas, this is how we do things now. We create economic storms then we look to provide an umbrella at the last possible second. We avert disaster but move no closer to solving our long-term economic problems. After a moment of spiritual clarity at the White House on Friday afternoon, Senate majority leader, the Democrat, Harry Reid, is working on a bipartisan deal ostensibly with his Republican adversary, Senate minority leader Mitch McConnell.

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL (R), MINORITY LEADER: -- engaged in discussions, the majority leader, myself and the White House, in the hopes that we can come forward as early as Sunday and have a recommendation that I can make to my conference and the majority leader can make to his conference.

(END VIDEO CLIP)

VELSHI: Well, if the Senate manage to -- manages to reach a compromise, the hope is that the House would follow. That's option one. The green one. Option two is less certain.

President Obama reportedly challenged congressional leaders from both parties on Friday to come up with a deal better than the one he proposed. The center piece of which is that the top marginal tax rate will increase for those earning $250,000 or more from 35 percent to 39.6 percent. That's only on the amount earned above that threshold.

Obama has told Congress either they come up with something better or put his proposal to a vote. He's betting that even those members of Congress who hate the idea of a tax increase on the rich will hate causing America to go over the fiscal cliff even more.

OK. Option three. That's the red box. That's the one where America goes over the fiscal cliff.

Jessica Yellin is CNN's chief White House correspondent.

Peer into the crystal ball for us, Jessica. Which of these scenarios is most likely?

JESSICA YELLIN, CNN CHIEF WHITE HOUSE CORRESPONDENT: Well, Ali, I think that after yesterday it's slightly more likely that there will be some sort of agreement. That doesn't mean that there are a whole bunch of optimists running around D.C. saying it's going to get resolved. But what you describe so well as a moment of spiritual clarity really -- yesterday really did lead a lot of people to think that -- some people to think that, you know, Senators Reid and McConnell have done this before.

They are two experts at getting together and crafting something that resolves things in the -- at the 11th hour. And if any two men can do it, it is these two men. And right now their staffs are working on negotiating that agreement. And so there's some hope that that could get done. I'd say more today than there was when we woke up yesterday morning -- Ali.

VELSHI: All right, Jessica. You called it -- I think you called jujitsu yesterday. What did you say?

YELLIN: Yes.

VELSHI: Some kind of jujitsu. This is a tough position. The president has taken a tough line on them. He says, I've got a proposal. You don't appear to like my proposal. But you haven't come up with something else that you could put to a vote.

Can you explain to our viewers what this means, when he says you can't come up with something better, put this to a vote? Why is that complicated?

YELLIN: Well, what he's saying effectively is that the message he campaigned on this -- was raise taxes for people making $250,000 and more, leave tax where they are for everyone else. He's just calling on Congress to put that very basic idea to a vote, maybe some other components, but basically that to a vote. The reason that's a political win for him because he believes that there are the votes for that to pass. But it will never get to a vote, Ali, because it -- that would mean no one in the Senate -- I mean procedurally no one in the Senate would object. It would have to get no one filibustering it. That's not going to happen. Then it would have to get onto the House floor.

Why would Speaker Boehner put it on the House floor? That's not in Speaker Boehner's interest. No Republicans want that. So it's never going to happen politically. So when he calls for it to happen, he's simply telling the American public look at -- these Republicans are obstructing an idea.

It gives him the potential, I should say, to eventually make the argument that Republicans obstruct an idea that he thinks could win and Republicans will say well, that's ridiculous because we object to it on principle and that's why we're objecting to it procedurally.

Does that make sense?

VELSHI: All right. Jessica -- Jessica, stay there. Thanks for your good explanation. Stay with us. I want to bring in the rest of our panel.

Ken Rogoff, professor at Harvard University, former chief economist at the International Monetary Fund, Annie Lowrey is an economic policy reporter for "The New York Times," Stephen Moore is an editorial writer for "The Wall Street Journal."

Let's start with you, Ken. You're the financial crisis guru here. Forget the politics. Just give us the math. If Washington fails to avert the cliff, the worst-case scenario will be the combination of tax hikes and spending cuts. What does that do to our economy?

KEN ROGOFF, ECONOMICS PROFESSOR, HARVARD UNIVERSITY: Well, if they don't come to a deal and then sit there all next year and don't come to a deal, we will go back into recession. It will be very, very ugly. And the United States is one of the few bright spots in the world and it will be ugly to have the whole world go into recession.

But I don't think that's likely. I think if we pass for a month then they'll eventually pass something. But it shows the dysfunction in Washington of not being able to pass anything.

And by the way, Ali, the debt ceiling's coming up. They're not agreeing on that. So even if they agree on this, then in a month or two they're going to be in the same position on the debt ceiling.

VELSHI: And our debt ceiling actually comes to a head on Monday, but the Department of the Treasury, the Treasury secretary says like they did last time they can move things around and probably keep us going for another few weeks.

Let's bring Stephen Moore in.

Stephen, for our viewers who don't know you, you are a hard-boiled anti-tax guy. You are a co-founder of the Club for Growth. You sort of subscribe to that Grover Norquist idea that don't raise taxes. Now option number two in the scenario that I put forward, Republicans end up being dared to vote against the president's plan.

Again, forget the politics. Forget what Jessica said about procedurally not getting there.

STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: Right.

VELSHI: The point that President Obama is trying to make is he wants everybody to vote one way or the other, up or down. So the idea is Republicans will be forced to vote one way or the other on extending the Bush tax cuts for people making below $250,000 a year.

MOORE: Yes.

VELSHI: And by definition making taxes go up on those earning above that. Would Republicans be forced to vote for the president's plan to avoid being blamed for rates rising on most taxpayers and going over the fiscal cliff?

MOORE: Well, a couple of things, Ali. First of all, I think the outlines of that deal you just described are probably where they're headed, although I think that Mitch McConnell and Harry Reid are -- I hear they're negotiating maybe a little higher income threshold, so maybe not $250,000, but maybe $400,000 or $500,000. Even the president put that on the table a couple of weeks ago.

Look, I was very pleased to hear Jessica say that she think we're -- inching towards an agreement. I don't want to go over this cliff. I think it would be a mistake politically and economically to do that. But I just want to let your viewers know that this isn't -- this is not a fight about small things. It's -- it's a fight about big, big ideas, about what our entitlement programs are going to look like, what is our tax system going to look like, you know, how much are we going to spend on all these programs.

Ali, these are deep ideological divisions between the two parties. I hate to see it come to the edge of this cliff, but the ideas here that we're fighting about are of major significance about the future of our country.

VELSHI: You know -- but Stephen, you and I have discussed this for how long. I had hair when you and I started discussing this.

(LAUGHTER)

MOORE: Two years at least. No --

(CROSSTALK)

MOORE: Right.

VELSHI: Ken Rogoff had an afro when we started talking about this. That's my point.

(LAUGHTER)

MOORE: That's right.

VELSHI: It's ridiculous, it's ridiculous --

MOORE: No, I agree.

VELSHI: -- that we are again here like we were for the debt ceiling, like we were for the government shutdown. It is ridiculous that we are here because we want to be having a big discussion. We have all the facts in front of us. We know that there are people like you who have a -- position on taxes. We know there are others who have positions on other things. And our democracy is supposed to allow us to somehow come to together, to convene, to deliberate and to evolve some sort of a compromise.

What response --

MOORE: It's not happening.

VELSHI: Right. And what responsibility do you think conservative Republicans who have signed this pledge to Grover Norquist bear for us getting to where we are today?

MOORE: Well, actually, let me defend Grover for a second.

VELSHI: Sure.

MOORE: I mean, he actually has signed on to some kind of a deal. Look, I mean, we're in a situation that if nothing happens taxes go up on everyone. So -- and then a tax guy like me doesn't want to see that happen obviously.

Look, I want to make one other point. Even if we go over the so- called cliff, and I think cliff is a bad metaphor here. It's really kind of -- of a slope. It's not like the world is going to come to an end on January 1st or 2nd if we don't have an agreement.

I actually agree with Ken Rogoff. I think sometime in the next two, three, or four weeks if we go past January 2nd, they will come to a deal. So we're not going to see Armageddon, in my opinion, in 2013.

VELSHI: Yes. And by the way, Grover is on the show and I did ask him about that specific issue. That he gave cover to Republicans to be able to go with John Boehner's suggestion.

MOORE: Right.

VELSHI: So I guess what I'm getting -- there's severe dysfunction in Washington, there's particular dysfunction in the -- in the Republican House Congress at the moment. But that's another issue we'll discuss.

Let me bring Annie Lowrey into this discussion. She's a senior policy or economic policy reporter at "The New York Times."

Annie, the debt ceiling, the fiscal cliff. We keep trying to solve economic storms that of our own making. Nothing being discussed this weekend, as Stephen just made clear, moves us any closer to solving our long-term issues. What we are in at the moment, the reason you are on TV with me right now is that this is a pure -- this is crisis management that Washington is in right now. It's -- it doesn't make any sense.

ANNIE LOWREY, ECONOMIC POLICY REPORTER, THE NEW YORK TIMES: Yes. It doesn't. And I think that if you look even a month or two ago, folks were talking about starting a tax reform process that we clean up the code. They were talking about freeing up money to invest in things like education. Nobody is talking about that anymore.

You know, right now they're really struggling to figure out what to do with the tax cuts. And, you know, they're not even talking actually about the sequester very much anymore, which would -- you know, the tax cuts, they would hurt immediately. And everybody's taxes are going up next year if you're a wage earner one way or another because of the payroll tax holiday expiring.

But there's a whole host of issues and they're just not going to be able to deal with all of them. And it's all become very, very immediate and it looks like, you know, the small deal is going to leave a whole bunch of things for them to do next year.

VELSHI: Yes. Yes, that's a good point. We're going to get to this a little more later in the show.

The taxes are the big -- where all the political heat is, but the discussion is actually about the more important things, all of those cuts, the structure of our government. We'll discuss this a little more, Annie.

Stephen mentioned his name. Coming up, this man may be the most feared man in Washington.

(BEGIN VIDEO CLIP)

GROVER NORQUIST, PRESIDENT, AMERICAN FOR TAX REFORM: If I went and became a Tibetan monk on the top of some mountain somewhere, the American people would still -- they were against tax increases long before I was born. The whole Tea Party thing predates me.

(END VIDEO CLIP)

VELSHI: Well, Grover Norquist has a point on the fiscal cliff showdown and why politicians will not back down from signing his anti- tax pledge. That's coming up next on YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: The fiscal cliff is a battle of ideological wills. Some Americans feel strongly that increasing taxes on anybody hurts the economy. That's quite possible that that's true. The central question is whether it will hurt all that much to raise income taxes a little bit on the highest part of the highest earners in the country. Well, to push the country to the edge of a recession over this is quite irresponsible. The increase in taxes will hardly affect the economy, but, you know, that's my opinion. And my opinion should count as much as anyone else's. The problem is that in Washington right now one person's opinion carries disproportionate weight.

That person is Grover Norquist, he's the head of Americans for Tax Reform. That's a group that's got a pledge that mostly Republicans members of Congress signed to say they won't raise taxes under any circumstances.

I spoke to Norquist after Friday's developments and asked him about taxes and his almost religious belief that tax increases, any tax increase, is bad for the economy.

(BEGIN VIDEOTAPE)

NORQUIST: We've seen that whenever you've raised the capital gains tax, the top marginal tax rates, but also tax increases distract from what the country needs to do. We need to deal with our runaway government spending. The government is spending too much money. Tax increases are not part of cutting the budget. Tax increases are what politicians do instead of reforming government.

VELSHI: Right.

NORQUIST: As long as tax increases are on the table, the politicians never even think about reforming government.

VELSHI: And I understand. You have been on this fight for a long time and you've been devoted to the whole idea of not seeing taxes increase anywhere. But what we're down to right now is largely a political battle over the increase in marginal tax rates based on what you earn.

And I understand there's a lot more to this puzzle, but on that front, because that's the one that gets most of the ink around here, it's the whether people who earn more than $250,000 or $400,000 or $1 million should pay a little bit more tax.

I guess the point I'm trying to get at is that's not actually going to hurt the economy. That's all we're talking about. Paying 4.6 percentage points higher on your income over $250,000. Just empirically the evidence isn't there that that's going to hurt the economy.

NORQUIST: Well, it's going to take taxes from 35 percent up to 43.6 percent because you have to add both the Obamacare tax that's coming and the tax -- the disappearing Bush tax increase.

VELSHI: Right.

NORQUIST: And this hits primarily, as you know, small business owners and people who file subchapter-S corporations.

VELSHI: Well, I don't think -- it's not primarily. That's not who it primarily hits. It hits some of those people.

NORQUIST: Well, over half of all the small business income that gets -- ends up paying this higher rate, if you do it, and the last time we did this, more than two-thirds of the people who got hit were actually the subchapter-S corporation.

I think it would actually have a very significant effect. But mostly the effect that -- the other effect it has is that we're not cutting spending because we're spending too much money. And that sends a very bad signal. If we're not going to do entitlement reform, because every time we talk about it Obama says, no, let's raise taxes instead, now we're dealing with tens of trillions of dollars of unfunded liabilities that were not -- for four years Obama's done nothing on entitlement reform. Nothing, nothing, nothing, for four years. A lot of golf. Nothing on entitlement reform.

What has he done? Chirped about raising taxes on rich people. Raising taxes on rich people is what Obama talks about instead of doing his job. So it's -- there are two costs to this. One, if you take money out of savings and investment, which is what you're doing with this, it doesn't help, it reduces the incentives to save, invest, and work. And the other thing you do is you never get to reforming government entitlements.

VELSHI: Right. But that's -- that's not -- that's not causal, though. It really isn't. I mean I hear your point.

(CROSSTALK)

NORQUIST: Yes, it is. It is, absolutely.

VELSHI: The fact is -- it's not really.

NORQUIST: You live in New York. I live in D.C.

VELSHI: Yes.

NORQUIST: Washington. This is all causal. The reason he's talking about tax increases is to avoid the conversation and dealing with spending restraint. That's why Obama does what he does.

VELSHI: The reason I doubt that, Grover, is because we've all done the math and we all absolutely agree on the math that you can't get out of the deficit hole we're in by taxing rich people, even if you tax them at 100 percent. I mean everybody knows that. So when Republicans say we don't have a tax problem, we have a spending problem, the fact is we've got both and we can deal with that.

But let me ask you this. You gave your blessing to the proposal that John Boehner put forward. And so many congressional Republicans are scared of voting for something that feels like, looks like, smells like a tax increase because they're worried that your organization will come back to haunt them because they signed a pledge. And in fact you gave your blessing to this and they still couldn't get the votes on the floor.

So what's up with that? Who -- why did that not happen? A week ago I was hopeful that we might have a deal.

NORQUIST: OK. Because the pledge is not to me. It's to the American people. It's to the people of the state that any congressman or senator is from. They have to feel that they can go to their constituents and say, I voted against all efforts to raise taxes. I argued having read the Boehner plan, it was silent on the taxing people who make more than a million dollars, it made permanent, as opposed to Obama who wants to just protect you for a year.

VELSHI: Right.

NORQUIST: He made permanent the tax cuts for people who made less than $250,000 a year or actually a million dollars a year. And as a result it was a giant step towards protecting all taxpayers and the Republicans held the two tools they need to protect all taxpayers and to reform spending.

And that's the debt ceiling increase where they can demand things in return for Obama needing a debt ceiling increase, since he's planning on driving debt up another $8 trillion the next decade, and the continuing resolution, because the Democrats in the Senate don't pass budgets anymore, we do a continuing resolution.

Those two tools can help you both cut spending and deal with -- further tax reform. Those weren't given up. The budget -- you know, not everybody liked plan B. We didn't endorse it. But it didn't violate the pledge.

VELSHI: You gave them cover.

NORQUIST: A lot of Republicans felt they could go.

VELSHI: Yes. You gave them cover to be able to vote for it and say, look, Grover is not mad at me for voting. But I guess I want to ask this one last thing, Grover, because we had this discussion --

NORQUIST: I'm terribly reasonable.

(LAUGHTER)

VELSHI: That's -- well, you do come and talk to us about it which we appreciate.

Grover, here's the thing. You say that it's not a pledge to you and it's a pledge to Americans for Tax Reform.

NORQUIST: Correct.

VELSHI: It's a pledge to constituents. But constituents don't have the money that you have to go out and actually do something if somebody breaks that pledge. Now there are many congressmen who have done things wrong, they've pledged -- they've said to their constituents they'll do something and their constituents throw them out of office if they don't do what they said.

This is different, because if you break this pledge to your constituents, Grover Norquist comes after you, not necessarily your constituents.

NORQUIST: Well, George Herbert Walker Bush, Bush 41, broke the pledge. Americans for Tax Reform didn't spend any money attacking him. Bill Clinton ran millions of dollars of ads attacking him for breaking his pledge. So since the pledge is a public piece of information, the press goes after you if you break the pledge, your local voters go after you, your Democratic opponent calls you a fibber.

The pledge is self-enforcing. If I went and became a Tibetan monk on the top of some mountain somewhere, the American people would still -- they were against tax increases long before I was born. The whole Tea Party thing predates me. So Harry Reid is -- misunderstands. The American people don't want taxes raised. They realize that spending problem is the problem, spending needs to come down.

VELSHI: Yes.

NORQUIST: Tax increases get in the way of spending restraint.

(END VIDEOTAPE)

VELSHI: I want to bring Stephen Moore back in the conversation.

Stephen, I don't know if Grover is the most powerful man -- unelected man in Washington or the most polarizing. A lot of people really don't like him. You've really defended him. You come from the same place in a lot of things. Here's what he said. Here's where I take issue.

He said that, increasing taxes avoids the conversation on having the spending discussion. And I said I don't think that's causal. I think we can all agree we're not having a robust enough conversation on how to deal with spending in this country and how to make government more efficient.

Is it a fact that by raising taxes we're just not going to have that discussion?

MOORE: Yes, I believe so. I believe that every time you raise taxes it actually reduces the pressure to increase -- to cut spending, and I agree with Grover on that. I want to take issue on one thing you said to Grover that I think is a little unfair.

VELSHI: Yes.

MOORE: You know, that vote that we had last week on the John Boehner plan B, which --

VELSHI: Yes.

MOORE: Actually there was no vote because --

VELSHI: The vote that didn't happen.

MOORE: Right. You know, you've been saying, oh, these guys are just following the instructions of Grover Norquist.

VELSHI: Yes.

MOORE: Look, I actually think Republicans made a mistake, personally, in not approving plan B.

VELSHI: Yes.

MOORE: But, you know, the people voted against it. The ones who said they were going to vote against it, there were about 50 House Republicans.

VELSHI: Yes.

MOORE: This was not because they were afraid of voters. It was truly, in my opinion -- I talked to a lot of them -- a vote of conscience.

VELSHI: Yes.

MOORE: They just didn't think they wanted to take a vote on something that they thought would hurt the economy and that's why it failed.

VELSHI: And I'm not going -- I don't take issue with it. I'm glad you point that out. I got a lot of people on Twitter saying, why do you have Stephen Moore and Grover Norquist talking about this because some of you really believe this as a fundamental issue.

(CROSSTALK)

MOORE: But not -- wait. But let me just say one other thing.

VELSHI: Yes.

MOORE: You know this was an election, 51, what, 48, Barack Obama won by three percentage points.

VELSHI: Yes.

MOORE: This is a divided country right now.

VELSHI: I agree.

MOORE: It's not me and Grover who --

VELSHI: It does not absolve anyone of the responsibility of getting the business of the nation done.

MOORE: I agree with that.

VELSHI: We can totally disagree.

MOORE: I agree. And that's why you and I --

(CROSSTALK)

VELSHI: We can all disagree -- yes.

MOORE: I want a resolution here.

VELSHI: Yes.

MOORE: And I think actually there's a -- there's room for -- I think there will be some kind of bargain in the next couple of days or next few weeks, and then we move on to these bigger issues that you've been talking about, entitlement reform, tax reform, et cetera.

VELSHI: Let us hope.

MOORE: You know, that one last point if I may. This -- whether we improve these tax increases for the rich or not, as you know, you've said this yourself, we still have a trillion-dollar deficit.

VELSHI: Yes.

MOORE: So we've got a lot of work to do.

VELSHI: Yes. We do have a lot of work to do. All I ask is that we get the work done.

Stephen Moore, always a pleasure.

MOORE: Right.

VELSHI: Thank you, my friend. We'll be talking to you a lot again in 2013.

MOORE: Have a great weekend. Happy new year.

VELSHI: Coming up next, the great tax debate that Stephen was just talking act. Does raising tax on the wealthy really hurt the economy? I'll give you an answer after this.

(COMMERCIAL BREAK)

VELSHI: The biggest issue in all this fiscal cliff wrangling is taxes. It's actually not the most important issue but it is certainly the central one. Grover Norquist just told you his strong opposition to any tax increases of any sort. Many Republicans share his view. But let's step back and look at the economy.

Obviously across-the-board tax increases would hurt the economy, but what would the real economic reaction be to small tax increases on the wealthiest Americans?

Now, Annie Lowrey of "The New York Times" is still with us.

Annie, I always have to make sure my viewers understand I am not advocating for tax increases on the rich. I just want to explain what could happen.

I also want to bring in Jeanne Sahadi. She's a senior writer at CNNMoney. Kevin Hassett, senior fellow and director of the -- of Economic Policy Studies at the American Enterprise Institute. He was, by the way, the author of much of Mitt Romney's economic policy. He's a good friend of the show.

Jeanne, let me start with you. Tax increases on people making more than $250,000 a year. Let's just use that as a number. It might be $400,000, it might be half a million, might be a million. But let's take $250,000. If you increase taxes, the marginal tax rate from 35 percent to 39.6 percent on that group of people, does it hurt the economy?

JEANNE SAHADI, SENIOR WRITER, CNNMONEY: Well, I'm going to use estimates from the Congressional Budget Office, which is a nonpartisan scorekeeper for Congress. They found that if you let those Bush tax cuts on high-income folks expire at that level it would not boost the economy, or rather it would boost the economy almost as much as if you let everybody's Bush tax cuts stay in place.

In other words, there's very little difference in how much you would help the economy if you let those Bush tax cuts stay in place for everyone or you let them stay in place for most people. So in that sense, it sounds like it wouldn't have a huge effect on the economic recovery. Having said that, I think if you asked most economists and tax experts, all things being equal, is it better to have lower rates or higher rates, they'd say probably better to have lower rates but all things aren't equal.

There is no objective level of what is too high. And there are always a lot of different factors that go into economic growth. So it will really depend on what else Congress does with its tax and spending policies. It's not just the short answer.

VELSHI: OK. So you sort of backed into this and said that -- you're answering my question in the -- in the reverse by saying it's not clear that increasing the taxes on that small portion of people would have much of an impact on the economy.

Let me take it to Kevin Hassett.

Kevin, do you agree?

KEVIN HASSETT, SENIOR FELLOW AND DIRECTOR OF ECONOMIC POLICY STUDIES, AEI: You know, I think going from 35 to 39.6, again, it does depend on what's -- what else is going on. That rate change alone isn't the biggest thing in the world. You know, there was a survey of a bunch of tax economists that I cite a lot in congressional testimony and elsewhere that found that yes, the big fundamental tax reform you'd have to be able to get, say, an extra percent a year or so out of growth for a while.

This tax increase would be kind of the opposite of tax reform so it would have an opposite effect. It would be negative for sure but it certainly wouldn't be big as 1 percent a year, I would guess. So it would be smaller than that. And so, you know, if we have external shocks, if fracking takes off and the economy starts to boom, then if we go up to 39.6, then we could still have a good year. But I don't think anyone disputes that the effect is negative. And there's probably some disagreement about whether it's minus 0.2 percent or minus 0.8 percent, but that's probably about the range we're talking.

VELSHI: All right. Well, you're always say good to us, and you always say nice things about Canada when talking about taxes. And when you're talking to my producers you mentioned a study, one of the most -- more comprehensive studies done about the effect of tax increases on the economy done by Christina Romer, not someone with whom you share a lot of ideological ground. She's the former chairwoman of President Clinton's Council of Economic Advisers. And she had done a study. So I asked her, I asked her directly, what is the effect of increasing taxes, you know, on the economy? Here's what she told me.

(BEGIN VIDEO CLIP)

CHRISTINA ROMER, PROFESSOR, BERKELEY COLLEGE: So it's clearly a matter of timing. So what our paper showed is that tax changes, both up and down, do have a powerful effect on the economy, and if you raise taxes in the short run it will tend to lower output. And that's one of the reasons why I'd say, you know, even though I very much support raising taxes for dealing with the deficit gradually over time, now is not the time to do it.

(END VIDEO CLIP)

VELSHI: Now is not the time to do it.

Annie Lowrey, that was a year ago. The recovery still chugging along. We've got an OK economy. It's not a -- it's not blowing the lights out but it's OK. And even with a deal, taxes on the wealthiest Americans are likely to go up.

Annie, what's your take on that?

LOWREY: Yes, so, I mean, I think if you -- if you look at a year ago, for instance, the White House was pushing really hard for this extension of the payroll tax cut, which hits everybody who earns a wage. And it's pretty regressive, thought it hits low-income families a little bit harder than high-income families. They're not doing that. That's going to hurt the economy probably more than an increase on taxes on the wealthy would.

Just go back to a point that Grover was making before. It's important to note that if you're making $250,000 a year your taxes are going to go up by something like a dime. And it's really people who are making a lot more money than that, and whatever changes happen to the tax cuts that are currently in place for investment income that you also need to look at.

So I think that there's this sense that having taxes increase on the wealthy is the least harmful way to go about raising revenue.

VELSHI: And to be fair, it's not the most complete way of fixing our deficit or our debt crisis. We've all sort of done the math on this. It's going to account for some amount of money, it's not insignificant but it's not going to be the way we can get there. So when -- when Grover makes the argument that raising taxes means we don't have to deal with spending, it fundamentally can't be true because we've got to deal with spending.

LOWREY: Yes. And I think that actually even very progressive folks on the left who would -- who would strongly prefer tax increases on the wealthy to cuts for programs for the poor would argue that raising taxes on just the rich at some point is not going to do it if you're going to have the level of spending that they're recommending that we have. So it's a big complicated thing. And I think that it's important to note that even if they get the cliff solved in the next couple of days there's going to be an argument about this for probably years in Congress about how to restructure the tax code.

VELSHI: Yes. Better we do that fast. I think your characterization is going to go down the history. It's a big, complicated thing. It absolutely is.

Annie Lowrey is the economic policy reporter at "The New York Times." Thanks very much for that.

Coming up next, the U.S. economy is on the verge of taking off but this fiscal cliff mess could get in the way. How much? What can we expect in 2013 with a deal or without a deal? Next.

(COMMERCIAL BREAK)

VELSHI: Welcome back to the special edition of YOUR MONEY. Hello to our viewers around the world, as well. I'm Ali Velshi.

The U.S. is nearing the edge of the fiscal cliff. By now, you are probably aware that it means -- what it means if we go over the fiscal cliff. It means higher taxes for almost Americans, jobless benefits running out for the long-term unemployed, spending cuts on things like defense, food inspections, education, air traffic safety. But the bigger question here is the U.S. economic renaissance that we could be on the -- on the verge of and whether that's at risk.

Job gains and economic growth are slow and steady in the United States. Home prices are rising. Consumers are still spending despite the fears of the fiscal cliff. We have come a long way from the dark days of the great recession.

I've told you that an economic renaissance could be just around the corner if lawmakers can get their acts together.

Ken Rogoff and Kevin Hassett are back with me. Jessica Yellin rejoins us, as well.

Ken, let me start with you. You are one of the top economists in the country. Is this political bickering a substantial threat to our economic renaissance that we could be on the verge of?

ROGOFF: Well, it's definitely holding businesses back because they don't know which direction things are going to go. And most people think they will work something out, and when the debt ceiling comes up in February they will work something out, but they don't want to get caught with their pants down, so to speak if it doesn't.

And so absolutely it's holding things back. And it shows a broader dysfunction in Washington that if they can't agree on this, how do they agree on other things, that people are very (INAUDIBLE) in their positions and there's no compromise.

VELSHI: Kevin, I know that you think, and Stephen Moore articulated this as well, that you think that it's sort of an either/or. Right? Either we cut taxes and we cut spending or we -- or we don't for whatever reason. But the reality is this cut that would come from this sequester, that would come from going over the fiscal cliff is more serious than a conservative economist like you would recommend.

HASSETT: Well, I think the spending cut is pretty large, but the real economic damage that would happen pretty much overnight if we go off the cliff is really coming from the massive tax increases that hit just about everybody, and then of course the market response to those things.

VELSHI: Wait, wait.

(CROSSTALK)

HASSETT: But you know --

VELSHI: Kevin, where were you? Didn't we just have this discussion in the last segment where we proved that that wouldn't actually have some massive effect on the economy? I think I remember you saying it would have a small effect.

HASSETT: No, I thought we were talking last segment about just the top marginal rate.

VELSHI: Right.

HASSETT: I'm talking about if we go off the cliff that everybody's taxes are --

(CROSSTALK)

HASSETT: Most are going up by a lot. And that's a big enough shock I think to cause a lot of damage. But you know what I'm hearing, I was talking just before I came on with a Republican member of Congress about, like, what he's hearing.

VELSHI: Yes.

HASSETT: And I think that one thing that looks like it might be getting ready to happen is that they're going to craft something like what we might start to call a mini deal. And the mini deal will be something that goes after the UI benefits and maybe extend a few things, patches the AMT, doesn't even touch the rates, lets us go off the cliff on those but then sort of asserts that since they can pass the mini deal it means that they'll be virtuous next year and they'll fix it retroactively.

But I think that right now the smart money might be on. You know, a mini deal and the hope would be that a mini deal would keep financial markets from panicking about the cliff.

VELSHI: Mini deal, Jessica, in our -- in my breakdown of this was box number one, the green box. Is the economy in real the focus in Washington? Because it does seem that political goals might be and might have been for the last 15 months or 16 months more important than the economy in Washington.

YELLIN: The economy is in the focus in Washington, Ali. I mean, Washington is dysfunctional, not clueless. And they know that if they completely botch this there will be serious consequences. The economy will go into a recession. But political leaders also do think that there is -- while they don't want to go off the cliff and it would be better to get a deal there is some wiggle room and they can get a new deal done in a matter of weeks after this or at least by, you know, the end of February when, you know, the debt ceiling is finally has to get resolved.

The fundamental problem here is that this is about the differences, you know, the fundamental differences between the two parties and they can't come to an agreement on, you know, these basic ideas. And so they're fighting over their basic ideas. And one side has to admit they're going to lose, and so they're really -- it is about these big philosophical issues, and that's why we're seeing this become such a big fight, Ali.

VELSHI: So, Jessica, I don't know whether you can rely on your sources for this, but think -- just be a novelist for a second and tell us what happened on Friday when President Obama, Vice President Biden, Senators Reid and McConnell and Representatives Boehner and Pelosi were in the White House. Clearly we all know what's going on.

What happened? How did that play out? How did that discussion go? Did President Obama say look, either you come up with a deal or you put my deal to a vote because we're not going to come together ideologically at that meeting?

YELLIN: No. And they're not unrealistic about that. So, you know, the president lays out what he thinks he can get done, which is this 250 and, you know, whether there's wiggle room up to 400 and now that might not even happen, maybe, is what Kevin is saying. But -- and then you -- unemployment benefits, an extension of that, and, you know, patch the AMT. These are things he wants.

And, you know, Senator McConnell, what can you do is, you know, the understanding of how this plays out. And Senator McConnell -- you know, they say, listen, we're going to take it up between us. Let Senators Reid and McConnell really resolve this together. And those are, as I said, two men who know how to work things out. Speaker Boehner really stepping out of it at this point because he has not been able to produce a deal to date and it's not on his shoulders.

And Nancy Pelosi is the one who's going to have to carry a lot of this weight if it gets anywhere in the House because she's going to have to deliver a lot of votes. The president not at his maximum frustration level, I have to say, still seeming a little bit enthusiastic.

VELSHI: All right. Jessica Yellin, thanks so much.

Hey, Ken, I want to just ask you, you're an expert on economic crises. I don't really want to have to use your expertise ever again. We're not going to a crisis, hopefully, as a result of this. What's your best advice in terms of keeping the economy on track? What's the best compromise everybody can come out with if they know it will help the economy?

ROGOFF: Well, we'd like to see tax reform. We'd like to see the -- Washington do things like infrastructure, cut back on spending. We don't -- it's dysfunctional. And that's what's so disheartening about this. This isn't a one-time thing. We're going to see it again in February. And it's hard to see where this is going to come to an end unless the parties reform.

VELSHI: Yes. Well, let's hope. I don't know if that's happening before Monday, but we'll keep on them.

Ken Rogoff, Jessica Yellin, Kevin Hassett, thanks to all of you.

The circus in Washington has real implications for your money and your investments. When we come back, we're going to talk about how to protect your money as lawmakers try to work out a deal.

(COMMERCIAL BREAK)

VELSHI: Well, we know what's at stake here and the stakes are high. If lawmakers fail to avert the fiscal cliff or come up with some sort of compromise, the U.S. economy is likely to contract by who knows how much next year. Unemployment could rise to 9 percent in 2014 according to Standard & Poor's, the rating agency. They said on Friday that it's unlikely that the fiscal cliff gridlock will spark an additional downgrade of the country's credit rating.

Remember back in August of 2011 S&P downgraded the U.S. credit rating from AAA for the first time to AA plus, citing an ineffective and unpredictable governance.

Well, it's great that S&P is unlikely to downgrade the debt, but the consequences for going over the fiscal cliff could be far more severe than a credit downgrade actually would be. We could -- easily fall into another recession, and we know what that can do to your investment portfolio.

Jim Awad is managing director at Zephyr Management in New York. He's a longtime money manager. Sean Egan knows a thing or two about credit ratings, he's the founder of Egan-Jones, an independent rating agency that is not paid by the corporate issuers that it rates.

Sean, your firm was quick to downgrade the U.S. credit rating last year. If we go over the cliff or lawmakers reach some sort of watered-down compromise, will you downgrade America again? SEAN EGAN, PRESIDENT, EGAN-JONES RATINGS CO.: No. Our take on it is that it's a very positive sign that the government is wrestling with the immediate problem of the budget deficit. It was $1.4 trillion last year. It's probably going to come in at about $1.2 trillion for the current year. So we view this whole wrangling as a positive, that it's the first step to solving a problem is recognizing it. Most people in Washington and throughout the country are recognizing the immediate problem of the federal budget deficit.

VELSHI: That is a remarkably glass-half-full view of the world, Sean. I appreciate that.

Let me just take a look at world borrowing costs. This is a gauge of how investors feel about a given country. Sovereign debt. So if you're going to buy bonds of a country, a 10-year bond yield of the U.S., it'll cost about 1.7 percent. Canada is about 1.8 percent, Germany is lower, 1.3 percent, Switzerland, which doesn't have any -- enough bonds to make a difference, is about 0.5 percent. Look at Portugal at 7 and Italy at 4.5 percent.

My point to you here, Sean, is whether or not you or S&P or anybody else downgrades the United States, is there a danger that it becomes substantially more expensive for the U.S. to borrow money anytime in the future?

EGAN: Well, a lot of the borrowing costs have been masked by the purchases by the Federal Reserve Bank. They purchase about 75 percent of what the Treasury has issued over the past year. The bigger challenge for a lot of institutional investors with regard to the credit quality of the U.S. is entitlement reform. The unfunded liabilities are in the area of $100 trillion depending on what type of interest rate or discount rate you use for those future liabilities.

And that's something that we have some time to address but perhaps more important than the immediate deficit reduction for a lot of institutional investors including ourselves.

VELSHI: All right, Sean. I'm going to take it over to Jim for a second.

Jim, your firm manages a lot of money for individual and institutional investors. What have they been doing ahead of the -- of the fiscal cliff?

JIM AWAD, MANAGING DIRECTOR, ZEPHYR MANAGEMENT: Well, good long-term investors have been keeping their eye on the long-term ball, which is that you have an investment goal, you have an asset allocation, and you keep rebalancing what we're advising people is keep rebalancing against your asset allocation.

If stocks go down you buy a little bit more, if they go up, you might want to take a little bit money off the table. So what we're advising people is ignore the headlines in the fiscal cliff. They're going to resolve themselves one way or the other. And keep to your long-term asset allocation goal. And the biggest percent of that should in large cap multinational U.S. equities because they have better balance sheets than the U.S. government, they have higher dividend yields than the Treasury pays or the corporate bonds pay.

And over the long-term, which is how people should think, they're going to grow earnings and dividends. So I would say pay attention to the headlines because they can affect the short-term, but don't act on the basis of the headlines. Don't make an investment decision today based on what you think might happen on Monday or Wednesday with the fiscal cliff.

VELSHI: OK. I want to talk to you both about this a little more. But as we go to a commercial break, because we have to be responsible and pay our bills, I want to show you what the S&P 500 has done over the last five years. You want to pull back and take a look at that. That's five years.

Coming up next, how to protect your money in 2013 no matter what happens in Washington this weekend or on Monday.

(COMMERCIAL BREAK)

VELSHI: Back with Jim Awad, managing director of Zephyr Management, Sean Egan, the founder of Egan-Jones, which is an independent ratings agency.

Sean, I know you deal in ratings. I want to just bring for our viewers, I want to show them, I showed them what the S&P 500, which may look like a lot of their own investments and their 401(k)s looked like for five years.

Here's what it's looked like over the last year. You can see it's up. I mean, we're up, I don't know, about 13 -- 12, 13 percent. That may all change on Monday, depending on what happens. The stock market is saying America is OK. What are the bond markets saying?

EGAN: The bond markets are also saying the -- that conditions are OK. However, there's a caveat, however, and that is the significant amount of money printing that has taken place not only in the U.S. but in fact, in every developed country --

VELSHI: Right.

EGAN: -- from the UK, the European Union and Japan. And that's --

VELSHI: Just to interrupt you, Sean, that's probably why everybody says all of this money printing is going to lead to inflation. And one of the reasons it hasn't really is because everybody is doing it.

EGAN: There's that reason and there's the underutilization both in terms of the employment and also in terms of planned capacity. In fact, there are two different views of the investment universe under the current conditions. One is that all this money printing is masking miserable underlying conditions, that real wages haven't increased very much.

VELSHI: Yes.

EGAN: And the economy is in terrific shape. The other view is that the economy is OK and that this additional money printing will result in risk assets increasing in value. And you know, people in our shop, some people have the one view, other people have the other view. It's very interesting. We're in unusual times and this is when some additional research will go a long way in pointing the -- pointing out the minefields. And that's where we spend our time.

VELSHI: Yes. And that's where you do spend your time. You're independent, you are not paid by the people who you rate which gives you a very credible voice.

Jim, for folks going in -- out of the weekend into Monday morning, they're worried maybe they don't see a deal. Do you do anything with your investments?

AWAD: No, not in anticipation of a deal. What I would say strongly is if we don't have a deal and we go over the cliff and markets act negatively next week, you want to be a buyer of stocks for the intermediate and longer term. Your only hope in this low return environment where cash pays nothing, where bonds pay nothing, we don't know what the dollar is going to be worth, we don't know where our treasuries are going to be in a few years, your only hope is to own growth of earnings and dividends. And that's what you get in large cap multinational companies with good balance sheets that you only hope to accumulate capital over time if you're a young person with a 401(k) and trying to plan for retirement.

VELSHI: OK. Both of you agree. We're -- it's uncertain but don't panic.

Sean Egan, Jim Awad, great to have you both on the show. Thank you so much.

We're taking a quick break. When we come back, more of YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: As I said at the top I am really am sorry that we've had to have this conversation for the hour. The fiscal cliff is a colossal waste of time, an economic storm of our own making and Washington is searching for little more than an umbrella to protect you from it.

Thanks for joining the conversation this week on YOUR MONEY. We're going to stay on this story until it's done. Normally we're here every Saturday at 1:00 p.m. Eastern and Sunday at 3:00 p.m. Eastern. I'm on daily at 3:30 p.m. but until this is done, you're going to see a lot of me.

Find me on Facebook at Facebook.com/alivelshi. Tweet me, my handle is @alivelshi. We'll see you through to the end of this. Have a great weekend.