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Updates on Fiscal Cliff Negotiations on Capitol Hill; Senate at Standstill

Aired December 30, 2012 - 15:00   ET

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


ANNOUNCER: This is CNN breaking news.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: It is 3:00 p.m. on the East Coast, noon on the West Coast. This is YOUR MONEY. I'm Ali Velshi. We're following breaking developments on the fiscal cliff and we welcome our viewers in the United States and around the world.

There has been a major snag in the negotiations toward a fiscal cliff deal with fewer than two days remaining on the countdown clock. Dana Bash is on Capitol Hill.

Dana, tell us what the main point of contention is now.

DANA BASH, CNN SENIOR CONGRESSIONAL CORRESPONDENT: Well, there are a few according to sources in both parties, but the biggest one when it comes to the Democrats, from their point of view, is the fact that Republicans in an offer that they made apparently last night included what is known as chained CPI, but in laymen's terms and in terms that really matter to many Americans, it would effectively make Social Security checks lower each month.

And in fact we learned this from sources earlier, but the Senate Majority Leader, Harry Reid, in the last few minutes, went to the Senate floor and talked about the snag. Listen to what he said.

(BEGIN VIDEO CLIP)

SEN. HARRY REID (D-NV), MAJORITY LEADER: The one thing I do want to mention is that we're not going to have any Social Security cuts at this stage. It just doesn't seem appropriate. We're open to just discussion about entitlement reforms, but we're going to have to take it in a different direction. The present status will not work.

We're willing to make concessions as part of a balanced, comprehensive agreement, but will not agree to cut Social Security benefits as part of a shorter, short-term agreement, especially if that agreement gives more handouts to the rich.

With 36 hours left until the country goes over the cliff, I remain hopeful, but realistic, about the prospect of reaching a bipartisan agreement. At some point in the negotiating progress, it becomes obvious when the other side is intentionally demanding concessions they know the other side is not willing to make. We are not there, Mr. President.

(END VIDEO CLIP)

BASH: So right now, Ali, talks are at a standstill. They haven't been going on all day. But as we speak, you're looking at the Senate floor, it's pretty empty. And that is because Republicans and Democrats are each going into their own meeting to hear a briefing behind closed doors from the Republican and Democratic leaders about exactly where things stand from their point of view, where the negotiations are, where the hang-ups are.

I mentioned one. The other, according to sources in both parties, Ali, is what we've been talking about for weeks and weeks, which is those tax rates. Republicans are saying they want to keep tax cuts in place for incomes above $400,000. Democrats from their perspective, they say they have moved away from, in the words of one source I talked to, "their comfort zone", which is $250,000. They've moved up from that but they're not willing to go above $400,000.

Bottom line is that this is, I think it goes without saying, not a good sign that things are so bad right now and they're not talking at this point when we are so close to what is a clear deadline tomorrow night.

VELSHI: Dana, it's beyond that. It's obnoxious, it's insulting to Americans, it's insulting to the world. More than 500 days have gone by since they came to an agreement that they would have to do something by now. It is quite remarkable that we are actually in this position.

Dana, excellent reporting, thank you. Stand by there.

I just want to remind our viewers, the two things that we're talking about here, the Democrats had signaled that they might be able to use $400,000 as a threshold. The Republicans had signaled they might be able to use $1 million as a threshold. But the Speaker of the House, who is the top elected Democrat (sic) in the country, was not able to get a vote. He was not able to get even his own member support on the $1 million threshold. So now, we don't know what the threshold is.

For chained CPI, I want to remind people, that's is the consumer price index. And many benefits in the United States, such as Social Security, are - the increase to that benefit is calculated based on CPI. And the way they calculate that is when a basket of goods increases or decreases in value, chained CPI would more follow consumer behavior. So if the price of meat were to go up, it may be that the average family then switches to chicken. Well, the consumer price index, the inflation calculation doesn't account for that possible switch. And that is why this discussion is going on about chained CPI. It would mean that when certain prices go up, you would make the assumption that people spend in a different way. And that is where the contention is.

I want to bring in Jessica Yellin, our chief White House correspondent. Jessica, we talked about chained CPI. This came up more than a week ago and the president signaled that he might think it's fair. In fact, he said it again this morning on one of the Sunday shows, that he might be okay with chained CPI. So why has this become a point of contention over which the talks may be breaking down?

JEESSICA YELLIN, CNN WHITE HOUSE CORRESPONDENT: Because that was in the context of a much larger deal, Ali, in which they were making much broader concessions, where Democrats were getting more of what they wanted, Republicans were conceding other points. That was in the context of a big deal with Speaker Boehner.

Now we're talking about the mini deal, the patch to get us through the new year, and so Democrats argue that this doesn't even have the votes to pass the House and the Senate. As Dana says, it's a quote, "poison pill" in the eyes of the Democrats.

We can continue to discuss that. I just want to bring you little bit of news, if I may. While this all is, as you put it, I think in very clearly, quote, "disgusting" and everything is moving very slowly, there is one potential glimmer of light. And that is that Senate Minority Leader, the Republican Mitch McConnell and Vice President Biden have spoken. They've spoken twice and the two of them have a history of cutting deals together. They were able to cobble together the debt deal that got us through the debt negotiations and kept the country from defaulting back in the summer of 2011.

Does this mean it will happen again? No. But it at least means there is a line of communication open between Democrats and a senior Democrat and Republican and the possibility that, who knows, maybe there could be a path forward and this very late hour. Ali, I'm not saying there will be.

VELSHI: Which is why nobody is saying we're done. Nobody is saying this is over. You know, for the last few weeks, most people will recall that the conversations have been between President Obama, at least the public ones, between President Obama and John Boehner. John Boehner is sort of sitting this one out. It's now Harry Reid, the Senate Majority Leader, the Democrat, and Mitch McConnell, the Senate Minority Leader, the Republican, and Joe Biden has sort of been brought in as the guy that you call if things are breaking down right now. So it's -- there's an impasse, they're stuck, but something might still be happening.

YELLIN: He's the master of the Senate. He was there for 30-plus years. He knows how to cut a deal. And we heard Senator McConnell say on the floor of the Senate he's looking for a dance partner. So I guess he thought Senator Reid wasn't it; now he's saying I'll try over here with Vice President Biden.

I don't think that he's going get any further with Vice President Biden on this issue of CPI for example. The White House will not be any more open to that than Senator Reid was. But if there is a way to get another route forward or if they're all just looking for an angle, maybe they can find another path this afternoon. Who knows?

VELSHI: Thank you, Jessica you're kind enough not to correct me. I did call John Boehner the top elected Democrat in the country. He's obviously the top-elected Republican in the country. Jessica, thank you for that reporting. We'll be back to you in a few moments. In a few hours, in just a few hours, trading will open in some parts of the world for the final time this year. Here's the problem -- they're going to be reacting to what's going on in Washington. People around the globe are going to be watching what is happening in the United States with a wary eye.

CNN international anchor Jim Clancy is with me now. Jim, this is such a hyper-focused American problem and yet it's really a problem for the whole world.

JIM CLANCY, CNN INTERNATIONAL ANCHOR: It definitely is. If Mitch McConnell is looking for a dance partner, The United States is the dance partner for the entire world. You know the markets hate uncertainty. What they hate even more is staring abject failure square in the face. Those markets are going to open up in, what, four or five hours' time and we should see some reaction, limited reaction, in Asia.

But perhaps not yet. It's still uncertain what is going to happen here. But there's a huge stake. Everyone realizes -- Europe has got its problems. Germany's starting to feel the effects of the global, of the downturn in Europe. China, cutting its growth forecasts; India doing the same. The last thing anyone on the world stage needs right now is for the U.S. to start sliding back into recession.

But you know, let's be clear here. That's -- that would take some time. There would still be time for some kind of a deal. But it's the uncertainty that is really driving everybody's nerves in all of this. It's going to affect commodity prices in countries like Brazil, countries like Russia. Everybody is in this together waiting to see what happens up there.

VELSHI: You're absolutely right. We're going to be watching those international markets to see how everybody is reacting. It's this whole big chain. Jim, thank you for that.

Back home, the Senate is still trying to work towards a deal as Jessica just told us. Senator Harry Reid earlier said that he is, in fact, hopeful about reaching a deal. Listen.

(BEGIN VIDEO CLIP)

REID: With 36 hours left until the country goes over the cliff, I remain hopeful but realistic about the prospects of reaching a bipartisan agreement. At some point in the negotiating process, it becomes obvious when the other side is intentionally demanding concessions they know the other side is not willing to make. We are not there, Mr. President. So I hope that we're going to be able to go further. Right now, with the status of negotiations, we've are not where we can come forward and say we have this for you.

(END VIDEO CLIP)

VELSHI: Ryan Lizza is a CNN contributor; he's the Washington correspondent for "The New Yorker". He joins us on the phone. Ryan, I know you've been watching this very closely with me for months now. Is there hope that you have that a deal will be reached before the end of tomorrow night, before January the first?

RYAN LIZZA, CNN CONTRIBUTOR (via telephone): Well, unfortunately, we don't know. We could be watching one of two things, Ali, one of two extremes. We could be watching the collapse of deal right in front of our eyes here and the public statements from McConnell and Reid are just sort of the beginning of the public campaign to cast blame about whose fault it was if the deal collapses. Or, frankly, it could be the exact opposite. We could be watching the final negotiating. This could be the final public posturing to scare each side into giving in a few inches on the final issues and perhaps this is what we need for the deal to be consummated later on today. So it could be one extreme or the other.

You know, the Senators, both caucuses are meeting right now up in the Senate. And we'll know a lot once that's over because these guys usually come out of those meetings and talk to the press and, you know, each side will get a sense of what the respective caucuses are willing to do.

I do think, looking at Harry Reid's comments that you played earlier, it does not look like the Democrats are going to budge on chained CPI, which you so eloquently explained a few minutes ago. They've publicly taken a stand against it. Ironically on the same day where Barack Obama noted that he was in favor of perhaps agreeing to chained CPI as part of a bigger deal.

So from what I can tell, the chained CPI is off the table for Democrats. If that's not enough for the -- if that's a must-have for the Republicans, then we're not going to have a deal.

VELSHI: Ryan, I'm going to interrupt you, we're going to keep on tracking this story together. Ryan Lizza joining us from New York.

Coming up next is a man you're not seeing on TV, but he's playing in the background. He may be the most feared man in Washington and he doesn't even hold office.

(BEGIN VIDEO CLIP)

GROVER NORQUIST, PRESIDENT, AMERICANS 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: Grover Norquist on the fiscal cliff showdown and why politicians won't back down from signing his anti-tax pledge. You're watching a breaking news edition of YOUR MONEY.

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 not 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.

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ANNOUNCER: This is CNN breaking news.

VELSHI: Welcome back to YOUR MONEY. We welcome our viewers here, in the United States and around the world. We've got breaking news on the fiscal cliff. There has been a significant snag in the negotiations with just fewer than two days remaining to go, about 36 hours remaining on the countdown clock.

Dana Bash is on Capitol Hill. She's got the latest. Dana, what have you got?

BASH: Well, if you just look what's going on behind me, this gives you a very good sense of where things stand and they're at a standstill. You see a lot of reporters milling around but what you can't see is what's going on as we speak behind closed doors. And it's really behind this wall. The Democrats, all Senate Democrats, are meeting right now, getting a briefing from the Senate Democratic leader, Harry Reid. And then down this hall which you can't really see from here, the same thing is going on with Republicans. And at this podium, we hope to hear from the Senate Majority Leader Harry Reid when he comes out after talking to Democrats.

But in terms of where we know things stand, they are really frozen as it goes. Earlier today we explained that the reason from the Democrats' point of view is because they got an offer from Republicans that includes what is known as chained CPI, which as you've been explaining very well, Ali, effectively means that Social Security checks would be smaller for Social Security recipients, which is something that is a nonstarter for Democrats in this particular negotiation. It is something that the president offered as part of a larger deal, but not now.

There are other things that are not being - that they're not together on, like tax rates and other big issues, but that is one major snag as far as Democrats are concerned. And that's why the Senate Majority Leader on the Senate floor a little while ago said he won't even give the Republicans a counteroffer because that is simply off the table. So we're going to see what happened in these talks. Perhaps on the Republican side, the Senate Minority Leader is going to hear from his rank and file that that is something they could give in on, and from the Democratic side, perhaps it's something - there are other things that they can give on.

But it does not feel like this is a deal in the making right here. You just don't get that feel at all, particularly because there's another thing we haven't talked about - perhaps you will with other guests - which is the sequester, $110 billion in spending cuts. That is something that Republicans want to keep; Democrats don't.

VELSHI: I'm going to do that. All right, Dana, thanks very much. We will check in with you very shortly.

Let's go to John Avlon. He is a senior political columnist for "Newsweek" and "The Daily Beast". John, 500 and some odd days since they first knew that we were going to face this reality, that the fiscal cliff was going to come to pass. This, as you have said, is about the most anticipated economic disaster the world has ever seen.

JOHN AVLON, SENIOR POLITICAL COLUMNIST, "NEWSWEEK": It is and it's absolutely pathetic that we are here just hours before the end of the year and now negotiations are at an impasse. I mean, it is the divided, dysfunctional Congress at a new low. We all knew that that Grand Bargain which we've been talking about, debating which would need a genuine entitlement reform, spending cuts, revenue increases, that right now - we're just trying to put a patch to not go over the cliff, which would be a kick in the teeth to the economy just as we're starting to recover.

So putting chained CPI on the table, the president spoke about it on "Meet the Press", but it was in the context of a larger Grand Bargain. The fact that the two sides seem blocked right now and back-channeling between McConnell and Biden, that's not a good sign for the country. We are hours away from the cliff here and there seems to be a stalemate in Washington.

VELSHI: What do you think is going to happen, John? What do you think happens? Do they cut a deal or are they just trying to figure out who gets the blame if America goes over the cliff?

AVLON: Well, they should all get the blame, first of all. But polls do show that Republican obstruction would get the brunt in the near term. The problem is this isn't just a political problem. As you well know, as you've explained to your viewers, Ali, this is an economic problem. The combined pack could take our recovering economy and put it back in recession. This is no joke. It's not just that all Americans' taxes would go up overnight.

And the real absurdity, again, just as a reality check -- both parties and the president are in agreement on 98 percent of the taxes. They are in agreement that 98 percent of Americans should not see their taxes raised. This debate is over 2 percent. And then additional things like extending unemployment insurance, not a small matter for 2 million Americans who will find their unemployment benefits disappearing overnight if Congress doesn't get something done.

So the question is what kind of a concrete proposal? We should be able to come together as a baseline, as a foundation for deal with the really difficult stuff going forward, because with that debt ceiling out there, we know we're going to need a larger plan, but it's not going to get done in the next 36 hours.

VELSHI: No. Any hopes of that happening are over at least for now. John Avalon, thanks very much.

Let's go to Jessica Yellin, CNN's chief White House correspondent. She's got new information about communication between the White House and the Senate's top Republican minority leader, Mitch McConnell. Jessica?

YELLIN: Hi Ali. Well, what I can report is that McConnell and the vice president have been in contact. They've spoken twice at least and this is at least some encouraging news. I know Dana has the best pulse on the mood and if she is saying it does not look encouraging, she really would know. But at the same time, the fact that these two men are at least in contact creates the possibility of a way forward. What we could see, potentially, is some bartering.

One thing that we know Republicans want is a way to get the estate tax, for example, from jumping up in the new year. And if they put the CPI on the table as a way to barter to get the estate tax reined in, maybe that's something that the Democrats, the vice president could get in there and start bartering with. I'm not speaking here from actual information about what the vice president is doing.

VELSHI: No, but you've got a lot of context. You've got a lot of context and we need to have that.

For our viewers around the world, and in America, who don't understand chained CPI. CPI is the consumer price index; it's the inflation measure that we use to adjust benefit checks including Social Security. And what the Republicans are proposing is that it reflect how people would behave. So often when the price of meat goes up, people switch to chicken. This is something the White House has said that they're willing to entertain. But as you mentioned, they would do it in the context a bigger deal, not the deal that they're talking about right now, which is a mini-deal.

Jessica, stay there. We'll come back to you. We'll keep checking in to see what the developments are.

This circus, there's no other way to put it - this circus in Washington has real implications for your money and your investments. When we come back, we'll talk about how to protect your money as American lawmakers try to work out a deal. You are watching YOUR MONEY on CNN.

(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.

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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.

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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 also 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.