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Threatening a Recovery; Budget Busting; U.S. and Other Forms of Government; Jobs Market Treading Water; Who is Howard Buffett?; Investing in 2013
Aired January 6, 2013 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: It is good-bye, fiscal cliff, hello debt ceiling cliff.
I'm Ali Velshi. This is YOUR MONEY.
Your elected officials once again ready to push America over the edge of the cliff.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed.
(END VIDEO CLIP)
VELSHI: Well, yes, you will, Mr. President, and very soon.
Democrats and Republicans are set to clash again over raising the U.S. debt ceiling.
Now let me just tell you, back in the old days, the U.S. had a system where every time a bill involving money was passed the Treasury had to raise money for it by issuing bonds. The debt ceiling law was established to give the U.S. Treasury the flexibility to borrow money without going to Congress to get approval every time a bill was passed.
It had absolutely nothing to do with spending control or debt control. It was a technicality. Most functioning countries don't have any such thing because they understand that if the government spends the money it has to pay the bills. Republicans seem to think the debt ceiling is a good tool to limit how much the government spends.
The current debt ceiling was officially hit on December 31st but like last time the U.S. Treasury is using extraordinary measures to get it through and sometime about late February or early March, they might. If Congress doesn't act by then, the government risks not being able to pay some of its bills.
Now as if that's not enough, by March 1st we could be heading off the sequester cliff. That's because the fiscal cliff deal that passed last week put off what to do with government spending for two months. Blanket cuts are still mandated by law to take effect unless both parties can agree to more targeted cuts. Now Republicans will target entitlements like Social Security and Medicare. Democrats will stand in their way. The GOP will then use the debt ceiling like a blood hammer to bang on the heads of Democrats to try to get their way on cuts.
But if Washington gets to March unscathed, there is a potential budget cliff to look out for. The current bill funding most of the federal government runs out on March 27th. By then it will be four years since the last actual complete budget was signed into law. Look for lawmakers to extend it again through another so-called continuing budget resolution.
Now this continues we stand the possibility of another debt downgrade and higher borrowing costs. Washington can't agree on anything except for last-minute tax deals after 518 days of grandstanding. This is no way to run the U.S. government.
Joining me now to discuss all this is Stephen Moore, an anti-tax crusader and an editorial board member at "The Wall Street Journal."
Stephen, let me start with you. President Obama says the debt ceiling is nonnegotiable, but Republicans in Congress are going to use it as a negotiation tactic. You always say the government needs to get out of the way and let businesses grow. Is not raising the debt ceiling to pay for bills already incurred standing in the way of the economy?
STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: Well, you know, Ali, you said that this -- the Republicans view this as a good tool to try to discipline spending. I don't think they view this as a good tool, but I do think they kind of view this as maybe the only tool that they have right now to try to get President Obama to negotiate on spending cuts.
As you've quite correctly said, we just lived through the first of these cliffs, which was the fiscal cliff. We got by that one. You know, Democrats feel they had their day there and they did. They got their tax increase. Republicans are still wondering, when are we going to get around to reforming these big giant entitlement programs and maybe disciplining spending on the discretionary side.
So I do think there will be a showdown on this debt ceiling. You may not like it, but I think we may come to the brink again. That's just the way -- you're right.
MOORE: This is way Washington works now.
VELSHI: Well, you know, conservative Republicans hold themselves up as financially responsible.
VELSHI: Isn't this an irresponsible thing to do, despite ideological leaning, to not pay bills that we've already run up?
MOORE: Well, you know, I think you gave a nice presentation in terms of the history of the debt ceiling but you didn't -- but, you know, the recent history, as long as I've been in Washington the last 25 years, Ali, we broke from that convention and we have used the debt ceiling, both parties, as a way to get things that they want in terms of the budget process.
I remember back in the 1980s, remember we had these votes on the Balanced Budget Amendment. That was part of the debt ceiling. Then we had, remember, Graham Rudman. That was supposed to discipline spending. That was done as part of the debt ceiling. So, you know, the convention in the last two or three decades has been to use the debt ceiling as a tool to get serious about cutting spending.
VELSHI: All right. Mohamed El-Erian is the CEO of PIMCO, one of the world's largest investors in bonds. And by the way, President Obama just appointed him to chair the newly created Global Development Council.
Mohamed, congratulations on that. Businesses and markets want certainty in the economy in order to invest and hopefully promote growth. We've averted the fiscal cliff just barely but we have three more potential cliffs awaiting us. America's economy has been slowly picking up steam.
Could Washington damage America's economic prospects with the way these things are being done as Stephen and I have just discussed?
MOHAMED EL-ERIAN, CEO, PIMCO: Yes, it could damage and has been damaging because we have been growing below potential. As you point out and as Stephen said and I agree, we have yet another drama coming up in the next few weeks because we have to deal with the three issues -- debt ceiling, sequester, and continuing resolution.
Ali, if someone wants to blow a whistle and say timeout, everybody, let's step back and see what we're doing, we would conclude, all of us, Republicans, Democrats, we'll all conclude that we have a messy if not broken economic governance system. And the major casualty of that is economic growth. And ironically, economic growth is what is needed to help those that the Democrats favor and those what Republicans favor.
So it's very frustrating because the more this political brinkmanship and posturing go on, the greater we undermine the potential of this country to grow and it has huge potential, Ali.
VELSHI: And that potential growth, some of that comes from this whole tax discussion. Taxes for the rich got the headlines in this debate but it's not only the rich who are actually going to pay more in 2013.
Christine Romans, host of "YOUR BOTTOM LINE", joins me now with more on this.
Christine, lots of taxes are actually going up despite the deal that we got. CHRISTINE ROMANS, HOST, YOUR BOTTOM LINE: Oh, yes. Taxes are rising for the super rich for the first time in 20 years and they'll have a lot of company because 77 percent of Americans will pay higher taxes next year in 2013. According to the Tax Policy Center even those making less than $10,000 a year will pay 68 bucks more in federal taxes. Between $50,000 and $75,000, you'll pay $822 more.
But of course the more money you make, the bigger the hit. Families making more than $1 million a year will see a tax spike of $170,000. That's largely, in part, for the rich people because of the higher tax rates. But tax hikes for the middle class comes from the end of the payroll tax cut. It was a temporary tax goody that wasn't renewed as part of this deal. Workers will again pay that 6.2 percent payroll taxes up from the 4.2 percent they paid over the past couple of years.
And Ali, there's another backdoor tax increase for upper middle class families. Joint filers making more than $300,000, individuals making more than $250,000 will see their personal exemption and their itemized deductions limited. That means higher tax bills for those -- for those families.
In fact, the Tax Policy Center says pretty much, Ali, the only groups who won't have higher taxes this year, retirees, the unemployed, the disabled, and rich people who don't work.
VELSHI: Wow. All right.
ROMANS: Tax bills higher for everyone else.
VELSHI: This was pretty broad based despite the fact that we have the impression that only the rich got taxed higher.
Christine, I will see you later on. We're going to talk about jobs.
VELSHI: You have a brand new jobs reports for our December that we want to talk about.
Maya MacGuineas is the head of the Committee for Responsible Federal Budget in Washington.
Maya, most Americans, as Christine said, are paying higher taxes following this fiscal drama. Your focus is on long-term solutions to economic problems. With three more cliffs facing the U.S. in the next few months, what's the danger, the danger of consistently making policy through these manufactured crises?
MAYA MACGUINEAS, PRESIDENT, COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET: Well, exactly. And we're already actually experiencing the result of that in that we know what we have to do to fix these problems. We have to deal with all the parts of the budget. We've got to reform the tax code and probably raise more revenues than we have. And importantly we have to focus on controlling spending and reforming our entitlements, which are right now unsustainable. And we continue to delay in dealing with them. Delaying all of this is irresponsible and the fact that the way we negotiate these deals and make these changes is, one, incremental, and two, always at the last moment, is already harming the economy. The potential upside that we have is going to come from putting some certainty into the economy, putting plans in place that are sustainable and people know what they can expect.
That's going to allow us to return to much stronger economic growth that we can absent those choices. And our political system is failing to put those changes in place right now. Even though we don't see the direct effects on us, it's already affecting all of us -- households, families, small businesses. And we're not going to get back on track until we make these changes.
VELSHI: Let me ask Mohamed this then. When Maya talks about certainty, Stephen has talked about it, we've all talked about it, certainty is what we want. Even when certainly goes in a direction you don't like.
How do you reconcile the fact that there are ideological and legitimate differences between conservatives and liberals in this country about tax and spending policy with the idea that the world requires certainty to retain its faith in the United States?
EL-ERIAN: Well, I think you can reconcile lots of these in a growing economy. And I think that's absolutely critical, Ali.
EL-ERIAN: OK? A lot of these inconsistencies can be reconciled if the economy were growing. It is when the pie starts to shrink or doesn't grow fast enough that these become -- so divisive and become paralyzing.
You know, we know lots of companies that have very strong balance sheets, that have lots of cash on their balance sheets, but they're not investing. And ask them why and they say we don't know what the environment looks like. Just tell us what the environment looks like so we can calculate the potential return on our investments and we'll invest. If uncertainty prevails, the risk premium is very high and you price out a lot of investment activity that's good for everybody.
VELSHI: Or they might go somewhere else where they have certainty even though it might not be a preferential investment environment.
OK, all of this fiscal cliff madness is really about spending and revenue. In other words, what you would call a budget. And there is nothing more broken in Washington than the budget process. If you are not yet outraged, stay with me until after the commercial and you will be.
VELSHI: The fiscal cliff debate has centered on two things, the revenue that the U.S. government takes in and the money it spends. In a perfect world that would be laid out in a plan every year that would take the form of a budget. It's no surprise that we're in this current mess considering Congress has gone close to four years without agreeing to a new federal budget.
The current so-called continuing resolution is the latest extension to the last federal budget -- sit down for this. It was signed into law in April 2009. The current continuing resolution expires on March 27th. Under normal circumstances the president submits an annual budget proposal to Congress in February for the fiscal year which starts in October.
Based on that, a budget resolution is written, deliberations and hearings take place, amendments are made, the complete budget resolution is supposed to be passed by April 15th but it often takes longer than that. In the end, it's sent to the president for his signature or veto. Now, sometimes Congress doesn't pass a budget resolution, and when that happens the previous year's resolution stays in effect.
So-called continuing resolutions are approved that continue funding federal agencies at their current levels. Now that way the government doesn't need to shut down just because your elected officials won't agree on a new budget. The only problem is we've had countless continuing resolutions over the last four years because very little if anything is agreed to in Washington these days.
Again, this is no way to run the government.
Maya MacGuineas, why don't we have have a budget and why does this seem to happen every year?
MACGUINEAS: Well, I really agree with a point you made before, which is there are different points of view from Republicans and Democrats where one group wants smaller government, one wants bigger government, and they're legitimate, they're different points of view. And yet the way we handle this in Washington is completely unacceptable and it leads to two things. Instead of compromising we just spend more money and refuse to pay for it. That's why we have a deficit.
And because policymakers are unwilling to come together and compromise and hammer out those differences, we operate the single biggest economy in the world without a budget, because they don't want to face up to the actual choices. If you want to spend more, how are you going to pay for it? Or if you want lower taxes, what spending are you willing to cut? And big deficits and operating without a budget is kind of an easy way to escape those hard choices. And that has what -- what has left us in this really damaging, unsustainable economic situation which is frankly so bad for the economy and also bad for the next generation.
VELSHI: Who do you hold responsible, Maya?
VELSHI: Who do you hold responsible not for ideological differences but for not having budgets? MACGUINEAS: You know, and I'm a political independent, and people always say whose fault is it, let's point the fingers. I hold our government officials responsible, the people who we all hire to come to Washington to run this country and we're working with a lot of CEOs who are watching this and saying, how come these guys can't work together? They want to get more involved with pushing them to come up with a deal because it's so frustrating to them and our small business leaders and our citizens who are part of fix the debt saying we actually want them to solve the problems and help strengthen the economy.
And I don't want to look at it as two camps. I want to look at it as people hired to run the country and we're not running it well right now.
VELSHI: I'd like to look like Brad Pitt and have a full head of hair but I don't think I'm going to get that either, Maya.
Let's ask Stephen Moore what he thinks.
First of all, Stephen, how bad is it that we don't have a budget and who do you hold responsible?
MOORE: It's dysfunctional that we don't have a budget. But look, let's be fair here. And I am a Republican so I'll admit that. But when you talk about not passing a budget, Ali, you should let your viewers know that it has been now almost 1400 days since the Democrats under Harry Reid have passed a budget. They haven't done their constitutional obligation of passing a budget every year.
Now you may or may not like Paul Ryan's budget. You know, I know you -- there are things in it that you picked apart, but at least the Republicans have passed a budget in the house. And so when you say, are they -- both sides responsible for not passing a budget, no. The Democrats have not. Now the president as you know every year submits a budget to Congress. He will submit one in the weeks ahead.
When he submitted his last budget before the Democratic Congress and they voted on it, that was defeated 97-0. So one of the problems here, and I think what Republicans are going to say going forward, is Mr. President, you and Harry Reid go forward. We've passed three budgets. We've done one every year. It's time for you to show your hand and tell us what you want to do. The frustration I have with you and Mohamed is you talk about how, you know, we have this gridlock and that, you know, the Republicans aren't being reasonable. But isn't it time for the Democrats to say what they want to cut?
VELSHI: Mohamed, let me ask you this. As you look at evaluating people's creditworthiness, is this absence of a budget, does that come into the equation when looking at the United States' creditworthiness and its investment climate?
EL-ERIAN: Yes, and for many reasons. First, an annual budget is the most basic element of economic governance. A family knows that. You know, your annual budget is really important. And if you have a country and as Maya said the most powerful country in the world who can't even do that, it points to dysfunction.
Second, the more we focus on the fiscal issue, the more we get obsessed, the more we forget other things that need to happen to grow this economy. Remember, medium-term sustainability is a fraction. The numerator is debt and deficits. The denominator is growth and prosperity. And the more we divert attention from what needs to be done to -- this reminds me of a couple fighting -- a divorcing couple fighting over a pillowcase. All right? And, yes, it may be important, but there's a lot more to the estate that you should worry about.
EL-ERIAN: And the frustrating thing is that we're not looking at what -- promote economic growth. Congress is creating problem after problem to divert attention from much bigger issues that require difficult decisions.
VELSHI: Love you guys at PIMCO. You come up with the best analogies. Divorcing couple fighting over a pillowcase and ignoring the bigger part of the estate.
Great conversation to all of you. Stephen, Mohamed, and Maya, thanks very much.
By the way, I want to ask you out there, who do you hold responsible for not having a budget? You heard the arguments. Tell me what you think. Tweet me @alivelshi.
Coming up, the fiscal cliff was an economic storm of Washington's creation. About that we are agreed. But could the fiscal cliff had happened in another country with a different form of government?
We'll see if America's system of government is to blame for the current mess.
VELSHI: So many people have said to me over the past months if only America had a different political system, maybe a parliamentary system, in which a government with a majority could get something done.
Here in the United States through a system of checks and balances President Obama can veto legislation that's passed in Congress, but he needs to work with Congress if he hopes to sign laws that he supports. Meanwhile, the U.S. Supreme Court can declare laws unconstitutional even though the other two branches have passed them.
In Great Britain, they have a parliamentary system where power is concentrated in the legislature with very few checks on its powers. So long as a political party holds a majority of seats in parliament it can go ahead and form a government, really a Cabinet of ministers headed by the prime minister. But if the party with the most seats holds less than an absolute majority, it tries to form a coalition government with other parties that are seated in parliament. So long as the government has the backing of a parliamentary majority it is pretty much assured of passing anything it wants into law. Not so in the United States. Americans elected a Democrat to the White House and a Republican majority to the House of Representatives. The U.S. is no stranger to gridlock and fiscal cliff negotiations were just another frustrating example.
My good friend Richard Quest, host of "QUEST MEANS BUSINESS" on CNN International joined me from London for a little debate on what we like to call "Q&A."
VELSHI: Could the fiscal cliff have happened in another country with another type of government?
Richard, ring the bell so I can start.
All right. The fiscal cliff, Richard, couldn't happen anywhere but in the United States because last year Washington passed laws that mandated across-the-board spending cuts and tax hikes harsh enough to send America back into a recession. That was billed as a compromise, by the way, between a Democratic White House and a Republican- dominated House of Representatives just to raise the U.S. debt ceiling.
That's where this started. And I'm the first to concede the politicians in a parliamentary system like the one you enjoy in the United Kingdom are just as capable of enacting stupid laws, but today's fiscal cliff can only be born in a system where two branches of government are at perpetual war with each other as they are now.
Bottom line, in a parliamentary system, it is faster and easier to pass legislation if you've got a majority elected by the people. They push their agenda until some time -- such time that either another election comes around or voters lose confidence. It's not perfect. Sometimes the parliamentary majority does the wrong thing because of its mandate, but Washington would have a better chance of getting things done if we had that kind of a system, Richard.
That's my six and a half minutes. You have 60 seconds.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: This is deeply, deeply worrying because you are -- you and I are virtually word for word.
By its very nature, no system of government is perfect and can suit every situation. But it must be pointed out the U.S. does manage to get itself in some more political gridlock more often than others. Even those countries, which have executive presidential systems -- France, for instance.
QUEST: Even in cohabitation they don't end up in the same situation or stalemate. One reason, of course, is especially where we have the parliamentary system. That majority that you're talking about which supports the government. And even when it's a weak parliamentary system, (INAUDIBLE) Israel.
QUEST: The coalition collapses and everybody has another vote. So pulling it together, checks and balances, are an amazing bulwark. They are the system of strength of the United States. But when you have both ends of Pennsylvania Avenue at each other's throats hammering out disagreements, it's just darn out impossible.
VELSHI: And "Q&A" and you. I want to know if you think the embarrassment that is the fiscal cliff mess could happen in another country. Tweet me right now @alivelshi.
Coming up, why December's job numbers prove another economic renaissances on the horizon, that is, if Washington doesn't mess things up.
VELSHI: Hundred and fifty-five thousand net new jobs added in the month of December. Meanwhile, the unemployment rate in the United States stayed steady at 7.8 percent after the Labor Department revised November's rate up just a notch. Either way, it's more of the same. Positive if otherwise sluggish job gains that we've been seeing for about 30 straight months. But big gains in construction and manufacturing jobs in December kind of support my thesis that an economic renaissance is beginning in America if only Washington would stop trying to mess things up.
For more on what this jobs report said, here's Christine -- Christine.
ROMANS: Boy, I hope you're right, Ali. Well, let's take a look here. I mean, you've got enough jobs being created that you're absorbing new people into the workforce but you're not meaningfully lowering the unemployment rate and that's where things get a little bit sticky. And the underemployment rate, Ali, 14.4 percent, that's not budging either, those are the people who are working part-time but would like to be working full-time, those are people who are out of work and just kind of sidelined by this economy overall.
You mentioned a couple of those areas that are doing well. I want to add 44,500 jobs created in health care. That's been a steady winner for the economy. Be careful, some of those are very low-paid jobs. Others, others are good middle class jobs. Leisure and hospitality. Apparently we must have been --
We must have been, I guess, preparing for the end of world by going out to dinner in December because they added waitresses, waiters, chefs and bartenders.
Manufacturing jobs, 25,000 created there. If you flip the screen, you can see the construction jobs. Some of those are Hurricane Sandy related. And maybe, maybe as you get some federal aid flowing in the northeast some of those jobs will continue again.
When you look within the sectors, you can see basically steady for everybody except the African-American unemployment rate, Ali, jumped up to 14 percent. It's been volatile. But you can see the structural disparities here between some of the different worker groups. And the -- and quite frankly, the great recession just made that worse, quite frankly.
This is over the past year. Remember in the spring how worried we were about that weak jobs.
ROMANS: It became very, very difficult in the election season about who was going to reverse this. But, look, now you're seeing this -- I would call this treading water, I would call this businesses carefully hiring, but they're -- you know, they're waiting for something really to unlock the genie out of the bottle and I haven't seen it yet -- Ali.
VELSHI: All right. Christine, let's join this conversation with Diane Swonk, she's the chief economist at Mesirow Financial.
Diane, interesting things in here. You and I have talked about this. I've been saying that the U.S. is poised for an economic renaissance with this energy boom and things going on in housing and maybe manufacturing. And we did see in this report some gains in construction. We saw gains in manufacturing.
What's your sense? What do you make of this report?
DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Well, the construction and manufacturing, some of it was Sandy related and also the housing market related. We are seeing, remember, last month's construction report, the only real bright spot was residential construction. And that's where the real bang for the dollar is in terms of jobs. And that's the place we need to see come back.
We continue to see, though, some losses in educational employment at the state and local level and retirees in the postal sector. We've yet to see those real big cutbacks in postal -- the budget for the -- U.S. post office so that's going to be a much bigger headwind down the road. But we are seeing retirees come out there. So the public sector still a drag on the overall numbers.
I also think it's important on the health care industry where the surprise on the upside was in nursing and in nursing homes, basically, people -- the 80 and over demographic are the fastest growing demographic today. And so you're starting to see that filter through and the contour of the jobs.
The flipside of this report, though, where was the fiscal cliff fears, it was in retail. We saw the retail fires in December.
VELSHI: Yes. SWONK: And remember, retail was very weak. People started to realize the fiscal cliff was out there. A lot of stores said they never recouped after Sandy what they thought they would. And the whole retail season they came in for the discounts but they really didn't come in in force. And we saw the retailers that had hired up early fire and get rid of some of those seasonal workers a little earlier as well. So that's the fiscal cliff sort of undercurrent in this story as well.
ROMANS: Hey, Diane, I'm wondering, is there anything in the fiscal cliff resolution, in the law, that could unlock some of that money on the sidelines the companies have just sitting in the bank? I mean I know there's a bonus depreciation clause. And people have talked about all the pork for different industries.
Is there anything in the fiscal cliff that you think does provide some resolution to companies so that maybe this month they say, I am going to add another shift, I am going to hire more workers, I am going to try to expand?
SWONK: I wish I could say yes, and I want to be optimistic. I actually do think we've learned something from 2011, but we've still got two months on the sequestration and already -- getting headed up, you know, showdown over the debt ceiling, which I hope does not occur. But, you know, this is not -- we're in a no man's land right now. The fiscal cliff deal resolution was marginal. It did not get the kind of resolution companies needed.
And in fact, it sort of confirmed, you know, we are going to see -- there is a tax hike for most Americans because you had that expiring payroll tax.
SWONK: And that will hurt retailers. So the retailers that usually get that hangover into January now because of gift cards and all the buying that sort of got pushed into January, that's not occurring and that's not going to occur in January. And so I think we're going to see more of a headwind in retail in January so there's not the kind of things that unlocks the money from the sidelines until we get a real fiscal deal and until Washington shows it can do more than pass the 11th hour. I mean, thank goodness January 1st was a holiday. I mean, everything expired on the 31st.
SWONK: But they took the holiday to vote it in so no one would really notice that they actually missed their deadline.
VELSHI: I was so looking forward to January 1st and 2nd for this all to be over.
Christine did the math on this, you've done it, too, 1.8 million jobs created in 2012. About 150,000 a month. Both Obama and Romney said if they are elected they'll create 12 million jobs in four years, three million a year, that's about 250,000 a month. We do know there's not going to be any unlocking, unleashing of this economic animal spirit at least until the fiscal cliff is finally settled, the sequester, March 1st, we hope. And then there's a budget debate.
Have we pushed back those days in which we can start to see real growth in this renaissance?
SWONK: Unfortunately, I think we have. I mean, if we do get over this and get to some real resolution -- we talked about this before -- roadmap for fiscal responsibility in this country, avoid a default on our debt, avoid downgrades to our debt and actually look like our government is leading instead of lagging the rest of the world, that could set the stage for a much stronger second half.
And you talked about housing. You know, housing is a game changer. We now have housing prices rising instead of falling.
SWONK: Remodeling picking up. You have two -- some finally unlocking the money to rebuild for the hurricane disaster areas along with the insurance payments. We've already seen it in auto sales. That was when the fastest claims came through. That along with the housing market and that wealth effect from homes moving up in price, people willing to remodel, maybe not willing to lease but remodel, the stock of homes in New York has fallen to huge lows, pushing up prices there.
This is a major game changer for the U.S. economy. And even though we're still seeing losses in public sector jobs they're abating. That headwind is abating. So the dynamics for 2013 are actually the best they've been in years.
SWONK: If we just get the government out of the way.
VELSHI: That's absolutely right. All right. Well said. Thank you, Diane. Good to see you as always. Have a happy new year. I suspect we'll be talking lots.
Diane Swonk is the chief economist at Mesirow Financial. Christine Romans is the host of "YOUR BOTTOM LINE".
All right. You recognize this guy? Of course you do. He's billionaire investor Warren Buffett. His legacy will be defined by the billions that he's made for himself and for his investors. But a more important part of his legacy might be the work that's being done by his children. I'm going to sat -- sit down with his son, Howard Buffett, the farmer -- that's right, he's a farmer -- who's set to take over the empire.
VELSHI: When Warren Buffett speaks, investors listen. The legendary 81-year-old investing legend has yet to name a CEO to succeed him but he has picked his son, Howard Buffett, to become nonexecutive chairman of Berkshire Hathaway when he leaves. It was a selection that confounded some investors because Howard isn't a high-flying investor on Wall Street. He's a farmer from Illinois.
I asked Howard what his father means when he calls him "the guardian" of Berkshire's culture.
HOWARD BUFFETT, INCOMING CHAIRMAN, BERKSHIRE HATHAWAY: Well, it's pretty simple. It means that he's made a lot of promises over the years to a lot of individuals, a lot of manager, a lot of families, and he wants those promises kept and he wants the same culture in place.
And so, you know, I'll have nothing to do with running the company, but I understand the company reasonably well. And so there will be a CEO in place that does the day-to-day management, but he also wants to ensure that between the board and a nonexecutive chairman position that really the culture is maintained.
VELSHI: I wasn't being facetious when I said you're a farmer from Illinois.
BUFFETT: No, I --
VELSHI: You really are.
BUFFETT: I have -- I often describe it this way. My mother said I didn't have enough Tonka toys when I was little so now I have a lot of big toys.
VELSHI: You really -- you conduct your own harvests. You --
BUFFETT: Yes. Yes. I block out time in April and September and make sure that I'm home. But it's a -- it's a rolling office for me. I mean, I had Tony Blair there this year, I had Eva Longoria, and it's a captive audience. It's great. You get them in there and they can't go anywhere. And, you know.
VELSHI: But they've got to work.
BUFFETT: They've got to work.
VELSHI: All right. Tell me where this interest came from. Why are you a farmer and why -- in particular the end of that sentence is why are you a farmer when Warren Buffett is your father?
BUFFETT: Well, I'll back up and say that it's because he is my father, because my dad is amazing in terms of letting his kids do what they want to do, what they're best at doing, letting them fail and learn from that. And so, you know, the fact that he told all three of us go do what you love doing, do what you enjoy doing, that's how I ended up there.
If I had a father that was trying to direct me one way or the other, I would never have the opportunity to do what I'm doing.
VELSHI: Let me ask you something. Let's turn to politics far second.
VELSHI: Because it is kind of central. I've tried to avoid politics for so much of this show today, but it is important. You are a Republican. You identify as a Republican.
VELSHI: You also have a father whose name has been attached to something that is an anathema to Republicans. What do you think about taxes?
BUFFETT: I don't think my dad's that far off on this one. I mean, you know, I was -- when we were visiting earlier I said, you know, I'm in a 35 percent tax bracket. My dad got me thinking about it a few months ago. And I went back and our effective tax rate that we've paid over the last five years has averaged just under 24 percent.
So, you know, I like to talk about well, I'm taxed at 35 percent. I'm not paying 35 percent. So -- but I also believe that you can overtax and you can -- you can hurt people and if you hurt people you hurt the economy by overtaxing. So there's a balance there. But I can tell you we have a long way to go on the spending side of it.
VELSHI: Yes. A lot of work there. One of the things that we're looking at that's being examined is the estate tax. This is an issue that you have some direct experience with, with the passing the estate.
VELSHI: Your father is a signatory to a letter that say that -- there should be taxes on estates particularly because he doesn't think that dynastic wealth should be one of those things that we strive for in America. Tell me about that. Because a lot of people will find that offensive. Why would you touch the money that my family has earned so hard -- worked to shard to earn?
BUFFETT: It's an emotional issue.
VELSHI: It is an emotional issue.
BUFFETT: And I completely understand that. I think my dad's line is one of the best, which is, you know, I'm going to give my kids enough that they can do something but not nothing. And, you know, if you just think about that that's a -- that's a great philosophy.
I think my dad is clever without saying it because he gave all three of us kids, now almost a couple -- over a couple of billion dollars over time through our foundations. And to me what better inheritance could you have than to be able to go out and spend serious money on trying to solve some of the most serious problems?
So when I look at it personally.
BUFFETT: I look at it as my parents have already basically given me an inheritance. And I love what they've done for all three of us.
VELSHI: Were you ever sore that you didn't get more?
BUFFETT: No. I think -- what I learned -- it's interesting because you go through -- and everybody would be different. But at fist I'm thinking I need more, I need more, I need more. And then you get more and you go, OK, now I've got to be really responsible with this. And this is a lot more. And so you kind of go through these phases. I think he was very smart about how he staged this in for us.
VELSHI: Well, despite the political madness in Washington over the past year, stocks rang up some pretty impressive gains in 2012. You can probably thank Ben Bernanke and the Fed for that.
After the break, I'm going to tell you what 2013 holds.
VELSHI: 2012, despite everything that was going on, it was a pretty good year for the stock market. The S&P 500 gained about 13 percent. That's the biggest gain in three years. Problem is most of you probably missed it.
Individual investors yanked more than $150 billion from the U.S. stock market over the course of the year and that turned out to be a mistake. But I get why it happened. Between banks behaving badly, political dysfunction in Washington, worrying winds blowing over from Europe, the market was a scary place to have your money.
But it is a new year, new opportunity to put your money to work. It will be volatile. It will be unpredictable. 2012's worries have not disappeared. We have a debt ceiling debate, a fiscal cliff deadline on the horizon, a budget discussion, and here in the United States we still have concerns about growth in Europe and Asia.
CNN Money polled a group of money managers. On average, they forecast that the S&P 500 will finish the year up 4.5 percent. That's pretty low by historical standards.
PIMCO founder and chief investment officer Bill Gross is on the same page. His forecast, one that stocks and bonds both return less than 5 percent in 2013. Unemployment, by the way, he thinks will stay at 7.5 percent, and that gold will grow up.
I want to bring in Ned Riley, he's the chairman of Riley Asset Management.
Ned, you are an eternal optimist with markets. Do you think these forecasts are too low? NED RILEY, CHAIRMAN, RILEY ASSET MANAGEMENT: I do. I think they are too low. As a matter of fact, we're looking specifically for the unemployment rate to drop to about 7 percent. The creation of 250,000 jobs a month seems a little bit ambitious as the administration has put that out as the target. But I look at things such as what the auto industry is doing today versus what it did a year ago.
What the housing industry is going to do in 2013 to get things motoring along. I also am somewhat of a contrarian on China and the Far East. I think things are going to get better as the year progresses. Industrial production turned up a little bit in China. The eurozone, it should benefit from the easy monetary policies that they've seen, and we don't -- we're not even arguing about a financial crisis in the eurozone right now.
Interest rates have actually come down on those harmed countries. So when I wrap it all together and I've got about 10 other reasons why I like the stock market, I think the market is probably going to be up about what it was this year, never exactly, you know, you can't pick the point.
RILEY: But about 13 percent or so. I'm looking for a 13 percent gain --
VELSHI: More than double what a lot of these economies --
RILEY: -- over 5 percent --
VELSHI: Are predicting. OK, that's a --
VELSHI: That's a bullish way. But I mean, if you're going to get 10, 12, 13 percent on the market, then it's definitely worth being in the market than not.
Gina Martin Adams is an equity strategist at Wells Fargo Securities.
Gina, you know, Ned ticks off a lot of things, unemployment, auto, housing, Asia. You don't -- you put those same things into a mix and you don't get as optimistic a view as he is.
GINA MARTIN ADAMS, EQUITY STRATEGIST, WELLS FARGO SECURITIES: Yes. Yes. It's more likely the market takes a little bit of pause. And a lot of that is because of policy and everything that's going on in Washington, creating some degree of limited risk tolerance. But the other really key component is earnings. I mean, the market has risen over the last several years on the backbone of very, very strong earnings gains.
A year ago we were talking about 16 percent earnings growth year-over- year. Now we're talking about somewhere between zero and 3 percent earnings growth year over year, so what I think we're more likely to take a little bit of a pause. The economy kind of resets. The earnings back dropped, resets a little bit in 2013 and then maybe we can move higher into the end of the year and into 2014.
VELSHI: We're getting a little more specific here. So let's take it a little further. Let's take a look at how these sectors performed in 2012. Financials did the best. That's on the right side of the screen, up more than 26 percent. But you could see consumer discretionary which is the kind of thing that gets affected by this ongoing fiscal cliff discussion, not doing so well.
Health care probably continues to be OK. Information technology a little worse. Energy return was very low return, very low natural gas prices may have contributed to that. What do you think in terms of sectors?
VELSHI: Once you're staring to pick and choose, where would you go?
ADAMS: My favorite call in the market going into 2013 is really the yield oriented sectors of the index health care, consumer staples, utilities. I think that investors completely broke up with yield over the last two months of 2012, fearing tax increases. And I think there's still -- the yield is still very desirable to an investor searching for opportunities for income.
So I think yield oriented means in the index probably present the best opportunity. On the other hand, I think technology and energy are probably a couple of the most dangerous components of the index right now. Technology in particular has the worst earnings trends in the index, probably going to show zero percent earnings for us in the fourth request. Maybe even a contraction in earnings in the first quarter as businesses have actually pulled back on spending to the tune of recession sorts of spending environments.
So tech is a little dangerous. And then energy really dependent upon the price of oil.
ADAMS: We've had some -- magnificent discoveries in the energy space over the last couple of years.
ADAMS: That's going to have great impacts on the economy going forward.
ADAMS: But it presents hurdles for these stocks in terms of outperformance relative to doing that.
VELSHI: Right. Cost of energy is coming down. That's -- we're not sure what that does to the energy stocks. Ned, if you're picking and choosing, what are you liking, what are you not liking?
RILEY: Just the opposite. I love the technology area right now. Last year, I bet on the Q's. The year before I bet on the Q's. They've beaten the market over the last two years, and I hear the case about slowing earnings, but the stocks have already slowed down. I mean, Apple is 200 points below its high.
If you start to look at them statistically, the price earnings ratios on the big cap stocks are less than the S&P 500. The future, the future growth, secular growth of this industry has got to be twice that of the S&P, yet it's got a P/E ratio, that's 3 percentage points less -- three multiple points.
The other factor I like about it is, this is the reason employment growth hasn't been strong. Substitution of labor for capital, clearly we've seen productivity rise because of what's going on in technology. The world still has to be wired without any question whatsoever. And I get back to this valuation issue again, if you look at free cash flow, enterprise value versus free cash flow, the top five stocks in the big tech index are selling at half of the multiple that they were five and 10 years ago.
My god, this is an industry that's gone bananas on one side of the earnings and yet the price earnings ratios have already dropped to take in the uncertainty of some cyclicality involved. And let me finish with this one, Ali. I think that this bonus depreciation, once I figure out what it means, could be a boon to the Apples of the world and the rest, but more importantly, it shows that capital investment is getting some notice in Washington and clearly, they know we need capital spending in this country to boost our economy. And to exports.
So bottom line, I love technology. I do like the health care area right now because it is the same thing, a unit grower. The other stocks, consumer nondiscretionary, I don't like. Consumer discretionary have come up quite a bit because of what's gone on in terms of basic economics.
But bottom line, Ali, I'm looking for 1500 in the S&P 500 over the next year and a half. Earrings this year, maybe 4 or 5 percent growth. And I'm clearly looking forward, inflation rate and interest rate starting to rise gradually throughout the year as the Fed loses control over the long end of the curve because of fundamental cyclical strength that we're going to see in this economy.
VELSHI: So, Gina, while you're not as bullish as Ned is generally about the market, you still think there are remarkable opportunities. In other words, all three of us are agreed that this constant pullout from the market should stop when it comes to my viewers?
ADAMS: Well, I think that there are selective opportunities for 2013. I don't want to get ahead of myself and suggest, you know, it's an all-out low case for stocks because I do think we're due for a pause. But I do think that investors searching for yield do have an opportunity particularly considering the trend that we saw at the end of 2012.
VELSHI: Gina Martin Adams is an equity strategist at Wells Fargo Securities. Ned Riley, he's a chairman of Riley Asset Management.
Hey, what are you doing with your money in 2013? As you've heard, there could be an economic renaissance. But Washington could still mess it up. Tweet me now @alivelshi.
Coming up, partisanship over progress, conflict over compromise. These have been prevailing themes in Washington over the past several months and they've overshadowed a lot of positive work that's being done by folks who were trying to make a real difference in the world.
Coming up, I'll introduce you to a man and an organization dedicated to collecting and spreading great ideas around the world for free.
VELSHI: There's a massive battle being waged in the world for one of the most precious commodities around. Your attention. Everywhere you go, media companies like ours, advertisers, educators, policymakers and self-promoters who are trying to get you to tune in. One organization has found the special sauce for making that work. And I'm a big fan of it.
TED, the non-profit organization, devoted to ideas worth spreading. It recently passed the one 1 billion videos viewed mark and what started out as a small conference nearly 20 years ago in California from the worlds of technology, education and design, hence the same TED, has turned into a global organization with conferences, events, workshops and a terrific Web site with more than 1400 videos and counting available for free online.
The videos are of really smart people who are innovators in their field of expertise delivering dynamic lectures that make you think differently about the world in many different fields.
Chris Anderson who acquired the TED conference in 2001 thinks differently, too. He did something most business people would scoff at. He gave away the TED brand and the license to host TED conferences for free to people who want to host their own TED talks regionally.
It's become a worldwide phenomenon. He created a similar experience with TED Ed allowing educators to post their lectures online and allowing other teachers to take bits and pieces of them and create their own lessons. Think of it as open source education.
(BEGIN VIDEO CLIP)
CHRIS ANDERSON, CURATOR, TED: I think there's lots of occasions where businesses might try opening up and be surprised at what happens. For example, we wanted to translate TED into other languages, instead of paying for thousands of translators to do it, which would have been unaffordable, frankly, we opened it up and made the transcripts free for anyone to look at.
Translators then applied at volunteers. We paired them up with each other so that they could check each other and we've ended up with the whole TED library being translated into more than 80 languages as a volunteer effort.
(END VIDEO CLIP)
VELSHI: Like TED, we are posting my interview with Chris Anderson online. It's worth watching. It's on our blog @CNN.com/yourmoney. I'll tweet it out, as well.
Thank you for joining the conversation this week on YOUR MONEY. We are here every Saturday at 1:00 p.m. Eastern and Sunday at 3:00 p.m. Eastern. Weekdays as well at 3:30 Eastern.
Find me on Facebook at Faceboom.com/alivelshi or tweet me, my handle is @alivelshi, and have a great weekend.