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Avoiding the Fiscal Cliff; Battle Over Raising Taxes; Hurdles to Compromise; Defending Main Street from Wall Street
Aired November 10, 2012 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: I have been warning you about it for months. Now that the election is over, the fiscal cliff is finally getting some love.
It's an economic storm of our own making that could trigger another recession and kill up to a million jobs next year if Congress and the president don't act. I'm Ali Velshi. This is YOUR MONEY.
VELSHI (voice-over): The elections are over. The American people have spoken. Now it's time for Washington to get to work.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES OF AMERICA: You elected us to focus on your jobs, not ours.
VELSHI: That's because nothing is more important to our economic recovery than creating jobs. President Obama says he'll add 12 million jobs over the next four years, but for his math to work, the pace of economic growth needs to pick up.
With a crisis in Europe and a slowdown in Asia, an economic storm beyond our control stands ready to batter our shores. Still, two years of consistent job growth proved we're heading in the right direction.
But the fiscal cliff is one storm that will be of our own making unless Washington acts, $7 trillion in across the board tax hikes and spending cuts over the next decade mandated to begin in January. It's the legislative equivalent of a slow motion train wreck that Washington can avoid. The question, will Congress and the president drive that train over a cliff?
REP. JOHN BOEHNER (R), HOUSE SPEAKER: We won't solve the problem of our fiscal imbalance overnight.
VELSHI: The elections are over. The threats to our economy are not. Time to get to work.
VELSHI: And there is lots of work to be done. Starts with averting this disaster of our own making. I repeat that. The fiscal cliff. We've got it covered from all angles as only CNN can. Christine Romans is host of CNN's "YOUR BOTTOM LINE," Richard Quest, host of "QUEST MEANS BUSINESS" on CNN International. David Walker spent a decade overseeing the federal government, how it spends your tax dollars, as the U.S. comptroller general. Today he's the CEO of Comeback America and he's an unapologetic deficit hawk.
Mohammed El-Erian is the CEO of PIMCO. His firm is one of world's the largest investors in bonds and Stephen Moore is a conservative, the founder of the low tax advocacy group Club for Growth and an editorial writer at the "Wall Street Journal."
I'm going to start with you, Stephen. My good friend. The fiscal cliff is the immediate threat both parties need to come together to fix it because not fixing it would set even conservative fiscal causes back, don't you agree?
STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: Yes. And I think most Republicans agree. They don't want to go off this fiscal cliff either, Ali. I think the one hang-up in negotiations, which will start on Tuesday, is the president says, look, I was re-elected to raise those tax rates on the rich. And you know what the Republicans are saying in the House, Ali? Well, you know what? We were elected not to raise those tax rates.
I do think if the president takes the tax rate increases off the table, you can get an agreement on entitlement reform, on getting some more revenues and doing some kind of honest to goodness common sense things to get this deficit under control over the next 10 years. We're not that far apart.
VELSHI: Right, and I can also grow a head of hair and look like Brad Pitt pretty soon.
Stephen Moore, you hang on with that thought for a second. We'll come back to you.
Let me bring Mohamed in.
Mohamed El-Erian, in a letter to the president this week you called Congress dysfunctional and you wrote -- you wrote to the president. You can mobilize the nation to put proper and timely pressure on Congress to cooperate. How?
MOHAMED EL-ERIAN, CEO, PIMCO: By being first very open about our outlook and the dangers for employment, for living standards, for income and equality if we don't deal with our underlying problems. And secondly by going forward. The fiscal cliff is a perfect example. Like you say, Ali, this was a problem of our own making. And if we're not careful, this will throw us into recession. That's the last thing we need.
So the president can take a leadership role, I think, like Stephen said, they will find compromise. I'm not sure that they should exclude the top income. I think everybody should contribute to the solution. They will find a mini-bargain and then we're going to have to pivot to some really bigger issues that are key to this economy growing over time and getting fiscal sustainability over time.
VELSHI: David, in its simplest terms, the fiscal cliff means $7 trillion. A combination of things expiring, taxes going up. Spending cuts. Over the course of a decade. I want to be serious about this without being fear-mongering about it but it is serious. That might sound like a dream scenario to a deficit hawk like you.
Wow, we're going to get rid of $7 trillion over 10 years. Why don't you love this idea of going over the fiscal cliff?
DAVID WALKER, FOUNDER AND CEO, COMEBACK AMERICA INSTITUTE: We must not go over the fiscal cliff because it would cause us to go back into recession, exacerbate our unemployment and underemployment problems, undercut confidence in government and potentially undercut the ability to be able to get a grand bargain.
We need to do a down payment.
WALKER: We need to extend most of the major tax provisions and spending reductions to set up a grand bargain in 2013. And the president needs to show extraordinary leadership and go directly to the people with the facts, the truth, and the tough choices. He should call Congress back and say no deal, no break. You don't get any days off other than weekends until we have a deal on the fiscal cliff. And we ought to do the same thing in 2014 for our fiscal grand bargaining.
VELSHI: All right, Richard and Christine, that means we don't get days off either while they do it. But you know what, it'd be worth giving up days to fix this.
Richard, what David is saying is -- and this is a guy -- David has been pressing for a very long time to be responsible about government spending. He is saying if we go over that fiscal cliff, it does start to look a little bit more Greece. You've got an economy that plunges. You've got GDP that plunges and you don't have a way to dig out of that.
RICHARD QUEST, HOST, CNN'S QUEST MEANS BUSINESS: Yes, if you do go over the fiscal cliff, which I don't think anybody around this table or indeed on this program, thinks will happen. And so really, if you do go over the fiscal cliff, you will suffer the consequences. The world will suffer the consequences. There's no doubt.
What worries me is a mini bargain that fudges the cliff for the moment, to mix the metaphors, but does nothing to fundamentally start to address the bigger problems. I --
VELSHI: Why would you be worried about that? It's not like we ever do that.
QUEST: Well, that's the problem because we are at crunch moment. I don't think getting back from the fiscal cliff is going to be that difficult. The moment the reality hits, everybody concerned, common sense will prevail. But what happens after that?
CHRISTINE ROMANS, HOST, CNN'S YOUR BOTTOM LINE: Washington showed so -- such terrible leadership in this. It's really horrific. And, you know, we were just in Washington for the election. And you talk to people in Congress and the people around them, Ali, they say it's not going to happen. But they don't know how we're going to get there. And they also don't seem to get that even a few days off the fiscal cliff is enough to really hurt stock market sentiment, to really hurt business sentiment.
I mean, there are people now on the left -- I mean, we've been talking so much about the right, how they will not give in on their taxes. There are now people in the left like Paul Krugman, saying let's go over it. Let's go over it. It's going to really hurt the Republican donors, the Republican interests. The president has caved twice. He cannot cave again.
Even a few days off the fiscal cliff -- I'm not sure the politicians get that. Even a few days off the fiscal cliff could spark a financial crisis.
ROMANS: I mean you just don't play with that fire.
VELSHI: Do you remember the day in 2008 --
VELSHI: -- when TARP failed in the --
VELSHI: -- House and the Dow plunged 777 points?
ROMANS: They didn't get it then. And suddenly when the market was telling them, the world is looking at you, America, and saying, wow, you're a bunch of fools. Then they got it.
ROMANS: And then they spent the next four years denying that they ever bailed out the banks. But the point is -- the point is is that they don't get that it's not really up to them. It's up to them to make sure the rest of the world doesn't completely lose confidence.
VELSHI: OK. So what this comes down to -- we all think it's not going to happen. We hope it doesn't happen. But it does come down to a very basic decision about who pays more taxes, who pays less tax, and what benefits stay and what go away.
John Boehner, the speaker of the House, says Republicans will accept higher tax revenues but not higher taxes. Huh? More when we come back.
VELSHI: The stakes could not be higher. If the United States goes over the fiscal cliff, taxes will rise for nearly 88 percent of Americans next year. We're talking about an average increase of $3500 per household. At the same time, $100 billion in automatic across- the-board spending cuts will take effect. Half in defense, half in nondefense. And millions of jobs could be lost.
The nonpartisan Congressional Budget Office says unemployment will jump back to 9 percent next year and the U.S. economy could be plunged back into recession.
Now avoiding the fiscal cliff will require compromise, something that's been in short supply in Washington over the last few years.
Stephen Moore joins me again.
John Boehner , Stephen, says Republicans will accept higher tax revenues but not higher tax rates. Explain that.
MOORE: Well, you do that two-ways, Ali. It's no that complicated. First, you have to get the economy growing faster. We all agree the best way to bring this deficit down is to get the growth back up to 3 to 4 to 5 percent from the 1.5 percent we've had for the last year or so. That's number one.
Number two, when I talk to Republicans, what they tell me, Ali, I had a discussion with Mitch McConnell on this a couple of days ago, he said look, we're willing to put these higher revenues on the table. We are willing to -- close the loopholes and the tax system, get rid of a lot of the carve-outs. And by the way, as you know, Ali, a lot of those carve-outs, the people who benefit from those, are rich people.
So I think Republicans are willing to compromise on this. I have to say this. I'm frustrated with all of you on this because, yes, we have a fiscal cliff that's going to hit on January. But let's not forget the whole context of this.
MOORE: We are running $1.2 trillion deficits and we can't keep doing that --
MOORE: -- year after year after year. We can't keep doing it.
VELSHI: David --
MOORE: We have to come up with solutions.
VELSHI: David Walker has been banging on this drum as well.
WALKER: Well, the key is is we've got to avoid the fiscal cliff. But we also have to address the much bigger fiscal abyss.
WALKER: Those are the large and growing structural deficits due to known demographic trends, rising health care cost, and outdated tax system. Here's the good news. The people are way ahead of the politicians. I just came back from a 34-day, 10,000-mile tour. We got a minimum of 77 percent support for a range of reforms dealing with spending, social insurance programs, and taxes.
Eighty-five percent believe it's going to take spending reductions and additional taxes heavily weighted towards the spending reductions. We just need leadership.
VELSHI: Right. And it needs to be done in a responsible way.
Let's bring Mohamed in for a second.
Mohamed El-Erian, tell me how you see this. We've heard from John Boehner. We've heard from the president. We are as yet lacking details but it seems to me we're already further ahead in this conversation than we've been in the last six months. Where do you see this going as a guy who looks at the credit risk of everybody in the world?
EL-ERIAN: So I would extrapolate, Ali, from our own experience here in California. We voted for higher taxes in order to fund better education. And I think people are recognizing that fiscal sustainability has a numerator and a denominator. The numerator is about debt containment and deficit containment. The denominators are about growth, making sure that you can grow living stands and pay off your debt.
And I think the realization is coming in that we need to optimize both and I think that our politicians will slowly get that. It's not going to be a big jump. And I think Richard Quest is correct in reminding us that this is a long haul. And let's focus both on the numerator and the denominator.
QUEST: The point Stephen has just made and Mohamed points out as well, you cannot have it both ways.
QUEST: You cannot remind us on the one hand that there's a $1.8 trillion deficit. But then on the other hand immediately say we won't have tax revenues raised -- tax rate raised. You cannot have your cake and eat it, too.
ROMANS: This is America. We've been doing that for 25 years.
QUEST: Yes, but that --
VELSHI: That's why we have increasing problems.
ROMANS: I know.
QUEST: Yes, that's exactly the problem. You're going into the negotiations saying, ah, we've got to do something about it. But we won't raise tax rates. But we must deal with the deficit. But we won't. You can't do it. It's cake and eat it.
ROMANS: Can I make a big point here about, OK, look, think about Simpson-Bowles. That's $4 trillion in cuts through the year 2020. Cuts and tax increases.
ROMANS: Simpson-Bowles, which didn't make it, right? You look at the fiscal cliff. That's $7 trillion, $7 trillion in 10 years with no thought, no nuance, no kind of strategy about what's the best for America.
VELSHI: So it's a sledgehammer where you actually hit us --
ROMANS: It's a big, dull hatchet when we need a scalpel and a bunch of surgeons.
ROMANS: And Congress is sitting there with a bloody scalpel. But a hatchet rather. And that's the problem here. They need -- going off the fiscal cliff, and it is popular now to say well, maybe we should go off for a while.
ROMANS: That would be bad.
VELSHI: Right. That is gaining in popularity.
Stephen Moore, you have -- I mean, listen, you and David, you guys have really spent a lot of time on this. And your approaches to this are a little more certain. A lot more surgical. Isn't that problem though, Stephen? As David said, he went around the country and talked to people. And I found the same thing when I was on the CNN Express on that bus trip. People understand what this means. They understand that we have to cut back on our spending. That they are concerned about the lack of sophistication with which -- with which Washington is handling this.
MOORE: Yes, but when? You know, look, I get so sick of this. You know, everybody says we have to cut spending. Even my good friend David Walker who I have so much respect for.
David, when are we going to cut the spending? And the answer always seems to be, well, we'll do it tomorrow, next year, the year after. And what's I'm saying is maybe it's not such a bad thing if we start right now. I'm not so opposed to 10 percent across the board in the spending programs.
And by the way, Mohamed, I have to say this. You know, you say the tax cuts aren't going to hurt the economy. My goodness, look at your state of California. The dingbats in California just raised the highest income tax rate to 13 percent. Every business and high-income person is going to move to Texas, which by the way is the fastest growing state in the country which has no income tax.
So I think tax rates do matter. I think the evidence is strong on this. And I don't want to see the United States go down the route of California. Because California is the state that is looking like Greece right now.
VELSHI: Hold on, everybody wants to respond to that. But we at CNN want to be fiscally responsible and pay the bills. So that's what we're going to do for the next two minutes. We're going to come back. We're going to hear from Mohamed about that and from David Walker.
Stay with us. You're watching a very animated edition of YOUR MONEY.
VELSHI: OK. I got the panel back. I want to get right into it.
Stephen Moore points out, Mohamed El-Erian that California's a bad example because state tax rates are so high in order to pay for some of the investments they've made. Your response?
EL-ERIAN: So I will say to Stephen, do the math. Just do the math. Everybody agrees that in order for us to improve our prospects, we need the following. We need tax reform. We need entitlement reform.
EL-ERIAN: In order to close our gap, we also need certain tax rates to go up. And we need certain spending to be cut.
MOORE: That's more than three.
EL-ERIAN: And finally, in order for this to be sustainable, we need to wrap it up with other issues and address our ability to grow. The labor market, credit, infrastructure. So I will tell you it's not about a partial solution, it's about a holistic solution that's going to involve a lot of steps, including a higher tax rate because that's what the math tells you.
VELSHI: So, David, Stephen Moore says when are we going to deal with it? The issue with the fiscal cliff is less, when, and more how?
WALKER: Right. On the fiscal cliff, for example, you cannot extend the payroll tax cut. That's over $100 billion. You can recognize that 99 weeks is enough for unemployment benefits. You can reach a compromise with regard to some defense and nondefense spending without doing the hatchet. And then what can you do is you can set up a bridge to a grand bargain to where we're focusing on getting debt to GDP, public debt, down to 60 percent within 10 to 12 years which will require everything we're talking about.
Budget controls, social insurance reforms, comprehensive tax reforms, additional defense and spending reductions but in an intelligent way. You can do that. It's possible with leadership.
VELSHI: But, David, you've been talking about this for so long when we weren't in a crisis. And nobody listened then. Not nobody listened. People listened. But decision makers in Washington didn't listen. I mean what -- will they listen this time?
WALKER: I think they will listen this time because the number one issue for Americans was the economy, jobs, and fiscal responsibility. What we need to do, as I said, is that President Obama needs to take a page out of President Clinton's book. He needs to use the bully pulpit. We need a meaningful citizen education engagement campaign. We need to demonstrate to the far right and the far left.
VELSHI: Do you think President Obama is on the right of this side of this issue, though? I mean use the bully pulpit.
WALKER: I mean he's wants a deal.
WALKER: I think Boehner wants a deal.
VELSHI: Stephen Moore, do you think President Obama wants a deal that you would be satisfied with?
MOORE: I don't know. I honestly don't know. I think if Barack Obama will move a little bit to the middle.
MOORE: Because in his first term he -- you know, he governed from the left. I think Republicans are -- look, we all are Americans first and foremost. We want to get these problems solved.
VELSHI: Right. And let me put it this way. Let's say President Obama moves to this so-called middle, wherever that is, but still says that the top 2 percent pay higher income taxes.
MOORE: The Republicans will not go along with those higher tax rates. That's World War III. If he's willing to say look, we can -- we can close loopholes, we can do other things but I just -- I think Republicans honestly believe, and I agree with them on this, that raising those tax rates is going to hurt the economy more than it's going to bring down the deficit.
And you know you're the one who's always said, jobs is number one.
MOORE: You're not going to create more jobs by putting higher taxes on businesses.
VELSHI: Richard, you're scribbling furiously here. There isn't a test at the end of this.
ROMANS: Except no, no, no, no, no. That's what he wrote.
MOORE: I'm not saying no, no, no, no, no. I'm just saying no to higher tax rates.
QUEST: I'm saying, look, you have an advantage here in that you're trying to put this -- you're trying to put Humpty Dumpty together before he's fallen off the wall. What we've learned --
ROMANS: Metaphor number six of the program, by the way.
QUEST: But what we learned from Europe is you don't want to wait for him to fall off the wall. The markets will do your job for you.
QUEST: Austerity and -- now we may have overdone austerity in Europe.
VELSHI: Really? We may have.
QUEST: And we're paying the price for it in Greece and Spain is about to get hit and Italy is about to get hit. But you have the chance to do it with the warning beacon flashing. If you do not do it, if you do not deal with this deficit and the long term -- I agree with Stephen, you do need to deal with the trillion dollar plus deficit sooner rather than later, then somebody, i.e., the markets, i.e., investors, i.e. -- because that's the big difference, ladies and gentlemen.
China is now a bigger player in the global economy than it was before.
QUEST: You're in new territory.
QUEST: Go on.
ROMANS: Here here.
QUEST: The rules of this game have changed.
VELSHI: David? WALKER: We have to keep in mind if you use honest and comparable accounting, the total government debt as percentage of the economy today in the United States is worse than every country in Europe but one. And it's called Greece. And we don't want to follow their example. We've got to deal with these structural deficits. But we're not going to deal with them in a lame duck session.
Let's do a down payment. Let's do a bridge to a grand bargain. We need to focus on debt to GDP. That's what matters. And after all, after World War II, we went from over 100 percent of debt to GDP down to the 30 percent (INAUDIBLE) range and we didn't pay off a dollar of debt because we constrained deficits and had fiscal responsibility and we grew the economy. That's what we need to do.
VELSHI: Mohamed El-Erian, we continue to speculate here at CNN that someone might ask you to be a treasury secretary of the United States. You --
ROMANS: Have they already started this rumor?
VELSHI: You continue to say that's not true. But we would like to hear your closing words on this because you are the guy who is going to -- you're going to lead the charge on deciding whether or not investing in the United States is a good bet or a bad bet. You're still on the good bet side?
EL-ERIAN: Yes, I am. And we are because we expect the following to happen. So we talked a lot about what should happen during this program. Let's speak to what's likely to happen. And what's likely to happen is our politicians will come together. They will meet in the middle on some issues resulting not in a 4 to 5 percent fiscal contraction, that would send us into recession, and that will be awful, but in a 1.5 percent fiscal contraction. What David calls the down payment.
The next step is the more difficult one. It's what Richard has spoken to which is to pivot, not just remove the headwind, but create tailwinds for our economy in terms of fiscal sustainability and growth. And that's going to require a lot of hard work. But we think it's feasible over time. In the meantime, let's remember that Europe is getting worse, not better. Let's remember that China is slowing. Let's remember that the Middle East is becoming less stable. And, therefore, we have no time to wait. We've got to move forward.
VELSHI: Mohamed, excellent. Thank you so much for joining us.
Mohamed El-Erian is the CEO of PIMPCO, Stephen Moore is an editorial writer with the "Wall Street Journal," David Walker is the founder and CEO of the Comeback America Initiative, Christine is the host of "YOUR BOTTOM LINE."
Richard, stay where you are. Things are about to get much more interesting in Washington. Richard Quest and I will get into a very civilized argument about America's future next.
(COMMERCIAL BREAK) VELSHI: Time now for some Q&As. Same president, same congressional makeup, same challenges for the U.S. economy but the next four years and more importantly the next 2 1/2 months will be very different. The election was a turning point and now things get interesting.
Joining me now in studio to debate this is Richard Quest, the host of "QUEST MEANS BUSINESS" on CNN International. He's the tall guy with the big ears.
Richard, good to see new person. You're taller and you have bigger ears in real life.
Now, Richard and I are old friends. This is what we do. The Q&A, this question and answer.
VELSHI: Question Ali, this time it's more of a fill in the blank. So the election is over. Now it gets interesting because of what?
Richard, you traveled all this way to join me in New York so you go first. Sixty seconds as you start it on the bell.
QUEST: Sixty seconds on now it gets interesting because now, Ali, it gets interesting because nothing has changed. Just think about it for one moment. The fiscal cliff remains and the United States is getting ever closer to going over the edge. But worse than that, the European sovereign debt crisis continues. Greece still hasn't had its latest (INAUDIBLE) of money. The situation in Spain is deteriorating. China is slowing down.
And as Carl Yonker said in Europe, everybody knows what needs to be done whether it's in Europe or the United States. Everybody knows what needs to be done. They just can't get re-elected if they do it. Worse than that, if they actually do it, they could find themselves to be in deep political trouble with their own party.
So now it gets interesting because -- it gets interesting because the stakes are so high. Whether it's in Europe or the United States. Either side could have an accident, which would ultimately pull them over the edge.
Now it gets interesting, Ali, why?
VELSHI: Richard, now it gets interesting start right now. Now it gets interesting because everybody has got to grow up. President Obama, the second term, it's about legacy, nothing ruins a legacy like presiding over an economy that plunges into recession. But President Obama doesn't have to run for office again. The 435 members of the House of Representatives do along with about 33 senators in two years. So it's time now for the children to leave the room. And I say that at risk of insulting real children who tend to behave more responsibly than some of your elected officials have.
Will Republicans, backed up by a ridiculous pledge to not raise taxes by a weakened Tea Party, and licking their wounds after a general repudiation of conservative fiscal policies, depart from that principle just long enough to achieve that so-called grand bargain?
Well, Richard, that is anybody's guess. But if they do, things will really get interesting because despite what you say about things being exactly the same, the same makeup of Congress, the same president, I think they're very different.
QUEST: Now it gets interesting.
VELSHI: It absolutely does. And that's our wish list. But, of course, if you and I had any real influence, we wouldn't actually be here. So coming up next, you're going to want to stick around for this. I will introduce you to one of the most influential and I think dangerous men in Washington. He could ultimately be responsible for taking the U.S. over the fiscal cliff and he's not even elected.
VELSHI: If the U.S. falls over the fiscal cliff, 88 percent of American households will see their taxes go up. So you would think that Republicans in Congress who signed this pledge to not raise taxes would be tripping over themselves to solve the problem but they can't.
I'll go one-on-one with the biggest impediment to compromise in Washington back in 90 seconds.
VELSHI: The most immediate threat facing the United States is the fiscal cliff and the election results did nothing to change the balance of power that we have seen in Washington in the last two years. A Democratic president now re-elected calling for taxes on the richest Americans to rise. A Republican controlled House of Representatives that opposes any increase in tax rates and a Democratic Senate caught in the middle.
Now avoiding the fiscal cliff will require compromise. But there is no compromise possible when one side says they can't lose. Everything has to be on the table. To succeed all parties need to give something up for the greater good. But there is a problem. It's a big problem. Almost all the Republicans in Congress has signed a pledge, a pledge not to vote for any net tax increases under any circumstances.
It is a pledge authored by Grover Norquist, the founder and president of Americans for Tax Reform.
Let me read the pledge to you. I reads as follows, I blank pledge to the taxpayers of the blank district in the state of blank, and to the American people that I will, one, oppose any and all efforts to increase the marginal income tax rate for individuals and businesses and, two, oppose any net elimination of reduction or elimination of deductions and credits unless matched dollar for dollar by further reducing tax rates.
And the current Congress, the one in place until January, 238 representatives and 41 senators have signed. By the way, one Senate Democrat, Ben Nelson of Nebraska, and two House Democrats, Robert Andrews of New Jersey and Ben Chandler of Kentucky have also signed it. Neither Nelson nor chandler will be in the new Congress but the people who won their seats have also signed the pledge.
Interestingly, six House Republicans did not sign the pledge. All but one will be in the next Congress. Pennsylvania Congressman Todd Plat retired. He'll be replaced by Republican Scott Perry who also didn't sign the pledge. Seven Republican senators in the current Congress didn't sign the pledge either. Two of them won't be around for the next Congress, Indiana's Richard Lugar who lost his nomination battle to a Tea Party-supported candidate, and Maine's Olympia Snow, who's leaving the Senate.
But the folks who won their seats also didn't sign the pledge. Joining me now is Grover Norquist, he's the author of the pledge and one of the most powerful fiscal conservatives in the country.
Grover, welcome back to the show. Thank you for being here. First of all, I want to ask you, where does your group, Americans for Tax Reform, get its money? Who is behind this effort for this pledge?
GROVER NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM: Well, the pledge doesn't cost any money. But we have 100,000 donors if that's your question. But the pledge doesn't cost any resources. We share it with people. And they make that commitment to the American people. As you pointed out, we have a majority in the House that's committed to not raising taxes. The leadership of the House and the Senate Republicans have made this commitment --
VELSHI: Well, let me ask --
NORQUIST: -- to the American people.
VELSHI: Let me stop you for a second. If the pledge doesn't cost any money, then why did American Crossroads GPS Karl Rove super PAC give you $4.5 million?
QUEST: Oh, well, they were supportive of our efforts in campaigns and so on, sure.
VELSHI: So that's --
QUEST: The pledge -- the pledge itself is not -- doesn't cost any money.
VELSHI: I understand. Right. Right. I -- only photocopying costs, I guess. I guess my only question is what happens to people --
QUEST: Now we use e-mail.
VELSHI: There you go. What happens to people who break the pledge? Those 238 in Congress? What happens if they break the pledge? Because you've got money behind you so you pile on and try and get them defeated in the next election?
QUEST: Well, the best example of that is George Herbert Walker Bush who ran for election in 1988, signed the pledge, won the primary, said, read my lips, and signed the pledge, and won the general election. Then two years later he walked into a grand bargain with the Democrats who promised to cut spending if he would raise taxes. Taxes were raised. Spending was not cut. Spending increased. And he lost the next election.
We didn't run any ads against Bush. The whole country knew that he had been taken to the cleaners. That he'd promised not to raise taxes and didn't keep his commitment. So these are self-enforcing. Why? Because the American people elect people who they want to reform government rather than raise taxes.
VELSHI: I like to think it's that pure. But the fact is, you have a lot of money. So the money got to be used for something, right? You can't be getting $4.5 million from these guys and $100,000 here and $200,000 here for nothing. I mean it doesn't cost that much to get the pledge out. So clearly that money goes somewhere. What happens? How does the money get spent to defeat people who break the pledge?
QUEST: Well, we've run ads to let people know who is taking the pledge and who doesn't. We'll do phones and to letting people know who's taken the pledge and hasn't. Now if liberals believe that being open to tax increases is a popular thing, then they should consider our advertising, letting them know that somebody's open to tax increases --
VELSHI: Got it.
QUEST: -- to be a campaign contribution to them. They seem to know better than that, though.
VELSHI: OK. So let's switch from the politics to the economics. Our GDP growth rate is 2 percent and yet we have the lowest tax rates in the United States that we've had for 30 years. So how do you connect the tissue on this? We've got -- we've got the lowest tax rates again in 30 years in America and yet we've only got a 2 percent growth rate.
So how does that argue that yet lower tax rates will create more growth?
QUEST: Well, first of all, we had a 28 percent top marginal tax rate in 1986 up in until 1990. So we actually have a top rate of 35 percent. We have a significantly higher tax rate than we had --
VELSHI: When our tax revenues are low?
QUEST: -- during the Reagan years. Of course they are.
VELSHI: Tax burden is lower.
QUEST: The total tax burden is lower because if we had a growth rate like Reagan's.
QUEST: A recovery, a strong Reagan --
VELSHI: More -- greater than 4 percent?
QUEST: There'd be 10 million Americans at work if we had Reagan's level of recovery.
VELSHI: Right. Right.
QUEST: Who aren't at work now. They'd be paying taxes.
VELSHI: And as I've said to Stephen Moore, if I had a full head of hair, I can look like Brad Pitt. We don't. We have a 2 percent growth rate. It's not predicted to do better than 3 percent. So I guess --
QUEST: With a top tax rate that Obama wants to take to 43, 44 percent, with a tsunami of regulations and attack on energy, they've now announced they want an energy tax. Something they didn't mention during the campaign. So there's a whole series of damaging things. The market sees that this is not exactly a healthy plan for the economy. Of course you have a lousy growth rate as long as you have Democrats threatening to throw tax increases on the economy.
QUEST: In addition to the regulatory burden, you've got French rates of economic growth.
VELSHI: All right. But let's say we let the Bush tax cuts expire at the end of the year and then Congress moved to increase tax rates, would that -- would that count? Would that violate your pledge?
QUEST: That would clearly be -- look, you can't go to the American people and say we raised taxes $500 billion and then we cut it $400 billion. Please only look at the cut, not the overall rate. If you raise taxes $100 billion on the American people, they're going to notice it. It doesn't pass the laugh test.
VELSHI: Grover, thanks for being us with again.
QUEST: You got it.
VELSHI: All right. Despite the Grover Norquist pledge, the talk in Congress does sound vaguely promising.
(BEGIN VIDEO CLIP)
BOEHNER: Let's rise above the dysfunction and do the right thing together for our country.
SEN. HARRY REID (D), MAJORITY LEADER: Compromise is not a dirty word.
(END VIDEO CLIP) VELSHI: So will our leaders rise to the occasion and drag us over the fiscal cliff with them or will they compromise? We'll gain the odds of compromise next on YOUR MONEY.
VELSHI: This year's debt ceiling debacle and this year's fiscal cliff has one thing in common, a failure to reach compromise in Washington is threatening to bring the country to the brink of financial ruin again. The world is watching whether America is willing to plunge itself into another financial crisis. There is a solution, though. It's one that University of Pennsylvania president Amy Gutmann writes about in her book, "The Spirit of Compromise: Why Governing Demands It and Campaigning Undermines It."
I'll talk to her in a moment. But first, a quick history lesson to put the current insanity -- and that's what it is -- into context for you. In the book Gutmann writes about the successful bipartisan Tax Reform Compromise of 1986 in which she writes Republican president Ronald Reagan and the Democratic speaker of the House, on the right there, Tip O'Neill, were able to put their minds to governing rather than campaigning.
She writes that it wasn't easy for them to do it but they did it. They got together and passed significant tax cuts that really benefited many Americans.
Jump ahead to 2010, to the debate over Obamacare where the compromise in passing the Affordable Care Act occurred only between Democrats. Not a single Republican joined them in the vote.
Amy Gutmann joins me now.
Thanks for being us with again. Good to see you. In your book, you fault today's elected officials --
AMY GUTMANN, PRESIDENT, UNIVERSITY OF PENNSYLVANIA: My pleasure.
VELSHI: -- for spending most of their time campaigning rather than governing compared to 30 years ago. What's changed? Why are elected officials different now than they were 30 years ago?
GUTMANN: Well, as our book foreshadows and I wrote the book with my Harvard colleague, Dennis Thompson. We have been overwhelmed by the permanent campaign where every day has been Election Day. And that's the bad news. It's been truly overwhelming and the good news is I think the American people have been underwhelmed by that.
So I think there is a time for change. But what's changed is that the 24/7 media, the influx of unlimited money into politics, the fact that it is easy to stand on principle and demonize your opponents and that makes good coffee. All of that has made the campaigning overwhelmed the governing in our democracy.
VELSHI: Paul Krugman wrote in an op-ed in the "New York Times" this week and he said the president shouldn't do anything about the fiscal cliff at the moment. I'll tell you what he wrote. He said, "Stand your ground, Mr. President. Don't give in to threats. No deal is better than a bad deal." That, Krugman says, by the way, would put extreme pressure on Republicans to make a deal as the economy tanks.
Now we talk a lot about the Tea Party and some extreme views that they have on this, but what about pressure from liberals on the president to resist compromise?
GUTMANN: So I said it before the election, and we say it in our book. You can blame one party more than the other but in the end both parties are going to have to compromise. And the victorious party is going to have to make the extreme ends of its party somewhat unhappy in order to make the party, the party of the common good, and also to basically rule in a way that helps the vast majority of the American people who are not on the extreme.
So I read Paul Krugman's column, and it's fine for a pundit. It's fine for activists to want the president or the Congress to hold as much ground as possible. But it is misleading to the American people to think that staring the fiscal cliff in the face and saying let's go over it because we're not willing to compromise is a winning proposition.
The president -- is running no longer for re-election. He's running for history.
GUTMANN: And he can be historic president if he makes a really good compromise and gets us over this fiscal cliff.
VELSHI: Compromise, as you have written in your book, does actually mean all sides giving something up. So we will watch this carefully.
Amy Gutmann, good to see you again on the show. Thanks for being with us.
So are you ready for the next big shock to the financial system? My next guest oversaw TARP, the 2008 bank bailout. He says, no, we're actually worse off than before the crisis. So how do we prepare for the next financial meltdown if there is one? I'll tell you after the break.
VELSHI: Americans have lost faith in their banks. A yearly Gallup poll shows confidence at an all-time low. Only 21 percent of respondents say they're actually feeling good about U.S. banks this year. Look at the trend going all the way back to 1980, from the mortgage meltdown and the subsequent bailout, scandals have battered the image of our financial institutions. Billions upon billions were lost by JPMorgan's infamous London whale trader on a risky bet. At MF Global, the commodity and derivatives trader, $1.6 billion of customer money vanished into thin air.
HSBC was found guilty of extensive international money laundering practices and nearly every major bank is under suspicion after Barclay's was outed for its role in rigging LIBOR, the London interbank rate that affects everything from your home loans to your credit cards.
Efforts have been made to restore confidence in the system. Dodd- Frank is the signature financial reform of President Obama's first term. It aims to put an end to too big to fail bailouts while monitoring threats to the consumers and the entire financial system. Some Dodd-Frank regulatory rules have yet to be written but President Obama vows not to go back on his efforts.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: After all we've been through, I don't believe that rolling back regulations on Wall Street will help the small businesswoman expand or the laid-off construction worker keep his home.
(END VIDEO CLIP)
VELSHI: There are plenty of critics out there who say Dodd-Frank, by the way, didn't go far enough and may have made big banks even more dangerous. One of those critics is Neal Barofsky. He was the special investigator general assigned to monitor TARP, the $700 billion bailout. He's since written, "Bailout: An Inside Account," of how Washington abandoned the main street while rescuing Wall Street.
Neil, look at the political donations that the two sides got. Look at President Obama's back in in 2008. These are from finance, insurance, and real estate industries. In 2008, he got more than McCain did. Then 2012, it collapsed. That's the purpose of collapse for President Obama. He's not getting the support of Wall Street on regulating anymore.
NEIL BAROFSKY, SENIOR FELLOW, NYU LAW SCHOOL: No, no. I mean, I think there's a couple reasons for this. One is that they looked at what Mitt Romney was offering, which was a complete teardown of Dodd- Frank.
BAROFSKY: And thought well, gee, that's -- that probably better for us than anything else. But the other thing, I think, very, very important for those numbers is the tax policy. And the fact that Barack Obama said that he was going to increase taxes on the wealthy which happen to be those big financial donors.
BAROFSKY: Whereas Romney was talking about lowering those taxes, so I think a lot of that is just people voting with their pocketbook.
VELSHI: So we don't -- well, this is a good point. Because when people said why did people -- why does corporate America seem upset that Barack Obama won, it could just be that there are people who are investors who are upset because it's going to cost them money. BAROFSKY: Rich guys want to keep their money.
VELSHI: Right. OK. So this may not be a sign of what it's going to do but let's talk about financial regulation. Americans still want to be safe from their financial institutions, and they don't fully feel that way. In fact they don't even partially feel safe. What's your sense? Are we -- are we able to withstand another financial crisis because while a lot of people say we won't go over that fiscal cliff, we're going to come close, we're going to come close again, with the debt limit again. Are we safe?
BAROFSKY: No, we still have banks that are now bigger than they were before the financial crisis. They still don't have adequate capital, that is their own money to shield them from significant losses. And we have government policy which is not doing the required things to make them safe or smaller so that if we go off the fiscal cliff or we fall off the European cliff, that there is a danger of major capital hits that could very easily put us back into a spiral financial crisis. So there is that real danger out there.
VELSHI: Dodd-Frank is a big, big piece of legislation. Mitt Romney was very clear, as you said, that he would get rid of it. Barack Obama is not clear on that. In fact he likes it. What's in there that keeps us safer and what needs to be fixed?
BAROFSKY: Well, I think one thing that's good is the Consumer Protection Bureau. Elizabeth Warren, now Senator-elect Elizabeth Warren --
VELSHI: Who would not have been running for office if the Senate Democrats -- the Senate Republicans had let her be nominated as the head of the Consumer Financial Protection Bureau, so now they've got her in the Senate. I don't know which one is worse for them.
BAROFSKY: You may have been right the first time with Senate Democrats because it was -- you know, Chris Dodd is the one who --
BAROFSKY: -- publicly said that she was unconfirmable. Probably did more damage than what the Republicans did. But at any event, that bureau is something that's done some really good work, is protecting consumers and having Elizabeth Warren in the Senate now to defend that institution from attacks from congressional audits and dependence on its funding is going to be a very important thing to watch. And that's one of the really good things of Dodd-Frank that came out, is that we have an agency now solely dedicated as a consumer protection. So that's definitely one of the good things.
VELSHI: Good to see you again, Neil. Thanks so much for being here.
BAROFSKY: Thank you for having me.
VELSHI: And thanks for joining the conversation this week on YOUR MONEY. We are here every Saturday 1:00 p.m. Eastern and Sunday 3:00 p.m. Find me on Facebook at Facebook.com/alivelshi. And tweet me, my handle is @AliVelshi.
As you know, don't tweet me and ask me this because I do actually read every message, and I am ready to debate you. Have a great weekend.