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Taxing the Rich; Greenspan on the Economy; The Tax Man Cometh; Getting Over Grover; Economic Storm Brewing; Buffett Talks Fiscal Cliff

Aired November 17, 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: This is the economic storm of our own making and it's threatening any chance of a sustained recovery.

I'm Ali Velshi. This is YOUR MONEY. I'm going to show you the damage that America could do itself if Washington allows us to go over the fiscal cliff.

According to studies, the average household could pay $3500 more in taxes. Unemployment in the U.S., which has come down to 7.9 percent, could head back up above 9 percent by this time next year. The U.S. could join Europe, which has been hit by a double-dip recession.

And according to a Pew Research/"Washington Post" poll, you clearly understand the danger of this fiscal cliff. Sixty-eight percent say that it will have a major effect on the economy, 21 percent say just a minor infect, only 2 percent say no effect. Ten percent said they don't know which is why you're watching this right now.

President Obama's solution to all of this is to make a deal centered around increasing taxes on the wealthy which will go a good part of the way to raising the $1.6 trillion in new revenue that he wants to raise over the next decade in his attempt to reduce the federal deficit. He wants to let the Bush era tax cuts that apply to what he calls the top 2 percent of earners expire.

Now if that happens, the top tax rate on income would jump from 36 percent to 39 percent. He likes to say that's where it was during the Clinton years. The second top rate would go from 33 percent to 36 percent.

Now this is what President Obama campaigned on. He's been vague about the specific numbers since his re-election, which suggests that he may compromise on the actual rates in order to get a deal.

There are other taxes as well that he's talking about. Taxes on investment gains would also go up. The capital gains tax could go from 15 percent to 20 percent and dividend taxes would go from 15 percent to the income tax rate. As I showed you, 39.6 percent.

Mitt Romney argues that this is would hurt individuals with savings and who own dividend paying stocks but the overwhelming majority of U.S. investment gains are enjoyed by the wealthy. This, again, would target that rich group that President Obama is talking about. But that's not all. The president also wants to raise an additional $500 billion by limiting the value of deductions that high-income households now enjoy. And he wants to use the so-called Buffett rule as a guide to future tax reform. The goal being to make sure that anyone making more than $1 million pays a minimum of 30 percent of their income in federal taxes regardless of what deductions and credits are otherwise available to them.

Now we'll hear more directly about that from Warren Buffett later in the show. But this show is more about politics than economics. Right now, remember that in 2010, President Obama vowed to eliminate the Bush tax cuts for the rich. Well, he folded back then. He allowed them to be renewed for another two years. But this time he campaigned on letting them expire and fresh off his election once again staring down a Republican-led House, the president is warning the wealthy that they will pay more.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: What I'm not going to do is to extend Bush tax cuts for the wealthiest 2 percent that we can't afford and according to economists will have the least positive impact on our economy.

(END VIDEO CLIP)

VELSHI: Now in return for the tax revenue, the president says he will negotiate with Congress on spending cuts. He claimed the cuts together with the revenues from raising taxes on the rich would reduce the federal deficit by $4 trillion over the next decade. So that's the president's plan. But without a compromise with the Republicans, America could be headed over the fiscal cliff.

Joining me is Mohamed El-Erian. He is the CEO at PIMCO, one of the world's largest investors in global bond.

Mohamed, welcome back to the show. You say taxes will and should go up for the wealthy. You predict Republicans, in your words, will "shout and scream," but ultimately they will go along with the tax hike for the sake of avoiding an economic disaster.

That was the president, Mohamed, not Republicans that blinked in 2010. Why do you think the Republicans will back down now?

MOHAMED EL-ERIAN, CEO, PIMCO: I think it's different this time around. First, nobody wants to go over the fiscal cliff. As you said, this implies a recession, it implies unemployment going up, and it implies us shooting ourselves in the foot at a time when the global environment is much more difficult. See what's happening in Europe, in the Middle East, in China.

Secondly, we just had an election, Ali. And the message -- one of the messages of the election was one of shared responsibility and fairer burden sharing. And it's a period in which the rich have done extremely well. Not just on the up side, but also in terms of being protected on the down side. Finally and importantly, the economic arguments against this while they will be valid at higher tax rates are not valid here. So if you look at the hand that president has, it is stronger than what the Republicans and I think both of them will want to seek some sort of compromise.

VELSHI: Sounds so reasonable. Let's bring Stephen Moore in. He's an editorial writer at the "Wall Street Journal." He's a conservative.

Stephen, do you agree? Are Republicans ready to strike a deal with the president if it means giving up the Bush tax cuts for the wealth? They have dug in on this.

STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: I don't know, Ali. I listen to this conversation. I feel like I'm living in France. I mean I just don't see any economic wisdom whatsoever in raising tax rates in an economy that is so fragile right now in a recovery that looks like it's losing steam. You saw what happened with the unemployment numbers this week. Now some of that was due to the storm. But this is not an economy that is kicking on all cylinders. It is barely kicking on one cylinder.

What I don't understand about what you and Mohamed are saying is how in the world do you get the economy to grow faster if you're going to raise taxes on businesses?

VELSHI: Well, I guess --

(CROSSTALK)

MOORE: You're going to raise taxes on investment --

VELSHI: I guess the issue, Steve -- the issue is --

MOORE: Yes.

VELSHI: Is compared to what? Right, so --

MOORE: Exactly.

VELSHI: In a world you don't want taxes on the rich to go up.

MOORE: Right.

VELSHI: Compared to the risk of a fiscal cliff, do you think Republicans in the House will look at that and say, we don't want to incur the wrath of the American people if we go over this fiscal cliff?

MOORE: Look, Mohamed may be right about the politics of this. What I want to talk about is the economics of it.

VELSHI: Sure. Sure.

MOORE: What I'm saying is it's insane. It is so dangerous to be talking about -- I mean explain this to me. How do you raise taxes on businesses and it frees up more jobs.

(CROSSTALK)

VELSHI: It is really insane to go from 36 percent to 39.6 percent? I would say going from 36 percent to 59.6 percent. I'm not an economists. I'm just saying is that really insane? And might you have heard in the president's comments in the last week the possibility of compromise? You know, he stopped talking about this 39.6 percent. I don't know if I'm the only one who noticed this.

MOORE: What we want to do is lower our tax rates to be more competitive, not raise them. I mean that -- I just don't see any economic wisdom in it. I mean I covered this in the editorial in the "Wall Street Journal" this week.

VELSHI: Yes.

MOORE: I mean, the period is when the economy has really grown is when we've been cutting tax rates. Here's the one last point if I may.

VELSHI: Yes.

MOORE: I listen to that whole press conference the president gave the other day.

VELSHI: Yes.

MOORE: And here's what struck me. I didn't hear one time talk about cutting government spending.

VELSHI: Well, you did. No, no, no. Come on.

(CROSSTALK)

MOORE: No.

VELSHI: Come on. Then you must have been --

MOORE: He said where's the deal? I mean --

VELSHI: You went to the soda machine if you didn't hear it. I agree with you.

MOORE: What did he say?

VELSHI: He was vague and he was a little unspecific. But he did say it's time to take a hard look at entitlements.

MOORE: Right.

VELSHI: Take a hard look at spending. I would agree with the criticism --

(CROSSTALK)

MOORE: He's never put anything on the table.

VELSHI: Yes.

MOORE: Right. I mean he's never put anything -- and this has been four years of this president. Where -- what spending cuts? They're not in his budget. They've never been in the budget.

VELSHI: Right.

MOORE: Here we are opening up a new session. I'm suspicious that those cuts are ever going to come.

VELSHI: Mohamed, are you suspicious that they're going to come? I kind of get, like, everybody in the world now gets this issue. I imagine I could go down to the corner store and somebody could decide something to avert the fiscal cliff because they get that taxes may have to go up on the rich. Whether or not you agree with it. And they get that spending has to be cut.

EL-ERIAN: So I think they're going to come. I think we will see reforms both on the tax side, which is base and rates, on the expenditure side. A couple of issues. You say we like France is like those who say we like Greece. We're neither like France. We're neither like Greece. We're the United States of America.

And I agree with Stephen that we need to invest in our growth engines. But that is going to materialize if we deal with our fundamental issues. Our fundamental issues is not a tax rate of 36 or 39. Our fundamental issue is that we haven't invested enough in our people, in our class, in our equipment and in our infrastructure. And we need private and public partnerships.

So it's critical, and Stephen is right to raise it. It's critical that this fiscal cliff debate not crowd out the issue that we as a nation have three distinct problems. Too much debt, too little growth, and too dysfunctional political system. And we need to address all three in a holistic manner. I do not think that the difference between high growth and low growth is a tax rate of 36 or 39 percent on the rate. It is much more whether we are enabling, enabling our citizens and our companies to produce and to prosper.

VELSHI: I think --

EL-ERIAN: And that takes a fundamental reform.

VELSHI: I think we're actually agreeing. Infrastructure, private- public partnerships, too much debt, too little growth is what the problem is. Unfortunately if we don't get a handle on that, then in 10 years we might be sitting here thinking that we're a little more like Greece.

OK, guys, good to talk to you.

MOORE: I don't want us to be -- I don't know if I like us to be Greece or France. Believe me. VELSHI: We all agree on that point, too. Good to see both of you. Mohamed El-Erian, nice to see you. CEO of PIMCO. Stephen Moore is an editorial writer with the "Wall Street Journal."

We'll be right back. Mohamed and Stephen, thank you for that.

Alan Greenspan ended a nearly two-decade run as Federal Reserve chairman in January of 2006. The economy was strong but the seeds for the 2008 financial meltdown had been planted.

(BEGIN VIDEO CLIP)

ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: The actual currency in 2008 surprised me with respect to the size of what the problem was.

(END VIDEO CLIP)

VELSHI: So how would Alan Greenspan handle the current threat of an economic storm that threatens America today? The former Fed chairman speaks to me about the fiscal cliff, the Bush tax cuts and why he wouldn't let the U.S. slip into a recession to solve America's long- term debt problems.

A rare interview with Alan Greenspan up next.

(COMMERCIAL BREAK)

VELSHI: Alan Greenspan had a front row seat to some of the biggest economic events of the last 25 years. When he was appointed chairman of the U.S. Federal Reserve, it was 1987. Ronald Reagan was in the White House.

Over 18 years Greenspan led the central bank of the world's largest economy through good times and bad. Now six years after he's left the job, his successor Ben Bernanke is warning of the danger of plunging over the fiscal cliff.

I've been warning you about the catastrophic effects that could have on America's already fragile recovery. But some say that it's fear mongering.

I spoke with Alan Greenspan who was in Washington at a Peterson Foundation event to discuss the fiscal cliff and I asked him point blank, do you believe the U.S. can go in a recession as a result of the fiscal cliff?

(BEGIN VIDEOTAPE)

GREENSPAN: Most certainly. But remember, all the forecasts come off econometric models, which didn't catch the 2008 crisis. And so you have to be very careful about using them to evaluate this type of problem.

VELSHI: The last time Washington faced the expiration of the Bush era tax cuts back in 2010, you said in interviews they should follow the law and let them expire for everyone. Now putting aside the other parts of the fiscal cliff, do you still feel that all Americans should see their income tax rates rise?

GREENSPAN: I say that this crisis is going to be extraordinarily difficult to resolve. In other words, the crisis I'm referring to is not the fiscal cliff crisis but the broad crisis with respect to debt. We have had a exorable rise in the rate of spending on so-called social benefits. And as I mentioned before, this is both Republican and Democrat and neither one of them get a hold on this.

But what the data very clearly shows is that as social benefits rise, the savings, the domestic savings of the American economy declines. And that is basically the root source of funding for capital investment and capital investment is where productivity comes from and productivity is where economic growth comes from.

So unless and until we recognize that we got to slow the pace and in fact reduce the level of benefits to allow savings to come through, that will create the type of economic growth, which will enable us to fund these social benefits. We're running into a stonewall here in which the more social benefits we have which we don't contain, the lower the rate of savings, lower the rate of growth, and a lesser quantity of real resources to fund the benefits.

This is obviously an unsustainable situation. And the sooner we come to grips with it the better. And I raised the issue of allowing the Bush tax cuts to rescind on schedule was not that I want taxes to go up. I think it's a terrible idea. Relative to what? I mean if we don't close this deficit fairly quickly, we are in real trouble.

Remember, it's always easier to cut taxes politically than it is to cut spending. So if you have to allow a significant rise in taxes to essentially cut a deal on a major benefit cut, that's a good deal for me because it's always easier in the future to cut -- politically to cut taxes than it is to cut spending.

VELSHI: So let me ask you this. If we can get to that 3 percent growth to 4 percent and beyond, then you've got -- you're seeing it becomes a virtuous cycle. Can that happen? Is there -- would the immediate spending cuts that we are looking at now help get us there?

GREENSPAN: Look, IMF studies show definitively that if you cut spending in a situation like this, it does lower the GDP but nowhere near the amount and increase in taxes lowers the rate of increase in GDP. So that I think if we have to have a moderate recession to solve this huge fiscal problem that's if front of us, I think there is a very small price to pay. Because we're not going to get out of this thing without paying it.

There is a presumption here that we have a whole schedule of economic policies, which can just basically solve the problems compared to a normal situation. It is not. This is an extraordinarily unprecedented situation and unless and until we reign in the spending growth, this economy can't function.

(END VIDEOTAPE)

VELSHI: The economy can't function. So he's saying a little recession is better than the idea of raising taxes on everyone. A fascinating conversation with the former Fed chairman. You can hear more of it on CNNmoney.com.

This country's fiscal house needs to be put in order. The president says you do it by taxing the rich. So does Warren Buffett.

Coming up next why the taxman must cometh for all of us.

(COMMERCIAL BREAK)

VELSHI: It was a key theme of the president's re-election campaign. The rich need to pay more and the middle class must be spared. In fact, the president made the case again this week.

(BEGIN VIDEO CLIP)

OBAMA: If Congress fails to act by the end of this year, everybody's taxes will automatically go up. Including the 98 percent of Americans who make less than $250,000 a year. And the 97 percent of small businesses who earn less than $250,000 a year. That doesn't make sense. Our economy can't afford that right now.

(END VIDEO CLIP)

VELSHI: Now arguably talk like that separating the rich from everybody else got the president another four years. So now I'm going to take a politically unpopular position. The middle class is not paying its share. Yes, you. Your taxes must rise.

Now before you throw your remote at the TV set, just hear me out. Our debt is on an unsustainable path. The nonpartisan Congressional Budget Office says that if we avoid the fiscal cliff and nothing changes -- take a look at this, this is the relationship between debt and GDP -- U.S. debt will be the equivalent of 93 percent of GDP by 2022, that's 10 years from now, and nearly 200 percent, double. Everything that we do in this economy by 2037.

Basically, we could end up like Greece. Now to fix it, we need more revenue. Not just from the top 2 percent. Your politicians have not told you the truth about this. So I will. Soaking the rich while quite possibly necessary simply doesn't provide enough revenue to close our massive budget gap. The middle class is where the money is economically speaking. It's where most of the money should be, by the way.

Even if you confiscated, and I am not suggesting this, but even if you confiscated 100 percent of the income of families making above 250,000 a year, you'd only get about $2 trillion. We need double that to make a serious dent in the debt. The middle class cannot be exempt if we're going to dig out of this hole.

Now letting the Bush tax cuts expire for everyone would raise over $4 trillion in revenue over the next decade. Putting us on a more sustainable path.

I know we're in a fragile economy right now. We're in a fragile recovery. And raising taxes on the middle class could hurt. Could even mean a brief recession. But I'm talking about putting the communal interests over your self-interests.

Right now federal income taxes for middle class families are near historic lows. The Tax Policy Center estimates that a median income family of four has an effective tax rate of just 5.6 percent. That is the lowest -- the lowest since the 1950s.

I'm suggesting -- I'm not suggesting a massive tax increase. But there's definitely room for taxes to rise and our collective future may well depend on it.

Joining me now is Robert Reich, he's a professor of public policy at UC Berkeley and a former secretary of labor under President Clinton. He's also the author of the book "Beyond Outrage: What Has Gone Wrong with Our Economy and Our Democracy and How to Fix It."

Bob, good to see you. I say that we need to raise --

ROBERT REICH, PROFESSOR, UNIVERSITY OF CALIFORNIA, BERKELEY: Good to see you, Ali.

VELSHI: -- taxes on the middle class for the good of the nation.

REICH: Yes, that's right.

VELSHI: Tell me why I'm wrong.

REICH: I just heard you, with great respect -- I have great respect for you, Ali.

VELSHI: Thank you, sir.

REICH: But you're dead wrong. I think you're wrong on a number of counts. Number one, the middle class -- I mean the median income in America right now is about $52,000 per worker. Family income is about $55,000. That's been declining. I mean the middle class actually is 8 percent, (INAUDIBLE) per inflation is 8 percent less, the typical middle class family 8 percent lower wages than it had in the year 2000.

You know, and it's been paying more taxes, not less taxes if you consider sales taxes, which have gone up dramatically. You consider Social Security taxes which over the last 20 years have continued to rise. You consider property taxes.

I mean middle class is paying out their ears with regard to taxes. And finally, the middle class is critical to a recovery. I mean that's where the demand in the economy comes from. They are the job creators because it's their spending that actually creates incentives for businesses to expand and create more jobs. You don't want to put an added tax burden on the middle class.

VELSHI: Well, look, lots of liberals want to protect the most vulnerable in society by insuring unemployment benefits and food stamps and housing subsidies and heating assistance. But if you exempt the middle class from paying more for these things, are you not setting in motion the ultimate demise of that safety net because there won't be enough money to pay for it if we don't somehow get economic growth?

REICH: No. First of all, most middle class people don't take advantage of the programs, the safety net programs you're talking about because most middle class people --

VELSHI: Right.

REICH: You know, if they're earning $50,000, $55,000 a family, they don't need those safety nets. Those safety nets are in case somebody actually falls out of the middle class. But more importantly, the wealthy in this country, the top 2 percent, 3 percent have never been as wealthy. They're now taking home, if you just look at the top 1 percent, over 20 percent of total income.

So look at the top 5 percent, they're taking home close to 28 to 30 percent of total income. That's where the money is. They're not spending it. It's not as if the economy needs their spending to keep going because to be rich means you've already got most of what you want. I mean they're the ones who save. And their savings ordinarily are good for the economy.

But in a global economy, their savings go around the world to wherever they can get the highest return. And that's where we ought to be taxing. Their tax rates have dramatically declined. I mean, you know, before 1981 --

VELSHI: Right.

REICH: -- the top marginal tax rate in this country was 70 percent.

VELSHI: Right. Right.

REICH: And now it's 35 percent.

VELSHI: No, I hear you.

REICH: And if you look at -- but wait a minute. But this is important, Ali.

VELSHI: Yes.

REICH: Because a lot of wealthy people actually pay the capital gains rate of 15 percent.

VELSHI: Right.

REICH: On most of what most of their income. So that's where we ought to raise taxes.

VELSHI: But, Bob, I'm not arguing, I'm not arguing that we should raise taxes on the middle class instead of raising it on the rich. I'm saying, and I'm saying it because President Obama doesn't have to run again in a re-election, doesn't give him the perfect opportunity to level with the American people and tell them that going after the rich alone simply won't do it in terms of revenues.

REICH: Well, you're making a bugaboo out of the deficit. And I think the most important thing in the foreseeable future is to get jobs back, to get the economy growing. We don't want to raise taxes on middle class. We don't want to cut government spending until the economy is really back to at least 6 percent unemployment or less, at least 3 percent growth or more.

VELSHI: Yes.

REICH: I mean it would be -- it would be --

VELSHI: Fair enough.

REICH: Ridiculous.

VELSHI: Bob Reich, always great to see you. I have great respect for you as well, you know that, right?

REICH: I do. Thank you, Ali.

VELSHI: Always a pleasure to see you. Robert Reich is the former secretary of labor.

REICH: Thank you.

VELSHI: Republicans cannot compromise on raising taxes. Why? Because of this man. Most Republicans in Congress have signed a pledge to never raise taxes or else. But with the fiscal cliff looming, could it be over for Grover? I'll introduce you to two GOP congressmen who are willing to break the pledge next.

(COMMERCIAL BREAK)

VELSHI: The most immediate threat facing the country is the fiscal cliff and the election results did nothing to change the balance of power that we've seen over the last two years. A Democratic president calling for taxes on the richest Americans to rise is staring down a Republican-controlled House of Representatives that opposes any increasing taxes whatsoever. It's a showdown that demands compromise. All parties need to give something up for the greater good. But there is a problem. A big one. Almost all the Republicans in Congress have signed a pledge not to vote for any net tax increases under any circumstances.

It's the pledge authored by Grover Norquist, founder and president of Americans for Tax Reform and its states, quote, "One, oppose any and all efforts to increase the marginal income tax rate for individuals and businesses. And, two, oppose any net reduction or elimination of deductions and credits unless match dollar for dollar by further reducing tax rates."

I'm joined now by Representative Scott Rigell and Steve LaTourette.

Both of you signed the Norquist pledge when you first came into office like most Republicans but now have now turned your backs on it. You both have your own justification. But you're essentially saying that our fiscal problems are too large and too dangerous to not consider every option.

Thank you for being with us, gentlemen.

Congressman Rigell, famed investor and supporter of President Obama's plan to raise taxes, Warren Buffett only made one political donation to a Republican this season. And it was to you.

(BEGIN VIDEO CLIP) ' WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Even though he had signed that Grover Norquist pledge about taxes, he decided that it was more important his pledge to the constitution than any pledge to Grover Norquist.

UNIDENTIFIED REPORTER: So he disavowed it?

BUFFETT: He disavowed it. I admire that a lot. I admire him. So I sent him a check.

(END VIDEO CLIP)

VELSHI: All right. We'll hear more from Warren Buffett later in the show. But Congressman Rigell, did your decision to break from the Taxpayer Protection Pledge damage your campaign for re-election in terms of fundraising and support from big money donors?

REP. SCOTT RIGELL (R), VIRGINIA: Well, Ali, no, it did not. The second district sent a businessman to Washington. And I go where the numbers lead me. And a careful analysis of our budget and trying to reconcile that with the Americans for Tax Reform Pledge led me to the clear decision that the pledge itself is an impediment to meaningful tax reform and also our tax code now presently yields just under 17 percent.

And we haven't run our country on that yield since 1959. And that's a long time ago before Medicare and Medicaid were even on the table. So revenues have to come up. Expenses have to come down. And I'm asking our friends on the other side of the aisle to help us on the expense side.

VELSHI: Congressman LaTourette, you decided not to seek another term in the House specifically because of that polarizing climate around the fiscal crisis.

I want to just read our viewers what you wrote on Monday. "We have a paralyzing gridlock in Washington even as we stair into the jaws of incredibly serious challenges as a nation. It is time for Republican soul searching. It's time for grassroots Republicans all across the country to recognize that they have been manipulated by the special interests."

Congressman, would that kind of soul searching be a priority anymore for those in Congress who now live in this perpetual campaign mode? It is difficult for you guys because you are constantly campaigning. REP. STEVE LATOURETTE (R), OHIO: Yes, you know, I signed the Norquist pledge back in 1994, October 1994. 18 years ago. And it's a different world. And so the pressures that our colleagues face are different than the ones that I've faced in the '90s with the explosion of the Internet and quite frankly in 24-hour cable news programs.

And it is a constant campaign. But I think that that poll that you cited, we also commissioned Frank Luntz to do a survey and the numbers are about the same. And people, you know, people will make a mistake going forward saying that if the president says yes I have a mandate to do what I want or Republicans say it's my mandate we got re- elected, they sent the same bunch back to Washington. So it looks like they voted for gridlock. That if you go underneath the numbers, what they voted for is they want both sides to work this thing out.

VELSHI: Congressman Rigell, this is an interesting point. You made it earlier. And that is that compromise does require everybody to give up something. The problem with the Republican position is that it was such a hard line to not budge on. So I suppose Republicans -- Democrats can move both on tax rates and on expenditures. But in a post election survey that was conducted by Pew Research concerning the fiscal cliff, 53 percent of respondents Republicans in Congress would be more to blame if we went over it. 29 percent placing blame on President Obama.

So at this point do you think if some of your colleagues on the Republican side were to disavow the pledge, the public would hold Republicans less responsible for anything that goes wrong with the economy?

RIGELL: As you look at the total package, what has to happen, we've got to address our fiscal situation. I appreciate Congressman LaTourette's emphasis on this because while we're facing a fiscal cliff here and it's a very serious one, the real problem, the underlying problem is the 700 point delta that we have between revenues and expenditures that threatens the foundation of our country.

VELSHI: Right.

Let me bring in Congressman LaTourette on that.

You're OK with raising taxes to fix the problem. But how far are you willing to go? Would you turn down the kind of budget slashes that Paul Ryan wants to make? Or are you just budging on the tax side?

LATOURETTE: Well, no. Here's the deal. And the number that I would throw back to you is in the survey that we included, 35 percent of Republicans said they would forgive their member of Congress, Republican member of Congress if they voted to increase tax rates as long as the increase revenue went to solve the problem, not to go to more spending.

And I think that that's the key. But I -- you know, I agree with Scott. You know, the president's sort of made fun of mitt Romney's five-point plan. But I tell you what, if the Democrats are willing to give on tax simplification which has some increases for some people, not in the marginal rates, but some people will pay more taxes, and they then bring a serious proposal to the table on entitlement reform, there's a deal that can be had. And I think both the president and Speaker Boehner in their public statements have indicated that they're willing to give that a shot.

VELSHI: Very good, gentlemen. Thank you very much for joining us, both of you. Both of you, it's good to see you.

RIGELL: Thank you.

VELSHI: Thank you for your work on behalf of the American people.

Representatives Steve LaTourette from Ohio and Representative Schott Rigell of Virginia.

Well, even if we avoid flying off the fiscal cliff, economic slowdowns in Europe and Asia could still push this economy over the edge. What president Obama can do in his second term next.

(COMMERCIAL BREAK)

VELSHI: President Obama confronted some major foreign policy challenges during his first term. But he is bound to be dogged by them in the second term. First, a sovereign crisis that has led to a double-dip recession in Europe. The Eurozone fell back into recession in the third quarter. That is the second time since the financial crisis began in 2009. Modest growth from nations like France and Germany couldn't make up for a slump across Europe. Unemployment has climbed as high as 25 percent. In countries like Spain and Greece. That's the official unemployment rate.

President Obama will need to focus on this coming storm as it threatens America's shores for the U.S. stakes are too high not to get involved. Now the U.S. and the EU trade $700 billion in goods and services a year, making it the world's biggest trading relationship. What's more, that financial crisis in Europe has resulted in an economic slowdown in Asia which takes us to another foreign policy challenge which is China.

Trade between the world's two largest economies grew to $531 billion in 2011. But economic output in China has fallen to just 7 percent. Right when U.S. firms like GM and Caterpillar are expanding their presence there.

President Obama will need to mend relations with the new leadership emerging in Beijing. That after a wave of China bashing during the election campaign in which Americans accuse China of stealing American jobs through currency manipulation or outright theft of intellectual property.

Closer to home, the president will have to address ties with America's immediate neighbors, Canada and Mexico. Last year the Obama administration blocked an extension to the Keystone Excel pipeline that would help deliver oil from Canada's tar sands, the oil sands, the highly controversial but productive sands all the way down to the Gulf of Mexico. Largely on environmental grounds.

Now the State Department is reviewing the altered pipeline route. The pipeline will likely get approval and get built. But either way, the energy relationship between the U.S. and Canada will continue to grow.

And while President Obama meets with his newly elected Mexican counterpart later this month, a major topic will no doubt be Obama's goal for immigration reform. It's a domestic issue with regional economic implications for both the United States and Mexico.

So President Obama has got a lot to think about.

Joining me now is Fareed Zakaria. He is host of the opotamus "FAREED ZAKARIA GPS."

Fareed, this is your specialty. You understand the economy and you understand foreign affairs. Let's talk about Europe first of all. During the campaign you would get the impression that China was the biggest economic threat to the United States. But if Europe doesn't get its act together, the trade between Europe and the U.S. is greater. Should the president be worrying about that more?

FAREED ZAKARIA, HOST, FAREED ZAKARIA GPS: He's worrying about it. Look, there is no danger of the kind of Lehman like collapse in Europe because the European Central Bank finally has essentially copied the Federal Reserve and has provided liquidity. So no crisis, no crash.

What instead has happened is the slow motion crisis, which is slow growth because Europe has embraced austerity. They've cut a lot of government spending. They've raised taxes. They closed budget deficits but the result is its put the economy is in a tailspin. Obama can't do much, though, because welcome to the post-American war.

VELSHI: Right.

ZAKARIA: The Europeans don't want to hear anything from the Americans. Tim Geithner, the secretary of treasury, tried to give them a few lectures about austerity. They said thank you but no thanks. We don't need to hear from you.

This is the first international economic crisis, the crisis of the European Union, in which the United States is not a central player. Since really the 1920s. And it is a new world because the Europeans think hey, we're big boys.

The EU economy, as you know, Ali, is larger than the U.S. economy.

VELSHI: Right.

ZAKARIA: So I think what's going to happen is President Obama is going to watch very anxiously because as you say it does have a huge impact. But I don't think there is much he can do about it.

VELSHI: Right. So that's why they don't talk about it as much. China is complicated. In Europe, we're mostly worried about the economy. The foreign policy issues are not as serious n China, there are a number of issues. One are the economic issues that I talked about. Low wages, currency, manipulation and intellectual property theft and those thins. And then there is the other issue and that is that China and the U.S. do not see eye-to-eye on a lot of the major issues that the world is facing right now.

ZAKARIA: You're exactly right. The economic issues, I think fundamentally can be dealt with. I think that as often happens when you deal with trade related things in a campaign, everything that is said during the campaign or of an American presidential campaign should be thrown into the garbage can.

VELSHI: Right. And the Chinese probably understand that.

ZAKARIA: One hopes that the Chinese are sophisticated enough. But you know the system even in China is becoming more open and more transparent. So maybe the leaders understand. But the people on the street don't.

VELSHI: Right.

ZAKARIA: And they listen to Mitt Romney. And that has an effect. If you watch the -- you know, the Twitter and social media phenomenon in China, they responded very negatively to the American campaign. They said China has been turned into the scapegoat.

VELSHI: Let's talk quickly about what's going on in the Middle East. This situation is heating up increasingly between Israel and the leadership in Gaza. What's your sense of how this affects what President Obama has to do?

ZAKARIA: Well, look, let's be clear. It's not really a war. Israel will win if there is -- it's a very lopsided war. On the one hand you have the powerful military machine in the Middle East, on the other hand you have, you know, the inhabitants of Gaza who have a few rockets which have never been able to really do much damage.

The question is, that's a tactical move the Israelis have undertaken. Understandable because of the rocket fire they faced. But what's the long-term strategy? What are they going to do about Gaza? They have tried to economically choke it off, it didn't work. They have tried this military operation once before including a ground invasion. Didn't really work.

Where are they going here? And that's where the United States can be helpful.

VELSHI: Fareed Zakaria, always a pleasure to see you. Thanks for joining us.

ZAKARIA: Pleasure, Ali.

VELSHI: One of the richest men in the world says, I may have to go dress shopping in a few years. Maybe he'll offer up a few of his $46 billion to help me get something nice. Warren Buffett is on the show next.

(COMMERCIAL BREAK)

VELSHI: When Warren Buffett talks, Wall Street listens, and so does Washington, and so do some of you.

This week CNN's Poppy Harlow scored an exclusive interview with Warren Buffett.

Poppy, Warren was -- he has been outspoken in the past particularly about taxes and what the rich should pay.

POPPY HARLOW, CNN CORRESPONDENT: Right.

VELSHI: What is he saying now that it's all on the front burner with the fiscal cliff?

HARLOW: Yes, I mean, top of mind is the fiscal cliff and I was sort of shocked by his answer. You'll hear it in a minute but, you know, he really wants to see President Obama, Ali, take an incredibly hard line in these negotiations with Republicans.

VELSHI: Right.

HARLOW: Doesn't want to see him back down. And frankly, he doesn't think closing loopholes, even a lot of them, is enough. He wants to see higher taxes, period. Here's his take.

(BEGIN VIDEO CLIP)

BUFFETT: We need to get our revenue up to about 19 percent of GDP. We need to get our expenses down to 21 or 21.5 percent of GDP. And everyone knows that. And we're a long way from 19 and we're a long way from 21.5 so it's going to take significant action on both sides.

And $1.6 trillion happens to be 1 percent of GDP. So you're just mulling at 1 percentage point by that.

HARLOW: Right.

BUFFETT: We'll need that much revenue. Now we'll need to cut expenditures significantly. Very significantly, too.

HARLOW: What is the likelihood of the United States falling into a recession if we go over the cliff?

BUFFETT: I don't think -- I don't think that's going to happen. I think that if we go past January 1st, I don't know whether it will be January 10th or February 1st, but we're not going to permanently cripple ourselves because 535 people can't get along.

HARLOW: Even if we go over for two months? Does that -- does that dip this economy back into a recession?

BUFFETT: I don't think so.

(END VIDEOTAPE) VELSHI: So ultimately, whether it's Greenspan or whether it's Warren Buffett, the ultimate discussion about the economy has to lead to growth and jobs.

HARLOW: Yes. Yes.

VELSHI: Did he say anything about that?

HARLOW: Of course he did. I mean we post your question, you know, Ali, you've been hammering away at this 12 million jobs issue. So we talked to him about jobs. And you know, it's interesting because Buffett is more optimistic than most people. And he's ever bullish on the American economy, but I want you to hear our exchange when it comes to creating a lot of jobs in the next four years.

(BEGIN VIDEOTAPE)

HARLOW: Both President Obama and Governor Romney's camps put out there that their plans could feasibly create 12 million jobs over the next four years. My colleague Ali Velshi has been hammering away at this, saying, you know, that math really just doesn't add up. It's very tough to do that and see that happening.

Do you think that's at all realistic?

BUFFETT: Well, people toss around numbers in campaigns. It's silly to say this thing will create two billion jobs or this will cost 800,000 jobs. Those people don't know. I mean -- it's great to get -- it'll get them in the papers, it'll get them on television, but what will create jobs in this country are the same things that have created for the last 200-plus years. I mean, that the American economy works very well. We went through one of the great financial panics of all time.

And we have been coming back from that, and we'll continue to come back from that. But it doesn't happen in a week or a month when you have this sort of cataclysmic panic that we had, really, particularly in the -- in the financial world. But it was a housing induced bubbling that popped.

HARLOW: Looking at the economy as it stands right now and looking at what we're facing, do you think it's at all feasible to get 12 million new jobs created in this country in the next four years?

BUFFETT: I don't think it's impossible, but I don't think there's any magic wand to do it. But I don't think it's impossible. That would be -- that would be 250,000 a month.

HARLOW: A month.

BUFFETT: And we have had periods when that's happened. We are coming back, so 12 million sounds like a stretch to me, but I don't think it's impossible. The economy is getting better.

(END VIDEO CLIP) HARLOW: Not impossible, but a stretch. And I asked him, Ali, do you think it's irresponsible for candidates to make promises like this? And he told me, you know, people in campaigns say a lot of things. Of course, they're campaigning to be president. But I know, Ali, you're going to wear a dress if it happens?

VELSHI: Right.

HARLOW: So I'm going to take you dress shopping in Omaha and maybe Warren will come.

VELSHI: It's not a punishment. If it happens and I have to wear a dress because somebody created 12 million jobs, it will be a happy occasion.

(LAUGHTER)

Not for those who have to see me, but it'll be a happy occasion.

HARLOW: We have it together.

(CROSSTALK)

VELSHI: Great conversation. We continue the rest of this conversation --

HARLOW: CNNMoney.com.

VELSHI: Very good. It's a really good and worthwhile conversation, particularly to those of you who are investors who want to know how Warren Buffett sees the financial future of this country.

Well, he said it. Rich people's taxes are going up but I say you're actually next. My closing argument after the break.

(COMMERCIAL BREAK)

VELSHI: Well, you heard it from Warren Buffett. Taxes are going up for rich. But that alone won't be enough to tackle our monstrous debt. We cannot afford to keep the Bush tax cuts for everyone, the math just doesn't add up. But who else gets hit.

Take a look in the mirror. Allowing the tax cuts to expire for everyone, unpalatable and unpopular as that would be, would slow growth in the short term, but the danger posed by doing nothing about the deficit is, in the long term, much greater. If you don't agree with me, find me at Facebook, my Facebook, at facebook.com/Alivelshi or tweet me, my handle is @AliVelshi. I'm ready to debate.

Thanks for joining the conversation this week on YOUR MONEY. We're here every Saturday, 1:00 p.m. Eastern and Sunday at 3:00 p.m. Have a great weekend.