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Quest Means Business
Fiscal Cliff: Final Hours; Fiscal Cliff Deadline Day; Fiscal Cliff Global Impact; Market Reaction; Fiscal Cliff Fallout; Fight Not Over; US Market Effects
Aired December 31, 2012 - 14:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST: It's in sight, but it's not done yet. President Obama just said a deal on the fiscal cliff. He said it is close.
They might fix the cliff, but can they fix the US Congress? Tonight, one senator tells me the divisions are "dangerous."
(BEGIN VIDEO CLIP)
SEN. CHRIS COONS (D), DELAWARE: It particularly concerns me about the message that we are sending with how difficult it is for us to reach consensus on these simple, mathematical realities.
(END VIDEO CLIP)
QUEST: And a warning from Brussels: the EU's top economic official, Olli Rehn, tells us tonight the risk to Europe from the cliff is very real.
I'm Richard Quest. I mean business.
Good evening and welcome to this special edition of QUEST MEANS BUSINESS as we count down the remaining ten hours until the fiscal cliff. Tonight on this program, we'll be taking you deep inside the cliff itself, a possible fall, and the inevitable global fallout.
It is a special edition of the program, and in doing so, we take the opportunity at this hour to wish a happy New Year to viewers in Pakistan and regions of Kazakhstan, Turkmenistan, and Uzbekistan and Tadzhikistan, who've just gone through their 2013 top of the hour.
Maybe the top of the hour, we've just heard from Barack Obama, who says a deal to stop tax hikes is in sight, but it's a big deal and it's a big deal but it's not done yet.
He was speaking a few moments ago to an audience of middle-class families in Washington, and the president said a deal to stop their taxes going up at midnight, well, he said it was almost complete, and then he blamed Congress for more not being achieved.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: My preference would have been to solve all these problems in the context of a larger agreement, a bigger deal, a grand bargain, whatever you want to call it, that solves our deficit problems in a balanced and responsible way.
It doesn't just deal with the taxes, but deals with the spending in a balanced way so that we can put all this behind is and just focus in on growing our economy. But with this congress, that was obviously a little too much to hope for at this time.
(LAUGHTER)
(END VIDEO CLIP)
QUEST: Now, here's where things stand on the negotiations so far.
(RINGS BELL)
QUEST: With hours to go, sources are telling CNN that the talks continue, significant progress was made earlier in the day. There's a division on the possible delay to the automatic spending cuts. Democrats want to push the cuts back by a year, Republicans only want to wait three months.
Democrats have offered a compromise on tax cuts. They're now willing to give tax breaks to people on $450,000 from President Obama's initial offer of $250,000, a quarter of a million. However, one Senate Democrat says he and other progressives in his party are against that compromise.
Republicans withheld -- we don't need too much detail on all of this. It is the -- minutia, the weeds, if you like, of the legislative process. If no deal is reached, taxes on almost every American will go up, spending cuts will follow. Let's put it into perspective. Go straight to Washington.
Lisa Desjardins is on Capitol Hill for us. You described it -- I'm not telling tales out of school -- you described it as a "mess." I think that was a -- probably a charitable definition, and as we go through the spending cuts and the tax rises, having heard the president, is it your gut feeling anything happens tonight or in time for tomorrow?
LISA DESJARDINS, CNN RADIO CAPITOL HILL CORRESPONDENT: I think there is definitely a chance at that, and I wish I could put a number on it, give you a percentage chance, but to be honest, Richard, I don't think anyone knows.
And I can tell you what it's come down to at this exact moment, and I won't get too much into the minutia, but all of this fiscal cliff, trillions of dollars at stake, certainly the fate of this country and Europe, potentially, and right now, what we're hearing, Richard, is it's come down to $24 billion. That's the amount of budget cuts that would hit in the next two months.
And as you say, Democrats and Republicans have been going back and forth over whether to postpone those cuts or try and reduce them. Well, now we understand both sides are looking at two months of trying to replace those budget cuts for the American government. That would cost $24 billion. They're just trying to find where they can get that $24 billion somewhere else.
So, short of, say, a millionaire -- I know Donald Trump doesn't have that kind of money -- stepping up and helping out, they're really -- they literally are telling us that they're looking under cushions to try and find $24 billion.
Which is amazing when you think about it, because the federal government spent about $4 trillion this year. Out of all that money, this $24 billion that they're trying to find, it's less than half of a percent.
QUEST: Right. And they're certainly not going to find it in --
(CROSSTALK)
DESJARDINS: Or a little bit more, rather.
QUEST: -- they're certainly not going to find it in my wallet. But the fact is, even if they get through this, it is, at best, delaying, and there are other cuts and tax rises in the package of the various policies, which will take effect. So, has anybody quantified what the medium-term effect will be?
DESJARDINS: No. And I think because we still don't know exactly what this deal will look like. I think if you're looking in the medium-term, we may get a reprieve, because they're planning to extend most of the current tax rates for most Americans.
It looks like just people making somewhat under $0.5 million or so would see their taxes go up. That's where they are on that. I think -- we don't expect any large economic effect from that. As for the spending cuts, it looks like they're trying to at least delay them or replace them. Again, no big effect.
But I think, Richard, the thing to watch here, and I think what Wall Street will watch, is Congress just punting all of these issues yet again, just a few months down the road, still not making the big decisions.
And by the way, Richard, watch for this: I'm wondering if this entire deal will actually add to the US deficit, or will it save any money? Remember, this whole exercise came to be because they were trying to save money, trying to escape the debt crisis that we've seen in Europe.
QUEST: All right. What -- I've got two words for you, Lisa, besides Happy New Year -- that's three, actually -- but I have two --
DESJARDINS: I'm intrigued.
QUEST: I've got two: debt ceiling. Because even if we get through this, we know the US has hit the debt ceiling, and we know that they've -- and already Geithner is doing extraordinary measures. Are we going to be back within two months?
DESJARDINS: Yes. I can give you one word to your two words, debt ceiling. My one word, yes. We will be back in two months, and not just for the debt ceiling, but also in March is when the US current spending bill runs out. That's the spending bill that funnels the money to the agencies.
All the government agencies are only funded through March, and in March we will yet again hit a potential government shutdown, either because of the debt ceiling, which I think will happen in February, or because of that spending bill running out. I know that's a lot to keep track of, but basically, what we're setting ourselves up for is a very cold spring, potentially, here in Washington.
QUEST: Lisa Desjardins. Excellent to have you covering this story for us tonight on Capitol Hill. Very much appreciate your insight and experience --
DESJARDINS: My pleasure.
QUEST: -- in bringing it to us tonight. Fascinating stuff. Now, the potential ramifications for the global economy are simply huge. That's one of the reasons that, of course, it's been so urgent, and so many governments around the world have been deeply concerned.
Olli Rehn is the European Commission's vice president. He's also the economics commissioner. He's the top economics commissioner in Europe, and he told me tonight, there will be a negative impact should the US go over the cliff, and I asked him how worried and concerned was he.
(BEGIN VIDEOTAPE)
OLLI REHN, VICE PRESIDENT, EUROPEAN COMMISSION (via telephone): We are certainly concerned about the US going over the fiscal cliff, even if it would not be a huge surprise in the light of the events of the last couple of days and weeks.
But there's still time for at least a partial deal, and we support the efforts of US policymakers to find a rapid solution and remove the uncertainty over economic growth.
QUEST: With the best forecast for eurozone growth next year to be just about stagnant or maybe up just a bit, down a bit, if the US were to contract by half to one percent, that would have quite a serious effect on the eurozone, wouldn't it?
REHN: It would certainly have a negative impact, but I think the overall negative impact of the US fiscal cliff or the US going over the fiscal cliff is rather going to be gradual than kind of a sudden wreck.
And in case there is no deal tonight before the year end, I trust that the US policymakers will continue to work in the coming days and weeks in order to strike a deal and to avoid the worst so that it would not lead to a free fall of the US economy and subsequently of the world economy.
QUEST: Would you say you're optimistic, cautious, or you're just waiting to see?
REHN: I'm a realist by definition, and that makes me cautious, but I think it's important that we all support the US policymakers so that they could strike a deal either tonight, preferably, or at latest in the coming days, coming two or three weeks, so that we can avoid the worst scenario of the US going over the fiscal cliff.
(END VIDEOTAPE)
QUEST: Olli Rehn, and we'll hear more from the vice president, his reflections on a rocky year for the eurozone later in the program.
One note just to bring to your attention, sources -- House sources are telling CNN that the House of Representatives, the second body in Congress, is unlikely to vote on any fiscal cliff package until New Year's Day.
So, even though the Senate may vote on whatever final package is put together this evening, the House will not take it up, likely, until tomorrow. That, of course, won't be lost on you. Shows that technically the US will have gone over the fiscal cliff, but there will be plenty of time if -- if -- if -- if -- if --
(RINGS BELL)
QUEST: -- they do have that vote, then there will, of course, be plenty of time to pull back from the worst effects. The Dow Jones has been in a holding pattern as we waited and saw which way the talks were going to go. This is the numbers --
(RINGS BELL)
QUEST: -- it's turned positive after the Obama speech, quite a bit. It was down about 23, 25 points earlier in the session. Now, we're up a third of a percent. Most European markets are up. The FTSE 100 -- except for the FTSE.
The Paris, the CAC, the Amsterdam, the Athens -- look at them all. They're all up quite strongly. The FTSE, though, was down half a percent. The DAX and the SMI were closed.
One thing to keep in mind today, Chancellor Merkel warned that the crisis is not over yet. That took its toll on the markets. We'll tell you a little bit more on her comments a little while in the program.
When we come back, the White House and Congress, they've got less than ten hours to at least start the legislative process of the budget plan. If they fail, then Americans start the new year preparing for smaller pay packets, after the break.
(COMMERCIAL BREAK)
QUEST: Welcome back, special edition on this New Year's Eve of QUEST MEANS BUSINESS, the fiscal cliff. If the US fails, almost every tax cut enacted since 2001 will expire in just about, oh, eight, nine hours from now.
Payroll taxes will jump from 4.2 to 6.2 percent. A short-term fix to protect taxpayers from the AMT -- it's the Alternative Minimum Tax -- will expire, along with a law effecting the pay of doctors who treat old-age pensioners.
Unemployment benefits will run out for around 2 million Americans who are long-term unemployed. Now, that happens in January.
In February, automatic budget cuts will come into effect. Most federal agencies will see a reduction of between 8 and 10 percent. Lisa Desjardins was talking about that earlier. Lawmakers will need to raise the current $16.4 trillion debt ceiling.
Now, move to March, and on the 27th, the current funding for the appropriations for the federal government runs out. So, without a deal, in June, the CBO estimates -- Congressional Budget Office -- that the national GDP will shrink by more than 1 percent in the first half of 2013.
One canard that has been doing the rounds in Washington and in economic circles is that going over the cliff just for a few days or a week or two would not cause any great harm because it could always be reversed. The Fed chairman, Ben Bernanke, simply doesn't agree.
(BEGIN VIDEO CLIP)
BEN BERNANKE, CHAIRMAN, US FEDERAL RESERVE: I don't buy the idea that a short-term descent off the fiscal cliff would be not costly. I think it would be costly, and in fact, we're already seeing costs.
Why is it that consumer confidence dropped so sharply this week? Why is it that small business confidence dropped so sharply? Why is -- why are the markets volatile? Why is business investment among its weakest levels during the recovery.
I think all of these things, at least to some extent, can be traced to the anticipation and the concern about the fiscal cliff, and I think that we don't know exactly what would happen, but I think there is certainly a risk that it could be serious, and therefore, I think it is very important.
(END VIDEO CLIP)
QUEST: Ben Bernanke. Felicia Taylor's standing by in New York. Ben Bernanke says it will have an effect. You saw there January, February, and March. It's coming, unless they do something. Felicia?
FELICIA TAYLOR, CNN INTERNATIONAL CORRESPONDENT: Yes, there's no question about it. It already his having an effect, and he laid out pretty succinctly exactly where we've been able to see it so far.
So, frankly, too much of this bubbly is going to give New Year party-goers a headache. But imagine the hangover the taxpayers are going to get tomorrow morning if we fall over the fiscal cliff.
The bottom line, things like this: paychecks are going to be getting a lot smaller for virtually all Americans beginning in the next few weeks, starting with the payroll tax holiday that all Americans have benefited from in recent years.
That's almost certain to go away tomorrow, and it'll affect everyone who earns a paycheck, including myself. So, for instance, somebody who's making $50,000 a year, they're going to earn $83 less a month. That's a lot for somebody who earns that kind of money.
But here's the really big tax bite from the fiscal cliff: the bite that'll take place if all Bush tax cuts expire. According to the experts, someone who makes between $40,000 and $65,000 a year will pay about $2,000 a year more. For those earning $65,000 to $108,000, they're going to be shelling out $3500 a year more.
And there's more to come. Low income earners are really going to get hit with the loss of certain tax credits. For example, the child tax credit, that's about $1700 worth, and makes a big difference.
QUEST: Yes.
TAYLOR: As of tomorrow, capital gains, estates, gifts, all subject to higher taxes if there's no deal. And don't forget that all this uncertainty is going to throw the tax season into chaos. Who knows when Americas are going to get their refunds, because many are going to have to file later because the IRS doesn't even have --
QUEST: All right, I --
TAYLOR: -- the answers yet on the taxes. And -- wait, wait -- there's $110 billion in domestic and military spending cuts that you already talked about, and frankly, that part of the employment equation --
(CROSSTALK)
QUEST: That -- now, Felicia --
TAYLOR: -- those -- that reduction in months, that means that that money doesn't go back into the marketplace. Another bad thing.
QUEST: As the British prime minister once said in Parliament, "Calm down, dear! Calm down!"
(LAUGHTER)
QUEST: A serious matter. At least I can always say that and blame David Cameron. But the fiscal cliff -- stay where you are, Ms. Taylor -- the fiscal cliff is only half the problem. The US was due to hit the so-called debt ceiling today, it's the maximum amount the US government is allowed to borrow.
Now, it's $16.4 trillion. That was raised in the middle of last year in the last budget debacle on the debt. Last week, Tim Geithner warned Congress he was putting "extraordinary measures" in place. He's literally shuffling the coffers. It saves them around $200 billion, it buys breathing space.
Grover Norquist, as the president of the taxpayers' advocacy group, he's the one who made everybody sign the no tax rise pledge, says if you put it all together, Americans are in for the long haul.
(BEGIN VIDEO CLIP)
GROVER NORQUIST, PRESIDENT, AMERICANS FOR TAX RETURNS: This fight does not end in a week, OK? This is a long-slogging fight because there are no budget cuts on the table that Obama or the Democrats have put there. We haven't even gotten to that conversation.
We should take as many of the tax cuts off the table as possible, and then because the Republicans have the clout of the debt ceiling increase, which they effectively used a year and a half ago, and the continuing resolution, where they could dole out money slowly to Obama and the Democrats to spend while reining it in. Those are two very powerful tools.
(END VIDEO CLIP)
QUEST: Grover Norquist. Felicia Taylor -- look. Americans have just gone through this, and we've still got the fiscal cliff to deal with all the way. Have they got the stomach for the politics?
Forget all the -- forget all the numbers and everything. In your everyday life of talking to friends and relatives and acquaintances, have they got the stomach for a debt ceiling fight on top of a fiscal cliff fight, on top of a budget fight?
TAYLOR: No, they really don't. People are exhausted about hearing about these things. You've got to remember, this one really is the doozy, and frankly, it's deja-vu. We had this back in August of 2011, the same issue.
That was when the credit rating agencies lowered the rating on the United States for the first time. So, that puts that back out there. Remember what that did to the US stock market. Obviously, hundreds of points were lost. So, investors obviously weren't very happy about that.
You've got to remember, an administration can only spend when it has enough money to pay for those things that they voted for, for the legislation that they've enacted. So, what this does is it affects social security benefits, it affects veterans, it affects military, it affects unemployment benefits, it affects a wide range of things if the US defaults.
So, this -- a question once again of the debt ceiling is exhausting to talk about one more time, because it's -- and it's great that Geithner came out and said that $200 billion buy some time, so hopefully they will enact something before the deadline comes up at the end of January.
QUEST: Would it affect a television business correspondent sitting in a studio in New York who's already tried to pull the heartstrings about watching her pay packet being cut?
(LAUGHTER)
TAYLOR: Well, maybe just a little.
QUEST: All right. Happy New Year.
TAYLOR: Happy New Year.
QUEST: Happy New Year, Felicia Taylor, on that happy -- on that -- well, it is a special edition of our program tonight. We weren't originally going to be with you on this New Year's Eve, but with so much importance on the fiscal cliff, we knew we -- we know you would expect us to try and make sense of it, so we are delighted to be here tonight.
When we come back, it's an eventful New Year in a long time for investors. The market and what the market makers make of the fiscal cliff. QUEST MEANS BUSINESS, good evening to you.
(COMMERCIAL BREAK)
QUEST: US stock markets are feeling the effect of the fiscal cliff and a deal that's likely to be reached. Have a look at the numbers and you'll see. Now, this is the Dow Jones over the last few weeks, and you can see how it's actually moved in a fairly dramatic fashion.
If you take the -- that's where the president was reelected, back on November the 6th. Now, we're down quite a bit since then, over -- about 2, 2.5 percent. There was a low point in the middle of November. You can put that down to the Gaza conflict adding to the losses. There was also worries about the fiscal cliff.
But then, the market does have quite a nice rally, and it's the absence -- the absence -- after the failure of the Boehner Plan B that really takes the steam out of the market, and so we end up to where we are the night of the fiscal cliff and where next.
Overall, though, the Dow year-to-date, a gain of just five percent. If there hadn't been this fiscal cliff business, it would be showing a gain of around about 11 percent, and analysts predict modest sell-off, the volatility, indeed, if it's not done.
Now, when we want to get sense of the markets, we ask Kenny Polcari, an independent trader to join us, and he's with me now. Kenny, what does -- what do the markets want? You're not going to be happy with this fiscal cliff fudge tonight.
KENNY POLCARI, INDEPENDENT TRADER: No, not at all. The markets want clarity, right? The markets want to know what the answers are going to be.
I think the market's going to be, honestly, quite disappointed as they start -- the strategists and economists start to dissect what the president just said, how it's going to be really a band-aid, they're talking about doing this in stages. It's not what the market wants to hear, because all that leaves is more confusion.
QUEST: Right. So, would -- it's blunt speak time, it's time for you and I to have a bit of blunt talk -- would you have preferred to go over the cliff for a long-term beneficial grand bargain?
POLCARI: OK. I actually thought it would be better to over the cliff, because if you went over the cliff, you would have clarity, right? Everyone knows exactly what would happen, taxes would've gone here, spending would've gone there, and then they could have argued it from the opposite side.
They would have on one level brought some taxes down, they would've increased spending. But they would have been forced into compliance.
Doing this band-aid routine and doing it over a number of -- a period of months or stages, as he said, is not going to work out well, in my opinion, because it's going to leave it way too confusing for investors, it's going to leave it confusing for companies, they don't know how to make plans, they don't know what they should hire --
QUEST: So --
POLCARI: -- they shouldn't hire, and -- go ahead.
QUEST: So, where will we see the market effect? Obviously, with the Fed still buying $85 billion a month as part of Q Eternity, and with the -- with bonds still being the only game in town, even a minor switch to equities, where do you expect to see this balloon start to squeeze out?
POLCARI: OK. So, what I expect to see -- and you're probably going to see -- I wouldn't be surprised if we saw pressure towards the end of today, that people at the very last moment are going to take some money off the table.
But I suspect once Asia and then Europe opens on Wednesday, Tuesday night for us, into Wednesday, and the global markets start to react, I will then think you'll see more pressure on the US market.
I don't by any stretch suggest you're going to get a TARP moment where the market sells off 700 points. I don't think you're going to get that at all, because there's a lot of money on the sidelines waiting. I think you see us test 1385 again, which is a 200-day moving average, and then as investors kind of re-price the risk.
QUEST: Kenny, as always, we've talked many times, you and I, over the year. It's been a treat and a pleasure to have you on QUEST MEANS BUSINESS. We need you to make sense of this, and I wish you and your family a happy New Year, Kenny. How very good to see you.
POLCARI: And to you, too. Thank you very much, Richard.
QUEST: Thank you, Kenny Polcari joining me from the New York Stock Exchange.
A little New Year's Eve enigma for you. One global market has ended the year up more than 300 percent. So, the question is, is it A, Venezuela? B, the Philippines? Or C, the robust market of Turkey? The answer later in the program for you.
On the edge of the deadline, and Barack Obama says a deal is in sight. The deal's not done yet. We'll take a closer look on what has been achieved. QUEST MEANS BUSINESS, good evening to you.
(COMMERCIAL BREAK)
RICHARD QUEST, CNN HOST (voice-over): Is it A, Venezuela; B, the Philippines; or C, the robust market of Turkey? The answer later in the program for you.
(END VIDEO CLIP)
QUEST: On the edge of the deadline and Barack Obama says a deal is in sight. The deal's not done yet. We'll take a closer look at what (inaudible). QUEST MEANS BUSINESS. Good evening to you.
(MUSIC PLAYING)
(COMMERCIAL BREAK)
(MUSIC PLAYING)
QUEST: Hello, I'm Richard Quest. More QUEST MEANS BUSINESS special in a moment. This is CNN and, on this network, the news always comes first.
(BEGIN VIDEO CLIP)
And so we've been talking over the last half hour, the Republican sources are now telling us the U.S. House of Representatives is unlikely to vote on any budget deal package until New Year's Day. That's after the midnight deadline and after tax rates have technically gone up.
Barack Obama says a budget deal is within sight. It's not complete yet. The president says the plan currently on the table will ask the wealthiest 2 percent to pay higher taxes for the first time in two decades.
At least 11 people have been killed in a series of attacks across Iraq, including Kirkuk to the north in Diyala province. Some reports are quoting higher casualty figures. Shiites were targeted in a number of bombings. At least seven people were killed when a bomb exploded outside a house in Masaya south of Baghdad.
The U.S. Secretary of State Hillary Clinton is being treated in hospital for a blood clot on the brain. Doctors discovered it during a follow-up examination for a concussion she suffered earlier this month. It comes as the secretary of state prepares to end her time in office.
New Year's celebrations are well and truly underway. Yes, that's obviously Sydney. It always has its $7 million firework display on the harbor bridge. In Seoul in South Korea was the traditional ringing of the Bosingak bell.
(MUSIC PLAYING)
(END VIDEO CLIP)
QUEST: Barack Obama says a deal to stop tax hikes is in sight and then went on to say the deal is not yet done. The president was speaking to an audience of middle class families in Washington and said the deal to stop their taxes going up at midnight was almost within reach.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Today it appears that an agreement to prevent this New Year's tax hike is within sight. But it's not done. There are still issues left to resolve. But we're hopeful that Congress can get it done. But it's not done.
(END VIDEO CLIP)
QUEST: The president.
While senators battle to avoid going over the cliff, economist Jeffrey Sachs says we should perhaps just jump over it.
Jeffrey joins me now from New York.
Always good to see you. First of all, look, they're going to do a deal and they're going to do a deal in some shape or form. And the worst excesses of the cliff are going to be negated.
Is that the right thing to do, Jeffrey?
JEFFREY SACHS, ECONOMIST: Well, what they're doing is locking in the Bush- era tax cuts, almost all of them, for probably 99 percent of households for the indefinite future. And unfortunately, the Bush-era tax cuts were never affordable. They led to bulging deficits. And now a Democratic president is leading the way to make the permanent for almost everybody.
In my view, it's all very shortsighted. As soon as this deal's done, then we'll get the report from the Congressional Budget Office that revenues are far short of what's needed to cover basic spending. And then we're going to have the next crisis.
QUEST: So what should, in your view, they have done? Bearing in mind deficit reduction has to begin at some point in the United States, and now's as good a time as any?
SACHS: Well, it sure does. But the way you do deficit reduction is not by making tax cuts permanent and giving away what would have been 2.5 percent of gross domestic product starting tomorrow of revenues that are needed to close essentially a 7 percent of gross domestic product chronic budget deficit.
So they gave away the start of real deficit reduction because we're a populistic country. We're always taking the easy steps always putting off the hard stuff.
QUEST: So -- all right. So, I mean, I can hear some people say, well, Jeffrey Sachs with his liberal views, not surprising that he'd perhaps want to say sort of -- to raise taxes.
But Jeffrey, if you barrel it down, should the U.S. now face its own moment of austerity?
SACHS: Well, if you mean by austerity, reducing budget deficits, yes. If you mean by austerity cutting taxes further from what is already the lowest tax collection of any high-income country, that's seems rather silly. United States is collecting about 31 percent of our national income in taxes at the federal, state and local level combined.
In Europe, the average is 40 percent or higher. In other words, the United States is already an anti-tax country, which has just made permanent tax cuts that we can't afford.
And in this sense, I think we're going to find that making those spending cuts to try to live within the taxes that are being determined today won't actually be possible other than doing grave damage to our infrastructure, to the natural environment, to our energy system, to our education system or to the poor.
Something's going to have to give. My guess is that what gives is chronic deficits for years to come, because I think what's being said and set today just doesn't make sense.
QUEST: We'll talk more about this in Davos, Jeffrey, as we -- as we --
SACHS: Please.
QUEST: -- as we get to grips with whether or not the deal is the right deal or not.
Looking forward to that. And I wish and your family Happy New Year as always and thank you -- thank you for all --
SACHS: And to you -- and to you, Richard.
QUEST: Thank you for always being generous with your time on QUEST MEANS BUSINESS. Lovely to have you on the program.
Jeffrey Sachs.
The view there, of course, needless to say, is one particular one; Chris Coons is the Senate Democrat doesn't necessarily share it. A little earlier, he described to me his frustration at the lack of consensus. He believes that whatever deal is put in place, well, he's still optimistic. Here's the senator.
(BEGIN VIDEO CLIP)
SEN. CHRIS COONS (D): Well, I think it is actually possible that we will still take up and pass in the United States Senate this evening a compromise package that gives some confidence to middle class families and small businesses about their tax rates going forward into next year and it deals with some of the currently unresolved issues about rates for estate tax, for the so-called alternative minimum tax and for a number of other important tax extenders.
I'm very disappointed. This means that we will be doing a small deal, not the bigger, broader, more bipartisan deal that was being actively negotiated between Speaker Boehner and President Obama as recently as 10 days ago and that might have really dealt with our deficits and the investments we need to make to make our economy here more competitive.
It is possible for us to take this up in the Senate and pass it and to have the House take it up and pass it tomorrow and still be effective, since tomorrow is a national holiday, a day when the markets are closed. And the new income tax rates will not be effectively implemented and the new Congress will not come into place until January 3rd.
QUEST: Why should we be optimistic, though, that months of failure, other than the fact of a deadline tonight and tomorrow should suddenly bring minds together?
COONS: Well, one of our great challenges here in the United States is that in our representative democracy, we continue to send to Congress folks more in the House than in the Senate, but in both chambers who represent the margins, the extremes of their respective political parties. This has made it harder and harder for us to achieve a responsible or principled compromise on the key fiscal issues facing our country.
I am disheartened and deeply concerned about how difficult it is for us to achieve this consensus and compromise even after an election where President Obama was reelected by a very significant margin in the Electoral College.
Divided government, a government here in the United States that continues to be divided between the House controlled by Republicans and the Senate controlled by Democrats, means that we will have to get used to cutting difficult deals, where both parties concede to some center position if we want to maintain our global position of leadership.
As a member of the Senate Foreign Relations Committee, it particularly concerns me about the message that we are sending with how difficult it is for us to reach consensus on these simple mathematical realities that we have to confront in the United States.
QUEST: Senator, even if you get a patch and you do a small deal, does the debt ceiling within two months, there is the grand bargain which still has to be negotiated, the U.S. is on an unsustainable debt path. Just about everybody agrees on that.
So 2013 at best is going to be troublesome and worse, could be redux all over again.
COONS: That's right. And my hope is that President Obama will demonstrate again today his very strong capacity to lead by challenging the Congress and the American people to be willing to make the big, tough concessions we have to make to deal with our deficit, to reform our entitlements, to invest in our economy and to protect our middle class.
If he doesn't, if we aren't able to reach that bold bipartisan compromise you referred to, then the next year or two, the president won't be able to make real progress on things like immigration reform, tax reform or dealing with handguns and violence in the United States, areas that I think he hopes to make a part of his agenda for his second term.
We will instead continue these incessant squabbles over the debt ceiling, over spending and over revenue. It is my hope, as a member of the Budget Committee, that we will finally confront them head-on and deal with them so that we can clear the deck for the more important policy issues that the United States needs to lead on for our country and for the world.
QUEST: Finally, Senator, this spirit of compromise that is so lacking in the House, where the Right is the Tea Party and the ultraliberals on the Left refuse to let the moderates do a deal. You didn't come into politics for this, did you?
COONS: That's right. One of our real frustrations, one of our challenges here in the last two years in Congress has been how few bills we've been able to get to the floor, to debate and consider, to amend and pass and then have go into law.
One of the issues -- it's a minor issue, but it's a very real one for working families in the United States, that is a piece of this fiscal cliff, is that our mandatory 5-year farm bill, our so-called Agricultural Bill, which was passed in a bipartisan way in the Senate back in June has been languishing in the House for six months.
If not passed today, milk prices in the United States are predicted to double in the weeks ahead. And further follow on consequences for food prices and for our whole farm sector of our economy, there's a dozen different areas like that.
And I couldn't agree with you more; it was not my hope in coming to the Senate to spend time in endless quorum calls and in procedural fights, but rather to tackle the very real policy issues, the leadership challenges that the United States faces.
It's my hope that in the year ahead we can renew our effort to cross these partisan divides and to make responsible compromises that allow us to lead again in the world.
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QUEST: So you've heard the economics view, the political view and the market view on the fiscal cliff and what's likely to happen next as our comprehensive coverage of the events in Washington continues.
When we come back after the break, we'll turn to our own bailiwick, Germany's chancellor remains unmoved by recent waves of optimism in a Eurozone recovery. Angela Merkel's New Year warning.
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QUEST: The German chancellor, Angela Merkel, has ended the year with a solemn warning. She says the Eurozone crisis has not run its course, despite recent optimism.
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ANGELA MERKEL, CHANCELLOR OF GERMANY (through translator): The European sovereign debt crisis has show us how important this balance is. The reforms that we have decided on are starting to work. But we still need a lot of patience. The crisis is not over yet. And we still have to do more internationally to control the financial markets better.
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QUEST: Now Olli Rehn, the European vice president says those analysts who predicted the European breakup in 2012 were, in his words, "behind the curve." There's no room for complacency in Europe, he says, and I asked him what his biggest goal would be next year.
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OLLI REHN, V.P., EUROPEAN COMMISSION: Certainly for 2013, I'm looking forward to the return of the recovery and sustainable growth and I do not only wish for that; I work for that and work on that which will require patience and determination to work for confidence and to continue with the reform course and supporting growth through targeted investment.
This should not (inaudible) any kind of complacency, but to work harder and with determination in order to restore the recovery in the European economy and thus create the foundations for sustainable growth and self-creation.
QUEST: You must be relieved there were moments during this year, sir, where serious commentators questioned whether the Eurozone would stay together. Well, you've got to the end of the year and it has and things are looking better. You must be relieved.
REHN: To an extent, yes. But as I said, no room for complacency. And those who were predicting a exit (ph) or a breakup of the euro, they were behind the curve last year -- this year. And next year we will continue with the same determination to ensure the sustainability of the euro.
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QUEST: Olli Rehn talking to me earlier.
In a moment on QUEST MEANS BUSINESS, the answer to which market rose the sharpest and the fastest and the highest and -- no, it's not that market. We're live at New York Stock Exchange trading wraps up in the closing hours of 2012. The market is now up nearly 100 points over 13,000.
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QUEST: Senate Minority Leader Mitch McConnell is now speaking in the Senate -- there we are. He's just finished. There we are. Sorry, I beg your pardon. (Inaudible) just been speaking there.
Well, we wanted to show you what (inaudible) it was all over before we even got there.
Let's show you instead how the markets have been progressing. 2012 was a very good year for most major markets. There was low volatility and steady gains and it was a welcome relief to investors after several years of upheaval.
If you look and see the winners and the losers on the superscreen, we're going to walk across. And remember, in all of this, we are looking for which was the best market, all right, which was the best market.
Well, the best market globally was probably Germany, the DAX index was up some 29 points. It closed at 7,612. Exporters benefited from low interest rates and relatively weak currency. After that, you're down to the CAC 40, is up some 15 percent at 3,641. The U.K. market just up a mere 5.8 percent. So you're seeing that Germany is probably the best.
In Asia, the Chinese market and the Hong Kong market, Hong Kong was up 22.9, 22.9. So that's a special territory but now, especially with Minister DeVries (ph) in the SAR, the Shanghai composite was just up 3.17 percent.
Of these markets, then, you're better off in Hong Kong; you're better off in Germany. But here's the big one. Venezuela. Now if you had the stomach for what was happening politically in the country and you did invest -- and let's not forget the currency risk -- the stocks were up 302 percent on the general index, which is also the answer to today's New Year's Eve "Conundrum."
It was largely because of BBBO banker Provential (ph) up 200 percent and the rally could be about the speculation over a possible change in government.
So 30, 12, 300, 22, 3.2 -- Alison Kosik is in New York.
By my reckoning, the Dow is 5.8, at its highest point of the year over the year-to-date, it was only 11 points. And now you've got the fiscal cliff, Alison.
ALISON KOSIK, CNN BUSINESS CORRESPONDENT: Right. But you know despite all of the turmoil from the fiscal cliff and everything else that went on this year, you know, as you said, the Dow ending the year, you know, anywhere from 5 percent to 6 percent higher, and it's a -- when you look at it that way, not such a bad year overall.
Let's look at the numbers right now. The Dow up in the triple digits. But don't let that triple-digit rally fool you. Yes, the market's up after President Obama spoke and you saw the Dow shoot higher when the president came out. But as he kept talking, Richard, did you notice? Stocks pulled back because --
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KOSIK: -- the president said -- the president said we're going to do this in stages, in steps. That's not what Wall Street is looking for. I think why you're seeing this rally is because it's the end of the year; you're seeing traders trying to shore up their positions, Richard.
QUEST: Come on. Are you telling me that they're not a little bit -- all right. Polcari said earlier they don't like this doing it in stages. So you're telling me this 101 points is just because of a -- what you and I used to call in the old days "book squaring"?
KOSIK: It could be. Also you're seeing the volatility a little higher as well. Stocks have been all over the place today. Not everybody's in the game today. Look, everybody's on vacation. It's New Year's Eve, right?
QUEST: Alison.
KOSIK: (Inaudible) volatility in the trades.
QUEST: Alison Kosik, who will be having a little tipple herself no doubt before midnight.
But Alison, before you go, would you say 2012 -- after all we've been through, the market has held its nerve? What are you most looking forward to in 2013?
KOSIK: Let's say I'm looking forward to a little less volatility, because even though it has been this kind of continuous, nice, you know, rise this year, you know, we could be in for more volatility next year, because Europe still isn't in the bag, right?
So I guess I'm hoping for more continuity, a little of what we saw this year. But I'd really like to see GDP rise. That would give the -- that would spur the market a little bit more as well. We definitely want to see U.S. GDP go up.
QUEST: Which, of course, you may or may not see, depending on the way -- Alison, have a lovely New Year's Eve -- excuse me; a bit chesty tonight.
Have a lovely New Year's Eve and thank you for your company always on the program and we will talk to you next year.
Now tonight's "Profitable Moment," I was going to talk about the fiscal cliff, but, frankly, it's a mess and there will be plenty of time for you and I to digest what happens after the Congress finally sorts out the problem.
Instead, allow me a moment to thank you for making time each night to come together for our nightly conversation on business and economics and putting the world of business to right.
Now these are difficult times for investors. Sovereign debt, bank bailouts, stagnant growth, fiscal cliffs. And the next 12 months will be tricky, too. Tonight on our show, Europe's Olli Rehn reminded us about how risky all these events will be for the global economy. Investors, well, you'll need nerve and verve to make money, or at least not to lose your shirts. And we will be here throughout.
Our mission statement is clear: the definitive word on how you earn and spend your money. We will help give you the competitive advantage next year as we have this year. So thank you for joining us each night. And I leave you with the ringing thought that whatever you're up to in 2013, I hope it is profitable. I wish you a Happy New Year.
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