[Ali Velshi, Cnn Anchor:] 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.
[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.
[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
[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.
[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.
[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
[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.
[Alan Greenspan, Former Federal Reserve Chairman:] The actual currency in 2008 surprised me with respect to the size of what the problem was.
[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.