The 'fiscal cliff' showdown

This is a rush transcript from "Journal Editorial Report," December 1, 2012. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," with the clock ticking, both sides dig in on fiscal negotiations. The president is taking his case to the public but he's mostly mum on spending cuts. How should Republicans respond?

And ahead of January's big tax hikes, companies and investors are cashing out, including one of President Obama's biggest supporters.

Plus, as Susan Rice makes the rounds on Capitol Hill, we'll look at who could make up the national security team in President Obama's second term.


PRESIDENT BARACK OBAMA: I am ready and able and willing and excited to go ahead and get this issue resolved in a bipartisan fashion so that American families, American businesses have some certainty going into next year.

REP. JOHN BOEHNER, R-OHIO, SPEAKER OF THE HOUSE: I'm disappointed in where we are and disappointed in what's happened over the last couple of weeks. The 'fiscal cliff' is a serious business. And I'm here seriously trying to resolve it. And I would hope the White House would get serious as well.


GIGOT: Welcome the "Journal Editorial Report." I'm Paul Gigot.

Not exactly a meeting of the minds this week between President Obama and House Speaker John Boehner on just where talks to end the fiscal showdown stand. The president, for his part, took his case to the public and repeated his called for a tax hike on upper income America but made little mention of cuts to entitlement spending, something the speaker says must be part of any final deal.

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; editorial board member, Mary Anastasia O'Grady; and Washington columnist, Kim Strassel.

Kim, so you're stuck in Washington, having to talk to all of these sources. Is the mood -- and you've been working them this week. I know. Is he mood as dour as it sounds?

KIM STRASSEL, WASHINGTON COLUMNIST: It is, by the end of this week, and here is why. The Republicans came out right after the election and said to the president, you want revenue here. You want revenue on the wealthy, we'll give it to you. Let's do this via limiting tax deductions for the wealthy. The president, instead of taking that and running with it, sealing a deal, has been campaigning for tax hikes. And to cap it off, sent Treasury Secretary Tim Geithner to Congress with this outrageous proposal. It's basically a compilation of everything that the president wanted in his budget. It's beyond what he even campaigned for. As a result, I think most Republicans wonder how serious he is about doing this.

They feel things are going backward.

GIGOT: Yes, that -- that's the way it sounds to me, too. I talked to some senior Republicans this week and they're increasingly of the belief that maybe the president wants to back them into a corner that could push them over the cliff and then be able to blame them if you have a recession or for taxes going up on everybody.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Well, I don't doubt that's what he's trying to do. It's hard to see where the upside is for the president if the economy slips into recession.

GIGOT: Yes, that's --

HENNINGER: We're talking about 2013 having no growth.

GIGOT: It would be horrible.

HENNINGER: Yes. So, it's a little hard to see what the game is. As Kim was mentioning, the president wants these tax increases. It seems to me we're going to go through this sort of scorpion dance through the rest of the year. What did the president campaign on? What was the one thing I think most people would say he campaigned on? That was raising tax rates on the wealthiest, those two top rates.

GIGOT: Right.

HENNINGER: That's the thing I think is on the table. And the --

GIGOT: But the Republicans put that on the table.

HENNINGER: And the Republicans put that on the table.

GIGOT: At least through deductions and the debate on whether rates were deductions.

HENNINGER: Well, yes.

GIGOT: But they're willing to put that on the table. The question is, what does the president then give Republicans in return, if anything?

HENNINGER: Well, I think that's what the Republicans position should be, is to say we have committed what you campaigned on. If you're not willing to talk about reducing spending, then we are not going to be able to do a deal with you. And I think that puts the political onus, to some extent, back on the White House.

GIGOT: Mary, the Republicans have been fighting among themselves over their no-new-taxes pledge. And Grover Norquist, the activist in Washington, has Republicans on record as saying, I won't vote for a tax increase. Are they really ending up here negotiating with themselves in a way that hurts their positions, vis-a-vis, the president?


I think that the president is energized by the fact that he thinks, look, I ran a lousy economy for four years, I left unemployment high, I increased the size of the debt and the deficit, I got everything I wanted, the place is a mess and, look, I got reelected.


So, what's so hard about me continuing to doing that and blaming it on them? Obviously, I'm very good at that. And that's basically where he's going here. And the Republicans I think are not very good poker players. First of all, they've signaled that they're reluctant to go over the cliff. I think if you're in this showdown, you have to say, you know, bring it, come on.

GIGOT: Do it.


They will get blamed for it, though, if that happens. No question. The president is already signaling that. So that wouldn't be a pleasant outcome for them. You're saying they should suggest to the president that we'd be willing to do that and then maybe he'll give at the end?

O'GRADY: Yes, I think they have to show that they are in -- that he's in a negotiation and that he has to give, and that they're willing to give. And if they just say, look, we're so afraid of getting blamed for that, of course, he's going to roll right over them.

GIGOT: Kim, where do you think the Republicans are? Where should they go here? Do they have real options, any other options other than maybe just giving the president, in the end, what he wants?

STRASSEL: You know, talking to Republicans, there's a very firm feeling out there, a strong feeling that John Boehner should be given some more time to negotiate and see what he can get. Because, look, there is an honest belief in the Republican Party that there is a big problem here, and if there's an opportunity to do something about the real driver suspending


GIGOT: Right.

STRASSEL: -- particular entitlements, they ought to take that opportunity.

But I do think you see people turning around to decide what would be a Plan B. One thing that came out this week was the suggest by Tom Cole, a Republican from Oklahoma, saying, maybe we should just agree to these middle class tax extensions and just sign them, give them to the president. That's what he says he wants. Get that off the plate. And then let him take all the political fallout for everything else that, you know, comes, the economic hit -- from --

GIGOT: Right.

STRASSEL: -- the top rates, the sequester and everything else.

GIGOT: So he's still end up having to doing something on the spending cuts that are coming and on the debt limit, Dan. Very briefly.

HENNINGER: Well, yes, but I think basically we're back to where we were in the 2011 negotiations. The Republicans committing us to tax cuts and to tax increases, and the Democrats promising to do something on spending later in 2013. It's very hard to see that that's going to get resolved by the end of the year.

GIGOT: All right, what a mess.


When we come back, the prospect of the tax cliff is already affecting the behavior of some companies and shareholders, including one of President Obama's biggest backers, who is cashing out before rates go up. The details are next.



JIM SINEGAL, FOUNDER & CEO, COSTCO: Business needs a president who has covered the backs of businesses, a president who understands what the private sector needs to succeed, a president who takes the long view and makes the tough decisions.



SINEGAL: And that's why I'm here tonight supporting President Obama.


GIGOT: That was Costco co-founder and former CEO, Jim Sinegal, at the Democratic National Convention in September, saying that President Obama would be better for business than Mitt Romney. But just before that second Obama term begins, he's getting a dividend. Mr. Sinegal and the rest of the Costco board voted this week to give themselves a special dividend, a $3 billion Christmas gift for shareholders that will allow them to be taxed at the current rate of 15 percent rather than next year's rate of over 40 percent. And Costco is just one of many companies making these one-time cash payouts in a move that will save stockholders, like Sinegal, millions in dividend taxes.

And so, Mary, turns out, maybe rates do influence --


-- investor behavior. What's the meaning of the great cash out of 2012?

O'GRADY: Well, don't tax you, don't tax me, tax the guy behind the tree.

GIGOT: Russell Long, former late senator.


O'GRADY: Exactly. And what you see here are very wealthy people, who can, you know, engineer ways to avoid taxes. Meanwhile, what he's -- the medicine he's suggesting for people who are starting to do better, people who, say, make $200,000, maybe working their whole life, they're the ones who are going to get hit with the Obama taxes. And really, I mean, you look at that and you think, a normal human being with -- you know, would be ashamed of that lack of intellectual honesty. Or should be, really.

GIGOT: What's fascinating economically is that Costco is borrowing the money to pay this dividend. Now, usually, when companies pay dividends, it's out of earnings, right?


GIGOT: Retained earnings. In this case, they're borrowing, taking on more debt, not to invest in the business in the future growth, but for a one-time equity pay out.


O'GRADY: But, Paul, what's to worry about? Interest rates are low thanks to Ben Bernanke.

GIGOT: Well, this is not -- but this shows that the tax rates combined, with very low borrowing costs that Mary mentioned, they're distorting business decisions.


GIGOT: Instead of investing in growth, you're investing in tax avoidance, in essence.


HENNINGER: Paul, Russell Long was a legendary Senate finance chairman. He said, I've come to the conclusion, if you're going to have capitalism, you're going to need capital.


GIGOT: Goes to the heart of this, right?

HENNINGER: Genius. Just pure genius.


Right, except that what's happening here is that capital that could be invested in productive businesses or used next year is being pulled out of 2013, into 2012, so it can be realized as a profit. And that capital probably will then be put in cash accounts or marginal investments because these people don't trust going into 2013. They're just taking economic activity out of that year.

GIGOT: OK. So what's the economic impact going forward next year?

HENNINGER: Why, I think it's dire for 2013. I really do. I mean, they're just sort of sucking the air out of 2013. And back to the point we were talking about, the negotiations in Washington --

GIGOT: Right.

HENNINGER: -- at some point, somebody, maybe the Republicans, have to speak up about defending the real economy against the sort of policies they're talking about down there.

GIGOT: Yes. They do get wrapped up in this insider baseball, and we're guilty of that, too, playing to that, and probably a lot of people out there. What they really want to know is, is the economy going to grow or not.


GIGOT: If you're increasing taxes on capital and dividends, you get less capital and dividends, and then less growth for the economy and then less revenue for the government.

O'GRADY: Well, a lot of people worry about the many years that Japan has been in a slow-growth environment. But they've kept interest rates very low in Japan. But the problem is government is too big. That's why Japan has not been able to start growing again. And this is the path that the U.S. is certainly on if we don't change that dynamic.

GIGOT: Kim, is there any recognition about this in Washington or is it all -- I mean, do you hear any of this discussion, or do they really believe, certainly, the White House and the treasury, that tax rates like this don't matter, that ultimately --


STRASSEL: No, they do. They do to a degree. If you talk to the higher-up officials in the White House, they say, come on, so we're going to raise the rates a little bit. It's not going to matter. I think what is fascinating to put it in the context of the bigger debate down here right about tax revenue.

GIGOT: Right.

STRASSEL: The White House and its economists have this view, the static view that, if you've got X amounts of capital gains income or dividend income, you tax it 20 percent more, you get 20 percent more tax revenue. You don't, because people decide to shelter it. They do their transactions the year before, when the amount is less. And so, all of these numbers that the White House is counting on and sort of rubbing its hands together, hoping to get, they're not going to get anywhere near that


GIGOT: Here is the --

STRASSEL: -- because the wealthy, as Mary said, are very good at making sure the tax man can't get their hands on it.

GIGOT: Mary, here is the thing I don't get about the president's calculation, politically. If you look at the Reagan's presidency and the Clinton presidency, one reason they had successful reasonably second terms was they had growth. Clinton had 4 percent growth, more than four percent. Reagan very close to that. That buoyed public sentiment that helped their approval ratings. Drew up enormous revenues that they could use. If Obama gets a recession in the second term after the slow growth of the first term, he's dead in the water. He can't afford that.

O'GRADY: Yes, but, Paul, there's a whole economic school -- we call it Keynesian -- which says that when the economy is slow and not growing, government has to step in and play the role of the engine of growth, by spending money. This is something that the Democrats believe in religiously. They think that the only way to get the economy growing again is to spend a lot of money from the government. That's where the problem comes in.

GIGOT: All right.

When we come back, as he prepares for a second term, President Obama faces the prospect of assembling a whole new national security team. A closer look at who could fill the top posts and a preview of the controversies to come, next.



HILLARY CLINTON, SECRETARY OF STATE: Susan Rice has done a great job as our ambassador to the United Nations. And, of course, this decision about my successor is up to the president.


GIGOT: That was secretary of state, Hillary Clinton, reacting to talk that President Obama may nominate U.N. Ambassador Susan Rice to replace her. Rice made the rounds on Capitol Hill Tuesday in an attempt to ease Republican concerns and smooth the way for a potential cabinet nomination, just one of the positions that President Obama will have to fill on his national security team in his second term.

We're back with Dan Henninger and Mary Anastasia O'Grady. And Wall Street Journal foreign affairs columnist, Bret Stephens, also joins the panel.

So, Dan, is there a case against Susan Rice for secretary of state?

HENNINGER: Senator John McCain and Senator Kelly Ayotte do, indeed, feel they have a case again her and it relates to the events that took place in Benghazi before the election, because Susan Rice, after the incident happened, that the murder of Ambassador Stevens, went on the Sunday morning talk shows and said that the demonstrations were related to the Islamic video that some kid in California made. And what they want to know is, why Susan Rice, the U.N. ambassador, was sent out there, and why she was sticking with the story that was crumbling almost as she was saying it.

GIGOT: But she said it was the intelligence community talking points and she was not trying to be dishonest.

HENNINGER: Two -- two points. They want to know whether the administration was politicizing or trying to protect the president from an ugly event in Libya just before the election. And, second, the more serious policy issue is, what exactly was the administration, the White House and the State Department doing during that period when this big fire fight was taking place in Benghazi? And I think the White House has been trying to sweep this issue away in the wake of the election. And I think these Senators are entitled to keep pressing to find out what happened then.

GIGOT: So, Susan Rice's nomination becomes an opportunity, I guess, in Dan's telling, to try to get at that story, that Libya story.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: It's actually an opportunity to get at what the nature of the Obama administration foreign policy is, Paul. And Susan Rice, in some ways, encapsulates a strain in Democratic policy thinking that goes way back. There's a story that's actually told by Samantha Powers, a close aide to President Obama. She wrote a book about the genocide in Rwanda in 1994. And Susan Rice was at the State Department, makes a cameo appearance in the book, where she is quoted asking, "If we call what happened in Rwanda genocide, how does that play for us in the, what there then the midterm elections of 1994?" Well, there's a pattern here, as you see. One is a reluctance to have America be engaged in certain issues. And the second one is politicizing foreign policy issues because they might hurt the president's political stance.

GIGOT: And you want a secretary of state, if you're -- well, the American people want a secretary of state who has some more independent judgment and is not going to thinking so much about the politics, is that the point?

STEPHENS: Well, that would be one thing that you would look for in the secretary of state.



GIGOT: Sorry for stating the obvious, I guess.

STEPHENS: The national interests and not the president's midterm, when it comes to Irans and North Koreas of the world.

GIGOT: But is that enough to stop, Mary, a president from getting the secretary of state that he wants. And with John Kerry, who is often mentioned, the Senator from Massachusetts, as the alternative to Susan Rice, would he be any better?

O'GRADY: Well, I'm surprised that the president is pushing so hard for here. Because quite apart from whether she was politicizing events that shouldn't have been, she also has a reputation of not being a very good diplomat. In that job you have to be able to persuade people to come on your side, and apparently, she tends to --

GIGOT: Rough edges.

O'GRADY: -- Insult people and she's a little bit abrasive. But John Kerry is also very troubling. His track record over the years, not as a diplomat -- he might be very good at going to dinners and so forth. But, you know, for example, in Latin America, when he ran for president, he was backed by Tomas Borge, who is a former Sandinista in Nicaragua. He was supported by Cristina Kirchner, in Argentina. His involvement, his office's involvement in Honduras was decisively in bringing Manuel Salaya (ph), who is a friend of Chavez, back to Honduras. And that's cost a lot of instability there.

STEPHENS: Right. The case for Susan Rice is that she's better than John Kerry.


GIGOT: Do you think that the president is going to nominate Susan Rice? And do you think if he does, that she'll get through?

STEPHENS: I expect yes on both counts. But I have a suggestion for the president. He should nominate Colin Powell, former secretary of state and a supporter, to be either secretary of state or secretary of defense.

He could fill both jobs.

GIGOT: All right.

We have to take one more break. When we come back, our "Hits and Misses" of the week.


GIGOT: Time now for "Hits and Misses" of the week.

Kim, first to you.

STRASSEL: A hit to the U.S. Supreme Court for throwing open the door to another constitutional challenge to Obama-care. The high court agreed to a request from Liberty University to reopen its lawsuit against a main provision of the health care law, arguing they are unconstitutional on the religious grounds. This, of course, goes to the point about the law requiring employers to provide contraception. No idea just how far this will go, but the court deserves credit for recognizing parts of the law still need a hearing.

GIGOT: All right, great, Kim. Thanks.


STEPHENS: This is a miss to China's People's Daily, the largest newspaper, I think, in the world, which picked up an item in the American media which called Kim Jong-Un, the young leader of North Korea, the sexist man alive. Now, of course, this item came from the satirical newspaper "The Onion," which couldn't resist this kind of line. Sometimes things are lost in translation and one of those things is irony.

GIGOT: Yes, that's for sure. That's funny.

HENNINGER: Paul, a hit to astronomy for its discovery of the largest black hole ever seen in the galaxy. It is the size of 77 billion suns.

It's 250 million light years away from the earth. And it's incomprehensible. What I like most about it though, it's rather humbling.

GIGOT: I thought you were describing Washington.


HENNINGER: That's not humbling.


That's frightening.

GIGOT: But it is incomprehensible.

HENNINGER: Yes. And it's 250 million light years away from anybody's experience.



And remember, if you have your own "Hit or Miss," please send it to us at And be sure to follow us on Twitter at JERonFNC.

That's it for this week's show. Thanks to my panel and to all of you for watching. I'm Paul Gigot. We hope to see you right here next week.

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