'Paper cuts to the economy': Washington and the sequester showdown

>> " morning joe ." it's 7:00 here on the east coast . mika and joe are off today. i'm with mike barnicle , dan senor , leigh gallagher, jonathan capehart. joining us, executive editor of the msnbc.com, don't laugh at your own title and msnbc political wolffe. great to see you.

>> good morning.

>> let's get right to the sequestration which is just over a week away. president obama and congressional republicans , no closer to a deal really to avert next week's automatic spending cuts. both sides spent most of tuesday talking past one another, each accusing the other of failing to act ahead of what could be a damaging blow to the economy. the president highlighted the potential job losses for first responders, some of whom joined him at a white house event. the white house sees trimming spending and raising new revenue as the best path to avert the sequester.

>> republicans in congress face a simple choice. are they willing to compromise to protect vital investments in education, in health care and national security and all the jobs that depend on them, or would they rather put hundreds of thousands of jobs and our entire economy at risk just to protect a few special interest tax loopholes that benefit only the wealthiest americans and biggest corporations? that's the choice. my door is open. i've put tough cuts and reforms on the table. i am willing to work with anybody to get this job done. none of us will get 100% of what we want. but nobody should want these cuts to go through. because the last thing our families can afford right now is pain imposed unnecessarily by partisan recklessness and ideological rigidity here in washington .

>> republicans have ruled out any more taxes. they say they just gave them tax hikes. they're betting they'll blame the president for lost funding in federal programs and the pentagon over ten years, should the sequestration take place. house speaker john boehner said, quote, today the president advanced an argument republicans have been making for a year. his sequester is the wrong way to cut spending. senate majority leader mitch mcconnell insisted "more than three months after the november election, president obama still prefers campaign events to common sense , bipartisan action." and joining us now for more on this from washington , the former chief economist of the international monetary fund and bloomberg view columnist, simon johnson . he's the co-author of "white

house burning: our national debt and why it matters to you," now out in paperback. simon , good to see you this morning.

>> nice to be with you.

>> simon , if you could help us through this over the next week or so, it doesn't look like there's a path to avoiding the sequestration if you listen to the two sides. so how damaging would this be? because we've heard a couple different versions of it that would have immediate impacts, more than 750,000 jobs lost perhaps. others say it won't be that bad. what's your view?

>> i think it's going to be bad. we're going to lose jobs, gdp is going to slow. i don't know if it will push us back into recession. but the effect on lower-income americans including children is really very harsh. given what's already happened with income inequality in this country in the last couple of years, this is nasty stuff.

>> simon , can you give us a sense, perhaps, of how quickly these job cuts occur? march 1st happens. sequester starts. are we looking at one fell swoop very quickly, or is it the drip treatment over a period of months?

>> it's over a period of months. i'm not sure it's going to feel like a drip, though. i think it's going to be a rolling set of nasty dramas. and remember, we also have the issue of funding the government and the debt ceiling fight coming up again in may. so there's a lot of uncertainty around fiscal policy , around government contracting of all kinds. so it's going to be a sort of rolling snowball effect , i might call it, where it gets bigger and bigger. and by may this may be the only thing we're talking about.

>> richard, one could wonder at this point, what was the point of setting the sequester limit if now we're just figuring out ways to come up with a new deal? this was supposed to be the deal. this was supposed to be the thing that forced action.

>> right.

>> what was the point of it if we're not going to enforce it?

>> that's a very good question. what was the point of it? the point of it was that people had crawled out on a limb, and they needed to come off it somehow. the very people who crawled out on that limb are now saying, how did we ever get here? you made me do it. it is ridiculous. and unfortunately, you know, what's that hillary clinton line that she used to use? the definition of madness is doing the same thing over and over again and expecting a different result. just in terms of the politics, and also in terms of the spending and the budget piece of this, this crowd in washington right now is doing the same thing over and over . and what you're going to have, i'm afraid, for republican friends, is that the politics don't work out well. you just fought on the same territory, and it didn't work out. and now you're going to have this rolling series of furlough letters and news stories saying, people are going to lose their jobs. why haven't they come together? and the history of this doesn't look good in terms of the politics, doesn't look good in terms of the budget. also doesn't look good for people who want to deal with the underlying problems.

>> the president did agree with this. this is an agreement he came up with republicans in congress.

>> i mean, the absurd it'd, it was your idea, no, it was your idea is a bit much. in terms of the impact on the macroeconomy, i agree with what simon said that the beneficiaries of these individual programs will take a hit. i'm very concerned about it, especially the defense department , you're talking about $50 billion a year immediately, which will be a big blow to the defense budget . and the beneficiaries of these individual programs on the discretionary side. but in terms of the macroeconomic impacts, and we're talking less than a quarter of 1% of gdp . again, i'm not for all of these cuts, but i am saying in terms of the macro impact, i mean, that's comparable to the tax increases that the president was for over this past year that were passed. so why are the tax increases not going to drain -- be a drain on gdp , but these cuts will be?

>> well, i think it's the combination. it's not just the sequestration. it's the other fiscal fights that we've had and that we're going to have. so it's this combination. and uncertainty of this kind is very bad, as you know, for all kinds of business investment and for consumer decisions. that's going to have a knock-on effect on employment. employers have been very reluctant to take people back on since 2008 . so we're compounding those problems in a way that i think is unnecessary and unfortunate.

>> jonathan capehart's got a question. jonathan ?

>> simon , you were at the imf?

>> yes, he was.

>> yeah. so how does the rest of the world look at what's happening here in the united states and how we go from fiscal crisis to fiscal crisis not every couple of years but seemingly every quarter, does the rest of the world think that we have become completely dysfunctional?

>> yes, although they've known that for some time now. it's remarkable that the u.s. dollar and u.s. government debt is still the primary safe haven . that's where people put their rainy-day money. and yet at the same time, these are sophisticated people around the world. i'm sure many of them watch your show. they understand fully the kinds of problems that we've created for ourselves. now, if you form -- if we continue down this road and if you bring those two thoughts together, the u.s. dollar is not such a compelling reserve asset. foreigners are not as willing to buy u.s. treasury debt in the future at low interest rates . then we have a much bigger problem coming. and we will have brought that problem on ourselves by behaving in this reckless, irresponsible manner repeatedly over these unnecessary fiscal showdowns.

>> simon , a different subject. you've written about, as you call it, the convergence of george will and sherrod brown on financial regulatory reform , which i agree with. i think there's been an opportunity for some time to sort of occupy wall street meets the tea party . it's sort of a joint populist backlash against the big institutions. what do you see in the current environment we're in right now that actually makes that potential increase for some sort of collaboration between, you know, two typically ideological adversaries?

>> well, i don't think we're going to see new legislation. but when i talk to officials, for example, around the fed or the fdic and some other bodies in washington , there is increasing skepticism about the very largest banks, how they behave. too big to manage has increasingly become a mantra. you look at the repeated mistakes, hsbc, jpmorgan chase in the last year or so. so some of the biggest best names on wall street have demonstrated that they can't manage themselves. citigroup repeatedly. and i would say going forward, absolutely citigroup's going to be the center of many of our problems. when you look at that and you think how little benefit we get from the size and the complexity of the institutions, increasingly people on the right like george will and people on the left like sherrod brown are saying let's walk this back. let's find reasonable ways -- put more equity in the system, let's have more capital behind all balance sheets, and let's limit the size and the risks that some of these mega banks can take. limit the downside damage they can do to the rest of us.

>> simon , speaking of risk, how would you say -- where have we come from the financial crisis to now in terms of the level of risk of the largest banks are taking? have they reined it in, or are there still things to be alarmed about, like the huge loss jpmorgan took last year? have we made any progress?

>> a little bit of progress has been made. dodd/frank had some steps in the right direction. certainly bank executives were scared and they're being more careful. when you look at the structure of the issue, the incentives they have, jeremy stein who is a governor of the federal reserve gave a speech a couple weeks ago. he said look at the incentive of big banks managing particularly investments in bank and in derivati derivatives. these problems are still with us and regulation by itself, just say we'll have smarter regulation, that's not going to work. you need a more decisive cap on the damage that these banks can bring to the economy. this is a point that jon huntsman started to make -- did make effectively in the republican primaries last time around. didn't get the broad attraction. george will is picking it up. other people on the right. and the left, sherrod brown , elizabeth warren , are also articulating what i would call populism. i would call it responsible, smart economics as finally confronting a problem that's brought us enormous damage.

>> simon , before i let you go, i want to point out in the title of your book, " white house

burning: our national debt and why it matters to you," it's a conversation we've been having a lot around this table, whether or not the debt matters today or sometime down the road in the future, and i think your question or your statement in that title is one that should be answered because i don't think most americans understand in the now, in the here, why debt matters to them. what's the short answer to that question for the average american , why they should be concerned or perhaps not concerned about the government debt ?

>> well, you should be concerned looking out 20 or 30 years. we bring the debt under control. and in our book, we make some, in our view, middle of the road responsible suggestions for doing that. you shouldn't be panicked. don't do things that damage the economy like, for example, the sequester. that's not what you need in order to regard the debt -- bring the debt under control, regard it as a serious issue, which we do. sequester under these circumstances to be avoided.

>> so do you believe, as, say, paul krugman believes, that the time to invest more into the economy?

>> i would continue with the sensible, long-term investment programs that we have in this country. and i think there are some additional needs around infrastructure and certainly investing in children's health and in children's education. i think those are terrific and important prior tos although they're not entirely federal, there's also state and local responsibilities there. i think the main issue, though, is don't damage the economy. don't have these repeated fiscal fights which are not for good reason and are not necessary to get the debt onto a responsible trajectory. we're doing a lot of damage that is unnecessary and should be avoided. and we're particularly damaging some of those vulnerable people in our society. we're going to look back on this episode in a generation with great regret.

>> as jonathan says, we seem to have these fiscal fights once a quarter at this point. simon johnson , thanks so much. always good talking to you.

>> thank you.

>> it's a good point, richard. we're governing by crisis.

>> yep.

>> i mean, we hop and skip from one to the next. piecemeal change, patchwork solutions. do we have a system, not just the people, do we have a system capable of tackling big problems like getting the debt under control?

>> i actually do think the system is working as it was intended to, right? in other countries, simon was just saying people think that america is totally dysfunctional. in other countries, if the prime minister or a president, if they are the head of the legislature, if they cannot pass that budget, the entire government collapses. our system was set up entirely differently. the budgets have to start in the house. the president doesn't get everything they want on anything. especially the budget. and that is -- that's embedded right at the heart of the way the system was set up. it's designed to be messy. it's designed to stop executives from having power especially over financial matters. the problem here is that everyone, if you step back, everyone's talking about the same problems. it's not as if the president is saying there is no long-term deficit problem. it's not as if republicans are saying we don't want to have to deal with any of this. so just leave it to someone else . the question is can they overcome their pride? can they overcome the very short-term political calculations that they're making? and i think it's very, very difficult. let's face it with this house republican caucus for their own leadership to figure out what the common ground is among house republicans . and if you cannot negotiate for yourself, how are you going to negotiate with the other side?

>> one of the problems, though, simon johnson alluded to, while they haven't done, like, fatal damage to the economy, they have inflicted a series of paper cuts to the economy with their inability to get anything done and to these continuing food fights on an average of every six or eight months.

>> but it's the threat of damage. with the fiscal cliff, that was the threat of fatal damage. and this, too, a million job cuts over two year ifs this goes through. it is the threat. and the funny thing is, we did put these mechanisms in on purpose back when we were doing the debt ceiling debate. and the thinking was oh, we'll put these in, but surely we'll think of rational ways to come to a solution. this will never happen. it happened in december. it's happening now. it's going to happen for the rest of the year with all the other hurdles we've mentioned.

>> and the clock is, the president's real shot at getting anything done is in this next year, 2013 . because 2014 , we're back into election season. the last two years of a second term, rarely anything on domestic policy gets done. that's when presidents try to get big things on foreign policy . you're looking at this year, 2013 , we're already deep into it. and it's --

>> it's like asking your kids about their homework. yeah, yeah. the paper's not due until next tuesday. why don't you get a head start ? monday night i'll be at it.

>> the problem is there's always an election around the bend. you have these tiny windows to get things done. so the question is, can we seize those windows? it doesn't look like we can this year. given the hurdles we have.

>> this is the 2014 election right now. both sides are trying to say we're going to fight 2014 on this one.

>> that's the problem.

>> the problem is they're already into 2014 .

>> that's the problem. it's politics on top of politics. it's like leadership takes sometimes not doing public opinion in your con stitd wency wants. it's leading.

>> this is depressing.

>> before we go, how about a little politics of gun. the white house pushing for new legislation. vice president biden heading to connecticut tomorrow to speak at a conference on gun violence . he'll be just miles away from sandy hook elementary school in newtown, connecticut. yesterday he fielded some questions from parents during an online town hall offering some advice that raised a few eyebrows when it comes to self-defense.

>> if you want to protect yourself, get a double-barrel shotgun, have the shells of a 12-gauge shotgun, and i promise you, as i told my wife, we live in an area that's wooded and is somewhat secluded. i said, jill, if there's ever a problem, just walk out on the balcony here, walk out, put that double-barrelled shotgun and fire two blasts outside the house. i promise you, whosever coming in -- you don't need an ar-15. it's harder to aim. it's harder to use. and, in fact, you don't need 30 rounds to protect yourself. buy a shotgun. buy a shotgun.

>> so the vice president there was making the case --

>> he's right.

>> -- of semiautomatic weapons. he doesn't want to take your gun away. he just wants you to have a shotgun and not a semiautomatic weapon.

>> there's something about the vice president looking into the camera and saying, buy a shotgun.

>> he's absolutely right. if you live in the area he just described, the noise alone of a shotgun is going to scare off any potential intruder.

>> it's like having an alarm system sign and not having the alarm system .

>> two shotguns he owns. he keeps them locked away in a cabinet in his delaware home.

>> i'm so happy they're locked away. from joe biden .

>> if someone actually tried to burglarize his home, i have a feeling the secret service would address the issue before jill biden ran out.

>> i don't know. i don't know.

>> with a double-barrelled shotgun.

>> i can see joe in the tank top and boxers.

>>> coming up, bullying in the age of social media . how twitter and facebook can make it feel like a 24/7 affair to a teenage victim. this is an important topic. we're going to get into it with author and senior editor at "slate." we tackle that topic in her new book. you're watching " morning joe " brewed by starbucks. [ clears