'This Week' Transcript: Senators Charles Schumer and Jon Kyl

NEW YORK, Dec. 30, 2012— -- (BEGIN VIDEO CLIP)

KARL (voice-over): Good morning, and welcome to a special edition of "This Week."

OBAMA: The hour for immediate action is here.

KARL: There's no doubt about that. With less than two days before America plunges over the fiscal cliff, lawmakers are finally saying, "Let's make a deal."

MCCONNELL: I'm hopeful and optimistic.

REID: Whatever we come up with is going to be imperfect and some people aren't going to like it.

KARL: So what will the imperfect solution look like? And even if there is a deal, will it be able to pass? And why does it always come to this?

OBAMA: This is deja vu all over again.

KARL: We'll ask our headliners, from the Senate, Democrat Chuck Schumer and Republican Jon Kyl, from the House, Democrat Chris Van Hollen and Republican Raul Labrador, in our powerhouse roundtable and all the week's politics, with former Vermont Governor Howard Dean, former Minnesota Governor Tim Pawlenty, Todd Purdum of Vanity Fair, and Maggie Haberman of Politico.

ANNOUNCER: From ABC News, "This Week" with George Stephanopoulos. Reporting from the Newseum in Washington, chief White House correspondent Jonathan Karl.

(END VIDEO CLIP)

KARL: You are looking at live pictures of Capitol Hill. Over the next 12 hours, what happens there or what doesn't happen will cut to the very heart of your financial future and the fate of our struggling economy.

Good morning. I'm Jonathan Karl with a special edition of "This Week." George is off for the holidays.

The world is watching and waiting to see what happens here today in Washington. At this hour, congressional leaders are working to find common ground, desperate for some sort of compromise. My sources tell me this morning the odds of a deal are still no better than 50/50.

The Senate will convene today at 1:00 p.m., the House back in at 2:00 p.m. Stock markets around the world are on edge, the Dow down five days in a row, falling nearly 160 points Friday, and early indications are those losses could be much worse if there is no deal. Consumers are jittery, too, their confidence in the economy plunging for the second straight month, falling to its lowest level since August.

So that's where we begin. Let's get the latest from two top Senate leaders. Joining us now, Senator Chuck Schumer of New York, Senator Jon Kyl of Arizona.

So, gentlemen, do we have a deal?

SCHUMER: Well, there are certainly no breakthroughs yet between Senator McConnell and Senator Reid, but there's a real possibility of a deal. I've been a legislator for 37 years, and I've watched how these things work. On these big, big agreements, they almost always happen at the last minute. Neither side likes to give up its position. They eyeball each other until the very end. But then, each side, realizing that the alternative is worse, comes to an agreement. So while an agreement is hardly a certainty, I certainly wouldn't rule it out at this last minute.

KARL: Give me your odds. I said 50/50...

(CROSSTALK)

SCHUMER: I think a little higher than that.

KARL: Senator Kyl?

KYL: I don't disagree with Chuck. And I also would say that the way you opened the program does not under- or overstate the consequences. If we are not able to reach an agreement, it will be dire. And that's from everybody from the Congressional Budget Office, which is nonpartisan, as you know, to the Fed chairman, probably at least another million jobs lost, an unemployment rate over 9 percent, and putting us back into recession. So responsible people on both sides of the aisle do need to try to come together, and there is a significant effort underway right now.

KARL: But let's understand what we're talking about. What kind of a deal? This is a -- the bare minimum, as the president said. What would this deal include?

SCHUMER: Well, obviously, I think all of us would have preferred the grand bargain, so to speak, of a $4 trillion deal. That can't happen at the last minute. But to avoid going over the fiscal cliff, to avoid taxes being raised on middle-class folks and on 98 percent of America, to avoid, in my view, a sequestration that would be very damaging to the defense and non-defense sides, there's an agreement that's possible.

And, you know, there are four issues that are outstanding. Each of them is bridgeable in a certain way. They are -- we believe that the Bush tax cuts should go up for people above $250,000 income a year. There's a disagreement on estate tax. We prefer the 2009 levels; Jon would prefer something else.

Whether unemployment insurance is included in, we feel that's very important. And then whether you use some -- a small portion of the revenues you gain from the tax increases to pay down sequestration for a year, those would be the four areas that they have to come to agreement on.

There are some areas I think there is agreement, dealing with the AMT patch so that middle-class people don't go up, the SGR, the Medicare, and some tax extenders on both the business and middle-class sides.

KARL: Let's be clear here. You're talking about extending some tax cuts for most Americans. You're talking about some more spending. This would be extending unemployment benefits. You're not talking about any of the hard stuff. I mean, this doesn't do anything -- as a matter of fact, the Wall Street Journal looked at the outlines of this potential deal and projected you'd actually add to the deficit as a result of a mini-deal over the next year.

KYL: Yeah, Jonathan, some people have tried to talk about the reductions in spending that are necessary to get our fiscal house in order. That would be the Republican side. The president and a lot of folks in his party have shied away from those discussions, and I think Chuck is accurate in saying that that's not going to happen in this conversation, but it should. You are right.

I can quote from the Washington Post editorial of just a few days ago in which they chastised the president for not following through on his campaign promises to talk about a balanced solution, one that would involve both tax revenue and savings. Ironically, the revenue that's produced in the president's proposals is about the same amount of money we're going to be spending just to provide disaster relief because of the hurricane to some of the folks on the East Coast.

SCHUMER: Now, wait, I don't think that's fair to the president. The president had put serious spending cuts on the table. He and Speaker Boehner a week-and-a-half ago were this close. In a $4 trillion deal, they were $200 billion apart on revenues and $200 billion apart on cuts.

And then what happened, all of a sudden, Speaker Boehner decided to do this Plan B. He went back and for a week tried to raise the amount that you would extend the Bush tax cuts to people over $1 million, couldn't get -- the plan was flawed from the beginning. Instead of trying to get a bipartisan deal with Democrats and Republicans, he tried to win over the 50 most hard-right conservatives in his body. It fell -- wait, wait -- it fell apart, and it's leading us to this last minute.

So our choice is simple: Avoid the fiscal cliff and people's taxes going up or do nothing and let it happen. We didn't want to be in that position, but Speaker Boehner pulled out of the deal a week-and-a-half ago. It's not fair to blame the president.

KARL: But I've got to ask you about this question about -- because this is one of the big sticking points left, is whose taxes go up? Is it people making over $250,000, as the president wants, or Republicans suggested nobody, or people making over a $1 million?

But you, Senator Schumer, had proposed raising taxes only on those making over $1 million. And I want to take a look at what you said about this proposal, going at $250,000. This was last year. You said, "In the eyes of many, it is hard to ask households making $250,000 or $300,000 a year -- in large parts of the country, that kind of income does not get you a big home or lots of vacations or anything else that is associated with wealth. It also would affect too many small businesses."

Weren't you right back then, when you said it was wrong to raise taxes on those...

(CROSSTALK)

SCHUMER: Well, look, we offered that to our Republican colleagues two years ago, when the political landscape was different. They rejected it. And then the president, sticking to $250,000, campaigned on it openly, overtly. He won the election on it overwhelmingly on that issue; 60 percent of the public was with him.

So that is our position. It's a position that brings in more revenues. And what we have learned, as the fiscal situation deteriorated, if you go much higher than $250,000, to raise the rest of the revenues you need, you're going to hurt the middle class as you take away their tax deductions. So it's the right place...

KARL: But you said back then...

SCHUMER: ... to be.

KARL: But you said back then it would affect too many small businesses. Frankly, you sounded a little like Senator Kyl.

SCHUMER: Well, the bottom line is very, very simple, and that is that if you do -- if you go much above $250,000, you're going to hurt the middle class even worse and small businesses even worse by having to take away tax deductions. That's not the place we were at two years ago. It is the place we're at now, because the situation is deteriorating.

KYL: Jonathan, it's exactly the opposite. The higher you set that level, the less small business you're going to hit. And you're exactly right, and Chuck was right back when he talked about a million, because the increase in the tax rates for individual taxpayers sweeps in about a million small-business owners. Remember, about half of small businesses are women-owned. And it sweeps them up because they don't pay corporate tax rates; they pay as individuals.

KARL: But -- but...

SCHUMER: Wait a second. That's counting big hedge funds as small businesses, big Hollywood productions, like Oprah Winfrey, as small businesses. It affects very few. We all know mom-and-pop small businesses, the dry cleaner down the street and others, don't make millions and millions of dollars.

KARL: And let's remember. All the tax cuts are set to expire on January 1st, so I've got to ask you, Senator Kyl, a lot of Republicans, a lot of your colleagues, people you greatly respect have said, you know what, why don't we do $250,000? We've got to do what we can do.

Let's take a look. Senator Cornyn, who's going to replace you as the number-two Republican in the Senate, said, "I believe we're going to pass the $250,000 and below sooner or later. We really don't have much leverage there because those rates go up by operation of law December 31st. I would focus on areas we have more leverage."

So why would the president agree to raise that limit a dollar when you have so many Republicans that have said, you know what...

KYL: I don't think you have "so many Republicans." That was one statement, and the context of it was, what is realistic as a deal, given the president's adamant position that he wouldn't compromise on anything above $200,000?

Let's just get back to the theory, because Chuck had it right the first time. The more people you sweep up in this big tax increase, the worst it's going to be for the economy, the worse it's going to be for small business, and most importantly, the worse it's going to be for workers.

Let me just point out two interesting statistics. Over half of the dividends paid by corporations go to people 65 years of age and older. In fact, a majority of adult Americans own stock or -- let me just make this point -- so when the dividend rate goes up to 68.6 percent, which is the combined corporate and dividend rate, A, corporations aren't going to pay dividends, and, B, if you are one of those seniors that get a dividend in your retirement, you're going to be taxed 68 percent. And, secondly, the death tax, 55 percent rate...

(CROSSTALK)

SCHUMER: Let's go to the death tax.

KARL: Quickly, and then...

(CROSSTALK)

SCHUMER: Six thousand of the wealthiest, wealthiest estates are the difference between what President Obama wants and Jon Kyl wants. It's $119 billion over 10 years. For those 6,000 estates a year, to give $119 billion away and instead take it out on cuts on Medicare and -- and -- and roads and education is unconscionable.

(CROSSTALK)

KARL: So but -- but can we look at the -- can we look at the bigger picture for a second? We've known for two years that these tax cuts would be expiring the day after tomorrow or at the end of the day tomorrow. We've known that these automatic cuts, the so-called sequester, this was going to be happening for more than a year.

Aren't you a little embarrassed as leaders in the Congress that it has gotten to this point, that tomorrow is New Year's Eve...

SCHUMER: Yeah.

KARL: ... the day it all expires, and you still don't have an agreement? I mean, we've been having this argument for two years.

SCHUMER: It is embarrassing, but almost every disagreement we have had is not because of the Senate, where we've had lots of -- you know, we've come to agreement on many things. There are 50 hard-right people in the House who don't want to compromise. They don't believe in any revenues; they say compromise is a dirty word. And Speaker Boehner, just as recently as last week, played their tune. You cannot make a deal...

KARL: OK, but then they berate the president for not...

(CROSSTALK)

SCHUMER: ... if you're going to let -- if you're going to let the people who are the hardest right and uncompromising dictate what we should do. So it's embarrassing, but I am hopeful in the new year, after Speaker Boehner is re-elected and he doesn't have to worry about those 50, that he will start working in a way like the Senate works a little more, which is Democrats and Republicans together, a majority of each party deciding and the extreme not deciding.

KYL: Let me get a word in edgewise here. On December 14th, here's what the Washington Post concluded an editorial by saying. There's no way to fix America's problem without doing something on entitlements. If the Democrats and Mr. Obama in particular don't get more seriously into that discussion, they have no standing to complain about the Republicans' lack of balance.

This is not just a problem with the House. The House passed legislation that would overt the fiscal cliff, both on the sequestration side and on the tax rate side. They've already acted.

SCHUMER: Now, wait a second.

(CROSSTALK)

SCHUMER: That was vouchering Medicare, and no one wants to do that.

KARL: I've got to ask Senator Kyl, though. There was a fascinating column yesterday by a conservative, Marc Thiessen in the Washington Post, making the case for allowing all of the tax cuts to expire. Let's take a look at what he said. He said: Shopping on a credit card is fun until the bill comes due. But if the bill never arrives, what incentive do people have to stop spending? Big government is great if you don't have to pay for it. Well, now it is time to pay for the bill. Maybe when the costs of the stimulus, Obamacare, the exploding entitlements are finally deducted from their paychecks, Americans will rediscover the virtue of big government.

Doesn't he have a point? If we have expanded the size of government so much under President Bush and President Obama, isn't it time to see somebody pay higher taxes?

KYL: Well, the way to economic recovery and growth is not by raising tax rates on the very people that employ the workers you want to keep working. Raising taxes is not going to provide the kind of growth that we need in the country to lift the people in the middle-income and lower-income brackets higher and to provide the capital that's necessary to invest in the markets to hire more people.

That's why both Senator Schumer and I are committed to trying to resolve this cliff problem, because, yes, it would be a very difficult thing. And if you want to go back into a recession and lose a million more jobs, then just talk about...

(CROSSTALK)

SCHUMER: So there is one place we agree. Nobody wants to raise taxes on people below $250,000. And that will be the impetus and why both of us have some degree of optimism that we can avoid this fiscal cliff in the next 24 hours.

KARL: OK, we are -- we are just about out of time. I want the bottom line from both of you. Even if Senators Reid and McConnell come to a deal, you're the top Republican vote-counter, will it pass and will it fly in the House? Will this be done in time?

KYL: If there is enough in the agreement for Republicans to be able to support it and we can get a majority of Republicans in the Senate and a majority of Democrats in the Senate, then I think there's a good opportunity for a majority of Democrats and Republicans in the House to support such a package. And I think a lot of that depends upon whether President Obama is willing to compromise this sort of fixation with raising taxes above anybody making more than $200,000 a year.

SCHUMER: Reid and McConnell are both very good leaders and very good vote-counters. If they come to an agreement, they know that they will be able to carry a majority of each of their troops. The real question mark is the House. The House is a bit out of control. They're the reason we've had the problems all along. But my guess? If the House and Senate agree and Leader McConnell agrees, the House will go along with it, too.

KARL: All right. Senator...

(CROSSTALK)

KYL: ... could I just say -- I would just say, it is not out of control to want to do something about our runaway spending in this country.

SCHUMER: You've got to compromise. You've got to compromise.

KARL: Senator Schumer, Senator Kyl...

KYL: Thanks, Jonathan.

KARL: ... thank you so much for joining us, and I hope you are right to be optimistic.

Up next, the House has its say. Are they ready to vote yes on a potential deal that may come from the Senate? Plus, our powerhouse roundtable waiting in the wings, their take on the toxic environment in Washington, the cliff chaos, and their predictions for 2013. We'll be right back.

(COMMERCIAL BREAK)

KARL: Let's turn now to the House. We're joined by Democratic Representative Chris Van Hollen of Maryland and Republican Representative Raul Labrador of Idaho.

So you just heard it from your Senate counterparts. They appear to be close to a deal, a mini-deal. Will it fly in the House?

VAN HOLLEN: Well, the House is a real problem, because, as we know, Speaker Boehner, the Republican speaker in the House, was unable to get his members to support his own plan, which said that we should ask people earning more than $1 million a year to pay a little bit more. And so Speaker Boehner is going to have to decide that he's going to allow the House finally to vote on a deal, whatever may come out of the Senate, rather than -- rather than play Republican caucus politics in the House.

KARL: But I guess the question you can answer is the Democrats. Based -- the deal we're talking about now, which would not address the debt ceiling, which would extend tax cuts to whatever income level they agree to, and do a couple of other things, like extend unemployment benefits, would Democrats en masse vote to support that in the House?

VAN HOLLEN: Well, Jon, I think you know -- and we'll probably be saying the same thing on this -- until we know exactly what the Senate's proposing, the senators couldn't tell us the details, it's impossible to know. It depends on the deal.

All I know is that Democrats in the House are very determined to avoid going over the fiscal cliff, but we want to make sure that any agreement asks folks at the very high income levels to pay a little bit more to reduce our deficit, because if you don't ask them to pay a little bit more, everybody else gets hit that much harder.

LABRADOR: You know, it's kind of funny to sit here and listen to Chris and say -- saying that it's the Republicans in the House who are the problem. If you look at the budget that Chris proposed two years ago, which was the alternative to the Paul Ryan budget, it only asked for tax increases from people making over $1 million. There were only about 50 of us in the House who said that we were not going to vote for John Boehner's deal last week.

All they needed was 50 Democrats to vote for the deal, and it would have passed last week, but, no, he spent the entire day, the entire day of the deal on the House floor attacking everything that John Boehner was going to do. When John Boehner actually tried to meet them halfway and now he comes here on national TV and he says that -- that -- that it's the Republicans in the House...

(CROSSTALK)

VAN HOLLEN: First of all, Raul, you've got to get your facts right. The budget that we brought -- and we did have an alternative budget that got an overwhelming Democratic vote -- did not say we're only going to raise taxes on people over $1 million. It actually supported the president's proposal. So you got to check your facts. What we're asking for in the House is the same thing that the Republicans got in the Senate, an up-or-down vote on their proposal.

KARL: Which would be raising taxes on those making over $250,000 a year.

VAN HOLLEN: That's right. But, Jon, what we're saying is, you don't have to -- you don't have to agree with us. Just allow a vote in the House. The Republicans got a vote in the Senate on their proposal.

KARL: But let me ask you, though, because Nancy Pelosi, your leader in the -- in the House, had proposed the million-dollar threshold.

LABRADOR: Exactly.

KARL: Let's take a look at exactly what she said. Don't want to put words in anybody's mouth here. This is Nancy Pelosi from March of this year -- I'm sorry. From March of this year. Go ahead.

(BEGIN VIDEO CLIP)

PELOSI: I said, let's begin by getting rid of tax cuts for people making over $1 million a year. I'm not even saying $250,000.

(UNKNOWN): I know.

PELOSI: And the president is saying $250,000. I'm saying $1 million and above. Who can argue with that?

(END VIDEO CLIP)

KARL: So who can argue with that?

VAN HOLLEN: Well, the question was whether...

LABRADOR: Only the Democrats.

VAN HOLLEN: The issue is, who could argue with over $1 million? And obviously, in the House, the Republicans didn't even agree with their own speaker on $1 million.

Look, the president, as we all know, as part of a larger agreement, has said $400,000 should be the threshold as part of a larger agreement. The issue is the balance between the cuts and the revenue, and what we've called for is balance. Republicans in the House have refused even one penny so far from people earning more than $1 million.

KARL: Which is -- which is -- which is your position...

VAN HOLLEN: That is not balanced.

KARL: So let me ask you. As I recall, when Boehner proposed this, $1 million and above, your answer was not just no, it was hell no.

LABRADOR: Absolutely.

KARL: So given what they're talking about here is going to certainly raise taxes on people making less than a million -- we don't know exactly where the threshold's going to be -- are you going to be hell no again?

LABRADOR: If it raises taxes and it doesn't cut any spending, which is what they're proposing, I think I would be -- I would be a no. But you have to look at what's happening. The president first proposed two -- about a year-and-a-half ago, he proposed $800 billion. And I love Washington math. He proposed increases in revenues of $800 billion. Then he goes to $1.2 billion. Now, after the elections, he's going to $1.6 billion. He goes back...

(CROSSTALK)

VAN HOLLEN: You know, Raul's got to get his facts straight. The president's proposal...

LABRADOR: They're the facts.

VAN HOLLEN: ... well over a year ago, if you look at the president's budget...

LABRADOR: If you read Bob Woodward's book, it was -- it was at $800 billion.

(CROSSTALK)

VAN HOLLEN: Look at the president's budget. Look at the president's proposal to Congress. September 2011, just take a look. It's on the Internet, $1.6 trillion in revenue.

KARL: Right, but...

(CROSSTALK)

VAN HOLLEN: That was -- that's what he proposed, Raul. Then...

LABRADOR: How many votes did that budget get?

VAN HOLLEN: Actually, it got overwhelming support in the House, despite the talking point you guys use.

LABRADOR: How many -- how many votes?

VAN HOLLEN: Well...

(CROSSTALK)

VAN HOLLEN: ... based on the Republicans' plan got an overwhelming Democratic vote...

KARL: It failed. The Republicans have failed, as well. So let's -- but I want to ask, Republicans seem to be incredibly divided on this issue of taxes. You wouldn't even support your leader. You wouldn't even support Speaker Boehner, a relatively modest increase of those making over $1 million.

Charles Krauthammer said that this is -- Republicans are basically completely divided on this. Here's what he said: President Obama's been using this -- and I must say with great skill and ruthless skill and success -- to fracture and basically shatter the Republican opposition. His objective from the very beginning was to break the will of Republicans in the House and to create an internal civil war, and he has done that.

Is that what we are seeing here, is an internal civil war...

LABRADOR: Absolutely.

KARL: ... in the House?

LABRADOR: And I agree with Charles. This -- this has been what the Democrats wanted to do from day one. They have tried to divide the Republicans. They have tried to get us to fight against each other on taxes when -- I'm not really sure that they don't want to go over the fiscal cliff.

You're going to have Howard Dean here a little bit later. He agrees with many Democrats that what -- what they need is actually more revenue. They want to expand the growth of government. They need more revenues. You know, Democrats are like bank robbers. You don't have the money in the 2 percent -- the money is in the 100 percent. They want to raise taxes on everyone.

(CROSSTALK)

KARL: But you're unwilling...

(CROSSTALK)

KARL: ... you're unwilling to compromise at all.

LABRADOR: I'm willing to compromise if we have real cuts.

KARL: Not on taxes.

LABRADOR: No, if we have real cuts -- because what happens in Washington is that we talk about raising taxes today and then we talk about cuts 10 years from now. It happened under Reagan, it happened under Bush, and it's what's going to happen to us once again.

VAN HOLLEN: Jon, look, the president put on the table a proposal with $1.2 trillion in cuts, if you include the interest savings, and $1.2 trillion in revenue. They can't get that kind of balanced package through a very right-wing caucus in the House of Representatives. The speaker is going to have...

(CROSSTALK)

KARL: ... smaller deal.

VAN HOLLEN: ... country over his Republican caucus.

KARL: Congressman Van Hollen, thank you for joining us. Congressman Labrador, thank you.

LABRADOR: Just remember that the balance was 3 to 1, and now we're talking about 1 to 1.

VAN HOLLEN: Well, no, that's not true.

(CROSSTALK)

KARL: We do have a raucous debate when it comes time to the House.

(CROSSTALK)

VAN HOLLEN: ... fact-free zone when it comes to the facts.

KARL: Still to come, this picture of president and Mrs. Obama was the most re-tweeted photo of all time. Will it be one of our powerhouse roundtable's defining moments of 2012? Stick around and find out. We'll be right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

(UNKNOWN): This country is hurting right now. I'm like, we need to stop worrying about politics and worry about people.

(UNKNOWN): Sit down, get in a room, and don't come out of that room until you've got this thing taken care of.

(UNKNOWN): It's absolutely ridiculous. And it (inaudible) long time ago.

(UNKNOWN): And if you have to get the job done, you need to get the job done.

(UNKNOWN): We heard the job is compromise. You have to work together to get the job done.

(UNKNOWN): I have very little faith that they're actually going to reach a deal, and that frustrates me greatly.

(UNKNOWN): If my job was to do something for four years and I couldn't do it, I'd deserve to be fired.

(UNKNOWN): The job is undone. Finish up. Let's go. We're all waiting.

(END VIDEO CLIP)

KARL: Welcome back. There's no shortage of anger out there at our political leaders for failing to do their job. Let's bring in our powerhouse roundtable. We have Todd Purdum, national editor of Vanity Fair; former Vermont governor and founder of Democracy for America, Howard Dean; Maggie Haberman, senior political reporter for Politico; and former Minnesota Governor Tim Pawlenty, now president and CEO of the Financial Services Roundtable.

Thank you all for joining us. Todd, we're talking about Congress. This is a big moment for Congress, obviously. But give us the perspective from the president's point of view. How important a moment right now is this in a test for President Obama?

PURDUM: I think it's a very big moment. It sets the tone for his second term. He thinks he has the public behind him. He thinks that he campaigned on these issues and he won. The problem is, individual members of the House, who outpolled him in their districts, don't share that view. So I think the stakes are very high for him, and he has got to deliver something, too, and he knows it, and that's why he's back here, and that's why maybe something will happen in the next 24 hours.

KARL: And you've seen the polls, Governor Pawlenty, that -- I mean, by a large margin, people right now are blaming Republicans for this mess and have made it clear that if we go over the fiscal cliff, it's going to be Republicans that are going to pay the price.

PAWLENTY: Well, the polls, of course, are a reflection of a moment in time. But, you know, I had some of these issues in Minnesota. I had the first government shutdown in the history of my state. And I learned some things, Jonathan.

One is, you've got to have leverage in a negotiation. Two is, you can overplay your hand. And if you corner one group so completely and you leave them no way out, it's likely to blow up. And the third and last thing that I learned is, if you do overplay your hand, the ill will that comes from that can reside for a long time and spoil your chances to get things done down the road.

And President Obama, I think, is in a very powerful position right now. He has some leverage. But I think in the interests of the country and the interests of getting things done for the rest of his term, he should be mindful of not overplaying his hand here. He's got a good sound bite, which is raise taxes on the wealthy from his perspective, but he hasn't given the Republicans the good sound bite they need to do the deal. You need that symmetry.

KARL: But, Governor Dean, you've been out there making quite consistently that we should go over the fiscal cliff.

DEAN: Right, see, I think we're having a conversation about the short term and about politics in Washington, which has pretty much been going on in the media since the election. But long term, we have to worry about the deficit.

This is a good deficit, solid deficit reduction proposal. My great fear is that they will make a deal and they'll simply kick the can down the road, and I think that may happen. It would be too bad. The right deal is to really take a big bite out of the deficit. You go back to the Clinton tax rates and you make some significant cuts. And you cut the Defense Department, which hasn't been cut in 30 years.

KARL: Maggie, it looks like we are going to get exactly what the governor just -- I mean, assuming they get to a -- and what was your take, listening to Schumer and Kyl?

HABERMAN: Well, Schumer and Kyl, my take was that there actually has not been that much progress. My take on Labrador...

KYL: They sounded so optimistic.

HABERMAN: Well, they did, they both did, because that's where the deal is being discussed right now, is in the Senate. It was the discussion with the House members that I found much more contentious and sort of interesting about where we are, and that I think is a real concern.

I do think that some Senate Democrats and some liberal members of the House would like to see the cliff gone over. They think that is the best way to press a reset. I don't think that's where the president is; I really don't. I think that's what he's saying publicly, but I think his second track is, I need a deal for all the reasons that Todd said.

KARL: Because if we go over the fiscal cliff, and he can get -- he can blame the Republicans, and he can do the tax cuts on the rich thing, he's the president. I mean, you know, as has been said, we don't really remember who the speaker of the House was when -- when Hoover was president. I mean, you know -- I mean, ultimately, it's his economy. It's his...

PURDUM: It's his country, and it's his economy, and it's his government. But I think one of the things that's instructive is that we are now down to such a tiny prospective deal, the tough issues are not being dealt with at all, even the sequestration, which was supposed to be so horrible, these automatic cuts in defense and other programs that were supposed to be so horrible that we'd never let them happen are now almost certainly going to happen, because there's not time to deal with that in the next 24 hours. I think it's just -- it's really a sad...

DEAN: I mean, the frustrating thing for me is, isn't this what we really need to do? I think Washington is actually incapable of making a deal that's going to help the country. What we're talking about here is a deal that's going to help the politicians. It'll help the president. We're arguing it's going to help Boehner. It's going -- that is not the problem. The problem is, we have a really big deficit, that the economy is three -- is much stronger three years on down the line than it was if we can stand this.

Now, I believe also that if we go over the cliff, then the president has a lot more leverage, because then all of sudden middle-class people's taxes are going to rise, and that's going to be bad for every politician in Washington. Maybe they'll actually get something done. But I think, at this point, at this late hour, I think almost any deal they come up with is worse than going over the cliff.

KARL: And let's be honest. The deal they're talking about would effectively reduce tax rates, because it would extend some of these taxes...

DEAN: Yeah.

KARL: ... and it would increase spending, so it would do exactly the opposite.

DEAN: Exactly. It will make the deficit worse if they cut a deal.

KARL: I mean, is that where we are, Governor?

PAWLENTY: No, I mean, Jonathan, the...

(CROSSTALK)

KARL: ... stuff that makes the problem worse?

PAWLENTY: I hope not. But you need leverage to get a deal done. This is a moment in time where people's backs are up against the wall. And it would -- there would be -- there was an opportunity for a big deal, but you need symmetry. If you're going to fly over the cliff, you need the tax cut -- or, excuse me, the president's argument on raising taxes, but you also need those structural spending changes to get enough Republicans to support the deal. They haven't gotten to that point. They just haven't gotten to that point.

HABERMAN: The other thing that I think is important to remember here is that, if we -- if we get a small deal -- and it really is, as Todd said, what we're talking about right now -- we're going to be back here again in a couple of weeks for a debt ceiling. And I'm not so clear on exactly who has the leverage there. Republicans think they have more leverage; Democrats, some will privately agree with that. So, you know...

(CROSSTALK)

KARL: Right, so we're going to be here in a situation where, once again, the credit of the United States is in question, we're at risk of defaulting because we've hit the debt ceiling. The president says he doesn't want to negotiate at all on this.

I'm wondering what your position on this is, Governor Pawlenty, because I remember full well what you were arguing during the Republican primaries, making the case that the Republicans should not give in and raise the debt ceiling unless they got a big price. Take a listen.

(BEGIN VIDEO CLIP)

PAWLENTY: I've said all along, don't do it unless you get something really good for it. You have to draw some lines in the sand. It's also a moment where you can push people's backs against the wall and get something significant.

(END VIDEO CLIP)

KARL: So you're now head of the Financial Services Roundtable. Is it still your position that Republicans should push the president against the wall and not give in on the debt ceiling?

PAWLENTY: Well, the financial services part of the economy, as well as the economy more broadly, wants to avoid the cliff. We don't want a Howard Dean scream, as the country bungee jumps into the cliff.

(CROSSTALK)

DEAN: You might need one. You might need one. I was right then, and I'm right now.

PAWLENTY: But to answer your question, seriously -- and thank you, Governor Dean, for your good sense of humor...

DEAN: Thank you, Tim.

PAWLENTY: ... you've got to have -- in moments in politics, you've got to have people get their backs up against the wall to do something big, but you don't want to overplay your hand. That's the...

KARL: But aren't Republicans playing with fire...

(CROSSTALK)

PAWLENTY: Speaker Boehner came out early, Jonathan, and said, look, I'll raise revenues and, by the way, I'll also increase the debt ceiling. In that moment, there was a signal that perhaps a bigger deal could have been done, and then it fell apart, but there was an acknowledgement that the debt ceiling would go up by Speaker Boehner. There was an acknowledgement that revenues would go up by Speaker Boehner. So the one wing of the plane you need to fly over the cliff was being constructed pretty nicely from -- on that side, but the other side, the real structural changes in entitlements, never materialized.

DEAN: You see, I think the smart thing to do here is to go over the cliff and then wrap -- then do a big deal, then wrap the debt ceiling, the cliff, the tax rates, the cuts all into one big deal. It's going to take some time, but I think you can -- if you go -- also, if you go over the cliff, you reduce the debt ceiling problem by $600 billion, so the debt ceiling gets postponed some more and that should give you enough time to do -- to do the deal. I think that's the way to go.

Obviously, you can't let us go over the cliff on the debt ceiling. That's a much more serious problem. This is really not a cliff. We call it the fiscal curb, which is really what it is.

KARL: It's not as catchy, Governor.

DEAN: I know.

KARL: But let's take a look at the larger issue here, this kind of absurdity of being here at the end of the year with this situation. Take a look -- take a listen to how President Obama put it on Friday.

(BEGIN VIDEO CLIP)

OBAMA: This is deja vu all over again. America wonders why it is that in this town for some reason you can't get stuff done in an organized timetable, why everything always has to wait until the last minute.

(END VIDEO CLIP)

KARL: I think the president there was speaking to virtually -- you know, for virtually everybody in the country, but I was struck, Todd, when he said this town, as if he doesn't live in this town, and actually have a pretty important address in this town.

PURDUM: Well, I mean, I think he's -- the painful lesson of his first term is that the limitations of change within Washington are pretty severe. And, you know, he's talked about that often in the campaign. And that's one of the things he learned.

So it will be interesting to see, if we do go over the cliff, whether the president can muster support among the public to say, you know, in a Howard Beale kind of moment, forget Howard Dean, we're -- we're mad as hell, and we're not going to take it anymore.

I mean, as you pointed out, a year ago we knew this, and two years ago we knew the tax cuts, so I'm not sure why we should think two months from now will be better in terms of trying to strike a deal on the debt ceiling or whatever it is.

KARL: And part of it is the incredible polarization of Congress.

PURDUM: Terrible. It's built-in, structural, built-in polarization.

KARL: Let's take a look. Nate Silver, the guru of all things numbers when it comes to politics or sports, looked at what's happened to the House of Representatives. Take a look at this, some pretty striking numbers.

We now have -- we look at swing districts. These are districts that were within 5 percent of where the national vote was in the presidential race. There used to be -- 1992 -- 103 competitive swing districts. Now there are just 35 districts out of 435 that are actually competitive.

And then what he calls landslide districts -- these are lopsided districts where there was more than 20 percent difference between the national race and what we have now -- look, the number of landslide districts has almost doubled. These members of Congress are now in a situation where they're worried about a primary and they are not concerned at all about appealing to the other party.

DEAN: It's actually a fairly simple fix, which, of course, neither the Republicans or the Democrats are going to want. You do what the voters of Florida and California did. You take redistricting out of the hands of legislators and put them in the hands of a public group, nonpartisan group. It's worked in Iowa for a long time. It had some startling results in California. And it's working in Florida. And this has been done by ballot, by citizens who are rising up against their state legislatures and saying, enough politics, stop screwing around with our government, let's do it ourselves.

HABERMAN: Well, this is what you saw with Plan B, right? I mean, essentially, this was the problem for Boehner. It's true on both sides, but this was why Boehner was unable to get the votes that he needed for an alternative plan that was purely about a P.R. gimmick, but basically his members did not want to take a vote on something that wasn't going to be real in the first place because of the fear of primary, because of threats over the Norquist pledge and the Club for Growth threatening to primary people.

So I don't see what -- I mean, I agree with you in terms of the longer-term nonpartisan redistricting, but in terms of the more immediate -- more immediate next couple of years, I'm not sure how you change it.

KARL: What does it say about Boehner's leadership? I mean, that was a pretty extraordinary moment when, even with a larger majority that he's going to have in the next Congress, he couldn't get his conference to agree on the bare minimum.

PAWLENTY: Well, I think at some level it's not just leadership, it's math. You know, in the old days, President Reagan and Tip O'Neill have a cocktail together and cut a deal that was pragmatic. You remember President Reagan said he wouldn't raise the gas tax ever. You know, his feet were in cement on that when he announced it at the microphone. He came and famously said the sound that you hear is the sound of cement cracking under my feet.

(LAUGHTER)

But back in the day, there were enough people in both parties who were kind of in-betweeners and they could -- they could accommodate a pragmatic solution. Those days appear to be numerically over for the moment, as your graph from Nate Silver just showed.

Even of the 35 swing districts, Jonathan, those 35 aren't necessarily swing members of Congress. Probably half of them are fully committed to the right or the left personally. So you have a very narrow sliver left of anybody who could be a hinge vote. Everybody is entrenched hard left, hard right, and there's very little room to maneuver in between.

KARL: And, Todd, also, you have a situation where the speaker doesn't have power because he doesn't have some of the tools that he used to have, earmarks, can't spread around extra special projects to districts.

PURDUM: Well, he can't even control his freshmen. I mean, the notion that some of these loopy freshmen go out and say things on a television program, I mean, 40 years ago, the notion -- or 50 years ago that Sam Rayburn would have had to deal with that is just inconceivable, that the breakdown in party discipline and seniority and all of those things that we, you know, like to decry as bad for democracy, it turns out in certain ways they were pretty good for democracy.

KARL: So is Boehner ultimately -- and maybe through no fault of his own style, but the kind of political situation, one of the weakest speakers of the House we have seen in modern times?

PURDUM: Well, he certainly -- in modern times. And it's interesting, because Speaker Pelosi was probably one of the strongest speakers in modern times, because she was in the same, you know, ballpark as her caucus, and Congressman Boehner is just not.

(CROSSTALK)

PAWLENTY: Can I say, though, on this point, in defense of Speaker Boehner, if you understand the dynamics of the current Republican Party and what it takes to go out publicly on the point and say, "I'm going to raise revenues, and I'm going to raise the debt ceiling," for him to do that early on in these discussions took great courage. It was a great risk for him, a huge risk. So that was...

(CROSSTALK)

KARL: What have you been able to...

(CROSSTALK)

PAWLENTY: That was an exercise of bold leadership. Now, he wasn't able to deliver it in that moment, but it's very rare these days that you see a leader who's take that much risk, willing to take that much flack from his or her own party, so please don't take that as a sign of weakness. I think it's a sign of leadership.

(CROSSTALK)

DEAN: I think -- well, Tim, I think it is a sign of weakness, and I'll tell you why. He must have known that was going to happen. And what -- the difference between what he did and what Pelosi did to get the health care bill through is, Pelosi went through her caucus and broke every arm in the caucus that was giving her trouble and then made the announcement. Boehner went out and made the announcement first and then he couldn't get his people. And that's a mistake, leadership mistake.

PAWLENTY: But in that moment, you'd have to concede, Governor, she had the votes within her own party...

DEAN: I think Boehner has courage. I do think that. And I do think he could be a good speaker. He's just not tough enough.

PAWLENTY: Oh, I don't agree with that.

DEAN: Results show.

KARL: Look into the crystal ball here for the next couple of days. And we're going to get your predictions for next year, but just over the next couple of days, based on what you heard here today from the senators and then the raucous discussion with the House members, each of you, do you think that the deal is going to happen? And if it happens, is it going to pass House and Senate?

PAWLENTY: There will be a deal. I'm a little pessimistic, unfortunately, at the moment. I hope they could get over the cliff and avoid this January 1st cutoff, but if they do go over the cliff, my hope is that they can put something together as early as possible in January, but I'm a little pessimistic about whether they can get that done by December 31st midnight.

(CROSSTALK)

HABERMAN: I'm where the governor is. I mean, I think that the -- I understand that Schumer and Kyl are optimistic, but there's not much coming out of the House right now that seems positive. I do think there will be some framework.

DEAN: It's the best thing for the country to go over the cliff right now. It's not a great thing for...

KARL: But will we?

DEAN: Yeah. It's not a great thing for the country, but it's the best of all the alternatives.

KARL: Todd?

PURDUM: Well, they'll have to do something, and the market's reaction on Wednesday morning, if they haven't done anything tomorrow, may be the next wedge that will...

DEAN: It will be, although I predict ultimately that if we go over the cliff and stay over the cliff, six months from now, the Dow will be at 15,000. You know why? The biggest uncertainty in the market is not taxes and blah, blah, blah.

KARL: Size of the deficit.

DEAN: It's the size of the deficit. If you go over the cliff, you've done something for the first time really serious about the deficit. All of a sudden, the financial horizons look pretty good.

KARL: OK, now we've asked each of you to come up with your -- since this is the last show of the year -- tell me what you felt were the defining or was the defining moment of 2012. Start with you, Governor Pawlenty.

PAWLENTY: Well, for the presidential race, of course, I would say it was the arrival of Hurricane Sandy. That was a moment that changed the dynamic, changed the coverage of the race, allowed the president to elevate his presence and message and persona in the race in a way that I think cemented or solidified or at least contributed greatly to his victory.

HABERMAN: I disagree completely. I think it was the 47 percent video. When that emerged, I think that that really was what sort of calcified the image of Mitt Romney that the president's ads had been maintaining for months, and I think it was very hard, even with a poor debate performance from Obama at first, to come back from.

DEAN: In 1984, I knew Mondale was going to lose when he gave his acceptance speech and said the next president has to raise taxes. He won't tell you; I just did. This year, I believed I knew that Mitt Romney was going to lose when he said, "I will veto the DREAM Act if it gets to my desk." When he said that in the Republican debate, I knew he couldn't get to 30 percent among Latinos and I knew he was done.

PURDUM: Well, it sounds like an obvious answer, but I think President Obama's re-election will be seen by history as...

(CROSSTALK)

(LAUGHTER)

PURDUM: I think -- I think the way that he won, the way that he won, so decisively, so clearly, and with an electorate that -- whose composition surprised the heck out of the Republicans will make his second term seen as -- he can no longer be seen as sort of a fluky creation of the wars and the Bush economy. He's actually a two-term president.

KARL: Well, I'll do a variation of that. Election night, the amazing moment when Fox News and all the other networks had called the election, and Karl Rove went on to say, "No, no, wait a minute, this is not over yet." A little reminder.

(BEGIN VIDEO CLIP)

ROVE: We got to be careful about calling things when we have, like, 991 votes separating the two candidates and a quarter of the vote yet to count.

(END VIDEO CLIP)

KARL: Now, the reason why to me that was the defining moment is because the Republicans were just shell-shocked. I mean, you guys really seemed to think you were going to win this thing.

PAWLENTY: But, Jonathan, it's one thing to score a touchdown, it's another thing to do a victory dance in the end zone.

KARL: OK.

PAWLENTY: There was a lot of data error and data bias. And I think part of it, by the way, is the commercialization of polling in a way that (inaudible) the industrialization of the use of the polling data, that biases...

(CROSSTALK)

KARL: Maybe if we can just listen to Nate Silver next time and not have to bother with the election.

(CROSSTALK)

KARL: OK, very quickly, predictions for 2013. Each have one.

PAWLENTY: All right. Well, I was going to say, immigration reform is going to pass the United States Congress and be signed into law as the president. And I also say there may be the re-emergence of Arab Spring-like protests in Jordan.

HABERMAN: I think there will be progress on immigration reform, not on gun control.

DEAN: The relationship with Israel will continue to deteriorate if Netanyahu is re-elected.

PURDUM: Gridlock will persist.

KARL: OK. I think (inaudible) and my prediction, the Washington one, the Washington Nationals will win the National League pennant and...

(CROSSTALK)

KARL: ... the Cy Young Award-winner narrowly edging out his -- his -- my friend, Gio Gonzalez, beating out Stephen Strasburg for the Cy Young Award.

All right. When we return, we honor a man President Obama called an American original. Plus, with the cliff still looming, we'll ask our star financial panel the pressing question, is your money safe? We'll be right back. Thank you very much.

(COMMERCIAL BREAK)

KARL: And now we honor our fellow Americans who serve and sacrifice.

This week, the Pentagon released the names of two servicemembers killed in Afghanistan.

We also want to honor this Sunday the man President George Herbert Walker Bush called a true American patriot and one of the great military leaders of his generation. General Norman Schwarzkopf, who led U.S. forces to victory in the Persian Gulf War, passed away this week at the age of 78. You can see our interview with Norman Schwarzkopf from "This Week" during the 1991 invasion of Iraq on our website at abcnews.com/thisweek.

And when we return, how concerned are Wall Street and the world markets as we count down to the cliff? The answer, when this special edition of "This Week" returns.

(COMMERCIAL BREAK)

KARL: And there's fear out there that things could get a whole lot worse, as investors count down to the final trading day of the year. We're joined now by ABC's Bianna Golodryga and Leigh Gallagher of Fortune magazine.

Thank you both for joining us. Bianna, let me start with you. What happens on Wall Street the day after a deal goes down, if they don't actually make a deal?

GOLODRYGA: Well, look, Jon, I don't have a crystal ball in front of me, but we saw a 2 percent decline in the Dow last week. If we don't have a deal, I do think that we'll continue to see a drop. I don't think it will be as huge of a drop, unfortunately, to press Washington's hands the way we did in 2011 last summer and before TARP was passed, but I think that ultimately, when we do get some sort of mini-deal, we'll see a rally back up. But again, this only just buys us a few weeks, because as your panel noted, we do have that debt ceiling coming up in February.

KARL: I mean, will -- the counter is, will Wall Street reward this mini-deal? Or will it be seen as, look, this really doesn't do anything?

GOLODRYGA: You know what? I think we may have a couple of days' bounce, the market rallying back up a percentage point or two, but I think ultimately the eye is going to be in what happens in February when that debt ceiling comes up.

KARL: And, Leigh, have the markets really fully taken into the possibility that this may not happen? I get the sense that people assume, oh, they'll do this at the end, you know, deadline as it always happens, but, I mean, does the market really see a failure, a complete failure as a possibility here?

GALLAGHER: You know, not quite yet. Even though we saw this 158-point drop that Bianna mentioned on Friday, and even though markets have been pretty unsteady actually ever since Plan B failed in the House, that was really kind of the turning point where we started to see this shakiness, for the most part, stocks had been building in the fact that there probably would be a deal.

So things have changed in just the past week. And I do think we'll see some major impact on Wednesday if there is no deal, because the market hasn't fully appreciated that yet. They don't kind of understand why this is happening, as most of the rest of us don't.

GOLODRYGA: But, Leigh, don't you think the writing's sort of been on the wall the past few weeks, as well. Up until last week, the Dow was positive for the month, and now all of a sudden we've seen a five-day decline. Consumer confidence fell for -- as Jon mentioned at the top of the show -- the second time in two months, so people are starting to sense the impact -- and CEOs are, as well.

GALLAGHER: They are. And, actually, that's why I think if there is a last-minute deal, I think we will see a rebound in the market, and I think that will be pretty strong. But CEOs have been worried about this for months, if not years. I mean, this has been -- that's why we've seen this parade of basically a who's who of the Fortune 500 had been traveling down to Washington in batches since July, August, you know, they don't want this to happen.

This is -- they don't know what this means for spending cuts, for tax cuts. This means they don't know what's going to happen to the economy and what's going to happen to the market. And that means they can't plan. And these companies build in their budgets for 2013 in June and July, so in many ways, this is going to be baked into the spending we see in 2013 already.

KARL: And, Bianna, you spoke just recently with the oracle of Omaha, right? You spoke to Warren Buffett. What's his take on all of this?

GOLODRYGA: Yeah, I asked him for his take. Ever the optimist long term with regards to the U.S. economy, he gave us a statement, as well. He said the American economy has worked well since 1776, albeit with periodic and sometimes severe interruptions, and will continue to do so. Berkshire will invest a record amount again in 2013 in plants and equipment. What's right with America far overshadows what's wrong with Washington.

Now, some could argue that if we do get past this fiscal cliff and address the debt ceiling, 2013 could actually be a good year for the economy. The housing market continues to recover. We do see an energy boom, as well. But, you know, I spoke with former Treasury Secretary Robert Rubin, as well, and I think he summed it up by saying that this really was a missed opportunity that we're seeing right here for some sort of grand bargain, for a big deal to address the debt limit here, and so far, we haven't been doing that.

KARL: And, Bianna, I would not count on these guys finally getting their act together in any significant way, even if we get a mini-deal. Thank you so much, both of you. Bianna and Leigh, thank you for joining us here on "This Week."

And finally, your voice this week. Today's question comes from Christy Miller Johnson on Facebook, who says, "My 16-year-old has a Twitter account with 34,000-plus followers. Where do you see journalism heading in 15 years? What advice to the next generation of journalists would you give?"

Well, thank you for that question, Christy. I would say that regardless of what form Americans will get their news in 15 years or 20 years, my advice to the next generation of journalists is to remember the basics: Know your history, try to get your facts straight, always strive to be fair, and don't be afraid to admit when you've made a mistake.

As for your 16-year-old's 34,000 Twitter followers, can I get a retweet?

You can follow me all week long online @jonkarl, and I'll answer some of your questions online after the show.

That's all for us today. Thank you for sharing part of your Sunday with us. Thank you. Check out "World News" with David Muir tonight. George will be back to start 2013 with a big -- with a big bang Sunday right here on "This Week."

END