Degree turn in testimony today . In september he said it was videos and spontaneous demonstrations. Today he said the cia knew all along it was a terrorist attack in libya. This story gets worse and worse, more and more complicated and we are going to parse through it. First up, with the fiscal cliff only 45 short days away, are we facing a stalemate or is there a new kissy huggy era coming to washington, d. C. . Weve got two kissy huggy cnbc contributors. Jared bernstein, former Vice President , biden chief economist, and kissy huggy Jim Pethokoukis of the American Enterprise institute. Jimmy p. , i love this New Washington picture. And i dont want to be pessimistic. I want to be optimistic. Maybe they can make a deal. But heres what i worry about, jimmy. Heres what i fear. The republicans are conceding that theyll give a revenue a tax revenue portion by limiting deductions. But i dont see any spending cuts. The sequester has been called off. Mr. Boehner would like a down payment on entitlements. I dont see that happening. To me remember it used to be 31 or 41 spending cuts to revenue increases. Right now it looks to me like its 101. 100. 10 of revenue hikes and no spending cuts, jimmy pethokoukis. I think what were going to get at the end of the day, youre going to get a lot of tax increases, and then youre going to get a lot of promises about caps and mechanisms. Be careful of the word process. Theres going to be a process in place for looking at further spending cuts. Or entitlement reform. But thats all going to be like tomorrow, the day after tomorrow, the 12th of never. What were going to get right away are tax increases in an economy thats going to be really slow. It was slow last year, slow before. The economic reports out today, terrible. And were going to try a little experiment about raising taxes in a lousy economy. Hop it works. Jared, jimmys got a point. The Industrial Production number, no matter how you slice it, with the hurricane or without the hurricane, was a lousy number. Business equipment continues to fall. That whole capital goods sector is in freefall right now. So yeah, great, no spending cuts. Lots of tax revenues. Your man wants 1. 6 trillion over the next ten years. I dont see how this works out. Let me explain how it works because jimmy was not being nearly kissy and huggy enough. Look, what people have to understand and appreciate, i dont know why this hasnt gotten more play. Maybe the white house itself needs to do a better job here. The congress and the president have already cut 1. 5 trillion of spending over the next ten years. 1. 7 trillion if you add interest savings. Now, Bowles Simpson which i think you and jimmy like a lot, calls for 3 trillion in spending cuts. We are halfiway there. This is not a promise for later. And it did come through the budget control act and other discretionary caps, p but its real. Its on the books. What we havent done yet is add any new real revenue and its a good thing jimmy pethokoukis. Can i correct jared . First of all, listen, we had, what, about 500 billion of interest expense. You know, youre not reforming government by doing that. Youre talking about a trillion dollars in war savings . No, no. Be war savings. Thats phone any numbers. Right now im at 1. 6. So lets just stick with your 1. 7. Weve got your 1. 7. Then youve got 1. 6 of tax increases. Thats not how you do fiscal consolidation. The way you do fiscal consolidation, also the way bill clinton did, was heavy on the spending cuts, lighter on the tax increases. This is an eu style tax hikeheavy austerity and we may get the same results. You are not rising above, jimmy. Ive got to tell you. Im rising into the truth. No. The 1. 7 trillion in spending cuts already on the books does not include war savings. Youre right to bring that up, but thats not in there. I didnt say it did. I thought you said it did. It does not include war savings. And there is absolutely nothing to worry about what does it include . Let me finish. Jimmy. No, its larry. Its huggy the expiration of the top two tax cuts does not no, its huggy kissy larry. Thank you, larry. Im trying to figure out where this trilliondollar spending cut is coming from. Because the wartime stuff has already been counted. The 1. 2 trillion that was in this budget control act is off the table. Theyre ending sequestration. Theyre ending the automatic cuts. Its gone. Its history. So look. I hope boehner can pull a rabbit out of the hat and not raise tax rates, which includes income taxes, Capital Gains taxes, dividends taxes, and any other bloody tax. I hope he can. But if hes going to give up to cap deductions, if hes going to give up a trillion or 1. 3 trillion of new revenues over ten years, i want to know what you get for it because my book, my book, jared, is you dont even go to the revenue side until you have milked and squeezed down every spending cut possible, including entitlements and the democrats dont want to touch entitlements. First of all, i dont think thats a very balanced approach. And secondly and even republicans now, mcconnell, boehner, are talking about more balance. And secondly, i agree with you guys on entitlements. They will be on the table. Medicare. Medicaid. I dont know about social security. Where . Which table . On the table that on the deal that is hopefully ultimately going to come out of this. This is the kissy huggy table. Jimmy pethokoukis, this is the kissy huggy, louis cannes table. Its an antique table. What i want to know is what the hells going to be on that antique table. I think what the president is trying to create is a you talk about the fiscal cliff. This is kind of like a tax hike straitjacket where he wants to raise tax rates and also get rid of tax breaks so the rich people cant wriggle out of those tax hikes by moving money or shifting it overseas or to different kinds of investments. Thats what he wants. Whats wrong with that . Well, hikes, thats going to be bad for growth. Thats why. Tell me, jimmy, how is it you know more than the Congressional Budget Office on this point . I mean, their analysts, nonpartisan, they told us that the expiration of the top two tax cuts would shave. 1 off the gdp. Actually, what they said, it would knock off a quarter point on a static analysis basis from an economy growing about 1 1 2 . May grow 1 in the fourth quarter. 1 10 of 1 . The cbo does not understand supply side economics. But ive got to get out of here. Jared bernstein, thank you. Jimmy pethokoukis, thanks vecry much, gentlemen. The executives said yes. The whitecollar workers said yes. Even the teamsters said yes. But the bakers union said no to a deal to keep hostess alive. What was that union thinking when it decided to play chicken with 18,500 jobs and then lose . In the next half hour im going to ask that union leader that question live on this program. And you dont want to miss it. Now, lets do some stock market work following on our discussion about the fiscal cliff, how do investors play this ball game. Here now is our pal done luskin, trend macro chief investment officer. You know, don, ill start with you. I know youve got a million scenarios. But if its all tax increases and no spending cuts, it just kind of makes me wonder how this can be good for stocks and the economy. It cant be good for the economy. Look, for one thing, you raise taxes, its not going to be good for the economy. I dont care what the socalled nonpartisan Congressional Budget Office says. Thats ridiculous. Any idiot knows you raise taxes, you retard Economic Growth. Period. Paragraph. As far as the spending cuts, theyre not on the table. What have we heard from obama about spending cuts . Weve heard that he wants to lower the cost of health care. What does that mean . Obama care 2 . Does that mean just paying medicare and medicaid providers less . Lets put entitlement cuts on the table, like they were on the table in july and august of 2011, when boehner and obama almost had a deal. Lets just go back there. Thats what boehner wants to do. What boehner said the day after the zbl the no, let me pick you up on that. That would be very bullish. I happen to totally agree with you. And thats exactly what Speaker John Boehner wants to do. That is precisely what he wants to do. Essentially have tax reform and have entitlement reform and have it laid out so it it all gets done next year. This year is the down payment. Thats right. Now, don, is it too early, though, to make a bet on any of this . Thats really what im asking. Between now and year end, when the bush tax cuts expire at year end, whats a stock market investor to do . Youre going to go up, youre going to go down. You saw today you had a is 00point swing. But thats no way to be invested. What is your advice on how investors play this fiscal debate . I understand the sentiment that the wise thing to do is to take a longterm perspective. But every once in a while we experienced this in the summer of 2008. Were experiencing it again now. Every once in a while a shortterm event happens that is so consequential you really need to take it into account. Larry, one thing we know for sure, no matter where we end up on december 31st were going to go to the brink to get there, and the decline in stocks that began mid september, weve already got a down payment. 8 1 2 drop in the s p. Theres going to be another 15 at least just from the horror show of watching these monkeys go to the brink with each other. And then when they get to the brink, maybe they fall off, maybe they dont. Either way were going to be in a bear market by year end. And if they do fall off were in another great recession. But this could be a great bear market. In other words, i have this reverse spin theory. If the stock market vigilantes do exactly what youre saying and they knock the market down another, i dont know what you said, 10 or 15 off of what weve done. Yep. That would scare the heck out of these politicians in washington. Scare the heck out of them. And that might be the best possible thing to create a freshl new bull market later. What do you think of that . Scare them, be vigilantes, and maybe well get something good out of this. I would like to believe that. But theres one possibility that thwarts that idea. Youre assuming that these people dont want to create a recession. Remember Rahm Emanuels doctrine . Never let a serious crisis go to waste. The thing thats wrong with obamas second term is they dont have a crisis. And sometimes i think they want to make one. Lints to what people like patty murray and Christina Romer are saying. What barack obama said at that press conference when he said if there was any scenario in which we could fall off a fiscal cliff. He said sure, we could imagine that scenario, if congress doesnt agree. Agree with whom . With him. Hes saying its my way off the cliff. And that is a way to go off the fiscal cliff, blame the republicans, stampede them into god knows what. Cap and trade, card check. Another stimulus plan. That aint no bull market, larry. I think all those fears are actually now slowly being discounted in the stock market. And i agree with you. More to come. President obama answered that question all wrong because he kind of left the door open that maybe hed let the cliff go through. Anyway, don luskin, thank you very much. Thank you, larry. Rockets continue to rain on israel. Another hamas leader is taken out. Thank you. Is it time to take the shackles off and let israel just finish the job . And folks, dont forget, free market capitalism, it is the best path to prosperity. But ive got to tell you, youve got to have limited government and youve got to have spending cuts to make this free market model work. Im larry kudlow. Well be right back. This is war. Nbcs Martin Fletcher is in tel aviv with the latest. Good evening, martin. Reporter israels security cabinet met this evening. On the agenda a discussion about escalating the operation in gaza and also the possibility of a ground invasion. They were challenged even more today by hamas. For the first time jerusalem, israels capital, came under attack from rockets from gaza. Two rockets fired. They fell harmlessly outside the town. Tel aviv, israels largest city, also attacked from gaza for the second time in two days. Rockets fell harmlessly, one in the city. Now, its extraordinary that hamas is still able to mount this kind of challenge to israel after these three days of intensive air attacks by israel aimed at knocking out the hamas capability. That raises the question of what israel will do to stop the hamas rockets. And the main question is will there be a ground invasion. The armys poised on the edge of gaza. 16,000 army reserveists have reported for duty today to their units. And the security cabinet this evening ordered that 75,000 more israeli army soldiers, reserveists, could be called up. An indication that an attack against gaza is certainly very possible. Now back to you. All right. Many thanks to nbcs Martin Fletcher. So i want to know, can israel just wipe out hamas . And once for all. Lets get right to it. Our special guest this evening is mark ginsburg. Hes the former u. S. Ambassador to morocco. Mark, welcome back to the show. Look, im probably naive. But 16,000 reserves have been called up. Maybe another 70,000 on the way. A ground war may start. Can the Israeli Defense forces just take out the hamas forces . Can they just take them out, martin . Well, they can. And the fact of the matter is that they failed to do so in 2008 because of International Pressure over civilian casualties. And thats of course the dilemma. But the fact of the matter is, larry, that were seeing once and for all why we cannot let iran get a nuclear weapon. Because hamas has been able to get these missiles from iran. And whats going to stop them if theyre firing missiles at jerusalem today, whats going to stop them from firing a Nuclear Missile at israel tomorrow . Thats why israel has to act authoritatively, finally, once and for all against the hamas military and civilian leadership. And stay on the ground for a while longer. In other words, not pull out. What im asking you i guess is just a basic military strategy issue. Will they continue until they get the job done . The International Community will scream bloody murder. Although legally israel is in its own selfdefense and has all the rights in the world. Im not so sure about the usa. Well get to that in a minute. But what i want to ask you is do you think the idf will stay on the ground and really get the job done . No. And ill tell you why. Because theres bigger fish to fry for israel right now with the patron saint of hamas, which is the Muslim Brotherhood in egypt and the egyptianisraeli peace treaty. You have to understand, larry, that as much as you and i are in agreement here it is very doubtful that israel is going to invade gaza militarily because that could very well provoke some military confrontation with egypt. Thats the last thing that the israelis want to see happen. And its the first thing that hamas wants to see happen. Now, this goes very importantly to president obamas foreign policy. So hes on the phone with morsy, the head of the Muslim Brotherhood, also the head of egypt, and hes also on the phone with netanyahu. But i dont get this. At some point dont we the United States have to say to israel go on ahead, these are terrorists, these are guys attacking jerusalem and tel aviv, and we give you a green light to do that . Dont we have to say that if obama believes what he actually said during the recent Political Campaign . Well, i agree with that. Of course the administration wants to have it both ways because thats the nature of diplomacy. Its going to let the israelis get a green light here, but theyre going to then stop the israelis from doing what essentially is to finish the job. After all, hamas is the equivalent of the khani network. If it works for the United States to use drones and to attack the terrorists that are attacking the american troops, whats good for the goose is good for the gander here. Larry, but at the same time you know the game. The administration is going to recognize that the egyptians are going to be placed in a position of having to do something if the israelis do invade, and the americans have a strategic interest, as of course the israelis do, of preserving the egyptianisraeli peace treaty. And thats but the Israeli Forces can bottle up gaza and stop egyptian weapons from getting through. They can do that, can they someone. Yeah, well, thats the problem, of course, is that the Sinai Peninsula has become hamass failed state, imperi imperialistic territory, where the iranians are being able to smuggle weapons in to hamas. Its going to take an effort to in effect quarantine the entire Sinai Peninsula once and for all. Were not talking about a difficult job. Its going to require the egyptians and the israelis to cooperate because it is after all egyptian territory from where these missiles are coming from, larry. All right. But let me go back to one other thing. Are you saying youve been in the foreign service. Youve been an ambassador. Youre saying that president obama will really not take a side here . He will not take a position here . I have not heard him on the subject of hamas. He has criticized them. But i havent heard him really bear down, its a terrorist thug group. And do you think that he doesnt get the egyptians that are playing footsie with hamas . The egyptian Prime Minister, the number two guy was in gaza today with the Prime Minister of hamas, or whatever hes called. Do you think obama doesnt get that . You really think hes going to try to play both sides against the middle . No, i look, he does get it. He talked to the israeli Prime Minister. I have confidence that the americans understand that israel cannot tolerate these types of missile attacks. And for all intents and purposes i suspect that the administration gave the israelis a green light. But of course theyre concerned, as the israelis are, over what may happen if they in effect cause the egyptians to act agains