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'Cliff' Deal Likely Despite 'Dysfunctional Govt.': Mauboussin

Mike Kemp  | Getty Images

Washington may be "dysfunctional," but lawmakers and the president will reach a debt-reduction deal to solve the "fiscal cliff," Legg Mason Capital Management's hief investment strategist says.

Michael Mauboussin, who is attending Charles Schawb's Impact 2012 investor conference, told CNBC's "Squawk Box" on Wednesday that leaders realize something has be done. Automatic spending cuts and tax hikes take effect Jan. 1 if no deal is reached by then.

"I think this is one everyone recognizes we have to do something," he said. "It may be something temporary until we get a solution ironed out, but I suspect we will get through this the next couple of months."

Skepticism aside, Mauboussin said Legg Mason remains optimistic about the stock market and the economy.

"We still think equities look very attractive, especially relative to fixed income," he said. "So that would be the simplest thing to say. And by the way, I think there is an economic recovery going on. It's going to be steady. And the big driver, I think people don't talk enough about is housing. Housing is a tremendous [driver]."

Mauboussin said the tax issue should be resolved not by higher rates but through system "simplification."

When asked about the appropriate level of taxes, he said it depends on whether one thinks income is a function of hard work or luck.

"It is an interesting topic when you think about taxes or tax policy. And I'm not going to really take a strong view on this. But let me paint out two extremes. One is if you believe that people's earnings are a function solely of their effort, of their skill, hard work, then higher tax rates, it is a disincentive for people to work. On the opposite, if you believe people's earnings are a result of pure luck, then tax rates wouldn't matter that much. So the question is, what's an appropriate tax policy given the combination of skill and luck in people's outcomes in their earnings? And I think that's a really interesting thing to think about and to discuss."

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