Full transcript of "Face the Nation" on Jan. 1, 2023

On this "Face the Nation" broadcast, moderated by Margaret Brennan:

• Michael Gapen, chief economist for Bank of America
• Kristalina Georgieva, managing director of the International Monetary Fund
  
• Former U.S. Ambassador to Russia John Sullivan, CBS News national security contributor Michael Morell, former Obama administration undersecretary of Defense for Policy Michele Flournoy, and former Trump administration National Security Adviser General H.R. McMaster
  
• Ben Tracy, CBS News senior national and environmental correspondent, and Kevin Book, an energy analyst and currently the managing director of ClearView Energy Partners  

Click here to browse full transcripts of "Face the Nation."    

MARGARET BRENNAN: Good morning, happy new year, and welcome to Face the Nation.

For this first day of 2023, we want to look forward, offering the outlook ahead on the economy, foreign policy and the environment, taking advantage of at least one quiet Sunday here in Washington before the new Congress convenes later this week.

We began with a look at the domestic economic forecast and the chief economist for Bank of America, Michael Gapen. He's here.

Happy new year to you, and it's good to have you in person.

MICHAEL GAPEN (Chief U.S. Economist, Bank of America): Happy new year as well. Thank you for having me on.

MARGARET BRENNAN: You know, a majority of voters polled by "The Wall Street Journal" say that the economy is going to look and feel worse in 2023.

What is your forecast?

MICHAEL GAPEN: So, I think that's probably true.

I think we're in a situation where the risk of recession is high. It may not be a deep and prolonged one. But we're in a situation where the economy has recovered very rapidly from -- from COVID, and it's come with a lot of inflation.

And the Federal Reserve is trying to slow down the economy to bring inflation down. And, in the past, more often than not, that's coincided with some sort of recession in the US economy and the U.S. labor market. It's not baked in. It's not for certain. We may be able to avoid it, but I would agree that the outlook by most people who sit in the position that I do think 2023 could be a difficult year for the U.S.

MARGARET BRENNAN: So, we may be able to avoid recession?

MICHAEL GAPEN: Yes.

MARGARET BRENNAN: Or it could be mild?

MICHAEL GAPEN: That's right.

In this particular case, I think it doesn't have to be deep. It doesn't have to be prolonged.

MARGARET BRENNAN: So we're currently at an inflation rate of about 7.1 percent. How long do we have to stomach higher prices? When does it feel better for the average American?

MICHAEL GAPEN: The evidence suggests we're already past peak inflation.

Right now, the trajectory is a more favorable one. It will probably take two to three years to get inflation back down to levels that we knew prior to the pandemic, in other words, low, stable, and something we didn't necessarily talk about, because it wasn't forefront on our mind.

But it may take another 18 to 24 months, maybe 36 months, to fully get us back to a situation where inflation doesn't seem to be as pressing as it is today.

MARGARET BRENNAN: Treasury Secretary Janet Yellen was recently quoted in an op-ed that she -- she penned as saying: "Times can be tough, but Americans are tougher. From the depths of the crisis, we have bounced back. And the president's economic plan has bolstered the U.S. economy's resilience to today's global challenges."

So, that's the political plan, the fiscal spending that Congress can -- can help them out with. Do you think, on that front, we are on a steady path forward?

MICHAEL GAPEN: The change that we've seen from, say, the fiscal policy side of the U.S. economy is one where industrial policy is creeping back in again, where we're trying to align our public sector interests with our private -- private sector opportunities, the CHIP Act.

And protecting the supply lines for -- for chips, for example, is -- is one of those.

MARGARET BRENNAN: For semiconductors.

MICHAEL GAPEN: That's right, for semiconductors, for -- which is a hugely important process for electronics and autos globally.

And, second, the Inflation Reduction Act has many components of a clean energy policy. So I think, from a medium-term perspective, we're seeing greater alignment, again, with political objectives, public sector objectives, and then private sector opportunity. We haven't done that in the United States for several decades.

MARGARET BRENNAN: In your newsletter, Bank of America's economists admit to being wrong about 2022.

MICHAEL GAPEN: It happens.

(LAUGHTER)

MARGARET BRENNAN: But so were the central banks, as you all point out. Central banks were about six months late in hiking interest rates.

The Fed stands out like a sour thumb in largely dismissing the hardest labor market in many decades. So, if -- if all the experts were wrong, why should the public trust that you're on the right path now?

MICHAEL GAPEN: Public policy planned for the worst, hoped for the best with the pandemic, and planned for the worst.

So, we didn't get the worst outcomes of -- of the pandemic, right, some of those that were predicted early on, but we put a lot of fiscal policy support in. We kept monetary policy easy and interest rates low. And we just -- we kind of got too much of a good thing coming out.

So now we're just -- we're course-correcting that. So it may mean some pain for the economy in the short run. But if the Fed is successful at bringing inflation down, that means it's a very good outlook for the U.S. economy over the medium term.

MARGARET BRENNAN: But pain in the economy, I mean, let's -- let's say what that is. That's likely job cuts.

MICHAEL GAPEN: Likely job losses yes.

MARGARET BRENNAN: There are six million unemployed people right now, with a jobless rate about 3.7 percent. That's a very strong jobs market.

MICHAEL GAPEN: Right.

MARGARET BRENNAN: Where do you think that jobless rate is going to go? How much pain are you preparing us for?

MICHAEL GAPEN: Right.

Part of the problem in the in the labor market right now is lack of available labor supply. We do think for about three and a half to 4 million workers short of where we were prior to the pandemic because of things like lack of immigration and early retirements and so forth.

So, this is why, if we want to reduce a hot labor market, cool it down a bit, it may involve some job losses. It could come in places like housing. The housing sector is retrenching. It could come in manufacturing. And it may come in professional and business services, in finance and other sectors like that.

MARGARET BRENNAN: For consumers, when the Federal Reserve keeps rates higher for an extended period of time, they see the impact in their credit card statement or in the mortgage rate.

So, if someone's looking at the housing market, wants to go out and buy a home right now, do they also have to wait the two to three years you referenced for inflation to come down before they feel like they can afford it?

MICHAEL GAPEN: Well, housing is under a tremendous affordability shock right now. As you know, home prices nationally are still up about 40 percent relative to pre-pandemic times, and...

MARGARET BRENNAN: Isn't that a bubble?

MICHAEL GAPEN: Well, I would...

MARGARET BRENNAN: Jerome Powell said it was a bubble.

MICHAEL GAPEN: Well, OK. I would disagree with -- with that.

And mortgage rates are high. They're -- they were over 7 percent. They're now above 6 percent. So, yes, I think the -- home prices are starting to come back down. But, yes, it will take time to cool down the housing market and return affordability.

Is it -- is it two years? I don't know. But it could be 12 -- it could be 12 months, could be 24 months, yes. The housing market currently is -- is in its own recession. At present, activity has really slowed down, particularly as mortgage rates rose.

MARGARET BRENNAN: I want to end on a positive note...

(LAUGHTER)

MICHAEL GAPEN: Of course.

MARGARET BRENNAN: . .. if we can.

I want to ask where you see sort of the best news in 2023. What makes you hopeful?

MICHAEL GAPEN: What makes me hopeful is not just in the U.S., but, globally, central banks have gotten the message on inflation.

They reacted very quickly. Inflation is now on -- on a downward trend. And we think that will continue.

MARGARET BRENNAN: Mm-hmm.

MICHAEL GAPEN: And the other area I would say is, I'm still very optimistic about the long-run prospects for the U.S. economy.

And, in that regard, what I mean is, in a world where we're pulling back from globalization a bit, and we're fracturing a bit, I think the positives of the U.S. actually become more positive, the U.S. becomes a better place for investment, returns to, capital and the dollar's strength in the world system will likely be preserved.

So, in some ways, I think our positives become more accentuated in the current environment. So, we've got a problem with inflation now. We will likely risk recession in 2023. But, beyond that, I think it's still a very positive outlook for the U.S.

MARGARET BRENNAN: All right, thank you so much for sharing your outlook.

MICHAEL GAPEN: Thank you.

MARGARET BRENNAN: The global economy also saw some serious turbulence in 2022. We spoke with the managing director of the International Monetary Fund, Kristalina Georgieva, as she wrapped up year-end business at the IMF here in Washington.

(Begin VT)

MARGARET BRENNAN: China has been this hub of cheap manufacturing for the world. We are all so dependent on it.

But, right now, it looks like COVID cases are exploding as they start peeling back those zero COVID restrictions. What will that mean for the global economy long- and short-term?

KRISTALINA GEORGIEVA (Managing Director, International Monetary Fund): In the short term, bad news.

China has slowed down dramatically in 2022 because of this tight zero COVID policy. For the first time in 40 years, China's growth in 2022 is likely to be at or below global growth. And looking in to next year, for three, four, five, six months, the relaxation of COVID restrictions would mean bushfire, COVID cases throughout China.

I was in China last week in a bubble in the city where there is zero COVID. But that is not going to last once the Chinese people start traveling.

MARGARET BRENNAN: They don't have an effective vaccine right now.

(CROSSTALK)

KRISTALINA GEORGIEVA: The -- the vaccinations fall behind. They have not worked on antiviral treatments and how that can be offered to people.

And so they will go through this tough time. If they stay the course, over time, they would be able to catch up with the rest of the world. But, for the next couple of months, it would be tough for China. And the impact on Chinese growth would be negative. The impact on the region would -- would be negative. The impact on global growth would be negative.

MARGARET BRENNAN: You've said that you fear that we are sleepwalking into a world that is poorer and less secure because of a split in the global economy between the U.S. and China.

What do you mean by that?

KRISTALINA GEORGIEVA: The way we have operated created excessive dependency in global chains.

We were too focused on cost: How can we make products cheaper? And COVID and then the senseless war Russia started against Ukraine have shown that this is not enough. We have to think of the security of supplies. And that means diversify the sources of products that make the economy function well, lifting up the level of cost.

But we shouldn't go beyond.

MARGARET BRENNAN: One of your IMF researchers gave a pretty dire prediction.

"Overall, this year's shocks will reopen economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come. And, for many people, 2023 will feel like a recession."

KRISTALINA GEORGIEVA: Mm-hmm.

MARGARET BRENNAN: What do we need to brace for?

KRISTALINA GEORGIEVA: For most of the world economy, this is going to be a tough year, tougher than the year we leave behind.

Why? Because the three big economies, U.S., E.U., China, are all slowing down simultaneously. The U.S. is most resilient. The U.S. may avoid recession. We see the labor market remaining quite strong.

This is, however, a mixed blessing, because, if the labor market is very strong, the Fed may have to keep interest rates tighter for -- for longer to bring inflation down.

The E.U., very severely hit by the war in Ukraine, half of the European Union will be in recession next year. China is going to slow down this year further. Next year will be a tough year for China.

And that translates into negative trends globally. When we look at the emerging markets in developing economies, there, the picture is even direr. Why? Because, on top of everything else, they get hit by high interest rates and by the appreciation of the dollar. For those economies that have high level of that, this is a devastation.

MARGARET BRENNAN: I want to make sure I get to Ukraine.

President Zelenskyy said they need $55 billion in foreign support next year. He expects $20 billion from the IMF. Is he going to get it?

KRISTALINA GEORGIEVA: We are working on providing support for Ukraine.

We have assessed the needs of Ukraine to range somewhere between $3 billion and $5 billion a month. What Putin did with destroying critical infrastructure in Ukraine, this is horrific. And it means that, in the next months, the country would be more on the high end of this range, because it is put in an awful position to have to restore access to electricity, to heat, to water.

Ukraine has proven to be remarkably resilient. Ukrainian economy is functioning. Pensions are being paid. When there is bombardment, restoration of energy, water, heat is done very quickly. And we see revenues collected in Ukraine in a very disciplined manner to support the functioning of the country.

MARGARET BRENNAN: So, the government's not going to collapse?

KRISTALINA GEORGIEVA: The government is very well-functioning under incredibly difficult circumstances. No, they're not going to collapse.

And then the other thing that is so remarkable is, actually, the world has proven to be more resilient than we feared a year -- in the beginning of the year. We look at the response to the energy shock in Europe, and Europe is moving towards independence from Russia decisively.

Yes, there will be a tough winter. Maybe the next one would be even tougher. But freedom from dependence on Russia...

MARGARET BRENNAN: Yes.

KRISTALINA GEORGIEVA: ... is coming.

MARGARET BRENNAN: How do you describe the state of U.S. economics and politics?

KRISTALINA GEORGIEVA: The U.S. economy, remarkably resilient. Decision- making in the U.S., because of the way the political set is at the moment, it is more difficult.

But, nonetheless, the U.S. has taken some very important steps that are helping to the -- the U.S. economy. But I do hope that the U.S. is not going to slip into recession, despite all these risks. We expect one-third of the world economy to be in recession.

And yes, as you said, even countries that are not in recession, it would feel like recession for hundreds of millions of people. But, if that resilience of the labor market in the U.S. holds, U.S. would help the world to get through a very difficult year.

MARGARET BRENNAN: Madam Managing Director, thank you for your time this morning.

KRISTALINA GEORGIEVA: Thank you.

(End VT)

MARGARET BRENNAN: Our full interview with Kristalina Georgieva is available on our Web site and our YouTube channel.

We will be back in one minute. Stay with us.

(ANNOUNCEMENTS)

MARGARET BRENNAN: For a look at what's ahead on the foreign policy front, we're joined by the former U.S. Ambassador to Russia John Sullivan, CBS News national security contributor Michael Morell, former Obama Administration Undersecretary of Defense for Policy Michele Flournoy, and former Trump administration National Security Adviser General H.R. McMaster, who joins us from Palo Alto.

It's good to have all of you here.

You know, February 24, 2022, was a wakeup call for the world on the national security front.

And, Ambassador Sullivan, I know you were posted to Moscow at the time. European nations really didn't believe the United States this was going to happen, and then it did. What was that like?

JOHN SULLIVAN (Former U.S. Ambassador to Russia): We knew it was going to happen. We'd been predicting it for months.

I had spoken to Secretary Blinken just a few days before, on February 19, and he asked me what the mood was. And I said it felt like August 31, 1939. A world leader was going to launch an aggressive war on the European continent with unknown consequences.

I then thought, geez, I hope I haven't overstated this. But we were very confident in our assessment about what he was going to do. The only question was when.

MARGARET BRENNAN: But what was so surreal, as a reporter, was that all of our allies were doubting that Vladimir Putin would do this.

FMR. AMB. JOHN SULLIVAN: Yes.

I spent a lot of time talking to fellow ambassadors in Moscow. The U.S. business community in Moscow, scoffed, they said: Oh, you're -- you're Chicken Little, the sky is falling. Absolutely not. This is irrational, Putin would never do it.

Those same people on February 25 were texting me on their way to the airport, saying goodbye. I was right.

MARGARET BRENNAN: To date, sanctions have not stopped Vladimir Putin. And he is making clear that this war is going to continue.

And that has global ramifications.

MICHELE FLOURNOY (Former U.S. Undersecretary of Defense): Absolutely.

I think, in 2023, we're likely to see minimal Russian gains on the military battlefield, but more of Putin's spoiler campaign, where he's using missiles and drones to take out civilian infrastructure, target electricity, target water supplies, really trying to break the will of the Ukrainian people, while also hoping that Europe has a very cold, dark winter, and the energy prices, the risk of a recession.

He's seeking to break the will of the Ukrainians and of NATO. I don't think he's going to be successful. I think, in 2023, we're either going to see some kind of escalation on Putin's side and/or -- possibly both -- some entry into some negotiations, if -- if, in fact, the Western and Ukrainian will holds and Putin realizes he can't actually achieve his objectives, so he wants to put lipstick on a pig and declare victory somehow.

MARGARET BRENNAN: General McMaster, Vladimir Putin just recently visited a military outpost for the first time with his generals.

Some have read that as an indication that he is -- he is doubling down. What do you see happening here? Some Ukrainian generals are forecasting a Russian offensive could begin as soon as January.

H.R. MCMASTER (Former U.S. National Security Adviser): I think that's likely to be the case, Margaret, but it's going to fail.

I mean, Putin is -- is in denial. He's a man who's always been obsessed, right, obsessed with restoring Russia to national greatness. And he fancied himself as the new czar presiding over an expanding Russian Empire.

Well, he's failed utterly, but he's increasingly isolated. You know, Putin, he's kind of a street thug. I mean, he's -- he's a bully and a coward at the same time. I think now we -- you know, we have agency Margaret.

We can -- we can stop meting out assistance. We can give Ukrainians what they need to protect their population and their infrastructure and to sustain a counteroffensive to regain at least the territories taken since the renewed offensive in -- on February 24.

MARGARET BRENNAN: Mike Morell, I want to know what you think the red line is.

From what I hear, it's Crimea, that, if the Ukrainians tried to retake that area, that that might lead to the escalation that you were just referring to.

What are your thoughts on that, and the contact that the CIA is having with Russian intelligence?

MICHAEL MORELL: So, Crimea is the most important piece for Putin, right, in terms of what he's taken since 2014.

But I'm not sure what that escalation could look like. I mean, he doesn't have a lot left, from a military perspective. His troops, in matter of fact, are digging into defensive positions in Eastern Ukraine right now.

I'm not sure what he can do, what he has left in his bag if the Ukrainians were to go into -- into Crimea. And I would not dissuade them from doing that.

MARGARET BRENNAN: Director Burns did have contact. He met face to face with his Russian counterpart.

I mean, the intelligence channels are some of the...

MICHAEL MORELL: Are open.

MARGARET BRENNAN: They're open.

But when you hear escalation, people fear Vladimir Putin's nuclear arsenal. What is the probability of it being used?

MICHAEL MORELL: So, I hope that part of the communication, right, between Director Burns and his -- his counterparts in Russia are: Here is what the United States will do if you were to use a nuclear weapon or biological weapons on the battlefield.

And I hope that we've sent a message that our response would be significant and consequential.

MARGARET BRENNAN: What does significant look like?

MICHAEL MORELL: I think what it looks like is U.S. forces attacking Russian forces inside Ukraine. I think that would force Vladimir Putin to think twice.

FMR. U.S. UNDERSECRETARY MICHELE FLOURNOY: I think the international dimension is important here.

I mean, Putin is pretty isolated, but you've had the prime minister of India come out and say: We don't want to see nuclear weapons used.

You've had Xi Jinping, probably Putin's closest ally, come out and be very clear that nuclear weapons should not be used. So, I think Putin would also find him incredibly isolated, not only from the West, but from much of the international community as well.

MARGARET BRENNAN: Ambassador Sullivan, does Putin care that he's isolated?

FMR. AMB. JOHN SULLIVAN: We made the same arguments to him to not invade Ukraine, that he'd be isolated, that the consequences would be devastating.

That turned out to be true; 141 countries condemned and deplored the -- the invasion of Ukraine by Russia in the General Assembly just after it occurred. He doesn't care. He's got his plan.

He is going to regather the Russian lands. His response would be: Peter the Great didn't care what -- what other leaders thought. Peter the Great did what he needed to do to gather the Russian lands, this mythic, in some sense, in his own mind, Russian empire that he wants to restore, he's messianic.

He doesn't care.

MARGARET BRENNAN: Well, that's terrifying.

(LAUGHTER)

MARGARET BRENNAN: I want to take a very quick break, because we have so many more national security issues to continue to talk about.

We'll be back with more of our panel. Stay with us.

(ANNOUNCEMENTS)

MARGARET BRENNAN: If you can't watch the full Face the Nation, you can set your DVR.

And we're replayed on our CBS News Streaming Network throughout the day Sunday.

(ANNOUNCEMENTS)

MARGARET BRENNAN: We will be right back with a lot more Face the Nation.

Stay with us.

(ANNOUNCEMENTS)

MARGARET BRENNAN: Welcome back to FACE THE NATION.

And we continue our conversation now with our foreign policy panel.

H.R. McMaster, General McMaster, I want to ask you, from a military perspective, we heard the CIA director describe a full-fledged military partnership between Russia and Iran. What does this look like?

H.R. MCMASTER: Well, I think where it heads next is support for Russia's war-making machine more broadly. I think you're going to see missiles. You already have reports of Islamic Revolutionary Guards Corps trainers and assemblers of - of these drones. And I - I think what we're recognizing is that these problem sets that we're facing with the theocratic dictatorship in Iran and the revontanist (ph) hyper nationalist Putin, they're connected to each other. And they're connected to China.

So, I think we - we are hopefully now in full recognition that we are in really consequential competitions with authoritarian regimes who are hostile to us. And we have to respond much more effectively than we responded in the past. And that's a broad range of, I think, preparations for a potential military conflict so we can deter a widening of the war, but there's also a very significant economic and diplomatic aspect of these interconnected problems.

MARGARET BRENNAN: One of the things you're saying there is recognize that the attempt to broker a nuclear deal with Iran is dead.

H.R. MCMASTER: It's a pipe dream. You know, I mean try to revive something that is completely dead. And I couldn't believe it, Margaret, as - as we were supplicating to the Iranian regime as they're intensifying their proxy war in the region and attacking some of our - you know, of our longstanding partners there. And I think we lost a lot of ground in the Middle East because of - we were chasing this pipe dream to try to revive this - this nuclear agreement. And if we didn't what would happen is, we'd give Iran a pass on the destructive effect the dictatorship has had on the Iranian economy. And if we're going to be in the business of making predictions, I think the chances are quite high of a significant conflict in the Middle East maybe entailing an Israeli strike on Iran's nuclear program.

MARGARET BRENNAN: Michele Flournoy, do you agree with that assessment?

MICHELE FLOURNOY: The real risk is that in 2023 they will acquire enough material in -- highly enriched nuclear material to build a bomb. Israel has long articulated that as a red line, that that is an unacceptable condition for them to have, to co-exist with. And then the decision that places on the president, the U.S. president's desk. Do we support them? Do we stand back? What - what happens? And do we find ourselves in an escalating situation with Iran in the Middle East?

MARGARET BRENNAN: And, Mike, the intelligence community has not determined that Iran actually will make a nuclear weapon, it's just that they're giving themselves the possibility to do so at a future date.

MICHAEL MORELL: The judgment has always been that what the Iranians want is to get to the threshold, right? To have all the pieces and be able to put them together quickly. Right now they have enough fissile material enriched to 60 percent for four bombs, and they could get to 90 percent, which is - which is what is required for a weapon, in a matter of weeks. So, in terms of fissile material piece, they're very, very close.

MARGARET BRENNAN: Does the regime, which has withstood many popular protests, withstand what's happening in the streets, which is unique with these protests that were started by young women?

MICHAEL MORELL: I think you have to look at the current protests in the context of a series of protests that have occurred since 2017. They've all had different causes, but the one thing they have in common is a growing alienation of the young people from the regime. And a growing group of people who want a more normal life and a lesser rigid life. But, at the same time, there's a large number of Iranians who support the regime. Eighteen million people voted for the current president, who's a hard liner. So, I don't think that we're going to see regime change unless there's an incident that takes us in a different direction.

MARGARET BRENNAN: It is so fascinating that the dynamic is there, that it's - that it's women who started this round of protest. And it makes me think, Michele, of, time again, as expected, it is the young women who are paying the price for what's happening in Afghanistan following the withdrawal of the United States.

Do you buy the argument that that choice to withdraw factored in, in any way, to Russia and China's assessment that the U.S. was in decline?

MICHELE FLOURNOY: It's one brick in a wall that they've been building for quite some time that has - that has many bricks, which is why it's so important that we need to invest in our alliances, really demonstrate our credibility when we make foreign policy commitments and so forth. I actually would give the administration some credit for that in terms of pulling NATO together after Russia's invasion of Ukraine, building stronger partnerships in Asia to try to deter and counterbalance China.

MARGARET BRENNAN: Are you optimistic that those alliances in the west will actually remain solid? Because there is an argument that if Vladimir Putin hadn't bombed Kyiv and terrified European leaders that that -- they wouldn't be united. That it's not just diplomacy, it was actual fear.

MICHELE FLOURNOY: But we - we are where we are. And I think the NATO alliance and - and the U.S./EU relationship, they have found their purpose again. There's a tremendous amount of transatlantic unity that I think is quite solid. I also think, as Beijing overplays their hand, that actually bolsters our - our alliances and our partnerships in the region. But we have to play our cards well and seriously compete, not only diplomatically, but shoring up deterrence militarily, competing economically, technologically, keeping our edge, making the right investments at home.

MARGARET BRENNAN: Ambassador Sullivan, you're not at the State Department anymore, so you can speak freely. How much of the withdrawal, how it was executed, and the agreement with the Taliban is responsible for shaping the perception of weakness of the west?

JOHN SULLIVAN: I completely agree with Michele, that the Russians, Beijing, they will use any misstep by the United States, real or imagined, against us in their -- in their false narrative. Unfortunately, in this case, we did make a major misstep. I think particularly in how we implemented the withdrawal. There's no doubt in my mind that it - it factored in, at least in some way, in the Russians' calculation about our strength, our ability to convince allies and partners to oppose what the Russians were doing, our credibility. Did it ultimately turn out to be the case? No. As with so many things, Putin was wrong about that, too.

MARGARET BRENNAN: Mike, after the fall of Kabul, you were on this program, and you correctly forecast that the Taliban knew where al Qaeda's leader was inside Afghanistan.

JOHN SULLIVAN: Right.

MARGARET BRENNAN: So I'm wondering what your thought is about where the emerging terror threat is now.

MICHAEL MORELL: So, al Qaeda is a problem that needs to be watched in Afghanistan. The bigger problem in Afghanistan at the moment is ISIS. They are increasingly recruiting from neighboring countries. And those individuals are coming in where they're getting training from ISIS. And the concern is that they might leave Afghanistan, go back to their home countries and conduct attacks against western interests. Think embassies.

The bigger - the bigger terrorism problem is actually in Africa, all the way from Somalia, all the way to west Africa, where you've got both al Qaeda affiliates and you've got ISIS affiliates. They have control of huge swaths of territory. They've conducted primarily local attacks so far. But, at some point, western embassies, western military bases in both Africa and possibly in Europe, could become targets. And if we're going to make a prediction for 2023, I'd say we're going to see a terrorist attack against a western interest somewhere in the world.

MARGARET BRENNAN: Well, that's terrifying. It's sobering. It's a reminder that declaring victory was too early.

MICHAEL MORELL: Terrorism has always waxed and waned. It has always gone up and down. And I think it's starting to bounce back again.

MARGARET BRENNAN: General McMaster, do you agree with that assessment that the emerging threat is coming out of Africa?

H.R. MCMASTER: I do, but it's also coming out of Afghanistan and it's also coming out of - of the Middle East still. And ISIS, in Syria, has not been defeated. And this is a main lesson from 9/11 is that threats, jihadist threats that develop abroad can only be dealt with at exorbitant cost once they reach our shores. So, sustained engagement through partners, like the partners we abandoned in Afghanistan are -- is really critical to our own safety and security.

MARGARET BRENNAN: I want to transition to the other looming threat that you hear the administration saying it will turn its eye towards in the new year, and that is China. Michele Flournoy, where do you begin to try to de- escalate?

MICHELE FLOURNOY: Well, I think there is a desire to sort of right the apple cart. That said, neither side is going to change its fundamental interests. And those interests are, in many ways, in conflict. So, there is a competition ongoing and it's economic, it's technological, it's informational, it's political, it's military. I think the real name of the game in 2023 is shoring up deterrence.

I don't think President Xi wants to move on Taiwan. He's got, you know, Covid to deal with. He's got a youth unemployment problem to deal with. He's got all kinds of domestic challenges. And I think he'd prefer to take Taiwan using economic and political coercion ultimately. But he has instructed his military, be ready by 2027. So, we've got the next few years to really make sure that he cannot have confidence in his ability to succeed militarily. So that means we have a lot of investment to do alongside investing in the drivers of our economic competitiveness, our technological competitiveness as well.

MARGARET BRENNAN: Ambassador Sullivan, how does Secretary Blinken approach this sort of trying to defrost this frozen relationship?

JOHN SULLIVAN: We're not going to do this alone. We just saw the Japanese government announcing its new national security and defense strategy, significantly increasing its defense budget. Our European allies and partners becoming more forthright about the threat that they see, the challenges they see from - from China.

MARGARET BRENNAN: And I want to get to General McMaster. I know you spent a lot of time on thinking about China. How do you see it?

H.R. MCMASTER: It's a grave threat. I think Xi Jinping means what he says, right? I think we have to be careful not to mirror image, not to fall into the same traps as we did with Vladimir Putin of confirmation bias and optimism bias. Xi Jinping has made quite clear in his statements that he's going to make, from his perspective, China whole again by subsuming Taiwan. And the preparations are underway. So I think what is important is what - what Michele said, deterrence. But good old-fashioned deterrence by denial. I mean hard power matters. And I think we are underinvested in defense in the United States. China has become increasingly aggressive, not only from an economic and financial perspective, and a (INAUDIBLE) diplomacy perspective, but physically with its military.

And what's really disturbing is I think Xi Jinping is preparing the Chinese people for war. In some of his speeches he said, well, for us to restore China to national greatness, it's going to take some - some sacrifices. So I think we have so take it very seriously and act to extend really our - our - our - our power.

We talk a lot about relying on our allying and then maybe if we take a step back the allies will do more. I think actually the opposite is the case. If Americans just do a little bit more, many of our allies will follow suit and bolster their defense capabilities and capacity as well.

MARGARET BRENNAN: Thanks for joining us.

We'll be right back.

(ANNOUNCEMENTS)

MARGARET BRENNAN: We now want to go to Ben Tracy, senior national and environmental correspondent out in Los Angeles, and welcome Kevin Book, an energy analyst and currently the managing director of Clearview Energy Partners.

Ben, I want to start with you because I don't want to just admire the problem, I want to talk about how to plan for what's ahead and what is being done. And I know out in California you've had, for a long-time concern about drought in the west. Then you have these predictions from NASA about flooding here in the east really at record levels. So, what is happening? What do people need to plan for?

BEN TRACY: Well, when we talk about climate change, you're basically talking about extremes, right? So, the extremes get more extreme. So, as you said, out here in the west, we're talking about hotter and drier. And that's created this 23-year-long mega drought that we're suffering through. And then in the east, as you mentioned, there's flooding. And so you're seeing, when you get these rain storms, they're often kind of supercharged and you're getting more flooding out of that.

Out here in the west, the real plan is, how do you kind of forecast and deal with water supplies when you're talking about hotter and dryer as the long-term trend? So, when you get more rain and less snow, you have less snowpack up in the mountains, and that is created this crisis out here with reservoirs, with the Colorado River. And that's really impacting millions of people when it comes to the water supply.

So, it's hard to plan for. But you now have the federal government coming out here in the west and saying, OK, states, you've got to get together and figure out how you're going to use this water supply or we're going to start imposing some pretty significant cuts on you if you don't do it yourselves.

MARGARET BRENNAN: But at the federal level, Ben, we saw this historic investment, $369 billion, as part of this Inflation Reduction Act. And the argument that all of this was ultimately supposed to alleviate climate change, but near-term it's really an investment in green energy. What difference is it going to make?

BEN TRACY: It is a huge investment and it could make a huge difference. The analysis of the bill shows that this really could get us to about a 40 percent cut in U.S. emissions by the year 2030. So, that's -- that's huge. And so much of that comes from these investment in the power grid and in renewable energy. And, in fact, the International Energy Agency came out and revised their forecast and said that the - that transition is actually accelerating. That we're going to see renewable energy overtake coal as the predominant energy supply worldwide by the year 2025.

MARGARET BRENNAN: And, Kevin, you look at this from the perspective of investments and planning. So, what is the biggest change that's coming in 2023? I mean we hear all about this money being spent on incentivizing people to buy electric vehicles, for example. Is that the upshot?

KEVIN BOOK (Managing Director, Clearview Energy Partners): It's a big topic right now because Europe's not happy about the incentives we're giving domestic manufacturing. But really we're coming into 2023 on the heels of big energy security changes. Big risks to the existing capacity. When you talk about the Inflation Reduction Act, one of the parts of the bill is that it keeping existing nuclear capacity on stream. The challenge is to keep clean electricity on the grid as you're adding new clean electricity to the grid and not losing it.

MARGARET BRENNAN: And nuclear being clean?

KEVIN BOOK: And nuclear is a clean emissions-free resource. And so there's no -- there's no equivalent, by the way, for - for hydro. You can't use a tax credit to make it snow in the Sierra Nevadas. But, in the meantime, we have to make sure we don't go dark before we go green. And so existing fossil resources are very front and center as we go into the year.

Russian fossil energy exports, about 5 percent of global consumption, are now being shunned by the west. And that's on top of an investment wave that has slowed considerably after the demand collapse of the pandemic. And so we're going into the year short on - on conventional resources. That's a big challenge.

MARGARET BRENNAN: But one of the criticisms of some of this legislation is that the payoff would be so much further down the line to something that Ben is describing as an immediate crisis. But you also hear from people who are in the marketplace that some of it just wasn't written well.

KEVIN BOOK: Well, fast drafting of big spending is hard. And, actually, the Democrats tried to get the bill done on a party line basis and do it in a hurry. That was also hard. What's ahead is harder still. They have to spend a lot of money and do it really fast. If Republicans take over Washington in 2024, some of the unobligated balances could be targeted.

Now, the tax credits, about $270 billion of the $370 billion that are in the bill, if you look at history, the last long-term extension of solar tax credits was in 2008. And it was projected by the Joint Committee on Taxation at about $3 billion over ten years. Came in at four times that amount. The credits, a lot of them in the IRA, are uncapped. There's no limit on them. And when the government hands out free money, it usually gets a lot of takers. So, no, not an immediate result, but potentially much bigger than forecast.

MARGARET BRENNAN: But, Ben, when you talk about climate change, it sounds like it's one little box. But what you're talking about is financial investment. We're talking about geopolitics. We're talking about local government. It's a huge beat you have here, Ben.

But on the sliver of geopolitics, with geopolitics, talk to me about why this spike in prices for gas and oil, in the wake of Russia's invasion of Ukraine, hasn't actually led quickly to going green? In fact, it made for dirtier energy investment, right, with coal.

BEN TRACY: Yes. Exactly. There's a lot of tension there because as those natural gas supplies were lessened to Europe, they had to turn to other forms of energy. So, you did see a ramp up in coal use.

There's actually a lot of analysts who are saying this eventually will more quickly accelerate this clean energy transition because you now have Europe looking at Russia and saying, we can't count on this in the future. So, we need to more quickly transition to other forms of energy, like renewables, so solar and wind.

You guys mentioned nuclear power. And that's a really interesting one because you've had this real reconsideration of nuclear power because it is a form of clean and reliable energy. And here in California you've actually seen, there's one nuclear plant still operating in this state. It's called Diablo Canyon. And that was going to be mothballed. And they have reversed that decision. The governor came out and said, we need this because we don't have enough renewable energy yet to make this transition off of fossil fuels.

MARGARET BRENNAN: But that's a difficult local government problem because people in this country often don't want nuclear plants in their backyard. They don't want mining and that kind of local production happening.

BEN TRACY: You're going to have this real tension all over this country if we want to mine these things domestically. These critical elements for the future of energy. They are going to be in somebody's backyard. They are going to be in places where people may not want them. The question is, is that a tradeoff versus getting it from a place like China and having them control that supply chain? So, that's a real tension. That's a real tension for President Biden and his own party.

MARGARET BRENNAN: Well, that's what's interesting is President Biden wants to go green, but not only is coal and natural gas cheap, but when you go green, it also makes us, in some ways dependent on China, as Ben just said there, for the elements that go into, for example, electric vehicle batteries.

Kevin, how does that shift actually happen? How do you convince Americans that the drilling needs to happen in their backyard versus bringing these in from other places in Africa and China?

KEVIN BOOK: Well, Margaret, it's a question mark whether we can. Indeed, a lot of what we're looking at right now for the Biden administration is a tension between rapid deployment and the development of a domestic industry. And so solar panels are a big example of this. A lot of them come from China and a lot of the solar material that goes into those panels comes from a region where there's forced labor allegations that are quite serious. And the question will be, how are we -

MARGARET BRENNAN: Human rights concerns.

KEVIN BOOK: How are we going to balance human rights with the green agenda? And the administration has been struggling with that.

The other part of it though is that, how are we going to get development inside the borders of the United States? Globalization made it easier to tighten the environmental laws because industry went overseas. Now we're trying to bring it home. And the question will be, how can we do that in a way that's compatible with our stricter environmental rules?

MARGARET BRENNAN: And just to underscore your point, the Department of Energy reports China controls 80 percent of rare earths. Those are the ingredients Ben was talking about in production and refining. That goes into generators for wind turbines. China controls 61 percent of global lithium refineries for battery storage in electric vehicles. You can't go green right now without China.

KEVIN BOOK: It's true. And deglobalizing was inflationary enough. Buying new stuff was inflationary. If you're going to put new infrastructure in place, it has a financial cost. How are we going to do this without going through China? Well, the answer is, we can't, not right away.

MARGARET BRENNAN: I want to ask you about pricing. We had these nightmare scenarios, going back to fossil fuels, of oil at like $125 a barrel in the new year. Are we past that? Are we still in that potential for a real severe spike?

KEVIN BOOK: We are stuck in the middle of a structural shortage, Margaret. Not only did we have underinvestment, but the shunning of Russian energy that we're doing now is leaving a hole in the supply picture. If gas isn't going into Europe on pipelines that it used to traverse, it's coming off the water from other countries. What are they burning instead? Well, some of them are burning oil. In other words, energy is tight everywhere because there's less of it in the world right now.

As we look ahead, you ask, well, what's going to change? And we're seeing new infrastructure risks. New risks that -- whether you're looking at Iran attacking Saudi infrastructure, or the Nord Stream pipeline sabotage this year, the Colonial Pipeline hack here in the U.S., or just the matter of fires, floods and freezes getting in the way of production. These challenges to supply are starting to mount. And so it's a pretty good expectation that we're going to be living in a time of scarcity for a while. It's changing our thinking, but slowly. We bought a lot of big cars when energy was cheap.

MARGARET BRENNAN: And scarcity means high prices.

KEVIN BOOK: I do mean high prices.

MARGARET BRENNAN: All right, Kevin Book, great to have you here. Ben, thanks for joining us.

We'll be right back.

(ANNOUNCEMENTS)

MARGARET BRENNAN: That's it for us today. Thank you for watching. Until next week, for FACE THE NATION, I'm Margaret Brennan.

(ANNOUNCEMENTS)

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