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YOUR MONEY

Taking Actions to Reduce America's Deficit and Debt; How American Lives Could Be Affected By Government Thriftiness; Dr. Doom's New Financial Forecast; What States Have to Do to Get Their Budgets Right; Investing in Your Home State

Aired February 19, 2011 - 13:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


ALI VELSHI, HOST: You want the deficit and the debt reduced in the most basic terms. How would life change for the average American if we don't do what you are advocating? If we don't reduce our debt in this country?

(BEGIN VIDEO CLIP)

DAVID WALKER, CEO, COMEBACK AMERICA INITIATIVE: I believe the United States is headed for a debt crisis similar to what's happened in Europe recently if we do not change course. I think it will happen within the next three to five years.

What would that mean? Much higher interest rates, much higher levels of unemployment, a serious economic recession on a global basis, much more insecurity. You cannot spend a lot more money than you make indefinitely without at some point in time paying a price. Good news is we can avoid that.

(END VIDEO CLIP)

VELSHI: All right. Let's get to that, then. Treasury Secretary Timothy Geithner has said that America is on an unsustainable course. Listen.

(BEGIN VIDEO CLIP)

TIM GEITHNER, TREASURY SECRETARY: Our deficits are too high, they're unsustainable. Left unaddressed they will hurt economic growth and leave us weaker as a nation. We have to restore fiscal responsibility and go back to living within our means.

(END VIDEO CLIP)

VELSHI: Dean Baker is the co-director for the Center of Economic Policy and Research.

I actually like the way David said it even better than Timothy Geithner, but David did say we can avoid that. So if the present course is unsustainable, assuming you agree with both David and Timothy Geithner, what has to change, or do you not agree with them?

DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND POLICY RESEARCH: Well I think it fundamentally misplaces the issue here. We have 25 million people are unemployed, underemployed or given up looking for work altogether because we had an economic collapse. It's sort of like we've had a shipwreck and we're sitting here waiting to be rescued and we are talking about how we want to rebuild our house when we get home.

I mean the main point here is we have to get the economy back on its feet. That's why we have huge deficits that are really not a mystery. The deficit in 2007 we can say was bigger than it should have been, but that was less than 1 percent GDP. The deficit exploded not because we went on a spending spree, the deficit exploded because the economy collapsed.

VELSHI: Two things that we're talking about here, the deficit which is the shortfall between what the government brings in and what the government spends, and the accumulation of all of those deficits, plus the interest, which is the national debt. I think that's more the problem, Dean, is it not, than just a few years' worth of deficits?

BAKER: Well, I really think the debt problem is somewhat separate issues, but the debt problem is also overplayed. There's no reason the Federal Reserve board can't buy and hold, it actually is buying a lot of the government debt. It can't continue to hold a lot of that.

Japan's central bank has done that, lots of problems with Japan but one problem it certainly doesn't have is inflation. Its central bank holds an amount to debt roughly equal to its GDP. That would be $15 trillion in the case of the United States. There's no reason the Federal Reserve board shouldn't be buying and holding a substantial amount of debt which means it doesn't create any interest burden at all.

VELSHI: All right. Let's get back to you in a second, David. Paul Ryan the Republican head of the House Budget Committee wonders whatever happened to those recommendations of the president's own Blue Ribbon Bipartisan Debt Commission. Here's his question.

(BEGIN VIDEO CLIP)

REP. PAUL RYAN, (R) WISCONSIN: The president in suggesting the fiscal commission gave people like me the idea that we're going to move the ball in the right direction. That that was a constructive step in the right direction. This is a punt. This doesn't even include any of the significant recommendations from the Fiscal Commission.

(END VIDEO CLIP)

VELSHI: David and Dean, hang on for a second. Let's bring in Gloria Borger; she is a senior CNN political analyst.

Gloria, David and Dean have different opinions on this. Dean is saying this isn't nearly as serious as it is, David has said for a long time this may be the most serious issue financially that the country faces. This reflects a lot of our own polling that indicates some people say jobs are far and above the most important thing, others say it's the debt.

Politically, Gloria, this was a moment, this debt commission of the president's was a moment when he could have pushed for the kind of measures involving Social Security, Medicare, Medicaid, that would have made a serious dent in the nation's debt, he decided not to. Why?

GLORIA BORGER, CNN SENIOR POLITICAL ANALYST: You know it was interesting listening to the chairman, Mr. Ryan who was on the commission and by the way did not vote for the package. Coming out of that commission, so it's interesting for him now to talk about it. Look. In talking to a couple of senior White House advisers, it's very clear to me that this is, you'll be shocked to learn, is some political positioning here.

I think, although they won't come out and say it, what the president intended to do is essentially let the Republicans play their hand and bait them, if you will. And what you heard from Ryan this week, and other Republicans is that they're going to come out and propose some real entitlement reform. This isn't rocket science here. Everybody kind of knows what needs to be done. We heard the president this week even hint at it when he talked about entitlement reform combined with some kind of tax reform which is exactly what the deficit commission was talking about.

But you can't get from here to there until you deal with the short term issues which are the things you were talking about, which is extending the debt ceiling, for example, or a resolution to keep the government running. They first have to deal with those things before they can get to the bigger issues.

VELSHI: Those are two very important current issues we're going to talk about a little later in the show. David let me get back to you for a second. Dean just fundamentally disagrees that this is the biggest problem we are facing, that the deficit and the debt are the biggest problems we're facing. Is it correct, what Dean says that we can go on for some time with Federal Reserve holding this kind of debt?

WALKER: The Federal Reserve is the largest holder of U.S. debt. That is a related party transaction that is self-dealing. You can temporarily delay market forces, you cannot permanent delay them.

Let me tell you what needs to happen. The president of the United States is the chief executive officer of the United States. The entity that he's in charge of has a deteriorating financial condition. His own people say it's on an imprudent and unsustainable path.

He needs to do the following, he needs to address the nation, he needs to help them understand the difference between our short term challenge, which is real, to make sure that we have real economic recovery, get unemployment down and make some targeted investments, and then he needs to have a path forward to deal with the iceberg that could sink the ship of state. He needs to call for a compromise on the CR with regard to spending cuts, he needs to call for tough -- VELSHI: CR is a continuing resolution that will keep the lights on in Washington. To stop the budget from shutting down.

WALKER: Correct. They need a compromise on that, because they're arguing over the bar tab on a ship that's headed for an iceberg. And then what he needs to do is he needs to call for bringing back tough statutory budgetary controls that would kick in 2013 or 2014 with automatic imports and mechanisms and serious citizen education engagement effort to engage the American people so we can make the tough choices.

VELSHI: That, I think we all support. Hold on, all of you just stay there for a second, because what Dean said earlier, Dean Baker, the guy in the middle there, what he said earlier actually resonates with a lot of Americans. Let me tell you why.

Look, Republicans blame Democrats for this mess, Democrats blame Republicans for this, who is really at fault for our massive deficits and our massive debt? And more importantly, what can you do about it? A very specific question, which I'll answer on the other side of this break.

(COMMERCIAL BREAK)

VELSHI: Before you get the impression that everybody agrees that we've got to cut the debt, clearly one of my guests doesn't, and actually voters are about split on this whole thing. Some people think the biggest thing they have to do, the government has to do, is deal with unemployment. But let's ask the American public which programs they would like to sacrifice in order to deal with the debt, and look at the pushback you get.

According to a recent CNN Opinion Research Poll, 78 percent of respondents said preventing cuts in Social Security was more important than reducing the deficit. That's an interesting question, because there are ways of dealing with Social Security without actually cutting the entitlement. Seventy five percent said preventing cuts in education programs was more important than reducing the deficit. And this one saddens me a lot, 61 percent only preferred not cutting aid to the unemployed, 38 percent favored reducing the deficit.

So more people think it's of that group, more people think it's important to reduce the deficit versus cutting unemployment benefits than the other ones.

Gloria Borger, there are only a few ways to reduce the deficit. One is to cut spending, another is to raise taxes and the third one which is the least painful is if we just have strong economic growth. We're not forecasting that certainly for the next year, so for the next little while, someone is going to have to sacrifice. We're either going to pay higher taxes, we are going to seek cuts or both.

Now we vote government officials into office to represent our interests, and it seems to at least some Americans reducing the debt is one of our major interests. So I guess here's my question to you. At what point do voters allow the government, allow their elected officials to make the tough choices that we elect them to make without threatening to throw them out of office because they've made life uncomfortable for us?

BORGER: Well you know I think this comes at a very interesting time. There's a lot of reassessing going on about the question of these automatic spending programs. We used to say, when I first started covering politics, that Social Security was a third rail. If you touched it, you died. Now generationally, there's clearly a shift here. People, younger people want to have their Social Security when they get older. They want to have their Medicare. But they're much more willing to talk about ways to save the programs that would be more interesting.

For example, just raising the retirement age over a period of ten years is not a draconian thing to do. Changing a little bit about Medicare reimbursements, perhaps making the wealthy pay a little bit more, is something that can be discussed. But I do agree with David that you have to have an education program that starts from the top down. Have the president say, look, we're really in a many jam, we have to figure out a way to save these programs and maybe, maybe, change the tax code. Reform the tax code. So you slash all of these benefits that people get in exchange for a lower rate. Right.

VELSHI: The concept of reforming the tax code is we all pay a little less as a percentage, but everybody actually pays. Dean, let me ask you this. If we reduced unemployment, we're about 9 percent. Let's say we cut that down in half. We know that would mean a whole lot more people paying taxes, more economic growth, more demand. We would assume that that means lower deficits and eventually cutting debt. How does it work the other way around? Can you cut debt as a priority, as a first priority and create jobs at the same time?

BAKER: There are some unusual ways you can do it. It's very, very difficult. I mean the basic story is if you reduce spending in the economy and it doesn't matter whether it comes from the government or the private sector. We have some bizarre cultist out there who are saying people in the government doesn't work for money. Everyone I know does. But you know if you cut government spending that's cutting spending in the economy that will reduce employment. Now you can try to offset that, there are things like, for example, the Federal Reserve board could adopt a more aggressive policy. There's not a lot of support for that, but it could have a deliberate policy of having a somewhat higher rate of inflation.

Chairman Bernanke actually advocated that himself back when he was professor of Princeton for Japan, so that is one policy. If you got the dollar down, that's why we have a really high trade deficit. The dollar is overvalued if we can get the dollar down, that would improve our trade situation. The last thing we could do and I wish we would go this way, if we went the route of greater work sharing; this is something Germany's done with remarkable success. Their unemployment rate is actually lower today than it was at the start of the downturn and that's even though Germany has actually had less GDP growth than the United States. So what they do is instead of getting firms to lay people off when they face shortfall in demand, they reduce their work hours so people in Germany -- VELSHI: As much as people don't want that to happen, when faced with the prospect of working fewer hours versus not working at all and losing your benefits, most people will choose that. David let me go back to you for a second and the deficit and the debt. We have a debt above $14 trillion, we have been told that it is unsustainable; obviously that's a subject for some debate. But let's assume that it is unsustainable. You cut it in half and you get down to $7 trillion. Is that sustainable? How do you determine how much debt is sustainable?

WALKER: Ali, $14.2 trillion in debt is sustainable. It's only about 63 percent of the economy. If you count what we owe Social Security and Medicare, it's 93 percent. The problem is not where we are today; it's where we're headed. We're on an unsustainable path. It's set to explode. Look. You can't grow your way out of this problem, its math. It would take double-digit real GDP growth for decades. It's never happened; it's not going to happen.

You can't inflate your way out of the problem because inflation will reduce the burden of the $14.2 trillion in debt, but our problem, or the tens of trillions in off balance sheet obligations, Medicare, Social Security, et cetera, that not only grow faster than inflation, they grow faster than the economy when the economy grows. We need to do what it takes to get unemployment down, to make some targeted investments for the future, to get economic growth, and starting in 2013, no later than 2014, start putting in place some of these reforms, phased in over time, entitlements, taxes, more defense in other cuts, it is possible to do both. And the president has a responsibility to use the bully pulpit to make the case.

VELSHI: Well, I'll be talking about more of that more toward the end of the show. My good friends thank you all for joining us. This is a complicated issue, but it's so great that you all come here with things that feel like solutions to how to deal with it. Dean Baker is co-director of the Center for Economic and Policy Research, David Walker, is the former comptroller, general of the United States, CEO of Comeback America Initiative, and Gloria Borger, our good friend and CNN senior political analyst.

All right. The man that predicted the financial crash earned the nickname and Dr. Doom, you know his name, hear what Dr. Roubini says is in store for our financial future. I'll tell you about it after the break.

(COMMERCIAL BREAK)

VELSHI: So a political scientist and an economist walk into a bar, this isn't actually a joke, it happened, the bar is the Stone Rose, here at the Time Warner Center in New York, the economist is Nouriel Roubini, nicknamed "Dr. Doom" for his dire but ultimately accurate predictions prior to the global financial crisis. He recently co-authored a piece with a political scientist Eurasia Group president Ian Bremmer. The piece argues that the world may look very different in the near future.

Christine Romans sat down with him and started the conversation with current events.

(BEGIN VIDEO CLIP)

CHRISTINE ROMANS, CO-HOST: Let me ask you about the budget. We talk about concerns about Americans' fiscal discipline. What do you think about the president's budget?

NOURIEL ROUBINI, ECONOMIST: Well I think we're kicking the can down the road and the president and Democrats are doing it but also the Republicans. In order to reduce the budget deficit we have to cut spending and eventually we will increase revenues and taxes.

But so far, the Democrats are against entitlement reforms that are necessary, Medicare, Medicaid, Social Security, and Republicans are against any form of tax increases. And we have gridlock in congress like never before that is total lack of bipartisanship and interest rates are low so we're pushing the problem to the future.

ROMANS: People are asking big fundamental questions in this country that they haven't asked in a very long time.

IAN BREMMER, PRESIDENT, EURASIA GROUP: They're asking that but that doesn't mean they're willing to take pain right now. I do think that this was a moment that Obama could have shown much more leadership, frankly.

ROMANS: On the budget.

BREMMER: Especially because you just had this bilateral deficit reduction commission that if you would have just said, pretty sensible, I mean "The Wall Street Journal," "The New York Times," everyone came out and said, pretty sensible, but that would have taken a level of leadership that would have made it somewhat less likely that we're going to see an Obama administration in 2012.

ROMANS: Well the president says we're impatient, because we are impatient we have to work together on Medicare, Medicaid, and Social Security, then the Republicans say no that we need leadership from the president, I mean it's the same old stuff, isn't it? I mean, how are we going to fix it if we're kicking the can down the road?

ROUBINI: Well you know the politicians are not showing leadership but the reality is also Americans need the reality check. If you ask Americans they say on one side I don't want my taxes to be increased, on the other side if you ask them, they want Social Security, they want Medicare, and they want social programs and so on. So we're in this gap in which there is a gap between reality and what reparations are. You need leaders telling you we need to make sacrifices. If we don't make sacrifices down the road we're going to have a fiscal train wreck.

ROMANS: You have to give something up, you have to in services, you have to pay more taxes and the economy has to grow strongly. We need all three of those things. Is there some spark in the economy that's going to spark the innovation or something that's going to make America in this century great again? ROUBINI: No, I mean we have to invest in the future. We have to reduce our budget deficit; we have to invest in education and the skill of the labor force and infrastructure to be able to compete in this global economy where China, India and emerging markets are rising.

ROMANS: A G-0 world, this is a world that has potentially more political destabilization, more potential for financial crises, and more trouble for middle classes and aspiring middle classes. Is that -- am I reading it correctly?

BREMMER: Sadly, all true. I know that we've put a G-20 together and that's aspirational. We'd like a G-20, the world's 20 largest economies getting together and saying here's what leadership is going to look like, but the reality is that the countries right now are taking big decisions overwhelmingly looking at their own countries, their own economies.

We've had Obama in power for two years now, there's no Obama doctrine on foreign policy. There was a Bush doctrine. You may not have liked it, if there was one. Carter, Reagan, all the rest, Clinton, you look at Japan, you look at Europe, overwhelmingly domestic difficulties and those are the guys that have been providing global leadership historically. The Chinese, the Indians, the Indonesians, emerging markets, they're not yet willing or prepared to provide leadership on issues like trade, on currency, and so what we're seeing is a breakdown in global governance and what we believe is a G-0.

ROMANS: So Nouriel a G-0 world, if everyone's going it for their own personal benefit, what does that mean for living standards in this country?

ROUBINI: It means we're going to have trouble. Because the economic and financial that we are facing are global and require coordination among countries.

ROMANS: So generation x, if 24 million jobs were created over ten years in this country, generation y, 8 million and change is the lose and we're not even keeping up with new entrance into the workplace, what does the -- a G-0 future if you will look like for generation y in this country?

BREMMER: It looks great for generation y if they're university educated and if they are entering into the higher levels of the economy.

ROMANS: Software engineering, computer systems, some science technology, and engineering.

BREMMER: You go to Silicon Valley and you go to the conferences they have, the private equity guys and looking at entrepreneur ship in the technology sector right now, you feel like you're in a different country and the problem is increasingly you are. And so this is what the gen y is not going to be one sort of mass of everyone can get a job, it's going to become like the country increasingly divergent. And that's something that we should worry about. Because you have to pay for these people.

ROMANS: Right.

ROUBINI: But there's also a huge underclass of very unskilled workers or young people who are not educated. This is huge. We're not investing in the skim skills of the labor force. So there is a gap between those very high skilled in education and the huge underclass is not having the skills to compete in the global economy. And that's a risk.

(END VIDEO CLIP)

VELSHI: Wow. What a discussion. He touched on so many, both of those guys touched on so many of the things we talk about, that underclass one really worries me. But listen, we know housing is a mess. It may be staging a recovery; I'll ask you about that in a second. We clearly know jobs and education and training is a problem. But the stock market bottomed in March of 2009, the S&P 500, which is what a lot of our viewers, will invest in through index funds and mutual funds has doubled since 2009.

ROMANS: Yes.

VELSHI: What do these guys have to say about investments at least?

ROMANS: Nouriel Roubini says stocks in the near term can keep going higher but he says Ali there are an awful lot of risks. I asked him, are the prospects for stock investors completely decoupled for the prospects for American workers? They both said, well yes, actually.

VELSHI: It's remarkable.

ROMANS: It is the companies are making money selling things overseas, by the rising of middle classes in other places. So that's what's been helping stock investors. But Nouriel Roubini said there are a lot of risks, he said the housing market is in a double dip, no question; he called the housing market a disaster and said we have a lot of concerns with our fiscal issues, a lot of risks he said.

VELSHI: I will tell you, you and I have never been scared about putting things on the record, I will put on the record, that I really disagree with him on that, I don't think the housing market is in a double dip at all. I do think though that we do have to address this issue of how workers don't invest in the stock market. Even if they have the availability to do so, it is a cultural ship. So the rich get richer because the stock market is doing well, and those of us who live for a wage don't necessarily think that's part of our world. So I want to talk to you about that that spread between the rich and everybody else later on in the show.

ROMANS: All right. You've got it.

VELSHI: All right. State budget cuts, this is something that's been in the news constantly. It means fewer services for you. One governor weighs in on the tough choices he has to make, next.

(COMMERCIAL BREAK)

VELSHI: Earlier in the show and probably for the last several weeks, we've talked about the battle over the federal budget but that almost seems a little bit removed compared to your reality, and that is the states and some municipalities are facing their own showdown over budget cuts. We've been seeing it all week in Wisconsin.

Let's bring in the governor of Montana, Governor Brian Schweitzer.

And, Governor, good to have you here. You are certainly -- Montana is one of those states that is certainly not in the dire situation that Illinois and New Jersey and New York and Pennsylvania and California are, but you've got budget issues.

What's the problem that you're facing in Montana?

GOV. BRIAN SCHWEITZER (D), MONTANA: Well, you have to balance your budget and, of course, a couple of years ago we started by building large surpluses. In fact, three years ago I demanded that the legislature put enough money aside so that if there was a recession we could weather the storm. And so we actually put in savings account, the largest savings account in the history of Montana. And today we have $355 million in our checking account, another $800 million in our savings account, and our entire budget is only about $1.7 billion per year.

So you plan for these events. And in the future, I mean, you've got to plan for these things. You know, it's like somebody who gets a fire in their couch. You call 911, but while the fire engines are getting there, try to put the fire out.

VELSHI: Right. Right.

SCHWEITZER: So two years ago we started cutting costs in Montana. We got our state employees two years ago to negotiate a zero percent increase in their salaries and we praised them for that. We went across, systematically across state government and cut 5 percent and 10 percent from all our budgets. Not cutting programs, just making government more efficient.

VELSHI: What can you tell your friends in Wisconsin because they're trying to cut costs in the public sector? Never mind what they're trying to do and how they're trying to do it, but what can they do differently then? How do you succeed cutting costs in the public sector because that's what every state needs to do?

SCHWEITZER: Well, every governor is the CEO of a large company. And every CEO in America and around the world knows that if you want high morale among your workers, if you want them to do more for less, you praise them. You say to them, look we're in this together. We need to get through these difficult times together. But these governors who today are demagoging their state employees, they're going to get less performance and they're going to lose money out of the deal.

VELSHI: Yes. OK, Governor, stand by.

Maya MacGuineas, with the New American Foundation, a left of center nonprofit.

Maya, you're an expert on fiscal policy. Now some governors, particularly Republican governors, want to cut taxes with an argument that that's going to raise revenue. How does that work?

MAYA MACGUINEAS, DIRECTOR, FISCAL POLICY PROGRAM, NEW AMERICAN FOUNDATION: Well, we all wish that old argument were one that does work but rarely is the case that if you cut taxes you're going to actually pay for themselves. Cutting taxes is indeed good for the economy in many instances, but not so good that it pays for itself.

I think the more sort of conservative model of save during the good times so you have money for the bad times, be responsible and don't over promise so that you don't have health care and pension promises that you can't live up to is the best kind of model for budgeting in the states.

VELSHI: Which is what Governor Schweitzer's been doing.

All right. Christine Romans with me again, Governor Scott Walker, we're talking about him, the governor of Wisconsin. He wants to pass a bill essentially stripping government workers including school teachers of nearly all of their collective bargaining rights.

So this is interesting, because earlier this week you were talking about the spread, the differential between the increase in earning power of average Americans over decades versus the wealthiest of Americans and one economist, Bill Rogers from Rutgers, former chief economist from the Department of Labor says the elimination of collective bargaining rights has been responsible at least in part for that stagnation of wages.

ROMANS: And that's what he says, he's a former Labor Department economist and I guess you could assume he's pro-labor. But the issue with Wisconsin is interesting, it's either a governor who is trying to cut costs and balance his budget or it's an attack on collective bargaining or an attack on teachers.

Put that part of it aside and look at it this way, Ali. This is something that's going to keep happening. This is a question of not having enough money. And when you don't have enough money, things get ugly and painful for people. That's what the states in distress seen is all about. And it's just starting to play out here.

Two years after the recession, what you're seeing there in the state house in Madison, what you're seeing in some other places, I think it's most poignant there in Madison because you have kindergarten teachers who are so riled up they're not teaching their kids anymore so that really brings home the fact we don't have enough money. And I wonder how this plays out on a federal budget. The federal budget doesn't have to be balanced, state budgets do. VELSHI: But this is where you feel it. This is where the rubber hits the road.

Governor Schweitzer, this is a bit of a problem. Again, let's be clear Montana doesn't suffer the same problems that a lot of other states do. You have some states around you, some of the mountain states, the western states are actually doing OK. But the reality is more people are affected in some ways by the state cuts which affect municipalities, and garbage collection, and libraries and state police, and all sorts of - and teachers, than in fact they feel a federal budget slow down.

SCHWEITZER: Well, let me explain what we do in states. It's a business model. Every state has the same business model. We educate, we medicate, we incarcerate, and that is 85 percent of every single state budget.

What you have is 50 different models but we spend about 85 percent of our money on three programs. So you easily could have anticipated this recession three or four years ago, put some money aside like we have in Montana, challenged every expense in government without cutting programs, and be prepared for this storm. Our unemployment went to 7.5 percent in Montana, but we still weathered the storm.

VELSHI: Governor, you sound like a Republican.

SCHWEITZER: No, let me tell you what Republicans are proposing to do in Montana. They're proposing to cut funding for K-12 education right now, which would force every single school district in Montana to raise property taxes on homeowners. I've said to them, we have the money in the bank. Don't force homeowners to pay for their local schools. Let us, the state of Montana, do the right thing, invest in the future. The fastest path to higher-paying jobs is higher education. Let's prepare our children for the future.

VELSHI: Yes. Governor, you have full support on this panel about that. That's a topic that Christine and I are incredibly passionate about.

Maya, great to see you. Maya MacGuineas is the director of Federal Fiscal Policy Program with the New America Foundation.

Christine, stick around, we're going to talk to you.

Hey, Governor, I want you to stick around for one question, because you've been getting a lot of news on this this week.

You have stated that Montana would expand the killing of endangered wolves despite their federal protections. You're saying its attacking cattle, livestock, and things like that, and you want to protect ranchers' property rights. The federal government says the way you want to go about this is not the answer.

Tell me about this. What other solutions did you consider before saying you want to go ahead with the killing of wolves? SCHWEITZER: Well, a dozen years ago and more when the federal government captured some gray wolves in Canada and turned them loose in Montana, they told us that once we get to 150 wolves and 12 breeding pairs they would no longer be an endangered species and that Montana would have the ability to manage them. Now we've got 600 wolves.

VELSHI: And they're off the endangered species list.

SCHWEITZER: That's right. We have 600 wolves right now. Those females are denning right now and we'll increase the number of wolves to about 1,000 and we were expected to have 150. So both our elk population and our livestock are at risk.

We're not going to hunt the wolves out to extinction; they are part of our wild life management scheme in Montana. But the federal government has reneged on our deal in Montana and as usual in Washington, D.C., they confuse motion for action.

VELSHI: I want to ask you this. Very poignant argument you make. But it smacks a little of Arizona and immigration.

Can a governor simply empower its citizens to ignore federal law?

SCHWEITZER: We aren't. In fact, federal law right now allows us to shoot wolves that are killing and harassing livestock. So we're just doing that. We've asked the federal government for what's called a 10-J and that would be a permit for our wild life officials to eliminate some of the wolf packs that are preying in large numbers on our elk population.

We're not going to do anything that violates federal law. I know that makes good copy, but in fact what we're doing in Montana is following the law and managing the wolf population.

VELSHI: OK, so if a rancher or a farmer shoots a wolf and gets in trouble for it by a federal officer, they can say the governor said it's OK?

SCHWEITZER: Certainly. In fact, they're not going to get in trouble for it because they have the legal right under federal and state law right now. If you have wolves that are attacking your cattle or your sheep, you can shoot them. That's the law.

VELSHI: Governor Schweitzer, good to talk to you. Thank you for joining us on the show.

SCHWEITZER: Thank you.

VELSHI: All right. Lending money to cash strapped states is a tax free investment. I'm going to tell you how to invest your money and how to reduce your risk after this break.

(COMMERCIAL BREAK) VELSHI: Cities and states are struggling to make ends meet, so you might be surprised to hear that lending them your money could make a good investment. We're talking about municipal bonds. They're a long-term loan to a local government and that government or that agency or that project wins by getting money, you win by earning interest in many cases without paying taxes. Federal taxes in some cases, state taxes if you live in a state that issues a bond your gain is free from state and local taxes as well. Walter Updegrave is a senior editor at "Money" Magazine, Walter, municipal bonds they are not just municipal.

WALTER UPDEGRAVE, SENIOR EDITOR, "MONEY" MAGAZINE: No, well if by municipal you mean a municipality, a city, no they could be states; they could also be for a specific project, a bridge, a tunnel, and a water and sewer authority, that sort of thing.

VELSHI: People who may have seen the term municipal bonds come up in the last few months might be seeing it in the context of it being riskier. Give me your sense of where they fit into a risk portfolio.

UPDEGRAVE: Sure. Well generally people think of them as being very safe, and that's why they buy them, partly for the safety and security.

VELSHI: Because you don't expect these projects, states and cities to go bankrupt.

UPDEGRAVE: Exactly. And they usually don't. The default rate on municipal bonds historically has been very, very low and they are generally a secure investment. Shouldn't be confusing them with treasuries though, they're not as secure as treasuries. And the -- right now a lot of states and municipalities are really struggling. We hear about the budget shortfalls, the pension, the unfunded pension and health care liabilities, so that has made it riskier and a lot of investors have pulled money out of municipal bonds which have sent the prices down. So there have been some losses in them recently.

But this is the kind of thing where you don't want to panic, people who own bonds shouldn't be just like getting rid of them wholesale and people who are thinking of buying them doesn't mean that they shouldn't be buying them. You just need to be a little more careful if you're buying for security and safety.

VELSHI: Yes. You're not really recommending people go and buy individual state agency or municipality bonds; you're talking about a fund?

UPDEGRAVE: Yes. Through funds I think is the much better way to go.

VELSHI: Which you buy just like a mutual fund.

UPDEGRAVE: So for example the Vanguard Tax Exempt Intermediate Fund, invests in intermediate term in community bonds, keeps most of its portfolio in AA or better, very highly rated bonds and it has incredible diversification, almost 3,000 issues.

VELSHI: Now you also like the T. Rowe Price Tax Free High Yield Fund, the ticker there is prafhx.

UPDEGRAVE: Right. Now this would be something for somebody who is willing to take some more risk. The signal here is you take high yield funds, you are going to get a high yield but whenever you get higher yield you're taking more risk. But in this case the fund sort of avoids the very bottom of the junk pile, it tends to focus on and it also has some investment grade or does have investment grade bonds. But they're just -- they have a little higher yield. So this is the kind of fund if you're willing to take a little more risk for a higher yield.

VELSHI: I want to show our viewers what we mean by this when you look at the one-year return, it's 0.9 percent. That feels like a CD or a bank account. The issue here is the tax saving. This is why you're saying don't bother with this in an IRA. If you look at the taxable equivalent yield, that's very nice, the 7.6 percent. All right. Excellent explanation. Walter's got great stuff; you can see a lot of his work on Money.com or in "Money" Magazine, Walter Updegrave, senior editor at "Money" Magazine, great to see you as always.

UPDEGRAVE: Good to see you.

VELSHI: All right. You knew you were due for a raise. But you hopefully just how overdue you are. I'll explain next.

(COMMERCIAL BREAK)

VELSHI: Time now to go beyond the headlines. Christine Romans is back. Joining me also is Pete Dominick, my good friend, host of Sirius XM "Standup." Guys take a look at this chart. If you're part of the red line, you're going to see a red line and a blue line emerging. If you're part of that red line, congratulations, you're in the top 5 percent income bracket in the United States. Almost everyone else, however, your wages have been stagnant for the past 30 years. In fact, this chart goes back to 1917; your wages have been largely stagnant for a very long time. Christine, you talk about this a lot. I have heard you talk about this for years, the fact that the middle class is disconnected from progress and growth. How did this happen?

ROMANS: How did it happen? Did it happen because of globalization? Did it happen because we don't have a manufacturing policy in this country or was it a national economic strategy? Did it happen because we sort of outsourced those jobs to multimillion dollar corporations who are looking for other countries for their profit and growth. I mean it is a combination of a lot of different things. But the bottom line is when you're talking about the American dream, which is do better than the generation before you, unless you're in that top line, and that ain't happening.

PETE DOMINICK, HOST, SIRIUS XM'S "STAND UP:" If you have a red shirt and much like the top 5 percent Christine. Let's go to the wall, you love to go to the wall. I want to examine politics. I don't know where 1981 is, but I think it's somewhere around here. We just talked about it, you just talked about who these people are, and who these are people, and these are people. These are voters, these are voters. These people got these people to vote for their interests, period. That is it, these people are still voting for their interests because these --

VELSHI: What happened toward the end here? Manufacturing jobs disappeared and markets started to take off.

DOMINICK: You could lay another graph over this, the demise of unions starts right around here, when unions are strong, union works who are middle class or who are not -- I love the life. Politics.

VELSHI: Here's a remarkable point, Pete. The rich got the average, the middle class to vote for policies that sustain them. Policies like for instance, extending a tax cut to the wealthiest in society. Christine, explain the psychology there, explain why 95 percent of the people support the system that enriches the top 5 percent?

DOMINICK: The American dream. They are going to be them some day Ali.

ROMANS: This recession has made the wall between the haves and the have-nots a lot harder to climb.

VELSHI: Interesting.

DOMINICK: Here's another thing I want to talk to you about, as if the middle class hasn't been battered enough. Food and clothing prices, you know this they're going up as a result of rising global commodity prices. Christine quickly walk us through this.

ROMANS: This is the big story of the money story of the week guys. So look you're talking about companies that are starting to say we can start passing along these higher raw materials prices, and that's going to be everything from meat to poultry to eggs. You're already seeing that. You've got grain prices that are historic. Then you take a look at cereal.

VELSHI: Or maybe the packages get smaller.

ROMANS: Or maybe the packages get smaller, or they have fewer manufacturers. Even some of these things that go into beauty products, those have been going up. Apparel, cotton prices are at record highs, they have more than doubled.

VELSHI: A 10 percent.

ROMANS: A 10 percent. This is a great CNNMoney story; you're going to see really chintzy t-shirts and jeans that have fake pockets.

DOMINICK: Here's one thing, I don't eat meat, I don't eat breakfast, I use baking soda, I go naked, I don't have a refrigerator. I have a question for you, what's the top ingredient in corn flakes? Corn right?

ROMANS: Well that's a very good point. Because you look at refrigerators, Whirlpool, LG, said they are going to be raising prices, one of the reasons is they have moved overseas, many of their manufacturing people, guess what prices are rising, it's also costing more to ship stuff halfway around the world to come back. Because of fuel costs and labor prices are going up from the quote, unquote cheap labor market. So it is a lot of different things.

VELSHI: Good to see you both as always. A very animated discussion. It's the first time I have ever seen Pete Dominick play an economist. Very nice. Good to see you Pete.

DOMINICK: It's politics.

VELSHI: Well from politico pundits to economists, everybody including Pete had something to say about President Obama's budget. Now it is my turn. I will reveal my open letter to President Obama after this break.

(COMMERCIAL BREAK)

VELSHI: It is time now for "The XYZ of It."

So we are in the midst of this budget debate for the 2012 fiscal year, meanwhile we haven't finalized the 2011 budget. I am quite sure the president is getting an ear full of advice from every corner, but I have decided to write him a letter with my thoughts on the budget. So here goes.

Dear Mr. President, as I've said before on TV while we all followed your State of the Union speech closely. The rubber really hits the road with your budget. That's the actual manifestation of your administration's priorities and challenges. You said this past week that your budget proposal is the opening salvo, that the final product after negotiations with Republicans will look very different.

Your proposal does take a big bite out of some domestic spending, but cutting or slashing some 200 programs, but it also increases spending on things like education and infrastructure. You have made some noble attempts to slash the deficit even though you are using some tricky wording by suggesting, quote, we're not going to be running up the credit card anymore.

Since we all know that even if we didn't charge another dollar, the interest alone would out strip the amount of money that the government spends on Medicare by 2018.

Mr. President, in recent years a little under 10 percent of the federal budget has been allocated just to pay the interest on the money that the government borrows, you know that, and you deserve kudos for taking a scalpel as you say rather than a machete to this budget. But saying they we are not going to charge more to the credit card in a few years isn't enough.

This problem is not going away and you are going to need to take that scalpel of yours to those third rail issues like Medicare, Medicaid and Social Security and it would be great if you could do that without doing further harm to those most vulnerable in society, like the unemployed, like the 99's the long term unemployed who have suffered through the recession and are now suffering through a recovery.

Mr. President as I said in my last letter to you, I wouldn't wish your job on anyone, and I certainly wouldn't want it, but I do wish you good luck.

Sincerely Ali Velshi.

Well that is my "XYZ."

Thank you for joining the conversation this week on YOUR MONEY. We are here every Saturday 1:00 p.m. Eastern and Sunday at 3:00 p.m.

And you can also catch Christine Romans on "YOUR BOTTOM LINE" Saturday mornings at 9:30 a.m. Eastern.

Make sure to connect with me on Twitter I'm @Ali Velshi.

Have a fantastic weekend.