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The Debt Deadline; Trouble at Home; Fixing Unemployment
Aired July 2, 2011 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: Who gets paid and who doesn't? That's the question that Treasury Secretary Tim Geithner may be forced to answer if the debt ceiling is not raised by next month.
Welcome to YOUR MONEY. I'm Ali Velshi. What is it? Chaos, catastrophe? No one can say for certain what's going to happen if the debt ceiling isn't raised.
Now the prevailing thought is that those who hold U.S. debt bond investors would be paid first. This would prevent America from defaulting on loan payments. Those are payments that we use to keep the engine of our economy running.
What about everybody else? According to the Bipartisan Policy Center, it would be impossible to keep paying for all of the most popular and important programs that you rely on.
That means possible reductions or delays to Social Security, Medicare, Medicaid, food stamps, maybe checks to federal workers, some combination of the above.
Jeanne Sahadi is a senior writer with CNNMoney. Every week, we lay a confusing scenario from Washington. Jeanne, helps us make sense of it. Jeanne, what is likely to happen about a month from now if we hit this deadline without a deal to raise the debt limit?
JEANNE SAHADI, SENIOR WRITER, CNNMONEY.COM: Well, you mentioned the Bipartisan Policy Center report. They estimate that about half of U.S. bills won't be paid, some 40 and 45 percent. That's a lot. That's a lot of bills.
And you know, it is the Social Security recipients who could be affected. It could be our military. It could be our federal workers. The truth is it's going to be a chaotic situation choosing who gets paid and who doesn't. That's going to create some bad blood.
It's an unnecessary situation from the administration's perspective. Congress could, in fact, not let that happen. They could step up and make a decision about raising the debt ceiling.
Even one of the world's largest bond investigators, Mohamed Arien, he was saying - you know, he's been a big proponent of debt reduction plans. But even he said, you know what, if it comes to kicking the can down the road because we can't get a deal before the debt ceiling has to go up, kick the can down the road a little and raise the debt ceiling. It's serious. VELSHI: All right, and that's the important thing to remember. Harvard professor Ken Rogoff is a former chief economist for the International Monetary Fund.
Ken, listen to this with me. Republican Senator Kay Bailey Hutchison said we're about to find out how serious the Obama administration is about reducing spending. Listen to what she said.
(BEGIN VIDEO CLIP)
SEN. KAY BAILEY HUTCHISON (R), TEXAS: You do the things that are essential. This is where I think the administration is going to be tested. If they won't make an agreement that will have spending reforms, if they start doing the chicken little thing by not paying Social Security recipients or people in our military or interest on our debt and instead choose to cut the things that will hurt the most, but not the things that they could cut responsibly, that's going to be the test that they're not serious.
(END VIDEO CLIP)
VELSHI: Ken, she's talking about a test. Is this a logical test? If you strongly believe that spending needs to be cut or taxes need to be raised or somehow the budget needs to be dealt with, is this the way to keep the administration's feet to the fire?
PROF. KEN ROGOFF, HARVARD UNIVERSITY: I think this is nuts. I mean, it's taking a huge risk. It's like we have a train going 100 miles an hour towards a bridge, a draw bridge and they're deciding whether to raise it at the last minute.
It's too late. I mean, you can talk about a year from now. You can talk about long term deficit reduction plans and by all means, let's do it, but you can't raise the debt ceiling. It will be utter chaos. I think it will cost us a lot of money, tens of billions of dollars.
VELSHI: This is interesting because people are talking about it as a cost-saving measure. If you can pressure the administration and congress into cutting spending, it will save money.
But the danger is in doing so, it could end up costing more money. Diane Swonk is a chief economist with Mesirow Financial. At a press briefing this week, President Obama made clear that he thinks we need a limit on the debt ceiling. Listen to what he said.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We have to seize this moment and we have to seize it soon. The vice president and I will continue these negotiations with leaders of both parties in Congress for as long as it takes. And we will reach a deal that will require our government to live within its means and give our businesses confidence and get this economy moving.
(END VIDEO CLIP) VELSHI: Here's my issue, Diane. I mean, between you and Jeanne and Ken, you all live in worlds that are highly specific. You have data that has to be analyzed. We are a month away from this thing.
We hit the debt ceiling back in May and we are still talking in broad generalities that are dictated by philosophy and ideology. Everybody's saying what they thing we should do largely, but nobody's really got a plan.
I would think at this point different sides should be negotiating details.
DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Well, you're absolutely right about that. In fact, I just got back from Europe where I met with economists from all over the world, financial economist from all over the world.
They think we're nuts. They're dealing with, you know, riots in the street in Greece and they've got, you know, real insolvency problems, real default problems and they can't believe that we would threaten one when we don't need to.
I agree 100 percent with Ken on long-term deficit reduction and actually it is going on. I've been in Washington several times working with the bipartisan committees and the nonpartisan groups trying to get these committees together.
The gang of six with Biden, the gang of five, gang of six, they keep calling themselves the gang of six, but you know, they're actually looking at structural reforms, long-term deficit reduction.
But there's no time at this point in time to tie to it the debt ceiling. They could come to some kind of agreement in principle, but there's no time to write legislation and pass it at this stage of the game.
And to play chicken with this, something that is really are -- we've gotten threats from the rating agencies on our credibility as a country to service our debt. This is just nuts.
VELSHI: You know, just keep your calendars free on the night of August 1st because if this deal gets done, you know it's not going to get done a minute before - the last minute that needs to get done. Jeanne Sahadi --
SWONK: Which is also ridiculous.
VELSHI: It is ridiculous. Jeanne, let's just think -- one of the reason - one of the excuses some people are using for not supporting this is that there's a doomsday scenario, there's a nightmare scenario out there, which isn't true.
I want to take you back a couple of years to the day -- the Sunday when it was announced by a lot of smart people here in New York City that Lehman Brothers was going to be allowed to collapse because the market would be able to absorb that.
Guess what happened? Global capital markets and credit markets froze instantly. Nobody really knows how serious or how not serious it's going to be. It's quite a risk.
SAHADI: Well, it certainly could be a progression of from bad to worse. You know, I think if August 3rd comes and they haven't raised the debt ceiling, it's plausible to say not too much will change.
For Tim Geithner, will not be having a summer vacation, but he will have to make some really tough decisions. He will have to make decisions about who not to pay. I disagree with the notion that we're going to save money if they just prioritize spending.
This is money that's owed. The government contract - has already signed a contract. The services have been provided --
VELSHI: This is the TV you already bought, this is the house you bought -- it's two separate discussions, right, Ken? I mean, I think there's a very valid -- I think most Americans would agree, very valid discussion to be had about holding on to spending, controlling spending and ideological differences. We're talking about bills we have incurred.
ROGOFF: That's exactly right, Ali. We have already spent the money. We have signed the contract, what Jeanne and Diane are saying is absolutely right. It's too late. It's not, I didn't mean to spend that much last year.
We made the decisions already. You can talk about going forward. It's a lot of grandstanding and posturing. And indeed, some countries take a real crisis to make these decisions. We need to change our course.
But this kind of super artificial crisis is a little scary because if something goes wrong and they don't do their homework a day in advance like President Obama's daughters, I have to say my daughter sure notice that had --
SWONK: I reminded my kids, too.
ROGOFF: We could have a disaster. If we could package that, we could get out of our productivity slump.
VELSHI: Let me ask you this, Diane. There is also an argument out there that says for all the danger that the world -- from a credit perspective will disrespect the United States if it has to miss payments on commitments it's already made.
There are those who say the world will respect the United States for seriously looking at its budget and taking tough decisions. Do you believe that could be plausible?
SWONK: The world will seriously respect us if we take a look at our deficit -- long-term deficit reduction over the next 10 to 15 years and come up with a plan. It has nothing to do with the debt ceiling. I've already - I mean, I've talked to all these people. These are investors. These are financial leaders among some of the top banks around the world. And they think we're nuts. They just can't believe we would do --
VELSHI: So we're doing this as an either/or, when in fact, smart people say, they're both necessary. You've got to raise the debt limit and you've got to deal with the budget.
VELSHI: Ken, just real quick. We are unique. The United States is unique in this business of having a debt ceiling that has to be constantly dealt with by Congress. Most countries deal with it in a different way.
ROGOFF: Well, I think everybody has some procedure like this. I think we are unique is it's become such a defining moment. The House has found that they have a tool.
They can get power they didn't realize they had. But if we regularize this, one day we'll screw up and we'll actually have a default and it will be a mess.
VELSHI: All right, stay exactly where you are. The housing bust triggered our financial meltdown and the housing recovery continues to be missing in action.
Are we getting any closer to solving that key problem in our economy? For those of you with a house to buy or a house to sell, I'll tell you what's ahead for housing. Stay with us.
VELSHI: So how did America go from boom to bust? The short answer in this particular case was housing. From consumers to major banks, it seemed everybody was tied into a boom in housing prices, and anyone who wanted to could get a mortgage.
The recession ended two years ago, but the housing market continues to stumble. Recently, though, we've been getting mixed signals. In May alone, existing home sales were down another 15 percent. One in every 605 housing units received a foreclosure filing last month. That could be anywhere from the first process to where you turn in the house.
It's about a third fewer foreclosures than a year ago and at least housing prices stop dropping in April snapping an eight-month losing streak. Now this data may sound bleak to you, but if you have the money and you're ready to buy, I continue to argue that this would be a good time to do so because prices may be drop further, but they're pretty low.
As for your mortgage, there's really nowhere for interest rates to go but up. Let's go back to Ken Rogoff for a moment. Ken, QE2, the second stimulus, the second quantitative easing, the money that the Federal Reserve has put into the economy ended this past week.
If the fed is really done pumping money into this economy, isn't it logical that interest rates would start to go up?
ROGOFF: Well, first of all, the economy is really soft and maybe gotten softer as they've started withdrawing the stimulus and that keeps interest rates down.
Second of all, I really think it didn't do that much in the end. It had only a fairly marginal effect. It had a lot of ceremony and theatrics.
But they didn't do it really forcefully enough or frankly big enough to really an affect so that's why withdrawing it is a big moment in some ways, but it's not hitting markets like people thought it might.
VELSHI: Let's ask Jeanne Sahadi about this. Let's tie it back to the conversation we were having about this debt ceiling. In theory, if one misses a payment -- think about this as your mortgage or your credit card -- if you miss a payment or you signal that you're going to miss a payment, your interest rate tends to go up. Is that likely to happen to America and for people with mortgages and loans?
SAHADI: Well, Ken is right. A lot of the bond investors I've talked to have said, look, contrary to popular belief, if we don't raise the debt ceiling, rates may still stay low because economic growth expectations have been reduced.
And also if we come up with a big spending cut back, it's just going to go into effect right away, markets may worry that it's going to impinge on economic growth even further. So that's a possibility.
But, you know, that's sort of a near-term picture. Over the long term, you're right. Interest rates have nowhere to go but up. And the question is, what would the U.S. do that would trigger something to push them higher?
Credit rating agencies are not going to like -- if we pay bond investors, that's great. But if we continue to not pay money we owe money to, like the government contractors. You know fixed ratings say, we're going to be put on ratings watch negative.
That is going to show - that's going to reduce confidence in your sovereign credit worthiness.
VELSHI: Isn't that tough for people to understand because the same thing happens to you. If you choose that you're paying your mortgage, but not your car bill, your credit rating still going to go down and your credit cost is going to go up.
Ken, let's talk about the housing market in general. It played such a big part in this boom that got us here. Does it have to play a big part in our economic recovery or can we just go on without housing coming back as quickly as we would have liked?
ROGOFF: Well, I think we're going to have to go on without housing coming back really quickly. I do think you're right, Ali, that if you have the cash, it might be a good time to buy in some places.
But it's hard to get the cash because if you don't because credit is pretty tight. It's part of what holding the prices down. You know, in a typical financial crisis, housing is at the center, it takes a long time to work its way out.
It comes later than the rest of the economy. I think the rest of the economy will have picked up before the housing market really has a boom again.
VELSHI: And Diane, they shouldn't work independently, right? I mean, if the rest of the economy is picking up and more people are working and the stock market, which has been doing well, but for the last few months, that should lead to an increase in housing -- housing values?
SWONK: Of course, that is the way it should work. But as Ken has written quite a bit about in the wake of a financial crisis, the credit conditions are tight.
And with the new Dodd/Frank bill, there are some I think 300 different constraints on mortgages going forward. So it's going to get etch hard tore get a mortgage going forward, which will compound the problem in housing.
I think it is a great time to buy if you can afford to buy and turnkey properties are seeing some activities because there's not a lot of them on the market. But there's still a big backlog of foreclosures.
We've done nothing to change our legislation on foreclosures to going forward to clear the inventories we have or to stop this problem from happening again.
VELSHI: All right, so we're all optimistic that things can happen in the right direction. We're all fearful that our legislators could do the wrong thing right now.
Thanks to all of you, Ken Rogoff is a professor at Harvard University, former chief economist with the International Monetary Fund. Diane Swonk is a chief economist at Mesirow Financial and Jeanne Sahadi is a senior writer at CNN Money.
All right, you know we have an unemployment crisis in this country. Why it might be worse than you think, but more importantly, how can we actually solve it? We have some solid ideas next.
VELSHI: All right, we talk a lot about the unemployment rate in this country, but I want to tell you why that might be a red herring. There are a few relevant indicators to look at if you really want to gauge how well we're doing when it comes to jobs and more importantly creating jobs.
Let me give you a few different ways of looking at this. Let's first look at the pace of job creation. Over the past 12 months, on average, the economy has added 72,000 jobs per month. Now, this includes months where we've added jobs and months where we've lost jobs.
Many economists say we need to create 300,000 jobs per month to significantly reduce the unemployment rate to where we were before the recession started. I will tell you that that hasn't generally happened in the entire history of the United States.
We are more likely to get into the 200,000 job a month growth rate when we're really doing well. So we're not adding enough jobs. But there is job growth on average over the last 12 months. Now, how many different types of industries are expanding?
This is relevant because you don't want to have an economy where you're just adding jobs in the health care sector and the oil industry. Over the past 12 months, 69 percent of sectors have added job. That might sound pretty good, but keep in mind we're coming from a very bad place.
We lost a lot of jobs. We basically hit rock bottom, losing 8 million jobs during the recession. But the point is there is growth across the board in many industries.
Let's take a look at the quality of jobs available. More than 8.5 million Americans who are currently working part time want to be full time either because they want more hours or they want the benefits that typically come from full-time work. They are also a lot of workers now who are temporary or freelance.
Mort Zuckerman is the editor in chief of "U.S. News and World Report," Eliot Spitzer is host of CNN'S "In the Arena" and Arianna Huffington is president and editor in chief of the AOL "Huffington Post" media group.
An August panel, I might say. I know you all have opinions on this. I'm going to start with you, Mort. You've recently written something where you say when it comes to unemployment, we are worse off than we actually realize.
MORT ZUCKERMAN, EDITOR IN CHIEF, "U.S. NEWS AND WORLD REPORT": Yes, because the real unemployment rate is close to 18 percent than it is to 9 percent. The reason for that is the average length of unemployment now is 40 weeks.
The number that you referred to, the 9.1 percent that is put out by the government, the so-called headline unemployment number, is they only count people who have applied for a job in the last four weeks.
When you've been out of a job for 40 weeks, you don't apply for a job every four weeks. If you measure it by another government statistic, which is called U6, they measure people who have applied for a job in the last six months, which makes more sense, the unemployment rate is 15.9 percent, almost 16 percent.
But there's another as you referred to the quality of jobs. The fact is in each of those months and indeed for the last two and a half years since President Obama has been in office, not a single net permanent job has been created. In the last month, they announced there were 54,000 jobs were created. We lost over 100,000 permanent jobs. In the preceding month, we lost 290,000 permanent jobs. So the jobs that are being created, the net job creation is all in part-time work.
The problem with that is you get no health care benefits. The median income for people working part time is $19,000 a year. That's how serious the unemployment is about.
VELSHI: So you're not earning a lot of money and you're getting the benefits, which is one of the reasons why a lot of people thought health care reform might be a good idea.
But let's move on to another issue, Eliot, we are sort of fully immersed in a discussion about a debt crisis and about the debt limit. There are a number of people, a substantial number of Americans who think that we have prematurely moved on from the jobs crisis, which is really ultimately the place where we'll get the economic growth that solves some of these debt problems.
ELIOT SPITZER, HOST, "IN THE ARENA": You are exactly right. I'm one of those people. I think we have to deal with jobs first. That doesn't mean we don't deal with the debt crisis now, but we deal with it in a way that says we make the very serious cuts in the entitlement programs that need to be made, but schedule them so they begin in the years three, four and five.
Because what we need to do is get this economy booming again. Growth is the only way to deal with the debt crisis. Jobs is the key not only to the quality of life. Mort was exactly right. In fact, it may be even worse than he said because there are other numbers you can add in there.
But Mort is exactly right. Over the last 20 years, net job creation has come only in government and health care, not in what Mike Spence, who wrote a brilliant article most recently about the tradable sector, the part of the economy that is really dynamic, manufacturing, high- tech, no job creation there at all.
That's where we need to focus. But in terms of the debt crisis, yes, we have to deal with now. But dealing with it now doesn't mean cutting the budget right now. It means cutting it in years three, four and five after the jobs have come back.
VELSHI: Arianna, you know, when President Obama -- the month he took office, we had lost almost 800,000 jobs then. At that time, it was very clear to everybody in America that jobs was the biggest issue.
But by the time we got to these mid-term elections, things have changed a little bit and a lot of people felt that it was about debt and deficits. Has the president shown enough urgency and commitment to the ongoing and lingering unemployment problem?
ARIANNA HUFFINGTON, PRESIDENT AND EDITOR IN CHIEF, AOL HUFFINGTON POST MEDIA GROUP: Unfortunately not. All three of us agree that job is the biggest crisis. Obviously deficit is a crisis, but without growth, we're never going to be able to solve the deficit problem.
And unfortunately the president's economic team led by Larry Summers completely miscalculated. They expected real job growth that did not happen. So they instead bought into the Republican talking points about the deficit being the primary crisis we are facing.
And as a result, now it's ironic. But we are headed to the 2012 election, and the president's possible adversaries, including Romney, are making jobs, the absence of job creation a primary attack point against the president.
During this week, Romney had a press conference about it. We see "Time" magazine talking about the index of Americans who think this is a lost case. And one of the greatest prices is college graduates not being able to find jobs. That's really contrary to the American dream in the sense of outward mobility.
VELSHI: All right, Arianna, Eliot, Mort, stick around. We've talked about the problems. Now we're going to talk about the specific solutions, from corporate America and government to the jobs crisis, coming up next.
(BEGIN VIDEO CLIP)
VELSHI: OK. We want solutions to the jobless crisis in this country. We've gotten beyond the headline number, that 9.1 percent unemployment. To tell you a little more about what this looks like, now we know if you ask businesses in America or at least some businesses, they'll tell you that the government is holding them back. It seems the majority of the American public might actually agree with them.
A recent CNN/Opinion Research poll shows that nearly two-thirds of Americans think that the government is doing too many things that should be left to individuals and businesses. Want to go to Arianna Huffington.
Arianna, are they right?
ARIANNA HUFFINGTON, PRES. & EDITOR-IN-CHIEF, AOL HUFFINGTON POST MEDIA GROUP: Well, at the moment, this is the new consensus that's emerging beyond left and right that the government needs to do more, that the government needs to do more when it comes to a payroll tax holiday, for example, which would help businesses hire more.
More when it comes to infrastructure spending, I mean, our infrastructure is crumbling. The government can borrow at below 3 percent. Construction workers are idle. And also more aid to states which are also finding themselves in a position of having to inflict major cuts.
This is the time for the government to step in and allow the private sector to begin to hire more. VELSHI: But those seem like conflicting things. I'm going to ask you about this, Mort, because Arianna is right. The places where most of us feel it is in states that end up cutting benefits. We're seeing this across the nation. What does the government specifically need to do and separately what does business in America need to do to help solve this problem? There is money in the system.
MORT ZUCKERMAN, EDITOR-IN-CHIEF, U.S. NEWS & WORLD REPORT: Well, in the first place, let's just start off with a basic fact. When you have millions of American families who have home mortgages that exceed the value of the home, it's called negative equity, and when you have millions who have credit card lines that they can't pay back, debt, they now understand, has consequences.
That's what has made the government debt an issue as well, because they translate it from their own personal experience. And the fact is we do have a huge problem of a runaway national debt. We've had $1.5 trillion in each year, which is the largest fiscal stimulus. And the American public says it hasn't worked. We really haven't created the jobs.
So the real question is, are there policies that will work? We've lost 6 million industrial jobs in the first decade of this century.
ZUCKERMAN: We've created fewer jobs in the first decade than we've created in any other preceding decade.
VELSHI: But that's sort of secular, Mort, right? We had lost jobs that we as an emerging -- as a developed economy were likely to lose...
ZUCKERMAN: Well, let me show you what the government could do. The government can -- one of the things the government can do is to change the number of H-1B visas, which goes to people -- 50 percent of our honors graduates in the hard sciences are foreign students.
It is crazy to send them back to countries and companies that compete with us. We've reduced the number of visas we used give to those folks from 195,000 down to 65,000. That is insane. Every other country in the world is trying to attract these people, and we won't let them stay here.
And what do they do? They work in the single most important and expanding industry that we have in this country, which is based on technology and research and science. And we send these people away.
That's an example that's pure domestic petty politics. That's one thing that should be redone. And the other thing, just to follow on what Arianna said, we have a huge need for major infrastructure. One of the great problems of the Obama program was they didn't have nearly enough for infrastructure, which would have -- and there were many suggestions.
In fact, I spoke to them about it. And I think they know they made a mistake about it. But this was one of the things that could have been going full flush now if they devoted it...
VELSHI: Right. But you saw the trouble right with high-speed rail. You see nobody wants to put the money into the electrical grid. I mean, these are problems. You're right. It could create jobs.
Eliot, you were chief executive of the state of New York, a state that is continually having budget problems. How do you address -- what does government do to either encourage or get out of the way of business? And do you actually believe that government involvement is preventing these companies with all of this money from hiring people?
ELIOT SPITZER, HOST, "IN THE ARENA": Look, I don't want to get into the blame game. But I think it is a fact, there's $2 trillion sitting on the side. Businesses are not investing it, not because of excess regulation, there's no demand.
VELSHI: There's no demand.
SPITZER: There's no demand. We have a demand crisis here. We need fiscal stimulus. How you get it in a way that is smart is really the hard question. Mort is right. Visa reform is critical. Infrastructure bank is critical. I would say investment in R&D is critical. I would say that in the long run, the macro policies of our government need to change.
That means we need to control health care costs. We simply haven't done that. Long-term that is what is putting us at a competitive disadvantage. We need to have an energy policy. Our energy costs and our export of capital to pay for energy is what is killing us in terms of both currency and in terms of competitiveness.
Those are the two big macro policies we have got to come to grips with. Then you get to visas, then you get to infrastructure, then you get R&D investment. Those are the things government can do. Then the private sector will invest. The private sector creates jobs. We all know that.
The government macro policies have to permit it to do so. And that's where we have failed. Go back to Jimmy Carter's speeches. You know, a maligned president, but he was right about energy. He was right about health care.
In other words, these issues in 30 years, we haven't yet dealt with them. I hate to say it, I am in favor of President Obama's health care plan, but it doesn't do enough about cost. Cost is what's going to kill us.
VELSHI: It provided access, lots of access.
SPITZER: Access, but not cost control.
VELSHI: Arianna, we're talking about health care, we're talking about energy, we're talking about infrastructure, and we're talking about education. Four solutions -- not solutions but four ideas that the government can play a role in driving the economy. What else does this government have to do? Because we need to lay out a plan that's going to create jobs. It's not happening on its own.
HUFFINGTON: Well, it's not happening because the White House conceded the debate. And basically what has happened is that for the past few months, there has been so much emphasis on the debt crisis as opposed to the jobs crisis, that there hasn't been a sense of urgency.
So there has been no real debate about these issues that we are discussing here. And there are so many things that we can do. I mean, you had Bill Gross, the co-founder of PIMCO, hardly a socialist, who has come out in favor of more stimulus. You have the economics editor of The Wall Street Journal.
I mean, there's a general emerging consensus that (INAUDIBLE) about the fact that the jobs crisis is going to make it impossible to really solve the debt crisis. Even Larry Summers came out and said that what's happening now, with tax revenues being down because incomes are down, it's going to make it much harder to reduce the deficit substantially as opposed to purely cosmetically, which is all we're doing now.
VELSHI: Arianna, a pleasure to talk to you. Arianna Huffington is the editor-in-chief of AOL Huffington Post. Mark Zuckerman is the editor-in-chief of U.S. News & World Report. Eliot Spitzer, you can catch him every week night at 8 p.m. Eastern on "IN THE ARENA" right here on CNN.
On this Fourth of July weekend, we're taking on two issues that would get to the core of this country, manufacturing and fast food. I'll explain next.
VELSHI: July 4th weekend is here, but not everybody is feeling that patriotic spirit, the dream to become an American was crushed for 22,000 immigrants who won green cards as part of the Diversity Visa Lottery, only to be told soon after that it was a government computer error.
Christine Romans is here. She's the host of CNN's "YOUR BOTTOM LINE." Also joining me, Pete Dominick, host of Sirius XM's Stand UP Radio.
Fifty thousand people from around the world are randomly selected in this lottery every year, no special skill or education required. What do you think of this system? Is it a good system, is it a bad system?
CHRISTINE ROMANS, HOST, "YOUR BOTTOM LINE": Well, that's a different story altogether. I mean, to 50,000 people randomly selected in a sea of -- I mean, it's just luck. I mean, what's the point?
VELSHI: I mean, I don't even know if this is common around the world. Are we the only country that does this?
ROMANS: It's rare. I mean, most countries try to match skills with what the economy needs, skills levels, education levels.
VELSHI: Right. We know we have shortages in some areas. ROMANS: Right. This is meant to broaden out, most of the people who come to this country, they are sponsored by somebody else, right? So you've got a lot of people coming from Mexico, Central America, from Canada, from, you know, other countries. This is a way to diversify that pool.
So for countries that don't send a lot of people here, some Africa countries, it's a way for people to get in. But 22,000 people? Come on. They should just give these people their green cards.
VELSHI: The computer picked it from -- rather than the whole set, picked it from a small subset. And that's why...
PETE DOMINICK, HOST, SIRIUS XM STAND UP: The first people who applied, it was supposed...
DOMINICK: This is way worse than winning the actual lottery. You won $30 million? Well, that doesn't -- you know, change your life as much as getting into America. And so that...
VELSHI: And for generations to come, yes.
DOMINICK: But it causes us to have a conversation about our immigration system, which is important. And we should. But do we have the -- attracting the best and brightest and are we keeping them here? That's one argument about the DREAM Act, with all of its warts.
It would allow people that are the best and brightest to stay here that have grown up here. And do we want to attract the best and brightest immigrants as well? In this case, one woman is a neuropsychologist or neuro -- whatever.
VELSHI: One woman who got it...
DOMINICK: Yes. And now she may not be able to stay here.
ROMANS: There are several different classes of visas that she should try to qualify too. You know, there's medical visas, there's H-1B visas, there's highly skilled technical visas. This is just a lottery, just because you're lucky, you get to get a green card.
These 22,000 people, I'm just saying, in all American fairness, 22,000 people, if the government told you you got a green card, they take it back, they should just give it to them.
VELSHI: Yes, but if you're in the group that didn't get one, you're sitting here saying, I didn't get a fair chance. Look, it's one of our biggest issues, that visa issue about how to get the best and the brightest continues to be a good debate. Another debate in this country, no secret that manufacturing was one of the industries, by the way, that built America and took quite a beating in the recession. This may surprise you. Since 1975, manufacturing output, the stuff we make, has more than doubled, but employment in that sector has dropped by 31 percent.
So the industry, Pete, is not dead. We are doing more with fewer people.
VELSHI: Because of technology, because of automation.
DOMINICK: Right. Technology and automation have taken over. They have replaced humans. There's not much you can do about that. But in America, there is something that we can do to educate our people or to get our young people interested in these engineering and manufacturing jobs.
Anecdotal, but women -- I know a friend of mine's young daughter, she is getting into this. And women take the -- they want to hire people in these jobs, they want to hire Americans in these jobs, but there's a shortage. That's why a guy like me could never do math really good. But we need to encourage our young people, especially young girls...
ROMANS: Yes, I agree with you. But we need to encourage our companies as soon as they can to ship all of their R&D overseas. Look, the factory floor is where inventions happen. And we have moved the factory floor. So we keep saying in this country, oh, we don't need the low-skilled manufacturing jobs.
Guess what? It's those low-skilled manufacturing jobs where somebody figures out a new way to do something. And all of these companies investing billions in R&D in China.
ROMANS: So that's where the R&D happens and...
VELSHI: But while there...
ROMANS: ... that's where you need the engineering.
VELSHI: ... we can't discount the effective outsourcing. The reality is, even without outsourcing, had we never outsourced anything, we would still have increased our output and still have fewer people...
ROMANS: Because of technology. Technology is everything. It's both of those stories. It's not one or the other.
DOMINICK: Up until World War II, we produced everything that we consumed. We know what happened, trade barriers. But that's capitalism. But what we're learning though is, things are changing. People are getting paid more in China and the cost of fuel for transportation is making it. So maybe slowly, very slowly we're going to start to see the manufacturing jobs come back.
ROMANS: Right. Well, one theory that we've heard from an oil analyst is that as the price of oil goes up, it may not be worth it to make steel in China. Maybe it's more worth it to make it in America rather than make a ton of steel and ship it.
DOMINICK: God forbid we make steel in America again.
VELSHI: I'll tell you. All right. Cheap food may not be such a bargain. Consumer Reports released a new fast-food survey rating the food value, staff, and speed at 53 top chains. Four of the biggest names rated the worst: McDonald's, Taco Bell, KFC, and Burger King, some of my favorites on that list. The biggest complaint is the food. I mean, I really -- I could live on certainly McDonald's and Taco Bell and KFC. I'll go to Burger King in a pinch.
Christine, honestly, this is some of the cheapest food out there. Really, people are complaining about quality? I like my McDonald's and KFC.
ROMANS: Well, look, it shows you the reason why they have all these great sales is because people need to buy cheap stuff. I mean, and that's the most important thing. That cheap is trumping quality in some of these cases. I think there's some new kind of surprising answers on there, too. I mean, what...
VELSHI: Well, Chick-fil-A is the best chicken out there. And I love Chick-fil-A.
ROMANS: I do, too. I love Chick-fil-A.
DOMINICK: I shouldn't be speaking on this, my wife would rather have me have an affair than take my kids to McDonald's. I sneak out there and go about quarterly. But are people really more concerned about the customer service at a fast-food place? The innovations, the ideas that they come up with, when they pitch, let's wrap bacon in cheese and Americans will buy it, that's more what I'm concerned about, the health costs.
VELSHI: I -- to recuse myself from the conversation, In-N-Out Burger...
VELSHI: ... has been rated -- and that consistently does well.
DOMINICK: Why? Why? Have you -- what is that, In-N-Out? People love that.
ROMANS: When you get on the West Coast mostly. I think they're in Denver, I'm not sure. But it has got a real lettuce leaf, not like a lumpy...
VELSHI: And nothing is frozen, everything comes in brand new and fresh. Look, I kind of live on fast-food. So I kind of get it.
DOMINICK: You live on fast, period, Ali Velshi.
VELSHI: I live on fast everything, right. That's always -- Pete, great to see you. Christine, thanks so much.
ROMANS: You're welcome.
VELSHI: Make sure to watch Christine on "YOUR BOTTOM LINE" Saturday mornings at 9:30 Eastern, and, by the way, with me every morning on "AMERICAN MORNING."
All right. The market can only go two ways for the rest of the year, it can go up or it can go down. I suppose there's a third way, flat. We have got investment strategies for you, depending on which way you think the market is going to go, right after the break.
VELSHI: The Fed stimulus to the economy ended a few days ago, leaving a lot of investors wondering what that means for the economy and particularly for the stock market. Now this was called QE2. It was the -- 2 is for the second round, and the QE is for the "quantitative easing."
It's not a battleship. It's not a cruise ship. QE2 had mixed results. It boosted asset or stock prices. But did it kick the economy up enough? A recent poll taken by the non-profit American Association of Individual Investors asked its members how stocks will do in the next six months: 37 percent are bullish; 36 percent are bearish; and 27 percent are somewhere in between.
I know that doesn't really help you all that much deciding what you think is going to happen. Jim Awad from Zephyr Management is back with us.
JIM AWAD, ZEPHYR MANAGEMENT: Thank you. Always my pleasure.
VELSHI: If I side with the 37 percent who are bullish, they think the stock market is going to do better over the course of the next six months or year, what should I do?
AWAD: Well, if you believe -- for the stock market to do better, the U.S. economy has to do better. So you would want to buy companies that are levered to the U.S. economy, so you would buy small cap stocks, because they do all of their business here in the United States.
So you would buy a small cap fund such as the T. Rowe Price New Horizons Fund, which is the quality granddaddy of small cap funds.
VELSHI: This has been a big year for small cap funds. Look at the one-year on this, 42.67 percent. That would have been your return on a $10,000 investment a year ago. You would be now around $14,000. When one looks at a run like that, one wonders if it has got a lot more to go.
AWAD: Well, for it to go significantly from here, you have to have an acceleration in the U.S. economy in the second half, as the Fed believes will happen. If the Fed is right, this fund will keep going.
VELSHI: Right. And for small caps, you don't need the economy to be going gangbusters, but it is what you call early cycle stocks, right, in a recovery.
AWAD: Well, you need a growth rate in excess of 3 percent in the United States for these companies to really show their profit stuff, if you will. So if you believe the economy is going to grow 3 percent or more, this is the way to play it.
VELSHI: And this is an area where do you want an expert, because otherwise you're guessing. These are little companies that are not...
AWAD: Oh, yes.
VELSHI: ... fully capitalized sometimes, so it is hard to know.
AWAD: Right. This is -- you really don't want an index. You want somebody who can go find the good companies versus the weak ones.
VELSHI: OK. What if I'm the other side? What is it, 36 percent who think that the economy is not going to pick up this year. I don't think that means you shouldn't be invested.
AWAD: No. There will be opportunities. So what you would do then is you would buy large cap stocks with dividends because large cap stocks have not done as well as small cap stocks.
VELSHI: Right. So in order to attract investment they have to pay a little bit.
AWAD: Right. Right, exactly. And so they're more attractively priced. They have good balance sheets. And many of them have excellent dividends. So the Sit Dividend Growth Fund buy stocks in companies that have a dividend greater than the S&P in general. And it is really quality.
It's companies like United Technologies and GE and IBM and Microsoft and JPMorgan. And so what you're doing is you're locking in a yield -- a dividend yield, much greater than the money markets.
VELSHI: Which is virtually nil these days.
AWAD: Right, right, yes. But you...
VELSHI: Again, you have too much money on any kind of interesting bearing...
AWAD: You get almost nothing. So maybe you get 1.3 or 1.4 percent in this fund which is great compared to money markets. And then you get the growth of dividends over time. And you have an option on a growth of the U.S. economy and the world economy because many of these big stocks have their earnings in emerging markets.
VELSHI: OK. Let's go there. Because we worry about the world. We see Britain, we see Greece. We worry that there isn't growth elsewhere. But there really is. In emerging market there's hot growth. So let's say you're part of the 36 percent who doesn't think the U.S. economy is going to do well. You're worried about some parts of the global economy. How do I tap into those places that are really growing?
AWAD: OK. So you want to buy an emerging markets fund. If you look at the numbers, what's going on in Asia and India and parts of Latin America, it is a powerful story. The transfer of wealth, the growth of the middle class, they are where we were in the 1950s.
So you would buy something like the Lazard Emerging Markets Fund. And if for some reason they're not accepting money, you'd buy their Emerging Markets Blend Fund. Either one of those are good.
But they are a Cadillac of emerging markets investing. And they do their research. They're in the good geographies, in the good companies. And the growth in the emerging markets is powerful, it's long term. And they're trading among themselves.
VELSHI: When you say they're like we were, they're buying things, consumption is still high in a lot of these places.
AWAD: Yes. Right, well, we have a lot of debt at the consumer level and at the federal level. They are growing their wealth. They have high savings. They're now buying toothpaste and technology and computers and they're building roads. And they have the money to do it and they're trading more with each other rather than just exporting to the U.S. and Europe. So it's great growth story.
VELSHI: And, again, the great thing here is that you're giving people specifics, because these are some places where indexes don't do the job. You want a manager and it might cost you a little bit higher than an index, but you want somebody who studies and knows the difference between this country and that...
VELSHI: ... this company and that. Jim, always a pleasure to see you. Jim Awad is managing director at Zephyr Management.
Well, enough is enough with these debt ceiling talks. Something has got to happen and it has got to happen, not soon, but now. We'll get into it next in my "XYZ."
VELSHI: Time now for the "XYZ" of it. Nearly three months ago, after a last-minute budget deal averted a government shutdown, I stood in this very spot and I pleaded with Congress and the president to never take us to the brink again. Here we are, barely a month to go until the U.S. government will begin to default on its obligations if the debt limit is not raised. This game of chicken has become so engrained in our politics that our elected officials would risk potential economic catastrophe by dragging us again to the edge of the abyss.
By the way, we have already blown through our legal debt limit. We did that back on May 16th. We are now well beyond the point where we should be talking in broad ideological term about budgets.
By now both sides should have been working specifics to get a deal done. Look, the United States is not Greece, but we can learn a lesson from what has just happened inside Athens' parliament, where a majority of Greek lawmakers voted for a strict austerity package that could cost them their political lives.
But they understood that it had to happen to avoid default and thereby putting the interests of their country ahead of their own interests. That's what we need here. Each side needs to give a little more in the name of the greater good, even if it costs them votes, or their seats on election day.
We need real political courage. Republicans in particular need to stop repeating the phrase, we don't have a revenue problem, we have a spending problem. Saying it over and over again doesn't make it true. We can't keep every tax break in the tax code.
Look, the stakes right now couldn't be higher. On a Sunday night back in September of 2008, some of the smartest financial minds in the country gathered here in New York and made a calculated decision that letting Lehman Brothers collapse would be taken in stride.
The next morning, global capital and credit markets worldwide seized. The effects of that single decision continue to choke a global economic recovery today. This is bigger. This is about the credit worthiness of the United States of America. The trust that the U.S. will pay for what it has already bought.
Now the Senate is going to stay in session next week. That's a good start. But time is running out and playing brinksmanship with the debt ceiling is not an option. It is really not an option.
That's my "XYZ." Thanks for joining the conversation this week on YOUR MONEY. We're here every Saturday, 1 p.m. Eastern, and Sunday at 3 p.m. Set your alarm for 5 a.m. Monday morning to join me on "Wake-Up Call," I'll help you get your week off to the right start. And stay connected 24-7 on Facebook and Twitter, my handle is @AliVelshi. I read every one of your tweets. Have a great weekend.