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Middle Class Americans Are Sinking Fast; Job Creation Must Be Job Number One; Foreclosure Prevention; Interview With Wisconsin Governor Scott Walker and Montana Governor Brian Schweitzer

Aired August 13, 2011 - 09:30   ET


CHRISTINE ROMANS, HOST: Sure feels like America's middle class has been under assault for years. Why the S&P downgrade could make it even worse.

Good morning. I'm Christine Romans.

Plus, the state of states, from unemployment to housing, budget cuts and education, what states are doing to stay on top of this economy.

And do you have AAA finances? It's time to take stock and take charge. We'll show you how.

But first, we begin with fears of a double-dip recession, home price taking another dip and 13.9 million people are still out of work. We just can't seem to catch a break.

Don Peck is features editor for "The Atlantic" and wrote the September cover story, "Can The Middle Class Be Saved?"

Don, what's the answer, can it?

DON PECK, FEATURES EDITOR, "THE ATLANTIC": The middle class can be saved but we need to take a wide array of aggressive action to save it, I think.

It's interesting the middle class itself has in many ways been downgraded in this recession. The housing bubble amassed a host of problems. The middle class has been slowly hallowing for years, wages in the middle class were stagnant throughout the oughts. But the middle class retained a sense of optimism and forward progress because of increasing housing wealth, and the increasing debt that went with it.

But the recession has blown away that fig leaf. And one reason I think that this period has seemed so painful to so many people is in some ways we've seen the concentration of a decade's disappointment in just the past three years.

ROMANS: Yeah. When you look at the -- look both of you, Raghuram Rajan of a former chief economist at the IMF, professor of finance at the University of Chicago's Booth School of Business.

You've been writing about wage stagnation. Basically this big divide for a while. This graphic we are showing is pretty shocking. Median incomes have been so flat, the blue line shows. How come it only becomes an issue after the financial crisis in 2008? Look at the red line. That's the top 1 percent income earners. Tell me, why?

RAGHURAM RAJAN, PROF. UNIV. OF CHICAGO BOOTH SCHOOL: Well, first, of course, the divide has been growing, as you say, but a divide is not just put in the median and top 1 percent. It's within the median and people like you and me, you know, at the upper middle class level. That's also been growing.

What kept the middle class quiet, as you said, was that even though income in equality was growing, consumption in equality was not. What made the difference? Credit. You had a big takeoff in credit over the last few years, especially credit against your house. That kept people fairly, you know, satisfied. Now, as Don just said, when the housing bubble collapsed and when the same people who had seen stagnant incomes now found they didn't have jobs, the houses were being foreclosed, that's when realization dawned that the dream had been stagnating for quite some time.

ROMANS: Terry Savage, personal finance columnist and author of "The Savage Truth On Money".

This all goes back to the housing. Housing was this mirage which helped mask, Terry, some of these pains that were happening. Now you've got 27 percent of homeowners owe more on their mortgage than the house is worth. Wow. Existing home prices keep dropping. Without a fix in housing is the middle class going to feel better?

TERRY SAVAGE, PERSONAL FINANCE COLUMNIST: We have to ask why that happened. And why that housing bubble happened in the first place is because politicians decided they would subsidize housing by encouraging Freddie and Fannie, who we have already paid out billions, to make mortgages to people who were not qualified.

All the negative talk about loss of the middle class is very encouraging to me because it flies in the face of history. Middle class is not a number. It's an attitude. It's about hope. And throughout our history the middle class at one point were the agrarian farmers. Then they thought that was a terrible job as farms became mechanized. And they all rushed to the cities to be industrial workers. That built our middle class.

In 1980, '81, '82, we thought we had lost those jobs and we did. But we couldn't see that we had this incredible productivity in technology come along that would create a whole new middle class. If government would get out of the way right now I think we will see something new. I have no idea what it is. Whether it comes from nanotechnology or some new energy independence. But the fact is, Americans has always aspired to be in the middle class so they could get better. From Jay Gatsby back in the, you know, "The Great Gatsby", looking at the shore, looking to be rich. And if we take away that dream, the belief that you can do it yourself, you can have an opportunity, and think government can take care of it, we're making a big mistake. ROMANS: I'd like to be less Jay Gatsby and more Thomas Edison. Is what I'm looking for. And Terry, I will give you this. The American people have been worried about losing the American dream and the middle class since men wore wigs.

So, Terry, Don, Raghuram stay right there.

With stagnant wages, rising tuition, the middle class is being priced out of the higher education. We're going to look at the cost of schooling and that investment in your family, next.


ROMANS: Terry Savage, Don Peck, Raghuram Rajan back with us now.

Don, education an issue we talk about almost every week on this program. You talked, yourself, in the last segment, about how we have to investing in these skills. But with skyrocketing tuition costs, the degree is still worth it, but it won't protect you against job loss like it used to. What is the value of education here? And is there a concerted effort in Washington to make sure that isn't downsized, too?

PECK: It's interesting. In some ways professional degrees are now what bachelor's degrees used to be. Wages have been rising very smartly for quite a long time for people with professional degrees, people with professional degrees today have very low unemployment rates. Things are less certain for college graduates.

However there's been a lot of commentary recently questioning whether a college degree is still worth it. We saw just that same sort of commentary during the Great Depression. It was wrong then. It's wrong now. All evidence suggests that a college degree is absolutely worth it; particularly in majors like the sciences and in math.


PECK: But a college degree, the return on that is actually near an all-time high.


PECK: So I would recommend to all of your viewers, considering whether or not to go to college, you should if you possibly can.

ROMANS: The unemployment rate for a bachelor's degree is 4.3 percent. You hear us every jobs report day saying it's 9.1 percent, 9 percent, 4.3 percent if you have a college degree.

Terry, how much should you be willing to pay for college? This is going to be in every living room and every financial aid office right now.

SAVAGE: Right now, right at this moment. And here's the thing. A degree is absolutely going to be worth it. I agree. But the financing and the debt may not be worth it. You know, unsubsidized Stafford loans, the ones not based on the facts of need, are now at 7.9 percent. Sorry, 6.8 percent. And Parents Plus loans, which are not based on need, are 7.9 percent. You know you can put money in the bank and get nothing. Why are you paying 7 percent or 8 percent on loans?

The trick to get that degree is to figure out how to make it more affordable. I think the real answer will be local community colleges. You don't want your kids at home for two more years. They don't want to be there. But if you can at least get them to stay home for two years, cut the burden of debt, cut the interest rate payment, get the degree, and then move on to the professional level.

ROMANS: Yeah, I like your thinking. I like three-year undergrad degrees. There are not very many of them. But you can find them. Especially, if you're going on to graduate work. The CLEP and the AP credits when you come in, all of this takes forethought for a 15, 16, 17, 18-year-old kid to do. I also don't think-and this is just me on my high horse, but I don't think you should be switching majors three or four times, because, Raghuram, it's a different kind of world right now. And that investment is so incredibly important.

Let's look at the broader world. What prevents the U.S. from slipping into another recession at this point? Because that's what families are worried about, too.

RAJAN: Well, I think a recession is, you know, it's something a lot of people are worried about. The real problem is years of slow growth. And what we need to do is figure out how we get out of this mess. And my sense is we really need to tackle the problem at the core. And that means housing, which we've already talked about, tackle the foreclosures, tackle the mortgages that are under water. And ensure that in some sense the housing market starts reviving, construction starts reviving, because that's where a lot of jobs are.

The second thing we need to do is match the skills to the jobs. There are jobs in the United States, except that they're not suitable for the kinds of skills that are available in the marketplace. And that's something we need to fix. And this is why I think not every degree is the same. I think we need to think about whether the degree that we're going to get is going to earn a job.

And as Don said, science, technology, engineering, math, is probably where the shortages are likely to come in the future. Probably much less of a market for sociologists and perhaps for economists. But that's something we need to think about. That we need to look at the local jobs market and this is where community colleges need to get together with businesses and try and tailor the kinds of course offerings to what the business actually needs.

ROMANS: What a fantastic discussion. We'll pick it up again another week, very soon. Don Peck, Terry Savage, Raghuram Rajan, thank you very much for joining us for that thoughtful analysis of the middle class.

Has it been downgraded? And what you can do about it. I think we all agree that you need to go to college and get the right major, and not too much debt.

Thanks, everybody.

What are states doing to make sure the middle class isn't downgraded? I posed that question to two well-known governors, next.



Let's stay with the middle class. And joining us are two governors from middle America. Wisconsin Governor Scott Walker and Montana Governor Brian Schweitzer.

On the jobs front, Wisconsin and Montana are both doing much better than the rest of the country at 7.6 percent and 7.5 percent for their jobless rates respectively, compared to the national unemployment rate of 9.1 percent.

Governor Walker, let's start with you. You were one of 26 governors who took office in January. I will tell you none have incited stronger passions than you, for both your supporters and your critics. Your critics say that your belief that government is too big and intrusive, and the taxes are too high has actually made you unfriendly to the middle class, teachers in particular.

How do you respond? And how do you feel like you have done now, halfway into this year in terms of the middle class in Wisconsin?

GOV. SCOTT WALKER, (R) WISCONSIN: Well, we've actually protected middle class jobs and middle class taxpayers, who for years historically have had to pay for more and more and more of expanse of government. In our case, early on this year we tackled the jobs agenda, literally starting on January 3, the first day we took office. Much of what we passed were passed by not only the Republican votes but many Democrats who understood to get people to work, to help the middle class you've got to create jobs. They come from the private sector and not through government. So we have been quite effective. First six months of this year, 39,000 new jobs in our state. That is a rate twice as fast as the job growth in the United States right now. We're going to continue down that path working together.

ROMANS: If you're a teacher in Wisconsin, a middle class teacher in Wisconsin are off or worse off than a year ago?

WALKER: Well, you are better off when compared to other states. Because states all across the country (AUDIO GAP). Because of the budget problems, laying off thousands of public employees, including teachers, we don't have massive layoffs. In fact, in many of our-a good example, Kakana (ph) School District, just outside Green Bay, Wisconsin, they took the savings from the reforms we provided and early this year. They actually restored any of the layoffs they were talking about, hired more teachers for this fall. Will actually lower the classroom size, and set money aside for merit pay. So, great teachers will actually fair better than they ever have in the past because of the reforms we gave our school district. ROMANS: Governor Schweitzer, I want to move now over to Montana. And welcome both of you to the program, two different, very different states. The latest per capita, personal income shows your state ranks 38 out of all 50 states and just a little more than $35,000. That's a big improvement from past years. Where does the middle class agenda rank for you right now?

GOV. BRIAN SCHWEITZER, (D) MONTANA: Well, in Montana we lead the nation in percent of our population who work for an employer with 10 or fewer employees. We really are the small business capital of America. And so, these people who are starting new businesses, who are investing all of their sweat equity back in, who are increasing the number of employees from three to five, that's what's going to get Montana and the rest of this country moving.

But during the last six years we built the largest budget surpluses in the history of Montana. All six of my budgets have ended with the largest budget surpluses in history. We have $340 million in the bank this year. In 2008, instead of sort of demagoguing state employees I negotiated with them not to increase their salary. They haven't had a salary increase now, for three years. When people retired, we didn't replace them. We found ways of cutting the size of government. I've cut more taxes for businesses and homeowners, than any governor in history, built the largest surpluses. And along the way made government more efficient.

ROMANS: You said something interesting there, Governor Schweitzer. You said demagogueing public servants. Are you seeing demagoguing of publics, for example, in Wisconsin, or am I misunderstanding you?

SCHWEITZER: I see it all over America. I see elected officials who are suggesting that the people who work for government are somehow not deserving of the compensation they get, or the wages that they get.

ROMANS: Are you speaking to the governor of Wisconsin or are you speaking in general?

SCHWEITZER: Just in general.

ROMANS: In general. Governors, I want you to both look at this map. All the states highlighted right now are under fire for possible school cheating scandals. Neither of your states are on the list. Congratulations. But I'm telling you that parents and taxpayers across the country are furious about these cheating scandals. Both of your states have signed up for a waiver from No Child Left Behind. I'm going to be honest with you, there are a lot of people who think some of the cheating scandals is-it's all stemmed in this race to test, test, test, test kids and it puts so much pressure on these school districts to lie, to cheat.

The administration, this week is going to allow these waivers. Do you think this is a good plan? And how much more needs to be done? Governor Walker, you first. WALKER: In our case, it's a good example, we've been working together. Our superintendent of public instructions, Tony Evers (ph), is independently elected. He historically has been more in line with Democrats and the teachers union. But he and I came together earlier this year to say we need to have a better accountability system for our schools than the No Child Left Behind mandate, out of the federal government.

So, you're right, we're seeking that waiver based on a system where we brought educators, parents, advocates, people from all across the spectrum together. And said, we need more than just one high- stakes test. We need a series of things certainly to measure proficiency, and advanced placement, in terms of core curriculum items. But also to look at progress, to look at advanced placement, to look at other issues, to make sure that every kid in every zip code in our state are getting access to great education.

Because we do-my kids both go to public schools, I want a great education for every kid in this state. We need to give the teachers the kind of support and incentives they need to continue to have a great education. But it doesn't just come through one high-stakes test. We're hoping to be one of those states that leads the nation in alternative to the federal mandate.

ROMANS: Governor Schweitzer, what about you?

SCHWEITZER: We don't talk about K-12 anymore. We talk about K- 16. And in Montana education is for life. That's a part of the reason why our students are some of the highest achieving students in science and math in America. In Montana we are 93 percent white, and we are about 7 percent Indian. And on our Indian reservations, we have real challenges. We have dropout rates of some 50 percent. Those are some of the lowest scores we have anywhere in Montana. And No Child Left Behind didn't recognize the kinds of gains that you make.

If you've got some of the lowest scores in America and you increase by 25 percent, you've made more gain than somebody who was at the 90 percent level, and who was able to increase to 5 percent, to the 95 percent level. So what we've done in Montana is, we've created a partnership between our colleges and our high schools, so that high- achieving students in high school are getting college credits already when they're a sophomore or junior in high school; so that we can take care of all sides of the bell-shaped curve. If we have high-achieving students, we allow them to take distance learning at university systems, and then it allows us to focus on some of the lower achieving students so they didn't increase in size.

ROMANS: But even with the surplus, you did have to raise tuition at the Montana state universities, didn't you?

SCHWEITZER: Well, we did go the longest time in the history of Montana with no tuition increases, longer than all 49 other states. But we did have to raise tuition a little bit, but we do have a scholarship program for middle class families in Montana. We call it the Best and Brightest. So every family in Montana can achieve the dream of a college education. We don't want kids dropping out because they have to go back to work. We want students to be able to get a university degree.

ROMANS: Best of luck to both of you. Multi-layered issues for the middle class. Some different, some the same, in both states, as we've seen around the country. Thank you very much, gentleman. Governor Scott Walker from Wisconsin, Governor Brian Schweitzer from Montana, thank you both.

WALKER: Thank you.

SCHWEITZER: Thank you.

ROMANS: The S&P may feel the country doesn't deserve the top credit rating, but do you? How to get your personal finances to AAA, how to keep them there, next.


ROMANS: OK, be brutally honest. Are you in panic mode about your personal finances? We want you to take a deep breath, because we've brought in someone to help us put your personal finances back to AAA status, and keep them there. Financial adviser Stacy Francis had been busy all week, calming down her clients, putting them in the right positions, and maybe taking advantage of all this mayhem.

Stacy, break this down for us a bit, AAA financial status. I kept think, if all of us can just try to have AAA personal finances. What does it take?

STACY FRANCIS, PRESIDENT, FRANCIS FINANCIAL: I know, everybody's focusing on the country now, the AAA status. And we forget, how would we rank? Would we get AAA status? Unfortunately, for a lot of consumers, not the case. There's a lot of things we need to think about to get our personal finances in the right financial mode.

ROMANS: A retirement plan is pretty important, because that's the very long-term. And that's where you could be taking advantage of lower stock prices now, because you are investing in stocks. When creating a retirement plan, you say there's three main factors, or issues. Walk us through them.

FRANCIS: There are three main factors. The biggest factor is know what your income is going to be. Obviously from Social Security, pensions, maybe part-time job, and investment income. And what's really important to know is, guess what, your investment income that you thought maybe you would be expecting 10 years ago, many people expect an 8 percent return. Guess what, now you should be looking at maybe a 6 percent return, even a 5 percent return. We know the type of life we are living in.

ROMANS: And be really brutally assess your expenses, as well, right?

FRANCIS: Brutally assess your expenses, and know exactly what you're spending. A lot of people only plan for 75 percent their current expenses in retirement. You need to plan for 100 percent. Your medical expenses will probably go up and probably also those vacation and entertainment expenses as well.

ROMANS: And don't just set and forget it. You have to make sure you're reassessing this and reallocating, you say every year, for a retirement plan.

FRANCIS: Yes, that is the third step. We spend more time planning our vacations than we do looking at our finances.

ROMANS: I know. Why is that? Because vacations are more fun.

FRANCIS: I know they're more fun and more interesting. But you need to be taking time to look at, you know, are you spending the right amount? Are you saving the right amount? Are you on track?

ROMANS: A lot of people feel they can't attack their retirement planning right now, because they're just worried about the housing situation, or making sure they can afford the mortgage. And it is interesting, earlier this week, I said on TV, I said what this Fed means for you, what this downgrade means to you, that if look, if you have an interest rate on a 30-year mortgage that's above 5 percent, you should think about refinancing. There are very low mortgage rates and people need to take advantage of that if we can.

FRANCIS: Exactly. Many of us are spending too much on our housing. Now's a great opportunity to reduce your spending, your actual monthly payment. If you're paying more than 5 percent on your interest rate, look at a 30-year, you are going to get a 4 percent range on interest, for a 15 year, you are going to get a 3 percent range for interest. Variable, we are even seeing in the 2 percent.

ROMANS: Really?

FRANCIS: How can you not do something?

ROMANS: Unbelievable.

The big savings dilemma for families is saving for retirement versus college. You need to save for retirement first, hopefully you're saving for both. Talk to me about finding the money to put away for college.

FRANCIS: Well, ideally, you're saving 10 percent of your income each year. But in reality, usually, we find people are not doing that. Saving for education is very important, but it's really important to do the savings for retirement first. No one's going to give you a loan to retire and your children can actually get a loan for school. However, it needs to be something that should be part of your financial plan.

ROMANS: Stacy Francis from Francis Financial, thank you so much for putting a AAA rating on our personal finances, because that should be our goal. That's the only thing we can control, right?

That's going to wrap things up for us this morning, but the conversation continues online. Please send us an e-mail with your thoughts and your questions too, to Yourbottomline@cnn. com. Find me on Facebook and Twitter @christineromans. Please tell me if you have refinanced and how much money you're saving.

Back now to "CNN SATURDAY" for the latest stories making news.

Have a great weekend everybody.