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The Economic Storm Ahead; Romney's Job Creation Claim; The Economic Storm Warning; Reforming the U.S. Tax System; A Ray of Hope
Aired August 12, 2012 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: Your politicians seem to think the best way to handle the job situation in this country is to tell you what you want to hear. My job is to tell you the truth.
I'm Ali Velshi. And this is YOUR MONEY.
An economic storm is approaching our shores from Europe. Another one is developing in Washington but your politicians refuse to level with you.
One week ago Mitt Romney made an audacious promise that during the first four years of his presidency, 12 million jobs will be created. Now someone who apparently helped him come up with that canard will join me in a minute so he can try that little trick on me. I'll ask him whether Mitt Romney was either absent or sleeping when he approved that outrageous claim.
But to be fair, politicians make a lot of promises to get your vote that they don't keep. Maybe they intend to keep some of them, maybe they don't. PolitiFact.com tracked more than 500 promises that President Obama made during his campaign in 2008 when he was candidate Obama. He's kept 37 percent of those promises. He's working on 23 percent of them. He's broken about 16 percent outright and he's compromised on about 14 percent to get the job done.
And the rest, well, some of you like to tweet me a lot and point out the many promises that he hasn't kept. Some of those broken promises can be blamed on Congress. They are stalled because your lawmakers won't do a thing about them.
I have spent the last few months blaming Congress for things, but it's not Congress who's going to stand in the way of Romney's ridiculous promise, it's the state of the U.S. economy. Twelve million jobs over four years, That's what Romney is promising. It's three million jobs a year or an average of 250,000 jobs per month every month for an entire presidency.
Now I'm going to save my next guest some time. He'll say not only is it possible but then it's been done before most recently during President Obama's second term in the late '90s. But that was a very different economy. One that was growing at an average of 4.2 percent a year. Ours is crawling at 1.5 percent.
You see companies need to be on solid footing to be confident enough to hire that many people. I'm all for big thinking on and off the campaign trail, but instead we get big promises that often end up being lies.
I'm joined now by David Gergen. He's CNN senior political analyst, but I want to start with Kevin Hasset. He is an economic advisor to Mitt Romney. He's one of the authors of the 12 million jobs in four years pledge.
Kevin, good to see you back here. You authored this claim. Please give me a solid economic basis for creating 12 million jobs in four years, three million a year, 250,000 jobs a month on average starting in January 2013.
KEVIN HASSETT, SENIOR FELLOW AND DIRECTOR OF ECONOMIC POLICY STUDIES, AEI: Right. Well, if you've looked at the study and it sounds like you've got a strong opinion about it, and I know you based those on your own analysis, so probably you did look at the study.
The fact is that there are lots of countries around the world that have been tinkering with their economic policies and then we've got lots of data what happens when they do that. So for example, Governor Romney has proposed that we cut the corporate tax rate from 35 to 25. Right now we're about the highest on earth.
There are actually two countries that have a higher corporate rate than the U.S. That's Ghana and the Congo. But other than that, everybody has a lower rate. But back when President Clinton increased it by 1 percent in the '90s we were actually right about in the middle of all countries around the world. And so we've had, really, you know, tens -- in 20, 30, 40, 50 countries changing every two or three years their corporate rate and then we've watched what happens when they do that and seen a lot of job creation.
And so if you look at our study, what we do is we look at the individual proposals that Governor Romney has made and then we go to the academic literature just like if you're a sports show, you go to the videotape and we say, well, what is the academic literature say would happen if you did that.
HASSETT: And then if you add it all up, then you get that big number that you mentioned. Of course, it's very important to mention that that's conventional on on everything happening.
VELSHI: Right. Right.
HASSETT: Everything happening that he proposes.
VELSHI: Conditional on everything happening. Later in the show, I've got -- in fact I've got them lined up. I've got the entire U.S. tax code lined up here. All 73,000 pages of it. That is not going to change in January 2013 no matter what Mitt Romney wants.
So here's my question to you. I'm not saying it's impossible to create 250,000 jobs a month. We have done it before and I'll point that out. The issue is in order to do that you've got to change things, which means it's not going to happen in the first month, it's probably not going to happen the first six months, which means you're going to be having to create even more jobs.
What economic circumstances in this country changes the day Mitt Romney takes office that would allow for immediate job growth at that sort of pace? We still have slow economic growth and there are no forecasts for substantially faster economic growth over the course of the next few years. We've still got a bloated and inefficient 73,000 page long tax code. We still have foreclosures and credit problems.
So how is it that the world somehow changes and the economic sun sunshine through the storm clouds because Mitt Romney becomes president?
HASSETT: You know, you listed a lot of the major things that we need to address and that Governor Romney is talking about on the stump. And, you know, it's absolutely right that if Governor Romney is elected and then he goes into the White House and nobody wants to adopt any of his policies in Congress, then, you know, one wouldn't expect that all of a sudden, you know, businesses would start investing again and people would start buying houses again, and the things that need to happen to really lift the economy.
But if Governor Romney is elected and he's got a Congress that he can work with, which I think is very highly likely, he's worked with Democrats and Republicans in the past, very successfully, then what's going to happen is he's going to start, you know, listing the problems and knocking them down one by one. And a lot of them were kind of easy to legislate. So, for example, the corporate rate reduction isn't that complicated, it's not the kind of thing that's going to take a staff, you know, 10, 15 months to write a bill so that we can all look at it.
I mean, we could cut the rate today. We just say, hey, let's cut the rate from 35 to 25. His proposal will be more complicated than that. But there's a heck of a lot of stuff that could happen right away. And once it does, then it's going to bring in something we talk a lot about in the papers. It's going to bring a lot of certainty back.
HASSETT: Which we certainly don't have now with, like, the entire tax code basically expiring in December.
VELSHI: I hear you, but there are a lot of Americans who are not going to be interested in you taking the simple approach of cutting corporate taxes without dealing with a whole lot of those other loopholes that make up the 73,000 pages and that's where the things gets bogged down.
Kevin, you're always so cheery in the way you present these situations. I always appreciate that.
HASSETT: Sorry about that. I'm sorry, Ali.
VELSHI: Let's -- no, it's -- we like it. Let's bring David Gergen in. He's a good friend of our show. David, politicians make very big promises in election times and sometimes even after they're elected. President Bush, number one, said read my lips, no new taxes. President Obama, and this is the one he keeps getting held to account for, is that the stimulus would make sure that unemployment never rose above 8 percent. And some people will tell you he never said that, but his people said it and they published it.
What -- is this the kind of thing that could come back and bite a President Romney?
GERGEN: Absolutely. Just as it came back to bite Mr. Obama. But I do think this. Kevin has got a legitimate, credible argument that we could be doing a lot better than we're doing now. There are enormous number of businessmen, as you well know, who are sitting on cash right now. Cash is on the sidelines because of the uncertainty over the election, uncertainty over the fiscal cliff after the elections. Uncertain whether we're going to get serious about what Simpson-Bowles in tackling a debt.
If you did those things and undertook them in a bold way, you could unleash a lot more economic growth in this country. But the notion of getting 12 million jobs over four years is a great dream. But most economists will tell you that's a pipe dream. Because the economy -- the fact is whatever we do, we are caught at the tail end of a very different kind of recession. As you know, they go back to the Rogoff- Reinhart analysis of this that financial recessions are deeper than you expect and they last longer than you expect and they leave you with one hell of a hangover.
And that's what we're experiencing right now. Plus we're in a new global economy. This is not like the '90s. It's very hard to compete to create jobs. So I think -- I think all of us believe we -- (INAUDIBLE) we can do better.
VELSHI: All right. So what we need -- we may disagree on the number of 12 million jobs over three months, Kevin, but what you, David and I agree on is that we can do better. So we want to discuss how we do better. Where is the plan that backs up these claims. Even if the claims don't live up to the expectations, I want to talk to you about the campaign.
The Romney campaign says the economy under President Obama is not getting better fast enough. Sounds like a great case for change. Is it true?
Plus whether you own your home, rent an apartment or squat in your parents' basement, I'm going to show you how people are making money off the real estate recovery. You don't need a down payment or a loan. Stay with us.
VELSHI: I've told you why I think Mitt Romney's claim that he can create 12 million jobs in four years is false. Now let me show you how hard it would be to do that. Romney, like many other politicians, goes on the offensive here using the rising unemployment rate against President Obama.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: In July unemployment went up again and the president is running out of time. Under Obama's economy, it's just not getting better.
(END VIDEO CLIP)
VELSHI: That is at best a misrepresentation of the unemployment situation. The unemployment rate is a favorite talking point amongst politicians. Now I have been consistent about this for many years. It is a secondary measure of the health of the labor market. It follows a group of people moving in and out of the job hunt. The monthly payroll numbers, the job creation or loss numbers, are a much clearer gauge of what we -- what we are, where we are.
The total job creation number is an absolute. Everyone can measure it. Everyone can feel it. And everyone can understand it. So let's throw that unemployment rate out the window. And I have been saying this for years and look at job creation numbers. You can see the deep cuts. This was during the recession. At the height of the recession, the end of 2008, 2009 losing somewhere in the neighborhood of 800,000 jobs a month when President Bush left office and President Obama takes office.
You can see in 2009 things started to improve. Job growth fluctuated but started to improve. A lot of that had to do with the stimulus bill. We saw a peak in the beginning of 2009. And -- 2010 we started to see losses again in 2010. And then from about the end of 2010 all the way to now, we have seen about two years worth of net job gains.
My point here is that Romney's promise of 12 million jobs over 48 months means that this economy would have to create 250,000 jobs every single month. That's about this level over her here. It doesn't happen very often. We've only seen a handful of months with that kind of job growth over the last four years.
So it would take a sharp, sharp turn around in the economy to all of a sudden be in a steady pace of 250,000 jobs a month.
I'm rejoined by David Gergen, CNN senior political analyst, and Kevin Hassett. He's of the American Enterprise Institute. He is also an economic adviser to Mitt Romney and an author of this claim that 12 million jobs can be created in four years.
Kevin, you and your co-authors wrote that, quote, "America took a wrong turn in economic policy in the past three years," end quote. Now does this mean we can see stronger job creation simply from a political policy change in Washington? Because, as you know from being on this show before, I think there's something else at play here including this massive storm coming in from Europe that Washington can do very little about.
HASSETT: Right. You know, what we have to do is focus on the things that we can have an impact on and you're right that other things could happen. You know, Europe could blow up and then there could be some months that are bad. But the fact is that you think about the problem this way. Suppose that the economy were -- was really struggling like it is now. And every policy was perfect. We had a brilliant tax code. The government had a balanced budget, everything was perfect and we weren't growing so much.
Well, then we'd really be scratching our heads. It's like, oh my gosh --
HASSETT: -- are we going to be able to improve this? But the fact is that if you look at pretty much any of our policies it's indefensible. Right? So the tax code is indefensible. The deficit is indefensible. Everything is broken. And that's kind of almost our best asset. So if we go in and start doing obvious fixes, then we can turn this economy around.
HASSETT: And I think -- and deliver a lot more jobs than we have. Now think about it. President Obama hasn't fixed anything. So instead of saying, well, gees, being the highest corporate tax on earth is a bad thing, let's fix that, he decided to, you know, spend money on the stimulus instead. And to leave the big problems untouched and I think that's why the growth is so low.
VELSHI: Kevin makes an interesting point, David, that there's so much that's not working that if you fixed all that was working we could see stronger job numbers. Does it get you to the numbers that Romney is talking about?
GERGEN: No, I don't think they do. But I think, again, we could do a lot better. Actually I thought you were sugarcoating where we are when you said, but we've improved a lot over the last two or three years. The fact is our economy is back to where it was in terms of GDP from before the recession and we have five million fewer jobs.
GERGEN: That is not exactly something that's impressive.
GERGEN: We can do better than that. And I do think that some of the things that Kevin is talking about -- have to be done like tax reform, getting the deficits under control, but I also think it's true that Republicans have not been very helpful. In fact they've opposed the president when he's tried to fix some of these things like the deficit. It's been very, very hard for him to deal with getting this deficit in better control.
He wanted to go through the -- you know, the big -- the big bang sort of theory approach to getting the deficits under control. I think the president ought to do a lot more right now. You know, Bill Clinton has said why don't you go in and extend the tax cuts, the Bush tax cuts, for a year. Do that before the elections. Get people more certainty.
Will Mitt Romney join President Obama in trying to do that? I don't know.
Kevin, you know, I don't know how you guys -- what leadership will you show on the fiscal cliff, for example, coming out. If you're elected what are you going to do about the fiscal cliff?
HASSETT: Yes, well, you know, Governor Romney has a very detailed plan. He goes after Medicare, the reforms for Medicare and Medicaid, Social Security --
GERGEN: Would you push that?
HASSETT: And he's got all these things on the table. So, you know, unlike Obama -- the thing I disagree with, David, is that I think that you're being too kind to President Obama. The fact is he had a super majority in the Senate. He could have done anything he wanted and he decided to take fixing things off the table. And so if we made a list of all the fiscal problems we had when he took office, you know, that list is still there. We have a lot less money because of the stimulus.
So if he had done both at the same time, if he had -- you had a tax reform that stimulated the economy, broaden the base, and lowered the rates, and stimulated it that way, then we wouldn't have the hangover we're having right now and we have a much better economy --
GERGEN: But --
HASSETT: -- and we wouldn't have so many problems.
VELSHI: I guess it goes back to the point that we can do better. I think the three of us are agreed. We can do better at job creation. But there are complicated things and maybe the president is getting too much blame and too much credit for what he can do.
Love to see you author some ads there, Kevin, that talk about what Congress can do and whether, as David says, some of this can get done before the election.
Boy, I will get on a limb here and tell people to go out and vote for a congressman who make a decision to deal with the fiscal cliff and deal with these things before the election and not after. But I may grow hair before that happens.
VELSHI: Kevin, always good to see you as always. Kevin Hassett is senior fellow, director of economic policies studies at the American Enterprise Institute and a Romney economic adviser.
David Gergen is CNN's senior political analyst. All right, coming up, thousands of pink slips going out just days before the election. Why it could happen just as the economic storm approaches.
VELSHI: I've been telling you about the fiscal cliff that we are headed over if Congress refuses to act. One incredibly rocky area of the cliff is the so-called sequester, which is a stupid name for a stupid thing. $1.2 trillion in automatic spending cuts over 10 years. Half of those cuts will come from defense including $55 billion alone next year.
Jobs will be lost. Possibly more than a million defense-related jobs next year. Most of them, by the way, are not government jobs. The bulk of the pink slips will come from private contractors who are hired by Uncle Sam. I don't know if that number is right, the one million job. Don't know if it's right or wrong. Some people say the number is alarmist. But let's even say it's in the ballpark. That would be equivalent -- take a look at the red bars -- to all of the jobs created this year.
I'm not willing to take that chance and your Congress shouldn't be either. Defense companies aren't waiting around. They are already starting to prepare for the job losses. Why? Because of something called the WARN Act. The Obama administration says the act doesn't apply here and that is triggering a political firestorm. But before we get to that, you need to know what the WARN Act is.
I want to bring in CNN's Poppy Harlow.
Poppy, tell us what the Warn Act is and what it has to do with defense cuts.
POPPY HARLOW, CNN MONEY.COM CORRESPONDENT: Yes, you know, Ali, most people haven't heard of it, but it's important because if you work for even a medium to big-sized company, this applies to you. It's technically called the Worker Adjustment and Retraining Notification Act. It was passed back in 1988. What it does is it requires any employer with 100 and more workers to send out these notices 60 days in advance if they are going to close a plant or if they're going to have mass layoffs.
So if defense contractors have to do mass layoffs because of government spending cuts, for example, they very well may need to send out these notices. So what is a mass layoff? Five hundred or more employees, or if your company has smaller than 500 employees but 100 or larger, 33 percent or a third of your workforce. If you're going to cut that many people you need to send these notices out.
So here's where it gets political and here's where timing is so important. OK? Sequester, as you said, Ali, a stupid name for a stupid thing. That would take effect if it happens January 2nd. So what's 60 days before that? When would these notices have to go out? November 2nd, just a few days before the election. So imagine getting, you know, a notice saying you've lost your job just as you head to the polls. So the big question now is, does this apply in this case?
So Labor Department came out this week and they said, no. They issued guidance which is this quote, and they basically said, well, we don't know if sequester is going to happen and so we don't know if these job cuts are going to come so it would be, quote, "inappropriate to send out a notice."
Well, Republicans say, look, that guidance is politically motivated. Take a listen.
(BEGIN VIDEO CLIP)
SEN. MITCH MCCONNELL (R), MINORITY LEADER: The only reason the administration sent out this guidance to employers earlier this week was to keep people in the dark -- keep them in the dark about the impact these defense cuts will have until, of course, after the election.
(END VIDEO CLIP)
HARLOW: All right. That's Senate minority leader Mitch McConnell. So Republicans siding with him on this. The Obama administration and the Labor Department saying, you know, you shouldn't be alarmists here. We shouldn't send out these notices because we don't know if these job cut are going to come.
Ali -- ultimately it's going to be up to the companies themselves whether or not they want to send out these notices. And Ali, as you know, if they don't send out the notices and then you mass layoffs, they could get sued.
HARLOW: So it's going to be really interesting to see whether the companies do this or not and it's absolutely political at this point. The Obama administration through the Labor Department saying inappropriate to send those notices out.
VELSHI: So once again --
HARLOW: But once the job cuts may come.
VELSHI: Once again we've got uncertainty by employers --
VELSHI: -- not knowing what to do and that could -- and they're costing Americans jobs.
Poppy, thanks for a great explanation.
What are these defense contractors planning to do? Lockheed Martin, the biggest government contractor, defense contractor, says it's reviewing the guidance issued by the Obama administration. Its CEO has said it may have to lay off 10,000 workers if Congress doesn't act. Another big contractor, BAE Systems says WARN notices are possible it could lay off 4,000 workers if the sequester happens.
Joining me now Rick McNeel. He's the president and CEO of LORD Corporation, which makes critical parts for helicopters and about 15 percent of their business is defense. And Thomas Buffenbarger. He is the president of the International Association of Machinists and Aerospace Workers, which is the defense industry's biggest union.
Rick, you've got 2800 employees worldwide. You say you're not laying anyone off yet. But how does Congress's inability to act affect jobs at Lord? Are there plans for hiring that are off the table right now? Are there contingencies for laying people off?
RICHARD MCNEEL, PRESIDENT AND CEO, LORD CORPORATION: Yes, the -- we're looking at different scenarios, but it's very difficult to understand where we're going because until we understand how that 55 million cuts next year will occur and the cuts beyond that, it's very difficult to plan and decide what you're going to do. So we're not only having an issue, but our suppliers that supply castings and forgings and machinists parts are not hiring, they are not -- they're not spending capital to expand in areas where expansion is needed. So there's just a lot of uncertainty out there right now.
VELSHI: Thomas, let me bring you into this. Critics say the defense industry is sounding the alarm on job cuts and the WARN Act because it is trying to protect its profits. In your case, I imagine, you're interested in protecting jobs.
THOMAS BUFFENBARGER, PRESIDENT, INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS: I certainly am interested in protecting jobs and Mr. McNeel is absolutely correct about the difficulties he faces as the union is in the same position. We don't know what to expect. We don't know -- we're confused by the pronouncements of the government as to when this is going to kick in, if it kicks in.
We know we have to abide by the law. We're going to represent and defend our members. If there is going to be a significant, catastrophic, in my opinion, economic event, we expect WARN notices to go out. Some states such as New York have a 90-day threshold. So these notices can come out in October. This is the weirdest event I have ever seen or Congress engage in.
The earlier clip of leader Mitch McConnell who is in large part responsible for the mess we're in right now with all the members of our Congress, quite frankly, have put an industry, a great industry, one that contributes significantly to our Gross Domestic Product and to a good standard of living in this country. They've put all this in jeopardy.
BUFFENBARGER: In the name of politics.
(CROSSTALK) BUFFENBARGER: And it's unacceptable.
VELSHI: Over political squabble. So here's the question. You're in a -- look, I know that unions and employers agree on a lot of things. We like to paint them as being on opposites. But the two of you gentlemen are on the same side of this issue. That these are nonstrategic cuts that are going to cost jobs one way or the other.
So, Thomas, what would you prefer happen based on these guidance issued by the labor secretary and the Obama administration that the WARN Act doesn't apply to sequester? Should people like Rick, you know, issue those WARN notices when they they think they might have to lay people off even if they may not have to because of the uncertainty of what's going to happen? What would you prefer happen in this case?
BUFFENBARGER: I believe in having information and putting it to use. And right now, the notices we've seen come from the government have come from at the lower levels. I haven't seen any elected officials name and signature attached to this. So I'm preparing for the worst. And I think most of our employer base is preparing for the worst, too.
If a company doesn't issue a WARN notice and we have this event occur, the fiscal cliff.
BUFFENBARGER: Then I'm going to represent our members taking our employers on for failing to follow the law. Now do I think it's right? Probably not. The employers are as confused as we are about the whole situation right now.
VELSHI: I think we're all agreed that this is, as you said, Thomas, one of the more puzzling -- the weirdest things we've ever seen go on politics, determining possibly the employment of a million or more Americans.
Richard McNeel is the president and CEO of LORD Corporation and Thomas Buffenbarger is the president of the International Association of Machinists and Aerospace Workers.
All right, we've got a lot to talk in this show about the tax code. Take a look at it. Seventy-four thousand pages of legalese, loopholes, tax breaks, exceptions from everyone -- for everyone from homeowners to big oil. That is it. Those aren't numerous versions of it. That's the tax code. The U.S. tax code. Probably the most complicated federal tax system on the planet. Maybe even in the galaxy. We all want to reform this colossal mess. I'll tell you how we're going to do it on the other side.
VELSHI: Want to comply with the U.S. tax code? No problem. This is just one piece of it, by the way. It's 73,608 pages. You just need to quickly leaf through the first one. It's incomprehensible, gibberish, full of tax breaks and loopholes that politicians in Congress slip in to throw a bone to interest groups that back them more from time to time to encourage economic behavior in a way that the government wants.
The last time the tax code was reformed Ronald Reagan was president and that took years of back and forth in Congress to pass. Since then, 15,000 changes have been enacted, 14 temporary tax breaks have multiplied into 132 temporary tax breaks that are renewed time and time again.
Last year the government collected $2.3 trillion in revenue, $1.1 trillion from individual income taxes, $181 billion from corporations. But there are many on the ideological right who think that's already too much. So what would real tax reform actually look like? Number one on the agenda would be rethinking hundreds of tax breaks that allow a multibillion corporation, let's say, General Electric, to pay an effective corporate tax rate of just 14 percent.
And how do you make getting rid of tax breaks more appetizing? Well, you create lower income tax rates for everybody. The theory is that if more people pay lower rates, Uncle Sam gets more or maybe the same.
Another point of contention is that the lower tax rates on capital gains and dividends, which are taxed at a much lower rate than normal income, that most people make. Now President Obama's bipartisan debt commission proposed taxing capital gains and dividends as ordinary income, but at new lower rates.
Joining us to discuss what the tax code should look like, from Washington, we've got Stephen Moore, editorial writer at "The Wall Street Journal" and something of an expert on -- on the issue of wanting lower taxes. And from Rochester, New York, we've got David Cay Johnston, he's a columnist at Reuters, a Pulitzer Prize-winning journalist for investigative reporting, that uncovered loopholes and inequities in the U.S. tax code.
His newest book out next month will be entitled, "The Fine Print: How Big Companies Use Plain English to Rob You Blind."
Gentlemen, good to see you.
Stephen, let's start with you. What's the biggest thing that needs to be done to reform the tax code? What is the process of getting it done? What's the important thing that we can all agree on in tax reform?
STEPHEN MOORE, EDITOR WRITER, WALL STREET JOURNAL: Well, Ali, thank you for letting me talk about my favorite subject which is how do we fix this tax system. I love the way you introduced this segment. You know, it was Albert Einstein who once said that the most complicated thing in the universe is the Federal Tax Code. And I think there's a lot of truth to that. So the idea of simplifying the code and making it more pro-growth as we did, as you correctly point out in 1986, it worked really well.
Now look, you and I, Ali, on this show have crossed swords many times. I've debated David on these issues a lot. But you know I bet the three of us could agree on one concept. Four words. Low rates, broad base. That's the -- that's the kind of hallmark for a good tax system.
And the tragedy is we waited now almost 25 years to see a new reform that brings those rates down, clears out all the pollution on the tax system. David has written on this extensively. We can do much better than the code that we have right now.
VELSHI: David, pick it up from there. Do we agree on low rate, broad base?
DAVID CAY JOHNSTON, PULITZER PRIZE WINNING AUTHOR: Well, yes and no. The most important principle in tax reform is that it has to be progressive. That is a 2500-year-old and therefore profoundly conservative idea and it's the idea that gave birth to democracy. That is, the less you have, the lower your tax rate, the more you have, the higher your tax rate.
And we don't, by the way, necessarily have to have income as our tax base. There are lots of things we could decide to have as a different tax base. But progressivity has been endorsed by every classic worldly philosopher. George Bush boasted that he made the system more progressive. And so long as we follow that principle that, I think, yes, I would agree broad base and lower rates, and get rid of all these favors across the board including the home mortgage interest deduction. And let's get rid of tax --
VELSHI: So hold on, I'm going to stop you right there. I'm going to stop you right there because that's exactly the first place we're going to run into a problem. So if I tell all my viewers we want corporations to pay more, I bet you most of them, even though that may not be the right idea, will say, yes, you know what, the fat cats should pay more. Don't touch my mortgage interest rate deduction. That's an expensive deduction and now this is where it becomes political. Right?
So let me take it back to you for a second, Stephen Moore. Out tax philosopher. We know have agreement. Low rates, broad base and progressive. I heard you agreeing with the progressive. You think that's OK. Now we've got to take the 74,000 pages down to, I don't know, 500 pages? And that means cutting out a lot of things people want including people on your side of the ideological spectrum.
MOORE: That's right. And look, I've always believed that this is the ultimate Washington versus America issue. America, businesses, households want the simpler system that is -- that is easier to comply with that doesn't, you know, take sometimes weeks to figure out what your tax burden is. But nobody in Washington, nobody in this town I'm in right now wants tax reform. None of the lobbyists want tax reform. None of the members of Congress on the tax writing committees want this.
And so if you look back at 1986, you remember this, David, people said this can't work. They can never do this. And you know what, Ali, a miracle happened. They got rid of a lot of the pollution and all of those loopholes in the tax system. Not all of them but a lot of them. And they got those rates, they cut the rates almost in half.
So what I'm saying is, I think 2013, Ali, I really believe is the year when all the stars are going to be aligned and we're going to get this done in part because the whole system is a train wreck right now.
VELSHI: Yes. 2013 is the year I'm going to be mistaken for Brad Pitt as I walk down Broadway in New York.
VELSHI: David Cay Johnston, let me ask you this. Should the tax code involve incentives put in by the government for people to behave a certain way to do certain things?
JOHNSTON: Well, the tax code inherently does that. I mean if you tax wages and profits, you get a set of incentives that grow just out of doing that. If you tax carbon, which "Forbes" magazine has come out in favor of, you get a different set of incentives. So by its very nature, a tax system creates incentives.
Targeted incentives have gotten completely out of hand and more importantly little, tiny favors. But the number one thing we need to get rid of, Ali, is we now have a system that favors multinational American corporations over domestic ones. It lets big companies like GE and Pfizer siphon profits out of the U.S., its expenses, and send them to tax havens and it requires American companies to pay their taxes in full.
We need to stop that kind of discrimination against domestic, which tend to be family-owned businesses --
JOHNSTON: -- in favor of the big multinational business.
VELSHI: Stephen Moore, should a company that makes computer chips be taxed at a different rate than one that makes potato chips?
MOORE: No. Absolutely not. I think every industry should be treated, you know, on a level playing field. I agree with what David said that we shouldn't get -- give breaks to multinationals.
David, one problem I have with the tax code is what we're actually doing is -- favoritism towards a French company versus an American company because companies -- generally are paying lower statutory rates. But I think that this can get done. I think it can be done. I think David is right in a progressive way. In 1986, by the way, when we lowered the top tax rate from 50 to 28 percent --
MOORE: -- we actually saw the percentage of taxes paid by the rich increase.
MOORE: So this can work in a way I think we can all agree on.
VELSHI: David, I don't know if we got a solution here, but we definitely had a smart conversation on tax reform. And I'd like to continue --
MOORE: It's going to happen in 2013. I'm sure of it. I'm betting my life on it.
VELSHI: And I'm going to -- yes, I'm going to get a pet unicorn.
VELSHI: OK, guys, good to see you.
Stephen Moore is an editorial writer with the "Wall Street Journal." David Cay Johnston is a columnist with Thomson Reuters and is a Pulitzer Prize-winning author.
Coming up, the real estate market is making a comeback. And even if you don't have enough for a down payment or enough to pay a mortgage, you can still cash in on that recovery. I'm going to tell you exactly how. Get a pen and paper. You're going to want to write this down next on YOUR MONEY.
VELSHI: I've actually been telling you about a ray of hope in this economy. And that is real estate. Most indicators suggest that home prices have bottomed out and are heading higher while interest rates, as you know, remain at all-time lows. That's great if you can refinance. It's great if you look into buy a house. It's even great if you try to sell a house that you've been stuck under water with.
But a lot of people simply aren't looking to buy a home right now. Either they don't have the savings for a down payment or they can't get a loan or they just aren't ready to buy, or maybe they've got a house. There are other ways to play the real estate recovery. Like homebuilders stock, for instance. Many are sharply higher this year. Lennar, KB Home, Toll Brothers, D. R. Horton, all beating the S&P 500, which itself is up almost 12 percent in 2012.
But it's not just residential housing that's showing promise. Commercial real estate, at least in some parts of the country, is showing a comeback of its own. Most of us in the United States are not in the market for an office park or an apartment building but you can get a piece of commercial real estate through REITs.
Now pay attention to this. REITs. Real Estate Investment Trusts. REITs are bought and sold like stocks. They have a ticker symbol. They trade like stocks. REITs own and operate income-producing properties. Office parks, malls, apartment buildings, hotels, self- storage facilities, you name it. They're required to pass along a big chunk of their income to shareholders in the form of dividends, much more than you'll get in a bank account, I'll tell you that. I'm joined by Stephen Leeb, a good friend of ours. He's with Leeb Capital.
Stephen, you say that REITs can be a shelter in an economic storm. I've been warning people there's an economic storm coming so you've got to find that shelter where you can. REITS are, I think, an interesting idea for people who are not in a position to buy property.
STEPHEN LEEB, PRESIDENT, LEEB CAPITAL MANAGEMENT: No, I think you're absolutely right, Ali. And the shelter in a sense that -- I mean take one that I like, Plum Creek.
LEEB: They basically cater to the housing market. They produce timber and things that you need to build houses.
LEEB: And they have obviously been through the worst of times. I mean, their business has really not been very good at all. One thing that's held steady for that company. They are a dividend. You have continued to collect dividends through this entire period of time. And the stock is actually recovered from --
LEEB: You know, went down. It never went down as much as the S&P 500, but even when it was down at its lowest point, you were still collecting enough money to pay for the groceries.
LEEB: I mean, and you know, that can be a valuable thing.
VELSHI: Just a couple of weeks ago I talked about this stuff, lumber liquidators, it's the same idea.
VELSHI: That if you're building, you need wood.
VELSHI: Back in our days, when you chose to go to college, it depended on where you might get in and what it would cost. There is a new determinant about choosing a college these days. Ask any college kid, it's what the housing looks like.
LEEB: American college campuses. This is growing at about 25 or 30 percent a year.
VELSHI: Yes. Huge. LEEB: Huge. And they're paying 3 percent. And the thing -- the advantage you get is not only are you getting that grocery money, that 3 percent, or the gas money, but you're also getting increases in the rents if you want to look it like that, of up to 20 or 30 percent a year because as you said at the beginning, we must pass all this money that they make through --
VELSHI: That's just part -- that's part of their structure, tax structure.
LEEB: Right. That's their structure.
LEEB: So if the rents are going up, are they getting more?
LEEB: Are they putting up more houses everywhere in the country?
LEEB: They're going to pass more money through you. And their dividend has grown -- I mean 20 percent a year through these horrible times. So you can actually afford to, you know, step up from, let's say, hamburger to steak, you know, when you start buying, you know, at the grocery store.
VELSHI: And you buy these things -- people ask me about this, you just buy them like you would buy any stock. You have a stock trading count.
LEEB: Absolutely the same deal. The same deal.
VELSHI: All right. Great conversation. Stephen Leeb with Leeb Capital Management. Take a look at REITs and how they might help you in your -- in your investments.
So coming up, REITs might be right but the storm clouds from Europe and the fiscal cliff on the horizon, should you be in the stock market at all? We'll talk about that on the other side.
VELSHI: The market is on a roll lately. The S&P 500 up nearly 12 percent year to date.
Now, I read your tweets. I know you don't trust the stock market, and you are not alone. Money has been rushing out of the stock market and into savings accounts. Since the beginning of the year, investors have pulled more than $64 billion from U.S. stock mutual funds. That's on top of billions more last year and the year before. At the same time, hundreds of billions are flowing into checking and savings accounts.
Investors have been rattled by the debt crisis in Europe, worries about this fiscal cliff, the fear of an economic slowdown. But it's not just these macro clouds that are shaking investor confidence. There is a growing distrust of the market and a feeling that Wall Street is a crooked casino where the house always wins. The bungled Facebook IPO, the Libor scandal. They were rigging the interest rate! JP Morgan's bets gone bad. Missing money at MF Global. I can go on and on. Of course you are suspicious. You have got very good reason to be. Yes, the game is rigged, but it does not mean you should sit on the sidelines.
Joining me now from London for a little Q&A is Richard Quest. He is the host of "QUEST MEANS BUSINESS." Richard, the question today, should you be in the stock market? I'll go first. Control room, give me 60 seconds on the clock.
Richard, the game is rigged, but you cannot afford not to be in it. It is time to stop fearing stocks. There are segments of the market you should avoid, but hiding your money in your mattress is not the answer. You are funneling money into savings accounts or CDs. You are getting nothing. Less than nothing. The average one-year certificate of deposit is paying 0.3 percent. Treasury bonds -- they're safe, but they won't create any wealth. Inflation is far outpacing the yield on a 10-year note. Keep listening. Stocks are where you can get significant returns. You have got to stomach a little risk.
Now, we just showed you real estate investment trusts, an area worth exploring. Bear market, market mutual funds designed to rise in a down market are another. The point, Richard, is there are sectors you should be in right now to protect yourself against the oncoming economic storm. You have got to do some research, you've got to pick and choose and allocate wisely, not emotionally, get help if you need it, but you must be in the market. Sitting on the sidelines gets you nowhere but left behind. Richard.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Well, once again, Ali Velshi has managed to be the master of stating the obvious, with no help, rhyme or reason to anybody else.
Of course, you have got to be in the market, but he listens when he says depends on which part of the market you are in. I will show you exactly the risks and pitfalls if you join me at the CNN super screen over here.
Think about the Olympics, and now let's look at the market race over the hedges. The U.S. market is up about 10, 11 percent so far for the year. Brazil is just up 2 percent. Forget China, China is out of the game completely. It's negative. The U.K., around 4 percent. But it's Germany, Germany that is now 17 percent up. Unfortunately for the average investor, who knew which was the best way to invest? So, yes, you do have to be in the market. You do have to take those risks. That much is an obvious statement.
VELSHI: Cut his mic off. We will see you next time, Richard Quest.
OK. You heard Richard and you heard me. Now it's your turn. Get on Twitter and Facebook, let me know if you are ready to jump back into the stock market. Find me on Facebook.com/alivelshi or tweet me @alivelshi. I am reading them all and I am ready to debate you.
Up next, Congress is on vacation, but the economic storm is still bearing down on us. So what can you do to protect yourself when Washington won't?
VELSHI: Congress is on vacation. The presidential election is less than three months away, and audacious claims are being made on both sides. You will eventually decide the outcome with your vote, and many of you will cast your ballot with your money, and the broader economy in the forefront of your mind.
Although I still believe there is an economic storm headed our way, there are some rays of hope. I told you about investing in real estate without buying any property. And the stock market is offering some enticing returns right now. But there are problems in Washington that can darken the economic picture and leave us ill-prepared for the economic storm.
You drive what we cover on this show each week, so speak up. Let's keep this conversation going. Find me on facebook.com/alivelshi, or tweet me right now. I read them all and I love the debate.
Thanks for joining the conversation this week on "YOUR MONEY." We are here every Saturday, 1:00 p.m. Eastern, Sunday 3 p.m. Have a great weekend.