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YOUR BOTTOM LINE

Saving the Economy: Can Either Party Really Bring Us a Solution?; Investing the Smart Way

Aired September 22, 2012 - 09:30   ET

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


CHRISTINE ROMANS, CNN ANCHOR: Are you a maker or a taker? Or do you believe in redistribution? These are false choices, folks.

Good morning, everyone. I'm Christine Romans. Career politicians, though, see it, oh, so clearly.

(BEGIN VIDEO CLIP)

SEN. HARRY REID (D-NV), MAJORITY LEADER: This week we learned Mitt Romney only wants to be president of half of the United States.

REP. PAUL RYAN (R-WI), VICE PRESIDENTIAL NOMINEE: President Obama said that he believes in redistribution.

(END VIDEO CLIP)

ROMNEY: Ah. We're all smarter than that, aren't we? You know it's not so simple. Taxes, entitlement, debt -- all three of these things must work together. And keeping the status quo on all three of these things is impossible.

The parties blame each other, and this is about the only thing they are 100 percent right on, because they both took us here, and this is not an issue that gets settled in less than 50 days; 12.5 million people are still out of work. Economic growth alone won't save us. It's forecast to only slowly increase over the next few years.

Will Cain is a CNN contributor; Ben Barber is a senior research scholar at the graduate center at City University of New York.

Romney's comments caught on hidden camera seemed to divide the country into two groups, makers and takers. Well, I refuse to believe that this election is between a cruel capitalist Ayn Rand winner-take-all candidate and a "spread the wealth" Karl Marx.

WILL CAIN, POLITICAL ANALYST: OK, fair enough. It's not between Ayn Rand and Karl Marx. But there's usefulness in the political theory that actually those two figures represent. And where we try to place these two candidates on that spectrum.

Here's the sin that Mitt Romney committed by dividing America into 47 versus 53. It's that the economic philosophy of conservatism would be one that applies to 100 percent, it makes not just the rich better off, but the poor better off. Milton Friedman said there's no system on the history of Earth, ever employed by any society that's put more poor people out of poverty than the free market system, that's the one I want to hear Mitt Romney advocate for.

ROMANS: And pulled also more people out of the tax rolls, too, I might add, because you know, let's take a look at something that the Republicans have done for years.

And, Ben, Romney is not sounding like Ronald Reagan here.

Here is Ronald Reagan in 1986 after cutting taxes for the working poor.

(BEGIN VIDEO CLIP)

RONALD REAGAN, FORMER PRESIDENT OF THE UNITED STATES: The bill I'm signing today is not only an historic overhaul of our tax code and a sweeping victory for fairness, it's also the best anti-poverty bill, the best pro-family measure and the best job creation program ever to come out of the Congress of the United States.

(END VIDEO CLIP)

ROMANS: OK. Ben. That tax reform resulted in fewer people paying taxes.

BENJAMIN BARBER, SR. RESEARCH SCHOLAR, CUNY: It did indeed, and it was the beginning of 30-35 years of a market etiology in which our assumption was if we reduce the means with which government operates we're going to improve the economic fortunes of the country.

That simply has not happened, and, in fact, what we've seen is we've seen tax rates go down, down, down. They were 90 percent, 80 percent on the rich in the '50s; during the Clinton era they were 28 percent. Today they are around 18 percent, but most of the rich like Romney don't pay that. They pay even less.

And so what we have is a kind of trickle-up theory. Give tax breaks to the rich and they will take the money, and they will do things, not jobs. They say they will create jobs, but that's not, in fact, what they do. You see, with -- all through the Bush years, all through the Bush years, all through the Bush years, taxes, you know, they were given back to the rich and we lost jobs.

The great recession happened under Bush's watch with his tax policies in place.

CAIN: OK. So Ben carried it one step further to a conspiracy. One that I am not actually going to disagree with to start. But let's say this. You're right.

Republicans are responsible for putting in place the earned income tax credit reducing the level of taxation on the poor, so it's a little disenheartening (sic) to hear Michele Bachmann today or Mitt Romney kind of in that speech suggest it's a problem that so many people don't pay taxes.

What we want is fewer people paying taxes, and those that do paying less. Now Ben said that's a concerted theory to starve the beast, to starve the government. I don't know that that's the case. We just think morally and economically it's a better system when people pay less in taxes and, by the way, that should accompany less spinning.

ROMANS: There's all this redistribution -- you're right -- and there's all this redistribution of wealth stuff. Who is going to -- you know, the president wants to redistribute the wealth in the country and that's what the Republican talking point is.

But when you look at -- and we have a chart I want to show. When you look, does that tax code --

(CROSSTALK)

CAIN: That's what I was just talking about.

ROMANS: Isn't that what it does, it redistributes the wealth?

(CROSSTALK)

UNIDENTIFIED MALE: -- progressive taxes.

ROMANS: I want to take you over here. Look at these shady areas, guys, these are where there have been Republican -- you can come along, it's all right. These are where there have been Republican presidents, right? These red shaded areas, this is the earned income tax credit, doubled here, look at all these taxpayers who are not paying. Moochers and deadbeats. No. It's just the way it works.

CAIN: But your chart illustrates the point that I just made. Republicans are responsible for ushering in the earned income tax credit and reducing the number of people paying federal income taxes. You can't complain about that fact today.

BARBER: And they are being attacked by Mr. Romney as moochers. Now, in effect, they're not paying --

ROMANS: You think he really believes that? Do you think he really believes that? Or you think he's playing to a (inaudible) conservative script.

BARBER: We can't be Nostradamus here. We have to listen to what he says and say I guess that's what he thinks. If you want to think that he's dissembling or a liar, we can say that. I'm not going to say that as a Democrat.

I want to say I believe what he says. And what he has said is that he doesn't believe in the earned income tax, which has taken a lot of people off the tax rolls for reasons Ronald Reagan prudently predicted.

(CROSSTALK)

ROMANS: We don't know what he would do with those or with the (inaudible) -- I'm not -- I don't know --

CAIN: (Inaudible) take away that. And I don't want to make the same mistake among the three of us here that Mitt Romney made and that's conflating several groups. The concept that 47 percent don't pay taxes --

ROMANS: (Inaudible) paying taxes, by the way.

CAIN: It is not the same thing as saying there might be takers in the society. It's not the same thing as saying there are people that dependent upon the government. What percent of people are actually dependent upon the government?

Not as high as 47 percent, not nearly as high, but those are two different groups, those that get checks from the government, those that don't pay taxes and, by the way, the third group that Romney conflated, those that are going to vote for President Obama.

ROMANS: So what happens to taxes? I mean, this is my question, and I don't want to steal too much of our thunder from our -- from what's going to happen after the break, but what happens to the taxes from here? With the way I look at it, we can't afford ourselves at the moment. What happens here?

BARBER: That's right. And we keep saying we can't afford it. We can't afford it because we're not paying for it. It's like saying I want that car but I'm unwilling to pay for, so I can't afford that car. Well, it depends on how much we want to pay.

If we paid into our government to do the things together we can't do alone the assets that made available to that government to do all the things we wanted it to do, we'd be just fine. But what we want and most Americans want is a lot of services from government, particularly the ones they get, and they don't want to pay for it.

CAIN: That's right. So Ben's being very honest, and I appreciate it.

What's going to happen? Taxes go up on everyone.

ROMANS: Yes, the bottom line, too, is we're all makers and takers.

BARBER: We are. We make --

ROMANS: The whole country.

BARBER: We make hamburgers --

ROMANS: (Inaudible).

BARBER: We don't just make profits, pay for profits the way Romney did in Bain, we make cars, we make hamburgers, we make sermons, we make art, we make a lot of things. And those are worthwhile, even though they don't make big profits.

ROMANS: (Inaudible), you know, the -- I -- you know, the Republican -- the Republican and Democratic talking points, the makers, the takers, the redistributionists, all that stuff, we're all of those things. That's the way it works.

OK, guys. Don't move. You're both staying here. Coming up, how can either Romney or Obama make cuts without hurting the recovery or taking too much from those in need?

The emergency money has been handed out, but do either of these guys have an exit strategy that makes sense?

(COMMERCIAL BREAK)

ROMANS: Governor Mitt Romney's comments at a closed-door fundraiser have actually opened the door to the most important discussion this country should be having -- food stamps, extended jobless benefits, stimulus projects, tax cuts, emergency aid for an economy that's not growing strongly enough.

But how will we know when the emergency is over? The government can't sustain this forever, right? The debt is racking up daily, more than $16 trillion now and counting, and how do we pay for this? And when do we start?

Ben Barber and Will Cain are back with us now.

Ben, if you give someone pain medication, and you keep giving it, at some point they become addicted to it. You have you to stop giving them the medication when the patient starts to get better. When does that happen?

BARBER: It happens with medication. It doesn't happen with government spending when that government spending is authorized by the American people.

(CROSSTALK)

ROMANS: -- you don't think we're addicted to this?

BARBER: No, I do not. But what I think we are addicted to is our defense budget, which is always exempted from anything, $4 trillion to $5 trillion has gone out under Obama. That's happened. It's part of what happened.

I agree with Will on that, but 3 trillion of that went to the Iraqi War, $3 trillion. We got out of Iraq, and you see today our being there did very little good, despite the horrendous losses of our troops and so on.

(CROSSTALK)

ROMANS: (Inaudible) take care of that --

BARBER: (Inaudible) got us in. We've got to hit not just discretionary spending for health and welfare and education and transportation that we all benefit from, we've got to hit those areas like atomic weapons, where we still are fighting the Cold War. So there's a lot that can be done to reduce taxes without cutting into the things that we really care about. ROMANS: Let's show the federal government budget breakdown because you can see here, the biggest part of the federal government, Medicare, Medicaid and CHIP -- that's for children; that's the biggest chunk -- Social Security, defense are next and there are the other safety net programs, food stamps and affordable housing.

Then you've got interest payments on our debt, incredibly important. Everything else goes into the remaining 20 percent. We'll grant Obama, I guess, a hypothetical second term. Where do you start cutting, without, you know, compassionately what do you start cutting?

CAIN: I don't know that you can cut compassionately and I don't know that President Obama will cut at all.

I think Ben forwards an interesting premise, and that this spending has all been sanctioned by the American people, that they have said they wanted this high level of spending. But I would counter that with this: they have also said continuously that they want low levels of taxation, so they have made two choices they cannot have, right?

So what needs to be presented is an either/or premise. You don't get to have both. And that day of reckoning is coming. It will come from the bondholders, the markets and it will come also from slow economic growth.

ROMANS: (Inaudible).

CAIN: It's not here yet, but there are interesting economists that you and I both like, like Ken Rogoff who suggests that premise of growing debt has a depressing effect on the economy, regardless of whether or not you can continue it. So what I'm telling you is the day of reckoning is coming and then we'll find out. Do they want that high level of spending or do they want low taxation?

BARBER: Well, the day of reckoning is actually going to be here on November 6th. That's the day of reckoning, because the American people will get a choice for those things. And the choice is very clear.

One side is saying cut particularly discretionary spending, increase the defense budget despite the fact that the Department of Defense hasn't asked for that and cut expenditures and cut taxes on the wealthy. That's what they are saying.

The other choices, keep that remarkable historical balance between government spending and government work and free enterprise. And the balance between the two is what makes this country great.

But when free enterprise begins to say we don't want government regulation, we don't want taxes, we don't want nothing, that's when things get out of kilter and that's the choice we will have on November 6th.

ROMANS: But isn't the real choice the beginning of the year with the fiscal cliff? I mean, whoever is the president still has to get this Congress to go along with them to figure out what to do. You know?

CAIN: The fiscal cliff is the small choice. The big choice still remains beyond the fiscal cliff.

(CROSSTALK)

ROMANS: (Inaudible) the fiscal cliff is holding back hiring, no question; it's keeping the unemployment rate higher than it should be right now.

CAIN: But there's a difference between talking about the potential economic effect of the fiscal cliff in dealing with our debt and deficit problem, all -- two different conversations.

So I agree with something Ben said, you can't balance the federal budget, you cannot cut it based upon the discretionary budget alone. You have to attack the fat where the fat is. And it's in the entitlement areas.

How do you do that, you asked me, compassionately? You talk about raising the age of Social Security. You talk about raising the age of Medicare. You talk about --

BARBER: Yes, yes and yes.

CAIN: You talk about recognizing --

BARBER: Will and I agree on that.

CAIN: -- people live longer these days.

ROMANS: You can't do that in an election year.

BARBER: That's right.

ROMANS: You can't -- you can't talk about these things in an election year.

UNIDENTIFIED MALE: Not at all.

ROMANS: And there's somebody always trying to get elected.

CAIN: (Inaudible) do it in an off year, Christine. I mean, people want their stuff. They want their stuff and they don't want to pay for it.

ROMANS: Let's look at some of these things, what the safety net looks like, you know, 26 percent are using Medicaid, 15 percent are on food stamps, 8 percent are using something called the WIC program -- that's food aid for women, infants and children -- 4 percent use housing assistance, 2 percent receive temporary aid to needy families.

Will, these are -- these are other safety nets, these are not the big entitlement programs. These are safety net. This is appropriate. You keep this, but you whittle away at those other things, the very, very --

CAIN: No, this can't remain here. We can't -- we can't continue to have the number of people on food stamps that we have today. And you suggested earlier that these are responses to an economic recession, to an economic crisis. Well, you ask a good question.

ROMANS: Do you think they are addictive?

CAIN: Yes, of course they are. How do you get yourself out of these situations? The course of government growth only goes in one direction.

BARBER: Here's a dirty little secret. To the redistributionist, the complaining about redistribution. The redistribution in this country goes from blue states to red states. The people who want it down are the ones who get it, the South receives much more from the government than it gives in taxes. The North and big cities give far more in taxes.

So, yes, money is being redistributed. It's being redistributed from blue to red, and it's also, by the way, being redistributed upwards, that is to say it's being redistributed so that in New York this week we just learned that the top 20 percent make 40 times what the bottom 20 percent make. Now someone, I -- you know, nobody -- I don't think anybody can justify a 40 times -- a 40 factor.

(CROSSTALK)

CAIN: I don't feel the need to.

BARBER: And so we tax a little more for those people to help the other folks, but the reality is more taxes go to Republican states than come from Republican states.

So this crazy asymmetry in which the Republicans complain about redistribution, the funds are being redistributed to the rich with lower taxes and redistributed to southern states that are poor and need government services far more than the north.

ROMANS: (Inaudible) says, you know, that you can't -- you can't -- President Obama just can't tax the rich and Governor Romney just can't cut his way out of this.

UNIDENTIFIED MALE: Right.

ROMANS: You know, so when do we start getting the real conversation about how to fix it?

CAIN: I saw Senator Tom Coburn say this. The politicians only make hard choices that involve pain when the pain of not making a choice is worse.

(LAUGHTER)

ROMANS: That's so true.

CAIN: So if -- I think there's some level of agreement here, that the middle class specifically is going to have to have taxes raised in order to maintain the level of spending they suggest they want or that they have to give up that spending in order to maintain the tax rates they suggest they want. Then the politicians will make that choice at the last possible minute.

BARBER: Well, the other thing that's going to happen is that, after November 6th when President Obama is re-elected -- and that will happen, I'm predicting it here, you can check me later -- when that happens, the Republicans, who have spent the last four years trying to unseat him, will realize he's now in for four years. It hasn't benefited them to be the resisters.

And I think will you see after his re-election, I think you will see some fairly serious compromising. I think you'll see the center of the Republican Party take the party back from the far right and, at that point, we may actually get some stuff done.

ROMANS: That's a bold prediction, sir, on both counts.

Nice to see both of you, Ben Barber, Will Cain.

All right. The U.S. stock market is soaring. Have you missed your chance to make some money? We're going to tell you how to invest the smart way. That means without emotion, next.

(COMMERCIAL BREAK)

ROMANS: What if I told you that since President Obama took office, the S&P 500 is up 80 percent? You could be back where you were before the recession hit, but you're not. You see, many average investors pulled out of the market.

So who's making money? Well, institutional investors with deep pockets, professional money managers and high frequency traders.

So is it too late for you to get in now? Depends on who you ask. Experts are pretty much split 50-50 on which way the market is headed. CNNMoney.com's Fear and Greed Index analyzes the emotions that drive the market. Right now, extreme greed is moving Wall Street. Remember legendary investor Warren Buffett's advice? He would tell you that it's time to run and hide.

(BEGIN VIDEO CLIP)

WARREN BUFFETT, BILLIONAIRE: You want to be greedy when others are fearful and you want to be fearful when others are greedy. It's that simple.

(END VIDEO CLIP)

ROMANS: Oh, it's so simple, but so difficult at the same time. The Federal Reserve announced it's holding interest rates at record lows through mid-2015. That means savers won't be getting much for their money. So is there anywhere for you to put your money right now? Matt McCall is president of Penn Financial Group.

Matt, should an average investor, who missed the run, missed this run from the last election cycle, frankly, should they get in right now?

MATT MCCALL, PRESIDENT, PENN FINANCIAL GROUP: I think you want to get in now, because you take a look at what's going on in this market. And yes, you have the S&P just off a five-year high. You have the Nasdaq just last week hit the highest level in a decade.

Still at the same time, Christine, most investors are sitting on the sidelines. You want to get in now because the Federal Reserve came out with what we call QE3, their third quantitative easing. The last two times that happened, what happened?

The stock market went up gangbusters, as you mentioned, up 80 percent since President Obama took office. So at this time, they're throwing money at you. You have to be in the market to collect that money.

ROMANS: And that's what QE3 is, quantitative easing, the third round of it, throwing money into the economy. And that's been helping a lot of different markets.

So if you are a stock investor, a typical stock investor, how do you ease in?

MCCALL: Well, you have to kind of look at the market in a long-term trend, because if you're looking to try to play the news from day to day, you'll be buying stocks, selling stocks. You're not that high- frequency trader. You want to look long-term, you want to look at solid companies. Well, look at indexes.

Look at the S&P 500, for example. It's been one of the best performing indexes, compared to all others around the world. A lot of people think, well, emerging markets are better. Maybe we look at China. The United States has been one of the best performers. Simply go in the S&P 500.

ROMANS: You like the construction industry, so if the Fed is going to keep interest rates very slow and there's a little bit of a housing recovery, is that one reason why you could have a play there?

MCCALL: Well, plus we have mortgage rates. The numbers just came out this week. Lowest ever. So if people are going to be out there buying a house now, this is when it's going to happen.

We have inventories dropping, which means home prices go up and the home builders have been really bustling lately. The stocks of the home builders have been fantastic. So I think we are going to ride that train as long as you can. And QE3 makes it attractive. They're spending $40 billion a month buying into mortgages.

ROMANS: And you have an exchange traded fund where you think you can do that. And tell me about that.

MCCALL: ITB is the symbol. The I shares, home construction, ETF. And the reason I go that route, instead of picking up just that one home builder, this gives you a basket of home builders. It gives you some materials companies. You basically play the entire sector without buying into one specific stock.

ROMANS: All right. You told me about another ETF. It's an agribusiness ETF with a very clever ticker symbol, MOO. (LAUGHTER)

MCCALL: (Inaudible), I mean, you really can't go wrong. MOO -- M-O-O -- what this does invest in, you know, agricultural chemicals, stocks, you look at corn, soybeans, et cetera. They're going through the roof because of the drought. You also -- the fact also QE3 makes commodities real assets go higher as the U.S. dollar falls.

These companies will help you make the quarter come out faster, stronger, better. These companies have been beaten down. I think it's a sector you want to play.

ROMANS: Matt McCall, this week, there was a survey of fund managers; 58 percent of them said stocks are overvalued. I think you can think stocks are overvalued, but they still have more to go?

MCCALL: They still have more to go. If you look at the PE ratio, which is the price to earnings, which is the way you value a market or a stock, very low compared to where it's been historically. I think you want to be in the market, now based on valuations, based on QE3, based on the fact that even though the CNN greed is very, very high, there's a lot of money on the sidelines.

And once the average investor starts pouring it back in, you're going to see a big rally.

ROMANS: The signs are flashing green, but you're not fearful right here?

MCCALL: I'm not fearful here. I'm putting my money in the market.

ROMANS: All right. Matt McCall, thanks.

Coming up, stimulus from the Fed has propped up the stock market, but QE always has a downside. A Romans rant on who's getting hurt.

(MUSIC PLAYING)

(COMMERCIAL BREAK)

ROMANS: We just talked about how to protect your money in the stock market. The Fed's move to pump money into the economy has been great for people with cash and the time horizon to invest aggressively.

What is the Fed doing? Let's cue this clip from the "Little Rascals." It's Baby Ben Bernanke, throwing money out of the window as fast as he can to bandage up our poor wounded economy. OK, I'm not making fun of the Fed chief. It's just a cute picture. In fact, I think what the Federal Reserve is doing is necessary.

But let's acknowledge the collateral damage here. Savers are getting killed. These are the people who spent their lives doing the right thing, putting their money away for a rainy day. Now they're nearing retirement and inflation is devouring their nest egg.

The average rate on a one-year certificate of deposit, 0.3 percent. A savings account, oh, my gosh, a paltry tenth of 1 percent. And now the Fed says low rates are here until mid-2015.

I get that the Fed had to act. It's arguably helping keep the economy afloat, but let's be clear. QE3 -- and QE1 and QE2 for that matter -- are not helping everyone and could actually be hurting some of us.

What do you think? Did the Fed do the right thing with this stimulus? Are you, a saver, getting crushed? Tell me @ChristineRomansCNN on Facebook or via Twitter @ChristineRomans. Let's keep the conversation going.

And coming up later, I'm going to be hosting "YOUR MONEY." If you're betting on Obama or Romney, why not put some money on it? We're going to tell you which stocks to buy, depending on who you think will win. See you at 1:00 pm Eastern.

(MUSIC PLAYING)