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YOUR BOTTOM LINE

Examining the Economy and America's Middle Class

Aired September 29, 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: Confidence is up and the housing market is recovering. But America's middle class is saying, if this is what a recovery feels like, take me back to the operating room.

Good morning, everyone. I'm Christine Romans. The prescription for saving America's middle class starts with two words: you're hired.

(BEGIN VIDEO CLIP)

ROMANS (voice-over): The middle class, suburbs, consumers and hard work, hard play. By definition, its earnings between $25,000 and 75,000 a year, the median family income is about $51,000. Those are the stats.

This is how it feels in this middle.

UNIDENTIFIED FEMALE: Hard working, challenged.

UNIDENTIFIED MALE: Need a break.

UNIDENTIFIED MALE: Heavy taxes and more taxes.

ROMANS (voice-over): Two-thirds of families live paycheck to paycheck. Too few families are saving enough for college, incomes are barely budging.

Here's the good news: your house price stopped tanking. But hitting a bottom doesn't ensure a vigorous recovery. If you're lucky, your house stopped losing you money, but where are you making money? If you bought stocks 10 years ago, you're just now breaking even.

And savers, who did exactly what they were supposed, well, you know how much they're earning in interest -- nothing. For years, American factories closed and big companies moved their research and development and production overseas.

UNIDENTIFIED MALE: China, India, Mexico.

ROMANS (voice-over): Conventional wisdom held America invents things. It doesn't have to make them. The result: 60 percent of jobs created in the recovery are low-wage jobs, around 13 bucks an hour or less.

(END VIDEO CLIP)

ROMANS: Studies have shown that the middle class has become smaller, poorer and less secure over the past generation. John Doggett, professor at the University of Texas at Austin joins us.

John, so what happened to the American middle class and how do we fix it?

JOHN DOGGETT, PROFESSOR, UNIVERSITY OF TEXAS/AUSTIN: Well, what happened in the past is that everybody thought that the solution was to get a higher degree of education. So you went from high school diploma to a college degree and eventually the graduate degree.

That doesn't work anymore because the nature of work is changing. And so the way we fix it is to understand that we have to not only invent things in the United States, we also have to figure out how to make them in the United States.

ROMANS: And we're not really doing that. Peter Navarro, the author of "Death by China" and a professor at UC Irvine, Peter, you call this a triple zero economy. Over the past 10 years, we've seen zero jobs growth, zero wage growth, zero stock returns. Which part of that -- which part of that equation is the most crippling?

PETER NAVARRO, PROFESSOR, UNIVERSITY OF CALIFORNIA/IRVINE: I think all of them. If you think about the middle class, where they're going to do anything, they need jobs, they need wage growth. We've seen average median household income actually go nowhere.

And importantly in their 401(k)s, which have become 201(k)s, they need robust stock returns. Now if we're going to get the wage growth and jobs growth, clearly we have to do, as the guest said, we got to restore the manufacturing base.

The one good piece of news I have in this triple zero economy, is I actually think going forward the next decade for stock returns is going to be a lot better than the last decade. And the reason is simple and it's somewhat troubling. I mean, first of all, if you think about the stock market here in America, it's physically located here but, increasingly, its returns are located elsewhere.

ROMANS: So sorry to interrupt you. But the very thing that's been a trend that has been, many would say, hurtful for American workers is the thing that can help American investors, because these are companies that -- they don't necessarily need American workers.

NAVARRO: Yes. That's exactly right. It is troubling in one sense, but it is good news. Here's the thing; it's like -- it doesn't -- it used to always matter whether the American economy was growing robustly. Now we've settled from a 31/2 percent rate down to more like a 11/2 percent rate.

Companies are adjusting. Companies are right-sizing and they're facing an era now where there's -- they don't have to pay wage increases. They've got historically low interest rates and they're selling into foreign markets rather than American markets.

So maybe at least one of the -- one zero in the triple zero economy is going to get better. The other two zeros, of course, is why we're having a presidential election. Both of these candidates need to get our manufacturing base back. And you know, we know where it's gone. It's gone to China.

ROMANS: John -- I want to bring John Doggett back in, because, John, you know, what we heard for so long, was that we didn't need to make stuff in America. We were -- I even heard you call (inaudible) companies that Appleize, invent it here; make it someplace else. We sell it here. We add value to consumers here.

What happens to jobs? I mean, where are those jobs, those high-paid service sector jobs that were supposed to replace manufacturing? For 25 years I heard people say, don't worry about it. The service sector will take care of it.

DOGGETT: Well, that's wrong. It's clear that the high-paid service sector jobs are not going to come into existence because they don't make any sense. You don't need a high-paid job to empty somebody's bedpan or put a catheter on them. And that's what we're doing -- or to flip burgers. What we're going to have to do is we're going to have to bring manufacturing back to the U.S.

But that's going to require a higher level of skill. In the past, if you look at our parents' generation, you could have a high school diploma, go work for GM or Ford, and with overtime make over $100,000 a year. So that's not going to be possible in the future.

But what we can do is this -- and this is really important. You think about Apple, everything that has Apple on it is made in China. If they brought that manufacturing back to the United States, that would increase the cost of an Apple product by 5 percent.

And guess what? The consumers would pay that price. So we can bring manufacturing back. And what we're starting to see now, is American companies are starting to bring manufacturing back.

But here's the big catch, the manufacturing they're bringing back require people that have higher skills because they have to be technically competent, they have to be literate and they have to have a work ethic that's very different than what it used to take to work in, say, in a car plant in the past.

ROMANS: Right. Let's bring Terry Savage back in with us. She's a personal finance columnist with the "Chicago Sun-Times." She's been listening to this conversation.

You know, Terry, the middle class faces not only this job crunch, all of the student loan debt but also the largest tax increase in history comes on January 1st, where the average American middle class family making, say, $50,000 a year, going off the fiscal cliff is going to raise your taxes by $2,200 next year.

And then there's $100 billion in cuts to things like Medicare and unemployment benefits and the things that people use. Will the middle class be the biggest loser if we go off the fiscal cliff? TERRY SAVAGE, COLUMNIST, "CHICAGO SUN-TIMES": America will be the biggest loser if we go off that cliff. And I hope, Christine, as does everybody else, that after this political season gets out of the way, that the lame duck Congress will come to some kind of agreement and conclusion to prevent that.

But all this lamenting and crying over the loss of the middle class in America, really, we have to take that and put that back in context. The definition of what middle class America means has changed over the last century, from farmers who then moved into industrial jobs. We don't lament the guys that stood in front of blast furnaces that we saw in our old high school videos making steel.

Technology and growth changed things. We live in a global economy. We can't change that. The best thing we can do to bring middle class America back is to have economic growth. And we won't have that until we have some kind of political leadership. And I'm particularly talking about Congress to set tax policies and get us out of this constant deficit.

ROMANS: Yes, that's a very good point, which is why we brought up the fiscal cliff, quite frankly, because here, even as you're seeing these little signs of life in the housing market, for example, then this fiscal cliff comes from your elected officials.

Don't go away, everybody, because we're going to talk about saving the middle class from itself; why your trip to the mall this weekend may be subsidizing your own demise.

(COMMERCIAL BREAK)

ROMANS: Inventing here, manufacturing there and paying lower prices for just about everything at the checkout line is the trap the middle class has fallen into. We want the latest and the greatest but we don't want to pay too much for it.

And this is what is means for jobs: 60 percent of the jobs that disappeared after the 2008 financial crisis were earners right in the middle. We're talking construction, manufacturing, office management, middle wage jobs.

Since then, low wage jobs are the jobs coming back; 58 percent of all job growth in the recovery have been jobs you couldn't buy a house with or send a kid to college on, those sorts of jobs.

So Peter, you know, the most amazing American consumer story in the world, Apple products, right, made at a place called Foxconn in China. And Foxconn was shut down this week because of some riots there and some problems and personnel issues there.

China desperate to grow a middle class like ours and they're doing it ironically by feeding our middle class with gadgets we think we can't live without. Is that a symbiotic relationship that's good for both countries?

NAVARRO: It's a parasitic relationship, which is bad for not just China and the U.S. but also Europe and the rest of the world. And what we have right now is a parasitic China with its unfair trade practices drained the lifeblood out of both Europe and the U.S. So as an export-led economy, it's going down the tubes.

And guess what? It drags all the commodity nations down with it, such as Australia, Canada, Brazil and Russia.

Now what we need to recognize -- I heard Terry talking about steel manufacturing as being old school and things like that. Germany has 25 percent of their labor force in manufacturing compared to only 9 percent. Manufacturing today means high technology manufacturing, which we need to be doing.

And if the middle class is going to survive, John is absolutely right, we need more of the STEM education, basically the science, the engineering, the math, the technology. And so there is a clear path to solving this problem. It basically must recognize we have to start producing as much or more than we consume.

And this whole thing about going to the Wal-Mart, yes, it's cheap there but we have got to understand the consequences.

ROMANS: (Inaudible) Terry, let me ask you about this, because consumer confidence is up, and a CNN ORC poll asks people how the economy will be doing a year from now. Two-thirds of them think the economy will be in better shape.

That American optimism is, of course, critical but -- but we can't fall into the same old traps of America rebuilding the middle class by buying cheap stuff they don't need, that's all imported, right?

SAVAGE: Well, wait a minute. Nobody says we don't need it, number one. It's hard to imagine living without your iPhone now. Number two --

ROMANS: Or those tennis shoes.

(CROSSTALK)

ROMANS: (Inaudible) tennis shoes.

SAVAGE: I agree with the point that our new growth and prosperity will be made out of technology and that we need education. But we can't do that by bashing China. And I'll tell you why. Because they are the largest foreign holder of our now $16 trillion national debt. They own over $1 trillion of U.S. treasuries. They lend to us.

UNIDENTIFIED MALE: (Inaudible).

SAVAGE: They get dollars and then they invest back into our treasury bills, close to a trillion and a half dollars.

Now the whole point --

NAVARRO: Hey, guess what. It's not China bashing if it's true. DOGGETT: It's $1.5 trillion. It's $1.5 trillion. Not a trillion. And she's absolutely right. And we need to understand the Chinese are not doing anything evil; they're doing what we've asked them to do. Our challenge is very simple --

(CROSSTALK)

DOGGETT: If we want to -- well, guess what, we told them, you want to make this stuff? And they said, sure. We'll make it. So our challenge is to get the American consumers to understand there is a price to cheap. And if you want to reinvigorate the middle class, then you need to pay a little bit more so we can bring manufacturing jobs back to the United States.

But there's something --

UNIDENTIFIED FEMALE: I disagree.

DOGGETT: (Inaudible).

Well, let me just talk about this one thing.

UNIDENTIFIED FEMALE: All right.

DOGGETT: Our biggest challenge is that we are declaring war against our children. We have kids at all the universities who just started, who were born in 1994, born in '94, and we are now -- have children who graduated from college who have more than $1 trillion of debt.

What does that mean to the economy and to the middle class? They can't afford to get married because they have to pay their college loans back. They can't afford to buy a house or even rent an apartment because they have to pay their college loans back.

And so what they are doing by trying to figure out how to pay their college loans back, that has had a big depressing impact on the economy and on the middle class. So one of the things we have to do is to come up with a policy that makes it possible for our kids to get the education they need to be competitive in the 21st century without bankrupting them by charging so much debt.

(CROSSTALK)

ROMANS: Terry, go ahead.

SAVAGE: First of all, let me go back and then add to your education point, but basically you don't want to ask Americans to pay more for goods. That's like when Jimmy Carter said turn down your thermostat. What we really need is economic growth so Americans can pay more and have more money to pay for cheap goods and have the --

(CROSSTALK)

NAVARRO: Terry, we can't -- it doesn't work that way.

Hang on, Terry; can I say something, Christine? ROMANS: Peter, jump in.

NAVARRO: Terry, look, look, look. You can't basically go on the way we're going. If we allow China to --

UNIDENTIFIED FEMALE: Agreed.

NAVARRO: -- to legally subsidize these goods and put -- flood our big box retailers with these cheap Chinese goods, we're never going to be able to restore our manufacturing base because our people can't compete with that.

You have to understand, Terry, there's these huge hidden costs for those cheap products. Of course, we can ask the American people to stop buying made in China because if they do that, it will save their jobs, they'll buy less -- more safe products made here in America and elsewhere. And we'll be able to restore our manufacturing base.

You seem to want them to go and keep spending their money on their credit card --

(CROSSTALK)

SAVAGE: Don't do that.

(CROSSTALK)

ROMANS: I know Terry does not endorse prolific spending.

NAVARRO: Spend away.

DOGGETT: Let me suggest -- let me suggest --

(CROSSTALK)

DOGGETT: Team, team, team, team, let me suggest something about manufacturing.

There are two countries that have demonstrated you can still have manufacturing and make high-quality products that are not cheap. One of them is Japan -- if you buy a Lexus, you know it's not cheap. The other is Germany; if you buy a Mercedes or BMW it's not cheap.

So the model of --

SAVAGE: Your Lexus is probably made here in the United States.

(CROSSTALK)

ROMANS: I lost control of my panel. So I will thank you all profusely.

Peter Navarro, John Doggett and Terry Savage. Apparently we have hit on a very, very interesting topic because we cannot put it to bed. Thanks, guys, we will talk about it again soon.

Coming up --

(BEGIN VIDEO CLIP)

CAMERON SHOSH, CENTURY 21: It's becoming more and more of a seller's market and less and less of a buyer's market.

(END VIDEO CLIP)

ROMANS: The housing recovery is real. It is. But it might not be for everyone. I'll tell you who's making money and how not to be left out. That's next on YOUR BOTTOM LINE.

(COMMERCIAL BREAK)

ROMNEY: This housing recovery is real, but it's not time to celebrate just yet. This week we learned home prices are now back where they were from nine years before, before the market peaked and then crashed. So if you bought, say, back in 2003, you're right back where you started. Why are prices rising? Fewer foreclosures and distressed property sales. Interest rates are at rock bottom.

And the Fed's latest plans promise to keep rates very, very low. Here's who wins as housing recovers. People with jobs and money in the bank. This is not a recovery for everyone. Millions of you have already been wiped out by foreclosure, and if you're still hanging on, well, the rest of this recovery could be slow.

Now analytics firm Fizer (ph) predicts that prices will bounce back on an average of 3.7 percent for the country per year for the next five years and the recovery will be uneven. And we take a look at this map. We're showing you states in green. Those prices there will rise by more than 5 percent per year in housing. But purple states will see increases of more like 2 percent to 3 percent per year.

Now CNN money analysis of all of this data shows that prices won't return to the 2006 highs until the year 2023. And some hard-hit states like California, Florida, Nevada, they're going to take even longer. But you know what they say? They say that all real estate is local. Here's where it's a seller's market.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: We put the house on the market the Thursday before Labor Day, and we were under contract the following Tuesday.

ROMANS (voice-over): The Opielas are a sign of a recovering housing market. They bought their two-bedroom, 11/2-bath row house in D.C.'s Capitol Hill area for $355,000 in 2009.

UNIDENTIFIED FEMALE: Do you love living in Capitol Hill?

UNIDENTIFIED MALE: Yes.

UNIDENTIFIED FEMALE: Yes.

ROMANS (voice-over): Now they're selling. DAN OPIELA, HOUSE SELLER: We were originally thinking of listing maybe around $430,000, $440,000, something like that, and after our original meeting with the realtor, he suggested $469,000, which at first I was a little bit worried about, because I thought maybe it would scare people away. So we went ahead and listed at that level.

UNIDENTIFIED FEMALE: Turned out to be the right thing to do.

ROMANS (voice-over): Hungry buyers came knocking.

OPIELA: Maybe 30, 35 people came through total for one 3-hour open house, which was pretty amazing. And then we had --

UNIDENTIFIED FEMALE: It was a lot of traffic.

OPIELA: We had probably seven or eight other scheduled appointments over a four- or five-day period. People come by, saw the sign, just wanted to come and see the place. So there was a lot of people looking for houses in this area.

SHOSH(voice-over): The market has been great this fall. Things are absolutely outstanding. Open houses are very busy. There's buyers out there getting a lot of Internet response to listings, getting a lot of calls on listings and things are moving fast.

ROMANS (voice-over): The latest housing headlines that show improving builder confidence, rising sales and prices and record low mortgage rates.

UNIDENTIFIED MALE: Housing is coming back to life.

ROMANS (voice-over): But don't break out the bubbly just yet. Home prices aren't expected to return to their peak until 2023.

UNIDENTIFIED MALE: There are three million loans that are in foreclosure or they're very late and likely to go into foreclosure. That's a lot of loans. There's 49.5 million people with mortgages. In some markets across the country, it's still a big problem.

ROMANS (voice-over): But for those in the market --

UNIDENTIFIED MALE: It's a fabulous time for buyers and refinancers. For the first time in six, seven years, sellers do have some leverage in the negotiations. Prices are rising, and they don't have to cut their price like they did before.

ROMANS (voice-over): Here's what buyers need.

UNIDENTIFIED MALE: You're going to need good credit. You're going to need proof of income. And you're going to need some money in the form of a down payment.

ROMANS (voice-over): As for the Opielas, they're looking to sell for a profit and they hope their next selling appearance is similar.

UNIDENTIFIED FEMALE: So it's always going to be like this going forward, right?

(LAUGHTER)

(END VIDEO CLIP)

ROMANS: Fizer (ph) expects prices in Washington, D.C., to rise about 6.5 percent per year for the next five years, that's just slightly below the national average.

Up next, a lost decade for the value of your home, your investments, your job. But today, the biggest threat may be from your political leaders, Congress. A "Romans Rant" on the middle class squeeze is next.

(COMMERCIAL BREAK)

ROMANS: To say the middle class is squeezed would be an understatement. More like caught in a vice. Eroding income levels, underwater mortgages, stagnant 401(k)s. Pew Research Center found middle class net worth loss 28 percent in the first decade of this century. The economy, of course, hit rock bottom four years ago this week. It is recovering. But that recovery has been agonizingly slow.

There is still all that debt the middle class racked up in the years before this collapse, money that lenders convinced many of you you could afford to pay back; you're still struggling to pay it off today. And there's a broken retirement savings system with millions of Americans who did what they were told to do.

They invested in the stock market through their 401(k)s and their IRAs only to see their savings crushed by all this volatility of recent years.

And now, just as housing and confidence begin to improve, your Congress cranks the vise tighter. Congress. The middle class faces the largest income tax increase in our lifetime because of the fiscal cliff we're all about to fall over. The White House estimates a typical middle class family of four will see its taxes rise by 2,200 bucks in 2013 -- $2,200 because of your Congress.

And remember, we put those politicians in office. Think of that as we head to November.

You feeling optimistic about your financial future? You think things are going to get better? You think we're going to avoid that fiscal cliff? What should be done to save the middle class? Let's keep this conversation going online. Find me on Facebook and Twitter. My handle is @ChristineRomans.

Have a great weekend.

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