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YOUR BOTTOM LINE

Rebuilding the U.S. Economy

Aired October 13, 2012 - 09:30   ET

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


CHRISTINE ROMANS, HOST: All right. Thanks, Randi. See you at the top of the hour.

Good morning, everyone. I'm Christine Romans.

We are seeing real signs of a recovery and slow signs of a recovery. But is it enough?

(BEGIN VIDEOTAPE)

ROMANS (voice-over): Slow growth, a fiscal cliff and economic uncertainty -- could America today be Rome before the fall?

Historians tell us that the Romans like civilians before and after collapsed under the weight of debt and partisan bickering and the overextended military and just plain old fiscal irresponsibility. Sound familiar?

Today, the U.S. has record debt, $16 trillion, fuelled in part by stimulus spending, tax breaks for everyone, and expensive wars abroad.

Whose fault is that?

MITT ROMNEY (R), PRESIDENTIAL NOMINEE: The president's policies have not gotten America working again.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Our goal was to turn it around.

ROMNEY: And the president has to stand up to take responsibility for it.

OBAMA: We inherited the worst economic and financial crisis since the Great Depression.

ROMANS: But what matters more is how we fix it. It is time to rebuild Rome and here's how.

First, do everything possible to put Americans back to work, because nothing is more important to the recovery than creating jobs.

Then, reboot our workforce. That means revamp our schools and colleges so they can turn out workers who can compete in tomorrow's knowledge-based labor force.

Finally, address long-term debt and deficit, implement a plan now that starts paying back what we owe instead of dumping on future generations.

So who has the best plan to fix America over the next four years and beyond? That's is the question to ask for the glory of Rome.

(END VIDEOTAPE)

ROMANS: Dramatic, I know, but happy Saturday.

So, are we closer to fixing this economy before it is too late? Some recent signs of recovery say, yes, unemployment down the 7.8 percent. That's the lowest rate since President Obama took office. Claims for first time unemployment benefits fell to levels not seen since 2008, and technical details going on there. But still, the trend is clear.

And real estate collapse got us into the mess, but now the housing prices are finally starting to rise. I'll say it again -- housing prices are starting to rise and foreclosures fell to five-year lows last month.

So how do we make sure that the economy really heals?

Two different philosophies, and one being very big election coming up to fix it.

President Obama says that the businesses need the tax incentives to create more jobs, and he says that the government needs to step in and the government needs to invest in programs now that can pay off later -- manufacturing, green energy, infrastructure and aid for state and local governments.

Mitt Romney says let the private sector create new jobs by cutting taxes and regulation and just get the government out of the way.

Former "New York Times" columnist Bob Herbert is a distinguished senior fellow at Demos, a left-leaning public policy think tank.

Peter Navarro is a professor of economics and public policy at University of California, Irvine, and director of the documentary film, "Death by China.

Peter, let me start with you. You say it doesn't matter how much the government spends. It's still a waste of money as long as American companies see incentives, whether it's lower taxes, costs, regulations, whatever, to move their jobs abroad.

It really doesn't matter what the government does to help?

PETER NAVARRO, PROFESSOR, UNIVERSITY OF CALIFORNIA, IRVINE: That's right if we understand what the problem is here. If you look at what globalization has done over the past few decades, we've got basically a destruction of our job creation ecosystem.

And the way it works, Christine, is simple. If a company like Caterpillar or G.M. decides to offshore their production instead of building a factory in Peoria or Detroit, basically what you got is a loss of jobs right there of the big company. But then, what you lose next is your supply chain which creates many, many more times number of jobs as the big OEMs, the original equipment manufacturers.

Once that supply chain is gone, then you lose the service sector jobs, so that manufacturing creates service sector jobs, but the service sector jobs don't create manufacturing.

ROMANS: Yes, I want to bring Bob here.

Are you confident, Bob, that if the president wins a second term, that these little signs of the recovery, Recovery Summer as Joe Biden called it, 28 months after the recovery summer, do they continue with a second term of Obama?

BOB HERBERT, SENIOR FELLOW, DEMOS: I'm not confident. In addition to the globalization problem, I think an even bigger problem has been the labor saving technological devices when you're talking about dispensing with American jobs.

And so, the big problem with the economy totally linked to the idea of not enough good jobs is demand. You don't have the consumer demand. You don't have the capability to spend, to buy the goods and services that we can produce. So, that's what we need to do. We need to address this demand thing.

ROMANS: That's where you spend money now.

HERBERT: Exactly. That is where you spend money on infrastructure, which we're going to have to fix anyway. You spend money on new green energy-type initiatives. You spend, as you pointed out, money on the education, which is really important, because you need a better educated workforce for the good jobs.

And in order to pay for all of that, which costs a lot of money, there is going to have to be a real sacrifice in the country. You're going to have to raise taxes and I believe standards of living are going to have to come down somewhat.

ROMANS: Peter Navarro, you can't tell people that you are going raise their taxes. Being honest somehow in the American political arena is somehow not possible.

NAVARRO: Well, you should not buy into Bob's narrative here. It's just simply wrong. I mean, if you look at the green energy issue, it totally proves my point.

I was in Pittsburgh last week with the "Death by China" film, I'm sitting there in a town hall, and they're talking about how they tried to start a couple of green energy companies in Pittsburgh, but they were totally crushed by China's unfair trade practices.

It's virtually impossible for our green industries here in this country, given the weight of the subsidies of China, to basically run that. So, you're not going to run that.

I mean, the idea of this whole notion of innovation and robots taking over, that's not the problem, Bob. The counter factual there is Germany. Germany has got 25 percent of the men and women in the workforce working in manufacturing and the highest level of automation that you can possibly have. We've got 9 percent.

We've got to figure out a way to start producing more than we consume, and when we do that, we will get the wages and the income to create demand that you are talking about. It's insane for our government to continue to try to spend more to stimulate an economy which does not have the engine to basically create those jobs, because it's gone offshore.

ROMANS: You have different views. You want to spend. You want tax reform. You want trade reform.

Peter Navarro, I hope they are talking about such things in Washington and not just talking about getting re-elected.

Gentlemen, thank you. See you again soon.

Al right. He's a teacher and Bill Gates is one of the students. The future of education does not depend on money or government or unions. It depends on this man, you're going to meet him in three minutes.

(COMMERCIAL BREAK)

ROMANS: America spends more time and more money on its education system than almost every other developed nation, spending all of this time and the money, and we are running in place. Teachers here spend around 1,100 hours a year with students and more than nearly every other developed country. We spend $10,500 a year on average per high school student. And yet, American students rank 27th in math, 19th in science and 13th in reading.

The country that dominates that knowledge business will lead the world, as you know. And China is pumping out engineers by the hundreds of thousands, 10 times as many as the U.S.

So far, the American advantage has come from quality and not quantity. The World Economic Forum estimates 81 percent of U.S. engineering grads are immediately employable. Only 10 percent of China's grads are.

It's a numbers game, though. As China spends more time turning out scientists and engineers, it's only a matter of time before the quality gap narrows. But here, we are struggling to make our kids ready for higher education.

President Obama included about $100 billion stimulus funding for U.S. public schools, money with strings attached. He wants standards for assessing both teachers and student, and he wants more efficient spending of the education dollars we already spend.

Salman Khan joins me now.

He -- let me tell you something about Salman Khan. He has taught nearly 200 million lessons to students around the world. Bill Gates called him a teacher to the world, giving us all the glimpse of future of education. And he does it without a classroom, without a Department of Education bureaucracy. He's got probably got a little overhead, but no unions.

He's got three MIT degrees and another from Harvard and you can download his brain for free at khanacademy.org, everything from algebra, to art history.

He's also author of the book "One World Schoolhouse".

And if that isn't enough, he was just named one of Fortune's 40 under 40.

Salman, congratulations.

That is a big honor of the 40 under 40.

SALMAN KHAN, KHANACADEMY.ORG: Well, thank you.

ROMANS: I want to ask you about the American education system. Largely through the stimulus, the president has been remaking K through 12 education with the goal of teacher accountability. He wants to get students better prepared for the knowledge economy. Is it working?

KHAN: Well, it is too early to know whether some of the later measures are working. I think that as you alluded to, there are things that we should not be complacent about and we are worried about. I don't know get as worried about the ranking so to speak. We shouldn't be not worried about them, but I'm more worried about just how students do participate in this economy.

You know, one thing I point out is that the U.S. might, sure, we might be low in the rankings in math and science, but we're still the most innovative country in the world. If you look at the innovation over the last 50 years, it is more and more concentrated inside of the U.S. and because beyond the core engineering and math skills, we have the entrepreneurship, we have the creativity, we don't stigmatize failure the way the rest of the world does.

And you actually do have people in countries, whether it's Singapore or other parts of Asia who actually visit the U.S. to see how can we get more critical thinking skills, how can we get more creativity in their students.

But with that said --

ROMANS: There is one Silicon Valley and it's in the U.S. So we are struggling to get the fifth grades up to grade level, but at the same time, the rest of the world is looking and saying, wow, this rule of law, this creative economy, especially the knowledge-based stuff is exciting and other countries want to figure out how the model it.

KHAN: Exactly.

And I think -- so the core issue is that America as a whole is in a good position. But what I do worry about is who gets to participate in that. Is it just going to be the 1 percent or the 2 percent who happen right now to get an engineering degree and can it be much broader?

And for me, the main issue right now of students who go the college, a substantial number of students, 20 percent to 30 percent, have to essentially retake the sixth grade math of those who want the go into the engineering. So, it's actually not a problem of people wanting to go to engineering. Of the people who want to go, less than half actually finish their curriculum because of the weaknesses in their skills.

ROMANS: Yes, and I know that college-ready and the ACT tells us that 1 in 4 high school students graduates ready for college in all of the subjects and you go the college and take on all of the student debt and it is almost like these barriers one way after another, but you say in the book, in particular, you say that a rigorous high quality education can be delivered for far, far less money. Tell me how.

KHAN: Yes. And I think the Maine issue, for me, it's s not a money issue, and you can never really say you are overspending on the education, because it's so important, but you can say that we can spend it much better.

And the one thing that I talk about is in the book is, you know, all of the focus is on how do we fix the existing model, but a question of is the model, itself, even right? What a lot of people don't realize is that this model of education where we group kids together and the age-based cohorts and move them together at a set pace and give them the grades and the bell rings every hour, and this is a 200-year-old model. This isn't the way humans naturally learn. It's not the way they traditionally learn.

It comes out of the Industrial Revolution. We inherited it from the Prussians, a country that doesn't exist anymore. And it probably was the best way to educate a lot of people 100 years ago. But we now have tools that we can do more personalize instruction.

So instead of getting a C on an exam in basic exponents. In our current model, despite the fact that I got a C, it pushes me on to the next concept, somehow expecting that I'll get it. And what happen by the time I show up in college, I have so many gaps in my knowledge after I retake sixth grade math.

What we are advocating, what I write in the book, what we're seeing, with the Khan Academy and other tools, is we can add voter reality, let students learned at their own pace, they master concepts before moving. Class time is not this kind one phase, all lecture type of situation. Instead, it can be interactive. It can be a conversation. It can and more creative projects.

The one thing I talk about in the book -- instead of trying to make our Prussian model like the Prussian model in Singapore or Finland or South Korea, we should make our Prussian model an American model which is more focused on creativity, more focused innovation, and more focus -- look, if you failed that is not going the mean that you are stupid, but you need to work harder, because we want you to master the concept.

ROMANS: Salman Khan, you bring a Prussia basic love exponents, I love having you over for a little chat. Nice to talk to you and thanks so much for dropping by. The book is great, and any parent can really get a lot out of it. Thank you, sir.

Up next, guess how much money the U.S. government borrows for every dollar it spends? The number will shock you.

(COMMERCIAL BREAK)

PERINO: We need to talk about how the government gets a grip on spending, because without that, we can't rebuild America.

The government borrows 43 cents for every dollar it spends. The national debt has shot up to almost 73 percent of GDP, about 19 points higher since President Obama took office. Two expensive wars, 10 years of tax cuts and stimulus spending in response to the worst financial crisis since the Great Depression all drove up our debt.

The U.S. deficit -- how much more we spend than we take in -- it's forecast to reach 7 percent of GDP this year. The biggest spending goes, of course, to Medicare, Medicaid, and especially Social Security.

The solution is simple, but politically, it's difficult. Raise revenues, that includes raising taxes and making more people pay taxes, and cut spending, including those popular entitlement programs. Doing those two things now could hurt the economy in the near term, but if we don't start planning at least to rein in our spending, the economy would suffer even more in the long run. That's according to a study by economists Carmen Reinhart and Ken Rogoff.

When a country's level of debt reaches 90 percent of GDP, its economy could shrink by one percentage point every year. At today's levels of government spending, we're headed to that 90 percent mark by 2014. Wow!

Alice Rivlin is a senior fellow at the Brookings Institution. She was director of the Office of Management and Budget under President Clinton and was first director of the Congressional Budget Office. Welcome to the program.

ALICE RIVLIN, BROOKINGS INSTITUTION: Thank you very much.

MADDOW: Now that I've terrified everyone, let's look at the short-term thinking here that led to the fiscal cliff. That in particular, if you think falling off the fiscal cliff can happen, Senator Alan Simpson of Simpson-Bowles disagrees. Listen.

(BEGIN VIDEO CLIP)

ALAN SIMPSON, FORMER CO-CHAIR, DEBT COMMISSION: They really believe honestly that no Congress could be this stupid, and by God, they can.

(END VIDEO CLIP)

ROMANS: And by God, they can.

Alice Rivlin, in your career, have you ever seen congressional malpractice to this degree?

RIVLIN: I've never seen the country this polarized and the parties acting in such partisan and self-serving ways. We've got to get past this election and restore some sense of comity and civility. Get to work, both parties, to solve the problems that beset us.

The problems aren't insoluble. With all respect to Carmen Reinhart, who made major contributions, there's nothing magic about some particular point where the economy goes downhill. But we're in danger -- we have endangered ourselves by taking on escalating amounts of debt, which will keep going on in the future.

We have to get our economy back recovering, growing faster, and we have to get our debt under control. That means our debt should not be growing faster than the economy. It's very simple.

ROMANS: And, you know, what kind of progress have you seen on that in the past year since the U.S. credit rating was downgraded? I mean, here we are again at the 11th hour -- the 11th hour -- talking about big changes, a lame duck Congress presumably is going to have to work with a president who could be a new president and we don't have any clear signal of how to fix this.

RIVLIN: Oh, I think we do. I served on the Simpson-Bowles commission. That was a bipartisan group and we came up with a sensible bipartisan solution.

Any solution to the rising future debt has got to include two things: slowing the rate of growth of Medicare, Medicaid, and Social Security. Remember, I didn't say cutting, I say slowing the rate of growth. And raising more revenues from a simpler and more efficient and effective pro-growth tax system. We can do both.

Simpson-Bowles had laid out a blueprint. I also worked with my old friend, Pete Domenici, the Republican from New Mexico, on a similar plan. So the blueprints are there. And I think we know what to do, almost everybody in the Congress knows that we have to do some of those two things.

ROMANS: Well, I'm encouraged by your optimism. I mean, your realism about the problem, your optimism that they all know that we're now at the moment where they can fix it. We do know that eight senators met this week. Getting at least a framework for how to fix it under way and they do have the blueprints in your plan, and also Simpson-Bowles.

Very nice to see you. Have a wonderful weekend. Alice Rivlin, thank you.

RIVLIN: You're very welcome.

ROMANS: All right. I'm going to tell you something no politician will ever admit.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: I'm a single mom, and I work, I work full- time, and I think I will definitely notice. Then I have to budget differently.

(END VIDEO CLIP)

ROMANS: You're getting a $1,000 pay cut next year. I'll tell you where it's going.

(COMMERCIAL BREAK)

ROMANS: I'm going to tell you what no campaigning politician will. Your taxes are going up next year. Even if Congress fixes the fiscal cliff, there is one tax break that is almost certain to disappear -- a tax break for all working Americans. It's called the payroll tax holiday, and when it expires January 1st, paychecks for 160 million Americans will get smaller.

If you make $50,000 a year, you'll take home $1,000 less next year. You'll have less money to spend, and the left-leaning Economic Policy Institute says the payroll tax cut alone will cut economic growth and will cost one million jobs.

Let's put it in perspective. That means the tax man is getting what your family could be spending each week on, say, six lattes at Starbucks or five gallons of regular unleaded, 15 dozen eggs, or seven gallons of orange juice, every week. You don't have to eat 15 dozen eggs a week to understand how much money $1,000 a year is.

Imagine if we go over the fiscal cliff and your taxes go up, say, $3,000 or more. Why is no one in Washington talking seriously about this?

I want to hear from you. What does the end of the payroll tax holiday mean for you and your family? Did you know your taxes almost certainly are going to go up? What do you think of a Congress that waits until the very last moment to fix America's problems?

Find me on Facebook and Twitter. The show's handles is CNNBottomline. My handle is @ChristineRomans.

"CNN SATURDAY MORNING" coming right up.