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Consumer Crunch; Budget Cut Showdown; America Under Cyberattack

Aired February 23, 2013 - 09:30   ET


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

We're not in a recession. But for many of you, it sure might feel like one.

Good morning, everyone. I'm Christine Romans.

For a moment there, it felt like things were turning around -- the stock market near all-time highs, the housing market recovering, and the economy adding jobs every month. But now, relief may have given way to a little bit of worry.

Here's why: it's starting to feel like a recession again, especially if you're living paycheck to paycheck, gas prices up nearly 50 cents in the past month, the fastest run-up since 2005.

You're bringing homeless money. That's thanks to the expiration of the tax cut. If you make $41,000, you're getting about, I don't know, 60 bucks less every month.

Rents are rising. They're up 12 quarters in a row now.

Unemployment is still too high.

If you were counting on an early tax refund, you've had to wait. Because of the fiscal cliff fiasco, the IRS didn't start issuing refund checks until January 30th. That's nearly two weeks later than last year.

But even if you're not living paycheck to paycheck. This matters to you, because maybe you're a small business owner. You're going to try to sell to that stretched consumer -- a consumer who has no choice but to cut back.

The big companies you work for say this is already happening. This week, Walmart, the proxy for the American consumer, says February sales were slow. Why? It blamed gas prices, the end of the payroll tax holiday and those delayed tax refunds.

So, that's what we know. Washington to the rescue? Of course not. On Friday comes austerity, $85 billion in forced spending cuts over the next seven months. Services will be curtailed, jobs will be lost.

Europe's experience could prove a valuable warning to Washington. The 17-nation eurozone is in a deepening recession. In Greece, thousands took to the streets this week to protest austerity measures and that nation where unemployment is now a shocking, shocking 17 percent.

Harvard University professor Ken Rogoff is the former chief economist for the International Monetary Fund and economic crisis expert.

Ken, is there a lesson from Europe's bet on sharp cutbacks? Should we be taking very seriously the sequester and what that will do in the near term to the U.S. economy?

KEN ROGOFF, HARVARD UNIVERSITY PROFESSOR: The sequester is not just a cut back, but a very crude cut back. You just sort of chop one finger off at every hand instead of letting somebody go.

I think it was designed that way because the idea was this will force us to do something. But now, they haven't.

ROMANS: I'm starting to hear people in Washington say, well, look, this is going to force some efficiencies in these agencies. They've had budgets that have been getting bigger and bigger and bigger for years, stimulus thrown into all different kind of safety net fund funds. Maybe this is just tough medicine.

ROGOFF: It might force efficiencies into some agencies, although they really weren't planning for it. So, they're having to do it pretty hectically.

But there are some agencies you probably don't want to cut. I mean, you know, across the board cuts are a very crude way to run policy. Do you want to cut your research and development, medical care, their projects where you promised to pay and may end up losing a lot of money?

The problem is it's so crude. They said, well, OK, this won't happen.

ROMANS: Right.

ROGOFF: We all know we won't do this.

ROMANS: I think we all agree that this is no way to run a country.


ROMANS: It's no way to run a checkbook.

Terry Savage writes a personal finance column for "The Chicago Sun Times".

Terri, Walmart isn't alone in sounding its warning about the American consumer. The National Retail Federation says nearly three-quarters of those polled are cutting back because of tax changes this year. I've been saying this a two-speed recovery, right? You've got a recovery for people with savings and a job and then there's this other recovery for people who aren't on solid footing in the job front or in savings.

Is the paycheck to paycheck crowd already in recession territory?

TERRY SAVAGE, THE CHICAGO SUN TIMES: I think it's wrong to label it. A lot of government spending isn't going to be cut -- Social Security, Medicare. They're exempt.

When you take a look at business, I heard on CNN, the chairman of Marriott International saying we're lowering our expectations, we know business won't travel as much. It's every family is going to be impacted. Every family has already been impacted to some extent.

But as you pointed out, when businesses cut back, that impacts their suppliers, it impacts their workers and there is no doubt that the combination -- now, look, let's put the numbers in perspective. We took $110 billion in tax increases. This is $85 billion in tax cuts. Right now, we're focused on the immediate impact.

U.S. economy is strong. It's been trying to grow for two years, despite what comes out of Washington.

And the real issue beyond this immediate impact is what happens to America so we don't get to be like Greece, so that the kind of austerity that Greece had to have, which really destroys the fabric of society, doesn't happen here? Are we better dealing with it now? Should everybody, the government and consumers at all levels take a bit of a cutback now to avoid that kind of draconian cuts they've had in Europe?

ROMANS: That's what I hear a lot, Ken. The reason you have to do -- maybe not a sequester, but the reason you have to have budget cutting now, even in an economy that's not on solid footing, is because this is preventing us from being like Greece. That the lesson is not look at Europe and being afraid of austerity in the U.S. the lesson is you better do austerity smart now in the U.S. it's like the chicken and the egg.

ROGOFF: Austerity is smart, you said.

ROMANS: Right.

ROGOFF: But this isn't. I mean, they're not doing policy in a sensible way. They're frankly things you want to spend more things on, like infrastructure, education. There are things you want to cut back.

So, I mean -- the problem here is that it's just there's nobody home making the policies.

ROMANS: Yes. That's what's so frustrating. We'll continue this conversation, because forced government spending cuts are set to take effect this Friday. Be prepared. I'm going to show you who specifically will be hit hardest.


ROMANS: An economy poised to soar is now under attack by its own government. Forced government spending cuts are set to take effect this Friday. It's something Washington has been calling "the sequester". It's $1.2 trillion cut over 10 years.

Forced spending cuts created during the 2011 debt ceiling debacle. It was a worst case scenario that was designed to be so bad lawmakers would be forced to make a budget deal to prevent it.

But now it looks like the most vulnerable in our society will be paying the price for Washington's inaction. Seventy thousand children from lower income families will lose their spots in Head Start programs, putting more than 14,000 teaching and staff jobs at risk. The cuts to mental health programs mean almost 400,000 seriously mentally ill people would go untreated.

And more than 100,000 people would be thrown out of emergency housing and back on to the streets; 3.8 million Americans on unemployment would see their benefits fall by 9.4 percent. That's about $400 less they'll get through the end of the year.

Everyone, though, will feel this one way or another. While Washington, Washington plays a blame game.


SEN. CHARLES SCHUMER (D), NEW YORK: The bottom line is very simple. The Republicans have proposed devastating cuts.

SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: Washington Democrats have gotten used to Republicans bailing them out of their own lack of responsibility.


ROMANS: Jeanne Sahadi is a senior writer at CNN Money.

Jeanne, it's like they're going like this -- they each pointing at the other. And we're stuck here in the middle, trying to figure out who is going to get hurt first and hardest.

Now, some of these tough decisions are not going to get made. And there are some who may argue, Jeanne, that the scenario is not that bad and it's necessary. These cuts are going to hurt the most vulnerable. How do these cuts translate to hurting the economy more generally, Jeanne?

JEANNE SAHADI, SENIOR WRITER, CNNMONEY: Well, the Congressional Budget Office estimates for this calendar year we're probably going to lose about 0.6 percentage points of economic growth. So, it's not going to put us in recession. But on top of the tax increases, we're looking at 1 1/2 percent points of growth being curbed.

So, it's economic growth we can't really afford to just forfeit for a set of cuts that most people say are pretty bad policy. It helps deficits but doesn't really help us with the debt problem. So, that's where we're at.

ROMANS: And, you know, it's been the most predictable crisis, you know, of the last few years.

I want to bring Harvard economist Ken Rogoff and "Chicago Sun Times" personal finance columnist Terry Savage back into the conversation.

Terry, you say the impact of these cuts is being overdramatized. Explain.

SAVAGE: Well, what we're doing is creating a drama to cover up for the fact that Congress has totally abdicated responsibility for making important decisions. It's like the mother shouting I'm going to give you the count of three to come down, one, two, 2 1/2. I mean, come down here. This is really important. I'm start over. One, two.


SAVAGE: This is going to go on all spring, you know? It's not just the sequester.

And then the president brings his budget to Congress. We haven't had a real budget in four years. Then the Republicans have to bring their budget at the end of March. If we don't have a budget we'll have the threat of shutdown.

So, then they'll pass a continuing resolution. Then everybody goes on spring break in with Washington, OK? By the time they come back, about 7th of April, we're facing tax day where we will continue to pay and they will maybe or maybe not get paid if they can't come together with some kind of a deal.

So, this is a drama that I think the American public is getting tired of it, you know?

ROMANS: I am certainly tired of it. I love your analogy with the children.

Ken Rogoff, I've got to say, I mean, I think comparing members of Congress to children who aren't listening is a very, very good analogy. It is serious. I think that some do overplay the drama or play up what is legitimate drama because, you know, they want to shine a light on this.

We're talking about labs that won't be funded, research that won't get funded. At some point, it won't happen day one maybe but as the days wear on, this will have a real effect on a lot of things that we take for granted that are working in the economy.

ROGOFF: We put a positive spin on it, and it's hard. I mean, I think the idea, it's a vaccination, because if we just keep spending and spending, eventually the market forces it on us. And it's much more unpleasant.

So, it's sort of an artificial crisis to prevent a real one. But at the end of the day, they don't agree on where to go. And how much are we going to cut spending.

ROMANS: There's no pressure from the market. There's no pressure at all right now from the market. I mean, interest rates are so low, it's incredible.

ROGOFF: Well, I'll tell you one thing. That's not necessarily a sign that nothing will ever happen. That there are many cases where things roll along for a long time and the market doesn't see it. But the thing is that the horizon is not a year. It's more like five years, 10 years, 15 years.

And so, it's so hard they're not even going to be in office necessarily. Well, I suppose some of the people in Congress are in office forever.

But that's what's hard about it. The real problem ways off, they don't agree on how to manage it. They create this artificial crisis, but they still can't do it.

ROMANS: I have to say that if you want to know when a lot of what's happening in all of this, you have to read Jeanne Sahadi at because you make sense out of the senseless every day.

SAHADI: Yes, well --

ROMANS: So, tell me, you're looking at what government agencies are saying, what the budget experts are saying. There are people in Washington who have to figure out how to -- how to spend money differently starting in one week.

SAHADI: Right. You know, I was talking to some this morning. He points out that we thought this would happen January 2nd. So, agencies were preparing for that. Then it got postponed for two months which shortened the window of time of which they have to make the cut.

Now it may happen, there's still a chance in the next week that Congress does an 11:00 pm deal that says we're going to cancel the sequester, postpone it for a couple of months. That's yet more planning for the agencies. Or the cuts go into effect March 1st but don't really happen until April in full force.

But somewhere between March 1 and march 27, where they have to pass more funding for the rest of the fiscal year, they come up with a deal to replace the sequester. All I have to say, agencies are spending time, money and people planning for something that everybody says is bad policy. And they've had to do it in three different versions. It defies logic.

ROMANS: It defies logic. You have a show. It defies logic. Today on CNN's it defies logic.

Thanks, you guys. It's really nice to see you. Ken Rogoff, Jeanne Sahadi and Terry Savage. Have a great weekend everybody.

All right. This normal-looking office building is getting lots of well-deserved attention. I'm going to tell you where it is and what's going on inside. Here's a hint: it's one of the most serious threat to our safety, our security, economy. America under attack every single day.


ROMANS: Just about every single day in this country, the U.S. is under attack, repeated attack, cyber attack. It's government agencies. It's companies, financial institutions, universities. And this cyber espionage is working.

This week a cyber security firm named Mandiant pinpointed a specific building in Shanghai, China, where Mandiant says hundreds of hacking operations took place that targeted computer networks at large companies, government agencies here in the U.S. and other countries around the world.

And the report says the operations from that building, backed by the Chinese military.

When a CNN news crew drove by to investigate, security officials laid chase to our crew members as they got close.


UNIDENTIFIED MALE: Keep driving. Drive away. Drive away. Drive away.



ROMANS: Later confiscating some of the tape in their possession.

Now, officials in China strongly denying any of these claims. I will be very clear -- the Chinese always deny claims of hacking, cyber espionage, any kinds of military espionage.

What's more -- they accuse the U.S. of hacking into hundreds of computer networks in China.

Experts here in the U.S. have a tough time putting a number on how much these alleged cyber crimes take from the U.S. economy. Estimates range from a few billion dollars a year to as much as $100 billion and more.

Intellectual property is one of the most serious losses. Industrial secrets that may have taken decades to assemble here are stolen within days by advanced hacking networks said to be emanating from China.

Barbara Starr is a CNN pentagon correspondent.

Chris Johnson is senior adviser at the Center for Strategic International Studies. And he was a former senior China analyst at the CIA.

Chris, let me start with you.

The CEO of Mandiant told Wolf Blitzer this week that U.S. corporations have had enough.


KEVIN MANDIA, CEO, MANDIANT: And that's one of the reasons why Mandiant released its report is we felt that tolerance in the private sector, that it's just shrinking. People are sick and frustrated with how much I.P. we've lost to Chinese hackers. So, we felt it was just a natural timing.


ROMANS: Chris, it sounds like U.S. corporations have had enough.

CHRISTOPHER JOHNSON, SR. ADVISOR, CENTER FOR STRATEGIC & INTERNATIONAL STUDIES: Yes, I think that's definitely true. I mean, what's telling about the report that has just come out is the pervasiveness of this espionage by the Chinese, and especially the role of the Chinese military in economic espionage. You know, it's presumed, of course, that an opposition force, military force might engage in probes of defense networks or national security information, looking for national security information.

But this economic espionage by the Chinese military is a stark revelation, and it demonstrates that it's the entire force of the Chinese government that is involved in this process.

ROMANS: Barbara, is there a cyber war between the U.S. and China? If so, what are the Pentagon's rules of engagement in such a war?

BARBARA STARR, CNN PENTAGON CORRESPONDENT: Well, I think absolutely. The answer is yes, I think it goes far beyond espionage. And it is war. It is war in this century.

The Pentagon, the Obama administration, actually trying to cope with that very question, Christine. If you call this a war, what are the battlefield rules? If they attack us, if they try and get into U.S. banking systems, what are the rules for the U.S. to retaliate? Would the U.S. in a battlefield situation try and take down another country's economic infrastructure, possibly having the impact of denying water, power, electricity to a population and a country we're at war with?

These are the fundamental questions the Pentagon is trying to cope with. For now, the Obama administration has a new cyber policy, if you will, where they're trying to share more classified information about the threat with U.S. business and industry so that the U.S. infrastructure has a better idea of what's going on.

ROMANS: I want to be clear, this Mandiant report doesn't just come out of the ether, right? We have had years -- Barbara, you've been covering it, Chris, you, too -- years of reports of Chinese lasers blinding satellites that are orbiting could essentially shut down the American financial system, right? We've had all kinds of reports of espionage for fighter jets, to keep nuclear subs quiet, things that will matter to our children, to our economic.

It is not an exaggeration at all.

So, Chris, how concert sudden this effort, this -- concerted is this effort, this industrial complex in China to get as much control as they can over the American system?

JOHNSON: It's a pervasive problem. I think it's important to recognize that while there have been these allegations of Chinese probing of U.S. critical infrastructure and so on, it's not exactly clear at this stage what the intent might be.

That said, I think with the Chinese military in particular -- there is a perception, n China, especially among the military, that U.S. has a full-up cyber plan, if you will, cyber war plan to conduct against China. You cannot convince them that this mentality is somehow wrong.

So, there is a sense in China that they should do the same thing. I think that's why we're seeing a lot of this activity. In terms of pervasiveness, it has been going on for many years. In area where China feels that they have a persistent gap in their own capabilities, cyber is a key area for them to try to improve.

ROMANS: Chris, Barbara, very nice to see both of you. We'll watch this space. Because this is something that will to continue to develop, I'm sure.

Washington isn't coming to save you, but it is possible to make it on your own. Coming up, I'm going to introduce you to someone who's working six jobs at once and loving every minute of it.


ROMANS: Working multiple jobs as a college student isn't unusual. But working six different jobs in your 50s -- well, that's business as usual for Charmaine DaCosta. She says her career choices are a by- product of the recession. While she's working hard, she also says she's making this economy work for her.


ROMANS (voice-over): Charmaine DaCosta is caterer --


ROMANS: -- a pastor, office manager --

DACOSTA: My next guest live --

ROMANS: -- host for Airbnb --

DACOSTA: When they travel, people appreciate someplace clean.

ROMANS: -- English language tutor, professor, and a singer/songwriter.

DACOSTA: I'm busy. There.

ROMANS: In 2007, DaCosta left her job as an executive assistant to pursue singing full time. Then the recession hit --

DACOSTA: The bottom fell out.

ROMANS: -- forcing DaCosta to get creative to make ends meet.

DACOSTA: Took music jobs, catering jobs, administrative work -- any job that would actually pay me and was legal. The economy is forcing people to use their hidden talents. ROMANS: And redefining traditional careers from 9:00 to 5:00 to 24/7.

DACOSTA: The office manager and the pastor jobs actually pay the same. The catering jobs vary, and then the Airbnb which is the bomb. I can make in one week in Airbnb what I make in two weeks on my other job.

ROMANS: "Can" being the operative word.

DACOSTA: Thank you very much.

ROMANS: Six jobs don't equal six figures.

DACOSTA: No, I'm off to New Life Baptist Church where I do my other things.

It's not the life that most people would choose, I'm sure. The con is I'm never quite sure when the mortgage is going to be made, what bills are going to be paid and when. I don't have the security of planning next year.

ROMANS: While DaCosta says she thinks she could find a full-time job again, she chooses not to.

DACOSTA: I'm the happiest I've ever been. Bar none. No time in my life have I been this happy.


ROMANS: If you have a creative way of thriving in the job market, we want to hear from you. Find us on Facebook and Twitter, my handle is @ChristineRomans. That's it for me.

You can catch my friend Ali Velshi here at CNN 1:00 p.m. Eastern. He's always asking you to follow him on Facebook. This week he was so desperate for followers, he asked Facebook's original friend for help.

Check out Ali Velshi with Mark Zuckerberg, --I'm not kidding -- coming up at 1:00 p.m. on "YOUR MONEY."

"CNN SATURDAY MORNING" continues right now.