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YOUR MONEY

What Happens on August 3rd?; Interview With Americans For Tax Reform President Grover Norquist; The Budget Stalemate In Washington Is Hampering Job Creation

Aired July 16, 2011 - 13:00   ET

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


ALI VELSHI, HOST: No one can say for certain what would happen if the debt ceiling is not raised, but the consequences are likely to be severe.

Welcome to YOUR MONEY. I'm Ali Velshi.

August 2nd is the day that the Treasury Department says it will no longer be able to pay all of our nation's bills and the United States will default on its debt. Now, Republicans are going to vote on their own plan this week, complete with spending cuts. But President Obama says he won't support deep cuts without increases in taxes.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: If you're trying to get to $2.4 trillion without any revenue, then you are effectively gutting a whole bunch of domestic spending that is going to be too burdensome and is not going to be something that I would support.

(END VIDEO CLIP)

VELSHI: David Gergen is CNN senior political analyst. David, there was a time when Republican House speaker John Boehner and President Obama both talked of doing something big to change America's unsustainable economic path. What do you think? Do you think that opportunity's lost?

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: Well, a week is a long time in politics, can be a lifetime, as you know, Ali. I think the -- I think what's now clear is that the big deal, the grand deal, the grand bargain of $4 trillion over 10 years -- that's dead. That's gone. I think the chances of getting a deal at $2.5 trillion or $2 trillion, the middle-level deal, very, very unlikely because the president does not want to go that high without tax increases or Republicans are not going to do it.

Here's the hard question, Ali, I think that's coming up. And that is the House Republicans are now pushing a very, very tough deal through the House. Over on the Senate side, the Republicans and Democratic leaders are working together on a version of the McConnell plan. And the president will accept that, as he said in his news conference Friday. But whether the House Republicans would accept that or not is a big, big question. It seems to me that's the lead horse. That's the lead solution right now, is a version of the McConnell plan, with throwing in the spending, which I think would be a good idea, of at least $1 trillion or $1.5 trillion worth of spending cuts. But whether the House Republicans -- they've been sending some signals they won't accept that --

VELSHI: Right.

GERGEN: -- in which case, we are really at loggerheads.

VELSHI: That's exactly right. Diane Swonk is the chief economist at Mesirow Financial. Diane, Ben Bernanke called it calamitous not to increase the debt ceiling. S&P and Moody's have both warned that it could downgrade the stellar, always stellar U.S. AAA credit ratings.

Forget the politics for a second and let's talk about consequences from an economist's perspective. If the U.S. fails to raise its debt ceiling on August 2nd, what does it mean for our already struggling economic recovery?

DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Well, it's incredibly bad news. I mean, it could be enough to push us into another recession, depending on how far. Immediately, they'd have to do 40 to 45 percent cuts in spending just right off the top of the board. Now, how long that would last? My -- my plan would be I would first stop paying Congress for not doing their job.

But I think the real issue is this is broad-based. You can't escape these. I know the American public doesn't like the fear- mongering that's going on around this issue, but it is real. It's a very real issue. The thought that we would all have to pay higher interest rates, the thought that we would allow the freedom of choice in this country to choose our future, which we still have within our grasp, leave to it the rest of the world to determine our future with higher interest rates and changes in the -- in spending cuts that are forced upon us and thrust upon us is just unimaginable to me.

But unfortunately, it's getting to be more worrisome as each day ticks on.

VELSHI: You economists are not given to broad statements like that. When you're doing it and Ben Bernanke's doing it in the same week, I think it means we've got something to worry about.

How might a U.S. government default affect you and your family? Tom Foreman is here to break it down for us -- Tom.

TOM FOREMAN, CNN CORRESPONDENT: Ali, "breakdown" is the right phrase because what we're talking about here, in theory, is a shock wave that would go through houses all over this country. And it would start with the value of your house itself. If the cost of borrowing money for the government gets higher, that would mean probably the cost of borrowing money for all of us would get higher. Interest rates would rise. That could mean many, many thousands more on mortgages for many people out there. Things like your car -- the rates could rise there. Gas prices could rise as a result of that. And of course, your roads might be in poor quality if the government can't afford to take care of them.

What about the people who earn the money for the house? Let's say you have a small business father (ph) up there. First of all, if he works for a small business, he could wind up unemployed because the business can't afford to operate that way anymore. He can lose money in his savings account, and he could have a difficult time getting a loan if he's trying to run his own business because money would tighten up all over.

Let's say that mom works for the government -- immediate impact. She could wind up furloughed. She could also see credit card rates rise because, again, one of the keys to this is the way the interest would ripple throughout this country.

Let's look at the kids over here. Here's a son. He wants to go to college. Student loans could become harder to obtain for the same reason, interest rates. Restrictions on financial aid could be put into place.

What about the daughter over here? Let's put her into the military. Her salary could be limited or delayed. She could possibly get IOUs, and you know how well those spend (ph) at the grocery store.

And private contractors -- really important here -- the people who supply everything for the government and the military and all these people -- they could be left hanging out on a limb simply because the money was not there.

And of course, what we heard this week, what about Grandma? Social Security could be delayed. Retirement benefits could be reduced.

All of this is just a theory. We don't really know where all of this would hit. But the simple truth is, this is not just a concern for Capitol Hill. It could be a concern for real homes across the country.

VELSHI: All right, Tom, there's a lot of "would have, should have." There's a lot of theory there. But David, the bottom line is, we don't know. You and I were together -- so were you, Diane -- after Lehman Brothers collapsed, and you know, a lot of smart people thought markets would take that in stride, and they didn't. This is a lot bigger than Lehman Brothers collapsing.

David, you have been in the White House. You understand how people think. Why are some people so concerned, particularly those who are concerned with scoring political points -- why is it this fealty to lower taxes overtaking the idea that this actually could have broader and more devastating effect, to not raise this credit limit?

GERGEN: Well, I think, ultimately, the Republicans -- at least I hope -- will agree to go and lift the debt ceiling. Certainly, Speaker McConnell (SIC) has agreed to that. Certainly -- I mean, Speaker Boehner has certainly. Mitch McConnell has over on the Senate side.

But there is a strong sentiment among Republicans that the cuts that are on the table now are illusory, that there are some gimmicks in there, that just as we saw at the end of last year, we had this announcement about great, big budget cuts -- when you really broke it right down, it didn't turn out to be very much.

VELSHI: Right.

GERGEN: You remember that. Turned out to be peanuts. There's a strong feeling that what they're being asked to do is to agree to cuts that are not actually -- that are actually quite modest, and then increase taxes, and in effect, to pay for the welfare state, a bloated welfare state. And they would like to shrink the size of the welfare state.

This is ultimately a conversation, a debate, a debate, you know, a food fight over how big the American government should be. And you know, that's why they're not -- that's why they're not doing it.

But I -- the question becomes -- I cannot believe, at the end of the day, House Republicans will be so recalcitrant that they'll take us into default. It just -- I -- I -- that would be so much beyond what I think we've ever experienced, Ali, knowing we're on the edge of Niagara Falls, knowing we're on the edge of a precipice, I can't believe they'll take us over.

VELSHI: You would think so and you would hope so. I don't know.

Diane, David, stay right there.

Let's talk to one of the most powerful voices in the debt ceiling debate. I think you're going to enjoy this. He's not an elected official. He's not a government employee. Grover Norquist is the president of Americans for Tax Reform.

Grover, your lobbying group has gotten more than 230 House Republicans and nearly 40 GOP senators to sign a pledge never to support an increase in taxes. And you warn those who break your pledge will pay a political price. Are you the reason that we don't have a debt ceiling increase right now?

GROVER NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM: Well, as you know, the pledge, the "taxpayer protection pledge," is a pledge that candidates for office and House and Senate members and presidents sign to the voters of their state and to the nation. The pledge isn't to Americans for Tax Reform. It isn't to me. The American taxpayers have asked and elected a majority in the House of Representatives and 41 members of the Senate who ran committing not to raise taxes.

VELSHI: Right.

NORQUIST: Our friend, President Obama, has said he won't try and solve the problem he created with his spending unless people -- VELSHI: Oh, wait, wait, wait, wait a minute.

NORQUIST: -- give him more money.

VELSHI: He created with his spending? You didn't just suggest that our budget problem is because of President Obama, did you, Grover?

NORQUIST: Well, let's see. On August 2nd, which is the new date that Geithner gave us --

VELSHI: Right.

NORQUIST: He gave us a may date. Now there's a new absolute date -- VELSHI: Right.

NORQUIST: -- that he wasn't --

VELSHI: You know, Grover, Grover --

(CROSSTALK)

VELSHI: Let's have a true conversation here. You know better than what that is. You know that we hit the debt limit on May 16th, and you know that the treasury secretary said --

NORQUIST: August 2nd --

VELSHI: -- I can move things around until August 2nd. Let's -- let's have a real conversation, Grover.

NORQUIST: The new day -- why are we hitting August 2nd? Why are we --

VELSHI: Because he's moving things around.

NORQUIST: -- hitting August 2nd?

VELSHI: You know that as well as I do. OK, let's just get back to the point --

NORQUIST: Because Obama spent -- we're at this --

VELSHI: Are we in this debt situation --

NORQUIST: -- debt ceiling because Obama --

VELSHI: -- because of the Obama administration, Grover?

NORQUIST: Yes.

VELSHI: OK.

(CROSSTALK)

VELSHI: -- because that's an unreasonable position. Let me just ask you something. What is wrong with electing --

NORQUIST: $800 billion on the stimulus?

VELSHI: What is wrong --

(CROSSTALK)

VELSHI: Our debt problem is far beyond $800 billion, Grover. What is wrong --

NORQUIST: That's why --

VELSHI: -- with electing people, as we do, to represent us in government and get to Washington and say, This conversation is a whole lot more nuanced and complex than it was when I was running for office in Iowa or in Arkansas or in New York, and I might have to compromise. Why is preserving the inability to increase taxes more important than the overall health of the economy and the danger that it's putting us into right now?

NORQUIST: Because not raising taxes is important to the health of the economy because the president wants to spend the money, he wants to raise taxes and spend more money, and the answer to that is no.

The most important thing to turn the economy around -- we've been losing jobs since Obama started spending more money, dramatically increased -- the Bush spending was bad and too high.

VELSHI: Right.

NORQUIST: Obama's spending is a trillion dollar more this year than when Bush left office, $1 trillion in one year. He's going to add another $10 trillion to the debt during his presidency. That's what we need to pull back. He wants to raise taxes. The American people and the people they elected say, Don't raise taxes, cut spending.

That's the argument. Obama wants to spend more and raise taxes. The Republicans want to spend not as much money as Obama does and not raise taxes. Why would you have them go to the American people and say, Because Obama wants to spend more money, you're going to have to pay for it? The answer to that's no.

VELSHI: OK, Grover, hold on right there because I want to ask you whether or not there are any taxes in this country that you need to see increased to make things a little more fair. Grover Norquist is standing by. We're going to be right back after the break.

(COMMERCIAL BREAK)

VELSHI: We're back with Grover Norquist. He's the president of Americans for Tax Reform. Grover, you've gotten so many Republicans in Congress to sign a pledge to never raise taxes. A lot of people are wondering if it's appropriate that you hold so much power in the Republican Party. You've never been elected to public office. But you certainly are influential.

What's the consequence, if somebody who has signed one of those pledges, one of those pledges of remarkable inflexibility that you forced them to sign, goes against you?

NORQUIST: Well, people take the pledge because they speak to their voters. The pledge is not to me. Can we make this clear?

VELSHI: Right.

NORQUIST: The pledge is to the voters of Oklahoma if your name is Tom Coburn. It's to the people of your state who elected you. They --

(CROSSTALK)

VELSHI: They didn't ask for the pledge. You provide the pledge. You write it. You get everybody to sign it. It's your pledge. Let's not mince words, Grover. Tell the truth. You want to make sure people don't increase taxes. This isn't -- the voter in Iowa didn't write that pledge.

NORQUIST: We offer that pledge to all candidates for office. Some choose to say to their constituents, Vote for me, I won't raise taxes.

VELSHI: OK.

NORQUIST: Obama said, Vote for me, I will raise taxes.

VELSHI: Right.

NORQUIST: So different people take different approaches. That vote, that pledge is put to the voters of their state --

VELSHI: Right.

NORQUIST: -- and then they get elected. It's important that people can trust their elected officials not to lie their way into office.

VELSHI: Is it not more important, Grover, that people can trust their elected officials to make the right decisions in their interest than to be loyal to Grover Norquist so that they get reelected again?

NORQUIST: OK, are you not listening?

VELSHI: I'm listening very clearly.

NORQUIST: The pledge is not to me. The pledge is to their constituents.

VELSHI: I'm waiting for you to tell me why --

NORQUIST: The pledge --

VELSHI: -- what you do makes America better.

NORQUIST: -- is to their constituents. Well, raising taxes does not make the economy stronger, it makes it weaker.

VELSHI: OK.

NORQUIST: Spending money you don't have does not make us stronger, it makes us weaker. We ought to spend less and not raise taxes. That's what people take the pledge to do.

VELSHI: You want -- and you believe --

NORQUIST: Obama wants to spend more.

VELSHI: I'll give you this --

NORQUIST: I'm going to repeat it --

VELSHI: I'll give you this, Grover. You were into this long before it was majority opinion. But right now, you've seen the Quinnipiac poll. You've seen the Gallup poll that says most Republicans -- not most Americans, most Republicans agree with the fact that there need to be spending cuts and some corresponding tax increases.

Do you think that there is not a tax in America on the wealthy or on corporations that needs to be increased? There's just no tax anywhere that you think needs to be increased?

NORQUIST: Well, the "Taxpayer Protection Pledge," which any of your viewers can go read on Americans for Tax Reform's Web site, atr.org, makes it very clear. Tax reform -- if there's a credit or a deduction that's inappropriate, get rid of it --

VELSHI: Right.

NORQUIST: -- just reduce rates so that it's not a hidden tax increase. We're Americans for Tax Reform. We were founded to pass tax reform in '86. We want lower rates and a broader base. We want tax reform but not hidden tax increases.

VELSHI: And I'll save -- I'll save the viewers, by the way, from going to your Web site. The pledge reads this, "I, the undersigned, pledge to the taxpayers of the state of undersigned and all the people of this state that I will oppose and vote against all efforts to increase taxes." That's accurate, Grover?

NORQUIST: Pretty simple.

VELSHI: All right, so --

NORQUIST: No net tax increase. No net tax increase.

VELSHI: And you continue -- OK, good, no net tax increase. You continue to counsel those who have signed this pledge not to negotiate at all with anything that will increase the debt limit if it involves increasing taxes.

NORQUIST: And take a look at what's happened across the country and the states this year. Governors who signed the pledge have won that fight. They're not raising taxes. They are reducing spending. The healthy states are not raising taxes. They've elected people who've taken the pledge. The unhealthy states like Illinois and Connecticut are raising taxes and damaging their economies. The pledge has saved Americans hundreds of billions of dollars --

VELSHI: Are you OK with the fact --

NORQUIST: -- that would have been tax increases.

VELSHI: -- that the pledge may cost Americans when this debt ceiling is not increased? It will cost Americans a lot of money when it's not increased.

NORQUIST: I hope that President Obama will not stick to his ideological left-wing guns and demand more spending and tax increases, that he will come to the table and actually put something in writing, which he hasn't done yet. There is no Obama plan in writing --

VELSHI: Wow. Grover --

NORQUIST: -- that he's negotiating from.

VELSHI: -- it is remarkable to hear you suggesting that President Obama does not stick to his ideological guns when your entire --

NORQUIST: I hope he won't.

VELSHI: -- (INAUDIBLE) is about sticking to your ideological guns.

Grover Norquist, thanks for coming on the show. Grover Norquist is the president of Americans for Tax Reform, a name that doesn't entirely represent what he's doing.

David, Grover Norquist is remarkably committed to what he's talking about. But he -- there is a problem here. There's an underlying problem that politicians in America cannot do something that risks their seat because their voters won't let them. And pledges like this contribute to a great deal of inflexibility in Washington.

GERGEN: Well, Ali, listen, let me put my cards on the table. And Grover knows this. I have supported the Simpson-Bowles plan all along. I do believe that taxes need to go up as part of an effort -- overall effort to get the deficits under control.

But you know, in fairness, you know, Grover does have a point. And Simpson-Bowles itself said -- it wasn't one-to-one, a tax increase versus $1 in spending cuts, it was two-to-one in spending cuts versus tax increases. The Simpson-Bowles commission recognized that the -- more central than taxes is the question of how much we're now spending. We've taken the level of spending in this country from about 20 percent of GDP at the federal level up, as you well know, to 24 to 25 percent over the last two years, another year in sight for 25 percent.

And what Republicans are saying is you got to sweat that down. And I believe that taxes ought to go up as part of this package, but I think it's unfair to villainize the Republicans when, in fact, there is a very real possibility that the Senate will present a plan which will have $1 trillion to $1.5 trillion dollars in cuts and no tax increases, and that's what the president is ultimately going to accept, and that may be where we come out at the end of the day.

VELSHI: The problem --

GERGEN: I just -- I think --

VELSHI: The issue is more political, David.

GERGEN: I think to say that default versus tax increases is -- is -- it misstates the problem somewhat.

VELSHI: Yes, well, I'm not sure why the two are in the same discussion. I would have really preferred that they deal with the debt ceiling, and they deal with spending and taxing entirely separately. But we're not in that position, David.

The reality is, in part because of people like Grover Norquist, we're not in that position. A lot of people who otherwise would vote for an increase in the debt ceiling can't do so because they are not in a position to compromise.

NORQUIST: Well, yes and no. I -- it comes back, Ali, to what people fundamentally believe is the problem. And Republicans fundamentally believe that this underlying problem is we've allowed spending to go higher and higher, and they don't want to raise taxes to pay for that. They would rather see it shrink down.

The Democrats -- I -- you know, who -- and I'm not trying to villainize Democrats, either. I think that they come from a very sincere place of really wanting to provide a stronger social safety net. They want to provide, you know, far more services to the country. And they believe that the rich ought to pay a lot more to get there to -- to get there.

VELSHI: Diane Swonk, is there any way to reduce our debt, to get into a situation where our deficits are not as big in a meaningful way to the tune of $2.4 trillion that we're talking about without increasing some taxes?

SWONK: Oh, there's a way to do it. It's whether or not that's really going to be politically acceptable to the American public. The kind of pain that that would induce -- and I agree completely with David on this one. The kind of pain that that would induce is not something that we're really ready to swallow. There's a balance in this country between spending and tax cuts. And it is more. We do need to cut spending more than raise taxes.

VELSHI: David Gergen, thanks very much. David Gergen is CNN's senior political analyst. Diane Swonk is a chief economist with Mesirow Financial.

We're going to tell you exactly what would happen if the president and Congress do not raise the debt ceiling in time.

(COMMERCIAL BREAK)

VELSHI: On August 3rd, there is a chance that America will wake up without enough cash to pay its bills. That means our senior citizens or our military may not be getting the checks they depend on.

Jay Powell is a visiting scholar for the Bipartisan Policy Center. He served as the undersecretary for finance at the Treasury under President Bush, SENIOR Well, what are the consequences if the debt ceiling isn't raised in time? The prevailing wisdom is that those that hold U.S. debt, bond investors, would get paid first. But what about everybody else?

Jay, you and others at the Bipartisan Policy Center say it would be impossible to keep paying for all of the most popular and important programs in this country that Americans rely on, and that means possible reductions or delays to Social Security, to Medicare or Medicaid, food stamps, checks to federal workers.

President Obama, in fact, said this week that he could not guarantee Social Security checks would be mailed out if we don't raise the debt ceiling. Now, Jay, Republicans are calling that a scare tactic. Forget the politics. Tell me what the numbers say.

JAY POWELL, VISITING SCHOLAR, BIPARTISAN POLICY CENTER: Yes, it's not a scare tactic. I mean, it's a fact that if the debt ceiling is not raised by August 2, then on August 3 and for the rest of August, the federal government will have approximately half of the cash it needs to pay its non-interest bills. And that is really not in dispute. I'm not hearing a lot of people saying that's not true anymore.

VELSHI: The screen we're looking at is August 3rd. On August 3rd, the revenue that will be taken in is $12 billion. The expenses are $32 billion, of which a big portion are Social Security payments.

You know, others have said, Well, the government doesn't work on this basis, where it's got no money left over from the previous day. Would there be money left over to help pay for Social Security on August 3rd?

POWELL: Yes, there would, but there wouldn't be enough to pay all of those $32 billion in bills. And we don't know to that level of precision whether there would be anywhere near enough to pay all of them. What that slide suggests -- that's the very first day after the debt ceiling --

VELSHI: Right. POWELL: -- should have been lifted. What it really suggests is that that Social Security payment would be at risk of slipping a day or so. That's what it suggests.

VELSHI: OK.

POWELL: But it's not a prediction. And you know, it's -- so I think the president's statement was accurate on its face.

VELSHI: OK, the next pretty important day, according to some of your research, is on August 15th. Tell me what happens then.

POWELL: Well, on August 15th, that's not a good day to be working in the Treasury Department. You've got basically a $29 billion interest payment and you've only got $22 billion of incoming funds. Now, the thing is, Treasury will always make sure it has enough cash to pay the interest. That will be the highest priority.

VELSHI: Right.

POWELL: It won't even be a thought process. That will be the highest priority, I believe, having worked there. So you will make sure to have enough cash to pay that. The problem is, there's another -- you know, it's $39 billion, I guess -- $41 billion in total costs that day. So you don't have anywhere near enough money to make all the other payments. And the other thing is, that's the date that the quarterly refunding auction closes. So there's a 10-year security that's got to be rolled over that day --

VELSHI: Right. You got to have the ability to pay that.

POWELL: That's right. Well, $27 billion worth of new money has to come in and buy a 10-year security or thereabouts, and that's the challenge.

VELSHI: All right, the rising possibility that Congress does fail to raise the debt ceiling has resulted in credit rating agencies threatening to review America's sterling AAA credit rating.

You know, a couple things. Ben Bernanke testified before Congress last week. And he said it doesn't actually matter whether you do some of this juggling that you're talking about. The credit markets will see this as a default one way or the other. So if you pay your bondholders but you don't pay something else, they'll still talk about it -- they'll still downgrade you.

What is the risk that if America gets it together before the August 2nd deadline that we keep our sterling credit rating?

POWELL: Well, first of all, our work strongly suggests that interest rates would go up if we enter the prioritization period. But in terms of the ratings, it seems as likely as not now that Standard & Poor's will actually go ahead downgrade us, whether there's a bond default or not. And that will not have a positive effect. That will -- that will mean higher rates, not dramatically higher rates necessarily, but higher rates. Moody's and Fitch have said, by contrast, that they won't downgrade us unless there's an actual bond default which we think is unlikely.

VELSHI: I want to ask you this one questions, because you've been in the Treasury. On August 3rd or 4th or 5th, whatever the case is, if we don't have a debt ceiling increase, who in Treasury makes that decision as to what gets paid?

POWELL: Of course, there is no playbook here. This is not the executive branch's role at all. So this is a new thing. Theoretically, people in the administration could make decisions and set priorities, or maybe not. Maybe they'll let the Fed pay the bills in the order they come due. They make take the position that they don't have the authority to do this.

VELSHI: Jay Powell, good to talk to you again. Thank you so much.

POWELL: Thank you.

VELSHI: Jay Powell is a visiting scholar with the Bipartisan Policy Center, former undersecretary of the Treasury.

More than 14 million Americans are still out of work. We need a solution to that problem. We need it pretty fast. Is a new stimulus the answer? With all this debt talk, it doesn't seem likely. But we're going to discuss it right after this.

(COMMERCIAL BREAK)

VELSHI: Welcome back.

There are still too few jobs to go around; 18,000 jobs added in June, well below the nearly 300,000 jobs some economists say we need to see each month for a sustained period, to see a meaningful reduction in the unemployment rate. Some 14 million Americans remain out of work. A lack of jobs is just one reason why Federal Reserve Chairman Ben Bernanke is warning Congress to be careful where they slash spending.

(BEGIN VIDEO CLIP)

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I only ask, or suggest, that as Congress looks at the timing and composition of its changes to the budget that it does take into account that in the very near term that the recovery is still rather fragile and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery.

(END VIDEO CLIP)

VELSHI: Former "New York Times" columnist Bob Herbert is a distinguished senor fellow, at Demos, Will Cain is a CNN contributor.

Bob, you feel the deficit reduction focus in Washington with the full support of president Obama is actually hurting job creation efforts.

BOB HERBERT, SR. FELLOW, DEMOS: No question about it. But I actually think that -- this is going to make you really cynical-I think this is sort of a phony debate. This is a manufactured crisis. We should be dealing with the debt ceiling separately, just raise it. And dealing with budget matters separately, they're very complex, and they involve more even than just the idea of whether you're going to raise taxes or whether you're going to cut spending.

And I don't think that we're making any progress here. I doubt-I agree with David Gergen-I doubt that even the Republicans are going to send the economy over a cliff. So I expect the debt ceiling to get raised one way or another.

VELSHI: Right.

HERBERT: But the real issues relating to the budget and the long-term debt are not going to be dealt with.

VELSHI: All right. Will Cain, something that sort of started trickling out there, which would be very hard politically to deal with in this country, in this climate is the idea of the necessity of more stimulus. We've just heard from people about how the stimulus is the reason, to some people, why we're in this trouble. Is there any possibility of more stimulus coming from the government?

WILL CAIN, CNN CONTRIBUTOR: None, zero. Let me tell you why. It's because, I think, for a lot of us, the feeling is the stimulus was effective as if we had taken $800 billion, walked into the bathroom, dumped it into the toilet and flushed it. That was about how much help it did. I'm not going to join the chorus that says it hurt. But it didn't help, Ali.

Look, I'm not alone. President Obama himself says it didn't create the jobs we expected. Even Paul Krugman says it wasn't created the right way. And that is the narrative now. That it should have been created the right way. If we had the right concoction of infrastructure, yadda, yadda, yadda, that would have been perfect.

VELSHI: All right, Bob, let's just get your response to what Will said.

HERBERT: The first thing is that suggesting the stimulus didn't help is just wrong. It did save a significant number of jobs. It probably created some jobs, not nearly enough, not even enough, he's right, as the president had hoped for.

But it also, and is crucial, gave significant help to the states who were just hemorrhaging revenue. So we were in a very dire crisis. And the stimulus helped prevent it from becoming even worse. I think the stimulus wasn't big enough. I think it wasn't shaped properly. There were too many tax cuts, et cetera.

VELSHI: There see, he bought your-

HERBERT: But beyond that, now we should take the budget issues and the jobs issue and move it separate from the debt ceiling thing. The only way to really get a handle on long-term deficits is, one, you need to increase some revenues. I think the bush tax cuts for everybody ought to be allowed to lapse. But we need job creation so that you have more people working and paying taxes.

VELSHI: We're all agreed on that, right?

HERBERT: Yeah, but that requires investment. So you begin to create these jobs and you address the budget deficits-

VELSHI: Why are you flinching?

HERBERT in the medium to long term.

VELSHI: Because I look at their investment means?

CAIN: Just extra spending, just, whatever you want to spend it on.

HERBERT: How do you create jobs?

CAIN: Here is the deal. Bob and I have a simultaneous agreement and disagreement.

VELSHI: OK.

CAIN: We need to separate the economy and the federal government budget and deficit. Those aren't necessarily playing together. A lot of conservatives would have you believe the federal government's deficit is impeding the immediate economy. No. It will eventually if you don't get entitlements under control.

HERBERT: Yes.

CAIN: So now that we get to, how do we fix the economy, yes, Bob and I will have a philosophical difference on investment. Again, I don't believe putting it in the hands of politicians and the government -- I don't believe they know what the next big thing is. I don't believe they know how to invest it properly. I believe the spontaneous chaos of free market do.

VELSHI: All right.

HERBERT: We agree that we need to create jobs.

VELSHI: What's the investment you think creates those jobs? And, frankly, whether it's big companies, or it is small businesses, what's the thing that's going to make it work?

HERBERT: Franklin Roosevelt said we ought to address this. He said this during the Depression, he said we ought to address this, the jobs issue, the way we would approach the emergency of a war. And that's what I think, because I think we have a jobs crisis that is that dire at the moment.

I think we ought to be investing in infrastructure and not just roads and buildings. I think we should be building new schools. I think we should be weatherizing every building in the United States. And we should have a crash program on new forms of energy, clean energy, and that sort of thing. So that we are in the forefront of this new industry for the 21st century. Those are the investments I would make.

CAIN: But Obama is not a dictator. He can't put that together, that perfect package.

HERBERT: Well, you asked what I would do. That's what I would do.

CAIN: The problem is now we have to go ask Nancy Pelosi and Eric Cantor to get together and come up with something similar. And that, Bob, isn't in a world we live in.

HERBERT: Eric Cantor would take us over an economic cliff.

CAIN: So would Nancy Pelosi.

HERBERT: No, she wouldn't. No, she wouldn't. I really disagree with that.

VELSHI: OK, let's say you don't like Bob's suggestion. We have had the freedom to have businesses to make decisions that would create more jobs. We haven't had it. We know businesses are sitting on a lot of money. We know we have seen remarkable profitability.

CAIN: Right.

VELSHI: What's stopping them? We keep hearing, it's a lack of clarity about what governments are going to do. It's Obamacare. The fact is, that's not really stopping anybody from-

CAIN: There is a one word answer.

VELSHI: Demand.

CAIN: Debt. Debt.

VELSHI: Come on!

CAIN: That's it.

VELSHI: You have the first letter right.

CAIN: Not government debt.

VELSHI: You even have the first two letters right.

CAIN: Not government debt.

VELSHI: How is debt stopping companies from hiring people?

CAIN: The Commerce Department just came out yesterday and said consumer spending is inching along. It's gagging. It can't get out of the way of itself. Why? Two-thirds of our economy depends on consumer spending and household debt, yours, mine, Bob's, everyone's, is at record, historical levels. Bob thinks the problem is jobs. I think the problem is debt. You'll never have a good employment market until you get rid of debt in the economy.

VELSHI: Boy, you can get rid of debt real well if you have jobs for everybody.

CAIN: A 100 percent employed economy with everyone digging ditches be a good economy?

HERBERT: The big corporations have found that they can make tremendous profits without as many workers. So they've gotten the cost of workers down and they are not going to jack that up much higher. I think it's amazing that Jeff Immelt from GE is the president's point man on jobs. I mean, Jeff learned at the neutron jack school of job creation. You know, so give me a break.

CAIN: We agree on that.

VELSHI: I would just as soon give the economy to both of you to handle. I bet you would come up with a good job situation. Will Cain, a pleasure to see you, CNN contributor. Bob Herbert is a senior fellow at Demos, and former columnist with "The New York Times."

All right, that phone hacking scandal that brought down one of Britain's biggest newspapers, why it has real implications in the United States now and in the future.

(COMMERCIAL BREAK)

VELSHI: Well, Rupert Murdoch's British tabloid "News Of The World" is out of business. Journalists employed by Murdoch's News Corporation are alleged to have been involved in hacking into the phones of celebrities, politicians, even murder victims. Now comes word that the FBI is looking into whether families and victims of 9/11 might have had their phones hacked as well.

The FBI is responding to angry lawmakers like Senator Jay Rockefeller who issued this statement -- quote, "The reported hacking by News Corporation newspapers against a range of individuals including children is offensive and a serious breach of journalistic ethics. This raises serious questions about whether the company has broken U.S. law. And I encourage the appropriate agencies to investigate to ensure that Americans have not had their privacy violated."

Howard Kurtz is host of "Reliable Sources," which airs every Sunday morning here on CNN, and the Washington bureau chief for "The Daily Beast" and "Newsweek."

Howard, the U.S. audience may not be too familiar with "News Of The World" but could this change their perception of other News Corp. properties like FOX News, "The Wall Street Journal," "The New York Post"" if 9/11 victims and their families are involved in this scandal? HOWARD KURTZ, HOST, CNN'S "RELIABLE SOURCES": That would certainly bring the story rather dramatically to this side of the Atlantic, Ali. But I want to be cautious here, because the FBI is conducting a preliminary inquiry, under some pressure from politicians, as you noted. It may well be that "News Of The World" was going after 9/11 victims because the tabloid thought it would be a great story. But we shouldn't make the leap and say that FOX News or "The New York Post" engaged in the same kind of tactics.

VELSHI: Why shouldn't we?

(CROSS TALK)

VELSHI: Is it because British tabloid journalism is something so different and unto itself that it is not necessarily the kind of thing that would happen in the United States?

KURTZ: The whole Fleet Street culture is a lot looser and more permissive and more questionable, in my view, than what we have here in the States. I mean "News Of The World" beyond the phone hacking thought it was a great idea to have a reporter dress up as a fake sheikh and do that videotape sting on Sarah Ferguson. That wouldn't fly here in the United States of America, or at least there would be a lot of criticism. And there was very little of it in London.

VELSHI: Does Rupert Murdoch need to do something to convince U.S. readers and viewers that these kinds of things were isolated to British tabloids and not indicative of practices at "The New York Post" , at "The Wall Street Journal," at FOX News.

KURTZ: Murdock has a lot of damage-control work ahead of him. On Friday when he accepted the resignation of his top British executive, Rebekah Brooks, that was a step in the right direction. There's going to be full-page apologies in the London newspapers clearly the onus now is on Murdoch . This is a huge black eye around the world for his empire. And naturally people are going to be suspicious about whether or not any of his U.S. media properties indulged in any of the same kind of questionable conduct. Murdoch has a lot of to do to repair the tattered image of his company.

VELSHI: All right. Howard, good to talk to you.

Howard Kurtz is the Washington bureau chief of "The Daily Beast" and "Newsweek," and the host of "RELIABLE SOURCES," right here on CNN.

Deal or no deal, is there a safe haven for your money in all of this debt mess that we're talking about? Coming up next.

(COMMERCIAL BREAK)

VELSHI: If you're struggling how to understand how a U.S. default would affect your 401(k), your IRA, your 529 and your other investments in stocks and bonds, you're not alone. This are plenty of doomsday scenarios out there. And one of the reasons for concern is that asset prices are based on what's called the risk free rate of return. That's the rate of return of U.S. Treasuries, which are generally assumed to be risk free. A default would signal for the first time ever that Treasuries are not free of risk. And it would trigger a repricing of many financial assets.

So how do you protect yourself from that? Jim Awad from Zephyr Management is back with us. He is a great friend of ours.

Jim, this is not to presume. I don't want to put words in your mouth and tell people they should be worried about what's going to happen. But people are worried.

JIM AWAD, ZEPHYR MANAGEMENT: It is a possible very negative event. Now, what I always tell people is don't panic and change your basic portfolio structure, based on short term or unpredictable events. But the U.S. might default. Greece might default. There's a lot going on.

VELSHI: Sure.

AWAD: So, what I would say in this environment. What people should do is reduce their risk profile, not change their strategic long term allocation. But on the margin, reduce their risk profile, for instance, by lightening up on junk bonds, lightening up on small cap stocks, lightening up on commodities; things that might be affected should there be a default.

VELSHI: We're probably talking a week again and things might be more serious, in which case my first advice to people has been find out how to log in to your 401(k), or your 529 to know what to do. But when you say lighten up on those parts of your portfolio, and do what with it? Just hold that money in cash, buy gold? What should they do?

AWAD: Well, we're talking about maybe 10 to 15 percent of your portfolio.

VELSHI: Yes?

AWAD: And what I would do is I would put money in gold because gold goes up whenever there is confusion and chaos. And you have debasement of currencies. People are going to rush into gold, as a safe haven. Also if the U.S. Treasury were to default, people would want to go into corporate bonds. So the Barclays Intermediate Term Credit Trust is a portfolio and an ETF that invests with a five year maturity, 3 percent yield, great credit, JP Morgan, Goldman Sachs, GE, are the kind of bonds. So you would want to go-

VELSHI: Bonds of companies.

AWAD: Of companies, so you would want to go to from U.S. Treasury debt because if they default, people will run to the certainty of strong corporate debt.

VELSHI: In fairness, that hasn't given much of a return. You're just talking about safety. If you close into this Barclays Capital Intermediate Term Credit Bond, ETF, that's safe.

AWAD: That's safe. What I'm saying is people-if Treasuries go down and interest rates go up, people will want to own corporate bonds instead of Treasury bonds. And what you want is you want high-quality corporates.

VELSHI: Right.

AWAD: And you didn't want to go too long term because who knows what inflation will be in 10 years. So this is a five-year high quality bond.

VELSHI: You say high quality, because that's what the government's bonds are right now. High quality, the highest bonds.

AWAD: Right.

VELSHI: You said gold. I mentioned this to somebody the other day. And he said, well, gold is just too expensive to buy. You are recommending the ETF for gold, GLD. By the way is up 30 percent, over the course of a year, but an ETF, and exchange traded fund is easy to buy and sell.

AWAD: Easy to buy and sell. And gold is still not adjusted for inflation. It's lower than it was in 1980. And if you see all the money that is being printing, people aren't going to want to own only dollars and euros. If you're a Chinese who just came into a lot of money, if you are an Indian middle-class, you are going to want some of your money in a store of values, because currencies are being debased by all the debt.

VELSHI: All right. Jim, good to see you as always. Thanks very much. Jim Awad of Zephyr Management with some advice about how you can start to protect yourself no matter how the debt ceiling negotiations shake out.

One thing is going to be certain, Americans are going to have to learn to accept the new reality that they face in the future. I'll explain next in my "XYZ."

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VELSHI: Time for the "XYZ."

It has become fashionable and to a great degree justified to be frustrated with Congress about the snail's pace at which debt ceiling negotiations are moving. This Republican Congress and the Democratic- controlled Congress that preceded it have shown a singular inability to perform some of the most basic tasks, with which they are entrusted. Namely making and passing a sustainable budget one time, and raising the debt ceiling. Neither of these matters are options.

On Friday, I spoke with presidential candidate Tim Pawlenty and asked him about the fact that both a Gallup poll and Quinnipiac poll show that most Americans, and even most Republicans would support a compromise that involves not just budget cuts, but also tax increases. Or if it is more palatable for you to hear it this way, the closing of certain loopholes and elimination of certain credits for businesses and high earners. Pawlenty's response was that you can't govern by polls. You know what, I agree with him. But Americans haven't taken that advice. Greek legislators did enacting legislation that clearly went against the will of the people.

So my open letter today isn't to legislators. It is to you. Dear America, the solution will be painful. Some spending cuts are necessary and everything needs to be discussed. Programs like Medicare do need to be retooled. There can be no sacred cows. And, yes, millionaires and billionaires and big business, you need to pay your share. Tax increases, or whatever you are more comfortable calling them, do have to be part of the solution. There is simply no way to make the math work without them.

Not everyone is going to be happy with the outcome. It's possible that no one will be happy with the outcome because we'll all give something up. But the sacrifice you refuse to make today will only require more painful ones, not just for your children, not just for your grandchildren, but for you. This is going to start hurting in the foreseeable future.

I'm asking you to give your elected officials the freedom to do what is best for the country, even if it is not ideal for you. There's a selfishness that is dominating this conversation. It's all about politicians doing what their constituents want. What happened to doing the best for the country?

Let your elected officials do their jobs without fear that if they don't pander to you, they won't get reelected. And honestly, enough of making candidates sign these all or nothing pledges about not increasing taxes. Your threats to unseat politicians who try to do the right thing actually limits their ability to do the right thing.

Living within our means will not be easy. It may mean working a few more years than you planned to, with fewer benefits than the prior generation had, but hard work and sacrifice are American attributes. And it is time for all of us, not just the politicians to rise to the challenge.

That is my "XYZ."

Thanks for joining the conversation this week on YOUR MONEY. We are here every Saturday 1:00 p.m. Eastern and Sunday at 3:00 p.m.

Catch me every morning starting at 5:00 a.m. Eastern, straight through 9:00 a.m., right here on CNN.

And don't forget Twitter. I'm @AliVelshi. I read every one of your Tweets.

Have a great weekend.