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YOUR MONEY

Recovery at Risk; Europe's Debt, America's Problem; Perry's Economic Record; Financial Fear Factor; Would Tax Hikes Help?; Wrong Man for the Job

Aired August 14, 2011 - 15:00   ET

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


ALI VELSHI, CNN ANCHOR: Your job, your savings, uncertainty is everywhere in this economy, but is it time to panic?

I'm Ali Velshi. Welcome to YOUR MONEY.

The recession may have ended in June of 2009, but some of you are certainly forgiven if that comes as news to you. A CNN/ORC poll finds 60 percent of Americans believe this economy is still in a downturn and that conditions are getting worse. That number has jumped, by the way, from 36 percent in April.

Economist Peter Morici is a professor at the University of Maryland School of Business. Peter, the most basic question that our viewers want to know right now is are we getting into another recession right now?

PETER MORICI, PROFESSOR, UNIVERSITY OF MARYLAND SCHOOL OF BUSINESS: If I have to bet, no. I submitted my forecast to the various polls last week and I said no, that the economy would grow faster in the second half, that things will get better.

Are there perils? Of course. But things will get better.

VELSHI: All right. It's bifurcated at best, though, Peter, that those with money who don't need credit or who have the ability to get credit can really do well in this economy, and those without jobs at the bottom, men with tough credit, are excused for thinking that things are bad.

MORICI: Oh, absolutely. If you don't have a job, it's still a depression outside. Or still a recession, however you want to look at it. And we are not growing fast enough to help those people.

To create the kinds of jobs we need, we have to grow at three and a half, four percent, even higher.

VELSHI: Peter, stay right there.

Ken Rogoff is a professor at Harvard University. He's a former chief economist for the IMF, probably the world's leading expert on economic crises.

Ken, what do you think? This - this - we've got something going on in the world. Is it recession? Is it worse? KEN ROGOFF, PROFESSOR, HARVARD UNIVERSITY: Well, I think it's pretty clear we've never escaped from the previous downturn. We're still living in the aftermath of it, and it's slow and rocky. And there's some problems on the horizon in Europe.

I think the short-term probably is things are going to be moderate to slow growth. There's no question, the risks have gone up, that it might even turn negative again.

VELSHI: Peter, a CNN/ORC poll finds that two-thirds of Americans right now disapprove of how President Obama is handling the economy. Just 34 percent approve. Is there something that the president, or Congress, for that matter, separately or together, can be doing to reassure Americans either that the economy is on solid ground or that they are taking action?

There have been all these calls while the markets have been gyrating for - for the government to do something about it, strangely, because most people want the government out of their lives until things go wrong. But what can the government do or say?

MORICI: Well, I think that we need to look at some places where we can stimulate the private sector to take initiative, unleash all that cash. You know, businesses are complaining about regulatory burdens. Maybe we need to talk about smarter regulation, that accomplishes the same objectives without costing businesses so much.

I think, for example, drilling for domestic oil and gas. You know, if we get that going, that's like a private sector infrastructure project.

VELSHI: Right.

MORICI: It's privately - you know, that's the same stuff that goes into roads - cement, steel, all the rest. So let's look at how we can do that but not so onerously.

VELSHI: And we know, Ken, that there's $2 trillion plus, depending on - on how you look at it, of money saved up by corporation in America that has not been employed over the last couple of years, understandably because we aren't sure where this economy is going. But, last week on this show, you said that the market is looking for leadership from Washington.

We've heard Peter's view of - of what that might be. Some ideas from you, specific policies that would provide the ignition that could get this economy moving again.

ROGOFF: Well, assuming Washington could get its act together to do anything after the paralysis of the debt debacle, I think I'd start with trying to find a way to address the household mortgage problem, which is still with us. It's still not only hurting consumption, it's making it hard for people to move, to take other jobs. There are a lot of ideas out there to try to bring down some of the worst mortgage problems. Second, I do think the Federal Reserve could do more. It cannot carry the whole burden on its shoulders, but I do think some moderate inflation, if it pushed for that, would be helpful.

And then, yes, as Peter said, there are all kinds of structural reforms. I think one of the big mistakes in the Great Depression of the '30s was the government just went crazy and was putting on all kinds of new regulations, trying this and that. And I think it's very good to take an overview of how to pull the government's role back to where it should be and try to keep the private sector not stalled on that account.

VELSHI: All right, Peter, it's got to be effective. I mean, one of the - one of the complaints about the stimulus in - in 2008 is it was big, certainly it was big, may not have been as targeted or effective.

So, I mean, how do you do that? How do you take the time to say this is what's effective? How do you make sure there's enough money or thought behind it, that it's big, and that it feels like something?

Because there seems to be a hunger for a solution that is large, whether it's deregulation or stimulus, depending on what side of the spectrum you're on, that there needs to be some big recognition. Not small programs, but big ones.

MORICI: OK, let's look at energy. Suppose we make it a policy to build out the natural gas pipeline across the United States, to make better use of those East Coast reserves, and to say replace one million or two million barrels a day of imported oil. The oil companies have a great deal of resources at their disposal.

Say, what's it going to take that we can be safe so that you can get drilling soon, and implementing those programs quickly. The private sector can move much more rapidly than the government because there aren't all these checks and balances with regard to the misuse of government money. So that's a good example.

In the mortgage area, why not make the people that hold the mortgages partners with the homeowner as opposed to writing down loans say, you know, all right, that this - this house is 25 percent underwater. Lower the payment on the basis of it now being, you know, 75 percent of its capital value, but then, when it's sold, you'll get 25 percent. That would immediately put cash in their pockets, allow them to refinance and get money moving again.

VELSHI: Great ideas, guys. Thanks very much. Peter Morici from the University of Maryland School of Business, always a pleasure to have you on the show.

Ken, stick around for a minute. I want to ask, when I come back, whether Europe's debt crisis is the most imminent threat to America's economy right now. I'm going to break it down for you, when we come back.

You're watching YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: Europe's debt crisis is America's problem. It started with worries about Greece's debt. It spread to Italy and Spain. This week, rumors that France's AAA credit rating could be downgraded wreaked havoc in our markets.

Richard Quest is host of CNNI's "QUEST MEANS BUSINESS. Richard, we have our own debt crisis here in America. I don't know why you feel the need to pile on.

But why did we see U.S. markets react so positively to news that France, Italy, Spain and Belgium had placed this temporary ban on short selling of financial instruments, financial stocks, which is something that amounts to a bet against the stock's performance. Why did that make such a big difference?

RICHARD QUEST, HOST, CNN INTERNATIONAL'S "QUEST MEANS BUSINESS": I wouldn't say that it was just any one individual aspect. You've got to take the market in its totality at the moment, and that is an unease about what is taking place both in Europe, both in the debt crisis in the United States, and with the deficit.

So anything at all like, for example, the banning of short selling or the reaffirmation of a AAA rating for France, or Softgen saying that they're not in financial trouble - anything at all that soothes the markets' nerves at this particular point, Ali, is what is really moving the market.

VELSHI: Ken Rogoff, back with us, from Harvard. Ken, we - we talk a lot about the rise of Asia and potentially the slowdown that some of Asia is experiencing. We really think that our economic fortunes are tied to that. Really, the last month or so has indicated to us that we - we are much more tied to Europe than we probably actually thought.

Is Europe and its problems a real threat to us here in America?

ROGOFF: Well, I don't think there's any question that in the immediate future what takes place in Europe is the dominant risk to the global economy. Of course, it affects our banks, there's a chance the euro will break up, all sorts of financial tests (ph).

But also, Ali, I know you've been following the riots in London.

VELSHI: Yes.

ROGOFF: Just think about if that went on in France and Greece and Italy, that they're having austerity and recession.

Europe is a bigger economy altogether than the United States. It has a huge impact on world markets. Of course it affects us.

VELSHI: You brought up an interesting question. I want to bring Christine Romans in. She's the host of CNN's "YOUR BOTTOM LINE."

Christine, I want to - you know, we've been following these riots very closely, and you've definitely - you and others have - have suggested that some of it's hooliganism, but some of it might actually be accommodated by this economic environment where people don't have all the jobs they want, where there is some austerity.

CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: Well, you have to wonder about what kind of influence that plays, and you know that economists, when they look at 10 percent plus unemployment, it's sort of one of those magic numbers, and Ken can tell you more about this than - than I can, because I'm not an economist.

But one of those magic numbers where you worry about social cohesion. You worry about what happens when people feel like they don't have opportunity.

One of the things that a lot of people are talking about this week about London in particular is when you have a generation and then two generations of people who feel like they don't have any opportunity, then what happens? I mean, you look at the - many of the young people in the streets, this vigorous discussion about, well, these kids aren't even in the labor market anyway. Well, what - why do they feel like - you know, what are there - what are they mad about, you know?

VELSHI: Right, but social cohesion is an interesting concept. It's certainly (INAUDIBLE) we - we've seen this - I don't mean to link this, but in Philadelphia, we got the mayor clamping down on kids who are having these flash mobs in the street.

Richard, you're back. You're in London. What's your sense having - you've been in - in Greece for the riots there and for the austerity plan that was - was implemented there. What's your sense of - of that side of things? This isn't just an economic ivory tower conversation.

QUEST: No, it's not. And what took place in the U.K. and has taken place over recent days has far more to do with criminality than it has to do with social deprivation. The prime minister did allude to that, David Cameron, in his House of Commons speech, when he talked about whether society is broken.

But, putting that in - we - in Athens, you saw protesters who are in the square and making their feelings felt, who were then hijacked by thugs and hooligans. In Britain, it was much quicker. The thugs and hooligans pretty much came from day one.

There was very little that you can hang your hat on here and say this was about social deprivation.

VELSHI: All right, (INAUDIBLE) change direction for a second. We've seen a whole bunch of commodities sway around with - with the stock market, but one thing we saw is we saw a drop in oil prices, we - we've seen a bit - a bit of a pickup at the end.

But I want to talk about that, because when we talk about an economy on the precipice of - of going back into a recession, oil prices are so central to this entire discussion. What are your thoughts?

ROGOFF: Well, that's absolutely right, Ali. I mean, of course, we're talking about Europe and the United States growing slowly, but not emerging markets. If you go to Asia, they're slowing, but it's still very fast.

And the countries in Latin America, which are enjoying the fruits of exporting to Asia - Brazil, Chile - they're doing great. You'd never know there was a recession there. So they're demanding a lot of energy, and in the Middle East, and it's kicking up the prices for everybody.

But, there's no question that the falling oil prices reflects the concern that a big part of world demand could be fading.

VELSHI: All right, Christine, what are we - let's come back to markets here in the United States.

ROMANS: Sure.

VELSHI: We are certainly not going to get into the business of predicting.

ROMANS: No way.

VELSHI: Other than - other than predicting that there will be volatility. That's - that's the one thing we can predict.

But I - let's think back to the times that - that you've seen this kind of volatility in the markets, and this is probably your third round of this, if not more.

ROMANS: Yes.

VELSHI: We - we have to get used to the fact that this might be with us for a little while.

ROMANS: And, you know, there's - there's a new element here, and with - a nod to "This Time Is Different," the book, wonderful book by Ken Rogoff, this time we have computerized trading, we have very fast speculation in the market, we have a lot of money that can be deployed very, very quickly. It's a different kind of fundamental structure of the way markets trade and interact today than it was in 1987.

VELSHI: Right. Absolutely.

ROMANS: So that's one thing that I've been talking to a lot of people who are working in the markets, trying to figure out does it feel different this time? How do you -

VELSHI: So, in 1987 we were still actually panicking and selling stocks.

ROMANS: No, I -

VELSHI: Here we could be selling stocks because a computer has decided that there's been so much momentum in the market.

QUEST: No, no, no, no. Hang on - hang on a second. You're forgetting '87. '87, if you remember, there was computer trading, there was program trades and it was program trading -

(CROSSTALK)

ROMANS: That drove it down 22 percent.

QUEST: That sent the cash and the future markets different.

The difference between now and '87 is the computers are faster, these super fast transactions are taking place.

(CROSSTALK)

ROMANS: Yes. High frequency trading. High frequency trading.

QUEST: High frequency.

ROMANS: We didn't even have that phrase in '87.

QUEST: That's the difference. Absolutely.

ROMANS: Ken, do you think it - do you think it has an effect on the volatility in - in markets, in the relationship between different asset classes?

ROGOFF: It definitely has an effect on the relationship between different asset classes, and it definitely affects how the big players, with access to all this technology, can do well versus small savers and smaller players who don't have these resources.

But, I mean, volatility has always been really high in the stock market. You know, it's - I don't think it's particularly high this decade, but, of course, the last week has just been crazy.

VELSHI: All right, guys -

ROMANS: That's a technical economic term - crazy.

VELSHI: That's right. Ken Rogoff - and when Ken's saying it's crazy, run for the hills.

Ken Rogoff from Harvard, great to see you, my friend. Richard, always a pleasure. Sort of sad to see you across the pond. We enjoyed having you here in the United States while this is all going nuts.

Christine, you stay right with us.

ROMANS: Sure.

VELSHI: America needs jobs brand-new Republican presidential candidate Rick Perry says look no further than his record as the governor of Texas. We'll do just that, breaking down Rick Perry's economic record with Candy Crowley, next on YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: The Republican primary race just got a little more interesting, with Texas Governor Rick Perry jumping in this weekend. A look now at Governor Perry's economic record in Texas.

The Texas GDP is expected to grow 3.7 percent this year. Growth last year was in line overall with the U.S. economy. So, Texas definitely stronger than the national economy.

Let's talk about unemployment. Texas unemployment stands at 8.2 percent, nearly a full percentage point lower than the national average. And, here's the interesting part, since the recession ended, Texas has added about 265,000 jobs. That is a huge chunk of the total of some 700,000 jobs created nationwide since the end of the recession in June of 2009.

Now, Texas also has the highest percentage of workers making minimum wage, and the highest percentage of workers working without health insurance. And that is especially interesting since Perry wants Texas to opt out of Medicare and has also proposed that states be allowed to opt out of social security.

CNN's chief political correspondent Candy Crowley is the anchor of "STATE OF THE UNION" every Sunday morning on CNN. She joins me now from Iowa. Candy, thanks for joining us.

The polls say President Obama is weak on the economy. Rick Perry is going to run on the fact that he's strong on the economy. How is this going to play with conservatives, how's it going to play with independents for whom the major issue right now is the economy?

CROWLEY: Sure. I mean, well, it's going to play well with conservatives who are already ready to welcome Rick Perry into the race, although he's got competition here for the hearts of the conservatives. But, nonetheless, he'll be popular among them.

But the independents are something different because he is quite conservative both socially and fiscally. I think you will see the White House - I know you will see the reelection campaign go after Perry on the very things you mentioned at the end, the highest percentage of minimum wage workers, the highest percentage of people without health care. This is - he's arguing that he wants to opt out of perhaps social security or Medicare because he could create a better program, a less expensive program inside the state.

They'll also argue this is an oil state and that that in part certainly does help with the employment issue.

So the great thing about having a record is you can run on it, and the bad thing about having a record is that other people can run against it.

VELSHI: Right.

CROWLEY: The independents, if they're looking for someone in the middle, that is - that's not Rick Perry. This is a - this is a right of center candidate.

VELSHI: But he is going to now challenge Mitt Romney for the top spot as a Republican frontrunner in the nomination bid. Rick Perry and Mitt Romney both share the fact that they've - they are - have been executives of a state. Romney brings the business background, Rick Perry brings the - the success on the ground. Tell me how this likely plays out.

CROWLEY: Well, let me tell you that in the near term, really what Rick Perry has to go after, and certainly the - that group of Republicans that he is going after, those that are supporting Michele Bachmann, this is, again, a candidate who comes in from the right. He is looking at - there's going to be Mitt Romney in the race, and there's going to be not Mitt Romney in the race. And the - and the seat that's open is not Mitt Romney.

So his sights initially are going to be set at Michele Bachmann, and she knows that and has already taken some shots at him. So he needs to get past that first stage. And I'm just, you know, reminding you that - that people like their politicians the best when they're not running for anything.

VELSHI: Right.

CROWLEY: So Rick Perry looks great now, and everybody's rah, rah, rah, but let's remember Fred Thompson. Waited until August or September for him to come in, and he collapsed.

VELSHI: All right, Candy, we will - that's one more thing for us to look at. It's going to be an exciting run until the election.

CROWLEY: Right.

VELSHI: Candy Crowley, good to see you.

CROWLEY: Makes it fun.

VELSHI: That's right. Candy's in - at the Iowa State Fair right now in - in Iowa.

All right, one week ago, S&P downgraded America's credit rating, so why are some investors behaving as if the U.S. - as if the U.S. is as safe a bet as ever? We'll talk about it on the other side.

(COMMERCIAL BREAK)

VELSHI: Welcome back to YOUR MONEY.

A lot of comparisons are being made between this period that we're in right now, with the volatility in the stock markets, and 2008. Very different situation, though, for the time being.

Back in 2008, we had a credit crisis. Individuals and companies were overextended. They were relying very heavily on borrowing and then when banks couldn't lend the money and - and there was an international credit freeze, it really put a halt on - on business.

Well, here we have a different situation. We've got people and companies saving their money, governments having overextended themselves and now getting into trouble. In fact, let me show you the personal savings rate. Let me compare the personal savings rate today to that back in 2007, 5.4 percent today, according to the U.S. Department of Commerce, only 2.1 percent back then.

Now, the 5.4 percent may not seem like a lot to you now, but it definitely is holding this economy back because folks aren't spending.

Mohamed El-Erian is the CEO of PIMCO. He joins is now. He's - he really keeps his eye on - on spending, on debts, on bonds.

Mohamed, welcome to the show. Thank you for being with us.

Let me as you this, Mohamed. What is it that has to happen to get these economic engines going again and convince investors that there is growth both in the United States and in - in global economies?

MOHAMED EL-ERIAN, CEO, PIMCO: Thank you for having me.

Let me put it in the context you've just put. So you have over here companies, particularly multinationals, with a ton of cash but unwilling to engage in the - in the global economy. Over here, you have governments with very heavy debt. The hope is that this sector here pulls up this sector. The reality is that this sector is pulling down the healthy part.

Why? because neither companies nor households are seeing the sorts of policy action that are required in this type of global crisis.

VELSHI: And we would love to know -

EL-ERIAN: So confidence (ph) -

VELSHI: -- what - what you think, because you watch this so closely. What is that policy action that might trigger that group over - over there, the companies, to engage, to invest their money, to open up factories, to hire people?

EL-ERIAN: So whenever you see a system suddenly collapse, like is happening now, it's because it's structurally weak. Think of a mound of sand on the beach.

VELSHI: Right.

EL-ERIAN: You can collapse the whole thing with a few grains of stand. Why? Because it's structurally weak.

So business know that. They see that. They see a labor market that's not functioning properly. They see concerns about whether the politicians know what they're doing, and, in that context, the debt debacle in Washington was very, very harmful.

They also see a labor market that is not functioning, a housing market that's not functioning. They have questions about the medium and public finance and they see no comprehensive policy response at the national level let alone coordinations across borders.

VELSHI: Yes. EL-ERIAN: So policymakers - so the business men are basically saying, you know what, I'm going to wait until the environment gets less risky.

VELSHI: Yes, I know, if you recall in 2008, we - we at least had this sort of international efforts, we had some global sense of what's going on. And now everybody seems to be in this row boat for themselves.

Christine, you know since the downturn, the economic downturn, the recession, people were told save your money, have stuff available. Businesses were told the same thing. As Mohamed said, businesses took that lesson, so did consumers. Now the problem is, as he says, everybody is holding on to their money. What do you even tell people at this point?

ROMANS: Well, it's interesting, because ironically the companies that are going to weather this most recent part of the storm are the ones with a lot of money in the bank. And that's the reason why they have a lot of money in the bank because they're not confident yet. How do you buy confidence to allow people to feel good enough to get out there and spend a little of that saved money? And that's why we just haven't had been able to figure out how to get that confidence flowing again.

He talks about policy prescriptions. The only coherent policy prescription that we've seen is the Fed. And now we know that that's going to last until the year 2013.

VELSHI: They said they're going to keep interest rates low until 2013.

ROMANS: I mean, Mohamed El-Erian, can you imagine the Fed, Ben Bernanke, telling us exactly when this - the expiration date on Fed policy? I started covering the Fed when they couldn't even know what they did with interest rates. You had to watch it in the market later.

Is the Fed the only one with a coherent plan here? And is it good enough or do the markets and you and others want to see more from the Fed? Is the Fed the last resort?

EL-ERIAN: So like you said, Christine, it was unthinkable that the Fed would commit to a date and a level, right? They don't like doing that and they did. And it's one of the many unthinkables. You know, the U.S. losing it's AAA was an unthinkable. Will it be enough? No.

There's two issues here. One is there's a difference between willingness and effectiveness. So the Fed is willing to do a lot. In fact, the Fed, like you say, it's the only game in town and they really stepped up to the plate risking their reputation. But they don't have effective enough policy instruments. So they are, if you like, boxing with one hand tied behind their back.

The second issue is that the Fed cannot compensate for failures elsewhere in Washington, D.C. The other economic agencies are basically asleep at the wheel. We haven't heard anything from them at the time when the situation is getting worse.

So I congratulate the Fed, but I also tell people be careful, it cannot carry all the burden.

VELSHI: You know, Mohamed, you and Bill Gross were on our air helping us understand prior to the debt ceiling debate and through the downgrade what this would likely to mean. And while many people were saying it would mean higher interest rates, you did point out that maybe it will, maybe it wouldn't.

When the S&P downgraded the United States credit rating, the assumption by many was that U.S. Treasuries would - would take a hit. Interest rates would go up. It would cost the U.S. more money - to borrow money. As it turns out, it's had the opposite reaction. Why is that?

EL-ERIAN: It's actually very simple to explain. And it's because interest rates are function not of one thing, credit worthiness, but of four. So undoubtedly the U.S. credit worthiness has gone down. However, this has been more than compensated by the three other things.

First, whenever recession fears go up, interest rates go down. Second, when the Fed tells you it's not moving anywhere for two years, it collapses the whole interest rate structure. Thirdly, people are scared. And when they're scared, they sell risk assets, they sell equities and they won into what is still the safest and most liquid market, which is treasuries. So we have compensated for the decline in the AAA but done so for bad reasons.

VELSHI: Is there an obvious other place to invest your money if you want that safety, you want a deep, liquid market for your money?

EL-ERIAN: No, there isn't. So people have been trying to go to the gold market. That has pushed gold high up. You know, we talk in terms of the concept of your cleanest dirty shirt.

VELSHI: Right.

EL-ERIAN: You know, as you're on a business trip, it suddenly gets extended, you can't get your shirt to the laundry and you have to wear something. So you'd end up wearing your cleanest, dirty shirt. And while the AAA has been lost, the U.S. Treasury market is still the cleanest, dirty shirt out there.

ROMANS: Let me ask you about double dip chances, you know, it's is this catch phrase, double dip, and it's not good like a, you know, a double dip of ice cream. It's not a good thing. One in four, CNNMoney puts the risk of a double dip recession at one in four. Where do you weigh in on that?

EL-ERIAN: We would weight in slightly above one in four, but still not the base case. The base case, though, will not feel great either.

ROMANS: Yes. EL-ERIAN: the base case is this notion of stalled speed, right? Think of a plane needing to go forward and suddenly cannot go forward fast enough. And for people who are unemployed, one percent growth is not enough for housing market that is impaired. One percent growth isn't enough. So I hope ironically is you get stalled speed. But if policymakers continue to dither, that probability of a recession is going to go up.

ROMANS: And that keeps interest rates low, doesn't it? It keeps interest rates very, very low.

EL-ERIAN: It does and it makes people feel very unsettled.

ROMANS: Yes.

EL-ERIAN: It makes companies accumulate even more cash.

VELSHI: Great conversation. Mohamed, as always, thanks very much for helping interpret this for us. Mohamed El-Erian, the CEO of Pimco. Christine, thanks very much to you as well.

ROMANS: Sure.

VELSHI: All right. Raising taxes, one side says we need more tax revenue to cut into America's massive debt. The other side says raising taxes is a job killer. Which side has the proof? We'll examine the evidence next in YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: Raising taxes to deal with the debt is a vexing issue. Whatever money America doesn't get from spending cuts, if the economy doesn't grow, has to come from increased revenue. President Obama wants to see wealthy Americans pay more in taxes.

Now, according to a CNN/ORC Poll, 63 percent of Americans agree with him. Just 36 percent of Americans would not want to see higher taxes on businesses and higher income Americans as part of a deficit reduction bill. So we hear it all the time. Tax hikes for the rich. Who are the rich?

Well, President Obama says that people making $200,000 per year or more are the rich. Now, by that standard, hiking taxes on the wealthy would mean that just three percent of taxpayers would wind up paying higher taxes. It seems pretty simple, right? Raise taxes on three percent of earners and you solve a lot of your problems.

Now, here's the argument against that. Those against hiking taxes on wealthier Americans say rich people already pay enough in taxes. That three percent making $200,000 or more actually pay a little more than 50 percent of the total income tax that the IRS takes in. Three percent of the population pays 50 percent of the tax.

Those are the numbers, but the debate continues. The question, the key question, would raising taxes hurt the economy and kill jobs, or as others have argued, do we have to face the reality that taxes need to go up to reduce deficits and get the national debt under control?

Christina Romer is the former chair of the President's Council of Economic Advisors. Back in 2007, before she joined the administration, while she was a professor of economics at Berkeley, she co-wrote a paper on the effects that tax changes have in economic growth.

Christina, welcome to the show. Your research has been quoted to both make the case for raising taxes to lower the deficit and against raising taxes because of the harmful effects on the economy and jobs. So I want to understand this from you directly and I - I've read the paper and it's definitely written for somebody smarter than me. So tell me what you can about this once and for all, who's right? Can we raise taxes and reduce deficits or does raising taxes hurt the economy?

CHRISTINA D. ROMER, FMR. CHAIR, PRES. OBAMA'S COUNCIL OF ECON. ADVISORS: So it's clearly a matter of timing. So what our paper showed is that tax changes, both up and down do have a powerful effect on the economy. And if you raise taxes in the short run, it will tend to lower output.

And that's one of the reasons why I'd say, you know, even though I very much support raising taxes with dealing with the deficit gradually over time, now is not the time to do it. Because either raising taxes or cutting spending now would absolutely be very hard on the economy. But that doesn't mean you can't legislate it to kick in when the economy is closer back to normal, then that's when the economy would be much more able to deal with it.

VELSHI: And we may be faced with that. The Congressional Super Committee is charged with coming up with another $1.5 trillion in deficit reductions somehow. In a stagnant economy, like we could be in right now, do tax increases make more sense than government spending cuts if this group is forced with coming up with something before the end of the year?

ROMER: Well, certainly the evidence is that that tax increases tend to have less of a contractionary impact than big cuts in government spending. So if it's an either/or, you should, I think, tax increases are less contractionary, especially tax increases on the very wealthy. Because I think they're not one - the wealthy are not ones that tend to spend very much with the income they get and so it has less of an impact if you raise their taxes at least in the short run.

VELSHI: And yet we hear -

ROMER: The key thing is -

VELSHI: Go ahead. I'm sorry.

ROMER: I was just saying, the key thing again is timing, right?

VELSHI: Right.

ROMER: So I would argue very strongly that we very much actually need more fiscal support now. We actually need probably a big tax cut now for firms that want to - to hire workers. But the way you make that fiscally responsible is to say to your super committee over the next 10 years, you're going to have to come up with another trillion or two trillion of deficit reduction.

But if you do it in that sequential way that can get you what you need for the economy today and give people the confidence that you'll get your deficit under control over time.

VELSHI: That rolls off your tongue so easily. It sounds so - so simple the way you say it.

All right. Let's say if you're saying that we could raise taxes in some cases, on higher income earner, we're talking about IRS just released new figures that show about three percent of people in 2009 claimed more than $200,000 in income. If you were to increase taxes on the higher - the highest earners in this country, over what timeframe and how would you suggest doing it?

ROMER: So I think the key thing is, you know, and here's a place where there's a lot of agreement among economists. That the best way to raise additional tax revenue is to cut back on loopholes, tax credits, deductions, all those so-called tax expenditures that are in our tax code and actually use some of the revenue you'd raise to reduce the deficit and you can even take some of it and reduce people's marginal tax rates.

And the reason there's so much agreement among economists, Republican, Democrat is that that is both good for the deficit and good for incentives. If you lower people's marginal tax rates, it does tend to have an incentive effect, encourage labor input, encourage working in entrepreneurial activities. So that's a good thing. So that's certainly why I think cutting tax expenditures is certainly the best way to go.

VELSHI: And yet over the last -

ROMER: And then again -

VELSHI: -- over the last few year, we haven't seen any tax increases and yet we haven't seen that stimulative effect, we haven't seen people spending money. So what - what's the tipping point here? What will it take to get people to spend that money to make investments to hire people to build factories? Isn't it ultimately demand that's going to do that?

ROMER: You know, demand is - is absolutely essential. I think the whole idea and certainly one of the things that came out of the paper that I wrote a couple of years ago was that - that tax cuts can be something that increases demand. That was part of why I was certainly very supportive of tax cuts in the recovery act.

And I think the truth is, they have worked. I mean, study after study that's looking at the recovery act says, yes, it probably wasn't big enough for the problem we were facing, but it absolutely did have a stimulative impact. I think part of what I'm thinking now is that we could be even smarter. So if the problem is firms have lots of cash, they're nervous, something like a big tax cut if you hire an unemployed worker might be just the thing that would tip them into that behavior that, of course, we want so much, which is putting people back to work.

VELSHI: All right. We're now going to take a quick break.

When we come back, I want to ask you about specifics. I want to get prescriptive about what the administration and Congress can do to get America back on a growth track and get - get jobs created. Stand by, Christina Romer. You're watching YOUR MONEY.

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VELSHI: Welcome back to YOUR MONEY. I'm Ali Velshi.

Continuing a conversation with Christina Romer. She's the former chair of the President's Council of Economic Advisors, joining me now from Berkeley, where she is a professor.

Christina, let me just ask you about this. Some fiscal conservatives have been making some outlandish claims recently about the so-called failure of the recovery act, the stimulus. Rick Santorum went as far as to tell me in an interview that it actually cost jobs. Now, you just finished telling me you thought it wasn't big enough. Do we need another one?

ROMER: I think we absolutely do need some more fiscal help for the economy. And whether that is another sort of chunk of infrastructure spending, I think that would be fantastic. I've talked a lot about a big tax cut for businesses that hire workers. I think we absolutely need some help for the economy now.

The important thing to realize, we've got two big problems. We've got a huge jobs problem and we've got a deficit problem. And the way you solve both of those is a comprehensive fiscal package that has fiscal stimulus in the near term and more deficit reduction as we pull out of this recession. And I very much support a bold plan that is much more aggressive on both those dimensions than we're currently talking about in Washington.

VELSHI: But you - you did work in the White House so you know that supporting a bold plan probably has about as much chance of working as I do of growing hair?

ROMER: You know, I think it's the right thing to be fighting for, it is the right economic policy and I actually think it's the right political strategy. I think the president needs to articulate a bold solution to what is clearly two big problems and I think if he makes that case and the American people get to hear it from him, I think they will realize that it's the right thing to do. And I think that will put pressure on the political process.

VELSHI: All right. Let's -

ROMER: I also think if you - VELSHI: Go ahead.

ROMER: -- yes. As I'm saying, I think if you look at what's happening with the economy, we are clearly in some very severe economic conditions, and, you know, I think the dynamics in Washington can change very quickly if this thing goes sour -

VELSHI: Yes.

ROMER: -- more quickly or worse than it currently is.

VELSHI: And we haven't seen that happen yet, but it could happen. You're right. Look, obviously let's continue this thread here about what the president could do. Obviously job growth is key to economic growth. We keep hearing calls from the administration or more broadly government to do more about jobs.

What specifically can the president or Congress do to foster the best environment to create jobs right now?

ROMER: Well, certainly the president just talked about some good sort of structural things like getting the free trade agreement and he's talked about cutting back on regulation or re-evaluating all of our regulations and that's certainly a good, sort of structural things to do. But we absolutely need to focus on the fact that we just don't have enough demand, consumers are not confident, businesses aren't investing.

When you have less demand, the two options you have are aggressive monetary policy and aggressive fiscal policy. And I think we ought to be firing on both those cylinders. I was actually quite encouraged that the Federal Reserve earlier this week showed some signs that maybe they're getting ready to be more aggressive. And I think that is incredibly important.

But I think the president ought to be fighting very hard for a better comprehensive fiscal plan that actually has fiscal support for the economy now, a tax cut, some more infrastructure spending. He's talked about extending unemployment insurance -

VELSHI: Right.

ROMER: -- all of those things are good things, but they need to be big. They can't be -

VELSHI: But let's - let's think about that.

ROMER: -- you know, a billion here, a billion there.

VELSHI: You're absolutely right. I so agree with you on the side of the extension of unemployment benefits, but at the end of 2010, President Obama agreed to extend those Bush Era tax cuts in exchange for the extension of unemployment benefits.

Now, I was quite amazed a couple of weeks ago during the debt ceiling negotiations, Mitch McConnell in what I thought was a remarkable revision of history, called that decision proof that even President Obama agreed the tax increases a damaging to the economy. I mean, was renewing the Bush tax cuts the wrong thing to do at the end of 2010 in exchange for getting extended unemployment benefits?

ROMER: I think extending the Bush tax cuts for, you know, the 90 percent or 95 percent of American families that are below $250,000, I think that absolutely was good policy in terms of where the economy was, but it just simply, to have a big tax increase on, you know, average Americans would have been very hard on demand.

I do think that - that we didn't need to extend them for the very high income earners, because I don't think that they spend very much out of current income, and so that they actually could, it wouldn't have had a big demand impact if we had extended those. You know, that was clearly a political calculation, what did you have to do to get the other things that we needed, like extending unemployment insurance or another payroll tax cut for workers. And so I think that's certainly where the president was coming down on that decision.

VELSHI: Christina Romer, thanks for joining us. Good to talk to you. Christina Romer, the former chair of the President's Council of Economic Advisors.

All right. I've got a very strong message for the CEO of one of the largest companies in the United States. It's all part of my "XYZ," coming up next.

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VELSHI: Time now for the "XYZ" of it.

Back in January, when President Obama first appointed GE CEO Jeff Immelt to head his council on jobs and competitiveness, I was skeptical. Now, seven months later, let's call it what it is - a big glaring mistake by the administration.

Immelt may be the poster boy for American business, but a job's czar he isn't. In fact, his presence is increasingly becoming a poke in the eye to the poor in this country. You've heard the reports that GE paid no federal corporate taxes last year. The company's tried to push back on that claim emphasizing that it did pay some federal taxes, but we know the company employs an army of tax lawyers designed to pay Uncle Sam as close to zilch as possible.

Now, this isn't Immelt's fault that he's a rich, well paid guy. He is after all the CEO of one of the world's biggest and most successful companies. But between heading a company that pays little or no federal tax and being in the top one percent of earners in the United States, he's perhaps a little out of synch with the major employment issues facing most Americans.

In 2009, the top 20 percent of U.S. earners raked in nearly half of all personal income. The bottom 20 percent of all earners made just three percent. Now, the debt deal signed into law wouldn't change that equation one iota. It contains no extension of unemployment benefits, no closing of corporate loopholes, and not one penny in new taxes on either America's top earners or corporations.

Given the rhetoric from the Republican controlled anti-tax House of Representatives, there's a fair chance that any further cuts will fall squarely on the backs of the most vulnerable. Now, none of this is Jeff Immelt or GE's fault. They seem to pay the taxes that the law requires of them.

But for an administration that claims to care about poverty and job creation, the presence of Immelt and GE so close to the White House feels a little awkward, especially in an increasingly bifurcated and divided America.

It's time for a bold change of course by the White House. Unless they've got some evidence of real value that Immelt has brought to the discussion on jobs, having him as an advisor to the president on the issue of jobs doesn't feel right.

Corporate America has not played a key role in putting the country back to work and the only thing GE has brought to light lately is how effective it is at not paying taxes. If I were the president, I'd have a - I'd have a good think about the impression that Jeff Immelt has created and think about whether it's time for him to go.

That's it for me. Thanks for joining the conversation this week on YOUR MONEY. We're here every Saturday, 1:00 P.M. Eastern our normal time, and Sunday at 3:00 P.M. You can also catch Christine Romans on "YOUR BOTTOM LINE," Saturday mornings at 9:30 A.M. Eastern.

Stay connected 24/7 on Facebook and Twitter. My handle is AliVelshi. The show is @CNNYourMoney. Have a great weekend.