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Countdown to Failure; Why Inflation Matters; Road to Economic Renaissance; Decisions, Decisions; Fixing America's Cities; If You Build it, Growth Will Come
Aired December 23, 2012 - 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: Just days to go before America goes over a fiscal cliff -- an outcome looking more likely every hour. Washington's willingness to take America to the brink threatens its prosperity.
I'm Ali Velshi. This is YOUR MONEY.
The latest movement in negotiations between Democrats and Republicans comes down to useless symbolic moves and haggling between grown men. Put bluntly, your elected officials are wasting time while the clock ticks.
House Speaker John Boehner announced his plan B to let Bush-era tax cuts expire for earners making more than a million dollars a year. And he wants to replace automatic cuts in Defense spending set to start early next year with unspecified cuts elsewhere.
The speaker pulled his so-called plan B for lack of support from his own party because many Republicans still beholden to Grover Norquist and that ridiculous pledge want no compromise at all.
The debate between the two sides centers around a balanced approach to the budget. Republicans say President Obama wants too much revenue -- that's taxes in normal speak -- and not enough cuts.
(BEGIN VIDEO CLIP)
REP. JOHN BOEHNER (R), HOUSE SPEAKER: At some point we're going to have to address the spending problem that we have. But we can't cut our way to prosperity. We need real economic growth. Many of us believe on both sides of the aisle the fundamental reform of our tax code will help us get our economy moving faster and put more Americans back to work. And more Americans on the tax rolls. How we get there, God only knows.
(END VIDEOTAPE)
VELSHI: Now President Obama doesn't see it that way.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: At some point there's got to be, I think, a recognition on the part of my Republican friends that, you know, take the deal. You know, they will be able to claim that they have worked with me over the last two years to reduce the deficit more than any other deficit reduction package.
(END VIDEO CLIP)
VELSHI: Mohamed El-Erian is the CEO of PIMCO, one of the world's largest investors in bonds. Mark Zandi is chief economist at Moody's Analytics. And joining me here in the studio is Christine Romans, host of "YOUR BOTTOM LINE."
Mohamed, let's start with you. Gross domestic product, GDP, the broadest measure of the economy, grew at an annual rate of 3.1 percent over the summer. We just got those numbers in this week. That's more than double the rate of the previous quarter. You can see the chart there. It's been choppy but it looks like we're going in the right direction.
America's economy is gaining pace, it's doing better than expected. And we've been saying that 2013 could be the year of a real economic renaissance in the United States or at least the beginning of one. So talk to me about the consequences to our prosperity if Washington doesn't reach a deal.
MOHAMED EL-ERIAN, CEO, PIMCO: The consequences are not good. So what the numbers are telling you is that the private sector is healing. And if the private sector were left to its own devices it would heal faster. Unfortunately, Washington is getting in the way.
And what we found out this week, Ali, is the problem is not just a lack of trust between Democrats and Republicans, we found out that the Republicans themselves can't unite, which means that the cooperative solution that you need to solve this country's headwinds becomes much more difficult, which means that the private sector will become more cautious, will hire less, will invest less, which means that our economic growth will slow down and our unemployment rate will stop going down as fast.
VELSHI: And, you know, we're just starting to get some traction here. We really want to keep this going.
Mark, let me ask you. The economy is doing belter than expected. There's no question. The revisions to a lot of numbers are looking better. Housing is coming back. Take a look at that. The median price of an existing home shot up 10 percent in November year over year. We've been seeing six months of home values going up in a row.
A lot of Americans build their wealth through their homes. Higher home values means more confidence going forward.
First of all, are you with us on the idea that we're on the cusp of an economic comeback and that Washington can do something to hurt that?
MARK ZANDI, MOODY'S ANALYTICS: Yes. Yes. I think the economy is feeling a lot better at year's end. A lot of good news on GDP, incomes, durable goods orders, which is business investment and as you point out the housing numbers are looking very, very good. So we have some good momentum going into 2013 and I think the only thing standing in our way from a much better economy is a piece of legislation on our fiscal issues. And you're absolutely right. If policymakers can't nail this down reasonably so in the next few days, the next couple of weeks, then it can do do a lot of economic damage and this good economic news is going to start to turn sour.
VELSHI: Christine, I know you're following this as closely as I am. What's your thought?
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: Well, I mean, look, you keep hearing Republicans talk about a more balanced approach, they want more spending cuts. But it's "Groundhog Day," Ali. It's "Groundhog Day" in Washington. Only the movie was funny. This is not funny. We're going to go over the cliff here.
I see politics are really the problem here and I don't see any progress, any progress at all, Ali, from where we were more than a year ago, 18 months ago when we first got in this mess with the -- with the Budget Control Act and raising the debt ceiling in the first place. I mean, do you agree with me, Ali? That we just haven't seen any political progress here.
VELSHI: Right. And Mohamed, let me ask you this. Let's talk about the first piece of damage we may see, which we saw during the debt ceiling debate, right? The idea that the U.S. gets its credit rating hurt again. There's been some talk about it from Fitch.
The net result of lowering the U.S.' credit rating the last time around in the debt debacle, it's kind of sad because the first experience most people have with that is that it wasn't as bad as we were warned it was going to be.
Is there a real danger to the U.S.' debt rating and what could that mean?
EL-ERIAN: So at some point, there was a danger. The reason why we haven't felt it is because we've been doing better than rest of the world. This concept that my colleague, Bill Gross, says, we're the cleanest dirty shirt. So we're not clean but we're cleaner than Europe is right now.
VELSHI: Right.
EL-ERIAN: So we haven't felt it. My main worry, Ali, is the following, is that if the Republicans and the Democrats can't get together to solve the fiscal cliff then you will need an external force. You will need a major market sell-off. You will need a major economic trauma to get them to focus.
VELSHI: There are other things that have been on the table. And I want to talk to our viewers about a few of those as soon as we come back.
Coming up next, the Republicans want a new formula for inflation. It's called chained CPI. It's not a bad idea overall but it could slow the growth in payments to Social Security recipients. That's got some people mad. The president has said he could agree to it but Democratic lawmakers say no way. I'll let you decide. I'll tell you what it means after the break.
(COMMERCIAL BREAK)
COSTELLO: So far the fiscal cliff debate in Washington has focused largely on taxes. Tax rates, how much the wealthiest 1 percent or 2 percent of Americans will see their rates go up. Tax hikes on the rich alone will not put all that much of a dent in the national deficit. You could take away every dollar, every dollar from the top 1 percent of earners and it wouldn't actually fill the gap.
We heard earlier in the week about chained CPI. It's a suggestion that John Boehner made for his proposal.
I want to bring in Christine Romans again to break this down -- Christine.
ROMANS: Thanks, Ali. You know, simply put, chained CPI would change the way the federal government calculates inflation, which could possibly save the government $300 billion over the next decade if implemented. Normally every year both wages and prices go up.
The consumer price index or the CPI measures how much they go up by tracking a basket of goods that Americans typically buy. This is important because it's used to calculate cost of living adjustments and Social Security. Checks pay a little more each year in line with inflation as calculated by that CPI.
Now, one potential flaw in the system, CPI assumes people don't change their basket, if, say, the price of meat goes up. In other words, they don't switch from meat to chicken because the price of beef has gone up. They don't switch or they don't switch from, say, arugula to -- I don't know, iceberg lettuce. It doesn't account for how behavior changes.
Chained CPI creates a chained basket of goods to measure inflation more accurately. Economists say it's measuring how people react to price changes not simply the fact that prices have changed.
Now a chained CPI would account for the fact that you're buying more chicken when beef is too expensive and stuff like that. That could result in a slower rate of inflation over time, saves the government money on those cost of living adjustments and it -- and in raising tax brackets on what people earn.
So why is chained CPI suddenly so vital to the fiscal cliff negotiation? It isn't a spending cut or a tax hike, but it would effectively cut spending and raise taxes on some, saving the government an estimated $300 billion over the next decade, Ali. But the problem, Ali, is that what that means is that seniors, the longer they live, the less money they would actually take home. They would see a cut to their benefits. And that's what has progressive so upset.
VELSHI: All right. Well, politically speaking, this was a significant concession from the Democrats or was it just an accounting fix?
ROMANS: Well, you know, it was both of those things. It is an accounting fix but it a significant concession from Democrats. Some Democrats who I spoke to has said, look, maybe I would consider this, maybe, but only if we could have some sort of mechanism, Ali, that a senior past age 85, for example, who would be facing a 6 or 8 percent cut in benefits, maybe there'd be some kind of adjustment to make sure --
VELSHI: Right.
ROMANS: Especially for people who are very poor that there'd be some sort of safety net. So, you know, Paul Krugman has said, of course, you know, a liberal firebrand in the "New York Times," has said this is a horrible idea, terrible, stupid idea, and that this is not something that the White House should consider at all.
VELSHI: Let's bring back the rest of the panel. Mohamed El-Erian is the CEO of PIMCO, one of the world's largest investors in bonds. Mark Zandi is a chief economist with Moody's Analytics.
Mohamed, let me start with you. So, you know, when you say we're the cleanest dirty shirt, I wonder when it comes to negotiations whether we are, because we take unreasonable polarized positions. So there are Republican who will not accept taxing the marginal income, you know, income above a million dollars and increasing that tax on the rich, and then you've got some Democrat who won't agree to this idea of chained CPI.
Bottom line, Mohamed, they're going to have to be tough decisions. You cannot win budget concessions without tough decisions. When you guys are sitting around looking at how the United States solves its problems, what are the obvious ways?
EL-ERIAN: So the obvious way is to get together and recognize that you can only solve a long-term debt issues in the context of high growth. So you approach the fiscal problem in a way that makes sure that you also promote economic growth. So that has two implications. One is you can't do it all on one side. You can't do it all on entitlements, nor can you do it all on revenues. You've got to move on both sides, which means political compromise. People don't like it, but that's the reality.
Second, fiscal reform that we need over the medium term has to be put in the context of a more comprehensive program that makes this economy grow faster and make it more productive.
Ali, what drives us crazy is that you can actually write this down. There are solutions to this. This is not Europe. This is not Greece. There are solutions. It's the politics that mess everything up.
VELSHI: Yes. You're absolutely right. Getting back to the issue of tax rates, it looked like we were getting closer. Boehner offered to raise rates for those making more than a million dollars a year, and by the way, the rate would only increase on the amount of money you earn over a million dollars a year. And just raising those rates were a major concession for any Republican. President Obama, who insists on letting the Bush tax cuts expire for earners making more than $250,000, or at least that's how he presented it during the campaign, offered to let those taxes rise on those making more than $400,000 a year. We're talking marginal rates then so that would be only on income above $400,000.
By the way, Mark, $370,000 a year is what puts you into the top 1 percent here. You're an economist. All those income levels, 250, 400, a million, flying around for raising rates, what's -- what in your opinion is the break-off point at which raising rates would substantially hurt the economy?
ZANDI: Well, I mean, I think they're coming to a compromise. As you point out the president's 400 K, Speaker Boehner was million. My guess is they come to an agreement somewhere around $500,000. If that's the breakpoint in the -- in the tax increase, I don't think that does significant damage to the economy. I think it's very helpful to raise enough revenue to address the balance that Mohamed was talking about.
And I do think that the chained CPI is also a very good way to go. It addresses some of the concerns about the entitlement programs and spending. And it's a reasonable thing to do. And it's also a part of that balance that we need. So both those things -- you know, all these things are going to hurt. Nobody really wants to do them, but we have to to address our fiscal problems. And if you kind of line up all the things that we can do and say which is going to do the least damage, allowing those tax rates for every income household to rise and the chained CPI are two good things that we should implement.
VELSHI: Let me ask Mohamed this. You know, a lot of people are saying you guys are making too much of a deal with this fiscal cliff. Nothing is going to actually happen on January 1st. Well, actually if the payroll tax deduction doesn't come back, you'll get lower -- you know, you'll get less money in your check. But that aside, is there a larger global market reaction that we're going to see, whether it's in bonds or equities?
EL-ERIAN: Well, we certainly aren't going to see a sell-off because I think the markets were convinced that our politicians would get their act together. So if we go over the cliff, you should look for risk assets to sell off. The question, Ali, is what happens in the rest of the world. Remember there aren't really very strong parts that can absorb the shock of slower growth in the U.S. and that can become even stronger engines for growth. China is slowing, Europe is in recession.
So the main concern -- and this is a risk scenario, it's what they call a left tail, it's not the baseline, is that we get a tipping process that one bad thing here leads to another bad thing elsewhere, which comes back here. And that's why the hope is somehow, somehow, I don't know how, but somehow in the next week Washington will find a way to avoid this fiscal cliff.
VELSHI: From your lips to god's ears, Mohamed, thanks very much. Mohamed El-Erian, Mark Zandi, Christine Romans.
Coming up, as long as Congress doesn't trip us up, we are on the way to an economic renaissance in this country. If you're not sure what I mean about that, I'll explain after we pay our bills.
(COMMERCIAL BREAK)
VELSHI: We are on the road to an economic renaissance. I want you to think about the United States economy like a runner along this road. Full economic recovery and prosperity is the destination. The economy right now warming up with a nice jog, getting ready to break into a full sprint.
Gross domestic product, the broadest measure for the economy, grew by an annual rate of 3.1 percent over the summer. That's more than double the rate of the previous quarter. Spending by Americans was the single biggest factor in that growth. And more Americans are spending their money to buy a home pushing prices upward across the country. The median price of an existing home shot up 10.1 percent in November year-over-year.
We've seen home values rise six months in a row as more Americans get back to work and take advantage of those low mortgage rates. Bottom line here, our runner, the U.S. economy, is just starting to break a sweat, and that runner should start to sprint soon as America begins to reap the rewards of its domestic energy boom.
We are extracting record amounts of oil and gas from shale through fracking and other technologies. Now that is pushing prices for natural gas, which is used in part to generate electricity down. That helps utilities and heavy industry compete, creating more jobs for Americans.
Now all of these things put together are sending my runner, the U.S. economy, dashing ever faster down that road toward an economic renaissance, one that offers real prosperity, real jobs for years to come. But running fast on this road requires something else, an investment in infrastructure.
And that's the subject of discussion I recently had with Harvard professor Ken Rogoff, "Wall Street Journal" editorial writer Stephen Moore, and Thomson Reuters digital editor Chrystia Freeland. I started off by asking Ken how you convince lawmakers that infrastructure money is well spent and how do you ensure that the money is, in fact, well spent?
(BEGIN VIDEOTAPE)
KEN ROGOFF, ECONOMICS PROFESSOR, HARVARD UNIVERSITY: I think you have to have firm regulatory oversight. It's not something you can just spend the money and walk away from. But there are the electricity grid, water, aging bridges. There's so many things -- hardening our cyber infrastructure against terrorist attacks and such. Many, many things. And Ali, it doesn't all have to be public money. There's no reason we have to be so statused about this that we can't have more private money. We have telephone companies, we have cable companies, we did the railroads that way. It doesn't all have to be public money.
VELSHI: Steve -- let me bring in Stephen Moore and I think he's going to really enjoy what you just said, he's nodding his head vigorously.
Stephen, I think you're going to disagree with my notion that government can be all that helpful to our runner. It's a new analogy, by the way. I hope you like it. You're probably here for weeks to come.
That government can be helpful other than by getting out of the way. I think you're going to suggest lower taxes, lower spending, fewer regulations. But let's, for the sake of this argument and this analogy, accept that taxes on the rich are going up and have this discussion about infrastructure.
STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: Yes.
VELSHI: There are many conservatives who argue that there is not a role for government in this. Let the markets and private industry handle it. But they haven't really and we've got substandard roads and bridges and -- electricity and broadband infrastructure. All of this means we're less attractive to business.
So do you accept that the government has a role to play in the rebuilding of America's infrastructure?
MOORE: Well, sure. And by the way, I love your optimism, Ali. I hope you're exactly right about 2013 and 2014. We've been spending a lot of money on these programs, roads programs, bridges programs, a lot of the -- you know, school building. I mean, that's been going on in a large magnitude in the United States.
What I like, and where we might find some agreement, you know, I do think private sector dollars can lead to a lot of this infrastructure. Let me just mention one example. When you want to talk about infrastructure projects, what about the Keystone Pipeline? That's a perfect example actually of a -- of a major important and necessary infrastructure project that doesn't actually even require a dime of federal money, and yet it is being blocked.
But I like this idea -- for example on transportation roads. You talk about, you know, potholes and that extracts a cost on people.
VELSHI: Yes.
MOORE: You know, in the state of Indiana they actually sold their highways and now are being financed and operated by a private company. In California you actually have private roads, private toll roads that do very well. I like the idea. I think we've got to get it really very sophisticated about how we finance these things.
VELSHI: That's right. MOORE: For example, used to be the gas tax financed roads.
VELSHI: Yes.
MOORE: Now we can use tolls. You know, you get an easy pass.
VELSHI: Right.
MOORE: You can go anywhere in the country and tolls are a very efficient way of financing roads.
VELSHI: And gas tax, federal gas tax hasn't gone down.
MOORE: Exactly.
VELSHI: And consuming less gas so that we have to actually find other ways.
MOORE: That's right. Yes.
VELSHI: I'm going to be talking to the governor of Illinois about this, Pat Quinn, because they're doing a lot of -- building of roads.
Let's bring Chrystia in here.
Chrystia, I think people underestimate the effect of fracking and natural gas in the United States and the lowering of the price of energy and what that does for heavy manufacturing, companies that use a lot of electricity. Stephen just talked about the Keystone XL pipeline from Alberta to take those oils from the oil sands where you're from. I think that's probably going to happen.
What's your sense of the role of energy in this -- in helping my runner run faster?
CHRYSTIA FREELAND, EDITOR, THOMSON REUTERS DIGITAL: Well, to use your wonderful metaphor, I do run a bit and when I run road races there's this wonderful power gel you can take when you start flagging after the first hour or so.
VELSHI: Right.
FREELAND: Energy is going to be like that power gel for the U.S. economy. I agree, people are underestimating it, and it's going to have a fantastic impact. You know, think about all of the time we are spending arguing in the United States about taxes. Energy is a tax on -- energy prices are a tax on everyone.
VELSHI: Right.
FREELAND: They're a tax on households, they're a tax on businesses. And we are going to see much more available cheaper energy and that will lower the burden on households and crucially, as you pointed out -- and this is where I think you're going to see a great knock-on effect, it makes manufacturing more viable in the U.S. So it's not just the jobs in the energy sector. It's the fact that all of them. VELSHI: That's right.
FREELAND: Especially natural gas, which is hard to transport, it starts to make sense to locate those factory to where that energy is. The other thing that I love about the energy story is, as we've discussed a lot, one of my huge concerns about the U.S. economy is well-paying middle-class jobs. And I think that, you know, we can't neglect the economic reality that we are seeing the hollowing out of those jobs.
VELSHI: Right.
FREELAND: Huge downward pressure on wages. In the energy sector, that's not happening so much because in the actual production of natural resources you can't outsource those jobs. Those are good jobs.
VELSHI: Yes --
MOORE: Ali, can I give you an example of what Chrystia is talking about?
VELSHI: Yes.
MOORE: I was in North Dakota a few months ago. You know, that's where the epicenter of this energy boom that Chrystia is talking about is going on. And it's amazing. If you fly over some of these little towns in North Dakota, they light up at night like a Christmas tree. And I asked what's going on. And what they're doing is they're burning off the natural gas because they want the heavy oil, because that's more valuable.
And I asked why are you burning off the natural gas? And they said we done have the pipelines yet to get that natural gas to the market.
VELSHI: Yes.
MOORE: So that's a perfect example of the kind of infrastructure that we need. I want to mention one other quick thing.
VELSHI: Sure.
MOORE: When you talk about -- you know, Ken mentioned telephone service in this country. That was mostly built actually with private dollars, not public dollars.
VELSHI: With a lot of regulation, though.
MOORE: That's true. But I guess I'm saying -- I think the thing we can all agree on.
VELSHI: Yes.
MOORE: If we're going to have the infrastructure we need, we are going to need private sector dollars to do it.
VELSHI: Right. And -- but you did cite an example of something that did involve government. I just -- I just want to be clear.
MOORE: Yes, but it was mostly private dollars.
(LAUGHTER)
VELSHI: But some government involved.
(CROSSTALK)
FREELAND: You're caught, Stephen. Admit it. Ali got you.
MOORE: No. I mean this is a --
VELSHI: Good. Good.
MOORE: This is making my case that we need the private sector to take play.
VELSHI: And at least with a little government help. Right?
MOORE: Yes.
VELSHI: All right, good conversation. Great to see you all.
(END VIDEOTAPE)
VELSHI: Coming up, you just heard us talk about this. Do you want better roads and bridges? How about a smarter electric grid? Maybe you do, but are you willing to pay higher taxes for them?
It's a tough decision. I'll talk with Fareed Zakaria next about how we make them.
(COMMERCIAL BREAK)
VELSHI: If you're still listening to President Obama and House Speaker John Boehner you'd be forgiven for thinking that the fiscal cliff fight is about taxes.
(BEGIN VIDEO CLIP)
BOEHNER: Unless the president and Congress take action, tax rates will go up on every American taxpayer.
OBAMA: If the argument is that they can't do -- they can't increase tax rates on folks making $700,000 or $800,000 a year, that's not a persuasive argument to me, and it's certainly not a persuasive argument to the American people.
(END VIDEO CLIP)
VELSHI: So here is the rub. The discussion centers on whether or not to let the top income tax rate jump from 35 percent to 39.6 percent on the marginal part, the part above the number, let's call it $400,000. But John Boehner says don't give the government more revenue because it already spends altogether too much. Now the question is not really about that 4.6 percent difference on what the rich will pay in taxes. The real conversation boils down to the role of government. Generally speaking, Democrats are willing to entertain a bigger role of government in society. Republicans want to roll it back. It's ideology. But a more constructive conversation would be how much do we expect to benefit from the services the government provides for us and how much are we willing to pay for those services in exchange?
That got me thinking, here's a list of countries rated on a scale of one to 10 on light satisfaction. Denmark tops the list at 10. My home, Canada, comes in at nine. The U.S. comes in at an eight, France is seven, and Japan is a four.
Let's compare that satisfaction to the average marginal tax rates people pay in those countries. Americans pay on average 41.7 percent when you factor in federal, state, and local taxes. Sounds like a lot but the Danes pay more, 48.1 percent. So how come these guys are happier than the Americans? Maybe because Danish taxes pays for a free education, post secondary.
Canadians, by the way, pay more than the U.S. does as well, 46.4 percent in taxes. How come they seem happier? Maybe because their taxes pay, like Denmark, for universal health care. The French pay fewer taxes than Americans do and are less happy. We don't really know why that happens. Only the Japanese actually make sense. They pay higher taxes, 47.2 percent, and they are less satisfied with what they end up with.
Fareed Zakaria is the host of CNN's "FAREED ZAKARIA: GPS." He's got a special on Sunday at 8:00 p.m. and 11:00 p.m. Eastern entitled "Tough Decisions." I asked him, are American taxpayers getting their money's worth?
(BEGIN VIDEOTAPE)
FAREED ZAKARIA, HOST, FAREED ZAKARIA GPS: Imagine a guy in Germany. Probably he pays, particular if he's upper middle class or upper class, he probably pays more in total taxes than his American counterpart, though it's not entirely clear once you add value-added tax consumption. That's for sure. So he's paying more.
VELSHI: That's a good point.
ZAKARIA: But here's what he gets in return. He gets universal health care, high quality. He gets a free education from kindergarten through any master's, bachelor's, PhD program he wants and it's pretty high quality as well. He gets free retraining if he ever loses his job. He gets all the benefits like daycare and things like that that Europe is famous for.
And the person in the United States may be is paying a couple percentage points lower income tax, but he has to then save for health care, he has to save for long-term care when he's -- when he gets old, he has to save for his children's college education, perhaps for high school education, and certainly for any kind of retraining he may need.
So, you know, it's not entirely clear that Europe -- Europeans are -- have such a bad deal.
VELSHI: So the question here, and this is why this is relevant to your tough decisions show, is it is a tough decision. We are deciding that we want less government. Right? So the idea of whether you pay 35 percent or 39.6 percent as your marginal top tax rate is really code for at 35 or lower I get less government.
Grover Norquist, who is leading this charge for no tax increase, says I want to drown government in the bathtub.
ZAKARIA: Here's the problem with that. Americans like government. So what we have for the last 30 years done is say we're going to have low taxes but we still want lots of government, and we've made up that difference by borrowing. And I think there's one part of what John Boehner says which is quite right. You can't keep doing this forever. At some point you've got to get that happened under constraint.
Now the problem is the Republicans realized that large growth of government is pretty popular. That's why they don't identify specific cuts.
VELSHI: Right.
ZAKARIA: What we need --
VELSHI: They say we'll cut this amount of money but nobody will tell you where it's going to cut because the things that they have to cut are going to hurt now. The low-hanging fruit is gone.
ZAKARIA: The only place where you could probably find something is, again, it gets to -- as you say, the role of government, the more interesting discussion, which is if you cut health care costs by saying we're going to improve quality but reduce costs. You can do that, but you're going to have to have panels, they call them death panels or whatever you want, but panels that say, look, this stuff is not worth it, we're not going to reimburse you. This long-term care is not worth it. You know, they're going to have to be judgments made and that's a role for government that Americans are very uncomfortable with.
That is government deciding what health care you get. But that's how the Europeans and the Taiwanese and all these guys do health care at half the cost we do with better result.
(END VIDEOTAPE)
VELSHI: All right. This Sunday at 8:00 p.m. Eastern, make sure and catch Fareed Zakaria's new special "TOUGH DECISIONS" from the raid on bin Laden to Henry Kissinger's role in opening China to the west. It's an inside look at how top leaders make extremely tough decisions. It's worth catching. Sunday night at 8:00 p.m. Eastern on CNN. Rib-shattering potholes, decaying bridges, electrical systems that haven't been upgraded since the 1950s. We're not talking about Cuba or India. We're talking about America, which earns a D grade from civil engineers for its infrastructure. There are ways to fix them that create real jobs. We'll tell you about it when we come back.
(COMMERCIAL BREAK)
VELSHI: American cities are growing but their infrastructure isn't keeping pace. Urban population increased by 12 percent between 2000 and 2010. Four out of every five Americans live in cities or suburbs, but look at this list of cities with the best infrastructure in the world. What's missing from this list? America.
Not a single American city makes the top 10. The highest, by the way, in America is Atlanta at number 13, Dallas at number 15, Washington, D.C. at number 22. In the world. The richest country in the world doesn't make the top 10 in terms of city infrastructure.
This is from Mercer, by the way, the survey. It ranks cities based on electricity and water infrastructure, congestion, public transportation and airport effectiveness, which is probably what got some of these American cities onto the list in the first place.
But Americans shouldn't be surprised. China spends about 9 percent of its total economic output on infrastructure. Europe spends about 5 percent. Fifty years ago, by the way, the U.S. spent about 5 percent, but now we spend half as much at 2.4 percent.
Richard Florida is a professor at NYU and the University of Toronto, as well as the senior editor at "The Atlantic."
Richard, U.S. cities have a problem. But I just sort of made it look like it was a spending problem, that China spends more, Europe spends more. Is it a spending problem?
RICHARD FLORIDA, PROFESSOR, UNIVERSITY OF TORONTO: Well, you know, U.S. cities are the great strength of the -- of the American economy's comeback. When you look at all the studies that have been done, the McKenzie studies and other studies, our research group has done, Ken's colleagues at Glazier has done it, Harvard, cities are a key part of our productivity and innovation advantage. The diversity of our cities.
But clearly we have lagged at infrastructure spending. And according to some reports we need to spend about another $2 trillion just to get up to par, get that up from 2.5 to 5 percent. But one of the things that's so important with (INAUDIBLE), in his -- in critical book on systemic crises and how these crises play out, one of the things that we found in looking at his work in an urban context is the key to recovery is not just government spending. It's not just a Keynesian demand-side spending or stimulus, it's the creation of new urban infrastructure.
It powered the recovery from the great crises of the last 19th century by building those electric grids and sewer systems and cable cars and subways. It powered our recovery from the Great Depression by building that suburban interstate highway network. But now with cities being the key, density being the central part of our productivity and innovation gains, we've got to investigate in public transit, in high-speed rail, we have to re-set our economy by investing in infrastructure on our cities for a new round of growth.
VELSHI: What a great intro to Ken, who's back with us.
Ken, you're in this discussion because you have said all these things that Richard says. You say infrastructure is key to economic growth and that cities are key to the economy. Let me just give you some of the figures that Richard were just talking about. Large cities produce 83 percent of economic output in the United States. The 30 largest cities in the U.S. account for half of all GDP.
Now we're all in favor of good infrastructure until it comes time to pay for it. And you say that some money can come from the private sector, but we've had some high-profile examples of public/private partnerships that have gone wrong. How do city governments make sure that city residents get what they pay for?
ROGOFF: I don't think there's any simple answer to this. And by the way, one reason we might want a national infrastructure bank is not for the money but just to provide oversight and ombudsman so that you have somebody to go to when you have a project or regulator, an interlocutor perhaps. But yes, we should -- definitely should allow private money. There is an additional problem, and Richard probably knows a lot more about this, about so-called eminent domain, where you can't just clear things out.
In China, they -- they used to at least just knock on your door and say you're moving, we're building here a road here.
VELSHI: Right.
ROGOFF: You've got to move out of your apartment tomorrow. We can't do that. And so it makes it trickier in our older cities to just rebuild in the way that they did in China.
VELSHI: Well, it's actually an interesting analogy because I've spent time in China and India in this last year and whenever he talks about China, India, you can't move people out at all. There are lawsuits and there are reasons to do that.
ROGOFF: Absolutely.
VELSHI: So Democracies have a little more problem with these massive infrastructure builds.
Another issue that we want to talk about, Richard, is that you say the U.S. has focused too much on car infrastructure. And that made sense at a certain time. Americans are now shifting to public transit, taking $10.4 billion trips on public transit last year, 2012, is expected to exceed that. And part of the problem here is public transit investment and infrastructure. FLORIDA: Well, we're up on public transit trips as you said. We're up on light rail trips, another 2 percent. Up about 5 percent on public transit trips. And moreover, those people who are located near public transit and near subway systems and light rail, they've seen their housing prices go up the most. So that's what people are desiring.
One of the things I'd like to see us do is obviously we're not going to give up on the suburbs and the exurbs, we're not going to give up on the car but let's pay for using the darn car. Let's tax the rolls. Tolls are one way to do it as you said in your last segment. Let's make sure congested cities like New York, like London has, have congestion pricing so it's not a free good. Let's make people who use the car pay for it and let's tilt the balance of our infrastructure funding using some of those funds to rebuild our public transit infrastructure.
And as you know, I've traveled into New York all the time and I travel into Canada all the time. My wife Rona always reminds me the difference of traveling into Pearson Airport versus the New York, our greatest city in the world, airports.
VELSHI: Yes.
FLORIDA: We've got to put a little bit more money. We know that airports, according to a whole range of recent studies, are big economic generators. About on the -- about on same plane as our high- tech industry clusters. We need to rebuild our airports, we need to invest in our public transit as well as keeping our roads going. But let's pay for the roads.
VELSHI: Ken, do you think -- I see you nodding your head. Do you think that there are some things that rank higher than other things or should this be done as a -- as a portfolio, that there are a lot of things that need to be fixed? Richard made a reference to the $2 trillion number to get our infrastructure on a national level up to -- up to a reliable point.
ROGOFF: Well, I want to pick up first on this idea of pricing things and congestion pricing, which people just in the United States haven't accepted. So if it's a really busy road, you pay more to use that road. That used to be impossible. I mean, you couldn't put a tollbooth every two miles. Now it's nothing. It's easy to achieve that.
That would make a huge difference in making it more efficient. And I certainly agree strongly with Richard that we emphasize the car way too much. We are past that. The cities are at the core of our development. They're probably at the core of our future for a long time.
We need to improve public transport. You can't just stuff more and more cars into the cities, which we're trying to do. You can see that everywhere.
VELSHI: All right. Great conversation, guys. Thanks very much for joining me.
Ken Rogoff is professor at Harvard University, Richard Florida, professor at the University of Toronto and New York University.
Both of them have excellent books that you should be reading to get smarter on these topics.
All right, we are on the road, to use that analogy, to an economic renaissance. But to get there we actually need real roads and railways and water and energy systems.
Are you still not convinced after all this? Well, if you're still worried about who pays the bill as opposed to who will benefit, stick around because I'm going to show you the state with the blueprint for exactly how we are going to rebuild America. Next, on YOUR MONEY.
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VELSHI: U.S. infrastructure is crumbling but some fear that we can't afford to rebuild. To those people, I offer a solution. Public/private partnerships. It's exactly what it sounds like. Government and business working together. It works elsewhere in the world but it is scarcely used in the United States.
Now it's not a one-size-fits-all solution. There are many different ways for this kind of collaboration to work but in an ideal world it would look something like this. Say we wanted to build a new highway, for instance. You used some public money, some public capital, that's state government money, and you attract private capital either through an infrastructure bank which we've discussed here, or by issuing bonds for the project.
Now there's big money waiting in the private sector to get the steady long-term returns that infrastructure investments provide. So that's how you get the money. Then the government enlists a private company to construct and operate the highway. Once it's up and running they charge fees to use the highway. You'll know that as tolls.
Now the money generated at the toll booth creates profits for the operator of the highway and returns for the public governments and private investors. This kind of partnership works with any infrastructure project that generates user fees. So we are talking airports, you see a lot of those kinds of public/private partnership out there, water ways, rail ways, electric and gas grids. Broadband systems. The list is endless.
One state leading the way in these types of partnerships is Illinois where Governor Patrick Quinn has made historic investments in infrastructure. He joins us now.
Governor Quinn, good to see you. Thank you for being with us. Your Illinois plan now put $31 billion of capital to invest in infrastructure and public/private partnerships. You created an initiative to expand broadband network, statewide, as an example.
Tell our viewers what role government played and what role the private sector played to make this work.
GOV. PAT QUINN (D), ILLINOIS: Well, we're still going. Matter of fact, we added $12 billion more with our toll way system, Ali, and you mentioned about the public/private partnerships. We've very interested in that with respect to our roads and also for our broadband deployment. We have 4100 miles of broadband. We're laying fiber right now across Illinois.
We've done over 7,000 miles of roads, over 1,000 bridges. We like to build buildings as well, school buildings. And so anytime we can tract private interests, we're always interested in that. We understand that the government does have to put some money on the table. That's what we're doing, And you know, there are opportunities for private investors. We passed a law in Illinois for public/private partnerships and we want to build, for example, a new airport south of the metropolitan area of Chicago. And we really are looking for a public/private partnership there.
VELSHI: And airports are the one thing we do in America that people get when it comes to -- private/public partnerships. There's always criticism of this, there's criticism that the governments don't have money, there are criticisms that governments don't make the right decisions.
The city of Chicago famously struggled with its public/private partnership on its parking meters in 2008. The city leased its parking system to a group of private investigators. For those who don't know the story, they did a poor job of managing the transition. There were steep rate hikes and confusion and it actually resulted in the downgrade of the city's credit rating.
Now I know, Governor, that's not your watch, that's not one of your projects.
QUINN: No, that's right.
VELSHI: But what are the lessons of that type of thing for your own initiatives?
QUINN: You got to be very careful. You know, the city also did one with the skyway, a bridge across from Chicago to Indiana. And that was done in a better fashion. If it's not carefully done, it can really backfire. So that's why we take each step and do it in a very reasonable sound way. We're embarking on this. This is brand new for our state of Illinois.
We do see, for example, the federal gas tax not just being able to finance the kind of infrastructure and highway and bridge improvement and expansion that we've had over the last half century. The federal gas tax is declining. And with fuel economy in our vehicles and we want that, we're just not going to have the revenues from the gas tax to build the roads and repair the roads we need for the future.
So we do have to look for these new ways of financing important matters that create jobs today. A lot of construction jobs are created. At the same time they lay the foundation for economic growth for decades to come. So investing in things like roads, bridges, rail systems, we're doing high speed rail from Chicago to St. Louis.
We'd like to do high speed rail, super high speed rail from Chicago to Champaign on top St. Louis and Indianapolis. That's going to require private investment if we're going to get the job done.
VELSHI: You know, I was over in China. It was one of the most impressive things about the place, high-speed rail all over the place, cutting travel time.
Listen, speaking about China, of the cities with the best infrastructure in the world, more than half of them are in Europe. Take a look at where public/private partnerships are happening. There's no coincidence. It's part of the reason we're not seeing much of these partnerships here in the United States is that the legislative structure for them doesn't every where. It only exists in 31 states.
Governor, in your state, there are several large-scale roadway projects. You've been talking about that.
QUINN: Right.
VELSHI: The Illinois has been looking at for a long time getting involved in. When you do projects like this, there are always accusations that it's pork and its favors to people. How do you decide where roadways and bridges at high-speed rail need to go?
QUINN: Well, it's a matter with the legislature. Elected representatives and the people have their priorities. We have a five- year plan in Illinois for our highway system, and then also a plan for our toll way system. We tell people ahead of time what the priorities are and people work on the priorities. They work together with us in the executive branch.
You know, when we're building a bridge across the Mississippi River as we're doing right now near east St. Louis, that's something that everybody understands. There's a bridge in Minneapolis that fell in to the river. Now we don't want that to happen anywhere in our country and certainly not in our state. And so we want to work together with people on something as big as a bridge that might take six years to build. We also need to build a bridge near the Quad City Airport, Rock Island and Moline, we want to build a bridge across the Mississippi to Iowa there.
VELSHI: My friend -- my friend Christine Romans will be very happy to hear that you guys are building a bridge up to the Quad cities. She's from that part of the country.
Governor, great to see you.
QUINN: We're bridge builders.
VELSHI: Thank you, Governor Quinn.
All right, I've given you my take on infrastructure and the fiscal cliff. But why are you even listening to me? Millennials are the future. They've got some remarkable answers as to why you need to change the way you think about work and life.
I'll tell you about it on the other side. You're watching YOUR MONEY.
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VELSHI: If you want to survival manual for the new American economy, pay attention to the kids. I recently moderated a panel discussion on millennials, those born after 1981, and I discovered that those of us with gray or no hair can learn a good deal from generation Y as they're called.
Seismic economic shifts in an era of permanent freelancing, disruptive technology and nonstop globalization mean that the job security that older generations were accustomed to is now gone. According to the Department of Labor, the average worker now stays in his or her job for just 4.6 years. So you've got to be flexible to survive.
Second, you'll need more training. These kids are the most educated bunch in history and they will assume that they need more education in the future. This economy handed millennials lemons so they're acquiring skills and credentials to make career lemonade. And if you're lucky enough to have a job right now, focus on what you get out of the experience more than what you get from the job itself.
Many of your youngest colleagues don't expect to stick around long enough to climb the ladder that more seasoned workers had done in the past. To try to develop skills and relationships that you might need down the road in another workplace in another career. Finally, don't be an Eeyore. Millennials are optimistic. Those who just graduated are keenly aware that they paid a lot for an education that doesn't guarantee them a lucrative job but they have hope.
Is Eeyore still on the screen?
Among millennials who said they don't earn enough money now, 88 percent believed they would in the future. So embrace change, keep learning, be willing to start over. This is all career advice from millennials. Not bad from those who are so young.
For more on this, see my column in December's "Money" magazine and let me know what you think. You can find me at Facebook.com/alivelshi, tweet me, my handle is @alivelshi.
Thanks for joining the conversation this week on YOUR MONEY. We are here weekdays 3:30 p.m. Eastern -- every Saturday at 1:00 Eastern and Sunday at 3:00. Have a great weekend.
