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Truth and Consequences; Debt Ceiling Dysfunction; Mind the Gap; Battle of the Smartphones; Hard Turn for a Soft Drink
Aired January 19, 2013 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: Washington continues to toy with creating another economic crisis. But what really are the consequences?
Welcome to YOUR MONEY. I'm Ali Velshi. The U.S. government has paid its bills on time for 237 years and now Congress is threatening to blow it. Earlier this week, the ratings agency Fitch threatened to downgrade America's sovereign credit rating if Washington failed to resolve the issue in a timely manner. Another ratings agency S&P famously downgraded America's perfect credit rating back in August of 2011.
Fitch didn't do it at the time. But the last time we had one of these debt ceiling debacles that embarrassment was the first downgrade of U.S. credit in history.
If Congress doesn't act and we default for the first time ever, the consequences are likely to be severe for all of us. Federal interest costs would likely rise. Business and personal borrowing costs would probably follow. It would also make the struggle to manage our historic debt levels tougher.
And the worst thing that can happen when you're buckling under debt is for your interest rate to go up. If that happens, it could mean higher taxes for you as well as more cuts to programs and services from the government. And any hope for a controlled fix to our debt problems would be compromised.
Now failing to pay for we've already -- what we've already spent would be hazardous to the fragile economic recovery that is now gaining steam.
Now just this week we got a reading about construction of new homes. It jumped 12.1 percent in December compared to the month before. That's the highest in more than four years. First-time claims for unemployment benefits fell to a five-year low. And the stock market that you invested in your 401(k) and your IRA is hitting five-year highs.
Things are OK. Defaulting on our fiscal obligations would hit the economy harder than that cliff we just narrowly avoided and we're going to face again. A report put out by JPMorgan during the 2011 debt ceiling fight exploded the myth that's going around that a few missed payments would be no big deal. They said that any delay in bond payments by the Treasury would have ripple effects similar to the aftermath of the Lehman Brother collapse. I'm not sure that's true but it's serious. All of this is caused by the debt ceiling. The U.S. is the only other country other than Denmark that uses this kind of tool. That's why Federal Reserve chairman Ben Bernanke has joined a chorus of vocal critics questioning why the U.S. even needs a debt ceiling.
(BEGIN VIDEO CLIP)
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: I think it would be a good thing if we didn't have it. I don't think that's going to happen. And I think it's going to be around. But I do hope that Congress will allow the government to pay its bills.
(END VIDEO CLIP)
VELSHI: Ron Brownstein is CNN senior political analyst as well as the editorial director at the "National Journal."
Ron, good to see you. The public debt now stands at more than $16 trillion.
RON BROWNSTEIN, CNN SENIOR POLITICAL ANALYST: Hi, Ali.
VELSHI: In and of itself that not -- it may not be as serious a problem as some make it out to be, especially when it costs the government about 1.8 percent a year to borrow money right now, which is lower than inflation. The problem which you often point out is it is likely to get much worse and that no one has a real plan to change it. But do Republicans have a point when they say this is the only leverage they've got, the only chance they have to really assert a move toward deficit reduction?
BROWNSTEIN: You know, in my mind they actually missed the big -- the best chance they had, which was the expiration of the Bush tax cuts, which was really the best chance for both sides. You could have imagined if there was ever a point where a grand bargain was possible, it would have been I think the Republicans accepting rolling back more of that tax cut than we did in return for acquiring Democrats to deal with the very real long-term challenge of entitlements.
We did not take advantage of that. We took -- we had a minimalist deal that confirmed 82 percent of the Bush tax cuts, probably the worst possible outcome from-- and no doubt -- no spending cuts, probably the worst possible outcome from the long-term deficit perspective. And now I think that history, Ali, is that this is not a powerful mechanism. In the end this is kind of a doomsday device if you cannot use.
VELSHI: Right.
BROWNSTEIN: If you go back to the -- to the mid-'90s with Bill Clinton and the Republican Congress, if you look at 2011, I think in the end they will decide they cannot use this measure and they seem to be heading that way already this week in their House Republican retreat.
VELSHI: Ian Bremer is with us as well, so is Christine Romans.
Let's bring Ian in. He's the president of Eurasia Group, a very influential political consulting firm.
Ian, business leaders and government leaders around the world pay attention to what you've got to say so I was intrigued to see that you write -- you wrote that the continuing role of U.S. stability tops your list of upside in your global economic outlook. U.S. stability, you said, not instability, I thought it was a typo, either you've been living under a rock for the -- last several weeks or I'd like to try a dose of whatever medication you're on.
IAN BREMMER, PRESIDENT, EURASIA GROUP: No, you know, it's not as if I think Washington that is working well. In fact, you know, sort of Washington dysfunction was number four of the top risk that we put out in 2013. The question is what's the impact that that has on the United States compared to the impact that sort of thing would have on a China, or a Russia, or Brazil, you name it.
The fact is the U.S. is the world's largest economy, the U.S. dollar is a global reserve currency. Housing continues to pick up, unemployment is going down, American corporations are the world's largest and they're sitting on lots of cash, which, you know, sort of quixotically it's precisely that strength that allows Washington to continue to be so incredibly dysfunctional.
So, yes, I'm feeling pretty bad over what's going to come out of Capitol Hill over the next few months but it's not medication that leads me to believe that America is stable.
VELSHI: Interesting that even Washington may not be able to mess up what's going on.
Christine Romans is the host of "YOUR BOTTOM LINE."
Christine, we're talking about the consequences -- we've been talking through the show about the consequences of not having a budget.
CHRISTINE ROMANS, HOST, CNN'S YOUR BOTTOM LINE: Yes.
VELSHI: Not having a serious plan to deal with debt and deficits. But a number of prominent Democrats point out that this debt problem isn't that much of a problem. Money is basically free in America and Republicans should stop obsessing about it.
ROMANS: It's a new narrative and they're getting bolder with it. The debate really comes down, Ali, to the way liberals and conservatives see the world. Those on the left usually frankly have no problem with the government taking a larger role in the economy. They believe that spending and borrowing money is a good thing because it'll stimulates the economy and it will pay off in the long run.
And liberal economists like Paul Krugman here, they argue that much more debt is really money the government owes itself. The U.S. is borrowing from itself. And as long as the U.S. economy and tax base grow the Treasury can keep that debt under control. An economist, Robert Reich, also remember, President Clinton's former labor secretary, a frequent guest on this show, he says Washington needs to stop obsessing over debt. He says the government should spend more, not less, if we want a sustainable recovery.
And conservatives, by contrast, they believe in a smaller government. They think the government has little or no role or at least a much limited role in the economy. So naturally they see any spending beyond what the government takes in as a drag on growth and efficiency in the free market.
Ali, it's so interesting because it's narrative that debt's not a problem against this other narrative on the right --
VELSHI: That debt is the only problem.
ROMANS: -- that debt is the only problem.
VELSHI: Right.
ROMANS: They're both wrong. They're both wrong and neither is trying to figure out how to actually fix it.
VELSHI: Ron Brownstein, back to you, I think your narrative is one of the clearest. It's not that debt is not a problem. It's that it's these cuts to -- you know, these cuts to entitlements, these cuts -- the spending right now is not what the issue is. The issue is entitlements are going to grow to fast that we're going to have a government that doesn't do anything in the way of investment and infrastructure and only gives people money for purposes of consumption.
BROWNSTEIN: Right. I mean, you've got a short-term issue and a long- term issue. I mean, the short-term debate, as Christine lays out, is whether you need in effect more stimulus to try to get the economy moving faster by taking on more debt in the near term. But there's a very different question about the long term. You know, the number of seniors in the U.S. is projected to roughly double over the next 30 years. And that creates enormous financial pressure on Medicare, Medicaid, and Social Security.
We've already seen over the last generation a tremendous shift of resources really from the future to the past, from younger generations and investment to entitlements and kind of sustaining older generations. In 1969, one-third of the federal budget was characterized as payment to individuals and one-third was characterized as public investment.
Today only one-sixth is characterized as public investment and over 60 percent is characterized -- one is doubled, one is cut in half. In the long run that's really no way to run a country. And I think what Democrats eventually will have to acknowledge is that if you allow entitlements to grow in the trajectory they're on, as you say, you're going to have very little money to do anything else.
I will just quickly for Republicans, though, their real fight here is not around ideology, it's around demography. In a country where the number of seniors is doubling over the next 30 years it's not really plausible that the share of GDP consumed by government is not going to increase somewhat even if we do --
VELSHI: Right.
BROWNSTEIN: -- make necessary retrenchments in the entitlement stage.
VELSHI: Ian?
BREMMER: Well, you've got to keep in mind that Congress' approval ratings right now are 14 percent and only going down. But those individual congressmen, when you actually talk to their constituents, are liked quite a bit. They're in gerrymandered districts, they're very homogeneous, as your guest just suggested, and they're bring back the bacon for folks that aren't prepared to pay pain right now.
So, you know, you've got -- you don't have an American association for young people, an AAYP, that's saying how dare you mortgage my future. You have the AARP that's actually they vote, they're powerful, they have a lot of money. As long as there's a relative level of comfort in the short term and international folks are willing to continue to invest and keep our interest rates nice and low by buying treasuries and not --
VELSHI: Yes.
BREMMER: They don't want to go to Europe, they don't want to go to Japan.
ROMANS: Yes.
BREMMER: We're going to be able to keep doing these policies. So for the next year it's going to be a lot of congressional dysfunction. Usually the first year of a second term incumbent president is when you get all the legislation through. We're not going to see it in 2013.
BROWNSTEIN: Right.
VELSHI: Christine?
ROMANS: You know, I'll tell you, the no association for young people but you know you have this new voice from progressives who were they're -- we're not mortgaging the future for our young people. People should -- we shouldn't be talking about that. The near term thing is got to be getting -- don't talk about debt, talk about growth. More government intervention, more stimulus in the market. So you still have this totally, totally polarized conversation happening in Washington.
VELSHI: Ron and Ian, great to see you guys. Thanks very much for that.
Christine, stay right where you are. I need you for another discussion on infrastructure which is also very interesting. All right. Have you ever looked at your bill and said, you know what, I'm kind of short on cash, I'm just not going to pay them all this month? Well, that's what some of your lawmakers think they should do with the government's bills.
After the break, I'll ask a member of the Senate Finance Committee if he thinks that's a good idea. And I'll give you a very simple explanation of the debt ceiling fight and tell you why it is in fact such a big deal.
(COMMERCIAL BREAK)
VELSHI: The debt ceiling is the most immediate threat to our economy. And it really shouldn't be. Now I hate to have to have to go through this again but there are still those who seem to not fully understand and that's understandable. So if you already get it, stay with me and maybe use my explanations for others who don't get it.
But here's how it works. Congress approves spending by creating bills and passing them into law, but instead of paying for them immediately, they give the Treasury the power to borrow money to pay the bills. It's an unusual system that isn't used in a lot of other places. In fact it's virtually used nowhere else in the world.
Now last year the U.S. government spent $3.8 trillion. Two-thirds of that roughly came from revenue. That's mostly taxes, $2.5 trillion. The rest was a shortfall. We had to borrow it. $1.3 trillion. That is the deficit. Now you take the sum total of all those annual deficits and the interest on them and that creates the national debt which right now is about $16.4 trillion and change.
Now the U.S. Treasury is empowered to borrow money to make up the shortfall between revenue and expenses, the deficit. But only up to a certain limit. That's the debt ceiling. Treasury does not make decisions about how the money is spent. They are simply empowered in this case to write the checks to pay the bills that are already incurred by your democratically elected Congress.
Now that we've hit the debt limit, we've actually exceeded it a little bit, the Treasury has two options left. They can fiddle around with about $200 billion the way you would if you're a little short on your monthly bills, paying some now, refinancing a little bit. That would get us through maybe mid-February to early March.
Once that stops working the Treasury needs to rely on the cash that it has on hand and the revenue that comes in each day from taxes. Problem is there isn't always that much cash on hand or enough money coming in on most days to cover the expenses. If there were, we wouldn't have a deficit.
Let me give you an example. I'm going to take one day as an example. February 15th. I choose that day because that might be the day, might be a little early but it might be the day that we stop being able to mess things around.
OK. The federal government on that day will take in an estimated $9 billion in revenues. Again, that is mostly taxes. On the same day, $52 billion will need to be paid out. So we've got a shortfall, as you can see, of $43 billion. So the Treasury needs to prioritize payments on that day, February 15th.
Now it can pay some bills on time, it can put off others. We're not entirely sure that prioritizing payments is legal, but that is probably what they'll have to do. Now alternatively the Treasury could wait until it has enough revenue on hand to cover one full day's payments and make all the payments at once. It would mean all the bills would be paid late. And we know how that starts to look, right? We -- we can imagine that that's not really a great way to do business.
Johnny Isakson is a Republican senator from Georgia, he's a member of the Senate Finance Committee.
Senator, thank you very much for being with us. I wanted to talk to you for quite sometime. You have an extensive, extensive business background, something I wish were mandatory, actually, in Congress. And you can -- you can agree that deciding whether to pay some bills but not others while you wait to scrape up enough cash to make payments isn't a sustainable way of doing business. Would you agree with that?
SEN. JOHNNY ISAKSON (R), GEORGIA: No, no question about it, Ali. It's all wrong. You're exactly right.
VELSHI: So what is our -- what -- given the principles that you stand for and that many in the Republican Party agree with and, in fact, some in the Democratic Party, that we do have to deal with our spending, how do you square that with this very specific debt ceiling problem that we have, that we have financial obligations that we've already made that need to be paid and we have a second debate going on about how we should spend our money?
ISAKSON: Well, basically, Ali, we're now at 100 percent leverage as a country, about $16.5 trillion in debt and about $16.5 trillion in GDP. If we continue to borrow and continue to spend beyond our limit, we're going to compound that debt and that deficit and be on an unsustainable course for this country to survive in the way you and I have known it.
What I liken this to, we're at a point kind of like Robert Frost poem, two verse -- "Two roads diverged in a yellow wood"?
VELSHI: Yes.
ISAKSON: We're going to take the one less travelled by and make all the difference. We're going to have to put our talking points -- and leave them outside the (INAUDIBLE) room.
VELSHI: Yes.
ISAKSON: Sit down at the table, begin to prioritize our spending, begin to act like a business person would have to act, and like every American family has to act and send the signal to the rest of the world we're getting our house in order.
VELSHI: Right.
ISAKSON: We do that and we'll return to greatness. We don't do that, we're going to be a debtor state.
VELSHI: Right. So you've really identified two very distinct issues that we have to deal with. You've recently said of the upcoming debt ceiling showdown the president wants an automatic credit card and he's not going to get one from the Congress.
Now I like to point out, I understand why that analogy has been made and in the past I have made it myself, but it kind of -- I sort of decided that I don't like it anymore because the debt limit is different from a credit card in that with a credit card you charge items when you purchase them with the intent -- the agreement to pay that. The debt limit is not actually a license to spend, it's a license to pay bills.
It's a bit of an anachronism. Only Denmark has it elsewhere in the world. And it forces a discussion, I agree, on spending cut but it's actually not what the debt limit is for.
ISAKSON: No, your explanations have been right on target. Let me -- let me tell you what I would wish the president would do. I hope the president is successful because as a country if he's successful we'll be successful. But he's got to begin to negotiate with the House and the Senate to find a path forward on spending less and borrowing less or we're going to be on an unsustainable course.
If it were me, if I were the president, I'd take the Simpson-Bowles proposal that he got two years ago and never brought forward. I would push it forward and say, look, let's deal with this in a macro sense. Let's put everything on the table. Let's put revenues on the table. Let's put tax expenditures on the table. Let's put spending on the table. And you've got to put entitlements, Medicare and Medicaid and Social Security on the table.
Then you've got the whole ball of wax from which the debt is caused and you have route to the solutions through reform of taxes, reform of the entitlements and reform of your spending --
(CROSSTALK)
VELSHI: But you know that that is at minimum a two- to three-year process. I wish we would engage in it starting this minute. But that's a complicated process. Even on this show I often show my viewers the tax code, 73,000 pages. Going to take some work to get that done and a lot of lobby groups and a lot of interest groups.
I want my viewers to know that you are -- you're a centrist on this. You're a very reasonable guy. You want to get business done. You want to get a budget. Why -- can we not separate these things? I know there are a lot of people in your party who say if you take the debt ceiling off the table and agree to increase it, you lose your leverage, Republicans lose their leverage to have the conversation that you'd like to have.
So how do we deal with that? Right now politics is standing in the way of good economics.
ISAKSON: Well, common sense needs to lead the way to a solution to the problem. And we have two points we can leverage. One, you're right, is the debt ceiling. The other is the CR that comes due on March 27th. The CR might be the better place to use that leverage. But one place or another we need to decide that both sides need to come together at the table of common sense and begin to put America on a sustainable course of economics.
VELSHI: What does a guy like you say then to the tougher parts of the Republican Party? Not -- not as many of them are in the Senate as in the House. But, you know, you talk about Simpson-Bowles. I agree with you. And by the way, most Americans would find Simpson-Bowles a little tough. There are some very, very difficult things in there that most Republicans and Democrats wouldn't even put forward.
But, you know, the vice presidential candidate, Paul Ryan, was one of those guys who was on that committee and didn't vote for it. How do we get hard line Republicans to say these are tough decisions, they're not going to be palatable, they're way further than most Republicans would even go in terms of debt spending cutting?
ISAKSON: Ali --
VELSHI: Spending cuts.
ISAKSON: Ali, we have a tough problem. Whatever solutions we come up with are going to be tough. But I would prefer tough solutions to a tough situation that perpetuates itself. We've got to face the music. We're 100 percent leveraged. It's beginning to compound our debt. Our deficits are growing. We're not going to be able to meet the dreams of the American people. We're in a protracted period of economic malaise.
The only thing that's going to change that is a country that has confidence in a Congress that it can manage its pocketbook like they manage theirs.
VELSHI: Yes.
ISAKSON: Business has confidence taxes are going to be reasonable and predictable, regulation is going to be fair and equitable, so they deploy the -- the cash that they've got in the bank right now. It's a big problem and there's no easy solution.
VELSHI: We'll be -- we'll keep pressuring Washington to do the right thing. And I hope they'll do the same within your caucus and say these are going to be tough decision, we can't bring the country to its knees because of our inability to compromise.
Senator, thanks for being with me. It's great to talk to you.
ISAKSON: Thank you, Ali. VELSHI: Who is this mysterious bag man and why might he be the only person passing a federal budget?
(COMMERCIAL BREAK)
VELSHI: All right. This last week President Obama informed the House Budget Committee chairman Paul Ryan that the White House would be late in presenting its budget proposal to Congress. The reason? Well, this battle over the fiscal cliff at the end of the year put his team behind schedule on the budget and it's been almost four years now, by the way, without a federal budget. Looks like we may be headed for a fifth.
Now there have been some political stuns to make it seem like budgets were going before Congress and failing in the past few years. Those budgets were put forward for an up-or-down vote without amendments. That's not really how budgets get passed. It never has been. It probably never will be.
They're supposed to be disagreement and back and forth between the sides. We've just taken that all to far. We've become too uncompromising. Both sides have essentially given up on trying to do it the right way.
Now they could reach some kind of middle ground agreeing on a budget, and if they did that, it would look like this. By law the president is required to submit a budget proposal to Congress before the first Monday in February. We're not going to get there. Once this proposal gets to Congress, budget committees in the House and the Senate work with, you know, public officials and other congressional committees to decide on a budget resolution.
That is supposed to be done by April 15th. And that's it. The budget resolution serves as a guide for all spending and revenue decisions for the year, at least that's how it's supposed to work, but none of this has happened since 2009. And that means we're borrowing more and more to cover our deficit.
Now in the last 10 years alone we've raised the debt ceiling every year with the exception of one. America's concerns about the federal budget deficit and government dysfunction rose high enough in January to actually knock unemployment out of the top spot on Gallup's list of most important problems for the first time since 2009.
I want to bring in a man who has played a leading role in actually passing budgets through all parts of the budget process. He was the chairman of the House Budget Committee. Jim Nussle guided six federal budgets through Congress. He served as the director of the Office of Management and Budget under President George W. Bush. He's a Republican. His nickname is Knuckles, which I think is pretty cool.
But back to the serious stuff, Congressman, from 2001 to 2007 you were the House budget chief. Today that job belongs to Paul Ryan. Why were we able to get budgets done when you ran things and we can't do that anymore? And try not to give me a particularly political or partisan answer. And I know you can do that. JIM NUSSLE, FORMER DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET: No, it's all personal ability, of course, right?
VELSHI: Yes.
(LAUGHTER)
NUSSLE: No. Look. I think these are good people trapped in a very difficult if not terrible situation with a process that they're not even using anymore. They're not even utilizing. You went through a very good outline of how the process is supposed to work. The challenge right now in my mind is that no one is using that process starring with, as you said the president is going to be late with his budget submission, and then Congress will not even most likely consider the budget.
So I think you put your finger on it. The process isn't working. These are good people, they're smart people. It's not that they're, you know, anti -- you know, budgets.
VELSHI: And they've -- but we've had -- we've had disagreements between parties for all of history.
NUSSLE: Sure.
VELSHI: Why has it been we've been able to get budgets in the past and now our ideological differences stop us from even getting a deal. Isn't that what the process is supposed to be there for?
NUSSLE: Well, and that's what it is. The process isn't being used. It'd be like if -- you know, I mean, right now people who are supposed to be sitting around a table in a committee room having hearings, discussing the budgets all having skin in the game, and by the end of the decision after amendments, after disagreements, after debate, they vote, and then the process moves forward.
Right now, as you know, there's a couple of people that go into a backroom and after a few months the smoke clears, they come out with a deal, they give you five seconds to look at it.
VELSHI: Yes.
NUSSLE: And then they cram it down your throat and say vote. That process is not working.
VELSHI: That's flawed.
NUSSLE: It's terrible.
VELSHI: Let's just clear up something. And a lot of people who say, we haven't got a budget and this one tried to put a budget forward, it got no votes. The truth is while we haven't got a new budget the way the system has worked is that -- we're just working on an old budget. So the disadvantage here is we haven't updated it, we haven't said this agency should get less money and this agency should get more. We're basically just continuing on with old budgets. So it's not like it's all willy-nilly and anybody can spend anything they want right now.
NUSSLE: Right. That's correct. I mean that technically is true. The reason why I think people get hung up on it, first, is for politics, as you say. But I think the second part is that we're in a -- we're in a more unique situation today than we were four years ago. So to be operating under the plan that was put in place four years ago really doesn't make a lot of sense because there's so many things that have changed.
VELSHI: Right.
NUSSLE: What is the real consequence of not having a budget that is current? I'm not asking you what the consequences of not having a budget because I think you and I agree that's misleading terminology. But of not having a budget that reflects 2013. What's the consequence?
NUSSLE: There are three things. Number one, it doesn't help control the congressional process, because that's the -- it's the first -- it's kind of the fences that outline the entire process for the year is the budget, number one. Number two, it provides unbelievable amount of uncertainty to the rest of the government and how they determine spending. And there's a lot of waste as a result of people just, you know, hurrying it up and use it or lose it kinds of mentalities.
VELSHI: Right.
NUSSLE: So that's the second. And then the third is what it does in the marketplace. I mean, people, whether it's the tax code or where it's fiscal spending, can't make decisions, and that has a challenge, of course, to the marketplace that helps -- that is driven at least in part by fiscal spending.
VELSHI: Yes, I don't really love comparisons to household, whether it's, you know, debt limits or credit card limits. But in this case this is easy to understand. I mean, you're going to operate your household differently than you did four years ago because your income and your expenses have changed. And in the government's case we're still using the same fences that we were using four years ago to use your expression.
NUSSLE: Right. Right. That's exactly right. I mean, it would be -- and the situation right now becomes even more complicated because if your -- if new members of Congress for now, two different congresses have not exercised that muscle memory of understanding how the process works.
VELSHI: Yes.
NUSSLE: They're not going to be able to be very effective when they actually need to exercise that process.
VELSHI: Right. Yes, it's an important process.
NUSSLE: It really is.
VELSHI: Jim Nussle, good to see you. Thank you very much for being with us.
NUSSLE: Good to see you, too.
VELSHI: I hope you come back because we're going to discuss this a lot over the coming weeks and it helps my viewers to understand it from somebody who's as deep in the process as you've been.
Former director of the Office of Management and Budget, former U.S. representative, and head of the Budget Committee.
All right. Listen. If you could get a three-to-one return on your investments, would you take it? Of course you would. So what is holding the U.S. back from investing in our roads, bridges and ports? I'll tell you next on YOUR MONEY.
(COMMERCIAL BREAK)
VELSHI: Three-to-one. That is the return the U.S. could get on investing in its roads, waterways, and electrical grid. That's according to a new report from the American Society of Civil Engineers.
Now you've heard me say that investment in infrastructure is one of the best things we can do to boost the U.S. economy. Over the short term, investment in infrastructure creates construction jobs. Over the long term, though, better roads, railways and ports. They allow U.S. businesses to operate more efficiently and they attract business to the United States.
There is no denying that America's infrastructure is in a sorry state. The American Society of Civil Engineers gives it a grade of D. Now the U.S. will invest in infrastructure, it just won't invest enough.
Here's what the U.S. needs. $2.75 trillion in investment in infrastructure to bring it to a grade of good repair. But the American Society of Civil Engineers expects the U.S. to invest $1.66 trillion, which means 40 percent of infrastructure needs will go unfilled. That means longer commutes, higher prices, more blackouts.
What is that extra $1.9 trillion that we are not going to spend buy you? Well, according to the ASCE it avoids $611 billion in costs to households, $1.2 trillion in costs for businesses. U.S. economic output would be increased by $3.1 trillion. It will save 3.5 million jobs. Every household will have an additional $3100 in disposable income each year.
Christine Romans is host of "YOUR BOTTOM LINE." Kate Ascher is the Milstein Professor of Urban Development at Columbia University. She's also a principal at Happold Consulting.
Kate, welcome to the show. Thank you for being with us. The U.S. spends around 2.4 percent of its economic output on infrastructure compared to 5 percent in Europe, 9 percent in China. You say the problem isn't money, it's somewhere else.
KATE ASCHER, ASSOCIATE PROFESSOR, COLUMBIA UNIVERSITY: I think a lot of the problem is political. It's all about the federal structure and the ability of the states to stop investment and the difficulty that local agencies and entities have putting their hands on money that in other countries they'd be able to spend.
VELSHI: Is the issue that -- it mean it sounds so obvious to me as a business guy that everybody -- various parties could put a certain amount of money in and we'd get this overall benefit. But there really is this just general sense that governments shouldn't spend money on these things, that the private sector will deal with it.
Whose responsibility is this to build this infrastructure?
ASCHER: Well, you know, in every country in the world it's the government's responsibility. But other countries are a little bit smarter and actually embrace the private sector and allow them to get on with it. But we found it hard to really embrace any kind of privatization. We kind of want the private sector go-to get on with it.
VELSHI: Yes.
ASCHER: But we can't actually delegate government responsibility to them because our politicians won't let us. When we try to privatize turnpikes and build bridges privately there's actual revolts at, you know, state legislatures.
VELSHI: Right.
ASCHER: So we just simply can't get out of our own way.
VELSHI: No kidding.
All right, Christine is here.
Christine, I want to play devil's advocate for a moment. Does this report, which gives the U.S. a solid D across the board.
ROMANS: Yes.
VELSHI: In fact, some -- I think some of our best grades is have a C- plus in waste management or something like that.
ROMANS: Right.
VELSHI: Does it overstate how serious the issue is?
ROMANS: Well, look, it is a serious issue, but a D grade, for example, a few years ago an appropriations staffer told me, look, it's the civil -- it's the American Society of Civil Engieers. They want a lot of this work. And they count every last berm and bridge that --
VELSHI: In other words, they might be a bit of an interested party.
ROMANS: You know --
VELSHI: They spend $3 trillion on infrastructure.
ROMANS: Yes, and the view at least in Washington, the view at least in Washington is, like, look, this is, you know, maybe rallying for union -- I mean, they don't want to be seen as wanting to go after too much infrastructure spending with government money. They want -- the other -- the other interesting thing to me about this, too, is, you know, other countries -- you mentioned those other countries. In other countries, they're starting from scratch. We have roads, we have bridges, we have cell towers, we have airports. We have all these things already.
So Washington is less of an immediacy to them. In a way, they can almost gloss it over.
VELSHI: Right. Well, the electrical grid is a perfect example.
ROMANS: Right.
VELSHI: We have one. You'd expect --
ROMANS: Right.
VELSHI: -- lights, they'll go on. Once in a while that doesn't happen. You have an extended blackout and then we're all about why haven't we fixed our infrastructure.
ROMANS: Right. Absolutely. Or you have a bridge that falls in --
VELSHI: Right.
ROMANS: In Minneapolis in 2007.
VELSHI: Right.
ROMANS: And people say we've got to look at all of our bridges.
VELSHI: Right.
ROMANS: And sort of like the emergency about that goes away after a while.
VELSHI: Right.
ROMANS: So that's one of the things here. And when you talk to people in Washington they say, we don't really need to spend all of those trillions, we just need to spend a little bit of it.
VELSHI: Right.
ROMANS: Yes, we know we've got a D but, you know, come on, we're not going the fix everything single thing that's wrong in this country.
VELSHI: Right. A brand-new country that's got low labor rates can probably get an A more affordably than the U.S. can get an A.
Kate, let me ask you this. I want -- I want you to listen to something Fareed Zakaria, host of "FAREED ZAKARIA: GPS" told me last week on this program.
(BEGIN VIDEO CLIP)
FAREED ZAKARIA, HOST, FAREED ZAKARIA GPS: Places like India, the best they have going for them, beyond anything else, is they're a very poor country. You know, you're just getting basic increases in standard of living. India's per capita GDP is $1,500. Our per capital GDP is about $50,000. When you're at our level, when your workers have the kind of wages our workers have, which we want them to have, you've got to get very smart.
(END VIDEO CLIP)
VELSHI: This is an interesting conversation, Kate, because I was saying, you know, Fareed travels all over the world. There are all sorts of countries that are building infrastructure that have governments in the way, that are not particularly functional. Why is it a bigger problem in the U.S.? And his point is, when you're paying people $50,000 you actually need everything to work, including all your bridge, all your broadband infrastructure, all your transport infrastructure, all your electrical infrastructure.
Is there a really good argument that this sort of additional targeted investment in infrastructure will do better for business in America? Will it attract business? Will it increase wages?
ASCHER: I think that -- I think it's sector driven and I think in some sectors like the electricity sector, like the road and rail sector, the lack of investment really does hamper competitiveness of American companies. I think in other sectors that people talk about -- aviation, ports, water -- I think it's less of an issue because our infrastructure is not as poor as that report would make it out to be.
VELSHI: Christine, another point that Fareed makes and others make is that while we're all very, very concerned about levels of debt and deficit in this country, the fact is if you were to choose to borrow money, historically there may never have been a better time than right now because it costs the U.S. government about 1.8 percent to borrow money for 10 years.
ROMANS: Yes. I mean, the curse of bottom market, as the world is worried about America and its ability to pay its debts, money keeps flooding into U.S. Treasuries driving down our interest rates making it cheaper for the American government to -- to borrow more money. So many say this is -- it has never been a more attractive time financially for the government to double down here and to find some important projects that are going to make this more competitive and help grow jobs and grow the economy at a cost of only 1.8 percent interest.
And remember, we own most of our own debt. America owns most of our debt, so you'll hear conservatives talk about we can't go right to the Chinese to borrow money so that we can spruce up our own infrastructure. We -- we borrow -- most of our -- most of our debt is owned by us. You know, we spent $850 billion in stimulus, and we did do things like railroad bridges and a lot of these things that were on the books. A lot of rural projects.
(CROSSTALK)
VELSHI: But most of that was still tax cuts.
ROMANS: And most of that was still tax cuts.
VELSHI: Yes.
ROMANS: But we did do some of these things. We just sort of started it and then we stopped. You know?
VELSHI: Yes. If we don't -- yes. It's more targeted.
ROMANS: You can't call it stimulus because that will never sell in Washington.
VELSHI: That will never pass.
Kate, good to see you. Thanks very much.
Kate Ascher is the Milstein Professor of Urban Development at Columbia University, principal at Happold Consulting.
Christine Romans is my co-host and friend and the host of "YOUR BOTTOM LINE" on Saturday mornings here at CNN.
OK. Remember this? People keep telling me, what is that?
(BEGIN VIDEO CLIP)
MICHAEL DOUGLAS, ACTOR, "WALL STREET": I don't care or how you get it.
(END VIDEO CLIP)
VELSHI: Gordon Gecko in the movie "Wall Street" was ahead of his time with this clunky, heavy, brick phone. But flash forward 25 years and the dumbbell in my hand has been replaced by the smartphone. I will tell you, though, why Apple may be losing its hold on the market. Coming up next.
(COMMERCIAL BREAK)
VELSHI: Yes, OK, mom, come on, I'm doing a show. I'll call you back. All right?
Listen, remember these things?
(BEGIN VIDEO CLIP)
DOUGLAS: I don't care where or how you get it. (END VIDEO CLIP)
VELSHI: Gordon Gekko, he made these phones famous in "Wall Street." I happen to like the sequel, by the way, "Wall Street 2."
(BEGIN VIDEO CLIP)
VELSHI: This is a financial crisis and anyone who doesn't admit that is just kidding themselves.
(END VIDEO CLIP)
VELSHI: But I have to tell you, let's talk about phones again. If you're like me, you are addicted to smartphones like the iPhone. This one for instance. Now Apple's stock -- let's just talk about this even if you don't have one. Apple's stock is off its high. Take a look at the stock from 2007 when the iPhone was introduced all the way up to -- up to there. But, you know, this year it came off its $700 high. On December 6th it was trading at $545. And people were wondering, is something going wrong with this stock or should I buy it?
I asked an Apple analyst about it. Here's what she told me back then.
(BEGIN VIDEO CLIP)
KATIE STOCKTON, MANAGING DIRECTOR, MKM PARTNERS: The initial resistance, as we call it, is around $600. That's where Apple has been selling pressure pretty recently. I think that's a conservative upside target for the intermediate term, it's about 10 percent above current levels. And beyond that, if we see a breakout about that level, I think we could look at $700 again, which is where we peaked in September.
(END VIDEO CLIP)
VELSHI: So let me just explain this to you if you're an investor. At $535 she was suggesting it's probably a safe buy until $600, and if it somehow that stock gets above $600, it might soar up to $700. Unfortunately since then it's gone the other way, getting down to about 480 bucks a share.
I'm going to talk to you about that in a second. This 480 bucks or 500 bucks a screaming buy for Apple or is there something wrong with the company?
Remember this? Remember back in 2007 this guy made this thing huge.
(BEGIN VIDEO CLIP)
STEVE JOBS, FORMER CEO, APPLE: This is one device.
(CHEERS AND APPLAUSE)
And we are calling it iPhone.
(END VIDEO CLIP)
VELSHI: OK. Everybody knows who that is. Steve Jobs. Do you know who these two guys are? I don't know how this guy got in the picture but these two guys. Do you know who they are? This is Jim Balsillie and Mike Lazaridis. If you're Canadian like me, you'd know. These are the guys who created the BlackBerry. This one, which a lot of people still use. The problem with these guys is when the makers of the BlackBerry first saw the iPhone they looked at it and said, not really, it's probably a flash in the pan.
And look at what happened. Take a look at BlackBerry versus iPhone sales. BlackBerry sales are the ones in the red line. IPhone sales in the yellow line. Go back to 2007 when this all started, when the iPhone came out. These sales were going very, very similarly. Then in 2010, the reason the iPhone jumped the way it was is a lot of major companies who until then had only let their staff use BlackBerrys bowed to the pressure to use the iPhone and said let's get iPhones in there.
IPhones took off. Now they've come down, as well, a little bit recently, but see what happened to BlackBerry? Those sales just dropped off.
But BlackBerry's maker, Research in Motion, could be ready for a comeback. Why? Well, the BlackBerry 10. It's coming out on January 31st. Won't be available to everybody on January 1st but it's coming out on January 31st. And a lot of people say this is the thing. This is the phone. Maybe they live to fight another day. Now some of you have been BlackBerrys, some of you have BlackBerry stock. This stock has taken a beating.
OK, bottom line. That stock could go up based on some analysts, Apple, a lot of faith in that company. Still, they need to make sure they're not complacent about this new device that BlackBerry is going to come out with. BlackBerry lives to fight another day. And, remember, Android still enjoys more market share gains than either of these two. So whether you're a phone owner or an investor in these companies, this is an interesting space.
All right. Another story, Coca-Cola reaps billions off of sales of sugary drinks worldwide. Now it says customers should be more healthy and drink fewer of them. Is that a PR stunt or is it a cunning business move?
I'll talk to the boss of Coke next.
(COMMERCIAL BREAK)
VELSHI: If you look under ubiquity, this is the definition of it. Coca-Cola, the iconic Coke bottle sold in 200 countries around the globe along with 3500 other Coca-Cola products and a good deal of them are full of sugar. Now across America, you see people drink Coke and other soft drinks in those big gulp style cups that took -- look big enough to have your six-pack into.
Soft drinks have come under fire from health advocates and certain politicians including New York's mayor, Michael Bloomberg, over growing obesity in this country. Now even Coca-Cola says it's concerned, acknowledging a link between sugary drinks and weight problems.
(BEGIN VIDEO CLIP)
UNIDENTIFIED FEMALE: For over 125 years, we've been bringing people together. Today we'd like people to come together on something that concerns all of us. Obesity. The long-term health of our families and the country is at stake and as the nation's leading beverage company, we can play an important role.
(END VIDEO CLIP)
VELSHI: Now that's an ad that Coca-Cola start running this past week. It's not often that you hear a company suggest that customers possibly dial back on how much of their product one consumes. And Coca-Cola isn't just any company. It is the single largest beverage company in the world by a long shot.
Joining me now to discuss this and more is Coca-Cola CEO Muhtar Kent.
Muhtar, good to see you. Thank you very much for joining us. This new --
MUHTAR KENT, CHAIRMAN AND CEO, THE COCA-COLA COMPANY: Good to be here, Ali.
VELSHI: This new ad announces new smaller sized drinks, number of calories in each -- on each drink marked clearly to help people manage the sugar they consume. Well, Coke has been around for a long time. Twenty or 32 ounces of Coke, as one of my producers points out, doesn't just find its way into someone's mouth.
I'm wondering if you guys at Coke are you getting soft to this idea that people don't need to take personal responsibility for what they consume and that governments and companies need to tell them?
KENT: I think, Ali, this is the time for Coca-Cola to actually not -- it's not taking a hard turn. It's actually amplifying what it has been doing for many, many years. We've always been part of active healthy lifestyles. And we think this whole debate about obesity is a societal issue, it's complicated. It's a factual societal issue and we find that it is correct and right and the right time for us to raise awareness, use our resources to raise awareness about this societal issue, and that we need to ensure that people, consumers have the right information.
That's why we're putting the information of calories on the front of the pack. That's why we're giving consumers more choice. That is why 25 percent, 25 percent of our entire global portfolio today is calorie-free or low calorie.
VELSHI: Right.
KENT: And that is why 40 plus percent of trademarked Coca-Cola sold in the United States through innovation, through smaller packs, through portion controls, through innovative beverages is now calorie- free.
VELSHI: You and your competitors, all, because I've seen the signs on trucks that deliver beverages to stores in New York saying, get -- basically get the politicians out of your business. You don't like the idea that Bloomberg and others are saying, it's sugary drinks that make kids fat.
KENT: I have a tremendous amount of respect for Mayor Bloomberg as I do for all the other mayors, all other politicians in the United States. All across the world. I think they have the right interests of their people when they talk about this issue. But I do think that this is not about one product, this is not about one package. This is a broader coalition that needs to come together and work together to create better informed choices, to create more innovation and also to make people more motivated to make those right choices.
VELSHI: All right. Let me ask you this, though. Next week not only will you be at the World Economic Forum in Davos, Switzerland. You are co-chairing. And I've talked to my viewers, most of whom won't be attending, about why this gathering which looks like the top 1 percent of the top 1 percent is important to them. What is so important about what goes on in Davos?
KENT: Because it does bring together that golden -- the important golden triangle of business and government and civil society together. And together, that group has to re-imagine growth, together that group has to create the right platforms to engage youth, together that group has to create the right platforms to empower, expand sustainability innovations around the world that will employ more people.
Together that group has to engage and empower more women entrepreneurs around the world. We have to all come together and properly, effectively, in a more dynamic manner, a collaborative manner re- imagine growth because if we don't, there's a real danger that the social fabric is going to break down around the world with youth unemployment under 27, unemployment around the world at 40, 50 percent globally.
VELSHI: Muhtar, I wish you the best of luck there. Always a pleasure to talk to you.
Muhtar Kent, one of the world's finest CEO, is the chairman and CEO of the Coca-Cola Company. You just heard him talk about why he's going to Davos.
Coming up next, I'll tell you why I'm going, and trust me, it's not because of the weather. We are talking cold.
(COMMERCIAL BREAK)
VELSHI: All right. I follow the money each week on this show. I look out for you. I also hold your lawmakers accountable for what they are doing or not doing to the economy. I am the network's chief business correspondent in addition to anchoring the show. It's a title I earned covering businesses, economies, stock markets around the world. For those of you who watch CNN International, you can see me do that every weekday morning on a show that I co-host called "WORLD BUSINESS TODAY."
So next week, I'm going to follow the money all the way to Switzerland. I'll be talking to some of the smartest, most influential and powerful minds in business who have an impact on your prosperity.
Now let me show you where I'm going. Davos is in the eastern part of Switzerland, or nestled in the Swiss Alps. At nearly a mile above sea level, it is the highest city in Europe. A little more than 10,000 people live there, but every year some of the biggest names in business come in for the World Economic Forum. It turns out to be the coldest place in Europe and maybe also the best place to take the temperature of the global economy.
Now I'll be thousands of miles away but I am not going to forget about my job. My focus will be on what role the U.S. plays in the global economy and what 2013 is going to look like to the global business elite because their decisions will have an impact on investment and job creation right here in the United States.
If you've got questions you want me to ask, you're unclear about how the U.S. fits into the -- the global economy right now, hit me up before I go or while I'm there. And tune in here, Saturdays at 1:00 p.m. Eastern, Sundays at 3:00.
Thanks for joining the conversation here at YOUR MONEY, and have a great weekend.
