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March Madness; Road to Forced Spending Cuts; Sequester: Stupid Name, Stupid Cuts; Investing in Crazy; Jumping in a Bull Market; Cuts and Long Lines
Aired March 03, 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's forced spending cuts now have the force of law behind them.
I'm Ali Velshi. Welcome to a special YOUR MONEY.
There's broad consensus that over the long term the U.S. government needs a plan to reduce its debt. But is this the way to do it?
(BEGIN VIDEOTAPE)
VELSHI (voice-over): Another deadline, another failure in Washington by your elected officials. Failure to put your prosperity above their ideology and partisan political interests. Someone even said the word (EXPLETIVE DELETED).
REP. JOHN BOEHNER (R), HOUSE SPEAKER: We should not have to move a third bill before the Senate gets off their (EXPLETIVE DELETED) and begins to do something.
VELSHI: And by Senate, he meant Democrats. But Boss Reid tossed the hot blame potato right back at Boehner.
SEN. HARRY REID (D), MAJORITY LEADER: I think he should understand who is sitting on their posterior. We're doing our best here to pass something.
VELSHI: All of this while your financial future hangs in the balance. The forced cuts could cost 750,000 jobs. In a weak economy that's barely growing, a lot of smart people say this so-called sequester is stupid.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Moreover, besides having adverse effects in jobs and incomes, a slower recovery will lead to less actual deficit reduction in the short run for any given set of fiscal actions.
VELSHI: Republicans say Democrats in the administration are fear mongering. The cuts amount to less than 3 percent of the entire federal budget. But without reforming costly and growing entitlements like Social Security, Medicare, and Medicaid, the cuts will be much bigger to some departments.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: What the sequester does is it uses a meat cleaver approach to gut critical investments in things like education and national security.
VELSHI: But apparently you don't care all that much. A new poll shows almost half of you aren't following this boring but important sequel to a bad movie you've seen too many times.
I get it. Trust me. I'd rather be reporting on something else, too. This wasn't supposed to happen.
OBAMA: This sequester is not something that I proposed. It's something that Congress has proposed. It will not happen.
VELSHI: I told you it wasn't supposed to happen. OK, so it happened. Now what?
GOV. BOBBY JINDAL (R), LOUISIANA: Absolutely you can cut less than 3 percent without all these awful consequences.
NIKKI HALEY (R), SOUTH CAROLINA: My kids and I could go and find $83 billion out of a $4 trillion budget.
VELSHI: Republicans say it may not be all that bad. But with the U.S. economy growing at an annual rate of, well, just a smidge, these sloppy, potentially dangerous cuts are a sadistic and perverse experiment that could go terribly wrong, costing America prosperity and jobs.
(END VIDEOTAPE)
VELSHI: Now if you get a kick out of this sort of drama, the U.S. government gets another chance do trip up the struggling economy in less than a month, that's when the current continuing resolution, the thing that passes for a federal budget in America, expires. For what it's worth to you, both President Obama and House Speaker John Boehner say they are really, really going to try to avoid that.
(BEGIN VIDEO CLIP)
BOEHNER: I did lay out that the House is going to move a continuing resolution next week to fund the government past March 27th. And I'm hopeful that we won't have to deal with the threat of a government shutdown while we're dealing with the sequester at the same time. The House will act next week and I hope the Senate will follow suit.
(END VIDEO CLIP)
VELSHI: All right. William Cohen has served as the secretary of defense in President Clinton's Democratic administration. As a Republican, he previously served in both Houses of Congress. He now heads the Cohen group, a consulting group that counts defense contractors among its clients.
David Gergen has also worked both sides of the aisle in Washington. He served as an adviser to four presidents, Nixon, Ford Reagan and one Democrat, Bill Clinton. He's a CNN political analyst and a professor and the director of Center for Public Leadership at Harvard's Kennedy School.
With those two -- those resumes, these two guests could probably solve this mess by themselves, with a little help from Jeanne Sahadi, she's with us as well. She's a senior writer with CNNMoney. She somehow manages to make sense of the insanity that has gripped Washington. There's no one writing smarter, more informed pieces on these spending cuts.
Secretary Cohen, good to see you again. Thank you.
WILLIAM COHEN, FORMER DEFENSE SECRETARY: Good to be with you.
VELSHI: Let me start with you. Thirteen percent cuts roughly across the Defense Department. There are some people who say that is a silver lining particularly some Democrats who say we would never have been able to negotiate those kind of cuts. What's your take on the defense cuts?
COHEN: They may see it as a silver lining but it's a really black cloud that's hanging over the Defense Department. I think you can make rational, responsible cuts. I think they have to be made, they will be made if Congress can find a way to sit down and resolve it responsibly. But right now the way the across-the-board cuts, what you'll do, you exempt -- the president has exempted our military in terms of our fighting forces.
VELSHI: Right.
COHEN: So personnel have been exempted. That means the entire cut of some $45 -- $44, $45 billion in the next six months come out of what we call O & M, operation and maintenance, that means slowdown in repairs, won't be sending ships back out quickly. Won't be able to repair aircraft. You have no real reduction in depot maintenance. And it will also have a reduction in procurement. So that will have a major impact on our readiness. So that's not a responsible way to legislate, to say, take 13 percent across the board.
It really doesn't match up resources with our responsibilities because the president has articulated a structure and a policy for shifting resources to the Gulf and to the Asia Pacific region. Now the question is all of these other countries looking at us saying, it's great philosophy, great strategy, where's the money.
VELSHI: Where's the money?
David Gergen, it's interesting. I think a lot of people agree with the secretary that across the board less than precise way of doing it doesn't work. What's interesting is that Republicans have suggested legislation that would allow the president to decide how to apply cuts to different agencies and it seems to be a power that the president isn't interested in.
Why would Republicans be offering that to the president and why wouldn't the president want the authority to direct those cuts?
DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: That's one of the great mysteries. Because if there's anything that everyone in Washington does agree on today that this is a stupid way to cut a budget, it's a dangerous way to cut a budget, especially in the defense area. I think it was a Pentagon comptroller who estimated that within a year two-thirds of army combat units would be at inadequate, unacceptable levels of readiness.
Within a year. Two-thirds. So that's the kind of thing that comes from this mindless way of doing across the board. Every governor in the country who's been having to cut has done it with sort of a sense of what's important, what's not essential, let's cut the nonessentials.
So why doesn't the president accept it? Why are the Republicans pushing it? Well, obviously, the Republicans are worried that there will be screens by doing it across-the-board way, there are going to be a lot of people who are going to scream. There are going to be things that will happen like, you know, we have long lines in airports. That's going to bring enormous pressure on the Republicans to give up and give the president the tax increases he wants.
On the other hand, from the president's point of view, if you -- if you accept this more as a smarter way of doing this, he may then lose some of this leverage. So I think it's irresponsible, frankly. I think the president has been right to try to find a better way to do this but wrong in refusing to accept this more flexible way of cutting.
VELSHI: Jean Sahadi, you write about the -- about four myths, there are probably 60 myths about this thing, but there are certainly four that are making their way around. They are, number one, that the world would be different today. Number two, that -- and this one is particularly popular to conservatives, that President Obama alone is to blame for this. Number three, that it's not hard to cut $85 billion from the budget. Number four, that the cuts will either hurt very badly or they won't matter at all.
Let's hone in on how easy it is to cut $85 billion out of a massive $3.5 trillion budget. South Carolina governor -- you heard her -- Nikki Haley, saying my kids could come up with those cuts.
JEANNE SAHADI, SENIOR WRITER, CNNMONEY: Well, that's good. She's got smart kids. A lot of people could come up with those cuts if we were in fact cutting over $3.5 trillion. We're not. What we're doing is we're cutting over half a year's funding for the smallest part of the budget. We're doing it primarily on the discretionary side. It accounts for a little more than a third of all spending.
And we're asking them to do it lickety-split so I agree with David that in fact if the president had more flexibility in how he makes those cuts, they could be smarter cuts but I wonder in terms of the timing can they really be that smart if you only have seven months to enact them?
So that I think would be a concern. I don't know what the terms of the Republicans' proposal are but, you know, cutting over seven months is a very short period of time to do so in a prioritized way. VELSHI: All right. I would encourage our viewers to read the stuff that you're writing on this because there are a lot of myths out there. Better to be fully informed about this.
Jeanne Sahadi, thanks so much.
Jeanne Sahadi is a senior writer with CNNMoney.
David Gergen and former defense secretary, Bill Cohen, stay where you are.
The U.S. spends as much on defense as the next 10 countries combined. So will these cuts really harm America's military superiority?
You're watching a special edition of YOUR MONEY from Washington.
(COMMERCIAL BREAK)
VELSHI: Welcome to a special YOUR MONEY from Washington, D.C. I'm here, most of Congress isn't, though. The drama is gone, the forced budget cut sequester, they went into effect on Friday night. But we could all see this moment coming 18 months ago. (BEGIN VIDEOTAPE)
VELSHI (voice-over): It's a white-knuckled drama played out not in days or hours but in month after interminable month. To understand how we got here today, rewind to the summer of 2011.
(On camera): We are just over two days away from the date when the United States may not be able to pay all of its bills.
(Voice-over): Congress is bitterly divided over how to raise the debt ceiling. Republicans demanding some $2.5 trillion in spending cuts.
BOEHNER: No one wants the United States to default on our obligations but we won't see real economic growth without a serious plan to deal with our deficit.
REP. JOHN LARSON (D), CONNECTICUT: Every American is being held hostage by the Republican majority.
VELSHI: The fight goes right up to the deadline. But late on Sunday, July 31st --
OBAMA: I want to announce that the leaders of both parties in both chambers have reached an agreement.
CAROL COSTELLO, CNN ANCHOR: A deal has been reached in the debt ceiling debate.
VELSHI: A last-minute deal to raise the debt ceiling through the 2012 presidential elections.
UNIDENTIFIED FEMALE: Agonizingly weekend. CHRISTINE ROMANS, HOST, CNN'S YOUR BOTTOM LINE: It was agonizing and we all were up late, late last night. E-mails flying at midnight.
VELSHI (voice-over): Congress agrees to about a trillion in cuts and the creation of a bipartisan supercommittee. Its job, to find another $1.5 trillion in cuts. Crucially, if the supercommittee fails, then indiscriminate, across-the-board forced spending cuts would kick in in 2013. The geeky word for it in Congress, the sequester.
At first there's relief in Washington.
JAY CARNEY, WHITE HOUSE PRESS SECRETARY: You may have noticed if you look outside that the cloud of uncertainty --
(LAUGHTER)
CARNEY: -- has been lifted.
VELSHI: But the good cheer does not last long. September 2011, the supercommittee begins work.
REP. JEB HENSARLING (R), TEXAS: I approach our task with a profound sense of urgency, high hopes and realistic expectations.
VELSHI: The weeks drag on, bargaining is intense, and in late November the supercommittee wraps up work without a deal.
SEN. PATTY MURRAY (D), WASHINGTON: We have to keep fighting to find a fair and balanced solution. And that was the challenge that divided us.
VELSHI: A disappointed President Obama urges lawmakers to do what the supercommittee could not do.
OBAMA: Good afternoon. Although Congress has not come to an agreement yet, nothing prevents them from coming up with an agreement in the days ahead.
VELSHI: Back then the deadline for forced budget cuts seemed far away, but the clock was ticking, and as I warned more than a year and a half ago --
(On camera): If they don't come to a deal then those automatic cuts could be very haphazard. They're automatic. They may not be the best thing for the economy.
(Voice-over): Now those cuts are upon us.
(END VIDEOTAPE)
VELSHI: Former secretary of defense, Bill Cohen, and David Gergen back with me.
David, that's the past. We've got the budget to deal with, at least the continuing resolution that substitutes for a budget ahead of us as well as the debt ceiling debate. We do not expect any so-called grand bargain on debt reduction and tax reform anymore but we expect less dysfunction. Is there a lesson in anything that has happened so far that might guide us?
GERGEN: I'm not sure there are very many good lessons because no one has won, no one has really lost on this last round. I think it just continues a slogging -- a slogging through continues. I think the -- if there was a silver lining yesterday it was that both sides in effect declared a truce through the remainder of this fiscal year until this September. And that is that they both agreed to the continuing resolution to keep the government going until September would be passed without making it an occasion to revisit the sequester.
And that will be helpful. If they could add this one thing to that continuation, to the CR as it's called, it would be to give the president more flexibility and have him in a calmer moment sign it. I think that that would be -- it is -- it is irresponsible for Washington to make the public pawns in a political game in Washington and make them feel maximum disruption and hardships in their lives when this could be done in a wiser way.
VELSHI: Absolutely. It could be done in a wiser way. And by the way, for our viewers who don't know about the budgeting process and the continuing resolutions, the CRs, I'm going to explain that in some detail a little while later so you understand what's going on.
Bill, let me ask you about this. Discretionary defense spending. You described it well earlier. Faces a 13 percent cut over the next seven months. Take a look at this, though. The U.S. spends 4.7 percent of its total economic output on the military, which is -- that's almost double the average of 2.6 percent across developed nations.
Now even Chuck Hagel, the new defense secretary, is not so much concerned about the scope of the -- of the cuts but more about the arbitrary approach to them. Listen to what he said.
(BEGIN VIDEO CLIP)
CHUCK HAGEL, DEFENSE SECRETARY: Leadership of the Pentagon, all of us, have two serious concerns. First, the abrupt and arbitrary cuts imposed by sequester, and second, the lack of budget management and flexibility.
(END VIDEO CLIP)
VELSHI: And so, David just talked about flexibility. And you mentioned that earlier. What are the way -- what are the ways in which we can cut the defense budget smartly?
COHEN: Sure. Ali, the big question is not so much how much we spend in defense but how you spend it. And so can you spend it consistent with your policy and your strategy? That's really the challenge. So looking at the defense budget, don't look just at the top line. That's coming down. But rather the growth from within. Where is the growth coming from?
It's coming in personnel costs to be sure. If you look at our personnel costs, they are a third of the budget and you're looking at the growth, for example, of healthcare. When I was at the Pentagon, the healthcare bill was $19 billion. I think it's $52 billion now and growing. If you were looking at the costs of retirement and the policies toward retirement, they continue to expand.
So the sort of entitlement programs --
VELSHI: Right.
COHEN: -- on a different level.
VELSHI: Right.
COHEN: Those have to be addressed. Those are third rails as well from the military saying, wait a minute, we're trying to attract the best and the brightest. We want to pay them well, we want to give them retirement benefits, we want to give them healthcare. Well, those all add up to a major part of the budget.
Then there is procurement. So you procure aircraft and ships and other types of equipment. We are the best in the world at this. So we're going to start cutting back somewhat on that and try to tailor our procurement to meet the threats of the future. So we're going to see less of a land-base capability, lighter footprint, faster deployable force, more on drones and other types of information technology where we have an advantage.
And so you're going to see a shift of that to not only the Middle East but over to the Asia Pacific region. You can make serious and substantial reductions if you do it in a way that's consistent with fulfilling that policy. Right now we're just cutting it irrespective --
VELSHI: Yes.
COHEN: -- of what the policy is and so you're going to have people who are going to be furloughed. You're going to have pilots who can't train, you're going to have forces who can't train. And therefore, you have people, for example, in Afghanistan, our men and women who are over there.
VELSHI: Yes.
COHEN: They may not be able to be replaced by the people who are training because they won't be trained up to that level. So it's a serious miscalculation, it's irresponsible, and there is a responsible way and the defense budget will come down. It has to be done in a serious and rational way.
VELSHI: David?
GERGEN: Ali, can I just add to that? We've had two defense secretaries in a row, first class, Bob Gates and Leon Panetta, who worked very, very hard to already put in place $500 billion of cuts in the Pentagon budget. But they warned at the time, do not go much beyond this. And here the Congress and the White House are mindlessly imposing another a $500 or more.
VELSHI: Yes.
GERGEN: Part of the defense budget. So that is clearly going to be a reduction at what is called our heart power, our capacity to project force. But there is also something, as you well know and Bill Cohen knows better than any of us, something called soft power. A term Joe and I, a friend, coined about America's attractiveness and its capacity to lead because others want to follow, others want to be associated with the United States. You've got a government dysfunctional that is leaderless and our soft power slips away from us.
VELSHI: Yes. And actually the secretary had said that when we're off camera. It's a very good point. Thank you for making it.
David, always a pleasure to see you.
GERGEN: Thank you.
VELSHI: David Gergen is a CNN senior political analyst. William Cohen is the former secretary of defense and the CEO of the Cohen Group.
Gentlemen, thanks to both you.
The federal budget needs to go on a diet. Both parties agree on that. But they're focusing on things like public broadcasting instead of focusing on the real budget fat. Social Security, Medicare and Medicaid. I may not be the first guy you go to for diet advice, but here in Washington I'm one of these folks -- one of these people folks better to listen to on this. We'll figure out a sensible way for Washington to solve its battle of the bulging budget up next.
(COMMERCIAL BREAK)
VELSHI: The federal government needs to lose some weight. Both sides agree on that. But these forced budget cuts now in effect won't reduce the debt. The reason is that the big entitlements, Social Security, Medicare, and Medicaid -- that would be the belly -- take up about 43 percent of the budget. That's where the fat is. And the budget will continue to gain weight over the next few years, the next few decades actually as Americans get older and health care gets more expensive.
But your politicians don't have the will to cut from those areas. They're pretending not to see the growing bloat in their belly that is preventing them from seeing their own feet. So they argue about things like Big Bird and public broadcasting.
Back in August of 2011 Republicans and Democrats agreed to give themselves half a year to come up with a sensible diet plan. They failed. So they gave themselves another year. Nothing happened. So now by law the U.S. needs to cut off budgetary body parts to shed $85 billion over the next seven months.
I'm talking about things like cutting food inspectors and reducing hours at national parks instead of making smart cuts. Agencies are cutting off fingers and toes and knocking out teeth to lose weight. Those little cuts don't add up to much, less than 3 percent of what the government spends each year, but they do affect performance. Take a couple of toes off your feet and see how that works.
The parts of the budget that are subject to the biggest cuts have already been hit over the last few years. Agencies don't have a ton of flexibility. As much as there's this old saw about how the government is full of waste, sure there is, it still amounts to hair and toenails when it comes to cutting the budget.
Programs that are effective are subject to the same cuts that the ones -- that ones that aren't. Is your right hand more useful than your left hand? Well, that's too bad because under the sequester, we need to cut fingers off of both hands. The bottom line is, it's an incredibly stupid way to lose weight.
Ken Rogoff is a Harvard professor, a former chief economist at the International Monetary Fund and an expert on financial crises. Nancy Cook is an economic and fiscal policy correspondent at the "National Journal" and Christine Romans is my friend and host of "YOUR BOTTOM LINE."
Nancy, let's start with you. Welcome to the show. You know, there's an old saw -- people think it's an old saw that we're just talking about, entitlements, Medicare and Medicaid, and Social Security. But the truth is, we're not advocating big cuts to these programs. They do need to be changed, they do need to be reformed. Healthcare is at the top of the list.
NANCY COOK, ECONOMIC AND FISCAL POLICY CORRESPONDENT, NATIONAL JOURNAL: Yes. And I think that both parties or these members of both parties think that that's the case. It's just a question of how quickly that happens. Right? So a lot of the House Republicans think that that should happen in the next year, that healthcare costs are out of control. Whereas a lot of Democrats think that you can wait a couple of years, let the economy get back on its feet a little bit more and then really start to make those cuts at the end of the next decade.
VELSHI: Ken, I mean, that does seem to be -- Nancy's outlined it well. I think you've said many times why wouldn't we just come up with a program that says don't cut things now or cut them less now, cut them a little bit more later on? Why have we not been able to agree on that?
KEN ROGOFF, ECONOMICS PROFESSOR, HARVARD UNIVERSITY: Well, I guess the problem is that if you say we're going to do a lot of spending now and don't worry about the budget consequences because in 10 years we'll tighten our belt, nobody believes it. So there's a feeling you need to do a little tightening now or at least put on the table what those cuts are going to be. Higher ages for Social Security retirement, maybe means testing more for some of the old-age entitlements. Just put it on the table. Say it's coming in 10 years but say it now and give a little credibility to what you're doing. But neither side wants to take the blame.
VELSHI: And the credibility issue is key to this thing but for some reason, Christine, businesses in the market seem to have factored in endless government inaction.
ROMANS: Yes.
VELSHI: We're used to seeing these situations go down to the last minute. How long is it going to be before business starts feeling the effects of these forced budget cuts in a big way?
ROMANS: Well, it's interesting because if you look at forced budget cuts, if you're a defense contractor, I mean, already people are watching the stocks of those companies very closely. But bottom line, the overall market, the stock market measures performance of these individual companies, and these companies seem to be -- what the market keeps seems to be telling us these companies are going to do OK despite this.
Who's going to be hurt? People are going to be hurt. People aren't going to get jobs. People aren't going to have services, especially, for example, you know, low-income kids in schools and some of these furloughs we've been talking about.
The market is telling us that it has disconnected itself from Washington, that Washington is, you know, acting like a child, and they're looking just at the bottom line. They've got an awful lot of money sitting on the sidelines. Right? These companies are doing as much as they can with what they -- with the workforce they've got.
And, Ali, many of these S&P 500 companies, they make, what, 45 percent or half of their revenue from overseas.
VELSHI: Right. Elsewhere.
ROMANS: So the stock market right now is a proxy for overall growth in the world.
VELSHI: Yes.
ROMANS: Not Washington in action.
VELSHI: OK. And we're going to talk a lot more about the stock market and how you invest in this climate, how you make money and safe from losing money in just a little while.
No one thought these forced spending cuts would happen but they did. Most likely your world is still the same today as it was yesterday. But Washington's next completely avoidable crisis will hit you hard no matter who you are after March 27th.
I'm going to explain that after the break.
(COMMERCIAL BREAK)
VELSHI: All of these made-up deadlines and manufactured crises are symptoms of the same illness plaguing Washington. Almost four years now without a federal budget and we're nowhere near of getting one. Now there have been some political stunts to make it seem like budgets were being presented to Congress and failing. But those so- called budgets were skeleton versions put forward for up-or-down votes which is not how budgets do or should get passed.
Budgets are and should be a compromise. Now if members of Congress were willing to reach across the aisle, agreeing on a budget would look something like this. By law the president is required to submit a budget proposal to Congress before the first Monday in February. Once the budget proposal gets to Congress, budget committees in the House and the Senate work to hammer out a more detailed budget resolution. That's supposed to be done by April 15th.
That budget resolution must be agreed to by both sides, by both the House and the Senate. It sends -- it puts spending caps and revenue floors in place for the year. And from there, various committees work together on bills that lay out exactly how much money goes to which agencies and departments.
The problem is Congress has been operating on funding bills devised years ago. They're able to get around passing a new budget every year by using something called a continuing budget resolution. You heard David Gergen say a CR, continuing resolution. It's basically an extension of the old appropriations bills.
The most recent continuing resolution is set to expire on March 27th. If Congress fails to do something about it, we are looking at a possible full government shutdown.
I want to bring back my panel. Ken Rogoff is here with us.
Ken, you are not given to hysterics. Jeanne Sahadi said earlier that the forced budget cuts are neither catastrophic nor particularly beneficial. Market certainly don't seem to care right now. We're facing this upcoming budget battle.
At some point does this dysfunction, the political dysfunction in Washington, actually hurt the economy or not really?
ROGOFF: Oh, it definitely hurts the economy. It hurts it now, it hurts it right away, but it doesn't necessarily hurt it dramatically in a crisis kind of way that can really energize everyone to do something. You know, it's hurting people who are vulnerable, it could be hurting our defense a year or two from now. So it's sort of a slow burn that makes it, you know, hard to feel it right away.
But, you know, that said, Ali, I think each of the individual agencies, although they're trying very hard to minimize the effect on the public, the fact is, if people are really mad about the national parks later, they're really mad about air traffic, then those agencies are going to get protected more next time. So we're sort of putting needles everywhere in the economy and seeing where it hurts. VELSHI: Nancy, you're worried that in addition to this budget thing that's coming up, we do have another debt ceiling debate. It might work itself out as part of the continuing resolution to the budget negotiations. It might not. But you're worried that that is one of those things in that crisis fashion that Ken talk about could be disastrous to the economy.
COOK: Yes, absolutely. I think that there will be no risk of a government shutdown. I don't think either party has any appetite for that. They don't want to be blamed for that. What they're really gearing up for is the debt ceiling fight and that will really hit in July and August. Very similar to what happened in the summer of 2011. It will be like deja vu all over again.
And the Republicans are going to try to use that to extract deeper spending cuts that they want to see and changes to entitlement programs.
VELSHI: You know, the last time this happened there was a big warning that interest rates are going to spike and they didn't. They've slowly been going up. But they didn't spike. Are you -- are you worried that some -- at some point people become less tolerant of America's misbehavior?
COOK: I think that that's true. I think that, you know, the general public is very tired of it. And I think also Wall Street and just the business community is very used to Washington following this predictable script but ultimately reaching a resolution.
VELSHI: Right.
COOK: And so the problem becomes if that script is broken and we don't reach a resolution on something like the debt ceiling.
VELSHI: Right.
COOK: Christine, no one thought they'd actually let the forced spending cuts happen. They were designed to be so distasteful that we wouldn't swallow that pill. But we did. How likely do you think we are to either have this government shutdown or as Nancy talks about a terrible damaging debate over the debt ceiling again?
ROMANS: You know what, I didn't think we'd actually see the sequester. I mean I think no one did back in August of 2011, well, they have the sequester so for sure they're going to figure something out and they didn't. So you can't predict what Washington is or isn't going to do.
But one important point here I think we need to make is when we say Washington, there's Congress and then there's the Fed.
VELSHI: Right.
ROMANS: Can you imagine what we'd be talking about in terms of business climate, in terms of the overall economy if you didn't have the Fed pumping billions of dollars into the economy every single month? In a way, the Fed is sort of like -- I mean, to use a phrase of Tim Geithner for a -- it's the foam on the runway. Right? And the Fed has been putting all of this -- all of this money into the system. You know, I just wonder if the -- if it weren't for the Fed, if this would be much more urgent right now, the reaction we're seeing in the markets and whether you've seen more urgency in Washington from actually setting some budget priorities.
VELSHI: Very good point.
And, you know, Ken, you were the former chief economist for the International Monetary Fund. It's lost on most people who are mad about government spending how much of a role the Fed has had in propping up this economy many times greater than the role of the -- of the -- of Congress.
ROGOFF: Well, absolutely. But also in propping up the market because the interest rates are zero and people don't know where to put their money. So it's definitely cushioned things. It's kept housing going up. But I think the -- you know, the government certainly has had a role but it's pulling out. And as it's pulling out with or without the sequester, that's hurting.
VELSHI: All right. Ken, stay with us.
Nancy, good to see you. Thank you very much. Nancy Cook is the economic and fiscal policy correspondent with "National Journal."
Christine, stay where you are.
No action here in Washington, by the way, but plenty of action on Wall Street with stocks nearing all-time highs. Why is that happening? And what specifically should you do about it?
I'll talk to you about that after this.
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VELSHI: The Dow Jones Industrial Index has been bumping up against record highs all week. Now I don't get carried away with market records. They're sort of like weather records. But you can't ignore the trend and the investor enthusiasm we've been witnessing. Mutual funds where most of you put your money through 401(k) plans saw their biggest inflows ever last month.
Despite the real or imagined threats to our economy, investors do not seem too scared but maybe they should be. Ben Bernanke issued this warning on Tuesday.
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BERNANKE: Given the moderate underlying pace of economic growth this near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.
(END VIDEO CLIP)
VELSHI: Christine Romans and Ken Rogoff are back with me.
Christine, there is a disconnect between the markets and the real pace of growth in the economy. Am I wrong? And if not, what does it mean?
ROMANS: No, you're right, Ali. I mean, 2012 was gangbusters for the market, 2013 off to an even stronger start. Mutual fund inflows in January back with a vengeance, as you said, $81 billion moving into the market. Think of that. We're talking about $85 billion coming out of the budget, $81 billion went into the market.
Low interest rates with no end in sight courtesy of the Fed and Ben Bernanke consistently strong corporate profits, a weak dollar have retail investors diving back into the market.
Consumer confidence, Ali, came back better than expected for February. You have to wonder, though, if it's based on reality because the fundamentals of the economy, they still have some cracks. The latest estimate of GDP growth was anemic in the fourth quarter. Rising only 0.1 percent, that is not a good performance. Personal income dropped, saw the biggest one-month drop in 20 years, but because the housing market is recovering, people might be feeling a little bit wealthier. Consumers are spending more, they're saving less. We're nearing all-time high for stock.
We have to ask the question, Ali, are we skating on thin ice?
VELSHI: That's a good question.
Ken, the one thing that stood out from what Christine just said is that drop in personal income in February. I don't know if we still got that chart. The biggest in 20 years. It's kind of alarming. We did have the higher payroll taxes that came into effect with the fiscal cliff discussions. We had higher gas prices eating into our wallets in January and February. What else might be at play there?
ROGOFF: Well, I think people are seeing their housing well go up, as Christine said, and the stock market has gone up, and that's influencing their spending, too. But there's a question if this is sustainable. Can you grow just out of this? Can you have it all be a consumer-led recovery? Businesses are holding back. They're making a lot of money but they're keeping it on the sidelines.
VELSHI: All right. Let's take a look at the Dow, Christine.
ROMANS: Sure.
VELSHI: Because we've been talking about this. Here's the Dow's all-time high. Take a look at this. And here's Friday's close. We're 108 points away. I'll have that for you in a second.
(LAUGHTER)
There we go. There you go. The all-time high, 14198, that's October 2007. Friday closes 14089, 108 points to go.
Retail investors, that's most of us, tend to pile into markets when they are topping off. What's your sense? I'm going to talk very specifically about investments in the next block.
ROMANS: Right.
VELSHI: What's your sense about how people should think of or approach stock markets right now?
ROMANS: Well, you know, here's I'm going to forget -- I'm going to put my personal finance hat on and say you've got have a plan first of all. If you're starting to decide what you wanted to do with stocks when they're 108 points from the high, I mean, come on. You're -- now you could be chasing into fumes for all you know of the bull market or, you know, maybe there's another big leg to go. But you've got to have a plan way before markets are already hitting highs.
You've got to be looking at the sectors. Be careful about the sectors that could be sensitive to Washington inaction. Right? That's important. But you've got to be rebalancing and -- and positioned for your age, especially now. If we're going to have one, two, or three years of brinksmanship in Washington --
VELSHI: Right.
ROMANS: -- then you've really got to have a strong plan here. Don't you think?
VELSHI: I completely agree with you, Christine.
Christine, good to see you as always.
Ken Rogoff, always a pleasure. Professor of -- former chief economist at the IMF and a professor at Harvard University.
And I'm hoping for those of you out here watching us this whole discussion is not esoteric. I'm hoping that you are, as Christine said, invested in a way that allows you to take advantage of this market rally but if you're not then you do need to stick around because after we pay some bills here, I'm going to explain to you exactly how to protect your money and possibly even make some money.
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VELSHI: Dow Jones Industrial Average, 108 points away from an all-time record. Time to queue the hats and the confetti like we did back in 1999. That's when the Dow hit 10000. Watch it. It's going to happen right there. There we go. Not so fast. The market had a roaring 2012, 2013 has started strong, but the stock market does seem disconnected, as Christine said, from the broader economy.
Economic growth has slowed -- we don't need to keep watching this, Dow, 10000 more. Gains or meager personal income, we just showed you, suffered its biggest drop in 20 years. I get tweets all the time from you asking me the same question. Should I buy stocks now? I've got some thoughts on it. But let's actually ask an investing pro.
David Kelly is chief global strategist at JPMorgan Funds.
David, good to see you. The Fed in keeping interest rates low -- Ken was just talking about this, has made stocks disproportionately interesting. So you can't make money in the bank. You think that lousy GDP number that we've got -- if you could just, by the way, I thought there was an error on the chart. It's all the way on the right. It almost -- looks like there's no growth there. It's 0.1 percent.
You think that's going to get better. And that things in this country will improve and -- if they're not improving already. So if my viewers are not invested in stocks right now, should they be?
DAVID KELLY, MANAGING DIRECTOR, JPMORGAN FUNDS: Yes, I think they should be. I mean, I think people ought to be -- have an appropriate strategy for where they are in life. But once you've got that appropriate strategy in place, I'd say the overweight stocks and the underweight fixed income. You know, the big elephant in the room is the fact that the Federal Reserve is sitting on interest rates. It's sitting on long-term interest rates. It's sitting on short-term interest rates.
That means you can't really make good long-term money on the bond market. And because you can't make good long-term on the bond market that is pushing money towards the stock market. That's really what is allowing the stock market to move forward here.
VELSHI: Let's talk about that. Bonds are just serving to not be a great investment at the moment. The interest that you get from bonds, the yield is not -- as it goes up, the value of the bonds are going down. Interest elsewhere is not keeping up with inflation.
Your home might be worth more than it was last year, but that's a slow and steady way to make money if it is a way to make money at all. You called all of this a TINA Market. A TINA market. What on earth is a TINA market?
KELLY: Well, there is no alternative. And the point is there is no big investment alternative to having money in the stock market right now. I do believe that -- home prices will move up and that's part of any person's investment plan ought to be owned. I think buying a house in the United States right now is great idea. So I think that's part of a strategy. But you also need to have liquid financial assets. And I think -- I think you should be -- you know, have a diverse portfolio. Have bonds in it but just be overweight stocks relatively you'd normally be.
VELSHI: Right. You don't want to end up in a situation where you own everything that goes in the same direction all the time. Let's take a look at the Dow. And if you are fully invested in the Dow -- this is back a year. If you are fully invested in the Dow or in stocks, not just the Dow, should you be doing anything differently right now?
KELLY: No. If you've got an appropriate amount of your wealth in stocks, you know, I think appropriate would be slightly overweight here, but I think you stick with it. I mean, the main thing to recognize is, yes, you know, the stock market is aligned appropriately with earnings. Stock -- the price of the stock really depends upon earnings and interest rates. Earnings are close to record highs, interest rates are close to record lows. And that's really what's putting the legs on to the stock market.
It's not the general economy.
VELSHI: Right.
KELLY: I do think the general economy will do better. I think that's one-tenth of 1 percent of the fourth quarter is a bit of an anomaly. I think we'd see about close to 3 percent growth in the first quarter. But, you know, you average those together it's still a disappointing economy. That's just 2 percent growth. But it isn't disappointing when it comes to earnings, which are pretty good, and it's certainly not disappointing in terms of interest rates which are so low that it makes -- you know, it makes stocks more valuable but it also makes all those bonds a little less valuable. And that's really what -- why I think people ought to be a little overweight stocks.
VELSHI: TINA. There is no alternative. David Kelly is the managing director of JPMorgan Funds, chief global strategist as well.
David, good to see you.
Coming up. You know the drill. Hurry up, remove your shoes, empty your pockets, take out your laptop, drop the water bottles, and then wait for that very slow family in front of you. The TSA's airport security line stands in the way of you making your flight while making your flight safe, so could private companies do any better? I'll introduce you to someone who says he's already doing it better than your government can.
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JOHN PISTOL, ADMINISTRATOR, TRANSPORTATION SECURITY ADMINISTRATION: We have obviously diverted resources and will divert resources from other areas to make sure that the checkpoints and check baggage areas are staffed fully. But the question then becomes the longer it goes on, at what point do we then have to start cutting back?
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VELSHI: Transportation Security Administration will feel a slow hit from the forced spending cuts that went into effect on Friday. Unless Congress strikes a deal, TSA chief John Pistole says airport screener will likely see their hours reduced in the coming weeks. And that could spell longer wait times on security lines. Now to be fair, this forced austerity is no fault of the TSA. But it does introduced the question, if private industry were running the screen, could airport security be done more efficiently?
Stephan Cretier is the CEO of Garda World Security. He says yes. Garda provides passenger screeners at 27 Canadian airports including the largest and busiest Toronto.
Stefan, good to see you. U.S. Homeland Security Secretary Janet Napolitano has said that in order to deal with these cuts the TSA will have to put a hiring freeze in place. Over time for screeners will be cut. The TSA's 50,000 screeners could be furloughed for up to seven days. Now the Department of Homeland Security and the TSA say safety will not be compromised but that wait times will be increased.
What's your take on the effects that these cuts are going to have?
STEPHAN CRETIER, CEO, GARDA: Well, good to see you, first, Ali. Well, I think, you know, it could become a nightmare but isn't it really a nightmare already? I think it's going to open up really the real discussion that should be happening today is, should the U.S. do like every single industrial country in the world and outsource their services to companies like us? And the role that the TSA should be oversight and not operating. We would see more efficient operation and more cost-efficient operation also.
VELSHI: There are only 16 U.S. airports that have private screeners right now. The larger ones, by the way, include San Francisco and Kansas City, but most of them are smaller, most -- they're more remote airports which have contracts with local security companies. Your company, Garda, provides passenger screening in 27 airports in Canada. Why did Canada go in that direction? And what have you been able to offer the government that it couldn't do itself?
CRETIER: Well, I think the government -- you know, Canadian government went through the same issues as the U.S. And when they got their act together in terms of budget, they turned around and they said, how can we do this in a more efficient way? And as we said, you know, every single country in the world does it that way. So we bring different efficient measures to get through put, number of passengers through the system, more efficiently and in a more secure manner.
You know, a good example in Canada a few years ago they had issues in terms of budget. They came to us and say, could we do things differently? And in just one region we're able to cut the budget from 260 million, 264, that's a 25 percent budget.
VELSHI: Wow.
CRETIER: Plus the head office was able to be cut also. So if you take the same example in the U.S. where you've got $3 billion budget.
VELSHI: Yes.
CRETIER: $1.5 billion is going to screeners and $1.5 billion is going to the oversight.
VELSHI: Yes.
CRETIER: This is totally ridiculous. So TSA needs to get their act together.
VELSHI: Yes.
CRETIER: And I think this event will put the pressure on the U.S. government to really look at the business.
VELSHI: All right.
CRETIER: And more importantly --
VELSHI: Stephan --
CRETIER: And more importantly what's happening -- yes?
VELSHI: I got -- I got to cut you up there. We'll have this conversation a little longer, though.
Stephan Cretier, the CEO of Garda. And that's it for us on YOUR MONEY. Have a great weekend.
