Return to Transcripts main page
Your Money
Deficit of Leadership; Budget Blowback; Road to Economic Renaissance; London Whale Watch; Samsung's New Smartphone; Another Crippled Cruise; Taxing the Economy; Innovation Slowdown
Aired March 16, 2013 - 13:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: After almost four years of not having a budget, both House Republicans and Senate Democrats have each put forward a new proposal. The bad news, neither of them will ever, ever pass.
Welcome to YOUR MONEY. I'm Ali Velshi.
Both sides of the aisle are digging their ideological heels deep into the dirt with these budgets, but the nonpartisan Congressional Budget Office won't even look at them because they are so vague.
Here's Senator Patty Murray on the Democratic budget.
(BEGIN VIDEO CLIP)
SEN. PATTY MURRAY (D), CHAIRMAN, SENATE BUDGET COMMITTEE: The Senate budget reflects the pro-growth, pro-middle class agenda that the American people went to the polls and supported last November.
(END VIDEO CLIP)
VELSHI: Both of these budgets have names, by the way. The Senate Democrats so-called "Foundation for Growth" budget is the first resolution that the Senate Democrats have put out in about four years. It would raise more tax revenues, selectively curb spending, and reduce deficits enough to stabilize the debt but not balance the budget in 10 years' time.
Now here's what the House Republicans promise.
(BEGIN VIDEO CLIP)
REP. PAUL RYAN (R), CHAIRMAN, HOUSE BUDGET COMMITTEE: Our budget will provide economic security for families. It will guarantee a secure retirement for seniors. It will expand opportunity for the young.
(END VIDEO CLIP)
VELSHI: Paul Ryan's latest edition of his "Path to Prosperity" budget isn't too different than previous versions. He now plans to drastically curb spending, reform the tax code without increasing revenue, and actually balance the budget in 10 years. And the president? Well, he's way behind on his February 4th deadline to put forward a budget proposal and he doesn't have much time left.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: My goal is not to chase a balanced budget just for the sake of balance. My goal is, how do we grow the economy, put people back to work.
(END VIDEO CLIP)
VELSHI: America doesn't really have a budget right now. It has what's called a continuing resolution, which is an extension of an earlier budget. That continuing resolution expires on March 27th. If Congress goes beyond that without at least a patch, the government could shut down.
By law, we're supposed to have an actual budget resolution voted on and in place by April 15th. But as I said, we are way behind on that. And then on May 18th, we're set to hit the debt ceiling. Some say that's going to be the worst showdown.
It's shaping up to be a wonderful spring in Washington. I want to bring in Annie Lowrey. She's the economic policy reporter with "The New York Times." Nancy Cook is the economic and fiscal correspondent for the "National Journal."
Annie, let's start with you. Both sides put budgets out. Everybody knows that neither of these budgets like so many in the last few years are going anywhere. So what happens next?
ANNIE LOWREY, ECONOMIC POLICY REPORTER, THE NEW YORK TIMES: So essentially we're going to go through the same sort of continuing resolution process that you've seen over the last couple of years. As you pointed out these budgets are political documents. They'll probably both pass their respective Houses but -- you know, there's almost no way to bridge the gap between them and they're very vague documents.
So again these are kind of political postures. Then we're going to go through the same sort of slow process of appropriating money through a continuing resolution that we've had in the last couple of years.
VELSHI: This is an important point you bring up because the budgetary process, which is central to what the government is supposed to do, is not supposed to be a political process necessarily, sure, it's the government's priorities, but it's fairly a technical process where everybody tries to come together and hammer it out. So when people say things -- and Nancy, they say this a lot, but you know everybody has putting forward budgets and they've been failing, these are not really budgets. These are vague sort of things. So do the impossible, Nancy, and tell us where the middle ground is, how we actually get to a budget. NANCY COOK, ECONOMIC AND FISCAL POLICY CORRESPONDENT, NATIONAL JOURNAL: Well, the tricky thing is is that the -- the two parties really have very fundamental disagreements about how we should, you know, raise money for the federal government, through taxing people, and then how we should spend money. And so the middle ground would be some sort of agreement on those things but, you know, as we saw in the yearend fiscal cliff deal just coming to an agreement to, you know, extend about 80 percent of the 2001/2003 tax cuts was a huge lift and really done at the last minute. And these are huge disagreements that the two parties still have.
VELSHI: Annie, the clock is ticking. Can we expect to see a budge from the president that is going to appeal to both parties? I mean, from what he's been saying, it doesn't sound like they're anywhere close to what Nancy just described.
LOWREY: No. And the president is going to put out a budget in early April. And regardless of its content, Republicans are going to oppose it just fundamentally because they will oppose anything that the president puts forward. And I think instead what we're going to see is an appropriations process that basically keeps on -- funding the government at the current levels including probably the sequester.
And it seems like both parties have kind of agreed that that's the path forward. They're going to start looking at cuts to entitlement programs, they're going to start looking at reducing tax expenditures, and we're going to have a fight over where that money from cutting loopholes and credits and deductions in the code is going to go to, whether to bringing down tax rates or whether to reducing the deficit further.
VELSHI: Nancy, we're going to talk about it later in the show, but the fact is that the investing world, the business world, the housing world seems to be ignoring what's going on. But in fact come March 27th that we don't have a patch, we could have a shutdown. Come May 18th, if they can't figure out what to do about the debt ceiling we could breach the debt ceiling again.
Give me your sense of how serious these matters are and what's likely to happen.
COOK: Sure. So I think that Congress will come to some sort of agreement next week before they take a two-week recess to keep funding the government. You know, they will pass a continuing resolution this week. I don't think that that's going to be a big issue. The question sort of moving forward is what's going to be the fight surrounding the debt ceiling. The Republicans really want to use that as an opportunity to make deeper cuts to entitlement programs.
And part of the president's outreach this week to Republicans has been to remind them that he's put on the table as part of a bigger deal about $400 billion in cuts in Medicare and Medicaid as well as, you know, about $130 billion in chained CPI, which would be, you know, a shift in the way we calculate some federal benefits.
And so think that the contours of a deal will come if it does come at all around the debt ceiling fight and the months leading up to that.
VELSHI: Nancy, good to see you. Thanks very much. Nancy Cook is the economic fiscal policy correspondent, "National Journal," Annie Lowery is the economic policy reporter at "The New York Times."
Well, Paul Ryan calls his budget the "Path to Prosperity." Mitt Romney hoped it would be the path to the presidency. That didn't work out. But Ryan will not be deterred.
(BEGIN VIDEO CLIP)
RYAN: I am proud of our budget because it's changed the conversation. Today we are not talking about cliffs or ceilings or sequesters. We're talking about solutions. And that's how it should be.
(END VIDEO CLIP)
VELSHI: Forget the Democrats. Could Paul Ryan be dealing with some anger from his own party? I'll ask one of the sharpest business minds in the Senate, Republican Johnny Isakson. That's next.
But during the break, make sure to tweet me, @alivelshi. Let me know if you think it's time for Republicans to move past the Ryan budget or do you think with the election aside that it's Obama and the Democrats who need to budge.
(COMMERCIAL BREAK)
VELSHI: Here we go again. Another budget from Paul Ryan, another lightning rod for Democrats to attack the GOP's economic proposals.
Remember when Mitt Romney picked Paul Ryan to be his running mate? We predicted then that it would turn a spotlight on Paul Ryan's budget proposals and we were right. Joe Biden and President Obama wasted no time using it to bludgeon the GOP nominees.
(BEGIN VIDEO CLIP)
JOE BIDEN, VICE PRESIDENT: Romney said, quote, it was marvelous, and that had he been president if it passed he would sign it. Now, that same budget, that the Ryan budget, the "New York Times" in the past called it, and I quote, "the most extreme budget plan by a House of Congress in modern times."
(END VIDEO CLIP)
VELSHI: I want to bring in Republican Senator Johnny Isakson of Georgia. Not only is he a senator but he's a former businessman and a member of the Senate Finance Committee. He's a good friend to the show.
Senator, good to see you. Thanks for being with us.
SEN. JOHNNY ISAKSON (R), GEORGIA: Great to be here, Ali. VELSHI: Paul Ryan's budget, Senator, is very similar to the one he proposed last year that you just heard Joe Biden criticizing. And by the way to the one that came up the year before. Every time Paul Ryan releases a budget Democrats call it a voucher program that will saddle seniors with extra costs.
Now under Paul Ryan's plan, American who turned 65 in 2024 or later would choose between private health insurance plans or they could stick with their traditional Medicare option. They'd get a subsidy from the federal government to put toward the cost of their premium. And the first year, the subsidy would cover the cost of the second least expensive private plan or the Medicare option, whichever is cheaper. In later years the subsidy would go up based on a competitive bidding process.
Senator, Paul Ryan pitched his proposals to voters in last year's election and the Republicans lost. Why do we keep bringing up something that doesn't seem to be getting public support?
ISAKSON: Well, first of all, I think we did a bad marketing job a year ago in the election. Let me just talk to you about what I think we ought to be saying. First of all, as you acknowledged, anybody 55 years or older is preserved for Medicare as they know it today. Those younger will go to a new program of premium support which allows the government to control the cost and the growth rate in Medicare much better than being for service reimbursement and preserves Medicare for future generations.
I think this is a question of, do you want to preserve Medicare or do you want to lose it? Because if we do nothing, Medicare will be gone in the not-too-distant future.
VELSHI: It is a tough sell, though, because the reality is in order to preserve it, someone's going to get cut and that is going to open you up to criticism from Democrats who say that while you've got a proposal that is going to reduce some taxes on wealthy American, we're cutting people on Medicare. In fact, if the Ryan budget were to become law, wealthy Americans would get a sizable tax cuts, there would be just two tax brackets, 10 percent and 25 percent -- instead of the current seven we have.
Low-income Americans wouldn't be affected by that. Some middle Americans -- middle income Americans would benefit. But according to the left-leaning Citizens for Tax Justice, the average millionaire making more than $3 million would pay $203,000 less in taxes if they give up all their tax breaks. If they don't, they'd pay $345,000 less.
So, Senator, the problem with the proposal is he doesn't say where he'll make up for the lost revenue. Where do you get a sense the cuts are going to come from?
ISAKSON: Well, in terms of the budget that was proposed by the House of Representatives, cuts are coming primarily or savings are coming primarily from reform of Social Security, reform of Medicaid, reform of Medicare, as well as cuts in discretionary spending and moving some of them away from defense into other areas of the government. But the difference in the two budgets, the 10-year prospect of the budget passed in the House of Representatives is $41 trillion spending over the 10 years. The Senate budget which was just approved Thursday night by the Senate Budget Committee spends $46 trillion. So you've got two differences. The Senate is trying to spend more, Senate Democrats. House Republicans are trying to be more efficient.
VELSHI: Let me ask you this, Senator. President Obama is trying a new strategy. He's reaching out to Congress, he's holding meetings on Capitol Hill. I don't understand why these weren't happening 18 months ago. But there's a shift from the campaign-style events that we've seen over the last month.
I want you to listen to something he said to George Stephanopoulos earlier this week.
(BEGIN VIDEO CLIP)
OBAMA: What I'm trying to do is create an atmosphere where Democrats and Republicans can get go ahead and together and try to get something done. But ultimately it may be that the differences are just too wide. If their position is we can't do any revenue or we can only do revenue if we gut Medicare or gut Social Security or gut Medicaid. If that's the position, then we're probably not going to be able to get a deal.
(END VIDEO CLIP)
VELSHI: Probably not going to be able to get a deal.
Senator, is it still possible to bridge the partisan divide now that Republicans and Democrats are really having to line up behind their very different -- as you just pointed out, very different budget proposals?
ISAKSON: Well, first of all, he said it may be that we can't cross the divide. He said may. That's an iffy reference. And yesterday in the luncheon, I was sitting two people away from the president when he was asked the very question about the quote on Stephanopoulos' program and he said I want to look at this as a problem we can solve rather than a problem we can't solve. And Republicans don't want to raise tax rates but are interested in tax expenditure reform like Simpson/Bowles. That produces revenue.
And as long as the president is committed to addresses entitlements which is where the real money is there's a possibility to make a deal. There will have to be sacrifice. There'll have to be a different approach. There'll have to be positive attitudes. But I underline the word he used was may, meaning we could do it. I hope he will do it.
VELSHI: You are an optimist, Senator. That's why I like having you on the show. You're a businessman. You're also one of I think eight senators who supported Simpson/Bowles. So you are optimistic about it, then so am I. Senator Johnny Isakson is a Republican from Georgia and he is part of the Senate Finance Committee.
Thank you, Senator, for being with us again.
ISAKSON: Thanks, Ali.
VELSHI: Coming up, despite Washington's dysfunction, we're experiencing something of an economic renaissance in this country. I've been saying it for months. But if you need more convincing, now the economist is on board. It says America's growth prospects are much brighter than they seem. Why? I'll tell you next on YOUR MONEY.
(COMMERCIAL BREAK)
VELSHI: If you've watched this show before, you've heard me say this before. America is a runner on the road to an economic renaissance. The housing market is coming back. Nationally prices rose more than 7 percent last year.
There's a domestic energy boom under way. We're extracting record amounts of oil and shale gas through fracking, hydraulic fracturing, and other technologies. That's pushing down prices for natural gas, which is used in part to generate electricity. That helps utilities and heavy industry compete and that creates more jobs for Americans.
And the jobs picture is improving. First-time unemployment claims are falling back to three prerecession levels. And last month the U.S. economy added 236,000 jobs, it's 36th month of consecutive private sector job growth.
There is real reason for optimism. But I've also warned you about this. Dysfunction in Washington threatens to trip our runner, the U.S. economy, just as it struggles to gain speed. So which way is this thing going to go?
Christine Romans is the host of "YOUR BOTTOM LINE." Edward McBride is the Washington, D.C. bureau chief for "The Economist."
Ed, welcome to the show. You have written a special report on America's competitiveness and you're with me on this. You say we should cheer up from infrastructure to education to immigration. You say despite glaring problems where you are in Washington, the outlook is less bleak than pessimists maintain. Make your argument.
EDWARD MCBRIDE, WASHINGTON BUREAU CHIEF, THE ECONOMIST: That's absolutely right. The special report goes through all the areas where there's usually a lot of handwringing about how America is doomed to decline, education, infrastructure, as you mentioned, a host of others, and basically looks at the arguments there and discovers that they're very much exaggerated, that there's reason for optimism.
And generally the reason people are pessimistic is because they focus too much on what's going on in Washington, D.C., where nothing is going on, right, where we're -- sort of political gridlock, and they focus too little on what's going on in the rest of the country and in cities and states around the country, governors, mayors, state legislators are looking at these problems and coming up to grips with them, and coming up with really encouraging creative solutions to the sorts of things that we're used to thinking can't be fixed in America.
VELSHI: Christine, let's take Ed's point that if we paid less attention to Washington we might be more optimistic. But even if we ignored Washington, every renaissance has its risks. What else are they other than Washington?
CHRISTINE ROMANS, HOST, CNN'S YOUR BOTTOM LINE: Well, and I will say, in America we've been worried about the risks to the American dream since about 1492. Right?
VELSHI: Yes.
ROMANS: I mean this is what we do. We fret about the American dream and the American model. But look, a lot of people look at the stock market, for example, and say this is an example of this renaissance, we're on the verge of -- the stock market at record highs. But there are a lot of folk who is say, look, the reason why the stock market is at record highs, three little word -- three little letters, rather. F-E-D. The Fed. Listen to what Jim Rogers, what he said about that this week.
(BEGIN VIDEO CLIP)
JIM ROGERS, CHAIRMAN, ROGERS HOLDINGS: If you give me a trillion dollars, I'll show you a good time, too. And that's what they're doing. They're throwing money out the window into the markets and it's going somewhere.
(END VIDEO CLIP)
ROMANS: So let's think about that for a minute. How much of this renaissance is being driven by the Fed in the very short term? And talk about the longer-term investments we need to make to have a true American renaissance for the next century but in the very short term renaissance -- many say renaissance is really Federal Reserve stimulus into the economy every month --
(CROSSTALK)
VELSHI: At least --
ROMANS: -- to the tune of $85 billion.
VELSHI: At least that part that is the stock market, that part that is the housing market, but Ed, this week Treasury Secretary Jacob Lew visited a seaman's plant in Georgia to get a firsthand look at what he sees as a manufacturing renaissance. Listen to what he had to say.
(BEGIN VIDEO CLIP)
JACK LEW, TREASURY SECRETARY: I think if you look at the job creation numbers over the last year, 18 months, it's been clear that we've seen a steady growth in manufacturing jobs. You're here today in a facility that has -- is proof that there is a bright future to American manufacturing.
(END VIDEO CLIP)
VELSHI: OK, so Ed, here's the thing that our viewers need to know. Manufacturing output is actually up after about years of declines, but up for the last few years. It's not actually resulting in a proportionate growth in manufacturing jobs in America, which is what most of my viewers will be interested in hearing. Are we getting jobs out of this?
MCBRIDE: Well, you have to, as Christine just did, separate the short term and the long term. You know, and I -- the special report that I've written attempts to look at the -- at the long term. And I think in the long term the prospects are very good. You know, America is in this incredibly competitive position regarding energy, very cheap natural gas, which is one of a big input for lots of industries.
You know, that helps with manufacturing. America's education system is being turned upside down in a way that I think people don't realize.
VELSHI: Yes.
MCBRIDE: A whole series of reforms, you know, from how teachers are paid, what the curriculum is, how students are tested. All of this stuff is changing. And if infrastructure, another one, you know, we're always worried about how the federal government doesn't have enough money for infrastructure, and at the moment it doesn't, that's right.
But if you look around the country, public/private partnerships, new forms of trust to channel private investment into infrastructure. You know, we're finding ways to deal with these problems that the U.S. has at the moment. And in a few years that should pay off.
VELSHI: It's music to my ears. Ed McBride is the Washington bureau chief with "The Economist." Ed, thanks very much for joining us.
Christine Romans is the host of "Your Bottom Line." She'll be back a little later in the show.
Hey, this ship is the latest PR headache for the popular cruise line called Carnival. But travelers are still booking trips on the high seas. Coming up next, I'll tell you if investors are jumping overboard.
And could this finally be it? The device that dethrones Apple as the king of smartphones? I'm still a BlackBerry guy. But this new gadget has my attention.
(COMMERCIAL BREAK) VELSHI: If a business were to lose $6 billion of shareholder money because of a bad trade and then tries to hide it by manipulating its results, one might expect the CEO of that company to be shown the door. That is not the case with JPMorgan and its CEO Jamie Dimon. In fact, Jamie Dimon did not even testify in two days of hearings this past week in front of a Senate investigation subcommittee.
That committee led by Senator John McCain and Senator Carl Levin spent nine months investigating what has come to be known as the London Whale trade that led to those $6 billion worth of losses for the bank. The London Whale refers to a former trader in JPMorgan's investment office in London who made a series of risky trades. Carl Levin says the bank ignored the risk.
(BEGIN VIDEO CLIP)
SEN. CARL LEVIN (D), CHAIRMAN, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS: It exposes the derivatives trading culture at JPMorgan, the piled-on risk, the hidden losses, the disregarded risk limits, the manipulated risk models, the dodged oversight and that misinformed the public.
(END VIDEO CLIP)
VELSHI: To be fair, Dimon took a 50 percent pay cut last year and accepted some responsibility for the losses. But the lack of oversight inside big banks more than four years after the financial crisis has got to make you wonder if anything has changed.
Well, a few things have changed. Banks are now required to hold more capital in their books to brace themselves from financial losses. This week the Federal Reserve approved the capital plans of 16 of the nation's 18 largest banks as part of the final leg of their so-called stress tests. Only two banks failed those tests, Allied Financial and BBT.
The Federal Reserve asked JPMorgan and Goldman Sachs to resubmit their plans later this year for further review. Still, there are plenty of critics out there that say banks are still too big and unwielding. Remember this guy?
(BEGIN VIDEO CLIP)
ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: I'm not in favor of -- breaking up the large banks. But if push comes to shove and there is no other way to eliminate the too big to fail problem, which is getting worse, not better, has not improved since the crisis began, I would be in favor of breaking up the banks.
(END VIDEO CLIP)
VELSHI: All right. Richard and Christine are back with me.
More than four years after the financial crisis, banks are still, still clearly behaving badly. Is history doomed to repeat itself?
RICHARD QUEST, HOST, CNN'S QUEST MEANS BUSINESS: Yes.
(LAUGHTER)
It's simple. I mean, we have to put up with the banks because we need them because they lubricate the economy. But they are not lovable creatures designed for the philanthropic good of man and beast. And I guess the only way forward is either very strong director of management on the top or regulation. And I'm afraid the former has been seen to fail so it's the latter that has to succeed.
ROMANS: All this play around this week about the London Whale, the London Whale, a $6 billion trading loss. I mean, it begs the larger question of what kind of financial regulations have really been put into effect since the financial crisis, what kind of real oversight is there. And that particular issue of the London Whale, by the way, it was absorbed completely by the bank's profits. Right? It didn't pose a threat to the overall --
(CROSSTALK)
VELSHI: Right. And --
QUEST: But it could have done. I mean, the argument against the -- against that is that if it had become systemic.
VELSHI: Right.
QUEST: We were lucky in that case it wasn't, but if it had we would have picked --
VELSHI: That aside, there are a lots of people who say banks are a great investment right now. Should this nonsense worry you? Should you be concerned --
ROMANS: The big banks have small, well capitalized medium tier banks.
QUEST: And don't be confused with whether it's a good investment with whether or not public policy dictates they should be restrained, constrained, or broken up. That's two different arguments, Ali.
VELSHI: Yes, they're --
QUEST: One of course is your backpocket and your pocketbook, the other is what's good for the health of the economy.
ROMANS: I mean, we're still fighting about banks the same way we were fighting about banks four years ago.
VELSHI: Yes.
ROMANS: I mean that's -- we could have had this conversation almost four years ago.
VELSHI: All right. Let me change this over. Let's talk a little tech for a second. The Samsung Galaxy S IV burst onto the scene this week. Now this thing is getting mixed reviews so far. No word on the price. But it should be available at all major cell phone carriers in the next couple of months. One big draw is going to feature the latest Android operating system, it's got a five-inch screen, makes it big, but you can see it very clearly.
A pixel display that's as good as any smartphone you'll find these days. At CNN.com we've got all the specs and a complete review. But check out the global smartphone market for a second. Samsung, top right corner, owns 29 percent of it. Apple, which largely sells one smartphone products at a time, has 21 percent. That makes it the king because Samsung has a lot of products. And a variety of others make up the rest, including my beloved BlackBerry which is somewhere in that other category.
(CROSSTALK)
ROMANS: Well, you're BlackBerry is the sliver in that other category.
QUEST: A Nokia, and Nokia isn't even mentioned by name.
VELSHI: Yes. They were the biggest player in the world. So does this device, the Samsung Galaxy S IV, which by the way you can use your eye to do things with, it charge wirelessly, it sounds neat. Does this become number one, not just by numbers but by mind share?
ROMANS: It's also a pedometer. You could use -- you could be looking at --
(CROSSTALK)
VELSHI: Do I look like I use a pedometer?
ROMANS: You can turn your TV, but here's what I think is really interesting about this. So at the -- at the road show for this, there's all this criticism today about whether it was maybe kind of sexist. Can we roll the video, guys? It was a little weird. Someone told me it was sort of the cross between a Broadway show and a "Star Trek" convention.
I mean, they were coming out with this new -- this new item, this new device. There was bizarre song and dance, there were women dressed up as drunken housewives, apparently. There were reporters there who didn't really exactly know what it was all about, I guess.
VELSHI: What do you think, Richard?
QUEST: Do not confuse bad taste with sexism.
(LAUGHTER)
ROMANS: OK. I'm just saying it's weird. I'm not saying it's sexist.
QUEST: Well, as I'm saying --
VELSHI: Right. These launches have taken on a life of their own. They have flash mobs like I couldn't care less about these products --
ROMANS: Well, they're making (INAUDIBLE) at the time. Remember the car -- the old car shows we used to go to when they'd have --
QUEST: See the view.
ROMANS: -- these beautiful women?
QUEST: My, my. I get so big.
(LAUGHTER)
VELSHI: Yes. But the point is, do we think Samsung has a product -- let's just move on from this conversation. OK.
ROMANS: Caress that --
(CROSSTALK)
VELSHI: You know what, you can find out about the Samsung Galaxy S IV yourself.
QUEST: I can show you (INAUDIBLE) --
VELSHI: Let's talk about another PR disaster.
QUEST: Hey, now, before you get to that, how do we know if it's going to be number one? Because if we did know we would not be sitting here talking to you.
VELSHI: That's right. I'd be flying to you to my yacht from my helicopter.
Let's talk -- we wouldn't be on a cruise ship, though. Another disaster for Carnival Cruise Lines, this ship, the Carnival Dream, turned out to be a nightmare. Suffered generator problems, there were reports of overflowing toilets again, although I've heard that being disputed. Luckily this thing made it to port in St. Maarten, which is not a bad place to get stuck.
The cruise will not continue. Passengers have been flown back to Florida, they'll get a three-day refund and a coupon for a half off on a future cruise, which I'm sure they'll be in a big hurry to book.
And now this word that another ship, the Legend, is having trouble maintaining speed.
Take a look at Carnival's stock price over the past three months. It's having some trouble maintaining speed as well. It definitely took a deep after that last debacle when an engine room fire crippled a ship in the Gulf of Mexico in February, that was called the Triumph.
Christine, you say cruises are the fast food of travel. What does that mean?
ROMANS: That means they're available to anybody. Everybody can get a bite of the Big Mac that is a Carnival cruise ride. I mean, this is really the only way that a lot of people in America are going to see the world, right? If you're a family with $55,000 a year, median family income, you got two kids, you're going to go for $100 a day for four days, you're going to be able to see Cozumel or you're going to be able to see, you know, parts of Mexico and the Caribbean, this is a very efficient way for people to get a lot of calories with a little bit of cost.
VELSHI: I love -- I love them.
QUEST: I absolutely adored them. I mean, they're great fun when you take it on its own terms.
VELSHI: Yes.
QUEST: You enjoy what's there. And --
VELSHI: And you can travel with other people who don't want to do the same things that you want to do.
QUEST: But here's the point. Here's the point.
VELSHI: Like sit by the pool and eat.
QUEST: All right, but enough -- well --
(LAUGHTER)
ROMANS: In that order.
VELSHI: Yes. (INAUDIBLE) show, doesn't it?
QUEST: Enough of our own personal travel delights and desires. As for Carnival, this really depends on whether or not it's a run of bad luck, what we journalists call dog bites charges, you know, when you hear one then you hear another then you hear another.
VELSHI: Yes.
QUEST: But actually it's no worse than normal, or is there something systematically wrong with the company?
VELSHI: And watching the chairman Micky Arison at a Miami Heat game -- he owns that team -- when the Triumph was out of sea with several thousand people on it.
ROMANS: But I had --
VELSHI: Tells me that maybe that company isn't run as well as it should.
QUEST: Which is -- which is no different from Tony Hayward of BP.
VELSHI: Absolutely. Saying he wants his life back.
QUEST: Being on his own -- or being on --
VELSHI: Yes.
QUEST: He's sailing ship at the time of the Gulf of Mexico disaster.
ROMANS: But Tony Hayward lost his job and I think there's no indication Micky Arison is going to lose his job.
VELSHI: Yes. No, I hear you. He's chairman of the company.
All right, guys. Good to see you both.
Hey, Richard, stay right where you are.
The Dow has had its longest winning streak in more than a decade. Markets are hot, they're helping the rich get richer. I want to know what you think. Tweet me now @alivelshi. Tell me if you think a record-breaking stock market helps everyone even if you're not invested? When we come back Richard and I will do a little "Q&A" on it.
(COMMERCIAL BREAK)
VELSHI: It is time for a little "Q&A" question, Ali, with my good friend Richard Quest, host of "QUEST MEANS BUSINESS" CNN International.
Richard, welcome. Good to see you.
QUEST: Thank you, sir.
VELSHI: The stock markets, we've been talking about this, are on a tear. The Dow is at its longest winning streak in more than a decade. Now I think both of us agree that bull market or not, most people should stay invested in stocks for the long haul and take advantage of market movements. But to help build their wealth you've got to do it that way.
Here in the United States, almost half of all people surveyed by Gallup say they have no exposure to the stock market.
Today's question, Richard, is does a record-breaking market help everyone? Let's -- I'll go first.
QUEST: For a change.
VELSHI: For a change. Give me 60 seconds from the ring of the bell.
All right, Richard. The answer is a resounding yes. In the United States, 47 percent of Americans do not invest in stocks so almost half the country hasn't gained directly from the Dow's almost 8,000-point climb since the lows on March 9th of 2009. The broader S&P 500 and the even broader Wilshire 5000 are in record territory as well. This is driven, as Christine said, in large part by the Fed. Historically low interest rates mean that outside of buying a home, which takes time and a lot of capital, the stock market is the only game in town if you want to build wealth unless you'd rather rob a bank or marry a rock star.
But even if you're not invested in the stock market, a record market creates wealth, it spurs investment, it encourages spending, and hence it creates jobs, so while it doesn't benefit everyone equally, stock markets do trickle down, and more importantly it's accessible to more people than those who simply choose to invest.
Do I have any more time left? I got two seconds. If you can't -- if you don't play, you can't win.
Go for it.
QUEST: How I wish just once you would actually answer the question in an educated and informed way and not go for the jugular. The only answer is yes and no.
VELSHI: That's definite.
QUEST: Of course the stock market benefits everyone through their 401(k) plans that they're invested in, through the wealth effect, through improved corporate profitability, through the Consumer Confidence numbers. Yes, the rising tide does lift all boats. But if it was only that simple.
Unfortunately, you know and I know even though if Ali Velshi doesn't know, it is not that simple because in an era when so many people who are directly invested in stocks are showing double-digit gains, it is those poor at the bottom who will never get a chance to get that sort of wealth that quite rightly say they are not involved. The only problem is it is the only game in town.
VELSHI: Yes. That's the problem. And on that we agree. Richard, always good to see you here.
Richard Quest is the host of "QUEST MEANS BUSINESS" on CNN International.
Hey, I was in Texas last week and one of that state's most powerful politicians told me it's true, everything is bigger in Texas, including job creation and economic growth. Should the rest of the country adopt the Texas miracle?
That's next on YOUR MONEY.
(COMMERCIAL BREAK)
VELSHI: Americans have been fighting about taxes since this country began. Remember the phrase, no taxation without representation? Fast forward to 2013 and we're still arguing about taxes. There's a conventional wisdom that lower taxes are best. It generally promote economic growth. But one of the toughest things to prove is the real effect that taxes have on the economy because increases and decreases never happen in a vacuum.
Take a look at the top tax rates since 1950. After World War II, the top marginal tax rate was more than 90 percent. Right now the top tax rate in this country is 39.6 percent. The argument that we pay really high taxes historically doesn't hold up.
Now in the meantime, the economy saw its fair share of ups and downs. This chart shows GDP on a yearly basis. Those years extending down were recessions. The average growth rate since World War II is a respectable 3.25 percent. We'd be very happy to have that today.
I spoke with the lieutenant governor of Texas, David Dewhurst, this week in the state capital, in Austin. Now he's probably the most powerful man in Texas and likely the most powerful lieutenant governor in the country because he writes the legislation, he controls the budget and he is head of the Texas Senate.
Texas has been trying to lure companies away from California and other states with the promise of lower taxes and lighter regulation. It's something people are calling the Texas miracle.
(BEGIN VIDEO CLIP)
DAVID DEWHURST (R), TEXAS LIEUTENANT GOVERNOR: We're 48th out of 50 states in per capita state spending. We've kept our taxes low. We're 47th out of 50 states in per capita state taxes. Over the last 10 years I've cut taxes over 51 times and expect a 52nd and a 53rd this year. And we've worked real hard to have the lightest regulatory hand we possibly could.
So when businesses look at Texas, we want to make it irresistible, irresistible to come into Texas, invest, create new jobs, which creates new sales tax revenue for the state so we can make yet further cuts in our taxes.
(END VIDEO CLIP)
VELSHI: Eduardo Porter is a columnist at "The New York Times." Will Cain, you've seen him before on this show, is a CNN contributor.
Eduardo, Lieutenant Governor Dewhurst, is he right? Should Washington take a page out of Texas' book?
EDUARDO PORTER, COLUMNIST, THE NEW YORK TIMES: Well, the claim that lowering taxes will produce economic growth has been tried at the national level for years. I mean, since the Reagan administration. And, in fact, we don't really have any good evidence that it has worked, that low taxes do indeed stimulate higher economic growth. So I would suggest that the evidence does not really support what lieutenant governor said.
VELSHI: I'm going to guess that you disagree with that. WILL CAIN, CNN CONTRIBUTOR: Yes. Listen, do low taxes lead to economic growth? Let me ask you this, and I'll ask you, Eduardo. If we add a top rate -- a top marginal tax rate of 98 percent, would it have a negative economic impact?
PORTER: Well, yes. At some point taxes do have -- if you were not going to keep any of the money that you make by work.
CAIN: So by that same logic, lower taxes will lead to economic growth. What you're suggesting is you know the exact place to pinpoint that where economic -- you know, diminishes.
PORTER: Well, you know, that 100 percent, it will probably diminish your effort. But moving, you know, from 35 to 40 percent, that will have a lot of import in your decisions to work --
(CROSSTALK)
CAIN: So not only do we agree that taxes have some impact on economic growth.
VELSHI: Yes.
CAIN: We can then go into the things that the lieutenant governor talked about and look at difference states and who is benefitting from economic growth now.
VELSHI: Right. Texas has certain other advantages. They -- they've got oil. It is also benefitting from the fact the state doesn't need to collect those state taxes because they get money from the federal government, they get -- and cities get high property taxes. So Texas has a high property tax burden.
CAIN: That is -- that is true, Ali. Now I've read -- Eduardo wrote an article in "The New York Times."
VELSHI: Yes.
CAIN: Where you analyzed --
VELSHI: It's called "The Blessings of Low Taxes Remain Unproved." It's worth a read.
CAIN: That's right. And he compared the United States' economic growth to that of European countries and other countries across the world. But if you look at this at a more domestic level, the little democracies, the little laboratories of federalism here, what you see is Texas isn't alone, Ali.
"Chief Executive" magazine ranks of the top 10 states for economic growth or where they'd like to locates their business, it's not just Texas, it's Indiana, it's states across the south. The top 10 are led by people, and this is going to sound partisan, Republicans who -- the more important point -- are pursuing these policies like low taxes and low level of regulation. VELSHI: All right. Will, you're from Texas where there is no state or income tax as we talked about or even state property tax. Governments have to get their revenue from somewhere and that's where the true tax picture in Texas gets a little more muddled. Cities and towns across Texas levy some of the highest local property taxes in the country. They're forced to because they get so little revenue from the state.
Now I challenged Lt. Governor Dewhurst on that point but he stuck to his guns. Listen to what he said.
(BEGIN VIDEO CLIP)
DEWHURST: The state government gets no benefit from our property taxes.
VELSHI: Right.
DEWHURST: And we do not have an income tax. So our whole economy from a state perspective is driven by consumer confidence. And right now our consumer confidence is high because people know that we're not going to raise taxes and we're going to keep this state pro growth and friendly to business coming in investing and creating new jobs.
(END VIDEO CLIP)
VELSHI: All right. So investing and creating new jobs. This is a conversation we have a lot on this show because investing has just been a bad word to use lately. What if you did think of your tax money whatever amount that is as an investment? In other words, things that will reward generations who may get stuck paying the bill.
CAIN: The question is who is a better steward of your dollars? Is there a third party -- we'll call that third party the government -- who is better -- in a better position to spend your money than you are?
VELSHI: Right.
CAIN: And I think economic history has proven the answer is no.
VELSHI: Right. So who's going to build the --
(CROSSTALK)
CAIN: And to be specific --
VELSHI: Who's going to build the electric grid?
CAIN: That argument --
VELSHI: Who's going to build high speed rail? Who's going to build the equivalent of a new highway system? Who's going to improve water delivery in the state?
CAIN: It's not an argument for anarchy. It's not an argument for no infrastructure.
VELSHI: Right. So the government is --
CAIN: It is not an argument for no taxes.
VELSHI: You told me once --
CAIN: It's an argument for lower.
VELSHI: I think you've said once government -- is the stuff that we agree to do together. Right? That's a --
CAIN: I don't know if I said that. That's very popular.
(CROSSTALK)
VELSHI: You quoted it. You used that. So do you agree that there is a role for tax money to be used for those purposes?
CAIN: Absolutely. Absolutely. And I also agree with Eduardo that tax policies don't exist in a vacuum. You said it as well. We're not that -- low regulation as well or somewhat strong infrastructure, those things all matter. The point here is taxes matter as well and Texas is the proof.
PORTER: But, Ali, I would like to revert to what you mentioned earlier, the comparison across countries. We have extremely low tax burdens compared to every other advanced nation in the world. I mean, around like 40 years ago we were roughly the same. You know, a quarter of our economy in taxes. And right now pretty much every other country has moved -- like to 35 percent and we stuck at 25 percent.
That hasn't hurt their growth relative to ours. I mean, we're roughly middle of the table, you know. And we do have much higher inequality. So, you know, there are also tradeoffs. You know, there's things that the government can do that -- that can do with the money that our government has not done.
VELSHI: The conversation is going to go on for many, many months, and possibly years.
Guys, good to see you.
Eduardo Porter is a columnist with the "New York Times." Will Cain is a CNN contributor.
Coming up, you heard me warn before of economic storm but my next guest says Silicon Valley is at risk of being hit by an economic tycoon as a result of Washington's dysfunction. Innovation under attack from your government next on YOUR MONEY.
(COMMERCIAL BREAK)
VELSHI: All right. You've heard how the forced spending cuts could hurt the U.S. Longer lines at airports, checkpoints, reductions in Head Start, fewer food inspectors on the job, but the forced cuts aren't just an immediate threat. They'll also hurt the U.S. over the long-term.
The U.S. government funds over 60 percent of basic research and development in the United States. Federally funded research and development faces a $12.5 billion cut this year according to the Information Technology and Innovation Foundation. That will result in about 200,000 job losses.
Economic output will be reduced by $203 billion by 2021. Small businesses will suffer, too. The Small Business Administration faces a 5 percent cut, that means around $4 billion less for small businesses that depend on government contracts. And the SBA has less money to mentor entrepreneurs and help them compete for those government contracts.
Michael Fertik is the founder and CEO of Reputation.com and he is -- I think you're the youngest CEO on the Fix the Debt Commission.
MICHAEL FERTIK, CEO, REPUTATION.COM: I think so.
VELSHI: The Fix the Debt --
FERTIK: I think so, yes.
VELSHI: You have said that when a butterfly flaps its wings in Washington, D.C., there is a potential of an economic typhoon in Silicon Valley. Why -- tell me what that means.
FERTIK: It is a very important question. So, look, when Congress is not able to act to solve the problem of the debt, address the problem of the budget, whatever you want to call it, what happens is that uncertainty increases in the economy. When uncertainty increases in the economy, investment slows down. We all know that.
Risk capital starts to dry up. The riskiest form of risk capital that we have in America is venture capital. Venture capitalism --
VELSHI: Right. What you guys all do with the West Coast.
FERTIK: What we all do in the West Coast or New York, whatever it is. So Silicon Valley, of course, is the beating heart of investment venture capital and in start-ups. And --
VELSHI: And just to be clear to my viewers. When you say risk capital, it's ventures that sometimes fail and sometimes are astronomically successful.
FERTIK: And that's part of the job.
VELSHI: Right.
FERTIK: That's part of the job, right. But we're not talking about a huge amount of money per year. We're talking about single- digit millions per year invested in venture-backed companies. But those single digits -- billions per year create hundreds of billions of dollars in wealth.
VELSHI: Right.
FERTIK: And in job creation and in wealth creation. And so that is the money that dries up first and we're seeing it already in Silicon Valley.
VELSHI: So you're saying that cuts -- what's the part that dries it up? Is it the uncertainty? Is the cuts to the research spending? What's the thing that most hurts.
FERTIK: Number one, fastest is uncertainty. Right? Confidence is the cheapest form of stimulus. Right? And so when Congress is not acting, when it's acting very poorly.
VELSHI: Right.
FERTIK: When it's acting to fill all those, what's happening is that all forms of capital, all forms of investment start to dry up. The riskiest form of risk capital is venture capital, that dries up first.
VELSHI: OK.
FERTIK: Next comes the cuts to innovation. So when you're looking about high leverage returns, high return on investment, innovation collars and basic science and R&D which shows up often in Silicon Valley in terms of actually commercially viable product ties product that is the compressed air in front of the tip of the spear of the American economy.
VELSHI: Right.
FERTIK: The thing that makes us the greatest economy in the world, that's what goes away. So you're talking about hugely highly leveraged impact that's -- curious with the American economy when these things don't happen as you see.
VELSHI: Silicon valley operates on engineers, encoders and adventurers.
FERTIK: The thing about Silicon Valley is we create the best, most highly leveraged knowledge worker jobs that everybody likes.
VELSHI: Yes.
FERTIK: Republicans like them, Democrats like them. And we feel the brunt first. It's a big, big shame.
VELSHI: An important topic. Michael Fertik is the CEO of Reputation.com.
FERTIK: Thank you.
VELSHI: Thanks for joining the conversation this week on YOUR MONEY. We are here every Saturday 1:00 p.m. Eastern, Sunday, at 3:00 p.m., weekdays at 3:30 P Eastern. Find me on Facebook at Facebook.com/alivelshi. Tweet me, my handle is @Alivelishi.
Have a great weekend.
