Stimulus Debate, Job Cuts Stir New Questions on Economy

KATHY KRISTOF: Well, I mean, the same advice that you'd give at any point in time. You know, apply for unemployment benefits immediately, cut back on your expenses - do the logical things that you know you should do, like updating your resume, making sure that your skills are up to speed for the market that you find yourself in. And don't get discouraged.

The job market is awful, but there's still economic activity, so, you know, you will get rehired, you know - it's just - it may be just a matter of time.

RAY SUAREZ: But where you might advise someone to hold out for a better offer or look for something that better fits their experience. This time you'd say just get anything, right?

KATHY KRISTOF: Well, I mean yeah. I'm not necessarily saying, oh go get a job at Starbucks if, you know, you're an investment banker. But, you know, maybe - (chuckles). Yes, this is not a time to be persnickety. It's great to be employed. It's wonderful if you can get a job doing what - being fully employed. If you can't be fully employed, be employed.

RAY SUAREZ: We've been "tweeted" by Matthew, who wants to know, "Why should I pay any attention? Experts all disagree. Shouldn't I just keep my head down and keep working?"

KATHY KRISTOF: I think that's exactly what you do during bad economic times. If you have a job, you keep your head down, you keep on working, you ignore what's going on around you except for, perhaps, to be a little bit more cognizant of your spending. Make sure you do not get ahead of yourself planning on next year's raise or, you know, overtime pay that you have not yet collected, as people often do when economic times are better.

If you do that, you'll come out of this recession in great shape - probably better shape than you would have if the times were better.

SUSIE GHARIB: I think that one thing that we've seen in this current recession is that everybody is affected - it's not like just one industry. I mean, we've seen across the board, layoffs from Macy's to Microsoft. It's everywhere.

And so on the one hand, yes, do your work, stick to your knitting and do a good job. But I think what Kathy also said is, be prepared and have your resume ready just in case. Sort of keep your ear to what else is going on and what trends there are. I think that's really important because, you know, maybe today it's not you, but it could be tomorrow and it's just good to be ready.

RAY SUAREZ: Is there starting to be some consensus among economists, among people who watch not only the business cycle but the broader movements inside the economy, when this all started and what the causative factors were?

SUSIE GHARIB: You're talking about this whole financial crisis - like how did we get here in the first place?

RAY SUAREZ: Right.

SUSIE GHARIB: Well, I think Ray, it's going to take - we're going to have to wait years to find out exactly how we got tangled into this worst financial crisis since the Great Depression. And probably we're going to have to wait for the historians to unravel the whole story.

But I think the short version is that it kind of started with the whole housing bubble and interest rates were really low and we remember all of those teaser rates to go and buy a home. And a lot of people bought homes that they shouldn't have and couldn't afford. But it was too tempting, and why not?

And then banks sold those mortgages to Wall Street so that they could free up their balance sheets to make more loans. And then Wall Street took those mortgages and sliced and diced them into these newfangled securities until nobody could really identify what they contained or what they were worth.

And then those securities were sold to hedge funds and investment banks and investors all around the globe, and along the way, Washington encouraged it and sort of cheerleader-ed it on. I mean, we remember President Bush championing the ownership society, a world in which every American's family owned a house, and that was considered a good thing. And regulators sort of turned a, you know, a blind eye to some of the risky stuff that was going on in the financial sector.

And here we are today. And all of these events kind of led up to where we are, where finally, when interest rates went up and those homeowners couldn't pay their mortgages or suddenly got sticker-shock that they had to pay these monthly fees and started to default and have delinquencies, then banks had to take on those bad assets and their earnings began to suffer and they had to take write-downs and their stocks started to go down. You know the story from there. It just - there was a ripple effect.

And so, everybody was kind of complicit. I know there was a stage where there was finger-pointing and Washington wanted to say it was Wall Street's fault, and - but, you know, we were all kind of complicit in this whole thing.

This mentality of our society of "shop til you drop" and buy, buy, buy. And so I think now we're paying the price for it. The big question is, how are we going to get out of this mess?

RAY SUAREZ: Have places like Los Angeles suffered worse, Kathy?

KATHY KRISTOF: You know, I think we're all in pretty much the same boat. There are places where the unemployment rate is higher than others, but as Susie was just saying, we got into this, really, over a long stretch of time. And in fact, I remember 10 years ago sitting in an editorial meeting at the LA Times talking about the level of debt that consumers were taking on and how it was such an unsustainable level of debt. And it could only be sustained as long as the economy kept on rolling and as long as people could continue to spend next year's bonus.

So what we see here is a recession that really had its roots in 10 or even 20 years of overspending. We're only going to get out of this through some really difficult months, maybe even years, of belt-tightening.

We need the consumer to be in better financial shape. We need all of the people who overspent to actually get their debt levels down to something that can be sustained. And, you know, there are a lot of things that, you know, people are trying to do to get the economy back on track. All of that activity is only going to have an impact once the consumer is able to pay down some of their debt.

SUSIE GHARIB: I think one of the other things that is somewhat concerning, picking up on what Kathy's talking about, taking on debt so that the economy is dependent on consumer spending - I mean, how often do we have reporters always say that two-thirds of the economy comes - is based on the consumer and, yes, that has been true. And now, as we're trying to fix the economy, we're turning again and saying, we have to do things so that consumers will spend again. And that's important, yes, but it's also dangerous, because Ray this is the very problem that got us where we are right now.

And so, you know, we don't want to get into the situation that consumers, again, pile on so much debt and have little savings. So we want to be careful about how much spending that we're talking about. I mean, on the one hand, saving is going to be good for the consumer's economic health and not good for the merchant on Main Street, but on the other hand, we don't want to repeat the problems of the past 10 years.

RAY SUAREZ: Well, I think it's a measure of individual concern about all the things that are going on that our mailbox was full this week with people wanting to ask the two of you questions. So let me get to those right away, and hopefully we can deal with a large number and I guess if you keep your answers slim and elegant, we'll be able to get to more questions.

Jamie writes from Oklahoma City: "How does this stimulus actually affect people? What is it, up to $900 billion or so now? Will this actually help me?"

SUSIE GHARIB: That's a good question, and maybe it will and maybe it won't. If you're out of a job, let's say, one of the things that this - one of the aspects of this stimulus package is to create construction projects. So, maybe, if you're ready - if you don't have a job and you want to get into the bridge-building business or highway-building business, that could be helpful. There's supposed to be a component for education or retraining, so could train you for new skills. If you're out of work, there might be some money that will go towards more unemployment benefits.

And then, as we mentioned earlier about tax cuts or tax breaks, you might end up paying less to the government and keeping more in your pocket. If you're a business owner, there's discussion about giving tax breaks if you invest in new equipment or if you hire people. So if you're a business owner, there might be something in it for you. So there are these targeted incentives throughout the package.

But I think that, in the end, even if you don't personally get any money, if your neighbor does and your neighbor gets a job, so your neighbor can pay his mortgage, then that's going to be a good thing for your neighborhood and your own home price and your sense of net worth. So I think bottom line, every little bit is going to help all of us.

RAY SUAREZ: Robert writes from Paris, France, "Why are we not devoting more money to repair the country's infrastructure? Roads, airports, seaports, trains, bridges. Also, the gas tax should be raised. Bigger cars will pay more money, pressure Detroit to design better cars." Kathy, is Robert onto something?

KATHY KRISTOF: You know, there obviously is - or part of this is to repair roads and bridges and so forth, and you know, this is a complicated alchemy in trying to design a package that gives a little bit of something to everyone and still not completely bankrupt the government while doing it.

So I think you're going to see that there are definitely infrastructure projects that will be beneficial in the long run, but they're also trying to put in some immediate help for people who need to have more money in their day-to-day budget, and that's where you're getting stuff on the tax cut side.

KATHY KRISTOF: Well, I don't think that it matters whether the corporation is American, but if the work is being done in America, I think that has a big impact.

RAY SUAREZ: Susie, you were going to say?

SUSIE GHARIB: Yeah, I was going to say on that, that, you know, certainly one way to get people to have jobs is to have these shovel-ready projects that they're talking about, roads and bridges and things like that.

But then, once the whole thing is over, what is - how is this going to contribute to long-term growth? And that's why there is some discussion that stimulus has to go into education, because you get more bang for your buck. It's - once you learn a new skill, that long after that bridge is built, you'll be able to really provide value to the economy. So there's also - so there's also that part of the equation as well to consider.

RAY SUAREZ: We got related questions from Daniel in Spring Lake Park, Minn., and William in Tucson, Ariz.: "After a brief examination of historical deficit and GDP numbers for this country, I could find no evidence of tax cuts ever doing anything to spur economic growth. Obviously, I don't know what to look for. Is there something that would support the conservative view that tax cuts are the only thing that will have any effect?"

And William adds: "My understanding is that government spending is significantly more stimulating than tax cuts, the reason being that much of the money not collected as taxes will just be used to pay down debt or put into savings, where it has little or no stimulative effect."

SUSIE GHARIB: This is such a hot topic now among economists and experts, it's such a philosophical debate, and you could get a bunch of experts in the room and, Ray, you'll get answers on both sides about whether tax cuts are better. And some will say that they're not.

Tax cuts don't necessarily mean that people are going to spend the money. We saw that with President Bush's first stimulus plan, where he gave those tax rebates, some of that went to pay down debt and some of it just sat in your - under your mattress, it was not spent. It didn't do anything to rev up the economy.

So that's why some people are saying that it would be better, if you're going to have some kind of tax breaks, have it targeted, some kind of incentive, sort of a bribe to get people to spend more money so that if you buy a house - you'll get a tax cut if you buy a house. If you're a business and you invest in something new or you hire some workers, you'll get a tax break.

So there is no way to say that tax cuts are better. I'll go back to what I said in the beginning - you've got to use every tool that we have. It's not one or the other. And by studying past recessions, historians have seen that Fed policy helps, you know, interest rate policy helps, tax breaks help, government spending helps. So, we've got to sort of do it all in this case.

KATHY KRISTOF: I'd also jump in and just tell you that to act as if tax cuts and government spending are two different things is to be relying on yesterday's tax cuts. What we've seen in the past decade are very targeted tax breaks, which you could equate to spending in those particular areas. So I think that it - you know, it's a fallacy to act like these are different things.

One of our biggest tax cuts or tax breaks is the Earned Income Tax Credit, which by another name is a social program. It's a break for homebuyers. That's a social program. We have tax cuts for paying for health insurance - that's a social program. We're just moving our social programs into the tax code because it's politically expedient. It makes our tax system impossible to get through, but it's more politically expedient that you get things passed that way, so.

RAY SUAREZ: Part of the debate in both the House and Senate stimulus plans had to do with encouraging homeownership and, certainly, we've just come through a year where, in many places in the country, the price of a home has come down drastically. James writes from Astoria, N.Y.: "My wife and I are both still employed. We have good credit and a decent amount of cash. We'd like to buy our first home. Can we expect to find banks willing to loan to first-time homebuyers right now?" Kathy?

KATHY KRISTOF: If they have good credit, absolutely. You should not have difficulty finding a loan, especially if your loan is a conforming loan amount, so it's not a drastically huge amount, and you have the income to support the loan. Yes, absolutely, there's still credit available to lend.

RAY SUAREZ: If you are like James and you've been waiting to buy and you've just seen that where you live - and New York City has knocked a lot of the froth off of the top of the market - isn't there an expectation that if you wait another three months or four months, the price will come down even more?

KATHY KRISTOF: You know, it may. I don't benefit from psychic impulses and the Psychic Network went under, so I kind of figure that a lot of people don't. You have to just work within what you know, and what you know is, okay, I want a home and I can afford it.

A home is more of something that you spend money on than an investment that you're hoping to earn a huge amount of money on. You buy a home when you can afford it and when you think that you've found the right place. And you should look a little less often at the value of that home than you do at the value of your stocks and bonds.

RAY SUAREZ: Susie, are the programs being proposed in various versions of the stimulus package going to really make the difference between being able to get a house or not, or is it just, like, a nice little extra?

SUSIE GHARIB: You mean, in terms of the whole stimulus package?

RAY SUAREZ: Yeah.

SUSIE GHARIB: Well, the hope is that this is going to get the economy moving again. I mean, right now, what alternatives do we have? Businesses have battened down the hatches; they're not spending; they're not hiring. Exports have slowed. People have lost jobs, as you reported, you know, the big jobs loss today. Or people are afraid of losing their job so they're not spending money. So right now our only hope of where growth can come from is government spending.

So this stimulus package is a way to get the money flowing in the economy and to get people working again and to get consumers and businesses spending again. And sure, you know, we've discussed that there's a debate on how to do it, but this seems like our best bet at getting the economy healthy again.

I know there's a lot of frustration because we also hear, in all of the news reports, that these politicians are getting some of their pet projects pushed into this stimulus plan, and that's not a good thing.

But I think, overall, the goal here is to get the economy moving. And that, hopefully, will stabilize the situation. Home prices then, over time, will go back up and maybe the stock markets will also feel there's some stability and certainty and people will start investing again. So everything is very interconnected here.

RAY SUAREZ: We got a lot of questions about debt, among them, from David in Los Altos, Calif., who writes: "In the 1930s, there was little federal debt and, more importantly, there was minimal consumer debt. Today, both have massive amounts of debt. So how can printing money with nothing to back it up other than an IOU benefit the economy in the long term? How can printing money not subject us to massive inflation, again, over the long term? Finally, exactly why can't we afford to let the large firms fail?"

SUSIE GHARIB: Do you want me to tackle that one? Yeah, let me start with the large firms failing. And I know this is frustrating for everyone. There's a lot of anger on why taxpayers need to bail out particularly the banks. And I think the government has not done a good job of explaining the role of banks in the economy. And I think that congressmen and women haven't done a good job of explaining this to their constituents.

Why do the banks need to be saved? The banks are the oil in the machine that makes this economy run. And some banks have failed - not the really mega-banks, but - and the worst problem is always the big banks because they're too big to fail because of the damage that their collapse would cause the financial system.

They have - these mega-banks - have such global exposure that their problems could send ripples through the whole global money markets. And it would be difficult to contain. And that would be horrible for all of us. So the challenge is to throw the banks some lifelines without scaring investors and without scaring the public and destroying confidence.

I mean, we saw last fall, when Lehman Brothers, an investment firm, was allowed to fail, what panic that created in the markets and for everybody, from Main Street to Wall Street. So, I don't think that that is the wise way to go, but I think that people have to understand that banks provide the grease that lubricates this economy and without bank lending, the economy is frozen. Just like Kathy was saying, that people with good credit can get a loan - well, people with moderate credit, a few years ago, were able to get a loan and now it's really difficult.

So we've got to protect these financial institutions, and I wish there was some way that someone could really explain this to the public so that they understand the importance of that. As for the big debt issue, yeah, it's scary: multi-trillion-dollar deficits for the future generations, that's a lot. But there was an economist who told me the other day, you know, when you have a patient who is having cardiac arrest, first you've got to save the patient on the table, and then later, you worry about their cholesterol level.

So kind of, let's save the patient here. We are in a severe financial crisis and let's take care of that - throw money at the situation - and later, we're going to figure out how to pay these deficits.

One lesson that I think has been learned by other countries who have gone through this is that you have to throw a lot of money at the situation in massive doses and stick with it until the recovery comes, and then we'll take care of all of the - you know, the side effects of it. At least, that's the theory, Ray. I hope that they're going to be right about it.

KATHY KRISTOF: Absolutely. You know, the terrible thing is, if you get foreclosed on, if you end up not being able to pay your credit card bills or have your car repossessed or any of these really dramatic impacts of a bad economy, you're going to suffer with this for a really long time to come.

Over the past 10 years, we had such loose credit standards that people didn't have the really negative repercussions of bankruptcy or foreclosure - whatever - that lasted for seven years or longer and made it difficult for them to borrow for really long stretches of time; that's changing.

So if you allow yourself to go into bankruptcy - if you can't avoid it - if you allow your house to be foreclosed on, you should expect that it's going to have very long-term repercussions and it's going to be very difficult for you to get past it in tomorrow's credit market. Tomorrow's credit market is, frankly, going to be like the market I walked into when I got out of school in the early '80s. It was really tight. If you - the long-standing joke was: If you need money, you can't get it; if you have money, you can. And that, unfortunately, is the sort of credit market we're walking into.

RAY SUAREZ: Might we end up regarding some of these setbacks as just things that happened to more people during this time, or are we still going to hold it against them in the same way? Being delinquent on a credit card, going into default on a mortgage - these were not mass experiences just a few years ago.

KATHY KRISTOF: Well, absolutely, but you know, over the short run, when you have a tight credit market, it's held against you.

But everything is cyclical. Eventually the credit markets will open up again and then it won't be held as much against you. They'll go, oh, you know, look, everybody had a hard time - they lost a job, there are mitigating factors. Those things will eventually come into play again, but not for a while.

RAY SUAREZ: I want to get final comments from you in just a second, but first, let me read you a note from Joan in Kingsburgh, Calif.: "Here are some thoughts to brighten your day: My husband and I are in our 70s and have just completed bankruptcy. I piled up a lot of debt because of health expenses and my husband never met a credit card he didn't like. With our Social Security payments and my very small pension, we're finding that being very careful makes it possible for us to be comfortable. Both of us can remember the days before not only credit cards, but installment plans, so staying within our budget feels kind of familiar. Thanks for fielding peoples' questions at this time. It's wonderful to know there's someone to go to just to talk." Susie, what are people looking at in the near term: stimulus plan or no stimulus plan?

SUSIE GHARIB: I think that there's going to be a stimulus plan. And I think that everyone is just trying to be hopeful that this is going to help us out. And if it doesn't, we're going to go back to the drawing board and figure out something else. There are a lot of smart men and women working in Washington right now, both in Congress and at the White House, and they'll figure it out.

RAY SUAREZ: Kathy?

KATHY KRISTOF: I agree. I think that we will have a stimulus plan. I don't think it's going to be perfect, but I think it's going to be as good as we can do, and you know, I liken some of these things to parenting. You know, nobody gave me instructions, you know. And so you just do the best you can and if you figure out that you've messed up, well, you go at it again. Tomorrow is another day.

RAY SUAREZ: Kathy, is it possible to overreact if you're working and paying all your bills ...

KATHY KRISTOF: Yes, people should not be panicking. If you are working and able to pay your bills, you're in a great spot. Just keep it up. Save prodigiously. Be careful about your spending. But don't stop investing; don't stop saving. Those are the backbone of every reasonable financial plan. And they will be 10 years from now and 20 years from now and, you know, for as long as we live. So be thoughtful, be calm, go about your day, do the best job you can, because that's the best you can do.

RAY SUAREZ: Kathy Kristof, personal finance columnist and writer for the Los Angeles Times. Thanks for being with us.

KATHY KRISTOF: Thank you.

RAY SUAREZ: And Susie Gharib, the New York-based anchor of PBS's "Nightly Business Report." Great to talk to you.

SUSIE GHARIB: It was a pleasure being on your program.

RAY SUAREZ: And thanks to all of our viewers who submitted questions. You can find more business and economic news on our Web site. Until next time, thanks for joining us. I'm Ray Suarez.