The U.S. Economy Today

1. The U.S. Economy Today The Great Recession and Its Aftermath

2. Outline • The Great Recession of 2008-2009 • The Government’s Response to the Great Recession • The Great Recession and Politics Understanding America

3. The Great Recession of 2008-2009 Understanding America As we discussed in the previous lecture, the actions by Congress and the Fed in response to the Financial Crisis of 2008 stabilized the financial situation. However, these actions did not stop the severe recession that followed.

4. The Great Recession: Changes in U.S. GDP from the 3rd Quarter of 2008 to the 2nd Quarter of 2009 Understanding America

5. The Great Recession: U.S. Unemployment Rates – July, 2008 to June, 2009 Understanding America

6. The Government’s Response to the Great Recession • Of course, during the financial crisis , the U.S. had a presidential election, which the Democrats won. • The response of the Obama administration was mainly to the resulting recession (called the Great Recession by some). Understanding America

7. The Government’s Response to the Great Recession • Like many governments around the world, the U.S. government enacted a massive economic stimulus package. • In February 2009, the U.S. Congress passed the Obama administration’s American Recovery and Reinvestment Act (ARRA). • The measures in the act were worth $787 billion. The act included tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including the energy sector. Understanding America

8. The Government’s Response to the Great Recession • What has happened since the government implemented its stimulus plan is that the economy has begun to grow again. • GDP has grown since the 3rd quarter of 2009. • However, GDP growth has generally been weak, typically less than the 3.5% growth that the U.S. economy has averaged since the 1950s. • Worryingly, the thing the American people are probably most concerned with, the unemployment rate, is still high. • The unemployment rate remains above 7%. • Before the recession, the full employment rate of unemployment was considered to be between 4% and 5%. • It is true that unemployment usually lags GDP growth after a recession, but the recession ended almost five years ago and unemployment still remains relatively high. Understanding America

9. The Government’s Response to the Great Recession • Moreover, the unemployment rate does not tell the full story. • Many people are not unemployed, but underemployed. • Many of the long-term unemployed are no longer looking for work, and are therefore not counted in the unemployment figures. • These people have dropped out of the labor force. Understanding America

10. The New Normal? • Many economists and commentators refer to this relatively low growth and high unemployment economy as the new normal. • In other words, this is what the American economy will look like into the foreseeable future, and American workers (or potential workers) will have to get used to it. Understanding America

11. GDP Recovery?: Changes in U.S. GDP from the 3rd Quarter of 2009 to the 4th Quarter of 2013 Understanding America

12. Continued High Unemployment: U.S. Annual Unemployment Rates – 2009-2013 Understanding America

13. The Government’s Response to the Great Recession • Another response by the government to the Financial Crisis was financial regulatory reform, which here means greater government regulation of the financial services industry, including banks. • This was accomplished with the passage (by a Democratic Congress and with the approval of President Obama) of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Understanding America

14. Regulatory Reform • The new law has a number of major provisions: • Bank Capital Requirements: • Essentially increases bank capital requirements. • Mortgage Reform: • Establishes minimum standards for issuing mortgages. • Consumer Protection: • Establishes a Consumer Financial Protection Bureau with authority to establish rules regarding the sale of most financial products to consumers. • Federal Deposit Insurance Corporation (FDIC): • Increases deposit insurance from $100,000 to $250,000. • Hedge Funds • Requires hedge funds and private equity funds to register with the Securities and Exchange Commission. Understanding America

15. Regulatory Reform • Dodd-Frank major provisions (continued): • Sale of Mortgage Loans: • Requires issuers of Asset Backed Securities (ABSs) to retain some credit risk for any asset, including mortgages, transferred by the ABS. • Federal Reserve Emergency Powers: • Establishes regulations to insure that emergency lending by the Federal Reserve is for liquidity purposes only, and not to aid failing financial institutions. • Volcker Rule: • Limits the ability of banks to engage in proprietary trading, and limits their ability to own interests in hedge funds or private equity funds. • Regulation of Derivatives (Swaps): • Allows the SEC to regulate the Over-the-Counter derivatives market. • Requires banks to spin off derivatives activities. Understanding America

16. Regulatory Reform • Dodd-Frank major provisions (continued): • Financial Services Oversight Council: • Establishes a 10-member council with authorization to determine which banks and non-bank financial institutions are systemically significant and should be subject to stricter regulations. • Resolution Authority: • The Federal Reserve (for banks) or the SEC (for broker-dealers) can determine if a financial institution poses a systemic risk. • The U.S. Department of the Treasury can then appoint a receiver to liquidate or reorganize the failing financial institution. • Corporate Governance: • Requires greater disclosure of executive compensation and bonuses. • Insurance: • Creates a new federal agency to regulate the insurance industry. Understanding America

17. The Government’s Response to the Great Recession • Of course, the huge size of the stimulus package, as well as the huge size of the 2008 act to bail out the financial sector mean that the U.S. will be running large government deficits into the foreseeable future. • If you look at this crisis, it was one mainly caused by debt. U.S. consumers and the U.S. government are going to have find ways to eliminate debt in order to avoid future financial disasters. • It is already true that American households have drastically reduced their debt. • The same cannot be said about the U.S. government. Understanding America

18. The U.S. Budget Deficit: Past, Present & Future • The CBO is the Congressional Budget Office. Understanding America

19. The Government’s Response to the Great Recession • This leads us to several questions: • When should the U.S. government start to try to decrease the deficit? • How should the deficit be decreased? • Tax increases • Budget cuts • Both • Will politicians, Democrats and Republicans, have the willpower necessary to do something unpopular and try to decrease the deficit? Understanding America

20. The Financial Crisis and Politics • Conservatives (mainly Republicans) claim that the government’s huge deficits could force interest rates higher, cutting off consumption and investment, and thus causing a “double dip” recession. • Republicans argue that the U.S. must cut the deficit immediately without raising taxes (therefore, only by reducing expenditures) and also reduce government regulation of business in order to get back to economic health. • In other words, less government will free business and people to take matters into their own hands and get the economy moving again. Understanding America

21. The Financial Crisis and Politics • On the other had, liberals (mainly Democrats) warn that cutting government spending would reduce consumption, thus decreasing demand for goods, and causing a “double dip” recession. • According to Paul Krugman, an economics professor at Princeton, Nobel Prize winner, and New York Times columnist (and noted liberal), the problem today is economic growth and unemployment, not the budget deficit. • Krugman has written that reducing the short-term deficit will only make matters worse by reducing demand and consumption. This would also reduce tax receipts, making it even more difficult to ever decrease the deficit. • Krugman argues that the government should be spending even more money to increase economic activity and reduce unemployment. • Long-term, Krugman argues, this would allow the economy to improve, increase tax receipts, and eventually allow the government to reduce the deficit. Understanding America

22. The Financial Crisis and Politics • The conflict over the budget and economic growth came to a head in the summer of 2011 during negotiations between Obama and the now Republican House of Representatives to increase the debt ceiling (thus allowing the U.S. to borrow more money) by $2.5 trillion. • Normally debt ceiling votes are routinely passed by Congress. However, the Republican House (which has many Tea Party members) insisted it would only approve the debt ceiling increase if the President agreed to a dollar for dollar decrease in spending (in other words $2.5 trillion in spending cuts) with no increase in taxes. • Eventually, Obama agreed to the trade-off of spending cuts and no tax increase for an increase in the debt ceiling. Understanding America

23. The Financial Crisis and Politics • Many claim that the fight over the debt ceiling increase was purely political, with the Republicans trying to make the President look bad before the 2012 election. • Some even accused the Republicans of deliberately harming the economy in order to reduce Obama’s chances of getting re-elected. • In fact, Standard & Poor’s did reduce the U.S.’s debt rating to AA+ from AAA (although Moody’s and Fitch have maintained their Aaa and AAA ratings). • It must be noted that many Tea Party members of Congress genuinely do believe in reducing the size of government by slashing government spending. Understanding America

24. The Financial Crisis and Politics • The last thing the Obama administration did concerning the aftermath of the recession was the proposal of a “jobs bill,” called the American Jobs Act, in 2011 in order to move the debate from the budget to high unemployment, which polling shows is of much more concern to most Americans. • Some said the jobs bill was purely political, since it had little chance of being approved by the Republican House of Representatives and actually becoming law. • In fact, the bill was dead on arrival, and was never seriously discussed by the House of Representatives. Understanding America

25. The Financial Crisis and Politics • Essentially, since the beginning of Obama’s first administration, except for the Federal Reserve, the U.S. government has done almost nothing about the Great Recession and its aftermath. • The problem has been political gridlock, which we have already discussed in this course • The Republicans want to cut government spending and not increase taxes. • The Democrats want to increase taxes on the wealthy while increasing spending on jobs programs. • And, the two parties cannot seem to be able to compromise. Understanding America

26. Questions • Describe the Great Recession of 2008-2009. • How did the U.S. government respond to the recession? • What are the two big problems for the U.S. economy going forward? • Describe the politics behind the U.S.’s economic problems? Understanding America