3RD ASEAN SENIOR MANAGEMENT DEVELOPMENT PROGRAM

1 August 2009

US Economy – 2009Bush tax cutsBush tax cuts

TARP

Stimulus

Budget

Current account

Dick Vietor

Harvard Business School

G.W. Bush -> Deficits & Terrorism

• September 11th

• Afghanistan• Homeland Security• Iraq• Four tax cuts – EGTRAA $1.3 tril (01),$100 bil (02), • JGTRRA $360 bil (03), $156 bil (04).• Fiscal surplus ($236 bn) to deficit ($1,700 bn)• Fiscal surplus ($236 bn) to deficit ($1,700 bn)• Savings to -0.1% • Debt from $5.6 to $11.0 trillion (back to 74%/GDP)• Current account deficit $410 to $731 billion (now 683$)• Net foreign debt to $2.4 trillion• $$ collapsing…

1980 1985 1990 1995 1999 2000 2001 2002 2003

GDP and other macroeconomic dataNominal GDP, billions of dollars 2,790 4,220 5,803 7,398 9,268 9,817 10,128 10,470 10,961Real GDP, billions of 2000 dollars 5,162 6,054 7,113 8,032 9,470 9,817 9,891 10,049 10,301GDP growth rate, percent -0.2 4.1 1.9 2.5 4.5 3.7 0.8 1.6 2.5

Composition of GDP, percent of total GDPConsumption 63.0 64.5 66.2 67.3 67.8 68.7 69.7 70.2 70.3Investment 17.2 17.4 14.8 15.5 17.5 17.7 15.9 15.1 15.2Exports 10.1 7.2 9.5 11.0 10.7 11.2 10.2 9.6 9.5Imports 10.5 9.9 10.9 12.2 13.5 15.0 13.8 13.7 14.1Government 20.3 20.8 20.3 18.5 17.5 17.5 18.0 18.7 19.1

Inflation rate, percent (from CPI) 13.5 3.6 5.4 2.8 2.2 3.4 2.8 1.6 2.3Unemployment rate, percent 7.1 7.2 5.6 5.6 4.2 4.0 4.7 5.8 6.0

Government finances and debt held by publicRevenues, percent of GDP 19.0 17.7 18.0 18.5 20.0 20.9 19.8 17.9 16.5Expenditures, percent of GDP 21.7 22.8 21.8 20.7 18.6 18.4 18.5 19.4 20.0Deficit (-) or surplus, percent of GDP

United States Macroeconomic Data, Government Finances, and Savings Rates, 1980–2008

Deficit (-) or surplus, percent of GDPOn-budget -2.7 -5.3 -4.8 -3.1 0.0 0.9 -0.3 -3.1 -5.0Off-budget (1) 0.0 0.2 1.0 0.9 1.4 1.5 1.6 1.5 1.5Total -2.7 -5.1 -3.9 -2.2 1.4 2.4 1.3 -1.5 -3.5

Debt held by public, percent of GDP 26.1 36.3 42.0 49.2 39.8 35.1 33.0 34.1 36.2

Government revenues by source, percent of total revenueIndividual income tax 47.2 45.6 45.2 43.7 48.1 49.6 49.9 46.3 44.5Corporate income tax 12.5 8.4 9.1 11.6 10.1 10.2 7.6 8.0 7.4Social insurance taxes 30.5 36.1 36.8 35.8 33.5 32.2 34.8 37.8 40.0Other revenues 9.8 10.0 8.9 8.9 8.3 7.9 7.6 7.9 8.1

Government expenditures by category, percent of total expendituresDefense 22.8 26.7 24.0 18.0 16.2 16.5 16.4 17.4 18.7Social Security 19.8 19.7 19.7 22.0 22.7 22.7 23.0 22.5 21.8Medicare & Medicaid 8.1 9.8 11.8 17.6 18.6 18.7 19.7 19.9 20.1Net interest 8.9 13.7 14.7 15.3 13.5 12.5 11.1 8.5 7.1Other (2) 40.4 30.1 29.8 27.1 28.9 29.7 29.8 31.7 32.3

Saving and net worthNational saving rate (3) 7.4 6.2 4.5 4.2 6.1 5.8 3.7 1.9 1.1Personal saving rate (4) 10 9 7 4.6 2.4 2.3 1.8 2.4 2.1Net worth as percent of income (5) 471 458 473 514 632 587 561 521 572

2004 2005 2006 2007 2008-Q1 2008-Q2 2008-Q32008-Nov

(6)

GDP and other macroeconomic data

Nominal GDP, billions of dollars 11,686 12,422 13,178 13,808 14,151 14,295 14,413Real GDP, billions of 2000 dollars 10,676 10,990 11,295 11,524 11,646 11,727 11,712GDP growth rate, percent 3.6 2.9 2.8 2.0 0.9 2.8 -0.5Composition of GDP, percent of total GDP

Consumption 70.1 70.0 69.9 70.3 70.7 70.9 70.5Investment 16.2 16.8 16.8 15.4 14.5 14.0 14.0Exports 10.1 10.6 11.2 12.0 12.9 13.5 13.7Imports 15.4 16.3 17.0 17.2 17.9 18.5 18.6Government 19.0 19.0 19.0 19.4 19.8 20.1 20.4

Inflation rate, percent (from CPI) 2.7 3.4 3.2 2.8 3.1 7.9 2.6 -10.2Unemployment rate, percent 5.5 5.1 4.6 4.6 4.9 5.3 6.0 6.6

Government finances and debt held by public2008 2008

Revenues, percent of GDP 16.3 17.6 18.5 18.8 17.7Expenditures, percent of GDP 19.9 20.2 20.4 20.0 20.9Deficit (-) or surplus, percent of GDP

On-budget -4.9 -4.0 -3.3 -2.5 -4.5Off-budget(1) 1.3 1.4 1.4 1.3 1.3Off-budget(1) 1.3 1.4 1.4 1.3 1.3Total -3.6 -2.6 -1.9 -1.2 -3.2

Debt held by public, percent of GDP 37.3 37.5 37.1 36.9 40.8

Government revenues by source, percent of total revenue

Individual income tax 43.0 43.0 43.4 45.3 45.4Corporate income tax 10.1 12.9 14.7 14.4 12.0

Social insurance taxes 39.0 36.9 34.8 33.9 35.7Other revenues 7.9 7.2 7.1 6.4 6.9

Government expenditures by category, percent of total expenditures

Defense 19.8 20.0 19.6 20.1 n.a.Social Security 21.4 21.0 20.5 21.3 n.a.Medicare & Medicaid 20.6 20.8 20.9 23.0 n.a.Net interest 7.0 7.4 8.5 8.7 n.a.Other (2) 31.1 30.8 30.5 27.0 n.a.

Saving and net worth 2008-Q3

National saving rate (3) 1.5 1.8 3.1 1.7 n.a.

Personal saving rate (4) 2.1 0.4 0.7 0.6 1.2Net worth as percent of income (5) 600 633 639 611 529

30%

40%

50%

60%

70%

80%

-2%

0%

2%

4%

6%

8%

Top Marginal Tax Rates, Government Budget Surplus or Deficit, and Economic Growth

0%

10%

20%

30%

-8%

-6%

-4%

-2%

1975 1980 1985 1990 1995 2000 2005

Top marginal income tax rate (right-hand axis)

Budget surplus or deficit (-), percent of GDP ( left-hand axis)

Real GDP growth rate (left-hand axis)

Marginal Tax Rates at Income Levels in Real (2000) Dollars, 1996 and 2004

20%

25%

30%

35%

40%

45%

0%

5%

10%

15%

0 100,000 200,000 300,000 400,000 500,000

Adjusted income levels, after exemptions and deductions, in 2000 USD

Marginal tax rates 1996 Marginal tax rates 2004

2002 2003 2004 2005 2006 2007 2008 2009 2020 2011

Total2002–2006

Total2002–

2011

Total Surplus as Projectedin January 2001 313 359 397 433 505 573 635 710 796 889 2,007 5,610

Changes

Legislative

Tax acta -38 -91 -108 -107 -135 -152 -160 -168 -187 -130 -479 -1,275

Discretionary spending -44 -49 -52 -54 -56 -57 -58 -59 -60 -61 -255 -550

Other -4 -6 -5 -3 -4 -2 -2 -2 -2 -2 -23 -33

Debt serviceb -5 -12 -22 -32 -44 -57 -72 -88 -106 -124 -114 -562

Subtotal -91 -158 -186 -197 -238 -268 -293 -317 -355 -317 -870 -2,420

Economic -148 -131 -95 -81 -75 -75 -76 -79 -82 -88 -530 -929

Technical -94 -84 -62 -51 -64 -64 -65 -64 -65 -45 -356 -660

The Budget and Economic Outlook: Fiscal Years 2003–2012, January 2002(billions of dollars)

Technical -94 -84 -62 -51 -64 -64 -65 -64 -65 -45 -356 -660

TOTAL CHARGES -333 -373 -343 -330 -377 -406 -433 -460 -502 -450 -1,757 -4,008

Total Surplus or Deficit (-) as Projected in January 2002 -21 -14 54 103 128 166 202 250 294 439 250 1,602

MEMORANDUM

Changes in the Surplus by Type of Discretionary Spending

Defense -33 -29 -29 -29 -29 -29 -30 -30 -31 -32 -149 -301

Nondefense -11 -20 -23 -25 -26 -28 -28 -29 -29 -30 -106 -249

Source: Congressional Budget Office.

20%

22%

24%

26%

Federal Government Receipts and Expenditures as a Percent of GDP

14%

16%

18%

20%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Receipts Expenditures

Highest marginal tax rate

Budget revenue as percent of GDP

Public debt as percent of GDP

80

100

120

140

160

180

Perc

en

t

Highest marginal tax rate

Budget revenue as percent of GDP

Public debt as percent of GDP

International Fiscal Comparison

0

20

40

60

80

United States Germany Japan Greece India Mexico

Perc

en

t

Sources: Highest marginal tax rates: World Bank, WDI online, World Development Indicators; Budget revenue and public debt:the Economist Intelligence Unit, EIU Data Services, Country Data, Annual Time Series.

Federal Funds Rate (top), Stock and Housing Indices (bottom)

0%

1%

2%

3%

4%

5%

6%

7%

Federal funds rate (dates as in chart below)

60

80

100

120

140

160

180

200

220

7000

8000

9000

10000

11000

12000

13000

14000

15000

Jan-0

0

Jul-00

Jan-0

1

Jul-01

Jan-0

2

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Case Shiller Home Price Index (right axis)

Dow Jones Industrial Average close (lef t axis)

1. Real estate prices began falling first quarter 20072. Demand for CDOs began to decline in second quarter 20073. Bear Stearns could not cover liabilities – sold to JP Morgan & bail out by Treasury4. Lehman Brothers – bankrupt5. Morgan Stanley – sold to Japanese 6. Merrill Lynch – sold to Bank America7. Fannie Mae, Freddie Mac – taken over by government9. AIG – taken over by government ($129 billion)

9. credit market frozen;10. Congress approves $700 billion – Paulson – buy bad assets, re-

Capitalize banks… TARP - $380 billion11. Fed lowers interest rates – pumps liquidity ($2.0 trillion) into mkt

What happened in US Financial Markets?

11. Fed lowers interest rates – pumps liquidity ($2.0 trillion) into mkt

12. Problems spread to rest of world13. Stock market drops 20%+14. Barack Obama elected15. China unveils $586 billion spending package…

16. G-20 meet and agree to (1) increase IMF liquidity, (2) find jointregulatory solutions, and (3) avoid protectionism;

17. Another bailout for CitiCorp - $41 billion + 306 bil bad assets;18. Bailout for GM and Chrysler…

19. Stimulus package legislated - $787 billion…

20. Obama proposes budget of $3.8 trillion…

21. Treasury announces Public Private Investment Program22. Treasury/OCC perform “stress tests” on 21 large banks - $75 bil. equity

Leverage in the US financial system has almost tripled since 1980

The Great American Debt Bubble

10

Name Bailout (in $ millions)

Funds Committed Under Bush Administration 379,800

Funds Disbursed to Financial Firms 281,000

of which:

Citigroup 50,000

Bank of 45,000

AIG 40,000

JP Morgan Chase 25,000

Wells 24,800

Goldman Sachs Group 10,000

Morgan Stanley 10,000

PNC Financial Services 7,579

Bancorp 6,599

TARP Funding Disbursement (as of February 18, 2009)Source: Adapted by casewriter based on data from the U.S. TreasuryDepartment.

CategoryAmount (in US$ bln)

% of Total

Spending, of which: 308,481 39.2%

Labor, Health, Education, Volunteering, andSocial Services 71,271

Transportation and Housing 61,051

Environment and Energy 50,775

Farming and Food 26,431

Commerce, Science and Justice 15,810

Government 6,707

Defense, Military, and Veterans 18,590

Other 14,059

Fiscal Stimulus Package BreakdownSource: Adapted by case writer based on variousgovernment documents.

Bancorp 6,599

SunTrust 4,850

Capital One Financial Corp. 3,555

Regions Financial Corp. 3,500

Fifth Third Bancorp 3,408

American Express 3,389

Others 43,320

Pending 54,000

Automakersa 23,400

Other (including some funding for TALF) 21,400

Funds Allowed under the Obama Administration 320,000

TOTAL 699,800

Other 14,059

Tax Cuts, of which: 288,339 36.6%

Individual 232,426

Business 6,150

Manufacturing 1,850

Economy 6,501

Infrastructure 19,638

Energy and Other 20,127

Individual Aid 14,443

Aid (including individual and health care) 190,421 24.2%

TOTAL 787,241 100.0%

Actual--------------------------------------------------------------------------------Projected-----------------------------------

---------------------------------------------

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Fiscal and macroeconomic data, billions of dollars

Total revenues 2,524 2,357 2,533 2,825 3,124 3,353 3,544 3,746 3,929 4,122 4,309 4,505

Total outlays 2,978 3,543 3,236 3,323 3,388 3,610 3,794 3,980 4,201 4,355 4,497 4,740

Deficit (-) or surplus -455 -1,186 -703 -498 -264 -257 -250 -234 -272 -234 -188 -235

On-budget -638 -1,340 -843 -641 -412 -413 -411 -398 -434 -393 -342 -381

Off-budget 183 155 140 143 149 156 162 164 162 159 154 146

Congressional Budget Office’s Fiscal and Macroeconomic Projections as of January 2009

Debt held by public 5,803 7,193 7,829 8,238 8,475 8,516 8,734 8,925 9,149 9,335 9,127 9,344

Nominal GDP 14,224 14,257 14,452 15,137 16,048 17,035 17,986 18,864 19,703 20,537 21,397 22,278

Fiscal and macroeconomic data, billions of dollars

Real GDP growth 1.2 -2.2 1.5 4.2 4.4 4.1 3.5 2.8 2.5 2.3 2.2Inflation (change in CPI) 4.1 0.1 1.7 1.8 2.0 2.2 2.2 2.2 2.2 2.2 2.2 2.2

Unemployment rate 5.7 8.3 9.0 8.0 6.8 5.8 5.1 4.9 4.8 4.8 4.8 4.8Three-month T bill rate 1.4 0.2 0.6 2.1 4.0 4.7 4.7 4.7 4.7 4.7 4.7 4.7

Source:Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 7, 2009, Table 5 and Table B1.

Bad News – Budget Deficits

Nixon Ford Carter Reagan Bush Clinton Bush

$$ bil.

Source: Compiled from Economic Report of the President 2009; CBO, Budget Outlook, March 2009. © Richard Vietor

Obama’s budgetary priorities (February 26, 2009)

•Make permanent the $800 tax cut for workers and their families; -expand the child tax credit; extend unemployment benefits;

•Build 21st century infrastructure – roads, bridges, mass transit, high-speed rail, air-traffic control, port security, clean drinking water, expanded broadband;

•Clean energy economy – auction tradable pollution permits; build electricity infrastructure, R&D on low-carbon technology, efficient buildings;

•Education – invest in early-childhood education, support rigorous assessment, improve teachers, stabilize student-loan programs;improve teachers, stabilize student-loan programs;

•Lower health care costs and insure broader coverage; computerize health records, invest in wellness, reducing over-payment, excessive drug prices, reducing readmission rates, reforming physician payment system, etc.;

•Increase funding for Department of Defense; reform acquisition (realign spending on needed weapon systems); terminate Iraq and focus on Afghanistan, increase veteran health care and educational benefits;

•Restore fiscal discipline – eliminate tax cuts on incomes over $235,000, eliminate unsuccessful programs and reduce direct payments to farmers.

Congressional Budget Office, December 2008.

May

Billions $$

Source: IMF World Economic Outlook, April 2009