Archives for posts with tag: President Obama

With the Democratic National Convention beginning this week in Charlotte, and with the President’s keynote speech on the docket for Thursday night, the most recent edition of the Economist considers what lies ahead should the President be re-elected.  The publication highlotes both the strengths of the first four years of the Obama administration, as well as the weaknesses, particularly the persistently high unemployment and the President’s weakened approval rating.  The Economist notes that even with a re-election, the President will continue to find staunch opposition from the Republican House majority, a stubbornness that could increase in light of the increasingly contentious political ads between the two parties.  The magazine contends that in a second term:

A tempting option will be to galvanise his party base, with talk of more health reform and threats of higher taxes on business and the rich. Rather than redesigning government, he could suck up to the public-sector unions by promising that jobs will not be cut. Rather than cutting entitlement programmes, he could reassure the elderly that America can actually afford them.

Such an approach is largely feasible given the current state of American politics, though worrisome given the fiscal status quo.  Without a significant reformation, in whatever form that may be, it appears that stagnation will continue to plague the U.S. economy and government.  Such potential makes this week’s DNC particularly intriguing.  Thursday’s address in Charlotte could go a long way in charting the future path of the United States, though unfortunately as the Economist considers, much of the similar rhetoric from four years ago has not yet come to fruition.

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Today marks the last day in which the constitutionality of the Affordable Care Act, or “Obamacare” as it has been colloquially titled, will argued before the Supreme Court.  The Act requires that , beginning in 2014, all individuals not covered by a private or government health insurance program to purchase a minimum health coverage plan or face a financial penalty.  This “individual mandate” is not required by those who experience financial hardship or religious practices which forbid such a practice, and represents the most controversial piece of the Act.  The bill itself hopes to expand the number of Americans covered by health insurance and expand the coverage of those who already possess a coverage program.  Opponents, however, point to increased funding costs and constitutional ramifications as reasons to oppose to the Act.

Over the first half of this week, the Affordable Care Act has been argued before the Supreme Court, challenging primarily the constitutionality of the “individual mandate.”  Wednesday morning’s arguments were focused mainly on the question of “severability,” namely, whether the entire Act would be null and void if the individual mandate is found unconstitutional, or whether other aspects of the bill could be maintained.  It remains highly uncertain as to which way the court will go in its ruling, which is likely to be delivered sometime in June, though many legal observers have “concluded the Obama administration’s solicitor general, Donald Verrilli Jr., did little to boost the individual mandate’s constitutionality in two hours of intense arguments Tuesday.”  Despite the White House’s subsequent statement affirming their support of Mr. Verilli, on such a divided bench this could play a major factor.  Currently Justices Sonia Sotomayor, Elena Kagan, Ruth Bader Ginsburg and Stephen Brayer are expected to uphold the mandate.  The remaining Justices Clarence Thomas, Antonin Scalia, Anthony Kennedy, Samuel Alito and Chief Justice John Roberts are less certain in terms of predictability, with Justice Kennedy seen as the most likely of these five conservative justices to swing his vote the other way.

Summary and prediction:

Since 2007, the United States Federal Reserve has implemented two rounds of quantitative easing, as well as “Operation Twist,” in an attempt to inject liquidity within the market and lower long-term interest rates in the hopes of pushing investors into riskier assets and increasing the demand for long-term investment.[1]  As the economy continues to drag, speeches by Fed Chairman Ben Bernanke regarding the Fed’s willingness to offer further economic assistance, combined with the predictions of many leading economists, seem to point towards a third round of quantitative easing on the way.  Unfortunately for the American people, should this QE3 program come to fruition, it is highly unlikely that it will sufficiently help encourage sustained economic growth within the marketplace.  Now that deflation is no longer a looming specter, further quantitative easing could very feasibly result in an inflation rate higher than ideal, especially in the commodities market.

The relative success of QE2, or lack thereof, made it evident that the Federal Reserve does not operate in isolation, and that issues, both domestically and abroad, can stifle the effectiveness of their programs.  Domestically, political turmoil has only continued to escalate as the conflict over the debt-ceiling was so severe that it raised uncertainty about the long term viability of the U.S. government’s ability to remain solvent to the point that it led to a downgrade of the U.S. debt.  Overseas, the Eurozone continues to face a debt crisis with no ideal or foreseeable resolution in sight.  Such factors have led to a heightened sense of uncertainty so severe that despite the credit easing and liquidity raising policies of the Fed, firms and investors still remain extremely risk-averse and prefer to hold lower risk assets despite the increasingly lower returns offered.  When considering the effect that this uncertainty had on the long term effectiveness of the QE2 program, it is difficult to imagine that yet another round of quantitative easing will have any more success.  While the Fed is intended to be a politically independent entity, when considering such a large scale program as QE3, it is important to address its prospects with a degree of political pragmatism and realistic expectations given the uncertainty of the economic and political environment.

In the end, I believe that a third round of quantitative easing will be implemented despite all the signs pointing towards its high potential for ineffectiveness.  It appears that Chairman Bernanke remains convinced that if he can further flatten the yield curve and inject more liquidity into the market, businesses and individuals will move into riskier assets and banks will have no choice but to lend.  QE3 will most plausibly use QE2 as a template for implementation, resulting in a purchase of longer-termed government debt and, like with QE2, this third round of quantitative easing will result in a hike in prices for riskier assets and for commodities, yet this effect will only be temporary.  As the Fed’s asset-purchases put inflationary pressure on commodity costs, consumption will decrease as consumers devote less of their money to non-energy assets.  Politically, the environment will remain hostile and the threat of more regulation, such as with the recent IMF proposal to hike BASEL surcharges on the world’s largest banks, will perpetuate a level of apprehension amongst potential lenders and borrowers that will largely negate the effect of the flatter yield curve.[2]  It remains uncertain as to how foreign governments will react to such a program, yet given the opposition to QE2’s dollar-weakening actions, one can surmise that another round of quantitative easing will only further antagonize them.  Given the evidence offered, however, it appears that the Federal Reserve will lack the foresight to weigh these external variables, along with the economic warning indicators, and engage in an economically and politically damaging third round of quantitative easing.


[1] Censky, Annalyn. “Federal Reserve Launches Operation Twist.” CNNMoney. CNN, 21 Sept. 2011. Web. 5 Nov. 2011.

[2] Brunsden, Jim, and Rebecca Christie. “Citi, JPMorgan May Face Highest Basel Capital Surcharges.” Bloomberg, 8 Nov. 2011. Web. 8 Nov. 2011.

On Friday, the United States Labor Department released a report showing that the United States economy added only 18,000 new jobs last month.  This correlates to a rise of the unemployment rate to 9.2%, a fact that was immediately reflected within the financial markets as the recovery stubbornly creeps along.  For President Obama, the timing of this news is especially troubling as he continues to try to hammer out a deal to increase the national debt ceiling.  As the 2012 election year approaches, and the economy remains at the forefront of the national conscience, the continuing economic struggles offer welcome ammunition for the President’s critics.  As addressed in this article from The Atlantic, incumbent candidates have not done particularly well in their re-election bids when high unemployment persists.  The author believes the President is not at fault for the dismal progress, and given the many times frustrating inability to quantify the benefits and drawbacks of an economic approach, it is hard to definitively confirm or refute her claim.  Yet while academically it is difficult to implicate the President for the current state of affairs, the more important question moving forward is how effectively the Republican party can use the economy politically to realize their goal of displacing the Democratic party from the White House.

Today, President Obama revealed his preliminary plan for debt-reduction which he believes will cut approximately $4 trillion off of the deficit within 12 years.  CNN outlines the tenets of his strategy, which combines mainly non-security discretionary spending cuts and tax revisions to reform and restructure how the federal government allocates its resources.  Tax wise, President Obama highlighted that he will allow the Bush-era tax cuts to expire yet plans to make this fact negligible by reforming the tax code in a way which will remove virtually all tax breaks in an effort to lower the overall rate.  The President also made sure to note that his plan will result in $3 of spending cuts for each $1 increase in tax revenue.  Additionally, the plan calls for greater oversight and control of government allocations to health care costs, which continue to skyrocket.  Overall, the plan appears to show the seriousness with which President Obama views the current national deficit and his methodology suggests that he will rely highly on his Bowles-Simpson Commission recommendations for inspiration.

Recently, a letter was circulated amongst former chairmen and chairwoman of the Council of the Economic Advisers in an effort to push Washington to take more drastic steps to reduce the national deficit, specifically citing the Bowles-Simpson Deficit Commission’s proposed steps as the best means of both effective and efficient deficit reduction while maintaining a pro-growth strategy.  While many former chairmen and chairwoman agreed to sign the document, notable omissions from the letter’s signatories show that the findings of the commission are far from universally supported, and that the techniques used to reduce the national deficit remain extremely contested within the economic community.  While some economists, such as former Chairman of the Board of Economic Advisers for President George W. Bush N. Gregory Mankiw, support the Deficit Commission’s calls for a more progressive tax structure and the elimination of many tax loopholes, others, such as former Chairman for President Clinton Joseph Stiglitz, feel that the Deficit Commission misinterprets deficit reduction as “means to an end — not an end in itself” (POLITICO).  Decision-making on seemingly every economic decision requires great deliberation and consideration of a complex mix of conflicting theoretic views and empirical evidence.  The debate surrounding the methods through which the United State government should pursue deficit reduction has proved that this issue is no exception to the rule.

As the economic downturn of 2007 continued to reduce the national GDP and increase the unemployment rate, the subject of the national deficit was brought to the forefront of media coverage and American concern.  As stimulus programs continued to be introduced to bolster and stimulate the sputtering economy, the American public became more and more aware that these programs were being financed not by an increase in taxes, but rather by an increase in debt.  While welfare programs had been financed largely by increased debt for over a decade, many now feared that the national debt and one of its new major owners, the Chinese, were eventually going to be a problem in the long-term.  The uncertainty of just how far off this “long-term” would be prompted increased pressure within Washington to make deficit-reduction a high priority.  In response, President Obama commissioned Erskine Bowles and Alan Simpson to lead a group charged with the task of determining in what way the government should approach the issue of deficit reduction.  Among their many proposals, the commission recommended a progressive tax increase across all income levels, an elimination of tax breaks such as mortgage interest hybrid car deductions, eliminate discretionary spending such as earmarks as well as cutting social program costs such as Social Security by eventually raising the eligibility age.  The commission’s findings hope to save an estimated $4 trillion in deficit spending over the next decade, a welcome message to many deficit hawks.  Yet their means of attaining these cuts are highly contested by many notable economists such as Joseph Stiglitz.

Former chairman of the Council of Economic Advisers under Bill Clinton Joseph Stiglitz refused the opportunity to sign the letter in support of the Bowles-Simpson findings.  In an editorial for Politico, he described exactly why he was opposed to many of the suggestions which the commission proposed, believing that, if implemented, the changes would mean that “growth would slow, tax revenues would diminish, the improvement in the deficit would be minimal” (POLITICO).  Fundamental to Stiglitz’s argument against the plan is his belief that the majority of deficit concern should focus not on the deficit total, but rather on the debt to GDP ratio.  In this way, Stiglitz proposes, fiscal policy should not concern itself as much with the total of its stimulus spending but rather concern itself with directing its spending towards pushing American output back towards its potential output.  High unemployment rates mean that currently, GDP or Y is sitting to the left of its potential output, ­or Y*.  Stiglitz notes that public sector expenditures, on technology, infrastructure, and education, have long remained underinvested.  With a leftward shift in total investment within this sector, the interest rates sit at attractive levels which Stiglitz feels “any firm that could borrow at terms similar to those available to the U.S., and with such high return projects, would be foolish to pass up the opportunity” (POLITICO).  As for the proposed cuts in healthcare programs, Stiglitz cites that he agrees with the sentiment, namely a reduction in exorbitant health care costs, yet feels the commission does not understand “the implications of attempting to curb costs of the public system for the aged and poor, without reforming that for rest of the economy” (POLITICO).  Instead, Stiglitz believes that, along with promoting public sector investment, eliminating excesses within the healthcare structure that reward drug companies with uncompetitive prices would provide the most efficient balance of both stimulus and deficit reduction to lower the national debt and continue to promote growth.

To the contrary, N. Gregory Mankiw believes that while indeed the recent stimulus programs are to blame for the recent spike in deficit, simply returning the domestic economy to its potential output level will not solve the deficit problem.  Rather, Mankiw contends that the deficit problem is indicative of a larger trend which has emerged in American fiscal policy which perpetuates high-spending and low taxation and remains unwilling to sacrifice anything in the face of an unsustainable practice.  One of the largest structural problems which Mankiw highlights in his argument is the increase in the age of America’s population, and subsequently, an increase in the amount of Social Security collected from an underfunded account.  To reconcile this, Mankiw proposes “a gradual but substantial increase in the age at which people become eligible for taxpayer-financed benefits for the elderly, including both Social Security and Medicare” (Harvard).  In this way, Mankiw believes that the country will be able to create a viable, long-term solution for these programs without cutting funding on those unable to work or increasing taxes on the economy as a whole.  The role of taxes in reducing the national deficit is central to every economist’s strategy, and Mankiw is no different.  He agrees that the Bowles-Simpson plan does an effective job of not too drastically increasing taxes, as excessive taxation will “distort incentives and shrink the size of the economic pie” mainly due adverse effect it has on work effort.  Citing a survey on the effect of taxation on European work productivity, Mankiw notes “the Davis-Henrekson study reports that a tax increase of 12.8 percentage points (a change of one standard deviation) reduces work for an average adult by 122 hours per year” (Harvard).  A progressive tax, however, will not have such an adverse effect Mankiw believes, and he indeed proposed that some forms of taxation, like a Pigovian tax or sin tax, will work to increase overall revenue without distorting incentives to work.  A Pigovian tax, such as on carbon or gas, is similar to damages paid due to a negative externality such as pollution.  The sin tax, on a product such as cigarettes, simply reduces the incentives to purchase products, to “protect people from themselves,” without effecting non-consumers (Harvard).  Mankiw stresses that while many of the measures proposed in his own personal prescriptions and the prescriptions of the Bowles-Simpson committee will be painful and difficult to accept, the alternative outcome in the long-run means “bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008” (POLITICO).

In the end, the national deficit poses a great threat to the future of the United States of America.  The commissioning of the Bowles-Simpson group by President Obama highlights the fact that many people are now well aware of this fact and seek a solution.  What remains to be seen is the sacrifices which people will seek, and most importantly accept, to reconcile this major issue.  Economists like Joseph Stiglitz believe that fiscal actions should be focused on returning the economy as a whole to its full output level and that such initiatives, along with increased taxes and government spending cuts, will eventually work to reign in the debt.   While economists like N. Gregory Mankiw agree that tax increases and spending reduction are both central to the solution, he focuses his solution more on redesigning the programs as a whole, noting “the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues” (POLITICO).  Mankiw, along with many other signatories on the letter supporting implementation of Bowles-Simpson recommendations, believe that the most effective means of closing this gap would be to broaden the tax base and increase, gradually, the age of eligibility for government programs such as Medicaid and Social Security.  This debate, above all else, illustrates the complexity and difficulty that will be required to reduce the national debt.  For too long, fiscal policy has relied on the ability to pass the debt on further down the line in the long-term to reap the rewards of the popularity associated with high spending and low taxation.  Yet as the Bowles-Simpson Commission and the arguments surrounding its findings show, the luxury of using deficit spending as a means of political gain will no longer exist without scrutiny.

USA Today ran a great article today on what the revolution and ousting of former President Mubarak, who had been in office for the last five U.S. Presidents, means in terms of U.S. foreign policy within the region.  Mubarak’s alliance with the United States had done a great deal in counter-terrorism efforts, especially regarding Hamas, who now controls the Gaza Strip.  Without him in power, the White House must reach out to whoever comes into power in Egypt to re-establish U.S.-Egyptian relations.  Exactly who America will be reaching out to may also be a troublesome manner, however, as Mubarak’s banning of the Muslim Brotherhood helped to constrain the power of a group which preaches conservative Muslim ideas and anti-Western sentiment.  With democratic elections it is very possible that this group, which inspired Osama bin Laden and assassinated former Egyptian president Anwar El Sadat, may be in control of Egypt.  This, along with the potential for a spread in uprisings within the Middle Eastern region, makes the conflict extremely sensitive.  A rise in the Muslim Brotherhood would certainly spell an increase in anti-American spirit and threaten our ally, Israel.  While no time frame for the elections have been established, the U.S. must actively monitor the events in Egypt especially carefully as regional stability and Israeli safety is a very real concern.

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