Can Obama Save the World

1
Can Obama Save the World?

• Oliver Griffith
• Managing Director, AmCham France
• Strasbourg, April 1, 2009

2
Importance of the USA

• nominal GDP (US 14.3 trillion, 2008) next 3
  countries combined
• EU included US 33 trillion, two-thirds of
  world GDP
• crisis started in US and solution must also

3
The Problem

• GDP fell 3.8 at annualized rate in last quarter
  of 2008 ? biggest contraction in 25 years
• unemployment rate at 8.1 and rising
• manufacturing employment at lowest level in 60
  years
• housing at lowest level since 1959 foreclosures
  increased over 200 from October 2006-2008
• consumer confidence at lowest level in 40 years
• in 8 years, the number of people without health
  insurance has risen from 6.9 million to 45.7
  million

4

• Decline in Industrial Production
• (Index, January 2000100)

Source Datastream
5

• Falling Exports
• (most recent months annual growth rate, )

US
Japan
Germany
France
Italy
UK
Canada
Brazil
China
Source OECD MEI
6

• Plummeting World Trade
• (annualized quarter-on-quarter growth, )

Source OECD
7
A Severe and Synchronised DownturnProportion of
OECD Economies Experiencing a 2-QuarterConsecutiv
e Downturn
Source OECD
8
Dramatically Worse Outlook Since September 2008
(Consensus forecasts of GDP growth () for 2009)

• 8

Source Consensus Economics Inc. and OECD
Economic Outlook 84 Database
9
The SolutionUS Governments Potential Support of
Financial System US 9.8 Trillion

• US Government as Investor
• US 0.9 trillion public-private investment
  program for distressed loans (Geithner plan)
• US 1.6 trillion commercial paper, buyer of last
  resort
• US 1.5 trillion federal home loan bank
  securities from Fannie Mae and Freddie Mac
• US 0.7 trillion TARP - Troubled Asset Relief
  Program (Paulson Plan)
• US 0.7 trillion other investments (AIG, Bear
  Stearns, etc.)

10

• US Government as Lender
• US 0.9 trillion TALF (consumer loans)
• US 0.9 trillion term auction facility (low
  interest, short term loans to banks)
• US 0.5 trillion other loans (line of credit to
  AIG)
• US Government as Insurer
• US 0.7 trillion bank debt, poorly performing
  assets
• US 0.4 trillion Fannie Mae/Freddie Mac
  potential losses
• US 1.0 trillion other (loans to Citi, Bank of
  America, etc.)

11
American Recovery and Reinvestment Act (ARRA)Tax
Cuts

• total expenditure US 288 billion
• tax relief for individuals US 237 billion
• US 116 billion tax credit of US 400 per worker
  and US 800 per couple in 2009 and 2010
• US 70 billion alternative minimum tax a 1-year
  increase in AMT floor to US 70,950
• US 15 billion expansion of child tax credit

12

• US 14 billion expanded college credit (US
  2,500 for tuition)
• tax relief for companies US 51 billion
• US 15 billion allow companies to use current
  losses to offset profits made in previous 5
  years, instead of 2 ? eligible for tax refunds
• US 13 billion to extend tax credits for
  renewable energy production (until 2014)

13
Healthcare

• total expenditure US 147.7 billion
• US 86.6 billion Medicaid (health coverage for
  the uncovered)
• US 24.7 billion 65 subsidy of insurance
  premiums for the unemployed
• US 19 billion health information technology

14
Social Security

• total expenditure US 82.5 billion
• US 40 billion extended unemployment benefits
  through 31 December 2009 increase of US 25 a
  week
• US 19.9 billion food stamp program
• US 14.2 billion one-time 250 payments to
  social security recipients
• US 3.95 billion job training

15
Education

• total expenditure US 90.9 billion
• US 44.5 billion aid to local school districts
  to prevent layoffs and cutbacks
• US 13 billion for low-income public school
  children

16
Housing

• total expenditure US 12.7 billion
• US 4 billion repair and modernization of public
  housing, including for energy efficiency
• US 2.25 billion tax credits to finance
  low-income housing
• US 2 billion help communities purchase and
  repair foreclosed housing
• US 1.5 billion rental assistance and housing
  relocation

17
Infrastructure Investment

• total expenditure US 80.9 billion
• US 45.2 billion highway and bridge construction
• US 8 billion intercity passenger rail
• US 20.7 billion investment into government
  facilities and vehicle fleets
• US 4.6 billion Army Corps of Engineers
• US 4.5 billion US General Services
  Administration (GSA)
• US 7.2 billion broadband and wireless access
• US 1.5 billion grants to state and local
  governments
• US 15 billion supplemental investments

18
Energy

• total expenditure US 49.7 billion
• US 11 billion electric smart grid
• US 6.3 billion state and local governments to
  make investments in energy efficiency
• US 5 billion weatherizing modest-income homes
• US 3.4 billion carbon-capture experiments
• US 2.5 billion energy efficiency research
• US 2 billion advanced car battery systems and
  components

19
Scientific Research

• total expenditure US 8.9 billion
• US 3 billion National Science Foundation
• US 2 billion United States Department of Energy
• US 1.3 billion university research facilities
• Other
• total expenditure US 17.2 billion
• US 8.8 billion grants to states to defray
  budget cuts
• US 4 billion state and local law enforcement
  agencies

20
The Budget US 3.6 trillion

• Structure
• 23 Medicare and Medicaid
• 21 defense
• 21 social security
• 10 other mandatory spending (salaries,
  government etc)
• 8 interest
• 17 discretionary (by appropriation)
• Sources
• 45 from individual income taxes
• 36 from social security taxes

21

• 2008 Budget
• US 3.1 trillion, receipts US 2.5 trillion,
  spending US 2.9 trillion ? US 455 billion
  deficit
• 2009 Budget
• US 2.5 trillion increase in national debt
• US 900 billion for each year 2010-2015
• in fiscal 2007, public debt US 5 trillion
  (36.8 of GDP)
• in 2008, total debt US 9 trillion (65.5 of
  GDP)

22

• Obamas Budget Promises
• end education programs that do not work
• end direct payments to large agribusinesses that
  do not need them
• eliminate no-bid defense contracts in Iraq
• reform defense budget
• root out waste, fraud and abuse in Medicare
  program
• end tax breaks for corporations that transfer
  jobs overseas
• end tax breaks for wealthiest 1.2 Americans
• restore sense of honesty and accountability to
  budget
• commitment to re-tool and re-image auto
  industry

23
Criticism and Comment of Economic Plans

• plan too small and cautious
• creation of 3.5 million jobs, but 4 million jobs
  already lost and 600,000 every month
• budget based on optimistic figures 8.1
  unemployment, ? could be more -1.2 growth in
  2009 ? 4 in next 4 years?
• current deficit of 12 to reduce to 3 by 2013?
• only US 45 billion for infrastructure
• better to simplify tax code, broaden corporate
  base while lowering rates

24

• doing too much at once fix financial system
  first do not rely on economic recovery for
  financial recovery
• do not build in protectionist measures
• US 50 billion insufficient for root cause ?
  mortgages
• destroying wealth by increased regulations and
  higher taxes
• demonizing bankers, which brings down share
  prices

25
Political Issues

• committee chairs to find consensus at federal
  level
• Chairs of House and Senate Tax Committees object
  to cuts for wealthiest ? might diminish charity
  donations
• Chair of Budget Committee from North Dakota ?
  objection to farm subsidies cuts
• Energy Committee consists of democratic members
  from coal states who object to emission caps
• Republicans will play politics
• Republican House minority leader called for
  federal spending freeze for the rest of year
• state-level bickering will slow down spending of
  federal funds

26
And When Will The Recession End?

• price/earnings ratio of 13 is 20 lower than in
  past 130 years (but ratio only 7 in early 1980s)
• stocks should rise when price deflation ends, so
  businesses can pay off debts
• home prices not at bottom in all markets
• recent stock rises after new US financial plan
• US savings rate up to 3 consumers pay off debt
  first, consumption may not resume soon
• consumer durables and house sales up in February

27
The G-20

• different conceptions in US and EU US spending,
  EU through automatic stabilizers
• ECB without strong political backing high rates
• Germany and France against UK much disagreement
  elsewhere euro zone versus the rest
• conservatism because of history
• fear of subsidizing the neighbors
• the crisis is Americas fault