Category: ARRA

What Accounts for the Slow Growth of the Economy After the Recession? (PDF)

The U.S. economy has grown slowly since the deep recession in 2008 and 2009, which was triggered by a sharp drop in house prices and a subsequent financial crisis.

During the three years following the recession (that is, the third quarter of 2009 through the second quarter of 2012), the economy’s output grew at less than half the rate exhibited, on average, during other recoveries in the United States since the end of World War II.

All told, between the end of the recession and the second quarter of 2012, the cumulative rate of growth of real (inflation adjusted) gross domestic product (GDP) was nearly 9 percentage points below the average for previous recoveries. Researchers continue to grapple with understanding the roles that steep declines in house prices and financial crises play in slowing the growth of output.

In the current recovery, both potential GDP, a measure of the underlying productive capacity of the economy, and the ratio of real GDP to potential GDP have grown unusually slowly. Because potential GDP is an estimate of the amount of real GDP that corresponds to a high rate of use of labor and capital resources, it is not typically affected very much by the up-and-down cycles of the economy; in contrast, because the ratio of real GDP to potential GDP depends on the degree of the economy’s use of resources, it captures cyclical variations in real GDP around its potential level.

In the first 12 quarters after the last recession, both potential GDP and the ratio of real GDP to potential GDP grew at less than half the rate that occurred, on average, in the aftermath of other recessions since World War II .

Disaggregating the unusually slow growth in output since the end of the last recession, the Congressional Budget Office’s (CBO’s) analysis shows that that pace is mostly owing to slow growth in the underlying productive capacity of the economy and to a lesser extent, to slow growth in real output relative to that productive capacity.

Specifically, CBO estimates that about two-thirds of the difference between the growth in real GDP in the current recovery and the average for other recoveries can be attributed to sluggish growth in potential GDP.

That sluggish growth reflects weaker performance than occurred on average following other recessions by all three of the major determinants of potential GDP: potential employment (the number of employed workers, adjusted for variations over the business cycle); potential total factor productivity (average real output per unit of combined labor and capital services, adjusted for variations over the business cycle); and the productive services available from the capital stock in the economy.

Although some of the sluggishness of potential GDP since the end of the last recession can be traced to unusual factors in the current business cycle, much of it is the result of long term trends unrelated to the cycle, including the nation’s changing demographics.

The remaining one-third of the unusual slowness in the growth of real GDP can be explained by the slow pace of growth in the ratio of real GDP to potential GDP—which in CBO’s assessment, is attributable to a shortfall in the overall demand for goods and services in the economy.

The Effects of Recent Fiscal Policy Actions on the Economy

Federal lawmakers enacted a variety of tax and spending measures aimed at reducing the severity of the recession and spur the recovery. Some of those measures increased federal purchases, particularly in the first six quarters following the recession, when total federal purchases added more to the growth of real (inflation-adjusted) gross domestic product (GDP) than they had on average in previous recoveries.

Other measures provided a substantial indirect boost to the economy during the recession and recovery. Those measures included increasing transfers to people (such as unemployment benefits), lowering taxes, and providing support to the financial system. The key fiscal policy actions were these:

  • Direct fiscal stimulus came from the Economic Stimulus Act of 2008, which was enacted in February 2008, and the much larger American Recovery and Reinvestment Act of 2009 (ARRA), which was enacted in February 2009. The Economic Stimulus Act provided tax rebates to low- and middle-income taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by Fannie Mae and Freddie Mac. ARRA authorized purchases of goods and services by the federal government, transfers to state and local governments (for spending on infrastructure and other purposes), payments to individuals, and temporary tax reductions for individuals and businesses (such as the Making Work Pay tax credit and favorable tax treatment of business investment). The Congressional Budget Office (CBO) estimates that ARRA raised real GDP by between 0.7 percent and 4.1 percent in 2010 and by smaller amounts in 2009 and more recently.
  • Other laws that were intended to have stimulative effects were ones that extended unemployment insurance benefits (which ARRA did as well); cut the payroll tax paid by employees in 2011 (which was later extended through 2012); provided credits for first-time home buyers (which were extended once by ARRA and again by the Worker, Home-ownership, and Business Assistance Act of 2009); and created the Car Allowance Rebate System (commonly referred to as “Cash for Clunkers”).
  • The Troubled Asset Relief Program (TARP) bolstered financial markets and institutions, largely by providing equity capital to banks and other financial firms.

In addition, fiscal stimulus without the need for new legislation came from the effect of the federal government’s so-called automatic stabilizers. Those stabilizers arise from the response of the federal tax system and social safety-net programs, such as the Supplemental Nutrition Assistance Program (formerly called the Food Stamp program), regular unemployment insurance benefits, and Medicaid.

The stabilizers automatically dampen swings in economic activity, by decreasing tax payments to the government and increasing benefit payments to households when economic activity slows and by having the opposite effect when economic activity picks up. For 2009 through 2011, federal fiscal support from the automatic stabilizers equaled about 2¼ percent to 2¾ percent of potential GDP, CBO estimates.

In CBO’s assessment, because the economy has been operating significantly below its potential level during the past few years, the boost to economic activity caused by fiscal policy actions was not significantly offset by a shift of resources away from production elsewhere in the economy—which is to say that little crowding out of production occurred.

However, when the economy is again operating close to its potential level, the increase in government borrowing that has resulted from the recent fiscal stimulus will tend to reduce the amount of funds available for private investment.

Therefore, policies that increase demand when the economy is weak often involve a trade-off between boosting economic output in the short run and reducing output in the long run, unless future policy changes are made to offset the additional accumulation of government debt.

Government Purchases

Relative to the average for past recoveries, purchases by federal, state, and local governments were more restrained in the 12 quarters after the end of the last recession (see Figure 3 on page 10).

Government purchases, which contribute directly to GDP, are outlays for goods and services, including compensation of government employees and investment in structures, equipment, and software. In contrast, other government spending (such as transfer payments to people) and taxes affect GDP indirectly through their influence on other components of output, such as consumer spending.

During and after the recession, federal policymakers enacted a variety of tax and spending measures that aimed to reduce the severity of the recession and aid the recovery. The positive impact of those fiscal policy actions on the level of output was larger late in the recession and early in the recovery than it was later in the recovery.

Purchases by State and Local Governments

Over the first 12 quarters following the last recession, weak growth in purchases by state and local governments slowed the growth of the ratio of real GDP to potential GDP by about 1 percentage point more than the average for previous recoveries (see Table 1 and Figure 3 on page 10). That weak growth in purchases stemmed equally from three sources.

Reductions in employment (of teachers and other personnel) account for a third of that weakness through lower payrolls; 12 quarters after the recession, growth in the number of workers employed by state and local governments was 12 percentage points lower than during the average recovery (see Figure 4 on page 11). Weakness in state and local governments’ purchases of goods and services from other sectors and a relatively slow pace of construction by those governments also each account for about a third of the overall weakness.

Most of the weakness in state and local governments’ purchases apart from their spending on construction can be traced to a below-average rebound in tax revenues and the need to balance general-fund budgets, but additional pressure came from below-average growth in federal grants.

The American Recovery and Reinvestment Act of 2009 (ARRA) authorized an increase in federal grants to states and localities through 2011; those grants helped support state and local purchases for a while, including in the final months of the recession, by raising the amount of assistance to states and localities above what it would have been otherwise.

However, the winding down, beginning in 2011, of payments from that increase in federal grants was most likely a drag on the rate of growth of state and local governments’ purchases last year and in the first half of this year.

In contrast, state and local governments’ construction spending was probably held back primarily by general budgetary pressures and by tight credit markets early in the recovery, because federal grants for capital projects in the current recovery have been in line with those during previous recoveries since 1959 (the first year for which such data are available).

Purchases by the Federal Government

Over the first 12 quarters following the recession, weak growth in purchases by the federal government slowed the growth of the ratio of real GDP to potential GDP by about threequarters of a percentage point compared with the average for previous recoveries (see Table 1 and Figure 3 on page 10).

Over the first half of that period, those purchases contributed more to economic growth (measured by growth of real GDP relative to potential GDP) than they did on average over the same period following other postwar recessions. Since the start of 2011, however, purchases by the federal government have provided less support, primarily as a result of weaker spending on national defense.

 As in the analysis of other sectors of the economy, the possibility of indirect effects complicates estimating federal purchases’ contribution to the growth of output since the trough of the recession. When an economy is operating near (or above) its potential level, higher government

spending can shift resources away from production in other sectors to government-funded projects. That indirect crowding-out effect means that increases in government spending may be offset by declines in purchases and investment elsewhere in the economy.

 However, by CBO’s estimates, that offset has been modest since the recession ended because of an economic environment in which unemployment has been high, a large amount of capital resources has gone unused, and interest rates have remained extraordinarily low.

Monetary Policy and the Slow Growth of Output

An important reason for the slow growth of the U.S. economy relative to its potential during this economic recovery is that the Federal Reserve’s ability to lower interest rates to stimulate economic activity has run into the limit that interest rates cannot be lower than zero. Moreover, the economy has been less responsive to a decline in interest rates in this recovery. Monetary policy has often spurred economic recoveries.

The Federal Reserve effectively sets the federal funds rate (the interest rate that financial institutions charge each other for overnight loans of their monetary reserves), which influences the demand for goods and services. The Federal Reserve usually can boost demand by reducing the federal funds rate, which typically lowers other interest rates, increases the prices of assets such as corporate equities, and lowers the exchange rate.

However, the Federal Reserve has been constrained in combating the recent recession. During that recession and early in the subsequent recovery, the historical relationships between the federal funds rate, economic activity, and the rate of inflation generally suggested that the federal funds rate would be less than zero.1 Because setting interest rates below zero is not possible, the Federal Reserve could only reduce the federal funds rate to near zero, where it has been since late 2008.

As a result, the Federal Reserve has used nontraditional policies, including large-scale purchases of securities issued by the Treasury and government sponsored enterprises, to push down longer-term interest rates on both Treasury borrowing and private-sector borrowing, such as mortgages. Those nontraditional policies noticeably reduced longer term interest rates, but they have not been powerful enough to spur strong economic growth.



Pass This Jobs Bill…

Obama’s Combative Save-My-Job Speech

Townhall – By Guy Benson

President Obama’s address to Congress was exactly what we thought it would be: a shallow, callow campaign rally masquerading as something serious and important.  As Charles Krauthammer framed it on Fox, tonight’s address represented the first presidential campaign speech delivered in the House of Representatives in US history. Obama tried to strike an urgent tone, repeatedly instructing Congress to pass his plan “right away.”

These appeals for immediate action started before he even described a single idea.   When those descriptions finally arrived, they were more of the same.  Targeted tax credits for businesses and individuals (not all of which are bad ideas, but that economists agree won’t make much of a dent).  Infrastructure spending on highways, bridges, and schools.  Bailouts to states to help save government jobs.  Mortgage bailouts.  Job training programs.  Unspecific regulatory reform.  Not all of these proposal are necessarily bad, but not one of them is new.

It was the 2009 Recovery Act all over again, except with a smaller (but still gargantuan) price tag — and without any acknowledgement of the previous stimulus and its abject failures.  As Body Snatcher Obama tends to do, the president spoke tonight as if this was his very first jobs plan.  Relevant, inconvenient context (think “shovel ready jobs”) was nowhere to be found.  Indeed, if this were such an obvious, “not controversial” set of ideas, why didn’t Democrats pass them easily when they controlled every elected lever of power in Washington for two full years?

The tone and tenor of the address, which was sprinkled with superficial appeals to bipartisanship, was highly political and practically unhelpful.  Strawmen were introduced and torched at record pace.  Lost in the shuffle, the cost of this grand scheme somehow jumped from $300 Billion on Tuesday to nearly $450 Billion today.

Those are estimates, of course, because there is no tangible legislation yet.  Which means it can’t be passed “right away,” nor can it be scored by the CBO.  As we’ve learned many times in recent months, the CBO cannot score a speech.  But not to worry, America.  Everything is paid for!


Enough of the class warfare Obama. Top 1% of wage earners earn 20% of the income, pay 38% of the income tax… Top 10% of wage earners earn 50% of the income pay 70% of the income tax.

“So really we need to get our facts straight and get beyond sort of this blame-the-rich game. This class war-fare, this class envy. We need to remember that this is America; where the American dream is open to all. You, Mr. President, are a product of the American Dream.

You should be proud of those who gain wealth. You should be proud of those who make a profit. We should extol the successes of American businesses, of American individuals. That would help us to move forward.” – Senator Paul

Rick Perry rebukes Obama over president’s new jobs plan

Houston Cron – By Emily Holden

Rick Perry quickly condemned President Barack Obama’s $447 billion plan to create jobs and rehabilitate the US economy, criticizing his proposal to spend more while America faces mounting debt.

“President Obama’s call for nearly a half-trillion dollars in more government stimulus when America has more than $14 trillion in debt is guided by his mistaken belief that we can spend our way to prosperity,” Perry said in a written statement Thursday night. “America needs jobs, smaller government, less spending and a president with the courage to offer more than yet another speech.”

Speaking before a joint session of Congress, Obama proposed a five-part package that would cut taxes for small businesses, expand payroll tax cuts for workers, extend unemployment benefits for the jobless and spend $100 billion on transportation projects.

Obama said the American Jobs Act “will not add to the deficit,” and asked members of Congress to increase the $1.5 trillion in savings they are charged with finding by Christmas to cover the full cost of his new plan.

“Like the president’s earlier $800 billion stimulus program, this proposal offers little hope for millions of Americans who have lost jobs on his watch, and taxpayers who are rightly concerned that their children will inherit a mountain of debt,” Perry said.

Hoffa rant riles ’em up, doesn’t create jobs

Obama economic adviser Alan Krueger supports prisoners joining labor unions…


An Update on TARP Support for the Domestic Automotive Industry

The Congressional Oversight Panel’s January oversight report, “An Update on TARP Support for the Domestic Automotive Industry,” found that, although it remains too early to tell whether Treasury’s intervention in the U.S. automotive industry will prove successful, the government’s ambitious actions appear to be on a promising course.

Even so, the companies that received automotive bailout funds continue to face uncertain futures, taxpayers remain at financial risk, concerns remain about the transparency and accountability of Treasury’s efforts, and moral hazard lingers as a long-run threat to the automotive industry and the broader economy.

Executive Summary*

Since the Panel‟s last comprehensive review of TARP support for the domestic automotive industry in September 2009, Treasury‟s automotive investments have, in financial terms, starkly improved. As of September 2009, the Congressional Budget Office (CBO) estimated that taxpayers would lose $40 billion on their automotive investments.

Today, CBO has reduced its loss estimate to $19 billion, and the three largest recipients of automotive bailout funds – General Motors (GM), Chrysler, and GMAC/Ally Financial – all appear to be on the path to financial stability.

While it remains too early to tell whether Treasury‟s intervention in and reshaping of the U.S. automotive industry will prove to be a success, there can be no question that the government‟s ambitious actions have had a major impact and appear to be on a promising course.

Even so, the companies that received automotive bailout funds continue to face uncertain futures, taxpayers remain at financial risk, concerns remain about the transparency and accountability of Treasury‟s efforts, and moral hazard lingers as a long-run threat to the automotive industry and the broader economy.

Treasury is currently unwinding its stakes in GM, Chrysler, and GMAC/Ally Financial. Of those companies, GM is furthest along in the process of repaying taxpayers. It conducted an initial public offering (IPO) on November 18, 2010, and Treasury used the occasion to sell a portion of its GM holdings for $13.5 billion.

This sale represents a major recovery of taxpayer funds, but it is important to note that Treasury received a price of $33.00 per share – well below the $44.59 needed to be on track to recover fully taxpayers‟ money. By selling stock for less than this break-even price, Treasury essentially “locked in” a loss of billions of dollars and thus greatly reduced the likelihood that taxpayers will ever be repaid in full.

Treasury has explained its decision to sell at a loss by saying that it wished to unwind government ownership of the automobile industry as quickly as possible. This justification may very well be reasonable, but it is difficult to evaluate. Because Treasury has cited different, conflicting goals for its automotive interventions at different times – saying, for example, that it wished to save American jobs, to produce the best possible return to taxpayers, or to return the company to private ownership as rapidly as possible – it is difficult for the Panel or any outside observer to judge whether Treasury‟s results in fact qualify as successful.

The other major automotive manufacturer to receive government assistance, Chrysler, remains a private company. Because Treasury has already absorbed $3.5 billion in losses on loans made to the pre-bankruptcy Chrysler, the prospect for a full recovery of taxpayers‟ money depends upon Treasury‟s ability to sell its ownership of Chrysler at a profit. However, as Treasury owns only 10 percent of the company‟s stock, it has very limited ability to influence the timing of an eventual public offering.

The remaining 90 percent of Chrysler was parceled out to several other parties, including the Italian automotive manufacturer Fiat, through the bankruptcy process – but while this approach may have saved Chrysler from liquidation, the result is that Treasury has little authority to act in taxpayers‟ interests.

Another source of concern is Treasury‟s hasty unwinding of its position in Chrysler Financial, in which taxpayer returns appear to have been sacrificed in favor of an unnecessarily accelerated exit, further compounded by apparently questionable due diligence.

The final major recipient of automotive-related aid, GMAC/Ally Financial, represents a curious case. GMAC/Ally Financial is a financial company, not a manufacturer; it operates in many fields entirely unrelated to the automotive industry. Traditionally, however, the company has provided the bulk of financing to GM car dealerships, as well as significant financing to individual purchasers of GM vehicles. As such, Treasury saw the survival of GMAC/Ally Financial as critical to its broader automotive rescue.

Since the Panel‟s report on GMAC/Ally Financial in March 2010, the company has experienced three consecutive quarters of profits and has reduced the risk in its mortgage portfolio. Even so, taxpayers likely will not begin to recover their investment until GMAC/Ally Financial conducts an IPO.

Treasury has had significant leverage over the IPO‟s timing due to its preferred stock holdings, but regrettably, Treasury has been inconsistent in acknowledging this leverage. Treasury‟s reluctance to recognize its own influence may represent an effort to claim a coherent “hands off” shareholder approach, despite the unique circumstances that apply to GMAC/Ally Financial.

The “hands off” approach may in itself raise questions. Treasury has asserted that, even if one of the automotive companies had announced an entirely unrealistic business plan, Treasury would not have intervened. In more practical terms, Treasury declined to block GM‟s purchase of AmeriCredit, a subprime financing company, even though AmeriCredit may ultimately compete against GMAC/Ally Financial and thus damage that company‟s ability to repay taxpayers.

Although Treasury‟s “hands off” approach may have reassured market participants about the limited scope of government intervention, it may also have forced Treasury to leave unexplored options that would have benefited the public.

Treasury is now on course to recover the majority of its automotive investments within the next few years, but the impact of its actions will reverberate for much longer. Treasury‟s rescue suggested that any sufficiently large American corporation – even if it is not a bank – may be considered “too big to fail,” creating a risk that moral hazard will infect areas of the economy far beyond the financial system.

Further, the fact that the government helped absorb the consequences of GM‟s and Chrysler‟s failures has put more competently managed automotive companies at a disadvantage. For these reasons, the effects of Treasury‟s intervention will linger long after taxpayers have sold their last share of stock in the automotive industry.

*The Panel adopted this report with a 4-0 vote on January 12, 2011.


Conclusions and Recommendations

The financial crisis laid bare the challenges facing the domestic U.S. auto industry. The cumulative impact of a series of strategic and competitive missteps over the preceding decade came to the fore in the fall of 2008. While the Panel has previously questioned the government‟s perception of its policy choices during various stages of the crisis, there is little doubt that in the absence of massive government assistance, GM, Chrysler, and GMAC/Ally Financial faced the prospect of bankruptcies and potential liquidation, given the apparent dearth of available financing from the private sector.

In the context of a fragile economy and the financial crisis (which severely restricted both corporate and consumer credit), the failure of these companies could have had significant near-term consequences in terms of job losses and the performance of the broader U.S. economy.

Although the assets of GM and Chrysler (plants and equipment, employees, brand recognition) would have had value to other firms over the longer term, it was in the context of these adverse near-term consequences that both the Bush and Obama Administrations provided assistance to the auto sector.

The Panel takes no position on the decision to support the auto industry, a topic addressed in our September 2009 report. All told, the Bush and Obama Administrations provided $81.4 billion in assistance to these three companies (as well as $3.5 billion for auto suppliers). Unlike assistance to the banks, much of the government‟s investment still hangs in the balance, with 66 percent of overall assistance still outstanding. Treasury is now on course to recover the majority of its automotive investments within the next few years, but the impact of its actions will reverberate for much longer.

Treasury‟s rescue suggested that any sufficiently large American corporation may be considered “too big to fail,” broadening moral hazard risk from its TARP rescue actions beyond the financial sector. Further, the fact that the government helped absorb the consequences of GM‟s and Chrysler‟s failures has put more competently managed automotive companies at a disadvantage.

Still, while the government perhaps set a dangerous precedent of expanding the notion of “too-big-to-fail” to the non-financial sector, the terms on which this support was provided offered considerably less comfort to legacy shareholders and creditors, at least to those of Chrysler and GM, than it did to the equity and debt holders of rescued financial firms.

While the outlook for the return on taxpayer funds has improved considerably over the past 12 months, there is still a long road ahead, particularly for GMAC/Ally Financial and Chrysler. Improving industry fundamentals – signified by GM‟s recent IPO – highlight a more hospitable backdrop since the Panel‟s last report on the auto sector in September 2009.

This backdrop corresponds with improved operating fundamentals, as GM and Chrysler have shed costs and positioned themselves to produce profits at much lower levels of output. Market shares have generally stabilized, as has vehicle pricing since manufacturers no longer need to offer generous incentives to reduce overladen inventories.

GMAC/Ally Financial has benefited from an improving backdrop for mortgage assets, allowing the firm to reduce the crushing overhang of its mortgage exposure, as well as reverse at least a portion of prior asset write-downs.

Against this improving backdrop, GM has reported improving earnings in each of the past four quarters. GMAC/Ally Financial is now in the black after reporting losses throughout 2009, and Chrysler‟s performance has improved materially with the help of its alliance with Fiat. (While operationally profitable, interest payments on TARP loans have prevented a bottom-line return to profitability at Chrysler.)

Treasury‟s calculations of potential taxpayer losses of $14.7 billion on total assistance of $81.3 billion to these three firms could ultimately prove conservative, but significant risks remain, given that the amount recovered will depend heavily on public market valuations of each firm‟s shares into 2011 and beyond.422 Below is a brief summary of the status of Treasury‟s investments in GM, Chrysler, and GMAC/Ally Financial.

  • GM: Of the $49.9 billion in total assistance, the government has thus far recouped $22.7 billion.423 As of December 31, 2010, the government‟s unsold stake is valued at $18.4 billion, which would represent a total taxpayer loss of $7.9 billion.
  • Chrysler: Only $2.2 billion in total assistance has been recouped,424 and $3.5 billion in loans are considered a loss. However, the improved financial performance of the company indicates that Treasury‟s remaining loans to Chrysler may in fact be ultimately recovered. As discussed in Section E, for the government to recoup losses already incurred to Old Chrysler, the equity value of a potential IPO would have to exceed $14.5 billion.
  • GMAC/Ally Financial: Significant equity investments in GMAC/Ally Financial imply greater risk and more uncertainty in the lead-up to a potential IPO in 2011, although the improved operating performance – similar to that of GM and Chrysler – bodes well for a meaningful return on the $17.2 billion in total assistance to GMAC/Ally Financial. This being said, GMAC/Ally Financial is now the last TARP recipient standing – after the accelerated Citigroup exit and recent announcements about exiting AIG – for which the government has control of its exit and not articulated a clear exit strategy.

These rescue efforts by the government employed differentiated strategies with varying levels of risk to the taxpayer. While GM and Chrysler were put through bankruptcy, GMAC/Ally Financial was not, to the relative benefit of its legacy shareholders and creditors. Whereas the government shouldered the entire rescue of GM, it enlisted Fiat as a partner for Chrysler, which is a smaller and less economically significant automobile manufacturer than GM.

While the Panel has outlined various scenarios that could see taxpayers recover a meaningful amount of this assistance over the next two years, the financial returns on these investments do not tell the entire story and should not overshadow the Administration‟s broader objectives in providing assistance to the auto industry.

Unlike the intervention in the financial sector, the government in this case sought a broad restructuring of the underlying industry, and it was able to pursue this objective given its controlling stake in some of the impacted companies. Given the broader restructuring aims – as well as countering the threat of imminent and massive job losses – it is perhaps not surprising that the government has offered various benchmarks beyond a strict tally of the full return of the taxpayer‟s assistance to measure its success in this endeavor.

While senior Treasury advisor Ronald Bloom once defined success solely in monetary terms – “the greater percentage of the money that we invested that we get back, the greater success” – on other occasions Mr. Bloom and others in the Administration have cited the dual mandates of jobs preservation and effecting lasting fundamental reform of the auto sector.

As outlined in this report, there are examples of conflict – some inevitable, others not – between Treasury‟s core principles. In particular, the government has sought to present a consistent narrative of its role as a reluctant shareholder. In the case of GMAC/Ally Financial, transparency that would illustrate the unique circumstances of specific investments and explain certain actions by Treasury has sometimes been sacrificed in favor of retaining the appearance of a consistent narrative. This unnecessarily undermines the spirit of transparency critical to the effectiveness of the TARP.

Another recent example of this conflict between Treasury‟s principles involves Chrysler Financial, where meaningful incremental taxpayer returns appear to have been sacrificed in favor of an unnecessarily accelerated exit, further compounded by apparently questionable due diligence. The Panel notes that questions stemming from this transaction are not motivated by the fact that seven months following Treasury‟s exit, Chrysler Financial sold at a price that was 33 percent higher than the value of the company implied by Treasury‟s settlement price.

Rather, the government‟s due diligence on the sale of its stake to Cerberus was surprisingly limited in scope. Treasury focused on the merits of the offer at hand and apparently neglected to contemplate more favorable valuation scenarios that may have resulted from a competitive bidding process of eager strategic buyers looking to acquire and invest in the Chrysler Financial platform. Given the apparent success of the longer-term investment mindset that has characterized the government‟s management of its AIG and GMAC/Ally Financial investments, Treasury‟s haste to exit Chrysler Financial is perplexing.

A final tally on the return of taxpayer assistance and a report card on longer-term reform efforts remain premature. Early returns indicate that the government‟s intervention in the auto sector – leaving aside any assessment of the relative merits of providing that assistance in the first place – has been surprisingly successful, both in terms of financial returns from assistance and the rebound in the companies‟ performance. The Panel notes that GM and Chrysler are now adding jobs after their initial downsizings.

However, as noted, a more robust scorecard, one that weighs the positives from government intervention, such as the near-term preservation of jobs and prevention of a deeper contraction in the economy, versus the negatives, including the investment of substantial taxpayer dollars and the precedent set by government intervention into the private sector, is required to evaluate fully the government‟s actions.

Nonetheless, this longer-term assessment should not obscure the near-term focus on recovering as much value as possible for the taxpayer. At the same time, the Panel recognizes that absent sustainable reform that produces a smaller auto industry subject to the discipline of the private capital markets, improved returns on taxpayer assistance could mask longer-term risks.

Likewise, the relatively improved outlook should not overshadow serious questions that prevent a more transparent assessment of the government‟s efforts. These questions arise from the fact that, having intervened on a massive scale and outlined sweeping mandates for the reform of the industry, the government – by its own account – then chose largely to retreat to the sidelines, performing run-of-the-mill oversight of its investments and leaving the heavy lifting to the government‟s designees on the companies‟ boards of directors.

Treasury has consistently (and often vociferously) asserted that it will not interfere or otherwise seek to influence the strategic management of the companies in which it holds a stake. The Panel recognizes the importance of a hands-off approach to day-to-day business operations and recognizes that crossing this line in certain instances can raise troubling questions regarding the government‟s role in the private sector. However, many would argue that this line had long since been crossed, given the government‟s initial decision to provide assistance to the auto industry, and to pretend otherwise today begs credulity.

In the case of GMAC/Ally Financial, the Panel recommended previously that Treasury explore the possibility of value-enhancing strategic arrangements that would seek to maximize the government‟s aggregate stake in both GM and GMAC/Ally Financial. Subsequently, rather than seeking a closer relationship with GMAC/Ally Financial, GM has chosen to build its own auto financing subsidiary via the acquisition of AmeriCredit.

While such a move may seemingly make strategic sense for GM, it is not clear if the value to the government, as a shareholder in GM, outstrips the potential negative impact of this acquisition to the government‟s stake in GMAC/Ally Financial. Treasury‟s deliberate refusal to take a portfolio investment approach to managing its holdings across the auto sector appears to be inconsistent with the rationale for its decision to rescue GMAC/Ally Financial, which was to help GM continue to finance car sales, particularly to its dealership network.

The Panel recognizes two potential positive developments from Treasury‟s hands-off approach. Namely, GM‟s efforts to establish its own captive auto finance subsidiary will likely improve the competitive dynamics in this market by reducing the company‟s reliance on GMAC/Ally Financial.

Further, any residual moral hazard in the marketplace related to the perception that GMAC/Ally Financial is too interconnected with GM to be allowed to fail would likely be mitigated by GM‟s development of its own captive financing subsidiary. The Panel makes the following recommendations:

  • The Administration should enhance disclosure in the budget and financial statements for the TARP by reporting on the valuation assumptions (“credit reform” subsidy rates) for the individual companies included in the overall subsidy rate for the AIFP.
  • The Panel recognizes that it is in the private sector‟s and the government‟s interest for Treasury to exit its investments as soon as practicable. However, Treasury should be cognizant that this may not in all instances be in the taxpayer‟s best interest. The Panel urges Treasury to consult independent third parties to assess these determinations in the future to identify instances where a longer investment horizon may meaningfully improve the outlook for the taxpayer‟s return on its investment.
  • Treasury sought to assure the Panel during its February 2010 hearing on GMAC/Ally Financial that legacy private sector stakeholders in the company would not see any return until and if the U.S. taxpayer recoups its entire investment. The Panel recommends that Treasury expand on this assertion, clarifying its approach to the treatment of legacy shareholders in GMAC/Ally Financial as the government‟s exit plan moves forward. Aside from the consequences to the taxpayer‟s interest, clarifying the treatment of legacy shareholders will help preserve market discipline going forward.
  • Given the scale of government intervention and the desire not to repeat this episode, it may be in the taxpayer‟s interest that Congress commission independent researchers to periodically assess the long-term fallout from the collapse of the auto industry and the subsequent government intervention, including the risk to taxpayers stemming from future disruptions to the auto market from economic, credit market or other potential threats. Related to these efforts, Congress should also follow up by contracting with independent researchers and market analysts to develop more credible estimates of the impact of the bailout of GM, GMAC/Ally Financial, and Chrysler on economic performance and employment.


Additional Views

A. J. Mark McWatters and Professor Kenneth R. Troske

We concur with the issuance of the January report and offer the additional observations below. We appreciate the efforts the Panel and staff made incorporating our suggestions offered during the drafting of the report. We wish to make the following points.

In the closing days of 2008 when GM, Chrysler, and GMAC/Ally Financial faltered, the American taxpayers – not the Department of Treasury – stood as the last safehaven for these distressed institutions. In return for their generosity the CBO estimates that the taxpayers stand to lose approximately $19 billion on their investments.

This is real money, enough to finance the construction of over four Nimitz-class aircraft carriers (at $4.5 billion each) or fund approximately 25 years of NIH-sponsored breast cancer research (at $765 million per year).

Treasury‟s primary role in the restructuring of GM, Chrysler, and GMAC/Ally Financial was to act as a funding conduit for the taxpayer sourced capital infusions. These institutions have, not surprisingly, performed reasonably well over the past several months due to the strength of their foreign markets, the recovery of their domestic markets, the replacement of their directors and senior management, the deleveraging of their balance sheets, the renegotiation of their collective bargaining agreements, the recovery of the capital markets, the tepid recovery of the general economy, and, of course, the “gift” of $19 billion or so of taxpayer funds. It remains to be seen, however, if these companies can remain on the path to financial recovery and independence from taxpayer-sourced subsidies.

The Panel concludes in the report: “there is little doubt that in the absence of massive government assistance, GM, Chrysler, and GMAC/Ally Financial faced the prospect of bankruptcies and potential liquidation.”

While bankruptcy did follow for GM and Chrysler and probably should have followed for GMAC/Ally Financial, we remain skeptical that the companies would have been liquidated and sold off for scrap value absent direct intervention by the government. The brisk turn-around of the three institutions over the past two years indicates that even in the last quarter of 2008 substantial inherent value existed within each company.

Despite claims to the contrary, we still have trouble concluding that Chevrolet, Cadillac, Buick, GMC trucks, and Jeep, as well as GMAC/Ally Financial‟s auto finance business, among others, were worth next to nothing in the closing days of 2008 and, but for the taxpayer-funded bailouts, would have failed and left hundreds of thousands temporarily unemployed.

It would have been preferable for these institutions to have been reorganized by private sector participants, with, perhaps, debtor-in-possession financing guaranteed to a limited extent by the government. It is difficult to accept that private sector strategic buyers, private equity firms, hedge funds, and sovereign wealth funds were not willing and able to orchestrate the successful reorganizations or restructurings of the three distressed companies.

Once the government entered the picture and signaled its intent to bail out the institutions with its unlimited taxpayer-financed checkbook, it is hardly surprising that private sector participants demurred. Under such circumstances, it is not possible for even the most sophisticated, motivated, and financially secure of private sector firms to prevail.

The Panel states in the report:

Treasury is now on course to recover the majority of its automotive investments within the next few years, but the impact of its actions will reverberate for much longer. Treasury‟s rescue suggested that any sufficiently large American corporation – even if it is not a bank – may be considered “too big to fail,” creating a risk that moral hazard will infect areas of the economy far beyond the financial system. Further, the fact that the government helped absorb the consequences of GM‟s and Chrysler‟s failures has put more competently managed automotive companies at a disadvantage. For these reasons, the effects of Treasury‟s intervention will linger long after taxpayers have sold their last share of stock in the automotive industry.

The Panel states in the report:

These favorable events, however, must be thoughtfully balanced against the moral hazard risks created by the taxpayer‟s bailout of the three institutions and the ongoing implicit guarantee of the government. By bailing out GM, Chrysler, and GMAC/Ally Financial, the government sent a powerful message to the marketplace – some institutions will be protected at all cost, while others must prosper or fail based upon their own business judgment and acumen. We regret that Treasury has focused solely on the apparent success of the GM IPO in assessing the rescues of the three institutions to the distinct exclusion of the moral hazard risks arising from the bailouts.

The Panel also states in the report:

As the Panel has discussed in earlier reports, the cost of any program initiated under EESA cannot be measured solely by the amount of money returned to the public coffers. The cost must also include a calculation of the risk that the American people assumed while the loans or investments were outstanding.

And it must include some accounting of the potential future effects on the industry and the wider economy, such as the heightened risk of moral hazard among American automobile companies, or among any large corporations, leading these companies and the market to assume that they have an implicit guarantee from the government (i.e., that they are “too big to fail,” or at least will receive generous government support to ease the bankruptcy process). Even if such effects cannot be determined until years into the future, their potential must be taken into account when measuring the success of the automobile programs.

In our view, the above passages represent the most significant analysis provided in the report. The TARP has all but created an expectation, if not an emerging sense of entitlement, that certain financial and non-financial institutions are simply “too-bigor too-interconnected-to-fail” and that the government will promptly honor the implicit guarantee issued for the benefit of any such institution that suffers a reversal of fortune. This is the enduring legacy of the TARP.

Unfortunately, by offering a strong safety net funded with unlimited taxpayer resources, the government has encouraged potential recipients of such largess to undertake inappropriately risky behavior secure in the conviction that all profits from their endeavors will inure to their benefit and that large losses will fall to the taxpayers. The placement of a government sanctioned thumb-on-the-scales corrupts the fundamental tenets of a market economy – the ability to prosper and the ability to fail.

Following the bailouts of GM, Chrysler, and GMAC/Ally Financial and the potential loss of $19 billion or more of taxpayer-sourced funds, is it realistic to expect that the government will permit these companies to fail the next time around? We have our doubts. More significantly, the directors, managers, and employees of these institutions most likely appreciate the benefits afforded by the government‟s implicit guarantee, but it remains to be seen whether they also appreciate the attendant moral hazard risks.

Although not the subject of this report, we would be remiss if we did not note that commentators have questioned the treatment of certain classes of creditors in the GM and Chrysler bankruptcies as well as certain procedures adopted by and rulings of the bankruptcy courts.

Regarding this matter, Barry E. Adler, the Petrie Professor of Law and Business, New York University, offered the following testimony to the Panel:

The rapid disposition of Chrysler in Chapter 11 was formally structured as a sale under §363 of the Bankruptcy Code. While that provision does, under some conditions, permit the sale of a debtor‟s assets, free and clear of any interest in them, the sale in Chrysler was irregular and inconsistent with the principles that undergird the Code.

The most notable irregularity of the Chrysler sale was that the assets were not sold free and clear … That is, money that might have been available to repay these secured creditors was withheld by the purchaser to satisfy unsecured obligations owed the UAW. Thus, the sale of Chrysler‟s assets was not merely a sale, but also a distribution – one might call it a diversion – of the sale proceeds seemingly inconsistent with contractual priority among the creditors.

Given the constraint on bids, it is conceivable that the liquidation value of Chrysler‟s assets exceeded the company‟s going-concern value but that no liquidation bidder came forward because the assumed liabilities – combined with the government‟s determination to have the company stay in business – made a challenge to the favored sale unprofitable, particularly in the short time frame afforded. It is also possible that, but for the restrictions, there might have been a higher bid for the company as a going concern, perhaps in anticipation of striking a better deal with workers.

Thus, the approved sale may not have fetched the best price for the Chrysler assets. That is, the diversion of sales proceeds to the assumed liabilities may have been greater than the government‟s subsidy of the transaction, if any, in which case the secured creditors would have suffered a loss of priority for their claims. There is nothing in the Bankruptcy Code that allows a sale for less than fair value simply because the circumstances benefit a favored group of creditors.

In addition, with respect to the bailout of GMAC/Ally Financial, the Panel offered the following observations in its March 2010 report:

Although the Panel takes no position on whether Treasury should have rescued GMAC, it finds that Treasury missed opportunities to increase accountability and better protect taxpayers‟ money. Treasury did not, for example, condition access to TARP money on the same sweeping changes that it required from GM and Chrysler: it did not wipe out GMAC‟s equity holders; nor did it require GMAC to create a viable plan for returning to profitability; nor did it require a detailed, public explanation of how the company would use taxpayer funds to increase consumer lending.

Moreover, the Panel remains unconvinced that bankruptcy was not a viable option in 2008. In connection with the Chrysler and GM bankruptcies, Treasury might have been able to orchestrate a strategic bankruptcy for GMAC. This bankruptcy could have preserved GMAC‟s automotive lending functions while winding down its other, less significant operations, dealing with the ongoing liabilities of the mortgage lending operations, and putting the company on sounder economic footing. ‘

The Panel is also concerned that Treasury has not given due consideration to the possibility of merging GMAC back into GM, a step which would restore GM‟s financing operations to the model generally shared by other automotive manufacturers, thus strengthening GM and eliminating other money-losing operations.

Download COP Report:  An Update on TARP Support for the Domestic Automotive Industry (PDF)(167 PAGES)

end – (

A list of Tea Party Caucus members and their earmark requests in Fiscal Year 2010, courtesy of Citizens Against Government Waste’s Pig Book:

NAME                EARMARKS        AMOUNT
Aderholt (R-AL)        69        $78,263,000
Akin (R-MO)             9        $14,709,000
Alexander (R-LA)       41        $65,395,000
Bachmann (R-MN)         0                  0
Barton (R-TX)          14        $12,269,400
Bartlett (R-MD)        19        $43,060,650
Bilirakis (R-FL)       14        $13,600,000
R. Bishop (R-UT)       47        $93,980,000
Burgess (R-TX)         15        $15,804,400
Broun (R-GA)            0                  0
Burton (R-IN)           0                  0
Carter (R-TX)          26        $42,232,000
Coble (R-NC)           19        $18,755,000
Coffman (R-CO)          0                  0
Crenshaw (R-FL)        37        $54,424,000
Culberson (R-TX)       22        $33,792,000
Fleming (R-LA)         10        $31,489,000
Franks (R-AZ)           8        $14,300,000
Gingrey (R-GA)         19        $16,100,000
Gohmert (R-TX)         15         $7,099,000
S. Graves (R-MO)       11         $8,331,000
R. Hall (R-TX)         16        $12,232,000
Harper (R-MS)          25        $80,402,000
Herger (R-CA)           5         $5,946,000
Hoekstra (R-MI)         9         $6,392,000
Jenkins (R-KS)         12        $24,628,000
S. King (R-IA)         13         $6,650,000
Lamborn (R-CO)          6        $16,020,000
Luetkemeyer (R-MO)      0                  0
Lummis (R-WY)           0                  0
Marchant (R-TX)         0                  0
McClintock (R-CA)       0                  0
Gary Miller (R-CA)     15        $19,627,500
Jerry Moran (R-KS)     22        $19,400,000
Myrick (R-NC)           0                  0
Neugebauer (R-TX)       0                  0
Pence (R-IN)            0                  0
Poe (R-TX)             12         $7,913,000
T. Price (R-GA)         0                  0
Rehberg (R-MT)         88       $100,514,200
Roe (R-TN)              0                  0
Royce (R-CA)            7         $6,545,000
Scalise (R-LA)         20        $17,388,000
P. Sessions (R-TX)      0                  0
Shadegg (R-AZ)          0                  0
Adrian Smith (R-NE)     1           $350,000
L. Smith (R-TX)        18        $14,078,000
Stearns (R-FL)         17        $15,472,000
Tiahrt (R-KS)          39        $63,400,000
Wamp (R-TN)            14        $34,544,000
Westmoreland (R-GA)     0                  0
Wilson (R-SC)          15        $23,334,000
TOTAL                 764     $1,049,783,150


When Citizens Against Government Waste (CAGW) released the first Congressional Pig Book in 1991, the group was a lonely voice in the pork-barrel wilderness.  There was only modest objection to the 546 projects worth $3.2 billion, and “earmark” was virtually unknown.  The one constant since then has been the undisputed reign of the King of Pork, Sen. Robert Byrd (D-W.Va.).

After Republicans took over Congress in 1994, pork-barrel projects started to be used as a currency of re-election.  Over the following decade, they became a currency of corruption, and the explosion in earmarks to their peak at $29 billion in 2006 helped erase the Republican majority.  The 9,129 projects in the 2010 Congressional Pig Book represent a 10.2 percent decline from the 10,160 projects identified in fiscal year 2009, and the $16.5 billion in cost is a 15.5 percent decrease from the $19.6 billion in pork in fiscal year 2009.

The reforms that were adopted when Democrats took over Congress in 2006 can be attributed to many years of work exposing earmarks, especially the outpouring of public outrage over projects such as $50,000,000 for an indoor rainforest in Iowa and $500,000 for a teapot museum in North Carolina.

The changes include greater transparency, with the names of members of Congress first appearing next to their requested projects in 2008; letters of request that identify where and why the money will be spent; and the elimination of earmarks named after sitting members of Congress in the House.

For fiscal year 2011, House Democrats are not requesting earmarks that go to for-profit entities; House Republicans are not requesting any earmarks (although there are both exceptions and definitional questions); not surprisingly, the Senate has rejected any limits on earmarks.  None of these reforms are sufficient to eliminate all earmarks, so CAGW expects there will still be a 2011 Pig Book.

The transparency changes are far from perfect.  The fiscal year 2010 Defense Appropriations Act contained 35 anonymous projects worth $6 billion, or 59 percent of the total pork in the bill.  Out of the 9,129 projects in the 2010 Congressional Pig Book there were 9,048 requested projects worth $10 billion and 81 anonymous projects worth $6.5 billion.

The latest installment of CAGW’s 20-year exposé of pork-barrel spending includes $4,481,000 for wood utilization research,  $300,000 for Carnegie Hall in New York City, and $200,000 for the Washington National Opera in the District of Columbia.

Following the exit of Alaska porker extraordinaire Sen. Ted Stevens (R-Alaska), the state slipped to number four in pork per capita.  Hawaii led the nation with $251 per capita ($326 million).  The runners up were North Dakota with $197 per capita ($127 million) and West Virginia with $146 per capita ($265 million).

The projects in this year’s Congressional Pig Book Summary symbolize the most egregious and blatant examples of pork.  As in previous years, all of the items in the Congressional Pig Book meet at least one of CAGW’s seven criteria, but most satisfy at least two:


  • Not specifically authorized;
  • Not competitively awarded;
  • Not requested by the President;
  • Greatly exceeds the President’s budget request or the previous year’s funding;
  • Not the subject of congressional hearings; or
  • Serves only a local or special interest.

2010 Pig Book Summary

The 2010 Congressional Pig Book Summary gives a snapshot of each appropriations bill and details the juiciest projects culled from the complete Pig Book. (.pdf)

end – ;(

Extreme Views

White House: The Economy Is Lost

Obama Admin. Says “Nothing Is Possible” To Help Struggling Economy As Jobless Claims Hit Nine-Month High, Employers “Scared To Death”; Gop Listening And Offering Better Solutions

With President Obama set to take off for Martha’s Vineyard in a matter of hours, the Obama Administration says “NOTHING IS POSSIBLE” (their caps, not ours) to help an economy showing new signs of job losses and employer uncertainty.  (Now, this is a peculiar admission coming from a White House that is also saying, despite his vacation, that the president is “working hard to do everything possible to get this economy back on the right track…,” but mixed messages can be a problem for those folks these days.)

Unsurprisingly, the White House also told POLITICO Playbook it would “love to back additional stimulus,” but outside of that, “RIGHT NOW, NOTHING IS POSSIBLE…” to get our economy moving again.  There you have it: the American people are asking ‘where are the jobs?’ and all Washington Democrats have to offer is more of the same failing ‘stimulus’ policies.  How’s that been working out?  Well, here’s how things are going a little more than two weeks after the Treasury Secretary declared “welcome to the recovery” in The New York Times:

The government reported this morning that jobless claim filings rose to their highest levels in nine months, “yet another setback” and a “sign that employers are cutting jobs again.”  Welcome to the reality…

Obama and the Socialist Bourgeoisie

Ellison, other Dems angry at second cut in food stamps

Econquotes: By Obama, Samuelson, Becker, Reich, Karlgaard, Magnet, Etc.

Townhall – By Ross Mackenzie

Recent quotations on the economy that may not put you to sleep….

President Obama: “All of us should be worried about the fact that we have been running the credit card in the name of future generations. We’ve got to get our debt and our deficits under control. That’s going to be our project for the next couple of years.”

Carnegie Mellon University economics Professor Allan Meltzer: “The administration’s stimulus program has failed. Growth is slow and unemployment remains high. The president, his friends and advisers talk endlessly about the circumstances they inherited as a way of avoiding responsibility for the 18 months for which they are responsible. But they want new stimulus measures — which is convincing evidence that they too recognize that the earlier measures failed. And so the U.S. was odd-man out at the G-20 meeting…,continuing to call for more government spending in the face of European resistance.”

Washington Post economics columnist Robert Samuelson: “What we’re seeing in Greece is the death spiral of the welfare state….Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven’t fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.”

Nobel economist Gary Becker, a founder (with Milton Friedman) of the Chicago school of economics: “This belief in individual responsibility — the belief that people ought to be free to make their own decisions, but should then bear the consequences of those decisions — this remains very powerful. The American people don’t want an expansion of government. They want more of what (Ronald) Reagan provided. They want limited government and economic growth. I expect them to say so in the elections this November.”…]

Sarah Palin Responds to Emily’s List Attacking Pro-Life Women on Abortion

CBO Releases Its Annual Summer Update of the Budget and Economic Outlook

CBO Director’s Blog – August 19, 2010

CBO estimates, in its annual summer update of the budget and economic outlook, that the federal budget deficit for 2010 will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010 when it issued its previous estimate.

Relative to the size of the economy, this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP. As was the case last year, this year’s deficit is attributable in large part to a combination of weak revenues and elevated spending associated with the economic downturn and the policies implemented in response to it.

This report presents CBO’s updated budget and economic projections spanning the 2010–2020 period. Those projections reflect the assumption that current laws affecting the budget will remain unchanged—and thus the projections serve as a neutral benchmark that lawmakers can use to assess the potential effects of policy decisions.

As such, CBO assumes that tax reductions enacted earlier in this decade that are currently set to expire at the end of this year do so as scheduled; it also assumes that no new legislation aimed at keeping the alternative minimum tax (AMT) from affecting many more taxpayers is enacted.

In addition, CBO assumes that the measures enacted in the past two years to provide fiscal stimulus to the weakened economy will expire as currently scheduled and that future annual appropriations will be kept constant in real (inflation-adjusted) terms. Under those assumptions, the federal budget deficit would decline substantially over the next two years—to 4.2 percent of GDP in 2012—and, consequently, the budget would provide much less support to the economy than has been the case for the past two years.

According to CBO’s projections, the recovery from the economic downturn will continue at a modest pace during the next few years. Growth in the nation’s output since the middle of calendar year 2009 has been anemic in comparison with that of previous recoveries following deep recessions, and the unemployment rate has remained quite high, averaging 9.7 percent in the first half of this year.

Such weak growth is typical in the aftermath of a financial crisis. The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment, and slow income growth as well as lost wealth will restrain consumer spending.

All of those forces, along with the waning of federal fiscal support, will tend to restrain spending by individuals and businesses—and, therefore, economic growth—during the recovery. CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until 2014.

In CBO’s current-law projections, once the economy has recovered, the federal budget deficit amounts to between 2.5 percent and 3.0 percent of GDP from 2014 to 2020. Projected deficits total $6.2 trillion for the 10 years starting in 2011, raising federal debt held by the public to more than 69 percent by 2020, almost double the 36 percent of GDP observed at the end of 2007.

Those projections, which are similar in many respects to the ones that CBO prepared in March, reflect assumptions about spending and revenues that may significantly underestimate actual deficits. Because the projections presume no changes in current tax laws, they result in estimates of revenues that, as a percentage of GDP, would be quite high by historical standards.

Because of the assumption that future annual appropriations are held constant in real terms, the projections yield estimates of discretionary spending relative to GDP that would be low by historical standards. Of course, many other outcomes are possible. If, for example, the tax reductions enacted earlier in the decade were continued, the AMT was indexed for inflation, and future annual appropriations remained the share of GDP that they are this year, the deficit in 2020 would equal about 8 percent of GDP, and debt held by the public would total nearly 100 percent of GDP.

A different fiscal policy would also yield different economic outcomes. For example, CBO estimates that under an alternative fiscal path similar to the one mentioned above, real growth of GDP in 2011 would be 0.6 to 1.7 percentage points higher than it is in the baseline forecast, and the unemployment rate at the end of 2011 would be 0.3 to 0.8 percentage points lower. However, later in the coming decade, real GDP would fall below the level in CBO’s baseline because the larger budget deficits would reduce investment in productive capital.

Beyond the 10-year budget window, the nation will face daunting long-term fiscal challenges posed by rising costs for health care and the aging of the population. Continued large deficits and the resulting increases in federal debt over time would reduce long-term economic growth.

Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly above their average percentage of GDP of the past 40 years, or adopt some combination of those approaches.

CBO Links

Entire Document:  pdf Full Summary:  pdf

Supplemental Material:

Jobless victims to be banned froom traveling (liberals want economic berlin walls)

Jobless claims rise to highest level in 9 months

Related Previous Posts:

COP: TARP Bailout Disproportionately Benefited Foreign Banks…

CBO: Federal Debt and the Risk of a Fiscal Crisis


Tomorrow is a Long Time

Obama’s ‘Redistributionists’ Retirement Plan: More Socialism Coming

New Department Of Labor (DOL) Socialist Retirement Regulations Coming Up Next?

The Creature From Jekyll Island

“Helicopter Ben” Bernanke: Keynesian Fine Tuning Or Intertemporal Misallocation?

Related Links:

The Heritage Foundation:  The Economic Freedom Act: Economic and Fiscal Effects

Ludwig von Mises Institute:  The Danger Not Over

HOTAIR (Capt Ed):  Dem strategists to candidates: Walk away from Obama

American Thinker: Economy Needs Heart Transplant, Obama Offering Band-Aid


WH: President Obama Announces Recess Appointments to Key Administration Posts

Human Events: BREAKING: Obama Appoints Maria del Carmen Aponte as Ambassador to El Salvador

Updated GOP Leader Article, Added Related Links and Police Video (h/t Commenter “Rocks” @ HA) – end