Economic Crisis of

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1 Economic Crisis of Worst recession since Great Depression Economy contracts t t 89%in 8.9% 4 th quarter t of ,000 jobs lost in January 2009 alone, unemployment surging Housing market crisis ripples through economy o y homebuilding o d g and d sales plummet, record foreclosures Financial market crisis threatens global economic collapse lending frozen 07/25/12 Page 1

2 Economic Performance 7% (Percent growth of real GDP, annualized rate) 5% 3% 1% -1% 3.8% 3.9% 3.8% 3.0% 2.5% 2.3% 1.7% 13% 1.8% 1.9% 1.3% 0.4% -0.7% -3% -5% -7% -6.7% -9% -8.9% -11% Q4Q Q2Q Q4Q Q2Q Q4Q Q2Q Q4Q Source: Bureau of Economic Analysis, U.S. Department of Commerce 07/25/12 Page 2

3 Private-Sector Jobs Picture 600 (Monthly change, in thousands of jobs, through June 2012) ,000 (June 2012) ,000 (Jan. 2009) Jan 2009 Jan 2010 Jan 2011 Jan 2012 Sources: Bureau of Labor Statistics, U.S. Department of Labor 07/25/12 Page 3

4 Following Severe Financial Crises, Economic Recoveries Are Shallower and Take Much Longer Real per capita GDP growth rates are significantly lower during the decade following severe financial crises... In the ten-year window following severe financial i crises, unemployment rates are significantly higher than in the decade d that t preceded d the crisis... i Dr. Carmen M. Reinhart and Dr. Vincent R. Reinhart National Bureau of Economic Research (NBER) Working Paper, After the Fall September /25/12 Page 4

5 U.S. Economic Growth Has Outpaced Global Competition 105 (Real GDP, 2008 Q1=100) United States 100 Euro Area Japan 95 United Kingdom Q Q Q Q Q1 Source: BEA, EuroStat, U.K. ONS, Cabinet Office of Japan 07/25/12 Page 5

6 What s Holding Back U.S. Economy From Stronger Recovery European debt / financial crisis throws cloud over global markets Political deadlock on fiscal issues creates uncertainty threat from Fiscal Cliff Federal, state, local government cutbacks create economic drag Housing market continues to pose threat Iran / Middle East t situation ti threatens t to disrupt oil supplies 07/25/12 Page 6

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9 Eurozone Economy Slowing g (Estimated percent growth of real GDP, annual rate) 3% 15% 1.5% 1% -1% -0.5% -3% Source: Blue Chip Economic Indicators, July 10, /25/12 Page 9

10 Economist Blinder on Threat to U.S. from European Debt / Financial Crisis My y rough g outlook for [U.S.]] GDP growth in calendar year 2012 is about 2.5 percent... The biggest threat to the economy is financial i contagion from Europe... [I]f we get a worse case scenario, a European financial i blow up that t looked somewhat like Lehman brothers... I think almost all, if not all, of that putative 2.5 percent growth could just evaporate in a worldwide recession. Former Vice Chairman of Federal Reserve Alan S. Blinder Testimony before Senate Budget Committee January 26, /25/12 Page 10

11 Who s Buying U.S. Exports Canada 19% Europe 22% Mexico 13% Rest of the World 4% South / Central America 11% Source: Census Bureau, U.S. Department of Commerce Note: Totals for 2011; does not add to 100 percent due to rounding. 7% China 23% Asia (excluding China) 07/25/12 Page 11

12 The Fiscal Cliff $1.2 T across-the-board sequester 2001 and 2003 tax cuts expiring AMT fix needed Extenders expiring or already expired Doc fix needed Payroll y tax cut expiringg Unemployment insurance extension expiring Debt limit increase required 07/25/12 Page 12

13 U.S. Borrowing Almost 40 Cents of Every Dollar It Spends 07/25/12 Page 13

14 Spending and Revenues 28% 26% 24% (% of GDP) Total Outlays 23.4% in % 20% 18% 16% Total Revenues $1.2 T Deficit 14% 15.8% in % Sources: OMB, CBO Note: 2012 estimate from CBO's March 2012 baseline. 07/25/12 Page 14

15 Gross Debt as % of GDP Under CBO Alternative Fiscal Scenario (% of GDP) 125% 119% 100% 90% Threshold 104% in 2012 in % 56% in % Debt Estimate Under CBO Alternative Fiscal Scenario 25% Sources: CBO and SBC Note: CBO s March 2012 baseline, adjusted to reflect its alternative fiscal scenario: extension of 2001 and 2003 tax cuts, tax extenders, AMT reform, SGR reform, and reversal of automatic spending reductions required by Budget Control Act. 07/25/12 Page 15

16 Economists Reinhart and Rogoff on Danger of Gross Debt Above 90 Percent of GDP Threshold We examine i the experience i of f 44 countries t i spanning up to two centuries of data on central t lgovernment td debt, inflation and d growth. Our main finding is that across both advanced countries and emerging markets, high debt / GDP levels (90 percent and above) are associated with notably lower growth outcomes. Carmen M. Reinhart and Kenneth S. Rogoff g Growth in a Time of Debt, American Economic Review: Papers & Proceedings May /25/12 Page 16

17 CBO Long-Term Debt Outlook 200% (Debt held by the public as % of GDP) Actual Projected 150% 100% 50% Debt Under CBO Alternative Fiscal Scenario 0% Source: CBO Long-Term Budget Outlook, June 2012 Note: CBO alternative fiscal scenario. 07/25/12 Page 17

18 Public Supports Balanced Deficit Reduction Approach QUESTION: What is the best way to reduce the federal budget deficit? ANSWER: Cut major programs 17% Increase taxes 8% Combination of both 62% Source: Pew Research Center, November 9-14, /25/12 Page 18

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