Masatoshi Katagiri [Profile]
Issues and Results during the Obama Administration:
Economic Policy and Financial and Healthcare Reform
Professor of Public Finance, U.S. Public Finance, Faculty of Economics, Chuo University
1. Introduction: Recovery of the American Economy is the Key to Obama's Re-election
This November, the U.S. will hold its presidential election as well as elections for both the House of Representatives and the Senate, at which time the Obama administration's achievements will be evaluated. With regard to "Obamanomics," a major factor in Obama's re-election will be whether or not people feel that the U.S. economy has recovered.
Amidst the worst conditions since the Great Depression in the 1930s, the Obama administration was inaugurated in January 2009, and, while aiming to recover the U.S. economy, they had to act quickly on matters including financial stability, economic measures, and assistance for the automotive industry, as they emerged from the worst situation approximately half a year after the inauguration. Following this, they have continued to implement economic measures that have helped the U.S. economy recover a good deal, setting up much needed financial regulatory reform and healthcare reform laws. Here, the results and issues regarding various measures will be explored.
2. Progress on Financial Stability and Enacting the Financial Regulatory Reform Act
(1) Progress on Financial Stability
On October 3, 2008, the Emergency Economic Stabilization Act (EESA) was enacted as a measure to stabilize the U.S. financial system after the financial crisis that arose after the collapse of Lehman Brothers in September 2008. The EESA authorized the Secretary of the Treasury to spend up to 700 billion U.S. dollars to stabilize the financial system by investing public funds in financial institutions that were on the verge of bankruptcy. However, because financial institutions continued to worsen financially and were reluctant to lend money, the Obama Administration announced a comprehensive Financial Stability Plan on February 10, 2009. The plan was for approximately 2 trillion U.S. dollars and instituted measures to address four main issues: (1) capital assistance; (2) the takeover of non-performing assets; (3) credit crunch; and (4) the housing loan crisis. These are detailed below.
- The Capital Assistance Program: This incorporated a comprehensive stress test for financial institutions and invested necessary capital in financial institutions under the condition of increased lending.
- The Takeover of Non-performing Assets: The Secretary of the Treasury, the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) worked together to establish a public investment fund that would help buy non-performing assets and also prepared government funds and financing to encourage private investors to buy non-performing assets from financial institutions. The funds that were set up were to be expanded to 1 trillion U.S. dollars.
- Credit crunch: In order to promote lending to consumers and businesses, the new FRB system was increased to a maximum of 1 trillion U.S. dollars in order to finance investors who held asset-backed securities.
- The housing loan crisis: The plan reduced the repayment burden for housing loans and implemented an interest rate cut policy.
By carrying out these measures in succession, within one year the major financial institutions had largely recovered. However, even though small and mid-size financial institutions turned a profit in 2010, non-performing loans in commercial real estate remained high and limited profits. Further, financial institutions also continued to see non-performing home loans remain high.
In September of 2008, the government took Fannie Mae and Freddie Mac under its purview after both had experienced a great loss from irrecoverable subprime loans, and had both companies buy home loans that met a certain criteria from financial institutions and issued MBS (securities). In this way they took on the risk of home loans and mitigated bad investments. In order to do this, over 180 billion U.S. dollars in public funds were given to both companies but the inactivity of the housing market and the insolvency of both companies grew, making them seek further support from the government. As this is a large public finance burden to the government, it is struggling as it attempts to curtail participation in the MBS market as soon as possible.
(2) Enacting the Financial Regulatory Reform Act
In order to prevent relapses in financial institutions, with the help of the Obama administration, the Financial Regulatory Reform Act was enacted to Congress on July 15, 2010. The act includes the "Volcker Rule" that limits high risk transactions by banks in order to prevent the relapse of financial institutions.
The main points are as follows:
- Proprietary transactions by banks performed for the purpose of increasing profits (excluding US debt transactions) would generally be prohibited.
- It would prohibit high risk derivative transactions on the part of banks.
- Public fund relief of financial institutions would be stopped, and bankruptcy dealings would proceed smoothly.
- Major financial institutions would be centrally controlled by the FRB.
- A council would be established to oversee the stabilization of the financial system.
- Hedge funds over a certain size would be obligated to be registered with the U.S. Securities and Exchange Commission.
- Consumer protection of financial transactions would be strengthened.
These laws are scheduled to be put into practice beginning July 2012, but because of opposition from the finance industry which would be subject to these laws and from foreign financial authorities, the details required to put them into practice are being delayed.
3. The Effects of Economic Policy and Problems with Healthcare and Financial Reform
(1) The Effects of Economic Policy
The Obama administration signed the American Recovery and Reinvestment Act into law on February 17, 2009. This was designed as an economic measure based on reducing income tax and improving the infrastructure, and was estimated to cost 787billion U.S. dollars. In December 2010, the extension of the Bush Tax Cut laws, which cost even more than the ARRA (858 billion U.S. dollars), was signed into law. Further, on September 8, 2011, economic and job measures costing 447 billion U.S. dollars, and which were based on employment tax reduction and public works, were announced.
As the overseer of prices and the economy, the FRB lowered the policy interest rate from 1% to 0 - 0.25% in December 2008, introducing actual zero interest rates. From January 2009 to March 2010, the purchase of MBS, or, from March 2009 to October 2009 as QE1 of the quantitative easing plan and November 2010 to June 2011 as QE2 of the quantitative easing plan, purchased mid and long-term national bonds. In August 2011, it was made clear that an ultra-low interest rate policy was "likely to continue to the middle of 2013." In September, a twist operation to increase the maintenance ratio of term national securities began. Further, on January 25, 2012, inflation targets of 2% were introduced to back up business. On January 27, it was announced that zero interest rates would be extended until the end of 2014.
Supported by these types of fiscal and monetary policies, the U.S. economy entered a solid transition down a path of gradual recovery, and in 2010, the GDP essential growth rate was 3.1%. Then, in 2011 the recovery tempo slowed down and the growth rate decreased to 1.7%. Unemployment continued to be high at 9% through October 2011, and since November has finally gone down to its current 8%.
During this time, the Big Three automakers completely recovered. In 2009, GM and Chrysler, which had received public funds as part of legal reorganization, were able to completely rebuild. Through the legal reorganization, GM greatly reduced its retiree pension and insurance costs. In 2011, GM total profits were at its highest ever and Chrysler also turned a profit. Ford managed 3 times the profit of GM.
(2) Enacting Healthcare Reform
Healthcare reform that was desired by the Obama administration was enacted on March 21, 2010. The fundamentals are as follows:
- All citizens will be required to maintain private health insurance. There would be a fine for not enrolling. Through this, the number of uninsured would go down from 460 million to 320 million, and the insured rate would go up from 83% to 95%.
- The total cost would be 440 billion U.S. dollars over the next ten years. This would be covered through reduced spending and increased taxes. The public funds deficit would decrease by 138 billion U.S. dollars over the next ten years.
- Expensive health insurance would be accompanied by a consumption tax, and there would be a tax increase for the extremely wealthy people making 250,000 U.S. dollars per year.
- A publicly supported insurance transaction market would be established and regulation of private insurance would be strengthened. Enrollment by low income earners would be encouraged and the oligopoly would be suppressed to promote competition. Denying insurance based on medical history would be prohibited.
However, governors from 26 Republican states have raised issues claiming that "this same law violates the individual freedom to choose" and since the High Courts in Virginia and Florida have issued decisions regarding the obligation of citizens to enroll in insurance as unconstitutional, the Obama administration has appealed to the Supreme Court. A decision in this case will be made in June 2012. At issue is whether or not an obligation to enroll in insurance is considered a "commerce act" as provided in the U.S. Constitution.
(3) The Issue of Fiscal Reconstruction
In 2011 Fiscal Year, the financial reform deficit was one trillion fourteen million dollars, and compared to the GDP of 8.7% (3rd postwar), this is a very large sum. On August 2, the debt remaining maximum term, the rough going parties coming in and out of power conference decided, and the 2011 budget management law was established. Under this law, the $2.1 trillion debt limit would be withdrawn and over the next ten years a decrease of debt deficit of $2.1 - 2.4 trillion was decided. However, despite this, for the first time in history, the S&P withdrew its rating of national securities.
In dispute over the "established plan to cut the deficit by at least $1.2 trillion over the next ten years" which is included in this law, bipartisan committee meetings were held and lasted for two months in the fall of 2011. However, both the Democratic and Republic parties were not able to compromise and could not reach an agreement. As a result, according to the provisions of the same law, the president has no choice but to exercise his right to veto and it will be required that the annual expenditure budget be reduced every year over a 13-21 year period.
Unable to keep his promise to the public to cut the budget deficit in half during his first term, in a presidential message regarding the 2013 budget, President Obama has said that he will decrease the deficit by $4 trillion over the next ten years. The pillars for accomplishing this are the tax increase for the rich who have an annual income of over $250 thousand and the abolishment of tax subsidies for oil companies.
4. Conclusion: A Path for Obama's Re-election
While the Obama administration has shown impressive results such as financial stabilization, financial regulatory reform, the revitalization of the U.S. economy, and healthcare reform, it has not yet reached a point where it can be considered fully victorious and the possibility of a political change occurring is not out of the question. Reducing the deficit, tax reform (reducing corporate tax rates, increasing taxes for the extremely wealthy), reducing class disparity and increasing the middle class, and promoting the Green New Deal: on these fronts, there have not been any notable accomplishments. This condition does not permit for optimism and I hope to pay close attention to how the Obama administration will move while aiming for re-election.
- Masatoshi Katagiri
Professor of Public Finance, U.S. Public Finance, Faculty of Economics, Chuo University
- Born in Osaka on August 15, 1945. Graduated from the Division of Philosophy, Faculty of Letters, Kyoto University in 1969. Graduated from the Department of Economics, Faculty of Economics, University of Tokyo in 1972. After working for Toshiba and other companies, completed a post-graduate doctoral course in 1980 at the Graduate School of Economics, University of Tokyo. Obtained a Doctorate in Economics in 1992 from the Graduate School of Economics, University of Tokyo. Served as Assistant Professor at Sapporo Gakuin University as well as Assistant Professor and then Professor at Tokyo Keizai University before beginning his current position in 1996. Standing Director of the Japan Institute of Public Finance and Editor-in-Chief of the Institute's Publication Series, Fiscal Studies, and board/committee member of many other academic societies. 1993 - 1994, 2003: Visiting Researcher at American University. 2004: Visiting Researcher at the London School of Economics. 1984: Received the 10th Fujita Prize from the Tokyo Institute for Municipal Research (for research on U.S. metropolitan public finances). Researched intergovernmental fiscal relations between federal, state, and regional governments in the U.S., U.S. tax policy, international comparative public finance in welfare states, and tax and public finance in Japan. Author of: Structural Change in U.S. Public Finance-Realignment of Intergovernmental Fiscal Relations among Federal, State and Local Governments, Toyo Keizai Inc., 2005; Theory of frmation of intergovernmental administrative and fiscal relations between federal and city governments-New Deal and Public Finance in Metropolises, Ochanomizushobo CO., LTD., 1993. Co-editor: Public Finance-Japanese Public Finance in Transition-(2nd edition), Toyo Keizai Inc., 2007. Co-editor/author: New Developments in Decentralized Public Finance, Chuo University Press, 2007. Co-editor/author: New Developments in Globalized Public Finance, Chuo University Press, 2010.
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