December 25, 2010
The 2010 fiscal scene in a nutshell? Jam-packed. Even though it officially ended the year before, the Great Recession continued its roll through the economy, leveling jobs, tax revenue, homes and optimism. Washington debated health care, tax cuts, the deficit, financial regulation — and took some steps toward getting the nation’s deficit under control. In Europe, one country after another fell victim to their own growing debt crises.
Of all the ups, downs and deficits, what were the biggest stories of the year? After consulting TFT experts, who collectively offered their take on the most important fiscal issues of 2010, the following eight stories had the most impact. Here’s the countdown.
8) TARP – The Final Numbers
The widely resented Troubled Asset Relief Program – considered by many to be a Wall Street bailout at the expense of everyday Americans when it was passed in October 2008 – was initially projected to cost the government $700 billion. At the time, no one really expected to see any of that money again. The outrage intensified as bailed-out banks proceeded to rake in record profits. But two years later, after the $12 billion profit reaped by the taxpayers in the sale of its remaining shares in Citigroup, the final price tag comes to just $25 billion. In government terms, that’s about five B-2 Spirit bombers and a handful of earmarks.
In the end, TARP will likely be remembered as a moderately successful program that everyone hated. But those naysayers have had the air let out of their tires.
7) The President’s Fiscal Commission
President Obama’s fiscal commission (or National Commission on Fiscal Responsibility and Reform) was perhaps the biggest fiscal nonevent of the year. Obama created the commission, led by Democrat Erskine Bowles and Republican Alan Simpson, by executive order as a fallback to a deficit panel that would have mandated an up-or-down congressional vote on its recommendations. That idea was killed in the Senate.
In order to bring the Simpson/Bowles deficit-reduction plan before Congress, 14 of the 18 commission members would have had to vote for it. On Dec. 3, the plan fell three votes short. Still, the commission put some strong and controversial ideas on the table, and generated both conservative and liberal support within the panel for specific recommendations. It also inspired a couple of copycat commissions, which also made recommendations that have yet to be adopted. At year’s end, though, we are more or less where we started: in agreement that the deficit needs to be addressed, but at odds over how to do it.
6) The Federal Reserve Gains Power
The Federal Reserve assumed a central role in helping the country out of the Great Recession as it flexed its independent muscles. In addition to lowering its key interest rate to nearly zero, it initiated two rounds of quantitative easing known as QE1 and QE2— which meant buying up over $1 trillion in mortgage-backed securities and other unattractive assets and purchasing $900 billion in short- and long-term Treasurys. The move is widely credited with stopping the economy’s downward spiral.
In addition to its more aggressive approach to monetary policy, the Fed was given expanded power to regulate the U.S. financial industry.
The Fed has emerged from the financial crisis with a high-profile mandate to prevent future crises. The financial reform bill passed this summer was mostly a yawn, but it created a new consumer protection agency headed by the controversial Elizabeth Warren and housed within the Fed, and it expanded the Fed’s oversight of banks.
The overall result is that Bernanke & Co. are on the hot seat in the event of another financial crisis.
5) State Budget Crises
The federal government may be in a fiscal bind, but at least it has the option to run deficits and borrow its way through the bad times. Most states, on the other hand, are required to balance their budgets, even when taxes slow to a trickle; during the Great Recession the states have experienced the steepest decline on record. With unemployment on the rise, they found their tax revenues declining while Medicaid obligations were soaring, along with unfunded pension obligations. Collectively, 46 states have budget gaps for fiscal year 2011, totaling $130 billion.
They’ve responded by slashing services like firefighting and law enforcement, laying off government staff, closing schools and raising taxes. Their brutal cutbacks have threatened the national recovery, as well, with their negative impact on consumer spending, business activity and unemployment. In addition, stimulus from the federal government to the states for the most part runs out in 2011, leaving the country between a rock and a hard place: As it stands, we’ll either bleed more from the federal government or watch state services dwindle to unacceptable levels.
4) European Debt Crisis
What started with a stab at austerity by a European country long-known for its dubious fiscal conditions quickly exploded into a crisis that threatened to consume the entire continent. When Greece announced on March 3 that it would be implementing massive cuts to entitlements and raising its sales tax by 2 percent, riots soon broke out in the streets of Athens. And despite the country’s efforts to rein in spending, Greece accepted a $160 billion bailout from the EU and IMF.
It was a harbinger of the year to come. The PIIGS – Portugal, Italy, Ireland, Greece and Spain – soon became synonymous with instability, and the healthier countries of the continent, particularly Germany, found themselves struggling to determine their obligation to their less fiscally sturdy neighbors. Ultimately, the world economic community found itself questioning the soundness of the euro altogether.
Meanwhile, across the pond, the United States is watching closely, and hoping to use the European crisis as a cautionary tale in order to avoid similar debt-induced crises at home.
3) Extension of Bush Tax Cuts
It’s only for two years, and it gained the president some significant concessions from across the aisle, but Obama’s decision to cave to Republican ultimatums and extend all of the Bush tax cuts, even temporarily, signaled a new era in Washington – one in which the president isn’t necessarily calling all the shots. Score one for the Tea Party.
The Congressional Budget Office projects that, if made permanent, the bill will add $857.7 billion to the federal deficit over the next 10 years. On the other hand, thanks to its inclusion of extended jobless benefits, the bill is expected to create well over a million jobs and boost economic growth. When the bill comes up for debate in two years, it will be at the height of the next presidential election. Can anyone be elected by raising taxes? Most economists agree that, eventually, taxes will have to go up to reduce the deficit. The question is when.
2) High Unemployment Persists
The stock market is up over 8 percent this year, Wall Street bonuses are set to approach record highs, and American companies are coming off their best quarter ever. But for the average American worker, the Great Recession is an undesirable houseguest who doesn’t realize he’s worn out his welcome. Unemployment, the most important measure of financial health for the general American populace, sits stubbornly at 9.8 percent, basically where it was a year ago, and far higher than it was at the start of the recession.
The implications seem endless and far reaching. Government expenditure on unemployment benefits has already been approved for another 13 months, at a cost of $57 billion; the tax base, and thus tax revenues, have shrunk; there is less consumer spending and more home foreclosures. Young people are having trouble getting a foot into the workforce, while some older workers may find themselves permanently on the outside looking in. With most experts in agreement that the unemployment rate is likely to stay near its current level over the next year, we can expect a downward pull on the economy for some time to come.
1) Health Care Reform
Talk about a healthy debate. Ever since President Obama signed the monumental health care reform bill into law on March 20, accusations, speculation and lawsuits have dominated the headlines. The Congressional Budget Office expected the new law to cost the government $938 billion over 10 years, but also estimated that it will ultimately reduce the net federal deficit by $143 billion during that same period.
But those numbers don’t have everyone convinced. Full implementation of the health care reform law is far from a done deal, as numerous lawsuits are questioning the constitutionality of mandating health insurance for all citizens – a Supreme Court case is inevitable. The president’s fiscal commission recently proposed a series of long-term cuts to health care expenditures that would also impact health care’s ultimate toll on the federal budget and deficit. And some Republicans in the new Congress have made repealing health care reform a stated goal. Every one of these elements has the potential to change the fundamental economics of the law.
Health Care Reform probably created more questions than it answered. Regardless, one thing is for sure: This piece of legislation is bound change the American economy drastically and permanently – more than any other fiscal phenomenon of 2010.