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    a negative effect of the american recovery and reinvestment act was that the federal deficit grew. many more business failed. state governments lost funding. the gross domestic product dropped.

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    Economic Report of the President (2013)

    [Economic Report of the President (2013)]

    [Administration of Barack H. Obama]

    [Online through the Government Publishing Office, www.gpo.gov]

    CHAPTER 3 FISCAL POLICY

    The American Taxpayer Relief Act of 2012 (ATRA), which was enacted

    on January 2, 2013, permanently extended the 2001 and 2003 Federal

    income tax cuts for 98 percent of taxpayers. The tax relief act

    reflects the approach supported by the President to reduce the

    Federal budget deficit- an approach that balances responsible

    reductions in government spending with new revenues and increased

    progressivity of the tax code. The new law extended the expansions

    of several tax credits enacted in the American Recovery and

    Reinvestment Act of 2009 (the Recovery Act) that have pro�vided

    economic opportunities through tax relief and college expense assis�

    tance to 25 million low- and middle-income students and working

    families each year. In addition, the new law prevented a substantial

    cut in Medicare physician payment rates, extended emergency

    unemployment insurance benefits to protect 2 million workers from

    losing their benefits in January 2013, and permanently indexed to

    inflation the exemption amounts for the Alternative Minimum Tax

    (AMT) to provide tax certainty to tens of millions of middle-class

    families. The permanent fix to the AMT will protect middle-class

    families from being subject to a tax designed to ensure that

    wealthy taxpayers pay their fair share in taxes.

    Together with the additional Medicare and investment income taxes

    for high-income taxpayers in the Affordable Care Act (ACA), ATRA has

    made the Federal tax system more progressive. Figure 3-1 shows the

    trends in average Federal individual income and employment tax rates

    by income class. These average tax rates, defined as the share of

    taxpayer income paid in taxes, are measured by holding the

    distribution of taxpayer income constant over time (using the 2005

    distribution with incomes adjusted for growth in the National Average

    Wage Index) to isolate the effects of tax law changes. The tax law

    changes in 2013 increased the average tax rate for taxpayers in the

    top 1 percent and the top 0.1 percent of the income distribution

    by 4.9 and 6.5 percentage points, respectively, while leaving

    individual income tax rates unchanged for 98 percent of Americans.

    91

    Another recent development in government finance is that the

    fiscal outlook for State and local governments has improved, although

    expenditures remain below pre-recession levels and State and local

    investment spending remains notably low. As shown in Figure 3-2, the

    continued decline in State and local investment is atypical. In other

    recoveries, State and local governments' gross real investment was

    typically flat for several quarters following a business-cycle trough

    and then increased, but, in this recovery, gross investment has failed

    to rebound.

    This chapter highlights the declining Federal budget deficit

    since 2009 and the additional work needed to achieve medium- and

    long-term fiscal health. It then outlines the principles for Federal

    income tax reform set forth by President Obama in September 2011 and

    describes specific plans pro�posed by the Administration to meet these

    goals. The enactment of ATRA is a step toward achieving these goals,

    but substantial work remains to make the tax code more equitable and

    efficient. The chapter also reviews the State and local budget outlook

    and the Federal Government's role in mitigating the recent recession's

    effect on government finances at these levels. Finally, the chapter

    discusses the long-term financial challenge facing State and local

    governments from the underfunding of pension plans.

    92 | Chapter 3

    The Federal Budget Outlook

    The Obama Administration has taken significant steps to restore

    the country's fiscal health without disrupting the continuing economic

    recovery. In fiscal year (FY) 2009, the Federal budget deficit was

    10.1 percent of gross domestic product (GDP). This ratio fell 3.1

    percentage points to 7.0 percent in 2012, the largest three-year

    reduction in the deficit since 1949. Under current law, the deficit

    is projected to fall to 5.3 percent in 2013 (CBO 2013). This decline

    in the deficit largely reflects the wind-down of Recovery Act spending,

    the reductions in spending set forth in the Budget Control Act of 2011,

    new revenues as a result of ATRA, and the improved performance of the

    economy.

    The Congressional Budget Office (CBO) projects that Federal

    receipts will grow by 11 percent to $2.7 trillion, or 16.9 percent of

    GDP, in 2013 (Figure 3-3). This is the highest receipts-to-GDP ratio

    since 2008, but still below the average of 18.3 percent of GDP

    recorded between 1970 and 2000. As a percent of GDP, outlays are

    projected to fall from 22.2 percent in 2013 to 21.5 percent in 2017

    due in large part to the spending caps put in place by the Budget

    Control Act as well as reductions in certain mandatory spending as the

    economy continues to improve. After 2017, outlays will rise, relative

    to GDP, as interest payments on the national debt increase and as

    Source : www.govinfo.gov

    The Great Recession

    Explore the Federal Reserve's history

    The Great Recession

    December 2007–June 2009

    Lasting from December 2007 to June 2009, this economic downturn was the longest since World War II.

    Store closing signs at a furniture store in 2009 (Photo: Associated Press; Photographer: Paul Sakuma)

    by Robert Rich, Federal Reserve Bank of Cleveland

    The Great Recession began in December 2007 and ended in June 2009, which makes it the longest recession since World War II. Beyond its duration, the Great Recession was notably severe in several respects. Real gross domestic product (GDP) fell 4.3 percent from its peak in 2007Q4 to its trough in 2009Q2, the largest decline in the postwar era (based on data as of October 2013). The unemployment rate, which was 5 percent in December 2007, rose to 9.5 percent in June 2009, and peaked at 10 percent in October 2009.

    The financial effects of the Great Recession were similarly outsized: Home prices fell approximately 30 percent, on average, from their mid-2006 peak to mid-2009, while the S&P 500 index fell 57 percent from its October 2007 peak to its trough in March 2009. The net worth of US households and nonprofit organizations fell from a peak of approximately $69 trillion in 2007 to a trough of $55 trillion in 2009.

    As the financial crisis and recession deepened, measures intended to revive economic growth were implemented on a global basis. The United States, like many other nations, enacted fiscal stimulus programs that used different combinations of government spending and tax cuts. These programs included the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009.

    Traders await news of the Federal Reserve's response to the mortgage crisis at the New York Stock Exchange. (Photo: Bettmann/Bettmann/Getty Images)

    The Federal Reserve’s response to the crisis evolved over time and took a number of nontraditional avenues. Initially, the Fed employed “traditional” policy actions by reducing the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with much of the reduction occurring in January to March 2008 and in September to December 2008. The sharp reduction in those periods reflected a marked downgrade in the economic outlook and the increased downside risks to both output and inflation (including the risk of deflation).

    With the federal funds rate at its effective lower bound by December 2008, the FOMC began to use its policy statement to provide forward guidance for the federal funds rate. The language made reference to keeping the rate at exceptionally low levels “for some time” (Board of Governors 2008) and then “for an extended period” (Board of Governors 2009a). This guidance was intended to provide monetary stimulus through lowering the term structure of interest rates, increasing inflation expectations (or decreasing prospects of deflation), and reducing real interest rates. With the recovery from the Great Recession slow and tenuous, the forward guidance was strengthened by providing more explicit conditionality on specific economic conditions such as “low rates of resource utilization, subdued inflation trends, and stable inflation expectations” (Board of Governors 2009b). This was followed by the explicit calendar guidance in August 2011 of “exceptionally low levels for the federal funds rate at least through mid-2013” and eventually by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance can be seen as an extension of the Federal Reserve’s traditional policy of affecting the current and future path of the funds rate.

    In addition to its forward guidance, the Fed pursued two other types of “nontraditional” policy actions during the Great Recession. One set of nontraditional policies can be characterized as credit easing programs that sought to facilitate credit flows and reduce the cost of credit, as discussed in more detail in “Federal Reserve Credit Programs during the Meltdown."

    Another set of non-traditional policies consisted of the large scale asset purchase (LSAP) programs. With the federal funds rate near zero, the asset purchases were implemented to help push down longer-term public and private borrowing rates. In November 2008, the Fed announced that it would purchase US agency mortgage-backed securities (MBS) and the debt of housing related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks).1  The choice of assets was partly aimed at reducing the cost and increasing the availability of credit for home purchases. These purchases provided support for the housing market, which was the epicenter of the crisis and recession, and also helped improve broader financial conditions. The initial plan had the Fed buying up to $500 billion in agency MBS and up to $100 billion in agency debt; this particular program was expanded in March 2009 and completed in 2010. In March 2009, the FOMC also announced a program to purchase $300 billion of longer-term Treasury securities, which was completed in October 2009, just after the end of the Great Recession as dated by the National Bureau of Economic Research. Together, under these programs and their expansions (commonly called QE1), the Federal Reserve purchased approximately $1.75 trillion of longer-term assets, with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.

    Source : www.federalreservehistory.org

    Preparing for the Next Recession: Lessons from the American Recovery and Reinvestment Act

    Recessions generate significant risks for both people and the economy.  At the human level, they increase hardship for families that lose jobs or businesses.

    POLICY FUTURES

    Preparing for the Next Recession: Lessons from the American Recovery and Reinvestment Act

    MARCH 21, 2016 | By

    Jared Bernstein and Ben Spielberg

    Executive Summary

    Recessions generate significant risks for both people and the economy.  At the human level, they increase hardship for families that lose jobs or businesses.  For the economy, they cost output that’s never recovered.  Moreover, recent research has found that recessions can cause considerable “scarring” as temporary symptoms such as joblessness morph into permanent disconnections between the jobless and the labor market.[1]  If such effects are large enough, they can significantly reduce both the future level of gross domestic product (GDP) and the economy’s growth rate.

    Consequently, measures that can quickly respond to a recession by bolstering the economy and at least moderating the downturn’s negative impacts are important.  While the Federal Reserve lowers interest rates and expands access to credit, the President and Congress can tap various “stabilizers” through budget and tax policy that can offset some of the financial losses that households experience and help them maintain higher levels of consumer spending.

    In many cases, stabilizers already take effect automatically.  The federal income tax is a good example.  As people lose income and fall into lower tax brackets, their tax burden falls by still-larger percentages, enabling them to retain more of their income.  On the spending side, more people become eligible for SNAP (formerly called food stamps) and unemployment insurance (UI), putting money in their hands to spend and, thus, relieving their hardship while boosting the economy.  In states with particularly high unemployment, jobless workers who exhaust their regular state UI benefits can get more weeks of benefits through the Extended Benefits (EB) program.

    The depth of the Great Recession and the slow recovery, however, serve as poignant reminders that monetary policy and automatic stabilizers don’t always do enough.  Meanwhile, state balanced-budget requirements present a serious obstacle to recovery efforts.  Because recessions drain state revenues as people and businesses become less prosperous and pay fewer taxes, states must cut spending, raise taxes, or do both to avoid deficits, which puts a further drag on the economy.  These realities strengthen the case for countercyclical federal stimulus measures beyond the existing automatic stabilizers, even during recessions less severe than the most recent one.

    For decades, policymakers have enacted temporary countercyclical measures during recessions to supplement the automatic stabilizers.  These measures have included additional weeks of unemployment insurance,[2] like the Emergency Unemployment Compensation (EUC) program that policymakers have enacted during or after every major recession since the late 1950s and which was in effect most recently from mid-2008 through 2013.  Policymakers also have cut taxes temporarily, provided temporary SNAP benefit increases, and allocated temporary fiscal relief for states.  These additional measures have reduced the depth and length of downturns and further alleviated the suffering associated with joblessness and income losses, especially for people with limited savings or access to credit.

    Countercyclical stimulus measures were especially important during the Great Recession, which ran from December 2007 through June 2009 but, due to its depth and sluggish aftermath, has affected Americans for much longer.  The 2009 American Recovery and Reinvestment Act (ARRA) “provided more than $830 billion in stimulus measures, much of it in the first three years after its passage in February 2009; about three-fourths of this was temporary spending increases, and the other fourth was tax cuts,” economists Alan Blinder and Mark Zandi wrote in a recent paper for our Full Employment Project.[3]  “It worked.  The job losses started to abate immediately, and the Great Recession officially ended in June.”[4]

    Blinder and Zandi’s analysis provides evidence that ARRA not only helped shorten the recession and lessen its severity, but that it also created jobs and raised output.[5]  They estimate that in 2010, for example, ARRA saved 2.6 million jobs and raised real GDP by 3.3 percent above what it otherwise might have been.  It also protected millions of people from falling into, or deeper into, poverty.[6]

    But while ARRA was clearly effective, many of its interventions ended too soon, as the economic need for them persisted both at the macroeconomic level (growth and unemployment) and the household level.[7]  The “fiscal impulse” from government at all levels (federal, state, local) turned negative in 2011[8] — that is, fiscal policy impeded the recovery — even though unemployment remained well over 8 percent and the labor market had considerable room to grow.  Though much of the fall in countercyclical spending was due to state and local government actions, federal fiscal policy also pivoted to deficit reduction too soon, toward the end of 2010, while the job market was still weak, long-term unemployment was historically high, and a large gap remained between actual and potential GDP.

    Moving forward in anticipation of further recessions, a stronger set of automatic stabilizers would help, though severe economic slumps like the Great Recession would still require policymakers to enact additional discretionary stimulus.  As outlined below, we recommend that policymakers:

    Source : www.cbpp.org

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