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America’s Budget Impasses

Since 1970, the United States of America faced about 47 significant economic crises/recessions.
In 1990, the America experienced a great era of growth, investment and development of its
history but unfortunately, the golden period of the American history came to an end in the March
2001. To cope with the financial crises of the 21st century, the President of that time, Mr. George
W. Bush took some initiatives followed and expanded by the current President of the US Mr.
Barrack Obama. The main reason behind the current recession is the Wall street financial crises
that happened due to the excessive short term mortgages from the major investment banks in
America and the crises begins by the declaration of Lehman brothers the third largest investing
bank or americas’ insolvency.

In the recent 2013 budget, the budget committee of the US and the President Barrack Obama
tried to answer all the questions that were in the minds of the Americans. In this budget, the
economists took some corrective actions to stabilize the economy of the US. The deficit is cut
down in a safer way to protect the investments in different significant fields like education, small
businesses, production sector and clean energy. The main objective of the American’s
economists is to strengthen the middle class of the country and to increase the growth rate of the
overall economy.

This is of course a big task for the US economists to balance the deficit and to achieve the goal
of the $4 trillion in deficit reduction without affecting the living standards of the middle and
lower class of the country. There is more work to complete to achieve the goal and so the US
government and experienced economists have classified their tasks in different realistic goals.
The 2013 budget is just a part of the main project of attaining the $4 trillion goal of deficit
reduction that is designed to move a step. In the comparison with the economic conditions of that
of 2001 the American economy is far better, improved and stable today and so it seems that
America will soon achieve its goal by the end of this decade.

Evaluate the condition of the American economy since 2001, when George W. Bush enacted
tax cuts.

In March 2001, the longest period of economic growth in the American history was ended
because of the destruction of the speculative dot-com bubble, 9/11 attacks and fall in business
investment and outlays. Moreover, the economic situation was dropped to the ground because of
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America’s Budget Impasses
the War in Afghanistan against terrorist forces including the Taliban and Al Qaeda. A continues
fall had been observed during March 2001 to November 2001, about 10 years after the previous
recession. As a result of this recession, the peak unemployment rate was recorded 6.3% in June
2003 and the GDP decline from peak to trough was -0.3%. With every passing day, the
economic conditions of the America went worse.

To control the fast decline in the economic conditions of the America, the George W. Bush,
president of America of that time, enacted tax cuts as a solution.

The tax cut means, a reduction in taxes to lower the burden of paying tax on the general public.
The immediate effect of this initiative was an increase in the real income of the general public
and a decrease in the real income of the government, because most of the taxes were paid by the
government to balance the economic conditions. The Administration of the president George W.
Bush enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA;
P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L.
108-27). By the end of 2010, the tax cuts were expired and were collectively named as the Bush
tax cuts. In a lame-duck session held in December 2010, the current president Barrack Obama
extended the Bush tax cut and the two ARRA provisions for two years with a cost estimate of
$408 billion.

The Bush tax cuts were the significant factor that controlled the American economy and crises.
During the fiscal cliff, 2012, the president Barrack Obama made the Bush tax permanent for
singles earning less than $400,000 per annum and couples making less than $450,000 per annum
and is eliminated for the rest of the people, by the American Taxpayer Relief Act of 2012.

Before the implementation of the Bush tax cuts, the peak marginal income tax rate was 39.6%
and after implementation it was reduced to 35%. After making it permanent and the elimination
for higher income levels returned the high income tax rate to 39.6%.

Evaluate the Situation in February 2009, the size of the stimulus and fiscal multiplier.

The President Barrack Obama took charge on 20th January 2009, when the economic conditions
of the America were in the midst of the worst downturn of the Great Depression. The February
2009 is a part of the worst downturn and the conditions were the same as at the end of 2008.
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America’s Budget Impasses
About 4.6 million private jobs were lost by the US economy including 821,000 jobs in January
2009 and 39,000 jobs in February 2009; the annual GDP rate was declined by 8.9% and was
adjusted to inflation. The financial system was just destroyed and the credit for household and
businesses was seized up. A gradual decline was observed in the home prices with no bottom
line insight and the auto industry experienced the lowest level in the 27 years. The financial and
housing crises resulted in the loss of $16 trillion and compelled the families to pull back their
spending plans, to increase savings, reduction in personal debt, on the other hand the leading
companies cut back their hiring plans, lay off valued employees and had eliminated investment
plans.

To control the worst economic conditions of the country, the Obama administration took some
initiatives to set a plan and strategies to balance the fiscal policy to support recovery program.
During the 2009, in the US economy, there was high debt, flexible exchange rates, lower income
and poor economic conditions and we know that the fiscal multipliers in such countries are much
weaker. Economists of the Obama administration assume that the federal funds rate will
expected to stay constant for a period of four years, expected a multiplier of 1.6 for the purpose
of government purchases and 1.0 for the purpose of tax cuts from the fiscal stimulus of America.
An alternative assessment of the John Cogan, John Taylor, Tobias Cwik and Volker Wieland
presented different models in which the rates of interests and taxes rises more quickly in
response to the higher public borrowing. Therefore was considered that their multipliers were
much smaller. They think America's stimulus will boost GDP by only one-sixth as much as the
Obama team expects. In February 2009, the Obama administration used high multipliers, as 1.6
job gains with an estimation to generate $787 billion stimulus packages approved by the
Congress. Unfortunately, due to fluctuating exchange rates, low income and high debt, the size
of the fiscal multiplier was close to zero. Though, the federal government made some significant
commitments to control the severe downturn but the gradual increase in the unemployment
raised questions about the efficacy of the US fiscal policy. The reason behind slow working of
the fiscal multiplier in US was the leakages in the globalized world due to high imports from the
rest of the world, in order to make it effective the government should either minimize these
leakages or their impact upon the country’s fiscal measures and the government also needed to
implement an accommodative monetary policy in the country.
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America’s Budget Impasses
A massive bail out has been faced by the financial institution of the United States due to the great
financial crises and the US federal government takes certain significant fiscal stimulus efforts to
offset the running severe economic downturn. The American restraint and reinvestment Act of
2009 which was also known as the Recovery Act was considered as the boldest measure of the
countercyclical fiscal stimulus in the US history. Soon after these steps were taken the economy
gets a U-turn reverse course and the contraction in the economy has been resolved and the GDP
of the country began to grow again in the third quarter of that year. The economy has been
expanded to the upcoming consecutive 3-4 years and the unemployment problem has also been
resolved and the monthly change in private employment turned positive in the year 2010.

Evaluate the budget options facing congress in 2013- both the short term effects and the
long term issues?

The 2013 fiscal year is, October 2012 to September 2013 and has been issued and now the
Obama administration and the Congress are working on the budget for the fiscal year 2014. The
congress is facing lots of long term and short term budget options in the fiscal year 2013, one of
which is known is sequestered. The immediate budgetary concern of the congress in 2013 was
the replacement of sequester while focusing on the long term budget challenges. Sequester is
basically an automatic across the board spending cuts and were put into place under the Budget
Control Act of 2011 (BCA). These sequesters were not the part of a policy but were made to
force the Congress to achieve the agreement on a board, long term deficit reduction package.
Unfortunately, the cuts implemented on 1st March 2013 in the absence of such an agreement and
so the US economy went through the unfavorable conditions caused hundreds of thousands of
job losses.

The long-term challenge for the Congress is the cost of health care for the aging population of
the state. One positive development that is achieved by the administration with the implications
for the federal budget and economy is a reduction in the growth of the healthcare spending. The
Congress is reviewing the healthcare laws for the expansion of Medicaid and is also trying to
provide state flexibility on Medicaid to control the government spending in the sector. Moreover,
the Congress and the Obama administration are working on some other future prospects to
achieve such as effective policies to strengthen the middle class and to kick off the
unemployment.
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America’s Budget Impasses
The Congressional Budget Office (CBO) projected that the Federal receipts will increase by 11
percent to $2.7 trillion, or 16.9% to the GDP of 2013. Compared to the 2008 receipts-to-GDP
ratio, it is the highest ratio but is still below from the average, 18.3% GDP that has been recorded
between 1970 and 2000. It is also projected that the outlays will fall from 22.2% in 2013 to
21.5% in 2017 due in large parts to the spending caps implemented by the Budget Control Act as
well as reduction in some mandatory spending as the economy improves.

Another long term challenge for the Congress is to stabilize the debt-to-GDP ratio for which it
needs to reduce the deficit to 3 percent of GDP or lower. Fortunately, the current implications
increased the revenues and at the same time decreased the outlays in these few years have
brought the federal budget deficit (the difference between outlays and receipts) closer to the
target.

The issues that are still needed to resolve include rebalancing of the tax code to help the families
and businesses, increase access to the quality early childhood education, building investment
infrastructure to make investments in American innovations and to achieve the goal of $4 trillion
in deficit reduction. Over the last four years, as a result of the hard work of both parties, the US
economy reduced the deficit in a balanced and effective way more than $2.5 trillion which is a
great effect and success of both the parties.

Both, the President and the Congress requires to submit an effective plan to be implemented this
year to convert the long term issues of the 2013 budget options into short term effects of the
2014. Both parties need to put in place certain suggestions and legislations to ensure the solvency
and to control the wasteful spending, to eliminate frauds and abuse. The new initiatives will
expand the opportunities by growing the US economy that alternatively results in the reduction
of unemployment and other issues.
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America’s Budget Impasses