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USA

Politics:

  • Analysis

    USA politics: Fiscal crisis moves closer as talks are delayed

    Fiscal crisis moves closer as talks are delayed

    Negotiators working to avert a US fiscal crisis have gone home for the Christmas holiday after infighting among Republicans stopped all progress on a deal. An agreement by year-end, or shortly thereafter, is still on the cards, but the process will have to be led by the Democratic Senate and the president, Barack Obama, after congressional Republicans on December 20th failed to pass a tax bill of their own to address the fiscal cliff. This has weakened the negotiating position of the Republican majority in the House of Representatives, putting Mr Obama and Senate Democrats in the driving seat.

    Efforts to steer clear of the fiscal cliff-a severe budget tightening scheduled for 2013 that threatens to push the US back into recession-will resume on December 27th, when most negotiators return to Washington. But propsects for a deal were dealt a major setback on December 20th when the Republican leadership in the House of Representatives (the lower chamber of Congress) advanced their own version of a plan and then withdrew it from consideration when it became clear that some of their own members would not support it. This self-implosion among House Republicans has weakened the negotiating position of the Republican Speaker of the House, John Boehner; at a minimum, it will delay a deal until just before the new year starts, and may result in no deal at all until early January. Previously, the Obama administration and Republican leaders in the House, the two chief negotiators, had moved closer to each other in negotiations after a prolonged stand-off since the 2012 elections. The goal is to prevent more than US$600bn in tax increases and spending cuts from taking effect in 2013 and to agree on a longer-term framework for fiscal reforms to reduce the fiscal deficit.

    The outline of a fiscal deal was coming together

    The main breakthrough in talks came in mid-December after Mr Boehner dropped his opposition to increasing tax rates on upper-income earners. For months, Mr Obama has been pushing to let marginal income tax rates rise on families making at least US$250,000 per year. Mr Boehner did not embrace that position, but he did propose raising taxes on incomes over US$1m annually. The Republican Party has fiercely opposed any kind of tax increases for two decades, so Mr Boehner's offer represented a significant political reversal. In response, Mr Obama proposed increasing tax rates on annual income only over US$400,000. He also accepted a key Republican demand to change the way inflation is calculated by using the chained consumer price index, which would reduce the growth rate of government benefits, including for Social Security. Many Democrats do not want to target the old-age retirement programme in deficit reduction talks.

    These concessions from both sides represented movement towards an eventual agreement, even though publicly, the two parties remained at odds, and lawmakers were cautioning that an agreement might still prove elusive. Even so, the outline of a possible resolution had become clear: a deficit reduction package that might total some US$2trn in aggregate over ten years, with spending cuts and revenues increases broadly balanced.

    House Republicans' "Plan B" has weakened their hand

    In an effort to bolster his negotiating position, Mr Boehner unexpectedly proposed a so-called "Plan B" that would permit tax rises only on incomes above US$1m a year. This was supposed to act as a positioning move, by showing that the House could pass legislation (to divert blame if the negotiations ultimately failed and partly to pressure Mr Obama to move the tax rises up the income scale). Yet, after conservatives rebelled against voting for tax increases that the president had already promised to veto, the tactic blew up in Mr Boehner's face. By cancelling the vote that he himself scheduled, he has now been shown unable to deliver his party's votes in favour of his own proposals. This has proved to be something of a disaster for his leadership. Indeed, his position at the head of the Republican majority has involved a constant struggle to secure votes from the party's right-wing hardliners to pass legislation that would also be acceptable to the Democratic majority in the Senate. Mr Boehner seemed to acknowledge as much after the failed vote attempt, when he indicated that the president and Senate Democrats would now have to drive the negotiations.

    Several things now seem clear. When the president and lawmakers return later this week, they will have to take the lead on a new proposal. Mr Obama, in fact, offered the outlines of a deal on December 21st, but it had few specifics, and mainly repeated the positions he has advocated for the last few weeks: averting a tax increase on incomes below US$250,000 while allowing taxes to rise on those at higher levels. Mr Obama and Senate Democrats, who are in the majority in the upper house, will have to try to push a deal through the Senate this week, but that will only be possible if Senate Republicans agree not to filibuster it. The Repubilcan minority leader, Mitch McConnell, has yet to give such an assurance, though it is possible. If a deal passes the Senate, it must then go to the House for approval. It seems clear that any deal that can pass the House will have to have substantial support from Democratic lawmakers. This will make for a more moderate agreement than would have been the case if the Republican House majority had signed off on a deal.

    If no deal is reached in the next week, tax rates will rise automatically on January 1st 2013, at which point Congress will be able to vote immediately to reduce tax rates for lower- and middle income households, alongside deferring the severe spending cuts. Significant financial market turmoil would be likely if 2013 starts without a deal, but the economic impact would be negligible if the tax rises are reversed and spending cuts moderated in the first weeks of the year.

    December 24, 2012

  • Background

    USA: Political forces at a glance

    Present government: Barack Obama was elected president in November 2008. He is a member of the Democratic Party, which expanded its majorities in both the House of Representatives (lower house of Congress) and the Senate (upper house) at the congressional elections, which were also held in November 2008.

    Parliamentary forces: The legislative branch of government, Congress, is bicameral. The Senate has 100 members (two per state), who each serve a six-year term, with one-third elected every two years on a state-wide basis. The House has 435 members, who each serve a two-year term and are elected from constituencies based of broadly equal size.

    Election results
    (no. of seats)
     House Senate 
     2006200820062008
    Republicans2021784941
    Democrats2332574958
    Independents0021
    Total435435100100

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    Next elections: Mid-term congressional elections will be held on November 2nd 2010, when all 435 seats in the House of Representatives and one-third of the seats in the Senate will be renewed. Presidential and congressional elections will be held on November 6th 2012, together with elections for governors in 13 states and territories.

    April 04, 2010

  • Structure

    USA: Political structure

    Official name

    United States of America

    Form of state

    Federal republic

    Legal system

    Based on the constitution of 1787

    Federal legislature

    Bicameral: Senate of 100 members directly elected on a plurality (first-past-the-post) system for a six-year term, with one-third of its seats up for election every two years; House of Representatives of 435 members directly elected on a plurality basis for a two-year term. The Senate has the power to confirm or reject presidential appointments, including the cabinet, and to ratify treaties; the House of Representatives has the sole right to initiate revenue bills, although they may be amended or rejected by the Senate

    Electoral system

    Universal direct suffrage from the age of 18

    National elections

    November 4th 2008 (presidential, House of Representatives and one-third of the Senate) and November 2nd 2010 (House of Representatives and one-third of the Senate); the next presidential and congressional elections will be held on November 6th 2012, together with elections for governors in 13 states and territories

    Head of state

    Executive president elected by popular vote via an electoral college of 538 members, for a maximum of two four-year terms. Barack Obama (Democrat) replaced George W Bush (Republican) as president on January 20th 2009, with Joe Biden as vice-president

    State legislatures

    Each of the 50 states, except Nebraska (which has a unicameral system), has a bicameral legislature that essentially follows the model of the federal legislature; the states have certain fiscal and legal rights; some states now limit the number of terms that can be served by their elected representatives

    National government

    The administration is appointed by and responsible to the president; its senior officials are subject to confirmation by the Senate

    Cabinet secretaries

    Agriculture: Tom Vilsack

    Commerce: Rebecca Blank (acting)

    Defence: Leon Panetta

    Education: Arne Duncan

    Energy: Steven Chu

    Health & human services: Kathleen Sebelius

    Homeland security: Janet Napolitano

    Housing & urban development: Shaun Donovan

    Interior: Ken Salazar

    Justice: Eric Holder

    Labour: Hilda Solis

    State: Hillary Clinton

    Treasury: Timothy Geithner

    Other offices with cabinet rank

    Environmental Protection Agency: Lisa Jackson

    Office of Management & Budget: Jeffrey Zients

    President's Chief of Staff: Jacob Lew

    United States Trade Representative: Ron Kirk

    Chairman of the Federal Reserve

    Ben Bernanke

    December 07, 2012

  • Outlook

    USA: Key developments

    Outlook for 2013-17

    • Policymaking will remain difficult, as the 2012 general election preserved divided control of Congress through the 2013-14 legislative term.
    • Although the Economist Intelligence Unit expects a slightly lower level of partisanship, many pressing policy challenges will go unaddressed.
    • The re-election of the president, Barack Obama, will ensure policy continuity in 2013-16. His most pressing task is to find agreement with Republicans in Congress on moderating the severe fiscal tightening scheduled for 2013.
    • A combination of moderate economic growth, spending restraint and some tax rises will reduce the federal budget deficit in 2013-17.
    • The Fed's open-ended bond-buying programme (QE3) will keep monetary policy extraordinarily loose until the unemployment rate falls substantially. The Fed will also keep interest rates exceptionally low until mid-2015.
    • We estimate real GDP growth of 2.2% in 2012 (revised up slightly from 2.1%). The impact of difficult fiscal decisions will hold back the economy, although we still expect it to expand by 2.1% in 2013 and by 2.3-2.4% in 2014-17.
    • Economic growth in the forecast period will be driven by rising private consumption as employment and wages expand steadily, and by relatively high investment growth, especially in the residential construction sector.
    • Inflation will remain moderate, but will average slightly above 2% over the forecast period. The current-account deficit is expected to narrow steadily. The US dollar is expected to strengthen slightly in 2013-17.

    Review

    • Negotiations over averting the so-called fiscal cliff in 2013 have started slowly following the 2012 election. The White House and Republican leaders have offered competing proposals that will serve as a basis for a compromise.
    • The head of the Central Intelligence Agency, David Petraeus, was forced to resign over an affair with his biographer. His replacement has not been named yet, but his departure is not expected to have an impact on policy.
    • State governors have been given more time to decide whether to run their own healthcare exchanges (which are set up as part of the 2010 healthcare reform) or let the federal government do so.
    • Economic growth in the third quarter was revised up to 2.7% (from 2%), but much of the improvement was driven by one-off factors-defence spending and inventories-that are unlikely to continue.
    • Industrial production fell by 0.4% month on month in October, driven by manufacturing weakness. Capacity utilisation declined to 77.8% (from 78.2%).

    December 07, 2012

Economy:

  • Background

    USA: Country fact sheet

    Fact sheet

    Annual data2011aHistorical averages (%)2007-11
    Population (m)311.8Population growth0.9
    GDP (US$ bn; market exchange rate)15,076bReal GDP growth0.5
    GDP (US$ bn; PPP)15,076bReal domestic demand growth0.0
    GDP per head (US$; market exchange rate)48,350Inflation2.2
    GDP per head (US$; PPP)48,350Current-account balance (% of GDP)-3.7
    Nominal effective exchange rate86.1FDI inflows (% of GDP)1.6
    a Economist Intelligence Unit estimates. b Actual.

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    Background: The US has the highest level of output in the world, with GDP valued at US$15.1trn in 2011. Serious economic imbalances that emerged in recent years triggered a financial crisis and a deep recession in 2008-09. It will take several years for the economy fully to absorb the overhang from these imbalances. The economy is growing again, but at well below historical rates.

    Political structure: Powers are constitutionally divided between the executive, legislative and judicial branches, and between the federal and state governments. The president heads the executive branch. The federal legislature, Congress, consists of a House of Representatives, whose members are elected from constituencies based on population, and a Senate, whose members are elected state-wide (two per state). The president is elected every four years and House members every two years. Senators serve a six-year term, with one-third elected at each congressional election.

    Policy issues: Fiscal consolidation will be the focus of public debate and a significant policy challenge for the forecast period. The financial crisis has turned regulation and supervision of financial markets into a priority. Debate continues over the necessity of further central bank stimulus. In the longer term, the withdrawal of the existing, massive monetary stimulus will have to be managed carefully. A reform of healthcare that will substantially extend the reach of health insurance coverage has largely weathered a Supreme Court challenge, and will now be implemented. Population ageing will require a major review of entitlement programmes in the long term.

    Taxation: In general, personal tax rates are low compared with rates in other industrialised countries, whereas corporate tax rates are somewhat higher. Tax jurisdiction in the US is a complex web of powers divided between the federal government, the states, and local counties and municipalities. Sales tax varies from state to state.

    Foreign trade: The merchandise trade account (payments basis) recorded a deficit of US$738bn in 2011, and the current-account deficit was 3.1% of GDP. There may be some progress on trade liberalisation, including more bilateral free-trade agreements (FTAs), but targeted protectionist measures may also become more common. Such measures will focus on China, given its huge bilateral trade surplus with the US.

    Main exports 2011% of totalMain imports 2011% of total
    Machinery & transport equipment39.2Machinery & transport equipment36.0
    Manufactured goods19.1Manufactured goods24.4
    Chemicals14.0Mineral fuels & lubricants20.6
    Mineral fuels & lubricants8.7Chemicals9.0
        
    Leading markets 2011% of totalLeading suppliers 2011% of total
    Canada19.0China18.9
    Mexico13.3Canada14.5
    China7.0Mexico12.0
    Japan4.5Japan6.0
    UK3.8Germany4.5

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    December 07, 2012

  • Structure

    USA: Economic structure

    Data and charts: Annual trends charts


    December 07, 2012

  • Outlook

    USA: Country outlook

    USA: Country outlook

    FROM THE ECONOMIST INTELLIGENCE UNIT

    POLITICAL STABILITY: The outcome of the 2012 general election will bring some stability to the political scene in the forecast period. The re-election of the president, Barack Obama, will ensure policy stability, while the continuation of a divided Congress--with the Republicans controlling the House of Representatives (the lower chamber) and the Democrats holding the Senate (the upper chamber)--means that the parties will need to seek compromise to advance legislation. The Economist Intelligence Unit expects the ideological split between Democrats and Republicans, which fuelled a highly partisan atmosphere in the past congressional term, to narrow slightly, but constructive agreement will still remain elusive for many important policy topics. The two parties have found themselves unable to reach compromises on most major issues in the past two years of power-sharing. Part of the reason for this was that Republicans had sought to deny the president any policy achievements in an attempt to limit him to a single term. This imperative is no longer present. Moreover, the Democratic gains on all fronts in the elections--they won additional seats in both the Senate and the House of Representatives, as well as a convincing victory in the presidential election--is expected to persuade some Republicans of the merits of co-operation. All the same, the Republican majority in the House will continue to be strongly influenced by ultra-conservative Republicans linked to the anti-government Tea Party movement. Their steadfast opposition to most presidential initiatives will have to be overcome in order to pass legislation. One way would be to attract some Democrats to more centrist positions, but the leader of the House Republicans, John Boehner--who is set to be the president's most important interlocutor in the coming term--will be wary of using this approach too often, as it will weigh on his party's cohesion.

    ELECTION WATCH: The 2012 elections continued the existing balance of power, but this disguises the Democrats' generally strong showing. Mr Obama convincingly defeated his Republican opponent, taking 332 electoral votes to Mitt Romney's 206. The president secured victory by winning practically all of the "swing states", where the outcome had appeared close ahead of the vote. In the Senate, Democrats added two seats (including an independent) to their previous tally, reversing concerns earlier in the year that they might lose control of the chamber. Republicans comfortably retained control of the House of Representatives, but Democrats nonetheless gained eight seats overall in the chamber.

    INTERNATIONAL RELATIONS: Confrontation with Iran over its nuclear programme will remain a pressing foreign policy challenge for the next few years. The US and the EU imposed economic sanctions on Iran in 2011, including embargoes on purchasing the country's oil. Iranian threats to close the Strait of Hormuz, a vital conduit for crude oil, and US vows to reopen it by military means, if necessary, will periodically contribute to oil price volatility. A potential Israeli military attack on Iran's nuclear enrichment facilities might draw the US into the fray if Iran strikes back at US bases or ships in the Middle East. In such a scenario, the US would be likely to strike back amid heightened tension across the region, but there is little appetite for engaging in another protracted war in the Middle East.

    POLICY TRENDS: Negotiations are under way over significant budgetary decisions to avert a so-called fiscal cliff early in 2013. A 2011 deal to raise the debt ceiling imposed deficit-reducing measures that began this year; these will accelerate in 2013 and will amount to US$2.1trn over the next decade. Tax cuts from the George W Bush era and payroll tax reductions also expire at the end of this year, and the debt ceiling will have to be raised again. Congress, eventually, is likely to enact a package that addresses all of these issues, even if some major decisions are deferred to 2013 or later. We expect the Bush tax cuts to be renewed for lower- and middle-income wage earners but not for the wealthy. Mr Obama was re-elected on a platform that specifically called for raising taxes on high earners, so he has a strong hand on this front. The outlook for expenditure cuts is less certain. Unless Congress acts to change the thrust of the debt ceiling deal, social welfare programmes and defence spending will see severe cuts starting in 2013. The emerging solution looks likely to have two steps: first, a small "down-payment" on fiscal savings for 2013 that raises taxes on high incomes and makes some spending cuts; and second, a longer-term fiscal framework that cuts the budget deficit over the coming decade and restrains growth in social welfare programmes.

    ECONOMIC GROWTH: Economic growth rose to 2.7% (annualised) in the third quarter of 2012 (revised up from an initial estimate of 2%), recovering strongly from a deceleration to 1.3% in the second quarter. The latest data make clear that much of the growth in the third quarter was driven by two one-off effects: a rise in federal defence spending and inventory building, neither of which is expected to continue in coming quarters. By contrast, consumer and business investment, the expected main drivers of a recovery, were weaker than hoped and will be held back in late 2012 and early 2013 by business and consumer caution over fiscal cliff developments. In the remainder of 2013, however, we expect growth to be lifted by the impact of the Fed's monetary stimulus. We have raised our GDP growth estimate for 2012 to 2.2% (from 2.1%), and expect a mild deceleration in the 2013 average, to 2.1%. In 2014-17 we project GDP to grow by an average of 2.3-2.4% a year.

    INFLATION: Consumer price inflation continues to rebound from a low of 1.4% in July, reaching 2.2% in October. Underlying price pressures have been soft this year, but inflation is expected to pick up into 2013 as the Fed's quantitative easing (QE) programme drives up commodity prices and provides a stimulus to the real economy. Even with a pick-up in prices, inflation will remain moderate, although the Fed has indicated its willingness to tolerate above-trend inflation for some time while the labour market remains weak. Even so, we do not believe that inflation will stay above 3% for an extended period of time. We estimate inflation at 2.2% in 2012 and forecast an annual average of 2.3% in 2013-17.

    EXCHANGE RATES: The euro:dollar exchange rate remains subject to investors' risk sentiment, with developments in the euro's debt crisis playing a strong role. The euro has strengthened back to almost US$1.30:EUR1 since a mid-year low, in part because of the QE programme but also because of euro area developments that lowered the chances of a break-up. Although the Fed's actions have the potential to weaken the US dollar, other currency areas are also loosening monetary policy. We estimate an average exchange rate of US$1.28:EUR1 in 2012. We expect the dollar to remain at average of US$1.29:EUR1, then maintain an annual average of around US$1.26:EUR1 in 2014-17.

    EXTERNAL SECTOR: Weaker export growth, resulting from a slowdown in the global economy, is estimated to cause the current-account deficit to widen slightly in 2012. The US economy is expected to be more reliant on export growth than before 2007, owing to the robust performance of emerging markets and the continued reticence of US households to spend, including on imports. Increasing energy self-sufficiency, owing to rising shale gas and oil production, will also play a key role in reducing import requirements. As a result, we expect the current-account deficit to narrow as a percentage of GDP in 2013-17 to 1.8% by 2016-17.

    December 07, 2012

  • Forecast

    USA: Country forecast summary

    Country forecast overview: Highlights

    • The period of divided government will continue at least until 2015. Power in Congress is split between the Democrats and Republicans at a time when they find themselves even more ideologically distant than usual. We believe that the degree of partisanship could be slightly lower in coming years, but the prospects for major reforms beyond fiscal policy will remain uncertain.
    • The president, Barack Obama, convincingly won re-election on November 6th, ensuring policy continuity for the next four years. He will still have to deal with the Republican majority in the House of Representatives, which, being heavily influenced by its ultraconservative Tea Party wing, will tend to oppose his legislative proposals.
    • The budget deficit will remain large, although it will decline steadily. Congress is focused on moderating a sharp fiscal contraction scheduled to occur from 2013 onwards under current law. Scheduled tax rises and spending cuts may well be pushed out to later in the decade, but taxes will nonetheless have to rise in the medium term, especially for high earners.
    • The Federal Reserve (the Fed, the central bank) is undertaking a new monetary stimulus, with an open-ended commitment to buy mortgage-backed securities. The Fed has stated its intention to continue with the bond purchases even when the economy picks up, and until unemployment falls markedly. This is likely to push inflation above normal tolerance levels of around 2%. The Fed's commitment to keeping interest rates exceptionally low until mid-2015 will help to hold down long-term interest rates as well.
    • The economy is estimated to grow by 2.2% in 2012 (revised up from 2.1%), but the approach of a potential fiscal shock in 2013 will restrain growth around the turn of the year. We expect the Fed stimulus to maintain growth at 2.1% in 2013, and forecast an average expansion of 2.3-2.4% in 2014-17. High levels of indebtedness in the household and financial sectors will prevent more normal post-recession recovery rates.
    • The US dollar is expected to strengthen to around US$1.26:EUR1 over the forecast period, from an estimated average of US$1.28:EUR1 in 2012. We expect the current-account deficit to stabilise as a share of GDP in 2012, before narrowing in 2013-16. This trend will be supported by faster domestic shale oil and gas production than previously expected.

    Country forecast overview: Key indicators

    Key indicators201220132014201520162017
    Real GDP growth (%)2.22.12.32.32.42.4
    Consumer price inflation (av; %)2.22.42.52.22.32.3
    Federal government budget balance (% of GDP)-7.0-5.9-5.2-4.1-3.2-2.6
    Current-account balance (% of GDP)-3.1-2.6-2.4-2.1-1.9-1.7
    US$ 3-month commercial paper rate (av; %)0.20.20.20.31.22.2
    Exchange rate ¥:US$ (av)79.482.686.789.092.291.4
    Exchange rate US$:€ (av)1.281.291.271.241.261.26

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    December 07, 2012

Country Briefing

Land area

9,161,923 sq km

Population

311.6m (July 1st 2011, Census Bureau estimate)

Main urban centres (incl suburbs)

Population in millions (July 1st 2009, Census Bureau estimates)

New York: 19.1

Houston: 5.9

Los Angeles: 12.9

Miami: 5.5

Dallas-Fort Worth: 6.4

Washington DC: 5.5

Philadelphia: 6.0

Atlanta: 5.5

Climate

Mainly temperate; subtropical in the South

Weather in Washington, DC (altitude 22 metres)

Hottest month, July, 21-31°C; coldest month, January, –3-6°C; driest month, February, 69 mm average rainfall; wettest month, August, 99 mm average rainfall

Language

English

Measures

Previous UK (imperial) system, except

US gallon = 0.833 UK gallon

US bushel = 0.969 UK bushel

US short ton = 2,000 lb

Currency

Dollar (US$) = 100 cents

Average exchange rates in 2011: ¥80:US$1; US$1.39:€1

Time

Hours behind GMT

Eastern zone: 5

Alaska: Hyder: 8

Central zone: 6

Aleutian Islands west of 169.30°W: 10

Mountain zone: 7

St Lawrence Island: 10

Pacific zone: 8

Rest of Alaska: 9

Hawaii: 10

Fiscal year

The federal government fiscal year, for example for 2009, runs from October 1st 2008 to September 30th 2009. State and local fiscal years can differ

Holidays

New Year's Day; Birthday of Martin Luther King, Jr (January 16th); Washington's Birthday (February 20th); Memorial Day (May 28th); Independence Day (July 4th); Labor Day (September 3rd); Columbus Day (October 8th); Veterans' Day (November 12th); Thanksgiving (November 22nd); Christmas Day

March 12, 2012

© 2008 Columbia International Affairs Online | Data Provided by the Economist Intelligence Unit