Economic Outlook 2013 Professor Franklin Allen

The Wharton School of the University of Pennsylvania

January 17, 2013

Welcome & Introductions

John Lee

The fiscal problems in the U.S.

Griffin Financial Group and President, ACG Philadelphia 2 www.acg.org/philadelphia

The fiscal problems in the U.S.

• The outcome of the U.S. election on November 6 has brought the fiscal problems to the foreground •

The fiscal problems in the U.S.

The fiscal cliff consisting of $700 billion of tax increases and expenditure cuts (roughly 4-5% of GDP) has been averted with permanent tax changes but kicking the can down the road for expenditures • The components of fiscal drags are as follows 3 www.acg.org/philadelphia

Fiscal drags in 2013

• Discretionary spending caps • • Health-care law taxes

Fiscal drags in 2013

Expiration of pay roll tax cut • Bush tax cuts for the wealthy • Physician payment tax cut • Sequester $84bn $21bn $116bn $45bn $20bn $85bn 4 www.acg.org/philadelphia

The long term problem

• • The fiscal cliff is a prelude to a significant long term problem that we have in the U.S.

The long term problem

Entitlement spending is set to increase significantly beyond tax revenues • Without cuts in expenditures and/or increases in taxes debt is set to increase significantly 5 www.acg.org/philadelphia

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Total tax revenue as a percentage of GDP

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Taxes on goods and services as a percentage of GDP 10 www.acg.org/philadelphia

Social security taxes as a percentage of GDP Social security taxes as a percentage of GDP 11 www.acg.org/philadelphia

Corporate tax revenue as a percentage of GDP Corporate tax revenue as a percentage of GDP 12 www.acg.org/philadelphia

A possible solution

• •

Initial set of deals

Taxes on the wealthy have been raised. Next we are set to deal with the expenditure side.

A possible solution

Longer-term deal

that raises revenue by reforming the tax code and slowing the growth in entitlement spending 13 www.acg.org/philadelphia

The debt ceiling

• The focus now switches to the debt ceiling, which Treasury Secretary Geithner announced was hit on December 31, 2012

The debt ceiling

• Extraordinary measures will allow an extension for up to two months • House Republicans are in a much stronger position to fight this and we may go through the deadline 14 www.acg.org/philadelphia

Problems

• President Obama reelected on the basis of raising taxes on the wealthy, which has now been achieved • raising taxes and cutting expenditures – they will push very hard for the latter having conceded on the former • A bumpy time ahead maybe!

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CONTRIBUTORS:

Donald S. Bernstein (Davis Polk & Wardwell LLP) William W. Bratton (University of Pennsylvania) Peter R. Fisher (BlackRock) Richard J. Herring (University of Pennsylvania) James R. Hines Jr. (University of Michigan) Howell E. Jackson (Harvard Law School) Jeremy Kreisberg (J.D. candidate - Harvard Law School) James Kwak (University of Connecticut) Deborah Lucas (MIT - Sloan School of Management) Michael W. McConnell (Stanford Law School) Jim Millstein (Millstein & Co., LLC) Charles W. Mooney Jr. (University of Pennsylvania) Kelley O’Mara (J.D. candidate - Harvard Law School) Zoltan Pozsar (International Monetary Fund) Steven L. Schwarcz (Duke University) Richard Squire (Yale Law School) Richard Sylla (New York University)

http://finance.wharton.upenn.edu/FIC/FICPress/usdebt.

pdf

Other FICPress titles are available for download at http://ficpress.wordpress.com

Problems in the Eurozone

• Problems in Greece in the first part of 2010 and since then show the difficulties associated with sovereign default within the Eurozone •

Problems in the Eurozone

Subsequent problems in Ireland and Portugal and now in Spain, Italy, and Cyprus have underlined the importance of this issue • Political economy factors in Germany and other Northern European countries are key and quite uncertain 17 www.acg.org/philadelphia

Five possible scenarios for Eurozone problem countries

1. Official scenario 2. IMF, EFSF/ESM and ECB end up with the debt and hold it for many years 3. Default and stay in the Eurozone 4. Leaving the Eurozone and regaining monetary policy 5. An accident 18 www.acg.org/philadelphia

Contributors

Edmond Alphandery

(CNP Assurances)

Arnoud W.A. Boot

(University of Amsterdam)

Josep Borrell Fontelles

(European University Institute)

Lee C. Buchheit

(Cleary Gottlieb Steen & Hamilton LLP)

Charles W. Calomiris

(Columbia University)

Youssef Cassis

(European University Institute)

Mitu Gulati

(Duke University)

Martin Hellwig

(Max Planck Institute for Research on Collective Goods)

Janet Kersnar

(Knowledge@Wharton)

Ramon Marimon

(European University Institute)

Wolfgang Munchau

(Eurointelligence)

Erik F. Nielsen

(Formerly Goldman Sachs)

Fabio Panetta

(Bank of Italy)

Helmut Siekmann

(University of Frankfurt)

David A. Skeel, Jr.

(University of Pennsylvania)

Karl Whelan

(University College Dublin)

http://finance.wharton.upenn.edu/FIC/FICPress/eurozone.pdf

Contributors

Leszek Balcerowicz (Warsaw School of Economics) Antonio Borges (Universidade Católica Portuguesa) Russell Cooper (European University Institute) Paul De Grauwe (London School of Economics) Bruno De Witte (Maastricht University) Charles Goodhart (London School of Economics) Friedrich K. Kübler (Johann-Wolfgang-Goethe University & University of Pennsylvania) Janet Kersnar (SNL Financial) Brigid Laffan (University College Dublin) Wolfgang Münchau (Eurointelligence) Victor Ngai (University of Pennsylvania) Pier Carlo Padoan (Organisation for Economic Co-operation and Development) Richard Portes (London Business School) Frank Smets (European Central Bank) Paul van den Noord (Organisation for Economic Co-operation and Development) Guntram Wolff (Bruegel) Jacques Ziller (University of Pavia) http://finance.wharton.upenn.edu/FIC/FICPress/goveuro.pdf

• • • • • • •

Other Economies

China Japan UK Central and Eastern Europe Brazil India Other emerging economies 21 www.acg.org/philadelphia

Concluding Remarks

• Crisis is still very much with us • Problems in the U.S., Eurozone, and the emerging economies are all becoming more significant • Still some way to go to emerge from the crisis with many problems along the way 22 www.acg.org/philadelphia

Upcoming Events Mark Your Calendar

acg.org/philadelphia

January 27 - 29, 2013 Annual Northeast ACG Stratton Ski & Snowboard Event January 29, 2013 Corporate Executives' Dinner Roundtable -

Integration Best Practices

February 21, 2013 Breakfast – Perspectives from Strategic & Financial Buyers February 26, 2013 DealMakers Workshop - Healthcare Industry Investing March 21, 2013 March Breakfast – Topic TBA April 22 - 25, 2013 InterGrowth -

Orlando, Fl www.acg.org/philadelphia