Afternoon Discussion Topics – Lecture #2 Problems with the US Economy 1. The Depressed State of the US Housing Market 2. Continuing Uncertainties in US Financial Markets 3. Exploding American Health Care Costs 4. Retirement Concerns of Baby Boomers and Social Security in the US 5. Persistently High US Fiscal Deficits and National Debt 6. What to do with Illegal Immigrants in America

1. The Depressed State of the US Housing Market a.US Housing Market began falling in price in early 2007 b.Financial Crisis due to MBSs and CDSs dragging down firms c.Median Prices continue to fall and foreclosures worsening problem d.Mortgage Rates at lowest levels since 1951 (30 yr. fixed rate 4.19%) e.Banks are accused of fraudulent foreclosures on houses f.Consumer spending is linked to house prices g.Nationwide moratorium being considered for foreclosures h.Fannie Mae and Freddie Mac have yet to be reformed

2. Continuing Uncertainties in US Financial Markets 1.Federal Reserve Board of Governors worried about potential deflation 2.Fed may engage in QEII buying long term government securities 3.Banks facing new trouble due to foreclosure controversy 4.Basic problem is fast paced finance versus slow paced legal process 5.14% of all US loans are overdue, 4% are in foreclosure 6.Commodities are rising again…especially gold, oil, cotton, rare earth 7.TED spreads are down and this is a good thing 8.Stock Market in US is doing well for now…but 9.US is at loggerheads with China RMB policy – where will the USD go?

3. Exploding American Health Care Costs 1. Health care costs rising 5% per year – CPI flat or no growth 2.New Health Care Law signed in March 2010 – will be phased-in 3.All Americans must have health insurance – penalties for those who don’t have 4.Expected to expand coverage to 32 million Americans 5.Health care costs are major cause of US fiscal deficits 6.Important factors causing costs to rise – prescription drugs, defensive medicine, poor preventative care, administrative costs 7.Americans cannot buy insurance across state lines, also there are no limits on the monetary judgments and awards on medical lawsuits

4. Retirement Concerns of Baby Boomers and Social Security in the US 1.US government estimates that Fiscal Gap = $40-50 trillion dollars 2.By 2050 US will have enough people 85 years old to fill NYC, LA, Chicago, etc. and enough 100 year olds to fill Washington DC. 3.In 1994 Medicare was growing 7 times faster than wages – historically 3 times faster than wages 4.Two major factors creating fiscal problems for America’s future – ageing and health care costs 5.In 1994 there were 33 million people over 65 and there are 77 million baby boomers began retiring in By 2030 there will be twice as many retirees as now, but only 18% more workers. 7.One solution is to enact a Federal sales tax and create uniform fully funded retirement accounts for everyone which are invested broadly in stocks and bonds

5. Persistently High US Fiscal Deficits and National Debt 1.US has a widening fiscal deficit – structural 2.Deficits are due to lower tax receipts and increased spending 3.Prediction are that deficits will remain high at 9-10% of GDP and debt will be close to 100% of GDP 4.Debt can be classified as gross public debt ($14.5 trillion) and publically owned public debt ($10 trillion). 5.Half of US debt publically held is foreign owned. A flight from US debt may cause a fall in the USD. 6.US may have to inflate to pay these debts in the future 7.US Federal entitlements are the main contributors to the deficit. 8.Some economists say the deficit in the short run is not important…instead we must increase government spending to recover

6. What to do with Illegal Immigrants in America a.Possibly as many as 20 million illegal workers in the US b.Illegal immigration has economic, political and cultural dimensions c.Policies include stricter border security, heavier punishment to employers, greater deportation, normalization, and amnesty d.1980s amnesty policy was not successful e.Illegal workers contributing to US productivity growth f.Illegal workers from Mexico are not assimilating as before g.Difficult to have open borders with welfare state h.Mexico is not helping control illegal worker migrations