South Dakota Chamber of

Commerce: Economic Outlook

Seminar

Tuesday, November 20, 2012

Marilyn Yager

Senior Policy Advisor

Alston & Bird

2

Election Results: Big Picture

Results

Implications

Voter Views

National Electoral College Results

Obama

Romney

270 votes

needed to win

332 Obama

206 Romney

2012 Electoral

Map

Obama

Romney Barack Obama (D)

Mitt Romney (R)

Unknown

12

7

55

6 6

4

10 5

9

3

3

3

3

3

5

7

6

HI 4

38 8

6

10

6

10 10

20 11

16

18

8

9

NH 4 MA 11

CT 7 RI 4

NJ 14

DE 3 MD 10

DC 3

VT 3

29

16

4

6

15

29

20

9

11

13 5

3

National Popular Vote Results

173 Romney

Romney

Obama

56%

54%

59%

52%

55%

HI 70%

54%

73%

65%

55%

69%

51%

53%

59%

58%

61%

60%

67%

54%

52%

53%

53%

54%

57% 54% 50%

61%

59%

61%

57% 58%

55% 61% 53%

55%

51%

51%

52%

63%

VT 67% 56%

NH 52%

MA 61%

CT 58% RI 63%

NJ 58%

DE 59%

MD 62% DC 91%

Barack Obama (D)

Mitt Romney (R) 50% 100%

Unknown

2012 Popular Vote Map

62%

National Total

• 50% Obama

• 48% Romney

50%

4

2012 Presidential Election Votes by Demographic

Voted for Obama Voted for Romney

Gender Women 55% 44%

Men 45% 52%

Race

White (non-Hispanic) 39% 59%

Black 93% 6%

Hispanic 71% 27%

Education Non-College Graduate 51% 47%

College Graduate 50% 48%

Age

18 to 29 years 60% 37%

30 to 44 years 52% 45%

45 to 64 years 47% 51%

64+ years 44% 56%

Income

Less than $50,000 60% 38%

$50,000 to $100,000 46% 52%

$100,000 or more 44% 54%

5

6

KEY FACTORS INFLUENCING VOTE

What one factor mattered most to you in deciding who you voted for in the

presidential election? What would you say was the 2nd most important factor in

deciding who you voted for in the presidential election? (Note: Only top five shown: Percentages add up to more than 100 because multiple responses were accepted.)

RANK ALL VOTERS VOTED FOR OBAMA VOTED FOR ROMNEY

1 Candidate

Characteristics (51%)

Candidate Characteristics

(55%)

Candidate Characteristics

(48%)

2 Economy & Jobs (32%) Economy & Jobs (18%) Economy & Jobs (48%)

3 Health Care (14%) Health Care (16%) Health Care (13%)

4 Social Issues (10%) Social Issues (9%) Social Issues (13%)

5 Foreign Policy (8%) Women’s Issues (7%) Foreign Policy (11%) &

Budget Deficit (11%)

Source: Kaiser Family Found. Tracking Poll, 11/7-10/12

87%

87%

78%

70%

69%

65%

61%

61%

60%

57%

46%

35%

32%

The Issue List: Economy, Direction Of Nation, And Obama’s Job Performance At Top

Percent who say each of the following was a major factor in their vote for president:

Which of these would you say was the BIGGEST factor in your vote for president?

The economy

The 2010 health care law

The candidate’s views on women’s health issues

Whether the candidate is a Democrat or Republican

The future of the Medicare program

The future of the Medicaid program

Note: None of these were the biggest factor (vol.), All were equally a big factor (vol.), Something else was the biggest factor (vol.), and Don’t know/Refused answers not shown for follow-up question. Source: Kaiser Family Foundation Health Tracking Poll (conducted November 7-10, 2012)

19%

15%

15%

3%

5%

9%

1%

4%

2%

6%

2%

2%

<1%

AMONG ALL VOTERS

Governor Mitt Romney’s background as a businessman

President Barack Obama’s job performance over the last four years

The direction the country is headed

The candidate’s views on the size and role of government

The candidate’s ability to relate to the middle class

Foreign policy

President Barack Obama’s handling of the response to Hurricane Sandy

81%

81%

81%

73%

72%

72%

67%

66%

57%

52%

49%

39%

30%

Candidates’ Voters Both Similar And Different In What They Voted On

Percent who say each of the following was a major factor in their vote for president:

The economy

The 2010 health care law

The candidate’s views on women’s health issues

Whether the candidate is a Democrat or Republican

The future of the Medicare program

The future of the Medicaid program

Source: Kaiser Family Foundation Health Tracking Poll (conducted November 7-10, 2012)

94%

96%

50%

66%

86%

42%

76%

55%

65%

18%

74%

29%

65%Governor Mitt Romney’s background as a businessman

President Barack Obama’s job performance over the last four years

The direction the country is headed

The candidate’s views on the size and role of government

The candidate’s ability to relate to the middle class

Foreign policy

President Barack Obama’s handling of the response to Hurricane Sandy

Voted for President Obama

Voted for Governor Romney

2012 Senate Results Chart

Former Senate Makeup

51

New Senate Makeup

173 Romney

Independent

Dem Maintained Seat

Republican Maintained Seat

Dem Defeated Incumbent

Republican Defeated Incumbent

Dem Won Open Seat

Republican Won Open Seat

Dem Not Up for Reelection

Republican Not Up for Reelection

15

1 7 2 3 5

30 37

Quick Takeaway

• While GOP remains the

minority, retains

filibuster power

Total Seats

Democrats: 53

Republicans: 45

Independents: 2

Total Seats

Democrats: 51

Republicans: 47

Independents: 2

9

Vacancy

2012 House Results Chart

Former House Makeup

New House Makeup

173 Romney

Dem Maintained Seat

Republican Maintained Seat

Unknown 5*

197 233

Quick Takeaways

• The Republicans were

expected to, and did, keep

their majority in the House

• Partisan expectations aside,

there are early signs of a

willingness to work across

the aisle…

190 240

5

*5 House races still unresolved, Louisiana’s 3rd district will have a December runoff, Arizona’s 2nd, Florida’s 18th, California’s 52nd, and North Carolina’s 7th are still in question

Total Seats

Democrats: 197

Republicans: 233

Unknown: 5*

Total Seats

Democrats: 190

Republicans: 240

Vacancies: 5

10

Demographic Profile of the Freshman Class

House

Freshman

House

Non-Freshman

Senate

Freshman

Senate

Non-Freshman All Congress

40 and Under 19% 5% 8% 0% 7%

Women 23% 16% 42% 29% 19%

African

American 6% 10% 0% 0% 9%

Hispanic 10% 5% 8% 5% 6%

Non-Christian 8% 7% 8% 14% 7%

Prior Military

Service 15% 20% 0% 14% 18%

Previously

Held Office 62% 100% 83% 100% 93%

A Look at the Congressional Class of 2012 by the Numbers

*Results calculated with House races still pending in California, Florida, Arizona and North Carolina; projected winners in pending races not accounted for in this tally

**Non-Christian here is taken to mean all religions other than Christianity. If a candidate does not have a stated religious affiliation he or she is not included in this count

***Previously Held Office refers to any elected government office

Source: http://www.cnn.com/election/2012/results/race/senate; http://nationaljournal.com/congress-legacy/see-new-senators-and-house-members-of-the-113th-congress-20121106;

http://www.nationaljournal.com/thenextamerica/politics/meet-the-victors-mapped-minority-members-of-congress-20121105 11

Demonstrated Issue Interest among House Freshmen

Republicans Democrats All Freshmen

Tax Reform 54% 20% 74%

Spending/Budget 60% 11% 71%

Job Creation/Economy 20% 48% 68%

Health Care 31% 37% 68%

Infrastructure/Transportation 6% 33% 39%

Education 6% 30% 36%

Energy/Environment 9% 24% 33%

Women’s Issues/Abortion 11% 20% 31%

Regulations 29% 0% 29%

Veterans’ Affairs 9% 13% 22%

National Security 14% 0% 14%

Immigration 6% 7% 13%

Science/Research 0% 7% 7%

Foreign Policy 0% 4% 4%

Focus of Campaign Messaging

Campaigning Freshmen Republicans

stayed silent on science, research, and

foreign policy issues

Campaigning Freshmen Dems barely

mentioned national security concerns

Most candidates talked tax reform, but

Republicans ran on spending and

budget issues while Dems focused on

job creation

12

Fewer Mavericks, More Polarization

• Over the past three decades,

overlap between GOP and

Dems has been disappearing,

resulting in more polarized

Congress

National Journal Vote Ratings in the

Senate* 1982 – 2011

Most liberal

Republican senator

Most conservative

Democratic senator

1982 D D D D D D D D D D D R D D D D D D D D D D D R D D D R D D R D D R D D R D R D R D R D D D R R R D R R D D R R D D D D R R R D R R R R R D R R R R R R R R R R R R R R R R R R R R R R R R R R

1994 D D D D D D D D D D D D D D D D D D D D D D D D D D D D D R D D D D D D D D D D D R D D D D D D D D D D R D D D R D D R R R R R D R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R

2002 D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D R R D R R R R R D R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R

R

2010 D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R

MORE LIBERAL MORE CONSERVATIVE

Ideological Conformity Gives Parties in Power Less Incentive to Compromise

2011

*National Journal’s “Vote Ratings” scores members of Congress on selected roll-call votes from the previous year

*Members are compared to each other on an ideological scale, from liberal to conservative

13

14

FISCAL CLIFF

15

LAME DUCK AND FISCAL CLIFF

Lame Duck:

Lame duck sessions are held after the election (November 6,

2012) but before the newly elected officials take office (Jan. 3,

2013)

Fiscal Cliff:

The fiscal cliff is shorthand to describe the mix of $607 billion in

US taxes and spending that are scheduled to expire on December

31, 2012.

Immense Pressure for Action in Six-Week

Window

16

Nov 6, 2012

Election Day

Dec 31, 2012 Jan 2, 2013

Nov 13, 2012

Lame Duck

Session Begins

Jan 1, 2013

Lame Duck Ends

• Bush-era tax cuts expire

• Emergency unemployment benefits end

• Payroll Tax Holiday ends

• Alternative Minimum Tax exemptions end

• Medicare Scheduled Physician Cut

• Sequester takes effect

$55B in mandatory

defense cuts

$55B in mandatory

non-defense cuts

Lame Duck Session

17

An Ever-Widening Budget Gap: The Deficit Has Grown to Unsustainable Levels

*Projection includes expiration of Bush tax cuts

Why the Gap Has Widened: Mandatory

Spending is Outpacing Revenues

Federal Revenue and Outlays as a Percentage of GDP by Fiscal Year

Interest Revenue w/Expired Bush Tax Cuts

Revenue w/Bush Tax Cuts Mandatory

Spending

Other

18

Recent Policies Contributing to the Deficit

Policy Amount Added to Deficit

2001 and 2003 Tax Cuts

$1,812B

2010 Two-Year Extension of

Tax Cuts

$620B

2009 American Reinvestment and

Recovery Act

$874B

2003-2012 Defense Spending

in Iraq and Afghanistan

$853B

Decreased

Revenue

Increased

Spending

19

Recession Has Been a Major Driver

• Unemployment during the

recession increased

spending on federally-

funded safety net

programs and decreased

revenue from taxable

income

• In 2011, the CBO

estimated that

underutilization of capital

and labor resources in the

wake of the recession

would add $340B to the

FY 2012 deficit

Deficit with weak

economic recovery

Deficit if economy were

operating at full potential

$973B

$630B

CBO Deficit Projections for FY 2012

20

A Closer Look at Declining Tax Revenue

Individual

Income Tax

48% Social

Insurance

Tax

35%

Corporate

Income

Tax Other

9%

Federal Revenues FY 2011

(As Percentage of Total: $2.3T)

Key Component of Revenue… …On a Worrisome Downward Slope

10.2%

8.4%

6.3%

21

Lame Duck: What’s in Play,

if No Action Taken

$221

$95

$65

$55 $55

$26

Bush-Era

Tax Cuts

Payroll

Tax Holiday

Sequester

Defense

Cuts

Sequester

Non-Defense

Cuts

Expiration of

Unemployment

Benefits

Tax

Extenders

Automatic Spending Cuts Expiring Tax Cuts

More than half a trillion

dollars at play

(2/3 expiring tax cuts)

Dollar Value of Expiring Tax Provisions and Mandatory Spending Cuts for FY2013*

(In Billions)

*Does not include Sustainable Growth Formula “doc fix” ($11B)

22

23

RE-FRESH ON SEQUESTRATION

Created by Budget Control Act of 2011 (BCA)

Debt ceiling increased by $2.1 trillion

Discretionary spending capped FY 2012-2021 (reduced federal spending by $917

billion over 10 years)

Creation of Joint Select Committee on Deficit Reduction (Super Committee) to

report package that reduces deficit by at least $1.5 trillion over 10 years

Spending reduction trigger (sequestration) of $1.2 trillion over 10 years if no Super

Committee deficit reduction package

Sequestration starts January 2, 2013

Implemented through across-board-cuts to mandatory spending

(with exceptions) and reduced discretionary spending caps

through FY 2021

Exempt: Veterans programs, Military personnel benefits, Medicare beneficiary

payments, Social Security benefits, refundable tax credits, and Medicaid.

24

SEQUESTRATION:

SEEMED LKE A GOOD IDEA AT THE TIME …

If Sequestration Is Kicks In

Budget Cuts 2013 to 2021

Defense Budget (Mandatory programs –

10.0%; Discretionary programs – 9.4%)

$493.2B

Non-Defense Budget (Mandatory program

– 16.6%; Discretionary program – 38.0%)

$493.2B

Interest $216B

TOTAL $1.2 Trillion

Most Defense Cuts from Operations and Maintenance Estimated Dept. of Defense Spending Cuts from Sequestration During FY 2013

($23.44B)

($15.32B)

($7.47B) ($1.63B) ($.32B) ($.20B)

Operations

and

Maintenance Procurement

Military

Construction Family Housing

Revolving and

Management

Funds

Research

Development

Testing and

Evaluation

($.03B)

Trust Funds

Total cuts:

54.6B

Most impact

on private

sector

contractors

26

Non-Defense Cuts Focus Heavily on Medicare

Estimate Dept. of Health and Human Services Cuts from

Sequestration for FY 2013

($11,855M)

($2,529M) ($1,532M) ($605M)

($490M) ($275M)

Centers for

Medicare and

Medicaid

Services NIH

Health

Resources

and Services

Administration FDA CDC

Administration

for Children

and Families

($168M)

Substance

Abuse and

Mental Health

Services

Administration

Departmental

Mgmt.

Administration

On Aging

Office of the

Inspector

General

Program

Support

Center

($319M) ($122M) ($5M) ($5M)

Total

cuts:

54.6B

27

Multiple Additional Services Face Serious Cuts

Consumer Safety Services

Domestic Security Services

Other Noteworthy Services

• FAA air traffic control functions

• Food processing plant inspections

• EPA water and air protection functions

• FBI, border patrol, federal prosecutors, correctional

officers, customs agent staffing

• FEMA response capabilities

• National Weather Service severe forecast capabilities

• Housing and food assistance programs

• National park services

• Education grants

Category Affected Infrastructure Net Funding Impact

28

29

Challenges

30

CHALLENGES

The election didn’t change any of the challenges:

Weak Economy which decreases revenue – relative to their size the

economy, since 2008 federal revenues have been at their lowest level in 60

years

Entitlement spending on the rise

Gridlock and mistrust remain – Congress passed fewer bills in 2011 than in

any year in modern history

Deficit reduction and entitlement reform is popular in theory, not in

practice

Congress rarely follows its own rules for setting a budget

Fewer and fewer budget move through all the steps to final passage

The last time Congress completed work on all appropriations bills was

1996

31

32

Health Care

33

Medicare and Medicaid in the

Bull’s Eye

The Medicare ‘doc fix’ package expires December 31, 2012:

Since 2005, Congress has put off reforming the Medicare physician

payment system due to cost and complexity

Absent reform, Medicare is scheduled each year to cut “doc” payments by

large amounts – this year’s cut will be 27%

Congress has delayed each of the scheduled cuts, but the budgetary cost of

these delays must be offset - a 3-month delay costs about $11 billion

Medicare and Medicaid payments are viewed as a source of

revenue to offset:

The Medicare “doc” fix

Any grand deficit reduction plan

And may be looked at to offset the cost of extending the tax cuts

34

REMINDER OF WHAT THE FEB. 2012

EXTENDER BILL LOOKED LIKE

Health-Related Offsets Would Save $21.2 bill. over 10 years ($18 bill. for

“doc-fix”), preventing shortfall until 1/1/13

POLICY

OFFSETS

Reducing Medicare Hospital “Bad Debt” Payments $18 bill.

Resetting Medicare Clinical Laboratory Payment Rates $2.7 bill.

Medicaid Disproportionate Share Hospital Payments $4.1 bill.

Correcting the Louisiana Medicaid Matching Rate $2.5 bill.

Reduction in the Prevention and Public Health Programs $5 bill.

35

Affordable Care Act and Other Issues

36

Affordable Care Act & Other Issues

ACA implementation

The possibility of repeal is now largely gone, but Congress may be looking at

delaying the implementation of portions, or revising and scaling back portions of

the bill

States will take center stage with ACA implementation issues like state vs federal

health exchanges, and whether to expand their Medicaid programs

Entitlements

Proposals include: raising Medicare eligibility age, means testing premiums,

increasing beneficiary out of pocket costs for Medigap policies, increasing co-pays

for skilled-nursing and home health care, drug rebates, and block granting

Medicaid or capping Medicaid provider taxes

Entitlement changes are very unpopular and risky for incumbents who support

them

Compounding pharmacy crisis and ongoing drug shortages

37

LIKELY OUTCOME OF LAME DUCK? MANY OF

THE ISSUES WILL BE KICKED INTO NEXT

CONGRESS

38

Options for Lame Duck

Do nothing,

let everything

expire

Enact a large deficit reduction package before Christmas, i.e.

Simpson-Bowles “super package”

($4 Trillion)

The Delay Approach:

3, 6, or 12-mo “doc fix,”

Bush/AMT patch,

sequestration delay

Policy Options

Several Scenarios Leading to Fiscal Instability: CBO Analysis, August 2012

Alternative Scenario: Tempered Approach

Avoid short-term economic shock and long-term fiscal insolvency by enacting a combination of tax increases and spending cuts that would widen deficit in 2013

relative to current law, but would reduce deficits later in the decade relative to current law*

Short-Term Long-Term

Do Nothing

(“Fiscal Cliff”)

Stall

Everything

• Likely recession; lower deficit

• Real GDP decreases by 0.5%

• Unemployment rate rises to about 9%

• Deficit shrinks to about $641 billion, or 4%

of GDP

• Healthier fiscal course

• Real GDP begins growing in late 2013; growth

averages 2.4% between 2018 and 2022

• Unemployment rate declines to 5.3% by late 2022

• Deficit continues to shrink to 0.4% GDP by 2018,

then rises to 0.9% by 2022

• Stronger economy; higher deficit

• Real GDP grows by 1.7%

• Unemployment rate declines to about 8%

• Deficit totals $1T, almost 2.5% of GDP

more than in fiscal cliff scenario

• Fiscally untenable; unsustainable debt

• Real GDP in first few years higher than fiscal cliff

scenario, then decreases later

• Unemployment rate initially lower, then income

levels reduced

• Deficit averages 5% GDP from 2014-22

Two Dramatic Scenarios: Doing Nothing vs. Stalling Everything

*From May 2012 CBO Analysis

Overall Positive Assessment Overall Negative Assessment Legend

39

40

Possible Outcomes

41

Possible Lame Duck Outcomes

Tax Cuts

One of two options:

Allow to expire with tax overhaul early next year

Temporarily extend tax cuts

Sequestration

Both parties are likely to agree to put off sequestration for 1 year, in order

to allow time to tackle a large deficit reduction package and tax reform

Medicare “doc” fix

Expect another short term delay – 4 months, or 6 months, or 1 year

42

2013: CONGRESS RETURNS