Category Archives: DOJ, DC and inside the Beltway

What do Banks Say About the Recession?

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What do economists have in their forecasts?

It is important to watch other countries performance like China, Greece and Brazil:

Bank Of America Admits The U.S. May Already Be In A Recession

Zerohedge: Almost one year ago, in March 2015, we explained how “The Fed’s Artificial Steepening Of The Yield Curve” has resulted in many unexpected consequences, the most important of which has been the erroneous interpretation of the yield curve as a leading recessionary signal. As said back then, “the artificially steep yield curve is a reflection of policy intent not economic reality…. Where the yield curve in the all-important belly of the 5s10s might have deeply inverted in the past just prior to recession, there is no justification to expect the same attainment of absolute levels where artificial monetary intrusion has pushed the curve much, much steeper.”

One week ago, it was as if a light bulb went off over Wall Street’s head, when first Deutsche Bank’s Dominic Konstam realized the significance of the above excerpt, and admitted that far from the 4% recession odds that the Fed’s hopeless FRB/US DSGE computer model spews out when looking at the “normal” yield curve, when normalizing for the Fed’s intervention odds of a recession in the next 12 months soar to 50%!

In a special report published earlier this week, we noted that today’s near-zero interest rate regime does not allow the yield curve to freely invert or even flatten too much because of certain structural limits. For example, liabilities-driven investors who in the past could receive long rates below the fed funds rate can no longer do so once rates are floored at zero. Investment fund managers are also restricted by mandates from buying negative yielding assets that lead to mark-to-market losses on their portfolios. Pension investors, who must target returns based on liability assumptions, have been driven into high yielding non-core rate assets as their discount rates are stubbornly and unrealistically high compared to Treasury yields. These factors keep the curve artificially steep even though both short and long rates have been clearly trending downward over the years.

An “artificially steep yield curve” – almost as if that’s exactly the phrase we used before. What DB did then is the logical next step: to adjust the artificial yield curve and exclude the Fed’s intervention. 

To address the artificial steepness of the curve we corrected the 3m10y spread for the level of the rates. Specifically we regressed the spread against the short rate, leaving the residual which by definition removes for the bias of the rate level and is centered at zero. Using this new curve as model input, we found the probability of a recession in the next 12 months is 46 percent, considerably higher than the original Fed model has predicted.

But wait, there’s more, because while the short-end remains anchored, with every 25 bps tightening in the 10Y yield, recession odds rise by another 6%.

As it may be useful for investors, we attempt to handicap the relationship between the yield curve and future recessions captured in our model. Holding the 3m rate constant, every 25 bps rally in 10s (implying an equal flattening in 3m10y) raises the recession probability by 6 percent. If 10yr yields rally to 1.50%, our model predicts a 59 percent chance of recession in the next 12 months; at 1.00% 10s, the probability is 71 percent.

 

At Friday’s close, recession odds are well over 50% according to DB’s model.

Or perhaps far higher, because shortly after DB admitted what we said in early 2015, namely that everyone who was looking at the yield curve as is was wrong, Bank of America’s Ruslan Bikbov did the exact same analysis and ended up with a far more disturbing conclusion:

The US Treasury curve is still steep by historical standards. Taken at face value, this may suggest recession odds are small. However, we argue this logic is flawed because the curve is structurally steep when the Fed Funds rate is close to zero. When adjusted for the proximity of rates to zero, the curve may already be inverted and therefore may already be priced for a recession.

And numerically: “Implied recession odds are as high as 64% if the adjusted OIS curve is used”

Laughably, this comes from the same bank whose chief economist Ethan Harris recently “predicted” US GDP for the next decade and forecast there will be no recession until 2027… the same Ethan Harris as profiled in “Perma-bears” 1 – BofA Economist 0.”

* * *

Below are the full wonkish details from BofA for all those Wall Street strategists who still hold on to the erroneous creed that recession odds are non-existent if simply looking at the unadjusted yield curve.

A leading recession indicator

We received numerous questions on the shape of the US yield curve and its relationship to recession odds. With the sharp weakening of US manufacturing data in recent months, recession risks are on everybody’s mind, while the curve has the reputation of one of the most powerful leading recession indicators. The basic fact is likely well known to our clients: each US recession since the mid 1950s (when Treasury bond data become available) was preceded by an inverted or extremely flat curve within one year before a recession start (Chart 8). This is, of course, intuitive because a flat curve reflects lower growth and/or inflation expectations. Some of our clients and market commentators pointed to this fact and the relative steepness of the curve to argue that current recession risks are rather low. Indeed, the 3m10s curve at 155bp is still far from being flat (Chart 8).

Mind the zero bound

However, we believe that a simple mechanical extrapolation of the past link between the curve and recession odds is flawed. In particular, curve-based models calibrated to pre-2009 data are likely to underestimate recession odds today. This is because with the Fed Funds at only 38bp risks for plausible Fed Funds paths are asymmetric. Although tighter policy paths are unconstrained, the room for further cuts is likely limited resulting in a steepening bias for the curve. To see this, imagine an extreme situation where the policy rate is at zero and negative rates are not feasible. In such a scenario the curve simply cannot invert, and must be necessarily biased steeper relative to its historical distribution.

Granted, we cannot rule out the possibility of negative rates in the US, but it is safe to say the Fed’s reaction function must be highly asymmetric around zero. Because negative rates entail significant risks for the financial stability of money market funds and the banking sector, the negative growth/inflation shock required for a cut below zero should be larger than positive shocks required for a hike of a comparable size. In addition, negative rates should be floored by the storage cost of currency, another reason for asymmetric risks around zero. In any case, the market currently sees only a small chance of negative rates in the US (Chart 9). The end result is structural steepness of the curve at near-zero Fed Funds levels.

Don’t wait for the curve to invert

Even a casual look at other countries with near-zero policy rates confirms that the curve does not need to flatten significantly for a recession to occur. Consider Japan, a country with the longest zero-rate history. Japan had a recession in 1991-1993, which was preceded by an inverted curve, consistent with past US experience (Chart 10). But note the call rate was at 8% when the curve inverted. Since 1995, the call rate has not exceeded 50bp. Over that period, Japan had four official (announced by the Committee for Business Cycle Indicators) recessions, none of which was preceded by an inverted curve (Chart 10).

A number of other G10 countries adopted near-zero rate policy regimes since 2008 and experienced recessions since then. Some of these recession episodes are analyzed in Table 3. We use two methods to identify recessions: technical definition (at least two consecutive quarters of negative growth) and recession dates reported by Economic Cycle Research Institute (ECRI), which employs methodology similar to that of the NBER in the US. For each recession episode, we report the range of the 3m10s government curve and the policy rate observed for a year immediately before the beginning of a recession.

Again, an inverted curve did not emerge to signal an imminent recession. In fact, in some cases the curve ahead of recessions was steeper than in the US today. As an illustration, Chart 11 shows the historical German curve. Consistent with typical US experience, the curve flattened to extreme levels ahead of each of the pre-2009 recessions. However, Germany also had a technical recession in Q4 2012-Q1 2013 when the ECB rate depo rate was at zero. Not surprisingly, the curve remained steep before that recession. In fact, the curve did not flatten below 120bp in the one-year period ahead of the recession.

Adjusting the curve for zero-rate effects

Although the curve cannot be taken at face value in a near-zero rate regime, we believe it may still provide useful information about recession odds if adjusted for the zero bound effect. The idea is to estimate a model-implied curve that could be prevalent today if negative rates were just as feasible as positive. The curve adjusted in such a way may be directly compared to its historical distribution. As a result, it may be a better recession signal than the observed curve.

Turning to technical details, we model forward rates with a truncated (at zero) normal distribution, calibrated by matching its mean and standard deviation to forward rates and at-the-money option prices. We then compute adjusted forwards as the mean of the corresponding distribution without truncation (hence, using a symmetric distribution around the mean and allowing for negative rates). Although the choice of the truncated normal distribution is somewhat arbitrary, it provides a simple tool to model the core of our argument. Because very long-dated options are not liquid, we analyze 3m5s rather than 3m10s (normally used in academic literature) Treasury curve for this analysis. We found only a small deterioration in R2 statistics for recession forecasting probit models when the 3m5s curve is used instead of 3m10s. Consistent with intuition, the 3m5s curve adjusted in such a way has been significantly flatter than actually observed curve (Chart 12).

Technical factors contributed to Treasury curve steepness

Further, the Treasury curve may be currently skewed steeper by technical factors. Treasury bonds in the belly of the curve dramatically cheapened in the past few months, which is evident from extremely tight levels of swap and OIS/Treasury spreads. As a result, the Treasury curve now looks very steep to OIS. While the 3m5s Treasury curve is at 92bp, the corresponding OIS curve is only at 56bp (Chart 13). The likely reason for this is reserve selling of foreign central banks who need to support national currencies against the recent USD appreciation. International reserves of world central banks declined by about $1tn since September 2015. At the same time, the ability of dealers to absorb the supply has declined in recent years due to regulatory pressures on balance sheets.

Conventionally, academic literature on recession forecasting uses Treasury curve data. But the Treasury curve may not be the best measure of market expectations, presumably the key component of the curve predictive power. Because of the technical nature of the recent Treasury cheapening, the OIS curve should be a better measure of market expectations, and therefore may be more relevant for  assessing recession risks.

 

The curve may be priced for a recession

Applying our methodology to the OIS curve, we found that the adjusted 3m5s OIS curve at -30bp is already inverted. This suggests that the curve already could be priced for a recession (Chart 12). Granted, our methodology signaled a false alarm in 2012 when the curve was also inverted but a recession did not follow (Chart 12). However, at that time the curve flattened to extreme levels because of the forward guidance, an unprecedented event in the history of US monetary policy. In contrast, this time the curve flattened following the Fed hike, which looks more like a typical curve inversion episode. In fact, the Fed was hiking in all previous historical episodes where the curve inverted ahead of US recessions (Chart 8). From this point of view, the current curve flattening may be more worrisome.

Implied recession odds

Our economics team sees only about a 20% probability of a recession in the next year. They argue that the two most important causal factors in recession–aggressive Fed tightening in a battle against above-target inflation and very high oil prices–are not evident today. They also argue that both “real” and financial bubbles are small. The only sector that overexpanded in the recovery is the tiny oil and gas sector (about 2% of the economy at the peak) and the high yield sector overshot fundamentals, but it is much less important than the housing and equity market bubbles of the last two cycles.

Nonetheless, clearly markets are worried and an indicator we have developed confirms their concerns. To quantify implications from the inversion of the adjusted curve, we follow academic literature to compute model-implied recession probabilities from a standard probit regression based on the curve. We acknowledge this type of a model is highly simplistic and does not take into account all the complexities of today economic environment. Still, model probabilities may be interesting to know given the curve’s track record.

We estimated a standard probit model to pre-2009 sample when zero rates were not an issue. We then computed implied probability of a recession within next 12 months with different assumptions about the proper curve to be used in the current regime (Table 4). The model implies about 32% recession odds if the Treasury curve is taken at face value. Just using OIS instead of Treasury rates brings this probability to about 42%. Implied recession odds are as high as 64% if the adjusted OIS curve is used (Table 4).

Obama’s Paris Climate Agreement to Cost Trillions

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Obama’s Paris Global Warming Treaty Will Cost At Least $12.1 Trillion

A.Follett/DailyCaller: The United Nations Paris agreement to stop dangerous global warming could cost $12.1 trillion over the next 25 years, according to calculations performed by environmental activists.

“The required expenditure averages about $484 billion a year over the period,” calculated Bloomberg New Energy Finance with the assistance of the environmentalist nonprofit Ceres.

 

That’s almost as much money the U.S. federal government spent on defense in 2015, according to 2015 spending numbers from the bipartisan Committee For Responsible Federal Budget. The required annual spending is almost 3.7 times more than the $131.57 billion China spent on its military in 2014.

Bloomberg’s estimates are likely low, as they exclude costly energy efficiency measures. The amount spent to meet global carbon dioxide emissions reduction goals could be as high as $16.5 trillion between now and 2030, when energy efficiency measures are included, according to projections from the  International Energy Agency. To put these numbers in perspective, the U.S. government is just under $19 trillion in debt and only produced $17.4 trillion in gross domestic product in 2014.

American taxpayers spend an average of $39 billion a year financially supporting solar energy, according to a report by the Taxpayer Protection Alliance. The same report shows President Barack Obama’s 2009 stimulus package contained $51 billion in spending for green energy projects, including funding for failed solar energy companies such as Solyndra and Abound Solar.

Solyndra was given a $535 million loan guarantee by the Obama administration before filing for bankruptcy in 2011. Abound Solar got a $400 million federal loan guarantee, but filed for bankruptcy in 2012 after making faulty panels that routinely caught fire.

Despite relatively high levels of taxpayer support, in 2014 solar and wind power accounted for only 0.4 and 4.4 percent of electricity generated in the U.S., respectively, according to the Energy Information Administration.

Ironically, solar and wind power have not done much to reduce America’s carbon dioxide emissions. Studies show solar power is responsible for one percent of the decline in U.S. carbon-dioxide emissions, while natural gas is responsible for almost 20 percent. For every ton of carbon dioxide cut by solar power, hydraulic fracturing for natural gas cut 13 tons.

*** Really dude?

Protect the health of American families. In 2030, it will:

  • Prevent up to 3,600 premature deaths

  • Prevent 1,700 non-fatal heart attacks

  • Prevent 90,000 asthma attacks in children

  • Prevent 300,000 missed workdays and schooldays

Boost our economy by:

  • Leading to 30 percent more renewable energy generation
    in 2030

  • Creating tens of thousands of jobs

  • Continuing to lower the costs of renewable energy

Save the average American family:

  • Nearly $85 a year on their energy bills in 2030

  • Save enough energy to power 30 million homes
    in 2030

  • Save consumers $155 billion from 2020-2030

*** Climate Action Plan

Explore the infographic to learn about the progress we’re making to combat climate change, and read President Obama’s full Climate Action Plan here.

 

SCOTUS to Rule on Obama’s Executive Order

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Primer: This is the White House official Fact sheet and Executive Order being challenged.

The Supreme Court has often dealt a big blow to presidents in their second term.

LATimes: Harry Truman was rebuked for claiming the power to seize strike-bound steel mills during the Korean War. Richard Nixon resigned shortly after the court ruled unanimously he must turn over the Watergate tapes.

Bill Clinton’s impeachment was triggered by the court’s decision that he must answer questions under oath in the Paula Jones sexual harassment case. And George W. Bush lost before the court when he claimed his power as commander in chief gave him almost unfettered authority over prisoners held at the Guantanamo Bay prison.

Now, as President Obama begins his last year in office, the court is set to render a verdict on his use of his executive authority. The justices will decide whether he violated the law by authorizing more than 4 million immigrants living in the U.S. illegally to come out of the shadows without fear of deportation and obtain work permits.

There are signs that at least some of the justices are ready to rein in the president’s ability to take such bold action without the approval of Congress.

Never before has the high court ruled that a president violated his constitutional duty to “take care” that laws are “faithfully executed.” Yet when justices agreed to hear the immigration case, they surprised many by asking both sides to present arguments on whether Obama’s actions violated the rarely invoked “take care” provision. That question had not even been at issue when lower courts blocked Obama’s plan from taking effect.

In a separate pending case this term, the court also will rule on whether the president and his healthcare advisors went too far by requiring Catholic charities and other faith-based employers to formally opt out of providing a full range of contraceptives to their female employees by citing their religious objections.

The faith-based entities argued that by notifying the government of their decision to opt out — which triggers a process under which employees would get contraceptive coverage by other means — they would be “complicit” in supplying “abortion-inducing drugs.”

The decisions, both due by summer, will help answer a question that looms over Obama’s presidency. Has he properly used his power as chief executive to circumvent congressional gridlock on issues such as immigration, climate change and healthcare, or has he gone too far and violated his duty to enforce the laws as set by Congress?

The cases come before the court with a backdrop of Republican claims that the president has overreached and abused his power. Former House Speaker John A. Boehner said Obama was “acting like a king” and “damaging the presidency” when he announced the deportation-relief plan now before the high court.

On the campaign trail, Sen. Ted Cruz of Texas promises GOP voters that, if he is elected president, his first task on his first day in the White House will be to “rescind every illegal and unconstitutional executive action of Barack Obama.”

White House officials and supporters of the president counter that Obama’s actions are not only legal and well within his discretionary authority, but that Congress has left him no choice by refusing to take action on pressing national problems.

Conservative scholars think Obama has left himself vulnerable by announcing broad executive actions on policies that had been considered and rejected by Congress, and which even he once said were beyond his authority.

In his first term, Obama told Latino activists who were pushing him to take unilateral action that he could not “waive away the laws Congress put in place” regarding the removal of immigrants who entered the country illegally. But later the president decided he did have the power to suspend deportation and offer “lawful presence” and work permits to as many as 5 million of those immigrants.

So far conservatives have mostly failed to derail Obama in the Supreme Court. Twice, the justices upheld the president’s healthcare law against conservative attacks, with Chief Justice John G. Roberts Jr. casting his vote with the court’s four liberals.

Four years ago, in a key test of state-versus-federal power, the court ruled for Obama after his administration sued to block Arizona from enforcing a law to crack down on immigrants in the country illegally.

In 2011, Obama and then-Atty. Gen. Eric H. Holder Jr. raised ruffles on the right when they announced the administration would not defend in court the Defense of Marriage Act, which recognized only marriages between a man and a woman. House Republicans took up the cause, but two years later the high court agreed with the administration and struck down key parts of the law as unconstitutional.

But the new immigration and contraceptive cases pose a tough test for Obama’s lawyers. In last year’s healthcare case, they were defending a law that had won approval in Congress, when both chambers were controlled by Democrats. “We must respect the role of the legislature and take care not to undo what it has done,” Roberts said in upholding its system of insurance subsidies.

This year, by contrast, Obama is defending an executive action on immigration that was taken without the approval of Congress and in the face of fierce Republican criticism.

Similarly, the “contraceptive mandate” was not spelled out in the Affordable Care Act, as lawyers for Catholic bishops often point out. It was adopted later in a regulation issued by Obama’s healthcare advisors.

But Obama’s defenders, including immigration law experts, say the critics are missing the crucial point that the deportation laws give the chief executive a free hand to decide how or whether to deport those living here illegally. Contrary to what many assume, the law does not say federal officials must arrest and deport such people. Rather, it says they are “subject” to removal, based on policies and priorities set by the executive branch.

Obama’s administration says it wants to focus on deporting criminals, security threats, gang members and drug traffickers, not parents and grandparents who have children in the United States legally.

The administration can quote a powerful voice to back up its view of the matter. “Aliens may be removed” if they entered the country illegally and committed crimes, said Justice Anthony M. Kennedy, but “a principal feature of the removal system is the broad discretion exercised by immigration officials…. Federal officials, as an initial matter, must decide whether it makes sense to pursue removal at all. As a general rule, it is not a crime for a removable alien to remain present in the United States.”

Kennedy spoke for the court four years ago in rejecting Arizona’s claim that immigrants who could not prove their citizenship should be arrested, and Roberts agreed. Kennedy’s explanation of the deportation system may also defeat any claims that Obama is violating his duty to “faithfully execute” the law.

“The president is not claiming a constitutional authority to not enforce the law. He’s claiming authority based on the immigration statute,” said Walter Dellinger, a White House lawyer under President Clinton. “And if the court says he is wrong, then he will comply with that.”

34 Groups Connected to Militant Islam

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UN chief: 34 groups now allied to Islamic State extremists

UNITED NATIONS (AP)— Thirty-four militant groups from around the world had reportedly pledged allegiance to the Islamic State extremist group as of mid-December — and that number will only grow in 2016, U.N. Secretary-General Ban Ki-moon said in a report Friday.

Ban said IS poses “an unprecedented threat,” because of its ability to persuade groups from countries like the Philippines, Uzbekistan, Pakistan, Libya and Nigeria to pledge their allegiance.

He said U.N. member states should also prepare for an increase in attacks by IS associated groups traveling to other countries to launch attacks and develop networks.

“The recent expansion of the ISIL sphere of influence across west and north Africa, the Middle East and south and southeast Asia demonstrates the speed and scale at which the gravity of the threat has evolved in just 18 months,” Ban said, using another abbreviation for the group.

Adding to the threat, IS is “the world’s wealthiest terrorist organization,” Ban said, citing estimates the group generated $400-$500 million from oil and oil products in 2015, despite an embargo.

According to the U.N. mission in Iraq, cash taken from bank branches located in provinces under IS control totaled $1 billion. The mission also estimates that a tax on trucks entering IS controlled-territory generates nearly $1 billion a year, he said.

The extremist group captured large swathes of Iraq and Syria less than two years ago and despite international efforts to oust them, Ban said IS continues to maintain its presence in both countries and is expanding to other regions.

But the report and vote was in November of 2015:

UnitedNations: The Security Council determined today that the Islamic State in Iraq and the Levant/Sham (ISIL/ISIS) constituted an “unprecedented” threat to international peace and security, calling upon Member States with the requisite capacity to take “all necessary measures” to prevent and suppress its terrorist acts on territory under its control in Syria and Iraq.

Unanimously adopting resolution 2249 (2015), the Council unequivocally condemned the terrorist attacks perpetrated by ISIL — also known as Da’esh — on 26 June in Sousse, on 10 October in Ankara, on 31 October over the Sinaï Peninsula, on 12 November in Beirut and on 13 November in Paris, among others.  It expressed its deepest condolences to the victims and their families, as well as to the people and Governments of Tunisia, Turkey, Russian Federation, Lebanon and France.

The 15-member body condemned in the strongest terms ISIL’s gross, systematic and widespread abuses of human rights, as well as its destruction and looting of cultural heritage.  Those who committed, or were otherwise responsible for, terrorist acts or human rights violations must be held accountable.  By other terms, the Council urged Member States to intensify their efforts to stem the flow of foreign terrorist fighters into Iraq and Syria, and to prevent and suppress the financing of terrorism.

Following the vote, nearly all Council members took the floor to decry the “barbaric” attacks and hateful world view espoused by ISIL, reaffirming their support in both stemming the threat and bringing perpetrators to justice.  In an echo of the sentiments voiced by many around the table Spain’s representative declared:  “Today, we are all French, Russian, Malian and Arab,” adding:  “It is time to act with a French, Russian, Malian and Arab heart.”  The Council had a duty to guarantee the values and principles of the United Nations, and all must close ranks to vanquish terrorism, he stressed.

France’s representative, recalling that Da’esh had perpetrated an act of war against his country on 13 November, said today’s vote signalled recognition of the threat’s exceptional nature.  The fight against terrorism could only be effective if combined with a political transition that would eliminate Da’esh, he said, adding that France had obtained activation of the European Union’s mutual solidarity clause.

The Russian Federation’s representative said today’s unanimous vote was a step towards the creation of a broad anti-terrorism front aimed at eradicating root causes.  That also had been the aim of a Russian draft presented to the Council on 30 September, he said, describing attempts by some to block his delegation’s efforts as politically short-sighted.

Also speaking today were representatives of China, United States, Nigeria, Lithuania, Jordan, New Zealand, Chile, Angola, Venezuela and the United Kingdom.

K -14 Free Education? Not so Much

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Obama to propose $2.5 billion community college tax credit

TheHill: President Obama on Tuesday will propose a $2.5 billion tax credit over five years for businesses that invest in local community colleges and hire their graduates, administration officials told Reuters.
The Community College Partnership Tax Credit, which will be formally proposed in the president’s fiscal 2017 budget, would give employers who invest in schools and hire students from such programs a one-time $5,000 tax credit per individual.
“Employers can define those skills and help colleges develop the curriculum that teaches them,” James Kvaal, White House deputy director of domestic policy, told Reuters.
The administration estimated the initiative would help train 500,000 highly skilled workers over five years.
Ted Mitchell, under secretary at the Department of Education, said the proposal would receive bipartisan support.
“The idea of … bringing together community colleges and the local employer base is a very powerful one and really doesn’t break along party lines,” he said.
Under the president’s proposal, states would get a portion of the tax credit and be responsible for choosing which businesses and community colleges participate in the program.
The administration believes the program will spur employers to propose curriculums uniquely tailored to their labor needs.

FACT SHEET – White House Unveils America’s College Promise Proposal: Tuition-Free Community College for Responsible Students

Nearly a century ago, a movement that made high school widely available helped lead to rapid growth in the education and skills training of Americans, driving decades of economic growth and prosperity. America thrived in the 20th century in large part because we had the most educated workforce in the world.  But other nations have matched or exceeded the secret to our success. Today, more than ever, Americans need more knowledge and skills to meet the demands of a growing global economy without having to take on decades of debt before they even embark on their career.

Today the President is unveiling the America’s College Promise proposal to make two years of community college free for responsible students, letting students earn the first half of a bachelor’s degree and earn skills needed in the workforce at no cost. This proposal will require everyone to do their part: community colleges must strengthen their programs and increase the number of students who graduate, states must invest more in higher education and training, and students must take responsibility for their education, earn good grades, and stay on track to graduate. The program would be undertaken in partnership with states and is inspired by new programs in Tennessee and Chicago. If all states participate, an estimated 9 million students could benefit. A full-time community college student could save an average of $3,800 in tuition per year.

In addition, today the President will propose a new American Technical Training Fund to expand innovative, high-quality technical training programs similar to Tennessee Tech Centers that meet employer needs and help prepare more Americans for better paying jobs. These proposals build on a number of historic investments the President has made in college affordability and quality since taking office, including a $1,000 increase in the maximum Pell Grant award to help working and middle class families, the creation of the $2,500 American Opportunity Tax Credit, reforming student loans to eliminate subsidies to banks to invest in making college more affordable and keeping student debt manageable, and making available over $2 billion in grants to connect community colleges with employers to develop programs that are designed to get hard-working students good jobs.

The President’s Plan: Make Two Years of College as Free and Universal as High School

By 2020, an estimated 35 percent of job openings will require at least a bachelor’s degree and 30 percent will require some college or an associate’s degree. Forty percent of college students are enrolled at one of America’s more than 1,100 community colleges, which offer students affordable tuition, open admission policies, and convenient locations.  They are particularly important for students who are older, working, need remedial classes, or can only take classes part-time. For many students, they offer academic programs and an affordable route to a four-year college degree. They are also uniquely positioned to partner with employers to create tailored training programs to meet economic needs within their communities such as nursing, health information technology, and advanced manufacturing.

The America’s College Promise proposal would create a new partnership with states to help them waive tuition in high-quality programs for responsible students, while promoting key reforms to help more students complete at least two years of college. Restructuring the community college experience, coupled with free tuition, can lead to gains in student enrollment, persistence, and completion transfer, and employment. Specifically, here is what the initiative will mean:

Enhancing Student Responsibility and Cutting the Cost of College for All Americans: Students who attend at least half-time, maintain a 2.5 GPA while in college, and make steady progress toward completing their program will have their tuition eliminated. These students will be able to earn half of the academic credit they need for a four-year degree or earn a certificate or two-year degree to prepare them for a good job.

Building High-Quality Community Colleges: Community colleges will be expected to offer programs that either (1) are academic programs that fully transfer to local public four-year colleges and universities, giving students a chance to earn half of the credit they need for a four-year degree, or (2) are occupational training programs with high graduation rates and that lead to degrees and certificates that are in demand among employers.  Other types of programs will not be eligible for free tuition.  Colleges must also adopt promising and evidence-based institutional reforms to improve student outcomes, such as the effective Accelerated Study in Associate Programs (ASAP) programs at the City University of New York which waive tuition, help students pay for books and transit costs, and provide academic advising and supportive scheduling programs to better meet the needs of participating students, resulting in greater gains in college persistence and degree completion.

Ensuring Shared Responsibility with States: Federal funding will cover three-quarters of the average cost of community college. States that choose to participate will be expected to contribute the remaining funds necessary to eliminate community college tuition for eligible students. States that already invest more and charge students less can make smaller contributions, though all participating states will be required to put up some matching funds. States must also commit to continue existing investments in higher education; coordinate high schools, community colleges, and four-year institutions to reduce the need for remediation and repeated courses; and allocate a significant portion of funding based on performance, not enrollment alone. States will have flexibility to use some resources to expand quality community college offerings, improve affordability at four-year public universities, and improve college readiness, through outreach and early intervention.

Expanding Technical Training for Middle Class Jobs. Additionally, in order to spread the availability of high-quality and innovative programs like those in Tennessee and Texas, which achieve better than average completion and employment outcomes, the President is also proposing the American Technical Training Fund. This fund will award programs that have strong employer partnerships and include work-based learning opportunities, provide accelerated training, and are scheduled to accommodate part-time work. Programs could be created within current community colleges or other training institutions. The focus of the discretionary budget proposal would be to help high-potential, low-wage workers gain the skills to work into growing fields with significant numbers of middle-class jobs that local employers are trying to fill such as energy, IT, and advanced manufacturing. This program will fund the start-up of 100 centers and scale those efforts in succeeding years. Smaller grants would help to bring together partners and start a pilot program. Larger grants would be used for expanding programs based on evidence of effectiveness, which could include past performance on graduation rates, job placement rates and placement wages. Building on the President’s community college initiative, known as the Trade Adjustment Assistance Community College and Career Training Grants and for which 2014 was the final year of funding, these funds will help community colleges become more job-driven.

Building on State and Local Programs.  In the past year, Tennessee and the City of Chicago initiated free community college programs.  In the first year of the Tennessee program, 57,000 students representing almost 90 percent of the state’s high school graduating class applied for the program. The scholarship is coupled with college counseling, mentorship, and community service that early evidence suggests supports greater enrollment, persistence and college completion.  This is coupled with efforts to spur innovation and improvement by funding colleges using performance outcomes based on student success and an innovative approach to career and technical education through the Tennessee Colleges of Applied Technology.  These Tennessee Tech Centers have a graduation rate of 80 percent and a job placement rate of 85 percent.

Building on a Record of Progress. Since taking office, President Obama has taken steps to expand federal support to help more students afford college, while calling for a shared responsibility in tackling rising college costs. Key achievements include:

  • Doubling the Investment in Pell Grants: The President has raised the maximum Pell Grant award to $5,730 for the 2014-15 award year — a nearly $1,000 increase since 2008. The number of Pell Grant recipients has expanded by 50 percent over that same time.
  • Expanding Education Tax Credits: President Obama established the American Opportunity Tax Credit in 2009 to assist families with the costs of college, providing up to $10,000 for four years of college tuition.
  • Pay-As-You-Earn Loans: All new borrowers can now cap loan payments at 10 percent of their incomes. The Department of Education has begun the process to amend its regulations and will make the new plan available on all direct loans by December 2015. We expect it to benefit up to 5 million borrowers.
  • First in the World Grants: In September, the Department of Education awarded $75 million to 24 colleges and universities under the new First in the World grant program to expand college access and improve student learning while reducing costs.
  • College Ratings Program: The Department of Education continues to develop a college ratings system by the 2015-2015 school year that will recognize institutions that excel at enrolling students from all backgrounds; focus on maintaining affordability; and succeed at helping all students graduate with a degree or certificate of value.
  • Job-Driven Training Grants: Through the Trade Adjustment Community College and Career Training program more than 1,000 institutions have received $2 billion in federal funding to design education and training programs, working closely with employers and industry that prepare workers for jobs in-demand in their regional economies, such as health care, information technology and energy. These programs have shown early success — through the end of FY2013, among the nearly 164,000 individuals who had enrolled in these programs 88 percent either completed a program or continued the program into a second year.
  • White House Summit on Community Colleges: In October 2010, the President convened community college leaders, faculty and students; business leaders; philanthropic organizations; and other workforce development experts for the first White House summit dedicated to the role that community colleges play in our efforts to increase the number of college graduates and prepare those graduates to lead the 21st century workforce.
  • Center for the Analysis of Postsecondary Readiness: Last August, the Department of Education launched a new $10 million Institute for Education Sciences-funded Center for the Analysis of Postsecondary Readiness (CAPR) that is working to strengthen the research, evaluation, and support of college readiness efforts across the nation. CAPR is documenting current practices in developmental English and math education to identify innovative instructional practices that improve student success.
  • Call to Action on College Opportunity: Last December, the President, Vice President, and First Lady joined college presidents and leaders of non-profits, foundations, and other organizations to announce over 600 new commitments to produce more college graduates. Community colleges made commitments individually, and in partnership with neighboring school districts and four-year institutions, to build seamless transitions among institutions, develop clear educational and career pathways, implement strategies to increase student completion of STEM programs, and establish more accurate measures of student progress and success.