RL6_Report_To_President.pdf - Economic Report of the...

Unformatted text preview: Economic Report of the President Transmitted to the Congress February 2002 together with THE ANNUAL REPORT of the COUNCIL OF ECONOMIC ADVISERS UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON : 2002 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail Stop: SSOP, Washington, DC 20402-0001 Economic Report of the President | i C O N T E N T S Page ECONOMIC REPORT OF THE PRESIDENT ............................................... 1 ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS*...... 5 OVERVIEW......................................................................................................... 15 CHAPTER 1. RESTORING PROSPERITY....................................................... 23 CHAPTER 2. STRENGTHENING RETIREMENT SECURITY .................... 65 CHAPTER 3. REALIZING GAINS FROM COMPETITION ......................... 99 CHAPTER 4. PROMOTING HEALTH CARE QUALITY AND ACCESS ..... 145 CHAPTER 5. REDESIGNING FEDERALISM FOR THE 21ST CENTURY .. 187 CHAPTER 6. BUILDING INSTITUTIONS FOR A BETTER ENVIRONMENT ............................................................................................. 215 CHAPTER 7. SUPPORTING GLOBAL ECONOMIC INTEGRATION ....... 251 APPENDIX A. REPORT TO THE PRESIDENT ON THE ACTIVITIES OF THE COUNCIL OF ECONOMIC ADVISERS DURING 2001 ........... 301 APPENDIX B. STATISTICAL TABLES RELATING TO INCOME, EMPLOYMENT, AND PRODUCTION....................................................... 313 * For a detailed table of contents of the Council’s Report, see page 9 Economic Report of the President | iii ECONOMIC REPORT OF THE PRESIDENT Economic Report of the President | v ECONOMIC REPORT OF THE PRESIDENT To the Congress of the United States: Since the summer of 2000, economic growth has been unacceptably slow. This past year the inherited trend of deteriorating growth was fed by events, the most momentous of which was the terrorist attacks of September 11, 2001. The painful upshot has been the first recession in a decade. This is cause for compassion—and for action. Our first priority was to help those Americans who were hurt most by the recession and the attacks on September 11. In the immediate aftermath of the attacks, my Administration sought to stabilize our air transportation system to keep Americans flying. Working with the Congress, we provided assistance and aid to the affected areas in New York and Virginia. We sought to provide a stronger safety net for displaced workers, and we will continue these efforts. Our economic recovery plan must be based on creating jobs in the private sector. My Administration has urged the Congress to accelerate tax relief for working Americans to speed economic growth and create jobs. We are engaged in a war against terrorism that places new demands on our economy, and we must seek out every opportunity to build an economic foundation that will support this challenge. I am confident that Americans have proved they will rise to meet this challenge. We must have an agenda not only for physical security, but also for economic security. Our strategy builds upon the character of Americans: removing economic barriers to their success, combining our workers and their skills with new technologies, and creating an environment where entrepreneurs and businesses large and small can grow and create jobs. Our vision must extend beyond America, engaging other countries in the virtuous Economic Report of the President | 3 cycle of free trade, raising the potential for global growth, and securing the gains from worldwide markets in goods and capital. We must ensure that this effort builds economic bonds that encompass every American. America faces a unique moment in history: our Nation is at war, our homeland was attacked, and our economy is in recession. In meeting these great challenges, we must draw strength from the enduring power of free markets and a free people. We must also look forward and work toward a stronger economy that will buttress the United States against an uncertain world and lift the fortunes of others worldwide. THE WHITE HOUSE FEBRUARY 2002 4 | Economic Report of the President THE ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS Economic Report of the President | 5 LETTER OF TRANSMITTAL COUNCIL OF ECONOMIC ADVISERS, Washington, D.C., February 5, 2002. MR. PRESIDENT: The Council of Economic Advisers herewith submits its 2002 Annual Report in accordance with the provisions of the Employment Act of 1946 as amended by the Full Employment and Balanced Growth Act of 1978. Sincerely, Robert Glenn Hubbard Chairman Randall S. Kroszner Member Mark B. McClellan Member Economic Report of the President | 7 C O N T E N T S Page overview ............................................................................................... 15 chapter 1. restoring prosperity......................................................... Macroeconomic Performance in 2001: Softer Economy, Harder Choices .................................................................................. Aggregate Demand During the First Three Quarters ...................... Preliminary Evidence on Aggregate Demand in the Fourth Quarter............................................................................. Labor Markets ................................................................................ Inflation.......................................................................................... Productivity and Employment Costs .............................................. Saving and Investment.................................................................... The Cyclical Slowdown...................................................................... Moderation After Very Rapid Growth ............................................ Decline in Equity Values................................................................. Surge in Energy Prices .................................................................... Higher Interest Rates ...................................................................... Collapse of the High-Technology Sector......................................... Lingering Effects of Y2K ................................................................ Effects on Inventories and the Capital Stock................................... From Slowdown to Recession ......................................................... Policy Developments in 2001............................................................. Fiscal Policy Before the Terrorist Attacks......................................... Tax Relief in 2001 .......................................................................... Monetary Policy Before the Terrorist Attacks.................................. The Macroeconomic Policy Response After September 11 ............. Economic Developments Outside the United States .......................... The Economic Outlook ..................................................................... Near-Term Outlook: Poised for Recovery ....................................... Inflation Forecast............................................................................ Long-Term Outlook: Strengthening the Foundation for the Future ............................................................................... The Policy Outlook: An Agenda for Economic Security .................... 23 chapter 2. strengthening retirement security............................... Rationale for a National Retirement System ................................... Insurance Against Uncertainty........................................................ Foresight and Planning ................................................................... Redistributive Goals ....................................................................... Contents 23 23 30 33 34 34 35 36 36 37 37 38 38 38 39 41 43 43 44 45 46 51 52 52 54 54 61 65 66 66 67 68 | 9 Page Sources of Retirement Security........................................................... Social Security ................................................................................ Employer-Sponsored Pensions ........................................................ Individual Savings........................................................................... Labor Earnings ............................................................................... Public Assistance............................................................................. Challenges Ahead ............................................................................... Social Security: Past and Present......................................................... Origins of the Current System........................................................ Social Security and National Saving................................................ The Future of Social Security ............................................................. Advantages of Personal Accounts .................................................... The Financial Sustainability of Social Security................................ Other Sources of Retirement Security ................................................ Employer-Sponsored Pension Plans ................................................ Individual Saving............................................................................ Fostering Self-Reliance.................................................................... Meeting the Challenge of Retirement Security ................................... 69 69 71 72 72 72 73 74 74 76 79 79 86 92 93 94 96 96 chapter 3. realizing gains from competition .................................. Motivations for Organizational Change ............................................. The Role of Agency Costs in Organizational Change ..................... Mergers........................................................................................... Other Organizational Forms: Joint Ventures and Partial Equity Stakes ................................................................................ Incorporating Economic Insights into Competition Policy ................ Competition Policy, Corporate Governance, and the Mergers of the 1980s and 1990s ................................................................ The Role of Corporate Governance Changes.................................. Policy Lessons for Promoting Organizational Efficiencies................... Policy Lessons from Joint Ventures ................................................. Shaping Policies to Address Partial Equity Stakes............................ Policy Toward Vertical Relations ..................................................... Cross-Border Organizational Changes................................................ Multijurisdictional Review.............................................................. Elements of International Policy Convergence................................ Core Principles of Competition Policy............................................ Dynamic Competition and Antitrust Policy....................................... Sources of Incentives for Innovation............................................... Fostering Innovation Through Organizational Structure ................ Dynamic Competition as Repeated Innovations............................. Implications of Dynamic Competition for Competition Policy...... Conclusion......................................................................................... 99 101 102 103 10 | Economic Report of the President 107 112 114 116 117 118 120 123 125 125 127 127 130 132 136 137 138 142 Page chapter 4. promoting health care quality and access................... Encouraging Flexible, Innovative, and Broadly Available Health Care Coverage .................................................................................. Recent Trends in Health Care Costs and Coverage ......................... Addressing Barriers to Effective Competition in Health Insurance . Increasing Health Insurance Coverage ............................................ Making Medicare Coverage More Flexible and Efficient ................ Better Support for High-Quality, Efficient Care................................. Shortfalls in the Quality of Care ..................................................... Disparities in the Health Care System ............................................ Empowering Providers to Improve Quality of Care ........................ Empowering Patients to Make Informed Health Care Choices....... Fulfilling the Promise of Medical Research......................................... The Benefits of Biomedical Research .............................................. Many Unanswered Questions About Existing Medical Treatments. The Role of the Federal Government in Supporting Research ........ Conclusion: Fulfilling the Potential of 21st-Century Health Care..... 145 149 149 154 159 166 171 171 173 175 176 179 180 182 184 185 chapter 5. redesigning federalism for the 21st century................ Institutional Design in a Federal System............................................. Fostering Partnerships, Competition, and Accountability .................. Elementary and Secondary Education ................................................ Setting Standards and Measuring Progress ...................................... Expanding Options ........................................................................ Providing for Vulnerable Populations: Government Partnerships.... Summing Up: Getting Incentives Right ......................................... Welfare ............................................................................................... Focusing on Results ........................................................................ The Importance of Measurement ................................................... The Value of Incentives .................................................................. The Benefits of Flexible Approaches ............................................... Encouraging Broad Participation .................................................... Medicaid and SCHIP......................................................................... Limitations and Shortcomings of the Current System .................... Fostering Market-Based Health Insurance ...................................... Conclusion......................................................................................... 187 188 191 192 193 194 196 199 199 200 202 203 204 206 207 208 210 213 chapter 6. building institutions for a better environment........ The Government’s Role in Environmental Protection ........................ Measuring the Benefits and Costs of Environmental Protection......... Types of Environmental Regulation ................................................... Command-and-Control Approaches .............................................. Standard Market-Based Approaches: Permit Trading and Fees........ 215 219 221 223 223 223 Contents | 11 Page Other Flexible Approaches: Informal Markets and Tradable Performance Standards ................................................................. Myths About Flexible Approaches ...................................................... Case Studies in Flexible Environmental Protection............................. The Sulfur Dioxide Permit Trading Program .................................. Tradable Quotas in the Alaskan Halibut and Sablefish Fisheries ..... Informal Permit Trading in the Tar-Pamlico River Basin ................ When Markets Don’t Work ............................................................ Lessons for Future Policy: Climate Change ........................................ Base Policy Action on Sound Science.............................................. Choose a Flexible, Gradual Approach............................................. Set Reasonable, Gradual Goals ....................................................... Provide Information and Encourage Reductions ............................ Give Technology—and Institutions—Time.................................... 226 228 232 233 237 240 243 244 245 245 246 248 248 chapter 7. supporting global economic integration ..................... The United States in the International Economy ............................... Trends and Patterns in U.S. and World Trade................................. Trends and Composition of Capital Flows...................................... The Benefits of Globalization............................................................. The Benefits of Trade...................................................................... The Benefits of Capital Flows......................................................... The Role of Migration.................................................................... Some Myths About Trade and Globalization...................................... Trade and the Environment............................................................ Trade and Employment .................................................................. Trade and Relative Wages ............................................................... The Effects of Trade on Developing Nations .................................. International Policy Issues and the Role of International Institutions . International Trade Institutions and the Benefits of Trade .............. Role and Reform of International Financial Institutions................. Conclusion......................................................................................... 251 252 252 260 265 265 268 270 271 271 272 273 274 275 275 281 300 A. B. appendixes Report to the President on the Activities of the Council of Economic Advisers During 2001............... 301 Statistical Tables Relating to Income, Employment, and Production............................................................ 313 12 | Economic Report of the President Page list of tables 1-1. Administration Forecast.................................................................. 1-2. Accounting for Growth in Real GDP, 1960-2012 .......................... 1-3. Accounting for the Productivity Acceleration Since 1995 ............... 7-1. U.S. Manufacturing Trade as Share of Shipments and Consumption, 2000 ..................................................................... 7-2. Estimated Gross Private Sector Capital Flows ................................. 7-3. Estimated Net Private Sector Capital Flows.................................... 7-4. Estimated World Cross-Border Claims and U.S. International Investment Position, Year-End 2000............................................. list of charts 1-1. Real GDP Growth.......................................................................... 1-2. Real Consumption Growth ............................................................ 1-3. Growth in Real Gross Private Domestic Investment ....................... 1-4. Standard & Poor’s 500 Composite Stock Index .............................. 1-5. Growth in the Real Capital Stock ................................................... 1-6. Consumer Sentiment...................................................................... 1-7. Discount Window Borrowing ........................................................ 1-8. Effective and Target Federal Funds Rates ........................................ 1-9. Productivity Growth Around Business Cycle Peaks......................... 2-1. Income Sources of Aged Households, 1998.................................... 2-2. Pension Plan Participants by Type of Plan ...................................... 2-3. Ratio of Working-Age to Retirement-Age Persons .......................... 3-1. Announced Mergers and Acquisitions Involving U.S.-Headquartered Firms............................................................ 3-2. Fraction of U.S. Mergers and Acquisitions Involvin...
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