Economic Report of the President 1994 - The American Presidency ...

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the future should be reflected in lower real long-term rates. As aconsequence, the composition of output will shift toward investmentat the expense of consumption.The Short-Run Level of Real ActivityLong-term rates might also fall because of bad news about expectedfuture real economic activity. Real growth in the first halfof 1993 was indeed disappointing. But both Administration and privateforecasters believed, correctly as it turned out, that growthwould be better in the second half of the year. Moreover, if thereare fears of a future slump, why is the stock market at recordhighs? Presumably, market participants expect good earnings anddividends. The low bond yields and high stock values are consistentwith the path of stable growth, low inflation, and decreasing unemploymentthat the Administration forecasts. Finally, the news of increasinggrowth that began to emerge in the fall was greeted byonly modest increases in long-term rates.Inflation RiskA decline in expected inflation could also account for the declinein long-term bond rates associated with the deficit reduction plan.Chart 2-13 shows, however, that there is no break in inflation expectationsassociated with this decline in long-term bond rates. Thedifference between the nominal and real interest rates in Chart 2-13 gives a time-series of expected long-term inflation. In October1992 the Blue Chip consensus expected an average annual GDP inflationof 3.3 percent for 1994-98 and 3.4 percent for 1999-2003.In October 1993, the consensus was again for 3.3-percent inflationfor 1995-99, and 3.3 percent for 2000-2004. Hence, the consensusforecast implies that virtually all the recent reductions in nominallong-term rates were also reductions in real rates.SHORT-RUN EFFECTS OF INTEREST RATESThe reduction in real long-term interest rates has been an importantelement powering the economic recovery. As discussed elsewherein this chapter, reductions in Federal purchases—especiallyfor defense—have been an important factor holding back the recovery.As the reductions in expenditures and increases in taxes builtinto the Administration's plan take effect, they—taken in isolation—wouldplace a continued drag on the economy. But theyshould not be taken in isolation. Because long-term interest ratesanticipate credible future fiscal consolidation, the effects of deficitreduction in long-term rates show up in advance of the actual deficitreduction. The resulting increases in interest-sensitive expendituresprovide a boost to economic growth that works in the oppositedirection of the direct fiscal effect. This increase in interest-sensitivespending is closely linked with the sustained reduction in84
long rates. In 1993, real GDP in the interest-sensitive sectors (businessfixed investment, housing, and consumer durables) rose 11percent, while the non-interest-sensitive sectors showed virtuallyno growth.The interest-sensitive components of spending did not, however,increase uniformly throughout 1993. Producers' durable equipmentwas strong throughout the year, growing 18 percent from fourthquarter to fourth quarter. Expenditure on consumer durables wasalso strong throughout the year (with an 8-percent growth rate),but production of automobiles was irregular. Investment innonresidential structures was weak for most of the year, most likelyas a result of high vacancy rates in existing buildings, due inturn partly to overbuilding in the 1980s. The lags in the responseof residential construction to the low interest rates were unusuallylong. Residential investment fell at a 4-percent annual rate in thefirst two quarters of 1993, but rose at a 21-percent rate in the lasttwo quarters.Net exports would appear on many economists' lists of interestsensitiveexpenditures. Normally, low interest rates should lead todepreciation of the dollar and therefore to increased exports. Thischannel for interest rates was offset by other factors, however.Short-term rates fell around the world, not just in the UnitedStates, and the dollar has actually appreciated slightly on a multilateralbasis. (A further discussion of the exchange rate is presentedin Chapter 6.)LONG-TERM EFFECTS OF DEFICIT REDUCTIONThe key macroeconomic rationale for reducing the Federal deficitis to increase investment and therefore productivity and real incomesin the future. Changes in fiscal policy should exert sustainedeffects on national investment and saving. As discussed above, thePresident's economic plan should increase the share of domestic investmentin GDP by about 1 percent once it is fully phased in.Chart 2-15 shows the projected impact of such an increase in thenational investment rate on the marginal product of capital, thereal wage rate, and the capital stock. (Box 2-4 contains details ofthe computation.) The data are expressed relative to the initialsteady-state position.All of the variables require several decades to adjust to theirsteady-state values. The ultimate reduction in the return to capitalis about 2 percentage points. The reduction in long-term rates wehave already seen is closer to IV2 percentage points. The reductionin the marginal product of capital takes place, however, over a verylong period of time. Indeed, as presented in the chart, the marginalproduct of capital is down only 1 percentage point after 8 years.Moreover, since capital and bonds are not perfect substitutes, their85
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S : Sf:' ;: W^W't-^WW': ;, S 4 Si :
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unitedminds
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Economic Report of the PresidentTo
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the Technology Reinvestment Project
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formed health care system, increase
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CONTENTSPageCHAPTER 1. A STRATEGY F
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PageProviding Comprehensive Benefit
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LIST OF CHARTS—CONTINUEDPage3-5 L
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CHAPTER 1A Strategy for Growth and
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which have left consumers and busin
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that growth in both real compensati
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for inflation was on average roughl
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Box 1-2.—Saving, Investment, and
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investments in human capital; inves
Page 39 and 40: of the income distribution (Table 1
Page 41 and 42: Box 1-3.—Credible Deficit Reducti
Page 43 and 44: Chart 1-7 Correlation of Investment
Page 45 and 46: Box 1~4*~-A Balanced Budget Amendme
Page 47 and 48: This educational record is not good
Page 49 and 50: fallen markedly since the 1960s (Ch
Page 51 and 52: The development and deployment of n
Page 53 and 54: Earlier rounds of GATT talks had fo
Page 55 and 56: Chart 1-10 Projected Real Growth Ra
Page 57 and 58: are therefore on the public dole. M
Page 59: prise communities and be granted sm
Page 62 and 63: ingredient that should allow the ec
Page 64 and 65: Chart 2-2 National Defense Purchase
Page 66 and 67: Chart 2-3 Growth of U.S. Merchandis
Page 68 and 69: Chart 2-5 Households: Credit Market
Page 70 and 71: THE HEADWINDS ARE MOSTLY CALMINGAs
Page 72 and 73: 1993, real consumer spending increa
Page 74 and 75: RESIDENTIAL INVESTMENTResidential i
Page 76 and 77: smallest annual increase in 20 year
Page 78 and 79: ments with the Internal Revenue Ser
Page 80 and 81: safe-harbor rules for underpayment
Page 82 and 83: Chart 2-9 Alternative Measures of t
Page 84 and 85: Meanwhile, the Mountain States were
Page 86 and 87: inflation is measured by the Blue C
Page 88 and 89: Saving, Investment, and Capital Acc
Page 92 and 93: Chart 2-15 Dynamic Effects of Defic
Page 94 and 95: joyed healthy average real GDP grow
Page 96 and 97: Chart 2-16 Personal Income Taxes as
Page 98 and 99: TABLE 2-2.— Administration Foreca
Page 100 and 101: TABLE 2-3.— Accounting for Growth
Page 103 and 104: CHAPTER 3Trends and Recent Developm
Page 105 and 106: first quarter of 1991, nonfarm payr
Page 107 and 108: cause defense cutbacks have caused
Page 109 and 110: UNEMPLOYMENT AND NONEMPLOYMENTThe U
Page 111 and 112: Chart 3-3 Civilian Unemployment Rat
Page 113 and 114: Chart 3-6 Employment-to-Population
Page 115 and 116: Chart 3-8 Ratio of White-Collar to
Page 117 and 118: than would be expected given its hi
Page 119 and 120: that the natural rate is falling? M
Page 121 and 122: SLOW INCOME GROWTHIncome trends hav
Page 123 and 124: Chart 3-10 Average Annual Growth of
Page 125 and 126: Box 3-3.—Consequences of Producti
Page 127 and 128: likely that immigration could expla
Page 129 and 130: We do, however, know how many worke
Page 131 and 132: size. No data are available on vola
Page 133 and 134: BENEFITSOne of the concerns raised
Page 135 and 136: edented partnership to develop a nu
Page 137 and 138: CHAPTER 4Health Care ReformTHE UNIT
Page 139 and 140: make cost-conscious decisions. In a
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A third rationale for universal cov
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Box 4-1.—Moral Hazard and Adverse
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ies depending on one's health statu
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than people in other countries do,
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sumers are ill equipped to bring st
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By itself, the aging of the populat
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TABLE 4-3.- Sources and Uses of Hea
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about 65 to 70 cents for a typical
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THE ARCHITECTURE OF THE HEALTHSECUR
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etary savings for the Federal Gover
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contribution, within limits. Outsid
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salary income, payments from the em
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TABLE 4-6.—Caps on Premiums by Fi
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An example will illustrate the proc
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TABLE 4-9.—Sources and Uses of Fe
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Chart 4-9 Business Spending on Heal
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Health care reform should set the s
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and private sectors, addressing env
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Box 5-1.—Selected National Perfor
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Box 5-2*—Market PowerFirms are sa
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ate regulation. For example, State
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competitiveness of U.S. industry, a
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Box 5-4.—ExternalitiesAn external
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in the habitat of the spotted owl r
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CLIMATE CHANGE ACTION PLANCertain g
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eral, lays a foundation for broader
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The Administration's proposal seeks
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vances in technical know-how have a
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Investments in R&D are risky. Like
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1950s and 1960s, and American compa
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ico and Lawrence Livermore in Calif
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of industry. MOCs will be affiliate
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tiveness. Again, the hoped-for resu
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forts to cut the massive Federal bu
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TECHNOLOGY POLICY, GROWTH, ANDCOMPE
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mitment to an open international tr
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ses, which take such intersectoral
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An important sectoral development i
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TABLE 6-3.—Stock of U.S. Outward
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technical change has been offered a
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ent account is a broader measure of
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TABLE 6-6.—Intrafirm Trade as Sha
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greater access to the Japanese mark
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the transparency of its trade regim
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that if the states of the former So
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Box 6-3.—Mexican Economic Reforms
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1998, while nontariff barriers on a
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ward convergence in environmental a
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Box 6-4.—The Asian "Miracle"Per c
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Box 6-5.—The Economic Impact of t
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development, and environmental clea
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THE TRADE POLICY AGENDABy lowering
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ignated monopolies. It also establi
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The dollar ended 1993 roughly where
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Box 6-7.—Exchange-Rate Volatility
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Chart 6-5 French Franc-Deutsche Mar
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Besides bringing these endeavors to
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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Report to the President on the Acti
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duction budget package, the North A
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Working Group studying cost-benefit
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prepares the Economic Indicators an
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Appendix BSTATISTICAL TABLES RELATI
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POPULATION, EMPLOYMENT, WAGES, AND
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AGRICULTURE:PageB-96. Farm income,
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Gross domestic product
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TABLE B-3.—Implicit price deflato
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TABLE B-4.—Fixed-weighted price i
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TABLE B-5.—Changes in gross domes
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TABLE B-7.—Cross domestic product
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TABLE B-9.—Gross domestic product
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TABLE B-ll.—Gross domestic produc
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TABLE B-13.—Gross domestic produc
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TABLE B-15.—Personal consumption
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TABLE B-17.—Gross and net private
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TABLE B-19.—Inventories and final
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TABLE B-21.—Foreign transactions
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TABLE B-23.—Relation of gross dom
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TABLE B-25.—National income by ty
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TABLE B-26.—Sources of personal i
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TABLE B-27.—Disposition of person
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TABLE B-29.—Gross sating and inve
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TABLE B-31.—Median money income (
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TABLE B-33.—Population and the la
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TABLE B-34.—Civilian employment a
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TABLE B-36.—Unemployment by demog
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TABLE B-38.—Civilian labor force
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TABLE B-40.—Civilian unemployment
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TABLE B-42.—Unemployment by durat
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TABLE B-44.—Employees on nonagric
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TABLE B-45.—Hours and earnings in
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TABLE B-47.—Productivity and rela
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PRODUCTION AND BUSINESS ACTIVITYTAB
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TABLE B-51.—Industrial production
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TABLE B-53.—New construction acti
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TABLE B-54.—New housing units sta
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Year or monthTABLE B-56.—Manufact
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TABLE B-58.—Manufacturers' new an
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TABLE B-60.—Consumer price indexe
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TABLE B-61.—Consumer price indexe
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TABLE B-63.—Changes in consumer p
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TABLE B-64.—Producer price indexe
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TABLE B-66.—Producer price indexe
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TABLE B-67.—Changes in producer p
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TABLE B-69.—Components of money s
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TABLE B-70.—Aggregate reserves of
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TABLE B-72.—Bond yields and inter
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TABLE B-73.—Total funds raised in
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TABLE B-74.—Mortgage debt outstan
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TABLE B-76.—Consumer credit outst
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TABLE B-78.—Federal receipts, out
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TABLE B-79.—Federal budget receip
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TABLE B-81.—Federal and State and
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TABLE B-83.—State and local gover
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TABLE B-85.—Interest-bearing publ
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TABLE B-87.—Estimated ownership o
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TABLE B-89.—Corporate profits by
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TABLE B-91.—Sales, profits, and s
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TABLE B-93.—Sources and uses of f
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TABLE B-95.—Business formation an
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19481949195019511952195319541955195
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TABLE B-99.—Indexes of prices rec
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TABLE B-101.— Farm business balan
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TABLE B-103.—U.S. international t
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TABLE B-104.—U.S. merchandise exp
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TABLE B-106.—U.S. merchandise exp
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TABLE B-108.—Industrial productio
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TABLE B-110.—Foreign exchange rat
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NATIONAL WEALTHTABLE B-l 12.—Nati
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SUPPLEMENTARY TABLETABLE B-114.—S
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