Economic Report of the President

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Box 1-2: Okun’s LawOne way of estimating the economy’s potential growth rate isthrough the empirical regularity known as Okun’s Law, which relateschanges in the unemployment rate to GDP growth (Chart 1-6). The chartplots the four-quarter change in the unemployment rate (which hasbeen adjusted to account for demographic changes) against the fourquartergrowth rate of real output. According to Okun’s Law, theunemployment rate falls when output grows faster than its potentialrate and rises when output growth falls short of that potential. The rateof real GDP growth consistent with a stable unemployment rate is theninterpreted as the rate of potential growth; this potential can be estimatedas the rate at which the fitted line in Chart 1-6 crosses thehorizontal axis. As can be seen by the position of the two parallel lines,the pace of potential real GDP growth appears to have picked up after1995. The lower line, which is drawn through data for 1980–1995,suggests that potential real GDP grew at a 2.8 percent annual rateduring those years. The upper line—which is drawn through data for1996–2004 and is estimated so as to be parallel to the lower line—suggests that real potential GDP growth accelerated to a 3.5 percentannual rate during the past nine years.44 | Economic Report of the President
The growth rate of the economy over the long run is determined by itssupply-side components, which include population, labor force participation,productivity, and the workweek. The Administration’s forecast for the contributionof different supply-side factors to real GDP growth is shown inTable 1-2.As seen in the fourth column of the table, the supply-side composition ofreal GDP growth has been unusual since the beginning of 2001, with exceptionallyhigh productivity growth (4.2 percent at an annual rate) beingpartially offset by a large decline in the ratio of nonfarm business employmentto household employment. This unusual pattern reflects the discrepancybetween the slow growth of employment as measured by the employer surveyand the more rapid growth of employment as measured by the householdsurvey—a disparity that has not been adequately explained. Declines in thelabor force participation rate have also held down real GDP growth during thepast four years, although the reasons for these declines may be partly cyclical.TABLE 1-2.— Accounting for Growth in Real GDP, 1953–2010[Average annual percent change]Item1953 Q2to1973 Q41973 Q4to1995 Q21995 Q2to2001 Q12001 Q1to2004 Q32004 Q3to2010 Q41) Civilian noninstitutional population aged 16 and over 1 .......... 1.6 1.4 1.2 1.2 1.12) Plus: Civilian labor force participation rate ........................ .2 .4 .1 -.5 -.13) Equals: Civilian labor force 2 .................................................... 1.8 1.8 1.4 .7 1.04) Plus: Civilian employment rate ............................................ -.1 .0 .3 -.4 .15) Equals: Civilian employment 2 .................................................. 1.7 1.8 1.7 .4 1.16) Plus: Nonfarm business employment asa share of civilian employment 2 3 ............................... -.1 .1 .5 -.9 .07) Equals: Nonfarm business employment................................... 1.6 1.8 2.1 -.6 1.18) Plus: Average weekly hours (nonfarm business) ................. -.3 -.3 -.3 -.4 .19) Equals: Hours of all persons (nonfarm business).................... 1.3 1.6 1.9 -1.0 1.210) Plus: Output per hour (productivity, nonfarm business) ..... 2.5 1.5 2.4 4.2 2.511) Equals: Nonfarm business output............................................ 3.8 3.1 4.3 3.2 3.812) Plus: Ratio of real GDP to nonfarm business output 4 ......... -.2 -.2 -.5 -.4 -.413) Equals: Real GDP...................................................................... 3.6 2.8 3.8 2.8 3.31Adjusted by Council of Economic Advisers to smooth discontinuities in the population series since 1990.2Bureau of Labor Statistics research series adjusted to smooth irregularities in the population series since 1990.3Line 6 translates the civilian employment growth rate into the nonfarm business employment growth rate.4Line 12 translates nonfarm business output back into output for all sectors (GDP), which includes the output offarms and general government.Note: The periods 1953 Q2, 1973 Q4, and 2001 Q1 are NBER business-cycle peaks. Detail may not add to totalbecause of rounding.Sources: Council of Economic Advisers, Department of Commerce (Bureau of Economic Analysis), and Departmentof Labor (Bureau of Labor Statistics).Chapter 1 | 45
Page 1 and 2: Economic Reportof the PresidentTran
Page 3 and 4: C O N T E N T SECONOMIC REPORT OF T
Page 5 and 6: ECONOMIC REPORT OF THE PRESIDENTTo
Page 7 and 8: the playing field is level for our
Page 9 and 10: LETTER OF TRANSMITTALCOUNCIL OF ECO
Page 11 and 12: Monetary Policy ...................
Page 13 and 14: Encouraging FDI ...................
Page 15 and 16: 3-4. The Equivalence of Sales Taxes
Page 17 and 18: Real GDP expanded by 3.7 percent du
Page 19 and 20: Options for Tax ReformChapter 3, Op
Page 21 and 22: and better Nation for it. A compreh
Page 23 and 24: Innovation and the Information Econ
Page 25 and 26: ecause they do not expect family me
Page 27 and 28: The Administration has pushed aggre
Page 29 and 30: C H A P T E R 1The Year in Review a
Page 31 and 32: Consumer SpendingConsumer spending
Page 33 and 34: easons for this correlation are dis
Page 35 and 36: 2003, a number of countries that to
Page 37 and 38: ProductivityRecent productivity gro
Page 39 and 40: The projected path of inflation as
Page 41: strengthen. The forecast is based o
Page 45 and 46: In sum, potential real GDP is proje
Page 47 and 48: C H A P T E R 2Expansions Past and
Page 49 and 50: The behavior of real GDP is similar
Page 51 and 52: of faltering may be attributable to
Page 53 and 54: most recent expansions have shown r
Page 55 and 56: middle of 2003. The more moderate r
Page 57 and 58: 1.2 percent. Employment continued t
Page 59 and 60: SummaryModerate recessions are foll
Page 61 and 62: permanent cuts should permanently r
Page 63 and 64: and the Jobs and Growth Tax Relief
Page 65 and 66: Federal government revenues had bee
Page 67 and 68: Fiscal policy played an especially
Page 69 and 70: C H A P T E R 3Options for Tax Refo
Page 71 and 72: High Compliance CostsThe complexity
Page 73 and 74: a reasonable estimate is that a 10
Page 75 and 76: Excess BurdenBecause taxes distort
Page 77 and 78: Box 3-3 — continuedThe bottom 40
Page 79 and 80: more uniform or pure version of the
Page 81 and 82: of being collected all at once at t
Page 83 and 84: would have to differ from state tax
Page 85 and 86: owner claimed it was for business,
Page 87 and 88: The current set of saving incentive
Page 89 and 90: the current system. In addition, so
Page 91 and 92: C H A P T E R 4ImmigrationIn recent
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TABLE 4-1.— Foreign-Born Share of
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immigrants (also called illegal or
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largest group of immigrants was bor
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employment costs, including wage fl
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Chapter 4 | 103
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wages fall in response to immigrati
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immigrants from Latin America do re
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addition, as migrants leave the cou
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include siblings and adult children
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despite the tremendous growth in th
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The TWP would allow new foreign wor
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C H A P T E R 5Expanding Individual
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This phenomenon, known as the “tr
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producing more of that good. Simila
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In 2002, the President proposed “
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provide evidence of increased profi
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schools are four times as efficient
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low administrative costs, estimated
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Box 5-2: The Benefits of Land Title
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development plan designed by others
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C H A P T E R 6Innovation and theIn
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E-mail is the most common online ac
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Changed circumstances, such as new
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Illegal Acts on the InternetThe Int
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or develop new markets, which can l
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inflation factor for the price cap
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U.S. households connecting to local
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garbling their transmissions. To li
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from 51.3 percent in December 1999
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for their property rights. The Admi
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C H A P T E R 7The Global HIV/AIDS
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Chart 7-1 Estimated HIV Infection L
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There is no cure for HIV/AIDS, thou
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AIDS is more damaging to a househol
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and risk reduction have helped redu
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only one price, the drug companies
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Box 7-1 — continuedfocused on the
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Box 7-2 — continuedenhancing coor
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ConclusionThe United States and cou
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Good Two. In Ricardo’s simple mod
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The Impact of Trade on Labor Market
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The U.S. Advantage in Services Trad
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U.S. firms is associated with a cor
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anked the second-best country out o
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the Chinese government agreed to el
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Trade LiberalizationTariffs and oth
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ConclusionThe United States is the
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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Report to the President on theActiv
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The Council continued its efforts t
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The Staff of the Council of Economi
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John List and Ted Gayer provided co
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Appendix BSTATISTICAL TABLES RELATI
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PageB-32. Gross saving and investme
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PageB-94. Relation of profits after
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Real gross domestic pr
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TABLE B-3.—Quantity and price ind
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TABLE B-5.—Contributions to perce
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TABLE B-6.—Chain-type quantity in
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TABLE B-7.—Chain-type price index
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TABLE B-8.—Gross domestic product
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TABLE B-10.—Gross value added by
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TABLE B-12.—Gross domestic produc
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TABLE B-13.—Real gross domestic p
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TABLE B-14.—Gross value added of
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TABLE B-16.—Personal consumption
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TABLE B-18.—Private fixed investm
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TABLE B-20.—Government consumptio
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TABLE B-22.—Private inventories a
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TABLE B-24.—Foreign transactions
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TABLE B-26.—Relation of gross dom
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TABLE B-28.—National income by ty
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TABLE B-29.—Sources of personal i
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TABLE B-30.—Disposition of person
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Year or quarterTABLE B-32.—Gross
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TABLE B-33.—Median money income (
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TABLE B-35.—Civilian population a
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TABLE B-36.—Civilian employment a
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TABLE B-38.—Unemployment by demog
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TABLE B-40.—Civilian labor force
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TABLE B-42.—Civilian unemployment
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TABLE B-44.—Unemployment by durat
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TABLE B-46.—Employees on nonagric
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TABLE B-47.—Hours and earnings in
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Year orquarterTABLE B-49.—Product
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PRODUCTION AND BUSINESS ACTIVITYTAB
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Year ormonthTABLE B-53.—Industria
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Year or monthTABLE B-55.—New cons
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TABLE B-57.—Manufacturing and tra
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TABLE B-59.—Manufacturers’ new
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Year ormonthTABLE B-61.—Consumer
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TABLE B-62.—Consumer price indexe
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TABLE B-64.—Changes in consumer p
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TABLE B-65.—Producer price indexe
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TABLE B-67.—Producer price indexe
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TABLE B-68.—Changes in producer p
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TABLE B-70.—Components of money s
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TABLE B-71.—Aggregate reserves of
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TABLE B-73.—Bond yields and inter
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TABLE B-74.—Credit market borrowi
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TABLE B-75.—Mortgage debt outstan
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TABLE B-77.—Consumer credit outst
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TABLE B-79.—Federal receipts, out
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TABLE B-81.—Federal receipts, out
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TABLE B-83.—Federal and State and
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TABLE B-85.—State and local gover
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End of yearor monthTABLE B-87.—U.
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End of monthTABLE B-89.—Estimated
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TABLE B-91.—Corporate profits by
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TABLE B-93.—Sales, profits, and s
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YearComposite(Dec. 31,2002=5,000) 3
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YearAGRICULTURETABLE B-97.—Farm i
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TABLE B-99.—Farm output and produ
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Year ormonthTABLE B-101.—Agricult
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INTERNATIONAL STATISTICSTABLE B-103
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TABLE B-104.—U.S. international t
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TABLE B-106.—U.S. international t
Page 330 and 331:
TABLE B-108.—Industrial productio
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TABLE B-110.—Foreign exchange rat
Page 334:
TABLE B-112.—Growth rates in real
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