E C O N O M I C R E P O R T O F T H E P R E S I D E N T

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Using its size and its superior long-distance service, the Bell system becamethe dominant firm in areas of the country where it had once competed withindependent phone companies. To convince consumers to sign up for itsservice over those of the independents, the Bell system advertised the advantagesof its larger number of connections. By refusing to interconnect withcompeting systems, the Bell system was able to exploit the advantage of itslarge network to the detriment of its competitors.Establishing a new network in an industry with strong network externalitiescan be very difficult, because users of the existing network may have to incurcosts to move to the new network. In some cases, such as the software industryor the computer networking equipment industry, these switching costs mayinclude major investments in equipment and training to use the new network.An even larger cost for users of the new network, however, may be that imposedby the lack of connections with the incumbent network.These switching costs, however, do not necessarily allow the incumbentfirm to rest on its laurels. A new network can supplant an established networkin certain circumstances. One advantage a new network may have isthat its new technology may simply work better for some applications thanthe established network’s technology. Where the old network may have toworry about compatibility with existing standards, a new provider can startfrom scratch and take advantage of technological developments to create abetter product. With a superior technology, a new network provider may beable to convince some users to incur the switching costs because the advantagesof the new technology are large enough to make it worthwhile even ifusers cannot connect easily with the old network. Once it has established aniche market among these users, the provider can then seek to expand theuse of its network to more mainstream customers. The computer industry,for example, has seen several waves of technology go beyond an existingdominant standard, and each of those waves in turn developed into its ownstandard. Early computer technology was dominated by mainframes, butmainframes were later supplanted by minicomputers for many uses, and bypersonal computers for still more uses. In each case the new technologystarted out not by directly challenging the incumbent, but by appealing to agroup of users not well served by the existing technology.As information technology advances, the economic effects of new data andcommunications networks will become increasingly important. The Internetprovides a model for how those networks can work together. The Internetcan be described as a “network of networks” held together by a standardcommunications protocol. The hardware and software running any individuallocal network may be completely incompatible with the hardware andsoftware running a different local network, but with a standard communicationsprotocol the two networks can talk to each other. This increases theChapter 3 | 121
value of each network to its users. Where these new technologies will take usin the 21st century will only become evident over time, but by encouragingconnections between networks, government and the private sector can worktogether to provide a strong platform on which new ideas and newtechnologies can grow.The Role for Government PoliciesWe have seen how firms in a range of industries are now realizing some ofthe productivity gains that recent advances in information technology havepromised. For its part, this Administration remains committed to a policythat encourages innovation and competition in the private sector to thefullest extent possible. One element of that policy is establishing the rules forprotecting intellectual property rights to new products through patents.Although patents have been used to protect the property rights of inventorsin their inventions since the founding of the Republic, the last several yearshave seen an explosion in the number of patents granted in the United States(Chart 3-8). Several hypotheses have been advanced to explain this surge inpatent grants, including the possibility that it reflects today’s rapid pace oftechnological discovery. A recent court ruling clearly indicating thepatentability of computer software may also have encouraged the patentsurge.122 | Economic Report of the President
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E C O N O M I CR E P O R TO F T H E
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C O N T E N T SPageECONOMIC REPORT
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ECONOMIC REPORT OF THE PRESIDENTTo
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my State of the Union address, I pr
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hard-pressed families—with additi
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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PageSources of Business Cycle Moder
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PageHeterogeneity in Abatement Bene
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Page2-3. Net Worth and the Personal
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PageLIST OF BOXES2-1. The CPI-U-RS,
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These successes notwithstanding, th
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$33,740, Americans today can acquir
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those in the highest decile rose 0.
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Data on poverty also show progress.
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Over the years, government support
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asis, the current expansion also sh
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The current expansion, by contrast,
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InflationAccelerating inflation pos
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it was argued, must be shifting the
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is that the direction of technologi
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Challenges for the FutureThis chapt
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in the new labor market. The chapte
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disruptive in some cases. Finally,
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C H A P T E R 2Macroeconomic Policy
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Chapter 2 | 51
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usiness cycle has changed over the
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cent over the four quarters of 1999
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framework that continues to pay dow
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The labor force participation rate
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Box 2-1.—continuedof no substitut
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feed directly into the index. Moreo
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funds rate (the interest rate that
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nesses with below-investment-grade
Page 67 and 68: From 1989 to 1999, corporate earnin
Page 69 and 70: ital includes the value of intellec
Page 71 and 72: of gross personal saving to GDP has
Page 73 and 74: The beginnings and ends of U.S. bus
Page 75 and 76: introduced in 1913 and Social Secur
Page 77 and 78: Of course, it is premature to decla
Page 79 and 80: Box 2-3.What Did We Learn from the
Page 81 and 82: TABLE 2-3.— Accounting for the Pr
Page 83 and 84: future extrapolates long-term trend
Page 85 and 86: Over the past 6 years, the CPI-U-RS
Page 87 and 88: work enables job hunters to work wh
Page 89 and 90: Chart 2-17 shows how this could hap
Page 91 and 92: of professional economic forecaster
Page 93 and 94: Administration’s forecast is used
Page 95 and 96: Innovations during the 20th century
Page 97 and 98: transformations the Internet and e-
Page 99 and 100: Another industry that saw major cha
Page 101 and 102: One example is the “lean” produ
Page 103 and 104: Box 3-1. Measuring the Economy in a
Page 105 and 106: Box 3-2. Implementing Local Competi
Page 107 and 108: of fiber optic cable deployed by te
Page 109 and 110: How Information Technology IsChangi
Page 111 and 112: total investment in information tec
Page 113 and 114: For e-retailers, the Internet repla
Page 115 and 116: suppliers for surplus quantities of
Page 117: However, the same technology that d
Page 121 and 122: many possible uses but that depends
Page 123 and 124: Maintaining CompetitionAnother way
Page 125 and 126: Similarly, by reducing barriers to
Page 127 and 128: Formal education was a far less imp
Page 129 and 130: The Transformation of the Labor Mar
Page 131 and 132: Americans has risen almost 10-fold
Page 133 and 134: diploma (Chart 4-5). That same year
Page 135 and 136: ensuring equal opportunity for all
Page 137 and 138: those of men (again looking at full
Page 139 and 140: Box 4-1. The Role of Government Pol
Page 141 and 142: severe disabilities. For example, a
Page 143 and 144: Box 4-2.—continuedOther policy in
Page 145 and 146: equirements of jobs. To right this
Page 147 and 148: uild and maintain a world-class ele
Page 149 and 150: Class Size Reduction. Average class
Page 151 and 152: During this Administration, the Fed
Page 153 and 154: years ago. In 2000, 13.1 million st
Page 155 and 156: through a period of unpaid training
Page 157 and 158: The first major mandatory training
Page 159 and 160: a 30-year low, labor force particip
Page 161 and 162: ConclusionTwo key developments—th
Page 163 and 164: TABLE 5-1.—Contrasting American F
Page 165 and 166: opened up for women to work and as
Page 167 and 168: The increased prevalence of single-
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to an increasing share of the popul
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Box 5-1.—continuedAlthough most f
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For the past 50 years, the median i
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gle mothers the median rose from $1
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TABLE 5-3.— Share of Women with C
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income growth over the last 30 year
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consumption patterns have changed,
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Increases in the Minimum WageThe mi
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Box 5-4.The National Strategy to Re
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or older, and of those 85 or older,
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of single-parent families increased
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caregivers for the elderly say thei
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would allow all workers who get tim
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C H A P T E R 6Opportunity and Chal
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Meanwhile innovations in transporta
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But to look at U.S. trade only in t
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Data from the U.S. computer industr
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net indebtedness of about 18 percen
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capital flows. Coupled with other d
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forces to play themselves out. In t
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The Benefits of a Global EconomyThe
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Domestic production can expand when
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In short, increased globalization b
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key sectors such as finance, teleco
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international trade is not a zero-s
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As these data suggest, not all WTO
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For example, preferential U.S. trad
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By contrast, in 1998 output fell on
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Box 6-3.The New International Finan
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The key objective of the initiative
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Chapter 6 | 233
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demand for exports. It would be a m
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integrating with the world economy
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The past century of experience in a
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242 | Economic Report of the Presid
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Box 7-1.—continuedand energy pric
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Box 7-2.—continuedproviding usefu
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Incentive-Based Approaches to Addre
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compliance costs may fall by less t
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Box 7-4.—continuedroughly 5 to 15
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so a system of multipollutant tradi
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sulfur dioxide trading program. The
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coastal zone. Trades can occur with
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Permit Trading: Phasedown of Leaded
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To address the problems associated
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Box 7-5. Individual Quotas for Fish
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A landmark international agreement
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However, the country could cut ener
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Quantitative Restrictions on Tradin
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comprehensive domestic trading syst
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Box 7-9.—continuedthe use of ener
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C O N C L U S I O NA Century of Cha
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More than 40 percent of the work fo
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growth and are credited with helpin
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have much to gain from continuing t
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Appendix AREPORT TO THE PRESIDENT O
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Council Members and Their Dates of
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previously served as the New Centur
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(antidumping, countervailing duties
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with a number of developing countri
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Michael Treadway provided editorial
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Appendix BSTATISTICAL TABLES RELATI
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POPULATION, EMPLOYMENT, WAGES, AND
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AGRICULTURE:PageB-95. Farm income,
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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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Year orquarterGrossdomesticproductT
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TABLE B-12.—Gross product of nonf
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TABLE B-14.—Personal consumption
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TABLE B-16.—Private gross fixed i
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TABLE B-18.—Government consumptio
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TABLE B-20.—Private inventories a
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Year orquarterTABLE B-22.—Foreign
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TABLE B-24.—Relation of gross dom
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Year orquarterTABLE B-26.—Nationa
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TABLE B-27.—Sources of personal i
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TABLE B-28.—Disposition of person
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TABLE B-30.—Gross saving and inve
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TABLE B-31.—Median money income (
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TABLE B-33.—Civilian population a
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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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Year orquarterOutput per hourof all
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PRODUCTION AND BUSINESS ACTIVITYTAB
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TABLE B-51.—Industrial production
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Year or monthTABLE B-53.—New cons
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TABLE B-55.—Manufacturing and tra
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Year or monthTotalTABLE B-57.—Man
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Year ormonthTABLE B-59.—Consumer
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TABLE B-60.—Consumer price indexe
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TABLE B-62.—Changes in consumer p
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TABLE B-63.—Producer price indexe
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TABLE B-65.—Producer price indexe
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TABLE B-66.—Changes in producer p
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TABLE B-68.—Components of money s
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TABLE B-69.—Aggregate reserves of
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Year andmonthBills(new issues) 13-m
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TABLE B-72.—Credit market borrowi
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TABLE B-73.—Mortgage debt outstan
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TABLE B-75.—Consumer credit outst
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TABLE B-77.—Federal budget receip
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TABLE B-79.—Federal receipts, out
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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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End of monthTABLE B-87.—Estimated
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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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Year or monthTABLE B-93.—Common s
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AGRICULTURETABLE B-95.—Farm incom
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TABLE B-97.—Farm output and produ
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Year ormonthTABLE B-99.—Indexes o
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Year orquarterExportsINTERNATIONAL
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TABLE B-102.—U.S. international t
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TABLE B-104.—U.S. international t
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TABLE B-106.—Industrial productio
Page 422 and 423:
PeriodTABLE B-108.—Foreign exchan
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TABLE B-110.—Growth rates in real
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