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

Bureau of the Census, the working-age population is projected to grow atalmost 1.1 percent annually through 2007 (a bit faster than projected lastyear). In line with the latest projection from the Bureau of Labor Statistics, thelabor force participation rate is projected to increase by less than 0.1 percentper year. The length of the average workweek is projected to remain about flatover the entire projection horizon. In contrast, the employment rate is projectedto decline roughly 0.1 percent per year as the unemployment rate edgesup to 5.2 percent—the middle of the range judged consistent with long-runinflation stability. From 2008 on, growth in the working-age populationslows a bit, and the labor force participation rate begins to fall as the first waveof the baby-boom cohort reaches the early retirement age of 62.Budget Effects of a High-Investment EconomyAn economy fueled by high investment—especially in computers—will becharacterized by two forces that partly offset the positive effects on the Federalbudget of faster productivity growth: higher depreciation and a largerwedge between the CPI and the GDP price index.A high-investment economy is an economy in which a large share of outputis required to replace worn-out capital, simply because more investmentmeans more capital goods to be depreciated. The share of nominal businessfixed investment in nominal GDP, which had averaged 11 percent since1959, increased to about 12½ percent by the end of 1999 and is likely toincrease further in the near term. The 1½-percentage-point increase in theinvestment share thus far portends a similar increase in the share of total grossdomestic income claimed by depreciation. As depreciation claims an increasingshare of income, less room will be available for the taxable componentssuch as profits and wages and salaries.The rapid decline in computer prices, together with an increasing nominalshare of computers in GDP, also has negative effects on the Federal surplusthrough the “wedge” between the CPI and the GDP price index. A largerwedge reduces the Federal budget surplus because cost-of-living adjustmentsfor Social Security and other indexed programs increase with the CPI, whereasFederal revenues increase with the slower-growing GDP price index. Theeffect is reinforced by the fact that the CPI is also used to index income taxbrackets and other features of the tax code.Rapid declines in computer prices increase the wedge, because computerprices have a 10 times larger weight in the GDP price index (1.1 percent) thanin the CPI (where the December 1999 relative importance weight is only 0.11percent). For example, computer price declines held down the increase of theGDP price index by 0.23 percentage point but reduced CPI inflation by only0.03 percentage point.86 | Economic Report of the President