Economic Report of the President

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tion as measured by percentage changes in the gross national product(GNP) deflator rose to 7.4 percent from 5.8 percent in 1977. Aneven larger increase occurred in 1979 when the unemployment rateaveraged 5.8 percent.The Effect of Demographic FactorsThere are a number of reasons to believe that the inflation thresholdunemployment rate increased during the 1960s and 1970s. Manyeconomists believe that demographic factors may have contributed tothe increase. Persons with little labor market experience tend to havehigh rates of unemployment as they move from job to job in aneffort to obtain a desirable career position. In the last 15 years, thechildren of the baby boom have reached maturity thus raising substantiallythe share of inexperienced workers in the labor force. Inaddition, women with little recent labor market experience have enteredthe labor force at an unprecedented rate during the last 15years. It has been estimated that if the labor force had the same demographiccomposition today as it had in 1958, the unemploymentrate would have been about three-quarters of a percentage pointlower in 1982. The share of young people in the labor force will declinesharply over the next decade due to a dramatic reduction in thebirth rate throughout the late 1960s and the 1970s. This providesgrounds for cautious optimism that the inflation threshold unemploymentrate will decline.Social Insurance ProgramsOther factors which have increased the inflation threshold unemploymentrate in recent years are less likely to be reversed in thenext decade. These include the effects of social programs. While providingimportant financial support to their recipients, these programsalso have both behavioral and reporting effects on the measured unemploymentrate.Behavioral effects of social insurance programs such as unemploymentinsurance include the encouragement of firms to lay off workersand the inducement of persons to prolong their spells of unemployment.These effects are discussed in more detail below. Reportingeffects occur when programs induce persons to change reportingof their labor force status, without changing their behavior. For example,some experts believe that the Federal Supplemental Benefitsprogram instituted during the 1975 recession caused persons whootherwise would have withdrawn from the labor force to report thatthey were unemployed because of job search requirements. There issome evidence to suggest that the work registration requirements inthe food stamp and AFDC programs have had a similar effect.38
Wage RigidityA number of studies show that wages and prices are much morerigid now than prior to World War II, and that rigidity has increasedwithin the post-War period. Increased wage rigidity is likely to raisethe economy's inflation threshold level of unemployment, since lessflexible wages increase the inevitable unemployment associated withthe sectoral shocks which buffet the economy.The reasons for this change are not well understood. A side effectof the provision of a "safety net" program is that employees maybecome more resistant to wage reductions, leading to increases inwage and price rigidity. To the extent that the two-earner family is aform of private "safety net" against the financial losses of unemployment,the recent growth in the number of two-earner families mayalso have contributed to increasing wage rigidity in the United Statesover time.Increasing Structural ChangeA final factor that may have contributed to a rising inflation thresholdunemployment rate is the increasing rapidity of structural changein the economy. This acceleration, which is in part caused by theeconomy's increasing sensitivity to events in the world economy, isevidenced by increasing dispersion across industries and localities inrates of unemployment. Because transfers of human and physical resourcesare costly and take time, increased unemployment is a concomitantof structural change.While the separate impacts of these factors—changing demographiccomposition, larger social insurance programs, increased wage rigidity,and increased structural change—are difficult to quantify, it isreasonable to conclude that together they may have significantly increasedthe inflation threshold unemployment rate. Expansionary macroeconomicpolicies are unlikely to reverse the effects of thesechanges.PUBLIC WORKS EMPLOYMENT PROGRAMSDirect provision of public works jobs by the government is a politicallypopular response to cyclical unemployment during recessions.Available evidence suggests, however, that public works programsadopted in past recessions proved counterproductive, and that the inherentcapability of public works programs to combat cyclical unemploymentis limited.The Timing of Public Works ExpendituresPublic employment programs that produce useful goods or servicesgenerally take time to plan and implement. Therefore, such programsoften have their greatest effects on public employment long39
Page 5: CONTENTSPageECONOMIC REPORT OF THE
Page 9 and 10: ECONOMIC REPORT OF THE PRESIDENTTo
Page 11 and 12: Monetary policy will play a critica
Page 13 and 14: Interest Rates and the U.S. Trade D
Page 15: THE ANNUAL REPORTOF THECOUNCIL OF E
Page 19 and 20: CONTENTSPageCHAPTER 1. FROM RECESSI
Page 21 and 22: PageConclusions 122CHAPTER 6. REVIE
Page 23 and 24: CHAPTER 1From Recession to Recovery
Page 25 and 26: slowed somewhat in the 1970s regard
Page 27 and 28: nal GNP growth is reflected in a sl
Page 29 and 30: inflation. More specifically, the A
Page 31 and 32: inflation rate, or with a 12 percen
Page 33 and 34: 1988, an increase of about one-four
Page 35 and 36: CHAPTER 2The Dual Problems of Struc
Page 37 and 38: frequently associated with poor hea
Page 39 and 40: Chart 2-2Distribution of Unemployme
Page 41 and 42: Chart 2-4Distribution of Unemployme
Page 43: These findings suggest several conc
Page 47 and 48: that these measures may have caused
Page 49 and 50: Most young people find jobs or leav
Page 51 and 52: to employers who hire youths. Tax c
Page 53 and 54: defined broadly to include individu
Page 55 and 56: ship between incomplete experience
Page 57 and 58: CHAPTER 3The United States in the W
Page 59 and 60: with 2.6 percent in the other Organ
Page 61 and 62: TABLE 3-1 .—Structure ofthe U.S.
Page 63 and 64: TABLE 3-2.—Trade balances by comm
Page 65 and 66: concentrate on doing what it does r
Page 67 and 68: the United States will depress pric
Page 69 and 70: Chart 3-3Real Exchange Rates Of Maj
Page 71 and 72: AN UNDERVALUED YEN?The explanations
Page 73 and 74: arily reduced the international com
Page 75 and 76: nancial markets. These transactions
Page 77 and 78: TABLE 3-6.—Economic performance b
Page 79 and 80: were undoubtedly a highly favorable
Page 81 and 82: of lenders that some debtors will n
Page 83 and 84: CHAPTER 4Increasing Capital Formati
Page 85 and 86: ate of net investment was required,
Page 87 and 88: able share in Japan and 56 percent
Page 89 and 90: During the 1970s, productivity grow
Page 91 and 92: MEASURING NATIONAL SAVINGDomestic s
Page 93 and 94: TAX RULES AND PERSONAL SAVINGMany e
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on consumption taxation might also
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Nevertheless, a number of economic
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tion permitted businesses to deprec
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A final problem under current tax l
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fleeted efforts to deal with proble
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egulation was probably not applicab
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Aeronautics Board, for example, the
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system resulted. Price controls, wh
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NGPA, both controlled and decontrol
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Price and allocation controls only
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nications industries through the re
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Several major pieces of legislation
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tempt to set cartel rates would be
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computer information and advertisin
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of computer technology to the payme
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trend by widening the sources and u
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changes. That is, members can arbit
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ceived to be a consequence of exces
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lowest point in the post-World War
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ing. Partly in response to the drop
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Chart 6-3Ratio of Consumer Installm
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Chart 6-4RATIO1.85Real Inventory/Sa
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percent increase in real defense pu
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8.8 percent in 1981. These declines
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housing. Borrowing by the nonfinanc
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orous competitor for credit as usur
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1982 their share had risen to over
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TABLE 6-9.—Economic outlook for 1
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A critical element in achieving hea
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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Report to the President on the Acti
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ety of interagency and internationa
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ence J. Kotlikoff (Yale University)
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CONTENTSNATIONAL INCOME OR EXPENDIT
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B-70. Mortgage debt outstanding by
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Gross national product
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19291933193919401941194219431944194
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TABLE B-5.—Changes in GNP and GNP
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TABLE B-ll.—Gross national produc
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TABLE B-13.—Output, costs, and pr
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TABLE B-14.—Personal consumption
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TABLE B-16.—Gross and net private
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TABLE B-18.—Inventories and final
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TABLE B-20.—Relation of national
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TABLE B-21.—National income by ty
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TABLE B-22.—Sources of personal i
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TABLE B-24.—Total and per capita
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Year or quarterTotalTotalTABLE B-26
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POPULATION, EMPLOYMENT, WAGES, AND
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TABLE B-29.—Noninstitutional popu
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TABLE B-31.—Selected employment a
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TABLE B-33.—Civilian unemployment
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TABLE B-35.—Unemployment by reaso
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TABLE B-37.— Wage and salary work
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TABLE B-39.—Average weekly earnin
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TABLE B-41.—Changes in productivi
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TABLE B-43-—Industrial production
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TABLE B-45.—Capacity utilization
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TABLE B-46.—New construction acti
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TABLE B-48.—Nonfarm business expe
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TABLE B-50.—Manufacturers' shipme
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Year or monthAllitemsPRICESTABLE B-
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TABLE B-53.—Consumer price indexe
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TABLE B-55.—Changes in consumer p
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TABLE B-57.—Producer price indexe
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MONEY STOCK, CREDIT, AND FINANCETAB
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TABLE B-63.—Commercial bank loans
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TABLE B-64.—Total funds raised in
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TABLE B-66.—Aggregate reserves of
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TABLE B-67 .—Bond yields and inte
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TABLE B-69.—Consumer installment
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TABLE B-71-—Mortgage debt outstan
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TABLE B-72.—Federal budget receip
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TABLE B-74.—Relation of Federal G
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TABLE B-76.—Federal Government re
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TABLE B-78.—State and local gover
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TABLE B-80.—Estimated ownership o
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CORPORATE PROFITS AND FINANCETABLE
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Year or quarterTABLE B-84.—Corpor
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TABLE B-86.—Relation of profits a
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TABLE B-88.—Determinants of busin
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TABLE B-9Q.~Current assets and liab
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TABLE B-92.—Common stock prices a
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AGRICULTURETABLE B-94.—Farm incom
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TABLE B-96.—Farm input use, selec
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TABLE B-98.—U.S. exports and impo
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INTERNATIONAL STATISTICSTABLE B-100
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TABLE B-101.—U.S. international t
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TABLE B-103.—U.S. merchandise exp
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TABLE B-105.—International invest
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TABLE B-107.— World trade balance
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TABLE B-109.—Growth rates in real
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TABLE B-lll.—Unemployment rate, a
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