Economic Report of the President

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educe U.S. GNP by one-half percentage point or more from thelevel it would otherwise reach.The Outlook for Debtor NationsThe problems of the developing countries are not insoluble. Ifgrowth in the world economy resumes and real interest rates fall tohistorical levels, the debt burden of even the most heavily indebtedcountries will become much more manageable. Mexico and Brazil,among the most heavily indebted countries, both have debts wellbelow half their GNPs. At a historically typical real interest rate of 2percent, the real burden of debt service would fall to less than 1 percentof GNP—a fully manageable level in a growing economy.The key to recovery from the debt problem, however, lies in increasedexports from the debtor countries. Import restrictions by thedeveloping countries can only accomplish so much in improving theirtrade balances. Imports have already fallen considerably in high debtcountries in the last year, leaving limited room for further cuts. Asgrowth resumes among the debtor countries, they will tend to importmore, and will need to export more to pay for the imports. They willnot be able to do this if the industrial countries, including the UnitedStates, institute new protectionist measures. Yet as developing countriesattempt to increase their exports, strong political pressures willdevelop in the industrial countries to stop them. Leaders in theindustrial countries must realize that shutting out imports from thedeveloping world will not only incur the usual costs of protection—higher prices to consumers and jobs lost in unprotected sectors—butalso will threaten the basic stability of the world financial system.76
CHAPTER 4Increasing Capital FormationATTAINING AN ADEQUATE RATE OF CAPITAL FORMATIONin the United States is a crucial challenge for economic policy duringthe 1980s. Devoting a larger share of national output to investmentwould help restore rapid productivity growth and rising living standards.During the past two decades, fiscal, monetary, and regulatorypolicies contributed to the low rate of net investment in plant andequipment; the share of gross national product (GNP) devoted tocapital formation was below the levels achieved by most other industrializednations.The Administration and the Congress have instituted a set of taxand regulatory policies designed to increase the share of output devotedto capital formation. The noninflationary monetary policies followedby the Federal Reserve, with the Administration's support,should also contribute in the long run to increased capital formationand improved efficiency in the allocation of the capital stock. Thischapter examines the linkages between economic policy and capitalformation, and discusses the rationale for the Administration's initiativesin this area.Many forms of investment contribute to productivity growth. Researchand development expenditures provide the basis for the technologicalchange that is a wellspring of productivity growth. Anothermajor source of productivity growth is investment in education andtraining that promotes the accumulation of valuable human capital.Public sector infrastructure investments may also have an importantrole to play. This chapter, however, focuses on nonresidential plantand equipment investment. Past public policies probably discriminatedmost heavily against this form of investment. Plant and equipmentinvestment is also more amenable to quantitative analysis than otherforms of capital investment because of the difficulties involved inmeasuring intangible capital.By late 1982, investment and capacity utilization rates in theUnited States had fallen to very low levels. Even after the recoveryfrom the recession begins, capacity utilization will increase onlygradually, and it will take time for new policies to increase the shareof national output devoted to saving and investment. Hence, levels of77
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CONTENTSPageECONOMIC REPORT OF THE
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ECONOMIC REPORT OF THE PRESIDENTTo
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Monetary policy will play a critica
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Interest Rates and the U.S. Trade D
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THE ANNUAL REPORTOF THECOUNCIL OF E
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CONTENTSPageCHAPTER 1. FROM RECESSI
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PageConclusions 122CHAPTER 6. REVIE
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CHAPTER 1From Recession to Recovery
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slowed somewhat in the 1970s regard
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nal GNP growth is reflected in a sl
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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 and 44: These findings suggest several conc
Page 45 and 46: Wage RigidityA number of studies sh
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: of lenders that some debtors will n
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
Page 95 and 96: on consumption taxation might also
Page 97 and 98: Nevertheless, a number of economic
Page 99 and 100: tion permitted businesses to deprec
Page 101 and 102: A final problem under current tax l
Page 103 and 104: fleeted efforts to deal with proble
Page 105 and 106: egulation was probably not applicab
Page 107 and 108: Aeronautics Board, for example, the
Page 109 and 110: system resulted. Price controls, wh
Page 111 and 112: NGPA, both controlled and decontrol
Page 113 and 114: Price and allocation controls only
Page 115 and 116: nications industries through the re
Page 117 and 118: Several major pieces of legislation
Page 119 and 120: tempt to set cartel rates would be
Page 121 and 122: computer information and advertisin
Page 123 and 124: of computer technology to the payme
Page 125 and 126: trend by widening the sources and u
Page 127 and 128: changes. That is, members can arbit
Page 129 and 130: ceived to be a consequence of exces
Page 131 and 132: 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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