Economic Report of the President

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sophisticated capital goods occurs when the demand for new capitalgoods increases.The legacy of past policies, which have artificially depressed savingand investment, provides a second reason for increasing the rate ofcapital formation. As described below, this discrimination againstcapital formation has taken many forms, including tax policy, monetarypolicy and recurring Federal budget deficits. Although thereexist instances of market failure, a market economy can generally beexpected to allocate resources in an efficient way. When public policiessystematically discriminate against one type of spending, however,there is a strong presumption that too little of it will take place.A related and final justification for increased capital formationcomes from a comparison of the total pretax return to investmentwith the return received by private investors. Estimates suggest thatthe total pretax return to investment in corporate capital, as measuredby its pretax marginal product, is about 11 percent. This meansthat $1.00 invested today yields society $1.11 next year, or alternativelya permanent yield of 11 cents. While the total pretax returnfluctuates from year to year with cyclical conditions, studies havetended to find that it has stayed within the range of 8 to 15 percentthroughout the postwar period.In contrast, private investors have earned much smaller rates ofreturn over the last several decades, with many investors earningnegative real after-tax returns over much of that period. Even leavingaside the effects of personal taxes, the real return on short-term debtinstruments averaged less than 1 percent during the 1950-81 interval.While equity investments have yielded a higher average return,they carry with them a large amount of risk. The average real returnon common stock before personal taxes was 6 percent over the1950-81 period, but investors lost money in real terms in 12 of thoseyears and over periods as long as 17 years.This large spread between the total and private returns to investmentis a consequence of the tax system, which extracts a portion ofthe total return to investment before it reaches private investors.Capital market returns are reduced because the corporate income taxreduces the return that corporations can pay out to investors. As aconsequence of this tax-induced divergence between the private andtotal return to investment, too little investment takes place. This suggeststhe desirability of measures both to reduce tax distortions andto increase incentives to save and invest.84
MEASURING NATIONAL SAVINGDomestic saving is an important determinant of a nation's level ofinvestment. Economic output is either invested in capital assets,which help produce future output, or consumed privately or publicly.Only by forgoing consumption does it become possible for a nationto invest in a sustained way. While funds from abroad are available tofinance some investment, experience suggests that most matureeconomies have financed investment through domestic saving. Increasingthe rate of capital formation in the United States without increasingobligations to foreigners therefore probably requires increasednational saving.Table 4-3 provides information on net national saving as reportedin the national income and product accounts. On average, from 1951to 1981, the United States saved 6.7 percent of total output beyondthat necessary to replace depreciated capital. Private saving, comprisingpersonal saving and corporate retained earnings, totaled 7.3 percentof GNP. Federal Government dissaving through budget deficitsaveraged 0.9 percent of GNP, while the sum of State and local governmentsurpluses averaged 0.3 percent of GNP.TABLE 4-3.—Net saving as percent of GNP, 1951-81[Percent]Not adjusted for inflationAdjusted for inflation 3PeriodTotalFederalState andlocalPrivate >FederalState andlocalPrivate1951-551956-606.76,9-0.3.0-0.1-.27.27.10.91.1-0.1-.15.95.91961-651966-707.47.5-.4.6.0.17.88.0.2.6.2.47.06.51971-751976-806.45.8-1.8-1.9.61.27.66.5-.31.11.65.64.419815.0-2.01.15,9.01.53.61951-816.7-.9.37.3.4.65.8'Private saving less capital consumption allowances with capital consumption adjustment.2 Adjusted by GNP implicit price deflator.Sources: Department of Commerce (Bureau of Economic Analysis), Board of Governors of the Federal Reserve System, and Councilof Economic Advisers.While the total saving rate can be measured unambiguously, thereare serious conceptual problems in measuring its various componentsduring an inflationary period. Inflation erodes the real value of thenational debt. Interest rates incorporate inflation premiums andthese premiums compensate lenders for the fact that they are repaidin cheaper dollars. Thus, they do not really represent income to borrowersor costs to lenders. This principle is recognized by the FinancialAccounting Standards Board and is often applied in the privatesector. Table 4-3 therefore also presents a breakdown between pri-85
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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
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inflation rate, or with a 12 percen
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1988, an increase of about one-four
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CHAPTER 2The Dual Problems of Struc
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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 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: During the 1970s, productivity grow
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
Page 133 and 134: ing. Partly in response to the drop
Page 135 and 136: Chart 6-3Ratio of Consumer Installm
Page 137 and 138: Chart 6-4RATIO1.85Real Inventory/Sa
Page 139 and 140: 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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