Economic Report of the President

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The Economic Recovery Tax Act of 1981 also contained severalother provisions directed specifically at encouraging private saving.The Individual Retirement Account (IRA) provisions in the tax codewere extended to cover the entire working population. Working individualsare now permitted to make a yearly tax deductible contributionof $2,000 to finance consumption during retirement. Taxes areonly paid when the funds plus accumulated interest are withdrawnfrom the IRA. Private estimates suggest a substantial response to thislegislation, with about $10 billion placed in IRAs during 1982. A crucialissue in evaluating the efficiency of IRAs is their effectiveness inraising saving incentives on the margin. Some critics have arguedthat IRAs do not provide an incremental incentive for saving becausecontributors can simply transfer funds from other sources without increasingtotal savings. While this occurs to some extent, it is certainlynot universal and will decrease in the future as contributors exhausttheir funds available from other sources. The fragmentary evidenceavailable from private sources suggests that more than half of all IRAcontributors contribute less than the maximum amount allowable, indicatingthat they do face increased saving incentives on the margin.The 1981 tax legislation also provided for an interest exclusionstarting in 1985, allowing individuals to exclude 15 percent of theirnet interest income up to a limit of $3,000. This will also raise thereturn to savings and spur capital formation. Extending the exclusionto dividends as well as interest payments would reduce the tax biasfavoring debt over equity as a source of corporate finance.The 1981 tax act also raised the return to saving by reducing thetop marginal rate on capital gains from 28 percent to 20 percent.This reform partially compensates for the serious distorting effect ofinflation on the measurement of capital gains. Because of inflation,an owner of an asset that experiences no real appreciation will neverthelessbecome liable, at the time of sale, for taxes on the nominalappreciation of the asset. Complete elimination of this distortionwould require indexation for inflation in the measurement of capitalgains.In recent years support has grown among economists and othertax experts for moving the tax system toward taxation of consumptionand away from taxation of income. This change might entail expandingthe existing exclusions of interest and dividend income andthose mechanisms, such as IRAs, which permit tax-deferred accumulationof savings. It might also involve limiting the deduction of interestexpenses for consumer borrowing. Movement toward taxationof consumption is supported by some advocates on the grounds thattaxing individuals on what they take from the economy is "more fair"than taxing what they contribute to the economy. A tax system based88
on consumption taxation might also prove easier to administer thanthe current system because it would eliminate many of the problemsinvolved in measuring certain types of capital income.FINANCIAL REGULATION AND PRIVATE SAVINGAn additional set of public policies that has probably discouragedprivate saving over the last several decades is the regulation of financialinstitutions. As Chart 4-3 shows, small savers holding savings accountssubject to Regulation Q,have received below market rates ofinterest, and holders of checking accounts have received even lowerrates of interest. These low returns are largely consequences of regulationslimiting the interest rates financial institutions may pay oncustomer deposits. As late as 1980, the spread between Treasury billrates and the yield on savings deposits subject to Regulation Q wasas great as 8 percent.The adverse effects of financial regulations on personal savinghave probably lessened considerably in recent years, due to both privateand public actions. In the private sector, the development andexplosive growth of money market funds has made it possible formost high and middle income savers to receive market rates of interest.Legislation adopted in 1982 with Administration support has allowedcommercial banks and thrift institutions to offer financial instrumentswith competitive interest rates to a wide range of depositors.The Administration has strongly supported removal of the manyunnecessary regulations that have impeded competition in the financialservices industry. As discussed in more detail in Chapter 5, theDepository Institutions Deregulation and Monetary Control Act of1980 and the Depository Institutions Act of 1982 have played importantroles in beginning this process of deregulation. Banks and thriftinstitutions can now offer insured accounts that are competitive withmoney market funds in terms of both the interest rates they pay andthe services they provide, thereby increasing incentives for saving.A related development has occurred in the Federal Government'spolicies regarding U.S. Savings Bonds. Savings bonds have historicallypaid low rates of return. In 1980, 10-year Treasury bonds paid11.5 percent, while Series EE Savings Bonds paid an annual yield ofonly 7 percent from issue to maturity 11 years later. Because of legislationrecently proposed by the President and passed by the Congress,the return on savings bonds is now based on market rates. BetweenNovember 1, 1982, and April 30, 1983, for example, U.S. SavingsBonds will earn 11.09 percent if they are held at least 5 years.Apart from making saving more attractive to savings bond purchas-89
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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
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Chart 2-2Distribution of Unemployme
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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 and 90: During the 1970s, productivity grow
Page 91 and 92: MEASURING NATIONAL SAVINGDomestic s
Page 93: TAX RULES AND PERSONAL SAVINGMany e
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
Page 141 and 142: 8.8 percent in 1981. These declines
Page 143 and 144: 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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Economic Report of the President

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