Economic Report of the President

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Chart 4Productivity Adjusted for Cyclical VariationPERCENT CHANGE FROM 4 QUARTERS EARLIER-1- 2 I • •. I . • i I • • • I • . . Ii • . I • i • I . . . I i . . I .i. I M ) I i • i L i > I • i • I • i i I1965 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80NOTE.—DATA ARE FOR PRIVATE NONFARM BUSINESS, ALL PERSONS.SOURCE: COUNCIL OF ECONOMIC ADVISERS.research and development. But there has also been widespreadagreement that a large portion of the slowdown has not yet been explained.INVESTMENT NEEDSOne of the causes of the decline in productivity growth has beenthe decline in growth of the capital stock relative to the labor force.Because a rising'share of capital formation has been devoted to adjustmentsto cope with higher energy prices and to complying withenvironmental and safety regulations, a diminishing fraction of investmenthas been available to effect gains in productivity. Althoughthese developments may not have been the primary causes of theproductivity slowdown, increasing capital formation would neverthelessbe an effective way of reversing the slowdown. Many of the factorsaffecting productivity cannot be directly or immediately influencedby the government, but economic policy—especially taxpolicy—can influence the pace of capital formation.As a general rule, an increase in the amount of capital invested perworker is associated with an increase in output per worker—i.e., inincreased productivity. There are two reasons for this. First, processesthat generate more output per worker usually require more capitalper worker, and second, increasing the ratio involves putting newercapital into place. The newer capital is likely to* embody more ad-70
vanced technology and will therefore increase the efficiency of thecapital stock.During the decade of the 1960s the capital-labor ratio grew at anaverage rate of about 3 percent per year; over the last 5 years, however,the ratio has remained roughly constant. This development hasbeen due to both the slower growth in the capital stock and to themore rapid growth in employment and hours worked (Table 9). The1974-79 deceleration in the growth of capital is somewhat at oddswith the rough stability in the investment share of GNP over thesame period and requires some explanation. A greater share of investmentis now being spent on relatively short-lived assets. Theratio of investment in equipment to investment in nonresidentialstructures has increased in recent years. The result is that each dollarof gross investment now yields less net investment because the capitalstock is depreciating more rapidly.TABLE 9.—The investment share, and growth in the capital-labor ratio, 1949-79Period1949-59Real business fixedinvestment aspercent of realGNP 1 9.1Net capitalstock(nonresidential)sPercent change, average annual rate(end of year to end of year)Employment3Hours 3CapitalemploymentratioCapitalhoursratio4.01.10.72.93.21959-69 ....9.84.61.61.23.03.31969-7410.54.21.2.52.93.71974-7910.33.03.12.8-.1.21 Average annual investment-GNP ratio, in percent.2 Net fixed nonresidential business capital, 1972 dollars, end of year.3 For private business, all persons. End of year calculated as average of year's fourth quarter and following year's firstquarter.Sources: Department of Commerce (Bureau of Economic, Analysis) and Department of Labor (Bureau of Labor Statistics).To restore the growth of the capital stock per worker to that of the1960s would require that the share of investment in GNP rise by atleast 1 percentage point from its recent average of about 10 Vz percent.Such a development should, at a minimum, restore the productivitygrowth lost from this source. Further improvement would requireyet more investment.Apart from the necessity of improving the productivity growth rate,there are other reasons why future economic policy should encourageincreased investment. Last year's Report discussed these needs indetail. The average age of the capital stock at the end of 1979 was7.1 years. This suggests that much of our plant and equipment wasput in place when oil prices were much lower than they are now.Higher energy prices have shortened the service life of older and lessenergy-efficient capital and made it in the national interest to speedup its replacement. The magnitude of these investments is difficult to71
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Economic Reportof the PresidentTran
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ECONOMIC REPORTOF THE PRESIDENT
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We have heard much about American i
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at an approach that took account of
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een due to overall demand in the ec
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to $27.5 billion in the new budget
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ductions would amount to over $27 b
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10 percent inflation rate, keeping
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tutes for petroleum. The Synthetic
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esponse can be so large as to wipe
Page 27: THE ANNUAL REPORTOF THECOUNCIL OF E
Page 31 and 32: CONTENTSCHAPTER 1. INFLATION AND GR
Page 33 and 34: PageChallenges to the International
Page 35 and 36: CHAPTER 1Inflation and Growth in th
Page 37 and 38: needed to control inflation by resi
Page 39 and 40: decline in productivity growth may
Page 41 and 42: Chart 1Standard Unit Labor CostsPER
Page 43 and 44: end of 1974 the world price of oil
Page 45 and 46: price decisions cannot easily be re
Page 47 and 48: Federal budget achieved a surplus.
Page 49 and 50: As an abrupt increase in the price
Page 51 and 52: policies but are based on the wides
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Page 55 and 56: duction and employment to grow only
Page 57 and 58: Moreover, their actions must indica
Page 59 and 60: Starting with its 1975 targets as a
Page 61 and 62: well after the fact whether the mon
Page 63 and 64: Reserve provides some flexibility i
Page 65 and 66: in response to circumstances in par
Page 67 and 68: Although the flexibility of TIPs ma
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Page 73 and 74: large firms. Even among large firms
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Page 81 and 82: correct some of the distortions in
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Page 85 and 86: EXPECTED PRODUCTIVITY GAINSAlthough
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Page 89 and 90: increase demand pressures, especial
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Page 93 and 94: eintroduce the problem of changing
Page 95 and 96: CHAPTER 2Improving the Adaptability
Page 97 and 98: use less and produce more energy in
Page 99 and 100: expectation of price controls or fu
Page 101 and 102: dependence on foreign oil mean that
Page 103 and 104: While the market solution might pro
Page 105 and 106: High energy prices and excessive de
Page 107 and 108: part, the interests of these partie
Page 109 and 110: Federal regulations designed to pro
Page 111 and 112: Agency (EPA) from considering prosp
Page 113 and 114: other things, that federally assist
Page 115 and 116: ing services. Money-market mutual f
Page 117 and 118: holdings of consumer and business l
Page 119 and 120: they once had and thus cannot conti
Page 121 and 122: finding ways around outdated regula
Page 123 and 124: proportion of the existing farms pr
Page 125 and 126: prices for years in the future, reg
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derground water resources once thou
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comprehensive, actuarial crop insur
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duced a decline in the median age o
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elude government investments in loc
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some of the firms in the chosen sec
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CHAPTER 3The Economy: Review and Pr
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uild up oil inventories and maintai
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Chart 7Selected Interest Ratesand B
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had risen just 2 months earlier. By
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Chart 8Personal Saving RatePERCENT1
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chief cyclical determinant of housi
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ment were sharply diminished by the
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dropped even faster, in large part
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ployment grew more vigorously after
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terials fell for a full third of th
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1979, slowed to a 19 percent annual
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costs of production. The evidence s
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sharp decline in output in the seco
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ecord high interest rates during th
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automatic transfer services (ATS) n
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plunged in March, although the only
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(FHLB) System increased their borro
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THE PROSPECTS FOR 1981 AND 1982In 1
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expectations. Of course, if the eco
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The uncertainty of developments in
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produce a slight decline in the sav
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more rapid growth thereafter. Durin
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eemergence of modest but sustained
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hike would depend on many factors,
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major revision of the NIPA occurred
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per year. This modest acceleration
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THE INDUSTRIAL ECONOMIES: TRENDS AN
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Chart 10Labor Costs, Value-Added De
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Rather, the German current account
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TABLE 30.—Inflation in major indu
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THE GLOBAL OIL MARKETTable 31 summa
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may be preserved. Stocks are in fac
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straint on growth. Finally, policie
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outside government, both at home an
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ates are high, differences in polic
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Japanese trade performance in volum
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No "Say's Law" operates in internat
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the cost of the loans, and they may
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At the same time, access to the IMF
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to closer cooperation is to risk a
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While all countries, in attempting
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threats of disruption, market-shari
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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Past Council Members and their date
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1977 to review selected analyses of
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The Chairman and the Council Member
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University). Kate Stith Pressman, s
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CONTENTSNATIONAL INCOME OR EXPENDIT
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GOVERNMENT FINANCE'—ContinuedB-72
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Gross national product
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TABLE B-3.—Implicit price deflato
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TABLE B-5.—Implicit price deflato
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TABLE B-10.—Gross national produc
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TABLE B-12.—Output, costs, and pr
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TABLE B-14.—Gross private domesti
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TABLE B-16.—Inventories and final
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TABLE B-18.—Relation of national
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TABLE B-19-—National income by ty
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Year orquarter192919331939194019411
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TABLE B-22.—Total and per capita
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Year orquarterTotalTotalCurrencyand
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TABLE B-26.—Population by age gro
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TABLE B-27.—Noninstitutional popu
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Year or monthTABLE B-29.—Selected
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TABLE B-31.—Unemployment rate by
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TABLE B-33.—Unemployment by reaso
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TABLE B-35.—Wage and salary worke
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TABLE B-37.—Average weekly earnin
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TABLE B-39.—Changes in productivi
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TABLE B-42.—Industrial production
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TABLE B-44;—New construction acti
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TABLE B-45.—New housing units sta
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TABLE B-47.—Sales and inventories
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TABLE B-49.—Manufacturers' new an
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TABLE B-51.—Consumer price indexe
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19391940194119421943194419451946194
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TABLE B-54.—Changes in special co
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TABLE B-55.—Producer price indexe
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TABLE B-57.—Producer price indexe
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TABLE B-58.—Changes in producer p
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TABLE B-60.—Components of money s
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TABLE B-62.— Total funds raised i
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TABLE B-63.—Federal Reserve Bank
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TABLE B-65.—Bond yields and inter
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TABLE B-66—Consumer credit outsta
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TABLE B-68.—Mortgage debt outstan
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GOVERNMENT FINANCETABLE B-70.—Fed
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TABLE B-l\.—Federal budget receip
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TABLE B-73.—Government receipts a
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TABLE B-75.—State and local gover
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TABLE B-77,—Interest-bearing publ
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TABLE B-79-—Maturity distribution
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TABLE B-81.—Corporate profits by
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TABLE B-83.—Sales, profits, and s
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TABLE B-85.—Relation of profits a
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TABLE B-87.—Sources and uses of f
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TABLE B-89-—State and municipal a
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TABLE B-91.—Business formation an
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TABLE B-93.—Farm output ami produ
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Year or month1940194119421943194419
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TABLE B-97.—Balance sheet of the
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TABLE B-99— U.S. international tr
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TABLE B-100.—U.S. merchandise exp
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TABLE B-102.—U.S. merchandise exp
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TABLE B-104.— World trade: Export
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TABLE B-106.—International reserv
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• • ' •TABLE B-108.—Industr
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TABLE B-110.—Summary of major U.S
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