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LETTER OF TRANSMITTALCOUNCIL OF ECONOMIC ADVISERSWashington, D.C., February 4, 1999MR. PRESIDENT:The Council of <strong>Economic</strong> Advisers herewith submits its 1999 Annual<strong>Report</strong> in accordance with the provisions of the Employment Act of 1946as amended by the Full Employment and Balanced Growth Act of 1978.Sincerely,Janet L. Yellen,ChairJeffrey A. Frankel,MemberRebecca M. Blank,Member9
C O N T E N T SPageCHAPTER 1. MEETING CHALLENGES AND BUILDING FOR THEFUTURE ............................................................................ 19Policy Lessons from Three Long Expansions ....................... 20Keynesian Activism in the 1961-69 Expansion............. 21The Supply-Side Revolution and the 1982-90Expansion .................................................................... 22Deficit Reduction and the Current Expansion.............. 24Conclusion ....................................................................... 27Preserving Fiscal Discipline .................................................. 28Reaching Surplus............................................................ 28Fiscal Policy in an Era of Surpluses .............................. 30Meeting the International Challenge ................................... 34Containing the Crisis and Promoting Recovery ........... 34Strengthening the International FinancialArchitecture................................................................. 36Embracing Change While Promoting Fairness.................... 37Agriculture ...................................................................... 38Mergers............................................................................ 39International Trade......................................................... 40Promoting Prosperity for All Americans............................... 41Conclusion............................................................................... 42CHAPTER 2. MACROECONOMIC POLICY AND PERFORMANCE ...... 43The Year in Review................................................................. 45The Stance of Macroeconomic Policy ............................. 45Turmoil in Financial Markets ........................................ 47Components of Spending ................................................ 47The Labor Market and Inflation .................................... 52Financial Markets .................................................................. 55The Effect of Risk on Interest Rates and EquityPrices ........................................................................... 56Changing Risk Perceptions and Financial MarketDevelopments.............................................................. 57New Concerns About Hedge Funds ............................... 63Financial Market Influences on Spending .................... 67The Investment Boom............................................................ 69Causes of the Boom......................................................... 70Implications of the Investment Boom............................ 73Macroeconomic Implications of the Y2K Problem ............... 7611
Page 1 and 2: EconomicReportof thePresidentTransm
Page 3 and 4: C O N T E N T SPageECONOMIC REPORT
Page 5 and 6: ECONOMIC REPORT OF THE PRESIDENTTo
Page 7 and 8: Once we have saved Social Security,
Page 9: THE ANNUAL REPORTOF THECOUNCIL OF E
Page 13 and 14: PageCHAPTER 5. REGULATION AND INNOV
Page 15 and 16: Page2-3. Accounting for Growth in R
Page 17 and 18: Page6-5. Terms of Trade ...........
Page 19 and 20: CHAPTER 1Meeting Challenges and Bui
Page 21 and 22: Box 1-1.—The Dating of Business C
Page 23 and 24: Chart 1-1 Core Inflation and Unempl
Page 25 and 26: expansion prematurely. In fact, the
Page 27 and 28: the duration of the typical unemplo
Page 29 and 30: throughout that decade of peace and
Page 31 and 32: all individuals aged 65 and older r
Page 33 and 34: extent that it would reduce Social
Page 35 and 36: the vulnerability of the internatio
Page 37 and 38: access. Even so, international agre
Page 39 and 40: eliminated entirely, because the go
Page 41 and 42: Nevertheless, adjustment assistance
Page 43 and 44: CHAPTER 2Macroeconomic Policyand Pe
Page 45 and 46: Then the chapter explores two other
Page 47 and 48: target Federal funds rate brought t
Page 49 and 50: high of 66.8 percent in the third q
Page 51 and 52: the third-quarter deceleration and
Page 53 and 54: (that is, excluding food and energy
Page 55 and 56: probably would have increased by ab
Page 57 and 58: Equities clearly involve risk as we
Page 59 and 60: highest level in at least 40 years
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attributed to the lesser liquidity
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971231 980106 980112 980116 980122
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about the potential impact of large
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With respect to leverage, the degre
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noted earlier, investment-grade bor
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Chart 2-8 Corporate Profits and Net
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is attributable to the strong econo
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productivity; the latter is in turn
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the year 2000, mistaking it instead
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Box 2-2.—continuedare not expecte
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construct an accurate forecasting m
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is estimated as the location where
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the recent surge in productivity re
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Box 2-3.—continuedhowever. Import
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Chart 2-12 Three Measures of Core I
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a level of capacity utilization tha
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Box 2-4.—continuedChanges to be i
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Nonfarm manufacturing and trade inv
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has been for the past 3 years. But
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who have traditionally not fared as
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Box 3-1.—continuedas well as full
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and been replaced by younger, more
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Particularly interesting, however,
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Chart 3-5 Median Hourly Wages of Me
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In fact, in 1990 immigrants and nat
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Box 3-2.—continuedsome firms may
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Box 3-3.—continuedmaximum of $3,7
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willing to hire welfare recipients
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participation. The renewed increase
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TANF grants in reserve at the Treas
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JOB DISPLACEMENTWorkers are conside
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evidence finds that the percentage
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their non-labor market activities.
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The Administration is especially co
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CHAPTER 4Work, Retirement, and theE
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Chart 4-1 Life Expectancy at Age 65
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Population aging is not just an Ame
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Box 4-1.—continuedfor couples and
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earlier retirement, by increasing l
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uyouts may also have contributed to
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Box 4-2.—Social Security RulesThe
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available with the same hourly pay,
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Box 4-4.—Types of Pension PlansUn
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worker—declined. More of these ol
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survey) was about 13 percent higher
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well-being is that families have di
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Chart 4-9 Living Arrangements of El
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mentioned earlier in this chapter a
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Box 4-7.—The Federal Role in Empl
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inequality among retirees who have
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whether minorities and women are li
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TABLE 4-4.—Poverty Rates Among th
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TABLE 4-6.—Family Holdings of Fin
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variety of reasons, including the f
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the number of patents granted in th
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The United States has a decades-lon
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matter, depending on various condit
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company Roche Holdings, Ltd. Some o
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The antitrust authorities’ linkin
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espective Writings and Discoveries.
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Box 5-3.—Cooperative Innovation a
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machine owned by another. The disti
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companies begin to offer DSL servic
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and compete for customers on the ba
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In another part of the Internet mar
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technology at hand. But incentive-b
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the flexibility to choose lower cos
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In contrast to both performance and
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The SO 2 experience reveals several
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Box 5-7.—The Partnership for a Ne
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Consumers’ investment in energy e
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clean-energy projects in developing
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Chart 5-2 Energy Efficiency and Pri
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equipment, and more than 90 percent
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Box 5-9.—Is There an Environmenta
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larger coal plants. In 1994 these t
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around the country, and seven other
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other social goals. The fund would
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greater opportunity, faster growth,
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Chart 6-1 Net Capital Flows to Deve
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Box 6-1.—The Explosive Growth of
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Recent Financial LiberalizationIn m
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and investment (although openness t
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Box 6-2.—Market-Based (Arm’s-Le
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conditionality in the face of unsou
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Box 6-4.—Sovereign Spreads in Eme
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social safety nets in the crisis co
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Box 6-5.—Moral Hazard in Financia
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Empirical studies confirm that, by
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withdrew $26 billion in 1997. Altho
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America, and these linkages partly
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8.5 percent of GDP in 1998. Indones
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sary revenues to meet these extra i
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which is considered a monetary asse
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ates at home, they sought higher re
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Chart 6-3 Real Value of the Dollar
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The increase in the trade deficit a
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Chart 6-6 Current Account BalanceTh
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Chart 6-7 Economic Growth and Trade
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investment. The U.S. gross investme
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Chart 6-10 Current Account Deficit
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with other countries to strengthen
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REFORM OF THE INTERNATIONAL FINANCI
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about their macroeconomic and finan
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decisions respond to market signals
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Other measures recommended by the w
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ADOPTION OF MEASURES TO REFORM THEI
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Another way to improve global surve
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Issues Posed by Hedge Funds and Oth
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the best investment opportunities,
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egulation of inflows to banks alone
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complement the role of official fin
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emerging markets will take time to
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Box 7-1.—continuedpartner; a stro
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Chart 7-1 European Short-Term Inter
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members agreed in a separate Growth
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Box 7-2.—continuedthrough an auto
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advantages of EMU to U.S. residents
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Box 7-3.—How Does the Dollar Rank
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connection between the currency in
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as an economic superpower early in
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Appendix AREPORT TO THE PRESIDENT O
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Council Members and Their Dates of
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The Chair and Members work as a tea
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countries. The Council heads the U.
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Chief of Staff and General CounselM
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affiliations. They are Christopher
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C O N T E N T SNATIONAL INCOME OR E
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B-71. Aggregate reserves of deposit
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General NotesDetail in these tables
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TABLE B-1.—Gross domestic product
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TABLE B-2.—Real gross domestic pr
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TABLE B-4.—Percent changes in rea
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TABLE B-5.—Contributions to perce
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TABLE B-6.—Chain-type quantity in
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TABLE B-7.—Chain-type price index
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TABLE B-9.—Real gross domestic pr
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Year orquarterGrossdomesticproductT
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YearBased on1972 SIC:TABLE B-13.—
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TABLE B-15.—Output, costs, and pr
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TABLE B-17.—Real personal consump
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TABLE B-19.—Real private gross fi
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TABLE B-21.—Real government consu
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TABLE B-23.—Real inventories and
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TABLE B-25.—Real exports and impo
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TABLE B-27.—Relation of national
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TABLE B-28.—National income by ty
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TABLE B-29.—Sources of personal i
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TABLE B-31.—Total and per capita
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TABLE B-32.—Gross saving and inve
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POPULATION, EMPLOYMENT, WAGES, AND
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TABLE B-35.—Civilian population a
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TABLE B-37.—Civilian employment b
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TABLE B-39.—Civilian labor force
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TABLE B-41.—Civilian employment/p
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TABLE B-43.—Civilian unemployment
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TABLE B-45.—Unemployment insuranc
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TABLE B-46.—Employees on nonagric
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TABLE B-48.—Employment cost index
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Year orquarterTABLE B-50.—Changes
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Year or monthTABLE B-52.—Industri
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TABLE B-54.—Capacity utilization
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Year or monthTABLE B-56.—New hous
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TABLE B-58.—Manufacturers’ ship
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PRICESTABLE B-60.—Consumer price
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TABLE B-61.—Consumer price indexe
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TABLE B-63.—Changes in special co
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TABLE B-65.—Producer price indexe
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YearandmonthMONEY STOCK, CREDIT, AN
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TABLE B-70.—Components of money s
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TABLE B-72.—Bank credit at all co
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TABLE B-73.—Bond yields and inter
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TABLE B-74.—Credit market borrowi
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TABLE B-76.—Mortgage debt outstan
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GOVERNMENT FINANCETABLE B-78.—Fed
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TABLE B-80.—Federal receipts and
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TABLE B-82.—Federal Government re
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TABLE B-84.—Federal and State and
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TABLE B-86.—State and local gover
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TABLE B-88.—Maturity distribution
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CORPORATE PROFITS AND FINANCETABLE
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TABLE B-92.—Corporate profits of
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TABLE B-94.—Relation of profits a
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Year or monthTABLE B-96.—Business
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End of yearTotalassetsTABLE B-98.
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YearFarm population,April 1Number(t
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YearTABLE B-102.—U.S. exports and
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TABLE B-103.—U.S. international t
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TABLE B-105.—U.S. international t
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TABLE B-107.—International invest
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TABLE B-109.—Civilian unemploymen
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TABLE B-111.—International reserv
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