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other social goals. The fund would be supported by a surcharge on allelectric power transmission.Deregulation relies on the forces of competition to keep prices reasonablefor consumers. The benefits of deregulation, therefore, dependon the extent of competition in each market. The Administration’splan enhances FERC’s authority to block anticompetitive mergers andto promote competition through divestiture and other means.218
CHAPTER 6Capital Flows in the Global EconomyINTERNATIONAL FINANCIAL DEVELOPMENTS last year posedserious challenges for the world economy. What began in the summerof 1997 as a regional currency crisis in developing Southeast Asiaerupted into a wider and deeper economic disturbance in 1998. By latesummer the turmoil had extended to many other financial marketsand to a number of economies around the globe. The outbreak of financialand economic turmoil in Russia in August immediately threatenedto spread the contagion to Latin America. Interest rates in these andother emerging market countries rose sharply, and large-scale capitalflight raised risk premiums on their sovereign bonds. Several countriesexperienced sharp depreciations of their currencies or strains on theirforeign exchange reserves. Prices of stocks, bonds, and other financialand real assets fell. Commodity prices continued to fall, engenderingtalk of global deflation. Ultimately the financial turbulence led to ageneral flight from risky assets even within the United States andWestern Europe. Japan’s hopes for recovery from a long-enduringslump were dashed.Prompt policy action and signs of a turnaround in Asia improved theoutlook later in 1998. Even so, by late 1998 a third of the world’seconomies were in recession or experiencing markedly slower growth.The International Monetary Fund (IMF) has estimated world economicgrowth at only 2.2 percent in 1998 and projected that it wouldremain at that level in 1999, in stark contrast to robust growth of 4.2percent in 1997. Those estimates indicate a deceleration of globalgrowth to levels not seen since the pronounced world slowdowns of1974-75, 1980-83, and 1990-91. The risk of such a global slowdownposes new challenges to economic policy.The widespread financial turmoil—perhaps the most severe experiencedby the world economy during the last 50 years—followed a periodof increasing global integration of goods and financial markets.World trade has increased dramatically as trade restrictions havesteadily fallen and many countries have made a historic commitmentto opening their economies to international trade. Restrictions oninternational capital transactions have also been eased, and the integrationof financial markets has led to an unprecedented volume ofcross-border capital flows.The recent turbulence should not cloud the benefits of this ongoingtrend toward globalization. The integration of markets has provided219
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EconomicReportof thePresidentTransm
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C O N T E N T SPageECONOMIC REPORT
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ECONOMIC REPORT OF THE PRESIDENTTo
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Once we have saved Social Security,
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THE ANNUAL REPORTOF THECOUNCIL OF E
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C O N T E N T SPageCHAPTER 1. MEETI
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PageCHAPTER 5. REGULATION AND INNOV
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Page2-3. Accounting for Growth in R
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Page6-5. Terms of Trade ...........
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CHAPTER 1Meeting Challenges and Bui
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Box 1-1.—The Dating of Business C
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Chart 1-1 Core Inflation and Unempl
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expansion prematurely. In fact, the
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the duration of the typical unemplo
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throughout that decade of peace and
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all individuals aged 65 and older r
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extent that it would reduce Social
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the vulnerability of the internatio
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access. Even so, international agre
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eliminated entirely, because the go
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Nevertheless, adjustment assistance
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CHAPTER 2Macroeconomic Policyand Pe
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Then the chapter explores two other
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target Federal funds rate brought t
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high of 66.8 percent in the third q
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the third-quarter deceleration and
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(that is, excluding food and energy
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probably would have increased by ab
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Equities clearly involve risk as we
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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
Page 166 and 167: TABLE 4-6.—Family Holdings of Fin
Page 168 and 169: variety of reasons, including the f
Page 170 and 171: the number of patents granted in th
Page 172 and 173: The United States has a decades-lon
Page 174 and 175: matter, depending on various condit
Page 176 and 177: company Roche Holdings, Ltd. Some o
Page 178 and 179: The antitrust authorities’ linkin
Page 180 and 181: espective Writings and Discoveries.
Page 182 and 183: Box 5-3.—Cooperative Innovation a
Page 184 and 185: machine owned by another. The disti
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Page 188 and 189: and compete for customers on the ba
Page 190 and 191: In another part of the Internet mar
Page 192 and 193: technology at hand. But incentive-b
Page 194 and 195: the flexibility to choose lower cos
Page 196 and 197: In contrast to both performance and
Page 198 and 199: The SO 2 experience reveals several
Page 200 and 201: Box 5-7.—The Partnership for a Ne
Page 202 and 203: Consumers’ investment in energy e
Page 204 and 205: clean-energy projects in developing
Page 206 and 207: Chart 5-2 Energy Efficiency and Pri
Page 208 and 209: equipment, and more than 90 percent
Page 210 and 211: Box 5-9.—Is There an Environmenta
Page 212 and 213: larger coal plants. In 1994 these t
Page 214 and 215: around the country, and seven other
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Page 220 and 221: Chart 6-1 Net Capital Flows to Deve
Page 222 and 223: Box 6-1.—The Explosive Growth of
Page 224 and 225: Recent Financial LiberalizationIn m
Page 226 and 227: and investment (although openness t
Page 228 and 229: Box 6-2.—Market-Based (Arm’s-Le
Page 230 and 231: conditionality in the face of unsou
Page 232 and 233: Box 6-4.—Sovereign Spreads in Eme
Page 234 and 235: social safety nets in the crisis co
Page 236 and 237: Box 6-5.—Moral Hazard in Financia
Page 238 and 239: Empirical studies confirm that, by
Page 240 and 241: withdrew $26 billion in 1997. Altho
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Page 244 and 245: 8.5 percent of GDP in 1998. Indones
Page 246 and 247: sary revenues to meet these extra i
Page 248 and 249: which is considered a monetary asse
Page 250 and 251: ates at home, they sought higher re
Page 252 and 253: Chart 6-3 Real Value of the Dollar
Page 254 and 255: The increase in the trade deficit a
Page 256 and 257: Chart 6-6 Current Account BalanceTh
Page 258 and 259: Chart 6-7 Economic Growth and Trade
Page 260 and 261: investment. The U.S. gross investme
Page 262 and 263: Chart 6-10 Current Account Deficit
Page 264 and 265: 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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