[Budget Supplement]
[Creating an Age of Possibility]
[2. Three Years of Progress]
[From the U.S. Government Printing Office, www.gpo.gov]


  As President Clinton took office in January 1993, the economy was only 
then emerging from a long period of sluggish growth--beginning with the 
1990-1991 recession and continuing through an extremely weak recovery, 
marked by rising unemployment.
  The sluggishness exacerbated some serious long-term trends. Since the 
early 1970s, the incomes of most Americans have not grown as much as 
they once did--in fact, not much at all. As discussed in the previous 
chapter, only those atop the income ladder have enjoyed steady income 
growth. For others, the daily struggle to make ends meet has threatened 
to become a losing battle. For workers with only a high school 
education, times have been especially tough.
  The President campaigned on a pledge to restore widely shared 
prosperity, and he shaped his economic policies to achieve this primary 
goal. The huge Federal budget deficit was a major obstacle. Others 
included sluggish business investment, slow job growth, and the 
overgrown Federal Government, about which the public had grown deeply 
cynical.
  Three years later, our economy is stronger and the deficit is down 
even more than we had predicted. In dollar terms, the policies that we 
enacted with the last Congress have cut it almost in half, from $290 
billion in 1992 to $164 billion in 1995. As a share of the economy, we 
have cut it by over half, to 2.3 percent (see Charts 2-1 and 2-2).
  But as detailed in Chapter 1, we need further action to balance the 
budget once and for all.
  The Administration also has begun to significantly change the way that 
the Federal Government works. Under the leadership of the Vice 
President's National Performance Review, we are working to create a 
Government that ``works better and costs less.''

                                     


  Since January 1993, we have cut the number of Federal employees by 
over 200,000, to its lowest level in 30 years; the Federal share of the 
civilian workforce is at it lowest level since the 1930s. We are 
eliminating 16,000 pages of Federal regulations. We have reformed 
Federal procurement so that the Government now buys at the best price; 
no longer do we read news accounts of $600 hammers. (For more details on 
how we are making Government work, see Chapters 13 and 14.)

                                     


  Meanwhile, the Administration has employed Government where it does 
the most good--investing in education and training, protecting the 
environment and public health, helping people get needed health care, 
strengthening families by helping America's neediest children, and 
rewarding work. On the world stage, the President has strengthened 
American leadership and advanced American strategic and economic 
interests and values.
  Still, we have much more to do. Fully reversing the long-term trends 
that have weakened America will take time and enormous effort.
  This chapter reviews what we have done to meet the economic and social 
challenges that the Administration inherited three years ago. It 
describes how the economy and society have responded to these 
initiatives, and the economic path that we envision for the future.

                    WHAT THE ADMINISTRATION INHERITED

Near-Term Economic Problems

  The President inherited an economy that had nominally escaped from 
recession, but had not yet resumed solid and sustainable economic growth 
either for the short term or further down the road.

  Unemployment: Unemployment rose sharply in late 1990 with the onset of 
recession. Though the recession technically ended in early 1991, growth 
was so weak for many months that unemployment continued to rise. In 
January 1993, unemployment was 7.1 percent, 
[[Page 20]]
about a quarter-point higher 
than when the 1990-91 recession ended.
  Although the economy created some new jobs in the recovery of 1991-92, 
net job creation was weak. In the four years before January 1993, the 
economy created just 2.4 million net new jobs--about 51,000 a month. 
Over the same period, the labor force grew by 80,000 people each month. 
With the number of potential workers rising faster than the number of 
jobs, higher unemployment necessarily followed.

  Slow Growth: Weakness in the labor market reflected weak economic 
activity in general. The economy was growing, but very slowly. From the 
start of 1991, through the first quarter of 1993, real Gross Domestic 
Product, or GDP, grew at well under half the rate of economic recoveries 
since 1960 that lasted at least that long.
  The Credit Crunch: The U.S. financial system showed increasing strains 
in the 1980s. Individuals and corporations pushed their debt burdens 
higher and higher, and interest payments absorbed more and more income. 
While the amount of debt was rising, its quality was falling. Savings 
and loan institutions and banks made some extremely risky loans, many of 
which proved worthless.
  As losses to the Government's deposit insurance programs mounted, the 
problems of deteriorating credit quality and failing financial 
institutions became clear. Bank and thrift regulators began to close the 
failed institutions and the surviving ones raised their credit standards 
sharply. Many businesses, especially in areas with heavy concentrations 
of bad loans, had trouble getting needed credit.
  Meanwhile, individuals and businesses reduced their borrowing to 
improve their balance sheets and cut the burden of their interest 
payments. These steps led to slower consumer spending and less real 
estate investment. In cities across the country, new construction
[[Page 21]]
came to a halt as developers scrambled to find tenants for empty office 
buildings.

Long-Term Problems

  The economy's cyclical problems were just part of what the new 
Administration faced. Underlying those problems were chronic conditions 
that had lasted over a decade. Among the most damaging were the Federal 
budget deficit, the fall in private saving, the slowdown in productivity 
growth, and the increase in income inequality.

  The Budget Deficit: The Government has incurred a deficit every year 
since 1969, but the deficit exploded in size in the 1980s--largely due 
to the fiscal policies of 1981 and the economic conditions of that day.
  The Administration and Congress cut income tax rates by 23 percent, 
reducing revenue by over four percent of GDP, and increased spending on 
defense. The tax cuts, higher defense spending, and second recession in 
two years combined to send the deficit soaring. By 1983, it had nearly 
tripled, to $208 billion, and since then has never fallen below $149 
billion.
  Higher and higher deficits brought more and more debt. From the start 
of the Republic to 1980, the Government had accumulated just under $1 
trillion in debt. From 1980 to 1992, the debt rose to $4 trillion.
  To be sure, a big deficit can help to stabilize the economy during a 
recession. But this deficit was harmful because it was ``structural''; 
it would continue even if the economy performed well. Despite numerous 
attempts to cut the deficit over the next decade, it threatened to reach 
unsustainable levels as this Administration assumed office.
  A structural deficit is important because it affects the Nation's pool 
of saving. Nations must set aside funds today to build the factories and 
machines that will generate income for tomorrow; what they set aside 
[[Page 22]]
is their saving. It has two components: (1) private saving (by individuals 
and businesses); and (2) public saving (by Federal, State, and local 
governments).
  If the Federal Government borrows from that pool to finance its 
deficit, then the borrowed saving is not available to make productive 
private investment. With its big deficits, the Federal Government in the 
1980s massively drained our Nation's saving pool. Worse, as Federal 
deficits were rising, private saving was falling, making the Nation's 
saving problem worse.

  Private Saving: Private saving averaged 13.3 percent of GDP in the 
1960s, but dropped to 7.3 percent in the 1980s (see Chart 2-3). A fall 
in private saving affects investment and the trade balance in the same 
way as an increase in the budget deficit. Thus, the fall in private 
saving exacerbated the economic effects of the higher budget deficit.

                                     


                                     








  In the 1980s, lower national saving pulled down investment. To some 
extent, the drop in investment was offset by more borrowing from abroad. 
But that, in turn, led to other problems--including a rising trade 
deficit. Increased foreign borrowing converted the United States from 
the world's largest creditor to its largest debtor nation. To service 
those debts, the Nation will have to increase its exports over its 
imports for the foreseeable future (see Chart 2-4).

                                     


  Thus, because of the higher deficits and lower private saving, the 
1980s economic expansion was financed by debt to an unprecedented degree 
(see Chart 2-5). Much of the extra borrowing was not backed by more 
assets; thus, the borrowing raised the burden of debt service without 
providing a corresponding increase in resources to service the debt. 
High real interest rates, caused by the higher borrowing, further 
aggravated the problem.
[[Page 23]]
[[Page 24]]
[[Page 25]]
  Debt left the economy vulnerable when recession struck in the 1990s, 
and it helps explain why the recovery was initially so weak. No strong 
recovery could occur until the unwise policies of the 1980s were 
reversed.
  The decline in saving and investment also contributed to another of 
the economy's chronic weaknesses--sluggish productivity growth.

  The Productivity Slowdown: Rising productivity holds the key to higher 
incomes. For 25 years after World War II, productivity growth averaged 
2.7 percent a year, the highest in U.S. history for that long a time 
period, and it reached three percent a year in the 1960s. Incomes rose 
substantially for most families, and workers grew accustomed to annual 
pay increases that outstripped inflation. The middle class expanded, as 
did opportunities for home ownership, education, and leisure.
  Since the early 1970s, productivity has grown an average of only about 
one percent a year, about a third as fast as before (see Chart 2-6). 
With slower productivity growth, the rapid rise in living standards came 
to an end. The Nation's promise of opportunity was in danger and 
Americans began to fear that, for the first time in U.S. history, future 
generations would not enjoy higher living standards than their parents.
  While the economy continued to grow, it did not grow as fast as in 
earlier decades. Moreover, growth depended more on the entry of new 
workers, especially married women, into the labor market. When growth in 
the labor force slowed, as at the beginning of the 1990s, productivity 
improvements alone could not sustain continued rapid increases in real 
GDP.

  Rising Inequality: Another chronic problem, aggravated by slower 
productivity growth and lower saving, was rising income inequality. For 
the lowest 60 percent of American 
[[Page 26]]
families, the standard of living 
actually fell from 1979 to 1992. Only those at the top continued to 
enjoy substantial income gains.
  For families in the bottom 20 percent of income, real mean income was 
14 percent lower in 1992 than in 1973; for families in the top five 
percent, real income was 17 percent higher. As a result, the gap between 
the top and bottom incomes widened to record levels.

The Social Repercussions

  Slow productivity growth and widening income inequality have effects 
throughout society. The difficulties of working families in making ends 
meet have raised the pressures on them and weakened the social fabric. 
The consequences have come to light in the economic and social 
statistics on poverty, social breakdown, and crime.
  The sluggish economy of the early 1990s was especially hard on the 
poor. The official poverty rate hit its low point in 1973, after falling 
sharply for most of the previous decade. Since then, increases in 
poverty during recessions have outpaced reductions in poverty during 
recoveries.
  By 1992, the poverty rate had risen to nearly 15 percent. That year, 
more than one in five of the Nation's children were poor.

                  WHAT THE ADMINISTRATION HAS ACHIEVED

  To bring the economy back to health, the Administration sought to 
tackle the budget deficit while promoting prosperity by investing in 
education and training, and science and technology; by opening new 
markets; and by keeping interest rates and inflation in check.

Budget Policy

  The President and the last Congress enacted the Omnibus Budget and 
Reconciliation Act of 1993, designed to reduce the deficits by a 
combined $505 billion over five years, 1994-98. Because the economy has 
performed better than even the Administration had predicted, we now 
expect those deficits to fall by $697 billion over the same period, even 
without further steps to reduce them.
  The President's 1993 economic plan, which still governs U.S. fiscal 
policy, achieved over half of its $505 billion of deficit reduction 
through spending cuts ($255 billion), and the rest through tax measures 
designed to increase the progressivity of the tax code and also raise 
revenue. It made deep cuts in discretionary spending and entitlement 
programs. It extended through 1998 the annual limits, or ``caps,'' on 
discretionary spending that Congress first imposed in 1990. (This budget 
would extend them even further.) In addition, it cut entitlements by $98 
billion.
  Nevertheless, the President's plan also expanded the Earned Income Tax 
Credit (EITC), which rewards work for those in the lowest-income 
brackets. The EITC makes work pay. It offers a positive inducement to 
low-income families to enter the working world and avoid the cycle of 
dependency. The plan raised the rate of the EITC, expanded it to provide 
tax relief to more lower-income working families with children, and 
extended the credit to apply, at lower rates, to low-income workers 
without children.
  In the 1993 plan, only one revenue increase affected typical American 
households--a 4.3 cent per gallon increase in the Federal excise tax on 
gasoline. The change was well timed; it occurred while gas prices were 
falling, so it imposed little or no extra burden on households. 
Moreover, the plan brought down interest rates, saving these typical 
households sizable sums on home mortgages and auto and other consumer 
loans.
  All told, about 90 percent of the revenue increases came from 
households with incomes of over $100,000. To be sure, no one ever wants 
to raise taxes. But this change was appropriate--given the pressing need 
to cut the deficit, and given that high-income families prospered so 
much in the preceding decade. And with the plan at least partly 
responsible for growth in the economy and the stock market since 1993, 
these people have prospered in the last three years.
  Largely due to the President's plan and the economic growth it helped 
spur, the deficit fell from $290 billion in 1992 to 
[Page 27]]
$164 billion in 
1995; we expect it to remain near this level through 1997. This Nation 
now has the smallest deficit, relative to the size of its economy, of 
any developed country in the world except Norway.
  At the same time, even with total discretionary spending rising far 
less than inflation, the President has worked with Congress to 
reallocate funds to programs that invest in the future and, thus, spur 
economic growth. While the private sector plays the lead role in 
creating growth, the Federal Government must play a key supporting role.
  Among other things, the President and Congress increased funding for 
Head Start; Goals 2000 educational reforms; college scholarships; 
dislocated worker assistance; research and technology; environmental 
protection; the national forests and parks; Clean Water and Safe 
Drinking Water revolving funds; community policing; and the operations 
of the FBI, the Immigration and Naturalization Service, and Federal 
prisons.
  The President and Congress also created and funded the Americorps 
program that enables students to work in communities while earning funds 
for college; the Charter Schools program to support public school 
choice; the School-to-Work Opportunities Act to help young people make a 
smooth transition from high school to work; and the Federal Direct 
Student Loan program to make borrowing cheaper and more effective, and 
to ease the burden of repayment.

Economic Achievements

  By addressing the deficit, the Administration helped resolve the 
economy's short-run problems. The President's plan enabled the Federal 
Reserve to maintain low interest rates throughout 1993, and financial 
markets responded by lowering long-term rates.
  For example, the yield on ten-year Treasury notes fell from 6\3/4\ 
percent in late 1992 to 5\3/4\ percent by the end of 1993, helping to 
end the credit crunch. Interest rates have fluctuated since 1993, but 
with the fall in the deficit freeing up resources for private 
investment, investment has boomed ever since.
  Real growth accelerated in 1993, but inflation remained firmly in 
check. Within two years, unemployment fell below six percent, producing 
the lowest combined rates of unemployment and inflation in three decades 
(see Charts 2-7 and 2-8).

  Job Growth Up, Unemployment Down: Since January 1993, the economy has 
added 7.7 million net new jobs, an average of 214,000 a month (see Chart 
2-9). Over seven million were in the private sector. Over half of the 
new jobs were in the high-paying professional or managerial categories. 
The economy created over a million new jobs in the basic industries of 
construction and manufacturing, including the bellwether automobile 
industry.


  Economic Growth Up: Also since January 1993, real GDP has risen at a 
2.6 percent annual rate, roughly triple the average growth rate of the 
prior three years and faster than such economies as Japan's and 
Germany's (see Charts 2-10 and 2-11). Since the first quarter of 1993, 
private sector GDP--excluding government--has grown by 3.2 percent a 
year.


  Inflation Under Control: The Consumer Price Index has risen an average 
of just 2.7 percent a year since January 1993, marking the smallest 
three-year rise since the mid-1960s (see Chart 2-12).
  Interest Rates Down: In the President's first year, long-term interest 
rates paid by home buyers, business investors, and the Government fell 
by over a point. Inflation fears temporarily reversed that drop in 1994, 
but interest rates fell again in 1995 as inflation fears proved 
unwarranted and chances for more deficit reduction rose. By the end of 
1995, long-term rates were down a full point from their levels of 
January 1993. Aside from a few months in 1993, long-term rates were at 
their lowest point since the 1960s (see Chart 2-13).
  Household Wealth Up: Lower interest rates improved the financial 
standing of households by making home ownership more affordable and 
boosting the stock market. The home ownership rate rose to 65.1 percent 
by the end of 1995, its highest since 1981. Meanwhile, the stock market 
has given its strong endorsement on the state of the economy. Since 
January 1993, the Dow-Jones Industrial average has risen by over 60 
percent, with 36 percent of the rise coming in 1995. All other major stock 
[[Page 28]]
[[Page 29]]
market indexes were up by corresponding amounts.
  Exports Up: U.S. exports of goods and services have risen at a rapid 
7.6 percent annual rate (after adjusting for inflation) since the first 
quarter of 1993. Merchandise exports have risen even quicker, at a 9.6 
percent rate. The export record is particularly impressive in light of 
the anemic growth in some of the other major industrialized countries.

                                     


  With other economies growing more slowly than America's, our imports 
should have grown faster than our exports. They did. Consequently, the 
trade deficit rose through the first half of 1995. But, as the gap in 
economic growth narrowed a bit in the second half of the year, so did 
the deficit--it fell between June and December of 1995, from $11.4 
billion to $6.8 billion. The bilateral deficit with Japan dropped from 
an annual rate of $64.7 billion in the first half of 1995 to $56.3 
billion in the second half.

Progress Against Unfavorable Long-Term Trends

  As we have seen, the economy as a whole has improved markedly in the 
last three years. To be sure, we face the ongoing challenge of 
addressing the fundamental factors that determine long-term prosperity. 
Even for those, however, various signs of progress appeared in 1994, the 
last year for which statistics are available.
  That year, median family income rose while the poverty rate--and, 
importantly, the poverty rate for children--fell. Real incomes grew in 
all five quintiles of the income scale for the first time in five years 
(see Chart 2-14).

                                     


  Further improvement may have occurred last year, given the favorable 
levels of unemployment and growth in real income. The President's 
program is designed to do even more by creating opportunity and 
encouraging responsibility (see Chapters 5 through 12) 
[[Page 30]]
and providing tax 
relief to millions of middle-income families (see Chapter 12).
  Productivity growth has only begun to rise, and the final pay-off of 
deficit reduction has not yet arrived. But the fundamental economic 
changes are in the right direction.
  In the coming years, the saving and investment boom of the last three 
years will generate higher incomes by enabling workers to produce and 
earn more. In the near term, the main effect of higher investment has 
been to lower unemployment--itself an early step toward greater 
prosperity.

                  A PRUDENT LOOK AT THE ECONOMIC FUTURE

  In its economic assumptions, the Administration projects a 
continuation of current favorable economic conditions. The assumptions 
are reasonable and conservative.\1\
  \1\For a more detailed explanation of the Administration's economic 
assumptions, see Analytical Perspectives, Chapter 1.
---------------------------------------------------------------------------
  Specifically, they project:
  Real GDP growth (on the new chain-weighted basis\2\) that 
          averages 2.3 percent a year through 2002, in line with private 
          forecasters and CBO--about a half-point a year less than what 
          the Administration has achieved over the last three years;
  \2\The Government now measures growth on the new basis that the Bureau 
of Economic Analysis introduced in January 1996.
---------------------------------------------------------------------------
  The unemployment rate to remain stable at 5.7 percent, close 
          to its current level and within the range that it has 
          maintained for over a year;
[[Page 31]]
          
          
          
          
[[Page 32]]
  An increase in the CPI of about 2.8 percent a year from 1998 
          to 2002, about the same as it averaged in the previous three 
          years; and
  The 10-year Treasury bond rate to fall by 1.1 percentage 
          points over the next four years as the deficit continues to 
          decline. Over the past year, the rate has fallen by two 
          percentage points.
  These economic assumptions presume that Congress adopts the 
President's proposals--most fundamentally that the President and 
Congress put the budget on a path to balance by 2002--and that the 
progress will be evident to households, businesses, and investors. For 
this reason, the Administration expects to see declines in interest 
rates, stimulating sustained growth and investment.
[[Page 33]]

                                       Table 2-1.  ECONOMIC ASSUMPTIONS\1\                                      
                                  (Calendar years; dollar amounts in billions)                                  
----------------------------------------------------------------------------------------------------------------
                                                                        Projections                             
                                   1994  -----------------------------------------------------------------------
                                  Actual    1995     1996     1997     1998     1999     2000     2001     2002 
----------------------------------------------------------------------------------------------------------------
Gross Domestic Product (GDP):                                                                                   
  Levels, dollar amounts in                                                                                     
   billions:                                                                                                    
    Current dollars............    6,931    7,254    7,621    8,008    8,417    8,848    9,295    9,772   10,268
    Real, chained (1992)                                                                                        
     dollars...................    6,604    6,742    6,888    7,047    7,212    7,380    7,553    7,730    7,911
    Chained price index                                                                                         
     (1992=100), annual average    105.0    107.6    110.6    113.6    116.7    119.9    123.1    126.4    129.8
  Percent change, fourth                                                                                        
   quarter over fourth quarter:                                                                                 
    Current dollars............      5.9      4.1      5.1      5.1      5.1      5.1      5.1      5.1      5.1
    Real, chained (1992)                                                                                        
     dollars...................      3.5      1.5      2.2      2.3      2.3      2.3      2.3      2.3      2.3
    Chained price index                                                                                         
     (1992=100), annual average      2.3      2.5      2.8      2.7      2.7      2.7      2.7      2.7      2.7
  Percent change, year over                                                                                     
   year:                                                                                                        
    Current dollars............      5.8      4.7      5.1      5.1      5.1      5.1      5.1      5.1      5.1
    Real, chained (1992)                                                                                        
     dollars...................      3.5      2.1      2.2      2.3      2.3      2.3      2.3      2.3      2.3
    Chained price index                                                                                         
     (1992=100), annual average      2.3      2.5      2.8      2.7      2.7      2.7      2.7      2.7      2.7
                                                                                                                
Incomes, billions of current                                                                                    
 dollars:                                                                                                       
    Personal income............    5,750    6,104    6,416    6,716    7,025    7,337    7,664    8,031    8,434
    Wages and salaries.........    3,241    3,420    3,607    3,801    3,995    4,193    4,403    4,629    4,864
    Corporate profits before                                                                                    
     tax.......................      528      602      650      702      753      800      843      882      917
                                                                                                                
Consumer Price Index (all                                                                                       
 urban):\2\                                                                                                     
    Level (1982-84=100), annual                                                                                 
     average...................    148.2    152.4    156.6    161.3    165.9    170.5    175.3    180.2    185.2
    Percent change, fourth                                                                                      
     quarter over fourth                                                                                        
     quarter...................      2.6      2.7      3.1      2.9      2.8      2.8      2.8      2.8      2.8
    Percent change, year over                                                                                   
     year......................      2.6      2.8      2.8      3.0      2.8      2.8      2.8      2.8      2.8
                                                                                                                
Unemployment rate, civilian,                                                                                    
 percent:                                                                                                       
    Fourth quarter level.......      5.6      5.6      5.7      5.7      5.7      5.7      5.7      5.7      5.7
    Annual average.............      6.1      5.6      5.7      5.7      5.7      5.7      5.7      5.7      5.7
                                                                                                                
Federal pay raises, January,                                                                                    
 percent:                                                                                                       
    Military...................      2.2      2.2      2.6      3.0      3.1      3.1      3.1      3.1      3.1
    Civilian\3\................  .......      2.0      2.0      3.0       NA       NA       NA       NA       NA
                                                                                                                
Interest rates, percent:                                                                                        
    91-day Treasury bills\4\...      4.3      5.5      4.9      4.5      4.3      4.2      4.0      4.0      4.0
    10-year Treasury notes.....      7.1      6.6      5.6      5.3      5.0      5.0      5.0      5.0      5.0
                                                                                                                
----------------------------------------------------------------------------------------------------------------
NA=Not available.                                                                                               
                                                                                                                
\1\Based on information available as of mid-January 1996.                                                       
                                                                                                                
\2\CPI for all urban consumers. Two versions of the CPI are published. The index shown here is that currently   
  used, as required by law, in calculating automatic adjustments to individual income tax brackets. Projections 
  reflect scheduled changes in methodology.                                                                     
                                                                                                                
\3\Percentages for 1994-1996 exclude locality pay adjustments. Percentages to be proposed for years after 1997  
  have not yet been determined.                                                                                 
                                                                                                                
\4\Average rate (bank discount basis) on new issues within period.