    [Analytical Perspectives]
    [Economic and Accounting Analyses]
    [2. Stewardship: Toward a Federal Balance Sheet]
    [From the U.S. Government Printing Office, www.gpo.gov]

                                  Introduction
      This chapter presents a framework for describing the financial
    condition of the Federal Government and its performance as a steward of
    publicly owned assets. Although parts of the presentation are similar in
    appearance to a business balance sheet, they are not the same. The
    Government's sovereign powers have no counterparts in the business
    world, and its resources and responsibilities are broader than the
    assets and liabilities found on a typical balance sheet. For this
    reason, it is not possible to judge how well the Government is
    discharging its stewardship obligations simply from an examination of
    its formal assets and liabilities. A review of how national welfare and
    security are faring in light of Government policy is also needed.
      Because of the differences between Government and business, and the
    serious limitations that exist in the available data, the material
    presented below must be interpreted cautiously. The conclusions are
    necessarily tentative and subject to future revision as the estimating
    methods are improved and better data become available.
      The presentation consists of three parts:

    [[Page 18]]
                                                         Table 2-1.  GOVERNMENT ASSETS AND LIABILITIES*
                                                 (As of the end of the fiscal year, in billions of 1995 dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   1960       1965       1970       1975       1980       1985       1990       1993       1994       1995
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    ASSETS

    Financial assets:
      Gold and Foreign Exchange...............         98         69         58        130        322        154        194        171        171        183
      Other Monetary Assets...................         37         53         32         15         38         24         31         39         31         34
      Mortgages and Other Loans...............        122        156        202        202        278        341        276        230        218        193
        Less Expected Loan Losses.............         -1         -2         -4         -9        -16        -16        -18        -24        -26        -22
      Other Financial Assets..................         58         77         64         64         84        108        166        202        190        188
                                               -------------------------------------------------------------------------------------------------------------
        Subtotal..............................        314        353        351        403        706        611        648        618        584        576
    Physical Assets:
      Fixed Reproducible Capital:
        Defense...............................        826        842        839        683        586        694        771        782        780        744
        Nondefense............................        146        175        189        216        248        249        254        251        256        255
      Inventories.............................        252        218        203        181        220        252        219        179        170        168
      Nonreproducible Capital:
        Land..................................         87        121        151        234        296        318        315        241        237        235
        Mineral Rights........................        314        291        241        334        607        683        457        388        360        335
                                               -------------------------------------------------------------------------------------------------------------
          Subtotal............................      1,626      1,646      1,622      1,647      1,958      2,197      2,016      1,841      1,803      1,737
                                               =============================================================================================================
            Total assets......................      1,940      2,000      1,972      2,050      2,664      2,808      2,664      2,459      2,387      2,313

    LIABILITIES

    Financial liabilities:
      Currency and Bank Reserves..............        220        241        267        272        273        290        348        396        422        437
      Debt held by the Public.................        954        941        800        787      1,019      1,809      2,483      3,072      3,158      3,219
      Miscellaneous...........................         28         29         31         33         44         55         82         59         60         61
                                               -------------------------------------------------------------------------------------------------------------
        Subtotal..............................      1,202      1,211      1,097      1,092      1,336      2,153      2,913      3,527      3,640      3,717
    Insurance Liabilities:
      Deposit Insurance.......................          0          0          0          0          2          9         67         13          8          4
      Pension Benefit Guarantee Corp..........          0          0          0         41         30         41         40         63         31         19
      Loan Guarantees.........................          0          0          2          6         12         10         14         28         30         27
      Other Insurance.........................         30         27         21         19         26         16         19         18         17         16
                                               -------------------------------------------------------------------------------------------------------------
        Subtotal..............................         30         27         23         67         69         76        140        122         86         66
    Federal Pension Liabilities...............        734        930      1,104      1,256      1,707      1,693      1,625      1,563      1,541      1,513
                                               =============================================================================================================
          Total liabilities...................      1,966      2,168      2,225      2,414      3,112      3,922      4,678      5,212      5,267      5,296
          Balance.............................        -26       -169       -252       -364       -448     -1,114     -2,014     -2,753     -2,880     -2,983
            Per capita (in 1995 dollars)......       -146       -867     -1,231     -1,686     -1,961     -4,658     -8,034    -10,635    -11,018    -11,312
            Ratio to GDP (in percent).........       -1.1       -5.4       -6.9       -8.7       -9.0      -19.1      -30.4      -39.5      -39.9      -40.7
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    *This table shows assets and liabilites for the Government as a whole, including the Federal Reserve System. Therefore, it does not break out separately
      the assets held in Government accounts, such as social security, that are the obligation of specific Government agencies. Estimates for 1995 are
      extrapolated in some cases.

                 THE FEDERAL GOVERNMENT'S ASSETS AND LIABILITIES
      Table 2-1 summarizes what the Government owes as a result of its past
    operations, along with the value of what it owns, for a number of years
    beginning in 1960. The values of assets and liabilities are measured in
    terms of constant 1995 dollars. For all of this period, Government
    liabilities have exceeded the value of assets, but until the early 1980s
    the disparity was relatively small, and for many years it deteriorated
    only gradually.
      In the late 1970s, a speculative run-up in the prices of oil, gold,
    and other real assets temporarily boosted Federal asset values, but
    since then they have declined.\2\ Currently, the total real value of
    Federal assets is estimated to be about 20 percent greater than it was
    in 1960. Meanwhile, Federal liabilities have increased by almost 170
    percent in real terms. The sharp decline in the Federal net asset
    position that began in the 1980s was principally due to the large
    Federal budget deficits that began at that time along with the drop in
    asset values. Currently, the net excess of liabilities over assets is
    about $3 trillion or over $11,000 per capita.
      \2\This temporary improvement highlights the importance of the other
    tables in this presentation. What is good for the Federal Government as
    an asset holder is not necessarily favorable to the economy. The decline
    in inflation in the early 1980s reversed the speculative runup in gold
    and other commodity prices. This reduced the balance of Federal net
    assets, but it was good for the economy.
    ---------------------------------------------------------------------------

    Assets

      The assets in Table 2-1 reflect a comprehensive list of the financial
    and physical resources owned by the Federal Government. The list
    corresponds to items that
    [[Page 19]]
    would appear on a typical balance sheet, but
    it does not constitute an exhaustive catalogue of Federal resources. For
    example, the Government's most important financial resource, its ability
    to tax, is not reflected.
      Financial Assets: At the end of 1995, the Federal Government's
    holdings of financial assets amounted to about $570 billion. Government-
    held mortgages and other loans (measured in constant dollars) reached a
    peak in the mid-1980s. Since then, Federal loans have declined. The
    holdings of mortgages, in particular, have declined sharply over the
    last three years as the holdings acquired from failed Savings and Loan
    institutions have been liquidated.
      The face value of mortgages and other loans overstates their economic
    value because of future losses and the interest subsidy on these loans.
    These estimated losses are subtracted from the face value of outstanding
    loans to obtain a better estimate of their economic worth.
      Over time, variations in the price of gold have accounted for major
    swings in this category. Since 1980, gold prices have fallen, and the
    real value of U.S. gold and foreign exchange holdings have dropped by
    over 40 percent. Last year, for the first time in several years, these
    assets rose in value.
      Reproducible Capital: The Federal Government is a major investor in
    physical capital. Government-owned stocks of fixed capital amounted to
    about $1.0 trillion in 1995. About three-quarters of this capital took
    the form of defense equipment or structures. From 1960 to 1981, the net
    stock of defense capital fell as a share of GDP, but between 1982 and
    1991, the ratio generally held steady. Since 1991, the reduction in
    defense purchases following the end of the Cold War has caused a decline
    in the ratio of these stocks to GDP of about 1\1/2\ percentage point.
      Non-reproducible Capital: The Government owns significant amounts of
    land and mineral deposits. There are no official estimates of the market
    value of these holdings. Researchers in the private sector have
    estimated what they are worth, and these estimates are extrapolated in
    Table 2-1. Private land values are about 20 percent lower than they were
    at the end of the 1980s, although they have risen somewhat since 1993.
    It is assumed here that Federal land has shared in this decline. Oil
    prices have fluctuated but are lower now than they were five years ago.
    These shifts are likely to have pulled down the value of Federal mineral
    deposits.
      Total Assets: The total real value of Government assets has declined
    about 15 percent over the last 10 years, principally because of declines
    in the real prices of gold, land, and minerals. At the end of 1995, the
    Government's holdings of all assets were worth about $2.3 trillion.

    Liabilities

      The liabilities listed in Table 2-1 are analogous to those of a
    business corporation. They include public debt, Federal trade credit,
    and Federal pension obligations owed to its workers. Other potential
    claims on Federal resources are not reflected.
      Financial Liabilities: These amounted to about $3.7 trillion at the
    end of 1995. The largest component was Federal debt held by the public,
    amounting to over $3.2 trillion. This measure of Federal debt is net of
    the holdings of the Federal Reserve System. Those holdings exceeded $380
    billion in 1995. Although independent in its policy deliberations, the
    Federal Reserve is part of the Federal Government, and for that reason
    its assets and liabilities are included here in the Federal totals. In
    addition to debt held by the public, the Government's financial
    liabilities include $440 billion in currency and bank reserves, which
    are mainly obligations of the Federal Reserve System, and about $60
    billion in miscellaneous liabilities.
      Guarantees and Insurance Liabilities: The Federal Government has
    contingent liabilities arising from loan guarantees and insurance
    programs. When the Government offers insurance, the initial outlays may
    be small or, if a fee is charged, they may even be negative, but the
    risk of future outlays associated with such commitments can be huge. In
    the past, the cost of such risks was not recognized until after a loss
    was realized. In the last few years, however, techniques have been
    developed which permit estimates to be made of the accruing costs
    arising from these commitments. The estimates are reported in Table 2-1.
    The resolution of the many failures in the Savings and Loan and banking
    industries have helped to reduce the losses in this category by about
    half since 1990.
      Federal Pension Liabilities: The Federal Government owes pension
    benefits to its retired workers and to current employees who will
    eventually retire. The amount of these liabilities is large. As of 1995,
    the discounted present value of the benefits is estimated to have been
    around $1.5 trillion.\3\
      \3\These pension liabilities are expressed as the actuarial present
    value of benefits accrued-to-date based on past and projected salaries.
    The cost of retiree health benefits is not included. The 1995 liability
    is extrapolated from recent trends.
    ---------------------------------------------------------------------------

    The Balance of Net Liabilities

      The balance between Federal liabilities and Federal assets has
    deteriorated over the past 15 years at a rapid rate. In 1980, the
    negative balance was less than 11 percent of GDP. Currently, it is
    estimated to be over 40 percent. The budget deficit has declined since
    1992, however, and this has slowed the rate of decline in the net asset
    position. If the Administration's budget proposals were to be enacted,
    it is likely that the rate of decline in the net asset position would be
    halted and even reversed.
    [[Page 20]]
                  THE BALANCE OF RESOURCES AND RESPONSIBILITIES
      The data summarized in Table 2-1 are useful in showing the
    consequences of past Government policies, but Government's continuing
    commitments to provide public services are not reflected there, nor can
    the Government's broader resources be displayed in a table limited only
    to the assets that it owns. A better way to examine the balance between
    future Government obligations and resources is by projecting the overall
    budget. The budget offers the most comprehensive measure of the
    Government's financial burdens and its resources. By projecting total
    receipts and outlays, it is possible to examine whether there will be
    sufficient resources to support all of the Government's ongoing
    obligations.
      The Federal Government's responsibilities extend well beyond the five-
    year window (or the expanded seven-year window) that has been the focus
    of recent budget analysis and debate. There is no time limit on
    Government's constitutional responsibilities, and programs like social
    security are clearly expected to continue indefinitely.
      This part of the presentation shows some alternative long-run
    projections of the Federal budget that extend through the year 2050.
    Forecasting the economy and the budget over such a long period is highly
    uncertain. Future budget outcomes depend on a host of unknowns--
    constantly changing economic conditions, unforeseen international
    developments, unexpected demographic shifts, the unpredictable forces of
    technological advance, and unknown future political preferences. Those
    uncertainties increase the further projections are pushed into the
    future. Even so, long-run budget projections are needed to assess the
    full implications of current action or inaction.
      It is evident even now that there will be mounting challenges to the
    budget after the turn of the century. The huge baby-boom generation born
    in the years after World War II is aging and will begin to retire in
    little more than a decade. By 2008, the first baby-boomers will become
    eligible for social security. In the years that follow there will be
    serious strains on the budget because of increased expenditures for both
    social security and Medicare. Long-range projections can offer a sense
    of the seriousness of these strains and what may be needed to withstand
    them.

      The Long-Range Outlook for the Budget.--Since the Administration took
    office there have been major changes in the long-run budget outlook. In
    January 1993, the deficit was clearly on an unsustainable trajectory.
    Had current policies continued unchanged the deficit would have steadily
    mounted not only in dollar terms, but relative to the size of the
    economy.\4\ The Omnibus Budget Reconciliation Act of 1993 (OBRA) changed
    that. Not only did it produce a decline in the near-term deficit, but it
    also brought down the long-term budget deficit as well. The policies in
    OBRA were sufficient to maintain the deficit as a stable share of GDP
    into the next century. This was a marked improvement over the long-term
    outlook that the Administration inherited.
      \4\Over very long periods when the rate of inflation is positive,
    comparisons of dollar values are meaningless. Even the low rate of
    inflation assumed in this budget will reduce the value of a 1995 dollar
    by over 60 percent by 2030, and by almost 80 percent by the year 2050.
    For long-run comparisons, it is much more useful to examine the ratio of
    the deficit and other budget categories to the overall size of the
    economy as measured by GDP.
    ---------------------------------------------------------------------------
      Despite this improvement, the long-run picture for the budget has
    remained threatening. A GAO study released in 1992 concluded that, ``the
    economic and political reality is that the nation cannot continue on the
    current path'' of increasing long-run deficits. More recently, the 1994
    report of the Bipartisan Commission on Entitlement and Tax Reform found
    that there exists a ``long-term imbalance between the Government's
    entitlement promises and the funds it will have available to pay for
    them.'' On a narrower front, the annual trustees' reports for both the
    social security and Medicare trust funds project a long-run actuarial
    deficiency for these programs, and have for some time.

      Economic and Demographic Projections.--Long-run budget projections
    must be based on a long-run demographic and economic forecast.
    Otherwise, it is impossible to estimate either future resources or the
    potential claims on them. The forecast used here is an extension of the
    Administration's economic projections described in the first chapter of
    this volume. Inflation, unemployment and interest rates are assumed to
    hold stable at their values in the year 2006. The real rate of economic
    growth is determined by the expected growth of the labor force and labor
    productivity. Productivity is assumed to continue rising at the same
    rate as in the Administration's medium-term projections, approximately
    1.2 percent per year.\5\
      \5\This projection is stated in terms of the new chain-weighted
    measures for GDP introduced by the Bureau of Economic Analysis in
    January. On the unrevised basis, the projected growth rate is about one-
    half percentage point higher.
    ---------------------------------------------------------------------------
      Population growth is expected to slow over the next several decades.
    This is consistent with recent trends in the birth rate and an expected
    decline in the proportion of women in their childbearing years. The
    slowdown is expected to lower the rate of population growth from over 1
    percent per year to about half that rate by the year 2020.\6\ Labor
    force participation is also expected to decline as the population ages.
    Together these trends imply a slowdown in real economic growth beginning
    around the year 2005. The rate of real GDP growth slows to less than 1.5
    percent per year after 2020 because of these trends.
      \6\The population growth assumptions in these projections are based on
    the intermediate assumptions in the 1995 social security trustees'
    report for the period after 2006.
    ---------------------------------------------------------------------------

      The Deficit Outlook.--Chart 2-2 shows three alternative deficit
    projections: a projection based on the policies in place prior to
    enactment of OBRA, the current outlook before incorporating the
    President's proposals to balance the budget, and a projection that shows
    the long-run outlook assuming those proposals are adopted.
    [[Page 21]]
    The chart clearly illustrates the dramatic improvement
    in the deficit that has
    already been achieved and shows that more is possible, not only in the
    short run but also in the long run. If the budget were balanced by 2002,
    the task of achieving fiscal stability when the demographic bulge hits
    after 2005 would be substantially reduced.
      Along the pre-OBRA baseline, the deficit reaches over 40 percent of
    GDP by the year 2030. OBRA reduced the deficit by extending the caps on
    discretionary outlays; reforming Medicare; changing the rules for other
    entitlement programs; and raising tax rates on upper-income taxpayers,
    among other measures. A strengthening of the economic outlook also
    improved the deficit projection following the enactment of OBRA. In the
    current context, it is notable that OBRA lowered the deficit in the long
    term as well as in the short term. This would require that the
    discretionary savings achieved in 1994-1998 be preserved by holding the
    level of real discretionary spending constant thereafter. A return to
    the prior spending trajectory would partially undo these savings.
    Similarly, the savings in Medicare and other entitlements would need to
    be preserved.
      Despite the improvement in the outlook after the passage of OBRA,
    serious long-run problems remain. Beginning around the year 2010 and
    continuing throughout the next several decades, the deficit would rise,
    eventually reaching unsustainable levels. The initial increase is caused
    by the expected retirement of the baby-boom generation that puts new
    strains on social security and Medicare. By 2030, the deficit reaches 12
    percent of GDP, and by 2050, it is 26 percent. Table 2-2 shows
    alternative long-range budget projections for the major spending
    categories. The table shows that the entitlement programs are the major
    driving force behind the rise in the deficit in the long run.

                                       Table 2-2.  ALTERNATIVE BUDGET PROJECTIONS
                                                    (Percent of GDP)
    ----------------------------------------------------------------------------------------------------------------
                                                       1995    2000    2005    2010    2020    2030    2040    2050
    ----------------------------------------------------------------------------------------------------------------
    Current outlook without a balanced budget:
      Receipts......................................    19.3    19.3    19.2    19.2    19.2    19.4    19.4    19.5
      Outlays.......................................    21.7    21.3    21.2    21.8    25.0    30.9    37.4    45.3
        Discretionary...............................     7.8     6.5     5.8     5.3     4.5     4.0     3.4     3.0
        Mandatory...................................    10.6    11.7    12.4    13.4    16.4    19.7    21.5    22.5
          Social security...........................     4.8     4.7     4.7     4.8     6.0     7.1     7.6     8.0
          Medicare and Medicaid.....................     3.5     4.3     5.2     6.2     8.3    10.7    12.3    13.0
        Net interest................................     3.3     3.1     3.0     3.1     4.1     7.3    12.5    19.8
      Deficit.......................................    -2.3    -1.9    -2.0    -2.6    -5.8   -11.6   -18.0   -25.8
      Federal debt held by public...................    51.4    50.8    49.5    50.5    68.4   121.0   207.8   327.0

    Presidential policy (balanced budget):
      Receipts......................................    19.3    19.4    19.4    19.3    19.4    19.5    19.5    19.6
      Outlays.......................................    21.7    19.7    18.7    18.1    18.5    20.0    20.5    20.6
         Discretionary..............................     7.8     6.0     5.4     4.9     4.2     3.7     3.2     2.8
         Mandatory..................................    10.6    11.1    11.4    12.0    14.0    16.1    16.8    17.1
           Social security..........................     4.8     4.7     4.7     4.8     6.0     7.1     7.6     8.0
           Medicare and Medicaid....................     3.5     3.9     4.3     4.9     6.0     7.2     7.7     7.7
         Net interest...............................     3.3     2.6     1.9     1.2     0.3     0.2     0.4     0.7
      Deficit.......................................    -2.3    -0.3     0.7     1.2     0.9    -0.5    -0.9    -1.0
      Federal debt held by public...................    51.4    47.0    35.6    24.1     6.5     3.7     9.5    14.2
    ----------------------------------------------------------------------------------------------------------------

      Social security benefits, driven by the retirement of the baby-boom
    generation, rise from around 5 percent of GDP in 2000 to over 7 percent
    in 2030. The rise in Federal health care is even greater. Without the
    President's policies, Medicare and Medicaid together would reach 4
    percent of GDP in 2000 and then continue to rise to 11 percent by the
    year 2030. As entitlement spending rises, if no corrective action is
    taken, the deficit grows rapidly. Initially, the programmatic spending
    is responsible for the increase, but as time passes a vicious spiral
    takes hold in which more
    [[Page 22]]
    borrowing leads to higher Federal interest
    payments on the growing debt, which is financed in turn by yet more
    borrowing. The spiral is unstable in that if it continued unchecked it
    would eventually drive the debt and the deficit to infinity. Long before
    that point, a financial crisis would surely be triggered that would
    force some type of action on the Federal Government--action that was
    certain to be drastic and painful.
      The long-run deficit outlook would be much improved if the President's
    budget proposals were enacted. Balancing the budget would set it on a
    solid footing for several decades. There is no justification in these
    projections for the concern sometimes expressed that a balanced budget
    would be a transitory phenomenon, to be followed quickly by a return of
    large and growing deficits. Under the Administration's economic and
    demographic assumptions that would not happen. The additional savings
    projected for the entitlements and the further reduction in
    discretionary spending leave the budget in a much improved position
    compared with the outlook in the absence of these changes. The lower
    level of Federal debt and interest that result from a balanced budget
    also help to maintain a budget surplus in these projections in the
    period beyond 2006.
      Even with the improvements caused by a balanced budget, a very long-
    run deficit problem would remain as a result of the expected strains on
    social security and the health programs in the period following the
    retirement of the baby-boom generation. Balancing the budget would
    enable the Government to run a surplus over the following decades
    without further major policy initiatives. Eventually, the surplus would
    dissipate to be followed by a reappearance of the unified budget
    deficit.\7\ By the year 2050, however, the deficit would still be lower,
    as a percentage of GDP, than it was in 1992. To prevent the reemergence
    of a deficit, policies would have to be changed to reform social
    security and check the growth of Medicare and Medicaid.
      \7\These projections assume that any surplus is used to reduce the
    debt. This depends on political choices in future years.
    ---------------------------------------------------------------------------

      Alternative Scenarios.--Budget projections are uncertain, and long-run
    projections are especially so. Therefore, it is essential to study how
    such projections can vary under reasonable variations in assumptions. A
    number of such alternative scenarios have been developed for these
    projections. Each alternative focuses on one of the key uncertainties in
    the outlook. Generally, the scenarios highlight negative possibilities
    rather than positive ones to show the risks in the outlook.
      1. Discretionary Spending. The projections assume that discretionary
    spending is held constant in real terms once budget balance is reached.
    This is a strong assumption in a long-run context, although it is the
    usual assumption when current services projections are made, and
    currently discretionary spending is only half as large as a percent of
    GDP as it was 30 years ago. What makes it questionable is the fact that
    with real economic growth occurring and population rising, the public
    demand for Government services--more national parks, better
    transportation, additional Federal support for scientific research--
    might be expected to increase as well. It also assumes that the Nation's
    real defense needs will not vary from the proposed levels at the end of
    the current budget period. Alternative assumptions that allow for these
    programs to grow with population or overall economic activity are shown
    in Chart 2-3. These alternative assumptions worsen the deficit outlook.

      2. Health Spending: The most volatile element of recent budgets has
    been Federal health spending. Expenditures for Medicare and Medicaid
    have grown faster than other entitlements, and even after the reforms
    [[Page 23]]
    in the President's budget, which go a long way toward
    reining in their growth, they continue to rise more
    rapidly. In the long-run projections,
    the growth of real per capita spending for Medicare, following the
    Medicare trustees' assumptions, is assumed to slow down gradually. Per
    capita Medicaid spending is constrained by the proposed cap on per
    capita spending. The beneficiary populations vary with the demographic
    assumptions. The alternative scenario shows what would happen instead if
    faster trends in spending for these programs resumed after 2006. Chart
    2-4 shows the resulting deficit outlook from such assumptions.

      3. Productivity: The slowdown in productivity growth in the U.S.
    economy that began in 1973 is responsible for much of the weaker
    performance of U.S. income growth since that time. Indeed, over the long
    run, productivity gains are the principal source of higher incomes, so
    slower growth of productivity necessarily means a slower rise in living
    standards. Productivity can be affected by changes in the budget
    deficit, but many other factors influence it as well. Educational
    achievement, R&D, energy prices, regulation, changes in business
    organization, and competition all affect productivity. The alternative
    scenarios illustrate what would happen to the budget deficit in the long
    run if productivity growth were higher or lower. A higher rate of growth
    would make the task of preserving a balanced budget much easier; a lower
    growth rate would have the opposite effect. Chart 2-5 shows how the
    deficit varies with changes of one-half percentage point of average
    productivity growth.

      4. Population: In the long-run, demographics dominate the projections.
    Changes in population growth feed into real economic growth through the
    effect on labor supply and employment. Changes in demographics also
    affect spending under the entitlement programs. Much of the long-run
    problem that remains even with a balanced budget is due to expected
    demographic shifts. Chart 2-6 illustrates how important these are by
    showing what would happen to the deficit under the alternative
    demographic assumptions used by the social security trustees in their
    most recent report.

      Conclusion.--OBRA improved the long-run deficit outlook dramatically,
    but even so the deficit is still projected to increase beginning around
    the year 2010, and to rise to unacceptable levels by mid-century. The
    President's current budget proposals would not only balance the budget,
    but go some distance toward resolving the long-run deficit problem as
    well. The long-run budget problem is not the result of irresponsible
    discretionary spending, and while it is necessary to control
    discretionary spending, and while it is necessary to
    [[Page 24]]
    [[Page 25]]
    control discretionary spending, doing this alone will not
    be enough to solve the long-run problem.
      Actuarial Balance in the Social Security and Medicare Trust Funds.--
    Because of the critical role of the social security and Medicare
    programs to the long-range budget outlook, it is worthwhile to examine
    the status of these programs more closely. Table 2-3 shows the changes
    in the 75-year actuarial balances of the social security and Medicare
    Trust Funds since 1994. There was only a small change in the
    consolidated balance for the OASDI Trust Funds which combines the
    separate funds set up for retirement and disability insurance.
    Legislation to shift resources from the retirement fund to the
    disability fund prevented the latter from becoming insolvent. The
    combined OASDI fund is not projected to become depleted until 2030. In
    1995, the trustees for the Hospital Insurance Trust Fund projected that
    under intermediate assumptions, the HI trust fund would be insolvent in
    2002, one year later than projected in 1994. More recent data has shown,
    however, that outlays exceeded income in 1995, sooner than was expected.
    In addition, baseline spending for HI has slightly increased from Mid-
    Session Review baseline estimates, primarily to reflect anticipated
    growth in home health spending. The trustees are expected to revise the
    projected exhaustion date for HI later this Spring in their 1996 Report.
    Because the trustees' analysis considers a wide range of factors,
    including additional experience in the current fiscal year, new analyses
    of the factors affecting HI benefit growth during fiscal years 1990-95,
    updated projections of HI payroll tax income and current interest rate
    expectations, it is not possible to accurately predict the exhaustion
    date until the Report is completed. Furthermore, the trustees' estimates
    do not take account of possible legislative changes, such as those
    proposed in this budget, that would postpone the date at which the fund
    is depleted.
    [[Page 26]]
         TABLE 2-3.  CHANGE IN 75-YEAR ACTUARIAL BALANCE FOR OASDI AND HI TRUST FUNDS (INTERMEDIATE ASSUMPTIONS)
                                            (As a percent of taxable payroll)
    ----------------------------------------------------------------------------------------------------------------
                                                                                OASI       DI       OASDI      HI
    ----------------------------------------------------------------------------------------------------------------
    Actuarial balance in 1994 report........................................     -1.46     -0.66     -2.13     -4.14
    Changes in balance due to changes in:
      Valuation period......................................................     -0.06     -0.01     -0.07     -0.10
      Economic and demographic assumptions..................................      0.13      0.01      0.14      0.01
      Disability assumptions................................................      0.00     -0.05     -0.05      0.00
      Legislation...........................................................     -0.40      0.40      0.00      0.00
      Methods...............................................................     -0.06     -0.01     -0.07      0.00
      Hospital costs........................................................      0.00      0.00      0.00      0.64
      Other.................................................................      0.00      0.00      0.00      0.07
                                                                             ---------------------------------------
        Total changes.......................................................     -0.40      0.35     -0.05      0.62
    Actuarial balance in 1995 report........................................     -1.87     -0.31     -2.17     -3.52
    ----------------------------------------------------------------------------------------------------------------

                           NATIONAL WEALTH AND WELFARE
      Unlike a private corporation, the Federal Government routinely invests
    in ways that do not add directly to its own assets. For example, Federal
    grants are frequently used to fund capital projects by State or local
    Governments for highways and other purposes. Such investments are
    valuable to the public which pays for them with taxes, but they are not
    owned by the Federal Government.

                                                                   TABLE 2-4.  NATIONAL WEALTH
                                                (As of the end of the fiscal year, in trillions of 1995 dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   1960       1965       1970       1975       1980       1985       1990       1993       1994       1995
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    ASSETS

    Publicly owned physical assets:
      Structures and Equipment................       2.0        2.3        2.8        3.4        3.7        3.7        3.9        4.0        4.0        4.1
        Federally owned or financed...........       1.1        1.2        1.3        1.3        1.4        1.5        1.6        1.6        1.6        1.6
          Federally owned.....................       1.0        1.0        1.0        0.9        0.8        0.9        1.0        1.0        1.0        1.0
          Grants to State & Local.............       0.1        0.2        0.2        0.4        0.5        0.5        0.6        0.6        0.6        0.6
        Funded by State and local Governments.       0.9        1.1        1.5        2.1        2.4        2.2        2.3        2.4        2.4        2.5
      Other Federal assets....................       0.7        0.7        0.6        0.9        1.4        1.4        1.1        0.9        0.9        0.9
                                               -------------------------------------------------------------------------------------------------------------
             Subtotal.........................       2.7        3.0        3.5        4.3        5.2        5.1        5.0        4.9        4.9        4.9
    Privately Owned Physical Assets:
      Reproducible Assets.....................       5.4        6.2        7.9       10.2       13.0       13.6       15.0       15.3       15.8       16.2
        Residential Structures................       1.9        2.2        2.7        3.6        4.9        4.9        5.4        5.7        5.9        6.1
        Nonresidential Plant and equipment....       1.9        2.3        3.0        4.0        5.0        5.6        6.0        6.0        6.1        6.3
        Inventories...........................       0.7        0.7        0.9        1.1        1.3        1.2        1.3        1.2        1.2        1.3
        Consumer Durables.....................       0.9        1.0        1.3        1.5        1.7        1.9        2.3        2.4        2.5        2.6
      Land....................................       1.9        2.3        2.6        3.4        5.1        5.9        5.9        4.5        4.5        4.4
                                               -------------------------------------------------------------------------------------------------------------
            Subtotal..........................       7.3        8.5       10.5       13.6       18.1       19.4       20.9       19.8       20.3       20.7
    Education Capital:
      Federally Financed......................       0.1        0.1        0.2        0.3        0.4        0.5        0.7        0.8        0.8        0.8
      Financed from Other Sources.............       6.1        7.9       10.6       12.3       15.0       18.1       22.8       25.0       25.9       26.7
                                               -------------------------------------------------------------------------------------------------------------
            Subtotal..........................       6.1        8.0       10.8       12.6       15.4       18.6       23.5       25.8       26.7       27.5
    Research and Development Capital:
      Federally Financed R&D..................       0.2        0.3        0.5        0.5        0.6        0.7        0.8        0.8        0.8        0.9
      R&D Financed from Other Sources.........       0.1        0.2        0.3        0.4        0.4        0.6        0.8        0.9        1.0        1.0
                                               -------------------------------------------------------------------------------------------------------------
            Subtotal..........................       0.3        0.5        0.7        0.9        1.0        1.3        1.6        1.8        1.8        1.9
                                               =============================================================================================================
              Total assets....................      16.5       20.1       25.5       31.3       39.7       44.4       51.0       52.3       53.7       55.0

    LIABILITIES:

      Net Claims of Foreigners on U.S.........      (0.2)      (0.2)      (0.2)      (0.2)      (0.5)      (0.2)       0.3        0.6        0.7        0.9

              Balance.........................      16.7       20.3       25.7       31.5       40.2       44.6       50.7       51.7       52.9       54.1
    Per capita (thousands of 1995 dollars)....      92.2      104.4      125.5      145.8      176.1      186.5      202.1      199.7      202.6      205.1

    ADDENDA:

      Total Federally funded capital..........       2.1        2.3        2.6        3.0        3.8        4.1        4.2        4.1        4.1        4.1
      Percent of national wealth..............      12.3       11.3       10.2        9.5        9.4        9.1        8.2        8.0        7.8        7.6
    --------------------------------------------------------------------------------------------------------------------------------------------------------

      The Federal Government also invests in education and research and
    development (R&D). These outlays contribute to future productivity and
    are in that sense analogous to investments in physical capital. Indeed,
    economists have computed stocks of human and knowledge capital to
    reflect the accumulation of such investments. Nonetheless, these capital
    stocks are not owned by the Federal Government, nor would they appear on
    a business balance sheet.
      Table 2-4 presents a national balance sheet. It includes estimates of
    total national wealth classified in three categories: physical assets,
    education capital, and R&D capital. The Federal Government has made
    contributions to each of these categories, and these contributions are
    also shown in the table. Data in this table are especially uncertain
    because of the assumptions needed to prepare the estimates. Overall, the
    Federal contribution to the current level of national wealth is about
    7\1/2\ percent, which is down from around 8 percent at the end of the
    1980s, and from over 12 percent in 1960.

    Physical Assets

      These include stocks of plant and equipment, office buildings,
    residential structures, land, and Government's physical assets such as
    military hardware, office buildings, and highways. Automobiles and
    consumer appliances are also included in this category. The total amount
    of such capital is vast, amounting to around $26 trillion in 1995; by
    comparison, GDP was about $7 trillion.
      The Federal Government's contribution to this stock of capital
    includes its own physical assets plus $0.6 trillion in accumulated
    grants to State and local governments for capital projects. The Federal
    Government has financed about one-quarter of the physical capital held
    by other levels of Government.

    Education Capital

      Economists have developed the concept of human capital to reflect the
    notion that individuals and society invest in people as well as in
    physical assets. Investment in education is a good example of how human
    capital is accumulated.
      For this table, an estimate has been made of the stock of capital
    represented by the Nation's investment in education. The estimate is
    based on the cost of replacing the years of schooling embodied in the
    U.S. population aged 16 and over. The idea is to measure how much it
    would cost to reeducate the U.S. workforce at today's prices.
      This is a crude measure, but it can provide a rough order of
    magnitude. According to this measure, the stock of education capital
    amounted to $28 trillion in 1995, of which about 3 percent was financed
    by the Federal Government. The total exceeds the Nation's stock of
    physical capital. The main investors in education capital have been
    State and local Governments, parents, and the students themselves who
    forgo earning opportunities in order to acquire education.
      Even broader concepts of human capital have been considered. Not all
    useful training occurs in school, or formal training programs at work.
    Much informal and yet invaluable learning occurs within families or on
    the job. Labor compensation amounts to about two-thirds of national
    income. Therefore, it is conceivable that the total value of human
    capital might be as large as three times the estimated value of physical
    capital. Thus, it can be seen that the estimates offered here are in a
    sense conservative, because they reflect only the costs of acquiring
    formal education.
    [[Page 27]]
    Research and Development Capital

      Research and Development can also be thought of as an investment,
    because R&D represents a current expenditure for which there is a
    prospect of future returns. After adjusting for depreciation, the flow
    of R&D investment can be added up to provide an estimate of the current
    R&D stock.\8\ That stock is estimated to have been about $1.9 trillion
    in 1995. Although this is a large amount of research, it is a relatively
    small portion of total National wealth. About half of this stock was
    funded by the Federal Government.
      \8\R&D depreciates in the sense that the economic value of applied
    research and development tends to decline with the passage of time which
    leads to movement in the technological frontier.
    ---------------------------------------------------------------------------

    Liabilities

      When considering the debts of the Nation as a whole, the debts that
    Americans owe to one another cancel out. This does not mean they are
    unimportant. The buildup in debt largely owed to other Americans was
    partly responsible for the sluggishness of the recovery from the 1990-
    1991 recession in its early stages. Indeed, the debt explosion in the
    1980s may have helped to bring on the recession in the first place.
      However, these debts do not belong on the national balance sheet. If
    they were included, there would have to be offsetting entries. Only the
    net debt that is owed to foreigners belongs on the national balance
    sheet. America's foreign debt has been increasing rapidly in recent
    years, as a consequence of the U.S. trade deficit, but the size of this
    debt is small compared with the total stock of assets. It amounted to
    about 1\1/2\ percent of the total in 1995.
      Most of the Federal debt held by the public is owned by Americans, so
    it does not appear in Table 2-4. Only that portion of the Federal debt
    held by foreigners is included. Even so, it is of interest to compare
    the imbalance between Federal assets and liabilities with national
    wealth. The Government will have to service the debt or repay it, and
    its ability to do so without disrupting the economy will depend in part
    on the wealth of the private sector. Currently, the Federal net asset
    [[Page 27]]
    imbalance, as estimated in Table 2-1, amounts to about 5\1/2\ percent of
    total U.S. wealth as shown in Table 2-4.
                            Trends in National Wealth
      The net stock of wealth in the United States at the end of 1995 was
    about $55 trillion. Since 1980 it has increased in real terms at an
    annual rate of 2.2 percent per year--about half the 4.5 percent rate it
    averaged from 1960 to 1980. (All comparisons are in terms of constant
    1995 dollars.) Public capital formation slowed down markedly between the
    two periods. The real value of the net stock of publicly owned physical
    capital was actually lower in 1995 than in 1980--$4.9 trillion versus
    $5.1 trillion in the earlier year. Since 1980, Federal grants to State
    and local governments for capital projects have grown less rapidly,
    while capital funded directly by State and local governments has grown
    at an average rate of only 0.1 percent per year.
      Private capital formation in physical assets has also grown more
    slowly since 1980. The net stock of nonresidential plant and equipment
    grew 1.6 percent per year from 1980 to 1995 compared with 4.9 percent in
    the 1960s and 1970s, and the stock of business inventories actually
    declined. Overall, the stock of privately owned physical capital grew at
    an average rate of just 0.9 percent per year between 1980 and 1995.
      The accumulation of education capital, as measured here, also slowed
    down in the 1980s, but not nearly as much. It grew at an average rate of
    4.7 percent per year in the 1960s and 1970s, about the same as the
    average rate of growth in private physical capital during the same
    period. Since 1980, education capital has grown at a 4.4 percent annual
    rate. This reflects the extra resources devoted to schooling in this
    period, and the fact that such resources were rising in relative value.
    R&D stocks have grown at about the same rate as education capital since
    1980.
                   Other Federal Influences on Economic Growth
      Many Federal policies have contributed to the slowdown in capital
    formation shown here. Federal investment policies obviously were
    important, but the Federal Government also contributes to wealth in ways
    that cannot be easily captured in a formal presentation. Monetary and
    fiscal policies affect the rate and direction of capital formation.
    Regulatory and tax policies affect how capital is invested, as do the
    Federal Government's credit assistance policies.
      One important channel of influence is the Federal budget deficit,
    which determines the size of the Federal Government's borrowing
    requirements. Smaller deficits in the 1980s would have resulted in a
    smaller gap between Federal liabilities and assets than is shown in
    Table 2-1. It is also likely that, had the $3 trillion in added Federal
    debt since 1980 been avoided, a significant share of these funds would
    have gone into private investment. National wealth might have been 2 to
    4 percent larger in 1995 had fiscal policy avoided the buildup in the
    debt.
                                Social Indicators
      There are certain broad responsibilities that are unique to the
    Federal Government. Especially important are the Government's role in
    fostering healthy economic conditions, promoting health and social
    welfare, and protecting the environment. Table 2-5 offers a rough cut of
    information that can be useful in assessing how well the Federal
    Government has been doing in promoting these general objectives.
      The indicators shown here are only a limited subset drawn from the
    vast array of data available on conditions in the United States. In
    choosing indicators for this table, priority was given to measures that
    were consistently available over an extended period. Such indicators
    make it easier to draw valid comparisons and evaluate trends. In some
    cases, however, this meant choosing indicators with significant
    limitations.

                                                                               Table 2-5.  ECONOMIC AND SOCIAL INDICATORS
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
       General categories                         Specific measures                        1960     1965     1970     1975     1980     1985     1990     1991     1992     1993    1994\1\    1995
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Economic:
       Living Standards.....  Real GDP per person (1992 dollars).......................   12,512   14,792   16,521   17,896   20,252   22,345   24,559   24,058   24,447   24,728    25,335   25,591
                              Average annual percent change............................      0.4      3.4      2.2      1.6      2.5      2.0      1.9     -2.0      1.6      1.2       2.5      1.0
                              Median family income (1994 dollars):
                                All families...........................................   25,866   30,147   35,407   36,177   37,857   38,200   40,087   39,105   38,632   37,905    38,782       NA
                                Married couple families................................   27,030   31,482   37,735   39,204   41,671   42,835   45,237   44,607   44,249   44,106    44,959       NA
                                Female householder, no husband present.................   13,660   15,305   18,276   18,048   18,742   18,814   19,199   18,163   17,984   17,890    18,236       NA
                              Income share of middle three quintiles (%)...............     54.0     53.9     53.6     53.5     53.4     52.0     51.2     51.4     51.0     43.9      49.0       NA
                              Poverty rate (%)\2\......................................     22.2     17.3     12.6     12.3     13.0     14.0     13.5     14.2     14.8     15.1      14.5       NA
                              Economic security inflation and unemployment:
                                Civilian unemployment (%)..............................      5.5      4.5      4.9      8.5      7.1      7.2      5.5      6.7      7.4      6.8       6.1      5.6
                                CPI-U (year over year % change)........................      2.0      1.3      4.3      6.8      8.9      5.5      4.0      4.2      3.0      3.0       2.6      2.8
       Employment prospects.  Increase in total payroll employment (millions, Dec. to       -0.5      2.9     -0.5      0.4      0.2      2.5      0.3     -0.9      1.2      2.8       3.5      1.7
                               Dec.).
                               Managerial or professional jobs (% of civilian                 NA       NA       NA       NA     22.2     24.1     26.0     26.5     26.5     27.1      27.5     28.3
                               employment).
       Wealth creation......  Net national saving rate (% of NNP)......................     11.4     13.3      9.3      6.8      7.3      6.2      4.2      4.1      2.7      2.8       3.9      4.7
       Innovation...........  Patents issued to U.S. residents (thous.)................     42.0     53.6     50.1     51.4     40.8     43.4     53.0     57.8     58.7     61.1      64.2     64.4
                              Multifactor productivity (average percent change)........      1.1      3.2      1.1      1.3      0.7      0.6      0.3     -1.0      1.4      0.5       0.8       NA
    Social:
       Families.............  Children living with a single parent (% of all children).      9.2     10.2     12.9     16.4     18.6     20.2     21.6     22.4     22.8     23.3      23.1       NA
       Safe communities.....  Violent crime rate (per 100,000 population)\3\...........      160      199      364      482      597      557      732      758      758      746       716       NA
                               Murder rate (per 100,000 population)....................      5.1      5.1      7.8      9.6     10.2      7.9      9.4      9.8      9.3      9.5       9.0       NA
                               Juvenile crime (murders per 100,000 persons age 14-17)..       NA       NA       NA       NA      8.2      7.1     15.8     17.3     17.5     18.6        NA       NA
       Health and illness...  Infant mortality (per 1,000 live births).................     26.0     24.7     20.0     16.1     12.6     10.6      9.2      8.9      8.5      8.4       7.9       NA
                               Low birthweight (<2,500 gms) babies (%).................      7.7      8.3      7.9      7.4      6.8      6.8      7.0      7.1      7.1      7.2        NA       NA
                               Life expectancy at birth (years)........................     69.7     70.2     70.8     72.6     73.7     74.7     75.4     75.5     75.8     75.5      75.7       NA
                               Cigarette smokers (% population 18 and oover)...........       NA     42.4     39.5     36.4     33.2     30.1     25.5     25.6     26.5     25.0        NA       NA
                               Bed disability days (average days per person)...........      6.0      6.2      6.1      6.6      7.0      6.1      6.2      6.5      6.3      6.7        NA       NA
                              National health expenditures (% of GDP)..................      5.2      5.8      7.2      8.1      9.0     10.4     12.1     12.8     13.1     13.5        NA       NA
       Learning.............  High school graduates (% of population 25 and older).....     44.6     49.0     55.2     62.5     68.6     73.9     77.6     78.4     79.4     80.2      80.9       NA
                               College graduates (% of population 25 and older)........      8.4      9.4     11.0     13.9     17.0     19.4     21.3     21.4     21.4     21.9      22.2       NA
                              National assessment of educational progress\4\...........
                                 Mathematics...........................................       NA       NA       NA      304      298      302      305       NA      307       NA        NA       NA
                                 Science...............................................       NA       NA      305      296      283      288      290       NA      294       NA        NA       NA
       Participation........  Voting for President (% eligible population).............     62.8       NA       NA       NA     52.6       NA       NA       NA     55.2       NA        NA       NA
                               Voting for Congress (% of eligible population)..........     58.5       NA     43.5       NA     47.4       NA     33.1       NA     50.8       NA      36.0       NA
                              Individual charitable giving per capita (1994 dollars)...      199      238      286      304      331      349      427      423      422      419        NA       NA

    Environment:
       Air quality..........  Population living in counties with ozone levels exceeding
                               the standard (millions).................................       NA       NA       NA       NA       NA       76       63       70       43       51        50       NA
       Water quality........  Population served by secondary treatment or better              NA       NA       NA       NA       NA      134      155      157      159      162       164      166
                               (millions).
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\Data are preliminary for infant mortality and life expectancy.
    \2\The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
    \3\Not all crimes are reported, and the fraction that go unreported may have varied over time.
    \4\Dates shown in table for the national educational assessments are approximate.

      The individual measures in this table are influenced in varying
    degrees by many Government policies and programs, as well as by external
    factors beyond the Government's control. They are not outcome
    indicators, because they do not measure the direct results of Government
    activities, but they do provide a quantitative measure of the progress
    or lack of progress in reaching some of the ultimate values that
    Government policy is intended to promote.
      Such a table can serve two functions. First, it highlights areas where
    the Federal Government might need to modify its current practices or
    consider new approaches. Where there are clear signs of deteriorating
    conditions, corrective action might be appropriate. Second, the table
    provides a context for evaluating other data on Government activities.
    For example, Government actions that weaken its own financial position
    may be appropriate when they promote a broader social objective.
      An example of this occurs during economic recessions when reductions
    in tax collections lead to increased Government borrowing that adds to
    Federal liabilities. This deterioration in the Federal balance sheet
    provides an automatic stabilizer for the private sector. State
    Government, local government and private budgets are strengthened by
    allowing the Federal budget to run a deficit. More stringent Federal
    budgetary controls could be used to hold down Federal borrowing during
    such periods, but only at the risk of aggravating the downturn.
      The Government cannot avoid making such trade-offs because of its size
    and the broad-ranging effects of its actions. Monitoring these effects
    and incorporating them in the Government's policy making is a major
    challenge.
                       An Interactive Analytical Framework
      No single framework can encompass all of the factors that affect the
    financial condition of the Federal Government. Nor can any framework
    serve as a substitute for actual analysis. Nevertheless, the framework
    presented above offers a useful way to examine the financial aspects of
    Federal policies. Increased Federal
    [[Page 28]]
    support for investment, the reduction in Federal absorption
    of saving through deficit reduction, and
    other Administration policies to enhance economic growth are expected to
    promote national wealth and improve the future financial condition of
    the Federal Government. As that occurs, the efforts will be clearly
    revealed in these tables.
            TECHNICAL NOTE: SOURCES OF DATA AND METHOD OF ESTIMATING
                     Federally Owned Assets and Liabilities

    Assets

      Financial Assets: The source of data is the Federal Reserve Board's
    Flow-of-Funds Accounts. Two adjustments were made to these data. First,
    U.S. Government holdings of financial assets were consolidated with the
    holdings of the monetary authority, i.e., the Federal Reserve System.
    Second, the gold stock, which is valued in the Flow-of-Funds at a
    constant historical price, is revalued using the market value for gold.

    Physical Assets

      Fixed Reproducible Capital: Estimates were developed from the OMB
    historical database for physical capital outlays. The database extends
    back to 1940 and was supplemented by data from other selected sources
    for 1915-1939. The source data are in current dollars. To estimate
    investment flows in constant dollars, it is necessary to deflate the
    nominal investment series. This was done using BEA price deflators for
    Federal purchases of durables and structures. These price deflators are
    available going back as far as 1940. For earlier years, deflators were
    based on Census Bureau historical statistics for constant price public
    capital
    [[Page 30]]
    formation. The capital stock series were adjusted for
    depreciation on a straight-line basis, assuming useful lives of 46 years
    for water and power projects; 40 years for other direct Federal
    construction; and 16 years for major nondefense equipment and for
    defense procurement.
      Fixed Nonreproducible Capital: Historical estimates for 1960-1985 were
    based on estimates in Michael J. Boskin, Marc S. Robinson, and Alan M.
    Huber, ``Government Saving, Capital Formation and Wealth in the United
    States, 1947-1985,'' published in The Measurement of Saving, Investment,
    and Wealth, edited by Robert E. Lipsey and Helen Stone Tice (The
    University of Chicago Press, 1989).
      Estimates were updated using changes in the value of private land from
    the Flow-of-Funds Balance Sheets and in the Producer Price Index for
    Crude Energy Materials. The Bureau of Economic Analysis is in the
    process of preparing satellite accounts to accompany the National Income
    and Product Accounts that will report on changes in mineral deposits for
    the Nation as a whole, but this work is not yet completed.

    Liabilities

      Financial Liabilities: The principal source of data is the Federal
    Reserve's Flow-of-Funds Accounts.
      Contingent Liabilities: Sources of data are the OMB Deposit Insurance
    Model and the OMB Pension Guarantee Model. Historical data on contingent
    liabilities for deposit insurance were also drawn from the Congressional
    Budget Office's study, The Economic Effects of the Savings and Loan
    Crisis, issued January 1992.
      Pension Liabilities: For 1979-1994, the estimates are the actuarial
    accrued liabilities as reported in the annual reports for the Civil
    Service Retirement System, the Federal Employees Retirement System, and
    the Military Retirement System (adjusted for inflation). Estimates for
    the years before 1979 are not actuarial; they are extrapolations. The
    estimate for 1994 is a projection.
                           Long-Run Budget Projections
      The long-run budget projections are based on long-run demographic and
    economic projections. A model of the Federal budget developed at OMB
    computes the budgetary implications of this forecast.
      Demographic and Economic Projections: For the years 1996-2006 the
    assumptions are identical to those used in the budget. As always, these
    budget assumptions reflect the President's policy proposals, in this
    case that the budget be balanced. The long-run projections extend these
    budget assumptions by holding inflation, interest rates, and
    unemployment constant at the levels assumed in the budget for 2006.
    Population growth and labor force participation are extended using the
    intermediate assumptions from the 1995 social security trustees' report
    and Bureau of Labor Statistics projections. The projected rate of growth
    for real GDP is built up from the labor force assumptions and an assumed
    rate of productivity growth. The assumed rate of productivity growth is
    held constant at the average rate of growth implied by the budget's
    economic assumptions. The economic forecast used to project the budget
    in the absence of the President's balanced budget proposals is altered
    to reflect the higher interest rates and lower profits that would be
    expected to prevail under these circumstances.
      Budget Projections: For the years 1996-2006, the projections follow
    the budget. After 2006, receipts are projected using simple rules of
    thumb linking income taxes, payroll taxes, excise taxes, and other
    receipts to projected tax bases derived from the economic forecast.
    Outlays are computed in different ways. Discretionary spending grows at
    the rate of inflation. Social security, Medicare, and Federal pension
    outlays are projected using the most recent actuarial forecasts
    available at the time the budget was prepared (April 1995 for social
    security). These projections are repriced using Administration inflation
    assumptions. Other entitlement programs are projected based on rules of
    thumb linking program spending to elements of the economic and
    demographic forecast such as the poverty rate.
                           National Balance Sheet Data
      Publicly Owned Physical Assets: Basic sources of data for the
    federally owned or financed stocks of capital are the investment flows
    computed by OMB from the budget database. Federal grants for State and
    local Government capital were added together with adjustments for
    inflation and depreciation in the same way as described above for direct
    Federal investment. Data for total State and local Government capital
    come from the capital stock data prepared by the BEA.
      Privately Owned Physical Assets: Data are from the Flow-of-Funds
    national balance sheet. Preliminary estimates for 1995 were prepared
    based on net investment from the National Income and Product Accounts.
      Education Capital: The stock of education capital is computed by
    valuing the cost of replacing the total years of education embodied in
    the U.S. population 16 years of age and older at the current cost of
    providing schooling. The estimated cost includes both direct
    expenditures in the private and public sectors and an estimate of
    students' forgone earnings, i.e., it reflects the opportunity cost of
    education.
      For this presentation, Federal investment in education capital is a
    portion of the Federal outlays included in the conduct of education and
    training. This portion includes direct Federal outlays and grants for
    elementary, secondary, and vocational education and for higher
    education. The data exclude Federal outlays for physical capital at
    educational institutions and for research and development conducted at
    colleges and universities because these outlays are classified elsewhere
    as investment in physical capital and investment in R&D capital. The
    data also exclude outlays under the GI Bill; outlays for graduate and
    post-graduate education spending in HHS, Defense and Agriculture; and
    most outlays for vocational training.
      Data on investment in education financed from other sources come from
    educational institution reports on
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    the sources of their funds, published
    in U.S. Department of Education, Digest of Education Statistics.
    Education capital is assumed not to depreciate, but to be retired when a
    person dies. An education capital stock computed using this method with
    different source data can be found in Walter McMahon, ``Relative Returns
    To Human and Physical Capital in the U.S. and Efficient Investment
    Strategies,'' Economics of Education Review, Vol. 10, No. 4, 1991. The
    method is described in detail in Walter McMahon, Investment in Higher
    Education, 1974.
      Research and Development Capital: The stock of R&D capital financed by
    the Federal Government was developed from a database that measures the
    conduct of R&D. The data exclude Federal outlays for physical capital
    used in R&D because such outlays are classified elsewhere as investment
    in federally financed physical capital. Nominal outlays were deflated
    using the GDP deflator to convert them to constant dollar values.
      Federally funded capital stock estimates were prepared using the
    perpetual inventory method in which annual investment flows are
    cumulated to arrive at a capital stock. This stock was adjusted for
    depreciation by assuming an annual rate of depreciation of 10 percent on
    the outstanding balance for applied research and development. Basic
    research is assumed not to depreciate. The 1993 Budget contains
    additional details on the estimates of the total federally financed R&D
    stock, as well as its national defense and nondefense components (see
    Budget for Fiscal Year 1993, January 1992, Part Three, pages 39-40).
      A similar method was used to estimate the stock of R&D capital
    financed from sources other than the Federal Government. The component
    financed by universities, colleges, and other nonprofit organizations is
    based on data from the National Science Foundation, Surveys of Science
    Resources. The industry-financed R&D stock component is from that source
    and from the U.S. Department of Labor, The Impact of Research and
    Development on Productivity Growth, Bulletin 2331, September 1989.
      Experimental estimates of R&D capital stocks have recently been
    prepared by BEA. The results are described in ``A Satellite Account for
    Research and Development,'' Survey of Current Business, November 1994.
    These BEA estimates are lower than those presented here primarily
    because BEA assumes that the stock of basic research depreciates, while
    the estimates in Table 2-4 assume that basic research does not
    depreciate. BEA also assumes a slightly higher rate of depreciation for
    applied research and development, 11 percent, compared with the 10
    percent rate used here.
                                Social Indicators
      The main sources for the data in this table are the Government
    statistical agencies. Generally, the data are publicly available in the
    President's annual Economic Report and the Statistical Abstract of the
    United States.