[Economic Report of the President (1997)]
[Administration of William J. Clinton]
[Online through the Government Printing Office, www.gpo.gov]

[DOCID: f:erp_p4._]
Economic Report of the President - - - - - - - - - - - - H. Doc. 105-002
[From the online service of the U.S. Government Printing Office]
[wais.access.gpo.gov]



CONTENTS

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Page
Chapter 1. Growth and Opportunity: Creating a New Economic Order       17
An Economic Philosophy......................................       18
The New Vision..........................................       19
Government's Core Economic Mission......................       20
An International Vision.................................       21
The Economic Record.........................................       22
The Achievements........................................       22
The Reasons.............................................       24
The Economic Agenda.........................................       28
Growth..................................................       28
Opportunity and Individual Responsibility...............       37
Conclusion..................................................       41
Chapter 2. Macroeconomic Policy and Performance.................       43
The NAIRU and its Evolution.................................       45
Predicting Changes in Inflation.........................       45
Changes in the NAIRU....................................       48
The Economic Consequences of Inflation......................       51
The Effect of Inflation on Output.......................       51
The Effect of Inflation on the Distribution of Income...       53
Risks in Macroeconomic Policy...........................       53
The Financial Condition of Households.......................       54
Trends in Consumer Credit...............................       54
Impact on Households....................................       57
Possible Effects on Lending Institutions and Consumer
Spending..............................................       60
Inflation-Indexed Securities................................       62
How Inflation-Indexed Securities Work...................       62
Benefits of Indexed Securities..........................       63
Experience in Other Countries...........................       66
Measurement Issues..........................................       67
The Consumer Price Index................................       67
Income- and Product-Side Measures of Output.............       72
Review and Outlook..........................................       74
Overview of 1996........................................       74
Outlook and Forecast....................................       85
Chapter 3. Economic Challenges of an Aging Population...........       93
The Aging of the Population.................................       93
The Impact of Demographics on National Saving...........       95
The Impact of Demographics on the Budget................       97
Social Security.............................................       98
The Size of the Problem.................................       99
Recommendations of the Quadrennial Advisory
Council...............................................      104
Issues for Further Study................................      107
Conclusion..............................................      117
Medicare....................................................      117
Sources of the Financing Problems.......................      119
Short-Term Options......................................      121
Long-Run Options........................................      129
Conclusion..............................................      133
Medicaid Financing of Long-term Care........................      134
Conclusion..................................................      137
Chapter 4. The Labor Market.....................................      139
Traditional Labor Market Indicators.........................      140
The Quality of New Jobs.....................................      140
Job Growth Within Service-Producing Industries..........      142
Economy-wide Job Growth.................................      142
Full-Time Versus Part-Time Jobs.........................      144
The Level of Wages..........................................      144
Trends in Wages.........................................      146
Wages Versus Total Compensation.........................      147
Job Loss....................................................      149
Trends in the Rate of Job Loss..........................      149
The Costs of Job Loss...................................      153
Job Stability...............................................      154
Worker Anxiety..............................................      156
Public Opinion Polls....................................      156
Quit Behavior...........................................      157
Policies to Mitigate the Costs of Economic Change...........      158
Unemployment Insurance..................................      158
Advance Notice..........................................      160
Reforming Training and Reemployment Services............      161
Portability of Pension and Health Care Benefits.........      161
Conclusions.................................................      162
Chapter 5. Inequality and Economic Rewards......................      163
Recent Trends in Inequality.................................      164
Earnings Inequality.........................................      165
Documenting Trends in Earnings Inequality...............      165
Between-Group Inequality................................      166
Within-Group Inequality.................................      169
Earnings Inequality Among Women.........................      169
Explanations for Increasing Earnings Inequality.........      170
Income Inequality...........................................      175
Documenting the Increase in Income Inequality...........      176
Explanations for Increasing Income Inequality...........      180
Alternative Measures of Inequality..........................      181
Consumption Inequality..................................      182
Wealth Inequality.......................................      182
Mobility................................................      183
Government Policy and Inequality............................      185
Assessing the Impact of Government Policy...............      185
Additional Policies to Reduce Inequality................      186
Conclusion..................................................      187
Chapter 6. Refining the Role of Government in the U.S. Market
Economy.......................................................      189
Markets, Governments, and Complementarity...................      190
The Advantages of Markets...............................      191
Why Have Government At All?.............................      192
Markets and Public Policy as Complements....................      196
Using Public Policy to Bring Competition to Regulated
Industries................................................      197
Reasons for the Delay in Deregulating Electricity and
Telephone Service.....................................      197
The Telecommunications Act of 1996......................      200
Expanding Competition in Electricity: Federal Orders and
State Initiatives.....................................      205
Markets Complementing Governments...........................      208
Emissions Trading: Applications to Air Pollution........      208
Spectrum Auctions.......................................      213
Natural Resource Policy Reform..........................      216
Disposal of Surplus Defense Properties..................      228
Changes in Farm Policy..................................      229
Limits on Bringing Markets into the Public Sector...........      231
Conclusion..................................................      232
Chapter 7. American Leadership in the Emerging Global Economy...      235
Three Sweeping Changes......................................      236
The End of the Cold War.................................      237
Industrialization and Growth Come to the Developing
World.................................................      238
Increased Globalization.................................      243
Achievements and Opportunities..............................      248
Explaining the Benefits of Integration..................      250
U.S. Policy on Trade with Developing Countries..........      252
Patterns of Foreign Investment in Developing and
Transition Economies..................................      254
Other Aspects of U.S. Policy Toward Emerging Market
Economies.................................................      257
Integrating the Transition Economies into the World
Economic System.......................................      257
A Framework for Future Leadership...........................      266
International Economic Cooperation......................      268
International Peace and Order...........................      274
Environmental Issues....................................      277
Basic Research..........................................      277
Conclusion..................................................      288

Appendixes

A. Report to the President on the Activities of the
Council of Economic Advisers During 1996.........      281
B. Statistical Tables Relating to Income, Employment,
and Production...................................      293

List of Tables

2-1.    Growth in Consumer Credit Outstanding...............     55
2-2.    Average Increase in Rate of Return When Inflation
Rises by 1 Percentage Point.....................     64
2-3.    Accounting for Growth in Real GDP, 1960-2003........     86
2-4.    Administration Forecast.............................     90
5-1.    Earnings Ratios for Male High School Graduates and
25- to 34-Year-Old-Male Full-Time, Year-Round
Workers.........................................    171
6-1.    The Interconnection Debate..........................    204
6-2.    Examples of Mining Patents Issued Since 1994........    218
6-3.    Miles of Streams Polluted by Hardrock Mine Wastes...    219

List of Charts

1-1.    The ``Misery Index''................................     23
1-2.    Federal Budget Deficit..............................     25
1-3.    Actual and Trend Labor Productivity.................     29
1-4.    Federal Government Employment.......................     38
2-1.    Unemployment and the Probability of Inflation.......     46
2-2.    Changes in Core Inflation and the NAIRU.............     47
2-3.    Delinquency Rates...................................     58
2-4.    Alternative Measures of Productivity................     74
2-5.    Growth in Real GDP..................................     75
2-6.    Consumer Price Inflation............................     76
2-7.    Civilian Unemployment Rate..........................     77
2-8.    Wealth and Saving...................................     79
2-9.    Yields on Treasury Securities.......................     83
2-10.    Bond Yield Spreads..................................     84
2-11.    Unemployment and the NAIRU..........................     88
2-12.    Inflation and Trend Unit Labor Costs................     88
3-1.    Total Fertility Rate................................     94
3-2.    Life Expectancy at Age 65...........................     95
3-3.    Dependency Ratio of the Aged........................     96
3-4.    Growth in Entitlement Spending......................     98
3-5.    Growth in Per-Enrollee Costs of Health Care.........    121
3-6.    Self-Described Health Status of Medicare Enrollees..    126
3-7.    Projected Lifetime Nursing Home Use by Current 65-
Year-Olds.......................................    135
4-1.    Unemployment Rate...................................    141
4-2.    Employment-to-Population Ratio......................    141
4-3.    Part-Time Employment for Economic Reasons...........    145
4-4.    Measures of Annualized Real Wage and Earnings Growth
Since 1982......................................    146
4-5.    Alternative Inflation Adjustments to Wages..........    147
4-6.    Real Compensation and Labor Productivity............    151
4-7.    Displacement Rate Among Long-Tenure Workers.........    152
4-8.    Permanent Job Losers Unemployed Less Than 5 Weeks...    153
4-9.    Median Job Duration for Males by Selected Age.......    155
4-10.    Job Leavers Unemployed Less Than 5 Weeks............    156
5-1.    Real Household Income Growth by Quintile from 1993
to 1995.........................................    164
5-2.    Earnings Ratios for Male Full-Time, Year-Round
Workers.........................................    168
5-3.    Male Full-Time, Year-Round Workers by Real Earnings
Range...........................................    168
5-4.    College/High School Median Earnings Ratio for Male
Full-Time, Full-Year Workers....................    169
5-5.    Ratio of Median Earnings of Males Age 45-54 to Those
of Males Age 25-34..............................    170
5-6.    Increase in Inequality Due to Supply Shifts.........    173
5-7.    Increase in Inequality Due to Demand Shifts.........    173
5-8.    Change in Share of Income Received by Each Quintile
from 1979 to 1995...............................    178
5-9.    Share of Households by Real Income Range............    178
5-10.    Poverty Rates.......................................    179
5-11.    One-Year and Five-Year Mobility Rates...............    185
6-1.    Economic Activity Attributable to National Forest
System Programs.................................    223
7-1.    GDP Per Capita in the ``Four Tigers''...............    239
7-2.    GDP Per Capita in Four Other Asian Economies........    240
7-3.    Real GDP Growth in Latin America....................    243
7-4.    Growth in World Output and Trade....................    244
7-5.    Shares of World Trade...............................    247
7-6.    U.S. Exports of Goods by Destination................    253
7-7.    Net Capital Flows to Developing Countries...........    255
7-8.    Stock of U.S. Direct Investment Abroad..............    256

List of Boxes

1-1.    Explaining the Productivity Slowdown................     30
2-1.    Unemployment and Changes in Inflation...............     46
2-2.    Securitization of Consumer Loans....................     56
2-3.    Nonbusiness Bankruptcy: Trends and Causes...........     59
2-4.    Profitability of Credit Card Operations.............     61
2-5.    Tax Treatment of Indexed Securities.................     63
2-6.    How Indexed Securities Reduce Inflation Risk........     65
2-7.    Estimates and Recommendations of the Advisory
Commission to Study the Consumer Price Index....     71
3-1.    The Problem of Adverse Selection....................    122
4-1.    Effects of the Redesign of the Current Population
Survey..........................................    143
4-2.    The Influence of Inflation Adjustments on Measured
Real Wages and Incomes..........................    145
4-3.    Sources of Wage Data................................    148
4-4.    Trends in Employer Health Care Costs................    150
5-1.    Executive Compensation..............................    151
5-2.    Earnings Inequality and the Winner-Take-All Society.    172
5-3.    The Experts' Consensus on Earnings Inequality.......    175
5-4.    Shortcomings of Household Income Measures...........    177
5-5.    Intergenerational Mobility..........................    184
6-1.    The Benefits of Deregulaton.........................    190
6-2.    The Role of Copyright in an Electronic Global
Economy.........................................    193
6-3.    The Economics of Federalism in Regulation...........    198
6-4.    Telecommunications Policy Is Not Just for Telephone
Companies.......................................    201
6-5.    Why Were the Regional Bell Operating Companies Kept
Out of Other Markets?...........................    203
6-6.    Mergers During the Transition to Competition........    206
6-7.    Bringing the Government to the People via the
Internet........................................    209
6-8.    Taxing Pollution Versus Giving Away Emissions
Trading Permits Versus Auctioning...............    211
6-9.    Spectrum Auctions: A $22 Billion Economic Idea......    214
7-1.    Trade Adjustment Measures...........................    251
7-2.    How Educating Foreign Students Promotes Markets and
Democracy.......................................    260
7-3.    Foreign Aid and U.S. Public Opinion.................    265
7-4.    Reducing the Debt Burden of Developing Countries....    267
7-5.    Tied-Aid Agreements.................................    275