[Economic Report of the President (1999)]
[Administration of William J. Clinton]
[Online through the Government Printing Office, www.gpo.gov]



Economic Report
of the President

Transmitted to the Congress

February 1999

TOGETHER WITH
THE ANNUAL REPORT
OF THE
COUNCIL OF ECONOMIC ADVISERS

UNITED STATES GOVERNMENT PRINTING OFFICE

WASHINGTON : 1999
________________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, D.C. 20402-9328



C O N T E N T S

__________

Page
ECONOMIC REPORT OF THE PRESIDENT................................

ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS*..............        7

Chapter 1. Meeting Challenges and Building for the Future.......       19

Chapter 2. Macroeconomic Policy and Performance.................       43

Chapter 3. Benefits of a Strong Labor Market....................       99

Chapter 4. Work, Retirement, and the Economic Well-Being of the
Elderly.....................................................      131

Chapter 5. Regulation and Innovation............................
Chapter 6. Capital Flows in the Global Economy..................      219

Chapter 7. The Evolution and Reform of the International
Financial System............................................      267

Appendix A. Report to the President on the Activities of
theCouncil of Economic Advisers During 1998.................      307

Appendix B. Statistical Tables Relating to Income, Employment,
and Production..............................................      319

__________
* For a detailed table of contents of the Council's Report, see page
11

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ECONOMIC REPORT
OF THE PRESIDENT

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ECONOMIC REPORT OF THE PRESIDENT

To the Congress of the United States:

I am pleased to report that the American economy today is healthy
and strong. Our Nation is enjoying the longest peacetime economic
expansion in its history, with almost 18 million new jobs since 1993,
wages rising at twice the rate of inflation, the highest home ownership
ever, the smallest welfare rolls in 30 years, and unemployment and
inflation at their lowest levels in three decades.
This expansion, unlike recent previous ones, is both wide and deep.
All income groups, from the richest to the poorest, have seen their
incomes rise since 1993. The typical family income is up more than
$3,500, adjusted for inflation. African-American and Hispanic
households, who were left behind during the last expansion, have also
seen substantial increases in income.
Our Nation's budget is balanced, for the first time in a generation,
and we are entering the second year of an era of surpluses: our
projections show that we will close out the 1999 fiscal year with a
surplus of $79 billion, the largest in the history of the United States.
We are on course for budget surpluses for many years to come.
These economic successes are not accidental. They are the result of
an economic strategy that we have pursued since 1993. It is a strategy
that rests on three pillars: fiscal discipline, investments in education
and technology, and expanding exports to the growing world market.
Continuing with this proven strategy is the best way to maintain our
prosperity and meet the challenges of the 21st century.

The Administration's Economic Agenda

Our new economic strategy was rooted first and foremost in fiscal
discipline. We made hard fiscal choices in 1993, sending signals to the
market that we were serious about dealing with the budget deficits we
had inherited. The market responded by lowering long-term interest
rates. Lower interest rates in turn helped more people buy homes and
borrow for college, helped more entrepreneurs to start businesses, and
helped more existing businesses to invest in new technology and
equipment. America's economic success has been fueled by the biggest
boom in private sector investment in decades--more than $1 trillion in
capital was freed for private sector investment. In past expansions,
government bought more and spent more to drive the economy. During this
expansion, government spending as a share of the economy has fallen.

[[Page 4]]

The second part of our strategy has been to invest in our people. A
global economy driven by information and fast-paced technological change
creates ever greater demand for skilled workers. That is why, even as we
balanced the budget, we substantially increased our annual investment in
education and training. We have opened the doors of college to all
Americans, with tax credits and more affordable student loans, with more
work-study grants and more Pell grants, with education IRAs and the new
HOPE Scholarship tax credit that more than 5 million Americans will
receive this year. Even as we closed the budget gap, we have expanded
the earned income tax credit for almost 20 million low-income working
families, giving them hope and helping lift them out of poverty. Even as
we cut government spending, we have raised investments in a welfare-to-
work jobs initiative and invested $24 billion in our children's health
initiative.
Third, to build the American economy, we have focused on opening
foreign markets and expanding exports to our trading partners around the
world. Until recently, fully one-third of the strong economic growth
America has enjoyed in the 1990s has come from exports. That trade has
been aided by 270 trade agreements we have signed in the past 6 years.

Addressing Our Nation's Economic Challenges

We have created a strong, healthy, and truly global economy--an
economy that is a leader for growth in the world. But common sense,
experience, and the example of our competitors abroad show us that we
cannot afford to be complacent. Now, at this moment of great plenty, is
precisely the time to face the challenges of the next century.
We must maintain our fiscal discipline by saving Social Security for
the 21st century--thereby laying the foundations for future economic
growth.
By 2030, the number of elderly Americans will double. This is a
seismic demographic shift with great consequences for our Nation. We
must keep Social Security a rock-solid guarantee. That is why I proposed
in my State of the Union address that we invest the surplus to save
Social Security. I proposed that we commit 62 percent of the budget
surplus for the next 15 years to Social Security. I also proposed
investing a small portion in the private sector. This will allow the
trust fund to earn a higher return and keep Social Security sound until
2055.
But we must aim higher. We should put Social Security on a sound
footing for the next 75 years. We should reduce poverty among elderly
women, who are nearly twice as likely to be poor as other seniors. And
we should eliminate the limits on what seniors on Social Security can
earn. These changes will require difficult but fully achievable choices
over and above the dedication of the surplus.

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Once we have saved Social Security, we must fulfill our obligation
to save and improve Medicare and invest in long-term health care. That
is why I have called for broader, bipartisan reforms that keep Medicare
secure until 2020 through additional savings and modernizing the program
with market-oriented purchasing tools, while also providing a long-
overdue prescription drug benefit.
By saving the money we will need to save Social Security and
Medicare, over the next 15 years we will achieve the lowest ratio of
publicly held debt to gross domestic product since 1917. This debt
reduction will help keep future interest rates low or drive them even
lower, fueling economic growth well into the 21st century.
To spur future growth, we must also encourage private retirement
saving. In my State of the Union address I proposed that we use about 12
percent of the surplus to establish new Universal Savings Accounts--USA
accounts. These will ensure that all Americans have the means to save.
Americans could receive a flat tax credit to contribute to their USA
accounts and additional tax credits to match a portion of their
savings--with more help for lower income Americans. This is the right
way to provide tax relief to the American people.
Education is also key to our Nation's future prosperity. That is why
I proposed in my State of the Union address a plan to create 21st-
century schools through greater investment and more accountability.
Under my plan, States and school districts that accept Federal resources
will be required to end social promotion, turn around or close failing
schools, support high-quality teachers, and promote innovation,
competition, and discipline. My plan also proposes increasing Federal
investments to help States and school districts take responsibility for
failing schools, to recruit and train new teachers, to expand after
school and summer school programs, and to build or fix 5,000 schools.
At this time of continued turmoil in the international economy, we
must do more to help create stability and open markets around the world.
We must press forward with open trade. It would be a terrible mistake,
at this time of economic fragility in so many regions, for the United
States to build new walls of protectionism that could set off a chain
reaction around the world, imperiling the growth upon which we depend.
At the same time, we must do more to make sure that working people are
lifted up by trade. We must do more to ensure that spirited economic
competition among nations never becomes a race to the bottom in the area
of environmental protections or labor standards.
Strengthening the foundations of trade means strengthening the
architecture of international finance. The United States must continue
to lead in stabilizing the world financial system. When nations around
the world descend into economic disruption, consigning populations to
poverty, it hurts them and it hurts us. These nations are our trading
partners; they buy our products and can ship low-cost products to
American consumers.

[[Page 6]]

The U.S. proposal for containing financial contagion has been taken
up around the world: interest rates are being cut here and abroad,
America is meeting its obligations to the International Monetary Fund,
and a new facility has been created at the World Bank to strengthen the
social safety net in Asia. And agreement has been reached to establish a
new precautionary line of credit, so nations with strong economic
policies can quickly get the help they need before financial problems
mushroom from concerns to crises.
We must do more to renew our cities and distressed rural areas. My
Administration has pursued a new strategy, based on empowerment and
investment, and we have seen its success. With the critical assistance
of Empowerment Zones, unemployment rates in cities across the country
have dropped dramatically. But we have more work to do to bring the
spark of private enterprise to neighborhoods that have too long been
without hope. That is why my budget includes an innovative ``New
Markets'' initiative to spur $15 billion in new private sector capital
investment in businesses in underserved areas through a package of tax
credits and guarantees.

Going Forward Together in the 21st Century

Now, on the verge of another American Century, our economy is at the
pinnacle of power and success, but challenges remain. Technology and
trade and the spread of information have transformed our economy,
offering great opportunities but also posing great challenges. All
Americans must be equipped with the skills to succeed and prosper in the
new economy. America must have the courage to move forward and renew its
ideas and institutions to meet new challenges. There are no limits to
the world we can create, together, in the century to come.


THE WHITE HOUSE

FEBRUARY 4, 1999

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THE ANNUAL REPORT
OF THE
COUNCIL OF ECONOMIC ADVISERS

[[Page 9]]



LETTER OF TRANSMITTAL

Council of Economic Advisers
Washington, D.C., February 4, 1999
Mr. President:
The Council of Economic Advisers herewith submits its 1999 Annual
Report in accordance with the provisions of the Employment Act of 1946
as amended by the Full Employment and Balanced Growth Act of 1978.
Sincerely,


Janet L. Yellen,
Chair
Jeffrey A. Frankel,
Member
Rebecca M. Blank,
Member