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




[[Page 11]]

C O N T E N T S

Page
Chapter 1. Meeting Challenges and Building for the Future.......       19
Policy Lessons from Three Long Expansions...................       20
Keynesian Activism in the 1961-69 Expansion.............       21
The Supply-Side Revolution and the 1982-90 Expansion....       22
Deficit Reduction and the Current Expansion.............       24
Conclusion..............................................       27
Preserving Fiscal Discipline................................       28
Reaching Surplus........................................       28
Fiscal Policy in an Era of Surpluses....................       30
Meeting the International Challenge.........................       34
Containing the Crisis and Promoting Recovery............       34
Strengthening the International Financial Architecture..       36
Embracing Change While Promoting Fairness...................       37
Agriculture.............................................       38
Mergers.................................................       39
International Trade.....................................       40
Promoting Prosperity for All Americans......................       41
Conclusion..................................................       42
Chapter 2. Macroeconomic Policy and Performance.................       43
The Year in Review..........................................       45
The Stance of Macroeconomic Policy......................       45
Turmoil in Financial Markets............................       47
Components of Spending..................................       47
The Labor Market and Inflation..........................       52
Financial Markets...........................................       55
The Effect of Risk on Interest Rates and Equity Prices..       56
Changing Risk Perceptions and Financial Market
Developments..........................................       57
New Concerns About Hedge Funds..........................       63
Financial Market Influences on Spending.................       67
The Investment Boom.........................................       69
Causes of the Boom......................................       70
Implications of the Investment Boom.....................       73
Macroeconomic Implications of the Y2K Problem...............       76

[[Page 12]]

Near-Term Outlook and Long-Run Forecast.....................       83
The Administration Forecast.............................       83
Components of Long-Term Growth..........................       84
Inflation: Flat or Falling?.............................       88
What Has Held Inflation in Check?.......................       91
The Near-Term Outlook...................................       95
Chapter 3. Benefits of a Strong Labor Market....................       99
Economy-Wide Developments in the Labor Market...............      100
Employment..............................................      100
Wages...................................................      101
Disadvantaged Groups........................................      103
Low-Wage Workers........................................      104
Less Educated Workers...................................      105
Blacks and Hispanics....................................      107
Immigrants..............................................      109
Single Mothers..........................................      112
Overcoming Disadvantages in the Labor Market............      116
Benefits to Society of a Strong Labor Market................      116
Welfare Reform..........................................      116
Crime...................................................      120
Job Displacement, Tenure, and the Contingent Work Force.....      121
Job Displacement........................................      122
Job Tenure..............................................      123
The Contingent Work Force...............................      124
Myths and Realities.....................................      126
New Developments in Job Training and Lifelong Learning......      127
Chapter 4. Work, Retirement, and the Economic Well-Being of the
Elderly.......................................................      131
Population Aging, Life Expectancy, and Health Status........      132
Older Workers and Retirement................................      135
Long-Term Trends in Labor Force Participation at Older
Ages..................................................      136
Recent Changes in the Labor Force Participation of Older
Men...................................................      139
Influences on the Timing of Retirement..................      141
Unemployment and Job Loss...................................      149
The Unpaid Contributions of the Elderly.....................      151
The Economic Well-Being of the Elderly......................      152
Income and Consumption..................................      153
Poverty.................................................      163
Wealth..................................................      166
Are Older Workers Saving Enough for Retirement?.........      167

[[Page 13]]

Chapter 5. Regulation and Innovation............................      171
Competition Policy and Innovation...........................      173
Merger Review and Innovation............................      173
Do Bigger Firms Help or Hurt Innovation?................      174
Market Concentration, Competition, and Innovation.......      175
Merger Policy in High-Technology Markets................      177
Intellectual Property and Antitrust.....................      181
Network Competition and Innovation......................      185
Environmental Regulation and Innovation.....................      193
Environmental Policy and Incentives to Innovate.........      193
Environmental Policy and the Diffusion of Technology....      201
Innovation and Diffusion: An Application to Climate
Change Policy.........................................      205
The Long-Run Costs of Environmental Regulation..........      210
Regulation and Innovation: The Case of the Electric Power
Industry..................................................      211
From Innovation to Deregulation and Competition.............      213
The Benefits of Deregulation................................      216
The Challenge of a Competitive Market: Environmental and
Social Objectives.........................................      217
Chapter 6. Capital Flows in the Global Economy..................      219
International Capital Flows, Their Causes, and the Risk of
Financial Crisis..........................................      221
Trends in Financial Integration.........................      221
The Causes of Increased Capital Flows...................      223
The Financial Crises of the 1990s.......................      225
The Asian Crisis and Its Global Repercussions...............      227
The Asian Economic Model................................      227
A History of the Crisis and Its Contagion...............      228
The Causes of the Crisis................................      237
The Causes of Contagion.................................      242
The Policy Response to the Crisis...........................      245
The Role of the International Community.................      245
The Motivation of the IMF Programs in Asia..............      246
U.S. Support of IMF Funding.............................      249
New Initiatives to Restore Growth in East Asia..........      250
Reform of the International Financial Architecture......      251
Japan's Economic and Financial Crisis.......................      251
Effects of the Emerging Markets Crisis on the United States.      253
Macroeconomic Effects...................................      253
The Trade and Current Account Deficits..................      255
Conclusion..................................................      265

[[Page 14]]

Chapter 7. The Evolution and Reform of the International
Financial System..............................................      267
Reform of the International Financial Architecture..........      268
From the Halifax Summit to the G-22 Reports.............      268
Greater Transparency and Accountability.................      269
Reforming and Strengthening Domestic Financial
Institutions..........................................      271
Better Crisis Resolution, Including Appropriate Roles
for the Official Community and the Private Sector.....      272
Adoption of Measures to Reform the International
Financial Architecture................................      276
Further Steps to Strengthen the International Financial
Architecture..............................................      276
Strengthened Prudential Regulation and Supervision in
Industrial Countries..................................      277
Strengthening Prudential Regulation and Financial
Systems and Promoting Orderly Capital Account
Liberalization in Emerging Markets....................      280
Developing New Approaches to Crisis Response............      285
Strengthening the IMF...................................      286
Minimizing the Human Costs of Financial Crises..........      287
Sustainable Exchange Rate Regimes for Emerging Markets..      287
European Economic and Monetary Union........................      291
The EMU Schedule........................................      291
The Benefits and Potential Costs of EMU.................      293
The Euro as an International Currency and the
Implications for the Dollar...........................      297
Conclusion..................................................      305

Appendixes

A. Report to the President on the Activities of the
Council of Economic Advisers During 1998.........      307
B. Statistical Tables Relating to Income, Employment,
and Production...................................      319

List of Tables

1-1.    Stabilization Policy Indicators in Three Long
Expansions......................................     25
1-2.    Economic Growth Indicators in Three Long Expansions.     26
2-1.    Growth of Real GDP and its Components During 1997
and 1998........................................     48
2-2.    Disaster Damage: National Income and Product
Accounts Estimates of Value of Structures and
Equipment Destroyed.............................     82

[[Page 15]]

2-3.    Accounting for Growth in Real GDP, 1960-2007........     85
2-4.    Expected Effects of Methodological Changes on the
CPI and Real GDP................................     94
2-5.    Administration Forecast.............................     97
4-1.    Estimated Pension Coverage and Offer Rates for
Private Sector Wage and Salary Workers..........    158
4-2.    Gender Differences in Pension Wealth, 1992..........    162
4-3.    Consumption Patterns of Elderly and Nonelderly
Households by Age of Household Head, 1997.......    163
4-4.    Poverty Rates Among the Elderly for Various
Demographic Groups..............................    165
4-5.    Sociodemographic Characteristics of the Poor and
Nonpoor Elderly Population, 1997................    165
4-6.    Family Holdings of Financial and Nonfinancial
Assets, by Age of Head of Family, 1995..........    167
4-7.    Total and Financial Wealth of Households by
Percentiles.....................................    168
6-1.    Capital Flows to Industrial and Developing Countries    223
6-2.    Five Asian Economies: External Financing............    241
7-1.    The Importance of Major Currencies on the Eve of the
Introduction of the Euro........................    301

List of Charts

1-1.    Core Inflation and Unemployment in Three Long
Expansions......................................     23
1-2.    Contributions to Economic Growth in Three Long
Expansions......................................     28
1-3.    The Federal Budget Balance, 1946-98.................     29
1-4.    Growth in Real Family Income, 1947-97...............     41
2-1.    Unemployment Rate...................................     44
2-2.    Inflation Rate......................................     44
2-3.    Net Worth and the Personal Consumption Rate.........     49
2-4.    Yields on Treasury Securities.......................     60
2-5.    Risk Spreads........................................     60
2-6.    Equity Prices in 1998...............................     63
2-7.    Contribution of Investment to Overall GDP Growth....     69
2-8.    Corporate Profits and Net Interest Payments.........     71
2-9.    Net National Saving and Its Components..............     72
2-10.    Estimation of Potential GDP Growth by Okun's Law....     84
2-11.    Actual Versus Simulated Productivity Growth.........     87
2-12.    Three Measures of Core Inflation....................     90
2-13.    Inflation and Trend Unit Labor Costs................     91
2-14.    Export and Import Prices Versus the CPI and GDP
Price Index.....................................     92
2-15.    Inventory-to-Sales Ratio (Nonfarm Business).........     96

[[Page 16]]

3-1.    Unemployment and Discouraged Workers................    100
3-2.    Median Hourly Wages of Men and Women Aged 16 and
Over............................................    103
3-3.    Hourly Wages of Low-Wage Workers Aged 16 and Over...    105
3-4.    Percent Change in Employment Rate by Level of
Education, 1993-1998............................    106
3-5.    Median Hourly Wages of Men Aged 16 and Older by Race
and Ethnicity...................................    108
3-6.    Median Hourly Wages of Women Aged 16 and Older by
Race and Ethnicity..............................    108
3-7.    Unemployment Rates of Persons Aged 16-24 by Race and
Ethnicity.......................................    109
3-8.    Unemployment Rates by Nativity......................    110
3-9.    Labor Force Participation Rates of Single Women.....    113
3-10.    The Earned Income Tax Credit in 1993 and 1998.......    115
3-11.    Welfare Participation and Unemployment..............    117
3-12.    Job Displacement Rate...............................    122
3-13.    Outcomes After Job Displacement.....................    123
3-14.    Characteristics of Contingent and Noncontingent
Workers, February 1997..........................    125
4-1.    Life Expectancy at Age 65...........................    133
4-2.    Population of the United States by Age..............    133
4-3.    Projections of the Population Aged 65 Years and Over    134
4-4.    Labor Force Participation Rates of Older Men and
Women...........................................    138
4-5.    Women's Labor Force Participation Rates at Each Age.    138
4-6.    Men's Labor Force Participation Rates at Each Age...    140
4-7.    Full-Time and Part-Time Work Among Men Aged 60-61...    140
4-8.    Net Labor Force Exit Rates of Men at Each Age.......    144
4-9.    Living Arrangements of Elderly Widows...............    155
4-10.    Composition of Income Among the Elderly.............    156
4-11.    Composition of Income by Quintile Among the Elderly,
1996............................................    156
4-12.    Poverty Rate by Age Group...........................    164
4-13.    Household Financial Wealth by Race and Ethnicity....    168
5-1.    Emissions of Six Major Air Pollutants...............    197
5-2.    Energy Efficiency and Prices........................    208
5-3.    Energy Consumption..................................    208
5-4.    Fuel Consumption by Motor Vehicles..................    209
6-1.    Net Capital Flows to Developing Countries...........    222
6-2.    Perceived Risk and the Spread on Emerging Market
Bonds...........................................    235
6-3.    Real Value of the Dollar and the Trade Deficit......    254
6-4.    Dollar Exchange Rates...............................    254

[[Page 17]]

6-5.    Terms of Trade......................................    255
6-6.    Current Account Balance.............................    258
6-7.    Economic Growth and Trade Balances of G-7 Countries,
1992-97.........................................    260
6-8    Employment Growth and Trade Balances of G-7
Countries, 1992-97..............................    260
6-9.    Saving, Investment, and the Current Account Balance.    261
6-10.    Current Account Deficit and Net International
Investment Position.............................    264
6-11.    Foreign Direct Investment Flows.....................    264
7-1.    European Short-Term Interest Rates..................    292
7-2.    European Long-Term Interest Rates...................    292
7-3.    International Use of Major Currencies...............    301

List of Boxes

1-1.    The Dating of Business Cycles.......................     21
1-2.    Full Employment and the NAIRU.......................     24
2-1.    The Electrical Revolution, the Computer Revolution,
and Productivity................................     76
2-2.    Preparing Federal Systems for the Year 2000.........     78
2-3.    Accounting for the Environment......................     87
2-4.    Methodological Changes to Price Measurement.........     93
3-1.    Sources of Wage Data................................    101
3-2.    Increasing the Minimum Wage.........................    111
3-3.    The Earned Income Tax Credit........................    113
3-4.    The Welfare to Work Partnership.....................    118
4-1.    Easing the Burden of Long-Term Care.................    136
4-2.    Social Security Rules...............................    143
4-3.    Age Discrimination in the Labor Market..............    146
4-4.    Types of Pension Plans..............................    147
4-5.    Medicare Reform.....................................    150
4-6.    The Changing Living Arrangements of the Elderly.....    154
4-7.    The Federal Role in Employer-Provided Pension Plans.    159
5-1.    The Scope of Government Support of R&D..............    172
5-2.    Electronic Commerce and Digital Copyright Protection    183
5-3.    Cooperative Innovation and the Y2K Problem..........    184
5-4.    Reverse Engineering and Compatibility...............    187
5-5.    Recent Trends in Air Quality........................    196
5-6.    Comparing Estimates of Environmental Compliance
Costs Before and After Regulation...............    199
5-7.    The Partnership for a New Generation of Vehicles....    202
5-8.    Energy Efficiency Since the 1970s...................    207
5-9.    Is There an Environmental Kuznets Curve?............    212
5-10.    The Trend Toward Decentralized Power Generation.....    215
6-1.    The Explosive Growth of Foreign Exchange Trading....    224

[[Page 18]]

6-2.    Market-Based (Arm's-Length) Versus Relationship-
Based (Insider) Finance.........................    230
6-3.    The Asian Growth Model in Perspective...............    232
6-4.    Sovereign Spreads in Emerging Markets...............    234
6-5.    Moral Hazard in Financial Institutions..............    238
7-1.    Currency Boards.....................................    289
7-2.    Is Europe an Optimum Currency Area?.................    295
7-3.    How Does the Dollar Rank Today Against Other
International Currencies?.......................    300