[Economic Report of the President (2001)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
C O N T E N T S
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Page

Chapter 1. The Making of the New Economy ...............................  19
The Economy from 1973 to 1993 .........................................  21
What Makes the Economy New? ...........................................  22
Sustaining the Virtuous Cycle .........................................  24
Information Technology and the New Economy ............................  25
The New Trend in Productivity Growth ..................................  26
Sources of Growth: Capital, Labor Quality,
and Total Factor Productivity .......................................  26
Productivity Increases by Sector and Industry ........................  30
Learning from the New Productivity Trends ............................  33
Innovations in the Information Technology Sector ......................  34
Growing Competition ..................................................  34
Organizational Changes ...............................................  36
Innovations in Compensation and Finance ..............................  37
New Complementarities ................................................  38
Innovation Throughout the Economy .....................................  38
New Production Methods ...............................................  39
Changes in Inventory and Supply Chain Management .....................  39
New Relationships with Customers .....................................  40
Shifting Corporate Boundaries ........................................  40
Behind the New Trends: The Role of Policy .............................  41
Fiscal Discipline ....................................................  42
Investing in People and Technology ...................................  43
Setting the Rules for Fair and Open Competition ......................  45
Social Policies ......................................................  47
Challenges for the Future .............................................  48
Preserving Fiscal Discipline .........................................  49
Nurturing a Vibrant Private Sector ...................................  50
Ensuring That Globalization Enhances the New Economy .................  50
Creating an Economy That Works for All ...............................  51

Chapter 2. Macroeconomic Policy and Performance	........................  55
The Year in Review ....................................................  57
Private Domestic Spending ............................................  60
Government Spending and Fiscal Policy ................................  63
International Influences .............................................  64
Monetary Policy and Financial Markets ................................  65
Labor Markets and Inflation ..........................................  68
The Economic Outlook ..................................................  70
The Near-Term Outlook ................................................  71
Productivity and the NAIRU ...........................................  73
Inflation Measurement and the Federal Surplus ........................  74
The Stock Market, Saving, and Consumption Prospects ..................  75
The Long-Term Projection .............................................  77
The Fiscal Terrain in the New Economy .................................  79
Strong Public Saving: The Payoff from Deficit Reduction ..............  80
What Caused the Surpluses? ...........................................  83
The Importance of Maintaining Fiscal Discipline ......................  87
Conclusion ............................................................  93

Chapter 3. The Creation and Diffusion of the New Economy ...............  95
The Advance and Convergence of Information Technologies ...............  98
Why Is the U.S. Economy Awash in Technology? .......................... 103
The Demand for New Technology	........................................ 104
Financial Market Developments ........................................ 106
R&D in the New Economy ............................................... 110
Intellectual Property Protection ..................................... 118
A Favorable Alignment ................................................ 119
Doing Business in the New Economy ..................................... 120
New Developments Inside Plants and Firms ............................. 121
Changes in Firm Boundaries ........................................... 128
Competition and Strategy ............................................. 136
Understanding Performance Gains ....................................... 138
How Do Technology and Organizational Change
Improve Performance? ............................................... 138
The Dynamics of Market Competition ................................... 140
Conclusion ............................................................ 142

Chapter 4. The New Economy in a Global Context ......................... 145
The Role of Trade Liberalization in Promoting Globalization ........... 147
Globalization and Economic Performance	................................ 148
Scale and Network Effects ............................................ 148
Competition and Innovation ........................................... 149
Changes in the Global Organization of Production ..................... 150
Better Technology, More Trade ......................................... 153
Technology and Knowledge-Based Products in U.S. Trade and
Investment Flows .................................................... 155
New Challenges	........................................................ 157
The U.S. Trade Balance and Current Account ........................... 158
Raising Performance in Other Countries ............................... 161
The Importance of Institutions and Policy ............................ 166
Raising Incomes in Developing Countries .............................. 169
Adjusting to Change at Home .......................................... 173
Trade and the Environment and Labor Standards	........................ 175
Challenges for Legal Frameworks ...................................... 176
Making Globalization Work ............................................. 180
Opening Markets to Trade and Investment ............................... 182
Conclusion ............................................................ 185

Chapter 5. Living in the New Economy ................................... 187
Good News from the American Economy ................................... 188
Helping Families Help Themselves ...................................... 193
Welfare Reform ....................................................... 193
Making Work Pay ...................................................... 198
Reaching out to Underserved Communities .............................. 204
Education in the New Economy .......................................... 209
A Role for Federal Education Policy .................................. 209
Reducing Class Size .................................................. 211
The Importance of Teachers ........................................... 212
The Need for Modern Schools .......................................... 216
New Educational Technology and Internet Access ....................... 216
Standards and Accountability ......................................... 219
Increasing Public School Choice ...................................... 220
Helping Students Make the Transition from Secondary
School to College .................................................. 222
Innovation and Access in Health Care .................................. 223
Technological Innovations ............................................ 223
Organizational Innovations to Control Health Care Costs .............. 225
Improving Health Insurance Coverage .................................. 229
Building Livable Communities .......................................... 236
Business and Suburbanization ......................................... 237
Sprawl and Its Challenges ............................................ 238
Regional Coordination and Sprawl ..................................... 239
Individual Decisions and Sprawl ...................................... 239
The Administration's Response ........................................ 241
Conclusion ............................................................ 242

Conclusion: Achievements and Challenges in the New Economy ............. 245
Technology's Role in the New Economy ................................. 247
The Role of Policy in Supporting the New Economy ..................... 249
Globalization and the New Economy .................................... 250
Harnessing the New Economy ........................................... 250


Appendixes
A. Report to the President on the Activities of the Council of
Economic Advisers During 2000 .................................... 253
B. Statistical Tables Relating to Income, Employment, and
Production ....................................................... 267


List of Tables
1-1. Accounting for the Productivity Acceleration in the 1990s	........  28
1-2. Labor Productivity Growth by Industry,
Selected Periods, 1989 to 1999 .................................  32
2-1. Growth of Real GDP and Its Components During 1998-99 and 2000 ....  58
2-2. Administration Forecast ..........................................  72
2-3. Accounting for Growth in Real GDP, 1960-2008 .....................  78
2-4. Components of Federal Budget Outlays .............................  84
3-1. Content and Commerce on the Internet ............................. 102
4-1. Source of Inputs Used in Production by U.S. Multinational
Corporations at Home and in Foreign Affiliates ................. 153
4-2. Changing Composition of U.S. Trade Flows ......................... 156


List of Charts
1-1. Growth in Real Household Income by Quintile, 1973-93 and 1993-99 .  20
1-2. Growth in Gross Domestic Income Due to the Information
Technology Sector ..............................................  25
1-3. Output per Hour in the Nonfarm Business Sector ...................  27
1-4. Producer Price Index for Electronic Computers ....................  30
1-5. Indicators of Growth in Information Technology Activity ..........  35
1-6. Information Technology Firms .....................................  36
1-7. Inventory-to-Sales Ratio in Manufacturing and Trade ..............  40
1-8. Mergers and Acquisitions Involving U.S. Firms ....................  41
1-9. Federal Budget Balance ...........................................  43
1-10. Computer Imports and Exports as a Share of Computer
Purchases and Production .......................................  46
2-1. Growth in Real GDP ...............................................  58
2-2. Growth in Output per Hour in the Nonfarm Business Sector .........  59
2-3. Consumption and Disposable Income ................................  60
2-4. Personal and Wealth-Adjusted Saving Rates ........................  61
2-5. Real Investment in Equipment and Software ........................  63
2-6. Actual and Structural Federal Budget Balances ....................  64
2-7. Equity Prices ....................................................  66
2-8. Contributions to Growth in Market Capitalization .................  67
2-9. Selected Interest Rates and Yields ...............................  68
2-10. Consumer and Import Prices .......................................  70
2-11. Nonfarm Business Compensation per Hour and Unit Labor Costs ......  71
2-12. Net Worth-to-Income Ratio and Consumption Rate ...................  75
2-13. Actual and Projected Federal Budget Balances .....................  81
2-14. Actual and Projected Debt Held by the Public .....................  81
2-15. Public, Private, and National Saving .............................  82
2-16. Growth in GDP and Adjusted Gross Income (AGI) ....................  86
2-17. Population Aged 65 and Over and Outlays for Social
Security and Medicare ..........................................  89
2-18. Long-Term Budget Balance Projections Under Different
Policy Assumptions .............................................  90
3-1. Real Investment in Information Technology	........................  98
3-2. Prices and Real Investment in Computer and
Peripheral Equipment ...........................................  99
3-3. Prices and Real Investment in Software ........................... 100
3-4. Employment in Computer and Data Processing Services .............. 101
3-5. Venture Capital Investment ....................................... 107
3-6. Number and Gross Proceeds of Initial Public Offerings ............ 109
3-7. First-Day Returns for Initial Public Offerings ................... 110
3-8. Real Research and Development Spending by Source and Type ........ 111
3-9. Total Expenditures on Industrial R&D by Firm Size ................ 113
3-10. New Domestic Strategic Technology Alliances ...................... 117
3-11. Firms Introducing or Expanding Nonexecutive Stock
Option Plans, 1996-98 .......................................... 127
3-12. Employment in Management Consulting and Employment Agencies ...... 131
3-13. Tobin's q in the Nonfinancial Corporate Sector ................... 137
3-14. Business Failures ................................................ 141
3-15. Real Corporate Profits ........................................... 141
4-1. Imports and Exports by End-Use Category .......................... 156
4-2. Trade in Capital Goods and Selected Components ................... 157
4-3. Growth in Real GDP by Region ..................................... 158
4-4. The Trade Deficit and the Real Effective Exchange
Rate of the Dollar ............................................. 159
4-5. Saving, Investment, and the Current Account Balance .............. 159
4-6. OECD Estimates of Growth in Potential Output ..................... 162
4-7. Change in Average Annual Productivity Growth from
1990-95 to 1996-99 ............................................. 163
4-8. Indicators of the Pervasiveness of Information Technology ........ 165
5-1. Unemployment Rates by Race and Hispanic Origin ................... 190
5-2. Poverty Rates by Race and Hispanic Origin	........................ 190
5-3. Maximum Real EITC Benefit by Family Earnings, 1993 and 1999 ...... 199
5-4. EITC Benefit and Labor Force Participation of Unmarried
Women with Children ............................................ 200
5-5. Real Minimum Wage Combined with the Real Maximum EITC Subsidy .... 201
5-6. Poverty Rates in Metropolitan and Nonmetropolitan Areas,
1993 and 1999 .................................................. 208
5-7. Revenue per Pupil by Source and Income Quartile of
School District, 1994-95 ....................................... 210
5-8. Share of U.S. Public Schools with Internet Access ................ 217
5-9. Sources of New Computers Received by Elementary
Schools in 1997-98 ............................................. 219
5-10. Health Expenditures and Enrollment in Health
Maintenance Organizations ...................................... 228
5-11. Average Federal Tax Benefit for Health Expenses, 2000 ............ 230
5-12. Health Insurance Coverage of Those under Age 65, by Type and
Income, 1999 ................................................... 231


List of Boxes
2-1. Are Treasuries Being Swapped out of Their Benchmark Role? ........  69
3-1. Federal R&D and Commercial Technology: Licensing, Cooperation,
and Partnerships ............................................... 116
3-2. Information Technology in the Machine Tool Industry: The
New Economy Helps the Old ...................................... 123
4-1. A New Role for Multinational Firms ............................... 151
4-2. Information Technology and Cross-Country Differences in
Measuring Economic Growth ...................................... 164
4-3. Reforming International Institutions ............................. 180
4-4. The Global Promise of Biotechnology .............................. 183
5-1. The Workforce Investment Act ..................................... 196
5-2. Rewarding Effective Teachers ..................................... 214
5-3. Reducing the Digital Divide ...................................... 218
5-4. Ensuring That Gains Are Maintained ............................... 221
5-5. The Rise of E-Health: On-Line Medical Information ................ 227
5-6. Challenges to Smart Growth in Atlanta ............................ 240
5-7. Examples of Smart Growth ......................................... 242