[Economic Report of the President (2002)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
Overview



The events of 2001 brought new challenges for the U.S. economy and
for economic policy. The war against terrorism has increased the
demands on our economy, and we must do everything in our power to
build our economic strength to meet these demands. At the same
time, we must take pains to ensure that the benefits of economic
growth are shared as widely as possible, both within and beyond
our borders.

Economic growth is not an end in itself. As it raises standards of
living--consumption, in the language of economists--growth also
provides resources that may be devoted to a variety of activities
beyond the traditional marketplace. Growth can fund environmental
protection, the work of charitable organizations, and many other
activities of interest and value to the United States, other
industrialized economies, and developing economies alike. These
uses of our economic growth contribute to achieving the President's
vision of ``prosperity with a purpose.''


Restoring Prosperity

The economy entered 2001 growing slowly, and growth continued to
decelerate through most of the year. After expanding at an annual
rate of 5.7 percent in the second quarter of 2000, gross domestic
product (GDP)--a standard measure of economy-wide production--began
to falter later that year, and the weakness persisted into 2001.
Some sectors stumbled into outright decline; for example, industrial
production peaked in June 2000 and then entered a prolonged slump.
After several quarters of increasingly weak growth, the terrorist
attacks of September 11 tipped the economy into recession, the
first in 10 years.

The economic difficulties that began in 2000 and continued through
2001 should not blind us to the fact that the outlook for the economy
remains strongly positive. What matters most for long-term growth
is improvements in productivity. Productivity growth in the United
States accelerated during the second half of the 1990s, and
economists generally believe that much of that faster productivity
growth is permanent. New technology deserves much of the credit--but
by no means all of it. Better, more efficient ways of doing business
also contributed, and only a fraction of the many possible
improvements have yet been made. Our economic challenge is, in
large measure, to discover how to reap the benefits of the remainder.

The United States is unique among industrial economies in having
experienced this recent boom in productivity growth. In principle,
nothing prevents businesses in all of the world's industrial and
industrializing economies from adopting the same technologies
available here. Yet only the United States has enjoyed an increase
in sustained productivity growth since 1995. This stronger
productivity performance therefore likely derives from uniquely
American advantages: notably, the strength of our institutions and
the flexibility of our business culture. Accordingly, this Report
focuses on those institutions and on that culture, and proposes
strategies for improving them and putting them to use, to sustain
our growth and broaden our prosperity.

The Report begins, in Chapter 1, by reviewing the important economic
events of 2001. The chapter goes on to present the economic outlook
for the United States and to sketch an agenda for the institutions
needed to speed the Nation's growth and enhance its economic security.


Strengthening Retirement Security

No area of American life could benefit more from enhancements to
its institutional underpinnings than retirement security, and the
President has made the reform of the Social Security system a
central part of his economic agenda. As he has stressed,
``Ownership in our society should not be an exclusive club.
Independence should not be a gated community. Everyone should
be part owner in the American Dream.''

Chapter 2 of this Report examines the changing nature of retirement
security and the institutional changes needed to meet this challenge.
There is little dispute about the need for reform, and there is
growing agreement that personal accounts within the Social Security
system are an indispensable part of any reform plan. Personal
accounts would enhance individual choice--the very foundation of
the success of our market economy. The current Social Security
system collects 12.4 percent of all covered wages and essentially
constrains all working Americans to place that sizable share of our
wealth in a single entity--one that demographic change is rendering
increasingly inadequate to support the system's obligations.

Personal accounts would permit individuals to diversify their
retirement portfolios, thus increasing their retirement security.
They would for the first time acquire rights of ownership, wealth
accumulation, and inheritance within Social Security. These
advantages are widely recognized. Less well appreciated, however,
is that ownership and inheritability will enhance Social Security's
role in making our economic system more equitable. Some groups in
our society with lower average incomes also have lower life
expectancies, and as a consequence, they benefit less today from
Social Security than do other, wealthier groups. Under a system
of personal accounts, the early death of a worker would no longer
mean the loss to that worker's heirs of much of what he or she has
paid into Social Security. Instead, those assets could be passed
on to the next generation. For all these reasons, personal accounts
are an important part of reforming Social Security, and thereby of
strengthening retirement security for all Americans.


Realizing Gains from Competition

One source of the United States' superior economic performance
over the past decade has been the success of its institutions
for promoting open, competitive markets. Strong incentives to
compete are what drive firms to exploit new opportunities, and
so achieve faster growth throughout the economy. Deregulation of
several key industries during the 1970s and 1980s brought
substantial benefits to consumers and to the economy as a
whole--however, it took time for all of those benefits to be
realized, and this counsels patience in evaluating more recent
deregulation initiatives in, for example, electricity markets.

The task of competition policy--as detailed in Chapter 3 of this
Report--is to promote competition in a way that ensures the
efficient allocation of resources and serves the interests of
consumers. In doing so, however, competition policy must walk a
fine line: efforts to prevent anticompetitive changes in the
behavior and organization of firms may inadvertently keep firms
from taking steps that could lower their costs or improve their
products. Such ill-advised interventions would ultimately harm
consumers rather than benefit them.

The recent past has witnessed a remarkable shift in the competitive
landscape. Mergers and acquisitions have reshaped and continue to
reshape the organization of firms and the nature of competition
itself. Our competition policy must be flexible enough to
acknowledge and support the quest for efficiency that drives
these changes, while remaining vigilant against efforts to restrain
competition. To fail in this task would be to hinder the growth of
innovative firms, the adoption of new technology, and the
enhancement of productivity.

The markets in which American firms compete today are increasingly
global markets, and globalization motivates further changes in
firms' organization. Our competition policy should acknowledge
and reflect these motivations. But other countries have their own
competition policies, and inefficient policies in any one of them
may impose costs on firms and consumers in the United States and
around the world. The United States should therefore pursue the
harmonization of national competition policies--but should do so
in a way that spreads best-practice, efficient competition policy
worldwide.

Finally, competition policy must also deal with the increased
importance of ``dynamic competition,'' in which firms compete not
just for increments of market share but for absolute (if temporary)
market dominance, through rapid innovation. Policies should
recognize that, at any given moment, high profits and substantial
market share--indicators that might warrant concern about competition
in some industries--need not preclude vigorous dynamic competition
among firms in industries undergoing rapid technical change.


Promoting Health Care Quality and Access

Health care is one of the largest and most vibrant sectors of the
economy. Biomedical research, both public and private, has generated
stunning advances in our understanding of biology and disease and
achieved major therapeutic discoveries. As a result, Americans
today are living longer lives with less disability. However, the
health care delivery system today is troubled, as medical
expenditures are again rising rapidly. The costs of private health
insurance to working Americans and the costs to taxpayers of
government health programs, including Medicare and Medicaid, are
increasing at rates far surpassing the growth of the economy.
Managed care is under fire from patients and physicians alike. With
the economic slowdown and rising costs, concerns about the growing
number of uninsured are again coming to the fore.

Much of the discussion about Federal policies to address these
concerns has been framed through a narrow lens that focuses on
``guarantees'' for access and treatment, to be achieved largely
through expanding government programs that rely on regulation and
price setting. Yet this approach does not ensure access to
innovative care that meets the diverse needs of patients in an
efficient way.

Chapter 4 of this Report explores an alternative framework, one
that focuses on achieving better health care through solutions
that emphasize both shared American values and sensible economics.
These solutions build on existing support; they encourage
flexible, innovative, and broadly available health care coverage;
they emphasize the central role of the patient in making health
care decisions; and they improve those decisions by creating an
environment for medical practice that encourages steps to improve
quality and reduce costs. This approach emphasizes patient-centered
health care, with individual control and individual responsibility.

If we move toward a system of informed choice and well-crafted
economic incentives, and away from rigid regulation, the health
care system will benefit from the resulting flexibility and
competition. In this vision, government support would be used to
broaden access and to encourage competition in both the private and
the public sectors. Support should be targeted to improving the
health care of those most in need: the uninsured and those with
significant health expenses. New incentives should strengthen the
market by improving information about quality and cost, broadening
choice, rewarding quality, and addressing costs by encouraging
value purchasing by both employers and patients.

The Administration's emphasis on patient-centered health care
reform centers on three objectives. First, we must develop flexible,
market-based approaches to providing health care coverage for all
Americans. Second, we must support health care providers in their
efforts to meet the demand for higher quality and value, in part by
making better information available about providers, options,
outcomes, and costs. And finally, we must provide the foundation
for further innovation through strong support for biomedical
research. Providing competitive choices for all Americans, and
meaningful individual participation in those choices, will
encourage innovation in health care delivery and coverage.
Improving incentives and information, and taking steps to help
patients and providers use information effectively, will help
ensure continued improvements in the health of Americans in the future.


Redesigning Federalism for the 21st Century

Throughout its history the United States has relied heavily on
State and local governments to provide certain goods and services.
Our federal system has been a source of greater efficiency and of
innovation in government practice. History reveals several tensions
as well, most vividly evidenced by Washington's all-too-frequent
practice of providing funds to State and local governments without
allowing flexibility in their use. As discussed in Chapter 5 of
this Report, this tension between flexibility and control can be
resolved efficiently by specifying standards for outcomes but
leaving it to State and local providers to determine how best to
achieve those outcomes.

Focusing on outcome standards and flexibility to improve efficiency
can also imply a role for the private sector in providing public
services. The choice of where to draw the line between the public
and the private sector depends on the characteristics of the
services to be provided. The nature of some services makes it
difficult for markets to meet the needs of the population
effectively. Even then, it may be efficient to rely on the
private sector to produce the service, but to let State and local
governments decide what and how much shall be provided.

Chapter 5 of this Report discusses the principles underlying the
roles of differing levels of government, and of for-profit firms
and not-for-profit organizations, in identifying and meeting needs
for public goods and services. Specifically, the chapter shows how
allowing public and private organizations to compete in meeting
preset standards can improve the efficiency of programs in
education, welfare, and health insurance for needy populations.

In education, evidence supports the benefits of competition in
improving quality, with public, private, and charter schools vying
with each other to provide the best education most efficiently.
When the right institutions are in place, school systems can be
held accountable for results. Similarly, the providers of safety
net benefits--such as welfare and Medicaid--must be accountable to
taxpayers for the quality of services they provide and the resources
they use to provide them. By tying payments to these providers to
results, and by allowing private nonprofit providers to compete
with them on an equal footing, the market discipline that yields
innovation and efficiency in the private sector can be brought to
bear in the public sector as well.


Building Institutions for a Better Environment

Not so long ago, environmental protection and market-based economic
growth were widely regarded as fundamentally in conflict. The past
30 years, however, have seen dramatic improvements in environmental
quality go hand in hand with robust growth in GDP. Releases of many
toxic substances have been reduced, and many of our natural resources
are better protected. Rivers are cleaner and the air is clearer.

In many of these early environmental interventions, the anticipated
benefits were clear, large, and achievable at relatively low cost.
The next generation of environmental issues, however, is certain
to be more challenging. Ongoing efforts to protect endangered
species, maintain biodiversity, and preserve ecosystems will
require tradeoffs between the welfare interests of current and
future generations. But those early initiatives also taught us
that the costs of environmental protection can be minimized
through careful policy design. Part of the challenge for
environmental protection today is to identify the best institutions
to address each of an array of stubborn environmental problems.
Another part is to design those institutions so that they can
evolve to address new problems in the future.

Chapter 6 of this Report describes how flexible, market-based
approaches to environmental protection--using tradable permits,
tradable performance standards, and similar mechanisms for a fixed
overall standard--allow businesses to pursue established performance
goals or emission limits in the manner they find most efficient.
The chapter documents, through several case studies, that such an
approach can often achieve equal or greater environmental benefits
at lower cost than one based on inflexible government mandates.
The chapter concludes by illustrating how--and how not--to apply
this experience with flexible mechanisms to the long-term challenge
of global climate change.


Supporting Global Economic Integration

The final chapter of this Report examines our institutions for
international trade and finance. International flows of goods,
services, capital, and people have played an increasingly important
role in the world economy, raising the standard of living in the
United States and around the world. These gains from international
interaction stem from an improved allocation of resources. A more
efficient global allocation of productive inputs such as capital
and labor translates into higher global output and consumption.
Today, however, signs of a slowing global economy, and threats to
the freedom that is part and parcel of a well-functioning economic
system, make it more important than ever to rededicate ourselves
to the free exchange of goods, services, and capital across borders.

It is therefore critical that the United States continue to lead the
world in the liberalization of trade. The restoration of the
President's Trade Promotion Authority (TPA) will provide the
Administration the flexibility and the bargaining power to promote
this liberalization most effectively. By streamlining the system
for approving trade agreements, TPA will allow the United States
to keep pace with our trading partners in the timely adoption of
trade liberalization.

The United States must also continue to encourage efforts to
strengthen the international financial architecture. A stronger
global financial system is needed to support the cross-border
flows of capital that are vital to increasing world output. The
Administration is taking the lead in the debate over principles for
reform of international lending by the International Monetary Fund
and the World Bank. In addition, the Administration is seeking to
shift the multilateral development banks' emphasis toward grants
for low-income countries: this is consistent with continued efforts
to make these institutions more efficient and more focused on growth
in living standards in developing countries. U.S. leadership in this
area is essential to safeguarding and enhancing both our own
economic prospects and those of the rest of the world.


Conclusion

The past year has shown that we cannot be complacent about America's
rate of economic growth, gains in productivity, and successes in
global markets. Nor can we afford to be parochial. We seek growth
and prosperity for the whole world, and we will achieve it by
wise economic policy and farsighted institutional reform.