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

 
CONTENTS

Page

Overview .......................................................  15 Chapter 1. restoring prosperity ................................  23
Macroeconomic Performance in 2001: Softer Economy,
Harder Choices .........................................  23
Aggregate Demand During the First Three Quarters .....  23
Preliminary Evidence on Aggregate Demand in the
Fourth Quarter .....................................  30
Labor Markets ........................................  33
Inflation ............................................  34
Productivity and Employment Costs ....................  34
Saving and Investment ................................  35
The Cyclical Slowdown ..................................  36
Moderation After Very Rapid Growth ...................  36
Decline in Equity Values .............................  37
Surge in Energy Prices ...............................  37
Higher Interest Rates ................................  38
Collapse of the High-Technology Sector ...............  38
Lingering Effects of Y2K .............................  38
Effects on Inventories and the Capital Stock .........  39
From Slowdown to Recession ...........................  41
Policy Developments in 2001 ............................  43
Fiscal Policy Before the Terrorist Attacks ...........  43
Tax Relief in 2001 ...................................  44
Monetary Policy Before the Terrorist Attacks .........  45
The Macroeconomic Policy Response After September 11 .  46
Economic Developments Outside the United States ........  51
The Economic Outlook ...................................  52
Near-Term Outlook: Poised for Recovery ...............  52
Inflation Forecast ...................................  54
Long-Term Outlook: Strengthening the Foundation
for the Future ......................................  54
The Policy Outlook: An Agenda for Economic Security ....  61

Chapter 2. strengthening retirement security ...................  65
Rationale for a National Retirement System .....  66
Insurance Against Uncertainty ..................  66
Foresight and Planning .........................  67
Redistributive Goals ...........................  68
Sources of Retirement Security .........................  69
Social Security ................................  69
Employer-Sponsored Pensions ....................  71
Individual Savings .............................  72
Labor Earnings .................................  72
Public Assistance ..............................  72
Challenges Ahead .......................................  73
Social Security: Past and Present ......................  74
Origins of the Current System ..................  74
Social Security and National Saving ............  76
The Future of Social Security ..........................  79
Advantages of Personal Accounts ................  79
The Financial Sustainability of Social Security.  86
Other Sources of Retirement Security ...................  92
Employer-Sponsored Pension Plans ...............  93
Individual Saving ..............................  94
Fostering Self-Reliance ........................  96
Meeting the Challenge of Retirement Security ...........  96

Chapter 3. realizing gains from competition ....................  99
Motivations for Organizational Change ..................  101
The Role of Agency Costs in Organizational Change 102
Mergers ........................................  103
Other Organizational Forms: Joint Ventures and
Partial Equity Stakes ..........................  107
Incorporating Economic Insights into Competition Policy.  112
Competition Policy, Corporate Governance, and the
Mergers of the 1980s and 1990s .................  114
The Role of Corporate Governance Changes .......  116
Policy Lessons for Promoting Organizational Efficiencies  117
Policy Lessons from Joint Ventures .............  118
Shaping Policies to Address Partial Equity Stakes 120
Policy Toward Vertical Relations ...............  123
Cross-Border Organizational Changes ....................  125
Multijurisdictional Review .....................  125
Elements of International Policy Convergence ...  127
Core Principles of Competition Policy ..........  127
Dynamic Competition and Antitrust Policy ...............  130
Sources of Incentives for Innovation ...........  132
Fostering Innovation Through Organizational
Structure ....................................  136
Dynamic Competition as Repeated Innovations ....  137
Implications of Dynamic Competition for Competition
Policy .......................................  138
Conclusion .............................................  142
Chapter 4. promoting health care quality and access ............  145
Encouraging Flexible, Innovative, and Broadly Available Health
Care Coverage ........................................  149
Recent Trends in Health Care Costs and Coverage.  149
Addressing Barriers to Effective Competition in Health
Insurance ....................................  154
Increasing Health Insurance Coverage ...........  159
Making Medicare Coverage More Flexible and
Efficient ....................................  166
Better Support for High-Quality, Efficient Care ........  171
Shortfalls in the Quality of Care ..............  171
Disparities in the Health Care System ..........  173
Empowering Providers to Improve Quality of Care.  175
Empowering Patients to Make Informed Health Care
Choices .......................................  176
Fulfilling the Promise of Medical Research .............  179
The Benefits of Biomedical Research ............  180
Many Unanswered Questions About Existing Medical
Treatments ....................................  182
The Role of the Federal Government in Supporting
Research ......................................  184
Conclusion:  Fulfilling the Potential of 21st-Century
Health Care .........................................  185

Chapter 5. redesigning federalism for the 21st century .........  187
Institutional Design in a Federal System ...............  188
Fostering Partnerships, Competition, and Accountability.  191
Elementary and Secondary Education .....................  192
Setting Standards and Measuring Progress .......  193
Expanding Options ..............................  194
Providing for Vulnerable Populations: Government
Partnerships .................................  196
Summing Up: Getting Incentives Right ...........  199
Welfare ................................................  199
Focusing on Results ............................  200
The Importance of Measurement ..................  202
The Value of Incentives ........................  203
The Benefits of Flexible Approaches ............  204
Encouraging Broad Participation ................  206
Medicaid and SCHIP .....................................  207
Limitations and Shortcomings of the Current
System .......................................  208
Fostering Market-Based Health Insurance ........  210
Conclusion .............................................  213

Chapter 6.  building institutions for a better environment .....  215
The Governmentï¿½s Role in Environmental Protection ......  219
Measuring the Benefits and Costs of Environmental
Protection ...........................................  221
Types of Environmental Regulation ......................  223
Command-and-Control Approaches .................  223
Standard Market-Based Approaches: Permit Trading
and Fees .....................................  223
Other Flexible Approaches: Informal Markets and Tradable
Performance Standards ........................  226
Myths About Flexible Approaches ........................  228
Case Studies in Flexible Environmental Protection ......  232
The Sulfur Dioxide Permit Trading Program ......  233
Tradable Quotas in the Alaskan Halibut and Sablefish
Fisheries ....................................  237
Informal Permit Trading in the Tar-Pamlico River
Basin ........................................  240
When Markets Don't Work ........................  243
Lessons for Future Policy: Climate Change ..............  244
Base Policy Action on Sound Science ............  245
Choose a Flexible, Gradual Approach ............  245
Set Reasonable, Gradual Goals ..................  246
Provide Information and Encourage Reductions ...  248
Give Technology--and Institutions--Time ........  248

Chapter 7. supporting global economic integration ..............  251
The United States in the International Economy .........  252
Trends and Patterns in U.S. and World Trade ....  252
Trends and Composition of Capital Flows ........  260
The Benefits of Globalization ..........................  265
The Benefits of Trade ..........................  265
The Benefits of Capital Flows ..................  268
The Role of Migration ..........................  270
Some Myths About Trade and Globalization ...............  271
Trade and the Environment ......................  271
Trade and Employment ...........................  272
Trade and Relative Wages .......................  273
The Effects of Trade on Developing Nations .....  274
International Policy Issues and the Role of International
Institutions ........................................  275
International Trade Institutions and the Benefits of
Trade ........................................  275
Role and Reform of International Financial
Institutions .................................  281
Conclusion .............................................  300

Appendixes
A. Report to the President on the Activities of the Council of Economic Advisers During 2001 ...........................................  301
B.	Statistical Tables Relating to Income, Employment,
and Production ......................................  313

List of Tables

1-1.	Administration Forecast ................................  53
1-2.	Accounting for Growth in Real GDP, 1960-2012 ...........  55
1-3.	Accounting for the Productivity Acceleration Since 1995.  61
7-1.	U.S. Manufacturing Trade as Share of Shipments and
Consumption, 2000 ............................  255
7-2.	Estimated Gross Private Sector Capital Flows ...........  261
7-3.	Estimated Net Private Sector Capital Flows .............  263
7-4.	Estimated World Cross-Border Claims and U.S. International
Investment Position, Year-End 2000 ...................  264

List of Charts
1-1.	Real GDP Growth ........................................  24
1-2.	Real Consumption Growth ................................  27
1-3.	Growth in Real Gross Private Domestic Investment .......  29
1-4.	Standard & Poor's 500 Composite Stock Index ............  33
1-5.	Growth in the Real Capital Stock .......................  41
1-6.	Consumer Sentiment .....................................  42
1-7.	Discount Window Borrowing ..............................  49
1-8.	Effective and Target Federal Funds Rates ...............  50
1-9.	Productivity Growth Around Business Cycle Peaks ........  60
2-1.	Income Sources of Aged Households, 1998 ................  70
2-2.	Pension Plan Participants by Type of Plan ..............  71
2-3.	Ratio of Working-Age to Retirement-Age Persons .........  88
3-1.	Announced Mergers and Acquisitions Involving
U.S.-Headquartered Firms .....................  104
3-2.	Fraction of U.S. Mergers and Acquisitions Involving a
Foreign Buyer or Seller ......................  104
3-3.	Industry-Funded Research and Development and Patents
Granted for Inventions .......................  131
3-4.	Sales Revenue of Selected Prescription Anti-Ulcer Drugs.  140
4-1.	Health Care Expenditures ...............................  150
4-2.	Expenditures on Components of Health Care ..............  150
4-3.	Mortality Rates for Coronary Heart Disease .............  181
4-4.	Survival Rate After AIDS-Defining Infection ............  181
5-1.	Children in Federally Supported Programs for the Disabled 199
5-2.	The Changing Allocation of Welfare Funds in Six States .  205
6-1.	Emissions of Major Air Pollutants ......................  217
6-2.	Reductions in Average Ambient Concentrations of Major Air
Pollutants, 1981-2000 ........................  217
6-3.	Sulfur Dioxide Emissions and GDP in Canada, United Kingdom,
and United States ............................  218
6-4.	Sulfur Dioxide Allow
ances Traded Between Economically
Distinct Organizations ......................  236
6-5.	Emissions from Phase I Facilities in the Sulfur Dioxide
Trading Program ..............................  236
6-6.	Nutrient Loading by the Tar-Pamlico Basin Association ..  243
7-1. 	World Merchandise Trade Volume .........................  253
7-2.	U.S. Trade Relative to National Output .................  254
7-3.	U.S. Trade by Sector in 2000 ...........................  267
7-4.	Import-Weighted Average Tariffs, 1999 ..................  277

List of Boxes
1-1.	Better Tools: Improving the Accuracy and Timeliness of
Economic Statistics ..........................  24
1-2.	Capital Overhang and Investment in 2001 ................  39
1-3.	Increased Security Spending and Productivity Growth ....  56
1-4.	Is There Still a New Economy? ..........................  58
2-1.	National Saving, Personal Saving, and Growth ...........  74
2-2.	Does Social Security Alter Retirement Behavior? ........  78
2-3.	The Effect of Social Security on Income Distribution ...  82
2-4.	The Effectiveness of Saving Incentives .................  95
3-1.	A Co-Production Agreement and a Partial Equity Stake:
Pixar and Disney .............................  111
3-2.	The Primestar Acquisition ..............................  122
3-3.	Dynamic Competition in the Market for Prescription
Anti-Ulcer Drugs .............................  139
4-1.	Managed Care: Good, Bad, or Somewhere in Between? ......  151
4-2.	The Need for Good Risk Adjustment ......................  156
4-3.	Federal Employee Health Insurance Plans ................  169
4-4.	The Puzzle of Geographic Variations in Medicare
Expenditure ..........................................  174
4-5.	Survival Rates and Mortality Rates .....................  183
5-1.	Why Have Welfare Caseloads Declined? ...................  201
5-2.	The State Children's Health Insurance Program ..........  209
5-3.	Community Health Centers ...............................  213
6-1.	Trends in National and International Environmental
Quality ..............................................  216
6-2.	Environmental Fees in Other Countries ..................  225
7-1.	Vertical Trade and Production Sharing ..................  256
7-2.	Crisis and Restructuring in Ecuador ....................  288
7-3.	Elliott Associates versus Peru .........................  296