[Economic Report of the President (2003)] [Administration of George W. Bush] [Online through the Government Publishing Office, www.gpo.gov] CONTENTS --------------------- Page OVERVIEW .................................................... 15 CHAPTER 1. MACROECONOMIC PERFORMANCE IN 2002 ................ 27 GDP and Its Components in 2002 .............................. 29 Consumption ......................................... 29 Nonresidential Investment ........................... 35 Residential Investment .............................. 43 Net Exports ......................................... 45 Government Purchases ................................ 46 The Labor Market, Productivity, and Real Wages .............. 47 Macroeconomic Policy and the Budget Outlook ................. 51 Monetary Policy ..................................... 51 Fiscal Policy ....................................... 52 The Federal Budget .................................. 54 The President's Jobs and Growth Initiative .......... 54 The Effect of Tax Relief on Interest Rates .......... 55 Developments in the Rest of the World ....................... 59 The Economic Outlook ........................................ 63 Near-Term Outlook ................................... 64 Inflation Forecast .................................. 65 Long-Term Outlook ................................... 66 Interest Rate Outlook ............................... 70 Income Forecast ..................................... 70 Conclusion .................................................. 71 CHAPTER 2. CORPORATE GOVERNANCE AND ITS REFORM .............. 73 Foundations of Corporate Governance ......................... 79 Market-Imposed Discipline: External Governance Mechanisms ........................................ 80 Internal Governance Mechanisms ...................... 84 Legal and Regulatory Institutions ................... 94 Corporate Governance Reform ................................. 99 Information Accuracy and Accessibility .............. 102 Management Accountability ........................... 103 Auditor Independence ................................ 104 Corporate Governance and the Global Economy ................. 105 Conclusion .................................................. 106 CHAPTER 3. POLICIES FOR DYNAMIC LABOR MARKETS ............... 109 Employment Dynamics and Labor Market Policy ................. 113 Unemployment Assistance Policy .............................. 121 Dynamics of Program Participation and Social Policy ......... 127 Fostering Skill Development ................................. 132 Conclusion .................................................. 134 CHAPTER 4. REGULATION IN A DYNAMIC ECONOMY .................. 135 The Demand for Regulation ................................... 138 Regulation to Address Market Imperfections .......... 138 Regulation to Address Specific Interests ............ 141 Principles of Regulation .................................... 142 Can the Market Achieve the Desired Outcome? ......... 143 Can Private Regulation Suffice? ..................... 145 Will Government Regulation Impede or Distort Market Dynamics? ......................................... 149 Is There a Less Restrictive Alternative? ............ 151 Do the Benefits Justify the Costs, and How Are Both Distributed? ...................................... 156 The Demand for Regulatory Reform ............................ 159 Regulatory Review and Regulatory Reform ............. 160 Effects of Reform on Prices ......................... 162 Effects of Reform on Innovation and Consumer Satisfaction ....................................... 163 Effects of Regulatory Reform on Resource Allocation . 164 Pitfalls of Regulatory Reform ............................... 165 Failure to Coordinate Reforms ....................... 166 Deviation from Competitive Conditions ............... 167 Creating Perverse Incentives ........................ 168 Putting the Principles to Work .............................. 170 Conclusion .................................................. 173 CHAPTER 5. TAX POLICY FOR A GROWING ECONOMY ................. 175 Objectives of Tax Reform .................................... 178 Simplicity: Freeing up Resources for Productive Use . 178 Fairness: Relating Taxes to Ability to Pay and to Economic Well-Being ................................ 179 Long-Term Growth: Boosting Economic Performance by Improving Incentives ............................... 181 Analysis of Alternative Reforms ............................. 184 What Does the Current System Tax? ........................... 190 Taxation of Human Capital ........................... 194 Taxation of Housing ................................. 195 Taxation of Nonprofits .............................. 196 Distributional Consequences of Tax Reform ................... 196 Decisions on the Path to Reform ............................. 202 Integration and the Double Tax on Corporate Income .. 202 Uniform Taxation of Investment ...................... 205 Broadening the Tax Base and Lowering Tax Rates ...... 207 Income Versus Consumption as the Base ............... 208 International Tax Considerations .................... 208 Conclusion .................................................. 211 CHAPTER 6. A PRO-GROWTH AGENDA FOR THE GLOBAL ECONOMY ....... 213 The Importance of Growth .................................... 216 The Global Growth Experience ........................ 216 The Benefits of Growth .............................. 219 Promoting Growth .................................... 223 Pro-Growth Principles ....................................... 227 Economic Freedom: Competition and Entrepreneurship .. 227 Governing Justly: Rule of Law and Government Accountability ..................................... 236 Investing in People: Health and Education ........... 239 The Administration's Policies to Enhance Growth ............. 241 Trade Promotion Authority ........................... 242 The Millennium Challenge Account .................... 249 Reforming the Multilateral Development Banks ........ 253 Conclusion .................................................. 254 APPENDIXES A. Report to the President on the Activities of the Council of Economic Advisers During 2003 ....... 257 B. Statistical Tables Relating to Income, Employment, and Production ................................. 269 LIST OF TABLES 1.1. Administration Forecast ............................. 63 1.2. Accounting for Growth in Real GDP, 1960-2008 ........ 66 1.3. Accounting for the Productivity Acceleration Since 1995 69 2.1. SEC Enforcement Efforts and Outcomes, 2000-2002 ..... 77 2.2. Legal Rules That Shape the Roles of Institutional Investors .......................................... 91 2.3 Some Corporate Governance Initiatives of NYSE and Nasdaq ............................................. 100 2.4. The President's Ten-Point Plan and the Sarbanes-Oxley Act ................................................ 101 5-1. Household Saving in Tax-Preferred and Taxable Accounts 1999 ............................................. 193 5-2. Tax Rates on Capital Income for a Hypothetical Investor in 2003 .......................................... 203 5-3. Effective Tax Rates by Asset and Sector Under Current Law and Various Reforms .............................. 205 6-1. Income Per Capita and Social Indicators ............. 220 6-2. Millennium Challenge Account Indicators ............. 250 LIST OF CHARTS 1-1. GDP Growth and the Contribution of Consumption ...... 27 1-2. Net Worth and Consumption Propensity ................ 31 1-3. Equity Prices and Fixed Private Nonresidential Investment ........................................ 38 1-4. Nonfinancial U.S. Equity Issuance ................... 39 1-5. Credit Market Liabilities of the Nonfinancial Business Sector ............................................ 40 1-6. Equity Markets and Risk Spreads ..................... 41 1-7. Corporate Bond Risk Spreads ......................... 41 1-8. Housing Starts ...................................... 44 1-9. Duration of Unemployment ............................ 48 1-10. Saving, Investment, and the Current Account Balance . 60 1-11. International Investment Position and Investment Income ............................................ 61 2-1. Merger and Acquisitions Transactions by Industry, with Deregulation ................................. 83 2-2. Tender Offers ....................................... 84 2-3. Net New Venture Capital Funds ....................... 88 2-4. Percent of Equity Held by Institutions .............. 89 3-1. Employment-to-Population Ratio for Women ............ 113 3-2. Employment-to-Population Ratio by Race and Ethnicity . 114 3-3. EITC Benefit and Labor Force Participation of Unmarried Women with Children ..................... 119 3-4. EITC Benefit by Family Earnings and Number of Children for 2003 .......................................... 119 3-5. Fraction of Unemployed Workers Finding Work by Number of Weeks Unemployed ............................... 123 3-6. Unemployment and AFDC/TANF Recipients, 1960-2008 .... 130 4-1. Light Vehicle Sales ................................. 151 4-2. Ratio of Costs of Command-and-Control to Least-Cost Regulation ........................................ 153 4-3. California Power Exchange Prices per Megawatt-Hour .. 167 4-4. Emissions of Selected Pollutants Under the Clean Air Act and Clear Skies ............................... 171 5-1. Projection of Returns Affected by the Alternative Minimum Tax ....................................... 180 5-2. Marginal Federal Income Tax Rates for Hypothetical Couple in 2003 .................................... 183 5-3. Distribution of Marginal Federal Income Tax Rates for Joint Filers in 2003 .......................... 183 5-4. Alternate Tax Bases, 2000 ........................... 191 5-5. The 12 Largest Tax Expenditures, FY2002 ............. 192 5-6. Effective Marginal Tax Rates by Age for Hypothetical Couple ............................................ 201 6-1. Regional Economic Performance ....................... 217 6-2. Growth Rates of National Income and Income of the Poorest ........................................... 223 6-3. Regulatory Quality and Income per Capita ............ 226 6-4. Rule of Law and Income per Capita ................... 226 6-5. Inflation and Growth in Income per Capita ........... 228 6-6. Openness and Growth ................................. 232 LIST OF BOXES 1-1. Measuring the Effect of Stock Market Wealth on Consumption ....................................... 32 1-2. Measuring the Effect of Mortgage Refinancing on Consumption ....................................... 34 1-3. New Measures of Consumer Price Inflation ............ 50 1-4. Calculating the Effect of Higher Government Debt on Interest Rates .................................... 57 1-5. Accounting for the Recent Strength in Productivity Growth ............................................ 67 2-1. Do Bad Bidders Make Good Targets? ................... 81 2-2. Who Owns Corporations? .............................. 86 2.3. What Incentives Do CEOs Face? ....................... 92 2-4. Markets, Accountability, and the Enforcement of Rules ............................................. 96 3-1. Has There Been a Decline in Long-Term Employment? ... 116 3-2. Two Ways to Look at Income Mobility ................. 117 3-3. The Earned Income Tax Credit ........................ 118 3-4. The Growth in SSDI and SSI Disability Caseloads ..... 128 4-1. The Government Is Not Perfect, Either ............... 155 4-2. Assessing the Economic Impact of Major Regulatory Initiatives ....................................... 157 5-1. The Toll of Two Taxes: Compliance with the Regular and the Alternative Minimum Tax ................... 181 5-2. What Tax Rate Do Taxpayers Really Face? ............. 182 5-3. How Are Consumption Taxes and Individual Retirement Accounts Similar? ................................. 187 5-4. Taxpayers Exhibit Substantial Fluidity Across Tax Rate Brackets .......................................... 198 6-1. Combating the HIV/AIDS Epidemic in Africa ........... 221 6-2. China, the WTO, and the Rule of Law ................. 247