[Economic Report of the President (2003)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]


 
CONTENTS

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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