[Economic Report of the President (2006)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]


 
Economic Report
of the President




Transmitted to the Congress

February 2006


together with
THE ANNUAL REPORT
of the
COUNCIL OF ECONOMIC ADVISERS

UNITED STATES GOVERNMENT PRINTING OFFICE

WASHINGTON : 2006

For sale by the Superintendent of Documents, U.S. Government Printing
Office
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ISBN 0-16-075418-6


CONTENTS

--------
Page
ECONOMIC REPORT OF THE PRESIDENT ............................     1

ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS* ..........     7

CHAPTER 1. THE YEAR IN REVIEW AND THE YEARS AHEAD ...........    25

CHAPTER 2. SKILLS FOR THE U.S. WORKFORCE ....................    49

CHAPTER 3. SAVING FOR RETIREMENT ............................    65

CHAPTER 4. IMPROVING INCENTIVES IN HEALTH CARE SPENDING .....    85

CHAPTER 5. THE U.S. TAX SYSTEM IN INTERNATIONAL PERSPECTIVE .   107

CHAPTER 6. THE U.S. CAPITAL ACCOUNT SURPLUS .................   125

CHAPTER 7. THE HISTORY AND FUTURE OF INTERNATIONAL TRADE ....   149

CHAPTER 8. THE U.S. AGRICULTURAL SECTOR .....................   173

CHAPTER 9. THE U.S. FINANCIAL SERVICES SECTOR ...............   195

CHAPTER 10. THE ROLE OF INTELLECTUAL PROPERTY IN THE ECONOMY    211

CHAPTER 11. RECENT DEVELOPMENTS IN ENERGY ...................   231

APPENDIX A. REPORT TO THE PRESIDENT ON THE ACTIVITIES
OF THE COUNCIL OF ECONOMIC ADVISERS DURING 2005 .............  259


APPENDIX B. STATISTICAL TABLES RELATING TO INCOME,
EMPLOYMENT, AND PRODUCTION ..................................   273


* For a detailed table of contents of the Council's Report, see
page 11



ECONOMIC REPORT
OF THE PRESIDENT





ECONOMIC REPORT OF THE PRESIDENT


To the Congress of the United States:

The United States economy continues to demonstrate remarkable
resilience, flexibility, and growth. Having previously endured a
stock market collapse, recession, terrorist attacks, and corporate
scandals, this year the economy showed strong growth and robust
job creation in the face of higher energy prices and devastating
natural disasters. This is the result of the hard work of America's
workers, supported by pro-growth tax policies.
In 2005, the Nation's real gross domestic product (GDP) grew
3.5 percent for the year, above the historical average. About
2 million payroll jobs were added in 2005, and the unemployment rate
dropped to 4.7 percent last month, well below the averages of the
1970s, 1980s, and 1990s. Real disposable personal income increased,
and real household net worth reached an all-time high. This growth
comes on top of an already strong expansion. More than 4.7 million
payroll jobs have been added since August 2003.
Compared with the performance of other nations' economies, our
economic growth is especially impressive. The United States has
added more jobs in the past two-and-a-half years than Japan and the
European Union combined. Real GDP growth in the United States has
been faster than in any other major industrialized country since 2001,
and America is forecasted to continue as the fastest-growing country
over the next two years.
Our economy's fundamental strength comes from the ingenuity and hard
work of our workers. Productivity--how much workers produce per
hour--has accelerated since 2000. In the past five years, productivity
has grown faster than in any other five-year period since the mid-1960s.
The productivity of the United States is increasing faster than any other
major industrialized country.
Productivity growth raises our standard of living and plays a central
role in our competitiveness in the worldwide economy. Productivity
growth will be even more important as new technologies accelerate
global economic integration and as the American population ages.
We must now build on this fundamental strength by making robust
investments in physical sciences, improving private incentives
for research and development, and boosting math and science education
and worker training.  The American Competitiveness Initiative will
help us remain a world leader in science and technology, which means
good high-paying jobs for the American people.
We must also continue to pursue pro-growth economic policies and foster
a culture of entrepreneurship. To adopt innovations effectively, our
companies and workers need the incentives and flexibility that support
a thriving free-market economy.
Maintaining a low tax burden is essential for our economic growth and
competitiveness. Tax relief has helped our economy, and raising taxes
will increase the burden on our families and small businesses. To keep
our economy growing, Congress needs to make the tax relief permanent.
Two years ago, I called for cutting the budget deficit in half by 2009
by restraining spending and spurring economic growth. Every year of my
presidency, we have reduced the growth of non-security discretionary
spending, and last year Congress passed bills that cut this spending. This
year, my budget will cut it again, and it will reduce or eliminate more
than 140 programs that are performing poorly or not fulfilling essential
priorities. By passing these reforms, we will save the American taxpayer
another $14 billion next year, and we will stay on track to cut the deficit
in half by 2009.
Controlling discretionary spending alone is not enough, however. We have
recently passed significant savings in mandatory spending programs. We
need to do more because the only way to solve our Nation's fiscal challenges
is to address the explosions in growth of entitlement programs like
Social Security, Medicare, and Medicaid. I have called for a bipartisan
commission to examine the full impact of the Baby Boom retirement and help
us come up with bipartisan answers. The longer Congress waits to act, the
more difficult the choices will become.
Working together, we accomplished other significant pro-growth reforms that
will help our Nation's economy grow stronger and create more jobs.  More
remains to be done.
Growth in spending on health care has been more rapid than general inflation,
straining consumers, employers, and government budgets. Two years ago, we
created Health Savings Accounts (HSAs) to help give patients more control
over their health care decisions and to make health care more available and
affordable. This year, I am proposing to enhance HSAs to make them more
widely available, valuable to consumers, and attractive to small
businesses--and to make it easier for people to keep their insurance policies
when they change jobs. Last year, we worked with Congress to pass a patient
safety bill that will help reduce medical errors. Getting doctors and
patients the information they need on the quality, cost, and effectiveness
of different treatments will help Americans get the highest quality and
highest value care. This year, my Administration will push to make more
information about price and quality available to consumers, and move forward
on these and other policies to lower the cost of health care.
Our Nation's liability laws allow too many frivolous lawsuits and raise costs
for consumers and businesses. A year ago, we worked with Congress to pass
bipartisan class action reform to help curb lawsuit abuse. I urge Congress in
the coming year to pass other essential legal reforms, including asbestos and
medical liability reforms.
Energy prices have risen in the last year, but the underlying causes of high
prices are long-standing.  Last year, we passed the first major energy bill
in over a decade. It encourages new technologies and updates government
regulations.  Over time, the new law will help increase the reliability of
our energy supply and the efficient use of the energy we have. We must
continue to find new ways to diversify our sources of energy. I have proposed
the Advanced Energy Initiative to help increase research in alternative
energy sources and technology and to make America less dependent on foreign
sources of energy.
Because 95 percent of the world's customers live outside of our borders,
opening international markets to our goods and services is critical for our
economy. My Administration will continue to work tirelessly to open markets
and knock down barriers to free and fair trade so that American farmers and
workers can compete on a level playing field worldwide.
These and other issues are discussed in the 2006 Annual Report of the Council
of Economic Advisers. This report is prepared by CEA to help policymakers
understand the economic context of a variety of issues and trends as
our Government makes decisions regarding our economic future. By
adopting sound economic policies that build on our strengths, we will
keep our economy moving forward and extend prosperity for all Americans.




THE ANNUAL REPORT
OF THE
COUNCIL OF ECONOMIC ADVISERS


LETTER OF TRANSMITTAL

Council of Economic Advisers,
Washington, D.C., February 13, 2006
Mr. President:
The Council of Economic Advisers herewith submits its 2006 Annual
Report in accordance with the provisions of the Employment Act of
1946 as amended by the Full Employment and Balanced Growth Act of
1978.
Sincerely,


Katherine Baicker
Member







Matthew J. Slaughter
Member