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

 
CONTENTS

Page

overview .....................................................   19
chapter 1. the year in review and the years ahead ............   25
Developments in 2005 and the Near-Term Outlook ...............   25
Consumer Spending and Saving .........................   25
Housing Prices .......................................   30
Residential Investment ...............................   31
Business Fixed Investment ............................   31
Business Inventories .................................   32
Government Purchases .................................   33
Exports and Imports ..................................   34
Employment ...........................................   35
Productivity .........................................   36
Wages and Prices .....................................   38
Financial Markets ....................................   41
The Long-Term Outlook Through 2011 ...........................   42
Growth in GDP over the Long Term .....................   43
Interest Rates over the Near and Long Term ...........   46
The Composition of Income over the Long Term .........   46
Conclusion ...................................................   47
Chapter 2. skills for the u.s. workforce .....................   49
Educational Achievement in the United States .................   49
Workforce Skills and the U.S. Standard of Living .....   50
Educational Attainment ...............................   51
Math, Science, and Reading Skills in the United States
and Around the World .................................   54
School Accountability and No Child Left Behind .......   55
Immigrants in the U.S. Workforce .............................   56
Immigrants in Science and Engineering ................   57
Regulation of Legal Immigration ......................   59
Skilled Immigration and Innovation ...................   61
Job Training .................................................   61
The Role of Community Colleges .......................   62
Job Training Funding .................................   63
Conclusion ...................................................   63
Chapter 3. saving for retirement .............................   65
What Does ``Retirement Preparedness'' Mean? ..................   65
Estimates of Retirement Preparedness .........................   66
The Risks to Retirement Preparedness .........................   69
Are Low Saving Rates Putting Household Net Worth at
Risk? ...............................................   69
Defined-Benefit Pensions .............................   74
Social Security ......................................   79
Conclusion ...................................................   83
Chapter 4. improving incentives in health care spending ......   85
The Growth in Health Care Spending ...........................   85
Where Health Spending Has Grown ......................   88
First-Dollar Insurance Inhibits Consumer Cost-Consciousness ..   91
Causes of First-Dollar Insurance Coverage ............   92
Consequences of First-Dollar Insurance Coverage ......   94
Consequences of Inefficient Health Care Spending .............   97
Private Spending .....................................   97
Public Spending ......................................   99
Strengthening the Role of Health Consumers Through Public
Policy .....................................................  100
Health Savings Accounts (HSAs) .......................  100
Informed Consumers Are Better Consumers ..............  104
Conclusion ...................................................  106
Chapter 5. the u.s. tax system in international perspective ..  107
Fundamental Choices in Tax Systems ...........................  107
Designing a Tax System ...............................  108
Taxes Distort Economic Decisions .....................  109
U.S. Tax Policy in International Perspective .................  112
International Comparison of Overall Tax Burdens ......  112
International Comparison of Tax Bases and Rate
Structures ..........................................  113
Recent International Tax Reforms .....................  116
U.S. Tax Reforms: Past, Present, and Future ..................  118
Twenty Years of Tax Reform ...........................  119
Potential Reforms to the Tax System ..................  120
Conclusion ...................................................  122
Chapter 6. the u.s. capital account surplus ..................  125
Global Capital Flows--Principles .............................  128
Global Capital Flows--Recent Patterns ........................  130
Global Capital Exporters .....................................  132
The United States and Net Capital Inflows ....................  136
Overview .............................................  136
Net Capital Importers--International Comparisons .....  138
U.S. Share of Global Flows and the Asset Composition
of U.S. Capital Inflows .............................  139
Causes of U.S. Capital Inflows .......................  140
Low and Declining U.S. Saving ........................  140
High U.S. Economic and Productivity Growth ...........  142
Financial Market Size ................................  143
Global Role of the U.S. Dollar .......................  144
U.S. Capital Flow Sustainability .............................  144
Conclusion ...................................................  146
chapter 7. the history and future of international trade .....  149
A Retrospective on Trade .....................................  149
The Payoff to America from Global Economic Integration .......  155
Benefits to Consumers ................................  155
Benefits to Firms and Their Workers ..................  158
Taking Stock of the Benefits of Trade to America .....  160
The Policy Scene Today: Avenues to Further Liberalization ....  164
Prospective Gains from Further Liberalization ........  164
Avenues for Further Liberalization ...................  168
Moving Beyond Goods Trade Liberalization .............  168
Conclusion ...................................................  170
Chapter 8. the u.s. agricultural sector ......................  173
The U.S. Farm Sector Has Evolved Dramatically Over Time ......  174
The Average Farm Payment Recipient Is No Longer Poor .  176
Production and Government Payments Are Concentrated on
Large Farms ..........................  177
Issues in Current U.S. Farm Policy ...........................  178
Agricultural Production and Farm Program Benefits Are
Increasingly Concentrated ...........................  178
Farmers Today Have Many Options for Managing the Risks
They Face ...........................................  180
Economic Costs of Commodity Support Programs .........  182
Trade Policy Issues ..........................................  183
Trade Is Essential to the U.S. Agricultural Sector ...  184
Nonsubsidized Commodities Now Account for Most of U.S.
Agricultural Exports ................................  184
Trade Agreements Promote Reform of U.S. Commodity
Support Programs ....................................  185
Benefits of Agricultural Trade Liberalization ........  186
Alternatives to Commodity Subsidies ..................  188
Environmental Aspects of Agricultural Subsidies ......  189
Conclusion ...................................................  192
Chapter 9. the u.s. financial services sector ................  195
The Economic Roles of Financial Services .....................  195
Financial Services Address Information Problems in Lending
and Investing ......................................  195
Other Benefits of Financial Services .................  198
The United States Enjoys a Comparative Advantage in
Financial Services ...................................  199
Economic Growth and Stability ................................  200
Financial Development and Economic Growth ............  200
Financial Services and Economic Stability ............  202
Policy Issues ................................................  204
Consumer Protection ..................................  204
Safety and Soundness .................................  206
Conclusion ...................................................  210
Chapter 10. the role of intellectual property in the economy .  211
Knowledge Is Different from Other Types of Goods .............  212
Treating Knowledge as Intellectual Property ..........  213
The Social Costs of an Intellectual Property System ..  213
Intellectual Property Rights Basics ..........................  215
Patents: Protecting a Particular Implementation of
an Idea .............................................  216
Copyrights: Protecting the Expression of an Idea .....  216
Trademarks: Protecting the Symbol of an Idea, Product,
or Service ..........................................  217
Trade Secrets: Limited Protection for Knowledge
Kept Secret ........................................  217
Intellectual Property, the American Economy, and Economic
Growth .....................................................  218
Intellectual Property and the American Economy .......  218
Intellectual Property Protection and Economic Growth .  221
Intellectual Property Policy Challenges ......................  222
Ensuring the Integrity of the Patent Process .........  222
Intellectual Property and International Trade ........  224
Technological Change and Intellectual Property Reform . 227
Conclusion ...................................................  229
Chapter 11. recent developments in energy ....................  231
Energy Sources and Uses ......................................  232
Crude Oil ....................................................  233
A Global Market in Crude Oil .........................  233
Crude Oil Prices .....................................  234
The Strategic Petroleum Reserve ......................  235
Future Price Expectations and Incentives for
Nonconventional Fuels ...............................  236
Gasoline and Other Refined Products ..........................  238
Gasoline Prices ......................................  239
Refining Capacity and Trade ..........................  242
Price-Induced Substitution and Technological Change ..  243
Reform of the New Source Review Program ..............  246
Natural Gas ..................................................  246
Regionalized Natural Gas Markets .....................  247
Natural Gas Prices ...................................  247
Liquefied Natural Gas ................................  248
Prospects for Domestic Production of Natural Gas .....  251
Electricity ..................................................  252
Electricity-Generation Technologies ..................  252
The Real-Time Challenge of Electricity Markets		252
Real-Time Pricing and Other Reforms ..................  253
Environmental Protection .............................  254
Electricity Markets in Transition ....................  256
Conclusion ...................................................  257

appendixes
A.  Report to the President on the Activities of the Council
of Economic Advisers During 2005 .......................  259
B.	Statistical Tables Relating to Income, Employment,
and Production ....................................  273

list of tables
1-1.	Administration Forecast ..............................   43
1-2.	Supply-Side Components of Real GDP Growth, 1953-2011 .   44
2-1.	Average Annual Earnings by Education (2004 dollars) ..   50
2-2.	Educational Attainment by Race, Ethnicity, and
Gender, 2004 .......................................   53
2-3.	Rankings of Selected Advanced Countries by Average Score
on International Tests .......................   55
3-1.	The Median Value (in 1998 dollars) of Net Worth for
Households Headed by a 25- to 34-Year
Old--Differences by Homeownership, Marital
Status, and Education ........................   68
3-2.	Median Value of Wealth-to-Income Ratios for Households
Headed by a 25- to 34-Year Old--Differences by
Homeownership, Marital Status, and Education .   68
4-1.	The Premiums Charged for Three Sample Health Insurance
Plans with Different Patient Cost Sharing ....  102
7-1.	Important Milestones in American Trade History .......  151
8-1.	100 Years of Structural Change in U.S. Agriculture ...  175
8-2.	Farm Income and Farm Operator Household Income by
the USDA Farm Size Classification, 2004 ......  177
8-3.	Distribution of Agricultural Production and Government
Payments by the USDA Farm Size
Classification, 2003 .........................  178
11-1.	Energy Sources and Uses, 2004 ........................  233

list of charts
1-1.	Consumption & Net Worth (Relative to Disposable
Personal Income) .............................   30
1-2. 	Business Fixed Investment and Cash Flow ..............   33
1-3.	Productivity Growth During Cyclically-Comparable Business
Cycle Intervals ..............................   37
1-4.	Inflation ............................................   38
1-5.	Survey and Market Measures of Expected Inflation
in 2005 and 2006 ...................................   40
1-6.	10-Year Treasury Yield ...............................   41
1-7.	Corporate Bond Yield Spreads .........................   42
1-8.	Labor Force Participation Rate and Disabled Workers
Relative to Population .............................   45
2-1.	Educational Attainment by Age, 1947-2004 .............   52
2-2.	Foreign-born Share of Employment by Education among
Scientists and Engineers, 1996-2002 ..........   58
3-1.	Personal Saving as a Percentage of Disposable
Personal Income ...................................   70
3-2.	Household Net Worth as a Percentage of Disposable
Income ............................................   72
3-3.	Household Saving Rate as a Percentage of Disposable
Income ............................................   72
3-4.	Funding Status of the Pension Benefit Guaranty
Corporation .......................................   76
4-1.	National Health Expenditures as a Percentage of GDP ..   86
4-2.	Family Health Insurance Premiums 1999-2005 ...........   87
4-3.	Real Hourly Compensation of the Civilian Population ..   98
5-1.	Tax Revenues as a Percent of GDP for the OECD Countries
in 2002 ......................................  113
5-2.	Top Marginal Personal and Corporate Tax Rates for the
OECD Countries in 2004 .......................  116
6-1.	Net Capital Inflows to the United States .............  126
6-2.	Largest Net Capital Importers and Exporters-2004 .....  131
6-3.	Current Account Balances of Oil-Producing Countries ..  138
6-4.	Annual Growth and Current Account Balances -
1995-2004 .......................................  139
6-5.	Gross National Saving Rates - 1995-2004 ..............  140
7-1.	Average U.S. Tariff on Dutiable Goods, 1930-2005 .....  154
7-2.	Consumer and Import Price Growth, 1990-2004 ..........  156
7-3.	Average Tariffs Across Countries .....................  166
8-1.	Farm Sector Inputs, Output, and Total Factor
Productivity ......................................  175
8-2.	Farming Output and Share of U.S. GDP .................  176
8-3.	Value of Agricultural Production by Farm Size (1989 versus
2003) ........................................  179
8-4.	Government Commodity Payments by Farm Size (1989
versus 2003) .................................  180
8-5.	Composition of U.S. Farm Household Income by Source
(household average) ..........................  181
8-6.	Net Direct Payments to Farmers .......................  183
8-7.	Value of U.S. Agricultural Exports of Bulk and
High-Value Commodities ...........................  185
9-1.	Share of GDP from Financial Services .................  200
9-2.	Long-Term Decline in Volatility of Macroeconomic
Indicators .......................................  203
10-1.	Intellectual Property Industries' Share of 2003
Gross Domestic Product ...........................  219
10-2.	Share of Assets in Current Market Value of Public U.S.
Corporations .................................  220
10-3.	Growth Rate of U.S. Exports ..........................  221
11-1.	World Proven Oil Reserves ............................  234
11-2.	Estimated Production Costs of Alternatives to
Conventional Oil ................................  238
11-3.	U.S. Household Gasoline Expenditures .................  242
11-4.	U.S. Energy Intensity ................................  244
11-5.	World Proven Natural Gas Reserves ....................  249

list of boxes
1-1.	Economic Impact of the 2005 Hurricanes ...............   26
3-1.	Earlier Attempts to Shore Up Social Security .........   81
4-1.	Tax Preferences for Employer Health Insurance Premiums   92
4-2.	Medical Liability Costs ..............................   95
5-1.	Fiscal Challenges Ahead ..............................  114
5-2.	Simple, Fair, and Pro-Growth: Proposals to Fix
America's Tax System, Recommendations of the
President's Advisory Panel on Federal Tax Reform ..  121
6-1.	Analyzing the Current and Capital Account Balances ...  129
6-2.	High Saving and Financial Sector Inefficiency ........  137
6-3.	The Link Between Fiscal and Trade Deficits ...........  141
7-1.	The Regressive Nature of U.S. Tariffs ................  157
7-2.	Trade and Labor ......................................  161
7-3.	Trade and the Environment ............................  163
7-4.	U.S.-Asia Trade Relationship .........................  166
8-1.	New Zealand's Abolition of Agricultural Subsidies ....  187
8-2.	Policy Mechanisms for Addressing Agri-environmental
Issues ...........................................  190
8-3.	A Market-Based Approach to Reduce Overfishing ........  192
9-1.	Venture Capital and Innovation .......................  201
9-2.	Regulation Is Not Costless ...........................  205
10-1.	Intellectual Property in the Early American Republic .  214
10-2.	The Free Software Licensing Movement .................  228
11-1.	Energy Futures Markets ...............................  237
11-2.	The Effects of Hurricanes Katrina and Rita on Energy
Supplies .....................................  239
11-3.	Automobile Fuel Economy Standards ....................  245
11-4.	Cap-and-Trade Programs for Air Pollution .............  255