[Economic Report of the President (2007)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
Overview



The U.S. economy continues to exhibit robust growth, with a strong
labor market and moderate inflation (see Chapter 1). These
accomplishments are supported by rapid productivity growth that
makes our economy one of the most dynamic and resilient in the world. Productivity growth is a common thread that ties nearly all positive
economic news together and plays a central role in our international competitiveness.

Much of this Report explores the role of productivity and
productivity-related issues in the continuing expansion of the U.S.
economy. Policymakers face a challenge: productivity growth is
important for economic growth and many of the underlying issues that
they are trying to solve, but there is no single cause of productivity
and no single policy to spur its growth (see Chapter 2). Tax policy
can be structured to encourage productivity growth (see Chapter 3). Entitlement programs, on the other hand, may indirectly weigh on
productivity growth if not reformed (see Chapter 4). Open commerce
and financial markets allow productivity to flourish (see Chapters
7-9). Economists discuss productivity growth using macroeconomic
data, but its result is most importantly seen in increases in
individual Americans' standards of living.


Chapter 1: The Year in Review and the Years Ahead

The economic expansion continued for the fifth consecutive year in
2006. This economic growth comes despite numerous headwinds, and
results from inherent U.S. economic strengths and pro-growth
policies. Chapter 1 reviews the past year and discusses the
Administration's forecast for the years ahead.
The key points are:
Real GDP posted above-average 3.4 percent growth in 2006.
The composition of growth changed, with more coming from exports
and business structures investment, while residential investment
flipped from contributing to GDP growth in 2005 to subtracting
from it in 2006. Consumer spending remained strong.
Labor markets continued to strengthen, with the unemployment
rate dropping to 4.6 percent and payroll job growth averaging
187,000 per month. Real average hourly earnings accelerated to a
1.7 percent increase during the 12 months of 2006.
Energy prices rose sharply in the first half of the year,
but then declined just as sharply in the second half.



Chapter 2: Productivity Growth

Productivity growth rarely makes the headlines, but is important
to the Nation because higher productivity growth improves the
outlook for economic issues such as standards of living, inflation, international competitiveness, and long-run demographic challenges.
Chapter 2 reviews the sources of the recent strength in productivity
growth, highlighting the role that flexible markets and
entrepreneurship play in explaining cross-country differences.
It also explains the benefits of productivity growth and discusses
how policymakers can further promote it. The key points are:
Recent productivity growth has been primarily driven by
efficiency growth (growth in how well labor and capital inputs are
used) and by capital deepening (growth in the amount of capital
that workers have available for use).
Openness to international trade and investment, and
improvements in the education and training of the U.S. workforce,
will continue to be important to long-run productivity growth.
Policies that encourage capital accumulation, research
and development, and increases in the quality of our education
system can boost productivity growth.



Chapter 3: Pro-Growth Tax Policy

Chapter 3 discusses the advantages of adopting a more pro-growth
tax system. It reviews recent changes that have reduced tax
distortions on capital investment decisions, and evaluates options
to reduce such distortions further. The key points are:
The goal of pro-growth tax policy is to reduce tax
distortions that hamper economic growth. Most economists agree that
lower taxes on capital income stimulate greater investment,
resulting in greater economic growth, greater international
competitiveness, and higher standards of living.
The tax code contains provisions that discourage investment
and create distortions that affect the level, distribution, and
financing of capital investment.
Estimates from research suggest that removing these tax
distortions to investment decisions could increase real gross
domestic product (GDP) by as much as 8 percent in the long run.
Since 2001, temporary changes in the tax code have reduced
the tax on investment. These pro-growth policies have stimulated
short-run investment and economic growth. However, the temporary
nature of the provisions eliminates desirable long-run economic
stimulus.


Chapter 4:

The Fiscal Challenges Facing Medicare


Social Security, Medicare, and Medicaid are three entitlement
programs in the United States that provide people with important
economic security against financial risk. However, the projected
long-term growth in entitlement spending is unsustainable because
of the pressure it puts on future Federal budgets. It is crucial
that reforms to these programs preserve the protection against
financial risk that these programs provide without having negative
effects on economic growth. Chapter 4 focuses on Medicare by
examining the main reasons for its projected financial pressures
and by discussing ways to improve the efficiency of the program and
thus slow the growth of Medicare spending. The key points are:
Medicare spending is growing quickly, primarily because of
the demo-graphic shift to an older society and the increases in
per-beneficiary medical spending driven largely by new technologies.
Rewarding providers for supplying higher-quality care and
improving incentives for patients to choose higher-value care can
both increase the efficiency and slow the growth of Medicare
spending.



Chapter 5: Catastrophe Risk Insurance

Insuring economic losses arising from large-scale natural and
manmade catastrophes such as earthquakes, hurricanes, and terrorist
attacks poses challenges for the insurance industry and for Federal
and State governments. Chapter 5 examines the economics of
catastrophe risk insurance. The key points are:
In insurance markets, as in other markets, prices affect
how people weigh costs and benefits. Artificially low insurance
prices can discourage people from adequately protecting against
future losses. For example, subsidized property insurance prices
may stimulate excessive building in high-risk areas, potentially
driving up future government disaster relief spending.
Government intervention in insurance markets can have
unintended consequences, such as limiting the availability of
insurance offered by private firms.
Insurers manage catastrophe losses by being selective about
which risks to insure, designing insurance contracts to provide
incentives for risk-reducing behavior, and charging prices that are
high enough to enable them to diversify risk over time or transfer
risk to third parties. By managing and pricing risk more effectively,
government insurance programs can reduce the burden they impose on
taxpayers and minimize negative effects on private insurance markets.


Chapter 6: The Transportation Sector:
Energy and Infrastructure Use

The transportation sector accounts for the majority of the petroleum
consumed in the United States andï¿½whether plane, train, ship, or
automobile- almost all transportation is powered by petroleum.
Understanding the petroleum market, and the ways in which consumers
and firms respond to changes in world oil prices, is key to
understanding the transportation sector. In addition to petroleum,
the transportation sector also relies heavily on infrastructure.
The key points of Chapter 6 are:
Recent increases in the price of oil and the external costs
of oil have led to renewed interest by markets and governments in
the development of new alternatives. Government can play a role in
ensuring that external costs are taken into account by markets, but
ultimately markets are best suited to decide how to respond.
Cars and light trucks are the largest users of petroleum.
As a result, the fuel economy of the vehicles purchased and the
number of miles that they are driven have a large effect on oil
consumption.
Congestion is a growing problem in American urban areas.
Cities and States have shown a growing interest in and capacity for
setting prices for road use during peak periods to reduce the full
economic costs of congestion.



Chapter 7: Currency Markets

The need for international transactions provides the impetus for a
huge, well-functioning market that facilitates currency conversions
and allows global economic integration and trade to occur smoothly
and quickly at low cost. Both by volume of trade and ease of making transactions, currency markets today are the world's deepest, most
liquid markets. Currency markets range from common markets where
parties simply exchange one currency for another to sophisticated
markets where parties buy and sell currencies far into the future.
The key points of Chapter 7 are:
Foreign-exchange markets allow firms to trade goods and
services across borders, and to manage the risks they face from
fluctuations in the price of their domestic currency.
As with any other good, the exchange value of a currency is
determined by its supply, as well as the demand for the country's
assets, goods, and services.
Over much of the 20th century, countries tended to favor
fixed exchange rates, but in recent decades there has been a shift
toward freely floating exchange rates.
Monetary and exchange-rate policies are tightly linked.
A nation's government must decide between controlling its exchange
rate and controlling its domestic inflation rate.


Chapter 8: International Trade and Investment

The United States derives substantial benefits from open trade and
investment flows. Over many decades, increased trade and investment
liberalization has been an important catalyst for greater
productivity growth and rising average living standards in the
United States. The key points of Chapter 8 are:
Looking ahead, international trade liberalization in
services presents significant opportunities for U.S. workers,
firms, and consumers.
Foreign direct investment (FDI) flows into the United States
benefit the U.S. economy by stimulating growth, creating jobs,
promoting research and development that spurs innovation, and
financing the current account deficit.
U.S. direct investment abroad is an important channel of
global market access for U.S. firms. U.S. multinational companies
have contributed to productivity growth, job creation, and rising
average living standards in the United States.


Chapter 9: Immigration

The United States is a nation of immigrants and a nation of laws,
and we value both historical legacies. Immigrants continue to make
positive contributions to our Nation and our economy, yet our
current immigration laws have proven difficult to enforce and are n
ot fully serving the needs of the American economy. The key points
of Chapter 9 are:
International differences in economic opportunities and
standards of living create strong incentives for labor migration.
Once established, migration flows from a certain region tend to be
self-perpetuating.
Foreign-born workers make significant contributions to the
American economy, but not all Americans gain economically from
immigration. Foreign-born workers tend to be concentrated at the
low end and the high end of the educational spectrum relative to
native-born workers.
Immigration policy plays a key role in determining the
volume and composition of the foreign-born workforce. Comprehensive
immigration reform can help ensure an orderly, lawful flow of
foreign-born workers whose presence continues to benefit the
American economy.