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


 
CONTENTS

Page

overview......................................................... 17

CHAPTER 1. THE YEAR IN REVIEW AND THE YEARS AHEAD................ 23
Developments in 2006 and the Near-Term Outlook................... 24
Consumer Spending and Saving.................................. 24
Housing Prices................................................ 27
Residential Investment........................................ 28
Business Fixed Investment..................................... 30
Business Inventories ......................................... 31
Government Purchases ......................................... 31
Exports and Imports .......................................... 32
Employment ................................................... 33
Productivity.................................................. 34
Prices and Wages ............................................. 35
Financial Markets ............................................ 38
The Long-Term Outlook Through 2012............................... 38
The Composition of Income Over the Long Term.................. 43
Conclusion....................................................... 44


CHAPTER 2. PRODUCTIVITY GROWTH................................... 45
The Basics of Productivity Growth: Framework and Recent Facts.... 47
Factors That Increase Labor Productivity ..................... 47
Productivity Growth in Recent Years .......................... 49
Productivity Growth and Worker Earnings ......................... 51
Productivity and Average Earnings ............................ 51
Productivity and Income Differences ............................. 52
Understanding the Acceleration in U.S. Productivity: Industry
Analysis ........................................................ 54
Why Has Productivity Growth Accelerated in the U.S. While
Slowing in Other Countries?...................................... 58
International Openness ....................................... 59
Flexible Labor Markets ....................................... 60
Low Costs of Starting a Business ............................. 61
Policy Implications ............................................. 61
Conclusion ...................................................... 62


CHAPTER 3. PRO-GROWTH TAX POLICY ................................ 63
Rationale for Pro-Growth Tax Policy ............................. 64
Defining the Tax Base ........................................ 64
Choosing the Tax Rates........................................ 65
The U.S. Tax System - Previous Distortions and Recent Reforms ... 66
Tax Treatment of Physical Capital Investment ................. 66
Tax Treatment of Human Capital Investment .................... 71
Pro-Growth Changes Since 2001 ................................ 72
Incremental Approaches to a More Pro-Growth Tax System .......... 76
Expensing of Investment ...................................... 77
Reducing Statutory Tax Rates.................................. 81
Comparison of Effects of Different Pro-Growth Policies ....... 82
Conclusion....................................................... 84



CHAPTER 4. THE FISCAL CHALLENGES FACING MEDICARE ................ 85
Entitlement Spending and Medicare ............................... 85
The Basics of Medicare ....................................... 88
Increases in Medicare Spending Over Time ........................ 92
Projections of Future Medicare Spending and Revenue .......... 92
Reasons for the Changes in Medicare Spending Over Time .......... 96
Increases in the Number of Medicare Beneficiaries............. 96
Increases in Spending Per Beneficiary......................... 97
Improving the Efficient Allocation of Resources in Medicare ..... 98
Inefficient Health Care Spending ............................. 98
Better Incentives for Health Care Providers and Insurers .... 100
Better Incentives for Medicare Beneficiaries ................ 102
Conclusion...................................................... 104



CHAPTER 5. CATASTROPHE RISK INSURANCE........................... 105
The Economics of Catastrophe Risk Insurance .................... 105
Effective Underwriting Reduces Information Problems.......... 107
Catastrophe Losses Are Difficult to Forecast ................ 108
Managing Catastrophe Losses ................................. 110
Federal Catastrophe Insurance Programs ......................... 113
The National Flood Insurance Program ........................ 113
Terrorism and War-Risk Insurance Programs ................... 116
State Property Insurance Markets ............................... 118
Conclusion...................................................... 122



CHAPTER 6. THE TRANSPORTATION SECTOR: ENERGY AND
INFRASTRUCTURE USE ............................................. 125
Fuel Markets and the Transportation Sector ..................... 126
Responding to Changes in the Price of Oil ................... 127
External Costs of Oil Use.................................... 129
Transportation Fuel Supply ..................................... 129
Alternative Fuels and Advanced Technologies ................. 130
Demand for Transportation Fuel ................................. 132
Improving Fuel Economy ......................................... 134
Transportation Infrastructure and Management of Existing
Traffic Flow ................................................... 137
The Cost of Congestion....................................... 140
Building More Roads ......................................... 141
Pricing Road Space .......................................... 142
Conclusion...................................................... 147



CHAPTER 7. CURRENCY MARKETS AND EXCHANGE RATES ................. 149
Currency Markets Are Large...................................... 150
What Determines Currency Values ................................ 154
Interest Rate Parity......................................... 155
Purchasing Power Parity ..................................... 158
Fixed versus Floating Exchange Rates............................ 159
Floating Exchange-Rate Regimes............................... 159
Fixed Exchange-Rate Regimes ................................. 161
The Links Between Monetary and Exchange-Rate Policies........... 162
Conclusion...................................................... 166



CHAPTER 8. INTERNATIONAL TRADE AND INVESTMENT .................. 167
Trade Liberalization: A Key Contributor to the Strength of the
U.S. Economy.....................................................167
Firms That Engage in International Trade Are Strong
Performers .................................................. 168
The Effects of Nontariff Barriers on International Trade .... 169
International Trade in Services ................................ 171
U.S. Competitive Advantage in Services....................... 171
Looking Ahead to Larger Gains from Trade Liberalization......... 174
Foreign Direct Investment ...................................... 175
Contributions of Inward FDI to the U.S. Economy ............. 176
The Contributions of Outward FDI to the U.S. Economy......... 181
Conclusion...................................................... 188



CHAPTER 9. IMMIGRATION ......................................... 189
The Economics of Immigration ................................... 190
The Migration Decision and the Volume of International
Migration.................................................... 190
Lessons from American Immigration History.................... 193
Foreign-Born Workers in the U.S. Labor Force................. 195
The Foreign-Born Skill Mix and the Labor Market Impact....... 197
Comprehensive Immigration Policy Reform ........................ 202
A Legal Bridge between Employer Demand and Migrant
Supply....................................................... 203
The Pitfalls of Partial Policy Reforms ...................... 204
Conclusion ..................................................... 206



appendixes

A. Report to the President on the Activities of the Council of
Economic Advisers During 2006................................ 207
B. Statistical Tables Relating to Income, Employment,
and Production ................................................. 221



list of tables

1-1. Administration Forecast .................................... 39
1-2. Supply-Side Components of Real GDP Growth, 1953-2012 ....... 40
2-1. Implied Doubling Rates for the Level of Productivity Using
Historical Growth Rates..................................... 46
3-1. Effective Marginal Tax Rates on Capital Income of
Corporations by Asset Type ................................. 68
3-2. Effective Marginal Tax Rates on Investment.................. 83
6-1. Cost of Congestion in Wasted Time and Fuel in the largest
Urban Areas ............................................... 141
8-1. U.S. International Trade in Private Services, 2005 ........ 173
9-1. Ten  Most Common Occupations for Foreign-Born Workers,
2005 ...................................................... 196
9-2. Ten Occupations with the Highest Proportion of
Foreign-Born Workers, 2005................................. 196



list of charts

1-1. Consumption and Net Worth (Relative to Disposable
Personal Income) .......................................... 25
1-2. Residential Investment and House Prices ................... 27
1-3. Consumer Price Inflation................................... 35
2-1. Sources of Labor Productivity Growth ...................... 50
2-2. Productivity and Real Compensation Grow Together .......... 51
2-3. Efficiency Growth Highest in Sectors that Made Large IT
Investments in 1990s ...................................... 55
2-4. Average Annual Productivity Growth Has Fallen for Most
G7 Nations since 1990 ..................................... 59
3-1. Effective Marginal Tax Rates on New Investment ............ 70
3-2. Effective Marginal Tax Rates on New Business Investment ... 70
3-3. Real Private Nonresidential Fixed Investment .............. 73
3-4. Dividends per Share........................................ 74
3-5. Percent of Firms in the S&P 500 Paying Dividends .......... 74
4-1. 2006 Government Outlays.................................... 86
4-2. Total Healthcare Spending by Medicare Beneficiaries,
1966-2050 ................................................. 93
5-1. Annual Accident Rate for U.S. Passenger Cars.............. 109
5-2. Annual Claim Rate for Properties Covered by the National
Flood Insurance Program .................................. 109
5-3. National Flood Insurance Program Annual Premiums and
Losses.................................................... 116
6-1. Historical and Projected U.S. Oil Consumption and
Production ............................................... 127
6-2. The Real Price of Imported Crude Oil ..................... 128
6-3. Projected Sales of Alternative Technology Cars and Light
Trucks by Fuel Type....................................... 131
6-4. Share of Vehicle Miles Traveled .......................... 133
6-5. Main Sources of Congestion ............................... 138
6-6 Travel Time and Hour of Day on I-90 from Bellevue to Seattle .. 139
7-1. Interest Rates on U.S. and German Long-Term Bonds ........ 156
7-2. Exchange Rate Policy Has Moved Away from Fixed Rates ..... 161
8-1. Percent of Private U.S. Workforce by Sector, 1800-2005 ... 172
8-2. Trade Balance by Sector, 1970-2005 ....................... 172
8-3. Economic Activities of U.S. Affiliates of Foreign Companies
(2004).................................................... 177
8-4. Foreign Investment Position in the U.S. by Asset Type (2005) ..179
8-5. U.S. Multinational Goods Sales through Foreign Affiliates
and Exports (2004) ........................................... 184
8-6. Economic Activities of U.S. Multinational Companies (2004).... 187
9-1. Educational Attainment Among Foreign-Born U.S. Residents,
2005 ......................................................... 200
9-2. Foreign-Born Proportion of U.S. Workers by Education Level,
2005 ......................................................... 200




list of boxes


1-1. Indirect Effects of the Housing Sector......................... 29
1-2. Long-Term Prospects for Labor Force Participation ............. 41
2-1. Intangible Capital and IT Investment .......................... 56
2-2. Information Technology, the Supply Chain, and Productivity
Growth in Retail Trade......................................... 57
3-1. Investment Returns Under Different Tax Systems:
A Numerical Example ........................................... 78
3-2. Who Bears the Burden of Corporate Taxes? ...................... 82
4-1. The President's Proposal to Improve the Tax Treatment of
Private Health Insurance ...................................... 87
4-2. The Medicare Advantage Program ................................ 89
4-3. Long-Term Care................................................. 94
4-4. Medicare Part D Prescription Drug Benefit ..................... 101
5-1. Catastrophe Bonds and Sidecars- Accessing Financial Markets
to Better Manage Catastrophe Risks ............................ 111
5-2. Gulf Coast Property Insurance Markets After Hurricanes
Katrina, Rita, and Wilma ...................................... 120
6-1. The President's New Energy Initiatives ........................ 136
6-2. Cordon Pricing Experiences in London and Stockholm............. 143
6-3. Airport Pricing to Decrease Congestion ........................ 146
7-1. Types of Currency Market Transactions ......................... 152
7-2. Hedging Against Foreign-Exchange Rate Fluctuations ............ 154
7-3. A Description of the IMF Classification of Exchange-Rate
Regimes ....................................................... 160
7-4. The Impossible Trinity......................................... 165
8-1. Nontariff Barriers Restrict Trade ............................. 170
8-2. Multinationals Bring New Products and Processes to the
Host Country .................................................. 179
8-3. U.S. Multinational Companies and U.S. Jobs..................... 185
9-1. The Number and Characteristics of Unauthorized Migrants ....... 198