[Economic Report of the President (2008)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
Overview




The U.S. economy retains a solid foundation, even as it faces
challenges ahead. Toward the end of 2007, there were increasingly
mixed economic indicators (see Chapters 1 and 2). Economic growth is
expected to continue in 2008. Most market forecasts suggest a slower
pace in the first half of 2008, followed by strengthened growth in
the second half of the year. The inherent resilience of our economy
has enabled it to absorb multiple shocks in recent years, but the
President does not take this growth for granted. Recognizing the
near-term risks of a broader economic slowdown, the President called
on the Congress to enact an economic growth package to protect the
health of our economy and encourage job creation. Much of this Report
examines contributions of pro-growth economic policies and
market-based reforms that can further strengthen our economy and
allow more Americans to benefit from continued economic expansion.
The United States' commitment to fair and open trade and investment
policies is an important factor in our international competitiveness
and in the dynamic nature of our economy; export performance has
played a notable and growing role in economic growth in recent
years (see Chapter 3). Lower tax rates have also contributed to
economic performance by easing the burden on labor and capital
and enabling consumers to allocate resources more efficiently
(see Chapter 5). There remains considerable opportunity to strengthen
our economic position by enacting a short-term economic growth
package, and by addressing key challenges in the housing and credit
markets, rising health care costs, infrastructure financing and the
need to diversify our energy portfolios (see Chapters 2, 4, 6, and 7).
A mixed economic picture also underscores the need for accurate
measures of economic performance. Improvements to economic statistics
programs could contribute to a greater understanding of the economy
for public policymakers and private decision makers (see Chapter 8).


Chapter 1: The Year in Review
and the Years Ahead

Economic expansion continued for the sixth consecutive year in 2007.
This economic growth came despite a weak housing sector, credit
tightening, and high energy prices. Sustained growth has resulted
from U.S. economic flexibility, openness and other pro-growth policies.
Projections of weaker growth in the first half of 2008 and near-term
risks of a broader economic slowdown, however, led the President to
call on the Congress to enact a short-term economic growth package.
Chapter 1 reviews the past year and discusses the Administration's
forecast for the years ahead. The key points are:
 Real GDP posted solid 2.5 percent growth during the four
quarters of 2007, similar to the pace of a year earlier.
Compared with the preceding years of the expansion, the
continued reorientation of aggregate demand resulted in
more growth from exports and business fixed investment,
while residential investment flipped from contributing
positively to GDP growth from 2003 to 2005 to subtracting
from it in 2006 and 2007.
 Labor markets were tight in the first half of 2007, but
conditions slackened somewhat in the second half, with job
growth slowing and the unemployment rate edging up to 4.7
percent in the third quarter and to 5.0 percent by December.
 Energy prices dominated the movement of overall inflation
in the consumer price index (CPI), with large increases toward
the end of the year. Core consumer inflation (which excludes
food and energy inflation) moved down from 2.6 percent during
the 12 months of 2006 to 2.4 percent in 2007. Food prices rose
appreciably faster than core prices.
 Nominal wage gains of 3.7 percent for production workers
were offset by the unexpected rise in energy prices. These
nominal gains, however, exceeded measures of expected price
inflation implying an expectation of real wage gains during
the next several years.
 The Administration's forecast calls for the economic
expansion to continue in 2008, but at a slower pace. Slower
growth is anticipated for the first half of the year, and
the average unemployment rate for 2008 is projected to move
up from the 2007 level. In 2009 and 2010, real GDP growth
is projected to grow at 3 percent, while the unemployment
rate is projected to remain stable and below 5 percent.
 The contraction of the secondary market for some mortgage
securities and the ensuing write-downs at major financial
intermediaries are a new downside risk to this expansion.
As of the end of 2007, however, these developments had not
greatly affected the nonfinancial economy outside of the
housing sector.


Chapter 2: Credit and Housing Markets

In the summer of 2007, the ongoing contraction in the U.S. housing
market worsened and credit markets experienced a substantial
disruption. Chapter 2 reviews the developments in the housing and
credit markets, and describes public and private responses. The key
points are:
 Rising delinquencies in subprime mortgages revealed an
apparent underpricing of risk and raised concerns about
which market participants were exposed to that risk, but
the subprime market was not the only cause for the
contraction in credit markets.
 The Federal Reserve provided liquidity and took measures
to support financial stability in the financial markets in
the wake of the disruptions in the credit markets.
 The Administration focused its response on housing markets
and helping homeowners avoid foreclosure-in particular,
subprime borrowers facing increases in the interest rate on
their adjustable-rate mortgages.
 Participants in the credit and housing markets are actively
addressing challenges that were revealed during the summer
of 2007. Markets are generally better suited than government
to adapting to changes in the economic environment; markets
can respond quickly to new information, while government
policy often reacts with a lag or has a delayed impact.
 Financial innovations in the mortgage and credit markets
have provided a range of economic benefits, but not without
some costs. Over time, markets tend to retain valuable
innovations and repair or eliminate flawed innovations.
 The macroeconomic effects of the downturn in housing and the
credit market disruptions may occur through several channels,
including the direct effect on residential investment, the
reduction of wealth on personal consumption, and tighter
lending standards on business investment.


Chapter 3: The Causes and Consequences of Export Growth

One noteworthy development in recent years has been the rapid growth
of U.S. exports. This growth has provided clear benefits to
entrepreneurs and workers in export-oriented industries, and to
the economy as a whole. Chapter 3 identifies the primary factors
that have driven recent export growth and discusses several
longer-term trends that have lifted exports over time. More broadly,
the chapter addresses the benefits that flow from open trade and
investment policies as well as some related challenges. The key
points of this chapter are:

 The United States is the world's largest exporter, with
$1.5 trillion in goods and services exports in 2006. The
United States was the top exporter of services and the
second largest exporter of goods, behind only Germany.
 In recent years, factors that have likely contributed to
the growth in exports include rising foreign income, the
expansion of production in the United States, and changes
in exchange rates. One reflection of that growth is that
exports accounted for more than a third of U.S. economic
growth during 2006 and 2007.
 Over time, falling tariffs and transport and communication
costs have likely lowered the cost of many U.S. goods in
foreign markets, boosting demand for U.S. exports.
 Open trade and investment policies have increased access to
export markets for U.S. producers. Increased investment
across borders by U.S. companies facilitates exports.
 Greater export opportunities give U.S. producers incentives
to innovate for a worldwide market. Increased innovation and
the competition that comes from trade liberalization help
raise the living standard of the average U.S. citizen.
 Nearly all economists agree that growth in the volume and
value of exports and imports increases the standard of living
for the average individual, but they also agree that the
gains from trade are not equally distributed and that
some individuals bear costs. The Administration has proposed
policies to improve training and support to individuals
affected by trade disruption.


Chapter 4: The Importance of Health and Health Care

The American health care system is an engine for innovation that
develops and broadly disseminates advanced, life-enhancing
treatments and offers a wide set of choices for consumers of health
care. The health care system provides enormous benefits, but there
remain substantial opportunities for improvements that would reduce
costs, increase access, and improve quality, thus providing even
greater health for Americans. Chapter 4 examines the economics of
health and health care. The key points in this chapter are:
 Health can be improved not only through the appropriate
consumption of quality health care services, but also through
individual behaviors and lifestyle choices such as quitting
smoking, eating more nutritious foods, and getting more exercise.
 Health care has enhanced the health of our population;
greater efficiency in the health care system, however, could
yield even greater health for Americans without increasing
health care spending.
 Rapid growth in health care costs and access to health
insurance continue to present challenges to the health care
system.
 Administration policies focus on reducing cost growth,
improving quality, and expanding access to health insurance
through an emphasis on private sector and market-based
solutions.


Chapter 5: Tax Policy

Economists and policymakers have long debated the appropriate role
of the government in a market economy. The government can provide
public services and transfer payments to lower-income individuals, but
these benefits often come at the cost of higher taxes and lower
economic output. The key points in this chapter are:

 The ratio of federal taxation in the United States to gross
domestic product (GDP) has fluctuated around an average value
of 18.3 percent over the past 40 years; despite the
President's 2001 and 2003 tax relief, this ratio was
18.8 percent in 2007, above the 40-year average. Under
current law revenues are predicted to grow faster than the
economy in coming years, raising the level of taxation well
above its historical average.
 Tax reductions in 2001 and 2003 have considerably lowered
the tax burden on labor and capital income and reduced
distortions to economic decisions. Making these tax cuts
permanent can greatly improve long-term economic outcomes.
 In addition to contributing to growth, the tax cuts of 2003
ï¿½20       also improved the efficiency of the tax structure primarily
by reducing the double taxation of corporate income.
 The business tax structure in the United States still
creates substantial distortions. To attract investment from
abroad and compete more effectively in foreign markets, the
United States must consider how best to address distortions
created by the structure of business taxes, as other
countries have done.


Chapter 6: The Nation's Infrastructure

Our economy depends on infrastructure that allows goods, people,
information, and energy to flow throughout the nation. As our
economy grows and our infrastructure faces growing demand, policy
should support investments that ensure that existing capacity
is used as efficiently as possible. Chapter 6 discusses some of
the economic issues associated with major transportation,
communication, and power transmission systems. The key points in
this chapter are:

 Infrastructure typically requires large capital investments
to build and maintain capacity. Once built, however, the
cost of allowing an extra person to use the capacity is
typically low. This often means that infrastructure cannot
be provided efficiently by a competitive market and many
types of infrastructure are instead provided by
Government-regulated companies or, in some cases, by the
Government itself.
 Demands on the U.S. infrastructure grow as the economy
expands, and Government policies often determine how
effectively infrastructure can accommodate that growth.
Properly designed user fees can help ensure efficiency by
revealing information about what infrastructure consumers
value most.
 The price people pay for using infrastructure should
reflect the extra cost associated with its use. This includes
the cost of maintaining the infrastructure itself, as well
as delays caused by increased congestion.
 The private sector plays an important role in providing
infrastructure. However, lack of competition in markets for
infrastructure raises concerns about market power, so that
Government oversight is sometimes necessary. The Government
must continually reassess the need for oversight in the face
of changing market conditions.


Chapter 7: Searching for Alternative
Energy Solutions

Energy is used for many purposes in our economy: electricity
generation, transportation, industrial production, and direct uses
by homes and businesses. Energy security and environmental concerns
motivate the consideration of policies that diversify our sources
of energy. Chapter 7 outlines options for changing the way we produce
and consume energy in two sectors of our economy: electricity
generation and transportation. The key points in this chapter are:

 The current suite of available alternative energy sources
is an important part of achieving our goal, but a number
of technical, regulatory, and economic hurdles must be
overcome to use them fully.
 There are several promising, but currently unproven,
methods of producing and delivering energy that, if
successfully developed and deployed, will greatly enhance
our Nation's energy portfolio.
 Appropriate and limited government action can play a
useful role in helping to realize our energy security goals.


Chapter 8: Improving Economic Statistics

Statistical systems have substantial value for both public
policymakers and private decision makers. Chapter 8 examines several
key issues in economic statistics, including the role of Federal
statistical programs in a dynamic economy, the importance of
continuity in statistical series, and ways to improve the value of
existing statistical data.

The key points are:

 Robust statistical systems produce products that are
important to understanding the changing state of the
economy and to formulating sound policy. But statistical
systems, like physical infrastructures, become obsolete
or depreciate with time if they are not maintained.
 Statistical measures must keep up with the changing nature
of the economy to be relevant and useful. For example, it
is important that these measures reflect new and growing
industries (such as high-technology industries or services)
and intangible capital (such as research and development).
 Disruptions in a statistical series render it much less
useful to policymakers and other data users. Thus, continuity
in statistical series is an important goal.
 More effective statistical use can be made of existing data.
In particular, amending relevant legislation to enable full
implementation of the Confidential Information Protection and
Statistical Efficiency Act (CIPSEA) could greatly improve the
quality of Federal statistics.