[Economic Report of the President (2010)]
[Administration of Barack H. Obama]
[Online through the Government Printing Office, www.gpo.gov]

 
CONTENTS

Page
CHAPTER 1. TO RESCUE, REBALANCE, AND REBUILD ...................... 25
Rescuing an Economy in Freefall ................................. 26
Rescuing the Economy from the Great Recession .................. 28
Crisis and Recovery in the World Economy ....................... 29
Rebalancing the Economy on the Path to Full Employment .......... 29
Saving and Investment........................................... 29
Addressing the Long-Run Fiscal Challenge ....................... 31
Building a Safer Financial System............................... 32
Rebuilding a Stronger Economy ................................... 33
Reforming Health Care........................................... 33
Strengthening the American Labor Force ......................... 35
Transforming the Energy Sector and Addressing Climate Change ... 36
Fostering Productivity Growth Through Innovation and Trade ..... 37
Conclusion ...................................................... 38

CHAPTER 2. RESCUING THE ECONOMY FROM THE GREAT RECESSION .......... 39
An Economy in Freefall .......................................... 39
The Run-Up to the Recession ................................... 40
The Downturn .................................................. 41
Wall Street and Main Street ................................... 44
The Unprecedented Policy Response ............................... 46
Monetary Policy ............................................... 47
Financial Rescue .............................................. 49
Fiscal Stimulus ............................................... 51
Housing Policy ................................................ 55
The Effects of the Policies ..................................... 56
The Financial Sector .......................................... 57
Housing ....................................................... 60
Overall Economic Activity ..................................... 63
The Labor Market .............................................. 68
The Challenges Ahead ............................................ 72
Deteriorating Forecasts ....................................... 72
The Administration Forecast ................................... 75
Responsible Policies to Spur Job Creation ..................... 78
Conclusion ...................................................... 79

CHAPTER 3. CRISIS AND RECOVERY IN THE WORLD ECONOMY ............... 81
International Dimensions of the Crisis .......................... 82
Spread of the Financial Shock ................................. 82
The Collapse of World Trade ................................... 87
The Collapse in Financial Flows ............................... 89
The Decline in Output Around the Globe ........................ 90
Policy Responses Around the Globe ............................... 93
Monetary Policy in the Crisis ................................. 93
Central Bank Liquidity Swaps .................................. 96
Fiscal Policy in the Crisis ................................... 98
Trade Policy in the Crisis ................................... 100
The Role of International Institutions ......................... 100
The G-20 ..................................................... 100
The International Monetary Fund .............................. 101
The Beginning of Recovery Around the Globe ..................... 102
The Impact of Fiscal Policy .................................. 104
The World Economy in the Near Term ........................... 106
Global Imbalances in the Crisis .............................. 108
Conclusion ..................................................... 111


CHAPTER 4. SAVING AND INVESTMENT ................................. 113
The Path of Consumption Spending ............................... 114
The Determinants of Saving ................................... 115
Implications for Recent and Future Saving Behavior ........... 117
The Future of the Housing Market and Construction .............. 120
The Housing Market ........................................... 121
Commercial Real Estate ....................................... 123
Business Investment ............................................ 126
Investment in the Recovery ................................... 126
Investment in the Long Run ................................... 127
The Current Account ............................................ 129
Determinants of the Current Account .......................... 129
The Current Account in the Recovery and in the Long Run ...... 132
Steps to Encourage Exports ................................... 133
Conclusion ..................................................... 135


CHAPTER 5. ADDRESSING THE LONG-RUN FISCAL CHALLENGE .............. 137
The Long-Run Fiscal Challenge .................................. 137
Sources of the Long-Run Fiscal Challenge ..................... 139
The Role of the Recovery Act and Other Rescue Operations ..... 143
An Anchor for Fiscal Policy .................................... 144
The Effects of Budget Deficits ............................... 145
Feasible Long-Run Fiscal Policies............................. 146
The Choice of a Fiscal Anchor ................................ 148
Reaching the Fiscal Target ..................................... 149
General Principles ........................................... 149
Comprehensive Health Care Reform ............................. 150
Restoring Balance to the Tax Code ............................ 151
Eliminating Wasteful Spending ................................ 155
Conclusion: The Distance Still to Go ........................... 156

CHAPTER 6. BUILDING A SAFER FINANCIAL SYSTEM ..................... 159
What Is Financial Intermediation? .............................. 160
The Economics of Financial Intermediation .................... 160
Types of Financial Intermediaries ............................ 163
The Regulation of Financial Intermediation in the
United States .................................................. 166
Financial Crises: The Collapse of Financial Intermediation ..... 170
Confidence Contagion ......................................... 170
Counterparty Contagion ....................................... 172
Coordination Contagion ....................................... 173
Preventing Future Crises: Regulatory Reform .................... 174
Promote Robust Supervision and Regulation of Financial Firms . 175
Establish Comprehensive Regulation of Financial Markets ...... 176
Provide the Government with the Tools It Needs to Manage
Financial Crises ............................................. 178
Raise International Regulatory Standards and Improve
International Cooperation .................................... 179
Protect Consumers and Investors from Financial Abuse ......... 179
Conclusion ..................................................... 180


CHAPTER 7. REFORMING HEALTH CARE .................................. 181
The Current State of the U.S. Health Care Sector ................ 182
Rising Health Spending in the United States  .................. 182
Market Failures in the Current U.S. Health Care System:
Theoretical Background ........................................ 185
System-Wide Evidence of Inefficient Spending .................. 188
Declining Coverage and Strains on Particular Groups and
Sectors ....................................................... 191
Health Policies Enacted in 2009 ................................. 196
Expansion of the CHIP Program ................................. 197
Subsidized COBRA Coverage ..................................... 197
Temporary Federal Medical Assistance Percentage (FMAP)
Increase ...................................................... 199
Recovery Act Measures to Improve the Quality and Efficiency
of Health Care ................................................ 201
2009 Health Reform Legislation .................................. 202
Insurance Market Reforms: Strengthening and Securing
Coverage ...................................................... 202
Expansions in Health Insurance Coverage Through the
Exchange ...................................................... 205
Economic and Health Benefits of Expanding Health
Insurance Coverage ............................................ 206
Reducing the Growth Rate of Health Care Costs in the Public
and Private Sectors ........................................... 207
The Economic Benefits of Slowing the Growth Rate of
Health Care Costs ............................................. 210
Conclusion ...................................................... 211

CHAPTER 8. STRENGTHENING THE AMERICAN LABOR FORCE ................. 213
Challenges Facing American Workers .............................. 214
Unemployment .................................................. 214
Sectoral Change ............................................... 216
Stagnating Incomes for Middle-Class Families .................. 217
Policies to Support Workers ..................................... 219
Education and Training: The Groundwork for
Long-Term Prosperity ............................................ 221
Benefits of Education ......................................... 221
Trends in U.S. Educational Attainment  ........................ 222
U.S. Student Achievement ...................................... 226
A Path Toward Improved Educational Performance .................. 227
Postsecondary Education ....................................... 228
Training and Adult Education .................................. 229
Elementary and Secondary Education ............................ 231
Early Childhood Education ..................................... 233
Conclusion ...................................................... 234

CHAPTER 9. TRANSFORMING THE ENERGY SECTOR AND
ADDRESSING CLIMATE CHANGE .......................................... 235
Greenhouse Gas Emissions, Climate, and Economic Well-Being ....... 236
Greenhouse Gases ............................................... 237
Temperature Change ............................................. 238
Impact on Economic Well-Being .................................. 239
Jump-Starting the Transition to Clean Energy ..................... 243
Recovery Act Investments in Clean Energy ....................... 243
Short-Run Macroeconomic Effects of the Clean Energy
Investments ..................................................... 246
Other Domestic Actions to Mitigate Climate Change ................. 247
Market-Based Approaches to Advance the Clean Energy
Transformation and Address Climate Change .......................... 248
Cap-and-Trade Program Basics ..................................... 248
Ways to Contain Costs in an Effective Cap-and-Trade System ....... 250
Coverage of Gases and Industries ................................. 253
The American Clean Energy and Security Act ....................... 254
International Action on Climate Change Is Needed ................... 255
Partnerships with Major Developed and Emerging Economies ......... 256
Phasing Out Fossil Fuel Subsidies ................................ 257
Conclusion ......................................................... 257

CHAPTER 10. FOSTERING PRODUCTIVITY GROWTH THROUGH
INNOVATION AND TRADE ................................................. 259

The Role of Productivity Growth in Driving Living Standards ........ 261
Recent Trends in Productivity in the United States ............... 262
Sources of Productivity Growth ................................... 264
Fostering Productivity Growth Through Innovation ................... 266
The Importance of Basic Research ................................. 267
Private Research and Experimentation ............................. 269
Protection of Intellectual Property Rights ....................... 270
Spurring Progress in National Priority Areas ..................... 272
Increasing Openness and Transparency ............................. 272
Trade as an Engine of Productivity Growth and Higher Living
Standards .......................................................... 274
The United States and International Trade ........................ 275
Sources of Productivity Growth from International Trade .......... 276
Encouraging Trade and Enforcing Trade Agreements ................. 280
Ensuring the Gains from Productivity Growth Are Widely Shared ...... 282
Conclusion ......................................................... 284


REFERENCES ........................................................... 285


APPENDIXES

A.  Report to the President on the Activities of the Council of
Economic Advisers During 2009 .................................... 305
B.  Statistical Tables Relating to Income, Employment, and
Production ....................................................... 319


LIST OF FIGURES

1-1.  House Prices Adjusted for Inflation ............................. 27
1-2.  Monthly Change in Payroll Employment ............................ 28
1-3.  Personal Consumption Expenditures as a Share of GDP ............. 30
1-4.  Actual and Projected Budget Surpluses in January 2009
under Previous Policy ........................................... 31
1-5.  Real Median Family Income ....................................... 33
1-6.  Total Compensation Including and Excluding Health
Insurance ....................................................................... 34
1-7.  Mean Years of Schooling by Birth Cohort ......................... 36
1-8.  R&D Spending as a Percent of GDP ................................ 37
2-1.  House Prices Adjusted for Inflation ............................. 40
2-2.  Income and Consumption Around the 2008 Tax Rebate ............... 42
2-3.  TED Spread and Moody's BAA-AAA Spread Through
December 2008 ................................................... 43
2-4.  Assets on the Federal Reserve's Balance Sheet ................... 48
2-5.  TED Spread and Moody's BAA-AAA Spread Through
December 2009.................................................... 57
2-6.  S&P 500 Stock Price Index ....................................... 58
2-7.  Monthly Gross SBA 7(a) and 504 Loan Approvals ................... 60
2-8.  30-Year Fixed Rate Mortgage Rate ................................ 61
2-9.  FHFA and Loan Performance National House Price Indexes .......... 63
2-10. Real GDP Growth ................................................. 64
2-11. Real GDP: Actual and Statistical Baseline Projection ............ 65
2-12. Contributions to Real GDP Growth ................................ 66
2-13. Average Monthly Change in Employment ............................ 68
2-14. Estimated Effect of the Recovery Act on Employment .............. 69
2-15. Contributions to the Change in Employment ....................... 71
2-16. Okun's Law, 2000-2009 ........................................... 74
3-1.  Interbank Market Rates .......................................... 83
3-2.  Nominal Trade-Weighted Dollar Index ............................. 85
3-3.  OECD Exports-to-GDP Ratio ....................................... 87
3-4.  Vertical Specialization and the Collapse in Trade ............... 88
3-5.  Cross-Border Gross Purchases and Sales of Long-Term
Assets .......................................................... 90
3-6.  Industrial Production in Advanced Economies ..................... 91
3-7.  Industrial Production in Emerging Economies ..................... 92
3-8.  Headline Inflation, 12-Month Change ............................. 93
3-9.  Policy Rates in Economies with Major Central Banks .............. 94
3-10. Change in Central Bank Assets ................................... 95
3-11. Central Bank Liquidity Swaps of the Federal Reserve ............. 97
3-12. Tax Share and Discretionary Stimulus ............................ 99
3-13. Outperforming Expectations and Stimulus ........................ 105
3-14. OECD Countries: GDP and Unemployment ........................... 108
3-15. Current Account Deficits or Surpluses .......................... 110
4-1.  Personal Consumption Expenditures as a Share of GDP ............ 114
4-2.  Personal Saving Rate Versus Wealth Ratio ....................... 115
4-3.  Personal Saving Rate: Actual Versus Model ...................... 118
4-4.  Actual Personal Saving Versus Counterfactual Personal
Saving ......................................................... 119
4-5.  Single-Family Housing Starts ................................... 121
4-6.  Homeownership Rate ............................................. 122
4-7.  Fixed Investment in Structures by Type ......................... 124
4-8.  Commercial Real Estate Prices and Loan Delinquencies ........... 125
4-9.  Nonstructures Investment as a Share of Nominal GDP ............. 128
4-10. Saving, Investment, and the Current Account as a Percent
of GDP ......................................................... 132
4-11. Growth of U.S. Exports and Rest-of-World Income:
1960-2008 ...................................................... 134
5-1.  Actual and Projected Budget Surpluses in January 2009
under Previous Policy .......................................... 138
5-2.  Actual and Projected Government Debt Held by the Public
under Previous Policy .......................................... 139
5-3.  Budgetary Cost of Previous Administration Policy ............... 141
5-4.  Causes of Rising Spending on Medicare, Medicaid, and
Social Security ................................................ 142
5-5.  Budget Comparison: January 2001 and January 2009 ............... 143
5-6.  Effect of the Recovery Act on the Deficit ...................... 144
5-7.  Top Statutory Tax Rates ........................................ 153
5-8.  Evolution of Average Tax Rates ................................. 154
6-1.  Financial Intermediation: Saving into Investment ............... 161
6-2.  Financial Sector Assets ........................................ 163
6-3.  Share of Financial Sector Assets by Type ....................... 164
6-4.  Confidence Contagion............................................ 171
6-5.  Counterparty Contagion ......................................... 173
6-6.  Coordination Contagion ......................................... 174
7-1.  National Health Expenditures as a Share of GDP ................. 183
7-2.  Total Compensation Including and Excluding Health
Insurance ...................................................... 184
7-3.  Child and Infant Mortality Across G-7 Countries ................ 190
7-4.  Insurance Rates of Non-Elderly Adults .......................... 192
7-5.  Percent of Americans Uninsured by Age .......................... 193
7-6.  Share of Non-Elderly Individuals Uninsured by Poverty
Status ......................................................... 194
7-7.  Medicare Part D Out-of-Pocket Costs by Total Prescription
Drug Spending .................................................. 195
7-8.  Share Uninsured among Adults Aged 18 and Over .................. 198
7-9.  Monthly Medicaid Enrollment Across the States .................. 200
8-1.  Unemployment and Underemployment Rates ......................... 214
8-2.  Unemployment Rates by Race ..................................... 215
8-3.  Real Median Family Income and Median Individual
Earnings ...................................................................... 218
8-4.  Share of Pre-Tax Income Going to the Top 10 Percent of
Families ....................................................... 219
8-5.  Total Wage and Salary Income by Educational Group .............. 222
8-6.  Mean Years of Schooling by Birth Cohort ........................ 224
8-7.  Educational Attainment by Birth Cohort, 2007 ................... 225
8-8.  Long-Term Trend Math Performance ............................... 227
9-1.  Projected Global Carbon Dioxide Concentrations with No
Additional Action .............................................. 238
9-2.  Recovery Act Clean Energy Appropriations by Category ........... 246
9-3.  United States, China, and World Carbon Dioxide
Emissions ...................................................... 255
10-1. Non-Farm Labor Productivity and Per Capita Income .............. 261
10-2. Labor Productivity Growth since 1947 ........................... 262
10-3. R&D Spending as a Percent of GDP ............................... 270
10-4. Exports as a Share of GDP ...................................... 275
10-5. Intra-Industry Trade, U.S. Manufacturing ....................... 278



LIST OF TABLES


2-1.  Cyclically Sensitive Elements of Labor Market Adjustment ........ 70
2-2.  Forecast and Actual Macroeconomic Outcomes ...................... 73
2-3.  Administration Economic Forecast ................................ 75
3-1.  2009 Fiscal Stimulus as Share of GDP, G-20 Members .............. 98
3-2.  Stimulus and Growth in Advanced G-20 Countries ................. 104
5-1.  Government Debt-to-GDP Ratio in Selected OECD
Countries (percent) ............................................ 147

LIST OF BOXES

2-1.  Potential Real GDP Growth ....................................... 76
4-1.  Unemployment and the Current Account ........................... 130
7-1.  The Impact of Health Reform on State and Local Governments ..... 208
8-1.  The Recession's Impact on the Education System ................. 224
8-2.  Community Colleges: A Crucial Component of Our
Higher Education System ........................................ 230
9-1.  Climate Change in the United States and Potential Impacts ...... 240
9-2.  Expected Consumption Loss Associated with Temperature
Increase ....................................................... 241
9-3.  The European Union's Experience with Emissions Trading ......... 252
10-1. Overview of the Administration's Innovation Agenda ............. 266