[Economic Report of the President (2011)]
[Administration of Barack H. Obama]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 1

From Crisis to Recovery and Growth

The recession that began at the end of 2007 was both the longest
and the worst since the Great Depression more than 75 years ago. By
some measures, such as the total jobs lost, it was as deep as the past
three recessions combined.

It was a breathtaking moment of free fall in the private sector.
Capital markets collapsed. Credit to businesses froze. Banks failed.
Foreclosures soared. National output fell at rates not seen in decades.
And millions of people lost their jobs.

Policymakers in the Administration, Congress, and the Federal Reserve
responded with aggressive, concerted actions to stop the crisis.
Although there will likely be debates over the impact of each of those
responses for decades to come, few can dispute that the economic
climate has improved substantially from the darkest days at the end of
2008 and the beginning of 2009 in large part because of these actions.
And the Nationï¿½s economy did not fall into depression.

As gross domestic product (GDP) has been recovering, and as the
private sector has added more than 1.1 million jobs since the beginning
of 2010, economic policy has shifted from crisis to recovery and
fostering growth.

This year, the Economic Report of the President puts its primary
focus on the particular moment in which the Nation now finds itself--a
moment when the most important priority is reestablishing the primacy
of broad-based growth to ensure the well-being of the American people
and to keep America the premier economy on earth.

Without question, growing our way out of the hole left by the crisis
will take a determined effort across industries, states and localities,
and the Federal Government. Data from many countries over many years
document how painful the emergence from a deep financial crisis can be.

The challenges today have been heightened by the need to confront
multiple pressures, many of which are lingering effects of the crisis
itself: financial woes in europe, continued weakness in the U.S.
housing market, depleted state and local government budgets, and the
need to improve the Nation's long-term fiscal situation. And yet the
American economy has now been growing for more than a year and a half.
the private sector, as of this writing, has added jobs for 11
consecutive months. the economy must grow faster, but certainly this is
movement in the right direction.

The challenge will be to shift the focus of the U.S. recovery away
from the boom-and-bust cycles of the recent past toward more
sustainable growth. In particular, from 2001 to 2005, the two
overwhelming drivers of growth were increased consumer spending and
investment in residential real estate. each was unsustainable.
Consumption spending grew faster than income, and the personal saving
rate fell dangerously close to zero. the bursting of the housing bubble
left millions of vacant homes and lowered home prices such that
investment in the housing sector is still struggling to recover.

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Figure 1-1 shows how imbalanced the early 2000s were relative to
normal expansions in the second half of the 20th century. It
illustrates the share that personal consumption, residential
investment, exports, and nonresidential business fixed investment
contributed to GDP growth during the five years following the business
cycle peak in 2001:Q1, relative to the past averages. Consumption and
residential investment were dramatically outsized contributors to GDP
growth during the recent boom compared to the past. Business investment
and exports were dramatically undersized.

U.S. nonresidential investment and exports during 2000-2005 were weak
not only relative to our own history, but also relative to other major
economies. Figure 1-2 shows that U.S. nonresidential investment barely
grew at all over those years. Nonresidential investment grew faster in
other G-7 countries than in the United States and grew even faster in a
broader set of advanced economies.

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Figure 1-3 shows the cumulative growth of exports from the United
States during 2000-2005, compared with export growth in other high-
income economies and other major exporters. Clearly, U.S. export growth
in the early 2000s was weak relative to export growth in other major
economies.

The Nation can do better, and the Administration has outlined a plan
to enable it to do so. It is important to remember that the recent
consumption and residential booms were aberrations. the goal now is to
return to more sustainable sources of growth, where nonresidential
business investment and exports take a more central role. to help
business investment reclaim this role as a key driver of growth, the
Administration has made extensive efforts to encourage businesses to
invest at homeï¿½through tax policy, credit policy, and the public
investments that make the United States an attractive place to do
business. With the momentum of the recovery building among our trading
partners, the Administration also believes that we should turn to
greater exports as an important source of growth going forward.

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The United States established itself as the premier economic power in
the world based on the energy and ingenuity of its people, and the
Administration will continue to reinforce this foundation of our
growth--educating workers, investing in science, and building the
infrastructure that American companies need to succeed. As the
President says, with the policies in place to support innovation and
sustained economic growth, the United States will ``win the future.''
this Economic Report follows these themes in greater detail and also
examines other key aspects of the economy, as described below.

The Year in Review and the Years Ahead

Coming out of the deepest recession since the 1930s, the economy
completed its sixth consecutive quarter of recovery by the end of 2010,
as described in Chapter 2. Real GDP grew 2.8 percent during the four
quarters of 2010, up from 0.2 percent a year earlier. During 2010,
stress in financial markets eased, the stock market gained 13 percent,
and the economy added 1.1 million private sector jobs.

Recent growth in consumer spending reflects improvements in
sentiment, in the stock market, and in banks' willingness to lend to
consumers, thus easing many of the adverse shocks received during the
recession. the increase in consumer spending has been achieved without
a significant decline in the personal saving rate.

Housing prices have stabilized, but construction activity and most
aspects of the housing market remain weak, about one-quarter of
mortgages are under water, and the foreclosure rate remains high.

Equipment and software investment grew rapidly during 2010, but
investment in business structures did not. Cash flow is strong. the
inventory investment contribution to real GDP growth has moderated.
Export growth has been strong.

Government policy has supported the recovery during 2009 and 2010,
and the tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act, the compromise tax framework signed into law by the
President on December 17, 2010, will help the economy in 2011. The
position of state and local governments, however, remains difficult.
At the same time, long-run fiscal responsibility is crucial, and the
Administration has taken a number of steps to reduce deficits in coming
years.

Private sector employment grew in each of the final 10 months of
2010, and the unemployment rate fell during 2010. the Recovery Act, the
Hiring Incentives to Restore employment Act, and the education Jobs and
Medicaid Assistance Act all helped to increase employment.

The Administration's economic forecast reflects the view that the
U.S. economy is operating substantially below its potential level, as
indicated by the elevated unemployment rate. Although the
Administration estimates that the potential growth rate of real GDP is
2.5 percent, it believes that real GDP can grow faster over the next
six years as the gap between actual and potential GDP declines.
Reflecting this above-trend growth, the Administration projects that
the unemployment rate will continue to fall over time.

The Foundations of Growth

As the United States begins to shift from crisis to recovery and
growth, the Nation needs to make critical investments in innovation,
infrastructure, and skills. Chapter 3 details Administration policies
in these areas that are designed to deliver rapid, sustained, and
broad-based economic growth and quality jobs in the years ahead.

The historical rise in American standards of living, in broad
measures of income per person, in health and longevity, and in the
variety of goods and services that Americans consume, demonstrates the
power of long-run trends over short-run economic cycles in determining
Americans' economic prosperity. Physical capital (investment), human
capital (skills), and innovation are the primary sources of economic
growth but have been neglected for years. to foster innovation, the
Administration is proposing critical investments in basic research, intellectual property rights, antitrust enforcement, research tax
credits, entrepreneurship, and national priority areas, such as
biotechnology and nanotechnology, health information technology, and
clean energy. these investments work to ensure that the private sector,
the Nationï¿½s engine of innovation, is not saddled by market failures
but can forcefully and efficiently drive America's economic growth.
Chapter 3 also discusses the role of infrastructure--including
21st-century transportation, electricity, and information networks--as
a critical platform for growth.

Emphasizing the core importance of skills to U.S. economic growth and
to the quality jobs of today and tomorrow, Administration policy
focuses on enhancing early childhood education, elementary and
secondary schooling, higher education, and job training. these efforts
not only help U.S. citizens live up to their potential and compete in a
global economy, but also work to reverse the Nationï¿½s rising wage
inequality and declining rates of educational attainment relative to
other countries.

The World Economy

The world economy saw sustained progress toward economic recovery in
2010, but growth during the recovery has been unevenly distributed
between advanced and emerging economies.

As part of a broader shift toward growth in the United States that
relies more on exports and investment, the President has set a goal of
doubling nominal U.S. goods and services exports in five years: from
$1.57 trillion in 2009 to $3.14 trillion a year by the end of 2014.
Through the first three quarters of 2010, exports increased by 17
percent relative to the same period in 2009, representing a significant
step toward that goal. A sizable portion of that growth came from
increasing exports to emerging markets. Chapter 4 details the ways in
which a changing world economy will affect this goal, as well as the
U.S. role in the world economy.

The President's National export Initiative has identified several
areas in which U.S. trade policy can complement the forces already at
work in the evolving global economy to help achieve this export goal.
The Administration is committed to a trade policy that opens new
markets for U.S. exporters by reducing foreign government--imposed
tariffs and nontariff barriers. The Administration is also actively
enforcing commitments taken on by its trading partners and assisting
U.S. exporters with gaining access to trade credit and streamlining the
exporting process.

Health Reform

A signature effort of the Administration has been to ensure the
security and affordability of health insurance coverage while extending
coverage to millions of uninsured Americans. the Affordable Care Act,
which President Obama signed into law in March 2010, is the latest
chapter in nearly a century-long history of efforts to ensure
comprehensive health insurance coverage for more Americans, coupled
with major steps in the quest for high value in health spending. For
decades, the policy problem posed by tens of millions of uninsured
Americans has overshadowed the underlying economic challenge of how to
control costs while preserving the high quality of the American medical
care system. In addition to implementing policies to cover the
uninsured, the Affordable Care Act introduces a framework for moving
the medical care system toward high-value care.

Chapter 5 describes how the Affordable Care Act controls costs and
improves quality by strengthening physician and hospital incentives to
improve the quality of care and provide care more efficiently. these
delivery system reforms are paired with reforms that create new
coverage options through competitive state marketplaces for insurance,
ensure access to affordable coverage through the provision of tax
credits for small businesses and individuals, and put in place
individual and employer responsibility requirements. Over the next
decade, these reforms are expected to expand coverage to 32 million
Americans, make health care more affordable, and improve the quality of
care. the Affordable Care Act is also fiscally responsible. the
Congressional Budget Office has estimated that the law will reduce
projected deficits by $230 billion during 2012ï¿½21 and by more than $1
trillion in the subsequent decade.

Energy Policy

Energy plays a critical role in the economy, and Chapter 6 outlines
key steps the Administration is taking to transition the Nation toward
cleaner sources of energy that have the potential to support new
industries, exports, and high-quality jobs; to improve air quality and
reduce the dangers of climate change; and to enhance Americaï¿½s energy
security and international competitiveness.

As an initial step, the Recovery Act directed over $90 billion in
public investment and tax incentives to increasing renewable energy
sources such as wind and solar power, weatherizing homes, and boosting
R&D for new technologies. Looking forward, the President has proposed a
Federal Clean energy Standard to double the share of electricity
produced by clean sources to 80 percent by 2035, a substantial
commitment to cleaner transportation infrastructure, and has increased
investments in energy efficiency and clean energy R&D.

These programs are interconnected in important ways. they are all
motivated by the fact that the national benefits from clean energy go
beyond its immediate producers or consumers. the programs focus on
different parts of the clean energy supply chainï¿½innovation,
manufacturing, generation, and useï¿½and thus complement one another. And
in the end, the Administrationï¿½s clean energy programs are linked by
the goal that in coming years Americans will breathe cleaner air, enjoy
better health, face reduced risks from climate change, and work and do
business in an economy based on a safer and more secure energy supply.

Supporting America's Small Businesses

America's small businesses are an essential building block to
economic growth and prosperity, in part because entrepreneurs create a
disproportionate share of net new jobs in the U.S. economy. Chapter 7
examines the heavy toll the recession took on small businesses,
dramatically reducing the availability of credit and capital needed to
add capacity, hire more workers, and develop new products. In response
to these challenges, the Administration has taken several important
steps, most notably through the Recovery Act, the Small Business Jobs
Act, and the Startup America initiative, to increase the flow of credit
and capital to small business.

The Administration has enacted 17 tax cuts for small businesses to
support Americaï¿½s entrepreneurs. It has also enacted policies to make
health insurance more affordable for small businesses and entrepreneurs
and to facilitate small business exports to new markets overseas. taken
together, these efforts have improved the outlook for American small
business and created a stronger environment for entrepreneurship.

Conclusion

The past year has seen crucial improvement in the American economy.
Although the recession generated devastating job losses and an output
decline of historic proportions, the economy is no longer on the brink
of a depression. Growth has resumed, jobs are returning, and
unemployment is falling. Now is the time to chart the course for an
economy that will provide jobs, new and revitalized industries, and
rising living standards for Americans. this Report lays out the central
elements of the path forward.