[Economic Report of the President (2006)] [Administration of George W. Bush] [Online through the Government Printing Office, www.gpo.gov] CONTENTS Page overview ..................................................... 19 chapter 1. the year in review and the years ahead ............ 25 Developments in 2005 and the Near-Term Outlook ............... 25 Consumer Spending and Saving ......................... 25 Housing Prices ....................................... 30 Residential Investment ............................... 31 Business Fixed Investment ............................ 31 Business Inventories ................................. 32 Government Purchases ................................. 33 Exports and Imports .................................. 34 Employment ........................................... 35 Productivity ......................................... 36 Wages and Prices ..................................... 38 Financial Markets .................................... 41 The Long-Term Outlook Through 2011 ........................... 42 Growth in GDP over the Long Term ..................... 43 Interest Rates over the Near and Long Term ........... 46 The Composition of Income over the Long Term ......... 46 Conclusion ................................................... 47 Chapter 2. skills for the u.s. workforce ..................... 49 Educational Achievement in the United States ................. 49 Workforce Skills and the U.S. Standard of Living ..... 50 Educational Attainment ............................... 51 Math, Science, and Reading Skills in the United States and Around the World ................................. 54 School Accountability and No Child Left Behind ....... 55 Immigrants in the U.S. Workforce ............................. 56 Immigrants in Science and Engineering ................ 57 Regulation of Legal Immigration ...................... 59 Skilled Immigration and Innovation ................... 61 Job Training ................................................. 61 The Role of Community Colleges ....................... 62 Job Training Funding ................................. 63 Conclusion ................................................... 63 Chapter 3. saving for retirement ............................. 65 What Does ``Retirement Preparedness'' Mean? .................. 65 Estimates of Retirement Preparedness ......................... 66 The Risks to Retirement Preparedness ......................... 69 Are Low Saving Rates Putting Household Net Worth at Risk? ............................................... 69 Defined-Benefit Pensions ............................. 74 Social Security ...................................... 79 Conclusion ................................................... 83 Chapter 4. improving incentives in health care spending ...... 85 The Growth in Health Care Spending ........................... 85 Where Health Spending Has Grown ...................... 88 First-Dollar Insurance Inhibits Consumer Cost-Consciousness .. 91 Causes of First-Dollar Insurance Coverage ............ 92 Consequences of First-Dollar Insurance Coverage ...... 94 Consequences of Inefficient Health Care Spending ............. 97 Private Spending ..................................... 97 Public Spending ...................................... 99 Strengthening the Role of Health Consumers Through Public Policy ..................................................... 100 Health Savings Accounts (HSAs) ....................... 100 Informed Consumers Are Better Consumers .............. 104 Conclusion ................................................... 106 Chapter 5. the u.s. tax system in international perspective .. 107 Fundamental Choices in Tax Systems ........................... 107 Designing a Tax System ............................... 108 Taxes Distort Economic Decisions ..................... 109 U.S. Tax Policy in International Perspective ................. 112 International Comparison of Overall Tax Burdens ...... 112 International Comparison of Tax Bases and Rate Structures .......................................... 113 Recent International Tax Reforms ..................... 116 U.S. Tax Reforms: Past, Present, and Future .................. 118 Twenty Years of Tax Reform ........................... 119 Potential Reforms to the Tax System .................. 120 Conclusion ................................................... 122 Chapter 6. the u.s. capital account surplus .................. 125 Global Capital Flows--Principles ............................. 128 Global Capital Flows--Recent Patterns ........................ 130 Global Capital Exporters ..................................... 132 The United States and Net Capital Inflows .................... 136 Overview ............................................. 136 Net Capital Importers--International Comparisons ..... 138 U.S. Share of Global Flows and the Asset Composition of U.S. Capital Inflows ............................. 139 Causes of U.S. Capital Inflows ....................... 140 Low and Declining U.S. Saving ........................ 140 High U.S. Economic and Productivity Growth ........... 142 Financial Market Size ................................ 143 Global Role of the U.S. Dollar ....................... 144 U.S. Capital Flow Sustainability ............................. 144 Conclusion ................................................... 146 chapter 7. the history and future of international trade ..... 149 A Retrospective on Trade ..................................... 149 The Payoff to America from Global Economic Integration ....... 155 Benefits to Consumers ................................ 155 Benefits to Firms and Their Workers .................. 158 Taking Stock of the Benefits of Trade to America ..... 160 The Policy Scene Today: Avenues to Further Liberalization .... 164 Prospective Gains from Further Liberalization ........ 164 Avenues for Further Liberalization ................... 168 Moving Beyond Goods Trade Liberalization ............. 168 Conclusion ................................................... 170 Chapter 8. the u.s. agricultural sector ...................... 173 The U.S. Farm Sector Has Evolved Dramatically Over Time ...... 174 The Average Farm Payment Recipient Is No Longer Poor . 176 Production and Government Payments Are Concentrated on Large Farms .......................... 177 Issues in Current U.S. Farm Policy ........................... 178 Agricultural Production and Farm Program Benefits Are Increasingly Concentrated ........................... 178 Farmers Today Have Many Options for Managing the Risks They Face ........................................... 180 Economic Costs of Commodity Support Programs ......... 182 Trade Policy Issues .......................................... 183 Trade Is Essential to the U.S. Agricultural Sector ... 184 Nonsubsidized Commodities Now Account for Most of U.S. Agricultural Exports ................................ 184 Trade Agreements Promote Reform of U.S. Commodity Support Programs .................................... 185 Benefits of Agricultural Trade Liberalization ........ 186 Alternatives to Commodity Subsidies .................. 188 Environmental Aspects of Agricultural Subsidies ...... 189 Conclusion ................................................... 192 Chapter 9. the u.s. financial services sector ................ 195 The Economic Roles of Financial Services ..................... 195 Financial Services Address Information Problems in Lending and Investing ...................................... 195 Other Benefits of Financial Services ................. 198 The United States Enjoys a Comparative Advantage in Financial Services ................................... 199 Economic Growth and Stability ................................ 200 Financial Development and Economic Growth ............ 200 Financial Services and Economic Stability ............ 202 Policy Issues ................................................ 204 Consumer Protection .................................. 204 Safety and Soundness ................................. 206 Conclusion ................................................... 210 Chapter 10. the role of intellectual property in the economy . 211 Knowledge Is Different from Other Types of Goods ............. 212 Treating Knowledge as Intellectual Property .......... 213 The Social Costs of an Intellectual Property System .. 213 Intellectual Property Rights Basics .......................... 215 Patents: Protecting a Particular Implementation of an Idea ............................................. 216 Copyrights: Protecting the Expression of an Idea ..... 216 Trademarks: Protecting the Symbol of an Idea, Product, or Service .......................................... 217 Trade Secrets: Limited Protection for Knowledge Kept Secret ........................................ 217 Intellectual Property, the American Economy, and Economic Growth ..................................................... 218 Intellectual Property and the American Economy ....... 218 Intellectual Property Protection and Economic Growth . 221 Intellectual Property Policy Challenges ...................... 222 Ensuring the Integrity of the Patent Process ......... 222 Intellectual Property and International Trade ........ 224 Technological Change and Intellectual Property Reform . 227 Conclusion ................................................... 229 Chapter 11. recent developments in energy .................... 231 Energy Sources and Uses ...................................... 232 Crude Oil .................................................... 233 A Global Market in Crude Oil ......................... 233 Crude Oil Prices ..................................... 234 The Strategic Petroleum Reserve ...................... 235 Future Price Expectations and Incentives for Nonconventional Fuels ............................... 236 Gasoline and Other Refined Products .......................... 238 Gasoline Prices ...................................... 239 Refining Capacity and Trade .......................... 242 Price-Induced Substitution and Technological Change .. 243 Reform of the New Source Review Program .............. 246 Natural Gas .................................................. 246 Regionalized Natural Gas Markets ..................... 247 Natural Gas Prices ................................... 247 Liquefied Natural Gas ................................ 248 Prospects for Domestic Production of Natural Gas ..... 251 Electricity .................................................. 252 Electricity-Generation Technologies .................. 252 The Real-Time Challenge of Electricity Markets 252 Real-Time Pricing and Other Reforms .................. 253 Environmental Protection ............................. 254 Electricity Markets in Transition .................... 256 Conclusion ................................................... 257 appendixes A. Report to the President on the Activities of the Council of Economic Advisers During 2005 ....................... 259 B. Statistical Tables Relating to Income, Employment, and Production .................................... 273 list of tables 1-1. Administration Forecast .............................. 43 1-2. Supply-Side Components of Real GDP Growth, 1953-2011 . 44 2-1. Average Annual Earnings by Education (2004 dollars) .. 50 2-2. Educational Attainment by Race, Ethnicity, and Gender, 2004 ....................................... 53 2-3. Rankings of Selected Advanced Countries by Average Score on International Tests ....................... 55 3-1. The Median Value (in 1998 dollars) of Net Worth for Households Headed by a 25- to 34-Year Old--Differences by Homeownership, Marital Status, and Education ........................ 68 3-2. Median Value of Wealth-to-Income Ratios for Households Headed by a 25- to 34-Year Old--Differences by Homeownership, Marital Status, and Education . 68 4-1. The Premiums Charged for Three Sample Health Insurance Plans with Different Patient Cost Sharing .... 102 7-1. Important Milestones in American Trade History ....... 151 8-1. 100 Years of Structural Change in U.S. Agriculture ... 175 8-2. Farm Income and Farm Operator Household Income by the USDA Farm Size Classification, 2004 ...... 177 8-3. Distribution of Agricultural Production and Government Payments by the USDA Farm Size Classification, 2003 ......................... 178 11-1. Energy Sources and Uses, 2004 ........................ 233 list of charts 1-1. Consumption & Net Worth (Relative to Disposable Personal Income) ............................. 30 1-2. Business Fixed Investment and Cash Flow .............. 33 1-3. Productivity Growth During Cyclically-Comparable Business Cycle Intervals .............................. 37 1-4. Inflation ............................................ 38 1-5. Survey and Market Measures of Expected Inflation in 2005 and 2006 ................................... 40 1-6. 10-Year Treasury Yield ............................... 41 1-7. Corporate Bond Yield Spreads ......................... 42 1-8. Labor Force Participation Rate and Disabled Workers Relative to Population ............................. 45 2-1. Educational Attainment by Age, 1947-2004 ............. 52 2-2. Foreign-born Share of Employment by Education among Scientists and Engineers, 1996-2002 .......... 58 3-1. Personal Saving as a Percentage of Disposable Personal Income ................................... 70 3-2. Household Net Worth as a Percentage of Disposable Income ............................................ 72 3-3. Household Saving Rate as a Percentage of Disposable Income ............................................ 72 3-4. Funding Status of the Pension Benefit Guaranty Corporation ....................................... 76 4-1. National Health Expenditures as a Percentage of GDP .. 86 4-2. Family Health Insurance Premiums 1999-2005 ........... 87 4-3. Real Hourly Compensation of the Civilian Population .. 98 5-1. Tax Revenues as a Percent of GDP for the OECD Countries in 2002 ...................................... 113 5-2. Top Marginal Personal and Corporate Tax Rates for the OECD Countries in 2004 ....................... 116 6-1. Net Capital Inflows to the United States ............. 126 6-2. Largest Net Capital Importers and Exporters-2004 ..... 131 6-3. Current Account Balances of Oil-Producing Countries .. 138 6-4. Annual Growth and Current Account Balances - 1995-2004 ....................................... 139 6-5. Gross National Saving Rates - 1995-2004 .............. 140 7-1. Average U.S. Tariff on Dutiable Goods, 1930-2005 ..... 154 7-2. Consumer and Import Price Growth, 1990-2004 .......... 156 7-3. Average Tariffs Across Countries ..................... 166 8-1. Farm Sector Inputs, Output, and Total Factor Productivity ...................................... 175 8-2. Farming Output and Share of U.S. GDP ................. 176 8-3. Value of Agricultural Production by Farm Size (1989 versus 2003) ........................................ 179 8-4. Government Commodity Payments by Farm Size (1989 versus 2003) ................................. 180 8-5. Composition of U.S. Farm Household Income by Source (household average) .......................... 181 8-6. Net Direct Payments to Farmers ....................... 183 8-7. Value of U.S. Agricultural Exports of Bulk and High-Value Commodities ........................... 185 9-1. Share of GDP from Financial Services ................. 200 9-2. Long-Term Decline in Volatility of Macroeconomic Indicators ....................................... 203 10-1. Intellectual Property Industries' Share of 2003 Gross Domestic Product ........................... 219 10-2. Share of Assets in Current Market Value of Public U.S. Corporations ................................. 220 10-3. Growth Rate of U.S. Exports .......................... 221 11-1. World Proven Oil Reserves ............................ 234 11-2. Estimated Production Costs of Alternatives to Conventional Oil ................................ 238 11-3. U.S. Household Gasoline Expenditures ................. 242 11-4. U.S. Energy Intensity ................................ 244 11-5. World Proven Natural Gas Reserves .................... 249 list of boxes 1-1. Economic Impact of the 2005 Hurricanes ............... 26 3-1. Earlier Attempts to Shore Up Social Security ......... 81 4-1. Tax Preferences for Employer Health Insurance Premiums 92 4-2. Medical Liability Costs .............................. 95 5-1. Fiscal Challenges Ahead .............................. 114 5-2. Simple, Fair, and Pro-Growth: Proposals to Fix America's Tax System, Recommendations of the President's Advisory Panel on Federal Tax Reform .. 121 6-1. Analyzing the Current and Capital Account Balances ... 129 6-2. High Saving and Financial Sector Inefficiency ........ 137 6-3. The Link Between Fiscal and Trade Deficits ........... 141 7-1. The Regressive Nature of U.S. Tariffs ................ 157 7-2. Trade and Labor ...................................... 161 7-3. Trade and the Environment ............................ 163 7-4. U.S.-Asia Trade Relationship ......................... 166 8-1. New Zealand's Abolition of Agricultural Subsidies .... 187 8-2. Policy Mechanisms for Addressing Agri-environmental Issues ........................................... 190 8-3. A Market-Based Approach to Reduce Overfishing ........ 192 9-1. Venture Capital and Innovation ....................... 201 9-2. Regulation Is Not Costless ........................... 205 10-1. Intellectual Property in the Early American Republic . 214 10-2. The Free Software Licensing Movement ................. 228 11-1. Energy Futures Markets ............................... 237 11-2. The Effects of Hurricanes Katrina and Rita on Energy Supplies ..................................... 239 11-3. Automobile Fuel Economy Standards .................... 245 11-4. Cap-and-Trade Programs for Air Pollution ............. 255