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i
Transmitted to the (foiigress
January 1993




Economic Report
of the President

Transmitted to the Congress
January 1993
TOGETHER WITH

THE ANNUAL REPORT
OF THE

COUNCIL OF ECONOMIC ADVISERS

UNITED STATES GOVERNMENT PRINTING OFFICE
WASHINGTON : 1993
For sale by the U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
ISBN 0-16-041592-6







C O N T E N T S
Page

ECONOMIC REPORT OF THE PRESIDENT

1

ANNUAL REPORT OF THE COUNCIL OF ECONOMIC
ADVISERS*

7

CHAPTER 1. PERSPECTIVES ON THE ECONOMY AND ECONOMIC
POLICY

19

CHAPTER 2. RECENT DEVELOPMENTS AND THE ECONOMIC OUTLOOK

35

CHAPTER 3. MONETARY AND FISCAL POLICY IN THE CURRENT
ENVIRONMENT

73

CHAPTER 4. THE ECONOMICS OF HEALTH CARE

119

CHAPTER 5. MARKETS AND REGULATORY REFORM

169

CHAPTER 6. ECONOMIC GROWTH AND FUTURE GENERATIONS

225

CHAPTER 7. WHITHER INTERNATIONAL TRADE AND FINANCE? ....

279

APPENDIX A. REPORT TO THE PRESIDENT ON THE ACTIVITIES OF
THE COUNCIL OF ECONOMIC ADVISERS DURING 1992

329

APPENDIX B. STATISTICAL TABLES RELATING TO INCOME, EMPLOYMENT, AND PRODUCTION

341

*For a detailed table of contents of the Council's Report, see page 11.




(iii)







ECONOMIC REPORT
OF THE PRESIDENT




Economic Report of the President
To the Speaker of the House of Representatives and the President of
the Senate:
The last 4 years have challenged the American economy, and the
economy is meeting those challenges. The longest peacetime expansion in America's history ended in the second half of 1990. While
the 1990-91 recession was relatively short (8 months compared to a
postwar average of 11), the recovery was quite slow by historic
standards but accelerated in the second half of 1992, with real
gross domestic product growth over 3 percent and unemployment
falling.
It is important to understand that the interruption to growth
was temporary. An unusual confluence of forces—the delayed
effect of the tight monetary policy in 1988-89 designed to head off
an incipient rise in inflation, the oil price shock related to the Gulf
War, the credit crunch, the problems in financial institutions, the
overbuilding in commercial real estate, the fiscal imbalances, and
the substantial current and prospective defense downsizing—all hit
the economy in a relatively short period of time. These events occurred in the midst of a worldwide slowdown among the industrialized countries which temporarily slowed America's export boom—
Canada and the United Kingdom were in far steeper recessions
than the United States, with unemployment rates rising to over
10 percent, and Germany and Japan entered recession in 1992.
While the consolidation and transition were painful, the policies
of my Administration have worked with the natural forces of the
private economy to lay a foundation for stronger growth ahead. Inflation and interest rates are at their lowest levels in a generation.
Consumers have trimmed their installment debt and have taken
advantage of low interest rates to refinance their mortgages. Corporations have been raising equity, on balance, for the first time in
several years. And, despite the economic slowdown abroad, America is once again the world's leading exporter and is more internationally competitive than it has been in many years, with productivity once again rising at a respectable rate.
In addition to these short-term problems and challenges, which
the economy has been successfully weathering, the United States
faces serious challenges in sustaining the economic recovery and simultaneously providing a firmer basis for long-term growth in productivity, income, and employment opportunities. Throughout my
Administration, I have presented a series of interrelated and com-




prehensive programs to achieve these goals. I strongly believe my
proposals—some of which I was able to implement unilaterally,
others of which I have worked with the Nation's Governors to advance, others of which have been partially adopted by the Congress, and others of which the Congress has thus far refused to
enact—reflect sound principles. These principles define the appropriate, though limited role for government in improving the foundations and performance of our economy. My fundamental reform
agenda included:
• Fiscal Reform. In addition to the existing spending limits, I
have proposed setting new caps on the growth of mandatory
spending to reduce future budget deficits; restore tax incentives for saving, investment, and entrepreneurship to spur economic growth; and reforming the budget process itself, most
notably by giving the President a line item veto and enacting a
balanced budget Constitutional Amendment.
• Trade Liberalization. In a series of multilateral, regional, and
bilateral initiatives, this Administration has set forth a forward-looking program, opening markets not closing them, in
order to expand trade and growth for our Nation and the
world. The North American Free Trade Agreement is an historic achievement that offers us the opportunity to create a
more prosperous and stable Western Hemisphere. The United
States has taken the lead in the Uruguay Round of GATT.
Bringing the Uruguay Round to a successful conclusion remains essential to advancing U.S. and global economic prosperity.
• Regulatory Reform. The Federal, State, and local governments
regulate too much, and often in inflexible, inefficient, costly,
and unnecessary ways. While some government regulation is
necessary, it should be limited to only those areas where serious market failures require attention and should provide maximum flexibility for the private sector to comply with the regulations. My Regulatory Moratorium, for example, saved American businesses and consumers over $20 billion a year.
In addition to these general areas of economic policy, I have
made important proposals that would provide choice-based education reform; a more balanced approach to tort, malpractice, and
civil justice reform; job training and insurance reform; marketbased health care reform to control costs and provide access for the
uninsured; and regulatory reform of the banking system. I would
especially like to note my innovative proposals to spread hope and
opportunity to the least advantaged in our society. Proposals such
as enterprise zones and home ownership form the basis of my program to provide millions of disadvantaged Americans with the opportunity to live free of crime and drugs, in safe neighborhoods,




and with productive employment. These citizens need and deserve
the opportunity to have a stake in their communities and in society.
Americans should take great satisfaction in the fact that totalitarian, centrally planned economies all over the world are moving
toward pluralistic democratic capitalism. The pace differs and the
road will not be easy. But our advice, encouragement, and assistance has been essential. America has illuminated the advantages of
freedom and market economies. Not so long ago it was fashionable
to argue that all the world's economies were converging toward
some form of socialism; the Communist regimes would ease some
restrictions and allow market forces to play a role in their economies, and the democratic capitalist regimes would continue their
headlong rush toward ever-larger bureaucratic welfare states. But
history has rendered its judgment. The world's economies have
opted decisively for various forms of democratic capitalism, not socialism or central planning. Our form of economic organization—a
dynamic market economy based on individual initiative, entrepreneurship, personal freedom, and respect for private property—has
made America the largest and most productive economy in the
world, providing our citizens with the highest standard of living of
any industrialized country. Our economic success continues to inspire market-oriented reforms in regions as diverse as the former
Soviet Union, Eastern Europe, Latin America, and China.
America's future can and should be bright. We have the strongest, largest, most successful economy in the world, with the highest
standard of living. But we cannot take continued economic growth
for granted. The reform proposals I have put forward during my
Administration, if enacted, would greatly enhance long-term economic growth, providing the foundation for higher living standards, a better legacy of prosperity for our children, improved social
and economic mobility for the disadvantaged, more resources to
pay for nontraditional goods and services such as a healthier environment, and for maintaining America's economic and geopolitical
leadership into the twenty-first century.

THE WHITE HOUSE
JANUARY 13, 1993




{/







THE ANNUAL REPORT
OF THE
COUNCIL OF ECONOMIC ADVISERS




LETTER OF TRANSMITTAL
COUNCIL OF ECONOMIC ADVISERS,

Washington, D.C., January 8, 1993
MR. PRESIDENT:

The Council of Economic Advisers herewith submits its 1993
Annual Report in accordance with the provisions of the Employment Act of 1946 as amended by the Full Employment and Balanced Growth Act of 1978.
Sincerely,




Michael J. Boskin
Chairman

David F. Bradford*
Member

Paul Wonnacott
Member




C O N T E N T S
Page

CHAPTER 1. PERSPECTIVES ON THE ECONOMY AND ECONOMIC
POLICY

The Declinists Meet the Facts
The Revisionists Meet the Facts
The Economy's Performance after 1980
The Real Economic Problems
Agenda for Reform
Fiscal Reform
Trade Liberalization
Regulatory Reform
Education Reform
Health Care Reform
Empowering the Disadvantaged
Conclusion
CHAPTER 2. RECENT DEVELOPMENTS AND THE ECONOMIC OUTLOOK

An Overview of the Economy in 1992
Early Improvement
Mixed Performance and Uncertainty
Second-Half Revival
Special Factors-Hurricanes
Low Inflation
The International Slowdown
Longer Term Structural Adjustments and Shortterm Performance
Monetary and Fiscal Policy in 1992
Summary
Recent Economic Performance in Historical Context
Slow Recovery
The Recession in Historical Context
Regional Disparities
Employment and Productivity Trends
Summary
The Economic Outlook
The Administration's Economic Projections
Accounting for Growth
Summary
Conclusion




11

19

20
23
26
27
30
31
31
32
32
32
33
33
35

40
41
44
46
47
47
49
50
51
57
57
58
59
60
62
65
65
65
69
71
71

Page
CHAPTER 3. MONETARY AND FISCAL POLICY IN THE CURRENT
ENVIRONMENT

Macroeconomic Policy in Historical Context
Causes of Recessions
The Limits of Policy
Summary
Recent Economic Developments
Macroeconomic Policies and Economic Performance
in the 1980s
Structural Imbalances in the Economy
External Events
Summary
The Channels of Monetary Policy
Short-Term Effects of Monetary Policy
Long-Term Consequences of Monetary Policy
Indicators of Monetary Policy
Summary
Monetary Policy Since 1970
Recent Complications for Monetary Policy
Summary
Fiscal Policy
Tools of Fiscal Policy
Recent Behavior of Expenditures and Tax Receipts...
The Budget Process
Limitations of Countercyclical Fiscal Policy
Summary
Would Different Policies Have Helped?
Conclusion
CHAPTER 4. THE ECONOMICS OF HEALTH CARE

Health Care in the United States
The Health of the U.S. Population
Providing and Paying for Health Care Services in
the United States
Employer-Provided Benefits
The Government's Role
Recent Changes in the Provision of Care
Summary
Rising Expenditures, Declining Insurance Coverage
Trends in Health Care Expenditures
Health Care Expenditures in Other Developed Countries
The Uninsured
How the Uninsured Use Health Care Services
Recent Changes in the Number of Uninsured
Summary
Economic Theory of the Health Care Market




73

74
75
77
82
82
82
84
92
96
96
97
98
101
101
102
106
107
108
108
109
Ill
113
115
115
118
119

119
120
121
123
127
129
132
132
132
133
134
137
138
138
139

Page

Providing Health Care Services
Problems of Measuring Quality
The Supply of Providers
Health Insurance
Concerns Over the Distribution of Medical Resources
Summary
Why Are Health Care Expenditures Increasing?
Prices and Quantities of Health Care
Recent Increases in Health Care Expenditures
Components of Price Increases in the 1980s
Projections of Future Cost Increases
Summary
Proposals for Reform of the Health Care Market
Administration Proposal
Managed Competition
Play-Or-Pay
National Health Insurance Proposals
Rate Setting
Global Budgets
Politics and Health Care
Summary
Conclusion
CHAPTER 5. MARKETS AND REGULATORY REFORM

Regulatory Reform
Regulation and Government Failure
A Balanced Regulatory Policy
The Regulatory Reform Initiative
Market Incentives
Summary
Telecommunications: Regulatory Reform and Innovation
Telecommunications and the U.S. Economy
Guidelines for Reform in Telecommunications Regulation
Reforming Telecommunications Regulation
Summary
Regulating Financial Markets and Services
The Changing Financial Scene
The Value of Financial Services
The Changing Role of Government
Current Issues in Regulatory Reform
Summary
Ownership and Pricing of Natural Resources..
Why Does the Government Own and Manage Resources?
Establishing Markets for the Right to Use Resources




139
139
140
141
144
146
146
147
148
149
151
154
154
154
159
161
162
164
164
165
166
167
169

170
171
172
173
174
178
178
178
180
182
190
190
190
191
192
195
203
203
204
205

Page

Pricing of Government-Owned Natural Resources
Reforming Public Resource Policy
Summary
Risks to Health, Safety, and the Environment
Risk in Perspective
Risk in the Marketplace
The Role of Government: Providing Information and
Regulating Risk
Improving Government Efforts to Address Risk
Summary
Conclusion
CHAPTER 6. ECONOMIC GROWTH AND FUTURE GENERATIONS

Evaluating Growth
Growth and Intergenerational Fairness
What Is Economic Growth?
Economic Growth and the Environment
Summary
The Productive Capacity of the U.S. Economy
The Physical Capital Stock
Marketable Wealth
Human Capital
Technology
Organizational Capital and Market Institutions
Natural Resources
Limits to Growth?
Summary
Budget Deficits and Future Generations
Deficits and the Economy: Some Basics
Correcting Deficits for Inflation and Government Investment
The Federal Debt and Future Budgetary Problems....
Accounting for Intergenerational Transfers
Summary
Highlighting the Cost of Government Retirement and Insurance Programs
The Social Security System
Government Insurance and Credit Programs
Summary
Strengthening the Framework for Growth
Governmental Policies to Promote Growth
Tax Structure to Promote Growth
Consumption Taxes
Improving the Income Tax
Summary
Conclusion




14

206
211
212
212
212
214
215
222
223
223
225

227
228
229
230
232
233
233
235
236
238
240
240
242
242
243
244
251
252
254
258
258
259
262
264
265
266
267
268
272
276
276

Page

CHAPTER 7. WHITHER INTERNATIONAL TRADE AND FINANCE? ....

279

The Evolution of Exchange-Rate Arrangements
Pegged Exchange Rates Under the Bretton Woods
System
The Dollar in the Floating-Rate Era
The Movement Toward a Single Currency in Europe
Pegs to the Dollar Among Developing Countries
Exchange Arrangement Options for the Former
Soviet Union
The Future of Exchange-Rate Relations
Summary
The Changing Role of the International Monetary Fund..
The IMF in the Bretton Woods Era and Afterwards..
Long-Term Financing, the IMF, and the World Bank
Summary
The North American Free-Trade Agreement
Trade in Services and Investment
Intellectual Property Rights
Agricultural Trade
Safeguards and Other Trade Rules
The Environment and Labor
Other Regional and Bilateral Trade Developments....
Summary
The Uruguay Round
Agriculture
Textiles and Other Important Issues
Summary
Regional Integration and Multilateralism
Summary
Trade Policy Agenda for the Future
International Trade and Competition Policy
Trade Rules for High-Technology Industries
Trade and the Environment
Summary
Conclusion

282
285
289
294
300
303
306
307
308
308
309
310
310
311
313
313
314
315
315
317
317
317
321
321
321
322
323
323
324
325
326
326

APPENDIXES

A. Report to the President on the Activities of the
Council of Economic Advisers During 1992
B. Statistical Tables Relating to Income, Employment,
and Production

329
341

LIST OF TABLES, CHARTS, AND BOXES
Tables

2-1
2-2
2-3
2-4

Recovery Comparisons
Recession Comparisons
Administration Forecasts
Alternative Forecasts and Deficit Projections




15

58
59
66
69

LIST OF TABLES, CHARTS, AND BOXES—CONTINUED
Tables

Page

2-5 Accounting for Growth in Real GDP, 1960-98
4-1 Average Annual Percent Change in Personal Health
Care Expenditures Per Capita, Prices, and Quantities: 1960-90
4-2 Side-by-Side Comparison of Health Insurance Plans
7-1 Output Growth and Inflation in the G7 Countries
7-2 The Increasing Variability of U.S. Exchange Rates,
Output, and Inflation
7-3 Common Agricultural Policy Expenditures, EC Agricultural Trade, and EC Self-Sufficiency for Selected
Commodities: 1975-90

70
147
155
287
290
320

Charts

2-1
2-2
2-3
2-4
2-5
2-6
2-7
2-8
2-9
2-10
3-1
3-2
3-3
3-4
3-5
3-6
3-7
3-8
3-9
3-10
3-11
3-12
3-13
3-14
3-15
4-1
4-2
4-3

Real Gross Domestic Product Growth
Civilian Unemployment Rate
Nonfarm Payroll Employment
Consumer Confidence
Consumer Price Inflation
M2 Money Stock and Growth Target Ranges
Ratio of Permanent Job Losers to Total Unemployed...
Unemployment Rates by State, November 1982
Unemployment Rates by State, June 1992
Growth in Output per Hour, Nonfarm Business Sector
Gross National Product Per Capita, 1870-1990
Civilian Unemployment Rate
Consumer Price Inflation
Loans and Securities Held by U.S. Commercial Banks .
Debt Service Payments as Percent of Disposable
Income
National Defense Outlays
Output per Hour, Nonfarm Business Sector
Consumer Confidence and Personal Consumption Expenditures
International Real GDP Growth
Real and Nominal 3-Month T-Bill Rates
Growth Rates of Monetary Aggregates
Velocities of Monetary Aggregates, 1970-92
M2 Money Stock and Growth Target Ranges
Velocities of Monetary Aggregates, 1988-92
Real Federal Spending and Taxation in Recent Recoveries
Paying for Health Care Expenditures: 1960 and 1990 ...
Health Insurance Coverage
Real Per Capita Health Care Expenditures




16

41
43
43
44
48
52
60
63
63
64
74
76
80
86
88
89
91
94
95
100
103
103
104
105
110
125
126
133

Charts

4-4 Growth in Real Per Capita Health Care Expenditures Page
in Selected Countries
134
4-5 Employer-Provided Health Insurance, by Firm Size:
1990
136
4-6 Share of Health Care Expenses Paid Out-of-Pocket
142
4-7 Projected Health Care Expenditures as Percent of
GNP
152
4-8 Per Capita Personal Health Care Expenditures, by
Age: 1987
153
5-1 AT&T's Market Share
189
5-2 Single-Family Mortgage Debt Outstanding
200
6-1 Capital per Employed Civilian
234
6-2 Household and National Private Wealth Per Capita
237
6-3 Unified Deficit and Primary Deficit Less Deposit Insurance Payments
245
6-4 Debt Held by the Public as Percent of GDP
247
6-5 Net Foreign Investment as Percent of GDP
249
6-6 Long-Run Budget Projections as Percent of GDP
253
6-7 Social Security Benefits as Percent of Payroll Taxes
256
7-1 Exchange Rates of Major Industrialized Countries in
Terms of the Dollar
287
7-2 Inflation Rates in Japan, Germany, and the United
States
291
7-3 Exchange Rate and Interest Rate Differences: United
States and Germany
292
7-4 Central Exchange Rates of Selected EMS Countries
296
7-5 Inflation Rates in Selected EMS Countries
297
7-6 Interest Rates in the United States and the Major European Economies
299
Boxes

2-1
2-2
3-1
3-2
3-3
3-4
4-1
4-2
4-3
4-4
4-5
4-6
4-7

Recessions and Business Cycle Dating
Data Revisions and the Severity of the Recession
The Role of Bank Capital
The Merits of an Independent Central Bank
Real and Nominal Interest Rates
International Interest Rate Differences and Capital
Flows
Canada
Germany
United Kingdom
Coordinated Care
Measuring Changes in Health Care Expenditures
Health Risk Adjusters
Oregon Medicaid Waiver Proposal




17

42
61
87
97
99
107
122
123
124
130
148
157
163

Boxes

5-1 If Deregulation Is So Great, Why Has My Phone Bill
Gone Up?
5-2 Federal Crop Insurance and Disaster Assistance
5-3 Government Creates a Market for Fishing Rights
5-4 Forests as a Public Good
5-5 Measuring the Value of Nonmarket Goods
5-6 Reform of California Water
6-1 Global Climate Change and Future Generations
6-2 Gary Becker
6-3 Superfund Wastes as an Environmental Liability
6-4 Intergenerational Redistribution from Social Security..
6-5 Trust Funds
6-6 The Growing Liabilities of the Pension Benefit Guarantee Corporation
6-7 Inflation and Capital Gains
6-8 The Corporate Alternative Minimum Tax
7-1 Exchange-Rate Arrangements
7-2 Floating Exchange Rates
7-3 Real Exchange Rates and Real Interest Rates
7-4 Pegged Exchange Rates and Disinflation in Argentina.
7-5 Free-Trade Areas and Customs Unions
7-6 The Oilseeds Dispute




18

Page
183
203
207
208
209
210
231
239
241
255
261
263
274
275
283
290
293
302
312
319

CHAPTER 1

Perspectives on the Economy and
Economic Policy
THE AMERICAN ECONOMY IS THE largest and most productive in the world. Not only does it have the highest per capita
levels of productivity and output of any industrialized country, but
even its modest growth in 1992 surpassed the performance of the
other major industrialized countries. The American economy faces
serious short-term problems and long-term challenges, however. As
past Economic Reports of this Administration have stated, the
Nation cannot take sustained, long-term economic growth for
granted. It must pursue wise economic policies that improve the
foundation and performance of the economy. Such policies are by
nature limited but not passive. Activist economic policy reforms can
greatly improve the performance of the American economy, laying
a better foundation for the economic growth that provides expanded employment opportunities, not just for new entrants into the
labor force but for those seeking upward economic mobility, a
higher standard of living, a richer legacy of prosperity for our children, the resources to help pay for nontraditional goods and services such as a healthy environment, and assurance that America's
economic and geopolitical leadership will extend into the next century.
Because the last 4 years have been so challenging to the American (indeed, to the world) economy and more recent economic performance has not been what Americans have come to expect, two
currents of opinion have gained currency, based on a lack of accurate information and faulty analysis. The first, which can be labelled "declinism," puts forth the notions that America has been in
substantial decline, that America is lagging behind its economic
competitors, that economic collapse is just around the corner, that
the United States is deindustrializing, or that foreigners will soon
own all (or at least too much) of America. These complaints cannot
survive a thorough scrutiny based on readily available factual information and sound economic analysis. To be sure, the American
economy does, indeed, face serious challenges, but it does so from a
position of great strength and with the tools and experience needed
to overcome them. On one point, however, the prophets of declin-




19

ism and the authors of this Report fully agree: the Nation cannot
and should not take continued economic growth for granted.
The second current of opinion, which can be labeled "revisionism," uses the recent problems of the American economy to argue
that the general changes in economic policy of the last 12 years
have somehow been a calamitous mistake, responsible for all the
problems in the economy and none of its remarkable achievements;
indeed, the economy would have performed better if the policies of
the 1960s and 1970s had been continued. Again, to be sure, policies
of the last 12 years were far from perfectly implemented. But, on
balance, economic policy since 1980 has been much superior to that
of the late 1960s and the 1970s. And the performance of the economy, fairly evaluated, generally reflects that major improvement in
policy direction.

THE DECLINISTS MEET THE FACTS
Contrary to the claims of the declinists, the United States remains the largest, richest, and most productive economy in the
world. With less than 5 percent of the world's population, the
Nation produces about a quarter of the world's total output of
goods and services. The American economy is about 2V2 times the
size of the next largest economy, Japan. The average standard of
living of Americans—as measured by gross domestic product (GDP)
per capita—exceeds that of any other major industrialized country.
Productivity, or output per worker, in the American economy is
also higher than in these other nations.
While it is true that the fortunes of particular industries have
ebbed and flowed, America is not deindustrializing. Total employment in manufacturing has fluctuated within a modest range depending on economic conditions since 1960. In fact, manufacturing's share of total economic output has been roughly constant for
the last 30 years. And the United States accounts for an even larger
share of the industrial output of the countries of the Organization
for Economic Cooperation and Development (OECD)—the 24 largest
industrial market economies—than it did in 1970.
Neither is America losing its overall competitive edge. The
United States is the world's leading exporter; indeed, it is more
internationally competitive than it has been in decades. From 1987
to 1991, exports rose from 8 to over 11 percent of GDP. This strong
export performance prevented the recent recession from having a
far greater negative impact on U.S. employment and has helped
sustain the economy through a difficult period of sluggish economic
growth. Although many U.S. manufacturers face stiff competition
in markets with high volume and low profit margins, America has




20

maintained its technological edge in areas that are allegedly at
risk, including microprocessors, advanced telecommunications, and
biotechnology.
Some declinists play on fears of foreign investment, in the same
way that many West Europeans of the 1950s and 1960s played on fears
of the American investment that helped rebuild their economies.
These fears are unfounded. Foreign investment helps to build
plants and equip workers, leading to higher productivity and improved standards of living. Increasing global integration and the
general strength of the American economy are among the reasons
for the long-term growth of foreign investment in the United
States. Foreign investment is a sign of strength and future prospects, not a symptom of decline. In any event, foreign investment
in the United States is a quite modest share of GDP relative to foreign investment in most other industrialized countries.
What about the recent problems of the American economy?
(These problems are discussed in more detail in Chapters 2 and 3 of
this Report) No economic system is immune to disruption. Even
well-functioning market economies run the risk of temporary setbacks due to external shocks, policy mistakes, or other disturbances. The American economy, which had already experienced a
few quarters of slow growth, fell into a recession in the second half
of 1990 that was shorter (8 months, compared with a postwar average of 11) and slightly less severe (output declined 2.2 percent relative to a postwar average of 2.8 percent; unemployment rose 2.8
percent, less than the postwar average of 3.4 percent) than other
postwar recessions. More troubling was the anemic pace of the recovery that began in March 1991. Unfortunately, the Administration's prediction that this would be the slowest recovery since
World War II proved to be correct. Growth was so sluggish, in fact,
that job creation was insufficient to prevent unemployment from
rising even months after the recovery had begun.
The declinists worry that America is losing the competitive economic race with Germany and Japan and perhaps with other countries as well. This argument must seem somewhat remarkable to
the other major industrialized countries, which not only started out
behind the United States in terms of productivity and per capita
income but have experienced far more severe economic problems
recently. The recessions in Canada and the United Kingdom were
much steeper than the U.S. recession, with unemployment rising to
over 10 percent. Germany and Japan entered recession in 1992, as
the American economy was moving from anemic to modest growth.
Inflation in some of these countries is still a serious concern, while
inflation and interest rates are at their lowest levels in a generation in the United States.




The American economy still faces many challenges. To improve
the prospects for long-term growth in productivity, primary and
secondary education badly need improvement; legal, tax, and regulatory obstacles to entrepreneurship and business expansion must
be removed; and expanding federal entitlement spending, which
has contributed to large structural budget deficits, must be brought
under control. But the view that the Nation is already in decline or
must inevitably falter does not accord with the facts. The future is
neither bleak nor predetermined, and America has the ability to
solve the problems that lie ahead.
Basing policy on a faulty analysis of the economy's problems and
prospects will not improve economic performance. The economy
does not need answers to false problems. The declinists attribute
the economy's alleged ills to fundamental flaws in the free market
system. Their response to trade problems is protectionism or "managed trade," and they would solve the problems of particular industries with an industrial policy that mandates volumes of new government regulations; government subsidies; tax breaks; and new
government spending on projects the private sector would eventually undertake itself if free to do so. These notions, while appealing
to declinists, avoid the fundamental fact that private markets and
an open trading system—not government regulation and subsidies—have been the fundamental source of the remarkable economic progress industrial nations have made in the postwar era.
The usual argument of the industrial policy proponents is that
Japan's Ministry of International Trade and Industry (MITI), has
been the driving force behind Japan's remarkable progress in the
post-World War II era. MITI did play a powerful role in Japan's
economic progress immediately after the war, but the country's
success is attributable primarily to classic prescriptions: its high
saving and investment rates and the hard work of its labor force.
Indeed, MITI attempted to prevent SONY from entering the consumer electronic business. In each case, the Japanese firms sensibly
avoided making what would have been very expensive mistakes, not
just for themselves but for the Japanese economy.
In fact, there is no reason to believe that bureaucrats or politicians are better able than private individuals or firms to allocate
resources to their most productive uses. In the United States, the
Federal Government's Synfuels program of the early 1980s, which was
terminated without ever producing a commerically viable product,
offers a $3 billion example of the government's inability to secondguess the markets. Another classic example is the French and British
Concorde SST, which became a multimillion dollar commercial flop
and wasted taxpayers' resources in those countries. The very nations
the declinists envy so much are currently moving away from heavy




22

government intervention in the workings of the economy. Many of the
more advanced social welfare states in Western Europe, including
Sweden, France, and the United Kingdom, have, to various degrees,
pulled back from their reliance on nationalized industry, outsized
transfer payments systems, excessive bureaucratic regulation, and
high rates of taxation.
In short, the declinists are wrong on the facts. America still has
the largest and strongest economy in the world. It is neither deindustrializing, nor losing some overall economic competition with
other countries. Although it can improve its competitive position in
specific industries, America still enjoys the highest standard of
living of the major industrialized countries. But again, the declinists
and the authors of this Report agree on one point: The Nation cannot
take continued economic growth for granted.

THE REVISIONISTS MEET THE FACTS
The second group of skeptics argues that the changes in economic policy most closely associated with the last 12 years (some of
which actually began earlier) misdirected the American economy
and led to its current problems. Economic policy in the last 12
years has aimed primarily at reducing inflation and maintaining it
at low levels; restraining growth in regulation; lowering tax rates
to restore incentives to produce income and wealth; controlling government spending and targeting it more effectively; expanding
international trade; and providing for a strong national defense.
What is not generally understood is that this approach was a logical outcome of postwar U.S. economic history. Its policies did not
entirely succeed but rather left a legacy of impressive accomplishments, as well as some notable failures and an important unfinished agenda.
The quarter century of rapid productivity growth that followed
World War II led to substantial increases in living standards and
wages for the American people. Most economists describe the rapid
productivity growth of this period as extraordinary, far above the
long-term trend. In part, this growth can be traced to the pent-up
demand left over from the Great Depression and World War II; to
opportunities to export and help rebuild war-ravaged nations, especially in Europe; and to the dissemination of major technological
breakthroughs that had been promulgated during the war, from jet
airplanes to communications.
With relatively low unemployment and inflation, rising productivity growth, and generally improving economic performance,
America in the 1960s turned its attention to a variety of other concerns, including a noble, if controversial, attempt to improve the
condition of the disadvantaged in society through substantial in-




23

creases in social welfare spending. In the last half of the 1960s and
the first half of the 1970s the introduction of medicare and the vast
expansion of Social Security benefits unrelated to need put in place
a variety of forces that caused problems during this period, set in
train serious problems for future government budgets, and created
enormous controversy about the most appropriate way for the government to assist those in need.
The economy went through a series of profound changes and disruptive internal and external shocks throughout the 1960s and
1970s, including the Vietnam War, rising inflation coupled with
stagnating growth, two significant oil price hikes, and a significant
increase in government regulation and spending—as well as in the
marginal tax rates facing ordinary American workers. By 1980 inflation had soared to double digits, and the Nation was caught in a
sharp but brief recession.
The major goal of the 1980s and beyond was clearly to restore
healthy, noninflationary economic growth. This objective required
an economic environment with a rate of monetary expansion that
was slower, more predictable, and more stable than it had been in
the 1970s; reduced growth in government spending; and a concerted effort to remove those disincentives from the tax and regulatory
systems that obstruct working, saving, investing, innovating, and
entrepreneurship. In short, the economic objectives of the 1980s required a serious reorientation of monetary, fiscal, regulatory, and
trade policies.
Deregulation did not just begin in the 1980s but had its roots in
the Carter and, to some degree, the Ford Administration. However,
social regulation—regulation of health, safety and the environment—expanded at an accelerating pace throughout the 1970s.
With inflation at double digit levels, the Federal Reserve committed itself to a disinflationary policy in late 1979, and while the resulting disinflation was quite costly—the unemployment rate
peaked at 10.8 percent in 1982—inflation rates dropped to the 4- to
5-percent range with a loss of output that was only about a third
of what many economists and policymakers had predicted.
The tax system was dramatically reformed in 1981 to improve
economic performance. Tax brackets were indexed for inflation and
marginal tax rates reduced. Capital consumption allowances were
accelerated, the investment tax credit was expanded, and universal
individual retirement accounts were introduced. In 1986, a major
tax reform was enacted with the idea of lowering marginal tax
rates and broadening the tax base while removing special incentives. Unfortunately, the slowdown in depreciation, full taxation of
capital gains, elimination of investment incentives, and some other
specific changes (including a more onerous corporate alternative
minimum tax) would prove to be major problems in the coming




24

years. The tax reforms stabilized revenues as a share of GDP, while
government expenditures rose relative to GDP. The budget deficit
grew substantially to become a key focus of concern.
When the President took office in 1989, he faced many economic
challenges, not the least of which was the prospect that the already
large budget deficit would grow over time. Several attempts to control the Federal deficit had already been undertaken, such as the
Gramm-Rudman-Hollings budget law. In 1990 the Congress passed
and the President signed a set of comprehensive budget reforms,
but these reforms were not sufficient to control growth in the largest and most rapidly expanding area of the budget—so-called entitlement spending for programs such as medicare and medicaid.
Some progress was made in slowing the growth of regulation, although perhaps the most important reform, the risk-based deposit
insurance reform proposed by Vice President Bush's Task Force on
Regulatory Relief, was not enacted. The intransigence on this issue
would greatly aggravate the costs of cleaning up the savings and
loan industry later on. Major new regulatory programs, such as the
1990 Clean Air Act Amendments and the Americans with Disabilities Act, while designed for the admirable purposes of creating a
healthier environment and bringing the disabled into the mainstream of American life, were much costlier and more cumbersome
than necessary. While some innovations were implemented to
reduce the costs imposed by the amendments to the Clean Air Act,
such as the emissions allowance trading program on sulfur dioxide,
it became increasingly clear that such regulation would lead to
substantial economic disruption. Budgetary constraints on direct
government spending to achieve health, safety, and environmental
goals led lawmakers to impose new and excessive regulations as an
alternative.
The growth of regulation leads to litigation as various groups
seek to have regulations overturned or recast by the courts. In fact,
the courts have developed into a new economic policy forum for the
interpretation of important rules and regulations. Regulatory advocates have emerged whose activities have distorted the original legislative intent of many programs, imposing heavy direct costs and
increasing uncertainty about private investment decisions. The regulatory reform initiative implemented in the last year of the Bush
Administration forcefully laid out the principles of sound regulation and carried out some reforms within the constraints of existing statutes. The regulatory system was finally pointed in the right
direction. The reforms implemented during the first year of the
moratorium indicate how great the rewards of a more sensible regulatory policy can be.
While the Administration was moving in the direction of a less
economically disruptive regulatory policy, congressional microman-




25

agement of the economy increased greatly. New regulation is but
one example. More serious are new laws that increasingly prescribe the precise methods of achieving regulatory outcomes rather
than allowing private firms and households greater flexibility to
achieve the same results at far lower costs.

THE ECONOMY'S PERFORMANCE AFTER 1980
A major success of the economic policies of the past decade was
the reduction of inflation to its lowest level in a generation. Inflation held remarkably steady (excluding an occasional run-up or collapse of energy prices) into the late 1980s. By then, however, incipient inflationary pressure was beginning to emerge. In a welcome
break from previous policy, the Federal Reserve attempted to prevent a rise in inflation and, indeed, to reduce inflation further.
This program of early intervention—the second round of disinflation of the 1980s—brought the inflation rate down to the 3-percent
range that had prevailed during the 1950s and 1960s. This success
augers well for future expansion. As discussed in Chapters 2 and 3
of this Report and in the last two Economic Reports of the President, however, the additional disinflation, which occurred during a
time of adjustment to severe structural imbalances, and the oil
shock resulting from the Gulf War ushered in a prolonged period of
sluggish growth.
Partially in response to lower tax rates, the defense buildup, and
reduced inflation in the early 1980s, the economy commenced the
longest peacetime expansion in the Nation's history. While the
1981-82 recession had been deep, the recovery was exceptionally
strong. Output grew by 3.9 percent in 1983 and 6.2 percent in 1984,
the fastest rate since the 1950s. Between 1982 and 1990, the economy's growth averaged 3.3 percent per year. The expansion of the
economy created 21 million additional jobs and 5 million new businesses. The rate of unemployment declined from its peak of 10.8
percent at the end of 1982 to 5.2 percent in June 1990, declining for
all major industrial, occupational, and demographic categories.
These achievements were accompanied by serious strains—for
example, friction in world trade, a buildup of household and corporate debt relative to income and profits, and budget deficits that
were large for a prosperous peacetime—all of which threatened to
impede future growth.
In addition to the remarkable growth in employment, several
other labor market developments deserve particular note. Real
labor compensation continued to grow slowly. The wage premium
for highly skilled relative to younger, less educated workers rose
substantially. The wage gap between men and women closed by
one-fourth, and for the first time in recorded history unemployment
rates were no worse for women than for men.




26

Productivity growth rebounded somewhat during the expansion
of the 1980s from what it had been in the 1973-81 period, especially
in manufacturing. There is strong evidence that the inability to
separate out improvements in quality from true inflation in the
price increases in the service sector have led to a systematic understatement of long-run productivity growth. Improving the Nation's
productivity growth is the highest long-term economic priority—
higher output per worker hour is the foundation of rising wages
and living standards.
In summary, the change in the basic orientation of economic
policy was exactly what was needed, given the economic problems
of the period. However, while highly desirable, this change was imperfectly implemented. The biggest problem was the failure to control the growth of government spending. Second, while the lower
marginal tax rates represented a significant achievement, an opportunity was missed in the 1986 Tax Act to continue the progress
toward removing the tax impediments to saving, investment, and
entrepreneurship that began in the late 1970s and was the hallmark of the 1981 Tax Act. Worse yet, the tax treatment of investment and entrepeneurship moved in the wrong direction, with deleterious consequences. Third, trade policy was disappointingly protectionist. Finally, insufficient progress was made in reforming regulation.
A more limited role for government, sound money, expanded
world trade, reduced and more effective and efficient regulation,
and lower tax rates were, and still are the correct thrust of economic policy and were partially responsible for the fact that the
economy performed much better in the last decade than it did in
the 1970s. Even the deep recession of 1981-82 was a consequence of
the disinflation made necessary by the policies of the 1970s, which
had led to double-digit inflation. But numerous problems remain.
This course of policy was enacted imperfectly, and some parts not
at all. New problems emerged and some old problems persisted.

THE REAL ECONOMIC PROBLEMS
The American economy is neither in long-term decline nor shortterm contraction. It is emerging slowly from a period of sluggish
growth and a short, about average, recession after the longest
peacetime expansion in history. But it does face serious problems
and challenges.
The fundamental challenge facing the American economy is the
slowdown in the rate of productivity growth, which began in the
late 1960s and worsened in the early 1970s. Even small differences
in the rate of productivity growth compounded over long periods of
time can lead to dramatic differences in future standards of living.




27

With its productivity growing half a percentage point less rapidly
than that of the United States, the United Kingdom went from the
highest standard of living in the world in the late 19th century to a
standard of living only two-thirds that of the United States today.
Such is the power of compounding. Simply put, raising the rate of
productivity growth is essential to raising income per capita and is
the foundation of rising real wages. To lay the foundations for
higher and more sustained productivity growth, the following
issues must be addressed.
First, a highly skilled labor force is essential to America's future.
The deplorable state of public elementary and secondary education
in the United States is perhaps the Achilles' heel of America's economic future. Our future labor force first acquires knowledge and
skills, or at least the foundation upon which future knowledge and
skills must be based, in the schools. On international test after
international test, America's students do not stack up well. They
will not be able to earn as much as or more than their peers tomorrow if they do not learn as much as or more than their peers today.
Second, the Nation saves and invests too little. A higher rate of
capital formation and more efficient capital allocation are essential
to raising labor productivity. The Nation's tax, regulatory, and
legal systems, as they now stand, pose severe obstacles to a more
efficient and higher rate of capital formation. There is also legitimate concern about the appropriate role of government in financing public investment, such as infrastructure and research and development. The economic criteria that should be used to determine
the appropriate role of government are straightforward: there is a
role for government when there are investments that the private
sector will not undertake, perhaps because individual firms cannot
fully appropriate the returns to making them, and when the benefits to society are likely to outweigh the costs of the investment.
Third, throughout history, the expansion of international trade
has increased the pace of world economic growth and the contraction of international trade has led to worldwide contractions, most
notably the Great Depression. After several successful rounds of
tariff reductions in the General Agreement on Tariffs and Trade
(GATT), new forms of trade barriers and problems—bilateral, regional, and multilateral—have emerged. Expanding world trade
and opening trade and investment markets worldwide will be enormously important to the future economic growth of the American
and world economies. Opportunities are substantial, but difficult
political obstacles remain.
After the need to raise productivity growth, a second major problem is the sluggish short-term performance of the economy and the
inadequate pace of job creation. The economy has been through
several challenging years. While heightened concern during a




28

period of slow growth is understandable, the 1990-91 recession
must be placed in historical perspective. There have been nine recessions in the United States since World War II, and each downturn has been followed by a phase of renewed growth. It appears
now that the economy is emerging from a period of sluggishness to
a period of modest, self-sustaining growth.
An unusual confluence of forces, including the delayed effect of
the tight monetary policy pursued in 1988 and 1989 (which was designed to head off an incipient rise in inflation), the oil price shock
related to the Gulf War, the credit crunch, the problems in financial institutions, the overbuilding in commercial real estate (worsened by the credit crunch and the wild swings in the tax rules), the
fiscal imbalances, and the substantial current and prospective defense downsizing all hit the economy in a relatively short period of
time. These events occurred during a worldwide slowdown among
the industrialized countries, slowing America's export boom.
While the consolidation and transition were painful, and earlier
economic policy might well have been somewhat more aggressive
in dealing with the short-term problems, unless the economy falters badly in its current or prospective state, fiscal and monetary
policy should be directed primarily by the long-term goal of enhancing noninflationary economic growth. If the economy falters
badly, and unemployment rises or appears likely to do so, it would
be wise to combine any short-term fiscal stimulus with simultaneously enacted long-term spending cuts to reduce future budget
deficits. This strategy would help allay fears in financial markets
and decrease the likelihood that a rise in interest rates would
offset much of the benefit from short-term fiscal stimulus. It would
also help promote long-term investment. Monetary policy, now that
it has achieved the lowest inflation rates in a generation and
broken the previous cycle of ever-higher inflation at corresponding
stages of successive expansions, should be directed toward maintaining low and stable inflation while providing sufficient money
and credit to support economic expansion. The last thing the economy needs after having gone through two rounds of disinflation—the
first in the early 1980s and the second in the early 1990s—is excessive money growth that would rekindle inflation and a return to the
boom/bust cycles of the 1970s,
A third major problem confronting America is the economic condition of the disadvantaged. For several decades the rate of economic growth greatly reduced the poverty rate. But a combination
of demographic, social, economic, and policy factors has led to a situation where many Americans have little opportunity or incentive
to improve their condition and have a standard of living far below
that of most Americans. As noted in previous Economic Reports,
economic growth is essential to provide rising employment opportu-


334-230


29
O—92

2 (QL3)

nities for new entrants into the labor force and those seeking
upward economic mobility. But economic growth, by itself, will not
be sufficient to make major inroads in the poverty rate in the
United States.
Fourth, the Nation's health care system costs too much and fails
to insure too many Americans. Because of its importance to both
the economy and the welfare of all citizens, problems in the health
care system pose a special threat to future increases in income and
living standards. While Americans enjoy rising life expectancies
and probably the highest quality of health care in the world,
health care expenditures, which now account for one-eighth of the
economy, are rising rapidly. Estimates suggest that one out of
every seven or eight Americans is not covered by health insurance.
The system of health insurance and third-party payment and the
lack of incentives to use health services wisely are only a few of
the factors that are driving up health care costs. Chapter 4 of this
Report describes these issues and proposed solutions in far greater
detail.
In summary, the economy has short-term problems and longterm challenges. Each of these is discussed in much more detail in
subsequent chapters in this Report, and each is amenable to policy
reforms that would greatly strengthen the American economy.

AGENDA FOR REFORM
In order to surmount the challenges, solve the problems, and
take advantage of the opportunities confronting the American
economy, government policy in numerous areas needs to be reformed. Successful implementation of this reform agenda would
greatly enhance the prospects for a stronger economy, higher living
standards, and greater economic and social mobility for the disadvantaged. It is an activist agenda, but one that points to more limited
government. This is far from a contradiction. The private sector of
the economy is where most of the jobs are created and income
earned. Sometimes the government can play an effective role in
dealing with problems, but too often in the past the government
has overplayed that role, creating costly, ineffective, inefficient bureaucracies and unnecessarily wasteful spending. The answer is not
to let the existing programs continue indefinitely, nor is it always
to eliminate government involvement. It is to seek reform based on
sound economic principles in a primarily pluralistic democratic
capitalist and federal system, consistent with individual initiative,
freedoms, and responsibilities.
A comprehensive agenda for reform has been presented during
the course of the Bush Administration. Some of the reforms had
their roots in proposals made during the Reagan Administration,




30

while others were entirely new. The President was able to implement some of thfem unilaterally; some of them were partially adopted by the Congress; and others the Congress refused to enact, at least
in a form acceptable to the President. The appropriate though
limited role for government in improving the foundations and performance of the economy includes, in addition to maintaining a
sound monetary system with low and stable inflation:
FISCAL REFORM
• Removing Tax Penalties on Saving, Investment, and Entrepreneurship. Despite the substantial and desirable reduction in
marginal tax rates achieved in the 1986 Tax Reform, disincentives to saving, investment, and entrepreneurship in the current
tax system were worsened. Restoring tax incentives, such as a
capital gains differential, more neutral capital cost recovery or
other investment incentives, and elimination of the double
taxation of saving, should be a high priority. Further, this could
be accomplished either by reforming the income tax or by
moving to a consumed income tax, as discussed in Chapter 6. It
should be done in the context of tax simplification. The corporate tax also ought to be explicitly or implicitly integrated with
the personal tax to eliminate the double taxation of corporate
source income, reduce the bias favoring debt as opposed to
equity finance, and restore investment incentives. Further, the
corporate alternative minimum tax, which was greatly expanded in 1986, should be substantially reformed or repealed.
• Limiting and Redirecting Growth of Federal Government
Spending. Bringing the budget under control requires limiting
the growth of the mandatory spending that forms the bulk of
the budget. This will mean a substantial reduction in the
growth of entitlements, especially for health care. The best
place to start would be with entitlement payments to well-off
individuals. It is also desirable to continue to reorient spending
to productive investment in infrastructure and research and
development.
• Reforming the Budget Process. A good start would be giving the
President a line-item veto.
TRADE LIBERALIZATION
• NAFTA. The North American Free Trade Agreement
(NAFTA) offers the opportunity to create a more prosperous
and stable Western Hemisphere. It should be adopted by the
respective legislatures as rapidly as possible. It will be phased
in over many years, so the fear of economic dislocation is
greatly exaggerated.




31

• Completing the Uruguay Round. To bring the Uruguay Round
of GATT to a successful conclusion remains essential to advancing U.S. and global economic prosperity. (Each of these is
discussed in more detail in Chapter 7.)
REGULATORY REFORM
• Utilizing Market Incentives. Wherever possible, command-andcontrol approaches that prescribe particular ways of meeting
the objectives of regulation should be replaced by performance standards allowing far greater flexibility to workers,
firms, and consumers to meet sensibly chosen standards.
• Reform Risk Assessment and Management. There needs to be a
fundamental reexamination and reform of the Federal Government's risk assessment and risk management systems. Current
procedures result in biased estimates of risk and in uneven
standards of risk minimization, with unrealistically strict requirements in some areas and missed opportunities for major
reductions in risk in others.
EDUCATION REFORM
• School Choice. Low- and middle-income families should be
given the opportunity to send their children to schools of their
choice, whether public or private. School choice will create
competition, forcing schools to improve their quality in order
to attract students, in much the same manner as do American
universities, which are the best in the world.
• National Educational Standards. Families and educators need
objective, widely accepted standards that define children's skill
levels in key areas. Without such standards in place, it is impossible to evaluate the quality of schools or assess children's
academic performance.
HEALTH CARE REFORM
• Improving Access to Health Care. Reforms are needed to provide insurance to low-income people. The best way to do this is
to provide them with tax credits tied to the purchase of health
insurance to enable them to choose among the options available in the health care market.
• Pooling Health Risks. To lower the cost of health care for
those with chronic illnesses, it is important to pool risks among
the healthy and the chronically ill. Risk pooling should be accomplished through the use of health risk adjusters and not
through mechanisms that discourage insurers from providing
insurance to those in poor health.
• Access to Health Insurance for Employees in Small Businesses.
Regulatory reform is needed to enable small businesses to gain




32

access to the health insurance market and to reduce the cost of
this insurance. Small businesses should be encouraged to pool
their health insurance buying power and should be made
exempt from state benefit mandates and premium taxes.
• Malpractice reform. The malpractice litigation crisis must be
ended and the system overhauled. Litigation over medical malpractice raises costs directly and encourages the practice of
costly defensive medicine.

EMPOWERING THE DISADVANTAGED
• Enterprise 2k>nes. To improve the employment opportunities of
the disadvantage*! in distressed urban and rural communities,
enterprise zones should be created. Businesses locating within
the enterprise zone would be eligible for a tax incentive to encourage employment of low-income residents.
• Weed and Seed. To control violent crime, and to provide social
and economic support to areas where high crime rates and
social ills are prevalent, neighborhoods should be given assistance through job training, drug treatment and prevention, and
educational activities.
• Housing and Homeownership. Reforms are needed to increase
the possibilities for low-income families to own their own
homes in order to have a stake in their communities.

CONCLUSION
Continuing the activist, appropriate, but limited governmental
role demonstrated by the Bush Administration is the proper basis
of economic policy for the 1990s and beyond. Such a role will foster
the spirit of vitality, creativity, productivity, and resourcefulness
that has so often described America and its accomplishments in the
past. The major need is for a steady, coherent, coordinated, longterm policy framework.
Without abandoning government's substantial accomplishments,
such as greatly mitigating the economic distress attributable to unemployment and poverty, government spending must be made
much more cost conscious and target effective. Without deluding
themselves about the prospects of instantly promoting the rate of
economic growth, policymakers must unravel the disincentives for
capital formation and new business creation that government regulatory and tax policies have created. Without forgetting the genuine needs for greater health, safety, and environmental protection,
Americans must begin to clean up the regulatory morass that
hinders the country's economic progress. Without ignoring important national interests, America must resist the lure of protectionism and managed trade and complete the work of liberalizing trade




33

throughout the world. Without neglecting the fact that markets
sometimes do not work perfectly, it must be recognized that this is
the exception and not the rule, and that governments often fail to
improve on imperfect market outcomes.
America's economic success sends an important message that
free political institutions, free markets, and economic progress are
linked. Responding to economic challenges to enhance the Nation's
long-term economic growth in an open world trading system is the
single most important thing Americans can do to ensure the prosperity of future generations and influence decisively the evolution
of many of the world's economic and political systems toward
democratic capitalism.




34

CHAPTER 2

Recent Developments and the
Economic Outlook
OVER THE LAST SEVERAL years, the U.S. economy has been
struggling through a period of consolidation and transition. In addition to the oil price shock in the second half of 1990, various structural relationships and imbalances contributed to the recession and
the sluggish economic performance including defense downsizing; a
boom-bust cycle in commercial real estate aggravated by wide
swings in the tax laws and bank regulation; credit market constraints resulting from the balance sheet, capital, and regulatory
difficulties that financial institutions faced; and a buildup in corporate debt relative to profits and household debt relative to income.
The working off of these imbalances added to the economy's cyclical difficulties. Changing demographic trends that have slowed the
underlying rate of household formation and the more recent trend
toward corporate downsizing also have played a role in slowing the
economy. The sluggish economic performance has not been confined to the United States: In recent years, Australia, Canada, and
the United Kingdom have been in recession, and Japan and Germany entered recession during 1992. Other European countries are
verging on recession. Although some countries are adopting policies
to help stimulate their economies, the general slowdown in the
international economy will act as a drag on U.S. exports and
growth for some time.
As the Nation's economic difficulties are resolved—as the drag
associated with corporate and household indebtedness is reduced;
banks improve their capital position, become less cautious about
lending, and face a more-balanced regulatory environment; the adjustment to defense cuts progresses; and the supply of developed
real estate is brought into balance with demand—conditions for a
stronger, sustained expansion are being laid. Other developments
that promise to enhance the prospects for a sustained expansion include low and stable inflation, low interest rates, and rising productivity. Interest rates and core inflation—consumer price inflation
excluding the volatile food and energy components—are at their
lowest levels in a generation.
In the late 1970s, inflation climbed to disturbing double-digit
levels, exceeding 13 percent during 1979 and 12 percent during




35

1980. Inflation imposed a heavy burden on the economy, complicating saving and investment decisions and adding to the economic
uncertainties that many Americans faced. Additionally, because
tax brackets were not indexed for inflation at that time, increases
in nominal income that barely kept pace with inflation automatically pushed taxpayers into higher tax brackets. The severe recession that followed in the early 1980s, the country's worst economic
performance since World War II, was largely a direct consequence
of the disinflation policies—in particular tight monetary policy—
that successfully reduced inflation from the double-digit levels of
1979-80 to less than 4 percent in 1982. Inflation remained in the 4to 5-percent range for the rest of the decade. While the recession of
the early 1980s was deep, the loss of output was not nearly as
severe as many economists had predicted it would have to be in
order to achieve such a sharp reduction in inflation.
The lower rate of inflation was a significant improvement, and
the economy grew strongly, producing over 21 million new jobs between 1982 and 1990. But concern mounted that progress toward
lower inflation had stalled. It seemed that a rate of 4 to 5 percent
might be a new floor below which inflation would be unlikely to
fall. In the early 1970s, such rates of inflation had been considered
unacceptably high; in response to such rates, the Nixon Administration imposed wage and price controls to bring inflation down, in
what proved to be an unsuccessful effort with costly side effects. In
the late 1980s, as the economy continued to expand and the unemployment rate fell to its lowest level in 15 years, incipient inflationary pressures raised fears of a resurgence in inflation. This raised
the possibility of another round of rapidly accelerating inflation—
and the costly efforts required to fight it—much like the severe
events of the late 1970s.
The Federal Reserve was determined to avoid the mistakes of the
past and to act before a new inflationary spiral developed. In order
to prevent a substantial increase in inflation and to resume the
progress toward lower inflation that had begun early in the decade,
the Federal Reserve pursued a strategy that tightened monetary
policy gradually in an attempt to contain the growth of nominal
output and reduce inflation without causing an actual decline in
real output. This has sometimes been called a "soft-landing" strategy. Short-term interest rates rose from about 7 percent in early
1988 to about 10 percent in early 1989. By acting in a timely
manner with forward-looking monetary policies, the Federal Reserve improved the prospects for a reduction in inflation without a
costly economic downturn.
As growth slowed in 1989 and early 1990, the Federal Reserve
began gradually lowering interest rates as evidence of poor economic performance and lower inflationary pressures accumulated.




36

Interest rates fell gradually from the spring of 1989 until the beginning of 1990. In the last quarter of 1990, after it was evident that
the economy had indeed entered a recession, the Federal Reserve
became more aggressive in lowering interest rates, which continued to fall through 1991 and much of 1992. During this period, the
reserves of banks and other depository institutions grew substantially. However, the broader money supply measures grew at surprisingly low rates and appeared largely unresponsive to increases
in bank reserves and reductions in short-term interest rates (Chapter 3). Moreover, the economy did not respond to the decline in interest rates as rapidly or as strongly as the Federal Reserve and
many private observers had anticipated.
The soft-landing strategy involved inevitable risks because it
slowed aggregate demand growth and made the economy more vulnerable to potential adverse developments. This strategy might
have worked if large shocks and other unforeseen factors depressing economic activity had not emerged or if the drag they exerted
on the economy had been readily observable and easily offset by
changes in policy. However, policies are always conducted in an uncertain environment, and it takes time to recognize problems and
implement policies—and for those policies to take effect.
At the time the various problems facing the economy began to
emerge, it was difficult to determine their severity or the kind of
stimulus that would be required to offset them without reversing
progress toward lower inflation. With the benefit of hindsight, a
more rapid reduction in interest rates might have reduced the
downward pressures on output and contributed to a healthier recovery without reviving inflationary pressures—although the
progress in reducing inflation could have been slowed. In any
event, too much reliance was placed on monetary policy, and the
economy would have benefited from fiscal stimulus (primarily tax
incentives), regulatory relief, and policies oriented toward trade expansion.
If the soft-landing strategy failed to avert a recession as a result
of unexpected events, the strategy was highly successful in reestablishing progress toward lower inflation. The rate of core inflation
declined from 5.2 percent during 1990 to about 3.5 percent during
1992. Following the decline of inflation from the double-digit levels
of the late 1970s to the 4- to 5-percent range in the mid- to late1980s, the more recent decline represents the second round of a
long-term disinflation effort started over a decade ago. The current
low and stable inflation rate means that households will be able to
save with reduced concern that inflation will erode the purchasing
power of their nominal assets, while businesses will be able to
commit themselves to long-term projects with less uncertainty that
inflation might render their investments unprofitable. As a result




37

of reduced inflationary pressures and the credibility the Federal
Reserve has gained from its inflation fight, the economy may be
spared the need for the policy reversals—so prevalent from the late
1960s through the early 1980s—that resulted in the upward ratcheting of inflation and wide swings in output and employment.
During the recent period of disinflation, the U.S. economy has
gone through several fairly distinct phases: a period of slow growth
starting in early 1989 and continuing through the first half of 1990;
a recession for the next three quarters, with real gross domestic
product (GDP) falling a total of 2.2 percent; and three quarters of
very sluggish recovery, with real GDP growing about 1.2 percent at
an annual rate. During 1992, the U.S. economy remained in a
modest and uneven recovery, with the rate of growth picking up to
the 2.5- to 3-percent range.
Last year's Administration forecast correctly predicted that, by
historical standards, the economy would grow at a quite modest
pace during 1992. Through the middle of the year, employment and
income growth remained sluggish, and consumer and business confidence were low. Export growth slowed, restricting what had been
a source of strength for the U.S. economy for many years. However, by midyear the outlook began to improve as unemployment
began a gradual decline, nonfarm payrolls began to edge up,
income growth picked up, and consumer and business confidence
stabilized and then began to rise.
The current Administration forecast predicts that real GDP will
grow about 3 percent during 1993. Growth is expected to continue
in the 3-percent range through the mid-1990s. Sustained growth
will require, among other things, a fiscal policy oriented toward
spending restraints to reduce the structural budget deficit over
time and tax incentives that enhance growth, a monetary policy
that provides sufficient growth in money and credit to sustain the
expansion while maintaining low inflation, regulatory reform that
provides greater room for the use of market incentives to minimize
the negative impacts of regulation on economic growth, and trade
policies that succeed in opening markets worldwide and in supporting growth in the international economy.
The unemployment rate is expected to decline slowly but steadily
during 1993, averaging 6.9 percent for the year (compared with 7.4
percent for 1992) and to continue its slow decline through the mid1990s. Inflation likely will remain low in 1993 and in coming years,
with consumer prices rising in the range of about 3 percent per
year. With moderate growth and low inflation, short-term interest
rates are expected to remain low in 1993, and long-term interest
rates are expected to decline. In coming years, short-term rates are
likely to increase slightly as the economy continues to expand, and
long-term rates are expected to stabilize as inflation remains low.




38

However, the outlook for interest rates in general and long-term
rates in particular depends on fiscal and monetary policies. Policies
that would lead to higher spending and deficits or higher inflation,
relative to what is currently expected, could boost long-term interest rates and retard economic growth in the future.
The economy is expected to improve in coming years. But challenges remain. Short-term cyclical performance remains uncertain,
various structural imbalances have yet to be worked out, and a
high rate of productivity growth must be maintained to sustain increases in Americans' living standards. Of the various short-term
cyclical concerns that remain, the most important center on the
need for improved employment prospects and the related bolstering
of consumer confidence. Corporate restructuring and military
downsizing are significant structural adjustments that could
hamper job growth.
This Administration has recognized throughout its term, and
stated explicitly in each of its previous Economic Reports, that the
Nation faces serious economic challenges and cannot take economic
growth for granted. The Administration's policies and policy proposals have been designed to support sustained increases in the Nation's standard of living by raising long-term productivity growth
while boosting the job base. Unfortunately, the Congress did not
enact many of the Administration's key growth proposals in an acceptable form. Included in these proposals were pro-growth fiscal
measures designed to enhance incentives for entrepreneurship,
saving, and investment and to increase economic growth, as well as
spending controls aimed at reducing the multiyear structural
budget deficit. This Administration also has promoted a trade
policy designed to open markets worldwide, contributing to more
vigorous growth, and pursued regulatory reforms to reduce unnecessary burdens on businesses and consumers.
The Nation has been through difficult economic times over the
past several years, but despite these difficulties, the U.S. economy
remains the strongest and most resilient in the world. The recovery
from the recent recession has been slow and protracted, but the
performance of the economy during the last 4 years has not been
uniformly weak. Broad-based, readily available information does
not support the argument that the country's recent economic performance has been the worst since World War II. Economic conditions, including inflation, interest rates, unemployment, and real
growth, have been better during the past 4 years than they were
during the 1978-82 period. Core inflation and interest rates are
now at their lowest levels in a generation, well below the doubledigit rates that prevailed 12 years ago. At its recent peak the unemployment rate was 7.7 percent, considerably lower than the peak
of nearly 11 percent in the early 1980s and the 9-percent peak




39

during the 1973-75 recession. And in terms of real GDP and
income, the slow growth of the past 4 years still exceeds the average growth from 1978 to 1982.
The soaring inflation and interest rates of the late 1970s condemned the U.S. economy to years of declining output, falling incomes, and rising unemployment. Yet these adjustments, painful as
they were, set the stage for the sustained expansion of the 1980s.
For the last several years, the economy has been going through a
similar but much less severe period of consolidation and transition,
with structural adjustments and disinflation restricting economic
growth. This period once again has meant substantial hardship for
millions of Americans. But the numerous structural adjustments of
recent years have been laying the basis for a solid, sustained expansion in the 1990s. As the drag associated with household and
corporate indebtedness is reduced, consumer spending and investment in plant and equipment will increase. As banks improve their
balance sheet positions and banking regulation and supervision
become more balanced, credit conditions will improve. Over time,
shifting resources from defense to civilian industries will strengthen the private economy and provide new employment opportunities. Enhanced productivity already has boosted the Nation's competitive position in international markets, and low and stable inflation will reduce the need for policies that could restrict future
growth. Together, these factors will help create a strong, sustainable recovery, more jobs, and higher incomes in years to come.

AN OVERVIEW OF THE ECONOMY IN 1992
The pattern of real GDP growth reveals the slow and uneven
nature of the economy's recent performance (Chart 2-1). The recession of 1990-91 ended in March 1991, following 8 months of decline
(Box 2-1). Beginning with the second quarter of 1991, real GDP
grew for six consecutive quarters, although growth averaged only 2
percent at an annual rate. Furthermore, the pattern of growth was
uneven. During the final three quarters of 1991, the pace of recovery was particularly slow; in the fourth quarter of 1991, the economy was essentially flat, with real GDP increasing at only a 0.6-percent annual rate. During the first three quarters of 1992, the economy grew at a stronger pace, but still well below the average for
previous recoveries.
Uneven growth during a recovery is not unusual. Indeed, every
previous postwar recovery has shown a "saw-tooth" growth pattern
with weaker quarters following, or sandwiched between, stronger
quarters. The underlying growth rate was low for much of 1991
and 1992—too low, in fact, to increase employment appreciably.
While real GDP increased for six consecutive quarters after its




40

Chart 2-1 Real Gross Domestic Product Growth
Real GDP has grown for six consecutive quarters, following three quarters of decline
during the recession.
Percent change
6
4.5
3.4

3.3
2.9

2.8
2.2
1.7

1.6

1.5

1.2

1.0

0.6

-1.6
-3.0
-4

-3.9

I
I
I
I
I
J I
I
I
1986 1987 1988 1989 90.I 90.ll 90.III 90.IV 91.1 91.11 91.111 91.IV 92.1 92.II 92.Ill
Note: Annual values are IV/IV change. Quarterly values are seasonally adjusted at an annual rate.
Source: Department of Commerce.

trough in the first quarter of 1991, the unemployment rate increased by 1.2 percentage points, reaching an 8-year high of 7.7
percent in June 1992 before trending down for the remainder of
the year (Chart 2-2). Nonfarm payroll employment remained
almost flat after the recession ended, declining slightly in late 1991
and early 1992, before growing slowly through the end of 1992
(Chart 2-3).
EARLY IMPROVEMENT
The economy picked up in the first quarter of 1992, with real
GDP expanding at an annual rate of 2.9 percent—the strongest
growth in 3 years. Real consumer spending posted its best quarterly performance in over 5 years, rising 5.1 percent at an annual
rate. Real final sales—real GDP less the change in business inventories, a measure of aggregate demand in the economy—rose at an
annual rate of 4.7 percent in the first quarter. Real per capita disposable personal income also increased, recording its largest gain
in 2 years. Consumer confidence, as measured by the Conference
Board's Consumer Confidence Survey, reached an 18-year low early
in the year but then rose more than 50 percent through the spring




41

Box 2-1.—Recessions and Business Cycle Dating
For the past year and a half the question of whether the
economy has been in a slow recovery or has continued in recession has been hotly debated. The National Bureau of Economic
Research (NBER), a private economic research organization, is
the official arbiter determining the beginning and ending dates
for recessions and expansions—the turning points of the business cycle. In late December 1992, the NBER Business Cycle
Dating Committee determined that the recession that began in
July 1990 ended in March 1991, indicating the recession lasted
only 8 months.
During a recession, the economy is in a decline of significant
depth, duration, and diffusion (that is, spread across various industries and sectors); during a recovery it regains the output
lost during the recession. A recovery is typically followed by a
sustained expansion. To say that the recession ended in March
1991 does not mean that the economy was doing well after that
date; rather, it means that the period of decline had ended and
output had begun to increase. The recovery was complete by
the third quarter of 1992, when real GDP climbed above the
prerecession peak of the second quarter of 1990.
Key economic variables must be examined to determine the
beginning or end of a recession. The components of the Department of Commerce's index of coincident indicators—nonfarm
payroll employment, industrial production, real personal
income less transfer payments, and real manufacturing and
trade sales—generally serve that purpose well. Industrial production and real manufacturing and trade sales hit their low
point in early 1991. Real personal income less transfer payments and nonfarm payroll employment also reached their initial lows in early 1991 but then flattened out, even dipping
slightly in late 1991 and early 1992.
The debate also was clouded somewhat by the methodology
used to construct the index of coincident indicators. This methodology results in a downward bias that would generate a declining index even if the economy were growing very slowly.
The Department of Commerce has begun publishing an alternative coincident index based on revised methodology that
shows a trough—the low point in economic activity—in March
1991, a result consistent with the NBER dating of the end of
the recession.
(Chart 2-4). Civilian employment and labor force participation—the
percentage of the working-age population working or actively seek-




42

Chart 2-2 Civilian Unemployment Rate
The unemployment rate fell steadily during the second half of 1992. The recent peak of 7.7
percent in June 1992 was well below the 10.8 percent peak following the 1981-82 recession.

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
Source: Department of Labor.
Chart 2-3 Nonfarm Payroll Employment
Nonfarm payroll employment grew slowly during 1992, after being stagnant for much of
1991 following the recession.
Thousands
110,500

-110,304
June 1990

110,000

109,500 -

109,000 -

108,500

-

108,000
108,711
December 1992
I

I

I

July
Oct
Jan
Apr
July
Oct
1990
1991
Note: November and December 1992 data are preliminary.
Source: Department of Labor.
Jan




Apr

43

Jan

Apr

July
1992

Oct

ing work—rose as the economy appeared to be moving into a sustainable recovery and job prospects appeared brighter. After-tax
corporate profits surged nearly 11 percent in the first quarter, the
largest increase in 4 years.
Chart 2-4

Consumer Confidence

Consumer confidence has been extremely volatile over the last 2 years, turning up again
in the final months of 1992.
Index, 1985 = 100
120
110 -

100

-

1990

1991

1992

Source: The Conference Board.

Other indicators also pointed to an improved economic outlook in
early 1992. Lower mortgage rates helped boost housing construction, with housing starts surging 20 percent over the first 3 months
of the year. Orders for durable goods rose 7.4 percent between December 1991 and April 1992, and industrial production—the output
of the Nation's factories, mines, and utilities—rose 2.2 percent between January and May. The improved economic outlook was reflected in five consecutive monthly increases in the index of leading indicators, a measure designed to predict the economy's shortterm performance.
MIXED PERFORMANCE AND UNCERTAINTY
Growth slowed after the initial surge, and the economy expanded
at a modest 1.5-percent annual rate in the second quarter. Real
final sales declined slightly in the second quarter, indicating that
aggregate demand was weak. Hence, the change in inventory investment more than accounted for the growth in the economy in




44

the second quarter. Inventory investment often increases significantly and adds to growth during recovery periods as firms increase stocks in anticipation of increased sales. However, in the
recent recovery, better management of inventories coupled with
slow and uneven demand led businesses to be more efficient and, at
the same time, more cautious in managing inventories. In such an
environment, the degree to which inventory accumulation is due to
lower-than-expected demand—and is therefore undesired—and the
degree to which it is a desired buildup in anticipation of increased
sales remain unclear.
The final expenditure components of real GDP—consumption, investment, government purchases, and net exports (exports of goods
and services minus imports of goods and services)—showed uneven
performance in the second quarter. Consumer spending stalled.
Fixed investment increased strongly, with spending for producers'
durable equipment and residential investment showing solid gains.
Government purchases declined slightly. Net exports fell significantly as imports rose and exports declined slightly. The deterioration in net exports in the second quarter had a significant negative
effect on real GDP, directly reducing the annual growth rate by 1.8
percentage points.
Consumer confidence also began to fall again in the middle of
the year. Although mortgage rates remained low compared to earlier years, they moved up somewhat from their January low, and
housing starts and housing sales fell back after their earlier surge.
New orders for durable goods, retail sales, industrial production,
and the index of leading indicators flattened out.
The lack of significant improvement in the labor market was a
particularly important factor underlying the continued sluggish
performance of the economy throughout 1992. While employment
rose in the first half of the year, too few jobs were created to
absorb the increased number of job seekers. As a result, the unemployment rate rose from 7.1 percent in January to 7.7 percent in
June, as the number of unemployed persons rose from just under 9
million to nearly 10 million. The optimism of the first few months
of the year was replaced with pessimism as employment prospects
stagnated.
The weak labor markets reflect, in part, increases in efficiency.
The strong performance of corporate profits noted earlier reflected
vigorous cost-cutting efforts that often involved layoffs or restricted
hiring in response to slow growth in aggregate demand. While such
cost-cutting measures may help boost productivity and profits and,
eventually, strengthen the economy, they also contribute initially
to sluggish labor markets and slow income growth for a large proportion of households.




45

Because sustained income gains are the basis for continued
growth in consumption, the immediate effect of sluggish performance in the labor market, with the accompanying reduced prospects for income gains, is decreased prospects for a pickup in
spending. Wages and salaries and "other" labor income—primarily
employer contributions to private pension and welfare funds—account for nearly two-thirds of all personal income. From March
1991 through September 1992, aggregate weekly hours worked by
private nonagricultural production workers were essential flat, increasing only 0.3 percent, and real average gross hourly earnings
for private nonagricultural workers actually fell, decreasing 0.7
percent. Total real wages and salaries rose less than 1 percent over
the same period. Because consumer spending accounts for twothirds of the spending stream constituting GDP, its growth is crucial to a sustained economic expansion.
SECOND-HALF REVIVAL
The economy revived in the second half of the year, with real
GDP growing at a 3.4-percent annual rate in the third quarter, the
highest rate in over 3V2 years. The performance of the major components of real GDP shows that the revival was broad based in the
domestic economy. Consumer expenditures rose at an annual rate
of 3.7 percent, with solid contributions from increased spending on
services and both durable and nondurable goods. Investment spending also made a significant contribution to third-quarter growth,
rising at an annual rate of 6.5 percent as producers increased purchases of durable equipment and inventories surged, offsetting a
decline in spending on structures. Government purchases more
than made up for the second-quarter decline, rising at a 3.8-percent
annual rate. The only major component to have a negative effect
on growth was net exports, which continued to decline because of
an increase in imports that more than offset an increase in exports. Commerce Department estimates for the fourth quarter had
not been released when this Report was written. Initial data and
private forecasts indicate that real GDP likely continued to grow at
a moderate pace in the fourth quarter, supported primarily by a
further large increase in consumer spending.
In the second half of the year, various indicators pointed to an
improving economy. Retail sales climbed steadily. Consumer confidence declined slowly into the fall but then rose strongly in the
final months of the year. After having slipped back in the summer,
housing starts increased into the fall. New orders for durable goods
and industrial production picked up. Initial claims for unemployment insurance trended down and by the end of the year had
reached their lowest level in over 3V2 years. The index of leading




46

indicators increased in the fall after having been flat during the
summer.
SPECIAL FACTORS—HURRICANES
The effects of Hurricanes Andrew and Iniki were among the
most important of the special factors affecting the economy in
1992. In August, Hurricane Andrew swept across southern Florida,
the Gulf of Mexico, and into Louisiana, causing enormous damage.
In September, Hurricane Iniki struck Hawaii. Department of Commerce estimates show that Hurricane Andrew destroyed or severely damaged over 100,000 private residences, Hurricane Iniki over
6,500. Insurance covered three-fourths of the more than $9.1 billion
in residential property losses, one-half of the $1.2 billion in proprietors' property losses, and four-fifths of the $3.5 billion in corporate
property losses. Hence, total property loss was nearly $14 billion, of
which about three-fourths was covered by insurance. Hurricane
Andrew also disrupted several major industries—oil and gas extraction, petroleum refining, and petrochemicals—contributing to a
reduction in industrial production. The hurricanes also initially reduced personal income through lost wages, uninsured losses of personal and business property, and crop damage. The cost of benefit
payments made by insurance companies had a significant negative
effect on corporate profits in the third quarter.
Ironically, the subsequent rebuilding and new purchases resulting from the hurricanes will have a net positive effect on real GDP.
GDP measures production, not the stock of wealth or capital. While
the hurricanes destroyed wealth and capital and, in the short run,
disrupted production and income, the increased expenditures and
production required by rebuilding will boost real GDP. Given the
magnitude of the rebuilding effort, the contribution to real GDP
growth at the end of 1992 and in early 1993 could be as high as
0.25 to 0.5 percentage point of growth at an annual rate per quarter over several quarters. The effect on real growth in each quarter
will depend on how the purchases and rebuilding are distributed
through time.
LOW INFLATION
During 1992 inflation fell to the lowest rate in a generation.
Through November consumer price inflation during 1992 was 3.1
percent at an annual rate, and core inflation was 3.5 percent
(Chart 2-5), the lowest yearly rate since 1972. Producer price inflation was somewhat higher during 1992 than during 1991; it had
been unusually low during 1991 as a result of declining oil prices
from their peaks during the Gulf conflict.
Various fundamentals helped keep consumer and producer price
inflation low and contributed to the decline in core inflation. The




47

Chart 2-5 Consumer Price Inflation
Consumer price inflation has fallen over the past 2 years, with core inflation nearing its
lowest level in two decades.
Percent
16

All Items

14

12
Excluding Food
and Energy
10

November 1992
3.4%

3.0%
I

1970

I

l

I

I

I

I

I

I

I

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

Note: Percent change in CPI-U from 12 months earlier.
Source: Department of Labor.

recession and slow recovery in the United States and the sluggish
international economy have resulted in only modest growth of aggregate demand. Slow money growth over the past several years
contributed to, as well as reflected, the sluggish economy and waning
inflationary pressures. Primary commodity prices have not increased as they typically do during a recovery. These fundamentals
are likely to keep inflation well below the 4.5- to 5-percent range of the
mid- to late-1980s. In fact, the average expected 12-month change
in consumer prices, measured by the Michigan Surveys of Consumers, has declined over the past several years, falling from over 5
percent in early 1989 to about 3V2 percent in late 1992.
Low inflation not only benefits the economy but helps set the
stage for sustained economic expansion. Lower inflation helps to
maintain the purchasing power of Americans' savings and wealth.
Low inflation has also helped bring nominal interest rates to their
lowest levels in a generation. Low interest rates have helped households and businesses reduce the cost of paying off existing debt.
Low mortgage rates helped to make housing more affordable in
1992 than it had been at any time in the past 18 years and created
a burst of refinancing activity. Over the past 4 years, the interest




48

rate on 30-year fixed-rate mortgages declined by over 2 f percentVe
age points; for a $100,000 30-year mortgage, that interest rate decline translates into savings of over $2,000 per year. Household
debt-service payments as a percent of disposable income have
fallen from a high of over 18 percent in late 1990 and early 1991 to
about I6V2 percent, improving household finances and freeing up
funds for spending or saving. These lower interest rates also mean
that interest income will be lower and that some of the economic
benefits of lower interest rates will be offset. For some specific
groups such as retirees, lower interest rates mean a significant decline in income.
THE INTERNATIONAL SLOWDOWN
Even though U.S. export growth has slowed gradually over the
last several years, exports have made a significant contribution to
economic growth, rising from 8 percent of real GDP in 1987 to over
11 percent in 1991. In 1992 slower export growth and a significant
increase in imports caused the Nation's trade balance to deteriorate. Because the dollar's low foreign exchange value has bolstered
the economy's international competitive position, the slowdown in
export growth and deterioration of the U.S. trade balance appear
to be the result of the sluggish economic performance of our major
trading partners and the recent growing demand within the United
States.
Despite the economic difficulties that the U.S. economy has had
to face, over the past year and a half it has performed better than
the economies of the other large industrial economies that belong
to the Group of Seven (G-7)—Canada, France, Germany, Italy,
Japan, and the United Kingdom. The German and Japanese economies, which grew strongly in 1990 and 1991 (with average annual
real growth exceeding 4 percent) slowed markedly and entered recession during 1992. Canada and the United Kingdom were in recession in 1991, with real output declining by about 2 percent in
each country; in 1992, growth in the Canadian economy resumed at
a slow pace, but the United Kingdom continued in recession.
France and Italy experienced sluggish economic performance in
both 1991 and 1992, with real annual growth rates in the 1- to 2percent range. Because the other G-7 countries account for almost
one-half of all U.S. merchandise exports, slow growth or recessions
in their economies can have a significant negative effect on U.S.
exports.
U.S. exports to the newly industrialized economies of the Pacific
Rim have been increasing, with the share to Korea, Taiwan, Singapore, and Hong Kong increasing from 8 percent in 1986 to nearly
11 percent in 1991. The outlook for real growth in those four economies is good and to some degree may offset the decline in demand




49

for U.S. goods and services among G-7 members. Prospects also are
good for expanded trade with Latin and South America, and the
North American Free Trade Agreement (NAFTA) should boost
trade with Mexico. In the past 6 years, U.S. exports to Mexico have
roughly tripled. While real growth in Mexico has slowed over the
past 2 years, growth in 1992 and 1993 likely will compare favorably
to the stagnant performance of the mid-1980s. (Chapter 7 of this
Report has a detailed discussion of international financial and
trade issues.)
LONGER TERM STRUCTURAL ADJUSTMENTS AND
SHORT-TERM PERFORMANCE
As discussed earlier, the structural imbalances and adjustments
of the past several years have been a major cause of the sluggish
performance of the economy. In the 1970s and early 1980s, shifting
demographic trends related to the postwar baby boom boosted
household formation, increasing residential investment and spending on big-ticket durable goods such as cars, appliances, and furniture. However, by the late 1980s the share of the population in the
age groups that traditionally form households had begun to decline, reducing the demand for new housing and related durable
goods relative to other goods and services.
As the Cold War wound down, so did the defense buildup of the
mid-1980s; moderate cuts in defense have been followed by more
significant cuts that are likely to continue through the mid-1990s.
Federal defense spending shifted from being a large net stimulus to
the economy to being a sizable drag. Over the 1982-87 period Federal defense purchases directly contributed an average 0.35 percentage point annually to real GDP growth. Over the 1987-91
period, however, the direct effect was negative: -0.05 percentage
point. In 1992 real Federal defense purchases were running nearly
$20 billion (in 1987 dollars) below their 1991 level, resulting in a
direct negative effect of nearly 0.4 percentage point on the growth
rate of real GDP. Yet the actual impact of defense cutbacks has
been greater than these data indicate. Because the data on purchases relate primarily to the delivery rather than the production
of goods, the decline in purchases in 1992 from 1991 does not account for the additional decline in manufacturers' inventories of
defense capital goods, which fell by $6 billion from October 1991 to
October 1992. In addition, the data reflecting the effect on the
Nation as a whole understate the short-term effect on local communities in the regions where defense industries are concentrated. Indirect effects contribute significantly to the overall effect of defense
cutbacks.
Problems in the financial sector have had a significant
effect on the recent economic situation because of the integral role




50

the sector plays in ensuring a growing, healthy, and flexible economy. When functioning properly, financial institutions help allocate
capital efficiently and thus promote economic growth. Structural
problems, like the recent constraints on credit that have resulted
in a "credit crunch," impair the ability of financial institutions to
function efficiently and, as a result, reduce growth. Credit crunches
used to occur from time to time because regulations fixed an upper
limit on the interest rates that could be paid on deposits. Those interest rate caps made it more difficult for depository institutions to
attract deposits and forced them to cut back on loans. Over the
past several years, however, restructuring of depositories' balance
sheets—in part market driven and in part to meet new capital
standards—as well as the overreaction of examiners to the earlier
excesses of banks and savings and loans, have contributed to credit
constraints. In addition, the Congress passed two bills—the Financial Institution Reform, Recovery, and Enforcement Act of 1989
and the FDIC Improvement Act of 1991—which contained several
features that inadvertently contributed to the credit crunch and restricted bank lending (Chapter 5). Balance sheet restructuring, in
combination with an unusually steep yield curve, resulted in declining commercial and industrial loans by banks and increased
growth of bank holdings of government securities (Chapter 3). The
reduced lending created particular difficulties for small and
medium-sized businesses that typically rely heavily on banks as a
source of funds. In addition, a variety of other financial intermediaries have suffered asset quality and capital problems that have
reduced their willingness and ability to lend at precisely the same
time that banks and thrifts have reduced lending.
Other factors, including the overbuilding of commercial real
estate and high levels of consumer and corporate debt, have constrained both private investment and consumption. As these imbalances are gradually worked off, the drag on the economy will be
reduced, allowing the economy to operate closer to its potential.
(Chapter 3 contains an in-depth discussion of these issues.)
MONETARY AND FISCAL POLICY IN 1992
Desires to balance the need for short-term stimulus with longterm objectives governed monetary and fiscal policies in 1992. The
Federal Reserve lowered interest rates in response to accumulated
evidence of abating inflationary pressures and continued sluggish
economic performance. Interest rates fell during the year, while
the reserves of banks and other depository institutions grew rapidly. However, growth rates for the broader monetary aggregates
were below the lower bound of the Federal Reserve's target ranges
for most of the year. When the need for a fiscal policy that would
provide immediate stimulus became increasingly clear in late 1991,




51

the President, in January 1992, responded by proposing tax incentives and other measures to encourage short-term growth and job
creation as well as long-term investment and productivity (the program was not adopted by the Congress). (A broader discussion of
monetary and fiscal policies in an historical context is presented in
Chapter 3.)
Monetary Policy and Interest Rates
As a result of sluggish economic performance and monetary
policy actions, short-term interest rates have been on a downward
trend over the last 3V2 years. Growth of the broader monetary aggregates, however, has remained consistently weak. The M2 monetary aggregate—which includes currency, checking accounts,
money market accounts and funds, savings and small time deposits, and a few other items—stayed below the lower bound of the
Federal Reserve's target range for much of 1992 (Chart 2-6).
Chart 2-6 M2 Money Stock and Growth Target Ranges
Growth in the M2 money stock has been near or below the lower bound of the Federal
Reserve's target range for much of the past 2 years.
Billions of dollars
3,800

3,700
2.5 - 6.5% target
3,600

2.5 - 6.5% target
3,500

3,400

3,300

I,

Nov
Jan
1990

,1,

Mar

,1,

May

July
1991

Sept

Dec

,1,

Feb

Apr

,1,

June Aug
1992

,1,

Oct

Dec

Note: Percentage growth lines indicate growth target ranges set by the Federal Reserve each year.
Source: Board of Governors of the Federal Reserve System.

While the long-term relationships between money—specifically
M2—and nominal GDP have been relatively stable in the past, the
short-term relationships have not been as stable. Furthermore, particularly in the short and medium terms, the Federal Reserve can
only influence, not control, the quantity of money. However, because it can directly affect the Federal funds rate—the rate banks




52

charge each other for overnight loans— this rate tends to be the
focus of short-term monetary policy. The Federal Reserve generally
increases the Federal funds rate when inflationary pressures
appear to be rising and lowers it when inflation appears to be
waning and the economy is weak. Changes in the Federal funds
rate, however, do not necessarily signal a fundamental shift in
policy toward loosening or tightening because of the natural tendency for market interest rates to decline when the demand for
credit falls during a period of sluggishness or to rise when demand
for credit increases in a strong economy.
The slow growth of money and credit in recent years, at a time
when the Federal Reserve has been lowering interest rates and
boosting bank reserves, reveals significant changes in the relationship between short-term interest rates and the growth of money
and credit. Traditionally, reductions in Treasury bill and other
money market interest rates have led people to want to hold more
of the deposits and currency included in M2, since the income forgone by holding M2 balances is reduced. But during 1992 nominal
GDP grew at a rate of around 5 percent, while the M2 monetary
aggregate grew at a much lower rate—less than 2Vz percent—demonstrating that the relationship between the growth of money and
credit and the growth of the economy had changed during this
period.
Economists have not been able to agree on the reasons for the
slow growth of M2 in the presence of falling short-term interest
rates and rapidly rising bank reserves. M2 growth may have been
constrained as households and firms moved funds away from lowyielding M2 assets to seek higher returns in long-term bonds and
equities or to repay outstanding debts. Because the gap between
long-term bond yields and short-term deposit rates has become especially large—and because of increased investment opportunities
for small investors—M2 assets may be less responsive to short-term
interest rates than they have been in the past. Additionally, the decrease in bank lending that has occurred due to more cautious
lending by banks as well as to reduced loan demand by firms and
households may have led banks to compete less aggressively for
time and savings deposits by lowering interest rates, reducing advertising, or taking other actions to lower the growth of these components of M2.
Declining interest rates on time and savings deposits and money
market accounts not only have weakened demand for M2 assets in
total but also have reduced the opportunity cost of holding checking deposits or currency—included in the narrower Ml aggregate—
that pay lower interest rates or no interest at all. Holdings therefore have shifted from time deposits and money market accounts
(included in M2 but not in Ml) to transactions accounts within Ml,




53

as well as to bonds and equities not included in M2, as noted above.
In consequence, Ml growth has been very strong in the past few
years, also reflecting increased currency demand from abroad and
the higher demand deposits associated with mortgage refinancings,
even as M2 growth has lagged. Depository institutions are required
to hold reserves of 10 percent against the bulk of deposits included
in Ml, but the reserve requirements do not apply to the nontransactions deposits included in M2. Hence, banks have needed the
large increases in reserves over the past year in order to meet their
reserve requirements on rapidly growing Ml deposits; excess reserves have been low and stable.
The changing relationship between M2 and economic activity has
complicated the process of monetary policymaking, making it
harder to judge the extent to which current monetary policy is
stimulating or restraining the economy, and added to uncertainties
about the impact prospective monetary policy actions will have on
the economy in the future.
These complications may have been all the more important because it was difficult at the time to perceive the changing relationship between M2 and the level of economic activity. As in most economic relationships, the link between M2 and the economy has
been variable, so that a period of a few months in which M2 is
lower than expected is not sufficient to indicate that the fundamental relationship between M2 and the economy has changed. In fact,
the growth of M2 did not fall substantially and consistently below
what the Federal Reserve Board staffs statistical models predicted
until late 1990, after the recession already had started. Even now,
there is no definitive explanation as to why M2's relation to nominal GDP changed.
Given these difficulties, concerns have been raised as to whether
M2 was the appropriate monetary aggregate to target in recent
years—and whether it is the best aggregate to target at present.
The most important criterion used to evaluate the appropriateness
of an aggregate for monetary targeting is the predictability of its
relationship to GDP. Recent research indicates that M2 continues
to be the most useful aggregate available; in spite of recent
changes, its relationship to GDP is still more predictable than that
of other monetary aggregates. While the Federal Reserve always
looks at a set of indicators for implementing monetary policy, it
may be appropriate in this uncertain environment for the Federal
Reserve to place greater weight on more direct indicators of production, income, and prices in addition to monetary aggregates. If a
more predictable relationship between M2 or some other aggregate
and GDP is reestablished in the future, the Federal Reserve could
return to placing greater emphasis on that aggregate.




54

During 1992, following the sizable reductions at the end of 1991,
the Federal Reserve initially held short-term interest rates relatively steady but near midyear began to lower them again in response to accumulating evidence that the economy remained sluggish and as the growth of the broader monetary aggregates continued to be slow. The most significant cut in interest rates took place
in early July, when the Federal Reserve cut both the discount
rate—the rate the Federal Reserve charges banks for loans to cover
shortfalls in monetary reserves—and the target for the Federal
funds rate by 0.5 percentage point, to 3 percent and about 3.25 percent, respectively. Those cuts, which brought interest rates to their
lowest levels in nearly three decades, were followed by an additional reduction of 0.25 percentage point in the targeted Federal funds
rate in September.
Other interest rates that also have been falling for several years
were at low levels in 1992. The prime rate—the interest rate banks
charge for loans to their best business customers—ended the year
at its lowest level in nearly 20 years, falling from more than 11 percent in mid-1989 to just 6 percent. The rate on 30-year fixed-rate
mortgages also fell to a 20-year low in September, declining below
8 percent from its mid-1989 high of more than 11 percent. Yields
on long-term government and corporate bonds also dropped, although the decline was less pronounced than it was for short-term
securities. As a result, the yield curve—a curve plotting the yields
of comparable securities according to their term to maturity—
became much steeper as the difference between long-term rates
and short-term rates increased. Such a result is typical during recessions and early recoveries, although the yield curve has been
unusually steep recently.
Fiscal Policy in 1992
During periods of slow growth or recession, fiscal policy typically
shifts to assume a more stimulative role in the economy. To compensate for reduced private spending, government spending increases and tax collections are reduced. Some of this happens because of automatic stabilizers; spending for some programs (such as
unemployment compensation) automatically increases during recessions, and tax collections are reduced as incomes and expenditures
grow slower or even decline. In addition, Federal spending can be
boosted or taxes lowered through discretionary changes to existing
programs and policies. Typically, these actions provide a significant
stimulus to the economy. During the recent recession and early recovery, Federal spending and taxes were modestly stimulative,
mainly because of the automatic stabilizers. However, Federal
spending and taxes did not provide as large a boost as typically occurred in earlier recessions and recoveries. The Budget Enforcement Act of 1990, the ongoing defense downsizing, and a political




55

stalemate between the Administration and the Congress played important roles in keeping fiscal policy from being more stimulative
(Chapter 3).
The need for a fiscal policy that would provide more direct economic stimulus became increasingly apparent when the already
sluggish recovery showed signs of faltering in late 1991. In January
1992 the President submitted a set of proposals designed to provide
a short-term stimulus to the economy as well as to enhance longterm growth. The proposals for short-term stimulus included a cut
in the capital gains tax rate, a temporary investment tax allowance, simplified and enhanced depreciation for companies paying
taxes under the corporate alternative minimum tax (AMT) rules, a
temporary tax credit for first-time homebuyers, allowing individual
retirement account (IRA) balances to be used for first-time home
purchases, and two additional proposals aimed at providing a boost
to real estate investment and values. Additional proposals were directed at boosting the Nation's long-term economic performance
through higher investment and enhanced productivity. The Congress did not pass the President's proposals.
The President was, however, able to take unilateral steps that
did not require the consent of the Congress, including the reduction
of tax withholding and the acceleration of spending for certain programs already in place. If the President's broad set of proposals
had been adopted, growth and employment would have been
higher—and unemployment lower—than they actually were during
1992. The positive benefits of the proposals would have carried
through to future years, boosting investment, productivity, economic growth, and the Nation's standard of living.
A key factor in preventing fiscal policy from being more stimulative in the recent downturn has been the mounting concern over
the budget deficit. The size of the deficit and the level of public
debt in recent years has given rise to fears of a resurgence of inflation or of dramatic tax increases if the growth of government
spending is not controlled. These fears are manifested in higher
long-term interest rates and would be heightened if a fiscal policy
were adopted that increased the short-term deficit without simultaneously legislating a credible program to reduce future deficits substantially. Hence, if the economy's recovery falters in the coming
months and a period of very sluggish growth and rising unemployment appears likely, an appropriate response might be to adopt tax
cuts and incentives to spur growth immediately, while at the same
time adopting larger reductions in future government spending.
Such a policy combination would allay concerns in financial markets about future budget deficits and prevent the rise in long-term
interest rates that could otherwise offset much of a direct fiscal
stimulus.




56

SUMMARY
• The economy experienced modest and uneven growth during
1992. Consumer spending provided a significant boost to the
economy. Investment spending also contributed to growth, but
government purchases made little or no contribution, and a
significant decline in net exports subtracted from growth.
• The labor market was sluggish throughout the year, with employment remaining relatively stagnant and the unemployment rate rising until the summer, when it began declining.
• In 1992 core inflation and interest rates were at their lowest
levels in a generation. Low inflation and interest rates help
put the economy on track for a sustained expansion.
• Slow growth in the international economy could limit U.S.
export growth and reduce prospects for a return to strong economic growth in the near term.
• The Federal Reserve lowered interest rates during 1992, but
growth of the broad monetary aggregates remained sluggish.
Various structural changes as well as weak demand for funds
have restricted M2 growth. Historical relationships among interest rates, the monetary aggregates, and GDP have shifted,
making the implementation of policy more difficult.
• Fiscal policy recently has provided only a modest stimulus to
the economy. The President proposed a set of tax incentives
and other initiatives in January 1992 designed to provide further short-term stimulus to the economy as well as to boost investment and productivity. Additional fiscal stimulus, if
needed, should be coupled with simultaneously enacted future
reductions in government expenditures.

RECENT ECONOMIC PERFORMANCE
IN HISTORICAL CONTEXT
Following the longest peacetime expansion in history, the Nation
has been through difficult economic times over the last several
years, with a slow and protracted recovery following a recession
that was somewhat shorter and shallower than average. Comparisons with the average of previous recessions and recoveries are informative, even if there is no such thing as a typical or average recession or recovery. For example, the regional pattern of economic
activity or the relative contributions to growth from increased
labor hours and increased productivity can vary significantly
across business cycle experiences.




57

SLOW RECOVERY
As the forecasts of this Administration correctly anticipated, the
pace of growth during the recent recovery has been much slower
than it was during other postwar recoveries (Table 2-1). In the first
year and a half following previous troughs, growth in real GDP
averaged nearly 10 percent; growth ranged from a low of 3.4 percent during the short four-quarter recovery of 1980-81 to a high of
16 percent in 1949-51. If the extraordinary recovery of 1949-51 is
excluded, growth averaged about 9 percent during the first year
and a half after previous troughs. In the year and a half following
the most recent trough, however, real GDP increased only 2.9 percent, less than one-third the postwar average.
TABLE 2-1.—Recovery Comparisons
First Year and a Half of Recovery

l

Real
Output2

Payroll
Employment

Unemployment
Rate Change

Percent
Change

Percent
Change

Percentage
Points

Recovery

1949-51
1954-55
1958-59
1961-62
1970-72
1975-76
1980-81 3
1982-84

16 0
11.6
93
10 5
8.6
8.0
34
111

11.7
5.4
4.8
45
4.4
4.5
2.0
6.1

-4.8
-1.7
-1.7
-12
-.2
-1.0
-.6
-3.4

Recovery Average....

98

5.4

-1.8

1991-92

29

.1

.7

;eries with base year near the recovery period: for 1949-51
and 1954-55, GNP measured in 1954 dollars was used; for 1958-59 and 1961-62, GNP in 1958 dollars; for 1970-72 and 197576, GNP in 1972 dollars; for 1980-81 and 1982-84, GNP in 1982 dollars; for 1991-92, GDP in 1987 dollars. A fixed-weight
measure of real output based on the prices of a more recent year (for example, GDP in 1987 dollars) generally changes less
than one based on prices of an earlier year. This property creates problems in long-term comparisons of real output. See
'Alternative Measures of Change in Real Output and Prices,' Survey of Current Business, April 1992. Caution should be used in
interpreting these data because of definitional changes made to the output measures over time.
3
Recovery after 1980 recession is through peak in July 1981 (four quarters).
Note.—Upcoming data revisions may affect the values reported in this table.
Sources: Department of Commerce, Department of Labor, and National Bureau of Economic Research.

The sluggish nature of the recovery was particularly evident in
the labor market. During the first 18 months after previous postwar troughs, nonfarm payroll employment increased, on average,
by 5.4 percent, ranging from a low of 2 percent in 1980-81 to a high
of nearly 12 percent in 1949-51. In comparison, for the 18 months
following the March 1991 trough, nonfarm payroll employment was
essentially flat, increasing only 0.1 percent. Unemployment rate
data also show the effects of the slow recovery in the labor market.
After 18 months of expansion in previous postwar recoveries, the
unemployment rate was, on average, 1.8 percentage points below
its level at the trough, with a range of declines from 0.2 percentage
point in 1970-72 to 4.8 percentage points in 1949-51. In contrast,
from March 1991 to September 1992, the unemployment rate increased by 0.7 percentage point.




58

THE RECESSION IN HISTORICAL CONTEXT
The slow recovery followed a recession that was somewhat shorter and shallower than average (Table 2-2). Initial data had suggested that the 1990-91 recession was relatively mild, but subsequent
data revisions—released more than a year after the end of the recession—showed that real GDP fell by 2.2 percent (Box 2-2). The
decline was less than the average of previous postwar recessions
and less than those of the previous three recessions of 1973-75 (4.9
percent), 1980 (2.3 percent), and 1981-82 (3.3 percent). In terms of
duration, the 8-month recession of 1990-91 was shorter than the
average of 11 months for previous postwar recessions.
TABLE 2-2.—Recession Comparisons
Unemployment Rate
Real Output2

Payroll
Employment

Change

Months

Recessic n

Duration1

Percent
Change

Percent
Change

Percentage
Points

1948-49
1953-54
1957-58
1960-61
1969-70
1973-75
1980
1981-82

11
10
8
10
11
16
6
16

Recession Average

11
8

1990-91

High
Months After
Trough

Percent

0
4
3
3
9
2
0
1

-5.2
-3.5
-4.3
-2.2
-1.5
-2.9
-1.4
-3.1

4.5
3.6
3.8
2.3
2.7
4.4
2.2
3.6

7.9
6.1
7.5
7.1
6.1
9.0
7.8
10.8

-2.8

-3.0

3.4

7.8

3

-2.2

-2.0

2.7

7.7

15

-1.4
-3.7
-3.9
-1.6
-L0
-4.9
-2.3
-3.3

1

Duration based on National Bureau of Economic Research dating of business cycle peaks and troughs.
Real output changes are determined from historical GNP or GDP series with base year near the recession period: for 1948-49
and 1953-54, GNP measured in 1954 dollars was used; for 1957-58 and 1960-61, GNP in 1958 dollars; for 1969-70 and 197375, GNP in 1972 dollars; for 1980 and 1981-82, GNP in 1982 dollars; for 1990-91, GDP in 1987 dollars. A fixed-weight measure
of real output based on the prices of a more recent year (for example, GDP in 1987 dollars) generally changes less than one
based on prices of an earlier year. This property creates problems in long-term comparisons of real output. See 'Alternative
Measures of Change in Reaj Output and Prices,' Survey of Current Business, April 1992. Caution should be used in interpreting
these data because of definitional changes made to the output measures over time.
Note.—Changes determined from series-specific peaks and troughs. Upcoming data revisions may affect the values reported in
this table.
Sources: Department of Commerce, Department of Labor, and National Bureau of Economic Research.
2

The 1990-91 recession also had a somewhat less severe effect on
payroll employment and the unemployment rate than on average
in previous postwar recessions. The decline in nonfarm payroll
employment associated with the 1990-91 recession was 2 percent,
about two-thirds the average decline of previous recessions (but the
Bureau of Labor Statistics recently reported that this likely overstates the true decline). Similarly, the increase in the unemployment
rate resulting from the 1990-91 recession was 2.7 percentage points,
below the recession average of 3.4 percentage points.
However, other measures indicate that the effect of the 1990-91
recession and subsequent slow growth period on labor markets was
more severe than the absolute change in employment or the unemployment rate indicated. The unemployment rate peaked at 7.7 percent—slightly below the average peak for previous recessions—15




59

months after the end of the recession. Typically, the unemployment rate hits its peak an average of only 3 months after the end
of a recession. In addition, the percentage of unemployed who lost
their jobs permanently rather than being temporarily laid off,
reached its highest level on record, eroding workers' long-term job
security and limiting prospects for the quick rebound in employment that usually occurs during a recovery (Chart 2-7).
Chart 2-7 Ratio of Permanent Job Losers to Total Unemployed
The fraction of unemployed workers not expecting to be recalled to a job has been on an
upward trend over the past several decades. In 1992 it rose to its highest level on record.
Percent
50

45 -

40

35

30

25

20

1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991
Source: Department of Labor.

Additionally, as highlighted in last year's Report, the relative
proportions of unemployment among white-collar, blue-collar, and
sales and services workers has shifted, making the relative effect
on white-collar workers somewhat more severe. Because of job
losses in finance, insurance, and real estate, white-collar workers
recently have accounted for a larger proportion of total unemployment—relative to blue-collar or sales and services workers—than
they did in recent recessions. Nonetheless, blue-collar unemployment
still accounted for a larger share of total unemployment than
white-collar unemployment.
REGIONAL DISPARITIES
The regional disparities in labor market performance also indicate that the effects of the recession and slow recovery were widely




60

Box 2-2*—Data Itewsibns .and the Severity of the
Various government agencies and private groups release,a;:
steady stream of data about the economy.. Typically, the data:;
are released' in preliminary form, subject to subsequent'reyi-...sion. Most monthly data, lor example, are released in preiimi-'.
nary form, and are subject .to revision for 2 or 8 months,. Also,..
once a year, data series are usually revised.to' take..account.of.
additional Information from comprehensive annual surveys
and to reestimate the regular seasonal.patterns in the data... , :,
During 1992, the.annual,revisions, to several key data series
showed that the recession was more severe .than initial ..data ;;
had indicated. In July the Department of Commerce released.
revised data for real...GDP as part of its regular revisions-to. the
national income and product accounts (NIPAs). Prior to the revisions Department of Commerce estimates had shown a-, total
decline in real GDP (measured in 1987 dollars) over two consecutive quarters—the fourth quarter Of 1990 and the first quarter of 1991---of 1.6 percent The revised estimates showed, a .decline over three consecutive quarters totaling••2.2 percent, with •
the estimated change in real .GBP in the third quarter of 1990
revised down from a small increase to a significant decline.
In a separate set of annual revisions, the Department of
Labor reported that nonfarm payroll-employment .declined in
early 1991 by much more than was originally estimated. The
revised data resulted in a larger estimated decline in nonfarra
payroll, employment during the recession; the absolute size: of
the decline increased by about 0.5 percentage' point. However,
recent, research by the Bureau of Labor Statistics indicates
that the bulk of the revisions resulted from non-economic 'factors—mainlyy improved employment, reporting procedures instituted in early 1991.
: ;
The data discussed above represent important sources of
information for policymakers and the general public, and their
reliability is crucial. Policy might have been conducted in a different fashion if the true severity of the recession had been
known earlier. At a time of fiscal constraint, government statistical agencies often must attempt to handle an increased
workload with dwindling resoui^es. The need for improved
quality of statistics was the motivation behind the Economies
Statistics Initiative developed by an intei^gen^ working group
and approved by the President mMmmx^m W
on the programs in-:::109^
delay their felM

61
334-230 0—92-




3 (QL3)

dispersed and differed from the regional effects of the 1981-82 recession. Chart 2-8 plots the average unemployment rate In each
State for November 1982, the month the unemployment rate
peaked at the end of the 1981-82 recession. Unemployment rates
generally were much lower on the East Coast (with the exception
of the Carolinas and Rhode Island) than in the Midwestern industrial States and some parts of the South, which were hit hard by
problems in manufacturing.
Chart 2-9 plots unemployment rates for June 1992, the month of
the recent unemployment rate peak. The unemployment rate for
the Nation as a whole was lower than it was during the 1981-82
recession. Following the 1981-82 pattern, several States in the industrial heartland fared worse than other parts oi the country, especially Illinois and Michigan. The Northeast (Massachusetts, New
York, and Rhode Island, in particular) and other widely dispersed
states such as Alaska, California, Florida, Mississippi, New Jersey,
and West Virginia experienced relatively high unemployment
rates. This regional distribution reveals the structural adjustments
underway in the economy. Restructuring in the domestic auto industry hurt Michigan and Illinois. NewT England and California
were particularly hard hit by ongoing defense cutbacks. Overbuilding in commercial real estate and restructuring in the finance and
insurance industries had disproportionately negative effects on
California, Florida, and the Northeast.

EMPLOYMENT AND PRODUCTIVITY TRENDS
The relatively stagnant labor market performance at a time
when output was increasing reveals that real growth during the recovery resulted exclusively from labor productivity gains. It is not
unusual to see labor productivity surge when the economy is in a
recovery phase because firms tend to keep their most productive
workers on the payroll during downturns and use the existing
workforce more intensively during the initial phase of an upturn.
In the first year and a half of previous recoveries, labor productivity growth averaged 3.0 percent at an annual rate, about twice the
average annual rate of labor productivity growth of the past three
decades.
Over the first six quarters of the recent recovery, labor productivity in the nonfarm business sector grew at an annual rate of 2.5
percent, only slightly less than the average for previous recoveries
(Chart 2-10). However, the unusual thing about the past year and a
half is that all of the gain in output resulted from labor productivity gains. In previous recoveries, the split between the increase in
labor productivity and the increase in labor hours worked was
much more balanced, with labor productivity gains and the in-




62

Chart 2-8

Unemployment Rates by State, November 1982
November 1982
United States = 10.8%

Source: Department of Labor.

Chart 2-9

Unemployment Rates by State, June 1992
June 1992
United States = 7.7%

Source: Department of Labor.




63

crease in labor hours accounting for roughly equal shares, on average.
Chart 2-10 Growth in Output per Hour, Nonfarm Business Sector
Productivity has rebounded strongly over the past year and a half, typifying the strong gains
that usually occur during a recovery.
Percent change
5

3.0
2.4

1.3
0.8

0.1

-0.7

-2

I

I

_L

I

I

J_

I

1959-69 1969-79 1979-89 1990
1991
91.1
91.11
91.111
91.IV
92.1
92.II
Note: Annual values are IV/IV change. Quarterly values are seasonally adjusted at an annual rate.
Source: Department of Labor.

The increase in labor productivity is expected to continue as the
economy settles into a sustained expansion and higher investment
boosts the stock of productive capital. Labor productivity growth
had been slipping in recent decades, but several factors suggest
that it is likely to improve over the experience of the past two decades. The average age of the population and the workforce will continue to increase, and evidence suggests that a move toward a more
experienced work force is usually associated with higher productivity growth. Also, during the past two decades, oil price shocks diverted spending into energy-saving rather than labor-saving capital
equipment and, as a result, the economy is less vulnerable now to
energy shocks than it was during the 1970s. The labor force is expected to grow slowly, making labor relatively less abundant. Over
time, this likely will increase real wages, promoting higher capital
investment and faster growth in labor productivity. In addition,
low real interest rates reduce capital costs and the anti-inflation
credibility that the Federal Reserve has earned reduces uncertainty premiums in interest rates. Prospects for reducing the structural
budget deficit over time would also likely promote lower interest




64

rates and borrowing costs, helping to boost investment and contributing to labor productivity.

SUMMARY
• In terms of output and employment, the recovery of 1991-92
has been the slowest of the postwar era.
• Compared with previous postwar recessions, the recession of
1990-91 was somewhat shallower and shorter. In labor markets, however, the effects of the recession were less straightforward. While the effects on employment and the unemployment
rate were milder than average, nonfarm payroll employment
remained relatively stagnant for over a year following the
trough, and the unemployment rate peaked more than a year
after the decline in real GDP had ended.
• State unemployment rates show that the coastal States and
the Northeast were hit relatively hard in the recent recession
and slow recovery, while the heartland was disproportionately
affected by the 1981-82 recession.
• All of the gain in output during the past year and a half resulted from increases in labor productivity. The outlook for
continued productivity gains is good.

THE ECONOMIC OUTLOOK
Factors such as low interest rates and low inflation provide a
strong foundation for continued short- and long-term economic
growth. While structural adjustments have slowed the economy for
the last several years, economic performance is expected to improve as structural imbalances are resolved.
THE ADMINISTRATION'S ECONOMIC PROJECTIONS
Table 2-3 shows Administration projections for key economic
variables for the period from 1992 through 1998. At the time of this
writing, estimates of GDP for the fourth quarter of 1992 and for
1992 as a whole were not available. Data from the first three quarters and preliminary information for the fourth quarter indicate
that real GDP grew at a rate of around 2.5 to 3 percent from the
fourth quarter of 1991 to the fourth quarter of 1992. During 1993,
the economy is expected to grow at a moderate pace early in the
year and then pick up later in the year, with real GDP growing
around 3 percent during the year. Growth is expected to continue
in the 3-percent range through the mid-1990s but then to slow
slightly in the second half of the decade. The slight slowing of
growth later in the decade reflects the movement of the economy
toward full employment of available resources without increased
inflationary pressure.




65

TABLE 2-3.—Administration Forecasts
Item

1992

1993

1994

1995

1996

1997

1998

Percent chan ie, fourth quarter to fourth quarter
Real GDP

2.6

2.9

3.1

3.0

2.9

2.8

2.7

GDP deflator, 1987 = 100

2.5

2.6

2.7

2.8

2.8

2.8

2.8

Consumer price index, CPI-U..

2.9

2.8

2.9

3.0

3.0

3.0

3.0

Unemployment rate, percent

7.4

Interest rate, 91-day Treasury bills, percent.

3.4

Calendar year average

Interest rate, 10-year Treasury notes, per
cent
Civilian employment, millions

7.0

117.7

Sources: Council of Economic Advisers, Department of the Treasury, and Office of Management and Budget.

Sustained higher economic growth will improve employment
prospects. The unemployment rate is expected to decline during
1993, averaging 6.9 percent for the year, down from 7.4 percent for
1992. In the mid-1990s, with the economy expected to continue in a
sustained expansion, the unemployment rate is expected to decline
steadily, reaching a level of 5.3 percent by 1997.
Inflation is expected to remain low in 1993 and in coming years,
not only because of excess capacity and underemployment of resources in the immediate future, but also because of the Federal
Reserve's ongoing efforts to keep inflation in check. The Administration projections show consumer prices rising about 3 percent annually; the implicit price deflator for GDP is expected to rise at a
rate slightly below 3 percent annually.
With moderate growth and low inflation, short-term interest
rates are expected to remain low in 1993 and long-term interest
rates are expected to decline. As the economy moves back toward
full employment of resources, short-term rates are likely to rise. In
the middle and later years of the projection, long-term rates are expected to stabilize as inflation remains low. However, the outlook
for interest rates in general—and long-term rates in particular—
depends critically on the outlook for fiscal policy. The adoption of.
policies that would lead to higher structural budget deficits, relative to what is currently expected likely would boost long-term interest rates and retard economic growth in subsequent years.
Economic forecasting is an imprecise science. Unexpected developments can cause forecasts to go awry, and changes in policies can
cause actual events to differ substantially from the forecast. Ultimately, economic forecasts are based largely on predictions about
human behavior, usually taking the previous patterns of behavior
as a guide. But human behavior is complex, difficult to predict, and
subject to change. People do not always respond in the same way,




66

or with the same speed, in what appear to be similar circumstances.
Changes in the general state of the economy can also affect the
relative accuracy of forecasts. Forecasting becomes much more difficult when the economy shifts from expansion to recession or from
recession to recovery. Despite a difficult forecasting environment,
this Administration's forecasts generally have been accurate by
forecasters' standards. Using a broad set of variables—real growth,
consumer price inflation, the unemployment rate, and the Treasury bill rate—from the annual forecasts presented in the Budget of
the U.S. Government, this Administration's (1990-92) short-term
forecasts for the year under consideration have been more accurate
than either the Carter (1978-81) or Reagan Administration (198289) forecasts. The average absolute error of Bush Administration
forecasts is over 20 percent smaller than Reagan Administration
forecasts and over 30 percent smaller than Carter Administration
forecasts. Each Administration—in its entirety—had to forecast in
periods of comparable difficulty, as there were business cycle turning points at some point during each of their terms. However, forecasts for the individual terms of the Reagan Administration were
produced during significantly different economic environments.
There was a deep recession following high and volatile inflation
during the early years of the first Reagan term, while during the
second Reagan term, the economy was in the midst of a sustained
expansion with moderate inflation. This Administration's forecasts
were about 30 percent more accurate than those of the first Reagan
term and about 10 percent more accurate than those of the second
Reagan term.
This Administration's short-term forecasts also have matched up
relatively well with the individual and "consensus" (really the average) Blue Chip forecasts, although the accuracy of specific forecasts of this Administration relative to individual Blue Chip forecasts, has varied. The first forecast of this Administration—the
mid-session forecast in 1989—was more accurate than any of the
individual Blue Chip forecasts as well as the consensus. The Budget
forecast for 1990, prepared in late 1989, was less accurate than the
consensus and the bulk of individual Blue Chip forecasts. However,
the mid-session forecast prepared in mid-1990 was as accurate as
the consensus and in the middle of the pack of individual forecasts.
The Budget and mid-session forecasts for 1991 also were as accurate as the consensus and in the middle of the pack of individual
forecasts. Both the Budget and mid-session forecasts for 1992 (prepared in late 1991 and mid 1992 respectively) were more accurate
than the consensus and the vast majority of individual forecasts
(based on data currently available).




67

General interpretations of the economic situation and public
comments also matter. In late 1990, when the Council of Economic
Advisers reported that the Nation was in a recession, it was the
first time in any of the nine postwar recessions that an Administration had acknowledged that the Nation was in a recession before
the data on even one quarter of decline in real output were available. At that time the Administration forecast for 1991 correctly
predicted that real output would continue to decline in the first
quarter of 1991 and then grow slowly in the remaining quarters of
the year. That forecast also correctly predicted that the recovery
would be the slowest on record.
The uncertainties of forecasting can be seen in the range of projections provided in Table 2-4. The higher growth alternative is
consistent with a sharper and faster rebound in economic activity
than in the Administration's projection, reflecting the uncertainty
about the positive potential for growth. Over the past several
years, the recession and slow growth have pushed the economy
well below its potential level of output. A high level of excess capacity of productive plant and equipment currently exists in the
economy and labor is less than fully utilized, as indicated by the
current level of the unemployment rate. Because of the underutilization of resources, there is significant upside potential for growth.
The economy has been working its way through many structural
problems for several years, and as the drag from those structural
difficulties is reduced, economic growth likely will improve further;
the extent and timing of that improvement are uncertain. Consumer and business confidence have been lower than justified by
economic fundamentals, and as consumer and business confidence
rebound, consumer spending and business investment may pick up
more strongly than expected.
The lower growth alternative is consistent with continued sluggish activity, reflecting uncertainty about the downside risks for
growth. The drag from ongoing defense downsizing and other structural adjustments may be larger and more persistent than expected. Slower-than-expected growth in the international economy may
hinder U.S. exports, increase the trade deficit, and reduce economic
growth in the United States relative to what is expected in the Administration projection. Adoption of improper policies could adversely affect the performance of the economy.
The lower section of Table 2-4 shows projections for the Federal
budget deficit for the Administration forecast and the higher and
lower growth alternatives. The deficit projections are significantly
affected by changes in the projected rate of economic growth.
Under the higher growth alternative, the Federal budget deficit is
projected to decline somewhat faster than under the Administration projection and then to stabilize at a level about $40 to $60 bil-




68

TABLE 2-4.—Alternative Forecasts and Deficit Projections
1992

Item

1994

1993

1996

1995

1997

1998

Percent change, fourth quarter to fourth quarter

r

Alternative Forecast
Real GDP

2.6
2.6

Consumer Price index, CP!--U
Higher growth
Lower growth

3.5!
2.0 i

4.0 !
2.2 i

2.9

Higher growth
Lower growth

i

r~

3.1 !
2.3 |

3.5 |
2.2 j

-L

3.4
2.5

4.0
2.3

3.2
2.5

4.5
2.3

4.7
2.3 I

5.0
2.3

5.1
6.7

5.0
6.5

7.0
2.9

7.5
3.0

207
266
338

194
265
344

Percent, annual average
Unemployment rate, civilian
Higher growth
Lower growth

I
j
i
interest rate, 91-day Treasury bill |
Higher growth
|
Lower growth
j

6.7 i
7.6

3.4
3.4

6.0 I
7.5 !

5.6

4.0 j
2.7 !

5.0 I
2.7 j

5.6
2.8

6.3 |
2.8

Billions of dollars, fis*ca! years
Deficit projections
Higher growth..
Administration..
Lower Growth...

290
290
290 I

328 I
332 |
340

287 |
297 |
322

240
265
307

201 1
241 i
300 i

Sources: Council of Economic Advisers, Department of the Treasury, and Office of Management and Budget.

lion below that of the Administration projection; the cumulative
effect on the debt is about $200 billion over the 8 years of the projection. Under the lower growth alternative, the Federal budget
deficit remains at much higher levels—in excess of $300 billion—
throughout the projection, with a cumulative effect approaching
$300 billion of additional debt relative to the Administration projection.

ACCOUNTING FOR GROWTH
Overall growth of real GDP can be decomposed into four components: (1) labor force growth, or growth in the number of people
available for work each year; (2) the change in the share of the
labor force that is employed, or the employment rate; (3) the
growth in the number of hours an employed person works each
year, represented as the growth in average weekly hours; and (4)
labor productivity growth, or the growth in the average amount of
goods and services produced per hour of labor.
Table 2-5 shows the contribution of these factors in average real
GDP growth for various periods. The first three columns provide
historical comparisons for periods from business cycle peak to business cycle peak. The final column shows the contributions for the
period, incorporating actual data since the recent business cycle
peak (in the third quarter of 1990) along with estimates for the
forecast period to 1998. Economic growth is projected to average 2.3
percent a year from the business cycle peak in 1990 through the
end of the forecast in 1998.




69

TABLE 2-5.—Accounting for Growth in Real GDP, 1960-98
[Average annual percent change]

1960 I
to
1981 I

Item

1) Civilian noninstitutional population aged 16 and over
2) PLUS: Civilian labor force participation rate
3) EQUALS: Civilian labor force
4) PLUS: Civilian employment rate

,

5) EQUALS: Civilian employment
6) PLUS: Nonfarm business employment as a share of civilian employment 1
7) EQUALS: Nonfarm business employment
8) PLUS: Average weekly hours (nonfarm business sector)

1.8
.3
2.1
-.1
2.0
•1 !
2.1
-.6

9) EQUALS: Hours of all persons (nonfarm business)
10) PLUS: Output per hour (productivity, nonfarm business)

3.2

1990 III
to
1998 IV

1.2
.0

2.4
-.4

1.3
-.1

2.1
-.7

1.1
.0

3.3
.1

13) EQUALS: Real GDP

1981 I
to
1990 I

0.9
.3

1.5
1.7

11) EQUALS: Nonfarm business output
12) LESS: Nonfarm business output as a share of real GDP2

1973 IV
to
1981 ill

2.0

1.2
1.4
2.6
.3

2.1

2.6

2.3

1

Line six translates the civilian employment growth rate into the nonfarm business employment growth rate.
2
Line 12 translates nonfarm business output back into output for all sectors, or GDP, which includes the output of farms and
general government.
Note.—Data may not add due to rounding.
Time periods are from business cycle peaK to business cycle peak to avoid cyclical effects.
Sources: Council of Economic Advisers, Department of Commerce, Department of Labor, Department of the Treasury, and Office
of Management and Budget.

This projection assumes an average rise of 1.2 percent a year in
the labor force over the 1990-98 period, a lower rate than during
the prior three decades. Slower labor force growth results from
slower growth in the working-age population and from smaller increases in projected labor force participation rates.
The civilian unemployment rate is projected to fall to 5.3 percent
at the end of the forecast, only slightly below the unemployment
rate at the business cycle peak in the third quarter of 1990. Hence,
only a slight contribution (rounded to 0.0 in Table 2-5) is attributed
to changes in the civilian employment rate from the previous peak
of the business cycle through the end of the forecast. The largest
contribution from a falling unemployment rate during the forecast
occurs between 1992 and 1995. As the economy nears full employment in the later years of the forecast, increases in the employment rate make smaller contributions.
A key assumption underlying the 2.3-percent forecasted average
growth rate of real GDP is that the increase in labor productivity
will average 1.4 percent a year. That rate of productivity growth is
higher than the rates experienced during the 1970s and 1980s, but
substantially lower than those of the 1960s. As discussed earlier in
this chapter, labor productivity growth has been quite strong over
the past year and a half, and various factors—including a more experienced and slower growing labor force and likely higher investment resulting from low real interest rates and lower and less volatile inflation—point to a higher rate of productivity growth in




70

coming years in comparison with the low rates of the past two decades.

SUMMARY
• In the short term, the economy is expected to show continued
gradual improvement, with real growth at about 3 percent
during 1993. During 1993 the unemployment rate is expected
to decline gradually as the economy improves, and inflation
and interest rates are expected to remain relatively low.
• Real growth is expected to continue in the 3-percent range
through the mid-1990s before slowing gradually to the 23A-percent range later in the decade. The unemployment rate is expected to show steady but gradual declines over the next 4
years. Current fundamentals point to only slight increases in
inflation and short-term interest rates, with long-term interest
rates declining slightly before stabilizing.
• The uncertainties of economic forecasting indicate that growth
could be higher or lower than currently anticipated. With
higher real growth, the projected level of the Federal budget
deficit falls significantly; with lower growth, the Federal
budget deficit increases.

CONCLUSION
Following 8 months of recession and 1V2 years of recovery, there
are signs that the economy is entering a period of solid and sustained expansion. The extended period of slow growth—which appears to be largely over—reflected the economy's response to serious structural imbalances and long-term trends. The process of improving household and corporate balance sheets, adjusting to reductions in defense expenditures, and bringing the supply of commercial and multifamily residential real estate into balance with
demand resulted in a protracted period of sluggish economic
growth. As well, the implementation of the second round of disinflation since 1980, which brought inflation to its lowest level since
the early 1970s, was also accompanied by painful adjustments.
These adjustments, costly as they were and as they continue to
be for millions of Americans, have laid the foundation for strong
and sustained economic growth. In particular, a more secure outlook for low inflation will provide enhanced incentives to save and
invest during the economy's future expansion.
However, the Nation cannot take this expansion for granted.
Even as the recovery appears to be picking up steam, unemployment continues to be too high and job growth too low. This sluggish
performance in the labor market reflects the continued process of
adjustment by firms to more competitive conditions and changing




71

patterns of product demands. To put Americans back to work, it is
necessary to continue to strengthen the fundamental dynamism
and resilience of the Nation's economy in the face of change, to
create an environment conducive to new business formation and
small business expansion, and to promote the entrepreneurial process that only a sound market economy can produce.
The gains from recent adjustments can only be fully exploited if
they are coupled with appropriate policies. These include provision
of sufficient money for sustained growth consistent with maintaining low inflation; a fiscal policy directed toward the long-term control of government spending and tax incentives to save, innovate,
and invest; continued movement toward free and open trade
throughout the world; and growth-enhancing regulatory reform to
ensure sustained progress toward more smoothly functioning markets at home.




72

CHAPTER 3

Monetary and Fiscal Policy in the
Current Environment
THE EFFORTS AND ACCOMPLISHMENTS of households and
businesses produce the economic growth that leads to improved
living standards. An environment that includes an open trading
system, a strong market system with well-designed and efficient
regulation where necessary, and legal protection of property rights
fosters such progress. Monetary and fiscal policies also shape the
environment within which households and businesses make their
decisions. These policies are important tools used to pursue the
goals of the Employment Act of 1946, which charges the Federal
Government with promoting "maximum employment, production,
and purchasing power."
Monetary and fiscal policies can be best understood in the context of the events, both historical and recent, that shaped them.
Such an analysis can assist in choosing policies that improve
rather than disrupt short- and long-term economic performance. Of
particular interest are the circumstances and policies surrounding
the recent recession, which began in July 1990 and lasted until
March 1991. While the decline in output was less than the average
for other post-World War II recessions, by most measures the recovery was the weakest in postwar history.
Monetary policy refers to actions taken by the Federal Reserve
(the Fed) that influence bank reserves, the money stock, and interest rates. An expansionary monetary policy tends initially to lower
short-term interest rates by increasing the availability of money
and credit. Lower interest rates encourage spending, particularly
on investment projects. When the economy is operating well below
capacity, increased spending is likely to lead to increased output.
Once the economy is at or near capacity, however, rapid monetary
expansion is likely to lead to inflation (a sustained increase in
prices) rather than output growth. Conversely, contractionary, or
tight, monetary policy reduces the growth rate of the money stock,
increases short-term interest rates, and eventually lowers inflation.
Fiscal policy refers to the spending and taxing policies of the
Federal Government. Fiscal policy can influence total demand in
the economy by changing taxes and government spending. Expansionary fiscal policy, for example, implements tax cuts, government




73

spending increases, or both, in order to increase economic activity
during downturns. Fiscal policy can also affect incentives to work,
save, invest, and innovate. Changes in taxes on capital, for example, affect the after-tax return on investment in physical assets and
thus the incentive for capital accumulation. Evaluations of fiscal
policy changes must take into account the effects of both consumer
and business demand and supply-side incentive effects.

MACROECONOMIC POLICY IN HISTORICAL
CONTEXT
The dominant feature of per capita real gross national product
(GNP), or output, since 1870 has been its steady growth, but there
have been noticeable interruptions in growth as well (Chart 3-1).
The "business cycle" refers to fluctuations of output around a longterm trend—that is, recessions followed by recoveries and expansions. However, nothing is very regular about the timing and magnitude of these fluctuations.
Chart 3-1 Gross National Product Per Capita, 1870-1990
While there have been occasional interruptions, real GNP per capita has been rising
since 1870.

5,000

-

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960
Note: Trend line represents constant annual growth of 1.7 percent.
Sources: Department of Commerce and Romer, Journal of Political Economy.

1970

1980

1990

In the long run, aggregate output grows because of increases in
the quality and quantity of physical capital, the knowledge and
skill of workers, the size of the labor force, advances in technology,




74

improved resource allocation through trade expansion and a more
dynamic market system, and the entrepreneurial process that creates new businesses and products. These factors do not grow at a
constant rate; this explains a small part of the variations in output.
The major short-term fluctuations, however, do not reflect primarily changes in the productive capacity of the economy, but changes
in its rate of utilization. For example, during economic declines the
labor force is not fully utilized, as indicated by high unemployment
rates.
The Great Depression, which began in late 1929, was the largest
decline in economic activity in recorded U.S. history. Output fell by
nearly 30 percent during the first 3 years of the Depression. The
unemployment rate had risen to 25 percent by 1933 and remained
well above 10 percent until the early 1940s (Chart 3-2). By comparison, output has fallen an average of 2.7 percent during post-World
War II recessions. In the most severe of these, which began in the
fourth quarter of 1973, real output fell 4.9 percent and the unemployment rate peaked at 9.0 percent. The 1981-82 recession, which
began in an already weak economy, involved a smaller decline in
output of 3.3 percent, but the unemployment rate reached 10.8 percent. In contrast, in the recent recession, output declined 2.2 percent and the unemployment rate later peaked at 7,7 percent. (The
basis for cyclical comparisons is discussed in detail in Table 2-2.)
The relative stability of the postwar era may reflect fewer or less
severe disturbances. But it also may be due to the development of
public and private institutions and policies designed to offset temporary disruptions or to help the economy adjust. These institutions are particularly important in light of the fact that the costs
of recessions are not shared evenly across the population. For most
families, incomes remain roughly the same or continue to grow
during a recession; the economic and social costs of recessions fall
disproportionately on those who experience or are threatened with
unemployment or reduced employment.
The experience of the United States is not unique. All modern
industrial economies grow at uneven rates. Recessions in the
United States often coincide with slowdowns in the economies of its
trading partners because many of the factors affecting the economy, such as oil price changes, affect other economies as well. Trade
and capital flows that link national economies also transmit purely
domestic economic shocks from one country to others.
CAUSES OF RECESSIONS
Can carefully chosen policies eliminate recessions entirely? The
answer, unfortunately, is that they almost certainly cannot, although well-designed policies may reduce the frequency and severity of economic downturns. To understand the limitations of policy,




75

Chart 3-2

Civilian Unemployment Rate

During the Great Depression the unemployment rate reached 25 percent and remained at
double-digit levels for 10 consecutive years.

1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984
1989
Note: Annual data. Prior to 1947, data are for ages 14 and over; starting in 1947, data are for ages 16 and over.
Source: Department of Labor.

the factors that contribute to recessions must be taken into account. They can be broadly classified as structural adjustments, external events (also called shocks), and policy mistakes. At any
given time, the economy may be struggling to overcome one or
more of these adverse factors. Recessions occur when a number of
unfavorable factors exist simultaneously or an unusually large
problem arises.
A sharp reduction in expenditures on national defense, for example, gives rise to structural adjustments in production and employment. Such reductions followed World War II, the Korean and
Vietnam wars, and are now taking place in response to the end of
the Cold War. The Nation on the whole is better off when a conflict
ends and the resources devoted to national defense can be put to
other uses. Nonetheless, large decreases in military spending disrupt production and employment as production patterns adjust to
meet changing demands. The temporary declines in output and increases in unemployment following World War II and the Korean
war illustrate the costs that are incurred while resources are reallocated.




76

External shocks in the form of large and sudden oil price increases have been an important factor in several recent recessions.
The partial embargo on oil exports by the Organization of Petroleum Exporting Countries in 1973 tripled world oil prices. Since oil is
an important input in production, oil price shocks may lead industries to change their production patterns. For example, oil-fueled
plants may be refitted to run on coal. Further, since the United
States is a net oil importer, it would pay more for its imported oil,
thereby transferring income and wealth to oil exporting countries
and reducing the overall demand for domestic output.
In some instances policy mistakes have contributed to economic
downturns. The Great Depression is perhaps the best example.
Even after production and prices had begun to decline sharply,
monetary policy remained contractionary by most measures. The
1930 passage of the Hawley-Smoot Tariff Act raised tariffs on many
imports, leading our trading partners to retaliate and disrupting
global trade flows. With the economy still mired in depression in
1932, a tax increase was enacted in an effort to balance the budget.
But by reducing disposable income and household spending, the tax
increase deepened the Depression. This series of policy blunders
turned what could have been a moderate or severe recession into
the Great Depression.
Even if no policy mistakes are made, however, structural adjustments and external shocks may cause occasional periods of declining output. It is unrealistic to expect that well-chosen policies can
always compensate completely for all types of disturbances and
eliminate recessions entirely.
THE LIMITS OF POLICY
The extent to which fiscal and monetary policies can mitigate
short-term economic fluctuations has been the subject of debate.
Views on this subject have evolved considerably in recent decades,
and will undoubtedly continue to evolve as circumstances change
and new policies are tried.
The Activist Approach
The Keynesian view, which reached its peak of influence in the
1960s, advocated government spending increases and tax cuts, supported by expansionary monetary policy, to stimulate overall
demand whenever output fell below the economy's estimated capacity to produce. More restrictive policies were advocated when inflation became a greater concern. Many economists believed that a
stable tradeoff existed between unemployment and inflation rates:
Expansionary policies would lower unemployment at the cost of
somewhat higher—but not continually rising—inflation. It was believed that ' 'activist" or "fine-tuning" policies could increase
demand whenever the economy was below capacity, reducing busi-




77

ness cycle fluctuations and at the same time increasing long-term
growth in the economy's capacity. Such policies frequently changed
course in response to short-term economic developments.
Impediments to Fine-Tuning
The foundation of the activist approach was discredited by the
historical experience of the 1960s and 1970s. Output grew rapidly
in the 1960s, but inflation, as measured by the rate of change in
the consumer price index, rose from 0.7 percent during 1961 to 6.2
percent during 1969. In the 1970s the economy experienced many
difficulties, including large simultaneous increases in both inflation
and unemployment. This development contradicted the idea that a
stable tradeoff existed between inflation and unemployment and
led to a rethinking of the efficacy of fine-tuning.
It has become clear that a number of factors, including delays,
forecasting difficulties, and uncertainty about the economy's response, make fine-tuning unreliable at best. Furthermore, well-intentioned policies may actually increase business cycle fluctuations.
Policymaking is complicated by a number of delays, or lags. The
information available on the current state of the economy is imperfect; most data for a particular month or quarter are not available
until the next month or quarter and are often revised substantially. As a result, policymakers learn that the economy has changed
direction only after the fact, resulting in a recognition lag. But
even after it becomes clear that the economy has weakened, delays
in the political process create lags in implementing specific policies. For instance, most fiscal policies require time-consuming congressional action and then must be approved by the Administration, creating an action lag between the time problems develop and
action is taken. Finally, even after new policies are implemented,
further lags may occur before economic activity is affected. A reduction in tax rates, for example, may initially have little effect on
consumption or investment because time elapses before consumers
and businesses can respond fully. Thus, expansionary countercyclical actions will have their intended effect only if the economy
would have remained weak well into the future.
Because of the various lags, policymakers must rely on economic
forecasts in setting policies. Economic forecasting is an imprecise
science; it is particularly difficult around business cycle turning
points. Fortunately, market economies have many self-correcting
tendencies that eventually reduce the effects of external shocks or
structural imbalances. As noted, disturbances such as oil price
shocks or reductions in defense spending create a need for changes
in patterns of production. Growth in output tends to fall as these
adjustments begin but resumes as they are completed. While these
self-correcting tendencies are a desirable feature of market economies, the pace at which adjustments occur is unpredictable, compli-




78

eating the forecasting process and raising the possibility that a recovery may be well under way before the economy receives significant stimulus from policies introduced to fight the recession. In
this case, such policies may cause higher inflation but only small
gains in production.
A further impediment to fine-tuning is uncertainty about how
the economy will respond to changes in fiscal and monetary policy.
The economic response to a particular policy change depends in
part on people's expectations about future policies. For instance,
firms and households may view economic policies as temporary
under a fine-tuning regime because policy changes can be expected
to occur relatively frequently. Unpredictable policies may complicate the task of long-term planning for firms and households, discouraging investment and undermining long-term economic
growth.
Fine-Tuning and Inflation
The costs of high and variable inflation are considerable but
more subtle than the costs of recessions. In a market economy,
prices provide essential information about the relative scarcity of
goods and services. High and volatile inflation obscures this information and distorts the allocation of resources. Furthermore, unexpected inflation arbitrarily redistributes income and wealth. It
hurts lenders and people on fixed incomes and helps borrowers,
since the real value of interest and principal payments is eroded by
inflation.
Inflation also has unintended effects on the tax structure that
affect incentives to work, save, and invest. The Economic Recovery
Tax Act of 1981 indexed income tax brackets for inflation beginning in 1985, but some taxes on capital income are still affected by
inflation. For example, capital gains are not indexed for inflation,
and depreciation allowances are effectively reduced by inflation because they are based on original rather than replacement cost.
These features of the tax system cause inflation to both reduce the
real after-tax return on capital assets and discourage investment.
The late 1940s and early 1950s were marked by dramatic changes
in inflation rates associated with the aftermath of World War II
and the beginning of the Korean war (Chart 3-3). From 1952 into
the mid-1960s, however, inflation never exceeded 3 percent. The
rate of inflation then began to increase, albeit erratically, reaching
double digits in 1974 and again in 1979 and 1980. In fact, from 1960
to 1980 inflation was higher at each successive business cycle peak,
and each recovery also began with a higher inflation rate than the
preceding one.
Why did the fine-tuning policies pursued during this period contribute to rising and variable inflation? If expansionary policies
stimulate demand when the economy is already approaching capac-




79

Chart 3-3 Consumer Price Inflation
During the 1960s and 1970s the inflation rate reached a higher level at each successive
business cycle peak. This upward trend was reversed in the 1980s.
Percent change from same quarter year ago
PT
PT
PTPT

P T

P T

PT P T

PT

-5
1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

Note: Quarterly data; CPI-U, all items. Shaded areas represent recessions from peak (P) to trough (T).
Source: Department of Labor.

ity, they may increase output temporarily but then, after some lag,
increase prices. In particular, a monetary policy that produces
growth in money that persistently exceeds growth in real output
inevitably leads to inflation. If expansionary policies are expected
to continue, people may anticipate higher future inflation rates as
well, complicating the process of reversing inflation.
One danger of fine-tuning is that expansionary policies may
become addictive. Political considerations can cause policymakers
to favor short-term stimulus to expand output and employment relative to policies to control inflation. This is one of the reasons why
inflation was higher at the end of each recession between 1960 and
1980. Policymakers may also simply overestimate the economy's capacity, especially when structural adjustments or external shocks
are temporarily slowing the growth of capacity. If expansionary
policies persist after the economy is near capacity, output and employment will increase very little, but inflation will continue to
rise.
Because of the considerable costs of inflation, episodes of high
and variable inflation lead to policy actions to contain or reverse it.
Reducing inflation—that is, disinflating—after an extended period




80

of rising or high inflation tends to result in reduced output growth
and increased unemployment. The recession of 1981-82, during
which unemployment rates rose to almost 11 percent, was in part a
consequence of the policies introduced to reverse the rising inflation that had developed throughout the 1960s and 1970s. An important accomplishment of the past 12 years has been the reduction
and subsequent containment of inflation, achieved in part by adherence to a credible, systematic monetary policy.
Alternatives to Fine-Tuning
Fine-tuning is complicated by a number of factors such as variable and uncertain lags, the need for accurate forecasts, and the
temptation to pursue overly expansionary policies. Furthermore, frequent policy changes complicate the task of long-term planning for
firms and households, discouraging investment and undermining
long-run economic growth.
An alternative to fine-tuning that avoids some of these difficulties is the establishment of systematic and clearly stated policy
plans consistent with the long-term objectives of high and stable
output growth and low and stable inflation. Credibility is achieved
over time both as plans are carried out and long-term objectives
are accomplished. Even if policymakers aim to follow a systematic
policy, however, it is not always possible to specify all contingencies, and changes in the economy may occasionally require that
plans be revised. For example, if the relationship between money
growth rates and output shifts, the targets for monetary growth
will need to be adjusted. Similarly, high and persistent budget deficits may necessitate changes in fiscal policies.
Fine-tuning policies can be likened to a weathervane. Just as the
weathervane changes direction with the wind, fine-tuning policies
frequently shift in response to changes in the economy. Adhering
to systematic policies, on the other hand, is much like following a
course laid out by a compass. Just as travellers deviate from the
compass headings only if an obstacle such as a mountain lies in
their path, policymakers deviate from their plans only if a severe
or protracted economic contraction or rising inflation is at hand. In
contrast to fine-tuning, systematic policies do not change in response to small, temporary variations in the rate of growth. Any
deviations from the announced plans are explained in the context
of long-term policy goals, so as not to undermine future credibility.
One might call such a policy "gross-tuning," to distinguish it from
both fine-tuning and from the notion that policies should be set according to rigid rules which are mechanically followed regardless
of actual and prospective developments in the economy.




81

SUMMARY
• The United States and other modern industrial economies experience occasional periods of recession when output declines
and unemployment rises.
• Recessions can result from a number of factors that impede
growth, including unavoidable structural imbalances, external
disturbances, and government policy errors.
• Monetary and fiscal policies may be able to mitigate recessions, but they cannot eliminate business cycle fluctuations
completely. Overly aggressive attempts to do so are likely to
lead to higher inflation and impede long-term growth in
output.

RECENT ECONOMIC DEVELOPMENTS
Recent monetary and fiscal policies have been heavily influenced
by the legacy of the preceding two decades, most notably by the
rising inflation of the late 1960s and 1970s and the emergence of
large budget deficits during the long expansion of the 1980s. Many
structural imbalances, some of which had their roots in the 1970s,
worsened the recent recession and slowed the subsequent recovery.
In addition, the economy was buffeted by an oil price shock after
Iraq invaded Kuwait in August 1990.
MACROECONOMIC POLICIES AND ECONOMIC
PERFORMANCE IN THE 1980s
The economy entered the 1980s with declining production and
high inflation. After rising rapidly in the late 1970s, inflation
reached a peak of 13.3 percent during 1979—the highest rate since
the aftermath of World War II. Faced with high and rising inflation, the Federal Reserve announced new measures that were intended to signal its unwillingness to finance a continuing inflationary process. The 1979 Annual Report of the Board of Governors of
the Federal Reserve System noted that "the System's day-to-day
operating procedures would be altered in a way expected to make
the achievement of growth targets for the monetary aggregates
more certain. Specifically, policy would be conducted with greater
emphasis on supplying reserves to member banks at a rate believed
consistent with growth objectives for monetary aggregates; and less
attention would be focused on short-term interest rates as a guide
for open market operations." Focusing on short-term interest rates
"had become less reliable in an environment of rapid and variable
inflation."
Efforts to curb inflation were costly. The economy suffered a
brief but steep recession from January to July of 1980, during
which output fell by 2.3 percent and unemployment rose to 7.8 per-




82

cent. Inflation edged downward slightly to 12.5 percent during
1980. After a brief period of growth, the economy entered another
recession in July 1981 that lasted until November 1982. This recession was unusually severe, with unemployment rates climbing
above 10 percent for the first time since 1941.
While the recession was painful, the loss of output was actually
far below the levels that many models had predicted would be necessary to achieve the dramatic reduction in inflation that occurred.
By the time the economy emerged from the recession of 1981-82,
core inflation—which excludes the volatile food and energy components—had fallen below 5 percent. One reason models overestimated the loss in output was that they neglected to take into account
the fact that credible policies could lower inflationary expectations
and lead to a faster and less costly reduction in inflation.
After a difficult 3-year period, the longest peacetime expansion
in modern U.S. history began in late 1982. As is often the case, the
early phase of recovery was marked by rapid growth in output as
idle resources came back into use. In 1983 real gross domestic product (GDP) grew by 3.9 percent. GDP growth increased to 6.2 percent in 1984, faster than during any year since 1951. By the end of
1984, many of the previously idle resources had been brought back
into use and real output expanded at a rate of about 3 percent
from 1985 to 1989. Job growth in the 1982-89 period was remarkable. Nonagricultural payrolls increased by 18 million, from 90 million in 1982 to 108 million in 1989, exceeding the combined increase in employment in Western Europe and Japan, with their
much larger total population, over the same period.
Fiscal and Monetary Policy in the 1980s
Growth in government expenditures on programs such as defense
and medicare contributed to demand during the 1980s. Federal
Government spending as a share of GDP rose from 20.2 percent in
1979 to 23.4 percent by 1985. Substantial changes in the tax structure in 1981 increased incentives to work and invest. Total tax receipts, however, changed little as a percentage of GDP. By the mid1980s, the combination of growing government spending and stable
tax receipts had resulted in budget deficits that were large relative
to the size of the economy, particularly for a peacetime expansion.
The Federal budget deficit averaged about 5 percent of GDP from
1984 to 1986.
In response to growing concern about the deficit, the Federal
Government in 1985 adopted (and later amended) the Balanced
Budget and Emergency Deficit Control Act, known as GrammRudman-Hollings (GRH), which seemed to be somewhat successful
in slowing the growth of government expenditures. While the original deficit targets under the GRH were never met, deficits did fall
to about 3 percent of GDP by 1989. Still, containing spending




83

growth and reducing the deficit remained major fiscal policy issues
as the economy entered the 1990s.
While real output and employment grew steadily following the
1981-82 recession, the rate of inflation—in contrast to the 1970s—
remained relatively stable. Core inflation hovered around the 4- to
5-percent range from 1982 to 1988. While low compared to the rates
of the late 1970s, these rates would have been deemed unacceptable
just two decades earlier. Many argued in favor of a second round of
disinflation. However, the Fed had eased credit conditions in late
1987 and early 1988 in order to counter any economic weakness
and to ensure the smooth functioning of financial markets in the
wake of the stock market crash of October 1987. It soon became
clear that the economy had remained strong in spite of the crash,
with unemployment rates hovering around 5V2 percent and monetary aggregates growing at rates near the top of their target
ranges in early 1988. Concerns about inflationary pressures rose
relative to concerns about the possibility of recession.

A Shift in Policy
Mindful of the cost of reversing rising inflation in the early
1980s, the Fed tightened reserve conditions in a series of steps beginning in March 1988 and continuing into 1989. The Fed target
for growth in M2, a key measure of the money stock, was lowered
from the 4- to 8-percent range in 1988 to the 3- to 7-percent range
in 1989. The Federal funds rate (a key short-term interest rate)
rose by more than 3 percentage points between March 1988 and
March 1989. This policy change is often referred to as the "softlanding" strategy. Its presumed objective was a slow deceleration
of the economy that would head off an incipient rise in inflation,
and possibly even lower it, without causing a recession. This strategy represented a welcome break from the policies of the 1960s and
1970s, which typically had reacted to inflation only after it had
risen significantly, thereby imposing greater costs in terms of lost
output and higher unemployment during the disinflation process.
The soft-landing strategy was laudable but went unappreciated
by many observers. Preemptive measures to contain inflation may
go unnoticed whereas measures to reduce inflation after it has already risen are painfully obvious. The latter may receive more
praise, even though the former may reflect a much wiser policy.

STRUCTURAL IMBALANCES IN THE ECONOMY
Even though the economy experienced strong growth in the midto late-1980s, several structural imbalances were building that
would contribute to the most recent recession and subsequent slow
recovery. Problems in the financial sector led to a credit crunch,
high debt levels burdened households and corporations and inhibited spending, the end of the Cold War led to reductions in defense




84

spending, corporate restructuring hindered employment growth,
overcapacity in commercial real estate discouraged new construction, and budget problems constrained the spending of State and
local governments.
The Credit Crunch
After a period of relatively easy credit in the mid-1980s, bankers
and bank regulators appear to have adopted much more stringent
standards near the end of the decade, although regional credit
problems had occurred earlier. Companies that could easily obtain
financing in the past had difficulty finding new bank loans; they
faced a "credit crunch." In practice, it is difficult to quantify a
credit crunch. A reduction in bank lending during a recession can
be caused by weak demand, limited supply, or a combination of the
two. Nevertheless, there is evidence that a credit crunch has been
at work in the latest recession and recovery.
Banks play a unique role in financial markets, specializing in obtaining and analyzing information on the creditworthiness of small
firms that often have difficulty obtaining credit elsewhere. As a
result, the effects of the recent credit crunch were concentrated on
small businesses and some types of commercial real estate that
have limited alternative funding sources. Medium-sized and large
corporations appear to have been less affected, since they can
borrow in the commercial paper and bond markets, where firms
obtain financing by issuing securities directly to investors. The effects were also concentrated geographically, with California and
the Northeast experiencing the tightest credit conditions.
One reason for the shift in bank lending practices was a shift in
regulatory policy. During the steady growth of the 1980s, regulators were perhaps too sanguine, exerting insufficient control on
risk-taking by banks and savings and loans (S&Ls). By the late
1980s, however, the situation had changed. The magnitude of the
S&L problems had come to light, and it became clear that the government-backed insurance fund for savings and loans (the Federal
Savings and Loan Insurance Corporation, or FSLIC) would go bankrupt, causing heavy taxpayer losses. The economy was beginning to
slow, and bad loans were weakening many banks. Recognizing that
banks were also susceptible to large losses, regulators became concerned about the strength of all insured financial institutions. The
Congress passed two bills—the Financial Institution Reform, Recovery, and Enforcement Act of 1989 and the FDIC Improvement Act
of 1991—which contained several features that inadvertently contributed to the credit crunch and restricted bank lending (Chapter
5).
Regulators worldwide focused on the need to rebuild bank capital
(Box 3-1). A bank's capital is the difference between the value of
its assets (reserves, loans, and securities) and the value of its liabil-




85

ities (primarily deposits). In 1988 the industrialized nations agreed
to a common set of capital standards for financial institutions,
known as the Basle Accords. While most U.S. banks already met
the new risk-based capital standards, some fell short. Furthermore,
the new rules failed to mandate adequate reserves for government
bonds in comparison with commercial loans, unintentionally providing an incentive for banks to shift their assets into government
bonds and away from commercial loans—a tendency some have
suggested contributed to the decline in commercial lending (Chart
3-4).
Chart 3-4 Loans and Securities Held by U.S. Commercial Banks
Commercial banks have shifted their assets into government securities and away from
commerical loans.
Billions of dollars
700

600

500
Commercial and
industrial Loans
400
U.S. Government
Securities

300

200

100

I

1973

1975

|

1977

1979

I

1981

1983

I

I

1985

1987

1989

I

I

1991

Source: Board of Governors of the Federal Reserve System.

The combination of higher capital standards and lower asset
values created a "capital crunch" for banks. To increase capital,
banks had to reduce their asset holdings, raise more capital, or
both. Since raising capital quickly is often expensive, many banks
chose to reduce assets by cutting back on lending, which increases
the ratio of capital to assets because capital remains approximately
the same while assets shrink. In this sense, the capital crunch for
banks appears to have contributed to the credit crunch for businesses.




Box 3-1.—The Role of Bank Capital
Bank regulators set minimum capital standards for two reasons. First, capital absorbs losses that would otherwise have to
be paid by the Federal Deposit Insurance Corporation (FDIC)
or taxpayers (if the losses were large enough). Another important motive for ensuring that banks have sufficient capital is
to reduce the perverse incentives caused by deposit insurance.
When a bank is close to bankruptcy, it may invest in risky
projects that have a high rate of return if they succeed. Because the FDIC will absorb any insured losses, the bank is willing to take a gamble that could keep it from failing.
The underlying weakness in the capital position of U.S. financial institutions in recent years can be traced to a number
of causes. For the S&Ls, the problems can be traced back to
losses suffered in the late 1970s, when rising inflation and
rising interest rates caused the value of their mortgage loans
to plummet and their funding costs to rise. These difficulties
were compounded by losses on risky investments made in the
1980s following deregulation, a situation discussed in Chapter
5.
The problems facing commercial banks were more varied
and on the whole not as severe. In the early 1980s, large banks
suffered major losses on loans to Third World countries. While
these had become less of a problem by 1990, the banks soon experienced a new wave of losses. The average commercial bank
loan has become more risky in recent years, in part because
established firms can borrow at more favorable terms from
sources such as the commercial paper market. Losses from defaults on real estate loans, particularly in regions where property values were falling, further eroded bank capital. Conversely, many believe that tighter credit conditions contributed to
the fell in property values by creating a shortage of financing
for real estate investments.
Bank capital increased markedly in 1992 due to record banking industry profits and improvements in loan performance.
However, a continuing challenge for bank regulators is to
strike a balance between the need to ensure that banks have
sufficient capital and the need to allow banks the necessary
flexibility to provide the credit essential for economic growth.
The Buildup of Household and Corporate Debt
In addition to the constraints on the supply of credit, a number
of factors contributed to unusual softness in the demand for credit.




87

Consumers entered the 1990s with high levels of outstanding debt
relative to their income. The ratio of household interest payments
to income remained between 14 and 16 percent from mid-1960 until
1983 but had grown to 18 percent by the end of the 1980s (Chart 35). An increase in corporate indebtedness in the 1980s was brought
about by a wave of financial restructurings. Tax laws that continued to heavily favor debt over equity encouraged this trend. The
rise in the share of income devoted to interest payments began to
act as a constraint on private sector spending as income declined
and prospects for future growth dimmed.
Chart 3-5 Debt Service Payments as Percent of Disposable Income
Household interest payments climbed from 14,2 percent of disposable income in 1983 to
18.1 percent in 1990.

I960
1964
1968
1972
1976
1980
1984
1988
Note: Quarterly data. Debt service payments include mortgage payments.
Sources: Department of Commerce and Board of Governors of the Federal Reserve System.

1992

Recently corporate and household balance sheets have begun to
strengthen. In 1992 corporations issued a record volume of new
equity, increasing their ability to borrow in the future. Much existing corporate debt has been refinanced at lower rates, and new
bond issues have been on the rise. The ratio of household interest
payments to income has fallen back to approximately I6V2 percent.

Defense Spending Reductions
Outlays on defense, which had increased substantially during the
first half of the 1980s, peaked at 6.5 percent of GDP in 1986, then
flattened and began to decline slightly (Chart 3-6). Soon thereafter,




it became apparent that defense spending was likely to be cut substantially during the 1990s due to reforms in the Soviet Union and
Eastern Europe. The President's budget for fiscal 1993 calls for defense outlays in fiscal 1997 to fall to an estimated 3.7 percent of
GDP.
Chart 3-6 National Defense Outlays
After rising to 6.5 percent of GDP in fiscal 1986, national defense outlays are projected to
decline to 3.7 percent of GDP in fiscal 1997.
Percent of GDP
14

1954

1958

1962

1966

1970

1974
1978
Fiscal Year

1982

1986

1990

1994

Note: Estimates are from July 1992 Midsession Review.
Sources: Department of Commerce and Office of Management and Budget.

Reductions in defense spending have many ramifications. Overall
the Nation will benefit, since more resources will be available to
provide other goods and services. As mentioned earlier, however,
certain transitional problems are associated with drawdowns.
Workers no longer needed in the defense industry will not be hired
immediately by nondefense firms, resulting in some transitional
unemployment.
Some have argued that the recent and prospective reductions in
defense spending will have little effect on economic performance,
even in the short run, since they represent a smaller share of GDP
than previous reductions and are scheduled over a longer period of
time. However, the short-term impact of defense spending reductions is evident in the changes in unemployment rates across
States. Unemployment in the four States most heavily dependent
on defense industry purchases—Connecticut, Virginia, Massachusetts, and California—rose by 4.1 percentage points between 1988




89

and September 1992. Meanwhile, the combined unemployment rate
for all other States rose by only 1.5 percentage points. These figures indicate that defense reductions are a substantial drag on the
economy today. Although the level of defense spending should be
shaped by national security needs rather than concern about temporary economic dislocations, such dislocations will increase in the
event of even deeper budget cuts.
The short-term impact of current defense reductions may be
larger than many expected for several reasons. First, the relatively
gradual rate of spending reductions may be misleading. Because
businesses plan for the future, they are likely to adjust their work
forces and equipment purchases as soon as they are aware of impending reductions, rather than waiting until the cuts actually
occur. In addition, defense industry workers fearing the possibility
of permanent job loss are likely to reduce their spending today. Uncertainty about the nature and size of the reductions increases the
number of workers who feel vulnerable. Finally, the increasingly
specialized nature of defense and commercial production suggests
that defense industry workers—including highly skilled scientists
and engineers—and perhaps some military personnel may have
greater difficulty finding comparable nondefense employment now
than they would have 20 years ago.
The changes in State unemployment rates show that the shortterm impacts of defense reductions will be severe in some regions.
In some instances, defense spending reductions have coincided with
property deflation and banking problems. Southern California is a
prime example. By reducing employment opportunities and income
substantially in certain regions, the defense drawdown exacerbated
declines in property values. As noted in Box 3-1, falling property
values combined with increased default rates on real estate loans
have eroded bank capital. Until these structural problems begin to
be resolved and credit conditions ease, high unemployment may
persist in regions such as Southern California.
Industry Restructuring
Defense downsizing is an example of industry restructuring in
which long-term adjustment occurs in response to changing conditions. In this case, restructuring is a response to a lessening of the
threat to national security. Although in other cases the underlying
sources of change may be more difficult to identify, restructurings
occur continuously in a market economy; some industries grow rapidly while others decline. Technological breakthroughs, shifts in
consumer preferences, fluctuations in input prices, changes in domestic and international competition, and countless other influences require firms and industries to adjust constantly in order to
remain profitable.




90

The degree of industry restructuring appears to have been unusually great during the recent recession. Chart 2-7 in Chapter 2
shows that the percentage of unemployed workers who have permanently lost their current jobs rather than just being laid off
reached an all-time high of over 45 percent in October 1992. This
job loss is in part a result of the weak economy, but it is also an
indication that U.S. industries are making the painful long-term
adjustments necessary to increase their productivity and remain
competitive in international markets. Productivity in the nonfarm
business sector has been rising rapidly in the last six quarters,
partly because of these restructurings (Chart 3-7). History shows
that the Nation's living standards are ultimately linked to productivity levels, so these adjustments are a positive long-term development. In the short run, however, restructurings are likely to increase the length of time workers remain unemployed, since displaced workers must find new employment rather than simply
waiting to be recalled to their former jobs.
Chart 3-7 Output per Hour, Nonfarm Business Sector
The recent period of strong productivity growth is the largest six-quarter gain in nonfarm
business productivity since 1982-83.
Index, 1982 = 100
114
112 -

1977

1979

1981

1983

1985

1987

1989

1991

Source: Department of Labor.

Slowdown in Commercial Construction
Investment spending in general and construction in particular
undergo more severe fluctuations than the rest of the economy. Be-




91

cause of the long life of structures, small changes in interest rates
or tax policies strongly affect demand for this type of investment.
Commercial real estate has recently undergone a pronounced
cycle of "boom and bust." Changes in the tax code in 1981 greatly
increased the incentive to invest in new commercial real estate,
The annual average rate of spending on nonresidential structures
from 1981 through 1985 rose 25 percent in real terms over the previous 5-year period, in spite of the steep recession of 1981-82. The
1988 tax act reversed and in fact further reduced the incentives for
commercial real estate introduced in the 1981 law. As the new
measures were phased in, the real estate boom gradually ended.
The overbuilding that occurred during the first half of the 1980s
and the credit crunch in recent years would probably have ended
this boom even without the tax changes. Vacancy rates for commercial office space, for example, had risen sharply by the mid1980s in many metropolitan areas.
Changes in tax laws, interest rates, and demographics contributed to a slowdown in the construction of multifamily housing units.
The 1986 tax reforms reversed the incentives not only for commercial real estate but also for multifamily housing units. Increases in
interest rates in the late 1980s raised the cost of financing new construction projects. Furthermore, as the ''baby-boom5J generation
matured, the rate of household formation declined. The number of
multifamily housing units under construction rose from 379,000 in
1981 to 670,000 in 1985, before falling back to 373,000 in 1989.
Reduced residential construction tends to reduce the purchase of
consumer durables, such as furniture and home appliances, as well.
Housing starts and building permits in 1992 were well above their
1991 levels, but demographic trends suggest that neither household
formation nor housing starts will return to the levels of the 1960s
and 1970s anytime soon.
State and Local Fiscal Developments
Most States are prohibited from running a budget deficit, and
local budgets showed relatively large surpluses in the mid-1980s.
However, State and local government expenditures have risen substantially in recent years. Because tax revenues failed to keep pace
with expenditures, combined State and local government surpluses
had fallen to half the level of the mid-1980's by 1990. These budget
problems meant that expenditures could not easily be increased
and taxes could not easily be reduced.

EXTERNAL EVENTS
By 1990 many structural adjustments were adversely affecting
output growth: Banks had grown more cautious in their lending
policies, high debt levels had reduced household and business
spending, the defense industry was contracting, industry restruc-




92

turing was hindering employment growth, construction had slowed
considerably, and State and local fiscal spending was constrained.
Of these factors, it was clear that at least two—reduced defense
spending and the glut of commercial real estate—would be continuing drags on the economy for some time to come.
The effects of these structural adjustments were aggravated by
external events. The Iraqi invasion of Kuwait in August 1990
caused world oil prices to double. This oil price shock was a further
drag on growth in the United States and other oil-importing industrial economies. Economic slowdowns that developed in some foreign countries made economic recovery in the United States more
difficult by reducing demand for U.S. exports.
The Oil Price Shock
In the wake of the Iraqi invasion, the world price of oil soared,
roughly doubling between July and October 1990. Consumer and
business confidence plummeted, reflecting uncertainty about the
standoff in the Persian Gulf. In October 1990 the Conference
Board's index of consumer confidence reached its lowest level since
1974 (Chart 3-8). In an uncertain environment, it is natural for
firms to postpone spending until they begin to feel more confident
about the future. Similarly, many households postpone purchasing
big-ticket items until they have solid information about their own
employment situation. Oil price increases also disrupt the production process as firms seek to economize on energy.
Real output in the economy declined in the third and fourth
quarters of 1990 and the first quarter of 1991. Civilian nonagricultural employment peaked at just over 115 million in May 1990 and
then fell gradually below 114 million by January 1991. The oil price
shock put upward pressure on energy prices, but weak demand
muted the impact on other prices. The annual rate of core inflation
rose by less than one-half percentage point between the first and
second half of 1990.
As the Persian Gulf conflict was resolved, oil prices fell back to
pre-crisis levels and consumer and business confidence increased
sharply. These developments led to a sudden burst of consumer
spending (Chart 3-8) and gains in production. The short-lived euphoria after the Persian Gulf crisis was not sufficient to generate a
strong recovery, however, because the structural problems had not
been satisfactorily resolved. Debt burdens remained high, commercial and industrial lending were declining, and it became apparent
that defense reductions would accelerate due to marked changes in
the relationship between the United States and the Soviet Union.
Although real output began to grow again in the second quarter
of 1991, employment hovered between 113 and 114 million for the
rest of the year. Output grew slowly, but only because output per
worker increased; employment changed little.


334-230 0—92


93
4 (QL3)

Chart 3-8

Consumer Confidence and Personal Consumption Expenditures

Driven in part by the drop in consumer confidence during the Gulf War, personal
consumption expenditures fell in late 1990 before beginning to rise in early 1991.
Index, 1985 = 100
140 |

Billions of 1987 dollars
1 3,400

Personal Consumption
Expenditures

Consumer Confidence

120 h

/

/

"
- 3,350

r*
V
100 (-

A

/f\/\ / \ /
v

f\

/ r \v
i

- 3,300

J

/
'

-\ 3,250

80 h

•
-A 3,200

60 -

W
/v
4 Q

I

,i
I

H 3,150

,

|

1
i i i i i i i i i i I i i i i i i i i i i i I i ,i ,i ,i , i i i i i i, i I i i i i i i i i i i i I i i i i i i i i i ,i i I

1988

1989

1990

1991

I 3

1 0 0

1992

Sources: Department of Commerce and the Conference Board.

The Worldwide Slowdown
Exports provided a source of growth in output in the United
States throughout the 1980s and even during the recession of 199091. Unfortunately, many major U.S. trading partners began experiencing recession or slower growth just as the U.S. economy was beginning to recover (Chart 3-9). Recessions in Canada and the
United Kingdom that were associated with, among other causes,
very tight monetary policies intended to secure large reductions in
inflation, began about the same time as the U.S. recession, but
have been much more severe, with unemployment rates exceeding
10 percent. Although Germany and Japan continued to grow faster
than the United States in 1990 and 1991, recent data indicate that
they have both entered recession. As a result of these foreign economic slowdowns, the demand for U.S. exports has been lower than
it otherwise would have been.
Some of the same structural problems that slowed the U.S. economy were affecting foreign economies as well. In Japan, the huge
increase in stock prices during the 1980s was reversed at the end of
the decade, with the Nikkei stock market average plummeting 58.6
percent between December 1989 and August 1992. Real estate




94

Chart 3-9 International Real GDP Growth
As the U.S. economy began to recover, output growth in Germany and Japan weakened
considerably.
Percent change, IV/IV
8

1988

1989
|Q4 U.S.

B

Germany ^

1990
Ja

P

an

1991
U K

I I - -

1992

L J Canada

Note: Data for Japan and Germany are for GNP. Changes for 1992 are 1992.111/1991.IV at an annual rate.
Sources: Organization for Economic Cooperation and Development and The Economist.

prices also fell: Residential land prices in the six largest cities decreased 20.6 percent from the second half of 1990 to the first half of
1992. These developments may depress Japanese spending by lowering household wealth and could constrain lending since many
loans are collateralized with real estate. The Japanese slowdown
appears to be worsening; output declined 0.4 percent in the third
quarter of 1992.
Germany has had to confront the high costs of unification. Government spending on income assistance programs has soared since
east and west were united in 1990, putting upward pressure on
both output and prices. Union wage demands have exceeded productivity growth, putting more upward pressure on costs and
prices. Fearing an increase in inflation, the Bundesbank (Germany's central bank) pursued a tight monetary policy, forcing other
European countries to adopt tighter monetary policies in order to
maintain parities under the European Monetary System. Output
growth has slowed significantly throughout Europe in recent years.
Recent Developments
As indicated in Chapter 2, the U.S. economy has made modest
improvements over the past year. Output has grown in each quar-




95

ter since the first quarter of 1991, although the somewhat erratic
growth has been insufficient to support substantial increases in
employment. Meanwhile, the rate of core inflation has fallen to
levels not seen in this country for 20 years. These recent developments, viewed against the backdrop of the structural adjustments
and external shocks that have affected the economy, provide the
context in which recent policy choices must be evaluated.
SUMMARY
• Output grew rapidly during 1982-86, but the development of a
relatively large Federal budget deficit during this period
placed constraints on fiscal policy.
• Although inflation was reduced dramatically at the beginning
of the 1980s, the Fed became concerned about a possible resurgence in 1988, leading to the adoption of a more restrictive
monetary policy.
• Many structural imbalances were contributing to a slowdown
in growth by mid-1990, including problems in financial markets, heavy debt burdens, the defense drawdown, industry restructuring, commercial overbuilding, and State and local government budget problems.
• The oil shock contributed to a recession beginning in the
summer of 1990. The persistence of several structural problems
and the slowdown in foreign economies weakened the recovery.

THE CHANNELS OF MONETARY POLICY
The goals and limitations of monetary policy can be best understood by first considering the basic channels through which monetary policy operates. Monetary policy is conducted by the Federal
Reserve System (the Fed), which is the central bank of the United
States. The Full Employment and Balanced Growth Act of 1978 directs the Fed to set ranges for the growth of monetary and credit
aggregates (the money supply) taking into account "past and prospective developments in employment, unemployment, production,
investment, real income, productivity, international trade and payments, and prices." The Fed is also responsible for maintaining the
orderly functioning of the payments system and is one of several
Federal banking regulators.
The Fed, whose 7 governors are chosen by the President with the
consent of the Congress to serve staggered 14-year terms, is independent in the sense that its decisions do not have to be ratified by
either the Administration or the Congress. This independent status
allows the Fed to pursue the goal of low and stable inflation more
effectively (Box 3-2). Nevertheless, the Fed sets policies that reflect




96

the government's overall policy objectives and makes periodic reports to the Congress.
Box 3-2.—The Merits of an Independent Central Bank
An independent central bank is one important component of
the American political system of checks and balances. Studies
have shown that since World War II, countries with independent central banks have had lower and more stable inflation
rates- For instance, between 1955 and 1988, Italy, New Zealand, and Spain, which had the least independent central
banks, had average inflation rates of 7 J, 7*8, and 8.5 percent,
respectively. In comparison, Germany and Switzerland, which
had the most independent central banks, had average inflation
rates of 3.0 and 3J2 percent, respectively. Their lower inflation
rates did not come at the expense of reduced real output In
fact, the average growth rate of real GDP appears to be unrelated to the central bank's degree of independence.
Why are independent central banks more successful at
avoiding inflation? The main reason is that an independent
central bank is less vulnerable to short-term political pressures
to inflate than are those with closer links to the government.
Particularly during recessions, governments may try to rely on
an overly expansionary monetary policy to hasten a recovery.
Of course, it sometimes appears that a central bank should
have chosen a different course. But such isolated incidences do
not justify reducing central bank autonomy. The relevant question is whether, on balance, allowing the Congress or the Administration to set monetary policy would result in better economic performance. The weight of evidence suggests that it
would not.
SHORT-TERM EFFECTS OF MONETARY POLICY
In setting monetary policy, the Fed states its objectives in terms
of targets for short-term interest rates and target ranges for the
growth rate of several measures of the money supply. Short-term
interest rate targets are called "operating targets" because the Fed
monitors interest rates almost continuously and generally can
exert a high degree of control over them.
Interest and Exchange Rates
The Fed most frequently uses open market operations to influence short-term interest rates and credit conditions. To put downward pressure on interest rates, it buys U.S. Treasury securities in
the open market. The increased demand for securities causes their
prices to rise, or equivalently, their rates of return to fall. In




97

paying for these purchases, the Fed increases the monetary base—
the money financial institutions have on deposit at the Fed plus
the currency in circulation.
While lower interest rates tend to stimulate spending on average, some groups cut spending in response to lower rates. Lower
rates benefit borrowers but hurt savers. For example, senior citizens living off interest income from their savings suffer when interest rates fall.
As well as spurring increased domestic investment and spending,
lower interest rates tend to increase demand by lowering the exchange value of the dollar. Lower U.S. interest rates encourage investment to be shifted to other countries where rates of return are
higher, causing demand for U.S. dollars to drop and reducing the
dollar's exchange value against foreign currencies. U.S, goods
become cheaper for foreigners, encouraging U.S. exports, and foreign goods become more expensive for Americans, encouraging consumption of domestic products.

LONG-TERM CONSEQUENCES OF MONETARY POLICY
Expansionary policies increase nominal GDP, which is the total
dollar value of goods and services produced in a year. Because the
change in nominal GDP is the sum of the change in the price level
and the change in the quantity of real output, an increase in nominal GDP may reflect higher output, higher prices, or a combination
of the two. When the Fed pursues an expansionary monetary
policy, the hope is, of course, to increase real output rather than
inflation.
As discussed earlier, in response to an increase in demand firms
tend, on average, to increase production when they have excess capacity and to increase prices when production approaches capacity.
In a recession, many firms find themselves with excess capacity, so
that monetary expansion is likely to show up predominantly as an
increase in output. The closer the economy is to its capacity, the
more likely it is that an increase in aggregate demand will increase inflation. But because monetary policy has long and variable
lags, excessively high money growth today may not show up as inflation for many months or even years.
Monetary policy affects both current and future interest rates, in
part because it affects people's expectations about future inflation.
Distinguishing between real and nominal interest rates is essential
to understand the effect of inflation on interest rates (Box 3-3),
Nominal, or market, interest rates increase with the rate of anticipated inflation. Although the Fed may be able to temporarily
reduce short-term interest rates by adding reserves to the banking
system, this action may cause an increase in inflationary expectations that results in higher short-term interest rates in the future.




98

Box 3-3.—Real and Nominal Interest Bates
The promised return on a corporate bond, a mortgage, a government security, or a savings account is called a "nominal interest rate/* A nominal interest rate is simply a promised rate
of return, or dollars received tomorrow per dollar invested
today. The expected real interest rate is the return after adjusting for expected inflation, or the nominal interest rate less
the expected rate of inflation. For instance, if the bank offers a
return of 10 percent on 1-year certificates of deposit, but prices
are expected to increase by 6 percent over the course of the
year, the expected real return is only about 4 percent, since it
is anticipated that the money received will buy 6 percent less
than it did when it was deposited. When inflation rates declined at the beginning of the 1980s, the gap between nominal
and real interest rates declined as well (Chart 3-10),
Although the Fed may be able to use monetary policy to influence real interest rates in the very short run, broader
market forces are generally believed to be the fundamental determinants of real interest rates. For instance, the destruction
caused by Hurricane Andrew put upward pressure on real interest rates as firms and households sought funding to rebuild
the damaged areas. The large Federal deficit also puts upward
pressure on real interest rates, because the government competes with private borrowers for limited savings. The real interest rate is also affected by international developments such
as the increased demand for capital due to German unification. Finally, tax policy affects the real after-tax return received by investors.
At any point in time, interest rates vary with the maturity of the
debt obligation. For instance, on November 13, 1992, the market
rate for 6-month Treasury bills was 3.3 percent, for 5-year Treasury
bonds 6.0 percent, and for 30-year Treasury bonds 7.6 percent. This
relationship between maturity and interest rates is called the
"yield curve." Expansionary monetary policy tends to depress very
short-term rates, such as the overnight Federal funds rate.
Medium- and long-term rates respond less predictably to changes
in monetary policy, in part because they reflect expectations about
future inflation.
Concern about how policy changes will influence expectations
and, hence, long-term interest rates is a factor the Fed must consider in setting policy. Since both short-term and long-term rates
affect the economy, the Fed must be careful that in lowering shortterm rates it does not inadvertently increase long-term rates. In




99

Chart 3-10 Real and Nominal 3-Month T-Bill Rates
The real rate of interest is approximately equal to the nominal 3-month T-Bill rate minus
the inflation rate as measured by the consumer price index.
Percent per year
15

10

-5

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

Note: T-biil rates are for secondary market. Inflation defined as annual change in CPI-U.
Sources: Department of Labor and Board of Governors of the Federal Reserve System.

fact, over the last 3 years, virtually every time the Fed lowered the
short-term Federal funds rate, long-term interest rates either declined or were unchanged, although the declines in long-term rates
were substantially less than the declines in short-term rates.
Some observers focus almost exclusively on relatively high longterm interest rates as the reason for the limited effectiveness of the
recent loosening of monetary policy. Since November 1990, the Federal funds rate has fallen by 4.7 percentage points, while the 10year Treasury bond rate has fallen by only 1.8 percentage points.
The relatively high long-term rates may slow the growth of longterm business investments and mortgage borrowing. On the other
hand, evidence suggests that many borrowers easily substitute
short-term financing for long-term debt. For instance, many firms
finance a large proportion of their capital expenditures with shortterm bank debt, and many families now finance their homes with
adjustable rate mortgages. Furthermore, at the beginning of past
recoveries, relatively high long-term rates did not appear to discourage increased investment spending. For these reasons, it is
doubtful that the weaker-than-expected demand for credit is due
exclusively to the level of long-term rates.




100

INDICATORS OF MONETARY POLICY
The Fed uses several measures, or monetary aggregates, to quantify what is popularly called money. The monetary base, or MO, is
the only monetary aggregate that can be controlled with precision
through open market operations. In setting target ranges for
money growth rates, the Fed focuses on several broader aggregates.
Until 1982 the Fed's primary target was Ml, the funds generally
used for transactions, including currency in circulation, checking
accounts, and travelers checks. Since 1982, the primary monetary
target has been M2—Ml plus a number of short-term financial
assets such as savings accounts.
Monetary aggregates are "intermediate targets." Unlike operating targets such as short-term interest rates, monetary targets are
adjusted infrequently. They are intermediate to more fundamental
goals such as maintaining a low and stable inflation rate. An important consideration in choosing a monetary target is whether it
exhibits a predictable relationship with nominal GDP; that is, a
predictable velocity. The velocity of money is the ratio of nominal
GDP to the money stock. Velocity measures the average number of
times the money stock is spent each year in generating the transactions that constitute nominal GDP. If velocity were perfectly predictable for a monetary aggregate under Fed control, then the Fed
could set the growth rate of nominal GDP.
In addition to interest rates and monetary aggregates, the Fed
relies on many other types of information to judge whether its
policy is having the intended effect, including exchange rates, the
unemployment rate, the level of inventories, the capacity utilization rate, commodity prices, and changes in the price level. Statistical data that provide information about the current situation and
the effects of past policies also provide some insight into the future.
For instance, an increase in inventories often reflects a cutback in
sales and signals a fall in future production, and gold prices and
long-term interest rates reflect the market's expectations about inflation. Unfortunately, no perfect indicator or set of indicators
exists that can accurately predict the future consequences of current policies under all circumstances.
SUMMARY
• In the short run, the Fed can use monetary policy to increase
the availability of credit and to lower interest rates. In the
long run, an excessively expansionary monetary policy will
lead to inflation and higher nominal interest rates.
• Interest rates, monetary aggregates, and many other indicators
help the Fed assess the effects of its actions. No set of indicators, however, provides a reliable forecast of the future consequences of current policy choices.



101

MONETARY POLICY SINCE 1970
An important indicator of Fed policy is the growth rate of monetary aggregates, although these do not always move together over
time (Chart 3-11). Prior to 1982 the Fed's primary target was Ml
but since then it has dropped its Ml target and focused on M2. The
reason is clear from Chart 3-12: After a steady increase, the velocity of Ml dropped sharply in 1981 and became much more variable,
making its relationship with nominal GDP much less predictable.
The velocity of M2, on the other hand, has generally been more
predictable, although its velocity also dropped sharply in 1980-82.
Starting in late 1979 the Fed made a strong commitment to reducing inflation. Although monetary policy was perceived as tight
during this period, in fact the growth rates of both Ml and M2
were approximately the same as they had been in the late 1970s
(Chart 3-11). This episode illustrates that monetary policy cannot
be evaluated simply by looking at the growth rate of the money
supply in the abstract; rather, it must be evaluated relative to the
current economic situation. Given that the economy was in the
midst of a sharp recession during this period, some would argue
that, by maintaining the previous growth rate of money, the Fed
was running a tight policy.
As mentioned earlier, fear of growing inflationary pressure in
the late 1980s led the Fed to try to engineer a soft landing. To do
this, the Fed had to balance the risk that reducing the growth rate
of money would increase the chances of a recession against the risk
that maintaining money growth at the same rate would increase
inflation. Starting in early 1988, the Fed began to raise short-term
interest rates. The target growth range for M2 was revised downward in 1989, and its growth rate often remained near the bottom
of the target range and sometimes even below it (Chart 3-13). As
inflationary pressures eased and inflation in fact declined in a soft
economy, the Fed cut short-term interest rates gradually from mid1989 to late 1990 and then cut rates more aggressively, for a cumulative decline of about 4 percentage points since December 1990.
Some have argued that the Fed's policy in these years was the
primary cause of the most recent recession and slow recovery, but
this conclusion appears to be unwarranted. Although a somewhat
more expansionary policy may have been appropriate during the
recession and early in the recovery, many other factors—some unforeseeable, others of a severity and duration that would have been
hard to predict—were acting as a drag on the economy. Furthermore, the fact that the growth of M2 remained at the low end of
the target range came as somewhat of a surprise to the Fed. From
January 1991 to October 1992, Ml grew at an annual rate of 12.0
percent, but M2 lagged behind, growing at an annual rate of only




102

Chart 3-11 Growth Rates of Monetary Aggregates
The growth rates of the various monetary aggregates are quite variable. In the past 2
years, M1 growth has accelerated, while M2 growth has declined.
Percent change, 4-quarter moving average

A

15 _
-

i i
/ i
#
i

M2

A/
/1 v

\

/ M

10 -

\

Jin

/
"- .-V

•/

i

/

/ if

i/

f

i

S

- ft'

V

Ay

\
MO

5 - .-"

/

v\

M1

v

V-.

A*'

\VI
i
i

-5

I.,.11,. 1., ,1., 11...1..
.., i.,,
h i i l •.. I...
1970 1972 1974 1976 1978 1980 1982 1984 1986

i

.

111.

1988 1990 1992

Source: Board of Governors of the Federal Reserve System.

Chart 3-12 Velocities of Monetary Aggregates, 1970-92
In the early 1980s, the predictability of the relationship between M1 and GDP weakened
significantly. As a result, M2 became the Federal Reserve's primary monetary target.
Index, 1970=100
160
150

/

\

140

M1 Velocity

.'*

\

/

130

120

110

100

90

80

1970

1972 1974

1976 1978

1980 1982

1984 1986

1988

Sources: Department of Commerce and Board of Governors of the Federal Reserve System.




103

1990

1992

Chart 3-13 M2 Money Stock and Growth Target Ranges
Since the mid-1980s, the Federal Reserve repeatedly has lowered the target range for M2
growth. M2 generally has been in the lower part of the target cones.
Billions of dollars
o,ouu
2.5 - 6 5% t a r g e t / ^

3,600 -

3,400

5 - 6 . 5 % target

3-7% t a r g e t / l ^
3,200 -

3,000

5.5 - 8.5% t a r g e t / X ^ ^^

3 - 7 % target

4 - 8 % target

2,800

2,600

^ ^ t 3 - 9% target

I

!

1986

I

!

1987

1988

i

1989

I

i

1990

1991

i
1992

Note: Percentage growth iines indicate growth target ranges set by the Federal Reserve each year.
Source: Board of Governors of the Federal Reserve System.

about 2.6 percent. This divergence in growth rates was accompanied by an increase in the velocity of M2 and a decrease in the velocity of Ml (Chart 3-14).
Although there is no simple explanation for the divergence in
the growth rates and velocities of Ml and M2, the fall in the general level of interest rates and the steep yield curve appear to have
been contributing factors. When interest rates drop, the difference
between the returns on checking accounts and savings accounts
generally narrow, so investors become less inclined to move money
from checking to savings, explaining in part the recent drop in the
velocity of Ml, which consists largely of checking accounts. When
long-term rates rise above short-term rates, people tend to shift
savings out of the short-term assets included in M2 and into assets
with higher yields, such as Treasury bonds, reducing the M2 money
stock and increasing its velocity.
The change in M2's velocity has again raised the question of
whether it is appropriate for the Fed to focus on a single monetary
aggregate or whether it should attach some weight to a range of
other indicators. Researchers have examined a number of alternatives, including the behavior of MZM (M2 less time deposits such as




104

Chart 3-14 Velocities of Monetary Aggregates, 1988-92
As the growth rates of M1 and M2 diverged, the velocity of M2 began to increase while the
velocity of M1 dropped sharply.
Index, 1988 = 100
110

108

106

104

102

100

98

96

I

•

,

1988

,

I

,

,

1989

,

I

,

i

1990

,

I

,

,

,

I

1991

1992

Sources: Department of Commerce and Board of Governors of the Federal Reserve System.

certificates of deposit). MZM is intended as a fairly broad measure
of money that includes only accounts which can be withdrawn immediately without penalty. Unfortunately, the velocity of MZM is
more variable than that of either Ml or M2, and it does not appear
to be a better predictor of GDP.
Others have suggested a nominal GDP target, under which the
Fed would increase the growth rate of the monetary base when
nominal GDP growth falls below the target range and reduce it
when GDP growth exceeds the target range. Since nominal GDP is
measured infrequently and responds to monetary policy often with
a considerable lag, however, nominal GDP targeting would increase
the risk that policy actions would be taken too late. More fundamentally, even if nominal GDP growth could be controlled fairly
precisely, the division of nominal GDP growth between price increases and real output increases is difficult to predict or control.
None of the other alternatives to an M2 target is obviously superior either, making it likely that the Fed will have to rely on a variety of imperfect measures that include M2, other monetary aggregates, and other indicators of the future path of inflation and
output.




105

RECENT COMPLICATIONS FOR MONETARY POLICY
How much and how quickly spending increases in response to
lower interest rates depends on a number of factors, most of which
are beyond the Fed's control. Although short-term interest rates
have fallen a total of about 4 percentage points since December
1990, demand has grown at a disappointingly weak pace for most of
this period.
A number of factors appear to have tempered the response to interest rate cuts in the last few years relative to previous recoveries.
Despite lower market interest rates, borrowers had difficulty obtaining loans because of the troubled condition of many financial
institutions. The high business and household debt levels accumulated in the 1980s weakened demand for new borrowing. The capital-intensive sectors that usually respond most rapidly to interest
rate reductions were beset by other problems that hampered
growth. In particular, the excess supply of and high vacancy rates
in commercial real estate damped the demand for new buildings,
and a slowdown in the rate of household formation lowered the
demand for residential construction. As a result, it appears that
lower interest rates have so far failed to generate as much new
spending as expected. Firms and households have benefited from
lower rates, however, as interest burdens have been reduced by
record levels of refinancing of corporate debt and mortgages in the
last few years.
While problems such as the credit crunch and overbuilding are
likely to diminish over time as the economy adjusts, other developments may have a more lasting impact on the effectiveness and
channels of monetary policy. One such development is the increased integration of world capital markets.
First, monetary policy cannot control interest rates and exchange rates independently because the two are interrelated. Decreases in U.S. interest rates lower the dollar's value as investors
seek higher returns in other countries. In the early 1980s, our relatively tight monetary policy was one of the factors that strengthened the dollar. Now, the tough anti-inflationary policies of the
German Bundesbank have had the effect of strengthening the deutsche mark and the currencies linked to it. These exchange-rate
swings may lead to unwanted effects on both the balance of trade
and price levels, limiting monetary policy options. For instance, a
sharp appreciation of the dollar could raise the trade deficit and
cause job losses in export-producing and import-competing industries.
Second, as capital markets become more integrated, capital tends
to flow more quickly into those countries that offer the highest rate
of return. The Fed has an increasingly limited ability to control
real U.S. interest rates, since attempts to unilaterally lower rates




106

cause foreign investors (and some American investors) to move
their money abroad (Box 3-4). This outflow tends to push U.S. interest rates back up, since new investors must be found.
Box 3-4.—International Interest Rate Differences and Capital
Flows
Investors deciding between different types of assets will
choose those investments offering the highest rate of return
after risk is taken into account Capital tends to flow from
countries offering lower expected rates of return to those offering higher expected rates of return. By reducing the supply of
capital in the countries offering low returns and increasing it
in those with higher rates, this process tends to equalize expected returns across national borders*
Investors consider expected exchange-rate movements as
well as relative interest rates when comparing international
investments. For example, a 1-year bond in the United Kingdom may offer an 8-percent interest rate, while an American
bond may offer only 4 percent interest. However, if the pound's
value in terms of dollars is expected to decline by 5 percent
over the year, the British bond's return, in dollars, would be
only about 3 percent, making it the less attractive investment.
Since investors compare investments in different countries
taking into account expected changes in exchange rates, the
exchange-rate adjusted expected returns on similar assets tend
to be equalized across countries.
Finally, not all of the increased demand generated by reduced interest rates will benefit domestic producers. Both foreign and domestic companies can borrow in the United States to finance operations abroad that do not contribute to U.S. GDP. At the same
time, some domestic borrowing will be used to finance expenditures
on imports. Similarly, U.S. borrowers benefit when foreign interest
rates fall, because money can then be borrowed abroad to finance
domestic investment.
SUMMARY
• The goal of using monetary policy to increase output without
increasing inflation is inherently difficult to achieve. When the
Fed increases or decreases bank reserves, the path from reserve changes to interest rates to output and prices is often unpredictable.
• In recent years, a number of factors have further complicated
the task of setting monetary policy. The weakening in the relation among M2, interest rates, and nominal GDP has decreased




107

the reliability of monetary aggregates as indicators of policy,
at least in the recent period.
• Transitory problems in financial markets and structural
changes in the global economy have altered the response of the
U.S. economy to the Fed's policies.

FISCAL POLICY
In light of the economy's performance over the last 2 years, it is
natural to ask what role Federal fiscal policy played in the recession and slow recovery. Was policy in part responsible for the poor
economic performance, or did policy make the economy stronger
than it otherwise would have been?

TOOLS OF FISCAL POLICY
As mentioned earlier, fiscal policy refers to changes in Federal
spending and the tax system that influence demand and incentives
to work, save, and invest. Federal purchases of goods and services,
which make up nearly 8 percent of GDP, contribute directly to
total spending. Changes in transfer payments and income taxes
affect spending indirectly through their impact on disposable (aftertax) income. Since households typically save a portion of additional
income, their spending tends to change by less than their disposable income. Consequently, changes in transfers and taxes affect
total spending less than changes in purchases of an equal magnitude.
The Federal budget distinguishes between two main types of expenditures: mandatory and discretionary. Nearly all mandatory
spending is in the form of "entitlements," or programs such as
medicaid, medicare, and unemployment insurance which use preset
criteria to determine eligibility and benefit levels. Discretionary
spending, on the other hand, refers to government spending that
requires annual budget appropriations. The distinction is important for fiscal policy, because short-term changes in mandatory
spending are heavily affected by short-term economic conditions,
Automatic Stabilizers
Discussions of fiscal policy often divide Federal taxing and spending activities into two kinds: automatic stabilizers and discretionary policy. Automatic stabilizers act as buffers when the economy
weakens by automatically reducing taxes and increasing government spending. Mandatory spending for programs such as unemployment insurance, food stamps, welfare programs, and medicaid
increases when the economy slows down since benefit criteria
depend on income or employment status. These transfer payments
help consumers maintain spending.




108

The tax system as a whole also acts as an automatic stabilizer. In
an economic slump, personal income and corporate profits are
lower, so tax payments fall, helping to reduce the decline in aftertax incomes that would otherwise occur. Likewise, government revenues from excise and other sales-based taxes fall when purchases
decline. In fact, taxes typically change by a larger proportion than
GDP, primarily because average income tax rates fall with income
levels. This feature of the tax system makes after-tax income more
stable than pretax income, which helps insulate consumption
spending from changes in income.
Discretionary Fiscal Policy
Discretionary fiscal policy refers to changes in discretionary
spending and new tax legislation. Many classic examples of discretionary fiscal policy are new tax initiatives. For example, tax cuts
in 1964 were intended to stimulate spending and economic expansion, while the income tax surcharge of 1968 was designed to curb
rising inflation.
Since the change in total annual expenditures determines whether policy has been expansionary or contractionary, it is difficult to
attribute expansionary fiscal policy to specific acts of spending. For
example, increased spending on highways in a given year is expan- *
sionary only if it is not offset by a decline in some other part of the
annual appropriations. Nonetheless, changes in discretionary
spending have potentially significant effects on the economy, as
evidenced by the economic responses to the defense buildups and
drawdowns over the past 50 years.
RECENT BEHAVIOR OF EXPENDITURES AND TAX
RECEIPTS
While expansionary and contractionary policies are easy to describe, they are difficult to measure. Automatic stabilizers cause
the Federal budget deficit to rise during recessions and fall during
expansions, even without discretionary fiscal actions. For this and
other reasons discussed in Chapter 6, changes in the budget deficit
are an imperfect measure of discretionary fiscal policy.
More than in the past, large Federal budget deficits and budget
problems at the State and local levels have constrained fiscal
policy. Real Federal purchases, which fell 0.8 percent during the
recent recession and recovery, rose an average of 2.1 percent
during earlier recessions and recoveries (Chart 3-15). Real Federal
purchases have fallen only once before during a similar business
cycle phase—the recession and recovery of 1969-71—and then by a
much greater amount, 15.4 percent. In both cases, defense drawdowns were occurring; recently because of the end of the Cold War,
and earlier because of the winding down of the Vietnam conflict.




109

Real defense purchases fell by 4.2 percent during the recent period,
well below the decline of 20.3 percent during 1969-71.
Chart 3-15 Real Federal Spending and Taxation in Recent Recoveries
During the recovery of 1991-92, Federal Government purchases and transfers did not
increase as much as they had in past recoveries.
Percent change
40

1961-62

1970-71
g g Purchases

1975-76
1980-81
Recovery dates

1982-83

1991-92

[^/] Transfer Payments £\\] Receipts

Note: National Income and Product Accounts basis. Change is from trough of recession to fourth quarter
of recovery.
Source: Department of Commerce.

Federal nondefense purchases increased 8.6 percent in the recent
period, almost twice the average for previous recessions and recoveries. This increase only partially offset the defense cuts, however,
since defense purchases are 2 f times the level of nondefense purVe
chases. Increases in State and local government purchases, which
are about IV2 times greater than Federal purchases, were also
below average. Federal, State, and local government purchases
combined rose just over 1 percent during the recession and recovery of 1990-92—about 40 percent of the average increase during other
recessions and recoveries since 1959. Federal transfers have also
grown more slowly recently than they did during earlier slowdowns, but State and local transfers have grown at twice their
normal rate. The combined change in transfer payments for all
levels of government during the recent period was 15.5 percent,
compared to the 18.6 percent average increase during previous recessions.
While the bottom line is that recent fiscal policy has been less
expansionary than fiscal policy during previous recessions and
early recoveries, it does not necessarily follow that more expansion-




110

ary policies were either possible or desirable. Growing government
expenditures and large Federal budget deficits acted as a constraint on traditional forms of fiscal stimulus.
THE BUDGET PROCESS
The budget process itself also limits the potential of fiscal policy
to stimulate the economy. Each January or February the President
submits a budget for the fiscal year beginning in October, with 13
appropriations proposals for discretionary spending. Mandatory
program expenses and interest payments on outstanding debt do
not require annual appropriations but are estimated in the budget.
Both houses of the Congress make separate modifications to the
President's proposal and then meet to resolve their differences on
any appropriations bills. Once this is done, the House and Senate
must pass the appropriations bills and forward them to the President to be signed into law or vetoed.
Because the Federal budget process begins well in advance of
actual spending, and because downturns are difficult to forecast,
annual appropriations are usually not an effective means of fighting recessions. New legislation can be introduced to modify appropriations during the fiscal year, but there may still be legislative
delays in the Congress and further delays between appropriation
and actual expenditure. For example, government procurement
procedures can involve time-consuming regulations intended to
ensure fairness in contract awards. In contrast, monetary policy
changes can be implemented more rapidly, since open market operations do not require congressional action and the extended delays
it sometimes imposes.
Reducing growth in government expenditures and budget deficits
were important long-term objectives of this Administration's fiscal
policy. Escalating government spending and budget deficits are believed to be partly responsible for the decline in conventional measures of national saving and investment rates during the 1980s.
Modifications to the budget process introduced as part of the Omnibus Budget Reconciliation Act of 1990, known as the Budget Enforcement Act (BEA), were intended to improve on the GRH and
bring government spending and budget deficits under control. Like
any credible deficit reduction plan, however, the BEA restricted expansionary countercyclical policy actions by placing constraints on
new mandatory spending programs, tax decreases, and all discretionary spending. These restrictions help explain the recent behavior of expenditures and receipts.
Absent special circumstances, the BEA requires that any new
mandatory spending program be offset by some combination of decreases in other mandatory spending programs or by a tax increase. Similarly, any tax bill projected to decrease total govern


Ill

ment revenue would trigger across-the-board spending cuts unless
it was matched by specific cuts in spending programs. These constraints on new mandatory spending programs and tax initiatives
are known as the "pay-as-you-go" provisions of the BE A.
A problem with these provisions is that the method used to estimate the effects of tax changes on revenues is very imprecise. A
change in tax law can cause a series of changes—often referred to
as feedback effects—in the consumption, investment, and saving
decisions of individuals and firms. Current government methods of
estimating changes in revenue allow for a very narrow range of
feedback effects. While a full accounting of the feedback effects
that new tax proposals could have is currently impractical, the absence of fully dynamic estimates has limited the usefulness of the
estimating process in tax policy debates.
The BEA also established legally binding caps (adjusted for inflation and certain technical factors) that impose a "flexible freeze"
on discretionary spending growth. Originally, separate caps prohibited transfers of funds across three categories of spending: domestic, defense, and international. These "firewalls" expire after fiscal
1993, when a single cap will be applied to total discretionary spending.
The discretionary spending caps and pay-as-you-go rules in the
BEA are much more difficult to circumvent than the GRH budget
deficit targets. The GRH required the Administration to estimate
total receipts and expenditures at the start of the fiscal year to determine if the deficit would be below the target for the upcoming
year. However, it was not difficult to pass legislation later in the
year that increased the deficit. Another weakness of the GRH was
that the deficit was estimated only for the upcoming year, so that
legislation significantly increasing deficits in subsequent years did
not conflict with the provisions of the GRH. For the most part, the
BEA solved both of these problems by requiring the Administration
to show, within days of its passage, whether legislation signed by
the President increased or decreased the deficit over both 1- and 5year time horizons. Legislation that violated the BEA targets resulted in across-the-board spending cuts to restore compliance.
Although an effective deficit reduction plan necessarily requires
constraints on fiscal expansion, the BEA does not eliminate expansionary actions completely. First, the automatic stabilizers implicit
in mandatory spending programs and the tax code are allowed to
operate, since the BEA deficit targets are adjusted for changes in
short-run economic conditions. Second, the BEA constraints on
policy changes can be waived under either of two conditions: (1) in
the event of a "low-growth scenario"—two consecutive quarters of
less than 1 percent growth or a forecast of two or more consecutive
quarters without growth or (2) when the President declares an




112

emergency (such as a weak economy that does not qualify as a lowgrowth scenario or humanitarian relief efforts). Finally, economic
activity can be stimulated by policy changes that strengthen economic incentives without increasing spending or reducing total receipts, such as an appropriately designed reduction in capital gains
tax rates.

LIMITATIONS OF COUNTERCYCLICAL FISCAL POLICY
Even in the absence of procedural constraints, the ability of
countercyclical fiscal policy to stimulate a weak economy may be
limited. The effect of changes in purchases, transfers, and taxes on
total spending is complex and uncertain.
Expectations
People's actions depend not only on their current situation but
also on their expectations for the future. For example, many people
in their 50s and early 60s, anticipating retirement, save a large
share of their incomes. Fiscal policy can affect people's behavior by
changing their current disposable income, but changes in spending
will also depend on people's expectations about their future disposable income. For instance, a temporary income tax cut will affect
consumption less than a permanent cut. If people think a cut in
income tax rates will last, they are likely to respond by consuming
most of their additional after-tax income. They have little reason to
save more, because they expect the higher after-tax income to last
into the future. But if they expect that a tax cut will soon be
reversed, they may save most of their temporary windfall to spend
when taxes rise again and their disposable income falls. Given
current concerns about large budget deficits, unless income tax cuts
are linked to reductions in future government spending, people may
be more likely to believe any current tax cut will be offset by higher
taxes in the future. If so, tax cuts will have little effect on current
spending.
People's expectations about the future can affect other tax initiatives as well. For example, when the government introduces a temporary investment tax allowance, businesses have an incentive to
shift investment expenditures to the period in which the temporary
tax credit applies. In contrast to a cut in personal income taxes for
families—which will have little effect on spending if it is temporary—an investment tax allowance will have a stronger short-run
effect if it is temporary. If businesses know the investment tax allowance is permanent, they have no reason to change the timing of
expenditures. The long-term effects of a permanent investment tax
credit or more neutral depreciation are discussed in Chapter 6.
The amplified response to a temporary investment tax allowance
may appear to make it an excellent tool for fiscal policy. But the
role of people's expectations in determining the response to an in-




113

vestment tax allowance has far-reaching implications for policy.
Once businesses know that an investment tax allowance is being
considered, they may defer investment spending so that they are
better able to take advantage of the investment tax allowance at a
later date. Similarly, if in the past the government has introduced
a temporary investment tax allowance during recessions, people
may defer investment at the first hint of a slowdown in the future,
hoping to benefit from another tax credit. This deferral of spending
may exacerbate fluctuations in output.
Crowding Out
Changes in government purchases may also have limited effects
on total spending. For example, if the appropriation for the construction of a new highway system is not accompanied by a corresponding increase in tax revenues, the budget deficit and government borrowing will increase. Increased government borrowing
may put upward pressure on interest rates and discourage investment spending, offsetting at least part of the increase in total
demand resulting from the construction project. This reduction in
private investment associated with an increase in government
spending is known as "crowding out."
How important is crowding out? Unfortunately, it is difficult to
distinguish the effect of changes in government spending from the
many other factors that influence interest rates and private investment. At present, interest rates may be particularly sensitive to
changes in fiscal policy, raising concern about crowding out. Given
the already large budget deficit, further increases in spending now
may seriously undermine the credibility of fiscal policy and create
expectations of higher future deficits and tighter conditions in
credit markets, resulting in higher long-term interest rates now.
Actions need not increase the current government budget deficit
in order for crowding out to occur. Actions that make higher spending more likely in the future may increase interest rates now, even
if they have no effect on current deficits. For example, if a law
passed today increased government spending beginning in the year
2000, expectations of tighter conditions in credit markets in the
future could raise long-term interest rates and reduce investment
today.
Resource Allocation
Countercyclical fiscal policies also have long-term effects on the
allocation of resources that should be taken into account. For example, policymakers may decide to construct a highway system to
stimulate spending in an economic downturn. The benefits the
highway system will provide may not justify the costs incurred; if
they did, the project should have been undertaken long before the
idle resources provided additional incentive. History shows that, in




114

a market economy, idle resources typically are brought back into
use in the private sector after a period of transition. And unlike
government projects, these private activities are sustainable only if
they meet the stringent test of the market: sufficient consumer
demand to ensure that the value of the activity exceeds its cost. If
a downturn is expected to be brief, relying on the safety net of unemployment insurance and other programs while waiting for idle
resources to be brought back into private activities could maximize
their economic value. If, on the other hand, a recession is expected
to be long or severe, there is a stronger case for short-run fiscal
stimulus.
SUMMARY
• Automatic stabilizers increase spending and reduce taxes automatically when the economy weakens.
• During the recent recession and recovery period, fiscal policy
appears to have been less expansionary than it was in previous
recession and recovery periods.
• The Budget Enforcement Act places constraints on spending
growth and tax reductions. Expansionary measures are limited
to automatic stabilizers, increases in spending or tax cuts that
are allowed under special circumstances, and initiatives that
increase incentives.
• Factors such as expectations and crowding out increase uncertainty about the response of the economy to fiscal policy.
Short-term stimulus is likely to be effective only in the event
of a downturn that is expected to be long-lived or severe.

WOULD DIFFERENT POLICIES HAVE HELPED?
During the past 4 years, the economy experienced a slowdown in
growth in 1989, a recession in late 1990 and early 1991, and then
an unusually weak recovery beginning in March 1991. Only recently has the economy shown sufficient vigor to reduce the unemployment rate for several consecutive months. In light of this experience, would earlier and more expansionary fiscal or monetary policies have been desirable during the recession and early recovery?
The answer, in our opinion, is a qualified yes. Given that many of
the factors responsible for the slow growth in the U.S. economy—
defense reductions, commercial overbuilding, and the slowdown in
foreign economies—were expected to persist into the future, there
appeared to be little danger that inflation would rise as a result of
a moderately more expansionary policy, although it may well have
fallen more slowly.
The conclusion that more stimulative policies would have been
desirable does not come simply with hindsight. The Administration



115

proposed fiscal policies in early 1992 that would have provided a
modest stimulus to the economy. These initiatives included unilateral measures such as a reduction in excess income tax withholding and several proposals requiring congressional action, including
a temporary investment tax allowance to speed up spending on
productive assets, a temporary tax credit for first-time homebuyers,
and a reduction in the tax rate on capital gains.
The Administration's proposals would have provided short-term
stimulus to the weak economy primarily by using tax incentives to
encourage business and residential investment. Reductions in
excess withholding taxes were intended to stimulate household
spending, while the temporary investment tax allowance would
have stimulated business investment. The cut in capital gains taxes
would have increased the value of capital assets and thus, wealth,
thereby providing short-term stimulus to spending in addition to
long-term incentives for investment and entrepreneurship.
The Administration's proposals were designed to avoid increasing
the already large deficit. By emphasizing investment incentives,
the fiscal proposals would have increased capital formation and the
potential for long-term growth. Unfortunately, only the unilateral
measures were implemented, since the Congress did not pass the
President's proposals in an acceptable form.
A fiscal plan with even stronger tax incentives merited consideration, subject to one very important condition—that legislative
action (not just the development of general plans) be taken at the
same time to reduce both future government spending growth and
future budget deficits. Any policy initiative had to take into account both the short-term problem of recession and slow recovery
and the long-term problem of low productivity growth that is due,
in part, to insufficient national saving and investment. While the
recession could have provided an argument for short-term fiscal expansion, such action would have been both less effective and inappropriate if it had sacrificed long-term goals by increasing expectations of future government spending and budget deficits.
Some have argued that, given the slow growth of M2 and the
overall weakness in the economy, monetary policy has been the
predominant cause of the recent recession and weak recovery. As
noted earlier, a number of unforeseen problems complicated the
task of setting monetary policy. It is not clear to what extent the
slow growth of M2 reflected inadequate expansion of the monetary
base, weak demand, or portfolio shifts away from the assets that
constitute M2 (undermining its usefulness as an indicator of monetary policy).
While it would have been desirable for monetary policy to have
been somewhat more expansionary than it in fact was during the
recession and early recovery in order to further cushion the de-




116

clines in output and employment, such a policy could have delayed
progress on reducing inflation. Furthermore, in the presence of uncertainty about the effectiveness of fiscal and monetary policy
tools, there are advantages to using both to reduce the uncertainty
about the overall response of the economy. During this period, too
much responsibility for strengthening the economy was left to monetary policy. Greater help from fiscal incentives, regulatory relief,
and trade liberalization was needed.
Overall, it appears that recent fiscal and monetary policy have
been less expansionary than in the typical postwar recession and
early recovery. It should be remembered, however, that in many
cases past policies proved to be too expansionary and worsened inflation in the subsequent recovery. Nonetheless, the weakness of
the economy—indicated by both the fall in output during the recession and the substantial decline in core inflation over the past
year—and the prospects that the weakness would continue made a
case for somewhat greater stimulus from fiscal and/or monetary
policies during the recession and early recovery. Even perfect policies probably could not have prevented a recession, given the
myriad factors impeding growth during this period, but they may
have softened the recession and speeded up the recovery.

CONCLUSION
This chapter has emphasized the difficulties inherent in using
monetary and fiscal policies to offset short-term fluctuations in the
economy. The experience of the 1960s and 1970s has shown that
fine-tuning can be destabilizing and may even erode long-term
growth rates by increasing the uncertainty associated with longterm planning and impeding the reallocation of resources.
In response to the apparent failure of fine-tuning, some have
taken the opposite position that there is no benefit to countercyclical policies, even when the economy experiences a protracted recession. This argument is based on the belief that the primary effect
of policy changes in response to short-term conditions is increased
uncertainty among private decision-makers, with possible negative
impacts on output.
A more balanced view recognizes the limitations of fine-tuning,
without precluding the possibility that policy may need to be adjusted occasionally. In this view, policies are designed primarily
with long-term objectives in mind. Because sound money is indispensable to a well-functioning economy, monetary policy targets
are guided by the goals of maintaining low and stable rates of inflation and facilitating the reliable provision of credit. Spending
policies are guided by cost-benefit analysis, taking into account
future effects as well as short-run economic conditions. Tax policies




117

are structured to minimize interference with market incentives to
work, save, invest, and innovate. In the present situation, fiscal
policy should also aim for gradual reduction in the growth of government expenditures and the budget deficit.
In certain circumstances, however, it may be necessary to change
policies. First, it is possible that relationships between policy targets, such as the growth target for M2, and policy objectives, will
change. In that case, targets for M2 may need to be adjusted and/
or supplemented or replaced by targets for other monetary aggregates or other indicators. Second, if structural adjustments, external shocks, or other factors are expected to weaken the economy
for an extended period, then more expansionary policies may be appropriate to facilitate the economic adjustment process. To the
greatest extent possible, the circumstances under which policies
might change should be specified in advance, so that credibility is
enhanced rather than compromised by such deviations. The lowgrowth scenario provisions of the BEA are an example of this kind
of "recession escape clause." When policy must deviate from the established targets, actions should be consistent—and understood to
be consistent—with the long-term objectives of high and stable
output growth and low and stable inflation.
While the economy has endured a period of protracted weakness
during which more expansionary policies would, in our judgment,
have been desirable, economic developments in 1992 and current
indicators of future activity suggest that a more self-sustaining recovery consistent with maintaining low inflation is finally underway and that additional short-term fiscal and/or monetary stimulus may be unnecessary. If the modest recovery were to falter, any
short-term fiscal stimulus should be tied to long-term spending reductions in order to minimize upward pressure on interest rates,
thereby increasing the effectiveness of the short-term stimulus and
reducing future deficits. Monetary policy should remain focused on
sustaining a recovery consistent with low and stable inflation. Interest rates and inflation rates are now at their lowest levels in
two decades, providing the foundation for long-term, noninflationary growth in output and employment.




118

CHAPTER 4

The Economics Of Health Care
AMERICANS ARE LIVING LONGER, healthier lives than ever
before. Since 1960, average life expectancy has increased by more
than 5 years. American physicians have access to the best technology in the world and more than one-half of the world's medical research is funded by private and public sources in the United States.
At the same time, the share of the Nation's income devoted to
health care has been growing rapidly, and today more than 35 million Americans lack health insurance. Growing concern about
rising expenditures and reduced access to insurance has led to the
development of a wide variety of proposals for health care reform,
from the Administration's market-based approach to calls for a
government-run national health insurance program.
The success of any of these proposals will depend on how well it
addresses the reasons behind the increase in expenditures and decline in insurance. Economics is very helpful in understanding
these developments. It suggests that most health care in the
United States is financed and delivered in ways that give both
health care providers and their insured patients many incentives
to increase the quality of health care but little reason to be concerned about its cost.

HEALTH CARE IN THE UNITED STATES
In many respects, the health care industry resembles other service industries such as transportation and legal services. It supplies
a service—health care—in response to consumer demand. But the
demand for health care is different from the demand for many
other services because most people do not pay for their care directly. Instead, the government and private insurers pay most health
care expenses. The supply of health care also differs from that of
many other service industries. Consumers rely on providers for information about health care services and these providers are heavily regulated, primarily by other health care providers. Finally,
many people believe that health care is inherently different from
other goods and services. They believe that everyone should be entitled to at least some health care, although they may not believe
that everyone has a similar entitlement to goods in general.




119

THE HEALTH OF THE U.S. POPULATION
Americans buy health care to improve their health, but recent
research suggests that the connection between health care and
health is not a simple one. In fact, increases in life expectancy in
developed countries are not strongly related to increases in the
number of physicians or hospital beds per capita, nor are they primarily a consequence of increasing utilization of these services.
Studies show that increases in life expectancy are mainly related to
changes in behavior and improvements in medical technology. Between 1960 and 1990, life expectancy at birth, which is strongly affected by changes in infant mortality, rose from 67 years to 72
years for men and from 73 years to 79 years for women. The life
expectancy of older Americans, a group that may be more strongly
affected by improvements in medical technology, increased by 3
years between 1960 and 1990, a larger increase than occurred between 1900 and 1960.
Changes in Behavior
Changes in behavior offer great promise as a way to prevent disease and preventing disease is often less costly than treating it.
Many Americans have adopted increasingly healthy lifestyles.
During the 1980s, the rate of smoking among adults decreased from
33 to 26 percent, more Americans exercised regularly, and deaths
associated with alcohol abuse declined substantially. Traffic accident deaths per capita have declined by over 30 percent since 1970,
in part because of greater use of seat belts.
Medical Technology
Improvements in medical technology (a term that includes drugs,
vaccines, and knowledge about treatments as well as medical
equipment) reduce the incidence of disease and improve the effectiveness of treatment. For example, over 33,000 cases of polio were
reported in the United States in 1950, but polio has been all but
eradicated since the development of the polio vaccine. Only 25
years ago, childhood leukemia was nearly always fatal; today the
long-term survival rate for children diagnosed with leukemia is
about 65 percent. New drugs have greatly improved the well-being
of those with ulcers and virtually eliminated the need for surgery
to treat this medical problem. Similarly, coronary bypass surgery
has greatly improved the quality of life of those with angina.
Continuing Problems
Despite the many medical advances of recent years, cures for
many diseases have yet to be discovered and new diseases continue
to emerge. For example, the rate of mortality from breast cancer
has not improved since 1950 despite the development of new
screening methods and new treatment therapies. Acquired immune




120

deficiency syndrome, or AIDS, has claimed the lives of over 160,000
Americans. Tuberculosis, a disease that had almost disappeared in
the United States, has reemerged. Among young people, homicide
and drug abuse exact an enormous toll.
A further problem is the persistence of serious disparities in
health across income and race categories. For example, black
babies are more than twice as likely as white babies to have low
birthweight. While many ascribe these differences in health to differences in the ability to pay for care, evidence from the United
States and other countries casts doubt on the belief that health insurance alone can greatly narrow these disparities. Studies in the
United Kingdom have found that the gap in mortality between rich
and poor has actually increased since the introduction of national
health insurance. This result is consistent with evidence showing
that increased utilization of medical services has relatively little
effect on health.

PROVIDING AND PAYING FOR HEALTH CARE
SERVICES IN THE UNITED STATES
The U.S. health care industry as defined in government statistics
includes services provided in hospitals, nursing homes, laboratories,
and physicians' and dentists' offices. It also includes prescription
and nonprescription drugs, artificial limbs, and eyeglasses, as well
as the services of nontraditional practitioners. But many goods and
services that may strongly affect health, such as fitness club services and food, are not included in the usual definition.
The U.S. health care industry employs 9 million people, including over 600,000 physicians; by comparison, the automobile manufacturing industry employs about 800,000 people. Inpatient services
are provided by approximately 6,500 hospitals containing over 1
million hospital beds. One-half of these hospitals are private, nonprofit institutions, some 30 percent are operated by Federal, State,
and municipal governments, and the remainder are operated privately on a for-profit basis.
Health care expenditures averaged $2,566 per person in 1.990 and
were divided among health care services in almost the same proportion as in 1960. The largest part of each health care dollar,
about 38 cents in 1990, was spent on hospital care, which covers all
services billed through a hospital, including those of some physicians, such as medical residents and radiologists. More than 1 in
every 10 Americans was admitted to a non-Federal short-stay hospital (a hospital in which the average length of stay is less than 30
days) in 1990, for an average stay of 6 days; over 10 percent of
these admissions were for maternity care. Physician services are
the second largest category of expenditures, accounting for about
19 percent of health care expenditures. In 1990, the average




121

American made 5.5 visits to a doctor. Most of the remaining 43 percent of health care expenditures was divided among drugs, nursing
home care, dental services, vision products, and home health care
services.
In most other developed countries, the government plays a larger
part in financing and, in many cases, in delivering health care
than in the United States. Boxes 4-1, 4-2, and 4-3 describe the
health care systems in Canada, Germany, and the United Kingdom.
Box 4-1.—Canada
Since 1971, all Canadians have been covered by public health
insurance plans administered by the Provinces. In Canada, it is
illegal to sell private insurance for services provided by the
public plans and participating physicians and hospitals may
not accept direct payment from patients for those services.
While the Provinces differ in the methods they use to finance
health care, most funding comes from general tax revenues.
Physicians are paid by the provincial governments on a feefor-service basis according to a fee schedule negotiated by the
provincial governments and physician associations. There have
been very substantial increases in the utilization of physician
services since the introduction of public health insurance. Attempts to cut total costs by limiting physicians' fees have been
partially thwarted by these continuing increases in utilization.
Hospitals receive annual lump sum, or global, budgets that
are not tied directly to hospital expenditures. Hospitals cannot
purchase new equipment without government approval and
many types of high-technology equipment are less common in
Canadian than in U.S. hospitals. The global budget reimbursement system and restrictions on the purchase of equipment
have led to waiting lists for some nonemergency hospital services.
Financing Health Care
Since 1960, U.S. health care financing has undergone a major
change (Chart 4-1). In 1960, most medical care was paid for directly
by consumers, but by 1990 only 23 percent of health care expenses
were paid for directly by consumers. Thirty-two percent were covered by private health insurers and 41 percent by the government.
This change can be traced to three developments: the expansion of
employer-provided benefits, the development of medicare (a government program that finances care for the elderly and disabled), and
the initiation of medicaid, a program that extended and formalized




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Box 4-2,—Germany
All working Germans and their families are required to have
health insurance. Those with low and middle incomes must
participate in one of the approximately 1,100 not-for-profit
health insurance plans known as sickness funds. Most bluecollar workers are assigned to a specific plan, while most
white-collar workers may choose among plans. In addition,
about 26 percent of the population earn incomes high enough
to allow them to opt out of the sickness funds and purchase
private insurance; over one-third of those eligible do so. Out-ofpocket payments in the sickness funds are very low. The sickness funds are financed primarily from payroll taxes, and premium rates can vary substantially according to the fund. General revenues are used to fund coverage for the nonworking
poor, who are insured through the sickness funds.
German physicians belong to regional associations that negotiate lump-sum budgets with the sickness funds. Individual
physicians are then reimbursed by the physicians' associations
on a fee-for-service basis, with the fees adjusted retroactively to
comply with the negotiated budget. Hospitals are paid operating costs negotiated between the hospitals and sickness funds
and pay the salaries of their staff physicians out of these operating costs* Hospital capital investments are mainly paid for
by State governments.
Germans make many more physician visits per year than
Americans, but the average visit is much briefer. Germans also
spend more days in the hospital, on average, than do Americans. The ratio of hospital staff to patients, however, is much
lower in Germany than in the United States, and Germany
does not have as much high-technology equipment. Physicians
spend, on average, more time with privately insured patients
than with those enrolled in the sickness funds, and hospitals
provide special facilities for these patients.

existing programs to finance health care for the poor. People no
longer bear most of the financial responsibility for their own health
care decisions; instead most Americans have relatively little exposure to the cost implications of these decisions.

EMPLOYER-PROVIDED BENEFITS
Large numbers of American employers first began offering
health insurance benefits to their employees during World War II.
During and after the war, Federal wage and price controls led businesses to expand nonwage benefits such as health care—which




123

Box 4~3.—United Kingdom

In the United Kingdom, the National Health Service (NHS)
finances and delivers health care. All residents are eligible to
receive care through the NHS, although a small but growing
private insurance market also exists. The NHS is financed primarily from general revenues and only very low copayments
are required for a limited number of goods and services.
Almost all physicians are employed by the government,
which also owns most of the hospitals. Office-based primary
care physicians who are part of the NHS are compensated in
part through payments for each patient, adjusted according to
the patient's age. Specialists are salaried and may only see
those patients who have been referred by a general practitioner.
Expenditures per person are much lower in the United Kingdom than in other developed countries. Health care in the
United Kingdom is characterized by a much lower level of high
technology and fewer physicians per capita than in Canada,
Germany, or the United States. There are long waiting lines for
many high-cost, nonemergency procedures, and physician visits
are very short.
were exempt from the controls—in order to attract workers. By
1960, private employers were paying for about 13 percent of national health care expenditures, and today, most Americans receive
health insurance benefits through their employers (Chart 4-2).

Tax Treatment of Benefits
Tax provisions that exempt employer-provided health insurance
from Federal and State income taxes encourage the spread of such
insurance. Employees do not pay tax on the share of their compensation that comes to them in the form of employer-paid health insurance. This preferential tax treatment is effectively a government subsidy. The amount of the subsidy depends on the worker's
tax rate: the higher the tax rate, the greater the subsidy. The
greater the subsidy, the more likely workers are to want a larger
part of their compensation in the form of health insurance.
Firms can increase the generosity of a health insurance package
by lowering deductibles (the fixed amounts that policyholders must
pay toward bills each year before any insurance payments are
made), copayment rates (the share of medical bills that must be
paid by policyholders), or the employee's share of premiums. Employers may also expand the range of services included in policies,
as they did during the 1980s, when an increasing proportion began
to offer vision and home health care benefits. Between 1972 and




124

Chart 4-1 Paying for Heaith Care Expenditures: 1960 and 1990
The share of health expenditures paid for out. of pocket has fallen substantially since 1960.

1980

1990

2%
21

0/

56°/c

32%

m

Out of Pocket \/\

Private insurers [jx*| Government

[ j Other

Source: Health Care Financing Admimstraiion.

1989 the total cost of all deductibles, copayments, and employeepaid insurance premiums remained almost constant as a share of
after-tax income, at about 5 percent, despite the sharp increase in
overall health care expenditures.
As tax rates have changed over time, so has the proportion of
health care expenditures funded by employer payments. In 1965,
when the marginal combined Federal tax rate of the median
worker (including the Federal income tax and the employee's and
employer's shares of the Social Security and medicare tax) was 17
percent, private employer contributions for private health insurance accounted for 14 percent of U.S. national health care expenditures. By 1982, when the combined marginal rate reached 38 percent, 21 percent of U.S. health expenditures were accounted for by
private employer contributions for private insurance. During the
1980s, the marginal combined tax rate of the median worker fell
(to 30 percent in 1990) and the share of national health care expenditures paid for by private employer contributions stopped
rising, remaining at about its 1982 level, although the dollar
amount of employer health care expenditures continued to increase.

125

334-230 0—92




5 (QL3)

Chart 4-2 Health Insurance Coverage
Most Americans receive health insurance through their employers.

59%

9%

^ 14%

Percent of population
by insurance provider
Note: Other includes, for example, privately purchased health insurance and the Department of Veterans
Affairs,
Sources: Department of Commerce and Congressional Research Service.

Employer-sponsored insurance is also exempt from State income
taxes in most States, but these taxes are not included in the above
figures. State income taxes currently range between 0 and 12 percent, so that for most people the entire tax subsidy is greater than
the Federal subsidy.
By not taxing benefits as income, the government is effectively
forgoing revenues that could be used to lower tax rates. If all the
health insurance benefits expected to be provided in 1993 were
counted as part of Americans' taxable income, the Federal Government would collect approximately $65 billion in additional revenues.
Insurance Costs and Money Wages
A firm's cost of health insurance must be passed along to someone—customers, owners, employees, suppliers, or some combination
of these groups. In most cases, employers are constrained in their
ability to pass along these costs to their customers, owners, and suppliers. In general when health insurance costs rise, firms must raise
the cash component of wages less than they otherwise would in
order to meet the higher health insurance costs.




126

Between 1973 and 1989, employers' contributions to health insurance absorbed more than one-half of workers' real gains in compensation. Much of the growth in compensation reported for the 1980s
took the form of higher health insurance premiums.
THE GOVERNMENT'S ROLE
Until the mid-1960s, the government's role in the provision and
financing of health care was limited primarily to prevention and
medical research. Some government health care spending continues to be targeted to these areas. The Federal Government spent
over $22 billion in 1992 on preventive health efforts, including
$594 million spent for AIDS prevention and $297 million for childhood immunizations. In 1990 the Federal Government spent about
$10 billion to fund medical research. Since the mid-1960s, the government has also taken an active role in providing health insurance.
Medicare
Medicare, a nationwide Federal health insurance program that
began in 1966 for people over 65 and for those with disabilities, is
comprised of a hospital insurance program and a supplementary
medical insurance program. Most Americans over the age of 65 are
eligible for medicare hospital insurance benefits, which they receive without paying a special premium. Some disabled persons
under 65 and most people who suffer from chronic kidney disease
are eligible for medicare hospital benefits.
Medicare hospital benefits cover all reasonable costs for 60 days
of inpatient hospital care per year, after a $676 deductible; days 61
through 90 are covered with a daily copayment of $169. In addition,
those insured through medicare have a 60-day lifetime reserve for
hospitalizations exceeding 90 days, during which they must contribute $338 a day toward the cost of their care. (These deductible and
patient payment amounts are for calendar year 1993.) Medicare
hospital insurance also provides limited coverage for posthospital
nursing services, home health care, and hospice care for the terminally ill.
Participation in the medical insurance portion of medicare is voluntary. For a monthly premium of $36.60, people 65 and over and
all others eligible for hospital benefits may purchase medical insurance. When the medicare program began, premium income financed half the cost of supplementary medical insurance but today
premiums cover only about one-quarter of the costs of these benefits and general tax revenues cover the remainder. Medicare medical insurance covers physician services, laboratory and other diagnostic tests, and outpatient hospital services. It generally pays 80
percent of the approved amount for each service with an annual
deductible of $100.




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Many medicare beneficiaries purchase additional private insurance, called medigap insurance, to cover deductibles and copayments that are not paid by medicare. In 1990, 77 percent of medicare beneficiaries had medigap insurance. Of these, some 44 percent purchased such insurance directly; another 40 percent were
retirees receiving medigap coverage through their former employers. For medicare recipients below the poverty level, another government program, medicaid (discussed below), provides this additional coverage. A recent change in Federal law requires that all
medigap insurance must cover all patient payments for hospital
and medical care except the deductibles. Purchasers of medigap insurance have relatively few out-of-pocket expenses for hospital and
physician bills. New medicare beneficiaries (those who have just
turned 65) are guaranteed the right to purchase medigap insurance
at the same rate regardless of their health status.
Medicaid
Medicaid is a Federal-State matching entitlement program that
provides medical benefits to low-income individuals including the
elderly, blind, disabled, children, adults with dependent children,
and some pregnant women. Eligibility for medicaid has been tied to
participation in the aid to families with dependent children (AFDC)
or supplemental security income program. In 1986, the Congress
extended medicaid coverage to pregnant women and children
under 6 whose family incomes fall below 133 percent of the Federal
poverty level. States may choose to cover all pregnant women and
all children under the age of 1 with family incomes of up to 185
percent of the Federal poverty level, and 29 States currently do so.
By 2002, the medicaid program will be required to provide coverage
for all children under 18 whose families are below the Federal poverty line.
For some senior citizens whose incomes are below the poverty
line and who receive medicare benefits, medicaid pays deductibles
and copayments for physician and hospital expenses. Medicaid also
covers long-term nursing home care: some 25 percent of all medicaid expenses in 1987 were for nursing home care for those over 65.
Each State administers its own medicaid program according to
Federal eligibility guidelines. The Federal Government contributes
50 percent of the State's administrative costs and a percentage of
the medical expenses based on a matching formula that gives more
money to poor than to wealthy States. The Federal share of medicaid costs ranges from a low of 50 percent to a high of 79 percent.
Federal law mandates that medicaid beneficiaries can be required
to pay only small copayments.
In 1990, 25.3 million persons received medicaid benefits. Expenditures for the aged, blind, and disabled, who account for only 27 per-




128

cent of the caseload, made up about 70 percent of the outlays. Dependent children accounted for only 14 percent of medicaid outlays.

RECENT CHANGES IN THE PROVISION OF CARE
Until the late 1970s, most providers of health care in the United
States were paid using a system called retrospective reimbursement that paid for each service provided, encouraging providers to
increase their services. Hospitals and physicians had incentives to
counsel patients to accept more and costlier treatments, and insured patients had little reason to question these recommendations
because services were paid for largely by insurance. Physicians and
hospitals competed for patients by improving the quality of their
services, driving up prices.
During the 1980s, some attempts were made to control expenditures by encouraging physicians and hospitals to compete in ways
that keep costs down. Competition among insurers led to an increase in the use of innovative payment methods that, in turn,
have begun to create an environment in which competition among
providers may lead to lower health care costs.
Institutional Responses: Capitation and Coordinated Care
Under retrospective reimbursement, insurers paid physicians
and hospitals for the costs of services after the fact. There were few
restrictions on payments, and providers had little reason to compare the costs and benefits of services for insured patients. Insurers
using the retrospective reimbursement system responded to rapidly
rising expenditures by reviewing physician behavior more closely.
This oversight has taken different forms, including increased monitoring, or case management, for more costly cases (a procedure
used by an estimated 67 percent of employers in 1991) and requirements that patients seek a second opinion before undergoing surgery (used by about 49 percent of employers in 1991).
As health care expenditures rose during the 1970s and 1980s,
however, insurers also experimented with alternative reimbursement strategies that would create incentives to control expenditures while ensuring quality care. One major innovation was the
expansion of coordinated care programs that use capitation-based
reimbursement and direct review of the utilization of medical and
hospital services (Box 4-4).
Under capitation-based reimbursement, physicians receive an
annual payment for each patient in their care, regardless of the
services a patient uses during the year. Coordinated care organizations, which include health maintenance organizations (HMOs) and
preferred provider organizations, often use the capitation system to
pay providers. By 1990, 33 million Americans were receiving care
through HMOs, over 5 times as many as had 15 years earlier.




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Box 4*4,—Coordinated Care

The term "coordinated care" describes a variety of arrangements that increase coordination and management of health
care services. The best-known form of coordinated care is the
HMO, which provides its services through a single group of
doctors and other health care providers. Individuals enrolled in
an HMO pay a specific annual fee, regardless of the services
they receive, although a small copayment is sometimes
charged for services.
Another popular form of coordinated care is the preferred
provider organization, which contracts with a group of providers who are reimbursed for services based on a negotiated fee
schedule. Preferred provider organizations usually incorporate
programs to monitor the use of services to ensure that physicians do not offset lower fees with increased volume.
Coordinated care programs have been shown to reduce expenditures while maintaining the quality of care. Some studies
have found that coordinated care programs reduced the cost of
care by as much as 30 percent.
Although coordinated care has become increasingly common
in the private sector, it has not been as popular in public insurance programs. Medicare began entering into contracts
with HMOs in the mid-1980s. Because medicare beneficiaries
have few incentives to join HMOs, however, very few have
done so. Congressional restrictions on the use of coordinated
care by State medicaid programs have impeded the growth of
such arrangements for medicaid recipients and fewer than 10
percent of medicaid beneficiaries currently receive care
through these arrangements.
These innovations, which have occurred largely in the private insurance market, have reduced health care expenditures while offering health care that is at least as good as that of traditional retrospectively reimbursed medicine. In fact, capitation-based payment
gives physicians a financial incentive to invest in preventive care,
because they benefit financially when their patients remain
healthy. Studies show that costs have risen more slowly in health
care markets where there is vigorous competition among many coordinated care providers.
Diagnosis-Related Groups
In an effort to control rising hospital expenses, which make up
the bulk of medicare payments, the Federal Government in 1983
replaced the existing retrospective payment system with a prospec-




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tive payment system. The new system reimburses hospitals with a
fixed amount for each patient based on the patient's diagnosis,
rather than on the services provided. A medicare patient admitted
to a hospital is now classified as belonging to one of 470 diagnosisrelated groups (DRGs) that form the basis for payment.
In principle, hospitals could compete to offer care for a particular
DRG at the lowest price. The medicare program, however, has set
fees for each DRG, limiting the opportunities for price competition
among hospitals. Payment for each DRG is based on the average
cost of treatment but may vary according to region and type of hospital. Hospitals that can provide care at less than the average cost
profit from this system.
Hospitals have responded to the new incentives the DRG system
provides. The length of the average hospital stay has fallen significantly. A study that compared hospital costs under DRGs with estimates of what costs would have been without DRGs suggests that
the system led to a one-time decline of about 20 percent of the cost
of hospital care paid for by medicare. The DRG system may also
slow increases in expenditures by removing the incentive that operated under retrospective reimbursement to add costly services. Finally, a substantial amount of evidence suggests that the DRG
system has not reduced the quality of care medicare patients receive, even though it provides hospitals with an incentive to limit
the services provided to a patient with a particular diagnosis.
The Resource-Based Relative Value Scale for Paying
Physicians
In response to the increases in physician expenditures during the
1980s, the medicare program in 1992 began implementing a new
fee system for physicians. The old system had reimbursed physicians the customary fee, a practice that could lead to cost spirals. If
one physician raised fees, the average would rise, and this increase
could be included in the next fee schedule.
With the new resource-based relative value scale, the Federal
Government sets the fee medicare pays for each service according
to the complexity and duration of the treatment. The current scale
has greatly increased the reimbursement for evaluative functions
and reduced the reimbursement for surgery.
Unfortunately, the method used to determine the new fee schedule may not be sound. Theoretically, fees should reflect not only
time and effort but also demand for the service and the willingness
of physicians to perform it. Unless a fee schedule takes into account these fundamental economic forces, it is likely to lead to
shortages and surpluses in particular specialties, especially those
with changing technology.




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SUMMARY
• Improvements in technology and behavioral changes have led
to significant improvements in Americans' overall health.
Americans are living longer, healthier lives, free from many
life-threatening illnesses. Many serious problems have developed, however, including AIDS and a recurrence of tuberculosis.
• The government's share of total health expenditures has increased and the share of patient out-of-pocket spending in total
health expenses has been falling. People have much less responsibility for the financial consequences of their health care
decisions than they did thirty years ago.
• Most Americans are insured through their employers. Employer-provided insurance benefits have increased dramatically
since World War II, in part because such benefits are excluded
from employees' taxable income. Employees pay for increases
in health care costs mainly through lower wages. Individual
expenditures for deductibles, copayments, and insurance premiums remained roughly constant as a share of after-tax
income between 1972 and 1989.
• Insurers have responded to cost increases with innovative
changes in the financing of care, moving away from fee-forservice, retrospective reimbursement of independent providers
to prospective, capitation-based reimbursement of networks of
providers.

RISING EXPENDITURES, DECLINING INSURANCE
COVERAGE
The impetus for health care reform is driven by two concerns:
the rapid rise in health care expenditures and the increasing percentage of Americans who lack health insurance.
TRENDS IN HEALTH CARE EXPENDITURES
Chart 4-3 shows the change in spending on health care since
1960. Some increases were due to the expansion of health insurance benefits through the establishment of the medicaid and medicare programs in the mid-1960s. Health care spending has continued to escalate since then.
Studies that examine patterns of health care spending across
countries show that the share of income countries devote to health
care usually rises with national income. Health expenditures in the
United States are no exception. Expenditures rose more quickly
than incomes between 1960 and 1990, from 5 percent of gross national product (GNP) in 1960 to 12 percent.




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Chart 4-3 Real Per Capita Health Care Expenditures
Real per capita health care expenditures have been rising at an average annual rate of 4.6
percent since 1960.
1990 dollars
3,000

2,500

-

2,000

-

1990
$2,566
Per Capita Health Care^
Expenditures

1,500

1,000

500

I
I
_L
1960
1965
1970
1975
1980
1985
Note: Expenditures are deflated by nonmedical care component of CPI-U. Growth rate of log trend
is 4.6 percent per year.
Sources: Department of Labor and Organization for Economic Cooperation and Development.

_L
1990

Health expenditures are not greatly affected by short-term
changes in economic conditions. Health care costs often continue to
grow during economic downturns, so that the share of national
income devoted to health care may rise during a recession and fall
when prosperity returns.
HEALTH CARE EXPENDITURES IN OTHER DEVELOPED
COUNTRIES
America is not alone: Germany, the United Kingdom, Canada, and
other industrialized countries all experienced large increases in
health care spending between 1960 and 1990. As Chart 4-4 shows,
spending in Germany increased rapidly between 1960 and 1980, but
slowed sharply in the 1980s. In Canada, the United Kingdom, and
the United States, expenditures increased rapidly in all three decades. Although outlays for health care have increased substantially
in all four countries, per capita health care spending in the United
States has historically been considerably higher than in the other
three countries. The United States currently spends about 1.5
times as much on per capita health care as Canada, about 1.7 times




133

as much as Germany, and about 2.6 times as much as the United
Kingdom.
Chart 4-4 Growth in Real Per Capita Health Care Expenditures in Selected Countries
Other countries have also experienced substantial increases in health care expenditures
since 1960.
Percent change per year
7

1960-70
^

Germany | |

1970-80
United Kingdom

|^/j Canada ^

1 980-90
United States

Note: Expenditure in national currency deflated by GDP price indexes for all items.
Source: Organization for Economic Cooperation and Development.

The rapid growth in health care spending in the United States,
Canada, Germany, and the United Kingdom is somewhat surprising because these countries have very different systems of health
care financing and provision. As health care expenditures continue
to increase, each of these countries is considering health care
reform. In some cases, these reform proposals include incorporating
features of U.S. health care financing and provision. The United
Kingdom and Canada have been experimenting with coordinated
care systems, the United Kingdom has been developing versions of
DRGs, while Germany has been increasing the use of patient copayments.

THE UNINSURED
Besides rising costs, the other major problem in U.S. health care
has been the increasing number of Americans who lack insurance—over 35 million people, according to current estimates. Because so many Americans receive health insurance through their
employers, the percentage of Americans without health insurance
is affected by changes in employment. The number of uninsured,




134

however, increased during the 1980s, even during periods of economic growth.
Who Are the Uninsured?
Although medicaid covers many of the very poor, about 47 percent of those with incomes below the poverty line, the probability
of being uninsured is highest among those with low incomes. As incomes rise, so does the probability of having health insurance.
Those in the 18-35 age group are more likely to be uninsured
than those of other ages. These young adults, most in good health,
may have been covered previously by their parents' health insurance. Young adults who work are more likely than other workers
not to accept health insurance coverage even when their employers
offer it, and young adults who lose their jobs are the least likely to
pay to retain their health insurance.
Most uninsured people report that their health is good or excellent relative to others of the same age. The population of uninsured Americans, however, also contains a group that is much
sicker than average, with serious chronic health conditions. The
chronically ill, who are very likely to incur high health care costs,
may find it very costly to obtain insurance.
Other Problems with Insurance Coverage
Health insurance is also a concern for people with limited insurance coverage and for those whose insurance ties them to a specific
employer. Some people with insurance are susceptible to large outof-pocket expenses, either as copayments or for services that their
insurance does not cover. Estimates from the mid-1980s suggest
that 7 percent of privately insured Americans under the age of 65
face a 1-percent chance of spending at least one-fifth of their family
income on health care. Over 20 percent of those over 65 have not
purchased supplementary medigap policies that cover medicare copayments and do not qualify for medicaid; they also may be subject
to substantial financial burdens if they become seriously ill.
Those whose health insurance ties them to a specific employer
face a different problem. Most private health insurance contracts
contain preexisting condition clauses limiting or excluding coverage for conditions that began before the policy went into effect.
These restrictions can force people with chronic conditions to stay
with one job when they would prefer to move to another. Even
those without chronic conditions may avoid changing jobs because
they prefer to stay with one insurer. A recent survey found that
over 25 percent of American households included a family member
who stayed in a job because of health coverage.
Gaps in Employer-Provided Health Insurance Coverage
Although not having a job greatly increases the probability that
an individual is not insured, the majority of uninsured Americans




135

are workers or their dependents. Workers may lack health insurance because their firm does not offer it, because they do not work
enough hours to qualify for benefits, or because they have been offered insurance and have chosen not to take it. While almost all
large firms in the United States offer health insurance to their
workers, small firms are far less likely to do so (Chart 4-5).
Chart 4-5 Employer-Provided Health Insurance, by Firm Size: 1990
Employees of large firms are much more likely than employees of smaller firms to have
health insurance.
Percent of employees
100

Fewer than 25

25-99
100-499
500-999
Firm size by number of employees
Note: Data for persons aged 18-64.
Source: Employee Benefit Research Institute.

1,000 or more

Three factors affect the ability and willingness of small firms to
provide health insurance. First, the administrative costs of health
insurance per employee rise rapidly as the size of a firm declines.
Second, small firms are less able to self-insure their health insurance coverage—that is, pay expenses from their own funds rather
than contracting with a commercial insurance company. About 65
percent of all firms self-insured the health costs of their employees
rather than purchasing commercial insurance in 1991, but only 41
percent of firms with fewer than 500 employees self-insured their
costs. Because small firms often purchase State-regulated commercial insurance, they incur costs associated with State-mandated
benefits (for example, coverage for chiropractic services) and pay
State insurance premium taxes. These mandates can be quite
costly and may affect the probability that a small employer will
offer insurance. Self-insured plans, on the other hand, are exempt-




136

ed from providing State-mandated benefits and paying State premium taxes under the Federal Employee Retirement Income Security
Act (ERISA). Third, risk-spreading, which keeps costs down by pooling the cost of possible serious health problems among a large
group is more difficult in smaller firms. When one employee of a
small enterprise becomes seriously ill, the cost of premiums for the
entire group increases much more than it would in a larger group.
This last observation is a matter of concern. The purpose of insurance should be to spread risk so that premiums do not increase
in small groups when an employee becomes ill. To improve riskspreading, small firms could purchase health insurance policies
that remained in force for 5 or 10 years, rather than the 1-year
contracts that are now customary. High employee turnover rates
and high business failure rates in small firms, however, may make
it costly for insurers and firms to make such contracts. Furthermore, continuing changes in medical technology may make it risky
for insurance companies to offer long-term contracts.
Firms are considerably less likely to offer health insurance to
their part-time employees than to their full-time employees, mainly
because coverage for a part-time employee costs as much as it does
for a full-time employee and accounts for a much higher share of
part-time workers' total compensation.
HOW THE UNINSURED USE HEALTH CARE SERVICES
Those who lack insurance do not necessarily forgo all health
care. They may pay for care directly or may receive it for free, primarily through hospitals. In 1989, U.S. hospitals provided over $10
billion worth of free, or uncompensated, care. People without
health insurance do use less health care than those with similar
health problems who are insured, however.
People without health insurance are far more likely than those
with insurance to report that they did not receive health care
during an illness because of financial constraints. Those who do
seek care are more likely to receive it in inappropriate and costly
settings such as emergency rooms. The uninsured are likely to be
sicker when they are admitted to a hospital; they are also likely to
be discharged from the hospital earlier than their insured counterparts.
New estimates suggest that out-of-pocket health expenditures
among the uninsured are lower than they are among insured
people with similar incomes and are far less than the cost of purchasing a basic health insurance policy. Some uninsured people
may be consciously choosing to rely on emergency room care and
personal savings rather than purchasing costly health insurance
coverage.




137

RECENT CHANGES IN THE NUMBER OF UNINSURED
Many of the uninsured are unemployed. Although the Consolidated Omnibus Budget Reconciliation Act allows those who leave
jobs to continue their coverage for up to 18 months through their
employer's health care plan by paying the full cost of the premium,
only about 20 percent of those eligible do so. Structural changes in
the American labor market have also affected insurance coverage.
Workers are most likely to be covered by health insurance if they
are unionized or employed in the manufacturing sector. But employment in manufacturing fell from 23 percent to 18 percent of
total employment during the 1980s, while the fraction of private
sector workers represented by a union fell from 19 percent to 13
percent between 1983 and 1991.
These changes in the composition of the labor force, however, explain only a small percentage of the increase in the number of uninsured. As health insurance becomes more costly, more people
may find it makes sense for them to seek higher wages rather than
health insurance from their employers, relying instead on emergency care.
Low-Wage Jobs and Health Insurance
For employers offering jobs at low wages, increases in the cost of
health insurance make it especially difficult to offer coverage.
These employers cannot lower wages to help pay for health insurance, because wages would then fall below the legal minimum.
Studies suggest that, in 1989, about one-third of all uninsured
American workers earned wages which, if reduced by the cost of
health insurance, would fall below the legal minimum. Requiring
employers to provide these workers with health insurance is likely to
lead to increased unemployment among low-wage workers.

SUMMARY
• Spending on health care has been rising steadily, both in absolute terms and as a share of national income. Since 1960,
spending on health care has also risen rapidly in other developed countries, but the per capita cost of health care is much
higher in the United States than in other developed countries.
• The number of uninsured has increased recently. Part of this
increase is due to the economic slowdown, while part is due to
a long-term decline in employer-sponsored health insurance.
• The uninsured are poorer and younger, on average, than the
insured. Although most are in good health, some are chronically ill. The uninsured do receive some health care, but they receive less than those with insurance and often receive care in
emergency rooms. Out-of-pocket health expenditures among




138

the uninsured are lower than among insured people with similar incomes.
• Many of the uninsured are workers employed by small firms.
A substantial fraction of uninsured workers earn wages which,
if reduced by the cost of health insurance, would fall below
minimum wage. Requiring employers to provide insurance to
these workers would lead to increased unemployment.

ECONOMIC THEORY OF THE HEALTH CARE
MARKET
Economic analysis can help explain much of the recent perf6rmance of the American health care market and the problems that
have emerged. Providers and purchasers of health care services respond to the incentives and restrictions they face, which stem from
both the nature of health care itself and the way it is financed and
delivered.

PROVIDING HEALTH CARE SERVICES
Two features of health care provision have significant implications for costs. First, it is difficult for consumers to evaluate the
quality of health care services. They rely on the advice of the provider of the service in deciding what to buy. While the lack of independent information is not unique to the health care market (car
owners may rely on mechanics), it can lead to the unwitting purchase of unnecessary, poor quality, or high-cost services.
Second, to protect consumers from unscrupulous or incompetent
providers, licensing boards in every State regulate those who work
in health care. The licensing procedure can increase the price of
services by restricting the number of providers and limiting the
ways that they may compete.

PROBLEMS OF MEASURING QUALITY
Physicians have much more information about treating a particular illness than their patients do. Patients may find it difficult
to evaluate their treatment; if they get better, they may not be
able to tell whether they have enjoyed a natural recovery or especially effective treatment. Lack of information can make it difficult
for people to make decisions about purchasing health care. A physician could charge a low fee either because the services are provided
in the most cost-saving way or because they are not performed
properly.
People have tried to overcome this problem by evaluating a primary care physician—asking for recommendations from friends,
for example—and then accepting the primary care physician's
advice on further treatment. But friends may not be able to assess




139

quality accurately; their advice may be particularly deficient in
evaluating the services of a group of doctors in a coordinated care
organization.
Information about provider quality is especially important because of the enormous variation in the way American doctors treat
patients with similar problems. For example, rates of use of some
discretionary procedures, such as tonsillectomies, can be ten times
as high in one county as in a neighboring county with a similar
population. In many cases, the use of such procedures deviates substantially from what experts recommend. Rates of mortality for patients with similar problems also differ considerably among hospitals.
These variations suggest that if consumers could better evaluate
their care, the quality of care could be improved substantially and
costs could be reduced. Physicians and hospitals that offer low-quality care at high prices would face stronger incentives to improve
quality and reduce costs.
Improving the Quality of In formation
Without a reasonably accurate way to measure quality, health
care plans, hospitals, and providers have a difficult time competing
on the basis of the price of services they offer. But developing such
information may not make economic sense for any single health
care provider or insurer, since setting up a system of gathering and
disseminating information would be costly and, once developed,
might well be copied. The tax treatment of employer-provided insurance and the government's growing role in health care provision have also limited the incentives for private insurers and providers to develop ways to compete by providing high-quality, lowcost care.
Despite these impediments, insurers and employers have recently been working together to develop systems for measuring the
quality of health care provided. The Federal Government has
launched a major initiative with the publication of mortality rates
(adjusted for the severity of patient illness) for medicare patients in
U.S. hospitals. A variety of other groups are providing information
in health care markets, including a group that publishes an annual
guide to Washington-area Federal employee health plans; the
Pennsylvania Health Care Cost Containment Council, which publishes information about hospital charges and mortality rates; and
a group of employers in Cleveland that sponsors the Cleveland
Health Quality Choice Project, which is developing measures to
compare the quality of care in Cleveland-area hospitals.
THE SUPPLY OF PROVIDERS
In many industries, costs rise when the necessary skilled personnel and materials are in short supply. In most cases, such short-




140

term shortages cause wages to rise, attracting new supplies of
skilled workers. Shortages and the high wages that they produce
are unlikely to persist over time. High physician incomes might
persist, however, without leading to an increased supply of doctors,
because the medical profession can, to some extent, regulate the
number of new physicians receiving licenses each year.
In the past, physicians' associations have also kept doctors from
competing on the basis of price. Until 1982, these organizations restricted their members' ability to advertise services. For many
years, professional associations controlled the types of fee arrangements that doctors could accept, stifling the growth of coordinated
care. These problems are less serious today. The number of practicing doctors has increased greatly and the profession's ability to
limit price competition has declined.
HEALTH INSURANCE
The need for health care depends, in part, on somewhat unpredictable and costly events, such as a serious illness or accident.
People can respond to the risk of such possibilities by self-insuring,
or saving money to pay for potential expenses; by investing in preventive health care; or by purchasing health insurance.
Insurance is most valuable when it protects people against uncertain events that carry a high risk of substantial financial loss.
Thus, early insurance plans were set up to cover costly hospital expenses. By 1960, insurance covered most hospital care, but people
generally paid for other services themselves. In recent years, however, insurance coverage has expanded to cover other services. The
share of out-of-pocket expenses for relatively predictable and inexpensive services (such as physician services, dental care, and pharmaceuticals) has been declining steadily (Chart 4-6).
Insurance can Lead to Overconsumption of Services
All insurance, whether privately or publicly provided, affects the
incentives of the insured. Because they are protected against the
full cost of a serious illness or injury, the insured have less incentive to take steps to limit the losses associated with such events.
The change in incentives that results from the purchase of insurance is known by economists as "moral hazard." To economists, the
term carries no connotation of dishonesty.
Moral hazard typically refers to a reduction in the incentive to
avoid undesirable events. For example, people insured against car
theft may leave their doors unlocked, increasing the chance that
their cars may be stolen. People with health insurance may be just
as careful as the uninsured about avoiding health risks, but they
also respond to the incentives produced through insurance by using
more health care services. They are likely to go to the doctor more
often and choose more complex procedures. Among health econo-




141

Chart 4-6 Share of Health Care Expenses Paid Out of Pocket
The share of expenses paid out of pocket varies considerably among services but has been
declining since 1960 for all services.
Percent

Physician
1960

|

1970

Source: Health Care Financing Administration.

mists, the term moral hazard has come to include this incentive for
the overconsumption of health care services, which adds to total
health care costs.
Studies suggest that the overconsumption of services due to
moral hazard is an important factor in rising health care costs.
One study in the 1970s gave one group of randomly selected families health insurance policies that provided them with full insurance for all health care services and another group a catastrophic
health insurance plan and a corresponding cash payment (for example, a health insurance policy with a $1,000 deductible together
with a cash payment of $1,000). Although both families were equally well indemnified, those who were fully insured used nearly 30
percent more services than those with the catastrophic insurance
plan. According to most measures of health status, families in both
groups were equally healthy at the end of the 3 to 5-year experiment.
Responses to Moral Hazard
Because people with insurance pay less than the full cost of insured services, moral hazard suggests they may use services that
they would not have chosen to purchase if they had to pay the full




142

cost. But by using these additional services, policyholders drive up
the cost of insurance. Ultimately, they pay the full expected cost of
these additional services through higher insurance premiums. Yet
many consumers would prefer less expensive insurance policies
that encourage them to use only those services that they value
most highly.
Insurers have two well-known ways to limit the potential response to moral hazard in their policies and keep premium costs
down. Traditionally, they have required those with insurance to
pay for part of their services through deductibles and copayments.
Even with deductibles and copayments for a particular service,
however, the price an insured patient pays for services will generally be less than the full cost.
Another response to moral hazard involves monitoring policyholders to ensure that they are taking appropriate preventive
measures and to cap the services that they can use if an illness or
injury occurs. By monitoring services and encouraging preventive
care, the insurer can try to restrict the policyholder to only those
services that are worth their full cost. Coordinated care organizations take this approach. These organizations typically charge low
copayments and deductibles but closely monitor the utilization of
health care services among those who are ill and often provide free
preventive care services. Conventional insurers have also begun to
adopt these monitoring practices, for example, by requiring a second
opinion for surgery.
Using Private Information in Purchasing Insurance
People usually know more than insurance companies about their
own health and their need for health care services. This asymmetry of information has important implications for the health insurance market. An insurer charges a premium based on the average
need for health care services. For those who anticipate that their
need for health care services will be higher than average, health
insurance is a bargain. But those who anticipate that their need for
health care services will be below average may find health insurance a poor investment. They may choose to pay for their health
care themselves or to purchase a health insurance policy with very
high deductibles and copayments. This process is known as adverse
selection.
If those at low risk drop out of the health insurance market, the
average premiums for the remaining purchasers will rise. In
theory, if the adverse selection process continues, the market for
insurance may disappear altogether as healthier people decline increasingly expensive insurance. Alternatively, people may sort
themselves into high- and low-risk groups and purchase different
kinds of insurance. If this occurs, those at high risk will purchase
comprehensive health insurance plans and face premiums that re-




143

fleet the full costs associated with their true health status. Low-risk
individuals will purchase less comprehensive insurance, paying low
premiums that reflect both the type of plan they purchase and their
health status.
Economic theory suggests that adverse selection can lead to
lower levels of health insurance coverage for the relatively healthy.
Studies also support this finding. Among firms offering multiple
health insurance plans, premiums for comprehensive coverage are
much higher than premiums for plans with high deductibles and
copayments. These higher premiums are not fully explained by the
fact that comprehensive plans offer additional services or by the
effects of moral hazard. Rather, evidence suggests that those who
choose the comprehensive plans are in poorer health than those who
choose plans requiring high out-of-pocket payments.
The theory of adverse selection can also explain some characteristics of the uninsured. For example, the uninsured appear to have
a low propensity to use medical services. When currently uninsured people obtain insurance, they use, on average, fewer services
than those who are continuously insured.

CONCERNS OVER THE DISTRIBUTION OF MEDICAL
RESOURCES
Asymmetries of information, whether between insurers and policyholders or providers and patients, can cause problems in the
health care market. Consequently, some people will not be able to
purchase insurance, and some patients willing to pay for better
care will not be able to find it. But even if these asymmetries could
be eliminated, health care would still be costly. Some Americans,
especially those who are poor or who have chronic health conditions, would still find it very difficult to purchase health insurance.
Risk Selection
Private insurers compete to offer people the lowest price for
their health coverage. One way to offer a better bargain to people
with lower-than-average health risks is to adjust the price of insurance offered to them to reflect only the cost of the health services
they can be expected to purchase. If insurers can observe the risk
characteristics of those they insure, they can charge these low-risk
people low premiums. People at high risk would be charged high
premiums that reflect all the costs they could be expected to incur.
People with chronic health conditions may be excluded from
commercial health insurance coverage due to preexisting condition
clauses. If they are able to find coverage, they are likely to be
charged very high rates that correspond to their expected health
costs. Ironically, improvements in diagnostic and management
technology may make it even harder for some people to obtain




144

health insurance, as insurance companies become better able to diagnose and screen out those with chronic health problems.
If insurers are required to charge all purchasers of health insurance in a community the same premiums (a practice known as community rating), they are prevented from responding to even readily
observable health characteristics by raising or lowering prices. Yet
these insurers will still try to compete by offering low prices to those
at low risk. They may do this by directly refusing to provide coverage to those at high risk, a practice called risk selection. Alternatively, they may use adverse selection to their advantage, selling
low-priced insurance contracts with restricted services or high copayment rates that appeal to those at low risk but would not be chosen
by those at high risk.
Health Care for the Poor and III
The unequal distribution of health care is an important policy
concern. Most Americans believe that everyone should be entitled
to at least basic health care, regardless of income or health status.
This belief distinguishes the health care sector from most other
parts of the U.S. economy and explains why charitable organizations have always played an important role in health care. Public
and voluntary hospitals continue to provide, to some extent, a
health care safety net that ironically causes other problems in the
health insurance market.
First, because this safety net operates principally through hospital emergency rooms, most of the uninsured receive care only when
their conditions are quite serious, although more effective care
could often be provided earlier in the course of their illness. Furthermore, providing emergency care through hospitals is likely to
be much more costly than providing preventive care in an outpatient setting.
Second, although most Americans agree that everyone should receive basic health care, the safety net does not force all Americans
to share the burden of this care equally. Instead, the costs may fall
on those who use hospitals that charge high fees to paying patients
in order to cover the cost of the uninsured.
Finally, the existence of the safety net may discourage some
people from purchasing health insurance, especially those with serious health conditions who must pay very high premiums and
those in very good health who do not expect to use services at all.
For these people, remaining uninsured may be better than purchasing insurance because they know that they will not be turned
away if and when they need care.
Unfortunately, programs that help low-income people purchase
health insurance can also have some undesirable effects. As family
incomes rise, support under income-tested health programs is
phased out. As with similar provisions in other government pro-




145

grams (such as aid to families with dependent children), this phaseout means that poor families may face a very high marginal "tax"
rate. Small increases in their income are accompanied by large reductions in the value of the health care and other support they receive. Such high taxes may discourage people from trying to increase
their incomes.
SUMMARY
• A lack of information may lead patients to spend money on
services they might not choose if they were fully informed. Private and public initiatives are underway to improve the quality of health care information.
• Health insurance reduces the price of health care services for
policyholders. Thus it can lead to the overconsumption of
health care—that is, the use of services whose full costs exceed
their benefit to the consumer.
• When policyholders have more information about their own
health status than do insurers (or than insurers are permitted
to use), adverse selection—which may cause the healthiest
people to opt out of the health insurance market—may occur.
• The existing safety net for the uninsured is problematic. The
uninsured receive insufficient and often inappropriate forms of
care and have few incentives to purchase insurance.

WHY ARE HEALTH CARE EXPENDITURES
INCREASING?
An economic analysis of the structure of the U.S. health care
market can help to explain why health care expenditures have
risen so sharply. The tax subsidy for health insurance has encouraged employers to provide employees with coverage that includes
very low copayments and deductibles and covers relatively predictable and inexpensive services. Most people covered by government insurance programs (medicare and medicaid) also make
low out-of-pocket payments. Although substantial out-of-pocket payments are required in the medicare program, most beneficiaries
have medigap policies that cover many of these costs. Out-of-pocket
payments for health care as a share of all health expenditures
have been falling, reducing the incentive for consumers to limit
their use of health care services. For example, studies show that, at
current levels, medigap insurance increases health care utilization
by up to 24 percent.
The open-ended nature of health insurance contracts means that
most new nonexperimental technologies will be covered by existing
policies. As a result, expensive new technologies covered by insur-




146

ance may be introduced before consumers would otherwise be willing to pay for them, further contributing to the escalation of costs.
PRICES AND QUANTITIES OF HEALTH CARE
The Health Care Financing Administration, the Federal agency
that administers medicare and medicaid, has developed a price
index for personal health care expenditures that measures the cost
of all health care services, regardless of who pays for them. Dividing total spending on health care by this price index produces a
composite measure of the quantity of the various health care services people consume, including physician visits, hospital care, and
drug purchases.
Two factors affect the price index: changes in the economy's general inflation rate and deviations in the price of health care services from the general rate of inflation. Table 4-1 provides measures
of changes in total health care expenditures and divides these into
changes in economywide prices, real health care expenditures,
health care prices in excess of economywide inflation, and quantities of health care consumed.
TABLE 4-1.—Average Annual Percent Change in Personal Health Care Expenditures
Per Capita, Prices, and Quantities: 1960-90
1960-70

Item

1970-80

1980-90

1) Personal health care expenditures per capita

9.2

11.9

2) MINUS:

2.2

6.2

4.6

6.9

5.4

4.4

1.7

1.6

2.3

5.1

3.8

2.2

Economywide inflation

3) EQUALS: Expenditures per capita corrected for inflation
4) MINUS:

Health care price increases in excess of inflation....

5) EQUALS: Quantity of health care per capita

9.2

Note.—Columns do not sum both because of rounding and because the price-quantity interaction terms have been omitted.
Source: Health Care Financing Administration.

This price index for health care expenditures, like other price indexes, is constructed by examining the cost of a basket of commodities or services over time. The personal health care price index
basket includes hospital care, physician services, drugs, and other
health-related products. The index reflects changes in the cost of
this broad basket, not the price of a particular service provided by
a hospital or physician.
The price index does not adequately reflect improvements in the
quality of the commodities or services, which usually appear as
price increases. For example, total expenditures for a hospital day
go up if the number of nursing visits made during that hospital
day increases. While such a change implies that the quality of a
day in the hospital has improved, it appears only as an increase in
the health care price index. An alternative way to measure
changes in health care expenditures is described in Box 4-5.




147

Box 4-5.—Measuring Changes in Health Care Expenditures
Measures of the cost of health care often fail to account for
changes in quality. An alternative method for measuring
health care costs, proposed in a 1962 study, suggests a way of
overcoming this problem by measuring the cost of treating a
particular ailment over time. For example, the study compared
the cost of treating an ear infection in 1971 to the cost of treating an ear infection in 1981 (in real dollars, the cost fell). The
study also suggested that the costs of treatment should be adjusted to reflect higher cure rates.
Why isn't this more appropriate method in wider use? One
reason is that it is computationally very difficult to measure
the full cost of treating an ailment. Moreover, even this
method does not capture all the changes that may have been
made in medical technology. Important advances in health
care have not only improved the technology for treating some
diseases but, in many cases, reduced their overall incidence. At
the same time, diseases exist today that were unknown in
1960. Even this modified method does not reflect the full effect
on costs either of improvements that reduce the incidence of
disease or of new diseases.
RECENT INCREASES IN HEALTH CARE
EXPENDITURES
U.S. health care expenditures have risen continuously since the
1960s, not only because health care prices have gone up but because Americans are using more services. In the 1980s, real health
care spending grew more slowly than it had during the preceding
two decades. Growth was split evenly between increases in the
quantity of health care consumed (2.2 percent annually) and increases in the health care price index in excess of general inflation
(2.3 percent annually) (Table 4-1).
Economic theory suggests that when prices rise people usually
consume less of a good or service. Yet the price of health care and
the quantity purchased rose in tandem during the 1980s (as well as
in earlier decades). These concurrent increases in price and quantity are consistent with the view that the quality of health care
changed during the 1980s. Consumers in 1990 were probably not
buying more 1980-style health care at 1990 prices; rather, they
were willing to pay more for 1990-style health care than they had
been willing to pay for 1980-style health care. The changes that
were measured in quantity and price hid underlying changes in
quality.




148

The quantity of health care services consumed increased primarily because of greater use of outpatient and physician care in the
1980s. The growth rate of inpatient hospital spending declined between 1982 and 1986, largely because of changes in the system of
medicare reimbursement. Although inpatient hospital services are
now paid prospectively, outpatient services for medicare continue
to be paid on a less constraining retrospective basis, giving hospitals a considerable incentive to move procedures from an inpatient
to an outpatient setting.
The health care sector responded in a flexible and rapid way to
this changed incentive. In 1980 only 16 percent of surgeries in
short-stay hospitals were performed on an outpatient basis, but by
1989, 49 percent were conducted on an outpatient basis. The potential for such responses needs to be taken into account in the development of health policy.
COMPONENTS OF PRICE INCREASES IN THE 1980s
The health care price index increased throughout the 1980s.
Price increases measured were due, in part, to increased use of expensive technologies and to changes in the cost and types of labor
used in health care. As insurers and providers competed by offering more generous coverage, technology, and high quality care,
costs rose.
Physician Costs in the 1980s
In the late 1980s, physician costs rose more rapidly than other
major components of health care spending, in part because of an
increase in the use of outpatient diagnostic and treatment facilities, some of them owned by physicians. Studies suggest that physicians order more tests when they own a share in diagnostic and
treatment facilities. These private facilities may be more convenient, but physicians may also be motivated by the incentives created by the traditional insurance system, which pays physicians for
each service they provide—including those provided by diagnostic
and treatment facilities that they own.
This practice may be curtailed by regulations stemming from the
1988 Clinical Laboratory Improvement Amendments. The act, intended to improve the quality of laboratory tests, imposes very
costly regulations on the operation of laboratories. But these regulations may not significantly improve the quality of health care
and, in fact, may impose additional costs on patients whose physicians operate small-scale office-based laboratories.
U.S. physicians became, on average, more highly specialized
during the 3 decades leading up to 1990, especially before 1980. In
1965 24 percent of U.S. physicians were general practitioners. By
1990 only 12 percent of U.S. physicians were general practitioners;
the other 88 percent were specialists, a much higher percentage




149

than in other countries, such as Canada. Specialists are usually
more highly paid than general practitioners, and the pay differential expanded during the 1980s as the demand grew for new diagnostic
and surgical procedures only specialists can provide.
Nursing Costs in the 1980s
In the early 1980s, salaries for nurses were low compared with
those for other occupations requiring similar levels of skill, discouraging some qualified applicants from entering nursing school. In an
effort to attract more nurses, hospitals increased nurses' real wages.
Between January 1980 and January 1990, the real hourly earnings of
private hospital employees rose about 25 percent (excluding the
value of nonwage compensation), while the earnings of all private
sector workers changed little. Registered nurses were among those
hospital employees receiving the largest pay increases during the
1980s. At the same time, reductions in the length of the average
hospital stay and increased use of outpatient surgery meant that
patients who were admitted and kept in hospitals were, on average,
sicker than those admitted in 1980. Hospitals were forced to increase
the ratio of highly skilled registered nurses to patients in order to
maintain the quality of their services.
Medical Technology in the 1980s
Increased use of costly medical technology also had an important
impact on measured health care prices in the 1980s. Between 1980
and 1990, for instance, the number of computerized axial tomography (CAT) scans performed in short-stay hospitals in the United
States increased over 400 percent. The number of community hospitals with magnetic resonance imagery equipment rose 500 percent between 1984 and 1991. Many of these new technologies also proliferated in nonhospital settings.
The use of new surgical techniques flourished in the 1980s. For
example, in 1980, 1 in every 400 American men aged 65 and over
had coronary artery bypass surgery. In 1990, about 1 in 100 American men in the same age group had this form of surgery.
The Costs of Malpractice
Litigation
The increasing costs associated with medical malpractice suits
have been an important factor in rising health care costs. Between
1982 and 1989, doctors' liability premiums, the principal source of
payment for malpractice claims, grew at 15 percent annually,
faster than any other component of medical practice costs. Another
more insidious effect of malpractice suits is that they may compel
physicians to perform tests that are not cost-effective simply to protect themselves from legal actions. The costs of defensive medical
practices have been estimated at over $20 billion in 1989 alone, or
almost 18 percent of total physician expenditures. Finally, malpractice insurance costs have caused some physicians to drop out of




150

some specialties, such as obstetrics, making such specialists hard to
find in some communities.
Although insurers and physicians spend large sums defending
themselves in malpractice suits, relatively little of this money
makes its way to those injured through negligence. A recent study
of malpractice cases in New York found that 16 times as many patients suffered an injury from negligence as received compensation
from the tort liability system. In 1984, only about 60 percent of the
money expended on malpractice litigation was actually paid to injured plaintiffs.
Administrative Expenditures
The administrative costs of the U.S. health care industry, which
are estimated at $80 billion in 1991, have been widely criticized
and unfavorably compared to the costs of administering the government-run systems in many other countries. Private insurance companies incur costs marketing their products, reviewing and processing claims, and screening and establishing the health status of potential enrollees. Billing individual patients or insurance companies raises costs for physicians and hospitals.
Recent studies find, however, that shifting to a system that eliminates the functions of the U.S. private insurance industry would
result in few overall cost reductions. Most of the administrative
cost savings would be offset by increases in utilization that would
come from the elimination of features of the current system that
reduce overall expenditures, such as patient payments and insurance company oversight. In other countries with multiple insurers,
such as Germany, administrative costs as a share of total health
expenditures are comparable to those in the United States.
Private insurance companies compete, in part, on the prices of
the services they offer. A competitive insurance company, like any
other firm, can increase administrative expenses only if the benefits of these expenditures exceed the new expense. In health insurance, much of the increase in administrative expenditures has come
from the expansion of programs that monitor service utilization,
and health insurance that offers these features is cheaper than insurance that does not—despite the administrative costs associated
with oversight programs. Nonetheless, some of these costs, such as
the costs of assessing the health status of new enrollees, may raise
aggregate health care expenditures.

PROJECTIONS OF FUTURE COST INCREASES
Many analysts expect that unless the health care market is substantially reformed, costs will continue to rise rapidly into the next
century. Recent projections suggest that health care, which consumed 12 percent of the GNP in 1990, may rise to as much as 16




151

percent of GNP by the year 2000 and to 26 percent by 2030 (Chart
4-7).
Chart 4-7 Projected Health Care Expenditures as Percent of GNP
Most forecasts suggest that health care expenditures wili continue rising, mainly due to
increases in prices and in the use of services.
Percent
30

2030
26.1%
25
Aging Population with Continued
Growth in Prices and Service Use
20
1990
12.3%
15

10

J
1980

l
1990

|
2000

|
2010

I
2020

L
2030

Note: The figure for 1990 (12.3 percent) is a projection from the model.
Source: Health Care Financing Administration.

These projected increases are due primarily to an expected continuation of the historic trends of increasing health care prices and
volume consumed, as well as improving quality. Because most projections of health care expenditures are based mainly on mechanical extrapolations of past trends, they do not take into account
changes in government programs or other individual and institutional responses to the rising cost of health care. During the 1980s,
as health care expenses rose rapidly, insurers, employers, consumers, and the government responded through innovations in the financing and delivery of care. Such changes in behavior, which
cannot be captured by the modeling techniques currently in use,
could have profound effects on the cost of health care.
Demographics
Projected increases in health costs are, to a small extent, a consequence of the aging of the population. Population aging alone is expected to cause health care expenditures to increase from 12 percent of GNP in 1990 to about 14 percent by 2030, explaining about
one-seventh of the total projected increase in health care costs (to
26 percent of GNP). The number of Americans over age 64, the age




152

group for which health care spending is the highest, will increase
through 2030, especially after the turn of the century.
Those over age 64 consume about 3 f times as much health
Ve
care as those between the ages of 19 and 64, and those over age 84
consume almost 2V2 times as much health care as those between
the ages of 65 and 69 (Chart 4-8). Health care spending is higher
among those over age 64 due primarily to the increased probability
of death at this age. Health care spending is especially high in the
last year of life. The 5 percent of aged beneficiaries who were in
their last year of life accounted for 29 percent of medicare expenditures in 1979.
Chart 4-8 Per Capita Personal Health Care Expenditures, by Age: 1987
Health care expenditures, especially for nursing home care, rise rapidly with age.

Other Personal Care
Nursing Home Care
Physicians' Services
Hospital Care

2,000

-

Under 19

19-64

65-84

Over 84

Source: Health Care Financing Administration.

Another important reason for the high costs of caring for those
over age 64, and especially for those over age 84, is nursing home
care. But because people who pay directly for much of this care, as
well as State governments, which both pay for care and license
nursing homes, have strong incentives to limit spending, most analysts expect the growth in spending for nursing home care to be
slower than the changing age composition of the population would
suggest.




153

SUMMARY
• Both the price of health care and the quantity of services consumed increased during the 1980s. Part of the apparent increase in price was due to improvements in the quality of care.
Labor costs, the costs of new equipment, and the use of new
treatments all contributed to the growth in expenditures
during the 1980s.
• Changes in administrative expenditures are unlikely to have
been an important contributor to overall expenditure growth.
Most administrative expenses reduce overall health care costs.
• Litigation over medical malpractice raises costs directly and
encourages the practice of costly defensive medicine.
• Simple extrapolations of health care expenditures—which do
not take cost-cutting measures into account—suggest that they
will consume as much as 26 percent of gross national product
by 2030. A small part of this increase is due to the aging of the
population.

PROPOSALS FOR REFORM OF THE HEALTH CARE
MARKET
Increasing health care expenditures and the growing number of
uninsured in the United States have led to a proliferation of proposals for health care reform. In the past year, some 70 bills have
been introduced in the Congress. While most of these plans seek to
alleviate the symptoms of trouble in the health care market, relatively few address the underlying causes of the cost increases and
insurance gaps.
As the response to the diagnosis-related group payment system
in hospitals has shown, changes in incentives can lead to major
modifications in health care provision. Because the health care
sector is flexible and responsive, health reforms that address underlying economic problems and provide sound incentives can be very
effective. On the other hand, reforms that ignore the economics of
health care are likely to lead to unexpected and undesirable results.
Table 4-2 provides a summary of the main proposals for health
care reform that are discussed below.

ADMINISTRATION PROPOSAL
This Administration's health care reform proposal is a comprehensive, market-based reform plan that builds on the strengths of
the existing market. It includes components designed both to
expand access to health insurance and to improve market functioning.




154

TABLE 4-2.—Side-by-Side Comparison of Health Insurance Plans
Issue

Cost containment
Moral hazard

Other

Administration Proposal

Managed Competition
Proposal

Pay-or-Play and Rate
Setting

National Health
Insurance and Global
Budgets

Encourages managed
care for public
programs.

Promotes use of basic
benefit package.

Increases competition in
small group market
and public programs.
Improves availability of
health care quality
information.

Increases competition in
small group market.

Provider and hospital fee
schedule.

Global budgets.

Provides low and middle
income people with
insurance certificate/
deduction.

Mandates coverage
through employers.

Requires employers to
offer insurance or pay
into public plan.

Universal coverage.

Implements health risk
adjusters for high-risk
people in individual
and small group
health insurance
markets.

Provides age-adjusted
community-rated
coverage in individual
and small group
health insurance
markets.

Covers employed persons
in ill health.

Universal coverage.

Physician and hospital
fee schedule.

Simplifies recordkeeping
and billing.
Reduces malpractice
litigation costs.

Access
Poor

III Health

Provides subsidies to
low income people
who are not employed
and to part-time
workers.

Access to Care Under the Administration Proposal
An important objective of health care reform is to provide better
access to health care for the poor and those with chronic illnesses.
The Administration's plan would address this objective by providing these groups with the funds to purchase health insurance
within the existing health care market at a reasonable price. It
would provide low-income Americans with a transferable tax
credit, ranging from a maximum of $1,250 for single persons to
$3,750 for families of three or more, for purchasing health insurance. Those who do not file tax returns would receive the credit in
the form of a transferable health insurance certificate. Middleincome people would be eligible for a tax deduction for health insurance.
The U.S. Treasury estimates that, when fully phased in (in 1997),
the health insurance tax credit and deduction could benefit about
90 million people. About 25 million of these potential beneficiaries
would be low-income people receiving the maximum applicable
credit. The credit or deduction would be reduced for those with
higher incomes: 10 million people with incomes between 100 and
150 percent of the poverty level would receive a partial credit or
deduction, and 56 million middle-income individuals would receive
a partial deduction.
States would develop basic insurance packages equal to the value
of the health insurance credit. Each State would ensure that at
least two insurers offered such a package. Because low-income




155

Box 4-6.—Health Risk Adjusters
The health risk pools envisioned under the President's plan
would incorporate a system of health risk adjusters intended to
equalize the cost of insuring those who differ only with regard
to health status. Insurers serving a pool each cover different
groups of people. Those providing coverage to groups with
more than the average number of health problems would receive a payment from the pool equal to the difference between
the expected average expenditures of that group and the average expenditures of all people in the pool An insurer providing coverage to a relatively healthy group would make a corresponding payment into the pool.
These payments would-be age-group specific. Thus, younger
people, who tend to be quite healthy, would face lower average
premiums than older people, who tend to have more health
problems. That means that implementation of a health risk
adjuster system would not give younger people additional incentives to leave the health insurance market or increase transfers
from the young to the old. (Chapter 6 contains a discussion of
current intergenerational transfers.) At the same time, the
health risk adjuster system would leave all people with the
incentive to save money for their old age.
Health risk adjusters have two advantages over community
rating. First, because the payments are based on average
rather than actual expenditures, everyone has incentives to
monitor his or her own use of care. People who consistently
use more than the expected average amount of health care for
someone of their health status would face higher rates than
those who economized on their use of care. Under community
rating, the actual costs of this additional care would be spread
among all people with insurance. Second, under a system of
health risk adjusters, insurers would have no incentive to deny
coverage to people with chronic health conditions. Firms that
insure only low-risk people would have to make payments into
the health risk pool to subsidize firms that insure high-risk
people. Under community rating, insurers could profit by discriminating against people with chronic health conditions.
Under the Administration's reform proposal, health risk adjusters would be phased in over a period of 5 years. Premium
bands would be implemented during the phase-in period. Premium bands limit the difference in premiums that insurers
can charge groups with different average health status. Further limits on rate increases would also be in effect during the
transition to health risk pools and risk adjusters.

157
334-230 0 - 9 2




6 (QL3)

tions and lower some of the administrative costs associated with
the screening of prospective enrollees in small-group plans.
Cost Control Under the Administration Plan
Other aspects of the Administration's proposal are designed to
improve the functioning of both private and public insurance in
the health care marketplace. The plan would increase incentives to
use coordinated care delivery systems within the medicare and
medicaid frameworks. It would provide both HMO and alternative
coordinated care options to medicare beneficiaries and increase financial incentives for beneficiaries to join the HMOs. The plan
would require States either to shift all nonelderly medicaid beneficiaries into coordinated care programs or to fold all medicaid beneficiaries into the tax credit and deduction program.
To improve the performance of the private health insurance industry, the Administration's plan would address the lack of information in health care markets by requiring States to implement
programs to help make information about the cost and quality of
medical services available to consumers. The Federal Government
would assist the States by developing prototype systems to assist in
data gathering and outcome comparison. Informed patients are
more likely to choose providers and insurers who provide high
quality services at reasonable prices.
Under the Administration's plan, administrative costs would be
reduced in both the private and public health insurance sectors.
The proposal calls for the Federal Government to work with the
private sector in developing record-keeping and billing forms.
These reductions in billing costs, in combination with the savings
from reduced health status screening, could lower the total administrative costs of the health care system significantly.
The Administration's proposal would encourage competition
among health plans. Because recipients of tax credits or deductions
(including former medicaid recipients) would be able to choose between at least two plans available in every geographic area, competition between the plans would help ensure an adequate level of
service. If one plan provided poor-quality service, those insured
could choose another plan. States would also be encouraged to
remove existing impediments to competition, such as regulations
limiting coordinated care arrangements and mandating the inclusion of certain benefits in insurance plans.
Malpractice costs would be reduced under the proposal's comprehensive liability reform plan. The plan would provide States with
incentives to cap the amount of allowable losses for damages other
than loss of income and the cost of health care associated with an
injury. States would be encouraged to employ systems of alternative dispute resolution, which may reduce the cost of adjudicating
disputes. The Federal Government would also intensify existing ef-




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forts to create guidelines and quality standards for health care
that, when adopted by a State, could be used by the courts to determine negligence. If the legal system relied on such standards, physicians would no longer have to practice defensive medicine. Standards could also improve the quality of care by keeping physicians
informed about state-of-the-art treatments for particular conditions.
The most important component of the Administration's proposal
with respect to improving health is its emphasis on prevention.
The proposal calls for substantially increased spending for Federal
preventive care programs and for an expansion of primary care
health services to low-income communities. It also increases funding for programs aimed at encouraging Americans to make healthier choices with respect to smoking, physical fitness, and diet.
MANAGED COMPETITION
Managed competition reforms are intended to improve the operation of the marketplace and expand the availability of employersponsored health insurance. Although managed competition has
many market-oriented features, it would greatly increase the role
of the government in the health care system and would limit the
range of health insurance options available to Americans. Many
types of managed competition proposals exist; the discussion that
follows examines one version.
Managed competition is built around the "accountable health
partnership/' an organization similar to an HMO that would provide both health benefits and consumer information. Each accountable health partnership would be registered with a national health
board that would monitor the insurance market.
The national health board would define a set of "uniform effective health benefits" that accountable health partnerships would
be required to provide. All insurers, both private and governmental,
would be required to offer the same basic benefit plan. Competition
would focus on providing these benefits in a cost-saving and medically effective fashion.
With managed competition almost everyone would have health
insurance coverage. The proposal would mandate employer-provided insurance for all full-time employees. Employers would be required to make a flat contribution to an insurer for each of their
employees of between 50 and 100 percent of the cost of the minimum benefit package offered by the cheapest accountable health
partnership in the area. An employee could use this money to buy
this plan, a more generous plan, or a plan from a different accountable health partnership. Even healthy employees would no doubt
find it in their best interest to purchase health insurance at only




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half the premiums, so the 50-percent minimum contribution requirement would help to limit adverse selection.
Small firms would purchase insurance through collective purchasing agents in each State. These purchasing agents would pool
risks and charge community rates across all small employers, although premiums could be age adjusted. Only those small employers who joined these organizations would be able to claim tax exemptions for health insurance premiums.
States would contract with the collective purchasing agent to
insure all part-time employees and other unemployed and uninsured people. For these people, the premium costs of the cheapest
available plan would be subsidized using revenues from taxes on
part-time employees and on those with independent incomes.
Each State's collective purchasing agent could contract with
many accountable health partnerships, creating competition among
them. The national health board would be responsible for ensuring
that the agent and each participating accountable health partnership met accounting, insurance, and benefit standards.
The mechanism for cost containment under managed competition is competition among accountable health partnerships over
the price of the minimum benefit package. Although people could
choose any insurance package offered by any participating accountable health partnership as long as it included at least the minimum benefits, they would not be able to deduct from their taxable
income more than the cost of the minimum benefit package offered
by the cheapest accountable health partnership. This limit on the
tax subsidy would encourage people to choose less comprehensive
health insurance and efficiently run insurance plans, since they
would face the full additional cost if they chose a plan whose price
exceeded that of the lowest-priced plan. Requiring that insurers
offer at least this benefit package would mean that low-risk people
could not engage in adverse selection by purchasing minimal benefit packages that would never be chosen by those at higher risk.
Because of the central role of the minimum benefit plan in this
proposal, the kinds of benefits and deductible and copayment levels
included in the plan would be very important. The benefits would
have to be designed to fit the services offered by both traditional
health insurers, which typically use deductibles and copayments to
limit moral hazard, and coordinated care organizations, which use
fewer deductibles and copayments but tend to monitor service utilization directly.
To avoid risk selection, the national health board would either
need to specify benefits in a way that would limit the ability of accountable health partnerships to avoid sicker-than-average people
or implement a system of health risk adjusters. Unless they did so,
insurers could avoid such people, for example, by locating their of-




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fices in buildings without elevators, or by contracting only with
physicians who do not specialize in the care of costly conditions.
With managed competition the government would take an active
role in selecting the basic benefit package and in defining the type
of insurance that most people would be likely to purchase. These
governmental decisions could change the insurance arrangements
of many Americans, because the accountable health partnerships
envisioned in the proposal are similar to HMOs, while most Americans are currently enrolled in traditional fee-for-service health insurance plans. These decisions will also have a profound effective
on the financial future of providers and insurers, who are likely to
press for benefits to be defined as broadly as possible, limiting the
ability of managed competition to contain costs.
PLAY-OR-PAY
Play-or-pay proposals for health care reform are structured
around requirements that firms either provide basic health insurance to employees and their dependents ("play") or pay a payroll
tax to cover enrollment in a public health care plan ("pay"). Most
play-or-pay proposals would also offer sliding subsidies to those
who are not attached to the work force.
Play-or-pay proposals focus on improving access to health insurance. But while play-or-pay would improve access to health insurance for some workers with low incomes or poor health status, it
could reduce the incomes and employment opportunities of many
other low-income people. Competitive firms would probably have to
pass along the costs of health insurance to their workers in the
form of lower wages. Thus, mandating health insurance through
the workplace could lead to lower wages among currently uninsured employees and to increased unemployment among employees
whose wages are at or near the minimum.
To the extent that employers choose to "play" rather than
"pay," play-or-pay reform would retain some of the competitive
aspects of the current health care market. Firms offering benefits
similar to those offered in the public plan, however, would be able
to switch to the "pay" option if the cost of their health insurance
premiums is greater than the payroll tax. If the tax is set too low,
everyone will eventually be enrolled in a single public plan. If the
tax is too high, small employers will be forced to buy costly insurance, which will increase the plan's potential to lead to layoffs.
Play-or-pay alone does not directly address the problem of controlling health care expenditures. The effect of play-or-pay on costs
would depend greatly on the structure of the public health insurance program, because a play-or-pay system would greatly increase
participation in this program. Medicaid includes only limited provisions to reduce moral hazard. It has only recently launched man-




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aged care initiatives and, because it covers a population in poverty,
currently incorporates few patient payment requirements. The
public program in a play-or-pay system would need to include more
patient payment requirements and managed care initiatives if costs
are to be contained. Otherwise, play-or-pay could lead to increased
overconsumption of medical resources, driving up health care costs.
Play-or-pay would provide health insurance to those with poor
health conditions who may not be able to afford insurance in the
current market. These people, however, are likely to be insured
through the public program. Firms that hire workers with serious
health conditions can avoid paying high insurance premiums by
switching to the public plan. As a consequence, the cost of providing care in the public plan is likely to rise, and payroll tax rates
may have to be raised to offset this increase. As the cost of health
care rises, firms that are required to provide health insurance may
begin laying off workers, especially low-skilled workers (as described above).

NATIONAL HEALTH INSURANCE PROPOSALS
Proposals for national health insurance envision replacing the
private health insurance market with a single national health insurer. This national health insurer would be funded through taxes
and care would be either free (as in Canada) or provided at a low
cost-sharing level. National health insurance would provide Americans, regardless of income or health status, with access to a centrally determined set of health care services, at no direct cost to
the insured. Because everyone would have exactly the same health
insurance, national health insurance avoids the problems of risk
selection and adverse selection.
Although national health insurance would ensure access to
health insurance for everyone, it provides few incentives for consumers to limit their use of services and could lead to an explosion
in cost unless other substantial reforms were undertaken. National
health insurance greatly reduces existing incentives for consumers
to limit their use of care. In most proposals, the cost of health care
is shared among all taxpayers with few deductibles and copayments. The Canadian experience and other evidence suggest that
substantial increases in utilization would be likely to accompany
such reductions in deductibles and copayments.
Some proposals for national health insurance envision saving
money by reducing administrative costs, but since reductions in administrative costs are likely to be accompanied by increased overconsumption of services, net health care costs may not decrease.
National health insurance plans can control costs mainly by controlling the quantity and quality of health care supplied, often
through price or budget controls (discussed below). An alternative




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way to control costs would be to fund only selected services, a
method that has been proposed for the State of Oregon's medicaid
program (Box 4-7).
Controls on supply and reductions in administrative costs are
easiest to achieve in national health insurance programs that do
not allow people to opt out by purchasing private health insurance.
Adding any degree of choice to a national health insurance program—by allowing people to purchase alternative insurance, for instance—may reduce the cost savings achieved through supply controls and would be likely to increase administrative costs.
Box 4-7.— Oregon Medicaid Waiver Proposal

The State of Oregon has developed an innovative proposal
that would extend medicaid insurance coverage to all Oregonians with incomes below the Federal poverty line. The plan
would extend coverage to this broad group of people by restricting the treatments available to those covered. As proponents of the plan put it, services, not people, would be rationed.
In order to determine which services would be provided, the
Oregon Health Services Commission undertook an extensive
process that included research and analysis as well as consultations with the public. Initially, the commission identified 709
"condition-treatment" pairs, such as appendicitis-appendectomy. Next, the commission classified each pair into 1 of 17 categories according to the outcomes that could be expected from
the treatment, such as "prevents death with full recovery/'
and ranked the pairs within each of the categories according to
their impact on the quality of life. Finally, the commission submitted the ranked list of 709 pairs to the State legislature.
The legislature appropriated funds to cover services 1-587 on
the list. These condition-treatment pairs would be included in
the basic medical plan. Those condition-treatment pairs ranked
588-709 would not be covered for those insured by medicaid in
Oregon.
Because medicaid is funded jointly by the Federal Government and the States, Oregon had to apply for a waiver from
the Federal Government in order to implement this plan. This
waiver was denied to the current version of the Oregon plan in
August because of concerns that it violated the rights of the
disabled under the Americans with Disabilities Act.




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RATE SETTING
Some play-or-pay and national health insurance proposals incorporate provisions for rate setting. Rate setting, currently in use for
hospital billing in some States, means that a governmental agency
sets a single schedule of health care prices on which all payments,
whether private or public, are based. In practice, increases in utilization often accompany such restrictions on prices in the health
care market, limiting their effectiveness as a method of cost control. Because of the difficulty of measuring prices and quantities of
health care, providers of health care services can easily change the
quantity of health care services they report to accommodate lower
prices. For example, an increase in the number of diagnostic tests
provided to a patient will appear to be an increase in the per-visit
price if all the tests are provided during one visit. This same increase will appear as an increase in quantity, rather than as a
price hike, if the tests are spread over multiple visits.
Problems in measuring units of health care services make the
enforcement of price controls in this sector troublesome. The Canadian experience suggests that the implementation of price controls
in a fee-for-service physician payment system is likely to be accompanied by large increases in office visits. For example, physicians
could require their patients to make office visits to get the results
of tests, rather than simply conveying this information over the
phone or by mail. Doctors could refuse to do more than one procedure per visit, requiring the patient to come back again for a
second procedure, in order to get a second fee from the government. Studies of the Canadian system suggest that very substantial
amounts of patient time are wasted through unnecessary trips to
the doctor.
Experience from other industries suggests that if price controls
could be enforced, they would likely lead to shortages of desired
services. Initially, rates may be set to reflect the availability and
need for services. But over time, the bureaucratic process of setting
rates may mean that changes in the provision of, or demand for,
services are not captured by new rates. When conditions change,
the old rates are likely to cause shortages.

GLOBAL BUDGETS
A frequently recommended proposal for controlling expenditures
in the health care system has been global budgets that cover all
health costs. Global budgets would fix the sums health care providers throughout the U.S. economy can spend.
It would be very difficult to implement global budgets in the
fragmented health care sector that now exists. For example, a
global budget would have to account for out-of-pocket payments
made by consumers, fee-for-service payments made by conventional




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insurers, per capita payments made by HMOs, and the provision of
uncompensated care in emergency rooms. They would have to allocate funding across regions, States, and cities, although currently
spending varies considerably in different localities. Most global
budget plans would begin by implementing price controls—for example, setting payment levels for diagnosis-related groups and for
HMOs—but as noted above, such controls are likely to lead to increases in utilization.
Global budgets could also be applied to individual hospitals, independent of the amount of service provided. Such budgets would
create incentives to reduce the services within a hospital and could
lead to delays in admitting patients, or reductions in the use of effective but costly medical technologies.
Under global budgets there would be few incentives for providers
to compete by developing better ways to deliver care. Improvements in health care delivery would be made primarily by government mandate. The government would take a very active role in
deciding how much health care would be provided, stipulating the
number of practicing physicians, the number of hospital beds, and
the availability of new medical technologies and treatments.
Such government-determined supply-side controls could also lead
to inappropriate decisions at the level of the individual provider.
For example, hospitals are likely to find it easier to stay within
their annual budgets if they keep their hospital beds filled with patients who have already recovered, rather than admitting sicker
patients. Global budgets for physicians may lead doctors to restrict
their hours and increase their vacation days rather than providing
cost-effective care. Efficient physicians can be penalized if global
budgets lead to across-the-board cutbacks in spending on care.

POLITICS AND HEALTH CARE
Most proposals for reform of the health care market envision a
larger governmental role. For example, under the Administration's
proposal, the Federal Government would define a basic benefit
plan that could be purchased by recipients of the tax credit or deduction (although they could choose other plans). Under the managed competition proposal, government boards would define accountable health partnerships and the basic benefits people could
purchase and still remain eligible for the tax subsidy. Such government-determined allocation decisions are likely to become politicized. Decisions about which services to cover and payments to
make may be affected by the political influence of provider groups
rather than by appropriate medical and economic considerations.
Governments already play an enormous role in the U.S. health
care industry as regulators, purchasers, and employers. Federal,
State, and local governments regulate virtually every aspect of the




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industry, from the supply of insurance to the practice of medicine
to the sale of Pharmaceuticals. In 1990 including the value of
health-related tax subsidies, governments paid for about the same
share of the output in this industry as in the aerospace industry.
The three levels of government together employed more than twice
as many health and hospital workers as postal workers.
Using government bureaucracies rather than markets to determine industry outcomes is usually wasteful and inefficient. The ordinary problems of regulation are magnified in the health care context for two reasons. First, setting quantities is difficult because of
the enormous variation in people's need for and attitude toward
medical care, a product that is constantly changing. Second, regulators have to rely on producer groups (including insurers, doctors,
and hospital employees) and some consumer groups for information
and support, and these groups share a proclivity to expand public
and private expenditures at the expense of the general public.
SUMMARY
• The Administration's proposal for health care market reform
would expand the insurance coverage available to low-income
and middle-income Americans.
• The use of health risk adjusters in the Administration plan
can reduce differences in the cost of health insurance between
people in good health and people in poor health. Unlike community rating plans, health risk adjusters limit the incentive
for insurers to exclude those in poor health.
• Managed competition proposals would encourage competition
among health insurers providing a basic benefit package. Managed competition requires that the government play a substantial role in the private health insurance market, monitoring insurers and defining the benefits that most Americans would receive.
• Play-or-pay proposals focus on improving access to insurance
by mandating that employers provide basic health insurance or
pay a tax to cover enrollment in a public plan. These proposals
do not directly address the problem of rising costs and may
cause firms to lay off low-wage workers.
• National health insurance proposals would provide insurance
for all Americans through a single national insurer. Without
substantial restraints on the quality and quantity of care provided, national health insurance could lead to a cost explosion.
• Attempts to regulate the price of health care are often ineffective in reducing expenditures because of offsetting increases in
utilization. If rate regulation succeeds in holding down prices,
it may lead to reductions in the quality of health care and to
waiting lines for services.




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CONCLUSION
The U.S. health care market provides a very high standard of
health care to most Americans. The cost of care in this market has,
however, been growing very rapidly, and many Americans have inadequate health insurance coverage. Careful analysis of this
market indicates that it is subject to many of the same economic
forces as other sectors and establishes certain guiding principles
that must be heeded if reform is to be successful.
As government and employer-provided health insurance programs have expanded, Americans have been paying for less of their
health care out of their own pockets. Because people with health
insurance do not face the full cost of their health care decisions,
they overconsume health care services. Over time, the quantity and
quality of services consumed by Americans have been increasing
rapidly.
Because of the high cost of health care, many of the poor and
chronically ill find that they cannot afford health insurance. These
uninsured individuals often resort to hospital emergency rooms, resulting in a very costly and inefficient use of resources. Most Americans believe poor and unhealthy people should not have to choose
between paying high premiums for health insurance or going without any insurance at all.
Because of the complexity of the health care industry, no reform
plan can address all features of the system perfectly. Yet some approaches are better than others, because they deal more directly
with the sources of rising expenditures and declining insurance
coverage. Successful reforms must create incentives for consumers,
insurers, and providers to cut costs and share the cost of care for
the chronically ill.
Experience in other countries and in the United States suggests
that health.care costs cannot be controlled, even with waiting lines
and limits on the use of medical treatments, unless the consumption of services is limited through incentives, such as deductibles
and copayments, that encourage people to regulate the way they
use health care services. Alternatively, insurers can monitor the
use of care through coordinated care arrangements. Failure to control the overconsumption of services that results from insurance
will make it impossible to control health care costs.
Even if overall costs can be controlled, expenditures for health
care are likely to remain higher for those in poor health than for
healthy people. One approach to this problem, community rating,
creates a single premium level for everyone. In a competitive insurance market, however, community rating conflicts with the incentives of both insurers and healthy people. Insurers will try to discourage unhealthy people from enrolling in their insurance plans,




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leaving the chronically ill without insurance. Alternatively,
healthy people will opt out of the insurance market or select plans
with high deductibles and copayments, so that the premiums paid
by those remaining in more comprehensive plans are very high.
Another response to differences in health risk is the use of health
risk adjusters, which provide insurers with incentives to insure
those in poor health.
Because providers know more about medical treatment than do
patients, a successful reform must give providers financial incentives to recommend only those treatments whose benefits exceed
their costs. Financing arrangements that pay doctors and hospitals
a fixed amount regardless of how many services they provide
reduce the incentive for providers to recommend unnecessary services. An important additional step toward achieving this goal is to
make it easier for patients to evaluate health care providers. Informed patients will be better able to identify providers that offer
high-quality health care at a reasonable price.
Reforms that give consumers, insurers, and providers appropriate incentives are likely to be the most effective way of controlling
costs, improving access to insurance, and giving Americans the
quality of health care that they want. Without these incentives,
health care costs will continue to climb and the number of uninsured will only grow larger.




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CHAPTER 5

Markets and Regulatory Reform
THE U.S. ECONOMY RELIES primarily on the market system
to determine what products are produced, in what quantity, and at
what price. The market system is the most effective way of allocating resources to meet the needs and wants of households and families. The market system provides firms with strong incentives to
produce the goods that consumers want at the lowest possible cost
and to find innovative ways of meeting consumer demands. Firms
that efficiently produce goods that consumers want will thrive;
others will be driven out of business, and the resources they
employ will be reallocated to more highly valued uses.
In deciding how much to buy at market prices, consumers register their opinions about the value of goods or services. In deciding
how much to sell at market prices, producers reveal their information about how cheaply goods and services can be produced. Markets perform the complex job of sorting through this vast amount
of information and opinion. The interaction between many producers and many consumers results in the production and consumption of an optimal quantity of each good—the best quantity from
the standpoint of the economy as a whole. In order to produce
more of one good, resources would have to be shifted away from
producing other commodities, and the value of the lost production
would be greater than the value gained by increased production of
the first good.
Markets are flexible and accommodate change well. Changes in
technology and consumer demands are quickly registered in the
market, reordering the types, prices, and quantities of goods and
services. The quest for profits encourages firms to develop new
products and cheaper ways to produce existing products. A successful new product generates high profits, which provide an incentive
to increase production of that product. Furthermore, markets can
reduce the costs of adverse developments. A sudden shortage of a
commodity will cause its market price to increase, encouraging consumers to conserve and producers to develop new sources of supply
for the product.
The alternative to markets is to have central planners command
production of what they think people should have, rather than
what consumers want. As the experience of centrally planned




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economies shows, government bureaucrats are rarely successful in
matching quantity supplied and quantity demanded and can be
quite inflexible in responding to change. In addition, people place a
high value on the right to make free economic choices.
Some markets, however, do not operate according to the ideal.
Some markets are necessarily served by a monopoly—a single
seller that restricts output and sets prices higher than would occur
in a more competitive market in order to maximize profits. In
other markets, some people affected by the production or consumption of a good are not able to influence those choices. For example,
firms and households may ignore the pollution problems they
create or firms may not provide full information about the risks of
using a product—information consumers may need to make the
best decision. Market failures constitute a legitimate reason for
governments to consider intervening in the private sector through
such means as regulation. There are costs associated with regulation, however. Attempts at regulation must be tempered by the understanding that the rules may be as imperfect as the market they
are trying to improve; that is, governments as well as markets may
fail. A balanced approach to the limited amount of regulation that
may be necessary in a market economy should be based on an understanding of costs and benefits and the use of market incentives
to achieve the desired outcome.

REGULATORY REFORM
Since the mid-1970s, substantial progress has been made in reforming the way the Federal Government regulates industry. The
result has been increased price competition and incentives for companies to introduce new products and services. For example, since
the Airline Deregulation Act of 1978, the number of passengers
flying annually has increased by 70 percent. Moreover, 43 percent
of all trips are now flown in markets with three or more competitors, compared with only 24 percent in 1979 and the average fare
per mile has declined 23 percent in real terms. In another example,
the Securities and Exchange Commission eliminated fixed stock
brokerage commissions in 1975, and in the following 6 years, rates
for individual investors dropped by over 20 percent, while rates for
institutional investors dropped almost 60 percent. Investors can
now choose between discount brokers who simply make stock
trades and brokers who provide complete investor services.
In some instances the benefits of regulatory reform efforts have
not been fully realized because reform has not been completed. For
example, the benefits of competition in the domestic airline industry have not been fully extended to international airline markets.
Although the United States has negotiated some foreign aviation




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treaties that encourage competition, many of the agreements allow
foreign governments to restrict seating capacity, the number of
competitors, and price competition. In addition, U.S. air carriers
continue to be immune from antitrust laws when using the International Air Transport Association as a forum for setting international air fares. The use of this forum can lead to higher prices and
fewer services than would be available in a more competitive
market. By eliminating the immunity enjoyed by U.S. carriers an
impediment to competition would be removed.
While some important examples of regulatory reform over the
past 17 years have been the result of congressional legislation,
agencies of the Federal, State, and local government often have
great discretion in deciding how to implement the laws. The President's regulatory reform initiative has encouraged Federal agencies
to eliminate unnecessary regulations and to use market incentives
to achieve regulatory goals at lower cost, rather than using "command-and-control" mechanisms that mandate particular technologies or set profit levels.

REGULATION AND GOVERNMENT FAILURE
While regulation based on a careful balancing of costs and benefits can sometimes improve market performance, policymakers
often ignore the fact that the government is an imperfect regulator. There are three reasons to be cautious about government intervention as the solution to market failure.
First, regulators often lack accurate information about an industry and cannot always predict the effects of specific regulations.
While the decision to regulate may be well-intentioned, the regulations themselves can have perverse and unintended consequences.
For example, corporate average fuel economy standards have led
manufacturers to produce lighter and therefore less crashworthy
cars than they would have, resulting in an estimated several thousand additional highway deaths per year.
Second, the regulatory process tends to favor those groups or businesses that can most influence the process in their own interest,
rather than in the interest of society as a whole. For example, Federal rules continue to restrict competition in various industries
such as international ocean shipping and international aviation.
Restraints on competition continue in part due to the fact that organized groups, such as those representing labor and firms in the
industry, capture benefits from the rules that exceed the costs of
participating in the process and therefore invest in maintaining
those rules. Each individual consumer, who must make similar expenditures to participate in the regulatory process, has less of a
stake and thus as a group consumers tend to underinvest in changing the rules.




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Third, regulation does not always accommodate change well.
While regulation may be imposed to achieve economic and social
goals, it is administered as a legal process. It often takes years to
accommodate new technologies or new ways of doing business. For
example, amendments made to the Real Estate Settlement Procedures Act in 1983 were meant to respond to the real estate settlement industry's interest in providing one-stop shopping for settlement services. Yet the process of actually writing the regulation
that implemented the new laws took 9 years. During that period,
uncertainties about what the regulations would permit slowed the
development of innovative real estate settlement services. Regulatory inflexibility can also retard the introduction of new technologies, an issue discussed fully in the telecommunications section of
this chapter.
Often the process of developing a rule does not end at the regulatory agency. Because all legislation requires interpretation, disputes arise concerning how well the rule conforms to the legislation's intent. Also, because those who stand to lose from a change
in the regulatory structure can challenge a new rule, the regulatory process creates an incentive to litigate. Even after the courts
render a decision, the process may have to begin again at the regulatory agency. Extended litigation makes it harder for the regulatory process to respond to changes within an industry and imposes
costs over and above the expense of actually complying with a regulation.

A BALANCED REGULATORY POLICY
The Administration has sought to apply the lessons of imperfect
regulation in developing its regulatory policy. The central principles of this policy have been to deregulate markets that can be
competitive and to advocate only regulations meeting certain criteria: The benefits of any regulation should exceed the costs; the
rules should rely, to the extent possible, on market incentives to
achieve their goals; they should ensure that regulatory goals are
achieved at the lowest possible cost; and they should provide clarity
and certainty to the regulated community and be designed to minimize the potential for litigation. In January 1992 the President initiated a regulatory reform initiative asking Federal agencies to
focus on these principles.
Similar principles have been applied, although not nearly extensively enough, when developing new legislation. The Clean Air Act
Amendments of 1990 require major sulfur dioxide emissions reductions from electric utilities, but let markets arrange for those reductions at lowest cost. The use of "tradable allowances" will
achieve the pollution reduction goals at savings of billions of dollars over the cost of mandating rigid pollution controls. Similarly,




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the Energy Policy Act of 1992 contains significant changes in Federal regulations governing electric utilities. By encouraging competition among firms that generate electricity for sale to local electric
utilities, these changes aim at reducing the cost of electricity to
consumers and promoting more efficient operation of electric utilities.
These central principles of regulatory policy have also been incorporated into proposals for legal reform. Wasteful litigation carries with it a very high cost for the U.S. economy. The Administration 's proposed legal reforms are designed to reduce the costs of litigation, while maintaining a fair system of dispute resolution. The
1991 Agenda for Civil Justice Reform in America proposes to
reduce litigation costs by employing alternative dispute resolution
techniques and by modifying the incentives for litigation. Greater
access to alternative dispute resolution mechanisms such as private
mediation or arbitration will enable less complex legal matters to
be resolved without resorting to the court process. To modify the
incentives for litigation the proposals suggest, among other things:
• capping punitive damages at an amount equal to a plaintiffs
actual damages;
• discouraging frivolous suits by adopting, in a limited set of
Federal cases, a modified "English rule" in which the loser
would pay the winner's legal expenses, up to a level equal to
the loser's expenses;
• limiting the amount of free document requests, after which the
requestor would have to pay the costs of providing the documents.
These proposals would reduce litigation costs by hastening the
resolution of disputes and discouraging waste in litigation.

THE REGULATORY REFORM INITIATIVE
The President began a regulatory reform initiative in January
1992 that asked Federal agencies, within existing statutes, to eliminate unnecessary government regulations and to ensure that the
remaining regulations meet the criteria described earlier. In all,
the 24 Federal agencies actively participating in the initiative proposed or adopted hundreds of reforms covering a wide array of government regulatory activities.
Many of the reforms are designed to reduce the paperwork
burden regulation imposes on businesses. For example, the Internal
Revenue Service has simplified the rules governing payroll tax deposits by businesses. Under the old rules many employers were required to make deposits as often as twice a week, but not necessarily on the same 2 days each week. Under the new rules, large employers will deposit payroll taxes on fixed days of the week and




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more of the smaller employers are permitted to make monthly deposits.
Agencies have also streamlined the way they conduct their own
business. For example, in April 1992 the Department of Justice and
the Federal Trade Commission jointly issued Horizontal Merger
Guidelines. For the first time, both agencies explicitly set forth the
same standards for deciding whether certain mergers are anticompetitive. Joint guidelines should result in greater certainty about
the standards applied in the more than 1,000 antitrust reviews of
mergers conducted each year.
Finally, many agencies are working to promote competition by
amending their existing regulations. For example, the Cable Communications Act of 1984 prevents local telephone companies from
providing cable television service in their respective service areas.
However, the act allows the Federal Communications Commission
(FCC) to exempt telephone companies from this rule in rural areas,
where competition from other sources is less likely to develop. In
July 1992, as a part of its review of existing regulations under the
regulatory reform initiative, the FCC proposed expanding the exemption from areas with fewer than 2,500 residents to those with
fewer than 10,000 residents. If adopted, more rural residents would
benefit from cable services provided by the telephone company in
competition with existing television services. The FCC has also
adopted new rules to increase competition in international communications and in local telephone markets.
MARKET INCENTIVES
A major objective of the regulatory reform initiative is to promote the use of regulations that utilize market incentives. The following sections describe three proposals of this type.
Performance Standards in Environmental Regulation
The Clean Air Act Amendments of 1990 require significant reductions in emissions that contribute to air pollution, but do not
always dictate the precise methods that must be used to meet clean
air standards. State and local governments will be able to determine how these standards are met in State Implementation Plans
submitted to the Environmental Protection Agency (EPA) for approval.
The EPA has proposed allowing States to include in their plans
the voluntary retirement of automobiles manufactured before the
1980 model year. Although these vehicles represent only 29 percent
of registered vehicles, they cause 53 percent of hydrocarbon and 61
percent of carbon monoxide emissions, two contributors to air pollution. One cost-effective way of reducing these emissions is to replace aging vehicles with cars that emit fewer pollutants. Under
the "cash-for-clunkers" program, a company that finds that a




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planned expansion will increase its emissions over an existing EPA
standard would have the option of offsetting this increase by purchasing and removing from the road "clunkers" operating in the
same region as the plant.
For example, the cost to an industrial polluter of reducing emissions by some amount through conventional controls may be
$1,000, but the owner of an old car that emits the same amount of
pollution may be willing to sell the vehicle for $500. Under the
EPA's proposal, the company could purchase the vehicle instead of
directly reducing emissions from the plant. Estimates of emissions
reduced would be based on a net reduction—for example, the difference between the emissions from the "clunker" and the emissions from the new car the seller is likely to purchase. The EPA ys
"cash-for-clunkers" program expands the notion of performance
standards by permitting standards to be met through alternative
means, such as eliminating sources of pollution other than those directly controlled by the polluter.
Incentive Regulation of Natural Gas Pipelines
Natural gas accounts for nearly one-half the energy consumed in
American homes. Interstate natural gas pipelines transport gas
across State lines, where it is sold to local gas distribution companies, electric utilities, and industrial users. The Federal Energy
Regulatory Commission (FERC) is required by law to approve the
prices interstate pipelines charge for transporting gas. Without regulation, a pipeline with a monopoly over gas delivery could raise
prices above what they would be in a competitive market. Only
when there is significant competition among pipelines to deliver
gas would regulation be unnecessary.
While regulation may be necessary in cases where a pipeline
does not face significant competition, the rules can be designed to
create incentives to reduce costs and implement innovations. As
part of the regulatory reform initiative, the FERC issued a policy
statement on incentive rate regulation in October 1992. Along with
outlining the essential elements of an incentive regulation policy,
the policy statement sets guidelines for natural gas pipelines (as
well as oil pipelines and electric utilities) that want to make specific incentive rate proposals to the FERC.
Under current practices, pipelines are regulated according to the
traditional cost-of-service method. Pipelines provide the FERC with
information on the costs they incur delivering gas, including the
cost of building the pipeline facility. The FERC then determines
the rates that can be charged to cover those costs, including a
return on invested capital.
The limits placed on profits under cost-of-service regulation function as a substitute for the downward pressure on prices that exists
in competitive markets. Unfortunately, cost-of-service regulation




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offers the regulated firm few rewards for cutting costs or using innovative techniques and sets few penalties for excessive spending.
Any attempt to reduce costs will eventually be followed by a reduction in the rates the company can charge, reducing total revenues,
and leaving the firm no better off. A service innovation that increases profits will also result in a reduction in rates to bring revenues in line with costs.
The distinguishing feature of incentive rate regulation is that,
unlike cost-of-service regulation, it focuses on prices rather than
profits. Once rates are no longer tied to the costs incurred, further
cost-cutting efforts do not translate into dollar-for-dollar reductions
in revenues. Incentive regulation allows regulated companies to
retain a portion of their cost savings, giving them an incentive to
produce efficiently and to innovate.
One challenge in implementing incentive rate regulation is determining the price standard. Price cap regulation establishes an
initial level of rates and then links a regulated company's rate increases to changes in an index of prices. An index related to the
pipeline company's own costs would be inappropriate because it
would immediately reestablish a link between prices and costs. An
appropriate index would be one over which the company has no
control, such as the consumer price index or the producer price
index. Prices could be allowed to rise each year by an amount
equivalent to a change in the index, less a fixed percentage that
reflects expected improvements in productivity.
The price cap method has been employed in the FCC's regulation
of American Telephone and Telegraph's (AT&T) long-distance services. A problem with price cap regulation as a long-run approach is
that it frequently uses current prices as the base rate to which the
index is applied. As costs change over time, the continued use of
the same index could lead to firms earning large profits or suffering large losses. This is not a critical problem in the case of AT&T,
which is in a transition to full deregulation. Many pipelines, however, are unlikely to face competition in the near future.
An alternative to the price cap method is yardstick competition,
which establishes a target against which a company's performance
can be measured. If the company improves on the target, its profits
increase; if it does not meet the target goals, its profits fall. One
way to implement this idea is to set a pipeline's prices equal to the
average costs of other similar pipelines. All pipelines would want to
lower costs under this system. Any pipeline that did not would
eventually find itself with prices targeted to industry costs that are
lower than its own costs. Yardstick competition forces firms to
compete on the basis of efficiency even though they do not compete
directly in transporting natural gas. One critical task facing a reg-




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ulator proposing to use yardstick competition will be in identifying
comparable pipelines and adjusting for differences among them.
Peak/Off-Peak Pricing at Airports
Every day, consumers pay for services whose prices are dependant on the time of day or the season. A typical long-distance telephone call has a price of 23 cents per minute during business
hours, when usage is high, but only 13 cents per minute late at
night, when usage is low. Movie ticket prices are higher during
evening hours, when demand for service is high, but are often
lower at other hours. In both of these cases there is a fixed capacity for providing a service and patterns of usage that vary throughout the day. The prices reflect the high value placed on the service
during periods of peak demand.
Airports are in a similar situation, because they also operate
with a fixed capacity, in this case to handle takeoffs and landings.
Approximately one-third of all delays are caused by demand that
exceeds the capacity of air traffic control and runways during peak
periods. As a result, the Nation's airport infrastructure is inefficiently used and some of the benefits of airline deregulation are
lost. Constructing additional runways is a plausible long-term solution, but in the short term the existing system can be more efficiently used. Time-based fees, or "peak/off-peak" prices, used regularly by electric utilities and telephone companies, are not commonly used by airports. The Department of Transportation is considering guidelines for local airport authorities on the use of timebased takeoff and landing fees to reduce airport congestion.
Currently, the typical airport landing fee is based on the weight
of the airplane using the runway. Basing fees on weight is aimed at
approximating the airport's costs of servicing an airplane flight (including space used and wear-and-tear on the runway). However,
such fees do nothing to alleviate airport congestion during periods
of high demand. Instead, takeoff and landing fees should reflect all
costs, including the costs of delay that one carrier imposes on another, so that those who value airport use most highly will use the
airport at peak times.
By making congestion costs explicit, so that those placing the
highest value on peak service will use the airport during peak
hours, congestion would be reduced. Without a peak/off-peak pricing system, passengers will continue to "pay" the costs of congestion,
but it will be in the form of long waiting times and takeoff delays.
Similarly, publicly funded highways and streets that serve as lowcost or free roadways tend to be congested at peak use times. Peak/
off-peak pricing could be used to solve road congestion problems as
well.




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SUMMARY
• A major goal of the President's regulatory reform initiative
has been to encourage Federal agencies to eliminate unnecessary regulations and to use regulatory innovations such as incentive rate regulation.
• Regulations that incorporate market incentives can be used to
reduce pollution at lower cost than command-and-control
methods.
• Setting appropriate prices for the use of the Nation's transportation system will assure that these resources are being used
efficiently.

TELECOMMUNICATIONS: REGULATORY REFORM
AND INNOVATION
Telecommunications is a broad sector encompassing local and
long-distance telephone services, satellite services, information
services, broadcasting, cable television, program production, and
manufacturing of associated equipment. Rapid technological
change and regulatory reform in the industry have increased the
variety and quality of entertainment, information, and communications services available to consumers and businesses. In the past,
for example, many Americans could only receive 3 television channels; now access to 50 channels is not uncommon. The venerable
national "phone company" monopoly is being transformed into a
multiplicity of entrepreneurs and firms, and competition has developed in many markets for telecommunications services and equipment.
While some parts of the industry are vigorously competitive,
others remain tightly regulated. There is legitimate concern that,
without regulation, consumers in some markets will not be protected from monopoly pricing. Insufficient weight, however, has been
placed on the costs of regulation; costs that not only include complying with regulation, but also the hidden costs of forgone product
innovation. The goal of the Administration has been to reform the
regulatory structure for telecommunications so that consumers receive the benefits of new products and services but are protected in
cases where markets are not competitive.
TELECOMMUNICATIONS AND THE U.S. ECONOMY
The U.S. telecommunications industry comprises thousands of
businesses and over 1 million workers. Telephone services alone,
including long distance, local, and cellular, are provided by over
2,000 companies employing over 700,000 people—about the same
number as the entire U.S. automobile manufacturing industry. In




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1991, reported local telephone revenues were $86 billion and longdistance revenues were $55 billion. Interstate long-distance communications represents a particularly high-growth component, with
the volume of calls more than doubling since 1984. A second major
segment of the telecommunications industry, the mass media, includes approximately 1,500 broadcast television stations, 11,000
radio stations, and 76 national cable television networks. In 1991,
these industries earned about $36 billion in advertising revenues.
One measure of performance in the telecommunications industry
is productivity. Even with significant deregulation in the United
States, the telephone services sectors in more heavily regulated
France and Japan have the same labor productivity levels, measured by output per worker, as the United States. One possible
reason is that the majority of U.S. telecommunications employees
still work for the regulated local telephone monopolies. Competitive pressure to improve efficiency has, until recently, been absent
in this sector because traditional rate-of-return regulation does not
encourage cost-cutting measures that could improve labor productivity.
Where the United States does hold a lead is in capital productivity. A recent study estimates that 2.4 calls are made in the United
States for each dollar invested in the network, but only 1.3 in
Japan, 1.2 in the United Kingdom, and 0.6 in France and Germany.
The United States' lead is due largely to a higher demand for telephone services and a correspondingly higher rate of network utilization. In part, competition among long-distance carriers and government pricing policies have stimulated demand by lowering longdistance rates so that they more closely reflect the actual costs of
providing the service.
Some have called for large public expenditures on the U.S. telecommunications infrastructure to expand the use of technologies
such as fiber optics. Yet it may be regulation that is discouraging
firms from investing in new infrastructure. When regulatory barriers are removed, competition and the ability of firms to reap the
rewards of their success provide sufficient incentives to invest in
commercially viable telecommunications technologies. There are
times, however, that firms are reluctant to invest because they
cannot be assured of fully capturing all the benefits of their investments. It is often difficult or inefficient to prevent information on
research or developing technologies from being used by other firms.
In such cases the government may have an appropriate role to play
in financing basic research and precommercial technologies, but
only if the benefits of the project exceed the costs.
However, government investment in particular commercial technologies amounts to little more than an attempt to guess which
products will be most in demand and then to determine the best




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ways of producing them. High-definition television (HDTV) provides a good example of this problem. The Japanese government
determined the technology that would be used for HDTV in their
country and financed its development. It now appears, however,
that the government-chosen analog technology was inferior to
other alternatives. Left to itself, U.S. industry has developed alternatives to Japanese HDTV using a digital technology that appears
to be superior in quality. Rather than having taxpayers invest in
predetermined technologies, the government should create a more
sensible regulatory environment to ensure continued productivity
improvements and the development of advanced telecommunications
technologies.

GUIDELINES FOR REFORM IN TELECOMMUNICATIONS
REGULATION
Today, technological innovations are making competition feasible
in areas where it was previously considered infeasible. For example, one company has announced that it will soon have the technology to deliver movies over existing telephone wires. Similarly,
cable television companies have the capability to provide customers
with telephone service on their lines. The full benefits of these opportunities will be lost if the government maintains a regulatory
structure that restricts competition and preserves artificial industry boundaries.
The Current Structure of Telecommunications Regulation
The U.S. telecommunications industry is governed by Federal,
State, and local regulatory agencies, with the Federal courts playing a special role. The FCC, the principal Federal regulatory
agency governing telecommunications, is responsible for regulating
interstate and international long-distance telephone services, managing non-Federal U.S. radio spectrum use, enforcing the rules applicable to the broadcasting industry, and establishing standards.
A complicating factor in the Federal regulatory structure is the
1982 court settlement of the Federal Government's antitrust case
against AT&T. This settlement, or consent decree, governed the
subsequent breakup of AT&T. Under the decree, AT&T was required to divest itself of its 22 local telephone companies, which
were then formed into 7 independent companies known as Regional
Bell Operating Companies (RBOCs), or "Baby Bells/' Most importantly, the decree also placed limits on the products and services
the RBOCs could produce. Although some of these restrictions have
been lifted, applications for interpretations of and waivers from the
remaining restrictions have made the Federal courts a virtual
second Federal regulator.
State regulatory commissions are responsible for regulating
intrastate telephone services, but they also share their authority




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with Federal regulators because the same equipment is often used
to provide both interstate and intrastate service. For example, the
same telephone company switch that handles calls from San Francisco to Los Angeles may handle calls from San Francisco to Phoenix as well. But the first call is regulated by the State government
and the second by the FCC. A system of rules and joint boards has
been developed to help separate the Federal and State roles. The
role of local government, on the other hand, has generally focused
on franchising cable television service. The local government's role
in cable television rate regulation will be expanded by new legislation, an issue discussed in detail below.
The Transition to Competition
One primary justification for limiting competition in the telecommunications industry has been the belief that certain markets are
served by "natural monopolies," or single suppliers that can meet
consumer needs more efficiently than multiple suppliers, often
with appropriate regulation of prices and the number of competitors. A classic example is the costly duplication of facilities that
would result from having competing electric utilities within the
same geographic area. Based on the natural monopoly rationale,
cable television services and local telephone services are provided
by a single company in most communities.
But monopoly franchising and rate regulation can also have
drawbacks. Protecting a monopoly may prevent potential competitors from implementing technologies that do not share the cost
characteristics of a natural monopoly. For many years, regulators
considered long-distance telephone service a natural monopoly, but
the development of microwave technology allowed the provision of
long-distance telephone service on a much smaller scale than had
been previously possible. Almost 500 firms now provide long-distance services, ranging from those that serve a variety of customers on a national scale to those that target specialized business
markets or operate on a much more limited geographic basis. New
transmission technologies may achieve similar results in other
markets that have been characterized as natural monopolies, such
as cable television and local telephone service. In fact, government
regulation, and not economic factors, may be the real bar to competition in those markets.
Competition drives firms to innovate and provide new services.
In many telecommunications markets, competition is superior to
continuing rate regulation and monopoly franchises, because competition can lower prices and increase the diversity of available
services.




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Protecting Consumers in the Transition
Markets in which competition has been precluded by government
regulation cannot become competitive overnight. For example, providing local telephone service requires significant capital expenditures for new companies. Immediate deregulation of rates would
allow a monopolist to increase rates without fear of an immediate
response from a competitor. As a result, where changing technology and removal of governmental regulation make it possible for a
regulated monopoly market to evolve into a competitive market,
consumers must be protected from temporary price increases
during the transition to competition. As part of the transition, incentive regulation is being used to encourage regulated companies
to operate more efficiently.
In many areas, regulation has been used to enforce a system of
cross-subsidies that keep prices low for certain classes of users,
such as residential and rural telephone subscribers (Box 5-1).
During a transition period—or longer if the subsidies are justified—these cross-subsidies should be replaced by direct subsidies.
When deregulatory policies create partially deregulated firms or
allow regulated firms to enter unregulated markets, additional
safeguards may be necessary to protect consumers and competition.
For example, telephone companies in States that use cost-of-service
regulation to determine rates may inappropriately transfer costs,
or "cross-subsidize," from the unregulated to the regulated sector,
artificially inflating prices for telephone service, and under some
circumstances, reducing competition in the unregulated markets.
In such cases, safeguards are necessary to ensure that customers
are not subsidizing company activities in unregulated markets.
Safeguards are also necessary to ensure that telephone companies
do not design or misuse the network in ways that discriminate
against companies selling related but unregulated services.
REFORMING TELECOMMUNICATIONS REGULATION
The transition from regulation to competition in telecommunications began over 20 years ago. Technological change, actions taken
by the FCC, and the breakup of AT&T in 1984 have allowed many
new firms to enter the telecommunications industry. For example,
in 1970 AT&T's manufacturing subsidiary, Western Electric, provided almost all of the company's equipment needs and the equipment used by its customers. FCC and court decisions to allow customers to use non-AT&T equipment and the separation of the
RBOCs from the manufacturing subsidiary, coupled with rapid advances in electronics, created a competitive market for equipment.
For instance, AT&T's U.S. market share of sales for private branch
exchanges (telephone exchange equipment for use within businesses) fell from*80 percent in 1970 to 28 percent in 1989.




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Box 5-1.—If Deregulation Is So Great, Why Has My Phone
Bill Gone Up?

When a telephone call is made across the country, a local
phone company starts the call, a different local company completes the call, and a long-distance company carries the call between the two areas. Thus, the local phone network plays two
roles: It provides phone service in a local area and access to
long-distance service. Before 1984, AT&T, with its virtual monopoly over long-distance and local telephone service, carried
nearly all phone calls. To determine the price of a long-distance call, Federal and State regulators had to allocate some of
the costs of the local network to long-distance usage. With a
higher share of the costs attributed to long-distance calling,
long-distance prices would be higher and local service prices
lower.
Political pressures resulted in a shift of costs to the long-distance operations of the telephone network, so that local rates
were kept artificially low. This regulatory shift of costs resulted in prices that led to an inefficient use of the network. The
cost of providing a customer access to a long-distance company
is a fixed cost, unrelated to the number of long-distance minutes that are used. However, these fixed costs were reflected in
the per-minute charge for service, a price that should only reflect the extra, or marginal cost, of providing the service. The
higher long-distance rates resulting from this policy caused
users to reduce long-distance calling and prompted the entry of
other companies.
Realizing the problems arising from this pricing policy, the
FCC began reform in the late 1970s. Instead of including the
costs of access in long-distance prices, some access costs are
now recovered through a fixed monthly subscriber line charge
added to the local telephone bill. The FCC has been gradually
shifting access costs for residential customers to the subscriber
line charge since 1983. The monthly price for local telephone
service increased 3.1 percent annually between 1983 and 1989
in real terms. For some, this increase has meant higher phone
bills. But interstate long-distance prices declined 9.8 percent
annually in the same period as a result of increased competition, the repricing of access, and technological improvements.
Many current regulations may continue to inhibit competition in
the telecommunications industry, however. Even with safeguards
in place, the RBOCs are limited in their ability to enter unregulated markets. Moreover, as discussed below, the cumbersome process




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by which the government manages the electromagnetic spectrum
continues to slow the development of new technologies that could
lead to greater competition in local telephone markets. Competition in local telephone markets could make regulatory safeguards
unnecessary. Competition would make it unprofitable for telephone
companies to discriminate against customers wanting to connect
with a local network, because dissatisfied customers could simply
switch to alternative networks. Similarly, competition would undermine attempts by one firm to use one business to cross-subsidize
another.
The government decides not only which services the local telephone companies can provide but also which services cable operators and broadcasters can provide. For example, three television
broadcast networks—CBS, NBC, and ABC—have not been allowed
to participate fully in the development, ownership, and syndication
of programming for broadcast and cable television since 1970. At
that time, the networks' over 90 percent share of the prime-time
viewing audience created concern that the networks had excessive
bargaining power over program producers, especially small independent producers. These financial interest and syndication rules
are unnecessarily restrictive, given that the share of prime-time
viewing the major networks command has fallen to 62 percent and
that there are now a multiplicity of alternative broadcast outlets
for program producers. Furthermore, an increasing fraction of program production is being done by a small number of large firms.
Therefore, the rules should be eased to allow greater participation
by networks to promote competition, while assuring that legitimately small independent producers are not subject to anticompetitive conduct. The FCC modified the rules slightly in 1991. A Federal Appeals Court, however, has questioned the manner in which
the modified rules were devised and has sent the matter back to
the FCC. The future of the rules remains uncertain.
While the goal of regulation has been to protect consumers, barring businesses from entering new markets may be reducing the incentive of firms to invest in new telecommunications technologies.
Furthermore, policymaking in telecommunications is stymied because businesses protected from competition can use the political
process to prevent entry by new competitors, while at the same
time demanding freedom to enter other markets. To break this
deadlock, protect consumers, and promote competition, reform of
the current telecommunications regulatory policy is necessary.
Managing the Electromagnetic Spectrum
The electromagnetic spectrum is the foundation of many telecommunications services. Radio and television broadcasters, cellular telephone services, police and fire communications, air traffic
control, and taxi dispatchers all rely on the spectrum. Because the




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range of frequencies within which these services can be provided is
limited, spectrum is a very valuable resource. The FCC, which is
responsible for managing the portion of the spectrum not used by
the Federal Government, determines which services will be allowed
to use a given spectrum band (known as "allocating" the spectrum), and who will be assigned licenses for their use.
While the FCC has a legitimate role in defining the terms under
which spectrum is used in order to prevent users from interfering
with each other, it is not well-suited to judge whether, for example,
paging systems have a higher social value than taxi dispatching.
The current administrative process for determining how bands are
used is slow and inflexible, constraining the introduction of new
technologies and the development of competitive markets. Cellular
telephone technology illustrates this problem. The spectrum allocation process began in 1968, yet the first commercial cellular license
was not assigned until 1982. Also, the number of licenses is fixed,
limiting competition to two cellular franchises in each local
market.
Currently, the FCC typically assigns licenses to use a given service either after comparative hearings or by lottery. Comparative
hearings are time-consuming, trial-like procedures. Companies that
place value on a license will naturally want the FCC to assign it to
them. The result is large expenditures by applicants to acquire the
license and a long delay before the license is assigned. The lottery
system is also cumbersome, involving large numbers of applicants
attempting to "win" a license. When an assignment is made, the
chosen licensee often does not provide the service. Instead, licenses
are frequently sold after the initial assignment. Since licenses are
often sold to other users, the FCC could hold an auction for licenses,
eliminating the current cumbersome process and generating revenue
for the U.S. Treasury. The bidder attaching the greatest value to
the spectrum license would receive it, and the step of holding lotteries or comparative hearings would be eliminated.
To permit more efficient use of the spectrum the FCC could
allow the licenses it auctions not only to be resold, but also to be
reassigned by the licenseholder for a different use. This approach
would offer licensees the maximum flexibility in using the spectrum, subject only to prohibitions on interfering with other spectrum users. Flexibility in the use of the spectrum would also encourage users to develop technologies that conserve the amount of
the spectrum used.
Removing Artificial Barriers to Innovation
Like the spectrum management system, the consent decree governing the breakup of AT&T limits innovation and competition in
telecommunications markets. Among other things, the 1982 decree
contained provisions that prevented the RBOCS from manufactur-




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ing telecommunications equipment, providing information services,
and providing most long-distance services. The problems of crosssubsidization and discriminatory use of a monopoly network were
two important reasons for initially limiting participation of the
RBOCs in unregulated markets.
In 1991 a Federal court struck down the provision in the decree
that barred the RBOCs from providing information services, allowing these companies to begin offering services such as message and
database services. Previously forced to act as conduits for other
providers of information services, the RBOCs can now provide
these services themselves. Because these companies have developed
expertise in communications networks and can take advantage of
the efficiencies, or "economies of scope," that make it cheaper to
provide multiple services over a single network than to have many
specialized networks, they will increase competition for information services.
The benefits of having competing services will be reduced, however, if the RBOCs limit competition by engaging in cross-subsidization or by denying other firms access to the local telephone network.
These problems must be continuously monitored by Federal and
State regulatory agencies. To reduce the concern about cross-subsidization and discrimination, the FCC has adopted rules governing
cost allocation and rules that attempt to assure open access to various components of the local telephone network on a timely and
nondiscriminatory basis. If problems arise, these rules may have to
be strengthened even further. The rules will continue to be necessary until competition is fully developed in local telephone markets.
The RBOCs are still barred from manufacturing telephone equipment, a category the courts have interpreted as including related
research and development. The ban effectively prevents seven of
the largest U.S. telecommunications companies from developing innovative technologies and otherwise competing in this market. Supporters of the ban fear that the RBOCs will attempt either to
transfer manufacturing costs to the regulated sector or to engage
in "self-dealing" by selling equipment to their affiliated telephone
companies at inflated prices, raising the costs of regulated telephone service and reducing competition in equipment manufacturing.
The FCC and many States have begun using incentive regulation
that should help to alleviate these problems by making it more difficult for the RBOCs to pass added costs on to telephone ratepayers. Also, a competitive market for telecommunications equipment
should provide competitors and regulators with adequate information on the market value of equipment, to allow them to monitor
the self-dealing problem.




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While the consent decree prevents the RBOCs from participating
in certain businesses, the Cable Communications Policy Act of 1984
and related FCC regulations prevent local telephone companies
from operating cable television systems (except in certain rural
communities). This ban remains in place, even though virtually all
communities with cable television have only one franchised operator, and average rates for the most popular basic cable service have
increased 36.5 percent, in real terms, since 1986 when the act effectively barred regulation in most communities. Although this increase may be due in part to the growing number of channels
available, it may also reflect the presence of market power.
The solution pursued in the Cable Television Consumer Protection and Competition Act of 1992 is to allow local governments to
regulate prices for basic cable television service in almost all communities. Regulating prices, however, does not solve the underlying
problem, which is a lack of competition. This approach also overestimates the ability of regulatory authorities to establish rates that
approximate competitive prices. The danger is that in the attempt
to regulate prices they will simultaneously diminish the variety
and quality of cable programming.
The preferred alternative is to promote competition that lowers
prices and provides alternative sources of television programming.
Having already invested in some of the fixed plant necessary to
provide video services, telephone companies are the most likely
competitors for incumbent cable operators. The FCC's i Video dialtone" policy, adopted in July 1992, allows local telephone companies to act as conduits for carrying television and other video services by other companies. Legislation is needed, however, to remove
the provisions in the 1984 Cable Act that prevent telephone companies from actually becoming full participants in providing programming. Such legislation may create an incentive for telephone companies to construct the infrastructure necessary for combining telephone and video services. Whether there is a demand for the services that such an infrastructure can provide will not be known
until the barriers to competition are removed.
Competition in Local Telephone Services
State regulators have begun to approve competition from alternative local service providers that typically provide private fiber
optic links between long-distance telephone companies and large
businesses. In 1989, the New York Public Service Commission ordered New York Telephone to interconnect with alternative local
service providers. The FCC recently modified its rules to allow
these providers to interconnect their private lines with the interstate facilities of local telephone companies. The policy of expanded
interconnection increases the possibility of competition for large
customers. It recognizes that residential customers may be served




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by a regulated monopoly for the near future, but is laying the
groundwork for competition even in residential markets.
Technological changes suggest that competition can develop in
the local telecommunications market. Many businesses have already switched to private networks for intracompany calls. Expanding wireless technologies, such as that for cellular telephone
service, do not necessarily have the characteristics of a natural monopoly and represent potential competition for local telephone companies. Competition for local telephone service would be further enhanced if cable television companies were permitted to provide
telephone service.
An important factor affecting competition in the future is the
policy of "universal service"—access for all residential users to a
basic level of telephone service at affordable rates. This policy has
been motivated by both equity concerns and the understanding
that each telephone user benefits from being connected to as many
people as possible. To make telephone service universal, basic services are often priced lower than the cost of providing the service.
Other services, such as touchtone or call waiting, are priced somewhat higher than costs to compensate for losses on the underpriced
basic services. Residential customers are usually the recipients of
these "subsidized" services.
One problem with this system of cross-subsidies is that companies—even those less efficient than the regulated incumbent—may
be able to undercut the regulated price and still earn a profit. If
the regulated monopolist cannot adjust its prices in response to
this competition, the inefficient companies will remain in business.
This pricing policy could ultimately cause many of the monopoly's
customers to switch to the new entrants, meaning that rates for
some of the subsidized services would have to be increased.
If regulated carriers are not permitted to respond to competition,
they may find that their rates do not cover the costs of providing
service to their remaining customers—most likely small businesses
and residential customers. Restricting competition is not the
answer to the problem, however. The best way to avoid the perverse results cross-subsidies can create is to give the regulated companies greater freedom to respond to competitive entry. Doing so
will discourage entry by inefficient competitors and only efficient
competitors will survive. Any perceived need for subsidies can be
achieved directly—for example, by charging all interconnecting
companies a fee that supports universal service and targeting the
subsidy to the groups that need it.
Competition in Long-Distance Services
In a series of decisions that began in the 1970s, the FCC and the
courts have opened the long-distance markets to competition. Chart
5-1 shows that since its breakup in 1984, AT&T's market share of




188

long-distance calling minutes has fallen from 84 percent to 60 percent. The FCC estimates that some 480 firms currently provide
interstate long-distance services, while over 90 percent of all telephone customers now have equal access to multiple long-distance
providers. Customers have shown a willingness to respond to competitive service offerings: Approximately 15 percent of all residential customers switched to a new long-distance carrier in 1991.
Chart 5-1

AT&T's Market Share

AT&T's market share has declined significantly since the breakup in 1984.

Percent of long-distance telephone calling minutes
90

1

,

1

,

1

1984

:

1

,

I

1985

.

.

1986

.

.

.

1987

.

,

t

1988

i

l

l

1989

.

.

.

1990

I

.

.

,

1991

1992

Source: Federal Communications Commission.

Except for AT&T, the FCC does not regulate the rates of interstate long-distance companies. To promote the efficiency of rate
regulation while still protecting consumers, the FCC introduced
price cap regulation for AT&T in 1989 and for the interstate services of local telephone companies in 1991. Several States have also
introduced incentive regulation for intrastate services. In 1991, increasing competition led the FCC to eliminate price cap regulation
for AT&T's large business services.
Price cap regulation is still in place for AT&T's residential, small
business, and 800 number services. For these services AT&T must
give the FCC at least 45 days notice before it can offer new services
or prices. The ability of most long-distance customers to easily
switch among long-distance companies that provide similar geographic coverage and service quality suggests that the FCC should
189


334-230

O—92

7 (QL8)

consider relaxing the constraints of price cap regulation on AT&T.
However, some form of regulation would still be appropriate for
communities that do not have a competitive long-distance market.
SUMMARY
• Government policies that protect consumers while allowing
firms to compete in new lines of business will promote an advanced telecommunications infrastructure.
• The current system for allocating the electromagnetic spectrum hampers the development and implementation of new
technologies that could create competition for existing monopoly service providers such as cable television and local telephone service.
• Because competition in long-distance telephone service is increasing, some of the remaining regulations governing AT&T
could be relaxed.

REGULATING FINANCIAL MARKETS AND
SERVICES
Well-functioning financial markets are essential to a modern
market economy. New and expanding business enterprises need
capital to make investments and create jobs, and they rely on the
futures, options, and foreign exchange markets to control unwanted risks. Families and businesses buy insurance to shield themselves from catastrophic losses. Well-developed mortgage markets
foster widespread homeownership.
Like the telecommunications markets, financial markets are subject to a wide variety of government regulations, including some
that are unnecessary, outmoded, and overly rigid. U.S. financial
markets are the largest and most developed in the world, and their
continued success depends on the government's ability to remove unnecessary regulatory impediments while at the same time protecting
investors and maintaining market integrity.
THE CHANGING FINANCIAL SCENE
The last 20 years have witnessed an explosion in the scope and
complexity of financial markets. The traditional roles of banks and
savings and loans (S&Ls) are in transition, and new institutions
and services have multiplied. Several important developments have
contributed to these changes. First, technological progress in electronic communications has lowered information costs and made financial services more available. A familiar example is the spread
of automatic teller machines, which freed depositors from the constraints of limited geographical access and short banking hours. Increased computerization also has accommodated large increases in




190

trading volume in the securities markets. Second, conceptual advances in finance have provided tools to assess the risk and value
of financial instruments such as options and futures contracts, contributing to the rapid growth of these securities markets. Perhaps
most important, the view of the government's role in financial
markets has changed significantly since the 1970s. Regulatory
reform has allowed the development of new services that are now
available to the public. These changes have contributed to and in
some cases were motivated by the globalization of these markets.
Globalization has lowered the cost of raising capital for U.S. businesses by providing foreign sources of capital and has provided
Americans with the opportunity to make valuable investments
abroad.
These developments have not been universally welcomed. Some
observers fear these innovations, perhaps because they know little
about them or are uncomfortable with the colorful vocabulary used
to describe new financial products. Skeptics associate what they
view as the increased volatility of financial markets with some of
these changes. After several highly publicized cases of fraud, other
critics questioned the integrity of some markets. Still others are
less concerned with the risks inherent in new products than with
the possibility that an overly broad Federal safety net—including
Federal deposit insurance—could encourage excessive risk-taking
that would be difficult to monitor and regulate. In an effort to keep
pace with innovation, public and private regulatory mechanisms
have been put into place to identify problems as they arise and to
correct them promptly. Most observers would agree that, in general, the innovations have been beneficial.
THE VALUE OF FINANCIAL SERVICES
Despite their seeming complexity, most financial instruments
and institutions can be understood in terms of three basic functions. First, people use financial markets to reallocate money over
time. For instance, instruments such as savings accounts, individual retirement accounts (IRAs), stocks, bonds, mutual funds, and
pension funds allow households to save for retirement. At the same
time, these instruments channel funds to businesses and households that borrow to make investments.
Second, people use financial contracts to share and reduce risk.
An insurance policy is perhaps the most familiar example, but
most new financial instruments can be used for risk management
as well. One extremely effective way to reduce risk is through diversification. The return on a diversified stock portfolio is much
less risky than the return on the stock of an individual company,
because in a portfolio, gains from profitable firms offset losses from
others that fail. Mutual funds are institutions that allow small in-




191

vestors to pool cash to purchase a diversified portfolio, balancing
risk and return with tools once available only to large institutional
investors or wealthy individuals.
Other contracts can also reduce risk. For instance, a U.S. manufacturer selling cars in France runs the risk of losing money if the
franc falls against the dollar, and a French farmer selling cheese in
the United States faces the opposite risk. In each case, the exchange-rate risk can be eliminated by writing a contract with a financial intermediary such as a bank or a trader in a brokerage
firm, specifying the exchange rate that will be used in the future.
Popular contracts of this type include futures, forwards, and swaps
(all of which are agreements to make specified payments on specified dates). The growth of active futures, forward, and swap markets has significantly lowered the cost of risk-management.
The third function of financial markets is to provide liquidity.
An asset is liquid if it can be bought or sold quickly, at a predictable price, and with low transactions costs. For instance, a savings
account is very liquid because it can be turned into cash almost instantly, while a house is illiquid because it takes time to sell and
its price is hard to predict. By offering standardized contracts with
well-understood risks, returns, and legal status, and by providing
information to the market, financial intermediaries enhance liquidity, lowering transactions costs for investors and borrowers alike.
Because participants in financial markets can invent, develop,
and market new financial instruments, the macroeconomy has
become better able to adapt to constantly changing conditions and
weather external shocks. Even in an economic expansion, particular industries and geographic regions experience significant economic disruptions. For instance, the collapse of energy prices in
1986 hurt U.S. energy producers, and the sharp rise of the dollar in
the early 1980s hurt our manufacturing industries. Episodes such
as these would have had a more severe impact in the absence of
active forward, futures, and swap markets in agricultural products,
oil, interest rates, and foreign exchange.

THE CHANGING ROLE OF GOVERNMENT
As financial markets have evolved, so has the nature of the government's involvement with them. The history of government
intervention in financial markets contains many useful lessons
that can help in determining when intervention is appropriate and
in understanding the problems that poorly designed intervention
can cause.
Much of the regulatory structure governing the financial sector
dates from the 1930s. The disruptive waves of bank failures
throughout the 1800s and the early years of this century, as well as
the Great Depression, convinced legislators that economic stability




192

depends on the stability of the financial system. Actions such as
the creation of the Federal Deposit Insurance Corporation (FDIC)
and the passage of the Glass-Steagall Act, which mandates the
legal separation of investment and commercial banking, date from
this period. Although the framers of this regulatory structure initially expressed some doubts, until the late 1970s calm prevailed in
the financial markets, and the regulatory system was widely considered a success.
High and volatile interest rates in the United States in the late
1970s began to expose some of the system's underlying weaknesses.
The heavy losses suffered by the S&L industry set the stage for the
recent string of failures. Commercial banks fared somewhat better,
but even they were adversely affected as depositors withdrew their
funds to seek higher market returns. Banks were prohibited from
paying the market interest rate by Regulation Q of the Federal Reserve, which set a 5-percent interest rate ceiling for savings accounts. Some obvious impediments to the effective operations of financial institutions were removed by the regulatory reforms of the
early 1980s, when interest rate ceilings were phased out and S&Ls
were given more freedom in their choice of investments. These
changes, however, did little to address many fundamental problems
in the regulatory structure. In fact, careless or uneven deregulation
sometimes exacerbated these problems and added to the losses
from S&L insolvencies.
The Government's Role in Financial Markets
The growth of financial services has been accompanied by a
steady increase in government involvement in many of the new activities. Is the large and expanding role of the Federal Government
in these markets beneficial? To evaluate this important and complex issue, it is useful to start with another, more basic question:
What current or potential market failures require government
intervention to be corrected? Most observers agree that regulation
should have a role in two areas.
First, government institutions help to maintain the stability of
the financial system. Financial markets act as the circulatory
system of the economy, creating vital connections between seemingly unrelated enterprises. When this system breaks down, even
healthy sectors of the economy may suffer. The Great Depression is
the most compelling example of this phenomenon, when a sharp
contraction of credit and a fall in asset prices preceded a 30-percent
drop in aggregate output and an unemployment rate that reached
25 percent.
Institutions such as the FDIC and the Federal Reserve System
limit the damage a financial crisis can cause by providing an emergency source of liquidity and by preventing financial panics from
spreading. For example, during the October 1987 stock market




193

crash, the Federal Reserve provided the banking system with additional reserves. Banks used these reserves to make emergency
loans that saved a number of financial firms from bankruptcy.
Some have credited these measures with preventing more widespread repercussions from the crash.
A second role for regulation is to improve the day-to-day operation of financial markets, both by providing prudent oversight to
prevent fraud and abuse, and by facilitating truthful disclosure of
information. For example, the Securities and Exchange Commission (SEC) requires corporations financed with publicly traded
stocks or bonds to disclose relevant financial information.
Challenges for Regulatory Reform
The dynamism of the financial marketplace presents a special
challenge to regulators. When a rule becomes particularly onerous,
someone is likely to invent a way to avoid it, often with unfortunate and unexpected consequences. For instance, in the late 1970s
market interest rates rose well above the Regulation Q ceiling, and
depositors moved their money into newly created high-yielding
mutual funds. The drop in deposit levels ultimately hurt small
businesses that depended on banks for loans not readily available
elsewhere. Ironically, one of the original reasons for imposing interest rate ceilings had been to lower the cost of bank-intermediated financing. The lesson here is that effective regulation must be
flexible and oriented toward creating incentives that will help and
not hinder efficient resource allocation. Rigid regulations can cripple the market's ability to provide valuable services and almost inevitably result in an unproductive game of regulatory catch-up.
In designing effective policies, regulators must also take into account the globalization of the financial services industry. Large
U.S. banks now have operations on every continent, while domestic
banks face competition at home from U.S. branches of foreign
banks. Many stocks that once traded exclusively in New York are
now also traded in London and Tokyo. Securities change hands
around the clock and around the world via new electronic trading
systems.
As markets become more international, they also become extremely competitive and mobile. Policymakers worldwide have
become increasingly aware that they must work together to create
a fair and open environment, maintain stability, and ensure accountability. Because today's markets are highly mobile, countries
that unilaterally impose costly regulations risk driving businesses
to other, less regulated countries. For example, some have suggested imposing a heavy tax on stock or futures market transactions to
discourage frequent trading and as a source of additional revenue.
Such a policy, however, would have the unfortunate consequences




194

of reducing market liquidity in the short run, and losing U.S. jobs
and tax revenues in the long run as transactions shifted overseas.
Finally, one unfortunate consequence of the piecemeal process of
financial regulation and reform has been that responsibility for
regulating the financial markets is spread across a large number of
Federal regulatory agencies. The Federal Reserve Board, Treasury
Department, Office of Thrift Supervision, Commodity Futures
Trading Commission, FDIC, and SEC often find themselves with
overlapping jurisdictions, especially as banks increase their participation in the securities markets and new financial instruments fall
across what were once distinct categories. In some cases, conflicts
between agencies have actually prevented viable financial products
from reaching the public. Better coordination in designing and implementing regulatory policy could significantly reduce the unnecessary burden imposed by inconsistent rules and reporting requirements.

CURRENT ISSUES IN REGULATORY REFORM
Recent regulatory developments affecting banks, S&Ls, and insurance markets have begun to address some of these issues, but
further reform is needed to ensure a safe and efficient financial
system.
Lessons From the S&L Debacle
Since 1980, regulators have shut down almost 1,200 insolvent
S&Ls with assets of over $500 billion, and additional insolvent
S&Ls are expected to be resolved over the next few years. The Administration estimates that this wave of S&L failures will ultimately cost taxpayers between $100 billion and $160 billion (in nominal
dollars). Because of deposit insurance, however, no insured depositor has lost a dime. Furthermore, in the last half century deposit
insurance has contributed to the relative stability of U.S. financial
markets.
Understanding the underlying causes of these failures can reduce
the probability of future losses of this magnitude. The troubles
began when the high interest rates of the inflationary 1970s substantially reduced the value of the long-term, fixed-rate mortgages
that were the primary assets of the S&Ls. As interest rates rose,
the cost of the short-term deposits used to finance mortgages increased, but the mortgage payments remained constant. By 1981,
the total value of S&L liabilities exceeded the total value of assets;
S&Ls as a group were technically bankrupt.
Although regulators and the Congress were aware of the problems, they chose to allow many insolvent S&Ls to continue operating. Ordinarily, when a private company nears bankruptcy, its operations are severely limited because investors refuse to provide
further financing. With deposit insurance, however, depositors




195

have little incentive to withdraw their funds, and no natural
market mechanism limits the activities of an insolvent S&L. In
fact, regulations restricting investment to traditional mortgage
lending were relaxed to make the S&Ls more competitive with
commercial banks. With nothing to lose, many S&Ls used their insured deposits to gamble on high-risk investments in areas outside
their scope of expertise. If these investments paid off, the financial
health of the S&Ls would be restored. If they failed, the deposit insurer would pay the costs.
This episode provides several important lessons. First, deposit insurance can encourage excessive risk-taking by depository institutions, leading not only to enormous liabilities for the taxpayer, but
to real economic losses to society through the inefficient use of private capital. For example, an insured lender has a greater incentive than an uninsured lender to provide financing for a very risky
and economically unjustifiable venture. As long as the government
provides deposit insurance, some regulation will be necessary to
counterbalance this incentive. A second lesson concerns the workings of the regulatory system. Perhaps the most disquieting aspect
of the S&L affair was the long delay before action was taken to
close insolvent institutions.
Although most insolvent S&Ls have now been closed or merged
with healthy institutions, a number of problems remain. The Resolution Trust Corporation (RTC), the Federal agency in charge of resolving insolvent S&Ls, is paying off depositors and recovering as
much money as possible in liquidating remaining assets. The RTC
can perform these activities only if it has the money to pay off depositors. As of this writing, the RTC has exhausted its funds. As a
result, insolvent institutions continue to operate and to lose money.
The Administration has urged prompt action, but until the Congress appropriates more funding, these avoidable costs will continue to mount.
Although they are less at risk than they were in the past,
healthy S&Ls could still suffer substantial losses if interest rates
rise, because these institutions hold a large portion of their portfolios in long-term mortgages or mortgage-backed securities financed
with short-term deposits. A rapid increase in interest rates would
raise funding costs, but the income from the mortgages would
remain largely fixed. For the most part, this situation appears to
be an indirect consequence of regulation and not the result of
market forces. Partly to correct this bias, S&L regulators have recently proposed new interest rate risk-based capital requirements
which are discussed below.
Developments In Commercial Banking
A variety of difficulties have also weakened commercial banks
(Chapter 3 has a discussion of recent developments in banking).




196

The unusually large number of bank failures in recent years has
left the bank insurance fund without enough money to cover anticipated future losses. Taxpayers are unlikely to be called on to make
up the deficiency directly. Deposit insurance premiums have increased, however, and these increases are likely to be passed on to
depositors through lower rates or higher service fees. To cover
near-term costs, the FDIC is authorized to borrow up to $70 billion
from the Treasury. This debt is expected to be repaid with future
deposit insurance premiums.
The Impact of Recent Regulations
In December 1991 the Congress passed the Federal Deposit Insurance Corporation Improvement Act. This act is the most recent
major legislative attempt to reform the rules governing depository
institutions. Its primary goal is to decrease future deposit insurance losses by tightening supervisory standards and increasing insurance premium rates and capital requirements for riskier institutions. By authorizing new borrowing from the Treasury, it also provides some of the much-needed funding to finish closing insolvent
banks and S&Ls.
In 1988, bank regulators around the world agreed, under the
Basle Accord, to set capital standards based on the default risk of a
bank's assets. Conceptually, bank capital is the difference between
the value of a bank's assets and its liabilities. With deposit insurance, bank capital provides a buffer against losses to the FDIC, so
it is appropriate that the capital requirement reflects a bank's risk.
For such a rule to provide the appropriate incentives, however, it
must set a capital standard that reflects all types of risk. The current risk-based capital requirement primarily focuses on default
risk. As a result, banks have an incentive to shift away from investing in commercial loans toward investing in Treasury securities, reducing one type of risk but incurring another: interest rate
risk. If interests rates rise, the value of long-term Treasury securities will decline relative to the value of the deposits financing
them, eroding bank capital. To correct this requires modifying riskbased capital standards to take into account interest rate and other
types of risk.
The FDIC Improvement Act's ''prompt closure" rule, which requires that the FDIC and other bank regulators restrict a bank's
activities if its capital falls below specified levels, addresses the
problem of lax regulation of weak institutions. For the most severely undercapitalized banks, the law generally requires closure or
conservatorship within 90 days. The purpose of this regulation is to
avoid the long delays and speculative losses that have added billions of dollars to the cost of the thrift crisis. The drawback is that
because bank capital is often poorly measured, some healthy insti-




197

tutions may be unfairly constrained, and some insolvent institutions may be allowed to continue to operate.
Bank supervisors rely heavily on accounting data to determine
the strength of individual banks. The need for reliable data has increased with regulations such as the prompt closure rule. Yet discrepancies between true and reported asset values continue to
occur because the reported, or book, value of an asset does not necessarily reflect current market conditions. For instance, a bad loan
can remain on the books for some time before a bank must recognize the loss. Conversely, a bank's assets may have appreciated, but
regulators often do not take the increases into account.
Some observers have proposed adopting a system of market value
accounting that would allow banks to report market values instead
of (or in addition to) book values. Although market value accounting would increase the quality of some information available to
regulators, it is difficult to determine the market value for infrequently traded assets such as some types of commercial loans.
Many bankers believe that using a combination of market and
book values can be more misleading than simply using book value.
As debate on this issue continues, regulators appear to be moving
toward a system that places increasing emphasis on market values
but still relies primarily on book values.
Proposals for Further Bank Reform
The FDIC Improvement Act failed to address many of the fundamental problems in the current regulatory structure. In 1991 the
Administration proposed a broader set of regulatory reforms to significantly improve the efficiency of our financial system. Since the
1991 Report described these proposals in detail, they are reviewed
here only briefly.
The Administration supports the removal of branch banking regulations that limit interstate banking. Although such rules were
originally intended to reduce the potential market power of large
banks, they have had the opposite effect, decreasing competition
between banks in local markets and increasing the cost of bank
services. Interstate banking would make banks safer because they
could more easily diversify their risks geographically and lower costs
by avoiding legal barriers to efficient operation.
Currently, the FDIC insures deposits up to $100,000, and wealthy
individuals can obtain virtually unlimited insurance by splitting
deposits among many separate accounts. Capping the maximum insurance coverage for a single individual would reduce the government's liability and still provide ample protection for the savings of
small depositors. An added benefit would be that large depositors
would have the incentive to monitor the investment policies of
their depository institutions.




198

The Administration supports a number of reforms that would
allow banks to provide a wider range of financial services. Banks
are currently limited in their ability to engage in such activities as
selling insurance and underwriting new stock and bond issues—
services that are complementary to traditional banking activities.
Allowing banks greater freedom to participate in these activities
could increase competition for such services and lower costs to the
public.
Unfortunately, the recent legislative efforts to reform bank regulations—the FDIC Improvement Act and the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA)—may
have created as many new problems as they have solved. (The 1991
Report has a discussion of FIRREA.) These laws burdened banks
with costly and unnecessary paper work, and generally created a
regulatory atmosphere that exacerbated the shortage of commercial credit during the recent recession and recovery. The Administration has proposed legislation to repeal several of the supervisory
provisions that impose unreasonably high compliance costs on
banks and do little to improve the soundness of the system.
Government-Sponsored Enterprises
With little public fanfare, the mortgage market has undergone
an enormous structural change. In 1975 S&Ls financed 46 percent
of single-family mortgages. By 1991 this share had shrunk to 16
percent. Much of the private market has shifted to two government-sponsored enterprises (GSEs), the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac) (Chart 5-2).
Fannie Mae and Freddie Mac are shareholder-owned corporations chartered by the Congress to provide a secondary, or resale
market for residential mortgages. Homebuyers still apply for mortgages from traditional lenders—S&Ls, banks, and mortgage
banks—that make and often service the loans. The GSEs buy mortgages from the initiating lenders and retain some of the mortgages
in their own portfolios. Through a process known as securitization,
the GSEs also gather mortgages into diversified pools. They issue
securities backed by these mortgage pools and sell the securities to
investors such as banks, insurance companies, and pension and
mutual funds. Interest and principal payments from the pool of
mortgages are passed through to investors as they arrive, and the
GSE promises to provide payment in the event of a default on an
underlying mortgage. Securitization enhances the liquidity of mortgages, lowering the cost of mortgage financing for homebuyers.
Although GSE charters state that the securities they issue are
not obligations of the Federal Government, the GSEs receive significant government benefits including exemption from State and
local income taxes and certain registration requirements, as well as




199

Chart 5-2 Single-Family Mortgage Debt Outstanding
The principal source of single-family mortgages has shifted from savings and loans to
government-sponsored enterprises.
Billions of 1982-84 dollars
2,500

2,000 -

1,500 -

1,000 -

500 -

1975

1980

1985

1988

1989

1990

1991

Government-Sponsored Enterprises y \ Commercial Banks | j Savings and Loans | | Others
Note: Other sources are private companies, government agencies, and individuals. Deflated by CPI-U.
Source: Board of Governors of the Federal Reserve System.

a contingent line of credit from the Treasury that authorizes discretionary emergency loans of up to $2.25 billion. Furthermore, the
fact that yields on GSE securities are only slightly higher than
those on Treasury securities with similar maturities suggests that
investors believe that the Federal Government would step in and
make the payments if the GSEs cannot meet their obligations.
In general, although the GSEs and the Federal Government may
have eliminated the default risk for the purchaser of an insured security, they cannot eliminate the risk inherent in the investment
activity being funded. The percentage of bad loans may actually increase when loans are insured and resold because the incentive to
monitor the mortgage borrower is reduced. While the S&Ls suffered the consequences of their lending decisions, the GSEs resell
mortgages originated by institutions that ultimately have a smaller
stake in whether the loans are repaid, although they do have an
interest in retaining the right to sell loans to the GSEs.
The phenomenal growth in GSE lending in recent years has
made it appear likely that the government would honor the guarantee implicit in GSE securities rather than risk a crisis in the
mortgage market. As a result, some have argued that potential




200

losses from these guarantees should be recognized in the budget
(Chapter 6). These GSEs have been very profitable in the last few
years. For instance, Fannie Mae had a net income of $1,4 billion in
1991. But Fannie Mae lost over $350 million between 1981 and
1985, and a large drop in housing prices could trigger much greater
losses.
Until recently GSEs have been lightly regulated in comparison
with banks and S&Ls. This fact is somewhat surprising given the
central role GSEs play in the housing market, the significant implicit subsidies provided by their status, and the potentially enormous liability the government faces if a GSE fails. Recognizing the
need for protection, the Congress passed a bill in October 1992 that
sets capital standards for GSEs and establishes a regulator who is
appointed by the President and located in the Department of Housing and Urban Development.
As it does with banks and S&Ls, higher capital reduces the government's potential liabilities and increases the incentive for GSEs
to control risk. The new GSE capital standards are structured similarly to those for banks and S&Ls; they are risk-based and mandate
prompt closure if capital falls below specified levels. They are significantly lower than those for banks and S&Ls, however, for several reasons. First, mortgage loans have a lower default rate than
the commercial loans that make up a significant part of bank portfolios. Second, GSE capital is based partially on market value, providing a reliable estimate of an institution's strength. Finally, because the GSEs resell most mortgages rather than keeping them on
their balance sheets, private investors bear a larger portion of any
interest rate risk, although the GSEs retain the default risk.
Whether these new standards will adequately protect the taxpayer
from GSE losses, however, remains to be seen.
The private sector successfully securitizes many other types of
loans, including credit card receivables, automobile loans, and some
types of mortgages and commercial credit. A larger role for private
sector securitization would reduce government liability and further
enhance market liquidity. Until 1992, one impediment to further
private securitization of assets such as small business loans was the
securities law itself, which required compliance with the outmoded
restrictions of the 1940 Investment Company Act. The SEC recently adopted new regulations to facilitate private securitization,
while still ensuring adequate investor protection.
Insurance Markets
Insurance allows people to reduce their exposure to many types
of risk by spreading losses across a larger group. Government insurance programs have been developed in part because some risks
are difficult to predict and catastrophic in size. The nature of the
losses may make it difficult for the private market to develop actu-




201

arially sound premium rates or sufficient reserves to credibly
insure such risks. Political considerations dictate the provision of
other types of insurance that in principle could be provided by the
private sector.
As in the credit markets, the government is increasingly taking
a direct role in providing insurance. In fact, the Federal Government has become the Nation's largest underwriter of risk. Government insurance programs affect the economy in three main ways:
They reduce and redistribute risk, reallocate wealth, and change
the incentives of the insured.
When insurance is underpriced relative to its long-term cost,
those who are protected receive a subsidy. Federal insurance programs have suffered substantial losses over the last decade (Chapter 6). Although some insurance losses were due to unforeseen and
perhaps unavoidable events such as the droughts that struck the
Nation's farms in 1983, 1988, and 1989, many can be attributed to
inaccurate risk assessments.
The Federal Government often undermines its insurance programs by providing disaster assistance with similar benefits, but at
little or no cost to the individual. This subsidy weakens incentives
to avoid risk or to buy insurance, putting the government under increased pressure to provide assistance after the next disaster. A
good example of this phenomenon is the experience of the Federal
crop insurance program (Box 5-2).
Insurance also reduces incentives for people to make cost-effective choices. For example, offering subsidized insurance rates for
flood protection can encourage people to retain homes on flood
plains. Well-designed insurance programs must provide incentives
that encourage prudent behavior, and the cost of misallocated resources due to distorted incentives should be part of any cost-benefit analysis of government insurance programs.
Is there a further role for the private sector in providing insurance? As private financial markets continue to expand, private insurers may be able to handle liabilities that were once considered
too large. For example, futures contracts related to health, homeowners, and catastrophic insurance have been developed that will
allow insurers to shift risk to other private entities such as banks,
mutual funds, and individual investors. Innovative combinations of
private and public insurance could also improve efficiency. For instance, it has been suggested that private insurers could set premium rates and cover a portion of deposit insurance, limiting the government's liability to losses that exceed the private coverage level.
To explore this idea, the FDIC Improvement Act requires the FDIC
to test private reinsurance and report the results in 1993.




202

Box 5-2.—Federal Crop Insurance and Disaster Assistance

Crop insurance protects farmers against losses from low crop
yields caused by bad weather, pests, or disease. Since 1938, the
Federal Government has offered farmers subsidized crop insurance. Between 1981 and 1990, the Federal Crop Insurance Corporation paid out $2.5 billion more than it collected in premiums.
The Federal Crop Insurance Act of 1980 set out to establish
crop insurance as the primary source of disaster risk management for farmers. But despite subsidized rates, many farmers
do not participate in the program. In recent years, less than
one-half of the eligible acreage was covered by Federal crop insurance.
Disaster assistance has undermined the effectiveness of the
crop insurance program. Based on their experience, many
farmers believe that whenever a widespread natural disaster
occurs the government will provide emergency disaster assistance to all affected. In a recent survey, 41 percent of farmers
who did not purchase crop insurance said that they did not do
so because they believe that the government would bail them
out in the event of a disaster. Conversely, low participation in
the crop insurance program makes it all the more likely that
the Congress will face political pressure to enact disaster legislation whenever a widespread disaster occurs.
SUMMARY
• The growth of financial services has lowered the cost of risk
management and expanded investment opportunities.
• The increasing flexibility and international mobility of financial markets necessitates a regulatory framework that focuses
on incentives and avoids rigid rules.
• Progress has been made in reforming the regulation of depository institutions, but impediments to efficient operation
remain. Further reform is needed to ensure a safe and competitive financial system.

OWNERSHIP AND PRICING OF NATURAL
RESOURCES
In the United States, the government owns a substantial share of
the Nation's resources. The Federal Government owns about onethird of the total land in the United States, including 29 percent of
forestlands and 43 percent of rangeland. State and local govern-




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ments and American Indian Nations own another 8 percent of U.S.
lands. Over 10 percent of the U.S. population receives water from
Federal projects. The land and water bring with them other important natural resources, including wildlife and minerals.
The principles of regulatory reform—allowing markets to work
where possible, and harnessing the power of market incentives to
accomplish regulatory objectives—should also be applied to issues
of government ownership and pricing of resources. Some resources
such as Federal rangelands and industrial timber stands are indistinguishable from adjacent privately owned lands and have no special features warranting public stewardship. In addition, the U.S.
Government often sets the price for using resources below the
market price, sometimes even below the direct cost of providing
them. These low prices can lead to overconsumption, distorted economic priorities, damage to the environment, and lost revenue.
WHY DOES THE GOVERNMENT OWN AND MANAGE
RESOURCES?
Most goods and services in our economy are private property,
traded in markets that determine prices and quantities. As has
been noted, markets efficiently allocate commodities to serve the
best interests of all. Government ownership of land and other natural resources in the United States is, in large part, a residual effect
of policies adopted in the last century to encourage settlement of
sparsely populated western territory. In many cases, there is no
economic reason for the government to own these resources.
However, for some resources, there may be a market failure that
does provide an underlying reason for government activity. There
are two interrelated ways in which private markets for natural resources and the right to use them may fail.
First, a private market may fail to produce the right amount of a
public good. Public goods are goods that can be used or enjoyed by
one person without detracting from the use or enjoyment of others.
For example, suppose Farmer Jones paves the road into town. The
neighbors can use the road without affecting its usefulness to
Jones, and, therefore, the road meets the definition of a public
good. While roads are not a natural resource, this example illustrates how a private market may fail: The neighboring farmers
have an incentive to wait, hoping someone else will incur the costs
of paving the road that all of them can use. Some natural resources
have the character of public goods; one person can enjoy the beauty
of a forest without detracting from another person's use of it. On
the other hand, grazing land and timberland are not public goods:
Timber harvested by one person is then not available to anyone
else. In fact, it is not uncommon for grazing land and timberland to
be privately owned.




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Second, in many cases, markets fail to reflect external costs or
benefits of using a resource. External costs and benefits, or externalities, affect individuals who are not parties to the economic transaction. For example, logging on a hillside may cause soil erosion,
imposing a cost on the people living at the bottom of the hill. The
cost to these people is not taken into account in the private market
for trees and lumber. Often, people are excluded from an economic
transaction affecting them because of the high costs of negotiating
and enforcing a settlement.
External costs and benefits are often a consequence of the failure
to establish property rights for natural resources. An example is a
communal grazing field. Anyone can bring cows to graze, but no
single farmer owns the field. Because every farmer can use the
field for free, farmers tend to bring more and more cows until the
field becomes congested. Each farmer using the field is creating an
external cost to the other farmers. Unless property rights have
been assigned stating which parties "own" the rights to the land or
the rights to graze on the land, the private market will not allocate
the pasture in a way that maximizes the joint benefits of all users.
ESTABLISHING MARKETS FOR THE RIGHT TO USE
RESOURCES
Establishing private markets for the right to use a resource often
requires government action. The establishment and enforcement of
property rights is quintessential^ in the realm of government.
During the 18th and 19th centuries, the U.S. Government established property rights for lands on the western frontier and then
sold or gave away those rights to homesteaders.
The most direct way for the government to address certain failures in markets for natural resources is to sanction legally valid
private property rights and allow owners to limit or sell access to
resources. For example, the common grazing field could be given or
sold into private hands and access limited by a fence. Private property rights give owners the incentive to stop the resource from
being overused and to manage it in a way that maintains or increases its value. Private timber companies in the United States replant their lands to maintain forested areas. On the other hand,
timber companies in some developing countries hold only shortterm logging concessions on government-owned land and have little
incentive to replant or otherwise sustain forest resources.
Not all natural resources lend themselves to ordinary boundaries
and fences. It is difficult to assign ownership of the atmosphere as
a storage space for waste products. One way to address this problem is to have the government create a special kind of property
right—the right to use the resource—and then to allow holders of
the right to sell it like any other property.




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A familiar example of a government-issued right to use a resource is a deer hunting license that permits the licenseholder to
hunt and kill a specified number of deer. However, hunting licenses cannot be traded or transferred. If a hunter wishes to kill
more deer than the license allows, he or she cannot legally buy the
licenses from other hunters and in that way gain the right to kill
more deer.
Making permits tradable (allowing them to be bought and sold) is
critical to ensure that the resource is used in an economically efficient way. People who attach a low value to using the resource will
sell their right to use it to those who attach a relatively high value
to use of the resource. The 1990 Clean Air Act Amendments, for
example, use tradable permits in order to lower the cost of reducing pollution. The law sets yearly caps on sulfur dioxide emissions
from electric utilities. Over time, the caps will be lowered, so that
by the year 2000 these emissions will be about one-half of their
1990 levels. Plants receive permits each year for the amount of
sulfur dioxide that may legally be released. Since the cost of limiting emissions may be much higher at some facilities than at others,
it is not economical to force each plant to reduce emissions by the
same amount. To deal with this, the law allows the permits to be
bought and sold. Plants that would find it expensive to reduce
emissions may be willing to pay a high price for the permits.
Plants that can reduce emissions relatively cheaply may be willing
to sell their permits. In this way, the market for permits reallocates them so that those plants able to reduce pollution inexpensively will reduce pollution the most. This system of tradable permits is expected to save the economy an estimated $1 billion per
year, or about 15 to 25 percent of the cost of reducing pollution
without tradable permits. Box 5-3 describes another example.

PRICING OF GOVERNMENT-OWNED NATURAL
RESOURCES
Where privatizing a resource is not feasible, another solution to
the problem of market failure is for the government itself to hold
the resource on behalf of the public. Government ownership of a
resource is most appropriate when the resource has the character
of a public good (Box 5-4). Goods and services typically provided by
the government include armed forces and public fire departments.
The U.S. Government has purchased or created national parks
such as the Grand Canyon. These are public goods that can be used
and enjoyed by many people at the same time. As noted earlier,
the private market may fail to provide the optimal quantity of
public goods as potential users wait for others to make the investment. To an increasing extent, the government has adopted this
prescription. Under this Administration, funds for State land and




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Box 5-3.—Government Creates a Market for Fishing Rights
There is no practical way to establish ownership rights of
ocean fish stocks. Traditionally, fish have been free for the
taking—a common pool resource. Theory teaches that such underpricing leads to overconsumption. In the halibut fisheries
off Alaska, fishing fleets caught so many halibut that the survival of the stock was threatened. No single fishing boat had
an incentive to harvest fewer fish since the impact on its own
future catch would be minimal and others would only increase
their take. This is an example of what is known as "the tragedy of the commons."
Officials tried limiting the length of the fishing season. But
this effort only encouraged new capital investment such as
larger and faster boats with more effective (and expensive)
fishing equipment. In order to control the number of fish
caught, the season was shortened in some areas from 4 months
to 2 days by the early 1990s. Most of the halibut caught had to
be frozen rather than marketed fresh, and halibut caught out
of season had to be discarded.
In late 1992, the Federal Government proposed a new approach: assigning each fisherman a permit to catch a certain
number of fish. The total number of fish for which permits are
issued will reflect scientific estimates of the number of fish
that can be caught without endangering the survival of the
species. Also, the permits will be transferable—they can be
bought and sold. By making the permits transferable, the
system in effect creates a market where one did not exist previously. The proposed system will encourage the most profitable and efficient boats to operate at full capacity by buying
permits from less successful boats, ensuring a fishing fleet that
uses labor and equipment efficiently. Moreover, the transferable permits system establishes a market price for the opportunity to fish—a price that better reflects the true social cost of
using this common resource.

water conservation were tripled, and 20 new national park units
and 57 new national wildlife refuges have been added or proposed.
The fact that the government owns certain resources does not
automatically guarantee that they will be allocated and used in the
best possible way. Prices charged for use of a resource significantly
affect the economic efficiency of that use. The appropriate price is
one where marginal social cost is equal to marginal social benefit.
Marginal costs are the expenses involved in providing an incremental unit of a resource, marginal benefits are the gains associated




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Box 5-4.—Forests as a Public Good
Government ownership of natural resources is sometimes intended to help produce the public goods that private ownership
has failed to provide. A prime example is the recent reform of
government stewardship of forests. Many private forests are
harvested by logging companies through clearcutting, which
involves removing every tree on a plot of land and then replanting the land with seedlings. While clearcutting can be the
least costly way to produce timber for industrial uses, it does
detract from the scenic value of forestlands.
In 1992 the Administration adopted a new "ecosystem approach" for managing these federally owned forests which
phases out clearcutting as a standard timber harvest practice.
Instead, trees in Federal forests will be selectively harvested in
order to preserve the scenic value of the forests. The Forest
Service expects that the new policy will reduce clearcutting on
Federal lands by as much as 70 percent from 1988 levels while
reducing the volume of logs cut by only 10 percent or less. This
policy exemplifies the appropriate role of government, not as
an owner of commercial timberland, but as a protector of forests as a public good.
with that additional unit. Social costs and benefits reflect the economic impact on all members of society and include externalities
as well as direct economic effects. Box 5-5 discusses some difficulties in measuring social costs and benefits
Chronic Underpricing
The rights to use government-owned natural resources are often
sold at prices that fail to incorporate the full costs to society and
sometimes at prices that do not even cover management expenses
(Box 5-6). Nineteenth-century government policies set prices low to
encourage settlement and development of the West. Powerful local
constituencies have helped keep them low.
Timber from Federal forests has been sold at prices even lower
than the government's cost of providing the timber—and without
incorporating possible externalities such as environmental damage.
Likewise, rights to graze on Federal lands are sold at prices that
fail to cover administrative costs.
Drawbacks of Underpricing
Whether or not it was warranted in the past, underpricing the
right to use natural resources today can create budgetary, economic, and environmental problems. On the first point, the budgetary
consequences are readily apparent: When the government sells nat-




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Box 5-5,—Measuring the Value of Nonmarket Goods
Since a public good is not traded on a competitive market,
the market cannot assign it a price based on its value. Measuring the benefits public goods provide is problematic* One
method is to infer the value of public goods from actual markets or observable economic behavior* For example, to estimate
the value people put on scenic beauty, economists may measure the effect of scenic beauty on actual real estate prices. The
value that people put on a park may be reflected in the
amount of time and money that they spend to visit and use it.
The contingent valuation method (CVM) uses public opinion
surveys. A polltaker asks people to estimate the amount they
would be willing to pay to maintain or create a certain public
good or the amount they would require to compensate for its
loss. Advocates of the CVM argue that it can generate reliable
estimates of value in cases where it is impossible to make inferences from actual markets or behavior, and in principle, it
takes into account the fact that some people value a good more
highly than others do.
However, the CVM also has generated considerable criticism.
For example, those surveyed do not actually have to pay the
amount they report, a factor that can lead to overstatements.
Responses are sensitive to the way questions are posed. (In one
case, the estimated value of protection from oil spills changed
by a factor of 300 when polltakers asked additional questions
before eliciting this value.) CVM results can be inconsistent.
(For example, one CVM study showed that people were willing
to pay more money to clean up small oilspills than to clean up
both small and large spills.) In many cases CVM results cannot
be verified except by another CVM study.
These problems are exacerbated when the CVM is used to estimate the value of goods that are abstract, symbolic, or difficult to comprehend. One study showed that if the CVM were
used to estimate the value of saving whooping cranes from extinction, resulting estimates might be as high, as $37 billion per
year (more than the Federal Government spends each year on
education and Head Start programs). Finally, even if all the
problems of the CVM could be resolved, care must be taken to
ensure that it is not used to analyze policy in a one-sided way.
For example, a proposed program to protect whooping cranes
might put people out of work. The $37 billion figure could be
cited by those who claim that the benefits of the program
exceed its costs. But opponents of that view could undertake a
CVM study of their own asking people how much they would
be willing to pay to protect these jobs.




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Box 5-6.—Reform of California Water
One highly publicized example of government underpricing
of natural resources has been California water. Forty-year contracts signed in the 1940s and 1950s guaranteed California
farmers water from Federal projects at prices of about $3 per
acre-foot, even though the government's current cost to supply
that water is often about ten times that amount. Cities and industries that need water cannot obtain it from farmers because
archaic legal restrictions block the development of water markets.
The Reclamation Projects Authorization and Adjustment Act
of 1992 was signed by the President, despite his concern over
certain aspects of the bill, in large part because it encouraged
more market-oriented pricing of Federal water in California.
The act allows those receiving water from the Federal Central
Valley Project to pay low subsidized prices for the first 90 percent but increases the price for the last 10 percent, so that the
price for the final units used will more closely reflect the full
costs of providing the water.
The act also allows recipients of Federal water to sell their
water rights. In this way, water can be shifted from relatively
low-value agricultural use to relatively high-value municipal or
industrial use. The high value of water to urban users is indicated by the fact that, in 1991, the California State Water
Bank sold nearly 400,000 acre-feet of State water to cities and
industrial users at a price of $175 per acre-foot.

ural resources below their market value, the taxpayer is subsidizing those uses. Under the 1872 Mining Law, mining companies are
able to buy land from the Federal Government for $2.50-$5.00 per
acre and then resell the land at market prices. In one extreme example, the government sold 17,000 acres of land for $42,500. Weeks
later, these lands were resold to major oil companies for $37 million.
Second, underpricing diverts resources from uses that would benefit society the most to less valuable tasks. In California, cities and
industries are often willing to pay substantially more than farmers
for water, demonstrating the high value water can have. But lowpriced Federal water is often used to grow crops such as alfalfa—a
crop fed to dairy cattle-—in effect subsidizing the production of
milk which has been in oversupply and is already subsidized by
Federal support programs. Letting farmers transfer water from
low-value agricultural uses to high-value uses could generate substantial economic gains for farmers and nonfarmers alike.




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Third, when underpricing leads to overuse, the environment may
suffer. For example, if the government underprices grazing rights
on federally owned land, overgrazing may lead to soil erosion. Pricing the right to use government-owned natural resources to reflect
actual social costs and benefits could help the environment as well
as improve economic performance.

REFORMING PUBLIC RESOURCE POLICY
Given the chronic problems of government ownership of natural
resources, what practical steps can be taken toward developing a
better system? As mentioned above, in some cases, governmentowned natural resources can be "privatized"—given or sold to private individuals. Once in private hands, access to the resource
would be priced by the market ensuring more efficient allocation
and reducing overconsumption. From the standpoint of economic
efficiency, the decision to give away the natural resource or to sell
it is not important. Even if the government gives away the resource to someone who cannot use it efficiently, efficient users will
make attractive offers to buy it from the initial recipients.
For the same reasons, the issue of who becomes the initial owner
of the resource is also unimportant in terms of economic efficiency.
However, it may be of critical importance in determining the political viability of privatization. If government-owned resources are
sold rather than given away to those now using them, the present
users may form a powerful group blocking privatization. On the
other hand, sales bring in government revenues which could be
used to pursue other objectives.
In cases where using a natural resource involves significant externalities, however, putting it in the hands of private owners will
not solve the problem of market failure, since the prices private
owners charge would reflect private costs and benefits rather than
social costs and benefits. But government ownership is not the only
way to deal with externalities. The actions of private owners can be
regulated by laws such as those that make people liable for damages if they cause hillside erosion. Externalities can also be incorporated in private market decisions through taxes and subsidies,
fines and fees, or other government action.
When natural resources remain in government hands, prices
charged for access to these resources ought to reflect, to the fullest
extent possible, the actual costs and externalities associated with
using the resource. This policy can be implemented in any of three
ways. First, when the appropriate price can be calculated, the government can set the selling price at that level. Second, when the
market price is unknown, the government can auction rights to use
the resource, allowing the auction to determine the market price.
Third, the government can give away or sell at low prices the right




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to use the resource, and allow that right to be bought and sold. In
this last case, the market for transferable rights will set prices and
dictate the appropriate use.
SUMMARY
• Markets for natural resources are sometimes characterized by
imperfections, either when the resource is a public good or
when the use of the resource involves externalities.
• Sometimes the market imperfection can be eliminated by assigning property rights. One way to define these property
rights is by creating tradable permits to use the resource.
• When the government retains ownership of a resource, access
to that resource should be priced to reflect social costs and benefits.

RISKS TO HEALTH, SAFETY, AND THE
ENVIRONMENT
Life involves risks as well as opportunities. Disease, crime, and
car accidents are well-known risks; every week seems to bring
claims of new kinds of risks, such as food contamination, toxic substances, and global climate change. Yet creating a truly zero-risk
society would be impossible. And it would be undesirable, not only
because such a goal would be prohibitively costly but also because
people often decide that some risks are worth taking—such as testing new technologies, using the fastest mode of travel to save time,
or even playing school sports.
Nevertheless, the risk of premature death and injury has in fact
declined steadily over the long term as society has become richer
and more technically advanced. In the short term, many risks can
be reduced, but only at a cost; for example, cars built to withstand
crashes will cost more than similar cars lacking such reinforcements. People often decide that avoiding risk is worth the cost:
they buy insurance, join health clubs, install car alarms, and take
detours to avoid dark alleys.
Amidst the myriad public choices about risk, the government
often acts to reduce risks. It tests and sets safety standards for
foods, drugs, automobiles, factories, and chemicals. It also plays an
active role in providing information about risk, and in regulating
behavior that may impose risks on others or on the environment.
RISK IN PERSPECTIVE
People commonly believe that contemporary life presents more
risks than the "simpler" times of the past. Certainly some types of
new technological risks exist today that did not in earlier eras. But
it bears recalling that in the "good old days" standards of living




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were lower, nutrition and health care were poorer, workdays were
longer and more dangerous, and food and water supplies were less
safe and reliable than they are today.
In fact the risk of premature death and injury is lower in modern
industrial society than in earlier and less technologically advanced
societies. Average life expectancy at birth, the most salient indicator of overall risk, has improved in the United States from 47 years
in 1900 to 75 years in 1990. In most poorer, less industrialized countries life expectancy is increasing but is only about 55 years. Other
indicators of risk are also improving: The life expectancy of an
American at age 65 increased by 45 percent between 1900 and 1990.
American infant mortality rates fell 81 percent between 1940 and
1990 to under 1 percent of live births; in low-income countries the
infant mortality rate is as high as 10 percent. Since 1945, a persons risk of being killed on the job has fallen by more than 70 percent. In 1900, infectious diseases (mainly tuberculosis, pneumonia,
diarrhea, and enteritis) were the leading causes of death in the
United States, accounting for 30 percent of all fatalities in that
year; today they cause about 5 percent, although the growing crisis
of AIDS (acquired immune deficiency syndrome)—and associated
resurgence of pneumonia and tuberculosis—is cause for national
and international concern. Today cancer, heart disease, and strokes
are the leading causes of death in the United States, together accounting for about two-thirds of all fatalities.
To be sure, the risk to Americans of certain new types of accidents has increased over time; after all, no Americans died in airplane crashes in 1900. But even new types of risk have been reduced as technology and operations have improved. A person's risk
of dying in an automobile accident has declined over 30 percent
since 1970. Furthermore, the increasing ability of science to detect
ever-smaller potential risks may cause people to perceive an increase in risk.
Health risks associated with environmental pollution have also
declined. Between 1970 and 1989, air pollution decreased significantly: particulates fell 61 percent, sulfur oxides 26 percent, carbon
monoxide 40 percent, and volatile organic compounds 31 percent.
As lead was phased out of gasoline over this period, lead emissions
dropped 96 percent. Industrial discharges of key water pollutants
also declined over 90 percent between the mid-1970s and mid-1980s.
Though difficult to quantify, the health benefits of reducing pollutant emissions can be significant. For example, substantial evidence
suggests that elevated levels of lead in children's blood cause lasting neurological damage, impairing IQ, productivity, and quality of
life and increasing expenses for remedial education and treatment.
Today cancer causes about a quarter of American fatalities, but
experts estimate that environmental pollution accounts for only




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1-5 percent of all cancer deaths. Occupational exposure is estimated
to account for another 2-8 percent, and food additives (which in
some cases actually protect against cancer) for —5 to 2 percent.
Smoking and other behavioral factors make much larger contributions to cancer.
Cancer is a less common cause of death in poorer countries,
where food spoilage, diseases borne by drinking water, and infant
mortality take their toll long before cancer can develop. Similarly,
within the United States, residents of low-income neighborhoods
are more likely to face high rates of crime and infant mortality,
and to have high levels of lead in their blood.

RISK IN THE MARKETPLACE
Every day, people make decisions about taking or avoiding risks.
Like other aspects of the quality of goods and services, riskiness is
a product feature that people evaluate when making transactions
in the marketplace. People can choose products and jobs with varying characteristics, including riskiness. People buy child car seats,
fire extinguishers, and reinforced locks. Today consumers are more
interested than ever in automotive safety features such as airbags
and antilock brakes, and manufacturers are responding to these
market demands.
Market prices for goods and services thus reflect people's preferences about risk-taking, the information they have about risks, and
the freedom they have to accept or avoid risks. When people are
well informed and can make their own decisions about risk-taking,
market prices will send signals that guide producers and consumers to provide and consume the socially desired amount of safety.
When people do not have sufficient information and choice, social
systems may develop that help people learn about and manage
risk. Government policy is one such social risk-management
system, but not the only one. Others include norms of behavior, insurance markets, and the system of tort (wrongful injury) liability
operated by the courts.
Personal behavior probably has the most pervasive influence on
the risks people face. People learn to drive defensively, look both
ways before crossing the street, lock their doors, and wash their
hands before eating. Many norms of behavior also help protect
others in the community, such as covering one's mouth while
coughing. Meanwhile, the risks that people willingly face—and
could choose to avoid—are often much larger than the risks that
people worry about being obliged to endure. Of those who regularly
drive or ride in automobiles, about 2 out of every 10,000 die in car
accidents each year, for a total of about 45,000 deaths annually. By
comparison, for those who live near municipal solid waste landfills,
the mortality risk is substantially less than 1 in 1,000,000 and may




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be far lower—a minute fraction of the risk of automobile travel,
and a risk that shows up (if at all) only decades later in life.
In competitive labor markets, as Adam Smith pointed out in
1776, employers trying to attract workers will offer wage increases
to offset undesirable job characteristics. Because most workers are
less willing to take a more dangerous job, employers have to offer
higher wages to attract workers to riskier jobs. The increase in
wages paid to compensate for the added risk is called a "risk premium." Studies show that workers in many occupations earn significant risk premiums. Because workers vary in their aversion to
bearing risk, the wage premium for a given amount of risk also
varies. Evidence suggests that most workers accepting a job with
an additional annual fatality risk of about 1 in 10,000 would earn
some $300 to $700 (in 1990 dollars) more than they would in a similar job without the additional risk. Workers who are significantly
less averse to bearing risk (such as those who seek jobs in especially risky occupations, like mining) tend to accept lower wage premiums for the same incremental increase in risk. These risk premiums not only compensate workers for their willingness to bear risk,
but also encourage employers to reduce risk. An employer who can
eliminate a risk at less than the cost of the premium the risk adds
to wages has an incentive to invest in greater workplace safety.
This incentive is significant: The extra wages that employers pay
to compensate for risk currently total over $100 billion per year.
The fact that workers receive risk premiums for facing risk does
not, of course, guarantee that the amount of these premiums represents the appropriate compensation or safety incentive. When people
do not have enough information about risks, or when they cannot
act freely on that information (such as when they cannot relocate
to seek a new job), they may earn risk premiums that under- or
overcompensate them for risk. Coal miners may be earning lower
risk premiums because they are less mobile, not because they are
more willing to accept risk. In situations where the perceived risk
of an activity is less than the true risk—for instance, when a machine has an undisclosed defect or a substance is more toxic than
believed—wage risk premiums probably do not fully compensate
workers for the risk. Conversely, when the perceived risk of an activity is great but the true risk is small, market transactions may
overcompensate for risk.

THE ROLE OF GOVERNMENT: PROVIDING
INFORMATION AND REGULATING RISK
People's actions can create risks for others, yet in some circumstances the marketplace does not provide efficient price signals
that encourage the socially desired amount of risk avoidance. Government can help people deal with risks by improving the way




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markets operate. When markets fail to offer people the information
and choice needed to understand and avoid or accept risks, the government can intervene to assess and manage risks. But the government can fail, too, and its intervention is only justified where it
does more good than harm—where its social benefits exceed its
social costs.
First, the government can try to improve the information about
risk available to people in the marketplace. Information about
risks may be inadequate because market participants do not have
an incentive to collect, distribute, or analyze it. Rules that government has developed to increase awareness of risks include those requiring labels on foods, electrical appliances, and other consumer
products, as well as the Occupational Safety and Health Administration (OSHA) Hazard Communication Rule that requires employers to inform employees about chemical hazards in the workplace.
But government efforts to mandate information can be expensive
and confusing, or can omit important information; in some cases
informational mandates can even discourage innovation of better
products. Extensive requirements for food labeling, for example,
could overload consumers with extra information that obscures the
most important nutritional facts, and could even keep some healthier food products off the market. Reports on toxic materials released by factories, which are required by community right-to-know
laws, often present only the total weight of each chemical discharged and do not differentiate chemicals by degree of toxicity,
potentially misleading people about the risks posed.
Second, the government can regulate risk by managing and limiting the choices open to individuals. As noted earlier in this chapter, government intervention may be warranted when private
transactions fail to take account of "external costs" imposed on society by pollution and other activities. Government regulation
might also be warranted when the information on which a risk decision must be based is so complex that the people affected do not
have the time to invest in understanding and acting upon it. Imagine trying to decide whether to board an airplane based on a risk
information label posted on the fuselage. Hence the government
evaluates the risks of complex machinery, medicines, and toxic substances, and sets safety standards for their production and use.
Again, poorly chosen or designed government regulations can be
expensive and can fail to reduce risk; they may even do more harm
than good.
Risk Assessment
To provide accurate information to the public and to develop appropriate regulations, the government must first identify and
evaluate risks. "Risk assessment" has become a widespread government function, performed by agencies such as the Food and Drug




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Administration (FDA), the EPA, and OSHA. It plays a pivotal role
both in government regulatory decisions and in choices made by individuals and businesses. Accurate risk assessment is a necessary
element of setting intelligent priorities and taking effective action
to improve people's health and safety.
Risk assessment is supposed to be a scientific, policy-neutral, reliable, and accurate method of obtaining information on risks. Unfortunately, the scientific credibility of government risk assessment
has been undermined by embedded policy judgments. Faced with incomplete information and pressure to deliver simplified findings
that support the goals of agency regulators, government risk assessors have developed methods that incorporate policy-based assumptions and methods. Instead of providing complete and accurate information, risk assessments present filtered estimates that are
tilted toward particular results. These embedded policy choices bias
government risk estimates away from true risk estimates, distorting decisions made by both the public and government agencies.
First, embedded policy judgments have encumbered the government's efforts to identify whether a substance or activity poses a
risk. Government assessments of health risks have tended to focus
almost exclusively on cancer, overemphasizing environmental
cancer risks but overlooking other dangers, such as reproductive
and neurological toxicity. Government risk assessors typically
assume that if high-level exposure to a substance causes cancer,
then any minimal exposure will pose a risk of cancer, even where
available evidence does not show harm below low doses. And researchers are required to use a classification system that simplifies
descriptions of test results, forcing important differences between
the physiology of laboratory animals and that of human beings to
be ignored. For example, gasoline vapors have been classified as a
human carcinogen because male rats exposed to these vapors in
the laboratory developed liver tumors, even though the researchers
knew that the mechanism that triggered these tumors does not
occur in humans.
Second, embedded policy choices also bias the government's assessment of the number of people actually exposed to a risk. Most
risk assessments do not analyze real data about exposure to real
people; instead, they hypothesize a "maximum exposed individual"
who breathes or ingests the most concentrated emissions 24 hours
a day for every day of a 70-year lifespan. Examples bordering on
the absurd are not uncommon. To determine the potential risk of
hazardous waste disposal sites, government risk assessors assume
that hypothetical children will unerringly locate the most contaminated spot on the site, dig through a five-foot clay cap and two
plastic liners to reach the most toxic dirt, and ingest 200 milligrams every day for 350 days a year (even in towns where the




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ground is frozen and snow-covered many months a year). Until recently, EPA risk assessors assumed that the level of pesticide residue on food was the maximum level permitted to be applied at the
farm, even though the permitted level at the farm is hundreds to
many thousands of times higher than the actual level of residue
found at the supermarket.
The Impact of Skewed Risk Assessments on Decisions
Inaccurate and biased risk assessments do not help protect
people. On the contrary, when skewed risk assessments are used to
guide regulatory policy, they distort the government's effort to
manage risks in ways that make regulation both more expensive
and less protective. They lead to excessive regulation that imposes
costs on society in lost use of products or the higher cost of substitutes. And they cause regulators to pay too much attention to low
risks and not enough to high risks.
Even apart from biasing regulation, skewed risk assessments can
have important negative consequences. Mixing policy with scientific risk assessment undercuts the credibility of risk estimates. Inconsistent risk assessment methods used by different agencies also
erode their credibility. Reports implying that all chemicals pose
high cancer risks can perpetuate exaggerated public fears. When
reported risks are not put into the perspective of everyday experience, the public can be frightened away from substances that in
fact pose very small risk.
Ironically, this fear may actually raise risks—increasing mortality and suffering—if inaccurate risk estimates mislead people into
ignoring the risks or eschewing useful products. A particularly
tragic example may have occurred recently in Peru when the government reduced the chlorination of its drinking water, apparently
relying in part on a study reporting that chlorination of U.S. drinking water could increase the risk of cancer. Yet in Peru, waterborne disease may be far more important than minute cancer risks;
the ensuing cholera outbreak killed nearly 4,000 people and afflicted almost 400,000 more.
Risk Management
If reliable information is available about the real risk posed by a
given substance, what should the government do? In many cases
the best answer is nothing, because the market will incorporate the
information and provide appropriate incentives for safety. As noted
above, government does have a role in addressing "externalities,"
as long as appropriate government action will do more good than
harm.
The primary issue in shaping government risk management is
the degree to which risk-causing activity should be restricted. Determining when the incremental cost of reducing risk begins to




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equal and then exceed the incremental benefit is often a difficult
analytic task. With limited social resources to spend on reducing
risk, weighing the costs and benefits of policy choices is not only
inevitable: it is the daily challenge of good government. For example, experts have pointed out that if the entire U.S. national
income were somehow devoted to preventing all of the 95,000 or so
accident fatalities that are occurring every year, about $60 million
could be spent per accident. Yet such a program would address
only about 4 percent of the yearly death toll in America, with no
funds left to address cancer or homicide, to say nothing of other
social imperatives like food, housing, education, and national defense.
A frequent objection to cost-benefit analysis is that some benefits
can be difficult to quantify. For example, it may be hard to measure in dollar terms the benefits of disease prevention or visibility
across a national park. Some costs of regulation are also hard to
quantify, such as the effect of a rule on future technological innovation. The solution to these difficulties, however, is not to give up
on rational balancing of costs and benefits. It is often useful to
produce a reliable estimate of the range within which costs and
benefits fall, since the alternative is to make a subjective and unsubstantiated judgment. The real question is whether it makes
sense to invest in improving our ability to measure costs and benefits—an investment which could end up costing society less than
omitting important costs or benefits from regulatory decisions.
Federal agencies now routinely conduct cost-benefit analyses of
policy proposals. Executive Order 12291, issued in 1981, requires
agencies to analyze the costs and benefits of proposals for major
regulations and to submit those analyses to an office of regulatory
review, which examines the calculations and suggests possible alternative approaches.
Even with expert cost-benefit analysis, it is not easy to determine
the proper level of government risk management. Yet we can be
fairly sure that there are substantial problems with existing approaches. First, some laws prevent agencies from considering costs
and benefits in making regulatory decisions. For example, parts of
the 1977 Clean Air Act required companies to install equipment
that reduced pollution by the maximum possible amount, no
matter how small the benefits of the marginal reduction in pollution might be or how much the extra equipment might cost. The
Delaney Clause of the Food, Drug, and Cosmetic Act requires the
FDA to ban any food additive that is found to induce cancer in
humans or animals, not matter how trivial the risk or how substantial the benefits of the substance; in 1992 a Federal court reaffirmed the rigidity of this rule. Moreover, the stringency of such




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rules only increases as scientific ability to measure minute risks
sharpens.
Second, some laws and rules set priorities that do not correspond
to real risks. Money spent on programs that make little difference
in risk is money no longer available for programs that are more
effective in reducing risks. For example, hundreds of billions of dollars will be spent to clean up waste disposal sites, which experts
have consistently ranked near the bottom of the environmental
risks facing Americans, while much less money is dedicated to combating the greater risk of childhood exposure to lead in paint and
soil in the inner city. Moreover, the costs of regulation can themselves increase health risks, by reducing the income of workers and
consumers.
The costs and benefits of a risk management policy depend in
part on the regulatory instrument or tool chosen to implement that
policy. Given a defined goal for risk reduction, policy tools should
be selected that minimize the cost of achieving that goal. On the
other hand, given a fixed budget for reducing risk, policy tools
should be selected that maximize the risk reduction achieved with
those resources. These are the two sides of the cost-effectiveness of
policy tools.
The "cost" side of cost-effectiveness has been heavily studied.
The central conclusion is that the cost of achieving a given regulatory goal can be significantly reduced by harnessing marketplace
incentives to achieve that goal rather than by dictating specific conduct or technologies. Risk management in the United States has
often employed command-and-control regulations that compel businesses to install particular pollution control or workplace safety
technologies. Today policymakers are increasingly using marketbased regulatory tools, such as fees and tradable allowances, that
focus on outcomes rather than methods. These tools set performance objectives and then allow industry the flexibility to achieve
results at least cost, thus allocating control efforts to the least
costly sources and providing an economic incentive to seek continuous improvements. Market-based tools have been applied to phase
down lead in gasoline, phase out ozone-depleting chlorofluorocarbons, and limit urban air pollution. Market-based incentive tools
can achieve environmental goals at substantial cost savings compared to command-and-control tools. Studies estimate these cost
savings at 10 to 50 percent or more, even 90 percent in some cases.
The "effectiveness" side of cost-effectiveness has received less
analytic attention, but is equally important. Rules aimed at reducing risk can often miss their targets. Increasingly critical attention
is being paid to the standard assumption that regulations will successfully eliminate the problem they address, even in cases in
which the regulated industry is in compliance. For example, stud-




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ies show that even though employers comply with OSHA safety
standards, injury rates are barely affected because OSHA's detailed
standards for physical design of the workplace do not address the
actual underlying causes of most injuries. In contrast, the workers'
compensation insurance system simply charges employers insurance premiums tied to the safety record at the workplace. Because
fewer injuries mean lower insurance payments, employers invest in
safety improvements that address the causes of injury at each
workplace. Although concerns about instances of abuse and mismanagement of workers' compensation have arisen recently, in
general its incentive-based feature is estimated to have reduced
workplace fatalities nationwide by some 20-30 percent.
The effectiveness of some regulations is undercut by "risk tradeoffs." Some regulations aimed at reducing a "target" risk inadvertently promote increases in "nontarget" risks.
• Because environmental laws focus on air, water, waste, and
workplace pollution separately, in some cases they may only
shift pollution from one of these "media" (such as air) to
others (such as water or the workplace). Scrubbers to remove
sulfur from air emissions, for example, generate sludge that
must be disposed of in some other way.
• Ethylene dibromide (EDB), once a widely used pesticide, has
been barred because regulators determined that it poses a
small cancer risk. Yet this pesticide kills a mold on peanuts
that harbors natural aflatoxins. The estimated human cancer
risk from the aflatoxin in one peanut putter sandwich is about
75 times greater than a full day's dietary risk from EDB exposure. Focusing on the pesticide's risk alone, instead of on the
net risk of the consumed food, may induce a net increase in
overall cancer risk.
• Immediate removal of asbestos from schools to protect occupants many years in the future could stir up asbestos fibers
that pose an increased risk to both the workers removing the
material and the children occupying the school today.
A different type of "risk tradeoff occurs when regulation aimed
at one risk only causes consumers to switch to riskier products or
activities.
• Rules requiring higher gas mileage in cars have saved fuel but
encouraged consumers to purchase smaller, lighter vehicles
that have higher fatality rates in crashes.
• Laws that place more restrictions on new facilities or products
than on old ones create an incentive against innovation, encouraging people to keep existing high-risk plants and products
in use longer, with a potential net increase in risk.


334-230 O - 9 2


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8 (QL3)

• Rules requiring parents to purchase separate airplane seats for
infants could encourage the parents to travel by car instead,
increasing the net risk of injury to the child.

IMPROVING GOVERNMENT EFFORTS TO ADDRESS
RISK
By exaggerating some risks and using cumbersome regulatory
tools, the current government approach to risk assessment and management provides far less protection of the public and the environment than it could for the resources it expends. The Administration
has supported several efforts to improve risk assessment and management. The overriding goal is to save more lives and better protect the environment by improving our ability to identify the most
important risks and to reduce them cost-effectively.
First, the Administration has sought to disentangle the scientific
role of risk assessment from the policy role of risk management. In
1992 the EPA issued new "Risk Characterization" guidelines requiring that all assumptions and methods embedded in risk assessments be disclosed in full. These guidelines are a positive step
toward credible and accurate risk assessment that should be forcefully implemented. Risk assessments need to examine not extreme
hypothetical cases but the real physiological risks to which real
people are exposed. In the case of pesticide residues on food, the
EPA has begun to test real supermarket residue levels instead of
assuming maximum permitted farm levels. Consideration should be
given to creating an independent scientific office to review agency
risk assessments, analogous to (but clearly separate from) the
review of agency risk management proposals currently conducted
by the Office of Management and Budget. Such a review process
would improve interagency consistency as well as the accuracy,
neutrality, and credibility of risk assessments.
Second, the Administration has emphasized the need to direct society's resources to their best uses. The Administration has insisted
on cost-benefit review of regulations under Executive Order 12291,
and is strengthening this process via the regulatory reform initiative discussed earlier. These efforts would be enhanced by automatic "sunset" provisions requiring that regulations be reviewed periodically to determine which have outlived their usefulness and can
be removed. In 1992 the President extended the cost-benefit analysis requirement to proposals for legislation; surprisingly, agencies
had not been routinely evaluating the costs and benefits of their
legislative proposals, and the Congress still does not. And the Administration has worked to base legislation, regulations and the
federal budget on the principle that priorities address major rather
than minor risks.




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Further, the problem of "risk tradeoffs" is not insoluble. Broader
and more thorough cost-benefit analyses, taking into account nontarget risks, can help identify potential risk tradeoffs. Cost-benefit
analyses should also be performed by experts independent of the
regulatory process who are not subject to pressure from affected
constituencies. To address the problem of cross-media shifts in pollution, the EPA is now moving toward a more integrated multimedia regulatory approach that addresses air, water, and land pollution in concert. A potential solution to the problem of regulations
that disproportionately burden new facilities and products is the
use of new source offsets, such as the provisions in the EPA's
urban air pollution rules, which allow new sources to operate as
long as they obtain emissions reductions at existing plants equal to
or larger than the new emissions they would contribute. More generally, statutes and rules should direct agencies to prevent uunreasonable risk," rather than mandating reductions in narrow categories of risk or use of specific technological fixes. By incorporating
this principle, the Administration's 1992 policy on the oversight of
biotechnology products will help ensure that biotechnology is used
safely to produce better drugs, better pest control systems, and an
improved food supply, without stifling a promising new technology.
SUMMARY
• Facing risks is inevitable, but reducing risk is costly. Some
risks can be worth taking because of their significant benefits.
Most risks are addressed by human behavior and by market
functions such as insurance and compensating risk premiums.
• Government risk assessment activities need to be improved by
disclosing embedded assumptions and incorporating more accurate risk assessment methods.
• The government should intervene to address risks when the
benefits of government action exceed the costs. Government
risk management policies should employ cost-effective incentive-based tools and should account for risk tradeoffs that may
undermine the effectiveness of policy efforts.

CONCLUSION
Millions of complex economic decisions are made every day: How
many soybeans should be produced, and how many ball bearings?
How much labor and how much equipment should be used to
produce these products? How much should a person be paid for a
given job? The U.S. economy relies on the market system for answers to these questions. Markets constitute an extraordinarily effective system for processing information on consumer demand, the
scarcity of resources, and methods of production. The market




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system also allows people to make free economic choices. At times,
however, markets may not perform well because of externalities,
failures in the availability of information, or because they are inclined toward natural monopoly. While government intervention in
such markets may be justified in these limited cases, government
attempts to improve performance in these markets can create unintended consequences. Government regulation should be undertaken only when there is a strong presumption that the benefits from
intervention exceed the costs, taking into account hidden costs such
as forgone innovation. This analysis should be conducted with the
understanding that regulation itself is imperfect and can reduce
the ability of firms to respond to changing conditions, including
new technologies. It is also important to recognize that government
regulation of risk is only one among many risk management systems, including norms of behavior, insurance, the marketplace
itself, and the tort system.
The President's regulatory reform initiative has established a
governmentwide review of regulatory policy to ensure that existing
regulations are necessary and cost-effective. Market incentives are
now being used to achieve regulatory objectives such as pollution
control and more efficient energy markets. Reform of telecommunications regulation is benefiting consumers by lowering prices for
communications services and encouraging service innovations.
Similarly, in the financial services sector, regulatory reform has
been directed at reducing the cost of risk management and expanding investment opportunities while continuing to preserve investor
protection and maintain market integrity. The government can
also use market incentives to prevent the overconsumption of natural resources by establishing property rights and by considering all
social costs when pricing government-owned resources.




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CHAPTER 6

Economic Growth and Future
Generations
STRONG AND SUSTAINED economic growth is the key to providing Americans with rising real incomes and the resources to
meet their needs, desires, and aspirations. Sustained economic
growth will also provide employment opportunities and offer people
the dignity and self-respect that come with full participation in the
economy.
Over the last century, Americans have achieved a remarkably
high average standard of living. This achievement and the high average annual rates of growth needed to attain it must not be taken
for granted. Cumulative increases in income are surprisingly sensitive to small differences in the long-term growth rate. For example,
in 1870 per capita income in the United States was 15 percent
below that of the United Kingdom. For the next 120 years, the average annual growth rate of real per capita income in the United
Kingdom was 1.38 percent; in the United States it was 1.86 percent.
As a result of this difference, per capita income in the United
States is now 50 percent greater than it is in the United Kingdom.
Such is the power of compounded growth.
As a consequence of America's economic record, each generation
of Americans has started life with the prospect of achieving a
higher standard of living than the preceding generation. Real national per capita income today is 15 times greater than it was in
1900. Real national private wealth, a partial measure of the Nation's productive capacity, stands at $70,000 per capita, more than
twice what it was at the end of World War II. Increased human
and physical capital, improved technology, and a strong market
system allow the average worker of the 1990s to produce 6.5 times
the real output of a worker in 1900. In the last two decades, however, productivity growth has slowed, raising questions about whether future generations will achieve the same advances in living
standards.
Although economic growth is traditionally associated with rising
levels of such measures of income and wealth, it is important to
recognize its nonmonetary dimensions as well. Significant improvement in such indicators of well-being as health status, environmental quality, and life expectancy have also been recorded. Since 1945




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the rate of occupational death has fallen by 70 percent. Changes in
lifestyle and developments in health care have increased life expectancy by more than 20 years since 1920—an increase of 40 percent.
While improvements in average income levels do not ensure that
all Americans are better off, a wealthier nation has more resources
to care for its people and to provide them with opportunities for
advancement. As average income has increased over the century,
poverty has been reduced significantly. (The record of recent decades was examined in Chapter 4 of last year's Report.)
The condition of the Nation's productive resources, both tangible
and intangible, will significantly affect living standards in the
years ahead. Growth depends on the quantity and quality of the
Nation's physical capital; the stock of natural and environmental
resources; a military capable of providing for the Nation's defense;
creative entrepreneurship; vigorous business, philanthropic, and
government institutions; an educational system that prepares children for the challenges ahead; a legal system that protects property rights and resolves disputes in a cost-effective manner; and a national commitment to free enterprise and open world markets that
captures the benefits from trade. While some of these factors are
already laying a solid foundation for the future, others are badly in
need of fundamental reform. America's elementary and secondary
schools must be dramatically improved. The legal system needs to
provide for more timely and affordable resolution of disputes. The
financial system requires major changes to adapt to modern conditions. The tax system is overly complex and impedes economic
progress. A central goal of the Administration has been to establish
policies across the entire spectrum of economic affairs that address
these problems and create an effective framework for continuing
growth.
Some critics have expressed concern that economic growth can
only be bought at the expense of the quality of the environment. In
fact, economic growth has enabled America to devote increased resources to improving environmental quality. As discussed in Chapter 5, it is a myth that environmental regulation is "free" of any
cost in terms of nonenvironmental goods and services. Another
myth is that economic growth should be suppressed to preserve the
world's stock of natural resources. Rather, well-functioning markets see to it that people have appropriate incentives to utilize and
preserve such assets.
Current and prospective government policies will have a profound effect on the well-being of future generations. Many critics
single out the Federal debt as the primary indicator of the stance
of government policy toward future generations. While the Federal
debt is an important component of the inheritance received by




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future generations—and the Administration has advocated significant spending cuts that would greatly reduce or eliminate the
future deficits that increase the Federal debt—it is but one of the
many channels through which government action will affect the
future. Government policies that reduce or improve incentives for
entrepreneurship, the quality of the Nation's legal system, the Nation's public infrastructure, and the quality of the educational
system can be of even greater importance, yet they are not recorded in measures of the debt or deficit.
The debt and the deficit are imperfect measures, even in their
narrow role of reflecting the government's financial liabilities. For
example, they fail to account adequately for the future liabilities of
government programs, such as future deposit insurance outlays.
The debt, while suggestive of the intergenerational transfers
caused by the government's financial liabilities, is often a far from
precise measure.
Nevertheless, it is generally agreed that current government
policies shift more of the financial burden to future generations
than did the policies of the past. Government actions are needed to
redress this imbalance, especially those encouraging economic
growth so that future generations may be more productive.
In this chapter, the diverse resources that lay the foundation for
growth are highlighted. The ways in which the financial liabilities
of the Federal Government imbedded in its current policies can
reduce future living standards are also stressed. Other chapters of
this Report discuss reforms that could improve the prospects for
future growth, as have previous Reports. Specific attention is given
in this chapter to reforming the Nation's tax system to restore incentives for entrepreneurship, saving, and investment.

EVALUATING GROWTH
In view of the myriad advantages it offers, increased economic
growth is obviously desirable. In particular, America needs to
pursue every opportunity to obtain the gains that come from removing unnecessary obstacles to growth. Yet increasing future
standards of living are often built upon sacrifices of present consumption in favor of investment, and in some instances the costs
are borne by present generations and the benefits enjoyed by
future generations. A policy that favors growth therefore often involves issues of intergenerational equity. Another problem that
must be dealt with is finding ways to quantify standards of living,
since the usual measures of income and wealth omit significant aspects of economic growth. A particularly important issue is the
effect of economic growth on environmental amenities.




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GROWTH AND INTERGENERATIONAL FAIRNESS
Productive investments in institutions, technology, and human
and physical capital contribute to growth. The resources required
for these investments are generally the result of reduced current
consumption, obtained typically when people save and invest voluntarily out of a desire to increase their own or their children's
income. Short-term growth can also be attained by forcing current
generations to sacrifice so that future generations may be better
off. Conversely, growth can be reduced when the capital stock is
run down or when governments borrow from future generations to
increase consumption today.
From an ethical or philosophical viewpoint, this intergenerational redistribution, which increases the well-being of one generation at the expense of another, may or may not be "just." Some
argue that because future generations are not represented in the
political process, government actions that reduce their well-being
are inherently unfair. The national debt, a liability passed on to
the future, is sometimes cited as indicative of a government financial policy that is "unjust" in this sense.
Future generations, however, benefit from many other private
and governmental activities. They inherit stocks of private and
public capital, technology, knowledge, and institutions. Government activities such as publicly supported schools and financial aid
programs represent transfers from older to younger generations.
And today's government-assisted scientific research often provides
benefits to future generations, as well as current generations.
As a result of the growing stock of assets, Americans on average
are likely to be better off in the future than they are today. If per
capita income in the United States continues to grow at its historical rate, in 40 years the average American will have a real income
that is twice the current level. Some might argue that as a result
of this rising income, it is proper for the government to redistribute income from future generations to the current generation. This
redistribution would not be unlike the redistribution government
undertakes within a generation from the rich to the poor.
Others desire to increase the ability of future generations to
achieve the same relative increases in living standards as have
past generations. Few people, however, believe that ever-higher
economic growth rates are worthwhile regardless of cost. Furthermore, even if such increases were desirable, sacrifice alone would
not ensure rapid growth. In the 1930s, the Soviet Union directed
massive amounts of resources away from consumption and into investment, but the investments were so poorly managed that this
sacrifice went largely unrewarded. Indeed, the collapse of communism in Eastern Europe and the former Soviet Union is in large




228

part the result of the failure of that economic system to raise living
standards substantially.
Some long-standing government policies inadvertently create incentives that reduce the rate of saving and reduce growth. For example, compared with alternative forms of taxation, the current
income tax system discourages saving in favor of current consumption. These policies impede the ability of current generations to
save and invest and hamper efforts to improve living standards.
Identifying and correcting such policies can result in improvements
in the well-being of both current and future generations of Americans.
WHAT IS ECONOMIC GROWTH?
Quantifying economic growth ideally requires capturing many
aspects of economic well-being, not just those reflected in statistical
measures such as wages, gross domestic product (GDP), or the
value of the physical capital stock. These statistics generally fail to
include goods and activities that are not valued in the marketplace—for example, the expected future return on advances in
knowledge, the quality of the environment, work in the home, or
leisure time. Nor are activities in the "underground economy" captured.
Problems emerge even in measuring increases in marketed goods
and services. Typically, measures of these quantities use an inflation-adjusted dollar volume of transactions. But separating the
effect of inflation from the effect of changes in the quality of goods
and services is difficult. For example, as discussed in Chapter 4,
much of the increase in the price of health care since 1950 represents improvements in the quality of care, rather than true inflation. Furthermore, many goods and services were simply unavailable in 1950—for example, personal computers and automatic teller
machines. One study estimates that the annual real growth rate in
the U.S. economy may have been underestimated by as much as 1
percentage point since 1979, or about 50 percent of the reported
growth in real GDP over this period, due to the failure to account
fully for improvements in the quality of marketed goods and services.
Choosing a useful summary indicator presents another difficulty
in measuring growth in living standards. Such an indicator can
focus on growth in income or on growth in consumption, for example. Fundamentally, living standards depend on consumption, but
consumption can grow over short periods independent of the
income-producing capacity of a nation if the saving rate falls or if
investment is insufficient to prevent the capital stock from diminishing.




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As a result of the many possible differences between statistical
indicators and actual living standards, changes in measures such
as income, hourly compensation, or the value of the physical capital stock may understate or overstate actual changes in well-being.
These problems have long been recognized, however, and measurement techniques continue to be improved.
To begin tracking the use of natural resources, for example, the
Department of Commerce is developing supplementary accounts to
the national income accounts. It is likely that building valuations
of natural resource use into these measures of net output would
change their reported levels only slightly in industrialized countries. For some developing countries, in contrast, where the sale of
raw materials derived from natural resources tends to be a much
larger share of output than in the United States, consideration of
the depletion of environmental assets in net output could substantially reduce reported growth.
Simple comparisons are often made between the growth rates of
different countries, but these calculations cannot be used to compare absolute levels of economic performance since a country may
have a higher growth rate but a lower living standard. For instance, some economies that faced obstacles to growth two or three
decades ago, such as South Korea, now have high growth rates, but
their living standards remain far behind those of Western Europe
and North America. Per capita growth rates indicate that living
standards are rising, but these rates do not measure the level of
living standards.

ECONOMIC GROWTH AND THE ENVIRONMENT
Economic growth should be properly understood to mean not just
"more" but "better." Living standards rise not just because people
consume more goods and services, but because the quality of those
goods and services improves. This includes the services of a healthful environment. The innovations in technology that accompany
economic growth allow resources to be used more efficiently and
sometimes even decrease the actual amounts of resources consumed.
Nor need economic growth be associated with increased pollution. As incomes rise, people tend to increase their demand for the
services of a beautiful and healthful environment. It is in poorer
countries that daily survival depends on current consumption and
preempts spending on long-term concerns, such as environmental
goals. Evidence shows that as per capita incomes rise above a
threshold (less than one-third of today's per capita GDP in the
United States), levels of key air pollutants decline steadily. Similarly, disease carried by polluted drinking water—perhaps the greatest environmental threat to health worldwide—is lower in high-




230

income areas. Rising national income is associated with a "demographic transition"—improved education, higher levels of labor
force participation, and lower infant mortality—which historically
has reduced desired family size and slowed population growth. In
short, higher national incomes are associated with longer and
healthier lives.
As this country has grown economically, it has devoted an increasing share of national income to environmental protection: 0.9
percent of GDP in 1972, 1.9 percent in 1987, and projected to increase to 2.6 percent by 2000. At the same time, the U.S. environment has become much cleaner: between 1970 and 1989, levels of
particulates fell 61 percent, sulfur oxides 26 percent, carbon monoxide 40 percent, and organic air pollutants 31 percent. Emissions
of lead and industrial water pollutants both fell over 90 percent.
Regrettably, U.S. environmental regulation has too often relied on
"command-and-control" rules that have raised the costs of achieving these gains (Chapter 5).
To characterize economic progress consistent with environmental
concerns, some have advocated the concept of "sustainable development/' yet a clear definition of this concept has been elusive. To
some, "sustainable development" means that each generation
should pass on to future generations an undiminished stock of natural resources. But such a definition fails to take into account the
fact that each generation passes on many other valuable assets, notably advances in knowledge and technology. A reduction in the
stock of one set of resources can easily be worthwhile—for future
as well as present generations—if it generates more valuable increases in another set of resources. For example, future generations could benefit if part of a forest is harvested to build a school,
yet they might be harmed if the school were built with the last remaining ancient forest.
A better definition of sustainable development is growth in
which every generation passes on a stock of "net resources" no
lower in per capita value than the stock it received—including natural and environmental resources as well as knowledge, technology, and physical and human capital (Box 6-1). Economic growth,
properly understood, includes all of these resources.

SUMMARY
• Choices made by families, businesses, and the government
affect economic growth and thus the amount of wealth transferred to future generations. While some decisions may reduce
transfers to future generations, those generations are still
likely to be significantly better off because of overall economic
growth.




231

Box 6-1.—Global Climate Change and Future Generations

Could change on a global scale turn the world upside down?
Some fear global climate change, others the suffering and conflict borne of poverty. In a world with limited resources, people
must consider the cost (in terms of other valuable activities
forgone) of reducing each risk.
The Intergovernmental Panel on Climate Change estimates
that if the preindustrial level of greenhouse gases in the atmosphere is doubled by 2025, the Earth's surface would be expected to warm from 1.5°~4.5° C above today's average temperature by 2100. This scenario is far from certain, and scientists
continue to study how much the climate may change, how
quickly, and in what geographic patterns.
Taking into account the effects on agriculture, ecosystems,
and other factors, economists have generated rough estimates
of the damage that can be expected from such global climate
change. Under the warming scenario laid out above, they estimate that global living standards in 2100 would be about 1 to 2
percent lower than otherwise expected. One study estimates
that additional warming could raise this loss estimate to 6 percent or more by 2300.
This potential damage must be weighed against the costs of
preventing global warming. Economists estimate that limiting
greenhouse gas emissions enough to prevent the predicted
warming—an action that would necessitate sharp emissions restrictions, especially painful in the developing world—would
reduce world income by about 2 to 3 percent in 2100. Hence
drastic restraint on emissions might cost future generations
more (in deprivation) than it helps (in protection from warming).
Just as the predictions of physical science concerning climate
change are uncertain, so are the economic estimates of losses
stemming from global warming. These costs and uncertainties
make policy decisions difficult. The best approach may be to
take low-cost actions to limit emissions now and to pursue research aggressively. At current emissions rates, waiting 10
years to take more costly actions would raise predicted warming only slightly; but the advances in knowledge from research
in that time could substantially reduce uncertainties and help
identify the best response strategies. Thus, the United States
has assembled a national action plan of low cost actions to
limit emissions, and funds $1.4 billion annually in research on
global change (more than the rest of the world combined).




232

j
|
j
!
|
|

• Sustained economic growth leads to substantial improvements
in living standards over time.
• Growth, broadly defined, includes non-monetary concepts like
the quality of leisure time and services from environmental
and government assets, which are not yet fully reflected in the
national income accounts.

THE PRODUCTIVE CAPACITY OF THE U.S.
ECONOMY
The capacity of the U.S. economy to generate higher living
standards encompasses the stocks of physical and human capital,
technology, social and economic institutions, and natural resources.
These economic resources, united by individuals willing to take entrepreneurial risks, operate together within a market economy to
create innovative new products and processes to meet the demands
of consumers and producers. Expanding America's productive capacity, in part by maintaining high output, is fundamental to longterm growth.

THE PHYSICAL CAPITAL STOCK
Perhaps the most commonly cited measure of the economy's productive capacity is the domestic stock of physical capital, which
consists of equipment, buildings, inventories, and infrastructure located in the United States. Most of the domestic capital stock is
privately owned, but a substantial portion is owned by Federal,
State, and local governments. While the Federal government owns
most defense-related capital, nearly 85 percent of nonmilitary government capital belongs to State and local governments, including
airports, roads, and school facilities.
Since 1950, total physical capital per worker has grown at an
annual rate of 1.6 percent (Chart 6-1). Growth in capital per
worker is, over long periods of time, closely associated with labor
productivity growth. From 1959 to 1973, for example, capital per
worker grew by 2.0 percent per year, while estimated overall labor
productivity (GDP per hour) grew by 2.8 percent annually. The end
of the post-World War II period of very rapid labor productivity
growth is often dated as 1973. From 1974 to 1991, capital per
worker grew by 0.6 percent and productivity grew by 1.0 percent
per year. While a variety of factors may be responsible for this reported slackening in productivity growth, including the difficulty of
properly accounting for quality changes mentioned earlier, the
slowdown in capital formation is likely to be an important factor.
The Nation's capital stock is augmented by the investments individuals, businesses, and governments make when, for example,
they put in place new buildings and equipment. The capital stock




233

Chart 6-1 Capita! Per Employed Civilian
Increasing capital per worker supports rising worker productivity and increasing wages.
1987 dollars
1 ZU,UUU

-

Private and Public Capital

100,000
80,000

^ ^

^

'**

Private Capital

60,000

40,000

20,000 -

I

, , , • I , , , , I , ,

1950

1955

1960

.

.

I

i

1965

.

i

>

1

.

1970

.

.

.

1

.

1975

.

i

i

1

i

1980

.

.

.

!

i

.

1985

.

•

1

.

1990

Note: Private and public capital stocks are net of depreciation. Public capital stock excludes
military capital.
Sources: Department of Commerce and Department of Labor.

is increased during the year by such new investment—referred to
as "gross" investment—and is diminished by wear-and-tear and obsolescence, or "capital consumption" (more popularly known as depreciation). Net investment—gross investment less depreciation—is
the resulting change in the capital stock.
Although net investment measures the change in the capital
stock, gross investment may have a separate effect that improves
the quality of the capital stock. High rates of investment in physical capital may contribute to high rates of economic growth via
"learning-by-doing" and "embodiment" effects. Learning-by-doing
occurs when the process of investing in physical capital results in
innovative techniques (such as new production processes) and products. The embodiment hypothesis states that new technology is
generally incorporated into physical capital before it augments productivity. For example, the advance in the technology of recording
music on compact discs requires new investment in compact disc
players. Through these two effects, the rate of investment can compound the rate of technological change.
New capital investment is financed out of savings. Saving provides not only a source of funds for investment but assets for




234

future consumption—for example, during retirement. Each year,
families decide how much of their income to consume and how
much to save, taking into account personal circumstances such as
expected future wages and potential college expenses. Saving decisions are also influenced by government tax and transfer policies.
The domestic saving rate is simply the percentage of national
income saved. It need not equal the domestic investment rate, although historically the two have been closely linked. Domestic investment may exceed domestic saving because of net foreign investment in the United States. Conversely, if U.S. saving used to finance investment overseas exceeds inflows of foreign investment
from abroad, domestic investment will be less than domestic
saving.
In an economy with well-functioning financial markets, households or firms that wish to save but have no productive investment
opportunities of their own use banks and other financial intermediaries to invest their savings. Competition provides an incentive
for intermediaries to invest in projects offering the highest rate of
return for a given amount of risk.
MARKETABLE WEALTH
The physical capital stock is only one element of the Nation's
productive capacity. Businesses also correctly regard as investment
their expenditures on research and product development, advertising, specialized training for employees, and numerous other activities. The results of such forms of investment are sometimes called
"intangible capital/' Productive capacity also depends importantly
on the manner in which the physical, intangible, and human capital are organized.
Under customary accounting practices, firms generally value
their assets at "book" value, which is determined primarily by the
purchase price of their assets less depreciation. The Department of
Commerce values capital using what might be referred to as "adjusted book value," which reflects the current dollar cost of replacing existing assets. The Commerce Department measure of capital
improves on standard book value by accounting for factors such as
inflation, but it does share one shortcoming with book value in that
it measures the cost of capital inputs rather than their anticipated
productivity. This shortcoming is particularly important when
major events, such as an unexpected and sustained increase in oil
prices, render some past investment obsolete almost overnight.
An alternative measure of the productive capacity of assets is
their market value. Market value reveals the earnings potential of
a collection of assets as reflected in the prices investors would be
willing to pay today to obtain them. The market value of a department store, for example, may be less than its book value (e.g., the




235

cost of its inventories on the shelves and its building less an allowance for depreciation) if a relocated highway has diminished its
customer base. Conversely, the market value of a software company that develops a new word-processing program is likely to be
much greater than the book value of the firm's tangible assets,
which may consist only of a few computers. Market value also includes the value of intangible capital, much of which is omitted
from conventional book value measures.
The market value of privately owned assets, or "private marketable wealth/' reflects investors' current estimates of the value of
these assets. It is forward looking, incorporating beliefs about the
future demand for the products these assets will produce and the
effects of current and future expected technological changes.
The Federal Reserve maintains statistics that allow calculation
of an approximation to aggregate private marketable wealth of
U.S. residents, using market prices for corporate stocks and land.
Commerce Department adjusted book value data are used for noncorporate businesses, owner-occupied housing, and consumer durables, because current market prices for these assets are more difficult to obtain. Debt securities are valued at their issue value.
Chart 6-2 shows the growth of two measures of per capita private marketable wealth, derived from the Federal Reserve statistics: "household wealth" (the total wealth of U.S. residents, including wealth owned indirectly through pension plans, insurance policies, and the like) and "national private wealth" (household wealth
less the value of net government debt). Because government debt
can be viewed as a liability all Americans share, national private
wealth may give a better measure of the net private wealth of
Americans, although it ignores the value of government assets. By
either measure, per capita wealth has increased significantly since
1960, reflecting both physical accumulation and technological
gains.
The average annual rate of increase of real national private
wealth per capita has been 1.8 percent since 1960. Fluctuations
around this trend are the result of changes in both the rate of investment and the market's perception of asset values. Both measures indicate that marketable wealth declined significantly between 1989 and 1990, primarily due to falling land prices. By the
end of 1991, however, private marketable wealth was again rising.
HUMAN CAPITAL
The stock of human capital is the total earnings capacity of the
Nation's work force, given the available stock of physical capital,
natural resources, and market institutions. Human capital in the
United States has been estimated to exceed substantially the value
of all other private wealth. Increases in human capital can also di-




236

Chart 6-2 Household and National Private Wealth Per Capita
Household wealth is the value of all household assets less liabilities. National private
wealth is household wealth less net government debt.
1987 dollars
80,000

70,000

--

60,000

-

50,000

-

40,000

-

30,000

-

20,000

-

10,000

1 , .
1960

y
Household Wealthy s

National Private Wealth

. 1 , .
1964

, 1 .
1968

, . 1 , ! ,
1
1972
1976

. , . ! , , , 1 . .
1980
1984

, 1 , , ,
1988

Note: From 1960 to 1981 national private wealth grew at an average annual rate of 1.8 percent.
The dashed line projects this rate beyond 1981.
Sources: Department of Commerce and Board of Governors of the Federal Reserve System.

rectly increase growth in the economy in two ways—by providing
more workers and by raising the knowledge and skills of the labor
force.
The Size of the Labor Force
The American labor force has changed markedly over the past
four decades in terms of size, composition, and skill level. The labor
force has grown as the postwar baby boomers have matured and an
increasing proportion of women have entered the workplace.
(People who do unpaid work at home are not included in measures
of the labor force.) In July 1992 more than 58 percent of workingage American women were participating in the labor market, compared with fewer than 34 percent in 1950. In addition, a growing
number of immigrants have entered the labor force. The absolute
increase in immigration during the 1980s was greater than it had
been in any decade since the early 1900s; the annual rate of immigration, however, as a share of the total U.S. population, was only
about one-fourth of 1 percent. These increases in the size of the
labor force have led to increases in total output.




237

Experience, Education, and Earnings
The level of human capital depends not only on the size of the
labor force but also on its education and experience. Improvements
in the skills of the labor force directly raise productivity and living
standards. Investing in human capital, like investing in physical
capital, means spending money up front—in the form of tuition
and earnings forgone during school or in training—in order to earn
a return in the future (Box 6-2). Estimates suggest that an additional year of schooling increases wages by about 10 percent, on average. Additional years of on-the-job experience also yield higher
future wages, although at a decreasing rate. The payoffs for education and on-the-job experience change over time. In the 1980s workers with high levels of education and experience earned even larger
returns from these investments in human capital than they had
previously.
Improvements in the skill level of the U.S. labor force over this
century have been dramatic. In 1910 the typical American worker
had completed only about 8 years of schooling and fewer than 5
percent of Americans had completed college. By 1990 the typical
worker had completed almost 13 years of schooling, and more than
one-fifth of all Americans aged 25-29 had completed 4 or more
years of college.
These increases in education have generated returns in the form
of higher wages. The average real hourly compensation of workers
in the U.S. economy has increased about 70 percent since 1959, the
earliest year for which the latest revision of these data are available. The rate of growth in real hourly compensation has slowed in
recent decades, perhaps in part because of the rapid increase in the
number of new entrants into the labor force caused by the baby
boomers and the rising labor force participation rates of women.
Real hourly compensation increased by only 4.2 percent between
1980 and 1991. (More detailed analysis of these changes in earnings
was provided in Chapter 3 of the 1992 Report.)

TECHNOLOGY
Technological change is a very important factor in explaining
economic growth. Developments in one field often revolutionize
production processes in others. For example, advances in computer
engineering have enabled the world's automobile manufacturers to
transform their production processes with robotics. In the not-toodistant future, advances in chemical engineering may lead to other
breakthroughs in the automobile industry, such as new batteries
capable of powering electric cars. The production process itself has
shifted from large inventories to just-in-time delivery systems. The
process of producing a car today is quite different from that of 30
years ago, let alone that used in the first decade of this century.




238

Box 6-2.—Gary Becker
Gary Becker, winner of the 1992 Nobel Memorial Prise for
economics, has devoted much of his career to the study of the
labor force. His research has covered a wide variety of subjects
and includes pioneering work on the economic returns to investment in human capital, the differences in earnings attributable to racial discrimination, and the determinants of fertility. He has also examined other aspects of human behavior, including the economics of crime and punishment, divorce, and
addictive behavior. His application of economic analysis to
such nontraditional areas has led to the establishment of entirely new fields of economic research that both Becker and
the many scholars who have followed his lead continue to
pursue.
Becker has made fundamental contributions to the theory of
human capital. In his 1964 book, Human Capital^ he developed
a theory of on-the-job training that helps explain why earnings
rise with experience. He drew a distinction between "general"
skills that workers can take with them when they leave a particular job and skills useful only in a specialized setting. He
argues that employers will provide workers with training in
general skills only if the workers pay for that training themselves.
To pay for these skills, workers would have to accept lowerthan-normal wages in their early years on a job. Once they had
completed their training, however, their wages would rise to
reflect their new skills. From then on, they would receive
wages greater than those of workers who did not have their
training.
Becker also argues that schooling is just a special form of
general training. Students in school pay tuition and forgo earning wages while investing in general skills. After they complete school, they receive higher wages than those who did not
attend. Becker estimated a return on college education between 1938 and 1961 that was over three times the rate of
return on an investment in corporate bonds.
Private and government investments in research and development (R&D) increase the stock of technological knowledge. The
growth in private R&D spending has slowed considerably since the
mid-1980s. Federal civilian R&D spending has increased over this
period, although government spending for defense-related research
has declined somewhat. These R&D expenditures provide only a
rough indication of the value of the technologies that emerge from




239

them. Because much of the stock of technological knowledge is embodied in human, organizational, and physical capital, it is difficult
to value it separately.

ORGANIZATIONAL CAPITAL AND MARKET
INSTITUTIONS
The growth rate of an economy depends also on the way its
human and physical capital is organized. In an economy characterized by a set of well-functioning markets, investors have an incentive to direct funds to their most valued use. In contrast, in the absence of markets, there are no prices to signal where investment
returns are greatest.
Government can assist the functioning of markets by creating a
legal system that protects property rights. In economies with ill-defined property rights, investors are often unwilling to make longterm investments because they may not be able to reap the rewards of their investments. Market performance is also enhanced
by a regulatory system that regulates only when necessary and
allows businesses to respond in a cost-efficient manner to changing
conditions and emerging opportunities (Chapter 5). A tax system
that does not hinder entrepreneurship or impede the ability of families to work and save provides a setting conducive to economic
growth.

NATURAL RESOURCES
This country has great wealth in the form of environmental and
natural resources. These natural resources—air, water, land, minerals, and living organisms—provide a variety of services that
enrich society. Some, such as oil reserves, can be valued using
market prices. Others provide valuable services that may not be
fully reflected in market prices. For example, a forested area may
do more than provide a source of timber for construction; it may
anchor land against erosion and flooding, filter rain water bound
for rivers, improve soil fertility, and harbor valuable wild plants
and animals. Managing forests to maintain a flow of these goods and
services can be more valuable than maximizing the production of
timber or clearing the land for other uses, although these other
actions could seem more profitable if the unpriced services were
ignored. Prudent stewardship of the Nation's natural resources will
increase wealth today and for future generations, and can reduce the
environmental liabilities left to the future (Box 6-3).




240

Box 6-3.—Superfund Wastes as an Environmental Liability
American industrial activity in the postwar period left significant residual wastes in local disposal sites. In 1978 residents of Love Canal, New York, discovered wastes near their
children's playground, prompting enactment of the 1980 "Superfund" law requiring cleanup of all such sites. Cleanups,
which require 10 to 15 years per site are slated to continue
well after the year 2000.
The risks to health and environment posed by these waste
disposal sites are an example of an environmental liability left
by previous generations for present and future generations.
The Superfund law responds by imposing a financial liability
(cleanup costs) today and in the future to reduce this environmental liability. Whether this response makes sense depends
on the cost of the cleanup relative to the benefits of reducing
these environmental risks.
Today there are about 1,250 sites on the Superfund national
priority list, and another 1,000 or more may be added over the
next decade. Experts estimate that at current cleanup standards, the total cost for cleaning up 2,000-3,000 sites over the
next three decades may amount to $100-$160 billion or more in
present value (1992 dollars).
However, the benefits of cleaning up these sites may be
lower than originally believed. The Environmental Protection
Agency's Science Advisory Board has ranked waste disposal
sites among the lowest of major environmental risks. Yet communities tend to fear waste sites and demand top-notch cleanups, in some cases so clean that children could eat the most
toxic dirt on the site, even 5 feet below the surface, year round,
and suffer no ill effects. Such cleanups involve excavation of
contaminated soil and incineration (in someone else's backyard), even though capping and containing wastes on site could
often provide the same health protection at substantially lower
cost.
While waste sites may represent a significant environmental
liability, the cleanup cost liability created by Superfund may
be larger still, and is only increased by the high litigation costs
of the Superfund process. The costs of cleanup represent financial resources that a community could have spent reducing
other environmental risks to the next generation, such as lead
poisoning in the inner city, or increasing other economic
assets, such as better schools, for the next generation.




241

LIMITS TO GROWTH?
Some believe that economic growth is ultimately constrained by
finite natural resources. This view traces its roots at least as far
back as Thomas Malthus, who wrote in 1798 that the population
has a natural tendency to grow faster than food production, and
hence is constrained by starvation, pestilence, and war. The
"limits-to-growth" hypothesis gained new popularity in the 1970s
and again in the 1990s, with attendant forecasts of disaster.
The limits-to-growth view, however, neglects the fact that markets induce adjustment to scarcity. When goods, services, or raw
materials become scarce, their prices rise, motivating investment
in more efficient ways of obtaining and using them or in developing substitutes. Rising energy prices encourage conservation. Rising
prices for land encourage improvements in agricultural techniques
that increase the output of food per acre. Indeed, contrary to the
Malthusian view, world cereal production has actually grown faster
than the global population.
Yet when markets do not operate well—or at all—valuable resources can be consumed too rapidly or simply exhausted. Inadequate property rights in water or forest resources, for example,
may result in their value to the future being neglected. In such
cases, establishing reliable property rights or, where markets are
seriously deficient, establishing appropriate fees or regulations that
are targeted at the problem constitute the economically sensible
approach, rather than misguided attempts to limit economic
growth. (See Chapter 5 of the Report for a discussion of market-oriented regulatory approaches.)

SUMMARY
• Physical, human, and organizational capital, and the technology that has been incorporated in each of them, determine the
Nation's productive capacity and are key contributors to economic growth.
• Total (private plus government-owned) physical capital per
worker in the United States has been on a long upward trend,
but the rate of increase has slowed since the early 1970s. This
slackening of growth is associated with a slowdown in the rate
of growth of worker productivity.
• The impact of organizational and technological improvements
is captured in part by the marketable private wealth of U.S.
residents, a measure of productive capacity that incorporates
investors' expectations of the future profitability of businesses.
Real national private wealth has shown sustained growth over
the post-World War II period, averaging 1.8 percent annually
from 1960 to 1991.




242

• Increases in the skill level of American workers have been another important contributor to growth in the standard of
living.
• Properly understood, economic growth is not rigidly constrained by natural resource limits.

BUDGET DEFICITS AND FUTURE GENERATIONS
Americans have become increasingly concerned that the Federal
Government is passing on to future generations large and growing
liabilities that will reduce their standard of living below what it
might otherwise have been. Of the many government activities
that may affect future living standards, considerable attention has
focused on the Federal debt and the large and persistent Federal
budget deficits. Much of this concern is correctly placed: The debt
and deficit can affect intergenerational equity and, under certain
conditions, can adversely affect the economy's productive capacity.
During the last 2 years, the Administration has recommended significant controls on spending that, if enacted, would reduce projected Federal budget deficits to a level roughly half that of fiscal 1992
within several years.
However, the Federal debt and Federal budget deficit represent
only two of many factors that will affect future living standards.
They are an incomplete measure of the legacy being passed to the
future because they deal only with Federal liabilities, but ignore
the surpluses traditionally run by State and local governments, private assets, the assets of the Federal, State, and local governments,
and the benefits received from economic and social institutions,
such as a sound monetary system, international markets open to
free trade, and the Nation's educational system. Taking these factors into account can markedly affect any assessment of how much
future generations will inherit. For instance, one recent study finds
that between 1970 and 1985, the tangible assets of the Federal Government were 20 to 80 percent greater in value than the Federal
debt held by the public.
Even in accounting for the Federal Government's liabilities, the
debt and the deficit are narrow and imprecise measures. The deficit reported by the government reflects almost entirely current
cash outlays and receipts, ignoring the future costs of current commitments. Further, the reported deficit fails to account for the effects of inflation in reducing the burden of outstanding debt and
the effects of government spending on productive investments that
will generate income or reduce outlays in future years.
Because the Federal debt and the deficit are imperfect measures
of the liabilities passed on to the future by government action, it is
important to understand what they do and do not reveal. This sec-




243

tion examines how the traditional measure of the deficit can be enhanced by taking into consideration the effects of inflation, government investment, future government commitments, and more directly assessing the intergenerational effects of these financial liabilities through generational accounts.
DEFICITS AND THE ECONOMY: SOME BASICS
The government collects revenues from households and corporations through taxes and fees, and spends money on various programs. The government runs a deficit when it spends more in any
given year than it collects in revenues. In fiscal 1992 the Federal
Government ran a deficit of $290 billion. It took in $1.1 trillion
(equal to 18.6 percent of GDP) from individual and corporate
income taxes, social insurance taxes and contributions, and several
other sources, and spent $1.4 trillion (23.5 percent of GDP) on
transfer payments, purchases of goods and services, and interest
payments.
The deficit is the difference between two very large numbers—
total spending and total receipts—each of which significantly influences the economy. For example, attempting to balance the budget,
either by raising taxes that seriously distort economic decisions or
by cutting productive government investment spending, clearly
would have a damaging effect on the economy. The Administration
has sought to reorient spending programs toward investment in the
future, and has advocated tax reforms to reduce impediments to
enterprise and productive investment.
Alternative Deficit Concepts
The deficit is measured in a number of ways. Each method conveys different information about the gap between government
spending and revenues.
The Unified Deficit. The difference between all Federal cash outlays and cash receipts is called the unified deficit, and is the measure of the deficit typically referred to in public discussions. To
obtain funds in excess of its revenues, the government must borrow
from the public an amount equal to the unified deficit, which is
usually the most prominent concern about deficits. Chart 6-3
shows the unified deficit of the Federal Government from 1950 to
1992, together with projections through 1996. To account for the increasing size of the economy, the deficits are shown as a percentage
of GDP. Relatively large deficits developed in the 1970s and have
persisted for two decades. In recent years, the unified deficit has
been significantly reduced by the large surplus of Social Security
tax revenues in excess of payments made to beneficiaries. In 1992,
for instance, a $62 billion Social Security surplus reduced the deficit
by that amount.




244

Chart 6-3 Unified Deficit and Primary Deficit Less Deposit Insurance Payments
The primary deficit less deposit insurance payments measures whether spending on
current programs is covered by current revenues.
Percent of GDP
8

1980
1970
1975
Fiscal Year
ie
Note: Thi primary deficit is the unified deficit less net interest.
Sources: Department of Commerce and Office of Management and Budget.

1950

1955

1960

1965

1985

1990

1995

Primary Deficits. The debt held by the public is the accumulation
of previous unified deficits. Interest payments on this debt are a
current obligation that results from past decisions to borrow from
the public. To examine the extent to which current actions, as opposed to past policies, are responsible for the development of the
debt, analysts look at a measure called the primary deficit—the
unified deficit less net interest on the debt.
Since 1989, the Federal Government has made large payments
for deposit insurance to resolve the problems in the savings and
loan industry. Like interest on the debt, deposit insurance outlays
represent payments for liabilities incurred in the past, so they have
also been subtracted from the government's expenditures to derive
the series shown in Chart 6-3, which is the primary deficit less deposit insurance payments. According to this measure, the Federal
Government's current actions led to surpluses in 19 of the 25 years
from 1950 to 1974, but led to deficits in 14 of the 19 years since
1974. Notice also that the government can run a unified deficit and
a surplus in the primary budget (net of deposit insurance) at the
same time, as it did from 1988 to 1990.




245

If the government runs a surplus in the primary budget, then
current revenues pay for all of the government's current programs
and some of the interest on the debt. However, with a primary deficit, the government must borrow to finance all the net interest and
some portion of its current programs as well.
Structural or Cyclically Adjusted Deficits. Deficits usually increase during business slowdowns, in part because of the so-called
automatic stabilizers built into fiscal policy. (Automatic stabilizers
are discussed in Chapter 3 of this Report.) For example, deficits
grew during the economic slowdowns of 1974-75, 1982-83, and
1990-92. In fact, economists agree almost unanimously that deficits
should increase during and immediately after recessions. Tax revenues decrease when people's earnings drop, while government
spending increases as more demands are made on unemployment
insurance and other "safety net" programs. Both the reduced receipts and increased outlays partially offset the decline in private
spending, helping to make recessions shorter and shallower than
they would be otherwise.
The portion of the unified deficit attributable to fluctuations in
overall business activity is called the cyclical deficit. Removing this
cyclical component results in the cyclically adjusted or structural
deficit. By abstracting from imbalances caused by short-term business conditions, the structural deficit can reveal whether a more
fundamental imbalance exists between revenues and outlays.
How Big Is the Debt?
The debt held by the public is the sum total of all the outstanding Treasury bills, notes, and bonds, U.S. savings bonds, and other
financial obligations of the Federal Government that the Treasury
sells to the public. The debt held by the public does not include the
$1 trillion in debt held in government trust funds. This debt is
owed by the government to itself, so economists generally use the
debt held by the public as the economically meaningful measure of
the national debt. At the end of 1992, the debt held by the public
was just over $3 trillion.
To put this sum into perspective, the debt held by the public is
52 percent of the size of GDP, about average for the industrialized
countries in the Organization for Economic Cooperation and Development. The debt is slightly more than twice as large as the government's annual outlays.
The debt-to-GDP ratio fell steadily from 1950 to 1974, but has
been increasing steadily since 1982 (Chart 6-4). Projections for the
immediate future show the debt-to-GDP ratio increasing slightly. If
uncontrolled, growth in entitlement programs, particularly medicare and medicaid, is projected to significantly increase the debt-toGDP ratio after the turn of the century.




246

Chart 6-4 Debt Held by the Public as Percent of GDP
Primary budget surpluses and strong growth allowed the debt-to-GDP ratio to fall until
1974, but primary budget deficits have caused it to rise since then.
Percent of GDP
100

1950

1955

1960

1965

1970
1975
Fiscal Year

1980

1985

1990

1995

Sources: Department of Commerce and Office of Management and Budget.

If GDP grows faster than the debt, the debt-to-GDP ratio falls, as
it did from 1950 to 1974, even though the Federal Government ran
a unified deficit for 20 of those 25 years. In 19 of those years, however, the government ran a primary surplus, so current (non-interest) spending was covered by current revenues (Chart 6-3). At the
same time, GDP grew faster than interest accumulated on the existing debt, indicating that the government's ability to service the
debt grew more rapidly than the cost of debt service. This illustrates the fact that balancing the budget, in the sense of achieving
a zero unified deficit, is not necessarily a prerequisite to reducing
the debt-to-GDP ratio.

How Deficits Can Affect the Economy
Beginning in the 1970s, the Federal Government has been running large unified deficits, regardless of the state of the economy.
Such deficit financing can have adverse economic consequences, encouraging consumption at the expense of saving and slowing capital formation.
The question, "What are the economic effects of deficit financing?" can only be answered clearly by comparing deficit financing
to some other policy. To examine the implications of deficit financ-




247

ing versus the alternative of raising current taxes, the current
level and composition of government spending will be taken as
given and fixed.
Because the focus here is on the effect of running deficits from a
long-run perspective, questions of the short-run impact of changing
policies will be neglected. The general subject of short-run macroeconomic policy has been extensively treated elsewhere in this and
previous Reports.
To begin exploring the economic effects of deficit financing relative to current taxation, two further simplifying assumptions are
helpful: First, the portion of after-tax income that households save
in aggregate is largely unaffected by the government's choice between deficit financing and current taxation. Second, the economy
is closed to international capital flows, so that investment in the
United States is financed entirely by domestic savings. The conclusions of the analysis are sensitive to these assumptions, and alternatives are discussed below.
For example, the government could finance the last $10 billion of
its spending by borrowing and running a $10 billion deficit, or it
could increase taxes by $10 billion. Under the above assumptions, if
the government runs a $10 billion deficit and borrows from the
public, this $10 billion of private saving is no longer available to
finance the private investments of firms and households.
Alternatively, the government could obtain $10 billion by raising
taxes, which would reduce aggregate after-tax income by $10 billion. Households would pay the additional $10 billion in taxes by
reducing both current consumption and saving. Because the tax increase, unlike a deficit, absorbs consumption as well as saving,
more saving is available to finance private investment.
In this scenario, using deficit financing to support government
spending depresses investment more than a tax increase would,
causing the Nation's capital stock to increase less than it would if
tax revenues had increased. Over time, small reductions in investment rates can leave workers with substantially less capital, reducing productivity and wage growth. However, the economy is not
closed to foreign investment and households can change their
saving behavior in response to government policy, partially offsetting the adverse consequences of deficit financing on capital formation.
International Capital Flows. International capital markets are
becoming increasingly integrated as discussed in Chapter 7. When
government borrowing or tax increases reduce the supply of available domestic savings, interest rates in the United States tend to
rise. Foreign investors take advantage of the higher yields by investing in U.S. assets, either directly, as when a foreign automobile
company builds an assembly plant in the United States, or indi-




248

rectly, by buying debt issued by the government, or the debt or
equity of U.S. firms.
Foreign investment in the United States tends to reduce the
effect of the deficit (or a current tax increase) on private domestic
investment and the capital stock. Evidence of the importance of
this mechanism is provided by national income and product account (NIPA) data, which show a net inflow of foreign capital
during most of the 1980s (Chart 6-5). Whether the government
chooses deficit or tax finance, foreign investment in the United
States adds to the domestic capital stock. American workers are
more productive and earn higher wages when foreign capital augments domestic saving.
Chart 6-5 Net Foreign Investment as Percent of GDP
Net inflows of foreign capita! to the United States between 1982 and 1990 permitted
both lower interest rates and more investment than otherwise would have been possible.
Percent of GDP
4

3 -

2 -

1960

1965

1970

1975

1980

1985

1990

Source: Department of Commerce.

Even with foreign capital inflows, however, future generations
are still relatively worse off with deficit than with tax financing if
the deficit absorbs more saving than a tax increase would have. With
deficit financing, foreigners will own more of the U.S. capital stock
than with tax financing, and future generations will have to make
larger payments to foreign investors (or, equivalently, will enjoy
lower payments from foreign debtors).




249

The Influence of Deficits on Private Saving. The conclusion that
national saving falls more with debt financing than it would with a
tax increase rests on the assumption that people maintain higher
consumption levels under deficit financing. Some economists have
argued, however, that taxpayers tend to save a large part, or even
all, of the amount by which current taxes are reduced by the
choice of deficit finance. Such behavior would occur, for example, if
families were to make provision for the future debt service burden
on themselves and their children that is implied when the government chooses debt financing. To the extent that such provision is
made, the effect of deficit rather than tax financing on national
private wealth accumulation (household wealth less government
debt) is reduced or eliminated, and future generations inherit approximately the same amount of wealth under either policy.
NIPA data for the period of high deficits during the 1980s suggest, however, that private saving did not increase to offset the deficit. In fact, deficits increased from an average of 1.6 percent of
GDP between 1959 and 1981 to an average of 4.4 percent of GDP
between 1982 and 1992, but net private saving—gross private
saving less depreciation—actually fell as a percent of GDP from an
average of 7.8 percent to an average of 3.0 percent over the same
periods.
The statistics on national private wealth accumulation appear to
present a somewhat different story. Unlike the NIPA statistics,
this measure of wealth incorporates increases in the value of
shares of corporate stock and land into aggregate saving, reflecting
the idea that households assess their economic positions using the
market value of their wealth. Since real national private wealth
per capita (defined as total household wealth less the Federal debt)
continued to grow throughout most of the 1980s, consistent with
the trend prior to 1981 (Chart 6-2), one might conclude that the
large Federal deficits of the period did not affect the path of wealth
accumulation.
Both the simple NIPA and national private wealth statistics,
however, can be misleading when viewed in isolation. More detailed studies that account for a number of other factors affecting
saving conclude that large deficits may induce somewhat higher
private saving. This increased saving, however, does not offset the
increased deficits dollar for dollar—national saving declines. Many
economists are concerned that the national saving rate is too low,
in part due to Federal deficits, and endorse adopting policies to increase the U.S. saving rate.




250

CORRECTING DEFICITS FOR INFLATION AND
GOVERNMENT INVESTMENT
Two improvements to the standard deficit measures have frequently been proposed: correcting for inflation and taking into account government investment activities. These additions result in a
more precise measure of the net liabilities incurred by the government each year, although they do not reflect the future costs of new
commitments.
Correcting for Inflation
The unified deficit measures the change in the outstanding Federal debt over the course of a year. Because the Federal debt is an
obligation to repay fixed dollar amounts in the future, its real
value is eroded by inflation (see Chapter 3). The debt burden passed
to the future is better measured in real, or inflation-adjusted,
terms.
In effect, inflation produces a hidden reduction in the deficit because it reduces the value of the outstanding debt. A concept corresponding to the real debt would be the real deficit—that is, the increase in the real debt during the year. (Note that this is not
simply the budget deficit expressed in real dollars.) These inflation
adjustments would have had a large effect in some years, eliminating more than half of the measured deficit in 1989, for example.
Some have argued that because inflation has reduced or sometimes eliminated real deficits, the need for fiscal restraint in inflationary times has been exaggerated. Most would agree, however,
that it would be a mistake to increase government spending or cut
taxes for this reason, since this would only add to inflationary pressures.
Government Investment
Like business investments, government investments add to the
Nation's capital stock. The text of the Federal budget draws attention to some of the government's investment activities, such as
road construction and R&D, but it does not systematically distinguish between investment and consumption expenditures. Separating capital and current expenses is not always easy, however, and
for that reason the distinction can be subject to political controversy since special interests may have a stake in whether expenditures are labeled as consumption or investment. The current cash
flow accounts, on the other hand, require less in the way of arguable
judgments. Several studies show that correcting recent deficits for government investments would have resulted in relatively small
changes because of offsetting adjustments for the depreciation of
the government's capital assets.




251

THE FEDERAL DEBT AND FUTURE BUDGETARY
PROBLEMS
Starting in the 1970s, budget deficits started to reflect large imbalances between government spending and tax revenues, and have
added significantly to the Federal debt. But servicing that debt is
only one way in which present and past budgetary choices affect
the future budgetary picture. People also expect to receive future
payments from a variety of ongoing government programs, such as
Social Security and medicare, and they expect the government to
continue providing services such as national defense.
Of course, expected future benefits from government programs
differ in legal status from the promised future principal and interest payments on government debt. The Congress can change spending programs, such as Social Security, without repudiating explicit
promises, but it is legally bound to meet debt service obligations. In
fact, however, the government can effectively repudiate a portion
of the debt by increasing the inflation rate to reduce the debt's real
value, although the adverse reaction of financial markets to such a
policy serves as a strong deterrent. Despite these varying degrees
of commitment, people reasonably expect a variety of future government benefits.
People not only expect the government to make future payments,
they also expect it to collect future revenues. The existing revenue
systems, including the personal and corporate income tax and the
payroll-based contributions to Social Security and medicare, can be
counted on to produce very substantial future cash flows.
Federal Debt as an Indicator of Future Fiscal Challenges
The Federal debt measures the effects of past discrepancies between spending and revenues, but it does not reveal the gap between future spending and revenues. A tax system that generates
large revenue increases as income grows, coupled with the anticipation of vigorous economic growth, could result in future surpluses
if present policies remain unchanged. Conversely, present policies
might imply rapid growth in outlays in the future without specification of how they will be financed.
Because the current Federal debt is the same whether future
surpluses or deficits are expected, explicit projections of anticipated
future revenues and expenditures are required. In general, the government's spending programs and tax receipts depend on the interaction between existing laws and policies, and the level of economic
activity. Combining projections of future laws and policies with
projections of economic performance provides an estimate of future
government outlays and revenues.
Such projections, in combination with the current level of the
Federal debt, would indicate the extent of the future fiscal chal-




252

lenges. A large Federal debt, for example, would be much less
worrisome if future projections revealed large budget surpluses. To
the extent that projections suggest a future budgetary gap, at some
point outlays will have to be reduced or revenues increased. Clearly, enhanced economic growth is the most desirable way to close
the gap between expenditures and revenues.

Long-Run Fiscal Projections
Assessing the future budgetary challenge requires making explicit projections of the likely course of policy. The Office of Management and Budget's January 1993 Long-Run Budget Projections
show that, through 2030, the government's revenues should remain
fairly constant at between 18.5 and 19 percent of GDP (Chart 6-6).
Spending is projected to decline from 23.9 percent of GDP in 1993
to 21.2 percent of GDP by 2003, after which it is expected to increase sharply, reaching 31.2 percent of GDP by 2030. These revenue and outlay projections show future deficits, which are projected to fall from 5.4 percent of GDP in 1993 to 2.6 percent of GDP in
2004, and then to rise to 12.1 percent of GDP in 2030.
Chart 6-6 Long-Run Budget Projections as Percent of GDP
The Administration's proposal to cap the growth of mandatory spending programs, except
Social Security, would balance the budget by 2001 and generate surpluses thereafter.
Percent of GDP
34
32

Outlays without
Spending Caps

30
28
26
24
22
20
18

Receipts

16
14
12

Outlays with
Spending Caps

10
8

2 |
1992

1996

|
2000

I

I

|

|

|

2004

2008
2012
2016
2020
2024
2028
Fiscal Year
Note: Estimates employ the extended middle path of the Administration's economic forecast. Outlays without
caps assume continuation of current services. Outlays with caps assume success in limiting mandatory
spending growth to inflation plus beneficiary population growth.
Sources: Council of Economic Advisers and Office of Management and Budget.

The growth in projected total expenditures reflects the explosive
growth of so-called "mandatory" spending for three programs—
medicare, medicaid, and Social Security—and also the growing


334-230 O—92


253
9 (QL3)

annual interest payments on the debt. Combined, medicare and
medicaid are projected to grow 6 percentage points faster than inflation from 1992 to 2030. Social Security is projected to grow 3 percentage points faster than inflation. And the rapid accumulation of
deficits causes interest payments on the debt to grow 4 percentage
points faster than inflation.
To restrain the growth in medicare and medicaid expenses, the
Administration proposed the Comprehensive Market-Based Health
Care Reforms, discussed in Chapter 4, in combination with a proposal to control mandatory spending. The mandatory spending caps
would restrict the growth rate of all mandatory spending programs, including medicare and medicaid, but excluding Social Security, to the percentage increase in the beneficiary population
plus an adjustment for inflation, and some spending increases in
the first 2 years to facilitate the transition.
Over the 10 years from 1993-2002, the proposed spending caps
would reduce projected outlays by a cumulative $1.6 trillion in 1992
dollars (Chart 6-6). The caps would achieve most of these savings
by limiting growth in medicare and medicaid spending, and, by reducing deficits, it would also limit the growth in net interest payments. Limiting mandatory spending along these lines would close
the projected budgetary gap just after the turn of the century and
generate large projected surpluses thereafter.
ACCOUNTING FOR INTERGENERATIONAL TRANSFERS
For many, the most important implication of a deficit is that it
may signal a shift of fiscal burdens to future generations. The government influences intergenerational distribution in many ways,
sometimes directly, as when local governments construct schools,
and sometimes indirectly, as when government social spending programs weaken the stability of families or when tax rules are redesigned to reduce obstacles to innovation. Some programs, such as
Social Security, have both direct and indirect consequences. Social
Security may directly transfer resources across generations via its
tax and benefit policies (Box 6-4), and indirectly influence future
well-being through its influence on private saving decisions.
Intergenerational Transfers and the Deficit
Even when considered in terms ol the more narrowly defined financial implications of government policies, the deficit can be a
misleading measure of intergenerational burden shifting, as the following examples illustrate.
Accounting for a Spending Increase. A policy change that does
not affect the budget deficit can still shift large fiscal burdens
across generations. For example, a decision to expand medicare
benefits to include extended home care services could be financed
by an increase in the medicare payroll tax. The budget deficit and




254

Box 6-4.---Intergenerational Redistribution From Social
Security
Under the current method of financing retirement benefits,
taxes on workers today are sufficient to pay the benefits of current retirees and to fund a portion of the benefits that will be
paid to future retirees. As a result of the maturing of the
Social Security system, as well as legislated changes, nearly all
researchers conclude that future retirees will have paid much
more for a similar level of benefits than current and past retirees.
Chart 6-7 compares the benefits a single wage earner can
expect to receive in the first year he or she becomes eligible for
full benefits with the accrued value of the combined employeremployee payroll taxes paid over the worker's life. The chart
assumes both that the worker earned the average wage each
year and that none of the benefits are subject to income tax.
As shown in the chart, a retiree in 1972 received about 30 percent of the accrued value of past payroll tax payments in the
first year of retirement. Such benefits will continue throughout
the worker's life. The corresponding figure for a single worker
retiring in 1.992 is less than 10 percent. By 2012, benefits received in the first year will represent only about 5 percent of
past taxes.

the government debt would be unaffected, but today's senior citi-'oni would active 'j significant benefit paid for by younger Arru"-i{ ans .md future generations. An alternative method ^ financ=n*
~m reased medicare benefits mi^ht be to require upper-mmerino med
icare b*-aefiriuries to pav a larger percentage ol their I>*VM expend :*. Such a policy als*> w^uid not alh >-i the budget wuf'jciL but it
would have dramatically difil-rvnt irnph.'dtj^ns for youn^er Americans and future ^entrati*uv,.
Bumming t:> 7'wanrr Invent>nent& f\:r the Future in some in
stances, cuirent spending benotiTf future ^ynerations because it finances a valuable investment Sorru have argued that thf defense
buildup of the 1980s should be credited n^t only with accelerating
the end of the Cc!d War and making the world a safer place, but
als^ with significantly reducing needed outlaws on national defense
for many years into the future Similarly, investments such as the
construction of the interstate highway system provide future benefits that should be taken into account along with any associated increase in national debt.
These examples point to two distinct problems with using current deficits to assess the effect of policy on intergenerational dis~




255

Chart 6-7

Social Security Benefits as Percent of Payroll Taxes

Retirement benefits for single workers as a fraction of the accrued value of their lifetime
payroll taxes have declined over time.

1972

1982

1992

2012

2032

Year of Retirement
Note; Data show first-year benefits as percent of accrued taxes paid.
Source: Social Security Administration.

tribution. Even if the government balanced its budget every year,
policy changes could still cause substantial resource transfers across
generations. Conversely, if the government finances an investment by
borrowing, the benefits future generations receive from the investment may more than offset the added debt burden.
Generational
Accounts
To address the issue of the government's direct influence on the
distribution of wealth between generations, researchers have begun
to develop "generational accounts" for the United States and other
countries. Generational accounts attempt to estimate the likely
present value of all taxes paid to all levels of government, less all
transfer payments received (from programs such as Social Security,
medicare, medicaid, and aid to families with dependent children)
from all levels of government, by each generation over its lifetime.
The accounts combine the existing debt with projections of the
course of future policy to provide an estimate of the burden projected to be placed on existing and future generations by government
fiscal policy. The Budget of the United States Government for Fiscal
Year 1993 included for the first time a set of generational accounts




256

for the United States. The Budget Baselines of January 1993 includes an updated and improved analysis.
To assess the long-term budgetary problem, generational accounts have been used to address the following hypothetical question: How much would the net tax rate (tax payments less transfers as a percentage of lifetime earnings) need to be raised on
future generations to close the projected budgetary gap, under the
strong assumptions that today's generations share none of the increased burden and existing spending programs remain unchanged? The best estimate is that the net tax rate must be more
than doubled for future generations.
Maintaining a constant net tax rate might be considered a rough
standard of "fiscal neutrality" across the generations. This exercise, which projects an increase in the fiscal burden on future generations relative to their earning power, supports the prevailing
sense that existing policies are placing a growing burden on future
generations and gives some idea of the magnitude of the effect.
The Budget Baselines of January 1993 also includes a discussion
of the way certain policy alternatives would affect the estimates.
One option is a modified version of the President's proposal to cap
mandatory spending that does not produce the large surpluses evident in Chart 6-6. By reducing the growth of transfers, this proposal would raise the net tax rate of existing generations, and comes
very close to restoring fiscal neutrality.
Estimates based on generational accounts are inherently subject
to a wide margin of error. The analysis depends on a great many
assumptions about future policy changes, demography, interest
rates, and growth rates, among other things. Additionally, this
newly developed approach does not yet take into account the potential effects of different policy choices on the assumed growth rate,
so-called dynamic feedback effects, which are clearly of considerable importance.
In using generational accounts, care should be taken to consider
a range of alternative assumptions about key factors, rather than
relying too heavily on specific estimates. In the case discussed
above, varying the key assumptions about interest rates and
growth rates within reasonable ranges does not change the qualitative conclusion that future generations will inherit a large burden
if current policies remain unchanged.
A second general guideline is that generational accounting analysis is likely to be most useful when comparing one specific policy
with another. Comparing the effect of adopting mandatory spending caps, for example, with the existing mandatory spending programs indicates how achieving the President's proposed goals
would reduce significantly the tendency to pass fiscal burdens to
future generations.




257

Because generational accounts attempt to answer important
questions about the effect of fiscal policy on current and future
generations, further development of this approach, as well as wider
understanding of its strengths and weaknesses, should be very
much encouraged.
SUMMARY
• The $3 trillion debt held by the public is a financial obligation
that the government has promised to pay in the future. It is one
of many long-term obligations of the government.
• The debt and deficits are only one part of the legacy left to the
future. They neglect Federal Government assets; Federal, State
and local government assets and liabilities; and, most importantly, private assets that will be transferred to future generations.
• A sustained policy of running deficits when the economy is
performing relatively well can decrease investment in favor of
consumption, which slows capital formation and wealth accumulation.
• Long-run budget projections show deficits declining relative to
GDP for about a decade, after which entitlement spending is
expected to increase much faster than revenues, threatening
resumed increases in the debt-to-GDP ratio.
• The national debt is a proxy for the Federal financial liabilities
passed to future generations, but to get a more accurate picture requires taking into account factors such as inflation, government assets, and other government commitments that do
not have specified funding sources.
• Generational accounts combine the existing debt with projections of current services to conclude that existing fiscal policies
tend to place a larger burden on future generations of Americans than on existing generations.

HIGHLIGHTING THE COST OF GOVERNMENT
RETIREMENT AND INSURANCE PROGRAMS
Significant long-term commitments arise from a variety of government programs such as pensions through Social Security and pension guarantee programs, and insurance outlays from deposit and
disability insurance. The generational accounts and long-run fiscal
projections reflect the liabilities from these programs, but it is
useful to examine more closely those programs that will contribute
most heavily to the financial burden passed to future generations if
current policies continue.
Estimating the size of the liabilities arising from these programs
requires a forward-looking measure of program commitments. Cur-




258

rently the Federal budget recognizes payments and receipts for
many of these programs only in the year they are made or arrive.
For instance, under the current budgetary system, if the government commits itself to pay out $50 million this year and $100 million next year for a certain program and receives $50 million in receipts for this program in both years, it reports a balanced budget
this year, simply overlooking next year's anticipated $50 million
shortfall. "Accrual accounting" provides an alternative method of
calculating liabilities that would reflect projected future shortfalls
in the current year. More precisely, the accrual account would
show a deficit equal to the amount that would have to be invested
today to yield $50 million next year (the "present value" of $50
million).
Accrual accounting procedures have the advantage that they
direct attention to fiscal problems as they are developing. For example, in fiscal 1982 the Federal Deposit Insurance Corporation
took in $1.4 billion more in deposit insurance premiums than it
paid out in payments to depositors, and the unified deficit was $1.4
billion lower in that year as a result. However, one study finds that
the projected future losses on developing country loans alone would
have resulted in an estimated $10 billion increase in the 1982 unified deficit on an accrual basis, alerting policymakers to the growing deposit insurance liabilities in a much more timely manner.
Progress has been made toward including forward-looking estimates of liabilities in the Budget. An accrual method was adopted
for Federal direct lending and credit programs under the Federal
Credit Reform Act of 1990. Provision is now made in the budget appropriation process for future losses from new government loans by
taking into account the probability that borrowers will default. The
Administration also proposed budgeting for government insurance
programs on an accrual basis starting in 1993, but this reform was
not adopted by the Congress.
In recent years, the Administration also has highlighted the current and expected future costs of Social Security and other retiree
annuity and health care programs by presenting projections of
future receipts and outlays in text tables in the Federal Budget.
These projections assume that currently mandated benefits and
earmarked receipts will continue at their present levels. The estimates provide useful information about potential future imbalances, but unlike Federal direct credit and loan guarantee programs, which are treated on an accrual basis, these estimates do
not affect the budget appropriations process.
THE SOCIAL SECURITY SYSTEM
The Federal Government has an implicit commitment to workers
contributing to Social Security to provide retirement and disability




259

benefits and some hospitalization costs in old age. The specific benefits that workers will receive depend on the Social Security rules
in effect at the time benefits are paid. Because the benefits will not
be paid until the future, they are not reflected in the current
budget or deficit.
The Social Security program has three major components: old
age and survivors insurance (OASI), which primarily finances retirement benefits; disability insurance (DI), which makes payments
to disabled workers and their families; and hospital insurance (HI),
which finances inpatient hospital and other related care for those
age 65 and over and the long-term disabled. Tax payments (or "contributions") and benefit payments flow through separate Social Security trust funds for each of these programs (Box 6-5).
Will Social Security Reserves Cover Baby-Boom Retirees?
Until recently, the OASI program operated under a pay-as-you-go
method. The retirement benefits of older workers were covered by
current workers, who, in their turn, expected to have their retirement benefits covered by future younger workers. As the program
matured, this system allowed most retirees to receive benefits that
far exceeded the accumulated value of their contributions. Over the
past 20 years, the Social Security taxes from approximately 3.7
workers have been used to pay benefits for one OASI beneficiary.
Estimates project that by 2030, there will be only 2.3 workers for
each beneficiary.
In the early 1980s, the Federal Government recognized that payas-you-go funding for OASI would require large future tax increases or large benefit cuts to maintain parity between annual
contributions and annual benefit payments. As a result, the government modified the pay-as-you-go policy. Currently, the OASI
trust fund collects contributions in excess of current benefit payments and is expected to continue to do so for the next several decades.
The other Social Security trust funds have more immediate cashflow problems. Because the DI trust fund is expected to be depleted
as early as 1997, the trustees have recommended prompt legislation
to strengthen the financing of this program. Similar problems with
the HI program have led to recommendations that the Congress
take appropriate action to control health care costs through specific legislation or as part of more comprehensive health care reform.
(See Chapter 4 of this Report for a discussion of health care
reform.)
Social Security and Saving
Some researchers have suggested that the Social Security program reduces private saving for retirement. Because American
workers know that Social Security will provide them with retire-




260

Box 6-5.—Trust Funds
Many government receipts are from taxes earmarked for
specific purposes rather than for general revenues. Some of
these dedicated tax receipts are deposited into trust funds
which may build up surpluses until they are drawn down by
expenditures. For example, the Social Security payroll tax is
deposited into three trust funds: the old age survivors insurance trust fund, the disability insurance trust fund, and the
hospital insurance trust fund (medicare, part A). Other programs also operate through trust funds. By law, most trust account surpluses must be invested in government securities.
The trust fund device is a source of much confusion in public
debate. Occasionally, some have mistakenly viewed the existence of reserves, or an increase in reserves, as an indication
that the program financed through the trust fund is financially solvent. Others take the surplus to mean that there are additional resources available to fund other government spending. A positive balance, however, does not indicate that the underlying program is necessarily financially solvent in the longrun. Rather, the programs are required to maintain a positive
balance in order to ensure that dedicated revenues are sufficient to meet the payments as they arise. With strict pay-asyou-go financing, dedicated revenues and expenditure levels
are adjusted to maintain a small surplus.
For example, in the case of the Social Security trust funds,
projecting the exhaustion of reserves does not imply the end of
Social Security. Instead, it indicates that adjustments will have
to be made, including decreasing projected benefits, increasing
Social Security taxes, or using revenues from other sources.
Conversely, a current surplus does not indicate that all future
payments can be financed from reserves.
In all, there are more than 150 trust funds that held just
over $1 trillion in government bonds at the end of fiscal 1992.
When these are added to the $3 trillion of government bonds
held by the public, the result is a $4 trillion Gross Federal
Debt—a number often quoted in the press. For the reasons disoussed in this chapter, however, economists and public policy
analysts appropriately focus on the debt held by the public.
ment income, their incentive to accumulate private savings may be
reduced.
Currently available private saving vehicles offer an incomplete
substitute for the type of retirement benefits Social Security provides. In particular, most forms of private saving offer incomplete




261

protection against inflation, while Social Security retirement benefits are indexed for inflation. If the government issued bonds indexed for inflation, private savings plans might be more able to
offer inflation-adjusted annuities, allowing a larger share of secure
retirement income to be provided by private sources.

GOVERNMENT INSURANCE AND CREDIT PROGRAMS
The Federal Government is the Nation's largest provider of
credit and underwriter of risk. Two-fifths of all outstanding private
and local government credit has been assisted by the Federal Government. In 1991, 82 percent of the credit for housing was federally
assisted. Most credit for agriculture and education is also federally
aided. Failures and defaults in these programs, which result in substantial liabilities for the government, have been occurring with increasing frequency.
The government provides insurance for a wide range of activities. By far the largest insurance commitment is held by the Federal Deposit Insurance Corporation (FDIC), which covers deposits up
to $100,000 at commercial banks and S&Ls. Other forms of direct
government insurance include pension fund insurance, veteran's
life insurance, crop insurance, flood insurance, political risk insurance against such losses as expropriation and war damage in foreign countries, and aviation and maritime war risk insurance.
The beneficiaries of these programs cover some of the costs
through insurance premiums. However, if premiums are set too
low, the government transfers resources from the taxpaying public
to the insured group. The difference between the premium payments and the expected losses to the government represents a subsidy to the insured group.
Federal insurance programs have lost substantial sums in the
last decade. Estimates of the total bill for the S&L cleanup range
from $110 billion to $160 billion in present value (1992 dollars). Indemnity payments made to farmers by the Federal Crop Insurance
Corporation exceeded insurance premiums by $2.5 billion over the
period 1981-90. High future payouts are also anticipated for programs such as the Pension Benefits Guarantee Corporation (Box 66).
As discussed above, the cash outlays of insurance programs do
not provide a clear and timely measure of the actual program
costs. Insurance programs commit the government to future outlays that are not delimited or estimated when the Congress authorizes the insurance, and the costs are not recorded when they
accrue. Instead, the budget records them when they are paid—
months, years, or in the case of pension guarantees, even decades
later. To correct these problems, the Administration proposed shift-




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Box 6-6,—The Growing Liabilities of the Pension Benefit
Guarantee Corporation

When Pan American World Airlines entered into bankruptcy proceedings in January 1991, among its debts was the
money required to fund pension benefits for its workers. Pan
Am's pension commitments exceeded the funds the company
had accumulated for benefit payments by over $900 million.
The Federal Government, which guaranteed the pensions, suffered a loss estimated at between $500 million and $700 million
when the plan was terminated. Unfortunately, Pan Am's experience is representative of a growing number of companies
with underfunded pension plans that expose taxpayers to significant losses.
The Federal Government insures many of the pensions of
the Nation's work force through the Pension Benefit Guarantee Corporation (PBGC), a Federal agency established in 1974.
Private corporations are required to pay a per-participant fee
in exchange for the PBGC's guarantee on defined-benefit pen- j
sion plans-—those which promise retirees specific monthly pay- I
ments. The PBGC insures approximately $900 billion in benefits for 40 million workers. The vast majority of these funds
are solvent: The 85,000 insured pension funds have over $1 trillion in assets. Thus, taken as a group, these funds have a surplus.
However, the PBGC, which ran a $2.3 billion deficit in 1991,
faces financial difficulty. Costs of future payments are projected to be $40 billion (in present value), offset by expected premiums of only $10 billion (in present value). These projections
suggest that the PBGC will be unable to fund this $30 billion
shortfall, and a future taxpayer bailout will be necessary if the
program is not modified.
The Administration proposed a number of measures to
reform the current pension insurance system, including shifting the budget treatment of insurance programs to an accrual
basis. The PBGC's position in bankruptcy proceedings would be
clarified to allow it better access to a company's assets when it
defaults on pension obligations. Further, the PBGC would not
be required to guarantee future benefit increases unless a plan
is fully funded. Efforts would be made to require companies
with underfunded plans to increase funding more quickly,
without seriously affecting their operations. Without these
changes, troubled companies can continue to promise overly
generous benefits knowing that they will not be responsible for
repayment if they go out of business.




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ing the budgetary treatment of insurance and pension guarantee
programs to an accrual basis.
Accounting for these unfunded future liabilities can produce
startling results. The Office of Management and Budget estimates
that for the PBGC, what appear to be 6 years of small cash surpluses starting in 1993 become 6 years of deficits totaling $18 billion when the anticipated future payments resulting from current
commitments are taken into account. For Federal deposit insurance programs over the same period, on a cash basis receipts from
the sale of closed banks' assets are expected to lead to future cash
inflows, but on an accrual basis deficits appear in most years.
Taken together, the total deficit between 1993 and 1998 would be
over $78 billion larger if these two programs were budgeted for on
an accrual basis.
Measuring the Cost of Implicit Guarantees
The large and rapidly growing government-sponsored enterprises
(GSEs) facilitate the provision of various types of credit, including
home mortgages, student loans, and agricultural loans. GSEs are
privately funded businesses, chartered by the government, that
make loans or repackage and sell them. Many investors believe
that the GSEs have an implicit guarantee that the government will
back these securities in the event of a GSE bankruptcy (see Chapter 5 for a discussion of the housing GSEs). Although the government has no legally binding obligation to make such payments, in
the one instance of a GSE insolvency, in 1987, the government
stepped in to protect investors by authorizing $4 billion for the
ailing Farm Credit System.
Currently the budget does not formally account for potential liabilities arising from the GSEs. This asymmetry in the treatment
of GSEs and other government credit programs has been justified
by the "private" nature of these enterprises and the fact that currently these enterprises are quite profitable. The high probability
of government intervention in the event that circumstances change
and a default occurs, however, suggests that neglecting to account
for these potentially large obligations could be a costly mistake.

SUMMARY
• Significant long-term commitments are being passed to future
generations through a number of government programs. The
Federal budget does not report the cost of the commitments entailed in many of these programs until the year payments are
actually made.
• The Social Security disability insurance and hospital insurance
trust funds are not sufficient to maintain benefit payments at
currently legislated levels without reforms to these programs.




264

The DI trust fund is projected to be depleted by 1997 and the
HI trust fund by 2002 if reforms are not implemented.
• Accrual accounting for government insurance programs incorporates the anticipated future costs of commitments made
today, providing a long-term view of the true financial implications of these programs.

STRENGTHENING THE FRAMEWORK FOR
GROWTH
Current and future generations of Americans have the capacity
to achieve great prosperity, but serious attention must be paid to
the Nation's institutions in order to ensure this result. Although
the real productive capacity of the economy has grown substantially since the end of World War II, productivity growth has slowed
significantly in the past two decades. This has raised concerns that
the rates of saving and investment are not sufficient to maintain
the historic high rate of growth in living standards. The Nation's
work force is highly educated, but many people now fear that
America's schools are not providing children with the skills they
need to compete in the future. The Nation possesses unmatched
technological strength, but recent declines in the rate of private
R&D investment could reverse this historic advantage. Our Nation
is the leader in demonstrating the strengths of a market economy,
but unnecessarily costly and inflexible regulatory and legal systems and an overly complex and inefficient tax system have reduced the benefits that the market system could provide. The government's fiscal policies, unless brought under control, will reduce
the inheritance that future generations will receive.
While the government is not the most important factor in economic growth, it can affect growth positively by providing an environment conducive to market enterprise. Conversely, it can inhibit
growth through burdensome tax and regulatory policies. Efficient,
well-functioning markets are essential in order to channel labor,
capital, and entrepreneurial effort into their most productive uses.
The Administration's economic policy has aimed at promoting
growth through broad-based policies designed to improve the functioning of the market system. The Administration has strongly opposed policies designed to subsidize select industries on the grounds
that such policies substitute government intervention for the freemarket incentives that motivate private businesses to earn profits,
workers to seek rewarding employment, and consumers to choose
the most desirable and cost-effective products. The energy of the
private sector is misdirected when businesses find it easier and
more profitable to appeal to the government for special assistance
than to improve their performance in the marketplace.




265

GOVERNMENTAL POLICIES TO PROMOTE GROWTH
Government activities that facilitate well-functioning markets
range from maintaining a sound monetary system to providing a
legal system that supports contracts and private property. These
activities are addressed elsewhere in this and previous Reports. The
ability of government to undertake these activities in a capable
manner is critical to promoting growth rather than hindering it.
As discussed in Chapter 5, the regulatory system can play an important role in promoting or interfering with the efficient allocation of resources. An open world trading and investment system is
also vital to economic growth. The policies of this Administration
have been designed to promote the efficient worldwide allocation of
resources, as discussed in Chapter 7.
Policies designed to enhance the skills and productivity of the
labor force are critical to ensuring that the rising living standards
made possible by economic growth are spread throughout the economy. The Administration has supported increased funding for
Head Start, a program aimed at developing skills required for
learning at an early age; promoting school choice for elementary
and secondary education; better access to higher education; and improved job training for labor market entrants and displaced workers.
Crime, drugs, joblessness, and welfare dependency are sapping
the strength of America's inner cities. Stemming and reversing
these conditions will directly add to America's productive capacity
and allow our citizens to share in its benefits. The Administration
has actively supported enterprise zone legislation that would offer
a variety of tax incentives to stimulate job creation in distressed
communities and has supported other reforms to reduce the negative effects of the welfare system on the incentive to work and to
save, as well as home ownership opportunities for public housing
tenants (these reforms are discussed in Chapter 4 of the 1992
Report).
One vital test of a well-functioning market system is its ability to
encourage and sustain new and innovative firms. The United
States has a tremendous number of successful startup firms. The
government must ensure that regulations do not inhibit these developing new businesses, and that the tax system encourages entrepreneurship, saving, and investment. The President's Regulatory
Reform Initiative was undertaken to guard against regulations that
create more burdens than benefits, particularly for small businesses.
The Federal Government also promotes technological advancement by funding R&D. Additional support for R&D investment is
provided through the Tax Code. Historically, investment in R&D
has resulted in very high rates of return. Private industry, howev-




266

er, is unable to capture the full benefit of some types of R&D activities because the knowledge gained is quickly disseminated. Consequently, these activities frequently confer significant benefits to
the public at large. In these cases, provided the expected benefits of
the activities exceed their costs, government support can contribute
to economic growth.
Sound policies to protect the environment and manage natural
resources can also strengthen the framework for growth, provided
their benefits exceed their costs. Careful cost-benefit analysis
should be the basis for determining whether an environmental
policy will add or subtract to economic growth and future wellbeing.
TAX STRUCTURE TO PROMOTE GROWTH
A nation's tax system comprises a set of rules that can have important implications for saving, investment, labor supply, occupational choice, innovation, and entrepreneurial endeavors. Eliminating or improving tax rules that impede these essential activities increases the well-being of current and future generations.
Impediments to Growth
The U.S. income tax system has been modified significantly over
the past decade, but still contains a number of obstacles that
impede economic growth. The current tax system shares one weakness of all income tax systems: it taxes the return to saving—interest, dividends, and capital gains. As a result, people who save pay a
tax penalty for saving rather than consuming. For example, a
worker who saves regularly pays the same tax on wage, salary, and
professional income as an individual paid the same amount who
spends everything he earns. In the future, however, the worker
who saves must also pay tax on the interest earned on the savings
and in the end pays more taxes than the nonsaver, even though
both have the same initial earnings. If this double tax on saving
reduces savings levels, as most believe it does, then the capital
stock grows more slowly. In turn, this acts as a drag on the growth
of output and real wages.
Corporate income distributed to shareholders in the form of dividends is also taxed twice, once under the corporate tax and a
second time under the personal income tax, while income in the
noncorporate sector is taxed only once. This double taxation of corporate income is likely to reduce investment by corporations. The
corporate tax also creates financing distortions because corporate
debt and equity are treated differently. This disparity affects corporate decisions to raise additional funds through new share issues,
retained earnings, or issuance of new debt. Corporate income paid
as interest to bondholders is taxable only to the bondholder. Because debt is not burdened with the double tax on corporate




267

income, firms may be encouraged to issue excessive debt that can
increase their vulnerability to economic downturns and adversely
affect investment decisions.
Because of the economic costs of the corporate tax, some have
suggested integrating it with the individual income tax. In December 1992 the Department of the Treasury proposed a sweeping
reform of the tax system {Restructuring the U.S. Tax System for the
21st Century: An Option for Fundamental Reform) which, among
other reforms, eliminates the double taxation of corporate income.
Under the Treasury proposal, corporate income distributed as dividends would not be subject to tax at the shareholder level. Shareholders would also be able to reduce their capital gains tax liability
by treating retained earnings as additions to the amount they originally paid for their shares.
The present income tax also misallocates capital across the economy, because income earned by different assets is taxed at different
rates. This misallocation results in less output from the capital
stock than could otherwise be produced. In principle, this misallocation could be eliminated by providing depreciation deductions
that reflect the expected decline in the value of business assets. In
practice, however, it is quite difficult to measure the rate at which
assets depreciate, and in order to prevent excessive complexity, the
Tax Code must provide general rules for depreciation that may not
adequately distinguish between different types of assets. As a
result, the annual deduction provided under the income tax for the
cost of a van used by a delivery service is the same if it is driven 1
mile or 100,000 miles. The formula for calculating the van's depreciation deduction is the same for a computer (whether laptop or
mainframe) even though the rates at which these assets lose economic value can be very different. While it may be nearly impossible to provide a formula in the Tax Code that correctly accounts
for the depreciation of an asset, the inability to account properly
for depreciation means that the tax system favors investments in
some assets and discourages investment in others. Because investors ultimately seek the investments with the highest after-tax
yields, relatively greater investment occurs in assets favored under
the Tax Code and too little investment occurs in disfavored investments.
CONSUMPTION TAXES
In recent years, consumption taxes have been discussed as a partial or total replacement for the income tax. The recent Treasury
proposal, for example, would partially replace the current income
tax with a type of consumption tax. Consumption taxes can take
various forms. Under some, tax liability is tied directly to a person's level of consumption. Under others, tax liability may be as-




268

sessed only on wage, salary, and business income. Despite differences in form, these taxes share one common principle: either they
tax income only when it is consumed, so that the tax on income
saved is deferred, or they impose no tax on the return to saving.
Proponents argue that consumption taxes distribute the tax burden
more fairly than income taxes, that they permit vast simplification
of tax rules, and that, partly as a result of this simplification, they
would lead to a much more efficient allocation of the Nation's resources.
Personal Consumption Taxes
Income taxes in the United States are generally thought to be
progressive, while consumption taxes commonly employed, such as
State sales taxes and the value-added taxes used by many foreign
countries, may not be. However, consumption taxes can be designed
to achieve any desired level of progressivity.

The individual income tax is progressive because it ties the tax
rate to income: The more a person earns, the higher the tax rate.
In the same way, a consumption tax is progressive if it is based, at
least in part, on total household consumption. A consumption tax
of this form is frequently called a personal consumption tax.
One type of personal consumption tax, the consumed income tax,
permits taxpayers to deduct net saving from taxable income. In its
pure form, this tax would extend the present income tax treatment
of pension saving and deductible individual retirement accounts
(IRAs) to all forms of saving, with no restrictions on the amount
that can be saved and no requirement that the money be used only
for retirement. Since the difference between income and saving is
consumption, this method effectively taxes households on total
annual consumption. The pure form of the consumed income tax
would not tax businesses (including corporations) directly, although
employers would typically be required to withhold taxes in the
same way as they do now.
Unlike sales and value-added taxes that tax consumption proportionately, the consumed income tax can tax high levels of consumption at higher rates, achieving any desired level of progressivity. The double tax on saving under the income tax is eliminated, because income saved is taxed only once—in the year it is consumed. A consumed income tax in its pure form would treat borrowed funds in the same way it would a withdrawal from an IRA
and subject the amount to tax. Subsequent repayment of interest
and principal would be considered saving and would therefore be
deductible. Some versions of consumed income taxes allow the taxpayer to exclude from the tax calculation both the initial borrowing and subsequent repayment.
An alternative method of addressing progressivity through a consumption tax is a two-tiered cash-flow tax that levies taxes at both




269

the individual and the business level. At the individual level, only
wages and other compensation are taxed according to a progressive
rate schedule. At the business level, both corporate and noncorporate enterprises are taxed at a flat rate on their gross receipts after
deducting costs such as materials, capital goods, and labor. Borrowing, lending, and interest paid and received are entirely omitted
from the tax calculation at both the business and individual level—
a major simplification. By not subjecting business income to a
second tax at the individual level, the double taxation of corporate
income under the current tax system is eliminated; the business
level tax is in place of a direct tax on the owners.
Improved Economic Efficiency Under Consumption Taxes
Advocates of consumption taxes believe that they result in a
more efficient allocation of resources than income taxes. With consumption taxes, the government essentially becomes a silent partner in every business, sharing in the costs of the business in the
same proportion to which it shares in the earnings. Thus, consumption taxes do not distort relative incentives among alternative investment projects. The market can ensure that investments with
the highest expected pretax returns are undertaken, the same as
would occur in the absence of taxes.
In contrast, under an income tax, the government shares in the
returns of investment projects, but not in the costs of the funds invested. As a result, the income tax creates a bias against investment, favoring current consumption over future consumption.
In addition to the distortion an income tax creates in favor of
consumption at the expense of investment, any income tax that is
reasonable to administer also is likely to affect the allocation of investment across diverse assets. This occurs when the income tax
fails to provide depreciation deductions that accurately correspond
to the actual decline in the value of assets. Investment patterns are
distorted as investors seek out projects that receive relatively favorable tax treatment and avoid those receiving less favorable
treatment. Projects may be attractive only because of the favorable
depreciation deductions offered. Other projects that offer higher
pretax but lower after-tax returns may be passed over. Because the
pretax return measures a project's entire yield, including both the
return the investor keeps after taxes are paid and the tax revenues
the government collects, projects with the highest pretax returns
offer the greatest benefit to the economy as a whole. Allowing investment to move to its most productive use generates the maximum
economic output. A consumption tax can help allocate investment
more efficiently across different activities. A consumption tax also
treats debt and equity equally, avoiding the distortions the income
tax creates in the choice of the source of financing.




270

Both forms of consumption taxes provide capital gains income
with more favorable treatment than it receives under the current
income tax. Under the consumed income tax, income earned on
savings is taxed only when it is actually used for consumption, permitting the tax-free rollover of reinvested capital gains. The twotiered cash-flow tax does not tax capital gains at all at the personal
level; at the business level, the government shares in all earnings
of the business to the same degree that it shares in the costs of the
business.
The income tax affects saving behavior in two ways: It reduces
the reward to saving (a substitution effect), which can be thought
of as reducing the incentive to save; the tax also reduces lifetime
income, and this loss in income can also affect saving (an income
effect).
In many cases, however, consumption taxes result in higher rates
of saving than an income tax. A consumption tax that generates
the same revenue as an income tax can have a similar income
effect to that of the income tax, but without the saving-reducing
substitution effect. It is possible, in theory, for this positive saving
response not to occur if labor supply declines under the consumption tax and by enough to offset the substitution effect. Although
some people incorrectly believe that the labor supply must fall
under a consumption tax, there is no reason to expect such an
effect. While the tax rate on income consumed presently may have
to be higher than it is under the income tax, those choosing between working more and working less face two tradeoffs: the
amount of present consumption affordable by working more and
the amount of future consumption affordable by working more. The
first tradeoff is likely to be worsened under a consumption tax, but
the second tradeoff is improved. The net effect on labor incentives
is ambiguous.
The efficiency effects of consumption taxation can be summarized as promoting the efficient allocation of assets in production
and reducing the distortion in favor of present consumption relative to future consumption, while its effects on work incentives are
ambiguous. Under a range of parameters, researchers find that a
consumption tax generates net efficiency gains compared with the
present tax system. The advantages of a consumption tax could, of
course, be weakened in practice, depending on the extent to which
it was complicated by special exemptions and deductions added
through the political process.
Improved Fairness and Simplicity
Fairness is inherently difficult to define, but a personal consumption tax can be considered fairer than the income tax for several
reasons. First, it does not treat people differently on the basis of
when they choose to consume the income they earn. In addition,




271

consumption may be a better measure of people's living standards
than current income. When making decisions on major purchases,
families may try to estimate their likely earnings and expenses at
least several years in advance. As a result, consumption reflects, in
part, expected income over an extended period. Consumption may
thus provide a more accurate measure of the family's "permanent
income" than annual income, which often fluctuates from year to
year, depending on personal circumstances. Others believe consumption taxes are fairer because they base tax liability on what
people take out of the economy rather than on what they produce.
To the extent that it is desirable to have those who consume more
pay higher rates of tax, consumption taxes can be made progressive.
Finally, the consumption taxes outlined here could potentially be
much simpler than the current income tax. Tax filing under the
two-tiered cash-flow tax could be particularly easy for individuals.
Tax liability could be determined by subtracting personal exemptions and a standard deduction from compensation and applying
the rate structure. Business returns too could be very simple under
this form of taxation. Multiyear accounts for depreciation would be
eliminated, since all investments are deducted the year they are
made. Because tax considerations would be removed from the investment process, business investments could be evaluated more
simply.
The abundance of exclusions, adjustments, deductions, and credits under the current income tax creates complexity, increases paperwork, and interferes with economic decisions. One estimate suggests that Americans spend $75 billion annually in direct costs and
lost time associated with complying with the U.S. tax system. Reducing the needless complexity of the current tax system can only
help the economy.
IMPROVING THE INCOME TAX
Although replacing the income tax with some form of consumption tax has received much support, the current tax system can be
reformed to eliminate or reduce aspects that inhibit growth.
Among these modifications are cutting the tax rate on saving and
entrepreneurship, in particular by reducing capital gains taxes, depreciation reform, and eliminating the double taxation of corporate
earnings by integrating the corporate and individual income tax
systems. The 1992 Treasury proposal for fundamental reform of the
tax system embraces a number of changes to reduce the tax rate on
saving.
Removing the Tax Penalty on Saving
Reducing the tax rate on saving would make the income tax
more like a consumption tax. As discussed above, many forms of




272

retirement saving already receive the kind of treatment accorded
to all saving under a consumption tax. Reducing capital gains tax
rates would also increase the return to saving and encourage entrepreneurial activity. Much of the return from the startup of new
ventures lies in the increasing value of a business, which is taxed
as capital gain. Furthermore, because capital gains are taxed only
when an asset is sold, high capital gains tax rates discourage such
sales. Investors are locked into current investments, including entrepreneurs who might be willing to sell previously successful
startup enterprises to fund new ventures. As a result, the capital
gains tax is likely to raise little revenue relative to the costs it imposes on the economy. Further, capital gains are overstated due to
inflation. Modification of the income tax system to provide for the
indexation of capital gains income for inflation would be a worthwhile reform in itself (Box 6-7). Adjusting debt for inflation might
also reduce incentives for excessive debt financing.
Reducing Biases in Business Taxation
In a vibrant economy, business activity takes many forms. It is
conducted by corporations, partnerships, and people working on
their own. But however business is conducted, all business income is
ultimately earned by people and all taxes are ultimately paid by
people, whether in their role as workers, consumers, or investors.
The tax system should not hinder the diversity of business activity. In many cases, individuals and small businesses are best suited
to foster entrepreneurial innovation—for example, small firms now
comprise more than 90 percent of high-technology businesses. In
other cases, large corporations may be the most efficient means of
conducting business.
The U.S. tax system can influence business activity in many
ways. Small businesses may face enormous difficulty in complying
with complex tax rules, such as those governing pension benefits.
The cost of complying with tax rules is in many cases a fixed cost
that exacts a higher share of revenues from small businesses than
from large businesses. The asymmetric treatment of profitable and
unprofitable firms under the Tax Code, which limits the ability of
firms with operating losses to receive tax refunds or carry these
losses forward with interest, may deter investment and, in particular, limit entrepreneurial activity and new business formation,
since new businesses often incur losses in their initial startup
phase.
Integrating the corporate and individual income tax systems
could eliminate many of these distortions. Other reforms of business taxation that could be implemented immediately include providing depreciation deductions at replacement cost to reflect the
effect of inflation and repealing the alternative minimum tax (Box
6-8).




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Box 6-7.—-Inflation and Capital Gains
The fact that capital gains are overstated due to inflation is
one reason that they were taxed at a lower rate than other
income prior to the 1986 Tax Reform Act. The effect of inflation can also be accounted for directly by indexing for inflation
the purchase price of an asset that is used to calculate capital
gains. Currently inflation adjustments are provided elsewhere
in the Tax Code—for instance, personal exemptions, standard
deductions, and tax brackets are ail indexed for inflation.
The overstatement of income earned from capital gains that
results from inflation can be explained through the following
example. Consider an investor who bought a share of stock for
$100 in 1980 and who sold the stock for $175 in 1992. Under
current law, the investor is taxed on a nominal capital gain of
$75, the difference between the sale price and the purchase
price. An investor in the 28-percent tax bracket would pay $21
in taxes on this gain.
Because of inflation since 1980, it would take roughly $170 in
1992 to purchase the same quantity of consumer goods that
$100 bought in 1980. As a result, the additional purchasing
power the investor has earned from this investment is only $5,
the difference between the sale price and the inflation-adjusted
purchase price of the stock.
Under current law, the investor in the 28-percent tax bracket pays $21 in taxes on a $5 real capital gain, an effective tax
rate of over 400 percent. If only real capital gains were taxed,
the investor would pay $1.40 in taxes on the $5 of real capital
gain earned on this investment.

j
|
|
|
!
i
j

Investment tax credits (ITCsj for equipment have traditionally
been used to stimulate the economy and reduce the cost of capital.
By reducing the after-tax cost of equipment, the ITC, like accelerated depreciation allowances, can be an important incentive for
businesses to increase investment, While not a necessary outcome,
traditionally the incentives the ITC has provided were uneven, diminishing its effectiveness in promoting investment in those sectors of the economy where investment returns may be greatest. For
example, all new equipment but only certain special types of structures have traditionally qualified for the ITC, and short-lived
equipment has been favored relative to long-lived equipment. This
disparity in the stimulus for different types of investment has resulted in an inefficient allocation of investment. While reducing
the cost of acquiring investment goods is highly desirable for economic growth, tax incentives should be designed to be unbiased so




274

Box 6-8.—The Corporate Alternative Minimum Tax

The 1986 Tax Reform Act implemented a more extensive
minimum tax on corporations. The alternative minimum tax
was developed in response to findings that showed a number of
large corporations had paid little or no tax during certain periods of the early 1980s. The minimum tax makes it more likely
that corporations that otherwise would have low income tax liabilities relative to their "book profits" will pay increased
amounts of tax. Although some believe that the minimum tax
improves fairness, there are two basic reasons why they do not.
First, low tax liability is not an indication of high after-tax
rates of profit. The 1-year accounting period on which the tax
system is based may penalize firms with low income tax liabilities due to temporarily large investment or research outlays
relative to their book profits.
Second, corporate taxes are ultimately paid by people.
Higher corporate tax payments under the alternative minimum tax are not directly related to any measure of a person's
ability to pay the tax. For example, many low- and middleincome families own corporate stock indirectly through pension funds and thus also share in the burden of corporate taxes.
The recession of 1990-91 demonstrates another adverse feature of the minimum tax. The structure of the alternative minimum tax suggests that minimum tax payments increase
during recessions, an undesirable feature of any tax system.
Recent data indicate that among the largest firms, approximately one-third more firms paid minimum tax in 1990 than
in 1989. Minimum tax revenues in 1990 from corporations were
$4.6 billion more than in 1989, rising to $8.1 billion. Increased
tax collections during recessions reduce the spending power of
the private sector and can deepen and prolong recessions.
While the rise in the minimum tax paid in 1990 is only about 5
percent of total corporate tax revenues, the procyclical feature
of this tax reduces the ' 'automatic stabilizer" property of the |
income tax.
I
as not to alter the relative profitability of investments in different
sectors of the economy. Capital cost recovery and investment credits can be designed to achieve the desired investment stimulus
without distorting the allocation of investment across sectors as
has been the case historically.




275

SUMMARY
• The government should direct its tax, regulatory, and spending
policies toward providing an environment conducive to market
enterprise.
• Consumption taxes are likely to increase the amount of saving
and the amount and efficiency of investment relative to the
current income tax.
• Consumption taxes can be designed to achieve any level of progressivity. Consumption taxes are likely to be fairer and simpler than income taxes.
• Individuals ultimately bear the burden of corporate taxes. Integrating the individual and corporate income tax systems can
do away with wasteful distortions of investment, organizational, and financial decisions.

CONCLUSION
It would be difficult to overstate the importance of economic
growth to future standards of living. Small increases in the growth
rate of the economy compound over many years into dramatic differences in the standard of living. Economic growth, broadly defined, includes the many factors affecting living standards, such as
the amount and quality of leisure time, as well as income,
Economic growth cannot be taken for granted. It results from the
interaction of labor, capital, and technology within the institutions
of the economic system. It requires the effort of the labor force, the
willingness of entrepreneurs to take calculated risks on promising
endeavors, the imagination of scientists and engineers to develop
new products, and the managerial talent to bring them to market.
The market system has a tremendous capacity to organize the
productive resources of an economy in a way that will satisfy the
needs and desires of the Nation's people, permitting them to generate the rising living standards that are manifested as economic
growth.
Government participation in the market can either contribute to
or detract from economic growth. In certain cases when markets do
not work well, the government may be able to intervene to improve
the allocation of resources. Whenever possible, government intervention should attempt a targeted correction of the market mechanism, allowing people and firms the greatest possible latitude to
generate economic growth.
The government undertakes many activities that affect economic
growth indirectly. It maintains the legal system that guarantees
private property rights and supports the economic system. It provides a social safety net for its citizens. The taxes it uses to raise
revenue can encourage or discourage saving, investment, and cap-




276

ital formation relative to consumption. Its investment in productive infrastructure provides public goods that can enhance market
activity for all. It can promote growth by funding research and development when the nature of the research will not permit private
firms to appropriate the full returns and when the benefits of the
research exceed the costs. To the extent that these policies are carried out properly or improperly, the government affects the living
standards of present and future generations.
Much of the discussion about the government's impact on future
generations tends to be limited to the impact of the Federal Government's deficit and the consequent debt. Both the deficit and the
debt are incomplete and imperfect measures of the legacy future
generations will inherit. They are incomplete because they neglect
the many assets, public and private, future generations of Americans will receive. They are imperfect because they often do not accurately measure the financial liabilities of the Federal Government.
While the existing debt and projected budget deficits are incomplete and imperfect measures, they serve as proxies for these liabilities. Considering the debt and deficits together with the many
broad concerns discussed in this chapter suggests that, on balance,
government policy has changed in recent decades to a position that
is less favorable to future generations. Moving to redress that imbalance should be an important national priority in coming years.
Consistent with the concern for future generations, however, this
should be done with mechanisms that encourage rather than discourage economic growth. Indeed, it is possible to reduce the deficit
substantially and immediately in ways that will cause much more
harm than good for the country. In contrast, the Administration
has advocated controlling the growth of mandatory spending to
reduce budget deficits and removing tax obstacles to entrepreneurship, saving, and investment, and hence economic growth. The Administration worked to guarantee the benefits of an open trading
system to all Americans. In the past year, the Administration's
regulatory reforms made an important start in rationalizing the
regulatory system. The Administration proposed fundamental reforms for our elementary and secondary education systems that
would harness the power of parents choosing schools to encourage
schools to improve their performance through competition. Proposed reforms of the legal system would accelerate the resolution
of disputes and discourage wasteful litigation. These policies, and
others like them, are needed to ensure that future generations will
continue to enjoy an improved standard of living.




277




CHAPTER 7

Whither International Trade and
Finance?
THROUGHOUT HISTORY, international trade and finance have
been powerful engines of growth for the United States and the
world. International trade has benefited all countries; one country
does not capture the benefits of open trade at the expense of its
trading partners. A key part of the Administration's economic
policy has been to work toward more open trade and investment
relationships through such initiatives as the North American Free
Trade Agreement (NAFTA) and the Uruguay Round of multilateral trade talks under the General Agreement on Tariffs and Trade
(GATT). Successful negotiations on NAFTA were completed in
1992, and progress has been made toward an agreement on the
long-lasting and complex Uruguay Round. In the area of international finance, the Administration implemented the Brady Plan,
which worked to make it easier for developing countries to service
commercial bank debt, and the Enterprise for the Americas Initiative (EAI), which supports investment and growth in the Western
Hemisphere.
International trade—the voluntary exchange of goods or services
across national boundaries—increases the well-being of all participants by promoting economic efficiency in a variety of ways. International trade allows each country to concentrate on its most efficient activities. Trade gives firms access to the large international
market, allowing them to increase output and lower their average
cost by taking advantage of scale economies. Access to world markets for raw materials, capital goods, and technology improves productivity. Foreign competition forces domestic monopolies or oligopolies to lower prices, and imported goods provide consumers with
greater choice. Finally, a liberal trade regime can provide a better
climate for investment and innovation, raising the rate of economic
growth.
An expansion in opportunities for international trade has effects
similar to those of technological improvements: For the same
amount of inputs and resources, more output will be produced. On
the other hand, like technological change, more open international
trade may require economic adjustments. Just as the invention of
the transistor shifted production away from vacuum tubes, in-




279

creased trade causes shifts in resources away from production of
commodities that compete with imports and toward production of
commodities exported from the country.
Open trade may be especially beneficial to the growth of the developing economies and the former Communist nations that have
smaller, less competitive markets and a greater need for investment and capital goods embodying modern technology. By creating
new competition, providing domestic producers with access to large
international markets, and improving the environment for investment, international trade can make a far greater contribution than
direct aid to economic development.
In general, international trade has grown much faster than
world production during the last 300 years. Most recently, between
1965 and 1990, inflation-adjusted merchandise exports grew by 439
percent, while world production rose 136 percent. The increase in
world trade is, in part, the result of GATT, which was created after
World War II to reduce tariffs and remove other nontariff barriers
to international trade. In seven rounds of GATT-sponsored multilateral trade negotiations (the Uruguay Round is the eighth), countries have lowered tariff barriers and agreed on codes of conduct
for nontariff barriers. Trade among GATT members now accounts
for over 80 percent of world trade.
An important counterpart to an integrated global trade system is
a well-functioning international financial system for the transfer of
bonds, equities, short-term securities, and other assets among nations. The international flow of capital takes various forms: Direct
foreign investment is the establishment of a business in a foreign
country; portfolio investment is the purchase of financial assets
such as corporate bonds or government securities; and direct lending is a similar form of capital inflow where a borrower promises
to repay a foreign lender.
The international financial system serves several important functions. It provides traders with access to foreign exchange and
credit, expanding the scope for commercial transactions, and allows
nations to finance trade imbalances through private capital flows,
government borrowing and lending, or changes in reserves. Second,
the system of international finance encourages capital to move to
countries where it is more productive. Capital inflows can finance
domestic investment, and therefore enable a country to invest more
than it saves; as a consequence, the country imports more goods
and services than it exports (that is, it runs a trade deficit). Finally,
international finance allows investors to diversify their portfolios,
and thus reduce the risk of losses due to poor economic performance or political upheaval in individual countries.
Trade in currencies represents another facet of international finance. Because international trade typically involves two or more




280

currencies, a smoothly functioning foreign exchange (or currency)
market—the market where currencies are exchanged for one another—is important for efficiency in the international markets for
goods, services, and assets. An exchange rate—the price of one currency in terms of another—influences both international capital
flows and international trade by affecting the domestic prices of
foreign commodities and assets. Between the end of World War II
and the early 1970s, exchange rates were pegged—that is, maintained at particular values—in line with an agreement made shortly before the end of World War II, commonly called the Bretton
Woods Agreement. Subsequently, exchange-rate regimes with varying degrees of flexibility have evolved. How, and under what circumstances, exchange rates should be allowed to change has
become an important issue, especially within the European Community (EC), which reestablished pegged rates among most of its
national currencies in the late 1970s. The reluctance to realign exchange rates within the pegged rate system in the face of major
disturbances has played a role in the current sluggish growth and
recession in a number of countries in Europe. This has adversely
affected the EC's trading partners by reducing demand for their exports.
Since World War II, the growth of international trade has been
complemented by the rapid expansion of international capital
flows. As economies grow and become more integrated with the
world economy, they develop occasional trade surpluses or deficits
that are financed through capital flows. For example, in the wake
of World War II, Europe's reconstruction needs far exceeded its
available savings, leading to large trade deficits for Europe and,
conversely, substantial U.S. trade surpluses coupled with capital
flows from the United States to Europe. Likewise, in the 1960s and
1970s, capital scarcity in many developing countries was reflected
in trade deficits and higher expected rates of return to investment
that attracted capital from industrialized countries.
In fact, the growth of international capital movements has
dwarfed the growth in trade. The stock of international bank loans,
for example, has grown from 5 percent of gross domestic product
(GDP) of countries in the Organization for Economic Cooperation
and Development (OECD) in 1973 to about 20 percent of OECD
GDP in 1991. Gross sales and purchases of U.S. long-term securities
by foreigners grew from $144 billion in 1978 to $5.6 trillion in 1991,
far outstripping the growth of world output and trade over this
period. Average daily turnover in U.S. markets for foreign currencies is estimated at about $192 billion in 1992, more than a tenfold
increase from $18 billion in 1980.
The growth in international finance is the result not only of the
increase in international trade but also of improvements in tech-




281

nology, financial innovations, and changes in regulatory environments. Technological improvements in communications and computers have made international financial transactions faster,
easier, and cheaper, and now provide investors with up-to-theminute information on financial activity throughout the world, Improved technology has also spurred development of new financial
products that require extensive processing of information to construct and price accurately.
The regulatory environment affecting international capital flows
has become less restrictive since World War II. During the 1950s,
for example, European countries removed laws restricting the exchange of domestic for foreign currency. By the end of 1992, members of the EC had removed almost all their capital controls. The
liberalization of restrictions on capital flows provided significant
impetus to the development of an integrated global financial
market.
As an important example, the removal of external capital restrictions in Europe, along writh other U.S. and European tax and regulatory policies, contributed to the creation in the 1950s and 1960s of
the Eurodollar markets in which banks outside the United States
accept deposits and make loans denominated in dollars. The Eurodollar markets have developed into "Eurocurrency" markets with
transactions in other currencies in addition to dollars, and have expanded throughout much of the globe. After the oil shocks of the
1970s, the Eurodollar markets played an important role in taking
deposits from oil-producing countries running trade surpluses and
lending those funds to oil-consuming nations requiring financing
for their trade deficits.

THE EVOLUTION OF EXCHANGE-RATE
ARRANGEMENTS
The past half century has been marked by a number of experiments with different exchange-rate arrangements. Under the Bretton Woods system, designed at the end of World War II, currencies
of participating nations were pegged to the dollar and only occasionally adjusted. Since this system was abandoned in the early
1970s, the exchange rates of the major industrialized countries
have generally "floated" against each other in response to market
forces. However, a number of European countries revived the
pegged exchange-rate system when they created the European
Monetary System (EMS) in 1979. Many developing countries peg
their currencies to the dollar or other stable currencies, and this is
considered a viable option for some of the economies of Eastern
Europe and the former Soviet Union as well.




282

At the heart of the widespread experimentation with different
exchange-rate arrangements is the fact that no one arrangementbe it a pegged~or a floating-rate system—is appropriate to all countries at all times and under all circumstances. Exchange-rate arrangements may be classified according to how rigidly they fix exchange rates between currencies (Box 7-1). At one extreme, several
countries (or for that matter, regions within a country) share a
single currency, so that there is no actual exchange rate to change.
At the other extreme lies a system with freely floating exchange
rates, in which currency values are determined exclusively by
supply and demand. Pegged exchange rates represent an intermediate case: Governments maintain exchange rates at desired levels,
but occasionally change those levels as circumstances change.
Box 7-1.—Exchange-rate arrangements
Single currency arrangements. Two or more countries form a
"currency union" to share a single currency. Because there is
only one currency, there is no exchange rate between participating nations.
Pegged exchange rates. Governments buy or sell currencies in
order to maintain the value of their own currency within a
specified band around the pegged rate. The pegged rate itself
occasionally can be changed in response to changing circumstances.
Floating exchange rates. With a freely floating exchange
rate, governments do not enter the foreign exchange markets
to influence exchange rates, which are determined exclusively
by market forces. In practice, governments occasionally intervene in foreign exchange markets to buy or sell currencies in
order to influence their value; this is known as a "dirty float/'
Different exchange-rate arrangements offer different benefits. A
pegged exchange rate, if held for extended periods, can reduce the
risks of exchange-rate changes to businesses conducting international trade. It can also exert pressure on governments to keep inflation low in order to maintain the value of their currencies. On
the other hand, pegging the exchange rate may prevent a country's
monetary authorities from responding flexibly to major shifts in
economic conditions, and in that regard floating rates or more
readily adjusted pegged rates may provide for more appropriate responses. For example, if world demand for one of a country's principal export products drops sharply, perhaps because a cheaper
substitute has been developed, it may be helpful to let the value of
that country's currency fall in international markets; this will
make the country's other products cheaper to foreigners, helping to




283

maintain demand for its goods and reducing the downward pressure on income and employment that a reduction in exports could
cause.
Hence, countries choosing an exchange-rate arrangement face a
tradeoff between the stability offered by fixed exchange-rate systems and the greater freedom to set domestic monetary policies
that is offered by more flexible exchange-rate arrangements. When
the international environment is relatively stable and rates of inflation are similar among countries, pegged exchange-rate systems
may work smoothly while inducing governments to control inflation. Conversely, major disturbances such as escalating oil prices,
or widely divergent inflation rates among countries, may call for
more flexible exchange-rate arrangements that can permit smooth
adjustment to these developments.
In practice, the distinction between the stability of one system
and the flexibility of the other can be exaggerated. Even in floating-rate systems, central banks often intervene in foreign exchange
markets in order to moderate fluctuations in currency values, although such interventions usually have very little impact, and
then only for brief durations, unless accompanied by fundamental
shifts in monetary policies. Conversely, the risk of exchange-rate
fluctuations to importers and exporters could be greater in a
pegged rate system that experiences occasional larger and unpredicted devaluations than in a floating-rate system where exchange
rates move continuously but by small amounts. Moreover, private
markets have developed means of helping traders *'hedge" (protect
against) such risks. An exporter expecting to receive British pounds
in one year can contract now, at a specified "forward" exchange
rate, to buy dollars for pounds next year, thereby guaranteeing the
dollar value of future receipts. In fact, since World War II, international trade has grown vigorously under both pegged and flexible
exchange rates.
Nevertheless, the choice of an exchange-rate arrangement can
substantially affect the performance of the economy and, in fact,
exchange-rate issues have been very important over the past year.
In Europe, the EMS came under severe strain as its members
struggled to keep pace with high German interest rates, exacerbating the economic slowdown and prompting Italy and the United
Kingdom to float their currencies. Argentina entered the second
year of a disinflation program that is based on a pegged exchange
rate and reduced budget deficits. The major industrialized countries pledged $6 billion to help Russia stabilize the ruble once appropriate policies are in place.
These developments may have important implications for our
owrn living standards and national security. Slower growth in
Europe has reduced demand for U.S. exports and slowed our own




284

recovery. Strong growth in various Latin American economies, on
the other hand, in part based on the stabilization of their currencies, is contributing to their emergence as key trading partners for
the United States. Economic stabilization and growth in the former
Soviet Union is indispensable to achieving peace and democracy in
that part of the world. An understanding of how and why exchange-rate arrangements have evolved since the creation of the
Bretton Woods system may shed light on the exchange-rate choices
confronting these economies today.

PEGGED EXCHANGE RATES UNDER THE BRETTON
WOODS SYSTEM
The primary objective of the Bretton Woods system was to
ensure a stable financial setting for international trade. When the
designers of the system met in Bretton Woods, New Hampshire, in
1944, they were eager to avoid repeating the experience of the
1930s. The abandonment at that time of the gold standard, which
had fixed the values of national currencies in terms of gold and
therefore in terms of one another, was followed by marked swings
in exchange rates and a sharp decline in international trade. While
increases in tariffs and falling incomes were primarily responsible
for the reduction in trade, the chaotic conditions of the interwar
period, including the Great Depression, convinced participants at
the Bretton Woods Conference of the need to limit market-driven
fluctuations in the value of currencies.
At the same time, the Bretton Woods participants recognized
that a system of permanently fixed exchange rates, such as the
gold standard, could establish too strong a link between domestic
economic activity and external developments. In a fixed exchangerate system, governments or central banks must finance surpluses
or deficits in their balance of payments (the difference between
international sales and purchases of goods, services, and assets) by
buying or selling international reserve currencies or gold. Whenever a central bank buys assets, whether domestic bonds or foreign
currencies, it increases the domestic money supply; conversely, the
domestic money supply falls when the central bank sells reserves
of foreign exchange. These changes in the money supply, in turn,
tend automatically to reduce existing payments imbalances. For example, countries with deficits sell reserves, leading to a decline in
the money supply, a contraction in aggregate demand and imports,
and thereby an automatic reduction in the balance of payments
deficit. The opposite occurs when countries with surpluses buy foreign exchange.
Depending on the initial state of the economy, these adjustments
may either improve or worsen the domestic situation. For example,
in a booming economy with inflationary pressures, the reduction in


http://fraser.stlouisfed.org/ 334-230 0—92
Federal Reserve Bank of St. Louis

285
10 (QL3)

the money stock associated with a payments deficit should restrain
demand and reduce inflation. If the economy is already weak, however, a payments deficit will lead to further contraction and increases in unemployment. The contraction may become even more
pronounced if the country is in danger of running out of international reserves; in this case, it may take strong action to suppress
domestic demand further in order to reduce its external deficit and
retain the reserves needed to protect its exchange rate.
By contrast, with freely floating exchange rates, the authorities
are not committed to a specific rate, and can focus on domestic objectives when setting monetary and fiscal policies. Balance of payments pressures lead to changes in exchange rates that, by changing the prices of exports and imports, lead to a reduction of payments imbalances with less need for domestic adjustment.
As a compromise between fixed and floating exchange-rate systems, the Bretton Woods system provided for an "adjustable peg/'
Under this system, each country would peg the price of its currency in terms of the dollar. When temporary balance of payments
deficits occurred, countries with limited reserves would be able to
borrow from the International Monetary Fund to alleviate the need
to contract aggregate demand sharply, giving them time to adjust
domestic policies more gradually. In the event of "fundamental disequilibrium" in the balance of payments—a phrase never precisely
defined but clearly referring to a situation in which countries are
unable to adjust their payments imbalances without severely disturbing the domestic economy—countries were allowed to change
their official exchange rates. The United States, in turn, linked the
dollar to gold at $35 per ounce.
Economic Performance Under the Bretton Woods System
For most of its quarter-century of existence (1946-71), the Bretton Woods system was relatively successful in securing its twin
goals of strong growth in international trade and stable exchange
rates. In fact, exchange rates were even more stable than had been
anticipated. National authorities, desiring to avoid the loss of prestige and increased speculative pressures associated with devaluations, were increasingly reluctant to change their official parities.
After some changes in parities in the late 1940s, exchange rates remained, with a few exceptions, largely unchanged until 1967 (Chart
7-1).
The Bretton Woods era was also marked by a steady growth in
output and, after a postwar burst of inflation, by relatively stable
prices. Inflation in the seven major industrial economies averaged
3.5 percent between 1950 and 1970, compared with 7.4 percent between 1970 and 1991 (Table 7-1). Annual growth in output averaged 5.4 percent and 2.9 percent, respectively, during the two periods. Some observers attribute the favorable performance of the in-




286

Chart 7-1 Exchange Rates of Major Industrialized Countries in Terms of the Dollar
Exchange rates were considerably more stable during the Bretton Woods era than they have
been in the past t w o decades.
Index, 1948=100
250

Germany /'•*

200

150
: /

Japan

100

50

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

Source: International Monetary Fund.

dustrial economies in the 1950s and 1960s to the pegged exchangerate system, which may have exerted pressure to pursue responsible macroeconomic policies, moderating the cycles of inflation and
recession that became more pronounced after 1971. However,
others contend that the successful economic performances of the
Bretton Woods period should not be attributed to pegged exchange
rates and that the relative stability of prices and of output growth
during this period is what enabled exchange rates to remain stable.
TABLE 7-1.—Output Growth and Inflation in the G7 Countries
Inflation

Output Growth
Country

1950-70

1970-91

United States
Japan
West Germany
Canada
United Kingdom
France
Italy

2.8
9.2
6.3
4.9
3.6
5.3
5.7

2.1
4.4
2.5
3.5
2.4
2.7
3.0

2.4
4.9
2.2
2.5
3.7
4.9
3.5

6.2
5.5
3.8
6.9
10.0
7.8
11.7

Average..

5.4

2.9

3.5

7.4

1950-70

1970-91

Note.—Output growth is the average annual growth of GDP/GNP in constant 1985 units of each domestic currency. Inflation is
the average annual growth of the CPI.
Source: International Monetary Fund.




287

The Breakdown of the Bretton Woods System
As the Bretton Woods era progressed, tensions within the exchange-rate system became more pronounced, in part because of
the increasing international integration of capital markets. At the
beginning of the Bretton Woods era, most countries had controls on
the purchase and sale of foreign exchange and on capital flows.
Over time, these controls were lifted, and by 1958 most European
countries had liberalized transactions in foreign exchange for trade
in goods and services. While most countries retained capital controls through the 1960s and beyond, advances in telecommunications and institutional developments such as the Eurodollar
market made these controls increasingly easy to evade.
As a result of increased capital mobility, balance of payments
deficits that raised the prospect of a currency devaluation tended
to trigger speculative capital outflows, forcing governments to take
severe restrictive actions or even to devalue their currencies. This
tendency substantially limited economic policy choices, since even
a moderate shift in a country's balance of payments could lead to a
crisis that would be difficult to resolve. Since governments tended
to resist devaluations (or in some cases, revaluations) until they
had no alternatives, purchases of foreign currency offered near-certain profits to speculators. Strong capital outflows forced the devaluations of the British pound in 1967 and the French franc in
1969. Ironically, growing capital mobility not only increasingly restricted domestic economic policy but also reinforced tendencies to
keep exchange rates unchanged. Governments declined to make
corrective adjustments in their parities in order to bolster confidence in their currencies.
A second source of heightened tension under the Bretton Woods
system was concern about the dollar's role in the international
monetary system. During the Bretton Woods period, the dollar
became the prime reserve currency, that is, it was used by other
countries as a medium of payment for international transactions
and as a reserve asset in case of future balance of payments deficits. On the one hand, the dollar's status as a reserve currency
meant that the United States could run balance of payments deficits without having to tighten its domestic policies (sometimes referred to as "deficits without tears"), since the countries that were
running balance of payments surpluses were willing to accumulate
U.S. dollars.
On the other hand, the willingness of other countries to hold dollars as a reserve currency depended in part on their confidence
that the dollar would retain its value in terms of gold. Persistent
U.S. balance of payments deficits, reflecting capital outflows in
excess of U.S. trade surpluses, caused foreign dollar claims on the
United States to grow significantly larger than U.S. holdings of




288

gold during the Bretton Woods period, increasingly throwing into
question the ability of the United States to maintain the official
price of gold at $35 per ounce. In March 1968, faced with declines
in its stock of gold, the United States participated in an international arrangement that allowed the price of gold to float in private markets, although the price was held at $35 per ounce for
transactions with foreign central banks. These banks, however,
became increasingly reluctant to continue accumulating dollars
whose price in terms of gold was declining in private markets.
Reinforcing these concerns was the asymmetrical nature of exchange-rate adjustments under Bretton Woods. Countries running
balance of payments deficits often had to devalue when international reserves threatened to run out, while surplus countries generally faced no analogous pressure to revalue. Since changes in exchange rates were made vis-a-vis the dollar, this led to a bias
toward devaluation for the system as a whole that caused the
dollar itself to become overvalued.
In 1971, record levels of U.S. private capital outflows occurred in
response to both expansionary monetary policy aimed at spurring
recovery from the 1970 recession, a policy that heightened fears of
rising inflation, and further concerns about the dollar provoked by
the first U.S. trade deficit in the postwar period. The threat of a
depletion of its stock of gold prompted the United States to suspend
the convertibility of dollars into gold in August 1971, in the process
eliminating a key feature of the Bretton Woods system and encouraging those countries that had not already floated their currencies
to do so. An attempt to reconstruct the global pegged exchange-rate
system, marked by the Smithsonian Agreement of December 1971,
was abandoned by March 1973 in response to continued balance of
payments difficulties among a number of participating countries.
THE DOLLAR IN THE FLOATING-RATE ERA
In the 1970s and 1980s exchange rates fluctuated more widely
than they had during the Bretton Woods period of the 1950s and
1960s (Table 7-2). Inflation and production in the United States
also became more variable since the breakdown of the Bretton
Woods system, and this occurred in other industrialized countries
as well.
As noted earlier, observers disagree on whether the end of the
pegged exchange-rate system was itself responsible for the increased economic volatility. During the 1970s, the world experienced a number of economic shocks, most notably the oil price increases of 1973-74 and 1979-80. These shocks tended to affect each
country differently, prompting a variety of policy responses and
partially explaining the increased volatility of exchange rates.
Moreover, the changes in exchange rates helped economies adjust




289

TABLE 7-2.—The Increasing Variability of U.S. Exchange Rates, Output and Inflation
Ratio of Variability:
1971-91/1950-70 1
Exchange rate 2 ...

13.00

Output 3

2.58

Inflation 4 ..

2.25

1
2
3
4

Ratio of statistical variance of the indicator during the 1971-91 period to its variance during the 1950-70 period.
Monthly deutsche mark/dollar rate.
Deviation from quarterly trend of real GDP (or GNP) in billions of 1982 dollars.
Twelve-month growth rate of the monthly, seasonally adjusted CPI.

Sources-. Department of Commerce, Bureau of Economic Analysis; Department of Labor; and International Monetary Fund.

to the shocks (Box 7-2); had exchange rates not been allowed to
adjust, many countries would have had to respond to balance of
payments difficulties by more sharply reducing aggregate demand.
Box 7-2.—Floating Exchange Rates
Under a floating exchange-rate system, governments allow
the market to set the prices of currencies. A central virtue of
floating exchange rates is that currency prices eventually
adjust to correct international payments imbalances, reducing
the need for domestic economic adjustment.
When there are tendencies toward a U.S. balance of payments deficit, the receipts of foreign exchange (from the sale of
goods and services abroad or from capital inflows) are less than
the demand for foreign exchange (to buy foreign goods and
services or to invest abroad). As a result, the prices of foreign
currencies rise (or equivalently, the dollar depreciates), making
foreign products more expensive at home and U.S. products
cheaper abroad. Imports fall, exports rise, and the supply and
demand for foreign exchange move into balance. An incipient
balance of payments surplus—when the supply of foreign exchange exceeds the demand at the current exchange rate—will
have the opposite effect, increasing the dollars value, depressing exports, and again restoring balance.
However, the fluctuations in currency values in the post-Bretton
Woods era reflected divergent economic policies and performances
as well as international economic shocks. Inflation rates for the
United States, Japan, and Germany diverged considerably in the
late 1970s, when U.S. policies focused on supporting recovery from
the mid-1970s recession and U.S. inflation rose in relation to that
of the other two countries (Chart 7-2). The higher inflationary
pressures in the United States meant that any attempt to have
fixed the value of the dollar during this period would have significantly increased balance of payments difficulties for the United




290

Box 7-3.—Real Exchange Rates and Real Interest Rates

When rates of inflation differ across countries, it is the real
exchange rate rather than the nominal (that is, actual) exchange rate that matters most to the balance of payments. The
real exchange rate takes into account changes in price levels.
For example, if Japanese prices doubled while U.S. prices remained unchanged, then for a given nominal yen/dollar exchange rate, the real exchange rate—which measures the purchasing power of the dollar in terms of Japanese goods—would
drop by half. A real exchange-rate appreciation signifies that a
country's goods and services are becoming more expensive
compared with foreign products; a real exchange-rate depreciation indicates that a country's products are becoming cheaper
compared with foreign products. When a country's inflation
rate differs from inflation rates abroad, its competitive position
generally will be stable if its nominal exchange rate adjusts by
enough to keep its real exchange rate stable.
Exchange-rate movements are often determined primarily by
capital movements, especially in the short run. Capital tends
to flow from countries with low real interest rates to those
with high real interest rates. The real interest rate is (approximately) the nominal interest rate less the expected rate of inflation. When differences in nominal interest rates merely reflect differences in expected inflation rates—that is, when real
interest rates are the same across countries—capital flows are
unlikely to occur in response, since exchange rates are likely
to change in the future to compensate for different rates of inflation.
An inflow of capital into a country with a high real interest
rate will create demand for the domestic currency, causing it
to appreciate. Conversely, the currency of a country with a low
real interest rate will depreciate as capital migrates out of that
country. As a result, monetary and fiscal policies that affect
real interest rate differentials will cause movements in the exchange rate (Chart 7-3).
policy had begun to ease in 1984, while attempts to reduce inflation
abroad had strengthened, narrowing the gap between U.S. and foreign interest rates. Against this background, in September 1985,
the G-5 countries (the United States, Germany, France, Japan, and
the United Kingdom) reached the Plaza Accord, agreeing to coordinate policies more closely to lower the dollar's value further. With
the dollar still falling in February 1987, six major industrial countries (the G-5 plus Canada) reached agreement, in the Louvre




293

Accord, to strengthen policy coordination and stabilize the dollar,
although it continued to decline until the end of the year. The
downward correction of the dollar and stronger growth in the other
major countries led to a narrowing of the U.S. trade deficit from its
peak of $160 billion in 1987 to $73 billion in 1991.
The widening U.S. trade deficit of the 1980s cannot be attributed
solely to the effects of floating exchange rates. Underlying both the
appreciation of the dollar and the increase in the trade deficit was
the widening gap between saving and investment in the United
States. U.S. gross investment averaged 17 percent of GDP in the
1980s, about the same as in the 1970s. However, the gross national
saving rate declined from 17 percent in the 1970s to 15.4 percent in
the 1980s, reflecting both reductions in household savings rates and
the growing Federal deficit. The reduction in national saving
meant that a greater share of U.S. investment had to be financed
with resources from abroad. Therefore, the trade deficit would have
widened with either pegged or floating exchange rates.
THE MOVEMENT TOWARD A SINGLE CURRENCY IN
EUROPE
In the Maastricht Treaty of 1991, the members of the European
Community agreed to replace their national currencies with a
single currency by the year 2000, thereby superseding the present
system of pegged exchange rates under the EMS and permanently
ruling out exchange-rate changes. Ironically, events in 1992, including the (at least temporary) withdrawal of a number of countries
from the exchange rate mechanism of the EMS, underscored the
shortcomings of a pegged exchange-rate system in the face of economic disturbances and provided an example of the pressures that
can build up if exchange rates are not realigned in a timely way.
Progress toward a single European currency is viewed as complementary to the increasing integration of the European market for
goods and services. In 1985, the member states of the EC agreed to
remove almost all remaining barriers to the free movement of
goods, capital, services, and people by the end of 1992, a step often
referred to as "EC 92." A single European currency is expected to
reinforce this integration by eliminating both the transactions
costs of dealing in different currencies and concerns about exchange-rate fluctuations that could interfere with cross-border business planning. In addition, the move to a single currency is expected to lower interest rates and thereby promote growth in some
member countries by eliminating the risk to lenders that the currency might be devalued against others in the system.
Many observers, however, believe that the primary economic
benefit of European integration lies in the elimination of barriers
to trade. There is uncertainty as to how much additional benefit




294

will be yielded by the permanent fixing of exchange rates implied
by a single currency. By comparison, NAFTA is designed to achieve
the benefits of regional free trade, but a currency union among the
United States, Mexico, and Canada is not believed to be necessary
to achieve these gains.
The European Monetary System
The EMS was created in March 1979, partially as a reaction to
the increased exchange-rate volatility that followed the end of the
Bretton Woods system. Under the exchange rate mechanism of the
EMS, most member countries are required to maintain their exchange rates within 2Vi percent of "central rates" established between their currency and each of the other members' currencies.
When an exchange rate between two members' currencies moves
2Vi percent away from its central rate—that is, to the edge of the
exchange-rate band—the central banks of both countries are required to intervene to prevent the exchange rate from moving outside the band. Realignments of each country's central rate are permitted. In this sense, the exchange rate mechanism was designed
to operate much like the adjustable peg of the Bretton Woods
system.
It was initially intended that the central rates would be changed
more frequently and in smaller increments than under Bretton
Woods; rates would be changed before irresistible pressures built
up. While realignments did take place relatively often in the first
few years of the EMS, they later became less frequent. Between
1979 and 1987, there were 11 realignments, after which essentially
no realignments took place until September 1992 (Chart 7-4).
The difference between the appreciating currencies of Germany
and the Netherlands and the most swiftly depreciating currencies,
such as those of France and Italy, is accounted for primarily by differences in their macroeconomic performance, particularly inflation (Chart 7-5). The countries with the highest inflation rates had
to devalue their currencies frequently in the early years of the
EMS in order to maintain the competitiveness of their exports and
prevent increases in external deficits.
By the mid-1980s, differences in rates of inflation became smaller
as the most inflationary nations brought their rates down toward
those of Germany and the Netherlands. Some observers argue that
the desire to avoid realignments, in particular because of the loss
of credibility and national standing such realignments entailed,
was important in leading policymakers in the countries with high
inflation to implement strong disinflationary measures. These
countries, notably France, concentrated on maintaining stable exchange rates with respect to the deutsche mark, since Germany
had for historic reasons established an unwavering commitment to
price stability; French inflation declined from over 10 percent at




295

Chart 7-4 Central Exchange Rates of Selected EMS Countries
Following an initial period of frequent realignments, exchange rates among the countries
of the EMS became more stable after the mid-1980s.
Index, March 1979 = 100
140

Germany ,"

130

.'

120

f

Netherlands

110

100

90

~rts

Belgium

jLl

Denmark

" * *L3
"
— ————j
\,

France
\

80

I
70

I
1979

1981

I
1983

1
I
1985

I
I
1987

I
I
1989

Italy
I
I
1991

\.

Note: Index is the value of domestic currency relative to the ECU (a weighted average of the currencies
of the EMS).
Source: Banque Nationaie de Paris.

the start of the 1980s to under 3 percent in 1992. Increasingly, the
deutsche mark became the monetary anchor for the EMS.
To the extent that disinflationary policies can be linked to the
EMS, this highlights an important rationale for the pegged exchange-rate system: to exert anti-inflationary discipline over domestic policies. An alternative view is that the disinflationary policies of various countries were not motivated by the EMS itself but
were part of a more widespread movement to correct the inflationary excesses of the preceding decade. During the 1980s, inflation
declined in many countries that did not participate in the peggedrate system of the EMS, including the United Kingdom (which did
not join the exchange rate mechanism of the EMS until 1990) and
the United States. This fact suggests that the relative stability of
EMS parities in recent years could have been the result, as much
as the cause, of a convergence in rates of inflation. By implication,
future changes in national priorities concerning inflation and
growth, such as those that have occurred recently, would reduce
the viability of a pegged exchange-rate system unless the members
were willing to make more frequent adjustments to their pegs.




296

Chart 7-5 Inflation Rates in Selected EMS Countries
During the 1980s, inflation rates in EMS countries declined while differences in inflation
rates across countries narrowed.
Percent change in consumer prices
25

20

15

United Kingdom

10

Netherlands
j _

1979

I
1980

I

I

1981

1982

I

1983

I

I

1984

1985

1986

I

1987

1988

1989

1990

1991

Source: International Monetary Fund.

The Maastricht Treaty on Economic and Monetary Union
The Maastricht Treaty of December 1991 is a blueprint for the
replacement of the EMS by an Economic and Monetary Union
(EMU) with a single currency and a European central bank overseeing a single monetary policy. Under the treaty, progress toward
the EMU would take place in stages, with the final stage—when
exchange rates are fixed irrevocably—to be initiated by 1999.
High standards for joining the EMU have been established, although there is still debate over how precisely these criteria will be
applied. An entering country's inflation rate must not be more
than 1.5 percentage points above the average of the three EC countries with the lowest inflation. Its interest rate on long-term government bonds cannot exceed those of the three members with the
lowest inflation by more than 2 percentage points. The country's
budget deficit must not exceed 3 percent of GDP, and outstanding
government debt must not exceed 60 percent of GDP. For at least 2
years, the country's currency must have remained within its EMS
band without realignment.
As of 1992, only three countries in the European Community
appear to have met all these conditions: Denmark, France, and




297

Luxembourg. Three—Greece, Italy, and Portugal—met none. The
difficulty of meeting these conditions suggests either that they may
have to be relaxed, that it may be difficult to meet the 1999 target
date, or that some countries may be admitted to the EMU only
after they have had additional time to improve their economic performance. The chances of this last possibility, sometimes referred
to as a "two-tier" or "two-speed" approach to monetary unification,
may have increased because of the recent developments in European exchange markets and politics discussed below.
Recent Pitfalls in Progress Toward Monetary Unification
A development that potentially could slow progress toward the
EMU is the partial collapse of the EMS in September 1992. A proximate cause of that event was the rise in interest rates and increased difficulty of supporting growth in Europe that accompanied
the reunification of Germany in 1990, and that added to tensions
within the EMS stemming from concerns over the declining competitiveness of some of its members' economies.
German reunification was a welcome development that helped to
mark the end of the Cold War. However, the costs of raising productivity and providing a social "safety net" in the former East
Germany sharply increased German government spending. The
conversion in 1990 of most East German ostmarks into West
German deutsche marks at a rate of 1-to-l (a very favorable rate of
exchange for the East Germans) further increased aggregate
demand. iVn acceleration of German wage increases, largely reflecting attempts to reduce wage disparities between East and West
Germany, added to inflationary pressures. In response to increased
government expenditures and higher inflation, Germany tightened
monetary policy rather than raising taxes enough to offset increased outlays. In consequence, the overall public sector budget
deficit increased from 0.8 percent of gross national product, or
output, in 1989 to over 6 percent in 1992, while the rise in interest
rates that had begun in 1988 continued through 1992 (Chart 7-6).
In order to maintain their exchange rates within their prescribed
bands, the other EMS countries were forced to increase their interest rates as well. Countries such as the United Kingdom, where interest rates and inflation had been declining, were prevented from
further reducing interest rates. This tightening of monetary policy
exacerbated the already existing slowdown in growth. In the
United Kingdom, where output had declined to a level more than 4
percent below its previous peak and the unemployment rate had
climbed above 10 percent by mid-1992, increasing pressure developed to either realign the pound or drop out of the EMS so that
interest rates could be lowered. High interest rates were also weakening Italy's prospects of retaining its EMS parity by boosting in-




298

Chart 7-6 Interest Rates in the United States and the Major European Economies
Germany's interest rates have increased since 1988, leading other EMS countries to increase
their interest rates or to lower them less than they might have otherwise.
Percent per year

ltaly
United Kingdom
15

10

I .

t

. . . . i

1988

1989

1990

1991

1992

Note: Rate for the United States is for 90-day certificates of deposit; all other rates are for 3-month
interbank loans.
Source: Board of Governors of the Federal Reserve System.

terest payments on its large public debt, thereby increasing its
fiscal deficit and posing the threat of higher inflation in the future.
Even without the difficulties posed by Germany's tighter monetary policy, Italy and the United Kingdom had been considered
more likely to devalue than many other EMS members. Italy had
maintained its nominal exchange rate essentially unchanged since
1987 but its inflation rate persistently exceeded the EMS average.
Inflation in the United Kingdom also had exceeded the EMS average; additionally, there was concern that when the United Kingdom entered the EMS's exchange rate mechanism in 1990, it had
pegged the pound at too high a level.
As the pressure of matching Germany's interest rates increased
the cost of maintaining their nominal parities, both Italy and the
United Kingdom began to experience massive capital outflows,
eventually prompting them to float their currencies and suspend
their participation, at least temporarily, in the exchange rate
mechanism of the EMS in September 1992. In addition, selling
pressure against the currencies of Ireland, Portugal, and Spain led
these countries to re-impose temporarily limited exchange controls
that in most cases had been dismantled previously under EC 92




299

goals. A subsequent episode of speculative pressure prompted the
devaluation of the Portuguese and Spanish currencies within the
framework of the EMS.
Recent pressure on exchange rates within the EMS has been
heightened by a second major development in the past half year,
the failure to achieve strong popular support for the Maastricht
Treaty. In June 1992, Danish voters rejected ratification of the
treaty. In September 1992, a French referendum endorsed the
treaty by just 51 percent of the vote. These revelations of popular
discontent with the Maastricht Treaty have raised concerns that
the treaty may have to be revised or its implementation delayed.

PEGS TO THE DOLLAR AMONG DEVELOPING
COUNTRIES
At present, about 27 countries as diverse as Argentina, Hong
Kong, and Sudan unilaterally peg their currencies to the dollar. A
number of developing countries also link their exchange rates to
the currencies of other industrialized nations, particularly France.
Notwithstanding the difficulties of maintaining a pegged exchangerate arrangement, pegs may help to stabilize the economy if combined with appropriate macroeconomic policies.
Pegs to the dollar or other stable currencies offer two important
benefits. First, the prices of many developing countries' traded
goods are determined mainly in the markets of industrialized countries such as the United States, and so by pegging to the dollar or
the currencies of other industrialized nations, these countries can
stabilize the domestic currency prices of their exports and imports.
This is probably the most important reason why some of the Asian
newly industrializing economies have linked their currencies (with
varying degrees of flexibility) to the dollar. Additionally, linking to
the dollar could help to stabilize trade flows with the United
States, their principal trading partner.
Second, and perhaps more important in recent decades, many
countries with high inflation have pegged to the dollar in order to
exert restraint on domestic policies and reduce inflation. At 3 to 4
percent annually, the U.S. inflation rate is well below inflation
rates in the developing world. By making the commitment to stabilize their exchange rates against the dollar, governments hope to
convince their citizens that they are willing to adopt the responsible monetary policies necessary to achieve low inflation. Pegging
the exchange rate may thereby reduce inflationary expectations,
leading to lower interest rates, reduced wage demands, a lessening
of the loss of output as a result of disinflation, and a moderation of
price pressures. In the 1980s various countries successfully augmented the initial phases of their disinflation programs with
pegged exchange rates, including Israel in 1985 and Mexico in 1988.




300

However, the histories of countries with high inflation are replete with examples of failed disinflation programs based on
pegged exchange rates. Typically, such programs fail because the
government neglects to reduce budget deficits and continues to
print money to finance them. These policies lead to continued inflation and an overvalued currency, causing a deterioration in the
balance of payments and prompting capital outflows in anticipation
of a subsequent devaluation. The authorities are then forced to devalue their currency, abandoning the linch-pin of the disinflation
program. While exchange-rate policies may usefully support a disinflation program, the exchange-rate system is not a substitute for
appropriate monetary and fiscal policies. In addition, to encourage
economic growth as well as reduce inflation, responsible macroeconomic policies should be complemented with reforms aimed at
strengthening the market system, including the removal of price
controls, the privatization of state-owned enterprises and elimination of public monopolies, and the reduction of barriers to external
trade.
Some countries have experimented with means of strengthening
the discipline over domestic policies that pegged exchange rates
provide. A currency board arrangement ties the domestic monetary
base (bank deposits at the central bank plus currency in circulation), a primary determinant of the money supply, to the foreign
exchange holdings of the monetary authority. The monetary base
responds mechanically to the balance of payments, since the currency board purchases all foreign exchange offered to it at the official price and sells foreign exchange to all who demand it at that
price. This automatically keeps the exchange rate fixed and prevents the government from issuing domestic currency to finance its
budget deficit. In Hong Kong, which has linked its money supply to
the dollar since 1983, inflation has averaged 7.7 percent annually.
Argentina developed a slightly different mechanism, passing a law
in 1991 fixing its currency against the dollar and requiring the central bank to hold international reserves at least equal to the monetary base (Box 7-4). This law limits the central bank's ability to finance the fiscal deficit, much as a currency board would, and has
led to substantial declines in inflation.
Even when disinflation programs based upon pegged exchange
rates succeed, factors such as wage contracts or slow-to-adjust expectations may slow inflation's decline and prevent it from falling
quickly to international levels. As a result, currencies often become
overvalued during disinflation programs, and countries adopting
pegged exchange rates then face the challenge of devaluing their
currencies later without reigniting inflationary expectations. For
example, Israel and Mexico, as noted above, both initiated relatively successful disinflation programs based on pegged exchange rates




301

Box 7-4.—Pegged Exchange Rates and Disinflation in
Argentina

|
|
!
1

!
|
!
|
I

Between 1982 and 1990, inflation in Argentina averaged
almost 1,000 percent annually. Three major disinflation programs based on a pegged exchange rate, announced in 1985,
1988, and 1989, all failed to achieve a lasting reduction in inflation. In each case, continued budget deficits and monetary
growth forced a devaluation that set the stage for further inflation. Inflation peaked at 197 percent per month in July 1989.
After March 1990, the government reduced the fiscal deficit
while allowing the exchange rate to float. The exchange rate
remained relatively stable, even though monthly inflation remained above 10 percent for most of the remainder of 1990. In
March 1991, following another plunge in the value of the domestic currency, Argentina passed a law fixing the exchange
rate against the dollar and requiring the central bank to hold
international reserves exceeding, at that exchange rate, the
value of the domestic monetary base. This meant that the central bank would have sufficient reserves to support the exchange rate, even if the entire domestic monetary base were
exchanged for dollars. The law prevents the central bank from
financing fiscal deficits on an extended basis, since that would
cause money growth to exceed the growth of the central bank's
international reserves.
So far, the "Convertibility Program," as the 1991 initiative
was labeled, has been successful. Annual inflation has declined
below 20 percent, its lowest level since the early 1970s, while
interest rates on deposits, a key indicator of inflationary expectations, have declined to around 10 percent. The interest rate is
well below the rate of inflation, but, as asset holders apparently consider a devaluation of the currency to be unlikely in the
near future, they are willing to accept rates of return on deposits roughly comparable to those available in international financial markets. The success of the Convertibility Program
shows how a pegged exchange rate can help to lower inflationary expectations and accelerate the process of disinflation.
However, the program was credible only because it was preceded by nearly a year of budget tightening and because, by requiring international reserves exceeding the monetary base, it
made continued budget tightening a necessity. This aspect of
the fixed exchange-rate program distinguishes it from its failed
predecessors. However, Argentina's inflation remains above
international levels, underscoring the continued vulnerability
of the stabilization program and the need for continued responsible fiscal and monetary policies.




302

in the 1980s. Because their inflation rates subsequently remained
above international levels, however, both countries have had to
adopt more flexible exchange-rate policies. This underscores the
need for continued monetary discipline, even after inflation has declined significantly.
EXCHANGE ARRANGEMENT OPTIONS FOR THE

FORMER SOVIET UNION
The demise of the Communist regime at the end of 1991 marked
the beginning of a new era of hope and opportunity for the people
of the former Soviet Union. Over time, market-based reforms promise to raise the standard of living and increase the potential for
growth. However, systems of taxation, budgeting, and monetary
control that were designed for a command economy have not been
adequate to ensure macroeconomic stability in the transition to a
market economy. Budget deficits in many of the new independent
states (NIS) of the former Soviet Union, as well as subsidies extended by the central bank to state-owned firms, have soared. With
the lifting of price controls, inflation has climbed as money is
printed to finance these outlays. The plummeting value of the
ruble has reduced people's desire to use and hold it. In some instances, this has led to barter trade, contributing to sharp reduc
tions in output and a collapse of trade among the new states of
the former Soviet Union.
In developing their monetary and exchange-rate policies, the new
states face two distinct but interrelated issues. First, how should
the ruble's value be stabilized, in terms both of goods and of other
currencies? Second, what type of monetary and exchange-rate arrangement among the states would best support stabilization and
continued intra-NIS trade? Additionally, the new states face the
challenge of complementing policies to stabilize macroeconomic
conditions with structural reforms aimed at establishing and protecting private property rights, encouraging competition and
market-determined prices, privatizing state-owned firms, and fostering private entrepreneurship.
Stabilizing the Ruble
Toward the end of 1992, inflation in Russia was running at over
25 percent per month, largely due to the printing of money to cover
government outlays and credit extended by the central bank to deficit-ridden industrial firms. As a result, the ruble's value has diminished substantially; it took about 140 rubles to buy one dollar
in July 1992, when exchange rates for various transactions were
combined into a single floating rate, while it took over 400 rubles
to buy a dollar at the end of the year. At the time the single exchange rate was established, the ruble's market value was expected
to fluctuate initially because of the unstable macroeconomic situa-




303

tion but then stabilize as economic reforms progressed, at which
time the government planned to peg the exchange rate to the
dollar or another "hard" (stable) foreign currency. At the end of
1992, economic reforms had not progressed sufficiently for the exchange rate to be pegged.
To help support the ruble when macroeconomic conditions improve, the G-7 countries announced in April 1992 the creation of a
$6 billion currency stabilization fund, conditional on an economic
reform program for Russia supported by the International Monetary Fund. Like the $1 billion 1989 stabilization fund for Poland,
this fund would be used to support the ruble if its market price declined. The mere existence of this fund could stabilize the ruble by
reducing the chances of devaluation and thus the incentive to speculate against it. In fact, the Polish stabilization fund was never
drawn upon, although Poland devalued its currency in May 1991
and subsequently has adjusted its value regularly in order to maintain the country's competitiveness in the face of continued inflation.
Successfully stabilizing the ruble would increase the demand for
domestic money, helping to reduce inflation; restore the currency's
credibility as a medium of transaction, reviving business that had
faltered when enterprises resorted to barter; and increase incentives to invest, promoting economic growth. However, pegging the
ruble must be combined with appropriate domestic policies. The experience of various developing nations in the 1980s underscores the
government's inability to peg the currency without cutting the
budget deficit and reducing monetary growth. In the absence of
such measures, an additional $6 billion in reserves could do no
more than briefly delay a devaluation.
Options for a Monetary Arrangement for the NIS
The difficulties of stabilizing the ruble are compounded by the
fact that it is the common currency of most of the new states of the
former Soviet Union. While only Russia can create ruble banknotes, the central banks of the other states can create ruble bank
deposits, thereby increasing the overall money supply. Additionally, some states—most notably Ukraine before it adopted its separate currency—have issued their own coupons which act as a substitute for ruble banknotes, partially in response to a shortage of
such notes; in the first half of 1992, shipments of ruble banknotes
from Russia to the other states were insufficient to keep up with
increases in the demand for banknotes. Even if Russia were to substantially reduce government spending and subsidies to state enterprises and stop printing money to finance these outlays, money creation by other states could lead to continued inflation. Since each
state enjoys the direct benefits of its monetary creation, while the




304

inflationary costs are spread throughout the NIS, the individual
states have strong incentives to create rubles.
The deterioration of trade between the states is another pressing
concern. The Communist regime created monopolies for many
products throughout the former Soviet Union and located them in
the different republics, so the new states are highly dependent on
trade with each other. To monitor and control trade imbalances between Russia and the other states, at the start of 1992 Russia required all intra-NIS payments to be channeled through special
"correspondent" accounts at the Russian central bank. Processing
payments through these accounts has been extremely slow, impeding trade flows and further reducing production and sales throughout the NIS. Moreover, Russia has sought to limit the impact of
monetary creation outside Russia by explicitly limiting the credit it
will extend to other states through the correspondent accounts.
Various options for an intra-NIS exchange and monetary system
that would address these problems have been considered.
Ruble zone. All members would continue to use the Russian
ruble as their currency. The central banks of the individual states
would agree on rules to limit monetary creation.
A ruble zone, like Europe's EMU, would have most of the features (both positive and negative) of a single-currency system.
Ideally, it would both support intra-NIS trade by providing a
common credible currency and, through its rules on ruble creation,
restrain the states' monetary policies and lead to lower inflation.
However, in the absence of a stable and credible ruble, some states
may believe that they can do better by adopting their own currencies. Moreover, the lack of political cohesion among these states, as
well as their difficult economic circumstances, means that the individual states are more likely than are the EMU members to break
the zone's monetary rules or even depart from the zone entirely in
order to pursue their own policies. In fact, the Baltic states and
Ukraine adopted their own currencies in 1992, dropping out of the
de facto ruble zone that has existed since the breakup of the Soviet
Union.
Ruble area. In a ruble area, each state would create its own currency and have its own independent central bank (as various states
already are doing) but would conduct intra-NIS trade in rubles.
This system would be less constraining and possibly more sustainable than a ruble zone, since member states could adjust their exchange rates and follow independent monetary policies. However,
unless Russia can sharply reduce its inflation rate and stabilize the
ruble exchange rate against Western currencies, the other states
may be unwilling to use the ruble.
Payments union. An alternative to using the ruble for intra-NIS
transactions would be to use a hard currency such as the dollar or




305

deutsche mark. Because intra-NIS trade accounts for such a high
proportion of economic activity in the NIS, however, each state
would need to maintain hard currency reserves in considerable
excess of their current holdings. One way to economize on the use
of hard currencies would be to create a payments union.
In a payments union, gross payments flows between countries
are recorded and net payments calculated; at regular intervals,
countries settle their accounts, in whole or in part, in hard currencies. An arrangement of this type, the European Payments Union,
was instrumental in supporting intra-European trade after World
War II, when initially dollars and other reserve assets were scarce.
Additionally, the European Payments Union helped to foster reductions in trade barriers within postwar Europe, and such an institution could play a similar role in the NIS.

THE FUTURE OF EXCHANGE-RATE RELATIONS
International exchange-rate arrangements continue to evolve.
Because there are serious tradeoffs between the stability offered by
pegged exchange-rate systems and the freedom to respond to
shocks offered by more flexible currency arrangements, the most
appropriate arrangement may vary over time and across countries.
Nonetheless, there are strong advocates for a single global exchange-rate system. Some observers tie many of the current economic difficulties among industrial countries to marked swings in
currency values, and advocate a return to a global pegged-rate
system, as in the Bretton Woods era, to enhance policy coordination among the industrial countries and foster a more stable international economic environment. Conversely, others argue that slow
growth and increased unemployment in Europe have been exacerbated by the commitment to maintaining parities within the EMS,
and advocate floating exchange rates free of government intervention.
In fact, implementing a global exchange-rate system would entail
serious difficulties. The United States, Germany, and Japan, with
their different macroeconomic circumstances and priorities, may
find little room for agreement on the common policies needed to
sustain a pegged exchange-rate system. Conversely, a global system
of floating rates would be unsatisfactory for many of the smaller
countries, which would want to continue pegging their currencies
to those of the major economies, either to stabilize their trade flows
or to help maintain responsible domestic policies.
Under these circumstances, a number of regional exchange-rate
blocs could evolve around a few major currencies, which would
then float or otherwise move against each other. In the foreseeable
future, the dollar will be the most important international currency, but other currencies may become the center of regional blocs. A




306

single European currency might become the basis of a Europe-centered bloc, while it is possible that the yen could perform a similar
role in East Asia.
The development of such currency blocs might occur most naturally in the context of regional trading arrangements. This is most
obviously the case in Europe, where the EMU is scheduled to
follow the elimination of trade barriers and other obstacles to a
single market that is taking place under EC 92. The development
of a bloc of nations with currencies linked to the dollar may develop as NAFTA is extended to additional countries in the Western
Hemisphere. If trading/currency blocs develop, however, it is essential that they remain outward looking, focusing on the elimination
of internal barriers to the movement of goods and capital rather
than on raising barriers to the rest of the world.
As regional economic arrangements develop rapidly in Europe
and in the Western Hemisphere, it may be time for a systematic
evaluation of the options for different exchange-rate arrangements.
SUMMARY
• Pegged exchange-rate arrangements can stabilize the environment for trade and provide incentives to avoid inflationary
policies. However, pegged rates can also constrain domestic
policies that could offset economic shocks and are likely to be
unsustainable when national policies diverge.
• The Bretton Woods system, designed as a compromise between
fixed and flexible exchange-rate systems, allowed pegged rates
to be adjusted if external pressures became too great. However,
the reluctance to adjust either official parities or domestic policies to maintain those parities made the Bretton Woods system
increasingly vulnerable to increased capital mobility and divergences in national priorities, leading to its breakdown in the
early 1970s.
• The EMS revived pegged exchange rates among a number of
European countries in 1979. Recent developments, including
German unification, have imposed great strains on the EMS,
contributing to a slowdown in output and prompting Italy and
the United Kingdom to float their currencies, raising concerns
about future progress toward monetary unification.
• By exerting pressure to pursue responsible domestic policies,
pegging to stable currencies like the dollar has helped some developing countries reduce their inflation rates. Such an arrangement may also be useful in the former Soviet Union, but
it will be effective only if combined with fiscal and monetary
restraint.




307

• Exchange-rate arrangements continue to evolve, and regional
currency blocs built around the dollar, a single European currency, and perhaps the yen may develop.

THE CHANGING ROLE OF THE INTERNATIONAL
MONETARY FUND
The International Monetary Fund (IMF) was envisaged by its
creators at Bretton Woods as the institutional linch-pin of the
international monetary system. In recent decades, however, its role
in lending to the industrialized countries has diminished substantially, while its relationship with many developing countries has
evolved considerably beyond temporary balance of payments financing. This evolution reflects important changes in the international financial system itself.

THE IMF IN THE BRETTON WOODS ERA AND
AFTERWARDS
The IMF initially was intended to serve three functions in the
Bretton Woods system: overseeing the system of pegged exchange
rates, providing temporary financial assistance to countries with
balance of payments problems (conditional on their adjusting domestic policies appropriately), and working to eliminate restrictions
on transactions in foreign exchange that could limit the growth of
international trade. It soon became apparent, however, that the
IMF would not be as powerful as might initially have been intended. The resources provided by the United States under the Marshall Plan immediately after World War II largely dwarfed those
available from the IMF, reducing the new institution's leverage
over national policies. Subsequently, U.S. payments deficits continued to increase global liquidity and reduce dependence on the IMF
for funding.
The move to floating exchange rates in the 1970s further reduced
the need to draw on IMF resources, since governments no longer
had to defend pegged exchange rates. The floating-rate system also
transformed what initially had been envisaged as one of the IMF's
key functions, the oversight of currency parities, although the IMF
Articles of Agreement were amended in 1978 to authorize the institution to ''exercise firm surveillance over the exchange-rate policies of members." Finally, the growing international integration of
capital markets provided the industrialized countries with alternatives to the IMF. In particular, after the oil price increases of the
1970s, additional funds became available in the Eurodollar markets
as the oil-exporting countries invested their surplus dollars. The
last IMF loans to major industrial countries in support of adjust-




308

ment programs were made to Italy and the United Kingdom in
1976.
Conversely, the oil shocks increased the financing needs of the
oil-importing developing countries. While some of these countries
were able to obtain commercial bank loans, this source of funding
evaporated with the debt crisis of the early 1980s, when excessive
accumulations of debt and rising global interest rates made it difficult for developing countries to repay their existing loans. In the
1970s and 1980s, the developing countries came to depend increasingly on the IMF for financing. The proportion of IMF credit outstanding extended to developing countries rose from an average of
58 percent in the 1950s to 65 percent in the 1970s and 100 percent
in the 1980s.

LONG-TERM FINANCING, THE IMF, AND THE WORLD
BANK
With the shift in focus from developed to developing countries
have come other changes in the role of the IMF. First, the IMF has
evolved from a type of credit union whose members took turns as
temporary borrowers and lenders to a financial intermediary between developed and developing countries. A second and related
development is that the current recipients of IMF loans typically
do not suffer from purely transitory payments imbalances, but
from longer term payments difficulties associated with sustained
structural imbalances and poor macroeconomic policies. As a
result, some countries have undergone prolonged sequences of IMF
programs, many of them never fully implemented. Increasingly, observers have recognized that solving the payments problems of
some countries may require long-term programs of structural adjustment such as those supported by the IMF's Extended Fund Facility, which was created in 1974.
The Extended Fund Facility, and particularly the structural adjustment facilities developed for low-income countries in the 1980s,
is similar in time frame and objectives to the Structural Adjustment Loan program initiated by the World Bank in 1980. The
World Bank, created along with the IMF at the 1944 Bretton
Woods Conference, is an investment bank that traditionally has
sustained much longer financing relationships with its members
than has the IMF. The World Bank initially focused on financing
specific projects such as roads, dams, power stations, agriculture,
and education, but its activities subsequently evolved to include
support for broader programs of structural reform such as the
Structural Adjustment Loan program. As a result, the activities of
the World Bank and the IMF increasingly have begun to parallel
each other.




309

The ongoing efforts to assist the former Communist economies
provide a good example of the convergence of roles between the
IMF and the World Bank. While many of these economies certainly
require financial assistance to meet their balance of payments deficits, their major problems are long term and linked to the need to
develop strong market-oriented economies and credible macroeconomic policies. The IMF is an important conduit of technical assistance in the areas of macroeconomic analysis and exchange-rate
policy, although its advice has at times been quite controversial. At
the same time, the World Bank has been active in assisting these
countries to privatize state-owned enterprises, restructure their financial sectors, and liberalize prices.
Despite the increasing similarity of their activities, the institutions clearly differ in their areas of focus: The IMF has a comparative advantage in macroeconomic policy analysis, and the World
Bank is better qualified to provide assistance in the design of specific projects and sectoral reform programs. Because progress
toward macroeconomic stabilization and microeconomic reforms
are mutually dependent, close coordination between the IMF and
World Bank is essential. Discussions on the division of responsibility between the IMF and the World Bank led in 1989 to an agreement reaffirming the IMF's focus on macroeconomic and balance of
payments issues and the World Bank's primary role in microeconomic and structural issues. It also strengthened the process of collaboration and coordination between the two institutions. However,
the evolution of the roles of the IMF and the World Bank will continue to be important to the world economy in the coming years.

SUMMARY
• The move to flexible exchange rates in the 1970s and the increasing integration of global capital markets has reduced the
IMF's role in providing financing for the industrialized nations. The focus of the IMF has shifted toward providing technical assistance and recurrent financing to the developing
countries, bringing its activities closer to those of the World
Bank.

THE NORTH AMERICAN FREE TRADE
AGREEMENT
The United States, Canada, and Mexico reached an agreement
on NAFTA in August 1992. NAFTA will create a free-trade area
with more than 360 million consumers and over $6 trillion in
annual output, linking the United States to its first- and third-largest trading partners (Box 7-5). NAFTA will stimulate growth, promote investment in North America, enhance the ability of North




310

American producers to compete, and raise the standard of living of
all three countries. NAFTA will also speed up technological
progress and provide innovating companies with a larger market.
Many economic studies show that NAFTA will lead to higher
wages, lower prices, and higher economic growth rates.
NAFTA will also reinforce the market reforms already under
way in Mexico. In recent years, Mexico has opened its markets and
implemented sweeping economic reforms. In 1986 Mexico joined
GATT and began unilaterally to lower its tariffs and other trade
barriers. In mid-1985, for example, the production-weighted tariff
in Mexico was 23.5 percent, but by 1988 it was only 11 percent.
Mexico's reforms have raised its economic growth rate, making it
an important export market for the United States. As economic opportunities in Mexico improve, Mexican workers have fewer incentives to migrate to the United States.
A stable and prosperous Mexico is important to the United
States, from both an economic and a geopolitical standpoint. The
United States shares a border roughly 2,000 miles long with
Mexico. In addition, the United States and Mexico are linked by
centuries-old ties of family and culture. NAFTA will help the two
countries forge a lasting relationship based on open trade and cooperation.
Existing duties on most goods will be either eliminated when the
agreement enters into effect or phased oui in 5 or 10 years (for certain sensitive items, up to 15 years). Approximately G percent of
O
U.S. industrial and agricultural exports In Mexico will be eligible
for duty-free treatment within 5 years. NAITA will also eliminate
quotas along with import licenses unless th'\y are essential for such
purposes as protecting human health.
In addition to dismantling trade barriers in industrial goods,
NAFTA also includes agreements in services, investment, intellectual property rights, agriculture, and the strengthening of trade
rules. There are also side agreements on labor provisions and protection of the environment.

TRADE IN SERVICES AND INVESTMENT
Under NAFTA, the three countries extend both national treatment and most-favored-nation treatment in services to each other.
Each NAFTA country must treat service providers from other
NAFTA countries no less favorably than it treats its own service
providers and no less favorably than it treats service providers
from non-NAFTA countries. In addition, a NAFTA country may
not require that a service provider of another NAFTA country establish or maintain a residence as a condition for providing the
service.




311

Box 7-5.—Free-Trade Areas and Customs Unions

In a free-trade area such as NAFTA, substantially all barriers to trade among the member countries are eliminated,
while each participant maintains its own individual trade barriers with nonmembers. In contrast, a customs union such as
the European Community not only eliminates internal barriers
among members, but also establishes a common external tariff
on imports from nonmembers.
Producers from outside a free-trade area have an incentive
to ship products through the low-tariff member and then
reship it duty free to a high-tariff member. The problem of
transshipment arises whenever tariffs with nonmembers differ
among members in a free-trade area.
The standard method of dealing with the transshipment
problem is to confine duty-free benefits to products originating
within the free-trade area. This practice requires that rules of
origin be established to determine those products that fall into
this category. NAFTA bases its general rules on changes in
tariff classification. A product is classified as originating
within North America if imported parts or materials have
been transformed enough to shift the product to a different
tariff classification. There are also specific rules of origin for
products such as textiles, automobiles, and computers.
The transshipment problem does not arise in a customs
union, since all members have the same external tariff. Under
NAFTA, the external tariff will be the same for some products,
likewise eliminating the transshipment problem. For example,
the external tariffs of the member countries will eventually be
harmonized and set at zero for certain computer products.
NAFTA eliminates discriminatory restrictions on U.S. sales to
and investments in the Mexican telecommunications market. Specifically, NAFTA gives U.S. providers of voice mail and packetswitched services nondiscriminatory access to the Mexican public
telephone network and eliminates all investment restrictions in
this sector by July 1995.
In financial services, Mexico's closed markets will be opened, allowing U.S. and Canadian banks and securities firms to establish
wholly owned subsidiaries. In insurance, firms with existing joint
ventures* will be permitted to obtain 100 percent ownership by
1996, and new entrants can obtain a majority stake in Mexican
firms by 1998. By the year 2000, most equity and market share restrictions will be eliminated.




312

For investment, NAFTA will in most cases require that investors
of the parties be treated the same as domestic investors. For all industries, the agreement will eliminate a variety of performance requirements such as minimum export levels and preferences for domestic sourcing. NAFTA investors will be able to convert local currency into foreign currency at the prevailing market exchange rate
for transactions associated with an investment. Each NAFTA country will ensure that such foreign currency may be freely transferred among NAFTA countries. No NAFTA country may directly
or indirectly expropriate the investments of NAFTA investors,
except for a public purpose and in accordance with law.

INTELLECTUAL PROPERTY RIGHTS
NAFTA protects inventions by requiring each country to provide
product and process patents for virtually all types of inventions, including Pharmaceuticals and agricultural chemicals. Copyrights of
computer programs and databases, as well as rental rights for computer programs and sound recordings are also protected—sound recordings for at least 50 years. Service marks and trade secrets are
also covered, along with integrated circuits both directly and as
components of other products.

AGRICULTURAL TRADE
Over a period of 15 years, NAFTA will virtually eliminate barriers to trade in agricultural commodities between the United
States and Mexico. About 50 percent of the agricultural trade between the two countries will be free of all trade barriers as soon as
the agreement takes effect. For remaining products, the phaseout
will take between 5 and 15 years. For most tariffs imposed by the
United States, the phaseout will simply involve an annual reduction in the tariff rate.
The phaseout for remaining nontariff barriers such as quotas is
more complicated. Initially, they will be replaced by tariff-rate
quotas that allow products to be imported in limited quantities at a
low (or zero) tariff rate and impose high tariffs for quantities above
the limit. The tariff-rate quotas will be phased out over a 10- to 15year period by increasing the quantity limit and/or reducing the
tariff applied to imports above the limit.
Liberalization of agricultural trade between the United States
and Canada continues as agreed to in the United States-Canada
Free-Trade Agreement, under which existing tariffs on all agricultural commodities will be eliminated by 1998, while nontariff barriers for dairy products, poultry, eggs, and sugar will remain. In a
separate agreement under NAFTA, Canada and Mexico agree to
eliminate tariffs on bilateral agricultural trade between the two
countries, exempting dairy products, poultry, eggs, and sugar. The




313

three NAFTA countries also agree to move toward domestic agricultural policies that are more conducive to free international
trade and to work toward eliminating export subsidies for agricultural products.
NAFTA is expected to lead to substantial increases in agricultural trade between the United States and Mexico. For example, as a
direct result of NAFTA, U.S. wheat and corn exports to Mexico are
expected to grow by about 40 and 50 percent, respectively, and
Mexican exports of some fresh vegetables to the United States are
expected to increase.

SAFEGUARDS AND OTHER TRADE RULES
During the transition period, if increases in imports from a partner country cause or threaten to cause serious injury to a domestic
industry, a NAFTA country may take a safeguard action that
either temporarily suspends the agreed duty elimination or re-establishes the pre-NAFTA duty. If a NAFTA country undertakes a
global or multilateral safeguard action, each NAFTA partner must
be excluded unless its exports account for a substantial share of
the total imports and they contribute importantly to the serious
injury or the threat of serious injury.
In reviewing antidumping and countervailing duty determinations, binational panels will substitute for domestic judicial review.
Under antidumping laws, duties may be imposed when a foreign
firm is found to be dumping—exporting its product at a price that
is below either the selling price in its home market or the cost of
production. Countervailing duty law allows the imposition of duties
on imports that are subsidized by foreign governments. Both the
importing and the exporting countries can request a review. A
panel must apply the domestic law of the importing country in reviewing the disputed determination. NAFTA preserves the right of
each country to retain its own antidumping and countervailing
duty laws. The panel's decisions will be binding.
Dispute resolution can involve several stages. First, a country
may request consultations. If the consultations fail, it may call a
meeting of the Trade Commission, which will include Ministers
designated by each country. If the issue remains unresolved, a
panel is convened to make findings of facts and determinations according to NAFTA. Upon receiving the panel's reports, the disputing countries are to agree on the resolution of the dispute. If a
panel finds that a complaint is justified but the countries cannot
reach an agreement, the complaining country may suspend equivalent benefits.




314

THE ENVIRONMENT AND LABOR
The three countries are committed to implementing the agreement in a manner consistent with environmental protection. The
agreement requires that international environmental agreements
regarding endangered species, ozone-depleting substances, and hazardous wastes take precedence over NAFTA provisions. NAFTA
countries recognize that it is inappropriate to encourage investment by relaxing domestic health, safety, or environmental measures.
The agreement affirms the right of each country to choose what
it considers appropriate measures to protect human, animal, or
plant life, health and the environment. In February 1992, the Governments of the United States and Mexico announced the integrated U.S.-Mexico Environmental Border Plan, a multiyear program
to improve protection of human health and natural ecosystems
along the border. The United States and Mexico will spend well
over $1 billion during the next several years to implement the
plan's first stage. In September 1992 a new U.S.-Mexico bilateral
agreement on environmental cooperation was initialed. The agreement establishes a joint committee which will meet at least annually to oversee joint work programs and to assess environmental
issues, which may include enforcement, pesticides, waste management, responses to chemical emergencies, and pollution.
In the area of labor adjustment assistance, the Administration
announced in August 1992 a new comprehensive worker adjustment program—Advancing Skills through Education and Training
Services. This program will nearly triple the resources now available for all worker adjustment by providing $2 billion annually, of
which at least $335 million is specifically reserved for workers affected by NAFTA.
The U.S. and Mexican labor ministries have been implementing
a 1991 memorandum of understanding addressing issues ranging
from worker rights to child labor. In September 1992 the United
States and Mexico signed a new agreement establishing a Consultative Commission chaired by the U.S. and Mexican Secretaries of
Labor that will provide a permanent forum for promoting the
rights and interests of workers in both countries. It will manage
new and ongoing cooperative labor activities directed at enhancing
workplace health and safety and enforcement, among other things.
OTHER REGIONAL AND BILATERAL TRADE
DEVELOPMENTS
In addition to NAFTA, there have been several important recent
developments in trade, including the Enterprise for the Americas
Initiative (EAI), the market access agreement with China, and the
Airbus accord.




315

Enterprise for the Americas Initiative
The agreement for a free-trade area in North America is only
the beginning. The EAI, proposed by the Administration in June
1990, addresses trade, debt, and investment issues in a comprehensive manner. The trade and investment aspects of EAI aim to open
up markets and increase investment flows throughout the hemisphere. The ultimate objective is to create a free-trade area stretching from Alaska to Argentina. The United States has signed trade
and investment framework agreements with a majority of countries in Latin America and the Caribbean, which establish principles governing mutual commercial relationships. They also set up
trade and investment councils, which provide an important mechanism for discussing trade and investment liberalization, and protecting intellectual property rights.
Market Access Agreement With China
The market access agreement with China signed in October 1992
will provide greater export opportunities for the United States.
China has committed to removing import restrictions, such as
import licensing requirements and quotas, from hundreds of products. This agreement commits China to substantially liberalize its
import administration and to make reforms that would lay the
foundations for a more prosperous China and a closer trade relationship between the two countries.
Among many commitments in the agreement, China's decision to
make its trade regime transparent is of long-term importance and
it moves China toward compliance with GATT rules. No later than
October 10, 1993, China will, among other things, publish regularly
and promptly all relevant trade laws and regulations. China has
also agreed to remove 75 percent of all nontariff import restrictions
within 2 years. In addition, China will reduce tariffs on many of
the 90 categories of commodities for which tariffs have been raised
since 1988.
The Airbus Agreement
In July 1992, the United States and the European Community
signed a bilateral agreement limiting government subsidies and
other forms of support for large civilian aircraft programs. This
agreement is a step forward in limiting trade conflicts in an important industry. It prohibits all future production subsidies. Funds
advanced by governments for aircraft development will be limited
to 33 percent of total development costs. The agreement also establishes terms and conditions for repayment of development funds
advanced by governments. Efforts are now underway to negotiate a
multilateral agreement limiting aircraft subsidies.




316

SUMMARY
• The Administration has successfully negotiated an agreement
with Mexico and Canada that will open up markets for trade
and investment in North America.
• NAFTA will eliminate most barriers to trade among Canada,
Mexico, and the United States; open markets in banking, insurance, and telecommunication among them; ensure nondiscriminatory treatment for NAFTA investors within the three
countries; protect intellectual property rights among NAFTA
countries; and provide dispute settlement mechanisms. There
are also side agreements on environmental protection and
labor provisions.
• NAFTA will reinforce the market-based economic reforms
under way in Mexico. As the Mexican economy grows, it will
continue to provide the United States with a valuable market
for exports. The EAI addresses trade, debt, and investment
issues throughout the hemisphere.
• The market access agreement with China will provide U.S.
firms with increased access to the growing Chinese market and
move China toward compliance with GATT rules. The Airbus
agreement provides limits on subsidies to the civilian aircraft
industry in the United States and the European Community.

THE URUGUAY ROUND
The Uruguay Round of multilateral trade talks aims not only to
lower tariffs on merchandise trade but also to integrate into GATT
areas of trade and investment that have not been subject to effective GATT disciplines. These areas include agriculture, textiles,
trade in services, investment, and intellectual property rights. The
Uruguay Round has also made progress in reforming GATT rules,
especially safeguards and other trade rules and dispute settlement
procedures. A breakthrough in the agricultural negotiations in November 1992 has improved prospects for a successful completion of
the round, but some issues remain to be settled.
The potential rewards for success in the Uruguay Round negotiations are great, as are the potential costs of failure. Failure to conclude the Uruguay Round successfully would not only deny us the
benefits of faster growth, it could also lead to a backsliding toward
greater barriers to, and contraction in, international trade, and a
resulting drag on living standards in the United States and around
the world.

AGRICULTURE
Throughout the Uruguay Round negotiations, the most difficult
issue has been agriculture. The Uruguay Round agenda for agricul-


334-230 0—92


317
11 (QL3)

ture includes transforming nontariff trade barriers into tariffs as
well as reducing tariffs, domestic support of agriculture, and export
subsidies. Agreement has been difficult to reach on all of these
issues, especially on how much to reduce domestic support of agriculture and subsidies of agricultural exports. The lengthy and contentious negotiations on agriculture illustrate how domestic political interests may conflict with trade liberalization. Box 7-6 describes another such example.
Virtually every developed country in the world subsidizes agricultural products. In 1986, at the beginning of the Uruguay Round,
government programs accounted for almost 80 percent of the value
of agricultural products in Japan, over 40 percent in the EC, and
over 30 percent in the United States. (The 1988 Report discusses
this in more detail.)
These subsidies interfere with world trade by increasing the
degree to which countries are self-sufficient in food production. In
many instances, the subsidy raises domestic prices for farm products above world prices and necessitates quotas or tariffs to keep
out lower-priced imported agricultural products. The subsidies can
even increase domestic production to such an extent that the country builds up surpluses that are disposed of on world markets.
Countries whose agricultural production costs are relatively high
can compete against countries whose production costs are low only
by directly or indirectly subsidizing exports. Because this practice
limits export markets for countries whose production costs are at
or near world price levels, some of these countries may react by
adopting subsidies of their own.
The Uruguay Round negotiations began with the general intention of liberalizing agricultural trade. The initial U.S. proposal in
1987 was that all subsidies—direct and indirect, domestic and
export—that distort agricultural trade should be gradually but totally eliminated over a 10-year period. This proposal was not accepted by other countries however, and negotiations continued for
several years without a successful resolution. In 1991, the GATT
Director General attempted to move the negotiations forward by
proposing a draft text that continued to serve as the basis for negotiations throughout 1992. The current draft negotiating text, often
referred to as the "Dunkel Text/' called for reductions in (but not
elimination of) internal agricultural supports and export subsidies.
In addition, all nontariff barriers would be converted to tariffs and
old and new tariffs would be reduced by an average of 36 percent.
Finally, countries would be required to open their agricultural
markets to international competition, so that exporting countries
would have at least a minimum level of access to a country's
market. Although the current draft negotiating text is less ambitious than the United States and some other countries had hoped




318

Box 7-6.—The Oilseeds Dispute
In December 1987, t£S« farmers complained that exports of
soybeans and other oilseeds to the EC were being unfairly restricted by a program that encouraged the production of oilseeds in the EC. In the 1960-61 Dillon Bound of GATT negotiations, the EC had agreed to make a concession to oilseeds ex*
porters by setting its oilseeds tariff at zero. At that time individual EC countries had no widespread system of supports for
domestic oilseed production. By the early 1980s, the EC had
adopted an oilseeds support program that increased domestic
supply, reduced growth in demand for imported oilseeds, and,
according to international trade law, "impaired the value of
the concession,"
The UJS, Government instituted an investigation to determine the validity of this complaint. As the investigation proceeded, the United States asked GATT to establish an expert
panel and issue an opinion. In December 1989, the expert
panel agreed that the U.S. complaint was justified and recommended that the EC end or modify its oilseeds program to
remove the impairment- In October 1991, the EC approved substantial modifications in the oilseeds program. However, the
GATT panel studied the modifications and found, in March
1992, that they were not sufficient to bring the EC into con*
formity with its GATT obligations.
In accordance with Section 301 of the Trade Act of 1974, the
U.S* Government threatened to impose tariffs on $1 billion
worth of imports from the EC if the EC did not take appropriate actions. Intense negotiations between the United States
and the EC continued throughout the summer and fall of 1992,
but no solution could be found that would fully compensate
UJS. oilseed farmers for their lost market,
On November 5, the United States announced that it would
impose a 200 percent tariff on over $300 million of EC exports,
primarily white wine, starting on December 5« Hie United
States deliberately announced a retaliation for only part of the
damage caused to its trade by the EC policies in order to leave
the door open for further negotiations while making clear its
intention to insist on its rights under GATT,
Later in November, the United States and the EC reached
an agreement in principle resolving the oilseeds dispute.
Among other things, the EC agreed to reduce the area on
which oilseeds mil be grown by reducing program payments if
plantings exceed specified area limits. With the agreement in
place, the tTil withdrew its threat to retaliate.




319

for, it nevertheless represents a significant step. For the first time
domestic agricultural policies would be submitted to effective
GATT discipline and support levels and export subsidies would be
reduced.
In the meantime, some countries have taken steps to reduce
their agricultural subsidies, largely because the subsidies are becoming so costly. The United States moved toward a more marketoriented agricultural policy with the 1985 and 1990 farm bills and
budget legislation. Government outlays for agricultural support fell
from almost $26 billion in 1986 to about $10 billion in 1991. The
changes brought about by these laws put the internal support targets of the current draft negotiating text within easy reach for the
United States.
In the EC, however, the cost of agricultural subsidies continued
to escalate (Table 7-3). In the spring of 1992 the EC adopted a new
set of internal agricultural policies, called Common Agricultural
Policy (CAP) reform, which represented a major departure from
previous policy. The old method of supporting crop farmers by
keeping farm prices above world levels was phased down, and a
new method of directly subsidizing farm incomes was adopted. CAP
reform represents significant progress, but still falls short of the
standards in the current draft GATT negotiating text.
TABLE 7-3.—Common Agricultural Policy Expenditures, EC agricultural trade, and
EC self-sufficiency for selected commodities: 1975-1990
[Millions of dollars]
1980

1975
1 2

Total expenditures
per capita (dollars)....
Export subsidies 2 3
EC agricultural exports 4
EC agricultural imports 4
Degree of self-sufficiency 5
Wheat
Beef
Fresh vegetables

5,612
22
1,457
11,648
29,684

i
!
i
j

101 |
99 !
95j

1985

1990

15,739
60
7,922
27,580
51,258

15,125
55
5,125
25,067
39,874

33,676
103
9,830
44,800
71,200

124
106
107

127
100
106

117
104
99 !

1

Data for 1975 and 1980 refer to EC-9; for 1985 to EC-10; for 1990 to EC-12.
CAP spending refers to Guarantee Section expenditures.
Export subsidies are expenditures for export refunds.
4
Trade data are for EC-12 and exclude intra-EC trade.
5
Self-sufficiency is the ratio of domestic consumption to production. For 1975 and 1980, values refer to marketing years
ending in those years. Values for 1985 are from marketing year 1985/86, except for beef which is from 1986/87. The 1990
values for wheat, beef and vegetables are from 1989/90, 1989, and 1987/88 respectively.
2

3

Sources: Department of Agriculture and Commission of the European Communities.

In November 1992 the United States and the EC reached an
agreement on the major elements that had blocked progress in the
multilateral negotiations in Geneva. Under the agricultural agreement, aggregate internal subsidies would be reduced by 20 percent,
and export subsidies would be reduced by 36 percent in value and
21 percent in volume over 6 years. To complete the Uruguay
Round, this agreement between the United States and the EC must
be agreed to by other parties to the negotiations, and multilateral




320

agreements on remaining agricultural and nonagricultural issues
must be reached.
TEXTILES AND OTHER IMPORTANT ISSUES
For decades, international trade in textiles and apparel products
has effectively been exempted from GATT rules. Instead, agreements have been established under the Multi-Fiber Arrangement
to limit textile and apparel exports from developing to developed
countries. These limits cost American consumers an estimated $11
billion in 1987. Under the current draft negotiating text for GATT,
51 percent of the volume of textile products covered by the MultiFiber Arrangement would be free of quotas in 10 years. After 10
years, quotas would be eliminated and textiles would be reintegrated into general GATT rules. All countries, including developing
countries, would cut their trade barriers in textiles significantly.
A successful Uruguay Round will also yield GATT rules governing trade and investment in services such as telecommunication
and financial services. Negotiations have led to agreements on
some trade-related investment measures. For example, the current
text prohibits requirements that foreign firms use a predetermined
amount of locally produced goods. A successful round could also
provide protection for intellectual property rights such as patents,
copyrights, and trademarks.
The current draft negotiating text prohibits voluntary export restraints and other similar measures often used as safeguards outside GATT rules. It sets specific time limits on the dispute settlement panels and provides for automatic adoption of their reports.
(Further details of the current draft negotiating text may be found
in the 1992 Report).
SUMMARY
• The Uruguay Round aims at extending and tightening multilateral trade and investment rules in areas such as agriculture, textiles, services, investment, and intellectual property
rights. Substantial progress has been made, but final agreement has not been reached.
• The most difficult area in the Uruguay Round has been agriculture. Negotiations continue in order to multilateralize the
U.S.-E.C. breakthrough in agriculture and other areas.

REGIONAL INTEGRATION AND
MULTILATERALISM
Regional integration such as NAFTA can further promote free
trade. The administration's objective is to expand open and transparent trade worldwide. Government policies should be aimed at




321

opening rather than closing markets. Multilateral, regional, and bilateral trade agreements are instruments to realize such an objective. Multilateral integration is the most important, with regional
integration and bilateral agreements fulfilling a complementary
role. GATT permits the creation of free-trade areas and customs
unions under two main conditions. Trade barriers must be eliminated on substantially all trade within the region. In addition, regional integration must not result in duties and regulations for outside countries that are more restrictive than original barriers.
These conditions make it more likely that regional integrations
will have an overall liberalizing impact, and will not promote trade
within the region at the expense of trade with outside countries.
Regional integration and multilateral efforts to reduce worldwide
trade barriers have often gone hand in hand. For example, despite
controversies, the integration of the European Community in the
1950s and the 1960s was accompanied by the Dillon Rounds and
the Kennedy Rounds of multilateral liberalization. Furthermore,
for countries that are left out of the regional groupings, there may
be added incentives to accelerate the process of multilateral liberalization to ensure that the benefits of freer trade will not be confined to members of regional agreements. Regional integration can
also help countries identify issues that are outside the scope of
GATT and later resolve them in a multilateral setting. For instance, the issues of extending and strengthening GATT rules to
services, investment, and intellectual property rights have been
successfully negotiated in NAFTA, providing useful experience for
negotiating the same topics in the Uruguay Round.
Though economic integration consistent with GATT will generally promote greater well-being for all participants, some economic
objections can be raised against regional trade arrangements. Primary among these is trade diversion, which occurs when member
countries switch from importing from a low-cost nonmember country to importing from a higher cost member country because the
countries outside the area do not benefit from the tariff cuts among
the members. Trade diversion distorts the trading pattern and
hurts countries outside the trading area.
The amount of trade diversion can be minimized if regional integration brings together countries that are already trading intensively with each other such as Canada, Mexico, and the United
States through NAFTA and the European economies through the
European Community.
SUMMARY
• Regional integration promotes trade within the free-trade area.
Trade may be diverted away from efficient producers in nonmember countries. Regional free-trade associations can mini-




322

mize potential risks by remaining within GATT guidelines.
The risk of trade diversion is less when a free-trade area is
made up of countries that already trade intensively with each
other.

TRADE POLICY AGENDA FOR THE FUTURE
The ratification of NAFTA and the satisfactory conclusion of the
Uruguay Round are the two immediate trade priorities. Next will
be the successful implementation of NAFTA and the round. While
GATT has contributed significantly to a more open and harmonious world trading system, new areas in trade will arise as the
world economy evolves. The international community will face several important trade issues in the not-too-distant future.
INTERNATIONAL TRADE AND COMPETITION POLICY
Within nations, governments have antitrust laws to enforce competition and prevent predatory practices by large firms. When
more than one country is involved, however, policies promoting
competition become more complex. Faced with unfair competition
from abroad, firms generally do not have the option of antitrust actions, and often turn to antidumping actions instead. Some critics
have observed that—unlike domestic antitrust enforcement which
generally lowers prices—antidumping actions raise prices. One solution is to make competition policies more compatible among nations, and enforceable across borders.
NAFTA contains provisions that the three countries will cooperate on issues of competition law enforcement and other antitrust
issues. It also imposes rules on federal monopolies and on any designated privately owned monopoly. Each country must ensure that
the monopolies do not engage in anticompetitive practices, including dealings with an enterprise with common ownership operating
in a different country. A trilateral committee will be set up to consider the relationship between competition laws and trade in the
NAFTA countries.
Competition policy in the EC is a special case. Firms in member
states of the EC cannot initiate antidumping actions against firms
from other member states, because competition policy is a community-wide issue. Antidumping actions can only be taken against
firms from nonmember countries.
Given the increasing linkages between international trade and
antitrust policies, there probably will be more attention paid to
this area. Multilateral efforts can resolve potential frictions and
help achieve economic efficiency and trade liberalization supported
by nondiscriminatory, transparent trade and competition rules.




323

TRADE RULES FOR HIGH-TECHNOLOGY INDUSTRIES
Increasingly, trade disputes involve government support for hightechnology industries. Some have expressed concern that unless the
United States provides preferential treatment, subsidies, and/or
trade restrictions to help high-technology industries, some of these
industries may not survive domestically. Economists generally
doubt the merits of government intervention in industries unless
market failures are clearly identified. If there are market failures
they are likely to occur at the early stage of research and development. At the generic and pre-competitive stage of research and development, the fruits of research may be hard to capture. But even
when the benefits of research cannot be fully appropriated by the
market, this does not mean that the government should automatically step in. The economic benefits of government-sponsored research must also be weighed against their costs. The role of government-sponsored research in our economy must be considered in
light of two standards: Appropriability and the balance of costs and
benefits.
If the U.S. Government had a policy of choosing specific technology for massive government subsidy in the past quarter century, it
is quite possible that we would have supported the supersonic passenger airplane and the development of a high-definition television
technology that soon proved to be obsolete. Neither of these
projects—which attracted strong support at the time—would have
represented a good investment. For example, the development of
high-definition television has already cost the Japanese government more than $700 million, with little prospect of recovering the
investment. As for the supersonic aircraft, the British and the
French Governments paid for the development of the Concorde.
The results have been a commercial disaster. Concordes are extremely expensive to run and only a few Concordes have been sold.
It is sometimes argued that the chances of failure can be lessened
by having choices made by a governmental technical group, divorced from political pressures. There is no reason to believe, however, that a governmental group would be better at making correct
choices than private individuals putting their own capital at risk.
Moreover, it is naive to believe that the spending of large sums by
the government can be kept free of the political process. Nor is it
self-evident that this would be desirable in a democratic system.
In spite of the difficulties in picking "winners," a number of governments are likely to continue active participation in research
and development activities, which could lead to an international
competitive race to subsidize high technology. To limit this danger,
bilateral and multilateral mechanisms may be needed to identify
what types of support may be legitimate. In the aircraft industry,
for example, the United States and the EC recently agreed to limit




324

development subsidies and prohibit future production subsidies.
This agreement demonstrates how nations can cooperate on questions of government support.
TRADE AND THE ENVIRONMENT
Trade and environmental issues have become intertwined in
recent years. Some accuse GATT of being hostile to the environment, while others argue that some environmental policies are
only disguised protectionism. Generally, economists view international trade as an effective means of promoting economic growth
and a higher standard of living. By improving the allocation of resources and access to the world market, trade will provide more resources and better technology to clean up the environment. In addition, as nations grow richer through open trade and the overall
quality of life improves, people will prefer and demand a cleaner
and better environment.
From an economic standpoint, environmental problems may require government action when prices do not reflect environmental
costs. But, even if these environmental problems exist, trade restraints are usually not the best policy. If the environmental problem is limited to one country, domestic policies should be employed.
Where pollution or other environmental problems spill across borders, however, international rules and cooperation will be necessary.
There are three main international environmental conventions
that affect trade. The Montreal Protocol seeks to reverse the depletion of the upper atmosphere ozone layer caused by the release of
chlorofluorocarbons and other chemicals. The protocol establishes
binding commitments to reduce the production and consumption of
controlled substances according to a strict time schedule. The protocol also requires certain types of trade restrictions imposed
against nonparties to support its objectives. The Convention on
Trade in Endangered Species of Fauna and Flora aims to protect
endangered species of wildlife by restricting and monitoring their
trade. The Basel Convention controls the transboundary movement
of hazardous wastes from one party to another. Both exporting and
importing countries are obligated to prohibit a transboundary
movement if there is reason to believe that the wastes will not be
managed in an environmentally sound manner.
Founders of GATT could not have foreseen the present importance of environmental problems. Clarification of environmental
policies, perhaps through GATT, may be desirable to ameliorate
environmental problems without unnecessary disruption of trade.




325

SUMMARY
• The international community may soon have to confront several emerging trade issues, including the relationship between
trade and competition policy, a code of conduct for government
support of high-technology industries, and the clarification of
trade and environmental issues.

CONCLUSION
Open trade provides important economic benefits: more vigorous
competition; greater incentives for innovation; a larger variety of
goods; and a more efficient allocation of resources. This implies
that trade will lead to a higher standard of living and higher economic growth. International trade is mutually beneficial—it benefits all countries involved. International trade has grown rapidly
since World War II, in part because of the success of GATT in removing trade barriers. The benefits of freer trade can be obtained
by regional as well as multilateral agreements. In 1992, the three
North American countries successfully completed negotiations for
NAFTA, which will remove most trade and investment barriers
among the three signatories and strengthen ongoing Mexican
market reforms. On the multilateral front, though progress has
been made in the complex Uruguay Round, no final agreement has
been reached.
Freer capital flows provide strong support for the continued
growth of global trade and output by facilitating trade, allocating
capital to its most efficient uses, and enabling people to diversify
their portfolios. Flows of international capital promise to play an
important role in supporting investment and growth in many developing and former Communist countries that are reforming their
economies.
Several exchange-rate arrangements have been used since the
Bretton Woods Conference almost 50 years ago. The Bretton Woods
system allowed the pegged rate to be adjusted when external pressures on a currency became too intense. But it was abandoned because of the reluctance to adjust official parities or to adjust domestic policies to defend these parities, the inability of the United
States to adjust its exchange rate, and greater capital mobility.
More recently, the EMS revived the pegged exchange-rate system
among many European countries. But events of the past year have
strained that system as EMS member countries were forced to
match increases in German interest rates, contributing to an economic slowdown and leading Italy and the United Kingdom to float
their currencies. Some developing countries have sought to lower
inflation by pegging their currencies to a stable currency, but a




326

pegged exchange-rate policy must be combined with reasonable domestic fiscal and monetary policies.
As the world economy evolves, international institutions such as
GATT and the IMF face new challenges. Following the collapse of
the Bretton Woods system, the primary focus of the IMF has shifted toward providing technical assistance and recurrent financing to
the developing countries and the transitional economies of Eastern
Europe and the former Soviet Union. With GATT, there are several emerging trade issues to be confronted including the relationship between trade and competition policy, government support in
high-technology industries, and international trade and the environment.




327




Appendix A
REPORT TO THE PRESIDENT ON THE ACTIVITIES
OF THE
COUNCIL OF ECONOMIC ADVISERS DURING 1992







LETTER OF TRANSMITTAL
COUNCIL OF ECONOMIC ADVISERS,

Washington, D.C., December 31, 1992
MR. PRESIDENT:

The Council of Economic Advisers submits this report on its
activities during the calendar year 1992 in accordance with the
requirements of the Congress, as set forth in section 10(d) of the
Employment Act of 1946 as amended by the Full Employment and
Balanced Growth Act of 1978.
Sincerely,




Michael J. Boskin, Chairman
David F. Bradford, Member
Paul Wonnacott, Member

331

Council Members and their Dates of Service
Name
Edwin G. Nourse
Leon H. Keyserling..

John D. Clark..
Roy Blough
Robert C. Turner
Arthur F. Burns
Neil H. Jacoby
Walter W. Stewart
Raymond J. Saulnier..
Joseph S. Davis
Paul W. McCracken...
Karl Brandt
Henry C. Wallich
Walter W. Heller
James Tobin
Kermit Gordon
Gardner Ackley
John P. Lewis
Otto Eckstein
Arthur M. Okun
James S. Duesenberry
Merton J. Peck
Warren L. Smith
Paul W. McCracken
Hendrik S. Houthakker
Herbert Stein
Ezra Solomon
Marina v.N. Whitman
Gary L Seevers
William J. Fellner
Alan Greenspan
Paul W. MacAvoy
Burton G. Malkiel
Charles L Schultze
William D. Nordhaus
Lyle E. Gramley
George C. Eads
Stephen M. Goldfeld
Murray L Weidenbaum...
William A. Niskanen
Jerry L. Jordan
Martin Feldstein
William Poole
Beryl W. Sprinkel
Thomas Gale Moore
Michael L Mussa
Michael J. Boskin
John B. Taylor
Richard L Schmalensee..
David F. Bradford
Paul Wonnacott




Position

Oath of office date

Chairman
Vice Chairman
Acting Chairman
Chairman
Member
Vice Chairman
Member
Member
Chairman
Member
Member
Member
Chairman
Member
Member
Member
Member
Chairman
Member
Member
Member
Chairman
Member
Member
Member
Chairman
Member
Member
Member
Chairman
Member
Member
Chairman
Member
Member
Member
Member
Chairman
Member
Member
Chairman
Member
Member
Member
Member
Chairman
Member
Member
Chairman
Member
Chairman
Member
Member
Chairman
Member
MsmbBr
Member
Member

August 9, 1946
August 9, 1946
November 2, 1949....
May 10, 1950
August 9, 1946
May 10, 1950
June 29, 1950
September 8, 1952...
March 19, 1953
September 15, 1953.
December 2, 1953....
April 4, 1955
December 3, 1956....
May 2, 1955
December 3, 1956....
November 1, 1958....
May 7, 1959
January 29, 1961
January 29, 1961
January 29, 1961
August 3, 1962
November 16, 1964..
May 17, 1963
September 2, 1964..
November 16, 1964.
February 15, 1968.
February 2, 1966....
February 15, 1968.
July 1, 1968.
February 4, 1969....
February 4, 1969....
| February 4, 1969....
January 1, 1972
September 9, 1971.
March 13, 1972
July 23, 1973
October 3 1 , 1973...
September 4, 1974.
June 13, 1975
July 22, 1975
January 22, 1977....
March 18, 1977
March 18, 1977
June 6, 1979.
August 20, 1980
February 27, 1981
June 12, 1981
July 14, 1981
October 14, 1982
December 10, 1982
April 18, 1985
July 1, 1985
August 18, 1986
February 2, 1989
June 9, 1989
October 3, 1989
November 13, 1991
November 13, 1991

332

Separation date
November 1, 1949.

January 20, 1953.
February 11, 1953.
August 20, 1952.
January 20, 1953.
December 1, 1956.
February 9, 1955.
April 29, 1955.
January 20, 1961.
October 3 1 , 1958.
January 3 1 , 1959.
January 20, 1961.
January 20, 1961.
November 15, 1964.
July 3 1 , 1962.
December 27, 1962.
February 15, 1968.
August 3 1 , 1964.
February 1, 1966.
January 20, 1969.
June 30, 1968.
January 20, 1969.
January 20, 1969.
December 3 1 , 1971.
July 15, 1971.
August 3 1 , 1974.
March 26, 1973.
August 15, 1973.
April 15, 1975.
February 25, 1975.
January 20, 1977.
November 15, 1976.
January 20, 1977.
January 20, 1981.
February 4, 1979.
May 27, 1980.
January 20, 1981.
January 20, 1981.
August 25, 1982.
March 30, 1985.
July 3 1 , 1982.
July 10, 1984.
January 20, 1985.
January 20, 1989.
May 1, 1989.
September 19, 1988.
August 2, 1991
June 2 1 , 1991

and the other Council Members appeared before numerous other
organizations to explain the Administration's economic principles,
policies, and outlook.
Dr. Boskin continued to chair the Working Group on the Quality
of Economic Statistics, an assembly of the major Federal statistical
agencies. The Council worked closely with the Working Group
throughout 1992 in implementing a list of 25 recommendations the
President had previously approved for improving the quality and
timeliness of economic statistics.
The Council was one of the leading participants in the formulation of the Administration's economic policies through various Cabinet and sub-Cabinet working groups. In testimony before the Congress and in meetings with business and other groups the Chairman and the Council Members stressed the importance of enacting
a set of stimulative, temporary tax reductions while slowing spending to reduce the long-term structural Federal budget deficit, shifting the composition of Federal spending toward investment in productive infrastructure and research and development, and reducing
the disincentives in the tax system to entrepreneurship, innovation, saving, and capital formation.
INTERNATIONAL ECONOMIC POLICIES
International economic issues remained a very high priority at
the Council during 1992. The Chairman and the Council Members
stressed the benefits of free trade and open markets for goods, services, and investment in numerous meetings with outside groups
and they emphasized the risk to world economic growth posed by
rising protectionism. The Council participated in formulating Administration policy on the Uruguay Round of the General Agreement on Tariffs and Trade, the North American Free Trade Agreement, and many other issues pertaining to international trade
policy. The Council also participated in formulating the Administration positions on legislation in the international arena.
The Council continued to be involved in Administration policies
for advancing economic reform in Eastern Europe and the former
Soviet Union, meeting with numerous officials from these countries
throughout the course of the year.
Dr. Boskin traveled to Paris as part of the U.S. delegation to the
Organization of Economic Cooperation and Development (OECD)
Ministerial Meeting. He also served as Chairman of the OECD Economic Policy Committee. Dr. Boskin continued to chair the Administration's working group on economic reform in the former Soviet
Union and continued to be a coordinator for the Administration's
assistance programs for the Commonwealth of Independent States.
Dr. Wonnacott led the U.S. delegation to assess U.S. economic
policy. He was also a member of the U.S. delegation to the OECD




335

Working Party 3 on macroeconomic policy coordination. Dr. Bradford headed the U.S. delegation to the OECD Working Party 1
meetings on microeconomic and structural issues.
The Council provided the President and the White House Senior
Staff with regular briefings and analytical materials on international developments and participated in preparations for the Economic Summit in Munich.
The Council also participated in discussions on a wide range of
issues—including developing country debt, macroeconomic policy
coordination, and various export promotion proposals—with other
members of the Administration, the Federal Reserve, the World
Bank, the International Monetary Fund, and representatives of
other countries. The Council Members and the Council Senior Staff
conducted numerous briefings on the U.S. economy for visiting officials and scholars.
MICROECONOMIC POLICIES
The Administration considered and proposed action this year on
a wide range of microeconomic issues. In its work in this area, the
Council repeatedly stressed that government regulation must pass
careful cost-benefit tests and that where regulation is appropriate,
it should be formulated to allow workers and firms maximum flexibility, as well as to provide incentives to meet social goals in the least
costly manner. The Council was instrumental in ensuring that legislative initiatives were designed to achieve reforms in as cost-effective a manner as possible. The Council emphasized the principles of
promoting flexibility, enhancing incentives, and placing maximum
reliance on the private sector in a wide range of policy areas.
The Council was also instrumental in the President's decision in
January 1992 to establish a 90-day Regulatory Moratorium. During
the moratorium Federal agencies issued only those new regulations
deemed essential to preserving the health and maintaining the
safety of the American people. Also during the moratorium all
agencies were encouraged to reexamine the regulations which were
already in place and for which they were responsible, with the goal
of rescinding those regulations that were no longer necessary and
modifying those regulations where the purpose could be achieved at
a lower cost to American businesses and individuals.
The Council worked with the Office of the White House Counsel
and the Council on Competitiveness within the Office of the Vice
President to assist the various agencies in implementing the President's regulatory review policies. The Council was particularly concerned that the proposed regulatory changes achieve the goals of
the underlying legislation at reduced cost to the American econo-




336

my, and that the agency's claims of cost savings were credible and
supportable.
At the end of the first 90 days the Regulatory Moratorium was
extended for another 120 days, after which it was extended for an
additional year.
In addition to the Moratorium, the Administration established
new criteria for performing cost-benefit analysis and new requirements for reviewing legislative proposals. The President asked all
agencies to perform cost-benefit analyses of legislative proposals
under active consideration by the Congress or to be proposed by the
agencies.
As a member of the Environmental Policy Review Group, Dr.
Bradford dealt with a wide range of environmental issues, including climate change policy, Western water reforms, the Wisconsin
Electric Power Company ruling on modifications at power plants,
and the development of appropriate contingent valuation methods.
He participated in a variety of working groups on income distribution, financial institution reform and regulation, tax policy, telecommunications, energy markets, and science and technology
policy. He also chaired the newly created interagency Committee
on Economic Research on Natural Resources and the Environment.
Dr. Bradford was instrumental in the development of the Administration's health care proposals, particularly the small market
reform and health risk adjuster proposals.
PUBLIC INFORMATION
The Chairman and the Council Members regularly testify before
the Congress, make public speeches, participate in radio and television news programs, and hold news briefings. In addition, the Council produces two publications a year for the public.
The Economic Report of the President is the principal medium
through which the Council informs the public of its work and its
views. It is an important vehicle for presenting the Administration's domestic and international economic policies. Annual distribution of the Economic Report in recent years has averaged about
45,000 copies. The Council assumes primary responsibility for the
monthly Economic Indicators, which is issued by the Joint Economic Committee of the Congress and has a distribution of approximately 10,000.
THE COUNCIL AND THE STAFF
The Chairman is responsible for communicating the Council's
views on economic developments to the President through personal
discussions and written reports. The Chairman also represents the
Council at Cabinet meetings, meetings of the National Security
Council on issues of economic importance, daily White House




337

senior staff meetings, budget team meetings with the President,
and at many other formal and informal meetings with the President and senior White House staff, as well as with other senior
government officials. The Chairman guides the work of the Council
and exercises ultimate responsibility for directing the work of the
professional staff.
Members of the Council are involved in the full range of issues
within the Council's purview, and are responsible for the daily supervision of the work of the professional staff. Members represent
the Council at a wide variety of interagency and international
meetings and assume major responsibility for selecting issues for
Council attention.
The small size of the Council permits the Chairman and Members to work as a team on most policy issues. There continued to
be, however, an informal division of subject matter. Dr. Bradford
was primarily responsible for microeconomic and sectoral analysis
and regulatory issues. Dr. Wonnacott was primarily responsible for
domestic and international macroeconomic analysis and economic
projections.
PROFESSIONAL STAFF
The professional staff of the Council consists of the Special Assistant, the Staff Assistant to the Chairman, the Senior Statistician, 11 senior staff economists, 1 staff economist, 7 junior staff
economists, and 1 research assistant. The professional staff and
their respective areas of concentration at the end of 1992 were:
Special Assistant to the Chairman
J.D. Foster
Staff Assistant to the Chairman
Shelley A. Slomowitz

Senior Staff Economists
K.C. Fung
Sherry Glied
Andrew S. Joskow
Steven B. Kamin
John H. Kitchen
Michael M. Knetter
Howard D. Leathers
Deborah J. Lucas
Andrew B. Lyon




International Trade
Health and Labor
Regulation, Energy, and Industrial
Organization
International Finance
Macroeconomics and Forecasting
Macroeconomics, Monetary Policy, and
Quality of Statistics
Agriculture, International Trade, and
Natural Resources
Financial Markets and Monetary Policy
Public Finance
338

Raymond L. Squitieri
Jonathan B. Wiener

Energy and Environment
Environment, Natural Resources, and
Health and Safety

Senior Statistician
Catherine H. Furlong

Staff Economist
Kevin Berner

Public Finance

Junior Staff Economists
Christopher J. Acito
Lucy P. Allen
Sherif Lotfl
Joshua B. Michael
Kimberly J. O'Neill
Natalie J. Tawil

Macroeconomics and Finance
Regulation and Microeconomics
International Macroeconomics and Finance
Macroeconomics and Quality of Statistics
Health and Public Finance
Environment and International Trade

Darryl S. Wills

Labor and Agriculture

Research Assistant
Bret M. Dickey
Macroeconomics and Forecasting
Mrs. Furlong manages the Statistical Office assisted by Susan P.
Clements, Linda A. Reilly, Margaret L. Snyder, and Brian A.
Amorosi. The Statistical Office maintains and updates the Council's statistical information system, overseeing the publication of
the Economic Indicators, the statistical appendix to the Economic
Report, and the verification of statistics in memoranda, testimony,
and speeches.
Emily Chalmers provided editorial assistance in the preparation
of the 1993 Economic Report.
Two former staff members returned to assist in the preparation
of the 1993 Report: Dorothy Bagovich (statistician) and Lissa J.
Rideout (student assistant).
SUPPORTING STAFF
The Administrative Office, which provides general support for
the Council's activities, consists of Elizabeth A. Kaminski, Administrative Officer, and Catherine Fibich, Administrative Assistant.
The secretaries for the Council of Economic Advisers during 1992
were Alice H. Williams and Sandra F. Daigle (secretaries to the
Chairman), Lisa D. Branch and Francine P. Obermiller (secretaries
to the Members). The secretaries for the Council's staff were Mary
E. Jones, Rosalind V. Rasin, Mary A. Thomas, and Janet J.
Twyman.
Mark H. Fithian, Ian B. Goldberg, and Jennifer Howard served
as student assistants during the year. Janet L. Fitzgerald and Mary




339

Elizabeth Pignone served as research assistants during the
summer.
DEPARTURES

Harry G. Broadman, who served as Special Assistant to the
Chairman and Senior Staff Economist, resigned in February 1992
to accept an appointment as Assistant U.S. Trade Representative.
The Council's senior staff economists in most cases are on leave
of absence from faculty positions at academic institutions or from
other government agencies or research institutions. Their tenure
with the Council is usually limited to 1 or 2 years. Most of the
senior staff economists who resigned during the year returned to
their previous affiliations. They are Randall W. Eberts (Federal Reserve Bank of Cleveland), Joseph W. Glauber (U.S. Department of
Agriculture), Spencer D. Krane (Board of Governors of the Federal
Reserve System), Catherine L. Mann (Board of Governors of the
Federal Reserve System), and Robert W. Staiger (Stanford University). Others went on to new positions: They are David S. Bizer (Securities and Exchange Commission) and William G. Gale (The
Brookings Institution). Junior staff economists generally are graduate students who spend 1 year with the Council and then return to
complete their dissertations. Those who returned to their graduate
studies in 1992 are: Jeffrey S. Gray (University of Pennsylvania),
John A. Higgins (Columbia University), Thomas N. Hubbard (Stanford University), Philip I. Levy (Stanford University), and Derek H.
Utter (University of Pennsylvania). Nancy L. Maritato (National
Academy of Sciences) and Michael G. Williams (Securities and Exchange Commission) went to new positions.




340

Appendix B
STATISTICAL TABLES RELATING TO INCOME,
EMPLOYMENT, AND PRODUCTION







CONTENTS
NATIONAL INCOME OR EXPENDITURE:
Page

B-l.
R-2.
B-3.
B-4.
B-5.
B-6.
B-7.
B-8.
B-9.
B-10.
B-ll.
B-12.
B-13.
B-l4.
B-15.
B-16.
B-17.
B-18.
B-19.
B-20.
B-21.
B-22.
B-23.
B-24.
B-25.
B-26.
B-27.
B-28.




Gross domestic product, 1959-92
Gross domestic product in 1987 dollars, 1959-92
Implicit price deflators for gross domestic product, 1959-92
Changes in gross domestic product and personal consumption expenditures, and related implicit price deflators and fixedweighted price indexes, 1960-92
Selected per capita product and income series in current and
1987 dollars, 1959-92
Gross domestic product by major type of product, 1959-92
Gross domestic product by major type of product in 1987 dollars,
1959-92
Gross domestic product by sector, 1959-92
Gross domestic product by sector in 1987 dollars, 1959-92
Gross domestic product of nonfinancial corporate business, 195992
Output, costs, and profits of nonfinancial corporate business,
1959-92
Personal consumption expenditures, 1959-92
Personal consumption expenditures in 1987 dollars, 1959-92
Gross and net private domestic investment, 1959-92
Gross and net private domestic investment in 1987 dollars, 195992
Inventories and final sales of domestic business, 1959-92
Inventories and final sales of domestic business in 1987 dollars,
1959-92
Foreign transactions in the national income and product accounts, 1959-92
Exports and imports of goods and services and receipts and payments of factor income in 1987 dollars, 1959-92
Relation of gross domestic product, gross national product, net
national product, and national income, 1959-92
Relation of national income and personal income, 1959-92
National income by type of income, 1959-92
Sources of personal income, 1959-92
Disposition of personal income, 1959-92
Total and per capita disposable personal income and personal
consumption expenditures in current and 1987 dollars, 1959-92
Gross saving and investment, 1959-92
Personal saving, flow of funds accounts, 1946-92
Median money income (in 1991 dollars) and poverty status of
families and persons, by race, selected years, 1971-91

343

348
350
352
354
355
356
357
358
359
360
361
362
363
364
365
366
367
368
369
370
371
372
374
376
377
378
379
380

POPULATION, EMPLOYMENT, WAGES, AND PRODUCTIVITY:
B-29.
B-30.
B-31.
B-32.
B-33.
B-34.
B-35.
B-36.
B-37.
B-38.
B-39.
B-40.
B-41.
B-42.
B-43.
B-44.
B-45.

Population by age groups, 1929-92
Population and the labor force, 1929-92
Civilian employment and unemployment by sex and age, 1947-92
Civilian employment by demographic characteristic, 1954-92
Unemployment by demographic characteristics, 1954-92
Civilian labor force participation rate and employment/population ratio, 1948-92
Civilian labor force participation rate by demographic characteristic, 1954-92
Civilian employment/population ratio by demographic characteristic, 1954-92
Civilian unemployment rate, 1948-92
Civilian unemployment rate by demographic characteristic,
1950-92
Unemployment by duration and reason, 1948-92
Unemployment insurance programs, selected data, 1960-92
Employees on nonagricultural payrolls, by major industry, 194692
Hours and earnings in private nonagricultural industries and
hourly compensation in the total economy, 1959-92
Employment cost index, private industry, 1979-92
Productivity and related data, business sector, 1959-92
Changes in productivity and related data, business sector, 196092

Page
381
382
384
385
386
387
388
389
390
391
392
393
394
396
397
398
399

PRODUCTION AND BUSINESS ACTIVITY:
B-46.
B-47.
B-48.
B-49.
B-50.
B-51.
B-52.
B-53.
B-54.
B-55.
PRICES:
B-56.
B-57.
B-58.
B-59.
B-60.
B-61.
B-62.
B-63.
B-64.




Industrial production indexes, major industry divisions, 1947-92 ..
Industrial production indexes, market groupings, 1947-92
Industrial production indexes, selected manufactures, 1947-92
Capacity utilization rates, 1948-92
New construction activity, 1929-92
New housing units started and authorized, 1959-92
Business expenditures for new plant and equipment, 1947-93
Manufacturing and trade sales and inventories, 1950-92
Manufacturers' shipments and inventories, 1950-92
Manufacturers' new and unfilled orders, 1950-92

400
401
402
403
404
406
407
408
409
410

Consumer price indexes for major expenditure classes, 1950-92
Consumer price indexes for selected expenditure classes, 1950-92.
Consumer price indexes for commodities, services, and special
groups, 1950-92
Changes in special consumer price indexes, 1958-92
Changes in consumer price indexes for commodities and services,
1929-91
,
Producer price indexes by stage of processing, 1947-92
Producer price indexes by stage of processing, special groups,
1974-92
Producer price indexes for major commodity groups, 1950-92
Changes in producer price indexes for finished goods, 1955-92

411
412

344

414
415
416
417
419
420
422

MONEY STOCK, CREDIT, AND FINANCE:
Page

B-65.
B-66.
B-67.
B-68.
B-69.
B-70.
B-71.
B-72.
B-73.

Money stock, liquid assets, and debt measures, 1959-92
Components of money stock measures and liquid assets, 1959-92..
Aggregate reserves of depository institutions and monetary base,
1959-92
Commercial bank loans and securities, 1972-92
Bond yields and interest rates, 1929-92
Total funds raised in credit markets by nonfinancial sectors,
1983-92
Mortgage debt outstanding by type of property and of financing,
1940-92
Mortgage debt outstanding by holder, 1940-92
Consumer credit outstanding, 1950-92

423
424
426
427
428
430
432
433
434

GOVERNMENT FINANCE:
B-74.
B-75.
B-76.
B-77.
B-78.
B-79.
B-80.
B-81.
B-82.
B-83.
B-84.

Federal receipts, outlays, surplus or deficit, and debt, selected
fiscal years, 1929-93
Federal receipts, outlays, and debt, fiscal years 1981-93
Federal budget receipts, outlays, surplus or deficit, and debt, as
percentages of gross domestic product, 1934-93
Federal and State and local government receipts and expenditures, national income and product accounts, 1959-92
Federal and State and local government receipts and expenditures, national income and product accounts, by major type,
1959-92
Federal Government receipts and expenditures, national income
and product accounts, 1976-92
State and local government receipts and expenditures, national
income and product accounts, 1959-92
State and local government revenues and expenditures, selected
fiscal years, 1927-91
Interest-bearing public debt securities by kind of obligation,
1967-92
Maturity distribution and average length of marketable interestbearing public debt securities held by private investors, 196792
Estimated ownership of public debt securities by private investors, 1976-92

435
436
438
439
440
441
442
443
444
445
446

CORPORATE PROFITS AND FINANCE:
B-85.
B-86.
B-87.
B-88.
B-89.
B-90.
B-91.
B-92.




Corporate profits with inventory valuation and capital consumption adjustments, 1959-92
Corporate profits by industry, 1959-92
Corporate profits of manufacturing industries, 1959-92
Sales, profits, and stockholders' equity, all manufacturing corporations, 1950-92
Relation of profits after taxes to stockholders' equity and to
sales, all manufacturing corporations, 1947-92
Sources and uses of funds, nonfarm nonfinancial corporate business, 1947-92
Common stock prices and yields, 1955-92
Business formation and business failures, 1950-92

345

447
448
449
450
451
452
453
454

AGRICULTURE:
B-93.
B-94.
B-95.
B-96.
B-97,
B-98.

Farm income, 1940-92
Farm output and productivity indexes, 1947-91
Farm input use, selected inputs, 1947-91
Indexes of prices received and prices paid by farmers, 1950-92
U.S. exports and imports of agricultural commodities, 1940-92
Balance sheet of the farm sector, 1939-92

455
456
457
458
459
460

INTERNATIONAL STATISTICS:
B-99.
B-100.
B-101.
B-102.
B-103.
B-104.
B-105.
B-106.
B-107.
B-108.

International investment position of the United States at yearend, 1983-91
U.S. International transactions, 1946-92
U.S. merchandise exports and imports by principal end-use category, 1965-92
U.S. merchandise exports and imports by area, 1983-92
U.S. merchandise exports, imports, and trade balance, 1972-92
International reserves, selected years, 1952-92
Industrial production and consumer prices, major industrial
countries, 1967-92
Civilian unemployment rate, and hourly compensation, major industrial countries, 1965-92
Foreign exchange rates, 1967-92
Growth rates in real gross national product/gross domestic product, 1971-91

NATIONAL WEALTH:
B-109. National wealth, 1960-91
B-110. National wealth in 1987 dollars, 1960-91

461
462
464
465
466
467
468
469
470
471
472
473

SUPPLEMENTARY TABLE:
B-lll. Selected historical series on gross domestic product and related
series, 1929-58




346

474

General Notes
Detail in these tables may not add to totals because of rounding.
Unless otherwise noted, all dollar figures are in current dollars.
Symbols used:
p
Preliminary.
Not available (also, not applicable).
Data in these tables reflect revisions made by the source agencies from
January 1992 through early January 1993.
Historical data for the national income and product accounts (NIPA) tables
for 1929-58 were not available in time for inclusion in these tables. A
Supplementary Table (Table B-lll) has been added that contains data for
selected NIPA series for those years. See Survey of Current Business,
December 1992.




347

NATIONAL INCOME OR EXPENDITURE
TABLE B-l.—Gross domestic product,

1939-92

[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Gross private domestic investment

Personal consumption expenditures

Fixed investment

Year or quarter

Gross
domestic
product

Nonresidential
Total

Durable
goods

Nondurable
goods

Services

Total
Total
Total

Structures

Producers'
durable
equipment

Residential

Change
in
business
inventories

1959

494.2

318.1

42.8

148.51

126.8

78.8

74.6

46.5

18.1

28.3

28.1

4.2

1960
1961
1962
1963
1964

513.4
531.8
571.6
603.1
648.0

332.4
343.5
364.4
384.2
412,5

43.5
41.9
47.0
51.8
56.8

153.1
157.4
163.8
169.4
179.7

135.9
144.1
153.6
163.1
175.9

78.7
77.9
87.9
93.4
101.7

75.5
75.0
81.8
87.7
96.7

49.2
48.6
52.8
55.6
62.4

19.6
19.7
20.8
21.2
23.7

29.7
28.9
32.1
34.4
38.7

26.3
26.4
29.0
32.1
34.3

3.2
2.9
6.1
5.7
5.0

1965
1966
1967
1968
1969

702.7
769.8
814.3
889.3
959.5

444.6
481.6
509.3
559.1
603.7

63.5 [
68.5
70.6
81.0
86.2

191.9
208.5
216.9
235.0
252.2

189.2
204.6
221.7
243.1
265.3

118.0
130.4
128.0
139.9
155.2

108.3
116.7
117.6
130.8
145.5

74.1
84.4
85.2
92.1
102.9

28.3
31.3
31.5
33.6
37.7

45.8
53.0
53.7
58.5
65.2

34.2
32.3
32.4
38.7
42.6

9.7
13.8
10.5
9.1
9.7

1970
1971
1972
1973
1974

1,010.7
1,097.2
1,207.0
1,349.6
1,458.6

646.5
700.3
767.8
848.1
927.7

85.3
97.2
110.7
124.1
123.0

270.4
283.3
305.2
339.6
380.8

290.8
319.8
351.9
384.5
423.9

150.3
175.5
205.6
243.1
245.8

148.1
167.5
195.7
225.4
231.5

106.7
111.7
126.1
150.0
165.6

40.3
42.7
47.2
55.0
61.2

66.4
69.1
78.9
95.1
104.3

41.4
55.8
69.7
75.3
66.0

2.3
8.0
9.9
17.7
14.3

1975
1976
1977
1978
1979

1,585.9
1,768.4
1,974.1
2,232.7
2,488.6

1,024.9
1,143.1
1,271.5
1,421.2
1,583.7

134.3
160.0
182.6
202.3
214.2

416.0
451.8
490.4
541.5
613.3

474.5
531.2
598.4
677.4
756.2

226.0
286.4
358.3
434.0
480.2

231.7
269.6
333.5
406.1
467.5

169.0
187.2
223.2
274.5
326.4

61.4
65.9
74.6
93.9
118.4

107.6
121.2
148.7
180.6
208.1

62.7
82.5
110.3
131.6
141.0

-5.7
16.7
24.7
27.9
12.8

1980
1981
1982
1983
1984

2,708.0
3,030.6
3,149.6
3,405.0
3,777.2

1,748.1
1,926.2
2,059.2
2,257.5
2,460.3

212.5
228.5
236.5
275.0
317.9

682.9
744.2
772.3
817.8
873.0

852.7
953.5

1,050.4
1,164.7
1,269.4

467.6
558.0
503.4
546.7
718.9

477.1
532.5
519.3
552.2
647.8

353.8
410.0
413.7
400.2
468.9

137.5
169.1
178.8
153.1
175.6

216.4
240.9
234.9
247.1
293.3

123.3
122.5
105.7
152.0
178.9

-9.5
25.4
-15.9
-5.5
71.1

1985
1986

4,038.7
4,268.6
4,539.9
4,900.4
5,250.8

2,667.4
2,850.6
3,052.2
3,296.1
3,523.1

352.9 919.4
389.6 952.2
403.7 1,011.1
437.1 1,073.8
459.4 1,149.5

1,395.1
1,508.8
1,637.4
1,785.2
1,914.2

714.5
717.6
749.3
793.6
832.3

689.9
709.0
723.0
777.4
798.9

504.0
492.4
497.8
545.4
568.1

193.4
174.0
171.3
182.0
193.3

310.6
318.4
326.5
363.4
374.8

185.9
216.6
225.2
232.0
230.9

24.6
8.6
26.3
16.2
33.3

1987

1988
1989
1990
1991
1982:1V
1983: IV
1984: IV
1985: IV
1986: IV
1987: IV...
1988: IV

5,522.2
5,677.5

3,748.4
3,887.7

464.3 1,224.5
446.1 1,251.5

2,059.7
2,190.1

799.5
721.1

793.2
731.3

577.6
541.1

201.1
180.1

376.5
360.9

215.6
190.3

6.3
-10.2

3,195.1
3,547.3
3,869.1
4,140.5
4,336.6
4,683.0
5,044.6

2,128.7
2,346.8
2,526.4
2,739.8
2,923.1
3,124.6
3,398.2

246.9 787.3
839.8
297.7
328.2 887.8
354.4 939.5
406.8 963.7
408.8 1,029.4
452.9 1,105.8

1,094.6
1,209.3
1,310.4
1,446.0
1,552.6
1,686.4
1,839.5

464.2
614.8
722.8
737.0
697.1
800.2
814.8

510.5
594.6
671.8
704.4
715.9
740.9
797.5

397.7
426.9
491.5
511.3
491.7
514.3
560.2

168.9
154.6
184.1
195.4
168.4
180.0
186.8

228.8
272.3
307.3
315.9
323.3
334.3
373.4

112.8
167.7
180.4
193.1
224.2
226.5
237.3

-46.3
20.2
51.0
32.6
-18.8
59.3
17.3

1989:1
II
Ill
IV

5,150.0
5,229.5
5,278.9
5,344.8

3,440.8
3,499.1
3,553.3
3,599.1

450.8
457.6
470.8
458.3

1,121.1
1,146.5
1,157.1
1,173.5

1,868.8
1,895.1
1,925.4
1,967.3

843.9
840.3
819.6
825.2

800.2
800.5
800.0
795.0

563.4
568.4
571.5
568.8

190.2
189.6
195.5
198.0

373.3
378.8
376.1
370.8

236.8
232.1
228.5
226.2

43.7
39.8
19.6
30.2

1990:1
II
Ill
IV....

5,445.2
5,522.6
5,559.6
5,561.3

3,672.4
3,715.3
3,787.8
3,818.2

478.0
463.5
463.0
452.7

1,199.3
1,208.7
1.235.3
1,254.5

1,995.0
2,043.1
2,089.6
2,111.1

820.3
833.0
805.7
739.0

812.2
795.3
795.3
770.0

580.1
572.1
585.2
572.9

202.4
201.5
204.1
196.3

377.6
370.6
381.0
376.6

232.1
223.1
210.1
197.1

8.1
37.7
10.4
-31.0

1991:1
II
Ill
IV

5,585.8
5,657.6
5,713.1
5,753.3

3,821.7
3,871.9
3,914.2
3,942.9

439.5
441.4
453.0
450.4

1,245.0
1,254.2
1,255.3
1,251.4

2,137.2
2,176.3
2,205.9
2,241.1

705.4
710.2
732.8
736.1

733.9
732.0
732.6
726.9

551.4
545.8
538.4
528.7

190.0
185.2
175.6
169.7

361.4
360.6
362.8
358.9

182.6
186.2
194.2
198.2

-28.5
-21.8

1992:1
II
Ill

5,840.2
5,902.2
5,978.5

4,022.8
4,057.1
4,108.7

469.4 1,274.1
470.6 1,277.5
482.5 1,292.8

2,279.3
2,309.0
2,333.3

722.4
773.2
781.6

738.2
765.1
766.6

531.0
550.3
549.6

170.1
170.3
166.1

360.8
380.0
383.5

207.2
214.8
217.0

-15.8
8.1
15.0

See next page for continuation of table.




348

9.2

T A B L E B-l.—Gross domestic product,

1959-92—Continued

[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]

Government purchases

Net exports of goods and
services 1

Federal
Year or
quarter

Net
exports Exports Imports

Total
Total

National
defense

Nondefense

State
and
local

Final
sales of
domestic
product

Gross
domestic purchases 2

Addendum:
Gross
national
product 3

Percent change
from preceding
period
Gross
domestic
product

Gross
domestic
purchases 2

1959

-1.7

20.6

22.3

99.0

57.1

46.4

10.8

41.8

490.0

495.8

497.0

8.7

9.1

1960
1961
1962
1963
1964

2.4
3.4
2.4
3.3
5.5

25.3
26.0
27.4
29.4
33.6

22.8
22.7
25.0
26.1
28.1

99.8
107.0
116.8
122.3
128.3

55.3
58.6
65.4
66.4
67.5

45.3
47.9
52.1
51.5
50.4

10.0
10.6
13.3
14.9
17.0

44.5
48.4
51.4
55.8
60.9

510.1
528.9
565.5
597.5
643.0

510.9
528.4
569.2
599.8
642.5

516.6
535.4
575.8
607.7
653.0

3.9
3.6
7.5
5.5
7.4

3.0
3.4
7.7
5.4
7.1

1965
1966
1967
1968
1969

3.9
1.9
1.4
-1.3
-1.2

35.4
38.9
41.4
45.3
49.3

31.5
37.1
39.9
46.6
50.5

136.3
155.9
175.6
191.5
201.8

69.5
81.3
92.8
99.2
100.5

51.0
62.0
73.4
79.1
78.9

18.5
19.3
19.4
20.0
21.6

66.8
74.6
82.7
92.3
101.3

693.0
756.0
803.8
880.2
949.8

698.8
767.9
812.9
890.6
960.7

708.1
774.9
819.8
895.5
965.6

8.4
9.5
5.8
9.2
7.9

8.8
9.9
5.9
9.6
7.9

1970
1971
1972
1973
1974

1.2
-3.0
-8.0
.6
-3.1

57.0
59.3
66.2
91.8
124.3

55.8
62.3
74.2
91.2
127.5

212.7
224.3
241.5
257.7
288.3

100.1
100.0
106.9
108.5
117.6

76.8
74.1
77.4
77.5
82.6

23.3
25.9
29.4
31.1
35.0

112.6
124.3
134.7
149.2
170.7

1,008.4
1,089.2
1,197.1
1,331.9
1,444.4

1.009.5
1,100.2
1,215.0
1,349.0
1,461.8

1,017.1
1,104.9
1,215.7
1,362.3
1,474.3

5.3
8.6
10.0
11.8
8.1

5.1
9.0
10.4
11.0
8.4

1975
1976
1977
1978
1979

13.6
-2.3
-23.7
-26.1
-23.8

136.3
148.9
158.8
186.1
228.9

122.7
151.1
182.4
212.3
252.7

321.4
341.3
368.0
403.6
448.5

129.4
135.8
147.9
162.2
179.3

89.6
93.4
100.9
108.9
121.9

39.8
42.4
47.0
53.3
57.5

192.0
205.5
220.1
241.4
269.2

1,591.5
1,751.7
1,949.4
2,204.8
2,475.9

1,572.3
1,770.7
1,997.8
2,258.8
2,512.5

1,599.1
1,785.5
1,994.6
2,254.5
2,520.8

8.7
11.5
11.6
13.1
11.5

7.6
12.6
12.8
13.1
11.2

1980
1981
1982
1983
1984

-14.7
-14.7
-20.6
-51.4
-102.7

279.2
303.0
282.6
276.7
302.4

293.9
317.7
303.2
328.1
405.1

507.1
561.1
607.6
652.3
700.8

209.1
240.8
266.6
292.0
310.9

142.7
167.5
193.8
214.4
233.1

66.4
73.3
72.7
77.5
77.8

298.0
320.3
341.1
360.3
389.9

2,717.5
3,005.2
3,165.5
3,410.6
3,706.1

2,722.8
3,045.3
3,170.2
3,456.5
3,879.9

2,742.1
3,063.8
3,179.8
3,434.4
3,801.5

8.8
11.9
3.9
8.1
10.9

8.4
11.8
4.1
9.0
12.2

1985
1986
1987
1988
1989

-115.6
-132.5
-143.1
-108.0
-79.7

302.1
319.2
364.0
444.2
508.0

417.6
451.7
507.1
552.2
587.7

772.3
833.0
881.5
918.7
975.2

344.3
367.8
384.9
387.0
401.6

258.6
276.7
292.1
295.6
299.9

85.7
91.1
92.9
91.4
101.7

428.1
465.3
496.6
531.7
573.6

4,014.1
4,260.0
4,513.7
4,884.2
5,217.5

4,154.3
4,401.2
4,683.0
5,008.4
5,330.5

4,053.6
4,277.7
4,544.5
4,908.2
5,266.8

6.9
5.7
6.4
7.9
7.2

7.1
5.9
6.4
6.9
6.4

1990
1991

-68.9
-21.8

557.0
598.2

625.9 1,043.2
620.0 1,090.5

426.4
447.3

314.0
323.8

112.4
123.6

616.8
643.2

5,515.9
5,687.7

5,591.1
5,699.3

5,542.9
5,694.9

5.2
2.8

4.9
1.9

IV
IV
IV
IV
IV
IV
IV

-29.5
-71.8
-107.1
-135.5
-133.2
-143.2
-106.0

265.6
286.2
308.7
304.7
333.9
392.4
467.0

295.1
358.0
415.7
440.2
467.1
535.6
573.1

631.6
657.6
727.0
799.2
849.7
901.4
937.6

281.4
289.7
324.7
356.9
373.1
392.5
392.0

205.5
222.8
242.9
268.6
278.6
295.8
296.8

75.9
66.9
81.9
88.3
94.5
96.7
95.2

350.3
367.9
402.2
442.4
476.6
509.0
545.7

3,241.4
3,527.1
3,818.1
4,107.9
4,355.4
4,623.7
5,027.3

3,224.6
3,619.1
3,976.2
4,276.0
4,469.8
4,826.2
5,150.7

3,222.6
3,578.4
3,890.2
4,156.2
4,340.5
4,690.5
5,054.3

1989:1
II
Ill
IV

-85.1
-80.1
-79.7
-73.9

489.7
509.5
509.0
523.8

574.9
589.6
588.7
597.7

950.4
970.2
985.6
994.5

392.3
401.6
407.3
405.1

293.5
298.2
305.3
302.5

98.7
103.4
101.9
102.6

558.1
568.6
578.4
589.3

5,106.2
5,189.7
5,259.3
5,314.6

5,235.1
5,309.6
5,358.6
5,418.7

5,164.0
5,243.3
5,294.7
5,365.0

8.6
6.3
3.8
5.1

6.7
5.8
3.7
4.6

1990:1
II
Ill
IV

-72.1
-59.9
-76.3
-67.2

541.2
551.2
555.9
579.7

613.3
611.2
632.2
646.9

1,024.7
1,034.3
1,042.4
1,071.3

420.3
424.4
422.6
438.3

311.6
312.9
308.4
323.2

108.7
111.5
114.3
115.0

604.3
610.0
619.7
633.0

5,437.1
5,484.9
5,549.2
5,592.3

5,517.4
5,582.6
5,635.9
5,628.5

5,464.1
5,537.0
5,577.8
5,592.7

7.7
5.8
2.7
.1

7.5
4.8
3.9
-.5

1991:1
II
Ill
IV

-28.7
-15.3
-27.1
-16.0

573.2
594.3
602.3
622.9

602.0
609.6
629.5
638.9

1,087.5
1,090.8
1,093.3
1,090.3

451.3
449.9
447.2
440.8

332.4
325.9
321.9
314.7

118.8
124.0
125.3
126.1

636.3
640.8
646.0
649.5

5,614.4
5,679.4
5,712.9
5,744.2

5,614.6
5,672.9
5,740.3
5,769.3

5,614.9
5,674.3
5,726.4
5,764.1

1.8
5.2
4.0
2.8

-1.0
4.2
4.8
2.0

1992:1
II
Ill

-8.1
-37.1
-36.0

628.1
625.4
639.0

636.2 1,103.1
662.5 1,109.1
675.0 1,124.2

445.0
444.8
455.2

313.6
311.7
319.6

131.4
133.1
135.7

658.0
664.3
669.0

5,855.9
5,894.1
5,963.5

5,848.3
5,939.4
6,014.5

5,859.8
5,909.3
5,992.0

6.2
4.3
5.3

5.6
6.4
5.2

1982:
1983:
1984:
1985:
1986:
1987:
1988:

1
2
3

Excludes receipts and payments of factor income from or to rest of the world.
Gross domestic product (GDP) less exports of goods and services plus imports of goods and services.
GDP plus net receipts of factor income from rest of the world.

Source: Department of Commerce, Bureau of Economic Analysis.


334-230 O—92


349
12 (QL3)

TABLE B-2.—Gross domestic product in 1987 dollars, 1959-92
[Billions of 1987 dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Gross private domestic investment

Personal consumption
expenditures

Fixed investment
Year or
quarter

Gross
domestic
product

Nonresidential
Total

Durable
goods

Nondurable
goods

Services

Total
Total
Total

Structures

Producers'
durable
equipment

Residential

Change
in
business
inventories

1959

1,928.8

1,178.9

114.4

518.5

546.0

296.4

282.8

165.2

74.4

90.8

117.6

13.6

1960
1961
1962
1963
1964

1,970.8
2,023.8
2,128.1
2,215.6
2,340.6

1,210.8
1,238.4
1,293.3
1,341.9
1,417.2

115.4
109.4
120.2
130.3
140.7

526.9
537.7
553.0
563.6
588.2

568.5
591.3
620.0
648.0
688.3

290.8
289.4
321.2
343.3
371.8

282.7
282.2
305.6
327.3
356.2

173.3
172.1
185.0
192.3
214.0

82.3
86.1
86.9
95.9

92.5
89.8
98.9
105.4
118.1

109.4
110.1
120.6
135.0
142.1

8.1
7.2
15.6
16.0
15.7

1965
1966
1967
1968
1969

2,470.5
2,616.2
2,685.2
2,796.9
2,873.0

1,497.0
1,573.8
1,622.4
1,707.5
1,771.2

156.2
166.0
167.2
184.5
190.8

616.7
647.6
659.0
686.0
703.2

724.1
760.2
796.2
837.0
877.2

413.0
438.0
418.6
440.1
461.3

387.9
401.3
391.0
416.5
436.5

250.6
276.7
270.8
280.1
296.4

111.5
119.1
116.0
117.4
123.5

139.1
157.6
154.8
162.7
172.9

137.3
124.5
120,2
136.4
140.1

25.1
36.7
27.6
23.6
24.8

1970
1971
1972
1973
1974

2,873.9
2,955.9
3,107.1
3,268.6
3,248.1

1,813.5
1,873.7
1,978.4
2,066.7
2,053.8

183.7
201.4
225.2
246.6
227.2

717.2
725.6
755.8
777.9
759.8

912.5
946.7
997.4
1,042.2
1,066.8

429.7
475.7
532.2
591.7
543.0

423.8
454.9
509.6
554.0
512.0

292.0
286.8
311.6
357.4
356.5

123.3
121.2
124.8
134.9
132.3

168.7
165.6
186.8
222.4
224.2

131.8
168.1
198.0
196.6
155.6

5.9
20.8
22.5
37.7
30.9

1975
1976
1977
1978
1979

3,221.7
3,380.8
3,533.3
3,703.5
3,796.8

2,097.5
2,207.3
2,296.6
2,391.8
2,448.4

226.8
256.4
280.0
292.9
289.0

767.1
801.3
819.8
844.8
862.8

1,103.6
1,149.5
1,196.8
1,254.1
1,296.5

437.6
520.6
600.4
664.6
669.7

451.5
495.1
566.2
627.4
656.1

316.8
328.7
364.3
412.9
448.8

118.0
120.5
126.1
144.1
163.3

198.8
208.2
238.2
268.8
285.5

134.7
166.4
201.9
214.5
207.4

-13.9
25.5
34.3
37.2
13.6

1980
1981
1982
1983
1984

3,776.3
3,843.1
3,760.3
3,906.6
4,148.5

2,447.1
2,476.9
2,503.7
2,619.4
2,746.1

262.7
264.6
262.5
297.7
338.5

860.5
867.9
872.2
900.3
934.6

1,323.9
1,344.4
1,368.9
1,421.4
1,473.0

594.4
631.1
540.5
599.5
757.5

602.7
606.5
558.0
595.1
689.6

437.8
455.0
433.9
420.8
490.2

170.2
182.9
181.3
160.3
182.8

267.6
272.0
252.6
260.5
307.4

164.8
151.6
124.1
174.2
199.3

-8.3
24.6
-17.5
4.4
67.9

1985
1986
1987
1988
1989

4,279.8
4,404.5
4,539.9
4,718.6
4,838.0

2,865.8
2,969.1
3,052.2
3,162.4
3,223.3

370.1
402.0
403.7
428.7
440.7

958.7
991.0
1,011.1
1,035.1
1,051.6

1,537.0
1,576.1
1,637.4
1,698.5
1,731.0

745.9
735.1
749.3
773.4
784.0

723.8
726.5
723.0
753.4
754.2

521.8
500.3
497.8
530.8
540.0

197.4
176.6
171.3
174.0
177.6

324.4
323.7
326.5
356.8
362.5

202.0
226.2
225.2
222.7
214.2

22.1
8.5
26.3
19.9
29.8

1990
1991

4,877.5
4,821.0

3,260.4
3,240.8

439.3
414.7

1,056.5
1,042.4

1,764.6
1,783.7

739.1
661.1

732.9
670.4

538.1
500.2

179.1
157.6

359.0
342.6

194.8
170.2

6.2
-9.3

1982: IV
1983:IV
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV

3,759.6
4,012.1
4,194.2
4,333.5
4,427.1
4,625.5
4,779.7

2,539.3
2,678.2
2,784.8
2,895.3
3,012.5
3,074.7
3,202.9

272.3
319.1
347.7
369.6
415.7
404.7
439.2

880.7
915.2
968.7
1,000.9
1,014.6
1,046.8

1,386.2
1,443.9
1,494.2
1,557.1
1,595.8
1,655.5
1,716.9

503.5
669.5
756.4
763.1
705.9
793.8
785.0

548.4
640.2
708.4
732.9
725.9
733.9
764.1

417.2
449.6
509.6
525.5
495.5
510.6
538.8

173.2
162.6
189.5
198.3
170.4
177.9
175.7

244.0
287.0
320.1
327.2
325.0
332.7
363.1

131.2
190.6
198.8
207.4
230.5
223.3
225.3

-44.9
29.3
47.9
30.2
-20.1
59.9
20.9

1989: I
IV..

4,817.6
4,839.0
4,839.0
4,856.7

3,203.6
3,212.2
3,235.3
3,242.0

435.2
440.2
450.6
436.8

1,048.1
1,047.0
1,052.6
1,058.9

1,720.3
1,725.1
1,732.2
1,746.3

802.9
794.5
769.0
769.5

761.7
757.5
753.1
744.6

539.5
542.2
541.8
536.7

177.0
174.7
178.8
179.8

362.4
367.5
363.0
356.9

222.2
215.4
211.2
208.0

41.2
36.9
16.0
24.9

1990: I....
II...
III..
IV..

4,890.8
4,902.7
4,882.6
4,833.8

3,259.5
3,260.1
3,273.9
3,248.0

453.5
439.2
437.7
426.6

1,058.3
1,057.1
1,059.1
1,051.6

1,747.7
1,763.7
1,777.1
1,769.8

763.0
770.2
743.1
680.0

755.4
737.4
732.0
706.8

544.8
535.6
542.9
529.3

182.0
180.1
181.2
173.2

362.8
355.5
361.7
356.1

210.7
201.8
189.1
177.5

7.5
32.8
11.2
-26.8

1991: I
II...
III..
IV..

4,796.7
4,817.1
4,831.8
4,838.5

3,223.5
3,239.3
3,251.2
3,249.0

412.0
411.3
419.4
416.1

1,043.0
1,046.3
1,044.8
1,035.6

1,768.5
1,781.8
1,787.0
1,797.4

646.0
649.5
672.0
676.9

671.1
669.8
671.4
669.3

507.0
503.0
498.7
492.1

166.8
162.2
153.0
148.4

340.2
340.8
345.8
343.7

164.1
166.9
172.6
177.3

-25.1
-20.4
.6
7.5

1992:I

4,873.7
4,892.4
4,933.7

3,289.3
3,288.5
3,318.4

432.3
430.0
439.8

1,049.6
1,045.6
1,052.0

1,807.3
1,812.9
1P?66

668.9
713.6
724.9

681.4
705.9
710.0

495.8
514.7
518.7

149.4
149.1
144.7

346.4
365.6
374.0

185.6
191.2
191.3

-12.6
7.8
15.0

942.9

See next page for continuation of table.




350

TABLE B-2.—Gross domestic product in 1987 dollars, 1959-92—Continued
[Billions of 1987 dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Net exports of goods and
services 1

Government purchases
Federal

Year or
quarter

Net
exports Exports Imports

Total
Total

National
defense

Nondefense

State
and
local

Final
sales of
domestic
product

Gross
domestic purchases 2

Addendum-.
Gross
national
product 3

Percent change
from preceding
pe.iod
Gross
Gross
domes- domestic
tic
purprod- chases 2
uct

1959

218

73 8

95 6

475 3

265 7

209 6

1915 2

1950 6

1939 6

55

58

1960
1961
1962
1963
1964

-7.6
-5.5
-10.5
-5.8
25

88.4
89.9
95.0
101.8
1154

96.1
95.3
105.5
107.7
112 9

476.9
501.5
524.2
536.3
549 1

259.0
270.1
287.3
285.7
281.8

217.9
231.4
236.9
250.6
267 3

1,962.7
2,016.6
2,112.5
2,199.6
2 324 9

1,978.5
2,029.3
2,138.6
2,221.4
2 3381

1,982.8
2,037.1
2,143.3
2,231.8
2,358 1

2.2
2.7
5.2
4.1
56

1.4
2.6
5.4
3.9
53

1965
1966
1967
1968
1969

-6.4
18 0
-23.7
-37.5
-41.5

118.1
125 7
130.0
140.2
147.8

124.5
143 7
153.7
177.7
189.2

566.9
622 4
667.9
686.8
682.0

282.1
319 3
350.9
353.1
340 1

284.8
303.1
317.0
333.7
3419

2,445.4
2,579.5
2,657.5
2,773.2
2 848 2

2,476.9
2,634.2
2,708.9
2,834.4
2 914.5

2,488.9
2,633.2
2,702.6
2,815.6
2,890.9

5.5
5.9
2.6
4.2
27

5.9
6.4
2.8
4.6
2.8

1970
1971
1972
1973
1974

-35.2
-45.9
-56.5
-34.1
-4.1

161.3
161.9
173.7
210.3
234.4

196.4
207.8
230.2
244.4
238.4

665.8
652.4
653.0
644.2
655.4

315.0
290.8
284.4 "209"6"
265.3 191.3
262.6 185.8

74"8
74.1
76.8

350.9
361.6
368.6
378.9
392.9

2,868.0
2,935.2
3,084.5
3,230.9
3,217.2

2,909.1
3,001.8
3,163.6
3,302.7
3,252.2

2,891.5
2,975.9
3,128.8
3,298.6
3,282.4

.0
2.9
5.1
5.2
-.6

-.2
3.2
5.4
4.4
-1.5

1975
1976
1977
1978
1979

23.1
-6.4
-27.8
-29.9
-10.6

232.9
243.4
246.9
270.2
293.5

209.8
249.7
274.7
300.1
304.1

663.5
659.2
664.1
677.0
689.3

262.7
258.2
263.1
268.6
271.7

184.9
179.9
181.6
182.1
185.1

77.8
78.3
81.4
86.5
86.6

400.8
401.1
401.0
408.4
417.6

3,235.6
3,355.3
3,499.0
3,666.3
3,783.2

3,198.6
3,387.1
3,561.1
3,733.3
3,807.4

3,247.6
3,412.2
3,569.0
3,739.0
3,845.3

-.8
4.9
4.5
4.8

-1.6
5.9
5.1
4.8

2.5

2.0

1980
1981
1982
1983
1984

30.7
22.0
-7.4
-56.1
-122.0

320.5
326.1
296.7
285.9
305.7

289.9
304.1
304.1
342.1
427.7

704.2
713.2
723.6
743.8
766.9

284.8
295.8
306.0
320.8
331.0

194.2
206.4
221.4
234.2
245.8

90.6
89.4
84.7
86.6
85.1

419.4
417.4
417.6
423.0
436.0

3,784.6
3,818.6
3,777.8
3,902.2
4,080.6

3,745.7
3,821.2
3,767.7
3,962.8
4,270.5

3,823.4
3,884.4
3,796.1
3,939.6
4,174.5

-.5
1.8
-2.2
3.9
6.2

-1.6
2.0
-1.4
5.2

1985
1986
1987
1988
1989

-145.3
-155.1
-143.1
-104.0
73 7

309.2
329.6
364.0
421.6
471 8

454.6
484.7
507.1
525.7
545 4

813.4
855.4
881.5
886.8
904 4

355.2
373.0
384.9
377.3
3761

265.6
280.6
292.1
287.0
2814

89.5
92.4
92.9
90.2
94 8

458.2
482.4
496.6
509.6
528 3

4,257.6
4,395.9
4,513.7
4,698.6
4 808 3

4,425.1
4,559.6
4,683.0
4,822.6
4 911 7

4,295.0
4,413.5
4,544.5
4,726.3
4 852 7

3.2
2.9
3.1
3.9
25

3.6
3.0
2.7
3.0
18

1990
1991

-51.8
-21.8

510.0
539.4

561.8
561.2

929.9
941.0

383.6
388.3

283.3
282.8

100.3
105.5

546.3
552.7

4,871.3
4,830.3

4,929.3 4,895.9
4,842.8 4,836.4

.8
-12

.4
-18

IV
IV
IV
IV
IV
IV
IV

-19.0
-83.7
-131.4
-155.4
-156.0
-136.0
-102.7

280.4
291.5
312.8
312.0
342.9
386.1
438.2

299.4
375.1
444.2
467.4
498.9
522.1
540.9

735.9
748.1
784.3
830.5
864.8
893.0
894.5

316.0
322.2
341.7
363.7
377.5
391.6
378.4

229.4
242.9
254.3
272.1
282.2
295.0
285.7

86.6
79.3
87.4
91.6
95.3
96.6
92.7

419.9
425.9
442.6
466.7
487.3
501.4
516.1

3,804.5
3,982.8
4,146.2
4,303.3
4,447.2
4,565.6
4,758.7

3,778.6
4,095.8
4,325.5
4,488.9
4,583.1
4,761.5
4,882.4

3,791.7
4,046.6
4,216.4
4,349.5
4,430.8
4,633.0
4,789.0

1989: 1
II
Ill
IV

-79.8
-70.0
-77.5
-67.4

454.5
472.0
472.9
487.7

534.3
541.9
550.5
555.0

890.8
902.3
912.2
912.6

370.1
376.9
381.5
376.1

276.7
280.4
286.9
281.5

93.4
96.5
94.5
94.7

520.7
525.4
530.7
536.5

4,776.3
4,802.0
4,823.0
4,831.8

4,897.3
4,908.9
4,916.5
4,924.1

4,830.7
4,851.6
4,853.4
4,875.1

3.2
1.8
.0
1.5

1.2
1.0
.6
.6

1990: I
II
Ill
IV

-58.4
-56.9
-59.3
-32.7

500.2
508.7
508.4
522.6

558,6
565.6
-567.7
555.3

926.8
929.4
924.8
938.5

383.4
385.4
378.3
387.3

284.9
285.1
277.3
285.8

98.5
100.3
101.0
101.5

543.4
544.0
546.5
551.2

4,883.3
4,870.0
4,871.4
4,860.6

4,949.2
4,959.7
4,941.9
4,866.5

4,907.8
4,915.5
4,898.9
4,861.4

2.8
1.0
-1.6
-3.9

2.1
.9
-1.4
-6.0

1991: 1
II
Ill
IV

-17.9
-17.4
-31.6
-20.5

515.9
536.1
544.2
561.4

533.8
553.5
575.8
581.8

945.1
945.6
940.2
933.1

394.1
393.8
387.2
378.2

291.8
287.6
280.6
271.0

102.2
106.2
106.6
107.2

551.0
551.8
553.0
554.9

4,821.8
4,837.4
4,831.2
4,830.9

4,814.6
4,834.4
4,863.4
4,858.9

4,822.0
4,831.8
4,843.7
4,848.2

-3.0
1.7
1.2
.6

-4.2
1.7
2.4
-.4

1992: I
II
Ill

-21.5
-43.9
-52.7

565.4
563.4
575.9

586.8
607.3
628.6

937.0
934.2
943.0

375.3
372.7
379.5

265.6
262.1
267.4

109.7
110.6
112.1

561.8
561.5
563.5

4,886.3
4,884.6
4,918.7

4,895.2 4,890.7
4,936.3 4,899.1
4,986.4 4,945.6

2.9
1.5
3.4

3.0
3.4
4.1

1982:
1983:
1984:
1985:
1986:
1987:
1988:

1

Excludes receipts and payments of factor income from or to rest of the world.
Gross domestic product (GDP) less exports of goods and services plus imports of goods and services.
3
GDP plus net receipts of factor income from rest of the world.
Source: Department of Commerce, Bureau of Economic Analysis.
2




351

7.8

TABLE B-3.—Implicit price deflators for gross domestic product,

1959-92

[Index numbers, 1987=100, except as noted; quarterly data seasonally adjusted]
1
'ersonal consumption
expenditures

Fixed investment
Nonresidential

Gross
domestic
product

Year or quarter

Total

Durable
goods

Nondurable
goods

Services

Total
Total

Structures

Producers'
durable
equipment

Residential

1959

25 6

27 0

37 4

28 6

23 2

264

281

24 4

312

23 9

I960
1961
1962
1963
1964

26 0
26.3
26 9
27.2
27 7

27 5
27.7
28 2
28.6
291

37 7
38.3
391
39.7
40 4

291
29.3
29.6
30.1
30.5

23 9
24.4
24.8
25.2
25.6

26 7
26.6
26.8
26.8
27.1

28 4
28.2
28 6
28.9
29.2

24 2
24.0
241
24.4
24 7

321
32.2
32 4
32.6
32 8

24 0
24.0
24 0
23.8
24 1

28.4
29.4
30.3
31.8
33.4

29.7
30.6
31.4
32.7
34.1

40.6
41.3
42.3
43.9
45.2

31.1
32.2
32.9
34.3
35.9

26.1
26.9
27.8
29.0
30.2

27.9
29.1
30.1
31.4
33.3

29.6
30.5
31.5
32.9
34.7

25.4
26.3
27.2
28.6
30.5

32.9
33.6
34.7
36.0
37.7

24.9
25.9
26.9
28.4
30.4

1970
1971
1972
1973
1974

35.2
37.1
38.8
41.3
44.9

35.6
37.4
38.8
41.0
45.2

46.4
48.3
49.2
50.3
54.1

37.7
39.0
40.4
43.7
50.1

31.9
33.8
35.3
36.9
39.7

34.9
36.8
38.4
40.7
45.2

36.5
39.0
40.5
42.0
46.4

32.7
35.2
37.8
40.7
46.3

39.4
41.7
42.2
42.7
46.5

31.4
33.2
35.2
38.3
42.4

1975
1976
1977
1978
1979

49.2
52.3
55.9
60.3
65.5

48.9
51.8
55.4
59.4
64.7

59.2
62.4
65.2
69.1
74.1

54.2
56.4
59.8
64.1
71.1

43.0
46.2
50.0
54.0
58.3

51.3
54.5
58.9
64.7
71.2

53.3
56.9
61.3
66.5
72.7

52.0
54.7
59.2
65.2
72.5

54.1
58.2
62.4
67.2
72.9

46.6
49.6
54.6
61.3
68.0

1980
1981
1982
1983
1984

71.7
78.9
83.8
87.2
91.0

71.4
77.8
82.2
86.2
89.6

80.9
86.4
90.1
92.4
93.9

79.4
85.7
88.6
90.8
93.4

64.4
70.9
76.7
81.9
86.2

79.2
87.8
93.1
92.8
93.9

80.8
90.1
95.3
95.1
95.7

80.8
92.5
98.6
95.5
96.1

80.9
88.5
93.0
94.8
95.4

74.8
80.9
85.2
87.3
89.7

1985
1986
1987
1988
1989

94.4
96.9
100.0
103.9
108.5

93.1
96.0
100.0
104.2
109.3

95.4
96.9
100.0
102.0
104.2

95.9
96.1
100.0
103.7
109.3

90.8
95.7
100.0
105.1
110.6

95.3
97.6
100.0
103.2
105.9

96.6
98.4
100.0
102.8
105.2

98.0
98.5
100.0
104.6
108.9

95.7
98.4
100.0
101.9
103.4

92.0
95.8
100.0
104.2
107.8

1990
1991

113.2
117.8

115.0
120.0

105.7
107.6

115.9
120.1

116.7
122.8

108.2
109.1

107.3
108.2

112.3
114.3

104.9
105.4

110.7
111.8

I
V
I
V
I
V
IV
I
V
I
V
IV

85.0
88.4
92.3
95.5
98.0
101.2
105.5

83.8
87.6
90.7
94.6
97.0
101.6
106.1

90.6
93.3
94.4
95.9
97.8
101.0
103.1

89.4
91.8
94.2
97.0
96.3
101.5
105.6

79.0
83.7
87.7
92.9
97.3
101.9
107.1

93.1
92.9
94.8
96.1
98.6
101.0
104.4

95.3
95.0
96.4
97.3
99.2
100.7
104.0

97.5
95.1
97.2
98.5
98.8
101.2
106.3

93.8
94.9
96.0
96.5
99.5
100.5
102.8

86.0
88.0
90.7
93.1
97.3
101.5
105.3

1989 1
II
III
I
V

106.9
108.1
109.1
110.1

107.4
108.9
109.8
111.0

103.6
104.0
104.5
104.9

107.0
109.5
109.9
110.8

108.6
109.9
111.2
112.7

105.1
105.7
106.2
106.8

104.4
104.8
105.5
106.0

107.4
108.6
109.3
110.1

103.0
103.1
103.6
103.9

106.5
107.8
108.2
108.8

1990 1
II
III
I
V

111.3
112.6
113.9
115.0

112.7
114.0
115.7
117.6

105.4
105.5
105.8
106.1

113.3
114.3
116.6
119.3

114.2
115.8
117.6
119.3

107.5
107.8
108.7
108.9

106.5
106.8
107.8
108.2

111.2
111.9
112.7
113.3

104.1
104.3
105.3
105.7

110.2
110.6
111.1
111.0

1991 1
II
III
IV

116.5
117.5
118.2
118.9

118.6
119.5
120.4
121.4

106.7
107.3
108.0
108.3

119.4
119.9
120.2
120.8

120.8
122.1
123.4
124.7

109.4
109.3
109.1
108.6

108.7
108.5
108.0
107.4

113.9
114.2
114.8
114.4

106.2
105.8
104.9
104.5

111.3
111.6
112.5
111.8

1992 1
II
III

119.8
120.6
121.2

122.3
123.4
123.8

'08.6
109.4
109.7

121.4
122.2
122.9

126.1
127.4
127.7

108.3
108.4
108.0

107.1
106.9
106.0

113.9
114.2
114.9

104.2
103.9
102.5

111.7
112.3
113.4

1965
1966
1967
1968
1969

1982
1983
1984
1985
1986
1987
1988

,

.

.

See next page for conunuauon of rao/e.




352

TABLE B-3.—Implicit price deflators for gross domestic product, 1959-92—Continued
[Index numbers, 1987 = 100, except as noted; quarterly data seasonally adjusted]
Government purchases

Exports and
imports of goods
and services1

Federal

Year or quarter
Total
Exports

Total

Imports

National
defense

Nondefense

State
and
local

Final
sales of
domestic
product

Gross
domestic
purchases 2

Percent
change
from
preceding
period,
GDP
implicit
price
deflator 3

1959

28 0

23 4

20.8

215

19.9

25.6

25.4

2.8

1960
1961
1962
1963
1964

28 6
29.0
28 9
28.9
291

23 8
23.8
23 7
24.3
24 9

20.9
21.3
22 3
22.8
23 4

21.3
21.7
22 8
23.3
23 9

20.4
20.9
217
22.3
22.8

26.0
26.2
26 8
27.2
27.7

25.8
26.0
26 6
27.0
27.5

1.6
1.2
2.3
1.1
1.8

1965
1966
1967
1968
1969

30 0
31.0
31.8
32 3
33.3

25 3
25.8
26.0
26 2
26.7

24 0
25.0
26.3
27 9
29.6

24.6
25.5
26.5
281
29.6

23.5
24.6
26.1
111
29.6

28.3
29.3
30.2
31.7
33.3

28.2
29.2
30.0
31.4
33.0

2.5
3.5
3.1
5.0
5.0

1970
1971
1972
1973
1974

35.3
36.6
38.1
43.6
53.0

28.4
30.0
32.2
37.3
53.5

31.9
34.4
37.0
40.0
44.0

31.8
34.4
37.6
40.9
44.8

36.9
40.5
44.5

39.3
41.9
45.5

32.1
34.4
36.5
39.4
43.5

35.2
37.1
38.8
41.2
44.9

34.7
36.7
38.4
40.8
44.9

5.4
5.4
4.6
6.4
8.7

1975
1976
1977
1978
1979

58.5
61.2
64.3
68.9
78.0

58.5
60.5
66.4
70.7
83.1

48.4
51.8
55.4
59.6
65.1

49.3
52.6
56.2
60.4
66.0

48.5
51.9
55.6
59.8
65.8

51.2
54.1
57.7
61.7
66.4

47.9
51.2
54.9
59.1
64.5

49.2
52.2
55.7
60.1
65.4

49.2
52.3
56.1
60.5
66.0

9.6
6.3
6.9
7.9
8.6

1980
1981
1982
1983
1984

87.1
92 9
95.2
96.8
98.9

101.4
104 5
99.7
95.9
94.7

72.0
78 7
84.0
87.7
91.4

73.4
814
87.1
91.0
93.9

73.5
81 1
87.6
91.6
94.8

73.3
821
85.9
89.5
91.3

71.1
76 7
81.7
85.2
89.4

71.8
78.7
83.8
87.4
90.8

111
79.7
84.1
87.2
90.9

9.5
10.0
6.2
4.1
4.4

1985 .
1986
1987
1988
1989

97.7
96.9
100.0
105 3
107.7

91.9
93.2
100.0
105 1
107.8

95.0
97.4
100.0
103 6
107.8

96.9
98.6
100.0
102 6
106.8

97.3
98.6
100.0
103 0
106.6

95.7
98.6
100.0
101 4
107.3

93.4
96.4
100.0
104 3
108.6

94.3
96.9
100.0
103.9
108.5

93.9
96.5
100.0
103.9
108.5

3.7
2.6
3.2
3.9
4.4

1990
1991

109.2
110.9

111.4
110.5

112.2
115.9

111.2
115.2

110.8
114.5

112.0
117.1

112.9
116.4

113.2
117.8

113.4
117.7

4.3
4.1

1982: IV
1983 IV ...
1984- IV
1985: IV
1986: IV
1987: IV
1988: IV

94.7
98.2
98 7
97.7
97.4
101.6
106.6

98.5
95.4
93 6
94.2
93.6
102.6
106.0

85.8
87.9
92 7
96.2
98.3
100.9
104.8

89.0
89.9
95 0
98.1
98.8
100.2
103.6

89.6
91.7
95 5
98.7
98.7
100.3
103.9

87.7
84.3
93 7
96.4
99.2
100.1
102.6

83.4
86.4
90 9
94.8
97.8
101.5
105.7

85.2
88.6
921
95.5
97.9
101.3
105.6

85.3
88.4
91.9
95.3
97.5
101.4
105.5

1989-1
II
Ill
IV

107.8
107.9
107.6
107.4

107.6
108.8
106.9
107.7

106.7
107.5
108.1
109.0

106.0
106.6
106.8
107.7

106.1
106.4
106.4
107.5

105.8
107.1
107.8
108.4

107.2
108.2
109.0
109.9

106.9
108.1
109.0
110.0

106.9
108.2
109.0
110.0

5.4
4.6
3.8
3.7

108.2
108.4
109 3
110.9

109.8
108.0
1114
116.5

110.6
111.3
112 7
114.1

109.6
110.1
111 7
113.2

109.4
109.7
1112
113.1

110.4
111.2
113 2
113.3

111.2
112.1
113 4
114.8

111.3
112.6
113.9
115.1

111.5
112.6
114.0
115.7

4.4
4.8
4.7
3.9

1991:1....:
II
Ill
IV

111.1
110.9
110.7
111.0

112.8
110.1
109.3
109.8

115.1
115.4
116.3
116.9

114.5
114.3
115.5
116.6

113.9
113.3
114.7
116.2

116.2
116.8
117.6
117.6

115.5
116.1
116.8
117.1

116.4
117.4
118.3
118.9

116.6
117.3
118.0
118.7

5.3
3.5
2.4
2.4

1992:1
II
III

111.1
1110
111.0

108.4
109 1
107.4

117.7
118 7
119.2

118.6
119 3
120.0

118.1
1189
119.5

119.8
120 3
121.0

117.1
118.3
118.7

119.8
120.7
121.2

119.5
120.3
120.6

3.1
2.7
2.0

1990:1
II
Ill
IV

1
2
3

.. .

.

Excludes receipts and payments of factor income from or to rest of the world.
Gross domestic product (GDP) less exports of goods and services plus imports of goods and services.
Quarterly changes are at annual rates.

Note.—Separate deflators are not calculated for gross private domestic investment, change in business inventories, and net exports
of goods and services.
Source: Department of Commerce, Bureau of Economic Analysis.




353

TABLE B-4.—Changes in gross domestic product and personal consumption expenditures, and related
implicit price deflators and fixed-weighted price indexes,

1960-92

[Percent change from preceding period; quarterly data at seasonally adjusted annual rates]
Personal consumption expenditures

Gross domestic product
Year or quarter

Current
dollars

Constant
(1987)
dollars

Implicit
price
deflator

Fixedweighted price
index
(1987
weights)

Current
dollars

Constant
(1987)
dollars

Implicit
price
deflator

Fixedweighted price
index
(1987
weights)

I960
1961
1962
1963
1964

3.9
36
7.5
55
7.4

2.2
27
5.2
4.1
5.6

1.6
12
2.3
1.1
1.8

4.5
33
6.1
5.4
7.4

2.7
2.3
4.4
3.8
5.6

1.9
.7
1.8
1.4
1.7

1.3
.8
.6
.9
1.1

1965
1966
1967
1968
1969

8.4
95
5.8
92
7.9

55
59
2.6
42
2.7

2.5
35
3.1
50
5.0

7.8
83
5.8
9.8
8.0

5.6
51
3.1
5.2
3.7

2.1
3.0
2.6
4.1
4.3

1.0
1.8
2.6
3.8
3.8

53
8.6
10 0
118
8.1

0
2.9
51
52
-.6

54
5.4
4.6
64
8.7

71
8.3
9.6
10 5
9.4

2.4
3.3
5.6
45
-.6

4.4
5.1
3.7
5.7
10.2

4.4
4,4
3.3
4.6
9.3

1975
1976
1977
1978
1979

8.7
115
116
13.1
11.5

-.8
49
45
4.8
2.5

9.6
6.3
69
7.9
8.6

10.5
11.5
11.2
11.8
11.4

2.1
5.2
4.0
4.1
2.4

8.2
5.9
6.9
7.2
8.9

8.1
5.6
6.4
7.0
8.5

1980 .
1981
1982
1983 .
1984

88
119
3.9
81
10.9

_5
18
-2.2
39
6.2

9.5
10 0
6.2
41
4.4

3.9
3.4

10.4
10 2
6.9
9.6
9.0

-.1
1.2
1.1
4.6
4.8

10.4
9.0
5.7
4.9
3.9

10.3
8.6
5.4
4.3
3.7

69
57
6.4
79
7.2

32
29
3.1
39
2.5

37
26
3.2
39
4.4

3.5
28
3.1
39
4.4

8.4
69
7.1
8.0
6.9

4.4
3.6
2.8
3.6
1.9

3.9
3.1
4.2
4.2
4.9

3.8
3.0
4.1
4.3
4.9

5.2
2.8

.8
-1.2

4.3
4.1

4.5
4.0

6.4
3.7

1.2
-.6

5.2
4.3

5.3
4.4

1987:1
1!
Ill
IV .

6.8
81
72
9.9

3.0
51
40
5.9

3.3
29
33
3.6

3.4
2.8
3.3
3.6

5.5
9.4
8.3
4.4

4.8
3.9
-.1

5.9
4.5
4.1
4.5

5.6
4.4
4.3
4.5

1988:1
II
Ill
I
V

6.1
91
76
8.1

2.6
43
25
3.9

3.6
44
51
3.9

3.6
4.5
5.4
3.7

9.9
7.9
8.4
8.9

7.1
2.5
2.9
4.1

2.8
5.2
5.1
4.7

2.7
5.2
5.3
4.6

8.6
63
3.8
51

3.2
18
0
15

5.4
46
3.8
37

5.0
4.7
3.7
3.6

5.1
7.0
6.3
5.3

.1
1.1
2.9
.8

5.0
5.7
3.3
4.4

5.2
5.9
3.5
4.3

7.7
58
2.7
1

2.8
10
-1.6
-39

4.4
48
4.7
39

5.4
46
4.7
4.1

8.4
48
8.0
32

2.2
1
1.7
-3.1

6.3
4.7
6.1
6.7

6.4
4.4
6.4
6.8

1970
1971
1972
1973
1974

. .

1985 .
1986
1987
1988 .
1989
1990
1991 .

1989:1
II ..
Ill
IV

....

. .

.

1990:1
||
III
IV . .

.

1991:1.
||
III
I
V

.. .

18
52
4.0
28

-30
17
1.2
6

53
35
2.4
24

4.7
35
3.0
24

.4
54
4.4
3.0

-3.0
20
1.5
-.3

3.4
3.1
3.0
3.4

3.4
3.3
3.0
3.1

1992-1
II
Ill

.. .

62
4.3
5.3

29
1.5
3.4

31
2.7
2.0

3.6
2.9
2.1

8.4
3.5
5.2

5.1
-.1
3.7

3.0
3.6
1.3

3.5
3.5
2.6

Source: Department of Commerce, Bureau of Economic Analysis.




354

TABLE B-5.—Selected per capita product and income series in current and 1987 dollars, 1959-92
[Quarterly data at seasonally adjusted annual rates, except as noted]
Constant (1987) dollars

Current dollars
Year or

Personal consumption
expenditures

DisposGross
domes- Person- able
personal
tic
al
prod- income
income Total
uct

Gross Disposdomes- able
tic
Dura- Non- Serv- prod- personal
ble durable
uct income
goods goods ices

Population

Personal consumption
expenditures
Total

Dura- Non- Serv- sands) 1
ble durable
goods goods ices

1959

2,791

2,209

1,958

1,796

242

838

716 10,892

7,256

6,658

646

2,928 3,083

177,073

1960
1961
1962
1963
1964

2,840
2,894
3,063
3,186
3,376

2,264
2,321
2,430
2,516
2,661

1,994
2,048
2,137
2,210
2,369

1,839
1,869
1,953
2,030
2,149

240
228
252
273
296

847
857
878
895
936

752
784
823
861
917

10,903
11,014
11,405
11,704
12,195

7,264
7,382
7,583
7,718
8,140

6,698
6,740
6,931
7,089
7,384

638
595
644
688
733

2,915
2,926
2,964
2,977
3,065

3,145
3,218
3,323
3,423
3,586

180,760
183,742
186,590
189,300
191,927

1965
1966
1967
1968
1969

3,616
3,915
4,097
4,430
4,733

2,845
3,061
3,253
3,536
3,816

2,527
2,699
2,861
3,077
3,274

2,287
2,450
2,562
2,785
2,978

327
348
355
404
425

987
1,060
1,091
1,171
1,244

974
1,041
1,116
1,211
1,308

12,712
13,307
13,510
13,932
14,171

8,508
8,822
9,114
9,399
9,606

7,703
8,005
8,163
8,506
8,737

803
844
841
919
941

3,173
3,294
3,316
3,417
3,469

3,726
3,867
4,006
4,169
4,327

194,347
196,599
198,752
200,745
202,736

1970
1971
1972
1973
1974

4,928
5,283
5,750
6,368
6,819

4,052
4,302
4,671
5,184
5,637

3,521
3,779
4,042
4,521
4,893

3,152
3,372
3,658
4,002
4,337

416
468
528
585
575

1,318
1,364
1,454
1,602
1,780

1,418
1,540
1,676
1,814
1,982

14,013
14,232
14,801
15,422
15,185

9,875
10,111
10,414
11,013
10,832

8,842 896
9,022 970
9,425 1,073
9,752 1,164
9,602 1,062

3,497
3,494
3,601
3,670
3,552

4,449
4,558
4,751
4,917
4,988

205,089
207,692
209,924
211,939
213,898

1975
1976
1977
1978
1979

7,343
8,109
8,961
10,029
11,055

6,053
6,632
7,269
8,121
9,032

5,329
5,796
6,316
7,042
7,787

4,745
5,241
5,772
6,384
7,035

622
734
829
909
952

1,926
2,072
2,226
2,432
2,725

2,197
2,436
2,717
3,043
3,359

14,917
15,502
16,039
16,635
16,867

10,906
11,192
11,406
11,851
12,039

9,711
10,121
10,425
10,744
10,876

1,050
1,176
1,271
1,316
1,284

3,552
3,674
3,722
3,795
3,833

5,110
5,271
5,433
5,633
5,760

215,981
218,086
220,289
222,629
225,106

1980
1981...
1982
1983
1984

11,892
13,177
13,564
14,531
15,978

9,948 8,576 7,677 933
11,021 9,455 8,375 994
11,589 9,989 8,868 1,018
12,216 10,642 9,634 1,173
13,345 11,673 10,408 1,345

2,999
3,236
3,326
3,490
3,693

3,745
4,146
4,523
4,971
5,370

16,584
16,710
16,194
16,672
17,549

12,005
12,156
12,146
12,349
13,029

10,746
10,770
10,782
11,179
11,617

1,154
1,150
1,131
1,270
1,432

3,779
3,774
3,756
3,842
3,953

5,814
5,845
5,895
6,066
6,231

227,715
229,989
232,201
234,326
236,393

1985
1986
1987
1988
1989

16,933
17,735
18,694
19,994
21,224

14,170
14,917
15,655
16,630
17,706

3,855
3,956
4,163
4,381
4,647

5,849
6,269
6,742
7,284
7,737

17,944
18,299
18,694
19,252
19,556

13,258
13,552
13,545
13,890
14,005

12,015
12,336
12,568
12,903
13,029

1,552
1,670
1,662
1,749
1,781

4,019
4,118
4,163
4,223
4,251

6,444
6,548
6,742
6,930
6,997

238,510
240,691
242,860
245,093
247,397

1990
1991

22,092 18,660 16,174 14,996 1,857
22 466 19 106 16 658 15 384 1 765

1982: IV
1983: IV
1984: IV
1985.1V
1986:1V
1987: IV
1988: IV

13,709
15,085
16,310
17,296
17,953
19,213
20,506

11,786
12,613
13,668
14,440
15,102
16,076
17,053

10,189
11,033
11,925
12,565
13,121
13,907
14,850

9,134
9,980
10,649
11,445
12,101
12,819
13,814

1,059
1,266
1,383
1,480
1,684
1,677
1,841

3,378
3,572
3,742
3,924
3,990
4,223
4,495

4,696
5,143
5,524
6,040
6,428
6,919
7,477

16,132
17,062
17,680
18,102
18,328
18,977
19,429

12,154
12,591
13,145
13,278
13,522
13,685
13,996

10,895
11,390
11,739
12,095
12,472
12,615
13,020

1,169
1,357
1,466
1,544
1,721
1,660
1,785

3,779
3,892
3,975
4,046
4,144
4,162
4,255

5,948
6,141
6,298
6,505
6,607
6,792
6,979

233,060
235,146
237,231
239,387
241,550
243,745
246,004

1989:1
I
I
Il
l
IV

20,893
21,170
21,312
21,519

17,466
17,639
17,720
17,995

15,133
15,214
15,322
15,558

13,959
14,165
14,345
14,491

1,829
1,852
1,901
1,845

4,548
4,641
4,671
4,725

7,582
7,672
7,773
7,921

19,545
19,589
19,536
19,554

14,090
13,967
13,951
14,015

12,997
13,003
13,061
13,053

1,766
1,782
1,819
1,759

4,252
4,238
4,249
4,263

6,979
6,983
6,993
7,031

246,488
247,026
247,701
248,372

1990:1
I
I
Il
l
IV

21,874
22,130
22,211
22,152

18,365
18,595
18,748
18,928

15,917
16,092
16,242
16,443

14,752
14,887
15,133
15,209

1,920
1,857
1,850
1,803

4,818
4,843
4,935
4,997

8,014
8,187
8,348
8,409

19,647
19,646
19,507
19,254

14,128
14,120
14,038
13,988

13,094
13,063
13,080
12,938

1,822
1,760
1,749
1,699

4,252
4,236
4,231
4,189

7,021
7,067
7,100
7,049

248,931
249,558
250,303
251,050

1991:1
I
I
Il
l
IV
1992:1
I
I
Il
l

22,194
22,422
22,577
22,671

18,884
19,050
19,151
19,337

16,433
16,604
16,706
16,885

15,184
15,345
15,468
15,537

1,746
1,749
1,790
1,775

4,947
4,971
4,961
4,931

8,491
8,625
8,717
8,831

19,058
19,090
19,094
19,066

13,861
13,891
13,876
13,913

12,808
12,838
12,848
12,803

1,637
1,630
1,658
1,639

4,144
4,147
4,129
4,081

7,027
7,061
7,062
7,082

251,687
252,329
253,053
253,776

4,126 7,104
4,099 7,108
4,113 7,141

254,388
255,054
255,786

,

12,339
13,010
13,545
14,477
15,307

11,184
11,843
12,568
13,448
14,241

1,480
1,619
1,662
1,783
1,857

22,958 19,578 17,143 15,814 1,845
23,141 19,717 17,297 15,907 1,845
23,373 19,790 17,332 16,063 1,887

4,899 8,240 19,513 14,068 13,044 1,757
4 952 8 666 19 077 13 886 12 824 1 641

5,008 8,960 19,159 14,017 12,930 1,700
5,009 9,053 19,182 14,021 12,893 1,686
5,054 9,122 19,288 13,998 12,973 1,719

4,227 7,059 249,961
4125 7 058 252 711

1
Population of the United States including Armed Forces overseas; includes Alaska and Hawaii beginning 1960. Annual data are
averages of quarterly data. Quarterly data are averages for the period.
Source.- Department of Commerce (Bureau of Economic Analysis and Bureau of the Census).




355

TABLE B-6.—Gross domestic product by major type of product, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]

Goods l

Year or
quarter

Gross
domestic
product

Final
sales of
domestic
product

Change
in
business
inventories

Durable goods

Total

Total

Final
sales

Change
in
business
inventories

Final
sales

Change
in
business
inventories

Nondurable goods
Change

Serv-

in
Final
sales

Structures

Auto
output

business
inventories

1959

494.2

490.0

4.2

250.8

246.6

4.2

91.1

3.1

155.5

1.1

181.7

61.7

19.4

1960
1961
1962
1963
1964

513.4
531.8
571.6
603.1
648.0

510.1
528.9
565.5
597.5
643.0

3.2
2.9
6.1
5.7
5.0

257.1
260.4
281.5
293.2
313.5

253.9
257.4
275.4
287.5
308.5

3.2
2.9
6.1
5.7
5.0

93.8
93.1
103.4
110.0
119.6

1.6
-.1
3.4
2.7
4.0

160.1
164.3
172.0
177.5
188.9

1.6
3.0
2.7
3.0
1.0

195.1
208.6
223.1
238.1
256.9

61.1
62.8
67.0
71.9
77.6

21.3
17.8
22.4
25.1
25.9

1965
1966
1967
1968
1969

702.7
769.8
814.3
889.3
959.5

693.0
756.0
803.8
880.2
949.8

9.7
13.8
10.5
9.1
9.7

342.9
380.1
395.1
427.4
456.6

333.2
366.3
384.6
418.3
446.8

9.7
13.8
10.5
9.1
9.7

132.4
147.9
154.5
169.1
180.1

6.7
10.2
5.5
4.7
6.4

200.8
218.5
230.2
249.1
266.8

3.0
3.6
5.0
4.4
3.3

276.0
302.8
330.7
363.0
395.8

83.8
86.9
88.5
98.9
107.1

31.1
30.2
27.8
35.0
34.7

1970
1971
1972
1973
1974

1,010.7
1,097.2
1,207.0
1,349.6
1,458.6

1,008.4
1,089.2
1,197.1
1,331.9
1,444.4

2.3
8.0
9.9
17.7
14.3

467.8
493.0
537.4
616.6
662.8

465.6
485.0
527.5
598.9
648.5

2.3
8.0
9.9
17.7
14.3

182.1
189.4
209.7
242.0
257.1

-.1
2.8
7.2
15.0
11.2

283.5
295.5
317.8
356.9
391.4

2.3
5.2
2.7
2.8
3.1

434.3
477.0
523.6
571.0
631.3

108.6
127.2
145.9
161.9
164.5

28.5
38.9
41.4
45.9
38.8

1975
1976
1977
1978
1979

1,585.9
1,768.4
1,974.1
2,232.7
2,488.6

1,591.5
1,751.7
1,949.4
2,204.8
2,475.9

-5.7
16.7
24.7
27.9
12.8

720.8
715.1
782.0
798.8
855.7
880.4
989.1 961.2
1,100.2 1,087.5

-5.7
16.7
24.7
27.9
12.8

288.8
323.6
368.3
416.9
474.5

-7.0
10.3
9.7
20.3
9.6

432.0
458.4
487.4
544.3
613.0

1.3
6.4
15.0
7.6
3.1

706.9
782.2
870.4
975.5
1,079.6

163.8
187.5
223.3
268.1
308.8

40.3
55.1
64.2
67.9
66.2

1980
1981
1982
1983
1984

2,708.0
3,030.6
3,149.6
3,405.0
3,777.2

2,717.5
3,005.2
3,165.5
3,410.6
3,706.1

-9.5
25.4
-15.9
-5.5
71.1

1,176.2
1,324.6
1,315.0
1,407.3
1,591.9

1,185.7
-9.5
1,299.2
25.4
1,330.9 - 1 5 . 9
1,412.8 - 5 . 5
71.1
1,520.8

502.1
544.2
541.6
579.4
647.0

-2.6
6.2
-16.0
5.5
44.9

-6.8
683.6
19.2
755.0
.1
789.3
833.4 - 1 1 . 0
26.2
873.8

1,215.4
1,357.4
1,494.2
1,636.3
1,770.7

316.4
348.6
340.4
361.5
414.7

59.2
68.3
65.3
88.3
104.2

1985
1986
1987
1988
1989

4,038.7
4,268.6
4,539.9
4,900.4
5,250.8

4,014.1
4,260.0
4,513.7
4,884.2
5,217.5

24.6
8.6
26.3
16.2
33.3

1,652.6
1,705.3
1,794.5
1,942.0
2,097.0

1,628.0
1,696.7
1,768.2
1,925.7
2,063.6

24.6
8.6
26.3
16.2
33.3

704.8
730.2
753.5
835.6
891.2

8.6
1.6
21.6
24.3
25.2

923.2
966.5
1,014.7
1,090.1
1,172.5

16.0
7.1
4.7
-8.1
8.1

1,939.0
2,097.3
2,267.2
2,460.9
2,642.1

447.1
466.0
478.2
497.5
511.7

115.8
120.4
118.9
129.1
135.1

1990
1991

5,522.2
5,677.5

5,515.9
5,687.7

6.3
-10.2

2,166.4 2,160.0
2,182.5 2,192.7

6.3
-10.2

920.6
907.6

-.9
-19.2

1,239.5
1,285.1

7.2
9.0

2,846.4
3,030.2

509.4
464.7

129.7
119.7

IV..
IV..
IV..
IV..
IV..
IV..
IV..

3,195.1
3,547.3
3,869.1
4,140.5
4,336.6
4,683.0
5,044.6

3,241.4
3,527.1
3,818.1
4,107.9
4,355.4
4,623.7
5,027.3

-46.3
20.2
51.0
32.6
-18.8
59.3
17.3

1,302.2
1,483.0
1,617.5
1,673.7
1,714.5
1,865.4
2,007.0

1,348.5 - 4 6 . 3
1,462.8
20.2
1,566.5
51.0
1,641.1
32.6
1,733.3 - 1 8 . 8
1,806.1
59.3
1,989.7
17.3

-5.2
-5.3
12.5
21.7
-7.0
981.8
22.2
1,036.9
1,128.7 - 1 8 . 0

1,553.3
1,686.1
1,824.7
2,008.9
2,154.1
2,327.6
2,528.5

339.5
378.2
426.9
457.9
468.1
490.1
509.1

63.2
101.9
110.4
115.1
122.5
120.9
136.1

1989:1
II...
III..
IV..

5,150.0
5,229.5
5,278.9
5,344.8

5,106.2
5,189.7
5,259.3
5,314.6

43.7
39.8
19.6
30.2

2,060.9
2,104.1
2,106.9
2,115.9

2,017.2
2,064.3
2,087.3
2,085.7

43.7
39.8
19.6
30.2

1990-.I

5,445.2
5,522.6
5,559.6
5,561.3

5,437.1
5,484.9
5,549.2
5,592.3

8.1
37.7
10.4
-31.0

2,151.6
2,180.0
2,178.0
2,155.8

2,143.5
2,142.3
2,167.6
2,186.8

1991:1..

5,585.8
5,657.6
5,713.1
5,753.3

5,614.4
5,679.4
5,712.9
5,744.2

-28.5
-21.8
.2
9.2

2,158.3
2,179.1
2,195.1
2,197.6

1992:1

5,840.2
5,902.2
5,978.5

5,855.9
5,894.1
5,963.5

-15.8
8.1
15.0

1982:
1983:
1984:
1985:
1986:
1987:
1988:

II....
III...

550.6 - 4 1 . 1
25.5
620.5
38.5
676.3
10.9
705.7
751.5 - 1 1 . 9
769.3
37.1
861.0
35.3

798.0
842.3
890.2
935.4

40.2
17.0
10.6
33.0

1,149.9
1,171.2
1,177.0
1,191.8

3.5
22.8
9.0
-2.8

2,576.8
2,616.7
2,659.9
2,715.2

512.3
508.7
512.1
513.7

140.3
137.3
131.9
131.0

8.1
37.7
10.4
-31.0

-1.3
936.1
10.7
914.5
919.5
10.3
912.1 - 2 3 . 1

1,207.4
1,227.8
1,248.1
1,274.6

9.4
27.0
.2
-7.9

2,765.1
2,826.6
2,875.6
2,918.4

528.5
516.1
506.0
487.1

129.5
132.9
139.0
117.4

2,186.8
2,200.9
2,194.9
2,188.4

-28.5
-21.8
.2
9.2

897.3
916.8
910.8
905.7

-35.4
-26.5
-7.0
-8.1

1,289.5
1,284.1
1,284.1
1,282.7

6.8
4.8
7.2
17.3

2,963.3
3,013.8
3,053.6
3,090.3

464.3
464.7
464.4
465.5

112.6
118.8
125.0
122.3

2,217.8 2,233.6
2,241.3 2,233.2
2,273.4 2,258.4

-15.8
8.1
15.0

923.6 - 1 9 . 3
9.5
932.3
2.7
943.8

1,310.0
1,300.8
1,314.6

3.5
-1.4
12.3

3,142.2
3,173.4
3,217.8

480.1
487.6
487,3

125.1
135.0
135.0

867.2
893.2
910.3
893.9

1
Exports and imports of certain goods, primarily military equipment purchased and sold by the Federal Government, are included in
services.
Source: Department of Commerce, Bureau of Economic Analysis.




356

TABLE B-7.—Gross domestic product by major type of product in 1987 dollars, 1959-92
[Billions of 1987 dollars; quarterly data at seasonally adjusted annual rates]
Goods »

Year or
quarter

Gross
domestic
product

Final
sales of
domestic
product

Change
in
business
inventories

Total

Total

Final
sales

Durable goods
Change
in
business
inventories

Final
sales

Change
in
business
inventories

Nondurable goods

Final
sales

Change
in
business
inventories

Services 1

Struc-

Auto
output

1959

1,928.8

1,915.2

13.6

825.2

811.6

13.6

273.8

8.6

537.8

5.0

843.7

259.9

59.5

1960
1961
1962
1963
1964

1,970.8
2,023.8
2,128.1
2,215.6
2,340.6

1,962.7
2,015.6
2,112.5
2,199.6
2,324.9

8.1
7.2
15.6
16.0
15.7

835.3
840.9
889.6
914.9
967.6

827.1
833.7
874.0
898.9
952.0

8.1
7.2
15.6
16.0
15.7

277.8
273.5
296.5
310.4
334.3

4.6
-.3
8.6
7.5
11.3

549.3
560.2
577.5
588.5
617.6

3.5
7.5
7.0
8.6
4.4

877.3
916.7
956.8
999.9
1,052.6

258.2
266.1
281.7
300.8
320.4

63.8
53.1
63.3
68.9
69.5

1965
1966
1967
1968
1969

2,470.5
2,616.2
2,685.2
2,796.9
2,873.0

2,445.4
2,579.5
2,657.5
2,773.2
2,848.2

25.1
36.7
27.6
23.6
24.8

1,033.0
1,113.3
1,129.4
1,168.9
1,193.9

1,007.9
1,076.6
1,101.7
1,145.3
1,169.1

25.1
36.7
27.6
23.6
24.8

364.1
399.4
413.7
430.4
438.4

18.3
27.1
14.5
12.8
15.7

643.8
677.2
688.0
714.9
730.7

6.9
9.6
13.1
10.9
9.1

1,102.1
1,168.4
1,226.6
1,277.8
1,324.6

335.4
334.5
329.3
350.1
354.5

83.2
80.4
72.4
86.6
82.9

1970
1971
1972
1973
1974

2,873.9
2,955.9
3,107.1
3,268.6
3,248.1

2,868.0
2,935.2
3,084.5
3,230.9
3,217.2

5.9
20.8
22.5
37.7
30.9

1,173.0
1,182.0
1,251.0
1,349.8
1,328.2

1,1671
1,161.3
1,228.4
1,312.1
1,297.3

5.9
20.8
22.5
37.7
30.9

428.0
419.2
458.4
528.0
524.6

-.9
8.9
16.2
31.2
19.6

739.1
742.1
770.0
784.1
772.7

6.9
11.9
6.4
6.5
11.3

1,362.0
1,401.8
1,454.1
1.508.3
1,553.9

338.9
372.1
401.9
410.4
366.1

65.4
85.3
89.9
98.7
79.0

1975
1976
1977
1978
1979

3,221.7
3,380.8
3,533.3
3,703.5
3,796.8

3,235.6 - 1 3 . 9
25.5
3,355.3
34.3
3,499.0
37.2
3,666.3
13.6
3,783.2

1,291.8
1,372.7
1,436.9
1,507.3
1,537.1

1,305.7 - 1 3 . 9
1,347.2
25.5
1,402.6
34.3
1,470.1
37.2
1,523.5
13.6

521.6 - 1 1 . 5
17.0
540.6
15.6
583.6
28.7
623.7
11.7
654.1

784.1
806.6
819.0
846.4
869.3

-2.5
8.5
18.7
8.5
1.9

1,602.2
1,649.1
1,701.2
1,770.6
1,821.7

327.7
359.0
395.2
425.6
438.0

74.8
96.8
106.0
104.2
94.8

1980
1981
1982
1983
1984

3,776.3
3,843.1
3,760.3
3,906.6
4,148.5

-8.3
3,784.6
3,818.6
24.6
3,777.8 - 1 7 . 5
3,902.2
4.4
4,080.6
67.9

1,509.5
1,547.4
1,468.7
1,531.7
1,667.7

1,517.7 - 8 . 3
1,522.9
24.6
1,486.2 - 1 7 . 5
1,527.3
4.4
1,599.8
67.9

626.4
619.4
578.9
601.5
655.1

-4.3
6.3
-16.0
6.3
45.7

891.4
903.4
907.3
925.8
944.7

-4.0
18.3
-1.5
-1.8
22.3

1,864.3
1,895.7
1,922.8
1,976.8
2,033.1

402.5
400.0
368.8
398.1
447.7

79.1
86.8
79.2
101.7
115.8

1985
1986
1987
1988
1989

4,279.8
4,404.5
4,539.9
4,718.6
4,838.0

4,257.6
4,395.9
4,513.7
4,698.6
4,808.3

22.1
8.5
26.3
19.9
29.8

1,695.0
1,740.1
1,794.5
1,892.5
1,961.7

1,672.9
1,731.6
1,768.2
1,872.6
1,932.0

22.1
8.5
26.3
19.9
29.8

703.4
731.5
753.5
833.1
868.1

9.3
1.9
21.6
23.3
23.8

969.5
1,000.1
1,014.7
1,039.5
1,063.9

12.9
6.7
4.7
-3.4
6.0

2,115.3
2,185.0
2,267.2
2,349.7
2,403.9

469.4
479.3
478.2
476.4
472.5

125.0
124.4
118.9
127.3
128.0

1990
1991

4,877.5
4,821.0

4,871.3
4,830.3

6.2
-9.3

1,956.8 1,950.7
1,911.2 1,920.5

6.2
-9.3

881.0
851.6

-.7
-17.5

1,069.7
1,069.0

6.9
8.2

2,463.0
2,497.6

457.7
412.2

121.7
109.3

IV..
IV..
IV..
IV..
IV..
IV..
IV..

3,759.6
4,012.1
4,194.2
4,333.5
4,427.1
4,625.5
4,779.7

3,804.5
3,982.8
29.3
4,146.2
47.9
4,303.3
30.2
4,447.2 - 2 0 . 1
4,565.6
59.9
4,758.7
20.9

1,447.7
1,597.8
1,680.9
1,708.1
1,741.8
1,850.8
1,926.0

1,492.6 - 4 4 . 9
1,568.5
29.3
1,633.0
47.9
1,677.9
30.2
1,761.8 - 2 0 . 1
1,790.9
59.9
1,905.0
20.9

-3.0
911.6
2.6
929.1
8.3
955.3
18.3
974.9
1,011.4 - 8 . 2
23.0
1,021.5
1,052.2 - 1 2 . 5

1,942.1
1,998.3
2,058.1
2,148.8
2,208.2
2,290.9
2,372.4

369.8
416.0
455.1
476.5
477.2
483.8
481.3

75.3
113.7
122.4
122.4
124.1
120.3
134.6

1989:1....
IV..

4,817.6
4,839.0
4,839.0
4,856.7

4,776.3
4,802.0
4,823.0
4,831.8

41.2
36.9
16.0
24.9

1,956.8
1,973.9
1,959.4
1,956.9

1,915.5
1,937.0
1,943.4
1,932.0

41.2
36.9
16.0
24.9

853.6
874.1
882.3
862.3

38.5
15.9
9.6
31.0

1,061.9
1,062.8
1,061.2
1,069.6

2.7
21.0
6.4
-6.1

2,382.3
2,394.5
2,408.5
2,430.0

478.4
470.5
471.1
469.8

133.3
130.4
124.6
123.8

1990:1....
II...
III..
IV..

4,890.8
4,902.7
4,882.6
4,833.8

7.5
4,883.3
32.8
4,870.0
11.2
4,871.4
4,860.6 - 2 6 . 8

1,972.0
1,975.3
1,957.7
1,922.3

1,964.5
7.5
1,942.6
32.8
1,946.5
11.2
1,949.1 - 2 6 . 8

900.1
879.1
877.1
867.6

-1.3
10.0
9.5
-21.2

1,064.4
1,063.4
1,069.4
1,081.5

22.7
1.7
-5.6

2,440.8
2,462.6
2,472.1
2,476.5

478.0
464.8
452.8
435.1

122.6
124.6
129.6
110.2

1991: 1 ...
II...
III..

4,796.7
4,817.1
4,831.8
4,838.5

4,821.8 — 25.1
4,837.4 - 2 0 . 4
4,831.2
.6
4,830.9
7.5

1,903.1
1,907.6
1,918.3
1,915.7

1,928.2 - 2 5 . 1
1,928.0 - 2 0 . 4
1,917.7
.6
1,908.2
7.5

847.4 - 3 2 . 2
860.2 - 2 4 . 0
851.7
-6.4
846.8
-7.4

1,080.8
1,067.8
1,066.0
1,061.3

7.1
3.6
7.0
15.0

2,480.5
2,497.3
2,503.7
2,509.0

413.2
412.1
409.8
413.7

104.8
110.7
112.2
109.4

4,873.7
4,892.4
4,933.7

4,886.3 - 1 2 . 6
7.8
4,884.6
15.0
4,918.7

1,924.0 1,936.6 - 1 2 . 6
1,936.7 1,929.0
7.8
1,966.2 1,951.3
15.0

-17.3
8.6
3.3

1,0770
1,063.3
1,071.1

4.7
-.8
11.6

2,520.1
2,522.4
2,537.5

429.5
433.3
429.9

111.2
121.4
118.6

1982:
1983:
1984:
1985:
1986:
1987:
1988:

IV..
1992:1....
II...
III..

580.9 - 4 1 . 9
639.4
26.7
677.6
39.7
703.1
11.9
750.4 - 1 1 . 9
769.4
36.9
852.9
33.5

859.6
865.7
880.2

1
Exports and imports of certain goods, primarily military equipment purchased and sold by the Federal Government, are included in
services.

Source: Department of Commerce, Bureau of Economic Analysis.




357

T A B L E B-8.—Gross domestic product by sector, 1939-92

[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Business J
Year or quarter

Gross
domestic
product

Nonfarm*

Total »

Farm

Statistical
discrepancy

Households
and
institutions

General government2

Total

Federal

State
and
local

1959

494 2

436 9

419 8

18 9

18

12 4

44 9

217

231

1960
1961
1962
1963
1964

513 4
531.8
571.6
603.1
648.0

4514
465.7
500.5
527.1
565.8

434 7
447.9
481.4
508.7
547.2

19 8
20.1
20.2
20.4
19.3

31

481

-2.2
-1.0
-2.0
-.7

13 9
14.5
15.6
16.7
17.9

51.6
55.5
59.3
64.4

22.6
23.7
25.2
26.5
28.5

25.5
27.9
30.2
32.9
35.9

1965
1966
1967
1968
1969

702.7
769.8
814.3
889.3
959.5

614.1
670.1
703.5
765.4
822.5

592.9
644.4
680.5
742.8
799.9

21.9
22.9
22.2
22.7
25.2

-.7
2.8
.8
-.1
-2.6

19.3
21.3
23.4
26.1
29.5

69.3
78.4
87.4
97.8
107.5

30.0
34.3
37.9
41.9
44.9

39.3
44.1
49.5
55.9
62.6

1970
1971
1972
1973
1974

1,010.7
1,097.2
1,207.0
1,349.6
1,458.6

858.7
931.2
1,025.3
1,151.5
1,242.7

832.5
900.0
991.7
1,102.2
1,193.9

26.2
28.1
32.6
49.8
47.4

.0
3.1
1.1
-.5
1.4

32.4
35.6
39.0
43.0
47.2

119.5
130.4
142.6
155.1
168.8

48.5
51.1
54.9
57.2
61.1

71.1
79.3
87.7
97.9
107.6

1975
1976
1977
1978
1979

1,585.9
1,768.4
1,974.1
2,232.7
2,488.6

1,346.1
1,507.4
1,691.1
1,921.1
2,147.9

1,291.4
1,450.6
1,633.0
1,858.7
2,069.7

48.8
46.4
47.2
54.7
64.5

6.0
10.4
10.9
7.6
13.8

52.0
57.1
62.4
71.0
78.9

187.7
203.9
220.6
240.7
261.9

66.6
71.0
75.6
81.8
87.1

121.1
132.9
145.0
158.9
174.8

1980
1981
1982
1983
1984

2,708.0
3,030.6
3,149.6
3,405.0
3,777.2

2,328.9
2,611.7
2,692.1
2,914.8
3,251.1

2,259.2
2,530.9
2,634.4
2,855.5
3,191.6

56.1
69.9
65.1
49.2
68.5

13.6
10.9
-7.4
10.2
-9.0

89.3
100.5
111.6
121.3
132.0

289.8
318.4
345.8
368.9
394.1

96.3
107.7
117.3
125.0
132.2

193.5
210.7
228.5
243.9
261.9

1985
1986
1987
1988
1989

4,038.7
4,268.6
4,539.9
4,900.4
5,250.8

3,473.5
3,665.7
3,890.8
4,201.0
4,495.9

3,420.3
3,601.5
3,849.5
4,161.8
4,413.7

67.1
62.9
66.0
67.6
81.1

-13.9
1.2
-24.8
-28.4
1.1

141.7
153.3
170.5
187.6
206.1

423.6
449.6
478.7
511.7
548.8

140.3
143.7
151.4
159.8
169.1

283.2
305.9
327.3
351.9
379.8

1990
1991

5,522.2
5,677.5

4,702.8
4,803.8

4,612.4
4,702.8

85.0
79.1

5.4
21.9

227.8
246.1

591.6
627.6

180.3
192.0

411.4
435.6

IV
IV
IV
IV
IV
IV
IV

3,195.1
3,547.3
3,869.1
4,140.5
4,336.6
4,683.0
5,044.6

2,724.0
3,046.6
3,330.3
3.561.2
3,718.3
4,016.6
4,327.3

2,674.1
2,986.9
3,283.2
3,501.5
3,656.0
3,970.9
4,291.9

60.0
45.8
67.5
65.7
64.3
70.6
60.8

-10.1
13.8
-20.5
-5.9
-2.0
-24.9
-25.4

115.5
125.1
135.6
145.6
157.8
177.6
194.3

355.6
375.6
403.2
433.6
460.5
488.8
523.0

121.1
126.2
134.1
142.4
144.9
153.2
161.3

234.5
249.4
269.2
291.2
315.6
335.6
361.7

1989 1
II
III
IV

5,150.0
5,229.5
5,278.9
5,344.8

4,413.9
4,481.5
4,518.2
4,569.8

4,342.9
4,397.6
4,437.6
4,476.6

82.5
82.3
79.4
80.4

-11.4
1.7
1.2
12.8

199.3
203.7
208.2
213.3

536.7
544.3
552.5
561.7

167.9
168.5
169.3
170.6

368.8
375.8
383.3
391.2

1990 1
II
III
IV

5,445.2
5,522.6
5,559.6
5,561.3

4,649.1
4,709.3
4,732.9
4,719.9

4,547.5
4,619.8
4,634.0
4,648.2

85.4
88.2
85.5
80.8

16.1
1.2
13.4
-9.1

218.8
225.0
231.3
235.9

577.3
588.4
595.3
605.5

177.8
180.5
179.8
182.9

399.5
407.9
415.6
422.6

1991 1
II
III
IV

5,585.8
5,657.6
5,713.1
5,753.3

4,726.2
4,786.7
4,835.2
4,867.2

4,635.8
4,677.1
4,725.5
4,772.9

77.0
82.5
79.2
77.9

13.4
27.1
30.5
16.4

237.4
244.1
249.3
253.5

622.2
626.8
628.7
632.7

193.3
192.4
191.3
191.1

428.9
434.5
437.4
441.6

1992 1
II
Ill

5,840.2
5,902.2
5,978.5

4,937.4
4,988.6
5,057.5

4,826.9
4,877.6
4,940.0

81.6
80.1
82.5

29.0
30.9
35.1

258.3
261.5
264.8

644.4
652.2
656.2

198.2
198.7
199.0

446.2
453.5
457.2

1982
1983
1984
1985
1986
1987
1988

1

Includes compensation of employees in government enterprises.
Compensation of government employees.
Source: Department of Commerce, Bureau of Economic Analysis.
2




358

TABLE B-9.—Gross domestic product by sector in 1987 dollars,

1959-92

[Billions of 1987 dollars; quarterly data at seasonally adjusted annual rates]
Business*
Gross
domestic
product

Year or quarter

Nonfarm1

TotalJ

Farm

Statistical
discrepancy

Households
and
institutions

General government2
Total

Federal

State
and
local

1959

1,928,8

1,582.1

1,543.4

45.2

-6.5

80.1

266.5

130.5

136.0

1960
1961
1962
1963
1964

1,970.8
2,023.8
2,128.1
2,215.6
2 340 6

1,609.5
1,650.7
1,740.8
1,818.8
1930 4

1,574.3
1,611.6
1,698.0
1,778.6
1886 8

46.4
46.9
46.3
47.1
46 0

-11.2
-7.8
-3.6
-6.8
-24

86.5
87.5
91.1
93.6
96 5

274.8
285.6
296.2
303.2
313 7

132.1
135.3
141.6
140.9
1417

142.7
150.3
154.7
162.3
172.0

1965
1966
1967
1968
1969

2 470 5
2,616.2
2 685 2
2,796.9
2 873.0

2,045 3
2,162.6
2 208 0
2,303.0
2,366.2

2 0017
2,109.1
2158 8
2,258.0
2,326.7

461
44.5
46 5
45.1
46.8

-25
9.0
2.6
-.1
-7.2

100 4
104.7
108 3
111.8
115.5

324 8
348.9
368 9
382.1
391.3

142.3
155.4
168.1
170.7
171.2

182.5
193.5
200.8
211.4
220.1

1970
1971
1972..
1973
1974

2 873.9
2,955.9
3,107.1
3,268.6
3 2481

2 368.4
2,447.4
2,594.8
2,749.7
2 719 6

2 318 9
2,388.6
2,541.3
2,702.0
2 666 0

49.5
50.5
50.7
48.6
50 7

.0
8.3
2.8
-1.0
30

114.1
116.7
120.0
123.2
124.3

391.4
391.8
392.2
395.7
404.1

161.6
152.4
143.7
138.0
137.9

229.8
239.5
248.6
257.7
266.2

1975
1976
1977
1978
1979

3.221.7
3,380.8
3,533.3
3,703.5
3,796.8

2,684.6
2,840.1
2,987.8
3,144.2
3,226.0

2,619.6
2,768.1
2,914.6
3,083.8
3,155.0

53.1
52.5
53.8
48.2
50.4

11.9
19.5
19.4
12.2
20.6

128.0
128.6
129.8
135.1
138.3

409.1
412.0
415.6
424.2
432.5

137.1
137.0
137.0
138.4
137.5

272.0
275.0
278.6
285.8
295.0

1980
1981
1982
1983
1984

3,776.3
3,843.1
3,760.3
3,906.6
4,148.5

3,193.4
3,253.6
3,167.3
3,308.2
3,541.7

3,123.4
3,179.2
3,115.8
3,243.1
3,496.4

51.0
60.8
60.2
53.7
55.1

19.0
13.6
-8.7
11.5
-9.8

142.6
145.6
148.9
151.0
154.9

440.3
443.9
444.2
447.4
451.9

139.2
140.9
142.4
144.8
146.4

301.1
303.0
301.8
302.6
305.4

1985
1986
1987
1988
1989

4,279.8
4,404.5
4,539.9
4,718.6
4,838.0

3,658.1
3,768.3
3,890.8
4,050.6
4,150.5

3,608.6
3,702.8
3,849.5
4,014.8
4,083.4

64.2
64.3
66.0
63.2
66.2

-14.7
1.3
-24.8
-27.4
.9

159.9
166.3
170.5
180.6
190.5

461.8
469.9
478.7
487.4
497.0

148.6
149.0
151.4
153.5
154.2

313.2
320.8
327.3
333.9
342.7

1990
1991

4,877.5
4,821.0

4,170.1
4,103.9

4,094.7
4,015.8

70.5
69.4

4.9
18.7

197.7
202.4

509.8
514.7

156.3
157.1

353.5
357.5

IV
IV
IV
IV
IV
IV
IV

3,759.6
4,012.1
4,194.2
4,333.5
4,427.1
4,625.5
4,779.7

3,166.3
3,411.5
3,583.0
3,706.1
3,786.7
3,969.9
4,104.2

3,116.9
3,349.0
3,548.9
3,646.8
3,724.4
3,925.5
4,074.5

61.1
47.0
56.1
65.5
64.4
69.0
53.8

-11.7
15.5
-22.0
-6.2
-2.1
-24.6
-24.1

149.6
151.7
156.8
162.3
166.9
173.2
184.7

443.8
448.9
454.4
465.1
473.5
482.3
490.7

143.2
145.2
147.1
148.7
149.8
152.8
154.0

300.6
303.7
307.3
316.5
323.7
329.5
336.7

1989 1
II
II!
IV

4,817.6
4,839.0
4,839.0
4,856.7

4,137.2
4,153.9
4,149.3
4,161.9

4,082.5
4,083.8
4,082.4
4,085.0

65.4
68.5
65.8
65.2

-10.7
1.6
1.1
11.7

187.5
190.0
191.6
193.2

492.9
495.1
498.2
501.7

154.0
153.8
154.3
154.8

338.9
341.3
343.9
346.9

1990 1
II
III
IV

4,890.8
4,902.7
4,882.6
4,833.8

4,191.1
4,196.5
4,172.8
4,120.1

4,107.8
4,124.6
4,089.9
4,056.4

68.7
70.8
71.0
71.6

14.5
1.1
11.8
-7.9

194.8
197.0
199.3
199.6

505.0
509.3
510.6
514.2

155.1
156.6
155.7
157.7

349.9
352.7
354.8
356.5

1991 1
II
III
IV

4,796.7
4,817.1
4,831.8
4,838.5

4,078.2
4,098.3
4,116.1
4,123.1

3,998.3
4,007.1
4,021.6
4,036.3

68.3
68.0
68.5
72.8

11.5
23.2
26.0
13.9

200.0
201.9
203.1
204.8

518.5
516.9
512.6
510.6

161.1
158.6
155.5
153.4

357.4
358.3
357.1
357.3

1992 1
II
III .

4,873.7
4,892.4
4,933.7

4,156.8
4,174.4
4,212.5

4,058.8
4,076.1
4,109.2

73.6
72.5
74.0

24.4
25.9
29.2

206.7
206.7
208.8

510.3
511.3
512.3

152.5
151.8
151.1

357.7
359.5
361.2

1982
1983
1984
1985
1986
1987
1988

1
2

.

Includes compensation of employees in government enterprises.
Compensation of government employees.

Source: Department of Commerce, Bureau of Economic Analysis.




359

TABLE B-10.—Gross domestic product of nonjinancial corporate business, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Net domestic product

Year or
quarter

Gross
domestic
product
of
nonfinancial
corporate
business

Domestic income
Consumption
of
fixed
capital

Total

Indirect
business
taxes 1

Corporate profits with inventory valuation and capital
consumption adjustments

Total

Compensation of
employees

Profits
Profits after tax
Total

Profits Profits
before
tax
tax
liability

Total

UndisDivitributed
dends
profits

Inven- Capital
contory
valu- sumption
ation
adjust- adjust-

ment

Net
interest

ment

1959

267.5

24.2

243.2

26.0

217.2

171.5

42.6

43.6

20.7

22.9

10.0

12.9

-0.3

-0.7

3.1

1960
1961
1962
1963
1964

278.1
285.5
311.7
331.8
358.1

25.2
26.0
26.9
28.1
29.5

252.9
259.6
284.8
303.7
328.6

28.3
29.5
32.0
34.0
36.6

224.6
230.1
252.8
269.7
292.0

181.2
185.3
200.1
211.1
226.7

40.0
40.8
48.2
53.8
60.0

40.3
40.1
45.0
49.8
56.0

19.2
19.5
20.6
22.8
24.0

21.1
20.7
24.3
27.0
32.1

10.6
10.6
11.4
12.6
13.7

10.6
10.1
13.0
14.4
18.4

-.2
.3
.0
.1
-.5

-.2

12
3.9
4.5

3.5
4.0
4.5
4.8
5.3

1965
1966
1967
1968
1969

393.5
431.0
453.4
500.5
543.3

31.5
34.3
37.5
41.4
45.3

362.0
396.7
415.9
459.1
498.0

39.2
40.5
43.1
49.7
54.7

322.8
356.2
372.8
409.3
443.3

246.5
274.0
292.3
323.2
358.8

70.3
74.9
71.8
76.0
71.3

66.2
71.4
67.5
74.0
70.8

27.2
29.5
27.8
33.6
33.3

39.0
41.9
39.7
40.4
37.5

15.6
16.8
17.5
19.1
19.1

23.4
25.1
22.2
21.3
18.4

-1.2
-2.1
-1.6
-3.7
-5.9

5.3
5.6
5.8
5.6
6.3

6.1
7.4
8.8
10.1
13.2

1970
1971
1972
1973
1974

561.4
606.4
673.3
754.5
814.6

49.7
54.6
61.0
66.2
77.5

511.6
551.7
612.4
688.3
737.1

58.8
64.5
69.2
76.3
81.4

452.8
487.3
543.2
612.0
655.7

378.7
402.0
447.1
505.9
556.8

57.1
67.2
77.0
83.6
70.6

58.1
67.1
78.6
98.6
109.2

27.2
29.9
33.8
40.2
42.2

31.0
37.1
44.8
58.4
67.0

18.5
18.5
20.1
21.1
21.7

12.5 - 6 . 6
18.7 - 4 . 6
24.7 - 6 . 6
37.3 - 2 0 . 0
45.2 - 3 9 . 5

5.5
4.7
5.0
5.0

17.1
18.1
19.2
22.5
28.3

1975
1976
1977
1978
1979

881.2
994.6
1,124.7
1,279.4
1,423.7

93.3
700.6
788.0 87.4
95.1
103.8
795.7
890.8
116.2 1,008.5 104.1
904.4
132.3 1,147.2 114.6 1,032.6
153.0 1,270.7 123.3 1,147.4

580.3
656.7
741.8
850.2
964.2

91.5
111.5
132.0
146.1
138.1

109.9
137.3
158.6
183.5
195.5

41.5
53.0
59.9
67.1
69.6

68.4
84.4
98.7
116.4
125.9

24.8
27.8
32.0
37.2
39.3

43.6
56.6
66.8
79.1
86.7

-11.0
-14.9
-16.6
-25.0
-41.6

-7.4
-10.9
-10.0
-12.3
-15.9

28.7
27.5
30.6
36.3
45.1

1980
1981
1982
1983
1984

1,546.5
1,748.6
1,802.8
1,936.1
2,166.5

174.8
207.0
229.4
242.1
248.1

1,371.7
1,541.5
1,573.4
1,694.0
1,918.3

139.4
167.9
169.4
185.8
206.9

1,232.4
1,373.6
1,404.0
1,508.2
1,711.4

1,053.5
1,164.8
1,209.9
1,271.6
1,409.2

120.7
136.9
111.5
159.9
214.3

181.6
181.0
132.9
155.9
189.0

67.0
63.9
46.3
59.4
73.7

114.6
117.1
86.7
96.4
115.4

45.5
53.4
56.4
66.5
69.5

69.1 - 4 3 . 0 - 1 7 . 8
63.7 - 2 5 . 7 - 1 8 . 4
30.2 - 9 . 9 - 1 1 . 5
29.9 - 8 . 5
12.5
45.9 - 4 . 1
29.4

58.2
71.9
82.5
76.7
87.9

1985
1986
1987
1988
1989

2,293.6
2,386.3
2,547.3
2,764.8
2,913.5

258.0
271.4
281.4
297.5
317.4

2,035.5
2,114.9
2,265.9
2,467.3
2,596.2

220.3
231.4
241.0
257.1
274.2

1,815.3
1,883.6
2,024.9
2,210.2
2,322.0

1,503.2
1,581.5
1,675.0
1,814.2
1,920.2

221.4
203.8
244.2
274.4
255.2

165.5
149.1
212.0
256.6
232.9

69.9
75.6
93.5
101.7
99.5

95.6
73.5
118.5
154.9
133.3

74.5
76.3
77.9
82.0
101.9

.2
21.1
9.7
-2.8
40.6 - 1 4 . 5
72.9 - 2 7 . 3
31.5 - 1 7 . 5

55.6 90.7
44.9 98.3
46.7 105.8
45.0 121.6
39.9 146.6

1990
1991
1982: IV..
1983: IV..
1984-. IV..
1985: IV..
1986: IV..
1987: IV..
1988: IV..

3,036.5 329.3 2,707.2
3,073.8 341.2 2,732.6

290.9 2,416.3 2,019.0
310.8 2,421.8 2,048.6

248.3
229.9

232.9
207.3

92.8
81.1

140.2
126.2

118.5
117.3

21.6 - 1 4 . 2
3.1

29.5 149.0
19.4 143.4

1,806.3
2,037.2
2,228.2
2,338.8
2,422.8
2,627.6
2,843.2

238.8
261.5
258.9
263.4
275.8
286.1
304.5

1,567.5
1,775.7
1,969.4
2,075.4
2,147.1
2,341.4
2,538.8

172.6
194.0
212.4
223.8
233.6
245.4
263.1

1,394.9
1,581.7
1,756.9
1,851.6
1,913.5
2,096.0
2,275.7

1,213.9
1,327.6
1,449.7
1,540.1
1,611.4
1,730.1
1,868.8

101.5
175.2
211.4
221.4
198.6
256.8
278.5

116.5
168.1
169.0
168.4
168.5
224.8
271.4

40.6
64.4
62.6
71.1
86.5
99.6
107.9

75.9
103.7
106.4
97.2
82.0
125.1
163.5

59.0
67.4
68.7
74.7
75.2
84.0
84.3

1989:1
II....
III..
IV..

2,870.1
2,902.3
2,930.2
2,951.5

308.7
312.4
321.7
326.5

2,561.4
2,589.8
2,608.5
2,625.0

266.6
272.5
278.8
279.0

2,294.9
2,317.4
2,329.7
2,346.0

1,894.9
1,907.2
1,924.0
1,954.6

262.2
263.2
254.8
240.7

260.6
237.3
217.8
215.9

113.2
101.6
92.3
91.1

147.4
135.7
125.5
124.8

102.4
100.5
102.3
102.3

45.0 - 3 7 . 6
35.3 - 1 5 . 7
-3.3
23.3
22.5 - 1 3 . 5

39.2
41.6
40.3
38.3

137.7
147.0
150.9
150.7

1990:1
II....
III..
IV..

2,999.6
3,053.1
3,048.2
3,045.0

324.8
327.2
330.8
334.4

2,674.9
2,725.9
2,717.4
2,710.6

286.1
286.6
293.5
297.5

2,388.8
2,439.3
2,423.9
2,413.2

1,985.3
2,017.6
2,035.7
2,037.3

254.9
272.0
239.7
226.6

224.6
235.4
245.4
226.4

89.3
93.7
98.0
90.1

135.3
141.7
147.4
136.2

118.2
113.5
118.0
124.5

17.2 - 6 . 6
28.2
3.8
29.5 - 3 2 . 6
11.7 - 2 1 . 2

36.9
32.9
26.9
21.5

148.7
149.7
148.4
149.2

1991: I
II....

3,037.1
3,062.7
3,084.4
3,111.1

338.9
341.0
341.5
343.5

2,698.2
2,721.7
2,742.9
2,767.5

304.1
305.5
314.7
318.7

2,394.2
2,416,2
2,428.2
2,448.8

2,022.1
2,042.0
2,058.6
2,071.8

226.2
231.4
226.5
235.3

203.1
205.2
211.2
209.7

78.8
80.3
83.3
82.1

124.2
124.9
127.9
127.6

119.0
115.5
113.9
120.9

5.2
9.3
14.1
6.7

6.7
9.9
-4.8

16.5
16.2
20.1
24.8

145.9
142.9
143.0
141.7

1992:

3,138.1 342.7 2,795.4 322.6 2,472.8 2,081.0
3,178.8 347.6 2,831.3 324.1 2,507.1 2,096.4
3,211.6 363.3 2,848.3 330.1 2,518.2 2,109.5

255.7
276.2
278.5

227.3
254.5
248.6

90.2
100.8
96.6

137.1
153.7
152.0

107.1
113.4
117.0

30.1 - 5 . 4
40.4 - 1 5 . 5
35.0 - 9 . 7

1

I....
II...
III.

Indirect business tax and nontax liability plus business transfer payments less subsidies.

Source: Department of Commerce, Bureau of Economic Analysis.




360

16.9 - 8 . 6 - 6 . 4 79.6
14.7 78.9
36.3 - 7 . 6
3.5 38.9 95.8
37.7
56.9 90.0
22.5 - 3 . 8
40.8 103.5
6.8 - 1 0 . 7
49.8 109.2
41.2 - 1 7 . 8
38.8 128.4
79.2 -31.7

33.8 136.0
37.1 134.6
39.5 130.3

TABLE B-ll.—Output, costs, and profits of nonfinancial

corporate business,

1959-92

[Quarterly data at seasonally adjusted annual rates]

Year or quarter

Gross domestic
product of
nonfinancial
corporate
business

(billions of
dollars)

Current-dollar cost and profit per unit of output (dollars) 2

Total
cost
and
profit 2

Consumption
of
fixed
capital

Indirect
business
taxes 3

Compensation
of
employees

Corporate profits with
inventory valuation and
capital consumption
adjustments
Profits
tax
liability

Net
interest

Profits
after
tax4

Output
per hour
of all
employees
(1987
dollars)

Compensation
per hour
of all
employees
(dollars)

Current
dollars

1987
dollars

1959
1960
1961
1962
1963
1964
1965
1966....
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1982: IV
1983: IV
1984: IV
1985: IV
1986: IV
1987-. IV
1988: IV

267.5
278.1
285.5
311.7
331.8
358.1
393.5
431.0
453.4
500.5
543.3
561.4
606.4
673.3
754.5
814.6
881.2
994.6
1,124.7
1,279.4
1,423.7
1,546.5
1,748.6
1,802.8
1,936.1
2,166.5
2,293.6
2,386.3
2,547.3
2,764.8
2,913.5
3,036.5
3,073.8
1,806.3
2,037.2
2,228.2
2,338.8
2,422.8
2,627.6
2,843.2

928.7
955.6
978.2
1,047.5
1,104.8
1,179.3
1,262.2
1,336.0
1,367.4
1,444.3
1,492.5
1,-473.4
1,525.9
1,629.5
1,706.9
1,669.7
1,625.6
1,748.5
1,866.7
1,967.1
1,995.7
1,980.9
2,035.1
2,001.3
2,112.3
2,284.1
2,364.3
2,439.3
2,547.3
2,684.8
2,718.9
2,740.0
2,698.0
1,999.6
2,204.2
2,328.4
2,396.9
2,463.3
2,604.0
2,719.0

0.288
.291
.292
.298
.300
.304
.312
.323
.332
.347
.364
.381
.397
.413
.442
.488
.542
.569
.603
.650
.713
.781
.859
.901
.917
.949
.970
.978
1.000
1.030
1.072
1.108
1.139
.903
.924
.957
.976
.984
1.009
1.046

0.026
.026
.027
.026
.025
.025
.025
.026
.027
.029
.030
.034
.036
.037
.039
.046
.057
.059
.062
.067
.077
.088
.102
.115
.115
.109
.109
.111
.110
.111
.117
.120
.126
.119
.119
.111
.110
.112
.110
.112

0.028
.030
.030
.031
.031
.031
.031
.030
.032
.034
.037
.040
.042
.042
.045
.049
.054
.054
.056
.058
.062
.070
.082
.085
.088
.091
.093
.095
.095
.096
.101
.106
.115
.086
.088
.091
.093
.095
.094
.097

0.185
.190
.189
.191
.191
.192
.195
.205
.214
.224
.240
.257
.263
.274
.296
.333
.357
.376
.397
.432
.483
.532
.572
.605
.602
.617
.636
.648
.658
.676
.706
.737
.759
.607
.602
.623
.643
.654
.664
.687

0.046
.042
.042
.046
.049
.051
.056
.056
.052
.053
.048
.039
.044
.047
.049
.042
.056
.064
.071
.074
.069
.061
.067
.056
.076
.094
.094
.084
.096
.102
.094
.091
.085
.051
.079
.091
.092
.081
.099
.102

0.022
.020
.020
.020
.021
.020
.022
.022
.020
.023
.022
.018
.020
.021
.024
.025
.026
.030
.032
.034
.035
.034
.031
.023
.028
.032
.030
.031
.037
.038
.037
.034
.030
.020
.029
.027
.030
.035
.038
.040

0.024
.022
.022
.026
.028
.031
.034
.034
.032
.029
.025
.020
.024
.027
.025
.017
.031
.033
.039
.040
.034
.027
.036
.033
.048
.062
.064
.053
.059
.064
.057
.057
.055
.030
.050
.064
.063
.045
.060
.063

0.003
.004
.004
.004
.004
.005
.005
.006
.006
.007
.009
.012
.012
.012
.013
.017
.018
.016
.016
.018
.023
.029
.035
.041
.036
.038
.038
.040
.042
.045
.054
.054
.053
.040
.036
.041
.038
.042
.042
.047

15.442
15.659
16.168
16.661
17.192
17.843
18.062
18.147
18.354
18.854
18.743
18.776
19.482
19.774
19.754
19.238
19.755
20.354
20.753
20.696
20.215
20.271
20.553
20.819
21.586
21.896
22.125
22.690
23.071
23.494
23.088
23.300
23.720
21.094
21.895
22.032
22.315
22.838
23.286
23.446

2.851
2.968
3.063
3.183
3.284
3.430
3.527
3.721
3.923
4.219
4.506
4.825
5.133
5.425
5.855
6.416
7.053
7.644
8.247
8.945
9.767
10.780
11.764
12.586
12.995
13.509
14.067
14.711
15.170
15.781
16.306
17.169
18.011
12.805
13.187
13.718
14.339
14.940
15.471
16.018

1989:1

2,870.1
2,902.3
2,930.2
2,951.5

2,719.1
2,715.8
2,717.9
2,722.7

1.056
1.069
1.078
1.084

.114
.115
.118
.120

.098
.100
.103
.102

.697
.702
.708
.718

.096
.097
.094

.042
.037
.034
.033

.055
.060
.060
.055

.051
.054
.056
.055

23.176
23.056
23.062
23.054

16.151
16.191
16.326
16.550

1990:1
II
Ill
IV

2,999.6
3,053.1
3,048.2
3,045.0

2,742.0
2,763.3
2,737.3
2,717.4

1.094
1.105
1.114
1.121

.118
.118
.121
.123

.104
.104
.107
.109

.724
.730
.744
.750

.093
.098
.088
.083

.033
.034
.036
.033

.060
.065
.052
.050

.054
.054
.054
.055

23.122
23.375
23.293
23.437

16.741
17.067
17.322
17.572

1991:1
II
Ill
IV

3,037.1
3,062.7
3,084.4
3,111.1

2,683.5
2,687.4
2,699.1
2,722.0

1.132
1.140
1.143
1.143

.126
.127
.127
.126

.113
.114
.117
.117

.754
.760
.763
.761

.084
.086
.084
.086

.029
.030
.031
.030

.055
.056
.053
.056

.054
.053
.053
.052

23.522
23.646
23.769
24.014

17.724
17.967
18.129
18.278

1992:1
II...
III..

3,138.1 2,737.6
3,178.8 2,760.8
3,211.6 2,787.6

1.146
1.151
1.152

.125
.126
.130

.118
.117
.118

.760
.759
.757

.093
.100
.100

.033
.037
.035

.060
.064
.065

.050
.049
.047

24.152
24.301
24.610

18.359
18.452
18.599

Total

1
Output is measured by gross domestic product of nonfinancial corporate business in 1987 dollars.
2
This is equal to the deflator for gross domestic product of nonfinancial corporate business with the decimal point shifted two
places to the left.
3
Indirect business tax and nontax liability plus business transfer payments less subsidies.
4
With inventory valuation and capital consumption adjustments.

Sources: Department of Commerce (Bureau of Economic Analysis) and Department of Labor (Bureau of Labor Statistics).




361

TABLE B-12.—Personal consumption expenditures,

1939-92

[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Nondurable goods

Durable goods
Personal
consumption
expendi- Total ]
tures

Year or
quarter

FurniMotor
ture
vehiand
cles house- Total *
and
hold
parts equipment

Clothand
shoes

Food

Gasoline
and
oil

Services

Fuel
oil
and
coal

Household
operation
Total ]

Housing 2
Total»

Electricity
and
gas

- Transportation

Medical

1959

318.1

42.8

18.9

18.1

148.5

80.7

26.4

11.3

4.0

126.8

45.0

18.7

7.6

10.5

16.3

1960
1961
1962
1963
1964

332.4
343.5
364.4
384.2
412.5

43.5
41.9
47.0
51.8
56.8

19.7
17.8
21.5
24.4
26.0

18.0
18.3
19.3
20.7
23.2

153.1
157.4
163.8
169.4
179.7

82.6
84.8
87.1
89.5
94.6

27.0
27.6
29.0
29.8
32.4

12.0
12.0
12.6
13.0
13.6

3.8
3.8
3.8
4.0
4.1

135.9
144.1
153.6
163.1
175.9

48.2
51.2
54.7
58.0
61.4

20.3
21.2
22.4
23.6
25.0

8.3
8.8
9.4
9.9
10.4

11.2
11.7
12.2
12.7
13.4

17.4
18.6
20.7
22.4
25.7

1965
1966
1967
1968
1969

444.6
481.6
509.3
559.1
603.7

63.5
68.5
70.6
81.0
86.2

29.9
30.3
30.0
36.1
38.4

25.1
28.2
30.0
32.9
34.7

191.9
208.5
216.9
235.0
252.2

101.0
109.0
112.3
121.6
130.5

34.1
37.4
39.2
43.2
46.5

14.8
16.0
17.1
18.6
20.5

4.4
4.7
4.8
4.7
4.6

189.2
204.6
221.7
243.1
265.3

65.4
69.5
74.1
79.7
86.8

26.5
28.2
30.2
32.3
35.1

10.9
11.5
12.2
13.0
14.0

14.5
15.9
17.3
18.9
20.9

27.7
30.5
33.7
39.0
44.4

1970
1971
1972
1973
1974

646.5
700.3
767.8
848.1
927.7

85.3
97.2
110.7
124.1
123.0

35.5
44.5
51.1
56.1
49.5

35.7
37.8
42.4
47.9
51.5

270.4 142.1
283.3 147.5
305.2 158.5
339.6 176.1
380.8 198.1

47.8
51.7
56.4
62.5
66.0

21.9
23.2
24.4
28.1
36.1

4.4
4.6
5.1
6.3
7.8

290.8
319.8
351.9
384.5
423.9

94.0
102.7
112.1
122.7
134.1

37.8
41.0
45.3
49.8
55.5

15.2
16.6
18.4
20.0
23.5

23.7
27.1
29.8
31.2
33.3

50.1
56.5
63.5
71.2
80.1

1,024.9
1,143.1
1,271.5
1,421.2
1,583.7

134.3
160.0
182.6
202.3
214.2

54.8
71.3
83.5
92.2
91.5

54.5
60.2
67.1
74.0
82.3

416.0
451.8
490.4
541.5
613.3

218.5
236.0
255.9
280.6
313.0

70.8
76.6
84.1
94.3
101.2

39.7
43.0
46.9
50.1
66.2

8.4
474.5 147.0
10.1
531.2 161.5
11.1 k 598.4 179.5
11.5 677.4 201.7
14.4
756.2 226.6

63.7
72.4
81.9
91.2
100.0

28.5
32.5
37.6
42.1
46.8

35.7
41.3
49.2
53.6
59.4

93.0
106.2
122.4
139.7
157.8

1980
1981
1982
1983
1984

1,748.1
1,926.2
2,059.2
2,257.5
2,460.3

212.5
228.5
236.5
275.0
317.9

84.0
91.6
97.7
120.6
144.6

86.0
91.3
92.5
104.4
115.3

682.9
744.2
772.3
817.8
873.0

341.8
367.3
386.0
406.2
430.2

107.3
117.2
120.5
130.8
142.5

86.7
97.9
94.1
93.3
94.5

15.4 852.7 255.2
15.8 953.5 287.1
14.5 1,050.4 311.1
13.8 1,164.7 334.6
14.2 1,269.4 362.3

113.0
126.0
141.4
153.6
165.5

56.3
63.4
72.6
80.7
84.6

65.1 181.3
69.4 213.6
71.6 240.5
78.9 265.7
89.1 290.6

1985
1986
1987
1988
1989

2,667.4
2,850.6
3,052.2
3,296.1
3,523.1

352.9 167.4
389.6 184.9
403.7 183.5
437.1 197.8
459.4 205.4

123.4 919.4 451.1
135.5 952.2 476.8
144.0 1,011.1 500.7
156.7 1,073.8 533.6
167.9 1,149.5 565.1

152.2
163.2
174.5
186.4
200.4

96.9
79.7
84.7
86.9
96.2

14.1
12.0
12.0
12.1
12.0

392.5
421.8
452.5
484.2
514.4

176.2
181.1
187.8
199.5
209.8

88.7
87.1
88.4
93.4
98.0

99.0
105.8
116.6
128.5
135.6

319.3
346.4
384.7
427.7
471.9

1990
1991

3,748.4
3,887.7

464.3
446.1

202.4
185.4

172.1 1,224.5 601.4
170.4 1,251.5 617.7

206.9
209.0

108.5
105.5

12.6 2,059.7 547.5
11.7 2,190.1 574.0

215.0
223.7

97.6
103.6

142.8
147.3

524.9
580.2

2,128.7
2,346.8
2,526.4
2,739.8
2,923.1
3,124.6
3,398.2

246.9
297.7
328.2
354.4
406.8
408.8
452.9

105.1
134.8
149.3
162.9
188.2
186.3
203.4

95.6
787.3 394.9
109.7
839.8 413.9
118.7
887.8 436.8
128.1
939.5 460.7
140.6 963.7 486.7
145.9 1,029.4 507.4
162.5 1,105.8 549.5

122.7
136.7
145.7
156.2
165.8
177.6
194.4

93.0
94.9
94.9
97.6
73.0
87.8
88.5

14.0
14.1
13.8
14.3
11.3
12.2
11.7

1,094.6
1,209.3
1,310.4
1,446.0
1,552.6
1,686.4
1,839.5

320.2
344.6
373.8
404.6
432.7
466.6
496.0

145.8
159.3
168.8
180.7
182.5
189.7
203.8

74.9
84.8
85.9
90.1
86.8
88.6
95.3

73.6
82.9
92.5
101.5
109.0
121.3
132.7

250.9
274.8
299.9
333.0
358.4
398.5
444.4

1989:1

3,440.8
3,499.1
3,553.3
3,599.1

450.8 203.7
457.6 204.9
470.8 215.0
458.3 198.1

164.9
167.3
168.8
170.8

1,121.1
1,146.5
1,157.1
1,173.5

555.8
562.0
567.6
575.3

195.2
199.4
201.7
205.4

90.9
100.4
97.7
95.9

11.2
12.0
11.5
13.2

1,868.8
1,895.1
1,925.4
1,967.3

502.9
510.2
517.7
526.6

206.9
206.0
208.7
217.7

96.6
94.9
96.6
103.7

134.5
134.5
135.9
137.6

457.0
466.0
475.3
489.2

1990:1
II
III....

3,672.4
3,715.3
3,787.8
3,818.2

478.0 213.0
463.5 202.5
463.0 201.5
452.7 192.6

174.8
172.2
171.5
169.9

1,199.3
1,208.7
1,235.3
1,254.5

589.7 206.9
597.6 206.8
606.4 208.4
611.8 205.6

101.0
99.3
109.5
124.0

12.0
12.1
13.3
13.0

1,995.0
2,043.1
2,089.6
2,111.1

534.7
543.1
553.6
558.8

208.0
216.2
218.4
217.5

92.5
98.7
99.9
99.4

140.0 503.2
141.8 517.2
143.4 533.1
145.9 546.0

3,821.7
3,871.9
3,914.2
3,942.9

439.5
441.4
453.0
450.4

180.9
180.7
189.3
190.9

169.2
171.5
172.2
168.9

1,245.0
1,254.2
1,255.3
1,251.4

613.6
619.2
617.9
620.0

206.2
210.8
212.0
206.8

108.1
105.5
104.7
103.5

12.2
11.4
11.8
11.3

2,137.2
2,176.3
2,205.9
2,241.1

565.0
571.5
576.5
583.0

218.4
224.8
226.1
225.5

100.0
104.4
104.6
105.2

145.1 558.7
146.2 572.5
148.2 586.3
149.8 603.2

4,022.8
4,057.1
4,108.7

469.4
470.6
482.5

198.9
200.7
201.7

176.3 1,274.1 627.9
176.3 1,277.5 623.2
182.4 1,292.8 627.3

216.5
217.4
224.3

102.8
105.4
107.7

11.6 2,279.3 590.9
13.8 2,309.0 597.4
13.0 2,333.3 603.3

223.5
227.9
225.8

101.8
104.2
104.8

152.6 614.8
152.5 629.0
153.1 642.0

1975
1976
1977
1978
1979

1982:
1983:
1984:
1985:
1986:
1987:
1988:

...

IV
IV
IV
IV
IV
IV
IV

IV...:
1991:1
II
Ill

IV....
1992:1
1
2

II
Ill

Includes other items not shown separately.
Includes imputed rental value of owner-occupied housing.

Source: Department of Commerce, Bureau of Economic Analysis.




362

1,395.1
1,508.8
1,637.4
1,785.2
1,914.2

TABLE B-13.—Personal consumption expenditures in 1987 dollars, 1959-92
[Billions of 1987 dollars; quarterly data at seasonally adjusted annual rates]
Durable goods
Year or
quarter

Personal
consumption
expendi- Total *
tures

Nondurable goods

FurniMotor ture
vehiand
cles house- Totall
and
hold
parts equipment

Food

Cloth- Gasoing
line
and
and
oil
shoes

Services
Fuel
oil
and
coal

Household
operation
Total»

Housing 2

ElecTotal» tricity
and
gas

Transportation

Medical
care

1959

1,178.9

114.4

59.7

38.2

58.2

38.1

22.6

546.0 159.8

75.0

34.5

45.4

95.0

1960
1961
1962
1963
1964

1,210.8
1,238.4
1,293.3
1,341.9
1,417.2

115.4
109.4
120.2
130.3
140.7

61.3
54.9
62.2
68.4
71.2

37.7 526.9
38.1 537.7
40.4 553.0
43.1 . 563.6
48.3 588.2

305.8
312.1
316.3
319.2
331.0

58.7
59.8
62.4
63.6
68.5

39.4
39.8
41.5
42.8
45.1

21.7
20.6
20.6
21.6
22.5

568.5
591.3
620.0
648.0
688.3

168.1
176.0
185.8
194.4
203.5

78.5
81.2
85.2
88.4
92.6

36.3
38.3
40.9
42.8
45.1

46.7
47.0
48.7
50.5
53.0

98.4
102.0
110.2
117.1
129.8

1965
1966
1967
1968
1969

1,497.0
1,573.8
1,622.4
1,707.5
1,771.2

156.2
166.0
167.2
184.5
190.8

81.2
81.8
80.3
91.8
95.1

52.1
57.6
59.5
62.9
64.3

616.7
647.6
659.0
686.0
703.2

346.5
359.1
364.5
380.7
389.7

71.5
76.3
76.9
80.2
81.9

47.3
50.2
51.8
55.5
59.2

23.5
24.2
24.2
23.0
21.8

724.1
760.2
796.2
837.0
877.2

214.6
224.4
234.5
246.0
259.1

96.8
101.4
106.2
110.1
115.3

47.2
49.7
52.4
55.0
58.0

55.4
58.6
62.0
65.4
68.9

135.8
142.3
148.1
159.5
171.3

1970
1971
1972
1973
1974

1,813.5
1,873.7
1,978.4
2,066.7
2,053.8

183.7
201.4
225.2
246.6
227.2

85.6
100.8
114.3
123.4
102.2

64.4
66.8
73.6
81.5
81.9

717.2
725.6
755.8
777.9
759.8

397.5
399.2
411.9
412.6
404.7

81.0
84.6
90.4
96.9
95.4

62.9
65.9
68.6
72.1
68.6

20.2 912.5 269.3
19.5 946.7 280.9
21.5 997.4 295.9
23.3 1,042.2 310.8
18.4 1,066.8 326.9

118.9
120.8
126.8
132.0
132.5

60.4
61.8
64.9
66.5
66.9

71.0
73.6
77.8
79.6
79.9

180.7
193.7
207.0
222.4
231.1

1975
1976
1977
1978
1979

2,097.5
2,207.3
2,296.6
2,391.8
2,448.4

226.8
256.4
280.0
292.9
289.0

102.9
124.6
137.3
141.5
130.5

79.1
84.2
91.4
96.6
101.3

767.1
801.3
819.8
844.8
862.8

413.2
431.9
441.5
442.8
448.0

98.5
103.2
108.7
119.0
124.1

70.6
73.4
75.7
77.4
76.4

18.1
20.3
19.6
19.5
18.1

1,103.6
1,149.5
1,196.8
1,254.1
1,296.5

336.5
346.7
355.4
372.9
387.9

138.1
143.9
151.0
158.0
162.9

70.4
72.9
76.0
78.8
79.3

81.4
84.4
90.2
92.9
96.1

243.8
255.5
267.9
279.2
290.9

1980
1981
1982
1983
1984

2,447.1
2,476.9
2,503.7
2,619.4
2,746.1

262.7
264.6
262.5
297.7
338.5

111.4
113.5
115.6
138.1
160.3

98.5
97.7
94.2
104.3
115.3

860.5
867.9
872.2
900.3
934.6

448.8
446.6
451.4
463.4
472.3

126.0
132.8
133.7
142.4
153.1

72.0
73.2
73.9
75.7
77.9

14.0
11.8
10.9
11.1
11.2

1,323.9
1,344.4
1,368.9
1,421.4
1,473.0

399.4
407.3
409.6
415.5
426.8

167.1
165.6
166.7
169.4
173.7

81.6
80.3
81.2
83.7
84.3

91.3
88.9
87.4
91.6
100.0

302.1
318.3
323.7
332.6
341.9

1985
1986
1987
1988
1989...

2,865.8
2,969.1
3,052.2
3,162.4
3,223.3

370.1
402.0
403.7
428.7
440.7

180.2
193.3
183.5
194.8
196.4

123.8 958.7 483.0 158.8
136.3 991.0 494.1 170.3
144.0 1,011.1 500.7 174.5
155.4 1,035.1 513.4 178.9
165.8 1,051.6 515.0 187.8

79.2
82.9
84.7
86.1
87.3

11.5
12.1
12.0
12.0
11.4

1,537.0
1,576.1
1,637.4
1,698.5
1,731.0

435.9
442.1
452.5
461.8
469.2

179.1
180.8
187.8
196.9
202.6

86.6
85.6
88.4
92.7
94.3

109.2
112.6
116.6
122.5
123.8

353.0
366.2
384.7
399.4
408.6

1990
1991

3,260.4 439.3 192.2
3,240.8 414.7 171.0

169.5 1,056.5 520.8 185.9
168.6 1,042.4 515.8 181.3

86.4
85.2

10.1 1,764.6 474.7
9.7 1,783.7 478.2

203.7
204.7

92.4
95.2

124.7 423.9
121.2 438.8

1982:
1983:
1984:
1985:
1986:
1987:
1988:

518.5 301.9

IV
IV
IV
IV
IV
IV
IV

2,539.3
2,678.2
2,784.8
2,895.3
3,012.5
3,074.7
3,202.9

272.3
319.1
347.7
369.6
415.7
404.7
439.2

123.7
96.4 880.7 458.3 135.7
151.6 109.3 915.2 467.1 147.7
164.3 118.7 942.9 475.1 154.7
173.9 128.6 968.7 488.2 161.7
193.6 141.4 1,000.9 496.9 171.9
183.6 145.9 1,014.6 502.4 174.5
197.7 160.3 1,046.8 518.0 182.8

73.4
76.9
79.0
79.5
84.6
85.4
87.5

10.5
11.4
11.1
11.4
12.4
11.9
12.0

1,386.2
1,443.9
1,494.2
1,557.1
1,595.8
1,655.5
1,716.9

411.0
419.7
431.3
438.1
444.8
457.0
465.6

166.2
173.3
174.8
182.6
182.8
189.3
198.6

80.2
86.8
84.5
88.5
86.8
88.6
93.0

88.2
94.2
103.5
111.2
113.4
117.9
124.2

327.8
334.8
344.9
359.1
372.0
390.7
403.0

1989:1
II
Ill
IV

3,203.6
3,212.2
3,235.3
3,242.0

435.2
440.2
450.6
436.8

196.2
195.6
205.3
188.3

163.0
166.1
166.3
167.9

1,048.1
1,047.0
1,052.6
1,058.9

516.8
514.2
513.2
515.6

183.3
186.5
190.4
190.9

88.1
85.4
87.1
88.6

11.1
11.6
11.0
12.0

1,720.3
1,725.1
1,732.2
1,746.3

467.0
468.4
469.9
471.3

201.0
199.5
201.3
208.5

94.1
91.8
92.6
98.8

123.6
123.4
123.7
124.3

406.6
407.0
408.8
411.8

1990:1
II
Ill
IV

3,259.5
3,260.1
3,273.9
3,248.0

453.5
439.2
437.7
426.6

202.6
192.8
191.3
182.0

171.8
169.7
168.9
167.5

1,058.3
1,057.1
1,059.1
1,051.6

518.3
521.2
521.6
522.0

188.6
185.6
186.2
183.2

87.4
86.4
86.7
85.0

9.8
10.9
10.9
8.8

1,747.7
1,763.7
1,777.1
1,769.8

473.3 197.9
474.1 205.3
475.1 207.6
476.1 204.1

87.8
93.8
94.8
93.2

125.2
125.0
124.9
123.5

418.3
422.1
426.7
428.6

1991:1
II
Ill
IV

3,223.5
3,239.3
3,251.2
3,249.0

412.0
411.3
419.4
416.1

169.6
167.2
173.3
174.0

166.9
169.3
170.4
167.9

1,043.0
1,046.3
1,044.8
1,035.6

516.4
516.3
515.0
515.3

180.8
183.2
183.7
177.5

83.9
86.0
86.0
84.7

9.4
9.8
10.0
9.4

1,768.5
1,781.8
1,787.0
1,797.4

476.5 201.4
477.9 206.5
478.8 206.5
479.8 204.6

92.1
96.6
96.3
95.6

121.2
121.5
121.2
121.0

431.9
435.6
440.5
447.2

1992:1
II
Ill

3,289.3 432.3 181.5
3,288.5 430.0 180.2
3,318.4 439.8 179.0

174.4 1,049.6 518.9 184.1
174.4 1,045.6 513.5 184.4
18L5 1,052.0 514.3 190.8

85.7
85.8
86.0

10.2 1,807.3 481.2 201.6
12.0 1,812.9 483.3 204.2
10.9 1,826.6 485.8 205.6

92.9
94.5
94.0

120.3 449.6
121.3 453.7
124.1 458.1

1

Includes other items not shown separately.

2

Includes imputed rental value of owner-occupied housing.

Source-. Department of Commerce, Bureau of Economic Analysis.




363

TABLE B-14.—Gross and net private domestic investment, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Equals: Net private domestic investment
Net fixed investment

Year or quarter

Gross
private
domestic
investment

Less:
Consumption of
fixed
capital

Nonresidentiai
Total
Total
Total

Structures

Producers'
durable
equipment

Residential

Change in
business
inventories

1959

78.8

44.6

34.2

30.1

12.3

6.6

5.7

17.8

4.2

1960
1961
1962
1963
1964

78.7
77.9
87.9
93.4
101.7

46.3
47.7
49.3
51.3
53.9

32.4
30.3
38.6
42.0
47.8

29.2
27.3
32.5
36.4
42.8

13.8
12.2
15.3
16.4
21.3

7.7
7.6
8.3
8.3
10.3

6.1
4.6
7.0
8.1
11.0

15.4
15.1
17.2
20.0
21.5

3.2
2.9
6.1
5.7
5.0

1965
1966
1967
1968
1969

118.0
130.4
128.0
139.9
155.2

57.3
62.1
67.4
73.9
81.5

60.7
68.3
60.6
66.0
73.7

51.0
54.5
50.1
56.9
64.0

30.3
36.7
33.2
35.0
40.5

14.1
16.0
15.1
15.8
17.9

16.2
20.7
18.1
19.2
22.6

20.7
17.8
16.9
21.9
23.5

9.7
13.8
10.5
9.1
9.7

1970
1971
1972
1973
1974

150.3
175.5
205.6
243.1
245.8

97.6
109.9
120.4
140.2

61.5
78.0
95.7
122.7
105.5

59.2
69.9
85.8
105.0
91.3

38.4
36.8
42.5
59.0
58.9

18.4
18.4
18.7
23.8
24.5

20.0
18.4
23.8
35.2
34.5

20.8
33.1
43.2
46.0
32.3

2.3
8.0
9.9
17.7
14.3

1975
1976
1977
1978
1979

226.0
286.4
358.3
434.0
480.2

165.2
182.8
205.2
234.8
272.4

60.9
103.6
153.1
199.3
207.8

66.5
86.8
128.3
171.3
195.1

41.5
45.6
64.9
94.1
117.3

18.8
19.9
23.4
35.5
49.9

22.7
25.6
41.5
58.6
67.4

25.1
41.2
63.4
77.3
77.8

-5.7
16.7
24.7
27.9
12.8

1980
1981
1982
1983
1984

467.6
558.0
503.4
546.7
718.9

311.9
362.4
399.1
418.4
433.2

155.7
195.6
104.3
128.2
285.6

165.2
170.2
120.3
133.8
214.6

113.8
127.1
99.1
69.1
126.6

59.1
75.5
72.4
46.2
65.1

54.7
51.6
26.7
22.9
61.5

51.4
43.1
21.2
64.6
87.9

-9.5
25.4
-15.9
-5.5
71.1

1985
1986
1987
1988
1989

714.5
717.6
749.3
793.6
832.3

454.5
478.6
502.2
534.0
580.4

260.0
239.1
247.1
259.6
251.9

235.4
230.4
220.9
243.4
218.6

146.1
114.4
103.0
125.8
117.1

75.2
51.8
46.7
47.9
48.6

70.9
62.6
56.3
77.9
68.5

89.3
116.0
117.9
117.6
101.5

24.6
8.6
26.3
16.2
33.3

1990
1991

799.5
721.1

602.8
626.1

196.7
95.0

190.4
105.3

106.9
52.3

51.4
25.2

55.5
27.1

83.5
53.0

6.3
-10.2

1982: IV
1983: IV
1984: IV
1985: IV
1986: IV
1987: IV
1988:1V

464.2
614.8
722.8
737.0
697.1
800.2
814.8

412.5
439.7
448.0
465.6
488.2
512.1
547.2

51.7
175.1
274.8
271.4
208.9
288.1
267.6

98.0
154.9
223.8
238.8
227.8
228.8
250.3

-46.3
20.2
51.0
32.6
-18.8
59.3
17.3

1989:1
II
Ill
IV

843.9
840.3
819.6
825.2

557.8
568.4
594.3
600.8

286.1
271.9
225.3
224.4

242.4
232.1
205.7
194.2

43.7
39.8
19.6
30.2

1990:1
II
Ill
IV

820.3
833.0
805.7
739.0

594.7
599.1
605.8
611.6

225.6
233.9
199.9
127.3

217.5
196.2
189.5
158.3

8.1
37.7
10.4
-31.0

1991:1
II
Ill

IV

705.4
710.2
732.8
736.1

618.9
623.5
624.9
637.1

86.5
86.8
107.9
99.0

115.0
108.5
107.7
89.8

-28.5
-21.8
.2

1992:1
II
Ill

722.4
773.2
781.6

631.4
638.2
697.7

91.0
135.0
83.9

106.8
126.9
68.9

-15.8
8.1
15.0

,

Source: Department of Commerce, Bureau of Economic Analysis.




364

9.2

TABLE B-15.—Gross and net private domestic investment in 1987 dollars, 1959-92
[Billions of 1987 dollars; quarterly data at seasonally adjusted annual rates]
Equals: Net private domestic investment
Net fixed investment

Year or quarter

Gross
private
domestic
investment

Less:
Consumption of
fixed
capital

Nonresidential
Total
Total
Total

Structures

Producers'
durable
equipment

Residential

Change in
business
inventories

1959

296.4

168.8

127.5

114.0

39.2

25.4

13.8

74.8

13.6

1960
1961
1962
1963
1964

290.8
289.4
321.2
343.3
371.8

173.7
178.6
183.6
189.6
196.4

117.1
110.8
137.6
153.7
175.4

109.0
103.6
122.0
137.7
159.7

44.1
39.9
49.5
52.8
69.7

30.5
30.6
32.9
32.1
39.5

13.7
9.4
16.6
20.7
30.2

64.8
63.7
72.5
84.9
90.0

8.1
7.2
15.6
16.0
15.7

1965
1966
1967
1968
1969

413.0
438.0
418.6
440.1
461.3

205.0
214.9
225.2
235.3
246.7

208.1
223.0
193.4
204.7
214.6

182.9
186.3
165.8
181.1
189.8

99.9
118.1
103.9
105.1
112.2

53.0
58.3
53.0
52.2
56.0

46.9
59.8
50.9
52.9
56.2

83.0
68.2
61.9
76.0
77.6

25.1
36.7
27.6
23.6
24.8

1970
1971
1972
1973
1974

429.7
475.7
532.2
591.7
543.0

258.0
269.1
285.0
296.4
310.3

171.7
206.6
247.2
295.3
232.6

165.8
185.8
224.6
257.6
201.7

98.7
85.0
98.9
134.6
122.3

53.5
49.0
49.2
57.9
53.4

45.2
36.0
49.7
76.7
68.9

67.1
100.8
125.7
123.0
79.4

5.9
20.8
22.5
37.7
30.9

437.6
520.6
600.4
664.6
669.7

322.8
334.6
348.4
364.5
384.5

114.8
186.1
252.1
300.0
285.2

128.7
160.6
217.8
262.8
271.6

72.0
74.5
99.0
134.4
154.1

36.7
36.8
39.8
55.2
70.1

35.3
37.7
59.2
79.2
84.0

56.8
86.1
118.8
128.4
117.5

-13.9
25.5
34.3
37.2
13.6

1980
1981
1982
1983
1984

594.4
631.1
540.5
599.5
757.5

400.7
417.8
429.5
447.4
455.5

193.7
213.2
111.0
152.1
302.0

201.9
188.7
128.5
147.7
234.0

129.5
131.6
101.0
71.6
134.3

73.3
82.0
75.3
50.3
69.3

56.1
49.6
25.7
21.4
65.0

72.5
57.1
27.5
76.0
99.8

-8.3
24.6
-17.5
4.4
67.9

1985
1986
1987
1988
1989

745.9
735.1
749.3
773.4
784.0

471.5
486.7
502.2
518.5
545.5

274.4
248.4
247.1
254.9
238.5

252.3
239.9
220.9
235.0
208.7

154.0
118.3
103.0
122.6
114.8

79.4
54.9
46.7
46.7
45.9

74.6
63.3
56.3
75.9
68.9

98.3
121.6
117.9
112.4
94.0

22.1
8.5
26.3
19.9
29.8

1990
1991

739.1
661.1

554.9
569.3

184.2
91.8

178.0
101.1

102.6
53.9

46.9
23.4

55.7
30.5

75.5
47.3

6.2
-9.3

1982: IV
1983: IV
1984: IV
1985: IV
1986: IV
1987:1V
1988-.IV

503.5
669.5
756.4
763.1
705.9
793.8
785.0

439.2
468.5
467.4
480.1
492.5
508.1
524.7

64.3
201.0
289.0
283.0
213.3
285.7
260.3

109.2
171.7
241.1
252.8
233.4
225.8
239.3

-44.9
29.3
47.9
30.2

1989:1
II
Ill
IV

802.9
794.5
769.0
769.5

530.1
535.7
556.7
559.6

272.9
258.8
212.4
209.9

231.6
221.8
196.4
185.0

41.2
36.9
16.0
24.9

1990:1
II
Ill
IV

763.0
770.2
743.1
680.0

549.9
553.5
556.6
559.6

213.0
216.7
186.5
120.5

205.5
183.9
175.3
147.2

7.5
32.8
11.2
-26.8

1991:1
II
Ill
IV

646.0
649.5
672.0
676.9

562.5
565.8
569.6
579.1

83.4
83.6
102.4
97.8

108.5
104.0
101.8
90.2

-25.1
-20.4
.6
7.5

1992:1
II
Ill

668.9
713.6
724.9

576.4
578.0
628.3

92.5
135.7
96.6

105.0
127.9
81.6

-12.6
7.8
15.0

1975
1976
1977
1978
1979

\

Source: Department of Commerce, Bureau of Economic Analysis.




365

-20.1
59.9
20.9

TABLE B-16.—Inventories and final sales of domestic business, 1959-92
[Billions of dollars, except as noted; seasonally adjusted]
Inventoriesl
Nonfarm
Quarter
Total 2

Farm
Total 2

Fourth quarter:
1959

Manufacturing

Wholesale
trade

Retail
trade

Other

Final
sales of
domestic
business 3

Ratio of inventories
to final sales of
domestic business

Total

Nonfarm

141.2

31.6

109.6

55.2

21.0

26.2

36.2

3.90

3.03

1960
1961
1962
1963
1964

145.2
147.0
153.4
158.7
164.2

33.0
33.7
34.8
34.9
33.3

112.2
113.4
118.6
123.8
130.9

56.2
57.2
60.3
62.2
65.9

21.3
21.8
22.4
23.9
25.2

27.5
27.0
28.3
29.6
31.0

37.4
39.3
41.5
44.2
47.1

3.88
3.74
3.69
3.59
3.49

3.00
2.88
2.86
2.80
2.78

1965
1966
1967
1968
1969

178.4
194.0
206.0
221.4
242.5

37.4
36.3
36.5
38.7
41.9

141.0
157.8
169.5
182.6
200.6

70.7
80.9
87.5
94.0
103.4

26.9
30.3
32.7
34.6
37.9

33.7
36.2
36.9
40.7
44.5

9.8
10.4
12.4
13.3
14.9

52.1
55.1
58.7
64.5
68.5

3.43
3.52
3.51
3.43
3.54

2.71
2.86
2.89
2.83
2.93

1970
1971
1972
1973
1974

249.4
267.4
296.6
365.1
435.2

40.1
45.0
55.3
78.0
74.3

209.2
222.4
241.3
287.1
360.9

105.8
107.3
113.6
136.1
177.0

41.7
45.2
50.0
59.4
75.6

45.8
52.3
57.7
66.4
74.6

16.0
17.6
19.9
25.2
33.7

72.2
78.6
87.5
96.0
104.0

3.45
3.40
3.39
3.80
4.18

2.90
2.83
2.76
2.99
3.47

1975....
1976
1977
1978
1979

440.1
475.3
521.6
605.3
702.6

75.5
72.2
75.2
92.1
97.9

364,5
403.1
446.4
513.2
604.7

177.8
194.9
210.6
238.0
280.6

76.2
86.1
96.2
111.7
141.2

74.7
82.7
93.3
107.5
118.9

35.8
39.4
46.3
55.9
64.1

116.2
127.6
142.7
164.5
182.3

3.79
3.72
3.65
3.68
3.85

3.14
3.16
3.13
3.12
3.32

1980
1981
1982
1983
1984....,

784.1
836.2
817.0
827.5
898.9

104.9
101.4
103.6
103.2
100.9

679.3
734.7
713.5
724.4
797.9

309.8
331.9
318.5
319.2
349.0

174.2
184.8
174.7
168.9
187.2

125.0
137.0
139.5
153.7
173.5

70.3
81.1
80.7
82.5
88.3

201.2
217.2
228.6
249.6
271.5

3.90
3.85
3.57
3.32
3.31

3.38
3.38
3.12
2.90
2.94

1985
1986
1987
1988
1989

904.3
887.9
950.6
1,025.1
1,081.6

96.6
90.5
90.9
95.4
96.3

807.7
797.3
859.7
929.6
985.3

339.9
328.1
349.3
383.2
409.7

184.9
183.4
196.3
215.3
224.8

188.6
193.4 I
216.1
229.9
250.2

94.3
92.4
98.0
101.2
100.6

292.7
311.1
329.2
358.4
376.6

3.09
2.85
2.89
2.86
2.87

2.76
2.56
2.61
2.59
2.62

1990
1991
1989:1
II
Ill
IV

1,106.8
1,082.1

94.6
90.5

1,012.2
991.6

422.2
406.7

236.0
235.5

252.0
255.8

102.0
93.6

393.3
403.9

2.81
2.68

2.57
2.45

1,048.4
1,061.4
1,067.1
1,081.6

97.5
98.3
95.1
96.3

950.9
963.1
972.0
985.3

393.9
401.8
407.4
409.7

216.8
220.6
222.5
224.8

238.9
239.4
240.7
250.2

101.4
101.3
101.3
100.6

363.0
369.0
373.6
376.6

2.89
2.88
2.86
2.87

2.62
2.61
2.60
2.62

1990:1
II
Ill
IV

1,084.6
1,095.8
1,117.2
1,106.8

96.5
98.6
97.2
94.6

988.1
997.2
1,020.0
1,012.2

412.3
415.0
427.5
422.2

226.5
230.1
236.5
236.0

246.7
249.9
252.3
252.0

102.6
102.3
103.7
102.0

385.2
388.1
392.0
393.3

2.82
2.82
2.85
2.81

2.57
2.57
2.60
2.57

1991:1

1,093.3
1,089.6
1,085.5
1,082.1

97.6
101.1
96.9
90.5

995.7
988.5
988.6
991.6

416.6
411.9
409.9
406.7

234.8
231.4
231.8
235.5

247.0
248.9
252.5
255.8

97.3
96.4
94.5
93.6

393.8
399.3
401.8
403.9

2.78
2.73
2.70
2.68

2.53
2.48
2.46
2.45

1,085.1
1,090.9
1,098.5

93.0
91.4
92.4

992.1
999.4
1,006.1

404.0
403.1
405.2

236.0
238.3
238.7

257.4
263.3
267.0

94.7
94.8
95.3

411.1
414.5
419.1

2.64
2.63
2.62

2.41
2.41
2.40

,

Ill
IV
1992:1

1
Inventories at end of quarter. Quarter-to-quarter change calculated from this table is not the current-dollar change in business
inventories (CBI) component of GDP. The former is the difference between two inventory stocks, each valued at their respective end-ofquarter prices. The latter is the change in the physical volume of inventories valued at average prices of the quarter. In addition,
changes calculated from this table are at quarterly rates, whereas CBI is stated at annual rates.
2
Inventories of construction establishments are included in "other" nonfarm inventories.
3
Quarterly totals at monthly rates. Final sales of domestic business equals final sales of domestic product less gross product of
households and institutions and general government and includes a small amount of final sales by farms.
Note.—The industry classification of inventories is on an establishment basis and is based on the 1987 Standard Industrial
Classification (SIC) beginning 1987 and on the 1972 SIC for earlier years shown.
Source: Department of Commerce, Bureau of Economic Analysis.




366

TABLE B-17.—Inventories and final sales of domestic business in 1987 dollars,

1959-92

[Billions of 1987 dollars, except as noted; seasonally adjusted]
Inventories'
Nonfarm
Quarter
Total 2

Farm
Total 2

Manufacturing

Wholesale
trade

Retail
trade

Other

Final
sales of
domestic
business 3

Ratio of inventories
to final sales of
domestic business

Total

Nonfarm

Fourth quarter:
1959

388.6

79.6

308.9

152.4

61.2

67.6

27.8

130.5

2.98

2.37

1960
1961
1962
1963
1964

396.7
403.9
419.5
435.6
451.2

80.5
82.1
83.9
85.4
83.4

316.2
321.8
335.7
350.2
367.8

153.9
157.9
166.1
171.6
179.6

62.4
63.7
65.9
69.6
73.4

71.4
70.2
73.8
76.9
80.3

28.5
30.0
29.9
32.0
34.5

133.2
138.8
143.8
152.1
159.7

2.98
2.91
2.92
2.86
2.83

2.37
2.32
2.33
2.30
2.30

1965
1966
1967
1968
1969

476.4
513.1
540.7
564.3
589.2

84.6
83.5
84.5
86.9
86.9

391.7
429.6
456.3
477.5
502.3

190.2
212.1
227.6
237.4
246.7

77.6
86.5
92.0
94.7
100.3

86.8
92.5
92.1
99.3
105.9

37.2
38.4
44.6
46.1
49.4

172.8
175.9
182.4
191.0
194.0

2.76
2.92
2.97
2.95
3.04

2.27
2.44
2.50
2.50
2.59

1970
1971
1972
1973
1974

595.1
615.8
638.4
676.1
707.0

86.3
89.2
90.6
92.9
92.5

508.8
526.7
547.7
583.3
614.5

246.1
243.9
249.6
264.9
283.7

106.9
112.3
116.3
121.1
130.8

105.8
117.8
125.3
134.5
133.6

50.0
52.6
56.5
62.7
66.4

196.3
203.4
218.5
223.1
218.5

3.03
3.03
2.92
3.03
3.24

2.59
2.59
2.51
2.61
2.81

1975
1976
1977
1978
1979

693.1
718.6
752.9
790.1
803.7

92.9
90.8
93.6
93.0
95.7

600.2
627.8
659.2
697.1
708.0

277.2
289.6
297.1
309.2
320.1

127.3
135.3
144.4
155.8
157.3

127.6
134.8
144.5
153.7
153.5

68.0
68.1
73.3
78.3
77.1

226.5
235.6
246.7
261.3
265.7

3.06
3.05
3.05
3.02
3.02

2.65
2.66
2.67
2.67
2.66

1980

1981
1982
1983
1984

795.4
820.0
802.5
806.9
874.8

92.3
98.3
101.4
93.1
94.8

703.1
721.7
701.0
713.8
780.0

319.9
324.0
311.3
311.9
339.4

161.9
164.8
159.9
159.3
174.7

146.7
152.9
151.7
162.8
181.4

74.6
80.0
78.1
79.8
84.5

265.4
262.7
264.9
279.0
292.7

3.00
3.12
3.03
2.89
2.99

2.65
2.75
2.65
2.56
2.66

1985
1986
1987
1988
1989

896.9
905.5
931.8
951.7
981.5

97.2
95.1
88.7
81.7
81.6

799.8
810.4
843.1
870.0
899.9

335.7
333.6
340.2
355.3
373.9

178.7
185.7
192.7
199.1
202.5

194.1
196.7
213.6
219.7
231.0

91.3
94.4
96.6
95.9
92.5

305.0
316.9
325.2
339.5
343.2

2.94
2.86
2.87
2.80
2.86

2.62
2.56
2.59
2.56
2.62

987.6
978.3

84.0
84.3

903.6
894.0

377.6
370.7

207.0
207.9

227.3
229.0

91.7
86.3

343.3
342.1

2.88
2.86

2.63
2.61

IV

962.0
971.3
975.2
981.5

83.1
84.5
83.1
81.6

878.9
886.7
892.1
899.9

360.2
367.0
372.2
373.9

198.4
201.6
202.1
202.5

225.5
224.3
224.5
231.0

94.8
93.9
93.3
92.5

340.2
342.0
343.2
343.2

2.83
2.84
2.84
2.86

2.58
2.59
2.60
2.62

1990:1
II
Ill
IV

983.4
991.5
994.3
987.6

82.0
83.2
84.3
84.0

901.4
908.4
910.0
903.6

376.7
378.6
379.8
377.6

203.5
206.2
207.8
207.0

226.5
228.9
228.8
227.3

94.6
94.6
93.6
91.7

347.2
345.9
345.4
343.3

2.83
2.87
2.88
2.88

2.60
2.63
2.63
2.63

1991:1
II
Ill

981.4
976.3
976.4
978.3

83.9
85.0
85.4
84.3

897.4
891.3
891.1
894.0

378.3
375.4
373.5
370.7

207.4
204.6
204.6
207.9

222.4
222.8
226.0
229.0

89.4
88.5
87.0
86.3

339.8
342.0
342.0
342.1

2.89
2.85
2.86
2.86

2.64
2.61
2.61
2.61

975.2
977.1
980.9

83.8
84.3
85.6

891.4
892.9
895.3

368.5
366.9
367.9

206.5
207.3
206.8

229.2
232.1
234.5

87.1
86.5
86.1

346.0
346.7
348.8

2.82
2.82
2.81

2.58
2.58
2.57

1990
1991
1989:1
II
Ill

IV

1992:1

1
Inventories at end of quarter. Quarter-to-quarter changes calculated from this table are at quarterly rates, whereas the constantdollar change in business inventories component of GDP is stated at annual rates.
2
Inventories of construction establishments are included in "other" nonfarm inventories.
3
Quarterly totals at monthly rates. Final sales of domestic business equals final sales of domestic product less gross product of
households and institutions and general government and includes a small amount of final sales by farms.

Note.—The industry classification of inventories is on an establishment basis and is based on the 1987 Standard Industrial
Classification (SIC) beginning 1987 and on the 1972 SIC for earlier years shown.
Source: Department of Commerce, Bureau of Economic Analysis.




367

TABLE B-18.—Foreign transactions in the national income and product accounts, 1939-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Payments to rest of the world

Receipts from rest of the world
Year or
quarter

Total

Merchandise2

25 0
30.2
31.4
33.5
36.1
41.0
43.5
47.2
50.2
55.6
61.2
70.8
74.2
83.4
115.6
152.6
164.4
181.6
196.5
233.3
299.7
360.9
398.2
379.9
372.5
410.5
399.3
415.2
469.0
572.9
665 5
717.6
741.7
357.5
388.3
415.2
402.9
426.7
506.8
606.9

22 3
22.8
22.7
25.0
26.1
28.1
31.5
37.1
39.9
46.6
50.5
55.8
62.3
74.2
91.2
127.5
122.7
151.1
182.4
212.3
252.7
293.9
317.7
303.2
328.1
405.1
417.6
451.7
507.1
552.2
587 7
625.9
620.0
295.1
358.0
415.7
440.2
467.1
535.6
573.1

15 3
15.2
15.1
16.9
17.7
19.4
22.2
26.3
27.8
33.9
36.8
40.9
46.6
56.9
71.8
104.5
99.0
124.6
152.6
177.4
212.8
248.6
267.7
250.6
272.7
336.3
343.3
370.0
414.8
452.1
4851
507.8
499.9
241.6
300.0
344.1
363.0
382.4
437.6
470.1

70
7.6
7.6
8.1
8.4
8.7
9.3
10.7
12.2
12.6
13.7
14.9
15.8
17.3
19.3
22.9
23.7
26.5
29.8
34.8
39.9
45.3
49.9
52.6
55.4
68.8
74.3
81.7
92.3
100.1
102 6
118.1
120.1
53.4
58.0
71.6
77.2
84.7
98.0
103.0

24
15
2.4
1.8
2.7
1.8
2.8
1.8
2.8
2.1
3.0
2.4
2.7
3.0
3.1
3.2
3.4
3.4
4.1
3.2
5.8
3.2
3.6
6.6
4.1
6.4
4.3
7.7
4.6
11.1
5.4
14.6
5.4
14.9
6.0
15.7
6.0
17.2
6.4
25.3
7.5
37.5
9.0
46.5
10.0
60.9
12.1
67.1
12.9
66.5
15.6
83.8
17.4
82.4
18.3
86.9
16.6
100.5
17.8
120.8
25.6
1415
27.9
139.9
126.0 - 1 3 . 3
64.4
13.8
17.8
71.0
20.4
85.5
19.4
82.4
19.6
88.9
21.4
106.9
23.8
130.2

04
.5

152.6
161.0
157.1
159.3

642.4
670.4
666.1
683.1

574.9
589.6
588.7
597.7

474.1
488.4
485.5
492.2

100.8
101.1
103.1
105.6

138.6
147.2
141.3
139.1

150.4
154.9
160.4
170.2

156.8
154.9
157.8
172.9

698.0
706.1
713.7
752.6

613.3
611.2
632.2
646.9

500.2
495.8
512.2
523.2

113.1
115.4
120.0
123.7

137.9
140.5
139.5
141.5

163.2
173.2
178.8
185.3

159.8
143.2
137.8
133.1

733.0
737.5
740.1
756.0

602.0
609.6
629.5
638.9

485.2
489.5
508.7
516.2

116.7
120.0
120.8
122.7

130.8 - 6 1 . 8
126.5 -16.7
9.1
124.5
16.2
122.3

761.0 628.1 437.3 190.8
756.7 625.4 435.2 190.2
767.9 639.0 446.7 192.4

132.9
131.3
128.8

761.0 636.2 513.1 123.1 113.3
756.7 662.5 537.0 125.5 124.3
767.9 675.0 559.7 115.3 115.3

Imports of goods and
services
Total

Total

Merchandise 2

Receipts
of factor
Serv- income3
2
ices

IV....
IV....
IV....
IV....
IV....
IV....
IV ...

25 0
30.2
31.4
33.5
36.1
41.0
43.5
47.2
50.2
55.6
61.2
70.8
74.2
83.4
115.6
152.6
164.4
181.6
196.5
233.3
299.7
360.9
398.2
379.9
372.5
410.5
399.3
415.2
469.0
572.9
665.5
717.6
741.7
357.5
388.3
415.2
402.9
426.7
506.8
606.9

20 6
25.3
26.0
27.4
29.4
33.6
35.4
38.9
41.4
45.3
49.3
57.0
59.3
66.2
91.8
124.3
136.3
148.9
158.8
186.1
228.9
279.2
303.0
282.6
276.7
302.4
302.1
319.2
364.0
444.2
508.0
557.0
598.2
265.6
286.2
308.7
304.7
333.9
392.4
467.0

16 5
20.5
20.9
21.7
23.3
26.7
27.8
30.7
32.2
35.3
38.3
44.5
45.6
51.8
73.9
101.0
109.6
117.8
123.7
145.4
184.2
226.0
239.3
215.2
207.5
225.8
222.4
226.2
257.7
325.8
371.6
398.1
423.1
198.2
218.2
231.4
222.6
235.8
283.3
345.4

42
4.8
5.1
5.7
6.1
6.9
7.6
8.2
9.2
10.0
11.0
12.4
13.8
14.4
17.8
23.3
26.7
31.1
35.1
40.7
44.7
53.2
63.7
67.4
69.2
76.6
79.7
93.0
106.2
118.4
136.4
159.0
175.1
67.4
67.9
77.3
82.1
98.1
109.2
121.6

43
5.0
5.4
6.1
6.6
7.4
8.1
8.3
8.9
10.3
11.9
13.0
14.1
16.4
23.8
30.3
28.2
32.8
37.7
47.1
69.7
80.6
94.1
97.3
95.8
108.1
97.3
96.0
105.1
128.7
157 5
160.6
143.5
91.9
102.1
106.6
98.1
92.8
114.4
139.9

1989: I
II
III....
IV....

642.4
670.4
666.1
683.1

489.7
509.5
509.0
523.8

358.5
376.5
370.5
380.7

131.2
132.9
138.5
143.1

1990: I
II
III....
IV ...
1991: 1
II ....
Ill ...
IV....
1992: I
II ....
Ill ...

698.0
706.1
713.7
752.6

541.2
551.2
555.9
579.7

390.7
396.4
395.5
409.6

733.0
737.5
740.1
756.0

573.2
594.3
602.3
622.9

410.0
421.1
423.5
437.7

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1982:
1983:
1984:
1985:
1986:
1987:
1988:

Transfer payments (net)

Payments
of
Serv- factor
in- 4
2
ices come

Exports of goods and
services
Total»

1
2

Total

From
From
From
persons govern- business
ment
(net)
(net)

Net
foreign
investment

.5
.6
.7
.8
.8
1.0
1.0
1.1
1.2
1.3
1.3
1.4
1.2
1.2
1.2
1.2
1.3
1.4
1.6
1.8
2.1
1.8
2.3
2.7
2.5
3.0
2.7
89
9.3
9.7
1.9
2.0
2.5
2.5
2.8
3.1
2.7

18
1.9
2.1
2.1
2.1
2.1
2.1
2.2
2.1
1.9
1.8
2.0
2.4
2.5
2.5
3.2
3.5
3.7
3.4
3.8
4.1
5.0
5.0
6.4
7.3
9.4
11.4
12.3
10.4
10.4
11.3
13.4
-28.3
8.2
11.0
13.9
13.5
12.8
14.6
15.1

01
.1
.1
.1
.1
.2
.2
.2
.2
.3
.3
.4
.4
.5
.7
1.0
.7
1.1
1.4
1.4
2.0
2.4
3.2
3.6
3.8
3.9
3.2
3.5
3.2
4.8
5.4
5.2
5.3
3.7
4.8
4.0
3.4
4.0
3.8
5.9

-12
3.2
4.3
3.9
5.0
7.5
6.2
3.9
3.5
1.7
1.8
4.9
1.3
-2.9
8.7
5.1
21.4
8.8
-9.2
-10.7
2.0
11.5
9.5
-2.5
35.0
-94.0
-118.1
-141.7
-155.1
-118.0
-89.3
-76.1
9.0
-15.8
-58.5
-106.3
-139.1
-149.0
-157.1
-120.1

23.7
22.8
25.7
30.3

8.2
8.7
8.7
9.8

10.0
8.6
11.5
15.1

5.5
5.5
5.4
5.4

-94.7
-89.1
-89.6
-84.0

25.7
29.7
28.7
27.4

8.5
9.0
10.2
9.5

12.0
15.5
13.3
12.8

5.3
5.2
5.2
5.2

-79.0
-75.3
-86.7
-63.2

9.4 -76.4
9.8 - 3 1 . 8
9.9 - 6 . 2
9.7
1.3

5.2
5.3
5.3
5.3

62.1
18.2
-22.9
-21.5

12.0
13.6
12.0

5.3
5.3
5.1

-16.0
-59.4
-49.6

27.4
29.3
27.1

10.2
10.4
10.0

Includes capital grants received by the United States (net), not shown separately. See Table B-26 for data.
Exports and imports of certain goods, primarily military equipment purchased and sold by the Federal Government, are included in
services.
3
Consists largely of receipts by U.S. residents of interest and dividends and reinvested earnings of foreign affiliates of U.S.
corporations.
4
Consists largely of payments to foreign residents of interest and dividends and reinvested earnings of U.S. affiliates of foreign
corporations.
Source: Department of Commerce, Bureau of Economic Analysis.




368

TABLE B-19.—Exports and imports of goods and services and receipts and payments of factor income in
1987 dollars, 1959-92
[Billions of 1987 dollars; quarterly data at seasonally adjusted annual rates]
Exports of goods and services

Imports of goods and services

Merchandise >
Year or quarter
Total
Total

Durable
goods

Nondurable
goods

Services 1

ceipts
of
factor

Merchandise'
Total
Total

Durable
goods

Nondurable
goods

Services l

Payments
of
factor
income 3

1959

73.8

58.0

31.5

26.5

15.8

17.0

95.6

60.2

26.0

34.2

35.4

6.2

1960
1961
1962
1963
1964

88.4
89.9
95.0
101.8
115.4

71.2
71.5
74.8
80.3
91.4

39.2
39.4
41.2
43.6
50.2

32.0
32.1
33.5
36.7
41.2

17.2
18.4
20.3
21.5
24.0

19.1
20.6
22.6
24.4
26.7

96.1
95.3
105.5
107.7
112.9

59.1
59.2
68.0
70.9
75.6

24.7
23.7
28.0
29.6
32.8

34.4
35.5
40.0
41.2
42.8

37.0
36.1
37.5
36.8
37.3

7.2
7.2
7.3
8.2
9.1

1965
1966
1967
1968
1969

118.1
125.7
130.0
140.2
147.8

92.1
98.4
100.1
108.8
114.4

52.2
56.1
63.8
70.0
75.2

39.9
42.3
36.3
38.7
39.2

25.9
27.3
29.9
31.5
33.3

28.3
28.1
29.2
32.3
35.8

124.5
143.7
153.7
177.7
189.2

86.5
100.2
105.2
128.1
137.0

40.5
50.6
53.1
68.7
74.1

46.0
49.6
52.1
59.4
62.8

37.9
43.5
48.6
49.6
52.3

9.9
11.0
U.8
13.6
17.8

1970
1971
1972
1973
1974

161.3
161.9
173.7
210.3
234.4

125.2
124.1
136.5
166.9
183.4

80.4
79.3
87.1
108.0
123.5

44.7
44.9
49.5
58.9
59.9

36.1
37.8
37.2
43.4
51.0

36.9
38.1
42.3
57.6
67.5

196.4
207.8
230.2
244.4
238.4

142.1
156.1
177.5
194.7
189.3

75.4
84.4
95.7
100.9
101.3

66.7
71.7
81.7
93.9
87.9

54.4
51.7
52.8
49.7
49.2

19.2
18.0
20.5
27.6
33.2

1975
1976
1977
1978
1979

232.9
243.4
246.9
270.2
293.5

178.5
183.9
183.9
203.0
225.7

121.3
121.8
119.5
132.1
148.1

57.2
62.1
64.4
70.9
77.6

54.4
59.5
63.0
67.2
67.8

57.5
63.0
67.9
78.7
107.1

209.8
249.7
274.7
300.1
304.1

163.3
200.4
223.2
245.2
248.7

82.1
100.9
112.9
130.0
132.1

81.2
99.5
110.3
115.3
116.7

46.5
49.3
51.5
54.8
55.3

31.6
31.5
32.2
43.2
58.6

1980
1981
1982
1983
1984

320.5
326.1
296.7
285.9
305.7

248.2
244.0
217.7
208.3
221.3

161.0
154.2
130.5
124.6
133.8

87.3
89.7
87.2
83.8
87.5

72.3
82.2
79.0
77.6
84.4

113.7
120.7
117.9
111.0
119.4

289.9
304.1
304.1
342.1
427.7

235.6
246.1
243.1
276.5
346.1

133.6
143.4
143.0
167.6
219.9

102.0
102.7
100.1
108.9
126.2

54.2
58.0
61.1
65.6
81.6

66.6
79.4
82.1
78.0
93.5

1985
1986
1987
1988
1989

309.2
329.6
364.0
421.6
471.8

224.8
234.3
257.7
307.4
343.8

139.3
144.8
163.0
202.8
230.9

85.6
89.6
94.7
104.6
112.9

84.4
95.3
106.2
114.2
128.0

103.4
99.2
105.1
123.8
144.7

454.6
484.7
507.1
525.7
545.4

366.5
398.0
414.8
431.3
450.4

237.2
254.6
264.2
274.7
287.1

129.3
143.4
150.6
156.7
163.3

88.1
86.7
92.3
94.3
95.0

88.2
90.2
100.5
116.1
130.1

1990
1991

510.0
539.4

368.5
392.5

249.2
266.4

119.3
126.1

141.4
146.9

141.1
120.8

561.8
561.2

460.3
463.5

291.2
296.7

169.1
166.8

101.5
97.7

122.6
105.4

1982: IV
1983: IV
1984-.IV
1985.1V
1986.1V
1987: IV
1988: IV

280.4
291.5
312.8
312.0
342.9
386.1
438.2

202.8
215.5
229.0
226.4
243.5
278.0
322.0

119.0
131.0
138.5
139.6
150.0
180.1
214.7

83.7
84.5
90.5
86.8
93.5
97.8
107.2

77.6
75.9
83.8
85.5
99.4
108.1
116.2

109.7
116.5
116.1
102.9
94.8
112.9
132.3

299.4
375.1
444.2
467.4
498.9
522.1
540.9

236.3
306.6
357.9
380.0
409.1
427.4
444.8

134.6
191.1
229.3
243.5
259.8
273.8
284.0

101.7
115.5
128.6
136.5
149.3
153.7
160.8

63.1
68.6
86.3
87.4
89.8
94.6
96.1

77.6
82.0
93.9
86.8
91.2
105.4
123.0

1989:1
II
Ill

454.5
472.0
472.9
487.7

330.2
346.9
343.3
354.8

220.9
233.5
231.3
237.8

109.3
113.5
112.0
116.9

124.3
125.0
129.6
132.9

142.5
148.6
143.6
144.3

534.3
541.9
550.5
555.0

440.4
447.6
455.0
458.5

283.3
286.2
288.3
290.4

157.1
161.4
166.7
168.1

93.9
94.3
95.5
96.5

129.4
136.0
129.2
125.9

500.2
508.7
508.4
522.6

363.5
368.7
366.7
375.3

245.2
251.6
248.7
251.3

118.3
117.1
118.0
123.9

136.7
140.0
141.7
147.3

140.3
136.8
137.8
149.3

558.6
565.6
567.7
555.3

458.3
464.5
465.7
452.7

285.1
291.4
295.0
293.3

173.2
173.0
170.7
159.4

100.3
101.2
102.0
102.6

123.3
124.0
121.5
121.7

1991:1

515.9
536.1
544.2
561.4

377.4
390.1
395.2
407.3

251.1
267.9
269.6
277.0

126.3
122.1
125.5
130.3

138.5
146.1
149.0
154.0

136.2
120.9
115.4
110.8

533.8
553.5
575.8
581.8

438.9
454.9
477.9
482.2

282.2
286.6
306.9
311.0

156.7
168.3
171.0
171.3

94.9
98.5
97.9
99.6

110.9
106.2
103.6
101.0

1992:1
II

565.4
563.4
575.9

408.1
408.0
420.4

276.1
278.4
285.8

131.9
129.6
134.6

157.3
155.4
155.5

109.7
107.6
105.0

586.8
607.3
628.6

488.0
507.8
526.4

316.3
327.0
342.1

171.8
180.8
184.3

98.8
99.5
102.2

92.7
101.0
93.0

IV

1990:1
II.....
Ill
IV

II
Ill
IV

1
Exports and imports of certain goods, primarily military equipment purchased and sold by the Federal Government, are included in
services.
2
Consists largely of receipts by U.S. residents of interest and dividends and reinvested earnings of foreign affiliates of U.S.
corporations.
3
Consists largely of payments to foreign residents of interest and dividends and reinvested earnings of U.S. affiliates of foreign
corporations.

Source: Department of Commerce, Bureau of Economic Analysis.




369

TABLE B-20.—Relation of gross domestic product, gross national product, net national product, and
national income, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]

Less:

Year or
quarter

Gross
domestic
product

Less:
Plus:
Receipts Payments
of factor of factor
income income to
rest of
from rest
the
of the
world 2
world l

1.5
18
1.8
1.8
2.1
2.4
2.7
3.1
3.4
4.1
5.8
66
6.4
7.7

PIUS:

Subsidies
Equals:
Gross
national
product

Less:
Consumption of
fixed
capital

Equals:
Net
national
product

IcSS

Indirect
business
tax and
nontax
liability

Business
transfer
payments

Statistical
discrepancy

current
surplus
of
government
enterprises

Equals:
National
income

-1.8

-0.9

410.1

-31

- 8

425.7
440.5
474.5
501.5
539.1

140 0
151.6
165 5
177.8
188.7

1.4
1.4
1.5
1.6
1.8
2.0
2.2
2.3
2.5
2.8
3.1
3.2
3.4
3.9
45
5.0
52
6.5
73
8.2
9.9

2,430.2
2,701.4
2,780.8
3,016.0
3,368.3

212.0
249.3
256.4
280.1
309.5

11.2
13.4
15.4
16.6
19.0

13.6
10.9
-7.4
10.2
-9.0

454.5
478.6
502.2
534.0
580.4

3,599.1
3,799.2
4,042.4
4,374.2
4,686.4

329.9
345.5
365.0
385.3
414.7

21.0
24.2
24.0
25.6
26.6

-13.9

51694.9

602 8
6261

4 940 1
5!068!8

444 2
475.2

26 4
28.1

64.4
71.0
85.5
82.4
88.9
106.9
130.2

3,222.6
3,578.4
3,890.2
4,156.2
4,340.5
4,690.5
5,054.3

412.5
439.7
448.0
465.6
488.2
512.1
547.2

2,810.1
3,138.7
3,442.2
3,690.7
3,852.3
4,178.5
4,507.2

262.3
291.7
317.7
335.1
351.6
372.3
394.2

152.6
161.0
157.1
159.3

138.6
147.2
141.3
139.1

5,164.0
5,243.3
5,294.7
5,365.0

557.8
568.4
594.3
600.8

4,606.2
4,674.9
4.700.4
4,764.2

5,445.2
5,522.6
5,559.6
5,561.3

156.8
154.9
157.8
172.9

137.9
140.5
139.5
141.5

5,464.1
5,537.0
5,577.8
5,592.7

594.7
599.1
605.8
611.6

1991:1
II
Ill
IV

5,585.8
5,657.6
5,713.1
5,753.3

159.8
143.2
137.8
133.1

130.8
126.5
124.5
122.3

5,614.9
5,674.3
5,726.4
5,764.1

1992.1
II
Ill

5,840.2
5,902.2
5,978.5

132.9
131.3
128.8

113.3
124.3
115.3

5,859.8
5,909.3
5,992.0

4.3
50
5.4
6.1
6.6
7.4
8.1
8.3
8.9

497.0

44.6

452.5

41.9

516 6
535.4
575.8
607.7
653.0

46 3
47.7
49.3
51.3
53.9

470 2
487.7
526.5
556.4
599.2

45 5
48.1
51.7
54.7
58.8

708.1
774.9
819.8
895.5
965.6

57.3
62.1
67.4
73.9
81.5

650.7
712.8
752.4
821.5
884.2

62.7
65.4
70.4
79.0
86.6

111
14.6

1,017 1
1,104.9
1,215.7
1362 3
1,474.3

88 8
97.6
109.9
120 4
140.2

928 3
1,007.3
1,105.7
12419
1,334.1

94 3
103.6
111.4
1210
129.3

28 2
32.8
37 7
47.1
69.7

14 9
15.7
17 2
25.3
37.5

1 599 1
1,785.5
1994 6
2,254.5
2,520.8

165 2
182.8
205 2
234.8
272.4

1 433 9
1,602.7
1 789 4
2,019.8
2,248.4

2,708.0
3,030.6
3,149.6
3,405.0
3,777.2

80.6
94.1
97.3
95.8
108.1

46.5
60.9
67.1
66.5
83.8

2,742.1
3,063.8
3,179.8
3,434.4
3,801.5

311.9
362.4
399.1
418.4
433.2

1985
1986
1987
1988.
1989

4,038.7
4,268.6
4,539.9
4,900.4
5,250.8

97.3
96.0
105.1
128.7
157.5

82.4
86.9
100.5
120.8
141.5

4,053.6
4,277.7
4,544.5
4,908.2
5,266.8

1990
1991

5 522 2
5,677.5

160 6
143.5

139 9
126.0

5 542 9

1982:1V
1983: IV
1984: IV
1985: IV
1986: IV
1987: IV
1988.1V

3,195.1
3,547.3
3,869.1
4,140.5
4,336.6
4,683.0
5,044.6

91.9
102.1
106.6
98.1
92.8
114.4
139.9

1989:1
II
Ill
IV

5,150.0
5,229.5
5,278.9
5,344.8

1990:1
II
Ill
IV

1959

494.2

1960
1961
1962
1963
1964

513 4
531.8
571.6
603.1
648.0

1965
1966
1967.,
1968
1969

702.7
769.8
814.3
889.3
959.5

10.3
11.9

1970
1971
1972
1973
1974

1,010 7
1,097.2
1,207.0
1349 6
1,458.6

13 0
14.1
16.4
23 8
30.3

1975
1976
1977
1978
1979

1585 9
1,768.4
1974 1
2,232.7
2,488.6

1980
1981
1982
1983
1984

-2.2
-1.0
-2.0
_ y
-.7
2.8
.8
-.1
-2.6
0
3.1
1.1
- 5
1.4
60
10.4
10 9
7.6
13.8

.2
.3
-.3
.1
.3
1.4
1.2
1.2
1.5
26
2.4
3.4
2.6
.4
26
1.4
33
3.6
2.9
4.8
4.7
6.2

11.7

9.5
6.4
9.7

586.9
643.7
679.9
741.0
798.6
833.5
899.5
992.9
1,119 5
1,198.8
1285 3
1,435.5
1,609 1
1,829.8
2,038.9
2,198.2
2,432.5
2,522.5
2,720.8
3,058.3

14.1
10.9
5.4

3,268.4
3,437.9
3,692.3
4,002.6
4,249.5

21.9

42
.5

4,468.3
4,544.2

16.0
18.1
20.2
22.2
24.9
24.2
27.2

-10.1
13.8
-20.5
-5.9
-2.0
-24.9
-25.4

9.6
19.2
9.7
2.6
8.2
22.0
16.5

2,551.5
2,834.3
3,134.4
3,341.9
3,486.0
3,828.8
4,127.6

401.7
411.6
421.0
424.4

27.2
26.6
26.3
26.2

-11.4

15.2
5.8
-3.9
4.4

4,203.9
4,240.8
4,248.0
4,305.2

4,869.4
4,937.9
4,972.1
4,981.0

436.0
437.7
447.3
455.7

26.1
26.3
26.4
26.8

16.1
13.4
-9.1

-5.6
10.3

9.5
2.7

4,400.7
4,475.3
4,479.3
4,517.9

618.9
623.5
624.9
637.1

4,996.0
5,050.9
5,101.5
5,127.0

464.7
468.2
480.0
487.9

27.3
27.9
28.4
28.6

13.4
27.1
30.5
16.4

-7.1

2.5
1.6

4,493.0
4,529.2
4,555.4
4,599.1

631.4
638.2
697.7

5,228.3
5,271.1
5,294.3

493.8
497.6
506.4

29.4
29.8
29.9

29.0
30.9
35.1

1.2

-24.8
-28.4

1.1
54

1.7
1.2

12.8

1.2

5.1
3.2
3.6

-3.4

4,679.4
4,716.5
4,719.6

1
Consists largely of receipts by U.S. residents of interest and dividends and reinvested earnings of foreign affiliates of U.S.
corporations.
2
Consists largely of payments to foreign residents of interest and dividends and reinvested earnings of U.S. affiliates of foreign
corporations.

Source: Department of Commerce, Bureau of Economic Analysis.




370

TABLE B-21.—Relation of national income and personal income, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Less:

Year or quarter

tional
come

Corporate
profits
with
inventory
valuation
and
capital
consumption
adjustments

Net
interest

Equals-.

PIUS:

Wage
Contribu- accruals
tions for
less
social
insurance disbursements

Personal
interest
income

Personal
dividend
income

Government
transfer
payments
to
persons

Business
transfer
payments
to
persons

Personal
income

1959

410.1

52.3

10.2

18.8

0.0

22.7

12.7

25.7

1.3

391.2

1960
1961
1962
1963
1964

425.7
440.5
474.5
501.5
539.1

50.7
51.6
59.6
65.1
72.1

11.2
13.1
14.6
16.1
18.2

21.9
22.9
25.4
28.5
30.1

.0
.0
.0
.0
.0

25.0
26.9
29.3
32.4
36.1

13.4
14.0
15.0
16.1
18.0

27.5
31.5
32.6
34.5
36.0

1.3
1.4
1.5
1.7
1.8

409.2
426.5
453.4
476.4
510.7

1965
1966
1967
1968
1969

586.9
643.7
679.9
741.0
798.6

82.9
88.6
86.0
92.6
89.6

21.1
24.3
28.1
30.4
33.6

31.6
40.6
45.5
50.4
57.9

.0
.0
.0
.0
.0

40.3
44.9
49.5
54.6
60.8

20.2
20.9
22.1
24.5
25.1

39.1
43.6
52.3
60.6
67.5

2.0
2.1
2.3
2.5
2.8

552.9
601.7
646.5
709.9
773.7

1970
1971
1972
1973
1974

833.5
899.5
992.9
1,119.5
1,198.8

77.5
90.3
103.2
116.4
104.5

40.0
45.4
49.3
56.5
71.8

62.2
68.9
79.0
97.6
110.5

.0
.6
.0
-.1
-.5

69.2
75.7
81.8
94.1
112.4

23.5
23.5
25.5
27.7
29.6

81.8
97.0
108.4
124.1
147.4

2.8
3.0
3.4
3.8
4.0

831.0
893.5
980.5
1,098.7
1,205.7

1975
1976
1977
1978
1979

1,285.3
1,435.5
1,609.1
1,829.8
2,038.9

121.9
147.1
175.7
199.7
202.5

80.0
85.1
100.7
120.5
149.9

118.5
134.5
149.8
171.8
197.8

.1
.1
.1
.3
-.2

123.0
134.6
155.7
184.5
223.2

29.2
34.7
39.4
44.2
50.4

185.7
202.8
217.5
234.8
262.8

4.5
5.5
5.9
6.8
7.9

1,307.3
1,446.3
1,601.3
1,807.9
2,033.1

1980
1981
1982
1983
1984

2,198.2
2,432.5
2,522.5
2,720.8
3,058.3

177.7
182.0
151.5
212.7
264.2

191.2
233.4
262.4
270.0
307.9

216.6
251.3
269.6
290.2
325.0

.0 274.0
.1 336.1
.0 376.8
-.4 397.5
.2 461.9

57.1
66.9
67.1
77.8
78.8

312.6
355.7
396.3
426.1
437.8

8.8
10.2
11.8
12.8
15.1

2,265.4
2,534.7
2,690.9
2,862.5
3,154.6

1985
1986
1987
1988
1989

3,268.4
3,437.9
3,692.3
4,002.6
4,249.5

280.8
271.6
319.8
365.0
362.8

326.2
350.2
360.4
387.7
452.7

353.8
379.8
400.7
442.3
473.2

-.2
.0
.0
.0
.0

498.1
531.7
548.1
583.2
668.2

87.9
104.7
100.4
108.4
126.5

468.1
497.1
521.3
555.9
603.8

17.8
20.7
20.8
20.8
21.1

3,379.8
3,590.4
3,802.0
4,075.9
4,380.3

1990
1991

4,468.3
4,544.2

361.7
346.3

460.7
449.5

502.3
528.8

.1
-.1

694.5
700.6

140.3
137.0

664.6
748.3

21.2
22.8

4,664.2
4,828.3

1982: IV
1983.1V
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV

2,551.5
2,834.3
3,134.4
3,341.9
3,486.0
3,828.8
4,127.6

150.3
229.1
261.3
284.9
264.6
343.3
378.3

256.8
281.8
321.1
331.9
349.7
368.6
408.1

272.8
298.3
332.2
362.3
388.7
409.6
453.5

.0
.0
.6
.0
.0
-.2
.0

373.6
418.7
485.4
507.5
532.6
562.3
608.9

69.4
80.6
79.3
92.7
105.6
100.1
113.8

419.9
428.0
442.3
474.8
505.8
528.1
563.5

12.3
13.2
16.2
18.8
20.9
20.4
21.3

2,746.8
2,965.8
3,242.5
3,456.7
3,647.8
3,918.5
4,195.2

1989:1
II
Ill
IV

4,203.9
4,240.8
4,248.0
4,305.2

369.4
369.9
357.3
354.5

433.8
454.9
462.4
459.8

466.3
471.0
475.3
480.4

.0
.0
.0
.0

643.1
670.7
677.6
681.2

120.2
124.2
128.7
132.9

585.8
596.4
609.1
624.0

21.8
21.1
20.9
20.8

4,305.2
4,357.4
4,389.2
4,469.4

1990:1
II
Ill
IV

4,400.7
4,475.3
4,479.3
4,517.9

367.6
384.0
351.4
344.0

457.6
457.6
456.0
471.4

493.9
499.6
506.5
509.1

.0
.0
.0
.2

683.8
690.5
697.3
706.3

137.5
139.8
141.6
142.5

648.2
655.0
667.1
688.1

20.8
21.1
21.2
21.6

4,571.7
4,640.5
4,692.6
4,751.9

1991:1
II
Ill

IV

4,493.0
4,529.2
4,555.4
4,599.1

349.6
347.3
341.2
347.1

456.2
444.4
450.5
446.9

521.5
526.5
532.1
535.2

.2
-.4
.0
.0

701.1
696.2
701.8
703.3

141.3
136.7
135.6
134.3

722.8
739.8
754.0
776.5

22.1
22.6
23.1
23.3

4,752.8
4,806.9
4,846.2
4,907.2

1992:1
II
Ill

4,679.4
4,716.5
4,719.6

384.0
388.4
374.1

430.0
420.0
407.3

546.2
550.8
554.4

.0
.0
.0

684.8
675.2
663.2

133.9
136.6
141.0

818.6
835.3
849.3

24.1
24.4
24.8

4,980.5
5,028.9
5,062.0

Source: Department of Commerce, Bureau of Economic Analysis.




371

TABLE B-22.—National income by type of income, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Proprietors' income with inventory valuation and
capital consumption adjustments

Compensation
of employees

Year or quarter

National
income 1
Total

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1982: IV
1983: IV
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV
1989:1
II
Ill
IV
1990:1
II
Ill
IV
1991:1
II
ill

IV
1992:1
II
Ill

281.2
296.7
305.6
327.4
345.5
371.0
399.8
586.9
443.0
643.7
475.5
679.9
524.7
741.0
578.4
798.6
618.3
833.5
659.4
899.5
726.2
992.9
812.8
1,119.5
891.3
1,198.8
948.7
1,285.3
1,435.5 1,058.3
1,609.1 1,177.3
1,829.8 1,333.0
1,496.4
2,038.9
1,644.4
2,198.2
2,432.5 1,815.5
2,522.5 1,916.0
2,720.8 2,029.4
3,058.3 2,226.9
3,268.4 2,382.8
3,437.9 2,523.8
3,692.3 2,698.7
4,002.6 2,921.3
4,249.5 3,100.2
3,291.2
4,468.3
4,544.2
3,390.8
2,551.5 1,940.4
2,834.3 2,101.2
3,134.4 2,288.1
3,341.9 2,442.5
3,486.0 2,582.5
3,828.8 2,785.1
4,127.6 3,004.9
3,048.2
4,203.9
3,077.5
4,240.8
4,248.0
3,112.2
4,305.2
3,162.8
4,400.7 3,223.7
4,475.3 3,281.2
4,479.3 3,320.5
4,517.9 | 3,339.6
4,493.0 3,343.0
4,529.2 3,379.6
4,555.4 3,407.0
4,599.1 3,433.8
4,679.4 | 3,476.3
4,716.5 3,506.3
4,719.6 3,534.3
410.1
425.7
440.5
474.5
501.5
539.1

Wages
and
salaries

259.8

272.8
280.5
299.3
314.8
337.7
363.7
400.3
428.9
471.9
518.3
551.5
584.5
638.7
708.6
772.2
814.7
899.6
994.0
1,120.9
1,255.3
1,376.6
1,515.6
1,593.3
1,684.2
1,850.0
1,986.3
2,105.4
2,261.2
2,443.0
2,586.4
2,742.9
2,812.2
1,611.8
1,747.3
1,903.9
2,039.1
2,153.9
2,336.7
2,510.6
2,545.3
2,567.4
2,595.1
2,637.9
2,686.1
2,735.7
2,768.2
2,781.4
2,774.9
2,804.3
2,824.4
2,845.0

2,877.6
2,901.3
2,923.5

Supplements
to
wages
and
salaries 2

21.4
23.8
25.1
28.1
30.7
33.2
36.1
42.7
46.6
52.8
60.1
66.8
74.9
87.6
104.2
119.1
134.0
158.7
183.3
212.1
241.1
267.8
299.8
322.7
345.2
376.9
396.5
418.4
437.4
478.3
513.8
548.4
578.7

328.6
353.9
384.2
403.3
428.6
448.4
494.3
502.9
510.1
517.1
524.9
537.6
545.5
552.3
558.2

568.1
575.2
582.6
588.7
598.7
605.0
610.8

Nonfarm

Farm

Total
Total

51.7
51.9
54.3
56.4
57.7
60.5

65.0
69.4
70.9
75.1
78.9
79.9
86.2
97.4
116.5
115.3
121.2
132.9
146.4
167.7
181.8
171.8
180.8
170.7
186.7
236.0
259.9
283.7
310.2
324.3
347.3
366.9
368.0
179.9
200.1
239.6
268.7
284.4
325.0
333.4
356.6
348.1
334.6
349.7
367.9
366.3
361.0
372.5
356.5
370.4
367.1
377.9
393.6
398.4
397.4

10.7
11.2
11.9
11.9
11.8
10.6
12.9
14.0
12.7
12.7
14.4
14.6
15.2 ,
19.1
32.2
25.5
23.7 1
18.3
17.1

21.5
24.7
11.5
21.2
13.5
2.4
21.3
21.5
22.3
31.3
30.9
40.2
41.7
35.8
10.2
6.3
21.9
17.8
23.6
42.4
30.9
51.3
42.3
29.0
38.4
48.1
43.6
32.2
42.8
34.3
41.3
29.5
37.9
40.1
38.5
31.5

Proprietors'

Capital
consumption
adjustment

Total

11.6
12.1
12.7
12.7
12.5
11.3
13.7
14.8
13.5
13.6
15.6
15.9
16.6
20.9
34.3
28.2
27.5
22.5
21.8
27.0
31.2
19.4
30.2
23.1
12.1
30.8
30.5
31.0
39.6
38.8
48.3

-0.9

-7.9
-9.0
-9.7
-9.7
-9.4
-9.0
-8.7
-8.3
-8.0
-8.1

41.1
40.6
42.4
44.5
45.9
49.8
52.1
55.3
58.2
62.4
64.5
65.3
70.9
78.3
84.3
89.8
97.5
114.6
129.4
146.2
157.0
160.3
159.6
157.3
184.3
214.7
238.4
261.5
279.0
293.4
307.0

49.5
43.4

-7.8
-7.6

325.2
332.2

20.0
15.8
31.2
26.7
32.1
50.6
38.8
59.3
50.3
37.4
46.4
56.1
51.4
40.0
50.5
42.0
48.9
37.1
45.4
47.5
45.8
39.7

-9.8
-9.5
-9.3
-8.9
-8.6
-8.2
-7.9
-7.9
-8.0
-8.4
-8.0

169.6
193.8
217.7
250.9
260.9
282.6
302.5

-.7
-.7
-.7

-.9
-1.1
-1.3
-1.4
-1.8
-2.0
-2.8
-3.8
-4.2
-4.8
-5.5
-6.4

-8.0
-7.8
-7.8
-7.7

-7.7
-7.6
-7.6
-7.5
-7.4
-7.3
-8.2

305.3
305.8
30.5.7
311.4
319.8
322.7
328.8
329.7
322.2
329.1
337.6
340.0
353.6
359.9
365.9

Inventory
valuation
adjustment

Capital
consumption
adjustment

40.2

0.0

0.9

39.8
41.8
43.9
45.2
49.2
51.9
55.4
58.3
63.0
65.0
66.0
72.0
79.3
86.5
94.2
100.2
117.6
132.5
150.2
161.8
165.8
160.9
157.8
176.1
197.1
212.4
230.6
252.4
266.8
281.1
310.0
318.7
168.0
182.5
196.6
223.2
230.0
254.2
274.9
279.2
277.8
278.6
288.7

.0
.0
.0
.0
-.1

.8
.6
.6
.7
.7

Proprietors'
income

300.6
306.7
315.4
317.3
310.2
316.5
322.4
325.6
339.1
344.8
350.2

-.2
-.2
_ 2
-.4
-.5
-.5
-.6
-.7
-2.0
-3.8

-1.2
-1.3
-1.3
-2.1
-2.9
-3.0
-1.4
-.6
-.6
_ 5
-.2
-.1
-.8
-1.5
-1.2
-.3

.6
-1.6
.1
-1.4
.7
1.7
-1.4
-3.3
-1.0
.2
_ 7
-1.0
-.9
_g
-'.5
_ 3
-.3
-.5
-.1
-1.0
-.5

.4
.2
.1
-.2
.0
-.1
— 5
_*2
-2
-.6
-1.4
-1.7
-1.8
-2.0
-1.9
-2.5
.2
.0
8.7
18.1
26.1
30.9
27.4
28.1
27.2
16.0
13.8
1.1
12.9
21.0
29.1
30.1
26.7
29.0
29.4
29.0
26.9
23.4
20.1
16.9
14.2
12.9
12.4
12.9
15.6
14.4
15.2
16.1
16.2

1
National income is the total net income earned in production. It differs from gross domestic product mainly in that it excludes
depreciation charges and other allowances for business and institutional consumption of durable capital goods and indirect business
taxes. See Table B-20.

See next page for continuation of table.




372

TABLE B-22.—National income by type of income, 1939-92—Continued
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Rental income of persons
with capital consumption
adjustment

Year or quarter
Total

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1982: IV
1983: IV
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV
1989:1
Il
l
IV
1990:1..
II
Ill
IV
1991:1
II
Ill
IV
1992:1
II
Ill
2
3

14.7
15.3
15.8
16.5
17.1
17.3
18.0
18.5
19.4
18.2
18.0
17.8
18.2
16.8
17.3
15.8
13.5
12.1
9.0
8.9
8.4
13.2
20.8
21.9
22.1
23.3
18.7
8.7
3.2
4.3
-13.5
-12.3
-10.4
24.1
22.2
24.3
14.0
4.7
6.8
2.8
-4.2
-9.6
-18.6
-21.6
-16.2
-13.8
-9.5
-9.6
-12.4
-12.3
-10.3
-6.6
-4.5
3.3
6.4

Rental
income
of
persons

18.0
18.7
19.2
19.8
20.3
20.5
21.3
22.1
23.4
22.8
23.9
24.2
25.6
26.1
28.2
29.3
29.5
29.9
30.0
34.4
39.1
49.0
61.1
64.4
64.8
66.5
63.4
53.4
50.0
53.4
44.2
44.6
47.5
66.5
64.5
67.6
60.0
50.2
54.2
52.6
47.7
44.8
44.6
39.8
41.0
43.0
47.6
46.9
44.0
44.3
47.0
54.7
51.7
60.0
90.3

Capital
consumption
adjustment

-3.4
-3.4
-3.3
-3.3
-3.2
-3.2
-3.3
-3.6
-3.9
-4.6
-5.9
-6.4
-7.4
-9.3
-10.9
-13.5
-15.9
-17.8
-21.0
-25.5
-30.8
-35.8
-40.2
-42.4
-42.8
-43.2
-44.6
-44.7
-46.8
-49.1
-57.7
-56.9
-57.9
-42.3
-42.4
-43.4
-46.0
-45.5
-47.4
-49.7
-51.9
-54.4
-63.1
-61.3
-57.1
-56.8
-57.1
-56.4
-56.4
-56.6
-57.3
-61.3
-56.2
-56.6
-83.9

Corporate profits with inventory valuation and capital consumption adjustments
Profits with inventory valuation adjustment and without
capital consumption adjustment
Profits
Total

Profits after tax
Total

Profits

before
tax

Profits
tax
liability

Total

UndisDivitributed
dends
profits

Inventory
valuation
adjustment

Net
interest

53.1

53.4

23.6

29.7

12.7

17.0

-0.8

10.2

51.0
51.3
56.4
61.2
67.5

51.1
51.0
56.4
61.2
68.0

22.7
22.8
24.0
26.2
28.0

28.4
28.2
32.4
34.9
40.0

13.4
14.0
15.0
16.1
18.0

15.0
14.3
17.4
18.8
22.0

-.2
.3
.0
.1
-.5

-.3
.3
3.2
3.9
4.6

11.2
13.1
14.6
16.1
18.2

77.6
83.0
80.3
86.9
83.2

78.8
85.1
81.8
90.6
89.0

30.9
33.7
32.7
39.4
39.7

47.9
51.4
49.2
51.2
49.4

20.2
20.9
22.1
24.6
25.2

27.8
30.5
27.1
26.6
24.1

-1.2
-2.1
-1.6
-3.7
-5.9

5.3
5.6
5.7
5.6
6.4

21.1
24.3
28.1
30.4
33.6

71.8
85.5
97.9
110.9
103.4

78.4
90.1
104.5
130.9
142.8

34.4
37.7
41.9
49.3
51.8

44.0
52.4
62.6
81.6
91.0

23.7
23.7
25.8
28.1
30.4

20.3
28.6
36.9
53.5
60.6

-6.6
-4.6
-6.6
-20.0
-39.5

5.6
4.8
5.3
5.5
1.2

40.0
45.4
49.3
56.5
71.8

129.4
158.8
186.7
212.8
219.8

140.4
173.7
203.3
237.9
261.4

50.9
64.2
73.0
83.5
88.0

89.5
109.5
130.3
154.4
173.4

30.1
35.6
40.7
45.9
52.4

59.4
73.9
89.5
108.5
121.0

-11.0
-14.9
-16.6
-25.0
-41.6

-7.6
-11.7
-11.0
-13.1
-17.3

80.0
85.1
100.7
120.5
149.9

197.8
203.2
166.4
202.2
236.4

240.9
228.9
176.3
210.7
240.5

84.8
81.1
63.1
77.2
94.0

156.1
147.8
113.2
133.5
146.4

59.0
69.2
70.0
81.2
82.7

97.1
78.6
43.2
52.3
63.8

-43.0
-25.7
-9.9
-8.5
-4.1

-20.2
-21.2
-14.9
10.4
27.8

191.2
233.4
262.4
270.0
307.9

225.3
227.6
273.4
320.3
325.4

225.0
217.8
287.9
347.5
342.9

96.5
106.5
127.1
137.0
141.3

128.5
111.3
160.8
210.5
201.6

92.4
109.8
106.2
115.3
134.6

36.1
1.6
54.6
95.2
67.1

.2
9.7
-14.5
-27.3
-17.5

55.5
44.1
46.4
44.7
37.4

326.2
350.2
360.4
387.7
452.7

341.2
337.8

355.4
334.7

136.7
124.0

218.7 149.3
210.7 146.5

69.4
64.2

-14.2
3.1

20.5
8.4

460.7
449.5

150.3
229.1
261.3
284.9
264.6
343.3
378.3

160.0
216.2
223.6
228.0
225.0
293.4
340.5

168.6
223.8
220.1
231.8
235.7
311.2
372.2

58.7
82.2
83.8
97.6
116.6
135.2
146.2

109.9 72.5
141.6 84.2
136.3 83.4
134.2 97.4
119.2 111.0
176.0 106.3
226.0 121.0

37.5
57.4
52.9
36.9
8.2
69.7
105.0

-8.6
-7.6
3.5
-3.8
-10.7
-17.8
-31.7

-9.6
12.9
37.7
56.9
39.6
49.9
37.9

256.8
281.8
321.1
331.9
349.7
368.6
408.1

369.4
369.9
357.3
354.5

331.3
330.0
319.8
320.6

368.9
345.7
323.1
334.1

154.8
143.7
132.6
134.2

214.1
202.0
190.5
200.0

127.8
132.2
136.9
141.3

86.3
69.8
53.6
58.7

-37.6
-15.7
-3.3
-13.5

38.1
40.0
37.6
33.9

433.8
454.9
462.4
459.8

367.6
384.0
351.4
344.0

337.4
359.6
334.4
333.5

344.0
355.8
367.0
354.7

132.4
137.6
143.0
133.7

211.6
218.2
224.0
221.0

146.1
148.7
150.6
151.9

65.5
69.5
73.4
69.1

-6.6
3.8
-32.6
-21.2

30.2
24.4
17.0
10.5

457.6
457.6
456.0
471.4

349.6
347.3
341.2
347.1

344.2
342.2
331.9
333.1

337.6
332.3
336.7
332.3

121.3
122.9
127.0
125.0

216.3
209.4
209.6
207.4

150.6
146.2
145.1
143.9

65.7
63.2
64.5
63.4

6.7
9.9
-4.8

5.3
5.1
9.3
14.1

456.2
444.4
450.5
446.9

384.0
388.4
374.1

360.7
361.4
344.4

366.1
376.8
354.1

136.4
144.1
131.8

229.7 143.6
232.7 146.6
222.2 151.1

86.2
86.1
71.1

-5.4
-15.5
-9.7

23.3
27.0
29.7

430.0
420.0
407.3

52.3
50.7
51.6
59.6
65.1
72.1
82.9
88.6
86.0
92.6
89.6
77.5
90.3
103.2
116.4
104.5
121.9
147.1
175.7
199.7
202.5
177.7
182.0
151.5
212.7
264.2
280.8
271.6
319.8
365.0
362.8
361.7
346.3

-0.3

Consists mainly of employer contributions for social insurance and to private pension, health, and welfare funds.
With inventory valuation adjustment.

Source: Department of Commerce, Bureau of Economic Analysis.




Capital
consumption
adjustment

373

T A B L E B-23.—Sources of personal income, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Wage and salary disbursements l

Personal
income

Year or quarter

j

Commodityproducing
industries
Total
Total

Manufacturing

Distributive
industries

Service
industries

Government

Other
labor

income l

Proprietors' income
with inventory
valuation and
capital
consumption
adjustments

Farm

Nonfarm

1959

391.2

259.8

109.9

86.9

65.1

38.8

46.0

10.6

10.7

41.1

I960....,
1961
1962
1963
1964

409.2
426.5
453.4
476.4
510.7

272.8
280.5
299.3
314.8
337.7

113.4
114.0
122.2
127.4
136.0

89.8
89.9
96.8
100.7
107.3

68.6
69.6
73.3
76.8
82.0

41.7
44.4
47.6
50.7
54.9

49.2
52.4
56.3
60.0
64.9

11.2
11.8
13.0
14.0
15.7

11.2
11.9
11.9
11.8
10.6

40.6
42.4
44.5
45.9
49.8

1965
1966
1967
1968
1969

552.9
601.7
646.5
709.9
773.7

363.7
400.3
428.9
471.9
518.3

146.6
161.6
169.0
184.1
200.4

115.7
128.2
134.3
146.0
157.7

87.9
95.1
101.6
110.8
121.7

59.4
65.3
72.0
80.4
90.6

69.9
78.3
86.4
96.6
105.5

17.8
19.9
21.7
25.2
28.5

12.9
14.0
12.7
12.7
14.4

52.1
55.3
58.2
62.4
64.5

1970
1971
1972
1973
1974

831.0
893.5
1,098.7
1,205.7

551.5
583.9
638.7
708.7
772.6

203.7
209.1
228.2
255.9
276.5

158.4
160.5
175.6
196.6
211.8

131.2
140.4
153.3
170.3
186.8

99.4
107.9
119.7
133.9
148.6

117.1
126.5
137.4
148.7
160.9

32.5
36.7
43.0
49.2
56.5

14.6
15.2
19.1
32.2
25.5

65.3
70.9
78.3
84.3
89.8

1975...,
1976
1977
1978
1979

1,307.3
1,446.3
1,601.3
1,807.9
2,033.1

814.6
899.5
993.9
1,120.7
1,255.4

277.1
309.7
346.1
392.6
442.1

211.6
238.0
266.7
300.1
334.9

198.1
219.5
242.7
274.9
308.4

163.4
181.6
202.8
233.7
267.7

176.0
188.6
202.3
219.4
237.3

65.9
79.7
94.7
110.1
124.3

23.7
18.3
17.1
21.5
24.7

97.5
114.6
129.4
146.2
157.0

1980
1981
1982
1983
1984

2,265.4
2,534.7
2,690.9
2,862.5
3,154.6

1,376.6
1,515.6
1,593.3
1,684.7
1,849.8

471.9
513.7
513.5
525.1
580.8

355.7
386.9
384.3
397.7
439.8

336.4
368.1
385.8
406.2
445.4

306.9
348.1
386.5
427.4
475.8

261.4
285.7
307.5
325.9
347.8

139.8
153.0
165.4
174.6
184.7

11.5
21.2
13.5
2.4
21.3

160.3
159.6
157.3
184.3
214.7

3,379.8
3,590.4
3,802.0
4,075.9
4,380.3

1,986.5
2,105.4
2,261.2
2,443.0
2,586.4

612.2
628.5
651.8
699.1
724.2

461.3
473.8
490.1
524.5
542.2

475.9
501.7
536.9
575.3
607.0

524.5
579.5
650.7
719.6
776.8

373.9
395.7
421.8
449.0
478.5

191.8
200.7
210.4
230.5
251.9

21.5
22.3
31.3
30.9
40.2

238.4
261.5
279.0
293.4
307.0

1990
1991

4,664.2
4,828.3

2,742.8
2,812.2

745.6
737.4

556.1
556.9

634.6
647.4

847.8
883.9

514.8
543.6

271.0
288.3

41.7
35.8

325.2
332.2

1982-.IV
1983: IV
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV

2,746.8
2,965.8
3,242.5
3,456.7
3,647.8
3,918.5
4,195.2

1,611.7
1,747.3
1,903.3
2,039.1
2,153.9
2,337.0
2,510.6

503.9
547.6
594.5
622.6
635.3
668.4
715.3

378.0
415.7
450.5
469.1
478.5
501.6
537.5

391.2
422.4
458.4
487.6
512.5
551.9
589.9

400.9
445.8
494.4
546.8
602.1
685.0
746.8

315.6
331.5
356.1
382.2
404.0
431.7
458.5

169.2
179.0
187.7
193.9
205.3
216.5
240.3

10.2
6.3
21.9
17.8
23.6
42.4
30.9

169.6
193.8
217.7
250.9
260.9
282.6
302.5

1989:1
II
Ill

4,305.2
4,357.4
4,389.2
4,469.4

2,545.3
2,567.4
2,595.1
2,637.9

720.9
719.8
723.8
732.1

542.2
539.6
541.3
545.7

599.8
604.5
607.5
616.1

756.5
768.7
782.1
800.0

468.2
474.4
481.6
489.7

244.8
249.4
254.2
259.1

51.3
42.3
29.0
38.4

305.3
305.8
305.7
311.4

4,571.7
4,640.5
4,692.6
4,751.9

2,686.1
2,735.7
2,768.2
2,781.3

740.0
748.9
749.4
744.0

549.7
558.4
559.4
556.9

625.5
633.7
639.1
640.2

819.0
841.2
861.1
869.9

501.6
511.8
518.5
527.1

264.9
268.9
273.1
276.9

48.1
43.6
32.2
42.8

319.8
322.7
328.8
329.7

1991:1

II
Ill
IV

4,752.8
4,806.9
4,846.2
4,907.2

2,774.7
2,804.7
2,824.4
2,845.0

734.6
734.6
738.8
741.5

551.2
553.4
559.0
563.9

638.6
647.0
651.1
652.9

861.8
879.4
890.2
904.3

539.7
543.8
544.3
546.4

281.5
286.1
290.6
295.0

34.3
41.3
29.5
37.9

322.2
329.1
337.6
340.0

1992:1
II
Ill

4,980.5
5,028.9
5,062.0

2,877.6
2,901.3
2,923.5

736.8
743.1
742.4

559.9
564.7
565.5

660.9
662.9
667.7

925.3
933.9
949.1

554.6
561.4
564.3

299.2
303.6
307.9

40.1
38.5
31.5

353.6
359.9
365.9

,

980.5

1985
1986
1987
1988
1989

:

IV

1990:1
II
Ill
IV

1
The total of wage and salary disbursements and other labor income differs from compensation of employees in Table B-22 in that it
excludes employer contributions for social insurance and the excess of wage accruals over wage disbursements.

See next page for continuation of table.




374

TABLE B-23.—Sources of personal income,

1959-92—Continued

[Billions of dollars; quarterly data at seasonally adjusted annual rates]

Year or quarter

Rental
income
of
persons
Personal Personal
with
dividend interest
capital
income
income
consumption
adjustment

Transfer payments to persons

Total

Old-age,
GovernGovern- Aid to
survivors,
ment
ment
families
disability,
unemwith
and
Veterans
ployment
ees
dependhealth
benefits
insurretireent
insurance
ment
children
ance
benefits
benefits (AFDC)
benefits

Other

Less-.
Personal
contributions for
social
insurance

Nonfarm
personal
income 2

1959

14.7

12.7

22.7

27.0

10.2

2.8

4.6

2.8

0.9

5.7

7.9

376.7

1960
1962
1963
1964

15.3
15.8
16.5
17.1
17.3

13.4
14.0
15.0
16.1
18.0

25.0
26.9
29.3
32.4
36.1

28.8
32.8
34.1
36.2
37.9

11.1
12.6
14.3
15.2
16.0

3.0
4.3
3.1
3.0
2.7

4.6
5.0
4.7
4.8
4.7

3.1
3.4
3.7
4.2
4.7

1.0
1.1
1.3
1.4
1.5

6.1
6.5
7.0
7.6
8.2

9.3
9.7
10.3
11.8
12.6

393.7
410.4
437.0
460.0
495.3

1965
1966
1967
1968
1969

18.0
18.5
19.4
18.2
18.0

20.2
20.9
22.1
24.5
25.1

40.3
44.9
49.5
54.6
60.8

41.1
45.7
54.6
63.2
70.3

18.1
20.8
25.5
30.2
32.9

2.3
1.9
2.2
2.1
2.2

4.9
4.9
5.6
5.9
6.7

5.2
6.1
6.9
7.6
8.7

1.7
1.9
2.3
2.8
3.5

9.0
10.3
12.2
14.5
16.2

13.3
17.8
20.6
22.9
26.2

534.9
582.4
628.3
691.4
753.1

1970
1971
1972
1973
1974

17.8
18.2
16.8
17.3
15.8

23.5
23.5
25.5
27.7
29.6

69.2
75.7
81.8
94.1
112.4

84.6
100.1
111.8
127.9
151.3

38.5
44.5
49.6
60.4
70.1

4.0
5.8
5.7
4.4
6.8

7.7
8.8
9.7
10.4
11.8

10.2
11.8
13.8
16.0
19.0

4.8
6.2
6.9
7.2
7.9

19.4
23.0
26.1
29.5
35.7

27.9
30.7
34.5
42.6
47.9

809.8
871.5
954.2
1,058.1
1,170.2

1975
1976
1977
1978
1979

13.5
12.1
9.0
8.9
8.4

29.2
34.7
39.4
44.2
50.4

123.0
134.6
155.7
184.5
223.2

190.2
208.3
223.3
241.6
270.7

81.4
92.9
104.9
116.2
131.8

17.6
15.8
12.7
9.7
9.8

14.5
14.4
13.8
13.9
14.4

22.7
26.1
29.0
32.7
36.9

9.2
10.1
10.6
10.7
11.0

44.7
49.1
52.4
58.4
66.8

50.4
55.5
61.2
69.8
81.0

1,272.5
1,415.1
1,569.9
1,770.3
1,989.3

1980
1981
1982
1983
1984

13.2
20.8
21.9
22.1
23.3

57.1
66.9
67.1
77.8
78.8

274.0
336.1
376.8
397.5
461.9

321.5
365.9
408.1
438.9
452.9

154.2
182.0
204.5
221.7
235.7

16.1
15.9
25.2
26.3
15.8

15.0
16.1
16.4
16.6
16.4

43.0
49.4
54.6
58.0
60.9

12.4
13.0
13.3
14.2
14.8

89.7
94.1
102.1
109.2

88.6
104.5
112.3
119.7
132.8

2,231.6
2,488.5
2,649.8
2,832.6
3,106.1

1985
1986
1987.
1988
1989

18.7
8.7
3.2
4.3
-13.5

87.9
104.7
100.4
108.4
126.5

498.1
531.7
548.1
583.2
668.2

485.9
517.8
542.2
576.7
625.0

253.4
269.2
282.9
300.4
325.1

15.7
16.3
14.5
13.4
14.4

16.7
16.7
16.6
16.9
17.3

66.6
70.7
76.0
82.2
87.5

15.4
16.4
16.7
17.3
18.0

118.1
128.5
135.5
146.5
162.6

149.1
162.1
173.6
194.5
211.4

3,333.2
3,545.6
3,749.4
4,023.9
4,318.0

1990
1991

-12.3
-10.4

140.3
137.0

694.5
700.6

685.8
771.1

352.0
382.0

18.0
27.5

17.8
18.1

94.0
101.3

19.8
22.0

184.2
220.2

224.8
238.4

4,599.6
4,770.4

IV
IV
IV
IV
IV
IV
IV

24.1
22.2
24.3
14.0
4.7
6.8
2.8

69.4
80.6
79.3
92.7
105.6
100.1
113.8

373.6
418.7
485.4
507.5
532.6
562.3
608.9

432.2
441.3
458.5
493.6
526.6
548.5
584.8

216.4
226.7
241.3
256.7
273.3
285.8
303.8

31.8
19.9
15.6
15.3
16.7
13.4
13.0

16.6
16.5
16.4
16.5
16.4
16.5
16.8

56.1
59.5
58.0
68.0
72.4
77.7
83.0

13.6
14.5
14.8
15.7
16.7
16.7
17.5

97.6
104.2
112.5
121.3
131.1
138.3
150.6

113.3
123.4
135.6
152.8
165.4
177.7
199.5

2,708.5
2,932.0
3,193.8
3,414.9
3,602.3
3,854.9
4,142.9

1989:1
II
Ill

-4.2
-9.6
-18.6
-21.6

120.2
124.2
128.7
132.9

643.1
670.7
677.6
681.2

607.6
617.5
630.0
644.8

316.5
321.6
328.1
334.4

13.5
13.8
14.6
15.6

17.5
17.3
17.3
17.3

85.9
87.0
87.9
89.3

17.6
17.8
18.1
18.4

156.6
160.0
164.0
169.9

208.2
210.3
212.4
214.7

4,232.2
4,293.2
4,338.0
4,408.5

1990:I
II
Ill
IV

-16.2

-13.8
-9.5
-9.6

137.5
139.8
141.6
142.5

683.8
690.5
697.3
706.3

669.0
676.1
688.3
709.7

348.0
348.7
352.8
358.6

16.1
17.1
18.1
20.7

17.9
17.8
17.8
17.7

93.1
93.2
94.0
95.7

19.2
19.5
19.9
20.5

174.7
179.7
185.7
196.5

221.2
223.0
227.3
227.8

4,500.9
4,573.8
4,637.5
4,686.3

1991:1
II....
III..
IV..

-12.4
-12.3
-10.3
-6.6

141.3
136.7
135.6
134.3

701.1
696.2
701.8
703.3

744.9
762.4
777.1
799.8

374.2
378.9
384.2
390.6

24.3
28.3
27.6
30.0

17.8
18.5
18.1
18.1

101.6
100.4
101.0
102.0

21.3
21.8
22.2
22.7

205.8
214.6
224.0
236.4

234.9
237.4
240.1
241.5

4,696.0
4,743.3
4,794.7
4,847.4

1992:1
II...
III...

-4.5
3.3
6.4

133.9
136.6
141.0

684.8
675.2
663.2

842.7
859.7
874.1

405.7
412.1
417.1

39.7
41.7
40.4

20.2
18.7
18.5

106.4
106.4
106.6

23.0
23.4
23.6

247.7
257.4
267.9

246.8
249.3
251.5

4,918.2
4,967.7
5,007.6

1961

1982:
1983:
1984:
1985:
1986:
1987:
1988:

IV

2
Personal income exclusive of the farm component of wages and salaries, other labor income, proprietors' income with inventory
valuation and capital consumption adjustments, and net interest.

Note.—The industry classification of wage and salary disbursements and proprietors' income is on an establishment basis and is
based on the 1987 Standard Industrial Classification (SIC) beginning 1987 and on the 1972 SIC for earlier years shown.
Source: Department of Commerce, Bureau of Economic Analysis.




375

T A B L E B-24.—Disposition of personal income, 1959-92

[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Percent of dispo sable
personal incom

Less: Personal outlays

Year or quarter

Personal
income

Less-.
Personal
tax and
nontax
payments

Equals:
Disposable
personal
income

Total

sonal
transfer
Personal
payconInterest
sumption paid by ments
expendi- persons to rest
of the
tures
world
(net)

Persona outlays
Equals.Personal
saving
Total

Personal Personal
consumpsaving
tion
expenditures

1959
1960
1961
1962
1963
1964

391.2
409.2
426.5
453.4
476.4
510.7

44.5
48.7
50.3
54.8
58.0
56.0

346.7
360.5
376.2
398.7
418.4
454.7

324.7
339.9
351.3
372.8
393.7
423.1

318.1
332.4
343.5
364.4
384.2
412.5

6.1
7.0
7.3
7.8
8.9
10.0

0.4
.5
.5
.5
.6
.7

22.0
20.6
24.9
25.9
24.6
31.6

93.7
94.3
93.4
93.5
94.1
93.1

91.8
92.2
91.3
91.4
91.8
90.7

6.3
5.7
6.6
6.5
5.9
6.9

1965
1966
1967
1968
1969

552.9
601.7
646.5
709.9
773.7

61.9
71.0
77.9
92.1
109.9

491.0
530.7
568.6
617.8
663.8

456.5
494.4
522,8
573.9
620.5

444.6
481.6
509.3
559.1
603.7

11.1
12.0
12.5
13.8
15.7

.8
.8
1.0
1.0
1.1

34.6
36.3
45.8
43.8
43.3

93.0
93.2
91.9
92.9
93.5

90.5
90.7
89.6
90.5
90.9

7.0
6.8
8.1
7.1
6.5

1970
1971
1972
1973
1974

831.0
893.5
980.5
1,098.7
1,205.7

109.0
108.7
132.0
140.6
159.1

722.0
784.9
848.5
958.1
1,046.5

664.5
719.4
788.7
872.0
953.1

646.5
700.3
767.8
848.1
927.7

16.8
17.8
19.6
22.4
24.2

1.2
1.3
1.3
1.4
1.2

57.5
65.4
59.7
86.1
93.4

92.0
91.7
93.0
91.0
91.1

89.5
89.2
90.5
88.5
88.6

8.0
8.3
7.0
9.0
8.9

1,307.3
1,446.3
1,601.3
1,807.9
2,033.1

156.4
182.3
210.0
240.1
280.2

1,150.9
1,264.0
1,391.3
1,567.8
1,753.0

1,050.6
1,171.0
1,303.4
1,460.0
1,629.6

1,024.9
1,143.1
1,271.5
1,421.2
1,583.7

24.5
26.7
30.7
37.5
44.5

1.2
1.2
1.2
1.3
1.4

100.3
93.0
87.9
107.8
123.3

91.3
92.6
93.7
93.1
93.0

89.1
90.4
91.4
90.7
90.3

8.7
7.4
6.3
6.9
7.0

1980
1981
1982
1983
1984

2,265.4
2,534.7
2,690.9
2,862.5
3,154.6

312.4
360.2
371.4
368.8
395.1

1,952.9
2,174.5
2,319.6
2,493.7
2,759.5

1,799.1
1,982.6
2,120.1
2,325.1
2,537.5

1,748.1
1,926.2
2,059.2
2,257.5
2,460.3

49.4
54.6
58.8
65.7
75.0

1.6
1.8
2.1
1.8
2.3

153.8
191.8
199.5
168.7
222.0

92.1
91.2
91.4
93.2
92.0

89.5
88.6
88.8
90.5
89.2

7.9
8.8
8.6
6.8
8.0

1985
1986
1987
1988
1989

3,379.8
3,590.4
3,802.0
4,075.9
4,380.3

436.8
459.0
512.5
527.7
593.3

2,943.0
3,131.5
3,289.5
3,548.2
3,787.0

2,753.7
2,944.0
3,147.5
3,392.5
3,634.9

2,667.4
2,850.6
3,052.2
3,296.1
3,523.1

83.6
90.9
92.3
93.7
103.0

2.7
2.5
3.0
2.7
8.9

189.3
187.5
142.0
155.7
152.1

93.6
94.0
95.7
95.6
96.0

90.6
91.0
92.8
92.9
93.0

6.4
6.0
4.3
4.4
4.0

1990
1991

4,664.2
4,828.3

621.3
618 7

4,042.9
4,209 6

3,867.3
4 009 9

3,748.4
3 887 7

109.6
112 5

9.3
97

175.6
199.6

95.7
95.3

92.7
92.4

4.3
4.7

1982: IV
1983:1V
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV

2,746.8
2,965.8
3,242.5
3,456.7
3,647.8
3,918.5
4,195.2

372.1
371.6
413.4
448.8
478.5
528.6
542.0

2,374.7
2,594.3
2,829.1
3,007.9
3,169.3
3,389.9
3,653.2

2,190.9
2,417.9
2,606.5
2,828.7
3,018.2
3,220.1
3,496.7

2,128.7
2,346.8
2,526.4
2,739.8
2,923.1
3,124.6
3,398.2

60.2
69.2
77.6
86.4
92.3
92.4
95.8

1.9
2.0
2.5
2.5
2.8
3.1
2.7

183.8
176.3
222.6
179.2
151.1
169.8
156.4

92.3
93.2
92.1
94.0
95.2
95.0
95.7

89.6
90.5
89.3
91.1
92.2
92.2
93.0

7.7
6.8
7.9
6.0
4.8
5.0
4.3

1989:1
II
Ill
IV

4,305.2
4,357.4
4,389.2
4,469.4

575.2
599.1
593.8
605.1

3,730.0
3,758.3
3,795.4
3,864.3

3,548.0
3,609.8
3,666.3
3,715.5

3,440.8
3,499.1
3,553.3
3,599.1

99.0
101.9
104.3
106.7

8.2
8.7
8.7
9.8

182.0
148.5
129.0
148.8

95.1
96.0
96.6
96.2

92.2
93.1
93.6
93.1

4.9
4.0
3.4
3.9

1990:1
||
III
IV

4,571.7
4,640.5
4,692.6
4,751.9

609.4
624.6
627.3
623.8

3,962.3
4,015.9
4,065.3
4,128.1

3,789.2
3,833.2
3,908.0
3,938.8

3,672.4
3,715.3
3,787.8
3,818.2

108.4
108.9
110.0
111.1

8.5
9.0
10.2
9.5

173.1
182.7
157.3
189.3

95.6
95.5
96.1
95.4

92.7
92.5
93.2
92.5

4.4
4.6
3.9
4.6

1991:1
II
Ill
IV

4,752.8
4,806.9
4,846.2
4,907.2

616.8
617.2
618.6
622.3

4,136.0
4,189.7
4,227.6
4,284.9

3,943.2
3,994.4
4,036.6
4,065.5

3,821.7
3,871.9
3,914.2
3,942.9

112.2
112.7
112.5
112.8

9.4
9.8
9.9
9.7

192.8
195.3
191.0
219.4

95.3
95.3
95.5
94.9

92.4
92.4
92.6
92.0

4.7
4.7
4.5
5.1

1992:1
||
III

4,980.5
5,028.9
5,062.0

619.6
617.1
628.8

4,360.9
4,411.8
4,433.2

4,146.3
4,179.5
4,229.9

4,022.8
4,057.1
4,108.7

113.3
112.0
111.2

10.2
10.4
10.0

214.6
232.3
203.3

95.1
94.7
95.4

92.2
92.0
92.7

4.9
5.3
4.6

1975
1976
1977
1978
1979

,

1
Percents based on data in millions of dollars.
Source: Department of Commerce, Bureau of Economic Analysis.




376

*

TABLE B-25.—Total and per capita disposable personal income and personal consumption expenditures in
current and 1987 dollars, 1959-92
[Quarterly data at seasonally adjusted annual rates, except as noted]
Disposable personal income

Year or quarter

Total (billions of
dollars)
Current
dollars

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1982: IV
1983: IV
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV
1989:1
Ill
IV

1990:1..
Ill
IV

1991: I...
II..,
1992: I
II
Ill

346.7
360.5
376.2
398.7
418.4
454.7
491.0
530.7
568.6
617.8
663.8
722.0
784.9
848.5
958.1
1,046.5
1,150.9
1,264.0
1,391.3
1,567.8
1,753.0
1,952.9
2,174.5
2,319.6
2,493.7
2,759.5
2,943.0
3,131.5
3,289.5
3,548.2
3,787.0
4,042.9
4,209.6
2,374.7
2,594.3
2,829.1
3,007.9
3,169.3
3,389.9
3,653.2
3,730.0
3,758.3
3,795.4
3,864.3

3,962.3
4,015.9
4,065.3
4,128.1
4,136.0
4,189.7
4,227.6
4,284.9
4,360.9
4,411.8
4,433.2

1987
dollars

1,284.9
1,313.0
lr356.4
1,414.8
1,461.1
1,562.2
1,653.5
1,734.3
1,811.4
1,886.8
1,947.4
2,025.3
2,099.9
2,186.2
2,334.1
2,317.0
2,355.4
2,440.9
2,512.6
2,638.4
2,710.1
2,733.6
2,795.8
2,820.4
2,893.6
3,080.1
3,162.1
3,261.9
3,289.5
3,404.3
3,464.9
3,516.5
3,509.0
2,832.6
2,960.6
3,118.5
3,178.7
3,266.2
3,335.8
3,443.1
3,472.9
3,450.1
3,455.7
3,480.9
3,516.8
3,523.9
3,513.7
3,511.6
3,488.7
3,505.2
3,511.5
3,530.8
3,565.7
3,576.0
3,580.5

Personal consumption expenditures

Per capita
(dollars)
Current
dollars

1,958
1,994
2,048
2,137
2,210
2,369
2,527
2,699
2,861
3,077
3,274
3,521
3,779
4,042
4,521
4,893
5,329
5,796
6,316
7,042
7,787
8,576
9,455
9,989
10,642
11,673
12,339
13,010
13,545
14,477
15,307
16.174
16,658
10,189
11,033
11,925
12,565
13,121
13,907
14,850
15,133
15,214
15,322
15,558
15,917
16,092
16,242
16,443
16,433
16,604
16,706
16,885
17,143
17,297
17,332

1987
dollars

7,256
7,264
7382
7,583
7,718
8,140
8,508
8,822
9,114
9,399
9,606
9,875
10,111
10,414
11,013
10,832
10,906
11,192
11,406
11,851
12,039
12,005
12,156
12,146
12,349
13,029
13,258
13,552
13,545
13,890
14,005
14,068
13,886
12,154
12,591
13,145
13,278
13,522
13,685
13,996
14,090
13,967
13,951
14,015
14,128
14,120
14,038
13,988
13,861
13,891
13,876
13,913
14,017
14,021
13,998

Total (billions of
dollars)
Current
dollars

318.1
332.4
343.5
364.4
384.2
412.5
444.6
481.6
509.3
559.1
603.7
646.5
700.3
767.8
848.1
927.7
1,024.9
1,143.1
1,271.5
1,421.2
1,583.7
1,748.1
1,926.2
2,059.2
2,257.5
2,460.3
2,667.4
2,850.6
3,052.2
3,296.1
3,523.1
3,748.4
3,887.7

2,128.7
2,346.8
2,526.4
2,739.8
2,923.1
3,124.6
3,398.2
3,440.8
3,499.1
3,553.3
3,599.1
3,672.4
3,715.3
3,787.8
3,818.2
3,821.7
3,871.9
3,914.2
3,942.9
4,022.8
4,057.1
4,108.7

1987
dollars

1,178.9
1,210.8
1,238.4
1,293.3
1,341.9
1,417.2
1,497.0
1,573.8
1,622.4
1,707.5
1,771.2
1,813.5
1,873.7
1,978.4
2,066.7
2,053.8
2,097.5
2,207.3
2,296.6
2,391.8
2,448.4
2,447.1
2,476.9
2,503.7
2,619.4
2,746.1
2,865.8
2,969.1
3,052.2
3,162.4
3,223.3
3,260.4
3,240.8
2,539.3
2,678.2
2,784.8
2,895.3
3,012.5
3,074.7
3,202.9
3,203.6
3,212.2
3,235.3
3,242.0
3,259.5
3,260.1
3,273.9
3,248.0
3,223.5
3,239.3
3,251.2
3,249.0
3,289.3
3,288.5
3,318.4

Per capita
(dollars)
Current
dollars

1,796
1,839
1,869
1,953
2,030
2,149
2,287
2,450
2,562
2,785
2,978

3,152
3,372
3,658
4,002
4,337
4,745
5,241
5,772
6,384
7,035
7,677
8,375
8,868
9,634
10,408
11,184
11,843
12,568
13,448
14,241
14,996
15,384
9,134
9,980
10,649
11,445
12,101
12,819
13,814
13,959
14,165
14,345
14,491
14,752
14,887
15,133
15,209
15,184
15,345
15,468
15,537
15,814
15,907
16,063

Population
(thpu-

1987
dollars

6,658
6,698
6,740
6,931
7,089
7,384
7,703
8,005
8,163
8,506
8,737
8,842
9,022
9,425
9,752
9,602

9,711
10,121
10,425
10,744
10,876
10,746
10,770
10,782
11,179
11,617
12,015
12,336
12,568
12,903
13,029
13,044
12,824
10,895
11,390
11,739
12,095
12,472
12,615
13,020
12,997
13,003
13,061
13,053
13,094
13,063
13,080
12,938
12,808
12,838
12,848
12,803
12,930
12,893
12,973

177,073
180,760
183,742
186,590
189,300
191,927
194,347
196,599
198,752
200,745
202,736
205,089
207,692
209,924
211,939
213,898
215,981
218,086
220,289
222,629
225,106
227,715
229,989
232,201
234,326
236,393
238,510
240,691
242,860
245,093
247,397
249,961
252,711
233,060
235,146
237,231
239,387
241,550
243,745
246,004
246,488
247,026
247,701
248,372
248,931
249,558
250,303
251,050
251,687
252,329
253,053
253,776
254,388
255,054
255,786

1
Population of the United States including Armed Forces overseas,- includes Alaska and Hawaii beginning 1960. Annual data are
averages of quarterly data. Quarterly data are averages for the pe.iod.
Source: Department of Commerce (Bureau of Economic Analysis and Bureau of the Census).




377

T A B L E B-26.—Gross saving and investment, 1959-92
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Gross investment

Gross saving
Gross private saving
Year or
quarter

Total
Total

Personal
saving

Gross
business
saving 1

Government surplus or deficit
( — ) , national income and
product accounts

Total

Federal

State
and
local

Capital
grants
received
by the
United
States
(net)2

Total

Gross
private
domestic
investment

Net
foreign
investment 3

Statistical
discrepancy

1959

79.4

82.5

22.0

60.5

-3.1

-2.6

-0.5

77.6

78.8

-1.2

-1.8

1960
1961
1962
1963
1964

85.1
84.4
92.8
100.4
110.0

81.5
87.4
95.8
98.8
111.5

20.6
24.9
25.9
24.6
31.6

60.9
62.5
69.9
74.1
80.0

3.6
-3.0
-2.9
1.6
-1.6

3.5
-2.6
-3.4
1.1
-2.6

.0
_ 4
.5
.4
1.0

82.0
82.2
91.8
98.4
109.3

78.7
77.9
87.9
93.4
101.7

3.2
4.3
3.9
5.0
7.5

-3.1
-2.2
-1.0
-2.0
-.7

1965
1967
1968
1969

125.0
131.5
130.8
141.7
159.5

123.7
132.5
144.5
146.4
149.5

34.6
36.3
45.8
43.8
43.3

89.2
96.1
98.7
102.5
106.2

1.2
-1.0
-13.7
-4.6
10.0

1.3
-1.4
-12.7
-4.7
8.5

.0
.5
-1.1
.1
1.5

124.2
134.3
131.6
141.7
157.0

118.0
130.4
128.0
139.9
155.2

6.2
3.9
3.5
1.7
1.8

-.7
2.8
.8
-.1
-2.6

1970
1971
1972
1973
1974

155.2
173.7
201.7
252.3
249.5

165.8
192.2
204.9
245.4
256.0

57.5
65.4
59.7
86.1
93.4

108.2
126.8
145.1
159.3
162.6

-11.5
-19.2
-3.9
6.9
-4.5

-13.3
-21.7
-17.3
-6.6
-11.6

1.8
2.5
13.4
13.4
7.1

0.9
.7
.7
0
4
-2.0

155.2
176.8
202.7
251.8
250.9

150.3
175.5
205.6
243.1
245.8

4.9
1.3
-2.9
8.7
5.1

.0
3.1
1.1
-.5
1.4

1975
1976
1977
1978
1979

241.4
284.8
338.2
415.7
468.5

306.3
323.1
355.0
412.8
457.9

100.3
93.0
87.9
107.8
123.3

206.0
230.0
267.1
305.0
334.5

-64.8
-38.3
-16.8
2.9
9.4

-69.4
-52.9
-42.4
-28.1
-15.7

4.6
14.6
25.6
31.1
25.1

0
0
0
0
1.1

247.4
295.2
349.1
423.3
482.2

226.0
286.4
358.3
434.0
480.2

21.4
8.8
-9.2
-10.7
2.0

6.0
10.4
10.9
7.6
13.8

1980
1981
1982
1983
1984

465.4
556.6
508.4
501.6
633.9

499.6
585.9
616.9
641.3
742.7

153.8
191.8
199.5
168.7
222.0

345.7
394.1
417.5
472.7
520.7

-35.3
-30.3
-108.6
-139.8
-108.8

-60.1
-58.8
-135.5
-180.1
-166.9

24.8
28.5
26.9
40.3
58.1

1.2
1.1
0
0
0

479.1
567.5
500.9
511.7
624.9

467.6
558.0
503.4
546.7
718.9

11.5
9.5
-2.5
-35.0

-94.0

13.6
10.9
-7.4
10.2
-9.0

1985
1986
1987
1988
1989

610.4
574.6
619.0
704.0
741.8

735.7
721.4
730.7
802.3
819.4

189.3
187.5
142.0
155.7
152.1

546.4
533.9
588.7
646.6
667.3

-125.3
-146.8
-111.7
-98.3
-77.5

-181.4
-201.0
-151.8
-136.6
-122.3

56.1
54.3
40.1
38.4
44.8

0
0
0
0
0

596.5
575.9
594.2
675.6
742.9

714.5
717.6
749.3
793.6
832.3

-118.1
-141.7
-155.1
-118.0
-89.3

-13.9
1.2
-24.8

1990
1991
1982: IV
1983-.IV
1984: IV
1985: IV
1986: IV
1987: IV
1988: IV

718.0
708.2

854.1
901.5

175.6
199.6

678.5
701.9

-136.1
-193.3

-166.2
-210.4

30.1
17.1

0
0

723.4
730.1

799.5
721.1

-76.1
9.0

5.4
21.9

458.5
542.4
637.0
603.8
550.1
667.9
720.1

615.4
678.7
764.7
734.7
676.3
783.7
814.8

183.8
176.3
222.6
179.2
151.1
169.8
156.4

431.6
502.4
542.1
555.5
525.3
613.9
658.3

-156.9
-136.3
-127.8
-130.9
-126.2
-115.8
-94.7

-183.4
-184.6
-186.8
-187.2
-177.5
-152.7
-134.9

26.5
48.3
59.0
56.3
51.2
37.0
40.2

0
0
0
0
0
0
0

448.4
556.3
616.5
597.8
548.1
643.0
694.7

464.2
614.8
722.8
737.0
697.1
800.2
814.8

-15.8
-58.5
-106.3
-139.1
-149.0
-157.1
-120.1

-10.1
13.8
-20.5
-5.9
-2.0
-24.9
-25.4

1989:1
II
Ill

760.6
749.4
728.9
728.4

826.7
811.0
811.2
828.6

182.0
148.5
129.0
148.8

644.7
662.5
682.1
679.8

-66.1
-61.5
-82.3
-100.2

-110.0
-109.7
-128.0
-141.5

43.9
48.2
45.7
41.3

0
0
0
0

749.2
751.1
730.1
741.3

843.9
840.3
819.6
825.2

-94.7
-89.1
-89.6
-84.0

-11.4
1.7
1.2
12.8

725.2
756.4
705.6
684.8

856.9
879.5
820.9
859.3

173.1
182.7
157.3
189.3

683.8
696.8
663.6
670.0

-131.7
-123.1
-115.3
-174.4

-167.8
-156.9
-145.6
-194.6

36.1
33.8
30.3
20.2

0
0
0
0

741.4
757.7
719.0
675.7

820.3
833.0
805.7
739.0

-79.0
-75.3
-86.7
-63.2

16.1
1.2
13.4
-9.1

754.1
701.3
679.4
698.2

889.4
896.9
884.9
934.8

192.8
195.3
191.0
219.4

696.6
701.6
693.9
715.3

-135.3
-195.6
-205.6
-236.6

-149.9
-212.2
-221.0
-258.7

14.6
16.5
15.4
22.0

0
0
0
0

767.5
728.4
709.9
714.6

705.4
710.2
732.8
736.1

62.1
18.2
-22.9
-21.5

13.4
27.1
30.5
16.4

677.5
682.9
696.9

950.1
968.1
992.1

214.6
232.3
203.3

735.5
735.8
788.8

-272.6
-285.2
-295.2

-289.2
-302.9
-304.4

16.6
17.7
9.2

0
0
0

706.5
713.8
732.0

722.4
773.2
781.6

-16.0
-59.4
-49.6

29.0
30.9
35.1

1966.

IV

1990:1
II
Ill
IV

1991:1
II
Ill
IV

1992:1
II

-28.4

1.1

1
Undistributed corporate profits with inventory valuation and capital consumption adjustments, corporate and noncorporate
consumption of fixed capital, and private wage accruals less disbursements.
2
Consists mainly of allocations of special drawing rights (SDRs).
3
Net exports of goods and services plus net receipts of factor income from rest of the world less net transfers plus net capital
grants received by the United States. See also Table B-18.
4
Consists of a U.S. payment to India under the Agricultural Trade Development and Assistance Act. This payment is included in
capital grants received by the United States, net.

Source-. Department of Commerce, Bureau of Economic Analysis.




378

TABLE B-27.—Personal saving, flow of funds accounts, 1946-92 :
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Net investment in
tangible assets 7

Increase in financia 1 assets

Year or
quarter

Personal
saving

Seuuiuieu
InsurCheckTime Money
ance Other
able
and
and finan- Owner- Condeposmarket Govern- CorpoOther pension cial occu- sumer
Total its and savings fund
rate
ment
deposaspied durasecurirecurren- its
shares securi- equi4
sets 6 iomes bles
cy
ties 3 ties serves 5
ties 2

1946
1947
1948
1949

22.3
12.4
16.8
13.4

19.6
12.6

1950
1951
1952
1953
1954
1955
1956.........
1957
1958
1959

23.3
24.7
38.0
35.0
27.6
36.9
39.2
39.1
36.2
36.7

15.0
19.5
28 5
24.5
20.9
28.6
31.8
29.2
32.8
35.0

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

38.5
38.0
44.5
49.0
61.1
68.1
82.5
84.2
82.4
81.9

32 3
35.3
39 6
45.4
56.0
57.9
62 9
72.4
69.4
70.7

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

91.1
103.3
121.2
157.4
122.5
155.0
168.3
193.0
204.1
214.0

80.5
107.4
134.9
146.4
149.3
174.4
209.2
254.0
287.1
327.6

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

213.9
239.0
262.8
312.5
384.4
361.1
438.2
339.4
381.0
456.5

326.9
322.7
386.8
502.9
565.1
581.9
609.0
456.8
535.3
593.9

1990
1991

417.5
351.2

522.1
422.0

8.9
8.9

5.6
.0

-2.9

20
2.7
4.6
16
.9
2.1
1.2
1.9
-.4
3.7
.9
9
-1.0

-12
4.2
6.1
6.7
24
10.3

9.5

6.3
3.5
2.3
2.6
2.4
4.8
78
8.2
9.2
8.6
9.4

-1.5

.5
1.0
.5
.9
-.6
74
3.7
.2
6.4
4.5
3.8

11.9
13 9
11.0

-2 7

8.3
21
.8
10

12 2
18.3

261

26.2
26.3
27.9

-1.0

191

13 6
-2.5

3.7
3.7

35.4
30 9

13

-1.1

8.9

27.6

7.4

43.5
67 7
74.0
63.5
56.2
77.6
107.1
106.6
99.6
74.4

-5.5
-110

13 4
13.4
13.1

6.3
6.0

15.6
19.7
22.0
35.8

9.2 124.9

-.9

"i'ji

1.3
.0
-.2
6.0

30.6

1.2 - 0 . 7
1.1 -.7
.2
1.0
.7
_.2
.7
-.6
1.8
.6
2
15
1.0
.3
-1.1
.7
1.0
1.1
1.2
2.0
1.1
1.5
1.5
18
.6
o _ 185
11
5
-14
1.4
-1.5
.6
-.2
1.0
-1.5
43
0
6.9
-3.1
82
61
-2.1

11.7

-.5
-44

7.4
72
-.3
9.5

5.1
5.4
53
5.6
6.1
6.3
77
7.9
7.8
8.5
9.5
9.5

10 4
11.9

115
121
13 0
13.9
16.4
17.0
19 3
18.8
19 9
21.8

3.7
2.7
22
1.6
2.9
2.0
24
2.4
2.0
1.7
3.4
1.9
4.3
1.9
37
4.4
25
2.1
3.2
3.2
41
6.8
57
3.9
4.1
65
9.4
8.2
9.2

3.8 6.7 2.0
6.8 9.4 - 5 . 1
93 10.2 - 1 1
8.5 10.9 58
11.9
11.9

14.9 - 1 . 8
11.4 - 4 . 9

12.6
13.0
17.1
16.0
13.6
12 6
19.5

10.3

115

5.9

-10.6 -6.8
-37.0 -7.1
-15.6 -19.9
-4.1
9.3
-49.4
2.4
61.3
-52.9
5.2 63.8
-32.1
4.5
-119.7 - 4 . 0
-97.2 -5.9

118.5
117.9
153.5
180.7
183.0
217.9
249.0
130.5
218.9
250.1

37.3
10.3
22.6
30.3
36.1
67.9
73.9
49.6
76.1
65.7

51.3
50.5
30.0
71.3
93.6
93.6
119.4
123.3
126.5
113.5

19.0
13.4

212.4
285.5

45.9
74.1

97.5
74.6

8.6

1.2

3.0

11.6 - 6 . 4
29.3 - 1 1 . 8
65.1 - 2 4 . 8

18.6
12.0

8.8
7.9
3.7
7.7
7.2
4.5
86

19.6
25 4
34.3
40.6
29.1
27.4
41.5
51.5
56.8
50.4

10.3
17.0
25.6
35.0
38.8

15.2
-4.7

7.0

12.7

11.9
15.1
20.2
23 2
21.3
26 9
26.2

17.7
27 8
36.7
40.2
30.4
28.1
44.7
65.8
78.5
75.2

16.7
18.1
16.8

87

17 4
16 3
18 2
20.5
22.1
21.6
19 0
18.5
19.9
19.9

24.2
28 0
48.5
39.9
43.7
71.9
56.6
78.6
95.0
101.8

-9.1
-4.4
-1.7
-5.0

Noncorporate
business
assets 8

21
1.1
2.0
3.2
1.2
2.5
3.2
1.3
22
2.9
43
4.7
4.4
8.4
79
7.3

10.2
11.7

Less: Net increase in
ueui
Mortgage
debt Conon sumer Other9
8
non- credit d e b t
farm
homes

4.1
4.9
4.8
4.2
7.0
6.4
64
7.4
9.0

12.2
10.8

8.6
95
12.9

110
12.2
13 8
16.2
16.8
16.8
12 7
13.1
16 7
17.4

13.0
26 3
39.3
43.6
34.2
6.1 39.3
62.0
4.0
16.3 93.0
23.1 109.9
32.0 116.2
10.1
15.1
18.1
23.2
11.6

26.3 14.2
27.3 27.5
22.4 10.1
50.6 - 1 1 . 8
81.8 24.3
95.8 26.8
111.4 16.0
102.9 12.3
112.6
7.4
109.3 19.4

96.8
76.1
58.1
125.4
143.2
164.2
251.9
234.6
241.2
244.7

3.1
3.7
32
3.2
4.6
3.3
33
4.1
1.3
7.0
3.6
2.6
3
7.7
40
2.2
59
8.5
9.5

10.1

59
5.1
10 8

9.9
4.6

14.0
19.0
22.7

9.4
8.0

22.9
36.7
45.1
40.5

2.6
2.7
26
1.8
5.2
3.5
32
2.0
4.9
5.4
4.2
2.9
6.4
6.2
5.6
6.6
65
8.9
10.2
13.1

118

17.0
16.4
19.4
19.2
32.0
44.5
26.7
54.3
33.7
46.1
64.8
86.4
114.5

2.6 105.3

39.6
28.1
23.5
85.9

29.9
39.6
65.9
88.3
108.6
126.1
-33.5
154.8
178.2
167.4

22.4
21.7
55.1 - 6 2 . 2

44.2
28.6

133.0
-44.5

1990.1
475.8
545.0
II
III.... 286.2
IV.... 363.2

697.4 - 1 3 . 9 101.0
610.7
68.2 - 1 6 . 6
367.5
44.3 - 1 8 . 9
412.8 - 9 . 2
21.3

100.8
-55.3
96.9
34.3

1991:1
II
III....
IV....

580.4
240.7
287.0
296.6

664.7
362.9
297.0
363.2

57.9
42.5
41.4 - 8 2 . 6
99.4 -138.2
21.5 - 7 0 . 7

175.8 - 1 0 . 3
-71.4
150.3
- 6 . 5 -160.3
16.4 -157.7

6.3
31.8
49.2
6.8
92.4 - 4 3 . 8
114.4
84.5

312.0 48.6
229.3 40.0
359.0 95.0
241.7 113.0

67.5
71.0
78.8
81.3

40.0
38.9
48.1
39.6

1992.1
II
III....

490.9
333.6
298.6

569.7
334.1
316.0

162.5 - 6 3 . 5
78.9 -170.0
163.0 -151.7

184.2
96.6
31.5
-46.1
- 2 0 . 3 -108.4

115.5 - 9 3 . 2
215.6 - 5 . 6
230.5 - 166.0

167.1
215.9
332.2

.5

82.7
89.1
51.1

3.1 - 1 4 . 6
55.8 - 1 9 . 9 209.1
18.7
52.6 - 1 4 . 7 121.1 - 1 2 . 4
61.5 - 1 3 . 9 146.6
.4 - 3 0 . 8

36.3
24.8
34.3
21.6
33.9
102.2

6.6
7.4

19.3

72.0
122.6
195.1
218.8
119.0
108.9
114.7
154.8
108.6

24.5
90.7
32.8
-31.1
44.0

8.7

23.6
72.0

279.9 - 2 4 . 7 101.7
74.7
182.0
41.8
130.4
65.1 -163.5
63.1
-60.3
12.1

16.9
16.4
48.9
81.7
82.3
57.5
32.9
50.1
41.7

96.1
112.0
126.2
155.5
190.7
108.1
88.4
109.5
93.2

9.2 218.9 17.5
85.1
41.6 - 2 1 . 6 141.7 - 1 2 . 5

59.9
36.3

332.5 40.8
187.9 21.4
193.3 14.4
161.8 - 6 . 6

78.2
63.3
58.9
39.4

-10.4
-7.8
-24.0
-8.0

31.9
67.9
19.8
25.7

162.4 - 9 . 8 113.6 104.8 11.6
269.0 46.9 104.3 87.3 15.4
141.6 71.6 91.8 81.5 11.9
276.7 74.8 80.2 66.7 - 2 . 0

13.9
36.8

-17.6
-14.3
-19.2
-35.2

152.6
157.7
122.0
134.7

1
2

Saving by households, personal trust funds, nonprofit institutions, farms, and other noncorporate business.
Consists of U.S. savings bonds, other U.S. Treasury securities, U.S. Government agency securities and sponsored agency securities,
mortgage pool securities, and State and local obligations.
3
Includes mutual fund shares.
5
6

Private life insurance reserves, private insured and nomnsured pension reserves, and government insurance and pension reserves.
Consists of security credit, mortgages, accident and health insurance reserves, and nonlife insurance claims for households, and of
consumer credit, equity in sponsored agencies, and nonlife insurance claims for noncorporate business.
7
Purchases of physical assets less depreciation.
8
Includes data for corporate farms.
9
Other debt consists of security credit, U.S. Government and policy loans, and noncorporate business debt.
Source: Board of Governors of the Federal Reserve System.




379

TABLE B-28.—Median money income (in 1991 dollars) and poverty status of families and persons, by race,
selected years, 1971-91
Families

1

Persons
below
poverty level

Below poverty level

Year

Number
(millions)

Median
money
income
(in
1991
dollars) 2

Female
householder

Total
Number
(millions)

Percent

Number
(millions)

Percent

Median money income (in 1991 dollars)
of persons 15 years old and over with
income 2 3
Males

Number
(millions)

Percent

Females

All
persons

Yearround
full-time
workers

All
persons

Yearround
full-time
workers

ALL RACES

1971
1973
1975 4
1977
1978
1979 5
1980
1981
1982
1983 4
1984
1985
1986
1987 4
1988
1989
1990
1991

53.3
55.1
56.2
57.2
57.8
59.6
60.3
61.0
61.4
62.0
62.7
63.6
64.5
65.2
65.8
66.1
66.3
67.2

$32,502
34,774
33,248
34,500
35,594
36,051
34,791
33,843
33,385
33,741
34,650
35,107
36,607
37,131
37,062
37,579
36,841
35,939

5.3
4.8
5.5
5.3
5.3
5.5
6.2
6.9
7.5
7.6
7.3
7.2
7.0
7.0
6.9
6.8
7.1
7.7

10.0
8.8
9.7
9.3
9.1
9.2
10.3
11.2
12.2
12.3
11.6
11.4
10.9
10.7
10.4
10.3
10.7
11.5

2.1
2.2
2.4
2.6
2.7
2.6
3.0
3.3
3.4
3.6
3.5
3.5
3.6
3.7
3.6
3.5
3.8
4.2

33.9
32.2
32.5
31.7
31.4
30.4
32.7
34.6
36.3
36.0
34.5
34.0
34.6
34.2
33.4
32.2
33.4
35.6

25.6
23.0
25.9
24.7
24.5
26.1
29.3
31.8
34.4
35.3
33.7
33.1
32.4
32.2
31.7
31.5
33.6
35.7

12.5
11.1
12.3
11.6
11.4
11.7
13.0
14.0
15.0
15.2
14.4
14.0
13.6
13.4
13.0
12.8
13.5
14.2

$21,814
23,246
21,455
21,816
22,064
21,680
20,736
20,367
19,874
20,048
20,450
20,646
21,268
21,324
21,769
21,850
21,147
20,469

$30,435
33,092
31,345
32,477
32,410
32,171
31,730
31,279
30,852
30,776
31,466
31,644
32,178
31,989
31,479
31,215
30,198
30,331

$7,610
8,068
8,204
8,493
8,208
8,010
8,142
8,251
8,387
8,759
9,003
9,135
9,457
9,945
10,228
10,571
10,494
10,476

$18,016
18,722
18,707
18,995
19,453
19,383
19,182
18,831
19,465
19,812
20,216
20,572
20,931
21,058
21,351
21,570
21,457
21,245

47.6
48.9
49.9
50.5
50.9
52.2
52.7
53.3
53.4
53.9
54.4
55.0
55.7
56.1
56.5
56.6
56.8
57.2

33,725
36,344
34,578
36,076
37,063
37,619
36,249
35,550
35,052
35,331
36,293
36,901
38,286
38,828
39,047
39,514
38,468
37,783

3.8
3.2
3.8
3.5
3.5
3.6
4.2
4.7
5.1
5.2
4.9
5.0
4.8
4.6
4.5
4.4
4.6
5.0

7.9
6.6
7.7
7.0
6.9
6.9
8.0
8.8
9.6
9.7
9.1
9.1
8.6
8.1
7.9
7.8
8.1
8.8

1.2
1.2
1.4
1.4
1.3
1.4
1.6
1.8
1.8
1.9
1.9
2.0
2.0
2.0
1.9
1.9
2.0
2.2

26.5
24.5
25.9
24.0
23.5
22.3
25.7
27.4
27.9
28.3
27.1
27.4
28.2
26.9
26.5
25.4
26.8
28.4

17.8
9.9
15.1 | 8.4
17.8 ' 9.7
8.9
16.4
8.7
16.3
9.0
17.2
19.7 10.2
21.6 11.1
23.5 12.0
24.0 12.1
23.0 11.5
11.4
22.9
11.0
22.2
21.2 10.4
20.7 10.1
20.8 10.0
22.3 10.7
23.7 11.3

22,870
24,392
22,538
22,850
23,110
22,648
22,057
21,611
21,011
21,092
21,586
21,659
22,443
22,666
22,979
22,916
22,061
21,395

31,291
34,050
32,070
33,141
33,011
33,100
32,635
32,014
31,674
31,598
32,544
32,522
33,077
32,735
32,538
32,591
31,347
30,953

7,736
8,146
8,288
8,622
8,307
8,085
8,187
8,343
8,501
8,912
9,109
9,312
9,643
10,199
10,480
10,777
10,751
10,721

18,224
19,039
18,751
19,115
19,637
19,552
19,368
19,145
19,728
20,077
20,417
20,863
21,251
21,448
21,671
21,826
21,716
21,555

20,351
20,975
21,276
20,609
21,951
21,302
20,974 ,
20,054
19,373
19,912
20,228
21,248
21,877
22,068
22,254
22,197
22,325
21,548

1.5
1.5
1.5
1.6
1.6
1.7
1.8
2.0
2.2
2.2
2.1
2.0
2.0
2.1
2.1
2.1
2.2
2.3

28.8
28.1
27.1
28.2
27.5
27.8
28.9
30.8
33.0
32.3
30.9
28.7
28.0
29.4
28.2
27.8
29.3
30.4

.9
1.0
1.0
1.2
•1.2
1.2
1.3
1.4
1.5
1.5
1.5
1.5
1.5
1.6
1.6
1.5
1.6
1.8

53.5
52.7
50.1
51.0
50.6
49.4
49.4
52.9
56.2
53.7
51.7
50.5
50.1
51.1
49.0
46.5
48.1
51.2

7.4
7.4
7.5
7.7
7.6
8.1
8.6
9.2
9.7
9.9
9.5
8.9
9.0
9.5
9.4
9.3
9.8
10.2

13,639
14,754
13,475
13,560
13,844
14,019
13,254
12,851
12,591
12,335
12,385
13,630
13,449
13,446
13,866
13,850
13,409
12,962

21,397
22,949
23,867
22,848
25,283
23.855
22,962
22,651
22,496
22,529
22,210
22,748
23,321
23,406
23,851
22,741
22,385
22,628

6,778
7,352
7,530
7,446
7,480
7,358
7,580
7,412
7,498
7,615
8,080
7,945
8,160
8,331
8,461
8,650
8.678
8,816

16,091
16,145
17,914
17,865
18,200
17,916
18,063
17,290
17,632
17,822
18,399
18,468
18,596
19,157
19,419
19,629
19,324
19,134

WHITE

1971
1973
1975 4 .
1977
1978
1979 8
1980.
1981.
1982
1983 4
1984.
1985
1986
1987 4
1988
1989
1990
1991.
BLACK

1971.
1973
1975 4
1977
1978
1979 5
1980.
1981
1982
1983 4 .
1984 .
1985.
1986
1987 4 .
1988.
1989
1990
1991

5.2
5.4
5.6
5.8
5.9
6.2
6.3
6.4
6.5
6,7
6.8
6.9
7.1
7.2
7.4
7.5
7.5
7.7

32.5
31.4
31.3
31.3
30.6
31.0
32.5
34.2
35.6
35.7
33.8
31.3
31.1
32.4
31.3
30.7
31.9
32.7

x
The term "family" refers to a group of two or more persons related by blood, marriage, or adoption and residing together; all such
persons are considered members of the same family. Beginning 1979, based on householder concept and restricted to primary families.
2
Current dollar median money income deflated by CPI-U-X1.
3
Prior to 1979, data are for persons 14 years and over.
4
Based on revised methodology; comparable with succeeding years.
5
Based on 1980 census population controls; comparable with succeeding years.

Note.—Poverty rates (percent of persons below poverty level) for all races for years not shown above are: 1959, 22.4; 1960, 22.2;
1961, 21.9; 1962, 21.0; 1963, 19.5; 1964, 19.0; 1965, 17.3; 1966, 14.7; 1967, 14.2; 1968, 12.8; 1969, 12.1; 1970, 12.6; 1972, 11.9;
1974, 11.2; and 1976, 11.8.
The poverty level is based on the poverty index adopted by a Federal interagency committee in 1969, with minor revisions
implemented in 1981. The poverty thresholds are updated every year to reflect changes in the consumer price index (CPI-U). For
further details, see "Current Population Reports," Series P-60, No. 181.
See "Current Population Reports," Series P-60, No. 180 for details regarding the median money income series.
Source: Department of Commerce, Bureau of the Census.




380

POPULATION, EMPLOYMENT, WAGES, AND PRODUCTIVITY
T A B L E B-29.—Population by age groups. 1929-92
[Thousands of persons]
Age (years)
July 1

Total
Under 5

5-15

16-19

20-24

25-44

45-64

65 and
over

1929

121,767

11,734

26,800

9,127

10,694

35,862

21,076

6,474

1933

125,579

10,612

26,897

9,302

11,152

37,319

22,933

7,363

1939..

130,880

10,418

25,179

9,822

11,519

39,354

25,823

8,764

1940
1941
1942
1943
1944

132,122
133,402
134,860
136,739
138,397

10,579
10,850
11,301
12,016
12,524

24,811
24,516
24,231
24,093
23,949

9,895
9,840
9,730
9,607
9,561

11,690
11,807
11,955
12,064
12,062

39,868
40,383
40,861
41,420
42,016

26,249
26,718
27,196
27,671
28,138

9,031
9,288
9,584
9,867
10,147

1945
1946
1947
1948
1949

139,928
141,389
144,126
146,631
149,188

12,979
13,244
14,406
14,919
15,607

23,907
24,103
24,468
25,209
25,852

9,361
9,119
9,097
8,952
8,788

12,036
12,004
11,814
11,794
11,700

42,521
43,027
43,657
44,288
44,916

28,630
29,064
29,498
29,931
30,405

10,494
10,828
11,185
11,538
11,921

1950
1951
1952
1953
1954

152,271
154,878
157,553
160,184
163,026

16,410
17,333
17,312
17,638
18,057

26,721
27,279
28,894
30,227
31,480

8,542
8,446
8,414
8,460
8,637

11,680
11,552
11,350
11,062
10,832

45,672
46,103
46,495
46,786
47,001

30,849
31,362
31,884
32,394
32,942

12,397
12,803
13,203
13,617
14,076

1955
1956
1957
1958
1959

165,931
168,903
171,984
174,882
177,830

18,566
19,003
19,494
19,887
20,175

32,682
33,994
35,272
36,445
37,368

8,744
8,916
9,195
9,543
10,215

10,714
10,616
10,603
10,756
10,969

47,194
47,379
47,440
47,337
47,192

33,506
34,057
34,591
35,109
35,663

14,525
14,938
15,388
15,806
16,248

1960
1961
1962
1963
1964

180,671
183,691
186,538
189,242
191,889

20,341
20,522
20,469
20,342
20,165

38,494
39,765
41,205
41,626
42,297

10,683
11,025
11,180
12,007
12,736

11,134
11,483
11,959
12,714
13,269

47,140
47,084
47,013
46,994
46,958

36,203
36,722
37,255
37,782
38,338

16,675
17,089
17,457
17,778
18,127

1965....
1966....
1967....
1968....
1969....

194,303
196,560
198,712
200,706
202,677

19,824
19,208
18,563
17,913
17,376

42,938
43,702
44,244
44,622
44,840

13,516
14,311
14,200
14,452
14,800

13,746
14,050
15,248
15,786
16,480

46,912
47,001
47,194
47,721
48,064

38,916
39,534
40,193
40,846
41,437

18,451
18,755
19,071
19,365
19,680

1970
1971
1972
1973
1974

205,052
207,661
209,896
211,909
213,854

17,166
17,244
17,101
16,851
16,487

44,816
44,591
44,203
43,582
42,989

15,289
15,688
16,039
16,446
16,769

17,202
18,159
18,153
18,521
18,975

48,473
48,936
50,482
51,749
53,051

41,999
42,482
42,898
43,235
43,522

20,107
20,561
21,020
21,525
22,061

1975
1976
1977
1978
1979

215,973
218,035
220,239
222,585
225,055

16,121
15,617
15,564
15,735
16,063

42,508
42,099
41,298
40,428
39,552

17,017
17,194
17,276
17,288
17,242

19,527
19,986
20,499
20,946
21,297

54,302
55,852
57,561
59,400
61,379

43,801
44,008
44,150
44,286
44,390

22,696
23,278
23,892
24,502
25,134

1980
1981
1982
1983
1984

227,726
229,966
232,188
234,307
236,348

16,451
16,893
17,228
17,547
17,695

38,838
38,144
37,784
37,526
37,461

17,167
16,812
16,332
15,823
15,295

21,590
21,869
21,902
21,844
21,737

63,470
65,528
67,692
69,733
71,735

44.504
44,500
44,462
44,474
44,547

25,707
26,221
26,787
27,361
27,878

1985..
1986..
1987..
1988..
1989..

238,466
240,651
242,804
245,021
247,342

17,842
17,963
18,052
18,195
18,508

37,450
37,404
37,333
37,593
37,972

15,005
15,024
15,215
15,198
14,913

21,478
20,942
20,385
19,846
19,442

73,673
75,651
77,338
78,595
79,943

44,602
44,660
44,854
45,471
45,882

28,416
29,008
29,626
30,124
30,682

1990
1991
1992

249,924
252,688
255,414

18,874
19,222

38,592
39,201

14,452
13,949

19,305
19,372

81,192
82,439

46,284
46,752

31,224
31,754

Note.—Includes Armed Forces overseas beginning 1940. Includes Alaska and Hawaii beginning 1950.
All estimates are consistent with decennial census enumerations.
Source: Department of Commerce, Bureau of the Census.

381
334-230 0—92




13(QL3)

TABLE B-30.—Population and the labor force, 1929-92
[Monthly data seasonally adjusted, except as noted]
Civilian labor force

Year or month

Civilian
noninstitutional
population1

Resident
Armed
Forces l

Labor
force
including
resident
Armed
Forces

Employment
including
resident
Armed
Forces

Unemployment rate

Employment

Total
Total

Agricultural

Nonagricultural

Unemployment

All
workers 2

Thousands of persons 14 years of age and over

1929
1933
1939
1940
1941
1942
1943
1944

99,840
99,900
98,640
94,640
93,220

1945
1946
1947

94,090
103,070
106,018

1947
1948
1949
1950
1951
1952
1953 6 ...
1954
1955
1956
1957
1958
1959
I960 6 ...
1961
1962 6 ...
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972 6 ..
1973 6 ..
1974....
1975....
1976
1977....
1978 6 ..
1979....

101,827
103,068
103,994
104,995
104,621
105,231
107,056
108,321
109,683
110,954
112,265
113,727
115,329
117,245
118,771
120,153
122,416
124,485
126,513
128,058
129,874
132,028
134,335
137,085
140,216
144,126
147,096
150,120
153,153
156,150
159,033
161,910
164,863
167,745
170,130
172,271
174,215
176,383
178,206
180,587
182,753
184,613
186,393
188,049
189,765
191,576

49,180
51,590
55,230
55,640
55,910
56,410
55,540
54,630
53,860
57,520
60,168

47,630 10,450
38,760 10,090
45,750 9,610
47,520 9,540
50,350 9,100
53,750 9,250
54,470 9,080
53,960 8,950
52,820 8,580
55,250 8,320
57,812 8,256

Civilian
workers 3

CivilCivilian
ian
emlabor
ployforce
ment/
parpopticiulapation
tion
4
rate
ratio 5

Percent

3.2

37,180 1,550
28,670 12,830
36,140 9,480
37,980 8,120
41,250 5,560
44,500 2,660
45,390 1,070
45,010
670
44,240 1,040
46,930 2,270
49,557 2,356

24.9
17.2
14.6

9.9
4.7
1.9
1.2
1.9
3.9
3.9

55.7
56.0
57.2
58.7
58.6
57.2
55.8
56.8

47.6
50.4
54.5
57.6
57.9

58.3
58.8
58.9
59.2
59.2
59.0
58.9
58.8
59.3
60.0
59.6
59.5
59.3
59.4
59.3
58.8
58.7
58.7
58.9
59.2
59.6
59.6
60.1
60.4
60.2
60.4
60.8
61.3
61.2
61.6
62.3
63.2
63.7

56.0
56.6
55.4

56.1
53.6
54.5

Thousands of persons 16 years of age and over

1980....
1981....
1982....
1983....
1984....
1985....
1986 6 .
1987....
1988....
1989....
1990...
1991....
1992....

1,169
2,143
2,386
2,231
2,142
2,064
1,965
1,948
1,847
1,788
1,861
1,900
2,061
2,006
2,018
1,946
2,122
2,218
2,253
2,238
2,118
1,973
1,813
1,774
1,721
1,678
1,668
1,656
1,631
1,597
1,604
1,645
1,668
1,676
1,697
1,706
1,706
1,737
1,709
1,688
1,637
1,564
1,566

63,377
64,160
64,524
65,246
65,785
67,087
68,517
68,877
69,486
70,157
71,489
72,359
72,675
73,839
75,109
76,401
77,892
79,565
80,990
82,972
84,889
86,355
88,847
91,203
93,670
95,453
97,826
100,665
103,882
106,559
108,544
110,315
111,872
113,226
115,241
117,167
119,540
121,602
123,378
125,557
126,424
126,867
128,548

60,087
62,104
62,636
63,410
62,251
64,234
65,764
66,019
64,883
66,418
67,639
67,646
68,763
69,768
71,323
73,034
75,017
76,590
78,173
80,140
80,796
81,340
83,966
86,838
88,515
87,524
90,420
93,673
97,679
100,421
100,907
102,042
101,194
102,510
106,702
108,856
111,303
114,177
116,677
119,030
119,550
118,440
119,164

59,350
60,621
61,286
62,208
62,017
62,138
63,015
63,643
65,023
66,552
66,929
67,639
68,369
69,628
70,459
70,614
71,833
73,091
74,455
75,770
77,347
78,737
80,734
82,771
84,382
87,034
89,429
91,949
93,775
96,158
99,009
102,251
104,962
106,940
108,670
110,204
111,550
113,544
115,461
117,834
119,865
121,669
123,869
124,787
125,303
126,982

57,038
58,343
57,651
58,918
59,961
60,250
61,179
60,109
62,170
63,799
64,071
63,036
64,630
65,778
65,746
66,702
67,762
69,305
71,088
72,895
74,372
75,920
77,902
78,678
79,367
82,153
85,064
86,794
85,846
88,752
92,017
96,048
98,824
99,303
100,397
99,526
100,834
105,005
107,150
109,597
112,440
114,968
117,342
117,914
116,877
117,598

1

Not seasonally adjusted.
Unemployed as percent of labor force including resident Armed Forces.
Unemployed as percent of civilian labor force.
4
Civilian labor force as percent of civilian noninstitutional population.
5
Civilian employment as percent of civilian noninstitutional population.
See next page for continuation of table.
2

3




382

7,890
7,629
7,658
7,160
6,726
6,500
6,260
6,205
6,450
6,283
5,947
5,586
5,565
5,458
5,200
4,944
4,687
4,523
4,361
3,979
3,844
3,817
3,606
3,463
3,394
3,484
3,470
3,515
3,408
3,331
3,283
3,387
3,347
3,364
3,368
3,401
3,383
3,321
3,179
3,163
3,208
3,169
3,199
3,186
3,233
3,207

49,148 2,311
50,714 2,276
49,993 3,637
51,758 3,288
53,235 2,055
53,749 1,883
54,919 1,834
53,904 3,532
55,722 2,852
57,514 2,750
58,123 2,859
57,450 4,602
59,065 3,740
60,318 3,852
60,546 4,714
61,759 3,911
63,076 4,070
64,782 3,786
66,726 3,366
68,915 2,875
70,527 2,975
72,103 2,817
74,296 2,832
75,215 4,093
75,972 5,016
78,669 4,882
81,594 4,365
83,279 5,156
82,438 7,929
85,421 7,406
88,734 6,991
92,661 6,202
95,477 6,137
95,938 7,637
97,030 8,273
96,125 10,678
97,450 10,717
101,685 8,539
103,971 8,312
106,434 8,237
109,232 7,425
111,800 6,701
114,142 6,528
114,728 6,874
113,644 8,426
114,391 9,384

5.2
3.2
2.9
2.8
5.4
4.3
4.0
4.2
6.6
5.3
5.4
6.5
5.4
5.5
5.0
4.4
3.7
3.7
3.5
3.4

4.8
5.8
5.5
4.8
5.5
8.3
7.6
6.9
6.0
5.8
7.0
7.5
9.5
9.5
7.4
7.1
6.9
6.1
5.4
5.2
5.4
6.6
7.3

3.9
3.8
5.9
5.3
3.3
3.0
2.9
5.5
4.4
4.1
4.3
6.8
5.5
5.5
6.7
5.5
5.7
5.2
4.5
3.8
3.8
3.6
3.5
4.9
5.9
5.6
4.9
5.6
8.5
7.7
7.1
6.1
5.8
7.1
7.6
9.7
9.6
7.5
7.2
7.0
6.2
5.5
5.3
5.5
6.7
7.4

63.8
63.9
64.0
64.0
64.4
64.8
65.3
65.6
65.9
66.5
66.4
66.0
66.3

56.1
57.3
57.3
57.1
55.5
56.7
57.5
57.1
55.4
56.0
56.1
55.4
55.5
55.4
55.7
56.2
56.9
57.3
57.5
58.0
57.4
56.6
57.0
57.8
57.8
56.1
56.8
57.9
59.3
59.9
59.2
59.0
57.8
57.9
59.5
60.1
60.7
61.5
62.3
63.0
62.7
61.6
61.4

TABLE B-30.—Population and the labor force, 1929-92—Continued
[Monthly data seasonally adjusted, except as noted]
Civilian labor force
Year or month

Labor EmployCivilian
force
ment
noninsti- Resi- includ- including
dent
tutional Armed
resident
popula- Forces1 resident Armed
tion 1
Armed Forces
Forces

Unemployment rate

Employment
Total

Total

Agricultural

Nonagricultural

Unemployment

113,400
113,546
113,818
113,912
113,990
114,338
114,244
114,376
114,126
114,370
114,818
114,672
114,786
114,931
115,050
114,878
115,051
114,980
114,831
114,671
114,601
114,517
114,257
114,222
113,717
113,673
113,672
114,124
113,414
113,601
113,461
113^264
113,831
113,761
113,643
113,583
113,890
113,749
114,070
114,312
114,394
114,266
114,515
114,562
114,503
114,518
114,855
115,049

6,684
6,355
6,204
6,475
6,370
6,567
6,498
6,501
6,596
6,655
6,724
6,667
6,606
6,573
6,491
6,711
6,583
6,403
6,712
7,012
7,121
7,255
7,502
7,726
7,806
8,123
8,462
8,306
8,507
8,487
8,378
8460
8,479
8,695
8,670
8,984
8,992
9,223
9,284
9,225
9,459
9,788
9,628
9,624
9,550
9,379
9,301
9,280

Civilian
labor
Civil- force
parAll
ian
work- work- ticiers 2 ers 3 pation
rate 4
Percent

rhousands of person > 16 years of age and over
1989: Jan
Feb
Mar
May".!!!!!!!!!!
June
July
Aug
Sept
Oct
Nov
Dec
1990: Jan
Feb
Mr
a
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
1991: Jan
Feb
Mar
Apr
May
June
July
Aug ,
Sept
Oct
Nov
Dec
1992:Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec

185,644
185,777
185,897
186,024
186,181
186,329
186,483
186,598
186,726
186,871
187,017
187,165
187,293
187,412
187,529
187,669
187,828
187,977
188,136
188,261
188,401
188,525
188,697
188,866
188,977
189,115
189,243
189,380
189,522
189,668
189,839
189,973
190,122
190,289
190,452
190,605
190,759
190,884
191,022
191,168
191,307
191,455
191,622
191,790
191,947
192,131
192,316
192,509

1,696
1,684
1,684
1,684
1,673
1,666
1,666
1,688
1,702
1,709
1,704
1,700
1,697
1,678
1,669
1,657
1,639
1,630
1,627
1,640
1,601
1,570
1,615
1,617
1,615
1,602
1,460
1,456
1,458
1,505
1,604
1^616
1,624
1,614
1,605
1,604
1,599
1,585
1,585
1,577
1,574
1,570
1,568
1,566
1,566
1,552
1,531
1,517

125,071
124,816
124,902
125,230
125,158
125,646
125,631
125,840
125,641
125,946
126,393
126,236
126,246
126,301
126,429
126,406
126,559
126,275
126,274
126,461
126,493
126,535
126,545
126,835
126,315
126,621
126,718
127,069
126,644
126,876
126,693
126]598
127 211
127,289
127,207
127,340
127,627
127,770
128,133
128,320
128,613
128,868
128,918
128,970
128,840
128,618
128,896
129,108

118,387
118,461
118,698
118,755
118,788
119,079
119,133
119,339
119,045
119,291
119,669
119,569
119,640
119,728
119,938
119,695
119,976
119,872
119,562
119,449
119,372
119,280
119,043
119,109
118,509
118,498
118,256
118,763
118,137
118,389
118,315
118438
118 732
118,594
118,537
118,356
118,635
118,547
118,849
119,095
119,154
119,080
119,290
119,346
119,290
119,239
119,595
119,828

123,375
123,132
123,218
123,546
123,485
123,980
123,965
124,152
123,939
124,237
124,689
124,536
124,549
124,623
124,760
124,749
124,920
124,645
124,647
124,821
124,892
124,965
124,930
125,218
124,700
125,019
125,258
125,613
125,186
125,371
125,089
124^982
125,587
125,675
125,602
125,736
126,028
126,185
126,548
126,743
127,039
127,298
127,350
127,404
127,274
127,066
127,365
127,591

116,691
116,777
117,014
117,071
117,115
117,413
117,467
117,651
117,343
117,582
117,965
117,869
117,943
118,050
118,269
118,038
118,337
118,242
117,935
117,809
117,771
117,710
117,428
117,492
116,894
116,896
116,796
117,307
116,679
116,884
116 711
116^522
117,108
116,980
116,932
116,752
117,036
116,962
117,264
117,518
117,580
117,510
117,722
117,780
117,724
117,687
118,064
118,311

3,291
3,231
3,196
3,159
3,125
3,075
3,223
3,275
3,217
3,212
3,147
3,197
3,157
3,119
3,219
3,160
3,286
3,262
3,104
3,138
3,170
3,193
3,171
3,270
3,177
3,223
3,124
3,183
3,265
3,283
3,250
3258
3,277
3,219
3,289
3,169
3,146
3,213
3,194
3,206
3,186
3,244
3,207
3,218
3,221
3,169
3,209
3,262

Civilian
employment/
population
ratio5

5.3
5.1
5.0
5.2
5.1
5.2
5.2
5.2
5.2
5.3
5.3
5.3
5.2
5.2
51
5.3
5.2
5.1
5.3
5.5
5.6
5.7
5.9
6.1
6.2
6.4
6.7
6.5
6.7
6.7
6.6
67
67
6.8
6.8
7.1
7.0
7.2
7.2
7.2
7.4
7.6
7.5
7.5
7.4
7.3
7.2
7.2

5.4
5.2
5.0
5.2
5.2
5.3
5.2
5.2
5.3
5.4
5.4
5.4
5.3
5.3
5.2
5.4
5.3
5.1
5.4
5.6
5.7
5.8
6.0
6.2
6.3
6.5
6.8
6.6
6.8
6.8
6.7
6.8
6.8
6.9
6.9
7.1
7.1
7.3
7.3
7.3
7.4
7.7
7.6
7.6
7.5
7.4
7.3
7.3

66.5
66.3
66.3
66.4
66.3
66.5
66.5
66.5
66.4
66.5
66.7
66.5
66.5
66.5
66 5
66.5
66.5
66.3
66.3
66.3
66.3
66.3
66.2
66.3
66.0
66.1
66.2
66.3
66.1
66.1
65.9
65.8
661
66.0
65.9
66.0
66.1
66.1
66.2
66.3
66.4
66.5
66.5
66.4
66.3
66.1
66.2
66.3

62.9
62.9
62.9
62.9
62.9
63.0
63.0
63.1
62.8
62.9
63.1
63.0
63.0
63.0
631
62.9
63.0
62.9
62.7
62.6
62.5
62.4
62.2
62.2
61.9
61.8
61.7
61.9
61.6
61.6
61.5
61.3
61.6
61.5
61.4
61.3
61.4
61.3
61.4
61.5
61.5
61.4
61.4
61.4
61.3
61.3
61.4
61.5

6
Not strictly comparable with earlier data due to population adjustments as follows: Beginning 1953, introduction of 1950 census
data added about 600,000 to population and 350,000 to labor force, total employment, ana agricultural employment. Beginning 1960,
inclusion of Alaska and Hawaii added about 500,000 to population, 300,000 to labor force, and 240,000 to nonagriculturaf employment.
Beginning 1962, introduction of 1960 census data reduced population by about 50,000 and labor force and employment by 200,000.
Beginning 1972, introduction of 1970 census data added about 800,000 to civilian noninstitutional population and 333,000 to labor
force ana employment. A subsequent adjustment based on 1970 census in March 1973 added 60,000 to labor force and to employment.
Beginning 19/8, changes in sampling and estimation procedures introduced into the household survey added about 250,000 to labor
force and to employment. Unemployment levels and rates were not significantly affected. Beginning 1986, the introduction of revised
population controls added about 400,000 to the civilian population ana labor force and 350,000 to civilian employment. Unemployment
levels and rates were not significantly affected.
Note.—Labor force data in Tables B-30 through B-39 are based on household interviews and relate to the calendar week including
the 12th of the month. For definitions of terms, area samples used, historical comparability of the data, comparability with other series,
etc., see "Employment and Earnings."
Source: Department of Labor, Bureau of Labor Statistics.




383

TABLE B-31.—Civilian employment and unemployment by sex and age, 1947-92
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]

Civilian employment
Males
Year or month
Total
Total

1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1991: Jan..
Feb..
Mar.
Apr..
May.
June
July.
Aug.
Sept
Oct..
Nov.
Dec.
1992: Jan.
Feb..
Mar.
May"
June
July.
Aug.
Sept
Oct..
Nov.
Dec.

57,038
58,343
57,651
58,918
59,961
60,250
61,179
60,109
62,170
63,799
64,071
63,036
64,630
65,778
65,746
66,702
67,762
69,305
71,088
72,895
74,372
75,920
77,902
78,678
79,367
82,153
85,064
86,794
85,846
88,752
92,017
96,048
98,824
99,303
100,397
99,526
100,834
105,005
107,150
109,597
112,440
114,968
117,342
117,914
116,877
117,598
116,894
116,896
116,796
117,307
116,679
116,884
116,711
116,522
117,108
116,980
116,932
116,752
117,036
116,962
117,264
117,518
117,580
117,510
117,722
117,780
117,724
117,687
118,064
118,311

40,995
41,725
40,925
41,578
41,780
41,682
42,430
41,619
42,621
43,379
43,357
42,423
43,466
43,904
43,656
44,177
44,657
45,474
46,340
46,919
47,479
48,114
48,818
48,990
49,390
50,896
52,349
53,024
51,857
53,138
54,728
56,479
57,607
57,186
57,397
56,271
56,787
59,091
59,891
60,892
62,107
63,273
64,315
64,435
63,593
63,805
63,816
63,623
63,589
63,765
63,498
63,545
63,468
63,417
63,703
63,608
63,589
63,398
63,466
63,351
63,547
63,777
63,830
63,751
63,830
63,901
63,976
63,924
64,043
64,194

16-19
years

2,218
2,344
2,124
2,186
2,156
2,107
2,136
1,985
2,095
2,164
2,115
2,012
2,198
2,361
2,315
2,362
2,406
2,587
2,918
3,253
3,186
3,255
3,430
3,409
3,478
3,765
4,039
4,103
3,839
3,947
4,174
4,336
4,300
4,085
3,815
3,379
3,300
3,322
3,328
3,323
3,381
3,492
3,477
3,237
2,879
2,786
3,010
3,031
2,982
2,890
2,905
2,860
2,804
2,805
2,866
2,832
2,797
2,729
2,802
2,745
2,704
2,744
2,743
2,724
2,760
2,797
2,851
2,836
2,837
2,868

Unemployment
Females

20
years
and
over

Total

38,776
39,382
38,803
39,394
39,626
39,578
40,296
39,634
40,526
41,216
41,239
40,411
41,267
41,543
41,342
41,815
42,251
42,886
43,422
43,668
44,294
44,859
45,388
45,581
45,912
47,130
48,310
48,922
48,018
49,190
50,555
52,143
53,308
53,101
53,582
52,891
53,487
55,769
56,562
57,569
58,726
59,781
60,837
61,198
60,714
61,019
60,806
60,592
60,607
60,875
60,593
60,685
60,664
60,612
60,837
60,776
60,792
60,669
60,664
60,606
60,843
61,033
61,087
61,027
61,070
61,104
61,125
61,088
61,206
61,326

16,045
16,617
16,723
17,340
18,181
18,568
18,749
18,490
19,551
20,419
20,714
20,613
21,164
21,874
22,090
22,525
23,105
23,831
24,748
25,976
26,893
27,807
29,084
29,688
29,976
31,257
32,715
33,769
33,989
35,615
37,289
39,569
41,217
42,117
43,000
43,256
44,047
45,915
47,259
48,706
50,334
51,696
53,027
53,479
53,284
53,793
53,078
53,273
53,207
53,542
53,181
53,339
53,243
53,105
53,405
53,372
53,343
53,354
53,570
53,611
53,717
53,741
53,750
53,759
53,892
53,879
53,748
53,763
54,021
54,117

16-19
years

1,691
1,682
1,588
1,517
1,611
1,612
1,584
1,490
1,547
1,654
1,663
1,570
1,640
1,768
1,793
1,833
1,849
1,929
2,118
2,468
2,496
2,526
2,687
2,735
2,730
2,980
3,231
3,345
3,263
3,389
3,514
3,734
3,783
3,625
3,411
3,170
3,043
3,122
3,105
3,149
3,260
3,313
3,282
3,024
2,749
2,613
2,820
2,867
2,861
2,892
2,772
2,762
2,645
2,562
2,680
2,707
2,728
2,672
2,681
2,686
2,603
2,605
2,646
2,526
2,585
2,632
2,607
2,581
2,586
2,623

Note.—See footnote 6 and Note, Table B-30.
Source: Department of Labor, Bureau of Labor Statistics.




384

Females
20
years
and
over

Total

20
20
Total 16-19 years Total 16-19 years
years and
years and
over
over

14,354 2,311 1,692 270 1,422 619
14,936 2,276 1,559 256 1,305 717
15,137 3,637 2,572 353 2,219 1,065
15,824 3,288 2,239 318 1,922 1,049
16,570 2,055 1,221
191 1,029 834
16,958 1,883 1,185 205 980 698
17,164 1,834 1,202
184 1,019 632
17,000 3,532 2,344 310 2,035 1,188
18,002 2,852 1,854 274 1,580 998
18,767 2,750 1,711 269 1,442 1,039
19,052 2,859 1,841 300 1,541 1,018
19,043 4,602 3,098 416 2,681 1,504
19,524 3,740 2,420 398 2,022 1,320
20,105 3,852 2,486 426 2,060 1,366
20,296 4,714 2,997 479 2,518 1,717
20,693 3,911 2,423 408 2,016 1,488
21,257 4,070 2,472 501 1,971 1,598
21,903 3,786 2,205 487 1,718 1,581
22,630 3,366 1,914 479 1,435 1,452
23,510 2,875 1,551 432 1,120 1,324
24,397 2,975 1,508 448 1,060 1,468
25,281 2,817 1,419 426 993 1,397
26,397 2,832 1,403 440 963 1,429
26,952 4,093 2,238 599 1,638 1,855
27,246 5,016 2,789 693 2,097 2,227
28,276 4,882 2,659 711 1,948 2,222
29,484 4,365 2,275 653 1,624 2,089
30,424 5,156 2,714 757 1,957 2,441
30,726 7,929 4,442 966 3,476 3,486
32,226 7,406 4,036 939 3,098 3,369
33,775 6,991 3,667 874 2,794 3,324
35,836 6,202 3,142 813 2,328 3,061
37,434 6,137 3,120 811 2,308 3,018
38,492 7,637 4,267 913 3,353 3,370
39,590 8,273 4,577 962 3,615 3,696
40,086 10,678 6,179 1,090 5,089 4,499
41,004 10,717 6,260 1,003 5,257 4,457
42,793 8,539 4,744 812 3,932 3,794
44,154 8,312 4,521
806 3,715 3,791
45,556 8,237 4,530 779 3,751 3,707
47,074 7,425 4,101
732 3,369 3,324
48,383 6,701 3,655 667 2,987 3,046
49,745 6,528 3,525 658 2,867 3,003
50,455 6,874 3,799 629 3,170 3,075
50,535 8,426 4,817 709 4,109 3,609
51,181 9,384 5,380 761 4,619 4,005
50,258 7,806 4,337 700 3,637 3,469
50,406 8,123 4,662 667 3,995 3,461
50,346 8,462 4,896 731 4,165 3,566
50,650 8,306 4,785 708 4,077 3,521
50,409 8,507 4,842 753 4,089 3,665
50,577 8,487 4,880 730 4,150 3,607
50,598 8,378 4,915 722 4,193 3,463
50,543 8,460 4,853 678 4,175 3,607
50,725 8,479 4,939 699 4,240 3,540
50,665 8,695 4,899 693 4,206 3,796
50,615 8,670 4,895 707 4,188 3,775
50,682 8,984 5,101
720 4,381 3,883
50,889 8,992 5,174 717 4,457 3,818
50,925 9,223 5,324 769 4,555 3,899
51,114 9,284 5,360 767 4,593 3,924
51,136 9,225 5,266 727 4,539 3,959
51,104 9,459 5,497 740 4,757 3,962
51,233 9,788 5,666 880 4,786 4,122
51,307 9,628 5,485 773 4,712 4,143
51,247 9,624 5,531 778 4,753 4,093
51,141 9,550 5,477 797 4,680 4,073
51,182 9,379 5,410 687 4,723 3,969
51,435 9,301 5,292 758 4,534 4,009
51,494 9,280 5,200 741 4,459

144
153
223
195
145
140
123
191
176
209
197
262
256
286
349
313
383
385
395
405
391
412
413
506
568
598
583
665
802
780
789
769
743
755
800
886
825
687
661
675
616
558
536
519
581
591
634
565
571
595
560
541
587
576
535
633
563
610
564
585
580
561
598
673
616
567
603
573
612
564

475
564
841
854
689
559
510
997
823
832
821
1,242
1,063
1,080
1,368
1,175
1,216
1,195
1,056
921
1,078
985
1,015
1,349
1,658
1,625
1,507
1,777
2,684
2,588
2,535
2,292
2,276
2,615
2,895
3,613
3,632
3,107
3,129
3,032
2,709
2,487
2,467
2,555
3,028
3,413
2,835
2,896
2,995
2,926
3,105
3,066
2,876
3,031
3,005
3,163
3,212
3,273
3,254
3,314
3,344
3,398
3,364
3,449
3,527
3,526
3,470
3,396
3,397
3,516

TABLE B-32.—Civilian employment by demographic characteristic, 1954-92
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]
Black and other

White
Year or
month

All
civilian
workers

Total

Males

Females

Both
sexes
16-19

Total

Black

Males

Females

Both
sexes
16-19

Total

Males

Females

Both
sexes
16-19

1954
1955
1956
1957
1958
1959

60,109
62,170
63,799
64,071
63,036
64,630

53,957
55,833
57,269
57,465
56,613
58,006

37,846
38,719
39,368
39,349
38,591
39,494

16,111
17,114
17,901
18,116
18,022
18,512

3,078
3,225
3,389
3,374
3,216
3,475

6,152
6,341
6,534
6,604
6,423
6,623

3,773
3,904
4,013
4,006
3,833
3,971

2,379
2,437
2,521
2,598
2,590
2,652

396
418
430
407
365
362

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

65,778
65,746
66,702
67,762
69,305
71,088
72,895
74,372
75,920
77,902

58,850
58,913
59,698
60,622
61,922
63,446
65,021
66,361
67,750
69,518

39,755
39,588
40,016
40,428
41,115
41,844
42,331
42,833
43,411
44,048

19,095
19,325
19,682
20,194
20,807
21,602
22,690
23,528
24,339
25,470

3,700
3,693
3,774
3,851
4,076
4,562
5,176
5,114
5,195
5,508

6,928
6,833
7,003
7,140
7,383
7,643
7,877
8,011
8,169
8,384

4,149
4,068
4,160
4,229
4,359
4,496
4,588
4,646
4,702
4,770

2,779
2,765
2,843
2,911
3,024
3,147
3,289
3,365
3,467
3,614

430
414
420
404
440
474
545
568
584
609

1970
1971
1972
1973
1974
1975
1976
1977

78,678
79,367
82,153
85,064
86,794
85,846
88,752
92,017
96,048
98,824

70,217
70,878
73,370
75,708
77,184
76,411
78,853
81,700
84,936
87,259

44,178
44,595
45,944
47,085
47,674
46,697
47,775
49,150
50,544
51,452

26,039
26,283
27,426
28,623
29,511
29,714
31,078
32,550
34,392
35,807

5,571
5,670
6,173
6,623
6,796
6,487
6,724
7,068
7,367
7,356

8,464
8,488
8,783
9,356
9,610
9,435
9,899
10,317
11,112
11,565

4,813
4,796
4,952
5,265
5,352
5,161
5,363
5,579
5,936
6,156

3,650
3,692
3,832
4,092
4,258
4,275
4,536
4,739
5,177
5,409

574
538
573
647
652
615
611
619
703
727

7,802
8,128
8,203
7,894
8,227
8,540
9,102
9,359

4,368
4,527
4,527
4,275
4,404
4,565
4,796
4,923

3,433
3,601
3,677
3,618
3,823
3,975
4,307
4,436

509
570
554
507
508
508
571
579

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

99,303 87,715
100,397 88,709
99,526 87,903
100,834 88,893
105,005 92,120
107,150 93,736
109,597 95,660
112,440 97,789
114,968 99,812
117,342 101,584

51,127
51,315
50,287
50,621
52,462
53,046
53,785
54,647
55,550
56,352

36,587
37,394
37,615
38,272
39,659
40,690
41,876
43,142
44,262
45,232

7,021
6,588
5,984
5,799
5,836
5,768
5,792
5,898
6,030
5,946

11,588
11,688
11,624
11,941
12,885
13,414
13,937
14,652
15,156
15,757

6,059
6,083
5,983
6,166
6,629
6,845
7,107
7,459
7,722
7,963

5,529
5,606
5,641
5,775
6,256
6,569
6,830
7,192
7,434
7,795

689
637
565
543
607
666
681
742
774
813

9,313
9,355
9,189
9,375
10,119
10,501
10,814
11,309
11,658
11,953

4,798
4,794
4,637
4,753
5,124
5,270
5,428
5,661
5,824
5,928

4,515
4,561
4,552
4,622
4,995
5,231
5,386
5,648
5,834
6,025

547
505
428
416
474
532
536
587
601
625

1990
1991
1992

117,914 102,087
116,877 101,039
117,598 101,479

56,432
55,557
55,709

45,654
45,482
45,770

5,518
4,989
4,761

15,827
15,838
16,119

8,003
8,036
8,096

7,825
7,802
8,023

743
639
637

11,966
11,863
11,933

5,915
5,880
5,846

6,051
5,983
6,087

573
474
474

1991:Jan
Feb....
Mar....
Apr....
May...
June...

116,894
116,896
116,796
117,307
116,679
116,884

101,108
101,189
100,957
101,398
100,985
101,056

55,795
55,645
55,525
55,706
55,576
55,498

45,313
45,544
45,432
45,692
45,409
45,558

5,193
5,238
5,137
5,115
5,003
4,960

15,820
15,781
15,848
15,906
15,696
15,804

8,050
8,031
8,075
8,048
7,895
8,010

7,770
7,750
7,773
7,858
7,801
7,794

664
657
679
672
673
656

11,886
11,862
11,947
11,957
11,772
11,833

5,883
5,893
5,943
5,901
5,749
5,856

6,003
5,969
6,004
6,056
6,023
5,977

506
486
505
493
499
483

July....
Aug....
Sept...
Oct....
Nov....
Dec...

116,711
116,522
117,108
116,980
116,932
116,752

100,828
100,803
101,102
101,163
101,051
100,821

55,433
55,438
55,585
55,543
55,550
55,352

45,395
45,365
45,517
45,620
45,501
45,469

4,795
4,823
4,935
4,936
4,908
4,811

15,896
15,783
15,968
15,822
15,821
15,912

8,057
8,004
8,072
8,069
8,065
8,051

7,839
7,779
7,896
7,753
7,756
7,861

650
578
608
609
630
606

11,893
11,770
11,997
11,796
11,775
11,868

5,885
5,826
5,936
5,903
5,882
5,889

6,008
5,944
6,061
5,893
5,893
5,979

475
416
469
451
465
449

Feb....
Mar....
Apr....
May...
June...

117,036
116,962
117,264
117,518
117,580
117,510

101,172
101,085
101,340
101,479
101,530
101,307

55,476
55,385
55,523
55,700
55,724
55,606

45,696
45,700
45,817
45,779
45,806
45,701

4,856
4,791
4,703
4,749
4,782
4,582

15,910
15,972
15,943
16,038
16,049
16,160

8,035
8,045
8,035
8,069
8,075
8,090

7,875
7,927
7,908
7,969
7,974
8,070

654
649
596
609
606
637

11,860
11,818
11,814
11,857
11,858
11,971

5,880
5,820
5,808
5,821
5,819
5,856

5,980
5,998
6,006
6,036
6,039
6,115

522
497
463
454
450
469

July....
Aug....
Sept...
Oct....
Nov....
Dec...

117,722
117,780
117,724
117,687
118,064
118,311

101,558
101,524
101,412
101,458
101,816
102,043

55,738
55,762
55,800
55,811
55,880
56,062

45,820
45,762
45,612
45,647
45,936
45,981

4,691
4,756
4,807
4,788
4,786
4,833

16,171
16,306
16,253
16,212
16,190
16,214

8,101
8,147
8,127
8,117
8,178
8,118

8,070
8,159
8,126
8,095
8,012
8,096

645
700
642
637
632
645

11,979
12,098
12,033
11,984
11,948
11,960

5,846
5,876
5,859
5,847
5,867
5,838

6,133
6,222
6,174
6,137
6,081
6,122

475
510
469
443
454
482

1978

1979

1992: Jan

Note.—See footnote 6 and Note, Table B-30.
Source: Department of Labor, Bureau of Labor Statistics.




385

TABLE B-33.—Unemployment by demographic characteristic, 1954-92
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]

Black and other

White
Year or
month

Al
l
All

civilian
workers

Total

Males

Females

Both
sexes
16-19

Total

Black

Males

Females

Both
sexes
16-19

Total

Males

Females

Both
sexes
16-19

458
451
470
629
637
695
690
683

279
262
297
330
330
354
360
333

738
840
975
1,059
911
913
894
858
776
111
734
805
912
786
755
808
795
798
770
730
801
812
921
836
839
867
876
866
909
950
955
958
928
883
889
921
932

343
357
396
392
353
357
347
312
288
300
258
270
313
283
263
312
284
252
241
250
270
286
288
251
263
288
305
276
297
333
326
323
305
342
324
320
316

1954
1955
1956
1957
1958
1959

3 532
2,852
2,750
2,859
4,602
3,740

2 859
2,252
2,159
2,289
3,680
2,946

1,913
1,478
1,366
1,477
2,489
1,903

946
774
793
812
1,191
1,043

423
373
382
401
541
525

673
601
591
570
923
793

431
376
345
364
610
517

242
225
246
206
313
276

79
77
95
96
138
128

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

3,852
4,714
3,911
4,070
3,786
3,366
2,875
2,975
2,817
2,832

3,065
3,743
3,052
3,208
2,999
2,691
2,255
2,338
2,226
2,260

1,988
2,398
1,915
1,976
1,779
1,556
1,241
1,208
1,142
1,137

1,077
1,345
1,137
1,232
1,220
1,135
1,014
1,130
1,084
1,123

3,339
4,085
3,906
3,442
4,097
6,421
5,914
5,441
4,698
4,664

1,857
2,309
2,173
1,836
2,169
3,627
3,258
2,883
2,411
2,405

1,482
1,777
1,733
1,606
1,927
2,794
2,656
2,558
2,287
2,260

290
372
352
367
361
318
312
338
313
304
374
450
491
484
514
692
713
766
774
759

138
159
142
176
165
171
186
203
194
193

4,093
5,016
4,882
4,365
5,156
7,929
7,406
6,991
6,202
6,137

788
971
861
863
787
678
622
638
590
571
754
930
977
924
1,058
1,507
1,492
1,550
1 505

498
599
509
496
426
360
310
300
277
267

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

575
669
580
708
708
705
651
635
644
660
871
1,011
1,021
955
1,104
1,413
1,364
1,284
1,189
1,193

235
249
288
280
318
355
355
379
394
362

906"
846
965
1,369
1,334
1,393
1 330

U19

'448
395
494
741
698
698
641
636

7,637
8,273
10,678
10,717
8,539
8,312
8,237
7,425
6,701
6,528
6,874
8,426
9,384
7,806
8,123
8,462
8,306
8,507
8,487
8,378
8,460
8,479
8,695
8,670
8,984
8,992
- 9,223
9,284
9,225
9,459
9,788
9,628
9,624
9,550
9,379
9,301
9,280

5,884
6,343
8,241
8,128
6 372

3,345
3,580
4,846
4,859
3 600
3.A26
3,433
3,132
2,766
2,636
2,866
3,775
4,121
3,405
3,645
3,874
3,718
3,759
3,802
3,905
3,778
3,892
3,841
3,870
3,959
4,032
4,129
4,151
4,066
4,204
4,343
4,179
4,186
4,204
4,078
4,028
3,918

2,540
2,762
3,395
3,270
2 772
2>65
2,708
2,369
2,177
2,135
2,225
2,672
2,926
2,553
2,559
2,629
2,570
2,729
2,763
2,623
2,676
2,572
2,731
2,783
2,931
2,788
2,857
2,914
2,867
2,817
3,021
3,046
2,997
2,990
2,947
2,879
2,985

1 291
1374
1,534
1,387
1 116
1074
1,070
995
910
863
856
977
983
1,011
909
966
976
1,027
989
1,020
927
913
981
978
1,038

1 752
l]930
2,437
2,588
2,167
2il21
2,097
1,924
1,757
1,757
1,783
1,979
2,337
1,911
1,904
1,978
1,989
1,982
1,949
1,866
1,976
2,017
2,101
1,973
2,099

938
1,008
1,040
936
961
1,140
1,003
970
1,009
880
984
936

2,278
2,240
2,240
2,261
2,382
2,445

922
997
1,334
1,401
1 144
l',095
1,097
969
888
889
933
1,043
1,259
1,000
1,015
1,048
1,065
1,066
1,060
1,012
1,041
1,056
1,032
1,005
1,116
1,251
1,212
1,230
1,190
1,268
1,297

2,413
2,406
2,342
2,326
2,343
2,378

1,293
1,305
1,274
1,298
1,247
1,255

830
933
1,104
1,187
1 022
l!026
999
955
869
868
850
936
1,079
911
889
930
924
916
889
854
935
961
1,069
968
983
1,027
1,028
1,010
1,071
1,114
1,148
1,120
1,101
1,068
1,028
1,096
1,123

377
388
443
441
384
394
383
353
316
331
292
313
369
317
319
357
322
288
265
295
322
331
340
286
307
338
346
321
348
381
395
389
368
401
375
384
383

1,553
1,731
2,142
2,272
1914
l!864
1,840
1,684
1,547
1,544
1,527
1,679
1,958
1,632
1,605
1,675
1,699
1.702
1,678
1,592
1,668
1,705
1,773
1,671
1,752
1,882
1,897
1,915
1,899
2,011
2,030
2,016
2,008
1,948
1,964
1,946
1,975

815
891
1,167
1,213
1003
951
946
826
771
773
793
874
1,046
846
850
867
904
904
908
862
867
893
852
835
913
1,015
1,021
1,049
990
1,061
1,075
1,058
1,080
1,065
1,075
1,025
1,043

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1991:Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
1992: Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec

s',m

6,140
5,501
4,944
4,770
5,091
6,447
7,047
5,958
6,204
6,503
6,288
6,488
6,565
6,528
6,454
6,464
6,572
6,653
6,890
6,820
6,986
7,065
6,933
7,021
7,364
7,225
7,183
7,194
7,025
6,907
6,903

M73

Note.—See footnote 6 and Note, Table B-30.
Source: Department of Labor, Bureau of Labor Statistics.




386

380
481
486
440
544
815
779
784
731
714

TABLE B-34.—Civilian labor force participation rate and employment/population ratio, 1948-92
[Percent; 1 monthly data seasonally adjusted]
Employment/population ratio

Labor force participation rate
Year or month

1948

civilian
work-

Males

58.8
58.9
59.2
59.2
59.0
58.9
58.8
59.3
60.0
59.6
59.5
59.3
59.4
59.3
58.8
58.7
58.7
58.9
59.2
59.6
59.6
60.1
60.4
60.2
60.4
60.8
61.3
61.2
61.6
62.3
63.2
63.7
63.8
63.9
64.0
64.0
64.4
64.8
65.3
65.6
65.9
66.5
66.4
66.0
66.3 j

1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992

Females

Both
sexes
16-19
years

32.7
33.1
33.9
34.6
34.7
34.4
34.6
35.7
36.9
36.9
37.1
37.1
37.7
38.1
37.9
38.3
38.7
39.3
40.3
41.1
41.6
42.7
43.3
43.4
43.9
44.7
45.7
46.3
47.3
48.4
50.0
50.9
51.5
52.1
52.6
52.9
53.6
54.5
55.3
56.0
56.6
57.4
57.5
57.3
57.8

52.5
52.2
51.8
52.2
51.3
50.2
48.3
48.9
50.9
49.6
47.4
46.7
47.5
46.9
46.1
45.2
44.5
45.7
48.2
48.4
48.3
49.4
49.9
49.7
51.9
53.7
54.8
54.0
54.5
56.0
57.8
57.9
56.7
55.4
54.1
53.5
53.9
54.5
54.7
54.7
55.3
55.9
53.7
51.7
51.3

75.7
75.9
75.9
75.6
75.6

57.2
57.4
57.4
57.6
57.4
57.4

52.8
52.7
52.9
52.7
52.0
51.5

66.5
66.7
66.7
66.8
66.6
66.7

86.6
86.4
86.4
86.3
86.3
86.0
85.5
85.4
85.5
84.8
84.2
83.7
83.3
82.9
82.0
81.4
81.0
80.7
80.4
80.4
80.1
79.8
79.7
79.1
78.9
78.8
78.7
77.9
77.5
77.7
77.9
77.8
77.4
77.0
76.6
76.4
76.4
76.3
76.3
76.2
76.2
76.4
76.1
75.5
75.6

58.2
58.7
59.4
59.1
58.9
58.7
58.8
58.8
58.3
58.2
58.2
58.4
58.7
59.2
59.3
59.9
60.2
60.1
60.4
60.8
61.4
61.5
61.8
62.5
63.3
63.9
64.1
64.3
64.3
64.3
64.6
65.0
65.5
65.8
66.2
66.7
66.8
66.6

64.0
64.2
64.9
64.4
64.8
64.3
64.5
64.1
63.2
63.0
63.1
62.9
63.0
62.8
62.2
62.1
61.8
60.9
60.2
60.5
60.3
59.6
59.8
60.4
62.2
62.2
61.7
61.3
61.6
62.1
62.6
63.3
63.7
64.3
64.0
64.7
63.7
63.1

66.7| 63.8

I 75.6

1991: Jan
Feb
Mar
Apr
May
Jun

66.0
66.1
66.2
66.3
66.1
66.1

Jul
Aug
Sep
Oct
Nov
Dec

65.9
65.8
66.1
66.0
65.9
66.0

75.5
75.3
75.7
75.4
75.3
75.3

57.1
57.1
57.3
57.5
57.4
57.5

50.7
49.7
51.0
51.8
51.3
51.0

1992: Jan
Feb
Mar
Apr
May
Jun

66.1
66.1
66.2
66.3
66.4
66.5

75.4
75.3
75.5
75.6
75.9
75.9

57.6
57.7
57.8
57.8
57.8
57.9

Jul
Aug
Sep
Oct
Nov
Dec

66.5
66.4
66.3
66.1
66.2
66.3

75.7
75.8
75.7
75.5
75.4
75.4

58.0
57.9
57.7
57.6
57.8
57.9

1

Black
and
other

White

I

Black

All
civilian
workers
56.6
55.4
56.1
57.3
57.3
57.1
55.5
56.7
57.5
57.1
55.4
56.0
56.1
55.4
55.5
55.4
55.7
56.2
56.9
57.3
57.5
58.0
57.4
56.6
57.0
57.8
57.8
56.1
56.8
57.9
59.3
59.9
59.2
59.0
57.8
57.9
59.5
60.1
60.7
61.5
62.3
63.0
62.7
61.6

59.9
60.2
59.8
58.8
59.0
59.8
61.5
61.4
61.0
60.8
61.0
61.5
62.2
62.9
63.3
63.8
63.8
64.2
63.3
62.6

63.3 I 61.4
I

63.4
63.1
63.5
63.6
62.8
62.9

63.0
62.7
63.3
63.4
62.5
62.6

66.5
66.4
66.5
66.6
66.5
66.5

62.8
62.7
63.4
63.0
62.4
63.1

51.4
51.7
50.5
50.4
51.2
51.8

66.6
66.6
66.8
66.8
66.8
66.8

51.3
51.5
52.1
50.6
51.4
51.6

66.9
66.8
66.7
66.5
66.6
66.7

i
l

Females

Males

83.5
81.3
82.0
84.0
83.9
83.6
81.0
81.8
82.3
81.3
78.5
79.3
78.9
77.6
77.7
77.1
77.3
77.5
77.9
78.0
77.8
77.6
76.2
74.9
75.0
75.5
74.9
71.7
72.0
72.8
73.8
73.8
72.0
71.3
69.0
68.8
70.7
70.9
71.0
71.5
72.0
72.5
71.9
70.2

Black
and
other

Black

55.2
56.5
57.3
56.8
55.3
55.9
55.9
55.3
55.4
55.3
55.5
56.0
56.8
57.2
57.4
58.0
57.5
56.8
57.4
58.2
58.3
56.7
57.5
58.6
60.0
60.6
60.0
60.0
58.8
58.9
60.5
61.0
61.5
62.3
63.1
63.8
63.6
62.6
62.4

43.0
43.6
43.3
43.0
42.3
42.0

62.8
62.8
62.6
62.9
62.6
62.6

55.7 |
I
56.6
56.3
56.5
56.6
55.7
56.0

54.3

53.7
53.9
53.8
54.1
53.7
53.8

69.7 | 53.8

58.0
58.7
59.5
59.3
56.7
57.5
57.9
56.2
56.3
56.2
57.0
57.8
58.4
58.2
58.0
58.1
56.8
54.9
54.1
55.0
54.3
51.4
52.0
52.5
54.7
55.2
53.6
52.6
50.9
51.0
53.6
54.7
55.4
56.8
57.4
58.2
57.3
56.1

53.7
54.5
53.5
50.1
50.8
51.4
53.6
53.8
52.3
51.3
49.4
49.5
52.3
53.4
54.1
55.6
56.3
56.9
56.2
54.9

55.4
55.2
55.5
55.5
54.6
54.8

61.9
61.8
61.7
61.9
61.6
61.6

70.8
70.5
70.4
70.6
70.2
70.2

62.3
62.1
63.2
62.5
61.8
62.6

61.5
61.3
61.6
61.5
61.4
61.3

70.1
70.0
70.2
70.0
69.9
69.7

53.6
53.5
53.7
53.7
53.6
53.6

40.9
40.3
41.7
41.8
41.7
40.9

62.4
62.4
62.5
62.5
62.4
62.2

56.2
55.7
56.3
55.6
55.5
55.7

55.U
54.4
55.3
54.3
54.2
54.5

63.6
63.5
63.3
63.6
63.9
64.4

63.0
62.8
62.8
62.9
63.3
63.8

61.4
61.3
61.4
61.5
61.5
61.4

69.7
69.5
69.6
69.8
69.8
69.7

53.8
53.8
53.8
53.8
53.8
53.8

41.6
41.4
40.3
40.6
41.0
40.0

62.4
62.3
62.4
62.5
62.5
62.3

55.6
55.7
55.5
55.7
55.7
56.0

54.4
54.1
54.1
54.2
54.1
54.6

64.2
64.5
64.0
63.7
63.5
63.6

63.7
64.1
63.5
63.2
62.9
63.0

61.4
61.4
61.3
61.3
61.4
61.5

69.7
69.7
69.7
69.6
69.6
69.7

53.9
53.8
53.6
53.6
53.8
53.9

40.8
41.3
41.4
41.0
41.1
41.7

62.4
62.4
62.3
62.2
62.4
62.5

55.9
56.2
55.9
55.7
55.5
55.4

54.5
55.0
54.6
54.3
54.1
54.0

Civilian labor force or civilian employment as percent of civilian noninstitutional population in group specified.

Note.—Data relate to persons 16 years of age and over.
See footnote 6 and Note, Table B-30.
Source: Department of Labor, Bureau of Labor Statistics.




White

47.7
45.2
45.5
47.9
46.9
46.4
42.3
43.5
45.3
43.9
39.9
39.9
40.5
39.1
39.4
37.4
37.3
38.9
42.1
42.2
42.2
43.4
42.3
41.3
43.5
45.9
46.0
43.3
44.2
46.1
48.3
48.5
46.6
44.6
41.5
41.5
43.7
44.4
44.6
45.5
46.8
47.5
45.4
42.1
41.0

31.3
31.2
32.0
33.1
33.4
33.3
32.5
34.0
35.1
35.1
34.5
35.0
35.5
35.4
35.6
35.8
36.3
37.1
38.3
39.0
39.6
40.7
40.8
40.4
41.0
42.0
42.6
42.0
43.2
44.5
46.4
47.5
47.7
48.0
47.7
48.0
49.5
50.4
51.4
52.5
53.4
54.3
54.3
53.7

I

Both
sexes
16-19
years

387

TABLE B-35.—Civilian labor force participation

rate by demographic characteristic,

1934-92

[Percent;1 monthly data seasonally adjusted]
Black and other or black

White

Year or month

All
civilian
workers

Females

Males
Total
Total

16-19
years

20
years
and
over

Total

16-19
years

Females

Males
20
years
and
over

Total
Total

16-19
years

20
years
and
over

Total

16-19
years

20
years
and
over

Black and other
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972

58 8
59.3
60.0
59.6
59.5
59.3
59.4
59.3
58.8
58.7
58.7
58.9
59.2
59 6
59.6
60.1
60.4
60.2
60.4

58 2
58.7
59.4
59.1
58.9
58.7
58.8
58.8
58.3
58.2
58.2
58.4
58.7
59 2
59.3
59.9
60.2
60.1
60.4

85 6
85.4
85.6
84.8
84.3
83.8
83.4
83.0
82.1
81.5
81.1
80.8
80.6
80 6
80.4
80.2
80.0
79.6
79.6

57 6
58.6
60.4
59.2
56.5
55.9
55.9
54.5
53.8
53.1
52.7
54.1
55.9
56 3
55.9
56.8
57.5
57.9
60.1

87 8
87.5
87.6
86.9
86.6
86.3
86.0
85.7
84.9
84.4
84.2
83.9
83.6
83 5
83.2
83.0
82.8
82.3
82.0

33 3
34.5
35.7
35.7
35.8
36.0
36.5
36.9
36.7
37.2
37.5
38.1
39.2
40 1
40.7
41.8
42.6
42.6
43.2

40 6
40.7
43.1
42.2
40.1
39.6
40.3
40.6
39.8
38.7
37.8
39.2
42.6
42 5
43.0
44.6
45.6
45.4
48.1

32 7
34.0
35.1
35.2
35.5
35.6
36.2
36.6
36.5
37.0
37.5
38.0
38.8
39 8
40.4
41.5
42.2
42.3
42.7

64 0
64.2
64.9
64.4
64.8
64.3
64.5
64.1
63.2
63.0
63.1
62.9
63.0
62 8
62.2
62.1
61.8
60.9
60.2

85 2
85.1
85.1
84.2
84.1
83.4
83.0
82.2
80.8
80.2
80.1
79.6
79.0
78 5
77.7
76.9
76.5
74.9
73.9

612
60.8
61.5
58.8
57.3
55.5
57.6
55.8
53.5
51.5
49.9
51.3
51.4
51 1
49.7
49.6
47.4
44.7
46.0

87 1
87.8
87.8
87.0
87.1
86.7
86.2
85.5
84.2
83.9
84.1
83.7
83.3
82 9
82.2
81.4
81.4
80.0
78.6

46 1
46.1
47.3
47.1
48.0
47.7
48.2
48.3
48.0
48.1
48.6
48.6
49.4
49 5
49.3
49.8
49.5
49.2
48.8

310
32.7
36.3
33.2
31.9
28.2
32.9
32.8
33.1
32.6
31.7
29.5
33.5
35 2
34.8
34.6
34.1
31.2
32.3

47 7
47.5
48.4
48.6
49.8
49.8
49.9
50.1
49.6
49.9
50.7
51.1
51.6
51 6
51.4
52.0
51.8
51.8
51.2

48.7
49.3
49.0
48.8
49.8
50.8
53.1
53.1
53.1
53.5
53.7
54.2
55.2
56.5
56.9
58.0
58.0
58.7
57.8
57.0
58.0
57.4
56.8
57.5
57.8
57.4
56.7
56.6
56.6
57.6
57.0
56.3
56.9
57.1
57.3
57.2
57.7
58.0
58.6
58.7
59.1
58.3
58.0
57.7
58,

32.2
34.2
33.4
34.2
32.9
32.9
37.3
36.8
34.9
34.0
33.5
33.0
35.0
37.9
39.1
39.6
37.9
40.4
36.7
33.5
35.2
37.6
35.7
38.2
34.9
33.7
30.8
33.5
28.9
31.3
33.7
32.4
31.3
34.2
35.1
31.7
34.8
37.4
36.1
36.0
37.7
36.6
33.0
34.7
35.1

51.2
51.6
51.4
51.1
52.5
53.6
55.5
55.4
55.6
56.0
56.2
56.8
57.6
58.6
58.9
60.0
60.1
60.6
60.0
59.3
60.1
59.4
58.9
59.4
60.0
59.8
59.3
58.8
59.3
60.1
59.3
58.5
59.4
59.3
59.4
59.6
59.9
60.0
60.8
60.9
61.2
60.3
60.3
59.9
60.2

Black
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1991: Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
1992: Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec

60.4
60.8
61.3
61.2
61.6
62.3
63.2
63.7
63.8
63.9
64.0
64.0
64.4
64.8
65.3
65.6
65.9
66.5
66.4
66.0
66.3
66.0
66.1
66.2
66.3
66.1
66.1
65.9
65.8
66.1
66.0
65.9
66.0
66.1
66.1
66.2
66.3
66.4
66.5
66.5
66.4
66.3
66.1
66.2
66.3

60.4
60.8
61.4
61.5
61.8
62.5
63.3
63.9
64.1
64.3
64.3
64.3
64.6
65.0
65.5
65.8
66.2
66.7
66.8
66.6
66.7
66.5
66.7
66.7
66.8
66.6
66.7
66.5
66.4
66.5
66.6
66.5
66.5
66.6
66.6
66.8
66.8
66.8
66.8
66.9
66.8
66.7
66.5
66.6
66.7

79.6
79.4
79.4
78.7
78.4
78.5
78.6
78.6
78.2
77.9
77.4
77.1
77.1
77.0
76.9
76.8
76.9
77.1
76.9
76.4
76.4
76.5
76.5
76.6
76.6
76.5
76.4
76.4
76.2
76.4
76.3
76.2
76.0
76.2
76.2
76.4
76.4
76.6
76.6
76.5
76.4
76.5
76.2
76.2
76.2

60.1
62.0
62.9
61.9
62.3
64.0
65.0
64.8
63.7
62.4
60.0
59.4
59.0
59.7
59.3
59.0
60.0
61.0
59.4
57.2
56.7
58.7
58.6
58.7
56.8
58.1
57.0
56.7
55.7
56.7
56.8
56.7
56.1
56.7
56.5
56.2
56.2
56.2
57.1
56.5
56.9
58.4
56.0
57.2
57.1

82.0
81.6
81.4
80.7
80.3
80.2
80.1
80.1
79.8
79.5
79.2
78.9
78.7
78.5
78.5
78.4
78.3
78.5
78.3
77.8
77.8
77.8
77.9
78.0
78.1
77.8
77.8
77.8
77.7
77.9
77.7
77.7
77.5
77.7
77.7
77.8
77.9
78.1
78.0
77.9
77.9
77.8
77.7
77.6
77.6

43.2
44.1
45.2
45.9
46.9
48.0
49.4
50.5
51.2
51.9
52.4
52.7
53.3
54.1
55.0
55.7
56.4
57.2
57.5
57.4
57.8
57.3
57.5
57.4
57.7
57.5
57.7
57.3
57.3
57.3
57.6
57.5
57.6
57.7
57.7
57.9
57.8
57.7
57.8
58.0
578
57.6
57.5
57.8
57.9

48.1
50.1
51.7
51.5
52.8
54.5
56.7
57.4
56.2
55.4
55.0
54.5
55.4
55.2
56.3
56.5
57.2
57.1
55.4
54.3
52.6
55.4
55.0
54.4
56.6
54.3
54.3
52.4
52.2
53.3
54.7
54.3
54.4
53.0
53.5
52.8
52.0
53.2
52.1
52.3
52.3
52.4
51.9
52.5
52.6

42.7
43.5
44.4
45.3
46.2
47.3
48.7
49.8
50.6
51.5
52.2
52.5
53.1
54.0
54.9
55.6
56.3
57.2
57.6
57.7
58.1
57.4
57.7
57.6
57.7
57.7
57.9
57.6
57.6
57.6
57.8
57.7
57.8
58.0
58.0
58.2
58.2
58.0
58.2
58.3
58.2
57.9
57.9
58.1
58.3

59.9
60.2
59.8
58.8
59.0
59.8
61.5
61.4
61.0
60.8
61.0
61.5
62.2
62.9
63.3
63.8
63.8
64.2
63.3
62.6
63.3
63.0
62.7
63.3
63.4
62.5
62.6
62.3
62.1
63.2
62.5
61.8
62.6
63.0
62.8
62.8
62.9
63.3
63.8
63.7
64.1
63.5
63.2
62.9
63.0

73.6
73.4
72.9
70.9
70.0
70.6
71.5
71.3
70.3
70.0
70.1
70.6
70.8
70.8
71.2
71.1
71.0
71.0
70.1
69.5
69.7
69.8
69.8
70.4
70.3
68.6
69.7
69.4
68.7
70.0
69.2
68.7
69.4
70.3
69.6
69.7
69.1
69.8
70.2
69.8
70.2
69.8
69.6
69.2
69.0

1
Civilian labor force a: percent of civilian noninstitutiorral population in group specified,
is
Note.-Data relate to ,
persons 16 years of age and over
See footnote 6 and No' Table B-30.
ite,
Source: Department of Labor, Bureau of Labor Statistics.




388

46.3
45.7
46.7
42.6
41.3
43.2
44.9
43.6
43.2
41.6
39.8
39.9
41.7
44.6
43.7
43.6
43.8
44.6
40.6
37.4
40.7
36.8
35.2
39.4
39.2
36.9
38.0
35.6
36.7
41.1
37.2
36.3
37.2
43.8
42.2
39.5
37.6
38.2
40.8
41.2
41.0
41.6
41.0
39.7
41.6

78.5
78.4
77.6
76.0
75.4
75.6
76.-2
76.3
75.1
74.5
74.7
75.2
74.8
74.4
74.8
74.7
74.6
74.4
73.8
73.4
73.1
73.8
74 0
74.2
74.0
72.6
73.5
73.4
72.6
73.5
73.0
72.5
73.2
73.4
72.8
73.2
72.8
73.4
73.6
73.1
73.6
73.1
73.0
72.6
72.1

TABLE B-36.—Civilian employment/population ratio by demographic characteristic, 1954-92
[Percent;1 monthly data seasonally adjusted]
White

All
civilYear or month ian
workers

Black and other or black

Males
Total
Total

16-19
years

Females
20
years
and
over

Total

16-19
years

Males
20
years
and
over

Total
Total

16-19
years

Females
20
years
and
over

Total

16-19
years

20
years
and
over

Black and other

1954 . .
1955
1956 .
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971 .
1972

55 5 55.2
56.7 56.5
57 5 57.3
57.1 56.8
55.4 55.3
56.0 55.9
561 55.9
55.4 55.3
55 5 55.4
55.4 55.3
55 7 55.5
56.2 56.0
56.9 56.8
57.3 57.2
57 5 57.4
58.0 58.0
57.4 57.5
56 6 56.8
57.0 57.4

1972
1973
1974
1975
1976
1977 .
1978
1979... .
1980
1981 ....
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1991: Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
1992: Jan
Feb
Mr
a
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec

57.0
57 8
57.8
561
56.8
57 9
59.3
59.9
59.2
59.0
57 8
57.9
59 5
60.1
60 7
61.5
62 3
63.0
62.7
61.6
61.4
61.9
61 8
61.7
61.9
61.6
61.6
61.5
61.3
61.6
615
61.4
61.3
61.4
61.3
6H
61.5
61.5
61.4
61.4
61.4
61.3
61 3
61.4
61.5

81.5
82.2
82.7
81.8
79.2
79.9
79.4
78.2
78.4
77.7
77.8
77.9
78.3
78.4
78.3
78.2
76.8
75.7
76.0

49.9
52.0
54.1
52.4
47.6
48.1
48.1
45.9
46.4
44.7
45.0
47.1
50.1
50.2
50.3
51.1
49.6
49.2
51.5

84.0
84.7
85.0
84.1
81.8
82.8
82.4
81.4
81.5
81.1
81.3
81.5
81.7
81.7
81.6
81.4
80.1
79.0
79.0

31.4
33.0
34.2
34.2
33.6
34.0
34.6
34.5
34.7
35.0
35.5
36.2
37.5
38.3
38.9
40.1
40.3
39.9
40.7

36.4
37.0
38.9
38.2
35.0
34.8
35.1
34.6
34.8
32.9
32.2
33.7
37.5
37.7
37.8
39.5
39.5
38.6
41.3

31.1
32.7
33.8
33.9
33.5
34.0
34.5
34.5
34.7
35.2
35.8
36.5
37.5
38.3
39.1
40.1
40.4
40.1
40.6

58.0
58.7
59.5
59.3
56.7
57.5
57.9
56.2
56.3
56.2
57.0
57.8
58.4
58.2
58.0
58.1
56.8
54.9
54.1

76.5
77.6
78.4
77.2
72.5
73.8
74.1
71.7
72.0
71.8
72.9
73.7
74.0
73.8
73.3
72.8
70.9
68.1
67.3

52.4
52.7
52.2
48.0
42.0
41.4
43.8
41.0
41.7
37.4
37.8
39.4
40.5
38.8
38.7
39.0
35.5
31.8
32.4

57.4 76.0
58.2 76.5
58.3 75.9
56.7 73.0
57.5 73.4
58.6 74.1
60.0 75.0
60.6 75.1
60.0 73.4
60.0 72.8
58.8 70.6
58.9 70.4
60.5 72.1
61.0 72.3
61.5 72.3
62.3 72.7
63.1 73.2
63.8 73.7
63.6 73.2
62.6 71.5
62.4 71.1
62.8 72.1
62.8 71.8
62.6 71.6
62.9 71.8
62.6 71.6
62.6 71.5
62.4 71.3
62.4 71.3
62.5 71.4
62.5 71.3
62.4 71.3
62.2 71.0
62.4 71.1
62.3 70.9
62.4 71.0
62.5 71.2
62.5 71.2
62.3 71.0
62.4 71.1
62.4 71.1
62.3 71.1
62.2 71.0
62.4 71.1
62.5 71.2

51.5
54.3
54.4
50.6
51.5
54.4
56.3
55.7
53.4
51.3
47.0
47.4
49.1
49.9
49.6
49.9
51.7
52.6
51.0
47.2
46.3
48.9
49.3
48.3
47.0
47.3
46.5
45.9
46.5
47.2
47.0
46.7
45.8
46.8
45.7
44.9
46.2
45.8
45.0
45.9
46.4
47.4
47.1
47.1
47.2

79.0
79.2
78.6
75.7
76.0
76.5
77.2
77.3
75.6
75.1
73.0
72.6
74.3
74.3
74.3
74.7
75.1
75.4
75.0
73.3
72.9
73.8
73.5
73.4
73.7
73.4
73.3
73.2
73.1
73.2
73.1
73.1
72.8
72.9
72.8
73.0
73.1
73.1
72.9
73.0
72.9
72.8
72.8
72.8
73.0

40.7
41.8
42.4
42.0
43.2
44.5
46.3
47.5
47.8
48.3
48.1
48.5
49.8
50.7
51.7
52.8
53.8
54.6
54.8
54.3
54.3
54.2
54.5
54.3
54.6
54.2
54.4
54.1
54.1
54.2
54.3
54.2
54.1
54.3
54.3
54.4
54.4
54.4
54.2
54.3
54.2
54.0
54.0
54.4
54.4

41.3
43.6
44.3
42.5
44.2
45.9
48.5
49.4
47.9
46.2
44.6
44.5
47.0
47.1
47.9
49.0
50.2
50.5
48.5
46.1
44.3
46.6
47.5
47.0
48.2
46.0
46.3
44.0
44.1
45.6
46.0
46.0
45.2
45.1
45.1
44.4
44.2
45.3
42.5
43.8
44.4
44.2
44.1
43.9
44.6

40.6
41.6
42.2
41.9
43.1
44.4
46.1
47.3
47.8
48.5
48.4
48.9
50.0
51.0
52.0
53.1
54.0
54.9
55.2
54.8
54.9
54.7
54.9
54.8
55.0
54.8
54.9
54.8
54.7
54.8
54.9
54.7
54.7
55.0
54.9
55.1
55.0
55.0
55.0
55.0
54.9
54.7
54.7
55.0
55.0

53.7
54.5
53.5
50.1
50.8
51.4
53.6
53.8
52.3
51.3
49.4
49.5
52.3
53.4
54.1
55.6
56.3
56.9
56.2
54.9
54.3
55.4
55.2
55.5
55.5
54.6
54.8
55.0
54.4
55.3
54.3
54.2
54.5
54.4
54.1
54.1
54.2
54.1
54.6
54.5
55.0
54.6
54.3
54.1
54.0

66.8
67.5
65.8
60.6
60.6
61.4
63.3
63.4
60.4
59.1
56.0
56.3
59.2
60.0
60.6
62.0
62.7
62.8
61.8
60.5
59.1
61.0
61.0
61.5
61.0
59.3
60.3
60.5
59.8
60.9
60.4
60.1
60.1
59.9
59.2
59.0
59.1
59.0
59.3
59.1
59.3
59.1
58.8
58.9
58.5

31.6
32.8
31.4
26.3
25.8
26.4
28.5
28.7
27.0
24.6
20.3
20.4
23.9
26.3
26.5
28.5
29.4
30.4
27.6
23.8
23.6
23.8
22.7
24.3
24.7
23.6
24.8
23.7
23.2
24.4
23.7
23.0
23.4
28.0
25.9
24.4
21.4
21.8
22.4
23.8
23.5
23.2
22.9
22.0
24.0

79.2
80.4
81.3
80.5
76.0
77.6
77.9
75.5
75.7
76.2
77.7
78.7
79.2
79.4
78.9
78.4
76.8
74.2
73.2

41.9
42.2
43.0
43.7
42.8
43.2
43.6
42.6
42.7
42.7
43.4
44.1
45.1
45.0
45.2
45.9
44.9
43.9
43.3

24.7
26.4
28.0
26.5
22.8
20.3
24.8
23.2
23.1
21.3
21.8
20.2
23.1
24.8
24.7
25.1
22.4
20.2
19.9

43.7
43.9
44.7
45.5
45.C
45.7
45.8
44.8
44.9
45.2
46.1
47.3
48.2
47.9
48.2
48.9
48.2
47.3
46.7

43.0
43.8
43.5
41.6
42.8
43.3
45.8
46.0
45.7
45.1
44.2
44.1
46.7
48.1
48.8
50.3
51.2
52.0
51.6
50.3
50.4
50.8
50.4
50.7
51.0
50.7
50.3
50.5
49.9
50.8
49.3
49.3
49.9
49.9
50.0
50.0
50.2
50.1
50.7
50.8
51.5
51.0
50.6
50.1
50.4

19.2
22.0
20.9
20.2
19.2
18.5
22.1
22.4
21.0
19.7
17.7
17.0
20.1
23.1
23.8
25.8
25.8
27.1
25.7
21.4
22.1
23.9
23.3
23.7
22.3
23.3
21.1
21.6
16.6
20.5
19.6
21.6
19.8
22.2
22.1
20.3
22.4
21.7
22.9
22.2
25.7
22.1
19.8
21.7
22.3

46.5
47.2
46.9
44.9
46.4
47.0
49.3
49.3
49.1
48.5
47.5
47.4
49.8
50.9
51.6
53.0
53.9
54.6
54.2
53.1
53.1
53.5
53.1
53.3
53.9
53.4
53.1
53.3
53.1
53.7
52.2
51.9
52.8
52.5
52.6
52.8
52.8
52.8
53.3
53.5
53.9
53.7
53.5
52.8
53.0

Black

1

Civilian employment as percent of civilian noninstitutional population in group specified.

Note.—Data relate to persons 16 years of age and over.
See footnote 6 and Note, Table B-30.
Source: Department of Labor, Bureau of Labor Statistics.




389

73.0
73.7
71.9
66.5
66.8
67.5
69.1
69.1
65.8
64.5
61.4
61.6
64.1
64.6
65.1
66.4
67.1
67.0
66.1
64.9
63.3
65.5
65.7
65.9
65.3
63.7
64.6
64.9
64.2
65.2
64.8
64.5
64.4
63.7
63.1
63.1
63.5
63.3
63.6
63.2
63.5
63.2
63.0
63.2
62.5

TABLE B-37.—Civilian unemployment rate, 1948-92
[Percent;1 monthly data seasonally adjusted]
Males

Year or month

All
civilian
workers

1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972 ..
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1991: Jan
Feb
Mar
May
June

July
Aug
Sept
Oct

Nov
Dec

1992:Jan
Feb
Mar
Apr
May
June

July
Aug
Sept

Oct

Nov
Dec

3.8
5.9
53
3.3
3.0
29
5.5
44
4.1
43

6.8
5.5
5.5
6.7
55

Total

3.6
5.9
51
2.8
28
28
53
42
3.8
41
6.8
5.2
5.4
6.4

52

5.7
52
4.5

5.2
46
4.0

38
3.8
36
3.5
49
5.9
56
4.9

32
3.1

5.6
8.5
7.7
7l
6.1
5.8
7.1
7.6
9.7
96
7.5
72
7.0
6.2
55
5.3
5.5
6.7
7.4
6.3
6.5
6.8
6.6
6.8
6.8
6.7
6.8
6.8
6.9
69
7.1

7.1
7.3
7.3
7.3
7.4
7.7
7.6
7.6
7.5
74

7.3
7.3

Females

20

29
2.8
44

5.3
50

4.2
4.9
7.9
7.1
63

5.3
5.1
6.9
7.4
9.9
99
7.4

70

6.9
6.2
55
5.2
5.6
7.0
7.8
6.4
6.8
7.1
7.0
7.1
7.1
7.2
7.1
7.2
7.2
71
7.4
7.5
7.8
7.8
7.6
7.9

8.2
7.9
8.0
7.9
78
7.6
7.5

16years
19
and
years over
9.8
14.3
12 7
8.1
8.9
79
13.5
11 6
11 1
12 4
17 1
15.3
15.3
17.1
14 7
17.2
15 8
14.1
117
12.3
116
11.4
15 0
16.6
15 9
13.9
15.6
20.1
19.2
17 3
15.8
15.9
18.3
20.1
24.4
23 3
19.6
19 5
19.0
17.8
16 0
15.9
16.3
19.8
21.5
18.9
18.0
19.7
19.7
20.6
20.3
20.5
19.5
19.6
19.7
20 2
20.9
20.4
21.9
22.1
20.9
21.2
24.4
21.9
21.8
21.8
19 5
21.1
20.5

3.2
5.4
47
2.5
2.4
25
49
38
34

36
6.2
4.7
4.7
5.7
46

4.5
39
3.2
25
2.3
22
2.1
35
4.4
40
3.3
3.8
6.8
5.9
52
4.3
4.2
5.9
6.3
8.8
89
6.6
62
6.1
5.4
48
4.5
4.9
6.3
7.0
5.6
6.2
6.4
6.3
6.3
6.4
6.5
6.4
6.5

6.5
64

6.7
6.8
7.0
7.0
6.9
7.2
7.3
7.2
7.2
7.1
72
6.9
6.8

20

Total

4.1
6.0
57
4.4
36
33
6.0
49
48
47
68
5.9
5.9
7.2
62
6.5
62
5.5
48
5.2
48
4.7
59
6.9
66
6.0
6.7
93
8.6
82
7.2
6.8
7.4
7.9
9.4
92
7.6
74
7.1
6.2
56
54
5.4
6.3
6.9
6.1
6.1
6.3
6.2
64
6.3
6.1
6.4
6.2
6.6
66
6.8
67
6.8
6.8
6.9
6.9
7.1
7.1
7.1
7.0
69

S.9
7.0

16years
19
and
years over
8.3
12.3
114
8.3
8.0
72
11.4
10 2
11.2
10 6
14.3
13.5
13.9
16.3
14 6
17.2
16 6
15.7
14 1
13.5
14 0
13.3
15 6
17.2
16 7
15.3
16.6
19 7
18.7
18 3
17.1
16.4
17.2
19.0
21.9
21 3
18.0
17 6
17.6
15.9
14 4
14 0
14.7
17.4
18.5
18.4
16.5
16.6
17.1
16 8
16.4
18.2
18.4
16.6
19.0
17 1
18.6
17 4
17.9
18.2
17.7
18.4
21.0
19.2
17.7
18.8
18 2
19^1
17.7

3.6
5.3
51
4.0
3.2
29
5.5
44
4.2
41
6.1

5.2
5.1
6.3
54
5.4
52
4.5
38
4.2
38
3.7
48
5.7
54
4.9
5.5
8.0
7.4
70
6.0
5.7
6.4
6.8
8.3
81

6.8
66

6.2
5.4
49
47
4.8
5.7
6.3
5.3
5.4
5.6
5.5
58
5.7
5.4
5.7
5.6

5.9
60
6!l
60
6.1
6.1

6.2
6.2
6.3
6.4
6.4
6.4

62

6^2
6.4

1

Unemployed as percent of civilian labor force in group specified.
Data for 1949 and 1951-54 are for April; 1950, for March.
Note.—Data relate to persons 16 years of age and over.
See footnote 6 and Note, Table B-30.
Source: Department of Labor, Bureau of Labor Statistics.
2




390

Both
sexes
16-19
years

9.2
13.4
12 2
8.2

85

76
12 6
110
11.1
11 6
15.9
14.6
14.7
16.8
14 7
17.2
16 2
14.8
12 8
12.9
12 7
12.2
15 3
16.9
16 2
14.5
16.0
19.9
19.0
17 8
16.4
16.1
17.8
19.6
23.2
22 4
18.9
18 6
18.3
16.9
15 3
15 0
15.5
18.6
20.0
18.6
17.3
18.2
18.4
18 8
18.4
19.4
18.9
18.2
19.3
18 7
19.8
18.9
20.0
20.2
19.4
19.9
22.8
20.6
19.9
20.4
18 9
20.2
19.2

White

3.5
5.6
49
3.1
28
27
50
39
36
38
6.1
4.8
5.0
6.0
49
5.0
46
4.1

34
3.4
32

3.1
45
5.4

51
4.3
5.0
7.8
7.0
62
5.2
5.1
6.3
6.7
86
84
6.5
62
6.0
5.3
47
4.5
4.7
6.0
6.5
5.6
5.8
6.1
5.8
60
6.1
6.1
6.0
6.0
6.1

62
6.4
6.3
6.5
6.5
6.4
6.5
6.8
6.6
6.6
6.6
65
6.4
6.3

Black
and
other

Black

5.9
8.9
90
5.3
5.4
45
99
87
83
79
12 6
10.7
10.2
12.4
10 9
10.8
96
8.1
73
7.4
67
6.4

82
9.9
10 0 "To 4"
9.4
9.0
9.9 10.5
14.8
13.8
14.0
13.1
13 1 14 0
12.8
11.9
12.3
11.3
14.3
13.1
15.6
14.2
18 9
17.3
17 8 19 5
15.9
14.4
13 7 15 1
14.5
13.1
13.0
11.6
10 4 11 7
10 0 114
11.3
10.1
12.4
11.1
14.1
12.7
12.1
10.8
11.9
10.8
12.3
11.1
12.4
11.1
12 6
11.2
12.4
11.0
11.8
10.5
12.4
11.1
12.4
11.2
11.7
13.1
11 1 12 4
11.7
12^9
13 7
12.5
13.8
12.3
13.9
12.3
13.8
12.4
14.5
12.9
14.5
13.1
14.4
13.0
12.9
14.2
13.9
12.6
12 5 14 1
12.6
14.0
12.8
14.2

Experienced
wage
and
salary
workers
4.3
6.8
6.0
3.7

3.4

32
6.2
48
4.4
46
7.3
5.7
5.7
6.8
56
5.6
50
4.3

35
3.6
34
3.3
48
5.7
53
4.5
5.3
8.2
7.3
66
5.6
5.5
6.9
7.3
9.3
92
7.1
68
6.6
5.8
52
5.0
5.3
6.5
7.1
6.0
6.3
6.6
6.4

6.5
6.5
6.5
6.5
6.5
6.6
67
6.9
6.9
7.0
7.1
7.0
7.2
7.3
7.2
7.2
7.2
71
7.0
7.0

Married
men,
spouse
present 2

Women
who
maintain
families

3.5'
4.6
1.5
1.4
17
4.0

26
2.3
28
51
3.6
3.7
4.6
36
3.4
28
2.4
19
1.8
16

1.5
26
3.2
28
2.3
2.7
5.1
4.2
36

2.8
2.8
4.2
4.3
6.5
6.5
4.6

43
4.4
3.9
33
3.0
3.4
4.4
5.0
4.1
4.2
4.5
4.4
4.4
4.4
4.3
4.3
4.5
4.2
46
4.8
4.8

5.0
4.9
4.8
5.0
5.1
5.2
5.3
5.2
51
4.9
4.8

£9

4.4
4.4
5.4
7.3
7.2
7.1
7.0
10.0
10.1
94
8.5
8.3
9.2
10.4
11.7
12.2
10.3
10.4
9.8
9.2
81
8.1
8.2
9.1
9.9
9.2
9.1
9.0
9.5
9.2
9.1
8.3
9.3
9.1
9.6
91
9.2
9.1
9.5

9.9

10.0

9.9

10.1
10.3
10.3

9.1

93
10.4
10.3

TABLE B-38.—Civilian unemployment rate by demographic characteristic,

1950-92

[Percent;] monthly data seasonally adjusted]
Black and other or black

White

Year or month

All
civilian
workers

Males
Total
Total

16-19
years

Females
20
years
and
over

Total

16-19
years

Females

Males
20
years
and
over

Total
Total

16-19
years

20
years
and
over

16-19
years

20
years
and
over

8.4
6.1
5.7
4.1
9.2
8.5
8.9
7.3
10.8
9.4
9.4
11.9
11.0
11.2
10.7
9.2
8.7
9.1
8.3
7.8
9.3
10.9
11.4

20.6
19.2
22.8
20.2
28.4
27.7
24.8
29.2
30.2
34.7
31.6
31.7
31.3
29.6
28.7
27.6
34.5
35.4
38.4

8.4
7.7
7.8
6.4
9.5
8.3
8.3
10.6
9.6
9.4
9.0
7.5
6.6
7.1
6.3
5.8
6.9
8.7
8.8

11.8
11.1
11.3
14.8
14.3
14.9
13.8
13.3
14.0
15.6
17.6
18.6
15.4
14.9
14.2
13.2
11.7
11.4
10.8
11.9
13.0
11.6
11.2
11.9
11.6
11.7
11.4
10.8
11.9
11.8
13.5
12.4
12.3
12.7
12.7
12.6
13.1
13.6
13.5
13.5
13.0
12.5
12.7
13.2
13.2

40.5
36.1
37.4
41.0
41.6
43.4
40.8
39.1
39.8
42.2
47.1
48.2
42.6
39.2
39.2
34.9
32.0
33.0
30.0
36.1
37.2
36.3
34.6
38.1
36.1
30.8
31.6
35.6
42.6
34.5
41.8
33.4
36.6
34.9
37.2
36.1
35.7
42.1
36.4
38.4
31.8
39.8
39.8
37.5
36.5

9.0
8.6
8.8
12.2
11.7
12.3
11.2
10.9
11.9
13.4
15.4
16.5
13.5
13.1
12.4
11.6
10.4
9.8
9.6
10.5
11.7
10.0
9.8
10.2
10.2
10.6
10.4
9.5
10.4
10.7
12.0
11.3
11.1
11.4
11.4
11.4
11.8
11.9
12.2
12.1
11.9
11.0
11.3
11.8
11.9

Total

Black and other
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972

5.3
3.3
3.0
2.9
5.5
4.4
4.1
4.3
6.8
5.5
5.5
6.7
5,5
5.7
5.2
4.5
3.8
3.8
3.6
3.5
4.9
5.9
5.6

13.4
11.3
10.5
11.5
15.7
14.0
14.0
15.7
13.7
15.9
14.7
12.9
10.5
10.7
10.1
10.0
13.7
15.1
14.2

1972
1973
1974
1975
1976
1977
1978
1979

5.6
4.9
5.6
8.5
7.7
7.1
6.1
5.8
7.1
7.6
9.7
9.6
7.5
7.2
7.0
6.2
5.5
5.3
5.5
6.7
7.4
6.3
6.5
6.8
6.6
6.8
6.8
6.7
6.8
6.8
6.9
6.9
7.1
7.1
7.3
7.3
7.3
7.4
7.7
7.6
7.6
7.5
7.4
7.3
7.3

14.2
12.3
13.5
18.3
17.3
15.0
13.5
13.9
16.2
17.9
21.7
20.2
16.8
16.5
16.3
15.5
13.9
13.7
14.2
17.5
18.4
16.7
15.9
17.7
17.3
18.6
18.4
18.9
16.6
16.7
17.3
17.7
18.5
17.3
19.0
20.0
17.8
18.4
21.2
18.8
18.5
18.7
15.9
17.7
17.2

10.4
9.1
9.7
9.5
12.7
12.0
12.7
14.8
12.8
15.1
14.9
14.0
12.1
11.5
12.1
11.5
13.4
15.1
14.2

9.0
5.3
5.4
4.5
9.9
8.7
8.3
7.9
12.6
10.7
10.2
12.4
10.9
10.8
9.6
8.1
7.3
7.4
6.7
6.4
8.2
9.9
10.0

9.4
4.9
5.2
4.8
10.3
8.8
7.9
8.3
13.7
11.5
10.7
12.8
10.9
10.5
8.9
7.4
6.3
6.0
5.6
5.3
7.3
9.1
8.9

14.4
13.4
15.0
18.4
26.8
25.2
24.0
26.8
22.0
27.3
24.3
23.3
21.3
23.9
22.1
21.4
25.0
28.8
29.7

14.2
13.0
14.5
17.4
16.4
15.9
14.4
14.0
14.8
16.6
19.0
18.3
15.2
14.8
14.9
13.4
12.3
11.5
12.6
15.2
15.7
15.9
13.6
13.8
14.7
15.3
14.8
16.0
15.6
14.4
15.9
15.4
17.0
14.9
15.6
16.0
15.0
14.9
18.4
16.3
15.2
15.8
15.1
16.4
15.1

10.4
9.4
10.5
14.8
14.0
14.0
12.8
12.3
14.3
15.6
18.9
19.5
15.9
15.1
14.5
13.0
11.7
11.4
11.3
12.4
14.1
12.1
11.9
12.3
12.4
12.6
12.4
11.8
12.4
12.4
13.1
12.4
12.9
13.7
13.8
13.9
13.8
14.5
14.5
14.4
14.2
13.9
14.1
14.0
14.2

9.3
8.0
9.8
14.8
13.7
13.3
11.8
11.4
14.5
15.7
20.1
20.3
16.4
15.3
14.8
12.7
11.7
11.5
11.8
12.9
15.2
12.6
12.6
12.7
13.3
13.6
13.4
12.8
13.0
13.1
12.6
12.4
13.4
14.7
14.9
15.3
14.5
15.4
15.5
15.3
15.5
15.4
15.5
14.9
15.2

31.7
27.8
33.1
38.1
37.5
39.2
36.7
34.2
37.5
40.7
48.9
48.8
42.7
41.0
39.3
34.4
32.7
31.9
32.1
36.5
42.0
35.4
35.6
38.3
36.9
36.0
34.7
33.4
36.7
40.5
36.4
36.5
37.2
36.1
38.7
38.3
43.2
43.0
45.1
42.3
42.7
44.3
44.2
44.8
42.2

9.9
8.4
7.4
7.6
12.7
10.5
9.6
11.7
10.0
9.2
7.7
6.0
4.9
4.3
3.9
3.7
5.6
7.3
6.9
Black

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1991: Jan..
Feb...
Mar..

fe

June
July..
Aug..
Sept.
Oct...
Nov..
Dec.
1992:Jan..
Feb...
Mar..
Apr..
May.
June
July.
Aug.
Sept
Oct..
Nov.
Dec.
1
Unemployed as percent of civilian labor force in group specified.
Note.-See Note, Table B-37.
Source: Department of Labor, Bureau of Labor Statistics.




391

7.0
6.0
7.4
12.5
11.4
10.7
9.3
9.3
12.4
13.5
17.8
18.1
14.3
13.2
12.9
11.1
10.1
10.0
10.4
11.5
13.4
11.2
11.3
11.1
11.8
12.2
12.1
11.6
11.5
11.3
11.2
11.0
12.0
13.2
13.3
13.8
12.8
13.8
13.6
13.6
13.8
13.5
13.7
13.0
13.3

TABLE B-39.—Unemployment by duration and reason, 1948-92
[Thousands of persons, except as noted; monthly data seasonally adjusted1]

Duration of unemployment
Year or month

1948
1949
1950
1951
1952
1953
1954
1955
1956
1957 . . .
1958
1959
I960
1961
1962
1963
1964
1965
1966
1967 .
1968
1969
1970
1971
1972
1973
1974
1975
L976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
L987
1988
1989
1990
1991
1992

Unemployment

Less
than
5

27
5-14 15-26 weeks
weeks weeks and
over

2 276
3 637
3 288
2 055
1,883
1 834
3532
2 852
2 750
2 859
4 602
3 740
3 852
4 714
3911
4,070
3 786
3 366
2 875
2 975
2,817
2,832
4,093
5,016
4,882
4,365
5 156
7,929
7 406
6,991
6 202
6 137
7,637
8,273
10 678
10 717
8,539
8 312
8,237
7 425
6,701
6 528
6 874
8,426
9,384

1,300
1,756
1450
1,177
1,135
1142
1 605
1335
1412
1408
1753
1585
1719
1806
1,663
1,751
1697
1628
1573
1634
1,594
1,629
2,139
2,245
2 242
2,224
2 604
2,940
2 844
2,919
2 865
2 950
3,295
3,449
3 883
3 570
3,350
3 498
3,448
3 246
3,084
3 174
3 169
3,380
3 270

669
1,194
1,055
574
516
482
1116
815
805
891
1,396
1,114
1 176
1376
1,134
1,231
1117
983
779
893
810
827
1,290
1,585
1472
1314
1 597
2,484
2 196
2,132
1923
1 946
2,470
2,539
3311
2 937
2>51
2 509
2,557
2 196
2,007
1 978
2 201
2,724
2 760

193
428
425
166
148
132
495
366
301
321
785
469
503
728
534
535
491
404
287
271
256
242
428
668
601
483
574
1,303
1018
913
766
706
1,052
1,122
1 708
1 652
U04
1 025
1,045
943
801
730
809
1,225
1424

116
256
357
137
84
78
317
336
232
239
667
571
454
804
585
553
482
351
239
111
156
133
235
519
566
343
381
1,203
1 348
1,028
648
535
820
1,