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Transmitted to the Congress
February 1999




Economic Report
of the President

Transmitted to the Congress
February 1999
TOGETHER WITH

THE ANNUAL REPORT
OF THE

COUNCIL OF ECONOMIC ADVISERS
UNITED STATES GOVERNMENT PRINTING OFFICE
WASHINGTON: 1999
For sale by the U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
ISBN 0-16-049896-1







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. MEETING CHALLENGES AND BUILDING FOR THE
FUTURE

19

CHAPTER 2. MACROECONOMIC POLICY AND PERFORMANCE

43

CHAPTER 3. BENEFITS OF A STRONG LABOR MARKET

99

CHAPTER^ WORK, RETIREMENT, AND THE ECONOMIC WELL-BEING
OF THE ELDERLY

131

CHAPTER 5. REGULATION AND INNOVATION

171

CHAPTER 6. CAPITAL FLOWS IN THE GLOBAL ECONOMY

219

CHAPTER 7. THE EVOLUTION AND REFORM OF THE INTERNATIONAL
FINANCIAL SYSTEM

267

APPENDIX A. REPORT TO THE PRESIDENT ON THE ACTIVITIES OF THE
COUNCIL OF ECONOMIC ADVISERS DURING 1998

307

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

319

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










ECONOMIC REPORT
OF THE PRESIDENT




ECONOMIC REPORT OF THE PRESIDENT
To the Congress of the United States:
I am pleased to report that the American economy today is healthy
and strong. Our Nation is enjoying the longest peacetime economic
expansion in its history, with almost 18 million new jobs since 1993,
wages rising at twice the rate of inflation, the highest home ownership
ever, the smallest welfare rolls in 30 years, and unemployment and
inflation at their lowest levels in three decades.
This expansion, unlike recent previous ones, is both wide and deep.
All income groups, from the richest to the poorest, have seen their
incomes rise since 1993. The typical family income is up more than
$3,500, adjusted for inflation. African-American and Hispanic households, who were left behind during the last expansion, have also seen
substantial increases in income.
Our Nation's budget is balanced, for the first time in a generation,
and we are entering the second year of an era of surpluses: our projections show that we will close out the 1999 fiscal year with a surplus of
$79 billion, the largest in the history of the United States. We are on
course for budget surpluses for many years to come.
These economic successes are not accidental. They are the result of
an economic strategy that we have pursued since 1993. It is a strategy
that rests on three pillars: fiscal discipline, investments in education
and technology, and expanding exports to the growing world market.
Continuing with this proven strategy is the best way to maintain our
prosperity and meet the challenges of the 21st century.
THE ADMINISTRATION'S ECONOMIC AGENDA

Our new economic strategy was rooted first and foremost in fiscal discipline. We made hard fiscal choices in 1993, sending signals to the market that we were serious about dealing with the budget deficits we had
inherited. The market responded by lowering long-term interest rates.
Lower interest rates in turn helped more people buy homes and borrow
for college, helped more entrepreneurs to start businesses, and helped
more existing businesses to invest in new technology and equipment.
America's economic success has been fueled by the biggest boom in private sector investment in decades—more than $1 trillion in capital was
freed for private sector investment. In past expansions, government
bought more and spent more to drive the economy. During this expansion,
government spending as a share of the economy has fallen.




The second part of our strategy has been to invest in our people. A
global economy driven by information and fast-paced technological
change creates ever greater demand for skilled workers. That is why,
even as we balanced the budget, we substantially increased our annual investment in education and training. We have opened the doors of
college to all Americans, with tax credits and more affordable student
loans, with more work-study grants and more Pell grants, with education IRAs and the new HOPE Scholarship tax credit that more
than 5 million Americans will receive this year. Even as we closed the
budget gap, we have expanded the earned income tax credit for almost
20 million low-income working families, giving them hope and helping
lift them out of poverty. Even as we cut government spending, we have
raised investments in a welfare-to-work jobs initiative and invested
$24 billion in our children's health initiative.
Third, to build the American economy, we have focused on opening
foreign markets and expanding exports to our trading partners
around the world. Until recently, fully one-third of the strong economic growth America has enjoyed in the 1990s has come from exports.
That trade has been aided by 270 trade agreements we have signed in
the past 6 years.
ADDRESSING OUR NATION'S ECONOMIC CHALLENGES

We have created a strong, healthy, and truly global economy—an
economy that is a leader for growth in the world. But common sense,
experience, and the example of our competitors abroad show us that
we cannot afford to be complacent. Now, at this moment of great plenty,
is precisely the time to face the challenges of the next century.
We must maintain our fiscal discipline by saving Social Security for
the 21st century—thereby laying the foundations for future economic
growth.
By 2030, the number of elderly Americans will double. This is a seismic demographic shift with great consequences for our Nation. We
must keep Social Security a rock-solid guarantee. That is why I proposed in my State of the Union address that we invest the surplus to
save Social Security. I proposed that we commit 62 percent of the budget surplus for the next 15 years to Social Security. I also proposed
investing a small portion in the private sector. This will allow the
trust fund to earn a higher return and keep Social Security sound
until 2055.
But we must aim higher. We should put Social Security on a
sound footing for the next 75 years. We should reduce poverty
among elderly women, who are nearly twice as likely to be poor as
other seniors. And we should eliminate the limits on what seniors
on Social Security can earn. These changes will require difficult but
fully achievable choices over and above the dedication of the
surplus.




Once we have saved Social Security, we must fulfill our obligation to
save and improve Medicare and invest in long-term health care. That
is why I have called for broader, bipartisan reforms that keep
Medicare secure until 2020 through additional savings and modernizing the program with market-oriented purchasing tools, while also
providing a long-overdue prescription drug benefit.
By saving the money we will need to save Social Security and
Medicare, over the next 15 years we will achieve the lowest ratio of
publicly held debt to gross domestic product since 1917. This debt
reduction will help keep future interest rates low or drive them even
lower, fueling economic growth well into the 21st century.
To spur future growth, we must also encourage private retirement
saving. In my State of the Union address I proposed that we use about
12 percent of the surplus to establish new Universal Savings
Accounts—USA accounts. These will ensure that all Americans have
the means to save. Americans could receive a flat tax credit to contribute to their USA accounts and additional tax credits to match a
portion of their savings—with more help for lower income Americans.
This is the right way to provide tax relief to the American people.
Education is also key to our Nation's future prosperity. That is why I
proposed in my State of the Union address a plan to create 21st-century
schools through greater investment and more accountability. Under my
plan, States and school districts that accept Federal resources will be
required to end social promotion, turn around or close failing schools,
support high-quality teachers, and promote innovation, competition, and
discipline. My plan also proposes increasing Federal investments to help
States and school districts take responsibility for failing schools, to
recruit and train new teachers, to expand after school and summer
school programs, and to build or fix 5,000 schools.
At this time of continued turmoil in the international economy, we
must do more to help create stability and open markets around the
world. We must press forward with open trade. It would be a terrible
mistake, at this time of economic fragility in so many regions, for the
United States to build new walls of protectionism that could set off a
chain reaction around the world, imperiling the growth upon which we
depend. At the same time, we must do more to make sure that working people are lifted up by trade. We must do more to ensure that spirited economic competition among nations never becomes a race to the
bottom in the area of environmental protections or labor standards.
Strengthening the foundations of trade means strengthening the
architecture of international finance. The United States must continue to lead in stabilizing the world financial system. When nations
around the world descend into economic disruption, consigning populations to poverty, it hurts them and it hurts us. These nations are our
trading partners; they buy our products and can ship low-cost
products to American consumers.




The U.S. proposal for containing financial contagion has been taken
up around the world: interest rates are being cut here and abroad,
America is meeting its obligations to the International Monetary
Fund, and a new facility has been created at the World Bank to
strengthen the social safety net in Asia. And agreement has been
reached to establish a new precautionary line of credit, so nations
with strong economic policies can quickly get the help they need
before financial problems mushroom from concerns to crises.
We must do more to renew our cities and distressed rural areas. My
Administration has pursued a new strategy, based on empowerment
and investment, and we have seen its success. With the critical assistance of Empowerment Zones, unemployment rates in cities across
the country have dropped dramatically. But we have more work to do
to bring the spark of private enterprise to neighborhoods that have too
long been without hope. That is why my budget includes an innovative "New Markets" initiative to spur $15 billion in new private sector
capital investment in businesses in underserved areas through a
package of tax credits and guarantees.
GOING FORWARD TOGETHER IN THE 21ST CENTURY

Now, on the verge of another American Century, our economy is at
the pinnacle of power and success, but challenges remain. Technology
and trade and the spread of information have transformed our economy, offering great opportunities but also posing great challenges. All
Americans must be equipped with the skills to succeed and prosper in
the new economy. America must have the courage to move forward and
renew its ideas and institutions to meet new challenges. There are no
limits to the world we can create, together, in the century to come.

\K/UUUOJU^OL
THE WHITE HOUSE
FEBRUARY 4,1999




THE ANNUAL REPORT
OF THE
COUNCIL OF ECONOMIC ADVISERS







LETTER OF TRANSMITTAL
COUNCIL OF ECONOMIC ADVISERS
Washington, D.C., February 4,1999
MR. PRESIDENT:
The Council of Economic Advisers herewith submits its 1999 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,




Janet L. Yellen,
Chair

Jeffrey A. Frankel,
Member

Rebecca M. Blank,
Member




C O N T E N T S
Page

CHAPTER 1. MEETING CHALLENGES AND BUILDING FOR THE
FUTURE
Policy Lessons from Three Long Expansions
Keynesian Activism in the 1961-69 Expansion
The Supply-Side Revolution and the 1982-90
Expansion
Deficit Reduction and the Current Expansion
Conclusion
Preserving Fiscal Discipline
Reaching Surplus
Fiscal Policy in an Era of Surpluses
Meeting the International Challenge
Containing the Crisis and Promoting Recovery
Strengthening the International Financial
Architecture
Embracing Change While Promoting Fairness
Agriculture
Mergers
International Trade
Promoting Prosperity for All Americans
Conclusion
CHAPTER 2. MACROECONOMIC POLICY AND PERFORMANCE
The Year in Review
The Stance of Macroeconomic Policy
Turmoil in Financial Markets
Components of Spending
The Labor Market and Inflation
Financial Markets
The Effect of Risk on Interest Rates and Equity
Prices
Changing Risk Perceptions and Financial Market
Developments
New Concerns About Hedge Funds
Financial Market Influences on Spending
The Investment Boom
Causes of the Boom
Implications of the Investment Boom
Macroeconomic Implications of the Y2K Problem




11

19
20
21
22
24
27
28
28
30
34
34
36
37
38
39
40
41
42
43
45
45
47
47
52
55
56
57
63
67
69
70
73
76

Page

Near-Term Outlook and Long-Run Forecast
The Administration Forecast
Components of Long-Term Growth
Inflation: Flat or Falling?
What Has Held Inflation in Check?
The Near-Term Outlook
CHAPTER 3. BENEFITS OF A STRONG LABOR MARKET
Economy-Wide Developments in the Labor Market
Employment
Wages
Disadvantaged Groups
Low-Wage Workers
Less Educated Workers
Blacks and Hispanics
Immigrants
Single Mothers
Overcoming Disadvantages in the Labor Market
Benefits to Society of a Strong Labor Market
Welfare Reform
Crime
Job Displacement, Tenure, and the Contingent Work
Force
Job Displacement
Job Tenure
The Contingent Work Force
Myths and Realities
New Developments in Job Training and Lifelong
Learning
CHAPTER 4. WORK, RETIREMENT, AND THE ECONOMIC
WELL-BEING OF THE ELDERLY
Population Aging, Life Expectancy, and Health Status
Older Workers and Retirement
Long-Term Trends in Labor Force Participation at
Older Ages
Recent Changes in the Labor Force Participation of
Older Men
Influences on the Timing of Retirement
Unemployment and Job Loss
The Unpaid Contributions of the Elderly
The Economic Well-Being of the Elderly
Income and Consumption
Poverty
Wealth
Are Older Workers Saving Enough for Retirement?....




12

83
83
84
88
91
95
99
100
100
101
103
104
105
107
109
112
116
116
116
120
121
122
123
124
126
127
131
132
135
136
139
141
149
151
152
153
163
166
167

Page

CHAPTER 5. REGULATION AND INNOVATION
Competition Policy and Innovation
Merger Review and Innovation
Do Bigger Firms Help or Hurt Innovation?
Market Concentration, Competition, and Innovation..
Merger Policy in High-Technology Markets
Intellectual Property and Antitrust
Network Competition and Innovation
Environmental Regulation and Innovation
Environmental Policy and Incentives to Innovate
Environmental Policy and the Diffusion of
Technology
Innovation and Diffusion: An Application to Climate
Change Policy
The Long-Run Costs of Environmental Regulation
Regulation and Innovation: The Case of the Electric
Power Industry
From Innovation to Deregulation and Competition
The Benefits of Deregulation
The Challenge of a Competitive Market:
Environmental and Social Objectives

CHAPTER 6. CAPITAL FLOWS IN THE GLOBAL ECONOMY
International Capital Flows, Their Causes, and the
Risk of Financial Crisis
Trends in Financial Integration
The Causes of Increased Capital Flows
The Financial Crises of the 1990s
The Asian Crisis and Its Global Repercussions
The Asian Economic Model
A History of the Crisis and Its Contagion
The Causes of the Crisis
The Causes of Contagion
The Policy Response to the Crisis
The Role of the International Community
The Motivation of the IMF Programs in Asia
U.S. Support of IMF Funding
New Initiatives to Restore Growth in East Asia
Reform of the International Financial Architecture
Japan's Economic and Financial Crisis
Effects of the Emerging Markets Crisis on the
United States
Macroeconomic Effects
The Trade and Current Account Deficits
Conclusion




13

171
173
173
174
175
177
181
185
193
193
201
205
210
211
213
216
217

219
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225
227
227
228
237
242
245
245
246
249
250
251
251
253
253
255
265

Page

CHAPTER 7. THE EVOLUTION AND REFORM OF THE
INTERNATIONAL FINANCIAL SYSTEM
Reform of the International Financial Architecture
From the Halifax Summit to the G-22 Reports
Greater Transparency and Accountability
Reforming and Strengthening Domestic Financial
Institutions
Better Crisis Resolution, Including Appropriate Roles
for the Official Community and the Private Sector
Adoption of Measures to Reform the International
Financial Architecture
Further Steps to Strengthen the International Financial
Architecture
Strengthened Prudential Regulation and Supervision
in Industrial Countries
Strengthening Prudential Regulation and Financial
Systems and Promoting Orderly Capital Account
Liberalization in Emerging Markets
Developing New Approaches to Crisis Response
Strengthening the IMF
Minimizing the Human Costs of Financial Crises
Sustainable Exchange Rate Regimes for Emerging
Markets
European Economic and Monetary Union
The EMU Schedule
The Benefits and Potential Costs of EMU
The Euro as an International Currency and the
Implications for the Dollar
Conclusion
A.
B.

1-1.
1-2.
2-1.
2-2.




267
268
268
269
271
272
276
276
277
280
285
286
287
287
291
291
293
297
305

APPENDIXES
Report to the President on the Activities of the Council
of Economic Advisers During 1998
307
Statistical Tables Relating to Income, Employment, and
Production
319
LIST OF TABLES
Stabilization Policy Indicators in Three Long
Expansions
Economic Growth Indicators in Three Long
Expansions
Growth of Real GDP and its Components During 1997
and 1998
Disaster Damage: National Income and Product Accounts
Estimates of Value of Structures and Equipment
Destroyed
14

25
26
48

82

Page

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

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

Accounting for Growth in Real GDP, 1960-2007
Expected Effects of Methodological Changes on the CPI
and Real GDP
Administration Forecast
Estimated Pension Coverage and Offer Rates for Private
Sector Wage and Salary Workers
Gender Differences in Pension Wealth, 1992
Consumption Patterns of Elderly and Nonelderly
Households by Age of Household Head, 1997
Poverty Rates Among the Elderly for Various
Demographic Groups
Sociodemographic Characteristics of the Poor and
Nonpoor Elderly Population, 1997
Family Holdings of Financial and Nonfinancial Assets,
by Age of Head of Family, 1995
Tbtal and Financial Wealth of Households by
Percentiles
..
Capital Flows to Industrial and Developing Countries..
Five Asian Economies: External Financing
The Importance of Major Currencies on the Eve of the
Introduction of the Euro
LIST OF CHARTS
Core Inflation and Unemployment in Three Long
Expansions
Contributions to Economic Growth in Three Long
Expansions
The Federal Budget Balance, 1946-98
Growth in Real Family Income, 1947-97
Unemployment Rate
Inflation Rate
Net Worth and the Personal Consumption Rate
Yields on Treasury Securities
Risk Spreads
Equity Prices in 1998
Contribution of Investment to Overall GDP Growth
Corporate Profits and Net Interest Payments
Net National Saving and Its Components
Estimation of Potential GDP Growth by Okun's Law....
Actual Versus Simulated Productivity Growth
Three Measures of Core Inflation
Inflation and Trend Unit Labor Costs
Export and Import Prices Versus the CPI and GDP
Price Index
Inventory-to-Sales Ratio (Nonfarm Business)




15

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97
158
162
163
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167
168
223
241
301

23
28
29
41
44
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60
60
63
69
71
72
84
87
90
91
92
96

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




Unemployment and Discouraged Workers
Median Hourly Wages of Men and Women Aged 16 and
Over
Hourly Wages of Low-Wage Workers Aged 16 and
Over
Percent Change in Employment Rate by Level of
Education, 1993-1998
Median Hourly Wages of Men Aged 16 and Older by
Race and Ethnicity
Median Hourly Wages of Women Aged 16 and Older by
Race and Ethnicity
Unemployment Rates of Persons Aged 16-24 by
Race and Ethnicity
Unemployment Rates by Nativity
Labor Force Participation Rates of Single Women
The Earned Income Tax Credit in 1993 and 1998
Welfare Participation and Unemployment
Job Displacement Rate
Outcomes After Job Displacement
Characteristics of Contingent and Noncontingent
Workers, February 1997
Life Expectancy at Age 65
Population of the United States by Age
Projections of the Population Aged 65 Years and Over
Labor Force Participation Rates of Older Men and
Women
Women's Labor Force Participation Rates at Each Age
Men's Labor Force Participation Rates at Each Age
Full-Time and Part-Time Work Among Men Aged 60-61...
Net Labor Force Exit Rates of Men at Each Age
Living Arrangements of Elderly Widows
Composition of Income Among the Elderly
Composition of Income by Quintile Among the Elderly,
1996
Poverty Rate by Age Group
Household Financial Wealth by Race and Ethnicity
Emissions of Six Major Air Pollutants
Energy Efficiency and Prices
Energy Consumption
Fuel Consumption by Motor Vehicles
Net Capital Flows to Developing Countries
Perceived Risk and the Spread on Emerging Market
Bonds
Real Value of the Dollar and the Trade Deficit
Dollar Exchange Rates

16

100
103
105
106
108
108
109
110
113
115
117
122
123
125
133
133
134
138
138
140
140
144
155
156
156
164
168
197
208
208
209
222

235
254
254

Page

6-5.
6-6.
6-7.
6-8
6-9.
6-10.
6-11.
7-1.
7-2.
7-3.
1-1.
1-2.
2-1.
2-2.
2-3.
2-4.
3-1.
3-2.
3-3.
3-4.
4-1.
4-2.
4-3.
4-4.
4-5.
4-6.
4-7.
5-1.
5-2.
5-3.
5-4.
5-5.
5-6.
5-7.
5-8.
5-9.
5-10.
6-1.

Terms of Trade
Current Account Balance
Economic Growth and Trade Balances of G-7
Countries, 1992-97
Employment Growth and Trade Balances of G-7
Countries, 1992-97
Saving, Investment, and the Current Account Balance
Current Account Deficit and Net International
Investment Position
Foreign Direct Investment Flows
European Short-Term Interest Rates
European Long-Term Interest Rates
International Use of Major Currencies
LIST OF BOXES
The Dating of Business Cycles
Full Employment and the NAIRU
The Electrical Revolution, the Computer Revolution,
and Productivity
Preparing Federal Systems for the Year 2000
Accounting for the Environment
Methodological Changes to Price Measurement
Sources of Wage Data
Increasing the Minimum Wage
The Earned Income Tax Credit
The Welfare to Work Partnership
Easing the Burden of Long-Term Care
Social Security Rules
Age Discrimination in the Labor Market
Types of Pension Plans
Medicare Reform
The Changing Living Arrangements of the Elderly
The Federal Role in Employer-Provided Pension Plans....
The Scope of Government Support of R&D
Electronic Commerce and Digital Copyright Protection
Cooperative Innovation and the Y2K Problem
Reverse Engineering and Compatibility
Recent Trends in Air Quality
Comparing Estimates of Environmental Compliance
Costs Before and After Regulation
The Partnership for a New Generation of Vehicles
Energy Efficiency Since the 1970s
Is There an Environmental Kuznets Curve?
The Trend Toward Decentralized Power Generation
The Explosive Growth of Foreign Exchange Trading




17

255
258
260
260
261
264
264
292
292
301
21
24
76
78
87
93
101
Ill
113
118
136
143
146
147
150
154
159
172
183
184
187
196
199
202
207
212
215
224

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




Market-Based (Arm's-Length) Versus RelationshipBased (Insider) Finance
The Asian Growth Model in Perspective
Sovereign Spreads in Emerging Markets
Moral Hazard in Financial Institutions
Currency Boards
Is Europe an Optimum Currency Area?
How Does the Dollar Rank Today Against Other
International Currencies?

18

230
232
234
238
289
295
300

CHAPTER 1

Meeting Challenges and Building for
the Future
THE ECONOMIC POLICIES of the past 6 years have nurtured and
sustained what is now the longest peacetime expansion on record. By
December 1998, the 93rd month since the bottom of the last recession,
18.8 million jobs had been created (17.7 million of them since January
1993). More Americans are working than ever before, the unemployment rate is the lowest in a generation, and inflation remains tame.
This record of achievement is especially noteworthy in light of the troubles experienced in the international economy in 1998. The United
States has not entirely escaped the effects of this turmoil—and calm
has not been restored completely abroad. But the fundamental soundness of the U.S. economy prevented it from foundering in 1998's
storms.
This Administration laid a strong policy foundation for growth in
1993 when the President put in place an economic strategy grounded
in deficit reduction, targeted investments, and opening markets
abroad. Since then the Federal budget deficit has come down steadily,
and in 1998 the budget was in the black for the first time since 1969.
This policy of fiscal discipline, together with an appropriately accommodative monetary policy by the Federal Reserve, produced a favorable climate for business investment and a strong, investment-driven
recovery from the recession and slow growth of the early 1990s. Even
while reducing Federal spending as a share of gross domestic product
(GDP), the Administration has pushed for more spending in critical
areas such as education and training, helping families and children,
the environment, health care, and research and development. And
although international economic conditions have led to a dramatic
widening of the trade deficit, the United States has succeeded in
expanding exports in real (inflation-adjusted) terms by almost 8
percent per year since 1993.
Clearly, there is much for Americans to be proud of in the economic
accomplishments of the past 6 years. But as recent events in the
rest of the world have reminded us, our prosperity is threatened when
the global economy does not function well. Our immediate challenge
on the international front is to help ensure that the global economy
rebounds and begins to regain strength. Our longer run challenge as
we enter the 21st century will be to continue to build and refine the




19

international economic arrangements within which countries can
embrace opportunities to grow and develop through international
trade and investment.
Challenges remain at home as well. The restoration of fiscal discipline is one of the most important accomplishments of the past 6
years. But one very important challenge in the years ahead will be to
maintain that discipline and to ensure that fiscal policy contributes to
preparing the country for the demographic challenges it faces in the
next century. That is why, in his 1998 State of the Union address, the
President called for reserving the future budget surpluses until Social
Security is reformed. In this year's State of the Union message, the
President put forward his framework for saving Social Security while
meeting the other pressing challenges of the 21st century.
A second major development of the past 6 years has been the
reform of the Nation's welfare system, which, together with the
strong economy, has produced a dramatic reduction in welfare case
loads. Here the challenge will be to continue to make work pay for
all Americans who play by the rules and want to work, while
preserving an adequate safety net. Finally, the strength of the
American economy over the past 6 years should not blind us to the
inevitability of change and the threat of disruption that is always
present in a dynamic market economy. For example, difficult
agricultural conditions in 1998 put stress on the new, marketoriented farm policy enacted in 1996. Similarly, the ongoing wave of
mergers among large companies in the financial, telecommunications, and other industries has raised questions about
the disruptions these reorganizations cause for communities and
workers—questions that go beyond traditional antitrust concerns.
Such questions may be better addressed by broader policies such as
maintaining full employment and promoting education and training.
The challenge here is to capture the long-run benefits from
productivity-enhancing change without ignoring the short-run costs
to those hurt by that change.
This chapter provides an overview of these challenges and the Administration's responses. First, however, we provide some background by
putting the current economic expansion in its historical context.

POLICY LESSONS FROM THREE LONG EXPANSIONS
The current economic expansion is only the third that has lasted
at least 7 years, according to business-cycle dating procedures that
have been applied back to 1854 (Box 1-1). It is useful to review and
compare the histories of each of these long expansions in order to
understand the role of macroeconomic policy in promoting balanced
and noninflationary growth.




20

Box 1-1.—The Dating of Business Cycles
Although all signs indicate that the current economic expansion has continued into 1999, its precise length wiE not be known
until some time after it has ended. The dating of business cycles
is not an official U,S. Government function* Instead, once it has
become clear that the economy has reversed direction, the
Business Cycle Dating Committee of the National Bureau of Economic Research (NBEE) meets to determine the turning point for
historical and statistical purposes. For example, the July 1990
business-cycle peak was announced April 25,1991, and the March
1991 trough was announced December 22,1992. A popular recession indicator is two consecutive quarters of decline in real GDP,
but the NBER does not use this approach. Rather, it defines a
recession as a recurring period of decline in total output, income,
employment, and sales, usually lasting from 6 months to a year.
The Employment Act of 1946 (which created the Council of Economic
Advisers) established a policy framework in which the Federal Government is responsible for trying to stabilize short-run economic fluctuations, promote balanced and noninflationary economic growth, and
foster low unemployment. Although the U.S. economy has continued to
experience fluctuations in output and employment in the more than
half a century since then, it has avoided anything like the prolonged
contraction of 1873-79, or the 30 percent contraction in output and 25
percent unemployment rate of the Great Depression. Moreover, the
three longest expansions of the past century—including the current
one—have all occurred since the Employment Act was passed.
Each of these three long expansions can be interpreted as an experiment in macroeconomic policy. The longest—the expansion of 1961-69,
which lasted 106 months—was associated with the first self-consciously
Keynesian approach to economic policy. It was also associated with
Vietnam War spending. The longest peacetime expansion before the current one was the expansion of 1982-90, which lasted 92 months. Although
the economic philosophy underlying the policies of that period is often
characterized as ariti-Keynesian, this expansion, too, featured a stimulative fiscal policy. The current expansion is the only one of the three in
which fiscal policy was contractionary rather than expansionary, reflecting the budget situation at the time and the view that fiscal discipline
would lower interest rates and spur long-term economic growth.
KEYNESIAN ACTIVISM IN THE 1961-69 EXPANSION
In the early 1960s the Council of Economic Advisers advocated
activist macroeconomic policies based on the ideas of the British economist John Maynard Keynes. The Council diagnosed the economy at




21

that time as suffering from "fiscal drag" arising from a large structural
budget surplus. (The structural budget balance is the deficit or surplus
that would arise from the prevailing fiscal stance if the economy were
operating at full capacity.) The marginal tax rates then in effect, which
were far higher than today's, were seen as causing tax revenues to rise
rapidly as the economy approached full employment, draining purchasing power and slowing demand before full employment could be
achieved. The problem was not the fact that Federal Government
receipts and expenditures were sensitive to changes in economic
activity—this sensitivity plays an important automatic stabilizing role,
particularly when economic activity falters, as reduced tax payments
and increased unemployment compensation help preserve consumers'
purchasing power. The problem was that the automatic stabilizers
kicked in too strongly on the upside, not only preventing the economy
from reaching full employment but also, ironically, preventing the
actual budget from balancing. Thus, President John F. Kennedy
proposed a tax cut in 1962, which was enacted in 1964, after his death.
This tax cut provided further stimulus to the economic recovery that
had begun in 1961. The unemployment rate continued to fall, until
early in 1966 it dropped below the 4 percent rate that was considered
full employment at the time. Inflation had been edging up as the
unemployment rate came down, but it then began to rise sharply
(Chart 1-1). Although the changed conditions appeared to call for fiscal
restraint, President Lyndon B. Johnson was reluctant to raise taxes or
scale back his Great Society spending initiatives. Meanwhile Vietnam
War spending continued to provide further stimulus.
At the time, policymakers believed that the rise in inflation could be
unwound simply by moving the economy back to 4 percent unemployment, but when restraint was finally applied it produced a rise in
unemployment with little reduction in inflation. This so-called stagflation, together with a slowdown in productivity and a series of oil price
shocks in the 1970s, dealt a serious setback to the prevailing view
among economists that economic policy could be easily adjusted to
achieve the goals of the Employment Act.

THE SUPPLY-SIDE REVOLUTION AND THE 1982-90
EXPANSION
At the beginning of the Administration of President Ronald Reagan
in 1981, the economy was bouncing back from the short 1980 recession,
but it was also experiencing very high inflation. President Reagan's
program for economic recovery called for large tax cuts, increased
defense spending, and reduced domestic spending. Although advocates
of these policies invoked the 1964 tax cut as precedent, the justification
offered for this policy was not Keynesian demand stimulus. Rather it
was the "supply-side" expectation that substantial cuts in marginal tax
rates would call forth so much new work effort and investment that




22

Chart 1-1 Core Inflation and Unemployment in Three Long Expansions
Inflation rose late in both the 1960s and 1980s expansions, but inflation has
remained low in the current expansion.
Change in consumer price index, all items excluding food and energy (percent)

6
,1969

1983

1961

3

4

5

6
7
8
Unemployment rate (percent)

10

11

Source: Department of Labor (Bureau of Labor Statistics).

the economy's potential output would grow rapidly, easing inflationary
pressure and bringing in sufficient new revenue to keep the budget
deficit from increasing. In the short run, however, this expansionary
fiscal policy collided with an aggressive anti-inflationary monetary
policy on the part of the Federal Reserve. The budget deficit ballooned
in the deep recession of 1981-82, and it stayed large even after the
Federal Reserve eased and the economy began to recover.
Compared with the 1961-69 expansion, the 1982-90 expansion was
marked by higher levels of both inflation and unemployment. But the
main distinguishing feature of this expansion was the large Federal
budget deficits and their macroeconomic consequences. In the early
1980s the combination of an expansionary fiscal policy and a tight
monetary policy produced high real interest rates, an appreciating dollar, and a large current account deficit. (The current account, which
includes investment income and unilateral transfers, is a broader measure of a country's international economic activity than the more familiar trade balance.) Although borrowing from abroad offset some of the
drain on national saving that the budget deficit represented, and prevented the sharp squeeze on domestic investment that would have
taken place in an economy closed to trade and foreign capital flows, the
effect of this policy choice was a decline in net national saving and
investment after 1984. As in the 1961-69 expansion, inflation began to
rise as the economy moved toward high employment. By this time,
however, the prevailing view was that inflation could not be reversed




23

simply by returning to the full-employment unemployment rate
(Box 1-2). Instead the economy would have to go through a period of
subnormal growth in order to squeeze out inflation.
Box 1-2,—Full Employment and the NAIRU
Maintaining fall employment is a major goal of macroeconomic
policy, but how exactly is that objective defined? The prevailing
view in the 1960s was that lower unemployment rates were associated with higher rates of inflation, and that full employment
was defined by the unemployment rate associated with a tolerable
inflation rate. At that time, the full-employment unemployment
rate was thought to be about 4 percent* The experience of the
1970s helped persuade economists that, once the unemployment
rate dropped below a certain level, prices would not just rise
but accelerate (that is, the inflation rate would rise). The fullemployment unemployment rate came to be defined as the
nonaecelerating-inflation rate of unemployment, or NAIRU,
Statistical studies suggest that the NAIRU was higher from the
mid-1970s through the 1980s than it was in the 1960s and that it
has come down somewhat in the 1990s. This evolution has been
attributed to a variety of factors, including changes in the demographics of the labor force. For example, the United States now has
a more mature labor force, as a consequence of the aging of the
baby-boom generation, and more mature workers tend to experience less unemployment than younger ones. Although the NAIRU
is an indicator of the risk of inflation, estimates of the NAIRU have
a wide band of uncertainty and should be used carefully in
formulating policy. The NAIRU implicit in the Administration's
forecast has drifted down in recent years and is now within a range
centered on 5.3 percent.

DEFICIT REDUCTION AND THE CURRENT EXPANSION
The economy was out of the 1990-91 recession when President Bill
Clinton took office, but the recovery was weak and job growth
appeared slow. Budget deficits were very large, partly because of the
recession but also because the structural deficit remained large. The
President's economic program sought to get the economy moving again
while bringing the budget deficit under control. It was based on the
idea that reducing the Federal budget deficit would bring down interest rates and stimulate private investment. With a responsible fiscal
policy in place, and with favorable developments in inflation and productivity, the decline in the unemployment rate to less than 5 percent
did not lead to interest rate hikes that could have choked off the




24

expansion prematurely. In fact, the economy witnessed a combination
of low consumer price inflation and low unemployment that compared
favorably with the low "misery index" achieved in the late 1960s. (The
misery index is the sum of the inflation and unemployment rates.) This
time, however, inflation is tame rather than rising.
Judged by the objectives of stabilization policy (inflation and unemployment), the current economic expansion has been very successful
(Table 1-1). Three-quarters of the way through the eighth year of expansion, inflation remains low even though the unemployment rate has
been below most estimates of the NAIRU. This situation stands in
marked contrast to the sharply rising inflation experienced at the end of
TABLE 1-1.— Stabilization Policy Indicators in Three Long Expansions
First
6 years

Item

Last
12 months

7th year

1961-69
Core inflation ratel 2
Unemployment rate

18
5.1

44
3.8

59
35

44
7.2

44
5.3

51
53

3.1
6.3

2.3
4.8

2.5
4.5

1982-90
Core inflation rate1.2
Unemployment rate

. .

.

1991-present3
Core inflation rate1 2.
Unemolovmentrate
1
Average annual percent change in the
2
Average rate for the period (percent).
3

consumer price index for all items excluding food and energy.

Through December 1998.
Note. Based on seasonally adjusted data.
Sources: Department of Labor (Bureau of Labor Statistics) and National Bureau of Economic Research.

the 1960s expansion and the milder price acceleration seen at the end of
the 1980s expansion. To be sure, this good inflation performance has
been aided by favorable conditions such as a continuing sharp decline in
computer prices, a drop in oil prices, rapid growth of industrial capacity,
and downward pressure on prices of traded goods due to weakness in
the world economy. And, as discussed in Chapter 2 of this Report, the
Administration (as well as the consensus of private forecasts) projects
a moderating of growth over the next 2 years. What is significant,
however, is that the actions taken over the past 6 years to reduce the
budget deficit created conditions in which the Federal Reserve could
accommodate steady noninflationary growth. And, of course, the strong
economic performance helped improve the budget balance even
further.
Growth in GDP has also been solid. With slower growth in the working-age population and slower trend productivity growth since the
early 1970s, it is understandable that GDP has grown more slowly




25

than it did in the 1960s (Table 1-2). Moreover, growth over the 1980s
expansion partly reflects how far below potential output the economy
was at the start of that expansion, which followed a deep recession,
rather than a particularly strong underlying growth trend. Finally,
growth in aggregate income matters for some purposes, but productivity growth is what matters for real wages and a rising standard of living over the longer term. And productivity growth has continued relatively strong well into this expansion—it has not exhibited the decline
that often occurs late in expansions. Nevertheless, the rate of productivity growth over this expansion remains well below that achieved in
the 1960s, before the productivity slowdown.
TABLE 1-2.—Economic Growth Indicators in Three Long Expansions
[Average annual percent change]
From
previous
peak1

From
trough

Item

1961-69
Real GDP
Civilian noninstitutional population
Civilian labor force .
Nonfarm business sector productivity

4.8
15
1.7
3.0

4.3
15
17
28

37
12
1.6
13

26
12
16
10

30
10
1.2
15

26
10
11
14

1982-90
Real GDP
Civilian noninstitutional population
Civilian labor force
Nonfarm business sector productivity
1991-present2
Real GDP
Civilian noninstitutional population
Civilian labor force
Nonfarm business sector productivity
1
Peaks of 1960II, 19801, and
2

Through 1998 III.

1990 HI.

Note. Based on seasonally adjusted data, except population.
Sources-. Department of Commerce (Bureau of Economic Analysis), Department of Labor (Bureau of Labor Statistics), and
National Bureau of Economic Research.

Relatively slow productivity growth continues to prevent the kind of
wage and income growth that produced a doubling in living standards
between 1948 and 1973. As discussed in Chapter 3, however, the sustained tight labor market that this expansion has created in the past
few years has brought benefits to the vast majority of American workers, including groups that had fallen behind over the past two decades
or so, such as low-wage workers and minorities. A labor market like
that of today has numerous benefits. It increases the confidence of job
losers that they will be able to return to work; it lures discouraged
workers back into the labor force; it enhances the prospects of those
already at work to get ahead; it enables those who want or need to
switch jobs to do so without a long period of joblessness; and it lowers




26

the duration of the typical unemployment spell. It can reduce longterm structural unemployment by providing jobs and experience to
younger and less skilled workers, thus increasing their longer run
attachment to the labor force. In short, a sustained tight labor market
helps the rising tide of economic growth lift all boats.
This expansion has illustrated how the mix of monetary and fiscal
policy can affect the composition of output. Unlike the expansion of the
1980s, which saw an expansionary fiscal policy restrained by tight
monetary policy, the current expansion has taken place under conditions of fiscal restraint and an accommodative monetary policy. The
1980s policy mix brought with it relatively high real interest rates,
declining net national saving and investment, and a large current
account deficit, which changed the United States from the world's
largest creditor Nation to its largest debtor. Strong performance by the
U.S. economy in the 1990s is again associated with a strong dollar and,
most recently, a widening trade deficit, as the United States has continued to absorb foreign goods while weakness abroad has reduced
demand for U.S. goods. On balance, however, the current account
deficits of the 1990s have been the result of generally rising net
national investment remaining greater than generally rising net
national saving.
The current account balance depends on the gap between saving and
investment. But future growth depends on the levels of saving and
investment. Since 1993, net national saving has increased by about 3
percentage points as a share of GDP, to better than &/2 percent in the
first three quarters of 1998. The current expansion has been distinguished by the large contribution of private fixed investment to GDP
growth and the negligible contribution of government spending
(Chart 1-2). Strong investment has already been associated with
strong growth in capacity, which has helped keep inflation in check,
and may have contributed to maintaining growth in productivity as
the expansion has matured. Chapter 2 discusses this investment boom
in greater detail.

CONCLUSION
Through a combination of sound policy, other favorable conditions,
and of course the energetic efforts of millions of American workers and
businesses, the current economic expansion has achieved both high
employment and low inflation. Longer run trends in productivity and
population growth will ultimately determine how fast the economy
grows. But the investment that has driven the current expansion
should pay off in stronger growth and productivity and higher future
standards of living than otherwise would have been the case. With the
Federal budget once more under control, large deficits will not
constrain future policy choices.




27

Chart 1 -2 Contributions to Economic Growth in Three Long Expansions
More than a third of the increase in real GDP in the current expansion came from
fixed investment.
Share of total increase in GDP (percent)

1961-69

1982-90

1991-present

Sources: Department of Commerce (Bureau of Economic Analysis), National Bureau of Economic
Research, and Council of Economic Advisers.

PRESERVING FISCAL DISCIPLINE
Reducing the Federal budget deficit has been a centerpiece of this
Administration's economic policy. Between 1993 and 1997 the deficit
came down steadily. Last year, for the first time since 1969, the budget was in the black, with the largest surplus as a share of GDP in
over 40 years.
The Administration now projects substantial surpluses in the unified Federal budget well into the future. (The unified budget includes
both on-budget and off-budget Federal Government programs.) With
no further action, however, the aging of the U.S. population and continued growth in health care spending per person would eventually
push the budget back into deficit. The favorable near-term outlook has
provided an important opportunity to address these longer term problems. In his 1999 State of the Union address, the President presented
his plan to use much of the projected budget surpluses to help save
Social Security and strengthen Medicare, while preserving the fiscal
discipline that has been so hard won over the past 6 years.
REACHING SURPLUS
Except during wars and economic downturns, the Federal budget
has stayed roughly balanced for most of the Nation's history. Yet the
large budget deficits that emerged in the early 1980s persisted




28

throughout that decade of peace and economic expansion, and then
worsened in the 1990-91 recession (Chart 1-3). In 1992 outlays
exceeded receipts by $290 billion, or 4.7 percent of GDP. When the
President took office in January 1993, the deficit was projected to
reach almost $400 billion in 1998 and over $600 billion in 2003,
assuming no change in policy. By 1998, however, receipts exceeded
outlays by $69 billion, or 0.8 percent of GDP. (All references to years
in this section are fiscal years running from October through
September, unless otherwise noted.)
Chart 1-3 The Federal Budget Balance, 1946-98
After a period of persistent large deficits in the 1980s, the Federal budget surplus in
1998 was the largest as a share of GDP since 1957.
Percent of GDP

6

1946

1952

1958

1964

1970
1976
Fiscal years

1982

1988

1994

Source: Office of Management and Budget.

Between 1992 and 1998 the Federal budget balance improved by
about 5l/2 percent of GDP. In an accounting sense, this dramatic
change is attributable in roughly equal parts to an increase in receipts
and a decline in outlays, both as shares of GDP. More fundamentally,
three forces have been at work: policy changes, faster-than-anticipated
economic growth, and higher-than-expected tax revenues, even after
adjusting for faster economic growth.
In 1993 the President and the Congress enacted a deficit reduction
package designed to cut over $500 billion from the deficits expected to
accumulate over the following 5 years. The program slowed the growth
of entitlements and extended the caps on discretionary spending put in
place in 1990. It raised the tax rates of only the 1.2 percent of taxpayers with the highest incomes, while cutting taxes for 15 million working families. Four years later the President and the Congress finished




29

the job of reaching budget surplus by passing the Balanced Budget Act
of 1997, which incorporated additional deficit reduction measures.
Strong economic growth also played an important role in reducing
the deficit. Faster-than-expected growth created more income and
more tax revenue. In addition, it reduced unemployment insurance
benefits and outlays for other means-tested entitlement programs—
although the effect of better economic performance is considerably
smaller on the spending side than on the revenue side.
Finally, technical factors boosted receipts and depressed outlays
over and above what policy changes and macroeconomic conditions
can account for. In 1997 and again in 1998, higher-than-anticipated
individual income tax collections were by far the largest source of
technical differences on the revenue side. These appear to have
arisen from higher capital gains realizations and changes in the
distribution of income among taxpayers (a shift toward more taxable
income in the higher brackets), most likely reflecting strong stock
market performance. An important technical factor on the spending
side has been lower-than-expected outlays for Federal health
programs (primarily Medicare and Medicaid), most likely reflecting
slower growth in health care costs economy-wide.

FISCAL POLICY IN AN ERA OF SURPLUSES
Achieving a surplus in the Federal budget has provided the foundation for tackling longer term problems. Indeed, balancing the budget
has been the critical first step in improving the Nation's future fiscal
and economic strength. The most important of the longer term problems is posed by the aging of the population, with its implications for
future imbalances in Social Security and Medicare.
Before turning to this issue, however, it is worth emphasizing that
achieving long-run fiscal discipline does not, and should not, preclude
the possibility of running a short-run deficit if needed for stabilization
purposes. The automatic stabilizers in the budget will continue to be
the most important instrument of fiscal policy for muting short-term
fluctuations in economic activity. But as Japan's current problems
remind us, an economy can become mired in stagnation to such an
extent that discretionary fiscal stimulus may be appropriate. The
elimination of large structural budget deficits frees fiscal policy to
undertake such a role if needed.
The Demographic Challenge and Social Security
Social Security is an extremely successful social program. For 60
years it has provided Americans with income security in retirement
and protection against loss of family income due to disability or death.
Social Security retirement benefits are indexed for inflation and provide
a lifetime annuity—a package that has been difficult if not impossible
to obtain in the financial marketplace. In any case, fewer than half of




30

all individuals aged 65 and older received any private pension benefits
in 1994. Social Security benefits are the largest source of income for
two-thirds of those in this age group and the only source for 18 percent
of them. Social Security has achieved dramatic success in helping
reduce the poverty rate among the elderly from 35 percent in 1959 to
10.5 percent in 1997. But Social Security is more than just a pension
plan: it is a family protection plan, and nearly every third beneficiary
is not a retiree. For example, one of every six 20-year-olds will die
before reaching retirement age. For the average wage earner who dies
leaving a spouse and two children, Social Security provides survivors'
benefits roughly equivalent in value to a $300,000 life insurance policy.
In addition, three of every ten 20-year-olds will become disabled for
some period during their working lives, and for them Social Security
provides disability protection.
The most commonly used yardstick to measure the financial soundness of the Social Security system is the 75-year actuarial balance—the
difference between expected income and costs over the next 75 years.
The Social Security actuaries now project that the current balance in
the trust fund, together with projected revenues over the next 75 years,
will be insufficient to fund the benefits promised under current law. By
2013 payroll contributions, together with the part of income tax receipts
on Social Security benefits that is deposited in the trust fund, are
expected to fall short of benefits. By 2021 the shortfall is expected to
exceed the trust fund's interest earnings, so that the fund will begin to
decline. And by 2032 the trust fund is expected to be depleted, although
contributions would still be sufficient to pay about 75 percent of current-law benefits thereafter. Of course, future taxes and benefits will
depend on a variety of economic and demographic factors that cannot be
predicted perfectly, so the actual problem may be smaller—or larger—
than we now believe. Nevertheless, the actuaries' intermediate projections imply that the imbalance in the old age, survivors, and disability
insurance program (OASDI, the main component of Social Security)
over the next 75 years amounts to around 2V* percent of taxable payroll
(which equals about 1 percent of GDP today).
The key factors contributing to the projected OASDI imbalance
are improvements in life expectancy and a reduction in birth rates,
which have put the United States on a path of rapid decline in the
number of employed workers for every retiree. When the Social
Security Act was passed in 1935, the life expectancy of a 65-year-old
American was about 13 years. Today, life expectancy for a 65-yearold is 18 years and rising. Meanwhile people are retiring earlier. In
1950 the average age for first receiving Social Security retirement
benefits was 68; today it is 63. As a consequence of these changes,
the ratio of employed workers to retirees has fallen from about five
to one in 1960 to three and a half to one today. In only 30 years' time
it will be just two to one and still falling.




31

In addition to its effects on Social Security retirement and disability
benefits, this demographic transition will have important effects on the
Medicare and Medicaid programs as well as on the broader economic
environment. Medicare is a Federal program that pays for health care
for the elderly and certain disabled persons; Medicaid is a joint Federal-State program that provides medical assistance, including nursing
home care, to those with low incomes among the elderly, the disabled,
pregnant women, children, and members of families with dependent
children. Both programs face steeply rising costs over time as the
population ages and as the cost of providing medical care likely rises
further. Federal spending on Medicaid is financed out of general
revenues. Spending on Medicare is financed in two parts: hospital
insurance (part A) is funded through the hospital insurance payroll
tax, whose proceeds go to a dedicated trust fund, and supplementary
medical insurance (part B) is funded through general revenues and
monthly premiums paid by beneficiaries. The intermediate projections
of the Medicare actuaries imply that the hospital insurance trust fund
will be exhausted in 2008.
For the Nation as a whole, the core of the problem is how to provide
a high standard of living for both workers and retirees in the next century, even though a smaller share of the population will be in the work
force than today. A natural solution is to make workers more productive, by increasing investment in both physical and human capital.
Investing in productive capital expands the total economic pie, and
that is the prerequisite to meeting the retirement costs of the babyboom generation without unduly burdening future workers. The key to
accomplishing this is to increase national saving. The Federal Government can play its part by maintaining fiscal discipline. Indeed, the
President's proposal to use much of the currently projected budget
surpluses for Social Security and Medicare reform would add about
2 percent of GDP to the contribution of government saving to national
saving over the next 15 years.
The Administration's Policy
In his 1998 State of the Union address, the President proposed to
reserve the budget surplus until agreement had been reached on a
plan to secure the financial viability of Social Security. To accomplish
this task, the President suggested a process of public education and
discussion, followed by the forging of a bipartisan agreement. The
President later set forth five principles to guide the reform process:
• Strengthen and protect Social Security for the 21st century. This is
an overriding goal, and it rules out proposals that fail to provide a
comprehensive solution to the solvency problem. For example, a
plan to divert existing payroll taxes into a new system of individual
accounts, without other, offsetting changes, would fail the test to the




32

extent that it would reduce Social Security's revenues and make the
existing imbalance even larger.
• Maintain universality and fairness. The current program provides
benefits on a progressive basis, and ensuring progressivity is an
important standard by which reform proposals should be judged.
• Provide a benefit that people can count on. Any proposed reform of
Social Security must continue to offer people a secure base for
retirement planning.
• Preserve financial security for low-income and disabled beneficiaries.
The commitment to the disability and survivors' insurance aspects
of the OASDI program must be maintained.
• Maintain fiscal discipline. Fiscal discipline is essential to ensure
that the emerging budget surpluses are not drained before Social
Security reform has been addressed, and that fiscal policy plays a
helpful role in preparing for the retirement of the baby-boomers.
In his 1999 State of the Union address, the President put forward a
comprehensive framework for Social Security reform that satisfies these
principles. First, about three-fifths of the projected budget surpluses over
the next 15 years would be transferred to the Social Security trust fund.
Second, about a fifth of the transferred surpluses would be invested in
equities to achieve higher returns, just as private and State and local government pension funds do. The Administration intends to work with the
Congress to ensure that these investments are made by the most efficient
private sector investment managers, independently and without political
interference. These two steps alone would extend the solvency of the
Social Security system until 2055. Third, the President called for a bipartisan effort to make further reforms to Social Security that would extend
its solvency to at least 2075.
The President repeated his commitment to "save Social Security first."
He also stated that—if Social Security reform is secured—the remaining
projected surpluses over the next 15 years should be dedicated to three
purposes. First, about 15 percent of the projected surpluses would be
transferred to the Medicare trust fund. The Administration, the Congress, and the Medicare commission should work to use these funds as
part of broader reforms. Even without such reforms, however, the transfers would extend the projected solvency of the Medicare trust fund to
2020. Second, about 12 percent of the projected surpluses would be used
to create Universal Savings Accounts, which would help people save
more for their retirement needs. The government would provide a flat tax
credit for Americans to put into their accounts and additional tax credits
to match a portion of each dollar that a person voluntarily puts into his
or her account. These accounts would not be part of the Social Security
system but would provide additional retirement resources. The
remainder of the projected surpluses over the next 15 years would be




33

reserved to improve military readiness and to meet pressing domestic
priorities in such areas as education and research.
Within this framework, the national debt of the United States would
decline dramatically. Debt held by the public would fall from about 45
percent of GDP today to less than 10 percent in 2014. That would be
the smallest burden of government debt on the economy since the
United States entered World War I in 1917.

MEETING THE INTERNATIONAL CHALLENGE
This Administration has been committed from the start to outwardlooking trade and investment policies. And in his 1999 State of the
Union address the President called for a new consensus in the Congress to grant him traditional trade-negotiating authority that permits
trade agreements negotiated with other nations to be submitted to an
up-or-down Congressional vote without amendment. At the same time
he proposed the launch of an ambitious new round of global trade
negotiations within the World Trade Organization. The general principle behind the Administration's international economic policy is that
open domestic markets and an open global trading system are a better
way to raise wages and living standards over the longer term than are
trade protection and isolationism. Recent strains on the fabric of the
international economy have increased the allure of protectionism in
some quarters. But the main lesson should be that it is essential to
promote growth in the world economy, to help crisis-stricken economies
recover, and to reform the international financial system in ways that
make future crises less likely without abandoning the benefits that
come with increased international trade and investment flows.
During the year and a half that has elapsed since the collapse of
the Thai currency in July 1997, Asia's currency crisis has developed
into a more widespread crisis affecting many countries around the
globe. As the crisis has spread, it has impacted global commodity
markets, impaired economic development, and imposed extraordinary hardship in the crisis-afflicted countries, all the while posing
risks to growth worldwide, including in the United States and other
industrial countries. According to projections by the International
Monetary Fund (IMF), global growth is now expected to reach a
modest 2.2 percent in 1999, which represents a decline both from
the 4.2 percent rate attained in 1997 and from its long-run historical
average of 4 percent.

CONTAINING THE CRISIS AND PROMOTING RECOVERY
Since the crisis began, the United States has led the international
community's efforts to promote world economic growth, to stabilize
international financial conditions, and to implement reforms to reduce




34

the vulnerability of the international system to future crises. These
initiatives are described in detail in Chapters 6 and 7.
A first prerequisite for restoring strong world economic performance
is strong growth in the industrial countries that are the main
customers of the crisis-afflicted economies. This need has been clearly
recognized and addressed in both words and deeds by the United
States and its partners among the Group of Seven (G-7) large industrial nations. In October the G-7 finance ministers and central bank
governors issued a joint statement indicating that, in their view, the
balance of risks in the world economy had shifted. With inflation low
and well controlled, countries should commit themselves to
preserving or creating the conditions for sustainable domestic growth.
Monetary conditions were subsequently eased in the key industrial
countries. In the United States, the Federal Reserve reduced the
Federal funds rate three times, helping restore confidence and
liquidity. Japan, Canada, and most of the major European countries
also lowered interest rates. Japan, a country in deep recession whose
recovery is particularly critical to the growth prospects of its crisisafflicted Asian trade partners, has also taken steps to provide fiscal
stimulus and has committed substantial resources to strengthen its
financial system. Much remains to be done, however, and many private
forecasts are for continuing contraction in Japan. Although it is premature to conclude that the rest of the world economy is out of peril,
conditions have improved noticeably since October, when it appeared
that the world might be headed into a generalized global credit crunch.
It is important to emphasize that, in serving as an engine of global
growth during this period, the United States will inevitably see an
increase in its already sizable trade deficit, and some sectors, particularly those heavily exposed to trade, will experience disproportionate
impacts. The result may be a rise in calls for protection, and it will
therefore be important to find constructive approaches to the
disruptions caused by trade. The United States remains committed to
outward-looking, internationalist policies and has urged the crisisimpacted countries to keep their own markets open.
Beyond working to ensure growth in the industrial world, the
Administration has focused since the onset of the crisis on the need to
contain the international contagion of financial disruption and to
restore the confidence of market participants. The Administration has
supported the IMF in its goal of providing financial assistance to countries in crisis that are willing to implement the reforms needed to
restore economic confidence and strengthen the underpinnings of their
economies, including their corporate and financial sectors. The emphasis of IMF programs on financial sector reform reflects the growing
consensus, discussed in Chapter 6, that structural weaknesses, particularly in the process of financial intermediation, were a key element in
initiating the crisis. It appears that many countries in East Asia have




35

now made considerable progress toward establishing the foundation
for recovery. In addition, an IMF stabilization package for Brazil, supplemented by bilateral financing, was arranged in November.
As the crisis spread, the Administration recognized that its contagion
threatened even countries that had taken great strides in implementing
sound macroeconomic and structural policies and had worked to
strengthen the fundamentals of their economies. The President therefore
proposed, and the G-7 leaders agreed to establish, an enhanced IMF facility to provide contingent, short-term lines of credit that could be drawn
upon by countries pursuing strong, IMF-approved policies, accompanied,
as appropriate, by additional bilateral finance. As the scope of the crisis
widened, the resources of the IMF became increasingly strained. A key
step in expanding them was for the United States to meet its own financial obligations to the organization. The Administration proposed, and in
October the Congress approved, $18 billion in funding, opening the way
for about $90 billion of usable resources to be provided by all IMF members to the liquidity-strapped institution.
Ib address the suffering inflicted by the crisis on the citizens of the
affected countries, the Administration has proposed policies to stimulate
economic recovery and alleviate hardship. Another decade of lost growth
like that endured during the debt crisis of the 1980s would be intolerable,
and the Administration recognizes that the industrial countries must do
more than just serve as good customers for the products of crisis-impacted
countries. One problem that is delaying recovery in several of the Asian
crisis countries is that large numbers of companies and banks, including
many that were in good health before the crisis, now face unmanageable
debt burdens. Companies and financial institutions in Indonesia, the
Republic of Korea, and Thailand, for example, face substantial overhangs
of bad debt as a result of high interest rates and currency depreciations. Tb
address this systemic problem, the President proposed the exploration of
comprehensive plans to help countries restructure debt and restore the
flow of credit needed for firms to operate. The Asian Growth and Recovery
Initiative, jointly announced by the United States and Japan in November
1998, is designed to promote this goal. In addition, many crisis-afflicted
countries lack effective social safety nets. Therefore the Administration
also sought, and agreement was reached, to establish a new World Bank
emergency facility to support social safety net spending focused on the
most vulnerable citizens of these countries.

STRENGTHENING THE INTERNATIONAL FINANCIAL
ARCHITECTURE
The most important issue raised by the recent international crisis is
how to make sure the world never again faces another one like it.
Unfortunately, there is no silver bullet—no simple solution that would
simultaneously guarantee countries access to global capital flows and
eliminate the risk of a crisis of confidence once again withdrawing that




36

access. Even so, international agreement is finally emerging on some
steps that can and should be taken to strengthen the architecture of
the financial system, to make it less crisis prone. Chapter 7 is devoted
to a discussion of potential reforms, including those proposed in recent
reports by working groups of central bank governors and finance ministers from a group of industrial and key emerging market countries,
informally dubbed the G-22.
The G-22 reports focus on measures to increase transparency and
accountability in the financial operations of individual countries, of
private financial and corporate institutions, and of international
financial institutions such as the IMF and the World Bank. Greater
transparency and accountability will enhance the availability,
relevance, and reliability of information that investors need to
evaluate the risks in lending. The reports also propose a series of
reforms to strengthen domestic financial institutions: improvements in
prudential supervision and regulation are particularly needed to
create stronger incentives for borrowers and lenders to weigh risks and
act with appropriate discipline, thereby reducing the odds of a crisis.
Finally, the reports identify policies that could improve the
coordination of creditors' interests during a future crisis and promote
its orderly, cooperative, and equitable resolution.
Again, no magic formula can prevent the recurrence of currency and
financial crises. But things can be done to limit their frequency, their
impact, and their pernicious tendency to spread from country to country
Therefore, even as the United States works to contain the current crisis
and help restore growth in the affected parts of the world, it will also
work with the G-7 and through other international forums to implement
reforms of the international financial architecture that will help achieve
this longer term goal. Such reform is crucial for restoring support in an
international economic system based on trade and investment flows that
can contribute to rising global living standards in the 21st century.
Additional necessary steps are described in Chapter 7.

EMBRACING CHANGE WHILE PROMOTING FAIRNESS
The tradeoff between efficiency and fairness is a classic problem in
formulating economic policy. Policies that confer benefits broadly
sometimes confer them unevenly, imposing relatively high costs on a
relative few. In well-functioning markets, the broadly distributed gains
usually outweigh the concentrated losses—often many times over. But
those who are hurt naturally seek relief through the political process,
and if government responds by substituting political remedies for
market outcomes, it can dissipate the aggregate gains.
Increases in the Nation's standard of living over the longer term
require that we embrace change and do not retreat from the constant




37

succession of new opportunities and challenges of an ever-changing
world. However, considerations of fairness require that we ensure that
no part of our society bears disproportionate losses for the sake of
achieving net gains for the rest. More pragmatically, achieving political
consensus to embrace worthwhile change sometimes requires looking
out for the interests of those who are visibly harmed, even if that
means sacrificing some portion of the potential gains. Three very different areas of current policy concern—agriculture, corporate mergers,
and international trade—illustrate these difficult choices.

AGRICULTURE
For more than a decade, a new, bipartisan farm policy has directed
farmers to seek income increasingly from markets rather than from
Federal subsidies. The 1994 Crop Insurance Reform Act and the Federal Agriculture Improvement and Reform (FAIR) Act of 1996 sought to
replace the farm income safety net, based on government-managed
price and income supports, with a system in which farmers manage
their own risk through crop diversification, transactions in futures
markets, and government-subsidized crop and revenue insurance.
However, when the President signed the FAIR act, he expressed his
concern that it failed to provide an adequate safety net for family farmers, and he reiterated his commitment to work with the Congress to
strengthen that safety net.
Farmers prospered in the first few years under the FAIR act. Net
farm income rose to a record $53.4 billion in 1996 and remained high
in 1997, as export demand grew and world commodity prices rose from
1995 levels. In addition, farmers benefited from the transitional payments provided by the 1996 act, which boosted farm income by about
$6 billion in both 1996 and 1997. In 1998, however, farm income fell, as
commodity prices dropped sharply and farmers confronted a number of
weather-related problems. In response, the Administration insisted on
a $6 billion emergency assistance package to boost farm income. Net
farm income in 1998 is estimated to have been about $48 billion, only
slightly less than the 1997 figure of $50 billion. The President has also
pledged to work with the Congress this year to reform the crop
insurance program and farm income assistance.
The experience of 1998 reflected the tension inherent in a farm policy
that is market oriented yet tries to provide an adequate safety net for
family farmers. Current farm policy encourages farmers to make their
planting decisions on an economic basis rather than with an eye to government support, while helping them manage risk by subsidizing
insurance against both poor harvests and low prices. But to the extent
that farmers have a reasonable expectation that the government will
step in to provide assistance in the event of an emergency, they
are unlikely to take all the appropriate risk management steps
themselves. This gives rise to a moral hazard problem that cannot be




38

eliminated entirely, because the government will always be under strong
pressure to address what are perceived to be legitimate disasters.

MERGERS
The United States is in the midst of its fifth corporate merger wave
of the century. The value of all mergers and acquisitions announced in
1997 was almost $1 trillion, and activity in 1998 was over $1.6 trillion.
By almost any quantitative standard the current boom is substantial.
Measured relative to the size of the economy, only the spate of trust
formations at the turn of the century comes close to the level of current
merger activity. Measured relative to the market value of all U.S.
companies, however, the 1980s boom was roughly comparable in size.
Qualitatively, the current merger wave is similar to those before the
1980s in that it is taking place in a strong stock market, with stock
rather than cash the preferred funding source. But unlike the pre19808 transactions, many recent mergers are neither purely horizontal
(between firms in the same or similar industries) as in the 1890s and
1920s, nor purely conglomerate (between firms of different industries)
as in the 1960s and 1970s. Rather, they represent market extension
mergers, in which the merging companies are in the same industry but
serve different and noncompeting markets, or synergy-seeking mergers, in which companies in related markets combine to take advantage
of economies of scope. In contrast to the 1980s, when many mergers
were primarily motivated by financial considerations, today's mergers
are primarily motivated by business strategy and the need to respond
to fundamental shifts in a rapidly changing economy.
The main reason managers give for undertaking mergers is to
increase efficiency. Mergers can encourage greater efficiency by reducing excess capacity, taking advantage of economies of scale and scope,
and stimulating technological progress. Over time, such efficiencies
translate into lower prices and better products and services for consumers. However, mergers that increase market concentration can
raise prices and reduce consumer benefits. In addition, mergers, like
other forms of economic change, can disrupt established patterns of
economic and social activity.
When the antitrust agencies—the Federal Trade Commission and
the Antitrust Division of the Department of Justice—review mergers,
they do so with an eye to protecting competition for the benefit of consumers. They pay considerable attention to market definition—over
how large a market the merged firm might exert market power, and
what competitors it faces in that market—so that the effects of a merger are evaluated in the proper context. Antitrust enforcement has been
rigorous in this Administration, and mergers receive careful scrutiny.
Most have been found to be procompetitive or competitively neutral.
But the minority that would reduce competition and harm consumers
have been challenged. The current approach, which is aggressive




39

without being heavy handed, stands in contrast to both the strong
antimerger bias of the 1960s and 1970s and the much more lax
enforcement of the 1980s.
Antitrust enforcement does not and probably should not encompass
the broader range of possible economic and social effects that may be
associated with mergers, such as job loss, change in ownership structure (including reduced diversity of ownership), and localized service
disruptions. Such effects result not only from mergers but from many
other forces as well, including technological change, deregulation, and
international competition. Indeed, mergers may be more a symptom of
broad change in the economy than a cause. The policies that are best
for dealing with these changes include promoting full employment and
macroeconomic stability, developing a skilled and well-trained work
force, providing adequate unemployment insurance and other safety
net programs, and helping communities adapt to economic change. All
of these have been part of the Administration's economic strategy of
the last 6 years.

INTERNATIONAL TRADE
International trade policy has long been a laboratory for addressing
the challenge of balancing efficiency and fairness and for providing
political safeguards for those who might be hurt by change and would
otherwise work to block it. For example, U.S. trade law recognizes that
imports can sometimes be associated with labor displacement and
other disruptions, and it provides for several kinds of relief in these circumstances. So-called escape clause relief allows temporary measures
to be adopted in cases where rising imports are judged to have been a
substantial cause of serious injury to an industry. And antidumping
duties may be imposed in cases where foreign producers are judged to
have dumped their products in U.S. markets (that is, sold them at less
than fair value).
Trade adjustment assistance is an alternative way of dealing with
disruptions associated with trade. Since 1962 U.S. trade laws have
provided for some kind of cash assistance for workers who have lost
their jobs as a result of trade. In addition, the North American Free
Trade Agreement (NAFTA) provides assistance to workers displaced
from companies that have shut down their U.S. plants and moved production to Mexico or Canada, and the Administration has supported
extending such assistance to all workers displaced by the movement of
work to another country. In theory, trade adjustment assistance provides compensation from the broad class of those who gain from trade
(represented by the taxpayers generally) to those who lose from it
(workers in trade-impacted industries), without interfering with the
efficiency-enhancing effects of freer trade. In practice, of course, things
are more complicated if adjustment assistance interferes unduly with
workers' incentives to find new jobs—another moral hazard issue.




40

Nevertheless, adjustment assistance illustrates the general principle
that it is desirable to address the disruption caused by positive change
rather than block the change itself.

PROMOTING PROSPERITY FOR ALL AMERICANS
From the end of World War II until the early 1970s, the rising tide of
economic growth raised wages and incomes uniformly for American
families of all incomes. For example, just as the median family income
approximately doubled between 1947 and 1973, so did the incomes of
families near the top and the bottom of the income spectrum (Chart 1-4).
Since the early 1970s, however, the pace of income growth has slowed
and income inequality has increased. Median family income in 1997
was about 10 percent higher than in 1973, but income at the 95th
percentile (that is, an income exceeded by that of only 5 percent of
American families) was more than a third higher, whereas income at
the 20th percentile was virtually unchanged.
This Administration has recognized from the start that the stubborn
problems of slow productivity growth and rising income inequality
were among the greatest challenges it would face. And there are heartening signs that we may have turned the corner. As mentioned earlier,
productivity growth has remained relatively strong in this expansion,
whereas in past expansions it has tended to flag as the expansion
matures. Moreover, as detailed in Chapter 3, low-wage and minority
Chart 1-4 Growth in Real Family Income, 1947-97
Growth in real family income has slowed and inequality has increased since 1973.
Percent of 1973 level
140

95th percentile

120

100

80

*~

"

20th percentile

60

40
1947

1951

1955

1959

1963

1967

1971

1975

Source: Department of Commerce (Bureau of the Census).




41

1979

1983

1987

1991

1995

workers are enjoying some of the best labor market conditions they
have seen in decades. The Bureau of the Census reports that the Gini
coefficient (a standard measure of income inequality) has recorded no
statistically significant increase since 1993, and the poverty rate fell to
13.3 percent by 1997, from 15.1 percent in 1993. These trends are
encouraging. However, it is difficult to disentangle the cyclical effects
arising from the particular strengths of this expansion from possible
improvements in underlying trends.
Maintaining macroeconomic stability is a necessary condition for
ensuring that all Americans participate in the country's growing prosperity. But it is also important to continue to develop policies that
address the challenges of a changing economy and a changing society,
especially in the areas of education and training. Chapter 3 discusses
the Administration's initiatives to improve schools, open the doors of
college to all Americans, strengthen America's work force development
system, and promote lifelong learning.

CONCLUSION
The U.S. economy remained strong in 1998 despite a serious weakening in the international economy and considerable financial turmoil.
The economy's ability to weather these storms is testimony to the
soundness of the policies of the past 6 years and to the underlying
strength of the current economic expansion. Although there is much
for us all to be proud of in this economic success, the Nation still faces
important challenges as it prepares for the 21st century. Chapter 2 of
this Report reviews domestic macroeconomic developments in 1998
and presents the Administration's forecast for 1999 and beyond.
Chapter 3 analyzes the benefits of the strong labor market in this
expansion. Chapter 4 provides a context for the national discussion of
Social Security reform by analyzing work, retirement, and the
economic well-being of the elderly. Chapter 5 examines the role of
innovation and regulation as determinants of long-term economic
performance, with particular emphasis on antitrust policy, environmental regulation, and restructuring of the electric power industry.
Finally, Chapters 6 and 7 analyze recent events in the international
economy from the standpoint of increased globalization of capital flows
and the evolution and reform of the international financial system.




42

CHAPTER 2

Macroeconomie Policy
and Performance
THE U.S. ECONOMY PERFORMED very well in 1998. Real output
increased 3.7 percent at an annual rate over the first three quarters of
the year, once again exceeding the predictions of most forecasters.
Nonagricultural jobs increased by about 2.9 million during the year,
and the average unemployment rate for the year dropped to 4.5 percent, its lowest level since 1969 (Chart 2-1). The consumer price index
rose by only 1.6 percent, its second smallest increase since 1964 (Chart
2-2), and other measures of inflation were even more muted.
Yet the turmoil in foreign economies that began in the summer of
1997 did not leave the U.S. economy unscathed. Net exports declined
sharply during 1998, as a result of slow or negative economic growth in
a number of the United States' trading partners and a substantial rise
in the foreign exchange value of the dollar since early 1997. Moreover,
during the late summer and fall, domestic financial conditions, which
had been highly conducive to economic growth for several years,
became much less favorable. Investors' sudden flight from risky assets
reduced some businesses' access to capital and raised the cost of
borrowing for others.
Despite these dampening forces, the economic expansion maintained
considerable momentum. A significant factor underlying this strong
performance was the continued practice of responsible fiscal policy:
1998 will be remembered as the year the Federal Government recorded its first unified budget surplus since 1969. The surplus contributed
to the low level of interest rates during the year, increased the capital
available for private investment, and provided a more stable backdrop
for private economic decisions. Monetary policy also provided an
important boost to the economy. The Federal Reserve held overnight
interest rates steady for much of the year, but it reduced rates three
times in quick succession when the financial environment deteriorated
in the fall. Following the Federal Reserve's actions, financial stresses
in the United States abated considerably, with risk premiums in
interest rates declining once again and the issuance of corporate
debt picking up.
The first section of this chapter reviews the course of the U.S. economy during 1998. The next section focuses on developments in domestic financial markets, which were exceptionally turbulent last year.




43

Chart 2-1 Unemployment Rate
In 1998 the average unemployment rate fell to its lowest level since 1969.
Percent

12

10

60:Q1 63:Q1 66:Q1 69:Q1 72:Q1 75:Q1 78:Q1 81:Q1 84:Q1 87:Q1 90:Q1 93:Q1 96:Q1
Source: Department of Labor (Bureau of Labor Statistics).

Chart 2-2 Inflation Rate
Inflation remained low in 1998, with the consumer price index recording its second
smallest rise since 1964.
Percent

16

14
12
10

60:Q1 63:Q1 66:Q1 69:Q1 72:Q1 75:Q1 78:Q1 81:Q1 84:Q1 87:Q1 90:Q1 93:Q1 96:Q1
Note: Data are four-quarter percent changes in the CPI.
Source: Department of Labor (Bureau of Labor Statistics).




44

Then the chapter explores two other macroeconomic topics that have
received a lot of attention recently: the boom in business equipment
investment during the past several years, and the "year 2000" problem
involving computers. The final section of the chapter analyzes the outlook for the U.S. economy. When the economic expansion continued
through December, it became the longest recorded peacetime expansion. The Administration expects the expansion to continue during
1999, albeit at a more moderate pace.

THE YEAR IN REVIEW
Real gross domestic product (GDP) increased 3.7 percent at an annual rate between the fourth quarter of 1997 and the third quarter of
1998 (the latest period for which data were available when this Report
went to press). Preliminary data suggest that GDP growth likely
remained in this neighborhood in the fourth quarter, bringing growth
for the year as a whole close to that recorded in 1996 and 1997. Once
again, business investment in equipment made a substantial contribution to GDP growth, while a larger drag from net exports was offset by
a stepup in household spending on goods, services, and housing from
its already robust pace of the previous several years.

THE STANCE OF MACROECONOMIC POLICY
Both fiscal policy and monetary policy made vital contributions to
the excellent performance of the U.S. economy during 1998.

Fiscal Policy
The passage of the Omnibus Budget Reconciliation Act of 1993
marked the beginning of a significant shift toward fiscal restraint by
the Federal Government. The Balanced Budget Act of 1997 put in
place the additional policies needed to bring the budget into sustained
balance. In fiscal 1998 (October 1997 through September 1998), the
Federal Government capped 6 years of dramatic budget improvement
by recording the first budget surplus since 1969. The $69 billion surplus was the largest as a share of GDP since 1957. The goal of eliminating the budget deficit by 2002 was accomplished 4 years ahead of
schedule. Net interest payments—the fiscal burden imposed by the
large deficits of the past—remain substantial, however, at 15 percent
of total expenditures and 3 percent of GDP in fiscal 1998. Excluding
these payments, the "primary" budget balance, the difference between
tax revenue and expenditures for current needs, reached a surplus of
more than $300 billion.
Although the attainment of a budget surplus marks a major fiscal
milestone, the case for continued fiscal responsibility remains strong.
Demographic trends point to an aging of the population that will




45

significantly increase expenditures on Social Security and government
health programs over the next several decades. The emergence of a
budget surplus offers the opportunity to prepare for this challenge.
Indeed, the unified budget surplus includes the current excess of
receipts over benefit payments in the Social Security system, which
amounted to $99 billion in fiscal 1998. (Apart from the Social Security
system, the Federal Government had a deficit of $30 billion in 1998,
producing the unified surplus of $69 billion.) The Administration has
stated that none of the unified surplus should be used until the future
solvency of Social Security is assured. The President has repeatedly
reaffirmed this commitment to "save Social Security first," and he presented a specific proposal for Social Security reform in his recent State
of the Union address.
Monetary Policy
In conducting monetary policy during 1998, the main focus of the
Federal Reserve's concerns shifted from a potential reversal of the
favorable trend of inflation to a potential weakening of economic activity. When the year began, the target Federal funds rate—the rate
banks charge each other for overnight loans—stood at 5.5 percent,
where it had been for the preceding 9 months. However, the surge in
economic growth during the first several months of the year heightened the concern of the Federal Open Market Committee (FOMC, the
Federal Reserve's principal monetary policy decisionmaking body) that
intensifying use of the economy's resources might lead to a buildup of
inflationary pressures. The FOMC did not adjust the Federal funds
rate in response, but it noted in March that a tightening of monetary
policy was more likely than an easing in the months ahead.
Despite a slowing of growth in the second quarter, the FOMC
believed that the balance of risks still pointed to the possibility of rising inflation over time. It therefore maintained a bias toward future
monetary tightening. Indeed, labor costs accelerated during 1998 in a
very tight labor market. However, the rapid deterioration in financial
conditions in the late summer and fall persuaded the Federal Reserve
that a much less restrictive monetary policy was appropriate. The
FOMC dropped its bias toward tightening at its August meeting, cut
the Federal funds rate by 25 basis points (0.25 percentage point) at its
September meeting, did so again in mid-October in an unusual
between-meeting move, and lowered the funds rate yet again at its
November meeting. In both October and November the Federal
Reserve Board also cut the discount rate—the rate it charges banks to
borrow from the Fed—by 25 basis points, to maintain the discount
rate's traditional position below the funds rate. The easing of monetary
policy was not a reaction to any observed weakness of economic activity but rather a preemptive or forward-looking action intended to sustain the expansion. The cumulative 75-basis-point reduction in the




46

target Federal funds rate brought that rate to 4.75 percent, its lowest
value in 4 years.

TURMOIL IN FINANCIAL MARKETS
The past year was a tumultuous one in U.S. financial markets. The
first half of the year witnessed an extension of the highly favorable
conditions that had prevailed over the previous several years. Yields
on intermediate- and long-term Treasury securities moved in a fairly
narrow band that was centered a little below the levels that had prevailed during the latter part of 1997. Most households and firms
enjoyed ample access to credit on good terms. Meanwhile equity prices
rose sharply, with most major indexes hitting record highs in July
that ranged from 17 to 28 percent above their values at the beginning
of the year.
Financial conditions during the second half of the year were less
favorable. In mid-August Russia devalued the ruble and effectively
defaulted on its domestic debt, marking a new round of the financial
crisis in emerging markets that had begun in Southeast Asia a year
earlier. As the international financial turmoil worsened, investors'
desire to shift their portfolios away from emerging market
economies—a trend that had been apparent over the previous year—
intensified, and they began to shy away from all but the safest and
most liquid assets in the markets of the industrial countries. (Chapter
6 discusses developments in international financial markets at
length.) Among U.S. assets, the shift of investor preferences away
from private securities and toward government securities caused the
difference, or spread, between private and Treasury yields to spike
upward. Yields on higher quality corporate debt were little changed
(although the spread between these yields and Treasury yields
widened as the latter fell), but businesses with lower credit ratings
faced much higher costs of borrowing. Moreover, issuance of corporate
debt slowed sharply, banks tightened terms and standards on business loans (although the volume of lending actually increased significantly), and stock prices dropped steeply.
Financial conditions improved markedly after mid-October, partly in
response to the Federal Reserve's interest rate reductions. Risk
spreads narrowed, debt issuance accelerated, and stock markets
rebounded to new highs. Nevertheless, some American businesses
apparently faced more limited access to credit and a higher cost of borrowing at the end of 1998 than at the beginning of the year.

COMPONENTS OF SPENDING
As already noted, real GDP increased at an annual rate of 3.7 percent between the fourth quarter of 1997 and the third quarter of 1998
(Table 2-1), close to the pace of the previous 2 years. Quarterly output




47

TABLE 2-1.— Growth of Real GDP and its Components During 1997 and 1998
Growth rate
(percent)

Item
1997

Contribution to GDP growth
(percentage points)
1997

1998

1998

3.8

3.7

3.3

3.9

5.4
13.5
11.0
-4.5

2.5
.2
1.0
1.1

3.7
.5
1.2
-.5

14.0

Consumer expenditures
Housing
Business fixed investment .. ..
Exports of goods and services
Imports of goods and services
Government consumption
and gross investment

3.8

3.9

3.7
4.2
9.8
9.6

Final sales

3.7

3.4

Gross domestic product

9.0

-1.7

1.1

-1.1

Change in inventories

.3

.2

.5

1.4

-.2

Note: Data for 1997 are for fourth quarter to fourth quarter; data for 1998 are for fourth quarter
to third quarter at annual rates.
Contributions are approximate.
Detail may not add to totals because of rounding.
Source: Department of Commerce (Bureau of Economic Analysis).

during 1998 was quite erratic: after surging at a 5.5 percent annual
rate in the first quarter, real output growth slowed to 1.8 percent in the
second quarter, and then picked up to 3.7 percent in the third quarter.
This irregular pattern was strongly influenced by sharp swings in
inventory investment (discussed below). Final sales, which increased
by about 3V2 percent during 1997, rose at a fairly steady 4% percent
annual rate during the first half of 1998, grew at a much slower pace
in the third quarter, and apparently accelerated a little at the end of
the year. Among the components of final sales, net exports exerted a
substantial drag during the first half of the year but less during the
third quarter, as their rate of decline eased. Meanwhile private domestic final sales—consumption, housing, and business fixed investment—
increased less rapidly in the third quarter than during the first half of
the year.
Household Spending
Real personal consumption expenditures (PCE) surged during the
first half of 1998, increasing at roughly a 6 percent annual rate.
PCE growth downshifted during the third quarter to about a 4 percent pace (which still exceeded its growth rate for the four quarters
of 1997) and remained strong in the fourth quarter, according to the
partial data available.
Demand for homes was also very strong. Although real residential
investment represents less than 5 percent of GDP, its growth during
the first three quarters of 1998 accounted for over 10 percent of GDP
growth. Single-family housing starts were the highest since 1978, and
new and existing single-family home sales reached record levels. The
percentage of Americans who own their own home reached an all-time




48

high of 66.8 percent in the third quarter (the latest period for which
data are available). Growth in homeownership was especially fast for
groups that have been underrepresented in the past, such as blacks
and Hispanics.
This robust growth in household spending during 1998 occurred
against a backdrop of extremely favorable fundamentals. First, real disposable income maintained its solid upward trend, rising about 3% percent at an annual rate over the first three quarters (based on the PCE
chain-weighted price index). Second, household wealth soared to an
extraordinary level—almost six times income—as a result of the dramatic runup in stock prices (Chart 2-3). This expansion in household
Chart 2-3 Net Worth and the Personal Consumption Rate
Surging household wealth in 1998 helped increase consumer expenditures and
reduce the personal saving rate.
Percent

Ratio
6.0

100

Personal
consumption rate
(right scale)

Ratio of net worth to
disposable personal income
(left scale)
5.2

4.0

0

:

1960

1964

1968

1972

1976

1980

1984

1992

1996

Note: Personal consumption rate is the ratio of personal outlays to disposable personal income. It
equals one minus the personal saving rate. Household net worth for each year is constructed as the
average of net worth at the beginning and the end of the year. Data for 1998 are approximate.
Sources: Department of Commerce (Bureau of Economic Analysis), Board of Governors of the
Federal Reserve System, and Council of Economic Advisers.

resources permitted spending to grow significantly faster than disposable income. Indeed, the personal saving rate—measured by the difference between disposable income and consumer outlays, as a percentage of disposable income—fell sharply again during 1998. After
averaging roughly 4.5 percent between 1992 and 1994, this rate
dropped to about 3 percent in 1996, about 2 percent in 1997, and about
% percent in the first three quarters of last year. (Last summer's
revision of the measured saving rate is discussed later in this chapter.)
Household spending was also spurred by low interest rates and a
ready availability of credit. In particular, housing affordability soared,
as interest rates on 30-year fixed rate mortgages averaged more than
l
/2 percentage point below their 1997 values. Indeed, mortgage credit




49

expanded more rapidly during the first three quarters of 1998 (the latest available data) than in any year since 1990. Over the same period,
consumer credit grew at a somewhat faster rate than in 1997 but well
below the torrid pace of 1994 and 1995. Total household debt appears
to have increased faster than disposable income in 1998 for the sixth
year in a row. Nevertheless, delinquency rates on consumer loans
remained close to their 1997 values, and delinquency rates on mortgages stayed quite low. Personal bankruptcy filings reached a new
record high in the third quarter of 1998, but the rate of increase over
the preceding year was well below the pace recorded between 1995 and
mid-1997.
Last year's Economic Report of the President included an extended
discussion of the long-term upward trend in the bankruptcy rate. During 1998 the Congress considered various proposals to reform the
bankruptcy law, and both the House and the Senate passed reform
bills; however, the two houses were unable to agree on a compromise
bill that incorporated the Administration's key principles for bankruptcy reform. The Administration supports reform of the bankruptcy
law that would require both debtors and creditors to act more responsibly: troubled debtors who can repay a portion of their debts should do
so, but creditors should treat debtors fairly, in keeping with the creditors' superior expertise and bargaining power.
Consumer sentiment was buoyant during 1998, probably reflecting
both the favorable fundamentals and expectations for continued economic growth. The consumer sentiment index of the Survey Research
Center at the University of Michigan posted its highest reading in
more than 30 years in early 1998. This optimism waned somewhat in
the fall, but the Michigan index finished the year near the top of its
historical range.

Business Investment
Real business fixed investment grew extremely rapidly during the
first half of 1998, increasing over 15 percent at an annual rate, and
then rose at a slower pace, on average, in the second half of the year.
Sharp gains in purchases of producers' durable equipment (PDE)
accounted for more than the total advance in business fixed investment during the first three quarters. Real PDE investment increased
about 16 percent at an annualized rate over that period, exceeding its
robust average annual growth rate over the preceding 3 years of 11
percent. Among its components, spending on computers and peripheral equipment surged 75 percent in real terms over the first three quarters of 1998 (annualized), and real spending on communications equipment jumped about 20 percent (annualized). (The causes and
consequences of the recent boom in equipment investment are discussed further below.) Real PDE was little changed in the third quarter but apparently increased strongly again in the fourth quarter. Both




50

the third-quarter deceleration and the fourth-quarter pickup likely
reflected fluctuations in motor vehicle sales.
Business investment in structures fell a bit in real terms during the
first three quarters of 1998. Office construction was boosted by low and
declining vacancy rates, but other commercial construction was sluggish, and industrial construction was held down by ample factory
capacity. Spending in this category may also have been dampened by a
tightening in available financing during the third quarter, although
conditions in the commercial mortgage-backed securities market
improved noticeably by the end of the year.
Investment in business inventories varied dramatically across the
first three quarters of 1998. Inventories increased $91 billion in real
terms at an annual rate in the first quarter, and the stepup in inventory investment relative to the fourth quarter of 1997 contributed over
1 percentage point to the annualized increase in first-quarter GDP.
However, several quarters of strong inventory growth apparently persuaded businesses to reduce their rate of stockpiling in the second
quarter; in addition, a strike at the Nation's largest automaker led to a
decline in motor vehicle inventories. All told, the sharply lower rate of
inventory accumulation in the second quarter subtracted over 2*6. percentage points from second-quarter GDP growth. Inventory accumulation
ran at a moderate pace during the third quarter.

Government
Federal Government consumption expenditures and gross investment contracted in real terms over the first three quarters of 1998, following a real decline during 1997. This measure of government spending, which is included in GDP, differs from unified budget outlays in a
number of ways. Among the most important differences are that the
GDP measure includes the depreciation of government capital and
does not include transfer payments, interest, or grants to State and
local governments. Defense purchases represent about two-thirds of
Federal consumption expenditures and gross investment. During the
first three quarters of last year, a roughly 2 percent annualized
decrease in defense spending more than offset a roughly 1 percent
annualized increase in the smaller category of nondefense spending.
Consumption expenditures and gross investment by State and local
governments moved up over 2 percent at an annual rate over the same
period, just below the average pace of the previous several years.
Strong growth of household income boosted income tax collections considerably, and most State governments today appear to be in good
financial condition.

International Influences
In 1998 the Federal Reserve Board replaced its traditional index of
the foreign exchange value of the dollar with several new ones. New




51

indexes have been developed for three currency groups: a group of
major currencies that are traded heavily outside of their home markets, a group of currencies of other important U.S. trading partners,
and the aggregate of these two groups, labeled the "broad index." For
each group the Federal Reserve calculates both nominal and priceadjusted indexes; all are defined such that a rise indicates a strengthening of the dollar. Because the indexes are designed primarily to measure U.S. competitiveness in world markets, the weights of the various
currencies are based on market shares of U.S. goods in foreign markets
and of foreign goods in U.S. and third-country markets, and these
weights vary over time. Still, the new nominal index for the major currencies, when calculated retrospectively over the past 20 years, tracks
the Federal Reserve's previous index fairly closely.
The foreign exchange value of the dollar continued its advance during 1997 into the third quarter of 1998, but then fell back. All three
real indexes peaked in August or September and then declined sharply,
ending at or below their values at the end of 1997. The nominal major
currency index behaved similarly to the corresponding real index, but
the nominal broad index and the nominal index relative to other
important trading partners both increased, on net, over the year.
Real net exports (exports minus imports of goods and services)
dropped roughly $100 billion over the first three quarters of 1998,
holding down the growth rate of GDP (assuming the other components
of GDP were unchanged) by about l1^ percentage points. The negative
contribution of this category was considerably smaller in the third
quarter than in the first half of the year. The current account balance
(which includes international transactions in investment income and
transfers, as well as trade in goods and services) deteriorated during
1998 as well, owing to both the drop in net exports and an increase in
net payments of investment income to foreigners.
The decline in net exports stemmed from a combination of falling
exports and rising imports. Real exports declined by about 4 percent at
an annual rate during the first three quarters of 1998, following a 10
percent runup during 1997. This deterioration was attributable to
weaker activity in a number of foreign economies, especially in Asia, as
well as the higher value of the dollar (which itself was related to the
contrast between foreign economic developments and U.S. economic
strength). Real imports posted a 9 percent annualized advance during
the first three quarters of 1998, below their increase during 1997,
despite a sharper decline in import prices.

THE LABOR MARKET AND INFLATION
American labor markets enjoyed another excellent year in 1998,
with both employment and real wages rising at impressive rates.
(Chapter 3 includes a more extensive discussion of employment and
compensation patterns and trends.) Meanwhile core consumer prices




52

(that is, excluding food and energy prices) increased at their slowest
pace since the 1960s.

Employment
Nonfarm payroll employment expanded by about 2.9 million jobs
during 1998. The number of manufacturing jobs slipped a bit, following
small increases during 1996 and 1997. Weakness in this sector was
probably linked to declining exports of goods. However, jobs in the services sector, which accounts for about 30 percent of nonfarm employment, posted another impressive gain. Nonfarm payrolls rose to 127
million by the end of the year, an increase of nearly 17.7 million jobs
since January 1993. (Over this period, the increase in employment
reported by firms significantly exceeds that reported by households.
Part of this difference can be traced to differences in methodology
between the payroll and household surveys, but the explanation for the
remaining discrepancy is unclear.) Over 90 percent of the increase in
jobs since 1993 has been in the private sector.
The unemployment rate averaged 4.5 percent in 1998, down from 4.9
percent in 1997. After falling for 6 straight years, the unemployment
rate now stands about 3 percentage points below its January 1993
level. Indeed, the 4.3 percent rate in April and December of last year
was the lowest since February 1970. Another measure of available
workers is the sum of those who are looking for work (the official definition of unemployment) and those who would accept a job but have
not been looking (so-called marginally attached workers, which include
discouraged workers). In 1998 this combined group accounted for only
5.4 percent of the civilian labor force plus marginally attached workers, down from 5.9 percent in 1997 and 7.4 percent in 1994. The labor
force participation rate—the percentage of the population over age 16
that is either employed or looking for work—leveled off in 1998 at 67.1
percent, after trending up between 1995 and 1997. The upward trend
resulted from a marked increase in labor force participation by adult
women and a respite from the previous slide in participation among
adult men. In 1998 the participation rate for women was just below 60
percent, and that for men was almost 75 percent. The employment-topopulation ratio—the proportion of the civilian population age 16 and
older with jobs—averaged a record 64.1 percent last year.

Productivity and Compensation
Labor productivity in the nonfarm business sector increased by
about 2.1 percent on an annual basis during the first three quarters of
1998, somewhat above the 1.7 percent gain of 1997. Measured productivity has risen much faster over the past 3 years than it did between
the business-cycle peaks of 1973 and 1990, but much of the measured
surge may be attributable to methodological changes and to output




53

growth that was above the economy's long-run potential. (Recent
developments in productivity are discussed at greater length below.)
Compensation rose significantly during 1998. The employment cost
index (ECI, a measure of wages, salaries, and employer costs for
employee benefits) for workers in private industry moved up 3.6 percent (annualized) during the first three quarters of the year (according
to the latest available data), continuing its acceleration of the previous
several years. Wages and salaries increased 4.1 percent at an annual
rate, while benefits climbed 2.4 percent. For the 12-month period ending in September 1998, compensation growth in construction and manufacturing was quite close to that during the previous 12-month period, but compensation growth in the service-producing industries
picked up sharply. The acceleration in compensation was especially
pronounced in the finance, insurance, and real estate sector, likely
reflecting bonuses and commissions associated with higher volumes of
stock trading, mortgage refinancing, and other financial sector activity.
Other measures of compensation also showed substantial gains during 1998. For example, average hourly earnings increased 3.8 percent
over the year. Unlike the ECI, this series excludes benefits and covers
only production and nonsupervisory workers, among other differences.
Because consumer prices increased so little during 1998, these nominal compensation gains translated into appreciable advances in real
compensation. The increase in the ECI less the increase in the consumer price index (CPI) was 2.1 percent during the first three quarters
of 1998, compared with the solid 1.7 percent gain during 1997. The
increase in real average hourly earnings during the year was 2.4 percent, slightly above the 1997 growth rate, which was the fastest in
more than two decades.

Prices
Inflation fell again in 1998 from its already subdued 1997 pace. The
CPI increased by only 1.6 percent last year, just below its 1.7 percent
rise during 1997 and well below its 3.3 percent rise during 1996. The
chain-weighted price indexes for GDP and PCE both edged up less
than 1 percent on an annualized basis during the first three quarters
of 1998, well below their increases during the previous several years.
The CPI rose at its slowest rate since 1986 and its second-slowest since
1964; the GDP price index rose at its slowest rate since 1961.
Much of the 1998 decline in inflation can be attributed to a significant
slide in crude oil prices. Weak demand for oil in Asia together with plentiful worldwide supply helped push down CPI energy prices by almost 9
percent for the year as a whole. The so-called core CPI, which excludes
the volatile food and energy components of the broader index, increased
2.4 percent during 1998, a little above the previous year's mark of 2.2
percent. However, in January 1998 certain methodological adjustments
were made to the way the CPI is calculated; otherwise the core CPI




54

probably would have increased by about 2.6 percent last year, almost %
percentage point faster than during 1997. On the other hand, core
prices as measured by the chain-weighted price index for PCE excluding
food and energy decelerated during 1998; this index increased by only
1.2 percent at an annual rate in the first three quarters of the year, compared with a 1.6 percent rise during 1997. The CPI and PCE price
indexes differ in both coverage and methodology (as discussed later in
this chapter). But by either measure, core inflation has dropped, on net,
over the past several years. Indeed, core inflation has been lower during
the past few years than at any time since the mid-1960s.
Several factors have helped to hold down core inflation despite the
strong growth of aggregate demand and very tight labor markets. (The
forecast section of this chapter further explores the reasons for recent
low inflation.) Part of the reason why wage increases have not put
more pressure on prices has been rapid productivity growth. In addition, corporate profits stand at roughly their largest share of national
income during the past 30 years, and some wage increases have been
offset by reduced profit growth of late. Another important contribution
to low inflation has been declining prices of nonoil imports, as excess
capacity in Asia and depreciating foreign currencies have encouraged
foreign producers to reduce the dollar prices of their goods. Beyond
their direct impact on the prices paid for imports, these overseas developments have discouraged domestic producers from raising their
prices as much as they might have otherwise. Inflation has probably
also been restrained by the strong increase in industrial capacity in the
United States during this expansion. Although the unemployment rate
was at a 29-year low in 1998, the average rate of capacity utilization in
industry during the year was about equal to its long-term average.
Low inflation readings in 1998 were reinforced by a continued slide
in expected inflation. Actual inflation depends on expectations of inflation, because the wage and price increases sought by workers and
firms are influenced by the prices they expect to pay for other goods.
According to the University of Michigan's survey of households, the
median expectation for annual inflation over the next 5 to 10 years was
about 2.8 percent in the fourth quarter of 1998, slightly below the late1997 figure of 3.1 percent and well below the 3.6 percent reading of 6
years ago. Long-term inflation expectations of professional forecasters
are even lower, according to the survey conducted by the Federal
Reserve Bank of Philadelphia, but have fallen by a similar amount in
recent years.

FINANCIAL MARKETS
Through much of the current expansion, falling interest rates and
rising equity prices have provided important support to real economic
activity. Indeed, the disruptions to foreign financial markets and




55

institutions that began in 1997 initially improved financial conditions
in the United States, as shifting portfolio preferences helped to further
reduce U.S. interest rates and boost U.S. equity prices. The resulting
strength in domestic consumption and investment offset at least some
of the dampening effect of the drop in net exports. However, the worsening of international conditions in the summer of 1998 changed the
domestic financial situation dramatically. An intensified "flight to quality" by lenders and investors restricted businesses' access to credit and
raised the average cost of their borrowing. But by the end of the year a
significant easing of monetary policy and somewhat greater confidence
in the international economic outlook had produced a substantial
improvement in financial conditions.

THE EFFECT OF RISK ON INTEREST RATES AND
EQUITY PRICES
Many of the developments in financial markets over the past several years have been linked to changing perceptions of risk. Therefore, to
understand these developments, one must begin with the basic relationships among risk, interest rates, and equity prices. All ownership
of financial assets involves risk, and because people generally want to
minimize the uncertainty they face, they will hold riskier assets only if
those assets pay higher expected returns. As a result, changes in
perceived risk require adjustments in expected returns.
Consider debt securities, such as bonds. All bonds are subject to market risk, or the possibility that current yields, and therefore prices, will
change to reflect changes in market conditions. Because bondholders
generally receive fixed payments, increases in prevailing interest rates
reduce, and decreases raise, the value of outstanding bonds. Most
bonds are also subject to credit risk, or the possibility that the issuer
will default on the bond's interest payments or on repayment of the
bond's face value. Commercial paper—short-term debt securities
issued by corporations—also has credit risk, but because of its short
maturity it faces little market risk. Bank loans often have repayment
terms similar to those of bonds, and therefore banks face both market
risk and credit risk on their loans.
U.S. Treasury securities have essentially no credit risk, because
people believe that the Federal Government will always meet its
legal obligations. All private debt securities do have credit risk, and
therefore the yields on those securities exceed the "risk-free" yield
on Treasury debt. Private credit rating agencies assess the likelihood of default by private borrowers. Higher rated debt is deemed
"investment-grade," whereas lower rated debt is called "speculative," "high-yield," or "junk." Changes in perceived riskiness affect
the spreads between yields on these private debt issues and the
risk-free Treasury yield.




56

Equities clearly involve risk as well. A simple model of equity pricing
sets the price of a share of stock equal to the present discounted value
of future dividends payable on that share. One risk facing equityholders, therefore, is that of changes in a company's dividends, which are
often related to sustained changes in its earnings. Decreases in expected earnings growth reduce a stock's price-earnings ratio, or the price of
a share as a multiple of the company's current earnings. Another risk
for equityholders is that of changes in the discount rate that investors
apply to future earnings. One can view the discount rate as the sum of
the risk-free interest rate and a risk premium; increases in either component reduce the price of a share and thus the price-earnings ratio.
The average return to owning equity has exceeded the average
return to owning debt securities over most long historical periods in
the United States. Between 1946 and 1995, for example, the extra
return from holding a portfolio of shares that matches the Standard &
Poor's (S&P) 500 composite index (an index of share prices of 500
large, publicly traded U.S. firms) instead of a portfolio of Treasury bills
averaged almost 7 percent per year. Because equity returns are more
variable than bond returns, it is not surprising that equity returns are
generally higher. But the difference in returns—the equity premium—
has been larger on average than can be explained by stocks' greater
riskiness and economists' traditional assumptions about investor
behavior. The explanation for its size remains something of a mystery.

CHANGING RISK PERCEPTIONS AND FINANCIAL
MARKET DEVELOPMENTS
The behavior of debt and equity markets during much of the current
expansion suggests a substantial fall in the perceived riskiness of U.S.
financial assets. Although this apparent trend in risk perceptions abated in the summer of 1997, when financial crises enveloped several East
Asian economies, it did not reverse in significant measure until the
late summer and fall of 1998, when risk premiums increased at an
alarming rate. By the end of the year, risk premiums were declining
again but remained much higher than when the year began.
Setting the Stage: The Reduction in Perceived Risk Prior to
Mid-1997
In early 1997 both debt and equity markets reflected a significant
relaxation in investors' concern about the riskiness of financial assets
over the previous several years. Comparing instruments of similar
maturity, the spread between the average yield on Baa-rated corporate
bonds (Baa is the rating of the median corporate bond in terms of outstanding volume) and the 30-year Treasury yield was little changed
between the first half of 1993 and the first half of 1997. However, the
spread between the yield on high-yield bonds and the 10-year Treasury
yield fell by about 1% percentage points between those two periods,




57

and spreads between bank loan rates and the Federal funds rate
dropped as well. Equities also may have benefited from lower risk premiums, as a tremendous bull market raised price-earnings ratios
appreciably between late 1994 and early 1997. However, isolating the
effect of changes in risk perceptions on equity prices during this period
is difficult, because a surge in stock analysts' forecasts of earnings
growth probably also contributed to the price rise.
The observed reduction in risk premiums could have been caused by
either an increased willingness to bear risk or a reduction in the
amount of perceived risk. Because preferences toward risk probably
adjust slowly, the latter explanation is much more likely. But why did
risk perceptions change in this way? One possibility was growing speculation that the U.S. economy had entered a "new era," in which faster
trend growth of real output, lower inflation, and business cycles of
smaller amplitude or less frequency would be the norm. Another possibility was a strengthening belief that countries around the world
would continue to move toward capitalism. Such a move might reduce
the riskiness of certain investments in the United States, by improving
access to overseas markets or limiting the danger of international conflict. The spread of capitalism might also raise the expected return to
investments in developing countries; indeed, Table 6-1 and Chart 6-1
in Chapter 6 document a substantial increase in the flow of funds to
developing countries before 1997.

A Flight to Quality
In the summer of 1997 perceptions of risk began to change. As
emerging market economies in East Asia faltered, investors' desired
portfolios shifted toward U.S. assets. The actual quantities of domestic
and foreign assets in their portfolios adjusted slowly, because many
commitments are long term, and in any case, international capital
flows must be balanced by trade in goods and services and investment
income in any given year. However, asset prices adjusted quickly, with
yields and exchange rates moving to dampen potential capital flows.
Increased demand for U.S. assets, combined with an improving Federal budget outlook and downward revisions to expected inflation,
pushed U.S. interest rates down between mid-1997 and mid-1998. In
choosing among domestic assets, investors became a little more cautious, but the widening of risk spreads was generally quite limited.
Equity prices were little changed, on balance, during the second half
of 1997 but surged again during 1998. The S&P 500 jumped 22 percent
between the beginning of 1998 and mid-July, and the NASDAQ composite (an index of over-the-counter stocks, including those of many
startup and high-technology companies) rose 28 percent. Many stock
valuation measures moved further beyond their historical ranges. For
example, the ratio of stock price to lagging four-quarter earnings for
the S&P 500 reached almost 29 at the end of the second quarter, the




58

highest level in at least 40 years and almost double its average value
since 1956. Nor did low interest rates on risk-free securities fully
explain this phenomenon. The gap between the earnings-price ratio
(the inverse of the price-earnings ratio) and the real 10-year Treasury
yield—the latter measured by the difference between the nominal 10year rate and long-term inflation expectations in the Philadelphia
Federal Reserve's survey of professional forecasters—was among the
smallest in many years.
The extraordinary valuation of equities may have been partly attributable to stock analysts' expectations of very fast earnings growth.
However, some market observers worried that these expectations were
unrealistic: national income had been rising more rapidly than many
economists believed was sustainable, and corporate profits already
represented a larger share of national income than usual. Indeed,
accelerating compensation of workers left profits in the third quarter of
1998 (the latest available data) slightly below their year-earlier level.

Stresses in U.S. Financial Markets
The flight to quality intensified dramatically during the late summer
and fall of last year. The effective default on Russian government debt
in August made clear that the dangers of financial turmoil—and the
limited ability of international efforts to control that turmoil—were not
confined to East Asia. In particular, the Russian debacle heightened
fears of large-scale capital outflows from Latin America, where some
economies were, like Russia, facing large fiscal deficits. The resulting
uncertainty about future economic and financial conditions around the
world caused a sudden, stunning shift in desired portfolios toward
safer assets.
Between the end of July and mid-October, Treasury yields dropped
sharply and risk premiums on private debt spiked upward (Charts 24 and 2-5). The spread between the yield on Baa-rated bonds and the
30-year Treasury yield rose almost 80 basis points, roughly matching
its peak during the 1990-91 recession. The spread between the yield
on high-yield bonds and the 10-year Treasury yield nearly doubled,
moving from 3.7 percent on July 31 to 6.6 percent on October 14.
Wider risk spreads were apparent in the market for short-term debt
as well, with the difference between the average 3-month AA-rated
nonfinaneial commercial paper yield and the 90-day Treasury yield
rising from 53 to 118 basis points. The increase in investment-grade
bond spreads was more a reflection of falling Treasury yields than rising investment-grade yields (in fact, the latter were little changed on
net), but businesses with lower credit ratings faced substantially
higher costs of borrowing.
Part of the widening of spreads reflected greater concerns about
credit quality in an economy that appeared to be facing an increasing
risk of a sharp slowdown. Another part of the widening can probably be




59

Chart 2-4 Yields on Treasury Securities
Long- and intermediate-term Treasury yields declined in 1997 and then fell in the
summer and fall of 1998. Short-term yields also fell sharply in the second half of 1998.

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Source: Department of the Treasury.

Chart 2-5 Risk Spreads
Yield spreads between private securities and Treasury securities increased
dramatically in the summer and fall of 1998.
Percentage points
11

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Note: The investment-grade spread is the average yield on Baa-rated corporate securities less the
30-year Treasury yield. The high-yield spread is the average yield on high-yield bonds less the 10-year
Treasury yield.
Sources: Department of the Treasury, Moody's Investors Service, and Merrill Lynch.




60

attributed to the lesser liquidity of private issues at a time when
heightened uncertainty created larger liquidity premiums; we return
to this issue shortly. In addition, less risk-averse investors (such as
hedge funds, discussed later in this chapter) faced more cautious
lenders during this period, which reduced their ability to purchase
riskier or less liquid securities.
Market conditions also worsened along several other dimensions.
Issuance of new debt dropped precipitously, with public offerings of
nonfinancial corporate bonds falling roughly by half between July and
September. In the high-yield sector, issuance virtually ceased in
August and September. Dealers were reluctant to manage new offerings into the fall, probably because of the heightened uncertainty in
financial markets and greater difficulty in placing new securities.
Some firms substituted bank loans for financing in the securities market, and business lending by banks boomed. However, banks were not
immune to the rising economic uncertainty, and they tightened their
business loan standards and terms.
A further worrisome development was the increasing illiquidity of
debt markets, especially after mid-September. Bid-ask spreads
widened substantially, and dealers were less willing to enter into
large transactions at posted rates. The price of liquidity climbed, too.
So-called on-the-run Treasury securities are the most recently issued
of a given maturity, and they are traded much more actively than offthe-run securities. Because of this greater liquidity, on-the-run issues
usually offer yields that are a few basis points below off-the-run yields
of similar maturity, but this gap widened considerably for 30-year
bonds in late September. In addition, the yield spread between the
Treasury's on-the-run conventional debt and its less liquid inflationindexed debt fell much more sharply during this period than did
survey measures of inflation.
Equity prices slumped as well. Between July 17 and August 31, both
the S&P 500 and the NASDAQ lost about one-fifth of their value,
falling a little below their levels at the beginning of the year. The Russell 2000 index of small-capitalization stocks had lagged behind other
major indexes since the spring, and by the end of August it stood nearly 23 percent below its value at the beginning of the year. Equity
issuance by nonfinancial corporations declined sharply in late summer
as well.
These gyrations in financial markets took a toll on financial institutions. Share prices of money-center banks (which include some of the
largest commercial banks) and investment banks fell much more
sharply than the broad equity indexes, in the face of rising concern
about exposure to emerging markets, the quality of loan portfolios, and
possible losses from securities trading activities. Nevertheless, the
underlying strength of the commercial banking system—which
enjoyed generally high profits, low delinquency and charge-off rates,




61

and ample capital—may have helped contain the financial market
deterioration. However, several hedge funds lost large sums of money,
and one very large fund narrowly averted default (as discussed in the
next section).
All of these developments raised fears of a credit crunch that could
have significantly limited firms' access to external financing and thereby slowed capital investment and GDP growth. (Household borrowing
did not appear to be hampered by market conditions, as mortgage
rates declined and banks reported no change in terms or standards on
consumer loans.) As already noted, the FOMC cut the Federal funds
rate by 1A percentage point at the end of September, but market participants' desire for safety and liquidity showed no sign of diminishing. In
response, the FOMC cut the funds rate by a further 1A point in midOctober, explaining that "growing caution by lenders and unsettled
conditions in financial markets more generally are likely to be
restraining aggregate demand in the future." The October drop in the
funds rate was the first policy change between regularly scheduled
FOMC meetings since 1994, suggesting to market participants that
the Federal Reserve had taken an aggressive easing posture.

Calm Restored
After this second rate cut, the stresses in financial markets began to
abate. Risk and liquidity premiums fell back a little, and debt issuance
picked up in both the investment-grade and the high-yield sectors. The
FOMC made a third ^-point cut in the Federal funds rate at its
November meeting, noting that, despite an improving situation in
financial markets, "unusual strains" were still present.
Financial market conditions stabilized further during the remainder
of the year, and growth in bank loans eased as borrowers returned to
the capital markets. Nevertheless, risk spreads remained significantly
wider than when the year began, and Treasury yields stayed low. The
yield on Baa-rated corporate debt was little changed in 1998, but that
on high-yield debt increased by about 1% percentage points. Banks
reported a further tightening of loan terms and standards in November, but average interest rates on their commercial and industrial
loans were lower in late 1998 than in late 1997.
Equity markets were little changed, on net, between the end of
August and early October, but from there they climbed rapidly to new
highs (Chart 2-6). Between October 8 and year's end, the S&P 500
gained 28 percent and the NASDAQ 55 percent. For the year as a
whole the S&P 500 and the NASDAQ were up 27 and 40 percent,
respectively, but the Russell 2000 lost 3 percent. The Wilshire 5000,
the broadest index of U.S. equity prices, finished 1998 roughly 22 percent above its value at the end of 1997, achieving its fourth consecutive
year of double-digit increases.




62

Chart 2-6 Equity Prices in 1998
Stock markets rose strongly in the first half of 1998, fell sharply between mid-July
and the end of August, and surged again after early October.
Index (12/31797 = 100)
150

140

130

*~

NASDAQ

\

120

110

100

90

80

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep

Oct

Nov Dec

Sources: National Association of Securities Dealers Automated Quotations and Standard & Poor's.

The striking changes in financial market conditions over the past
year and a half had—and will continue to have—important effects on
real economic activity in the United States. Before discussing these
effects, however, it is worth examining in greater detail one type of
financial institution that was hit especially hard by the turmoil of last
year.

NEW CONCERNS ABOUT HEDGE FUNDS
In late September a group of large financial institutions urgently
invested $3.5 billion in Long-Term Capital Management (LTCM), a
prominent hedge fund, to prevent its imminent collapse. Representatives of these firms—which were already LTCM's principal creditors—
had been encouraged to undertake the rescue by the Federal Reserve
Bank of New York, which feared that a sudden failure of the fund could
significantly disrupt financial markets. The New York Federal Reserve
Bank did not set the terms of the rescue or invest public money. Nevertheless, the episode prompted serious questions about the economic
effects of hedge funds and appropriate public policy toward them.

What Are Hedge Funds ?
The label "hedge fund" is usually applied to investment companies
that are unregulated because they restrict participation to a relatively
small number of wealthy investors. No precise figures are available,
but the amount invested in hedge funds as of mid-1998 appears to




63

have been around $300 billion. Hedge funds follow a variety of investment strategies, but they often make combinations of transactions
with various counterparties designed to focus their risk exposure on
certain specific outcomes. (Derivative instruments, such as futures
and options, can be an efficient way to structure these transactions,
but are not the only way.) For example, if a fund expects the yield
spread between mortgage-backed securities and U.S. Treasuries to
decline, it can buy the former and sell the latter short (which means
selling securities that the fund has borrowed but does not own). Identical movements in the yields of the two types of securities will be a
wash for the fund, but a narrowing of the yield spread will make it a
profit by increasing the value of the mortgage-backed securities relative to the Treasuries. Of course, this focusing of risk does not eliminate risk, as an unexpected widening of the spread will create a loss for
the fund.
Hedge funds can play a useful economic role by bearing risk that
would otherwise be borne by more risk-averse businesses and individuals. Hedge funds can also reduce inefficiencies in asset pricing by
exploiting discrepancies in prices relative to economic fundamentals or
historical norms. Their activity causes these discrepancies to narrow,
increasing liquidity by ensuring that other market participants can
buy and sell securities at consistent prices.
LTCM had made a variety of investments all over the world, focused
primarily on the expectation that various financial market spreads
and volatilities would converge to their historical norms. Instead, the
flight to quality in 1998 increased volatility and sharply widened risk
and liquidity spreads in many markets simultaneously, causing many
of LTCM's bets to lose money. Compounding these bad outcomes was
the huge amount of borrowing that LTCM had used to finance its
transactions; through this heavy leveraging of its equity capital, the
fund had raised its return when its investment decisions were correct,
but had also reduced its margin for error. Before its final crisis, LTCM
had only $4 billion or so of equity capital, but over $100 billion in
assets and sizable positions in futures contracts, forward contracts,
options, and swaps.
If LTCM had defaulted, its creditors and counterparties could and
probably would have tried to cover their losses by selling the collateral
LTCM had pledged to them. The counterparties would also have tried
to rehedge newly exposed positions, which would have put additional
strains on markets at a time when risk and liquidity premiums were
already rising sharply. Because many of LTCM's investment positions
were quite specialized, or were large relative to the markets in which
they traded, rapid liquidation and rehedging by counterparties would
probably have caused big swings in some market prices. The New York
Federal Reserve Bank was especially concerned not about the direct
losses that creditors and counterparties would have incurred, but




64

about the potential impact of large price movements on other investments by these firms and on the investments of the many individuals
and institutions not associated with LTCM.
By investing several billion dollars of new capital in LTCM, its principal creditors and counterparties prevented the firm's immediate
default. These firms probably saved money as a result, because
unwinding LTCM's portfolio gradually was expected to be much less
disruptive to markets and prices than a sudden liquidation.
Regulation of Hedge Funds
The near collapse of LTCM raised questions about the proper regulatory stance toward hedge funds and other institutions that actively
trade securities and derivative instruments. Currently, hedge funds
face far less regulatory scrutiny than do many other financial institutions. No government agency is charged with their direct supervision.
For example, hedge funds are exempt from the Investment Company
Act of 1940 (which provides for regulation of mutual funds) because of
their restrictions on participation. However, hedge funds' creditors and
counterparties provide some degree of "market regulation" by evaluating the funds' collateral, investment positions, and equity capital
before doing business with them. The care exercised by these creditors
and counterparties is, in turn, monitored to some extent by the government regulators of those institutions. These regulators include the
Federal Reserve Board and the Office of the Comptroller of the Currency (OCC) for banks, the Securities and Exchange Commission
(SEC) for broker-dealers, and the Commodity Futures Trading
Commission (CFTC) for futures commission merchants.
Of course, lending institutions' techniques for managing their credit
risks are not perfect, and market regulation cannot prevent all problems arising from hedge funds. Moreover, some financial firms that are
likewise largely unregulated, such as certain broker-dealer affiliates,
also engage in leveraged trading strategies. Following the near collapse of LTCM, the Secretary of the Treasury called on the President's
Working Group on Financial Markets, which he chairs, to study the
implications of the operations of firms such as LTCM and their relationships with their creditors. (This working group was established by
executive order in 1988. Its members are the Secretary of the Treasury,
the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the SEC, and the Chairperson of the CFTC.
Additional participants are the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the New York Federal Reserve
Bank, the OCC, the National Economic Council, and the Council of
Economic Advisers.)
Should there be more government regulation of hedge funds and
other highly leveraged financial institutions? One justification for regulating financial institutions generally is to reduce systemic risk—the




65

chance of a general breakdown in the functioning of financial markets.
This risk arises largely from the asymmetry of information that is
intrinsic to capital markets. Because market participants have difficulty judging the financial health of institutions, they cannot fully
understand the risk of their investments. Moreover, bad news about
one firm can have a contagion effect on others, reducing their access to
capital as well. This spillover effect may have been exacerbated by
financial innovation, which has linked the fortunes of financial institutions in ever more complex and subtle ways. Further, when financial
institutions fail, asset prices in illiquid markets may overshoot their
long-run values.
But even if market participants had better information and more
fully understood the risks of their investments, they might take more
risk than is socially desirable. Of course, every firm has an incentive
to restrain its risk taking in order to protect its capital, and firm managers have an incentive to protect their own investments in the firm.
However, no firm has an incentive to limit its risk taking in order to
reduce the danger of contagion for other firms. In addition, some
firms take more risk because of deposit insurance, which makes it
easier for banks to attract depositors without having to demonstrate
financial soundness. Some very large firms may take additional risk
because they believe that the government views them as "too big to
fail" and would step in to prevent their collapse.
The collapse of LTCM might have posed a larger systemic risk than
the collapse of almost any other hedge fund at almost any other time.
Few institutions are as large or as leveraged as LTCM was, and the
market strains that its default would have provoked would have been
especially severe during the extreme worldwide flight to quality and
liquidity that occurred last fall. One can argue that the risk management practices of both hedge funds themselves and the firms
with which they deal should give more weight to the likelihood of
such unusual events, and indeed the experience of 1998 may have
chastened financial institutions in this regard.
Despite the risks just described, determining the appropriateness of
government regulation of hedge funds and other leveraged institutions
is not straightforward. The study by the President's working group,
expected to be completed early this year, will address a number of possible regulatory issues, including disclosure and leverage. With respect
to disclosure, it appears that LTCM's creditors lent to the fund on the
basis of insufficient information, or failed to analyze adequately the
information they had. Market participants now appear to be demanding more disclosure from hedge funds, which is a positive development.
The working group is exploring whether the government should
require additional disclosure to counterparties, creditors, investors,
regulators, or the public.




66

With respect to leverage, the degree of LTCM's leverage caused the
risks in its portfolio to be transmitted more rapidly to other market
participants. Creditors to hedge funds now appear to be reducing the
amount of leverage they are willing to provide, which is another positive development. In addition, bank regulators can employ their existing regulatory tools to induce banks to make more prudent decisions.
The working group is evaluating whether the government should do
more to discourage excessive leverage, and if so, what specific steps
might be appropriate.

FINANCIAL MARKET INFLUENCES ON SPENDING
The financial market developments described in this section have
had a significant impact on household and business spending. This
impact has been felt through several channels, including wealth
effects, effects on interest rates, and effects on the availability of
credit to businesses.
Wealth and Consumption
An increase in a person's net worth raises the amount that he or she
can consume, either today or in the future. Statistical evidence suggests that consumer spending has tended to rise or fall by roughly 2 to
4 cents per year for every dollar that stock market wealth rises or falls.
This wealth effect usually occurs over several years, but much of the
adjustment is seen within 1 year. The effect might be larger today than
in the past because more Americans own stocks: the Survey of
Consumer Finances shows that 41 percent of U.S. families owned
stocks directly or indirectly in 1995, compared with 32 percent in 1989.
However, there is little direct evidence on this point.
The dramatic increase in stock prices over the past few years has
provided a significant impetus to consumer spending. Applying the
historical relationship cited above to the change in total household
wealth (which includes other assets and liabilities as well as stocks),
one could conclude that rising wealth boosted consumption growth by
nearly a percentage point during 1998, after a similar increase during
1997. Robust spending has, in turn, led to a dramatic decline in
households' saving out of income from current production, with the
personal saving rate falling to a historical low of 0.2 percent in the
third quarter of last year. (Net private saving, which combines personal saving and undistributed corporate profits, has also declined as
a share of national income during the past few years, but less sharply
than has personal saving.)
The sharp decline in household saving in recent years became more
apparent after the annual revision of the national income and product
accounts in July 1998. Prior to the revision, capital gains distributions
by mutual funds had been included in personal income (just as interest payments are), which bolstered measured personal saving. But




67

these distributions do not represent income from current production,
and the revised data correctly exclude them from income. The revision
lowered the measured personal saving rate, and by a greater amount
in more recent years because capital gains distributions by mutual
funds were greater. However, the revision had no effect on private
saving, because the markdown of personal saving was automatically
offset by an increase in the measured undistributed profits of the
mutual fund industry.

Interest Rates and Consumption
Changes in interest rates affect household spending through various
channels. Consider a decline in rates. This tends to boost the value of
stocks and bonds, which has a wealth effect on consumption as discussed above. In addition, lower rates encourage spending on houses,
automobiles, and other durable goods often bought on credit, while
reducing the return on new saving. Moreover, a decline in interest
rates augments homeowners' cash flow by reducing payments on
adjustable rate mortgages and spurring mortgage refinancing. At the
same time, however, lower interest rates work to reduce spending in
several ways. Household cash flow is diminished by a drop in interest
income, and people who are saving to reach a target level of wealth
need to save more to reach that target. On balance, lower rates probably stimulate household spending, and higher rates probably dampen
it, but the magnitude of these effects is unclear.
Nominal interest rates on Treasury securities reached unusually low
levels last year. For example, for the year as a whole, the average
10-year Treasury yield was the lowest since 1967, and at the peak of
the financial market stress in early October the 10-year yield touched
its lowest value since 1964. Real Treasury yields (as measured by the
difference between nominal yields and survey measures of inflation
expectations) were also low, although less exceptionally so. Interest
rates facing household borrowers did not fall as sharply as did Treasury rates last year; for example, interest rates on consumer loans
from commercial banks were only slightly lower in 1998 than in 1997,
and credit card rates were roughly unchanged. But rates on fixed rate
mortgages averaged more than Vi percentage point lower in 1998 than
in 1997.

Financial Conditions and Business Investment
For several years through mid-1998, businesses enjoyed ready
access to external funding on favorable terms. This circumstance was
one of the factors encouraging the brisk pace of capital investment, as
reported in the following section. Last year's sudden flight to quality
changed this situation abruptly, raising borrowing costs for some businesses and limiting others' ability to borrow. However, one should not
overstate the impact of these developments on economic activity. As




68

noted earlier, investment-grade borrowers faced essentially the same
cost of long-term debt capital at the end of 1998 as at the beginning,
although riskier borrowers saw their borrowing costs rise. Financial
markets and institutions continued to funnel substantial funds to businesses. Moreover, most businesses do not face an overwhelming burden of servicing existing debt. The aggregate debt-service burden for
nonfinancial corporations—measured as the ratio of net interest payments to cash flow—fell roughly by half between 1990 and 1996 and
then slipped a little further in the following 2 years.

THE INVESTMENT BOOM
Business investment in plant and equipment has grown remarkably
rapidly during the 1990s. Chart 2-7 shows that real business fixed
investment has contributed about one-quarter of real GDP growth
during this expansion, compared with an average of roughly 15 percent
during previous expansions since World War II. Outlays for producers'
Chart 2-7 Contribution of Investment to Overall GDP Growth
Total business fixed investment has accounted for a much larger share of real GDP
growth in this expansion than in previous ones, due entirely to equipment investment.
Percent of real GDP change

30

Average of previous
postwar expansions

Total business fixed investment

Producers' durable equipment

Nonresidential structures

Sources: Department of Commerce (Bureau of Economic Analysis) and National Bureau of Economic
Research.

durable equipment have been especially strong, increasing at an average annual rate of more than 10 percent in real terms and contributing
more than twice as large a share of GDP growth as during previous
expansions. In contrast, real investment in nonresidential structures
has barely changed, on net, contributing almost nothing to output
growth during this period.




69

CAUSES OF THE BOOM
The pace of investment depends on decisions made by myriad individual firms, each reacting to a variety offerees. Still, one can identify
at least four general factors that have contributed to the recent surge
in investment.
Rapid Output Growth
One key factor is the rapid growth of output during the past several
years. In a simple model, a firm's desired capital stock depends on its
expected sales, as well as on the cost of capital and other factors. An
increase in expected sales induces an increase in desired capital, which
requires investment. The level of investment thus depends on the
change in sales; if one views sales as the rate at which firms are distributing their products, the change in sales is an acceleration of that
rate, and this sort of model is therefore called an "accelerator model."
A pure accelerator model expresses aggregate investment only as a
function of output growth, typically with several lags built in to capture both a gradual adjustment of sales expectations and a gradual
adjustment of the capital stock to its desired level. The capital stock
adjusts gradually because firms often choose to install new capital
slowly, in order to reduce the cost of installation. Research using more
elaborate accelerator models shows that they can explain a large share
of the variation in equipment investment over the past several
decades, and a smaller share of the variation in building of nonresidential structures. Of course, the observed correlation between output
growth and investment reflects not only the influence of the former on
the latter but also the reverse: strong investment also boosts output.
Nevertheless, strong demand outside of the investment sector in recent
years has clearly helped to boost investment demand through this
accelerator effect.
Robust Profits
A second factor underlying strong investment has been robust corporate profits. Although profit growth waned in 1998, economic profits
(defined as book profits adjusted for changes in inventory valuation
and for capital consumption) represented almost 12 percent of national income in the first three quarters of 1998, well above the 1980s peak
of about 9 percent. (Profits peaked at over 14 percent of national
income in the 1960s.) The increasing share of profits in national
income over the past 5 years is mirrored by a declining share of net
interest payments (Chart 2-8); the sum of these components now represents roughly the same portion of national income as during the
1980s. Thus, much of the runup in profits has been simply a shift in
capital income from debtholders to equityholders. After-tax profits—
which represent the funds available for payments to stockholders and




70

Chart 2-8 Corporate Profits and Net Interest Payments
The corporate profit share of national income has risen recently while the net interest
share has fallen. The sum of these pieces of capital income has varied less.
Percent of national income

20

Corporate profits + net interest

75:Q1

77:Q1

79:Q1

81:Q1

83:Q1

85:Q1

87:Q1

89:Q1

91:Q1

93:Q1

95:Q1

97:Q1

Note: Corporate profits includes inventory valuation and capital consumption adjustments.
Source: Department of Commerce (Bureau of Economic Analysis).

for investment—have also made up an unusually large share of national
income in recent years.
Profits can affect investment in two ways. First, high returns to
existing capital may help persuade firms that the return to new capital
investment will be high as well. Second, high profits allow firms to purchase capital using internally generated funds, which are generally
less expensive to the firm than external funds (the proceeds of borrowing or the sale of shares). This difference in cost arises because lenders
know less about a firm's investment projects and financial condition
than the firm itself does. Their informational disadvantage creates socalled agency problems, which include both moral hazard (firms may
alter their behavior in ways that raise their lenders' risk without the
lenders' knowledge or acquiescence) and adverse selection (firms that
seek external funds will tend to be those with riskier projects). Thus,
the information asymmetry between firms and potential lenders raises
the cost—and sometimes restricts the quantity—of funds raised in
financial markets.
Plentiful External Capital
A third reason for the impressive recent pace of investment has been
the ready availability of external funding. In particular, the dramatic
reduction in Federal Government borrowing has left more resources
available for private use. The domestic source of new loanable funds in
the economy is national saving, which equals saving by the Federal




71

Government plus saving by households, businesses (in the form of
undistributed after-tax profits), and State and local governments.
Since 1992, net private and State and local government saving has
declined slightly as a share of GDP, but the surge in Federal receipts
relative to expenditures has more than offset that dip (Chart 2-9). Over
this period, net national saving has more than doubled as a share of
GDP, rising from 3 percent to 6% percent—its highest level since 1984.
(Net saving equals gross saving less the consumption of fixed capital.)
Chart 2-9 Net National Saving and Its Components
Net national saying has increased substantially since 1992, owing entirely to an
increase in saving by the Federal Government.
Percent of GDP

15

Private and State and local
government saving

10

-5

Federal Government saving

-10
80:Q1

82:Q1

84:Q1

86:Q1

88:Q1

90:Q1

92:Q1

94:Q1

96:Q1

98:Q1

Source: Department of Commerce (Bureau of Economic Analysis).

An alternative approach to evaluating the availability of external
funding is to focus on the price or cost of those funds—the interest
rate—rather than the quantity. Both price and quantity depend on
business investment decisions. A high level of desired investment creates strong demand for loanable funds, pushing up their cost and perhaps increasing the quantity of funds supplied by savers. Therefore, if
saving and desired investment for any given interest rate both
increase, the equilibrium interest rate can either rise or fall. This
ambiguity makes movements in the cost of borrowed funds an unreliable indicator of shifts in the supply of funds. As already noted, however, the increase in the supply of loanable funds during the past several years came entirely from a reduction in government dissaving,
which is largely independent of investment demand. (It is not entirely
independent because part of the improvement in government finances




72

is attributable to the strong economy, which in turn is due partly to
strong investment.)
In addition to national saving, another source of funds for investment is capital inflows from abroad. In the national income and product accounts, domestic investment equals national saving (plus a statistical discrepancy) less net foreign investment, which is the amount
that domestic residents are lending abroad less the amount that foreigners are lending to us. Net foreign investment has been significantly negative on average during this decade (that is, foreigners have been
investing more capital in the U.S. economy than Americans have been
investing abroad), as it was during the 1980s, providing additional
resources for domestic investment. As with private domestic saving,
however, the net capital inflow depends partly on the demand for
investment funds, so it cannot be considered an independent cause of
strong investment.
Falling Computer Prices
A fourth factor spurring investment during the past several years
has been a remarkable drop in the price of computers. (Prices have
also fallen for some other capital goods, although less dramatically.)
Continued technological advances pushed down the chain-weighted
price index for business computers and peripheral equipment by
about 30 percent at an annual rate during the first three quarters of
1998, following declines of around 25 percent during both 1996 and
1997. The combination of falling prices, new products, more innovative applications of existing technology, and concerns about the year
2000 problem (discussed later in this chapter) has sharply boosted
outlays in this area. Between the end of 1995 and the third quarter of
1998, nominal computer spending increased roughly 30 percent, and
real computer spending tripled. Nominal computer spending is now
roughly twice what it was at the end of the 1980s, and real computer
spending is about 12 times as large. This exceptional advance in real
computer spending has comprised a significant part of growth in real
equipment investment.
IMPLICATIONS OF THE INVESTMENT BOOM
The 1990s boom in business fixed investment has generated a significant increase in the Nation's stock of business capital. The larger
capital stock has benefited the economy in two important ways: it has
helped restrain inflation by increasing industrial capacity, and it has
helped raise productivity.
Capacity Utilization and Inflation
When demand for resources in the economy exceeds supply, inflation
usually results. The simplest measure of the utilization of labor
resources is the unemployment rate. Inflation often rises when labor




73

markets are tight, because competition for workers among firms puts
upward pressure on wages; if these wage increases are not matched by
increases in productivity, firms face higher costs of production and
raise their prices as a result. Consequently, the unemployment rate is
useful in predicting inflation, although of course the relationship is far
from perfect.
The simplest measure of the utilization of capital resources is the
capacity utilization rate. Inflation often rises when capacity utilization
is high because the marginal cost of production is higher in those situations, and higher marginal costs can lead to higher prices. The capacity utilization rate reported by the Federal Reserve Board is the ratio
of the actual level of output to a sustainable maximum level of output
(or capacity), based on a realistic work schedule and normal downtime.
The Federal Reserve produces these numbers for the industrial sector
(manufacturing, mining, and utilities) only, using data from the Survey
of Plant Capacity collected by the Census Bureau. The correlation
between the capacity utilization rate and acceleration of the core CPI
is positive and fairly high, even though capacity utilization data apply
to only a portion of the economy. (Because final demand for services is
more stable over the business cycle than final demand for goods, the
focus of capacity utilization on the goods-producing sector may not represent a significant obstacle to predicting cyclical pressures for inflation.) In time-series models, capacity utilization is often an important
predictor of inflation, and several studies have found that the nonaccelerating-inflation rate of capacity utilization (analogous to the nonaccelerating-inflation rate of unemployment, or NAIRU) is close to the
mean value of that series.
Despite the historical relationship between the unemployment rate
and inflation, the very low unemployment rate of the past several
years has not produced an increase in inflation. Indeed, core inflation
has dropped, on net, during this period. One factor that may have
helped hold down inflation is the rapid pace of investment, which has
caused total industrial capacity to grow faster in each of the past 4
years than in any other year since 1967, when the series began. As a
result, capacity utilization has stayed fairly close to its long-run
average since 1996 in spite of substantial output growth and rising
utilization of labor resources.

Productivity
The accumulation of capital boosts the productivity of labor through
capital deepening, or increases in the quantity or quality of capital per
worker. New capital can also embody technological advances or innovative ways of organizing work that raise the productivity of both labor and
capital, known as multifactor productivity or total factor productivity.
The Bureau of Labor Statistics breaks down growth in potential
output into changes in the quantity of labor and changes in labor




74

productivity; the latter is in turn broken down into changes in labor
quality, changes in the quantity and quality of capital, and changes in
multifactor productivity. Between 1990 and 1996 (the last year for
which the breakdown is officially tabulated), labor productivity in private business increased at an average rate of 1.1 percentage points per
year. Improvements in labor quality accounted for 0.4 percentage
point, and capital deepening contributed about 0.4 percentage point.
(In comparison, capital deepening contributed 0.7 percentage point to
multifactor productivity growth between 1979 and 1990. Although
gross business fixed investment has increased significantly as a share
of GDP during the past 6 years, it represented a smaller share of GDP
on average between 1990 and 1996 than between 1979 and 1990. Net
business fixed investment, which determines the change in the business capital stock, was also a smaller share of GDP on average during
the later period.) Gains in multifactor productivity represented the
remaining 0.3 percentage point of labor productivity growth, part of
which may be related to capital investment, although such an effect is
difficult to quantify.
Some observers are surprised that the torrid pace of computer
investment has not had a more apparent effect on productivity growth.
As noted earlier, much of the acceleration in measured labor productivity during the past 3 years may owe to methodological changes and
cyclical dynamics rather than fundamental advances such as the
increasing use of computers. One factor limiting the impact of the
information technology revolution on productivity is the relatively
small share of this type of capital: computers and peripheral equipment still represent less than 5 percent of the total net stock of equipment and less than 2 percent of net nonresidential fixed capital. And
the small base of computer capital means that many years of brisk
investment would be needed before computers could represent an
appreciable part of the capital stock.
Even so, computers could have a large effect on productivity if the
rate of return to computer capital were especially high. In conventional growth accounting, such as the calculations made by the Bureau of
Labor Statistics, unusually high returns to computers would appear as
higher multifactor productivity. However, measured multifactor productivity has not increased especially rapidly during the 1990s. Measurement error could play a role here, as a substantial part of the output of computers is intangible and may not be captured in the national
income accounts. Yet mismeasurement of output has been a perennial
problem for national income accounting, and whether this problem is
worse in the computer age is not clear.
More fundamentally, the full benefits of the dramatic advance of
computer technology may still lie ahead of us. Economic historian
Paul David has compared the computer revolution to the transition to
electric power in the late 19th and early 20th centuries. He noted that




75

the productivity gains from the electrification of manufacturing were
not large at first but became quite substantial several decades after
the opening of the first central power station. Box 2-1 examines the
hypothesis that rising productivity follows major technical innovations
with a considerable lag, and considers whether productivity patterns
in the information age are likely to mirror those that followed the
widespread adoption of electrical power.

MACROECONOMIC IMPLICATIONS
OF THE Y2K PROBLEM
It is now less than a year until the widely anticipated arrival of the
year 2000 problem, called Y2K for short (or, more colorfully, the "millennium bug" or "millennium bomb"). Many older computer programs,
including those running on microprocessors embedded in other electronic products, encode the current year using only the last two digits.
Thus, when January 1, 2000, arrives, they may fail to recognize "00" as
Box 2-1.—The Electrical Re volution, the Computer Revolution, and Productivity
Although the electric dynamo was invented well before the turn
of the century, it did not seem to fuel large gains in productivity
until many years later. One economic historian reports that tJ*S*
productivity grew more slowly between 1&9Q and 1913 than previously, but it increased rapidly between 1919 and 1929, and he
attributes half of the acceleration in manufacturing productivity
relative to the preceding decade to growth in electric motor capacity. Drawing a parallel between this episode and the spread of
computing technology in our own time^ he argues that an extended process of technological diffusion may now be under way, which
may yield large productivity gains in the future. Others have
noted similar lagged productivity effects following the introduction of steam power and the development of the automobile.
The slow diffusion of electric power may be explained primarily
by the need to build new factories and redesign manufacturing
processes in order to take full advantage of the new technology.
Many manufacturers would have gained little from simply replacing a large steam power unit with a large electric power unit in
the same factory. Substantial cost savings were available over
time from building new factories: electric-powered factories could
be single-story and less sturdy, machinery could be reconfigured
more easily, and the flexibility of wiring meant that portions
of plants could be shut down individually. However, new
construction was generally unprofitable until existing plants had




76

the year 2000, mistaking it instead for 1900. The result could be incorrect output or total system failure. Although it sounds to many at first
like a trivial matter, of interest only to computer engineers and programmers, in fact the Y2K problem is potentially extremely serious,
given the central role that computer technology has taken in our lives.
Problems caused by the Y2K bug in one company, industry, or sector
may have widespread consequences in others.
There are many conceivable Y2K disaster scenarios. Most involve
disruptions to some critical infrastructure that links the rest of the
economy together, such as transportation systems, power distribution
grids, or telecommunications or financial networks. Such disruptions
would likely have effects that are more than proportionate to the size
of the sector directly affected. Some observers warn that in January
2000 planes may stop flying, telephone traffic may be disconnected,
financial transactions may not go through, power grids may shut
down, and so on. Others have worried that Social Security recipients
might not receive their checks (although, as Box 2-2 notes, the Social
Box 2-1.—continued
depreciated. In addition, a relatively loose industriallabor market
at the turn of the century kept the price of labor low and discourajpNl manufacturers from substituting capital for labor. Real
wages in the United States did not rise enough to motivate significatit expansion of the capital stock until immigration from
Europe was curtailed during World War I, Lastly, implementing
the new processes throughout the economy required a considerable supply of specialized talent—electrical engineers and factory
architects experienced in the new designs—which developed only
slowly.
Whether productivity in the information age will follow the
path of productivity in the electric age remains to be seen. The
introduction of computer technology is similar in many ways to
the transition to electric power. Integrating computers into the
work environment is not a straightforward matter: firms are
clearly still adapting the organization of work to take maximum
advantage of the new technology At the same time, the diffusion
of computers differs from the spread of electricity in important
ways. For example, computers have already spread through the
economy much faster than electric power did, at least in part
because of their plunging prices. The historical analogy is
intriguing and has appealing implications, but even its main
proponent warns against taking it too literally It is simply too
soon to know whether the computer revolution will generate a
surge in productivity growth ahead.




77

Box 2-2.—Preparing Federal Systems for the Year 2000
The Federal Government is a sufficiently large player in the
economy that a failure of its own operations due to the Y2K problem would cause great inconvenience and hardship to many Americans, even if it did not impact the macroeconomy. The Federal
Government operates some of the largest, most complex computer
systems in the world, which provide services to millions of Americans. At the Social Security Administration (SSA) alone, information systems track annual earnings for more than 125 million
workers, take 6 million applications for benefits each year, and
make monthly benefit payments to 48 million Americans. The
Federal Government also exchanges vast amounts of information
with the States, which administer key Federal programs such as
the food stamp program, Medicaid, and unemployment insurance.
Preparing Federal systems for the year 2000 is an enormous
challenge, and agencies have mounted aggressive efforts to ensure
that their critical services will not be disrupted. SSA was the first
agency to begin work on the Y2K problem, as long ago as 1989. By
1995 several agencies had Y2K projects under way and were sharing information with each other about their efforts. In 1995 the
Office of Management and Budget (OMB) formed an interagency
committee, which it asked the SSA to chair, to coordinate the various Federal efforts. In 1996 the Chief Information Officers Council was assigned the responsibility of building on and overseeing
the committee's work.
Since early 1997 the OMB has produced quarterly reports on
agencies* progress in assessing, remediating, testing, and implementing critical systems. The Administration has established a
goal of having all critical systems compliant by March 1999. As of
November 15,1998, 61 percent were already compliant, up from
27 percent a year earlier. A small percentage of critical systems
Security Administration is already Y2K-compliant) and even that
hospital life-support systems might shut down.
Huge efforts to address the Y2K problem have been under way for
some time, especially in large corporations and financial markets and
in the U.S. Government (see Box 2-2 on Federal Y2K efforts; see also
Box 5-3 in Chapter 5, on the Administration's initiative to encourage
Y2K information sharing among companies). The American economy is
large, diverse, and resilient, and people will find ways around those
disruptions that, despite everyone's best efforts, will inevitably occur.
But it is essential to guard against complacency. Some, in particular
some smaller companies and some State and local governments, have
not yet gotten the message.




78

Box 2-2.—continued
are not expected to meet the March goal, and their agencies have
been instructed to produce specific benchmarks showing how they
will complete work on these systems before January 1, 2000, and
to create contingency plans where necessary.
Federal payment systems are of particular concern to the public
and the economy. Social Security and veterans' benefits systems
are already compliant, and the Internal Revenue Service appears
well on its way to being able to collect and process tax returns and
issue refunds in a timely manner. For Medicare, which continues
to face major system challenges, the Health Care Financing
Administration is developing contingency plans to ensure that
health care funding is not disrupted. State-run systems for
administering Federal benefit programs play a critical role in distributing a wide range of benefits, and a few States are receiving
increased attention from Federal agencies.
The OMB also works with agencies to ensure that they have
adequate financial resources to address the problem. In the fall of
1998 the Congress provided a $3.35 billion emergency fund to
ensure that unanticipated Y2K funding needs are met and that no
system will fail for lack of financial resources.
In February 1998 the President's Council on Year 2000 Conversion was created to coordinate the Federal Government's Y2K
efforts. The council works with the OMB to ensure that agencies
are making the most effective use of their financial and human
resources to prepare their systems. The council is also concerned
with reaching out beyond the Federal Government to promote
action on the problem and to offer support to Y2K efforts in the
private sector, by State, local, and tribal governments, and by
international entities.

Some foreign countries have only recently gotten the message as
well. Thus concern has shifted recently to the international dimension.
Y2K problems can be transmitted not just from one company to another, but also from one country to another. Australia and Canada are
classed with the United States among those countries relatively far
along in their remedial efforts. But some European countries have
been diverted by another large information processing task, namely,
that of converting their information systems to deal with the new
European currency, the euro, which came into existence in January
1999. In many countries, preparations are not as far along as they
should be. The reassuring notion that developing countries are not yet
as dependent on computers as are many industrial countries is




79

outweighed by the fact that their equipment is likely to be older and
therefore may contain more of the old two-digit coding.
Those companies and countries that only began to address the Y2K
problem in 1998 now find themselves in a race against time. And any
that have still not begun to deal with the problem will probably find
their efforts have come too late. In such cases, business continuity
planning to minimize probable disruptions is particularly necessary.
A few Wall Street forecasters have assigned high odds to the likelihood that the Y2K problem will lead to a serious global recession. Such
forecasts seem excessively dire. Even if disruptions turn out to be
more serious than most analysts expect, they will most likely show up
primarily as inconveniences and losses in certain sectors. It is less likely that they would manifest themselves as the sort of economy-wide
macroeconomic disturbances that can lead to a recession. In other
words, aggregate economic statistics such as GDP and employment
will probably not reflect Y2K effects to any noticeable extent. However,
it would be unwise to state categorically that a Y2K recession is not in
the cards. Computer technology is so pervasive in our lives that it is
difficult to predict all the possible sources of danger.
Some effects on the demand side of the economy can reasonably be
predicted—indeed, they are already upon us. First, the need to address
the Y2K problem is already boosting demand for computer hardware
and software, both to retrofit older machines and programs and to purchase new equipment that is Y2K-compliant. From a review of quarterly 10-K reports filed by Fortune 500 firms, the Federal Reserve
Board has estimated that these large companies will spend a total of
$50 billion on Y2K fixes. Indeed, this spending probably helps explain
why real investment in computers and peripheral equipment in late
1998 was running more than 60 percent above its level a year earlier.
Sometime later in 1999, it is likely that a tendency for firms to freeze
their systems, so as not to be caught in midstream when January 1,
2000, arrives, will work to moderate Y2K spending. Thereafter a second burst of pent-up computer spending may occur, especially if new
Y2K-related problems are revealed.
The Y2K problem is also increasing demand for the services of computer programmers. This effect should reverse after 2000, if all goes
well, but it is likely to persist for some time after January 1. Not only
may unanticipated glitches be discovered and need to be fixed, but
companies are also likely to face a backlog of upgrade tasks that they
had postponed in order to divert programming resources to Y2K issues.
Economists at the Federal Reserve Board have pointed out that the
increased demand for computer goods and services may not be showing
up in GDP, to the extent that it takes the form of firms reallocating
their own computer support services to work on the problem. To the
contrary, they point to a negative effect on productivity resulting from
the diversion of resources from what would otherwise be investment in




80

new productive capacity, and they estimate a loss to U.S. productivity
due to such diversion of 0.1 to 0.2 percent per year in 1998 and 1999.
Uncertainty over the performance of information and delivery systems might lead firms to stockpile inventories in the runup to January 2000. Uncertainty has a positive effect on the demand for inventories at every stage of production, from raw materials such as oil and
other mineral and agricultural products to retailers' inventories of
consumer goods. The Y2K inventory effect should provide a clear
boost to GDP in the fourth quarter of 1999, offset by a corresponding
negative effect in early 2000. But this possibility implies no particular
distortion of economic activity and calls for no particular policy
response. Given the intrinsic uncertainty created by Y2K, it is rational and sensible, even optimal, for companies to take the precaution of
adding a bit to inventories ahead of time. There is no reason to presume that this tendency to stockpile will be greater, or that it will be
less, than what is appropriate.
Disturbances in the financial sector are also possible. The demand
for cash balances, like the demand for inventories, is affected by uncertainty. Risk-averse people may withdraw more than the usual amount
of money from automatic teller machines on the way to their New
Year's Eve parties this year. As any macroeconomic textbook shows, an
increase in the demand for cash without an increase in its supply can
have a contractionary effect on the economy. Unlike the other factors,
however, this one is easily accommodated. The Federal Reserve has
already made arrangements to ensure that banks have the currency
they need to satisfy a surge in demand. Thus, an increased demand for
cash is one part of the macroeconomic equation that need not be a
source of concern.
Effects on the supply side—notably in the infrastructure sectors
mentioned above—are the source of the more alarming scenarios and
are much harder to predict. It is here that the greatest risks lie. There
is no way to evaluate, for example, whether the prospect of Y2K glitches in the financial sector will stoke irrational end-of-millennium
unease to the point of provoking self-confirming volatility in securities
markets. Banks have reported that Y2K compliance is already an
important factor in their decisions to extend credit in certain foreign
countries, particularly in Asia and Eastern Europe, where countries
are thought to be among the least well prepared for the Y2K problem.
A tightening of bank lending in these regions could accentuate the
capital scarcity arising from the recent flight to quality.
There is no way of knowing the odds that the Y2K problem will lead
to a recession. Even those who issue pessimistic forecasts admit freely
that they are purely subjective judgments. This is not the sort of problem that lends itself to formal modeling; macroeconomic models simply
are not built to address one-time scenarios such as a Y2K debacle.
Moreover, if one knew enough about all the potential problems to




81

construct an accurate forecasting model, one would also know enough
to go out and fix them. But as always, the unpredictable problems are
the hardest to predict.
One can look to historical precedent—past disruptions of transportation or power systems due to strikes, weather events, or technological failures, for example—to see if anything can be learned about
the macroeconomic spillover effects. Such an analysis is encouraging.
Table 2-2 reports over 20 major disasters that occurred in the United
States between 1971 and 1995, most of them weather-related, together with estimates of their monetary damages. The adverse impacts on
buildings and property, even leaving aside the tremendous human toll,
were often large: over 1 percent of GDP each in the cases of Hurricane
Andrew in 1992 and the Northridge, California, earthquake in 1994. In
economic terms these damages represent a loss in future consumption;
resources must be diverted to replace or repair the capital stock that
TABLE 2-2. —Disaster Damage: National Income and Product Accounts
Estimates of Value of Structures and Equipment Destroyed
Impact on NIPAs
Disaster

Value
destroyed
(billions of
1992 dollars
at annual rates)1

Area affected
Period

1971:1
1972: II
1973: II

Flood, dam collapse
Windstorms flood
Floods
Tornadoes
Hurricanes David and Frederick

California
Middle Atlantic
Mississippi
Alabama, Indiana, Kentucky, Ohio,
Tennessee
Idaho
Kentucky, Virginia, West Virginia
Alabama, Mississippi, North Dakota
Arkansas, Texas
Alabama, Mississippi

Mudslides
Riots
Mount St Helens eruption
Hurricane Iwa
Floods
Hurricane Alicia ..
Hurricanes Elena and Gloria
Tropical Storm Juan
Hurricane Kate
Floods
Hurricane Hugo
Earthquake

California
Miami (Florida)
Oregon, Washington
Hawaii
Arkansas, Missouri
Texas
Atlantic and Gulf Coasts
Gulf Coast
Atlantic Coast
Atlantic Coast
North and South Carolina
Loma Prieta (California)

1980: 1
1980: II
1980: II

Fire
Hurricane Andrew
Hurricane Iniki
Winter Storm
Floods
Earthquake
Hurricane Opal

Oakland (California)
Florida and Louisiana
Hawaii
24 Eastern States
9 Midwestern States
Northridge (California)
Florida plus 9 Southern States

1991: IV
1992: III
1992: III
1993: I
1993: III
1994: I

Earthquake
Hurricane Agnes
Flood
Tornadoes

1
Reflected as additions to consumption of fixed capital.
Source: Department of Commerce (Bureau of Economic Analysis).




82

1974:
1976:
1977:
1979:
1979:
1979:

II
II
11
II
II
III

1982: IV
1982: IV
1983: III
1985: III

1985: IV
1985: IV
1985: IV
1989: III

1989: IV

1995: IV

1.7
20.2

6.3
1.9
1.4
2.8
}3,
4.6

)»
';:;
1.5

4.3

}4,
17.8
15.8

6.1
63.9

7.9
7.9
8.2
74.8

8.6

has been lost or damaged. Yet in most cases the reduction in the capital stock had only a limited impact on current sales and production, so
that the disruption did not show up in the national statistics on output,
income, or employment for the year. The same is true of strikes, even
those that affect the communications or transportation infrastructure.
The 1997 strike against the Nation's leading private package delivery
service, for example, in the end had little discernible impact on GDP, in
part because firms and individuals found other ways to ship their
packages. Americans are, after all, very adaptable. Also, output that is
lost in one month is often made up the next.
To be sure, it could be dangerous to generalize from these precedents. A disruption that affected the entire country, or that lasted
more than a few weeks, would offer less scope for substitution. But
even when a failure of major power cables cut power to the central
business district of New Zealand's largest city for 2 months last year,
the estimated effect on the year's GDP growth was small in the end.
To summarize, even if Y2K disruptions turn out to be on the serious
side, they will most likely show up primarily as inconveniences and
losses in some sectors, and not in noticeable macroeconomic terms. A
survey of 33 professional forecasters reported an average expectation
that the Y2K problem and efforts to address it would add 0.1 percent to
economic growth in 1999 and subtract 0.3 percent in 2000. Given typical yearly fluctuations in GDP, it would be hard to identify effects of
this magnitude after the fact. The huge efforts now under way, both in
the government and in the corporate sector, should make a truly serious disruption, let alone a recession, less likely. Again, however, it is
important to avoid complacency. We should all redouble our preventive
efforts, to keep from having to put the adaptability of the economy to
the test.

NEAR-TERM OUTLOOK AND LONG-RUN FORECAST
THE ADMINISTRATION FORECAST
The Administration projects GDP growth over the long term at
roughly 2.4 percent per year—a figure consistent with the experience
so far during this business cycle as well as with reasonable growth
rates of the economy's supply-side components. One method for estimating the economy's potential growth is an empirical regularity
known as Okun's law, which can be illustrated by a scatter diagram
(Chart 2-10). The diagram plots the four-quarter change in the unemployment rate against the four-quarter growth rate for real output.
According to Okun's law, the unemployment rate falls when output
grows faster than its potential rate, and rises when output growth falls
short of that rate. The rate of GDP growth consistent with a stable
unemployment rate is interpreted as the rate of potential growth and




83

is estimated as the location where the fitted line in Chart 2-10 crosses
the horizontal axis—in this case around 2.5 percent.

COMPONENTS OF LONG-TERM GROWTH
Labor Force
In the long term, the growth rate of the economy is determined primarily by the growth of its main supply-side components: population,
labor force participation, the workweek, and labor productivity
(Table 2-3). Of these, the most easily understood is the civilian workingChart 2-10 Estimation of Potential GDP Growth by Okun's Law
Real GDP growth in excess of its potential rate lowers the unemployment rate.
Potential growth is estimated to be around 2.5 percent.
Change in unemployment rate (percentage points)
1.5

1991
1990
1992
1995
2.5% potential growth

1993

0.0

0.5

1.0

1.5

2.0
2.5
3.0
Output growth (percent)

3.5

4.0

4.5

5.0

Note: Change in unemployment rate is the fourth-quarter to fourth-quarter change in the
demographically adjusted unemployment rate. Output growth is the fourth-quarter to fourth-quarter
percent change in the geometric mean of the income- and product-side measures of GDP. Pre-1995
growth rates have been adjusted for methodological changes. GDP growth in 1998 is estimated.
Sources: Department of Commerce (Bureau of Economic Analysis), Department of Labor (Bureau of
Labor Statistics), and Council of Economic Advisers.

age population (the number of Americans aged 16 and over), which has
grown at a 1.0 percent annual rate over the past 8 years. Official
projections by the Bureau of the Census point to a growth rate of 1.0
percent per year through 2008 for this segment of the population.
The labor force participation rate—the percentage of the workingage population that is working or seeking work—was little changed in
1998, after notable increases in the 2 previous years. Although no readily apparent explanation emerges for the year-to-year pattern, the
resurgence of strong GDP growth in 1996 (following a slower year), the
expansion of the earned income tax credit, and the welfare reform law
passed in the summer of 1996 probably all contributed to the increase
in participation that year and in 1997. Welfare reform required States
to move more of their public assistance caseload into work or work-related




84

activities. Most likely, the boost to participation from these efforts will be
spread over the years between 1996 and 2002. Evidence for this effect is
the rapid rise in the participation rate for women who maintain families.
The increase in the participation rate for this group, which makes up only
6 percent of the labor force, accounts for half of the increase in the total
participation rate over the past 3 years. These labor market issues are
discussed further in Chapter 3.
On average, the total participation rate has been little changed since
the last business-cycle peak. Looking ahead, the Administration
expects the participation rate to increase by almost 0.2 percent per
year during the phase-in period of welfare reform (that is, through
2002) and then to slow to 0.1 percent per year thereafter.

Productivity
The official measure of productivity in the nonfarm business sector
has grown at about a 2 percent annual rate over the past 3 years, substantially faster than the 1.1 percent average annual growth rate
between the business-cycle peaks of 1973 and 1990. To assess whether
TABLE 2-3.—Accounting for Growth in Real GDP, 1960-2007
[Average annual percent change]
1960 II

1973 IV

1990 III

1998 III

to

to

to

1973 IV

Item

1990 III

1998 III

to
2007 IV

1) Civilian noninstitutional population aged 16 and over
2) PLUS- Civilian labor force participation rate1

1.8
2

1.5
5

1.0
0

1.0
1

3) EQUALS: Civilian labor force1
4) PLUS: Civilian employment rate1

2.0
.0

2.0
-.1

10
2

1.1
-.1

5) EQUALS-. Civilian employment1
6) PLUS: Nonfarm business employment as
a share of civilian employment1 2

2.0

1.9

12

1.1

1

.1

4

.1

7) EQUALS: Nonfarm business employment
8) PLUS- Average weekly hours (nonfarm business)

2.1
-5

2.0
-4

16

1.2
0

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

16
2.9

17
1.1

17
1.4

11) EQUALS- Nonfarm business output
12) PLUS: Ratio of real GDP to nonfarm business output4

45
-.3

2.8
-.1

13) EQUALS- Real GDP

42

2.7

1

o
3

(1.6)

12
1.3

31
-.4

3

(33)
(-.5)

2.5
-.2

26

3

3

(2 8)

5

2.3

Adjusted for 1994 revision of the Current Population Survey.
Line 6 translates the civilian employment growth rate into the nonfarm business employment growth rate.
Income-side definition.
4
Line 12 translates nonfarm business output back into output for all sectors (GDP), which includes the output of farms and
general government.
5
GDP growth is projected to fall below its underlying trend for this period (about 2.4 percent) as the employment rate is
projected to fall 0.1 percent per year over this period.
Note. Detail may not add to totals because of rounding.
The periods 1960 II, 1973 IV, and 1990 III are business-cycle peaks.
Sources: Council of Economic Advisers, Department of Commerce (Bureau of Economic Analysis), and Department of Labor
(Bureau of Labor Statistics), and National Bureau of Economic Research.
2

3




85

the recent surge in productivity represents an increase in long-term
trend growth, several measurement issues must be addressed, as well
as the cyclical behavior of productivity. One such issue concerns the
decision to switch to geometric price indexes for some components of
consumption. This decision, announced by the Bureau of Labor Statistics for the CPI starting in 1999, was first implemented by the Department of Commerce with last year's annual revisions to the national
income and product accounts. (The Department of Commerce used the
experimental CPI series that the Bureau of Labor Statistics began
releasing in 1997.) The new methodology raised the measured annual
growth rates of real nonfarm output and productivity by roughly 0.2
percentage point per year for 1995 and subsequent years. The change
did not apply to earlier years, because last year's annual revision did
not reach back that far. If the same methods were applied to earlier
years, as they probably will be with the next benchmark revision, the
average annual rate of productivity growth since 1973 might be 1.3
percent rather than the 1.1 percent officially reported.
A second measurement issue concerns whether real output is best
measured on the product side (the official method) or on the income
side of the national accounts, or by a mixture of the two. Since 1993,
the average annual growth rates of the income-side measures of output
and productivity have been 0.5 percentage point higher than the official product-side measures. Because both sides of the accounts contain
useful information, the Administration's (unofficial) estimate includes
the information from both these series by averaging them—as has
been done in Chart 2-11.
Other, more fundamental measurement issues exist as well. Box 2-3
discusses attempts to include environmental benefits in measures of
national income, as would be required for a truly comprehensive
measure of economic welfare.
In the long term, productivity increases with training, technological
innovation, and capital accumulation. But productivity growth also
shows considerable variation over the business cycle, typically falling
below its trend during recessions, then growing faster than trend during the middle of an expansion, and finally falling again in advance of
the business-cycle peak, as it did between the peaks of 1980 and 1990.
This cyclical behavior can be captured by a model in which firms only
partially adjust toward their desired level of employment in any quarter, because hiring and firing are costly. As shown in Chart 2-11, a simulation from this model shows that the above-trend growth of productivity in recent years is consistent with strong output growth and an
underlying trend rate of 1.3 percent.
The most straightforward conclusion is that the trend growth of
labor productivity has not changed much during the post-1973 period
and that recent productivity growth reflects primarily cyclical factors.
Since 1994, on the other hand, labor productivity has grown faster




86

Chart 2-11 Actual Versus Simulated Productivity Growth
The recent behavior of productivity is consistent with strong output growth and a
1.3 percent trend.
Chained 1992 dollars per hour (ratio scale)
32

Simulated

Actual

1.3 percent trend

1981

1983

1985

1987

1989

1991

1993

1995

1997

Note: Productivity has been adjusted for methodological changes and is defined as the average of the
income- and product-side measures.
Sources: Department of Commerce (Bureau of Economic Analysis), Department of Labor (Bureau of
Labor of Statistics), National Bureau of Economic Research, and Council of Economic Advisers.

than under the simulation, and it remains possible that the growth
rate of trend labor productivity has risen recently. Weighing these possibilities, the Administration has projected long-term annual growth of
labor productivity at 1.3 percent, but will closely monitor productivity
data over the next year for further evidence of a stronger growth rate.
Box 2-3.—Accounting for the Environment
Economists have long realized that GDP is a measure of market
output, not of national welfare. By design, changes in GDP primarily reflect the value of goods and services as measured in the
marketplace, excluding changes in leisure time, health status,
environmental quality, and other aspects of well-being. Recently,
concerns over sustainable development have sparked interest in
expanding the system of national income accounts to include measures of environmental quality and the stock of natural resources.
Some people worry that economic development may entail a deterioration of environmental quality and a depletion of natural
resources, causing national well-being to fall even as measured
GDP rises. Proposals for a "green GDP" attempt to address this
desire for a more comprehensive scorecard on well-being and environmental sustainability.
Incorporating environmental and natural resource assets into a
unified system of national income accounts is exceedingly difficult,




87

Box 2-3.—continued
however. Important aspects of environmental quality must first be
measured in physical units, which then must somehow be translated into a common economic measure (dollars). There is little
agreement about how to value many aspects of environmental
quality, or even on methods for establishing such values. For
example, setting a dollar value on the health and aesthetic benefits of lowering air pollution raises a host of difficult philosophical
and technical issues.
These problems have led most countries to abandon the quest to
incorporate the environment formally into GDP. An alternative
favored by Eurostat, the statistical office of the European Union,
is to report only physical measures of different aspects of environmental quality. This approach makes no attempt to aggregate
these various estimates into a common unit of measure, and no
attempt to estimate green GDP. Rather, separate accounts track
various measures of environmental quality individually.
An intermediate approach, used by the United Nations System
of Environmental and Economic Accounting and in prototype
accounts developed by the United States, is a system of satellite
accounts to account for certain important aspects of environmental quality. These accounts, although developed to be consistent
with the system of national income accounts, are not restricted to
the same definitions and methods. This flexibility allows them to
focus on issues of particular interest and to be tailored to available
information. As information and methods of valuation improve,
the system of satellite accounts would move closer to a unified set
of economic and environmental accounts.
The satellite accounts approach allows the system of national
income accounts to address two fundamentally different needs.
There will always be a need for a frequently updated measure of
market-based goods and services for both government and the private sector, which GDP fulfills. A broader measure of well-being is
also needed, even though it is likely to be less precise and available less frequently, and this the satellite accounts can provide.
Fortunately there is no need to choose between them.

INFLATION: FLAT OR FALLING?
The key to the longevity of this expansion has been low inflation.
Direct measures of the strain on productive capacity, such as the
unemployment rate and the capacity utilization rate, play a role in
determining whether the economy has reached the limits of its capacity.




But in the last analysis, it is the direction of inflation that signals
whether or not the capacity limit has been breached. Over the past 2
years, low and stable inflation has allowed decisionmakers, both in
business and in government, to focus primarily on growth rather than
on bottlenecks.
In addition to its importance for policy decisions, the level and direction of inflation are important variables in long-term economic and
budget projections. In this context it is important to note the gap that
has developed between inflation as measured by the CPI and the measures of inflation included in the national income accounts. The broadest measure of inflation for goods and services produced in the United
States is the chain-weighted price index for GDP, which increased
only 1.0 percent over the four quarters ending in the third quarter of
1998, almost a percentage point below its year-earlier pace. In contrast, the CPI posted a larger increase--and less of a deceleration—
over the past year, despite a much larger weight for petroleum prices,
which fell during the year. The difference becomes striking when one
focuses on the contrast between two price measures that appear to
have the same coverage: the price index from the national income
accounts for personal consumption expenditures excluding food and
energy (the core PCE), and the CPI excluding food and energy (the
core CPI). As Chart 2-12 shows, the core CPI inflation rate has been
roughly flat for the past year at about 2.4 percent, whereas that of the
core PCE has slowed to 1.1 percent for the four quarters ending in
the third quarter of 1998, from a 1.9 percent increase during the
year-earlier period. Furthermore, the difference that has opened up
between these two series has no historical precedent. What could
cause such a divergence?
More than half of the deceleration in the core PCE over the past year
is accounted for by price imputations. National income accountants
impute prices for components of the consumer market basket for which
there is no nationally collected price measure. These items include lotteries, insurance, and financial intermediation. One of these imputed
prices (that for "free" checking accounts) slowed sharply over the past
year. Because these imputations tell us little about the course of inflation, it is more useful to focus on an index that excludes imputations
(Chart 2-12).
Excluding imputations, the index for the core PCE still shows lower
inflation than does the core CPI, and a gap between the series has
opened up over the past few years. The major sources of the difference
are in the treatment of medical care and housing. The price index for
medical care in the PCE, which was formerly an aggregation of mostly
CPI components, has now shifted toward an aggregation of components from the producer price index. Over the four quarters ending in
the third quarter of 1998, medical prices in the PCE index have
increased much less (2.2 percent) than the CPI measure of the same




89

Chart 2-12 Three Measures of Core Inflation
Inflation as measured by the core CPI was flat in 1998. In contrast, the core PCE
measure fell, although less so excluding imputations.
Percent

6

Core CPI
Core PCE
chain price index

i ...
88:Q1

89:Q1

90:Q1

i ...
91:Q1

Core PCE
chain price index
excluding imputations
i ... i ... i ... i .
92:Q1

93:Q1

94:Q1

95:Q1

96:Q1

97:Q1

98:Q1

Note: Inflation is measured as the four-quarter percent change in the three measures.
Sources: Department of Commerce (Bureau of Economic Analysis), Department of Labor (Bureau of
Labor Statistics), and Council of Economic Advisers.

concept (3.5 percent). Although the increase in housing prices is similar in both indexes (because the PCE housing index uses CPI sources),
housing is twice as important in the CPI as in the PCE price index.
This difference in weight, together with an increase in the price of
housing relative to the overall index, means that housing has also been
a source of the difference between the CPI and PCE inflation measures. At this time, with no compelling reason to prefer one index to
the other, it is best to keep an eye on both.
In addition to the price index of the core PCE, other price indexes
from the national income accounts are increasing at or below an annual rate of 1 percent per year. One of these, the price index for nonfarm
business output (which is aggregated from consumption prices as well
as prices of other spending components) increased at only a 0.5 percent
annual rate in the past four quarters. Can this low rate persist?
Whatever the rate of inflation today, in the long run the inflation of
business prices will likely gravitate toward the rate of increase in
trend unit labor costs—that is, the increase in hourly compensation
less the rate of trend productivity growth. Until recently, one measure
of trend unit labor costs (namely, the ECI measure of hourly compensation, described earlier in the chapter, less the trend in productivity)
has closely matched the rate of price increases in the nonfarm business
sector (Chart 2-13). However, a large gap has opened up recently, with
the ECI-based measure of trend unit labor costs increasing at a rate of
2.5 percent over the past four quarters (a 3.8 percent increase in




90

hourly compensation less 1.3 percent trend productivity growth), in
contrast with an increase of 0.5 percent in prices in the nonfarm business sector. The historical pattern suggests that this gap will close, and
it could do so through either higher price inflation, lower wage inflation, or higher trend productivity growth. The eventual outcome may
involve some combination of all three, but the inertia in wages and
trend productivity growth suggests that most of the correction will
come from a higher rate of inflation of nonfarm business prices, at
least as measured in the national income accounts. If this price measure gravitates upward, it will close not only the gap between prices
and trend unit labor costs, but also the gap between the price measures from the national income accounts and the CPI. Accordingly, the
Administration projects that inflation as measured by the GDP price
index will rise to 2.1 percent by 2000. At the same time, the CPI is projected to rise at a 2.3 percent annual rate—about the current rate of
increase of the core CPI.
Chart 2-13 Inflation and Trend Unit Labor Costs
Output price inflation has followed trend unit labor costs until recently.
Percent change from previous year

10

Output prices
(nonfarm business less housing)

Hourly compensation (ECI) minus
trend productivity (1.3%)
80:Q1

82:Q1

84.-Q1

86:Q1

88:Q1

90:Q1

92:Q1

94:Q1

96:Q1

98:Q1

Note: Output prices have been adjusted for methodological changes.
Sources: Department of Commerce (Bureau of Economc Analysis), Department of Labor (Bureau of
Labor Statistics),and Council of Economic Advisers.

WHAT HAS HELD INFLATION IN CHECK?
Inflation has been steady or falling despite an unemployment rate
that has been below 5 percent since July 1997. A model of inflation that
included only the unemployment rate and inflation expectations would
have predicted a pickup of inflation during this period. Three factors
that have held measured inflation down over this period have been
pressure from the international environment (including low oil prices),




91

a level of capacity utilization that is low relative to the unemployment
rate, and certain methodological changes in the official measure of
inflation. But even taking these factors into account, the unemployment rate associated with stable inflation (the nonacceleratinginflation rate of unemployment, or NAIRU) has probably edged lower.
Conditions in the international environment have restrained inflation. The foreign exchange value of the dollar has risen substantially
over most of the past 3 years, both oil and nonoil import prices have
been falling, and exporters of U.S. goods face stiff competition. On the
import side, prices of nonpetroleum goods have fallen at about a 4 percent annual rate, on average, during the past 3 years (Chart 2-14).
Chart 2-14 Export and Import Prices Versus the CPI and GDP Price Index
Export and import price declines have held down inflation.
Four-quarter percent change

10

Chain price index of
exported goods ' Chain price index of imported
nonpetroleum goods
87:Q1

88:Q1

89:Q1

90:Q1

91:Q1

92:Q1

93:Q1

94:Q1

95:Q1

96:Q1

97:Q1

98:Q1

Sources: Department of Commerce (Bureau of Economic Analysis) and Department of Labor (Bureau
of Labor Statistics).

With the share of nonpetroleum imports at about 15 percent of consumption, these imports account for about 0.6 percentage point of the
reduction in consumer price inflation. Meanwhile exporters of U.S.
goods have cut prices by about 3V2 percent per year over the past 3
years, presumably to match stiff competition abroad. With goods
exports at about 8 percent of GDP, export prices have subtracted about
0.3 percentage point from the inflation rate as measured by the GDP
price index. In recent months the dollar has retraced some of its appreciation of the 1995-98 period, and so the damping effect on inflation
may not be as forceful over the medium term.
Capacity in manufacturing, mining, and utilities has grown at a 51A
percent annual rate over the past 3 years, outpacing growth in




92

production at 434 percent. Consequently, the capacity utilization rate
has dropped to a level that is now I index point below its long-term
average of 82.1 percent of capacity. This slack in capacity is the legacy
of a sustained high level of industrial investment and stands in sharp
contrast to the tightness in labor markets. Over most of the postwar
era, slack in capacity has moved with the unemployment rate, and so
these two measures usually tell much the same story. However, in current circumstances the excess industrial capacity offsets some of the
tightness in labor markets.
A final reason for the slowing of reported price indexes has been
methodological changes to both the CPI and the indexes used in the
national income accounts (Box 2-4). In general, these changes have
reduced the measured rate of inflation. For the CPI, methodological
changes made from 1995 through 1998 reduced the rate of CPI inflation by about 0.44 percentage point. Changes to be introduced in 1999
and 2000 will reduce it by an additional 0.24 percentage point.
Box: 2-4.—Methodological Changes to Price Measurement
The Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA) have recently made several methodological
changes that have improved the accuracy of the consumer price
index and the price indexes in the national income accounts. One
of these changes goes into effect this year (Table 2-4). Most of the
improvements made by the BLS have reduced the measured
increase in the CPI, and many will also affect the deflation of
nominal output and therefore raise the growth rate of measured
real GDP. Changes made through 1998 include the substitution of
generic drugs when patents expire on proprietary brands; the correction of a problem in rotating new stores into the survey
through a procedure called "seasoning" (a problem that was corrected first in the food category and later in other categories of
goods); a modification of the formula for measuring increases in
rent; a change to measuring prices on hospital bills rather than
the prices of hospital inputs; a switch to measuring computer
prices by the computers' intrinsic characteristics ("hedonies"); and
an update of the market basket from one based on the 1982-84
period to one based on 1993-95. A change scheduled for this year is
the use of geometric rather than arithmetic means to address substitution bias within categories; next year the BLS will bring in
the results of more frequent rotation of the items sampled in categories with many new product introductions.
The combined effect of the changes made through 1998 has been
to lower the CPI inflation rate by 0.44 percentage point per year.




93

Box 2-4.—continued
Changes to be implemented in 1999 and 2000 will lower CPI
inflation by a further 0.20 and 0.04 percentage point per year. The
BE A brought the geometric CPI components into the national
income accounts during the annual revision of July 1998. In this
revision the books were open only for the 3 previous years, and so
the effect of the geometric CPIs now begins in 1995. In the bench*
mark revision scheduled for October 1999, this effect will be taken
back farther into the historical record. The BEAhas also recently
switched from using the CPI to using the producer price index
(PPI) to deflate physicians' services and the services of government and for-profit hospitals. These changes, made in the July
1997 annual revision of the national income accounts, reached
back to 1994. Because the PPI measures of these prices have been
increasing less than the comparable CPIs, the changes reduce the
rate of increase of the chain-weighted price index for GDP and
raise real GDP growth. These changes, in addition to those passed
through from the CPI, will have cumulated to raise the annual
growth rate of real GDP by 0.29 percentage point by 2000.

TABLE 2-4. — Expected Effects of Methodological Changes
on the CPI and Real GDP
Year effect
is felt

Percentage-point
effect on

Change

In the
CPI
(i)

PPIs for hospitals and physicians

CPI
percent
change

In the
NIPAs
1993, 1994

GDP
percent
change
(i)

.06

Generic prescription drugs
Food at home seasoning
Owners equivalent rent formula
Rent composite estimator

1995
1995
1995
1995

General seasoning

1996

(i)

-.10

(i)

Hospital services index

1997

(i)

-.01

(i)

1998
1998

(2)

-.04
-.17

.00
(1)

-.20
-.04

.15
.03

Pre-1999
1999 and after

-.44
-.24

.26
.03

TOTAL

-.68

.29

Personal computer hedonics
Updated market basket

. .. .

Geometric means
Rotation by item

1995
1978
1978
1978

(1)

1999

1

1995

2000

2000

-.01
-.04
-.10

.03

.00
.03
.03
-.01

Not relevant for this index.
2
The entire NIPA series back to 1948 reflects this methodology change, so that there is no
discontinuity in the series.
Sources: Department of Commerce (Bureau of Economic Analysis), Department of Labor (Bureau of Labor Statistics), and
Council of Economic Advisers.




94

A proper accounting for these changes can explain in part the recent
low inflation in terms of the CPI (although not that in terms of the
GDP price index). The rest can be explained by some combination of
low nonoil import prices, low oil prices, and a downtick in the NAIRU.
But it is as yet impossible to know exactly which combination of these
factors is the right one.

THE NEAR-TERM OUTLOOK
Both supply- and demand-side considerations argue for some moderation in real GDP growth from its rapid 3.7 percent annual pace of
the past 3 years. On the supply side, the unemployment rate has fallen by about 0.4 percentage point per year over the past 3 years, and it
is questionable whether a further decline of this magnitude could be
accommodated without inflationary consequences. Labor force growth
has not kept up with demand for labor in the past 2 years, nor can it be
expected to keep up with a repetition of that kind of demand growth.
On the demand side, private consumption and fixed investment are
expected to grow less rapidly in 1999 than they did in 1998. Consumption, which constitutes two-thirds of demand, rose at more than a 5
percent annual rate during the first three quarters of 1998. Growth of
consumer spending, which was well in excess of the growth rate of disposable personal income, reflected the remarkable growth of stock
market values. As a consequence, the saving rate fell almost 2 percentage points over the year, finally dropping to near zero by year's
end. Unless the stock market continues to surge, consumption is likely to grow at a more moderate pace. Continued real income growth is
likely to motivate further, but smaller, consumption gains.
Business equipment investment grew at an extraordinary 26 percent annual rate in the first half of the year, the fifth consecutive year
of double-digit growth. Business purchases of computers accounted for
much of this growth; the rapid pace of innovation in the computer
industry is driving new investment, and prices have been falling
sharply. But equipment investment decelerated sharply in the third
quarter of 1998. Investment in business structures has been about flat
over the past year and a half. Low capacity utilization may be one factor limiting investment growth. However, as long as the relative price
of equipment is falling, it is likely that business investment will continue to grow faster than the economy as a whole.
Strong real income growth, together with the drop in mortgage
interest rates over the past year, is also buoying residential investment. The 1.62-million-unit pace of housing starts in 1998 was the
highest in a decade. Even if mortgage rates remain around their current low levels, housing activity and residential investment are likely
to edge down because of demographic factors and the lack of pent-up
demand after several years of strong growth.




95

Nonfarm manufacturing and trade inventories also grew rapidly in
1998, but no faster than sales. The (nominal) inventory-to-sales ratio
was thus little changed over the year and remains at one of its lowest
levels ever (Chart 2-15). Nevertheless, if the components of final
demand were to decelerate to a more modest rate in 1999, the level of
Chart 2-15 Inventory-to-Sales Ratio (Nonfarm Business)
Despite recent strong stockbuilding, inventories remain lean with respect to sales.
Months' supply

3.2

3.0

2.8

2.6

2.4

2.2

53:Q1

57:Q1

61:Q1

65:Q1

69:Q1

73:Q1

77:Q1

81:Q1

85:Q1

89:Q1

93:Q1

97:Q1

Note: Based on data in current prices.
Sources: Department of Commerce (Bureau of Economic Analysis) and National Bureau of Economic
Research.

inventory investment would have to drop in order for this lean inventory
posture to be maintained.
Some restraint is likely to come from the international economy, as
the rise in the dollar over the past 3 years and the continued restructuring of several Asian economies have already weakened—and will
continue to weaken—demand for American-made products. Because
the direction of trade responds with a lag to changes in the exchange
rate, the appreciation of the dollar over the past 2 years is likely to
boost demand for imports and limit growth of exports in 1999. As a
result, net exports are likely to become more negative in 1999,
although they probably will not decline as much as in 1998.
Up to now, the Asian economic crisis has not had the negative effect
on the U.S. economy that was anticipated a year ago. The consequences of a larger-than-expected drop in import prices have offset
much of the direct loss of exports. On the one hand, American exports
to the Asian economies most affected by the crisis have fallen about
$30 billion (in nominal dollars) since the second quarter of 1997.
On the other hand, the weakness abroad has been a major factor in




96

lowering the price of imported crude oil, which has fallen almost $8 per
barrel from precrisis levels. Because the United States purchases
about 3l/2 billion barrels of foreign petroleum and petroleum products
per year, the resulting $27 billion saving on the national oil import bill
offsets almost all of the loss in exports to Asia. In addition, the drop in
nonpetroleum import prices and the price discipline imposed on
exporters who compete in international markets have held down inflation by about half a percentage point, as discussed earlier. Low inflation has in turn allowed interest rates to be lower, and domestic
demand higher, than they would otherwise be.
A moderation in output growth to 2.0 percent is projected for the next 3
years—about half a percentage point below the economy's long-term
growth rate, but roughly in line with the consensus of professional
economic forecasters (Table 2-5). Over these 3 years the unemployment
TABLE 2-5. — Administration Forecast
Actual
Item

1999
1997

2000

2001

2002

2003

2004

2005

1998

Percent change, fourth quarter to fourth quarter
Nominal GDP

5.6

'4.5

4.0

4.2

4.1

4.5

4.5

4.5

4.6

Real GDP (chain-type)

3.8

'3.5

2.0

2.0

2.0

2.4

2.4

2.4

2.4

GDP price index (chain-type)

1.7

'.9

1.9

2.1

2.1

2.1

2.1

2.1

2.1

Consumer price index (CPI-U)

1.9

1.5

2.3

2.3

2.3

2.3

2.3

2.3

2.3

Calendar year average
Unemployment rate (percent)

4.9

4.5

4.8

5.0

5.3

5.3

5.3

5.3

5.3

Interest rate, 3-month Treasury bills (percent) ...

5.1

4.8

4.2

4.3

4.3

4.4

4.4

4.4

4.4

Interest rate, 10-year Treasury notes (percent)

6.4

5.3

4.9

5.0

5.2

5.3

5.4

5.4

5.4

125.8 127.7

129.2

130.5

132.1

134.0

136.0

137.9

Nonfarm payroll employment (millions)

122.7

2

1

Forecast.
Preliminary.
Sources: Council of Economic Advisers, Department of Commerce (Bureau of Economic Analysis), Department of Labor
(Bureau of Labor Statistics), Department of the Treasury, and Office of Management and Budget.
2

rate is projected to edge up slowly to 5.3 percent—the middle of
the range of unemployment compatible with stable inflation. Thereafter, the Administration's forecast is built around a growth rate of
potential output of 2.4 percent per year. The Administration does not
believe that 2.4 percent annual growth is the best the economy can do;
rather, this projection reflects a conservative estimate of the effects of
Administration policies to promote education and investment and to
balance the budget. The outcome could be even better—as indeed it




97

has been for the past 3 years. But the Administration's forecast is used
for a very important purpose: to project Federal revenues and outlays
so that the government can live within its means. For this purpose,
excessive optimism is dangerous and can stand in the way of making
difficult but necessary budget decisions. On the other hand, excessive
pessimism can force difficult decisions where none was required. In the
final analysis, the only worthy objective is the creation of a sound
forecast that points to the eventual outcome using all available
information as fully as possible.
As of December 1998, the current economic expansion, having lasted
93 months, was the longest ever during peacetime and the second
longest on record. There is no apparent reason why this expansion cannot continue. As the 1996 Economic Report of the President argued,
expansions do not die of old age. Instead, postwar expansions have
ended because of rising inflation, financial imbalances, or inventory
overhangs. None of these conditions exist at present. The most likely
prognosis is therefore the same as last year's: sustained job creation
and continued noninflationary growth.




98

CHAPTER 3

Benefits of a Strong Labor Market
THE NATION'S LABOR MARKET is performing at record levels:
the number of workers employed is at an all-time high, the unemployment rate is at a 30-year low, and real (inflation-adjusted) wages are
increasing after years of stagnation. Groups whose economic status
has not improved in the past decades are now experiencing progress.
The real wages of blacks and Hispanics have risen rapidly in the past
2 to 3 years, and their unemployment rates are at long-time lows;
employment among male high school dropouts, single women with
children, and immigrants, as well as among blacks and Hispanics, has
increased; and the gap in earnings between immigrant and native
workers is narrowing.
The most recent data also show that the employment relationship is
strong. Job displacement—job losses due to layoffs, plant closures, and
the like—has declined substantially since the 1993-95 period, and
among those who have been displaced, the share that have found new
work has increased. These reemployed workers still typically earn less
on the new job than at the job they lost, but these wage losses are at
record lows. Moreover, the popular assertion that secure lifetime jobs
are disappearing appears to be overstated. This is not to suggest that
the picture is entirely benign: some groups have experienced declines
in job tenure since the 1980s, and the rate of job displacement remains
relatively high given the current strength of the labor market. To
address these and other problems, this Administration has undertaken
a number of measures to strengthen education and job training and to
promote lifelong learning.
Besides spreading the benefits of economic growth more widely, the
robust labor market has generated other, less obvious benefits. It has
contributed to a decrease in welfare case loads, allowing States and
localities to focus increased resources on designing and implementing
welfare reform. In addition, low unemployment and, especially, the rise
in average wages may have contributed to a reduction in crime. Several
studies have demonstrated an inverse relationship between labor
market opportunities and criminal behavior: the better the options in
legal employment, the less likely are potential criminals to commit
crimes.
The chapter begins by documenting economy-wide developments in
the labor market in the past few years within the context of longer run
changes. It then focuses on recent improvements experienced by workers




99

who have traditionally not fared as well in the labor market, including
high school dropouts, blacks, Hispanics, youth, immigrants, and single
mothers. The chapter then goes on to examine some important but less
obvious side benefits of the tight labor market. This is followed by a discussion of evidence on changes in the relationship between workers and
employers, including job displacement, job tenure, and the contingent
work force. Finally, the chapter reviews recent policy developments to
promote job training and lifelong learning.

ECONOMY-WIDE DEVELOPMENTS IN THE
LABOR MARKET
EMPLOYMENT
The usual indicators of labor market progress—employment, unemployment, and wages—show that working men and women continue to
benefit from the ongoing economic expansion. Employment is at an alltime high, with 133 million Americans at work in December 1998, and
only 4.3 percent of the labor force unemployed. Having fallen from 7.3
percent in January 1993, the unemployment rate is at its lowest level
since February 1970 (Chart 3-1).
Chart 3-1 Unemployment and Discouraged Workers
The unemployment rate is at its lowest level since February 1970. Including
discouraged workers increases the rate by at most four-tenths of a percentage point.
Percent

Thousands

12

Discouraged workers
(right scale)

Unemployment rate
(left scale)

10

v

500

Unemployment rate
including discouraged workers.
(left scale)

i
1969
1973
1977
1981
1985
1989
1993
1997
Note: Discouraged workers and the unemployment rate incfuding them are annual averages.
Source: Department of Labor (Bureau of Labor Statistics).

Data on discouraged workers provide further evidence of a strong
labor market. The number of discouraged workers—workers who are
not employed and who have not looked for work in the past 4 weeks




100

because they did not think they could find a job —has shrunk by onethird since 1994, the earliest year for which comparable data are available. Discouraged workers are not counted in the labor force and therefore are not captured in the official unemployment rate. However,
because there are so few discouraged workers, redefining the unemployment rate to include them as unemployed increases the unemployment
rate by no more than 0.4 percentage point (see Chart 3-1).
Much of the growth in employment reflects an increase in the share
of women looking for and finding jobs. More women than ever before
have joined the labor force: among women aged 25-64, 72.4 percent
were working or seeking work in 1998, up from 70.2 percent in 1993
and 33.1 percent in 1948. The labor force participation rate among
men aged 25-64 gradually declined during the 1960s and early 1970s,
but it has remained steady at about 88 percent ever since.
A tight labor market in a high-employment economy means that
more men and women who are looking for jobs are finding them, and
finding them faster. Those unemployed in 1998 had been searching for
work an average of 14.5 weeks, down from 18.8 weeks in 1994, the earliest year with comparable data. The average length of a spell of unemployment is sensitive to the number of those undergoing long spells. In
1998, 14.1 percent of the unemployed had been searching for a job for
over 27 weeks, far below the 1994 figure of 20.3 percent. By contrast,
the share of those unemployed for less than 15 weeks rose from 64.2
percent to 73.6 percent during the same period.
WAGES
One of the best documented labor market trends of the past few
decades has been the decline in real wages among men. According to
the Current Population Survey (CPS; see Box 3-1 for a description of
Box 3-1,—Sources of Wage Data
This chapter uses several different sources of data on wages.
The Bureau of Labor Statistics (BLS) of the Department of Labor
publishes estimates derived from monthly surveys of both households and establishments: the CPS, which surveys about 50,000
households, and payroll records reported by about 390,000 establishments representing the nonfarm sector. Earnings data tabulated by the BLS from the household data usually describe the
median weekly earnings of full-time workers aged 16 and over.
However, because significant portions of the populations of interest in much of this chapter often do not work full time, in many
cases the Council of Economic Advisers has made special tabulations of wages including all workers aged 16 and over—part-time




101

Box 3-1.—continued
as well as full-time—in the CPS data. Unless otherwise specified,
this is the population referred to in this chapter.
All of the Council's tabulations use the merged Outgoing
Rotation Group (ORG) files of the CPS, which include a subset
(25 percent) of the full CPS sample who are asked about their
earnings and hours on their current job each month. In the ORG
data, hourly wages are measured by dividing usual weekly earnings by usual weekly hours, both as measured on the individual's
main job. All wage data are presented in real 1997 dollars, adjusted
for inflation using the CPI-U-X1 (the urban consumer price index
with rental equivalence).
This chapter also uses BLS establishment data, collected from
businesses and State and local governments. Prom these data are
derived estimates of average weekly earnings and hours worked
for production and nonsupervisory workers. In addition, the
employment cost index (ECI), also constructed from establishment data, measures total compensation paid to workers, including both wages and salaries and the cost of benefits such as health
plans. Fixed industry weights are used to ensure that th& ECI
reflects only changes in compensation, not shifts in employment
across industries and occupations. The CPS wage data and Average weekly earnings of production and nonsupervisory workers do
reflect these shifts, as well as wage trends within iixdipstri^s atid
-occupations.
.
.
, : ,;v:i;r^4;:, ?;;-•>
the data), between 1979 and 1993 the median real wage for men fell by
11.1 percent (Chart 3-2). However, progress has been made since 1996:
the median real wage for men rose 1.7 percent in 1997 and 2.3 percent
in 1998. Women experienced slightly stronger real wage growth in 1997
of 1.9 percent, but their wages were flat in 1998. Other measures of
compensation show similar increases. Data reported by establishments
(businesses and government agencies; the CPS data cited above are
from surveys of households) show that, after stabilizing in the early
1990s, real hourly earnings of production and nonsupervisory workers
have risen by 5.4 percent since 1993. The employment cost index (see
Box 3-1) shows that total compensation (wages and salaries plus benefits) per worker increased by 2.2 percent in real terms from the third
quarter of 1997 to the third quarter of 1998. Employers' wage and
salary costs in that period rose by 2.7 percent and benefit costs (health
insurance, paid leave, supplemental pay, retirement benefits, and the
like) by 1.2 percent. Establishment data also show that the average
workweek for production and nonsupervisory workers continued to
hover between 34.4 and 34.8 hours, as it has since the mid-1980s.




102

Chart 3-2 Median Hourly Wages of Men and Women Aged 16 and Over
Men's wages generally declined between 1979 and 1993, but have risen in more
recent years. Women's wages have risen steadily.
1997 dollars
15
14

13

12

10

1979

1982

1985

1988

1991

1994

1997

Note: Sample includes part-time as well as full-time workers.
Source: Council of Economic Advisers tabulations of Current Population Survey data.

DISADVANTAGED GROUPS
A strong labor market is particularly important to less advantaged
groups in the labor market, such as workers with less education,
younger workers, racial and ethnic minorities, and immigrants. The
unemployment rates of these groups typically swing up and down
more than the average during expansions and recessions. When
employers find it hard to fill vacancies, they are more willing to hire
and train workers whom they might pass over when they have fewer
openings and an abundance of applicants.
For the same reason, a tight labor market can also pull up wages for
disadvantaged workers. When labor is scarce, these workers can command better pay than at other times. The current expansion is especially important for disadvantaged workers given their experience
from the late 1970s to the early 1990s, when wage inequality grew and
less skilled groups faced persistently declining wages, on average.
The reasons for these wage declines and the rise in inequality that
accompanied them were discussed in the 1997 Economic Report of the
President and are still being debated, but it seems clear that demand
for highly skilled workers has been expanding faster than supply,
whereas demand for less skilled workers has declined even faster than
supply. Even though the fraction of the population without a high
school diploma has shrunk, as older, less educated cohorts have retired




103

and been replaced by younger, more educated ones, the number of jobs
available to high school dropouts shrank even faster from the late
1970s to the early 1990s. An important explanation is technological
change in manufacturing, as a result of which the manufacturing
sector requires fewer workers to produce more output than in the
past. Competition from lower wage, low-skilled labor in other countries
may also have been a factor, although most studies find that technological change is more important than increased international trade in
explaining the declining demand in the United States for workers
with no more than a high school diploma. Meanwhile, employment has
expanded dramatically in the financial, professional, and business
services industries, where most jobs require a college education or
beyond.
Unions have historically helped less educated workers obtain higher
wages than they could get otherwise. As employment in the highly
unionized goods-producing, transport, and utilities industries has
declined as a share of the work force since the 1950s, however, so has
union membership. Like the American economy in general, the labor
market has become more competitive in recent decades, with compensation and job security more often determined by market forces than
before. This has benefited many American workers who were in a
position to take advantage of the new job opportunities, but it has been
hard on less skilled workers at the lower end of the wage distribution.
The Administration's efforts to keep the economy expanding and to
make work pay have been particularly important to these workers. Not
only is the overall labor market performing at record levels, but several groups of workers who had been experiencing low employment
rates, declining wages, and high rates of unemployment have begun to
show marked improvements. These groups include low-wage workers,
workers with less than a college education, blacks and Hispanics,
immigrants, and single mothers.
LOW-WAGE WORKERS
It is well established that workers at the lower end of the wage distribution have not fared well in recent decades: from the late 1970s
through the early 1990s, the purchasing power of their wages declined.
Between 1979 and 1993 the real hourly wages of male and female
workers (including part-timers) at the 10th percentile of the wage distribution fell by 14.8 percent and 15.8 percent, respectively (Chart 3-3).
More recently, however, these lowest paid workers have seen significant gains. Real hourly wages for men 16 and older at the 10th and
20th percentiles have increased by about 6 percent since 1993, with
especially large gains in the past 2 years. One might expect the earnings of low-wage women to have declined in recent years as supply
expanded when a large number of them left welfare and entered the
labor force. But on the contrary, wage increases for women were




104

Chart 3-3 Hourly Wages of Low-Wage Workers Aged 16 and Over
During the 1980s, wages declined for men and women at the 10th and 20th percentiles
of the wage distribution, but significant gains have occurred since 1993.
1997 dollars

Men: 20th percentile

Women: 20th percentile

Women: 10th percentile

1979
1982
1985
1988
1991
1994
Note: Sample includes part-time as well as full-time workers.
Source: Council of Economic Advisers tabulations of Current Population Survey data.

1997

significant, with wages for those at the 20th percentile increasing by
4.7 percent since 1993.
These gains have not been confined to the lower end of the wage distribution. Real hourly earnings of the median male worker have
increased by 3.6 percent since 1993, while those of the highest earning
men and women (measured at the 90th percentile; these data are not
shown in the chart) have increased by 6.4 percent and 6.2 percent,
respectively.
LESS EDUCATED WORKERS
Education is a key determinant of labor market success, and much of
the decrease in real wages for low-wage workers over the past two
decades may be due to changes in the economy that have placed
increasing value on skilled labor. The shift from goods-producing
industries to services and to a more technology-intensive workplace
has increased the premium on education, and particularly on workers
who have at least a bachelor's degree. In this new economic environment it is important to monitor the progress of those with less education, who risk missing out on gains in the economy as a whole. During
the current economic expansion, however, those with less education
appear to be sharing in the benefits of the tight labor market in a number of ways.
Since 1993 the strong labor market has sharply reduced unemrates for workers at all levels of educational attainment.




105

Particularly interesting, however, are changes in the employment-topopulation ratio for people with different levels of attainment. As
Chart 3-4 shows, high school dropouts have experienced a much larger
relative increase in their employment rate than have workers with more
education. This increase is the joint result of increased labor force
participation among dropouts and decreased unemployment among
those dropouts who are in the labor force. The economy created enough
low-skilled jobs to employ a larger share of the dropout population,
which is shrinking as more-educated younger cohorts replace older ones.
Chart 3-4 shows the results for men and women combined, but looking
at men and women separately yields the same qualitative result.
Chart 3-4 Percent Change in Employment Rate by Level of Education, 1993-1998
Among persons aged 25 to 64, high school dropouts have experienced a larger relative
increase in their employment rate since 1993 than those with more education.
Percent change

10

Less than
High school
Some college
College degree
high school
diploma
Source: Council of Economic Advisers tabulations of Current Population Survey data.

More than
college degree

Workers with less education are not only experiencing employment
gains; they are also beginning to share in wage gains. From 1993 to
1998, male high school graduates aged 20 and over without any college
attendance experienced a real increase in their median wage of 2.8 percent. Although small, this was an improvement over their experience
from 1979 to 1993, when their median wage fell by 21.8 percent. In 1998
the median real wage of male high school dropouts aged 20 and over
finally increased, for the first time since at least 1979, by 7.0 percent.
Although, as these numbers show, both the employment and the
earnings of workers with less education have been improving, education remains a key determinant of labor market outcomes. The fiscal
1999 budget passed by the Congress contained a down payment for the




106

Administration's initiatives to reduce class size by hiring 100,000 new
teachers. The Administration has also encouraged both young people
and adults to pursue further education and job training. The new
GEAR UP program, for example, provides mentors to disadvantaged
students preparing for college, and the new HOPE Scholarship tax
credit provides up to $1,500 for the first 2 years of college or vocational
school. Also, in 1998 the Administration obtained an increase both in
total funding for Pell grants, to $7.7 billion, and in the maximum
grant, from $3,000 to $3,125. These grants provide financial aid to
undergraduates on the basis of need.
For fiscal 2000 the Administration is proposing substantial changes
to America's schools. Measures in the President's budget will hold
teachers, schools, and students more accountable for educational outcomes; will reduce class size; will provide for building and renovating
public schools; and will recruit outstanding new teachers. The President has asked the Congress to expand on the $1.2 billion down payment made last year to reduce class size in the first three grades to a
national average of 18. The Administration has proposed new Federal
tax credits as incentives to help States and school districts build new
public schools and renovate existing ones. The President's budget contains a series of new initiatives and funding increases to help recruit
well-prepared people to teach where they are most needed, in highpoverty urban and rural communities. In addition, the President is
proposing to help the more than 44 million adults who perform at the
lowest level of literacy to acquire reading and writing skills. His budget would, among other things, establish a 10 percent tax credit for
employers who provide workplace education programs for their
employees who lack basic skills.

BLACKS AND HISPANICS
After years of decline, the real wages of black men began to increase
in 1993; they have risen by 5.8 percent since 1996 alone. Black women
and Hispanic men and women have also experienced recent gains
(Charts 3-5 and 3-6). Because blacks and Hispanics are disproportionately represented in the lower end of the wage distribution, the longrun trends in their wages are similar to those for low-wage workers
generally. Both of these minority groups have less education on average than the rest of the work force, and Hispanics are younger on average. When the real wages of workers without a college education started declining in the 1970s, the median real wages of black and Hispanic
men started declining as well. In the last few years, however, their
wages have been rising.
Employment opportunities are also expanding for minorities. The
unemployment rates for blacks and Hispanics in 1998 were the lowest
ever recorded, and were 4.1 and 3.6 percentage points lower, respectively, than in 1993. But minority unemployment is still unacceptably




107

Chart 3-5 Median Hourly Wages of Men Aged 16 and Older by Race and Ethnicity
After years of decline, wages have risen for white and black men since 1993 and for
Hispanic men since 1995.
1997 dollars
16
White non-Hispanic

14

12

Black non-Hispanic
10

1994
1979
1982
1985
1988
1991
Note: Sample includes part-time as well as full-time workers.
Source: Council of Economic Advisers tabulations of Current Population Survey data.

1997

Chart 3-6 Median Hourly Wages of Women Aged 16 and Older by Race and Ethnicity
Black and white women now earn their highest wages ever, and wages of Hispanic
women have increased recently.
1997 dollars
16

14

12

White non-Hispanic
\
Black non-Hispanic

^ \
1979

1982
1985
1988
1994
1991
Note: Sample includes part-time as well as full-time workers.
Source: Council of Economic Advisers tabulations of Current Population Survey data.




108

^

1997

high, at 8.9 percent for blacks and 7.2 percent for Hispanics in 1998,
compared with 3.9 percent for whites.
The tight labor market of the 1990s appears to be helping even
young minority workers, who suffered greater wage declines than others in the 1980s and who typically have extraordinarily high unemployment rates. By 1998 the unemployment rate among black youth
aged 16-24 was 20.7 percent, lower than in any year since the data
series began in 1973. And the unemployment rate among young Hispanics aged 16-24 dropped 3.7 percentage points between 1993 and
1998 (Chart 3-7). Moreover, the median real wages of young black
males aged 16-24 rose by 6.2 percent in 1998 alone.
Chart 3-7 Unemployment Rates of Persons Aged 16-24 by Race and Ethnicity
Unemployment rates among young people have fallen since the early 1990s, although
blacks continue to have more than twice the unemployment rate of whites.
Percent

40

30

20

10

White

1973
1976
1979
1982
1985
Source: Department of Labor (Bureau of Labor Statistics).

1988

1991

1994

1997

IMMIGRANTS
Foreign-born workers often face challenges in the labor market that
native-born workers do not: weaker English skills, a lack of networks
for finding jobs, and unfamiliarity with American institutions and
workplace culture sometimes create barriers to their obtaining good
jobs. Foreign-born workers, including those from Mexico and Central
America (who account for about 30 percent of new immigrants since
1980), are less likely to have completed high school than are Americanborn workers. However, there is wider variation in educational attainment among immigrants than among natives; whereas many immigrants have minimal schooling, many others have completed college.




109

In fact, in 1990 immigrants and natives were equally likely to have a
college degree.
A worrisome trend has been the decline in relative educational
attainment and wages of successive cohorts of immigrants over the
past few decades. Although educational levels have risen across successive cohorts since 1960, they have not kept up with the educational
attainment of natives. Immigrants who entered in the late 1980s are
much more likely to lack a high school diploma than persons born in
the United States. However, during the past 4 years, immigrants have
clearly been sharing in the labor market benefits of the economic
expansion, particularly through reduced unemployment rates.
(Comparable data are not available for earlier years of the CPS
because the CPS did not collect data on country of birth until 1994.)
Unemployment rates decreased from 1994 to 1998 throughout the
working population, but immigrants have experienced especially large
declines (Chart 3-8). Particularly striking is the narrowing of the gap
in unemployment rates between native-born workers and those born in
Mexico and Central America. This trend has been coupled with steady
Chart 3-8 Unemployment Rates by Nativity
The gap in unemployment rates between natives and foreign-born persons has narrowed
since 1994.
Percent

10

Mexican- and Central American-born

U.S.-born
4 -

1994
1995
1996
1997
Source: Council of Economic Advisers tabulations of Current Population Survey data.

1998

levels of labor force participation for men in this group and a small
increase among women. As a result, employment rates for both males
and females from Mexico and Central America have increased. Arising
share of these workers are also working full time.




110

Certain groups of immigrants are also earning more. Since 1995 the
median real wage of Mexican- and Central American-born immigrants
has risen, by a total of 6.8 percent for men and 3.8 percent for women.
This is particularly encouraging because one might expect the continuing addition of low-wage new entrants to the population of Mexicanand Central American-born immigrants to depress the group's median
wage, even though individual immigrants' wages tend to increase with
time in the United States. In fact, because entrants since 1995 are likely to have below-median wages and are included in the pool used to
calculate the median wage in 1998, wages for Mexican- and Central
American-born immigrants already employed in the United States in
1995 have probably risen by even more than the median for the group
overall. The increases in the minimum wage in 1996 and 1997, as well
as the President's proposed $l-per-hour increase over the next 2 years
(Box 3-2), are especially important for large numbers of these
immigrants, whose wages are at or near the minimum.
Box 3-2.—Increasing the Minimum Wage
On October 1,1996, the minimum wage was raised from $4,25
to $4.75 an hour. It was again increased to $5*15 an hour on September 1, 1997. These were the first increases in the minimum
wage in 5 years, during which its real value had fallen by 15 percent. The President has proposed to increase the minimum wage
further, by $1 per hour over the next 2 years.
As Chart 3-3 shows, the wages of low-wage workers have
increased markedly since 1996, and the recent increases in the
minimum wage are likely to explain some of this rise. It has been
estimated that almost 10 million workers benefited from the
recent minimum wage hikes. Some have suggested that much of
the benefit from a higher minimum wage goes to teenagers from
well-off families, but in fact most minimum wage workers are
adults from lower income families, and their wages are a major
source of their families' earnings. Among workers who were earning between $4.25 and $5.15 an hour just prior to the 1996
increase, 71 percent were aged 20 or older, 58 percent were
women, and one-third were black or Hispanic. Almost half (46 percent) of the affected workers worked full time, and most lived in
low-income households. Over half the benefits from the higher
minimum wage went to households in the bottom 40 percent of
the income distribution. In 1997 the earnings of the average minimum wage worker accounted for 54 percent of his or her family's
total earnings.
A potential side effect of increasing the minimum wage is a
reduction in employment: with low-wage labor more expensive,




111

Box 3-2.—continued
some firms may hire fewer workers. Many studies have examined
this issue, and the weight of the evidence suggests that modest
increases in the minimum wage have had very little or no effect on
employment. In fact, a recent study of the 1996 and 1997 increases,
using several different methods, found that the employment
effects were statistically insignificant. Moreover, the unemployment rates of black teenagers and high school dropouts—two
groups of workers most likely to be affected by the wage hike—are
lower today than they were just prior to the increases.
Increases in the minimum wage and expansions in the earned
income tax credit reinforce each other. Among low-wage workers,
the joint effect of these changes has been a substantial increase in
income. Between 1993 and 1997 the inflation-adjusted minimum
wage rose by 9 percent, while the maximum payment under the
earned income tax credit rose by 38 percent for one-child families
(116 percent for two-child families). For families with one earner
working full time at the minimum wage, the combination of higher
earnings and a larger tax refund would have raised total income
by 14 percent if the family had one child, and by 27 percent for a
family with two or more children. As a result of these policy
changes, one- and two-child families with a single full-time
minimum wage worker now earn enough to escape poverty
SINGLE MOTHERS
The percentage of children living in single-parent families, usually
with a single mother, has risen sharply over the past few decades. The
share of all families (defined as households in which one or more persons live with children of their own under age 18) that were headed by
a single parent increased from 13 percent in 1970 to 32 percent in
1998. The majority of these families rely heavily on the mother's labor
earnings; therefore, the labor market opportunities available to these
mothers are critical for their families' economic well-being.
The labor force participation rate of single mothers aged 16-45 has
been climbing since 1993, after remaining essentially flat for many years
(Chart 3-9). In just the 4 years from 1993 to 1997, their participation rate
increased by 8.7 percentage points, from 75.5 percent to 84.2 percent.
What caused this unusually large rise? The expansion of the earned
income tax credit (EITC; Box 3-3) seems to have contributed. During
the same 4 years the real value of the maximum EITC payment
increased by 38 percent for workers with one child, including single
mothers, and by 116 percent for those with two or more children.
In contrast, the proportion of single women without children who




112

Chart 3-9 Labor Force Participation Rates of Single Women
The share of single mothers in the labor force has increased dramatically since 1993,
due in part to increases in the earned income tax credit (EITC).
Percent

Thousands of 1997 dollars

100

,

Single women
without children
(left scale)
Single women
with children
(left scale)

80

Maximum EITC
(right scale)

/
60

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Note: After 1990, the maximum EITC is the average of the maximum for taxpayers with one child and
with more than one child.
Source: Jeffrey B. Liebman "The Impact of the EITC on Incentives and Income Distribution," Tax Policy
and the Economy, 1998. Updated by Council of Economic Advisers.

participated in the labor market—who became eligible for only a very
small credit in 1994, if their earnings were very low—did not change
over this period. As Chart 3-9 shows, the difference in labor force participation rates of single women with and without children has closely
tracked growth in maximum EITC benefits.
One recent study concluded that as much as 60 percent of the
increase in employment of single mothers since 1984 was attributable
to expansions in the EITC. For the period between 1992 and 1996 the
EITC explains 33 percent of the increase in annual employment among
Box 3-3.-The Earned Income Tax Credit
The EITC is a tax credit for low-income workers designed to
reduce their overall tax burden; The credit is reftmdable; that is,
workers can receive the full amount to which they are entitled
even if it exceeds the income ^^^&^^^^l^si^ apply directly
to the internal Revenue Service for the EITC and generally
receive the credit as part of their tax refund*
Only families with a working member are eligible for the EITC,
and the amount depends on the faipaily's labor market earnings.
For example, a worker with one chili will receive a credit of 34
cents per dollar of 1998 earnings, up to a inaxipum of $2,271* A
family with two or more children gets 40 cents per dollar up to a




113

Box 3-3.—continued
maximum of $3,756 (Chart 3-10). Childless workers aged 25-64
with earnings under $10,030 are eligible for a much smaller credit of less than 8 cents per dollar up to a maximum of $341. For all
eligible workers the credit remains at the maximum over a range
of earnings and then is gradually phased out.
The EITC was significantly expanded under the Omnibus Budget Reconciliation Act (OBRA) of 1993. Before the 1993 law was
passed, eligible working parents received just 19 to 20 cents for
each dollar earned up to the maximum. OBRA 1993 increased the
maximum credit for families with two or more children by over
$1,500 (in 1998 dollars) and extended eligibility to families with
incomes up to $30,095—about $3,600 more than under previous
law. These expansions have resulted in significant increases in the
labor force participation of single mothers.
A large proportion of families eligible for the EITC—81 to 86
percent in 1990—have claimed the credit. About 19.8 million
workers are expected to claim the credit in tax year 1998, receiving an average of $1,584. About 16.4 million of these claims will be
for workers living with children; these families will receive an
average credit of $1,870.
The EITC is targeted to families living in poverty, with the goal
of lifting their income above the poverty line. The latest estimate
from the Bureau of the Census shows that the EITC lifted 4.3 million persons—workers themselves and their family members—out
of poverty in 1997, more than twice as many as in 1993. Just over
half (2.2 million) of these were under the age of 18, and 1.8 million
were living in families headed by unmarried women. Updates by
the Council of Economic Advisers of analyses reported in the 1998
Economic Report of the President find that over half the decline in
child poverty between 1993 and 1997 can be explained by changes
in taxes, most importantly in the EITC. The EITC enabled about
1.1 million blacks and nearly 1.2 million Hispanics to escape
poverty in 1997. These statistics make it clear that the EITC has
become a major weapon in the fight against poverty.
this group. A second study examined the 1986 EITC expansion, which
was more modest than the 1993 expansion, and found that it, too, significantly increased labor force participation among single mothers,
especially those with less education. Still another study, looking at the
effects of the EITC on all eligible families, found that the 1993 expansion could account for an increase in labor supply of 19.9 million hours
by 1996 and induced an estimated 516,000 families to move from
welfare into the work force.




114

Chart 3-10 The Earned Income Tax Credit in 1993 and 1998
The EITC has been expanded considerably since 1993, with the maximum credit
increasing by over $2,000.
Credit amount (1997 dollars)
4,000

3,000

2,000

1,000

5,000

10,000

15,000
20,000
Earnings (dollars)
Note: Credit amount depicted is for a family with two or more children.
Source: Department of the Treasury.

25,000

30,000

Other factors also contributed to the increase in labor force participation among single mothers. Changes in the welfare system, culminating in the enactment of the Personal Responsibility and Work
Opportunity Reconciliation Act (PRWORA) in 1996, were very important. PRWORA replaced the Aid to Families with Dependent Children
(AFDC) program with Temporary Assistance for Needy Families
(TANF), which made most Federal welfare assistance dependent on
work effort and limited the lifetime duration of assistance. Before
PRWORA was passed, States had been experimenting with work
requirements and time limits under waivers of the Federal rules governing AFDC since the early 1990s. Even before that, States had been
changing their formulas for calculating AFDC benefits in ways that
made it more worthwhile for low-income single mothers to work. It has
been estimated that changes in the welfare system account for about
30 percent of the increase in employment of single mothers between
1984 and 1996, and at least 20 percent of the increase between 1992
and 1996. PRWORA is discussed further below.
Expansions of Medicaid coverage to low-income children who were
not eligible for AFDC removed another disincentive to their mothers'
working. Expansions of training and child care programs for lowincome workers also encouraged these women to work. These factors
played a much smaller role than did the EITC and welfare reform,
however. Finally, the tighter labor market has made employers more




115

willing to hire welfare recipients and has made it easier for all single
mothers to find jobs in recent years.
OVERCOMING DISADVANTAGES IN THE LABOR
MARKET
The last several years have seen the gains from the ongoing economic
expansion distributed throughout the population, reaching groups that
had previously been left out. Low-wage workers, high school dropouts,
blacks, Hispanics, immigrants, younger workers, and single mothers
have all enjoyed better labor market outcomes. Administration policies,
most importantly the expansion of the EITC and the increases in the
minimum wage, along with efforts to keep the overall economy growing,
have played a central role in achieving these successes.
However, members of these disadvantaged groups are still much
more likely than other workers to be unemployed, and when they do
find a job, they still earn lower wages than other groups. A competitive
labor market is a two-edged sword. Although competition is the most
efficient way to allocate labor and get goods produced at lower cost, it
may result for some in wages that fail to ensure an adequate income.
Competitive market forces produced an increasingly unequal distribution of earnings from the late 1970s into the early 1990s, so that some
people found it difficult, even by working hard, to support their families.
Government can mitigate these undesirable side effects of labor
market competition. Beyond its emphasis on education, this Administration has responded to the problem of low wages for the less skilled
by expanding the EITC and raising the minimum wage, as described
in Boxes 3-2 and 3-3. The Administration will continue to address this
concern by designing policies that make work pay, improve education,
and expand opportunities for education and job training, as described
previously in this chapter. Moreover, the President's fiscal 2000 budget
proposes an $84 million increase in funding for civil rights enforcement, including $14 million for an Equal Pay Initiative at the Equal
Employment Opportunity Commission and the Department of Labor.

BENEFITS TO SOCIETY OF A STRONG LABOR MARKET
Better employment opportunities and higher wages are obviously
good for workers individually. But today's strong labor market is
enhancing the well-being of the whole of American society in ways that
are less obvious. One way is by easing the implementation of the 1996
welfare reform act; another is by reducing crime.
WELFARE REFORM
It has been 2l/2 years since the President signed the Personal
Responsibility and Work Opportunity Reconciliation Act into law,




116

initiating dramatic changes in the Nation's welfare system. Welfare
assistance is now work-focused and time-limited: with few exceptions,
Federal welfare assistance is strongly linked to the recipient's efforts to
find a job. Adults cannot receive aid for more than a total of 5 years
during their lifetime, and in some States the maximum is even less.
PRWORA shifted greater responsibility for welfare management to
States and localities, many of which have responded quickly by
redesigning and implementing their own welfare programs. In most
States this effort builds on reforms initiated under waivers approved
by this Administration before PRWORA was passed.
Welfare case loads have fallen dramatically since PRWORA was
enacted in August 1996 (Chart 3-11). Moreover, this reduction has been
experienced nationwide, with every State except Hawaii and Rhode
Island posting double-digit percentage reductions in case loads. The
national case load peaked in 1994, and since that time it has declined
by 42 percent; in 17 States the case load in September 1998 was less
than half what it had been in March 1994.
Chart 3-11 Welfare Participation and Unemployment
The percent of the population on welfare has declined dramatically since 1994.
Percent

Percent

Welfare participation rate
(right scale)

6 -

5 -

Unemployment rate
(left scale)

1970
1974
1978
1982
1986
1990
1994
Note: Welfare participation rate for 1998 is for September.
Sources: Departments of Labor (Bureau of Labor Statistics) and Health and Human Services.

1998

What caused this unprecedented case load reduction? Case loads
normally fluctuate with the business cycle, rising in periods of high
unemployment and declining when unemployment is low, as it is today.
Chart 3-11 illustrates the relationship between labor market
opportunities and welfare participation over the past three decades.
When unemployment increased in the early 1970s, so, too, did welfare




117

participation. The renewed increase in welfare participation in the late
1980s and early 1990s, as well as the decline that began in 1994, also
corresponded with changes in employment opportunities during these
periods.
Other evidence suggests that in the current expansion many businesses are coming to see welfare recipients as an untapped source of
employees. In a 1998 survey of 400 businesses that are members of the
Welfare to Work Partnership (Box 3-4), 71 percent stated that they or
their industry faced a labor shortage, and that the tight labor market
was one of the main reasons they were hiring welfare recipients. MoreBox 3-4.—The Welfare to Work Partnership
At the President's urging, the Welfare to Work Partnership was
launched in May 1997 to lead the national effort to encourage
businesses to hire people from the welfare rolls. Founded with five
participating businesses, the partnership grew to include 5,000
businesses within 1 year; it currently has a membership of 10,000.
In 1997 the 3,200 businesses then participating hired an estimated
135,000 welfare recipients.
An important goal of the partnership is to increase awareness
within the business community that welfare recipients are productive potential employees. A survey of Michigan firms suggests
that lack of such awareness may be an important barrier to some
businesses: among firms that said they had been contacted by the
Michigan employment agency and informed about the advantages
of hiring from the welfare rolls, the majority had subsequently
hired at least one welfare recipient* To overcome the awareness
barrier, the partnership provides outreach, technical assistance,
and support for hiring welfare recipients through a variety of
channels, includinga toll-free number, a World Wide Web site, a
^Blueprint for Business* manual, and a guide to retaining welfare
workers.
Many firms realize that welfare recipients are a pool of good
potential workers, and the partnership has helped firms learn
how to locate and identify them. In fact, in a survey of partnership
firms who have hired former welfare recipients, 76 percent reported that these workers were "good, productive employees/ The
tight labor market has motivated many firms to consider hiring
welfare recipients, but the hope is that the efforts of the partnership and the employment emphasis of PRWORAhave built a relationship between employers and welfare offices that will endure
into leaner times. If so, firms will continue to tap into the pool of
reliable employees on the welfare rolls even after their hiring
pressures ease.




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over, the tight labor market is most likely causing employers to expand
efforts to invest in and retain current workers, including former welfare recipients. The skills and job experience that former welfare recipients are accumulating during this expansion may be a lasting benefit.
However, the trend in welfare participation does not always match
that in unemployment, most notably when other important changes
are taking place, including changes in welfare benefits and in family
structure, as well as policy reforms. Indeed, welfare participation did
not increase during the recession of the early 1980s. It is difficult to
determine how much each of several factors—the economy, program
reforms, and other factors—has contributed to the recent case load
decline. An analysis by the Council of Economic Advisers that examines these competing factors finds that a 1-percentage-point decline in
the unemployment rate in each of 2 successive years is associated with
roughly a 4 percent decline in the case load in the second year. Other
studies have corroborated this finding. Applying this estimate to the
change in the unemployment rate between 1994 and 1998 indicates
that the improvement in the labor market can explain an 8.3 percent
drop in welfare case loads. Given that the national welfare case load
actually fell by 42.3 percent during this period, it appears that
improved labor market conditions were responsible for roughly onefifth of that decline. Similar analyses indicate that the share of the
decline since 1996 that can be explained by the strength of the economy is much smaller, reflecting the importance of other changes, especially welfare reform. This result builds on the Council's analyses,
which show that welfare reform achieved through State waivers
played an important role in the case load reductions of the mid-1990s.
The case load reduction, combined with fixed block grant funding
under PRWORA, has translated into greater resources for States and
localities. The amount of the Federal welfare grant given to each State
is now fixed (with some exceptions) and guaranteed, typically at the
level of funding that the State received in 1994. As a result, States
receive more Federal assistance today than they would have under the
AFDC program, under which Federal transfers decreased as the case
load fell. It has been estimated that, in 1997, 46 States had more welfare resources at their disposal—State and Federal dollars combined—
under PRWORA than they would have had if the old system had been
maintained. The difference nationwide was $4.7 billion, with a median
difference across all States of $44 million, or 22 percent.
States are using these expanded resources in a variety of ways.
Some have enhanced investment in services such as child care, transportation, and substance abuse treatment for those who remain on
welfare, many of whom face multiple barriers to employment. Other
States are expanding support for welfare recipients who have gone to
work. In part because States have been unable to forecast case load
levels with any degree of accuracy, some States have a portion of their




119

TANF grants in reserve at the Treasury. These States will be able to
draw upon these reserves should case loads once again increase or
should those remaining on assistance need more intensive and costly
services. Many States are responding by reducing their own contribution to welfare funding (but can do so by no more than the Federal
maintenance-of-effort requirement allows).
Although the additional resources have thus allowed States to concentrate on designing and implementing welfare reform, the expanded
resources come with greater responsibility and accountability. States
and localities now have many more decisions to make regarding their
welfare programs. Moreover, because the Federal block grant is fixed,
States bear most of the risk associated with a future rise in the case
load.
Since PRWORA's enactment, this Administration has pursued various initiatives to enhance the welfare reform effort. The $3 billion Welfare to Work Grants Program targets long-term, hard-to-employ welfare recipients and noncustodial parents, helping them move into
lasting, unsubsidized employment. These resources can be used for job
creation, job placement, and job retention efforts. Most of the resources
are given directly to localities through private industry councils or
local work force boards. The Administration has proposed an additional $1 billion for the Welfare to Work Grants Program in fiscal 2000.
The welfare-to-work tax credit is a credit to employers to encourage
them to hire and retain long-term welfare recipients. The credit for
each eligible worker hired is equal to 35 percent of the first $10,000 in
wages during the first year of employment, and 50 percent of the first
$10,000 in the second year.
The Congress fully funded (at $283 million) the President's proposal
for welfare-to-work housing vouchers for fiscal 1999. The vouchers
may be used by welfare families to reduce a long commute or to secure
more stable housing to eliminate emergencies that keep them from
getting to work every day on time. Another important barrier facing
people who want to move from welfare to work—in cities and in rural
areas—is lack of transportation to jobs, training programs, and
child care centers. With the President's leadership, the Transportation
Equity Act for the 21st Century authorized $750 million over 5 years to
address this problem.

CRIME
The incidence of crime can be related to many factors, both in the
individual and in the policy environment, but clearly one determinant
is conditions in the legal labor market. A person who has a good job
usually finds his or her time better spent in legitimate activities than
in committing crimes, and risks losing more income from incarceration
than does someone who is unemployed or earning low wages. Statistics




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show that crime rates have in fact been dropping since the current
economic expansion began: between 1991 and 1997, property crimes
and violent crimes per capita fell 16 percent and 19 percent, respectively,
and the total crime index dropped 17 percent.
Studies have found that unemployment is related to crime rates,
but that the effect tends to be modest and insufficient to explain
changes in crime rates over periods longer than the business cycle.
New studies suggest, however, that crime may be more strongly correlated with wages than with unemployment. These studies find that
potential criminals are more likely to be influenced by longer term
prospects in the mainstream economy than by shorter term conditions,
and that wages are a better measure of these longer term prospects
than is the unemployment rate.
The new research shows that young men—the demographic group
most likely to commit crimes—respond to wage incentives. Declining
real wages during the 1980s and early 1990s appear to have influenced
the rise in crime rates. In particular, the decline in wages of less
skilled men between 1979 and 1995 is estimated to have increased
property crimes by 10 to 13 percent and violent crimes by about half
that amount. These findings are consistent with the idea that economic
incentives play a greater role in economically motivated crimes such as
burglary and robbery. In addition, because blacks have lower wages on
average than whites, about one-quarter of the racial difference in the
probability of committing a crime can be explained by the wage gap
between the races.
Falling wages therefore provide at least a partial explanation for
why property crimes did not fall much over the 1980s and early 1990s
as the proportion of 18- to 24-year-olds in the population declined. Of
course, other factors such as policing and sentencing practices also
affect crime rates. But the correlation between wages and crime suggests that the current strong labor market and wage growth among
young men have helped reduce crime rates.

JOB DISPLACEMENT, TENURE, AND THE
CONTINGENT WORK FORCE
Popular accounts sometimes suggest that the relationship between
workers and firms is undergoing profound change. The contemporary
work environment, in this view, is characterized by more frequent
corporate downsizings and other job displacements, the disappearance
of lifetime employment, and the rapid growth of a "contingent work
force" that can no longer count on high and rising earnings and job
security. However, a growing body of research using nationally
representative data calls this picture into question.




121

JOB DISPLACEMENT
Workers are considered displaced if they leave their jobs involuntarily, because of a plant closing, insufficient or slack work, abolition of
their position or shift, or some other, similar reason. Since 1984 the
Bureau of Labor Statistics (BLS) has conducted a biennial, nationally
representative survey of workers who have been displaced from their
jobs sometime in the 3 years prior to the survey (in the early years of
the survey the period was 5 years). Data from the 1996 survey showed
job displacement to be unusually high given the overall strength of the
economy. Extrapolation of the survey's findings indicated that about 15
percent of the work force had been displaced at some time between
1993 and 1995. This figure was up from 12.8 percent in 1991-93,
despite a drop in the overall unemployment rate from 7.5 percent in
1992 to 6.1 percent in 1994 (Chart 3-12). This rise in job displacement
led some analysts to argue that the employer-employee relationship
had changed and that displacement was on a rising trend.
Chart 3-12 Job Displacement Rate
The displacement rate fell to 12 percent for the 1995-97 period, but it is still a third
higher than in 1987-89, when unemployment was about the same.
Percent

Percent

10

..
.
x
Unemployment rate
(left scale)

Displacement rate
(right scale)

15

/

10

0

0
1981-1983 1983-1985 1985-1987 1987-1989 1989-1991 1991-1993 1993-1995 1995-1997
Sources: Henry S. Farber, "Education and Job Loss in the United States: 1981-1997," Princeton
University, 1998, and Department of Labor (Bureau of Labor Statistics).

Results from the 1998 survey, however, suggest that this interpretation may have been premature: that survey showed a substantial
decline in job displacement, to 12.0 percent for the 1995-97 period. All
major groups of workers experienced improvements: men and women,
younger and older workers, high school dropouts and college-educated
workers, and workers in manufacturing as well as those in professional
services. Nevertheless, the rate of job displacement in 1995-97 was still




122

one-third higher than it had been in 1987-89, when the unemployment
rate was at a similar level.
Historically, between 30 and 42 percent of displaced workers were
not employed 1 to 3 years after losing their jobs. Thus it is encouraging
that this rate has fallen to 24 percent in the latest survey (Chart 3-13).
Chart 3-13 Outcomes After Job Displacement
Among displaced workers, the share not employed 1 to 3 years after losing their jobs
fell to 24 percent in 1995-97; losses in earnings reached a record low of 5.7 percent.
Percent
50
Not employed in survey year
Earnings loss among reemployed
40

30

20

10

o
1981-1983 1983-1985 1985-1987 1987-1989 1989-1991 1991-1993 1993-1995 1995-1997
Source: Henry S. Farber, "Education and Job Loss in the United States: 1981-1997," Princeton
University, 1998.

In addition, reemployed workers typically earn less than they did in their
previous jobs. For example, one study of workers in the 1970s and 1980s
who had at least some earnings in the years after displacement finds an
average earnings decline of 29 percent in the year of displacement, which
subsequently shrinks to 10 percent. Here again the latest data are
encouraging: the reduction in weekly earnings among those reemployed
was only 5.7 percent in 1995-97, a record low, and earnings losses were
at or near record lows for workers of all levels of education.

JOB TENURE
Trends in average job tenure—the length of time a person stays with
the same employer—are often confused with trends in downsizing and
job displacement. In fact these trends may be quite different: because
many workers leave their jobs voluntarily, statistics on job tenure may
not accurately reflect rates of displacement. Yet much media attention
has focused on a purported disappearance of lifetime jobs, suggesting
that workers are holding jobs for shorter periods, and often implying
that these job terminations are more frequently involuntary. The




123

evidence finds that the percentage of workers with long job tenure
(10 or more years) has declined somewhat. The share of workers aged
35-64 who have long job tenure fell by about 5 percentage points
between 1979 and 1996 but remains substantial at roughly 35 percent.
The decline in the percentage of long-tenured workers has occurred
across many segments of the population. Workers at all levels of
educational attainment have experienced similar rates of tenure
decline, and declines have occurred across industries and occupations,
narrowing gaps in average tenure that formerly prevailed between
occupations. The trends differ for men and women, however, and the
aggregate decline in the percentage of long-tenured workers masks an
increase among women. Accounting for part of the overall decline since
1979 in the percentage of long-tenured workers are shifts in the demographic, industrial, and occupational composition of the labor force.
Some of the decline is also due to the large number of new workers
that firms have hired during the current expansion. Obviously, the
addition of many workers with short job tenure by itself lowers the
median tenure in the work force.
Retention rates, which give the likelihood that a given worker will
remain with the same employer in the next year, are not complicated
by the changing rate at which new workers are hired. Analysis of
retention rates complements findings on the cross-sectional distribution of tenure over all workers. Workers with less than 2 years of
tenure had moderately higher retention rates in the mid-1990s than in
the late 1980s. On the other hand, retention rates appear to have
decreased among workers with longer tenure. Again, however, some of
these changes may be due to voluntary separation.

THE CONTINGENT WORK FORCE
Contingent employment is defined by the BLS as employment without an implicit or explicit long-term contract. The BLS has conducted
two surveys of such employment. The first, in 1995, found that contingent employment made up a relatively small share of total employment. The second, in 1997, found that that share was not increasing.
Using the BLS's "middle" definition of contingency, about 2.4 percent of
the labor force (3 million workers) identified themselves as contingent
workers in February 1997, a slightly smaller share than in February
1995. This definition includes workers who say they expect to work
(and have worked) under their current arrangements for 1 year or less,
whether they are wage and salary workers, self-employed persons, or
independent contractors. In addition, it includes temporary help and
contract company workers if they have worked and expect to work for
the customer to whom they were assigned for 1 year or less.
Forty percent of contingent workers in 1997 were in so-called alternative work arrangements. They included independent contractors,
on-call workers, temporary help agency workers, and workers provided




124

by contract firms; the remaining 60 percent were in "traditional" jobs.
None of these categories of contingent workers comprised more than
0.5 percent of the labor force.
Contingent and noncontingent workers were strikingly similar in
terms of educational attainment and race (Chart 3-14). Also, contingent workers were employed in a wide variety of occupations, belying
the view that all contingent jobs are low-skilled jobs. However, contingent workers include a relatively large proportion of very young workers: 37 percent of contingent workers, but only 13 percent of noncontingent workers, were less than 25 years old.
Chart 3-14 Characteristics of Contingent and Noncontingent Workers, February 1997
Contingent and noncontingent workers are similar in terms of educational attainment
and race. Contingent workers are more likely to be young and working part time.
Percent

Contingent workers
Noncontingent workers

20 -

10 o
College
Black
Female
graduate
Source: Department of Labor (Bureau of Labor Statistics).

Under age 25

Work part-time

Forty-five percent of contingent workers were employed part time,
compared with only 18 percent of noncontingent workers. Contingent
workers also earned less: their median weekly earnings were only 53
percent of that of noncontingent workers, although differences in age
and hours worked appear to account for much of the earnings gap.
Regardless of age, however, contingent workers were less likely to be
offered health insurance or a pension plan by their employer.
Data from 1997 show that nearly half of all contingent workers
accepted their contingent jobs for personal reasons: because they wanted a flexible work schedule, for example, or because they were in
school or in training. Thus, although contingent work is not a matter of
choice for many people, it may allow others to balance their work and




125

their non-labor market activities. In fact, although 57 percent of
contingent workers stated that they would prefer a noncontingent job,
36 percent said they preferred contingency.
For contingent work to become widespread, of course, it must also
meet the needs of employers. Accordingly, a 1996 survey asked employers their reasons for using flexible staffing arrangements. (These
arrangements, which included hiring from temporary agencies, shortterm hires, regular part-time work, on-call arrangements, and contract
work, were most likely not all contingent jobs as defined above. But
most were probably either contingent jobs or alternative work arrangements.) The most commonly cited reasons were fluctuations in workload and the need to cover absences of regular staff. Many employers
also said they hired from temporary agencies or took on part-time
workers as a means of screening candidates for regular jobs: 21 percent
of those using agency temporaries and 15 percent of those using regular part-time workers cited this reason as important. Savings on wage
and benefit costs were cited as important by only 12 percent of employers using agency temporaries, by 21 percent of those using regular
part-time workers, and by 10 percent of those using short-term hires
and on-call workers. Even so, the survey found that the hourly costs of
workers in flexible staffing arrangements were lower than those of
regular workers in similar arrangements, and that the savings were
primarily due to lower benefit costs.

MYTHS AND REALITIES
Nationally representative data on the employer-employee relationship thus run counter to much current conventional wisdom. The last
several years have seen both a decline in job displacement and, for
those who are displaced, shorter spells of joblessness and a smaller loss
of earnings upon finding a new job. The disappearing lifetime job of
popular mythology is not to be found in the data, which instead show
only modest declines in job tenure. Moreover, contingent workers are
not disproportionately workers with little education, the wages they
earn are similar to those of noncontingent workers of the same age,
and contingent work has not become more prevalent in recent years. In
addition, the flexibility of the contingent arrangement appears to be a
significant benefit to many workers as well as to their employers. On
the other hand, job displacement remains relatively high given today's
low unemployment rates, and contingent workers are much less likely
to receive pension or health benefits than are noncontingent workers.
These developments are part of the reason why this Administration
has expanded and redesigned Federal policies and programs of job
training, education, lifelong learning, and assistance to dislocated
workers—initiatives discussed in the next section.




126

NEW DEVELOPMENTS IN JOB TRAINING AND
LIFELONG LEARNING
The Federal Government and the governments of the States provide
assistance to workers through a number of channels. Unemployment
insurance, job training, and reemployment services are cornerstones of
the worker support network, helping workers to identify job opportunities and to retool, and providing financial support until they find
their next job.
In the face of a rapidly changing global economy and the increased
rewards to more highly skilled workers, this Administration has
sought to strengthen America's work force development system and to
promote lifelong learning. In August 1998 the President signed the
Workforce Investment Act (WIA), which gives workers greater control
over their training, streamlines public employment and training services, and makes all training providers more accountable for their services. WIA establishes Individual Training Accounts, self-directed
accounts that allow workers more choice over their own training or
retraining. To help workers make informed decisions about which
training program is best for them, WIA also requires that training
providers report the performance of their graduates in terms of job
placement, earnings, and job retention. In addition, WIA establishes
universal access to core employment services, such as skills assessment, career counseling, information about vacancies, job search
assistance, and follow-up services to assist in job retention.
WIA streamlines employment services through consolidation. The
Federal Government has set up partnerships with 48 States to build
systems of one-stop career centers, which provide convenient access to
a variety of training and employment programs under one roof. The act
requires each local area to have at least one one-stop center providing
job training, employment service activities, unemployment insurance,
vocational rehabilitation, adult education, and other assistance. More
than 800 such centers are already in operation.
WIA also strengthens accountability for States, localities, and training providers. States and localities will have to meet performance
goals for job placement, earnings of placed workers, and retention, or
else face sanctions. But if they exceed their goals, localities qualify to
receive State incentive grants. To become eligible for funds under WIA,
training providers must be certified under the Higher Education Act,
the National Apprenticeship Act, or the State procedure used by the
local Workforce Investment Board. To retain eligibility, each provider
must meet performance standards established by the local board. The
information that training providers must report on the performance of
their graduates will be available at the one-stop centers, allowing
potential trainees to make an informed choice among programs. This
in turn will make providers more responsive to trainees' needs.




127

The Administration is especially concerned about those whose
careers are interrupted by corporate restructuring, changes in government policies, or turbulence in global markets. The Administration has
pushed to expand assistance programs for these dislocated workers,
helping to nearly triple funding for these programs to $1.4 billion
between 1993 and 199S. Under the Economic Dislocation and Worker
Adjustment Assistance Act (EDWAA), one of the funding streams consolidated under the WIA, the Administration provides grants to State
and local programs. They in turn decide who most needs assistance
and how best to provide services, which can include on-site rapid
response for announced plant closings, job search counseling and support, literacy courses, vocational education, and financial assistance
during training. In addition, the Trade Adjustment Assistance (TAA)
program, including a special transitional adjustment assistance provision under the legislation implementing the North American Free
Trade Agreement (NAFTA-TAA), continues to help those workers
whose jobs may be affected by competition from imports.
Workers are considered dislocated if they have lost their jobs and are
unlikely to return to their previous industries or occupations. Included
are those who have lost their jobs as a result of massive layoffs, plant
closure, natural disaster, or Federal action. Farmers and ranchers
hurt by general economic conditions, as well as the long-term unemployed with limited opportunities in their original occupations, may
also qualify. (Note that the definition of "dislocated" is more narrow
than that of "displaced" workers, discussed above.) In program year
1998, over 600,000 of these dislocated workers will have participated
in the EDWAA program. In the program year that ended in June 1997,
71 percent of dislocated workers leaving the program were employed
and had earnings, on average, of $10.39 per hour, or 94 percent of their
previous wages. The Administration's strong and continued support for
this program has also generated new funding for assisting tradeimpacted workers not formerly covered by TAA or NAFTA-TAA and for
buttressing the training system with innovative approaches for targeted
groups.
The lifetime learning tax credit, enacted in 1997, targets adults who
want to go back to school, change careers, or take a course or two to
upgrade their skills, as well as college juniors and seniors and graduate and professional degree students. The 20 percent credit applies to
the first $5,000 of a family's qualified education expenses through
2002, and to the first $10,000 thereafter.
Information about job openings and potential workers is especially
important in a rapidly changing economy. America's Labor Market Information System, an Internet-based system that shares data on available
jobs (America's Job Bank) and workers (America's Talent Bank), has
been designed to meet this need. America's Job Bank (located on the
World Wide Web at http://www.ajb.dni.us/) posts roughly 700,000 jobs on




128

any given day and received over 6 million "hits" (individual job searches)
in July 1998 alone. America's Talent Bank (http://www.atb.org) was fully
integrated with the job bank in May 1998, and as of July a total of
112,000 resumes had been posted with the service. In addition, workers
and employers can obtain information about the wages and employment
prospects of certain occupations across the country using America's
Career InfoNet (http://www.acinet.org/acinet/).
These policies help ensure that all workers can find employment following a job loss, or improve their training and skills in order to move
up in the labor market. This Administration is committed to making
sure that the labor market benefits all workers, and that the benefits
of the current economic expansion are enjoyed by all.




129




CHAPTER 4

Work, Retirement, and the
Economic Weil-Being of the Elderly
JUST 50 YEARS AGO, the baby boom was getting under way, and
about 1 out of every 12 Americans was 65 or over. Today, about one out
of every eight Americans is elderly, and the oldest baby-boomers are
preparing for retirement. As the baby-boomers continue to age, the
elderly population will rise dramatically. It is projected that by the
time the youngest baby-boomers hit age 65, in 2029, almost 20 percent
of Americans will be elderly—about 2V2 times the proportion in 1950.
As America adjusts to this phenomenal demographic change, it is
important to assess the economic well-being and work decisions of the
current and the soon-to-be elderly. A review of statistics on the wellbeing of older persons and the labor market outcomes of workers who
are approaching retirement age yields four important conclusions.
First, long-term trends in the labor force participation of older Americans, both male and female, are changing. The century-long decline in
male labor force participation at older ages has leveled off since 1985.
More men aged 55-64 are continuing to work, often part time or in a
different occupation, after "retiring." Meanwhile the share of women
aged 55-64 participating in the labor force has increased by almost 10
percentage points in the past 15 years.
Second, employer-provided pensions and health insurance are also
undergoing rapid change. The share of participants in defined-contribution pension plans, such as 401(k) plans, is growing and the share in
defined-benefit plans shrinking. Employer-provided health insurance
coverage for retirees has also become less widespread, less generous,
and more expensive. These developments have many ramifications,
both for retirement incentives and for the incomes and living
standards of retirees.
Third, the economic status of the elderly as a group has improved
remarkably during the past three decades. Their poverty rate has
fallen to less than half what it was in 1970. In that year the elderly
were more than twice as likely to live in poverty as the nonelderly, but
today poverty is slightly less prevalent among the elderly than it is
among younger persons.
Finally, the elderly are a diverse group, which means that averages
can be quite misleading. In particular, although most elderly groups—
men and women, blacks and whites, older and younger elderly, single




131

as well as married persons—have enjoyed economic progress, large
disparities in well-being prevail among these groups. The most recent
data show that just 4.6 percent of elderly married men, but 28.8
percent of elderly black women and 17.9 percent of elderly widows, live
in poverty. And whereas Social Security benefits account for at least
80 percent of income for 38 percent of all elderly households, another
9 percent rely on Social Security for less than 20 percent of their
income. Moreover, among those now approaching retirement age, over
10 percent have no financial savings whatsoever, and 30 percent have
less than $1,200, whereas the top 10 percent have over $200,000 in
financial assets. Over half of all blacks and Hispanics aged 51-61 have
no financial holdings.

POPULATION AGING, LIFE EXPECTANCY,
AND HEALTH STATUS
As we approach the 21st century, the confluence of a reduction in
fertility and improvements in longevity is causing the share of older
people in the population to rise. The total fertility rate—the number of
children that an average woman will bear over her lifetime—has
declined substantially since the turn of the century. This decline was
not a steady, uninterrupted one, however: a substantial increase in fertility was associated with the baby boom of 1946-64. The total fertility
rate increased from 2.3 in 1940 to 3.8 at the peak of the baby boom in
1957. It then fell to 3.2 by the end of the boom, and today the total
fertility rate is about 2.0.
Life expectancy has risen throughout the 20th century. Americans
today are more likely than their parents and grandparents to reach old
age, and having reached that threshold they live a greater number of
years thereafter. In 1900, 65-year-old men and women had similar
remaining life expectancies, at 11.4 years and 12.0 years, respectively
(Chart 4-1). These figures had risen by mid-century to 12.8 years for
men and 15.1 years for women. The 1950s and 1960s saw substantial
gains in life expectancy for older women, but stagnation for older men.
Since the 1970s, however, strong gains have occurred for both sexes.
Current life tables indicate that 65-year-old men and women today can
expect to live an additional 15.7 years and 19.2 years, respectively. And
projections imply that life expectancy will continue to increase in the
next century.
The anticipated transition of the baby-boom generation into old age
has drawn attention to the aging of the population. The baby-boomers,
who are currently between the ages of 35 and 53, will begin to reach
age 65 by 2011. Chart 4-2 shows this bulge in the population, which
swelled the number of children and adolescents 30 years ago. This
group will reach retirement age over the next 30 years. Although the
growth rate of the elderly population will be very low between 1995




132

Chart 4-1 Life Expectancy at Age 65
The number of years that Americans can expect to live after the age of 65 has increased
throughout the 20th century and is expected to continue increasing.
Years of life remaining

25

Women

20

\

15

10

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040
Source: Data prior to 1998 from Department of Health and Human Services; 1998-2040 projections
from Social Security Administration.

Chart 4-2 Population of the United States by Age
Baby-boomers created a bulge in the population of children and adolescents 30 years ago
and will move into retirement ages over the next 30 years.
Ages

1968

0

5

10

10
15
20
Population (millions)
Source: Department of Commerce (Bureau of the Census).




15

1998

20

25 0

5

133

25 0

10

15

20

25

and 2010 as a result of low fertility in the 1930s, that rate will more
than double in the following 20 years. Also as a result of the baby
boom, different age groups among the elderly will peak at different
times: those between 65 and 74 will peak at 38 million in 2030, and
those 75 to 84 will peak at 29 million 10 years later.
The "oldest old," those aged 85 and over, are of particular concern
because of their high rates of poverty and institutionalization,
described below. This group will grow both in number and as a share of
the population, from about 4 million today to 18 million by 2050.
Accounting for about 1.5 percent of all Americans today, the oldest old
are projected to make up 23 percent of the elderly population and
about 5 percent of the overall population 50 years from now.
At the same time that the size of the elderly population is increasing,
its racial, ethnic, and gender composition will also change. In 1998 the
non-Hispanic white population accounted for the largest proportion of
elderly, and their number is projected to nearly double to 52.0 million by
2050. But the proportion of non-Hispanic whites in the elderly population
will decline as the numbers of elderly persons of other racial and ethnic
groups grow even faster, causing their proportion of the elderly population to double (Chart 4-3). The elderly Hispanic population, for example,
is expected to grow to 13.8 million in 2050, or eight times what it was in
1998. In 1994, elderly women outnumbered elderly men by a ratio of 3 to
2 overall, and by 5 to 2 among those over 85. About half of elderly women
were widowed, more than three times the percentage for elderly men,
who were nearly twice as likely to be married.
Chart 4-3 Projections of the Population Aged 65 Years and Over
The share of the elderly population that is white, non-Hispanic is projected to fall by
about one-fifth between 1998 and 2050.
Percent

] White, non-Hispanic

| Black, non-Hispanic

[~J Hispanic

I Native American, non-Hispanic ^Asian/Pacific Islander, non-Hispanic

100

80

60

40

20

1998
Source: Department of Commerce (Bureau of the Census).




134

2050

Population aging is not just an American trend but a major global
phenomenon—a natural result of better health and nutrition and
lower fertility and mortality rates worldwide. Never before have so
many people in so many societies lived for so long. Yet as much as population aging is a natural result of the benefits of increased longevity
and survival among all age groups, it also represents a fundamental
shift in social structure that affects labor markets, family structures,
and the social contract among generations.
Increasing life expectancy does not automatically imply that health
status has improved. In fact, despite improvements in mortality at
older ages in the 1970s, some studies claim that the health status of
the elderly worsened during that period. But since 1980 the evidence
points to a decline in chronic disability among the elderly. In 1994 the
number of people aged 65 and older who were disabled (that is, who
had functional problems lasting 90 days or longer in dealing with various normal activities of daily living) was 14.5 percent (or 1.2 million)
lower than would have been expected if the age-specific chronic disability rates observed in 1982 had persisted. This decline was found to
have contributed significantly to reducing the rate of institutionalization between 1982 and 1994. However, many older Americans still
require long-term care (Box 4-1).
Although disability rates have declined they are much higher in
lower socioeconomic groups. In 1993, for example, persons aged 50 and
over who had not graduated from high school tended to perform much
worse on four measures of physical functioning than did those who had
attended college.

OLDER WORKERS AND RETIREMENT
Retirement patterns have been changing over time in response to
changes in institutions and in the preferences and practices of employers
and workers. These changes are reflected in changing long-term trends
in the labor force participation of the elderly (that is, the proportion of
the older population who are either employed or looking for work),
particularly the decline in labor force participation rates of older men
during most of this century. Recent years, however, have seen a leveling
off of this decline. Since the mid-1980s, 55- to 64-year-olds in each year
have been just as likely to be in the labor force as those in the preceding
years. They have been more likely to work part time and less likely to
work full time, however. This section reviews these changing patterns of
retirement and their causes. It turns out that a variety of factors influence the timing of retirement, such as the rules governing pensions and
Social Security benefits, characteristics of jobs held by the elderly and
accommodation made to impaired elderly workers, and health insurance
coverage. The section concludes with a discussion of unemployment, job
loss, and tenure as experienced by the elderly.




135

Box 4-1.—Easing the Burden of Long-Term Care
Like Social Security and Medicare, long-term care will become a
primary concern of baby-boomers as they approach retirement
age. In 1994 an estimated 2.1 million elderly living in the community needed help because of problems with three or more activities
of daily living (such as eating, bathing, dressing, or moving
around) or because of a comparable cognitive impairment. That
number will rise as the population ages, and the fast-growing population of the "oldest old," those 85 and older, is at greatest risk.
Much long-term care today is provided informally: about 65
percent of elderly persons living in the community and needing
long-term care assistance rely exclusively on unpaid sources, most
often family and friends. Surveys have found that 8 of every 10
caregivers provide unpaid assistance averaging 4 hours a day, 7
days a week. For many, such assistance competes with the
demands of paid employment. In addition, home and communitybased care requires substantial out-of-pocket expense, totaling
over $5 billion in 1995.
The Administration has proposed four initiatives to help relieve
the burden of families with members in need of long-term care.
The first is a tax credit of up to $1,000 for people of all ages with
three or more limitations in activities of daily living (or a comparable cognitive impairment). Persons needing long-term care
themselves, or their family members who care for and house them,
can claim the credit, which phases out at incomes of $110,000
LONG-TERM TRENDS IN LABOR FORCE PARTICIPATION
AT OLDER AGES
Labor force participation rates for men 55 and older have declined
during most of the 20th century. For example, the participation rate of
men aged 55-64 fell from 89.5 percent in 1948 to 68.1 percent in 1998
(Chart 4-4). These trends in labor force participation are the result of
two factors: trends in retirement age and trends in longevity. The average retirement age depends on the retirement rate at each age, and
retirement rates have been increasing at younger ages and decreasing
at older ages. Consequently, the estimated median age of retirement
(defined as complete withdrawal from the labor force) for men declined,
from 66.9 years in the 1950-55 period to 62.1 years in 1990-95.
Early in this century, most men worked until they died or became
disabled, and both death and disability tended to occur at much
younger ages than today. Today more men live longer after retiring
than they did in earlier decades. Over the 1950-95 period, male life
expectancy at age 65 rose by 20 percent. This helped to reduce over
time the participation rate of men 65 and older, by increasing the




136

Box 4-1,—continued
for couples and $75,000 for unmarried taxpayers. The credit
would provide financial support for about 2 million Americans,
broadly expanding an existing set of tax allowances. Under current tax policy, taxpayers can claim the child and dependent care
tax credit to cover part of the cost of care of a disabled spouse,
when that cost is incurred by the taxpayer in order to work. A taxpayer who itemizes can also deduct any qualified long-term care
expenses that exceed 7.5 percent of adjusted gross income. The
new tax credit would defray some costs of both formal and informal care. Over half the chronically ill people thus helped will be
elderly persons.
Second, the National Family Caregiver Support Program would
fund State initiatives establishing "one-stop shops" that assist
families caring for elderly relatives through training, counseling,
and arranging for respite care.
Third, the Administration has proposed a national campaign to
educate Medicare beneficiaries about the program's limited coverage
of long-term care and help inform their care decisions. The need for
information is great: nearly 60 percent of Medicare beneficiaries are
unaware that Medicare does not cover most long-term care.
Finally, the Administration has proposed that the Federal Government serve as a model employer, by offering nonsubsidized,
quality long-term care insurance to all Federal employees and
using its market leverage to negotiate favorable group rates.
denominator (the total number of men in this age group). Therefore,
the participation rate of men aged 65 and over has declined even more
than the decline in average retirement age might suggest.
Meanwhile the labor force participation rate for women aged 55-64
has actually increased since 1948—in fact it has more than doubled,
from 24.3 percent to 51.2 percent (Chart 4-4). This has happened
despite a decline in women's median retirement age, from 67.7 years in
1950-55 to 62.6 years in 1990-95, because more recent cohorts of
women have been more likely to be in the labor force during most of
their adult lives (Chart 4-5).
In the face of long-term improvements in health and longevity, why
has the retirement age fallen, not risen, during the 20th century? Rising wages are a large part of the answer. As their earning power has
risen, men have enjoyed both more income and more time for activities
other than paid work. They have taken some of this additional time in
the form of leisure at the end of life, as well as shorter workdays and
workweeks and more holidays during the year. The growth of Social
Security and employer pensions since the 1930s has also facilitated




137

Chart 4-4 Labor Force Participation Rates of Older Men and Women
Labor force participation by older men generally declined until the mid-1980s but has
since leveled off; that of older women has increased since 1948.
Percent

100
Men aged 55-64
80

60

Women aged 55-64

\

40

Men aged 65 and older
Women aged 65 and older

20

\

1948 1952 1956 1960 1964 1968 1972 1976
Source: Department of Labor (Bureau of Labor Statistics).

1980

1984

1988

1992

1996

Chart 4-5 Women's Labor Force Participation Rates at Each Age
Increases in the labor force participation of women across birth cohorts have offset the
decline in labor force participation as women age.
Percent

70

, Born in 1935

60

50

40

Born in 1915^^

, Born in 1905

30

20

Born in 1925
10

55

57

59

61

63

65

67

Age
Source: Department of Labor (Bureau of Labor Statistics).




138

69

71

73

75

77

79

earlier retirement, by increasing lifetime wealth for the early cohorts
in the Social Security system and by providing income in old age. Even
though earnings were rising from generation to generation, many
individuals might not have saved enough to retire without these
sources of income. For these reasons the average length of retirement
has risen faster than the average male life expectancy at age 55;
hence, the average male retirement age has fallen.

RECENT CHANGES IN THE LABOR FORCE PARTICIPATION
OF OLDER MEN
There are signs that this long-term trend toward earlier retirement
may have abated. Since the mid-1980s the decline in labor force
participation rates for men in the older age groups has leveled off
(Charts 4-4 and 4-6). Other evidence indicates that an increasing
proportion of male pension recipients are continuing to work. For
example, in March 1984, 37 percent of men aged 55-61 who had
received pension income in the previous year were working. By March
1993 this number had climbed to 49 percent.
Rather than withdrawing from the labor force completely, many older
men are leaving long-term career jobs but continuing to work, often part
time or part year. Many are becoming self-employed. Chart 4-7 shows, for
example, that between 1985 and 1997 the fraction of men aged 60-61 who
worked full time, year round declined from 55.1 percent to 51.8 percent,
while the fraction working part time increased from 5.7 percent to 10.4
percent. Increases in part-time work also occurred among men in other
age groups. In 1997, 16 percent of employed men aged 55-64 and 30
percent of those 65 and over were self-employed.
The use of "bridge jobs" between a full-time career and complete
retirement is not a new phenomenon. Evidence from the 1970s indicates that even then about a quarter of older workers took such transitional jobs. More recent evidence suggests that a somewhat higher
percentage may be taking such jobs since 1985.
What accounts for the apparent stalling of the decline in male labor
force participation at older ages? It is not yet clear whether the leveling off since the mid-1980s is a short-term, cyclical phenomenon or a
new long-term pattern. And in any case, older men's hours of work are
still falling, even if the percentage of older men working is not, because
of the shift from full-time to part-time work seen in Chart 4-7.
The recent increase in work by pensioners may stem from a need for
income by those who were displaced during the recession of 1990-91.
Some elderly persons cannot afford full-time leisure, but can finance
part-time leisure by working part time. Pension recipients' need for
income may also have grown in recent years because of rising health care
costs. Not only have these costs risen in general, but many employers
have stopped providing health insurance to their retirees or have reduced
their benefits, as discussed below. The increase in early retirement




139

Chart 4-6 Men's Labor Force Participation Rates at Each Age
Not only does men's labor force participation decline with age, but until recently each
new cohort of older men had lower age-specific participation than the one before.
Percent
100

, Born in 1915
80

Born in 1905

60

40

20

55

57

67
69
Age
Source: Department of Labor (Bureau of Labor Statistics).
59

61

63

65

71

73

75

77

Chart 4-7 Full-Time and Part-Time Work Among Men Aged 60-61
The fraction of men aged 60-61 who were working was the same in 1985 and 1997,
but there was a shift from full-time to part-time work.
Percent
100

Full time, full year

| Full time, part year

Part time, full year

| Part time, part year

80

77
72

60

40

20

1979

1985

Source: Department of Labor (Bureau of Labor Statistics).




140

1997

79

buyouts may also have contributed to increased work by pensioners.
More workers now than in the past are able to spend their pension funds
for other purposes, in advance of or at retirement. The shift to definedcontribution pension plans (discussed below) means that benefits are
more often received in the form of a lump-sum distribution upon termination of a job, instead of as an annuity, as is typically the case in definedbenefit plans. Many workers spend these lump sums instead of rolling
them over into another retirement account, thus reducing the funds
available to them in retirement.
The rise in work among older persons may also be related to changes
in the demand for labor. Employers may be becoming more willing to
hire older workers, as the "baby bust" that followed the baby boom
leads to labor shortages. Since 1980 the part-time wages of older men
have risen relative to those of younger men. This has made part-time
work more attractive to retirees.
If the long-term decline in the labor force participation rate among older
men has indeed run its course, it could indicate a limit to the desire for
more years of complete leisure at the end of life. Older people may want to
continue using their skills, or to try something new, when they leave a
career job while still relatively young and healthy (and to earn some
income in the process). The growth of the service sector, where jobs are less
physically demanding and schedules more flexible than in manufacturing,
makes work at older ages more attractive today than in the past. Changes
in pensions and Social Security rules, discussed below, have also removed
many of the incentives to retire abruptly and completely.
If rising lifetime wages have been driving the long-term decline in
labor supply of older men, we might expect that supply to level off in
the coming decade, as the cohorts born after 1945, who came of age as
wages stagnated in the 1970s, start turning 55. In other words, not
only may their labor force participation rates remain more or less constant, but so may the share of these workers working full time, year
round. Alternatively, an increase in labor force participation may combine with an increase in part-time, part-year work. Much will depend
on employers' demand for older workers, as reflected in the wages,
fringe benefits, and working conditions offered to them, and on the
incentives built into pension and Social Security rules—pension
incentives being a reflection of employers' demand for older workers.

INFLUENCES ON THE TIMING OF RETIREMENT
What factors enter into a worker's decision to retire sooner rather
than later? Among the possible considerations are changes in wages
and other compensation as one grows older, the structure of employer
pensions and Social Security, the worker's health and the availability
of health insurance coverage, and the influence of prevailing social
norms. Although the effect of each factor cannot be quantified precisely,
all play a role in the retirement decision.




141

Compensation
Wages on a given job do not tend to decline with age, nor should they
be expected to: there is little evidence that productivity declines with
age per se, in the absence of disability. Although clinical tests have
found that manual dexterity declines with age, other skills improve,
and older workers develop ways to compensate for whatever skill losses
they do suffer. Wages do decline when older workers change jobs, but
one cannot infer from this that age alone reduces productivity. Lower
wages following a job change may be due to the loss of "firm-specific
human capital"—such as seniority, knowledge of the organization,
working relationships, or goodwill gained in the former workplace.
It may also reflect the worker's choice to move to a position entailing less
responsibility or less strenuous or stressful working conditions. Nevertheless, older workers who lose their jobs may opt to retire rather than
accept the wage reduction that may accompany a job change.

The Availability of Social Security and Employer Pensions
The structure of Social Security and employer pensions may also influence the exact timing of labor force withdrawal. Certain Social Security
rules (Box 4-2) create an incentive for many people to retire at age 62, the
earliest age at which benefits are available for persons without disabilities. This is evident in the large drop in labor force participation of both
men and women at age 62 (Charts 4-5 and 4-6) and in the spike in retirements among men at that age that has appeared since the mid-1960s,
after early benefits were made available to men in 1961 (Chart 4-8).
Social Security has a number of conflicting effects on work incentives. On the one hand, the combined Social Security and Medicare
payroll tax of 15.3 percent lowers the net wage, which by itself would
tend to discourage work. On the other hand, more years of work could
increase future benefits for some who have had years with little or no
earnings, because substituting years of higher earnings raises one's
average monthly earnings in the Social Security benefit formula.
Future benefits are a form of deferred compensation, and increasing
them tends to encourage work.
Apart from these features, the present value of expected Social Security benefits does not change for the average person, regardless of whether
he or she begins to receive Social Security benefits at age 62 or at the normal retirement age (NRA). This is because the benefit increases by 8.3
percent per year that it is deferred (up to age 65), which is actuarially fair
for a person with average life expectancy, and better than fair for someone with longer than average life expectancy. However, not everyone is
average; many may not expect to live that long. For them, Social Security wealth decreases the longer they postpone benefits beyond age 62. This
creates an incentive to begin taking benefits at 62 rather than later, for
workers whose life expectancy is lower than the average.




142

Box 4-2.—Social Security Rules
The old-age, survivors, and disability insurance program of the
Social Security system is designed to replace a portion of earnings
lost because of retirement, disability, or death. It is financed by a
dedicated tax of 12.4 percent on earnings in covered jobs, up to a
maximum in 1999 of $72,600. That maximum is indexed each
year to changes in the average wage. Formally, half the tax is
levied directly on the employer, and half on the employee through
payroll withholding, but it is generally agreed that, in an economic
sense, the burden of the tax falls entirely on the worker. Selfemployed workers pay the full tax.
Retirement benefits are based on a person's lifetime average
indexed monthly earnings (AIME; the indexing reflects increases
in national average wages) in covered employment. Only earnings
up to the maximum taxable earnings in each year are counted.
Before earnings are averaged, a certain number of years with the
lowest (or zero) indexed earnings are dropped. The monthly benefit payable at the normal retirement age (called the primary insurance amount, or PIA) is calculated according to a progressive formula in which the replacement rate (the PIA as a percentage of
average lifetime earnings) falls as lifetime earnings rise. Benefits
are indexed to the consumer price index, and therefore have risen
more slowly than average wages in the past two decades.
The normal retirement age (NBA) is the age at which one
becomes eligible for a full retirement benefit. The NRA is
currently 65 but is scheduled to rise gradually to 67, beginning
with workers who will reach age 62 in the year 2000. Retirees may,
however, begin receiving a permanently lower benefit as early as
age 62. This minimum age for receiving benefits will remain at 62
even as the NRA rises. The benefit reduction is calculated to be
actuarially fair (that is, it preserves the present value of expected
benefits for a person with average life expectancy).
Between ages 62 and 70, receipt of both normal and actuarially
reduced benefits is subject to a retirement earnings test. For persons below the NRA the annual benefit is reduced by $1 for every
$2 of annual earnings above a certain exempt amount ($9,600 in
1999). For those between the NRA and age 70 the reduction is $1
for every $3 of annual earnings above a higher exempt amount
($15,500 in 1999). These exempt amounts are scheduled to
increase in the future, and the President has proposed that this
earnings test be eliminated entirely.
Persons who begin receiving retirement benefits before reaching
the NRA and then earn more than the exempt amount, so that
their benefits are reduced or completely withheld for a given




143

Box 4-2.—continued
month because of the earnings test, receive an aetuarially fair
increase in benefits when they reach the NRA. Thus, benefits lost
are recovered later. Moreover, earnings from age 62 up to the NRA
are considered in the AIME and may well increase the benefit one
receives at the NRA. On the other hand, workers continue to pay
the Social Security payroll tax, as well as income and other
payroll taxes, as long as they work. From the NRA on, postponed
benefits are increased by only 5.5 percent per year (for persons
who reach age 65 in 1998-99), which is less than aetuarially fair.
However, this adjustment for delayed retirement is being gradually
increased, in a process that began in 1990 and will continue until
cohorts reaching the NRA in 2009 and after get an aetuarially fair
8 percent per year for postponing benefits, up to age 70.
Those who discount future income at a higher rate than 8.3 percent
may also want to start taking their Social Security benefits early. In
particular, they may have a strong preference for current over future
income because they are unusually "present oriented" or risk averse.
Also, those who want to receive their Social Security benefits before
the NRA need not leave the labor force entirely to do so. They can
receive their full benefit as long as they keep their earnings under the
exempt amount (see Box 4-2). However, part-time jobs are not always
Chart 4-8 Net Labor Force Exit Rates of Men at Each Age
The peak age at which men retire from the labor force has dropped from 65 to 62 in
the past three decades.
Percent decline in labor force participation rate

25

1996-97 combined

\

15

10

56

57

58

59

60

61

62

63

Age
Source: Department of Labor (Bureau of Labor Statistics).




144

64

65

66

67

68

69

70

available with the same hourly pay, benefits, and working conditions
as full-time jobs, so that many may prefer to stop working completely
rather than take a part-time job. Other individuals may wish to retire
or work part time even before age 62, but cannot yet collect any Social
Security benefits and do not have sufficient savings and pension
income to live on. Because future Social Security income cannot be
used as collateral for a loan, this creates an incentive to continue
working until age 62. All of these considerations help to explain the
spike in retirements at that age.
The fact that Social Security benefits deferred beyond age 65 are
increased by only 5.5 percent per year (for workers aged 65 in 1998-99)
means that Social Security wealth declines for a worker with life
expectancy equal to or lower than the average who continues to earn
more than the exempt amount beyond that age. As recently as 1989,
the increase was only 3 percent per year. (See Box 4-2 for an explanation of this phased-in increase in benefits deferred beyond the NRA.)
This provision has acted like an additional tax on earnings above the
exempt amount that kicks in at age 65. Although the exempt amount is
higher at ages above the NRA than below it, good part-time jobs may
not be available for workers over age 65. The decline in Social Security
wealth for persons whose earnings exceed the exempt amount at ages
65 and above has provided a special incentive to retire at that age,
which is reflected in another drop in labor force participation and a
spike in retirements at age 65 (Charts 4-5, 4-6, and 4-8). The rules governing private pension and Medicare benefits, as well as other social
factors, also create incentives to retire at 65, as discussed elsewhere in
this chapter.
Because the Social Security rules do not vary across persons in a
given age group, it has been difficult to measure Social Security's
effect on labor supply separately from other factors. One study used
data for age groups that were subject to different exempt amounts
from just before and after changes in the earnings test rules. The
study found that the earnings of a substantial number of workers—
over 20 percent of male workers aged 67-69, and nearly 10 percent of
those aged 63-64—were clustered within $1,000 below the exempt
amount. The cluster moved when the exempt amount moved. This
study estimated that the effect of the earnings test is to reduce the
average annual working hours of male workers aged 65-69 by about 4
percent. Only 28 percent of men (and 18 percent of women) in this
age group are currently in the labor force, but more might seek jobs if
the earnings test were completely eliminated, as the President has
proposed.
In recent years the most common age for starting Social Security
benefits has shifted from 65 to 62. Part of the explanation may be the
continuing increase in lifetime income, which allows recent cohorts to
retire earlier. Social norms may also be shifting, making it more




145

acceptable for men to be idle before age 65. The decisions in 1956 and
1961 to make Social Security benefits available at 62 for women and
men, respectively, may have both reinforced and expressed such a
change in norms—in a democratic society, legislation often tends to follow social norms. The abolition in 1978 of mandatory retirement before
age 70 (Box 4-3) may also have removed age 65 as the predominant
focus for retirement planning.
Box 4-3.—Age Discrimination in the Labor Market
The Age Discrimination in Employment Act (ADEA) of 1967
outlawed age-based employment discrimination against both
employees and job applicants who are 40 years of age or older.
Later amendments prohibited mandatory retirement before the
age of 70 (in 1978) and then outlawed mandatory retirement altogether (in 1986), with a few exceptions. A 1990 amendment prohibited employers from denying benefits to employees because of
age.
The number of age-discrimination charges filed with the Equal
Employment Opportunity Commission (EEOC) has fluctuated
over the past decade between about 14,500 and 19,800 per year.
That number remained fairly constant between 1987 and 1990,
increased sharply in the early 1990s (reaching a high of 19,809 in
1993), and then fell substantially after 1994. In fiscal 1998,15,191
such charges were filed. Of the charges filed that year, 12 percent
had outcomes favorable to the party bringing charges.Most of the
rest ended either with a ruling by the EEOC of no reasonable
cause or for administrative reasons.
Incentives provided by employer pensions must also be considered in
any effort to explain changing retirement patterns. Twenty years ago,
most employer pensions were of the defined-benefit (DB) type (Box 4-4).
Workers covered by such plans typically had strong incentives to
retire before age 65, as early retirement benefits had a higher
actuarial value. Defined-contribution (DC) plans, including those with
401(k)-like features, on the other hand, contain no incentives for early
retirement, because pension wealth continues to grow until the funds
are withdrawn. As these plans have become more widespread in the
past 20 years, workers have been less constrained in their choice of
retirement age.

Job Characteristics and Job Accommodation
For the elderly as for others, the effect of health problems on the
ability to work, and thus on the decision to work or retire, depends on
several factors. These include the type of job one has, the opportunities
for accommodating health problems, and the opportunities to switch to




146

Box 4-4.—Types of Pension Plans
Under a defined-benefit plan, a worker qualifies for a pension benefit by working in a covered category (which may exclude certain types
of workers, such as part-timers) for a given number of years. This
period, called the vesting period, is now 5 years for the vast majority of
workers in the private sector. The benefit is then available at a certain
age and is usually calculated by multiplying a given percentage of final
earnings by the number of years of service. About half of workers
with DB pensions are in plans that are integrated with Social Security; I
that is, the pension benefit formula reduces the pension amount to I
adjust for expected Social Security benefits. Reduced benefits may be
available at an earlier age. These benefits often have a higher actuarial value than normal retirement benefits, and this produces strong
incentives to retire at a certain age. Most DB plans in the private
sector are insured by the Federal Government (see Box 4-7).
By contrast, defined-contribution plans do not entail age-specific
retirement or work incentives. DC plans are essentially tax-favored
savings accounts to which employers may contribute, sometimes even
if the employee does not also contribute. Examples of DC plans are
savings or thrift plans, deferred profit-sharing plans, money purchase
plans, employee stock ownership plans (ESOPs), and 401(k) arrangements. Benefit levels in DC plans are not guaranteed and are not federally insured. Instead, the funds are invested, often at the worker's
direction, and the amount of the eventual retirement benefit depends
on the amounts contributed and on the portfolio's performance over
the years. Benefits are usually paid in a lump sum upon departure
from the firm, although sometimes other options are available. These
funds are usually portable; that is, they may be rolled over tax-free
into another pension plan or an individual retirement account.
Because the employer's obligation is limited to its financial contribution and the plans reduce administrative costs and enhance flexibility,
they are popular with employers.
Section 401(k) of the tax code allows an employee of a for-profit firm
to contribute a share of his or her cash compensation to a DC plan, and
to defer taxes on both the initial contributions and the investment
returns. Employees of nonprofit organizations, State and local governments, and Indian tribes can participate in similar tax-deferred
annuity programs. Under most before-tax retirement savings plans,
the employer matches a percentage of contributions, but Section
401(k) does not require employers to contribute in this manner. This
chapter refers to all plans providing for employee contributions as
"401(k)-type plans." Although 401(k)-type plans are popular DC plans,
there are other types of DC plans that do not provide for tax-deferred
employee contributions (for example, most money purchase pension
plans and a substantial share of profit-sharing plans and ESOPs).




147

a less demanding job. There is no consensus on what constitutes a
physically demanding job. One definition considers a job physically
demanding if it entails regularly lifting objects that weigh at least 25
pounds. By this definition the share of older Americans employed in
such jobs has fallen steadily, from 25 percent in 1950 (for those aged
60-64) to 7 percent in 1990. But other job requirements besides physical strength may make continuing work difficult for older workers. For
example, about 90 percent of older workers say that their jobs require
good eyesight and intense concentration.
Employers frequently accommodate the health impairments of their
elderly workers. More than half of older workers who develop a new,
health-related job limitation continue to work, and around half of
those report that their employer has made some special accommodation for them. The most common types of accommodation involve
changing the structure of the job, rather than making new investments
in equipment or incurring other direct employment-related costs.
Changes in job structure include changing the scope of the job (reported
by 51 percent of those who have received accommodation), allowing
more breaks and rest (45 percent), and providing assistance with
certain aspects of the job (37 percent). Although the evidence is limited,
accommodation rates appear to be similar for workers at all levels of
education.
The direct cost of accommodating older workers with impairments
appears to be small in most cases, with a median of about $200 per
accommodation; 70 percent of accommodations cost less than $500.
These estimates do not, however, take into account losses in productivity from changes in job scope and increased assistance from co-workers, nor, on the other hand, do they consider the cost saving of not having to hire and train a replacement worker.

Health Insurance and Retirement
Studies have found that the availability of health insurance to
persons under 65 that is not contingent on working—either employerprovided retirement coverage or Medicare eligibility of a spouse—
tends to increase a worker's likelihood of retiring. Widespread provision of retiree health benefits by employers may have contributed to
the pre-1985 trend toward retirement before age 65, but its influence
has diminished since then. The magnitude of the response and the role
health insurance has played in retirement trends remain highly
uncertain, however.
Between 1987 and 1996 the share of wage and salary workers aged
55-64 who were covered by health insurance from a current employer—
their own or a nonelderly family member's—remained constant at 73
percent, despite increased availability of health insurance from
employers. Although more workers in this age group were offered coverage, the takeup rate—that is, the fraction of offers accepted by the




148

worker—declined. More of these older workers are getting their health
coverage through a spouse's employer, as the share covered by health
insurance from their own main job fell by 2.5 percentage points, to 61.7
percent. The share of employees aged 55-64 who had access to health
insurance coverage through either their own or a family member's job
rose from 78.5 percent to 80.4 percent. However, the share of those
with access who actually were covered by health insurance dropped
from 92.8 percent to 90.4 percent, possibly because of the increased
cost of premiums to the worker. Many of the rest had other private or
public health insurance, but the fraction of non-self-employed workers
aged 55-64 who were uninsured increased by almost 3 percentage
points, to 12.0 percent in 1996.
Many employers provide health insurance for their retired workers,
although an increasing number are requiring the retiree to share the
cost. In 1993, 45 percent of full-time workers in medium-size and larger
firms had access to health benefits upon retirement that were at least
partly paid for by their employer. This fraction had declined considerably between 1985 and 1988 but changed little since then. Virtually all
of these workers could get coverage from their employer to bridge the
gap between retirement and eligibility for Medicare at age 65, and
some coverage would continue after that for all but a small percentage.
However, the percentage of workers who would have to pay part of the
cost of coverage increased dramatically from 1988 to 1993, from 46 percent to 61 percent of those offered coverage before age 65, and by a similar amount for those offered coverage from age 65 on. Nevertheless, by
one estimate the annual employer cost per retiree soared by 34 percent
in real terms between 1988 and 1992 alone, to $2,760 (in 1992 dollars).
Because a majority of employers do not offer health insurance coverage to their retirees, and some firms, especially smaller ones, do not
even provide coverage to their active workers, a large and growing
number of 55- to 64-year-olds have no health insurance. The number of
uninsured people in this age group grew by 7 percent in 1997 alone.
Persons in this age group are considerably more at risk of needing
expensive medical care than younger people, and often they cannot
obtain commercial health insurance or find it unaffordable. And unless
they are disabled or poor, they are not eligible for public insurance
such as Medicare or Medicaid. The President has therefore proposed to
allow 55- to 64-year-olds to purchase Medicare coverage (Box 4-5).

UNEMPLOYMENT AND JOB LOSS
Unemployment is less prevalent among the elderly than among
younger workers. In 1998 the unemployment rate among 20- to 24year-olds was 7.9 percent, the rate for 25- to 54-year-olds was 3.5 percent, and the rate for 55- to 64-year-olds was lower still at 2.6 percent.




149

Box 4-5*—Medicare Keform
The Medicare program, like Social Security, reflects the Nation's
commitment to provide for the needs of its older members, and to
support disabled Americans of all ages. Reforming Medicare to
protect its financial soundness and ensure that it provides highquality care for its beneficiaries has been one of the Administration's top priorities. The President worked to include important
Medicare provisions in the Balanced Budget Act of 1997, which
paved the way for an increasingly broad array of innovative health
insurance choices for beneficiaries and shored up the Medicare
trust fund. The President has taken steps to enroll mor& lower
income seniors in supplemental benefit programs that provide
financial assistance in paying Medicare premiums and other
health care costs not covered by Medicare. The President has also
developed initiatives to provide new preventive care benefits, to
assist beneficiaries whose managed care plans have left the
program, and to reduce Medicare fraud.
Even with these reforms, the aging of the population and the
continuing development of new medical treatments will lead to
mounting cost pressures for the Medicare program in the years
ahead. The President has proposed to reserve 15 percent of the
projected Federal budget surpluses over the next 15 years for the
Medicare trust fund, which would extend the program's solvency
from 2008 to 2020. In addition, with the President's encouragement,
the National Bipartisan Commission on the Future of Medicare was
formed to consider reforms to address the difficult long-term problems facing the program. The Commission's report, due in March
1999, will be an important next step toward the Administration's
goal of developing a bipartisan agreement that will preserve and
strengthen Medicare for all Americans in the 21st century.
The rate was slightly higher, at 3.2 percent, for workers 65 and older.
Older workers have historically had lower unemployment rates than
younger workers, and these data show that the current employment
situation for older workers is strong.
In addition to having lower unemployment rates, older workers are
less likely to be displaced (that is, to have lost their job because of a
plant closing, insufficient or slack work, abolition of their position or
shift, or some other similar reason) than are workers in their 20s and
30s. This has been true in every year since national data on displacement first became available in 1984. (See Chapter 3 for a general discussion of displaced workers.) According to the latest survey, conducted
in 1998, the displacement rate (the ratio of workers displaced anytime
in the 3 years prior to the survey to total employment at the time of the




150

survey) was about 13 percent higher for workers aged 25-34 than for
those aged 55-64. The rate of displacement fell from the 1993-95
period to the 1995-97 period for all age groups. However, the decline
was relatively small among older workers: the displacement rate fell
10 percent among those aged 55-64, compared with 21 percent among
those aged 25-34.
Although the rate of job loss is lower among older than among
younger workers, the cost of being displaced may be higher for workers
in their late 50s and early 60s. Older displaced workers are much more
likely to leave the labor force after job loss. Among workers displaced
in 1995-97, 30 percent of 55- to 64-year-olds and 55 percent of workers
65 and older had left the labor force by 1998, compared with just 9 percent of workers aged 25-54. Presumably many of these older displaced
workers retire following displacement. But among displaced workers
who remain in the labor force, the share who are unemployed is higher
among older workers. In addition, for workers who do find jobs after
being displaced, wage losses are substantially higher among older
workers than among younger ones. Thus, even if displacement is less
likely among older workers, when it does occur it may be more costly.

THE UNPAID CONTRIBUTIONS OF THE ELDERLY
It is not easy to attach a dollar figure to the value of the many
unpaid contributions made by the elderly to the economy and society.
Nevertheless, it is important to acknowledge the wide range of
productive activities in which they are engaged. According to a 1996
survey, 43.5 percent of the population over age 55 volunteered at
nonprofit organizations and for other causes, averaging 4.4 hours per
week per volunteer. Many quite elderly persons are part of this active
corps of volunteers: almost 34 percent of those 75 years old and older
reported volunteering. The settings in which older people volunteer are
both formal and informal. For example, 65 percent of volunteers aged
55 or older reported serving with a religious institution, 22 percent
volunteered with an educational institution, and 37 percent worked
informally in their neighborhoods or towns.
Many older people need ongoing assistance because of functional
limitations or cognitive impairments, yet do not need nursing home
care. Instead they often receive informal care, typically from other
elderly persons, including their spouses and children. This informal
caregiving work is largely hidden, because it is for the most part performed in a nonpublic setting and is typically unpaid. The work may,
however, be essential to the caregiver's family and to the financial stability of the household, as formal care arrangements may cause severe
financial strain. The provision of assistance by family members and
friends may also reduce the burden on publicly provided services (see
Box 4-1 for a discussion of long-term care).




151

A 1992 survey found that 15.1 million Americans over the age of 55
were providing direct care to sick or disabled family members, friends,
or neighbors. Twenty-eight percent of men and 29 percent of women
aged 55 and over were caring for others, as were 22 percent of all persons aged 75 and over. The typical amount of caregiving was 5 hours
per week, but 2.4 million caregivers spent 18 or more hours per week.
And although the proportions of men and women who were caregivers
were close to equal, the total number of female caregivers was greater
because women outnumber men in the older population.
Grandparents, and even great-grandparents, are important sources
of assistance to families. In some households children reside with a
grandparent; in others one or more grandparents assist parents with
caregiving in various ways. According to the 1992 survey, 14.2 million
Americans over the age of 55 helped take care of their grandchildren or
great-grandchildren.
The Bureau of the Census reports that in 1997, 3.9 million children,
or 5.5 percent of all children, lived in a household maintained by a
grandparent—a 76 percent increase since 1970. There were substantial
increases in the number of households maintained by grandparents,
with or without a parent present. Among children living in households
maintained by grandparents, the greatest increases since 1970 were in
households where one parent also resided. More recently, the number
of grandchildren living with their grandparents without any parents
present has increased most rapidly.
This increase in grandparents' assistance with the care of their
grandchildren parallels the increase in single-parent families, but it
may also be due in part to the increased financial pressures faced by
young married couples, who struggle to meet the demands of careers
while raising children. Grandparents also step in when parents cannot
function adequately because of drug use, mental or physical illness, or
incarceration, or when parents abuse or neglect their children.

THE ECONOMIC WELL-BEING OF THE ELDERLY
By almost any measure, the economic well-being of the elderly has
improved tremendously over the past three decades. Income is the
most widely used measure, but it is only a starting point, because it
has several weaknesses as a measure of well-being. First, people are
most concerned about the goods and services that income can buy—
about consumption, in other words—not income per se. People save
in some periods to finance their consumption in later periods. As a
result, income may be higher or lower in one year than another even
though consumption is similar in both years. This logic suggests
that it is important to consider the consumption of the elderly, which
is examined below. A second weakness of income as a measure of




152

well-being is that families have different needs, depending on the
number of people in the family, their ages, where they live, and so
on. Thus, an income that would seem generous to one family might
be barely adequate for another. A third weakness of the income
measure is that some economic goods do not have an easily quantifiable monetary value and are therefore not recorded as income. Most
important for the elderly, home ownership and medical insurance
certainly increase well-being, yet they are not captured by measuring
before-tax money income. As a result, two families with identical
incomes and identical needs could have very different economic status:
one might, for example, own a valuable home and have generous
medical insurance coverage, whereas the other rents an apartment
and has no insurance.
Because of these weaknesses, three other sets of indicators of
well-being are examined here in addition to income: the poverty
rate, indicators of wealth accumulation (including home equity),
and indicators of health status. The poverty rate adjusts differences
in income across families for disparities in family size and composition. Wealth provides a cushion for people to smooth their consumption over time and creates a buffer against adversities, such as
health problems, that may require substantial expenditure. Finally,
earlier in this chapter changes in health status and life expectancy
were examined, which are also important measures of well-being.
Most of the national data used to examine families' economic status
are based on surveys of the noninstitutionalized population. This limitation is not of great importance when examining older workers, or
even all persons over 65—only 5 percent of the elderly live in an institution (typically a nursing home). However, the proportion of institutionalized elderly rises sharply with age, to almost one-fourth of all
persons 85 and over. Older persons in institutions typically have few
economic resources and are in poor health. Therefore, findings from
surveys of the noninstitutionalized population will not necessarily
apply to the oldest old. Box 4-6 examines changes in living arrangements of the elderly during the 20th century, with a focus on widows.

INCOME AND CONSUMPTION
The Three-Legged Stool
Economic security in old age is often described as a three-legged
stool, the legs being Social Security benefits; income from accumulated
assets, including savings and home ownership; and pension income.
But the notion of a stool with three legs of roughly equal size is misleading. The importance of each source of income varies tremendously
among the elderly—many Americans depend almost entirely on Social
Security, for example. In addition, for many elderly households labor
market earnings provide a fourth leg to the stool. Moreover, the




153

Box 4-6.—The Changing Living Arrangements of the Elderly
Through most of history, the family has played an important
role in providing support to the needy elderly. Shared housing can
be an especially important and intensive form of support, and the
past century has seen tremendous changes in living arrangements
among the elderly. These changes have been particularly striking
among elderly widows, who now account for 27 percent of all
persons over 65.
The share of elderly widows living alone stayed roughly constant at a low level—10 to 15 percent—for several decades until
about 1940 (Chart 4-9). Between 1940 and 1980, however, that
proportion increased sharply, and the share living with adult
children fell. By 1980, 59 percent of elderly widows were living by
themselves, and only 22 percent shared a home with their
children. This strong upward trend in widows' independence ended
in 1980: living arrangements in 1990 were similar to those
observed in 1980. It is estimated that rising economic status,
primarily due to wider coverage and more generous benefits from
Social Security, accounted for 62 percent of the increase in the
share of elderly widows living alone between 1940 and 1990. About
9 percent of the change was explained by a decline in the number
of children available for widows to move in with.
When elderly people have been asked to express their attitudes
about living arrangement options in the event they needed care,
68 percent say they would like to receive assistance in their own
home, and only 20 percent state that they would like to move in
with relatives. Apparently, improvements in widows' economic status have allowed them to fulfill this desire to live independently. But
despite these gains, poverty remains relatively high among widows (see Table 4-4).
average share of income from each source has changed over time and
may continue to change in the future.
In 1962, before the sharp increases in Social Security benefits of the
late 1960s and early 1970s, Social Security accounted for 31 percent of
income for the elderly and their spouses; asset income accounted for 16
percent, and pension income was 9 percent. Earnings were also important at 28 percent. The remaining 16 percent of income included
welfare and all other sources of income.
Income from these sources has grown at different rates in the past
30 years (Chart 4-10; income data refer to before-tax money income,
the official Census Bureau definition, unless otherwise noted). The
share provided by Social Security has increased, to 40 percent of
income on average in 1996, whereas pensions and asset income each




154

Chart 4-9 Living Arrangements of Elderly Widows
Between 1940 and 1990, the share of elderly widows living alone increased sharply,
and the share living with adult children fell.
Percent

100 -

40 -

20 -

0
1880
1900
1910
1920
1940
1950
1960
1970
1980
1990
Source: Kathleen McGarry and Robert Schoeni, "Social Security, Economic Growth, and the Rise in
Independence of Elderly Widows in the 20th Century," National Bureau of Economic Research
Working Paper No. 6511, 1998.

composed about one-fifth of income. The share of income comprised of
labor earnings has declined substantially, as is to be expected given the
decline in elderly labor force participation during this period. These
changes took place during a period when the median incomes of both
married and single elderly persons nearly doubled.
The composition of income looks quite different at different income
levels. Among elderly households in the bottom fifth of the income distribution in 1996, Social Security accounted, on average, for 81 percent of
income, public assistance for 11 percent, and asset income and pensions
for only 3 percent each (Chart 4-11). Clearly, a large segment of the elderly
have saved relatively little for their retirement. Elderly households in the
top quintile of the income distribution rely fairly evenly on Social Security,
asset income, pensions, and labor market earnings.

Saving Social Security
Social Security plays an important and unique role among the
sources of income for the elderly. As discussed in Chapter 1, it is a
family protection plan as well as a pension system, providing
Americans for more than half a century with income in retirement and
protection against loss of family income due to disability or death. In
particular, by providing a lifetime annuity, it offers a level of income
security difficult to obtain in private markets. Through its special
contribution to the well-being of the elderly, survivors, and the
disabled, Social Security has been an extremely successful social
program. Yet the demographic pressures of population aging,




155

Chart 4-10 Composition of Income Among the Elderly
The share of income from earnings has declined over time for persons aged 65 and
older and their spouses, while the share from pensions has increased.
Percent

| Social Security

| Asset income

| ] Pensions

^ Earnings

jSJ Welfare and other
100

80

60

40

20

1962 1967 1976 1978 1980 1982 1984 1986
Note: Data are for elderly persons and their spouses.
Source: Department of Commerce (Bureau of the Census).

1988

1990

1992

1994

1996

Chart 4-11 Composition of Income by Quintile Among the Elderly, 1996
The composition of income differs for lower versus higher income elderly. Social
Security is the main source of income for poorer households.
Percent

| Social Security
! Public assistance

| Asset income

Q] Pensions
Earnings

• Other Income

100

80

60

40

20

Bottom quintile
2nd quintile
3rd quintile
Note: Data are for elderly persons and their spouses.
Source: Department of Commerce (Bureau of the Census).




156

4th quintile

Top quintile

mentioned earlier in this chapter and discussed at greater length in
the 1997 Economic Report of the President, will require forward-looking action from policymakers to preserve the program's financial viability in the first quarter of the next century and beyond. Chapter 1
describes the President's proposals to do this.

From Defined-Benefit to Defined-Contribution Pension Plans
An important source of income for many elderly is employment-related
pensions. The past 20 years have seen dramatic changes in the prevalence of the two main types of pension plans. Defined-contribution plans,
including 401(k)-type plans, have gained in popularity as participation in
defined-benefit plans has declined (Table 4-1; see also Box 4-4 for a discussion of the two types of plans). The portability of DC plans favors
mobility among jobs, and workers' demand for more-portable benefits
may have contributed to the ascendance of these plans. DB plans are
more prevalent in unionized manufacturing firms and in the public sector, both of which have seen a decline in their share of the work force,
thus contributing to the decline in DB participation rates. Before passage
of the Employee Retirement Income Security Act (ERISA) in 1974
(Box 4-7), employees in DB plans were exposed to the serious risk that
their employers would underfund the plan or divert its funds to other
purposes. Even with the protections afforded by ERISA against underfunded DB plans, DC plans have become increasingly popular, suggesting
that workers have come to accept the investment risks inherent in these
plans in exchange for their flexibility. Benefits in DC plans depend on
uncertain investment returns, whereas DB retirement benefits are more
certain because they are usually tied to years of employment according to
a known formula. Many workers are in DC plans that supplement a DB
plan, but almost all of the recent growth in DC participation has been
among workers who do not have DB plans.
The growing prevalence of DC, and especially 401(k), plans represents a major shift of responsibility for providing for retirement
income from the employer to the worker, making the provision
of retirement income more and more like individual (albeit taxadvantaged) saving. Concomitantly, the trend toward DC plans has
shifted certain risks between employer and worker. Under a DB
plan, the nominal benefit amount is guaranteed at retirement, and
the employer bears the risk of providing this amount. The worker
" has no control over how the pension fund is invested. Moreover, a
worker's pension is at risk if he or she changes jobs. Since there
typically is no provision for worker contributions, workers usually
receive nothing at all from jobs that end before the vesting period is
completed. Finally, because benefits for vested employees are determined in nominal terms when employment terminates, inflation
may drastically erode a pension's purchasing power by the time a
separated worker reaches retirement age.




157

TABLE 4-1. — Estimated Pension Coverage and Offer Rates for
Private Sector Wage and Salary Workers
Percent of workers covered by a
Primary
definedbenefit
plan1

Year

Primary
definedcontribution
plan1

1981
1982
1983
1984

37
36
35
34

9
10
11
11

1985
1986
1987
1988
1989

33
32
31
30
29

13
14
15
15
16

1990
1991
1992
1993
1994

28
27
26
26
24

17
18
20
20
21

1995

23

23

401(k)-type
plan2

(3)

Percent of
workers
offered a
401(k)-type
plan2

(3)

(3)

(3)

3

7
(3)

(3)

(3)

(3)

(3)

(3)

(3)

(3)

14

25

(3)

(3)

(3)

(3)

(3)

(3)

(3)

(3)

23

35

(3)

(3)

(3)

(3)

1

For workers covered under both a defined-benefit and a defined-contribution plan, the defined-benefit plan is designated
as the primary plan unless the plan name indicates it provides supplemental or past service benefits.
2
All plans providing for tax-deferred employee contributions, whether or not the employer also contributes.
3
Not available.
Source.- Department of Labor (Pension and Welfare Benefits Administration).

Most private 401(k)-type DC plans, on the other hand, rely on
worker contributions for at least a portion of benefits. The worker
typically decides how much to contribute and where to invest the
funds (within certain limits). Although workers have greater control
over investments in DC plans, they also bear the risk of variable
returns on those investments, in marked contrast to DB plans.
Because there is no vesting period for employee contributions in either
type of plan, they belong to the worker from the start. Employers
often make matching contributions to 401(k) plans, which belong to
the worker once the vesting period is completed. A job change need not
affect the worker's accumulation, provided the worker leaves the
funds in the account or rolls them over into a new tax-deferred
account. However, only a third of those aged 45-54 in 1993 who had
received a lump-sum pension distribution had put it into a retirement
account; fewer than half had put it into any financial asset. Of those
aged 25-34, only 25 percent had put their lump sums into financial
assets, including retirement accounts.
Less wealthy, lower income, and less educated workers tend to be
more risk averse in their investment choices; that is, they tend to
invest in more conservative, fixed-income securities rather than in
stocks. By taking less risk (other than inflation risk), they earn lower
long-run rates of return on average and therefore tend to end up with
smaller accumulations at retirement than do higher income, wealthier




158

Box 4-7.—The Federal Role in Employer-Provided
Pension Plans
The Employee Retirement Income Security Act of 1974 governs
pension and welfare plans sponsored by private employers. The
act covers both defined-benefit and defined-contribution plans.
ERISA was enacted because of concerns about the private pension
system: that too few employees were receiving or would receive
the pensions they had come to expect; that too many participants
were being treated unfairly by plans and employers; and that
existing law was inadequate to deal with these problems. Title I of
the act spells out the protections it provides for workers and fiduciary standards for employers, trustees, and service providers.
Title II sets forth standards that plans must meet in order to
qualify for favorable tax treatment, and Title III contains administrative provisions. Title IV, which is carried out by the Pension
Benefit Guaranty Corporation, a Federal agency, regulates
employers' funding of their plans to make sure they set aside
sufficient funds to pay the promised pensions. It also insures
vested participants' pensions, at least up to certain levels, against
the eventuality that the employer cannot pay.
This Administration has worked for continued pension reform
to promote retirement saving. Many of the President's proposed
pension provisions were adopted in the Minimum Wage Increase
Act of 1996. That act expanded pension coverage in several ways.
It created a new 401(k)-type plan for small businesses, with a
simple, short form intended to make it easier for small businesses
to provide their workers with pensions. It made it easier for employers to let new employees participate in 401(k) plans immediately. It
required State and local government retirement savings plans
to be held in trust so that employees do not lose their savings if
the government declares bankruptcy. It expanded access to
401(k)-type plans to employees of nonprofit organizations and
Indian tribes. And it promoted portability for veterans by allowing
reemployed veterans and their employers to make up for pension
contributions lost during active service.
More recently, the Administration has proposed a number of
initiatives to address concerns about women's pension arrangements. One proposal would allow time taken under the Family
and Medical Leave Act to count toward eligibility and vesting. For
some workers such a provision could make the difference between
receiving or not receiving credit toward minimum pension vesting
requirements for an entire year of work (a minimum amount of
work is required in a given year for it to count toward the vesting
period). Another would address the needs of widows by requiring




159

Box 4-7.—continued
employers to offer an option that pays a survivor benefit to the
nonemployee spouse equal to at least 75 percent of the benefit the
couple received while both were alive, in exchange for a smaller
benefit while both are alive. This option would give the surviving
nonemployee spouse the security of a larger benefit than otherwise, which may better reflect the cost of living for one person
compared with two. This would improve the protection provided by
the Retirement Equity Act of 1984, which requires that
pensions be paid in the form of a joint life annuity in which the
surviving nonemployee spouse receives at least 50 percent of the
benefit received while both spouses were living, unless the retiree's
spouse signs a consent to have the pension paid in some other
form, such as a lump sum or a single life annuity.
individuals with the same contributions, although their return is also
more certain. At least partly because they have lower incomes and less
wealth on average, blacks and women make more conservative investment choices, and consequently would tend to accumulate even less in
a DC plan that provides for employee-directed investments, compared
with white men, than their lower contributions alone can account for.
They also are more likely to cash out their lump-sum distributions
when changing jobs.
It is important to distinguish risk aversion based on lower income
and wealth from risk aversion based on lack of knowledge and investment experience. Those who have fewer resources to cushion potential
losses cannot afford to take as much risk as those with more to spare.
This is a perfectly sound reason for avoiding risk. However, if lower
income groups are choosing assets with less risk and correspondingly
lower expected yields out of lack of knowledge, or because they misperceive the amount of risk involved in higher yielding assets, the policy implications are different. Of course, income, wealth, education,
experience with investments, and knowledge of investment principles
are correlated with each other. Women also may have less knowledge
of investments because husbands have traditionally taken care of
these financial matters for the family, although this is no doubt changing as family structure and roles within the family change. There is an
urgent need to educate all workers about investments so that, if they
are managing 401(k) investments, they have a better chance of achieving
their retirement income goals.
Depending on what happens to coverage and participation rates and
to average contributions and rates of return, the DC "revolution" could
either increase or reduce the average pension income of older
Americans. But the movement toward DC plans could result in greater




160

inequality among retirees who have the same job tenure. Under a DB
plan that bases benefits on pay and years of service and is not integrated with Social Security (as explained in Box 4-4), the pensions of
workers with the same years of service will differ only in proportion to
their pay. Under a DC plan, however, their pensions will differ according to the difference in investment returns (compounded) as well as in
proportion to pay. If the difference in returns is positively correlated
with pay, the inequality of retirement income will be magnified. Moreover, contribution rates may be more unequal in 401(k) plans, because
they are partly or wholly chosen by the employee (subject to certain
rules and dollar limits, which may be especially restrictive for higher
paid employees). In most DB plans, benefit levels are determined by
the employer (also subject to certain rules and limits).
It is difficult to predict the effect of the shift from DB to DC plans on
the average pension incomes of women and minorities relative to white
men. Because women earn less on average than men, and minorities
earn less than whites, the pensions of women and minorities are smaller on average under either type of plan. The evidence is that, for people
aged 51-61 in 1992, the male-female differential in accumulated pension
wealth from all jobs was smaller in DC than in DB plans, even though
the male-female differential in accumulated pension wealth on the
current job was greater in DC plans (Table 4-2). These data on pension
wealth do not, however, control for possible differences in earnings, job
turnover, and tenure between participants in DC and DB plans.
One might expect gender and racial gaps to be greater in DC plans
at a given date on the workers' current jobs because white men tend to
have longer job tenure than women and blacks. In DC plans, pension
benefits grow exponentially with tenure, because the contributions
earn a compound rate of return, whereas in most DB plans benefits
increase only proportionally with years of service and salary (unless
benefits are integrated with Social Security). A dollar invested each
year at 4 percent annual interest is worth $12.48 after 10 years and
$30.97 after 20 years. Therefore, at a given date, a worker who has
been in a DC plan for 20 years will have 2.48 times the accumulation of
a worker who has been in the plan for only 10 years, even if they made
exactly the same contribution to their accounts in each year they
participated in the plan. In most DB plans that are not integrated with
Social Security, the worker who separates after 20 years of service
would receive only twice the benefit of an equally paid worker who
separates at the same time after 10 years of service.
However, when pension wealth from all jobs is considered, the gender and racial gaps may be smaller in DC plans because they do not
penalize job turnover and intermittent labor force participation as
much as DB plans do. This depends crucially, however, on whether the
DC funds are left to grow rather than withdrawn and spent when jobs




161

TABLE 4-2.— Gender Differences in Pension Wealth, 1992
Ratio of
male to female
median
individual
pension
wealth

Percent with pension
wealth
Kind of pension plan
Women

Men

From all jobs during lifetime:1
Defined-benefit

31

54

2.2

Defined-contribution

28

38

1.7

Defined-benefit only

31

30

1.3

Defined-contribution only

22

21

2.7

Both

16

24

2.1

On current job only:

2

1

Self-reported for all lifetime jobs, all nonretired non-self-employed respondents aged 51-61 in 1992 who worked
since 1982.
2
Pension providers administrative records for current job only, currently employed respondents aged 51-61 in 1992.
Source: Health and Retirement Survey, Wave 1. For lifetime jobs data, custom tabulations by Marjorie Honig, October 1998;
for current job data, Richard W. Johnson et al, Gender Differences in Pension Wealth: Estimates Using Provider Data, unpublished paper, August 1998.

end. And as we have seen, many recipients of lump-sum payments do
spend them rather than roll them over.
DB plans provide benefits in the form of an annuity, which guarantees an income for life, unless the plan provides, and the participant
elects, a lump-sum payment option. The optional forms of annuity and
lump sum are calculated using a uniform mortality table for all races
and both sexes combined, so that participants do not receive different
monthly benefits simply because of their race or sex. However, whites
(and Hispanics) and women have longer remaining life expectancies at
age 55 than blacks and men, respectively, and so receive the stream of
benefits over a longer period of time, on average.
The accumulation in a DC plan, on the other hand, does not depend
on life expectancy. But participants in DC plans cannot assure themselves a guaranteed income for life, unless their plan provides a group
annuity option or they purchase an annuity on their own. DC plans
thus pose the risk that the beneficiary will outlive his or her savings.
The private market for annuities is subject to adverse selection, in that
those who expect to live a long time are more likely to purchase annuities, and this drives up their price. This works to the disadvantage of
women in DC plans, since they are more likely than men to live long
enough to run out of money if they do not have an annuity.
Finally, market forces may cause wages to adjust to differences in
employers' pension costs, so that workers who get more deferred pension compensation in one type of plan may "pay" for this benefit in the
form of lower wages, or their wages may grow more slowly with time
on the job. All of these considerations leave it an open question




162

whether minorities and women are likely to be better off relative to
white men in DB or DC pension plans.

Consumption
The economic status of the elderly is ultimately measured by the
standard of living that they enjoy. Elderly households typically spend
less on consumption than younger households (Table 4-3), in part
because the average elderly household has fewer people. But the three
largest expenditure categories for elderly households are the same as
those for younger ones, namely, housing, transportation, and food. As
is well known, health care accounts for a greater share of expenditure
for elderly households than for younger ones: 11.7 percent versus 4.2
percent.
TABLE 4-3.— Consumption Patterns of Elderly and Nonelderly Households
by Age of Household Head, 1997
Percent of total expenditures
Item

Head
under 65

All
households

Housing
Transportation ...
Food
Personal insurance and pensions

32.4
18.5
13.8

9.3

Head
65 and over

32.3
19.0
13.7
10.2

33.1
15.6
14.3

3.9

Health care
Entertainment
Apparel and services
Cash contributions

5.3
5.2
5.0
2.9

4.2
5.3
5.1
2.4

Miscellaneous
Education
Personal care products and services
Alcoholic beverages

2.4
1.6
1.5
.9

2.4
1.8
1.5
.9

2.5
.6
1.8
.8

.8
.5

.8
.4

.6
.7

$34,819

$37,543

$24,413

Tobacco and smoking

Reading
AVERAGE DOLLAR EXPENDITURES

11.7

4.5
4.3
5.4

Source: Department of Labor (Bureau of Labor Statistics).

POVERTY
The reductions in poverty among the elderly in recent decades have
been remarkable: in 1970, 25 percent of all persons over 65 were living
in poverty, but in 1997 only 11 percent were poor (Chart 4-12). Much of
this improvement occurred in the early 1970s, in part because of double-digit percentage increases in Social Security benefits enacted in
1971, 1972, and 1973. But progress has been made since then as well:
elderly poverty has fallen by 28 percent in the last 15 years alone, and
since 1993 it has declined by 14 percent.
Many elderly people, however, live just above or just below the
poverty line; relatively small changes in their income could move them




163

Chart 4-12 Poverty Rate by Age Group
Poverty among the elderly has declined dramatically, from 25 percent in 1969 to
11 percent in 1997.
Percent

30

Underage 18

25

\

20

15

10

1969
1972
1975
1978
1981
1984
Source: Department of Commerce (Bureau of the Census).

1987

1990

1993

1996

into or out of poverty. In 1997, 6.4 percent of the elderly were "near
poor"; that is, their before-tax money income placed them above the
poverty line but below 125 percent of that line. Another 5.9 percent
had incomes below, but at least 75 percent of, the poverty threshold.
The decline in poverty among the elderly has been experienced
across demographic groups: men and women, whites and blacks,
younger as well as older elderly persons, and married as well as single
persons (Table 4-4). In particular, poverty among black elderly persons
has fallen from 48.0 percent to 26.0 percent since 1970, while the rate
for whites has fallen from 22.6 percent to 9.0 percent. And poverty
among widows has been reduced by half during the same period, with
a decline of almost 3 percentage points between 1993 and 1997.
At the same time, Table 4-4 highlights the tremendous variation in
the income status of the elderly, and the fact that poverty remains high
for several groups. Poverty rates for elderly women are nearly twice as
high as those for elderly men, and 72 percent of all elderly living in
poverty are women (Table 4-5). Widows, who account for roughly half
of all elderly women, have an especially high rate of poverty, at 17.9
percent. The President has proposed to address this problem as part of
the ongoing discussions to save Social Security.

Identifying the Needy Population
Who are the elderly living in poverty? The majority of impoverished
elderly are single—either widowed, divorced, or never married




164

TABLE 4-4. — Poverty Rates Among the Elderly for Various
Demographic Groups
[Percent]
Year

Women

Men

Whites

Blacks

Ages
65-79

Widows

Ages 80
and over

1970

190

284

226

480

368

230

31 1

1980

110

191

136

38 1

251

142

226

1990

76

154

101

338

214

105

186

1993

79

152

107

280

207

107

111

1997

7.0

13.1

9.0

260

17.9

9.7

13.4

Source: Council of Economic Advisers tabulations of March Current Population Survey data.

(Table 4-5). Just over half (51 percent) are widows or widowers.
Seventy-two percent of the elderly poor are women, compared with
only 56 percent of the nonpoor elderly. Although elderly persons from
minority groups are more likely to be in poverty than elderly whites,
whites account for two-thirds of the elderly poor. Finally, as shown in
Table 4-4, poverty is more widespread among the oldest old than
among younger elderly persons. However, only 13.7 percent of all
elderly persons in poverty are 85 or older (Table 4-5).
Alternative Measures of Income and Poverty
The income measure above can be broadened to include other
factors that affect well-being, including taxes, noncash benefits
(such as food stamps), and the imputed amount that would have to
be paid if homeowners rented their home. If all of these factors are
TABLE 4-5. — Sociodemographic Characteristics of the Poor and
Nonpoor Elderly Population, 1997
[Percent]
Elderly
in poverty

Characteristic

Age
65-74
75-84
85 and over

486

56.2

28.1
51.2

59.9
30.3

123
8.5

60
3.8

672

Race/ethnicity
Non-Hispanic white
Non-Hispanic black
Hispanic

34.9

71.8

Marital status
Married/separated
Widowed
Divorced
Never married

566

37.7
13.7

Female

886
70
4.4

21.0
11.7

Source: Council of Economic Advisers tabulations of March 1998 Current Population Survey data.




Elderly not
in poverty

165

8.6

included, the elderly appear to be in better shape than if these
factors are excluded. Average before-tax income for all households
headed by someone 65 or older was $31,269 in 1997. Adding net
capital gains ($1,116, on average) and subtracting taxes ($4,033, on
average) leads to average after-tax income of $28,352. Adding in
noncash government transfers ($153), imputed rent ($4,274), and
employer-provided health insurance ($321) increases the value to
$33,100. Benefits that are not included in this calculation are the
values of Medicare and Medicaid, which are substantial but difficult
to determine. These calculations demonstrate that a broader
accounting of income available for consumption suggests that
before-tax cash income underestimates monetary well-being by an
average of a minimum of $1,831 (because Medicare and Medicaid
are not valued), or 5.5 percent.
As described earlier, an alternative measure of well-being is consumption, or how much people spend on goods and services. It has been shown
that the trends in "income poverty" and "consumption poverty" are
similar: consumption poverty among the elderly was 84 percent higher,
and income poverty 70 percent higher, in 1972-73 than in 1988.
WEALTH
Wealth holdings allow families to maintain consumption when earnings and income are low. Wealth includes financial assets such as savings accounts, stocks, bonds, and mutual funds, as well as nonfinancial
assets such as homes, vehicles, and businesses. Table 4-6 reports the
share of families holding each of these types of assets and, for those
holding that asset, its median value as of 1995.
The vast majority of the elderly—over 90 percent—have at least
some assets. Among elderly families holding financial assets, the median
value in 1995 was roughly $20,000. Median values of nonfinancial
assets varied by age: elderly families headed by 65- to 74-year-olds had
greater median nonfinancial assets ($93,500) than did those whose
head was 75 or older ($79,000); the family home was the most important nonfinancial asset across age groups. Financial wealth is commonly held in the form of retirement accounts: 35 percent of families
headed by a 65- to 74-year-old held such an account, with a median
balance of $28,500. In 1995 fewer than 15 percent of elderly families
held mutual funds outside retirement accounts, although those who
did have accounts had substantial holdings, on average.
Wealth holdings among the elderly vary enormously (Table 4-7). In
1994,10 percent of all households with a member aged 70 or older had
$162 or less in total wealth (in 1996 dollars), and at least that many
had no financial assets at all. Another 20 percent had no more than
$541 in financial assets and less than $30,311 in total wealth. At the
same time, 10 percent had at least $415,622 in total wealth, with at
least $175,341 in financial assets.




166

TABLE 4-6. — Family Holdings of Financial and Nonfinancial Assets,
by Age of Head of Family, 1995
Median value among holders
(thousands of dollars)

Percent of families
holding assets
Type of asset

Age of head

Age of head

All
families

65-74

75 and
over

FINANCIAL ASSETS

90.8

92.0

Transaction accounts
Certificates of deposit
Savings bonds
Bonds
Stocks .

87.1
14.1
22.9

91.1
23.9
17.0

15.3

18.0

21.3

Mutual funds
Retirement accounts
Life insurance
Other managed
Other financial

12.0
43.0
31.4

13.7
35.0
37.0

10.4
16.5
35.1

19.0
15.6

5.6

5.7
5.3

30.0

10.4

3.0

9.0

35.0

NONFINANCIAL ASSETS

91.1

92.5

90.2

83.0

93.5

79.0

Vehicles
Primary residence
Investment real estate
Business
Other

84.2
64.7
17.5
11.0

82.0
79.0
26.5

72.8
73.0
16.6

8.0

7.9
8.9

3.8
5.4

10.0
90.0
50.0
41.0
10.0

3.0

3.8
11.0

9.0

5.1

All
families

65-74

75 and
over

93.8

13.0

19.1

20.9

93.0
34.1
15.3

10.0

7.0

26.2

2.1
1.0
8.0

5.0

3.0
17.0

1.5

5.0
11.0

4.0

58.0
15.0

40.0
25.0

50.0
28.5

50.0
17.5

5.0

5.0
100.0

26.0

80.0
55.0

100.0
16.0

5.3
80.0
20.0
30.0
15.0

Source: 1995 Survey of Consumer Finances.

The 1998 Economic Report of the President described in detail the gaps
in earnings and income between races and ethnic groups. However, these
disparities are small relative to the differences in wealth. The median
household income of elderly whites is about twice that of elderly blacks
and Hispanics, but the comparable ratio for wealth is about five to one.
Gaps in holdings of financial assets are even wider. In fact, as Chart 4-13
shows, median financial wealth for households with a member 70 or older
is zero for blacks and Hispanics. This means that over half of the members
of these groups have no financial assets at all; the only wealth they have
consists of their home or other physical assets. This result holds for those
approaching retirement age as well: over half of households that contained
a black or Hispanic person aged 51-61 had no financial assets in 1992.
In sum, a large share of the elderly have very little wealth, and what
wealth they do have is mostly in the form of housing and other illiquid
assets, not financial assets. At the same time, a significant share
of elderly people have quite large wealth holdings, including ample
financial assets.

ARE OLDER WORKERS SAVING ENOUGH FOR
RETIREMENT?
One reason why it is important to know the level of wealth holdings
of older persons is to determine whether they will have enough
resources in retirement. Answering this question is difficult for a




167

TABLE 4-7.— Total and Financial Wealth of Households by Percentiles
[1996 dollars]
With member aged 51-61 '

With member aged 70 and over 2

Percentile
Total

Financial

Total

Financial

10

1,115

-1,338

162

0

30

45,705

1,115

30,311

541

50

111,809

15,607

84,206

8,659

70

222,950

55,738

166,682

41,995

90

585,690

208,459

415,622

175,341

95

964,259

367,868

669,974

313,882

269,946

81,779

177,678

65,116

Mean
1

Data are for 1992.
Data are for 1994.
Note. Total wealth includes equity held in homes, value of business and other tangible assets, and a detailed list
of financial assets.
Source: James P. Smith, The Changing Economic Circumstances of the Elderly: Income, Wealth, and Social Security,
Center for Policy Research, Syracuse University, 1997.
2

Chart 4-13 Household Financial Wealth by Race and Ethnicity
Among older Americans, financial wealth is much higher for whites than for blacks or
Hispanics. Over 50 percent of blacks and Hispanics have no financial wealth.
1996 dollars (thousands)
100

I Mean

• Median

80 r 76.3

60

20

White
Black
Hispanic
White
Black
Hispanic
Note: Data are for households with a member of the given age. Data for ages 51 -61 are for 1992 and
data for ages 70 and older are for 1994.
Source: James P. Smith, "The Changing Economic Circumstances of the Elderly: Income, Wealth,
and Social Security," Center for Policy Research, Syracuse University, 1997.




168

variety of reasons, including the fact that life expectancy, future
interest rates, streams of income, and needs during retirement are
highly uncertain. Moreover, to address this question one must first
define what one means by "enough." Recent studies have defined
"enough" as the amount of resources that preretirees need to maintain
their current standard of living throughout retirement. These studies
take into account the fact that the postretirement income needed to
maintain the preretirement standard of living is smaller than the
amount needed prior to retirement.
There is evidence that a significant share of the population
approaching retirement are not saving enough to maintain their
preretirement standard of living. It has been found that persons aged
51-61 in 1992 who have household earnings of $30,000 (the median)
would need to save 18 percent of their income in the years remaining
until retirement, if they wish to retire at age 62 and maintain their
preretirement consumption levels throughout retirement. This 18 percent is above and beyond the household's automatic contributions to
Social Security and pensions. Postponing retirement to age 65 reduces
the necessary saving rate to 7 percent. Typical actual saving rates for
persons approaching retirement have been estimated at 2 to 5 percent.
These estimates mask substantial variation within the population
approaching retirement. It has been found that roughly 70 percent of
households with persons aged 51-61 need to add to their savings,
above and beyond their automatic contributions to Social Security and
pensions, in order to retire at age 62 and maintain their standard of
living; this estimate decreases to 60 percent if retirement is postponed
to age 65. But by the same token, roughly one-third do not need to add
to their savings to maintain consumption throughout retirement. Not
surprisingly, the saving rate necessary to maintain the preretirement
standard of living is substantially higher for households with less
wealth. Finally, although several theories have been advanced to
explain why so many people have a saving shortfall, the available
empirical evidence is not conclusive.
To help Americans save enough to enjoy a more secure retirement,
the President has proposed to reserve about 12 percent of the projected
unified budget surpluses over the next 15 years—averaging about $35
billion a year—to establish new Universal Savings Accounts (USAs).
Under the proposed plan, the government would provide a flat tax
credit for Americans to put into their USA accounts and additional tax
credits to match a portion of each extra dollar that a person voluntarily
puts into his or her USA account. This plan would provide more help
for low-income workers. These accounts will build on the current
private sector pension system to enable working Americans to build
wealth to meet their retirement needs.




169




CHAPTER 5

Regulation and Innovation
BECAUSE INNOVATION—the development and adoption of new
technology—is essential to U.S. economic performance over time, regulation that interferes with innovation, however justifiable on other
grounds, comes at a cost. Therefore, in such areas as competition policy, environmental regulation, and electric power restructuring, the
Administration has worked to ensure that regulation not only does not
interfere with innovation, but indeed fosters beneficial technological
change and adapts itself to such change as well.
Appropriately designed regulation can achieve desirable outcomes
that unconstrained commercial activity would not produce. Historically, regulation in the United States has been selectively applied both to
certain types of undesirable economic behavior and to certain effects of
that behavior. Antitrust laws, for example, promote competition and
prohibit anticompetitive actions that interfere with market performance. Industry-specific economic regulation has traditionally constrained the exercise of market power by natural monopolies such as
telephone companies and electric utilities. Environmental regulation,
for its part, has targeted the side effects of economic activity on the
health of people and of the environment.
Although regulation, when wisely applied, can prevent economic
harm and protect economic benefits, real productivity gains over time
depend on innovation—on the steady flow of new ideas, products, and
processes. Over the past 50 years, more than half of all productivity
gains in the U.S economy, as measured by output per labor hour, have
come from innovation and technical change. Innovation thus boosts all
sectors of the economy; it is important for agriculture just as it is for
semiconductors. Those industries that fall under the rubric of high
technology-including aerospace, telecommunications, biotechnology,
and computers-provide particularly dramatic examples of growth
through innovation: their combined share of manufacturing output has
increased by more than half since 1980. Indeed, high-technology products have become an increasingly important part of everyday life for
American consumers. The spread of Internet use in the past 6 years,
from a few specialized applications to a routine tool for tens of millions
of Americans, is one notable illustration. But it is through innovative
effort economy-wide, both public and private, that the United States
has succeeded in strengthening its position as the world leader in
research and development (R&D; Box 5-1). To take just one measure,




171

the number of patents granted in the United States grew to more than
140,000 in 1998, after passing the 100,000 mark for the first time in
1994.
Given the economic importance of innovation, public policy can achieve
greater good when it extends its perspective beyond the immediate
goals of particular regulatory programs and takes into account the
effects of regulation on the development and adoption of new technology.
This chapter first addresses how U.S. antitrust policy, beyond its conventional focus on the price and output benefits of competition, has
Box 5-1.—The Scope of Government Support of R&D
The Federal Government supports innovative activity in both
direct and indirect ways. And it does so in no small measure: data
from 1997 show that U.S. Government agencies provide about 30
percent of all funds spent on R&D in the United States. The government's share of funds for basic research (research that
advances scientific knowledge but has no immediate commercial
objectives) is higher still, at about 57 percent. The National Institutes of Health (NIH), for example, are a principal source of funding for biomedical research. NIH programs provide resources for
such projects as AIDS/HIV treatment, cancer research, and the
Human Genome Project. The government has also taken a direct
role in R&D and scientific education through the National Science
Foundation and other agencies such as the Department of Energy,
which oversees the large complex of Federal laboratories. Federally
funded research has been responsible for major developments in
space technology, defense systems, energy, medicine, and agriculture, to list just a sample. Federal agencies face the continuous
challenge of matching their missions to the technological needs of
an evolving world.
Industry provides most of the remaining 70 percent of R&D
funding in the United States. Indeed, its proportion has grown
steadily in the past decade, to about two-thirds of the total. But
government plays a role—an indirect one—in this effort as well,
for example through tax incentives that encourage innovation.
The research and experimentation tax credit, which allows firms
to reduce their tax obligations by 20 percent of qualifying R&D
expenditure, was recently extended until June 1999. The government also supports basic research that underlies many applied
advances in private industry, and it engages in partnerships
with institutions such as universities to share the risk of longterm R&D efforts that have the potential to create widespread
benefits.




172

incorporated consideration of the long-run benefits of innovation. The
chapter then examines how alternative ways of implementing environmental regulation affect the innovation and diffusion of new
technology. Finally, the restructuring of the electric power industry is
presented as an illustration of how technological change affects the
desired form of regulation, and how regulatory changes in turn affect
the pace and direction of new technological and market developments.

COMPETITION POLICY AND INNOVATION
Innovation makes enormous contributions to the Nation's economic
growth, not just in the large and growing high-technology sector but
across all sectors of the economy. The impact of new technologies goes
beyond expanding the range of choices for consumers and lowering
prices; often, new ideas have significant consequences for the very
structure and performance of markets. In turn, one firm's competitive strategy and market behavior can affect the incentive and the
ability of all firms in an industry to produce innovative goods and
services, sometimes for the worse. The reciprocal effects of technological innovation on markets, and of markets on innovation, pose
ongoing challenges for antitrust policy. The antitrust authorities
have not shied from these challenges: 1998 saw the continued application of the antitrust laws in technologically complex industries,
and renewed attention to the economic benefits of innovation in
assessing the health of these vital markets.
MERGER REVIEW AND INNOVATION
Corporate merger activity continues at a swift pace: in fiscal 1998
over 4,000 merger notifications were filed with the Antitrust Division
of the Justice Department and the Federal Trade Commission, the
two Federal agencies concerned with antitrust. About 7,000 additional
mergers were valued at less than $10 million, the level at which premerger notification is required. The total value of all mergers in 1998
is estimated at over $1.6 trillion. The scope of merger activity in 1998
is comparable, depending on the measure used, to that experienced at
the turn of the century and in the late 1980s. Although, as in other
years, most of these mergers were small, the recent wave of economic
consolidation has been distinguished by the number of very large
mergers and by the number of mergers in such highly innovative sectors as telecommunications, aerospace, and biotechnology. These
transactions, in addition to simply creating bigger firms, sometimes
create measurably more concentrated markets. Given the importance
of these advanced industrial sectors for future growth, a pressing
question for antitrust authorities has been how such changes in
market concentration and firm size affect innovative activity.




173

The United States has a decades-long history of enforcing its
antitrust laws to ensure that mergers, acquisitions, and other structural changes in firms and markets do not unduly empower the resulting enterprises to raise prices or restrict output. The use of antitrust
policy as a framework for preserving and encouraging innovation, however, is a more recent development, on which there is less consensus.
The relationship between an industry's market structure and the
amount of innovative activity in that industry may differ from the relationship between market concentration and short-term price competition, the conventional focus of antitrust. Whereas concentration nearly always weakens price competition, its effects on innovation are less
clear-cut. Antitrust authorities investigating today's mergers thus confront a difficult task: they must not only assess the likely effects of consolidation on prices and output in the relevant product market, but
also account for a merger's potential impact on innovation and the
benefits it promises to consumers in the long run.

DO BIGGER FIRMS HELP OR HURT INNOVATION?
Several recent mergers are notable for their sheer size. In the last
few years the financial services, telecommunications, and petroleum
industries have all seen mergers or proposed mergers valued in the
tens of billions of dollars. Antitrust policy in the United States does
not, however, generally treat firm size per se as important for determining the strength of competition. Market share, which does not necessarily correlate with size, is understood to be the more relevant
determinant of whether prices and quantities are set competitively.
There has been greater debate, however, about the relevance of firm
size for innovation. Indeed, one could make perhaps as strong a theoretical case that bigness is good for innovation as that it is bad or indifferent. Some commentators, following the economist Joseph Schumpeter, have praised large enterprises for their superior ability to
attract the financial and human capital, bear the risk, and recoup the
investment required for sustained research and development (R&D)
activities. Small firms, on the other hand, have been touted as more
creative and more nimble in adapting to changes and opportunities
than their larger, more bureaucratic counterparts.
Empirical studies have consistently found that big enterprises are
more likely than small ones to undertake at least some R&D. In addition, among those firms that do undertake R&D, bigger firms tend to
make larger R&D investments. Beyond a threshold level of size, however, it is less evident that larger firms' R&D investments are proportionately greater than those made by smaller firms. Most recent
research supports the consensus view that, in general, R&D rises only
proportionately with firm size.
Data matching R&D investment with the number of patents generated have shown that smaller firms produce more innovations per




174

R&D dollar than do large firms. But these results do not necessarily
imply that large firms are less desirable from an innovation standpoint. First, not all patents are equivalent in value, and not all successful R&D is patented. So simply counting patents is an imperfect
measure of innovative productivity.
Second, there may be diminishing returns to R&D. Big firms, because
of their greater resources and ability to diversify, may simply be more
willing to risk investing in projects that appear to have less prospect of
success. Some of these projects do succeed, making discoveries that
smaller firms might have missed.
Finally, large firms may earn higher returns on their R&D than
small ones because they can deploy innovations across a broader array
of products, or take advantage of process cost savings over a larger production volume. This may explain why large firms continue to invest in
R&D even after their proportionate patent yield drops below that of
smaller firms.
In short, although available data and research do call into question
the conjecture that large firms are superior innovators, they do not
necessarily support the contrary view that large firms are bad for technological progress and economic growth. The evidence suggests that
the large firms created by some recent mergers will have no special
tendency—but likewise no special reluctance—to engage in innovation.

MARKET CONCENTRATION, COMPETITION, AND
INNOVATION
The focus on market share in U.S. competition policy fits logically
with antitrust's basic premise that economic performance improves
with competition. Of course, exception is made for industries that are
natural monopolies, in which costs per unit of output decline as a firm's
production increases, to the point that it is most efficient to have just
one firm produce all output. In such markets, which historically have
included railroads, electric power, and telecommunications, monopoly
may actually be better for consumers, so long as the monopolist can be
prevented from abusing its power to raise prices or stifle innovation by
potential competitors. Competition in such cases would require wasteful duplication of facilities—parallel sets of railroad tracks, or duplicate sets of wires connecting houses to the electric power grid or the
telephone network. For this reason natural monopolies have generally
been allowed to operate but subjected to strict regulation. In most
industries, however, economic theory and antitrust policy have long
seen more rather than less competition as best serving the purpose of
lowering prices, expanding output, and making consumers better off.
The presumption in favor of greater competition becomes less
universal when the policy goal is not just lower prices for a given set of
goods produced under a fixed set of technologies, but also the preservation of efficient innovative activity by firms over time. As a theoretical




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matter, depending on various conditions, either monopoly power or
competition may yield the greater amount of innovation. On the one
hand, rivalry over market share gives competitive firms an incentive
to develop new products and processes that will help them improve or
defend their market position. On the other hand, competitive firms
face greater risk in their investments in innovation than do those
with market power. Even if a firm does make a potentially profitable
discovery, and even if it can establish intellectual property rights
over that discovery that give it a temporary monopoly, rivals may
soon develop similar or better advances that diminish or negate its
value. The risk that a competing firm's successful innovations will
trump one's own grows with the number of competitors, and the
expected return to innovation may fall to the point where it does not
justify the cost.
Firms in competition also face more-binding financial constraints. A
monopolist or other firm with market power probably has, or can raise,
more cash for R&D and has a better chance of recouping its R&D
investment. Large, established firms might be particularly adept at
marshaling resources for incremental innovation or for helping to
bring a small firm's invention to market.
Even a monopolist—especially an unregulated one—has an incentive to engage in cost-reducing innovations. But because a monopolist
already has the market share for which competitive firms strive, it
may have less incentive to pursue product innovations and improvements than do firms facing competition. Further, a monopolist will
have an incentive to innovate strategically to protect its monopoly by
excluding rivals and by avoiding cannibalization of its existing business. This may lead it to delay implementation of those innovations it
does develop. A monopolist might therefore be a qualitatively inferior
innovator from the perspective of consumers and overall economic welfare. A dominant firm may also have an incentive to deter others from
engaging in innovative activity that threatens its market power.
The result could be a shift in the industry-wide pattern of innovation
that makes everyone except the dominant firm worse off.
The findings of empirical studies do not resolve this ambiguous
theoretical relationship between competition and innovation. Some
studies find innovation to be most intense among firms in oligopoly
markets that provide a mix of competitive incentives and abovecompetitive returns. Other studies find no such correlation. To the
extent there is consensus, it is that neither the presence of many
competitors nor pure monopoly correlates systematically with optimal
levels of innovation. But even in such polar cases, predictions about
R&D activity are hard to make. The determination requires looking at
the facts in each case, because market factors other than concentration, as well as a firm's regulatory status and the nature of its products
and technologies, also affect innovation.




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In some industries, fierce competition yields substantial R&D:
dozens of firms today are racing to develop new antiobesity drugs, for
example. But monopolies can be energetic innovators, too: during
AT&T's decades of dominance of the telecommunications industry, its
Bell Laboratories research arm developed a steady stream of new
technologies. In each case factors independent of market structure
made the difference. The market for antiobesity drugs is new, the
rewards for successful R&D are huge—future sales could reach an estimated $5 billion per year—and the efficient level of R&D investment
could be quite high. In the case of AT&T, although innovation in
telecommunications might have been greater under competition, consumer demand for increased capabilities in the telephone system,
opportunities to enter new markets, and the guarantee of steady, regulated returns that could help fund risky R&D made complacency
undesirable even for an established monopolist.
In addressing innovation, antitrust policy must therefore temper the
strong presumption in favor of competition that applies in conventional analysis of short-run price and output levels. Although more rivalry
rather than less will often remain the rule of thumb, enforcement
authorities cannot as confidently presume as a matter of economic theory that more competition is good or that market power is bad for
R&D. When the overall level and the future path of innovation are at
issue, case-by-case analysis of the economic facts is likely to be even
more vital than in conventional antitrust investigations.

MERGER POLICY IN HIGH-TECHNOLOGY MARKETS
The puzzles posed by the economics of innovation have not deterred
the antitrust authorities from investigating how mergers in several
U.S. industries would affect the flow of new ideas, products, and
processes. They have, however, taken a deliberate, measured approach
to their investigations. Recent enforcement decisions have taken into
account both the traditional presumptions about competition and the
inability to rely on those presumptions when it comes to promoting
innovation. But they also reflect careful consideration of the ambiguous effects that firm size and market structure may have on innovation. Thus, although the antitrust authorities have recognized the
need for a dynamic perspective on mergers and have not refrained
from enforcement based on concerns about innovation, they have
brought such actions only where changes in market concentration
were extreme and, generally, where other evidence of effects on
innovation was present.
Early Cases
One of the first enforcement actions motivated by innovation
concerns occurred in 1990, when the Federal Trade Commission (FTC)
challenged the acquisition of Genentech, Inc., by the Swiss-based




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company Roche Holdings, Ltd. Some of the issues raised in that case
were traditional questions about reduction of competition: for example,
Roche was on the verge of becoming a major challenger to Genentech's
dominant position in the market for products to treat human growth
hormone deficiency. But more central to the Commission's complaint
was that Roche and Genentech were actual—not just potential—
competitors in the development of some other important therapeutic
innovations, especially for the treatment of AIDS and HIV infection.
Concerns about dynamic effects on the market and on the pace of
innovation, not about short-term price or output levels, drove the
enforcement decision.
The Justice Department's Antitrust Division first challenged a merger
on innovation grounds in 1993, when it investigated the proposed
acquisition of General Motors' Allison Transmission Division by ZF
Friedrichshafen, a German company. Allison and ZF together produced 85 percent of world output of heavy-duty automatic transmissions for trucks and buses, but they actually competed head to head in
only a few geographic markets. The Justice Department nonetheless
concluded that even markets whose concentration would be unaffected
by the merger would be harmed by the combined company's reduced
incentive to develop new designs and products, and it therefore moved
to block the transaction.
These two cases differ in important ways, and each establishes a
significant precedent for factoring innovation effects into competition
policy. In reaching its decision to challenge Roche's acquisition of
Genentech, the FTC did not have to predict that the resulting
increased concentration in the biotechnology industry would reduce
innovation. Rather, the increase in concentration was accompanied
by concrete evidence that Roche was at an advanced stage in developing a competing human growth hormone treatment, and that Roche
and Genentech were among a small group of companies racing
to develop certain AIDS/HIV treatments. The merger would thus
have concentrated actual, not merely potential or speculative,
R&D efforts.
The Justice Department's action in the ZF/Allison case was in one
respect bolder. There was no specific R&D effort that the Antitrust
Division found would be compromised by the acquisition. But the decision indicates that where the consolidation is so great as to leave an
industry near monopoly and without other potential sources of new
developments, potential harm to the "innovation market" could justify
challenging the transaction. These two factors—very high levels of concentration and evidence of parallel and competing innovation efforts—
have also formed the basis for several recent actions through which the
relationship between antitrust and innovation has further developed.




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Aerospace
The aerospace industry is one of the most innovative in the United
States. Its market is characterized by high concentration but also, outside the defense sector, by international competition. In the past 2
years the FTC has approved one major aerospace merger, and the Justice Department has blocked another. Innovation considerations are
central to explaining both these enforcement decisions.
In 1997 the FTC approved the merger of Boeing Co. and McDonnell
Douglas Corp., the two largest commercial aircraft manufacturers in
the United States. In that case, analysis of innovation in the aerospace
industry supported the merger, not because the transaction was
expected to increase R&D, but because the analysis showed that
McDonnell Douglas had fallen behind technologically and could no
longer exert competitive pressure on Boeing or its overseas rivals.
Acquisition by Boeing would therefore not reduce competition and
would allow McDonnell Douglas' assets to be put to better use by a
more technologically advanced enterprise.
Concerns about progress in aerospace innovation led to the opposite
conclusion in Lockheed Martin Corp.'s proposed acquisition of
Northrop Grumman Corp., first announced in 1997. The Justice
Department's challenge to the merger last year noted that Lockheed
and Northrop were two of the leading suppliers of aircraft and electronics systems to the U.S. military. The Department concluded that
the merger would give Lockheed a monopoly in fiberoptic towed decoys
and in systems for airborne early warning radar, electro-optical missile
warning, and infrared countermeasures. In addition, the merger would
reduce the number of competitors in high-performance fixed-wing military airplanes, on-board radiofrequency countermeasures, and stealth
technology from three to two. The agency contended that consolidation
in these markets would lead to higher prices, higher costs, and reduced
innovation for products and systems required by the U.S. military.
Although traditional competitive concerns about prices were an
important part of the challenge to this acquisition, concerns about
innovation were central. For example, the Justice Department noted
that both Lockheed and Northrop had launched R&D efforts in
advanced airborne early warning radar systems, and it concluded that
consolidation of the two efforts would harm future military procurement. The Department also found evidence that competition is particularly important for technological advances in high-performance military aircraft. It thus concluded that "competition is vital to maximize
both the innovative ideas associated with each military aircraft program, as well as the quality of the processes used to turn innovative
ideas into cost-effective, technically sound, and efficiently produced
aircraft."




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The antitrust authorities' linking of competition to innovation in the
Lockheed/Northrop case was a cautious one. Two factors weighed heavily toward blocking the transaction. First, there was evidence that
Lockheed and Northrop either were actually conducting competing
R&D on relevant products or were the leading contenders to conduct
such R&D in the future. Second, there was evidence that their consolidation would lead to either monopoly or substantial dominance in
relevant product markets, not just reducing but in large part eliminating competitive pressure. Thus, a combination of market structure and
the existence of parallel innovation efforts pointed toward a likely
reduction in innovative activity if the merger were consummated.

Biotechnology and Pharmaceuticals
The FTC recently focused on innovation concerns in crafting a consent agreement with two merging firms in the biotechnology and pharmaceuticals industry. In 1996 Ciba-Geigy Ltd. and Sandoz Ltd., two
Swiss firms with substantial U.S. operations, announced plans to
merge into a new company, to be known as Novartis. The FTC raised
several objections to the merger. Some of the objections concerned traditional antitrust matters: the FTC was concerned that the combination would give the merged entity power to reduce competition and
raise prices in the market for herbicides used in growing corn and in
that for flea-control products for pets. The FTC accordingly ordered
that one party divest its businesses in those markets as a condition for
its approval. The more novel parts of the Commission's challenge,
however, had to do with the prospects for innovation in the market for
gene therapy products, which allow treatment of diseases and medical
conditions by modifying genes in patients' cells.
At the time of the FTC's investigation, in 1996 and 1997, no gene
therapy products were yet on the market; indeed, none had even been
approved by the Food and Drug Administration. Conventional
antitrust analysis therefore did not apply, because there was no product market in which to analyze the merger's effects on prices and output. The Commission instead adopted a dynamic perspective: looking
to the future, it found two reasons for long-run competitive concerns.
First, the market for gene therapy products is expected to grow rapidly, with annual sales of $45 billion projected by 2010. Second, Ciba and
Sandoz were among a very few firms with the technological capability
and rights to intellectual property necessary to develop gene therapy
products commercially. Together they would control essential patents,
know-how, and proprietary commercial rights without which other
firms, even if they did eventually develop gene therapy products,
would be unable to commercialize them.
The FTC concluded that "preserving long-run innovation in these
circumstances is critical." The Commission did not, however, block the
merger. Instead, it crafted a consent decree designed to correct those




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aspects of the transaction that raised concerns for current and future
competition. As noted, the Commission required divestiture of certain
overlapping herbicide and flea-control businesses. More interestingly,
the Commission did not require divestiture of either firm's gene therapy
division. Instead, Ciba and Sandoz agreed to license technology and
patents sufficient to allow one of their rivals to compete against the
merged entity in the development of gene therapy products.
The Commission's remedy steered between the potentially conflicting economic effects that a merger can have on R&D. On the one hand,
consolidating complementary capabilities can enhance innovation and
allow a combination of firms to achieve what the same firms could not
have achieved separately. On the other hand, concentrating markets to
near-monopoly levels can dampen the pressure to innovate and reduce
the enhanced probability of success that comes from multiple R&D
efforts. The Commission declined to order either Ciba or Sandoz to
divest its gene therapy subsidiary because it found that the R&D
efforts of the parent companies and their subsidiaries were closely
coordinated, so that divestiture would have been disruptive and counterproductive for innovation. The decision instead to order compulsory
licensing to a capable competitor was designed to preserve both market
competition and the benefits of the merging parties' relationships with
each other and their respective gene therapy subsidiaries.
The market context in this case is significant. Ciba and Sandoz
were not merely two of several viable competitors in the relevant
market; their merger did not simply change the degree of competition
within a middling range of market concentration. Rather, their
combination concentrated virtually all innovation capability and
essential inputs for the commercialization of gene therapy under one
corporate roof. Innovation concerns became sufficient to motivate
intervention because the facts showed a combination of monopoly
market structure and a reduction in the number of potential innovation efforts. These provided sound economic support for the use of
competition policy to preserve the impetus for technological progress.
But the FTC's action also broke important new ground: it expressly
recognized that a current merger could be challenged on grounds of
future innovation and competition in a product market that does not
yet—but likely will—exist.

INTELLECTUAL PROPERTY AND ANTITRUST
As the above discussion of merger review demonstrates, the incorporation of innovation concerns into antitrust enforcement often involves
intellectual property issues. The purpose of intellectual property protection is to encourage people to bring inventions and other creative
works into the marketplace. In so doing it furthers, in the words of the
U.S. Constitution, "the Progress of Science and useful Arts, by securing
for limited Times to Authors and Investors the exclusive Right to their




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respective Writings and Discoveries." To be sure, not all inventors or
artists are motivated by economic gain. But in many cases the decision
to devote time and resources to risky, innovative projects or to invest in
publication will hinge on the ability to profit from success.
Patents in the United States accordingly confer limited rights to
exclude others, even those who have come up with the same idea independently, from making, selling, or using a covered invention without
the patentholder's consent. Patenting allowed Eli Whitney to capture
the profits his cotton gin made possible, just as today it allows an electrical engineer to secure her rights to the returns on an advance in
computer technology. Copyright statutes similarly provide protection
against unauthorized copying of original works in a variety of media
(including electronic media; see Box 5-2), even if the copying is not literal or exact. Only Thelonious Monk (or the record company to which
he sold the rights) could freely record "'Round Midnight"; only a software developer (or a manufacturer to which the developer grants a
license) has exclusive rights to copy and sell its programs commercially.
Finally, trademark laws can be used to protect brand recognition. One
restaurant entrepreneur cannot misleadingly use another restaurant's
name for his own new business; a new soft drink's label cannot look too
much like the market leader's.
On the surface, a tension exists between intellectual property protection and competition policy: one grants exclusive rights that confer
a limited, temporary monopoly; the other seeks to keep monopoly at
bay. But at a more basic level the two areas of policy have a common
goal: to enhance economic performance and consumer welfare. For that
reason patents, for example, are extended only to novel, nonobvious,
and useful inventions and are limited in duration to 20 years.
Copyrights are granted for the life of the author plus 70 years.
Once an innovative product has been developed, efficiency dictates
that it be produced competitively. So patents should not provide a
greater incentive to invent than is necessary to get the invention into
the stream of commerce. The limits on the duration, scope, and availability of patents implicitly balance the benefits of preserving incentives to innovate against the efficiency costs of granting exclusive
rights. A similar balance between innovation and competition appears
in U.S. antitrust policy, which recognizes that innovation sometimes
benefits from cooperation among competitors (Box 5-3). The National
Cooperative Research and Production Act, for example, reduces potential antitrust liability for qualifying R&D and production joint
ventures. In fiscal 1998, 38 such joint ventures registered with the
Department of Justice and the FTC, bringing to over 750 the number
of registrations since the statute was passed in 1984.
Similarly, the 1995 Antitrust Guidelines for the Licensing of Intellectual Property acknowledge the exclusivity conferred by intellectual
property protection but recognize that patents do not necessarily




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Box 5-2.—Electronic Commerce and Digital Copyright
Protection
More than 70 million Americans now have access to the Internet,
which they use in no small part for commercial activities, including the purchase of music, video, software, text, and other information goods that can now be sent directly from one computer to
another. The volume of this electronic commerce exceeded $10 billion in 1998 and is predicted to reach $300 billion within a few
years. Electronic commerce provides unprecedented opportunity
for firms and individuals to sell and distribute such digital goods
widely and quickly But with these benefits comes risk: the ease
with which a recording company can deliver a new song to buyers
electronically is matched by that with which buyers can illegally
copy and resell it. For electronic commerce to reach its potential,
sellers must be sure that their products are legally protected from
such piracy
New copyright legislation has taken steps to protect digital
goods and so encourage innovative commercial uses of electronic
media. The 1998 Digital Millennium Copyright Act makes it a
crime to break the "digital wrappers" that protect electronically
encrypted intellectual property, or to sell equipment designed to
penetrate such encryption. This increased protection of digital
goods will help spur commerce and innovation, but it may also
unduly restrict legitimate uses of copyrighted material. For example, the fair use doctrine allows free access to copyrighted works
for limited personal, educational, and research purposes that do
not compromise the work's commercial value. What has traditionally been prohibited is not access to the copyrighted work, but
rather its indiscriminate copying and distribution. An absolute
ban on bypassing digital wrappers might allow publishers to
impose a per-use fee on publications in digital format. This would
block free access to such works and thus erode the fair use principle. The 1998 Digital Millennium Copyright Act attempts to balance the need to preserve commercial incentives with the right to
fair use by permitting anyone who cannot get access to materials
usually covered by the fair use doctrine to petition the Librarian of
Congress for an exemption from the statute.
confer market power and that licensing of intellectual property is generally procompetitive. Licensing and other arrangements for transferring patents or copyrights can help bring complementary factors of
production together and thus allow faster and more efficient use of new
inventions. This benefits consumers by reducing costs and encouraging
the introduction of new products. Under the guidelines, the FTC and




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Box 5-3.—Cooperative Innovation and the Y2K Problem
As explained in Chapter 2, many older computer programs
encode years using only the last two digits and will not properly
interpret "00" as "2000" when the year 2000 arrives. This "year
2000" (Y2K) problem may cause data to be lost and programs and
systems to fail worldwide. The risks are particularly acute in
industries where different firms' computer systems are highly
interdependent. Accordingly, once the extent of the problem was
recognized, a number of manufacturing firms and securities firms
proposed, through their trade associations, to exchange information among themselves and their computer services suppliers that
would expedite resolution of the problem in their industries. Participating firms would share information gathered from manufacturers about efforts to make chips, other hardware, and software
compliant with Y2K demands, and would exchange the results of
product tests, successful remedies, and information about the
sources of various computer products.
The competitive concerns raised by the prospect of such collaboration were multifaceted. For example, securities firms compete
with each other not just in the provision of financial services, relevant information for which is stored in each company's computers,
but also in the procurement of computer systems. Exchange of
information about products and the results of various tests could
potentially be used by rivals as a vehicle for fostering and monitoring collusion in both areas of competition. At the same time,
computer hardware manufacturers and software developers compete in the development of new products and in innovating around
the Department of Justice balance these benefits case by case against
the risk that a particular licensing arrangement could reduce competition in the product market or in the development of new technologies.
For example, in 1997 the Justice Department concluded that an
agreement to package certain patents essential for advanced videocompression technology into a single license was permissible because
the patents were complements and because the licenses, which would be
granted on a nondiscriminatory basis, were unlikely to facilitate collusion or the exercise of market power. But in another action the FTC
required recision of an agreement that pooled patents for laser systems
used in eye surgery because the partners in the deal were the only
independent competitors in the market for that equipment prior to the
pooling arrangement. Recently, the Justice Department successfully
concluded its 1996 challenge to a license that granted a hospital access
to software necessary to repair medical imaging equipment only if the
hospital agreed not to compete with the licensor in providing repair




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Box 5-3.—continued
challenges like the Y2K problem. The proposed information
exchange could give these firms competitively valuable details
about their rivals' product developments or terms of sale to
customers, undermining competition and opening the door for
collusion here as well.
Collaboration on the Y2K problem also offered clear benefits,
however. A joint effort would avoid duplicative equipment testing
and information gathering, allow more efficient identification of
successful remedies, and permit faster and more accurate responses to computer system vendors about remaining problems. Manufacturers could devote resources to product improvement that
would otherwise have been devoted to exchanging information.
The Justice Department stated in its letters reviewing the
proposed collaborations, issued July 1 and August 14,1998, that it
did not foresee grounds for enforcement action, because the
proposals contained sufficient safeguards that the benefits of cooperation outweighed the risks to competition. The firms agreed to
cooperate without exchanging price or customer information that
could be used to restrain competition. And computer manufacturers would receive test information about their own products only,
not those of their rivals. Although the Justice Department recognized that the information exchanges could still affect competitive
strategy, it concluded that the agreements were unlikely to lessen
innovation or pricing rivalry among vendors and offered real
prospects for reducing the costs and increasing the speed of a
resolution to the Y2K problem.
services to third parties These cases reflect careful monitoring by the
antitrust authorities of the interaction among intellectual property
protection, competition, and innovation.

NETWORK COMPETITION AND INNOVATION
Antitrust policy in the United States has devoted substantial
attention in the past year to the relationship between competition and
innovation in what are today called network industries. Enforcement
actions in the credit card and software industries as well as consent
decrees in the telecommunications industry have highlighted the challenges enforcement agencies face in balancing long-run encouragement of
innovation with short-run concerns about competition.
Networks are a familiar concept to Americans: we are linked to each
other by telephone networks, we increasingly shop and obtain information through the web of linked computers we call the Internet, and we
confidently slide a card issued by one bank into an automatic teller




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machine owned by another. The distinguishing characteristic of network
goods is that their value to each consumer increases the more they are
used by others. New telephone subscribers add to the number of people
that existing subscribers can call; their participation in the network
increases the system's value to current and future users. New buyers of a
word processing package are more people with whom earlier purchasers
can easily exchange documents. This additional value that new users add
to network goods is termed a "network externality."
Network benefits are not limited to communications systems or to
systems in which communication is an element. A good whose usefulness depends on the existence of complementary products—products
used in conjunction with the original good—may likewise increase in
value to users as more and more people adopt it. A widely used product
may attract greater investment in the provision of complements than
one that has few users. In the personal computer industry, for example, software producers typically devote most of their efforts to writing
programs that will be compatible with the more widely used hardware
platforms and operating systems. (Achieving compatibility sometimes
requires reverse engineering of existing products; see Box 5-4). Over
time more, better, and cheaper software thus becomes available for
more popular machines than for others. Similarly, the best-selling
video game platform will attract more game developers, thus reinforcing
the advantage of that platform over competitors.
Because of network externalities, a product's popularity can be selfreinforcing: new customers buy the more popular good because of the
larger externality, which then grows still further, making the product
yet more attractive to additional purchasers. This dynamic sometimes
makes network markets "tip" toward monopoly. A network monopoly
has benefits for consumers not generally found in conventional markets, because its dominance can maximize the network externality. But
network dominance also poses hazards that compound conventional
economic concerns about monopoly.
First, the product that becomes the network standard will not necessarily be the most capable, most efficient, or highest-quality product on
the market. Because consumers want the good that will offer the largest
network externality, expectations about a product's success can be at least
as important to their purchase decisions as price and quality. Consumers
using products, even superior products, that have lost the competitive
battle receive a much smaller network benefit, and may eventually have
to incur the costs of switching to the dominant product. These include not
only the cost of purchasing the rival product but the cost of learning to
use it. By the same token, if an inferior good gets a decisive lead in
"installed base" among consumers, their switching costs may be enough
to keep them from moving to the superior standard. And new customers
may find that the greater network externality available from the leader
offsets the price or design advantages of the contender.




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Box 5-4.—Reverse Engineering and Compatibility
When competing network products are mutually compatible,
consumers benefit from the same network externality regardless
of which product they choose. If the value of a word processing
package depends on the number of people with whom documents
can be shared, then a new entrant can overcome its network disadvantage by enabling its product to exchange files with the leading program. Similarly, if a new game platform can play cartridges
designed for rival systems, it gains value from the increased availability of complementary goods. Translation between systems is
not always perfect, however, and a dominant firm facing new
rivals might try to reestablish its advantage by reintroducing
incompatibility in subsequent versions of its software. Nevertheless, cross-compatibility remains an important competitive
strategy for entrants into network markets—and is beneficial for
consumers.
To achieve compatibility, a competitor may have to "reverse
engineer" the rival's product, to learn how to make it work together
with its own. For that reason, firms with a market edge might try
to protect their products against efforts to establish cross-compatibility by restricting competitors' access to critical interfaces where
information is exchanged. One means of doing so is to enforce a
copyright on the particular lines of computer code that a rival
would have to use to make its product compatible. Courts, however,
have been increasingly reluctant to uphold copyright protection for
such purely functional aspects of computer programs. A leading
producer may instead try to encrypt or otherwise technologically
protect the information to which a rival seeking compatibility
needs access. The Digital Millennium Copyright Act of 1998
expressly permits software developers to circumvent such protections. It thereby limits the extent to which a program copyright
can block competition by noninfringing programs or in markets for
complementary software. But to avoid undermining the incentive
to develop new software, the act allows circumvention only to the
extent necessary to achieve compatibility.
Second, these same switching costs can make network markets particularly hard for new competitors to enter, especially if new products
cannot interconnect with those already in the market. This potentially
makes network monopolies quite stable and reduces the dominant
firm's incentives to introduce innovative products and services. An
example is the delay in the marketing of digital subscriber line (DSL)
technology for high-speed telecommunications. Although DSL technology
has been available since the 1980s, only recently did local telephone




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companies begin to offer DSL service to businesses and consumers
seeking low-cost options for high-speed telecommunications. The
incumbents' decision finally to offer DSL service followed closely the
emergence of competitive pressure from cable television networks
delivering similar high-speed services, and the entry of new direct competitors attempting to use the local-competition provisions of the
Telecommunications Act of 1996 to provide DSL over the incumbents'
facilities.
Third, a network monopolist may have advantages in selling complementary goods that allow it to extend its dominance from one market to another. Advantages in complementary markets are not necessarily anticompetitive. The provider of one good may be able to exploit
economies of scale and scope that make it a superior provider of the
complementary good. But a monopoly provider of one product may also
be able to tie or bundle a second product in a way that forecloses competition in the second product market. For example, it may condition
sale of the monopoly good on whether the buyer also purchases the
complementary good.

The Challenge for Antitrust
In network markets as in others, antitrust law does not condemn
monopolies legitimately achieved. Incentives to innovate and compete
might diminish if dominance itself, honestly earned, could be secondguessed by enforcement authorities. Instead, what antitrust proscribes
is anticompetitive conduct—predatory or exclusionary practices—that
creates or maintains monopoly power. The particular challenge of network markets is that, because network effects can accrue rapidly and
be costly to reverse, there is a premium on being able to identify and
stop anticompetitive activity quickly. Once dominance is acquired, it
may be impractical or undesirable to use regulatory or antitrust remedies to undo the outcome, even if an inferior standard prevails or if
anticompetitive tactics have been employed. To be sure, antitrust can
target unlawful conduct designed to preserve or extend those outcomes. But once customers have adopted a standard, remedies that
would reduce the accrued network externality are costly, no matter
how dominance was achieved.
Identifying predatory or exclusionary practices early can be difficult
in the network context. Competitive strategies that would be inherently
suspect in a conventional goods market may be reasonable in network
markets, especially when competitors believe, rightly or wrongly, that
the winner will take all. For example, pricing below cost is often a telltale sign of predation in conventional markets. But in network markets it may be a matter of competitive necessity to price below cost in
order to penetrate the market quickly, gain a lead in installed base,
and raise expectations that a product will deliver a large network benefit. Predatory pricing rules in Federal antitrust policy do allow for




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transitional circumstances and recognize that prices may not reflect
startup costs for new entrants. In applying those rules in network markets, authorities must analyze, on the facts of each case, when aggressive pricing constitutes a legitimate strategy that other competitors
would rationally pursue, and when they amount to predatory conduct
that forecloses competition.
Similarly, when a network monopolist enters a market for complementary products on terms that make it hard for competitors to succeed, authorities must determine whether the monopolist's advantage
stems from genuine efficiencies or from anticompetitive arrangements.
Where efficiencies are identified that cannot be achieved in a manner
that has less effect on competition, enforcement agencies must balance
the welfare gains from those efficiencies against the welfare losses
from reduced competition. A good illustration of the problem comes
from the days before personal computing. Technological innovations
adopted in the 1970s made mainframe computer components sufficiently compact that certain memory devices were for the first time
built into the main computer cabinet and hardwired into the central
processing unit. IBM Corp., the market leader, thus began to sell computers and memory storage as an integrated unit. Independent manufacturers of IBM-compatible memory devices sued, claiming IBM had
leveraged its market power in mainframe computer processors into the
more competitive peripherals market. In California Computer Products v. IBM, decided in 1979, the U.S. Court of Appeals ruled in IBM's
favor after finding on the facts that, in this particular case, integration
was an efficient and natural result of beneficial product innovation.
Several very recent enforcement actions demonstrate the complex
issues at stake in network competition and show how preserving both
the incentive and the opportunity for development of innovative
products and services has become an essential concern of competition
policy. Among these are actions in the credit card industry and in the
markets for Internet software and services.
Credit Cards
As use and acceptance of a particular brand of credit card grow, that
card becomes more valuable for both businesses and consumers. This
gives rise to a classic network externality, with all the benefits to consumers—and the possible effects on competition and innovation—
already described. Concern over competition and innovation among
general-purpose credit card networks recently prompted the Department of Justice to file an antitrust suit against the two largest
networks, Visa and MasterCard.
The credit card industry operates at two distinct levels. Consumers
and merchants are most directly involved in the downstream level,
which encompasses card issuance and card acceptance services. The
players at that level are banks and other institutions that issue cards




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and compete for customers on the basis of interest rates, annual fees,
payment terms, customer service, and various enhancements or usage
bonuses. The Justice Department's challenge concerns the industry's
second level: the upstream level, encompassing the underlying card
networks themselves. These networks provide various services to card
issuers: they implement systems and technologies for card use and
clearance, develop card products, and promote the card brand. They
also set fees for participation in the card network.
The competitive dynamics of these two levels are very different. If
numerous institutions can join a network and issue cards, competition
at the downstream level—for consumers of card services and merchants requiring acceptance services—will be strong. Competing at the
network level, however, is more difficult. Establishing brand name
recognition, developing processing and information systems, and building a sufficient base of merchants and card users take enormous
amounts of time and money. Either a new entrant at the network level
must attract potential issuers from more established systems, or it
must enter the market at both levels itself, issuing cards and providing
acceptance services as well as providing network services. The difficulty
of the undertaking can be surmised from the fact that only one new
network, Discover (now Novus), has successfully entered the generalpurpose credit card market in the last 30 years.
Visa and MasterCard began as separate, competing networks owned
and governed by their card-issuing members. Each eventually accepted
the other's members into its network as participating owners. As a
result, the two networks now have substantially overlapping ownership and governance. The Justice Department's case focuses primarily
on the innovation-reducing consequences of this arrangement. The
Department alleges that the corporate governors have stopped both
networks from introducing new products and services because
improvements in one network, although they would benefit consumers,
would largely shift profits from the other network rather than raise
overall returns. And with a combined 75 percent share of the credit
card market by volume of transactions, the governors face little pressure from competitors to implement new initiatives in the systems
jointly.
The Justice Department's complaint specifically identifies innovations that it alleges were delayed by the two networks' overlapping
structure. One of these is "smart card" technology: the use of integrated
circuits in the cards themselves to store more data, perform a greater
array of functions, and better monitor fraud and credit risk. According
to the Department, when Visa indicated that it did not want to introduce smart cards, MasterCard's board decided not to continue their
development. Whether the decision was anticompetitive or driven by
legitimate business judgment about the commercial viability of smart
card technology remains to be proved. But whatever the outcome, the




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Justice Department's challenge represents an important application
of antitrust policy to the particular problems of competition and
innovation in network industries.
Telecommunications and the Internet
Network effects have been essential to the structure and regulation
of telecommunications. At the beginning of this century communities
were often served by competing telephone systems, with AT&T and an
alliance of independent companies each taking about half the market.
Generally, the competing systems refused to interconnect with each
other and exchange traffic, and so a customer could only call people
who subscribed to the same network. Eventually, AT&T was able to tip
the market in its favor by patenting superior long-distance technology
to which subscribers of competing telephone companies were denied
access. This gave consumers an incentive to switch to AT&T, and the
company grew into a nationwide monopoly.
In 1984 the Federal Government broke up AT&T's integrated
monopoly into a long-distance company and seven regional companies
providing local telephone service. Each of these seven companies still
had a monopoly over the local service network in its region. The
Telecommunications Act of 1996, however, opened the door to local telephone competition by requiring the regional monopolies to, among
other things, interconnect and exchange traffic with new entrants into
the market on nondiscriminatory terms. From the standpoint of network economics, this provision makes entry easier by allowing any
new telephone company, no matter how small, to offer consumers the
same network benefit as a larger carrier.
Preserving competition has also been a regulatory priority in
telecommunications networks other than the telephone system. Internet "backbone" providers transport information between the highcapacity computer networks that make up the Internet. They sell their
services to businesses, institutions, and the Internet service providers
(ISPs) that offer Internet access directly to consumers. They also negotiate terms for the exchange of traffic with each other to provide the
universal connectivity that defines the Internet. When MCI Communications Corp. and WorldCom, Inc., which in addition to their other
lines of business were two leading backbone service providers, were
merging in 1998, the Justice Department required MCI to divest its
Internet backbone business to an independent competitor. Without the
divestiture, the merged company would have had substantial control
over the transport of Internet traffic, making it more tempting to
reduce the services it provided to rival networks with which it
exchanged traffic. The Department's enforcement action thus helped
preserve competition in the backbone market and ensure that no
single company could dominate the "network of networks" that comprises the Internet.




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In another part of the Internet market, the Justice Department has
challenged what it alleges are anticompetitive practices in the market
for browsers, software that consumers use to access the Internet from
their computers. All computers have operating systems that control
and allocate the hardware resources of the computer and allow it to
run various applications programs of the user's choosing, such as word
processors and browsers. The necessity for any new operating system
to be accompanied by a range of compatible applications creates a barrier to entry into the operating system market. Operating systems are
subject to network effects because more programs will be developed to
run on the more widely used systems. As more programs are developed
to run on a particular operating system, that system becomes yet more
popular to consumers. The result is a market for operating systems
that has a propensity to tip to a dominant provider. Currently,
Microsoft Corp.'s Windows operating system dominates the market for
systems that run on IBM-compatible personal computers.
The Justice Department claims, among other charges, that Microsoft
has misused its dominance in the market for personal computer operating systems to maintain power in that market and to attempt to gain
dominance in the complementary market for browsers. Microsoft,
which packages its browser with current versions of Windows, has
allegedly required computer manufacturers to agree, as a condition for
receiving licenses to install Windows on their products, not to remove
Microsoft's browser or to allow the more prominent display of a rival
browser. Because consumers demand that manufacturers preload Windows onto new personal computers, manufacturers face heavy costs if
they do not accept Microsoft's terms. Similarly, the Department claims
that Microsoft has refused to display the icons of ISPs on the main
Windows screen or list them in its ISP referral service unless the ISPs
agree, in turn, to withhold information about non-Microsoft browsers
to their subscribers. The ISPs are also required, the Department
alleges, to adopt proprietary standards that make their services work
better in conjunction with Microsoft's browser than with others.
Microsoft responds that integrating its Internet browser makes its
operating system more functional and increases the features and uses
of programs written for that operating system, to the ultimate benefit
of consumers. The company also claims that the contractual arrangements with ISPs are nothing more than cross-promotional agreements,
which are common within the computer industry.
The case against Microsoft reflects an effort by the Justice Department to prevent perpetuation of monopoly by allegedly anticompetitive
means, to protect competition in the Internet browser market and to
maintain incentives for the development of innovative software by
preventing anticompetitive actions against successful products. The
challenge for competition policymakers in this context is to preserve
competitive opportunities without punishing successful competitors.




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At issue is where to draw the line. Is a successful company's use of
aggressive tactics legitimate, so that regulation might reduce future
innovation incentives and consumer welfare? Or do those tactics cross
the line into misuse of market position to engage in predatory or exclusionary conduct that forecloses competition and innovation, to the
ultimate detriment of consumers? Striking the right balance is essential for promoting innovation and protecting consumer welfare in the
fast-moving conditions of network competition.

ENVIRONMENTAL REGULATION AND INNOVATION
Environmental regulation addresses the problem of environmental
damage caused by pollution generated as a consequence of economic
activity. As long as polluters do not bear the full cost of the environmental damage they impose on others, they will lack the incentive to
reduce emissions adequately. Unregulated markets therefore typically
generate too much pollution. Well-designed environmental regulation
can reduce pollution and increase the net value of economic activity,
which is the value of goods and services produced after deducting all
costs of production, including the social costs of environmental damage.
Environmental policy may have a significant impact on the pace and
direction of innovation, which over the longer term may be of greater
importance than the impact of policy on immediate environmental
outcomes. In what follows, the interaction of environmental regulation
and innovation is examined. The incentive to generate new technologies under alternative forms of environmental regulation is discussed.
This is followed by a discussion of the diffusion of existing technology
among potential adopters and the role for policy to modify diffusion
rates. Some of the major points of this discussion are illustrated in the
context of policy regarding global climate change. Finally, the long-run
impact of environmental regulation on productivity is discussed.

ENVIRONMENTAL POLICY AND INCENTIVES TO
INNOVATE
Three Approaches to Environmental Regulation
Governments can implement environmental regulation in any of
three principal ways: by providing producers and consumers with economic incentives to reduce their emissions, by enforcing limits on the
rate of pollution discharge, or by mandating technology that producers
or consumers must use to reduce pollution. This Administration's environmental policy has increased the use of incentive-based approaches.
The preference for such approaches is often justified on static costeffectiveness grounds: an incentive-based approach can achieve any
environmental goal at lowest cost, given existing technology, because it
induces emitters to reduce emissions as efficiently as they can with the




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technology at hand. But incentive-based approaches can also be justified on dynamic grounds: under incentive-based regulation, sources of
emissions may be more inclined to develop new technology that
reduces pollution at lower cost than under alternative forms of regulation. In this way, market forces ensure that innovation and creativity
are used to help improve the environment rather than devoted to
finding ways to escape the brunt of regulation.
Examples of incentive-based approaches include tradable permit
systems, emissions taxes, subsidies to reduce pollution, and liability
rules. Under a tradable permit system, the government issues permits
that allow emission of a given quantity of a pollutant; total emissions
are limited by the number of permits issued. Emissions without a permit are banned. Although total emissions are thus capped, each source
of emissions can choose its own level of emissions by buying or selling
permits. The added flexibility afforded by permit trading allows
sources that find abatement expensive to buy permits from sources
that can abate at less cost. Thus, overall emissions are reduced at
lower total cost. In 1998, for example, the Environmental Protection
Agency (EPA) introduced regulations to reduce nitrogen oxides (NOX)
emissions in 22 States and the District of Columbia, allowing for emissions trading among electric utilities that are sources of NOX emissions. Sources needing more permits than have been allocated to them
can buy them from sources that succeed in reducing emissions below
their initial allocation.
Under an emissions tax, sources of emissions are taxed on their
activities that cause environmental damage. If the tax is set to approximate the social cost of the environmental damage caused by the
activity, sources face appropriate incentives to reduce emissions to an
economically efficient level, that is, the level at which the social benefits deriving from additional pollution reductions just cover their cost.
Despite the theoretical appeal of emissions taxes, however, they have
rarely been used to regulate pollution in the United States.
Subsidies, on the other hand, have been used occasionally to encourage the use of more environmentally benign technologies. A system of
environmental subsidies mirrors that of an emissions tax: sources of
potential environmental benefits receive government payments to
encourage their beneficial activities. For example, under the Energy
Policy Act of 1992, electricity produced from wind and biomass fuels—
two environmentally benign sources of energy—receives a tax credit of
1.5 cents per kilowatt-hour generated.
Finally, liability rules impose financial responsibility on emissions
sources for any environmental damage they cause, thus providing
them with a direct incentive to reduce the adverse environmental
impacts of their activities. For example, the Oil Pollution Act of 1990
makes firms liable for cleanup costs, natural resource damages, and
third-party damages caused by their oil spills into surface waters.




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Similarly, the Clean Water Act makes parties liable for the costs of
cleaning up their spills of hazardous substances.
As noted at the outset, an economic advantage of incentive-based
approaches is their static cost-effectiveness: given existing technology,
they achieve a given environmental objective at lower cost. For
example, a system of tradable permits minimizes the cost of a given
amount of emissions reduction by ensuring that the reduction is
undertaken by those emissions sources, and only those sources, that
can do it most cheaply. This comes about because any source that
can lower emissions at a cost below the market price of permits will
profit by doing so, through the sale of its unneeded permits in the
market. Likewise, any source for which the cost of reduction exceeds
the market permit price will find it profitable to pollute beyond
its allowance, covering its excess emissions by buying additional
permits in the market.
It is not always feasible to monitor the contribution of individual
sources to environmental damage. In such cases it is impractical to allocate emissions permits, levy taxes on emissions, or assign liability for
damage. Instead, incentive-based environmental regulation may take
the form of providing incentives for emissions sources to change their
production methods, rather than incentives to reduce pollution per se.
For example, fertilizer runoff from farmland causes nitrate pollution of
ground and surface waters, but it is difficult to measure the pollution
attributable to each of the many widely scattered ("non-point source")
producers. In part because farmers contribute to non-point source pollution, the Department of Agriculture pays up to 75 percent of the costs
of certain conservation practices that reduce environmental damage,
under the Environmental Quality Incentives Program of 1996.
In contrast to incentive-based approaches, technology standards
stipulate the equipment and methods that sources must employ to control emissions. Performance standards, on the other hand, specify a
limit on the emissions allowed by each source but allow the source to
choose how best to meet this limit. Many environmental regulations
combine elements of both performance and technology standards. For
example, the Clean Water Act requires sources to meet an effluent performance standard for conventional pollutants that is set according to
what could be achieved using the "best conventional technology." Often
this becomes a de facto technology standard. Conversely, technology
standards sometimes allow sources to use technologies other than
those specified if they can demonstrate that the alternative technology
will achieve the same amount of pollution reduction.
In the context of environmental regulation, technology or performance
standards, in contrast to incentive-based approaches, may not be costeffective, because they provide no mechanism for concentrating emissions
reductions where they are cheapest. Of the two types of standards, performance standards are preferred because they allow emissions sources




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the flexibility to choose lower cost methods of abatement. Technology
standards may also lock in the use of pollution control technologies that
are unnecessarily costly in the face of changing conditions.

Incentives to Innovate Under the Three Approaches
Although incentive-based regulation may thus be preferable to
regulation by performance or technology standards from the perspective
of the short-term, static cost of achieving given environmental objectives,
evaluation of the relative cost-effectiveness of the three approaches over
longer horizons is more complex. Achieving ambitious environmental
goals in a growing economy will require advances in technology (Box 5-5).
The evolution of pollution control costs over time is affected by innovation, and the three approaches differ in the incentives they offer potential
innovators. Innovation may be particularly important when environmental regulation is relatively new, because then there are often unexplored
avenues of research and significant learning-by-doing effects.
An important criticism of technology standards is that they may provide little incentive to search for more cost-effective ways to reduce
emissions. A technology standard provides an incentive to develop
cheaper new technologies only if those technologies can meet mandated
targets and win regulatory approval. Performance standards, in contrast, provide an incentive to find lower cost ways of reducing emissions, at least to the level of the standard. However, they may give little
incentive to search for new methods to reduce emissions below the
Box 5-5.—Recent Trends in Air Quality
Environmental regulation has sharply reduced emissions of a
number of important pollutants over the past several decades.
Emissions of five of six major air pollutants (the exception being
nitrogen oxides) have fallen, substantially since passage of the
1970 Clean Air Act Amendments (Chart 5-1). The EPA's phaseotit
of lead additives in gasoline has been largely responsible
for the spectacular fall in lead emissions since the 1970s: lead
emissions in 1997 were less than 2 percent of 1970 emissions.
These improvements occurred during a period of considerable
economic growth. From 1970 to 1997, real GDP expanded by 114
percent, so that emissions per unit of GDP have fallen dramatically
since 1970. In certain sectors the reduction in pollution per unit of
output has been especially striking. Vehicular emissions of volatile
organic compounds per mile traveled have fallen by 81 percent,
and emissions of carbon monoxide by 73 percent, since 1970.
These impressive reductions could not have taken place without
substantial innovation in new processes and products as well as
their widespread adoption.




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Chart 5-1 Emissions of Six Major Air Pollutants
Since the Clean Air Act Amendments of 1970, the emissions of five out of six major
air pollutants have fallen dramatically.
Index (1970 = 100)
140

Nitrogen oxides
120

100

80

60

Sulfur dioxide

/
Volatile organic
compounds

40

20

1985

1970
1975
1980
Source: Environmental Protection Agency.

1990

1995

current standard, unless standards are expected to become tighter in
the future.
One way to increase the incentive to innovate under performance
standards is for regulators to commit to the implementation of a strict
standard in the future. Such strict, "technology-forcing" performance
standards raise the value of innovations that lower pollution control
costs. Whereas requiring emissions sources to meet a stringent
standard immediately with existing technology may impose large
costs, announcing the same stringent emissions targets well in
advance provides an incentive to innovate, as well as time to develop
the infrastructure and make other investments necessary to adopt and
implement new technologies. This can reduce compliance costs significantly. For example, in 1970 the California Air Resources Board adopted
stringent air emissions standards for new cars, which took effect in
1975. Many at the time did not believe the standard could be met at a
reasonable cost. Yet the stringent standard contributed to the development of an emerging technology, the catalytic converter, which cut
automobile emissions dramatically and is widely used today. There is a
downside, however, to the technology-forcing approach. Innovative
activity is risky: investments in R&D may or may not pay off in new
discoveries. If they do not, compliance costs may fall by less than
anticipated, and the ambitious environmental goal may prove extremely
costly to meet. And relaxing the goal at a later date in the face of high
compliance costs, thereby rewarding failure, has its own drawbacks.




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In contrast to both performance and technology standards, incentive-based approaches reward emissions sources for developing methods that reduce emissions, regardless of their current level. For example, under a system of tradable permits, any technology that reduces
emissions allows a source to profit from higher permit sales (or lower
permit purchases). Similarly, under emissions taxes, subsidies to
reduce pollution, or liability rules, innovations are rewarded through
lower costs, higher subsidies, or lower liability payments, respectively.
Because incentive-based approaches provide rewards for reducing
emissions at all pollution levels, rather than just to a given standard,
they offer incentives for innovation that are superior to those under
either technology or performance standards.
The Impact of Alternative Regulatory Policies on Reducing
Sulfur Dioxide Emissions
Regulation of sulfur dioxide (SO%) emissions from coal-fired electric
generating plants illustrates the importance of environmental regulatory structure for cost savings and innovation. The 1977 Clean Air Act
Amendments required new fossil fuel-fired electrical generating plants
to remove 90 percent of SC>2 from their smokestack emissions
(70 percent if the plants use low-sulfur coal). This policy effectively
mandated the use of scrubbers, devices that remove SO2 from the
exhaust gases produced by burning coal.
Title IV of the 1990 Clean Air Act Amendments established a tradable permit program for S(>2 emissions. In phase I of the program,
which began in 1995, permits were allocated to 110 electric utility
plants around the country. In phase II, which begins in 2000, the program will be extended to cover virtually all fossil-fuel-burning electric
generating plants and is ultimately expected to reduce SC>2 emissions
to 50 percent of 1980 levels. Under the tradable permit program,
plants that can reduce emissions cheaply, by switching to low-sulfur
coal, for example, can sell permits to plants for which emissions reduction is more expensive. Estimates of cost savings just from allowing
trading range from 25 to 43 percent.
Changing the SC>2 regulatory system to a tradable permit system
may also spur innovation that results in additional cost savings. Original compliance cost estimates will be overstated when they do not adequately take technological advances into account. (Box 5-6 explores
whether there is a systematic tendency for preimplementation cost
estimates to exceed costs actually achieved.)
In fact, estimates of the cost of reducing S(>2 emissions in 2010 have
fallen substantially over time. In 1990 the EPA forecast that the total
annual compliance cost for SC>2 emissions reduction in 2010 would be
in the range of $2.6 billion to $6.1 billion (in 1995 dollars). In contrast,
a 1998 study projected annual compliance costs in 2010 at just over $1
billion (again in 1995 dollars). Factors other than technological change




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Box 5-6.—Comparing Estimates of Environmental
Compliance Costs Before and After Regulation
In part because of the recent experience with S(>2 regulation,
some environmentalists have voiced concern that estimates of
compliance costs made before regulation is implemented systematically overstate the likely costs. A recent study reviewed the limited number of cases, from 1972 through the early 1990s, where
both pre- and postimplementation cost estimates exist, to determine whether the former routinely overestimated compliance
costs. The study found both cases of overestimation and cases of
underestimation. Prior to 1981, compliance costs for nearly all new
regulations were apparently overestimated. Since then, however,
the accuracy of estimates has improved and the balance has been
more equal.
Preparing accurate estimates of compliance costs involves many
challenges. When estimating costs in advance of implementation,
analysts must inevitably base their forecasts on the policies actually
proposed. But policies are often changed or relaxed in the process of
implementation, so that comparison of these early estimates with
actual implementation costs often ends up comparing apples and
oranges. Furthermore, cost estimates prepared before implementation typically assume 100 percent compliance. But not all firms may
comply, and those that do not are often those with the highest compliance costs. Cost estimates after implementation are inevitably
based on data covering only those firms in compliance, and hence
they tend to be lower than estimates based on perfect compliance.
On the other hand, to the extent that cost estimates are not
sufficiently optimistic about future technological advances, the costs
of compliance will be overstated.
also help explain the dramatic decline in expected compliance costs.
For example, certain aspects of the program that effectively loosened
the limit on total emissions were not included in the original forecast.
Perhaps the single most important factor, however, was the decline
in railroad freight rates as a result of railroad deregulation. Coal from
the Powder River Basin in Montana and Wyoming has the lowest
production cost and lowest sulfur content of any coal in the United
States. Lower railroad rates reduced the cost of transporting lowsulfur Powder River Basin coal to Midwestern utilities. Coal-fired
electric generating plants already dependent on coal transported from
distant locations gained direct cost savings. Other plants found they
could reduce emissions at lower cost by switching to low-sulfur coal
rather than investing in scrubbers.




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The SC>2 experience reveals several advantages of relying on incentive-based approaches to environmental regulation. First, even with a
given technology, allowing trading lowered compliance costs. Second,
tradable permits provided added incentives to innovate. Third, tradable permits allowed sources the flexibility to adapt to changing circumstances rather than be locked into a prescribed method. The
Administration has recently adopted rules to allow trading of NOX
emissions and is a strong proponent of establishing an effective international permit trading system to meet the reductions in greenhouse
gas emissions agreed to in the 1997 Kyoto agreement on climate
change.
Getting Innovation Incentives Right
It is widely recognized that the volume of R&D activity undertaken
in a market economy may fall short of what would best serve society's
interest. The market failures that produce this outcome apply broadly
throughout the economy but may be particularly acute in the area of
environmental technology.
One critical reason why private R&D activity may be less than what
is socially ideal is that the economic and social benefits of a promising
new technology may exceed what the innovating firm can capture for
itself. This appropriability problem can emerge where patent protection is incomplete, so that rival firms can quickly and freely imitate an
innovation, or where basic research leads to advances in knowledge
that are difficult to patent. Even where patenting is secure, there are
often important knowledge spillovers from one firm to another. Innovations in one field may spawn ideas that lead to innovations in others.
Empirical evidence supports the notion of appropriability effects: such
evidence strongly indicates that the social rate of return from R&D
greatly exceeds the private rate of return. Therefore, a strong case for
public support for R&D can be made, to better align the private
returns with the social.
Two additional concerns relating to the private provision of R&D
are of specific importance to environmental policy. First, environmental regulation itself may aggravate the appropriability problem.
As noted above, under technology and performance standards, emissions sources do not receive credit for the value of environmental
improvements they introduce. As a result, beyond the usual appropriability problems facing innovators, there may be too little incentive for firms to generate environmental innovations.
Second, inappropriate incentives for innovation may also result
when environmental regulation, even when incentive-based, is either
too lax or too stringent. When regulation is too lax, emissions sources
may have insufficient incentive to innovate to reduce emissions or to
lower costs; when it is too strict, they may spend more on devising




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innovations than the resulting reduction in emissions is worth.
Abstracting from the appropriability concerns common to all R&D,
incentive-based approaches generate efficient innovation incentives
only when they succeed in "getting prices right"—that is, when they
ensure that the prices of tradable emissions permits or the taxes
levied on emissions fully reflect the actual damages resulting from
pollution. Only under these conditions will potential innovators
appropriately weigh the cost of innovations against the expected benefits, including both expected reductions in compliance costs and the
benefits from reduced pollution.
Thus, although private sector incentives to innovate are typically
insufficient, more R&D activity is not always better. Like other investments, investment in R&D activity is justified only when the expected
benefits exceed the costs. Of course, it is difficult at the outset to predict the success of an R&D venture, because the returns are inherently
uncertain. As Albert Einstein put it, if we knew what we were doing, it
wouldn't be research.
Even when regulation succeeds in "pricing" environmental damage
appropriately, a strong case can usually be made for government support of environmental research because of the large gap that likely
exists between social and private returns, particularly in the area of
basic research. The Federal Government funds environmental
research to identify environmental threats and find solutions to those
threats. Basic research into environmentally friendly technologies
can provide the knowledge base for the development of cheaper
means of controlling the environmental impact of economic activity.
In 1994, direct Federal investment, amounting to $5.1 billion,
accounted for around 50 percent of all U.S. environmental R&D
expenditures. The greater part of the government's environmental
R&D investment is carried out through its system of research laboratories and competitive grants to universities and researchers.
Research is also undertaken through public-private research partnerships such as the Partnership for a New Generation of Vehicles
(Box 5-7).
ENVIRONMENTAL POLICY AND THE DIFFUSION OF
TECHNOLOGY
Although innovation is a necessary precondition for improved environmental technology, better environmental performance will not be
realized unless that new technology is adopted. Regulatory, informational, and other hurdles may block or delay the adoption of new,
more environmentally friendly technologies. Policy may play a useful
role in encouraging the diffusion of new technology if consumers or
firms do not adopt new technologies as fully or as rapidly as is best
for society.




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Box 5-7.—The Partnership for a New Generation of Vehicles
The Federal Government can play a particularly vital role in
promoting R&D in situations where the private sector's incentive
to pursue innovations with environmental payoffs is distorted. For
example, low gasoline prices have made consumers less concerned
about fuel efficiency, dampening the automobile industry's interest in developing more-fuel-efficient vehicles. Yet vehicle emissions are a major source of greenhouse gas emissions and other
pollutants, and therefore such efforts would produce clear benefits
to society.
In response, the Partnership for a New Generation of Vehicles
was established in 1993 between the Federal Government and the
major domestic automakers, with the aim of dramatically increasing the fuel efficiency of vehicles while maintaining performance
and price. A goal of the program is to develop, by about 2004, a
production prototype of a midsized sedan that would achieve 80
miles per gallon. The R&D needed to reach that goal ranges from
basic research into lightweight materials and alternative power
sources to applied engineering of new manufacturing processes. To
entice firms to join the research endeavor, the government cofunds both basic and more applied research and provides access to
the extensive Federal laboratory system and its experts. To date,
several new technologies have been developed that are bringing
this goal closer to reality.

Patterns and Incentives in Technological Diffusion
The diffusion of a new technology often follows a well-established
pattern. Initially, the new technology is adopted by only a few. Over
time the pace of adoption increases, slowly at first and then more
rapidly. The pace of adoption finally reaches a peak and then begins to
fall as the market approaches saturation. The trendline of cumulative
adoption thus follows an S-shaped curve. The spread of information
among potential adopters seems to explain this pattern. A few pioneers
are the first to become aware of the new technology and make the decision to adopt. Word of the new technology then spreads to those in contact with the pioneers, and each new user informs several others, so
that adoptions begin to pick up momentum. Finally, after the bulk of
the population of potential adopters has learned about the new
technology, the rate of new adoption slows.
This pattern of diffusion provides important insights into the rate of
adoption, but it does not answer the policy question of whether that
rate is efficient. Failure to adopt technology may be appropriate—the
costs of adoption may simply exceed the benefits. But market failures
may also impede adoption, even when the benefits outweigh the costs.




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For policy purposes it is important to distinguish between these two
situations. Only in the second can policy play a constructive role in
promoting the adoption of new technology. Like the incentives for
innovation, the incentives for adoption of new technologies will be
inadequate when market prices fail to reflect the full environmental
impact of pollution. For example, if energy prices do not reflect the full
environmental consequences of energy use, consumers will have an
inadequate incentive to purchase energy-efficient products. An obvious
solution to this problem is to "get prices right"—to adjust energy prices
so that consumers face the true costs of their decisions.
A different problem arises when potential adopters lack complete
information about potentially useful new technologies. In making their
decisions about what products to buy, consumers may need to acquire
information. As long as consumers both pay all the costs of acquiring
information and reap all the benefits of making a more informed decision, their lack of complete information does not constitute a market
failure. But in fact they do not reap all the benefits: in the course of
adopting a new technology, one person often spreads information about
that technology to others, through conversation or by observation. This
sharing of information confers a benefit on those who receive it, but
because the first adopter does not profit from that benefit, he or she
will not account for it in deciding whether to adopt.
If this problem results in too little sharing of information, and therefore too little adoption of worthy new technologies, the solution may be
for the government to provide information, or to require others to provide it. The government can also lower the cost of acquiring information by providing a credible source of objective information. The Energy
Policy and Conservation Act of 1975, for example, requires many appliances to carry energy labels showing the product's energy efficiency
rating and an estimate of its annual energy costs. The EPA and the
Department of Energy also operate the Energy Star program, in which
products are assessed for their energy efficiency, and efficient products
are allowed to display the Energy Star label.
Another approach when consumers lack full information is to regulate technology directly. For example, the Department of Energy has
implemented energy-efficiency standards for appliances. This
approach may be preferred when providing information is costly.

Residential Energy Conservation: The Energy Paradox
Studies have found that many consumers are unwilling to invest in
energy-efficient products such as compact fluorescent light bulbs,
improved insulation materials, and energy-efficient appliances, even
though they would save money by doing so. Their failure to make these
energy-saving and apparently cost-saving investments is sometimes
called the "energy paradox."




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Consumers' investment in energy efficiency, whether in installing
better insulation or buying more energy-efficient appliances, typically
involves, like most investments, an initial cost followed by future benefits from lower energy bills. Studies have calculated the rate of return
for a variety of investments in energy efficiency and found that these
returns often have a present value that exceeds typical financing costs.
Thus, consumers could expect net economic savings over time.
One possible explanation for the energy paradox is that many consumers are not in a position to capture the promised savings and
therefore have little or no incentive to invest in energy efficiency. For
example, renters may not make energy-efficient investments if their
rent includes a fixed amount for utility costs, so that they do not
directly reap the benefits from conservation. Consumers might also
lack information about energy-efficient alternatives. For instance,
there is some evidence that providing free information increases adoption rates for energy-efficient lighting. Or consumers may simply be
myopic, influenced more by the immediate cash expense than by the
promise of future savings. Policies that lower the initial cost of
purchase may therefore be the most effective in encouraging adoption.
Some analysts think the energy paradox may be an illusion, an artifact of flawed data or logic. The engineering data used to estimate
energy-efficiency gains may be too optimistic: the gains achievable in a
laboratory setting may be far greater than what a typical consumer in
a typical home would realize. Consumers may fail to install insulation
or other energy-saving investments correctly, for example. The costs of
investing in energy efficiency may be underestimated as well. The time
and resources consumers devote to learning about energy-efficient
investments are not usually factored into the analysis. For some consumers, these costs may exceed any possible savings. Energy-efficient
products may also have other features or other effects that consumers
do not like. Improved insulation may raise indoor air pollution by
reducing ventilation; fluorescent light bulbs may not fit existing light
fixtures. Finally, given uncertainty about the future price of a new
technology, delay may be rational. Even if immediate adoption would
save money, consumers who wait may get a better price and thus save
even more. Because adoption can take place at any time, analyses that
ignore this "option value" of waiting may overstate the value of
current adoption.
A conclusive answer to the energy paradox has yet to be found. In
any case, recent low energy prices combined with implementation of
energy efficiency standards for appliances and various informational
programs seem to have reduced the opportunities for investments that
save both energy and money.




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INNOVATION AND DIFFUSION: AN APPLICATION TO
CLIMATE CHANGE POLICY
Climate change is a problem that will be with us for a long time:
policies to address the threat will require the abatement of greenhouse
gas emissions over decades, even centuries. Given this long horizon,
innovation in technologies that can reduce greenhouse gas emissions
must play a role, and therefore the impact of climate change regulation
on incentives to innovate cannot be ignored. The ultimate cost of global efforts to address this environmental challenge will depend importantly on the pace at which such innovation takes place. The Administration's efforts to deal with climate change therefore incorporate
many of the principles discussed above, to create appropriate incentives that promote both innovation and the speedy diffusion of new
technology. These efforts are reflected both in achievements in international negotiations and in domestic actions.
Emissions of greenhouse gases, primarily from the burning of fossil
fuels and deforestation, have led to a 30 percent increase in the atmospheric concentration of these gases (primarily carbon dioxide, methane,
and nitrous oxide) from levels prevailing prior to the industrial revolution. If emissions continue along their projected, "business as usual"
path, a doubling of carbon dioxide concentrations from their levels before
the industrial revolution is likely midway through the next century.
According to the best climate models, this could lead to global warming
of the atmosphere of between 1.8 and 6.3 degrees Fahrenheit by 2100.
The potential adverse impacts of such a change are many: a rise in sea
level, greater frequency of severe weather events, shifts in growing conditions due to changing weather patterns, changes in the availability of
fresh water, threats to human health from increased range and
incidence of disease, and damage to ecosystems and biodiversity.
To address the risks of climate change, the member countries of the
United Nations have participated in a series of international negotiations, including conferences in Rio de Janeiro in 1992, in Kyoto in
1997, and most recently in Buenos Aires in 1998. Building on the 1992
United Nations Framework Convention on Climate Change, the Kyoto
climate change agreement places binding limits on emissions of greenhouse gases by the industrial countries over the period from 2008 to
2012. The agreement contains several features that promote the costeffective reduction of these gases. For example, its proposed emissions
trading program grants sources the flexibility to trade emissions
allowances with sources in other industrial countries. Further, the
agreement provides industrial countries with the flexibility to implement policies that promote trading across different types of greenhouse
gases. Sources in industrial countries will have opportunities to invest,
through the agreement's Clean Development Mechanism, in




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clean-energy projects in developing countries, and thereby generate
emissions credits for use at home.
The emphasis on emissions trading in the Kyoto agreement embodies the Administration's preference for incentive-based environmental
regulation. For the reasons explained above, an incentive-based
approach should give firms strong incentives to find low-cost methods
of reducing or sequestering greenhouse gas emissions. By pricing
greenhouse gas emissions, this approach also stimulates the diffusion
of existing technologies and provides private sector incentives for R&D
into the next generation of technologies. In addition, announcing emissions targets well in advance may produce payoffs akin to those of a
technology-forcing standard. Such an approach provides incentives for
firms to innovate, while also allowing them time to adjust by replacing
depreciating plants with equipment incorporating new technology,
thereby further lowering the cost of emissions reduction. In conjunction with the international trading system proposed under the Kyoto
agreement, the Administration supports developing a domestic greenhouse emissions trading program starting in the 2008-12 commitment
period. This would allow U.S. firms to participate in international
trading of greenhouse gas emissions, as part of an efficient, low-cost
national abatement strategy.
Because 82 percent of domestic greenhouse gas emissions come from
the burning of fossil fuels, achieving climate change policy goals will
require improving the energy efficiency of the economy. The rate of
energy efficiency improvement (EEI) across the economy can be
thought of as the sum of three factors: market-induced, policy-induced,
and autonomous EEI. Market-induced EEI reflects the effect of
changes in energy prices on consumption decisions. Policy-induced
EEI reflects the effects of policies on energy consumption. The
autonomous component of EEI is that which would take place even in
the absence of policy and market price changes. The gradual structural shift in the U.S. economy toward services and away from manufacturing and agriculture may explain some of this component. Changes
in energy efficiency over recent decades is summarized in Box 5-8.
Policies can provide incentives to invest in energy-efficient technologies and increase the rate of EEI through price changes. For
example, the Administration's economic analysis on climate change
found that a tradable permit program that results in permit prices
of $23 per ton of carbon would increase the annual rate of EEI
approximately 25 percent above the level projected in the absence of
such a policy.
In addition to policies affecting energy prices directly, the Administration believes that a strong argument can be made for policies to
stimulate innovation and diffusion through R&D and appropriate fiscal incentives. The President's 2000 budget includes continued funding
for the Climate Change Technology Initiative (CCTI), a program




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Box 5-8.—Energy Efficiency Since the 1970s
Energy efficiency in the United States is now much greater
than it was at the time of the first oil shock just over 25 years ago.
Nevertheless, because of growth in the economy, the United States
today consumes more energy than it did in 1973. The ratio of energy
use to GDP, a measure of the energy intensity of output, fell rapidly
in the 1970s and early 1980s but stopped declining in the late
1980s. More recently it has again begun to decline (Chart 5-2). Yet
despite these efficiency gains, total energy use rose by 27 percent
between 1973 and 1997 (Chart 5-3), stimulated by population
growth and rising GDP per capita. Virtually the entire increase
came after 1986, a year that ushered in a period of relatively low
energy prices. Before 1986, relatively high energy prices had kept
energy use flat.
One of the most dramatic increases in energy use has been in
that by motor vehicles: their annual fuel consumption rose 54
percent between 1970 and 1996. Although the average fuel efficiency of new passenger cars more than doubled between 1973 and
1996, from 14.2 to 28.5 miles per gallon, the fuel efficiency of the
Nation's vehicle fleet has not increased as much, because of a shift
toward light-duty trucks and sport-utility vehicles. The efficiency
gains were also partly offset by an increase in miles traveled per
vehicle and a large increase in the number of vehicles. The net
effect of these changes has been a small decline in fuel use per
vehicle but a large increase in total energy consumption (Chart 5-4).
Energy use in homes, in contrast, was about the same in the
early 1990s as it was in the 1970s, as efficiency gains have kept
pace with increases in the number of households, in average house
size, and in the average number of appliances per household. For
example, the efficiency of the average new refrigerator improved
192 percent from 1972 to 1996. Energy use per household declined
rapidly in the late 1970s and early 1980s but has been stable since.
designed to spur the development and adoption of new energy- and
carbon-saving technologies through tax incentives and R&D investments. Many of the efforts within the CCTI reflect recommendations
made in a 1997 report by the President's Committee of Advisors on
Science and Technology. The Committee found that "the inadequacy of
current energy R&D is especially acute in relation to the challenge of
responding prudently and cost-effectively to the risk of global climatic
change from society's greenhouse gas emissions." By providing public
support for energy R&D through the CCTI, the level of innovation
will likely increase, offsetting in part the appropriability problems
associated with this type of R&D.




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Chart 5-2 Energy Efficiency and Prices
Energy efficiency improved rapidly in the 1970s and early 1980s, periods of rising energy
prices. But as energy prices have fallen since then, energy efficiency has stagnated.
Thousands of Btus per dollar

Index (1982-84 =
1.1

20

A
Real consumer
price of energy
(right scale)

18

1.0

16

0.9

14

0.8

12

0.7

0.6

1970
1975
1980
1985
1990
1995
Note: The relative consumer price of energy is the ratio of the CPI for energy to the CPI for all items.
Sources: Energy Information Administration, Department of Commerce (Bureau of Economic
Analysis), and Department of Labor (Bureau of Labor Statistics).

Chart 5-3 Energy Consumption
Total energy use has increased significantly since the mid-1980s as energy
prices have fallen.
Quadrillion Btus
100

90

80

70

60 -

1985

1970
1975
1980
Source: Energy Information Administration.




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1990

1995

Chart 5-4 Fuel Consumption by Motor Vehicles
Although fuel consumption per vehicle has declined, total fuel consumption by
vehicles has continued to increase.
Billions of gallons

Gallons

1000

160

\
140

Fuel consumption per vehicle
(right scale)

V
\
\

900
^_^

/
800

120

700

Total fuel consumption
(left scale)

600

100
500

1970
1975
1980
Source: Department of Transportation.

1985

1990

1995

The proposed CCTI package for fiscal 2000 contains $3.6 billion over
the 1999-2004 period in tax credits for energy-efficient purchases and
renewable energy. These include tax credits of $1,000 to $4,000 for consumers who purchase highly fuel-efficient vehicles, a 15 percent credit
(to a maximum of $2,000) for purchases of rooftop solar equipment, a
10 to 20 percent credit (also subject to a cap) for purchases of energyefficient building equipment, a credit of $1,000 to $2,000 for purchasing energy-efficient new homes, an extension of the wind and biomass
tax credit and an expansion of eligible biomass sources, and an investment credit for the purchase of combined heat and power systems. The
package also contains $1.4 billion for fiscal 2000 for additional R&D
investments covering the four major sources of carbon emissions in the
economy—buildings, industry, transportation, and electric power—and
investments in carbon removal and sequestration. The proposal builds
on the fiscal 1999 budget, which included more than $1 billion in CCTI
funding for R&D. The funding in that budget represented a 25 percent
increase over fiscal 1998 appropriations for climate change R&D.
Complementing these fiscal measures, the Federal Government can
undertake other actions to promote the diffusion of climate-friendly
technology. In October 1997 the President called for a series of steps to
reduce energy use by Federal buildings, vehicle fleets, and other new
equipment, and to promote the use of renewable energy sources. As the
Nation's largest single energy user, the Federal Government spends
nearly $8 billion each year for power to operate facilities, vehicles, and




209

equipment, and more than 90 percent of this energy comes from fossil
fuels. The Federal Government plans to expand its procurement of
renewable and less carbon-intensive fuels. These efforts will accelerate
the diffusion of new energy-efficient and carbon-lean technologies.
Further, the Federal Government's experience with these technologies
should speed their diffusion through the rest of the economy, by
demonstrating their applicability and feasibility for other users.

THE LONG-RUN COSTS OF ENVIRONMENTAL
REGULATION
The policies just described are based on the conviction that the
development of new technology, and the widespread adoption and diffusion of already existing technology, can make environmental protection less expensive, and that over the long run it is possible to have
both economic growth and a sounder environment. Yet some analysts
make a much bolder claim: they argue that further environmental protection can be achieved at little or no economic cost. The energy paradox, described above, perhaps provides some evidence for this claim. If
stricter environmental regulation is costless, then implementing such
regulation is unambiguously desirable, because it would mean that
real environmental benefits can effectively be had for free. Although it
is a difficult proposition to test, the weight of the evidence suggests
that stricter environmental regulation would impose an additional
cost, but a modest one.
There are several ways in which stricter environmental regulation,
by conferring benefits on regulated firms and the economy as a whole,
might pay for itself. First, environmental regulation might force firms
to reconsider their methods of production, which could lead them to
discover new methods that simultaneously lower both emissions and
cost. For example, in direct response to environmental regulations
requiring the phaseout of chlorofluorocarbons, a new method was
found for cleaning electronic circuit boards that not only eliminated the
use of these chemicals but increased product quality and lowered operating costs as well. Second, firms that become subject to strict environmental regulation before their rivals do may gain a competitive
(first-mover) advantage over their competitors by developing new products and technologies for which demand may later become widespread.
For example, Scandinavian pulp and paper equipment suppliers
increased their exports after more environmentally friendly production
processes were introduced in Scandinavia. Third, if there are significant spillover effects from R&D, all firms may benefit from additional
R&D activity that comes in response to environmental regulation,
even though each firm individually might not have expanded its R&D
efforts without the spur from regulation.
Many would dispute the proposition that environmental benefits
can be obtained at no net cost. After all, if opportunities for profitable




210

investment are there for the taking, why should firms need prodding
by regulators to seize them? Profit-maximizing firms gain by cutting
costs and seizing strategic advantages. The profit motive itself should
ensure that no large cost savings go unrealized, or first-mover advantages untapped. This critique, however, does not take into account the
benefit of additional R&D in the presence of spillover effects. Moreover,
difficulties in internal organization may prevent a firm from operating
in a manner fully consistent with profit maximization. However, it is
not clear that government policies can be designed to overcome these
internal organizational problems.
Resolving the debate about whether environmental regulations
impose long-run costs will require solid empirical evidence. Although it
is difficult to test the proposition directly with existing data, some evidence concerning the long-run productivity consequences of environmental regulation is available. (Some intriguing evidence also exists on
the environmental regulatory consequences of increased productivity;
see Box 5-9.) The bulk of this evidence indicates that increasing the
stringency of environmental regulation does entail a modest reduction
in long-run productivity.

REGULATION AND INNOVATION:
THE CASE OF THE ELECTRIC POWER INDUSTRY
This chapter has discussed the interplay between regulation and
innovation, showing how innovation often necessitates regulatory
change, and in turn how regulatory change can affect the pace and
direction of innovation. Here we illustrate these themes with a discussion of the ongoing deregulation and restructuring of the electric power
industry, one in which technological and organizational innovation has
changed the appropriate form of regulation. The electric power industry provides an appropriate case study both because of recent initiatives to introduce competition in electric power generation and because
of the potential environmental impacts of power generation.
Although other industries (air travel, trucking, and telecommunications, for example) have been opened to competition over the past few
decades, the electric power industry, with sales of $212 billion in 1996,
is among the largest yet to be targeted for deregulation. Competition
has already been introduced at the wholesale level (electric power generation), but retail electricity markets (the sale of electricity to final
consumers) are still, for the most part, regulated monopolies. In 1998
the Administration proposed legislation to remove many of the remaining barriers to competition and encourage States to implement retail
competition. The goal of the Administration's Comprehensive Electricity Competition Plan is to provide consumers access to the wholesale
power market while maintaining regulation of transmission and




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Box 5-9.—Is There an Environmental Kuznets Curve?
We have so far examined the question of whether environmental regulation affects productivity. But could there be an effect in
the opposite direction? Some have suggested that higher productivity might lead to increased demand for environmental protection,
by way of an increase in income per capita.
In an empirical analysis, the economist Simon Kuznets found
that income inequality rose with income per capita at low levels of
income, but fell with income per capita at higher levels. The
inverted-U relationship thus described has come to be known as
the Kuznets curve. Several analyses of patterns of emissions of air
and water pollutants across countries have shown a similar relationship to income per capita: emissions seem to increase with
income at low incomes, and fall with income at high incomes—an
environmental Kuznets curve. If the familiar inverted-U relationship in fact holds in this domain as well (a more recent study,
using the latest available data, failed to find it), countries that
reach a certain level of development should experience declining
pollution with economic growth, because of increased demand for
environmental protection with higher income. In other words,
growth is not necessarily an enemy of the environment.
Just where the turning point in the relationship between development and environmental quality occurs, if it occurs, is Important for predicting whether global emissions of any pollutant are
likely to increase or decrease in the near future. If peak pollution
levels occur at relatively low levels of income per capita, global
emissions should soon begin to fall as more countries pass the
peak. However, a substantially higher peak would mean that pollution will likely get worse before it gets better. One study found
that sulfur dioxide concentrations peak at income per capita levels
around $5,760, roughly that of a middle-income country like Chile.
A second study using slightly different data and methods found
that emissions per capita of sulfur dioxide, particulate matter,
nitrogen oxides, and carbon monoxide peaked at higher income
levels.
Unlike air and water pollutants, which have primarily local
effects, greenhouse gas emissions seem to increase with income at
all income levels. This should not be surprising. Because greenhouse gas emissions contribute to changes in the global atmosphere but do not have visible local effects, national governments,
even in the richer countries, come under less pressure from their
citizens to regulate their national emissions alone. Without international agreements to limit greenhouse gas emissions, achieving
a more prosperous world may entail ever-increasing emissions.




212

distribution systems, which will probably remain natural monopolies.
Just as telephone deregulation has allowed consumers to choose their
long-distance company, so deregulation of the electric power industry
will soon allow them to choose their source of electricity The plan has
five main objectives: to encourage States to implement retail competition; to protect consumers by promoting competitive markets; to
ensure access to and the reliability of the power transmission system;
to promote and preserve public benefits (for example, through assistance to low-income customers and consumer education); and to amend
existing Federal statutes to clarify Federal and State authority with
respect to the industry. The Administration's proposed deregulation
plan provides an excellent example of how an enlightened regulatory
approach can remove barriers to private innovation, resulting in both
economic and environmental benefits. The competitive incentive to
produce electricity more efficiently is expected to translate into lower
fuel consumption and less pollution.
FROM INNOVATION TO DEREGULATION AND COMPETITION
The electric power industry has been regulated since the early
1900s, when States first began to grant electric companies exclusive
service areas. Electric utilities were overseen by public utility commissions (PUCs) and guaranteed a "reasonable" rate of return on their
investments, provided they set reasonable rates and met various social
objectives such as universal access.
Regulation was justified on the grounds that it was less costly to
have one electric utility provide service than to have competing utilities. Firms faced enormous startup costs in installing generating units,
transmission and distribution lines, and individual connections. Duplication of transmission and distribution networks by competing firms
would have caused unnecessary expense. With the support of the privately owned utilities, States restricted competition by granting utilities monopoly status to encourage them to make the necessary investments and avoid wasteful duplication. As demand for electricity grew
rapidly, developments in generating technology also supported the
notion that electricity supply was a natural monopoly. By the 1970s,
coal- and nuclear-fired plants generally needed to be very large,
exceeding 500 megawatts capacity, to exploit economies of scale. The
capital demands for such a large plant needed to be spread over a large
consumer base for the utility to recoup its investment. Since then,
technological and organizational innovations in electric power generation have blunted its natural monopoly characteristics and reduced the
need to restrain competition in the generation of electricity. Deregulation in the natural gas industry and the increased availability of gas
caused gas prices to fall. The cheaper fuel source spurred innovation in
electric power generation and made combined-cycle gas turbine plants,
which today can be as small as 100 megawatts, competitive with much




213

larger coal plants. In 1994 these technologies contributed to a 35 percent fall in the average size of new fossil-fuel generating plants relative
to that of existing plants. These changes mean that large users can
threaten to generate their own electricity if their utilities do not offer
lower rates. Technologies on the horizon promise further reductions in
the efficient size of electricity generation, to the point where even residential users may some day find it economical to generate their own
power (Box 5-10).
The development of an interconnected electricity system, and an
improved understanding of how to operate generating plants and the
transmission grid independently of each other, have made competition
feasible. As the market for electric power grew, individual systems
began to interconnect, making it physically possible for consumers in
one utility's service area to receive electricity from generators in another.
To maintain the integrity of the electric power grid, the quantity of
electricity supplied must always match the quantity demanded. With
quantities demanded fluctuating constantly, the output of generators
supplying power to the grid must be closely coordinated. Until recently,
this was taken to mean that generation, transmission, and distribution
services needed to be jointly owned. Recent technological and institutional innovations, however, such as computerized controls and independent system operators (ISOs), offer ways to coordinate unaffiliated
generators and provide fair, open access to transmission lines while
maintaining their integrity.
Today the electric power industry is governed by a mix of State and
Federal regulation. But a series of Federal actions beginning in 1978
has begun to introduce competition at the wholesale level. The Public
Utility Regulatory Policies Act of 1978 (PURPA) first opened the door
by requiring public utilities to purchase power from renewable sources
and from sources using cogeneration (see Box 5-10). The price of this
"qualified power" was determined by State regulators and tended to be
greater than the utility's average cost of generation. Although this
requirement saddled some utilities with high-cost, long-term contracts,
it also demonstrated that generators not owned by the public utility
could be integrated into the electric power system, and it helped spur
the development of smaller scale generating technologies. The Energy
Policy Act of 1992 went further, creating a new class of independent
generating companies that could sell power directly to utilities.
In April 1996 the Federal Energy Regulatory Commission (FERC)
issued Order 888, requiring public utilities to provide access to their
transmission lines at reasonable, nondiscriminatory rates.
At the State level, to further these policies and reap the benefits of
competition, many utilities are collaborating to create regional or
statewide ISOs to manage their transmission grids. ISOs set transmission prices and can contract for network services (to provide backup power, for example). There are currently four ISOs in operation




214

Box 5-10.—The Trend Toward Decentralized Power
Generation
The trend toward smaller, cleaner, and quieter generating
plants, combined with certain aspects of the physics of electricity
transmission and generation, has led some to claim that the days
of centralized electric power are numbered. Generating electricity
from a fuel source is never perfectly efficient; some of the energy
in the fuel source is inevitably lost in the transformation process.
This energy typically takes the form of heat, which can be captured and used in industrial processes, or as space heating if the
generator is physically close enough to consumers in need of heat.
An electric power plant thus produces two potentially valuable
products—electricity and heat—for the price of one. The exploitation
of these potential economies is called cogeneration.
Once generated, electricity typically goes through many steps
before reaching the end user. It may be transmitted over highvoltage wires for long distances, after which it must be transformed into lower voltage to be distributed, and finally transformed again before being delivered to consumers. On average,
some 7.5 percent of the electricity generated is lost through the
distribution chain before reaching the end user. On-site electricity
generation avoids the greater part of these losses, thus increasing
efficiency and lowering costs.
In the past, economies of scale in electricity generation and the
nuisance of locating loud and polluting plants near homes and
businesses outweighed this incentive for small-scale local generation. This situation has begun to change, however, as very small
scale plants are becoming more competitive with large-scale generation, and as plants are becoming quieter and less polluting.
These changes do not necessarily imply the total demise of centralized power. An electric power grid remains an efficient way of
allowing generating plants with different production characteristics to serve consumers with different load profiles. For example,
electricity demand from many businesses peaks during the day,
whereas residential demand is concentrated during the mornings
and evenings. If each of these groups generated its own electricity,
not only would each need to have its own facilities, but each facility would spend many hours per day with slack capacity. A single
large generating plant can supply the same customers with less
total generating capacity Depending on the size of distribution
losses and the value of excess heat, it would be wasteful to have
two separate plants, one at the office and another one at home,
when one plant could service both loads.




215

around the country, and seven others are in the planning stages. Still
others are planning to form power exchanges or pools to help create
efficient spot power markets.
States throughout the country are going further, expanding consumer choice by introducing retail competition into electricity markets.
Eighteen States have passed legislation or issued regulations toward
this end. Many States and utilities across the country have implemented pilot programs, and statewide retail competition is, to various
degrees, already being offered in California, Massachusetts, Montana,
Pennsylvania, and Rhode Island.
Although States are thus moving forward, several Federal laws and
regulations still hamper full competition in retail markets. For example, the Public Utility Holding Company Act of 1935 makes it hard for
utilities to cross State lines to compete in each other's markets.
PURPA requires public utilities to purchase expensive "qualified
power" but would not impose such costs on new competitors. The
Administration's electricity competition plan would remove these and
other barriers to competition. It would also modernize the institutions
that protect the reliability of the electricity supply system, enabling
them to function more effectively in emerging competitive markets.

THE BENEFITS OF DEREGULATION
The traditional means of regulating monopolies through rate setting
did not provide strong incentives for utilities to improve their efficiency
or offer new services—things that would happen naturally in a
competitive market. By allowing companies to compete to provide
electricity to consumers, deregulation forces companies to search for
more efficient means of producing and delivering electricity, as well as
new means of providing the energy services desired by customers. In a
$212 billion industry, even small efficiency gains from competition can
have large benefits.
Above and beyond the direct efficiency gains in the production and
delivery of electricity, retail competition can encourage firms to offer
new products and find innovative ways to reduce overall energy costs.
Time-of-day metering can encourage consumers to shift their purchases
away from peak periods and thereby reduce capacity requirements. As
already discussed, there appear to be barriers in the markets for energyefficient products. Utility commissions have therefore stepped in to
force public utilities to invest in energy efficiency. In the move toward
a competitive industry, utilities are now rethinking such investments.
There is no way for a utility to force consumers to keep buying its power
once the utility has made an efficiency investment (buying insulation
for a consumer's house, for example). New structures will develop in a
more competitive market to allow firms to pay for and install energyefficient equipment in return for a share of the subsequent savings.
Restructuring, by making it easier to bundle efficiency services with




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the provision of electricity, could provide incentives for increased
growth of energy service companies (ESCOs). The potential role for
ESCOs is illustrated by the experience in California under deregulation, where many supply contracts for commercial and industrial customers include an energy management component.
Competition may also permit customers to express, through their
purchases, their preferences for environmentally sound electricity.
"Green" power marketers have sprung up in many of the States now
offering retail competition and in those with pilot programs. For a premium, these marketers sell electricity that is generated with a greater
proportion of renewable sources than the current mix. If enough consumers are willing to pay enough extra for green power, it will provide
a profit motive to encourage the future development of such resources.

THE CHALLENGES OF A COMPETITIVE MARKET:
ENVIRONMENTAL AND SOCIAL OBJECTIVES
Regulatory changes bring with them a host of challenges, as old
ways of meeting various objectives must be rethought. In the past,
PUCs had direct oversight over utilities. In some States they sought to
include environmental considerations in their approval criteria for
new generating assets. This encouraged the construction of generating
plants that were less polluting than would have been the case if utilities were allowed to ignore this issue. With competition, however,
PUCs lose their ability to influence the composition of electricity supply. If a utility is required to buy more expensive clean energy, its rates
will have to reflect the higher costs. With competition, consumers
would then be able to buy power from other providers who had lower
costs because they were not subject to the same provisions.
In a competitive market, unless these environmental spillovers are
internalized through other means (such as existing environmental regulations), the government must step in to pursue them in new ways.
For example, as already noted, PURPA requires utilities to buy power
from "qualified" clean generators. In support of the same goals, the
Administration's proposal includes establishing a tradable renewable
portfolio standard to promote more environmentally friendly power
production. This approach would require each generator to cover a
fraction of its total generation from renewable sources (not including
hydroelectric power). If a seller did not generate enough renewable
power by itself, it could purchase credits from companies that exceeded
their generation requirement.
Similarly, under competition, other social objectives cannot be pursued by placing requirements on only one set of actors—the utilities.
Therefore, the Administration's competition plan would establish a
"public benefits fund" to support affordable electricity service to lowincome customers, invest in energy efficiency measures, and promote




217

other social goals. The fund would be supported by a surcharge on all
electric power transmission.
Deregulation relies on the forces of competition to keep prices reasonable for consumers. The benefits of deregulation, therefore, depend
on the extent of competition in each market. The Administration's
plan enhances FERC's authority to block anticompetitive mergers and
to promote competition through divestiture and other means.




218

CHAPTER 6

Capital Flows in the Global Economy
INTERNATIONAL FINANCIAL DEVELOPMENTS last year posed
serious challenges for the world economy. What began in the summer
of 1997 as a regional currency crisis in developing Southeast Asia
erupted into a wider and deeper economic disturbance in 1998. By late
summer the turmoil had extended to many other financial markets
and to a number of economies around the globe. The outbreak of financial and economic turmoil in Russia in August immediately threatened
to spread the contagion to Latin America. Interest rates in these and
other emerging market countries rose sharply, and large-scale capital
flight raised risk premiums on their sovereign bonds. Several countries
experienced sharp depreciations of their currencies or strains on their
foreign exchange reserves. Prices of stocks, bonds, and other financial
and real assets fell. Commodity prices continued to fall, engendering
talk of global deflation. Ultimately the financial turbulence led to a
general flight from risky assets even within the United States and
Western Europe. Japan's hopes for recovery from a long-enduring
slump were dashed.
Prompt policy action and signs of a turnaround in Asia improved the
outlook later in 1998. Even so, by late 1998 a third of the world's
economies were in recession or experiencing markedly slower growth.
The International Monetary Fund (IMF) has estimated world economic growth at only 2.2 percent in 1998 and projected that it would
remain at that level in 1999, in stark contrast to robust growth of 4.2
percent in 1997. Those estimates indicate a deceleration of global
growth to levels not seen since the pronounced world slowdowns of
1974-75, 1980-83, and 1990-91. The risk of such a global slowdown
poses new challenges to economic policy.
The widespread financial turmoil—perhaps the most severe experienced by the world economy during the last 50 years — followed a period of increasing global integration of goods and financial markets.
World trade has increased dramatically as trade restrictions have
steadily fallen and many countries have made a historic commitment
to opening their economies to international trade. Restrictions on
international capital transactions have also been eased, and the integration of financial markets has led to an unprecedented volume of
cross-border capital flows.
The recent turbulence should not cloud the benefits of this ongoing
trend toward globalization. The integration of markets has provided




219

greater opportunity, faster growth, and rising standards of living for a
large share of the world's population. Trade among countries has
fueled growth by harnessing the benefits of international comparative
advantage and providing a dynamic stimulus to productivity. Financial
integration, too, offers advantages. Open capital markets have promoted growth by allocating capital to those countries whose domestic
investment opportunities exceed domestic saving. The ability of capital
to flow to all corners of the world has allowed global investors to diversify the risk in their portfolios. And the knowledge that these investors
are watching over their shoulders may have helped governments
achieve discipline in their monetary and fiscal policies.
The promise of these long-term benefits should not, however, lead us
to neglect the real costs of the current crisis—or the possibility of new
crises years hence. Therefore the United States, together with other
industrial and developing countries and the international financial
institutions, has taken a number of important steps. To support continued growth in a context of low inflation and to restore confidence in
unsettled financial markets, the Federal Reserve and other central
banks worldwide have reduced key interest rates. To support economic
stabilization in Brazil and to head off further contagion, the IMF has
assembled a $41 billion stabilization package for that country. To
ensure the IMF's continued ability to respond to financial crises, the
Congress has approved the Administration's request for $18 billion in
new funding, the U.S. share of a roughly $90 billion international
package. To secure financial stability and help avoid crises in the
future, Indonesia, the Republic of Korea, and Thailand have undertaken serious structural reform of their economic and financial systems. To resolve its long-festering banking problems and stimulate its
economy, Japan has passed bank reform legislation and a program of
fiscal stimulus. Finally, to strengthen the international financial system and make it less crisis prone, the international community is
working together to foster reforms of the international financial architecture. These measures serve to promote confidence and improve the
prospects for growth in the world economy in 1999.
This chapter analyzes the factors that have led to increased global
financial integration. Next it considers the causes of the Asian crisis
and its contagion to other economies, the policy response to the global
turmoil, and the role of Japan. The chapter concludes with an analysis
of the effects of the international financial crisis on the United States.
Chapter 7 is devoted to a discussion of developments in the international financial system and proposed reforms to its architecture aimed
at reducing the likelihood of future crises and promoting the orderly
resolution of those that do occur. That chapter also discusses the
prospects for the recently launched monetary union in Europe and the
implications of the creation of the new European currency, the euro, for
the U.S. dollar.




220

INTERNATIONAL CAPITAL FLOWS, THEIR CAUSES,
AND THE RISK OF FINANCIAL CRISIS
TRENDS IN FINANCIAL INTEGRATION
The phenomenal growth of international capital flows is one of the
most important developments in the world economy since the breakdown of the Bretton Woods system of fixed exchange rates in the early
1970s. Their growth can be traced to the oil shock of 1973-74, which
spurred financial intermediation on a global scale. Mounting surpluses in the oil-exporting countries could not be absorbed productively
within those economies, and at the same time the corresponding
deficits among oil importers had to be financed. The recycling of
"petrodollars" from the surplus to the deficit countries, via the growing
Euromarkets (offshore markets for deposits and loans denominated in
key currencies, particularly the dollar), produced the first post-Bretton
Woods surge of international capital flows. As a result, many developing countries gained access to international capital markets, where
they were able to finance their growing external imbalances. Most of
this intermediation occurred in the form of bank lending, as large
banks in the industrial countries built up large exposures to developing
countries' debt.
The buildup of these external liabilities eventually became excessive
and, together with loose monetary and fiscal policies in the borrowing
countries, sharp declines in their terms of trade, and high international
interest rates, triggered the debt crisis of the 1980s. Starting in Mexico in 1982, that crisis rapidly engulfed a large number of developing
countries in Latin America and elsewhere. The rest of the 1980s saw a
period of retrenchment, with a significant slowdown in capital flows to
emerging markets (especially in Latin America) as burdensome foreign
debts were rescheduled, restructured, and finally reduced with the
inception of the Brady Plan in 1989.
The resolution of the 1980s debt crisis led to new large-scale private
capital inflows to emerging markets in the 1990s. Several factors
encouraged this renewed surge of international financing. Many Latin
American countries were adopting policies emphasizing economic liberalization, privatization, market opening, and macroeconomic stability.
Countries in Central and Eastern Europe had embarked on their historic transition toward market economies. And rapid growth in a group
of economies in East Asia had caught the attention of investors worldwide. Net long-term private flows to developing countries increased
from $42 billion in 1990 to $256 billion in 1997.
The largest share of these flows took the form of foreign direct
investment—investment by multinational corporations in overseas
operations under their own control. These flows totaled $120 billion in
1997 (Chart 6-1). However, bond and portfolio equity flows accounted




221

Chart 6-1 Net Capital Flows to Developing Countries
Foreign direct investment is the largest source of net capital flows to developing
countries.
Billions of dollars
300

250 -

200 -

1991

1992

1993

1994

1995

1996

1997

Source: World Bank.

for 34 percent of the total in that year, amounting to $54 billion and
$33 billion, respectively. In contrast, commercial bank loans represented
only 16 percent of net flows to developing countries, or $41 billion, in
1997, compared with about two-thirds in the 1970s. To the extent it
went to bond rather than equity flows, this massive relative switch out
of bank lending, which is characterized by a small number of substantial lenders, would eventually pose a problem not encountered in the
1980s, namely, how to coordinate the actions of a large number of
creditors (an issue discussed further in Chapter 7).
Table 6-1 reports gross inflows and outflows of both foreign direct
investment and portfolio investment (two of the main components of
capital flows) for both developing and industrial countries over several
decades. Two points are noteworthy. First, although net flows have
been large and growing, the magnitude of gross flows may be a better
indicator of financial integration. As investors in one country diversify
their portfolios by purchasing foreign assets, and as foreign investors
increase their purchases of assets in the first country, gross flows may
increase substantially without net flows changing nearly as much. And
in fact gross cross-border inflows and outflows have grown even faster
than net flows. Second, the rise in cross-border capital flows has
occurred in developing and industrial countries alike. Although the
Mexican peso crisis of December 1994 led to a modest slowdown in
capital flows to emerging markets in 1995, they surged again
thereafter until the Asian crisis erupted in the summer of 1997.




222

TABLE 6-1.— Capital Flows to Industrial and Developing Countries
[Billions of dollars]
Developing countries

Industrial countries
Flows

Direct
investment

Portfolio
investment

Direct
investment

Portfolio
investment

Gross outflows:
1973-78
1979-82
1983-88
1989-92
1993-96

28.6
46.9
88.2

201.3
259.6

11.8
35.0

126.5
274.6
436.4

0.4
1.1
2.3
10.4
19.2

5.5
17.8
-5.1
10.3
19.2

Gross inflows:
1973-78
1979-82
1983-88
1989-92
1993-96

17.9
36.6
69.3

141.9
173.0

24.4
51.0

139.1
343.0
549.9

5.0
14.6
15.5
37.8

106.4

1.3
3.1
4.0
27.5
95.9

Net inflows:
1973-78
1979-82
1983-88
1989-92
1993-96

....

-10.7
-10.3
-18.9
-59.4
-86.6

12.6
16.0
12.6
68.4

113.5

4.6
13.5
13.2
27.4
87.2

-4.2

-14.7
9.1
17.2
76.7

Source: International Monetary Fund.

Further evidence of the trend toward global financial integration is
the sharp expansion of foreign exchange trading. This growth has
been evident both in spot markets (where currency transactions are
settled within 2 business days, or "on the spot") and in the use of derivative instruments (where trading is for future delivery of currencies, or
in options to buy or sell currencies). Most purchases and sales of
foreign exchange are related to financial transactions rather than
merchandise trade, and indeed foreign exchange trading has grown
much faster than international trade in goods over the last two
decades (Box 6-1).
THE CAUSES OF INCREASED CAPITAL FLOWS
Several factors have undoubtedly contributed to this phenomenal
growth of international capital flows. First, countries have opened
their financial markets, both domestically and internationally, as
governments in industrial and developing economies alike have
phased out restrictions on financial activity and progressively
reduced or eliminated controls on cross-border capital transactions.
In many instances, this financial liberalization has been accompanied by macroeconomic stabilization, privatization, trade liberalization, and deregulation. These structural reforms in capital-scarce
developing countries have created significant investment opportunities, attracting a surge of foreign capital with the expectation of high
rates of return. Growth in international trade has also increased the




223

Box 6-1.—The Explosive Growth of Foreign Exchange Trading
The single statistic that perhaps best illustrates the dramatic
expansion of international financial markets is the volume of trading
in the world's foreign exchange markets. The Bank for International
Settlements (BIS, an international institution in Basle, Switzerland,
that acts as a kind of central bankers' bank) released in October 1998
a preliminary compilation of a triennial survey of 43 foreign
exchange markets. It shows that, in current-dollar terms, the volume
of foreign exchange trading in these markets grew 26 percent
between April 1995 and April 1998, following a 45 percent increase
between 1992 and 1995. That volume now stands at $1.5 trillion per
day (after making corrections to avoid double counting). By way of
comparison, the global volume of exports of goods and services for all
of 1997 was $6.6 trillion, or about $25 billion per trading day. In other
words, foreign exchange trading was about 60 times as great as
trade in goods and services.
In the BIS preliminary survey, spot market purchases amounted
to 40 percent of foreign exchange transactions in 1998, down from 44
percent in 1995. Forward instruments continued to grow in importance relative to spot sales. Over-the-counter derivatives, although
still a smaller fraction of total transactions, have been the fastestgrowing segment of the market.
A striking feature of the foreign exchange market is the small percentage of trades made on behalf of nonfinancial customers. In the
most recent survey, transactions involving such customers represent
only 20 percent of total turnover.
Trading also tends to be focused geographically in a few major centers. Arguably there is a natural equilibrium consisting of one major
center in each of the world's three 8-hour time zones. New York is the
major center in the Western Hemisphere, with U.S. volume now
equal to $351 billion per day (18 percent of world turnover). Tokyo
established itself in the 1980s as the major center in the third of the
world that includes Asia. Its turnover, however, has fallen off recently, as markets in Singapore have gained. Average daily transactions
totaled $149 billion (8 percent of the world total) in Japan and $139
billion in Singapore. London continues to handle the greatest volume
of foreign exchange transactions, with its share of world turnover
increasing to 32 percent, at an average daily volume of $637 billion.
To summarize, the volume of world trade in foreign exchange has
continued to grow. Derivatives far exceed spot market transactions.
Most trades take place between professional traders at banks and
other financial institutions; only a fraction of foreign exchange sales
and purchases directly involve those who import and export goods
and services.




224

volume of trade-related financing and bolstered trade in derivative
instruments, as buyers and sellers seek to hedge their exposures to
currency and commercial risk.
At the same time, financial innovations in the United States and
other industrial economies have rendered cross-border investments
more accessible to institutional and individual investors. Revolutionary advances in information and communications technology, together
with significantly lower transportation and transactions costs, have
underpinned this rapid development. Mutual funds, hedge funds, and
the growth of new financial instruments, including derivatives, have
enabled investors to choose which risks they will and will not accept in
their quest for higher returns. A radical increase in the available range
of instruments and assets has afforded investors unprecedented opportunities to increase returns and decrease risks through global diversification. Although most wealth is still primarily invested in domestic
assets, international portfolio diversification is now an option for both
institutions and households.

THE FINANCIAL CRISES OF THE 1990s
Although financial crises have a long history and have recurred
throughout the century, the same two decades that have seen spreading financial liberalization and ever-growing global capital flows have
also witnessed such crises, which imposed serious real costs on the
economies affected. Since the resurgence of these flows after the 1980s
debt crisis, three more financial crises of at least regional importance
have struck. The first occurred in 1992-93, when several currencies in
the Exchange Rate Mechanism (ERM) of the European Monetary System experienced speculative attacks. Italy and the United Kingdom
were forced to abandon the ERM in the fall of 1992 and allow their currencies to depreciate; Sweden, whose currency was effectively pegged
to the ERM currencies, was obliged to follow suit shortly thereafter. A
series of devaluations of several other ERM currencies ensued, and the
ERM exchange rate bands for France and the remaining members had
to be widened in the summer of 1993, to cope with the speculative pressure on their currencies.
The collapse of the Mexican peso in December 1994 touched off the
second crisis. Other Latin American currencies quickly came under
attack through what became known as the tequila effect. The third crisis of the 1990s, the Asian currency and financial crisis that has now
spread to Russia, Latin America, and beyond, was triggered by the
devaluation of the Thai baht in July 1997. (The history and causes of
that crisis are described in detail below.) Although each of these crises
had distinct characteristics and causes, several common elements,
which factor significantly into current debates surrounding the reform
of the international financial architecture, can be identified.




225

Recent Financial Liberalization
In most crisis countries, significant liberalization of international capital
transactions and the progressive elimination of capital controls preceded
the crisis. Italy and France had fully liberalized capital movements in the
years just before the ERM crisis. Mexico had progressively liberalized its
domestic and international financial regime in the early 1990s. Similarly,
several East Asian economies had embarked on financial liberalization,
both domestic and international, over the course of the 1990s.

Semi-Fixed Exchange Rate Regimes
All three crisis episodes occurred under semi-fixed exchange rate
regimes. Each country that fell victim to crisis had attempted to stabilize
the value of its currency with respect to those of its key trading partners.
None, however, had fixed its exchange rate in a rigid way. For example,
exchange rates in the ERM had been permitted to move against one
another within a band (typically plus or minus 2% percent from a central
parity rate), in an arrangement designed as a step toward European
monetary integration. Similarly, the Mexican peso had followed a crawling band against the dollar, which allowed it to escape the very high inflation rates the country had suffered in the 1980s. Finally, the currencies of
several Asian economies were loosely pegged to currency baskets in which
the dollar had an effective weight of at least 80 percent. Although all
these arrangements may have speeded integration into the world system
of trade and finance and helped curb inflation in some episodes, they also,
in the Mexican mid Asian cases, may have hindered the adjustment of
real exchange rates in the face of large trade deficits. The sudden abandonment of relatively fixed exchange rates in time of crisis reinforced negative market expectations, intensifying financial market pressures and
producing severe recessions in the presence of large foreign currencydenominated debts.
The rigidly fixed exchange rate regimes of Argentina and Hong Kong
are organized as currency boards, in which only as much domestic currency is issued as is backed by holdings of U.S. dollars (see Box 7-1 in
Chapter 7). Their exchange rate regimes have successfully withstood
the recent crisis, but at some cost to their economies.

Contagion
In all three episodes, a crisis that began in one country quickly
spread beyond its borders. In some cases the next victims were neighbors and trade partners; in others they were countries that shared similar policies or suffered common economic shocks. At times, as in the
summer of 1998, changes in investor sentiment and increased aversion
to risk contributed to contagion within and across regions. (The causes
of contagion are discussed further in a later section.)




226

Concurrent Banking Crises
The currency crises of the 1990s have often been associated with
banking and financial sector crises. This is most clearly evident in the
Asian and Mexican episodes, but weaknesses among financial institutions also played a role in the ERM devaluations. In Finland and Sweden, banking crises emerged in conjunction with the currency turmoil,
whereas in Italy some segments of the banking system experienced
financial distress. The Asian crisis provides a striking example of the
link between currency and banking crises, underscoring the profound
vulnerability to which fragile financial and banking sectors subject an
economy. The causal links between banking crises and currency crises
are complex and often reciprocal: financial weaknesses may contribute
to a currency crisis, and a currency crisis can exacerbate a financial
crisis by increasing the burden of foreign currency liabilities.

THE ASIAN CRISIS AND ITS GLOBAL
REPERCUSSIONS
THE ASIAN ECONOMIC MODEL
For over two decades, beginning in the 1970s and in some cases earlier, a number of East Asian economies grew at very rapid rates, in a
phenomenon widely hailed as the "Asian miracle." Thirty years ago it
might have seemed that industrialization was a privilege reserved,
with the sole exception of Japan, for the European countries and a few
others where Europeans had settled. The East Asian miracle
economies not only disproved this notion but industrialized far more
quickly than their predecessors had. Starting from 1780 (roughly the
beginning of the industrial revolution), the United Kingdom took 58
years to double its income. The United States and Japan took almost
as long (47 years, starting from 1839, and 35 years, starting from 1885,
respectively). Yet Korea accomplished the same feat in 11 years and
China in just 10 (starting in 1966 and 1977, respectively).
These economies' remarkable success served to enhance living standards, reduce poverty, and expand economic opportunities for multitudes of the region's inhabitants, Perhaps even more impressive,
these economies maintained a more equal distribution of income and
wealth than did many developing countries that lagged behind. East
Asia's success was achieved through a focus on the fundamentals—the
factors that most economists consider critical to economic growth.
These include high rates of saving and investment, sustained investments in education (with particularly high completion rates for basic
education and high literacy), a pronounced work ethic, and an outward
orientation characterized by heavy involvement in international trade




227

and investment (although openness to imports and foreign investment
was in some cases highly selective). The East Asian strategy also
emphasized sound macroeconomic management, including low budget
deficits and inflation rates.
The East Asian recipe for economic success, with its clear focus on
the underpinnings of economic growth, has served and should continue
to serve as an inspiration for countries seeking to escape poverty, the
recent crisis notwithstanding. Indeed, as developing countries around
the world increasingly opted for capitalism over state planning in the
1980s and 1990s, they were not merely reacting against the conspicuous failures of state planning in their own economies and in the former
Soviet bloc; they were also attracted to East Asia's inspiring example.
Their enormous strengths notwithstanding, it is now commonly
recognized that the East Asian economies concealed structural weaknesses, which eventually contributed to the crisis. Arguably, Asian
governments relied too much on centralized state coordination rather
than decentralized market incentives to maintain their progress.
Government favoritism toward selected industries and exports was
widespread, as was protection of domestic industries against foreign
competition. Other practices distorted private sector lending and
investment incentives. For example, relationship-driven banking
(Box 6-2) hindered capital market discipline and flexibility. Financial
institutions in general were often poorly supervised and inadequately
regulated; implicit and explicit government bailout guarantees
fostered moral hazard in the financial sector (as discussed below).
A heavy dependence on bank debt rather than equity (as securities markets in some countries were underdeveloped) led to excessive leveraging
of firms. The activities and balance sheets of corporations and financial
institutions lacked transparency, as reflected in weak accounting and
disclosure standards. Enforcement mechanisms were informal rather
than formal: effective bankruptcy and foreclosure laws were lacking.
Box 6-3 presents a further analysis of the Asian growth model.

A HISTORY OF THE CRISIS AND ITS CONTAGION
In the summer of 1997, financial turmoil in Thailand spread to several neighboring economies with outwardly similar features at similar
stages of development: Indonesia, Malaysia, and the Philippines. This
contagion took the form of declines in both equity and currency markets. Next, Singapore and Taiwan, concerned about the competitive
effects of these four economies' currency depreciations, decided to let
their currencies float rather than resist the speculative pressure building against them. By October the contagion was affecting Hong Kong
(whose return to China that summer had already increased the political uncertainty about its future), putting pressure on the Hong Kong
dollar and sharply depressing local stock markets. The first bout of
truly global contagion then ensued, as stock markets in the United




228

States and Europe fell sharply, and as other emerging market
economies were forced to raise interest rates to prevent a run on their
currencies. The spread of the crisis to Korea and further deterioration
in Indonesia led to a severe and worsening crisis in the winter.
Investor sentiment seemed to improve by March 1998, as the Thai
and Korean currencies stabilized and Korea successfully converted its
short-term bank debt into longer term loans. Also, higher interest
rates and tighter monetary policy in Latin America following the October episode helped stabilize investors' confidence in that region. In
April, however, several negative developments led to a new loss of
investor confidence. Plunging commodity prices, resulting in part from
the deepening recession in Asia, hurt a wide range of commodity
exporters. Oil exporters such as Ecuador, Mexico, Russia, and
Venezuela were hit hard by plunging oil prices. Agricultural exporters
such as Argentina, Australia, Canada, and New Zealand were also
affected, as the crisis in Asia and abundant global supply led to a sharp
fall in agricultural prices. Mineral producers such as Chile and Peru
suffered damage as well.
Violence in May surrounding the collapse of the Suharto regime devastated confidence in Indonesia and again shook confidence in the rest
of East Asia. Currency pressures on economies as far removed as
South Africa, a sharp deterioration of business conditions in Japan,
and the continued fall of the yen added to the pessimism. The yen's
weakness led to concern that China might devalue its currency in
response and that the Hong Kong peg would collapse, causing another
round of currency depreciations in Asia. However, China gave assurances that it would not devalue, and the pegs held. These adverse
developments, however, led to another round of sharp declines in
emerging market equities starting in May.
Financial turmoil spread next to Russia, where the fall in the price
of oil (one of the country's biggest exports) fed a growing current
account imbalance in an economy already weakened by inadequate tax
collection, a large fiscal imbalance financed by short-term ruble debt,
and disappointment at the slow pace of structural reform. The manifestations included a sharp fall in the Russian stock market, speculative pressure on the ruble, and a sharp increase in the interest rate on
ruble-denominated public debt. Despite negotiation in July of an IMF
package aimed at reducing the fiscal deficit, the Russian government
failed to restore confidence. It proved unable to implement its anticrisis program in the face of opposition from the legislature, from powerful business interests, and from advocates of a return to communism.
The deterioration in market conditions culminated in a comprehensive
breakdown in confidence in the first weeks of August.
On August 17 the Russian government, faced with growing losses of
foreign reserves triggered by capital outflows, decided to devalue the
ruble, to restructure its short-term public debt unilaterally in a form




229

Box 6-2.—Market-Based (Arm's-Length) Versus RelationshipBased (Insider) Finance
Financial economists have long distinguished between marketbased and relationship-based financial systems, broadly characterizing the Anglo-American system as the former and citing many
Asian economies as examples of the latter. This generalteatiop can
provide useful insights for understanding Japan's persistent financial problems as well as the crisis in East Asian emerptig ^aarkets.
The details, however, differ widely within Asia, !& Japan thebest
example is the "main bank" relationship that many established
firms traditionally have with their primary lenders, In Aiian
developing countries the relationships that^ underpiimed financial
transactions were often based more generally on pers^iiM or political connections. Loans from a bank to an affiliated firm are called
connected lending; loans guided by the government are called
directed tending.
Although securities markets are more important in marketbased systems, commercial banks are prominent in both systems.
A crucial distinction concerns tile roles that they play^ Iii a maricetbased system, banks are one of many sources of eKtern^Ifinance
for firms. They compete with bond and commercial pabw P^keta,
along with markets for equity, to provide fundstocoinpa^ies. In
such a system, bank loans are typically provided through arai%length market transactions* Loans are contracted for specific
periods, and interest rates are competitively determined on the
basis of independent assessments of risk.
A decade ago, economists commonly emphasized the benefits
that were thought to result from a relationship4>ased system* It
was argued that main banks in Japan, for example, were better able
to distinguish between temporary and fundamental problems when
affiliated firms got into financial trouble. They could therefore continue
to lend to those firms whose problems were only temporary, under
circumstances where impatient, market-based financial systems
would be unable to tell the difference, and therefore could not lend.
It was also argued that relationship banking improved young
firms' access to funds. In market-based systems, competition
that implied material default, and to impose a 90-day moratorium on
private sector payments of foreign liabilities. These decisions led to a
profound financial crisis, which in turn sparked a dramatic spread of
investor pessimism to Latin America and other emerging markets and
a sharp downturn in equity markets in the United States and other
industrial countries. The contagious spread of turmoil from Russia to
Brazil and other Latin American countries arguably signaled a degree




230

Box 6-2.—continued
limited a bank's ability to take chances, since nothing prevented
its competitors from subsequently stealing its customers if business went well. In relationship-based systems, on the other hand,
long-term relationships promised handsome payoffs for banks
from those firms that succeeded.
Some credited this financial system with promoting the Asian
economies'high rates of investment and growth. But along with their
strengths, relationship-based systems also possess weaknesses,
which the Asian crisis has now exposed. Relationship-based systems neglect the information encapsulated in market prices. This
information, the product of numerous independent assessments of
profitability and risk, possibly becomes more important as
economies develop and attractive opportunities for further investment become relatively more scarce. Relationship-based systems
might also foster the corruption and abuse that have become
known as "crony capitalism."
Long-term banking relationships create value when they facilitate the transfer of funds to profitable firms that are either young
or temporarily distressed. Perhaps they are also unavoidable if an
ineffective legal system forces investors to maintain some type of
control to prevent their funds from being misused. They destroy
value, however, when they misallocate resources.
The Asian crisis seems to offer numerous examples of such
misallocation. Borrowers that should have been foreclosed upon,
or at least cut off from further lending, were allowed to continue
borrowing, which increased their losses and those of their
banks. Lack of transparency in financing practices may have
enabled bankers and corporate managers, shielded from market
constraints, to invest in pursuit of personal priorities rather
than in their firm's best interest. It appears, for example, that
some Asian firms, unchecked by external market discipline,
developed excess capacity in industries such as steel and electronics. Many Asian economies are currently struggling to overcome the adverse real consequences of these misguided financial
decisions.
of financial panic, as investors apparently withdrew capital indiscriminately from most emerging market economies regardless of their
strength. This sharp loss of confidence may have partly originated in
the perception that the IMF had few resources left, or that it was not
willing to use them to rescue a country that until then had been
considered "too important to fail." If this is the case, it appears that
investors drew the wrong lesson from the IMF's enforcement of




231

conditionality in the face of unsound Russian macroeconomic policies.
The loss of confidence may also have been partly caused by the perception that other countries might follow Russia down the path of unilateral default, debt moratoria, and capital controls.
Although the major Latin American economies were structurally
much stronger than the Russian economy, investors now sought to
avoid risk everywhere. Emerging market sovereign spreads (Box 6-4)
over U.S. Treasuries rose to about 1,500 basis points (15 percentage
points) by September (Chart 6-2). In all probability this signaled an
Box 6-3.—The Asian Growth Model in
The Asian crisis caught most analysts by surprise. Some had
warned of economic policy flaws in Asia, but few expected them
even to produce a sharp slowdown, and no one predicted the
profound crisis that actually materialized. Until recently many
observers thought that the East Asian countries possessed the
strong economic fundamentals and structural characteristics
necessary for sustained long-run growth.
If structural weaknesses in the Asian economic system lie at the
origin of the crisis, as many observers contend, a natural question
is why the crisis occurred when it did. One hypothesis is that countries pass through natural stages of economic development, and
that the Asian financial system, based on such practices as relationship banking, is better suited to countries in the early stages.
After all, financial intermediation by banks (even in the context of
relationship banking) is a tremendous step to take for countries
where firms are used to financing all investment out of family savings or retained earnings. Relationship banking may mimic the
close ties of extended family lending and thus ease the transition
to a more arm's-length financial system. Moreover, as long as
growth is rapid, high leverage (that is, a high ratio of debt to equity)
is sustainable. But when growth slows, the financial system needs
to adapt, and firms need to reduce their high leverage.
Some slowdown in East Asia's growth was probably inevitable
at some point, after the breakneck growth of the preceding
decades, for the simple reason that economic convergence served
as one of the driving forces of that growth. An economy that starts
out behind the world leaders in income per capita can close part of
the gap over time by growing more rapidly, provided of course such
fundamentals as an outward orientation and investment in physical and human capital are in place. Convergence occurs for two
reasons: the high rate of return on capital in labor-abundant
economies, and the opportunity to emulate the most advanced
technology and management practices of the leaders. But as the




232

extreme rise in investor risk aversion, and large-scale flight from
emerging markets and other risky investments in favor of "safe
havens," notably U.S. Treasury bills. The sharp increase in the preference for liquidity, together with attempts to unwind highly leveraged
positions, added to pressure on the prices of a wide range of risky
assets. As described in Chapter 2, capital markets within industrial
countries, including the United States, were also affected by the flight
to quality: as yields on safe government securities fell, the spread of
high-yield securities (junk bonds) over Treasuries increased sharply.
Box 6-3.—continued
income gap closes, this impetus to growth diminishes. Economies
encounter diminishing returns to capital, limits on labor supply
growth from rural-to-urban migration, and infrastructure con*
straints. Also, as they draw closer to the technological frontier,
they have less to learn from those who have gone before. Japan
had achieved convergence by the 1980s, and Hong Kong and
Singapore by the 1990s. Korea and the others still had some way
to go—a very long way in some cases. Nevertheless, the basic
principle remains that the smaller the remaining gap, the less
the forces of convergence contribute to further growth.
One controversial view is that East Asia's growth from the
beginning had more to do with the rapid accumulation of the factors of production—both labor, through increased labor force participation rates, and capital, due to very high investment rates—
than with growth in the productivity of these factors. Some
studies have found only modest underlying growth rates of multifactor productivity (a measure of increased efficiency in the use
of all factors, resulting in part from technological progress). If
this view is correct, it means that East Asia's high growth rates
were not sustainable in the long run, given that the rate of
employment growth must at some point decline, and given an
expected reduction in the rate of investment. However, even this
view implies at worst a gradual slowdown of growth, not the sudden and severe crisis that occurred.
The answer to why the East Asian crisis struck when it did is
thus probably a complex one. As discussed below, it appears that,
around mid-1997, the factors working to produce an eventual slowdown in growth interacted in unfortunate ways with existing
financial sector weaknesses, excessive corporate leverage, financial fragility resulting from poorly designed capital market liberalization, foreign indebtedness, a slowdown in export markets, worsening terms of trade, and the development of overcapacity in many
sectors. The crisis was the result.




233

Box 6-4.—Sovereign Spreads in Emerging Markets
The Asian crisis has introduced into popular parlance a number
of terms formerly encountered only in arcane financial discussions
among bankers and economists. One of these is "sovereign spread."
A simple definition of sovereign spread is the difference between
yields on bonds issued by the government of one country (for
example, an emerging market country) and those (safe) bonds
issued by the government of a major industrial country. The yield
in question is the yield to maturity, or the rate of return earned by
holding the bond until it matures (including all interest and principal payments), and the bonds being compared must be of the
same maturity and currency denomination for the comparison to
be valid.
Using the prices of bonds issued by governments in emerging
market economies, one can measure the implicit risk premium
that the market demands to compensate for the extra default risk
entailed in holding a bond from a particular emerging market.
(Default risk is the risk that the debtor will fail to pay all principal
and interest on its obligation on time. The bonds of the major
industrial country governments are considered to carry little or no
default risk.) The sovereign spread on foreign currency-denominated bonds measures only the default risk of a country's obligations—not currency risk, because payments are to be made in
foreign currency.
During the periods of extreme market turbulence following the
Mexican peso crisis in 1994 and the Russian default in 1998, sovereign spreads rose sharply. In the latter episode these spreads
reached about 1,500 basis points by mid-September (Chart 6-2).
Estimates of the default probabilities incorporated in emerging
market bond prices can be derived fairly easily from their sovereign spreads, given the assumption that U.S. government bonds
are default risk-free. At their height, these spreads implied very
high default probabilities for many countries, leading to the conclusion either that markets were exceptionally pessimistic or that
investors were becoming exceedingly risk averse.
A second interesting comparison relates to the difference in
yields on dollar- and local currency-denominated bonds. As long as
the default risk on these bonds is the same, this differential measures the market's assessment of currency risk, that is, the risk
deriving from changes in the international value of the currency.
Interestingly, even under most "fixed" exchange rate regimes, a
positive currency risk premium can be observed, suggesting that
investors expect a devaluation at some point or that they require
an implicit "insurance" premium to compensate for that possibility.




234

Chart 6-2 Perceived Risk and the Spread on Emerging Market Bonds
The risk premium on emerging market bonds shot up between March and September
1998. Spreads subsequently declined, then rose again following Brazil's devaluation.
Stripped spread over Treasuries (basis points)
2000

Brazil devalues real
(January 1999)
1500

Mexican peso crisis
(December 1994)

East Asia crisis spreads
to Korea
(November 1997)

1000

500

*U/

1993

V *L

1994

1995

1996

1997

I

Russia defaults
(August 1998)

1998

Source: J.P. Morgan Emerging Markets Bond Index.

Even the spreads between Treasuries and high-grade corporate bonds
rose to some extent, reflecting the generalized increase in risk aversion.
The huge losses and near-collapse of a prominent hedge fund contributed to the panic. By early October there were hints of a generalized
global credit crunch: rising spreads on the entire range of bond instruments from high-quality corporate bonds to junk bonds and emerging
market sovereign instruments; an interruption of access to international capital markets for most emerging economies; a drying up of bond
financing in all emerging markets and a shrinkage in new bond issues
in industrial countries; evidence of a tightening of lending standards by
commercial banks in the United States; a slowdown in reported
earnings growth; and a contraction in stock markets worldwide.
However, by the middle of November, conditions in international and
domestic capital markets had improved noticeably, thanks to a number
of positive developments:
The Administration, as discussed in Chapter 1, took the lead in
proposing a comprehensive set of steps to contain and resolve the crisis. These proposals included measures to support growth in the
industrial countries, as well as policy reforms in emerging markets to
promote their recovery; creation of a precautionary facility within the
IMF to support countries subject to speculative pressures despite
good economic fundamentals; measures to support the accelerated
systemic restructuring of Asian banks and corporations; significant
increases in the support by multilateral financial institutions of




235

social safety nets in the crisis countries; increases in trade financing
to the affected countries; and reform of the international financial
system architecture to make it less crisis prone.
• On October 30 the leaders of the Group of Seven (G-7) nations
(Canada, France, Germany, Italy, Japan, the United Kingdom, and
the United States) issued a joint statement affirming their strong
commitment to growth and the resolution of the crisis; endorsing
the U.S. proposal for an enhanced IMF facility to provide contingent
short-term lines of credit for countries pursuing strong, IMFapproved policies; presenting concrete proposals to implement initial reforms to the system; and laying out areas for further consideration in the effort to strengthen the international financial
architecture. The G-7 finance ministers and central bank governors
issued a more detailed statement that same day.
• The Federal Reserve reduced the Federal funds rate three times: at
the end of September, in mid-October, and again in mid-November.
These moves helped restore confidence and liquidity. Interest rate
reductions in a number of other industrial countries, including
Canada, Japan, and most of the European countries, significantly
eased monetary conditions in the world economy.
• In October the Congress approved an $18 billion funding package
for the IMF, opening the way for about $90 billion of usable
resources to be provided by all IMF members to the liquiditystrapped institution.
• In November, negotiations leading to an IMF-led support and stabilization package for Brazil were concluded. The G-7 and 13 other
countries agreed to support this country's adjustment efforts.
• Japan passed legislation to address the problems of its banking sector, and the Japanese government proposed a supplemental fiscal
package, restoring some confidence in Asian markets.
• The yen appreciated sharply in October, reducing the risk of a devaluation by China that might have led to another round of devaluations in Asia. The stronger yen will also stimulate the exports of
other East Asian countries to Japan and third-country markets,
although it will raise debt-service costs for East Asian countries that
have large amounts of yen-denominated debt.
• In mid-November the leaders of the member nations of the AsiaPacific Economic Cooperation embraced a comprehensive strategy to
accelerate recovery and restart growth. They undertook commitments
to pursue prudent, growth-oriented macroeconomic policies, strengthen
domestic financial institutions, and further liberalize trade and
investment. The crisis-affected countries reaffirmed the importance of




236

restructuring the corporate and financial sectors to help revitalize the
private sector. These countries also committed themselves to building
and strengthening social safety nets to protect the poor and economically dislocated, with support from the multilateral development
banks and the international community.

THE CAUSES OF THE CRISIS
Identifying the cause or causes of the Asian crisis has engendered
heated debate. Countries that experienced currency and debt crises in
the past, such as the Latin American countries in the 1980s, typically
shared several common characteristics. These included large budget
deficits and a large public debt, high inflation as a result of monetization of those deficits, slow economic growth, and low saving and investment rates. (A deficit is said to be monetized when the central bank
finances it by printing additional currency.) In Asia, in contrast, most
of the economies engulfed by the crisis had enjoyed low budget deficits,
low public debt, single-digit inflation rates, rapid economic growth, and
high saving and investment rates.
The absence of the macroeconomic imbalances typical of past crises
has led some to argue that the Asian crisis was not due to problems
with the economic fundamentals. These analysts contend that the
crisis represented an essentially irrational but nevertheless self-fulfilling panic, akin to a bank run, fueled by hot money and fickle international investors. (See Box 6-5 for a discussion of domestic bank runs.)
Although speculative capital flight certainly exacerbated the crisis, it
is now commonly agreed that, along with their many strong fundamentals, the East Asian crisis economies also shared some severe
structural distortions and institutional weaknesses. These vulnerabilities
eventually led to the crisis in the summer of 1997.
First, connected lending and, at times, corrupt credit practices rendered the financial sectors of the crisis economies fragile. Loans were
often politically directed to favored firms and sectors. In addition, regulation and supervision of banking systems were notably weak, and
implicit or explicit guarantees that the government would bail out
financial institutions in trouble created moral hazard (see Box 6-5).
These weaknesses contributed to a lending boom and overinvestment
in projects and sectors, especially real estate and certain other sectors
not exposed to international competition, that were risky and had low
profitability; excess capacity also accumulated in some sectors whose
goods were internationally traded. Before the crisis, speculative purchases of assets in fixed supply fed an asset price bubble in some
economies, with equity and real estate prices rising beyond levels warranted by the fundamentals. Poor corporate governance and what has
come to be called "crony capitalism" fed the distortions in the system
and fueled the investment boom. Domestic and international capital




237

Box 6-5.—Moral Hazard in Financial Institutions
Moral hazard is a key concept in the economics of asymmetric
information, the study of transactions in which buyers and sellers
differ in their access to relevant information. In general terms,
moral hazard occurs whenever economic actors covered by some
form of insurance pursue riskier behavior as a consequence.
Examples of moral hazard abound: insured homeowners, for
instance, are more likely to build homes in a flood plain or in areas
prone to wildfires, and less likely to install alarms and antitheft
systems; insured drivers might drive more recklessly. If insurers
can observe such behavior, they can penalize it through higher
premiums. But if they cannot, they may try to regulate their
clients' behavior and make sure that the client bears a portion of
any losses. Sometimes these strategies are enough to mitigate
moral hazard, but in extreme cases moral hazard may cause insurance markets to disappear entirely.
Banks are subject to a rather unique risk that both requires
insurance and creates moral hazard. The risk is that a bank's
depositors might suddenly, with or without good reason, lose confidence in the institution and seek to withdraw their funds en
masse. Given that most of the assets of any bank are tied up in
loans to clients, even a well-managed bank will quickly exhaust its
cash reserves in the face of such a run. And any attempt to liquidate its other assets prematurely will diminish their value. Thus,
even strong banks can fail if a bank run occurs, and the failure of
one bank can cause runs on others.
Banks, of course, play a pivotal role in all modern economies, not
only through their intermediation between saving and investment,
but also through their operation of the economy's payments system.
liberalization may have aggravated the original distortions by allowing
banks and firms to borrow more money at lower rates in international
capital markets.
In Thailand, restrictions on entry into banking led to the growth of
unregulated, nonbank finance companies, whose excessive borrowing
intensified the real estate boom. Liberalization of international capital
restrictions, for example through the establishment of the Bangkok
International Banking Facility, enabled Thai banks and firms to
borrow heavily abroad, in foreign currency, at very short maturities.
No fewer than 56 of these heavily indebted finance companies were in
distress even before the crisis and were eventually closed after the
crisis broke.
In Korea, excessive investment was concentrated among the
chaebols, the large conglomerates that dominate the economy. The




238

Box 6-5.—continued
Most governments therefore provide both a system of deposit insurance, to discourage bank runs, and lender-of-last-resort facilities, to
assure banks ample access to liquidity in emergencies. In addition,
governments frequently rescue troubled financial institutions that
are deemed "too big to fail," that is, whose failure could do damage to
the broader financial system or provoke a run on other institutions.
By reducing the risk faced by banks, however, such insurance
mechanisms create moral hazard. With their loans largely funded
from government-insured deposits, banks have an incentive to
gamble by purchasing excessively risky assets. When things turn
out well, shareholders reap the rewards; if things turn out badly,
the government bears most of the cost. Bank depositors are similarly subject to moral hazard: if deposit insurance protects them
from loss in the event their bank fails, they have little incentive to
monitor the bank's risk taking.
Insurance against bank runs thus comes at the inevitable
expense of increased moral hazard. Even so, its provision may still
be justified. What is clear, however, is that either implicit or explicit government guarantees call for effective prudential supervision
and regulation of banks and the maintenance of strong capital
adequacy standards to mitigate the effects of moral hazard.
In East Asia, implicit and explicit government guarantees were
coupled with inadequate prudential supervision and regulation of
banking systems. Perceived government guarantees may have
encouraged foreign investors to lend more to Asian banks and
monitor their loans less carefully than they would have otherwise.
Moral hazard thus contributed to Asian banks* excessive borrowing
from abroad and excessively risky investing at home.
chaebols' control of financial institutions, together with government
policies of directed lending to favored sectors, led to overinvestment in
such industries as automobiles, steel, shipbuilding, and semiconductors. By early 1997, well before the crisis hit Korea, 7 of the 30 main
chaebols were effectively bankrupt.
In Indonesia, a large share of all bank credit consisted of directed
credit, channeled to politically privileged firms and sectors.
Although Indonesia had already suffered a banking crisis in the
early 1990s, such practices remained widespread. Moreover,
most of the borrowing was in foreign currency terms, compounding
debtors' inability to repay when the local currency depreciated. A
large fraction of foreign banks' lending to Indonesia was not
intermediated through the domestic banking system but went to
firms directly.




239

Empirical studies confirm that, by the eve of the crisis, the return to
capital had fallen sharply in East Asia as the result of excessive investment. Studies document a rapid buildup of fixed assets throughout
Asia between 1992 and 1996, with particularly rapid growth in
Indonesia and Thailand. With most of this growth financed by debt
(especially in Korea and Thailand), many corporations were already
heavily leveraged by 1996, well before the currency crisis increased the
burden of that portion of the debt denominated in foreign currency. At
the same time, moderate to low profitability severely impaired the
ability of many Asian firms to meet their interest obligations. In Korea,
the average debt-to-equity ratio of the top 30 chaebols was over 300
percent by the end of 1996; by 1997 the return on invested capital was
below the cost of capital for two-thirds of the top chaebols.
In spite of high saving rates, the investment boom in East Asia led to
large and growing current account deficits, financed primarily through
the accumulation of short-term, foreign currency-denominated, and
unhedged liabilities by the banking system. Exchange rate regimes
entailing semi-fixed pegs to the dollar exacerbated the problem in two
ways. First, as the U.S. dollar appreciated between 1995 and 1997, so
did the semi-pegged currencies. This worsened the trade deficits of
those economies whose currencies were closely following the dollar.
Second, the promise of relatively fixed exchange rates led borrowers to
discount the possibility of a future devaluation, and thus to underestimate the true cost of foreign capital. Also, although budget deficits
were low in most of the region, the implicit and explicit government
guarantees of a bailout of the financial system in a crisis implied large
and growing unfunded public liabilities, which only emerged once the
currency crisis had triggered a wider banking crisis.
Disturbances originating outside of East Asia made these economies
still more vulnerable to crisis. One such development was, for several
economies, a slowdown of export growth in 1996 and a worsening of
the terms of trade, partly associated with a slump in the world price of
semiconductors. Another was the persistent stagnation of the Japanese
economy throughout the 1990s. The resulting weakness of the yen
caused an appreciation of those Asian currencies that were effectively
pegged to the dollar. Yet another exogenous event was the emergence
of China as a major regional competitor.
In 1997 the bubble burst. Stock markets dropped, and the emergence of widespread losses, and in some cases outright defaults,
revealed the low profitability of past investment projects. Nonperforming loans, already on the rise before the currency crisis, escalated, threatening many financial institutions with bankruptcy. In
addition, the firms, banks, and investors that had relied heavily on
external borrowing were left with a large stock of short-term, foreign
currency-denominated, unhedged foreign debt that could not be easily
repaid. The ensuing exchange rate crisis intensified this problem, as the




240

fall in local currencies dramatically increased the domestic currency
value of the foreign-denominated debt, unleashing further financial
pressures on banks and firms. The free fall of currencies was intensified
by the sudden rush of firms, banks, and investors to cover their previously unhedged liabilities. Thus, accelerating depreciation aggravated
the original foreign currency debt problem, creating a vicious circle.
Concern among investors about the commitment of governments to
structural reforms heightened their uncertainty about policy, contributing to massive capital outflows. Although problems with the fundamentals likely triggered the crisis, currency and stock markets may
also have overreacted, with panic, herd behavior, and a generalized
increase in risk aversion producing a sudden reversal of capital flows,
exacerbating the crisis.
The sharp reversal of capital flows to East Asia in the second half of
1997 is clearly evident in the data. Table 6-2 shows that net private
flows to five Asian crisis countries (Indonesia, Korea, Malaysia, the
Philippines, and Thailand), which had averaged $90 billion per year in
1995-96, experienced a dramatic turnabout in 1997 to a net outflow of
$1 billion. This sharp reversal, amounting to about 10 percent of the
combined GDPs of these countries, took place entirely in the
second half of the year, as foreign investors fled and international
banks sharply contracted their short-term loans. Commercial banks
TABLE 6-2. —Five Asian Economies: External Financing
[Billions of dollars]
1998

Item

CURRENT ACCOUNT BALANCE

1996

1995

-410

-546

-263

1999

(estimated)

1997

(projected)

585

432

815

1006

288

-5

-12

790

103.2

-1.1

-28.3

-48

Equity investment, net
Direct equity net
Portfolio equity, net

15.9

19.7

11.0

13.9

-3.2

8.5
64
2.1

187
142
4.5

Private creditors net
Commercial banks net
Nonbanks, net

63.1

83.5

-23.4

653

-4.7
-256
21.0

-36.8

532
9.9

-350
-1.7

-188
-4.6

External financing, net
Private flows, net

49

58

18.2

3.6
68

25

-2.6

299

27.8

-.3
29

-2.0

22.1

21.6

-6

79

Resident lending/other net

-26.5

-26.8

-35.0

-16.9

-14.9

Reserves excluding gold 1

-140

-193

325

-41 1

-270

Official flows, net
International financial institutions
Bilateral creditors

1

Minus sign indicates increase.
Note. Countries are Indonesia, Malaysia, Philippines, South Korea, and Thailand.
Detail may not add to totals because of rounding.

Source: Institute of International Finance.




241

61

35
-2.0

55

withdrew $26 billion in 1997. Although equity investments also lost
value in 1997, the decisions by international commercial banks not to
roll over their loans to Indonesia, Korea, and Thailand worsened the
financial crisis and the currency collapse. It is estimated that net private outflows in 1998 were even larger than in 1997, amounting to
some $28 billion, driven again by large-scale bank withdrawals.
The drastic reversal of capital flows required a wrenching adjustment of the current accounts of the affected countries. Deficits in the
current account (the aggregate of goods and services trade, investment
income, and transfer transactions) can only be sustained as long as foreign lending is available to finance them. The withdrawal of that
financing therefore resulted in higher domestic interest rates, depreciated currencies, and a sharp economic contraction, producing a substantial decline in imports and an abrupt about-face in the current
account from deficit toward surplus. The aggregate current account
balance of the five crisis countries moved from a deficit of $55 billion in
1996 to one of only $26 billion in 1997 (with most of the adjustment in
the second half of the year) and an estimated surplus of $59 billion in
1998. As private capital flows have fallen sharply, the role of financing
external obligations has been transferred to the official sector (the IMF
and other multilateral as well as bilateral official creditors) and to foreign reserves. Whereas in 1996 the five Asian countries made small
net transfers to official creditors, in 1997 and 1998 they received net
official flows of $30 billion and $28 billion, respectively. Moreover,
whereas in 1995 and 1996 net private inflows in excess of current
account imbalances led to sharp increases in the five countries' foreign
exchange reserves, the turnaround of capital flows in 1997 led to a loss
of reserves equaling $33 billion.
The fundamentals in the crisis countries and the policies they followed thus go a good way toward explaining the reversal of capital
flows in 1997. But the size of those flows and their concentration in the
second half of 1997 suggest that, in addition to the debtors' excessive
reliance on short-term bank debt, investor flight, especially by commercial banks, contributed to worsening the crisis. Calls for greater
private sector involvement in crisis resolution (as proposed, for example, in the reports of the G-22 working groups, discussed in Chapter 7)
recognize that the private sector needs to be involved in preventing
financial crises and, should crises occur, needs to contribute constructively to their containment and orderly resolution. Indeed, the Korean
crisis eased in early 1998 when commercial banks agreed to roll over
about $20 billion in loans to Korean banks by turning them into mediumterm loans.

THE CAUSES OF CONTAGION
Contagion, or the spread of market dislocations from one country to
the next, has been observed in the behavior of exchange rates, stock




242

markets, and the sovereign spreads of emerging market economies.
Some observers interpret this contagion in the same way they do the
crisis itself, namely, as proof that markets are irrational and prone to
unjustified panic. Various explanations based on economic fundamentals
can also be adduced, however.

Common Shocks
Contagion may be due to common economic shocks. For example,
falling commodity prices hurt commodity-exporting countries. This can
explain why the same shocks affected countries as distant from each
other as Canada, Chile, Indonesia, Russia, and New Zealand.

Trade Linkages
When one country devalues its currency, its competitive position
improves relative to that of its major trading partners. The trading
partners' currencies may then experience pressure as speculators recognize that their trade deficits are likely to rise. Another channel of
contagion via trade occurs through income effects: a downturn in
Japan depresses Asian exports to Japan, and vice versa. Trade linkages fostered the spread of the currency crisis within East Asia in
1997. Evidence suggests that contagion is related to the strength of
trade links and regional factors.

Competitive Devaluations
Contagion may also have resulted from the prospect, or simply the
fear, of competitive devaluations among countries competing in thirdcountry markets. For example, the first wave of currency declines in
Asia in the summer of 1997 worsened the cost competitiveness of other
economies throughout the region that initially maintained their nominal exchange rates fixed. This led to attacks on many of these currencies. Concerns about loss of competitiveness help explain, for example,
the decisions of Taiwan and Singapore to allow their currencies to fall
as the other regional currencies were depreciating. The weakness of
the yen in 1997 and much of 1998 may also have provoked fears of
competitive devaluations in the region.

Other Real and Financial Linkages
Other links between countries' real and financial sectors may also
serve as a conduit for contagion. If one country invests in and lends
heavily to another, bad economic news in the latter will upset markets
in the former. Pressures in the financial and currency markets of Hong
Kong, Korea, and Singapore, for example, were related to the fact that
these economies had heavily lent to, invested in, and traded with firms
in Indonesia and the other crisis economies. Losses of this nature
also affected banks and other financial firms in Japan, Europe, and
the United States that had invested in East Asia, Russia, and Latin




243

America, and these linkages partly account for the contagion to
industrial countries' financial markets.
Imperfect Information and Investor Expectations
Yet another channel of contagion involves alterations in investors'
perceptions concerning common structural conditions in different
economies or likely policy responses. For example investors' belief in
the strength of the Asian economic model may have changed when one
of the star performers stumbled. The failure of financial institutions in
one country may lead investors to believe, in the absence of better
information to the contrary, that institutions in similar countries in the
same region might be facing the same problems. Similarly, the unwillingness or inability of several Asian economies to defend their currencies more aggressively may have altered investors' views concerning
the policy preferences of other economies in the region.
Contagion may also have resulted as investors changed their assessments of the odds of official bailouts. In mid-August 1998, Russia
decided to devalue its currency, default on its debt, and impose
exchange controls. Although Russia had been considered the classic
example of a country deemed too important to fail, its inability to meet
the conditions of its IMF program and its policy actions led to the
interruption of further official assistance. These events shook international investors' confidence and, rightly or wrongly, increased their concern that other emerging markets might follow similar policies or
might not be bailed out. Spreads on emerging market sovereign instruments had not previously priced in this possibility, and the resulting
contagion to Brazil and the rest of Latin America was rapid and sharp.
Market Illiquidity
Some large, highly leveraged financial institutions (including some
hedge funds) lost money when Russia defaulted. They then, in effect,
faced margin calls that forced them to liquidate their positions in
other markets, providing yet another avenue of contagion. In markets
that are imperfectly liquid, such sales will force down prices. The
phenomenon thus points to the role played by market illiquidity in
propagating contagion.
Shifting Risk Aversion and Investor Sentiment
The explanations of contagion just outlined can be categorized as
involving rational assessments on the part of market participants,
based either on the actual fundamentals or their perceptions thereof.
Other hypotheses advanced to explain the phenomenon are based on
"irrational" investor behavior. Some argue that, as volatility in financial markets increased, investors simply withdrew en masse, without
distinguishing among emerging markets according to their fund
amentals. Phenomena such as financial panic, herd behavior, loss of




244

confidence, and a generalized increase in risk aversion may indeed
have played some role in the spread of the crisis in 1997-98 within
Asia, from Asia to Russia, from Russia to Latin America and other
emerging markets, and eventually to G-7 capital markets.
One indication of increased risk aversion among investors is the
sharp increase in sovereign spreads in the summer of 1998 (see Box
6-4). Explaining so large an increase in spreads in many countries
without resort to increased risk aversion requires the unlikely assumption that the perceived probability of sovereign defaults had risen to
very high values in many emerging markets. For example, the sharp
increase in spreads experienced by Argentina, whose probability of
default was surely not extremely high, provides evidence of an increase
in risk aversion.

THE POLICY RESPONSE TO THE CRISIS
THE ROLE OF THE INTERNATIONAL COMMUNITY
The international community (chiefly the IMF, the World Bank,
the Asian Development Bank and the G-7) moved quickly to stem
the spreading financial crisis. The United States encouraged the
rapid development of financial stabilization packages to respond to
requests for support, first from Thailand in July 1997 and later from
Indonesia and Korea. As a condition for financial assistance, the
IMF has generally required substantial economic reforms, including
banking sector restructuring and, initially, fiscal discipline and the
maintenance of high interest rates to curb capital outflows and currency attacks. The objective of these programs has been to restore
investor confidence by tackling the root causes of the crisis in each
country. For this reason, the programs went beyond addressing
major fiscal, monetary, or external imbalances, and sought to
strengthen financial systems, improve government policy making
and corporate governance, enhance transparency of policies and economic data, restore economic competitiveness, and modernize the
legal and regulatory environment. The IMF's practice of making its
lending dependent on such policy programs, which it continues to
monitor and enforce as funds are being disbursed, is termed "conditionality." The IMF makes every effort to work with countries to
identify reforms consistent with their circumstances, and the conditions negotiated can be altered over time if the economy does not
respond as expected.
In the Asian crisis, the IMF-supported programs evolved as the
dimensions of the crisis became clearer. The Indonesian case
provides a striking example. The initial IMF package of October
1997 required strict fiscal discipline. In June 1998 a renegotiated
agreement allowed the country to run a budget deficit of as much as




245

8.5 percent of GDP in 1998. Indonesia's economic performance had
deteriorated, as policy uncertainty, political turmoil, and violence
worsened the economic outlook through the summer of 1998. As a
result, budget deficits had automatically risen. The IMF recognized
that, in this context, the additional fiscal stringency needed to
counter such a passive deterioration of the budget deficit would
prove counterproductive.
In those countries that implemented IMF policy reforms most assiduously, particularly Korea and Thailand, the stabilization packages
were successful in calming financial markets and creating the basis for
growth to resume. A measure of financial stability returned in these
countries in 1998 as the packages were implemented. Both countries
saw their currencies appreciate in the first half of 1998 after sharp
drops in 1997; domestic interest rates fell back to precrisis levels by
the summer; trade balances improved substantially; and foreign
reserves began to increase again. The financial crisis produced severe
real consequences in both countries, as economic activity dropped
sharply in 1998 and recessions began. However, by the late fall of 1998
some signals suggested that both economies may have bottomed out
and that economic recovery might start in 1999. In particular, both
economies saw an increase in real exports and some tentative signs of
a recovery in economic activity.

THE MOTIVATION OF THE IMF PROGRAMS IN ASIA
The severity of the Asian crisis has led some critics to challenge the
IMF's approach and the wisdom of the measures that it imposed.
Several criticisms can be distinguished.

Structural Reforms
One criticism relates to the breadth of the restructuring efforts that
the IMF required. Critics contend that the IMF has intruded excessively in the domestic affairs of crisis countries by insisting on structural reforms, which lie beyond its traditional competence in the area
of macroeconomic adjustment. However, an effective rescue strategy
had to address the factors responsible for the crisis, and these were primarily structural rather than macroeconomic. IMF lending would have
served little purpose if the weaknesses in the financial sector (ranging
from poor bank supervision and regulation to murky relations among
governments, banks, and corporations) were not addressed. Similarly,
improved corporate governance and an end to crony capitalism, on
which the IMF insisted, would help countries avoid future crises.
Market analysts had made it plain that halfhearted reform efforts
would do little to restore market confidence.
The IMF's focus in the Asian crisis on structural reform, rather than
only on macroeconomic issues, represents neither an unprecedented
expansion of its domain nor an unwarranted intrusion into areas




246

beyond its competence. The IMF's approach to crisis management has
always evolved over time in response to the changing problems faced
by the world economy. For example, after 1973 the IMF turned its
attention from the balance of payments problems of the industrial
countries, which by then had abandoned fixed exchange rates, to the
problems of developing countries, many of which were newly independent. Similarly, it adopted new approaches in response to the international debt crisis of the 1980s and adapted its policies to aid the transition of the former Soviet bloc countries to market economies after
1990. It is appropriate and desirable that an international agency
adapt and evolve in response to developments in the world economic
system.

The Prescription of Tight Monetary Policies
A second criticism relates to the IMF's monetary policy conditions, in
particular its insistence on high interest rates to limit currency depreciation. Critics contend that high interest rates stifle growth and lead
to the bankruptcy of otherwise viable firms. The logic of the IMF's high
interest rate strategy was to contain the extent of currency depreciation. Like high interest rates, a plummeting currency in countries
with large net external liabilities also stifles growth, by increasing the
debt burden of banks and other firms whose debts are denominated in
foreign currencies. The result is financial distress, bankruptcy, and
economic contraction. Arguably, the failure of Malaysia and Indonesia
to raise interest rates sufficiently following the run on the Thai baht
may have been responsible for the destabilizing depreciations of their
currencies that followed. Moreover, the surge in Indonesia's inflation
rate reminds us that a loose monetary policy can rapidly ignite
inflation expectations.

Restrictive Fiscal Policies
A third criticism is that the fiscal policy requirements in the IMF
plans were unnecessarily strict. At the onset of the crisis, the Asian
countries under attack were running small budget deficits or even fiscal surpluses and had achieved relatively low ratios of public debt to
GDP. A loosening of fiscal policies as soon as the crisis broke would
most likely have raised doubts about policymakers' commitment to
reduce outstanding current account imbalances, jeopardizing the credibility of their plans. Also, even though fiscal deficits and public debt
were typically low before the crisis, the crisis itself changed that picture: the projected fiscal costs of financial bailouts in several Asian
countries were estimated in the range of 20 to 30 percent of GDP.
Extra public liabilities of this magnitude translates into a permanent
increase in the domestic interest bill paid by Asian governments of 2 to
4 percent of GDP per year. The IMF's fiscal plans, which were negotiated on a country-by-country basis, were targeted to raise the neces-




247

sary revenues to meet these extra interest costs. They were not just
fiscal discipline for fiscal discipline's sake.
However, when recessions in the crisis countries materialized during
1998, the IMF progressively loosened its fiscal conditions to permit fiscal deficits on cyclical grounds and to accommodate programs to
address the social consequences of the crisis. Like those of other countries, the economies of the crisis countries benefit from the use of fiscal
policy as a counterweight to recession. It must be acknowledged, too,
that the year's revelations about the size and depth of the recessionary
effects of the crisis surprised not only the Asian governments and the
IMF, but also the vast majority of country analysts.

Moral Hazard
Not all the IMF's critics claim that its measures have been too austere. Indeed, some have argued that the generosity of the IMF's rescue
packages creates moral hazard, by leading international investors to
lend carelessly and inducing domestic governments to engage in risky
policies in the expectation that they would be insulated from the
adverse consequences of their decisions by international assistance.
However, several objections can be raised against the view that the
expectation of an IMF bailout contributed importantly to the crisis,
and against the overly simplistic view that the IMF in fact bailed out
all investors in Asia. On the borrower side, it is hard to imagine that
the availability of international support in the event of a crisis does
much to induce moral hazard on the part of governments. Governments have strong incentives to avoid both the economic turmoil that a
crisis produces and the strict and politically unpopular conditions that
come with IMF support. Moreover, on the lender side, a majority of private creditors, especially bondholders and equity investors, have sustained huge losses even where official assistance was provided. By the
end of 1997, foreign equity investors had lost nearly three-quarters of
their holdings in some Asian markets. Only commercial banks were
spared, and that only partially. For example, although foreign banks
operating in Korea demanded and got public guarantees on bank loans
as a precondition for rolling over existing loans, the conditions for
these rollovers entailed a burden on these creditors. Their short-term
loans were converted into medium-term loans at interest rates only a
few hundred basis points above U.S. Treasury rates. Finally, although
some have claimed that the Mexican rescue package in 1995 raised
expectations of future bailouts and thus encouraged the later surge of
capital flows to Asia, no direct evidence has been adduced to support
this theory.
Even if these moral hazard concerns were judged to have some validity, they would still need to be balanced against the heavy economic
and human costs of inaction. Failure of the international community to
respond to a crisis, leaving countries and creditors to sort out their




248

debts on their own, could well result in extraordinary costs all around.
A lesson from the debt crises of the interwar period and the 1980s is
that an official hands-off strategy requires that debtors and creditors
engage in complex negotiations over a long period. During that time
access to international markets is curtailed, long-term growth is drastically reduced, and the human toll may be exorbitant. Also, the experience of the 1990s suggests that highly interdependent economies can
be subject to the rapid transmission of speculative waves of financial
panic across regions. Therefore failure to address a local crisis with an
appropriate program of international assistance, restoring market confidence promptly, may greatly increase the chances of a systemic chain
reaction.

U.S. SUPPORT OF IMF FUNDING
Since the crisis began, the United States has supported the IMF's
role in extending financial support to crisis countries on a conditional
basis. However, as the crisis progressed, it became apparent that it
threatened even those countries that had made great progress in
implementing sound macroeconomic and structural policies and had
worked to strengthen the fundamentals of their economies. To deal
with such threats, the United States was joined by the other G-7 countries in proposing an enhanced IMF facility to support countries with
good economic fundamentals and sound, IMF-approved policies, to
help them fight off contagion. This initiative builds on the establishment, in late 1997, of a new IMF facility to provide large-scale financing in exceptional circumstances, at shorter maturities and higher
interest rates than under normal IMF financing.
The United States also recognized that if the IMF is to continue to
play its critical role in countering contagion, its resources had to be
expanded. With its nearly worldwide membership, broad experience,
and sophisticated skills in financial crisis management, the IMF is the
proper organization to take the lead in handling such episodes.
Through the IMF, moreover, the United States succeeds in leveraging
its own contributions toward crisis resolution. This Administration
recognized that the United States could not expect to exert leadership
in resolving the crisis unless it met its own fair share of the obligations
of all IMF members. Therefore, the President requested, and the Congress agreed last year, to provide $18 billion in much-needed new
funding to the IMF. Of this amount, $14.5 billion represents the U.S.
share of a quota increase applying to all IMF members. The remaining
$3.5 billion represents the U.S. contribution to a new backup source of
financing called the New Arrangements to Borrow (NAB).
Many observers have misunderstood the consequences of IMF funding legislation for the Federal budget. Corresponding to any transfer to
the IMF under the U.S. quota subscription or the NAB, the United
States receives a liquid, interest-bearing claim on that institution,




249

which is considered a monetary asset. Thus, funds provided to the IMF
are not treated as outlays in the Federal budget.
The President urged the world's major economies to stand ready to
activate the $15 billion remaining in the IMF's existing emergency
fund—the General Arrangements to Borrow (GAB)—to ensure the
IMF's continued ability to support reform and fight contagion. The
approval of the NAB doubled these emergency funds. Under the NAB,
as under the GAB, IMF members whose currencies are relatively
strong will stand ready to lend to the IMF when supplementary
resources are needed, to forestall or cope with an impairment of the
international monetary system, or to deal with an exceptional situation that threatens the system's stability. The resources available to
the IMF under the GAB and the NAB combined will amount to as
much as $48 billion. The NAB was activated shortly after it entered
into effect on November 17,1998, to help finance the IMF arrangement
for Brazil, which its executive board approved on December 2.

NEW INITIATIVES TO RESTORE GROWTH IN EAST ASIA
In addition to supporting the IMF, the United States has recognized
the need to do more to help crisis countries get back on their feet, to
restore growth, and to mitigate the suffering inflicted on so many
people in the countries affected.
The Asian Growth and Recovery Initiative, announced jointly by the
United States and Japan at the summit of APEC leaders in Kuala
Lumpur in November of last year, includes innovative financing
schemes aimed at accelerating bank and corporate restructuring in the
crisis-afflicted economies of East Asia. In Indonesia, Korea, and Thailand, for example, the combination of initially high interest rates and
illiquidity has led to harsh recessions and a vast overhang of bad debt.
Corporate debt-to-equity ratios, which as we have seen were already
very high before the crisis, became unsustainable once the crisis
struck, as a result of real currency depreciation and the burden of high
real interest rates. When highly leveraged companies cannot service
their debt, a self-reinforcing spiral is created in which banks' cash
flows are squeezed, forcing them to contract new lending not only to
the illiquid corporations but to those in better health as well. The
object of bank and corporate restructuring is to restore the flow of credit and restructure corporate balance sheets, so that firms in these
countries can get back to business, and to strengthen the corporate
governance of these firms.
To ensure that the crisis-impacted countries maintain access to
critical imports, and to help American businesses continue selling
abroad, the Export-Import Bank will establish new short-term credit
facilities for critical Asian and Latin American markets. The United
States will coordinate its efforts with those of the other leading industrial nations to ensure that trade credit continues to flow. Moreover,




250

the Overseas Private Investment Corporation (OPIC) has developed a
new financial instrument to help emerging market economies raise
money in international capital markets. Its aim is to keep private
capital flowing to crisis-impacted but deserving economies.
The severe economic downturn experienced in East Asia has caused
sharp increases in unemployment and poverty, jeopardizing the substantial strides the East Asian economies had made over several
decades in alleviating poverty and raising real incomes. The social
costs of the crisis have been enormous, and made much worse by the
absence of developed social safety nets, such as unemployment insurance and efficient welfare programs. The President has therefore
asked the World Bank and the Asian Development Bank to double
their aid through an expanded Social Compact initiative, with a focus
on strengthening the social safety net. The emphasis would be on job
assistance, basic needs, and aid to children, the elderly, and other
groups especially vulnerable to economic distress.

REFORM OF THE INTERNATIONAL FINANCIAL
ARCHITECTURE
Even as it worked to mitigate the impact and contain the spread of
the crisis, the Administration collaborated with other countries to find
ways to strengthen the international financial system to make it less
prone to future crises. Discussions in 1998 concerning the reform of the
international financial architecture culminated in the October publication of three reports on the subject. The reports were written by
working groups formed by the G-22, a group of systemically significant
industrial and emerging market economies, first brought together in
April 1998. The G-22 reports are discussed in Chapter 7.

JAPAN'S ECONOMIC AND FINANCIAL CRISIS
Japan, the leading economy in Asia, inadvertently played an unfortunate role in the emergence and spread of the Asian crisis. Throughout the 1990s Japan has suffered a hangover from the bursting of stock
market and land bubbles at the end of the 1980s. In 1996, after 4 years
of disappointing growth, it appeared that the Japanese economy was
finally recovering. But a large increase in the Japanese consumption
tax in April 1997, implemented to address Japan's large fiscal deficit
and longer term demographic pressures on its budget, caused the
country to lapse into recession in the second quarter of that year.
Japan's economic weakness likely contributed to the Asian crisis
through several channels. Weak growth at home reduced Japan's
demand for imports from the rest of East Asia. Japanese banks, in
fragile condition after the bursting of the 1980s bubble, were further
weakened by a stagnant economy in the 1990s. Facing low interest




251

rates at home, they sought higher returns through large-scale lending
to the fast-growing East Asian economies. Although U.S. and European banks had also lent extensively in the region, Japanese banks
had the largest cross-border and foreign currency lending of any industrial country banks to the Asian crisis economies. Thus, Japanese
banks and securities firms were particularly hard hit when the crisis
erupted. As the crisis escalated, and as Japan's own economic crisis
deepened in 1997 and 1998, many Japanese banks, faced with significant losses, recalled foreign loans in order to avoid a domestic lending
squeeze.
Japan's role in the Asian crisis contrasts sharply with the U.S. role
in the Mexican crisis of 1995. Whereas a strongly expanding U.S.
economy helped Mexico avoid a worse outcome, the weakness of
Japan's economy and financial institutions undoubtedly added to
Asia's woes. In turn, the significant decline in Japan's own exports to
the crisis countries, along with the losses suffered by its financial
institutions on their Asian loans, have hit Japan's vulnerable economy
hard, adding to its domestic difficulties.
Japan remained in recession throughout 1998. Real growth over the
four quarters of 1997 amounted to -0.4 percent. Real GDP in the first
half of 1998 was down 3.8 percent at an annual rate, and few if any
signs of recovery were in evidence by the end of the year. Japan risks
descent into a deflationary spiral in which falling prices cause high
real interest rates, further discouraging spending.
In response to the deepening contraction and a growing credit
crunch, the Japanese government has taken several significant policy
steps. In the fall of 1998, legislation was approved providing public
funds to address the problems of the banking system. Of the 60 trillion
yen (about $500 billion) in the package, about 30 percent has been earmarked for protection of depositors, 40 percent to recapitalize weak
banks, and 30 percent to purchase the shares of nationalized banks.
Although questions remain about its implementation and effectiveness, the banking reform bill is a necessary step toward restructuring
Japan's financial system.
To stimulate growth, the Japanese government announced a 17trillion-yen fiscal stimulus package in April 1998, including both public
works expenditures and tax reductions. As the contraction continued to
intensify, however, the Japanese government proposed further expansionary fiscal measures in the fall. In November it announced a plan to
pass a third supplementary budget aimed at implementing over 17 trillion yen in additional public works and other spending measures in 1999,
along with more than 6 trillion yen in tax cuts.
As the world's second-largest economy, Japan has a key role to play
in maintaining global economic growth. The United States has urged
Japan to take strong and sustained fiscal measures to stimulate
domestic demand, restore confidence, deal promptly and effectively




252

with its banking problems, and open its markets and deregulate its
economy. Japan's performance will help determine the prospects for
Asia's recovery.

EFFECTS OF THE EMERGING MARKETS CRISIS ON
THE UNITED STATES
MACROECONOMIC EFFECTS
The United States enjoyed strong economic growth before the onset
of the Asian crisis and has continued to do so since. But the crisis has
had an impact, both real and financial. One consequence has been a
marked decline in net exports and a widening of the trade deficit. The
growing trade deficit (Chart 6-3) is largely attributable to three factors:
faster income growth in the United States than in most other industrial countries, which raises imports; outright contraction in Japan and
much of the rest of East Asia, which cuts U.S. exports; and an appreciation of the dollar in both nominal and real terms relative to both
European and Asian currencies, and particularly the yen (from mid1995 until September 1998). Since the summer of 1998 the dollar has
depreciated against the yen, but the fall of the dollar against the other
G-10 currencies is still modest on a trade-weighted basis (Chart 6-4).
Two sectors adversely affected by the crisis were agriculture and
manufacturing. Shrinking exports and low prices (attributable partly
to the financial crisis, and partly to large global supplies of agricultural
commodities following bumper harvests), on top of bad weather in
some regions, led to a fall in farm incomes. In manufacturing, both
export industries and industries that compete with imports sustained
damage. The commercial aircraft industry, for example, suffered from
the fall of exports to Asia. The steel industry and the textiles and
apparel industry have come under import pressure as the dollar's
appreciation reduced the price of imports from the crisis countries. As
discussed in Chapter 2, U.S. financial markets also felt the impact, and
financial institutions have suffered losses on their emerging market
loans and investments.
The appreciation of the dollar since 1995 (illustrated in Chart 6-4)
also had a number of beneficial effects at home. Import prices have
fallen, especially for oil and other commodities, contributing to the
drop in inflation and improving the U.S. terms of trade (Chart 6-5).
The terms of trade is a measure of the prices at which we sell our goods
abroad, relative to the prices we pay for imports. An increase in the
terms of trade translates into increased purchasing power of U.S.
goods in world markets and higher real U.S. income. A strong dollar
and subdued inflation have also supported lower interest rates,
both short and long term, benefiting households, firms, and other
borrowers.




253

Chart 6-3 Real Value of the Dollar and the Trade Deficit
The trade deficit is a macroeconomic phenomenon: increases typically follow an
appreciation of the dollar.
Index (first quarter 1976 = 100)
140 ,

Percent of GDP
,4

130

120

Real trade deficit
(right scale)

Real value of the dollar
(left scale)

110

100

90

80

76:Q1

78:Q1

80:Q1

82:Q1

84:Q1

86:Q1

88:Q1

90:Q1

92:Q1

94:Q1

96:Q1

98:Q1

Sources: Department of Commerce (Bureau of Economic Analysis) and Federal Reserve Bank of
Dallas.

Chart 6-4 Dollar Exchange Rates
The dollar has fluctuated sharply against the currencies of Japan and other major
trading partners, but less sharply against broader indexes of foreign currencies.
Index (fourth quarter 1993 = 100)
140

Broad trade-weighted index

\

120

Broad real trade-weighted index

100

Trade-weighted index,
G-10 countries

\

80

i
93:Q1

93:Q3

.

German mark/dollar

Japanese yen/dollar
i . i . i .
94:Q1

94:Q3

95:Q1

95:Q3

96:Q1

96:Q3

97:Q1

97:Q3

98:Q1

98:Q3

Note: The broad trade-weighted index is relative to 129 trading partners; the real measure is relative to
111, and is adjusted for domestic inflation. A rise in an index indicates an appreciation of the dollar.
Sources: Board of Governors of the Federal Reserve System and Federal Reserve Bank of Dallas.




254

Chart 6-5 Terms of Trade
Import prices have fallen more than export prices since the onset of the Asian
crisis, leading to an improvement in the terms of trade.
Index (fourth quarter 1983 = 100)
140

Price of
imports
130
120
110
100

90

Terms of
trade

80

70
1983

1985

1987

1989

1991

1993

1995

1997

Source: Department of Labor (Bureau of Labor Statistics).

THE TRADE AND CURRENT ACCOUNT DEFICITS
The Short-Term Behavior of the Trade Imbalance
In 1998, faster U.S. growth relative to growth in our trading partners combined with the continued appreciation of the dollar to exert a
powerful impact on the U.S. trade balance. The deficit in trade in goods
and services rose substantially. Based on data for the first 11 months of
the year, it now appears that the deficit for 1998 will be in the neighborhood of $170 billion, up from $110 billion in 1997. Compared with
1997, it appears that exports of goods and services in 1998 will be
down about 1 percent, whereas imports of goods and services will be up
about 5 percent. Relative to past trends, the decline in exports is by far
the more striking of the two figures.
A large fraction of the increase in the dollar value of the trade deficit
is related to the decline in exports to Asia; the contribution of import
growth to the increased nominal value of the deficit has been quite
modest thus far. The decline in exports to six key East Asian countries
(Indonesia, Japan, Korea, Malaysia, the Philippines, and Thailand),
measured at an annual rate, was running at $25 billion to $30 billion
in the fall of 1998. Korea alone accounted for almost two-fifths of the
decline. Imports from these countries have also risen, continuing an
upward trend that has persisted for several years.




255

The increase in the trade deficit and the negative contribution of
increased imports are larger when measured in real terms rather than
as nominal dollar values, because import prices have fallen more than
export prices. The dollar prices of imports from four East Asian
economies (Hong Kong, Korea, Singapore, and Taiwan) fell 10.8 percent between August 1997 (at the onset of the Asian crisis) and December 1998; the dollar prices of U.S. imports from Japan declined by 4.7
percent over the same period. Although measures of import prices for
the other Asian crisis economies are not available, it is likely that they
fell by even more, because the depreciation of their currencies against
the dollar was greater. Sharp drops in the global prices of many primary commodities have also exerted downward pressure on U.S.
import prices. Import prices for petroleum products were 43.0 percent
lower in December 1998 than in August 1997; import prices for agricultural goods declined 3.3 percent over the same period. Despite their
overall decline, the prices of U.S. imports from the Asian economies
have fallen by a smaller percentage than the values of their currencies
have against the dollar. This implies that the pass-through from the
depreciations to the decline in import prices has so far been less than
full. Because U.S. export prices have also fallen, the decline in exports
of goods and services was more modest when measured in real rather
than nominal terms.

A Longer-Term Perspective on the Current Account
International trade has contributed greatly to growth and well-being
in the United States. Nevertheless, some contend that the large and
growing U.S. trade deficit costs American workers jobs; others argue
that it reflects unfair trade practices of our trading partners or signals
a loss of U.S. competitiveness in world markets. The growing trade
deficit has indeed been associated with dislocations in some manufacturing industries, but job gains in construction, services, information
technology, and other sectors not directly involved in international
trade have been greater than job losses in manufacturing. Arguments
about the adverse consequences of trade deficits are largely misplaced:
the rising U.S. trade deficit is primarily a reflection of strong U.S.
investment, employment, and output growth, not a symptom of economic weakness.
The current account and the saving-investment balance. Unraveling
misconceptions about the trade deficit requires an understanding of
the trade balance and a closely related concept, the current account
balance. A country's trade balance is equal to the difference between
the value of its exports and the value of its imports—in other words,
the value of goods and services sold by its residents to foreigners
minus the value of the goods and services that its residents buy from
foreigners. The current account balance simply adds other sources of
foreign income to the trade balance, to arrive at a complete accounting




256

of the economy's current transactions (as distinct from its capital
transactions, such as borrowing in the form of foreign loans). The most
important of these other sources are interest and investment earnings
received on foreign assets (and paid on foreign liabilities), and aid
grants and transfers.
A country's current account balance also equals the difference
between its gross national income (the sum of gross domestic production and net income received from abroad) and its spending (the sum of
private and public consumption and investment spending). Since
national saving is the difference between gross national income and
total consumption, the current account is also equal to the difference
between national saving and domestic investment. If a country's
national income exceeds its spending, or, equivalently, if national saving exceeds domestic investment, the current account will be in surplus. If instead a country spends (that is, consumes and invests) more
than its national income, investment will exceed saving, and the current account will be in deficit.
For the current account to be in deficit-that is, for investment to
exceed saving—a country must be able to finance that deficit through
capital inflows (borrowing) from the rest of the world. A country's current account deficit for a given period therefore equals the increase in
its net foreign liabilities in that period (or the decline in its net foreign
assets, if the country is a net creditor). Conversely, current account
surpluses, which reflect an excess of saving over investment, increase
a country's net foreign assets (or reduce its net foreign liabilities).
Business cycles, long-run growth, and the current account. The
argument that current account deficits inevitably cause a net loss in
jobs and output is at odds with the evidence. Rapid growth of production and employment is in fact commonly associated with large or
growing trade and current account deficits, whereas slow output and
employment growth is associated with large or growing surpluses.
Chart 6-6 shows, for example, that the U.S. current account improved
during the recessions of 1973-75, 1980, and 1990-91, but declined during the cyclical upswings of 1970-72,1983-90, and 1993 to the present.
This reflects both a decline in demand for imports during recessions
and the usual cyclical movements of saving and investment. During a
recession both saving and investment tend to fall. Saving falls as
households try to maintain their consumption patterns in the face of a
temporary fall in income; investment declines because capacity utilization declines and profits fall. However, because investment is highly sensitive to the need for extra capacity, it tends to drop more sharply
than saving during recessions. The current account balance thus tends
to rise. Consistent with this, but viewed from a different angle, the
trade balance typically improves during a recession, because imports
tend to fall with overall consumption and investment demand. The
converse occurs during periods of boom, when sharp increases in




257

Chart 6-6 Current Account Balance
The current account balance has been positive and/or increasing during recessions
and has decreased during periods of economic expansion.
Billions of dollars

-60 -

70:Q1 72:Q1 74:Q1 76:Q1 78:Q1 80:Q1 82:Q1 84:Q1 86:Q1 88:Q1 90:Q1 92:Q1 94:Q1 96:Q1 98:Q1
Source: Department of Commerce (Bureau of Economic Analysis).

investment demand typically outweigh increases in saving, producing
a decline of the current account. Of course, factors other than income
influence saving and investment, so that the tendency of a country's
current account deficit to decline in recessions is not ironclad.
The relationship just described between the current account and economic performance typically holds not only on a short-term or cyclical
basis, but also on a long-term or structural basis. Often, countries
enjoying rapid economic growth possess structural current account
deficits, whereas those with weaker economic growth have structural
current account surpluses. This relationship likely derives from the
fact that rapid growth and strong investment often go hand in hand.
Whether the driving force is the discovery of new natural resources,
technological progress, or the implementation of economic reform, periods of rapid economic growth are likely to be periods in which new
investment is unusually profitable.
Investment must, however, be financed with saving, and if a country's national saving is not sufficient to finance all new profitable
investment projects, the country will rely on foreign saving to finance
the difference. It thus experiences a net capital inflow and a corresponding current account deficit. The current account deficit is then
merely the result of thousands of individual firms issuing debt or equity or borrowing from banks to finance investment. As long as these
individual decisions are sensible, the associated current account deficit




258

should promote, not detract from, economic welfare. If the new investments are profitable, they will generate the extra earnings needed to
repay the claims contracted to undertake them. Thus, when current
account deficits reflect strong, profitable investment programs, they
work to raise the rate of output and employment growth, not to destroy
jobs and production.
Historically, countries at relatively early stages of rapid economic
development, such as Argentina, Australia, and Canada in the early
part of this century, have enjoyed an excess of investment over saving,
running large structural current account deficits for long periods. The
same general pattern has held in more recent times: faster growing
developing countries have generally run larger current account deficits
than the slower-growing mature economies.
The link between trade and current account deficits and growth is
also confirmed by comparing the U.S. trade balance with those of its
G-7 partners since the recovery from the 1990-91 recession. Charts
6-7 and 6-8 show a clearly negative correlation between output growth
and the trade balance, and between employment growth and the trade
balance, respectively. The United States enjoyed the fastest output and
employment growth—and the largest trade deficit—among the countries shown. Conversely, Japan had the largest trade surplus, but the
second-slowest rate of growth. Trade surpluses are also the norm in
Europe, where growth of output and employment has been disappointing. Similarly, unemployment in the United States has been low and
falling since 1993, a period during which unemployment has remained
high in Europe and has been growing rapidly in Japan.
Budget deficits and the current account. Although current account
deficits are not usually a cause for concern when they reflect strong
investment opportunities, they may be worrisome if they instead
reflect a decline in national saving. Since national saving includes the
government's own saving or dissaving, one cause of a growing current
account deficit can be rising government budget deficits. Such deficits
may be harmful, resulting in an unsustainable buildup of foreign debt,
if the government spending they permit is devoted to current
consumption rather than productivity-enhancing public investment.
For example, in the late 1970s many developing countries ran large
budget deficits, borrowing heavily in world capital markets to finance
them, and accumulating large foreign debts in the process. Much of
this borrowing went to support excessive government spending in the
face of insufficient tax revenue. By 1982 many of these governments
were having difficulty servicing their foreign debts. A severe debt crisis
erupted in that year, forcing many countries to negotiate a rescheduling
of their foreign liabilities to avoid default.
The large U.S. current account deficits of the 1980s, also driven by
large fiscal deficits, were a matter of concern for the same reason.
These "twin deficits/' as they were labeled, led to high real interest




259

Chart 6-7 Economic Growth and Trade Balances of G-7 Countries, 1992-97
Across the major industrial countries, positive trade balances have been associated
with weak economic performance.
Average annual GDP growth (percent)
3.5

- • United States

3.0

United Kingdom •

2.5 |-

• Canada

2.0

1.5

France i

• Germany

Japan,

Italy •
1.0

-160

-120

-80
-40
0
40
Average merchandise trade balance (billions of dollars)

80

120

Source: Organization for Economic Cooperation and Development.

Chart 6-8 Employment Growth and Trade Balances of G-7 Countries, 1992-97
Across the major industrial countries, positive trade balances have also been
associated with weak employment performance, and vice versa.
Average annual employment growth (percent)
2.0

15

,

J United States
Canada I

1.0

°'5 n

Japan I

United Kingdom I

o.o

France
-0.5

ltalyl

-1.01

I Germany

-1.5
-160

-120

-80
-40
0
40
80
Average merchandise trade balance (billions of dollars)

120

Source: Organization for Economic Cooperation and Development.

rates, a crowding out of productive investment (as evidenced by a fall
in the national investment rate after its recovery from the 1982 recession), and a reduction in long-run growth opportunities. Chart 6-9
presents the U.S. current account deficit, the national and public




260

(Federal Government) saving rates, and the domestic investment rate.
Conceptually, the current account is equal to net foreign investment,
which is the difference between national saving and domestic investment; in practice, however, this equality may be obscured by measurement errors, which have been large in recent years both in the international transactions accounts and in the national income and product
accounts. Thus, although over time there is a strong correlation
between the current account balance and the saving-investment balance, in any given period the two measures may move in different
directions. Chart 6-9 clearly shows the twin deficits of the 1980s: as fiscal deficits increased in an environment of tight monetary policy in the
early 1980s, the dollar appreciated in real terms, and the current
account moved into substantial deficit. The crowding out of productive
investment, due to the high real interest rates associated with the fiscal deficit, is suggested by the fall in the investment rate between 1984
and 1990. The current account improved during the 1990-91 recession
as the investment rate slumped sharply.
Chart 6-9 Saving, Investment, and the Current Account Balance
The current account deficit grew in the mid-1980s as saving fell faster than
investment. In the 1990s, however, both investment and saving are increasing.
Percent of GDP

Net domestic
investment

10

Current account balance

Net national
saving plus
statistical
discrepancy y

\

Net national
saving

r I

Federal Government
saving
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Source: Department of Commerce (Bureau of Economic Analysis).

During the 1990s the Federal budget deficit first declined, then
disappeared, and finally turned to a surplus in 1998. National saving
increased as a consequence, despite a decline in the personal saving
rate. Even so, the current account deficit has again increased. However,
this increased deficit can be viewed as virtuous, because it has
been driven by an even stronger increase in the pace of domestic




261

investment. The U.S. gross investment rate rose from a low of 12.2 percent of GDP in the middle of 1991 to 16.0 percent in the third quarter
of 1998.
The investment boom that the United States has enjoyed since 1993
has contributed to expanding employment and output and will provide
payoffs for many years to come. It could not, however, have been
financed by national saving alone: a current account deficit provided
the additional capital inflow needed to finance the boom. In the
absence of foreign lending, U.S. interest rates would have been higher,
and investment would inevitably have been constrained by the supply
of domestic saving. Therefore, the accumulation of capital and the
growth of output and employment would all have been smaller had the
United States not been able to run a current account deficit in the
1990s. Rather than choking off growth and employment, the large current account deficit, perhaps paradoxically, allowed faster long-run
growth in the U.S. economy.
The Asian crisis and the current account deficit. The experience of
the Asian crisis countries demonstrates that current account deficits
can be dangerous not only when they finance unsustainable budget
deficits but also when they finance investments of low profitability. As
already noted, the crisis-afflicted East Asian economies all enjoyed
high saving rates. Their large current account deficits were attributable to their even higher investment rates. Even so, the buildup of debt
deriving from these current account imbalances became unsustainable,
because, as discussed above, distortions in the operation of East Asian
financial systems led to excessive investment in low-profitability
projects. Investment-driven current account deficits enhance economic
welfare only when expected investment returns exceed the cost of the
borrowed funds. Throughout the East Asian region the rate of return
to capital, although still positive, appears to have been falling in the
1990s, signaling a deterioration in the quality of the investment
projects.
Moreover, foreign debt must be serviced and, at some point, fully
repaid. Therefore, debtor countries must ultimately run trade surpluses, which may require adjustments in their real exchange rates. Borrowing in world capital markets is perhaps least problematic when the
new investments it permits augment a country's capacity to produce
goods for sale in foreign markets. In contrast, many Asian countries
borrowed abroad to finance commercial and residential investments,
producing goods, such as office buildings and houses, that are not
usually traded internationally.
The U.S. international investment position. If current account
deficits continue year after year, creditor countries eventually become
net debtors: every year the stock of net foreign liabilities rises by an
amount equal to the current account deficit (ignoring valuation
effects). Not all of these liabilities consist of debt: the capital inflows




262

that finance current account deficits can take the form of equity investment, as in foreign direct investment. Thus an increase in a country's
net foreign liabilities does not automatically translate into an increase
in foreign debt, strictly speaking, but rather a decrease in the net
international investment position.
Chart 6-10 shows the relationship between the U.S. current account
and the change in the U.S. net international investment position
(where direct investment is valued at current cost). In the 1970s the
United States was a net creditor country. However, the string of current account deficits in the 1980s led to a reduction of net foreign
assets and eventually, in 1987, turned the United States into a country
with growing net external liabilities.
Because the U.S. current account deficits of the 1980s were primarily driven by fiscal deficits and low national saving rates, the accumulation of net foreign liabilities was greeted with some concern. The
large fiscal deficits were financed by government bonds, some of which
foreign investors purchased directly. Since 1993, however, current
account deficits have been driven by increases in investment, with foreign financing taking the form of both direct and portfolio investment.
(Chart 6-11 shows trends in both inward and outward foreign direct
investment.) At present, U.S. net foreign liabilities amount to a
relatively modest 15 percent of GDP.
Policies Toward the External Imbalance
Calls for protection from import competition typically increase when
the U.S. trade deficit burgeons, as it has since the onset of the Asian
crisis. Although the crisis has caused dislocations in some export and
import-competing industries, overall employment growth remains
strong in the U.S. economy. As we have argued, the growing U.S. trade
imbalance primarily reflects strong investment and growth opportunities in the United States in comparison with our trade partners, rather
than increased barriers to trade in foreign markets. Looked at another
way, the countries affected by the crisis have been forced to reduce
their own current account deficits by their sudden inability to finance
those deficits through foreign borrowing. The increased U.S. trade
deficit, at least through the first three quarters of 1998, primarily
reflects falling exports to these economies—declines in their imports
engendered by the sharp economic contractions those countries have
suffered.
To restore world economic growth to its level before the crisis, the
United States and other industrial countries must maintain open
markets. Higher barriers to trade in the United States would not
only hinder recovery in Asia and other crisis countries but provoke
emulation and retaliation by our trading partners, which would
hamper our own growth prospects. It is worth remembering that it
was a dramatic switch to protectionist policies in the United States




263

Chart 6-10 Current Account Deficit and Net International Investment Position
As the United States started to run large current account deficits in the early 1980s,
the net international investment position declined.
Trillions of dollars

Billions of dollars

2.0

200

Current
account deficit
(left scale)

150

1.5

\

100

1.0

50

0.5

0.0

-50

-0.5

Net international
investment position
(right scale)

-100

-150

1979

1976

1982

1988

1985

1994

1991

-1.0

1997

Note: Net international investment position at current cost.
Source: Department of Commerce (Bureau of Economic Analysis).

Chart 6-11 Foreign Direct Investment Flows
The 1980s saw a surge in foreign direct investment into the United States. In the
1990s, however, direct investment outflows have again surpassed inflows.
Billions of dollars
140

U.S. direct
investment abroad

Foreign direct investment in
the United States

1960

1963

1966

1969

1972

1975

1978

1981

1984

Source: Department of Commerce (Bureau of Economic Analysis).




264

1987

1990

1993

1996

-1.5

and other industrial countries that deepened the Great Depression.
As the crisis economies recover, their demand for U.S. goods and services will increase as well, once again fueling our own export
growth.
Recognizing the need to maintain open markets worldwide, the
President has called for a new consensus on trade, to continue to
expand America's opportunities in the global economy while ensuring that all of our citizens enjoy the benefits of trade, through
greater prosperity, respect for workers' rights, and protection of the
environment. The President asked the Congress to join him in this
new consensus by restoring his traditional trade-negotiating authority (so-called fast-track authority), to allow him to pursue an ambitious trade agenda. At the top of this agenda is a far-reaching new
round of global trade negotiations within the World Trade Organization aimed at shaping the world trading system for the 21st century.

CONCLUSION
During a period of great turmoil in the global economy, the first
imperative of the Administration has been to work with the international community to sustain worldwide growth. That is a prerequisite
for the recovery of the countries now afflicted by crisis. No country, not
even the United States, is an island in the world economy. The
growth prospects of all the world's industrial nations will suffer
unless all do their part. The United States and its G-7 partners have
clearly recognized this imperative.
The United States remains committed to opening markets to
international trade, recognizing that an open trade environment
will be the best policy for domestic growth, support the recovery of
the crisis-afflicted countries, and ensure the continued growth of the
world economy. At the start of his Administration in 1993, the President declared, "The truth of our age is this—and must be this: Open
and competitive commerce will enrich us as a nation. . . . And I say
to you in face of all the pressure to do the reverse, we must compete,
not retreat." Now, as then, the Administration remains strongly
committed to outward-looking, internationalist policies.
Beyond working to ensure growth in the industrial world, the
United States has focused since this crisis began on the need to contain financial contagion and restore market confidence so that capital flows can continue, and on the need to promote recovery and alleviate suffering in the crisis-afflicted countries. The Administration
has supported the IMF in its mission of providing financial assistance to those countries in crisis that are willing to implement the
often tough reforms needed to strengthen the underpinnings of their
economies. At the same time, the Administration is collaborating




265

with other countries to strengthen the architecture of the international financial system, with the goal of enhancing its stability in a
world of continued integration of global product and financial
markets. These reforms of the international financial architecture
are discussed in Chapter 7.




266

CHAPTER 7

The Evolution and Reform of the
International Financial System
THE FINANCIAL PROBLEMS THAT BEGAN in Asia in the second
half of 1997 have exposed weaknesses both in emerging market countries
and in the international financial system. In response, the United States
has taken steps, jointly with the international community, not only to
contain the financial crisis but also to foster reforms of the international
financial system to make it less crisis prone in the future. The recent
turmoil followed a robust period of increasing integration of world
product and financial markets—a trend well epitomized by the longanticipated realization of European Monetary Union in January 1999.
The recurrence of currency and financial crises in the world economy
poses major challenges to policymakers. What are the causes of these
repeated crises, and of instability and financial market volatility?
Are financial integration and globalization partly to blame? Does
integration into modern global financial markets require the loss of
macroeconomic policy autonomy? What regime of exchange rates is best
for emerging market economies and other small countries in this new
world of global capital mobility? Can the Bretton Woods institutions—the
International Monetary Fund (IMF) and the World Bank—which were
designed for a world of fixed exchange rates and limited capital mobility,
still promote the stability of the international financial system in a
radically different environment? What institutional framework best
promotes the stability of the international financial system? Answers to
these questions will be critical to efforts to strengthen the stability of the
international financial system and help to ensure that global financial
integration will continue to sustain prosperity and growth in the world
economy.
A broad international consensus now supports reform of the global
financial architecture to achieve several goals: to increase transparency
(that is, to improve the availability of information about macroeconomic
and financial conditions); to strengthen and reform domestic financial
institutions so as to prevent crises from occurring; and to improve the
mechanisms available to resolve those crises that do occur. This chapter
starts by describing proposals that have been advanced in each of these
three areas. It then analyzes the next steps that are being considered in
the redesign of the international financial system. Finally, it considers
European Monetary Union, the prospects for the euro as an international
currency, and the possible implications for the U.S. dollar.




267

REFORM OF THE INTERNATIONAL FINANCIAL
ARCHITECTURE
As explained in Chapter 1, the international community, under U.S.
leadership, has proposed a set of reforms to strengthen the international financial system. These reforms, designed to reduce the
incidence of future crises, are referred to collectively as the "new international financial architecture." Their aim is to create an international
financial system for the 21st century that captures the full benefits of
global markets and capital flows, while minimizing the risk of
disruption and better protecting the most vulnerable groups in society.
The work accomplished toward these goals in 1998 was only the latest
stage in an evolutionary process that has been under way for some
years.

FROM THE HALIFAX SUMMIT TO THE G-22 REPORTS
A broad debate on the steps needed to strengthen the international
financial system was already under way when the Mexican peso was
devalued suddenly in December 1994. The ensuing crisis, however,
gave the debate considerable impetus and pertinence. The annual
summit of the leaders of the Group of Seven (G-7) nations (Canada,
France, Germany, Italy, Japan, the United Kingdom, and the United
States) in 1995, held in Halifax, Nova Scotia, initiated work in a number of areas. One such area was additional study of means to promote
the orderly resolution of future financial crises. The finance ministers
and central bank governors of the G-10 countries were asked to review
a number of ideas that might contribute toward that objective. The
G-10 (which actually has 11 members: the G-7 plus Belgium, the
Netherlands, Sweden, and Switzerland) established a working party,
which submitted a report—informally known as the Rey Report, after
the chairman of the working party—to the ministers and governors in
May 1996.
The report noted recent changes in financial markets that, in some
cases, have altered the characteristics of currency and financial crises
in emerging markets. It indicated that neither debtor countries nor
their creditors should expect to be insulated from adverse financial
consequences in the event of a crisis. It also called for better marketbased procedures for the workout of debts when countries and firms
are in financial distress. Reforms of bond contracts were proposed to
encourage the cooperation and coordination of bondholders when the
financial distress of a country or a corporation requires the restructuring of the terms of a bond. The report also suggested a review of IMF
policies on "lending into arrears" to extend the scope of this policy to
include new forms of debt. Such policies would allow the IMF to
continue lending, in certain unusual and extreme circumstances, to
countries that had temporarily suspended debt-service payments but




268

continued to maintain a cooperative approach toward their private
creditors and to comply with IMF adjustment policies.
A number of important innovations came out of this reform process:
the development of international standards for making economic data
publicly available (under the IMF's Special Data Dissemination Standard); international standards for banking supervision (the Basle Core
Principles for Banking Supervision); the decision to expand the IMF's
backup source of financing under the New Arrangements to Borrow
(25 participants in the NAB agreed to make loans to the IMF when
supplementary resources are needed to forestall or cope with an
impairment of the international monetary system, or to deal with an
exceptional situation that poses a threat to its stability); and, more
recently, a new financing mechanism in the IMF, called the Supplemental Reserve Facility, to help members cope with a sudden and
disruptive loss of market confidence, but on terms designed to
encourage early repayment and reduce moral hazard.
Despite some progress in strengthening the system, the eruption of
the Asian crisis in 1997 demonstrated the importance of considering
further questions regarding the operation of the international system.
In November 1997, on the occasion of the Asia-Pacific Economic Cooperation leaders' summit in Vancouver, a number of Asian leaders
proposed a meeting of finance ministers and central bank governors to
discuss the crisis and broader issues. They suggested that participation in the meeting be expanded to include emerging market countries,
not just the usual small number of major industrial countries. The
President responded by calling on the Secretary of the Treasury and
the Chairman of the Board of Governors of the Federal Reserve System to convene such a meeting. Finance ministers and central bank
governors from 22 systemically significant countries in the international financial system (informally dubbed the Group of 22, or G-22)
gathered in Washington on April 16, 1998, to explore ways to reform
the system that could help reduce the frequency and severity of crises.
Three working groups were formed to consider the following three sets
of issues: measures to increase transparency and accountability,
potential reforms to strengthen domestic financial systems, and
mechanisms to facilitate appropriate burden sharing between official
institutions and the private sector in time of crisis. The three working
groups presented their reports in October 1998 on the occasion of the
annual meetings of the IMF and the World Bank.
GREATER TRANSPARENCY AND ACCOUNTABILITY
The report of the first working group reflects the existence of a
broad consensus on the need for greater transparency not only by the
private sector and national authorities but by the international financial institutions (IFIs) as well. The Asian crisis made clear once more
that it is important for countries to provide sufficient information




269

about their macroeconomic and financial conditions. The information
needed includes data on the size, maturity, and currency composition
of external liabilities, as well as accurate and comprehensive measures
of the level of foreign exchange reserves. The crisis also underscored
the need for banks and corporate enterprises to provide accurate information about their financial accounts. Without such information, outsiders cannot adequately assess the true financial condition of governments and firms. The crisis made clear as well the importance of
transparency on the part of the IFIs themselves, and led to calls for the
IMF and other IFIs to be more open about their activities, economic
analysis, policy advice, and recommendations.
The report of the G-22 working group on transparency and accountability recommends that national authorities publish timely, accurate,
and comprehensive information on the external liabilities of the financial and corporate sectors in their countries as well as their own foreign exchange positions. Published information on official foreign
exchange positions would extend to both reserves and liabilities, for
example those deriving from government intervention in forward
exchange markets. The report recommends adherence to existing
international standards for transparency and finds that standards in
additional areas, including monetary policy and accounting and disclosure by private financial institutions, might be useful. The report calls
for better monitoring of countries' compliance with such standards,
including through IMF reporting on countries' adherence to internationally recognized standards. It also recommends that the potential
for greater transparency of the positions of investment banks, hedge
funds, and institutional investors be examined.
Finally, the report calls on the IMF and the other IFIs to be more
open and transparent. Accountability, it argues, is important for all
institutions, and unnecessary secrecy would be particularly inappropriate in institutions that are telling others to be more transparent.
For example, the report recommends that IFIs adopt a presumption in
favor of the release of information, except where confidentiality might
be compromised. It also calls for publication of program documents, of
background papers to reports following the regular yearly visit by the
IMF to a member state, of public information notices following the IMF
Executive Board's discussion of reports on member countries' economic conditions, of retrospective program reviews, and of other policy
papers.
Increased transparency can help prevent the buildup of countries'
financial and macroeconomic imbalances. In the Asian crisis, for example, more information concerning the external debt of firms and banks
might have limited investors' willingness to lend to such institutions in
the first place. Transparency can also encourage more timely policy
adjustment by governments and help limit the spread of financial
market turmoil to other countries by enabling investors to distinguish




270

countries with sound policies from those with weaker policies.
Nonetheless, transparency alone is unlikely to be sufficient to prevent
another major crisis from occurring. In Asia, greater transparency
about net reserves and offshore liabilities of the financial and corporate systems might well have helped attenuate the crisis. But
investors also missed many warning signals in data that were widely
available. More is needed than just information.

REFORMING AND STRENGTHENING DOMESTIC
FINANCIAL INSTITUTIONS
As discussed in Chapter 6, weaknesses in the financial sectors of
borrowing countries now appear to have been a central cause of the
Asian crisis, and of some previous financial crises as well. Commercial
banks and other financial institutions borrowed and lent imprudently,
channeling funds toward projects that were not always profitable.
Insufficient expertise and resources in countries' regulatory institutions led to weak regulation of the financial system, and in particular
to lax supervision of banks. Insurance of bank deposits was either
implicit or poorly designed. Often, governments did not provide explicit deposit insurance; rather, they implicitly insured the liabilities of the
banking system. Connected lending was widespread: banks and other
financial firms in a business group would make loans to other firms in
the group without objectively evaluating or monitoring their soundness. The result was often distorted incentives for project selection and
monitoring. All these factors contributed to the buildup of severe structural weaknesses in the financial system, the most visible manifestation of which was a growing level of nonperforming loans. The growing
supply of funds from abroad, facilitated in part by capital account liberalization, only heightened the problem; rising capital inflows combined with poorly regulated and often distorted domestic financial systems to create a dangerous environment.
Strengthening domestic financial systems, the focus of the second G22 working group, will thus be a central element of ongoing systemic
reform. The list of measures required is long and will take years to
complete. The reforms recommended by the G-22 report include the
development of liquid and deep financial markets, especially markets
in securities (bonds and equities). Financial markets should be able to
rely on strong prudential regulation and supervision of banks and
other financial institutions, based on the Basle Core Principles of
Banking Supervision and the Objectives and Principles of Securities
Regulation set out by the International Organization of Securities
Commissions. Appropriate restrictions on connected lending would be
beneficial. The working group's report also calls on countries to design
explicit and effective deposit insurance mechanisms to protect bank
depositors. The report also calls for better corporate governance in both
the financial sector and the nonfinancial sector, so that investment




271

decisions respond to market signals rather than to personal relationships. It further recommends the design and implementation of bankruptcy and foreclosure laws for insolvent firms and, more broadly, the
implementation of efficient insolvency and debtor-creditor regimes,
possibly including procedures for systemic bank and corporate restructuring and debt workouts for corporations in financial distress. Finally,
the report advocates better coordination and cooperation among international organizations and international supervisory entities
in strengthening financial systems, as well as increased technical
assistance for and training of government officials and regulators.
BETTER CRISIS RESOLUTION, INCLUDING APPROPRIATE
ROLES FOR THE OFFICIAL COMMUNITY AND THE
PRIVATE SECTOR
Although strengthening financial systems may prevent some crises
from occurring and make those that do occur less virulent, it cannot be
expected to eliminate them altogether. It is therefore essential to
establish means of minimizing the depth and severity of crises without
undermining appropriate incentives for prudent private and public
behavior. This very important task constitutes the third and final
pillar of the set of international financial reforms proposed in October
by the G-22 working groups.
The G-22 report on this topic identifies policies that could help promote the orderly resolution of future crises, including both official
assistance and policies and procedures that could facilitate the involvement of the private sector as appropriate. It noted that recent events
have highlighted how the larger scale and greater diversity of recent
capital flows to emerging markets generate the risk that crises can
erupt more quickly and can be larger in scope than in the past. It is of
critical importance that the IMF and the other IFIs remain capable of
catalyzing policy reform and the restoration of market confidence in
their member countries in the event of an international financial crisis,
in the context of a strong program of policy adjustment. The combination of adjustment and financing should be sufficient to resolve most
payments difficulties. However, the scale of private capital flows significantly exceeds the resources that the official community can reasonably provide, even with the quota increase to bolster IMF resources
and other measures. Moreover, the perception that sufficient official
financial assistance may be made available to allow a country to meet
all contractual obligations without some form of appropriate private
sector involvement might distort the incentives of both creditors and
debtors. It may encourage some creditors to take unwarranted financial risk, some debtor countries to follow inappropriate policies, and
both debtors and creditors to underestimate the risks they are assuming. Although the international community will continue to provide
assistance—conditioned on economic reform—to deal with the prob-




272

lems that have given rise to crises, mechanisms are needed to allow
the private sector to participate constructively in containing crises
and resolving them over time. Work is under way to find constructive
and cooperative ways to "bail in" private investors.
New procedures suitable to modern markets might be usefully developed for effective management of the financial difficulties of both firms
and countries. When banks accounted for the majority of international
capital flows, as in the 1970s and 1980s, troubled debtors could more
easily resolve a crisis through joint negotiations with a small number
of banks and the IFIs. Negotiations such as those developed to address
the 1980s debt crisis entailed agreements to postpone debt repayments (debt restructuring) and occasionally to reduce the overall value
of the obligation (debt writedown). However, the recent proliferation of
creditor institutions and instruments and the growth of international
bond markets have made it harder to coordinate the actions of creditors during a crisis. Unilateral actions by troubled debtors are, on the
other hand, highly disruptive and can lead to contagion, if they
increase investors' concern that other countries may follow suit. This
might explain why Russia's unilateral debt restructuring in August
1998 disrupted markets as far away as Latin America.
Recognizing the need for new procedures, the G-22 report includes a
number of recommendations. First, it calls for a range of policies to
help prevent crises and limit the severity of those that do occur. The
report emphasizes that countries might want to limit the scope of government guarantees, including those covering the liabilities of financial institutions, and to make explicit those guarantees that are offered
and price them appropriately (for example, through effective deposit
insurance). In addition, the report endorses the development of innovative financing techniques to permit increased payment flexibility,
greater risk sharing among debtors and creditors, or the availability of
new financing in the face of adverse market developments such as sudden reversals of capital flows. For example, debt contracts calling
explicitly for repayments contingent on the prices of key primary commodities could automatically reduce countries' debt burdens when
prices move against them.
Finally, the report identifies key features of effective insolvency and
debtor-creditor regimes (including bankruptcy, restructuring, and foreclosure laws) and highlights the role of such regimes in contributing to
effective crisis containment and resolution. Workable procedures in these
areas may be useful to encourage the prompt recovery of economic activity following a financial crisis. Among the most important basic objectives
of an insolvency regime are to maximize the value of a firm's assets after
its liquidation or reorganization; to provide a fair and predictable regime
for the distribution of assets recovered from debtors; and to facilitate
the uninterrupted provision of credit for commercial transactions by
providing an orderly regime for the distribution of debtors' assets.




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Other measures recommended by the working group would encourage the coordination of creditors in the event of a crisis. Following the
recommendations of the 1996 Rey Report, the G-22 report proposes
the inclusion of creditor coordination clauses in bond contracts.
These clauses would be designed to create an environment in which
all parties—creditors, debtors, and IFIs—can work together to
resolve crises in the most advantageous manner possible. Collective
action clauses in bond contracts could help overcome the problems to
which a large number of creditors inevitably gives rise. For example,
a clause allowing for the collective representation of creditors (such
as through the formation of a creditors' committee) can help facilitate
coordinated action among a large group of creditors. A majority
action clause could prevent a small minority of creditors from impeding a debt-restructuring agreement, by allowing a qualified majority
of creditors to alter the payment terms of the debt contract. Currently, most sovereign bond contracts in the United States require unanimity to restructure the terms of the contract. Similarly, sharing
clauses would mandate the equal treatment of creditors by imposing
a fair division of payments among them. This could discourage disruptive legal action and preferential settlements that benefit a few
creditors at the expense of others.
The report also calls for new methods of crisis management in the
extreme case of a temporary suspension of debt payments. Recent
experience (as in Russia in 1998) underscores the fact that such suspensions and unilateral restructuring actions can be highly disruptive,
especially if they substitute for policy reform and adjustment. The
G-22 report argues that countries should not, and normally would not,
suspend debt payments (interest and principal) until all other reasonable alternatives have been exhausted. However, suspension might
occur in exceptional cases, in the event of severe and unanticipated
adverse market developments. In these cases, the report emphasizes
the importance for countries to rely on orderly and cooperative
approaches, rather than unilateral actions, in negotiating the restructuring of contractual obligations. Unilateral action may entail
significant economic and financial costs.
If a country does suspend its debt payments to private creditors, it is
technically in arrears. The report argues that, in those exceptional
cases when a country experiences a severe crisis and a temporary payments suspension cannot be avoided, the international community
and private creditors may still have an interest in providing incentives
for strong and sustained policy adjustments and structural reform. It
therefore suggests that the international community can signal its conditional willingness to provide financial support, under appropriate
conditions, even if a country has imposed a temporary payments suspension. The report argues that such official support should be provided
only if the decision to suspend payments reflects the absence of rea-




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sonable alternatives, if the government is willing to undertake strong
policy adjustment, and if the government is engaged in good faith
efforts with creditors to find a cooperative solution to the country's
payments difficulties. An IMF policy of lending to a country that has
not yet completed negotiations with private creditors, but is negotiating cooperatively and in good faith, is referred to as "lending into
arrears."
A final set of recommended measures would facilitate prompt and
orderly debt workouts. As outlined above, the orderly resolution of
crises will require a combination of official finance, in the context of
strong policy adjustment programs, and appropriate private sector
involvement. Financial crises are often associated with significant
financial distress in the banking and corporate sectors. Although
national insolvency regimes (such as bankruptcy and corporate
restructuring laws) are intended to provide an appropriate legal
and institutional framework for the restructuring of corporate debt,
corporate sector crises may occasionally achieve sufficient scale to
threaten the solvency of a country's entire financial system, as happened in the Asian crisis.
Several measures can be undertaken to facilitate the orderly workout of the liabilities of firms in distress. One such measure is available
in domestic insolvency regimes—such as corporate restructuring under
Chapter 11 of the U.S. bankruptcy code—that allow distressed firms to
obtain new, senior credits to ensure their ongoing operation during the
restructuring of their debt. (Seniority means that the new lenders will
be first in line for repayment. Without such assurance, new lenders are
unlikely to come forward.) Analogously, in the international context,
the report suggests that the development of better means of encouraging the private sector to provide new credits, in the event of a debt crisis or suspension of debt payments, should be considered. Otherwise,
loans for basic purposes, such as working capital for production and
exports, can become unavailable. In certain circumstances the government may also find it useful to develop a framework for encouraging
out-of-court negotiations between private debtors and their creditors.
International support can be harnessed to support restructuring
efforts as well. For example, one goal of the Asian Growth and Recovery Initiative, recently launched by the United States and Japan, is to
support the implementation of more comprehensive and accelerated
restructuring of banks and corporations in the crisis-afflicted countries
in Asia.
Implementation of the international financial architectural reforms
proposed in the G-22 reports will take time. But they also promise to
reduce the likelihood of future crises and the severity of those that do
occur. For its part, the G-7 strongly signaled its commitment to implement many of the reforms proposed by the working groups in its
October 30 declaration, a subject considered next.




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ADOPTION OF MEASURES TO REFORM THE
INTERNATIONAL FINANCIAL ARCHITECTURE
The release of the G-22 reports was followed by detailed discussions
among the G-7 finance ministers and central bank governors and with
officials from other industrial and emerging market economies. The
G-7 ministers and governors agreed, in a statement issued on October
30, 1998, on specific reforms to strengthen the international financial
system. In the words of their communique, they:
agreed to carry these forward through our own actions and in the
appropriate international financial institutions and forums.
These reforms are designed to: increase the transparency and
openness of the international financial system; identify and disseminate international principles, standards and codes of best
practice; strengthen incentives to meet these international standards; and strengthen official assistance to help developing countries reinforce their economic and financial infrastructures. They
also include policies and processes to ensure the stability and
improve the surveillance of the international financial system.
Finally, they aim at reforming the International Financial Institutions, such as the IMF, while deepening cooperation among
industrialized and developing countries.

FURTHER STEPS TO STRENGTHEN THE
INTERNATIONAL FINANCIAL ARCHITECTURE
In their October 30 statement, the G-7 countries committed themselves to a number of reforms consistent with the recommendations of
the G-22 working groups, as well as a great deal of additional analysis
and research. The G-7 also stressed the need for the international
community to widen its efforts to strengthen the international financial system. The G-7 thus committed themselves to initiate further
work in a number of other important areas to identify additional,
concrete steps to strengthen the international financial architecture.
These include:
• examining the additional scope for strengthened prudential
regulation in industrial countries
• further strengthening prudential regulation and financial systems
in emerging markets
• developing new ways to respond to crises, including new structures
for official finance and new procedures for greater private sector
involvement in crisis resolution
• assessing proposals for further strengthening of the IMF




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• seeking to minimize the human cost of financial crises and
encouraging the adoption of policies that better protect the most
vulnerable in society
• consideration of the elements necessary for the maintenance of
sustainable exchange rate regimes in emerging markets.
Each of these steps poses a number of issues and challenges. Many
are interrelated. Some of these issues that the international community
will be examining in the future are addressed below.

STRENGTHENED PRUDENTIAL REGULATION AND
SUPERVISION IN INDUSTRIAL COUNTRIES
The crises of the past year have revealed the importance of strengthening prudential regulation to promote international financial stability.
Global financial integration has led to a proliferation of financial institutions making cross-border transactions, to the growth of offshore
financial centers and hedge funds, and to the development of a wide
range of derivative instruments. In this new environment, investors
may underestimate the risks they are assuming during periods of
market euphoria, and thus contribute to an excessive buildup of
exposures during the upswing.
Such developments pose significant challenges to financial regulators
and supervisors. Regulatory incentives may be needed to encourage
creditors and investors to act with greater discipline, that is, to analyze
and weigh risks and rewards appropriately in their lending and investment decisions. Thus, it will be useful to examine the scope for strengthened prudential regulation and supervision in industrial countries. Here
we explore some aspects of these regulatory challenges.
Enhanced International Financial Supervision and Surveillance
Traditionally, supervision and regulation of financial systems have
been domestically based. But the increased global integration of financial markets and the proliferation of institutions doing cross-border
transactions suggest the desirability of enhanced international financial supervision and surveillance. Better national and international
procedures to monitor and promote stability in the global financial
system might prove useful.
Although good financial supervision still must begin at the domestic
level, international institutions and national authorities involved in
maintaining financial sector stability must work jointly to foster stability and reduce systemic risk. They will also benefit from exchanging
information more systematically about the risks prevailing in the
international financial system. A useful contribution in this regard
might be a policy-oriented forum including financial authorities from
the G-7 countries, key emerging markets, the IFIs, and other relevant
international organizations.




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Another way to improve global surveillance and coordination might
be to have the IFIs, working closely with international supervisory and
regulatory bodies, conduct surveillance of national financial sectors
and their regulatory and supervisory regimes. For this to succeed, all
relevant information would need to be made accessible to them.
Strengthened Bank Capital Regulation
At the heart of the issue of bank regulation are banks' capital adequacy standards. As discussed in Chapter 6 (see Box 6-5), banks may
have an incentive to make excessively risky investments, since much of
the cost of failure may be borne by the government. To mitigate this
tendency, banks are required to hold a certain amount of their own
capital in reserve against the loans they make.
The fact that many banks are currently active on a global scale provides good reasons for common international bank capital standards.
Globally active banks headquartered in countries with low capital
requirements would otherwise be at an advantage over those headquartered elsewhere. In addition, by virtue of their global scale, the
impact of a global bank's failure would likely extend well beyond the
borders of the country in which it is headquartered.
The 1988 Basle Capital Accord established such an international bank
capital standard by recommending that globally active banks maintain
capital equal to at least 8 percent of their assets. In addition, the accord
sought to distinguish between more and less risky assets and required
that more capital be held against investments with greater risk. As a
result, the 8 percent standard called for in the accord applies not to a
bank's total assets but to its risk-weighted assets. Safe government bonds
or cash, for example, receive a zero weight in calculating aggregate risk
exposure, whereas long-term lending to banks and industrial companies
in emerging markets receives a 100 percent weight. Such minimum capital standards are meant to work in conjunction with direct supervision of
banks and basic market discipline to restrain excessive risk taking by
banks that have access to the safety net.
Even at the time of their adoption, it was recognized that the standards called for in the Basle Capital Accord might have to be reviewed
and strengthened in the face of developments in the international
financial environment. Effective capital regulation is an evolutionary
process, and the Basle standards have already been improved in a
number of ways in the decade since their adoption, for example by the
adoption of amendments covering market risk. However, recent developments have made some shortcomings of the rules for credit risk
more apparent. First, the risk weights applied to broad asset categories mirror only crudely the actual risk associated with different
types of assets. Second, a number of financial innovations may have
made it easier for banks to assume greater risk without becoming subject to increased capital charges. Third, the current standards may




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have encouraged banks in industrial countries to make short-term
rather than longer term loans to banks in emerging markets. Fourth,
off-balance-sheet items such as derivative positions, committed credit
lines, and letters of credit may not be adequately addressed by the current standards. The task of further improving the Basle Capital Accord
has just started. No consensus has yet emerged concerning the next
steps in the reform of bank capital regulation. But it is likely that a
strong and effective system of bank capital regulation will rely on several complementary components: strengthened capital standards;
improved internal risk management controls in banks, including
greater reliance on banks' own models of risk assessment; and
increased reliance on market discipline.
A broad debate is certain to be waged over how to provide effective
capital regulation of banks in the globalized environment in which
they now operate. The Basle standards were designed for banking
institutions in the G-10 countries, but the proliferation of financial
institutions in emerging markets also poses the question of whether
the same standards adequately address the risks faced by institutions
operating in emerging markets.
The rapid development of derivative instruments and their widespread use in international financial markets pose another set of difficult regulatory issues. Derivatives are contracts written in terms of the
price of some underlying asset; for example, stock options and stock
futures contracts are written in terms of stock prices. Derivatives can
be used to hedge risks and thus have been very useful in risk management by banks, other financial institutions, and nonfinancial firms.
However, they can also be used to take speculative positions, thus
increasing rather than decreasing risk. Moreover, the fact that derivative positions are recorded off the balance sheet makes it more difficult
for the market and for regulators to assess their contribution to the
risks taken by the institution using them. Also, because the creditworthiness of the counterparties to a derivatives transaction is not perfect,
firms or banks that believe they are hedged against various risks may
effectively not be.
A difficult issue concerns the type of regulatory oversight that should
be put in place for derivative instruments. For example, excessive regulation of derivatives could lead the derivatives business to move to
unregulated offshore markets. The President's Working Group on
Financial Markets is undertaking a long-term study of derivative instruments, including their potential risks and effects. This study will review
recent market developments and existing regulation and consider what
regulatory or legislative changes may be appropriate. It will investigate
possibilities for reducing systemic risk and eliminating legal uncertainty.
It will also assess the potential use of derivatives for fraud or manipulation, and methods for curtailing regulatory arbitrage, or the exploitation
of differences in regulation across different jurisdictions.




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Issues Posed by Hedge Funds and Other Highly Leveraged
Investment Funds
Another set of difficult regulatory issues is posed by hedge funds and
other highly leveraged entities. Hedge funds in their present form represent a relatively recent innovation in financial markets. The nearfailure of a prominent hedge fund in September 1998 (see Chapter 2)
focused renewed attention on the role and activities of these and other
highly leveraged entities.
The "hedge fund" label is usually applied to investment funds that
are unregulated because they restrict participation to a small number
of wealthy investors (see Chapter 2 for a broader discussion of their
activities). They generally use sophisticated techniques to make
targeted investments. In addition, some of them use significant leverage—that is, they not only invest their own equity capital but use
sizable amounts of borrowed funds as well. Regulation of hedge funds
could also prove difficult. Poorly designed regulation might, for example, lead such funds to move to unregulated offshore markets.
The impact of hedge funds and other highly leveraged entities on
financial markets certainly needs to be better understood. Accordingly,
the Secretary of the Treasury has called upon the President's Working
Group on Financial Markets to prepare a study of the potential implications of the operation of firms such as hedge funds and their relationships with their creditors. A primary concern for regulators is to
ensure that lenders appropriately manage the risks associated with
extending credit to hedge funds.
The study by the President's working group will examine a number
of issues, including questions relating to the disclosure of information
by entities such as hedge funds and the potential risks associated with
highly leveraged institutions generally. The study will also examine
whether the government needs to do more to discourage excessive
leverage, and if so, what the appropriate steps might be. A number of
the agencies participating in the working group are also involved in
several studies on the international aspects of these questions.
STRENGTHENING PRUDENTIAL REGULATION AND
FINANCIAL SYSTEMS AND PROMOTING ORDERLY CAPITAL
ACCOUNT LIBERALIZATION IN EMERGING MARKETS
The Asian crisis has focused attention on a wide variety of financial
policies, both international and domestic in scope. Considering the central role played by financial sector weaknesses in the crisis (see Chapter 6), the case for strengthening financial systems is particularly
strong in emerging markets. Accordingly, the second area in which the
G-7 called for further work is the identification of concrete steps to further strengthen prudential regulation and financial systems in emerging markets. Clearly, this is an ambitious undertaking and will require




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a vast number of issues to be considered and challenges to be overcome. Some of the most significant are addressed below.
Many countries have benefited significantly from the increased integration of global capital markets. But recent events have shown that
integration, when countries do not have the policies and institutions in
place to capture the full benefits of global integration, can also bring
new risks. The right approach is to put into place the policies and
institutions needed to capture the full benefits of financial integration.
Remarkably, very few countries have been tempted to turn inward
as a result of the recent crisis. However, instead of facing the challenges of strengthening their financial institutions, a few have in effect
decided to eschew the benefits of international capital flows by introducing controls on capital outflows as a way to prevent "destabilizing"
capital flight. However, many considerations argue against the use of
capital controls in a crisis. First, controls on outflows are often in practice administered in institutional frameworks in which they are used
to extract economic rents and delay necessary reforms. Elaborate
foreign exchange controls thus lead to corruption, besides distorting
international trade. In any case, investors often find ways to avoid the
controls over time. Moreover, capital controls may divert attention
from the need to address policy distortions that lead to excessive
borrowing, such as inadequate prudential supervision and regulation
of the financial system. Reliance on targeted controls might eventually
also lead countries to use capital controls indiscriminately, thus
insulating unsound macroeconomic policies from the discipline of the
marketplace. Capital controls and other domestic capital market
restrictions also serve as a form of financial repression—a distortionary type of taxation—that reduces the incentive to save. Studies
show that capital controls in Latin America in the aftermath of the
1980s debt crisis led to negative real interest rates, which eventually
provoked more flight of capital out of the country rather than less.
Finally, controls on outflows may discourage capital inflows, since
foreign investors will then fear they may not be able to repatriate the
proceeds of their investments in the future. Fears of the imminent
imposition of controls on capital outflows can actually accelerate rather
than avoid or postpone a crisis, and they can lead to perverse international contagion. For example, news of the imposition of capital controls in Russia and Malaysia in August 1998 was a factor in the spread
of financial panic to Latin America and other emerging markets.
The Benefits of Free Capital Mobility
The arguments for free capital mobility are numerous, especially
when domestic financial systems are strong and properly supervised
and regulated. The United States and most other leading industrial
countries, for example, do well without capital controls. First, with
unrestricted capital mobility, the market is free to allocate saving to




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the best investment opportunities, regardless of where in the world
those opportunities are. Investors can then earn a higher rate of return
than they could if limited to the domestic market. Second, firms and
other borrowers in high-growth countries can obtain funds more
cheaply abroad in the absence of controls than if they had to finance
their investments at home. Third, free capital mobility allows investors
and households to diversify risk; access to foreign investment opportunities enhances the benefits of portfolio diversification. Fourth, the
scrutiny of global investors can provide an important discipline on policymakers. Well-functioning capital markets can discourage excessive
monetary and fiscal expansion, since inflation, budget deficits, and current account deficits quickly lead to reserve outflows and currency
depreciation. Logically, a case for restricting capital mobility requires
the identification of distortions in the market allocation of capital.
Increasing the Resilience of Financial Systems
Although introducing controls on outflows is not a desirable
response to a crisis, international capital inflows can reverse suddenly,
and openness potentially does make emerging economies more vulnerable to such reversals. As a result, policies to increase the resilience of
financial systems might be usefully identified, to make countries less
vulnerable to these crises. These include effective prudential regulation and supervision of financial markets, as discussed above. The G-7
has suggested investigating concrete means of encouraging emerging
market economies to adopt international standards and best practices.
In addition, countries could take several steps to reduce the vulnerability of their financial systems. For example, they can encourage
greater participation in their markets by foreign financial institutions.
They can foster a better credit culture in the banking system. They can
rely more on equity and other financing that does not result in the
buildup of excessive debt burdens. They can implement an orderly and
progressive liberalization of their capital accounts. And in some
circumstances they might find it useful to rely on restraints on some
short-term capital inflows, in the context of sound prudential
regulation of the banking system.
The Orderly Liberalization of Capital Flows
Most emerging market economies have historically placed heavy
restrictions on their capital markets. One result of the recent crisis is a
growing consensus that capital market liberalization has to be carried
out in a careful, orderly, and well-sequenced manner if countries are to
benefit from closer integration into the global economy. As discussed in
Chapter 6, however, if domestic financial systems are weak, poorly regulated, and subject to institutional distortions, rapid capital account
liberalization can lead to excessive short-term borrowing and lending
and a mismatch of maturities and currency denominations in the




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assets and liabilities of both financial institutions and nonfinancial
firms. To reduce the risk of financial and currency crises following liberalization, effective regulatory and supervisory regimes must be in
place, and the financial sector must be poised to deal adequately with
these risks.
It may prove useful to develop principles to help guide countries that
are liberalizing and opening their capital markets, to help reduce the
vulnerability of their financial systems to sudden shifts in capital
flows. Possible measures include, for example, a policy of openness to
foreign direct investment and promotion of longer term equity financing. Conversely, some support consideration of measures to restrain
cross-border short-term interbank flows into emerging markets,
because such flows are likely to be both volatile and vulnerable to
distortions arising from financial safety nets.
Prudential Regulation of Short-Term Interbank Cross-Border
Inflows
One approach to ensuring the stability of short-term interbank flows
is through enhanced prudential banking standards. On the borrower
side, a range of possible measures could be considered to help discourage imprudent foreign currency borrowing, while relying on market
mechanisms to the extent possible. Prudential bank standards, such as
limits on a bank's open foreign currency positions, if enforced effectively, could reduce the riskier kinds of foreign borrowing by banks. Some
countries have experimented with regulatory requirements that force
their banking systems to maintain "liquidity buffers" to protect against
the risk of sudden shifts in funds out of the banking system. Argentina,
for example, has required banks to maintain large, liquid reserves
against their short-term liabilities, including their short-term foreign
liabilities.
Greater prudence in the use of short-term, cross-border interbank
flows could also be encouraged on the lender side. This could be accomplished through prudential regulation of the international short-term
lending of banks in the industrial countries, so as to encourage more
careful lending to emerging market entities that operate in weak
financial systems.
Should There Be Broader Controls on All Short-Term Capital
Inflows'?
More controversially, some have suggested wider use of marketbased restraints on all short-term capital inflows, to deter short-term
foreign borrowing not just through banks but by other means as well.
Chile is one country that has taken this approach. In some countries,
nonfinancial firms are reported to have undertaken large-scale risky
cross-border borrowing directly, rather than via the banking system, in
the leadup to the crisis in Asia, for example. It has been argued that




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regulation of inflows to banks alone would lead to evasion through
direct cross-border borrowing by nonfinancial firms. It has also been
argued that taxes on general inflows may help in the management of
monetary policy when surges in inflows create difficult problems, such
as how to "sterilize" their impact and avoid an inflationary surge in the
money supply.
The effectiveness of such controls has been questioned, however.
Evasion and leakages tend to make capital controls less effective over
time. Also, the apparent success of Chile may have been due more to
that country's very effective prudential regulation and supervision of its
financial system and fairly sound macroeconomic policies than to capital controls. Finally, such controls have tended to favor large corporations (which are more capable of raising funds directly in international
financial markets) at the expense of small and medium-size ones.
The available empirical evidence from countries that have imposed
controls on a broad range of short-term capital inflows shows that they
do appear to have affected the composition of inflows. Controls have
steered inflows away from instruments of short-term maturity and
toward longer term instruments and foreign direct investment. They
do not appear to have affected the overall volume of capital inflows.
Opponents of controls point out that, during the recent financial turmoil, Chile, Colombia, and Brazil have all reduced their controls in
order to stimulate urgently needed capital inflows and reduce pressures against their currencies. Proponents reply that these moves do
not undermine the rationale for controls. Their purpose is to slow
down short-term capital inflows temporarily during a cyclical phase
where such inflows are feared to be excessive. In the outflow phase of
the cycle (and especially in time of crisis), it is argued that it is sensible, and not inconsistent, to remove the controls. Evidence on the
appropriateness of Chilean-style controls is not only mixed but preliminary and based on the experience of a limited set of countries. Given
the numerous arguments on both sides, policies to restrict all
short-term inflows remain quite controversial.
Alongside the policies needed to strengthen financial systems, a
number of other policies are beneficial in developing countries to
enhance financial stability, foster long-term economic growth, and
limit their vulnerability to shifts in global capital. Countries need
sound and consistent monetary and exchange rate policies, as well as
fiscal policies that avoid excessive accumulation of government debt.
Although short-term and foreign currency borrowing can be very
appealing to a government, because it is cheaper and often easier in
the short run than borrowing long term and in local currency, too much
of this kind of borrowing makes countries vulnerable to sudden shifts
in investor confidence. Sound public debt management is important to
insure against the risk of market disruptions.




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DEVELOPING NEW APPROACHES TO CRISIS RESPONSE
Any regime designed to respond to international financial crises
must provide some combination of external financial assistance and
domestic policy changes. The provision of large-scale official international finance raises difficult questions concerning the criteria that
should govern access to such assistance, the appropriate terms, the
links (if any) to private sector involvement, and the sources of funding.
Reform of the present regime also requires the consideration of new
procedures for coordinating the relevant international bodies and
national authorities, alongside greater participation by the private
sector in crisis prevention and resolution.

New Structures for Official Finance
The recent global financial turmoil points to the usefulness of developing new ways for the international community to respond to crises. This
entails exploring the possibilities of new structures for official finance
that better reflect the evolution of modern markets. In their October 30
declaration the G-7 agreed that, in response to the current exceptional
circumstances in the international capital markets, strengthened
arrangements for dealing with contagion will be beneficial. They called
for the establishment of an enhanced IMF facility that would provide a
contingent short-term line of credit for countries pursuing strong IMFapproved policies —that is, those cases where problems stem more from
contagion than from poor policies. This would be a departure from traditional IMF packages, which are disbursed in a series of stages, or tranches, to encourage borrowers to adhere to strict policy conditionality. This
facility could be drawn upon in time of need and would entail appropriate
interest rates along with shorter maturities. The facility would be
accompanied by appropriate private sector involvement.
The rationale for a precautionary facility is that countries with sound
economic policies may be subject to attack because of contagion. The
international community has a role to play in international financial
crises, by intervening, when appropriate, to help limit contagion and global instability. It may make sense in today's world of large and sudden liquidity needs for more official money to be made available up front in
return for policy changes that are likewise more up front. The Congress'
agreement in 1998 to support an increase in the IMF quota will provide
the IMF with an important pool of new, uncommitted funds. The U.S.
contribution that Congressional action made possible will be strongly
leveraged through the contributions of the other IMF members.

The Continued Need for Greater Private Sector Participation
As described earlier in this chapter, the G-22 working group report
on international financial crises pointed to the need for future work to
develop new procedures for orderly and cooperative crisis resolution, to




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complement the role of official finance. The G-7 has called for similar
work as part of the next steps identified in its October 30 Declaration.
The size, sophistication, and heterogeneity of recent international capital flows have reduced the relevance of the procedures used in the
past when the private sector was involved in the resolution of severe
international financial crises. These procedures were developed during
an era when a small number of large international banks were the
source of most capital flows to emerging markets. There is now a need
to develop innovative ways for holders of new financial instruments to
participate constructively in crisis containment and resolution. Also,
innovative financing techniques, such as prenegotiated contingent
lines of credit and financial provisions that provide greater explicit
sharing of risk between creditors and debtors, are two avenues, among
others, worthy of exploration.

STRENGTHENING THE IMF
With the IMF's resources recently augmented, the institution's
members need to be sure that its policies effectively address the new
challenges of the global economy, and to provide the necessary political
oversight and guidance to accomplish this objective. An enhanced IMF
facility to provide a contingent line of credit, as discussed above, would
constitute a significant adaptation and strengthening of the IMF's
policies for crisis prevention and resolution to reflect the evolution of
the global economy. Another area where policies could be strengthened
is in the concerted use of periodic reviews of members' economies, to
promote greater transparency of policies and compliance with standards or other expressions of best practice in areas relevant to the
effective conduct of economic policy. One aspect of transparency of particular importance concerns encouraging the publication, by those
countries that rely on global capital markets, of key economic data as
set forth in the Special Data Dissemination Standard, which has been
in effect on a voluntary basis since 1996. The IMF's own transparency
could also be further improved by such steps as more widespread public release of information on the policy deliberations of the IMF's Executive Board. This could be accomplished along the lines of the procedures for the IMF's periodic reviews, mentioned above, whereby the
country under review may assent to a press release. In all these areas,
the IMF will need to ensure that its work continues, as warranted, to
be closely coordinated with other international entities, such as the
World Bank.
It will also be important to ensure that the IMF's Interim Committee, as the body designed to provide ministerial-level guidance to the
work of the IMF on a regular basis, is able to continue to provide effective political-level oversight and direction of the IMF in a manner that
reflects the evolving nature of the challenges of the international
financial system. Consideration of proposals to achieve this objective




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is in progress. Any changes adopted will need to be consistent with the
parallel objective of strengthening the World Bank's Development
Committee, which is the comparable entity for that organization.

MINIMIZING THE HUMAN COSTS OF FINANCIAL CRISES
The sharp recessions in East Asia have led to a steep increase in
both unemployment and poverty in that part of the world, inflicting
severe social costs. More attention must be given in time of crisis to the
effect of economic adjustment on the most vulnerable groups in society.
Thus, strengthening social safety nets in crisis countries is also an
important goal of stabilization packages. Ways must be found to minimize the human cost of financial crises and encourage the adoption of
policies that better protect the most vulnerable in society. Just as
important, countries should be encouraged to establish minimal social
services for their populations, so as to be prepared to weather financial
crises and other such shocks.
The Administration has been working with the world's multilateral
development banks (MDBs; these include the World Bank and the
regional development banks) to provide increased social safety nets in
the countries in crisis, to help the least advantaged citizens in those
countries who are experiencing hardship. The G-7 have asked the
World Bank to develop, in consultation with other relevant institutions, general principles of good practice in social policy. These should
then be drawn upon in developing adjustment programs in response to
crises. The World Bank and the regional MDBs are well positioned to
provide adequate spending in the areas of health and education—two
of the most crucial areas in which the MDBs should focus their
resources. Plans for employment creation, support for small and mediumsize enterprises, and support in the development of unemployment
insurance and pension plans are needed as well.

SUSTAINABLE EXCHANGE RATE REGIMES FOR
EMERGING MARKETS
Exchange rate regimes are institutional choices that signal policies,
priorities, and commitments. They vary in their rigidity. The choices go
beyond fixed versus floating rates. They range from institutional
arrangements like monetary unions, dollarized regimes, and currency
boards to conventional fixed exchange rates, crawling pegs, basket
pegs, managed floats, and free floats. No single exchange rate regime
is best for all countries at all times; rather the choice must be based on
a country's circumstances.
The choice of an appropriate exchange rate regime for emerging
market economies is particularly difficult, given that many emerging
markets have extensive trading ties to a number of major industrial
economies, and that the credibility of the policy environment in many




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emerging markets will take time to establish. No matter what
exchange rate regime a country chooses, it is critical that it be backed
by strong financial regulation and appropriate monetary and fiscal
policies. Macroeconomic stability is based on good policies, irrespective
of the exchange rate regime. Policy mistakes that contribute to a
currency crisis can occur under any exchange rate regime.
The three goals of financial market openness, monetary policy independence, and exchange rate stability are not conceptually consistent—indeed, these goals are sometimes called the "impossible trinity."
There are tradeoffs among these goals: a country can attain any two
out of the three, but not all three; it must give up at least one. As we
have seen, most countries have moved in the direction of increasingly
open capital markets. For them the choice narrows to the other two
goals. With perfect capital mobility, a country choosing a fixed
exchange rate loses its ability to pursue an independent monetary policy; conversely, an autonomous monetary policy can be pursued only if
the exchange rate is allowed to moveflexibly.Therefore, a choice must
be made between exchange rate fixity and monetary policy autonomy if
free capital mobility is to be maintained.
Benefits of Fixed Exchange Rate Regimes
Why would a country choose to fix its exchange rate, if it must give up
a large part of its monetary independence to do so? There are a variety
of reasons. One is that by eliminating exchange rate risk, a fixed
exchange rate regime may encourage international trade and finance.
However, the evidence on the effects of exchange rate stability on trade
volumes is mixed. The effects on trade and finance may be greater if a
country goes beyond fixing its exchange rate and simply adopts the
currency of another country, through monetary union or dollarization.
Another potential benefit of fixed rate regimes is that they can
foster monetary discipline. The loss of monetary autonomy under
fixed exchange rates limits the ability of monetary authorities to
pursue excessively expansionary and inflationary monetary policies.
Thus, such a regime can be an important signal of policy commitment to achieving and maintaining low inflation, especially when
countries are seeking a rapid retreat from conditions of high inflation or hyperinflation, as part of a consistent plan for macroeconomic stability.
By reducing the ability of monetary authorities to monetize fiscal
deficits, a fixed rate regime may also restrain tendencies toward loose
fiscal policy. Adopting a fixed exchange rate does not, however, automatically instill policy discipline. Rather, a fixed exchange rate regime
or a currency board requires fiscal discipline and a strong financial system to be credible. (A currency board is a particularly rigid variety of
fixed rate regime that issues only as much domestic currency as is
backed by foreign exchange reserves; see Box 7-1 for a discussion.)




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Box 7-1.—Currency Boards
A currency board is a monetary institution that only issues currency to the extent it is folly backed by foreign assets. Its principal
attributes include the following:
• an exchange rate that is fixed not just by policy, but by law
• a reserve requirement stipulating that each dollar's worth of
domestic currency is backed by a dollar's worth of reserves in a
chosen anchor currency, and
• a self-correcting balance of payments mechanism, in which a
payments deficit automatically contracts the money supply,
resulting in a contraction of spending.
By maintaining a strictly unyielding exchange rate and 100
percent reserves, a government that opts for a currency board
hopes to ensure credibility,
The first currency board was established in Mauritius, at that
time a colony of Great Britain, in 1849, The use of currency boards
eventually spread to 70 British colonies. Their purpose was to provide the colonies with a stable currency while avoiding the difficulty
of issuing sterling notes and coins, which were costly to replace if lost
or destroyed. The colonies also benefited from this arrangement in
that they could earn interest on the foreign currency assets being
held in reserve. The use of currency boards peaked in the 1940s and
declined thereafter. In the 1960s, many newly independent African
countries replaced their currency boards with central banks, and
most other countries followed suit in the 1970s.
The introduction of currency board-like arrangements in Hong
Kong (1983), Argentina {1991), Estonia (1992), Lithuania (1994),
and Bulgaria (1997) constitutes a small resurgence in their use
worldwide. A currency board can help lend credibility to the
policy environment by depriving the monetary authorities of the
option of printing money to finance government deficits. Argentina, for example, has benefited from the credibility inspired by its
currency board regime. Argentina was prompted to adopt such a
regime, which it calls the Convertibility Plan, because of a dramatic hyperinflation in the 1980s and the absence of a credible
monetary authority. Since 1991 the country has become a model of
price stability and has achieved laudable growth rates, except
during the recession brought on by the tequila crisis in 1995,
from which it has rebounded. By most accounts, the currency
board has worked for Argentina.
Characteristics that suit countries to be candidates for currency
boards are the following: a small, open economy; a desire for
further close integration with a particular neighbor or trading




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Box 7-1.—continued
partner; a strong need to import monetary stability, because of a
history of hyperinflation or an absence of credible public institutions; access to adequate foreign exchange reserves; and a strong,
well-supervised, and well-regulated financial system. Advocates of
currency boards have pushed for their wider use—in
particular, for Indonesia, Russia, and Ukraine. However,
proclaiming a currency board does not automatically guarantee
the credibility of the fixed rate peg. A currency board is unlikely to
be successful without the solid fundamentals of adequate
reserves, fiscal discipline, and a strong and well-supervised financial system, in addition to the rule of law.
Benefits of Exchange Rate Flexibility
Exchange rate flexibility offers several benefits. Most succinctly, as
already noted, it allows greater monetary independence. Flexible
exchange rate regimes allow a country to pursue a different monetary
policy from that of its neighbors, as it might want to do, for example,
when it is at a different stage of its business cycle. In addition, a flexible rate regime can facilitate a country's adjustment to external
shocks, such as the swings in capital flows and the terms-of-trade
shocks that have been factors in recent crises. Finally, flexible
exchange rates make the risk of foreign currency-denominated borrowing by banks and firms explicit. This may help discourage the
accumulation of unhedged foreign currency liabilities.
Many episodes of currency crisis in the 1990s, discussed in Chapter
6, occurred under regimes where exchange rates were either fixed or
kept in a narrow band. Semi-fixed exchange rate regimes and policies
of exchange rate-based stabilization have at times led to real currency
appreciations that worsened a current account deficit and helped trigger a crisis. Maintaining fixed rates long into the aftermath of an
exchange rate-based stabilization can lead to a real appreciation (due
to residual inflation) and a deteriorating trade balance, which can
eventually undermine the fixed rate regime if it is not supported by
consistent policy regimes. Some countries have made strong institutional commitments to a rigidly fixed regime; others could benefit from
increasing flexibility during periods of macroeconomic and financial
stability, when the move to flexibility may be less disruptive.
One form of fixed exchange rates that is even more extreme than a
currency board is a monetary union, which solves the problems of
credibility and speculation automatically. The next section discusses
the prospects of European Monetary Union and whether Europe
represents an "optimum currency area."




290

EUROPEAN ECONOMIC AND MONETARY UNION
The European response during the 1990s to the challenges
presented by financial globalization has been to continue the process
of economic and financial integration of the continent. As part of this
process, 11 members of the European Union embarked on a project
of monetary unification, which took effect on January 1, 1999, with
the third stage of European Economic and Monetary Union (EMU).
European integration raises some of the same analytical issues and
policy challenges as the integration of the emerging market countries into the world financial system.

THE EMU SCHEDULE
In a summit meeting in the spring of 1998, the heads of the EU governments decided that EMU should proceed as envisioned in the
Maastricht Treaty of 1991 to its third stage, monetary unification. The
founding members of EMU were selected on the basis of assessments,
made by the European Monetary Institute (the forerunner of the European Central Bank) and the European Commission, as to whether they
had met the Maastricht Treaty's economic convergence criteria in
1997. Members were required to have had government deficits and
total debt that were no greater than 3 percent and 60 percent of gross
domestic product (GDP), respectively. In addition, their inflation rates
and long-term interest rates had to have been within 1.5 and 2 percentage points, respectively, of the average of the three EU countries with
the lowest inflation and interest rates. Finally, members' currencies
must also have stayed within the EU Exchange Rate Mechanism
bands for 2 years.
Twelve of the 15 EU members wished to participate in EMU from its
inception, and 11 of these were found to satisfy the criteria (only
Greece was not). This, in part, reflected remarkable progress toward
fiscal consolidation, since the targets had seemed out of reach for
members such as Italy a mere year or two before. Of the other three
EU countries, Denmark and the United Kingdom had opted not to join
EMU for the time being, whereas Sweden had chosen not to qualify by
remaining out of the Exchange Rate Mechanism.
The remarkable convergence of financial conditions in the European
countries is clear from data on the 11 EMU countries' short-term and
long-term interest rates (Charts 7-1 and 7-2), which show a sharp convergence after 1996. Differences in interest rates across countries can
be due to two major factors: a currency premium related to the risk of
devaluation, and a country premium related to the possibility of
default on the public debt. With monetary union to start in January
1999, short-term interest rates had converged by late 1998, as currency
risk was eliminated (default risk is already close to zero for very




291

Chart 7-1 European Short-Term Interest Rates
As European Monetary Union approached, short-term interest rates in the euro-11
area fully converged.
Percent

10

Italy

Other euro-11 countries
1996
1997
98Q1
98Q2
Note: Other euro-11 countries include Austria, Belgium, Finland, France, Germany,
and the Netherlands.
Source: European Central Bank.

i
98Q3

Dec 98

98Q3

Dec 98

Chart 7-2 European Long-Term Interest Rates
Long-term interest rates have sharply converged with the approach of
European Monetary Union.
Percent

10

Other euro-11 countries

1996
1997
98Q1
98Q2
Note: Other euro-11 countries are Austria, Belgium, France, Germany, Luxembourg,
and the Netherlands.
Source: European Central Bank.




292

short-term public debt). Even after monetary union, differences among
long-term interest rates may remain, as different EMU countries with
different stocks of public debt may be perceived as having different
default probabilities. However, long-term interest rates among the 11
countries (collectively called the euro-11 area) had converged quite
sharply by the fall of 1998 as well.
In July 1998 the European Central Bank came into existence. On
January 1, 1999, a single currency, the euro, was created as the
currency of the 11 EMU countries. On the same date the European
Central Bank took control of monetary policy in these countries. Existing national notes and coins will continue to circulate until euro cash is
introduced, but the mark, the franc, the lira, and the rest are no longer
separate currencies. Rather they are "nondecimal denominations" of
the euro, locked in to it at permanent conversion rates. (By analogy,
U.S. dollar bills are issued in the 12 Federal Reserve districts around
the country and carry a circular seal with a letter inside denoting the
district from which they come. However, Europeans will continue for
some time to be far more aware of the geographic origin of the currency
they carry than Americans are.) Only in 2002 will euro cash enter into
circulation and national currencies be phased out. This transition period
is necessary because authorities need time to print the banknotes and
mint coins. Retailers and banks also want time to prepare, and
governments have to consider how to change their services over to the
use of the euro.
Although euro cash will be introduced only in 2002, many changes
will occur in the 3 years between now and then. Government bonds
issued after 1999 will be denominated in euros. Almost all outstanding
issues of marketable government debt by the participating countries
were redenominated in euros at the end of 1998. Moreover, several
large European companies plan to begin accounting in euros in 1999.
Such a move may lead smaller firms to follow. Even businesses that do
not switch their internal accounting to euros may quote prices in euros
for trading before 2002. Consumers and the public sector are likely to
be using national currency units until 2002. In general, European governments agreed that there will be no compulsion and no prohibition
in the use of the euro between 1999 and 2002.

THE BENEFITS AND POTENTIAL COSTS OF EMU
EMU offers several potential benefits. Transactions costs in trade
among the members will be lowered, as exchange rate risk and currency transactions within Europe will both be eliminated; the ensuing
goods market integration and enhanced price competition will be beneficial to consumers. Integrated European financial markets will be
broadened and deepened. Price discipline will be preserved by the
independent European Central Bank, which is committed to price
stability. It is hoped that fiscal discipline will also result, since, as the




293

members agreed in a separate Growth and Stability Pact, membership
requires maintenance of a disciplined fiscal policy. (According to the
pact, fines may be imposed on countries found to be running excessive
deficits.) Participation in EMU thus eliminates national monetary policy and limits the scope of fiscal policy as a stabilization tool. This loss
of macroeconomic tools to address cyclical unemployment makes more
urgent the need for European structural reforms, for example to
increase flexibility in the labor market. In this sense it is hoped that
EMU might serve as discipline to nudge European countries to implement structural reforms more rapidly and eliminate impediments to
sustained growth.
The creation of a large region of monetary stability is a commendable culmination of the 50-year process of economic, social, and political integration that has taken place in Europe. Indeed, the original
motivation for economic integration in Europe was to ensure that the
countries in the heart of Europe, which had fought three major wars
over the preceding 100 years, never do so again. This is one reason
why, in historical perspective, European integration has always been
in the political interest of the United States. But the United States will
also benefit in an economic sense, as a trading partner with Europe,
from strong economic performance there, which the single-currency
project may enhance in the long run. As long as Europe remains open
to trade, what is good for Europe economically is good for Americans.
However, EMU also entails some potential costs. Most important,
the loss of monetary autonomy deprives countries of a tool to respond
to asymmetric national shocks —unexpected economic developments
that affect some countries differently than others. Similarly, exchange
rate changes are another instrument for coping with such shocks, but
with EMU this tool will also no longer be available. Without these
tools, flexibility of wages and labor mobility across regions and industries are the major mechanisms of adjustment. But labor mobility is
much lower among the nations of Europe than, for example, among the
American States. Fiscal policy can also play a stabilization role, but
again, the rules for EMU membership constrain countries' ability to
use that tool. Finally, Europe also lacks a centralized system of taxes
and transfers comparable to that of the United States to cushion
against regional and national shocks. Limited labor mobility, structural labor market rigidities, and decentralized and constrained fiscal
policies could imply that Europe does not satisfy the criteria for an
optimum currency area (Box 7-2) as clearly as do the States of the
United States.
Although these potential costs of EMU have some relevance, some of
the objections to EMU have been exaggerated. For example, although
monetary policy is a potent policy tool for mitigating cyclical
unemployment (that caused by shocks affecting aggregate demand for
a country's goods and services), it has little long-run impact on




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Box 7-2.—Is Europe an Optimum Currency Area?
The theory of optimum currency areas provides a set of
criteria by which to identify groups of countries that are likely to
benefit from membership in a common monetary union. Some
research suggests that the nations of the European Union are less
well suited to a common currency than are, for example, the
States of the United States. Yet Europe is becoming increasingly
integrated over time, and this may tip the balance in the
direction of satisfying these criteria in the future.
Common rather than national shocks. Why do countries ever
need independent currencies? If a country (or other geographic
region) suffers an adverse shock, such as a fall in demand for its
products, it may want to follow a more expansionary monetary
policy, to stimulate demand and head off unemployment. Yet it
cannot do so if it does not have an independent currency. Conversely, only common shocks can be properly addressed by a
unionwide change in monetary policy.
For example, in the early 1990s Germany experienced a sudden
increase in interest rates, as a result of unification, which led to an
increase in western German spending in the eastern lander. It was
difficult for other European countries to accept this increase in German interest rates, because it did not suit their own economic conditions. The resultant strains broke apart Europe's Exchange Rate
Mechanism in 1992-93, although it was later restored.
A high degree of labor mobility. Labor mobility is an important
criterion for an optimum currency area: a region that has this
means of adjustment available has less need for monetary
independence. In the event of an adverse shock in one country,
workers can simply move to other countries or regions with
stronger economies. Although this might not appear to be an
attractive solution, it turns out that interstate migration is the
most rapid means of adjustment (more rapid than changes in
wage levels, for example) to economic downturns within the United States. Labor mobility among the European countries is much
lower than in the United States. Thus, by the labor
mobility criterion, European countries are less well suited to a
common currency than are the American States.
The existence of a federal system of fiscal transfers. When
disparities in income do arise in the United States, Federal
fiscal policy helps narrow them. One recent estimate suggests
that when a region's income per capita falls by $1, the final
reduction in its disposable income is only 70 cents. The
difference, a 30 percent Federal cushioning effect, comes about
both through an automatic decrease in Federal tax receipts and




295

Box 7-2.—continued
through an automatic increase in unemployment compensation
and other transfers. The cushioning effect has been estimated
at a lower 17 percent in the case of the Canadian provinces.
European countries have greater scope for domestic fiscal stabilization than do American States. There are also some crosscountry fiscal transfer mechanisms. But neither the fiscal
transfer mechanisms already in place within the European
Union nor those contemplated under EMU (the so-called cohesion funds) are as large as those in the U.S. or the Canadian fiscal system.
At least by the theoretical criteria of labor mobility and availability of fiscal transfers, then, the European Union is not as
good a candidate for a monetary union as the United States.
European countries may be less adaptable to adverse shocks
than American States. This suggests that, if shocks occur in the
coming decade that affect EU members as differently as did the
German unification shock of the early 1990s, governments in
those countries adversely affected could experience popular
resentment against what for them will be the insufficiently
expansionary monetary policies of the rest.
The prospects for EMU. There is good hope, however, for a
successful EMU. The degree of integration among the EU
countries is increasing decade by decade. International labor
mobility, for example, is likely to be higher in the future than in
the past. The Schengen convention now allows free movement
of citizens among a subset of European countries. Thus, the
European countries may come to satisfy the textbook criteria of
an optimum currency area in the future, even if they do not do
so fully now.
unemployment caused by such structural rigidities as labor market
inflexibility or real wage rigidity. Such conditions result in high levels of the full-employment unemployment rate (the lowest rate of
unemployment consistent with stable inflation —also called the
nonaccelerating-inflation rate of unemployment, or NAIRU) in many
European countries and in such chronically depressed regions as
southern Italy. These problems must be addressed through
structural reform, with or without monetary union.
Second, the scope for fiscal expansion is also limited in Europe,
because fiscal deficits and debt-to-GDP ratios remain high in a
number of countries. Fiscal consolidation must therefore continue
with or without EMU; in this sense, EMU may not be a strong
constraint.




296

Third, asymmetric shocks and limited factor mobility may diminish
over time as EMU itself leads to greater real integration among the European economies (see Box 7-2). For example, as intra-European trade continues to grow in response to European integration and EMU, the
creation of a common free market for goods, services, and factors of
production could make idiosyncratic national shocks less prevalent, if it
reduces the geographical concentration of industries in certain countries.
Finally, it has been argued that EMU is likely to exert discipline in
favor of structural reform. As there will be no national monetary and
exchange rate policies, and fiscal policy autonomy will be constrained,
the ability to use instruments of macroeconomic policy to delay structural market reforms will be reduced; governments will then have
stronger incentives to pursue policies that further long-run economic
growth. Critics of this view contend, however, that EMU could actually
slow the drive for structural reforms: because reforms are socially
costly, the flexibility deriving from monetary, exchange rate, and fiscal
discretion could ease the transition costs as resources are reallocated.
With EMU, the absence of these social shock absorbers may slow
structural reform.

THE EURO AS AN INTERNATIONAL CURRENCY AND THE
IMPLICATIONS FOR THE DOLLAR
Monetary union in Europe is a positive development that could
simultaneously benefit the continent itself, the United States, and the
world economy. Some have expressed concern, however, that a strong
European economy and the emergence of the euro as an alternative
international currency, rivaling the dollar, are likely to harm the United States. Such concerns are largely misguided. The United States has
long benefited from a prosperous, growing Europe, and ever since the
Marshall Plan, U.S. policy has supported the development of strong
market economies on that continent. The United States will benefit
from an open and integrated economic area in Europe. American producers will be able to export to a large, integrated European market
with no cross-national restrictions on trade. U.S. firms producing in
Europe will benefit from the lack of exchange rate volatility, common
standards for goods and services, and a large, open market. Indeed,
U.S. corporations have more experience selling into a large, unified
market than do their European counterparts. American financial institutions, in particular, are already quite competitive in commercial and
investment banking services and securities products and can benefit
from the opportunities provided by the broadening and deepening of
integrated European financial markets.
The emergence of the euro as an international currency should not
be viewed with alarm, for a number of reasons. Even if the euro
emerges as a strong international currency, the negative effects on
U.S. economic welfare are likely to be small and outweighed by the




297

advantages of EMU to U.S. residents, as already described. And in any
case the euro is unlikely to rapidly displace the dollar as a major international currency, given that the foundations of the successful performance of the U.S. economy remain intact. International currency
status does not automatically follow from a currency's possession of a
large home base.

The Functions of an International Currency
What does it mean to be a major international currency, and is it likely that the euro will become one? A currency has three main uses: it can
be used as a means of payment, as a unit of account, and as a store of
value. An international currency is simply one that is also used outside
its home country for these three purposes. Within each of the three
functions, an international currency has both official and private uses.
In money's store-of-value function, investors decide how much of
their wealth to hold in the form of assets denominated in various currencies. Will public and private investors hold a fraction of their portfolios in assets denominated in euros? If they hold a fraction that
exceeds the sum of the fractions previously occupied by the German
mark and the other disappearing European currencies, a portfolio shift
would occur, leading to greater demand for euros. This, in turn, could
cause an appreciation of the euro. However, whether euro-denominated assets do acquire a higher share of portfolios will depend on various
economic factors. These include the inflation rate in the euro area, confidence in the value of the euro relative to the dollar and the yen, the
rate of return on euro-denominated assets, and economic growth in
Europe, as well as political factors.
The official side of the store-of-value use is that central banks hold
currencies as foreign reserves. The euro's emergence raises the possibility of greater diversification of these reserves away from the dollar
toward the euro. In the 1970s and 1980s, the dollar's share of reserve
currency holdings gradually shrank to make room for the mark and
the yen. This trend was suspended, or even reversed, in the 1990s. But
it could resume in the 2000s to make room for the euro. Such diversification away from the dollar would depend in part on the same riskreward considerations as matter for private use. Countries with strong
economic fundamentals, sound currencies, and low inflation are more
likely to have their currency used as an international currency. As long
as the United States maintains a strong economy, international
demand for dollars will remain strong.
A unit of account is a reference scale for quoting prices, which is
distinguishable from the actual currency in which assets are held or payments made. For the private sector an international currency functions
as a unit of account through its use in invoicing imports and exports.
Presently, the dollar plays a dominant role in invoicing around the world,
especially for primary commodities like oil. Invoicing within Western




298

Europe will henceforth be mostly in euros, but the euro may also come to
be used even more widely in Central and Eastern Europe, the Middle
East, and Africa, areas of substantial and increasing trade with Europe.
One official use of international currencies that can be classified
under the unit-of-account function is as a major currency to which
smaller countries can peg their exchange rates. Non-EMU European
countries, particularly those in Central and Eastern Europe, are likely
to consider pegging their currencies to the euro for two reasons:
because they undertake more of their trade and finance with the EU
countries than with the United States, and because they aspire to
eventual membership in EMU. If this happens, greater use of the euro
by these countries as an intervention currency will increase official
demand for euros. The unit-of-account, store-of-value, and means-ofpayment functions are thus interrelated.
Currently, the dollar is the primary vehicle currency in foreign
exchange trading, which is one example of the use of a currency as a
means of payment. A trader who wishes to exchange one minor currency for another usually has to exchange the first currency for one of the
major currencies, and then exchange that currency for the currency he
or she ultimately wants to buy. Traders today are more likely to use
the dollar as the intermediate, or vehicle, currency than to go through
some other major currency or to be able to find a counterparty for a
direct cross trade. (See Box 7-3 on the role of different international
vehicle currencies.)
The use of a currency by the private sector as a means of payment in
international trade and finance depends on economies of scale in payments systems. As in the case of a domestic currency, increasing
returns to scale in payments are significant: it is easier and cheaper to
use the same currency that everyone else uses. In this regard the
advantages of incumbency and inertia favor the dollar even as the
euro's natural home grows to be as large as that of the dollar.
In short, although it is likely that the euro will become an international currency, it is unlikely that the dollar will be replaced anytime
soon in its role as the leading international currency.
7s it Good or Bad to Be an International Currency?
Does it matter whether the dollar remains the leading international
currency? One should not overemphasize the decidedly modest benefits
that having an international currency provides to a country.
Advantages of having a key currency. At least five advantages accrue
to a country from having its currency used internationally. The first is
convenience for the country's residents. It is certainly more convenient
for a country's exporters, importers, borrowers, and lenders to be able
to deal in their own currency rather than in foreign currencies. The
global use of the dollar, like the increasingly global use of the English
language, is a natural advantage that American businesses may take




299

Box 7-3.—How Does the Dollar Rank Today Against Other
International Currencies?
Most measures show a gradual decline in international use of the
dollar in recent decades. Reserve currency use, perhaps the best
measure, is shown in Chart 7-3. The dollar's share of central bank
reserve holdings declined from 76 percent in 1973 to 49 percent in
1990. This reflects a gradual shift of central bank portfolio shares into
marks and yen. However, the dollar's share in reserve holdings has
been relatively flat in the 1990s, amounting to 57 percent in 1997.
Other major measures of international currency status, as of
the eve of the birth of the euro, are shown in Table 7-1, They tend
to present the same picture: the dollar still leads, despite a gradual decline in its use versus the mark and the yen over the last 30
years. The dollar is still more important than its three or four
closest rivals combined.
The first column in Table 7-1 reports the popularity of major currencies among smaller countries choosing a peg for their currencies,
The dollar is the choice of 39 percent of these countries. Three currencies (those of Bosnia, Bulgaria, and Estonia) were pegged to the
mark last year, however. Elsewhere, the French franc was, after the
dollar, still the most common choice as a peg, accounting for 29 percent of countries using pegs; these countries are principally in Africa,
owing to a special set of arrangements with the French treasury. The
euro is inheriting this role of the mark and the franc. It is still the
case that no currencies anywhere are pegged to the yen. The dollar
was the currency either bought or sold in fully 87 percent of trades in
global foreign exchange markets in April 1998 . This figure (like the
share of reserves held in dollars) should automatically go up in
1999, as EMU eliminates intra-European transactions among
member currencies.
The various measures of the use of currencies to denominate private international financial transactions—loans, bonds, and
deposits—also still showed the dollar as the dominant currency,
with a 54 percent share.
Figures on the use of international currencies as substitutes in
local cash transactions are not generally available. According to estimates, however, the leader has been the dollar, for which internationally circulating cash has been estimated by the Federal Reserve
at 60 percent of currency outstanding. International circulation of
the mark has been estimated by the Bundesbank (Germany's central
bank) at 35 to 40 percent of the German currency outstanding, but
because the outstanding stock of marks is much smaller than that
of dollars, the mark's share of total currency in international
circulation is smaller than this figure would suggest.




300

Chart 7-3 International Use of Major Currencies
Although official use of the dollar is below its peak in the mid-1970s, it remains
much more widely used than the other major currencies.
Percent of official holdings of foreign exchange (end of year)
80

60

40

Pound

Mark

20

1965

1969

1973

1977

1981

1985

1993

1989

1997

Source: International Monetary Fund.

TABLE 7-1.— The Importance of Major Currencies on the
Eve of the Introduction of the Euro
[Shares in international use]

Currency

U S Dollar
Deutsche mark
Japanese yen
Pound sterling
French franc
Other EMS currencies

ECU
Other/unspecified
1
2

Pegging
of minor
currencies

039
.06
00
.00
29
.04
00
.22

Foreign
exchange
reserves
held by
central
banks

Foreign
exchange
trading
in
world

057
.13
05
.03
01

087
.30
21
.11
05

(2)

,.,
} .17

05
.15

International
capital
markets

International
trade

markets1

.29

054
.11
08
.08
06
(2)

01
.12

048
.16
05
1.15

J

00
.16

Cash
held
outside
home
country

078
.22
(2)

.00
00
.00
00
(2)

Shares add to 2.00 because in each currency transaction there are two currencies traded.
Not available.

Sources: Various international agencies (including International Monetary Fund, Bank for International Settlements, and
Organization for Economic Cooperation and Development) and other sources.

for granted. But the benefits from having one's country's currency
used as a unit of account should not be overemphasized. Invoicing U.S.
imports in dollars does not necessarily shift the currency risk from the
buyer to the seller, as the dollar price sometimes can change quickly
when the exchange rate changes.
A second possible advantage is increased business for the country's
banks and other financial institutions. However, there need be no firm




301

connection between the currency in which banking is conducted and
the nationality of the banks conducting it (or between the nationalities
of savers and borrowers and the nationality of the intermediating
bank). British banks, for example, continued to do well in the Eurodollar market long after the pound's international role had waned. Nevertheless, it stands to reason that U.S. banks have comparative advantage in dealing in dollars.
Having an international currency may confer power and prestige,
but the benefits therefrom are somewhat nebulous. Nevertheless, historians and political scientists have sometimes regarded key currency
status and international creditor status, along with such noneconomic
factors as colonies and military power, as among the trappings of a
great power.
Some view seigniorage as perhaps the most important advantage of
having other countries hold one's currency. Seigniorage derives from
the fact that the United States effectively gets a zero-interest loan
when dollar bills are held abroad. Just as a travelers' check issuer
reaps profits whenever people hold its travelers' checks, which they are
willing to do without receiving interest, so the United States profits
whenever people in other countries hold dollars that do not pay them
interest. International seigniorage is possible wherever hyperinflation
or social disorder undermine the public's faith in the local currency,
leading them to prefer to hold a sound foreign currency instead. And
today the dollar is the preferred alternative. (Illegal activities are
another source of demand for cash, of course.)
How much does the United States gain from seigniorage? One way
to compute cumulative seigniorage is to estimate the stock of dollars
held abroad and calculate the interest that would otherwise have to be
paid on this "loan" to the United States. Foreign holdings of U.S. currency are conservatively estimated at 60 percent of the total in circulation. With total currency outstanding in mid-1998 at $441 billion,
foreign holdings are about $265 billion. Multiplying this figure by the
interest rate on Treasury bills yields an estimate for seigniorage of
about $13 billion a year.
A final advantage is the ability to borrow in international capital
markets in one's own currency. Some have argued that the United
States' financing of its current account deficit through foreign borrowing has been facilitated by the ability to issue dollar-denominated liabilities, and the concern has been expressed that this ability may be
hampered by a loss of reserve currency status. This concern is probably
overdone, however. First, many industrial countries whose currency is
not a key currency are able to borrow in domestic currency. Second,
countries with larger current account deficits than the United States
(as a share of their GDP) have regularly and persistently financed such
imbalances with borrowing in foreign currency rather than their own.
Countries become unable to borrow to finance current account imbal-




302

ances when such imbalances become unsustainable. The fact that borrowing may occur in domestic or foreign currency has little to do with
such sustainability.
Disadvantages of having a key currency. Having an international
currency confers at least two disadvantages on a country. These drawbacks explain why Germany, Japan, and Switzerland have in earlier
decades been reluctant to have their currencies held and used widely
outside their borders.
The threat of large fluctuations in demand for the currency is one disadvantage. It might be that the more people around the world hold an
international currency, the more demand for that currency will vary. Such
instability of demand, however, is more likely to follow from the increase
in capital mobility than from key currency status per se. In any case, central banks are particularly concerned that internationalization of their
currencies will make it more difficult to control their money stocks. This
problem need not arise if they do not intervene in the foreign exchange
market. But the central bank may view letting fluctuations in demand for
the currency be reflected in the exchange rate as just as undesirable as
letting them be reflected in the money supply.
The second disadvantage is an increase in average demand for the
currency. This is the other side of seigniorage. In the 1960s and 1970s
the Japanese and German governments were particularly worried
that, if domestic assets were made available to foreign residents, an
inflow of capital might cause the currency to appreciate and render the
country's exporters uncompetitive on world markets. Some Europeans
today express the same concern about the euro.

What Factors Determine International Currency Status?
Will the dollar maintain its global role in the foreseeable future? The
answer depends on four major conditions that determine whether a
currency is used internationally.
Patterns of output and trade. The currency of a country that has a
large share in world output, trade, and finance has a natural advantage. The U.S. economy is still larger than the euro-11 economies combined. If the United Kingdom and the other remaining EU members
(Denmark, Greece, and Sweden) join EMU in the future, however, the
two currency areas will then be very close in size.
History. There is a strong inertial bias in favor of using whatever currency has been the vehicle currency in the past. Exporters, importers,
borrowers, lenders, and currency traders are more likely to use a given
currency in their transactions if everyone else is doing so. For this reason, the world's choice of international currency is characterized by
multiple stable equilibria; that is, any of several currencies could fill
that role under certain conditions. The pound remained an important
international currency even after the United Kingdom lost its position




303

as an economic superpower early in this century. In the present context
the inertial bias favors the continued central role of the dollar.
The country's financial markets. Capital and money markets must
be not only open and free of controls, but also deep, well developed, and
liquid. The large financial marketplaces of New York and London
clearly benefit the dollar and the pound relative to the mark and the
yen. It remains to be seen whether EMU will turn Frankfurt or Paris
into one of the top few world financial centers.
Confidence in the value of the currency. Even if a key currency were
used only as a unit of account, a necessary qualification would be that
its value not fluctuate erratically. In fact, however, a key currency is
also used as a form in which to hold assets (firms hold working balances
of the currencies in which they invoice, investors hold bonds issued
internationally, and central banks hold currency reserves). For these
purposes, confidence that the value of the currency will be stable, and
particularly that it will not at some point be inflated away, is critical.
In the 1970s the monetary authorities in Germany, Japan, and
Switzerland established a better track record of low inflation than
did the United States, which helped their currencies to achieve
greater international currency status. Given the good U.S. inflation
performance more recently, this is no longer such a concern.
What Is the Prognosis for the Dollar and the Euro1?
In light of these desiderata for a would-be international currency, is
it likely that the euro will rival the dollar as the leading international
currency? The euro automatically inherits the roles of the ecu, the
mark, the French franc, and other currencies of the European Monetary System. Subsequently, the euro's share will probably gradually
rise, moving in the direction of Europe's share of output.
The odds, however, are against the euro's rapidly supplanting the
dollar as the world's premier currency. It is not that the dollar is ideally suited for the role of everyone's favorite currency. An international
currency is one that people use because everyone else is using it. Two
of the four determinants of reserve currency status—highly developed
financial markets and historical inertia—support the dollar over the
euro. The third, economic size, is a tie (or will be if the United Kingdom
joins EMU). The fourth determinant is also a tie, as both Europe and
the United States have pursued stable monetary policies aimed at
keeping inflation low.
The widespread use of the U.S. dollar as an international currency—
for holding reserves, pegging minor currencies, invoicing imports
and exports, and denominating bonds and lending—is testimony to
the strength of the U.S. economy and the confidence with which it is
viewed around the world. But the direct economic benefits deriving
from this international role are limited. The welfare of a country is
measured by its ability to produce a large quantity of goods and ser-




304

vices in demand, and to provide its citizens with sustained increases
in real income and consumption opportunities. Whether a country's
currency is an international currency or not has little to do with such
long-run well-being, as the experience of many successful economies
whose currencies do not have international roles attests. An economically strong and healthy United States that is also a leader and
champion of sound economic policies has led, as a by-product, to a
strong international role for the U.S. dollar.

CONCLUSION
Reforms are under way to create a strengthened international financial architecture for the global marketplace in the next millennium,
one that captures the full benefits of international capital flows and
global markets, minimizes the risk of disruption, and protects the
most vulnerable.
The United States has worked intensively with key emerging markets, other industrial countries, and the relevant international organizations to put in place the building blocks of this new architecture. The
reforms recommended by the G-22 and adopted by the G-7 are an
important starting point. The United States and its G-7 partners have
also agreed to do more to build a modern framework for the global
markets of the 21st century and to limit the swings of boom and bust
that destroy hope and diminish wealth. For these reasons they have
also committed themselves to initiate new work on a number of other
important areas, to identify additional steps to strengthen the international financial architecture. All these reforms will ensure that the
unprecedented growth and the increase in welfare and opportunity
experienced in the 50 years after the creation of the Bretton Woods
system are maintained in the future.
Meanwhile the United States salutes the formation of the European
Monetary Union. The United States has much to gain from the success of
this momentous project. Now more than ever, America is well served by
having an integrated and prosperous trading partner on the other side of
the Atlantic. Europe should benefit from a single currency that supports
these ends—and if Europe benefits, the United States gains as well.




305




Appendix A
REPORT TO THE PRESIDENT ON THE ACTIVITIES
OF THE
COUNCIL OF ECONOMIC ADVISERS DURING 1998







LETTER OF TRANSMITTAL
COUNCIL OF ECONOMIC ADVISERS
Washington, D.C., December 31,1998
MR. PRESIDENT:
The Council of Economic Advisers submits this report on its activities during the calendar year 1998 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,
Janet L. Yellen, Chair
Jeffrey A. Frankel, Member
Rebecca M. Blank, Member




309

Council Members and Their Dates of Service
Position

Name
Edwin G Nourse
Leon H Keyserling
JohnD Clark
Roy Blough
Robert C Turner
Arthur F. Burns
NeilH.Jacoby
Walter W Stewart
Raymond J Saulnier
Joseph S. Davis
PaulW 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
MertonJ.Peck
Warren L Smith
PaulW McCracken
HendrikS Houthakker .
Herbert Stein
Ezra Solomon
Marina v N Whitman
Gary L Seevers
William J Fellner
Alan Greenspan
PaulW 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
Laura D Andrea Tyson
Alan S. Blinder
Joseph E. Stiglitz
Martin N.Baily
Alicia H Munnell
Janet L Yellen
Jeffrey A. Frankel
Rebecca M. Blank




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
Member
Member
Member
Chair
Member
Member
Chairman
Member
Member
Chair
Member
Member

August9, 1946
August 9, 1946
November 2 1949
May 10 1950
August 9 1946
May 10, 1950
June 29 1950
Septembers 1952 ..
March 19, 1953
September 15, 1953
December 2 1953
April 4 1955
December 3, 1956
May 2, 1955
Decembers 1956
November 1, 1958
May? 1959
January 29 1961
January 29, 1961
January 29, 1961
Augusts 1962
November 16, 1964
May 17 1963
September 2, 1964
November 16, 1964
February 15 1968
February 2 1966
February 15, 1968
Julyl 1968
February 4, 1969
February 4, 1969
February 4 1969
January 1 1972
September 9 1971
March 13 1972
July 23 1973
October 31 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
Octobers 1989
November 13, 1991
November 13 1991
Februarys 1993
July 27, 1993
July 27, 1993
June 28, 1995
June 30 1995
January 29 1996
February 18 1997
April 23, 1997
October 22. 1998

310

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 1,1 958.
January 31 1959
January 20, 1961.
January 20 1961
Novemberl5 1964
July 31, 1962
December 27, 1962.
February 15, 1968.
August 31, 1964
February 1, 1966.
January 20 1969
June 30 1968
January 20, 1969.
January 20 1969
December 3 1,1971
July 15, 1971
August 31 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 31 1982
July 10, 1984.
January 20 1985
January 20 1989
Mayl 1989
September 19 1988
January 12 1993
August 2 1991
June 21 1991
January 20, 1993.
January 20 1993
April 22 1995
June 26, 1994.
February 10, 1997.
August 30 1996
August 1 1997

Report to the President on the Activities of the
Council of Economic Advisers During 1998
The Council of Economic Advisers was established by the Employment Act of 1946 to provide the President with objective economic
analysis and advice on the development and implementation of a wide
range of domestic and international economic policy issues.

The Chair of the Council
Janet L. Yellen continued to chair the Council during 1998. Before
becoming Chair of the Council, Dr. Yellen served as a Member of the
Board of Governors of the Federal Reserve System. Dr. Yellen is on
leave from the Haas School of Business at the University of California,
Berkeley, where she is the Eugene E. and Catherine M. Trefethen Professor of Business Administration. Dr. Yellen is responsible for communicating the Council's views on economic matters directly to the
President through personal discussions and written reports. She also
represents the Council at Cabinet meetings, meetings of the National
Economic Council (NEC), daily White House senior staff meetings,
budget team meetings with the President, and other formal and informal meetings with the President, senior White House staff, and other
senior government officials. Dr. Yellen is the Council's chief public
spokesperson. She directs the work of the Council and exercises
ultimate responsibility for the work of the professional staff.

The Members of the Council
Jeffrey A. Frankel is a Member of the Council of Economic Advisers.
Dr. Frankel is on leave from the University of California, Berkeley,
where he is a Professor of Economics. He previously directed the program on International Finance and Macroeconomics at the National
Bureau of Economic Research and is a former Senior Fellow at the
Institute for International Economics.
Rebecca M. Blank is also a Member of the Council of Economic
Advisers. Dr. Blank is on leave from Northwestern University, where
she is a Professor of Economics. Dr. Blank previously served as the
first Director of the Northwestern University/University of Chicago
Joint Center for Poverty Research and was a member of the research
faculty at Northwestern University's Institute for Policy Research.




311

The Chair and Members work as a team on most economic policy
issues. Dr. Frankel was primarily responsible for the Administration's
economic forecast, macroeconomic analysis, international economic
issues, and certain microeconomic issues, including those relating to
natural resources, the environment, and industrial organization.
Dr. Blank was primarily responsible for policy analysis relating to the
budget and taxation, labor, retirement security, health care, welfare
reform, and child and family issues. She also worked closely with the
President's Initiative on Race. The Chair and Members participate in
the deliberations of the NEC, and Dr. Yellen is a member of the NEC
Principals Committee.
WEEKLY ECONOMIC BRIEFINGS
Dr. Yellen and the Members continued to prepare the Weekly
Economic Briefing of the President of the United States for the President, the Vice President, and the President's other senior economic
and policy advisers. The Council, in cooperation with the Office of the
Vice President, prepares the written briefing, which provides analysis
of current economic developments, more extended discussions of a
wide range of economic issues and problems, and summaries of economic developments in different regions and sectors of the economy.
MACROECONOMIC POLICIES
A primary function of the Council is to advise the President on all
major macroeconomic issues and developments. The Council prepares
for the President, the Vice President, and the White House senior staff
almost daily memoranda that report key economic data and analyze
current economic events.
The Council, the Department of the Treasury, and the Office of
Management and Budget—the Administration's economic "troika"—
are responsible for producing the economic forecasts that underlie the
Administration's budget proposals. The Council, under the leadership
of the Members, initiates the forecasting process twice each year.
In preparing these forecasts, the Council consults with a variety of
outside sources, including leading private sector forecasters.
In 1998 the Council continued to take part in discussions about a
range of budget issues, including Medicare reform, discretionary
spending priorities, and the Administration's tax proposals. The Council also participated in discussions of proposals to strengthen the
Social Security system, and development of the President's proposal to
save Social Security for the 21st century.
The Council participates in the Working Group on Financial
Markets, an interagency group that monitors developments related to
financial markets and the banking sector. The group includes representatives from the Treasury, the Federal Reserve, the NEC, and
various regulatory agencies. The Council also participated in a




312

working group studying bankruptcy reform, and in another on the
macroeconomic implications of the Y2K problem.
The Council continued its efforts to improve the public's understanding of economic issues and the Administration's economic agenda
through regular briefings with the economic and financial press,
frequent discussions with outside economists, and presentations to
outside organizations. Drs. Yellen, Frankel, and Blank also regularly
exchanged views on the macroeconomy with the Chairman and
Members of the Board of Governors of the Federal Reserve System.
INTERNATIONAL ECONOMIC POLICIES
The Council was an active participant in 1998 in the international
economic policymaking process through the NEC and the National
Security Council, providing both technical and analytical support and
policy guidance.
The Council took an active role in developing policies to respond
to financial turmoil in Asia, Russia, and Latin America, including, for
example, the Asian Growth and Recovery Initiative, designed to accelerate the restructuring of bank and corporate debt in some countries
affected by the Asian crisis. The Council also monitored closely the
effects of the Asian crisis on U.S. trade. In addition, the Council actively
participated in the development of proposals to reform the
international financial architecture.
The Council was involved in a range of other international economic
issues, including evaluating and explaining the case for trade liberalization, U.S. trade remedy laws (antidumping, countervailing duties,
safeguards, and Section 301 actions), sanctions policy, and the agendas of multilateral and regional forums such as the World Trade Organization and the Asia-Pacific Economic Cooperation forum. Dr. Yellen
testified before the Senate Finance Committee on the causes and consequences of the U.S. trade deficit.
The Council continued its annual meetings with the Economic
Planning Agency of Japan and the State Development and Planning
Commission of China, the Council's counterparts in those countries,
and began to meet with France's new Council of Economic Analysis. In
May, Dr. Yellen led a delegation of U.S. economic officials, including
representatives of the Departments of Commerce and Treasury and
the Board of Governors of the Federal Reserve System, to China to
continue discussions about China's economy and economic reforms.
Dr. Yellen also participated in the President's trip to China in June,
and in November she traveled to Japan, as part of the President's
official visit, to discuss Japan's economy and economic reforms.
The Council often represents the United States at international
meetings and forums. It is a leading participant in the Organization
for Economic Cooperation and Development (OECD), the principal
forum for economic cooperation among the high-income industrial




313

countries. The Council heads the U.S. delegation to the semiannual
meetings of the OECD's Economic Policy Committee; Dr. Yellen serves
as that committee's chair. Dr. Yellen also represented the United
States at the 1998 OECD Ministerial and participated in the OECD's
High Level Group on Sustainable Development. In 1998 Dr. Frankel
participated in the OECD's Working Party 3 on macroeconomic policy
coordination. Dr. Blank led the U.S. delegation to the OECD's
Working Party 1, which focuses on budget and other microeconomic
issues. Dr. Steven N. Braun, Director, Macroeconomic Forecasting at
the Council, led the U.S. delegation to the OECD annual examination
of the United States.
MICROECONOMIC POLICIES
During 1998 the Council was an active participant in a range of
microeconomic policy discussions. The Council participated in various
interagency discussions on labor market issues, health care, education, urban issues, child care, statistical policy, and welfare reform.
The Council also participated in working groups on the minimum
wage, pensions, training initiatives for displaced workers, immigrant
visas, unemployment insurance reform, and farm policy.
The Council was actively involved in the President's Initiative on
Race. It coordinated the production and release of a document presenting important indicators of social and economic well-being by race
and ethnicity for use by a national audience including educators and
policymakers. In October the Council helped coordinate a major conference on racial trends in the United States, sponsored by the President's Initiative on Race and organized by the National Research
Council.
In June 1998 the Council issued a report titled Explaining Trends
in the Gender Wage Gap. The report concluded that although the gap
between women and men's wages has narrowed substantially since
the signing of the Equal Pay Act in 1963, a significant wage gap
remains, which cannot be explained by differences between male and
female workers in labor market experience and in the characteristics
of jobs they hold.
In the areas of regulation and competition policy, the Council helped
develop important Administration initiatives to improve the performance of markets, both domestically and internationally. On the
domestic front the Council provided background information for and
participated in a review of merger effects and related policy issues,
and participated in interagency reviews of competition and pricing in
various sectors of the transportation market. Dr. Yellen testified
before the Senate Judiciary Committee on the economic impact of




314

mergers in the United States. The Council also participated in a working group on consumer privacy policy, and in another group on natural disaster insurance. The Council worked to consider questions raised
by proposed tobacco legislation. It was also engaged in issues related
to the privatization of the U.S. Enrichment Corporation.
The Council has been active on several matters relating to telecommunications. It has worked with the Office of the Vice President to
examine increases in growth and competition in the U.S. telecommunications industry, and participated in interagency working groups to
review a variety of regulatory matters. The Council played an active
role in developing the Administration's response to proposed legislation to reform the global satellite industry and worked with other
agencies to develop competitive principles designed to increase consumer benefits from satellite communications. The Council took part
in interagency efforts to increase competition and efficiency in electric
power markets in a manner consistent with important environmental
and social objectives.
The Council was active in a range of policy discussions on natural
resources and the environment, including implementation of the
Clean Air Act, as it applies to automobiles, power plants, and other
pollution sources. It was involved in the development and analysis of
the Administration's global climate change policy. After the negotiation of the Kyoto Protocol, the Council responded to requests from the
Congress and the public to analyze the economic impact of the climate
change agreement. The Council led the preparation and release of the
Administration's economic analysis, titled The Kyoto Protocol and the
President's Policies to Address Climate Change: Administration Economic Analysis, which was released in July. Dr. Yellen testified on six
occasions before several House and Senate committees regarding the
Administration's findings. The Council has been particularly active in
developing and promoting plans for the international trading of emissions permits and other market mechanisms to achieve the targets of
the Kyoto Protocol most efficiently. To advance these plans, Members
and staff traveled to and consulted with officials from Argentina,
China, France, and the Republic of Korea.

The Staff of the Council of Economic Advisers
The professional staff of the Council consists of the Chief of Staff,
the Senior Statistician, nine senior economists, the Senior Advisor to
the Council, five staff economists, and three research assistants. The
professional staff and their areas of concentration at the end of 1998
were:




315

Chief of Staff and General Counsel
Michele M. Jolin
Senior Economists
Steven N. Braun
Douglas W. Elmendorf
Elise H. Golan
Stephen Polasky
Cordelia W. Reimers
Nouriel Roubini
Robert F. Schoeni
Howard A. Shelanski
Charles F. Stone

Director, Macroeconomic Forecasting
Macroeconomics and Financial Markets
Agriculture and Natural Resources
Environment and Natural Resources
Labor, Social Policy, and Education
International Economics
Labor, Social Policy, and Welfare
Regulation, Industrial Organization, and
Antitrust
Macroeconomics and Editor,
Weekly Economic Briefing of the President

Senior Advisor to the Council
Joseph E. Aldy

Global Environment and Natural Resources
Senior Statistician
Catherine H. Furlong
Staff Economists

Ryan D. Edwards
Quindi C. Franco
Nora E. Gordon
Bert I. Huang
Matthew R. McBrady

Macroeconomics
Environment and Natural Resources
Labor and Social Economics
Labor and Microeconomics
International Economics
Research Assistants

Andrew R. Feldman
Raymond P. Guiteras
Summer L. Scott

Weekly Economic Briefing of the President
and Labor
Weekly Economic Briefing of the President
and International Economics
Macroeconomics
Statistical Office

Mrs. Furlong directs the Statistical Office. The Statistical Office
maintains and updates the Council's statistical information, oversees
the publication of the monthly Economic Indicators and the statistical
appendix to the Economic Report, and verifies statistics in Presidential and Council memoranda, testimony, and speeches.




316

Susan P. Clements
Linda A. Reilly
Brian A. Amorosi

Statistician
Statistician
Research Assistant

Administrative Office
Catherine Fibich

Administrative Officer

Office of the Chairman
Alice H. Williams
Sandra F. Daigle
Lisa D. Branch
Francine P. Obermiller

Executive Assistant to the Chairman
Executive Assistant to the Chairman and
Assistant to the Chief of Staff
Executive Assistant to Dr. Frankel
Executive Assistant to Dr. Blank

Staff Secretaries
Mary E. Jones
Rosalind V. Rasin
Mary A. Thomas

International Economics, Labor, and
Health Care
Environment, Industrial Organization, and
Public Finance
Macroeconomics

Mrs. Thomas also served as executive assistant for the Weekly
Economic Briefing of the President.
Michael Treadway provided editorial assistance in the preparation
of the 1999 Economic Report. Michael A. Toman, Resources for the
Future, served as a consultant during the year.
Anne M. Piehl and Timothy Waidmann provided expertise in the
preparation of a report prepared by the Council for the President's
Initiative on Race entitled Changing America: Indicators of Social and
Economic Well-Being by Race and Hispanic Origin. Jenepher W.
Moseley provided editorial assistance in the preparation of this report.
Student interns during the year were Robert P. Bamsey, Gregory A.
Bedard, Carol L. Capece, Michael A. Egner, Heather L. Jambrosic, Jason
K. Nuzzo, Jenny E. Pippin, Annette M. Richter, Rachel E. Rubinfeld,
Kristen M. Scarafia, Jasmin K. Sethi, and Matthew C. Weinzierl. The
following student interns joined the Council in January to assist with the
preparation of the Economic Report: Enrique J. Alonso, David S. Felman,
Matthew S. Milner, and Nathaniel F. Stankard.
DEPARTURES
The Council's senior 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. Many of the senior
economists who resigned during the year returned to their previous




317

affiliations. They are Christopher D. Carroll (The Johns Hopkins University), Aaron S. Edlin (University of California, Berkeley), Jon D.
Haveman (Purdue University), and Sanders D. Korenman (Baruch
College of the City University of New York). Keith O. Fuglie returned
to the U.S. Department of Agriculture, and he has since accepted a
position with the International Potato Center. Senior economists who
resigned during the year and accepted new positions are Maria J.
Hanratty (University of Minnesota), Randall W. Lutter (American
Enterprise Institute and the AEI-Brookings Joint Center for Regulatory Studies), Adele C. Morris (Department of the Treasury), and
Jeremy B. Rudd (Department of the Treasury).
Staff economists are generally graduate students who spend 1 year
with the Council and then return to their universities to complete
their dissertations. Those who returned to their graduate studies in
1998 are Mark R. Hopkins (University of Wisconsin-Madison) and
Mark C. Rainey (Massachusetts Institute of Technology). Amy N.
Finkelstein began graduate studies at the Massachusetts Institute of
Technology and Sarah J. Reber at Harvard University. After serving
as a research assistant at the Council, Zachary M. Candelario accepted
a position at Mars and Company. Research assistants who began
graduate studies in 1998 are Melissa A. Clark (Princeton University)
and Ha Yan Lee (London School of Economics). Daniel K. Chang
began studies at Georgetown University Law Center.
Public Information
The Council's Annual Report is an important vehicle for presenting
the Administration's domestic and international economic policies. It
is now available for distribution as a bound volume, on CD-ROM, and
on the Internet, where it is accessible at http://www.access.gpo.gov/eop.
The Council also has primary responsibility for compiling the monthly
Economic Indicators, which is issued by the Joint Economic Committee
of the Congress. The Internet address for the Economic Indicators is
www.access.gpo.gov/congress/cong002.html.




318

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




319




CONTENTS
NATIONAL INCOME OR EXPENDITURE:
B-l.
B-2.
B-3.
B-4.
B-5.
B-6.
B-7.
B-8.
B-9.
B-10.
B-ll.
B-12.
B-13.
B-14.
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.
B-29.
B-30.
B-31.
B-32.
B-33.

Page

Gross domestic product, 1959-98
326
Real gross domestic product, 195&-98
328
Quantity and price indexes for gross domestic product, and percent changes, 1959-98
330
Percent changes in real gross domestic product, 1959-98
331
Contributions to percent change in real gross domestic product,
1959-98
332
Chain-type quantity indexes for gross domestic product, 1959-98 334
Chain-type price indexes for gross domestic product, 1959-98
336
Gross domestic product by major type of product, 1959-98
338
Real gross domestic product by major type of product, 1959-98 339
Gross domestic product by sector, 1959-98
340
Real gross domestic product by sector, 1959-98
341
Gross domestic product by industry, 1959-97
342
Real gross domestic product by industry, 1977-97
343
Gross domestic product of nonfinancial corporate business, 195998
344
Output, costs, and profits of nonfinancial corporate business,
1959-98
345
Personal consumption expenditures, 1959-98
346
Real personal consumption expenditures, 1982-98
347
Private gross fixed investment by type, 1959-98
348
Real private gross fixed investment by type, 1982-98
349
Government consumption expenditures and gross investment by
type, 1959-98
350
Real government consumption expenditures and gross investment by type, 1982-98
351
Inventories and final sales of domestic business, 1959-98
352
Real inventories and final sales of domestic business, 1959-98 .... 353
Foreign transactions in the national income and product accounts, 1959-98
354
Real exports and imports of goods and services and receipts and
payments of factor income, 1982-98
355
Relation of gross domestic product, gross national product, net
national product, and national income, 1959-98
356
Relation of national income and personal income, 1959-98
357
National income by type of income, 1959-98
358
Sources of personal income, 1959-98
360
v
Disposition of personal income, 1959-98
362
Total and per capita disposable personal income and personal
consumption expenditures in current and real dollars, 1959-98 363
Gross saving and investment, 1959-98
364
Median money income (in 1997 dollars) and poverty status of
families and persons, by race, selected years, 1979-97
366




321

POPULATION, EMPLOYMENT, WAGES, AND PRODUCTIVITY:
B-34.
B-35.
B-36.
B-37.
B-38.
B-39.
B-40.
B-41.
B-42.
B-43.
B-44.
B-45.
B-46.
B-47.
B-48.
B-49.
B-50.

Population by age group, 1929-98
Civilian population and labor force, 1929-98
Civilian employment and unemployment by sex and age, 195098
Civilian employment by demographic characteristic, 1955-98
Unemployment by demographic characteristic, 1955-98
Civilian labor force participation rate and employment/population ratio, 1950-98
Civilian labor force participation rate by demographic characteristic, 1955-98
Civilian employment/population ratio by demographic characteristic, 1955-98
Civilian unemployment rate, 1950-98
Civilian unemployment rate by demographic characteristic,
1955-98
Unemployment by duration and reason, 1950-98
Unemployment insurance programs, selected data, 1967-98
Employees on nonagricultural payrolls, by major industry, 195098
Hours and earnings in private nonagricultural industries, 195998
Employment cost index, private industry, 1980-98
Productivity and related data, business sector, 1959-98
Changes in productivity and related data, business sector, 195998

367
368
370
371
372

373
374
375
376
377
378
379
380
382
383
384
385

PRODUCTION AND BUSINESS ACTIVITY:
B-51.
B-52.
B-53.
B-54.
B-55.
B-56.
B-57.
B-58.
B-59.

Industrial production indexes, major industry divisions, 1948-98
Industrial production indexes, market groupings, 1948-98
Industrial production indexes, selected manufactures, 1948-98 ...
Capacity utilization rates, 1948-98
New construction activity, 1959-98
New housing units started and authorized, 1959-98
Manufacturing and trade sales and inventories, 1954-98
Manufacturers' shipments and inventories, 1954-98
Manufacturers' new and unfilled orders, 1954-98

386
387
388
389
390
391
392
393
394

Consumer price indexes for major expenditure classes, 1958-98
Consumer price indexes for selected expenditure classes, 195898
Consumer price indexes for commodities, services, and special
groups, 1958-98
Changes in special consumer price indexes, 1960-98
Changes in consumer price indexes for commodities and services,
1929-98
Producer price indexes by stage of processing, 1954-98
Producer price indexes by stage of processing, special groups,
1974-98
Producer price indexes for major commodity groups, 1954—98
Changes in producer price indexes for finished goods, 1960-98 ....

395

PRICES:
B-60.
B-61.
B-62.
B-63.
B-64.
B-65.
B-66.
B-67.
B-68.

396

398
399
400
401
403
404
406

MONEY STOCK, CREDIT, AND FINANCE:
B-69.
B-70.




Money stock, liquid assets, and debt measures, 1959-98
Components of money stock measures and liquid assets, 1959-98

322

407
408

B-71.
B-72.
B-73.
B-74.
B-75.
B-76.
B-77.

Aggregate reserves of depository institutions and monetary base,
1959-98
Bank credit at all commercial banks, 1973-98
Bond yields and interest rates, 1929-98
Credit market borrowing, 1989-98
Mortgage debt outstanding by type of property and of financing,
1945-98
Mortgage debt outstanding by holder, 1945-98
Consumer credit outstanding, 1955-98

410
411
412
414
416
417
418

GOVERNMENT FINANCE:
B-78.
B-79.
B-80.
B-81.
B-82.
B-83.
B-84.
B-85.
B-86.
B-87.
B-88.
B-89.

Federal receipts, outlays, surplus or deficit, and debt, selected
fiscal years, 1929-2000
Federal budget receipts, outlays, surplus or deficit, and debt, as
percent of gross domestic product, fiscal years 1934-2000
Federal receipts and outlays, by major category, and surplus or
deficit, fiscal years 1940-2000
Federal receipts, outlays, deficit, and debt, fiscal years 19942000
Federal Government receipts and current expenditures, national
income and product accounts (NIPA), 1979-98
Federal and State and local government receipts and current expenditures, national income and product accounts (NIPA),
1959-98
Federal and State and local government receipts and current expenditures, national income and product accounts (NIPA), by
major type, 1959-98
State and local government receipts and current expenditures,
national income and product accounts (NIPA), 1959-98
State and local government revenues and expenditures, selected
fiscal years, 1927-96
Interest-bearing public debt securities by kind of obligation,
1967-98
Maturity distribution and average length of marketable interestbearing public debt securities held by private investors, 196798
Estimated ownership of public debt securities by private investors, 1978-98

419
420
421
422
423
424
425
426
427
428
429

430

CORPORATE PROFITS AND FINANCE:
B-90.
B-91.
B-92.
B-93.
B-94.
B-95.
B-96.

Corporate profits with inventory valuation and capital consumption adjustments, 1959-98
Corporate profits by industry, 1959-98
Corporate profits of manufacturing industries, 1959-98
Sales, profits, and stockholders' equity, all manufacturing corporations, 1952-98
Relation of profits after taxes to stockholders' equity and to sales,
all manufacturing corporations, 1947-98
Common stock prices and yields, 1956-98
Business formation and business failures, 1955-98

431
432
433
434
435
436
437

AGRICULTURE:
B-97.
B-98.
B-99.
B-100.

Farm
Farm
Farm
Farm




income, 1945-98
business balance sheet, 1950-97
output and productivity indexes, 1948-96
input use, selected inputs, 1948-98

323

438
439
440
441

B-101. Indexes of prices received and prices paid by farmers, 1975-98
B-102. U.S. exports and imports of agricultural commodities, 1940-98 ...

442
443

INTERNATIONAL STATISTICS:
B-103. U.S. international transactions, 1946-98
B-104. U.S. international trade in goods by principal end-use category,
1965-98
B-105. U.S. international trade in goods by area, 1989-98
B-106. U.S. international trade in goods on balance of payments (BOP)
and Census basis, and trade in services on BOP basis, 197498
B-107. International investment position of the United States at yearend, 1989-97
B-108. Industrial production and consumer prices, major industrial
countries, 1973-98
B-109. Civilian unemployment rate, and hourly compensation, major industrial countries, 1973-98
B-110. Foreign exchange rates, 1977-98
B-lll. International reserves, selected years, 1952-98
B-112. Growth rates in real gross domestic product, 1980-98




324

444
446
447
448

449
450
451
452
453
454

General Notes
Detail in these tables may not add to totals because of rounding.
Because of the formula used for calculating real gross domestic product (GDP),
the chained (1992) dollar estimates for the detailed components do not add to the
chained-dollar value of GDP or to any intermediate aggregates. The Department
of Commerce (Bureau of Economic Analysis) no longer publishes chained-dollar
estimates prior to 1982, except for selected series.
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 February
1998 through late January 1999.




325

NATIONAL INCOME OR EXPENDITURE
TABLE B-l.—Gross domestic product, 1959-98
[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Personal consumption expenditures

Gross private domestic investment
Fixed investment

Year or
quarter

1959
I960
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
1993
1994
1995
1996
1997
1993:1

II
Ill
IV
1994:1
II
Ill
IV
1995-1
II
Ill
IV

Gross
domestic
product

507.2
526.6
544.8
585.2
617.4
663.0
719.1
787.8
833.6
910.6
982.2
1,035.6
1,125.4
1,237.3
1,382.6
1,496.9
1,630.6
1,819.0
2,026.9
2,291.4
2,557.5
2,784.2
3,115.9
3,242.1
3,514.5
3,902.4
4,180.7
4,422.2
4,692.3
5,049.6
5,438.7
5,743.8
5,916.7
6,244.4
6,558.1
6,947.0
7,269.6
7,661.6
8,110.9
6,444.5
6,509.1
6,574.6
6,704.2
6,794.3
6,911.4
6,986.5
7,095.7
7,170.8
7,210.9
7,304.8
7,391.9

1996:1

7,495.3
7,629.2
7,703.4
7,818.4

1997:1

7,955.0
8,063.4
8,170.8
8,254.5
8,384.2
8,440.6
8.573.9

II
Ill
IV

II
Ill
IV
1998-1
II
Ill

Total

Durable
goods

318.1
332.2
342.6
363.4
383.0
411.4
444.3
481.9
509.5
559.8
604.7
648.1
702.5
770.7
851.6
931.2
1,029.1
1,148.8
1,277.1
1,428.8
1,593.5
1,760.4
1,941.3
2,076.8
2,283.4
2,492.3
2,704.8
2,892.7
3,094.5
3,349.7
3,594.8
3,839.3
3,975.1
4,219.8
4,459.2
4,717.0
4,953.9
5,215.7
5,493.7
4,365.4
4,428.1
4,488.6
4,554.9
4,616.6
4,680.5
4,750.6
4,820.2
4,862.5
4,931.5
4,986.4
5,035.3
5,108.2
5,199.0
5,242.5
5,313.2
5,402.4
5,438.8
5,540.3
5,593.2
5,676.5
5,773.7
5.846.7

42.7
43.3
41.8
46.9
51.6
56.7
63.3
68.3
70.4
80.8
85.9
85.0
96.9
110.4
123.5
122.3
133.5
158.9
181.1
201.4
213.9
213.5
230.5
239.3
279.8
325.1
361.1
398.7
416.7
451.0
472.8
476.5
455.2
488.5
530.2
579.5
611.0
643.3
673.0
506.4
524.2
537.2
553.1
563.2
572.4
583.3
599.3
598.4
606.0
616.9
622.8
632.3
647.3
642.5
651.1
668.9
659.9
681.2
682.2
705.1
720.1
718.9

Nondurable
goods

148.5
152.9
156.6
162.8
168.2
178.7
191.6
208.8
217.1
235.7
253.2
272.0
285.5
308.0
343.1
384.5
420.6
458.2
496.9
549.9
624.0
695.5
758.2
786.8
830.3
883.6
927.6
957.2
1,014.0
1,081.1
1,163.8
1,245.3
1,277.6
1,321.8
1,370.7
1,428.4
1,473.6
1,539.2
1,600.6
1,354.4
1,366.3
1,373.9
1,388.0
1,404.4
1,416.0
1,439.5
1,453.7
1,459.6
1,470.7
1,476.8
1,487.5
1,506.8
1,537.9
1,543.6
1,568.3
1,589.7
1,588.2
1,611.3
1,613.2
1,633.1
1,655.2
1.670.0

Nonresidential
Services

127.0
136.0
144.3
153.7
163.2
176.1
189.4
204.8
222.0
243.4
265.5
291.1
320.1
352.3
384.9
424.4
475.0
531.8
599.0
677.4
755.6
851.4
952.6
1,050.7
1,173.3
1,283.6
1,416.1
1,536.8
1,663.8
1,817.6
1,958.1
2,117.5
2,242.3
2,409.4
2,558.4
2,709.1
2,869.2
3,033.2
3,220.1
2,504.6
2,537.6
2,577.4
2,613.8
2,649.0
2,692.2
2,727.8
2,767.2
2,804.5
2,854.7
2,892.7
2,925.0
2,969.0
3,013.7
3,056.3
3,093.9
3,143.9
3,190.7
3,247.9
3,297.8
3,338.2
3,398.4
3.457.7

See next page for continuation of table.




326

Total

78.8
78.8
77.9
87.9
93.4
101.7
118.0
130.4
128.0
139.9
155.0
150.2
176.0
205.6
242.9
245.6
225.4
286.6
356.6
430.8
480.9
465.9
556.2
501.1
547.1
715.6
715.1
722.5
747.2
773.9
829.2
799.7
736.2
790.4
876.2
1,007.9
1,043.2
1,131.9
1,256.0
854.3
857.4
872.8
920.3
963.4
1,017.9
1,007.1
1,043.1
1,058.9
1,029.6
1,030.6
1,053.6
1,075.3
1,118.3
1,167.9
1,166.0
1,206.4
1,259.9
1,265.7
1,292.0
1,366.6
1,345.0
1.364.4

Total

74.6
75.5
75.0
81.8
87.7
96.7
108.3
116.7
117.6
130.8
145.5
148.1
167.5
195.7
225.4
231.5
231.7
269.6
333.5
403.6
464.0
473.5
528.1
515.6
552.0
648.1
688.9
712.9
722.9
763.1
797.5
791.6
738.5
783.4
855.7
946.6
1,012.5
1,099.8
1,188.6
823.5
842.9
858.8
897.5
911.0
941.7
956.9
977.0
1,000.0
1,004.3
1,013.5
1,032.1
1,059.1
1,089.7
1,118.1
1,132.2
1,146.7
1,176.4
1,211.1
1,220.1
1,271.1
1,305.8
1.307.5

Total

46.5
49.2
48.6
52.8
55.6
62.4
74.1
84.4
85.2
92.1
102.9
106.7
111.7
126.1
150.0
165.6
169.0
187.2
223.2
272.0
323.0
350.3
405.4
409.9
399.4
468.3
502.0
494.8
495.4
530.6
566.2
575.9
547.3
557.9
604.1
660.6
727.7
787.9
860.7
580.5
598.8
606.4
630.6
634.6
652.9
667.4
687.5
713.6
728.1
729.5
739.5
759.0
774.8
801.1
816.8
827.1
850.5
882.3
882.8
921.3
941.9
931.6

Structures

18.1
19.6
19.7
20.8
21.2
23.7
28.3
31.3
31.5
33.6
37.7
40.3
42.7
47.2
55.0
61.2
61.4
65.9
74.6
91.4
114.9
133.9
164.6
175.0
152.7
176.0
193.3
175.8
172.1
181.3
192.3
200.8
181.7
169.2
176.4
184.5
201.3
216.9
240.2
171.7
175.2
177.8
180.7
175.4
185.2
186.8
190.7
197.9
201.8
203.0
202.2
206.5
211.3
218.0
232.1
236.2
234.3
243.8
246.4
245.0
245.4
246.2

Producers'
durable
equipment
28.3
29.7
28.9
32.1
34.4
38.7
45.8
53.0
53.7
58.5
65.2
66.4
69.1
78.9
95.1
104.3
107.6
121.2
148.7
180.6
208.1
216.4
240.9
234.9
246.7
292.3
308.7
319.0
323.3
349.3
373.9
375.1
365.6
388.7
427.7
476.1
526.4
571.0
620.5
408.9
423.6
428.6
449.9
459.3
467.7
480.6
496.8
515.6
526.3
526.5
537.2
552.6
563.5
583.1
584.8
591.0
616.2
638.5
636.4
676.3
696.6
685.4

Residential

28.1
26.3
26.4
29.0
32.1
34.3
34.2
32.3
32.4
38.7
42.6
41.4
55.8
69.7
75.3
66.0
62.7
82.5
110.3
131.6
141.0
123.2
122.6
105.7
152.5
179.8
186.9
218.1
227.6
232.5
231.3
215.7
191.2
225.6
251.6
286.0
284.8
311.8
327.9
243.0
244.1
252.4
266.8
276.4
288.7
289.5
289.5
286.4
276.2
284.0
292.6
300.1
315.0
317.0
315.3
319.5
325.9
328.8
337.4
349.8
363.8
375.8

Change
in
business
inventories

4.2
3.2
2.9
6.1
5.7
5.0
9.7
13.8
10.5
9.1
9.5
2.2
8.5
9.9
17.5
14.1
-6.3
16.9
23.1
27.2
16.9
-7.6
28.2
-14.5
-4.9
67.5
26.2
9.6
24.2
10.9
31.7
8.0
-2.3
7.0
20.5
61.2
30.7
32.1
67.4
30.7
14.5
14.0
22.9
52.4
76.3
50.2
66.2
59.0
25.3
17.1
21.5
16.3
28.5
49.8
33.8
59.7
83.5
54.6
71.9
95.5
39.2
57.0

TABLE B-l.—Gross domestic product, 1959-98—Continued
[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Net exports of goods
and services
Year or
quarter

Government consumption expenditures
and gross investment

Net
exports Exports Imports

National
defense

Federal
Total

Total

Nondefense

-1.7
55.7
20.6
22.3 112.0
67.2
11.5
2.4
25.3
22.8 113.2
65.6
54.9
10.8
3.4
22.7 120.9
69.1
57.7
26.0
11.4
2.4
27.4
62.3
25.0 131.4
76.5
14.2
29.4
78.1
62.2
3.3
26.1 137.7
15.9
79.4
5.5
33.6
28.1 144.4
61.3
18.1
35.4
3.9
81.8
62.0
19.7
31.5 153.0
1.9
37.1 173.6
94.1
73.4
38.9
20.7
1.4
41.4
85.5
39.9 194.6 106.6
21.0
-1.3
45.3
92.0
46.6 212.1 113.8
21.8
-1.2
49.3
92.4
50.5 223.8 115.8
23.4
1.2
57.0
90.6
55.8 236.1 115.9
25.3
88.7
-3.0
59.3
62.3 249.9 117.1
28.3
-8.0
66.2
74.2 268.9 125.1
93.2
31.9
94.7
.6
91.8
91.2 287.6 128.2
33.5
-3.1 124.3
127.5 323.2 139.9 101.9
38.0
13.6 136.3
122.7 362.6 154.5 110.9
43.6
-2.3 148.9
151.1 385.9 162.7 116.1
46.6
-23.7
182.4 416.9 178.4 125.8
158.8
52.6
-26.1
186.1
212.3 457.9 194.4 135.6
58.9
-24.0 228.7
252.7 507.1 215.0 151.2
63.8
-14.9 278.9
293.8 572.8 248.4 174.2
74.2
-15.0 302.8
317.8 633.4 284.1 202.0
82.2
-20.5 282.6
303.2 684.8 313.2 230.9
82.3
-51.7 277.0
89.4
328.6 735.7 344.5 255.0
-102.0 303.1
405.1 796.6 372.6 282.7
89.9
-114.2 303.0
417.2 875.0 410.1 312.4
97.7
-131.5 320.7
452.2 938.5 435.2 332.4 102.9
-142.1 365.7
507.9 992.8 455.7 350.4 105.3
-106.1 447.2
553.2 1,032.0 457.3 354.0 103.3
-80.4 509.3
589.7 1,095.1 477.2 360.6 116.7
-71.3 557.3
628.6 1,176.1 503.6 373.1 130.4
-20.5 601.8
622.3 1,225.9 522.6 383.5 139.1
-29.5 639.4
669.0 1,263.8 528.0 375.8 152.2
-60.7 658.6
719.3 1,283.4 518.3 360.7 157.7
721.2
-90.9
812.1 1,313.0 510.2 349.2 161.0
-83.9 819.4
903.3 1,356.4 509.1 344.4 164.7
-91.2 873.8
965.0 1,405.2 518.4 351.0 167.4
-93.4
965.4 1,058.8 1,454.6 520.2 346.0 174.3
1993:1
-46.6 647.1
693.7 1,271.5 521.3 363.6 157.7
II
718.7 1,281.2 517.8 361.7 156.1
-57.5 661.2
Ill
-72.1 646.8
718.9 1,285.3 515.7 358.0 157.7
IV
-66.6 679.4
746.0 1,295.5 518.5 359.4 159.1
1994:1
-76.6 678.5
755.1 1,291.0 506.9 344.9 162.0
II
-87.9 710.1
797.9 1,300.8 505.3 348.5 156.8
Ill
-103.4 732.6
836.0 1,332.3 520.4 359.7 160.7
IV
-95.6 763.7
859.2 1,328.0 508.3 343.6 164.7
1995:1
-94.7 787.8
882.5 1,344.1 512.3 346.1 166.2
II
911.4 1,357.8 511.7 348.1 163.6
-108.0 803.4
Ill
-74.5 835.1
909.6 1,362.3 511.2 345.5 165.7
IV
-58.4 851.5
909.9 1,361.4 501.2 337.9 163.3
1996:1
-75.7 856.6
932.3 1,387.5 517.1 350.3 166.8
II
-94.0 863.0
957.0 1,406.0 523.1 355.6 167.4
Ill
-115.5 861.4
976.9 1,408.6 519.0 351.3 167.7
IV
-79.6 914.2
993.8 1,418.8 514.6 346.7 167.9
1997:1
-93.3 930.2 1,023.5 1,439.4 517.0 341.1 175.9
II
-86.8 961.1 1,047.9 1,451.5 522.9 349.1 173.8
Ill
-94.7 981.7 1,076.4 1,459.5 521.0 347.1 173.9
IV
-98.8 988.6 1,087.4 1,468.1 520.1 346.5 173.6
1998:1
-123.7 973.3 1,097.1 1,464.9 511.6 331.6 180.0
II
-159.3 949.6 1,108.9 1,481.2 520.7 339.8 180.9
Ill
-165.5 936.2 1,101.7 1,492.3 519.4 343.7 175.7
1
Gross domestic product (GDP) less exports of goods and services plus imports of
2
GDP plus net receipts of factor income from rest of the world.
Source: Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997




327

State
and
local

Percent change
from preceding
Final
Gross Addenperiod
dum:
sales of domes- Gross
domestic
Gross Gross
pur- national domes- domestic
tic
product chases l prodtic
uct 2
purproduct chases *

503.0
44.8
508.9
524.1
523.3
47.6
541.9
541.5
51.8
579.1
582.8
55.0
611.7 614.1
59.6
65.0 658.0 657.6
709.4
715.3
71.2
79.5 774.0 785.9
823.1
832.2
88.1
901.4 911.8
98.3
972.7
983.4
108.0
120.2 1,033.4 1,034.4
132.8 1,116.9 1,128.4
143.8 1,227.4 1,245.3
159.4 1,365.2 1,382.0
183.3 1,482.8 1,500.0
208.1 1,636.9 1,617.1
223.1 1,802.0 1,821.2
238.5 2,003.8 2,050.5
263.4 2,264.2 2,317.5
292.0 2,540.6 2,581.5
324.4 2,791.9 2,799.1
349.2 3,087.8 3,130.9
371.6 3,256.6 3,262.6
391.2 3,519.4 3,566.2
424.0 3,835.0 4,004.5
464.9 4,154.5 4,294.9
503.3 4,412.6 4,553.7
537.2 4,668.1 4,834.5
574.7 5,038.7 5,155.6
617.9 5,407.0 5,519.1
672.6 5,735.8 5,815.1
703.4 5,919.0 5,937.2
735.8 6,237.4 6,274.0
765.0 6,537.6 6,618.8
802.8 6,885.7 7,037.9
847.3 7,238.9 7,353.5
886.8 7,629.5 7,752.8
934.4 8,043.5 8,204.3
750.1 6,413.8 6,491.1
763.4 6,494.7 6,566.7
769.6 6,560.6 6,646.7
777.0 6,681.3 6,770.8
784.1 6,741.9 6,870.9
795.5 6,835.1 6,999.2
811.9 6,936.3 7,090.0
819.6 7,029.6 7,191.3
831.8 7,111.8 7,265.5
846.2 7,185.6 7,318.9
851.1 7,287.7 7,379.3
860.2 7,370.4 7,450.3
870.4 7,479.1 7,571.0
882.9 7,600.6 7,723.2
889.6 7,653.6 7,818.9
904.2 7,784.6 7,898.0
922.4 7,895.2 8,048.2
928.6 7,979.9 8,150.2
938.5 8,116.2 8,265.5
947.9 8,182.6 8,353.3
953.3 8,288.7 8,508.0
960.4 8,401.3 8,599.9
972.9 8,480.9 8,703.4
goods and services.

510.1
529.8
548.4
589.4
621.9
668.0
724.5
793.0
839.1
916.7
988.4
1,042.0
1,133.1
1,246.0
1,395.4
1,512.6
1,643.9
1,836.1
2,047.5
2,313.5
2,590.4
2,819.5
3,150.6
3,273.2
3,546.5
3,933.5
4,201.0
4,435.1
4,701.3
5,062.6
5,452.8
5,764.9
5,932.4
6,255.5
6,576.8
6,955.2
7,287.1
7,674.0
8,102.9
6,468.1
6,525.3
6,596.9
6,717.1
6,811.2
6,920.3
6,992.3
7,096.8
7,189.3
7,233.3
7,313.2
7,412.6
7,515.0
7,643.3
7,708.6
7,829.0
7,952.4
8,062.3
8,162.0
8,234.9
8,369.4
8,421.8
8,510.9

8.5
3.8
3.5
7.4
5.5
7.4
8.5
9.5
5.8
9.2
7.9
5.4
8.7
9.9
11.7
8.3
8.9
11.5
11.4
13.0
11.6
8.9
11.9
4.1
8.4
11.0
7.1
5.8
6.1
7.6
7.7
5.6
3.0
5.5
5.0
5.9
4.6
5.4
5.9
3.9
4.1
4.1
8.1
5.5
7.1
4.4
6.4
4.3
2.3
5.3
4.9
5.7
7.3
3.9
6.1
7.2
5.6
5.4
4.2
6.4
2.7
4.7

9.0
3.0
3.3
7.6
5.4
7.1
8.8
9.9
5.9
9.6
7.8
5.2
9.1
10.4
11.0
8.5
7.8
12.6
12.6
13.0
11.4
8.4
11.9
4.2
9.3
12.3
7.3
6.0
6.2
6.6
7.0
5.4
2.1
5.7
5.5
6.3
4.5
5.4
5.8
4.1
4.7
5.0
7.7
6.0
7.7
5.3
5.8
4.2
3.0
3.3
3.9
6.6
8.3
5.1
4.1
7.8
5.2
5.8
4.3
7.6
4.4
4.9

TABLE B-2.—Real gross domestic product, 1959-98
[Billions of chained (1992) 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

Total

Durable
goods

2,210.2 1,394.6
2,262.9 1,432.6
. 2 314.3 14615
2,454.8 1,533.8
2,559.4 1,596.6
2,708.4 1,692.3
2,881.1 1,799.1
3,069.2 1,902.0
3,147.2 1,958.6
32939 20702
3393.6 2,147.5
33976 21978
3^510.0 2,279.5
3,702.3 2,415.9
. 3,916.3 2,532.6
3,891.2 2,514.7
3,873.9 2,570.0
40829 27143
4'273 6 28298
45030 29516
. 4*630.6 3^020 2
4,615.0 3,009.7
4,720.7 3,046.4
4,620.3 3,081.5 285.5
327.4
4,803.7 3,240.6
5,140.1 3,407.6
374.9
5,323.5 3,566.5 411.4
448.4
5,487.7 3,708.7
5,649.5 3,822.3
454.9
483.5
5,865.2 3,972.7
6,062.0 4,064.6
496.2
6,136.3 4,132.2
493.3
6,079.4 4,105.8 462.0
6,244.4 4,219.8
488.5
6,389.6 4,343.6
523.8
6,610.7 4,486.0
561.2
6,761.7 4,605.6
589.1
626.1
6,994.8 4,752.4
668.6
! 7,269.8 4,913.5
504.0
6,327.9 4,286.8
1993:1
II
519.3
6,359.9 4,322.8
III
6,393.5 4,366.6
529.9
542.1
6,476.9 4,398.0
IV
. .
550.7
6,524.5 4,439.4
1994:1
II . . . 6,600.3 4,472.2
555.8
561.7
6,629.5 4,498.2
Ill
IV
576.6
6,688.6 4,534.1
6,717.5 4,555.3
575.2
1995:1
II
6,724.2 4,593.6
583.5
III
6,779.5 4,623.4
595.3
IV
602.4
6,825.8 4,650.0
611.0
1996:1
6,882.0 4,692.1
||
6,983.9 4,746.6
629.5
III
7,020.0 4,768.3
626.5
IV
7,093.1 4,802.6
637.5
7,166.7 4,853.4
1997:1
656.3
II
653.8
7,236.5 4,872.7
Ill
7,311.2 4,947.0
679.6
IV
7,364.6 4,981.0
684.8
7,464.7 5,055.1
710.3
1998:1
II
729.4
7,498.6 5,130.2
HI
733.7
7,566.5 5,181.8
See next page for continuation of table.

1959
I960
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
1993
1994
1995
1996
1997 '.. '.."..




Nondurable Services
goods

1,080.6
1,112.4
1,151.8
1,178.3
1,215.9
1,239.3
1,274.4
1,303.5
1,316.1
1,302.9
1,321.8
1,351.0
1,389.9
1,417.6
1,450.9
1,486.3
1,337.5
1,347.8
1,356.8
1,361.8
1,378.4
1,385.5
1,393.2
1,402.5
1,410.4
1,415.9
1,418.5
1,425.6
1,433.5
1,450.4
1,454.7
1,465.1
1,477.9
1,477.1
1,495.7
1,494.3
1,521.2
1,540.9
1,549.1

1,728.2
1,809.0
1,883.0
1,977.3
2,041.4
2,126.9
2,212.4
2,262.3
2,321.3
2,341.0
2,409.4
2,468.9
2,535.5
2,599.6
2,676.7
2,761.5
2,445.3
2,455.9
2,480.0
2,494.4
2,510.9
2,531.4
2,543.8
2,555.9
2,570.4
2,594.8
2,610.3
2,622.9
2,648.5
2,668.4
2,688.1
2,701.7
2,722.1
2,743.6
2,775.4
2,804.8
2,829.3
2,866.8
2,904.8

Change
in
busiProness
Residucers'
durable dential inventories
equipment

Nonresidential
Total

2717
270.5
267.6
302.1
321.6
348.3
397.2
430.6
4118
433.3
4583
4261
474.9
531.8
595.5
5465
446.6
5374
622.1
6934
709.7
628.3
686.0
587.2
642.1
833.4
823.8
811.8
821.5
828.2
863.5
815.0
738.1
790.4
863.6
975.7
996.1
1,084.1
1,206.4
845.5
846.1
858.6
904.0
939.9
987.8
972.2
1,003.0
1,013.5
982.0
983.4
1,005.4
1,029.3
1,072.8
1,118.1
1,116.1
1,156.6
1,211.3
1,215.8
1,241.9
1,321.8
1,306.5
1,331.6

328

Total

610.4
654.2
762.4
799.3
805.0
799.4
818.3
832.0
805.8
741.3
783.4
842.8
915.5
966.0
1,050.6
1,138.0
814.8
831.1
844.5
880.8
887.8
913.2
922.7
938.5
957.1
957.8
965.8
983.1
1,011.4
1,043.5
1,067.1
1,080.4
1,096.0
1,127.0
1,159.3
1,169.5
1,224.9
1,264.1
1,270.9

Total

464.3
456.4
535.4
568.4
548.5
542.4
566.0
588.8
585.2
547.7
557.9
600.2
648.4
710.6
776.6
859.4
577.8
595.1
602.3
625.6
626.2
641.2
653.2
672.9
698.4
710.2
711.7
722.3
744.8
764.4
790.1
807.0
820.9
848.2
882.2
886.2
931.9
960.4
958.7

Structures

207.2
185.7
212.2
227.8
203.3
195.9
196.8
201.2
203.3
181.6
169.2
170.8
172.5
180.7
189.7
203.2
168.0
170.3
171.7
173.1
166.3
174.5
174.0
175.0
179.5
181.7
181.5
179.8
182.6
185.9
189.9
200.6
202.5
199.3
205.2
205.7
203.1
201.9
202.0

260.3
272.4
324.6
342.4
345.9
346.9
369.2
387.6
381.9
366.2
388.7
429.6
476.8
531.7
589.8
660.9
409.8
424.9
430.7
452.9
460.6
467.3
480.0
499.1
520.4
529.9
531.8
544.8
565.0
581.6
604.0
608.8
621.0
653.8
682.6
686.4
738.8
771.3
769.3

140.1
197.6
226.4
229.5
257.0
257.6
252.5
243.2
220.6
193.4
225.6
242.6
267.0
256.8
275.9
282.8
237.0
236.1
242.2
255.1
261.3
271.5
269.4
265.9
259.9
249.5
255.6
262.1
268.0
280.2
279.0
276.3
278.4
282.5
282.3
287.9
298.5
309.1
316.5

-15.6
-5.7
75.3
30.2
11.1
26.4
11.7
33.3
10.4
-3.0
7.0
22.1
60.6
27.7
30.0
63.2
32.3
16.6
15.3
24.2
53.1
75.9
49.7
63.6
54.3
21.7
14.7
20.1
14.4
26.1
47.5
32.1
56.3
79.0
51.0
66.5
91.4
38.2
55.7

TABLE B-2.—Real gross domestic product, 1959-98—Continued
[Billions of chained (1992) dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Net exports of goods
and services
Year or
quarter

Government consumption expenditures and
gross investment
Federal

Net
exports Exports Imports

Total

Total

National
defense

1959
I960
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
1993
1994
1995
1996
1997
1993-1
II
Ill
IV

Nondefense

71.9 1066 6185
86.8 108.1 617.2
88.3 107.3 647.2
93.0 119.5 686.0
100.0 122.7 701.9
113.3 129.2 715.9
115.6 143.0 737.6
123.4 164.2 804.6
126.1 176.2 865.6
135.3 202.5 892.4
142.7 214.0 887.5
158.1 223.1 866.8
159.2 235.0 851.0
172.0 261.0 854.1
209.6 272.6 848.4
229.8 265.3 862.9
228.2 235.4 876.3
241.6 281.5 876.8
247.4 3116 8847
273.1 338.6 910.6
299.0 344.3 924.9
331.4 321.3 941.4
335.3 329.7 947.7
-14.1 311.4 325.5 960.1 429.4
316.5 113.3
-63.3 303.3 366.6 987.3 452.7
334.6 118.5
-127.3 328.4 455.7 1,018.4 463.7
348.1 115.9
374.1 121.8
-147.9 337.3 485.2 1,080.1 495.6
393.4 125.2
-163.9 362.2 526.1 1,135.0 518.4
-156.2 402.0 558.2 1,165.9 534.4
409.2 125.3
-114.4 465.8 580.2 1,180.9 524.6
405.5 119.1
-82.7 520.2 603.0 1,213.9 531.5
401.6 130.1
-61.9 564.4 626.3 1,250.4 541.9
401.5 140.5
-22.3 599.9 622.2 1,258.0 539.4
397.5 142.0
-29.5 639.4 669.0 1,263.8 528.0
375.8 152.2
354.4 151.2
-70.2 658.2 728.4 1,252.1 505.7
-104.6 712.4 817.0 1,252.3 486.6
336.9 149.5
-96.5 792.6 889.0 1,254.5 470.6
323.5 146.9
-111.2 860.0 971.2 1,268.2 465.6
319.1 146.2
-136.1 970.0 1,106.1 1,285.0 458.0
308.9 148.6
-54.7 647.2 701.9 1,250.1 512.1
359.2 152.9
-62.6 660.1 722.7 1,253.1 507.8
356.7 151.1
-83.1 646.3 729.4 1,250.5 501.5
351.1 150.3
-80.5 679.1 759.7 1,254.7 501.3
350.8 150.4
1994:1
-97.6 676.0 773.6 1,241.9 487.2
335.1 151.9
II
-103.9 704.1 808.0 1,243.3 481.2
335.9 145.1
Ill
-111.1 722.1 833.2 1,268.1 496.4
347.0 149.4
IV
-105.9 747.3 853.2 1,255.8 481.7
329.6 151.7
1995-1
-109.5 763.9 873.4 1,256.2 478.6
328.3 150.0
II
328.4 147.6
-114.7 774.0 888.7 1,259.9 476.2
Ill
-86.8 806.3 893.1 1,257.6 473.1
323.9 148.8
IV
-74.8 826.1 900.9 1,244.5 454.6
313.3 141.1
1996:1
318.7 144.5
833.6 929.1 1,254.5 463.5
-95.5
II .
-113.5 845.5 958.9 1,276.2 472.6
325.0 147.3
Ill
-140.1 849.9 990.0 1,271.1 467.0
319.8 146.8
IV
911.1 1,007.0 1,271.2 459.5
-95.9
313.0 146.1
1997:1
-121.5 929.4 1,050.9 1,277.7 456.3
305.0 150.7
||
311.7 148.2
-131.6 963.6 1,095.2 1,284.4 460.4
III
-142.4 988.1 1,130.5 1,288.9 458.9
310.2 148.2
IV
308.7 147.3
-149.0 998.8 1,147.8 1,289.2 456.5
1998:1
-198.5 991.9 1,190.4 1,283.0 446.1
293.3 151.9
II
-245.2 972.1 1,217.3 1,294.8 454.1
300.3 152.9
Ill
-259.0 965.3 1,224.3 1,299.6 452.5
303.5 148.4
1
Gross domestic product (GDP) less exports of goods and services plus imports of
2
GDP plus net receipts of factor income from rest of the world.
Source: Department of Commerce, Bureau of Economic Analysis.




329

Final
Gross
sales of domestic
State domes- purtic
J
and
local product chases

531.4
534.9
555.0
584.7
616.9
631.8
656.6
682.6
708.6
718.7
735.8
746.4
765.7
783.9
802.7
827.1
738.0
745.3
749.1
753.4
754.7
762.2
771.7
774.1
777.6
7837
784.5
790.0
791.0
803.6
804.2
811.8
821.5
824.2
830.1
832.9
837.1
840,9
847.3

2,206.9
2,264.2
2,318.0
2,445.4
2,552.4
2,705.1
2,860.4
3,033.5
3,125.1
3,278.0
3,377.2
3,406.5
3,499.8
3,689.5
3,883.9
3,873.4
3,906.4
4,061.7
4,240.8
4,464.4
4,614.4
4,641.9
4,691.6
4,651.2
4,821.2
5,061.6
5,296.9
5,480.9
5,626.0
5,855.1
6,028.7
6,126.7
6,082.6
6,237.4
6,368.9
6,551.2
6,731.7
6,961.6
7,203.7
6,297.3
6,344.9
6,379.3
6,453.8
6,473.0
6,526.7
6,580.4
6,624.8
6,661.8
6,700.0
6,761.7
6,803.3
6,863.6
6,954.7
6,970.3
7,057.9
7,108.1
7,155.5
7,256.3
7,294.8
7,372.5
7,456.4
7,507.6

2,268.0
2,304.1
2,354.3
2,503.0
2,604.2
2,745.9
2,932.1
3,134.0
3,221.1
3,382.7
3,485.6
3,478.5
3,602.4
3,806.2
3,989.3
3,928.6
3,875.9
4,124.6
4,345.7
4,574.9
4,674.6
4,581.5
4,693.1
4,619.3
4,864.3
5,276.2
5,482.8
5,663.9
5,816.7
5,986.1
6,147.8
6,199.8
6,101.6
6,274.0
6,459.0
6,712.7
6,855.0
7,101.1
7,396.5
6,382.3
6,422.0
6,475.6
6,556.2
6,620.2
6,701.8
6,737.5
6,791.3
6,823.3
6,834.6
6,863.5
6,898.4
6,974.0
7,092.8
7,152.6
7,185.2
7,281.3
7,359.4
7,443.1
7,502.1
7,644.9
7,718.6
7,798.8

goods and services.

Addendum:
Gross
national
product 2
2,222.0
2,276.0
2,329.1
2,471.5
2,577.3
2,727.8
2,901.4
3,087.8
3,166.4
3,314.5
3,413.3
3,417.1
3,532.1
3,726.3
3,950.1
3,930.2
3,903.3
4,118.8
4,314.5
4,543.7
4,687.4
4,670.8
4,769.9
4,662.0
4,844.8
5,178.0
5,346.7
5,501.2
5,658.2
5,878.5
6,075.7
6,157.0
6,094.9
6,255.5
6,408.0
6,619.1
6,779.5
7,008.4
7,266.2
6,351.3
6,375.9
6,415.3
6,489.7
6,540.5
6,609.3
6,635.6
6,691.2
6,735.9
6,746.3
6,788.9
6,846.8
6,902.1 |
6,999.0
7,027.1
7,105.3
7,167.8
7,239.3
7,307.0
7,350.7
7,455.2
7,485.9
7,546.7

Percent change
from preceding
period
Gross Gross
domes- domestic
tic
product chases1

7.4
2.4
2.3
6.1
4.3
5.8
6.4
6.5
2.5
4.7
3.0

7.8
1.6
2.2
6.3
4.0
5.4
6.8
6.9
2.8
5.0
3.0

3i3
5.5
5.8
-.6
-.4
5.4
4.7
5.4
2.8
-.3
2.3
-2.1
4.0
7.0
3.6
3.1
2.9
3.8
3.4
1.2
-.9
2.7
2.3
3.5
2.3
3.4
3.9

16
5.7
4.8
-1.5
-1.3
6.4
5.4
5.3
2.2
-2.0
2.4
-1.6
5.3
8.5
3.9
3.3
2.7
2.9
2.7
.8
-1.6
2.8
2.9
3.9
2.1
3.6
4.2
1.0
2.5
3.4
5.1
4.0
5.0
2.1
3.2
1.9

2.0
2.1
5.3
3.0
4.7
1.8
3.6
1.7
.4
3.3
2.8
3.3
6.1
2.1
4.2
4.2
4.0
4.2
3.0
5.5
1.8
3.7

17
2.0
4.5
7.0
3.4
1.8
5.5
4.4
4.6
3.2
7.8
3.9
4.2

TABLE B-3.—Quantity and price indexes for gross domestic product, and percent changes, 1959-98
[Quarterly data are seasonally adjusted]
Gross domestic product (GOP)
Percent change from preceding period '

Index numbers, 1992=100
Year or quarter

GDP
(current
dollars)

Real GDP
GDP
(chain-type chain-type
quantity price index
index)

GDP
implicit
price
deflator

GDP
(current
dollars)

8.12
22.95
35.39
22.95
23.27
23.27
8.43
36.24
23.54
23.54
8.72
37.06
23.84
9.37
23.84
39.31
9.89
24.12
24.12
40.99
10.62
43.37
24.48
24.48
11.52
46.14
24.95
24.96
25.67
12.62
25.66
49.15
13.35
26.48
26.49
50.40
27.64
14.58
27.64
52.75
28.94
28.94
15.73
54.35
54.41
16.58
30.48
30.48
18.02
56.21
32.05
32.06
33.42
33.42
19.81
59.29
22.14
35.30
35.30
62.72
23.97
38.47
62.32
38.46
26.11
62.04
42.09
42.09
29.13
65.38
44.55
44.55
68.44
32.46
47.42
47.43
36.69
72.11
50.88
50.89
40.96
74.16
55.22
55.23
60.34
44.59
73.91
60.33
49.90
75.60
66.01
66.01
51.92
70.18
70.17
73.99
56.28
76.93
73.16
73.16
62.49
82.32
75.92
75.92
66.95
78.53
78.53
85.25
70.82
80.58
87.88
80.58
75.14
90.47
83.06
83.06
80.87
86.10
86.09
93.93
87.10
97.08
89.72
89.72
93.64
91.98
98.27
93.60
94.75
97.32
97.32
97.36
100.00
100.00
100.00
100.00
102.64
102.64
105.02
102.32
105.09
105.09
111.25
105.87
107.51
116.42
108.28
107.51
109.54
122.69
109.53
112.02
111.57
129.89
111.57
116.42
101.34
101.84
103.20
101.85
104.24
102.35
101.85
102.38
105.29
102.39
102.83
102.83
107.36
103.52
103.51
103.72
108.81
104.16
104.13
104.49
104.74
104.71
110.68
105.70
111.88
106.17
105.39
105.39
107.11
106.07
113.63
106.09
106.74
114.83
106.75
107.58
107.24
115.48
107.26
107.68
116.98
108.57
107.76
107.75
118.38
109.31
108.30
108.29
110.21
120.03
108.90
108.91
109.24
111.84
122.18
109.28
109.77
109.74
123.36
112.42
125.21
110.23
113.59
110.21
114.77
110.97
127.39
111.00
129.13
111.43
115.89
111.45
111.77
130.85
117.08
111.76
117.94
132.19
112.09
112.08
134.27
119.54
112.33
112.32
135.17
112.57
120.09
112.56
121.17
112.84
136.73
112.85
1
Percent changes based on unrounded data. Quarterly percent changes are at annual rates.
Source: Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997
1993:1
II
Ill
IV
1994:1
||
III
IV
1995:1
II
Ill
IV
1996-1
II
Ill
IV
1997-1
||
Ill
IV
1998-.I
||
III




330

8.5
3.8
3.5
7.4
5.5
7.4
8.5
9.5
5.8
9.2
7.9
5.4
8.7
9.9
11.7
8.3
8.9
11.5
11.4
13.0
11.6
8.9
11.9
4.1
8.4
11.0
7.1
5.8
6.1
7.6
7.7
5.6
3.0
5.5
5.0
5.9
4.6
5.4
5.9
3.9
4.1
4.1
8.1
5.5
7.1
4.4
6.4
4.3
2.3
5.3
4.9
5.7
7.3
3-9
6.1
7.2
5.6
5.4
4.2
6.4
2.7
4.7

Real GDP
GDP
(chain-type chain-type
quantity price index
index)

7.4
2.4
2.3
6.1
4.3
5.8
6.4
6.5
2.5
4.7
3.0
13
5.5
5.8
-.6
-.4
5.4
4.7
5.4
2.8
?3
-2.1
4.0
7.0
3.6
3.1
2.9
3.8
3.4
1.2
-.9
2.7
2.3
3.5
2.3
3.4
3.9
2iO
2.1
5.3
3.0
4.7
1.8
3.6
1.7
.4
3.3
2.8
3.3
6.1
2.1
4.2
4.2
4.0
4.2
3.0
5.5
1.8
3.7

1.0
1.4
1.2
1.3
1.2
1.5
1.9
2.8
3.2
4.4
4.7
5.3
5.2
4.2
5.6
8.9
9.4
5.8
6.5
7.3
8.5
9.3
9.4
6.3
4.3
3.8
3.4
2.6
3.1
3.7
4.2
4.4
3.9
2.8
2.6
2.4
2.3
1.9
1.9
3.9
2.1
1.8
2.7
2.5
2.2
2.5
2.6
2.5
2.0
1.9
2.0
2.2
1.4
1.8
1.6
2.8
1.7
1.2
1.1
.9
.9
1.0

GDP
implicit
price
deflator
1.0
1.4
1.2
1.3
1.2
1.5
2.0
2.8
3.2
4.4
4.7
5.3
5.2
4.2
5.6
9.0
9.4
5.8
6.5
7.3
8.5
9.2
9.4
6.3
4.3
3.8
3.4
2.6
3.1
3.7
4.2
4.3
4.0
2.8
2.6
2.4
2.3
1.9
1.9
3.9
2.0
1.9
2.7
2.4
2.2
2.6
2.7
2.5
1.8
1.9
2.0
2.3
1.2
1.8
1.8
2.8
1.6
1.2
1.2
.8
.9
1.0

TABLE B-4.—Percent changes in real gross domestic product, 1959-98
[Percent change from preceding period; quarterly data at seasonally adjusted annual rates]
Personal consumption
expenditures
Year or
quarter

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
1993
1994
1995
1996
1997

Gross
domestic
product

7.4
2.4
2.3
6.1
4.3
5.8
6.4
6.5
2.5
4.7
3.0
.1
3.3
5.5
5.8
-.6
-.4
5.4
4.7
5.4
2.8

1
Total

5.7
2.7
2.0
4.9
4.1
6.0
6.3
5.7
3.0
5.7
3.7
2.3
3.7
6.0
4.8

Nonresidential fixed
Durable
goods

13.4
2.0
-3.8
11.7
9.7
9.2
12.7
8.5
1.6
11.0
3.6
-3.2
10.0
12.7
10.3
-6.9
.0
12.8
9.3
5.3

Nondurable
goods

Services

Total

4.1
5.2
8.3
4.4
1.5
5.6
4.1
1.8
-.9
4.9
8.7
3.1
4.5
2.1
5.0
4.9
6.1 11.8
5.3
5.3 17.3
5.5
5.1 12.1
1.6
4.8 -1.6
4.5
5.2
4.3
2.7
4.8
7.2
2.4
4.0 -1.0
3.7
1.8
4.4
5.4
9^0
3.3
4.5 14.6
2.4
-2.0
2l2
1.5
3.5 -10i5
5.6
5.0
4.2
4.8
4.3
2.6
4.2 11.8
4.7
4.3
3.5
13.7
3.2
2.3
2.3
9.6
-.4
-.3 -8.0
1.9
1.5
?3
1.2
1.2
.9
?.3
-2.1
1.9 -4.4
1.2
.6
K7
4.7 -1.7
4.0
5.2
2.9
4.1 17.3
7.0
5.2 14.5
3.5
4.7
9.7
5.0
3.6
2.3
6.2
3.1
3.2 -3.5
4.0
9.0
3.2
4.2 -1.1
2.9
3.1
1.5
1.9
4.4
3.8
3.9
2.8
4.0
6.3
3.4
2.3
2.3
4.0
2.3
2.6
1.2
1.7
26
-6
10
-6
-.9
.8 -6.4
-.6 -6.4 -1.0
2.7
2.9
1.5
1.9
2.8
5.8
2.3
7.2
2.5
7.6
2.9
2.2
3.5
7.1
2.9
2.7
8.0
3.3
2.3
2.7
5.0
2.0
2.5
9.6
3.4
2.4
3.0
9.3
3.2
6.3
2.4
3.9
3.4
6.8
3.2 10.7
.1
1993:1
.4
-.7
-.7
1.3
6.2
II . .
3.4 12.6
1.7 12.5
3.1
2.0
Ill
4.1
8.4
2.7
2.1
4.9
4.0
IV
1.5
5.3
2.9
9.6
2.3 16.4
1994:1
6.4
2.7
.4
3.0
3.8
5.0
II
4.7
9.9
3.0
3.8
2.1
3.3
Ill .
1.8
4.3
2.2
2.0
7.7
2.3
IV
2.7
3.6
3.2 11.0
1.9 12.6
1995:1
1.7
2.3
1.9 -1.0
2.3 16.0
II
.4
3.4
5.9
1.6
3.8
6.9
Ill
.7
2.4
.9
3.3
2.6
8.3
IV
2.0
2.8
2.3
4.8
1.9
6.1
1996:1
2.2
3.7
5.8
4.0 13.1
3.3
II
4.7 12.7
4.8
3.0 11.0
6.1
Ill
1.2
1.8 -1.9
3.0 14.2
2.1
IV
2.9
2.0
8.8
4.2
2.9
7.2
1997:1
4.2
4.3 12.3
3.6
3.1
7.0
II
-.2
4.0
3.2 14.0
1.6 -1.5
Ill
4.2
4.7 17.0
6.2 16.8
5.1
-.4
IV
3.0
2.8
3.1
4.3
1.8
7.4
1998:1
3.5 22.2
5.5
6.1 15.8
II
5.4 12.8
5.3
1.8
6.1 11.2
III
5.4
4.1
3.7
2.4
2.1
-?
Note.—f ercent changes based on unrounded data.
Source: Department of Commerce, Bureau of Economic Analysis.




Exports and im- Government consumpports of goods tion expenditures and
gross investment
and services

Gross private domestic
investment

Structures

2.4
7.9
1.4
4.5
1.1
10.4
15.9
6.8
-2.5
1.4
5.4
.3
-1.6
3.1
8.2
-2.1
-10.5
2.5
4.9
10.9
12.6
6.7
7.9
-1.5
-10.4
14.3
7.3
-10.8
-3.6
2^2
11
-10.7
-6.8
1.0
1.0
4.8
5.0
7.1
6.0
5.5
3.4
3.3
-14.8
21.1
-1.1
2.3
10.7
5.1
-.4
-3.8
6.4
7.4
8.9
24.5
3.9
-6.2
12.4
.9
-4.9
-2.3
.2

331

Producers' Residura- dential
ble
equipment
12.4
4.1
-2.4
11.6
7.6
12.6
18.2
15.5
-1.0
6.1
8.3
-1.8
.8
12.7
18.5
2.1
-10.5
6.1
15.6
15.1
8.1
-4.4
3.7
-6.4
4.6
19.2
5.5
1.0
.3
6.4
5.0
-15
-4.1
6.2
10.5
11.0
11.5
10.9
12.1
6.4
15.6
5.5
22.3
7.0
5.9
11.4
16.9
18.1
7.6
1.4
10.1
15.7
12.3
16.2
3.2
8.3
22.8
18.8
2.2
34.3
18.8
-1.0

25.5
-7.1
.3
9.6
11.8
5.8
-2.9
-8.9
-3.1
13.6
3.0
-6.0
27.4
17.8
-.6
-20.6
-13.0
23.6
21.2
6.6
-3.7
-21.1
-8.0
-18.2
41.1
14.6
1.4
12.0
-2X)
-3.7
-93
-12.3
16.6
7.6
10.1
-3.8
7.4
2.5
.6
-1.6
10.8
23.1
10.0
16.6
-3.1
-5.0
-8.8
-15.0
10.1
10.6
9.3
19.5
-1.7
-3.9
3.1
6.1
J2
15.6
15.0
9.9

Exports

0.9
20.8
1.7
5.4
7.5
13.3
2.0
6.7
2.2
7.3
5.5
10.8
8!l
21.8
9.6
5.9
2.4
10.4
9.5
10.8
1.2
-7.1
-2.6
8.3
2.7
7.4
11.0
15.9
11.7
85
6.3
6.6
2.9
8.2
11.3
8.5
12.8
-1.2
8.2
-8.1
21.9
-1.8
17.7
10.6
14.7
9.2
5.4
17.8
10.2
3.7
5.8
2.1
32.0
8.3
15.5
10.6
4.4
-2.8
-7.7
-2.8

Imports

10.5
1.3

in
2.7

5.3
10.6
14.9
7.3
14.9
5.7
4.3
5.3
11.0
4.5
-2.7
-11.3
19.6
10.7
8.7
1.7
-6.7
2.6
-1.3
12.6
24.3
6.5
8.4
6.1
3.9
3.9
39

1'.5
8.9
12.2
8.8
9.2
13.9
7.6
12.4
3.8
17.7
7.6
19.0
13.1
9.9
9.8
7.2
2.0
3.5
13.1
13.5
13.6
7.0
18.6
17.9
13.5
6.3
15.7
9.3
2.3

Total

5.7
-.2
4.9
6.0
2.3
2.0
3.0
9.1
7.6
3.1
-.6
-2.3
-1.8
.4
-.7
1.7
1.5
.1
.9
2.9
1.6
1.8
U
2.8
3.1
6.1
5.1
2.7
1.3
2.8
30
.6
-!9
.0
.2
1.1
1.3
-6.9
1.0
-.8
1.3
-4.0
.4
8.2
-3.8
.1
1.2
-.8
-4.1
3.2
7.1
-1.6
.0
2.1
2.1
1.4
.1
-1.9
3.7
1.5

Federal

7.2
-3.1
3.9
8.3
-.4
-1.7
.0
11.4
9.9
1.0
-3.4
-7.1
-7.1
-1.7
-4.9
-.6
-.2
-1.0
1.6
2.1
1.5
4.2
4.2
3.2
5.4
2.4
6.9
4.6
3.1
-1.8
1.3
20

-2.1
-4.2
-3.8
-3.3
-1.1
-1.6
-15.4
-3.3
-4.9
-10.7
-4.9
13.3
-11.3
-2.6
-2.0
-2.6
-14.7
8.0
8.1
-4.7
-6.3
-2.7
3.6
-1.2
-2.1
-8.8
7.3
-1.4

State
and
local

3.5
4.1
6.2
2.9
6.0
6.8
6.7
6.4
4.9
5.7
2.8
2.8
3.3
2.2
3.0
3.6
2.9
.8
.4
3.6
1.6
.0
-2.0
-.3
3i8
5.3
5.5
2.4
3.9
4.0
3.8
1.4
2.4
1.5
2.6
2.4
2.4
3.1
4iO
2.1
2.3
.7
4.0
5.1
1.2
1.8
3.2
2^8
.5
6.5
.3
3.8
4.9
1.3
2.9
1.3
2.1
1.8
3.1

TABLE B—5.—Contributions to percent change in real gross domestic product, 1959—98
[Percentage points, except as noted; quarterly data at seasonally adjusted annual rates]
Gross private domestic investment

Personal consumption expenditures
Gross
domestic
product
(percent
change)

Year or
quarter

1959
I960 ....'.
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
1993
1994
1995
1996
1997
1993-1
||
III
IV

7.4
2.4
2.3
6.1
4.3
5.8
6.4
6.5
2.5
4.7
3.0
3^3
5.5
5.8
-.6

',...

5i4
4.7
5.4
2.8
-.3
2.3
-2.1
4.0
7.0
3.6
3.1
2.9
3.8
3.4
1.2
-.9
2.7
2.3
3.5
2.3
3.4
3.9

2iO
2.1
5.3
3.0
1994:1
II
4.7
Ill
1.8
IV
3.6
1.7
1995:1
.4
II
III
3.3
IV
2.8
1996:1
3.3
||
6.1
III
2.1
IV
4.2
1997:1
4.2
II
4.0
HI
4.2
IV
3.0
1998-1
5.5
II
1.8
3.7
Ill
See next page for continuation of table.




Fixed investment
Total

3.65
1.71
1.27
3.11
2.54
3.72
3.91
3.53
1.82
3.48
2.29
1.44
2.32
3.72
3.01
-.44
1.36
3.54
2.69
2.71
1.45
-.22
.77
.72
3.31
3.35
2.98
2.58
2.01
2.60
1.54
1.10
-.43
1.86
1.98
2.23
1.81
2.17
2.31
.45
2.31
2.80
1.98
2.60
2.02
1.58
2.18
1.25
2.26
1.77
1.57
2.50
3.21
1.26
1.97
2.91
1.08
4.19
1.88
4.09
4.09
2.78

Dura- Non- Servble durable ices
goods goods

1.07
.17
-.31
.89
.78
.77
1.07
.73
.14
.93
.31
-.28
.81
1.08
.90
-.61
.00
1.04
.80
.47
-.04
-.67
.09
-.01
1.07
1.14
.80
.77
.13
.55
.23
-.05
-.52
.43
.56
.58
.41
.52
.56
-.10
.97
.66
.76
.52
.31
.35
.87
-.09
.47
.66
.39
.48
1.03
-.16
.58
.98
-.13
1.30
.26
1.23
.91
.20

1.25
.44
.53
.90
.58
1.34
1.43
1.46
.42
1.18
.69
.63
.47
1.11
.83
-.50
.38
1.27
.65
.86
.56
-.11
.22
.14
.71
.83
.52
.70
.42
.61
.49
.21
-.22
.31
.46
.60
.41
.48
.49
-.23
.66
.56
.31
1.01
.43
.45
.54
.45
.31
.15
.41
.45
.96
.24
.57
.71
-.04
1.00
-.08
1.41
1.01
.42

1.33
1.10
1.05
1.31
1.18
1.61
1.41
1.34
1.26
1.37
1.29
1.09
1.04
1.54
1.28
.67
.98
1.23
1.24
1.39
.94
.56
.47
.58
1.53
1.38
1.66
1.11
1.46
1.44
.82
.94
.31
1.12
.96
1.06
.99
1.18
1.26
.79
.67
1.56
.91
1.05
1.28
.77
.75
.88
1.46
.95
.77
1.57
1.20
1.18
-.81
1.20
1.26
1.85
1.70
1.40
2.14
2.15

332

Change
in
busiProResiness
ducers' dential invenStruc- durable
tures equiptories
ment

Presidential
Total

2.90
-.07
-.16
1.83
.96
1.25
2.15
1.38
-.72
.80
.89
-1.10
1.66
1.87
1.99
-1.45
-3.04
2.81
2.49
2.03
.44
-2.16
1.54
-2.56
1.42
4.57
-.21
-.25
.20
.13
.65
-.85
-1.30
.85
1.17
1.73
.30
1.26
1.65
3.43
.04
.78
2.84
2.21
2.93
-.92
1.84
.63
-1.79
.09
1.26
1.33
2.45
2.48
-.12
2.17
2.92
.23
1.34
4.07
-.75
1.22

Total

Total

1.97
0.75
.12
.51
-.07
-.08
1.24
.77
1.03
.45
1.35
1.05
1.47
1.63
.82
1.25
-.30
-.17
.44
.97
.86
.73
-.36 -.10
1.08
-.01
.89
1.78
1.47
1.43
-1.07
.06
-1.75 -1.18
1.41
.50
1.22
2.19
1.88
1.51
1.14
.93
-1.23
-.06
.67
.32
-.57
-1.29
1.12
-.21
2.56
1.93
.80
.73
.12 -.42
-.11 -.12
.36
.46
.25
.42
-.46
-.06
-.64
-1.09
.67
.15
.95
.67
.74
1.12
.75
.91
1.21
.92
1.18
1.08
.92
.88
1.04
1.10
.84
.44
2.27
1.43
.04
.43
1.55
.90
.56
.70
.93
1.14
1.09
1.47
.05
.67
.47
.10
1.00
.61
1.65
1.29
1.83
1.09
1.29
1.37
.72
.88
.83
.71
1.63
1.39
1.66
1.67
.48
.16
2.82
2.21
1.95
1.35
.33 -.08

0.09
.28
.05
.16
.04
.36
.57
.27
-.10
.05
.20
.01
-.07
.12
.31
-.09
-.43
.09
.18
.41
.51
.30
.39
-.08
-.54
.61
.33
-.50
-.14
.02
.08
.04
-.37
-.20
.03
.03
.13
.14
.20
.25
.15
.09
.09
-.43
.51
-.03
.06
.27
.14
-.01
-.11
.17
.20
.24
.64
.11
-.19
.35
.03
-.15
-.07
.01

0.66
.23
-.13
.61
.41
.70
1.05
.98
-.07
.39
.53
-.12
.05
.77
1.16
.14
-.75
.41
1.04
1.10
.64
-.36
.29
-.49
.33
1.32
.41
.07
.02
.44
.34
-.10
-.27
.35
.65
.71
.78
.78
.88
.63
.95
.35
1.34
.47
.39
.73
1.08
1.19
.54
.11
.71
1.12
.89
1.12
.24
.59
1.58
1.32
.13
2.36
1.42
-.09

1.22
-.39
.01
.46
.58
.30
-.15
-.43
-.13
.53
.13
-.26
1.10
.89
-.04
-1.13
-.57
.91
.98
.37
-.21
-1.17
-.35
-.71
1.33
.63
.06
.54
.01
-.10
-.17
-.39
-.46
.53
.27
.39
-.16
.29
.10
.04
-.06
.40
.82
.39
.64
-.13
-.21
-.37
-.62
.37
.40
.36
.73
-.07
-.16
.12
.24
-.02
.32
.60
.60
.41

0.93
-.19
-.09
.60
-.07
-.10
.68
.56
-.43
-.17
.03
-.74
.58
.10
.56
-.38
-1.29
1.40
.30
.15
-.49
-.93
1.22
-1.27
.30
2.01
-1.00
-.37
.31
-.23
.40
-.39
-.21
.18
.22
.61
-.45
.04
.47
2.50
-1.00
-.06
.56
1.77
1.37
-1.47
.90
-.46
-1.84
-.39
.25
-.32
.61
1.17
-.83
1.33
1.27
-1.41
.85
1.22
-2.66
.89

TABLE B-5.—Contributions to percent change in real gross domestic product, 1959-98—Continued
[Percentage points, except as noted; quarterly data at seasonally adjusted annual rates]
Net exports of
goods and services
Year or
quarter

Exports

Net
exports

Total

Goods

Government consumption expenditures
and gross investment

Services

Total

Goods

-0.41
0.04 -0.02
1959
0.06 -0.45 -0.48
.79
1960
.09 -.06
.85
.76
.05
1961
.06
.11
.08
.02
.03
.00
1962
.17
-.21
.09 -.47
-.40
.25
.24
1963
.29
.06 -.11 -.12
.35
.41
1964
.52
.12 -.23 -.19
.63
1965
.02
.08 -.45 -.41
-.35
.10
-.32
1966
.27
.06 -.65 -.49
.33
.09 -.34
-.23
.11
1967
.02
-.17
-.35
1968
.30
.06 -.70 -.68
.36
-.02
.27
1969
.07 -.29
.20
-.20
.32
.54
1970
.44
.10 -.22
-.15
1971
.04 -.02
-.25
.05 -.29
-.33
-.20
1972
.42
43 -.01
-62 -57
.21 -.28 -.34
.93
1.21
1973
1.01
1974
.89
.46
.22
.21
.17
.68
.90
1975
.10
-.06
-.16
.96
.88
.17 -1.45 -1.35
-.97
1976
.49
.32
-.71
1977
.08
.11 -.90
-.84
.20
.03
1978
.68
.13 -.78
-.67
.81
.77
.02 -.16
-.14
.63
.79
1979
1.69
.97
1980
.11
.71
.67
.86
.20 -.27
-.15
.12
1981
-.08
-.18
-.67
.00
-.55
-.67
1982
.12
.21
-.04 -1.14 -1.01
-1.36
-.22
1983
-.19
1984
.18 -2.22 -1.84
-1.58
.64
.46
.21
1985
.20
.01 -.65 -.52
-.45
.27
1986
.26 -.83
-.31
.52
-.83
1987
.16
.80
.56
.23 -.63
-.40
.20 -.43 -.36
.82
1.25
1988
1.05
.23 -.43 -.37
.60
1.02
1989
.80
.37
.23 -.42
.78
1990
.55
-.27
.12
.67
1991
.48
.07
.60
.00
-.12
1992
.46
.16 -.74
.62
-.76
-.64
.24
.06 -.94
.30
1993
-.90
1994
.69
.13 -1.32 -1.22
-.50
.82
.14
1.17
.92
.25 -1.03
-.94
1995
1996
.76
.18 -1.13 -1.02
-.19
.95
-.27
1997
1.21
.22 -1.71 -1.51
1.43
1993-1
-.69
.50 -1.30 -1.72
-1.48
-.19
II
.11 -1.31 -1.21
50
.81
.70
III
-1.26
-.81 -.04 -.41 -.32
-.85
IV
.10 -1.82 -1.51
.18
2.01
1.90
1994-1
.07 -.83
-1.02
-.78
-.20 -.27
II
.37 -2.02 -1.94
-.34
1.67
1.30
Ill
1.04
.06 -1.43 -1.44
-.39
.98
.34
IV
.21 -1.11 -1.13
1.24
1.45
1995-1
.27 -1.09
-.17
.64
.91
-.72
II
.54
.09 -.80
-.87
-.26
.45
III
.64
1.60
-.20 -.14
1.81
1.16
IV
.21 -.40 -.29
.70
1.10
.89
-110
1996:1
.57 -.14 -1.54 -1.36
.43
||
-.94
.33 -1.60 -1.52
.33
.65
lit
.57 -.34 -1.58 -1.38
-1.33
.23
1.14
IV
-.85
-.88
2.35
3.22
2.06
-1.24
-.24 -2.21 -1.87
1.19
.95
1997-1
||
1.37
-.45
.38 -2.21 -1.99
1.76
III
-.47
.20 -1.69 -1.38
1.02
1.22
-.71
IV
-.30
.53
.67 -.14 -.83
-2.24
-.04 -1.94 -1.75
-.33
-.29
1998:1
||
.06 -1.18 -1.19
-.98
-2.08 -.92
-.30
-.32
-.32
.04 -.36
III
-.62
Source: Department of Commerce, Bureau of Economic Analysis.




Federal

Imports

333

Services

0.03
-.11
.03
-.07
.00
-.04
-.04
-.16
-.17
-.03
-.09
-.07
.04
-05
.06
.03
.08
-.10
-.06
-.11
-.02
.04
-.09
-.08
-.13
-.39
-.13
-.01
-.24
-.07
-.05
-.15
.07
.02
-.04
-.10
-.10
-.11
-.20
.42
-.10
-.09
-.31
-.05
-.08
.01
.02
-.37
.07
-.06
-.11
-.18
-.09
-.19
.02
-.34
-.21
-.31
-.12
-.19
.01
.01

Total

1.28
-.05
1.05
1.34
.52
.45
.66
1.94
1.68
.73
-.13
-.54
-.42
08
-.15
.36
.34
.01
.19
.60
.32
.36
.14
.27
.60
.66
1.24
1.06
.58
.27
.57
.61
.13
.08
-.19
.00
.03
.20
.24
-2.28
.19
-.17
.26
-.80
.08
1.52
-.75
.02
.22
-.15
-.78
59
1.28
-.30
.00
.37
.38
.25
.02
-.34
.64
.27

Total

0.96
-.41
.49
1.06
-.05
-.22
.00
1.30
1.18
.13
-.43
-.85
-.80
-.18
-.50
-.06
-.02
-.09
.14
.18
.13
.36
.37
.30
.52
.24
.66
.45
.30
-.18
.12
.17
-.04
-.20
-.36
-.30
-.24
-.08
-.11
-2.22
27
-.40
-.01
-.88
-.37
.93
-.89
-.18
-.14
-.19
-1.10
.53
.54
-.33
-.44
-.18
.23
-.08
-.14
-.57
.44
-.09

National
defense

0.31
-.22
.43
.63
-.27
-.44
-.19
1.26
1.21
.20
-.49
-.81
-.90
-35
-.49
-.19
-.10
-.13
.04
.01
.10
.21
.34
.45
.41
.30
.54
.38
.30
-.07
-.07
.00
-.07
-.36
-.34
-.27
-.20
-.06
-.15
-1.80
-.16
-.35
-.02
-.96
.05
.66
-1.03
-.08
.01
-.27
-.63
32
.37
-.30
-.39
-.46
.38
-.08
-.09
-.84
.38
.17

Nondefense
0.65
-.18
.05
.43
.22
.23
.19
.04
-.03
-.07
.05
-.04
.10
17
-.01
.13
.07
.03
.10
.17
.03
.14
.03
-.15
.12
-.06
.12
.07
.00
-.11
.19
.17
.02
.17
-.02
-.03
-.04
-.01
.04
-.43
-.11
-.05
.00
.09
-.42
.27
.15
-.11
-.14
.08
-.84
20
.17
-.03
-.05
.27
-.15
.00
-.05
.26
.06
-.26

State
and
local

0.32
.36
.56
.28
.57
.66
.66
.65
.50
.60
.30
.31
.38
.26
.35
.42
.36
.11
.05
.42
.19
.00
-.23
-.03
.08
.42
.58
.61
.28
.45
.45
.43
.17
.28
.17
.30
.28
.28
.35
-.06
.47
.24
.27
.08
.46
.58
.14
.21
.36
.05
.33
.06
.74
.04
.44
.55
.15
.33
.15
.24
.20
.35

TABLE B—6.—Chain-type quantity indexes for gross domestic product, 1959—98
[Index numbers, 1992=100; quarterly data seasonally adjusted]
Personal consumption expenditures

Gross private domestic investment
Fixed investment

Year or
quarter

1959
I960
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
1993
1994
1995
1996
1997
1993-1
II
Ill
IV
1994:1
II
III
IV
1995:1

II
III
IV

1996:1

II
III
IV

1997:1

II
III
IV
1998:1
II
Ill

Gross
domestic
product

35.39
36.24
37.06
39.31
40.99
43.37
46.14
49.15
50.40
52.75
54.35
54.41
56.21
59.29
62.72
62.32
62.04
65.38
68.44
72.11
74.16
73.91
75.60
73.99
76.93
82.32
85.25
87.88
90.47
93.93
97.08
98.27
97.36
100.00
102.32
105.87
108.28
112.02
116.42
101.34
101.85
102.39
103.72
104.49
105.70
106.17
107.11
107.58
107.68
108.57
109.31
110.21
111.84
112.42
113.59
114.77
115.89
117.08
117.94
119.54
120.09
121.17

Total

33.05
33.95
34.64
36.35
37.84
40.10
42.64
45.07
46.41
49.06
50.89
52.08
54.02
57.25
60.02
59.59
60.90
64.32
67.06
69.95
71.57
71.32
72.19
73.02
76.79
80.75
84.52
87.89
90.58
94.14
96.32
97.92
97.30
100.00
102.93
106.31
109.14
112.62
116.44
101.59
102.44
103.48
104.22
105.21
105.98
106.60
107.45
107.95
108.86
109.57
110.19
111.19
112.48
113.00
113.81
115.02
115.47
117.23
118.04
119.79
121.58
122.80

Durable
goods

21.10
21.53
20.72
23.14
25.39
27.73
31.24
33.88
34.42
38.20
39.56
38.29
42.11
47.46
52.37
48.77
48.74
54.96
60.06
63.21
62.90
57.85
58.51
58.44
67.01
76.75
84.21
91.79
93.13
98.97
101.57
100.98
94.56
100.00
107.23
114.87
120.59
128.16
136.86
103.18
106.29
108.47
110.97
112.72
113.77
114.99
118.02
117.74
119.44
121.86
123.30
125.06
128.86
128.24
130.50
134.34
133.82
139.12
140.17
145.39
149.30
150.18

Nondurable
goods

45.87
46.56
47.42
48.91
49.93
52.39
55.18
58.19
59.12
61.80
63.44
64.99
66.16
69.06
71.33
69.94
70.99
74.50
76.44
79.11
80.92
80.58
81.27
81.75
84.16
87.14
89.15
91.98
93.75
96.41
98.61
99.56
98.57
100.00
102.20
105.15
107.24
109.77
112.44
101.19
101.97
102.64
103.02
104.28
104.81
105.40
106.10
106.70
107.11
107.31
107.85
108.45
109.73
110.05
110.84
111.81
111.75
113.16
113.05
115.09
116.57
117.19

Nonresidential
Services

28.53
29.78
30.98
32.52
33.98
36.04
37.96
39.88
41.82
43.98
46.10
47.96
49.72
52.40
54.76
56.08
58.03
60.47
63.01
65.96
68.06
69.34
70.39
71.73
75.08
78.15
82.06
84.72
88.27
91.82
93.90
96.34
97.16
100.00
102.47
105.23
107.89
111.09
114.61
101.49
101.93
102.93
103.53
104.21
105.06
105.58
106.08
106.68
107.69
108.34
108.86
109.92
110.75
111.57
112.13
112.98
113.87
115.19
116.41
117.42
118.98
120.56

See next page for continuation of table.




334

Total

34.37
34.22
33.86
38.23
40.69
44.06
50.25
54.48
52.10
54.82
57.98
53.91
60.08
67.28
75.33
69.14
56.50
67.99
78.71
87.73
89.79
79.49
86.78
74.29
81.23
105.43
104.23
102.71
103.93
104.77
109.24
103.11
93.39
100.00
109.25
123.44
126.02
137.15
152.62
106.96
107.05
108.63
114.37
118.91
124.96
123.00
126.89
128.22
124.24
124.42
127.20
130.22
135.72
141.46
141.20
146.32
153.24
153.82
157.12
167.22
165.29
168.46

Total

34.09
34.36
34.19
37.28
40.04
43.87
48.31
50.94
49.91
53.37
56.54
55.16
59.34
66.41
72.43
67.68
60.12
66.07
75.78
84.34
88.78
82.77
84.32
77.91
83.51
97.32
102.02
102.76
102.05
104.45
106.20
102.86
94.62
100.00
107.58
116.86
123.30
134.10
145.25
104.00
106.08
107.79
112.43
113.32
116.56
117.78
119.79
122.17
122.26
123.28
125.49
129.10
133.20
136.21
137.91
139.90
143.85
147.98
149.28
156.36
161.36
162.23

Total

Structures

26.47
27.95
27.70
30.11
31.62
35.34
41.46
46.50
45.77
47.76
51.20
50.70
50.63
55.16
63.19
63.52
56.88
59.61
66.65
75.75
83.05
82.66
87.07
83.23
81.82
95.97
101.90
98.32
97.22
101.46
105.55
104.90
98.18
100.00
107.58
116.22
127.38
139.21
154.04
103.57
106.67
107.96
112.13
112.25
114.94
117.08
120.62
125.19
127.30
127.58
129.47
133.50
137.02
141.64
144.66
147.14
152.04
158.13
158.86
167.04
172.15
171.84

50.71
54.74
55.48
57.98
58.62
64.71
75.03
80.17
78.13
79.24
83.51
83.78
82.41
84.94
91.86
89.94
80.53
82.50
86.52
95.96
108.01
115.27
124.37
122.50
109.79
125.44
134.63
120.16
115.77
116.35
118.91
120.18
107.32
100.00
100.95
101.94
106.78
112.16
120.09
99.32
100.66
101.50
102.33
98.31
103.13
102.86
103.45
106.11
107.43
107.31
106.28
107.94
109.87
112.24
118.57
119.71
117.81
121.29
121.56
120.06
119.36
119.42

Producers'
durable
equipment
18.37
19.12
18.67
20.83
22.41
25.23
29.81
34.43
34.08
36.15
39.15
38.46
38.76
43.69
51.77
52.84
47.32
50.22
58.05
66.80
72.21
69.01
71.56
66.97
70.08
83.52
88.10
88.99
89.24
94.99
99.73
98.24
94.20
100.00
110.52
122.66
136.80
151.75
170.04
105.43
109.32
110.80
116.51
118.51
120.22
123.49
128.42
133.87
136.34
136.81
140.15
145.36
149.64
155.38
156.62
159.77
168.20
175.62
176.58
190.08
198.43
197.91

Residential

58.14
54.01
54.16
59.35
66.34
70.20
68.15
62.05
60.10
68.29
70.31
66.10
84.23
99.20
98.56
78.21
68.06
84.09
101.89
108.62
104.65
82.52
75.92
62.10
87.62
100.39
101.75
113.95
114.22
111.96
107.84
97.80
85.76
100.00
107.56
118.39
113.85
122.32
125.36
105.08
104.67
107.38
113.10
115.84
120.37
119.44
117.90
115.21
110.63
113.33
116.22
118.84
124.24
123.71
122.48
123.41
125.26
125.14
127.64
132.34
137.05
140.31

TABLE B-6.—Chain-type quantity indexes for gross domestic product, 1959—98—Continued
[Index numbers, 1992=100; quarterly data seasonally adjusted]
Exports of goods and
services
Year or
quarter

Imports of goods and
services

Government consumption expenditures
and gross investment
Federal

Total

Goods

Services

Total

11.24
15.94
11.53
9.78
13.58
14.23
10.82
16.15
. . 13.80
11.54
14.30
16.05
14.54
14.94
17.87
12.59
15.64
16.11
18.34
13.39
17.73
18.32
14.99
19.32
18.41
18.08
16.17
21.37
19.30
17.10
24.55
19.69
19.72
26.34
19.79
18.60
21.16
21.35
19.55
30.26
22.31
22.47
20.76
31.99
24.73
25.03
22.59
33.35
24.90
24.94
23.60
35.13
26.90
39.01
27.62
23.45
32.78
33.96
27.58
40.76
35.93
36.66
32.27
39.66
35.69
35.81
34.40
35.19
37.79
37.51
42.08
37.98
38.69
38.00
40.46
46.59
42.71
42.24
43.52
50.62
46.77
47.23
43.99
51.47
51.83
52.86
46.78
48.03
52.43
52.32
51.66
49.28
48.71
47.58
51.65
48.66
47.44
54.81
46.20
50.76
51.36
49.85
55.50
68.12
52.76
51.65
55.65
72.53
56.65
54.30
63.06
78.65
62.87
60.28
69.94
83.44
72.85
76.04
71.63
86.73
81.36
80.61
83.20
90.13
88.27
90.74
87.29
93.62
93.82
93.43
94.77
93.01
100.00 100.00 100.00 100.00
102.94
103.35 101.96
108.89
111.41
113.62
106.38 122.13
123.95 127.86 115.07
132.90
134.50 140.28 121.50 145.19
151.70
161.92 129.48 165.35
101.22
104.93
101.22 101.21
103.24
103.70
102.15
108.03
101.07
100.74
101.81 109.04
106.21
107.75 102.68 113.56
1994:1
105.73 106.79 103.28 115.65
II
110.12
111.72
106.46
120.79
III
112.93
115.54
106.99
124.56
IV
116.88 120.44 108.79
127.54
119.47
1995:1
123.12
111.19 130.57
II
121.05
125.05
111.99
132.85
Ill
126.10 129.81 117.63 133.51
IV
129.20
134.67
133.48 119.48
1996:1
130.37 135.72 118.27
138.88
II
132.23 137.07 121.21 143.35
Ill
132.92
118.10 147.99
139.60
IV
142.48 148.75
128.42 150.53
1997:1
145.35
154.09
126.20 157.10
II
150.70
160.28
129.77 163.72
Ill .
154.53 165.07
131.64
169.00
IV
156.21 168.25
130.32
171.59
1998:1
155.12
166.82 129.91 177.95
||
152.03 161.87 130.46 181.97
III
150.96
162.10
126.93 183.02
Source: Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997
1993-1
||
Ill
IV




Goods

13.06
12.84
12.83
14.72
15.32
16.33
18.64
21.58
22.72
27.41
28.91
30.05
32.57
37.00
39.61
38.51
33.65
41.26
46.28
50.43
51.30
47.49
48.46
47.24
53.66
66.64
70.84
78.10
81.72
85.01
88.58
91.27
91.23
100.00
110.49
125.56
137.61
151.36
173.56
106.20
109.72
110.70
115.32
117.72
123.81
128.48
132.22
134.75
137.79
138.40
139.48
144.07
149.31
154.40
157.65
164.59
172.05
177.43
180.19
187.38
192.49
193.87

335

Services

28.14
30.35
29.83
31.23
31.18
31.98
32.92
37.10
41.64
42.39
45.06
47.41
46.06
47.63
45.70
44.65
42.32
45.28
47.02
50.36
51.08
49.82
52.68
55.49
59.97
74.85
80.37
80.72
91.14
94.38
96.88
104.26
100.97
100.00
101.91
107.31
112.56
118.65
130.39
99.34
100.63
101.79
105.89
106.61
107.69
107.58
107.34
112.46
111.52
112.38
113.89
116.42
117.64
120.45
120.10
125.12
128.32
133.11
135.01
138.03
137.82
137.60

Total
48.94
48.84
51.21
54.28
55.54
56.65
58.36
63.66
68.49
70.62
70.22
68.59
67.34
67.58
67.14
68.28
69.34
69.38
70.01
72.05
73.18
74.49
74.99
75.97
78.13
80.58
85.47
89.81
92.26
93.44
96.06
98.94
99.55
100.00
99.08
99.09
99.27
100.35
101.68
98.92
99.16
98.95
99.29
98.27
98.38
100.35
99.37
99.40
99.70
99.51
98.48
99.27
100.98
100.58
100.59
101.10
101.63
101.99
102.01
101.53
102.45
102.84

Total
68.29
66.18
68.76
74.48
74.21
72.95
72.96
81.28
89.34
90.22
87.11
80.90
75.19
73.90
70.29
69.85
69.68
68.99
70.09
71.54
72.59
75.63
78.77
81.33
85.74
87.83
93.87
98.18
101.21
99.36
100.67
102.64
102.16
100.00
95.78
92.17
89.14
88.19
86.75
97.00
96.19
94.98
94.95
92.28
91.13
94.02
91.23
90.65
90.20
89.60
86.10
87.78
89.51
88.45
87.02
86.43
87.20
86.92
86.46
84.50
86.00
85.71

National
defense

81.85
80.17
83.51
88.45
86.22
82.48
80.84
92.66
104.71
106.69
101.56
92.88
83.49
79.91
74.82
72.80
71.78
70.43
70.89
70.99
72.13
74.71
78.77
84.23
89.05
92.63
99.55
104.68
108.89
107.92
106.86
106.86
105.79
100.00
94.32
89.66
86.08
84.93
82.20
95.58
94.92
93.42
93.36
89.19
89.40
92.33
87.71
87.36
87.39
86.19
83.37
84.82
86.50
85.11
83.29
81.15
82.94
82.56
82.15
78.06
79.93
80.78

Nondefense
38.65
35.54
36.44
43.88
47.89
52.02
55.56
56.27
55.66
54.18
55.41
54.56
56.70
60.39
60.11
63.34
65.13
65.97
68.55
73.17
74.04
78.21
79.09
74.46
77.85
76.17
80.02
82.25
82.32
78.25
85.45
92.31
93.28
100.00
99.33
98.24
96.50
96.03
97.64
100.46
99.29
98.76
98.81
99.77
95.36
98.13
99.69
98.54
96.98
97.77
92.70
94.91
96.77
96.46
95.97
99.01
97.39
97.36
96.79
99.83
100.48
97.47

State
and
local
34.90
36.32
38.57
39.70
42.09
44.98
48.00
51.09
53.58
56.61
58.17
59.80
61.75
63.12
65.03
67.35
69.32
69.90
70.18
72.68
73.87
73.88
72.41
72.22
72.69
75.44
79.47
83.85
85.87
89.24
92.78
96.31
97.68
100.00
101.45
104.06
106.55
109.09
112.42
100.30
101.29
101.81
102.40
102.57
103.59
104.89
105.21
105.69
106.51
106.62
107.37
107.51
109.22
109.30
110.33
111.65
112.01
112.82
113.19
113.77
114.28
115.16

TABLE B-7.—Chain-type price indexes for gross domestic product, 1959-98
[Index numbers, 1992=100, except as noted; quarterly data seasonally adjusted]
Personal consumption expenditures

Gross private domestic investment
Fixed investment

Year or
quarter

Gross
domestic
product

Total

22.81
23.19
23.44
23.69
23.99
24.31
24.69
25.34
26.01
27.04
28.16
29.49
30.82
31.90
33.62
37.03
40.04
42.32
45.13
!
48.41
52.76
58.49
63.73
67.40
70.46
73.14
75.84
78.00
80.96
84.32
88.44
92.91
96.82
100.00
102.66
105.15
107.56
109.75
111.81
101.83
1993:1
II
102.46
Ill
102.80
103.57
IV
104.00
1994:1
II
104.68
105.61
Ill
IV
106.31
106.75
1995:1
II
107.38
III
107.85
IV
108.28
108.87
1996:1
109.56
II
III
109.95
IV
110.62
111.31
1997:1
|
|
111.63
III
112.00
IV
112.30
112.30
1998-.I
II
112.55
Ill
112.84
See next page for continuation of table.

1959
I960
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
1993
1994
1995
1996
1997




22.95
23.27
23.54
23.84
24.12
24.48
24.95
25.66
26.48
27.64
28.94
30.48
32.05
33.42
35.30
38.46
42.09
44.55
47.42
50.88
55.22
60.34
66.01
70.18
73.16
75.92
78.53
80.58
83.06
86.10
89.72
93.64
97.32
100.00
102.64
105.09
107.51
109.54
111.57
101.85
102.38
102.83
103.52
104.16
104.74
105.39
106.07
106.74
107.26
107.76
108.30
108.90
109.28
109.77
110.21
110.97
111.45
111.77
112.09
112.33
112.57
112.85

Durable
goods

41.38
41.18
41.27
41.47
41.61
41.82
41.44
41.25
41.89
43.28
44.47
45.44
47.10
47.60
48.29
51.35
56.04
59.16
61.73
65.23
69.62
75.56
80.64
83.81
85.48
86.71
87.76
88.91
91.59
93.28
95.29
96.59
98.54
100.00
101.22
103.27
103.72
102.75
100.66
100.47
101.00
101.38
102.03
102.28
103.02
103.85
103.94
104.05
103.94
103.60
103.30
103.47
102.92
102.54
102.06
101.84
100.96
100.23
99.62
99.27
98.72
97.98

Nondurable
goods

24.49
24.84
24.99
25.18
25.48
25.80
26.27
27.14
27.78
28.85
30.19
31.66
32.65
33.74
36.39
41.59
44.83
46.53
49.18
52.59
58.33
65.30
70.57
72.81
74.64
76.71
78.72
78.73
81.82
84.83
89.28
94.62
98.06
100.00
101.46
102.77
103.96
106.08
107.69
101.26
101.38
101.27
101.92
101.90
102.23
103.31
103.64
103.49
103.89
104.11
104.34
105.12
106.04
106.12
107.05
107.57
107.52
107.72
107.95
107.35
107.41
107.80

Nonresidential
Services

18.47
18.96
19.33
19.62
19.94
20.28
20.72
21.32
22.03
22.97
23.91
25.20
26.73
27.91
29.17
31.41
33.97
36.50
39.46
42.62
46.08
50.96
56.17
60.80
64.86
68.17
71.62
75.28
78.23
82.16
86.55
91.22
95.78
100.00
103.62
106.85
110.37
113.32
116.61
102.43
103.35
103.93
104.79
105.50
106.37
107.24
108.27
109.11
110.03
110.82
111.52
112.11
112.95
113.71
114.51
115.50
116.30
117.04
117.59
118.00
118.55
119.05

336

Total

29.01
29.13
29.13
29.11
29.04
29.21
29.69
30.29
31.10
32.30
33.85
35.27
37.05
38.69
40.80
44.91
50.48
53.33
57.29
62.10
67.72
74.18
81.09
85.38
85.20
85.87
86.81
88.97
90.93
93.46
96.06
98.37
99.70
100.00
101.50
103.32
104.74
104.46
104.10
101.06
101.42
101.65
101.85
102.57
103.10
103.63
103.96
104.40
104.89
104.86
104.82
104.56
104.35
104.53
104.39
104.22
104.08
104.12
103.99
103.39
102.92
102.43

Total

27.95
28.08
28.03
28.03
27.98
28.15
28.64
29.25
30.08
31.31
32.87
34.28
36.05
37.64
39.74
43.69
49.22
52.12
56.19
61.09
66.71
73.03
79.94
84.47
84.38
85.01
86.20
88.56
90.44
93.25
95.85
98.24
99.63
100.00
101.53
103.40
104.81
104.68
104.45
101.08
101.45
101.69
101.91
102.64
103.19
103.71
104.04
104.45
104.95
104.93
104.92
104.72
104.55
104.76
104.70
104.53
104.40
104.50
104.37
103.81
103.33
102.91

Total

31.51
31.61
31.50
31.48
31.53
31.69
32.06
32.55
33.40
34.59
36.04
37.76
39.59
41.00
42.59
46.75
53.30
56.33
60.05
64.38
69.71
75.96
83.48
88.28
87.52
87.48
88.31
90.22
91.34
93.73
96.16
98.42
99.93
100.00
100.65
101.89
102.40
101.46
100.15
100.49
100.66
100.66
100.80
101.36
101.89
102.20
102.12
102.16
102.66
102.49
102.28
101.89
101.50
101.37
101.09
100.65
100.28
100.04
99.64
98.90
98.12
97.21

Structures

21.16
21.13
21.01
21.18
21.38
21.68
22.31
23.11
23.84
25.03
26.68
28.42
30.61
32.83
35.38
40.24
45.03
47.22
50.95
56.30
62.88
68.66
78.22
84.45
82.23
82.94
84.86
86.47
87.85
92.10
95.61
98.78
100.09
100.00
103.26
107.00
111.41
114.33
118.22
102.15
102.90
103.56
104.42
105.46
106.16
107.37
109.00
110.26
111.06
111.83
112.49
113.08
113.69
114.84
115.72
116.66
117.59
118.83
119.79
120.58
121.49
121.85

Producers'
durable
equipment
39.74
39.99
39.90
39.66
39.52
39.50
39.55
39.67
40.59
41.70
42.88
44.48
45.88
46.51
47.30
50.85
58.59
62.19
65.90
69.59
74.13
80.67
86.60
90.24
90.58
90.04
90.15
92.24
93.22
94.59
96.45
98.23
99.84
100.00
99.57
99.86
99.00
96.80
93.88
99.80
99.72
99.45
99.32
99.69
100.15
100.14
99.46
99.08
99.47
98.98
98.49
97.77
97.05
96.52
95.88
95.01
94.23
93.54
92.75
91.57
90.35
89.13

Residential

21.43
21.58
21.61
21.65
21.48
21.65
22.26
23.07
23.87
25.14
26.88
27.74
29.35
31.14
33.89
37.39
40.86
43.49
47.99
53.72
59.75
66.22
71.62
75.45
77.19
79.41
81.45
84.87
88.34
92.06
95.08
97.80
98.85
100.00
103.71
107.11
110.90
113.03
115.96
102.54
103.41
104.25
104.64
105.79
106.36
107.45
108.83
110.19
110.68
111.10
111.64
111.95
112.41
113.61
114.14
114.80
115.35
116.50
117.20
117.21
117.71
118.77

TABLE B-7.—Chain-type price indexes for gross domestic product, 1959—98—Continued
[Index numbers, 1992=100, except as noted; quarterly data seasonally adjusted]
Exports and
imports
of goods and
services

Government consumption expenditures and
gross investment
Federal

Year or
quarter
Exports

Total
Imports

Total

National
defense

Nondefense

Final
sales
of
State domesand
tic
local product

Total

Gross domestic
pur- l
Gross Gross
donaLess tional mes- chases
food product tic
Less
and
prodfood
energy
uct Total and
energy

18.10
28.74
18.61
20.94 18.10
17.45
22.79 22.44
19.51
18.34
22.75
29.10
21.14
17.82
23.11
18.20
19.82
18.75
21.14
23.38 23.00
18.38
18.66
19.01
29.51
20.48 18.24
18.74
23.68 23.28
19.42
29.48
21.12 18.83
20.89 19.15
29.44
23.97 23.58
19.19 21.67
19.61
19.90
19.25
21.30
29.64
24.32 23.94
20.15
20.58 19.77
22.75 19.63
21.75
20.41
24.80 24.39
30.61
23.22 20.17
22.05 20.73 21.19
25.07
21.07
21.89
25.51
24.04 21.14
31.55
22.56 21.56
32.80
24.72 22.35 26.34 25.83
22.65 22.47 22.55 21.72
33.48
23.00 23.74 23.84 22.92 26.34 23.60 27.50 26.95
34.54
24.18
25.13
27.65 25.23 28.80 28.21
23.60 25.19
36.04
30.33 29.73
27.08 25.94 30.30 27.31
24.99 27.21
1970
31.32
37.27
29.23 31.91
26.53 29.33 29.42 28.24 32.71
1971
38.50
28.44 31.46
32.00 31.01
1972
34.53 30.97 33.26 32.71
34.64
33.66 36.54 33.32 35.15
43.78
33.44 33.88 34.51
1973
54.11
37.00 38.28 38.17
48.04 37.45 37.89 37.24 39.31
1974
41.72
41.10 43.84 40.80 41.90
41.36
41.95
59.72
52.13
1975
61.62
53.69 43.99 44.63 43.85 46.33 43.38 44.37 44.15
1976
64.17
47.25 47.18
50.34 46.19
48.18 47.21
58.54 47.11
1977
50.65
50.82 52.84 49.26 50.71
68.16
1978
62.68 50.28 51.47
55.81
76.48
56.58 53.73 55.06 55.22
73.39 54.82 56.10
1979
61.10
84.17
60.86 62.20 62.05 62.34 59.70 60.15
91.45
1980 ....
90.31
68.23 68.26 65.57 65.82 66.72
96.39 66.84 68.31
1981
72.94 72.96 72.59 69.93 70.02 70.64 "69"04
90.76
71.32
93.13
1982
91.32
89.64 74.51
73.00 73.31
71.99
76.08 76.20 75.44 73.16
1983
92.30
1984
77.53 76.40 75.77 75.90 74.65
88.90 78.23 80.36 81.23
82.74 83.51
78.43 78.34 77.30
89.82
80.20 79.51
85.99 81.01
1985
80.40 80.10
88.54
81.59
80.51
85.95 82.69 83.96 84.49 82.16
1986
85.26 85.62 84.04 85.02 82.98 83.11
90.99
1987
82.88
90.99 85.15
87.30 86.75 87.52 86.06 86.13
96.00
1988
86.09
95.35 87.39 87.18
89.69 89.78 89.56
97.91
90.21
89.79 89.79 89.70 90.51
1989
97.81
98.74 100.37 94.06 92.92 92.92 92.84 94.91
93.62 93.83 93.35
1990
1991
97.30 97.00
100.31 100.02 97.45 96.88 96.47 97.95 97.86 97.31
100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
1992
100.07
98.75 102.50 102.51 101.77 104.29 102.49 102.65 102.48 102.65
1993
101.24
99.39 104.85 104.84 103.63 107.70 104.85 105.11 104.85 105.16
1994
103.39 101.61 108.12 108.17 106.48 112.13 108.09 107.54 107.28 107.69
101.60
99.36 110.80 111.35 109.98 114.57 110.48 109.59 109.18 109.35
1996
99.53
1997
95.72 113.20 113.58 112.00 117.27 112.96 111.66 110.92 111.05
99.97
98.82 101.71 101.79 101.23 103.15 101.65 101.85 101.71 101.82
1993:1
II
100.22
99.45 102.24 101.94 101.39 103.27 102.44 102.38 102.28 102.43
100.04
Ill
98.55 102.77 102.83 101.97 104.89 102.74 102.84 102.64 102.88
100.03
IV
98.19 103.26 103.48 102.48 105.84 103.13 103.53 103.28 103.49
100.44
97.64 103.95 104.04 102.90 106.73 103.90 104.17 103.80 104.10
1994:1
II
100.99
98.87 104.61 104.97 103.65 108.08 104.39 104.75 104.46 104.86
Ill
101.40 100.34 105.07 104.83 103.68 107.57 105.21 105.41 105.24 105.50
IV
102.11 100.72 105.75 105.53 104.31 108.42 105.89 106.09 105.88 106.18
103.13 101.09 107.00 107.02 105.42 110.78 106.98 106.75 106.47 106.83
1995:1
II
103.99 102.79 107.76 107.39 105.97 110.74 107.98 107.28 107.11 107.49
Ill
103.52 101.78 108.34 108.07 106.69 111.33 108.50 107.78 107.52 107.95
102.92 100.77 109.38 110.21 107.83 115.67 108.89 108.33 107.99 108.48
IV
102.62 100.32 110.53 111.36 109.59 115.46 110.05 108.94 108.56 108.92
1996:1
II
102.19
99.94 110.21 110.76 109.52 113.73 109.89 109.33 108.94 109.08
Ill
101.35
98.62 110.86 111.26 110.04 114.19 110.61 109.83 109.34 109.48
IV
100.26
98.55 111.61 112.00 110.79 114.92 111.37 110.28 109.90 109.92
100.01
1997:1
97.45 112.67 113.32 111.87 116.72 112.28 111.04 110.51 110.52
|
|
99.76
95.66 113.01 113.57 112.01 117.21 112.68 111.53 110.76 110.98
III
99.36
95.16 113.24 113.52 111.90 117.32 113.07 111.87 111.06 111.23
98.97
IV
94.62 113.87 113.91 112.23 117.83 113.83 112.19 111.34 111.49
98.13
92.05 114.17 114.66 113.04 118.46 113.89 112.45 111.29 111.69
1998:1
II
97.68
90.98 114.39 114.66 113.12 118.30 114.23 112.69 111.42 111.88
96.98
89.87 114.82 114.77 113.22 118.44 114.83 112.99 111.60 112.09
Ill
1
2 Gross domestic product (GDP) less exports of goods and services plus imports of goods and services.
Percent changes based on unrounded data. Quarterly percent changes are at annual rates.
Source: Department of Commerce, Bureau of Economic Analysis.

1959
I960
1961
1962
1963
1964
1965
1966
1967
1968

1969 ::

1995 ::.: :




337

Percent change2

Gross domestic
purchases '

22.95
23.27
23.54
23.85
24.13
24.49
2496
25.68
26.49
27.65
28.95
30.49
32.07
33.43
35.32
38.48
42.11
44.58
47.45
50.91
55.26
60.37
66.05
70.22
73.20
75.97
78.57
80.62
83.08
86.12
89.75
93.66
97.33
100.00
102.64
105.08
107.49
109.51
111.51
101.84
102.37
102.83
103.51
104.16
104.73
105.38
106.05
106.72
107.24
107.73
108.27
108.87
109.24
109.74
110.17
110.91
111.39
111.72
112.04
112.28
112.51
112.79

1.0
1.4
1?
1.3
1.2
1.5
1.9
2.8
3.2
4.4
4.7
5.3
5.2
4.2
5.6
89
9.4
5.8
6.5
73
8.5
9.3
9.4
6.3
4.3
3.8
3.4
2.6
3.1
3.7
4.2
4.4
3.9
2.8
2.6
2.4
2.3
1.9
1.9
3.9
2.1
1.8
2.7
2.5
2.2
2.5
2.6
2.5
2.0
1.9
2.0
2.2
1.4
1.8
1.6
2.8
1.7
1.2
1.1
.9
.9
1.0

1.0
1.4
11
1.2
1.3
1.6
19
2.8
3.0
4.3
4.7
5.4
5.3
4.5
5.9
10?
9.3
5.8
6.9
74
9.0
10.7
9.2
5.9
3.8
3.5
3.2
2.6
3.4
3.6
4.2
4.5
3.7
2.8
2.5
2.3
2.3
1.8
1.6
3.2
2.3
1.4
2.5
2.0
2.6
3.0
2.5
2.2
2.4
1.6
1.8
2.1
1.4
1.5
2.1
2.2
.9
1.1
1.0
-.2
.4
.7

• •••'•

"4l
3.7
3.5
3.6
3.5
3.9
4.0
4.2
3.9
3.1
2.7
2.4
2.4
1.5
1.6
3.5
2.4
1.8
2.4
2.4
3.0
2.5
2.6
2.5
2.5
1.7
1.9
1.7
.6
1.5
1.6
2.2
1.7
.9
1.0
.7
.7
.7

TABLE B-8.—Gross domestic product by major type of product, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Goods
Year or
quarter

Final
Gross sales of
domestic domesproduct
tic
product

Total

Change
business
inventories

Total

4.2
252.0
507.2
503.0
1959
3.2
523.3
257.8
526.6
1960
260.4
2.9
541.9
544.8
1961
6.1
579.1
281.2
585.2
1962
292.7
617.4
5.7
611.7
1963
313.2
5.0
658.0
663.0
1964
9.7
709.4
342.9
719.1
1965
13.8
774.0
380.6
787.8
1966
10.5
823.1
394.5
833.6
1967
901.4
426.7
910.6
9.1
1968
1969
972.7
9.5
455.8
982.2
467.5
2.2
1,035.6 1,033.4
1970
1,125.4 1,116.9
8.5
493.2
1971
9.9
539.8
1,237.3 1,227.4
1972
619.2
17.5
1,382.6 1,365.2
1973
14.1
665.7
1974
1,496.9 1,482.8
718.1
-6.3
1,630.6 1,636.9
1975
1,819.0 1,802.0
16.9
804.0
1976
883.7
23.1
1977
2,026.9 2,003.8
2,291.4 2,264.2
27.2
996.5
1978
2,557.5 2,540.6
16.9 1,115.2
1979
1,191.1
2,784.2 2,791.9
-7.6
1980
3,115.9 3,087.8
28.2 1,342.6
1981
1,333.2
3,242.1 3,256.6 -14.5
1982
-4.9 1,426.9
3,514.5 3,519.4
1983
3,902.4 3,835.0
67.5 1,607.0
1984
4,180.7 4,154.5
26.2 1,669.8
1985
4,422.2 4,412.6
9.6 1,720.6
1986
24.2 1,804.8
4,692.3 4,668.1
1987
10.9 1,942.9
5,049.6 5,038.7
1988
1989
31.7 2,124.0
5,438.7 5,407.0
8.0 2,203.8
5,743.8 5,735.8
1990
5,916.7 5,919.0
-2.3 2,234.0
1991
6,244.4 6,237.4
7.0 2,321.0
1992
20.5 2,422.1
6,558.1 6,537.6
1993
61.2 2,581.4
6,947.0 6,885.7
1994
30.7 2,675.6
7,269.6 7,238.9
1995
32.1 2,812.4
7,661.6 7,629.5
1996
67.4 2,978.5
8,110.9 8,043.5
1997
30.7 2,388.3
6,444.5 6,413.8
1993:1
II
14.5 2,408.7
6,509.1 6,494.7
Ill
6,574.6 6,560.6
14.0 2,412.0
22.9 2,479.6
IV
6,704.2 6,681.3
52.4 2,531.2
1994:1
6,794.3 6,741.9
||
6,911.4 6,835.1
76.3 2,568.6
III
50.2 2,582.8
6,986.5 6,936.3
IV
7,095.7 7,029.6
66.2 2,643.0
59.0 2,662.2
7,170.8 7,111.8
1995-.I
||
7,210.9 7,185.6
25.3 2,643.7
III
17.1 2,678.1
7,304.8 7,287.7
IV
7,391.9 7,370.4
21.5 2,718.4
16.3 2,754.9
1996:1
7,495.3 7,479.1
||
7,629.2 7,600.6
28.5 2,804.5
III
. .. . 7,703.4 7,653.6
49.8 2,832.3
IV
7,818.4 7,784.6
33.8 2,858.1
59.7 2,927.7
7,955.0 7,895.2
1997:1
II
8,063.4 7,979.9
83.5 2,967.0
Ill
8,170.8 8,116.2
54.6 2,998.9
IV
8.254.5 8,182.6
71.9 3,020.5
95.5 3,101.3
8,384.2 8,288.7
1998-1
II
39.2 3,064.5
8,440.6 8,401.3
Ill
8.537.9 8.480.9
57.0 3.085.9
Source: Department of Commerce, Bureau of Economic Analysis.




Durable goods
Change

Final
sales

business
inventories

Final
sales

Change
in
business
inventories

247.8
4.2
92.3
3.1
1.7
254.6
3.2
95.1
257.5
2.9
94.3
14
275.1
6.1 104.5
2.7
287.1
5.7 111.0
4.0
308.1
5.0 120.5
6.7
9.7 133.3
333.3
10.2
366.8
13.8 149.0
5.5
384.0
10.5 153.8
9.1 167.8
4.6
417.6
446.2
6.3
9.5 178.6
.0
465.3
2.2 180.2
3.2
484.7
8.5 187.0
7.2
529.9
9.9 209.3
601.8
17.5 241.4
14.6
14.1 256.7
11.0
651.6
724.5 -6.3 288.1
-7.5
787.1
10.6
16.9 322.5
860.6
23.1 366.9
10.2
20.3
969.3
27.2 416.9
1,098.3
16.9 475.0
12.5
-2.7
1,198.7
-7.6 502.9
28.2 546.0
7.5
1,314.5
1,347.7 -14.5 544.4 -15.5
1,431.8 -4.9 586.1
4.0
1,539.6
67.5 655.1
43.6
1,643.6
26.2 713.2
8.6
1,711.0
9.6 741.3
.6
1,780.6
24.2 764.7
21.5
16.4
1,932.0
10.9 837.0
31.7 907.3
21.3
2,092.3
2.5
2,195.8
8.0 935.7
2,236.3
-2.3 926.6 -16.6
2,314.0
7.0 965.9 -10.9
16.1
2,401.6
20.5 1,012.7
33.6
2,520.2
61.2 1,072.5
32.4
2,644.9
30.7 1,143.4
20.8
2,780.3
32.1 1,228.7
67.4 1,310.1
33.6
2,911.1
30.7 980.8
20.6
2,357.5
7.0
2,394.2
14.5 1,014.9
14.2
2,398.0
14.0 1,009.4
2,456.7
22.5
22.9 1,045.9
52.4 1,052.3
29.0
2,478.8
40.5
2,492.4
76.3 1,062.1
29.3
2,532.6
50.2 1,082.3
35.6
2,576.9
66.2 1,093.4
2,603.2
47.5
59.0 1,116.4
2,618.4
27.7
25.3 1,126.5
2,661.0
17.1 1,155.8
25.1
29.2
2,696.9
21.5 1,174.8
14.6
2,738.6
16.3 1,201.5
18.4
2,775.9
28.5 1,225.1
42.7
2,782.5
49.8 1,232.8
2,824.3
33.8 1,255.7
y 7.3
59.7 1,275.5
31.8
2,868.0
48.8
2,883.6
83.5 1,293.6
19.9
2,944.3
54.6 1,337.1
2,948.7
34.0
71.9 1,334.3
49.9
3,005.8
95.5 1,376.9
4.5
3,025.3
39.2 1,380.8
19.5
3.029.0
57.0 1.373.0

338

Nondurable goods
Final
sales

155.5
159.5
163.2
170.7
176.1
187.6
199.9
217.8
230.2
249.8
267.6
285.1
297.7
320.6
360.3
394.9
436.4
464.6
493.7
552.5
623.3
695.8
768.4
803.3
845.7
884.5
930.4
969.7
1,015.9
1,095.0
1,185.0
1,260.1
1,309.7
1,348.1
1,388.9
1,447.6
1,501.5
1,551.6
1,601.0
1,376.7
1,379.3
1,388.6
1,410.8
1,426.5
1,430.2
1,450.3
1,483.5
1,486.8
1,491.8
1,505.2
1,522.2
1,537.1
1,550.9
1,549.7
1,568.6
1,592.4
1,589.9
1,607.2
1,614.4
1,628.8
1,644.4
1.655.9

Change
in
business
inventories

1.1
1.6
3.0
2.7
3.0
1.0
3.0
3.6
5.0
4.5
3.2
2.2
5.3
2.7
2.9
3.1
1.2
6.3
12.8
6.9
4.3
-4.9
20.6
1.0
-8.9
23.9
17.6
9.0
2.8
-5.5
10.5
5.6
14.3
17.9
4.4
27.7
-1.6
11.4
33.8
10.1
7.4
-.2
.4
23.4
35.8
20.9
30.6
11.5
-2.4
-S.O
-7.7
1.7
10.1
7.1
26.5
27.9
34.6
34.7
37.9
45.6
34.7
37.5

Services

192.7
206.8
220.8
236.1
252.0
271.4
291.5
319.2
349.5
383.9
418.2
458.5
503.8
550.5
600.5
665.6
745.8
823.8
916.4
1,023.1
1,131.7
1,274.1
1,423.3
1,566.9
1,720.9
1,871.8
2,054.6
2,224.2
2,398.2
2,600.0
2,795.3
3,016.9
3,201.3
3,411.1
3,589.5
3,772.3
3,974.9
4,179.5
4,414.1
3,527.4
3,561.8
3,612.4
3,656.1
3,695.1
3,749.6
3,800.8
3,843.9
3,893.5
3,955.6
4,006.7
4,043.8
4,096.7
4,157.3
4,196.1
4,267.7
4,320.2
4,386.9
4,448.0
4,501.2
4,538.4
4,619.5
4.678.5

Structures

62.5
61.9
63.6
67.8
72.7
78,4
84.7
88.0
89.6
100.0
108.3
109.7
128.4
146.9
162.9
165.6
166.7
191.2
226.8
271.8
310.6
319.1
350.0
342.0
366.8
423.6
456.3
477.4
489.3
506.7
519.4
523.1
481.4
512.3
546.5
593.2
619.1
669.7
718.3
528.8
538.6
550.2
568.5
568.0
593.1
602.9
608.8
615.1
611.7
620.0
629.7
643.7
667.4
675.0
692.6
707.1
709.4
723.9
723.7
744.6
756.6
773.5

TABLE B-9.—Real gross domestic product by major type of product, 1959-98
[Billions of chained (1992) dollars; quarterly data at seasonally adjusted annual rates]
Goods
Year or
quarter

Final Change
in
Gross sales of busidomestic domes- ness
product
tic
product inventories

Total

Total

Final
sales

Durable goods
Change
in
business
inventories

785.2
13.2
10.5
796.8
799.4
8.6
19.5
857.8
886.4
17.8
15.6
940.8
30.3 1,017.8
42.4 1,106.9
32.0 1,120.2
26.9 1,170.8
'.".'.
27.0 1,204.7
5.4 1,188.8
22.3 1,216.8
24.7 1,305.9
37.7 1,424.5
23.4 1,403.1
-10.2
1,380.2
29.8 1,479.5
38.8 1,555.1
43.3 1,652.0
23.4 1,706.0
-10.2
1,689.7
33.1 1,761.8
1,681.0 1,706.7 -15.6
-15.6
-5.7
1,748.9 1,762.6
-5.7
75.3 1,926.4 1,853.3 75.3
30.2 1,966.1 1,940.6
30.2
11.1 2,018.8 2,011.7
11.1
26.4 2,077.9 2,055.0
26.4
11.7 2,181.0 2,171.0
11.7
33.3 2,301.8 2,269.2
33.3
10.4
10.4 2,304.8 2,295.4
-3.0 2,262.7 2,265.9 -3.0
7.0 2,321.0 2,314.0
7.0
22.1 2,391.5 2,370.7
22.1
60.6 2,514.2 2,453.9
60.6
27.7 2,591.0 2,561.1 27.7
30.0 2,708.8 2,675.6
30.0
63.2
63.2 2,867.9 2,799.7
1993:1
32.3
32.3 2,363.6 2,332.9
II
16.6
16.6 2,383.2 2,368.1
III
15.3
15.3 2,382.7 2,368.6
IV
24.2
24.2 2,436.5 2,413.2
1994:1
53.1 2,476.7 2,424.5
53.1
II
75.9
75.9 2,508.6 2,433.8
Ill
49.7
49.7 2,508.4 2,458.9
IV
63.6 2,563.1 2,498.4
63.6
1995-1
54.3
54.3 2,580.7 2,524.3
II
21.7 2,561.4 2,537.5
21.7
Ill
14.7
14.7 2,592.1 2,574.9
IV
20.1
20.1 2,629.8 2,607.7
14.4 2,653.7 2,636.1
14.4
1996:1
||
26.1
26.1 2,699.7 2,670.8
III
47.5 2,728.2 2,677.5 47.5
IV
32.1 2,753.5 2,718.2
32.1
1997:1
56.3 2,811.6 2,751.4
56.3
||
79.0 2,852.6 2,768.7
79.0
Ill
51.0 2.8S0.2 2,834.0
51.0
IV
66.5 2,917.0 2,844.8 66.5
91.4
1998:1
91.4 3,000.8 2,904.3
||
38.2
38.2 2,969.7 2,927.7
III
.'.
55.7
55.7 2,955.0 2,934.8
Source: Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997

2,210.2
2,262.9
2,314.3
2,454.8
2,559.4
2,708.4
2,881.1
3,069.2
3,147.2
3,293.9
3,393.6
3,397.6
3,510.0
3,702.3
3,916.3
3,891.2
3,873.9
4,082.9
4,273.6
4,503.0
4,630.6
4,615.0
4,720.7
4,620.3
4,803.7
5,140.1
5,323.5
5,487.7
5,649.5
5,865.2
6,062.0
6,136.3
6,079.4
6,244.4
6,389.6
6,610.7
6,761.7
6,994.8
7,269.8
6,327.9
6,359.9
6,393.5
6,476.9
6,524.5
6,600.3
6,629.5
6,688.6
6,717.5
6,724.2
6,779.5
6,825.8
6,882.0
6,983.9
7,020.0
7,093.1
7,166.7
7,236.5
7,311.2
7,364.6
7,464.7
7,498.6
7,566.5




2,206.9
2,264.2
2,318.0
2,445.4
2,552.4
2,705.1
2,860.4
3,033.5
3,125.1
3,278.0
3,377.2
3,406.5
3,499.8
3,689.5
3,883.9
3,873.4
3,906.4
4,061.7
4,240.8
4,464.4
4,614.4
4,641.9
4,691.6
4,651.2
4,821.2
5,061.6
5,296.9
5,480.9
5,626.0
5,855.1
6,028.7
6,126.7
6,082.6
6,237.4
6,368.9
6,551.2
6,731.7
6,961.6
7,203.7
6,297.3
6,344.9
6,379.3
6,453.8
6,473.0
6,526.7
6,580.4
6,624.8
6,661.8
6,700.0
6,761.7
6,803.3
6,863.6
6,954.7
6,970.3
7,057.9
7,108.1
7,155.5
7,256.3
7,294.8
7,372.5
7,456.4
7,507.6

339

Final
sales

604.4
637.6
703.1
758.2
793.6
819.8
897.0
951.9
963.9
934.2
965.9
1,007.0
1,056.7
1,135.6
1,227.7
1,331.9
977.3
1,009.0
1,003.4
1,038.2
1,040.4
1,044.7
1,062.1
1,079.4
1,103.5
1,117.7
1,151.4
1,169.9
1,193.4
1,225.7
1,233.9
1,257.6
1,279.2
1,311.2
1,365.8
1,371.4
1,420.4
1,434.1
1,438.2

Change
in
business
inventories

-17.8
4.9
49.7
10.0
.9
23.5
17.6
22.4
2.7
-16.6
-10.9
15.8
32.3
30.4
19.5
31.6
20.7
7.0
13.8
21.9
28.0
39.1
28.2
33.8
44.6
26.0
23.5
27.6
13.7
17.3
40.1
7.0
29.8
45.8
18.7
32.2
47.3
4.2
18.5

Nondurable goods
Final
sales

1,122.6
1,142.6
1,160.9
1,189.0
1,223.5
1,239.2
1,274.8
1,317.2
1,331.3
1,331.8
1,348.1
1,363.8
1,397.5
1,426.8
1,451.5
1,475.1
1,355.6
1,359.2
1,365.2
1,375.3
1,384.3
1,389.3
1,397.2
1,419.3
1,421.5
1,420.7
1,425.2
1,439.8
1,445.3
1,448.5
1,447.3
1,464.8
1,476.9
1,463.9
1,477.1
1,482.4
1,495.2
1,505.4
1,508.3

Change
in
business
inventories

2.0
-10.3
26.1
20.1
10.3
2.4
-6.1
11.0
7.6
13.4
17.9
6.2
28.2
-3.0
10.5
31.5
11.6
9.7
1.4
2.1
25.0
36.8
21.4
29.7
9.4
-4.6
-9.1
-7.8
.7
8.8
7.5
25.1
26.4
33.2
32.3
34.2
44.1
34.1
37.4

Services

1,115.3
1,167.1
1,219.9
1,277.5
1,336.9
1,406.3
1,472.5
1,557.8
1,639.4
1,712.0
1,774.1
1,824.0
1,875.8
1,936.1
2,004.4
2,063.3
2,123.5
2,182.9
2,250.5
2,334.3
2,391.3
2,441.4
2,475.8
2,518.7
2,598.4
2,678.0
2,797.8
2,903.2
3,011.6
3,128.6
3,208.5
3,295.4
3,332.3
3,411.1
3,469.5
3,542.9
3,615.7
3,701.7
3,798.7
3,447.0
3,454.1
3,480.4
3,496.4
3,510.4
3,533.9
3,559.7
3,567.7
3,580.4
3,611.9
3,633.0
3,637.5
3,660.1
3,698.1
3,706.3
3,742.2
3,752.3
3,784.9
3,816.4
3,841.1
3,854.8
3,907.3
3,940.1

Structures

299.4
296.5
304.7
322.2
343.9
367.0
385.4
385.9
380.2
403.6
408.8
391.1
427.4
459.0
469.0
420.5
382.3
418.3
458.7
498.1
511.7
475.9
468.8
428.5
460.7
523.1
550.3
558.4
554.6
550.8
546.0
533.3
484.5
512.3
528.7
554.9
557.3
588.5
612.5
517.5
522.8
530.3
544.5
538.6
559.0
562.1
560.1
558.7
552.2
556.4
561.8
571.6
589.8
590.6
602.2
610.3
607.9
614.6
617.2
625.2
632.1
641.7

TABLE B-10.—Gross domestic product by sector, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Business l
Gross
domestic
product

Year or
quarter

1959
I960
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
1993
1994
1995
1996
1997

'...'.

1993:1

II .
Ill
IV
1994-1
II
Ill .. .
IV
1995:1

||
III
IV
1996-1 .
II .. ..
Ill
IV
1997:1

II
Ill
IV
1998-1
||
III

Total

507.2
526.6
544.8
585.2
617.4
663.0
719.1
787.8
833.6
910.6
982.2
1,035.6
1,125.4
1,237.3
1,382.6
1,496.9
1,630.6
1,819.0
2,026.9
2,291.4
2,557.5
2,784.2
3,115.9
3,242.1
3,514.5
3,902.4
4,180.7
4,422.2
4,692.3
5.049.6
5,438.7
5,743.8
5,916.7
6,244.4
6,558.1
6,947.0
7,269.6
7,661.6
8,110.9
6,444.5
6,509.1
6,574.6
6,704.2
6,794.3
6,911.4
6,986.5
7,095.7
7,170.8
7,210.9
7,304.8
7,391.9
7,495.3
7,629.2
7,703.4
7,818.4
7,955.0
8,063.4
8,170.8
8,254.5
8,384.2
8,440.6
8,537.9

436.9
451.1
464.9
499.5
525.9
564.7
613.8
670.4
703.7
766.1
823.3
860.3
933.9
1,028.3
1,154.6
1,246.0
1,351.5
1,516.0
1,697.5
1,931.9
2,164.1
2,346.3
2,631.8
2,714.7
2,950.0
3,289.6
3,520.2
3,716.7
3,933.1
4,233.4
4,563.7
4,796.9
4,908.5
5,184.4
5,453.1
5,801.6
6,080.6
6,432.9
6,836.5
5,353.0
5,409.6
5,463.7
5,586.1
5,663.0
5,769.9
5,837.0
5,936.3
5,994.7
6,025.7
6,111.6
6,190.4
6,281.3
6,404.7
6,470.0
6,575.7
6,695.4
6,792.9
6,890.9
6,967.0
7,083.1
7,126.3
7,209.5

Nonfarm
Total

1

418.0
431.3
444.8
479.3
505.5
545.5
591.9
647.5
681.5
743.4
798.1
834.1
905.8
995.6
1,104.9
1,198.6
1,302.7
1,469.6
1,650.3
1,877.1
2,099.7
2,290.2
2,561.9
2,649.5
2,900.8
3,221.1
3,453.1
3,653.7
3,868.0
4,169.6
4,487.5
4,717.3
4,835.6
5,103.8
5,380.1
5,718.1
6,008.3
6,341.3
6,746.3
5,282.0
5,333.4
5,398.6
5,506.2
5,572.3
5,684.9
5,756.2
5,858.8
5,923.0
5,955.8
6,042.4
6,112.1
6,195.0
6,311.0
6,373.6
6,485.5
6,605.0
6,700.6
6,799.7
6,880.0
6,999.3
7,041.4
7,126.3

Households and institutions

l

Nonfarm
less
housing
382.4
392.7
403.4
434.7
458.1
495.3
538.4
590.6
620.6
678.6
728.2
759.2
824.1
906.9
1,007.9
1,092.8
1,188.4
1,344.6
1,510.9
1,721.3
1,923.6
2,085.0
2,326.6
2,390.0
2,624.1
2,918.6
3,121.1
3,295.2
3,481.6
3,750.4
4,036.1
4,234.1
4,325.7
4,560.6
4,822.9
5,123.6
5,378.8
5,679.2
6,047.2
4,725.6
4,778.7
4,841.5
4,945.9
4,984.5
5r101.6
5,158.0
5,250.4
5,304.0
5,329.2
5,413.8
5,468.2
5,547.7
5,655.2
5,706.3
5,807.7
5,917.0
6,004.4
6,096.8
6,170.6
6,285.4
6,315.0
6,387.1

Housing

35.6
38.6
41.4
44.6
47.4
50.2
53.5
57.0
60.8
64.8
69.9
74.9
81.7
88.7
96.9
105.9
114.3
125.0
139.4
155.8
176.1
205.1
235.3
259.5
276.7
302.5
332.0
358.5
386.4
419.2
451.4
483.2
509.9
543.2
557.1
594.4
629.6
662.1
699.1
556.5
554.7
557.1
560.3
587.8
583.3
598.2
608.4
619.0
626.7
628.6
644.0
647.2
655.9
667.3
677.8
688.0
696.2
702.9
709.4
713.9
726.4
739.2

Farm

18.9
19.8
20.1
20.2
20.4
19.3
21.9
22.9
22.2
22.7
25.2
26.2
28.1
32.6
49.8
47.4
48.8
46.4
47.2
54.7
64.5
56.1
69.9
65.1
49.2
68.5
67.1
63.0
65.1
63.8
76.2
79.6
72.9
80.6
73.0
83.5
72.3
91.6
90.2
71.0
76.2
65.1
79.9
90.7
85.0
80.8
77.5
71.7
69.9
69.3
78.2
86.3
93.7
96.3
90.2
90.4
92.2
91.2
87.0
83.8
84.9
83.2

Total

12.4
13.9
14.5
15.6
16.7
17.9
19.3
21.3
23.4
26.1
29.5
32.4
35.6
39.0
43.0
47.2
52.0
57.1
62.4
69.8
77.3
87.1
97.6
108.2
119.2
131.2
140.9
153.7
173.3
195.1
214.6
237.9
257.4
279.1
296.5
312.7
331.4
345.0
361.4
290.1
294.5
298.9
302.4
305.9
309.6
314.9
320.5
325.4
329.9
333.2
337.0
339.6
343.0
346.5
351.0
355.4
359.8
363.5
366.9
371.1
377.9
383.9

NonPrivate profit
house- instituholds
tions
3.6
3.8
3.7
3.8
3.8
3.9
4.0
4.0
4.2
4.4
4.4
4.5
4.6
4.6
4.8
4.6
4.6
5.4
5.9
6.5
6.4
6.1
6.2
6.3
6.3
7.3
7.3
7.7
7.7
8.3
8.9
9.4
9.1
10.1
10.7
11.0
11.8
11.9
12.0
10.5
10.6
10.7
10.8
10.8
10.9
11.1
11.3
11.6
11.8
11.9
12.0
11.9
11.9
12.0
12.0
12.0
12.0
12.0
12.0
11.8
12.0
12.2

8.9
10.1
10.7
11.8
12.8
14.0
15.3
17.2
19.2
21.7
25.0
27.9
31.1
34.3
38.2
42.6
47.4
51.7
56.5
63.2
71.0
81.0
91.5
102.0
112.9
123.9
133.6
145.9
165.6
186.8
205.7
228.5
248.3
269.0
285.8
301.7
319.5
333.1
349.4
279.6
283.9
288.2
291.6
295.1
298.7
303.8
309.2
313.8
318.2
321.3
325.0
327.7
331.1
334.6
339.1
343.4
347.8
351.5
355.0
359.2
365.9
371.7

General government 2
Total

57.9
61.5
65.5
70.1
74.8
80.4
86.0
96.1
106.5
118.4
129.5
142.9
155.9
170.1
185.0
203.7
227.1
245.8
266.9
289.7
316.0
350.8
386.4
419.2
445.3
481.7
519.6
551.9
586.0
621.0
660.3
709.0
750.7
781.0
808.5
832.7
857.6
883.6
912.9
801.4
805.0
812.0
815.7
825.4
831.8
834.7
838.9
850.7
855.2
860.0
864.5
874.5
881.5
886.9
891.7
904.2
910.7
916.3
920.5
930.1
936.3
944.5

Federal

31.8
32.9
34.2
36.3
38.1
40.5
42.3
47.1
51.6
56.5
60.2
64.3
68.2
73.1
76.9
83.5
91.7
97.9
106.1
113.8
122.3
135.6
151.0
164.0
173.5
190.8
203.6
211.1
221.3
230.0
240.5
252.7
268.1
274.4
276.9
275.2
275.4
279.2
281.3
278.9
276.2
277.2
275.3
277.5
277.7
273.6
272.0
276.3
275.1
275.8
274.6
279.2
279.9
279.6
278.3
282.9
282.4
281.0
278.8
282.1
281.2
281.8

State
and
local

26.1
28.6
31.3
33.8
36.7
40.0
43.7
49.0
54.9
61.9
69.3
78.7
87.7
96.9
108.1
120.3
135.4
147.9
160.9
175.9
193.7
215.2
235.4
255.2
271.8
290.9
316.0
340.7
364.7
391.0
419.8
456.3
482.6
506.6
531.6
557.5
582.2
604.4
631.7
522.5
528.9
534.8
540.4
547.8
554.1
561.1
566.9
574.4
580.1
584.2
590.0
595.3
601.6
607.3
613.4
621.3
628.3
635.3
641.7
648.0
655.2
662.6

1
Gross domestic business product equals gross domestic product less gross product of households and institutions and of general government. Nonfarm product equals gross domestic business product less gross farm product.
2
Equals compensation of general government employees plus general government consumption of fixed capital.
Source: Department of Commerce, Bureau of Economic Analysis.




340

TABLE B-ll.—Real gross domestic product by sector, 1959-98
[Billions of chained (1992) dollars; quarterly data at seasonally adjusted annual rates]
Business J
Year or
quarter

Gross
domestic
product

Households and institutions

Nonfarm *
Total

Total

1

Nonfarm
less
housing

Housing

Farm

Total

Private
households

Nonprofit
institutions

General government 2
Total

Federal

State
and
local

33.7
149.8
105.0
78.6 415.1 232.1 186.4
18.5
35.3
112.1
85.9 429.3 236.4 196.2
160.0
18.6
169.4
87.8 444.6 241.5 206.4
35.6 113.1
18.1
180.4
34.9 117.2
92.3 461.8 251.7 213.6
17.9
17.7
95.6 475.7 254.3 224.6
189.9
35.9 120.1
99.4 492.4 256.8 238.4
34.6 123.4
198.9
17.5
258.8 253.0
210.0
36.5 127.9
16.9 105.0
509.3
542.1 276.4 268.4
35.4 132.6
220.3
16.3 110.9
571.1 295.1 279.2
37.7 136.9
231.2
16.3 115.2
120.6 592.6 300.6 294.8
240.3
36.5 141.0
15.5
251.1
14.7
126.5 607.3 301.7 307.8
37.5 145.5
258.7
38.7
144.0
13.8 126.4 609.7 288.9 321.5
40.4 147.2
269.3
13.1 130.6 611.3 276.1 334.9
40.4 151.4
135.4 611.5
347.4
282.7
12.7
263.5
.. ..
12.4 139.6 614.8 253.8 360.2
295.9
40.3 154.9
10.7 143.2 625.2 252.0 372.6
311.7
39.3 156.1
315.4
46.4 161.2
10.1 149.2 631.1 249.0 381.7
323.4
44.7 163.0
10.4 150.6 634.3
247.5 386.4
47.0 167.5
155.0 639.1 246.3 392.6
333.6
10.5
351.7
44.9 170.3
10.8 157.5 649.2 247.3 401.8
370.7
48.3 173.7
9.4 163.1 654.2 245.1 409.3
. ..
46.7 178.7
395.6
8.3 169.8 660.9 246.7 414.5
411.6
60.0 182.7
7.8 174.7 662.3 248.3 414.2
180.4 666.6 250.3 416.4
418.7
62.6 188.0
7.6
40.2 192.3
421.3
7.6 184.8 668.7 254.2 414.4
417.6
437.5
56.7 197.1
8.7 188.2
676.0
258.2
8.7 194.6 693.2 263.9 429.2
451.9
66.9 203.4
459.7
64.2 213.5
9.0 204.3 709.9 266.9 443.0
473.9
65.3 224.1
8.9 215.2 724.2 272.3 452.0
491.0
58.2 240.6
9.5 231.0 741.3 274.1 467.3
506.8
65.9 253.4
10.1 243.3 758.1 276.2 481.9
774.7
515.9
70.8 264.1
280.3 494.5
10.2 253.8
281.0 500.1
526.8
71.6 272.1
9.4 262.6 781.1
543.2
80.6 279.1
10.1 269.0 781.0 274.4 506.6
71.0 290.1
542.1
10.3 279.8 782.3 267.7 514.5
524.2
562.7
85.0 297.9
10.4 287.5 782.6 258.4
577.4
72.0 304.8
10.8 294.0 780.2 248.2 532.1
588.7
78.6 311.8
781.2 240.7 540.8
10.5 301.3
. ...
235.4
786.2
551.3
604.5
90.3 321.5
10.2 311.3
1993:1
546.2
74.0 284.6
10.3 274.2 782.7 271.3 511.4
II
74.7 289.4
541.0
10.4 279.0 782.6 269.2 513.4
Ill
540.6
61.0 292.5
10.3 282.2 782.5 267.0 515.5
IV
74.4 293.9
540.6
10.3 283.6
781.3 263.5 517.8
1994-1 .
782.4
86.3 294.9
262.5
519.9
561.9
10.3 284.6
II
554.4
85.4 296.9
259.8 523.2
10.3 286.6
783.0
Ill
86.4 298.8
10.4 288.4
783.6
257.6
526.0
564.5
IV
253.8 527.8
569.8
81.9 301.0
10.5 290.5
781.5
1995:1
575.0
75.6 302.7
10.7 292.1 782.0
252.0 530.0
it
73.4 304.1
782.5
251.0 531.5
577.3
10.8 293.3
Ill
67.9 305.4
574.5
10.9 294.5 781.5 249.3 532.3
IV
582.9
71.3 307.0
10.8 296.2 774.9 240.3 534.9
1996:1
240.5 533.5
581.5
76.2 308.5
10.7 297.9 773.8
II
242.8 542.4
585.4
78.2 310.8
784.9
10.6 300.2
Ill
591.4
783.7
241.3 542.7
78.5 312.7
10.5 302.3
IV
81.3 315.0
10.4 304.7 782.3 238.2 544.5
596.6
237.4 546.8
783.7
1997:1
10.4 307.2
601.0
87.9 317.5
236.3
549.9
II
90.7 320.2
785.7
604.0
10.3 310.0
Ill
788.1
235.5 553.2
93.7 323.1
605.6
10.2 313.0
555.5
IV
315.1
232.5
88.8 325.1
787.3
607.3
10.0
606.2
9.8 316.9 789.6 232.4 557.9
1998:1
91.1 326.7
II
91.4 327.7
9.9 317.9 792.2 231.9 561.1
611.5
Ill
617.3
93.6 329.4
10.0 319.5 795.4 232.0 564.2
1
Gross domestic business product equals gross domestic product less gross product of households and institutions and of general government. Nonfarm product equals gross domestic business product less gross farm product.
2
Equals compensation of general government employees plus general government consumption of fixed capital.
Source: Department of Commerce, Bureau of Economic Analysis.

1959
I960
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
1993
1994
1995
1996
1997

2,210.2
2,262.9
2,314.3
2,454.8
2,559.4
2,708.4
2,881.1
3,069.2
3,147.2
3,293.9
3,393.6
3,397.6
3,510.0
3,702.3
3,916.3
3,891.2
3,873.9
4,082.9
4,273.6
4,503.0
4,630.6
4,615.0
4,720.7
4,620.3
4,803.7
5,140.1
5,323.5
5,487.7
5,649.5
5,865.2
6,062.0
6,136.3
6,079.4
6,244.4
6,389.6
6,610.7
6,761.7
6,994.8
7,269.8
6,327.9
6,359.9
6,393.5
6,476.9
6,524.5
6,600.3
6,629.5
6,688.6
6,717.5
6,724.2
6,779.5
6,825.8
6,882.0
6,983.9
7,020.0
7,093.1
7,166.7
7,236.5
7,311.2
7,364.6
7,464.7
7,498.6
7,566.5




1,721.7
1,758.2
1,795.8
1,911.7
1,997.7
2,122.6
2,268.8
2,419.3
2,470.5
2,590.4
2,670.8
2,673.9
2,777.3
2,958.2
3,159.1
3,125.4
3,100.1
3,298.2
3,475.8
3,687.8
3,804.8
3,779.9
3,878.4
3,772.7
3,946.5
4,266.0
4,425.4
4,563.0
4,699.8
4,882.2
5,049.4
5,097.0
5,026.4
5,184.4
5,317.2
5,530.6
5,677.4
5,903.5
6,164.9
5,260.6
5,287.9
5,318.5
5,401.9
5,447.5
5,520.7
5,547.5
5,606.6
5,633.3
5,638.1
5,693.4
5,745.1
5,801.1
5,889.6
5,925.3
5,997.9
6,067.9
6,133.3
6,203.0
6,255.6
6,352.3
6,382.6
6,445.9

1,677.4
1,710.8
1,748.5
1,868.0
1,953.4
2,083.2
2,227.7
2,383.8
2,430.5
2,555.0
2,634.6
2,635.1
2,736.5
2,920.6
3,127.5
3,095.6
3,050.3
3,256.4
3,431.8
3,652.2
3,763.2
3,741.4
3,816.7
3,705.9
3,916.3
4,211.8
4,357.8
4,499.0
4,635.1
4,826.9
4,984.9
5,026.5
4,954.9
5,103.8
5,246.2
5,446.0
5,604.9
5,824.3
6,074.3
5,186.7
5,213.4
5,257.1
5,327.6
5,361.7
5,435.8
5,461.6
5,524.8
5,557.4
5,564.2
5,624.9
5,673.1
5,724.3
5,810.8
5,846.0
5,916.1
5,979.7
6,042.3
6,109.2
6,165.8
6,260.4
6,290.5
6,351.8

1,524.7
1,548.3
1,576.8
1,685.1
1,760.9
1,881.4
2,014.4
2,159.8
2,195.9
2,310.9
2,380.0
2,373.6
2,464.3
2,634.3
2,827.3
2,781.6
2,733.9
2,929.7
3,093.7
3,295.2
3,388.4
3,346.2
3,406.8
3,291.9
3,497.0
3,774.7
3,906.2
4,039.3
4,161.0
4,335.8
4,477.9
4,510.5
4,428.1
4,560.6
4,704.1
4,883.3
5,027.5
5,236.0
5,470.5
4,640.5
4,672.5
4,716.5
4,787.1
4,799.8
4,881.5
4,897.1
4,954.9
4,982.3
4,986.8
5,050.6
5,090.3
5,143.1
5,225.9
5,255.0
5,319.9
5,379.2
5,438.9
5,504.4
5,559.6
5,655.9
5,680.5
5,736.1

341

TABLE B-12.—Gross domestic product by industry, 1959-97
[Billions of dollars]
Private industries
AgriGross
culdomesConture,
tic
for- Mining strucproduct
tion
estry,
and
fishing

Year

TransStaFinance,
insurtistiportaWholetion
Retail
ance,
cal
sale
Services
and
trade
and
disDura- Nontrade
public
crepreal
ble durable
utilities
ancy »
estate
goods goods

Manufacturing

Total

Government

Based on
1972 SIC:
1959

507.2

20.3

12.5

23.7

140.3

81.7

58.6

44.9

36.0

49.1

68.6

48.4

-1.6

64.8

1960
1961
1962
1963
1964

526.6
544.8
585.2
617.4
663.0

21.4
21.7
22.1
22.3
21.4

12.9
13.0
13.2
13.5
13.9

24.2
25.2
27.0
28.8
31.5

142.5
142.9
156.7
166.1
177.9

82.6
81.7
92.1
98.3
105.9

59.8
61.3
64.6
67.8
72.0

47.2
48.7
51.8
54.7
58.1

37.6
38.7
41.3
43.0
46.3

50.4
51.7
55.4
57.9
63.5

73.2
77.7
82.2
86.8
92.7

51.6
55.0
59.3
63.4
69.1

-3.2
-2.8
-1.8
-3.0
-1.5

68.9
73.0
78.2
83.9
90.1

719.1
787.8
833.6
910.6
982.2

24.2
25.4
24.9
25.7
28.6

14.0
14.7
15.2
16.3
17.1

34.6
37.7
39.5
43.3
48.4

196.3
215.3
220.8
241.1
254.4

118.8
131.1
134.1
146.3
154.4

77.5
84.3
86.7
94.8
100.0

62.2
67.1
70.4
76.2
82.5

49.9
54.3
57.7
63.3
68.4

68.0
72.7
78.2
86.6
94.2

99.7
107.8
117.0
126.6
136.1

74.7
82.7
90.8
99.4
110.8

-.8
3.3
1.3
.9
-1.5

96.3
106.9
117.9
131.2
143.3

1970
1971
1972
1973
1974

1,035.6
1,125.4
1,237.3
1,382.6
1,496.9

29.8
32.1
37.3
54.8
53.0

18.7
18.9
19.7
23.8
37.1

51.1
56.1
62.5
69.7
73.6

249.6
263.0
290.5
323.5
337.4

146.2
154.2
172.6
195.7
202.2

103.4
108.9
117.9
127.8
135.3

72.1
88.1
97.2 77.9
108.3
87.0
119.2
97.6
129.8 111.0

100.2
109.2
118.8
130.9
136.7

146.0
162.8
176.2
192.9
208.7

120.5
130.4
144.9
163.1
179.3

1.9
6.1
4.3
3.4
5.5

157.6
171.7
187.8
203.8
224.8

1975
1976
1977
1978
1979

1,630.6
1,819.0
2,026.9
2,291.4
2,557.5

54.7
53.5
54.1
63.1
74.5

42.8
47.6
54.1
61.5
71.2

75.1
84.9
93.8
110.6
124.7

354.9
405.5
462.6
517.1
571.3

207.0
239.9
277.6
316.9
343.5

147.8
165.6
185.0
200.2
227.9

142.2
161.2
179.1
202.2
219.0

121.0
129.0
142.2
160.9
182.3

152.8
172.2
190.2
215.6
234.2

226.6
250.0
283.4
328.0
370.6

199.1
223.9
255.5
294.6
333.2

12.1
19.9
18.2
18.1
28.2

249.3
271.2
293.5
319.8
348.2

1980
1981
1982
1983
1984

2,784.2
3,115.9
3,242.1
3,514.5
3,902.4

66.7
81.1
77.0
62.5
83.5

112.7
151.7
149.5
127.5
134.2

128.6
129.6
129.8
138.9
165.0

584.4
652.1
649.8
690.2
780.6

348.7
388.1
377.4
397.3
469.5

235.7
264.0
272.4
292.8
311.1

242.1
276.2
293.0
328.1
357.8

195.2
216.3
219.5
229.1
264.3

245.9
270.4
288.1
321.9
362.2

418.3
470.9
504.0
565.3
625.6

377.3
426.2
471.8
521.5
590.4

27.6
14.9
-2.5
37.1
5.0

385.5
426.5
461.9
492.4
533.8

1985
1986

4,180.7
4,422.2

84.3
82.0

132.8
86.3

185.5
207.3

803.1
833.2

477.1
487.0

326.0
346.2

376.6 280.7
393.8 293.5

395.0
415.2

690.6
760.4

651.1
712.2

2.4
23.3

578.6
615.0

1987
1988
1989

4,692.3
5,049.6
5,438.7

88.5
88.9
101.9

88.3
99.9
96.3

217.0 889.2
233.4 971.5
242.2 1,013.5

513.3
556.6
574.9

375.9
414.8
438.6

420.5 300.8
443.4 336.3
460.9 356.3

435.8
459.3
490.2

829.7
891.4
959.3

784.6
877.8
965.5

-15.4
-47.3
13.2

653.2
694.9
739.2

1990
1991
1992
1993
1994

5,743.8
5,916.7
6,244.4
6,558.1
6,947.0

108.7
102.9
112.4
106.1
119.2

112.3
101.1
92.2
94.6
94.9

245.2
228.8
229.7
242.4
268.7

1,031.4
1,028.1
1,063.6
1,116.5
1,216.1

572.8
558.3
573.4
615.7
679.2

458.6
469.8
490.3
500.8
536.9

482.1
511.6
528.7
561.7
598.7

503.5
517.4
544.3
573.2
615.3

1,024.1
1,081.6
1,147.9
1,218.1
1,267.6

1,059.4
1,107.6
1,200.8
1,267.0
1,350.4

17.4
10.1
44.8
52.6
14.6

792.5
839.5
873.6
902.7
933.5

1995
1996
1997

7,269.6
7,661.6
8,110.9

109.5
130.4
131.7

98.7
113.8
120.5

286.4 1,282.2
311.9 1,309.1
3?8.8 1.378.9

711.6
737.3
784.0

570.5
571.8
594.9

616.4 491.4
649.3 519.8
676.3 562.8

64hO 1,362.3
673.0 1,448.6
712.9 1.570.3

1,445.4
1,544.2
1.656.8

'.

1965
1966
1967
1968
1969 ..'.'

'....

'.
'..'

'.'..

..

Based on
1987 SIC:

367.2
388.1
406.4
423.3
468.0

1
Equals gross domestic product (GDP) measured as the sum of expenditures less gross domestic income.
Source-. Department of Commerce, Bureau of Economic Analysis.




342

-26.5 962.7
-32.2 993.7
-55.8 1.027.6

TABLE B-13.—Real gross domestic product by industry, 1977-97
[Billions of chained (1992) dollars]
Private industries
Gross AgriManufacturing
culdomes- ture,
Contic
for- Mining strucproduct estry,
tion
Dura- Nonand
Total
ble durable
fishing
goods goods

Year

TransFinance,
Stainsurporta- Wholetisti- Governtion sale Retail ance, Services cal ment
and trade trade and
dispublic
real
creputilities
estate
ancy 1

Based on
1972 SIC:

1977
1978
1979

4,273.6
4,503.0
4,630.6

61.1
59.0
64.4

82.4
84.6
73.6

213.8 796.5 435.1 361.9 346.8 201.0 364.5
221.2 836.5 461.7 374.0 362.8 215.5 389.9
227.8 864.8 470.5 395.4 378.7 228.2 389.1

742.7
786.0
830.7

712.5 37.3 717.4
759.5 34.5 731.6
787.3 49.5 739.4

1980
1981
1982
1983
1984 .

4,615.0
4,720.7
4,620.3
4,803.7
5,140.1

62.9
77.3
80.1
58.1
77.7

82.0
81.4
78.8
73.7
82.0

214.7
195.4
172.8
181.0
210.1

374.5
386.2
387.9
422.6
465.0

862.8
878.1
875.8
900.0
945.0

810.8
830.0
838.1
862.8
920.8

1985 .
1986

5,323.5
5,487.7

90.7
90.2

87.1 232.9 976.4 534.6 442.1
83.6 239.0 967.6 527.4 441.0

423.8 298.1 496.8
421.7 333.0 526.6

968.1
969.0

963.9 3.0 777.9
996.8 28.6 795.7

5,649.5
5,865.2
6,062.0

86.4
93.6
85.0 104.4
91.4
92.8

6,136.3
6,079.4
6,244.4
6,389.6
6,610.7

99.3 96.9
101.2 97.5
112.4
92.2
96.4
102.3
119.1 102.5

822.6
858.5
810.0
856.7
948.1

451.2
468.6
427.9
448.3
521.8

371.5
390.5
386.2
413.8
426.1

385.0
391.0
379.6
405.2
422.1

226.0
241.1
246.5
251.5
286.8

44.5
22.0
-3.4
49.7
6.5

748.8
749.4
748.3
753.0
760.1

Based on
1987 SIC:

1987
1988

1989
1990
1991
1992
1993
1994

I!.. .!.

239.6 1,041.7 565.0 477.9 453.9 322.8 509.2 1,015.7 1,041.4 -18.4 810.0
248.8 1,111.0 615.9 494.8 468.2 343.8 537.6 1,069.4 1,099.1 -54.6 829.0
251.9 1,106.0 612.9 492.8 474.5 366.3 553.4 1,101.8 1,149.5 14.7 847.7
247.5
229.0
229.7
234.3
249.8

1,090.0
1,050.2
1,063.6
1,100.8
1,193.2

600.4
568.0
573.4
608.3
671.3

489.4
482.2
490.3
492.5
522.0

491.7
512.8
528.7
551.9
584.1

6,761.7 106.2 107.4 254.2 1,271.6 727.0 545.1 592.2
1995
6,994.8 114.2 103.0 268.5 1,293.8 769.0 527.8 626.4
1996
1997
7,269.8 127.6 109.9 274.4 1,369.9 838.6 537.6 644.3
1
Equals the current-dollar statistical discrepancy deflated by the implicit price deflator for
Source: Department of Commerce, Bureau of Economic Analysis.




343

360.5
381.2
406.4
416.5
448.6

546.4
534.1
544.3
566.2
601.2

1,109.0
1,105.7
1,147.9
1,174.3
1,196.9

1,181.7
1,174.2
1,200.8
1,223.5
1,256.5

18.5
10.3
44.8
51.3
13.9

867.0
873.7
873.6
875.8
878.3

455.8 626.4 1,206.2 1,305.3 -23.1 876.5
486.6 665.9 1,246.0 1,349.1 -27.1 877.8
532.0 713.5 1,286.0 1,398.6 -45.4 884.0
gross domestic business product.

TABLE B-14.—Gross domestic product of nonfinancial corporate business, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Net domestic product

Year AT
I COI 01

quarter

Gross
domestic
product
of
nonfinancial
corporate
business

Domestic income

Consumption
of
fixed
capital

Total

Indirect
business 1
taxes

Corporate profits with inventory valuation and capital
consumption adjustments

P.nm
uOm-

pensaTotal

Profits

firm
lion
nf
01

Profits after tax
employ- Total Profits Profits
before tax
ees
Divi- Undistax liability Total dends tributed
profits

23.6 243.8 26.0 217.8 171.5 43.2
24.5 253.6 28.3 225.3 1812 40.7
251 2605 295 2309 1853 416
26^0 285.7 32.0 253.7 200.1 49^1
27.0 304.8 34.0 270.8 211.1 54.9
28.4 329.8 36.6 293.2 226.7 61.2
30.3 363.2 39.2 324.0 246.5 71.4
33.2 397.8 40.5 357.4 274.0 76.1
36.3 417.2 43.1 374.1 2923 73.0
39.9 460.5 49.7 410.8 323.2 77.5
44.1 499.2 54.7 444.5 358.8 72.5
48.5 512.8 58.8 454.0 378.7 58.3
53.0 553.4 64.5 488.9 402.0 68.8
57.6 615.8 69.2 546.6 447.1 80.4
62.6 691.8 76.3 615.5 505.9 87.1
73.3 741.3 81.4 659.9 556.8 74.8
87.5 793.7 87.4 706.3 580.3 97.3
96.9 898.4 95.1 803.3 657.4 118.4
108.8 1,016.7 104.1 912.6 742.6 139.4
124.4 1,159.7 116.4 1,043.2 852.9 154.0
143.9 1,285.8 125.4 1,160.4 968.1 147.2
165.4 1,388.4 141.6 1,246.8 1,058.5 130.1
193.2 1,574.1 170.4 1,403.7 1,171.5 160.3
209.7 1,613.7 172.1 1,441.6 1,217.0 142.1
222.7 1,727.6 189.0 1,538.6 1,280.5 181.5
228.7 1,958.8 210.2 1,748.6 1,421.7 239.0
1985
238.9 2,080.4 224.4 1,856.0 1,521.9 243.5
1986
253.2 2,163.1 235.8 1,927.3 1,603.2 226.0
1987
263.6 2,326.1 246.7 2,079.3 1,715.5 258.6
1988
2797 2,525.5 263.5 2,262.0 18467 294.3
297.4 2,653.5 280.8 2,372.7 1,950.0 276.7
1989
308.4 2,775.6 296.8 2,478.8 2,056.0 275.3
1990
1991
320.2 2,811.9 3180 2,493.9 2,090.6 269.7
1992
330.5 2,932.2 337.0 2,595.1 2,195.3 295.6
1993
340.3 3,090.1 358.5 2,731.6 2,290.7 346.4
1994
360.7 3,349.0 389.0 2,960.1 2,426.7 437.1
1995
375.6 3,544.8 397.3 3,147.5 2,556.0 487.4
393.4 3,741.0 411.6 3,329.4 2,679.7 548.5
1996
415.4 3,999.1 436.8 3,562.3 2,871.2 594.2
1997
1993:1
335.8 3,015.9 348.2 2,667.7 2,253.5 316.0
II
337.3 3,063.0 353.8 2,709.2 2,279.9 334.4
Ill
344.5 3,099.8 359.7 2,740.1 2,301.5 345.5
343.4 3,181.9 372.3 2,809.6 2,327.8 389.9
IV
1994:1
375.1 3,249.3 380.4 2,868.9 2,372.5 405.4
II
351.6 3,317.3 386.1 2,931.1 2,409.8 427.0
Ill
355.9 3,373.2 392.3 2,980.9 2,439.2 444.1
IV
360.0 3,456.4 397.1 3,059.2 2,485.2 472.0
1995:1
365.6 3,478.5 396.1 3,082.4 2,519.5 460.0
II
372.6 3,506.7 397.0 3,109.7 2,539.5 466.2
Ill
378.1 3,578.3 396.0 3,182.3 2,569.6 508.3
IV
385.9 3,615.8 400.2 3,215.6 2,595.3 515.0
1996:1
385.8 3,647.2 405.3 3,241.9 2,607.1 533.0
II
390.6 3,715.8 409.1 3,306.7 2,661.8 543.4
Ill
395.9 3,773.1 412.7 3,360.4 2,704.3 554.9
IV
401.3 3,828.0 419.5 3,408.5 2,745.7 562.8
1997:1
406.5 3,900.6 425.6 3,475.0 2,799.1 575.4
II
412.2 3,963.5 434.5 3,529.0 2,843.4 586.7
418.4 4,043.4 442.1 3,601.4 2,889.8 615.2
Ill
424.4 4,088.8 445.0 3,643.8 2,952.6 599.3
IV
1998:1
428.5 4,145.7 450.5 3,695.2 3,002.3 599.3
II
433.1 4,185.7 454.2 3,731.4 3,043.1 593.2
Ill
437.4 4,251.4 461.1 3,790.3 3,086.3 607.5
1
Indirect business tax and nontax liability plus business transfer payments
Source: Department of Commerce, Bureau of Economic Analysis.

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978 I
1979
1980
1981
1982
1983

1984 .: :

267.5
2781
2855
31L7
331.8
358.1
393.5
431.0
4534
500.5
543.3
561.4
606.4
673.3
754.5
814.6
881.2
995.3
1,125.4
1,284.1
1,429.7
1,553.8
1,767.3
1,823.4
1,950.3
2,187.5
2,319.3
2,416.3
2,589.6
2,805 2
2,950.9
3,084.0
3,132.1
3,262.6
3,430.4
3,709.7
3,920.4
4,134.4
4,414.5
3,351.8
3,400.3
3,444.3
3,525.2
3,624.5
3,668.9
3,729.1
3,816.4
3,844.1
3,879.3
3,956.5
4,001.7
4,033.0
4,106.4
4,168.9
4,229.3
4,307.1
4,375.7
4,461.9
4,513.2
4,574.2
4,618.8
4,688.9




344

43.6 20.7
40.3 19.2
401 195
45X) 20.6
49.8 22.8
56.0 24.0
66.2 27.2
71.4 29.5
67.5 27.8
74.0 33.6
70.8 33.3
58.1 27.2
67.1 29.9
78.6 33.8
98.6 40.2
109.2 42.2
109.9 41.5
137.3 53.0
158.6 59.9
183.5 67.1
195.5 69.6
181.6 67.0
181.4 63.9
133.7 46.3
157.4 59.4
191.0 73.7
167.6 69.9
151.5 75.6
214.9 93.5
260.6 101.7
237.0 98.8
237.3 95.7
218.1 85.4
257.8 91.1
308.6 105.0
392.3 128.8
441.5 136.7
473.1 151.5
505.4 169.8
275.6 92.5
306.9 104.7
303.1 102.9
349.0 120.0
359.1 119.5
380.7 124.6
400.7 130.1
428.9 141.1
431.5 134.6
432.1 132.8
451.4 139.3
450.9 140.3
460.8 146.8
473.3 151.3
476.5 152.5
481.8 155.5
488.3 164.4
495.6 166.4
528.0 178.1
509.8 170.1
484.2 159.7
491.8 162.1
497.3 163.8
less subsidies.

22.9
21.1
207
24'.3
27.0
32.1
39.0
41.9
39.7
40.4
37.5
31.0
37.1
44.8
58.4
67.0
68.4
84.4
98.7
116.4
125.9
114.6
117.5
87.4
97.9
117.3
97.6
75.9
121.4
1588
138.3
141.6
132.8
166.7
203.6
263.5
304.7
321.5
335.6
183.1
202.2
200.2
228.9
239.6
256.1
270.6
287.8
296.9
299.2
312.0
310.7
314.0
321.9
324.0
326.3
323.9
329.2
349.9
339.6
324.5
329.6
333.5

10.0
10.6
106
1L4
12.6
13.7
15.6
16.8
175
19.1
19.1
18.5
18.5
20.1
21.1
21.7
24.8
28.0
31.5
36.4
38.1
45.3
53.3
53.3
64.2
67.8
72.3
73.9
75.9
794
103.5
118.4
124.6
133.6
147.7
158.6
179.3
217.1
229.3
143.5
144.2
147.6
155.6
150.4
158.7
158.5
166.8
169.0
171.2
184.5
192.7
208.4
210.4
222.2
227.3
227.0
224.6
226.1
239.6
237.3
254.3
247.3

12.9
10.6
101
ISlO
14.4
18.4
23.4
25.1
222
21.3
18.4
12.5
18.7
24.7
37.3
45.2
43.6
56.3
67.2
80.0
87.9
69.2
64.2
34.2
33.8
49.5
25.4
2.1
45.5
794
34.8
23.3
8.2
331
55.9
104.9
125.4
104.4
106.3
39.6
58.0
52.5
73.4
89.2
97.4
112.1
121.0
127.9
128.0
127.6
118.0
105.5
111.5
101.8
99.0
96.8
104.6
123.8
100.1
87.2
75.3
86.2

Inventory
valuation
adjustment

Capital Net
con- intersump- est
tion
adjustment

-0.3 -0.1 3.1
-.2
.5 3.5
3
12 40
4.1 4l5
.0
.1
5.0 4.8
5.7 5.3
-.5
-1.2
6.5 6.1
6.8 7.4
-2.1
-1.6
7.0 8.8
-3.7
7.1 10.1
7.5 13.2
-5.9
6.7 17.1
-6.6
-4.6
6.3 18.1
8.4 19.2
-6.6
-20.0
8.6 22.5
-39.5
5.1 28.3
-11.0 -1.6 28.7
-14.9 -4.0 27.5
-16.6 -2.6 30.6
-25.0 -4.5 36.3
-41.6 -6.8 45.1
-43.0 -8.4 58.2
-25.7
4.6 71.9
-9.9 18.3 82.5
-9.1 33.2 76.6
-5.6 53.7 87.8
.5 75.4 90.6
11.4 63.1 98.1
-20.7 64.4 105.3
-293 631 1210
-17.5 57.2 145.9
-13.5 51.5 147.5
4.0 47.6 133.7
-7.5 453 104.2
-8.5 46.3 94.5
-16.1 60.8 96.3
-22.6 68.5 104.2
-1.2 76.7 101.2
6.9 81.9 96.9
-12.5 52.9 98.2
-17.1 44.5 95.0
.2 42.2 93.1
-4.8 45.7 91.9
-4.3 50.6 91.1
-15.1 61.4 94.3
-21.2 64.6 97.6
-23.6 66.7 102.1
-37.9 66.3 103.0
-33.9 68.1 104.0
-13.4 70.3 104.5
-5.3 69.5 105.3
-2.9 75.1 101.9
-6.2 76.3 101.6
1.2 77.2 101.2
3.0 78.0 100.0
8.1 79.1 100.6
10.3 80.7 99.0
4.8 82.5 96.3
4.3 85.3 91.9
25.3 89.8 93.6
7.8 93.7 95.2
11.7 98.5 96.5

TABLE B-15.—Output, costs, and profits of nonfinancial corporate business, 7939-98
[Quarterly data at seasonally adjusted annual rates]

Year or quarter

Gross domestic
product of
nonfinancial
corporate
business
(billions of
dollars)
Current
dollars

Chained
(1992)
dollars

Current-dollar cost and profit per unit of real output (dollars)1

Total
cost

sCon-

and

profit2

?r
of

fixed

cap-

Indirect
business
taxes 3

Compensation

Corporate profits with
inventory valuation and
capital consumption
adjustments

of
Profits
liability

ital

ees

Net
interest

employTotal

Profits
after
tax 4
0.025

tax

1959

267.5

910.3

0.029

0.188

0.047

0.023

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

278.1

940.4
960.5
1,041.5
1,101.1
1,178.5
1,275.2
1,364.4
1,399.1
1,487.7
1,546.9

.296
.297
.299
.301
.304
.309
.316
.324
.336
.351

.026
.026
.025
.025
.024
.024
.024
.026
.027
.028

.030
.031
.031
.031
.031
.031
.030
.031
.033
.035

.193
.193
.192
.192
.192
.193
.201
.209
.217
.232

.043
.043
.047
.050
.052
.056
.056
.052
.052
.047

.020
.020
.020
.021
.020
.021
.022
.020
.023
.022

.023
.023
.027
.029
.032
.035
.034
.032
.030
.025

.004
.004
.004
.004
.005
.005
.005
.006
.007
.009

.366
.380
.392
.415
.456
.501
.524
.551
.590
.643

.032
.033
.033
.034
.041
.050
.051
.053
.057
.065

.038
.040
.040
.042
.046
.050
.050
.051
.053
.056

.247
.252
.260
.278
.312
.330
.346
.364
.392
.435

.038
.043
.047
.048
.042
.055
.062
.068
.071
.066

.018
.019
.020
.022
.024
.024
.028
.029
.031
.031

.020
.024
.027
.026
.018
.032
.034
.039
.040
.035

.011
.011
.011
.012
.016
.016
.014
.015
.017
.020

285.5

311.7
331.8
358.1
393.5

431.0
453.4
500.5
543.3

0.294

0.026

0.003

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

995.3
1,125.4
1,284.1
1,429.7

1,532.5
1,594.1
1,719.4
1,819.7
1,786.8
1,759.3
1,901.3
2,041.8
2,177.1
2,224.2

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

1,553.8
1,767.3
1,823.4
1,950.3
2,187.5
2,319.3
2,416.3
2,589.6
2,805.2
2,950.9

2,229.9
2,331.9
2,298.8
2,405.1
2,641.2
2,747.3
2,835.4
2,973.9
3,130.1
3,179.8

.697
.758
.793
.811
.828
.844
.852
.871
.896
.928

.074
.083
.091
.093
.087
.087
.089
.089
.089
.094

.064
.073
.075
.079
.080
.082
.083
.083
.084
.088

.475
.502
.529
.532
.538
.554
.565
.577
.590
.613

.058
.069
.062
.075
.090
.089
.080
.087
.094
.087

.030
.027
.020
.025
.028
.025
.027
.031
.033
.031

.028
.041
.042
.051
.063
.063
.053
.056
.062
.056

.026
.031
.036
.032
.033
.033
.035
.035
.039
.046

3,084.0
3,132.1
3,262.6
3,430.4
3,709.7
3,920.4
4,134.4
4,414.5

3,210.2
3,168.8
3,262.6
3,374.4
3,586.3
3,745.5
3,914.8
4,154.4

.961
.988
1.000
1.017
1.034
1.047
1.056
1.063

.096
.101
.101
.101
.101
.100
.100
.100

.092
.100
.103
.106
.108
.106
.105
.105

.640
.660
.673
.679
.677
.682
.685
.691

.086
.085
.091
.103
.122
.130
.140
.143

.030
.027
.028
.031
.036
.037
.039
.041

.056
.058
.063
.072
.086
.094
.101
.102

.046
.042
.032
.028
.027
.028
.026
.023

3,351.8
3,400.3
3,444.3
3,525.2

3,310.2
3,352.5
3,387.2
3,447.7

1.013
1.014
1.017
1.022

.101
.101
.102
.100

.105
.106
.106
.108

.681
.680
.679
.675

.095
.100
.102
.113

.028
.031
.030
.035

.068
.069
.072
.078

.030
.028
.027
.027

3,624.5
3,668.9
3,729.1
3,816.4

3,526.1
3,559.8
3,594.6
3,664.9

1.028
1.031
1.037
1.041

.106
.099
.099
.098

.108
.108
.109
.108

.673
.677
.679
.678

.115
.120
.124
.129

.034
.035
.036
.038

.081
.085
.087
.090

.026
.026
.027
.028

3,844.1
3,879.3
3,956.5
4,001.7

3,682.3
3,710.0
3,776.2
3,813.5

1.044
1.046
1.048
1.049

.099
.100
.100
.101

.108
.107
.105
.105

.684
.685
.680
.681

.125
.126
.135
.135

.037
.036
.037
.037

.088
.090
.098
.098

.028
.028
.028
.028

4,033.0
4,106.4
4,168.9
4,229.3

3,826.9
3,891.0
3,944.2
3,997.1

1.054
1.055
1.057
1.058

.101
.100
.100
.100

.106
.105
.105
.105

.681
.684
.686
.687

.139
.140
.141
.141

.038
.039
.039
.039

.101
.101
.102
.102

.027
.026
.026
.025

4,307.1
4,375.7
4,461.9
4,513.2

4,054.5
4,117.0
4,198.5
4,247.5

1.062
1.063
1.063
1.063

.100
.100
.100
.100

.105
.106
.105
.105

.690
.691
.688
.695

.142
.143
.147
.141

.041
.040
.042
.040

.101
.102
.104
.101

.025
.024
.023
.022

4,574.2
4,618.8
4,688.9

4,309.2
4,352.0
4,417.2

1.061
1.061
1.062

.099
.100
.099

.105
.104
.104

.697
.699
.699

.139
.136
.138

.037
.037
.037

.102
.099
.100

.022
.022
.022

561.4
606.4
673.3
754.5

814.6
881.2

1990
1991
1992
1993
1994
1995
1996
1997

.
...

1993:1

II

Ill
IV
1994-1

||

III

IV
1995-1

II
III

IV
1996.-I

II

Ill
IV
1997-1 ..

II
Ill

IV
1998-1

|| .
Ill
1

.
lined (1992) dollars.
Output is measured
This is equal to the
ir 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.
2

Source: Department of Commerce, Bureau of Economic Analysis.




345

TABLE B-16.—Personal consumption expenditures, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Durable goods
Year or
quarter

FurniPersonal
Motor ture
convehi- and
sumption
expendi- Total 1 cles house- Total 1
and
hold
tures
parts equipment

Nondurable goods
Cloth- Gasoline
and
shoes oil

Z

Food

18.1 148.5 80.7
42.7 18.9
18.0 152.9 82.3
43.3 19.7
18.3 156.6 84.0
41.8 17.8
19.3 162.8 86.1
46.9 21.5
20.7 168.2 88.3
51.6 24.4
56.7 26.0
23.2 178.7 93.6
25.1 191.6 100.7
63.3 29.9
28.2 208.8 109.3
68.3 30.3
70.4 30.0
30.0 217.1 112.5
32.9 235.7 122.2
80.8 36.1
34.7 253.2 131.5
85.9 38.4
35.7 272.0 143.8
85.0 35.5
96.9 44.5
37.8 285.5 149.7
42.4 308.0 161.4
110.4 51.1
123.5 56.1
47.9 343.1 179.6
122.3 49.5
51.5 384.5 201.8
133.5 54.8
54.5 420.6 223.1
158.9 71.3
60.2 458.2 242.4
67.1 496.9 262.4
181.1 83.5
201.4 93.1
74.0 549.9 289.2
213.9 93.5
82.3 624.0 324.2
213.5 87.0
86.0 695.5 355.4
230.5 95.8
91.3 758.2 382.8
239.3 102.9
92.5 786.8 402.6
279.8 126.9 105.3 830.3 422.9
325.1 152.5 117.2 883.6 446.3
361.1 175.7 126.3 927.6 466.5
398.7 192.4 140.3 957.2 490.8
416.7 193.1 150.4 1,014.0 513.9
451.0 207.5 162.8 1,081.1 551.2
472.8 214.4 173.3 1,163.8 588.4
476.5 210.3 176.0 1,245.3 630.5
455.2 187.6 178.5 1,277.6 650.0
488.5 206.9 189.4 1,321.8 660.0
530.2 226.2 204.9 1,370.7 686.8
579.5 246.6 226.2 1,428.4 714.5
611.0 255.4 241.2 1,473.6 731.8
643.3 264.8 256.0 1,539.2 755.0
673.0 269.5 271.4 1,600.6 780.9
506.4 212.4 198.0 1,354.4 676.4
1993:1
II
524.2 224.3 202.1 1,366.3 684.1
Ill
537.2 228.5 207.6 1,373.9 690.2
IV
553.1 239.6 212.0 1,388.0 696.6
1994-1
563.2 244.1 216.2 1,404.4 703.9
II
572.4 243.3 223.5 1,416.0 711.8
Ill
583.3 245.4 229.7 1,439.5 718.5
IV
599.3 253.7 235.4 1,453.7 723.7
1995:1
598.4 250.3 236.2 1,459.6 726.1
II
606.0 254.4 237.9 1,470.7 730.4
Ill
616.9 257.9 243.2 1,476.8 733.0
IV
622.8 259.1 247.4 1,487.5 737.6
1996:1
632.3 264.9 248.9 1,506.8 743.3
II
647.3 267.7 257.1 1,537.9 751.8
Ill
642.5 262.8 257.2 1,543.6 757.5
IV
651.1 264.0 260.8 1,568.3 767.4
1997:1
668.9 271.3 266.6 1,589.7 775.4
II
659.9 260.7 269.2 1,588.2 775.8
Ill
681.2 274.5 273.8 1,611.3 785.3
IV
682.2 271.6 276.0 1,613.2 787.1
1998:1
705.1 277.0 288.5 1,633.1 796.9
II
720.1 288.8 288.9 1,655.2 810.2
Ill
718.9 282.6 294.1 1,670.0 818.7
1
Includes other items not shown separately.
2
Includes imputed rental value of owner-occupied housing.
Source: Department of Commerce, Bureau of Economic Analysis.

1959
I960
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 . .. .
1993
1994
1995
1996
1997




318.1
332.2
342.6
363.4
383.0
411.4
444.3
481.9
509.5
559.8
604.7
648.1
702.5
770.7
851.6
931.2
1,029.1
1,148.8
1,277.1
1,428.8
1,593.5
1,760.4
1,941.3
2,076.8
2,283.4
2,492.3
2,704.8
2,892.7
3,094.5
3,349.7
3,594.8
3,839.3
3,975.1
4,219.8
4,459.2
4,717.0
4,953.9
5,215.7
5,493.7
4,365.4
4,428.1
4,488.6
4,554.9
4,616.6
4,680.5
4,750.6
4,820.2
4,862.5
4,931.5
4,986.4
5,035.3
5,108.2
5,199.0
5,242.5
5,313.2
5,402.4
5,438.8
5,540.3
5,593.2
5,676.5
5,773.7
5,846.7

26.4
27.0
27.6
29.0
29.8
32.4
34.1
37.4
39.2
43.2
46.5
47.8
51.7
56.4
62.5
66.0
70.8
76.6
84.1
94.3
101.2
107.3
117.2
120.5
130.9
142.5
152.1
163.1
174.4
185.9
199.9
205.9
211.3
225.5
236.5
247.8
254.1
265.7
278.0
231.3
235.4
238.0
241.6
244.1
245.0
249.0
253.2
251.4
252.9
255.3
256.8
260.1
267.3
266.5
268.8
274.8
275.6
280.9
280.7
291.0
295.3
293.7

346

11.3
12.0
12.0
12.6
13.0
13.6
14.8
16.0
17.1
18.6
20.5
21.9
23.2
24.4
28.1
36.1
39.7
43.0
46.9
50.1
66.2
86.7
97.9
94.1
93.1
94.6
97.2
80.1
85.4
87.1
96.6
109.2
103.9
106.6
107.6
109.4
115.6
124.5
126.5
109.7
107.6
105.5
107.7
106.2
105.1
111.8
114.3
116.1
116.8
115.2
114.3
118.8
127.5
123.4
128.3
130.7
123.7
125.7
125.9
116.2
111.6
111.7

Services
Fuel
oil
and
coal

4.0
3.8
3.8
3.8
4.0
4.1
4.4
4.7
4.8
4.7
4.6
4.4
4.6
5.1
6.3
7.8
8.4
10.1
11.1
11.5
14.4
15.4
15.8
14.5
13.6
13.9
13.6
11.3
11.2
11.4
11.4
12.0
11.3
10.9
10.7
10.5
10.9
12.2
11.2
10.8
10.5
10.9
10.7
11.7
10.1
10.6
9.8
10.1
11.1
11.0
11.3
12.6
12.0
11.8
12.3
11.6
11.5
11.2
10.7
9.5
9.8
9.8

Household
operation

Total 1 Housing ^

127.0
136.0
144.3
153.7
163.2
176.1
189.4
204.8
222.0
243.4
265.5
291.1
320.1
352.3
384.9
424.4
475.0
531.8
599.0
677.4
755.6
851.4
952.6
1,050.7
1.173.3
1,283.6
1,416.1
1,536.8
1,663.8
1,817.6
1,958.1
2,117.5
2,242.3
2,409.4
2,558.4
2,709.1
2,869.2
3,033.2
3,220.1
2,504.6
2,537.6
2,577.4
2,613.8
2,649.0
2,692.2
2,727.8
2,767.2
2,804.5
2,854.7
2,892.7
2,925.0
2,969.0
3,013.7
3,056.3
3,j093.9
3,143.9
3,190.7
3,247.9
3,297.8
3,338.2
3,398.4
3,457.7

45.0
48.2
51.2
54.7
58.0
61.4
65.4
69.5
74.1
79.7
86.8
94.0
102.7
112.1
122.7
134.1
147.0
161.5
179.5
201.7
226.6
255.2
287.9
313.2
339.0
370.6
407.1
442.2
476.6
512.9
547.4
586.3
616.5
646.8
672.8
712.7
750.4
787.4
829.8
662.2
668.8
675.8
684.4
698.1
707.8
717.7
727.2
736.9
745.9
754.5
764.5
773.2
782.1
792.1
802.2
812.8
824.0
835.4
847.0
859.1
871.9
883.8

Trans- MediElec- porta- cal
care
tricity tion
Total and
gas
1

18.7
20.3
21.2
22.4
23.6
25.0
26.5
28.2
30.2
32.3
35.1
37.8
41.0
45.3
49.8
55.5
63.7
72.4
81.9
91.2
100.0
113.0
126.0
141.4
155.9
168.0
180.3
186.9
194.9
206.6
219.8
226.3
237.6
248.2
268.8
283.7
296.9
314.5
327.3
260.3
264.0
274.1
276.7
274.8
287.1
286.2
286.6
288.0
295.2
303.0
301.5
308.6
315.4
313.9
320.0
318.3
323.6
330.4
337.0
327.6
339.2
348.4

7.6
8.3
8.8
9.4
9.9
10.4
10.9
11.5
12.2
13.0
14.0
15.2
16.6
18.4
20.0
23.5
28.5
32.5
37.6
42.1
46.8
56.3
63.4
72.6
80.7
84.7
88.8
87.2
88.9
94.1
98.8
98.7
104.9
106.6
115.8
116.6
119.2
125.5
126.2
112.4
112.6
119.2
118.8
118.2
120.0
115.6
112.8
113.5
118.9
123.8
120.7
124.5
126.7
124.7
126.1
123.2
125.4
127.0
129.2
116.8
124.1
129.8

10.5
11.2
11.7
12.2
12.7
13.4
14.5
15.9
17.3
18.9
20.9
23.7
27.1
29.8
31.2
33.3
35.7
41.3
49.2
53.5
59.1
64.7
68.7
70.9
79.4
90.0
100.0
107.3
118.2
130.5
137.8
143.7
145.3
158.1
170.2
186.2
203.1
222.3
240.3
166.8
168.6
170.7
174.5
179.6
184.5
188.3
192.6
195.7
200.5
206.2
209.9
213.5
219.9
224.5
231.1
234.4
238.4
242.2
246.3
249.5
253.2
253.4

16.4
17.6
18.7
20.8
22.6
25.8
28.0
30.7
33.9
39.2
44.7
50.4
56.9
63.8
71.6
80.6
93.5
106.7
123.0
140.0
158.0
181.2
213.0
239.4
267.8
294.1
321.8
346.1
381.1
428.7
477.1
537.7
586.5
646.6
695.6
731.6
776.2
806.8
843.4
680.8
690.8
701.6
709.2
717.8
726.5
735.9
746.4
762.3
771.4
780.8
790.2
792.6
803.7
809.7
821.3
829.3
837.7
848.7
857.9
871.5
884.2
893.0

TABLE B-17.—Real personal consumption expenditures, 1982-98
[Billions of chained (1992) dollars; quarterly data at seasonally adjusted annual rates]
Durable goods
Year or
quarter

FurniPersonal
Motor ture
convehi- and
sumption
expendi- Total1 cles house- Total i
hold
and
tures
parts equipment

Nondurable goods

Food

Cloth- Gaso- Fuel
oil
line
flnri
dMU
and
coal
shoes oil

30815 2855 1339 913 1,0806 5651 1571 910 128
3,240.6 327.4 160.5 103.5 1,112.4 579.7 167.3 93.0 12.9
3,407.6 374.9 187.7 115.5 1,151.8 589.9 179.9 95.9 12.8
3,566.5 411.4 211.2 125.3 1,178.3 602.2 186.5 97.8 13.0
3,708.7 448.4 224.8 140.6 1,215.9 614.0 199.9 102.5 13.4
3,822.3 454.9 216.2 149.9 1,239.3 620.8 205.4 105.3 13.0
3,972.7 483.5 229.4 160.8 1,274.4 641.6 210.0 106.5 13.2
4,064.6 496.2 230.3 170.9 1,303.5 650.1 220.7 108.1 12.6
4,132.2 493.3 224.3 173.5 1,316.1 662.9 217.9 107.3 11.2
4,105.8 462.0 193.2 177.0 1,302.9 659.6 215.9 103.4 10.8
4,219.8 488.5 206.9 189.4 1,321.8 660.0 225.5 106.6 10.9
4,343.6 523.8 218.9 207.8 1,351.0 675.3 234.2 108.7 10.7
4,486.0 561.2 230.0 229.4 1,389.9 687.9 247.1 109.8 10.7
4,605.6 589.1 230.6 251.2 1,417.6 689.5 260.1 114.3 11.2
4,752.4 626.1 235.0 277.5 1,450.9 692.6 276.1 116.0 11.2
4,913.5 668.6 239.3 307.7 1,486.3 699.3 288.4 117.9 10.3
1993:1
4,286.8 504.0 209.1 200.4 1,337.5 670.1 228.8 107.2 10.8
II
4,322.8 519.3 218.4 205.0 1,347.8 674.1 233.4 108.6 10.3
Ill
4,366.6 529.9 219.8 210.9 1,356.8 677.9 235.9 109.8 10.9
IV
4,398.0 542.1 228.4 214.8 1,361.8 679.2 238.6 109.0 10.9
4,439.4 550.7 231.6 219.1 1,378.4 684.3 243.1 109.2 11.9
1994:1
II
4,472.2 555.8 228.4 226.1 1,385.5 689.8 242.7 109.6 10.2
Ill
4,498.2 561.7 227.3 232.2 1,393.2 687.9 248.1 109.9 10.7
4,534.1 576.6 232.6 240.3 1,402.5 689.5 254.7 110.7 10.2
IV
1995:1
4,555.3 575.2 227.4 242.6 1,410.4 689.5 256.4 113.5 10.4
II
4,593.6 583.5 229.5 246.6 1,415.9 689.6 258.4 114.2 11.4
Ill
4,623.4 595.3 232.6 254.1 1,418.5 688.9 262.1 114.3 11.3
IV
4,650.0 602.4 232.8 261.4 1,425.6 690.0 263.5 115.3 11.7
1996:1
4,692.1 611.0 235.9 265.0 1,433.5 691.1 268.0 114.7 11.9
II
4,746.6 629.5 237.9 277.7 1,450.4 693.4 276.4 116.2 11.1
Ill
4,768.3 626.5 232.8 280.0 1,454.7 691.4 279.8 116.0 11.3
IV
4,802.6 637.5 233.3 287.2 1,465.1 694.3 280.3 117.0 10.6
4,853.4 656.3 239.1 296.2 1,477.9 699.4 286.0 116.7 9.8
1997:1
II
4,872.7 653.8 230.8 303.7 1,477.1 697.3 283.3 118.3 10.4
Ill
4,947.0 679.6 244.4 312.7 1,495.7 700.6 291.9 118.4 10.7
IV
4,981.0 684.8 242.7 318.1 1,494.3 699.9 292.3 118.1 10.1
1998:1
5,055.1 710.3 247.8 335.8 1,521.2 706.8 307.4 118.5 9.2
11
5,130.2 729.4 258.9 339.3 1,540.9 716.3 311.4 118.4 9.7
Ill
5,181.8 733.7 252.6 352.0 1,549.1 718.9 309.8 121.1 9.9
1
Includes other items not shown separately.
2
Includes imputed rental value of owner-occupied housing.
Note.—See Table B-2 for data for total personal consumption expenditures for 1959-81.
Source: Department of Commerce, Bureau of Economic Analysis.

1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994 .
1995
1996
1997




347

Services
Household
operation
Total1

1,728.2
1,809.0
1,883.0
1,977.3
2,041.4
2,126.9
2,212.4
2,262.3
2,321.3
2,341.0
2,409.4
2,468.9
2,535.5
2,599.6
2,676.7
2,761.5
2,445.3
2,455.9
2,480.0
2,494.4
2,510.9
2,531.4
2,543.8
2,555.9
2,570.4
2,594.8
2,610.3
2,622.9
2,648.5
2,668.4
2,688.1
2,701.7
2,722.1
2,743.6
2,775.4
2,804.8
2,829.3
2,866.8
2,904.8

Housj n0 2
ing

5009
511.8
531.8
551.1
565.5
583.4
600.9
614.6
627.2
635.2
646.8
654.7
674.3
688.6
700.9
717.4
650.6
652.4
655.8
660.0
666.8
672.2
677.0
681.1
684.9
687.0
689.7
692.7
695.7
698.6
702.6
706.7
711.2
715.1
719.5
723.9
728.7
732.7
737.1

Total 1

1870
193.0
197.7
205.6
209.8
219.4
229.2
237.6
240.1
243.4
248.2
261.5
270.5
280.6
291.4
301.3
256.6
257.7
265.2
266.3
263.1
274.1
272.3
272.4
272.8
279.6
286.0
283.8
289.0
292.7
289.6
294.4
291.1
297.8
305.0
311.1
306.3
316.5
326.3

1

Trans- MediElec- porta- cal
tricity tion care
and
gas

903
93.0
93.6
96.1
95.1
98.4
103.4
105.6
1037
107.0
1066
112.3
112.5
114.7
118.0
116.0
111.0
109.2
114.7
114.1
113.8
115.8
111.4
108.9
109.4
114.8
119.1
115.6
118.8
119.6
116.5
117.2
112.4
116.0
117.2
118.4
110.5
117.4
123.8

1099
117.0
128.6
140.6
145.7
151.0
159.0
160.8
159.9
152.3
158.1
163.1
175.2
186.4
200.5
212.2
160.3
161.9
163.8
166.6
170.3
173.6
176.7
180.1
182.8
184.2
187.6
191.0
195.5
199.1
202.1
205.3
208.6
210.7
213.7
215.9
217.9
221.4
220.5

4422
459.7
472.4
490.7
510.3
537.3
561.3
575.8
602.8
621.6
646.6
655.3
662.1
675.0
686.6
701.7
653.7
654.3
656.4
656.7
658.1
661.1
663.2
666.0
669.1
673.0
677.2
680.9
679.5
685.6
687.7
693.5
694.8
698.6
704.2
709.4
714.9
721.6
725.3

TABLE B-18.—Private gross fixed investment by type, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Nonresidential
Producers' durable equipment

Structures
Year or
quarter

Priuata
rrivaic

fixed
investment

Total
nonresidential

Total1

Nonresidential Utilibuildings ties
including
farm

Mining
exploration,
shafts,
and
wells

18.1
10.6
4.9
46.5
74.6
12.0
5.0
49.2
19.6
75.5
12.7
4.6
19.7
48.6
75.0
13.7
4.6
52.8
20.8
81.8
13.9
5.0
21.2
87.7
55.6
5.4
62.4
23.7
15.8
96.7
19.5
74.1
28.3
6.1
108.3
84.4
116.7
21.3
7.1 •
31.3
20.6
7.8
85.2
31.5
117.6
9.2
33.6
21.1
92.1
130.8
24.4
9.6
37.7
102.9
145.5
25.4 11.1
106.7
40.3
148.1
111.7
42.7
27.1 11.9
167.5
47.2
195.7
30.1 13.1
126.1
150.0
55.0
225.4
35.5 15.0
38.3 16.5
165.6
61.2
231.5
61.4
35.6 17.1
169.0
231.7
187.2
65.9
35.9 20.0
269.6
39.9 21.5
223.2
74.6
333.5
49.7 24.1
91.4
272.0
403.6
65.7 27.5
323.0
114.9
464.0
73.7 30.2
350.3 133.9
473.5
405.4
86.3 33.0
164.6
528.1
409.9
175.0
94.5 32.5
515.6
399.4
152.7
90.5 28.7
552.0
110.0 30.0
176.0
648.1
468.3
128.0 30.6
502.0
193.3
688.9
123.3 31.2
494.8
175.8
712.9
495.4
126.0 26.5
172.1
722.9
133.3 27.1
530.6
181.3
763.1
142.7 29.4
566.2
192.3
797.5
148.9 27.5
575.9
200.8
791.6
181.7
126.1 31.6
547.3
738.5
783.4
113.2 34.5
557.9
169.2
119.2 32.8
604.1 176.4
855.7
128.7 32.0
660.6
184.5
946.6
727.7
143.8 33.9
201.3
1,012.5
160.9 31.7
787.9
216.9
1,099.8
860.7 240.2
1,188.6
177.3 33.5
171.7
113.6 33.8
580.5
823.5
1993:1 ....
117.6 32.7
598.8
175.2
842.9
II ...
606.4
III..
121.5 32.2
177.8
858.8
180.7
124.2 32.5
630.6
IV..
897.5
120.7 32.1
175.4
911.0
634.6
1994:1 ....
941.7
II ...
130.9 31.6
652.9
185.2
667.4
III..
130.0 32.0
956.9
186.8
133.2 32.4
977.0| 687.5 190.7
IV ..
139.7 33.6
713.6 197.9
1,000.0
1995:1 ....
144.2 34.5
II ... 1,004.3
728.1 201.8
144.7 34.4
729.5 203.0
III.. 1,013.5
146.6 33.2
739.5
202.2
IV .. 1,032.1
1,059.1
759.0
1996:1 ....
151.1 31.9
206.5
II ... 1,089.7
157.0 31.2
774.8 211.3
162.4 31.0
III.. 1,118.1
801.1
218.0
816.8
232.1
IV .. 1,132.2
173.2 32.9
1997:1 ....
1,146.7
827.1 236.2
177.5 32.5
II ... 1,176.4
850.5 234.3
172.9 33.4
III.. 1,211.1
882.3 243.8
180.0 34.1
IV .. 1,220.1
178.9 34.1
882.8 246.4
1,271.1
921.3 245.0
1998:1 ....
180.6 34.2
941.9 245.4
II ... 1,305.8
181.8 34.7
183.7 35.0
931.6 246.2
III.. 1,307.5
1
Includes other items, not shown separately.
2
Includes new computers and peripheral equipment only.
Source: Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997




2.5
2.3
2.3
2.5
2.3
2.4
2.4
2.5
2.4
2.6
2,8
2.8
2.7
3.1
3.5
5.2
7.4
8.6
11.5
15.4
19.0
27.4
42.5
44.8
30.0
31.3
27.9
15.7
13.1
15.7
14.4
17.5
17.1
13.3
16.6
16.7
16.3
18.1
22.7
16.0
16.8
16.8
16.6
15.7
15.8
17.0
18.1
17.3
15.6
16.2
16.0
16.7
16.9
18.6
20.3
20.6
22.2
23.8
24.3
23.5
22.4
20.7

348

Information processing
and related equipment
Total »
Total

28.3
29.7
28.9
32.1
34.4
38.7
45.8
53.0
53.7
58.5
65.2
66.4
69.1
78.9
95.1
104.3
107.6
121.2
148.7
180.6
208.1
216.4
240.9
234.9
246.7
292.3
308.7
319.0
323.3
349.3
373.9
375.1
365.6
388.7
427.7
476.1
526.4
571.0
620.5
408.9
423.6
428.6
449.9
459.3
467.7
480.6
496.8
515.6
526.3
526.5
537.2
552.6
563.5
583.1
584.8
591.0
616.2
638.5
636.4
676.3
696.6
685.4

4.0
4.7
5.1
5.4
6.1
6.8
7.8
9.6
10.0
10.6
12.9
14.3
14.9
16.5
19.8
22.9
23.5
27.2
33.1
41.8
49.9
58.9
69.5
72.7
82.0
98.6
104.2
108.8
109.8
118.2
127.1
124.2
122.6
134.2
141.6
152.1
173.0
189.4
206.6
137.2
138.1
145.0
146.0
147.6
149.4
152.8
158.5
162.6
173.6
174.8
181.1
185.0
185.2
192.7
194.6
197.1
202.6
213.0
213.6
226.5
231.6
235.2

Computers and
peripheral
equipment 2

0.0
.2
.3
.3
.7
.9
1.2
1.7
1.9
1.9
2.4
2.7
2.8
3.5
3.5
3.9 1
3.6 1
4.4
5.7
7.6
10.2
12.5
17.1
18.9
23.9
31.6
33.7
33.4
35.8
38.1
43.3
38.9
38.1
43.9
48.6
51.8
64.9
74.4
81.1
47.1
47.1
49.8
50.5
49.9
50.6
51.5
55.1
56.1
64.1
66.6
72.8
73.4
72.0
75.5
76.8
76.8
79.9
84.0
83.7
91.8
94.8
95.6

Other

4.0
4.5
4.8
5.1
5.3
5.8
6.6
7.9
8.1
8.6
10.4
11.6
12.1
13.1
16.3
19.0
19.9
22.8
27.5
34.2
39.8
46.4
52.3
53.9
58.1
67.0
70.5
75.4
74.0
80.1
83.8
85.2
84.5
90.2
93.0
100.3
108.1
114.9
125.5
90.1
91.0
95.2
95.5
97.7
98.8
101.2
103.4
106.4
109.6
108.2
108.3
111.5
113.2
117.2
117.8
120.3
122.7
129.0
129.9
134.7
136.8
139.5

Industrial
equipment

8.4
9.3
8.7
9.2
10.0
11.4
13.6
16.1
16.8
17.2
18.9
20.2
19.4
21.3
25.9
30.5
31.1
33.9
39.2
47.4
55.8
60.4
65.2
62.2
58.2
67.4
71.7
74.6
75.9
82.9
91.5
89.8
86.4
89.3
97.9
109.3
123.8
131.7
138.6
94.0
95.4
98.1
104.1
105.4
107.0
110.8
114.0
119.3
124.8
125.8
125.3
129.6
133.1
131.7
132.3
132.7
138.9
140.7
142.1
145.4
146.8
147.4

Transportation
and
related
equipment

8.3
8.5
8.0
9.8
9.4
10.6
13.2
14.5
14.3
17.6
18.9
16.2
18.4
21.8
26.6
26.3
25.2
30.0
39.3
47.3
53.6
48.4
50.6
46.8
53.7
64.8
69.7
71.8
70.4
76.0
71.2
75.5
79.5
86.2
99.9
118.6
126.2
137.2
152.0
92.9
102.9
96.4
107.5
113.1
115.5
119.8
126.1
131.0
125.5
122.5
125.8
130.0
134.3
143.4
141.2
141.5
151.9
158.8
155.9
172.4
181.2
164.0

Residential

28.1
26.3
26.4
29.0
32.1
34.3
34.2
32.3
32.4
38.7
42.6
41.4
55.8
69.7
75.3
66.0
62.7
82.5
110.3
131.6
141.0
123.2
122.6
105.7
152.5
179.8
186.9
218.1
227.6
232.5
231.3
215.7
191.2
225.6
251.6
286.0
284.8
311.8
327.9
243.0
244.1
252.4
266.8
276.4
288.7
289.5
289.5
286.4
276.2
284.0
292.6
300.1
315.0
317.0
315.3
319.5
325.9
328.8
337.4
349.8
363.8
375.8

TABLE B-19.—Real private gross fixed investment by type, 1982-98
[Billions of chained (1992) dollars; quarterly data at seasonally adjusted annual rates]
Nonresidential
Producers' durable equipment

Structures
Year or
quarter

Priuato
riivaie

fixed
investment

Total
nonresidential Total1

1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

Nonresidential
buildings
including
farm

Utilities

Mining
exploration,
shafts,
and
wells

610.4 464.3 207.2
126.6 39.5
185.7
654.2 456.4
117.6 34.2
762.4 535.4
137.6 35.4
212.2
155.2 35.6
227.8
799.3 568.4
144.5 36.5
805.0 548.5 203.3
142.4 30.7
799.4 542.4
195.9
145.3 30.0
196.8
818.3 566.0
150.2 30.9
832.0 588.8 201.2
152.0
28.1
805.8 585.2 203.3
126.9 32.0
181.6
741.3 547.7
113.2
169.2
783.4 557.9
34.5
31.8
115.3
170.8
842.8 600.2
119.9 29.9
172.5
915.5 648.4
180.7
128.8 30.6
966.0 710.6
141.0 27.8
189.7
1,050.6 776.6
150.5 28.7
203.2
1,138.0 859.4
33.4
111.3
1993:1 ....
814.8 577.8 168.0
114.4 31.7
831.1 595.1
II ...
170.3
117.1 31.0
171.7
844.5 602.3
III..
IV ..
31.0
118.5
173.1
880.8 625.6
1994:1 ....
114.3 30.3
166.3
887.8 626.2
123.1 29.6
174.5
913.2 641.2
II...
III..
120.6 29.8
174.0
922.7 653.2
IV..
29.8
121.8
175.0
938.5 672.9
179.5
957.1 698.4
1995:1 ....
126.1 30.7
181.7
II ...
129.5 31.3
957.8 710.2
III..
129.3 30.9
181.5
965.8 711.7
130.4 29.6
IV ..
983.1 722.3 179.8
1,011.4 744.8
28.3
133.9
182.6
1996:1 ....
27.5
138.3
II... 1,043.5 764.4 185.9
27.1
141.6
189.9
III.. 1,067.1 790.1
IV .. 1,080.4 807.0 200.6
150.2 28.4
1997:1 ....
152.8 28.1
202.5
1,096.0 820.9
147.8 28.6
199.3
II ... 1,127.0 848.2
Ill .. 1,159.3 882.2
152.0 29.1
205.2
IV .. 1,169.5 886.2
205.7
149.5 29.2
29.2
1998:1 ....
150.1
203.1
1,224.9 931.9
149.8 29.5
II ... 1,264.1 960.4 201.9
29.7
III.. 1,270.9 958.7 202.0
150.1
1
Includes other items, not shown separately.
2
Includes new computers and peripheral equipment only.
Source: Department of Commerce, Bureau of Economic Analysis.




Information processing
and related equipment
Total1

32.2
26.7
30.3
27.0
15.8
15.5
15.8
13.9
16.1
15.7
13.3
16.0
15.8
14.4
15.3
17.9
15.2
16.2
16.4
16.2
15.1
15.1
16.2
16.7
15.7
13.9
14.2
13.9
14.4
14.4
15.6
16.7
16.6
17.6
18.6
18.9
17.9
17.0
16.4

349

Total

Computers and
peripheral

Other

Industrial
equipment

±F>
260.3
272.4
324.6
342.4
345.9
346.9
369.2
387.6
381.9
366.2
388.7
429.6
476.8
531.7
589.8
660.9
409.8
424.9
430.7
452.9
460.6
467.3
480.0
499.1
520.4
529.9
531.8
544.8
565.0
581.6
604.0
608.8
621.0
653.8
682.6
686.4
738.8
771.3
769.3

54.5
63.4
79.8
88.0
94.1
97.5
106.6
116.2
116.2
117.8
134.2
147.9
165.1
201.5
245.4
298.0
140.5 i
143.2
152.5
155.5
158.1
160.8
166.1
175.6
183.7
199.2
205.2
217.7
229.5
238.0
253.1
260.9
271.8
288.1
311.5
320.7
353.4
376.8
399.6

4.7
7.1
11.6
14.5
16.7
21.0
24.0
29.4
29.4
32.4
43.9
56.1
67.2
100.8
151.3
214.8
51.0
53.2
58.4
61.7
62.2
64.1
67.1
75.3
80.4
95.2
105.3
122.1
133.6
142.6
158.5
170.7
182.5
203.9
229.9
242.9
292.2
331.5
370.5

67.0
70.4
79.0
81.9
84.6
80.2
85.7
88.1
88.2
85.9
90.2
92.3
99.4
108.1
115.4
126.6
89.6
90.3
94.6
94.8
96.8
97.8
100.2
102.8
106.1
109.2
108.2
108.7
111.9
113.7
117.9
118.2
121.1
123.7
130.0
131.5
136.7
139.7
142.8

85.5
78.5
89.9
94.1
93.5
91.1
95.3
101.5
95.0
88.3
89.3
96.5
105.5
115.4
120.5
125.9
93.4
94.2
96.5
102.0
102.8
103.8
106.7
108.9
113.2
116.4
116.6
115.6
119.1
122.0
120.4
120.6
120.8
126.4
127.7
128.6
131.5
132.5
133.1

Transportation
and
related
equipment

63.7
71.7
85.1
88.4
85.6
82.1
87.1
78.9
81.2
81.7
86.2
98.3
113.2
119.4
127.6
140.3
91.9
101.5
94.8
105.2
108.8
110.0
113.5
120.5
125.3
119.1
115.3
118.0
121.9
125.0
132.7
130.8
131.1
140.5
145.9
143.8
159.6
167.9
151.7

Residential

140.1
197.6
226.4
229.5
257.0
257.6
252.5
243.2
220.6
193.4
225.6
242.6
267.0
256.8
275.9
282.8
237.0
236.1
242.2
255.1
261.3
271.5
269.4
265.9
259.9
249.5
255.6
262.1
268.0
280.2
279.0
276.3
278.4
282.5
282.3
287.9
298.5
309.1
316.5

TABLE B-20.—Government consumption expenditures and gross investment by type, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Government consumption expenditures and gross investment
State and local

Federal
Year or
quarter

National defense
Total

Total

Total

Consumption
expenditures

Nondefense

Gross
investment
Structures

Equipment

11.2
112.0 67.2 55.7
42.0
2.5
113.2 65.6 54.9
42.5
2.2
10.1
2.4
11.5
43.9
120.9 69.1 57.7
131.4 76.5 62.3
12.5
47.8
2.0
11.0
137.7 78.1 62.2
49.6
1.6
144.4 79.4 61.3
49.9
10.2
1.3
52.0
8.9
153.0 81.8 62.0
1.1
61.2
11.0
173.6 94.1 73.4
1.3
71.3
13.0
194.6 106.6 85.5
1.2
11.8
212.1 113.8 92.0
78.9
1.2
10.9
223.8 115.8 92.4
80.0
1.5
10.7
236.1 115.9 90.6
78.6
1.3
7.7
79.2
1.8
249.9 117.1 88.7
82.3
268.9 125.1 93.2
1.8
9.1
83.7
8.9
287.6 128.2 94.7
2.1
9.7
90.1
2.2
323.2 139.9 101.9
97.0
11.6
2.3
362.6 154.5 110.9
101.3
2.1
12.6
385.9 162.7 116.1
109.6
2.4
13.8
416.9 178.4 125.8
118.4
14.6
457.9 194.4 135.6
2.5
130.7
18.0
507.1 215.0 151.2
2.5
150.9
3.2
20.1
572.8 248.4 174.2
174.3
633.4 284.1 202.0
3.2
24.5
197.6
29.4
4.0
684.8 313.2 230.9
214.9
35.4
735.7 344.5 255.0
4.8
236.3
4.9
41.5
796.6 372.6 282.7
257.6
6.2
48.5
875.0 410.1 312.4
272.7
6.8
52.9
938.5 435.2 332.4
7.7
287.6
992.8 455.7 350.4
55.1
7.4
48.7
1,032.0 457.3 354.0
297.9
6.4
51.0
303.3
1,095.1 477.2 360.6
312.7
6.1
54.3
1,176.1 503.6 373.1
325.4
4.6
53.5
1,225.9 522.6 383.5
50.9
1,263.8 528.0 375.8
319.7
5.2
1,283.4 518.3 360.7
44.5
311.1
5.1
41.8
1,313.0 510.2 349.2
5.8
301.6
1,356.4 509.1 344.4
6.3
39.9
298.2
304.1
6.7
40.2
1,405.2 518.4 351.0
5.7
1,454.6 520.2 346.0
34.0
306.3
46.4
312.4
4.8
1993:1 .... 1,271.5 521.3 363.6
45.4
II ... 1,281.2 517.8 361.7
4.9
311.5
5.4
Ill .. 1,285.3 515.7 358.0
42.0
310.6
5.3
44.3
IV .. 1,295.5 518.5 359.4
309.8
5.4
39.7
1994:1 .... 1,291.0 506.9 344.9
299.8
300.7
42.2
II ... 1,300.8 505.3 348.5
5.5
308.7
6.1
45.0
III.. 1,332.3 520.4 359.7 1
40.2
IV.. 1,328.0 508.3 343.6
297.3
6.1
1 3441 5123 3461
2987
1995-1
69
405
II ... 1,357.8 511.7 348.1
41.8
6.1
300.2
III.. 1,362.3 511.2 345.5
38.5
301.1
6.0
38.7
292.7
I V . . 1,361.4 501.2 337.9
6.5
6.7
43.5
1996:1 .... 1,387.5 517.1 350.3
300.1
II ... 1,406.0 523.1 355.6
305.9
7.2
42.6
III.. 1,408.6 519.0 351.3
39.3
305.5
6.5
304.7
6.4
IV .. 1,418.8 514.6 346.7
35.6
1997:1 .... 1,439.4 517.0 341.1
31.4
303.8
5.8
II ... 1,451.5 522.9 349.1
310.4
33.2
5.6
III.. 1,459.5 521.0 347.1
35.4
306.0
5.7
1,468.1 520.1 346.5
IV
304.8
5.7
36.1
293.3
5.4
32.9
1998:1 .... 1,464.9 511.6 331.6
II ... 1,481.2 520.7 339.8
31.9
303.0
4.9
35.4
III.. 1,492.3 519.4 343.7
302.9
5.5
Source: Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997




Total

11.5
10.8
11.4
14.2
15.9
18.1
19.7
20.7
21.0
21.8
23.4
25.3
28.3
31.9
33.5
38.0
43.6
46.6
52.6
58.9
63.8
74.2
82.2
82.3
89.4
89.9
97.7
102.9
105.3
103.3
116.7
130.4
139.1
152.2
157.7
161.0
164.7
167.4
174.3
157.7
156.1
157.7
159.1
162.0
156.8
160.7
164.7
1662
163.6
165.7
163.3
166.8
167.4
167.7
167.9
175.9
173.8
173.9
173.6
180.0
180.9
175.7

350

Consumpexpenditures

9.9
8.8
9.0
11.3
12.4
14.0
15.1
15.9
17.0
18.2
20.0
21.9
24.6
27.8
29.2
33.2
38.0
40.4
45.7
50.4
55.2
64.3
71.7
72.3
78.2
77.9
84.9
89.7
90.7
89.9
101.9
113.9
120.6
131.4
136.2
141.6
144.7
146.8
154.2
134.7
134.3
136.4
139.4
142.6
138.5
141.8
143.5
1443
144.5
146.1
143.8
145.6
147.2
147.4
147.0
153.0
154.4
154.0
155.3
157.6
106.9
155.8

Gross
investment
Structures

1.5
1.7
1.9
2.1
2.3
2.5
2.8
2.8
2.2
2.1
1.9
2.1
2.5
2.7
3.1
3.4
4.1
4.6
5.0
6.1
6.3
7.1
7.7
6.8
6.7
7.0
7.3
8.0
9.0
6.8
6.9
8.0
9.2
10.3
11.2
10.4
10.9
10.9
10.0
11.5
10.9
11.3
11.1
10.3
9.7
9.9
11.8
115
10.8
11.1
10.2
10.5
11.1
10.9
11.0
10.7
10.0
10.8
8.7
10.6
10.4
11.3

ConTotal

Equipment

0.2
.3
.5
.8
1.1
1.6
1.8
2.0
1.8
1.6
1.5
1.3
1.3
1.3
1.2
1.4
1.4
1.6
1.9
2.3
2.4
2.9
2.8
3.2
4.5
5.0
5.4
5.2
5.6
6.6
7.9
8.6
9.3
10.5
10.2
9.0
9.1
9.8
10.0
11.5
10.8
10.1
8.6
9.1
8.6
8.9
9.4
104
8.3
8.5
9.3
10.7
9.1
9.4
9.9
12.2
9.4
9.1
9.6
11.8
9.6
8.6

tion
itures

44.8
47.6
51.8
55.0
59.6
65.0
71.2
79.5
88.1
98.3
108.0
120.2
132.8
143.8
159.4
183.3
208.1
223.1
238.5
263.4
292.0
324.4
349.2
371.6
391.2
424.0
464.9
503.3
537.2
574.7
617.9
672.6
703.4
735.8
765.0
802.8
847.3
886.8
934.4
750.1
763.4
769.6
777.0
784.1
795.5
811.9
819.6
8318
846.2
851.1
860.2
870.4
882.9
889.6
904.2
922.4
928.6
938.5
947.9
953.3
960.4
972.9

30.9
33.7
36.7
39.1
42.2
46.0
50.5
56.5
62.9
70.8
79.8
91.6
102.9
113.4
126.4
144.0
164.9
179.7
196.1
214.5
235.9
261.3
285.3
307.9
326.2
350.8
382.6
412.7
441.1
471.3
507.2
550.1
579.4
603.6
631.6
663.8
695.2
724.7
758.8
621.4
628.9
635.0
641.1
651.6
659.2
668.6
676.0
6848
693i5
698.4
704.2
712.6
721.6
727.8
736.7
747.2
754.0
762.2
771.5
776.7
784.7
793.9

Gross
Structures

12.8
12.7
13.8
14.5
16.0
17.2
19.0
21.0
23.0
25.2
25.6
25.8
27.0
27.1
29.1
34.7
38.1
38.1
36.9
42.8
49.0
55.1
55.4
54.2
54.2
60.5
67.6
74.2
78.8
84.8
88.7
98.5
100.5
108.1
108.7
113.4
123.1
130.9
142.4
104.1
109.9
109.8
111.1
107.2
110.8
117.6
117.9
1196
124.0
123.3
125.6
127.4
130.4
130.3
135.6
142.7
141.6
142.8
142.6
142.0
140.6
143.2

ment

1.1
1.2
1.2
1.3
1.5
1.7
1.8
2.0
2.2
2.3
2.6
2.8
2.9
3.3
3.8
4.6
5.1
5.3
5.4
6.1
7.1
8.1
8.5
9.4
10.8
12.7
14.8
16.4
17.2
18.6
21.9
23.9
23.4
24.0
24.7
25.6
29.0
31.2
33.2
24.6
24.6
24.8
24.8
25.3
25.5
25.8
25.8
274
28.6
29.5
30.4
30.5
30.9
31.4
31.9
32.4
32.9
33.4
33.9
34.6
35.2
35.8

TABLE B-21.—Real government consumption expenditures and gross investment by type, 1982—98
[Billions of chained (1992) dollars; quarterly data at seasonally adjusted annual rates]
Government consumption expenditures and gross investment
State and local

Federal
Year or
quarter

Total

Total

Total

National defense
«
Consumpinvestment
tion
expend- Struc- Equipitures tures ment

Nondefense
Total

p
ConsumpTotal
investment
tion
expend- Struc- Equipitures
tures ment

102.3
8.6
3.2
282.0
5.6 32.0 113.3
960.1 429.4 316.5
105.9
8.4
4.7
6.6 37.0 118.5
293.3
987.3 452.7 334.6
6.4 41.7 115.9
1,018.4 463.7 348.1
102.3
8.7
5.2
301.3
107.4
5.7
7.9 48.6 121.8
1,080.1 495.6 374.1
8.9
318.2
5.4
53.7 125.2
110.6
9.4
331.1
8.6
1,135.0 518.4 393.4
109.2 10.3
341.1
5.9
1,165.9 534.4 409.2
9.2 58.4 125.3
104.8
7.6
6.8
1,180.9 524.6 405.5
345.3
8.5 51.9 119.1
114.8
7.4
7.9
6.9 53.8 130.1
1,213.9 531.5 401.6
340.9
1,250.4 541.9 401.5
123.8
8.5
6.4 56.1 140.5
8.3
338.9
123.6
338.7
4.7 54.1 142.0
1,258.0 539.4 397.5
9.3
9.2
131.4 10.3
319.7
10.5
5.2 50.9 152.2
1,263.8 528.0 375.8
4.7 43.8 151.2
129.9 11.0
10.3
1,252.1 505.7 354.4
306.0
130.4
9.9
9.1
292.2
5.0 39.7 149.5
1,252.3 486.6 336.9
127.5
9.4
281.1
5.4 36.9 146.9
9.9
1,254.5 470.6 323.5
10.7
126.1
9.6
5.5 37.0 146.2
1,268.2 465.6 319.1
276.6
128.7
8.6
11.6
272.4
1,285.0 458.0 308.9
4.5 31.9 148.6
130.0 11.4
1,250.1 512.1 359.2
1993:1
11.5
308.5
4.6 46.1 152.9
129.5 10.7
307.1
II ... 1,253.1 507.8 356.7
10.9
4.6 44.9 151.1
129.1 11.0
Ill ... 1,250.5 501.5 351.1
10.2
305.0
4.8 41.3 150.3
8.7
IV... 1,254.7 501.3 350.8
130.8 10.8
303.2
4.7 42.9 150.4
132.7
292.4
1994:1
9.9
9.2
4.7 38.1 151.9
1,241.9 487.2 335.1
127.1
II ... 1,243.3 481.2 335.9
8.7
4.8 39.6 145.1
9.3
291.5
9.4
Ill ... 1,268.1 496.4 347.0
130.8
9.0
298.7
5.3 42.9 149.4
IV... 1,255.8 481.7 329.6
131.1 11.1
9.6
286.2
5.2 38.1 151.7
1,256.2 478.6 328.3
1995:1
128.8 10.7
10.6
284.3
5.9 38.0 150.0
II ... 1,259.9 476.2 328.4
129.0
8.5
284.6
5.2 38.6 147.6
9.8
Ill ... 1,257.6 473.1 323.9
129.9 10.0
8.8
283.1
5.0 35.7 148.8
IV... 1,244.5 454.6 313.3
272.4
5.4 35.4 141.1
122.3
9.7
9.2
1,254.5 463.5 318.7
1996:1
124.0
9.4
11.3.
275.0
5.6 38.1 144.5
II ... 1,276.2 472.6 325.0
127.5
9.9
9.9
279.3
6.0 39.7 147.3
Ill ... 1,271.1 467.0 319.8
277.4
127.0
10.3
9.6
5.3 37.1 146.8
IV... 1,271.2 459.5 313.0
125.7
5.1 33.1 146.1
11.0
9.6
274.6
1,277.7 456.3 305.0
1997:1
128.5
4.7 29.2 150.7
9.3 13.8
270.8
4.4 30.9 148.2
II ... 1,284.4 460.4 311.7
129.0
276.2
8.5 10.8
Ill ... 1,288.9 458.9 310.2
128.5
10.6
9.2
272.3
4.5 33.3 148.2
IV .. 1,289.2 456.5 308.7
129.0
11.3
7.3
270.0
4.5 34.2 147.3
1,283.0 446.1 293.3
1998:1
130.0
8.8 14.1
257.9
4.3 31.0 151.9
II ... 1,294.8 454.1 300.3
11.7
132.9
8.6
266.1
3.8 30.3 152.9
128.4
Ill ... 1,299.6 452.5 303.5
10.7
265.1
4.3 34.2 148.4
9.3
Note.—See Table B-2 for data for total Government consumption expenditures and gross investment for
Source: Department of Commerce, Bureau of Economic Analysis.

1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997




351

fan
I/onS

Gross
investment

tion
Ll|UI|J-

itures

531.4
534.9
555.0
584.7
616.9
631.8
656.6
682.6
708.6
718.7
735.8
746.4
765.7
783.9
802.7
827.1
738.0
745.3
749.1
753.4
754.7
762.2
771.7
774.1
777.6
783.7
784.5
790.0
791.0
803.6
804.2
811.8
821.5
824.2
830.1
832.9
837.1
840.9
847.3
1959-81.

tures

67.0
455.6
458.2 66.3
467.9 73.8
487.8 80.9
513.3 85.9
525.5 87.8
545.3 91.6
566.3 93.5
583.2 100.7
593.8 101.3
603.6 108.1
615.8 106.1
633.4 107.1
644.0 111.5
656.8 114.9
672.3 121.0
610.8 102.7
613.5 107.4
617.5 107.0
621.5 107.2
627.2 102.7
631.6 105.5
635.9 110.6
639.0 109.6
641.0 1 109.6
642.8 112.7
644.3 111.2
647.8 112.3
648.1 112.9
657.9 115.1
659.1 114.0
662.2 117.8
665.9 122.7
670.1 120.6
674.7 121.0
678.5 119.5
682.8 118.5
687.3 117.0
691.6 118.2

ment

10.7
12.1
14.2
16.4
18.0
18.8
20.0
23.0
24.7
23.6
24.0
24.5
25.2
28.6
31.1
34.3
24.5
24.4
24.5
24.7
24.9
25.0
25.2
25.4
27.0
28.2
29.1
30.0
30.2
30.8
31.4
32.1
33.0
33.9
34.8
35.5
36.7
37.7
38.8

TABLE B-22.—Inventories and final sales of domestic business, 1959-98
[Billions of dollars, except as noted; seasonally adjusted]
Inventories1
Quarter

Nonfarm
Total'

Farm

Total*

Manufacturing

Fourth quarter:
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
1993-1
II
Ill
. .
IV
1994-1
II
III
IV

Wholesale
trade

Retail
trade

Other

Final
sales of
domestic
business3

Ratio of inventories
to final sales of
domestic business
Total

Nonfarm

2.71
20.0
98.9
130.7
9.0
36.5
3.58
18.3
51.6
31.8
21.4
3.57
101.8
134.4
8.9
37.7
2.70
52.8
32.6
18.6
103.4
3.48
2.62
20.9
34.2
137.6
9.2
39.5
19.1
54.3
3.47
22.3
36.2
109.0
9.2
41.8
2.61
19.9
57.6
145.2
114.4
3.32
2.57
9.8
44.5
23.6
59.6
33.3
147.6
21.3
121.4
47.4
2.56
31.9
3.23
22.7
24.9
63.2
153.3
10.6
27.7
131.9
168.1
3.20
2.51
68.2
36.2
11.7
52.5
24.3
2.67
148.6
3.33
27.7
30.1
78.3
36.8
185.5
12.5
55.6
161.4
3.34
197.7
2.73
31.1
85.2
36.3
15.3
59.2
29.9
34.4
2.67
91.4
173.8
213.2
3.28
31.7
39.5
16.3
65.1
3.37
37.7
42.7
189.9
232.7
18.1
2.75
99.0
69.1
35.2
2.74
199.7
38.7
41.2
240.9
3.31
102.8
19.3
72.9
39.0
3.27
259.7
79.4
2.66
44.9
48.2
211.5
20.9
42.1
103.5
23.4
3.25
2.59
50.0
109.4
58.9
228.8
287.8
46.0
88.5
58.7
3.52
2.75
75.3
267.8
29.2
54.8
125.1
343.1
97.5
105.4
3.76
3.13
64.2
158.2
66.0
330.3
396.3
38.0
69.8
338.4
64.7
70.0
408.3
39.8
3.46
2.87
69.3
164.5
118.0
73.3
441.7
129.7
3.40
181.1
66.6
375.1
43.5
2.89
77.2
50.4
3.40
81.2
202.8
71.9
421.0
492.8
145.0
2.90
86.6
3.46
94.5
228.4
96.6
484.0
580.6
59.1
2.89
101.9
167.6
268.7
186.4
3.62
105.3
113.6
561.9
675.5
67.5
3.01
120.5
3.59
3.04
113.7
622.8
736.0
74.0
204.8
138.5
296.5
113.3
151.4
103.7
84.9
3.53
123.9
318.1
678.2
781.9
221.8
3.06
84.6
3.29
123.5
299.5
109.2
658.0
767.2
232.8
2.83
150.3
681.1
786.7
86.4
255.4
3.08
154.1
138.0
302.6
105.6
2.67
333.4
169.0
108.5
751.5
860.0
91.8
276.7
3.11
2.72
157.3
2.94
98.4
173.4
105.9
769.1
875.0
297.7
2.58
171.9
325.3
99.5
176.8
314.6
94.3
768.2
862.5
315.7
2.73
177.2
2.43
927.4
106.4
2.78
199.5
332.9
97.9
829.5
190.6
333.1
2.49
2.74
109.6
213.8
358.8
102.0
890.8
992.8
362.8
2.46
208.5
218.4
232.7
107.8
2.71
2.44
382.1
103.6
941.0
1,044.6
384.9
237.1
232.4
974.1
1,082.4
104.8
403.4
2.68
2.41
399.7
108.3
383.4
240.1
961.0
102.0
2.56
235.5
97.2
1,058.1
413.1
2.33
2.44
249.4
375.5
103.0
245.3
104.9
973.1
1,077.9
441.9
2.20
2.48
260.4
378.4
102.8
443.5
2.23
247.8
989.3
110.1
1,099.5
248.4
103.9
2.45
262.2
996.5
1,102.1
449.6
2.22
381.9
105.6
2.43
1,003.7
1,104.9
105.0
454.1
2.21
251.9
263.3
383.5
101.3
1,013.4
107.6
2.40
254.5
267.3
101.5
1,114.8
463.6
2.19
384.0
110.0
2.42
255.9
270.9
1,025.6
1,132.2
467.6
2.19
388.9
106.6
1,049.7
111.6
2.42
279.3
396.4
1,150.0
474.5
2.21
262.5
100.3
284.2
1,069.0
1,168.9
112.6
2.42
482.2
2.22
268.2
403.9
99.9
290.7
104.1
115.0
2.45
489.2
2.24
277.5
1,096.5
1,200.6
413.3
118.7
104.4
2.50
494.6
287.3
298.2
426.9
1,131.1
1995:1
1,235.5
2.29
II
1,247.7
119.2
2.50
292.6
304.3
432.4
99.1
1,148.6
500.0
2.30
Ill
95.4
1,155.8
1,251.2
118.6
2.46
507.9
296.6
305.6
435.0
2.28
IV
122.1
514.1
307.8
434.8
1,163.6
1,261.9
2.45
2.26
298.9
98.3
124.1
2.43
2.24
304.9
98.4
1,168.2
1,266.6
522.1
438.3 300.9
1996:1
II
124.4
302.4
309.4
2.41
1,173.2
1,280.2
531.3
437.0
107.0
2.21
III
1,292.7
441.4
1,183.5
126.0
315.6
109.2
535.0
2.42
2.21
300.5
IV
316.7
1,299.6
129.8
447.1
104.4
1,195.2
545.2
2.38
301.5
2.19
1,201.4
1997:1
129.0
2.37
306.7
316.3
108.4
1,309.8
553.0
2.17
449.3
II
454.1
1,214.1
131.9
316.3
1,323.3
2.37
311.9
559.1
2.17
109.2
Ill
1,229.4
1,339.9
134.8
318.1
569.7
2.35
317.8
458.6
110.5
2.16
1,348.4
IV
321.4
135.0
109.1
1,239.3
321.0
574.6
462.0
2.35
2.16
136.6
325.3
1,363.6
1998-1
2.34
324.8
466.1
110.8
1,252.8
582.3
2.15
||
1,366.5
138.9
323.6
2.31
590.6
326.0
469.1
108.9
1,257.6
2.13
Ill
471.1
1,369.1
139.1
323.0
103.9
1,265.2
596.0
2.30
332.0
2.12
1
Inventories at end of quarter. Quarter-to-quarter change calculated from this table is not the current-dollar change in business inventories (C8I) component of GDP. The former is the difference between two inventory stocks, each valued at their respective end-of-quarter
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 of general government and includes a small amount of final sales by farms. .
Note.—The industry classification of inventories is on an establishment basis. Estimates for nonfarm industries other than manufacturing
and trade for 1986 and earlier periods are based on the 1972 Standard Industrial Classification (SIC). Manufacturing estimates for 1981 and
earlier periods and trade estimates for 1966 and earlier periods are based on the 1972 SIC; later estimates for these industries are based on
the 1987 SIC. The resulting discontinuities are small.
Source: Department of Commerce, Bureau of Economic Analysis.




352

TABLE B-23.—Real inventories and final sales of domestic business, 1959-98
[Billions of chained (1992) dollars, except as noted; seasonally adjusted]
Inventories *
Quarter

Fourth quarter:
1959
I960
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

Nonfarm
Total2

Farm

Total2

Manufacturing

Wholesale
trade

Retail
trade

Other

Final
sales of
domestic
business3

Ratio of inventories
to final sales of
domestic business
Total

Nonfarm

59.4
89.1
2.78
37.6
148.2
303.6
2.10
56.5
144.3
90.7
63.6
312.4
2.80
38.3
57.9
150.6
2.13
147.0
2.74
62.3
318.6
92.9
2.08
153.5
40.1
59.3
155.1
94.4
66.7
336.7
2.73
40.1
165.2
2.09
160.8
61.9
95.7
70.3
353.1
2.08
2.70
42.2
171.5
169.5
66.3
74.2
180.4
92.0
2.09
2.65
178.4
372.6
45.0
70.3
94.4
81.7
2.59
48.4
74.7
192.6
400.3
2.06
194.2
199.4
88.5
217.6
445.0
93.1
2.23
2.73
49.8
84.6
88.4
234.4
95.6
2.30
2.80
206.4
91.0
474.5
56.9
99.2
2.28
2.77
95.8
245.0
497.5
217.8
58.1
94.1
2.37
61.4
102.3
524.8
99.2
2.85
221.7
256.0
100.6
102.4
2.38
2.84
533.0
96.8
256.0
224.0
62.6
108.0
551.1
2.35
2.81
234.4
116.1
253.1
100.8
64.9
113.8
2.28
2.71
252.7
124.9
259.8
576.5
101.1
69.9
119.0
2.36
2.76
77.4
134.8
122.4
277.7
615.0
102.5
261.1
2.54
2.93
132.9
296.8
646.8
97.8
254.6
80.8
133.0
2.37
2.77
126.3
289.7
103.9
265.6
127.5
628.3
81.5
2.38
2.75
303.4
660.4
81.7
136.0
102.5
277.5
135.9
2.37
2.75
143.7
291.7
311.8
692.1
109.3
87.1
146.5
2.71
2.35
153.1
111.8
311.9
93.2
158.8
325.8
733.6
2.72
115.7
2.36
153.1
338.5
752.8
319.3
91.5
166.3
2.35
2.69
108.6
319.9
88.7
148.9
171.3
338.9
751.3
774.1
2.80
2.43
318.9
94.4
157.2
343.5
118.2
176.0
2.75
2.35
319.2
91.7
153.3
174.1
329.5
125.5
751.3
2.26
2.58
92.4
763.4
338.2
166.2
173.5
329.5
108.6
2.34
186.4
2.66
355.7
96.7
358.4
832.4
115.0
189.6
2.31
2.63
370.8
105.1
201.3
194.8
353.9
855.8
121.8
2.57
2.26
204.4
349.7
384.3
868.2
120.2
111.6
201.9
2.58
2.29
393.8
223.9
354.8
115.1
208.5
902.5
111.5
2.49
2.25
411.7
113.7
231.3
364.3
98.9
217.8
927.2
2.52
2.28
420.7
245.0
383.5
960.7
98.9
108.9
223.3
2.54
2.30
968.4
101.4
421.8
103.4
243.5
231.3
390.1
2.31
2.55
419.2
243.3
384.0
99.7
103.0
236.9
967.2
2.21
2.45
438.1
104.7
102.6
247.2
244.7
374.8
969.2
2.25
2.48
102.7
1993:1
435.8
100.6
256.5
246.0
376.1
979.2
II
2.24
2.47
439.4
378.4
258.0
247.1
985.1
101.5
101.1
2.24
2.47
380.4
442.0
249.7
98.0
Ill
102.3
259.6
992.0
IV
97.4
2.23
2.45
448.2
263.0
380.9
998.7
104.6
250.2
2.24
2.47
1994:1
449.7
266.2
384.7
100.8
106.5
251.2
1,008.6
||
272.7
2.25
2.49
387.3
105.0
453.9
107.9
255.6
1,023.5
Ill
2.25
2.49
275.8
259.4
1,033.1
107.9
458.2
108.3
389.6
2.27
IV
2.50
279.9
265.7
392.0
1,047.7
109.1
461.9
110.1
2.29
2.52
106.7
464.8
284.9
270.7
395.9
1,063.4
1995:1
111.8
||
2.29
2.51
288.9
273.7
398.9
102.6
467.8
111.0
1,072.6
2.28
2.49
111.4
473.0
289.6
277.2
401.9
1,080.2
98.3
Ill
IV
2.28
2.48
278.7
403.2
1,085.4
98.1
476.9
113.2
290.3
2.26
2.46
481.9
113.4
287.3
280.0
407.3
1,088.0
99.2
1996:1
II
2.24
290.4
2.45
488.4
280.7
407.6
1,091.8
102.1
113.6
Ill
2.25
411.4
104.4
2.46
114.4
295.3
489.6
280.3
1,101.5
2.44
2.23
496.9
296.1
415.2
1,108.7
105.2
IV
114.5
282.8
2.24
2.45
296.0
420.2
1,122.7
105.1
1997:1
500.8
118.0
288.6
II
2.47
2.26
504.3
120.8
297.5
295.6
426.8
1,140.7
106.8
Ill
2.25
2.46
512.3
122.4
298.7
430.8
1,151.7
299.8
108.6
2.48
2.26
515.5
124.4
435.2
1,167.4
109.6
IV
302.9
304.9
2.28
2.49
521.6
127.3
307.3
311.6
442.8
1,188.9
110.9
1998:1
2.26
2.48
528.4
304.3
448.7
1,196.4
II
129.9
313.5
113.1
2.27
III
2.49
532.2
302.9
453.5
1,208.1
115.3
130.9
320.9
1
Inventories at end of quarter. Quarter-to-q
from this table are at quarterly rates, whereas the 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 of general government and includes a small amount of final sales by farms.
Note.—The industry classification of inventories is on an establishment basis. Estimates for nonfarm industries other than manufacturing
and trade for 1986 and earlier periods are based on the 1972 Standard Industrial Classification (SIC). Manufacturing estimates for 1981 and
earlier periods and trade estimates for 1966 and earlier periods are based on the 1972 SIC; later estimates for these industries are based on
the 1987 SIC. The resulting discontinuities are small.
See Survey of Current Business, Table 5.13, for detailed information on calculation of the chained (1992) dollar inventory series.
Source: Department of Commerce, Bureau of Economic Analysis.
400.8
411.3
419.9
439.4
457.2
472.7
503.0
545.4
577.5
604.3
631.3
636.7
659.0
683.7
721.5
744.8
734.6
764.4
803.2
846.6
869.9
859.7
892.8
877.2
871.5
946.8
977.0
988.1
1,014.5
1,026.2
1,059.5
1,069.9
1,066.9
1,073.9
1,082.0
1,086.1
1,090.0
1,096.0
1,109.3
1,128.2
1,140.7
1,156.6
1,170.1
1,175.5
1,179.2
1,184.2
1,187.8
1,194.3
1,206.2
1,214.3
1,228.3
1,248.1
1,260.8
1,277.5
1,300.3
1,309.9
1,323.8




353

TABLE B-24.—Foreign transactions in the national income and product accounts, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]

Year or
quarter

Receipts from rest of the world
Exports of goods and
Reservices
ceipts
of
Total '
factor
2
Total Goods Serv-2
ices
come

Payments to rest of the world
Transfer payments
Pay(net)
ments
_
of
factor
From
Servinpersons governTotal
ment
ices2 come
(net)
(net)

Imports of goods and
services
Total
Total

2

Goods

0.4
2.4
15.3
1.5
4.3 25.0 22.3
7.0
4.2
25.0 20.6 16.5
2.4
15.2
.5
1.8
5.0 30.2
7.6
4.8
22.8
30.2 25.3 20.5
5.4 31.4
22.7
1.8
2.7
7.6
5.1
15.1
31.4 26.0 20.9
.5
1.8
2.8
6.1 33.5 25.0 16.9
8.1
5.7
.5
33.5 27.4 21.7
17.7
2.1
8.4
.6
2.8
6.6 36.1 26.1
6.1
36.1 29.4 23.3
.7
2.4
8.7
3.0
7.4 41.0
6.9
28.1 19.4
41.0 33.6 26.7
2.7
9.3
.8
3.0
8.1 43.5 31.5 22.2
7.6
43.5 35.4 27.8
3.1
10.7
26.3
.8
3.2
8.2
37.1
47.2 38.9 30.7
8.3 47.2
3.4
3.4
1.0
12.2
9.2
27.8
32.2
8.9 50.2
39.9
50.2 41.4
4.1
33.9 12.6
1.0
3.2
10.3 55.6
46.6
55.6 45.3 35.3 10.0
1.1
5.8
3.2
11.9 61.2
50.5 36.8 13.7
61.2 49.3 38.3 11.0
12.4
1.2
6.6
13.0 70.8 55.8 40.9
14.9
70.8 57.0 44.5
3.6
6.4
4.1
14.1
15.8
74.2 62.3
46.6
1.3
13.8
74.2 59.3 45.6
1.3
7.7
16.4 83.4 74.2
56.9
83.4 66.2 51.8 14.4
4.3
17.3
1.4
91.2
71.8 19.3 11.1
4.6
23.8 115.6
17.8
115.6 91.8 73.9
5.4
22.9
1.2
14.6
30.3 152.6 127.5 104.5
152.6 124.3 101.0 23.3
5.4
23.7
99.0
26.7
164.4 136.3 109.6
1.2
14.9
28.2 164.4 122.7
15.7
181.7 148.9 117.8 31.1
6.0
26.5
1.2
32.9 181.7 151.1 124.6
17.2
29.8
35.1
196.6 158.8 123.7
1.2
6.0
37.9 196.6 182.4 152.6
6.4
47.4 233.5 212.3 177.4
1.3
34.8 25.3
233.5 186.1 145.4 40.7
70.4 300.3 252.7 212.8
1.4
37.5
7.5
39.9
300.3 228.7 184.0 44.7
9.0
81.8 361.9 293.8 248.6 45.3 46.5
361.9 278.9 225.8 53.2
1.6
60.9
13.4
63.7
399.5 302.8 239.1
5.2
95.6 399.5 317.8 267.8 49.9
16.7
969 379.5 303.2 250.5 52.6
6.2
65.8
379.5 282.6 215.0 67.6
17.7
374.6 277.0 207.3 69.7
6.5
97.6 374.6 328.6 272.7 56.0 65.6
7.4
118.7 421.8 405.1 336.3 68.8 87.6
421.8 303.1 225.6 77.5
20.6
87.71 23.1
411.1 303.0 222.2 80.8 108.1 411.1 417.2 343.3 73.9
7.8
427.1 320.7 226.0 94.7
8.1
24.3
93.6
106.5 427.1 452.2 370.0 82.2
8.7
23.3
93.1 107.1
481.8 365.7 257.5 108.2 116.0 481.8 507.9 414.8
144.7 591.9 553.2 452.1 101.1 131.7
9.1
25.1
591.9 447.2 325.8 121.4
26.1
678.3 509.3 371.7 137.6
9.6
169.0 678.3 589.7 484.5 105.3 154.8
28.4
734.8 557.3 398.5 158.8
9.9
177.5 734.8 628.6 508.0 120.6 156.4
10.4
156.2 757.9 622.3 500.7 121.6 140.5 -12.1
757.9 601.8 426.4 175.4
7773 6394 4487 190.7
32.0
137.9 777.3 669.0 544.9 124.1 126.8
9.6
809.4 658.6 459.7 198.9 150.8 809.4 719.3 592.8 126.5 132.1
13.3
36.6
897.7 721.2 509.6 211.6
14.2
37.3
176.5 897.7 812.1 676.8 135.3 168.3
15.7
34.2
1,044.6 819.4 583.8 235.6 225.2 1,044.6 903.3 757.6 145.7 207.6
40.4
16.9
1,109.3 873.8 618.3 255.5 235.5 1,109.3 965.0 809.0 156.0 223.1
1,230.9 965.4 688.3 277.1
18.9
39.5
265.5 1,230.9 1,058.8 888.3 170.4 273.5
792.7 647.1 451.2 195.8 145.6 792.7 693.7 570.8 122.9 122.1
13.1
31.1
1993:1
II
13.1
33.6
810.0 661.2 462.2 199.0
148.9 810.0 718.7 593.2 125.4 132.7
Ill .... 800.0 646.8 447.9 198.9 153.2 800.0 718.9 592.8 126.1 130.9
13.4
35.0
13.7
IV ... 835.0 679.4 477.7 201.7
46.6
155.6 835.0 746.0 614.4 131.6 142.7
1994:1
14.0
31.9
839.6 678.5 475.7 202.8 161.1 839.6 755.1 622.4 132.8 144.2
II
14.1
878.3 710.1 499.2 210.9
33.6
168.3 878.3 797.9 663.8 134.1 159.3
Ill .... 914.4 732.6 518.9 213.7
14.2
36.5
181.9 914.4 836.0 699.2 136.9 176.1
IV ... 958.2 763.7 544.6 219.0
14.4
47.3
194.6 958.2 859.2 721.7 137.5 193.5
1,004.7 787.8 563.1 224.7 216.9 1,004.7 882.5 740.3 142.2 198.4
15.2
34.5
1995:1
II
32.4
1,030.8 803.4 574.2 229.3 227.4 1,030.8 911.4 766.1 145.3 205.0
14.8
Ill .... 1,059.7 835.1 593.3 241.7
15.6
34.0
224.6 1,059.7 909.6 762.51 147.1 216.2
IV .... 1,083.1 851.5 604.8 246.7 231.6 1,083.1 909.9 761.6 148.2 210.9
17.2
35.9
1996:1
1,086.3 856.6 609.9 246.7 229.7 1,086.3 932.3 780.2 152.1 210.0
15.8
41.8
II
1,092.3 863.0 609.5 253.4 229.3 1,092.3 957.0 802.7 154.2 215.2
35.0
16.6
Ill .... 1,096.1 861.4 612.6 248.9 234.7 1,096.1 976.9 818.3 158.6 229.5
35.9
16.6
IV .... 1,162.4 914.2 641.2 273.0 248.2 1,162.4 993.8 834.8 159.0 237.6
18.5
48.9
1997:1
35.1
1,183.3 930.2 661.4 268.8 253.1 1,183.3 1,023.5 859.1 164.4 255.6
18.0
1,229.4 961.1 682.9 278.2 268.3 1,229.4 1,047.9 879.2 168.7 269.4
II
18.2
36.0
Ill .... 1,256.0 981.7 700.2 281.5 274.3 1,256.0 1,076.4 902.7 173.6 283.0
19.5
37.6
IV .... 1,254.9 988.6 708.9 279.7 266.3 1,254.9 1,087.4 912.4 174.9 285.9
49.4
19.8
1998:1
1,243.6 973.3 694.5 278.8 270.3 1,243.6 1,097.1 920.9 176.2 285.1
19.2
37.0
II
1,220.2 949.6 668.8 280.8 270.6 1,220.2 1,108.9 931.8 177.1 289.3
19.9
36.8
Ill .... 1,201.2 936.2 663.3 272.9 265.0 1,201.2 1,101.7 924.7 177.0 292.1
20.0
39.1
1
Includes capital grants received by the United States (net), not shown separately. See Table B-32 for data.
2
Certain goods, primarily military equipment purchased and sold by the Federal Government, are included in
1986, repairs and alterations of equipment were reclassified from goods to services.
Source-. Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997




354

1.8
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
7.0
7.8
9.7
12.2
12.9
11.2
11.4
11.4
13.3
-27.9
16.6
17.3
16.4
11.4
16.2
12.7
12.6
14.8
15.5
26.2
11.2
12.9
15.7
25.8
11.9
10.8
11.2
11.6
19.0
11.0
11.8
22.8
9.5
9.9
9.9
21.5
9.9
9.0
11.2

From
business

0.1
.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
3.4
3.4
3.5
3.1
3.3
3.3
4.6
5.1
5.2
5.4
5.8
6.0
6.8
7.1
7.3
8.0
5.5
5.7
6.2
6.7
6.7
6.6
6.7
7.1
7.4
6.9
7.2
7.0
7.0
7.4
7.4
7.6
7.6
8.0
8.1
8.1
7.9
7.9
8.0

Net
foreign
investment
-1.2
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
8.9
-9.0
-10.4
2.6
12.5
7.4
-6.1
-37.3
-91.5
-116.9
-142.9
-156.4
-118.1
-92.4
-78.6
7.3
-50.5
-78.6
-120.0
-100.6
-119.2
-140.9
-54.2
-74.9
-84.9
-100.4
-91.6
-112.5
-134.2
-141.8
-110.7
-118.0
-100.1
-73.5
-97.8
-114.9
-146.2
-118.0
-130.9
-123.9
-141.0
-167.8
-175.6
-214.8
-231.6

services. Beginning with

TABLE B—25.—Real exports and imports of goods and services and receipts and payments of factor
income, 1982-98
[Billions of chained (1992) dollars; quarterly data at seasonally adjusted annual rates]
Exports of goods and services
Goods1
Year or quarter

Total

Total

Durable
goods

Nondurable
goods

Services1

Receipts
of
factor
income

Imports of goods and services
Goods1
Total

Total

Durable
goods

Nondurable
goods

Services1

Payments
of
factor
income

1982
1983
1984

311.4
303.3
328.4

213.5
207.3
223.7

117.0
114.6
127.0

98.4
94.4
98.1

98.5
96.8
105.9

143.5
138.2
160.3

325.5
366.6
455.7

257.4
292.4
363.1

138.4
166.8
221.9

115.6
123.1
140.2

68.9
74.4
92.9

100.7
95.9
121.9

1985
1986
1987
1988
1989

337.3
362.2
402.0
465.8
520.2

231.7
243.6
270.5
321.4
361.7

137.3
145.3
165.7
205.5
236.7

95.3
99.1
105.0
115.8
124.9

106.1
120.3
133.4
145.0
158.7

140.5
134.6
141.9
170.2
189.9

485.2
526.1
558.2
580.2
603.0

385.9
425.5
445.2
463.2
482.7

244.1
266.7
278.5
290.1
302.6

142.0
158.8
166.8
173.2
180.1

99.7
100.2
113.1
117.1
120.2

116.8
120.9
133.0
157.1
176.7

1990
1991
1992
1993
1994

564.4
599.9
639.4
658.2
712.4

391.6
419.2
448.7
463.7
509.8

260.0
279.6
300.9
317.5
356.5

131.6
139.6
147.8
146.2
153.5

173.1
180.8
190.7
194.5
202.9

190.6
161.1
137.9
147.3
168.4

626.3
622.2
669.0
728.4
817.0

497.3
497.1
544.9
602.0
684.1

310.9
312.7
346.4
389.4
456.0

186.4
184.4
198.4
212.5
227.8

129.4
125.3
124.1
126.5
133.2

170.2
145.7
126.8
128.8
160.0

1995
1996
1997

792.6
860.0
970.0

573.7
629.4
726.5

410.9
464.1
554.5

164.1
169.3
180.8

219.5
231.8
247.0

209.9 889.0
214.8 971.2
238.0 1,106.1

749.7
824.7
945.7

512.3
571.7
667.7

237.2
253.4
280.3

139.7
147.3
161.8

191.9
200.9
240.7

1993:1
II
Ill
IV

647.2
660.1
646.3
679.1

454.1
465.3
452.0
483.5

308.0
318.3
309.8
334.0

146.1
147.0
142.1
149.6

193.1
194.8
194.2
195.9

143.3
145.6
149.3
150.8

701.9
722.7
729.4
759.7

578.7
597.8
603.1
628.3

372.9
383.5
389.5
411.8

205.7
214.3
213.5
216.4

123.3
124.9
126.3
131.4

119.9
129.6
127.5
138.0

1994:1
II
III
IV

676.0
704.1
722.1
747.3

479.1
501.2
518.4
540.4

334.8
352.6
361.8
376.9

144.6
149.1
156.8
163.6

197.0
203.1
204.1
207.5

155.3
161.3
173.0
184.2

773.6
808.0
833.2
853.2

641.4
674.6
700.0
720.4

421.8
447.6
464.8
489.7

219.4
226.6
234.8
230.4

132.3
133.6
133.5
133.2

139.3
152.3
166.9
181.4

1995-1
II . ..
Ill
IV

763.9
774.0
806.3
826.1

552.4
561.0
582.4
598.9

390.3
400.7
419.2
433.5

162.7
161.4
164.9
167.5

212.1
213.6
224.4
227.9

203.9
212.4
208.9
214.3

873.4
888.7
893.1
900.9

734.2
750.8
754.1
759.9

500.6
512.5
512.2
524.0

233.3
238.1
241.4
236.1

139.6
138.4
139.5
141.3

185.3
190.1
199.1
193.1

1996:1
II
III
IV

833.6
845.5
849.9
911.1

608.9
615.0
626.4
667.4

442.0
453.4
465.1
495.7

169.3
165.4
165.9
176.7

225.6
231.2
225.3
244.9

211.1 929.1
209.9 958.9
213.5 990.0
224.5 1,007.0

785.0
813.5
841.3
859.0

543.8
561.7
583.2
598.1

241.5
251.9
258.5
261.7

144.5
146.0
149.5
149.0

190.8
194.6
206.1
212.0

1997-1
II
Ill
IV

929.4
963.6
988.1
998.8

691.4
719.1
740.6
754.9

521.0
548.6
570.4
578.1

177.2
179.2
180.4
186.3

240.7
247.5
251.1
248.6

227.8
241.0
245.6
237.6

896.8
937.4
966.7
981.8

633.8
659.2
681.2
696.6

265.2
280.0
287.7
288.1

155.3
159.2
165.2
167.5

226.1
237.5
248.9
250.5

297.6
306.7
309.9
services.

171.3 249.6
171.0 252.8
170.8 254.6
Beginning with

1,050.9
1,095.2
1,130.5
1,147.8

991.9 748.5 577.9 181.1 247.8 241.0 1,190.4 1,021.0 726.9
||
972.1 726.3 556.2 179.3 248.8 241.0 1,217.3 1,048.8 745.5
III
965.3 727.3 562.9 174.9 242.1 235.7 1,224.3 1,056.3 749.8
1
Certain goods, primarily military equipment purchased and sold by the Federal Government, are included in
1986, repairs and alterations of equipment were reclassified from goods to services.
Note.—See Table &-2 for data for total exports of goods and services and total imports of goods and services for
Source: Department of Commerce, Bureau of Economic Analysis.

1998:1




355

1959-81.

TABLE B-26.—Relation of gross domestic product, gross national product, net national product, and
national income, 1959—98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]

Year or
quarter

1959
1960
1961
1962
1963
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
1993
1994
1995
1996
1997

1964 ..:.:..::

1993:1

II
Ill
IV

1994:1

II
Ill
IV
1995-1
II
Ill
IV
1996:1

II
Ill
IV

1997:1

II
Ill
IV

1998:1

II
Ill

1 ace
Less.PlusPayReceipts ments
Gross of factor of factor Equals:
Gross
domestic income income national
from
to
product rest of
product
rest of
the
tho
me
world
world

507.2
526.6
544.8
585.2
617.4
663.0
719.1
787.8
833.6
910.6
982.2
1,035.6
1,125.4
1,237.3
13826
1,496.9
1,630.6
1,819.0
2,026.9
2,291.4
2,557.5
27842
3,115.9
32421
3,514'.5
3,902.4
4,180.7
4,422.2
4,692.3
5,049.6
5,438.7
5,743.8
5,916.7
6,244.4
6,558.1
6,947.0
7,269.6
7,661.6
8,110.9
6,444.5
6,509.1
6,574.6
6,704.2
6,794.3
6,911.4
6,986.5
7,095.7
7,170.8
7,210.9
7,304.8
7,391.9
7,495.3
7,629.2
7,703.4
7,818.4
7,955.0
8,063.4
8,170.8
8,254.5
8,384.2
8,440.6
8,537.9

4.3
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
238
30.3
28.2
32.9
37.9
47.4
70.4
818
95.6
969
97.6
118.7
108.1
106.5
116.0
144.7
169.0
177.5
156.2
137.9
150.8
176.5
225.2 1
235.5
265.5
145.6
148.9
153.2
155.6
161.1
168.3
181.9
194.6
216.9
227.4
224.6
231.6
229.7
229.3
234.7
248.2
253.1
268.3
274.3
266.3
270.3
270.6
265.0

1.5
1.8
1.8
1.8
2.1
2.4
2.7
3.1
3.4
4.1
5.8
6.6
6.4
7.7
11 1
14.6
14.9
15.7
17.2
25.3
37.5
465
60.9
658
65.6
87.6
87.7
93.6
107.1
131.7
154.8
156.4
140.5
126.8
132.1
168.3
207.6
223.1
273.5
122.1
132.7
130.9
142.7
144.2
159.3
176.1
193.5
198.4
205.0
216.2
210.9
210.0
215.2
229.5
237.6
255.6
269.4
283.0
285.9
285.1
289.3
292.1

510.1
529.8
548.4
589.4
621.9
668.0
724.5
793.0
839.1
916.7
988.4
1,042.0
1,133.1
1,246.0
13954
1,512.6
1,643.9
1,836.1
2,047.5
2,313.5
2,590.4
28195
3!l50.6
32732
3!546:5
3,933.5
4,201.0
4,435.1
4,701.3
5,062.6
5,452.8
5,764.9
5,932.4
6,255.5
6,576.8
6,955.2
7,287.1
7,674.0
8,102.9
6,468.1
6,525.3
6,596.9
6,717.1
6,811.2
6,920.3
6,992.3
7,096.8
7,189.3
7,233.3
7,313.2
7,412.6
7,515.0
7,643.3
7,708.6
7,829.0
7,952.4
8,062.3
8,162.0
8,234.9
8,369.4
8,421.8
8,510.9

Total

54.6
56.6
58.1
60.4
63.0
66.0
70.2
75.9
82.3
89.8
98.3
107.0
116.5
127.6
1400
162.5
188.7
206.0
228.6
258.3
296.7
3394
388^5
4243
445^3
461.5
486.6
517.9
545.8
582.2
625.4
651.5
679.9
713.5
727.9
777.5
800.8
832.0
871.8
721.8
720.7
735.3
733.6
823.3
753.1
762.2
771.4
783.1
794.4
803.5
822.2
818.6
826.4
836.5
846.4
856.1
866.5
877.0
887.6
894.5
902.3
912.3

Equals: Indirect BusiNet
busi- ness Statistical
naness
Govern- tional tax and trans- disfer crepanPrivate ment product
nontax paycy
liability ments

40.5
42.1
43.1
44.6
46.3
48.6
52.0
56.6
61.5
67.3
74.3
81.2
88.9
97.8
1071
124.5
146.3
161.3
181.0
206.8
239.9
2760
318.0
3462
365!2
378.4
399.5
424.4
447.0
478.0
515.1
534.3
556.4
585.4
594.5
638.6
657.0
684.3
720.2
590.5
588.1
601.1
598.1
685.2
614.9
623.3
631.2
641.2
651.1
659.2
676.4
672.2
679.2
688.5
697.3
705.8
714.9
725.2
734.7
741.1
748.5
757.3

Source: Department of Commerce, Bureau of Economic Analysis.




Less:

Less: Consumption of
capiiai

356

14.1
14.5
15.0
15.8
16.7
17.4
18.2
19.3
20.8
22.4
24.1
25.8
27.6
29.9
329
38.0
42.4
44.7
47.6
51.5
56.8
634
70'.4
781
Soil
83.1
87.1
93.5
98.7
104.2
110.3
117.3
123.5
128.2
133.4
138.8
143.8
147.7
151.6
131.3
132.7
134.2
135.5
138.1
138.1
138.9
140.2
142.0
143.3
144.3
145.7
146.4
147.2
148.0
149.2
150.3
151.6
151.8
152.9
153.4
153.7
155.0

455.5
473.2
490.3
529.0
559.0
602.1
654.3
717.1
756.7
827.0
890.0
935.0
1,016.6
1,118.3
12554
1,350.0
1,455.2
1,630.0
1,818.9
2,055.2
2,293.6
24801
2762.1
28489
3401.3
3,472.0
3,714.5
3,917.2
4,155.5
4,480.5
4,827.4
5,113.4
5,252.5
5,542.0
5,848.9
6,177.7
6,486.3
6,842.0
7,231.1
5,746.2
5,804.6
5,861.5
5,983.5
5,987.9
6,167.3
6,230.1
6,325.4
6,406.2
6,438.9
6,509.7
6,590.5
6,696.4
6,816.9
6,872.1
6,982.6
7,096.3
7,195.8
7,285.1
7,347.3
7,474.9
7,519.6
7,598.5

41.9
45.5
48.1
51.7
54.7
58.8
62.7
65.4
70.4
79.0
86.6
94.3
103.6
111.4
1210
129.3
140.0
151.6
165.5
177.8
188.7
2120
249.3
2564
280.1
309.5
329.6
344.7
364.8
385.5
414.7
442.6
478.1
505.6
532.5
568.5
581.2
606.4
627.2
520.6
525.9
534.4
549.4
556.9
564.4
573.2
579.4
579.1
580.6
579.6
585.6
593.9
599.7
603.8
628.3
617.2
625.0
632.0
634.5
641.9
647.7
656.5

1.4 -1.6
1.4 -3.2
1.5 -2.8
1.6 -1.8
1.8 -3.0
2.0 -1.5
2.2
-.8
33
2.3
2.5
1.3
2.8
.9
3.1 -1.5
3.2
1.9
3.4
6.1
4.3
3.9
34
45
5.5
5.0
12.1
5.2
6.5
19.9
18.2
7.3
8.2
18.1
9.9
28.2
112
276
13.4
K9
152 -25
16.2 37J
18.6
5.0
2.4
20.9
23.9
23.3
24.2 -15.4
25.4 -47.3
26.3
13.2
17.4
26.5
26.3
10.1
28.4
44.8
28.2
52.6
30.5
14.6
32.9 -26.5
33.8 -32.2
35.1 -55.8
27.8
71.0
27.7
46.9
28.2
47.5
29.0 45.0
29.7
6.3
30.1 42.4
30.7
15.2
31.5 -5.4
32.5
3.1
32.6 -22.7
33.3 -43.0
33.4 -43.2
33.2 -26.3
33.7 -20.6
33.9 -49.3
34.2 -32.6
34.5 -43.1
35.0 -47.7
35.4 -65.1
35.6 -67.3
35.6 -54.1
36.0 -85.7
36.3 -102.0

PIUS:

Subsidies
less cur- Equals-.
rent sur- National
plus of
govern- income
ment
enterprises
0.1
.3
1.3
1.5
.9
1.4
1.7
3.0
2.9
3.1
3.6
4.9
5.1
6.4
59
4'.5
8.1
7.4
10.1
11.1
11.7
152
16i9
21 1
25^6
25.5
21.9
25.1
31.0
28.5
24.2
25.3
23.6
27.1
31.1
26.6
25.1
22.0
21.9
33.0
32.8
30.2
28.5
28.1
25.9
25.1
27.4
24.6
24.9
25.5
25.2
24.0
22.8
20.0
21.2
21.3
21.0
22.0
23.4
23.5
23.9
24.6

413.9
429.8
444.8
479.0
506.3
544.1
592.0
648.9
685.5
747.3
805.4
840.6
908.6
1,005.3
1 1323
l',214.9
1,305.9
1,459.4
1,638.0
18623
2,078.5
22445
2*501 4
26008
2>93:3
3,164.4
3,383.4
3,550.3
3,813.0
4,145.3
4,397.3
4,652.1
4,761.6
4,990.4
5,266.8
5,590.7
5,923.7
6,256.0
6,646.5
5,159.8
5,236.9
5,281.7
5,388.7
5,423.2
5,556.3
5,636.1
5,747.3
5,816.1
5,873.3
5,965.3
6,039.8
6,119.6
6,226.8
6,303.6
6,373.9
6,509.0
6,604.5
6,704.8
6,767.9
6,875.0
6,945.5
7,032.3

TABLE B-27.—Relation of national income and personal income, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]

PI US:

L 8SS:

Year or quarter

National
income

Corporate
profits
with
inventory
valuation
Net
and
capital interest
consumption
adjustments

Contributions
for
social
insurance

Wage
accruals
less
disbursements

413.9
10.2
18.8
52.9
51.4
429.8
11.2
21.9
444.8
22.9
52.5
13.1
25.4
4790
605
146
28.5
506.3
66.3
16.1
5441
301
733
182
84.1
592.0
31.6
21.1
6489
406
898
243
87.4
685.5
28.1
45.5
504
7473
942
304
805.4
90.9
57.8
33.6
840.6
78.7
62.0
40.0
908.6
45.4
69.6
92.0
1,005.3
106.7
79.5
49.3
1,132.3
97.9
120.1
56.5
111.7
1 214.9
109.2
71.8
121.1
128.2
1,305.9
80.0
1 459.4
137.7
154.9
85.1
155.4
1,638.0
184.3
100.7
1 862.3
177.0
209.0
120.5
204.2
2,078.5
213.1
150.3
22445
2250
1883
1919
2*501.4
207.0
234.5
261.6
2,600.8
182.3
264.9
280.6
2 793.3
235.2
2759
301.9
3,164.4
345.5
290.1 318.5
3,383.4
304.0
375.9
337.2
3,550.3
293.8
402.0
363.1
333.2
423.3
3813.0
3722
4,145.3
462.8
382.1
398.9
491.2
4,397.3
380.0
456.6
4 652.1
397.1 467.3
518.5
4,761.6
411.3 448.0
543.5
4 990.4
571.4
428.0
414.3
52668
4928
4025
5960
5590.7
570.5
4123
630.5
5,923.7
672.4
658.9
420.6
6 256.0
750.4
688.0
418.6
66465
8179 4320
7270
5,159.8
459.2
585.3
411.2
5,236.9
478.2
594.0
404.6
5987
52817
4928
3989
5'388.7
395.4
606.1
541.2
5,423.2
512.0 397.2
619.2
1994:1
II
628.2
5,556.3
562.0
405.6
633.4
5 636.1
590.1
4156
Ill ...
5,747.3
617.7 430.7
641.2
IV
650.5
58161
6293
4269
1995-1
II
655.1
5',873.3
653.9
420.2
5 965.3
662.3
6986
4152
Ill
IV
667.7
6*039.8
707.8
420.2
673.4
6,119.6
735.9
419.2
1996:1
II
684.2
6,226.8
748.3
419.7
Ill
6,303.6
755.4
693.0
418.1
IV
6,373.9
762.0
417.5
701.3
430.4
6509.0
794.3
714.0
1997-1
II
722.1
6,604.5
815.5
431.8
Ill
6,704.8
730.8
840.9
433.3
6 767.9
740.9
4324
8208
IV
7550
68750
8292
4405
1998- 1
||
6*945.5
820.6
447.1
762.9
III
771.6
7,032.3
827.0
454.0
Source: Department of Commerce, Bureau of Economic Analysis.

1959
I960
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
1993
1994
1995
1996
1997
1993:1
II
Ill
IV




357

0.0
.0
.0
.0
.0
.0
.0
0
.0
0
.0
.0
.6
.0
-.1
.1
.1
-.2
0
.0
.2
-.2
.0
.0
.0
.0
.1
-.1
-15.8
44
13.3
13.4
9.3
3.7
70.1
-.1
_.l
-52.2
52.4
.3
.3
13.4
13.4
13.4
13.4
9.3
9.3
9.3
9.3
3.7
3.7
3.7
3.7
4.0
4.0
4.0

Equals:

Govern- Business
ment
Personal Personal transfer transfer Personal
interest dividend payments payments income
to
income income
to
persons persons

22.7
25.0
26.9
29.3
32.4
36.1
40.3
449
49.5
546
60.8
69.2
75.7
81.8
94.1
112.4
123.0
134.6
155.7
184.5
223.6
2747
337.2
379.2
403.2
472.3
508.4
543.3
560.0
595.5
674.5
704.4
699.2
667.2
6510
668.1
704.9
719.4
747.3
660.3
653.7
6478
642.1
641.4
656.4
674.1
700.4
702.3
701.5
702.6
713.2
713.5
715.9
721.5
726.8
740.1
745.7
750.5
753.0
757.0
763.0
769.2

12.7
13.4
14.0
15.0
16.1
18.0
20.2
20.9
22.1
245
25.1
23.5
23.5
25.5
27.7
29.6
29.2
35.0
39.5
44.3
50.5
575
67.2
63.8
71.0
75.4
79.4
86.3
90.2
104.2
126.3
134.9
137.7
137.9
1471
171.0
192.8
248.2
260.3
140.5
144.1
149.3
154.6
159.1
166.8
174.5
183.6
185.0
186.7
191.8
207.9
234.4
243.5
255.4
259.6
259.7
259.9
260.4
261.3
261.6
262.1
263.0

25.7
27.5
31.5
32.6
34.5
36.0
39.1
436
52.3
606
67.5
81.8
97.0
108.4
124.1
147.4
185.7
202.8
217.5
234.8
262.8
3126
355.7
396.3
426.6
438.5
468.7
498.0
522.5
556.8
604.9
666.5
749.1
835.7
8898
930.9
990.1
1,041.5
1,083.3
874.9
886.0
895.3
903.1
917.3
926.2
934.8
945.4
971.1
985.6
996.9
1,006.7
1,028.4
1,039.1
1,045.6
1,053.1
1,073.5
1,079.7
1,086.7
1,093.1
1,111.2
1,117.7
1,124.6

1.3
1.3
1.4
1.5
1.7
1.8
2.0
21
2.3
25
2.8
2.8
3.0
3.4
3.8
4.0
4.5
5.5
5.9
6.8
7.9
88
10.2
11.8
12.8
15.1
17.8
20.7
20.8
20.8
21.1
21.3
20.8
22.5
221
23.7
25.8
26.4
27.2
22.3
22.0
22.0
22.2
23.1
23.6
24.0
24.4
25.1
25.7
26.1
26.3
26.2
26.3
26.5
26.7
26.9
27.1
27.3
27.5
27.8
28.1
28.3

394.4
412.5
430.0
457.0
480.0
514.5
556.7
605.7
650.7
714.5
779.3
837.1
900.2
988.8
1,107.5
1,215.9
1,319.0
1,459.4
1,616.1
1,825.9
2,055.8
2,293.0
2,568.5
2,724.1
2,894.4
3,211.4
3,440.9
3,639.6
3,877.8
4,178.9
4,496.4
4,796.2
4,965.6
5,255.7
5,481.0
5,757.9
6,072.1
6,425.2
6,784.0
5,332.1
5,466.1
5,505.7
5,620.3
5,583.3
5,733.1
5,804.1
5,911.2
5,979.5
6,030.3
6,093.5
6,185.0
6,284.3
6,390.0
6,476.7
6,549.8
6,666.7
6,743.6
6,820.9
6,904.9
7,003.9
7,081.9
7,160.8

TABLE B-28.—National income by type of income, 1959-98
[Billions of dollars,- quarterly data at seasonally adjusted annual rates]
Compensation of employees
Wages and salaries

Total

Year or
quarter

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
1993
1994
1995
1996
1997

National
income 1

413.9
429.8
444.8
479.0
506.3
544.1
592.0
648.9
685.5
747.3
805.4
840.6
908.6
1,005.3
1,132.3
1,214.9
1,305.9
1,459.4
1,638.0
1,862.3
2,078.5
2,244.5
2,501.4
2,600.8
2,793.3
3,164.4
3,383.4
3,550.3
3,813.0
4,145.3
4,397.3
4,652.1
4,761.6
4,990.4
5,266.8
5,590.7
5,923.7
6,256.0
6,646.5

Supplements to wages and
salaries

Government

Other

Total

Employer
contributions for
social
insurance

Other
labor
income

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
1,121.1
1,255.7
1,377.6
1,517.6
1,593.9
1,684.8
1,855.3
1,995.7
2,116.5
2,272.7
2,453.6
2,598.1
2,757.5
2,827.6
2,970.6
3,094.0
3,254.0
3,441.9
3,640.4
3,893.6

46.0
49.2
52.4
56.3
60.0
64.9
69.9
78.3
86.4
96.6
105.5
117.1
126.7
137.8
148.7
160.4
176.1
188.7
202.4
219.8
236.9
261.2
285.6
307.3
324.5
347.8
373.5
396.6
423.1
450.4
479.4
517.2
546.0
567.8
584.3
602.2
622.7
640.9
664.2

213.8
223.7
228.0
243.0
254.8
272.9
293.8
321.9
342.5
375.3
412.7
434.3
457.8
500.9
560.0
611.8
638.6
710.8
791.6
901.2
1,018.8
1,116.4
1,232.0
1,286.7
1,360.3
1,507.5
1,622.1
1,720.0
1,849.5
2,003.2
2,118.7
2,240.3
2,281.5
2,402.9
2,509.7
2,651.8
2,819.2
2,999.5
3,229.4

21.4
23.8
25.1
28.1
30.7
33.2
36.1
42.7
46.6
52.8
60.0
66.6
75.6
88.1
104.4
120.3
136.6
162.0
188.9
217.4
247.5
276.3
310.2
333.7
359.4
401.7
430.0
455.9
485.0
520.3
553.5
595.2
630.4
674.3
720.8
758.0
767.0
768.6
793.7

10.9
12.6
13.3
15.1
16.7
17.5
18.3
22.8
24.9
27.6
31.5
34.1
38.9
45.1
55.3
63.7
70.6
82.2
94.1
107.3
123.2
136.4
157.1
168.3
182.2
212.8
226.9
239.9
249.7
268.6
280.4
294.6
307.7
323.0
335.7
353.0
365.3
381.7
400.7

10.6
11.2
11.8
13.0
14.0
15.7
17.8
19.9
21.7
25.2
28.5
32.5
36.7
43.0
49.2
56.5
65.9
79.7
94.7
110.1
124.3
139.8
153.0
165.4
177.2
188.9
203.1
216.0
235.4
251.7
273.1
300.6
322.7
351.3
385.1
405.0
401.6
387.0
392.9

Total

281.2
296.7
305.6
327.4
345.5
371.0
399.8
443.0
475.5
524.7
578.3
618.1
660.1
726.8
813.1
892.4
951.3
1,061.5
1,182.9
1,338.5
1,503.3
1,653.9
1,827.8
1,927.6
2,044.2
2,257.0
2,425.7
2,572.4
2,757.7
2,973.9
3,151.6
3,352.8
3,457.9
3,644.9
3,814.9
4,012.0
4,208.9
4,409.0
4,687.2

Proprietors' income with inventory valuation
ana capnai consumption aajusimenis
Farm

Total

51.9
51.9
54.4
56.5
57.8
60.6
65.1
69.4
71.0
75.3
79.1
80.2
86.5
98.3
116.8
115.7
121.8
133.6
147.4
169.5
185.0
176.6
187.6
179.6
191.9
248.7
268.6
279.5
305.1
335.3
357.4
374.0
376.5
423.8
450.8
471.6
488.1
527.7
551.2

Total

Proprietors'
income2

Nonfarm

Total

10.9
11.8 40.9
11.5
12.3 40.5
12.1
12.9 42.3
12.1
12.9 44.4
12.7 45.8
11.9
10.8
11.6 49.8
13.0
13.9 52.1
14.1
15.0 55.3
12.7
13.7 58.2
12.8
13.8 62.5
14.6
15.8 64.6
14.8
16.1 65.4
15.4
16.9 71.1
19.5
21.2 78.8
32.6
34.5 84.2
25.8
28.4 89.8
24.1
27.5 97.7
18.6
22.6 115.0
17.5
21.8 129.9
22.2
27.0 147.4
25.3 | 31.1 159.7
12.2
19.4 164.4
21.9
30.2 165.7
23.4 165.1
14.5
4.1
12.8 187.8
23.2
31.6 225.5
23.6
31.5 245.0
24.2
32.1 255.3
31.5
39.2 273.6
27.5
35.1 307.8
36.3
43.9 321.1
35.4
43.3 338.6
29.3
37.2 347.2
37.1
45.2 386.7
32.4
40.4 418.4
36.9
44.8 434.7
22.4
30.3 465.6
38.9
46.7 488.8
35.5
43.0 515.8

Proprietors'
income3

40.2
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
85.9
93.4
99.2
116.3
131.0
148.7
160.9
165.2
160.7
158.2
172.2
199.7
210.5
215.9
238.2
272.0
284.8
312.7
325.0
363.1
392.7
415.0
442.7
461.6
485.3

29.7
37.7 410.6 383.5
373.8
440.3
330.0
581.1 2,464.5 703.8
334.7 382.3
452.2
36.3
581.5 2,497.7 717.0
44.2 416.0 389.0
337.1 389.5 446.2 25.6
586.3 2,524.7 726.6
33.8 420.6 394.8
588.4 2,552.0 735.8
394.9 464.4
38.0
340.9
46.0 426.5 403.4
1994:1
347.1 399.5 463.9 46.4
596.0 2,594.8 746.7
54.3 417.5 408.1
II ...
352.0 403.7
474.7
601.3 2,631.0 755.6
38.8
46.7 435.9 410.9
Ill ..
603.5 2,663.7 761.5
354.6
406.9 471.6
33.2
41.1 438.4 416.6
IV ..
608.0 2,717.8 768.1
358.3 409.8 476.1
29.1
37.0 447.0 424.3
1995:1
361.7 407.1 478.6 22.8
617.3 2,764.3 768.8
30.7 455.7 434.9
II ...
621.2 2,795.6 766.7
482.4
20.4
363.2
403.6
28.3 462.0 439.9
Ill ..
624.5 2,838.2 767.2
19.1
367.0 400.3 489.8
27.0 470.7 447.1
IV ..
627.8 2,878.7 765.1
395.6
501.5 27.4
369.5
35.3 474.1 449.0
1996:1
634.4 2,907.6 761.5
387.9
516.1 34.8
42.7 481.3 455.4
373.5
II ...
639.1 2,976.0 767.2
528.0
41.0
48.8 487.0 460.5
379.6 387.5
Ill ..
642.7 3,030.8 770.9
386.4
384.5
533.5 43.2
51.0 490.3 462.5
IV...
647.2 3,083.7 775.0
36.7
44.4 496.4 468.1
389.0 386.0 533.1
1997:1
36.4
44.1 504.1 474.6
657.0 3,145.2 784.1
394.5 389.7
540.5
II ...
398.4 391.5 549.9
45.4 512.1 481.5
661.6 3,197.6 790.0
37.8
402.7 393.6
Ill ..
666.7 3,252.6 796.2
556.5
36.3
43.8 520.2 489.8
IV ..
407.4 397.0 558.0
671.4 3,322.2 804.4
31.4
38.8 526.6 495.5
1998:1
414.1 402.8 564.2 27.4
679.5 3,386.4 816.8
34.7 536.8 502.9
II ...
685.8 3,435.8 823.5
417.9 405.7 571.7 27.7
35.0 544.0 511.6
Ill ..
692.7 3,488.4 830.5
422.1 408.4 576.1 25.2
516.9
32.3 550.9
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
1993:1

II ...
Ill ..
IV ..

5,159.8
5,236.9
5,281.7
5,388.7
5,423.2
5,556.3
5,636.1
5,747.3
5,816.1
5,873.3
5,965.3
6,039.8
6,119.6
6,226.8
6,303.6
6,373.9
6,509.0
6,604.5
6,704.8
6,767.9
6,875.0
6,945.5
7,032.3

3,749.3
3,796.3
3,837.6
3,876.2
3,937.4
3,988.0
4,028.7
4,093.9
4,150.3
4,183.6
4,230.0
4,271.6
4,303.5
4,382.4
4,444.4
4,505.9
4,586.3
4,649.2
4,715.5
4,798.0
4,882.8
4,945.2
5,011.6

3,045.5
3,079.3
3,111.0
3,140.4
3,190.7
3,232.3
3,267.2
3,325.9
3,381.6
3,416.8
3,462.7
3,506.5
3,542.0
3,615.2
3,673.6
3,730.9
3,802.2
3,859.2
3,919.3
3,993.6
4,065.9
4,121.6
4,181.1

B-26.
See next page for continuation of table.




358

TABLE B-28.—National income by type of income, 1959-98—Continued
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Rental income of persons
with capital consumption
adjustment
. Year or
quarter
Total

Capital
conRental
income sumption
of
persons adjustment

Corporate profits with inventory valuation and capital consumption adjustments
Profits with inventory valuation adjustment and without
capital consumption adjustment

Total

Profits
before
tax

1959
I960
1961
1962
1963
1964

17.7
-2.0
53.4
19.8
52.9 53.1
18.6
20.6
-2.1
51.4 51.0
51.1
-2.0
19.2
21.2
52.5 51.3
51.0
-2.0
56.4
20.0
22.0
60.5 56.4
20.7
-1.9
22.6
66.3 61.2
61.2
-2.0
21.0
23.0
73.3 67.5
68.0
84.1 77.6
-2.2
21.8
23.9
78.8
1966
22.5
-2.5
24.9
89.8 83.0
85.1
1967
-2.7
23.6
87.4 80.3
26.3
81.8
1968
22.7
-3.2
25.9
94.2 86.9
90.6
23.4
1969
-3.9
27.3
90.9 83.2
89.0
1970
23.6
-4.2
78.7 71.8
78.4
27.8
1971
24.6
-4.9
29.5
92.0 85.5
90.1
1972
24.3
-6.0
106.7 97.9 104.5
30.3
1973
25.8
32.8
-7.0
120.1 110.9 130.9
1974 . .
25.7
34.4
-8.6 109.2 103.4 142.8
1975
24.7
34.9 -10.2
128.2 129.4 140.4
1976
24.3
35.7 -11.5
154.9 158.9 173.8
1977
36.4 -13.6
22.8
184.3 186.8 203.5
1978
24.8
41.3 -16.5
209.0 213.1 238.1
1979
26.9
46.9 -20.0
213.1 220.2 261.8
1980
33.9
57.5 -23.6
188.3 198.3 241.4
1981
44.5
70.9 -26.5 207.0 204.1 229.8
1982
46.5
75.0 -28.5
182.3 166.8 176.7
1983
46.1
235.2 203.7 212.8
75.1 -28.9
1984
79.4 -29.4 290.1 238.5 244.2
50.1
1985
48.1
79.3 -31.2
304.0 230.5 229.9
1986 .
41.5
73.0 -31.5
293.8 234.0 222.6
1987
44.8
77.9 -33.1
333.2 272.9 293.6
1988
55.1
382.1 325.0 354.3
90.1 -35.0
1989
51.7
91.4 -39.7
380.0 330.6 348.1
1990
61.0
397.1 358.2 371.7
99.1 -38.1
1991
67.9
107.5 -39.6
411.3 378.2 374.2
1992
79.4
127.5 -48.1 428.0 398.9 406.4
1993 .. . .
105.7
148.5 -42.8 492.8 456.9 465.4
1994
124.4
172.0 -47.6 570.5 519.1 535.1
1995
133.7
181.8 -48.0 672.4 613.0 635.6
1996
150.2
198.4 -48.1 750.4 679.0 680.2
1997
158.2
208.6 -50.4
817.9 741.2 734.4
1993:1
99.7
144.8 -45.1 459.2 419.2 431.7
II
105.6
146.6 -41.0 478.2 444.4 461.5
Ill
149.4 -43.3
106.1
492.8 459.8 459.6
IV
111.5
153.3 -41.9 541.2 504.1 508.9
1994:1
112.7
171.2 -58.4
512.0 470.8 475.1
II
126.0
169.0 -43.0 562.0 510.2 525.3
Ill
130.1
174.0 -43.9 590.1 535.0 556.2
IV
128.9
173.9 -45.0 617.7 560.3 583.9
1995:1
131.1
177.5 -46.4 629.3 572.6 610.5
II
133.3
180.0 -46.7 653.9 595.5 629.4
Ill
131.9
178.9 -47.1 698.6 637.4 650.8
IV
138.7
190.7 -51.9
707.8 646.5 651.8
1996-1
145.0
192.2 -47.3 735.9 667.0 669.9
II
148.4
196.0 -47.5 748.3 677.1 683.4
Ill
152.1
200.8 -48.6 755.4 683.0 681.9
IV
204.4 -49.1 762.0 688.7
155.3
685.7
1997:1
206.9 -49.4 794.3 720.5 712.4
157.5
II
158.0
815.5 740.1 729.8
208.0 -50.0
Ill . .
840.9 763.7 758.9
209.4 -50.8
158.6
IV
158.8
820.8 740.7 736.4
210.2 -51.4
1998:1
829.2 744.3 719.1
158.3
209.5 -51.2
II
161.0
212.2 -51.3
820.6 731.3 723.5
Ill
215.7 -52.0
163.6
827.0 732.1 720.5
2
3 Without capital consumption adjustment.
Without inventory valuation and capital consumption adjustments.
Source: Department of Commerce, Bureau of Economic Analysis.

1965 LIZ:




Capital Net
conInven- sump- interest
tory
tion
Profits after tax
valu- adjustProfits
ation
tax
ment
Divi- Undisliability Total dends tributed adjustprofits ment
Profits

Total

359

23.6
22.7
22.8
24.0
26.2
28.0
30.9
33.7
32.7
39.4
39.7
34.4
37.7
41.9
49.3
51.8
50.9
64.2
73.0
83.5
88.0
84.8
81.1
63.1
77.2
94.0
96.5
106.5
127.1
137.0
141.3
140.5
133.4
143.0
165.2
186.6
211.0
226.1
246.1
149.2
165.4
161.2
184.9
163.0
182.8
194.6
206.2
202.9
207.6
219.1
214.3
223.9
228.6
227.7
224.2
238.8
241.9
254.2
249.3
239.9
241.6
243.2

29.7
28.4
28.2
32.4
34.9
40.0
47.9
51.4
49.2
51.2
49.4
44.0
52.4
62.6
81.6
91.0
89.5
109.6
130.4
154.6
173.8
156.6
148.6
113.6
135.5
150.1
133.4
116.1
166.5
217.3
206.8
231.2
240.8
263.4
300.2
348.5
424.6
454.1
488.3
282.5
296.1
298.4
324.0
312.1
342.5
361.6
377.7
407.6
421.9
431.6
437.5
446.0
454.8
454.2
461.5
473.6
487.8
504.7
487.1
479.2
481.8
477.3

12.7
13.4
14.0
15.0
16.1
18.0
20.2
20.9
22.1
24.6
25.2
23.7
23.7
25.8
28.1
30.4
30.1
35.9
40.8
46.0
52.5
59.3
69.5
66.7
74.4
79.3
83.9
91.4
96.0
111.1
134.4
143.9
147.2
147.9
157.6
182.4
205.3
261.9
275.1
150.7
154.5
159.8
165.4
170.2
178.1
186.0
195.3
197.1
199.0
204.4
220.7
247.6
257.1
269.1
273.6
274.1
274.7
275.1
276.4
277.3
278.1
279.0

17.0
15.0
14.3
17.4
18.8
22.0
27.8
30.5
27.1
26.6
24.1
20.3
28.6
36.9
53.5
60.6
59.4
73.7
89.6
108.6
121.3
97.3
79.1
46.9
61.2
70.9
49.6
24.7
70.5
106.3
72.4
87.3
93.6
115.5
142.6
166.1
219.3
192.3
213.2
131.8
141.6
138.6
158.6
141.9
164.4
175.6
182.4
210.5
222.8
227.2
216.8
198.4
197.6
185.1
187.9
199.5
213.2
229.5
210.6
201.8
203.7
198.3

-0.3
-.2
.3
.0
.1
-U
-2.1
-1.6
-3.7
-5.9
-6.6
-4.6
-6.6
-20.0
-39.5
-11.0
-14.9
-16.6
-25.0
-41.6
-43.0
-25.7
-9.9
-9.1
-5.6
1L4
-20.7
-29.3
-17.5
-13.5
4.0
-7.5
-8.5
-16.1
-22.6
-1.2
6.9
-12.5
-17.1
.2
-4.8
-4.3
-15.1
-21.2
-23.6
-37.9
-33.9
-13.4
-5.3
-2.9
-6.2
1.2
3.0
8.1
10.3
4.8
4.3
25.3
7.8
11.7

-0.2
.5
1.2
4.1
5.1
5.8
6.6
6.9
7.1
7.3
7.8
6.9
6.5
8.8
9.2
5.8
-1.3
-4.0
-2.5
-4.1
-7.1
-10.1
3.0
15.5
31.5
51.5
73.5
59.8
60.2
57.1
49.3
38.9
33.1
29.1
36.0
51.4
59.4
71.4
76.6
40.0
33.8
33.0
37.1
41.2
51.8
55.1
57.4
56.7
58.3
61.2
61.3
68.9
71.2
72.3
73.3
73.8
75.5
77.2
80.1
84.9
89.4
94.8

10.2
11.2
13.1
14.6
16.1
18.2
21.1
24.3
28.1
30.4
33.6
40.0
45.4
49.3
56.5
71.8
80.0
85.1
100.7
120.5
150.3
191.9
234.5
264.9
275.9
318.5
337.2
363.1
372.2
398.9
456.6
467.3
448.0
414.3
402.5
412.3
420.6
418.6
432.0
411.2
404.6
398.9
395.4
397.2
405.6
415.6
430.7
426.9
420.2
415.2
420.2
419.2
419.7
418.1
417.5
430.4
431.8
433.3
432.4
440.5
447.1
454.0

TABLE B-29.—Sources of personal income, 1959-98
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Wage and salary disbursements1
Private industries
Year or
quarter

Personal
income

Total

Total

Goodsproducing
industries
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 . . ..
1992
1993
1994
1995
1996
1997

Manufacturing

Distributive
industries

Service
industries

Government

Other
labor
income '

Proprietors' income
with inventory
valuation and
capital
consumption
adjustments
Farm

46.0
109.9
86.9
213.8
38.8
65.1
10.6
113.4
223.7
41.7
89.8
68.6
49.2
11.2
44.4
52.4
89.9
114.0
228.0
69.6
11.8
122.2
96.8
243.0
73.3
47.6
56.3
13.0
50.7
127.4
60.0
100.7
254.8
76.8
14.0
136.0
107.3
82.0
54.9
64.9
15.7
272.9
59.4
115.7
69.9
146.6
293.8
87.9
17.8
65.3
161.6
128.2
321.9
95.1
78.3
19.9
72.0
86.4
169.0
342.5
101.6
21.7
134.3
80.4
184.1
375.3
110.8
96.6
146.0
25.2
200.4
90.6
157.7
412.7
121.7
105.5
28.5
99.4
117.1
203.7
158.4
434.3
131.2
32.5
457.4
140.4 107.9
209.1
126.5
36.7
160.5
137.4
501.2
228.2
153.3 119.7
43.0
175.6
148.7
255.9
560.0
170.3 133.9
49.2
196.6
148.6
276.5
611.8
160.9
56.5
211.8
186.8
163.4
277.1
638.6
176.0
65.9
211.6
198.1
79.7
309.7
710.8
188.6
238.0
219.5 181.6
94.7
346.1
266.7
791.6
242.7 202.8
202.3
901.2
274.9 233.7
219.6
110.1
392.6
300.1
237.1
1,018.8
442.5
124.3
335.3
308.5 267.8
1,116.4
356.4
336.7
307.2
261.3
139.8
472.5
1,232.0
388.0
368.5 348.6
285.6
153.0
514.9
1,286.7
165.4
515.1
386.2
385.9 385.7
307.3
426.4
405.7
177.2
528.2
401.2
1,360.3
325.0
445.9
1,507.5
445.2 475.6
347.6
188.9
586.6
620.7
468.9
1,622.1
373.8
203.1
476.5 525.0
481.2
1,720.0
501.6 581.0
637.3
396.6
216.0
653.7
660.4
535.4
235.4
497.2
1,849.5
423.1
450.4
251.7
707.0
530.1
2,003.2
575.3 720.9
732.4
779.5
479.4
273.1
2,118.7
606.8
548.1
2,240.3
634.1 852.1
517.2
300.6
754.2
561.2
322.7
746.3
546.1
2,281.5
562.5
646.6 888.6
765.7
972.6
567.8
351.3
583.5
680.3
2,418.6
699.4 1,024.7
584.3
781.2
592.9
2,505.3
385.1
824.4
741.4 1,072.7
2,638.5
602.2
405.0
620.8
863.9
622.7
401.6
647.9
2,805.8
782.9 1,158.9
909.0
640.9
387.0
674.6
2,990.2
823.3 1,257.9
975.0
3,225.7
664.2
392.9
719.5
879.8 1,370.8
566.7
749.7
2,394.4
581.1
373.8
677.5 967.2
1993:1
697.7 1,020.2
II
382.3
779.9
592.8
2,497.8
581.5
Ill
786.5
597.2
2,524.8
704.3 1,034.0
586.3
389.5
IV
588.4
808.6
614.9
2,604.2
394.9
718.2 1,077.4
797.1
1994:1
600.7
2,542.3
715.8 1,029.4
596.0
399.5
II
2,630.7
618.4
820.5
737.9 1,072.3
601.3
403.7
2,663.4
748.0 1,082.5
Ill
603.5
832.9
626.9
406.9
637.1
2,717.5
IV
608.0
847.2
763.6 1,106.7
409.8
642.4
1995:1
407.1
2,750.9
853.8
617.3
770.1 1,127.0
II
2,782.2
858.1
644.0
621.2
778.2 1,145.9
403.6
Ill
2,824.8
650.4
868.1
624.5
400.3
788.2 1,168.5
IV
2,865.3
875.7
395.6
654.6
795.3 1,194.3
627.8
1996: I
634.4
880.5
654.6
2,898.2
803.3 1,214.4
387.9
II
2,966.7
817.1 1,245.4
904.2
672.2
639.1
387.5
Ill
919.4
642.7
386.4
682.1
3,021.5
829.8 1,272.4
3,074.4
IV
689.4
931.9
647.2
386.0
842.9 1,299.5
702.4
1997:1
389.7
3,141.5
951.6
858.1 1,331.7
657.0
II
965.4
3,193.9
712.0
870.2 1,358.3
661.6
391.5
Ill
979.4
666.7
3,248.9
722.3
393.6
886.3 1,383.2
IV
671.4
3,318.4 1,003.7
741.3
397.0
904.5 1,410.2
3,382.4 1,019.0
750.4
1998:1
679.5
402.8
918.9 1,444.5
II
3,431.8 1,023.2
750.8
685.8
405.7
932.2 1,476.4
Ill
3,484.4 1,028.0
692.7
408.4
750.9
945.8 1,510.6
1
The total of wage and salary disbursements and other labor income differs from compensation of employees in Table
cludes employer contributions for social insurance and the excess of wage accruals over wage disbursements.
See next page for continuation of table.




394.4
412.5
430.0
457.0
480.0
514.5
556.7
605.7
650.7
714.5
779.3
837.1
900.2
988.8
1,107.5
1,215.9
1,319.0
1,459.4
1,616.1
1,825.9
2,055.8
2,293.0
2,568.5
2,724.1
2,894.4
3,211.4
3,440.9
3,639.6
3,877.8
4,178.9
4,496.4
4,796.2
4,965.6
5,255.7
5,481.0
5,757.9
6,072.1
6,425.2
6,784.0
5,332.1
5,466.1
5,505.7
5,620.3
5,583.3
5,733.1
5,804.1
5,911.2
5,979.5
6,030.3
6,093.5
6,185.0
6,284.3
6,390.0
6,476.7
6,549.8
6,666.7
6,743.6
6,820.9
6,904.9
7,003.9
7,081.9
7,160.8

259.8
272.8
280.5
299.3
314.8
337.7
363.7
400.3
428.9
471.9
518.3
551.5
583.9
638.7
708.7
772.6
814.6
899.5
993.9
1,120.8
1,255.9
1,377.7
1,517.6
1,593.9
1,685.3
1,855.1
1,995.9
2,116.5
2,272.7
2,453.6
2,598.1
2,757.5
2,827.6
2,986.4
3,089.6
3,240.7
3,428.5
3,631.1
3,889.8
2,975.4
3,079.3
3,111.1
3,192.6
3,138.3
3,232.0
3,266.9
3,325.6
3,368.2
3,403.5
3,449.4
3,493.2
3,532.7
3,605.8
3,664.2
3,721.6
3,798.5
3,855.5
3,915.5
3,989.9
4,061.9
4,117.6
4,177.1

360

Nonfarm

40.9
10.9
40.5
11.5
42.3
12.1
44.4
12.1
45.8
11.9
49.8
10.8
52.1
13.0
14.1
55.3
58.2
12.7
62.5
12.8
64.6
14.6
65.4
14.8
71.1
15.4
78.8
19.5
84.2
32.6
89.8
25.8
24.1
97.7
115.0
18.6
129.9
17.5
147.4
22.2
159.7
25.3
164.4
12.2
165.7
21.9
165.1
14.5
4.1
187.8
225.5
23.2
23.6
245.0
255.3
24.2
31.5
273.6
27.5
307.8
321.1
36.3
35.4
338.6
29.3
347.2
37.1
386.7
418.4
32.4
434.7
36.9
22.4
465.6
38.9
488.8
515.8
35.5
29.7
410.6
416.0
36.3
420.6
25.6
38.0
426.5
46.4
417.5
38.8
435.9
438.4
33.2
447.0
29.1
455.7
22.8
20.4
462.0
470.7
19.1
474.1
27.4
481.3
34.8
41.0
487.0
43.2
490.3
36.7
496.4
36.4
504.1
37.8
512.1
36.3
520.2
31.4
526.6
27.4
536.8
27.7
544.0
25.2
550.9
B-28 in that it ex-

TABLE B-29.—Sources of persona! income, 1959-98—Continued
[Billions of dollars; quarterly data at seasonally adjusted annual rates]

Year or
quarter

Rental
income
of
persons
with
capital
consumption
adjustment

Transfer payments to persons
Personal
dividend
income

Personal
interest
income

Total

Old-age,
Governsurvivors, Government
ment
disability, unememploy- Family
and
ployment Veterans ees
assishealth
insur- benefits retire- tance !
insurment
ance
ance
benefits
benefits benefits

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
1993
1994
1995
1996
1997
1993-1
II
Ill
IV
1994-1
II
Ill
IV

Other

Less:
Personal
contributions
for
social
insurance

17.7
12.7
22.7
4.6
10.2
27.0
7.9
2.8
0.9
5.7
2.8
3.1
13.4
25.0
9.3
1.0
6.1
4.6
11.1
3.0
18.6
28.8
3.4
26.9
9.7
1.1
5.0
12.6
4.3
19.2
14.0
32.8
6.5
4.7
3.7
20.0
15.0
29.3
34.1
10.3
1.3
14.3
3.1
7.0
32.4
1.4
4.8
20.7
16.1
4.2
15.2
3.0
36.2
11.8
7.6
4.7
4.7
16.0
2.7
21.0
18.0
36.1
37.9
12.6
1.5
8.2
41.1
1.7
4.9
40.3
5.2
18.1
2.3
21.8
20.2
13.3
9.0
44.9
45.7
6.1
4.9
22.5
20.9
17.8
1.9
20.8
1.9
10.3
22.1
5.6
49.5
54.6
6.9
2.3
25.5
2.2
23.6
20.6
12.2
54.6
7.6
5.9
30.2
2.1
22.7
24.5
63.2
22.9
2.8
14.5
6.7
23.4
25.1
60.8
8.7
2.2
26.2
3.5
32.9
70.3
16.2
7.7
69.2
19.4
38.5
4.0
23.6
23.5
84.6
27.9
10.2
4.8
75.7
30.7
8.8
44.5
5.8
24.6
23.5
100.1
11.8
6.2
23.0
9.7
5.7
24.3
25.5
81.8
111.8
34.5
13.8
6.9
26.1
49.6
10.4
60.4
4.4
27.7
94.1
42.6
25.8
127.9
16.0
7.2
29.5
112.4
11.8
25.7
47.9
19.0
7.9
35.7
70.1
6.8
29.6
151.3
50.4
81.4
24.7
29.2
123.0
22.7
9.2
44.7
14.5
17.6
190.2
14.4
55.5
35.0
134.6
26.1
10.1
49.1
92.9
15.8
24.3
208.3
155.7
61.2
52.4
10.6
13.8
104.9
12.7
22.8
39.5
223.3
29.0
69.8
58.4
184.5
32.7
10.7
13.9
116.2
9.7
24.8
44.3
241.6
81.0
14.4
26.9
223.6
36.9
11.0
66.8
131.8
9.8
50.5
270.7
88.6
12.4
33.9
274.7
43.0
80.8
15.0
154.2
57.5
321.5
16.1
104.5
49.4
89.7
16.1
182.0
44.5
67.2
337.2
13.0
15.9
365.9
94.1
16.4
379.2
112.3
13.3
25.2
46.5
63.8
54.6
204.5
408.1
119.7
403.2
439.4
58.0
14.2
102.6
16.6
221.7
46.1
71.0
26.3
132.7
16.4
75.4
14.8
235.7
50.1
472.3
453.6
60.9
109.9
15.9
79.4
508.4
149.0
15.4
16.7
253.4
15.7
48.1
66.6
118.7
486.5
162.1
70.7
16.4
16.7
41.5
543.3
129.3
269.2
16.3
86.3
518.6
173.7
16.7
44.8
560.0
76.0
136.6
16.6
282.9
90.2
543.3
14.5
194.2
300.4
82.2
17.3
147.6
16.9
55.1
104.2
595.5
577.6
13.3
210.8
51.7
87.6
18.0
163.6
17.3
14.4
126.3
674.5
626.0
325.1
704.4
223.9
61.0
94.5
19.8
185.6
17.8
352.0
134.9
687.8
18.1
235.8
22.0
218.2
67.9
137.7
699.2
102.2
18.3
382.3
26.8
769.9
248.4
79.4
23.3
253.8
19.3
414.0
137.9
858.2
667.2
109.0
38.9
105.7
147.1
260.3
20.2
444.4
912.0
651.0
116.6
24.0
272.8
34.0
124.4
277.5
20.2
171.0
954.7
668.1
124.5
24.3
289.3
473.0
23.6
133.7
293.6
308.8
20.8
21.4
192.8
704.9
133.8
23.3
507.8
1,015.9
719.4 1,068.0
306.3
150.2
141.3
21.6
323.5
21.6
538.0
21.9
248.2
326.2
151.4
19.7
22.4
158.2
1,110.4
747.3
331.1
565.9
260.3
19.9
99.7
255.2
23.7
20.0
140.5
897.2
660.3
114.2
267.3
437.6
34.5
259.2
144.1
271.4
653.7
24.0
20.5
34.4
105.6
908.0
115.9
441.9
261.6
117.4
24.0
20.3
446.4
34.7
106.1
149.3
647.8
274.6
917.3
265.2
111.5
119.0
24.2
277.9
19.8
451.8
32.6
154.6
925.3
642.1
112.7
641.4
272.0
20.0
27.7
159.1
940.4
120.5
24.3
284.6
463.3
656.4
276.2
470.4
126.0
123.8
24.3
287.3
20.1
23.9
166.8
949.8
278.8
24.4
674.1
125.9
290.7
20.5
130.1
174.5
958.8
475.8
21.6
700.4
282.9
24.2
482.4
128.9
127.6
294.5
20.1
20.9
183.6
969.8
288.9
1995:1
130.2
23.8
303.2
20.6
497.6
20.6
131.1
185.0
996.2
702.3
291.9
133.3
186.7
II .
133.3
23.5
20.8
505.6
21.1
701.5 1,011.2
307.0
Ill
295.3
135.1
23.1
21.1
21.7
131.9
191.8
702.6
310.6
511.5
1,023.0
IV
298.1
22.7
516.7
138.7
713.2
136.6
314.3
20.6
22.2
207.9
1,033.1
299.8
1996:1
145.0
234.4
713.5 1,054.6
137.6
22.3
320.8
21.5
529.6
22.8
||
141.1
148.4
304.6
715.9 1,065.5
21.9
322.9
21.9
535.6
22.1
243.5
Ill
308.5
21.4
21.7
21.4
255.4
142.3
324.6
540.6
152.1
721.5 1,072.1
IV
312.4
144.4
20.7
325.5
21.5
546.2
155.3
1,079.7
726.8
21.5
259.6
319.5
1997:1
20.2
328.8
22.5
157.5
259.7
740.1 1,100.4
148.9
559.1
20.9
||
323.7
22.4
745.7
150.7
19.9
330.0
158.0
1,106.8
563.9
19.9
259.9
III
328.2
22.6
152.2
19.5
331.8
158.6
260.4
750.5 1,114.0
568.3
19.6
333.6
22.3
IV
153.8
19.1
333.8
572.2
19.3
158.8
753.0 1,120.5
261.3
340.9
18.7
23.3
1998:1
158.3
757.0 1,139.0
156.8
338.9
581.6
19.6
261.6
||
158.4
345.1
18.0
341.6
23.2
161.0
262.1
763.0
585.0
19.5
1,145.8
III
349.5
17.1
343.8
23.3
163.6
769.2 1,152.9
160.3
589.0
19.5
263.0
1
Consists of aid to families with dependent children and, beginning with 1996, assistance programs operating under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996.
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.




361

TABLE B-30.—Disposition of personal income, 1959-98
[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Less: Personal outlays

Year or quarter

Personal
income

394.4
412.5
430.0
457.0
480.0
514.5
556.7
605.7
650.7
714.5
779.3
837.1
900.2
988.8
1,107.5
1,215.9
1,319.0
1,459.4
1,616.1
1,825.9
2,055.8
2,293.0
2,568.5
2,724.1
2,894.4
3,211.4
3,440.9
3,639.6
3,877.8
4,178.9
4,496.4
4,796.2
4,965.6
5,255.7
5,481.0
5,757.9
6,072.1
6,425.2
6,784.0
5,332.1
5,466.1
5,505.7
5,620.3
5,583.3
5,733.1
5,804.1
5,911.2
5,979.5
6,030.3
6,093.5
6,185.0
6,284.3
6,390.0
6,476.7
6,549.8
6,666.7
6,743.6
6,820.9
6,904.9
7,003.9
7,081.9
7,160.8

Less:
Personal
tax and
nontax
payments

Equals:
Disposable
personal
income

Total

324.7
349.9
44.5
48.7
363.8
339.6
379.7
50.3
350.5
402.2
54.8
371.8
58.0
422.0
392.5
458.5
56.0
422.1
494.8
456.2
61.9
534.7
494.7
71.0
77.9
572.9
523.0
92.1
622.5
574.6
669.4
621.4
109.9
109.0
728.1
666.1
108.7
791.5
721.6
856.8
791.6
132.0
967.0
875.4
140.6
1,056.8
159.1
956.6
156.4
1,162.6 1.054.8
182.3
1,277.1 1,176.7
210.0
1,406.1 1,308.9
1,585.8 1,467.6
240.1
1,775.7 1,639.5
280.2
312.4
1,980.5 1,811.5
2.208.3 2,001.1
360.2
371.4
2,352.7 2,141.8
369.3
2,525.1 2,355.5
2,815.9 2,574.4
395.5
437.7
3,003.2 2,795.8
3,179.7 2,991.1
459.9
514.2
3,363.6 3,194.7
3,646.9 3,451.7
532.0
3,901.6 3,706.7
594.9
4,171.4 3,958.1
624.8
4,340.9 4,097.4
624.8
650.5
4,605.1 4,341.0
690.0
4,791.1 4,580.7
739.1
5,018.9 4,842.1
795.0
5,277.0 5,097.2
5,534.7 5,376.2
890.5
989.0
5,795.1 5,674.1
662.5
4,669.6 4,488.4
685.6
4,780.5 4,549.5
695.5
4,810.2 4,609.8
716.4
4,903.9 4,675.2
712.9
4,870.5 4,738.2
750.5
4,982.6 4,803.3
739.9
5,064.2 4,876.1
753.0
5,158.2 4,950.7
767.2
5,212.3 4,997.4
795.7
5,234.7 5,070.6
799.0
5,294.5 5,132.1
818.3
5,366.8 5,188.8
849.7
5,434.6 5,261.1
893.3
5,496.7 5,356.2
899.4
5,577.3 5,405.2
919.7
5,630.1 5,482.5
1997:1
955.6
5,711.2 5,575.8
||
975.8
5,767.9 5,616.0
III
999.0
5,821.8 5,723.3
IV
5,879.4 5,781.2
1,025.5
1,066.8
1998:1
5,937.1 5,864.0
II
1,092.9
5,988.9 5,963.3
1,108.4
6,052.4 6,039.8
III ..."III
1
Percents based on data in millions of dollars.
Source: Department of Commerce, Bureau of Economic Analysis.

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
1993
1994
1995
1996
1997
1993-1 . .
||
HI
IV
1994-1
II
Ill
IV
1995-1
||
III
IV
1996-1
||
Ill
IV




Personal
Personal Interest transfer
conpaysumption paid
ments
by
expendi- persons to rest
tures
of the
world
(net)
318.1
332.2
342.6
363.4
383.0
411.4
444.3
481.9
509.5
559.8
604.7
648.1
702.5
770.7
851.6
931.2
1,029.1
1,148.8
1,277.1
1,428.8
1,593.5
1,760.4
1,941.3
2,076.8
2,283.4
2,492.3
2,704.8
2,892.7
3,094.5
3,349.7
3,594.8
3,839.3
3,975.1
4,219.8
4,459.2
4,717.0
4,953.9
5,215.7
5,493.7
4,365.4
4,428.1
4,488.6
4,554.9
4,616.6
4,680.5
4,750.6
4,820.2
4,862.5
4,931.5
4,986.4
5,035.3
5,108.2
5,199.0
5,242.5
5,313.2
5,402.4
5,438.8
5,540.3
5,593.2
5,676.5
5,773.7
5,846.7

362

6.1
7.0
7.3
7.8
8.9
10.0
11.1
12.0
12.5
13.8
15.7
16.8
17.8
19.6
22.4
24.2
24.5
26.7
30.7
37.5
44.5
49.4
54.6
58.8
65.5
74.7
83.2
90.3
91.5
92.9
102.4
108.9
111.9
111.7
108.2
110.9
127.6
143.6
161.5
110.0
108.3
107.9
106.6
107.6
108.7
111.4
116.1
119.8
124.4
130.2
136.3
137.1
140.7
146.1
150.7
155.4
159.0
163.5
168.2
168.3
169.8
173.2

0.4
.5
.5
'.6
'.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
5.2
6.2
6.5
7.4
7.8
8.1
8.7
9.1
9.6
9.9
10.4
9.6
13.3
14.2
15.7
16.9
18.9
13.1
13.1
13.4
13.7
14.0
14.1
14.2
14.4
15.2
14.8
15.6
17.2
15.8
16.6
16.6
18.5
18.0
18.2
19.5
19.8
19.2
19.9
20.0

Percent of disposable
personal income '
Equals:
Personal
saving

Personal outlays

Total

25.2
24.2
29.2
30.4
29.5
36.4
38.7
40.1
49.9
47.8
47.9
62.0
69.9
65.2
91.5
100.2
107.8
100.4
97.2
118.2
136.2
169.1
207.2
210.9
169.7
241.5
207.4
188.6
168.9
195.2
194.8
213.3
243.5
264.1
210.3
176.8
179.8
158.5
121.0
181.2
231.0
200.5
228.7
132.3
179.3
188.1
207.5
214.9
164.0
162.4
178.0
173.5
140.5
172.2
147.6
135.4
151.9
98.5
98.2
73.0
25.6
12.6

92.8
93.4
92.3
92.4
93.0
92.1
92.2
92.5
91.3
92.3
92.8
91.5
91.2
92.4
90.5
90.5
90.7
92.1
93.1
92.5
92.3
91.5
90.6
91.0
93.3
91.4
93.1
94.1
95.0
94.6
95.0
94.9
94.4
94.3
95.6
96.5
96.6
97.1
97.9
96.1
95.2
95.8
95.3
97.3
96.4
96.3
96.0
95.9
96.9
96.9
96.7
96.8
97.4
96.9
97.4
97.6
97.4
98.3
98.3
98.8
99.6
99.8

Personal Personal
consumption saving
expenditures

90.9
91.3
90.3
90.4
90.7
89.7
89.8
90.1
88.9
89.9
90.3
89.0
88.8
89.9
88.1
88.1
88.5
90.0
90.8
90.1
89.7
88.9
87.9
88.3
90.4
88.5
90.1
91.0
92.0
91.9
92.1
92.0
91.6
91.6
93.1
94.0
93.9
94.2
94.8
93.5
92.6
93.3
92.9
94.8
93.9
93.8
93.4
93.3
94.2
94.2
93.8
94.0
94.6
94.0
94.4
94.6
94.3
95.2
95.1
95.6
96.4
96.6

7.2
6.6
7.7
7.6
7.0
7.9
7.8
7.5
8.7
7.7
7.2
8.5
8.8
7.6
9.5
9.5
9.3
7.9
6.9
7.5
7.7
8.5
9.4
9.0
6.7
8.6
6.9
5.9
5.0
5.4
5.0
5.1
5.6
5.7
4.4
3.5
3.4
2.9
2.1
3.9
4.8
4.2
4.7
2.7
3.6
3.7
4.0
4.1
3.1
3.1
3.3
3.2
2.6
3.1
2.6
2.4
2.6
1.7
1.7
1.2
.4
.2

TABLE B-31.—Total and per capita disposable personal income and personal consumption expenditures
in current and real dollars, 1959-98
[Quarterly data at seasonally adjusted annual rates, except as noted]
Disposable personal income
Year or

Total (billions of
dollars)
Current
dollars

Chained
(1992)
dollars

Personal consumption expenditures

Per capita
(dollars)
Current
dollars

Chained
(1992)
dollars

Total (billions of
dollars)
Current
dollars

Chained
(1992)
dollars

Per capita
(dollars)
Current
dollars

Chained
(1992)
dollars

1,975
8,660
1,394.6
318.1
1,796
332.2
2,013
1,432.6
1,838
8,681
2,066 1 8,814
1,461.5
1,865
342.6
363.4
2,156 ! 9.098
1,533.8
1,948
9,294
2,229
1,596.6
2,023
383.0
411.4
2,389
1,692.3
2,144
9,825
10,311
2,546
1,799.1
444.3
2,286
2,720
1,902.0
2,451
10,735
481.9
2,882
1,958.6
11,081
509.5
2,563
2,070.2
11,468
3,101
2,789
559.8
604.7
3,302
2,147.5
2,982
11,726
3,550
2,197.8
12,039
3,160
648.1
12,366
3,811
2,279.5
3,383
702.5
2,4159
3,671
12,794
7707
4,082
4,562
2,532.6
13,566
4,018
851.6
4941
25147
4353
13,344
9312
13,444
5,383
2,570.0
4,765
1,029.1
13,837
5856
5268
1 1488 27143
6,383
2,829.8
5,797
14.142
l]277.1
14,715
7,123
2,951.6
6,418
1,428.8
7,888
3,020.2
14,951
7,079
1,593.5
14,867
8,697
3,009.7
1,760.4
7,730
15,064
19413 30464
9,601
8440
15,034
10,132
3,081.5
8,943
2,076.8
15,293
10,776
3,240.6
9,744
2,283.4
11,912
16,286
3,407.6
10,543
2,492.3
16,604
12,592
3,566.5 11,341
2,704.8
16,939
13,211
3,708.7
2,892.7
12,019
3,822.3
17,109
13,851
12,743
3,094.5
3,972.7 13,669
17,650
3,349.7
14,881
15,771
17,833
4,064.6 14,531
3,594.8
17,962
16,689
4,132.2 15,360
3,839.3
17,744
17,179
4,105.8 15,732
3,975.1
18,029
4,219.8 16,520
18,029
4.219.8
18,558
4,343.6
17,273
18,077
4,459.2
19,251
4,486.0 18,093
18,308
4,717.0
20,050
4,605.6 18,822
18,640
4,953.9
20,840
4,752.4 19,639
5,215.7
18,989
21,633
4,913.5 20,508
5,493.7
19,349
1993:1
18,159
4,286.8
4,365.4
17,832
16,976
II
18,104
18,545
4,322.8 17,177
4,428.1
III
18,607
4,366.6 17,363
18,101
4,488.6
18,920
IV
17,574
18,268
4,398.0
4,554.9
1994:1
18,752
4,439.4 17,774
18,032
4,616.6
II
18,286
19,138
4,472.2 17,978
4,680.5
19,400
Ill
4,498.2 18,199
18,369
4,750.6
19,711
4,534.1 18,419
18,541
IV
4,820.2
19,876
1995:1
18,542
18,621
4,555.3
4,862.5
II
19,915
18,551
18,762
4,593.6
4,931.5
Ill
20,091
18,628
4,623.4 18,922
4,986.4
20,316
IV
18,761
4,650.0 19,061
5,035.3
18,860
20,533
1996:1
4,692.1 19,299
5,108.2
II
20,722
18,919
5,199.0
4,746.6 19,600
20,976
19,079
Ill
4,768.3 19,717
5,242.5
21,127
IV
4,802.6
19,096
19,938
5,313.2
4,853.4 20,235
19,217
21,391
1997:1
5,402.4
II
4,872.7 20,329
21,558
19,315
5,438.8
Ill
19,385
21,709
4,947.0 20,660
5,540.3
21,871
19,478
IV
20,807
4,981.0
5,593.2
19,632
22,046
1998:1
5,055.1 21,078
5,676.5
II
22,192
19,719
21,394
5,773.7
5,130.2
Ill
22,373
19,829
5,846.7
5,181.8 21,612
1
Population of the United States including Armed Forces overseas; includes Alaska and Hawaii
of quarterly data. Quarterly data are averages for the period.
Source: Department of Commerce (Bureau of Economic Analysis and Bureau of the Census).

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
1993
1994
1995
1996
1997

349.9
363.8
379.7
402.2
422.0
458.5
494.8
534.7
572.9
622.5
669.4
728.1
791.5
8568
967.0
10568
1,162.6
1,277.1
1,406.1
1,585.8
1,775.7
1,980.5
2,208.3
2,352.7
2,525.1
2,815.9
3,003.2
3,179.7
3,363.6
3,646.9
3,901.6
4,171.4
4,340.9
4,605.1
4,791.1
5,018.9
5,277.0
5,534.7
5,795.1
4,669.6
4,780.5
4,810.2
4,903.9
4,807.5
4,982.6
5,064.2
5,158.2
5,212.3
5,234.7
5,294.5
5,366.8
5,434.6
5,496.7
5,577.3
5,630.1
5,711.2
5,767.9
5,821.8
j 5,879.4
5,937.1
5,988.9
6,052.4




1,533.9
1,569.2
1,619.4
1,697.5
1,759.3
1,885.8
2,003.9
2,110.6
2,202.3
2,302.1
2,377.2
2,469.0
2,568.3
26857
2,875.2
28542
2,903.6
3,0176
3,115.4
3,276.0
3,365.5
3,385.7
3,464 9
3,491.1
3,583.7
3,850.0
3,960.3
4,076.8
4,154.7
4,325.3
4,411.7
4,489.6
4,483.5
4,605.1
4,666.7
4,772.9
4,906.0
5,043.0
5,183.1
4,585.6
4,666.8
4,679.5
4,735.0
4,683.6
4,760.9
4,795.2
4,852.1
4,883.0
4,876.0
4,909.1
4,956.1
4,992.0
5,018.4
5,072.8
5,089.0
5,130.8
5,167.5
5,198.4
5,235.8
5,287.1
5,321.5
5,364.1

363

7,873
7,926
7,954
8,220
8,434
8,817
9,257
9,674
9,854
10,313
10,593
10,717
10,975
11,508
11,950
11756
ll!899
12446
12,846
13,258
13,417
13,216
13245
13,270
13,829
14,415
14,954
15,409
15,740
16,211
16,430
16,532
16,249
16,520
16,825
17,207
17,499
17,894
18,342
16,671
16,769
16,891
16,968
17,092
17,178
17,232
17,326
17,371
17,476
17,544
17,602
17,727
17,894
17,934
18,021
18,178
18,213
18,447
18,529
18,770
19,010
19,155

Gross domestic
product
per capita
(dollars)
Current
dollars
2,864
2,913
2,965
3,136
3,261
3,455
3,700
4,007
4,194
4,536
4,845
5,050
5,419
5,894
6,524
6998
7,550
8,341
9,201
10,292
11,361
12,226
13,547
13,961
14,998
16,508
17,529
18,374
19,323
20,605
21,984
22,979
23,416
24,447
25,403
26,647
27,621
28,849
30,278
25,061
25,250
25,432
25,866
26,158
26,546
26,764
27,115
27,345
27,434
27,719
27,982
28,318
28,761
28,972
29,338
29,795
30,138
30,468
30,707
31,132
31,277
31,561

Chained
(1992)
dollars
12,478
12,519
12,595
13,156
13,520
14,112
14,825
15,612
15,835
16,408
16,739
16,566
16,900
17637
18,479
18192
171936
18721
19,400
20,226
20,571
20,265
20,524
19,896
20,499
21,744
22,320
22,801
23,264
23,934
24,504
24,549
24,060
24,447
24,750
25,357
25,691
26,338
27,138
24,608
24,671
24,732
24,989
25,120
25,352
25,396
25,559
25,616
25,582
25,726
25,839
26,001
26,329
26,402
26,617
26,843
27,048
27,263
27,397
27,718
27,786
27,970

Population
(thousands)1
177,130
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
211939
213 898
215',981
218086
220,289
222,629
225,106
227,726
230,008
232,218
234,332
236,394
238,506
240,682
242,842
245,061
247,387
249,956
252,680
255,432
258,161
260,705
263,194
265,579
267,880
257,151
257,785
258,516
259,191
259,738
260,351
261,040
261,692
262,235
262,847
263,527
264,169
264,680
265,258
265,887
266,491
266,987
267,545
268,171
268,815
269,309
269,867
270,523

beginning 1960. Annual data are averages

TABLE B-32.—Gross saving and investment, 1959-98
[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Gross saving
Gross private saving

Gross government saving

Gross business saving
Year or
quarter

Total

Total

UndisPertrih.
lilDsonal
saving Total1 corporate
profits2

Corporate
and noncorporate
consumption of
fixed
capital

Federal
Total

57.1
1959
108.5 82.3 25.2
16.5
40.5 26.2
1960
113.4 81.6 24.2
57.4
15.3
42.1
31.8
15.7
43 1 283
1961 . . 1163 880 292 588
66.1
1962
30.4
21.5
30.3
126.8 96.5
44.6
1963
70.2
24.0
134.9 99.8 29.5
46.2
35.1
1964
75.9
27.3
487 329
145.3 1123 36.4
160.4 123.8 38.7
85.1
36.6
1965
33.1
52.0
1966 .. . 171 1 1319 401 91.9
35.2
567 392
1967
32.7
173.8 144.1 49.9
94.2
61.5 29.7
30.2
673 397
1968 .. . 1851 1454
478 97.6
1969
202.1 148.2
26.0
53.9
47.9 100.3
74.2
20.7
1970
197.3 163.8 62.0 101.8
81.2
32.6
1971
214.3 189.7 69.9 119.8
30.5
88.9 23.9
1972
39.0
243.9 201.7
65.2 136.5
97.8
41.5
42.7
296.4 241.3
107.1 55.1
1973
91.5 149.7
1974
27.0
51.5
301.2 251.7 100.2 151.5
124.5
47.2
-3.9
1975
297.3 301.2 107.8 193.5
146.3
54.8
1976
161.3 23.5
340.0 316.5 100.4 216.1
1977
394.7 348.6 97.2 251.4
70.5
181.0 46.1
1978
79.5
476.9 404.5 118.2 286.3
206.8 72.4
1979
72.6
540.6 448.8 136.2 312.5
239.9 90.7
1980
44.1
547.2 489.2 169.1 320.1
276.0 56.8
56.4
1981
318.1 68.1
650.8 581.7 207.2 374.4
1982
604.3 609.6 210.9 398.7
52.5
346.2 -5.3
1983
589.0 618.4 169.7 448.7
83.6
365.2 -29.4
1984
378.4 14.0
750.7 736.7 241.5 495.2 116.8
1985
399.4 15.2
745.6 730.5 207.4 523.1 123.6
424.4 10.8
1986
719.8 708.9 188.6 520.3
95.9
1987
447.1
779.6 726.0 168.9 557.1 110.0
53.6
1988
876.0 807.2 195.2 612.0 134.0
478.0 68.8
1989
906.3 814.3 194.8 619.5 104.3
515.1 92.0
1990
903.1 860.3 213.3 647.0 112.7
534.3 42.7
556.4
3.3
1991
934.0 930.6 243.5 687.1 130.8
585.4 -66.5
1992
904.3 970.7 264.1 706.6 137.1
1993
949.5 979.3 210.3 769.0 170.1
594.5 -29.8
1994
638.6 49.0
1,079.2 1,030.2 176.8 853.4 201.4
1,187.4 1,106.2 179.8 926.4 256.1
1995
657.0 81.2
1996
1,274.5 1,114.5 158.5 956.0 262.4
684.3 160.0
1997
1,406.3 1,141.6 121.0 1,020.6 296.7
720.1 264.7
1993:1
932.0 1,001.1 181.2 819.9 159.2
590.5 -69.1
II .... 942.1 977.3 231.0 746.3 158.3
588.0 -35.2
Ill ... 943.8 973.3 200.5 772.8 171.8
601.1 -29.4
IV ... 980.1 965.6 228.7 736.9 191.0
598.1 14.5
1994:1
1,062.4 1,048.6 132.3 916.3 178.7
685.2
13.8
201.2
II .... 1,065.5 995.7 179.3 816.4
614.9
69.7
Ill ... 1,071.0 1,021.2 188.1 833.1 209.5
623.3 49.7
IV ... 1,118.0 1,055.3 207.5 847.8 216.2
631.2 62.7
1995:1
1,161.5 1,098.7 214.9 883.8 229.3
641.1
62.8
II .... 1,153.8 1,075.8 164.0 911.8 247.3
651.1 78.0
Ill ... 1,190.4 1,110.0 162.4 947.6 275.0
659.2 80.4
IV ... 1,224.0 1,140.5 178.0 962.5 272.7
676.4 103.5
1996:1
1,233.0 1,119.4 173.5 945.9 264.4
672.2 113.6
II .... 1,255.3 1,091.6 140.5 951.1 262.6
679.2 163.7
Ill ... 1,298.8 1,128.6 172.2 956.4 258.7
688.5 170.2
IV ... 1,311.0 1,118.4 147.6 970.8 264.2
697.3 192.5
1997:1
1,353.9 1,126.3 135.4 990.9 281.4
705.8 227.5
II .... 1,416.3 1,169.5 151.9 1,017.6 299.0
715.0 246.9
Ill ... 1,427.0 1,139.0 98.5 1,040.5 311.5
725.2 288.0
IV .. 1,428.0 1,131.6 98.2 1,033.4 295.0
734.7 296.4
1998:1
1,482.5 1,130.1 73.0 1,057.1 312.0
741.1 352.4
II .... 1,448.5 1,079.0 25.6 1,053.4 300.9
748.5 369.4
Ill ... 1,474.5 1,078.7 12.6 1,066.1 304.8
757.3 395.7
1
Includes private wage accruals less disbursements not shown separately.
2
With inventory valuation and capital consumption adjustments.
3
Consists mainly of allocations of special drawing rights (SDRs).
See next page for continuation of table.




364

Total

12.8
17.8
136
14.0
17.2
13.0
15.9
15.6
5.6
120
24.3
2.2
-8.5
-2.4
8.7
5.1
-49.9
-31.9
-19.3
-2.8
13.0
-26.8
-20.6
-92.8
-131.8
-111.9
-116.9
-127.9
-77.2
-67.0
-56.4
-94.0
-132.2
-215.0
-182.7
-117.2
-103.7
-39.6
49.5
-211.2
-181.7
-182.2
-155.8
-139.9
-93.6
-118.3
-117.0
-119.4
-107.2
-106.2
-82.0
-79.4
-41.9
-29.6
-7.6
19.6
36.1
70.0
72.3
128.7
143.9
161.6

Consump- Current
tion surplus
of
or
fixed deficit
capital
10.2
10.5
107
11.2
11.8
12.1
12.5
13.0
13.9
149
15.6
16.2
16.9
18.2
19.9
22.0
24.0
25.4
27.0
28.9
31.5
34.1
37.1
41.9
42.6
44.1
46.1
49.6
51.7
54.3
57.0
60.7
63.9
65.9
67.9
69.5
70.7
70.6
70.6
67.0
67.5
68.4
68.8
69.1
69.6
69.3
69.8
70.3
70.7
70.7
71.0
70.7
70.7
70.5
70.7
70.8
70.9
70.3
70.2
69.9
69.5
69.6

Capi-

State and local

2.6
7.4
29
2.8
5.4
.9
3.4
26
-8.3
-28
8.7
-14.1
-25.3
-20.5
-11.1
-16.9
-73.9
-57.2
-46.3
-31.7
-18.4
-61.0
-57.8
-134.7
-174.4
-156.0
-162.9
-177.5
-128.9
-121.3
-113.4
-154.7
-196.0
-280.9
-250.7
-186.7
-174.4
-110.3
-21.1
-278.2
-249.2
-250.6
-224.6
-209.0
-163.2
-187.6
-186.8
-189.6
-177.9
-176.9
-153.0
-150.1
-112.6
-100.1
-78.3
-51.2
-34.8
-.3
2.2
58.8
74.4
92.0

tal

grants
Consump- Current received
tion surplus by the
or
Total
of
fixed deficit States
/ no »\ 3
(net) J
capital

13.5
14.0
147
16.3
17.9
199
20.8
235
24.1
276
29.6
30.4
32.4
43.9
46.4
46.5
46.0
55.3
65.4
75.1
77.7
83.6
88.7
87.5
102.4
125.9
132.0
138.8
130.8
135.8
148.4
136.7
135.5
148.6
152.9
166.2
184.8
199.6
215.2
142.1
146.5
152.7
170.4
153.7
163.3
168.0
179.7
182.1
185.2
186.6
185.4
193.0
205.6
199.8
200.2
207.9
210.7
218.0
224.1
223.7
225.6
234.2

3.9
4.0
43
4.6
4.9
52
5.7
63
6.8
76
8.5
9.6
10.7
11.7
13.0
16.0
18.4
19.4
20.7
22.5
25.4
29.2
33.3
36.2
37.5
39.0
41.0
43.9
47.1
49.9
53.3
56.6
59.6
62.3
65.5
69.4
73.2
77.1
81.1
64.3
65.2
65.8
66.6
69.0
68.5
69.6
70.4
71.7
72.6
73.6
74.7
75.7
76.5
77.5
78.5
79.5
80.6
81.4
82.7
83.5
84.3
85.4

9.6
9.9
104
117
13.0
147
15.1
173
17.3
20.0

20.8
21.7
32.2
33.4
30.5
27.6
35.9
44.7
52.6
52.3
54.4
55.4
51.3
64.9
86.9
91.0
94.9
83.8
85.9
95.1
80.1
75.8
86.3
87.4
96.8
111.7
122.6
134.1
77.8
81.3
86.9
103.7
84.7
94.8
98.4
109.3
110.4
112.6
113.0
110.7
117.3
129.1
122.3
121.7
128.4
130.1
136.6
141.4
140.2
141.3
148.7

0.9
7
7
0
6-2.0
0
0
0
0
1.1
1.2
1.1
0
0
0
0
0
0
0
0
0
G
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

TABLE B-32.—Gross saving and investment, 1959—98—Continued
[Billions of dollars except as noted; quarterly data at seasonally adjusted annual rates]
Addenda:

Gross investment

Year or quarter

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
1993
1994
1995
1996 ..
1997
1993-1
II
III
IV

.

....

1994: 1

II
III
IV

1995:1

||
III
IV

1996:1

||
III
IV
1997: 1
II
Ill
IV
1998- 1
||
III

Total

106.9
110.2
113.5
125.0
131.9
143.8
159.6
174.4
175.1
186.0
200.7
199.1
220.4
248.1
299.9
306.7
309.5
359.9
413.0
494.9
568.7
574.8
665.7
601.8
626.2
755.7
748.0
743.1
764.2
828.7
919.5
920.5
944.0
949.1
1,002.1
1,093.8
1,160.9
1,242.3
1,350.5
1,003.0
989.0
991.3
1,025.1
1,068.7
1,107.8
1,086.2
1,112.6
1,164.6
1,131.1
1,147.3
1,200.8
1,206.7
1,234.7
1,249.5
1,278.3
1,310.8
1,368.6
1,361.9
1,360.7
1,428.4
1,362.7
1,372.5

4
For details
5

Gross
private
domestic
investment

78.8
78.8
77.9
87.9
93.4
101.7
118.0
130.4
128.0
139.9
155.0
150.2
176.0
205.6
242.9
245.6
225.4
286.6
356.6
430.8
480.9
465.9
556.2
501.1
547.1
715.6
715.1
722.5
747.2
773.9
829.2
799.7
736.2
790.4
876.2
1,007.9
1,043.2
1,131.9
1,256.0
854.3
857.4
872.8
920.3
963.4
1,017.9
1,007.1
1,043.1
1,058.9
1,029.6
1,030.6
1,053.6
1,075.3
1,118.3
1,167.9
1,166.0
1,206.4
1,259.9
1,265.7
1,292.0
1,366.6
1,345.0
1,364.4

Gross
government
investment 4

29.3
28.2
31.3
33.2
33.5
34.5
35.4
40.1
43.5
44.3
43.9
44.0
43.1
45.4
48.3
56.0
62.7
64.4
65.4
74.6
85.3
96.4
102.1
106.9
116.5
131.7
149.9
163.5
173.5
172.9
182.7
199.4
200.5
209.1
204.5
205.9
218.3
229.7
235.4
202.9
206.5
203.4
205.2
197.0
202.4
213.2
211.2
216.3
219.6
216.8
220.7
229.2
231.3
227.9
230.3
235.3
232.6
237.3
236.5
237.4
232.5
239.7

Net
foreign
investment 5

-1.2
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
8.9
-9.0
-10.4
2.6
12.5
7.4
-6.1
-37.3
-91.5
-116.9
-142.9
-156.4
-118.1
-92.4
-78.6
7.3
-50.5
-78.6
-120.0
-100.6
-119.2
-140.9
-54.2
-74.9
-84.9
-100.4
-91.6
-112.5
-134.2
-141.8
-110.7
-118.0
-100.1
-73.5
-97.8
-114.9
-146.2
-118.0
-130.9
-123.9
-141.0
-167.8
-175.6
-214.8
-231.6

Statistical
discrepancy

-1.6
-3.2
-2.8
-1.8
-3.0
-1.5
-.8
3.3
1.3
.9
-1.5
1.9
6.1
4.3
3.4
5.5
12.1
19.9
18.2
18.1
28.2
27.6
14.9
-2.5
37.1
5.0
2.4
23.3
-15.4
-47.3
13.2
17.4
10.1
44.8
52.6
14.6
-26.5
-32.2
-55.8
71.0
46.9
47.5
45.0
6.3
42.4
15.2
-5.4
3.1
-22.7
-43.0
-43.2
-26.3
-20.6
-49.3
-32.6
-43.1
-47.7
-65.1
-*7.3
-54.1
-85.7
-102.0

Gross
saving
as a
percent
of
gross
national
product

21.3
21.4
21.2
21.5
21.7
21.7
22.1
21.6
20.7
20.2
20.5
18.9
18.9
19.6
21.2
19.9
18.1
18.5
19.3
20.6
20.9
19.4
20.7
18.5
16.6
19.1
17.7
16.2
16.6
17.3
16.6
15.7
15.7
14.5
14.4
15.5
16.3
16.6
17.4
14.4
14.4
14.3
14.6
15.6
15.4
15.3
15.8
16.2
16.0
16.3
16.8
16.4
16.4
16.8
16.7
17.0
17.6
17.5
17.3
17.7
17.2
17.3

Personal
saving
as a
percent
of
disposable
personal
income

7.2
6.6
7.7
7.6
7.0
7.9
7.8
7.5
8.7
7.7
7.2
8.5
8.8
7.6
9.5
9.5
9.3
7.9
6.9
7.5
7.7
8.5
9.4
9.0
6.7
8.6
6.9
5.9
5.0
5.4
5.0
5.1
5.6
5.7
4.4
3.5
3.4
2.9
2.1
3.9
4.8
4.2
4.7
2.7
3.6
3.7
4.0
4.1
3.1
3.1
3.3
3.2
2.6
3.1
2.6
2.4
2.6
1.7
1.7
1.2
.4
.2

on government investment, see Table B-20.
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-24.
6
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.




365

TABLE B-33.—Median money income (in 1997 dollars) and poverty status of families and persons,
by race, selected years, 1979-97
Persons
below
poverty level

Families^

Year

ALL RACES
1979 4
1980
1981
1982 5
1983
1984
1985
1986
19876
1988
1989
1990
1991 7
1992
1993
1994
1995
1996
1997
..
WHITE
4
1979
1980
1981
1982 5
1983
1984
1985
1986 6
1987
1988
1989
1990
1991 7
1992
1993
1994
1995
1996
1997
BLACK
1979 4
1980
1981 . .
1982 5
1983
1984
1985
1986 6
1987
1988
1989
1990
1991 7
1992
1993
.
1994
1995
1996
.
1997

Number
(millions)

Median
money
income
(in
1997
dol- 2
lars)

Below poverty level
Female
householder

Total

Number
(millions)

Median money income (in 1997 dollars)
of persons 15 years old and over with
income 2 3
Males

Number
(millions)

Percent

Females

Yearround
full-time
workers

Yearround
full-time
workers

Number
(millions)

Percent

59.6 $42,483
60.3 40,999
61.0
39,881
61.4
39,341
62.0
39,761
62.7
40,832
41,371
63.6
64.5
43,139
65.2
43,756
65.8 43,674
44,284
66.1
66.3
43,414
67.2
42,351
68.2
41,839
68.5 41,051
69.3
42,001
69.6
42,769
70.2
43,271
70.9
44,568

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
8.1
8.4
8.1
7.5
7.7
7.3

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
11.9
12.3
11.6
10.8
11.0
10.3

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
4.3
4.4
4.2
4.1
4.2
4.0

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
35.4
35.6
34.6
32.4
32.6
31.6

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
38.0
39.3
38.1
36.4
36.5
35.6

11.7 $25,548 $37,911
13.0 24,436 37,391
24,000 36,860
14.0
15.0 23,420 36,356
15.2
23,625 36,267
14.4
24,098 37,080
14.0
24,330 37,289
13.6 25,062 37,920
13.4
25,129 37,696
13.0 25,653 37,095
12.8 25,749 36,784
13.5 24,920 35,586
24,121 35,742
14.2
14.8 23,400 35,271
15.1 23,439 34,518
14.5 23,523 34,236
23,761 33,910
13.8
13.7 24,381 34,308
13.3 25,212 35,248

$9,439 $22,841
9,595 22,605
22,190
9,723
9,884
22,938
10,321 23,347
23,823
10,609
24,242
10,765
11,144
24,665
24,815
11,720
12,053 25,160
12,457
25,419
25,286
12,366
25,035
12,345
25,274
12,257
24,957
12,269
25,196
12,418
12,775 25,041
25,507
13,109
13,703 26,029

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
57.7
57.9
58.4
58.9
58.9
59.5

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
5.3
5.5
5.3
5.0
5.1
5.0

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
9.1
9.4
9.1
8.5
8.6
8.4

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
2.2
2.4
2.3
2.2
2.3
2.3

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
28.5
29.2
29.0
26.6
27.3
27.7

17.2
19.7
21.6
23.5
24.0
23.0
22.9
22.2
21.2
20.7
20.8
22.3
23.7
25.3
26.2
25.4
24.4
24.7
24.4

9.0
10.2
11.1
12.0
12.1
11.5
11.4
11.0
10.4
10.1
10.0
10.7
11.3
11.9
12.2
11.7
11.2
11.2
11.0

9,528
9,648
9,831
10,018
10,502
10,734
10,974
11,364
12,019
12,350
12,700
12,669
12,634
12,541
12,513
12,595
12,971
13,258
13,792

44,331
42,717
41,892
41,305
41,635
42,768
43,484
45,117
45,755
46,013
46,564
45,332
44,524
44,238
43,652
44,277
44,913
45,783
46,754

Percent

All
persons

26,689
25,992
25,466
24,760
24,855
25,437
25,523
26,447
26,710
27,079
27,004
25,997
25,212
24,488
24,415
24,550
25,165
25,521
26,115

39,006
38,458
37,726
37,325
37,236
38,350
38,325
38,978
38,575
38,344
38,406
36,940
36,475
36,110
35,357
35,132
35,296
35,538
36,118

All
persons

23,040
22,823
22,561
23,247
23,659
24,060
24,585
25,043
25,275
25,538
25,720
25,590
25,401
25,567
25,523
25,877
25,554
25,940
26,470

49.4
16,521 28,111
8,671 21,112
1.2
8.1 31.0
1.7 27.8
49.4
1.3
8,932
21,286
8.6 32.5 15,619 27,059
1.8 28.9
1.4
9.2 34.2
15,143 26,692
8,734
52.9
20,375
2.0 30.8
9.7 35.6 14,838 26,509
56.2
1.5
20,778
8,836
2.2 33.0
14,535
53.7
1.5
9.9 35.7
26,549
8,974
2.2 32.3
21,002
14,595 26,173
51.7
1.5
21,682
9.5 33.8
9,522
2.1 30.9
16,062
8.9 31.3
26,806
50.5
1.5
9,363 21,763
2.0 28.7
15,848
50.1
1.5
21,914
9.0 31.1
27,481
2.0 28.0
9,615
51.1
1.6
9.5 32.4
15,845 27,582
2.1 29.4
9,818 22,575
9.4 31.3
16,340 28,106
49.0
1.6
2.1 28.2
22,884
9,971
1.5
9.3 30.7 16,321 26,798 10,193 23,131
46.5
2.1 27.8
48.1
1.6
9.8 31.9 15,802 26,379 10,227 22,772
2.2 29.3
51.2 10.2 32.7
1.8
15,275 26,665 10,389
2.3 30.4
22,548
10.8 33.4 14,945 26,301
10,167
50.2
1.9
23,175
2.5 31.1
1.9
22,564
10.9 33.1
16,222
49.9
26,175
10,561
2.5 31.3
1.7
10.2 30.6
16,225 26,431
46.2
2.2 27.3
22,340
11,419
1.7
16,857
45.1
2.1 26.4
9.9 29.3
26,116
11,544
22,199
1.7
9.7 28.4
43.7
16,869 27,759
2.2 26.1
22,495
12,042
39.8
18,096
26,897
1.6
9.1 26.5
2.0 23.6
13,048 22,764
J
The term "family" refers to a group of two or more persons related by birth, marriage, or adoption and residing together. Every family
must include a reference person. Beginning 1979, based on householder concept and restricted to primary families.
2
Current dollar median money income adjusted by CPI-U-X1.
3
Prior to 1979, data are for persons 14 years and over.
4
Based on 1980 census population controls; comparable with succeeding years.
Reflects implementation of Hispanic population controls; comparable with succeeding years.
6
Based on revised methodology; comparable with succeeding years.
7
Based on 1990 census adjusted 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; 1971, 12.5; 1972, 11.9;
1973,11.1; 1974,11.2; 1975,12.3; 1976, 11.8; 1977,11.6; and 1978, 11.4.
Poverty thresholds are updated each year to reflect changes in the consumer price index (CPI-U).
For details see "Current Population Reports," Series P-60.
Source: Department of Commerce, Bureau of the Census.




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
8.0
8.0
8.1
8.1
8.5
8.4

25,103
24,717
23,631
22,829
23,464
23,837
25,039
25,780
26,005
26,224
26,158
26,308
25,392
24,141
23,927
26,748
27,350
27,131
28,602

366

POPULATION, EMPLOYMENT, WAGES, AND PRODUCTIVITY
TABLE B-34.—Population by age group, 1929-98
[Thousands of persons]
Age (years)
July 1
1929
1933
1939
1940
1941
1942
1943
1944
1945
1946
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
1993
1994
1995
1996
1997
1998

Total
121,767
125,579
130880
132 122
133,402
134 860
136,739
138 397
139 928
14U89
144 126
146 631
149,188
152 271
154878
157 553
160 184
163,026
165 931
168 903
171,984
174882
177*830
180,671
183 691
186 538
189 242
191,889
194,303
196 560
198712
200706
202*677
205 052
207 '661
209 896
211 '909
213854
215973
218 035
220 239
222*585
225,055
227 726
229*966
232188
234 307
236 348
238 466
240,651
242804
245*021
247 342
249 949
252*636
255 382
258089
260 602
263 039
265*453
267 901
270.290

Under 5
11,734
10,612
10418
10579
10,850
11301
12J016
12524
12979
13*.244
14406
14919
15,607
16410
17333
17312
17638
18,057
18566
19003
19,494
19887
20,175
20,341
20522
20469
20*342
20,165
19,824
19208
18*563
17913
17*376
17166
17244
17101
16851
16487
16121
15617
15564
15*735
16,063
16451
16,893
17228
17*547
17695
17842
17,963
18052
18*195
18508
18851
19',187
19489
19670
19*694
19526
19*.324
19150
19.020

5-15

16-19
9,127
9,302
9822
9,895
9,840
9730
9,607
9561
9361
9]ll9
9097
8952
8,788
8542
8,446
8414
8,460
8,637
8744
8916
9,195
9543
10,215
10,683
11,025
11180
12007
12,736
13,516
14311
14*200
14452
14*800
15289
15688
16039
16446
16769
17017
17,194
17276
17*288
17*242
17167
16*812
16332
15823
15,295
15005
15*,024
15215
15198
14*913
14461
13,970
13736
13879
14*122
14379
14,874
15211
15*599

26,800
26,897
25179
24811
24,516
24231
24,093
23949
23907
24]l03
24468
25209
25,852
26721
27279
28894
30,227
31,480
32682
33994
35,272
36445
37,368
38,494
39765
41205
41626
42,297
42,938
43702
44,244
44622
44*840
44816
44591
44203
43582
42989
42508
42,099
41298
40*428
39,552
38838
38*144
37784
37526
37,461
37450
37,404
37333
37*593
37,972
38588
39,146
39802
40386
41*009
41666
42,157
42648
42*970

20-24
10,694
11 152
11519
11690
11*807
11955
12*064
12062
12036
12004
11814
11794
11700
11680
11552
11350
11062
10,832
10714
10616
10].603
10756
10*969
11,134
11483
11959
12714
13,269
13746
14050
15248
15786
16*480
17202
18*159
18153
18*521
18975
19527
19*986
20499
20*946
21297
21590
21869
21902
21*844
21737
21478
20942
20385
19*846
19442
19309
19*.357
19211
18949
18*553
18136
17*650
17594
17.768

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.




367

25-44
35,862
37319
39354
39868
40*383
40861
41420
42016
42521
43027
43657
44288
44*.916
45672
46103
46495
46786
47,001
47194
47379
47*440
47337
47*192
47,140
47084
47013
46994
46,958
46,912
47001
47194
47721
48*064
48473
48*936
50482
51*749
53051
54302
55852
57561
59*400
61,379
63470
65^528
67692
69*733
71,735
73673
75,651
77338
78595
79,943
81207
82,444
82516
82831
83*155
83513
83,847
83771
83^18

45-^4
21,076
22933
25823
26249
26718
27196
27*671
28138
28630
29064
29498
29931
30*405
30849
31362
31884
32394
32,942
33506
34057
34,591
35109
35,663
36,203
36722
37255
37782
38,338
38,916
39534
40*193
40846
41*437
41999
42*482
42898
43235
43522
43801
44,008
44150
44*286
44,390
44504
44*500
44462
44474
44,547
44602
44,660
44854
45471
45*882
46294
46,766
48355
49595
50,906
52,258
53,734
55452
57.247

65 and
over

6,474
7,363
8764
9031
9,288
9584
9*867
10147
10494
10*828
11 185
11538
11,921
12397
12803
13203
13617
14,076
14525
14938
15,388
15806
16,248
16,675
17,089
17457
17778
18,127
18,451
18755
19*071
19365
19*680
20107
20561
21020
21525
22061
22696
23,278
23892
24502
25*134
25707
26^221
26787
27361
27*878
28416
29*008
29626
30124
30^682
31,237
31,766
32273
32779
33,164
33,560
33,867
34076
34.269

TABLE B-35.—Civilian population and labor force, 1929-98
[Monthly data seasonally adjusted, except as noted]
Civilian labor force
Year or month

Civilian
noninstitutional
population i

Employment
Total

Total

Agricultural

Noncultural

Unemployment

Not in
labor
force

Civilian
labor
force
participation
rate*

Percent

Thousands of persons 14 years of age and over

1929
1933
1939
1940
1941
1942
1943
1944
1945
1946
1947

99,840
99,900
98,640
94,640
93,220
94,090
103,070
106,018

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

37,180
28,670
36,140
37,980
41,250
44,500
45,390
45,010
44,240
46,930
49,557

1,550
12,830
9,480
8,120
5,560
2,660
1,070
670
1,040
2,270
2,356

Civil- Unemian
em- ployploy- ment
rate,
ment/ civilpopian
ulation 3 workers*
ratio

44,200
43,990
42,230
39,100
38,590
40,230
45,550
45,850

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
56.1
53.6
54.5

3.2
24.9
17.2
14.6
9.9
4.7
1.9
1.2
1.9
3.9
3.9

42,477
42,447
42,708
42,787
42,604
43,093
44,041
44,678
44,660
44,402
45,336
46,088
46,960
47,617
48,312
49,539
50,583
51,394
52,058
52,288
52,527
53,291
53,602
54,315
55,834
57,091
57,667
58,171
59,377
59,991
60,025
59,659
59,900
60,806
61,460
62,067
62,665
62,839
62,744
62,752
62,888
62,944
62,523
63,324
64,578
64,700
65,638
65,758
66,280
66,647
66,837
67.547

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
63.8
63.9
64.0
64.0
64.4
64.8
65.3
65.6
65.9
66.5
66.5
66.2
66.4
66.3
66.6
66.6
66.8
67.1
67.1

56.0
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
62.8
61.7
61.5
61.7
62.5
62.9
63.2
63.8
64.1

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
5.6
6.8
7.5
6.9
6.1
5.6
5.4
4.9
4.5

Thousands of persons 16 years of age and over
101,827 59,350 57,038
1947
103,068 60,621 58,343
1948
103,994 61,286 57,651
1949
1950
104,995 62,208 58,918
1951
104,621 62,017 59,961
105,231 62,138 60,250
1952
19535
107,056 63,015 61,179
108,321 63,643 60,109
1954
1955
109,683 65,023 62,170
110,954 66,552 63,799
1956
1957
112,265 66,929 64,071
113,727 67,639 63,036
1958
115,329 68,369 64,630
1959
5
117,245 69,628 65,778
I960
118,771 70,459 65,746
1961 5
120,153 70,614 66,702
1962
122,416 71,833 67,762
1963
124,485 73,091 69,305
1964
126,513 74,455 71,088
1965
128,058 75,770 72,895
1966
129,874 77,347 74,372
1967
132,028 78,737 75,920
1968
134,335 80,734 77,902
1969
137,085 82,771 78,678
1970
140,216 84,382 79,367
19715
144,126 87,034 82,153
1972 5
147,096 89,429 85,064
1973
1974
150,120 91,949 86,794
1975
153,153 93,775 85,846
156,150 96,158 88,752
1976
1977 5
159,033 99,009 92,017
161,910 102,251 96,048
1978
164,863 104,962 98,824
1979
1980
167,745 106,940 99,303
170,130 108,670 100,397
1981
172,271 110,204 99,526
1982
1983
174,215 111,550 100,834
1984
176,383 113,544 105,005
1985 5
178,206 115,461 107,150
180,587 117,834 109,597
1986
1987
182,753 119,865 112,440
184,613 121,669 114,968
1988
1989
186,393 123,869 117,342
189,164 125,840 118,793
19905
1991
190,925 126,346 117,718
1992
192,805 128,105 118,492
1993 5
194,838 129,200 120,259
1994
196,814 131,056 123,060
198,584 132,304 124,900
1995
1996 5
200,591 133,943 126,708
19975
203,133 136,297 129,558
1998
205.220 137.673 131.463
1
Not seasonally adjusted.
2
Civilian labor force as percent of civilian noninstitutional population.
3
Civilian employment as percent of civilian noninstitutional population.
4
Unemployed as percent of civilian labor force.
See next page for continuation of table.




368

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
3,223
3,269
3,247
3,115
3,409
3,440
3,443
3,399
3.378

49,148
50,714
49,993
51,758
53,235
53,749
54,919
53,904
55,722
57,514
58,123
57,450
59,065
60,318
60,546
61,759
63,076
64,782
66,726
68,915
70,527
72,103
74,296
75,215
75,972
78,669
81,594
83,279
82,438
85,421
88,734
92,661
95,477
95,938
97,030
96,125
97,450
101,685
103,971
106,434
109,232
111,800
114,142
115,570
114,449
115,245
117,144
119,651
121,460
123,264
126,159
128.085

2,311
2,276
3,637
3,288
2,055
1,883
1,834
3,532
2,852
2,750
2,859
4,602
3,740
3,852
4,714
3,911
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
7,047
8,628
9,613
8,940
7,996
7,404
7,236
6,739
6.210

TABLE B-35.—Civilian population and labor force, 1929-98—Continued
[Monthly data seasonally adjusted, except as noted]
Civilian labor force
Civilian
noninstitutional
population1
•

Year or month

Employment
Total

Total

Agricultural

UnNon- employagriment
cultural

Thousands of persons 16 years of age and over

1995- Jan
Feb
Mar

Not in
labor
force

Civilian
labor
force
participation
rate*

Civil- Unemian
em- ployploy- ment
rate,
ment/ civilpopian
ulation 3 workers4
ratio
Percent

7,338 65,719 66.8 63.1
197,753 132,034 124,696 3,520 121,176
5.6
5.4
7,189 65,775 66.8 63.1
197,886 132,111 124,922 3,609 121,313
5.4
7,142 65,908 66.7 63.1
198,007 132,099 124,957 3,634 121,323
5.8
7,636 65,557 66.9 63.1
198,148 132,591 124,955 3,575 121,380
May
5.6
7,436 66,405 66.5 62.8
198,286 131,881 124,445 3,350 121,095
June
5.6
66.5 62.7
7,431 66,497
198,453 131,956 124,525 3,466 121,059
July
5.7
7,536 66,279 66.6 62.8
198,615 132,336 124,800 3,378 121,422
5.7
Aug
66.6 62.8
7,496 66,472
198,801 132,329 124,833 3,374 121,459
5.7
7,497 66,397 66.6 62.9
199,005 132,608 125,111 3,282 121,829
Oct
5.5
66.6 62.9
7,340 66,494
199,192 132,698 125,358 3,430 121,928
Nov
5.6
7,427 66,744
66.5 62.8
199,355 132,611 125,184 3,339 121,845
5.6
Dec
7,429 66,998 66.4 62.7
199,508 132,510 125,081 3,350 121,731
5.6
7,464 66,969 66.5 62.7
199,634 132,665 125,201 3,489 121,712
1996- Jan
5.5
66.6 62.9
Feb
7,335 66,751
199,773 133,022 125,687 3,541 122,146
Mar
5.5
7,298 66,733 66.6 63.0
199,921 133,188 125,890 3,491 122,399
66.7 63.0
Apr
5.5
7,390 66,694
200,101 133,407 126,017 3,414 122,603
7,454 66,560
5.6
66.8 63.0
May
200,278 133,718 126,264 3,479 122,785
5.3
7,103 66,748 66.7 63.2
200,459 133,711 126,608 3,427 123,181
June
5.5
66.9 63.3
200,641 134,247 126,908 3,437 123,471
July
7,339 66,394
5.1
AUK
6,891 66,826 66.7 63.3
200,847 134,021 127,130 3,400 123,730
5.2
6,994 66,597
66.9 63.4
Sept
201,061 134,464 127,470 3,437 124,033
5.2
7,034 66,426
67.0 63.5
Oct
201,273 134,847 127,813 3,448 124,365
5.4
Nov
67.0 63.4
7,227 66,519
201,463 134,944 127,717 3,355 124,362
5.4
7,244 66,573 67.0 63.4
Dec ...
201,636 135,063 127,819 3,426 124,393
5
5.3
1997: Jan
7,126 66,687 67.0 63.5
202,285 135,598 128,472 3,462 125,010
7,154 66,826 67.0 63.4
5.3
Feb
202,389 135,563 128,409 3,346 125,063
Mar
5.1
6,996 66,563 67.1 63.7
202,513 135,950 128,954 3,418 125,536
Apr
5.0
6,842 66,622 67.1 63.8
202,674 136,052 129,210 3,496 125,714
4.9
6,678 66,729 67.1 63.8
202,832 136,103 129,425 3,437 125,988
June
5.0
67.1 63.8
6,824 66,746
203,000 136,254 129,430 3,409 126,021
4.9
6,633 66,788 67.1 63.9
Jury
203,166 136,378 129,745 3,428 126,317
67.1 63.9
4.9
6,630 66,824
203,364 136,540 129,910 3,354 126,556
6,654 67,005
4.9
67.1 63.8
Sept
203,570 136,565 129,911 3,382 126,529
4.7
6,445 67,267 67.0 63.8
203,767 136,500 130,055 3,289 126,766
Nov
4.6
67.1 64.0
6,289 67,106
203,941 136,835 130,546 3,377 127,169
4.7
6,448 67,012 67.2 64.0
204,098 137,086 130,638 3i383 127,255
Dec
5
1998: Jan
4.6
67.2 64.1
6,345 66,950
204,238 137,288 130,943 3,337 127,606
Feb
4.6
6,363 67,016 67.2 64.1
204,400 137,384 131,021 3,345 127,676
4.7
Mar
6,432 67,207 67.1 64.0
204,547 137,340 130,908 3,173 127,735
4.3
Apr ..
67.0 64.1
5,952 67,499
204,731 137,232 131,280 3,381 127,899
4.4
May
67.0 64.1
6,039 67,530
204,899 137,369 131,330 3,351 127,979
4.5
67.0 64.0
6,245 67,587
June
205,085 137,498 131,253 3,363 127,890
4.5
6,231 67,863 66.9 63.9
July
205,270 137,407 131,176 3,423 127,753
4.5
6,217 67,998 66.9 63.9
205,479 137,481 131,264 3,492 127,772
4.5
67.1 64.1
Sept
6,263 67,618
205,699 138,081 131,818 3,470 128,348
4.5
6,258 67,803 67.1 64.0
Oct
205,919 138,116 131,858 3,558 128,300
4.4
6,080 67,911 67.1 64.1
206,104 138,193 132.113 3,348 128,765
Nov
4.3
6,021 67,723 67.2 64.2
Dec ..
206,270 138,547 132,526 3,222 129,304
5
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, and agricultural employment. Beginning 1960, inclusion of
Alaska and Hawaii added about 500,000 to population, 300,000 to labor force, and 240,000 to nonagricultural employment. Beginning 1962,
introduction of 1960 census data reducedjwpulation 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 and employment. A subsequent adjustment based on 1970 census in March 1973 added 60,000 to labor force and to employment. Beginning 1978, changes in sampling and estimation procedures introduced into the household survey added about 250,000 to labor force and to employment. Unemployment
levels and rate', were not significantly affected. Beginning 1986, the introduction of revised population controls added about 400,000 to the
civilian population and labor force and 350,000 to civilian employment. Unemployment levels and rates were not significantly affected.
Beginning 1990, the introduction of 1990 census-based population controls, adjusted for the estimated undercount, added about 1.1 million to the civilian population and labor force, 880,000 to civilian employment, and 175,000 to unemployment. The overall unemployment rate
rose by about 0.1 percentage point.
Beginning 1994, data are not strictly comparable with earlier data because of the introduction of a major redesign of the Current Population Survey and collection methodology.
Beginning 1997, data are not strictly comparable with earlier data due to the introduction of revised population controls which added
about 470,000 to the civilian population, 320,0100 to the labor force, and 290,000 to employment. Unemployment rates and other percentages
of labor market participation were not affected.
Beginning 1998, data are not strictly comparable with earlier data due to the introduction of a new composite estimation procedure for the
Current Population Survey and revised population controls. If reestimated using the revised population controls, 1997 civilian population and
employment would change slightly and most unemployment rates and other ratios and proportions would be unaffected.
Note.—Labor force data in Tables B-35 through B-44 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.

sept .:

::::::::.:.

May .::::::::::::::::::: :::::::

oct .::::::::::::::::.::.::::::::::::




369

TABLE B—36.—Civilian employment and unemployment by sex and age, 1950-98
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]
Civilian employment
Males
Year or month
Total

I960
1951
1952
1953
1954
1955
1956
1958
1959
I960
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
1993
1994
1995
'.
1996
1997
1998
1997: Jan
Feb .
Mar
Apr
May
June
July
Aug

1957 ::: ::::...

sept ..:::...
Oct

Nov
Dec .
1998- Jan
Feb
Mar
Apr
May
June
July

AUK

sept :::::
Oct
Nov
Dec

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
118,793
117,718
118,492
120,259
123,060
124,900
126,708
129,558
131,463
128,472
128,409
128,954
129,210
129,425
129,430
129,745
129,910
129,911
130,055
130,546
130,638
130,943
131,021
130,908
131,280
131,330
131,253
131,176
131,264
131,818
131,858
132,113
132.526

Total
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
65,104
64,223
64,440
65,349
66,450
67,377
68,207
69,685
70,693
69,121
69,203
69,388
69,485
69,721
69,592
69,747
69,857
69,839
69,886
70,273
70,133
70,387
70,411
70,295
70,695
70,603
70,592
70,629
70,503
70,841
70,925
71,182
71.204

16-19
years
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
3,427
3,044
2,944
2,994
3,156
3,292
3,310
3,401
3,558
3,343
3,399
3,371
3,363
3,479
3,307
3,347
3,373
3,361
3,455
3,538
3,497
3,495
3,484
3,526
3,522
3519
3,598
3,573
3,563
3,579
3,562
3,609
3.651

Unemployment
Females

20
years
and
over

Total

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
61,678
61,178
61,496
62,355
63,294
64,085
64,897
66,284
67,135
65,778
65,804
66,017
66,122
66,242
66,285
66,400
66,484
66,478
66,427
66,735
66,636
66,892
66,927
66,769
67,173
67,084
66,994
67,056
66,940
67,262
67,362
67,573
67.553

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
53,689
53,496
54,052
54,910
56,610
57,523
58,501
59,873
60,771
59,351
59,206
59,566
59,725
59,704
59,838
59,998
60,053
60,072
60,169
60,273
60,505
60,556
60,610
60,613
60,585
60,727
60,661
60,547
60,761
60,977
60,933
60,931
61.322

16-19
years
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
3,154
2,862
2,724
2,811
3,005
3,127
3,190
3,260
3,493
3,239
3,213
3,272
3,349
3,226
3,233
3,269
3,238
3,211
3,240
3,304
3,340
3,505
3,513
3,477
3,468
3,492
3,471
3,469
3,466
3,551
3,496
3,428
3.577

Note.-See footnote 5 and Note, Table B-35.

Source: Department of Labor, Bureau of Labor Statistics.




370

Females

Males

20
years
and
over

Total

20
20
Total 16-19 years Total 16-19 years
years and
years and
over
over

15,824
16,570
16,958
17,164
17,000
18,002
18,767
19,052
19,043
19,524
20,105
20,296
20,693
21,257
21,903
22,630
23,510
24,397
25,281
26,397
26,952
27,246
28,276
29,484
30,424
30,726
32,226
33,775
35,836
37,434
38,492
39,590
40,086
41,004
42,793
44,154
45,556
47,074
48,383
49,745
50,535
50,634
51,328
52,099
53,606
54,396
55,311
56,613
57,278
56,112
55,993
56,294
56,376
56,478
56,605
56,729
56,815
56,861
56,929
56,969
57,165
57,051
57,097
57,136
57,117
57,235
57,190
57,078
57,295
57,426
57,437
57,503
57.745

3,288
2,055
1,883
1,834
3,532
2,852
2,750
2,859
4,602
3,740
3,852
4,714
3,911
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
7,047
8,628
9,613
8,940
7,996
7,404
7,236
6,739
6,210
7,126
7,154
6,996
6,842
6,678
6,824
6,633
6,630
6,654
6,445
6,289
6,448
6,345
6,363
6,432
5,952
6,039
6,245
6,231
6,217
6,263
6,258
6,080
6.021

2,239 318
1,221 191
1,185 205
184
1,202
2,344 310
1,854 274
1,711 269
1,841 300
3,098 416
2,420 398
2,486 426
2,997 479
2,423 408
2,472 501
2,205 487
1,914 479
1,551 432
1,508 448
1,419 426
1,403 440
2,238 599
2,789 693
2,659 711
2,275 653
2,714 757
4,442 966
4,036 939
3,667 874
3,142 813
3,120 811
4,267 913
4,577 962
6,179 1,090
6,260 1,003
4,744 812
4,521 806
4,530 779
4,101 732
3,655 667
3,525 658
3,906 667
4,946 751
5,523 806
5,055 768
4,367 740
3,983 744
3,880 733
3,577 694
3,266 686
3,847 741
3,762 729
3,717 726
3,667 717
3,404 642
3,666 764
3,466 706
3,511 715
3,480 692
3,478 669
3,361
656
3,429 576
3,332 677
3,324 692
3,362 685
3,028 585
3,189 665
3,274 678
3,360 678
673
3,251
754
3,361
3,264 713
3,163 713
3.233 717

1,922
1,029
980
1,019
2,035
1,580
1,442
1,541
2,681
2,022
2,060
2,518
2,016
1,971
1,718
1,435
1,120
1,060
993
963
1,638
2,097
1,948
1,624
1,957
3,476
3,098
2,794
2,328
2,308
3,353
3,615
5,089
5,257
3,932
3,715
3,751
3,369
2,987
2,867
3,239
4,195
4,717
4,287
3,627
3,239
3,146
2,882
2,580
3,106
3,033
2,991
2,950
2,762
2,902
2,760
2,796
2,78*
2,809
2,705
2,853
2,655
2,632
2,677
2,443
2,524
2,596
2,682
2,578
2,607
2,551
2,450
2.516

1,049
834
698
632
1,188
998
1,039
1,018
1,504
1,320
1,366
1,717
1,488
1,598
1,581
1,452
1,324
1,468
1,397
1,429
1,855
2,227
2,222
2,089
2,441
3,486
3,369
3,324
3,061
3,018
3,370
3,696
4,499
4,457
3,794
3,791
3,707
3,324
3,046
3,003
3,140
3,683
4,090
3,885
3,629
3,421
3,356
3,162
2,944
3,279
3,392
3,279
3,175
3,274
3,158
3,167
3,119
3,174
2,967
2,928
3,019
3,013
3,039
3,070
2,924
2,850
2,971
2,871
2,966
2,902
2,994
2,917
2.788

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
544
608
621
597
580
602
573
577
519
603
662
578
549
608
543
620
549
584
532
548
546
481
511
540
502
502
548
484
553
524
605
524
455

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
2,596
3,074
3,469
3,288
3,049
2,819
2,783
2,585
2,424
2,676
2,730
2,701
2,626
2,666
2,615
2,547
2,570
2,590
2,435
2,380
2,473
2,532
2,528
2,530
2,422
2,348
2,423
2,387
2,413
2,378
2,389
2,393
2.333

TABLE B-37.—Civilian employment by demographic characteristic, 1955—98
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]
White

Year or
month

All
civilian
workers

Total

Males

1955
1956
1957
1958
1959
I960
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
1993
1994
1995
1996
1997 ..
1998
1997:Jan
Feb
Mar ..
..

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
118,793
117,718
118,492
120,259
123,060
124,900
126,708
129,558
131,463
128,472
128,409
128,954
129,210
129,425
129,430
129,745
129,910
129,911
130,055
130,546
130,638
130,943
131,021
130,908
131,280
131,330
131,253
131,176
131,264
131,818
131,858
132,113
132,526

55,833
57,269
57,465
56,613
58,006
58,850
58,913
59,698
60,622
61,922
63,446
65,021
66,361
67,750
69,518
70,217
70,878
73,370
75,708
77,184
76,411
78,853
81,700
84,936
87,259
87,715
88,709
87,903
88,893
92,120
93,736
95,660
97,789
99,812
101,584
102,261
101,182
101,669
103,045
105,190
106,490
107,808
109,856
110,931
109,109
109,095
109,488
109,712
109,865
109,877
109,933
109,946
109,905
110,206
110,530
110,612
110,659
110,731
110,556
110,858
110,959
110,638
110,676
110,848
111,221
111,162
111,304
111,560

38,719
39,368
39,349
38,591
39,494
39,755
39,588
40,016
40,428
41,115
41,844
42,331
42,833
43,411
44,048
44,178
44,595
45,944
47,085
47,674
46,697
47,775
49,150
50,544
51,452
51,127
51,315
50,287
50,621
52,462
53,046
53,785
54,647
55,550
56,352
56,703
55,797
55,959
56,656
57,452
58,146
58,888
59,998
60,604
59,602
59,606
59,854
59,926
60,077
59,940
60,004
60,012
60,022
60,143
60,443
60,367
60,398
60,445
60,293
60,617
60,533
60,442
60,548
60,547
60,722
60,788
60,963
60,957

&:
::
June ...
J«iy
Aug

Sept ...
Oct
Nov
Dec
1998:Jan
Feb
Mar ..
..
Apr
May ..
..
June ...

J"iy
Aug

Sept ...
Oct
Nov
Dec

Black and other

Females

Total

Males

Females

Both
sexes
16-19

17,114
17,901
18,116
18,022
18,512
19,095
19,325
19,682
20,194
20,807
21,602
22,690
23,528
24,339
25,470
26,039
26,283
27,426
28,623
29,511
29,714
31,078
32,550
34,392
35,807
36,587
37,394
37,615
38,272
39,659
40,690
41,876
43,142
44,262
45,232
45,558
45,385
45,710
46,390
47,738
48,344
48,920
49,859
50,327
49,507
49,489
49,634
49,786
49,788
49,937
49,929
49,934
49,883
50,063
50,087
50,245
50,261
50,286
50,263
50,241
50,426
50,196
50,128
50,301
50,499
50,374
50,341
50,603

3,225
3,389
3,374
3,216
3,475
3,700
3,693
3,774
3,851
4,076
4,562
5,176
5,114
5,195
5,508
5,571
5,670
6,173
6,623
6,796
6,487
6,724
7,068
7,367
7,356
7,021
6,588
5,984
5,799
5,836
5,768
5,792
5,898
6,030
5,946
5,779
5,216
4,985
5,113
5,398
5,593
5,667
5,807
6,089
5,719
5,723
5,748
5,868
5,845
5,741
5,770
5,733
5,749
5,827
6,000
5,979
6,087
6,070
6,084
6,016
6,084
6,046
6,100
6,077
6,150
6,115
6,083
6,162

6,341
6,534
6,604
6,423
6,623
6,928
6,833
7,003
7,140
7,383
7,643
7,877
8,011
8,169
8,384
8,464
8,488
8,783
9,356
9,610
9,435
9,899
10,317
11,112
11,565
11,588
11,688
11,624
11,941
12,885
13,414
13,937
14,652
15,156
15,757
16,533
16,536
16,823
17,214
17,870
18,409
18,900
19,701
20,532
19,298
19,299
19,467
19,499
19,580
19,535
19,782
20,022
19,997
19,889
20,015
20,036
20,254
20,265
20,389
20,443
20,368
20,595
20,465
20,499
20,601
20,718
20,813
20,981

3,904
4,013
4,006
3,833
3,971
4,149
4,068
4,160
4,229
4,359
4,496
4,588
4,646
4,702
4,770
4,813
4,796
4,952
5,265
5,352
5,161
5,363
5,579
5,936
6,156
6,059
6,083
5,983
6,166
6,629
6,845
7,107
7,459
7,722
7,963
8,401
8,426
8,482
8,693
8,998
9,231
9,319
9,687
10,089
9,503
9,576
9,521
9,562
9,628
9,640
9,713
9,892
9,803
9,789
9,833
9,781
9,999
9,952
10,010
10,089
10,035
10,142
10,055
10,030
10,108
10,164
10,219
10,270

2,437
2,521
2,598
2,590
2,652
2,779
2,765
2,843
2,911
3,024
3,147
3,289
3,365
3,467
3,614
3,650
3,692
3,832
4,092
4,258
4,275
4,536
4,739
5,177
5,409
5,529
5,606
5,641
5,775
6,256
6,569
6,830
7,192
7,434
7,795
8,131
8,110
8,342
8,521
8,872
9,179
9,580
10,014
10,443
9,795
9,723
9,946
9,937
9,952
9,895
10,069
10,130
10,194
10,100
10,182
10,255
10,255
10,313
10,379
10,354
10,333
10,453
10,410
10,469
10,493
10,554
10,594
10,711

418
430
407
365
362
430
414
420
404
440
474
545
568
584
609
574
538
573
647
652
615
611
619
703
727
689
637
565
543
607
666
681
742
774
813
801
690
684
691
763
826
832
853
962
849
872
906
852
853
795
821
850
826
875
879
873
918
901
943
989
918
1,029
927
932
986
931
990
1,086

Note.—See footnote 5 and Note, Table B-35.

Source: Department of Labor, Bureau of Labor Statistics.




Black

Both
sexes
16-19

371

Total

FeMales males

Both
sexes
16-19

7,802
8,128
8,203
7,894
8,227
8,540
9,102
9,359
9,313
9,355
9,189
9,375
10,119
10,501
10,814
11,309
11,658
11,953
12,175
12,074
12,151
12,382
12,835
13,279
13,542
13,969
14,556
13,717
13,714
13,785
13,848
13,841
13,806
14,030
14,271
14,245
14,077
14,143
14,147
14,288
14,340
14,463
14,477
14,351
14,662
14,511
14,517
14,584
14,776
14,804
14,884

4,368
4,527
4,527
4,275
4,404
4,565
4,796
4,923
4,798
4,794
4,637
4,753
5,124
5,270
5,428
5,661
5,824
5,928
5,995
5,961
5,930
6,047
6,241
6,422
6,456
6,607
6,871
6,486
6,511
6,477
6,517
6,553
6,552
6,636
6,791
6,720
6,683
6,713
6,637
6,763
6,747
6,836
6,884
6,827
6,963
6,858
6,819
6,862
6,965
6,948
6,969

3,433
3,601
3,677
3,618
3,823
3,975
4,307
4,436
4,515
4,561
4,552
4,622
4,995
5,231
5,386
5,648
5,834
6,025
6,180
6,113
6,221
6,334
6,595
6,857
7,086
7,362
7,685
7,231
7,203
7,308
7,331
7,288
7,254
7,394
7,480
7,525
7,394
7,430
7,510
7,525
7,593
7,627
7,593
7,524
7,699
7,653
7,698
7,722
7,811
7,856
7,915

509
570
554
507
508
508
571
579
547
505
428
416
474
532
536
587
601
625
598
494
492
494
552
586
613
631
736
630
657
667
618
599
589
612
654
624
659
644
624
677
654
704
737
682
833
726
728
765
732
771
822

TABLE B-38.—Unemployment by demographic characteristic, 1955-98
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]
Year or
month

All
civilian
workers

White
Total

Males

2,852 2,252 1,478
2,750 2,159 1,366
2,859 2,289 1477
4,602 3,680 2,489
3,740 2,946 1,903
3,852 3,065 1,988
4,714 3,743 2,398
3,911 3,052 1,915
4,070 3,208 1,976
3,786 2,999 1,779
1,556
3,366 2,691
2,875 2,255 1,241
2,975 2,338 1,208
2,817 2,226 1,142
2,832 2,260 1,137
4,093 3,339 1,857
5,016 4,085 2,309
4,882 3,906 2,173
4,365 3,442 1,836
5,156 4,097 2,169
7,929 6,421 3,627
7,406 5,914 3,258
5,441 2,883
6,991
6,202 4,698 2,411
6,137 4,664 2,405
7,637 5,884 3,345
8,273 6,343 3,580
4,846
10,678 8,241
10,717 8,128 4,859
8,539 6,372 3,600
8,312 6,191 3,426
8,237 6,140 3,433
3,132
7,425 5,501
6,701 4,944 2,766
6,528 4,770 2,636
7,047 5,186
2,935
8,628 6,560 3,859
9,613 7,169 4,209
8,940 6,655 3,828
7,996 5,892 3,275
7,404 5,459 2,999
7,236 5,300 2,896
6,739 4,836 2,641
6,210 4,484 2,431
7,126 5,170 2,870
7,154 5,113 2,783
6,996 5,018 2,729
6,842 4,899 2,700
6,678 4,708 2,451
6,824 4,855 2,653
6,633 4,802 2,599
2,637
6,630 4,813
6,654 4,864 2,577
2,606
6,445 4,683
Nov
6,289 4,459 2,492
6,448 4,506 2,464
Dec
1998: Jan
6,345 4,567 2,462
Feb
6,363 4,540 2,454
Mar
6,432 4,628 2,512
5,952 4,263 2,243
A
6,039 4,353 2,389
June
6,245 4,570 2,470
6,231 4,395 2,431
July
Aug
6,217 4,537 2,446
Sept
6,263 4,530 2,509
Oct
6,258 4,552 2,447
Nov
6,080 4,383 2,348
Dec
6,021 4,436 2,432
Note.-See footnote 5 and Note, Table B-35.
Source: Department of Labor, Bureau of Labor

1955
1956
1957
1958
1959
I960
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
1993
1994
1995
1996
1997
1998
1997:Jan
Feb
Mar
Apr
May
June

ttz
8£z

f::




Black and other

Females

Both
sexes
16-19

Total

373
382
401
541
525
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
1,291
1,374
1,534
1,387
1,116
1,074
1,070
995
910
863
903
1,029
1,037
992
960
952
939
912
876
955
986
941
916
873
943
995
928
945
888
832
748
816
856
893
809
842
934
795
899
906
958
905
892

601
591
570
923
793
788
971
861
863
787
678
622
638
590
571
754
930
977