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Economic
Report
President
of the

Transmitted to the Congress
February 2003

Economic Report
of the President

Transmitted to the Congress
February 2003
together with

THE ANNUAL REPORT
of the

COUNCIL OF ECONOMIC ADVISERS
UNITED STATES GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003

For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250
Mail Stop: SSOP, Washington, DC 20402-0001

Economic Report of the President

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C O N T E N T S
Page

ECONOMIC REPORT OF THE PRESIDENT...............................................

1

ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS*......

5

OVERVIEW....................................................................................................... 15
CHAPTER 1. MACROECONOMIC PERFORMANCE IN 2002................... 27
CHAPTER 2. CORPORATE GOVERNANCE AND ITS REFORM .............. 73
CHAPTER 3. POLICIES FOR DYNAMIC LABOR MARKETS ..................... 109
CHAPTER 4. REGULATION IN A DYNAMIC ECONOMY......................... 135
CHAPTER 5. TAX POLICY FOR A GROWING ECONOMY........................ 175
CHAPTER 6. A PRO-GROWTH AGENDA FOR THE GLOBAL
ECONOMY.................................................................................................... 213
APPENDIX A. REPORT TO THE PRESIDENT ON THE ACTIVITIES
OF THE COUNCIL OF ECONOMIC ADVISERS DURING 2002............ 257
APPENDIX B. STATISTICAL TABLES RELATING TO INCOME,
EMPLOYMENT, AND PRODUCTION...................................................... 269

* For a detailed table of contents of the Council’s Report, see page 9

Economic Report of the President

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ECONOMIC REPORT
OF THE PRESIDENT

Economic Report of the President

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ECONOMIC REPORT OF THE PRESIDENT

To the Congress of the United States:
The economy is recovering from the effects of the slowdown that began in
the middle of 2000 and led to the subsequent recession. The American
economy has been hit hard by the events of the past three years, most
tragically by the effects of the terrorist attacks of September 11, 2001.
Our economy and investor confidence were hurt when we learned that
some corporate leaders were not playing by the rules. The combined impact
of these events, along with the three-year decline in stock values that
impacted business investment, slowed growth in 2002. Despite these
challenges, the economy’s underlying fundamentals remain solid—including
low inflation, low interest rates, and strong productivity gains. Yet the
pace of the expansion has not been satisfactory; there are still too many
Americans looking for jobs. We will not be satisfied until every part of
our economy is vigorous and every person who wants a job can find one.
We are taking action to restore the robust growth that creates jobs. In
January, I proposed a growth and jobs plan to add needed momentum to our
economic recovery. We will accelerate the tax relief already approved by
Congress and give it to Americans now, when it is most needed. Lowering
tax rates and moving more Americans into the lowest tax bracket will help
our economy grow and create jobs. Faster marriage tax relief and a faster
increase in the child tax credit will especially help middle-class families, and
should take effect now. We will take steps to encourage small business investment, helping them to expand and create jobs. We will end the unfair
double taxation of corporate income received by individuals. By putting
more money back in the hands of shareholders, strengthening investor

Economic Report of the President

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confidence in the market, and encouraging more investment, we will have
more growth and job creation. These steps will allow Americans to keep more
of their own money to spend, save, or invest. They will boost the economy,
ensure that the recovery continues, and provide long-term economic benefits
through higher productivity and higher incomes.
As our economy recovers, we also have an obligation to help Americans who
have lost their jobs. That is why we extended unemployment payments for
workers who lost their jobs and improved incentives for investment to create
new jobs. I also proposed a bold new program of reemployment accounts to
help workers searching for jobs.
Our commitment to a strong economy does not stop with these important
steps. We will continue to strengthen investor confidence in the integrity of
our markets. We will develop better ways to train workers for new jobs.
We will make the Nation’s regulations and tax code less onerous and more
reflective of the demands of a dynamic economy, and expand opportunities for
open trade and stronger growth in all nations, especially for emerging and
developing economies.
Our Nation’s economic progress comes from the innovation and hard work
of Americans in a free market that creates opportunities no other system can
offer. Government does not create wealth, but instead creates the economic
environment in which risk takers and entrepreneurs create jobs. With the
right policies focused on growth and jobs, strong economic fundamentals—
and hard work—I am confident we will extend economic opportunity and
prosperity to every corner of America.

THE WHITE HOUSE
FEBRUARY 2003

4 | Economic Report of the President

THE ANNUAL REPORT
OF THE
COUNCIL OF ECONOMIC ADVISERS

Economic Report of the President

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LETTER OF TRANSMITTAL

COUNCIL OF ECONOMIC ADVISERS,
Washington, D.C., January 29, 2003.

MR. PRESIDENT:
The Council of Economic Advisers herewith submits its 2003 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,

Robert Glenn Hubbard
Chairman

Randall S. Kroszner
Member

Economic Report of the President

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C O N T E N T S
Page

overview ................................................................................

15

chapter 1. macroeconomic performance in 2002 ...................
GDP and Its Components in 2002 ...................................................
Consumption ..............................................................................
Nonresidential Investment ...........................................................
Residential Investment.................................................................
Net Exports .................................................................................
Government Purchases.................................................................
The Labor Market, Productivity, and Real Wages ..............................
Macroeconomic Policy and the Budget Outlook ...............................
Monetary Policy ..........................................................................
Fiscal Policy .................................................................................
The Federal Budget .....................................................................
The President’s Jobs and Growth Initiative...................................
The Effect of Tax Relief on Interest Rates.....................................
Developments in the Rest of the World.............................................
The Economic Outlook....................................................................
Near-Term Outlook.....................................................................
Inflation Forecast .........................................................................
Long-Term Outlook ....................................................................
Interest Rate Outlook ..................................................................
Income Forecast...........................................................................
Conclusion .......................................................................................

27
29
29
35
43
45
46
47
51
51
52
54
54
55
59
63
64
65
66
70
70
71

chapter 2. corporate governance and its reform .................
Foundations of Corporate Governance..............................................
Market-Imposed Discipline: External Governance Mechanisms ...
Internal Governance Mechanisms ................................................
Legal and Regulatory Institutions.................................................
Corporate Governance Reform .........................................................
Information Accuracy and Accessibility........................................
Management Accountability ........................................................
Auditor Independence .................................................................
Corporate Governance and the Global Economy ..............................
Conclusion .......................................................................................

73
79
80
84
94
99
102
103
104
105
106

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Page

chapter 3. policies for dynamic labor markets .....................
Employment Dynamics and Labor Market Policy .............................
Unemployment Assistance Policy ......................................................
Dynamics of Program Participation and Social Policy........................
Fostering Skill Development .............................................................
Conclusion .......................................................................................

109
113
121
127
132
134

chapter 4. regulation in a dynamic economy........................
The Demand for Regulation .............................................................
Regulation to Address Market Imperfections................................
Regulation to Address Specific Interests........................................
Principles of Regulation ....................................................................
Can the Market Achieve the Desired Outcome? ...........................
Can Private Regulation Suffice?....................................................
Will Government Regulation Impede or Distort Market
Dynamics? ..............................................................................
Is There a Less Restrictive Alternative? .........................................
Do the Benefits Justify the Costs, and How Are Both
Distributed? ............................................................................
The Demand for Regulatory Reform ................................................
Regulatory Review and Regulatory Reform ..................................
Effects of Reform on Prices ..........................................................
Effects of Reform on Innovation and Consumer Satisfaction........
Effects of Regulatory Reform on Resource Allocation...................
Pitfalls of Regulatory Reform ............................................................
Failure to Coordinate Reforms .....................................................
Deviation from Competitive Conditions......................................
Creating Perverse Incentives.........................................................
Putting the Principles to Work ..........................................................
Conclusion .......................................................................................

135
138
138
141
142
143
145

chapter 5. tax policy for a growing economy .......................
Objectives of Tax Reform..................................................................
Simplicity: Freeing up Resources for Productive Use ....................
Fairness: Relating Taxes to Ability to Pay and to Economic
Well-Being ..............................................................................
Long-Term Growth: Boosting Economic Performance by
Improving Incentives...............................................................
Analysis of Alternative Reforms.........................................................
What Does the Current System Tax?.................................................
Taxation of Human Capital .........................................................
Taxation of Housing ....................................................................

175
178
178

10 | Economic Report of the President

149
151
156
159
160
162
163
164
165
166
167
168
170
173

179
181
184
190
194
195

Page

Taxation of Nonprofits ................................................................
Distributional Consequences of Tax Reform .....................................
Decisions on the Path to Reform.......................................................
Integration and the Double Tax on Corporate Income .................
Uniform Taxation of Investment ..................................................
Broadening the Tax Base and Lowering Tax Rates ........................
Income Versus Consumption as the Base......................................
International Tax Considerations .................................................
Conclusion .......................................................................................

196
196
202
202
205
207
208
208
211

chapter 6. a pro-growth agenda for the global economy....
The Importance of Growth...............................................................
The Global Growth Experience ...................................................
The Benefits of Growth ...............................................................
Promoting Growth ......................................................................
Pro-Growth Principles ......................................................................
Economic Freedom: Competition and Entrepreneurship..............
Governing Justly: Rule of Law and Government Accountability ...
Investing in People: Health and Education...................................
The Administration’s Policies to Enhance Growth .............................
Trade Promotion Authority..........................................................
The Millennium Challenge Account............................................
Reforming the Multilateral Development Banks...........................
Conclusion .......................................................................................

213
216
216
219
223
227
227
236
239
241
242
249
253
254

appendixes
A. Report to the President on the Activities of the Council
of Economic Advisers During 2003..................................... 257
B. Statistical Tables Relating to Income, Employment,
and Production ................................................................... 269
1.1.
1.2.
1.3.
2.1.
2.2.
2.3
2.4.
5-1.

list of tables
Administration Forecast ............................................................... 63
Accounting for Growth in Real GDP, 1960-2008 ........................ 66
Accounting for the Productivity Acceleration Since 1995 ............. 69
SEC Enforcement Efforts and Outcomes, 2000-2002.................. 77
Legal Rules That Shape the Roles of Institutional Investors .......... 91
Some Corporate Governance Initiatives of NYSE and Nasdaq...... 100
The President’s Ten-Point Plan and the Sarbanes-Oxley Act ......... 101
Household Saving in Tax-Preferred and Taxable Accounts
1999 ..................................................................................... 193

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Page

5-2. Tax Rates on Capital Income for a Hypothetical Investor
in 2003 ................................................................................
5-3. Effective Tax Rates by Asset and Sector Under Current Law
and Various Reforms .............................................................
6-1. Income Per Capita and Social Indicators ......................................
6-2. Millennium Challenge Account Indicators...................................
list of charts
1-1. GDP Growth and the Contribution of Consumption ..................
1-2. Net Worth and Consumption Propensity.....................................
1-3. Equity Prices and Fixed Private Nonresidential Investment...........
1-4. Nonfinancial U.S. Equity Issuance...............................................
1-5. Credit Market Liabilities of the Nonfinancial Business Sector.......
1-6. Equity Markets and Risk Spreads .................................................
1-7. Corporate Bond Risk Spreads ......................................................
1-8. Housing Starts .............................................................................
1-9. Duration of Unemployment ........................................................
1-10. Saving, Investment, and the Current Account Balance .................
1-11. International Investment Position and Investment Income ...........
2-1. Merger and Acquisitions Transactions by Industry, with
Deregulation .........................................................................
2-2. Tender Offers ..............................................................................
2-3. Net New Venture Capital Funds ..................................................
2-4. Percent of Equity Held by Institutions .........................................
3-1. Employment-to-Population Ratio for Women .............................
3-2. Employment-to-Population Ratio by Race and Ethnicity .............
3-3. EITC Benefit and Labor Force Participation of Unmarried
Women with Children ..........................................................
3-4. EITC Benefit by Family Earnings and Number of Children for
2003 .....................................................................................
3-5. Fraction of Unemployed Workers Finding Work by Number
of Weeks Unemployed...........................................................
3-6. Unemployment and AFDC/TANF Recipients, 1960-2008 ..........
4-1. Light Vehicle Sales .......................................................................
4-2. Ratio of Costs of Command-and-Control to Least-Cost
Regulation ............................................................................
4-3. California Power Exchange Prices per Megawatt-Hour .................
4-4. Emissions of Selected Pollutants Under the Clean Air Act and
Clear Skies ............................................................................

12 | Economic Report of the President

203
205
220
250

27
31
38
39
40
41
41
44
48
60
61
83
84
88
89
113
114
119
119
123
130
151
153
167
171

Page

5-1. Projection of Returns Affected by the Alternative Minimum Tax..
5-2. Marginal Federal Income Tax Rates for Hypothetical Couple
in 2003 ................................................................................
5-3. Distribution of Marginal Federal Income Tax Rates for Joint
Filers in 2003 ........................................................................
5-4. Alternate Tax Bases, 2000 ............................................................
5-5. The 12 Largest Tax Expenditures, FY2002...................................
5-6. Effective Marginal Tax Rates by Age for Hypothetical Couple ......
6-1. Regional Economic Performance..................................................
6-2. Growth Rates of National Income and Income of the Poorest ......
6-3. Regulatory Quality and Income per Capita ..................................
6-4. Rule of Law and Income per Capita.............................................
6-5. Inflation and Growth in Income per Capita .................................
6-6. Openness and Growth .................................................................
1-1.
1-2.
1-3.
1-4.
1-5.
2-1.
2-2.
2.3.
2-4.
3-1.
3-2.
3-3.
3-4.
4-1.
4-2.
5-1.
5-2.
5-3.
5-4.
6-1.
6-2.

list of boxes
Measuring the Effect of Stock Market Wealth on Consumption...
Measuring the Effect of Mortgage Refinancing on Consumption ..
New Measures of Consumer Price Inflation .................................
Calculating the Effect of Higher Government Debt on Interest
Rates.....................................................................................
Accounting for the Recent Strength in Productivity Growth.........
Do Bad Bidders Make Good Targets?...........................................
Who Owns Corporations? ...........................................................
What Incentives Do CEOs Face? .................................................
Markets, Accountability, and the Enforcement of Rules................
Has There Been a Decline in Long-Term Employment? ...............
Two Ways to Look at Income Mobility ........................................
The Earned Income Tax Credit....................................................
The Growth in SSDI and SSI Disability Caseloads ......................
The Government Is Not Perfect, Either.......................................
Assessing the Economic Impact of Major Regulatory Initiatives ...
The Toll of Two Taxes: Compliance with the Regular and the
Alternative Minimum Tax .....................................................
What Tax Rate Do Taxpayers Really Face?....................................
How Are Consumption Taxes and Individual Retirement
Accounts Similar?..................................................................
Taxpayers Exhibit Substantial Fluidity Across Tax Rate Brackets...
Combating the HIV/AIDS Epidemic in Africa ............................
China, the WTO, and the Rule of Law........................................

Contents

180
183
183
191
192
201
217
223
226
226
228
232
32
34
50
57
67
81
86
92
96
116
117
118
128
155
157
181
182
187
198
221
247

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Overview

T

he events of 2002 brought new challenges for the U.S. economy and for
America’s economic policy. Efforts to strengthen homeland security and
prosecute the war against terrorism placed new demands on the economy.
The recovery from the 2000-01 economic slowdown continued, but with an
unsatisfactory pace of job creation. These developments make it all the more
important to undertake policies that promote growth, both in the United
States and in the global economy.
Reliance on markets is key to enhancing growth. Thanks to the flexibility
of markets, consumers, businesses, workers, and investors can continuously
adapt to changing economic circumstances. The market constantly reshapes
and redirects economic activity and economic output in response to changes
in producers’ supplies and costs and in consumers’ incomes, demands, and
the prices they face. In turn, the market itself evolves, as new information,
new technologies, altered supplies, and other changes in the economic and
physical environments pose new problems and open up new opportunities.
Put simply, markets are dynamic.
This Report emphasizes the importance of dynamic markets in the U.S.
economy and the need to design public policies so as to preserve and build on
this dynamism. In particular, it discusses recent developments and policies in
the areas of corporate governance, labor markets, regulation, taxation, and
international economic development. It describes the lessons that have been
learned from recognizing the dynamic flexibility of the U.S. economy, and how
the President’s policy initiatives are putting those lessons into practice, to foster
economic growth and prosperity in the United States and around the world.

Assessing Macroeconomic Performance
Chapter 1 of the Report reviews the most important events for the
economy in 2002. The components of aggregate demand—consumption,
investment, government purchases, and net exports—are discussed in turn.
Particular attention is paid to the valuation of the Nation’s stock of productive assets and to the link between these asset values and demand. The
chapter then discusses the near-term outlook for the economy and the
outlook for productivity growth, because growth in productivity—output
per worker—is the main influence on long-run growth and living standards.
15

The U.S. economy grew at an annual rate of 3.4 percent through the first
three quarters of 2002. (The advance release for GDP in the last quarter of
2002 became available only after this Report went to press.) Although output
rebounded after the terrorist attacks of September 2001, job growth during
the recovery has remained unsatisfactory. However, the continued recovery in
output over the past year, and especially the robust improvements in productivity, foreshadow a return to more vibrant job creation in the future.
The contraction of 2001, although one of the mildest on record, turned
out to have started earlier and to have been more severe than data available
before July 2002 had indicated. The revised data that became available at
that time revealed that output had dropped moderately in each of the first
three quarters of 2001 before the rebound began in late 2001 and early 2002.
Output fell by a cumulative total of 0.6 percent from the peak at the end of
2000 to the trough in the third quarter of 2001, much less than in most
previous recessions. The mildness of the recession—in spite of the effects of
terrorist attacks, continued declines in the stock market, and concerns over
corporate governance—reflects in large part the benefits derived from the
flexibility of the market-driven U.S. economy.
Monetary and fiscal policy also provided support for demand in the face of
these adverse developments. In 2001, faced with signs of a slowing of
economic activity, the Federal Reserve reduced the target Federal funds rate
11 times during the year, for a total reduction of 4.75 percentage points, to
1.75 percent. The Federal Reserve then held the Federal funds rate steady
through most of 2002, until a half-percentage-point cut on November 6
brought it down to 1.25 percent.
Recent U.S. fiscal policy has pursued the goal of promoting economic
growth. Among the central components of a pro-growth fiscal policy are
measures to limit the share of output commanded by the government, and
measures to reduce disincentives to work, save, and invest. The Economic
Growth and Tax Relief Reconciliation Act (EGTRRA), enacted in June
2001, lowered marginal tax rates for all taxpayers. This tax cut will have
important incentive effects that will lead to higher incomes and improved
long-term living standards. EGTRRA also provided important support for
economic activity in the short term, because of the way in which the tax rate
reductions were set in place and the timing of the act’s passage.
On January 7, 2003, the President proposed a plan to enhance the longterm growth of the economy while supporting the emerging recovery. The
President’s plan would accelerate to January 1, 2003, many features of the
2001 tax cut that are currently scheduled to be phased in over several years
(including reductions in marginal income tax rates, additional marriage
penalty relief, a larger child credit, and a wider 10 percent income tax
bracket); it would eliminate the double taxation of corporate income by
excluding dividends from individual taxable income; it would increase to
16 | Economic Report of the President

$75,000 the expensing limit for small business investment; and it would
provide $3.6 billion to the States to fund Personal Reemployment Accounts
for unemployed workers (described below). The package would provide
near-term support to investment and improve the long-term efficiency
of capital markets, while at the same time insuring against a softening of
consumption by putting more money in consumers’ pockets.
Relatively slow economic growth in several countries that are important
U.S. trading partners contributed to a widening of the U.S. current account
deficit, a broad measure of the balance of the Nation’s international goods and
services transactions, in 2002. The current account is equivalent to the difference between net national investment and net national saving, and therefore a
large current account deficit can reflect high investment, low saving, or both.
It follows that there is no one “right” level for the current account balance.
Indeed, the crucial question in assessing the current account is not how large
it is, but instead whether investment is growing at a rate that supports higher
income and improved living standards for American households. The foreign
capital inflows that are the counterpart of the current account deficit are a
potentially important way in which to fund this investment.

Improving Corporate Governance
Corporate governance is the system of checks and balances that serves to
align the decisions of corporate managers with the desire of shareholders
to maximize the value of their investments. It is a largely private sector
activity built on the bedrock of the Nation’s legal infrastructure. Good corporate governance can substantially reduce the costs to investors of delegating
decisions to managers, as must inevitably occur when corporations obtain
external financing. Good governance also contributes to the ability of U.S.
corporations to maintain dispersed ownership and to the existence of welldeveloped financial markets. It enables corporations to compete more
effectively in financial and product markets that have become increasingly
global. The economy then benefits through more effective use of the available factors of production, including managerial talent, external capital, and
natural and human resources. Importantly, strong corporate governance
improves the attractiveness of corporate investments to households and other
investors by more closely aligning managers’ actions with investors’ interests,
and by making information about the corporation and the quality and
diligence of its management more transparent to outsiders.
Chapter 2 of this Report examines the evolution of institutions for corporate
governance in the United States. Last year was marked by important reforms
in U.S. corporate governance, including new laws, government regulations,
Overview

| 17

and private sector initiatives. The reforms were in part a response to the failure
of some managers and accountants to provide accurate information about
corporate financial and operating performance—events that drew attention to
possible weaknesses in the current system of governance.
In calling for reform in March of last year, the President articulated a plan
based on three core principles of good corporate governance: accuracy and
accessibility of information, accountability of management, and independence of external auditors. The plan recognizes both the complexity of
modern corporate governance systems and their inherent flexibility. Its call
for a careful reexamination of private governance customs and legal rules was
followed by a series of private and public sector initiatives. These include
stepped-up enforcement efforts by State and Federal Government authorities, facilitated by the President’s creation of a Corporate Fraud Task Force in
July to focus on conduct by managers and accountants that has been a source
of concern. The President also signed the Sarbanes-Oxley Act in July, which
the Securities and Exchange Commission is now implementing through a
series of new regulations.
Under the Sarbanes-Oxley Act, a new regulatory body is being created to
strengthen the incentives of auditors to meet their legal obligation to serve
the interests of shareholders and other investors. The Securities and Exchange
Commission must issue new disclosure regulations, including rules designed
to make it easier for investors to gauge the incentives and performance of
corporate managers. State governments are also instituting changes; State law
is fundamental to the governance structures of corporations. Private sector
organizations were among the first to respond to the President’s call for
reform. Self-regulatory organizations such as those that operate the Nation’s
stock exchanges contribute in important ways to the quality of U.S. corporate governance. Along with individual investor organizations, corporate
officials, and others, these organizations have taken steps to strengthen U.S.
corporate governance.
Even in the midst of these reforms, it is important to remember that
change is not new to U.S. corporate governance. The U.S. system of corporate governance is designed to be flexible. This flexibility indeed accounts for
its capacity to support economic growth over the decades, and for its strong
global reputation. The chapter highlights the three main components of the
U.S. corporate governance system: external governance mechanisms, internal
corporate governance, and laws and regulations. External and internal corporate governance mechanisms serve to align managers’ interests with those of
shareholders and can adapt to changing market conditions. The surety
provided by the U.S. legal system in upholding the contracts that investors
enter into when they supply capital to corporations contributes to the flexibility of the corporate governance system. This framework, which relies
18 | Economic Report of the President

on both the flexibility of private institutions and the integrity of public
institutions, remains in place throughout the present reforms and provides a
model for other economies to follow.

Designing Dynamic Labor Market Policies
As noted above and in Chapter 1, employment growth during 2002 did
not keep pace with the recovery in output. From December 2001 through
December 2002, nonfarm payroll employment fell by 181,000, while the
unemployment rate stayed between 5.5 and 6.0 percent. These statistics may
give the impression of a static labor market. Yet dynamism remains the
predominant characteristic of the labor market in the United States: in 2002
millions of workers found new jobs, started new businesses, and raised their
earnings. Chapter 3 of this Report documents some important dimensions of
these labor market dynamics and discusses their implications for employment and productivity growth and for the design of policy.
The mobility of workers—across jobs, up the opportunity ladder, and even
in and out of employment—is one important dimension of a dynamic labor
market and one of the great strengths of the U.S. labor market. American
workers change jobs frequently, particularly during the first decade of their
working lives, in part because doing so allows them to gain new experience
and skills and, importantly, to increase their earnings—most earnings growth
for younger workers comes about through job changes. For these new
entrants, however, employment itself is the key aspect of this dynamic,
because tenure on a job provides returns in terms of skill development and onthe-job training. This improvement in skills, in turn, makes possible the
upward ratcheting effect through which movement between jobs contributes
to increased earnings. Although staying on the ladder of upward mobility
means maintaining an attachment to the labor market, it does not necessarily
mean staying put in any one job. In a well-functioning labor market, there are
large and constant flows between employment and unemployment, and a
substantial number of jobs are created and destroyed each year. These large,
bidirectional flows are further evidence of the flexibility of the U.S. economy,
as expanding firms and industries take on more workers while those in decline
contract their labor forces. Research shows that frequent job changes for the
young are, in an important sense, the means through which individuals are
matched to the jobs that will provide them with the best opportunities.
Government policies are more effective when they recognize and foster
labor market mobility. Policies can support this mobility—and earnings
growth—by encouraging skill development and education. Another important policy goal is to meet the desire of individuals for social insurance
Overview

| 19

against the adverse consequences of short-term macroeconomic fluctuations
and personal misfortune. Policymakers face some difficult tradeoffs in
designing social insurance, however, because the provision of insurance can
itself distort behavior, making individuals less likely to enter employment or
to exert full effort toward finding a job. As an example, for decades the Aid to
Families with Dependent Children program provided insurance against
destitution, but it also created a financial incentive for recipients to stay out
of the work force. Welfare reform and the Earned Income Tax Credit are
examples of policies that have supported individuals in time of need while
also giving them incentives to enter the labor market and find jobs.
The Administration has proposed a new policy to foster skill development
and increase the rewards associated with work for those unemployed workers
who face the most difficulty in finding new employment. Qualifying workers
would receive a Personal Reemployment Account, with funds to be used for
expenses such as training, child care, or relocation. These accounts would be
targeted to those unemployed workers who are deemed most likely to
exhaust their unemployment benefits before finding a new job. Those who
find a new job within 13 weeks would be entitled to a cash payment of the
remaining funds in the account as a “reemployment bonus.” Personal
Reemployment Accounts thus would provide not only support for training
and skill development, but also a monetary incentive for unemployed
workers to find new jobs.

Developing Regulation for a Dynamic Economy
Competitive, efficient, and equitable markets are the cornerstone of a
flexible and dynamic economy. Regulation of economic activity is an
essential element of a market economy, but regulation can hinder economic
growth and well-being just as it can advance them. Well-formulated
regulation can lead to improved market outcomes, but regulation that is ill
conceived or that is not cost-effective can have unintended consequences that
actually make matters worse.
Chapter 4 of this Report illustrates how both the government and the
private sector play critical roles in ensuring a flexible economic environment
that promotes growth and prosperity by allowing economic resources to be
redeployed as opportunities evolve. The chapter provides a framework for the
evaluation of regulatory policies, focusing on Federal regulation and how it
can foster or hinder economic dynamism.
Regulation stems from a number of needs. Some demands for regulation
reflect a desire to improve the efficiency of markets rendered imperfect by

20 | Economic Report of the President

spillover effects, informational problems, or lack of competition. By compensating for or correcting these market imperfections, such regulation may
enhance growth. Other demands for regulation, in contrast, reflect a desire to
change market outcomes, for reasons that may be compassionate or selfish,
far-sighted or opportunistic. Regulatory policy must identify and deny those
demands for regulation that seek only economic rents for a privileged few,
and instead be based on sound science and economics, along with a careful
evaluation of the social needs behind the desire for regulation.
The chapter suggests some guidelines for evaluating both new regulations
and proposed regulatory reforms that will help reduce the costs of regulation
and achieve the best possible outcomes. When regulation is necessary, it
should be flexible and market based, and the burden of each regulation
should be justified by the benefits it confers. An important Administration
initiative is the revision of the Office of Management and Budget’s
Guidelines for the Conduct of Regulatory Analysis and the Format of
Accounting Statements. Conducted jointly by the Council of Economic
Advisers and the Office of Management and Budget, this initiative stresses
the principles of sound regulatory policy based on economic analysis.
Part of a complete understanding of the consequences of regulation is
recognizing that the impact and efficacy of specific regulations can change
over time with changes in technology, economic conditions, and scientific
knowledge. The chapter provides several examples, one of which is the
President’s Clear Skies Initiative. Aimed at reducing power plant emissions of
atmospheric pollutants, this program was designed in light of scientific
evidence linking impairments of human health to exposure to certain
polluting chemicals. Importantly, however, Clear Skies has also been crafted
in such a way that economic incentives provide the mechanism for reduction
of these pollutants at least cost to the economy.
Regulatory review and reform offer an important means for policymakers
to control the buildup of regulatory costs and limit the economic harm of
outdated regulations. Yet although many regulatory reforms have been clear
successes, others have created new problems. Examples include the experience with reform of the savings and loan industry in the 1980s and the more
recent experience with electricity markets in California. To avoid in the
future the kinds of unsatisfactory outcomes that resulted from these episodes,
regulatory reform should be guided by the same basic principles as the development of new regulations.

Overview

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Analyzing Tax Policy
An efficient tax system adequately finances government activities while
imposing as few distortions as possible on household and business decisions.
A tax system with high marginal tax rates or a complicated structure impedes
work effort and saving and hinders the risk taking and entrepreneurship that
are the foundations of growth. Tax rates that are unequal across activities
encourage tax avoidance and lead to potentially wasteful efforts at regulation,
reporting, and monitoring to control it. Tax deductions, exclusions, and
credits are often undertaken with the aim of targeting resources to worthwhile
social goals, but they can create considerable complexity for taxpayers. They
can also impose high effective tax rates in the range of income over which the
tax benefits are gradually withdrawn, in some cases discouraging additional
work effort among the very people the preferences were intended to help. The
combined result of all of these imperfections can be a tax system that imposes
significant compliance costs and wastes resources by misallocating them to
nonproductive activities.
Chapter 5 of this Report considers how tax policy changes could improve
economic growth and real incomes for all Americans. Such changes involve
difficult questions of how best to balance the sometimes competing objectives of simplicity, fairness, and faster long-term growth. The chapter
considers some approaches that economists have identified to achieve the
gains of higher incomes and efficiency within the framework of the existing
tax system. Even relatively modest changes can lead to important improvements in economic incentives and efficiency. In particular, the opportunity
exists to reduce significant differentials in tax rates across different activities
and to lower the tax on the return to capital, in ways that improve incentives.
Small improvements in this regard can have large long-run effects, because
saving and investment decisions made now will affect capital accumulation,
technological change, and innovation for years to come.
The chapter discusses the President’s proposal to abolish the double tax on
corporate income. The current taxation of corporate income is an important
example of how the current tax code falls short of the goal of taxing income
only once. Taxing corporate income twice, once at the corporate and again at
the individual level, reduces the after-tax reward to investing. It distorts corporate financing decisions, diminishes capital formation, and results in too little
capital being allocated to the corporate sector. As a result, the capital stock
grows more slowly than it could otherwise, lowering the productivity of
workers and thus the growth of their real wages. The President’s plan to eliminate this double taxation will boost long-term efficiency and support increased
investment that will promote higher near-term growth and job creation.

22 | Economic Report of the President

Taxing all income once, but only once, would greatly improve the efficiency
with which government revenue is raised. Tax preferences represent a policy
decision to exclude some income from the tax base, but this poses a tradeoff: a
higher overall tax rate is then required to raise a given amount of revenue—and
the higher rate in turn increases the inevitable distorting effects of taxation on
the economy. Even taxing all income just once, however, would leave in place
the tax code’s current distortion of the decision between current consumption
and future consumption (that is, saving). A tax system based on consumption
rather than income would remove this distortion, but it would also require a
higher average tax rate than a system based on comprehensive income, because
the consumption tax would have a smaller tax base (although it would be larger
than the present income tax base). The benefits of a consumption tax would
have to be weighed against the disincentive effects from this higher rate.
The chapter also discusses ways in which the dynamism of the U.S.
economy affects the evaluation of tax policies. For example, the effect of the
tax system on an individual taxpayer is not well represented by a one-year,
static snapshot of his or her income. Rather, its impact changes significantly
over time as the taxpayer proceeds through the stages of life and his or her
earnings rise and fall. Earnings typically rise through the working years, as
the individual gains experience and accumulates human capital, and then fall
as the individual retires and exits the work force. One’s tax bill is also affected
by, among other things, changes in employment, marriage and divorce,
having and raising children, giving to charity, starting up a business, and
buying and selling assets. The ebbs and flows of the business cycle also have
an impact. In evaluating the distribution of the tax burden and how changes
in the tax code affect that distribution, it is therefore important to consider
the full range of individuals’ lifetime experiences. For example, a college
student is likely to have little income today but will benefit from tax relief
upon entering the labor force. Conversely, a working couple nearing retirement who currently pay the top marginal income tax rate would benefit
today from a reduction in that rate, but they might benefit less in the future
once they have retired and their income is lower. In short, because everyone’s
tax situation changes over time for a variety of reasons, proper analysis of the
distribution of taxation must consider not just who will benefit from tax
relief today but who will benefit in the future as well.

Promoting Global Growth
Chapter 6 of this Report examines how countries throughout the world can
promote economic growth and thereby enhance the well-being of their
people. In recent years many countries, especially in the developing world,
Overview

| 23

have experienced robust growth, which has led to reduced poverty, lower
infant mortality, improved health outcomes, and longer life expectancy.
Many others, however, have been far less successful at promoting growth and
have not seen similar improvements in social indicators.
The central theme of the chapter is that all countries can experience faster
growth by creating an economic environment in which market signals lead to
better economic performance. Three principles guide these growth-oriented
policy reforms. The first is economic freedom, in which encouraging competition and entrepreneurship leads to stronger growth. Economic freedom
involves, among other things, a stable domestic macroeconomic environment with low inflation, appropriate government regulation, encouragement
of entrepreneurial initiative, and openness to the global economy. The
second pro-growth principle is governing justly. This involves safeguarding
the rule of law, controlling corruption, and securing political freedom—all
aspects of policy that are vital for developing trust in the accountability and
reliability of government. The third principle is investing in people. These
investments include those that promote the health and education of the
population, making workers more productive.
No one of these principles is enough to guarantee strong growth; rather, all
three are mutually reinforcing aspects of a pro-growth agenda. The specific
policy measures that will implement these pro-growth principles similarly
involve a number of elements: responsible fiscal and monetary policies, an
appropriate size and role of government, domestic flexibility and internal
competition, openness to the global economy, a healthy and educated population, and sound institutions. Countries that pursue a broad range of
policies consistent with these principles perform better than those that do
not. During the 1980s and 1990s, for example, those countries that were
more open to the international economy grew much faster on average than
those that were more closed.
The President has inaugurated three important policy initiatives designed
to stimulate economic performance in countries around the world: trade
liberalization initiatives negotiated pursuant to Trade Promotion Authority,
which will promote countries’ openness to international trade and investment; the Millennium Challenge Account, which will provide direct
financial assistance to developing countries adopting pro-growth policies;
and reform of the multilateral development banks, which will encourage
private sector involvement in results-oriented development programs
undertaken by the World Bank and the regional development banks.
Through these and other policies, the United States will help countries
address the challenge of improving their economic growth. Ultimately,
however, creating a pro-growth environment is up to each country’s own
people and government. The initiatives of the United States will help in
24 | Economic Report of the President

important ways, especially by reinforcing pro-growth decisions by governments
and individuals. They are not, however, substitutes for the adoption of good policies in developing countries themselves, which are ultimately the key to success.
The pro-growth agenda embodied in these three policy initiatives will
enhance growth and prosperity both at home and abroad. This is the most
direct way to improve standards of living and thus the lives of people around
the world.

Conclusion
The United States is recovering from both an economic downturn and the
aftershocks of the terrorist attacks of September 2001. Government policies
have aided this recovery in important ways, with support from both fiscal
and monetary initiatives. Perhaps most important in ensuring recovery,
however, has been the underlying flexibility and dynamism of the U.S.
economy. In the midst of the downturn, workers continued to find new
opportunities, savers continued to reallocate their funds in search of greater
returns, and firms continued to regroup and to invest in future growth. The
economic policies of the Administration will likewise continue to support
this quest for growth, both here at home and around the world.

Overview

| 25

C H A P T E R

1

Macroeconomic Performance in 2002

T

he U.S. economy solidified its forward progress in 2002, with the third
quarter of the year marking the fourth consecutive quarter of economic
growth. This progress followed a contraction in 2001 that was deeper and
longer than initial data suggested, but still mild by historical standards. Real
gross domestic product (GDP) declined by 0.6 percent during the first three
quarters of 2001, about one-fourth the average percentage decline over the
previous seven recessions. Growth resumed in the fourth quarter of 2001—
despite the terrorist attacks in September—and real GDP rose at an annual
rate of 3.4 percent in the first three quarters of 2002 (Chart 1-1). Although
economic activity probably weakened in the fourth quarter, the ongoing
improvement in productivity growth, together with lean inventories, foreshadowed a return to more normal levels of production and job growth in
the quarters ahead.
The economic recovery of 2002 resulted from a constellation of factors,
including the resiliency of the economy after the terrorist attacks and the

27

lagged effects of stimulative monetary and fiscal policy in 2001. Although
the Federal Reserve lowered the Federal funds rate only once in 2002—by
half a percentage point on November 6—the 475-basis-point reduction over
the course of 2001 continued to stimulate the economy throughout the year.
(A basis point is 0.01 percentage point.) Monetary stimulus was complemented by fiscal stimulus, in the form of the tax rate reductions included in
the Economic Growth and Taxpayer Relief Reconciliation Act of 2001
(EGTRRA) and the investment incentives in the Job Creation and Worker
Assistance Act (JCWAA) of 2002. In the long run, EGTRRA’s reductions in
marginal tax rates will raise potential output by increasing labor supply and
encouraging the entrepreneurial activities that are the building blocks of
economic growth. In the short run, however, the tax cuts buoyed disposable
income and helped keep consumption high. Robust consumption, in turn,
was a crucial locus of strength in the overall economy, contributing an
average of 2.1 percentage points to real GDP growth during the first three
quarters of the year. Additionally, the tax incentives in JCWAA, which the
President signed in March, provided needed support to investment at a time
when stability in this component of final demand was especially important.
In 2002 discussions of both economic activity and economic policy paid
particular attention to the valuation of the economy’s stock of productive
assets. One of the more favorable developments for many Americans in 2002
was the continued appreciation of their most important investment: their
home. Housing prices rose 6.2 percent from the third quarter of 2001 to the
third quarter of 2002, following an 8.7 percent increase in the same period a
year earlier. As discussed below, housing values were buoyed not only by low
mortgage interest rates, which reached levels not seen in more than a generation, but also by rising demand, continuing strength in purchases of second
homes, and ongoing improvements in mortgage finance. Strength in housing
values contributed to robust increases in residential investment, providing
another important impetus to final demand in 2002.
In the aggregate, however, the appreciation in housing wealth was
overshadowed by continued losses in the stock market. Like those for all of the
world’s major equity exchanges, U.S. stock indexes lost ground in 2002,
continuing a general slide that began in the spring of 2000. From the market’s
high point in the first quarter of 2000 to the fourth quarter of 2002, stockholders lost nearly $7 trillion in equity wealth. These losses continued to weigh
heavily on economic growth and job creation in 2002, by reducing the wealth
of consumers and raising the cost of equity capital for investing firms. The
precise reasons for the bear market of 2000-02 are subject to debate, but the
market’s 3-year slide was probably influenced by two general factors: a decline
in expected profit growth and an increase in the premium that investors
required to hold risky assets. These factors continued to play important roles
28 | Economic Report of the President

in the first three quarters of 2002 as the stock market continued its decline.
Specifically, corporate accounting scandals called into question the reported
profits of some firms, while risk premiums (as measured by the difference, or
spread, between the yields of corporate bonds and those of U.S. Treasuries)
rose to near-record levels. Although some observers attributed most of the
market’s decline to the corporate scandals, it is worth noting that equity prices
fell around the world, even in countries with different accounting systems and
governance institutions.
The stock market’s decline has caused some to question the productivity
improvements of the late 1990s. Yet even though investors may have overestimated the value of particular technology-intensive investments, it would
be a mistake to infer that technological improvements hold little promise for
future economic growth. Detailed analyses of the sources of productivity
growth indicate that the post-1995 productivity improvement owes much to
the U.S. economy’s ability to profit from technological innovation. If technology continues to progress at its recent pace, rising productivity will
continue to bring about improvements in living standards that compare
quite favorably with the more modest gains of only one or two decades ago.
In the short run, however, economic growth is determined by demand
factors as well as by the economy’s technology and potential to supply goods
and services. The next section discusses the individual components of GDP
from the demand side. There and elsewhere in the chapter, the discussion pays
particular attention to the links between asset markets (which set the prices for
stocks, bonds, and houses) and the components of real aggregate demand
(consumption, investment, government purchases, and net exports).

GDP and Its Components in 2002
Consumption
Consumption continued to be the prime locomotive for the recovery in
2002, rising at an annual rate of 3.0 percent over the first three quarters of the
year. (GDP data for the fourth quarter were not yet available as this Report
went to press.) Expenditure on consumer durables was especially strong, in
large part because of strong motor vehicle sales. Zero-percent financing offers
and other aggressive sales promotions sent automobile sales soaring to more
than 18 million units at an annual rate in July and August. (Automobile sales
were also especially strong in December.) Largely as a result, expenditure on
consumer durables accounted for more than 1.7 percentage points of GDP
growth in the third quarter. Consumption of nondurable goods was especially

Chapter 1

| 29

strong in the first quarter, rising 7.9 percent at an annual rate, but tailed off
afterward. Finally, consumption of services remained robust, accounting
for about 1 percentage point of GDP growth in each of the first three quarters
of the year.

Disposable Income and Consumption
In 2002 strength in consumption resulted in large part from strength in
purchasing power, as low inflation, tax relief, and steady nominal income
growth kept real disposable incomes high. On the price side, financing
incentives reduced the effective cost of new cars, allowing motor vehicle sales
to be a main driver of final demand in the middle of the year. Other categories with favorable price developments for consumers included food and
beverages, where prices rose only 1.5 percent in 2002, and apparel, where
prices declined 1.8 percent. On the income side, nominal personal income
rose at an annual rate of 4.5 percent during the first three quarters of 2002,
and tax cuts enacted the previous year allowed consumers to keep more of
their income gains for themselves. The passage of EGTRRA in 2001 reduced
Federal tax liabilities by about $56 billion in calendar year 2001 and about
$78 billion in 2002, helping disposable personal income, or nominal income
net of taxes, to rise at a robust annual rate of 9.0 percent during the first three
quarters of the year. Taken together, low price inflation and healthy growth
in nominal disposable personal income meant that real disposable personal
income grew at an annual rate of 7.0 percent during the first three quarters of
2002, which compares well with past recoveries. Ultimately, the strong
growth in real disposable income is a reflection of the high rate of productivity growth that the Nation continues to enjoy.

The Stock Market and Consumption
One of the most closely watched influences on consumption in 2002 was
the stock market, as many observers feared that continued retrenchment in
equity values would dampen consumers’ willingness to spend. One link
between the stock market and consumption arises from the market’s role as
an informal measure of the strength of the economy. Because consumers
often look to the stock market for information about the health of the
economy, consumer attitudes from survey data have long been closely correlated with stock indexes, and that correlation remained robust in 2002. Yet
the stock market is much more than an informal economic barometer.
Because equity holdings are an important component of household wealth,
changes in the stock market affect consumers’ ability to purchase goods and
services, not just their views of the future.
Economists have long been interested in precisely how changes in stock
prices affect consumption decisions. As a matter of accounting, an increase in
30 | Economic Report of the President

an individual’s wealth (equities as well as other assets) must ultimately bring
about an increase in his or her consumption, unless the extra wealth is to be
passed on to heirs as a bequest. The important empirical question is whether
the increase in consumption occurs quickly enough for wealth to affect
consumption at short horizons. The empirical relationship between aggregate
wealth and the average propensity to consume out of disposable income
suggests that the answer is yes, at least according to evidence through 2000.
Chart 1-2 shows that as household net worth rose in the late 1990s
(primarily because of the increase in stock prices), the average propensity to
consume increased to levels not seen in half a century. In more sophisticated
analyses that take other determinants of consumption into account, aggregate data on wealth and consumption suggest that a one-dollar reduction in
stock market wealth eventually reduces yearly consumption by 3 to 5 cents.
Although economic theory suggests a direct, causal impact of stock market
wealth on consumption, patterns in aggregate data do not by themselves prove
that this impact exists. Wealth and consumption might move together over
time because both are determined by some third factor, such as expectations
about the future. Indeed, the aggregate relationship between wealth and
consumption does not appear to have been very strong in the past 3 years, as
wealth has declined yet the average propensity to consume has remained stable.
However, recent empirical analysis using individual-level data is generally
supportive of the theoretical link between wealth and consumption (Box 1-1).

Chapter 1

| 31

Box 1-1. Measuring the Effect of Stock Market Wealth on
Consumption
Economists have long recognized that a close relationship between
wealth and consumption exists in aggregate data, but until recently
attempts to find microeconomic evidence isolating a true causal relationship between the two variables have had limited success. Part of
the reason is the general difficulty of finding evidence for macroeconomic relationships in microeconomic data. Data on individual
consumers are often noisy, in that period-to-period changes in their
consumption are influenced by a number of idiosyncratic factors. For
example, a family’s decision whether to buy a new car might be influenced by an increase in stock market wealth, but also by the arrival of a
new baby or the decision of one family member to take a new job. The
noise problem is compounded when available datasets measure
certain crucial household variables imperfectly. Most individual-level
datasets are adapted from surveys or administrative data that were not
expressly designed to test economic theories, and so they often omit
important information, such as precise measurements of wealth
holdings or consumption choices.
The noise problem in microeconomic data becomes less important if
the underlying changes in macroeconomic variables are large relative
to any background idiosyncrasies and measurement errors. As an
example, the large runup in stock prices before March 2000 gave
researchers a valuable opportunity to observe the link between wealth
and consumption at the individual level. One such study found that,
from 1983 to 1999, U.S. households that owned stocks did tend to
consume more when stock prices rose, whereas households that did
not own stocks left their consumption patterns unchanged. A second
study used another dataset and focused on the second half of the
1990s, when the increase in stock prices was most pronounced. This
study attempted to identify, from a number of demographic factors,
those U.S. households that were likely to hold stocks, and it found that
these households were the ones that increased their consumption the
most during this period. Studies such as these suggest that the aggregate relationship between wealth and consumption reflects at least in
part a true causal component, so that the decline in aggregate stock
market wealth would be expected to slow consumption growth
somewhat after the market began to decline in 2000.

32 | Economic Report of the President

If one takes the midpoint of the range noted above for the relationship between
changes in stock market wealth and changes in consumption (3 to 5 cents per
dollar), the $7 trillion reduction in equity wealth since early 2000 would be
expected to eventually lower yearly consumption by about $280 billion. A
reduction of this magnitude would have represented nearly 4 percent of
consumption and almost 3 percent of GDP in 2002.
Empirical findings also suggest that the response of consumption to
changes in stock market wealth is drawn out over time, and this has crucial
implications for the precise path of consumption over the next few years.
Because one would expect that the appreciation of equities before 2000
would still be increasing consumption today, some of the implied $280
billion drop in consumption after 2000 may simply represent a “cancellation” of a consumption increase that had not yet taken place. Moreover,
positive influences from the other determinants of consumption (such as
current income and the continuing appreciation in housing wealth) are
likely to offset the stock market’s negative effects on personal spending. For
these and other reasons, private forecasters predict that actual consumption
will continue to grow in the years ahead, along with GDP.

The Housing Market and Consumption
Along with healthy growth of disposable income, another positive
determinant of consumption growth in 2002 was the strength of the housing
market. (The sources of this strength, discussed in more detail below, include
record low mortgage rates and continued growth in housing demand, fueled
in part by high immigration and the demand for second homes.) Housing
wealth is more widely distributed among American families than stock
market wealth, and housing equity continued to rise in 2002. A common
way for this equity to support consumption is through borrowing against
home equity: the outstanding value of revolving home equity loans at
commercial banks rose from $155.5 billion in December 2001 to $212.3
billion in December 2002. Another way that homeowners can tap the equity
in their homes, for higher consumption or for spending on home improvements, is by refinancing their outstanding mortgages when interest rates have
fallen. Of course, simply refinancing a mortgage at a lower interest rate can
reduce monthly mortgage payments and free up extra cash. Many refinancers, however, choose to remove equity from their homes by taking out a
new mortgage with a larger principal than the amount outstanding on the
original mortgage. These “cash-out” refinancings boomed in 2002 as a result
of the continued appreciation in housing prices and declining long-term
interest rates. According to the Federal Home Loan Mortgage Corporation
(Freddie Mac), holders of conventional, conforming mortgages liquefied
about $59 billion in equity in the first three quarters of 2002. It is impossible
Chapter 1

| 33

to know for certain how this money was allocated among consumption,
home improvements, the paying down of nonmortgage debts, and the
purchase of other financial assets. Some survey research suggests, however,
that about half of this $59 billion would be allocated toward consumption
and home improvements (two sources of aggregate demand), which would
have raised GDP by about 0.4 percent above its baseline level through the
first three quarters of the year (Box 1-2).
Finally, housing equity can also be liquefied from the sale of an existing
home. Typically, the buyer of a new home takes out a mortgage that is larger

Box 1-2. Measuring the Effect of Mortgage Refinancing on
Consumption
Mortgage refinancings boomed in 2002 as interest rates fell and
housing prices rose. Many refinancers chose a “cash-out” option that
left them a pool of funds to spend after they retired their original mortgage. A key question is how consumers used these funds: spending on
consumption or home improvements would add directly to aggregate
demand, whereas paying down debts, making a purely financial
investment, or paying taxes would not. Some new data released in
2002 showed that the potential effect of cash-out refinancing on aggregate demand was large. According to Freddie Mac, holders of
conventional, conforming mortgages cashed out $110 billion through
the first three quarters of 2002, and they used about half of the
proceeds ($51 billion) to pay down second mortgages or home equity
lines of credit. (A conforming mortgage is one that falls within the
acceptance limit for securitization by Freddie Mac or Fannie Mae,
which was $300,700 in 2002.) This left a maximum of $59 billion that
could be used for spending that would boost aggregate demand. The
amount of funds freed up by cash-out refinancing among holders of
larger mortgages is not known precisely but would add to this total.
To learn more about how this liquefied equity is being used, the
Federal Reserve has sponsored occasional surveys of households to
ask how they spent funds obtained through cash-out refinancing. The
most recent survey covered refinancings in 2001 and early 2002. The
survey found that about 16 percent of liquefied equity was used for
consumption and 35 percent for home improvements, for a total of
51 percent that would add to aggregate demand. (Another 26 percent of
the funds was used to pay down nonmortgage debt, and the remaining
23 percent was used to fund investments in private businesses or financial securities or to pay taxes.) These percentages are almost identical to
results from an earlier survey that covered refinancings in 1998
and early 1999, which also found that about half of liquefied equity

34 | Economic Report of the President

added to aggregate demand. Allocating 51 percent of the $59 billion in
cashed-out equity to demand in the first three quarters of 2002
suggests an increase in GDP of about 0.4 percent.
One reason that only a portion of the liquefied funds added to
aggregate demand is that many consumers do not need to borrow
against their houses to finance their spending. By taking out a
nonmortgage loan or by drawing down savings, these consumers are
free to adjust month-to-month spending as they see fit. Some
evidence that only “liquidity constrained” consumers spend much of
the funds freed up by refinancing comes from another survey, which
follows a sample of families over time and has often been used to
study income dynamics in the United States. In addition to its standard
questions on income and spending patterns, this survey has included
some questions related to refinancing activity. Using these data,
researchers found that, among those who refinanced from 1991 to
1994, spending increases were far more pronounced among families
that were likely to have trouble borrowing from other sources.

than that retired by the seller. The increase in net debt is often close to the
seller’s capital gain on the house. From the economy’s point of view, such a
transaction allows the capital gain to be turned into liquidity, although the
seller often uses this liquidity to purchase another home. If so, this type of
equity liquefaction does not raise the seller’s consumption of other goods,
although it may raise residential investment if the new home purchase by the
seller of the original house results in a net increase in housing construction.

Nonresidential Investment
Nonresidential investment was one of the weakest components of demand
in 2002. In the first three quarters of the year, business fixed investment
declined at an annual rate of 3.1 percent, in large part because of a precipitous 17.8 percent fall in investment in structures. The other, larger
component of business fixed investment, equipment and software, fell at an
annual rate of 2.7 percent in the first quarter of the year, but then rebounded
to rise at an annual rate of 5.0 percent in the second and third quarters. In
light of the weak investment performance, many observers wondered
whether the economy suffered from a capital overhang, built up by excessive
investment in the years immediately before the 2001 recession. As discussed
in last year’s Report, this possibility is hard to verify, because it requires an
estimate of the “correct” amount of capital relative to the economy’s output,
a figure that is hard to know with certainty. Yet as the 2002 Report also noted,
Chapter 1

| 35

some empirical evidence had emerged in 2001 indicating that a modest
overhang had developed the previous year for some capital goods, notably
servers, routers, switches, optical cabling, and large trucks. However,
evidence that a widespread overhang continues to hinder overall investment
outside of a few particular industries is harder to find. In any case, the growth
rate of capital services has fallen sharply over the past 2 years, from an average
of more than 5.9 percent a year from 1998 to 2000 to 3.6 percent in 2001
and about 3.4 percent in 2002. This low rate of growth means that any
general capital overhang that had developed by 2000 is likely to have been
significantly reduced by the end of 2002.
Another important business investment development in 2002 was the
change in business inventories. In 2001 firms drew down $61.4 billion in
real inventories (in 1996 dollars), but real inventory investment turned positive in the second and third quarters of 2002. Although the level of inventory
investment remained modest, the change in that investment after the drawdown of 2001 added several percentage points to GDP growth, especially in
the first quarter. As the year drew to a close, inventory-to-sales ratios
remained close to their lowest levels in years, suggesting further room for
inventory expansion in 2003.
Although the short-term outlook for investment in both inventories and
equipment and software is positive, the outlook for investment in structures
is more uncertain. One potential positive influence on structures investment
going forward is the Congress’ passage of a terrorism risk insurance bill in
late 2002, which will facilitate the construction of projects that are difficult
to insure privately against terrorist attacks. Yet vacancy rates for both office
and industrial space remained high in 2002, suggesting that the rebound in
structures investment may not begin for some time.

The Stock Market and Nonresidential Investment
As noted above, one of the factors depressing business investment in 2002
was the stock market. However, the link between the stock market and
investment differs from that between the stock market and consumption. An
individual firm’s equity value is linked to its investment not because of
wealth effects, but rather because stock prices and investment are both
forward-looking variables. Technically, the stock price represents the value of
the future stream of dividends to be paid by the firm, discounted by a
required rate of return that is appropriate for risky assets. A firm with strong
future investment prospects will attract investors hoping to share in the
profits generated by the firm. As these investors bid up the stocks of companies with the best investment prospects, these firms will come to have the
highest stock values. Indeed, in the simplest model of business finance, stock
prices and investment potential are so closely correlated that no other information besides a firm’s stock price is needed to predict its investment activity.
36 | Economic Report of the President

In such a world, a firm with a high stock price can easily fund its investment
projects by issuing more equity, which investors willingly absorb if they believe
that the firm’s investment prospects are good. In what amounts to the same
thing, firms may also borrow in the capital markets to finance investment,
because lenders will be able to recognize firms with favorable prospects as good
credit risks. In fact, in this textbook case, the choice between equity financing
and debt financing does not matter to the value of the firm. It is true that
equity financing is more flexible than debt financing, because the payment of
dividends is under the control of the firm, whereas the schedule of interest
payments on debt is fixed at the time of the borrowing. But if individual stockholders as well as firms can borrow and lend freely in credit markets, a firm
will be unable to increase its overall value simply by changing its mix of debt
and equity financing. For example, a firm can raise its expected earnings per
share by repurchasing some of its outstanding shares with borrowed money.
But increasing the firm’s exposure to credit markets in this way makes ownership in the firm riskier, which reduces the willingness of investors to hold
equity in the firm. The net result is that the overall value of the firm does not
increase. The firm’s debt-for-equity switch affects only the fraction of its cash
flows allocated toward creditors rather than shareholders. The firm’s ability to
carry out “real” investment projects is the same as before.
Although the U.S. stock market does provide useful signals for overall
investment, the real world diverges from the textbook model in important
ways. One set of complications arises because managers of the firm are typically better informed about the firm’s prospects than outside investors. The
resulting informational asymmetry prevents investors from attaching values
to firms that perfectly reflect the firms’ investment prospects, so that the close
correlation between stock market values and investment found in the textbook model is lost. Another consequence of informational differences is that
firms must often fund investment from internal sources (such as retained
earnings or cash flow) rather than external sources (such as issuing equity or
borrowing in credit markets).
A second set of complications in the financing of investment is due to the
income tax. Firms are allowed to deduct interest payments as part of the cost
of doing business, but dividends paid to stockholders are not granted equal
treatment. As a consequence, dividend income is taxed twice, once at the
corporate level and again at the level of the individual dividend recipient.
This double taxation of dividends makes new equity financing less attractive
to firms than debt financing. Moreover, if investors and managers do not
share the same information, the resulting reliance on debt financing can have
damaging consequences for investment during economic downturns. One
concern is that the inflexibility of interest payments, relative to dividends,
means that a recession could cause widespread liquidity problems among
borrowing firms. A second problem is that, when aggregate conditions
Chapter 1

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worsen, lenders with incomplete information about firms may reduce credit
to firms that are good credit risks as well as those that are bad risks. The
resulting credit crunch may depress business investment by more than the
economic fundamentals would warrant.
These general principles of investment and corporate finance help to
illuminate recent movements in both the stock market and business investment. To start with, the correlation between the change in stock prices and
growth in business fixed investment was quite close after 1995 (Chart 1-3).
Although the stock market has typically been imperfectly correlated with
investment over the past two decades, both variables rose markedly from
1995 to 2000 and fell sharply thereafter. One interpretation of this pattern is
that although informational asymmetries and other complications can generally obscure the relationship between stock prices and investment, the rise in
both reflected a widely perceived increase in the value of physical capital
installed in firms after 1995. As many observers have noted, investors may
have overestimated the value of installed capital in many industries, driving
the stock prices of some firms to unsustainable levels and thereby encouraging these firms to invest too much. Even so, capital markets worked well in
the late 1990s, in the sense that the signals sent by market participants and
manifested in stock prices were received clearly by investing firms.

38 | Economic Report of the President

The boom in the stock market might have been expected to encourage
firms to finance investment by issuing equity, but it turns out that net
issuance of equity was actually negative in the late 1990s (Chart 1-4). To be
sure, many firms did issue equity in order to finance new investments,
through initial public offerings as well as the private venture capital market,
both of which surged through 2000. Yet these gross equity issues were more
than offset by share repurchases and merger-based stock retirements at other
firms, so that debt, not equity, served as the major source of business
financing during the investment boom. Business debt rose steadily
throughout this period, with net issuance of long-term corporate bonds and
short-term commercial paper playing especially important roles (Chart 1-5).
Of course, a major reason for this pattern of rising debt alongside a booming
stock market was that discussed above: the bias toward debt financing built
into the tax code.
In a general sense, the decline in the stock market after early 2000 can be
traced to both of the factors that determine equity prices: expectations of
future corporate earnings, and the risk premium that investors require in
order to hold equities. Evidence that expectations of earnings growth were
adjusted downward as the stock market fell comes from surveys of Wall
Street analysts who track individual firms. According to one such survey,

Chapter 1

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5-year-ahead earnings growth forecasts for the firms in the Standard &
Poor’s 500 index fell from a peak of more than 18 percent in mid-2000 to
slightly more than 13 percent by September 2002. Other data provide
evidence of an increase in market aversion to risk, which lowers the price that
investors are willing to pay for a stream of uncertain corporate earnings. A
common measure of the market’s aversion to risk is the interest rate spread
between corporate bonds and U.S. Treasury bonds, because corporate bonds
are subject to default risk whereas Treasuries are not. The widening gap
between yields for corporate and Treasury securities after 2000 coincided
closely with the decline in the stock market during this period (Chart 1-6).
Spreads continued to widen sharply in 2002, reaching near-record levels,
indicating that risk aversion played a key role in markets in the months
following September 11, 2001.
In addition to reductions in both earnings expectations and risk tolerance,
corporate governance was an often-cited factor in the stock market’s behavior
in 2002. Well-publicized allegations of corporate wrongdoing and questionable accounting practices may have caused investors to doubt the reported
earnings of some firms. One way to gauge the seriousness of corporate governance concerns in 2002 is to examine the interest rate spreads within the
investment-grade corporate bond market and, specifically, the difference
between interest rates paid by the highest-rated corporate borrowers and
those paid by firms with somewhat lower credit ratings. As Chart 1-7 shows,
40 | Economic Report of the President

Chapter 1

| 41

this spread widened sharply in the closing months of 2001. Although this
period was one of heightened uncertainty over the pace of near-term
economic growth, it also featured a number of important allegations of
corporate misbehavior, and the widening bond spread suggests that investors
became less willing to tolerate relatively high levels of risk at less-thanpremium-grade firms as 2002 began.
Although the effect of these revelations on interest rates and bond prices
appears pronounced, their effect on broad equity price indexes in 2002 is less
clear. To be sure, the revelations of questionable practices had important
consequences for the stock prices of many firms. Regarding the U.S. stock
market as a whole, however, it is important to recall, as noted above, that all
of the world’s major stock markets lost ground in 2002. The precise determinants of these movements are difficult to identify, but the uniformity of
stock market movements around the world suggests that a key driver of U.S.
stock prices in 2002 was a worldwide decrease in tolerance for risky assets
combined with lower projected earnings growth, and not necessarily the
corporate governance concerns specific to the United States.
As discussed in Chapter 2, government plays an important role in the
regulation of corporate behavior, complementing the monitoring mechanisms for invested funds that arise naturally in well-developed financial
markets. In March 2002 the President offered a 10-point reform plan
addressing a wide range of corporate governance issues, and in July he signed
the landmark Sarbanes-Oxley Act. The quick response to the accounting
scandals signaled by passage of this act underscored both the seriousness of
corporate responsibility issues and the importance of maintaining confidence
in markets.
Given the link between investment and stock prices discussed above, it
should not be surprising that investment softened considerably after early
2000. A key question was whether the temporary slowing of economic
growth would combine with the business sector’s reliance on debt financing
to engender a liquidity crisis or a credit crunch, either of which would
depress investment even further. By and large, however, credit markets in
2001 and 2002 continued to function without the sharp increase in the
nonprice rationing of credit that is typical of a credit crunch. Short-term
business lending did decline in 2001 and 2002, as both commercial paper
and commercial and industrial (C&I) bank loans fell. (See Chart 1-5 above.)
By itself, however, a decline in lending is not evidence of a credit crunch, in
which loans are no longer allocated by price and creditworthy firms are
denied loans at posted interest rates. Although nonfinancial business debt as
a percentage of GDP has declined somewhat over the past year, this decline
has been less severe than during many other business cycles. It is true that
C&I loans and short-term commercial paper outstanding have fallen sharply,
42 | Economic Report of the President

but many firms have simply substituted long-term bonds for commercial
paper in order to reduce rollover risk and lock in favorable long-term interest
rates. Corporate bond issuance was especially strong in 2001, before the
increase in borrowing spreads within the corporate sector (portrayed in
Chart 1-7) raised borrowing costs for firms that lacked the highest credit
ratings. Another factor leading to reduced bank lending was the general
decline in business loan demand that typically accompanies economic downturns. Specific evidence for a decline in loan demand comes from an October
2002 Federal Reserve survey, which found that senior loan officers at most
domestic banks put a decline in loan demand, not restrictions in loan supply,
at the heart of the decline in bank lending to businesses.
The relative stability of the business debt-to-GDP ratio in the aftermath of
the 2001 recession contrasts sharply with the decline in debt that followed the
1990-91 recession, when many feared that a credit crunch had taken hold. As
can be seen from Chart 1-5, the earlier debt decline was strongly influenced
by a sharp decline in commercial mortgages. This drop in mortgage credit
was, in turn, prompted by an earlier change in the tax code that made
commercial real estate investments less attractive on a purely tax basis, as well
as by continuing weakness in the savings and loan industry. Because these
headwinds to debt accumulation are not relevant for the current period, it is
much less likely that a sustained deleveraging of the corporate sector like that
observed in the early 1990s now lies ahead for the U.S. economy.
In summary, the link between stock prices and business investment has
proved especially strong since 1995. Both the stock market and business
investment reflected the optimism of investors in the late 1990s, and both
reflected the subsequent scaling back of expected profits as well as reduced
tolerance for risk. Yet even though the investment boom of the late 1990s
was funded primarily with debt and not equity, the drop in equity values did
not degenerate into a full-blown credit crunch that hindered investment
unnecessarily. As a result, rationing of credit is not expected to hinder the
investment recovery that private forecasters predict for the coming year.

Residential Investment
In contrast to the softness in nonresidential investment, residential investment
grew briskly in 2002, sparked by the lowest mortgage interest rates in more
than a generation. After hitting a recent peak of 8.64 percent in May 2000,
interest rates for conventional, fixed-rate 30-year loans fell to 5.93 percent by
the end of December 2002, their lowest level since 1965. Low mortgage rates
contributed to the 6.8 percent increase in single-family housing starts over
their already high level of 2001, while boosting sales of new homes to record
levels near the end of the year. The strength of housing construction during

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the past 3 years stands in contrast to past business cycles, when housing starts
were not nearly as robust (Chart 1-8).
Strong housing construction is also a natural consequence of rising
housing prices, although that rise moderated to an annual rate of 3.4 percent
in the third quarter of 2002 from an annual rate of about 9 percent in the
first half of the year. The continued appreciation of housing during the last
several years has led some observers to contend that the housing market is
caught in a bubble, in which buyers pay high prices for assets simply because
they hope to sell those assets to other investors at even higher prices, a
scheme that collapses quickly when no further purchasers can be found.
Proponents of the housing bubble theory noted that houses were particularly
expensive relative to rents, which indicated that high shelter costs alone did
not explain the entire rise in housing prices. Housing prices also rose much
more quickly than the median household income in 2001, which left the
price-to-income ratio at its highest level in more than two decades.
Because it is difficult to know the precise motivations of the millions of
persons who buy homes (or any other assets), it is impossible to know for
sure whether any sharp increase in home prices is a bubble. Yet the high
transactions costs involved in selling houses make a bubble in the housing
market unlikely. Moreover, new sources of housing demand have emerged in
the past two decades to support the fundamental value of owner-occupied
44 | Economic Report of the President

houses. One is the growth in purchases of second homes by baby-boomers,
many of whom are now in their prime earning years. Perhaps more important is the recent surge in immigration into the United States. In the 10 years
preceding the 2000 Census, the number of foreign-born residents in the
United States rose by 11.3 million, or 57 percent, compared with an increase
of only 5.7 million in the previous 10-year period. As a result, the share of
foreign-born individuals in the total U.S. resident population reached
11.1 percent in the 2000 Census. This is well above their 4.7 percent share in
1970 and comparable to the 13 to 15 percent shares recorded during the
golden age of immigration from 1860 to 1920.
By itself, a surge in immigration would be expected to raise shelter costs in
general, but not necessarily the price of homes relative to rents. Yet there is
evidence that the timing of the immigration wave, along with recent developments in mortgage finance, has raised demand for owner-occupied homes
separately from the demand for rental housing. Some recent research has
pointed out that immigrants who arrived in the 1980s have only recently
been able to make the transition to home ownership, because it takes time to
save for a down payment. Also, developments in mortgage finance over the
1990s have made home purchases more affordable by narrowing the spread
between mortgage interest rates and benchmark U.S. Treasury yields. The
liberalization of mortgage finance would be expected to exert a strong, independent effect on home demand, by enlarging the pool of potential buyers of
any nationality. This liberalization could well have combined with improvements in the financial positions of previous immigrants to result in a strong
source of housing demand in the past several years. According to the 2001
American Housing Survey, sponsored by the Department of Housing and
Urban Development, foreign-born residents have accounted for a sizable
share of first-time home purchases since 1997, when the increase in
house prices began in earnest. The survey shows that there were more than
5.7 million foreign-born homeowners in the United States in 2001, and
more than 20 percent of them had purchased their first house since 1997.
Although many of these new homeowners were members of minority
groups, the rate of homeownership among minorities still lags behind that of
whites. To redress this imbalance, in June 2002 the Administration
announced an initiative to add 5.5 million minority homeowners by the end
of the decade.

Net Exports
Although the output of the U.S. economy remained below potential in
2002, its growth rate still outpaced those of many other industrialized countries. Slow growth among many of the United States’ major trading partners,
in turn, contributed to slow growth in U.S. exports compared with that of
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imports. Exports rose at an annual rate of 7.4 percent during the first three
quarters of the year, while imports grew 11.1 percent. This discrepancy
between the rates of growth in exports and imports led to an increase in the
U.S. trade deficit, so that net exports exerted a drag on GDP growth in
the first half of the year. (Net exports were essentially unchanged in the
third quarter.)
Because changes in the trade deficit are often quantitatively important for
year-to-year changes in GDP growth, U.S. trade performance is an important concern. Imports and exports both provide benefits to consumers and
firms. Imports provide U.S. firms with a wider variety of low-cost inputs,
and consumers with wider variety and lower prices for goods. Moreover,
competition from international producers induces domestic firms to raise
their productivity, which raises incomes in the long run. Trade therefore
boosts consumer satisfaction at home and ensures that American producers
remain competitive, by increasing the size of the market in which they
operate. In light of the benefits of trade to both Americans and foreigners,
the Administration has made the expansion of trade a central policy objective. Two important trade-related developments in 2002 were the Congress’
granting of Trade Promotion Authority to the President (after an 8-year
hiatus) and the launching of an ambitious initiative to reduce barriers to agricultural trade, announced at the ongoing Doha round of trade negotiations
within the World Trade Organization. These developments and others are
described in more detail in Chapter 6, which discusses the importance of free
trade measures in promoting economic growth around the world.

Government Purchases
The war on terrorism continued to exert upward pressure on Federal
Government purchases in 2002. In late March the President requested that
the Congress provide an additional appropriation of $27.1 billion, primarily
to fund this effort. More than half of this amount was allocated to activities
of the Department of Defense and various intelligence agencies. Most of the
rest was needed for homeland security (mainly for the new Transportation
Security Administration) and for the emergency response and recovery
efforts in New York City. Although most of this spending was required for
one-time outlays only, it nevertheless contributed to the 6.4 percent annual
rate of increase in real Federal Government purchases in the first three quarters of 2002. State and local government purchases rose at a more moderate
1.7 percent annual rate during the same period.

46 | Economic Report of the President

The Labor Market, Productivity, and Real Wages
Although the labor market improved in 2002 after weakness in the wake
of the September 2001 attacks, most major labor market indicators showed
little progress over the course of the year. The unemployment rate hovered
between 5.5 and 6.0 percent throughout the year, after rising 1.8 percentage
points in 2001. Nonfarm payroll employment in 2002 was similarly weak,
with 181,000 jobs lost during the year, compared with 1.4 million jobs lost
the previous year.
As in past business cycles, the decline in manufacturing employment has
been especially pronounced. Factory employment fell by 592,000 in 2002,
following a decline of 1.3 million in 2001 and about 100,000 in 2000.
Another feature of previous business cycles that has recurred in the past
2 years is the increase in the number of workers who report a long unemployment spell. Like the overall unemployment rate, the number of workers
unemployed for 26 weeks or more rose in 2001 and remained high in 2002
(Chart 1-9). The rise in long-term unemployment is one of the most troublesome features of recessions, because long-term joblessness is costly to those
unable to find work. Indeed, the difficulties endured by the long-term unemployed were a key reason for the passage of the Job Creation and Worker
Assistance Act in March, which extended unemployment benefits for many
of these workers. Yet, as Chart 1-9 shows, the pattern of long-term unemployment observed in 2001 and 2002 was similar to patterns traced out in
previous postwar fluctuations.
In other ways, however, the recent behavior of the labor market has been
different from that in past business cycles. One difference is the high fraction
of job losers who reported a permanent rather than temporary separation in
2001. In the government’s monthly Current Population Survey, each respondent who reports a job loss is asked whether he or she expects to return to
work with the same employer. (Those who expect to return are typically on
an explicitly temporary layoff, although this need not be the case.) Research
from the Bureau of Labor Statistics found that, in the initial quarters of the
four recessions before 1990, slightly more than half of job losers were permanently separated from their previous employers, with the rest on temporary
layoff. In the three quarters after the business cycle peak of 1990, however,
the share of permanent job losers rose to almost three quarters, and the
comparable proportion for the March 2001 peak is nearly 90 percent.
The rising proportion of job losers facing a permanent separation in
recessions may reflect structural changes in the labor market during the past
two decades, including the rise in temporary help employment. A firm
facing a transitory increase in demand may use a temporary worker (formally
employed by a temporary help firm) rather than add staff to its regular work
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force. When demand falls, the firm would then permanently sever the
relationship with this worker; in the past the firm might have placed one of
its own workers on temporary layoff. This explanation is consistent with the
sharp rise in temporary help employment over the past 20 years as well as the
sharp drop in 2001. Yet it is important to keep in mind that the fraction of
workers losing their jobs in 2001 remained well below that in recent
recessions, because of the mildness of the 2001 contraction.
Although year-to-year fluctuations in the labor market are of immediate
concern, sustained improvements in the living standards of American workers
depend on more structural, long-term factors. As discussed in Chapter 3,
these factors include the flexibility and dynamism of the American labor
market, which matches millions of workers with new jobs each month and
provides incentives for investments that make workers more productive.
Indeed, pro-growth labor market policies in the United States have helped the
economy achieve a sizable increase in labor productivity growth since 1995.
When this increase began, many economists were skeptical that it was permanent, because productivity growth in a given quarter or year can be strongly
influenced by the business cycle. Indeed, macroeconomic research has long
established the procyclicality of productivity as a stylized fact, with output per
worker rising faster in expansions than in recessions. This productivity pattern
can be explained by the reluctance of firms to hire early in a recovery, before
48 | Economic Report of the President

they are sure that a robust recovery has taken hold. This reluctance means that
existing employees must work harder to fill the higher number of orders when
demand first begins to rise. The resulting increase in worker effort causes
output to rise faster than hours worked, so that the data indicate an increase in
productivity even without any improvement in the underlying technology of
production. Economists therefore prefer to observe improved productivity
performance over an extended period before pronouncing that a change in
productivity growth has taken place.
As productivity growth has stayed high since 1995, the productivity
improvement has increasingly come to be seen as lasting. Data from 2001 and
2002 only strengthen this conclusion. During the seven quarters ending in the
third quarter of 2002—a period that includes a recession and a recovery—
labor productivity grew at an annual rate of 3.2 percent, somewhat higher
than the annual rate of 2.5 percent from 1995 to 2000 and much higher than
the 1.4 percent trend from 1973 to 1995. (A formal analysis of recent productivity data is presented later in the chapter.) An improvement of only about
2 percentage points in productivity growth may not sound impressive, but
over time even a small increase in productivity growth brings about a large
improvement in living standards. For example, growth in productivity of
1.4 percent a year implies that productivity doubles every 50 years, but
growth of 2.5 percent implies a doubling every 28 years.
Strong productivity growth also helps to keep inflation down, by allowing
real wages to grow without an increase in unit labor costs, which would drive
up firms’ costs of production and therefore push output prices upward.
Indeed, another bright spot in 2002 was the behavior of inflation and real
wages. The consumer price index (CPI) rose 2.4 percent in 2002 (December
to December), close to its 1.6 percent rate of increase in 2001. The core CPI,
which does not include the volatile food and energy components, rose
1.9 percent.
Inflation is difficult to measure, because of the dynamic nature of
consumers’ choices (Box 1-3), and it is not directly linked to long-run living
standards. Nonetheless, low inflation is fundamental to a healthy economy.
High and variable inflation not only can cloud the relative price signals
needed to allocate resources efficiently, but also can introduce other distortions through the income tax. Additionally, bringing inflation down from
high levels typically requires sustained (and costly) increases in unemployment. The low inflation observed in 2002 gave policymakers the flexibility to
support the fledgling recovery without being overly concerned that they
would increase price pressures in doing so.
Taken together, rapid productivity growth and low inflation meant that
real wages continued to grow in 2002. As measured by the employment cost
index, real compensation for private industry workers grew 2.1 percent over
the four quarters ending in the third quarter of 2002. This compares with
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Box 1-3. New Measures of Consumer Price Inflation
Following through on a request from the Congress, the Bureau of
Labor Statistics has developed a new measure of consumer price inflation. Unlike the current official Consumer Price Index for Urban
Consumers, the new measure not only adjusts for consumer substitution between goods in response to movements in relative prices, but
also uses current expenditure weights rather than weights that are
several years out of date. The fact that weights from different adjoining
years are “chained” together gives the new measure of inflation its
name: the chained CPI, or C-CPI. The chained CPI is a supplemental
series and is not intended to replace the official CPI, versions of which
are used to index Social Security benefits, pensions, Federal tax
brackets, and many private contracts.
Any consumer price index must somehow aggregate the many
prices faced by consumers into a single number. The official CPI aggregates prices by using a fixed market basket. (Currently the basket
reflects consumption shares in 1999-2000 for 211 major categories of
goods and services.) The disadvantage of using a fixed-weight basket is
that the resulting price index is unable to reflect the reallocations that
consumers make when relative prices change. For example, if the price
of chicken were to rise while that of steak held steady, consumers
might well buy more steak; then the use of fixed weights would overstate the increase in the cost of meat generally, caused by the increase
in the cost of chicken. The new chained index reflects this substitution,
but at some cost. Specifically, the new index requires data on
consumer expenditure before and after these substitutions have
occurred. But whereas prices are relatively easy to measure on a realtime basis, expenditure shares are not, which means that current
expenditure shares must be estimated for the most recent periods.
Because it reflects substitution by consumers, the new measure uses
expenditure weights that are constantly changing as consumption
patterns change. As a result, the expenditure weights do not get out of
date as they do with a fixed-weight index. The difference that this use of
up-to-date weights makes is particularly important to the contribution of
computers to the cost of living, because the relative price of computers
has fallen during the past two decades even as the expenditure share of
computers has risen. A fixed-weight basket would tend to understate
the weight of computers in current consumption, because its expenditure weights are typically years out of date. As the price of computers
has fallen over time, the underweighting of computers in a fixed-weight
index causes this index to overstate the increase in the cost of living.
The chained CPI does not suffer from this problem, because its weights
are constantly being updated.

50 | Economic Report of the President

real compensation growth of only 1.3 percent during the same period a year
earlier. Although increases in benefits (such as employer payments for health
insurance) accounted for much of the acceleration in total compensation
growth, annualized real growth in wages and salaries also accelerated, from
0.9 percent to 1.7 percent across the same two periods.
In short, the sluggish performance of the labor market in 2002 was an
unwelcome development for many workers and their families, as well as a
matter of concern for policymakers. But rapid productivity growth, low
inflation, and healthy real wage gains set the stage for future improvements
in both unemployment and job growth in the years ahead.

Macroeconomic Policy and the Budget Outlook
The U.S. economy has suffered a number of serious setbacks in the past
3 years, including the terrorist attacks of September 2001, the significant loss of
stock market wealth since 2000, and the recent corporate accounting scandals.
Yet the contraction of 2001 was one of the mildest on record, with recovery
proceeding steadily, if modestly, in 2002. One reason for the economy’s
stability in the face of these adverse developments was the stance of macroeconomic policy, both monetary (set by the Federal Reserve) and fiscal (set by the
President and the Congress). This section analyzes the effects of monetary and
fiscal policy in detail, illustrating their likely impact on macroeconomic
performance in 2002 as well as the fiscal outlook for the years ahead.

Monetary Policy
In 2001, faced with signs of a slowing of economic activity, the Federal
Reserve reduced its policy interest rate, the Federal funds rate, 11 times
during the year, from 6.50 percent to 1.75 percent. The Federal Reserve then
held the funds rate steady through most of 2002, until a further halfpercentage-point cut on November 6 brought it down to 1.25 percent.
Although the Federal funds rate thus remained constant for most of 2002,
earlier rate reductions continued to stimulate the economy throughout the
year. Understanding the reasons for this lag requires an understanding of the
channels through which monetary policy affects the economy. A lowering of
interest rates stimulates demand through four main channels: encouraging
consumption (particularly of durables), stimulating business investment (by
lowering the cost of capital), promoting residential investment (as seen from
the booming housing sector), and lowering the foreign exchange value of the
dollar (which tends to raise exports and lower imports). All of these effects
take time to be felt. Consumers must plan how best to take advantage of

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lower borrowing costs, firms must plan new investments, and importers and
exporters must determine how any change in the dollar’s exchange value will
affect their prices and costs.
Measuring the size of these effects as well as the time needed for them to
be fully expressed is an active area of macroeconomic research. One method
for measuring the effect of monetary policy uses formal models of the
economy, in which the behavioral relationships governing consumption,
investment, imports, and exports are fully specified. After the researcher specifies a time path for the Federal funds rate, the model supplies the likely path
for each component of aggregate demand, based on the behavioral relationships embedded in the model’s equations. In contrast to this model-based
method, a more data-based method for measuring the effects of monetary
policy omits any formal modeling of behavioral relationships, instead using
statistical techniques to measure the past effect of funds rate changes on a few
key variables, such as output and the price level. An important goal of this
method is to take account of other factors, such as changes in fiscal policy
and temporary shocks to aggregate demand and prices, which may also have
affected the economy when a given change in monetary policy was taking
place. Although the precise channels of monetary policy are not specified in
the data-based method, it is hoped that the answers are less sensitive to
particular assumptions, which can differ across large behavioral models.
Results from both model-based and data-based methods suggest that
monetary policy changes take effect only after a lag of several months, but that
these effects are long-lasting, so that the rate reductions in 2001 are likely to
have stimulated the economy throughout 2002. To gain a sense of the magnitudes involved, one well-known model of the economy predicts that, holding
other factors constant, a 1-percentage-point decrease in the Federal funds rate
raises real GDP by 0.6 percent above its baseline level after 1 year. This effect
of monetary stimulus on real GDP rises to 1.7 percent after 2 years. Databased methods broadly concur with this assessment: one study shows that the
typical decrease in the funds rate raises output steadily in subsequent quarters,
reaching a maximum effect on output after about 18 months. Both methods
therefore imply that interest rate cuts in 2001 continued to exert considerable
economic stimulus in 2002.

Fiscal Policy
An important goal of fiscal policy is to promote growth by limiting the
share of output commanded by the government. In 2001 the Congress and
the Administration made major progress along these lines with passage of the
Economic Growth and Tax Relief Reconciliation Act, which featured a
broad-based cut in marginal tax rates. The long-term benefits of such a policy

52 | Economic Report of the President

are clear, as high marginal tax rates discourage the entrepreneurship and risk
taking on which the strength of the U.S. economic system depends. Yet
although the goal of EGTRRA was to improve long-term living standards
and limit the size of the government, the legislation conferred important
short-term benefits as well, thanks to the way in which the tax rate reductions were set in place and the timing of the act’s passage. A new lower tax
rate of 10 percent was introduced at the bottom range of the previous 15
percent bracket, and taxpayers in 2001 were given an advance rebate on their
likely savings due to this reduction.
Rebate checks ($300 for most single taxpayers, $600 for most married
couples filing jointly) arrived in mailboxes in the summer of 2001. The
timing of the resulting $36 billion infusion of spendable income into the
economy could not have been more favorable. Although the depth of the
2001 recession would not be known until revised GDP figures were
announced the next year, GDP had already declined by 0.6 percent at an
annual rate in the first quarter of 2001 and by 1.6 percent in the second
quarter. As estimated from the traditional relationship between overall GDP
and current income, the tax plan added about 1.2 percentage points of
growth at an annual rate in the third quarter. As a result, without the checks,
third-quarter GDP would have declined at an annual rate of 1.5 percent
rather than the 0.3 percent rate actually observed. In the fourth quarter, tax
relief continued to add 1.2 percentage points to the annual rate of real GDP
growth, so that instead of rising at an annual rate of 2.7 percent, GDP would
have risen by only 1.5 percent in the absence of the rebates.
The rebate checks mailed in 2001 represented only a small fraction of the
tax relief from the EGTRRA package. In addition to lowering marginal tax
rates, EGTRRA increases the incentives for saving, for making bequests to
heirs, and for investment. As a result, tax relief from EGTRRA probably
helped the private sector create 800,000 jobs by the end of 2002 relative to
the baseline level without tax relief, while raising GDP growth by about 0.5
percentage point over the course of that year.
In March 2002 the President signed the Job Creation and Worker Assistance
Act, which implemented a tax policy especially appropriate for the fledgling
recovery. The act promoted investment by allowing firms to immediately write
off (that is, expense) 30 percent of the value of qualified investments in the year
of purchase for investments made through September 11, 2004. As discussed
in Chapter 5, government policies can significantly improve growth by
removing tax distortions that penalize investment or other productive activities.
For example, introducing expensing lowers the cost of capital, thereby making
more investment opportunities profitable on an after-tax basis. The act stimulates investment by allowing partial expensing through most of 2004. In
addition to reducing the tax-adjusted cost of investment, the act extended

Chapter 1

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unemployment benefits to workers who have exhausted their regular benefits.
This enhanced the role of unemployment insurance as one of the economy’s
most important automatic stabilizers.

The Federal Budget
After 4 years of surpluses, the unified Federal budget recorded a deficit of
$158 billion in fiscal 2002, or about 1.5 percent of GDP. The return of the
deficit was primarily due to four factors: the lingering effects of the recession of
2001, the stock market plunge, increased Federal expenditure necessitated by
the war on terrorism, and the costs of homeland security. Recessions tend to
increase budget deficits because they lead to higher outlays (for unemployment
insurance, for example) at the same time that they reduce tax receipts (because
taxable income falls). The decline in receipts during the most recent downturn
in the business cycle has been especially pronounced. Total receipts in fiscal
2002 were $1,853 billion, having fallen $138 billion, or about 7 percent, from
their level in fiscal 2001. This represented a much larger percentage decrease in
receipts than in previous, far more severe recessions. One of the most important reasons for the dramatic decline in receipts given the mildness of the 2001
contraction was the coincident decline in the stock market. The stock market’s
decline reduced capital gains receipts in addition to reducing taxes on wage and
salary income for workers whose jobs are closely tied to equity markets. More
detailed information on the precise sources of the decline in receipts will not be
available until the Treasury completes its regular annual examination of individual tax returns. Even with the decline in receipts, however, the budget deficit
was relatively small as a fraction of GDP compared with those seen in previous
periods of war and recession.

The President’s Jobs and Growth Initiative
On January 7, 2003, the President proposed a plan to enhance the longterm growth of the economy while supporting the emerging recovery. At the
start of 2003 the consensus of private forecasters predicted accelerating
growth in real GDP over the course of the year, which would raise investment, reduce unemployment, and increase job growth. This consensus view
is reflected in the Administration’s outlook, discussed below. Yet the recovery
in investment could be delayed by weaker-than-expected profit growth,
higher required rates of return arising from geopolitical and other risks, or a
prolonged period during which companies focus on repairing their balance
sheets. More general risks to recovery in 2003 include an increased sense of
caution, which could lead households to pull back on their spending
plans, and the potential for further terrorist attacks. To insure against these
54 | Economic Report of the President

near-term risks while boosting long-term growth, the President has proposed
a focused set of initiatives. Specifically, the President’s plan would:
• Accelerate to January 1, 2003, many features of the 2001 tax cut that
are currently scheduled to be phased in over several years. These include
the reductions in marginal income tax rates, additional marriage penalty
relief, a larger child credit, and a wider 10 percent income tax bracket
• Eliminate the double taxation of corporate income by excluding dividends from individual taxable income
• Increase expensing limits for small business investment, raising to
$75,000 the amount that small businesses may deduct from their
taxable income in the year the investment takes place
• Provide $3.6 billion to the States to fund Personal Reemployment
Accounts for unemployed workers. These accounts would allow eligible
workers to spend up to $3,000 to defray the costs of finding or training
for a new job. Workers could keep any unspent balance in their account
if they find work within 13 weeks of going on unemployment.
Accelerating the marginal tax rate reductions would insure against a
softening of consumption by putting more money in consumers’ pockets
through long-term tax cuts, which have been shown to be more effective
than temporary cuts in boosting near-term spending. Ending the double tax
on corporate income would increase the ability of corporations to raise
equity capital, providing near-term support to investment while improving
the long-term efficiency of capital markets. (For more on how eliminating
the double tax on corporate income would help the economy, see Chapter
5.) The provisions also support investment by small firms. Higher expensing
limits would make it easier for small firms to expand by reducing the taxadjusted cost of capital; lower marginal tax rates would increase growth
incentives for small business owners whose business income is taxed at individual rates. Finally, Personal Reemployment Accounts, discussed in more
detail in Chapter 3, would provide unemployed workers with a new set of
incentives as they look for work. Accounts of this type, which reward unemployed workers for finding jobs quickly, have been shown in experiments in
several States to increase the speed with which unemployed workers find new
jobs. Moreover, by allowing workers a choice between using the funds to
support their job search and using them for job training expenses, the
accounts are well suited for the dynamic U.S. labor market.

The Effect of Tax Relief on Interest Rates
One of the most widely discussed issues in fiscal policy concerns the effect
of tax relief on interest rates. It is widely agreed that, in the immediate
Chapter 1

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aftermath of a permanent tax cut, consumption increases because consumers
have more disposable income. This increase in consumption raises GDP in
the near term, especially if the economy is operating below its potential, with
large amounts of unused labor and capital. In the long run, lower tax rates
have somewhat complicated, offsetting effects on GDP. On the negative side,
if the reduction in tax rates is not accompanied by spending reductions, it
will increase the budget deficit and may reduce national saving. Lower
national saving, in turn, will shrink the pool of loanable funds available in
capital markets, which increases interest rates and reduces investment.
Ultimately, lower investment leads to a smaller stock of productive capital,
resulting in lower wages, lower productivity, and lower output. Offsetting
this, however, is the positive effect of tax relief that operates through
improved incentives to work and take risks, for example by creating a new
firm or by making a new investment. Incentives to undertake these activities
improve after a cut in marginal tax rates, because the tax reduction allows
more of the rewards to be captured by workers, entrepreneurs, and investors
and not by the government. When tax relief extends to capital income (such
as dividends), as proposed in the President’s most recent jobs and growth
initiative, an additional positive effect arises through stronger incentives to
save. These positive effects on GDP operating through improved incentives
also have an impact on future budget deficits and investment, because
deficits will be less onerous if the economy grows in response to the
improved investment climate.
Assessing the ultimate effect of tax relief on GDP and future
government debt thus requires gauging both the negative effects that arise
through higher interest rates and the positive effects that come from
improved incentives. Unfortunately, measuring the effect through incentive
channels is difficult, because there have been few episodes of large, broadbased tax relief during the last several decades. Moreover, even these historical
episodes occurred amid a host of other economic developments, making it
difficult to isolate the direct effect of lower taxes on working and saving.
Obtaining a rough estimate of the interest rate effect is less difficult, because
widely accepted economic theory allows precise predictions of how much an
increase in the stock of debt should affect interest rates. The first step in
making this calculation is to note that an additional dollar of government
debt does not reduce the capital stock by a full dollar. About 40 cents of the
additional debt will be offset by larger capital inflows from abroad, so that the
U.S. capital stock would fall by only about 60 cents. The next step is to translate this 60-cent-per-dollar decrease in the capital stock into an ultimate
change in long-term interest rates. This is done by noting that the interest rate
on a bond should be closely related to the marginal product that physical
capital earns in the marketplace. This is so because the two should converge to
56 | Economic Report of the President

the point where investors are indifferent between holding financial securities
or holding physical capital in their portfolios. Reducing the physical capital
stock will increase the marginal return to capital in the marketplace by making
capital scarce relative to other factors of production; the key question is by
how much this marginal return rises. Some calculations (shown in Box 1-4)
imply that interest rates rise by about 3 basis points for every $200 billion in
additional government debt.
Given this relationship between government debt and interest rates,
concerns that higher interest rates would choke off the stimulative effects of
recent tax reductions seem unwarranted. For example, this relationship implies
that the $1.3 trillion in tax relief included in EGTRRA would raise interest
rates by only about 19 basis points—a modest cost to be set against the longterm incentive-based benefits expected from lower marginal tax rates.
The modest effect of government debt on interest rates does not mean that
tax cuts pay for themselves with higher output. Although the economy
grows in response to tax reductions (because of higher consumption in the

Box 1-4. Calculating the Effect of Higher Government Debt on
Interest Rates
The effect of government debt on interest rates depends on the
productivity of capital in the economy, because additional government
debt “crowds out” capital, increasing its scarcity relative to labor and
thereby raising its return in the marketplace. The higher return to capital
also increases the required return on other assets, such as bonds,
which drives up interest rates. One can get some idea of the productivity of capital in the United States by measuring how much of total
U.S. output is paid to suppliers of capital as opposed to suppliers of
labor. Gross capital income is usually about one-third of total U.S.
output, with the rest going to labor. Mathematically, the constancy of
the capital share implies that the marginal return on each unit of capital
is proportional to the output-to-capital ratio (Y/K). This proportionality
implies that the percentage change in the marginal return to capital
induced by a change in the capital stock is the same as the percentage
change in Y/K, which is simply the percentage change in Y minus the
percentage change in K. Some additional calculations show that the
constant one-third capital share implies that output should fall by onethird of 1 percent for every 1 percent decline in capital. This allows us to
write the ultimate percentage change in the marginal return to capital
as (percent change in Y) – (percent change in K) = (–0.33 percent) – (–1.0
percent) = 0.67 percent. In other words, the marginal product of capital
rises by 0.67 percent when the capital stock falls by 1.0 percent.

Chapter 1

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Box 1-4.—continued
Government data show that the U.S. capital stock was about $28 trillion
in 2001, so that 1 percent of the capital stock is $280 billion. Because one
dollar of debt reduces the capital stock by about 60 cents, an increase in
government debt of about $467 billion is required to crowd out 1 percent
of the capital stock ($467 billion x 0.60 = $280 billion). Government data
also imply that the gross marginal product of capital is about
10 percent, which implies that a 1 percent decline in the capital stock
would raise interest rates by about 6.7 basis points. A conservative rule
of thumb based on this relationship is that interest rates rise by about
3 basis points for every additional $200 billion in government debt.

short run and improved incentives in the long run), it is unlikely to grow so
much that lost tax revenue is completely recovered by the higher level of
economic activity. The small effect of debt on interest rates does show,
however, that attempts to stimulate the economy by raising taxes in order to
lower interest rates are likely to be unsuccessful, especially if the taxes raised
are those that discourage private saving and investment. The resulting reduction in interest rates will probably be too small to outweigh the negative
effects of tax increases that work through distorted incentives. Further, the
modest effect of increased debt on interest rates suggests that policymakers
should not be afraid to use fiscal policy when doing so improves the long-run
health of the economy. As long as the change in fiscal policy does not bring
about large, systemic imbalances in the economy—such as a high debt-toGDP ratio, or rapidly rising interest costs as a share of Federal
outlays—policymakers should not be paralyzed by the fear that any benefits
from tax reductions are likely to be undone by the increase in interest rates
they bring about.

58 | Economic Report of the President

Developments in the Rest of the World
Growth in many of the United States’ major trading partners was
even more disappointing in 2002 than was growth at home. Although growth
in Canada, America’s largest trading partner, was a surprisingly robust
4.0 percent during the four quarters ending in the third quarter of 2002,
growth elsewhere lagged far behind. The economy of the United Kingdom
grew only 2.1 percent over the same period; growth rates in Germany (0.4
percent), Italy (0.5 percent), France (1.0 percent), Japan (1.3 percent), and
Mexico (1.8 percent) were even lower. Low demand for U.S. exports
combined with the emerging recovery in the United States (which increased
U.S. demand for imports) sent the U.S. trade deficit to a record high in 2002.
Discussion of the U.S. position in international markets is often framed in
terms of the current account, a broader measure of international transactions.
In addition to the trade balance in goods and services, the current account
includes net investment income, net compensation of resident alien workers,
and net unilateral transfers. Because the trade component is by far the largest
in the current account balance, the widening in the trade deficit in 2002
contributed strongly to the widening in the current account deficit. The
latter reached a record 4.9 percent of GDP in the second quarter of 2002
before falling slightly, to 4.8 percent, in the third quarter.
One advantage of framing international finance discussions in terms of the
current account is that, as a matter of national accounting, the current
account balance equals the difference between net national saving and net
national investment. For example, if U.S. saving were smaller than U.S.
investment in a given period, the difference—the excess of investment over
saving—must have been financed by foreigners. In the process of financing
U.S. investment, foreign investors obtain U.S. assets, either in portfolio
form (that is, as stocks, bonds, or other financial securities) or though direct
controlling ownership of physical capital. These assets then generate investment income in the form of dividends, interest payments, and profits that
can be repatriated to the investors abroad. Balance of payments data therefore resemble a “sources and uses of funds” statement for the Nation as a
whole, providing useful information on the amounts of internal and external
investment financing. High levels of investment in the late 1990s meant that
the U.S. capital stock grew quickly in the late 1990s, but the accumulation of
past current account deficits requires an increasing portion of the income
earned by this capital to flow abroad. Over the past year, the U.S. current
account deficit has widened because net investment has been essentially flat
while net saving has fallen (Chart 1-10).
The relationship between the current account deficit and net investment
by foreigners in U.S. assets also makes clear how changes in international
Chapter 1

| 59

demand for U.S. assets can affect the trade balance, and vice versa. Consider
an increase in foreigners’ demand for U.S. assets. Their resulting accumulation of U.S. assets can affect international trade flows through an
appreciation of the dollar, because foreigners must obtain dollars in order to
purchase U.S. assets. Appreciation of the dollar tends to make imports
cheaper for U.S. residents, and U.S. exports more expensive to consumers
abroad; both these effects move the trade balance (and the current account)
toward deficit.
In light of the large number of trade-related and financial forces operating
on the current account, it is impossible to label a current account deficit of a
given magnitude either good or bad. As noted above, recent current account
deficits result from U.S. investment outpacing domestic saving. One factor
contributing to high U.S. investment relative to saving is the rapid increase in
U.S. productivity relative to that in many other major countries, which makes
the United States a good place to invest. Because productivity growth is ultimately responsible for rising living standards, the current account deficit
reflects at least in part some very good news about the American economy.
Even so, a current account deficit indicates that the United States is
consuming and investing more than it is producing. As Chart 1-10 shows,

60 | Economic Report of the President

the U.S. current account has typically been in deficit for the past two
decades. As a result, the net international investment position in the United
States (the value of U.S. investment holdings abroad less that of foreign holdings in the United States) has moved from an accumulated surplus of slightly
less than 10 percent of GDP in the late 1970s to a deficit of almost
20 percent of GDP in 2001 (Chart 1-11). Recent increases in the current
account deficit have led to some concerns that continued current account
deficits (and the increase in the United States’ international debt that would
result) might not be sustainable. Clearly, debt cannot increase without limit.
Because debt has to be serviced by the repatriation of capital income abroad,
the ratio of a country’s debt to its income has to stabilize at some point.
Yet the United States today is far from the point at which servicing its
international debt becomes an onerous burden. In fact, until last year, more
investment income was generated by U.S. investment in foreign countries
than by foreign investments inside the United States, even though the net
international investment position of the United States moved into deficit
almost two decades ago (Chart 1-11). Given the United States’ negative
international investment position, the fact that, until 2002, more investment
income flowed into the United States than flowed out of it implies that the

Chapter 1

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rates of return on U.S. investment abroad were higher than the returns
enjoyed by foreign investors in the United States. (Further analysis of international investment data indicates that these differences in rates of return are
especially pronounced for direct investment, and less so for portfolio investment.) Although debt service became a net transfer from the United States to
the rest of the world in 2002, this debt service is unlikely to amount to a
significant portion of U.S. output in the foreseeable future.
Near-term developments in the U.S. current account depend on a number
of factors. One of the most important is the rate of economic growth in the
rest of the world. Faster growth abroad raises the demand for U.S. exports,
which reduces the trade and current account deficits. A second factor
affecting the U.S. current account is the propensity of U.S. residents to save.
As Chart 1-2 showed, saving rates fell sharply in the 1990s; as noted above,
this may have stemmed from the strong appreciation in the stock market,
which allowed wealth to grow quickly without any increase in active saving
out of disposable income. The retrenchment in asset prices that began in
early 2000 may encourage some consumers to increase their active saving to
pre-1995 levels. For any given level of domestic investment, an increase in
the saving rate lessens the need to borrow from abroad and thereby reduces
the current account deficit. In any event, it is far preferable to reduce the
current account deficit by saving more than by reducing investment, because
lower investment results in slower growth in the capital stock, a lower growth
rate of labor productivity, and slower growth in living standards.
A third factor affecting the evolution of the current account is the future
demand by foreign investors for U.S. assets. To the extent that foreign
investors reduce their demand for U.S. assets and substitute holdings in other
countries for those assets, the real exchange value of the dollar will fall,
holding other factors constant. Conversely, the real value of the dollar will
rise with an increase in the demand for U.S. assets. Such an increase in
demand might result from continued productivity growth in the United
States or from an increase in the perceived safety of U.S. assets relative to the
rest of the world.
Moderate changes in foreign demand for dollar-denominated assets need
not have large disruptive effects on the U.S. economy. Gradual shifts in the
terms of trade would engender offsetting increases or decreases in the growth
of consumption and imports, leaving real GDP little affected. In fact, if
productivity growth remains relatively high in the United States while inflation remains low, a moderate shift in global demand away from U.S. assets
and the subsequent decline in the real value of the dollar may not even
require a change in the nominal exchange rate, because the real value of the
dollar falls with a constant nominal exchange rate when inflation at home is
lower than inflation abroad.
62 | Economic Report of the President

Moreover, history has shown that even a substantial decline in the value of
the dollar need not result in sharply lower prices for U.S. stocks, bonds, or
other assets. From the fourth quarter of 1985 to the fourth quarter of 1990,
the real, trade-weighted exchange value of the dollar fell by nearly 24 percent
while the current account deficit shrank from more than 3 percent of GDP
to less than 1 percent. At the same time, however, stock prices rose by about
47 percent while long-term interest rates (which move inversely to bond
prices) fell by more than 1 percentage point.
In the end, the key determinant of the sustainability of the U.S.
international debt position is continued confidence in the economic policies
of the United States. As long as the United States pursues its current marketoriented, pro-growth policies, there is no reason to believe that the current
account deficit represents a problem for continued economic growth.

The Economic Outlook
The economy continues to display supply-side characteristics favorable to
long-term growth. Productivity growth remains strong, and inflation remains
low and stable. Real GDP is expected to grow faster than its 3.1 percent potential rate during the next 4 years, and then to grow at a 3.1 percent annual rate
during the balance of the budget window. The Administration’s projections are
shown in Table 1-1.

TABLE 1-1.— Administration Forecast 1

Year

Nominal
GDP

Real GDP
(chaintype)

GDP price
index
(chaintype)

Consumer
price
index
(CPI-U)

Unemployment
rate
(percent)

Percent change, fourth quarter to fourth quarter

Interest
rate,
91-day
Treasury
bills
(percent)

Interest
rate,
10-year
Treasury
notes
(percent)

Nonfarm
payroll
employment
(millions)

Level, calendar year

2001 (actual) ....

2.0

0.1

2.0

1.9

4.8

3.4

5.0

131.9

2002 .................
2003 .................
2004 ................

4.2
4.8
5.2

2.9
3.4
3.6

1.2
1.4
1.5

2.3
2.0
2.1

5.8
5.7
5.5

1.6
1.6
3.3

4.6
4.2
5.0

130.8
132.5
135.2

2005 .................
2006 .................
2007 .................
2008 .................

5.0
5.0
4.9
5.0

3.4
3.3
3.1
3.1

1.6
1.7
1.8
1.8

2.1
2.2
2.2
2.3

5.2
5.1
5.1
5.1

4.0
4.2
4.2
4.3

5.3
5.4
5.5
5.6

137.9
140.4
142.6
144.7

1

Based on data available as of November 29, 2002.

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.

Chapter 1

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Near-Term Outlook
The Administration expects that aggregate economic activity will have
weathered a quarter of weakness at the end of 2002, following which it will
gather strength during 2003, with real GDP growing 3.4 percent during the
four quarters of the year. The unemployment rate, which was 5.9 percent in
the fourth quarter of 2002, is projected to edge down about
0.3 percentage point by the fourth quarter of 2003.
As discussed earlier, real GDP growth in 2002 was accounted for by solid
growth in consumption, a modest pickup in exports, and an increase in inventory investment. Although investment in equipment and software was slow, it
stabilized during the first quarter of 2002 and began to grow in the second and
third quarters, foreshadowing one way in which the composition of growth is
projected to differ next year: the growth rate of equipment and software investment is projected to pick up in 2003. (Another difference is that the
contribution of inventory investment is projected to wane.) Several factors are
expected to lead to a rebound in equipment and software investment. Any
capital overhang that might have arisen during the late-1990s investment
boom has been reduced, because the level of investment fell in 2001; expectations of future GDP growth have stabilized after falling during 2001; and the
replacement cycle is approaching for the short-lived capital goods put in place
during the investment boom of 1999 and 2000. At the same time, the financial foundations for investment remain positive: real short-term interest rates
are low, and prices of computers are falling more rapidly than they did in 2000.
(Computer investment accounted for a third of all nonresidential investment
growth from 1995 to 2000.) Less bright is the outlook for nonresidential structures, which still appears weak even after 2 years of decline. Even so, structures
investment is projected to stabilize around the second half of 2003, as the
maturing recovery generates higher occupancy rates for office buildings and
greater demand for commercial properties. The recent passage of legislation for
terrorism risk insurance may unblock some planned investments in structures
that were held up because of lack of insurance.
Real exports, which turned up in 2002, are projected to improve further
during 2003, reflecting the widely held expectation of stronger growth
among the United States’ trading partners and the lagged effects of the past
year’s decline in the dollar. Although real imports and exports are expected to
grow at similar rates during the four quarters of 2003, the United States
imports more than it exports, and therefore the dollar value of imports is
expected to increase more than the dollar value of exports. As a result, net
exports are likely to become more negative during the course of 2003.
Less change is expected for the largest component of aggregate demand,
consumption, which is expected to remain robust in 2003. The negative influence of the stock market decline on household wealth, and thus on
64 | Economic Report of the President

consumption, is expected to wane as this decline recedes into history.
Consumption growth will also be supported by fiscal stimulus and the lagged
effects of recent interest rate cuts. Finally, low interest rates will continue to
support the purchase of consumer durables, just as they did for much of 2002.

Inflation Forecast
As measured by the GDP price index, inflation fell to 0.8 percent during
the four quarters ending in the third quarter of 2002—down from
2.6 percent during the same period a year earlier. This broad-based index of
prices of goods and services produced in the United States is expected to rise
somewhat faster, at 1.4 percent during 2003, as the restraining effects of
falling energy prices and low food price inflation subside and the economy
strengthens. Inflation is expected to remain low, however, as the unemployment rate is now above the level that the Administration considers to be the
center of the range consistent with stable inflation, and capacity utilization in
the industrial sector is substantially below its historical average. Inflation by
the GDP measure is projected to edge up to 1.8 percent by 2007 and to stay
there for the remainder of the budget window.
As measured by the CPI, inflation during the 12 months ended in
December 2002 was 2.4 percent; core inflation was 1.9 percent. The CPI,
which differs from the GDP price index both in its methodology and in that
it includes only consumer goods and services, is projected to rise 2.0 percent
in 2003, close to last year’s core rate.
The difference between the CPI and the GDP measure of inflation has an
important effect on Federal budget projections. A larger difference increases
the Federal budget deficit because cost-of-living adjustments for Social
Security and other programs that are indexed for inflation increase with the
CPI, whereas Federal revenue tends to increase with the slower growing
GDP price index. For a given level of nominal income, increases in the CPI
also cut Federal revenue because they raise the thresholds of income tax
brackets and affect other inflation-indexed features of the tax code. Of the
two indexes, the CPI tends to increase faster, in part because it measures the
price of a fixed market basket. (See Box 1-3 above on the new chainweighted CPI.) In contrast, the GDP price index increases less rapidly than
the CPI because it reflects the choices of economic agents to shift their
purchases away from those items with increasing relative prices and toward
items with decreasing relative prices. In addition, the GDP price index
includes investment goods, such as computers, whose relative prices have
been falling rapidly. Computers, in particular, receive a much larger weight in
the GDP price index (0.7 percent) than in the CPI (0.2 percent).
During the 7 years from 1994 through 2001, the difference between
inflation in the CPI-U-RS (a version of the CPI designed to be consistent
Chapter 1

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with current methods) and the rate of change in the GDP price index averaged 0.5 percentage point a year, and it was 0.8 percentage point during the
four quarters ending in the third quarter of 2002. The difference is expected
to shrink to 0.6 percentage point in 2003-04 and to revert to its recent mean
of 0.5 percentage point in 2005 and beyond.

Long-Term Outlook
The Administration forecasts real annual GDP growth to average
3.4 percent during the first 4 years of the projection. As this is somewhat
above the expected rate of increase in productive capacity, the unemployment
rate is projected to decline as a consequence. In 2007 and 2008, real GDP
growth is projected to continue at its long-run potential rate of
3.1 percent. The growth rate of the economy over the long run is determined
by the growth rates of its supply-side components, which include
population, labor force participation, productivity, and the workweek. The
Administration’s forecast is shown in Table 1-2.

TABLE 1-2.—Accounting for Growth in Real GDP, 1960-2008
[Average annual percent change]
1960 Q2
to
1973 Q4

1973 Q4
to
1990 Q3

1990 Q3
to
2002 Q3

2002 Q3
to
2008 Q4

1) Civilian noninstitutional population aged 16 or over ....................
2) Plus: Civilian labor force participation rate ..............................

1.8
.2

1.5
.5

1.0
.0

1.1
.0

3) Equals: Civilian labor force 1 .........................................................
4) Plus: Civilian employment rate 1 ................................................

2.0
.0

2.0
-.1

1.0
.0

1.0
.1

5) Equals: Civilian employment 1 .......................................................
6) Plus: Nonfarm business employment as
a share of civilian employment 1 2 ....................................

2.0

1.9

1.0

1.1

.1

.1

.2

.4

7) Equals: Nonfarm business employment ........................................
8) Plus: Average weekly hours (nonfarm business) ......................

2.1
-.5

2.0
-.4

1.2
-.1

1.6
.0

9) Equals: Hours of all persons (nonfarm business) .........................
10) Plus: Output per hour (productivity, nonfarm business) ..........

1.7
2.9

1.7
1.4

1.1
2.2

1.6
2.1

11) Equals: Nonfarm business output .................................................
12) Plus: Ratio of real GDP to nonfarm business output 3 ..............

4.6
-.3

3.1
-.2

3.3
-.4

3.8
-.5

13) Equals: Real GDP ...........................................................................

4.2

2.9

2.9

3.2

Item

1

Adjusted for 1994 revision of the Current Population Survey.
Line 6 translates the civilian employment growth rate into the nonfarm business employment growth rate.
Line 12 translates nonfarm business output back into output for all sectors (GDP), which includes the output of
farms and general government.
2
3

Note.— The periods 1960 Q2, 1973 Q4, and 1990 Q3 are business cycle peaks.
Detail may not add to totals because of rounding.
Sources: Council of Economic Advisers, Department of Commerce (Bureau of Economic Analysis), and Department
of Labor (Bureau of Labor Statistics).

66 | Economic Report of the President

The Administration expects nonfarm labor productivity to grow at a
2.1 percent annual average pace over the forecast period, virtually the same as
that recorded from the business cycle peak in 1990 through the third quarter
of 2002. This projection is notably more conservative than the nearly 2¾
percent average rate actually recorded since 1995. The cautious projection of
productivity growth guards against several downside risks:
• Nonresidential fixed investment has fallen about 12 percent since its
peak in mid-2000. The slower pace of investment means that the
near-term growth of capital services is likely to be reduced from its
average pace from 1995 to 2002, leading to a lesser contribution to
productivity growth from the use of these capital services.
• As discussed in Box 1-5, about half of the post-1995 structural productivity acceleration is attributable to growth in total factor productivity
(TFP) outside of the computer sector. This growth is due to technological progress, better business organization, and other factors that are
hard to identify. Although there is no reason to expect this process to
slow, the Administration forecast adopts a cautious view of the pace of
TFP growth, setting it near its longer term average rather than at the
higher post-1995 pace.
Box 1-5. Accounting for the Recent Strength in
Productivity Growth
The most important macroeconomic characteristic of the late-1990s
boom, rapid productivity growth, remains intact. Annual productivity
growth has averaged almost 3 percent during the past 2 years, a period
that includes a recession (when productivity usually slows) and the
early stages of a recovery (when productivity usually rises rapidly). This
growth, moreover, has occurred despite a roughly 12 percent decline in
nonresidential investment spending since 2000.
Table 1-3 presents the results of an analysis of some of the factors that
influence productivity growth and compares their influence in two
periods: 1973-95 and 1995-2002. According to a model constructed by the
Council of Economic Advisers that is designed to capture the cyclical
behavior of productivity growth, the productivity acceleration after 1995
would have been 0.30 percentage point a year stronger but for the
delayed hiring needed to accommodate increases in aggregate demand
that occurred before and during 1995 (second line of Table 1-3).
Productivity adjusted for this cyclical effect, or structural productivity, has
accelerated by 1.73 percentage points since 1995 (third line of Table 1-3).
Cyclical factors held down productivity growth by 1.8 percentage points in
2001, as the economy entered a shallow recession, and then boosted

Chapter 1

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Box 1-5.—continued
productivity growth by about 1.5 percentage points in the early stages of
a recovery in 2002. (These figures average to -0.15 percentage point, as
shown in the table.) Thus during 2001 and 2002 structural productivity is
estimated to have grown 2.8 percent and 3.6 percent, respectively. This
estimated pace is similar to that for the 1995-2002 period as a whole and
well in excess of the 1.4 percent annual pace during the 1973-95 period.
In the accounting system adopted here, productivity increases can arise
from any of four sources: growth in the amount of capital services per
worker-hour throughout the economy (capital deepening), improvements
in the skills of the work force (labor quality), total factor productivity (TFP)
growth in computer-producing industries, and TFP in other industries. TFP
growth is the increase in aggregate output over and above that due to
increases in capital or labor inputs. For example, TFP growth may result
from a firm redesigning its production process in a way that increases
output while keeping the same number of machines, materials, and
workers as before.
As can be seen in the fourth line of the table, capital services per hour
contributed 0.52 percentage point more to productivity growth after 1995
than before, with information technology accounting for most of this acceleration. But in the wake of the drop in investment during the past 2 years,
one might think that this growing contribution of capital deepening could
not be sustained. Growth in capital services, which had averaged 5.5
percent annually from 1995 to 2000, dropped to about 3 1/2 percent during
the past 2 years. The drop in information capital services growth has been
more pronounced: from a 16 percent annual pace before 2001 to 8 3/4
percent annually in 2001 and 2002. This slowdown has been completely
offset, however, by the decline in hours in 2001 and 2002, with the result
that capital services per hour has grown even faster than in the late 1990s.
The Bureau of Labor Statistics measures labor quality in terms of the
education and experience of the work force. The agency uses differences in
earnings paid to workers with different characteristics to infer relative differences in productivity. Measured in this way, labor quality has risen as the
education and skills of the work force have increased. However, the increase
occurred at about the same rate both before and after 1995, so that labor
quality does not account for any of the post-1995 acceleration of productivity.
The rate of growth of TFP in computer-producing industries has been
rising, as evidenced by the rapid decline in computer prices relative to
prices in the rest of the business sector. Relative computer prices fell at a 26
percent annual rate during 1995-2000. Although this rate of decline has
slowed a bit in the past 2 years—to 21 percent—it remains impressive.
Calculations using relative computer prices as an indirect measure of
productivity growth in the computer-producing industries indicate that the

68 | Economic Report of the President

annual contribution of computer manufacturing to productivity growth in
the private nonfarm business sector accelerated 0.13 percentage point, to
0.31 percent, during 1995-2002 on average. However, that contribution has
edged back down during the past 2 years to 0.21 percentage point a year.
The final contribution comes from accelerating TFP in the economy
outside the computer-producing industries. This contribution is calculated
as a residual; it captures the extent to which technological change and other
business and workplace improvements outside the computer-producing
industries have boosted productivity growth since 1995. This factor
accounts for about 1.08 percentage points of the post-1995 acceleration in
structural productivity, or about 60 percent of the total. Taken at face value,
it implies that improvements in the ways capital and labor are used
throughout the economy are central to the post-1995 acceleration in
productivity, but because it is calculated indirectly, as a residual, it is equally
an illustration of the limits on our ability to account for the acceleration.
In summary, structural productivity growth remained almost as strong in
2001 and 2002 as in the years immediately preceding. Growth in TFP likewise continued strong, with industries outside the computer sector making
substantial contributions.

TABLE 1-3.— Accounting for the Productivity Acceleration Since 1995
[Private nonfarm business sector; average annual rates]
Item

Labor productivity growth rate (percent) ...................................

1973
to
1995
1.39

1995
to
2002
2.81

Acceleration
(percentage
points)

2000
to
2002

1.42

3.05

Percentage point contributions:
Less:

Business cycle effect ..................................................

.02

-.28

-.30

-.15

Equals:

Structural labor productivity .....................................

1.37

3.10

1.73

3.21

Less:

Capital services per hour............................................
Information capital services ....................................
Other capital services ..............................................
Labor quality................................................................

.73
.41
.32
.27

1.25
.82
.43
.26

.52
.40
.11
-.02

1.64
.69
.94
.26

Equals:

Structural TFP.............................................................

.36

1.57

1.21

1.29

Less:

Computer sector TFP...................................................

.18

.31

.13

.21

Equals:

Structural TFP excluding computer sector TFP ..........

.18

1.25

1.08

1.07

Note.— Labor productivity is the average of income- and product-side measures of output per hour worked.
Total factor productivity (TFP) is labor productivity less the contributions of capital services per hour (capital
deepening) and labor quality.
Data are adjusted for the July 2002 annual revision to the national income and product accounts (NIPA).
Productivity for 2002 is inferred from data for the first three quarters.
Detail may not add to totals because of rounding.
Sources: Department of Commerce (Bureau of Economic Analysis) for output and computer prices; Department
of Labor (Bureau of Labor Statistics-BLS) for hours, and for capital services and labor quality through 2000, but the
BLS figures have been adjusted by the Council of Economic Advisers for the effects of the July 2002 NIPA revision;
and Council of Economic Advisers for the business cycle effect, and for capital services and labor quality for
2001-2002.

Chapter 1

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In addition to productivity, growth of the labor force (also shown in Table
1-2) is projected to contribute 1.0 percentage point a year to growth of potential output on average through 2008. Labor force growth results from growth
in the working-age population and changes in the labor force participation
rate. The Bureau of the Census projects that the working-age population will
grow at an average annual rate of 1.1 percent through 2008. The labor force
participation rate is expected to be roughly flat through 2008, although it
may begin to decline around that year, which is the year that the oldest
baby-boomers (those born in 1946) reach the early-retirement age of 62.
In sum, potential real GDP is projected to grow at about a 3.1 percent
annual pace, slightly above the average pace since 1973. Actual real GDP
growth during the 6-year forecast period is projected to be slightly higher, at
3.2 percent, because the civilian employment rate (line 4 of Table 1-2)
makes a small (0.1 percentage point) and transitory contribution to growth
through 2006. This contribution then ends as the unemployment rate
stabilizes at 5.1 percent.

Interest Rate Outlook
Following a large decline in 2001, the interest rate on 91-day Treasury bills
fell an additional 50 basis points in 2002 and ended the year at 1.2 percent.
These reductions reflected the Federal Reserve’s efforts to stimulate the
economy, which left real short-term rates (that is, nominal rates less expected
inflation) close to zero. Real rates are not expected to remain this low once
the recovery becomes firmly established, and nominal rates are projected to
increase gradually to 4.3 percent by 2007, which would leave the real interest
rate on Treasury bills close to its historical average.
The Administration projects that the yield on 10-year Treasury notes, which
was 4.2 percent when the projection was finalized at the end of November, will
stay at that level for 2003 and then rise very slowly, reaching 5.6 percent by
2008. At that time their yield will be 3.3 percentage points above expected CPI
inflation—a relationship that is consistent with the historical average since
1959. From 2005 onward the projected term premium (the premium of the
10-year rate over the 91-day rate) of 1.3 percentage points is in line with its
historical average.

Income Forecast
One important purpose of the Administration’s forecast is to estimate
future government revenue, which requires a forecast of the components of
taxable income. The Administration’s income-side projection is based on the
historical stability of the long-run labor and capital shares of gross domestic
income (GDI). During the first three quarters of 2002, the labor share of
GDI was on the low side of its historical average of 58.0 percent. From this
70 | Economic Report of the President

starting point, it is projected to rise to its long-run average and then remain
at this level over the forecast period. The labor share consists of wages and
salaries, which are taxable, other labor income (that is, fringe benefits),
which is not taxable, and employers’ contributions for social insurance. The
Administration forecasts that the wage and salary share will decline while
other labor income grows faster than wages. This pattern has generally been
in evidence since 1960 except for a few years in the late 1990s.
The capital share (the complement of the labor share) of GDI is expected to
fall slightly before leveling off at its historical average. Within the capital share,
a near-term decline in depreciation (a consequence of the decline in shortlived investment during the past 2 years) is offset by a rise in economic profits,
which averaged 7.5 percent of GDI during the first three quarters of 2002, a
bit below the post-1973 average of 8.0 percent. Economic profits are expected
to rise to roughly 8 percent of GDI and to remain flat at that level for the
duration of the projection period. The pattern of book profits (known in the
national income and product accounts as “profits before tax”) reflects the
30 percent expensing provisions of the Job Creation and Worker Assistance
Act. These expensing provisions reduce taxable profits from the third quarter
of 2001 through the third quarter of 2004. The expiration of the expensing
provisions increases book profits thereafter, however, because the fraction of
investment goods expensed during the 3-year window will not be eligible for
depreciation thereafter. Other taxable income (the sum of rent, dividends,
proprietors’ income, and personal interest income) is projected to fall, mainly
because of the delayed effects of past declines in long-term interest rates,
which reduce personal interest income during the projection period.

Conclusion
The Administration believes that the economy is likely to grow somewhat
faster than in the projection presented here, as the long-run benefits from the
full reductions in marginal tax rates and the dividend exclusion are felt.
These should lead to increases in labor force participation and increased
entrepreneurial activity. The Administration, however, chooses to adopt
conservative economic assumptions that are close to the consensus of professional forecasters. As such, the assumptions provide a prudent, cautious basis
for the budget projections. Yet the Administration’s policies are designed to
enhance U.S. economic growth, not just maintain it. The remaining chapters
of this Report illustrate ways in which pro-growth economic policies can
improve economic performance at home and abroad, by striking the right
balance between the encouragement and regulation of firms, by promoting
flexibility and dynamism in labor markets, and by reducing tax-based disincentives to economic activity.
Chapter 1

| 71

C H A P T E R

2

Corporate Governance and Its Reform

C

orporate governance is the system of checks and balances that guides the
decisions of corporate managers. As such, it affects the strategy, operations, and performance of business firms over a large segment of the
economy: corporations during 2001 accounted for 60 percent of U.S. gross
domestic product (GDP). Corporate governance also affects the ability of
those outside the corporation—including investors—to monitor the quality
of management and its decisions and to influence and even control some of
those decisions. This observability, or transparency, can greatly enhance a
corporation’s ability to raise funds from outside investors. It can also make it
easier for other outsiders, including suppliers and customers, to transact with
the corporation, by making the incentives and abilities of its managers and
other employees more clear.
Households increasingly participated in the ownership of corporate stock
during the 1990s. Fewer than one-third of U.S. households—31.6 percent—
owned corporate stock directly or indirectly in 1989. By 1992 that number
had grown to 36.7 percent. More than half—51.9 percent—of households
owned stock as of 2001, the latest year for which comparable survey statistics
are available. The greatest percentage-point increases in household stock
ownership appear to have occurred in groups where it was lowest at the start
of the decade, for example among households with moderate rather than
high levels of income.
Access to well-developed financial markets accounts for some of the
success that U.S. corporations and their managers have enjoyed in attracting
capital from outside investors. U.S. securities markets are among the best in
the world. Their relative depth and liquidity make it easier for investors to
buy and sell common stock and other corporate securities, and this makes
investments in U.S. corporations more attractive. The relative efficiency of
U.S. securities markets is not the only reason for households’ willingness to
invest in corporations, however.
To compete successfully in well-developed financial markets, corporations
must win and maintain investors’ confidence. To do this, managers must
provide sufficient information about their firms’ prospects to persuade
investors that they can realistically expect a competitive return on their
investments. This is not always easy, even for a seasoned corporation whose
investment prospects are strong. Part of the difficulty is that managers,
as insiders, generally know more than outside investors know about the
73

corporation, the managers’ competence, and their likely diligence in
managing the investors’ funds. Facing this information disadvantage,
investors demand reliable information about the corporation and its
management. Specifically, they seek assurance that the corporation’s investment prospects—and its managers’ competence—are as good as the
managers might claim.
Investors also demand assurance that managers will work diligently in their
interest. It is not generally realistic for investors to expect managers to exercise the same diligence with funds provided by others that they would if only
their own funds were at stake. Thus some costs of delegating decisions to
management inevitably arise when managers go outside the corporation for
funds. These costs of separating ownership from control—what economists
sometimes call agency costs—are not the same for all corporations, because
the importance of managerial discretion in decision making tends to vary
across industries, and among firms in the same industry. Diligent managers
with good investment prospects may thus run the risk of being overlooked by
investors or receiving funds on less favorable terms, if they do not adequately
meet investors’ demand for information. For their part, investors who lack
reliable information can miss out on good investment prospects.
The value to managers, investors, and other participants in corporations
of finding efficient ways to meet this demand for assurance about the quality
of corporate investment opportunities can be high. One solution is for
managers to create systems of checks and balances that shape the conduct of
their corporations and that outsiders can readily observe. Checks and
balances governing the choice of managers and projects, for example, can
commit the corporation, through rules and incentives, to employ more
talented managers and to pursue more promising investment prospects.
Transparent systems for setting management compensation and procedural
safeguards on managers’ actions can reduce the agency costs of delegating
decisions to management. By creating strong systems of corporate governance, managers can thus improve both the efficiency of their firms and the
terms on which financing is available to them.
Strong corporate governance generally involves some form of publicly
revealed commitment to whatever checks and balances have been instituted.
This can be critical to meeting investor demand for assurance. Typically it is
not enough for managers simply to claim that they have instituted certain
systems and procedures and promise to maintain them; investors must be
able to verify that those systems and procedures are actually in place and that
the commitment to maintain them is real. This assures investors that these
arrangements are not likely to unravel when they are not looking.
The standards for strong corporate governance are thus high. Fortunately,
managers of U.S. corporations have a solid foundation on which to build.
Nationwide markets for capital and for management talent, together
74 | Economic Report of the President

with a strong legal system and a long tradition of sound internal corporate
governance, provide managers with incentives to innovate and powerful
tools for communicating credibly with outsiders.
One might think that laws and regulations by themselves could provide
investors the assurances they seek. Some researchers have indeed attributed
the comparative success of U.S. corporations in attracting small investors to
the relative strength of the U.S. legal system. The capacity of the U.S. court
system to provide impartial adjudication stands in contrast with what
researchers have found in some other countries. The lack of a court system
that can resolve disputes fairly can limit the willingness of investors—
especially small or unsophisticated investors—to provide corporations with
funds. This may partly explain why, in some other countries, large institutions such as banks play a bigger role in supplying financing to corporations
than they do in the United States, where households play a greater role. The
impartial adjudication of disputes by U.S. courts is something many U.S.
investors may take for granted.
Yet some effective corporate governance solutions have evolved in the
United States without express legal or regulatory guidance. Some contemporary institutions whose existence is usually attributed to certain laws appear, in
fact, to predate those laws. The presence, relatively early in the Nation’s
history, of strong financial markets—such as major stock exchanges—made it
easier for managers to create strong, transparent systems of checks and
balances that did not rely on the courts. Those conditions appear to have
allowed managers and corporations to develop reputations for quality, or to
efficiently rely on the reputations of well-known intermediaries, as means of
providing assurance to outside investors. Finally, legal solutions are sometimes
limited by the fact that contracts are often left incomplete, in the sense that
they do not specify what should happen under all possible contingencies. This
reflects the potentially prohibitive costs of writing agreements down so that a
judge can later verify their existence in the event of a dispute. It is costly not
just to anticipate possible future sources of disagreement, but also to involve
attorneys and other legal experts in drafting provisions to deal with those
eventualities, not to mention any time that might be spent in court.
The existence of both strong markets and a strong legal system can thus
explain U.S. corporations’ comparative effectiveness in meeting investor
demand for assurance. Market solutions and legal solutions can be substitutes
or complements for one another. Their comparative strengths can change
over time as market conditions change. It would thus be a mistake to view
the advantage of one over the other as absolute. As markets evolve, the effectiveness of legal solutions can change, and with it the comparative advantage
of markets in helping managers more closely align their actions with the
shareholders’ interest and communicate this alignment credibly to investors.

Chapter 2

| 75

Accordingly, effective corporate governance in the United States rests on a
foundation with three parts: legal institutions, external market forces, and
internal governance systems that respond to both. The next section of this
chapter explains how these parts work together to enable corporations to
develop systems of corporate governance that are responsive to investors. It
discusses how this foundation permits corporations to make adjustments
to their corporate governance systems over time, to respond to changing
market conditions.
This adaptive capacity of U.S. corporate governance has indeed been
critical to the ability of corporations—and the government—to respond to
recent changes in market conditions. During 2002, corporate managers
faced heightened demand for assurance from investors. At the same time,
allegations of misconduct by some managers and external auditors underscored the value of updating some of the laws and regulations that govern
corporate conduct. The alleged misconduct, in part, involved failure to
provide accurate information about corporate financial and operating performance. These difficulties—and related, potentially severe harms to investors
and employees—underscored concerns about possible weaknesses in U.S.
corporate governance that had emerged over the past decade. Many corporations have instituted changes accordingly. It was in this setting—and in light
of the important role that U.S. corporations, and thus U.S. corporate governance, play in the global economy—that the President in March 2002 called
for meaningful reform.
In calling for reform, the President set forth a plan that applies three core
principles of effective corporate governance: accuracy and accessibility of
information, accountability of management, and independence of auditors.
The plan recognizes the complexity of modern corporate governance systems
and their inherent flexibility. The call for careful reexamination of private
customs and legal rules led to further changes in private sector institutions
and the creation, in July 2002, of the Corporate Fraud Task Force,
comprising law enforcement officials from the Department of Justice, the
Securities and Exchange Commission (SEC), and other government agencies. (Table 2-1 illustrates the stepped-up enforcement efforts of the SEC
during this period and some of the results achieved during the same period.)
It also led, that same month, to the President signing new legislation, the
Sarbanes-Oxley Act of 2002, which the SEC is now implementing through a
series of new regulations being issued in phases during 2002 and 2003. These
changes constitute one of the most significant reforms of U.S. corporate
governance since the establishment of the SEC itself in 1934.
The President’s plan targeted the underlying causes of concern about investor
confidence. The suggestion of a crisis in investor confidence, which captured the
attention of policymakers during 2002, followed a substantial increase in the
number of earnings and other financial restatements—corrections to previously
76 | Economic Report of the President

TABLE 2-1.— SEC Enforcement Efforts and Outcomes, 2000-2002
SEC activity

Financial fraud and issuer reporting actions filed ..................

FY 2000

FY 2001

103

FY 2002

112

163

Officer and director bars sought ...........................................

38

51

126

Temporary restraining orders filed ........................................

33

31

48

Asset freezes...............................................................................

56

43

63

Trading suspensions ...................................................................

11

2

11

Subpoena enforcement actions...................................................

8

15

19

Disgorgement ordered (millions) ................................................

$463

$530

$1,328

Penalties ordered (millions) ........................................................

$44

$56

$116

Source: Securities and Exchange Commission.

issued statements—by U.S. public corporations, dating back to the mid-1990s.
There are sometimes good reasons for corporations to restate earnings. Yet a
Federal agency report noted that financial restatements by large, well-known
public companies “have erased billions of dollars of previously reported earnings
and raised questions about the credibility of accounting practices and the quality
of corporate financial disclosure and oversight in the United States.” The occurrence of so many restatements, in combination with high-profile allegations of
misconduct, created an impression that abuses in financial reporting had
become widespread.
Restatements of financial reports raise concern because they can leave
investors doubting the quality of the restated reports or, worse, those of other
companies that have not issued restatements. Similarly, although relatively
few restatements appear to be linked to management misconduct, innocent
managers can suffer from the perception that a few managers create about
the quality of management generally. The appearance of widespread restatements or misconduct can thus create a misimpression about the conduct of
corporations nationwide. In fact, most large U.S. corporations have shown
no signs of having to restate their earnings or otherwise warranting scrutiny
from the SEC, the entity charged with enforcing U.S. financial disclosure
rules. This remains true even after investors, enforcement officials, and
managers not implicated in any offenses stepped up their efforts to expose
misconduct, following the President’s call for reform in March 2002.
During the late 1990s the number of companies that filed earnings
restatements grew dramatically. After averaging 50 a year from 1991 to
1997, the number of restatements increased to 96 in 1998, 204 in 1999, 163
in 2000, and 153 in 2001, according to one study of certain types of
Chapter 2

| 77

restatements, compiled through a keyword search of news databases. About
10 percent of companies listed on major stock exchanges issued restatements
from January 1997 through June 2002, according to another study using a
similar method. The implication is that about 90 percent of public corporations, which have been the focus of concern, stuck with their original
financial reports during that period. Moreover, signs of error or misconduct
in financial reporting have not been randomly distributed among U.S.
corporations but rather have tended to concentrate in certain industries.
Earnings restatements have occurred with greater frequency among technology companies than among other companies, for example.
The more frequent occurrence of restatements in some industries may
reflect the unusual challenges those industries faced during the second half of
the 1990s. Those circumstances may have created valid reasons for restating
earnings but may also have created new opportunities for misconduct, which
the markets and legislators have moved quickly to correct. Governance structures themselves also tend to vary across corporations. The different
experiences of corporations in different industries, under different market
conditions and at different times, underscore the importance of exercising
caution before applying any one governance solution to all corporations or
unduly locking corporations into inflexible regulatory solutions.
The rest of this chapter is in two main parts. The first part surveys the
economic foundation of corporate governance and its reform. Corporate
governance was once solely the province of law: legal scholars and practitioners generated much of what was written on the subject, not to mention
most of the governance advice that corporations received. However, advances
in economic research over the past few decades, primarily in corporate
finance, have shed light on the critical role that corporate governance can and
does play in enhancing corporate efficiency and in increasing the depth and
liquidity of financial markets. The second part of the chapter provides an
overview of recent reforms and their anticipated contribution to the quality of
corporate governance, with special attention to new Federal legislation passed
during 2002. This is followed by a brief discussion of the relation between
corporate governance in the United States and that in other countries, an issue
that is receiving greater attention as markets become more global.
As empirical research has evolved, its focus has shifted to add richness and
depth to the understanding that economists now possess of how good corporate
governance can promote investors’ interests, corporate efficiency, and economic
efficiency more generally. Two decades ago, empirical economic research into
corporate governance focused on how and whether the entrenchment of
managers might lead corporations to change their internal governance practices
and structures in ways that might benefit the managers at undue expense to
shareholders. More recently, as markets have become more global, research has
78 | Economic Report of the President

turned to the differences between countries’ systems of corporate governance
and whether those differences have grown or diminished in recent years.
These shifts in focus reflect the evolution of markets and the demands they
place on researchers to provide practical insights and, in some instances,
guidance. The result has been an increase in the scope and depth of economists’ understanding of how corporate governance systems build on the
foundation that markets and the law provide, as indicated by the discussion
below of some legal rules that appear to undermine the effectiveness of U.S.
corporate governance. Specifically, regulations that may once have had a
beneficial effect now appear to place undue restrictions on investors in their
ownership of stock and their exercise of the rights attached to ownership. As
a related matter, some rules that seek to influence the ability of small
investors to obtain information appear to rest on an incomplete understanding of the production and distribution of information, particularly as it
affects small investors. The emergence of economic research on the role of
information and on the economic foundations of corporate governance has
complemented the development of corporate governance policy both in the
private sector and in government.

Foundations of Corporate Governance
Businesses that organize themselves as corporations are better able than
other kinds of businesses to raise capital from outside investors. This advantage is supported by corporate law, which allows individuals and
organizations to invest in a corporation without incurring unlimited liability
for the corporation’s actions or bearing the costs of participating directly in
its management, in order to share in the business’s profits. Limited liability
also accounts for the ease with which stock can be traded. When stock is
bought and sold, voting rights typically change hands, and this causes market
forces to affect the outcomes of shareholder votes in ways that do not apply
to other kinds of elections. This transferability of rights distinguishes the
voting rights of stockholders from those of citizens.
Yet strong legal institutions cannot alone account for the success that the
corporation has enjoyed as an organizational form in the United States. When
investors supply external financing, they delegate key decisions about the use of
those funds to managers. The cost of this separation of ownership from control
can be high, to the point of limiting a corporation’s profitable access to outside
financing. Even very detailed provisions in laws and contracts cannot realistically eliminate this cost: closing all the relevant loopholes in those provisions,
updating them to keep up with changes in market conditions and technology,
and enforcing them against violation would be prohibitively costly.
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Accordingly, managers and investors can have powerful incentives to
discover or invent other ways to reduce these remaining costs of separating
ownership from control, for if they succeed, the corporation can grow and
investors can participate in the resulting higher profits. However, these costs
can vary markedly across corporations and industries and over time. This
creates incentives for managers and investors to monitor existing solutions
and continue to seek new means of reducing the costs of separating ownership from control.
It is here that the three-part foundation of corporate governance in the
United States becomes important. The first part comprises the external
markets that put pressure on managers to perform, bringing their incentives
more closely into alignment with the shareholders’ interest and creating
incentives for them to develop new strategic or institutional means of
reducing the costs of separating ownership from control. The second is the
internal governance structure of the corporation, which adds a complementary set of rules and incentives to align management’s actions with the
shareholders’ interests. Finally, the legal system provides investors and other
participants in the corporation’s affairs with a means of impartial dispute
resolution. Related to this is the role that regulation plays in shaping corporate governance solutions. Some features of contemporary corporate
governance may indeed be built upon preexisting regulations or other legal
rules. The opposite may also be true, however: some contemporary features
of U.S. corporate governance predate modern securities regulation. Market,
legal, and regulatory solutions interact and can complement one another in
aligning the incentives of managers and the interests of shareholders.

Market-Imposed Discipline:
External Governance Mechanisms
The market institutions that have emerged in the United States to align
managers’ and investors’ interests tend to complement the legal discipline
that the courts provide. They do this by overlaying a more flexible yet fairly
standardized system of checks and balances onto the more rigid system of
court-enforced rules and laws.
As U.S. corporate governance has evolved since the mid-20th century,
experts in economics, finance, and law initiated extensive study of how the
sometimes-hidden forces of the marketplace operate on the corporation. The
result is that competition in at least three distinct external markets is now
recognized as shaping the governance structures of corporations:
• Competition in the market for corporate control
• Labor market competition
• Product market competition.
80 | Economic Report of the President

Box 2-1. Do Bad Bidders Make Good Targets?
During the 1980s, interest grew in the use of hostile and friendly
takeovers as means of disciplining bad management and of helping to
reallocate management and other resources among competing uses.
Research on this topic indicated that takeovers have favorable or at
worst neutral consequences for shareholders, on average. Yet some
bidders paid higher prices than others. This raised questions about
whether the disciplinary reach of the market for corporate control
might extend to corporations whose managers bid for other firms too
aggressively. The evidence is that corporations whose shareholders
appear most likely to have been harmed by their managers’ overly
aggressive acquisitions are indeed more likely to become acquisition
targets themselves. After a completed acquisition, managers appear to
face a greater chance of being replaced. Moreover, managers of
targeted corporations often face market discipline whether or not the
takeover bid succeeds. Takeover targets are often poor performers,
and management turnover appears to occur more frequently after the
defeat of a takeover bid if the target is a poorly performing corporation.
Merger and acquisition activity can in some instances strengthen
corporate governance by committing the corporation to the issuance of
more debt, ensuring the payout of free cash flow and closer monitoring by debtholders. Although research from other countries, such as
Japan, indicates that there, too, the threat of takeover can strengthen
managers’ incentives to act in the shareholders’ interest, evidence of a
well-functioning market for corporate control has been more visible in
the United States. For all these reasons, economists view the market
for corporate control as an important source of management discipline, complementing the beneficial effects of other market forces and
regulatory oversight. Mergers and acquisitions have a useful role to
play in corporate governance. In the market for corporate control, bad
bidders make good targets.

Each of these sources of market discipline contributes to managers’ incentives
to act in the interests of shareholders. This market discipline in each instance
can take the form of reputational sanctions: managers will bear losses in their
own expected future income if market participants decide to revise downward their beliefs about the quality of the corporation or its managers in
response to unfavorable news about their conduct.
The pressures of these distinct markets are most readily apparent at
different times in different industries and corporations (Box 2-1). Striking
evidence on the role of external markets in disciplining managers—and in
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reallocating assets among competing uses—emerged in the 1980s, for
example. During this period, changes in technology and in regulation led
many corporations to substitute external financing for internal financing.
This also exposed the managers of some of these corporations to the real
chance of being removed, as outside investors acquired significant amounts
of equity and debt. Helping in this transition was the emergence of individual investors who specialized in acquiring companies even against the
express wishes of incumbent management. Many of the so-called hostile
takeovers of the 1980s occurred in a few specific industries such as oil and
gas. The opportunity to improve corporate performance through restructuring made many of these transactions profitable.
Mergers and other corporate control transactions play a valuable role in
redistributing assets among alternative uses. By facilitating competition
between management teams, and between organizational forms, the market
for corporate control continuously affects the structure of corporations and
the way managers do their jobs. Transactions in this market tend to occur in
waves and to concentrate in specific industries, however, largely because the
gains from corporate control transactions often derive from industry-specific
technological and regulatory change, as Chart 2-1 illustrates.
Although managers continued to face pressure from the market for corporate control during the early 1990s, relatively few transactions occurred, as
data on tender offers in Chart 2-2 illustrate. Economic research at that time
documented some of the other external market forces and internal governance mechanisms that help align managers’ incentives with the
shareholders’ interest. Evidence on CEO turnover illustrates the contribution
of the labor market toward this alignment.
Managers face the threat that poor performance will cost them their jobs,
independent of the level of activity in the market for corporate control.
Research from the late 1980s and early 1990s indicates that CEOs were
significantly more likely to lose their jobs following poor performance of
their firms than at other times—a reflection of market discipline, in this case
labor market discipline. Board members of companies that violated financial
reporting rules also appear to suffer losses. The number of other directorships
held by its directors appears to decline significantly after a firm is charged
with accounting fraud. Indeed, evidence from a recent study suggests that
individual employees often lose their jobs after their contributions to corporate misconduct become known. All of this illustrates the practical
importance of the labor market as a source of discipline on management’s
performance, apart from the market for corporate control.
Finally, product markets are an important source of discipline for managers,
with a lasting and pervasive effect on the conduct of business of all sizes. If
corporations fail to deliver goods and services of suitable quality at a competitive
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price, consumers will not buy from them. This gives managers powerful incentives to put their efforts into marketing good-quality products at reasonable
prices. Product market competition is so critical to the performance of corporations that laws have been passed and remain vigorously enforced to prevent it
from being extinguished by collusion or merger. In fact, product markets can in
some instances provide discipline against abuses by corporations against
consumers, in addition to the discipline that the courts provide.

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Internal Governance Mechanisms
External market forces shape not just management conduct but also the
design of mechanisms internal to the firm. For example, to avoid being subjected
to a hostile takeover or to the threat of a proxy fight, managers have integrated
outside observers into their internal decision processes and have taken other steps
to improve the quality of their firms’ internal governance. They have also divested
assets that have higher value in applications outside the corporation.
Internal features of corporate governance can be difficult to discern from
outside the corporation. Were it not so, managers would not exercise as
much discretion as they often do over the corporation’s choices, and the
agency costs of separating ownership from control would not be as high as
they are. Yet a few features of internal corporate governance are strikingly
visible from without. Examples include the distribution of voting rights
attached to stock ownership, the relation between debt and equity in the
firm’s financial structure, the composition of the board of directors, and, to
some extent, the compensation of managers.
All features of internal corporate governance have the potential to affect
corporate efficiency. Only those features that outsiders can readily observe—
and that managers cannot easily alter—directly affect outside investors’
beliefs about their likely returns from investing in the corporation. Debt
finance provides one example. By taking on a significant amount of debt,
84 | Economic Report of the President

such as bank debt, managers can publicly commit to having a reputable
lender monitor the conduct of their business more closely and more often
than might otherwise occur.
The attachment of voting rights to stock provides a means of influencing
the actions of management that is independent of any debt that may exist.
The distribution of voting rights among shareholders is indeed important to
internal governance, as are the rules governing how and on what issues
shares may be voted. By exercising their voting rights, shareholders ratify
managers’ choices about some of the more transparent features of internal
corporate governance, such as the composition of the board. Shareholders’
exercise of their voting power became a focus of economic research during
the 1990s, following changes in State laws that appeared to make it more
difficult for individual large shareholders to unseat ineffective managers.
This period saw growing demand from institutional investors for guidance
on how best to exercise voting rights held as fiduciaries.

Shareholders: Ownership and Control
When a corporation decides to go public, its current investors must decide
what ownership and control rights to retain for themselves and what to offer
for sale to new investors. Going public can, of course, generate substantial
agency costs related to separating ownership from control. Prospective new
investors anticipate these potentially high costs. Their willingness to acquire
stock as part of a new issue accordingly reflects the quality of the steps taken by
the incumbent owner-managers to commit the corporation to a strong system
of internal governance. Research suggests that the value of such a system is far
greater in those industries, and under those market conditions, where the costs
to outsiders of monitoring the actions of management are relatively high.
One way for the incumbent owner-managers to make a commitment to
good governance is to retain a large fraction of the corporation’s stock. The
effect is to increase the sensitivity of the managers’ own wealth to changes in
the wealth of shareholders. Because the incumbent management has greater
control over the firm’s decisions than do other shareholders, the effect of
increased managerial ownership is to bring the incentives of management,
and thus the actions of the corporation, more closely into alignment with the
shareholders’ interest (Box 2-2).
Observed differences in the concentration of management’s stock ownership across companies indeed appear traceable to differences in the costs of
eliminating barriers to external influence, and the value of doing so.
Managers possess relatively large ownership stakes, on average, in corporations that operate in volatile markets or in industries where management’s
discretionary actions affect shareholder wealth yet are difficult for outsiders
to observe and evaluate. They tend to possess relatively small ownership

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Box 2-2.Who Owns Corporations?
In the United States, a corporation’s stockholders are its ultimate
owners. Possession of common stock and related equity securities confers
two fundamental rights of ownership: the right to participate in the corporation’s future profits and the right to vote on certain decisions of the
corporation, such as the appointment of directors. Stockholders learn what
issues are up for a vote by reading the proxy statement that they receive
by mail before each shareholders’ meeting. Meetings usually occur annually. These rights are established by State law and reinforced by Federal
laws and regulations, such as disclosure laws, that obligate corporations to
keep current and prospective future shareholders informed.
Well-developed financial markets have allowed U.S. public corporations to distribute their stock widely. Already in the 1930s, concern
arose that the diffuse ownership of U.S. public corporations might
undermine their efficiency. One study famously expressed the view
that professional managers lacked adequate incentives to serve the
shareholders’ interest, and that shareholders with small ownership
stakes had little incentive or ability to monitor and, when necessary,
intervene to correct the situation. Fifty years later, research into the
market forces and other mechanisms that guide managers’ actions
intensified. This work revealed that top-level managers of large public
corporations owned significant blocks of stock in their firms.
Indeed, management ownership of stock in U.S. public corporations
appears to have increased since the 1930s. One study reports that the
proportion of shares owned by managers of public corporations actually grew between 1935 and 1995, from an average of 12.9 percent to
an average of 21.1 percent. This increase appears to have occurred
between the 1930s and 1970s: little change occurred between 1980 and
2001, according to recent research.
Consistent with the incentive-aligning value of stock ownership,
management’s ownership stake is typically smaller in companies
where management discretion plays a less critical role and where
external oversight is less costly or easier to achieve—this is the case in
static or low-volatility market environments and in heavily regulated
industries. Managers’ ownership of stock in companies in the utilities
industry and other regulated industries is less concentrated than it is in
other industries, on average, and this pattern was present in both 1935
and 1995. This evidence is consistent with the views of many economists that an important function of management ownership of stock is
to reduce the cost of separating ownership from control by aligning
management’s incentives more closely with the investors’ interest in
ways that outsider investors can readily observe.

86 | Economic Report of the President

stakes in corporations that operate in less volatile markets and in regulated
industries where managerial discretion matters less to shareholder wealth.
This suggests that management’s stock ownership responds at least in part
to the market’s demand for an appropriate alignment between managers’
incentives and shareholders’ interests.
One alternative to concentrated managerial stock ownership is for one or
more investors who are not managers to accumulate a significant block of
shares. Corporations that have such outside blockholders can be easier to
acquire, because some of the transactions costs of concentrating ownership in
the hands of one or a few investors have already been borne. The presence of
a large blockholder can thus increase management’s risk of ouster due to poor
performance. This can in turn deter shirking and other bad management
practices, even if the blockholder does not directly exercise his or her rights of
influence or control.
Blockholders who own voting stock in the corporation can, of course,
influence the strategy or management of the corporation directly, by exercising their voting rights. Blockholders have greater abilities and incentives to
exercise these rights than do smaller shareholders, for two reasons. First,
ownership of more voting rights in the corporation gives each blockholder a
greater chance of influencing the outcome of any shareholder vote or related
decision. Second, the entitlement to a greater share of the corporation’s
future cash flows that comes with block ownership can make it significantly
more profitable for an outside blockholder to incur the upfront costs of
seeking to influence the outcome of a vote or other corporate decision. These
features indicate that the presence of outside blockholders can significantly
affect the quality of discipline that managers receive from the market, and
the quality of corporate governance generally.
Research on corporate blockholders has considered the possibility that they,
like managers, might have idiosyncratic interests that conflict with the interests of shareholders generally. Concerns that large investors might treat
themselves preferentially have arisen in the context of research into the source
of the premium at which voting stock tends to trade over other, nonvoting
stock, for example. The many different kinds of outside investors that appear
to exist and the nature of their incentives remain to be fully explored by
economic research.

Suppliers of Venture Capital
Venture capitalists differ from some other stockholders in that they tend to
follow a dual strategy, acquiring large ownership stakes while also participating actively in the governance of the corporation. Their large stakes can
allow them to capture enough of whatever gains accrue from their intervention to cover the high cost of the effort that successful intervention can
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require. Venture capital investors play a greater role in corporate governance
in countries, such as the United States, where stock markets are relatively well
developed. The presence of such markets makes it easier for venture capitalists eventually to sell their stakes to other investors who wish to own smaller
stakes and be less involved in the strategic or the day-to-day decisions of the
corporation. The emerging corporations that make the best use of venture
capital firms’ resources tend to be relatively risky, with high rates of failure.
Thus, when venture capital investments succeed, the returns can be very
high, even though the expected return on any individual investment may be
relatively low. Chart 2-3 illustrates changes in the level of venture capital
activity that have occurred over time in response to shifts in the demand for
the financing and expertise they bring to emerging businesses.
Recent studies indeed call attention to venture capital as a good source of
financing for corporations that face especially great difficulty in credibly
communicating their businesses’ future prospects to potential investors. Such
corporations include those whose value derives primarily from future growth
opportunities and those that have difficulty obtaining loans because they
cannot readily meet the collateral and other requirements of banks or other
lenders. Rather than try to satisfy a prospective lender, such firms often
concentrate equity ownership with the entrepreneur and a venture capitalist.
This may pave the way for some dispersed outside equity ownership.

88 | Economic Report of the President

Institutional Investors
The ability of shareholders other than managers to exercise their voting
rights in the firm can also play an effective role in aligning management’s
actions with the shareholders’ interest. During the 1970s and 1980s, institutional investors accumulated equity stakes in U.S. corporations of a size not
seen in the last half-century, as Chart 2-4 illustrates. As their ownership has
grown, so has the visible role of institutional investors in corporations. In the
1980s these institutions—which include pension funds, mutual funds, and
insurance companies—were often seen as passive participants in corporate
governance, and evidence supports this view. This changed during the 1990s.
Yet constraints on the role of institutional ownership have remained.
For example, the Investment Company Act of 1940 substantially restricts
the ability of institutions to discipline corporate management on behalf of
households and other investors. These restrictions appear to have arisen
from a desire to promote the diversification of institutional holdings and to
limit institutions’ influence over corporate management. Modern economic
research, however, has clarified the conditions that must prevail for diversification to be adequate. It appears that the Investment Company Act’s notion
of diversification would not stand up to modern economic theory: the act
requires excessive diffusion of funds across firms without ensuring true diversification. For example, a mutual fund that invests all its assets across a large

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number of software companies would conform to the letter of the act but
would not actually be diversified. The act may thus impose costs on
investors—and on modern corporate governance—without providing countervailing benefits to investors or to the functioning of the market generally.
Research has also brought to light the critical role that the prospect of
shareholder intervention in the corporation’s affairs can play in disciplining
management. This valuable discipline can often be achieved without actual
intervention, the necessary condition being that managers recognize the
threat of intervention. The Investment Company Act assures managers that
the ability of institutions to step in and take direct disciplinary action against
any misconduct will be limited. It thereby limits both the direct and the indirect roles of institutions in aligning the actions of corporate managers with
the shareholders’ interest. (Table 2-2 reviews other legal constraints on the
role of institutional investors.)

Boards of Directors: Insiders and Outsiders
One way for managers to commit to a closer alignment between their
incentives and the interests of their shareholders is to publicly surround
themselves with reputable advisers. They can accomplish this by appointing
to their boards of directors persons known for speaking out in the boardroom and, if necessary, taking action to prevent or remedy managerial
misconduct. Boards serve two important roles. First, they constitute a panel
of knowledgeable people who can offer the CEO timely advice in response to
unforeseen developments in the marketplace that the CEO or other
managers may be ill equipped to address on their own. Second, they can
review the quality of recommendations that the CEO receives from other
members of the corporation’s management. An important challenge in the
ongoing evolution of U.S. corporate governance is to find ways of improving
the quality of the commitment that directors themselves make to act
diligently in the shareholders’ interest.
This challenge had already attracted the attention of researchers even
before the events of last year put the issue on the front pages. Because boards
of different companies differ in their composition, researchers have been able
to evaluate statistically whether corporations with certain kinds of boards
tend to perform better or worse than others. The evidence from this research
is instructive, although not as consistent in its findings as the evidence on the
incentive-aligning role of insider ownership.
One finding of this research is that directors who are not employees of the
corporation may be less susceptible to the internal pressures that can undermine managers’ incentives to act in the shareholders’ interest. Research into
what drives CEO turnover, for example, shows that outsider-dominated
boards more frequently terminate CEOs following poor corporate performance than do insider-dominated boards (Box 2-3). Other research tells a
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TABLE 2-2.— Legal Rules That Shape the Roles of Institutional Investors
Institution

Restriction

Insurers
Life insurers

• No more than 2 percent of assets may be in the
common stock of a single company; no more than
20 percent of assets may be in equity interests.

Property and
casualty insurers

• No more than 2 percent of assets may be in a single
company’s preferred or guaranteed stock; at most,
10 percent of assets may be in common stock.

Source
State law
(New York example)
NY Insurance Law (for
insurers doing business
in NY)
Same

Mutual funds

• For half of portfolio: no more than 5 percent of fund’s Subchapter M of the Internal
assets may go into stock of any one issuer, and fund Revenue Code
may not purchase more than 10 percent of voting
stock of any company; otherwise tax penalties apply.
• Must get SEC approval prior to joint action with
Investment Company Act
affiliate; e.g., a fund needs SEC approval before
of 1940
acting jointly to control a company of which it and its
partner own more than 5 percent.

Pensions

• Must manage assets prudently, and generally assets ERISA:
must be diversified. (The “prudence rule” has been
29 U.S.C. § 1104 (a)(1)(B)
interpreted to require that a person responsible for a
29 U.S.C. § 1104 (a)(1)(C)
plan retain experts when appropriate, and is a
significantly higher standard than the business
judgment rule).
• Must act for the exclusive purpose of providing
29 U.S.C. § 1104 (a)(1)(A)
benefits to participants and beneficiaries.
• Traditional pension plans may not acquire any stock
29 U.S.C. § 1107 (a)(2)
or bonds issued by the company that sponsors the
plan if such acquisition would cause the plan to hold
more than 10 percent of its assets in such securities.
• Must also comply with supplemental rules that
29 U.S.C. § 1106 (a);
specifically prohibit potentially abusive transactions
1106 (b)
with the plan.

Bank holding companies
(BHC)

Generally cannot acquire direct or indirect ownership or
Bank Holding Company Act
control of any voting shares of any company that is not a
of 1956
bank. Several important exceptions exist which, for
example, permit a BHC to hold shares of a company:
• That do not exceed 5 percent of the company’s
12 U.S.C. § 1843(c)(6)
outstanding shares, if the ownership does not
constitute “control”
• Engaged in activities closely related to banking.
12 U.S.C. § 1843(c)(8)

Bank trust funds

• For pension accounts, no more than 10 percent of
ERISA:
assets may be in employer securities.
29 U.S.C. § 1107 (a)(2)
• Active bank control could trigger liability to controlled Bankruptcy case law
company.

Sources: United States Code, Department of Labor, Federal Deposit Insurance Corporation, Securities and Exchange
Commission, and National Association of Insurance Commissioners.

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similar story. Firms facing SEC enforcement actions tend to have fewer
outsiders on their boards, according to another study. The appointment of
outside directors also has been associated with stock price increases, even
among companies whose boards are already outsider-dominated, although
companies with more outsiders on their boards appear not to perform significantly better than other companies, on average. Evidence that outside
directors affect corporate conduct includes one study’s finding that banks with
more outside directors during the 1920s provided higher quality underwriting
services, and that investors recognized this: banks with more outside directors
were found to obtain higher prices than other banks for the securities they
underwrote. These findings are consistent with the view that insider-dominated boards face some of the same incentive conflicts that can diminish the
incentives of the CEO and other managers to act in the shareholders’ interest.
It would be premature, however, to conclude that shareholders always
benefit from adding outside directors, or that maintaining an outsiderdominated board is good for shareholders in all corporations. Studies of the
benefits to shareholders of having outside directors sit on corporate boards
have not consistently demonstrated that their presence improves shareholder
wealth. These mixed results may occur because the effects vary from one

Box 2-3. What Incentives Do CEOs Face?
Two important incentives for CEOs to act in shareholders’ interests
come from the labor market and from the provision of incentive-based
compensation. The role of the labor market is apparent in the fact that
CEOs often lose their jobs after their corporations perform poorly: one
study found that departure rates for CEOs at firms with poor performance relative to their industry exceeded those at firms with good
performance in all but 3 of 26 years studied. Actual CEO firings can be
difficult to identify, given that underperforming firms tend to quietly
encourage their CEO to leave rather than make a public spectacle of
the event. Nevertheless, proxies for dismissal—such as measures of
departure rates that exclude departures that were likely due to retirement—indicate that job loss is a powerful disciplinary mechanism for
CEOs in poorly performing companies. For example, one group of
researchers found that executives in poorly performing companies
tend to depart at younger ages: 34 percent of CEOs at such companies
left before age 60, compared with only 24 percent of CEOs at better
performing companies. Finally, one would expect underperforming
firms to be more likely to look outside the company in order to break
with the poor management practices of the past. Consistent with this,
research that used press reports to qualify departures as either forced

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Box 2-3.—continued
or voluntary found that outsiders replaced 49.6 percent of CEOs who
had been forced from their positions, but only 9.9 percent of those who
had departed voluntarily.
This practice of terminating CEOs following poor corporate performance appears to have stronger incentive effects on young CEOs than
on older CEOs who are nearer retirement. This is not surprising: young
CEOs have more future compensation to lose. Corporations appear to
compensate for this. Older CEOs receive pay that is more sensitive to
corporate performance than do younger CEOs, on average. One study
associates a 10 percent change in shareholder wealth with a 1.7
percent change in compensation for CEOs within 3 years of retirement,
but only a 1.3 percent change for those more than 3 years from retirement, for example. The threat of job loss and the provision of
performance-based pay thus appear to be substitute means of
providing CEOs with incentives to act in the shareholders’ interest.
Stock ownership also helps align CEO incentives with the shareholders’ interest. It enables the CEO to participate in any improvement
in shareholder wealth that may arise from his or her performance, and
it compels him or her to share in any losses. Options similarly allow
the shareholder to participate in the gain, yet with limited exposure to
downside risk. Options became an important part of executive pay
during the 1990s and thus have received special attention during
recent efforts at corporate governance reform. As a form of long-term
compensation, options have some attractive features. Unlike traditional bonus packages, which depend on accounting-based measures
of profits and corporate performance, the compensation that a CEO or
other manager receives from options depends on the market’s
appraisal of the corporation’s performance. This is reflected in the price
of the corporation’s stock. Specifically, stock options give the holder
the right to buy stock at a set price. When the market price of the stock
rises above that price, the option’s value to the holder also rises.
Option-based compensation, like restricted stock grants, can thus
allow CEOs and other officers to participate in the growth in shareholder value that occurs during their tenure.
In addition to helping to align the CEO’s incentives with the shareholders’ interest, incentive-based compensation can be a good way to
attract high-quality managers, because it rewards talent and effort.
Research on compensation by U.S. banks, for example, reveals that
compensation of bank CEOs tends to be both higher and more sensitive to changes in profits in States where deregulation has occurred;
managerial discretion is arguably more important in such States,
which appears to explain the difference in compensation patterns.

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corporation to the next, for example because market conditions are different
for different corporations. Moreover, it can be difficult for shareholders to
identify the incentives that each outside director brings to the corporation.
To summarize, corporations have sought in several ways to improve the
quality of their board’s commitment to serving the shareholders’ interest.
They have added members to their boards who neither are employees nor
have other business dealings with the corporation—such relationships can
create conflicts of interest and otherwise undermine directors’ incentives to
oppose an entrenched or ineffective management team. The supply of qualified independent directors is limited, however, and their quality may vary;
therefore this strategy is not likely to come without a cost. One way to avoid
unduly trading off quality for independence is to change the procedures that
the board follows, rather than its membership. Boards have tried various
procedural solutions in an effort to improve the quality of their commitment
to shareholders. One is to appoint someone other than the CEO to be the
chairman of the board. Another is to change directors’ committee assignments so that more outside directors are appointed to committees that make
such critical decisions as the setting of CEO compensation and the selection
of the corporation’s outside auditor.
An alternative strategy would be to enlist an outside organization (for
example, a stock exchange or a government regulator) to monitor certain
specific aspects of the firm’s internal governance. This shifts some of the
burden of monitoring from the board—and from shareholders generally—
onto the outside organization. Yet this strategy, too, has its limitations. Many
of the challenges of designing effective internal governance systems arise from
the fact that it is costly to monitor managers’ actions in a timely manner
from outside the corporation. Outside organizations can face many of the
same obstacles that boards can face in making and enforcing rules to ensure
good management.

Legal and Regulatory Institutions
Strong legal institutions are widely recognized as providing a solid foundation
for economic growth, including the emergence of a strong corporate sector.
Their contribution is seen as twofold. First, solid legal institutions provide a reliable, impartial means of resolving disputes. Although parties sometimes rely
on private means of dispute resolution, such as arbitration, the reliable
supply of dispute resolution through the courts remains a valuable, if not
critical, input to effective corporate governance. Courts have indeed been called
upon to enforce shareholders’ voting rights, including the right of individual
large shareholders to obtain internal governance reforms, such as changes in
board composition, that may benefit shareholders generally at the expense of
incumbent management.
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The second contribution of legal institutions is regulation. Securities
regulation in the United States predates the 1930s. Its evolution accelerated
rapidly, however, after the passage of the Securities Act of 1933 and the
Securities Exchange Act of 1934, which created the SEC and delegated to it
the task of writing and enforcing securities regulations. The Congress similarly authorized the SEC to delegate some, but not all, of this task to
specialized institutions. Stock exchanges, such as the New York Stock
Exchange (NYSE), operate under SEC oversight as self-regulatory organizations. The SEC has also delegated certain responsibilities for setting and
maintaining accounting standards to the Financial Accounting Standards
Board. Under the Sarbanes-Oxley Act, the SEC is overseeing the creation of
a new organization, the Public Company Accounting Oversight Board,
whose task will be to develop, maintain, and enforce the standards that guide
auditors in their monitoring and certification of corporate financial reports.
An extensive set of laws and regulations has thus arisen to supplement and
complement the role of the market in shaping corporate conduct. Like
private contracts, these rules are enforceable through the courts (Box 2-4).

Information and Disclosure
The central feature of modern U.S. securities regulation is the series of
SEC-enforced rules under which market participants must disclose information to the public. Reflecting this fact, the Securities Act of 1933 is
sometimes known as the “truth in securities law.” To the extent that investors
have good information, they can fine-tune their investment decisions,
shifting capital to those corporations that offer more or less risky investment
opportunities, depending on their risk preferences. Better availability of
information allows corporations whose managers do a good job or that offer
low-risk investment opportunities to gain access to capital at a lower price
than other, lower quality corporations or those whose offerings are relatively
more risky.
In requiring disclosure, securities regulations supplement both the law and
the market forces that create incentives for corporations to keep investors
informed. Corporate managers have incentives to supply favorable information
because, in doing so, they can distinguish themselves from other managers who
lack favorable information to report. Enforcement of anti-fraud laws can beneficially strengthen this signal. Managers and corporations that commit fraud
also risk costly market sanctions and loss of reputation, in addition to any
court-imposed sanctions.

Examples: Does it Matter How Investors Get Information?
Controversy often surrounds regulations that seek to control the production and distribution of information. Regulation of information in securities
markets is no exception. For example, the question of whether SEC-enforced
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Box 2-4. Markets, Accountability, and the Enforcement of Rules
The announcement of a court-imposed sanction can be a dramatic
event, particularly when it is for commission of a white-collar crime
such as the intentional and harmful dumping of toxic substances, or
fraud against a customer or investor. Yet the most important effects of
the court system are hidden. Court-enforced sanctions shape management conduct by creating a credible threat to impose punishment,
much as the threat of being pulled over for violating the traffic laws
shapes the conduct of drivers on the road. Good managers, like good
drivers, follow certain principles of conduct not only because they are
good people but also because they know that, if they do otherwise,
they risk being detected by enforcement authorities and subjected to
sanctions. There are indeed two different ways to discourage—or
deter—people from committing offenses, according to economists.
One is to step up detection efforts, so that offenders face higher probabilities of sanction. The other is to increase the total sanction that
offenders receive upon detection. The level of deterrence depends on
the would-be offender’s expected sanction—the product of the probability of detection and the size of the total sanction.
The total sanction that corporations—and managers—receive for
detected misconduct depends not just on the courts but also on the
market’s reaction to the news of misconduct. For example, corporations
can bear significant market, or reputational, sanctions for fraud against
customers or suppliers, as when news of fraud against one or a few
customers leads other customers to take their business elsewhere,
possibly driving the offending corporation into insolvency. The size of
the court sanction necessary to generate a given total sanction—and,
thus, the level of deterrence—is of course higher for offenders and
offenses where no market sanction is present. Two types of offenses for
which market sanctions on the corporation appear not to be good
substitutes for court sanctions are environmental offenses that harm
third parties and frauds committed by managers against shareholders.
Whatever the source and size of the total sanction, deterrence
depends on managers or employees who are in a position to influence
corporate conduct believing that they will be held accountable for any
harms that arise from misconduct, should it occur, with a high enough
probability to deter the offense. Accordingly, recent reforms highlight the
importance of clarifying management accountability and putting more
resources into enforcement. Accountability and diligent enforcement
are necessary for laws and regulations to do their work of promoting
good corporate governance. Economic research has drawn attention to
the fact that the effectiveness of rules generally depends on the effort put
into their enforcement, in addition to the size of the penalty.

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disclosure rules actually improve the quality of information that investors
receive remains a subject of debate among researchers almost 70 years after
the SEC’s creation. One study of the effects of disclosure regulations made
use of the fact that, although access to information was not as good in 1933
as it is now, investors did have better access in those days to information
about corporations whose stock had been traded for many years or was
traded over the NYSE than about other firms. If the new disclosure regulations implemented under the 1933 act had any effect, one would expect that
effect to be greater for new, unseasoned securities and for securities of corporations that were traded over the smaller, regional exchanges, which lacked
the strong listing standards and the following of brokers and investment
advisers that the NYSE had by then accumulated. That study, which examined the effects of initial disclosure requirements under the 1933 act,
concluded that there was such an effect: the act’s passage contributed to a
significant decline in the dispersion of securities prices, particularly among
unseasoned non-NYSE securities.
A growing number of federally mandated disclosure rules have been issued
over the decades since passage of the 1933 act. During the 1970s and 1980s,
economists intensively examined the role of information in financial
markets. They came to understand that information is a kind of commodity:
it is costly to produce and has value to those who possess it. Modern
economic research on the effects of disclosure regulation accordingly
considers not just the effect of requiring disclosure on whatever information
is produced, but also how the requirement to disclose information affects the
incentive to produce information. Contemporary research on the effects of
disclosure regulations thus focuses on how those rules affect the net quality,
or value, of information produced.
The Williams Act of 1968. Evidence on the effect of the 1968 Williams Act
amendments to the Securities Exchange Act of 1934 provides a good illustration of how disclosure regulations can have unintended, adverse
consequences that offset and potentially cancel out the benefit they are
designed to confer. During the 1960s, concerns arose that, in corporate
takeover attempts, shareholders were being pressured to sell, or tender, their
shares without being given enough time or information to make an informed
decision. To address these concerns, the Williams Act introduced regulations
under which acquirers today must disclose certain information, such as
their intention with regard to the target company, within 10 days of
obtaining 5 percent of any class of a company’s voting securities. This can
enable investors to do a better job of selecting the acquirer from among the
alternatives, conditional on any acquirer making an offer.
Yet research into the consequences of the Williams Act uncovered a more
subtle effect through which the act makes investors worse off. By requiring
disclosure and delay, the Williams Act reduces the value of searching for
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socially valuable acquisition prospects. It does this by enabling others to
free-ride on an innovative acquisition bid, tendering their own offers and
thereby raising the price that the innovator must pay and reducing its share of
the total value of the acquisition. This is reflected in the increased premium
that acquirers paid to the shareholders of target firms after passage of the act:
from 32 to 53 percent of the pre-offer stock price, on average, over the
ensuing decade. (Related State laws accounted for an additional increase: from
53 to 73 percent of the pre-bid price.) Moreover, these increased premiums
appear to have come at the cost of a reduced supply of takeover bids, as some
(but clearly not all) prospective bidders shifted their resources to other
pursuits. Some shareholders thus appear to have benefited at the expense of
others: those who still received bids after the act was passed got larger gains
than they would have otherwise, yet those who did not receive bids that
would have been offered had the act not been passed got nothing, and a
valuable source of market discipline was lost.
Financial Analysts’ Reports. Most recently, regulators have confronted the
fact that some investors—including small investors—receive information
about corporations from financial analysts’ reports. Given the extensive disclosure requirements that corporations already face, it might seem surprising that
analysts’ reports could have anything new and informative to offer. Research
into how stock prices respond to the release of those reports, however, suggests
that they are informative. Stock prices tend to increase when analysts issue
new “buy” recommendations or raise their ratings of corporations, and decline
when analysts issue new “sell” recommendations or lower their ratings.
Concerns have been raised that some analysts may face conflicts of interest
that could lead to biases in their reports. Conflicts can arise when an analyst
is writing a report on a firm that has done a significant amount of business
with the analyst’s employer or that faces the strong prospect of doing so in
the future. Research suggests that investors tend to take analysts’ affiliations
into account when deciding how to use the information in their reports:
investors appear to place less weight on reports of analysts whose employers
may present them with these conflicts. How and to what extent investors
take into account the potential for conflicts when evaluating analysts’
reports—and the corporate governance context in which analysts prepare
their reports—is an important area of ongoing research. The findings are
expected to shed light on the appropriate direction for corporate governance
reform as it affects the supply of information to investors.

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Corporate Governance Reform
One of the perennial challenges of running a business is adapting to change.
As businesses have grown in size and complexity, this challenge has grown as
well. To keep up with changes in the marketplace, corporate participants—
including both managers and investors—must confront the demands
associated with new technology, changing consumer preferences, and the
requirements of the public sector. As technology and changes in the structure
of markets in Europe and elsewhere have made it easier to trade across international boundaries, new challenges have emerged. Some of these developments
have placed U.S. corporations and the laws and regulations governing them
under relatively close scrutiny over the past decade, as other governments have
turned to the successful U.S. corporate governance system as a possible
template for creating new systems or modifying old ones. The ability of U.S.
corporations to adapt readily to change is critical to their profitability and,
accordingly, their ability to continue operating as independent enterprises.
The recent reforms of the U.S. corporate governance system are indeed the
latest in a history of dramatic changes going back over a century. These
include changes arising from five distinct merger waves (including those of
the 1980s and 1990s), from the introduction of the SEC in 1934, from the
imposition of constraints on institutional stock ownership through the
Investment Company Act of 1940 and other legislation, and from the
continuing modification of regulations under the securities laws.
The recent reforms were marked by a speech by the President on March 7,
2002. The President announced a “Ten-Point Plan to Improve Corporate
Responsibility and Protect America’s Shareholders,” calling for a concerted
response to the emerging news that some of the Nation’s largest corporations
had not truthfully reported their earnings and that this would harm
investors, including employees whose pensions were invested in the
company’s stock. This plan applies three core principles of effective governance: accuracy and accessibility of information, management accountability,
and auditor independence.
The private sector’s response was almost immediate. Individual managers
and investors undertook a careful reexamination of the governance practices
of their corporations; the resulting changes received widespread public attention in many cases. The most visible private sector initiatives were
undertaken by the self-regulatory organizations whose rules public corporations must follow as a condition for the public trading of their securities.
Table 2-3 shows how some of the specific initiatives undertaken by two such
organizations, the NYSE and the Nasdaq, implement the core principles
underlying the President’s plan for reform. The table reflects proposals that
were announced between April and June of 2002 and then updated during
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late 2002 and early 2003 to account for SEC-initiated regulatory changes
under new Federal legislation passed during July 2002.
As regulators, self-regulatory organizations, corporations, investors, and
others responded to this call for action, the President in July signed into law
the Sarbanes-Oxley Act of 2002. This legislation provides the courts and
Federal agencies with new tools to strengthen the ability of outside investors
to verify the quality of managerial decision making. The act applies the core
principles underlying the President’s plan. It addresses each of the points of

TABLE 2-3.— Some Corporate Governance Initiatives of NYSE and Nasdaq
Initiative

Principle
Information accuracy and
accessibility

NYSE and Nasdaq proposals require that listed companies publish codes of business
conduct and ethics and guidelines for corporate governance. NYSE proposal further
requires disclosure of board-approved exemptions.
Nasdaq proposal requires that a press release immediately disclose a going-concern
qualification in an audit opinion.
NYSE and Nasdaq proposals require disclosure of any permissible exemptions to their
corporate governance requirements by non-U.S. issuers.

Management accountability

NYSE and Nasdaq proposals require independent director approval of director
nominations and of CEO compensation.
NYSE and Nasdaq proposals require shareholder approval of all equity-based
compensation programs. NYSE further disallows a broker from voting on such plans
without customer instruction.
NYSE and Nasdaq proposals require that a majority of directors be independent
(except at “control” companies) and set a more stringent definition of
“independence,” which excludes persons with any financial or personal relationship
with the company.
NYSE proposal requires CEOs of all companies to certify annually that they know of no
violation of NYSE governance standards.
NYSE has ability to issue public reprimand letter for companies in violation of its
governance requirements.
Nasdaq proposal requires independent director approval of all related-party
transactions.
NYSE and Nasdaq proposals require that nonmanagement directors meet regularly
without management.

Auditor independence

NYSE and Nasdaq proposals require that the audit committee have responsibility to
hire and fire the auditor.
NYSE and Nasdaq proposals require audit committee approval of all nonaudit services
of auditors.
NYSE and Nasdaq proposals entail heightened standards of independence for audit
committee members in that compensation is allowed only for board or committee
service.
NYSE and Nasdaq proposals require financial literacy of all audit committee members
and accounting or financial management expertise of at least one.

Sources: New York Stock Exchange (NYSE) and Nasdaq Stock Market (Nasdaq).

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that plan, as Table 2-4 illustrates. In doing so, it accompanies the actions that
many others have begun to take, and continue to take, to strengthen each of
the key elements of a strong U.S. corporate governance system.

TABLE 2-4.— The President’s Ten-Point Plan and the Sarbanes-Oxley Act
Principle

Ten-Point Plan

Sarbanes-Oxley

Filing deadlines are accelerated.

3. CEOs should personally vouch for the veracity, timeliness, and
fairness of their companies’ public disclosures, including their
financial statements.

CEOs and CFOs must verify fairness and
accuracy of company reports. Individuals
committing "knowing and willful" violations of this
requirement are subject to 20 years in prison.
Following a restatement of earnings, executives
must forfeit bonuses, incentive-based
compensation, and profits from stock sales for
the previous year.

5. CEOs or other officers who clearly abuse their power should
lose their right to serve in any corporate leadership position.

The SEC may bar individuals from serving as
officers and directors.

6. Corporate leaders should be required to tell the public promptly
whenever they buy or sell company stock for personal gain.
Auditor
independence

Pro forma accounting statements must be
reconciled with generally accepted accounting
principles (GAAP) in company reports. Material
off-balance-sheet transactions must be
disclosed in company reports.

4. CEOs and other officers should not be allowed to profit from
erroneous financial statements.

Management
accountability

1. Each investor should have quarterly access to information
needed to judge a firm's financial performance, condition, and risk.

2. Each investor should have prompt access to critical information.

Information
accuracy and
accessibility

Management and principal stockholders must
report transactions by end of second business
day.

7. Investors should have complete confidence in the independence
and integrity of companies' auditors.

The audit committee hires and oversees accounting firms. Companies must disclose whether one
member of the audit committee is a "financial
expert." Auditors disclose all critical accounting
practices to audit committee.
Auditors may not provide any of at least eight
specified services for audit clients and must
obtain prior approval from the audit committee
for any services provided.

8. An independent regulatory board should ensure that the
accounting profession is held to the highest ethical standards.

The Public Company Accounting Oversight Board
("the Board") is funded by accounting support
fees assessed on public companies.
The SEC will appoint five full-time members in
consultation with the Federal Reserve Chairman
and the Treasury Secretary.
Only two members may be or have been certified
public accounts (CPAs). The Chair may not have
been a CPA for 5 years prior to service.
The Board may compel information from
registered accounting firms and their clients in
some circumstances.

9. The authors of accounting standards must be responsive to the
needs of investors.

The Board shall include in its auditing standards
the requirement that firms employ GAAP.

10. Firms’ accounting systems should be compared with best
practices, not simply against minimum standards.

The auditor's report to audit committee must
compare company's audit practices with the
auditor's preferred treatment.

Sources: The White House and the Congress.

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Information Accuracy and Accessibility
Virtually all aspects of recent corporate governance reform seek to promote
investors’ timely access to information about the financial performance and
operations of public corporations. Better informed investors can more readily
limit their exposure to losses stemming from the agency costs of separating
ownership from control and can more quickly act to remove underperforming managers as warranted.
The Sarbanes-Oxley Act promotes the accuracy and timeliness of financial
information in several ways. First, the act introduces new disclosure requirements. It requires that directors, officers, and principal investors disclose their
transactions in company stock more quickly than before: by the end of the
second day after the transaction, rather than 10 days after the close of the
calendar month as previously required. This enables investors to react more
quickly to the information contained in such disclosures. Indeed, more rapid
disclosure strengthens the capacity of outsiders generally to act on news of
insider trading. The act also requires that corporations make more information available about the quality of their internal control structures, including
whether they have special ethics rules in place to guide the actions of senior
financial officers, and whether their board of directors’ audit committee
includes any financial experts (and, if not, why not).
Financial analysts and auditors are also expressly required to make certain
disclosures under the act. Each must publicly disclose to investors whether any
conflicts of interest might exist to limit their independence from influences
other than the desire to serve the interests of shareholders. This provides an
additional check against any conflicts that might remain even after the other
provisions of the act, and the other reforms accompanying the act, are taken
into account.
Second, the act seeks to improve the effectiveness of the many existing
U.S. securities disclosure regulations by dramatically increasing some of the
sanctions for violating them. In promoting deterrence, these sanctions
complement the higher probability of detection that violators face from
stepped-up Federal enforcement under the Corporate Fraud Task Force. The
act provides for a fourfold increase in the maximum prison term for criminal
fraud—to 20 years rather than 5 years—and an even higher maximum term
of 25 years for securities fraud. Both of these increases in prison terms are in
addition to fines and other, nonmonetary sanctions. Recognizing that penalties cannot be imposed without evidence that a violation has occurred, the
act also increases the maximum sanction for destroying documents, allowing
courts to impose fines and terms of imprisonment of up to 20 years for this
offense. The most severe penalties, such as imprisonment, tend to apply only
to violations found to have occurred knowingly, with the stiffest sentences
reserved for violations that are both knowing and willful.
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Finally, the act creates new rules and institutions that are designed to
shape managers’ and auditors’ choices concerning the accuracy and timeliness of corporate financial reporting. In doing so, the act promotes
compliance with existing disclosure rules, in addition to strengthening
managers’ and auditors’ incentives generally to act in the interests of
investors. (These provisions apply the principles of management accountability and auditor independence and will be discussed in greater detail
under those headings.)

Management Accountability
The second core principle of the President’s plan is the promotion of
management accountability. The managers of public corporations initially
oversee the preparation of the financial reports that their companies file periodically under existing securities regulations. Holding them accountable for
the quality of those reports can thus serve as a further check on their accuracy
and completeness. Management accountability has implications beyond the
quality of financial reporting, however. Managers who expect the quality of
their companies’ performance to become known to investors face more
powerful incentives to serve the investors’ interest.
The Sarbanes-Oxley Act promotes management accountability by clarifying
the roles and responsibilities of various corporate officers, by introducing new
sanctions for managers who fail to live up to those responsibilities, and by
requiring that corporations adjust their internal governance structures so that
outside investors can more readily verify the strength of management’s
incentive to serve the shareholders’ interest. For example, the act requires that
CEOs and chief financial officers (CFOs) certify the accuracy and completeness of the financial reports that their companies file periodically under existing
securities regulations. The act makes it a Federal criminal offense, subject to
fines of up to $1 million, to knowingly engage in false certification of these
reports. In the extreme case where a CEO or CFO knowingly and intentionally provides false certification, the maximum sanction climbs to $5 million. In
case this is not enough to deter false certification, CEOs and CFOs who falsely
certify financial reports are also required to forfeit any bonuses, incentive
compensation, or other gains that they might have received from the company
during the year after the issuance of a false report.
The act also clarifies the roles and responsibilities of other corporate officers
besides CEOs and CFOs. It expressly charges corporations’ audit committees
with responsibility for overseeing the selection and compensation of the
company’s outside audit firm. As already mentioned, audit committees must
reveal whether any of their members are financial experts, and if not, why not.
A corporation’s attorneys are expressly held responsible for reporting any
evidence they might receive of a violation of the act, a breach of duty, or other
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violation to the chief legal counsel, to the CEO, or to the audit committee or
other independent directors (if other parties appear not to respond to the
information in a timely manner). This increased accountability is supported
by substantial sanctions for violations of rules under the act.

Auditor Independence
The creation of a special, national board to oversee the auditing of public
companies’ financial reports is perhaps the most visible corporate governance
reform under the Sarbanes-Oxley Act. In creating this new board, the Public
Company Accounting Oversight Board, the act introduces a new check on
the quality of audit services supplied to public corporations whose securities
are listed on U.S. exchanges. The economic role that the board will play in
overseeing public accounting companies is to strengthen the auditors’ incentives to do their jobs properly and with integrity, even in the face of pressure
from managers who might in some instances prefer not to accurately report
their companies’ performance.
Under the act, the oversight board will promote the independence of auditors
in several ways. To increase the chance of detecting any future misconduct by
auditors, each public accounting firm must register with the board and submit
to periodic reviews of its performance. The board is given the authority to act
upon any evidence of auditor misconduct by undertaking investigations. Upon
registering with the board, each registered public accounting firm agrees to
cooperate with the board’s investigations. Such cooperation includes retaining
audit work papers and other documents for a minimum of 7 years and
providing those records to the board on request.
When the oversight board discovers evidence of misconduct, it has the
power under the act to impose sanctions. It can impose fines on individual
auditors and the auditing firms that employ them. It can also bar auditors
from supplying their services to any U.S.-listed corporation, temporarily or
permanently. The combined effect of this new monitoring effort and these
newly instituted sanctions is to increase the expected cost of misconduct to
any registered accounting firm or employee.
The act goes beyond direct oversight of auditing firms, however, to address
the conditions under which external auditors are chosen and employed. First,
a corporation’s choice of auditor must be made by a committee of independent
directors who are not employees of the company and have no relationship with
it other than as directors. This provision is designed to limit the influence that
managers who prepare financial reports exercise over the choice of auditor.
Second, for each of its clients, the accounting firm that does the audit must
periodically assign a new person as the lead audit partner on each client’s
account. Both of these provisions limit the opportunities for collusion between
auditor and client. Finally, registered public accounting firms are no longer
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permitted to sell certain services other than auditing to their audit customers.
This addresses the concern that an auditor might choose to overlook problems
in a company’s financial reports if it believes that the company might reward it
with nonaudit business. Any exceptions to these basic rules must be disclosed
to investors, for example through the filing of reports by the audit committee
with the SEC.
To summarize, the Sarbanes-Oxley Act applies the principle of auditor
independence in two basic ways. It increases the sanctions that auditors can
expect to face if they engage in misconduct, thus encouraging them to comply
with certain professional standards to be set forth by the new oversight board.
The act also recognizes that some forms of compliance rely on the strength of
the auditor’s incentive to serve the investors’ interest. It strengthens this incentive by requiring that public accounting firms and their clients eliminate
potential conflicts of interest by making certain fundamental and verifiable
changes in their business practices.
The principle of independence is also relevant to the conduct of the oversight board. To serve as an effective monitor and enforcer of the supply of
independent audit services, the board must itself be free from conflicts
between the interests of investors and those of specific auditors and audit
clients. Accordingly, the act requires that a majority of the board’s members be
drawn from outside the accounting industry: members must not have
supplied audit services to any client in recent years. The requirement that
exactly two of the board’s five members be drawn from the accounting profession reflects a tradeoff between the value of specialized expertise and the value
of independence from the possible incentive conflicts that such expertise can
represent. This tradeoff is similar to that which public corporations face in
selecting members for their boards of directors.

Corporate Governance and the Global Economy
The change currently taking place in U.S. corporate governance is but one
wave in a sea of change internationally. This change is shaped in part by globalization, which encourages countries to adopt positive features of
other systems while retaining the best features of their own. International
competition fosters good corporate governance by favoring the best corporate
governance systems. In many respects, private and public sector institutions in
other countries are moving toward corporate governance systems that look
more like that of the United States—a tribute to the merits of the U.S. system.
At the same time, the U.S. Government recently lifted some of the legal rules
that had previously restricted bank participation in the underwriting of equity,
which has been commonplace in some other countries.
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The growing similarity among different countries’ systems of corporate
governance has captured the attention of researchers interested in how
economic and legal systems interact. Their findings illustrate the importance
of market forces in shaping the institutions of corporate governance, in addition to their role in guiding the strategic and the day-to-day decisions of
investors and managers. Researchers have found, for example, that European
and Japanese corporations tend to have relatively concentrated ownership
structures, with a relatively few persons or institutions often controlling large
blocks of shares. In contrast, corporations in the United States and other
common law countries, such as the United Kingdom, tend to have relatively
dispersed ownership, an outcome facilitated by strong securities markets,
rigorous disclosure standards, transparency, and relatively active markets for
corporate control. One study found that, in the United States, only 4 of the
20 largest corporations have a single shareholder who possesses 10 percent or
more of the voting rights on the board; in Germany, in contrast, 13 of the 20
largest corporations have such a shareholder. Yet these differences are
shrinking. Both the value of outstanding stock as a percentage of GDP and
the value of equity raised through initial public offerings as a percentage of
GDP rose substantially in European countries during the 1990s. Over this
period the market for corporate control became more international. One
study reported that, between 1985 and 1999, takeovers involving a European
party went from 11 percent to 47 percent of the total market value of all
transactions worldwide.
Meanwhile, in the United States, the enactment of the Gramm-LeachBliley Act in 1999 relaxed previous prohibitions against bank participation in
the ownership of stock. Banks in other developed countries, such as Germany
and Japan, appear to use the information they obtain as lenders to play a more
effective role as stockholders in monitoring corporate management. Banks’
participation in U.S. corporations as both lenders and shareholders may similarly improve corporate efficiency. To the extent investors view increased bank
participation in both lending and stock ownership as committing corporations to stronger performance, the effect may be not just more efficient
monitoring of management but better investor assurance as well.

Conclusion
Corporate governance systems, by establishing checks and balances that
influence the decisions of corporate managers, affect corporate efficiency
and, by implication, economic growth. To the extent that these systems are
observable—that is, transparent—to outsiders such as households and other
prospective investors, they can affect their willingness to do business with the
106 | Economic Report of the President

corporation. Strong managers who seek growth for their corporations thus
stand to gain by creating strong corporate governance systems. In doing so,
they can distinguish themselves and their corporations from others with less
promising prospects.
Major changes in the legal institutions that support U.S. corporate
governance occurred last year. These changes and many private sector reform
initiatives illustrate the application of three core principles underlying a plan
for corporate governance reform that the President set forth in March 2002.
These principles are familiar to economists: information accuracy and accessibility, management accountability, and auditor independence. The
Sarbanes-Oxley Act of 2002, by strengthening certain legal institutions,
promotes greater accuracy and accessibility of information and addresses
concerns about the independence of external auditors. The establishment of
the Corporate Fraud Task Force in July 2002, along with new enforcement
initiatives by the SEC, acts on the principle of management accountability
by subjecting offending managers and their organizations to a higher probability of getting caught and greater sanctions when they do get caught. The
Sarbanes-Oxley Act further strengthens management accountability by
allowing the courts to impose stronger sanctions on white-collar offenders
and instructing the U.S. Sentencing Commission to update related
sentencing guidelines to ensure their consistency with current information
on the seriousness of the offense and with the new statutory increases in
maximum sanctions. The act indeed implements each of the 10 points of the
plan for reform that the President articulated in his March speech.
Perhaps the most important reforms along the lines of the President’s plan,
however, have occurred in the private sector. Many managers—and management teams—have instituted improvements in the internal governance of
their corporations; their actions are apparent in numerous press releases and in
disclosures to the SEC. The appropriate reform for each corporation ultimately depends on the specific market conditions that it faces. Changes
specific to individual corporations include replacement of top managers and
auditors and adjustments in the compensation of top management and how it
is reported. More dramatic and far-ranging are the proposals by the NYSE
and the Nasdaq to tighten the standards that public corporations must meet
in order for their stock to be listed and traded on those markets. Some of these
proposals follow early action taken by the Chairman of the SEC to request
that these and other private self-regulatory organizations revisit and revise
their standards in early 2002, following the President’s call for reform. The
SEC and other Federal agencies will implement reforms under the SarbanesOxley Act in phases over the next several years.
U.S. managers, investors, and regulators are thus embarked on making
changes to U.S. corporate governance of a scope not seen since the creation of

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the SEC itself. The current push for reform will make use of new knowledge
gleaned from recent events and will apply this learning toward improving the
quality of managers’ and board members’ commitments to act in shareholders’ interest. Despite their scope, however, these changes do not
fundamentally depart from the evolutionary process that U.S. corporate
governance has followed over the past century. The fundamental building
blocks of corporate governance remain unchanged.
Competition will continue to shape the evolution of U.S corporate governance. This competition will affect different corporations differently,
depending on the nature of the markets in which they operate. Many of these
markets have become more global in recent years, and this globalization will
continue to place pressure on managers, investors, and public officials to
confront the issues that changing markets and technology can raise. The
capacity of individual corporations and of the Nation’s markets and public
sector institutions to promote increasingly effective resource utilization will
depend on their continuing success in committing corporate managers to act
in the best interests of shareholders and other investors, so as to limit the
agency costs of separating ownership from control. In so doing they will
continue to foster the efficient growth that the corporate sector of the economy
has enjoyed through its ongoing access to deep and resilient financial markets.

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C H A P T E R

3

Policies for Dynamic Labor Markets

A

lthough the economy continued to grow in 2002, employment growth
did not keep pace. From December 2001 through December 2002,
nonfarm payroll employment fell by 181,000, a small figure compared with
total employment of almost 131 million. During the same months the
unemployment rate hovered between 5.5 and 6.0 percent. The lack of
change in these statistics paints a picture of a labor market that is static and
stagnant. But this picture is misleading: dynamic change remains the most
fundamental characteristic of the U.S. labor market even today. The conventional misperception stems in part from the nature of most labor market
statistics, which by necessity show the situation at only a single point in time,
and which meld the often very different experiences of individual workers
and households into a single aggregate measure.
A closer look suggests ripples—even crosscurrents—beneath the surface.
The unemployment rate may have changed little in 2002, but the names and
faces of the individual workers who are unemployed do change. What makes
the labor market appear stagnant is that the official payroll employment and
unemployment statistics that are the most visible indicators of the health of
the labor market cannot capture its true dynamism. For example, in
December 2002, 67 percent of unemployed workers reported being unemployed for 5 weeks or more; this point-in-time statistic may suggest that
people who are unemployed this month will be unemployed next month. Yet
a recent study of employment flows found that the majority of workers
seeking work in any given month are not the same individuals who will seek
work the following month. Similarly, over the same period in 2002 in which
payroll employment scarcely grew, between 3.5 million and 5 million
workers started new jobs each month, and roughly the same number quit or
lost their jobs. This argues that dynamism, not stasis, is the essence of the
U.S. labor market.
This dynamism and its implications for the design of economic policy are
central themes of this chapter. Within these broad themes, the chapter
discusses the rewards to skill and work generated by the U.S. labor market
and how government policies can foster long-run job mobility by encouraging skill development and education. The labor market and the economy
as a whole today face multiple challenges: in the short run, the challenge is to
move past the recent downturn in the business cycle; in the long run, it is to
address the risks associated with dynamism: technological change and growth
109

inevitably lead to the destruction of some jobs and to the decline of certain
industries. If the Nation can maintain the dynamism—the flexibility and
mobility—of its labor markets, while providing all workers with meaningful
insurance against unemployment and loss of income, both the cyclical and
the structural economic challenges can be met without impairing those
features of the labor market that foster long-run growth.
Economic downturns are a difficult time for many workers and their
families, as growth in employment slows and unemployment and layoffs
increase. The recent economic slowdown has been no exception. Flexible labor
markets, however, can lessen the impact of a downturn on workers, and probably have done so since the recent contraction began. Although the
unemployment rate did increase sharply during the contraction of 2001 and
persisted at levels near 6.0 percent in 2002, unemployment remains low relative to the experience in previous recessions since World War II. Job creation
and destruction continued despite the decline in nonfarm payroll employment.
Workers do not encounter economic difficulties only in recessions: even
economic growth, or, more precisely, the structural change that accompanies
that growth, makes some workers worse off. Advances in technology and the
expansion of free trade provide benefits for consumers and for the vast
majority of workers, yet these same changes do real harm to some workers in
some areas of the economy. Workers displaced by technology or trade
may remain unemployed for long periods or drop out of the labor force
altogether. When they again find jobs, they are likely to earn less than at the
jobs they lost.
Government has a role in assisting both those who suffer disproportionately
during times of economic hardship and those who fail to benefit from, or are
harmed by, economic progress. Among other things, government can provide
retraining services and relocation assistance to those who would benefit from
them, and it can reward reemployment, through appropriate provisions in the
tax code, in social programs, and elsewhere, to encourage rapid reentry into
the work force. In these and other ways, effectively designed government policies can help make labor markets work better. However, policies that fail to
recognize the dynamics inherent in these markets can impair long-term
economic mobility and the well-being of workers. Policies will support labor
markets and help them work better if they recognize their dynamism and
avoid undermining their ability to reward work and skill.
Social insurance, through unemployment benefits and similar programs, is
an important mechanism by which government can assist those hurt or
threatened by the forces of economic change. Yet policymakers face a tradeoff
when seeking to provide social insurance. Such insurance is valuable in
sustaining the well-being of workers and their families during periods of

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unemployment, but it can also distort both their incentives and their
behavior, undermining what the U.S. labor market does best, namely, reward
work and skill and match workers to jobs. In a static, unchanging world,
policies that simply transfer public resources to those who are temporarily
poor would not distort their behavior or lead to dependency on welfare. But
in a world of continuous change in employment and unemployment, poorly
designed policies can inadvertently inhibit upward mobility. Although this
tradeoff cannot be entirely avoided, labor market policies are more effective
when, recognizing the dynamism of these markets, they provide social insurance in a manner that least distorts workers’ incentives to stay employed and
to improve their employment situation.
The objective of social insurance is to guard individuals and households
against sharp fluctuations in their standard of living that threaten their wellbeing. A standard assumption in economics is that most people would prefer
their consumption to be certain and steady over their lifetime, rather than
uncertain and variable. However, because employment and earnings vary in
response to events outside their control, most people find that their incomes
are not certain and steady. This creates a mismatch over time between their
desired consumption and their actual ability to consume, which they seek to
remedy by smoothing their incomes over their lives. They do this in a
number of ways. One way is by saving part of their income when income is
relatively high and by dissaving (that is, drawing down their savings, or
borrowing) when it is relatively low. Another is by purchasing private insurance policies against unexpected and costly events, such as large health
expenses, disability, or premature death. A third is by relying on informal
private insurance mechanisms, such as support from family members and
charities, when times are bad. Finally, the public safety net, of which social
insurance is a vital part, acts as a backstop in case these private insurance
mechanisms prove insufficient.
For most people, any spells of unemployment that occur during their
working years are temporary. Public insurance programs would ideally therefore provide assistance only for a similarly limited duration. However, a
well-known problem in insurance markets is that of moral hazard. Moral
hazard arises when people who have insurance against a given risk have less of
an incentive to take actions to minimize that risk than they would if they
lacked insurance. For example, people who have generous health insurance
may consume more medical services than they really need, because the additional services cost them little or nothing. Similarly, subsidized flood
insurance may encourage building and rebuilding of homes in flood plains,
because the insurer or the government, not the homeowner, pays when the
house is destroyed in the next flood.

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Moral hazard in social insurance can take the form of dependency on
welfare. For example, for decades the Aid to Families with Dependent
Children (AFDC) program provided income support for the poor but also
generated substantial work disincentives that encouraged people to stay in
poverty and out of the work force. The Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 (PRWORA) transformed this
system into one that acts more like insurance against temporary poverty and
less like a permanent transfer program. PRWORA, the most important piece
of welfare reform legislation in several decades, replaced AFDC with a new
program, Temporary Assistance for Needy Families (TANF), and allowed
States to implement innovative provisions in their welfare programs. (Many
States had already implemented welfare reforms before 1996 by obtaining
waivers from Federal welfare requirements.)
These changes, combined with time limits on welfare receipt and work
requirements as a condition for benefits, quickly led to a large decline in caseloads. Research has found that these reforms led to increases in work,
earnings, and income and a reduction in poverty. Other effects included an
increase in the marriage rate and a reduction in the prevalence of single
motherhood among women with little education (many of whom likely
would have been welfare recipients had welfare reform not happened). In
addition, States that placed a cap on welfare benefits, as opposed to
increasing benefits if a mother had an additional child while on welfare, saw
a reduction in out-of-wedlock childbirths. Welfare reform under PRWORA
thus provides a striking example of how well-designed policies can meet
the needs of those struggling in the face of labor market change while
maintaining the incentives that underlie long-term economic growth.
The remainder of the chapter proceeds as follows. It first discusses the
dynamics of employment and unemployment and provides examples of
unemployment policies that are made with a dynamic labor market or with
a static labor market in mind. Second, it discusses the dynamics of participation in welfare and other social assistance programs and contrasts those
programs that are designed with an understanding of dynamic labor markets
with those that are not. Finally, it discusses policies that support mobility and
dynamism in labor markets by fostering investments in skill. For example,
in January 2003 the President proposed the creation of Personal
Reemployment Accounts. These would provide unemployed workers with
up to $3,000 to use for training, child care, transportation, moving costs, or
other expenses associated with finding a new job. Recipients who take a new
job within 13 weeks would be allowed to keep the funds remaining in the
account as a reemployment bonus. This would give unemployed workers an
incentive to find work faster.

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Employment Dynamics
and Labor Market Policy
Whether from the perspective of the economy as a whole or from that of
the individual worker, labor markets work best when they are fluid and flexible, that is, when workers and employers can change their mutually
agreed-upon working arrangements as they see fit, to meet changing needs.
Over the long term, the U.S. labor market has indeed been full of change. A
vibrant economy created over 40 million new jobs between 1980 and 2002.
Even though the population of the United States aged 16 and over grew by
more than 46 million over the same period, a greater fraction of Americans
are working today than in the past: civilian employment rose from 59
percent of the population aged 16 and over in December 1980 to 62 percent
in December 2002. Women enjoyed a particularly large rise in their employment-to-population ratio over this period: for example, in December 1980,
48 percent of the female population were employed, but 56 percent had jobs
in December 2002 (Chart 3-1). Meanwhile the proportion of the male
population who were employed fell slightly, from 72 percent to 69 percent.

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Blacks and Hispanics also experienced rapid growth in employment since
1975 (Chart 3-2). Indeed, employment-to-population ratios for both these
groups rose by more (7.4 and 8.0 percentage points, respectively) than did
the ratio for whites (6.3 percentage points). By 2000 the ratios for Hispanics
and whites were almost equal. Unfortunately, although employment grew
faster during this period among blacks than among Hispanics or whites, the
black employment-to-population ratio remains lower than for whites, having
started from a much lower level. (Comparisons of employment by race and
ethnicity are somewhat clouded because the categories of Hispanic, black,
and white are not mutually exclusive: some Hispanics identify themselves as
white and others as black. Available data do not allow a comparison of nonHispanic whites and non-Hispanic blacks with Hispanics.)
The growth in employment in the 1980s and 1990s opened the door to
increased economic well-being for many more Americans. Workers with a
great deal of education and skill benefit from the greater availability of jobs,
but so do workers with less education and fewer skills: one study indicates
that, at both low and moderate skill levels, more labor market experience
means higher earnings; even entry-level jobs provide real economic opportunities. For both lower skill and higher skill workers, real wages grow roughly
5.5 percent a year during the worker’s first 10 years in the labor market.

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Why does time spent in employment, even in low-skilled jobs, promote
wage growth? One reason is that labor market experience fosters skill development. In a modern economy, school is not the only place where skills are
learned: family members and employers play a central role alongside formal
education in developing skills. One study estimates that job mobility, workplace education, and on-the-job learning account for as much as half of all
skill formation.
In the dynamic view of labor markets, job changes are not necessarily
events to be minimized at all costs, but rather are often changes for the
better; for example, job changes can lead to a better matching of workers to
jobs. Job mobility also contributes to skill development and wage growth.
Young workers change jobs often: a study shows that the typical young
worker holds seven jobs over his or her first 10 years of labor market experience, and one-third of the wage growth that young workers experience
occurs when they change one job for another. Indeed, two-thirds of lifetime
wage growth occurs within the first 10 years of labor market experience.
Together this evidence indicates that this job search and job tryout process—
playing the labor market field—is a crucial component in the economic
progress of young workers.
Job mobility is not limited to the young, of course. Studies show that
one-third of new full-time jobs end within 6 months, and one-half to twothirds end within 2 years. Not surprisingly, then, a large fraction of the work
force—roughly one-fifth—have been at their current job for less than a year.
However, once a worker has found a good match—a job in which the
worker’s skills are valued by the employer and the worker is sufficiently
compensated, both monetarily and in nonmonetary benefits and amenities—
the job often turns into a long-term employment relationship, to the benefit
of both worker and employer. Recent studies indicate that such relationships
remain common (Box 3-1). The pattern seems to be that many workers
switch jobs several times until they find the right one, ratcheting up their
wages along the way.
Job mobility and labor market experience, especially for young workers,
are an important component of overall income mobility in the United States.
In fact, studies of overall income mobility that include the benefits of job
mobility and experience find much more mobility than do studies that
implicitly exclude these sources of income growth. Box 3-2 provides a further
description of these two contrasting ways of looking at income mobility.
Nonwage benefits are also an important indicator of workers’ well-being.
For the majority of households, health insurance coverage is linked to
employment. But even many households with working members lack health
insurance. Data from the Current Population Survey, conducted by the
Bureau of the Census and the Bureau of Labor Statistics, show that out of a

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Box 3-1. Has There Been a Decline in Long-Term Employment?
The fraction of the work force in long-term employment relationships
has been falling over time. In 1979 over 40 percent of the work force
were in employment relationships that had lasted over 10 years, and
over 25 percent had been in employment relationships that had lasted
at least 20 years. In contrast, a 1997 study found that only about 35
percent of employment relationships had lasted at least 10 years, and
about 20 percent had lasted more than 20 years. However, this decline
in the fraction of long-term jobs is largely the result of the rapid expansion in employment that has occurred since 1980 rather than a decline
in the number of long-term relationships. Workers who are new to the
labor force have short job tenure by definition. There has been no
increase in the incidence of job loss among workers with long-term
employment relationships.

U.S. population of almost 285 million, 41.2 million lacked health insurance
at any given time during 2001. However, just as the unemployment numbers
fail to capture the dynamics of the labor market, so, too, these commonly
cited estimates of the population without health insurance fail to tell the
whole story. The Census figure probably overestimates the number of people
who go without insurance for a full year. Data from the Medical Expenditure
Panel Survey (MEPS), conducted by the Agency for Healthcare Research and
Quality, show that 23.5 million people were uninsured throughout a recent
2-year period, and that 80.2 million were without insurance at some time
during that period. For those who lose coverage, the median spell without
insurance is 5 months.
In the extreme, the combination of a high rate of workers changing jobs,
short durations of many employment relationships, and short average durations of unemployment could reflect either of two possible scenarios. One is
that a large fraction of workers are experiencing frequent but temporary
layoffs and recalls, such that a re-sorting of workers is taking place among an
unchanging set of existing jobs. The other is that workers are fluidly pursuing
job opportunities that are continually being created to replace other jobs that
are continually being destroyed. Both scenarios are likely at work, but studies
show that a substantial amount—35 to 45 percent—of worker turnover is
driven by the destruction and creation of jobs. Each year roughly 10 percent
of all existing jobs are destroyed, and a roughly equal number of new jobs
take their place.
Data from the Bureau of Labor Statistics’ Job Openings and Labor
Turnover Survey (JOLTS) document that the common notion of a static
labor market does not fit the facts even during periods of slow employment
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growth. The JOLTS gathers data on job openings and job turnovers from a
nationally representative sample of roughly 16,000 business establishments.
Those data reveal that, in October 2002, there were 3.2 million job openings—that is, available but unfilled positions—the equivalent of 2.5 percent
of total employment of roughly 131 million. Moreover, in that same month
4.1 million workers—3.1 percent of total employment—were hired into new
positions (from other positions or from nonemployment), and a nearly equal
number quit or lost their jobs. The majority of these separations were not
layoffs, however; 2.2 million of those 4.1 million workers left their jobs
voluntarily. Thus, although nonfarm payrolls increased by only 69,000
between September and October, and unemployment increased slightly
(from 5.6 percent to 5.7 percent), there was a large amount of movement
both into and out of jobs.
What kinds of policies work best to support workers in need of assistance
while maintaining the dynamism of a constantly changing labor market? The
Earned Income Tax Credit (EITC) is an example of a policy that works
Box 3-2.Two Ways to Look at Income Mobility
Some studies find substantial income mobility among Americans,
whereas others find much less. The differences between these studies
depend in large part on whether the income mobility that comes with
increased labor market experience is included in the analysis. Studies
that include all sources of income mobility are sometimes referred to as
“absolute” measures of mobility, whereas those that compare incomes
over time of cohorts of individuals of the same age and approximately
the same level of experience are sometimes called “relative” measures
of mobility.
Studies of absolute mobility find that 80 percent of individuals in the
bottom quintile of the income distribution were in a different quintile 10
years later. This finding suggests that most people at the bottom of the
income distribution move up as they gain labor market experience. Even
studies that examine the absolute mobility of men in their prime working
years (ages 25 to 44), after many job changes and after much wage
growth has already occurred, find a substantial amount of mobility.
Studies of relative mobility find less movement out of the bottom
quintile: only about half of workers in that group are no longer there after
10 years. These studies show that much of an individual’s upward
mobility is shared among all members of the cohort. Changes in the relative ranking of incomes among members of a cohort are a good measure
of social mobility, whereas changes in the absolute level of incomes are a
good measure of mobility in economic well-being. Taken together, these
studies show a substantial amount of both concepts of mobility.

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because it encourages rather than discourages mobility in the labor market
(Box 3-3). It does so because its implicit subsidy to earnings, which can be as
large as 40 percent, increases the rewards associated with work for the lowincome individuals to whom it is targeted. The credit thus provides an
incentive for those without jobs (including those on public assistance) to
enter or reenter the labor force. Indeed, several studies have found that the
EITC increases labor force participation among those eligible. The effect is
particularly strong for single parents. One study found that, between 1984
and 1996, the EITC accounted for roughly two-thirds of the 4.7-percentagepoint rise in labor force participation among single mothers with children.
By 2001 the labor force participation rate of these women had risen an additional 8.6 percentage points (Chart 3-3). In addition, studies have found the
EITC to be more than twice as effective as the minimum wage at lifting
families with children out of poverty, partly because of the program’s positive
employment incentives.

Box 3-3.The Earned Income Tax Credit
The EITC is a tax credit for the working poor. Benefits are paid only
to those who work, and these benefits rise as earnings increase.
Because the tax credit is refundable (that is, it can exceed the amount
of income tax otherwise due), families who pay little or no income tax
can benefit fully from the program.
The program works as follows. Families are eligible for the credit if a
member of the family works. The benefit amount depends on the
family’s labor market earnings, the number of children in the family,
and the marital status of the tax filer. In 2003 a family with two or more
children receives a subsidy of 40 cents for each dollar of earned
income up to $10,510. From that level the credit remains stable at
$4,204 until earnings reach $13,730 ($14,730 for a married couple).
Single individuals and families without children are also eligible but
typically receive less. The credit phases out over a range of income
from $13,730 through $33,692 ($14,730 to $34,692 for a married
couple). Over this range there is a relatively high implicit marginal tax
rate on earnings. For example, for each dollar earned between $13,730
and $33,692, a family with two or more children sees its EITC benefit
reduced by roughly 21 cents (Chart 3-4). According to the latest estimate from the Bureau of the Census, the EITC lifted 3.7 million people
out of poverty in 2001.

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Unfortunately, the EITC can also provide an earnings disincentive for
some low-income families who are already working. This disincentive comes
about because, over the income range in which the EITC is phased out,
recipients face a relatively high implicit marginal tax rate on earnings as the
subsidy is withdrawn. For example, for families with two or more children,
each additional dollar earned between $13,730 and $33,692 of income
reduces the credit by roughly 21 cents. In effect, this places an additional
21 percent tax on these families’ work efforts over that range of income. Of
course, if the phaseout were steeper and the implicit marginal tax rate higher,
fewer families would be affected by the disincentive. A further concern is that
a substantial amount of noncompliance or error occurs within the program.
The Internal Revenue Service has estimated that, of the roughly $31.3 billion
in EITC claims filed in 2000 for tax year 1999, between $8.5 billion and
$9.9 billion (27.0 to 31.7 percent) was improperly claimed and should have
been disallowed. This raises questions as to whether the resources devoted to
the EITC are being targeted in the most effective and efficient way possible.
In stark contrast to the EITC, which recognizes the dynamics of labor
market mobility and fosters labor force participation, the quintessential static
labor market policy is the minimum wage, or the closely related variant
known as the “living wage.” Policies such as these, which mandate that
employers pay their workers higher wages than they might pay voluntarily,
could be justified by the view that most labor market entrants will be stuck in
low-wage jobs and will not experience substantial wage growth over their
careers. Both the minimum wage and the EITC increase the earnings of
those low-income individuals who work. But whereas the EITC increases
employment, the minimum wage likely reduces it: the most recent studies
have found that significant employment losses are associated with minimum
wage policies.
What accounts for this difference in effects on employment? The EITC
effectively lowers the wage at which potential low-income workers are willing
to work but does not affect the demand of employers for their labor services.
A minimum wage, on the other hand, increases the cost to an employer of
hiring a low-wage worker and consequently reduces that employer’s demand
for labor services. Even when the minimum wage does not lead firms to
reduce employment, it has been found to reduce the amount of employerbased training young workers receive. Another reason why the EITC is a
more effective policy is that it is targeted to those workers who need it most:
workers, especially workers with children, from low-income families. The
minimum wage, on the other hand, applies to all workers whose wages
would otherwise be below the minimum; this includes low-wage workers
from families whose other working members earn high wages.

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Unemployment Assistance Policy
As noted at the outset, 6.0 percent of the labor force were unemployed in
December 2002; many more Americans face the risk of becoming unemployed. On December 14, 2002, the President called on the Congress to
extend unemployment benefits for the 750,000 unemployed workers whose
benefits would have otherwise expired. He further asked that this benefit
extension be retroactive, so that no one who is unemployed would fail to
receive any portion of benefits to which he or she is entitled. The Congress
responded to the President’s call, and on January 8, 2003, the President signed
this extension into law.
Unemployment and the risk of unemployment are a reality in a flexible
labor market like that of the United States. But this same flexibility also
results in higher overall employment than would prevail in an inflexible,
static labor market. Recognizing the job uncertainty inherent in a dynamic,
flexible labor market, government has long undertaken to provide social
insurance against the risk of lower income resulting from job loss. However,
the government’s unemployment policies should always take into account
the substantial and continual movement of workers into and between jobs
and into and out of unemployment.
The Federal-State Unemployment Insurance (UI) program provides unemployment benefits to eligible workers who are unemployed through no fault of
their own (with fault being determined under each State’s law) and who meet
other eligibility requirements set by each State individually. Workers who are
unemployed because they are new labor market entrants, have recently reentered the labor market, have quit a job, or were fired for cause are not eligible
for UI benefits. Although the formula used to determine benefits varies from
State to State, the dollar amount always depends on the worker’s previous
earnings up to a specified maximum. There is also a minimum UI benefit for
workers with especially low earnings. Because of this truncated benefit structure, the UI replacement rate (the ratio of the benefit to the recipient’s
previous earnings) is higher for low-paid than for high-paid workers, making
UI relatively more attractive to those who earned low wages while working. In
most States workers can receive up to 26 weeks of UI benefits; States with
unusually high unemployment may offer an additional 13 weeks of extended
UI benefits.
Statistics on the duration of unemployment show that although most
unemployment spells are short, their average duration is longer in the period
immediately following a recession. (These statistics cover all unemployed
workers, not just those receiving UI benefits.) On average over all recessions
and expansions since 1970, the median duration of unemployment has been
8.2 weeks in the year following a recession and 6.6 weeks at other times.
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Similarly, 38.2 percent of unemployment spells are of 5 weeks or less
immediately after a recession, compared with 44.0 percent at other times.
However, the surveys used to generate most labor market statistics may
overstate the duration of the typical unemployment spell. In one study that
examined completed spells of UI recipients after the unemployed worker had
found another job, it was estimated that 35 percent had returned to work
within 4 weeks of their job loss.
The most recent recession has followed the pattern of previous recessions:
the median duration of unemployment spells rose from 6.4 weeks in March
2001 to 9.6 weeks in December 2002. In March 2002 the President
responded to this need by signing the Job Creation and Worker Assistance Act
(JCWAA), which provided an additional 13 weeks of temporary extended
unemployment benefits to all eligible unemployed workers, and in January
2003, as noted above, the President again extended unemployment benefits.
Any time that policymakers consider offering or extending UI benefits,
they face a difficult tradeoff. UI can provide valuable assistance to unemployed workers, but it may also create a disincentive for benefit recipients to
return to work. Unemployed workers who rationally evaluate their options
may postpone accepting new work until their UI benefits are exhausted or
nearly exhausted. The result is higher unemployment and longer average
spells of unemployment. In the study cited above, for example, 40 percent of
those who had not received UI benefits, but only 35 percent of those who
had, returned to employment within 4 weeks of their job loss. This
5-percentage-point difference hints at the disincentives built into UI, since
fewer of those receiving it returned to employment quickly. Another study
found more direct evidence: each additional week of UI benefits was estimated to increase the duration of the average unemployment spell by about
a day. Many other studies have also found an association between the level of
weekly UI benefits and the duration of unemployment. Still more evidence
comes from Europe, where most countries have more expansive UI policies
than the United States and have higher rates of unemployment and longer
average unemployment spells. Although these differences in unemployment
outcomes may not be due to differences in UI policies alone, the totality of
the evidence suggests that they contribute.
Chart 3-5 illustrates another aspect of the relationship between the
availability of UI benefits and incentives to find a new job. Unemployed
workers who receive UI benefits are more than twice as likely to find a job in
the week before their regular benefits expire than in the several weeks immediately preceding. As noted above, UI benefits expire after 26 weeks unless
extended, in which case they expire at 39 weeks (for workers receiving either
extended UI benefits or temporary extended UI benefits). Perhaps not coincidentally, peaks in the fraction of unemployed workers finding work also
122 | Economic Report of the President

occur around these expiration dates. Among unemployed workers who do
not receive benefits, in contrast, there is no substantial difference in the
likelihood of finding a job at these points in their unemployment spell.
Moreover, although in theory workers should benefit from the longer time
that UI allows them to search for a new job, evidence of such a benefit is
hard to come by. Some States have experimented with giving UI recipients a
cash bonus if they start a new job before exhausting their benefits. These
reemployment bonuses have been found to reduce the number of weeks of
UI receipt, as was hoped. But researchers also found that those unemployed
workers who received bonuses—and consequently returned to work
sooner—did not, on average, end up taking lower paying jobs upon reemployment than those who did not receive bonuses. These findings suggest
that the longer period of time that traditional UI recipients remain unemployed does not necessarily lead them to find jobs better matched to their
skills. One possible downside to the reemployment bonuses is that the
prospect of the bonus may induce more unemployed workers to claim UI in
the first place, especially if they believe they will find work quickly and therefore might not bother to claim UI were it not for the bonus.
The President’s Personal Reemployment Accounts proposal, announced
on January 7, 2003, builds on the demonstrated potential of reemployment
bonuses to speed unemployed workers’ reentry into the work force. The

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proposed accounts would also add flexibility to the provision of training for
unemployed workers while avoiding penalizing those who quickly return to
work. Under the proposal, qualifying unemployed workers would each be
given an account with a value of $3,000, which the recipient could use for
reemployment services, training, or supportive services such as transportation
or child care. Recipients who become reemployed within 13 weeks of
receiving their first UI payment would be able to retain any balance
remaining in the account as a cash reemployment bonus. Those who do not
find work within that period would not be able to cash out their account but
could continue to use it for services while receiving UI benefits.
The President has proposed that States be granted a total of $3.6 billion to
create the new accounts, enough to provide immediate assistance for up to
1.2 million unemployed workers. The accounts would be targeted at those
unemployed workers who are very likely to exhaust unemployment benefits
before finding a new job. In some circumstances, States would be able to
provide the accounts to those unemployed workers who have already
exhausted their UI benefits within the last 3 months.
The flexibility that the new accounts would provide in accessing unemployment services and benefits is important, because research has shown that the
economic impact of unemployment differs greatly from worker to worker,
reflecting differences in their underlying skills and in their circumstances. For
those unemployed workers whose skills are no longer valued in the marketplace, extensive retraining may be appropriate. Other unemployed workers
may need help relocating or weathering a spell of unemployment but have
marketable skills and require little or no retraining. The President’s proposal
recognizes that the people best suited to evaluate their current skills and match
them with market opportunities are the displaced workers themselves.
Personal Reemployment Accounts are not intended as a replacement for
UI but rather would be structured as a new component of the UI system.
They would be offered as an additional option to those UI recipients who,
under current UI rules, are referred to reemployment services. Eligibility for
an account would be a one-time event.
Who would be eligible to receive Personal Reemployment Accounts? In
October 2002 there were 8.2 million unemployed workers, and in that same
month roughly 700,000 workers received first payments from the UI system.
Current law requires that States identify those UI applicants who are likely to
exhaust their benefits and refer these individuals to reemployment services.
Although each State applies different criteria, the factors used to identify
these workers include local unemployment rates, level of education, recent
job tenure, and prior employment in an industry or occupation in decline or
particularly hard hit by economic downturn. From July 2001 through June
2002, 10.4 million individuals began to receive UI benefits, and 1.2 million,
124 | Economic Report of the President

or about 12 percent, were judged to be very likely to exhaust 26 weeks’ worth
of regular UI benefits and were referred to reemployment services. Personal
Reemployment Accounts are targeted to those workers.
In more specific terms, Personal Reemployment Accounts would work in
the following way. UI recipients identified by their State as being very likely
to exhaust UI benefits under current law already must register with the State’s
Workforce Investment Act program to become clients of the alreadyestablished network of one-stop career centers. These recipients would be
given the option of receiving in addition a Personal Reemployment Account
as part of the intensive services they receive. The career centers would administer the accounts on the recipients’ behalf. The worker would continue to be
eligible for and receive UI benefits and would be free to use the core services
provided by the one-stop career center. Personal Reemployment Accounts
thus represent additional dollars available to the unemployed recipient.
Funds from the accounts could be used for other training and support
services (such as transportation and child care) at the recipient’s discretion. The
career center would use an “advanceable” process such as smart cards or an
allowable billing process to permit recipients to make payouts from the account.
If the recipient is reemployed within 13 weeks of starting UI benefits, the
career center would pay him or her, in cash, any balance remaining in the
account. The account would then be closed. States would have the option of
providing the cash balance as a single lump sum or in two installments of
60 percent and 40 percent, the latter after the recipient has been on the new
job for 6 months. The one-stop career center would distribute these bonus
payouts according to the policy of the State in which it is located. After the
cash payout is completed, the recipient could continue to use all of the nocost automated and staff-assisted basic reemployment services available at the
career centers. He or she would not, however, be eligible for intensive services
such as counseling, case management, or training under the Workforce
Investment Act for a period of 1 year after the cash payout. Recipients who
do not find employment within 13 weeks of starting UI benefits would be
able to continue to use the resources in the account for intensive, training, or
supportive services.
The potential to receive a reemployment bonus would provide eligible
workers a greater incentive to find new employment. At various times from
1984 to 1989, four States—Illinois, New Jersey, Pennsylvania, and
Washington—conducted controlled social experiments to determine the
effectiveness of providing reemployment bonuses to unemployed workers. In
these experiments, a random sample of new UI claimants were told they
would receive a cash bonus if they became reemployed quickly. The advantage of these experiments is that the effect of offering a reemployment bonus
on the duration of unemployment and on earnings upon reemployment can
be directly evaluated by comparing the experiences of UI claimants randomly
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chosen to be offered a reemployment bonus with those of UI claimants not
chosen for the bonus (who received the regular State UI benefit).
An evaluation by the Department of Labor of the reemployment bonus
experiments conducted in the States of Washington, New Jersey, and
Pennsylvania showed that a bonus of $300 to $1,000 motivated the recipients to become reemployed, reduced the duration of UI by almost a week,
and resulted in new jobs that were comparable in earnings to those obtained
by workers who were not eligible for the bonus and remained unemployed
longer. Similarly, a study of the experiment conducted in Illinois found that
a reemployment bonus of $500 reduced the duration of unemployment by
more than a week and did not lead to lower earnings at the worker’s next job.
Therefore it is likely that giving unemployed workers the option of receiving
the unspent balance in their Personal Reemployment Accounts will provide
them an incentive to find a new job quickly, reducing the time spent unemployed, but will not result in workers taking lower paying jobs than they
would get if they searched longer.
A potential problem with Personal Reemployment Accounts is that, like
other reemployment bonuses, they may make UI benefits more attractive for
unemployed workers who expect to find new employment quickly and thus
would be unlikely to apply for traditional benefits. However, the fact that
Personal Reemployment Accounts would be targeted to those workers whose
characteristics are highly correlated with long-term unemployment makes it
much less likely that the accounts would induce entry into the UI system.
Workers adversely affected by international trade are eligible for support
from another Federal program separate from the UI program: the Trade
Adjustment Assistance program. To further assist these dislocated workers,
the President and the Congress extended benefits under the program as part
of the Trade Adjustment Assistance Reform Act of 2002. The main features
of this part of the legislation include an extension of eligibility and an expansion of benefits. To be eligible for these benefits, laid-off workers must have
been working in an industry in which either sales or output has declined, and
increased imports must have contributed importantly to their being laid off.
(Workers subjected to partial rather than full layoff are also eligible.) Benefits
include both cash and training benefits, a tax credit for health care expenses,
and eligibility to participate in State-run high-risk insurance pools and other
State-based efforts to extend health care coverage. A pilot program for wage
insurance has also been launched for these workers. The program offers a
wage subsidy for eligible workers over 50 who take a new job at a lower
salary. The subsidy pays half of the difference in wages between the old and
the new job, up to $10,000. This program is particularly noteworthy because
it provides a direct incentive for seeking reemployment quickly.

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Dynamics of Program Participation
and Social Policy
Government social support is, of course, not limited to the unemployed.
Disability and spells of low income resulting from any cause are additional
risks against which the government may have a role in providing social insurance. In 2002 approximately 2 million families received TANF cash
assistance in any given month; another 5.2 million individuals received
Supplemental Security Income (SSI) payments, 6.9 million received Social
Security Disability Insurance (SSDI) payments, and some received both.
Most spells of welfare benefit receipt are of short duration: studies of
AFDC typically show that half of such spells ended within 1 or 2 years.
However, a significant fraction of welfare spells last a long time. In a study
conducted before the passage of welfare reform in 1996, 18 percent of spellswere found to last 5 years or longer, and one-quarter of recipients had spent
10 years or more on welfare, although not necessarily all in one spell. Since
1996, substantial progress has been made: welfare caseloads have fallen by 54
percent, and is it likely, although no studies are yet available, that the duration of welfare spells has shortened as well.
SSDI provides benefits to disabled and blind individuals who are insured
through workers’ payroll tax contributions. The worker must have worked
and paid Social Security taxes for a sufficient number of years and must have
worked recently to qualify for benefits. SSI, in contrast, is a means-tested
program for persons who are 65 or older, or of any age if the recipient is
blind or disabled. (A means-tested program is one in which eligibility is
determined by income or some other measure of the applicant’s means of
self-support, as opposed, for example, to a record of past contributions to an
insurance fund.) SSI is a program of last resort; its benefit formula takes into
account income received from other sources (including other Federal, State,
and local programs as well as private efforts). It does not duplicate these
sources but rather fills the gap between them and a specified minimum level
of income. Both SSDI and SSI define adult disability as the inability to
engage in any substantial gainful activity because of a mental or physical
impairment that is expected to result in death or that lasts for a continuous
period of at least 12 months. As of 2002 “substantial gainful activity” was
defined as work paying over $780 a month, when the impairment is other
than blindness, and over $1,300 a month for blindness. The average monthly
SSDI benefit in 2002 was $817, and the maximum monthly SSI benefit
was $545.
In contrast to TANF, participation in the SSDI and SSI programs has not
decreased in recent years (Box 3-4). Of course, unlike with TANF, individuals

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Box 3-4.The Growth in SSDI and SSI Disability Caseloads
The number of people receiving disability payments through either
the SSDI or the SSI program has increased dramatically. From 1990 to
2002, the number of SSDI recipients rose by 3.0 million, and from 1990
to 2001 the number of SSI recipients rose by 2.1 million. The President
supports a program that would address this rise in disability caseloads
by helping people with disabilities reenter the work force.
In 1999 Congress passed the Ticket-to-Work and Work Incentives
Improvement Act, which addresses the disincentives to return to work
that many individuals with disabilities face. The act allows recipients of
SSDI and SSI to choose their own vocational rehabilitation and support
systems, and it extends the Medicare benefits of SSDI recipients so
that they do not lose health benefits on returning to work. The act also
expands Medicaid eligibility for persons with severe disabilities. The
President has promised swift implementation of this initiative, to be
completed by the end of 2003.

apply to receive disability payments both because they require income support
and because health impairment limits their ability to work and perhaps
increases their demand for medical services. Thus one would expect a lower
rate of exit from SSDI and SSI than from TANF, even if their incentive structures were identical. Indeed, a low rate of exit has been the norm for these
programs: each year only about 1 percent of those who receive SSDI or SSI
leave the rolls to go to work.
How should welfare programs be designed for a dynamic labor market? If
labor markets were static, the design of social insurance to provide welfare,
like the design of UI, would be straightforward: the government would
simply provide cash assistance to needy families. In a dynamic labor market,
however, needy families typically require welfare benefits only for brief spells.
This very dynamism makes the design of welfare programs more difficult,
because policymakers again face a tradeoff. Welfare programs that provide
cash benefits without work requirements or time limits, such as the former
AFDC program, provide eligible families with needed assistance, but they
also create a disincentive for the adult members of those families to acquire
skills, to enter or reenter the work force, and to escape poverty. (They also
create a modest incentive to remain unmarried and to have children out of
wedlock, because the presence of a working husband reduces the benefit
whereas that of an additional child increases it.) The work disincentives that
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were part of AFDC (which in part remain under TANF) arose because
benefits were phased out as family income increased, imposing a high
implicit marginal tax rate on income earned by families receiving AFDC.
Although any well-designed means-tested public assistance program would
include an income phaseout and thus face this problem of high marginal
“tax” rates, the AFDC program unintentionally promoted dependency on
welfare and induced some families to have longer spells of welfare receipt.
The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 was motivated by the recognition that a better policy for families
requiring welfare assistance was needed. The reform granted greater program
authority to State governments and replaced the AFDC program, which was
based on Federal provision of matching funds to the States, with TANF, which
is a block grant program. These reforms essentially abolished Federal eligibility
and payment rules, giving States much greater discretion in designing their
own cash public assistance programs, and eliminated the Federal entitlement to
cash assistance. TANF not only gave States the freedom to set their own eligibility criteria and benefit levels but also created work requirements for
recipients, set a lifetime limit of 60 months of TANF assistance, and rewarded
States for strong performance in terms of reduced caseloads.
As noted previously, caseloads have fallen by 54 percent since PRWORA’s
enactment. However, because the unemployment rate was falling during
much of this period, an important question is whether the decline in caseloads was due to welfare reform itself or to the strength of the labor market.
A number of studies based on experiences during the period of extensive
State experimentation with welfare program waivers have found that
economic growth and the consequent decline in unemployment rates likely
had a secondary role in the decline in caseloads. As Chart 3-6 shows, the
correlation between unemployment and the number of AFDC/TANF recipients that is evident in the 1990s, and particularly after welfare reform, was
not evident in earlier periods of declining unemployment rates.
The era of innovation in welfare policy began with the granting of AFDC
waivers in the late 1980s: certain restrictions under the AFDC program were
waived for States wishing to experiment with alternative welfare program
designs. PRWORA continued this process, with the result that the particulars of State programs now vary widely. One important dimension on which
they differ is the rate at which welfare benefits are reduced as the recipient’s
income rises. This benefit reduction rate had been set by Federal law under
AFDC. Under PRWORA, many States have chosen a lower implicit rate in
an effort to increase the incentive to work and to provide more assistance to
low-wage workers. Lower benefit reduction rates, in conjunction with
increased work mandates, time limits, and work support programs, do
appear to have increased work incentives. By 2000, States reported that, in

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the aggregate, 34.0 percent of the welfare caseload were engaged in work or
job-related activities, up from 20.4 percent in 1994. Although States remain
subject to a Federal 60-month maximum time limit for individuals receiving
TANF funds, they can set shorter time limits or use State funds to extend
benefits. PRWORA has also increased expenditure on work support
programs such as subsidies for child care; between 1993 and 2000 annual
Federal child care subsidies almost doubled, from $9.5 billion to $18 billion.
With the recent economic slowdown and continued weakness in job
growth, a critical question is whether the number of TANF recipients will
increase to their pre-1996 levels. Analysis based on the relationship between
unemployment rates and recipients, combined with current forecasts for
unemployment in 2003 and beyond, suggests that the number of recipients
will increase only slightly and will not approach prereform levels (Chart 3-6).
Although it is still too soon to reach a final conclusion, welfare reform—
both TANF and the innovative policies implemented by States before and
since the enactment of PRWORA—seems to have had a remarkable impact
on public assistance caseloads. The reductions in caseloads, moreover, have
not been concentrated geographically but have been seen across the Nation.

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PRWORA has also shown positive, although still preliminary, effects on
employment, earnings, marriage rates, and the prevalence of single femaleheaded families.
At the same time that caseloads began to fall, employment increased
dramatically among the population most affected by the caseload declines.
Among those who reported receiving public assistance income in the
previous year, the share reporting being employed in March of the following
year rose from 19.8 percent in 1990 to 44.3 percent in 2000. Even among
those who remained on welfare, work effort greatly increased, possibly
reflecting both the work requirements and the rates at which benefits were
reduced with income. Among women on welfare, those who reported labor
earnings rose from 6.7 percent in 1990 to 28.1 percent in 1999. The research
literature suggests that approximately two-thirds of welfare leavers are
employed at any future point in time. In addition, employers have often
rated welfare recipients as performing as well as or better than other
employees. One study finds that former welfare recipients have higher rates
of wage growth than do other workers.
Poverty and income levels are directly tied to employment and wages.
Studies suggest that, just as it has raised employment, welfare reform has also
reduced poverty and increased income. For example, poverty among all
families headed by a single mother declined from 35.4 percent in 1992 to
26.4 percent in 2001. This finding is consistent with research showing that
States that adopted innovative welfare programs under AFDC waivers before
1996 recorded an average 2.4-percentage-point decline in the poverty rate of
the entire population of less skilled women. PRWORA itself was associated
with a 2.0- to 2.2-percentage-point decline in the poverty rate.
Research shows that, although many lost government assistance, single
mothers saw their incomes increase on average during the 1990s. Studies of
those who have left welfare reveal that around half remain in poverty, but
evidence also points to increases in family income over time. Data on
consumer expenditure meanwhile reveal increases in spending by lowincome single mothers in the 1990s.
Why has welfare reform been so successful? Studies of the States’
experiments with work requirements under AFDC waivers suggest that these
requirements led to increases in employment and reductions in welfare
payments. The effect of time limits is less well established, because few recipients have yet exhausted their eligibility under PRWORA, and evidence from
those States that implemented time limits as part of their AFDC waiver
programs is mixed.

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Fostering Skill Development
Labor market experience fosters the development of valuable skills. As
noted earlier, in addition to formal educational institutions, family members
and firms play a central role in skill development in the modern economy.
Job mobility, workplace education, and on-the-job learning by doing
account for as much as 50 percent of all skill formation. Training on the job,
together with simply the experience of being in the labor market, has been
found to be more effective at increasing the earnings of young workers than
are government training programs. Indeed, evidence from evaluations of
formal, publicly provided job training programs for youth demonstrates that
they have little or no impact on earnings.
When younger workers change jobs, the switch is usually accompanied by
an increase in wages, possibly because they have both increased their skills
and moved to jobs that use those accumulated skills more effectively. In
contrast, job changes for more experienced workers often result from job loss
and may result in lower earnings. Experienced workers who lose their jobs at
a given time are more than three times as likely to experience one or more
additional spells of unemployment in the following 2 years than similar
workers who did not lose their jobs at that time. In addition, more than onequarter of experienced workers who lose their jobs suffer substantial wage
reductions when they do return to work. The reductions in employment are
short-lived: within 4 years of the job loss, workers who lost their jobs have a
virtually identical likelihood of being employed as workers who did not lose
their jobs. But the wage losses are long lasting: 4 years after a job loss, the
average weekly earnings of job losers are 10 to 13 percent below those of
workers who did not lose their jobs. These permanent declines in wages
likely reflect a deterioration in the value of the skills these older workers had
previously acquired. This makes fostering the reacquisition of skills among
experienced workers who have lost their jobs a policy priority.
Some types of worker retraining have been effective at increasing the
earnings of displaced workers. One evaluation of a training program that
subsidized community college attendance by displaced workers found
that 1 academic year of community college raised these workers’ earnings by
about 5 percent.
Technically oriented vocational skills and science and math skills are
particularly important for displaced workers, because investments in these
skills result in much higher returns in the labor market than does non-technically oriented training. One study found that the expected return on
earnings from a curriculum that provides an academic year of more technical
and applied coursework ranges from 10 to 15 percent.

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The labor market rewards skill accumulation and investment in human
capital. In particular, it rewards with higher wages those who obtain more
schooling. Studies estimate that each additional year of education increases a
worker’s wages by 6 to 10 percent on average. The Bureau of Labor Statistics
reports that, in the fourth quarter of 2002, bachelor’s degree holders over the
age of 25 had an unemployment rate of 3.0 percent, and those working fulltime earned a median weekly income of $944, whereas workers with only a
high school degree earned a median weekly income of $545 and had an
unemployment rate of 5.1 percent. Americans have responded to the benefits
of human capital investment: in 1959 only 2 in 10 jobholders had some
college education; today roughly 6 in 10 are college educated.
The benefits of education not only are large but have increased. The
difference between the average earnings of college-educated workers and
those of high school-educated workers has increased by almost 70 percent
since the early 1980s. Education may also generate gains for society at large:
it is correlated with better public health, better parenting, lower crime, a
better environment, wider political and community participation, and
greater social cohesion, all of which may contribute to economic growth.
Earnings increase with age, with increased tenure on a job, and with the
accumulation of both general and job-specific human capital. Between 1963
and 1989, men with 30 years of job experience earned 75 to 85 percent
more, on average, than men in their first 5 years out of school. Furthermore,
one study finds that the past three decades have witnessed an increase in this
premium: whereas in 1969 high school-educated men with 30 years of work
experience earned 62 percent more than new entrants with the same education, by 1989 they were earning 110 percent more. In addition, workers who
have been at the same job a long time tend to stay there: accumulated tenure
is negatively related to turnover rates. The rising importance of experience
points to the value of employer-provided training. One study finds that onthe-job training accounts for at least two-thirds of the growth in wages in any
given year.
The President, recognizing the individual and economy-wide benefits of
an educated society, has vowed to make educating every child in America a
top priority. On January 8, 2002, he signed into law the No Child Left
Behind Act, designed to improve elementary and secondary education. The
act requires stronger accountability and high standards of achievement, to be
measured through annual testing of third through eighth graders and
publicly released report cards of school performance. It gives students who
attend low-performing schools, and their parents, greater scope to seek better
options. The act gives State and local governments greater control over
Federal education funding, which was increased by 49 percent from its 2000
level, to $22.1 billion in 2002. It creates a highly qualified teacher initiative,

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supported by investment, research, and training, and it increases Federal
money devoted to the teaching of reading. The Administration’s commitment to education highlights the importance of investing in the Nation’s
human capital, benefiting both individuals and the economy as a whole.

Conclusion
Policymakers can help labor markets work better, but they need to
remember that labor markets are dynamic, and that the policies that work
best for a dynamic labor market are very different from those that work best
for a static labor market. Static labor market policies may unintentionally
induce workers to accept longer spells of poverty and unemployment and to
remain in lower paying jobs. The policies described in this chapter should
encourage mobility and help workers smooth over the difficulties they
encounter during labor market transitions.

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C H A P T E R

4

Regulation in a Dynamic Economy

C

ompetition is essential to the vitality of the American economy. Both
government and the private sector play important parts in creating
markets that are competitive, and thus efficient and equitable. The private
sector is the primary source of competition and innovation, whereas the
government, often through its regulatory activities, enforces property rights
and contracts, the necessary foundations for competitive private enterprise.
In addition, the government provides those goods and services that the
private sector cannot profitably produce, such as national defense, public
safety, a more healthful environment, and social programs to benefit the
underprivileged. Together government and the private sector can work to
produce a vibrant, dynamic economy that offers its people the greatest
possible opportunity to satisfy their wants and needs. To realize these benefits, the government must work to foster flexibility and dynamism in the
economy by promoting sound monetary, fiscal, tax, and regulatory policies.
This chapter focuses on the role of Federal regulation in fostering or
hindering economic dynamism. By its nature, regulation can be a doubleedged sword. Although some demands for regulation reflect a desire to
improve the efficiency of intrinsically imperfect markets, other demands for
regulation seek to change market outcomes, for reasons that range from the
compassionate to the opportunistic. Well-designed regulation can provide
society with improved market outcomes and other benefits; poorly designed
regulation stifles economic efficiency and dynamism. Regardless of their
underlying motivation, many regulations are not well designed and impose
both short-run efficiency costs and long-run dynamic costs on the economy
that far exceed their benefits to individuals or society. This Administration
supports the development of Federal regulation based on sound science,
economics, and law—all important facets of a viable regulatory policy.
The definition of regulation encompasses both any authoritative rule
dealing with details or procedure, and any rule or order issued by an executive authority or regulatory agency of a government and having the force of
law. Regulation can thus be promulgated by government at all levels, or by
the private sector, or by private authorities working in conjunction with
government agencies. This chapter largely focuses on Federal regulation and
the potential of private sector regulatory efforts, but the principles discussed
can apply to regulation at all levels of government. Also important to recognize is that regulatory efforts generally consume a large amount of economic
resources and that the demand for regulation has been growing over time.
135

Two basic approaches to government regulation of economic activity can
be identified, each with very different implications for the dynamics and
efficiency of the economy: command-and-control regulation, and performance- or incentive-based regulation. Command-and-control regulation
typically uses the coercive power of the government to intervene in market
activity by setting prices, quantities, technological requirements, or barriers
to market entry or exit. Performance-based, market-oriented regulation, in
contrast, harnesses market forces to achieve the same social goals. Regulation
of this type includes taxes, subsidies, and cap-and-trade permit or quota
systems. Recent experience, notably in the area of environmental regulation,
has demonstrated that these market-based methods of regulation, which
regulate results and not processes, achieve dynamic and static efficiencies that
command-and-control regulation does not. This Administration’s regulatory
policy recognizes the importance of making regulation efficient by focusing
on the use of performance- and incentive-based approaches.
Regulatory review and regulatory reform, including reductions in the
amount and scope of regulation, provide a safety valve when the costs and
other burdens of regulation become excessive. Such a safety valve is important because some regulations, even when first introduced, may impose
short-run and long-run costs that exceed their economic and social benefits.
Moreover, new scientific knowledge, new technologies, other economic
changes, demographic changes, and changes in the social consensus can
make even well-formulated, flexible regulations obsolete. For example,
society should not abandon health and safety regulation that protects people
or the environment, but regulatory reform may achieve such protection in
ways that are more efficient. This greater efficiency may arise from applying
new science and technology, focusing on outcomes rather than processes
or technologies, or permitting regulated parties greater flexibility to meet
specific performance requirements and providing market incentives for
them to do so.
Recent changes from command-and-control to performance-based food
safety regulation by the Department of Agriculture illustrate this potential.
Until recently, meat and poultry processors were required to adhere to strict
regulations that prescribed in detailed fashion how food safety objectives
were to be achieved. Inspectors relied heavily on human sight, smell, and
touch to determine the safety of raw meat and poultry products. Although
the traditional approach has not been totally displaced, the new regulation
has supplemented this inspection process with scientific practices for identifying and reducing microbial contamination. This new approach gives the
industry a greater incentive to take advantage of new technology and scientific information to identify pathogens, and increased flexibility to take
appropriate measures to improve food safety.
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Similarly, in some potentially competitive industries, government controls
on prices or profits effectively shield certain government-favored companies
from competition. Here reductions in regulation can yield benefits for
consumers, potential market entrants, and the economy as a whole.
Regulatory reform in the airline, railroad, and trucking industries and the
lifting of geographical restrictions on bank expansion are all cases in point.
The resulting increase in competition in these industries has caused prices to
fall, innovation to increase, and resources to be more efficiently allocated.
These issues are of particular importance now, a time of increased demand
for regulation to restore the Nation’s sense of security and economic wellbeing. The national effort to enhance homeland security has resulted in the
rapid development and implementation of new regulations for a variety of
industries and activities. The expected payoff to enhanced homeland security
is reductions in the risk of future terrorist events and their consequences. The
response to the need for greater security in economic activity—whether, for
example, in the form of Federal air marshals on commercial flights or in the
form of backup computer systems—raises the overall cost of transacting business. It is in the Nation’s economic interest to balance the benefits of new
regulations with their costs.
Regulatory review and regulatory reform offer mechanisms to reduce these
costs, particularly as more is learned about the effectiveness and efficiency of
various types of regulation. Unfortunately, some of the most costly recent
episodes of market instability, such as the California energy crisis of 2000-01
and the crisis in the savings and loan industry in the 1980s, have been associated with poorly designed efforts at reduced regulation. The consequent
fear of further instability generates resistance to regulatory reform, even
when it holds the promise of significant economic benefit.
This chapter continues with a discussion of what causes demand for
regulation and how such demand can lead to regulations that may or may
not be economically beneficial. The chapter then considers several principles
that produce smarter regulation and illustrates those principles with a
number of recent case studies. Of course, no matter how beneficial a regulation is when first introduced, some regulations may outlive their usefulness.
Thus the discussion also addresses issues of regulatory reform. Because
reform can be a complex process, the discussion specifically focuses on some
of the potential pitfalls of regulatory reform. The chapter concludes by
showcasing how the Administration’s regulatory policies regarding the
environment embody the principles of sound regulation.

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The Demand for Regulation
As already mentioned, some regulations arise from the recognition of
market imperfections that hinder economic efficiency or harm public health
or safety. Other regulations stem from the desire of individuals, interest
groups, or society at large to modify market outcomes because of dissatisfaction with the distributions of production, income, and wealth that can result
even when markets function well. Unfortunately, these sources of demand
for regulation can come into conflict.
Regulation to correct market imperfections and market failures can
enhance the productivity of an economy and the wealth and satisfaction of
its people. This motivation also addresses the lack of markets for certain
important goods, such as environmental quality. In contrast, the second
motivation, whether the result of altruism or economic “rent seeking,” inherently involves a net economic cost. This cost arises because resources will be
allocated to or captured in less productive uses than would have been the case
absent the regulation. It is often difficult to distinguish between these motivations, because the effects of a given regulatory proposal usually have aspects
of both. Market-improving regulations do create winners and losers, and
although the winners should be able to compensate the losers, in practice
this is rarely required. Similarly, regulations whose effects are primarily
redistributive may often have aspects consistent with the public good.
Distinguishing between these two types of demand for regulation is an
important function of economic analysis and a motivation for requiring such
analysis of major Federal regulations. However, even regulations that primarily
seek to enhance economic efficiency and whose benefits exceed the associated
costs in a static world can unduly harm economic dynamism in the real world
and may have unforeseen consequences. This happens because unintended
consequences may at times prove important, and in the long run regulation
may lead to an inferior, less efficient outcome.

Regulation to Address Market Imperfections
Imperfections in the market cause resources to be misallocated or allocated
inefficiently. Unless these imperfect markets are regulated or overseen in
some manner, the result can be the inefficient use of resources, waste, and
lost economic value. Generally, this occurs for any of four primary reasons.
First, external costs and benefits (often called spillovers) may not be taken
into consideration when private production or consumption decisions are
made. Second, the private sector may either underproduce or fail to produce
public goods. Third, firms or consumers may lack information required to
allocate their resources efficiently. Fourth, if existing firms have market
power, they may underproduce and overprice their goods.
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Ensuring Public Health and Safety
Public health and safety issues can arise because of economic spillover
effects. (Spillover effects, or externalities, occur when one person’s actions
unintentionally affect another person for good or ill, and no compensation is
made to the person providing the good or suffering the ill.) Depending,
among other things, on who holds the relevant legal rights, on the costs of
enforcing those rights, or on the costs of negotiating other arrangements,
producers or consumers may have little or no incentive to consider the costs
borne by, or benefits enjoyed by, other people as a result of their actions.
Markets provide an incentive for producers to maximize the profits they earn
and to minimize the costs they must bear directly, but not to consider the
profits or costs of others. In the absence of regulation, for example, profitmaximizing producers may choose cheaper, more polluting production
processes, dispose of hazardous waste with less care for health and environmental consequences, or take greater risks of inadvertently harming the
environment than is socially optimal. Although private negotiations may lead
to full consideration of these external costs when few parties are involved,
this approach quickly becomes unworkable as the number of parties
increases. Thus, without government or private regulation, public health and
safety may not be adequately protected.
Specific examples of spillover effects on health and safety and of the associated
regulatory responses abound. For example, in the past, chlorofluorocarbons
(CFCs) were used as propellants in aerosol cans and as coolants in air conditioners. CFCs have been identified as a major cause of atmospheric ozone
depletion, which in turn is associated with adverse human health and environmental outcomes. These outcomes are external to private decisions to use CFCs
as coolants or propellants. Ultimately, the Environmental Protection Agency
(EPA) banned certain specific uses of CFCs as propellants in 1978, and an agreement in early 1990, the Montreal Protocol, banned their use internationally.
The choices of consumers, too, can produce spillover effects that influence
health and safety. Cigarette smokers may not fully take into account the
displeasure of or the health risks to others who breathe their secondhand
smoke. Drivers of automobiles that emit pollutants such as hydrocarbons
and nitrogen oxides may choose not to curtail their use on days when tropospheric ozone is above healthful levels, especially if the unhealthful air is
blown to another area. In such cases a role may exist for public policy or
private collective action to improve or protect the public welfare.

Ensuring Economic Efficiency
Spillover effects are not limited to costs, such as the damage to public health
and safety in the examples just given. At other times, markets may not suffice
to allow producers to capture the spillover benefits of their activities. For
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example, when an attractive real estate development increases surrounding
property values, or a successful tourist attraction lures customers to nearby
businesses, other property owners and these businesses may benefit without
having to compensate their benefactor. It is easy to imagine circumstances
that can lead to the underproduction of goods or services that provide these
external benefits.
Private producers may also underproduce or fail to produce public goods.
These are defined as goods that are both nonrival in consumption and
nonexcludable. Goods that are nonrival in consumption are those that can be
enjoyed by many people without reducing their availability to others. A
simple example is a piece of music: once written, a song or a symphony can
be performed and enjoyed over and over without ever being exhausted. For a
nonrival good to be a public good, however, it must also be nonexcludable;
that is, its use cannot be limited to only those who pay for it. Examples of
nonrival, nonexcludable public goods include national defense, police
protection, public health, a clean environment, wilderness preservation,
and public parks.
Public goods merit the name because although they are desirable to
produce, their nonexcludability makes it unprofitable for private businesses
to produce them, or at least to produce them in sufficient quantity to maximize economic efficiency. “Free riders” can enjoy these goods without having
to pay. Similarly, nonrival goods tend to be underproduced because, individually, consumers may be unwilling to pay a sufficiently high price to warrant
their production even though, collectively, their willingness to pay exceeds
the cost of their production. This poses the immediate question of who,
then, will provide public goods. In certain cases it makes sense for the
Federal Government to step in and provide the good or service at an efficient
level, because private provision will be insufficient.
Information is also essential to the efficient allocation of resources.
Consumers and producers must have sufficient knowledge of the characteristics and quality of products, their prices, and other information to make
good economic decisions. The absence of sufficient information can dampen
market activity because of distrust between potential buyers and sellers.
Alternatively, too many transactions may occur if buyers are too trusting and
make purchases they would have avoided given full information. In either
case the result is a misallocation of resources and lower economic well-being.
Markets as diverse as those for used cars and financial services are subject to
informational imperfections, and regulation has often stepped in to address
these imperfections. For example, the Food and Drug Administration
requires nutrition content labels on many foods so that potential consumers
have the information they need to protect their health.

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The exercise of market power is a fourth reason why market outcomes may
be less than optimal. Market power arises when there are too few producers
in a market to ensure adequate competition and significant barriers to entry
exist. Firms with market power may choose to underproduce, overprice, or
limit consumer choices in terms of quality and service. The exercise of
market power hurts consumers while allowing firms to use resources
inefficiently or to make extraordinary profits. These issues are the subject of
antitrust policy and regulation, which last year’s Report discussed in detail.

Regulation to Address Specific Interests
A second set of demands for regulation arises from the desire of individuals,
interest groups, or society at large to modify the distributions of output,
income, and wealth that markets produce, whether or not those markets function well. In contrast to the first set of demands for regulation, which focus on
improving economic efficiency, this set focuses directly on distributional
issues. For moral or altruistic reasons, members of society might conclude that
the distributions determined by the market are not entirely fair. Market
economies are efficient at producing wealth, but they distribute income in a
way that creates a gap between the well off and the poor. For example, those
with rare skills that are highly sought after will, by the laws of supply and
demand, receive high incomes, while those with more common skills that are
not widely demanded will receive lower incomes.
Through its democratic processes, American society has often demanded
regulatory actions that alter these distributions of income and wealth. Many
of these actions seek to expand the availability of education, training opportunities, medical care, welfare, nutrition, housing, or other goods and
services, especially for lower and middle-income individuals. An example is
regulation under the Americans with Disabilities Act, which requires that
persons with disabilities be accommodated in public, work, and educational
facilities. Another example is the requirement of equality in support for men’s
and women’s athletics under Title IX of the Education Amendments of
1972, which prohibits discrimination based on sex in education programs or
activities that receive Federal financial support. Unfortunately, fulfilling these
demands often entails a tradeoff between maximizing production and
achieving a more equal distribution of that production. Accepting something
less than the maximum possible output may be economically desirable if
members of society care about each other’s well-being.
Sometimes, however, the desire to circumvent market outcomes has
motivations that are far from altruistic. “Rent seeking” is the process by which
interest groups spend resources to influence legislative and regulatory processes
to receive favorable treatment for themselves. This, of course, is a normal and

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legitimate exercise of political rights in a democratic society. However, the
results have economic consequences that are important to understand.
Regulation can foster industry interests in many ways. Many regulations
set prices, allocate marketing quotas, or control the entry and exit of firms in
an industry. Such regulations bestow market power on firms in the target
industry, raising their profits much as in a private cartel, but with the
advantage of government sanctions and enforcement. For example, for years
the New York State Department of Agriculture and Markets, which issues
licenses to sell milk in New York, blocked the entry of out-of-state producers
into New York City’s milk market, thus allowing New York milk producers
to control the milk supply to the whole city. As a result, New Yorkers paid
more for their milk than did consumers in adjacent areas. For example, when
milk was imported from New Jersey to Staten Island, declines in the price of
milk were experienced as expected. In 1987 a Federal district court ended
the regime by ruling that the denial of licenses amounted to economic
protectionism and was unconstitutional.
Rent seeking can also result in product quality standards that restrict
supply or promote the interests of a dominant, established, or technically
advanced firm at the expense of new entrants or firms with less advanced
capabilities. For example, a dominant airline promoted the use of uniform
size templates for carry-on luggage at airport security checkpoints. Because at
least one competing airline had invested in larger overhead cargo bins to
attract customers, the dominant airline may have viewed the uniform,
restrictive templates as a means of negating this competitive threat.

Principles of Regulation
Although the two basic motivations for regulating described above may be
inherently at odds, during periods of political and market volatility both
types of demand for regulation increase. For example, since September 2001,
the terrorist attacks of that month, the ongoing threat of further terrorism,
and the war on terrorism as well as turmoil in financial and energy markets
have eroded Americans’ sense of security and well-being. As a result, the
Federal Government has received myriad proposals for new regulations or
regulatory authorities, and it has generated many proposals of its own. Areas
of proposed regulation related to homeland security include animal and
plant health, trade and immigration, airport security, airline security, port
security, chemical facility security, nuclear security, cybersecurity, the maintenance of backup facilities for critical components of the financial system,
terrorism risk insurance, airline war risk insurance, and money laundering,
among others. Recent corporate misbehavior and the resulting volatility in
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financial markets and certain energy markets have also led to a host of new
regulatory proposals on issues connected to corporate governance and
accounting (see Chapter 2 of this Report), trading of energy derivatives, safeguards for workers’ retirement savings, the conduct of investment research
by investment banking firms, and various issues related to information
disclosure and transparency in financial markets, among others.
No matter how pure and public-spirited the motivations for these proposals,
each has the potential to impose considerable costs on the economy. Especially
during a period of accelerating demand for regulation, understanding and
applying basic principles of good regulation will improve the chances of
achieving laudable regulatory goals without paying too dearly for the benefits.
The following questions can serve as guides when contemplating and designing
regulatory intervention to maximize public welfare:
• Can the market achieve the desired outcome without regulation?
• Can private sector regulation achieve the desired outcome instead of
government regulation?
• Will government regulation impede or distort market dynamics?
• Is there a less restrictive alternative to the proposed regulation?
• Are the costs justified by the prospective benefits, and how are both
distributed?
Imposing new regulation without careful consideration of each of these
questions risks inflicting an unnecessary burden on the economy, slowing
economic growth, and reducing the well-being of Americans. The significance
of each of these questions will next be examined in turn.

Can the Market Achieve the Desired Outcome?
Markets are powerful institutions. They allow an economy to adapt
quickly to changes in technology, availability of resources, consumer preferences, external threats, or other aspects of the environment in a way that best
meets the needs and desires of consumers and producers. The American
economy relies heavily on private initiative, mediated through the marketplace, to respond to change. Through the voluntary interactions of many
buyers and many sellers, markets create and reveal information about the
scarcity and value of goods and services and reward efficiency. By promoting
competition, markets induce producers to reveal the cost of producing additional goods and services, and consumers to reveal their willingness and
ability to pay for those goods and services. As consumers and producers
respond to market prices, resources are shifted among firms so as to meet
consumer demands at the lowest possible prices. By rewarding with profits
those firms that meet the desires of customers, and imposing losses on those
firms that do not, the market encourages and enables the migration of
resources to their most valuable uses.
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When markets alone cannot achieve these societal goals, performancebased, market-oriented regulation can be used to harness some of the positive
qualities of markets such as efficiency and flexibility. Such an approach is
desirable because the contrasting characteristics of markets and government
regulation imply that society can achieve greater flexibility and productivity
with greater reliance on markets and less on government regulation.
In contrast to the voluntary interactions of markets, government regulation
relies on the potentially coercive authority of the state to achieve desired ends.
Since government regulation is largely motivated by displeasure with market
performance or outcomes, it may ignore market information and may risk
directing resources away from their most productive uses. For the same
reasons, regulation may obstruct market signals and reduce flexibility in the
economy. Interference with market dynamics can reduce the rate of technological innovation and the efficient allocation or reallocation of resources
across firms or industries. Ultimately, such interference can reduce the rate of
economic growth. (This line of argument as it applies to developing countries
is further explored in Chapter 6 of this Report.)
Historical evidence on the conduct of commercial and investment banking
serves as an example of how markets can respond to challenges that might
otherwise be addressed by regulation. The Glass-Steagall Act of 1933 separated
commercial and investment banking in order to avoid conflicts of interest.
Researchers have shown, however, that market participants react in ways that
discourage such conflicts on their own. Thus regulation under Glass-Steagall
may have provided little additional benefit while preventing banks from
achieving economies of scale and scope.
During the 1920s, commercial banks circumvented existing rules
segregating investment and commercial banking services by establishing Statechartered affiliate banks that could underwrite securities. The Glass-Steagall Act
was passed in part as a response to the potential conflicts of interest that arise
when bankers have superior information relative to both investors and depositors. The primary danger is that when risky investment banking activities are
combined with commercial banking, bankers will be tempted to use their superior information to take advantage of less well informed investors or depositors.
In the absence of deposit insurance, depositors could be harmed if commercial
banks, through their investment banking affiliates, held risky or poorly
performing assets without appropriately increasing their equity capital to
protect depositors from losses. With deposit insurance, this conflict of interest
arises with respect to insurers. It is generally mitigated through the imposition
and enforcement of minimum capital requirements, among other measures.
Interestingly, historical evidence indicates that banks in the 1920s actually held
higher capital-to-asset ratios before safety net regulations were imposed. Recent
international experience suggests that banks substitute government deposit
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insurance or public capital for private capital. Thus the safety net may induce
bankers to exchange one form of prudent behavior for another.
Researchers have also found that investors in that era penalized the
“universal banks” that offered both investment and commercial banking
services: the securities underwritten by universal banks commanded lower
prices and had to pay higher yields when investors perceived a conflict of
interest. To avoid being thus penalized in the markets, universal banks tended
to create distinct investment banking affiliates, with their own capitalization
and boards of directors. Evidence shows that firms that organized investment
banking services as a department rather than as a separate affiliate obtained
lower prices for securities before Glass-Steagall’s enactment. Analysis of the
quality of securities sold by integrated banks shows that quality did not suffer
from the joining of investment and commercial banking services, and at the
same time banks benefited from economies of scale and scope through the use
of common resources, assets, and knowledge. Perhaps in recognition of this
evidence, the Congress passed the Financial Services Modernization Act (also
known as the Gramm-Leach-Bliley Act) in 1999, which repealed many of the
provisions of Glass-Steagall relating to the separation of commercial and
investment banking services. Chapter 2 of this Report further examines the
importance of market forces in providing appropriate incentives for socially
responsible behavior by corporate managers.

Can Private Regulation Suffice?
A common misconception is that government is the only source of
regulation. In fact, trade associations and other private organizations also
administer regulation. Private regulation may arise in response to the threat
of government regulation or as a spontaneous private solution to a market
imperfection. For example, private organizations are often effective at
providing regulation to overcome informational problems through standard
setting, certification, monitoring, brand approval, warranties, product evaluations, and arbitration. They often act in cooperation with government
regulators, certifying or guaranteeing compliance with government-set or
government-sanctioned standards, or acting as self-regulating organizations
under the purview of a government regulator. Such private regulations may
be effective because private regulators have their own independent,
reputational capital at risk and can enforce their regulations.
Just as markets and government regulators are imperfect, however, so, too,
are private regulators. And just as government regulators may face conflicts of
interest, so, too, may private regulators. For example, one form of private
regulation is the regulation of professional ethics by professional associations,
such as those in the medical and legal professions. Members of such boards
may face a conflict between the interests of consumers and the income
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potential of their fellow professionals. They may also be reluctant to reveal
professional misconduct for fear of reducing public regard for their profession. Private regulators, like government regulators, may also face incentives
or pressure to provide incumbent or dominant firms with competitive
advantages or barriers to competition.
Despite such imperfections, private regulation offers a variety of benefits
over government regulation in some circumstances. Because private regulatory mechanisms cannot be backed up with the use of coercive force, they
tend to be more flexible and have lower compliance costs. Private regulators
are less able to dictate command-and-control regulations, and therefore the
regulated businesses and individuals typically spend less time and other
resources complying. To be effective, private regulators need to be open to
suggestions from industry members, consumers and consumer groups,
universities and other scientific organizations, and government agencies. As a
result of these dynamic relationships, private regulators have a market incentive to closely follow changes and technological advances so as to preserve
their expert status and protect their reputation.
Private regulators face market pressures to control the burdens they impose
on businesses and consumers. These pressures can provide an incentive to
minimize their costs and facilitate flexibility. By increasing their own costeffectiveness, private regulators also lower compliance costs for businesses if
they operate in competitive markets. In contrast, although many government
regulatory agencies also rely on fees for their services, their budgets are set in
the political arena and may rely on general government revenue. Private
regulators have an incentive to provide firms with well-formulated guidelines
and firm-specific recommendations, helping firms reduce compliance costs
while meeting necessary standards. Private regulation may also require less
paperwork, which significantly reduces the time cost of regulation.
Although private regulators lack certain powers that governments have,
their regulation can nonetheless be effectively enforced through legally
enforceable contracts, sanctions (including revoking approvals, assessing
fines, and pulling products off the market), and public announcements. Both
private regulators and the companies that use their services also put their
reputations—often one of their most valuable assets—on the line. Firms
choose to comply with voluntary private regulation because they perceive it
as an important marketing tool, and the associated compliance costs as a
necessary cost of doing business rather than as a burden.
One example of successful and longstanding private regulation involves the
establishment by the insurance industry of an independent, not-for-profit
organization to test and certify product safety. This organization, founded in
1894, provides voluntary certification for a variety of industries and products
including electrical appliances, automotive products, medical appliances,
alarm systems, and chemicals. In 2001 alone, 64,482 manufacturers produced
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certified products, and 108,296 product evaluations were conducted. Beyond
testing and certification, this organization takes an active role in developing
industry standards. To protect their reputation for quality, many retailers are
reluctant to purchase goods unless they have received the organization’s
approval, even though Federal law does not mandate certification.
Furthermore, the market for safety certification and testing is competitive,
with at least 11 other private organizations providing similar services. In a
competitive market, all of these organizations face incentives to minimize the
cost of their services. Similar organizations exist to certify the environmental
soundness of products and services, showing that they meet established standards for reducing pollution and waste, conserving resources and habitats, and
minimizing global warming and ozone depletion.
These examples illustrate how independent private regulators can provide
a market-based solution to a market failure, namely, imperfect information.
In all these cases consumers cannot on their own readily verify production
processes or quality characteristics that are important to them. Imperfect
information is also important in financial markets, and there, too, the answer
has often been third-party verification. For example, several firms specialize
in providing risk ratings for firms seeking to issue stocks and bonds or enter
into customized derivatives contracts. This service helps firms market their
securities at more attractive prices, because third-party certification from the
credit rating agencies enhances the transparency of the risks associated with
these securities and the credibility of those offering them.
Some of the benefits of private regulation can most efficiently be captured
when private regulatory activity operates under government sanction. The
United States has a number of self-regulating financial organizations,
including stock exchanges and futures markets. These organizations operate
as private entities that establish rules, policies, and standards of conduct for
their members and member organizations. However, these regulatory activities are overseen and approved by a government agency: the Securities and
Exchange Commission in the case of stock markets, the Commodity Futures
Trading Commission in the case of futures markets. Government regulators
may also choose to work in cooperation with private, third-party certifiers.
For example, the Department of Agriculture recently completed the implementation of regulations governing the production and labeling of foods as
organic. These new standards rely primarily on independent, private sector
firms to certify that producers of foods claiming to be organic meet the
government-set standards. The market incentives faced by both the
producing firms and the certifying firms should help reduce the cost of
meeting and enforcing these standards from what it would be under pure
government enforcement.
Private regulation or government-sanctioned self-regulation may also be an
option for some aspects of homeland security. The chemical industry faces the
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risk of terrorist attack due to the potential to turn common, useful chemicals
into weapons of mass destruction. About 15,000 facilities in the United
States handle large quantities of dangerous chemicals already regulated under
the EPA’s Risk Management Program (RMP). These are chemicals that, if
released, would pose a significant threat to public health and safety.
Both private and public regulatory approaches could be used to improve
chemical site security. As an example of the former, one industry trade association imposed regulation on its members, requiring them to assess and
reduce their vulnerability to terrorist attack. However, only about 1,500 facilities, or 10 percent of those handling chemicals covered under the RMP, are
owned by members of this association. At least two public sector approaches
have been suggested to extend this regulation more broadly. A commandand-control approach would require certain designated actions or
technologies to reduce the threat. This approach focuses on reducing the use
and storage of chemicals, changing methods and processes, employing safer
technology, and generally improving security, all of which might reduce the
threat but fail to consider marginal (that is, incremental) risks or costs. An
alternative approach is a market-based mechanism, in which a chemical
facility would be required to obtain insurance coverage against liability
arising from an unanticipated release of chemicals, subject to review by the
appropriate government agency. The level of required coverage would
depend on an assessment of the facility’s vulnerability and the hazard to security, undertaken by the facility itself or its agent, which would include an
estimate of the probable range of losses resulting from a terrorist attack. This
insurance-based approach to chemical facility security would rely on market
flexibility to attain the socially desired level of security at the least cost.
This market-based approach has several advantages over governmentmandated standards. First, insurance prices that are adjusted for risk can
provide incentives for the owners and operators of chemical facilities to invest
in safety and security measures to the extent this is socially optimal. In
contrast, government-mandated standards may over- or underspecify investments relative to that optimum. Second, reliance on the insurance market
rather than the government to provide regulation gives owners and operators
the flexibility to implement the most efficient and cost-effective precautionary
measures given their facility’s existing technology and situation. Third, under
a government-mandated standards regime, chemical facility operators would
likely slow or halt the deployment of new security measures until any uncertainty about security requirements was resolved. In contrast, an
insurance-based mechanism, with its inherent flexibility, can build on existing
security measures, encouraging quicker deployment. However, the insurancebased approach will work only if private insurers are willing and able to
provide coverage at an affordable price and if the insurance industry itself is
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sufficiently competitive. If these conditions are not met, the appropriate
government agency could promulgate regulations mandating compliance with
certain safety standards but waive those standards for facilities that obtain a
sufficient level of insurance.

Will Government Regulation Impede or
Distort Market Dynamics?
Regulating economic behavior in a dynamic economy, especially through
traditional command-and-control regulation, is a laborious undertaking,
with the potential for unintended and unwanted results. Government regulation can lead to the expenditure of effort and resources inconsistent with
the initial regulatory intent. This happens because regulation does not
suspend or eliminate market forces but rather suppresses or redirects them.
When government promulgates and enforces regulations, it alters the incentives of economic decisionmakers (consumers, managers, and investors)
by changing costs, prices, information, or risks. Decisionmakers respond by
changing their behavior, often in ways that are unintended or even contrary
to the aims of the regulation. If regulation is static in design, failing to anticipate these reactions, the ratio of intended to unintended consequences tends
to diminish over time, which in turn may increase the demand for regulatory
reform. Dynamic regulation, in contrast, seeks to anticipate the reactions of
consumers and firms to regulatory changes, to ensure that the regulation
achieves the intended results.
Firms may respond to the regulatory constraints imposed on them by
increasing or decreasing production, entering or exiting industries, changing
lines of business, or developing new technologies. Consumers may look to
unregulated sources to obtain products or services that regulation has made
more expensive or rendered unavailable. Investors may shift capital from
regulated to unregulated industries or among research and development
projects to technologies that are more likely to be profitable under the regulatory regime. For example, when airfares were regulated and airlines
competed on the quality of their service, the airlines demanded that manufacturers develop faster, longer range aircraft. After regulatory reform led
airlines to adopt the hub-and-spoke system, allowing them to serve many
locations at less cost, they largely switched their new purchases to shorter
haul aircraft.
Performance-based regulation, too, can impede or distort market
dynamics. For example, corporate average fuel efficiency (CAFE) standards
distinguish between cars and light trucks, imposing less strict standards on
the latter. This provided automobile manufacturers with an incentive to shift
production away from cars to light trucks, to meet consumer preferences for

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larger vehicles as real fuel prices dropped. This regulation has also affected the
relative profitability of production locations for vehicles sold in the United States.
CAFE standards were established under the Energy Policy and
Conservation Act of 1975 in an effort to reduce oil consumption after the
1973 Arab oil embargo. At the time, high gasoline prices and long lines at
the pump induced a shift in consumer demand to more efficient vehicles.
The least expensive way to attain better fuel economy was to downsize
passenger cars, but this downsizing had two safety-related consequences: the
smaller vehicles were less stable when a driver lost control, and they offered
less protection in a collision. The result was an increase in traffic fatalities.
Because light trucks were used mostly as commercial and agricultural work
vehicles and made up a relatively small part of the market, lower fuel
economy standards were instituted for them than for passenger cars.
The effects of the 1970s oil crisis dissipated when gasoline prices declined in
the 1980s, and American consumers again demanded larger vehicles. Because
the CAFE standard was substantially lower for light trucks than for passenger
cars, manufacturers designed their new larger vehicles as minivans and sport
utility vehicles (SUVs) to qualify as light trucks rather than passenger cars.
Consumer acceptance of these vehicles has sharply increased U.S. sales of light
trucks (including minivans and SUVs), raising their share of the vehicle fleet
from approximately 20 percent in 1976 to 28 percent in 1985 and nearly 50
percent in 2001 (Chart 4-1). When the CAFE standards are binding, manufacturers must sell smaller, more fuel-efficient vehicles for less but can sell larger,
less fuel-efficient vehicles for more than they would in the absence of these standards. The shift in vehicle production from passenger cars to light trucks has
thus offset the intended effect of the regulation.
Another market-distorting characteristic of the CAFE standards is the
“two-fleet rule,” which applies to passenger cars but not light trucks. Under
this provision, automobile production is divided into two fleets: vehicles
made in North America and those made elsewhere. This encourages the
manufacture of small cars in North America, to bring the domestic fleet’s
average fuel economy up to the CAFE standard, but encourages the manufacture of large vehicles abroad, because overseas manufacturers tend to
produce more fuel efficient fleets than CAFE requires. Thus foreign manufacturers can produce higher profit, less fuel efficient cars without facing
CAFE penalties. Moreover, there is some evidence that because CAFE standards induce manufacturers to raise the price of less fuel efficient vehicles and
lower the price of more fuel efficient vehicles, they tend to shift market shares
toward imports at the expense of domestic automakers.
Alternative, market-oriented solutions are available to boost fuel economy
while reducing market distortions and regulatory burdens. One option
would be to allow manufacturers to trade fuel economy credits. Such a policy
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would allow manufacturers to concentrate production in their area of
comparative advantage, whether it be small, fuel-efficient vehicles or large,
less fuel efficient ones. Trading CAFE credits would also equalize the cost of
attaining the standards across manufacturers, a precondition for economic
efficiency. Thus, if combined with an overall cap on credits, this approach
would reduce the total cost of attaining any particular level of fuel economy
that policymakers choose to target. Other options would focus on policies
that more directly address fuel consumption rather than vehicle design,
because the key to reducing fuel consumption efficiently is to focus on the
desired outcome rather than specific technologies or processes.

Is There a Less Restrictive Alternative?
When public regulation is necessary, government agencies should respond
to the demand by promulgating regulations that are both statically and
dynamically efficient. Measures aimed at static efficiency are those that are
the most cost-effective that can be taken today to address the problem at
hand. Dynamically efficient regulation, in contrast, gives firms an incentive
in the long run to innovate and discover technologies that lower costs and
avoid negative spillover effects in the future.
Command-and-control regulation relies on dictating prices or quantities,
restrictions on technologies or processes, or who may enter or exit a market.
Agriculture in the United States, for example, has long been characterized by

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price and quantity restrictions. Government programs effectively guarantee
minimum prices to growers of major crops such as cotton, rice, wheat, corn,
and soybeans. Sugar and tobacco are marketed subject to government quotas,
and many fruits and vegetables are subject to marketing orders that limit the
quantity and quality that may be offered for sale. Entry and exit restrictions
often apply to government-regulated monopolies such as cable, telephone,
electricity, and transportation services. Many early environmental
regulations, including the landmark clean water and clean air legislation of
the 1970s, include provisions that require polluters to adopt certain pollution-reducing technologies. For example, the Clean Water Act effectively
requires pollution sources to adopt the “best practicable technology,” and the
Clean Air Act Amendments of 1977 require such sources to adopt the “best
available control technology” in certain regions of the country.
Performance-based regulations, in contrast, stipulate a performance goal
but allow firms flexibility in determining how best to meet that goal. Vehicle
emissions standards are one example. An advantage of this kind of regulation
is that it uses market forces to encourage firms to find low-cost solutions to
meet a given standard. Market-based approaches, which include tradable
permit systems, emissions taxes, and compliance subsidies, are similar to
performance-based approaches but are even more efficient. The gain in efficiency arises from the equalization of marginal compliance costs across firms.
If the regulatory goal is to reduce pollution, for example, the polluter is
afforded the flexibility to discover the most efficient techniques to decrease
its emission levels. Simultaneously, the market ensures that innovation and
creativity are rewarded.
Command-and-control regulations, such as technology standards, may
induce polluters to lower their emissions and in some cases may involve
lower enforcement costs for the regulator, but they fail to provide the longterm dynamic incentive that induces innovative behavior. Indeed,
command-and-control regulation often does not even meet the criterion of
static efficiency—achieving the regulatory goal at lowest cost given current
technology—because it may fail to provide the greatest benefits per dollar
spent on solving problems today. This point is highlighted in Chart 4-2,
which compares costs under a command-and-control regime with those
under a least-cost program, such as a market-based mechanism, across studies
of a variety of regulatory initiatives. For example, one study of sulfur dioxide
abatement found that command-and-control regulation imposed costs that
were approximately 1.8 times what they would have been under an efficiently designed market-based mechanism; another sulfur dioxide study
found that those costs were 4.3 times higher. Other comparisons across a
variety of antipollution programs all paint a similar picture: much the same
environmental improvement could have been achieved with far fewer
resources if market-based policies had been adopted.
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Command-and-control regulation typically provides few incentives for
producers or consumers to search for more cost-effective ways to reduce
pollution in the future. This happens because regulators have directed attention to the wrong target. Rather than focusing efforts on developing cheaper
ways to use mandated technologies, as command-and-control regulations
typically do, regulators should target the real problem: finding or developing
the most cost-effective way to reduce emissions.
This fact is highlighted when one considers the incentives created under the
1977 and 1990 Clean Air Act Amendments. Before 1990, electric utilities
faced command-and-control regulation centered on the adoption of certain
specified pollution control technologies. Although the 1970 Clean Air Act
had already established national ambient air quality standards for a number of
pollutants, including sulfur dioxide, it was the 1977 Clean Air Act
Amendments that clarified national standards for sulfur dioxide and added a
specific technology requirement for electric utilities. The amendments
required that most new coal-burning plants use flue gas desulfurization units,
or “scrubbers,” to achieve the required maximum emissions rates. To achieve
the air quality standards, plants were required to demonstrate the use of “best
available control technology” for each pollutant emitted, including sulfur
dioxide. Because the legislation mandated the specific means by which the
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utilities were to control their pollution, it created no incentive for them to
innovate to increase the ability of the scrubbers to reduce pollution. Rather,
the utilities faced only an incentive to develop methods to lower the operating
costs of scrubbers, to reduce the costs of complying with the regulation.
The 1990 Clean Air Act Amendments, by enacting a market-based trading
regime, radically shifted the utilities’ approach to complying with the emissions reductions mandate. Utilities were required to hold permits for each
ton of sulfur dioxide emitted. These permits were made tradable: a plant that
found itself unable to cover its total emissions with the initial allocation of
permits could purchase permits from another plant that had more permits
than it needed. Plants were no longer required to install scrubbers; instead
they could choose the method of reducing emissions that they found to be
most cost-effective and thus were given an incentive to engage in research
and development that would reduce emissions further.
Indeed, research into patents granted before 1990 in the electric utilities
industry shows that innovation in that industry had no effect on how much
pollution the scrubbers were removing, but instead sought to lower their operating cost. After the 1990 Clean Air Act Amendments, innovations, again as
measured by patents granted, continued to lower operating costs but also
increased the removal efficiency of scrubbers. By using a market mechanism,
regulators were able to meet the goal of reduced emissions in a much more
efficient and environmentally conscious manner: the dynamic market-based
approach not only spurred environmentally friendly innovation, but also
encouraged firms to control emissions in a more efficient and cost-effective way.
Creating a regulatory environment that enhances economic efficiency is a
difficult task. Just as markets are not always perfect, so, too, government agencies are not inherently benevolent, omniscient, or omnipotent (Box 4-1).
Unlike market participants, who are motivated primarily by the self-interested
goal of maximizing their profits, government regulators often are motivated
by several, sometimes conflicting, mandates. Regulators can also make
mistakes. They may make assumptions or estimates that result in unintended
consequences and increase the burden of regulation by imposing inappropriate standards, penalties, production restrictions, or prices. Further, the
government may suffer from persistent problems in retaining sufficient
knowledge and staffing expertise in the activity being regulated. Finally, individuals motivated by rent seeking or economically inefficient social goals may
unduly influence regulatory decisions. All of these factors may lead regulators
to make decisions that impair economic efficiency.
The President’s Management Agenda for fiscal year 2002 provides a strategy
for addressing inefficiencies in government and government regulation. This
strategy aims to refocus government activities in ways that are citizencentered, results-oriented, and market-based and that actively promote
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Box 4-1. The Government Is Not Perfect, Either
There are many ways in which markets may fail, or at least fall short
of the “perfect” market described in any elementary economics textbook. A common result of such imperfections is that more or less of a
good or service is produced than is optimal from the perspective of
society as a whole. Nonetheless, when market failure is diagnosed, it is
important to avoid a reflexive leap to the conclusion that the government can necessarily bring about a better outcome. Just as the actual
operation of a market may deviate from the idealized model, so, too,
government intervention may not always achieve the ideal outcome
envisaged by lawmakers or regulators.
Whenever markets are alleged to have failed, policymakers need to
consider the following question: Can the government bring about a
particular outcome more efficiently than the market? Actual government regulators, unlike their omnipotent theoretical counterparts, face
an array of potential complications that may make the answer to that
question negative. The following are some examples:
•

•

•

Inability to respond effectively to market dynamics. The bureaucratic environment in which regulators typically operate may
impede their ability to act quickly in response to changing technology or market conditions. The result can be a significant drag
on the economy.
Imperfect information about particular industries. Government
regulators may lack the necessary information or foresight to
devise or implement effective regulation for an industry.
Regulation that is uninformed can result in unforeseen consequences.
Lack of competitive pressure. Regulators and other government
officials do not face the same competitive pressures that firm
owners and managers and other private sector actors do. It is
precisely this competitive pressure that induces private firms to
innovate and enhance their productivity, and its absence may
prevent government regulation from being equally innovative
and efficient.

Complications such as these may mean that even an imperfect
market might achieve a more efficient outcome than government regulation, even if theory suggests that government intervention would
improve on the market outcome. Policymakers, therefore, should
consider not only market failure but also government failure, and
should ask themselves tough questions about the likely efficacy of
government intervention in the circumstances at hand.

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innovation. By mandating more strenuous review of government costs and
performance, the President’s agenda seeks to balance the imperfections of
government activity against those of the market. As part of this agenda,
citizen-oriented government activities are intended to limit rent seeking by
bureaucrats and private interests; results-oriented activities will be regularly
reviewed and their impacts on overall economic efficiency assessed, to allow a
better understanding of program costs and benefits; and market-based activities will be used to reduce informational and incentive discrepancies between
the public and the private sectors, to help improve the quality of information
available to regulators and the quality of their decisions.

Do the Benefits Justify the Costs,
and How Are Both Distributed?
On the one hand, one reason that regulation sometimes has an adverse
impact on the general public may be that proponents of the regulation focus
on its benefits and disregard its costs. On the other hand, proposed regulations whose benefits would justify the associated costs may be blocked
because opponents focus on the costs and downplay the benefits. Whether or
not a regulation is adopted may depend on how hard interest groups work to
influence the legislative process and the regulatory agencies. As a result, some
regulations may be adopted that benefit a particular group to the detriment
of overall societal goals, whereas others that could be socially justified are
blocked because they would impose significant net costs on particular
groups. Appropriate regulation is based on the balancing of marginal costs
and marginal benefits to society in general. When both costs and benefits are
considered simultaneously, regulations that are particularly beneficial or
detrimental can more easily be identified. In this process it is important to
consider the regulatory cost to the whole economy, not just the direct
budgetary cost to the government. Regulatory costs also include the private
sector’s direct and indirect compliance costs as well as incentive effects such
as reductions in the incentive to innovate. To improve information about the
benefits and costs of major Federal regulations (those with annual impacts in
excess of $100 million), the Administration is currently reviewing and
revising its guidelines on regulatory analysis (Box 4-2).
From an economic perspective, the standard rule of thumb to ensure
efficiency is that resources should be allocated across activities in such a way
that the marginal benefit is equal to the marginal cost. For example, in the
context of homeland security, it may be the case that additional resources
devoted to international counterterrorism efforts would reduce the risk of
terrorist attack much more than would additional resources spent on border
enforcement. If so, resources should be shifted toward counterterrorism up

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Box 4-2. Assessing the Economic Impact of Major
Regulatory Initiatives
Federal regulatory agencies issue approximately 4,500 new rulemaking
notices each year. About 600 of these are projected to have effects of
such magnitude as to warrant review by the Office of Management and
Budget (OMB). Of those 600, between 50 and 100 each year meet the
necessary criteria to be designated “economically significant, that is,
”
creating annual benefits or costs worth more than $100 million. Every
“economically significant” proposal must undergo a formal analysis
by the agency initiating the proposal of its benefits and its costs. The
OMB establishes guidelines for the regulatory agencies on how to
perform these economic analyses. In an effort to promote their transparency and maximize the net benefits to society, the OMB and the
Council of Economic Advisers are currently revising these guidelines.
Consistent with the principles of good regulation outlined in this
chapter, one proposed revision would have agencies complement their
benefit-cost analysis of proposed economically significant regulations
with a cost-effectiveness analysis. The two types of analysis are conceptually very different: a cost-effectiveness analysis identifies those
options for achieving the regulation’s objectives that make the most
effective use of the resources available, but it does not require quantification in dollar terms of the relevant costs and benefits. This exercise
provides the analyst with a transparent means of comparing regulatory
outcomes across an array of policy choices while maintaining scientific
rigor. Yet it is important to note that although all efficient policies are
cost-effective, not all cost-effective policies are efficient. This fact highlights the advantages of properly recognizing the total benefits and the
total costs of promulgating new regulations, reviewing existing ones,
and developing legislative proposals concerning regulation.
In this spirit, the guidelines highlight several state-of-the-art
techniques by which to estimate the benefits of a regulation, and
they outline appropriate methods for estimating its costs. On the benefits side, the guidelines endorse the use of stated and revealed behavior
in actual markets as signaling economic values. On the costs side, the
guidelines urge that all of the costs associated with the regulation—
including monitoring and enforcement costs, direct compliance
expenditures, and other direct costs such as legal and transactions costs,
product substitution, and discouraged investment—be recognized.
This major revision of the conduct of regulatory analysis is consistent
with the Administration’s goal to establish a greater focus on accomplishment by producing performance-based budgets. Under this new
approach, high-performing programs will be reinforced and poorly
performing activities reformed or terminated. This paradigm change

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Box 4-2. —continued
increases accountability and provides the necessary structure to more
completely integrate information about costs and program performance in a single oversight process. This is a necessary first step in
shifting budgetary resources among programs to ensure that the
greatest possible benefits are achieved with the available funds.

to the point where the marginal impact on overall homeland security is
unaffected by further resource shifting—that is, when risk mitigation per
dollar is equalized across activities. This kind of economic analysis of major
regulations generates information that can be used to distribute limited
regulatory resources to those areas where they will do the most good.
Because even socially efficient regulation creates winners and losers, firms
and other interest groups have an incentive to spend considerable resources
trying to capture the benefits of regulation for themselves. Even when the
benefits far exceed the costs, regulation rarely affects all participants equally. For
example, regulation can create barriers to competition by raising the cost of
market entry, or by imposing fixed compliance costs, which put smaller firms
at a disadvantage relative to larger ones that can spread those fixed costs over
their larger revenue base. Sometimes existing firms may successfully lobby for
exemptions from new rules. For these reasons, the Regulatory Flexibility Act,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, specifically requires a separate analysis of the impact of new regulation
on small businesses. Such analyses can limit, or at least shed light on, the
rent-seeking activities of dominant firms and other interest groups.
Recent experience with regulation governing the introduction of generic
pharmaceuticals illustrates these points. In this case, manufacturers of brandname pharmaceuticals took advantage of government regulation to shelter
their products from competition from lower priced generic substitutes. The
brand-name manufacturers circumvented the spirit of the law, but not necessarily its letter, by listing minor variations on their patents in order to extend
their protection from competition. Generic drugs represent a cost-effective
means of providing Americans low-cost access to important medical technology. The market entrance of generic drugs, typically priced far below their
branded counterparts, logically leads to their rapid substitution in place of
name-brand drugs. The Hatch-Waxman Amendments to the Federal Food,
Drug, and Cosmetic Act, enacted by the Congress in 1984, amounted to a
major reform of the approval process for generic drugs and has led to a large
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increase in the number of such drugs available to consumers. This profusion
of generic drugs, whose use is also encouraged by health insurers, has saved
consumers vast sums of money.
However, it has recently come to light that certain provisions of the
Hatch-Waxman amendments are subject to potential abuse. Under the
amendments, a generic drug maker may seek permission from the Food and
Drug Administration to produce a generic equivalent of a brand-name drug
whose manufacturer claims patent protection. However, the brand-name
manufacturer is given the opportunity to obtain a stay on the marketing of
the competing generic, during which time it can defend its patent in court.
In recent years brand-name drug manufacturers have increasingly adopted a
strategy of listing new patents—often for characteristics such as product
packaging—following a generic manufacturer’s application to market an
equivalent generic. Such a move forces the generic manufacturer to resubmit
its application and effectively extends the government-enforced stay on
generic competition. The Administration has proposed a new rule that seeks
to counter this strategy and balance the need for property rights protection
and innovation against the need for competition and greater access to lower
cost generics. The new rule does this in two ways. First, it would limit a
brand-name manufacturer’s ability to forestall generic competition by
limiting the government-enforced stay on generic competition. Second, it
would tighten the patent listing process to ensure that only appropriate
patents are filed. The potential savings to consumers from these changes are
estimated at $3 billion annually.

The Demand for Regulatory Reform
The more regulation limits the choices of producers, consumers, or
investors, the greater is the possible harm to economic activity, and the greater
the demand for regulatory reform. Moreover, the impact and efficacy of regulations can change over time. With time, regulations are more likely to become
constraining, or simply irrelevant, because of changes in technology or in the
products and services available in the marketplace. Such changes are often a
prerequisite for successful regulatory reform, because they weaken resistance to
reform from those interest groups that benefit from the status quo.
When government regulation controls prices, profits, or entry into a
potentially competitive industry, effectively shielding certain incumbent
firms from competition, regulatory reform can yield benefits for consumers,
potential market entrants, and the industry as a whole. Reform of regulation
in the airline, railroad, and trucking industries and the lifting of geographical
restrictions on bank expansion are all cases in point. As a result of the
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competition that followed regulatory reform of these industries, prices fell,
innovation increased, and resources were more efficiently allocated. Gains
may also be available from reform of government regulations that address
persistent market imperfections, for example with regard to health, safety, or
environmental quality. In these cases, reforming regulation to more closely
comply with the principles of regulation outlined earlier in this chapter can
reduce the costs of meeting regulatory goals.
Like the demand for regulation itself, the demand for regulatory reform
arises for two distinct and conflicting reasons. Sometimes such regulatory
harm comes to light when producers or investors perceive potential profit
opportunities if the regulation is removed. Some calls for reform arise from
the recognition that a regulation is imposing more costs than it is creating
benefits, or providing unfair advantages to some at the expense of others. For
example, when the restrictions on entry in the New York City dairy market,
discussed above, raised milk prices there, New Jersey dairies saw the chance for
profit if those restrictions could be jettisoned. The courts agreed, finding that
if the New Jersey dairies were allowed to sell milk in New York City, the price
of milk there would drop to that in other nearby locales where ample competition existed. In other cases, consumers themselves may discover that
regulation is preventing them from finding desired products and services. For
example, the regulatory requirement that certain prescription drugs be
supplied in child-resistant containers made opening the container difficult for
the elderly and the handicapped. Subsequently, the Consumer Product Safety
Commission launched an educational awareness program to inform the
public and pharmacists about appropriate exemptions from and requirements
of safety cap regulations.
Other calls for reform, however, may arise because a firm perceives an
opportunity to gain or take advantage of market power. This demand for regulatory reform is a type of rent seeking, as the firm is attempting to influence
regulatory outcomes in order to receive favorable treatment for itself.

Regulatory Review and Regulatory Reform
The President recently declared that, “There comes a time when every
program must be judged either a success or a failure. Where we find success,
we should repeat it, share it, and make it the standard. And, where we find
failure, we must call it by its name. Government action that fails in its
purpose must be reformed or ended.”
Regulation often has unintended consequences or causes changes in
economic behavior that make it less desirable or effective than anticipated.
This makes it important to revisit from time to time the question of whether
the results of a regulatory initiative solve real problems that the American

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people care about. In this sense, regulatory review represents an important
backstop against policies that are misguided, ineffective, or outdated.
This principle can be illustrated by a simple anecdote in which a specific
command-and-control regulation that appeared to offer a straightforward
solution to an apparently uncomplicated situation in fact provoked a dynamic
reaction that few if any had anticipated. This story shows how, even in the
seemingly most innocuous cases, government regulatory failure can greatly
complicate matters, reducing consumer choice and economic efficiency.
In 1972, in an effort to reduce the incidence of burns among children, the
Federal Government implemented a regulation requiring newly manufactured pajamas for small children to be made flame-resistant. Amended in
1974 to include larger children’s sleepwear, this standard required that fabrics
used for children’s sleepwear self-extinguish when exposed to a small open
flame such as from a cigarette lighter, candle, or match. Although the regulation neither prescribed specific fabrics nor required flame-retardant
treatments, in order to comply, manufacturers either switched to synthetic
materials (mostly polyester) that were inherently flame-resistant or treated
fabrics such as cotton with flame-retardant chemicals.
One such chemical, called TRIS, was widely used by industry as a flame
retardant to treat acetate, triacetate, and some polyester garments. However,
TRIS was subsequently found to be carcinogenic and was therefore banned
from use in cotton sleepwear. Polyester then became the fabric of choice for
manufacturers, since it did not require the use of a flame-retardant chemical.
Parents, however, began to express a demand for natural fibers such as cotton
for their children’s sleepwear. In response to this demand, retailers began
increasing their stocks of cotton and cotton-blend long underwear sets that
did not meet the Consumer Product Safety Commission’s flammability standard for children’s sleepwear, in some cases intermingling them with
flame-resistant sleepwear on children’s sleepwear racks. Responding to this
change in consumer preferences, in 1996 the commission voted to exempt
snug-fitting sleepwear (and all infants’ clothing up to size 9 months), after
concluding that snug-fitting pajamas exhibited a lesser propensity to burn.
Once again, consumers responded to this restriction by altering their
choices. They continued to purchase children’s long underwear in large quantities, as well as traditional flame-resistant polyester sleepwear that had
improved in style and comfort. They did not show a preference for snugfitting pajamas, which tended to be less comfortable, and comfort was likely
the primary concern of parents who preferred cotton sleepwear to synthetic
garments in the first place. Unit sales of children’s underwear increased from
1993 to 1996 by about 22 percent (98 million pieces). According to a wellknown clothing trade publication, this gain in underwear sales was
attributable to underwear being used as sleepwear. Unit sales of children’s

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sleepwear (excluding underwear) increased over the same period by about
28 percent (36 million pieces), reflecting an increase in sales of traditional fireresistant sleepwear garments. In 2000 the Consumer Product Safety
Commission launched an educational program for parents by requiring
manufacturers to place hangtags and permanent labels on garments
reminding parents to choose either snug-fitting or flame-resistant sleepwear.
This example highlights how even well-intended regulations can have a
high cost and unexpected consequences. It also demonstrates that market
forces continue to function after regulation is imposed: although the regulation sought to limit the options of producers and consumers, consumers’
preferences ultimately determined what was actually manufactured and sold.

Effects of Reform on Prices
When reformed regulation opens an industry to new entrants and frees
prices to respond to market forces rather than regulatory fiat, prices typically
fall. Deregulation of the airline industry is a prime example. Almost from its
inception and through the late 1970s, the airline industry was subject to strict
Federal regulation. The Civil Aeronautics Board (CAB), established by the
Congress in 1938, exercised nearly complete control over the industry, with
authority to establish maximum and minimum fares, control market entry and
exit, and govern airlines’ route structures. By the mid-1970s, however, pressure
for reform of airline regulation was building, motivated in part by research
arguing that regulation suppressed competition and resulted in welfare losses to
society. The CAB responded to this pressure in the late 1970s by reducing
entry restrictions and control over fares. Major cuts in fares soon followed,
accompanied by higher industry profits. These initial positive results spurred
the Congress to pass the Airline Deregulation Act (ADA) in 1978. From 1977
to 1996, airfares fell approximately 40 percent in inflation-adjusted terms.
According to a recent estimate of the welfare gains from this regulatory reform,
before September 2001 consumers were saving about $14.8 billion (in 2000
dollars) annually in lower fares compared with what they would be paying if
the previous system were still in place. One may reasonably assume that this
downward pressure on prices resulted, at least in part, from increased industry
competition: as of late 2002, 32 domestic carriers flew scheduled service in the
United States, compared with only 15 in 1978.
Regulatory reforms in other industries have had a similarly salutary effect
on consumer prices. Until 1980 the Interstate Commerce Commission
(ICC) regulated shipping rates for railroads and prevented railroads from
abandoning unprofitable lines. After partial regulatory reform in 1980, rates
on rail freight fell steadily: by 1999 real rates were roughly half their 1984
level. Regulatory reform in the trucking industry, which took place primarily
between the late 1970s and the early 1980s, resulted in similar rate declines.
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From the mid-1930s to the beginning of reform in 1980, regulation had
effectively controlled shipping rates and given incumbent truckers veto
power over the extension of new or expanded authority to transport goods.
This stifled competition from potential entrants. Declines in shipping
rates by truck and rail, combined with improved flexibility and on-time
dependability, also made possible by regulatory reform, are estimated to have
saved U.S. industry between $38 billion and $56 billion annually.

Effects of Reform on Innovation and
Consumer Satisfaction
Another common effect of the competition fostered by regulatory reform
is increased innovation, resulting in greater variety and higher quality for
consumers. Before deregulation of the trucking industry, both permitted
routes and goods carried were narrowly specified, creating costly inefficiencies. Reform allowed truckers to offer on-time delivery and more flexible
service, so that manufacturers could order components to arrive “just in
time” at the assembly line, and retailers could have the finished goods “just in
time” to be sold. This streamlining resulted in greatly reduced costs of
holding and maintaining inventories.
The case of the airline industry is particularly revealing of the potential for
innovation unleashed by regulatory reform, and the resulting benefits to
consumers. Before reform, airlines competed primarily by attempting to
provide better service to customers, since they were essentially prohibited
from competing on the basis of price. In the spirit of such nonprice competition, airlines attempted to offer more flights while decreasing the number of
passengers on each flight and emphasizing the quality of food and other inflight services. Following reform, it was expected that fares would fall but
that service quality would decline as well, in accord with consumer preferences. In reality, however, the unanticipated development of an entirely new
route structure—the hub-and-spoke system—allowed airlines to increase
flight frequency, giving customers a wider variety of departure times from
which to choose. Under the regulated regime, with its restrictions on entry of
existing carriers into currently served markets, such massive route restructuring would have been impossible. Research has shown that consumers
valued this innovation, an unexpected benefit of unregulated competition,
far more than enough to compensate for other declines in service quality
such as longer average travel times. Research has also shown that the benefit
to consumers is about $10.3 billion each year from increases in flight
frequency, thanks to the hub-and-spoke system, in addition to the billions in
gains from lower fares.

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The same competition that produced the efficiencies of the hub-and-spoke
system continues to inspire innovation and reshape the structure of the
airline industry in efficiency-enhancing ways. Following the hub-and-spoke
revolution, another wave of innovation resulted in the emergence of carriers
offering low-fare, no-frills, point-to-point service as an alternative to the
major airlines that dominated the major hubs. This, too, was a direct
response to consumer preferences. More recently, the introduction of the
“regional jet,” a new type of small jetliner, is again changing the face of air
travel. The low operating costs of regional jets make it more economical to
serve medium-length routes capable of supporting only a modest number of
passengers. This innovation opens up the prospect of adding smaller cities,
more frequent service to the spokes of hubs, and possibly even a new market
for point-to-point service. Without the stimulus of competition associated
with regulatory reform in the airline industry, these efficiency-enhancing,
cost-saving innovations in air travel would likely not have been conceived,
much less brought to fruition.

Effects of Regulatory Reform on Resource Allocation
In general, regulation that stifles entry and competition presents an attractive
opportunity for reform to improve the efficiency of resource allocation. A
corollary, however, is that, in some instances, reform can result in transitional
losses to parties that were protected under the regulatory scheme. For example,
truckers who had benefited from entry barriers that kept shipping rates artificially high saw a 10 percent drop in their wages relative to workers in the rest
of the economy; before reform, however, ICC-licensed truckers paid their
workers about 50 percent more than comparable workers in other industries.
Another efficiency-enhancing reallocation of resources can be seen in the
airline industry, where some carriers succumbed to competition following
reform but were replaced by new, more competitive entrants. By 2001 the total
market valuation of the major airlines alone, adjusted for inflation, was more
than double that of all carriers in 1976, before regulatory reform.
The lifting of restrictions on the geographic expansion of banks provides
yet another example of the efficiency gains and economy-wide benefits that
result when regulatory reform induces a reallocation of resources. These
reforms involved both State and Federal actions, including the passage of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Beginning in the 19th century and continuing through much of the 1970s,
States imposed geographic restrictions on the ability of banks to open
branches. Such restrictions were motivated in part by a desire to protect bank
profitability, since taxes on banking activity were an important source of
revenue in some States, as well as by fears that unfettered bank expansion

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would lead to a concentration of financial power. The development of large
corporations with interstate banking needs ultimately created pressure for
a less fragmented banking system, but that need was not fully met until a
major episode of reform occurred at the State level, which began in 1978 and
was essentially complete by the end of 1992.
Although little evidence is available on the effects of the Federal-level
reforms, studies of State-level reforms indicate impressive net benefits. Bank
efficiency, and thus the efficiency of economy-wide resource allocation,
increased following the introduction of statewide banking, as loan losses,
noninterest expenses, and loan rates all fell significantly. With these improvements came more rapid growth of both personal income and State government
revenue in States that had embarked on branching reform. These increases in
bank efficiency reveal the implicit cost of the old branching regulations and are
attributable to a number of factors. First, restrictions on branching and interstate banking may have limited opportunities for the most efficient banks to
expand. When those restrictions were lifted, the weaker banks lost some of the
protection from competition they had enjoyed and gave up market share to the
stronger banks, improving efficiency in the allocation of resources. Second, the
lifting of geographic restrictions may have increased pressure on managers
concerned about takeovers, resulting in increased managerial discipline;
evidence of this is a higher turnover rate for banks’ chief executive officers and
a tighter relationship between pay and performance. This increased discipline
may also have improved banks’ performance. Finally, the geographic
restrictions had limited banks’ ability to expand to their most efficient size;
removing these restrictions thus allowed small banks to grow and to take
advantage of economies of scale by reducing their average costs and increasing
their opportunities to diversify the risks associated with lending.

Pitfalls of Regulatory Reform
The potential benefits from regulatory reform for firms, consumers, and the
broader economy are great. Yet reform holds several potential pitfalls if not
undertaken with considerable care. Efforts to reform the regulation of thrifts
in the 1980s and of electricity markets in California in the 1990s led in both
cases to costly debacles, increasing public skepticism about reform. But regulators, advocates of reform, and the general public can learn much from these
experiences, and applying those lessons will help ensure the success of future
efforts. Although reform in these markets held great promise for efficiency
gains, with corresponding benefits to consumers, the precise form that reform
took in these instances illustrates the complexity of the issues with which
reform must typically contend. The two cases explored here underline the

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dangers of partial or incomplete reform. They also show the dangers of not
considering potential deviations from competitive conditions or the creation
of perverse incentives.

Failure to Coordinate Reforms
California’s recent attempt to deregulate its electricity markets demonstrates
the potentially expensive consequences of regulatory reform that lifts restrictions in one part of an industry without addressing restrictions elsewhere in
the same industry. For most of its history, the electricity industry in California
was heavily regulated and heavily concentrated: a few privately owned, vertically integrated monopolies owned and operated electricity generation,
transmission, and distribution facilities throughout most of the State. Under
pressure from consumers, who paid some of the highest electricity prices in
the Nation, the California legislature in 1996 passed a restructuring law.
Among other things, this law required the traditional monopolies to open
their transmission and distribution lines to competing generators and wholesale marketers, and it encouraged utilities to divest their existing generating
capacity. Independent power producers were allowed to apply for environmental and siting permits and to sell power to eligible wholesale and retail
customers. Retail customers were permitted to choose between purchasing
electricity directly on the wholesale electricity market and continuing to pay
regulated rates to obtain the “default” service from their local utility distribution company. Utilities serving retail customers were required to obtain
electricity at unregulated rates through newly established wholesale market
institutions and to charge customers a regulated rate for that electricity.
The restructured wholesale and retail markets for electricity functioned
reasonably well as long as demand remained low or moderate and generation
remained high. Regulators did not sufficiently anticipate, however, that the
excess capacity that prevailed in the industry before restructuring would dissipate as rapidly as it did. Many interdependent factors, including an increase in
electricity demand, rising natural gas prices, rising prices for pollution emissions permits, and other problems on the supply side, combined to drive
wholesale energy prices higher than regulators had expected. This proved
financially disastrous for the utilities, because the fixed price at which they
were compelled to sell electricity to retail customers was now far below the
wholesale price at which they could purchase electricity. In December 2000
utilities were paying almost $400 a megawatt-hour for electricity in the
wholesale market and reselling it to retail customers at $65 a megawatt-hour
(Chart 4-3). Their burden was compounded by the fact that regulators
refused to allow the utilities to enter into long-term forward contracts to
hedge their short positions. Ultimately, the failure to coordinate the reform of
wholesale and retail electricity markets in California proved a leading factor in
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the effective bankruptcy of California’s two largest utilities and the collapse of
the wholesale markets, which precipitated an expensive effort to guarantee
continued electricity availability.

Deviation from Competitive Conditions
Other factors also contributed to the failure of California’s experiment in
electricity deregulation. Although spot markets worked reasonably well at low
and moderate levels of demand relative to supply, the fact that consumers were
sheltered from price fluctuations meant that, in situations where demand was
high relative to supply, even small producers had considerable market power.
Generators quickly found that, under these circumstances, withholding electricity supply led to higher prices that increased their profitability, further
roiling markets. From November 2000 until May 2001, about 35 percent of
total generating capacity was not in service—roughly double the typical historical outage rate. California government officials have argued that, in some
cases, plants were withdrawn from service for strategic reasons, a claim that
generators dispute. In any case, regulators had not planned for this extreme
situation and had not built adequate flexibility into the regulatory structure to
respond effectively. Moreover, by keeping retail prices fixed, regulators shortcircuited the pricing mechanism and precluded the possibility that consumers
would respond to higher electricity prices by curtailing consumption.
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Furthermore, by failing to address problems in the licensing process for new
power plants and by creating an atmosphere of uncertainty over their potential
profitability, regulators may have diminished the ability and the incentives of
market participants to respond to high prices in the longer term by developing
new generating capacity.
To prevent widespread blackouts, the State of California itself eventually
had to enter into the sort of long-term contracts for electricity production that
regulators had previously prevented utilities from entering. However, because
these contracts were signed in the spring of 2001 at the height of a spot
market crisis, California committed itself to purchase power at prices at least
three times those prevailing in futures markets by the end of that summer.
Had all of the factors complicating electricity deregulation been carefully
considered, had the possibility of deviations from competitive conditions
been entertained, or had lessons from successful reform efforts in other jurisdictions been learned, California might have avoided this costly experience.

Creating Perverse Incentives
In any regulatory reform, special care must be taken to ensure that the
proposed changes do not inadvertently foster incentives for parties to engage
in activities or take risks that are likely to be harmful to the public good or
counter to the purpose of the reform. Another telling case of a reform that
created perverse incentives is that of the thrift industry, where regulatory
reform without appropriate safeguards resulted in imprudent risk taking at
the expense of the government.
Until the late 1970s, government regulation set limits on the activities that
savings and loan associations, or thrifts, could undertake, essentially
constraining them to taking in deposits and making mortgage loans. Because
the deposits they accepted were short term and the mortgages they issued long
term, the thrifts were exposed to interest rate risk: a sharp increase in shortterm interest rates would increase their deposit interest costs while leaving
their interest income from mortgages substantially unaffected. In 1966
Regulation Q, which established an interest rate ceiling on bank deposits, was
extended to cover thrift deposits as well. This regulation temporarily resolved
the interest rate squeeze facing the thrifts, but at the expense of depositors, for
whom few alternative instruments offered safety and liquidity comparable to
thrift or bank deposits. Other financial firms soon learned to circumvent
Regulation Q by creating money market mutual funds. With this innovation,
Regulation Q ceased to provide interest rate protection to thrifts, which then
began to run substantial losses with the rising inflation and sharply higher
interest rates of the late 1970s and early 1980s. In response to the thrifts’ pleas
for relief, the Congress passed legislation in 1980 and 1982 that significantly
expanded the thrifts’ lending authority: federally chartered thrifts were now
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permitted to make commercial real estate loans, commercial loans, and
consumer loans and to take direct ownership positions in investment projects.
The reform also allowed thrifts to offer adjustable-rate mortgages and phased
out interest rate ceilings on deposits.
In industries throughout the economy, creditors protect their interests by
monitoring the management and financial health of the firms they lend to.
Owners and managers who enjoy limited liability may face incentives to take
excessive risks with the firm’s assets or to operate in other ways that conflict
with the creditors’ interests. This danger is particularly acute when the firm is
running losses that put it in danger of imminent bankruptcy. In the case of
banks and thrifts, however, Federal deposit insurance short-circuits this usual
safeguard. Thus no mechanism existed to induce potential depositors to
avoid the riskier thrifts. A thrift’s principal creditors—its insured
depositors—have little incentive to monitor the institution’s financial health
or its risk taking, because their deposits are insured by the Federal
Government to a maximum of $100,000 per account. Also, thrifts faced flat
rates for deposit insurance, instead of rates adjusted for the likelihood of
insolvency. Accordingly, no economic disincentive deterred thrift managers
from taking excessive risks.
The usual regulatory response to the absence of this normal, market-based
protection is “safety and soundness” regulation, in which the government exercises the oversight role normally carried out by a firm’s creditors. The Achilles’
heel of thrift reform was precisely that it failed to accompany the thrifts’ deregulation with enhanced safety and soundness regulation. The effective
bankruptcy of the Federal Savings and Loan Insurance Corporation (FSLIC)
in the early 1980s constrained the regulatory response as the capital positions
of some thrifts eroded. In contrast to the airline industry, where safety regulation was maintained as reform proceeded, the necessary safety and soundness
regulation of thrifts was undermined. Minimum net worth requirements for
thrifts were actually lowered in both 1980 and 1982. Accounting rules were
liberalized, so that thrifts could avoid the consequences of failing to maintain
inadequate capital. Also, the number of field-force examiners declined between
1981 and 1984, and the number of examinations per thrift and per billion
dollars of thrift assets fell significantly. Moreover, the Congress raised the peraccount limit on federally insured deposits from $40,000 to the present
$100,000, further discouraging depositors from taking an active oversight role
and increasing the exposure of the Federal Government to the risky behavior of
thrift managers. These conditions enabled thinly capitalized or insolvent thrifts
to act on their incentive to shift risk to the FSLIC, and ultimately the taxpayer,
through increases in asset risk and capital distributions to shareholders.
Regulatory reform of the thrift industry could have been just as beneficial
as that in other industries. The reforms provided thrifts with new opportunities to improve their financial condition by opening up new investment
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and loan markets to them and by increasing their ability to attract new
deposits. Without the check of additional safety and soundness regulation,
however, those thrifts whose financial condition was deteriorating faced
incentives, and were given the means, to engage in excessive risk taking.
Ultimately, this combination contributed importantly to an industry-wide
crisis, which culminated in 1989 in a Federal bailout whose ultimate cost to
taxpayers was $124 billion.

Putting the Principles to Work
Of course, inventorying and showcasing sound regulatory principles is not
enough; good principles that are not acted upon represent lost opportunities
and frustrate effective public policymaking. Whether the principles outlined
in this chapter become a dead limb on the tree of regulatory policy evolution
or a vibrant branch depends on whether policymakers act to put these ideas
into practice.
This Administration has pursued the principles of sound regulatory reform
while recognizing that sound science drives good policy. It is now undertaking a major revision of the guidelines for conducting regulatory analysis
that utilizes these principles to ensure a greater focus on performance and
efficiency. The new guidelines emphasize transparency and increased
accountability, which together will provide the necessary structure for the
sharing of information across regulatory agencies. This will ensure that the
funds available for regulatory activity achieve the greatest possible benefits.
Examples from the environmental arena show that the Administration is
pursuing these principles in its regulatory initiatives. Efficient policies are a
hallmark of the President’s strategy. The President’s Clear Skies Initiative
to improve air quality in the United States uses market-based regulation to
tackle a pollution problem on which a scientific consensus has emerged.
Announced by the President on February 14, 2002, Clear Skies will reduce
emissions by power plants of three noxious air pollutants by well over half—
sulfur dioxide by 73 percent, nitrogen oxides by 67 percent, and mercury
by 69 percent—over the next 16 years. The reductions will also occur in
a timely fashion, as illustrated in Chart 4-4, which compares the nearterm reductions under Clear Skies with those under the Clean Air Act
Amendments of 1990.
Clear Skies uses a dynamic approach to regulation that provides firms with
the flexibility to reduce emissions in the most efficient and least costly manner
possible. Through a market-based cap-and-trade program, Federal emissions
limits, or caps, are set for each pollutant, and emissions permits are distributed
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to electricity generators. The cap is to be reduced over time, first in 2010 and
again in 2018, and firms are required to respond by reducing their emissions
accordingly. The advantage of this market-based approach lies in its ability to
allow individual firms to choose for themselves the most efficient methods to
reduce emissions. If they reduce emissions by more than the cap requires, they
can sell their unneeded permits on the open market or bank them for later
use; if their emissions exceed the cap, they can purchase unused permits from
other firms. Within this structure, firms can design an efficient and costeffective strategy tailored to both their current budgets and their future plans.
Further, this approach creates an incentive for firms to innovate to find
economical techniques for reducing emissions. This dynamic approach to
regulation is in sharp contrast to previous methods of command and control,
which were characterized by uncertainty over their enforcement.
The Clear Skies Initiative is modeled on the highly successful acid rain
reduction program under the Clean Air Act, which also used a cap-and-trade
system. This program accomplished dramatic reductions in sulfur dioxide
emissions at two-thirds the compliance cost of a traditional emissions
reduction program. It resulted in a decrease in pollution greater than all other
Clean Air Act programs combined. Emissions were reduced more quickly
than required: annual sulfur dioxide emissions were cut in the first phase by

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50 percent below allowed levels. Just as remarkable, the program requires
only a handful of EPA employees to administer. By taking this successful
program as its model, the Clear Skies Initiative hopes to achieve the same
levels of efficient and cost-effective emissions reductions.
The Clear Skies Initiative is an example of a new, original program that
enjoys scientific consensus and adheres to the principles of good regulation.
The Administration has also aggressively pursued reform of existing regulatory
programs in the area of air pollution. An example is the proposed changes to
New Source Review (NSR). Established as part of the 1977 Clean Air Act
Amendments, NSR is intended to protect public health and welfare as new
sources of air pollution are built and when existing sources are modified in a
way that significantly increases air pollutant emissions.
When the Congress established NSR, its intent was to maintain and
improve air quality while providing for economic growth. Through the
issuance of mandatory permits, regulators oversaw the construction and
modification of plants by establishing various actions that the sources had to
undertake to control emissions. Although this appeared at the time to be a
viable approach to emissions regulation, over time NSR has become substantially more complex as industrial practices and regulations have evolved.
In June 2002 the EPA issued a report to the President on NSR, citing
several adverse impacts of the regulation. Generally, the report found that
NSR impedes or results in the cancellation of projects that would maintain
or improve the reliability, efficiency, or safety of existing power plants and
refineries. Not only did the regulatory uncertainty and lack of flexibility
surrounding NSR hinder investment, the report found, but the added costs
and delays imposed by the NSR process had become quite burdensome as
well. The NSR permit process can add more than a year to the time needed
to review proposed modifications to a plant and can cost over $1 million.
Such obstacles might lead firms to delay or forgo plans to modernize their
facilities in ways that would benefit the environment.
To take just one example, a manufacturer that operates a process that
includes a drying system determined that the system’s energy efficiency could
be improved if the existing drier nozzles were replaced with Teflon-coated
nozzles. The firm found, however, that the replacement would be economical
only if the expense of obtaining an NSR permit could be avoided. NSR
currently does exclude repairs and maintenance activities that are deemed
routine, but it relies on an intricate and lengthy analysis to determine
whether a given repair meets the definition of “routine.” Since the firm could
not readily discern whether the installation of new nozzles would be
considered routine maintenance, a repair, or a replacement, it decided not to
proceed with the project. In this way, NSR deters firms from conducting
needed repairs and often results in unnecessary emissions of pollutants. In
this case NSR requirements actually made the environment worse off.
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The Administration recognizes that government action that fails in its
purpose must be reformed or ended. Recent EPA research points to the
conclusion that the NSR program has become outdated and is in need of
revision: although NSR was intended to be a method of reducing pollution, it
has led to actions by the private sector that were not intended and that do not
promote the goals of the regulation. After careful consideration of the detrimental effects of the regulation, this Administration has chosen to undertake
reforms that will remove constraints on firms that wish to make plant-level
modifications that will have beneficial impacts on the environment.

Conclusion
Administered effectively, government regulation can contribute greatly to
the Nation’s economic well-being. But regulation is not a silver bullet.
Unintended consequences occur and can negate the positive effects of regulation. Although no regulatory agenda is foolproof, this chapter has
showcased some fundamental principles of regulation and regulatory reform
that can foster competition and correct market failures while maintaining
both static and dynamic efficiency. These principles include the encouragement of economic flexibility and dynamism, an increase in market
orientation, and a reduction in reliance on command-and-control regimes.
In addition, regulatory review is an important safety valve for relieving the
regulatory burden.
The two policy initiatives summarized above—the adoption of Clear Skies
legislation and the reform of NSR—highlight the shortcomings of a one-sizefits-all regulatory approach. In some cases, when the science dictates it,
regulation must be made more stringent. In others, where regulation impedes
progress, reforms must be instituted that reduce or change the nature of the
regulation. The principles laid out in this chapter, together with the lessons
learned from past experience, can lend important insights into efficient ways
to tackle such difficult issues as homeland security and corporate reform.

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C H A P T E R

5

Tax Policy for a Growing Economy

T

he income tax has been the single largest revenue source for the Federal
Government ever since World War II. Today it touches nearly every
aspect of our lives. The income tax also fosters economic inefficiency, and its
complexity leads to staggering compliance costs. Past efforts at partial reform
of the income tax have not succeeded in reducing its complexity, removing
its distortions of economic incentives, or making it more fair. Some might
think that significant obstacles block the way to making great progress
toward achieving these goals, but in fact such reform can be accomplished
within the basic framework of the existing tax system.
In 2001 the Internal Revenue Service spent $8.9 billion on processing,
enforcement, and information systems, but this direct cost of administering
the income tax is just a small fraction of its total cost. It has been estimated
that individual taxpayers in the aggregate spend up to 3 billion hours each
year to comply with the tax system—about 27 hours per taxpayer. The
present tax code, with its myriad exclusions, exemptions, adjustments,
deductions, and credits has grown into a labyrinth of complexity. In tax year
2000 nearly 72 million taxpayers (56 percent of all taxpayers) used paid tax
preparers to complete their tax forms. Many taxpayers purchase tax-help
books and computer software. Compliance costs are also onerous for business taxpayers, especially small businesses, and the typical Fortune 500
company spends almost $4 million a year on tax matters.
The current tax system also causes households and businesses to rearrange
their affairs in a number of ways that make poor use of economic resources,
leading to substantial economic waste and, ultimately, reducing real incomes.
The system affects a number of important economic decisions, such as how
much to save and invest, how much risk to take, how much home mortgage
debt to carry, how much in tax-exempt bonds to hold, when to realize capital
gains, whether to hold assets that produce dividends or capital gains or
interest, how much labor to supply and how much to hire, whether to organize business operations in corporate or noncorporate form, and to what
extent to comply with the tax system. Perhaps one of the more salient distortions in the income tax today is that caused by the “double tax” on corporate
income. As discussed extensively later in this chapter, this double taxation
occurs when income distributed to shareholders as dividends or
realized as capital gains is subject to individual tax after already being taxed
at the corporate level. Double taxation causes too little capital to be allocated
175

to the corporate sector and a disproportionate share of capital to be allocated
to other sectors of the economy. For a discussion of the President’s recent
proposal to eliminate the double tax on corporate income see Chapter 1.
These distortions and others lower saving rates and inhibit investment,
capital accumulation, risk taking, and innovation, thereby lowering the
growth potential of the economy, real incomes, and consumption. It has
been estimated, for example, that elimination of the double tax on corporate
income alone could increase economic well-being by as much as $52 billion
each year forever. Tax preferences provided through the array of exclusions,
exemptions, adjustments, deductions, and credits represent policy decisions
to exclude some income from the tax base, but this poses a tradeoff: a higher
overall tax rate is then required to raise a given amount of revenue, and this
distorts household and business decisions and imposes a corresponding
burden on the economy. Reduction or removal of many of these distortions,
through broadening the tax base and lowering tax rates, would, by one estimate, increase accumulated capital by 10 to 15 percent and real GDP by 2 to
6 percent. The economic gains from fundamental reform of the tax system
could lead to substantial increases in economic well-being for all Americans.
The major objectives of tax reform are to reduce complexity, improve
economic incentives, and address fairness. The central theme that brings these
objectives together is that household and business decisions should depend on
the tax code as little as possible. Taxing all income, but taxing it only once, is a
key ingredient of many reform plans. This would involve broadening the tax
base while lowering tax rates. Some efforts have also focused on a shift from
taxing income to taxing consumption or consumed income.
A possible argument against reform is the suggestion that the current tax
system instead needs to be “ripped out by its roots” and completely replaced.
Arguments for such wholesale reform certainly have merit. This chapter,
however, illustrates ways in which the current system could be modified to
improve incentives and boost real incomes.
An important goal of any tax reform proposal is to reduce complexity. In
the current tax system, much of the complexity and thus much of the
compliance burden result from the numerous tax preferences, differential
taxation, and the taxation of capital income. Aspects of the current system
often involve complicated phase-ins and phaseouts designed to target tax
benefits to certain groups of individuals or businesses. Replacing these
targeted tax preferences with broad exclusions or lower tax rates would
reduce this complexity. Differential taxation, or the taxation of different
types of income at different rates—such as the double tax on corporate
income and the exclusion for many employer-provided fringe benefits—
creates incentives for taxpayers to rearrange their affairs to realize income in
ways that are taxed more lightly. The use of tax shelters and arrangements
that allow taxpayers to defer their tax liability is, to a large extent, the result
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of these kinds of differentials. Reducing differential taxation would reduce
complexity, reduce the incentives for tax shelters, and improve other
economic incentives. Finally, research suggests that compliance costs are
substantially higher for taxpayers with significant amounts of financial and
business income. Defining such income and allocating it to individual
taxpayers involves substantial recordkeeping. Many reform proposals would
both reduce the tax on certain types of capital income, to promote saving
and investment, and simplify the taxation of such income.
Some opponents of reform argue that taxing consumption rather than
income would necessarily place a relatively heavier tax burden on lower
income taxpayers. Conventional distributional analysis typically considers a
snapshot of taxpayers’ economic well-being at a particular point in time.
Research has shown that, when a longer view is taken, differences in wellbeing, whether measured by income or by consumption, tend to be not as
great, because of the fluidity of household incomes over time. Also, analyses
of the distributional effects of moving to a tax based on consumption rather
than income often do not recognize that a substantial portion of capital
income, which is earned primarily by higher income taxpayers, is taxed
under both income and consumption tax principles. The distributional effect
of moving to a consumption tax looks considerably more progressive when
the taxation of a substantial portion of capital income under a consumption
tax is taken into account. Indeed, both an income tax and a consumption tax
levy tax on the extraordinary (or what economists call supernormal or
inframarginal) returns to capital.
This chapter revisits these issues, focusing particularly on ways in which the
influence of taxes on key economic decisions could be diminished within
the framework of the current tax system. First, the key objectives of reducing
complexity, improving economic incentives, and achieving fairness are laid out
in greater detail. The broad principles that underlie the two main approaches to
taxation, that based on income and that based on consumption, are then
described. These principles focus on how to raise enough revenue to fund a
given level of government services in a way that has the least effect on economic
decisions. Next, a framework is outlined against which the current, hybrid tax
system can be compared and contrasted. Then two issues important to evaluating the distributional effects of moving to a consumption tax—the fluidity of
taxpayer incomes and the taxation of capital income under a consumption
tax—are discussed. This is followed by a discussion of how the current tax
system taxes neither wholly income nor wholly consumption, highlighting the
ways in which the current system departs from these broad principles. Finally,
the chapter considers some of the major decisions and tradeoffs involved in
proposed changes to the tax system. Modest structural changes are outlined that
would move the current tax system toward either an income- or a consumptionbased system, improve economic incentives, and reduce complexity.
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Objectives of Tax Reform
At the outset, some overriding and fundamental objectives for tax reform
can be identified: simplicity, fairness, and the promotion of long-term
economic growth through improvements in incentives. These objectives are
very much interrelated. Complexity, for example, can undermine one view of
fairness if, despite the progressive tax rate schedule and targeted tax preferences, taxpayers perceive that higher income taxpayers pay less tax than they
should, through tax avoidance and tax sheltering. Similarly, complexity from
the phase-in and phaseout of targeted tax preferences can distort economic
decisions, and thus impede long-term growth, by imposing a high effective
tax rate on certain taxpayer decisions. But sometimes these objectives come
in conflict. For example, addressing fairness through targeted tax preferences
may distort economic decisions and undermine long-term growth through
differential taxation and a higher overall tax rate.

Simplicity: Freeing up Resources for Productive Use
The current tax system is often viewed as difficult to understand, and the
resulting billions of hours and billions of dollars devoted to tax administration and compliance are a drag on the economy. As mentioned above,
taxpayers spend as much as 3 billion hours a year on Federal tax matters, and
compliance costs associated with the Federal income tax equal about 10
percent of revenue, or about $135 billion in 2001. The numerous tax preferences and the interactions among them, together with differential taxation,
give rise to much of the complexity in the current tax system. The taxation of
capital income and the complex rules governing depreciation also result in
considerable complexity for both households and businesses. The rules used
to define business receipts and deductions require recordkeeping and
complex calculations, sometimes over many years. Self-employed taxpayers
spend an average of 60 hours a year on such tax matters. Studies consistently
find that compliance costs are most onerous for smaller businesses. Taxpayers
with capital income, such as capital gains, dividends, interest, and rental
income, also tend to have high compliance costs.
Compliance costs can be high even for individuals who receive most of
their income as wages. The number of tax preferences has risen, often
involving multiple definitions, and preferences often give rise to complicated
interactions between provisions. For example, the tax code currently defines
a “child” in at least five different ways: one way for purposes of qualifying for
the child tax credit, another to qualify for the child and dependent care tax
credit, another to determine head of household filing status, another for
the Earned Income Tax Credit (EITC), and another for the exemption
for dependents. Taxpayers with children may need to understand which
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definition applies to some or all of these provisions when filling out their tax
returns. Multiple definitions also encumber the provisions of the tax code
relating to education expenses (such as the Lifetime Learning credit, the
Hope credit, the education deduction, Coverdell Savings Accounts, and
college savings and prepaid tuition plans), household maintenance tests, and
earnings tests. An increasing number of taxpayers are also required to comply
with two parallel tax systems: the regular tax and the alternative minimum
tax (Box 5-1).
A major source of complexity in the current income tax is its attempt to
target tax benefits to meet a variety of social goals. Integration of social goals
into the tax system takes the form of altering the definition of ability to pay
across a wide set of taxpayer characteristics. In this respect, defining a child
five or more different ways is important if it is desirable to vary tax preferences along these dimensions. However, it comes with considerable
compliance and economic costs. What is often not appreciated is the extent
to which the targeting of these tax preferences subjects taxpayers with the
same income to different effective tax rates (Box 5-2). Elimination and
consolidation of tax preferences would help simplify the tax system and
improve economic incentives.

Fairness: Relating Taxes to Ability to Pay
and to Economic Well-Being
The income tax system should relate a taxpayer’s tax liability to his or her
ability to pay and to his or her economic well-being. This is the rationale
behind the current progressive rate structure, whereby tax rates rise with
annual income, as well as behind many of the existing tax preferences.
However, the link to ability to pay begins to weaken when taxpayers with the
same level of income pay different amounts of tax, because of differences in
eligibility for some tax preferences, or have different opportunities to avoid
paying taxes. Taxpayers fortunate enough to receive good tax advice might,
for example, learn of opportunities to shelter income from tax legally; this
can erode confidence in the tax system. Faith in the fairness of the tax system
can also be undermined when compliant taxpayers see others evading
substantial amounts of tax.
How ability to pay is measured is also crucial to perceptions of fairness.
The current income tax system uses annual income as a yardstick for ability
to pay. Some have argued, however, that what a taxpayer actually consumes
better reflects his or her economic well-being than how much income that
taxpayer earns. Consumption patterns are determined by incomes over a
time horizon that extends well beyond 1 year. A household’s past income
and, in particular, its expectations about future income are critical in determining how much the household spends in any given year. Researchers have
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Box 5-1.The Toll of Two Taxes: Compliance with the Regular
and the Alternative Minimum Tax
An increasing number of taxpayers are required to comply with two
parallel income tax systems: the regular tax and the alternative minimum
tax (AMT). Although the AMT itself is not very complicated, taxpayers
may be surprised to learn that some of the deductions and credits they
claim under the regular tax, and even the benefit of the lower rate brackets,
are substantially reduced if they become subject to the AMT. Indeed, these
factors are exactly what push many taxpayers onto the AMT.
The AMT is, in many respects, an example of a government policy that
has had unintended consequences. The minimum tax, the precursor to
today’s AMT, was enacted in 1969 following a report that 155 very high
income individuals had paid no tax. Although its original intent was to
ensure that a relatively few high-income individuals pay tax, it is projected
that some 40 million taxpayers will pay the AMT by 2012, assuming that
the tax reductions enacted in 2001 are permanently extended (Chart 5-1).
Moreover, more than two-thirds of married taxpayers with two or more
children and 97 percent of taxpayers with incomes between $75,000 and
$100,000 will face the AMT by 2010. Some estimates indicate that by 2008
the AMT will raise more revenue than the regular tax.

180 | Economic Report of the President

generally concluded that incomes over longer time horizons are a better
indicator of differences in economic well-being than income in any one year.
Annual incomes can vary from lifetime incomes for many reasons. One is
that income tends to vary in a predictable way over a person’s working life.
Most individuals’ earnings are relatively low when they enter the work force
and then rise as they gain job experience. Earnings typically peak after
midlife and fall after one enters retirement. Early in their lives, taxpayers
might dissave (that is, dip into their savings or, more likely, borrow) to
finance college and job training expenses, and then save during their middle
years so as to accumulate wealth on which to support themselves in retirement. How much a taxpayer consumes in a given year depends both on that
taxpayer’s earnings and on how much he or she decides to save. Aggressive
savers can support a higher level of consumption in retirement. Incomes can
also vary in response to a variety of other events, such as transitions between
jobs, unemployment, marriage and divorce, illness, and volatility in business
income and income from the sale of assets.
Two conclusions can be drawn from this distinction between lifetime and
annual incomes. First, annual consumption rather than annual income
might be a better proxy for economic well-being, because consumption is
more closely related to income over a longer time horizon than to income in
a given year. Second, the use of annual income in analyzing the distributional
effects of the current tax system and proposed changes overstates the extent
of inequality among taxpayers. Some of the measured inequality will actually
reflect comparisons between taxpayers of different ages—for example,
comparing a working professional with a retiree who left the work force long
ago. Other measured inequality will reflect temporary shocks to income due
to changes in employment status, living arrangements, and the uneven
manner in which some people earn their income. Distributional analyses that
take these factors into account may provide a better measure of ability to pay
and of economic well-being.

Long-Term Growth: Boosting Economic Performance
by Improving Incentives
A central aspect of tax reform is whether it can improve the economy’s
overall performance, leading to a rise in real incomes. Reducing the tax
system’s deleterious impact on incentives to work, save, invest, and innovate
would help increase growth and boost real incomes in the long term. The tax
system affects these incentives in a number of ways. Differentials in the rate
of tax imposed on economic decisions cause households and businesses to
shift attention and effort to less taxed activities. These distortions in household and business decisions can result in a misallocation of resources in the
economy and reduce real incomes below what could be achieved otherwise.
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Box 5-2. What Tax Rate Do Taxpayers Really Face?
Many taxpayers look to their statutory tax rates—their “tax
bracket”—to gauge how large a bite the Federal Government takes
from their paycheck. Some might be surprised to learn that their effective marginal tax rate—what they actually pay on their last dollar of
income—can differ substantially from their statutory tax rate.
Moreover, even though statutory tax rates are relatively low at low
levels of income, reflecting the progressivity of the current tax rate
schedule, the effective marginal tax rates that low-income taxpayers
face can in some situations be unexpectedly high.
Chart 5-2 shows the effective marginal tax rate for a hypothetical
family of four at various income levels. What is striking about this chart
is that effective rates do not consistently rise with income. Rather,
there are numerous spikes and steps that reflect the phase-ins and
phaseouts of various deductions, credits, and other provisions.
Taxpayers may receive a tax benefit from the child tax credit, for
example, but find that the tax on their last dollar of income is pushed
up as this credit phases out.
The distribution of effective marginal tax rates for taxpayers at given
income levels is shown in Chart 5-3, which documents the extent to
which effective marginal tax rates vary at given levels of income. The
chart shows marginal tax rates for the 10th, 50th, and 90th percentiles,
where taxpayers are ranked at each level of income by their marginal
tax rate. At any given income level, 50 percent of taxpayers will have
marginal tax rates above the line indicated for the median taxpayer,
and 10 percent of taxpayers will have marginal tax rates exceeding the
line for the 90th percentile. For example, 10 percent of taxpayers with
$50,000 in income have marginal tax rates that are below 15 percent
(the tax rate at the 10th percentile); 50 percent have marginal tax rates
below, and half above, 15.3 percent; and 10 percent have marginal tax
rates above 27.8 percent.
As the chart shows, marginal tax rates diverge considerably even
among taxpayers at the same income level, especially at lower
incomes. The divergence arises because of the various deductions and
credits that phase in and then out at various rates, depending on a host
of taxpayer characteristics and choices. Indeed, these phase-ins and
phaseouts would cause considerable variation in effective marginal
rates even under a flat statutory tax rate schedule.

182 | Economic Report of the President

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As described above, reduction of these distortions can have a substantial
effect on capital accumulation (and thus wealth), increase long-term growth,
and boost real incomes.

Analysis of Alternative Reforms
The two main approaches typically advocated by economists to revamping
the current income tax involve moving the current tax base to one that is
closer to comprehensive income, or replacing the current income tax with a
tax that falls only on consumption. Comprehensive income, which some
advocate as the best measure of an individual’s overall well-being and ability
to pay, is defined as current consumption plus increases to wealth. Taxation
based on comprehensive income would include in the tax base all labor
income, income from the ownership of capital (such as dividends, interest,
rents, and accrued capital gains), and gifts and bequests received. Deductions
reflecting the cost of earning income, such as job-related training expenses,
would be allowed because they reflect neither purchases for consumption nor
any accretion to wealth. One feature of a comprehensive income tax is that it
treats individuals with the same accrued purchasing power equally, regardless
of the source, thus adhering to the principle of horizontal equity. An individual receiving income primarily from labor, for example, would be treated
no differently than a person with the same level of income from capital
or a bequest.
This framework, however, has some practical problems related to the
taxation of capital gains, inflation, income volatility, and imputed income.
Although capital gains reflect additions to wealth, measuring these gains as
they accrue is at best problematic: it requires frequent valuation of assets, and
accurate market values for some assets cannot easily be established. Another
problem is that inflation causes asset appreciation unrelated to changes in
purchasing power; a proper accounting would require that the inflationary
component of capital gains be removed from the tax base. Dividends and net
interest income should likewise be included in taxable income only to the
extent they exceed inflationary returns. Yet another problem is that the
volatility of taxable income combined with a progressive tax rate schedule
could cause two taxpayers who have the same taxable income when cumulated over several years to pay different amounts of tax, thereby violating the
principle that taxpayers with equal ability to pay be treated equally.
One of the most vexing problems associated with a comprehensive income
tax is the need to include imputed income in the tax base. Imputed
income arises from consumption or accretions in wealth that occur outside of
normal market mechanisms and therefore are difficult to value. The value
184 | Economic Report of the President

of the services that a homemaker provides is a standard example of imputed
income. Another is imputed rent, which accrues to a taxpayer who owns his
or her own home, because that taxpayer is just as well off as another who
owns a house of equal value but receives rental income from a tenant. Under
a comprehensive income tax, imputed rent—the flow of housing services
received by owner-occupants who, in effect, rent their house to themselves—
would be included in income. Expenses related to producing that income,
including depreciation, mortgage interest, and property taxes, would be
excluded from income, however. Clearly, taxing such imputed values raises
enormous practical difficulties.
A key aspect of analyzing a tax base is taking into account all of the points
of collection in the tax system. Income, for example, can be taxed and
collected either at the business or at the individual level. If tax on a comprehensive income tax base were collected entirely at the business level,
businesses would pay tax on their business receipts, less expenses, but would
deduct neither compensation to employees, nor interest payments, nor dividends paid to shareholders. If businesses are not allowed to deduct
compensation, they in effect withhold and remit to the government the tax
on compensation when paying the business-level tax.
Tax on interest and dividends could also be paid at either the business or
the individual level. If paid only at the business level, dividends and interest
would not be deductible, and the corresponding income would be excluded
from tax at the individual level. If, instead, dividends and interest were taxed
only at the individual level, businesses would receive a full deduction for
dividends and interest paid.
The current income tax demonstrates the importance of considering all
points of collection. Under the current tax system, interest income is not
subject to the business-level tax because interest payments are treated as a
deductible business expense. Instead, interest payments are included in individuals’ taxable income. In contrast, corporate dividends are subject to tax at
the business level because dividend payments are not deductible. What is
striking, however, is that dividends are also included in individuals’ taxable
income. Dividends are thus taxed twice.
Consumption, rather than income, has been suggested as another potential
tax base. As discussed above, one rationale is the claim that consumption is
more closely related to a taxpayer’s well-being than annual income. Also, by
taxing consumption rather than income, the tax system would not distort
taxpayers’ decisions about how much income to save. In contrast, because the
income tax includes the return to saving in the tax base, it taxes future
consumption (that is, current saving) more heavily than current consumption.
Under an income tax, current consumption is tax-favored relative to future
consumption, thereby discouraging saving.

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A hypothetical consumption tax could be implemented in any of several
ways. It could, for example, take the form of a national retail sales tax
imposed broadly on all consumption goods at the final stage of production.
An alternative form of consumption tax, common in Europe, is the creditinvoice method value-added tax (VAT), where a business pays taxes on its
total receipts but receives a credit for taxes previously paid by suppliers on
goods that the business has purchased from them. This tax builds in a degree
of self-enforcement, because businesses can claim a credit against their tax bill
only if another business has previously paid tax on the sale. Nevertheless, the
experience with State sales taxes and with the European VAT suggests that
compliance can be undermined and considerable complexity added when
certain final products are fully or partly exempted. Some have suggested that
transactions-based national retail sales taxes, where revenue is collected at
every point of final sale, raise difficult administrative and compliance issues
and may become infeasible at a rate above 10 percent.
Alternatively, a tax on final goods consumed by households could be
imposed on businesses’ total receipts less payments to other businesses,
including purchases of equipment and structures. This type of entity-based
consumption tax, called a subtraction-method VAT, imposes tax on final
purchases by consumers, which is remitted on the value added by businesses
at each stage of production. Because a subtraction-method VAT does not
provide a deduction for compensation, nearly 60 percent of the tax base
reflects compensation to workers. Under this approach, the tax on housing
consumption would essentially appear as a tax on the construction and sale
of new homes. This payment of tax on the value added at each stage of the
production of new homes is equivalent to “prepaying” the tax on the future
stream of annual housing consumption that the home provides; that is, it is
equivalent to a tax on annual imputed rental income.
The deduction for purchases from other businesses under a subtractionmethod VAT ensures that the tax does not fall on previously taxed business
sales. Unlike with an income tax, the deduction for investment expenditure
(in other words, expensing rather than depreciation) exempts from tax a
portion of the return to a capital investment. In economic terms, the deduction for investment expenditure exactly equals the tax on the cash flow from
the expected “normal” return on the investment. Therefore the deduction
eliminates the tax on this part of the investment return; that is, the return to
capital at the margin is fully exempt from tax. However, to the extent the
investment returns an amount in excess of the expected normal return,
perhaps because of chance, innovation, or successful risk taking, the tax on
these above-normal returns (what economists call supernormal or inframarginal returns) will exceed the tax value of the initial deduction. That is,
these supernormal returns will generally be taxed. Treatment of investment
186 | Economic Report of the President

earnings under a consumption tax would thus be similar to that under
Individual Retirement Accounts, as Box 5-3 explains.
The subtraction-method VAT has received a lot of attention in discussions
of tax reform because, with slight modification, its structure becomes very
similar to that of the current income tax. Instead of taxing compensation at
the business level as under the subtraction-method VAT, compensation could
be taxed at the household level by allowing businesses to deduct employee

Box 5-3. How Are Consumption Taxes and Individual Retirement
Accounts Similar?
Individual Retirement Accounts (IRAs) treat investment earnings in the
same way that a consumption tax would. They thus provide a framework
for describing how a consumption tax would exempt a portion of investment earnings from tax. If taxpayers deduct contributions to an IRA from
their taxable income, they are also required to include all distributions
from the IRA in their taxable income. For the purpose of discussing the
tax treatment of the return to saving under a consumption tax, the IRA
contribution limits can be ignored. An investor with unlimited access to
capital would invest up to the point where the payoff from an additional
dollar invested (the marginal investment) just covers the costs of the
investment, including taxes. The value of the upfront deduction for the
initial investment, however, will exactly offset (in present value) the tax
on the expected normal return when the IRA is distributed.
Consequently, with an IRA the decision to invest an additional dollar
is unaffected by the tax. Returns above the expected normal return
(extraordinary returns), however, will generally be subject to tax.
Consumption taxes treat investment earnings in essentially the same
way. Under a national retail sales tax—the most straightforward type of
consumption tax—no tax is paid on income that is saved or on investment earnings that are reinvested. Tax is paid only on sales of final
goods and services, that is, when the taxpayer consumes. The taxpayer,
in effect, receives an upfront deduction on savings. Imposing a tax on
final sales is thus effectively the same as taxing a distribution from an
IRA. Other types of consumption taxes, such as the subtraction-method
value-added tax and the two-tiered value-added tax, where compensation is taxed at the household level, work in essentially the same way.
Roth IRAs provide tax benefits that are similar to those of deductible
IRAs but differ in the timing of taxes paid. In contrast to a deductible
IRA, contributions to Roth IRAs are not deductible from taxable income.
Contributions are made with after-tax dollars, but distributions from
Roth IRAs are tax free. An important insight about deductible IRAs and

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Box 5-3.—continued

Taxation of Investments With and Without Extraordinary Returns:
Deductible IRA versus Roth IRA
Investment without
extraordinary returns

Item

Deductible IRA

Investment with
extraordinary returns
Deductible IRA

Roth IRA

Roth IRA

Investment .............................................................

$1,000

$1,000

$1,000

$1,000

Initial tax payment..................................................

0

-270

0

-270

Contribution ............................................................

1,000

730

1,000

730

Investment earnings...............................................

100

73

5,027

5,000

Account balance after 1 year .................................

1,100

803

6,027

5,730

Tax due upon distribution.......................................

-297

0

-1,627

0

After-tax distribution/account value ......................

803

803

4,400

5,730

Note.— Calculations are for a hypothetical 1-year investment, assuming no restrictions or penalties on distributions. The taxpayer is assumed to face a 27 percent tax rate when making the contribution and upon distribution. The
investment without extraordinary returns is assumed to return 10 percent, which is similar to the historical return to
corporate equities. The extraordinary or inframarginal return is assumed to be $5,000 on the first $730 contributed
to each IRA and 10 percent on the remaining $270 contributed to the deductible IRA.
Source: Council of Economic Advisers.

Roth IRAs is that an equivalent investment in each type of account will
result in the same after-tax account balance and finance the same
amount of consumption during retirement.
The table above illustrates the equivalence between deductible and
Roth IRAs for an investment without extraordinary returns. In this
example, $1,000 is invested in a deductible IRA and $1,000 in a Roth IRA
before paying tax. In the case of the deductible IRA, the upfront deduction
offsets any tax due. In the case of the Roth IRA, the taxpayer contributes
the after-tax amount to the IRA. After 1 year the initial investment plus
investment earnings are distributed. Tax is paid on the distribution from
the deductible IRA, but not on that from the Roth IRA.The key point is that
the after-tax distributions from the two IRAs are identical; that is, both
investments finance the same level of consumption. This result will
always hold provided the duration and rates of return of the investments
are the same and the tax rates at the time of contribution and the time of
distribution are equal. Aside from these factors, savers should generally
be indifferent between deductible and Roth IRAs.

188 | Economic Report of the President

Box 5-3.—continued
What is the significance of this difference in the timing of tax
payments between deductible and Roth IRAs? Under a Roth IRA the
taxpayer effectively is prepaying tax. Conversely, under a deductible
IRA, the government in effect becomes a co-investor in an amount equal
to the upfront deduction. The government receives its share of the earnings on the investment in the form of the tax payment due upon
distribution. For an investment with expected normal returns, the tax
payment due upon distribution under a deductible IRA is equivalent to
the prepayment of tax under a Roth IRA. If the government could “reinvest” the tax received from prepayment under a Roth IRA in an
equivalent investment, the value of its investment would be exactly
equal to the tax payment due upon distribution under the deductible IRA.
However, this equivalency may not hold if the investment yields
certain types of extraordinary returns: what economists sometimes call
inframarginal returns, such as might result from innovation, discovery,
or an idea with an extraordinarily large payoff. If these returns are, at
some level, fixed, they preclude reinvestment of the tax prepayment at
the same extraordinarily high return. In contrast, risky investments do
not necessarily produce inframarginal returns, because additional
investments could be made at the same rate of return.
The table compares the after-tax value of investments in deductible
and Roth IRAs with such extraordinary returns. With a deductible IRA
the extraordinary returns are taxed through the government’s role as a
co-investor. However, under the Roth IRA, this type of extraordinary
return goes untaxed, and the Roth IRA has a correspondingly higher
after-tax value than the deductible IRA.
This result has important implications for consumption taxes. A
consumption tax that works like a deductible IRA will tax all extraordinary investment returns, including inframarginal returns from
innovation and ingenuity. The example of the deductible IRA also illustrates how expensing of investment taxes such extraordinary returns.
The different tax treatment of extraordinary returns under a deductible
IRA than under a Roth IRA also illuminates the key difference between a
destination-based tax, which taxes imports but not exports, and an
origin-based tax, which taxes exports but not imports (discussed later
in the chapter). The taxation of exports under the origin principle
works like a prepayment mechanism that has the effect of exempting
extraordinary returns from tax.

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compensation and imposing a tax on compensation at the household level.
In contrast to a subtraction-method VAT, this structure (sometimes called a
two-tiered consumption tax) has several possible advantages. First, its similarity in structure to the current income tax could ease the transition and
facilitate acceptance. Second, unlike transactions-based and entity-based
consumption taxes, a two-tiered consumption tax would permit progressivity
to be introduced directly through the household-level tax by allowing
generous exemptions to individuals or by retaining tax preferences available
under current law. Of course, targeting of tax preferences for social policy
objectives introduces complexity and may have the unintended consequence
of distorting taxpayer behavior by implicitly imposing high effective
marginal tax rates.
Switching to a consumption tax without the necessary transition provisions
might impose a one-time levy on existing capital. In the context of a cash flow
tax, such as a subtraction-method VAT, that allows expensing of investment,
this one-time levy occurs because full expensing makes new investment
cheaper. The one-time levy would not distort economic decisions, however,
because it is imposed on existing capital, for which the decision to invest has
already been made, not on new capital. Taxing existing but not new capital
may transfer income from the old, who have accumulated assets over their
lifetimes, to the young, who have just begun to do so. This raises important
issues of fairness. The one-time tax on existing capital would mean a reduction in the tax burden of the young, reflected through lower tax rates, which
itself would offset the decline in value of existing assets and improve incentives
to work and save and allow a higher rate of capital accumulation.
Consumption tax reform could offer some type of transition relief to reduce
the one-time tax on existing capital. Partial transition relief could take the form
of allowing businesses to retain their basis in existing capital. The extent of
transition relief would determine the size of the tax on existing capital. The
more generous the transition relief, the smaller the benefits of a shift to a
consumption tax base.

What Does the Current System Tax?
The current tax system deviates from both a comprehensive income tax
base and a comprehensive consumption tax base in important ways. First, a
substantial share of income is removed from the tax base through the exclusions, exemptions, deductions, and credits available under current law. As
Chart 5-4 shows, tax preferences under current law reduce the income tax
base from what it would be under a comprehensive income tax by over
40 percent. A few major preferences, such as the personal exemption, the
standard deduction, and itemized deductions, including the home mortgage
190 | Economic Report of the President

interest deduction, account for 40 percent of income excluded from the
comprehensive income tax base. Exclusions, primarily for tax-preferred
savings and employer-provided health insurance, remove another 30 percent,
with other tax preferences accounting for the rest of the gap.
Tax preferences can distort economic decisions by creating tax differentials
between different types of income and consumption. These preferences are
similar to government transfers, or to subsidies that have the same effect as
direct government expenditures. As already noted, these preferences pose a
tradeoff against the higher marginal and average tax rates needed to raise a
given amount of revenue, which then distort household and business decisions. Preferences that apply unequally to taxpayers with similar resources
also violate the principle of horizontal equity.
Many of these preferences, however, serve useful social purposes. Some of
the preferences listed in Chart 5-5, for example, such as that for employerprovided health insurance, subsidize health care expenditure. The personal
exemption, the child tax credit, and the EITC adjust taxable income to
reflect ability to pay.
An important difference between a comprehensive income tax and the
current income tax is the high degree of differential taxation present in the latter.
The double tax on newly equity-financed corporate investment, as described
later in the chapter, is one of the most important examples, but others abound.
There is considerable variation across asset types in the acceleration of

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depreciation allowances, implying different tax rates for different investments.
The current tax system also taxes capital gains and dividends differently, excludes
from tax the implicit returns from consumer durables, and exempts from tax the
interest paid on State and local government bonds.
Like a comprehensive consumption tax, the current income tax also
exempts a substantial amount of income generated from returns to savings
through a variety of tax-preferred retirement plans and accounts. (Together
these amount to the largest item listed in Chart 5-5.) In 1998 roughly
99 million individuals participated, as either active workers, separated but
vested workers, survivors, or retirees, in the current system of employermanaged pensions. About 29 million workers were active participants in
defined-contribution plans (plans in which benefits vary with the return on
the invested funds). Contributions to these plans are tax deductible, with
employers often providing matching contributions. Another 23 million
workers participated in defined-benefit plans, to which employers make taxdeductible contributions on behalf of employees, with benefits typically based
on past pay and years of service. The investment income earned within these
accounts accrues tax-free, but distributions are included in taxable income.
Individual Retirement Accounts (IRAs) and similar arrangements such as
Medical Savings Accounts, Coverdell Savings Accounts, and college savings
and prepaid tuition (Section 529) plans provide similar tax advantages. The
192 | Economic Report of the President

TABLE 5-1.— Household Saving in Tax-Preferred and Taxable Accounts, 1999
Item

Billions
of dollars

Percent of
gross
household
saving

Percent of
expanded
disposable
income

Expanded disposable personal income ....................................................

6,911

Gross household saving ...........................................................................

853

100.0

12.3

Saving in tax-preferred plans/accounts ..........................................
Employer pension plans ....................................................
Individual Retirement Accounts ..............................................
Life insurance and other tax-preferred accounts ...................

249
164
43
43

29.1
19.2
5.0
5.0

3.6
2.4
.6
.6

Investment in owner-occupied housing .......................................

258

30.2

3.7

40.7

5.0

Net acquisition of taxable financial assets (less accrued taxes)....

347

Less: Household borrowing ....................................................................
Home mortgage borrowing ......................................................
Consumer and other borrowing ...............................................

579
374
206

8.4
5.4
3.0

Equals: Net household saving..................................................................

274

4.0

Note.—Expanded disposable personal income is equal to disposable personal income plus net investment in
government retirement accounts and corporate retained earnings less the accrued tax liability of saving.
Detail may not add to totals because of rounding.
Source: Council of Economic Advisers, using methodology described in William G. Gale and John Sabelhaus,
“Perspectives on the Household Saving Rate,” Brookings Papers on Economic Activity, 1999, and updated data from
Department of Commerce (Bureau of Economic Analysis), Board of Governors of the Federal Reserve System, and
Investment Company Institute.

combined effect of the upfront deduction for contributions and the tax
deferral on earnings is a zero tax (in present value terms) on the returns to
assets held within these accounts, although, as discussed below (and in Box
5-3), so-called extraordinary returns are still taxed in all but the Roth IRA
and other types of accounts where tax is “prepaid.” In 2001 about $10.9 trillion in assets was held within these tax-preferred retirement accounts. An
additional $22 billion was held within State-sponsored prepaid tuition and
college savings plans.
Because saving is the difference between income and consumption, the
exclusion of significant amounts of investment income from the tax base has
the effect of transforming the current tax system into a system that is partly
based on consumption. Table 5-1 puts this point in perspective by
comparing various categories of saving in the United States for 1999 (the
latest date for which consistent data are available). Gross household saving
was about $853 billion in that year. Saving net of borrowing was about
$274 billion, implying a household saving rate of about 4.0 percent of
income. Saving in tax-preferred accounts—defined-benefit plans, definedcontribution plans, IRAs, and life insurance accounts—accounted for nearly
30 percent of gross household saving in 1999.
Saving in owner-occupied housing accounted for another 30 percent of
gross household saving. As previously noted, imputed rental income is not
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taxed under the current system. Most of the appreciation in the value of
owner-occupied housing is likewise not taxed through the current exclusion
from capital gains taxation ($500,000 for taxpayers filing jointly, $250,000
for single taxpayers). This treatment exempts from tax most investment
income from owner-occupied housing. Interest and dividends are taxed
when received, but tax on the appreciation of financial assets is paid only
upon disposition of the asset (that is, tax is deferred), and then at preferential
capital gains rates, although the amount subject to tax includes inflationary
as well as real gains.
Although tax-preferred retirement saving and housing thus face effective
tax rates on the expected normal return that are close to zero (in present
value), taxpayers do not, in many cases, face a zero tax rate on their last dollar
of investment income. There are two explanations for this. First, an individual’s saving may exceed his or her eligible contributions to these accounts.
Second, taxpayers may be investing outside of these accounts because their
purposes are other than the prescribed goals of these accounts. Moreover, only
about 50 percent of employees had access to or were covered by an employermanaged pension plan in 1999. However, virtually all individuals with
earnings have access to some type of tax-preferred savings program, including
IRAs, because taxpayers without access to an employer-managed pension plan
are generally eligible to deduct contributions to an IRA from taxable income.
Thus the set of taxpayers who do not receive consumption tax treatment on
their last dollar of retirement savings consists of those without access to a
pension plan and who make the maximum IRA contribution, plus those
(very few) with access to a pension plan who make the maximum contribution. Data for the mid-1990s indicate that only about two-thirds of taxpayers
reporting deductible IRA contributions (2.5 million in 1996) contributed the
maximum amount allowed, and some of these taxpayers also contributed to
401(k)-type plans. Most other taxpayers received consumption tax treatment
on their last dollar of saving for retirement, and even more will do so as the
higher contribution limits for both 401(k)-type plans and IRAs, enacted
under the Economic Growth and Tax Relief Reconciliation Act of 2001, are
phased in over the next several years.
A number of special considerations arise when one contrasts the current
tax system with either the comprehensive income or the consumption tax
model. These considerations affect important productive resources or sectors
of the economy, such as human capital, housing, and the nonprofit sector,
and are discussed below.

Taxation of Human Capital
Because human capital is the most important component of national
wealth, it is also important to consider the tax treatment of this capital under
194 | Economic Report of the President

a comprehensive income or consumption tax. Investment in human capital
through education can be thought of as creating an intermediate input to be
used in the production of a final good and that pays a return: the educated
worker’s future stream of wages. Under the consumption tax model, only
final goods, not intermediate goods, should be subject to tax. Under the
current tax system, the tax treatment of human capital investment is mixed.
Costs of human capital accumulation include forgone earnings as well as
direct costs such as books, tuition, and supplies. Presently, of course, the
implicit cost of education represented by earnings forgone while receiving
education is not subject to tax but, consistent with a consumption tax, is
immediately expensed. Direct costs, including books, tuition, and supplies,
however, are currently subject to varying degrees of taxation.
Under current law a variety of tax provisions affect the tax treatment of
education expenditure. The Hope and Lifetime Learning tax credits and the
temporary deduction for higher education expenses (scheduled to expire after
2004) all provide varying degrees of relief, but they may not provide relief at
the margin or for the last dollar of postsecondary education expenditure for
many taxpayers. There are also several types of education savings vehicles,
such as Coverdell Savings Accounts and State college savings and prepaid
tuition plans, which exclude investment earnings on education-related
savings from tax. The college savings plans in particular, because of their very
high contribution limits, tend to provide consumption tax treatment at the
margin on the return to saving for higher education. The potential costs of
the residual bias against human capital formation can be significant.
Research has indicated that a 1-percentage-point increase in the income tax
rate may cause the long-run stock of human capital to decline by almost
1 percent—an effect with significant implications for national wealth.
Nevertheless, in addition to the various types of household saving listed in
Table 5-1, the expensing of forgone earnings and the various tax preferences
for education move the current system toward consumption tax treatment of
human capital.

Taxation of Housing
As discussed above, investment in owner-occupied housing is tax-favored
relative to other investment under the current tax system. The primary
source of this tax preference is the exclusion of the annual value of housing
services—imputed rental income—from income taxation. Although the
owner of a rental property is taxed on his or her rental income, no tax is paid
on the annual flow of housing services received by owner-occupants. Owneroccupied housing enjoys other tax advantages. Certain expenses related to
homeownership, such as mortgage interest and State and local property tax
Chapter 5

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payments, are allowed as itemized deductions. The deductibility of local
property taxes lowers the price of local public services. As noted above, the
first $500,000 of capital gains is excluded from income upon sale of a
primary residence. These advantages result in greater consumption of
housing services, and services provided by local governments are tax-favored
relative to similar, privately provided services.

Taxation of Nonprofits
The nonprofit sector—religious groups, private educational institutions,
government-sponsored enterprises, hospitals, and various associations and
foundations—is excluded from the current income tax to the extent that the
organizations themselves are generally not subject to tax. The wages of
nonprofits’ employees are, of course, subject to tax. There are also substantial
tax incentives in the tax system for individuals and businesses to contribute
to nonprofit organizations. Whether this relative tax advantage would
be retained if the current income tax were replaced by a consumption tax
depends on how the tax is structured. Under a two-tiered consumption
tax similar in structure to the current income tax, the current relative tax
advantage of nonprofits could be retained. The wages of their employees
would remain subject to tax under this type of consumption tax. However,
under a transactions-based consumption tax, such as a national retail sales
tax, there would be greater difficulty in exempting nonprofit organizations
from tax. In the case of a national retail sales tax, a system of exemptions for
purchases made by nonprofits would be needed, and this could add
complexity. The cost of charitable giving to nonprofits, however, might
change substantially under a consumption tax, for two reasons. First, there is
the issue of whether the individual and business deductions for charitable
giving would be retained. Second, incentives to give would be affected by any
change in the tax rate schedule. To the extent tax rates fall as a consequence
of fundamental tax reform, the tax incentive for individuals and businesses to
give to nonprofits would decline as well.

Distributional Consequences of Tax Reform
It is sometimes argued that a consumption tax base is less fair than an
income tax base because the benefit of not taxing capital income accrues
largely to those with higher incomes. However, this claim depends critically
on the time frame used to analyze the distributional effects of the two tax
bases. Consumption taxes are generally less regressive when viewed from a
lifetime perspective than when viewed from an annual perspective. It might
be expected that, for many individuals, lifetime consumption should be
196 | Economic Report of the President

roughly equal to lifetime income. If this is the case, the lifetime incidence of
a consumption tax and of an income tax should be close to proportional.
Also, as discussed above, a one-year snapshot of the distributional effects of
many tax changes can be misleading, because this type of distributional
analysis fails to take into account the fluidity of taxpayer incomes and other
characteristics (Box 5-4). Younger taxpayers entering the work force are likely
to have relatively low incomes as they continue to acquire human capital
through education and job experience. As their human capital develops, their
incomes tend to rise, peaking shortly before retirement. Saving and consumption patterns follow this cycle, with a period of accumulation accelerating in
midlife and peaking before retirement, when dissaving begins. These patterns
have been well documented, and distributional analyses that do not take them
into account may be misleading.
Consumption taxes may also be less regressive than often thought because
the bases of both a consumption tax and an income tax include key elements
of what is commonly called capital income. Capital income can be broken
down into four components: the return to waiting (that is, the opportunity
cost of capital), the return to risk taking (the risk premium), economic profit
(that is, the inframarginal return to investing), and the difference between
expected and actual returns. The key to analyzing the difference in distributional effects between a consumption tax and an income tax is that a
consumption tax exempts the first component of capital income from tax,
whereas an income tax includes it. The remaining three components are
generally taxed under both systems.
To understand how some forms of a consumption tax subject some capital
income to tax, it is useful to consider how the tax treats investment expenditure. Under a cash flow consumption tax, a firm expenses its capital
purchases. A successful investment will generate a series of future cash flows
to the firm. These future cash flows will be subject to tax, but the present
value of the expected future series of tax liabilities, as valued by the market,
will be exactly equal to the tax value of expensing the capital expenditure.
Because deductions have the same impact as other Federal Government
capital market transactions, they are valued the same as a risk-free investment, often assumed to be represented by the interest rate on Treasury bills.
The key point is that, to the extent that future cash flows from the
investment exceed (in present value) the initial investment, the excess will
generally be taxed. Future cash flows resulting from extraordinary profits,
due to innovation or the return to risk taking, are all generally subject to tax.
That is, to the extent the actual return exceeds the yield on a risk-free investment, as reflected by the Treasury bill rate, the difference will generally be
subject to tax under both a consumption tax and an income tax. The general
public is thus, in a sense, a proportional shareholder in all enterprises—a
co-investor—under an income or a consumption tax. Thus the general
Chapter 5

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public shares in the rewards to the extent the returns are unexpectedly high,
and shares in the losses in the case of a shortfall. Only the return to waiting
is generally exempt from tax under a consumption tax. As noted above (Box
5-3), certain types of extraordinary returns, such as inframarginal returns,
may also be free from tax if tax is “prepaid,” because the government no
longer acts as a co-investor and does not share in these inframarginal returns.
However, under a consumption tax, prepayment may be limited to difficultto-tax activities, such as housing services and investment in intangibles.
How important is it that only the opportunity cost of capital—the
expected normal return—generally goes untaxed under a consumption tax?
The answer depends critically on how large this opportunity cost is relative to
total capital income, and on who tends to receive this component of capital
income. If this component is large and received primarily by higher income
taxpayers, shifting to a consumption tax would have the immediate effect of
benefiting these taxpayers. It is important to note that the real risk-free
rate of return available to a tax-exempt investor has historically been below
1 percent a year.

Box 5-4. Taxpayers Exhibit Substantial Fluidity Across
Tax Rate Brackets
Do taxpayers tend to face the same marginal tax rate over time, or
do they change tax rate brackets as predictable and unpredictable life
events occur and their circumstances change? The table on the next
page considers the dynamics of statutory tax rate brackets over a
10-year period: the statutory tax rate brackets of taxpayers in 1987 are
compared with their statutory tax rate brackets in 1996 (these were the
years for which these data are available). In each year the statutory tax
rates the taxpayer would have faced had the Economic Growth and Tax
Relief Reconciliation Act of 2001 been in place in 1987 and 1996 (with
appropriate inflation adjustments) are compared. If most taxpayers
face the same tax rate at the beginning and the end of this 10-year
period, it might be concluded that a static, one-year snapshot is a good
indicator of a taxpayer’s lifetime average tax rate.
The tabulations, however, show a substantial amount of dynamics.
Taxpayers who remained subject to the same statutory tax rate in both
year 1 and year 10 are on the diagonal of the table (shown in bold).
About 53 percent of taxpayers (the proportion of taxpayers not on the
diagonal) were in a different tax rate bracket at the end of the period
than at the beginning. There was significant movement toward higher
tax brackets, reflecting upward mobility. In all, about 28 percent of
taxpayers had moved to a higher tax rate bracket at the end of the

198 | Economic Report of the President

Box 5-4.—continued
Taxpayers by EGTRRA Rate Bracket Using Panel
of Taxpayers from 1987 through 1996
Year 1
tax bracket
(percent)

Year 10 tax bracket (percent)
0

10

15

25

28

33

35

0.5
.3
.4
2.2
14.7
23.9
19.0

0.3
.1
.2
.8
7.5
19.8
49.1

Returns
in year 1
(thousands)

Taxpayers by rate bracket (percent distribution)
0
10
15
25
28
33
35

33.8
20.1
8.6
3.9
3.3
4.7
5.1

24.7
29.3
13.3
5.1
2.8
2.6
1.9

32.1
40.8
53.4
29.9
11.6
9.1
5.7

7.7
8.8
22.9
51.4
35.9
21.0
10.4

0.8
.6
1.2
6.7
24.0
18.9
8.8

10,360
15,370
50,059
31,427
2,682
1,096
633

Note.—Tabulations from 1987-1996 panel of taxpayers. Tabulations include only non-dependent taxpayers present
in all years of the panel data set. Each cell entry indicates the percent of taxpayers in a rate bracket in the last year of
the panel (i.e., column entry) relative to the number of all taxpayers in that rate bracket in the first year of the panel
(i.e., row sum).
Source: Council of Economic Advisers, based on tabulations provided by Department of the Treasury, Office of
Tax Analysis.

10 years. About 66 percent of the taxpayers in the bottom (zero tax
rate) bracket in year 1 had moved to a higher bracket after 10 years, the
vast majority moving to either the 10 percent or the 15 percent bracket.
About 47 percent of taxpayers in the bottom two brackets combined
(the zero and 10 percent brackets) had moved to a higher bracket by the
end of the period, although relatively few moved beyond the
15 percent bracket. There is also substantial movement down the tax
rate schedule. In all, about 26 percent of taxpayers moved to a lower
tax bracket. About 51 percent of the taxpayers in the top bracket in the
first year were in a lower tax bracket after 10 years. Forty-seven percent
of taxpayers in the top two brackets in year 1 had moved down to at
least the 28 percent tax bracket by year 10.
Although relatively few taxpayers moved from the lowest tax rate
brackets to the highest, a considerable fraction moved from the highest
brackets to the lowest. Of those starting in the 15 percent tax bracket or
below, only 1 percent reached the top two brackets. In contrast, of
those starting in the 33 percent bracket or above, 15 percent had
moved to the 15 percent bracket or below after 10 years. Of course,
taxpayers in the lower brackets may also be more likely to become
nonfilers, a possibility not accounted for here.
A considerably larger percentage of taxpayers were subject to any
particular tax rate at some time over the 10-year period than in just the
initial period. For example, more than twice as many taxpayers

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Box 5-4.—continued
were subject to one of the top two rates in either year 1 or year 10
(3.3 percent of returns) than in just the first year (1.5 percent of returns).
Moreover, this calculation excludes those taxpayers who may have
faced the top two rates during the intervening years but not in year 1 or
year 10, and the possibility that some taxpayers may not have filed a
tax return in some years. An analysis of all taxpayers who filed a
return in year 1 and were still alive in year 10 shows that nearly four
times (5.8 percent) as many taxpayers were subject to one of the top
two rates in at least 1 of the 10 years.
A number of factors explain the fluidity of taxpayers across tax rate
brackets over time. One piece of the puzzle is that most taxpayers’
incomes grow as they gain job experience and education, but then
decline in retirement as they leave the work force and rely on their
Social Security benefits, pensions, and savings, which may be nontaxable. Chart 5-6 shows the change in a hypothetical couple’s marginal
tax rate as that couple’s income follows this life cycle pattern of growth
followed by decline. In this example, a two-earner couple with two children earn about $65,000 at age 30 and pay income and Social Security
taxes. They buy a home and save for life’s uncertainties, their children’s
education, and their own retirement, using taxable accounts plus a
401(k). When they retire, they collect Social Security and live to the age
of 85. For simplicity, it is assumed that they neither receive an inheritance nor leave a bequest. The couple’s marginal tax rate, the rate paid
on the last dollar of earnings, varies greatly over the life cycle,
reflecting the couple’s passage through the various tax rate brackets
and the phase-in and phaseout of various tax deductions and credits as
their earnings and other characteristics change. The couple at first faces
a 15 percent marginal tax rate, then briefly faces a marginal tax rate of
20 percent because of the phaseout of the child tax credit, and then
faces a 25 percent marginal tax rate in midlife during the peak earnings
years. Toward the end of life the couple is in the 15 percent statutory
rate bracket, reflecting the decline in income in retirement, but pays
27.75 cents on the last dollar of income because the couple is in the
phase-in range of the tax on Social Security benefits.
Many taxpayers also have short-term fluctuations in their income as
they move in and out of the labor force or between jobs, or as their
business and investment income is hit by the ebbs and flows of the
business cycle. Finally, factors other than income, such as having children, going through marriage and divorce, or facing unusually high
medical expenses, as well as charity or home mortgage interest, can all
affect which tax bracket a taxpayer falls into.

200 | Economic Report of the President

Box 5-4.—continued
The substantial movement of taxpayers across rate brackets
suggests that tax burdens in a given year may tell a very different story
of the distribution of the tax burden than do measures of tax burdens
over longer horizons. These differences are important for evaluating
the distributional effects of changes in tax rates. Analyses that rely on
annual snapshots of taxpayer incomes are likely to suggest that a small
fraction of taxpayers benefit from rate cuts, when in fact a larger fraction of taxpayers are likely to benefit because of the substantial
movement of taxpayers up and down the tax rate schedule over time.

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Decisions on the Path to Reform
A number of choices would be involved in any effort to reform the tax
system. Some of these choices represent substantial shifts in tax policy but
could be made without major structural changes to the current tax. Also,
some of these changes do not involve a choice between the income and the
consumption tax frameworks but must be addressed within either framework.

Integration and the Double Tax on Corporate Income
The current tax system imposes a heavy tax burden on equity-financed
corporate investment through the double tax on corporate income.
Eliminating the high degree of differential taxation is the rationale behind the
President’s proposal to abolish this double taxation. Corporate income from a
newly equity-financed project is subject to two layers of tax. First, the corporate tax is paid on earnings at the firm level at a maximum rate of 35 percent.
For income distributed as a dividend, the second layer of tax is paid by individual shareholders at a maximum rate of 38.6 percent (plus any State or local
income tax). Alternatively, for assets held for more than 5 years, shareholders
pay tax at a statutory rate of 18 percent on the appreciation in stock value that
arises from corporate earnings retained and reinvested in the firm. The total
effective tax on corporate income is calculated by combining the two layers of
tax. As Table 5-2 shows, the effective tax rate (for Federal tax alone) on corporate income distributed to shareholders as dividends can be as high as 60.1
percent. For corporate income that is retained by the firm and realized by a
shareholder as a capital gain, the effective tax rate can be as high as 40.9
percent after accounting for substantial deferral. The effective tax rate on
capital gains is lower than the effective rate on dividends because of the preferential tax rate on long-term capital gains realizations and the ability to defer
taxes until gains are realized.
The double taxation of corporate income affects economic decisions in a
number of important ways that may reduce corporate investment, encourage
artificially high debt-to-equity ratios, discourage the payment of dividends, and
favor noncorporate organizational forms. The high tax on capital may also
discourage risk taking and innovation through its effect on entrepreneurship.
New firms innovate by developing new products and technologies and are a
testing ground for new forms of internal organization. Other firms can imitate
successful new approaches, leading to economy-wide improvements in productivity and faster economic growth.

202 | Economic Report of the President

TABLE 5-2.— Tax Rates on Capital Income for a Hypothetical Investor in 2003
Capital income

Individual tax rate
27.0 percent

38.6 percent
Percent

Dividends .......................................................................................
Retained earnings ..........................................................................
Debt ........................................................................................................
Pass-through income ......................................................................

52.6
40.9
27.0
27.0

60.1
40.9
38.6
38.6

Note.—Calculations are for a new equity-financed project and assume a 35 percent corporate tax rate and the indicated individual tax rate on ordinary income in 2003. An effective 9 percent rate is assumed for capital gains
realizations (i.e., 18 percent rate for assets held for more than 5 years multiplied by 0.5 to approximate the benefit of
deferring tax on accrued gains until the asset is sold.
Source: Council of Economic Advisers.

Debt Versus Equity Financing
Equity financing is tax disadvantaged relative to debt financing because
interest income, unlike dividends, is generally subject to only one layer of tax,
at the individual tax rate. As already mentioned, interest payments are
deductible as a business expense and thereby excluded from the corporate tax
base. Table 5-2 shows that the maximum effective tax rate on interest earnings
is 38.6 percent, the maximum tax rate on ordinary income. The encouragement of debt financing through the tax system results in an increased risk
of bankruptcy and financial distress. A heavier debt burden leaves firms
particularly vulnerable to capital market risk during a downturn or weakness
in the economy. Business failures and financial distress can result in losses to
shareholders, debtholders, and employees alike.

Dividend Payout Policy
The double taxation of dividends may also distort corporate dividend
payout policy and the investment decisions of firms. The economics literature
has generally found that, for new equity-financed investments, corporate
income paid out as dividends is tax-disadvantaged relative to corporate
income that is retained. This has important economic consequences. The
heavier tax burden on dividends can encourage investment in established
businesses with internally generated earnings, because these businesses will
tend to have more retained earnings because of the tax distortion. The distortion also favors stock repurchases over dividends.
Dividends may also provide a number of important benefits to investors
that have a direct bearing on corporate governance. Payment of dividends
may provide a signal to investors of a company’s underlying financial health.

Chapter 5

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Indeed, it may be a particularly potent signal given the current backdrop of
shaken confidence in corporate financial reporting. A firm cannot continue
to pay dividends for very long unless it has the earnings to support such
payments. Corporate managers and directors may have better information
about the firm’s future cash flows than do persons outside the company, and
dividend payments may reflect this information. Dividend payments may
also be one way for shareholders to impose discipline on corporate managers:
reducing the amount of cash at the discretion of management may focus
management’s attention on the most productive investments rather than on
purchases that may not increase shareholder value.

Choice of Organizational Form
The high tax on corporate income affects the allocation of capital, shifting
it from the corporate sector to owner-occupied housing and the noncorporate business sector (which includes sole proprietorships, partnerships,
S corporations, and nonprofit organizations). This entails an inefficient use
of resources and reduces real output and incomes. The higher tax on corporate income discourages the use of the corporate form of organization despite
the nontax benefits of incorporation such as limited liability and more
centralized management. The corporate and the noncorporate forms may
also offer different advantages with respect to scale economies and the development of entrepreneurial skill, which may not be fully exploited because of
the tax distortion.
Table 5-3 shows the extent to which the current system taxes capital in the
corporate sector at a higher rate than capital in other sectors, particularly the
noncorporate business and housing sectors. The economy-wide effective tax
rate is roughly 20 percent. However, the overall effective tax rate of between
32.2 percent and 34.5 percent in the corporate sector (depending on the
treatment of intangibles) is well over half again as high as the 20.0 to 21.2
percent effective tax rate (again depending on intangibles) in the noncorporate business sector. The effective tax rate on owner-occupied housing, in
contrast, is 3.9 percent. The tax penalty on income from capital in the corporate sector relative to other sectors is thus substantial.
The President’s proposal to eliminate the double tax on corporate income
would encourage a more productive allocation of capital. A study by the
Treasury Department estimates that, even in the absence of increased investment, the long-run economic benefit of eliminating the double tax ranges
from about 0.11 to 0.74 percent of consumption, or between $8 billion and
$52 billion in 2001. Moreover, the repeal of the double tax would be
expected to lead to increased investment and thus further economic gains
from stronger growth and job creation.

204 | Economic Report of the President

TABLE 5-3.— Effective Tax Rates by Asset and Sector Under Current Law
and Various Reforms
[Percent]
Current law

Economic
depreciation

Expensing

Corporate sector
Equipment...................................................................................
Structures ...................................................................................
Public utilities.............................................................................
Inventories ..................................................................................
Land ............................................................................................
Intangibles..................................................................................

30.5
38.8
29.9
37.9
37.9
4.4

37.9
37.9
37.9
37.9
37.9
4.4

4.4
4.4
4.4
4.4
4.4
4.4

Total without intangibles............................................................
Total with intangibles.................................................................

34.5
32.2

35.4

4.4

Noncorporate sector
Without intangibles ....................................................................
With intangibles..........................................................................

21.2
20.0

22.5

-8.8

Owner-occupied housing ....................................................................

3.9

3.9

3.9

Economy-wide average
Without intangibles ....................................................................
With intangibles..........................................................................

20.7
19.8

22.1

1.7

Asset and sector

Note.— Calculations include Federal taxes only and assume a 3 percent inflation rate and a 4 percent real
after-tax rate of return. Investments are assumed to be financed using 35 percent debt and 65 percent equity.
Effective tax rates are capital stock-weighted averages. Calculations do not reflect the temporary 30 percent
expensing provision included in the Job Creation and Worker Assistance Act of 2002.
Source: James B. Mackie III, “Unfinished Business of the 1986 Tax Reform Act: An Effective Tax Rate Analysis of
Current Issues in the Taxation of Capital Income,” National Tax Journal, June 2002.

Uniform Taxation of Investment
Another key aspect of the current tax system is that the provisions for
depreciation do not provide deductions that mirror the economic lives of
assets, nor do they adequately account for inflation. This divergence between
depreciation as provided in the current tax code and economic depreciation is
a departure from the framework of a comprehensive income tax. Table 5-3
shows how a move to economic depreciation would change effective tax rates
in the corporate sector.
Revamping the current system of depreciation to more closely reflect
economic depreciation would be a fundamental reform that would level the
playing field across different types of business investment. However, as shown
in Table 5-3, such a change would actually raise the effective tax rate on overall
business investment, because it does not include the accelerated depreciation
and expensing available for some investments under current law. Although

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greater neutrality between types of business investments would be achieved,
particularly within the corporate sector, the distortion between business
investments and owner-occupied housing would be increased. Also, a system
based on economic depreciation is complicated by the difficulty of frequently
updating asset classes and lives to keep pace with innovation and changes in
technology. Moreover, true economic depreciation would require indexing of
depreciation allowances for inflation, which may contribute to complexity.
As described above, under the consumption tax model, businesses would
deduct from their receipts all business expenses, including purchases of
equipment and structures. Consequently, a shift to a consumption tax would
involve replacing the system of depreciating investment under current law
and the income tax model with complete expensing. Expensing of investment in the year it is placed in service is more generous than either current or
economic depreciation for most investment, and it exempts from tax the
expected cash flow from a marginal investment. With expensing, there is no
tax on investment at the margin, because expensing exactly offsets (in present
value) the tax on the expected future cash flow from the investment. Cash
flow that arises from risk taking, inframarginal returns, and unexpected
losses or gains would continue to be taxed, because it exceeds the present
value of expensing. (See Box 5-3 above for a discussion of the tax treatment
of these types of extraordinary returns in the case of deductible and Roth
IRAs.) Expensing is needed under the consumption tax model to exclude
purchases of intermediate goods from the tax base, so that only final sales to
consumers, and hence consumption, are taxed.
Expensing of investment would dramatically lower the taxation of capital
income. As Table 5-3 shows, it would lower the economy-wide effective tax
rate on investment to near zero and virtually eliminate the tax-based disincentive to save and invest. Expensing also improves neutrality by removing
tax differences between investments in the corporate and investments in the
noncorporate sector.
The relative tax advantage of housing would be greatly altered under either
the income or the consumption tax model. A comprehensive income tax
would subject housing services to taxation, eliminating the relative tax advantage of housing and improving economic incentives, but introducing
considerable complexity. Under a consumption tax, housing consumption
would be taxed either by taxing the sale of newly constructed housing (that is,
prepayment) or by taxing the annual flow of housing services. Housing would
lose its tax advantage relative to other capital. The effect of these changes on
housing prices and the housing stock is the subject of extensive debate.

206 | Economic Report of the President

Broadening the Tax Base and Lowering Tax Rates
Broadening the tax base usually means eliminating the various tax
preferences under the current tax system. These preferences represent a policy
decision to reduce the effective tax rate for some, but they pose a tradeoff in
that a higher overall tax rate is needed under both the income and the
consumption tax models to raise an equivalent amount of revenue.
Eliminating preferences would improve incentives in two ways. First, as
illustrated above, many of the preferences carry with them high implicit tax
rates as the benefits are phased out. Eliminating these preferences repeals
these high implicit rates and the associated kinks in the effective tax rate
schedule. Second, once the preferences are eliminated, the same amount of
revenue can be raised with lower overall tax rates. Chart 5-4 earlier in the
chapter showed that the current tax base is considerably smaller than either
the income or the consumption tax base.
Chart 5-4 also indicated that the existing tax preferences are just as important, if not more important, in determining the size of the tax base when
saving is included as when it is excluded (that is, the difference between the
comprehensive income and comprehensive consumption tax bases). The
broader tax base under either reform would allow tax rates to be lowered.
Lower rates improve economic incentives, spurring private activity by
making more productive use of resources.
There are many avenues by which marginal tax rates can affect individual
and business decisions. Individuals can shift compensation toward less taxed
sources; they can adjust labor supply, saving, investment, and portfolio allocation decisions; and they can alter their compliance behavior. The economic
benefits of lower tax rates were precisely the rationale behind the reduction in
tax rates enacted in the Economic Growth and Tax Relief Reconciliation Act
of 2001. Some estimates suggest that the reduction in the top statutory tax
rate from 39.6 percent to 35 percent will raise the affected taxpayers’ taxable
incomes by as much as 3 percent when fully effective in 2006. This rise in
taxable incomes reflects individuals’ decisions to work, save, and invest more,
to increase tax compliance, to reduce evasion, and otherwise to shift efforts to
activities that become more lightly taxed as a result of the lower tax rates. The
extent to which taxes distort these decisions is, to some extent, diminished by
lower tax rates. Moreover, the rise in taxable incomes means that individuals’
behavioral response to the lower tax rates works to offset the direct cost of
rate reduction to the government.
Some estimates indicate that repeal of the double tax on corporate income,
combined with the uniform treatment of investment and general base broadening, would increase capital accumulation by over 10 percent and output by

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perhaps as much as 4 percent in the long run. A shift to a consumption tax
would go even further by excluding income from saving from the tax base.
Most estimates suggest that a shift to a consumption tax base would generally
increase the size of the capital stock in the long run, with some estimates
suggesting an increase of as much as 20 percent. Although estimates of the
impact on output vary, some models indicate that real output might rise in
the long run by as much as 6 percent.

Income Versus Consumption as the Base
The major difference between the consumption and income models is that
a consumption tax does not distort the choice between current and future
consumption (that is, saving); in other words, it is intertemporally efficient.
In contrast, an income tax distorts the relative prices of current and future
consumption by reducing the after-tax return to saving. Under an income
tax, current consumption is tax-favored, and saving disfavored, relative to
future consumption.Taxing consumption rather than income would eliminate this distortion. Because the tax base under the comprehensive
consumption tax model is smaller than under the comprehensive income tax
model, however (Chart 5-4), a higher tax rate would be required to raise a
given amount of revenue, which may involve some degree of additional
distortion. Nevertheless, as discussed above, studies indicate that elimination
of the tax on income from saving can have important salutary effects on
economic growth and real incomes by encouraging saving.

International Tax Considerations
The U.S. economy is increasingly linked to the world economy through
trade and investment. Domestically based multinational businesses and their
foreign investment help bring the benefits of global markets back to the
United States by providing jobs and income. Like all firms, multinationals
face a number of business decisions, including how much to invest and
where. Because multinationals by definition operate in a number of countries,
they also have to decide in which country to locate their headquarters, and
their decisions in turn affect which countries reap the majority of benefits
from the multinationals’ operations.
In the context of tax reform, it is important to consider how changes in the
international taxation of income would change the incentives for companies
to locate production, intangible assets, and research and development in one
country rather than another. Reform can have important effects on these
business decisions and on the efficient use of the Nation’s economic
resources, affecting employment and the competitiveness of workers in the
United States.
208 | Economic Report of the President

Two alternative approaches to taxing international flows of income are the
territorial system and the worldwide system. Under the territorial system, individuals and businesses pay tax on income only where it is earned, regardless
of where they themselves reside. (Certain passive or financial income from
abroad, such as royalties, also is subject to tax in the country of residence.)
Under the worldwide system, all income is subject to tax in the taxpayer’s
country of residence, regardless of where it is earned. Income earned abroad
may also be subject to tax by the country where it is earned. On the principle
that the same income should not be taxed by more than one country, foreign
taxes are generally creditable against domestic tax on foreign income up to the
domestic tax rate.
The United States uses a hybrid of these two systems. Resident individuals
and businesses are subject to tax based on their worldwide income. For
foreign subsidiaries of U.S. multinational companies, tax is usually paid only
when income is distributed to the domestic parent company as a dividend;
that is, tax is deferred until repatriation, at which time a credit can be
claimed for foreign taxes paid. It is primarily the opportunity of tax deferral
of certain active income that distinguishes the tax treatment of international
income by the United States from a pure worldwide system. Deferral has the
effect of relieving a substantial portion of the U.S. tax, in present value terms,
on the income of foreign subsidiaries of U.S. companies. However, because
tax is imposed upon repatriation, there is a disincentive to repatriate foreign
income; this disincentive is absent under a territorial system.
The rules surrounding deferral are the source of considerable complexity,
involving a bewildering assortment of definitions and rules. Deferral is
extended to income from active business operations abroad in order to
provide an equal footing with other operating businesses in the same foreign
country. Deferral of U.S. tax is not extended to income from portfolio
investments and other income viewed as highly mobile. Consequently,
certain income from portfolio-type foreign investments (for example,
interest, dividends, and royalties) is “deemed distributed” and is subject to
current U.S. tax. However, such income also includes various categories that
are more active than passive, such as foreign base company sales and services
income, income from shipping, and certain income from oil activities.
The foreign tax credit requires companies to make complex calculations in
order to claim the credit against the U.S. tax on repatriated dividends. The
foreign tax credit is calculated by “basket” or type of income (for example,
passive, financial services, and general active income) so that excess credits
generated on highly taxed active foreign business income cannot be used to
reduce the U.S. tax on lower taxed foreign income such as passive interest.
Over the past 30 years, U.S. companies have repatriated roughly half of the
after-tax income earned by their foreign subsidiaries.

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The U.S. system of taxing international income dates back to the 1960s,
when the United States was the source of half of all multinational investment
worldwide, produced 40 percent of the world’s output, and was the world’s
largest capital exporter. From this perspective it was appealing to construct a
tax system that was viewed as neutral with respect to the location of foreign
investment by taxing all income and taxing it all at the same rate. However,
this system is based on the idea that investment abroad is a substitute for
domestic investment and on the assumption of perfectly competitive markets
in a world with aggressive pricing and ease of entry, and with no brand-name
loyalty, economies of scale, or other sources of extraordinary profits.
The underpinnings of the worldwide system have shifted, however. It is
now recognized that most multinational corporations produce differentiated
products and compete in industries characterized by economies of scale,
thereby undermining the perfect competition model of the past. There is
some evidence that returns on foreign investment surpass those on domestic
investment and exhibit above-normal returns because of factors such as intangibles (brands, patents, and the like). Moreover, the United States is now the
world’s largest importer of capital and no longer dominates foreign markets.
For example, in 1960, 18 of the world’s 20 largest companies (ranked by sales)
were located in the United States, but by the mid-1990s that number had
fallen to 8. Companies can choose where to locate, and, under the worldwide
system of taxation, unless the domestic tax rate is the same in all countries in
which a company operates, the decision where to locate the company’s
headquarters will be affected by the countries’ tax systems.
There is some concern that the United States has become a less attractive
location for the headquarters of multinational corporations. Although multinationals operate in a number of countries, the Department of Commerce
reports that the bulk of the revenue, investment, and employment of
domestic multinational companies is located in the United States. In 1999
U.S. parent companies accounted for about three-fourths of U.S.-based
multinationals’ sales, capital expenditure, and employment. Therefore, where
a firm chooses to place its headquarters will have a large influence on how
much that country benefits from its domestic and international operations.
The United States is also one of only a few industrialized countries
(Switzerland and the Netherlands are other prominent examples) that do not
provide some form of integration of the corporate and individual income tax
systems. The resulting double taxation of corporate income makes it more
difficult for U.S. companies to compete against foreign imports at home, or
in foreign markets through exports from the United States, or through
foreign direct investment.
Another major choice in international taxation, and one that is particularly
important under the consumption tax model, is that between the so-called
destination and origin principles. Under the destination principle, imports are
210 | Economic Report of the President

taxed by making them nondeductible or by levying an import tax, and exports
are tax-exempt. The tax base then includes all domestic consumption,
whether goods and services are produced at home or abroad. Under the origin
principle, the opposite rule applies: exports are taxed, but imports are not, and
the tax base becomes consumption plus net exports. Either the origin or the
destination principle can be applied under a consumption tax, but the destination principle has the intuitive appeal of promoting economic growth
domestically by exempting, and thereby promoting, exports.
Nevertheless, under a flat-rate consumption tax, the origin and the
destination principle are equivalent at the margin. Under the destination
principle, again, foreign investment is essentially expensed, and the cash flow
from the investment is taxed as imports. The tax benefit of expensing will
exactly equal in present value the tax on the expected normal return of the
investment as it returns through imports. Under the origin principle, taxes
are essentially prepaid by taxing exports, and no tax is due on the returning
cash flow. Returning profits would thus be taxed under the destination principle, but not under the origin principle. The timing of the tax payment will
be different, but in present value terms the taxes paid under the destination
principle and under the origin principle will be the same for an equivalent
level of exports. This is similar to the equivalency between deductible IRAs
and Roth IRAs discussed in Box 5-3. The equivalency does not necessarily
hold, however, in the presence of extraordinary returns (returns to innovation, inventions, ideas, and risk taking). The returning extraordinary profits
would be taxed under the destination principle, but not necessarily under the
origin principle. It is also important to note, however, that the tax on the
returning cash flow under the destination principle could be avoided if a
taxpayer is able to relocate abroad. Such a taxpayer would receive the benefit
of the export exemption (expensing) and might avoid the tax on the
returning cash flow (imports) through relocation. Under the origin principle,
in contrast, the tax cannot be avoided because it is, in effect, prepaid.

Conclusion
Changes in tax policy involve many different objectives and can take many
different forms. This chapter has focused on the primary choices involved in
tax reform and the major differences among taxing consumption, taxing
income, and maintaining the current hybrid tax. Proposals for tax reform pose
the difficult question of how best to balance the sometimes competing objectives of simplicity, fairness, and faster long-term growth. Policy changes can
improve efficiency and boost real incomes, but it also matters enormously that
all Americans have the opportunity to achieve economic success.
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C H A P T E R

6

A Pro-Growth Agenda for the
Global Economy

M

any developing countries throughout the world have taken important
steps in recent years to promote the growth of their economies. Their
actions have lifted millions out of poverty, improved the health of their populations, and contributed to progress in addressing environmental challenges.
Other countries, including some of the world’s poorest, have had less success
in achieving and sustaining strong economic growth. Developed and developing countries alike face the challenge of improving economic performance
around the globe, so that more people can share in the benefits that come
with growth. The United States stands ready to address that challenge.
This chapter lays out some key factors that have been found to promote
and sustain faster economic growth. Although these factors are important in
all countries, the chapter’s primary focus will be on growth and development
in low- and middle-income economies. Three broad principles—securing
economic freedom, governing justly, and investing in people—underlie these
key growth-promoting factors and provide the organizing structure for the
discussion. Adoption of these principles creates an environment where
market signals lead to better economic performance.
Economic freedom promotes growth by encouraging competition and
entrepreneurship. Securing this freedom requires creating a stable domestic
macroeconomic environment with low inflation, regulating appropriately,
encouraging entrepreneurial initiative, and opening to the global economy.
Governing justly means establishing the rule of law, controlling corruption,
and guaranteeing political freedoms; all of these help develop trust in the
accountability and reliability of the government, which in turn encourages
entrepreneurship. Investing in people means devoting resources to enhancing
the productive capacity and well-being of the general population, in particular through improvements in education and health. Countries that ignore
this task will see their economic growth suffer, because people who are in
poor health or poorly educated are less productive.
No one of these principles suffices to guarantee strong growth; all three are
mutually reinforcing aspects of a pro-growth agenda. Actions by the United
States, the broader international community, and the international financial
institutions can help developing countries improve their economic performance. But creating the proper incentives for domestic growth ultimately
depends on decisions by those countries’ own citizens and governments.
213

The Administration has undertaken three important international
economic policy initiatives that are consistent with these pro-growth principles. First, it has sought and obtained from the Congress authority for the
President to negotiate and conclude trade liberalization agreements with
other countries in a streamlined fashion; the agreements reached under Trade
Promotion Authority will increase the integration of the world’s economies,
especially those of developing countries. Second, the Administration has
launched the Millennium Challenge Account program, which will extend
additional developmental aid to the world’s poorest countries provided they
have adopted pro-growth policies. Third, the Administration has called for
reform of the multilateral development banks, including both the World
Bank and the regional development banks, to increase their effectiveness in
spurring economic growth through greater emphasis on measurable results and
activities that increase productivity, including private sector development.
In August of last year, the Congress granted the President Trade Promotion
Authority (TPA) through the Trade Act of 2002. This legislation authorizes
the President to negotiate trade liberalization agreements with other countries
and commits the Congress to a yes-or-no vote, without amendments, on any
agreements reached under this authority. The President’s enhanced ability to
engage in international trade negotiations under TPA will help the United
States conclude agreements that will increase competition, boost productivity, and promote growth in both the United States and its trading partners.
TPA will enhance U.S. influence and effectiveness at the trade negotiating
table and will bring economic benefits to American families, workers, farmers,
and firms. Current U.S. proposals for trade liberalization of nonagricultural
goods alone could save Americans about $18 billion a year in import taxes,
resulting in $1,600 worth of benefits annually for an average family of four.
This renewed negotiating authority will also promote prosperity in our
trading partners, including developing countries. Indeed, those countries that
are now the least integrated into the world economy—including many of the
world’s poorest—stand to gain the most in proportion to their current
incomes from the increased openness that TPA makes more likely.
The Administration is already engaged in negotiating trade agreements in
a variety of contexts, including the multilateral negotiations organized under
the auspices of the World Trade Organization as well as regional negotiations,
such as those toward a Free Trade Area of the Americas, and various bilateral
free trade negotiations. All of these initiatives seek to promote economic
growth by decreasing barriers to trade in goods and services and establishing
effective procedures for settlement of international disputes involving trade.
Moreover, the rules-based trade agreements that are the object of these

214 | Economic Report of the President

negotiations will provide incentives for developing countries to improve
their own domestic institutions to provide greater transparency, strengthen
the rule of law, and improve the protection of property rights.
The second major Administration initiative, the Millennium Challenge
Account (MCA), will provide grants in aid to those developing countries that
qualify by fostering and maintaining an environment conducive to economic
growth. Funding for the MCA will increase over 3 years to a total of
$5 billion in 2006, an almost 50 percent increase over current U.S. bilateral
development assistance. Recipients of MCA grants will be chosen by their
demonstrated commitment to the three principles mentioned at the outset:
securing economic freedom, governing justly, and investing in people. The
specific MCA criteria associated with each of these principles are described in
more detail later in this chapter.
The Administration’s third pro-growth initiative involves reform of the
multilateral development banks (MDBs). Meaningful reform of these institutions will raise economic growth and prosperity in poor countries around
the world by encouraging the MDBs to focus on increasing productivity
growth in those countries. The MDBs can do this by fostering innovation to
support private sector development, insisting on measurable results as a
condition for continued aid, and delivering an increased share of total assistance in the form of grants rather than loans.
The Administration believes that pursuing the pro-growth policies outlined
in this chapter will help restore the flow of investment to low- and middleincome countries. This flow was interrupted by frequent and severe economic
and financial crises in some of these countries during the 1990s. Net international private capital flows, which averaged more than $150 billion a year
from 1992 to 1997, fell to less than $50 billion a year in 1998-2000.
Restoring strong private investment flows into low- and middle-income
countries will help create higher productivity jobs and raise living standards.
The chapter begins by laying out some basic facts about economic
performance and social indicators in the developing world. It then discusses
the three principles enunciated above and how they have been shown to lead
to faster economic growth. Finally, the chapter discusses the Administration’s
three major initiatives and how they embody pro-growth principles.

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The Importance of Growth
The term “economic growth” can be understood both in narrow,
quantitative terms and in a broader, more qualitative sense. Economists often
measure growth as the annual percentage change in a country’s real gross
domestic product (GDP) per capita, that is, the 1-year change in the country’s
income, adjusted for inflation and divided by the number of people residing in
the country. By this definition, growth simply indicates how the income of the
average resident of the country has changed from one year to the next. In qualitative terms, however, sustained strong growth over time means prosperity
instead of poverty, job creation in place of economic stagnation, and children
who are strong and healthy rather than malnourished and facing death from
illness. Helping countries boost their economic growth, in other words, is not
just a matter of statistics; it is about improving the lives of human beings.

The Global Growth Experience
Chart 6-1 illustrates the wide divergence in growth paths for several major
world regions from 1980 to 2000 (all of the growth rates that follow are in
terms of real GDP per capita). World income per capita grew at an annual rate
of 1.3 percent, increasing a total of 28 percent over the period. Performance in
the East Asia and Pacific region (East and Southeast Asia plus Australia, New
Zealand, and the Pacific island nations) far exceeded this benchmark: average
income per capita in these countries more than tripled, from $396 in 1980 to
$1,252 in 2000, with growth of more than 6.2 percent a year. In contrast,
incomes per capita in Latin America rose only from $3,548 in 1980 to $3,856
in 2000, which translates to an annual average growth rate of less than
0.5 percent. Average annual income per capita in the countries of Sub-Saharan
Africa actually fell by 14 percent during the period, from $658 in 1980 to
$564 in 2000, or by 0.8 percent a year. (Unless otherwise noted, all income
levels in this chapter are reported in constant 1995 dollars.)
Measures of countries’ adherence to the pro-growth principles introduced
above, and described in more detail below, suggest possible reasons for this
huge variation. One is the presence or absence of macroeconomic stability:
inflation varied substantially among the three regions, in a pattern that
mirrors their growth outcomes. Annual inflation in Latin America as a whole
remained relatively high during the 1980s and 1990s, averaging about
25 percent. In contrast, inflation in the fast-growing East Asia and Pacific
region averaged only about 12 percent during these two decades but fell
sharply in many countries over the period. Inflation in slow-growing SubSaharan Africa also averaged only about 12 percent. However, unlike in East
Asia and the Pacific, inflation in Sub-Saharan Africa rose over the period,
from 10 percent in the 1980s to 16 percent in the 1990s.
216 | Economic Report of the President

There were also important regional differences in the degree of countries’
openness to the global economy. The ratio of total international trade in
goods (imports plus exports) to GDP is a common measure of this openness.
In East Asia and the Pacific this measure rose from 39 percent in 1980 to
66 percent in 2000; it rose more modestly in Latin America over that period,
from 26 percent to 38 percent. Sub-Saharan African trade as a fraction of
GDP rose only from 55 percent in 1980 to 57 percent in 2000. In short, the
different regions’ growth performances are mirrored in the changing role of
trade in their economies.
Investment in people also varied considerably across regions. Only about
half of all children in Sub-Saharan Africa complete primary school, according
to surveys conducted from 1992 to 2000; the completion rate in East Asia
and the Pacific was almost twice as high. Information for the period from
1995 to 1999 indicates that average child immunization rates for measles, a
key indicator of health care for children, were 53 percent for Sub-Saharan
Africa versus 85 percent for East Asia and the Pacific.
Pro-growth policies have yielded important success stories in individual
countries as well, with a number of developing countries in Asia, Latin
America, and Africa significantly outperforming their neighbors in achieving
higher standards of living. The growth experiences of China and India, both
of which have undertaken far-ranging economic reform in recent years, have
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been especially impressive. (Box 6-2 later in the chapter discusses China’s
reforms.) China’s income per capita grew from $167 in 1980 to $824 in
2000, for an average annual growth rate of 8.7 percent. India’s GDP per capita
grew on average by 3.8 percent a year over the same period, from $226 in 1980
to $459 in 2000. Both countries were among the world’s poorest at the start of
the period. Their growth rates are even more noteworthy given that the average
growth rate for this period for the poorest countries as a group (those with
incomes per capita of less than $800 in 1980) was only 0.5 percent. Economic
growth in China and India has helped reduce their combined poverty rate (the
percentage of the population with incomes below $1 a day) from 62 percent in
1977-78 to 29 percent in 1997-98. (Incomes here are evaluated at purchasing
power parity, that is, adjusted such that $1 purchases the same amount of
goods and services in all countries.) The enormous size of the population in
both China and India (21 and 16 percent of world population in 1998,
respectively) means that economic progress in these two countries alone has
contributed significantly to reducing global poverty.
Chile and Botswana are examples of countries in other regions that have
also instituted pro-growth polices with impressive results. Chile has undertaken major tax reform, opened its economy to international trade and
investment, privatized important sectors of the economy, and reintroduced
democratic governance. Botswana has protected private property, discouraged corruption, invested heavily in education and health, and maintained
sound fiscal and monetary policies. Neither country would seem to be particularly well situated geographically to benefit from an integrating global
economy. Botswana is landlocked and is located in a region with some of the
worst economic performance in the world; Chile is located thousands of
miles from major markets in the United States, Europe, and Asia, and some
of its larger neighbors have suffered recurrent economic crises. Yet Botswana
and Chile recorded average annual per capita growth rates of 4.6 and
3.7 percent, respectively, from 1980 to 2000—far better than either the
world average of 1.3 percent or the 1.9 percent average for middle-income
countries (defined by the World Bank as those with incomes per capita
between $755 and $9,266, in 2000 dollars). Part of the explanation for their
impressive growth is the relatively stability of their macroeconomic environments: annual inflation during 1980-2000 averaged 15 percent in Chile and
11 percent in Botswana. Moreover, Chile’s inflation rate fell dramatically over
the period, from 29 percent to only 4 percent; the Latin American average
for inflation, as noted above, was 26 percent over the same period.
Despite the successes of Chile and Botswana, there are numerous stories of
countries that have experienced economic stagnation or even contraction. In
28 countries out of 134 for which consistent and complete data are available,
annual average growth in GDP per capita ranged between 0 and 1 percent
218 | Economic Report of the President

from 1980 to 2000. GDP per capita fell during that period for another
41 countries in the sample—in several cases by more than 30 percent over
the period as a whole.
The most troubling data are those that show a number of the world’s poorest
countries becoming even poorer over the past two decades. For example, Sierra
Leone (with annual income per capita of $293 in 1980), Zambia ($584), and
Nicaragua ($671) experienced average annual per capita growth rates of –3.6,
–2.1, and –1.9 percent, respectively, over 1980-2000. Real income per capita in
Niger plunged 38 percent over the same period, to only $203. In countries
such as these, life has become much more difficult for millions of people, many
of whom were already living at the edge of destitution.
The growth experiences of these desperately poor countries reflect their
failure to promote economic freedom, govern justly, and invest in their
people. Macroeconomic instability has been a serious problem for most of
these countries: in Nicaragua, annual inflation during the 1980s and 1990s
averaged a staggering 1,453 percent; the figures for Zambia and Sierra Leone,
at 53 percent and 47 percent, respectively, are modest only by comparison.
Measures of openness have been scarcely any better. Sierra Leone’s trade as a
ratio to its GDP fell from 56 percent in 1980 to only 25 percent in 2000.
Zambia’s involvement in the global economy also declined: its trade was
equivalent to 68 percent of its domestic economic activity in 1980 and fell
to 54 percent in 2000.

The Benefits of Growth
Statistics on GDP per capita and its growth fail to capture the full human
tragedy now playing out in the poorest countries. Already-poor countries
experiencing stagnant, or even negative, growth have difficulty coping with
the basic problems of human existence. Table 6-1 shows that, in 2000, the
world’s low-income countries suffered from higher rates of malnourishment,
shorter life expectancies, and dramatically higher infant mortality rates than
did countries with higher incomes. About one-quarter of the population of
the low-income countries was undernourished, according to a sample taken
over 1996-98, compared with only 11 percent of the population in the
middle-income countries. In 2000, mortality among children under 5 years
old reached 115 per 1,000 in the low-income countries, compared with only
7 per 1,000 in high-income countries. Life expectancy in low-income countries was 19 years shorter than in high-income countries (59 years versus
78 years), a difference that in part reflects the prevalence of epidemics like
HIV/AIDS (Box 6-1).
The positive association between higher levels of income and improved
social indicators highlights the importance of economic growth for
improving the human condition. This relationship was demonstrated in a
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TABLE 6-1.— Income per Capita and Social Indicators
Indicator

Low-income
countries

Middle-income
countries

High-income
countries
(1)

Prevalence of undernourishment (percent of population) .................

24

11

Under-5 mortality rate (per 1,000 children) ......................................

115

39

7

Life expectancy at birth (years) .........................................................

59

70

78

DPT immunization (percent of children under 12 months) 2..............

57

90

89

Measles immunization (percent of children under 12 months) .........

57

89

92

Public expenditure on health (percent of GDP)..................................

0.9

2.9

6.0

Public expenditure on education (percent of GDP) ............................

3.4

4.5

5.6

Addendum: Number of countries in each income category ..............

63

92

52

1
2

Not available.
Immunization for diphtheria, pertussis, and tetanus.

Note.—Income is defined as gross national income per capita in 2000: low income, $755 or less; middle income,
$756-$9,265; high income, $9,266 or more.
Data are for 1996-1998 for undernourishment; 2000 for mortality rate and life expectancy; 1995-1999 for
immunization; 1994-1999 for expenditure on health; and 1998 for expenditure on education.
Source: World Bank, World Development Indicators, 2002.

study of 58 developing countries from 1960 to 1985, which found that a
1 percent increase in income per capita is associated with a decline in infant
mortality of as much as 0.4 percent. This estimate implies that a 1 percent
increase in income per capita across the developing world could have averted
33,000 infant and 53,000 child deaths annually. Other broad measures of
social outcomes reflect similar patterns. The fast-growing region of East Asia
and the Pacific recorded a 45 percent decline in the rate of under-5 mortality
over the period 1980-2000, compared with only a 13 percent decline in SubSaharan Africa. Undernourishment fell by 30 percent in East Asia and the
Pacific, but rose by 3 percent in Sub-Saharan Africa, during the 1990s.
Economic growth does not just lead to higher average incomes for poor
countries; it also offers hope for those at the margins of society. A study of
92 developing and developed countries over 1950-99 found that the incomes
of the poor (defined as the poorest fifth of each country’s population) rose
one for one, on average, with national income per capita (Chart 6-2). This
means that economic growth did not just benefit societies’ richest but helped
the poorest strata as well. Data show, moreover, that worldwide economic
growth over the past 20 years has been accompanied by the lifting of
200 million people out of poverty (where the poor are defined as those with
incomes of less than $1 a day, in 1985 dollars). Nonetheless, the economic
benefits of growth have not reached to every corner of the world. The World
220 | Economic Report of the President

Box 6-1. Combating the HIV/AIDS Epidemic in Africa
The impact of the worldwide HIV/AIDS epidemic is perhaps most
dramatic in Sub-Saharan Africa. By the end of 2002 an estimated
29.4 million Africans were HIV-positive, about 70 percent of the global
total. In the previous year, 9 percent of all adults in Sub-Saharan Africa
were living with HIV/AIDS, compared with 1.2 percent globally. AIDS is
now the leading cause of death in the region. The epidemic has dramatically reduced life spans: estimates suggest that the region’s average
life expectancy of 47 years would now be 62 years if the epidemic had
never occurred.
Although the greatest tragedy of AIDS is the misery and loss of life it
inflicts, the disease has also brought severe economic consequences
to a region already suffering from extremely low incomes per capita
and often-negative growth rates. Estimates suggest that AIDS has cut
annual economic growth in the region by 2 to 4 percentage points.
South Africa, one of the region’s most important economies, could
suffer a drop in its economic growth by as much as 2.6 percentage
points as a result of the disease.
The economic consequences arise from a number of sources.
Infection rates are highest among young people, so that the illness is
most prevalent in individuals in their most productive years. Workers
are at risk of having to leave their jobs as they cope with the effects of
AIDS, either their own illness or as a caretaker for a sick relative. This
can be particularly disruptive to growth when skilled workers are
affected. For example, one estimate suggests that up to 30 percent of
teachers in Malawi and Zambia are HIV-positive. The direct and indirect
costs of the disease also put strains on governments struggling with
other social needs such as improving education. Societies will face
pressures for increased expenditure on health care. Public and private
investment could decline, both because of lower expected profits and
because of increased economic uncertainty. One striking indicator of
the implications for health care is that an estimated 50 to 80 percent of
urban hospital beds in Côte d’Ivoire, Zambia, and Zimbabwe are occupied by HIV-infected patients. This means that these beds are not
available for patients with other illnesses. The impact on important
social needs is shown by an estimate that treating one AIDS patient
costs as much as educating 10 primary school pupils for 1 year.
A few countries have had some success in combating the spread of
AIDS. The government of Uganda was one of the first to recognize and
respond to the epidemic. It invested heavily in an education and
outreach program involving HIV testing, counseling, and treatment.
These programs helped reduce Ugandan infection rates by more than
50 percent from 1992 to 1999. Senegal acknowledged the need to

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Box 6-1. —continued
address the AIDS problem as early as 1986 and instituted education
and outreach prevention programs. These efforts helped keep the infection rate low (below 1.8 percent), even as infection rates rose
dramatically in the country’s neighbors. At the end of 2001, only about
0.5 percent of Senegalese adults were HIV-positive.
The scope of the epidemic requires a global response, and the United
States has played a major role in this effort. For example, in May 2001
the United States took a leadership position on the Global Fund to Fight
AIDS, Malaria and Tuberculosis. The United States now leads the world
with the largest pledge, $500 million, to the Global Fund. In 2001 the
United States and other WTO members agreed to help developing
countries that lack pharmaceutical manufacturing capacity by
improving their access to drugs that combat the disease. This access
will be increased by ensuring appropriate flexibility in the WTO rules
that allow countries to compel licensing of patented medicines in the
event of a domestic health emergency. Although final agreement on
implementing this commitment has not yet been reached among WTO
members, the United States has unilaterally pledged not to challenge
any member that breaks multilateral rules to export drugs produced
under compulsory licenses to poor countries in need. In June 2002 the
President announced a $500 million International Mother and Child HIV
Prevention Initiative which will help reduce transmission of HIV from
infected pregnant women to their children in 12 African and Caribbean
nations. In the 2003 State of the Union address, the President
announced the Emergency Plan for AIDS Relief, a five-year, $15 billion
initiative to turn the tide in the global effort to combat the HIV/AIDS
pandemic. This proposal nearly triples the current U.S. commitment to
fighting AIDS internationally.

Bank estimates that 1.2 billion people, or 20 percent of the world’s population,
still lived on less than $1 a day in 1998. Evidence that economic growth can
benefit the poor makes the pursuit of growth-improving policies and institutions all the more vital.
Of course, the relationship between economic growth and measures of the
human condition can be complicated. For example, evidence suggests that
some measures of environmental quality show consistent improvement as
countries become richer. This appears to be the case, for example, with such
indicators as the availability of potable water and concentrations of arsenic in
water supplies. However, there is also evidence that other measures of environmental quality initially deteriorate, on average, as countries go through
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the early stages of development, but then improve once these countries
become sufficiently rich. For example, one study finds that the concentration
of sulfur dioxide in the atmosphere rises as poor countries begin to industrialize, but then falls as income per capita continues to rise beyond a certain
point. Similar results have been found for deforestation and for atmospheric
concentrations of particulate matter.
This inverted U-shaped relationship between economic growth and
environmental quality could reflect changes in the composition of output.
This could happen if countries undergoing industrialization initially
specialize in goods-producing industries with relatively high emissions and
then eventually shift to services industries, which typically generate lower
emissions. The relationship could also reflect the greater ability of richer
countries to devote resources to environmental measures, perhaps combined
with increased demand for such measures as average incomes rise and
people’s basic material wants become satisfied.

Promoting Growth
The evidence just laid out suggests that economic growth is critical for
improving the lives of millions in the developing world. This leads to some
natural questions for policymakers: What can be done to improve growth
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rates? Why have some countries grown while others remain in poverty? The
answers to these questions are critically important for governments of lowand middle-income countries as they try to improve the lives of their people.
The answers also have helped the Administration in the design of its three
major international economic initiatives, as will be detailed below.
For some countries, economic success may simply reflect their endowment
with valuable natural resources such as oil or diamonds. But even countries
with large supplies of such commodities can suffer poor economic performance. For example, Nigeria was the fifth-largest petroleum exporter among
the OPEC countries over the 1980-2000 period, with average annual oil
revenue of $18 billion, yet its average annual per capita growth rate over this
period was –1.1 percent. Similarly, Saudi Arabia experienced a growth rate of
–2.8 percent over this period despite its immense oil wealth.
Geographic location also influences economic outcomes—the good
fortunes of Chile and Botswana notwithstanding. A country’s location affects
the costs of transporting its goods to major markets, the productivity of its
agricultural resources, and the likelihood of major natural catastrophes such
as droughts, earthquakes, or hurricanes. For example, one benefit of a coastal
location is that it allows access to international sea routes, making transportation of goods far more efficient. One study suggests that, all else equal,
landlocked countries have growth rates 1.2 percentage points lower on
average than countries with outlets to the sea. Countries in tropical regions
apparently face a similar disadvantage: the same study finds that their growth
rates average 1.1 percentage points lower than those of countries outside the
tropics. The poor average performance of tropical countries is due at least in
part to endemic diseases, which can create serious health problems that
often have a measurable impact on growth. In Sub-Saharan Africa, for
example, health problems associated with malaria alone have been estimated
to reduce average annual growth by as much as 0.6 percentage point.
Geography also affects growth indirectly through its effect on institutions,
for example through the legacy of European colonization. In those parts of
the world where conditions were relatively hospitable to Europeans—for
example, where settler mortality rates were low—the settlements that the
European countries established tended to have better institutions, such as
effective judicial systems and strong property rights protections. Conversely,
in regions with high settler mortality rates, such as the tropics, European
colonizers tended to invest less in building these pro-growth institutions. The
weakness of these institutions continues to inhibit economic performance
decades and centuries later.
Clearly, natural resources and geography make a difference for economic
outcomes, but they are not the sole determinants. Sound policies and institutions, both of which are shaped by the deliberate decisions of individuals
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and governments, are also important. In particular, decisions involving the
role of government in the economy (economic freedom), the development of
political and legal institutions (governing justly), and the health and wellbeing of the population (investing in people) are all critical in shaping the
environment in which people work and invest.
Charts 6-3 and 6-4 show that higher incomes are associated with less
burdensome regulation and better protection under the rule of law. Chart
6-3 shows the relationship between income per capita and an index of regulatory quality; the latter is a composite measure, developed by the World
Bank, of levels of regulation, government intervention, and price controls
within a country, and thus an indicator of economic freedom. Chart 6-4
shows the relationship between income per capita and a similarly constructed
measure of the rule of law, which assesses the strength of property rights and
the prevalence of crime and corruption; this measure captures aspects of
governing justly. Higher positive values of these two measures correspond to
a less onerous regulatory burden or stronger rule of law, respectively. The
solid line in each chart shows a fitted relationship between the indicated
measure and income per capita. Both charts show a clear positive relationship. Of course, a positive correlation between measures of good policies and
institutions, on the one hand, and income on the other does not necessarily
demonstrate that the former causes the latter—it could be that countries
with higher average incomes are better able to afford or demand effective
government. But other evidence suggests that, to an important degree, higher
income is driven by good policies and institutions, not the reverse. In other
words, explicit government decisions, like the decision to enforce the rule of
law and to protect property rights, improve economic performance.
Table 6-1 above lists some selected indicators of investment in people and
shows their relationship with income per capita. Expenditure on health and
education, measured as a percentage of GDP, rises as income increases. The
increases in public expenditure on health are particularly dramatic: lowincome countries spend less than 1 percent of their GDP on health,
compared with 2.9 percent and 6.0 percent for middle- and high-income
countries, respectively. Immunization rates for certain major childhood
diseases in high-income countries are over 30 percentage points higher than
in low-income countries. Public expenditure on education also rises with
income, but less dramatically than the health variables. As with the variables
discussed above, these figures do not indicate the reason for this positive relationship: whether it is that richer countries can afford to spend more on
education and health, or that more investment in education and health leads
to higher incomes. But the relationships are suggestive that private and
public investment in health and education can be important for growth.

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Pro-Growth Principles
This section lays out three critical areas where countries can improve
economic performance. Promoting economic freedom helps firms, workers,
and consumers respond to market signals. Governing justly helps create an
environment in which entrepreneurs, investors, and ordinary people can
make economic plans with confidence that the government will not
undercut those plans with arbitrary decisions. Investing in people is important for growth because an educated and healthy population is critical for
taking full advantage of a society’s economic potential.

Economic Freedom: Competition
and Entrepreneurship
Economic freedom is fundamental to growth. One of the primary
responsibilities of a government pursuing pro-growth policies is to nurture a
stable, open economic environment in which market signals direct the allocation of resources. Reliance on the market provides incentives for entrepreneurs
to take risks by starting new firms and investing capital in existing ones.
Competition from both domestic and foreign sources will require firms to use
resources efficiently. Market signals encourage workers to raise their productivity, not because a government instructed them to do so, but because they
see it in their own interest. A pro-growth environment is supported by a stable
macroeconomic environment, appropriate government regulation, and openness to competition from both domestic and foreign sources, as well as
acceptance of foreign direct investment and financial market liberalization.

Macroeconomic Stability
A stable macroeconomic environment, characterized by low and stable
inflation and responsible fiscal policy, is an important component of a progrowth framework. Also important is an exchange rate for the country’s
currency that is not set arbitrarily by the government but reflects market
conditions and is sustainable given the country’s economic conditions.
Macroeconomic stability also facilitates access to international capital markets.
Foreign lenders will demand a higher interest rate on loans to an unstable
economy, if they lend at all, and foreign equity investors will avoid countries
with chronic macroeconomic problems that result in poor returns.
High and variable inflation makes it difficult for individuals and firms to
plan for the future; the resulting uncertainty leads to lower consumption and
investment and thus slower growth. This connection has been found in
many studies, even after taking into account other economic factors such as
income, education, investment, and openness to trade, and social factors
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such as life expectancy, fertility, and inequality. One study suggests that the
adverse effects of inflation on growth in developing countries are greatest
when inflation is high. Chart 6-5 illustrates this point by comparing inflation
and growth for 136 developing and developed countries from 1960 to 1994.
Although higher inflation is associated with slower growth, the effect is most
apparent when inflation exceeds 30 percent a year.
Fiscal deficits have been linked to inflation in developing countries, because
governments may be tempted to print money to finance large budget deficits.
This tendency is particularly problematic in countries with fixed exchange
rates. Under a fixed exchange rate regime, the monetary authority must buy or
sell domestic currency as economic conditions change, to maintain the official
exchange rate peg. If budget deficits lead to excessive domestic money creation
through central bank purchases of government bonds, there will be pressure for
the domestic currency to depreciate. The monetary authority will then be
forced to buy domestic currency with foreign currency to maintain the peg.
Because its foreign exchange reserves are necessarily limited, persistent fiscal
deficits and the consequent exchange market intervention increase the likelihood of a balance of payments crisis and undercut foreign investor confidence.
Economic growth has been shown to be slower in countries with larger
governments, as measured by government purchases of goods and services as
a percentage of GDP. Maintenance of an appropriate size and scope of
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government, with efficient mechanisms for both expenditure control and
revenue collection, is vital for economic performance. It is crucially important to give a high priority to strengthening public expenditure management.
Improved transparency and accountability, including public expenditure
tracking and fiduciary management, are needed to ensure more effective use
of domestic and external resources and thus make progress in increasing
growth and reducing poverty.
Increased government spending can require higher taxes for its financing,
and this has adverse effects on growth, since taxes distort incentives in a wellfunctioning economy. In particular, taxes alter relative prices, leading to
efficiency-reducing economic distortions and slower growth, by interfering
with the market’s ability to allocate resources.
When governments must finance large expenditures through high taxes,
those on whom the taxes are imposed will have an incentive to avoid them.
Faced with widespread tax avoidance or evasion, governments might be
tempted to turn to schemes that promise to secure revenue but are inefficient
and particularly costly to the economy. One such measure now in place in a
number of developing countries is the financial transactions tax, a tax levied
on bank account withdrawals or deposits (or both). Such a tax creates an
incentive for financial transactions to take place outside of the formal financial sector. This reduces financial intermediation, thus shrinking the base
from which the tax was designed to garner revenue. Indeed, research on the
effects of such taxes in several countries in Latin America has found that the
economic efficiency loss has ranged from 30 percent of the revenue collected
in Venezuela to 45 percent in Ecuador. Moreover, effective financial intermediation is important for growth for its own sake, so that the adverse effects
of taxes on financial transactions extend beyond the direct impact on the
efficiency of revenue generation.
Taxes on international trade can be similarly attractive to governments,
because the activity to be taxed is localized at a relatively small number of
border crossings, ports, and freight yards, making collection relatively easy. But
such policies also shield domestic industries from competition while raising
costs for domestic firms that rely on imported components. When taxes on
imports and exports are high, they create increased incentives for smuggling,
which both reduces government revenue and undercuts the rule of law.
As already mentioned, fear of macroeconomic instability decreases the
attractiveness of a country to foreign investors. One measure of the private
sector’s assessment of the macroeconomic situation in a country is the
country risk ratings developed by credit analysts. These measures are
designed to help investors predict future investment returns. They are based
on various measures of macroeconomic stability, including government debt
and inflation as discussed above. They also take into account other factors

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important to growth, including the country’s political situation, the level of
corruption, the quality of the bureaucracy, the balance of the current account
in goods and services, and experience with government expropriation of
private investments. These are discussed below.

Regulation, Privatization, and Entry
Government interventions that lower growth rates include onerous or
inefficient regulation, government subsidies that distort market signals, direct
intervention in production through government-owned enterprises, and
government-directed lending. A large body of research has documented the
damaging effects of excessive government involvement in the economy in
developed and developing countries alike. For example, evidence from
85 countries over the period 1960-85 suggests that, holding constant other
factors including the initial level of income, a one-time 10-percentage-point
increase in government consumption as a share of GDP is associated with a
one-time 1-percentage-point decrease in the growth of GDP per capita.
Privatization of state-owned enterprises has been found to improve
growth. In one study of 23 international airlines over 1973-83, privately
owned airlines were found to be more productive than their state-owned
counterparts: a change from complete state ownership to private ownership
increased an airline’s rate of productivity growth by 1.6 to 2.0 percentage
points a year. Similar results have been found for privatization of public utilities. In Chile, for example, privatization of electric utilities led to more
widespread access to electricity among the poor. Before the reform, which
began during the mid-1980s, 25 percent of the poorest fifth of the population lacked access to electricity; 10 years later this figure had fallen to about
6 percent.
An important caveat, however, is that privatization alone is not sufficient
to guarantee benefits to consumers; competition must increase as well.
Otherwise the effect might be simply to replace a public monopoly with a
private one, with continued restraints on trade and continued high prices.
This problem was highlighted in a study of telecommunications reform in
30 Latin American and African countries from 1984 to 1997: the study
found that the benefits to consumers, including lower prices and better
service, resulted from increased competition rather than privatization per se.
Governments can enhance competition by reducing regulation on domestic
firms that hinders their growth. Often, small producers in an industry, unable
to meet the burden imposed by the official business registration process,
choose instead to operate informally, that is, without official sanction. A drawback to operating in this way, however, is that these informal producers find it
more difficult to raise capital from financial intermediaries within the formal
sector, such as banks. This prevents them from growing and competing with
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the larger, established firms in their industry. In addition, informal producers
are less likely to participate in international markets, because they have
difficulty obtaining the letters of credit necessary for trade.
In Peru, for example, a study found that about half of all workers were
employed outside the formal sector, in part because of the onerous registration fees and other entry requirements faced by their employers. Subsequent
research has shown that undue entry restrictions continue to limit business
formation in a number of countries, and not only developing ones. One
study of 85 countries reports that, in the late 1990s, an entrepreneur starting
a new business in Austria needed to complete nine separate procedures,
which took at least 37 business days and cost the equivalent of $7,085 in
government fees. Bolivian entrepreneurs were required to complete 20
different procedures, pay $2,682 in fees, and wait at least 88 business days to
acquire the necessary permits. By contrast, in Canada an entrepreneur could
finish the same process in roughly 2 days, paying $280 in government fees
and completing only two procedures.
Clearly there are many ways in which government involvement in the
economy through regulation can affect economic outcomes. The measure of
regulatory quality introduced in Chart 6-3 incorporates the impact of a
number of domestic government interventions, including the incidence of
price controls, poor bank supervision, and excessive regulation. The World
Bank estimates that a 1-standard-deviation improvement in this regulatory
quality measure is associated with a threefold increase in growth of GDP
per capita.

Openness to International Trade
International trade increases competition and productivity growth. It also
brings greater specialization according to comparative advantage, lower
prices, and a wider selection of products and services for both consumers and
firms. Openness to trade allows exporters to sell their output in a larger
market; workers in export industries benefit as the resulting higher prices for
the goods they make translate into higher wages and incomes.
Chart 6-6 illustrates the relationship between growth and a measure of
openness as estimated in a recent study of developing countries. A sample
of 72 developing countries was split into “globalizers” and “nonglobalizers,”
with the former defined as the 24 countries in the sample that achieved the
largest increases in their trade-to-GDP ratio from 1975 to 1995. In the
1960s and 1970s, the nonglobalizers experienced somewhat faster growth of
real income per capita on average than the globalizers. During the 1980s,
however, globalizers experienced much higher growth rates: real income per
capita grew an average (weighted by population) of 3.5 percent a year in
these countries, compared with 0.8 percent for the nonglobalizers. The
divergence was even greater during the 1990s, with 5.0 percent annual
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growth for the globalizers versus 1.4 percent for the rest. To put these
differences into perspective, had the average globalizer and the average
nonglobalizer each begun with an income per capita of $1,000 in 1980, by
2000 the globalizer’s income per capita would have grown to $2,300, and the
nonglobalizer’s only to $1,240.
The fact that the latter figure is an average for fully two-thirds of a large
sample of developing countries suggests that enormous benefits remain to be
reaped from further removal of trade barriers and other distortions that affect
trade. These gains are particularly important for developing countries, which
are typically too small to affect the world prices of the goods they import or
export. If the government of such a country imposes a trade tax, foreigners
will continue to buy and sell at the unchanged world price, since they have
alternative markets. Consequently, the impact of any trade tax in a small
country ultimately is borne by domestic consumers and firms. The tax will lead
to lower productivity, lower standards of living, and higher costs of producing
goods. Higher barriers in developing countries will also reduce trade with other
developing countries, many of which would be natural trading partners under
free trade. According to an estimate by the World Bank, developing countries
would gain over three times as much from tariff elimination by other developing countries as they would from tariff elimination by developed countries.
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An important part of these gains stems from improvements in productivity
resulting from lower trade barriers and increased trade. Efficient firms will
have an incentive to expand production and increase exports. Increased export
production, in turn, results in lower average costs for firms that can exploit
economies of scale. Inefficient firms, unable to export to the international
market, or under increased competitive pressure from imports, will reduce
output or close. A parallel analysis applies to import-competing firms: those
that can continue to produce will have an incentive to become more efficient, while less efficient firms will leave the industry. In short, international
competition provides incentives to increase efficiency and productivity,
leading in turn to higher income per capita. (Chapter 1 further explores the
links between productivity and growth.)
Trade liberalization has in fact increased productivity in a number of
developing countries. A study of India for the 1986-93 period shows that the
trade liberalization that began there in 1991 led to increases in the growth
rate of productivity ranging from 3 to 6 percentage points in three out of
four industries considered: electronics, electrical machinery, and nonelectrical
machinery, but not transport equipment, all recorded gains. Similarly,
evidence suggests that productivity growth in Côte d’Ivoire tripled after
trade liberalization took place there in 1985. Chilean firms also increased
productivity in the wake of trade liberalization in the 1970s and 1980s:
industries facing competition from imports experienced productivity gains
3 to 10 percentage points higher than those of industries not engaged in
trade. Plants that closed down were on average 8 percent less productive than
those that continued to operate.
A further advantage of international competition, in developed and
developing countries alike, is that it can reduce the ability of firms to exploit
market power, which can reduce productivity and thus growth. Firms insulated from competition, whether domestic or international, not only are free
to increase prices to consumers, but also can become inefficient if they
restrict output and fail to take full advantage of economies of scale. Studies of
India, South Korea, and Côte d’Ivoire suggest as well that domestic
monopoly power fell after trade reform, as shown by a drop in price-cost
markups and an increase in productivity in many industries. Evidence from
India and South Korea indicates that international competition has increased
the benefits from more fully exploiting scale economies. Opening to the
world market increased production runs and lowered average costs in firms
in these two countries.
Barriers to trade can have unintended consequences for the adoption of
new, potentially growth-enhancing technologies. In 2000, Brazilian tariffs on
data processing and information systems exceeded 20 percent, raising the cost
of personal computers and contributing to a rate of computer ownership of
only 4 percent of the population. That same year, Costa Rica had a far higher
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rate of computer ownership (15 percent of the population) than Brazil, in part
because of zero tariffs on computers, despite similar income per capita in the
two countries ($4,600 in Brazil versus $3,900 in Costa Rica). Brazilian trade
policies clearly add to the cost of realizing the productivity gains widely
associated with computers.
Although increased trade leads to higher incomes and faster growth for the
economy as a whole, it can also mean economic dislocation for some workers.
Some firms will shut down, and some workers will lose their jobs or face lower
wages as international competition increases. Such dislocation can pose a
hardship for those who lack alternative employment near where they live, or
whose specialized skills are not easily transferred to other employment.
Because such job turnover is an unavoidable part of a growing and dynamic
economy, countries must address the social consequences of dislocation,
including dislocation due to trade, domestic competition, or technological
change. Nor should they do so only for altruistic reasons: countries that have
adequate private and governmental institutions to deal with such transition
costs will experience fewer pressures to avoid further trade liberalization or
other economic reform. (See Chapter 3 for a discussion of new approaches to
Trade Adjustment Assistance in the United States.)
This is important, because societies that pursue pro-growth policies such
as openness to trade will become richer as a result, and therefore will have the
resources they need to deal more effectively with these changes. Countries
that instead avoid trade liberalization will face the opposite problem: a fortunate few will see their jobs protected, but many more will have lost real
opportunities for improving their lives, perhaps without ever knowing it. The
economy as a whole, meanwhile, will experience slower growth and have
fewer resources with which to deal with broad social problems.

Foreign Direct Investment and Financial Flow Liberalization
Economic freedom is also enhanced by openness to the flow of capital
across international borders. Access to global capital flows provides countries
with a means to finance investment projects and the acquisition of new technologies. At the same time, the ability to invest capital abroad helps investors
spread their risks and aids in the establishment of new industries. Capital
account liberalization, especially in the context of sound banking supervision
and financial regulation, leads to improved economic growth, especially in
developing countries. One study found that the benefits of capital account
liberalization may be twice as great in non-OECD countries as in OECD
countries. (The Organization for Economic Cooperation and Development,
or OECD, is an association of industrialized market economies.)
Openness to financial flows, low trade barriers, and a good regulatory
regime can encourage foreign direct investment (FDI, defined as cross-border
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flows of capital for the purpose of control of an enterprise). In particular, if
foreign firms are able to freely move financial assets and profits into and out
of a country, and if tariffs are low on imported inputs, they will be more
inclined to set up plants in that country, thus contributing to its growth. A
lack of burdensome regulation can also encourage foreign investors to make
the commitment to establishing a long-term presence in a country. On the
other hand, FDI may be attracted by high tariffs on final goods entering the
country; this provides an artificial incentive for foreign companies to avoid
the duties by establishing a domestic presence.
Besides bringing in valuable capital, FDI also spurs growth through the
management skills, know-how, and new technologies that foreign investors
bring into the host country. These advantages have been shown, in both
developed and developing countries, generally to result in higher productivity
in foreign establishments than in domestic firms, which in turn leads to
higher wages in the foreign-owned plants. Mexican manufacturing data for
1970 suggest that both value added and gross output per employee were more
than twice as high in plants owned by multinational corporations as in private
domestic plants. Estimates from a study of Uruguay in 1988 found that
productivity, measured by value added per worker, was twice as high on
average in foreign firms as in domestic firms. One study of Indonesian manufacturing found that, in 1996, foreign-owned firms paid wages as much as
20 percent higher for white-collar workers and 12 percent higher for
blue-collar workers than did domestic firms.
Financial sector openness coupled with domestic financial liberalization
spurs competition among domestic financial firms and between them and
foreign participants in the financial sector. This openness exposes the
domestic firms to the best practices of world-class financial institutions and
exerts pressure on them to adapt quickly. Developed countries, including the
United States, have gained from financial market liberalization. In a similar
way, developing countries “import” not only the latest bank management
technology, but also the best risk management practices, the best work force
training, and the newest financial products. Developing countries that are
open to the establishment of a foreign financial presence in their economies
reap especially important benefits: those with open and competitive financial
services markets have growth rates up to 2.3 percentage points faster than
those with closed markets.
For many developing countries, reform of the financial sector will require
liberalization of domestic laws and regulations to allow foreign firms to provide
services in the domestic market on the same terms as domestic financial firms.
Transparency will require a mechanism by which firms can review and
comment on proposed regulations and obtain easy access to information on
existing laws, regulations and licensing, and other requirements in the financial

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sector. In such a highly regulated area, it is critical that all participants be aware
of any changes in the rules or their administration. In addition, effective planning by firms and workers requires that government regulations not change
arbitrarily or too frequently. Otherwise investment can be expected to be
lower, because the returns will be more risky. Once again, regulatory quality
can play an important part in creating an environment in which economic
growth can occur.
Efficient financial markets can also help elicit the best results from FDI. In
particular, one argument in support of FDI is that it enables residents of the
host country to acquire knowledge and learn new techniques while working
in foreign-owned plants, and then go to work for (or start) a domestic firm
and apply that knowledge there. However, empirical studies have found
mixed evidence on whether such technological spillovers systematically
occur. If the country’s financial system is not well developed (for example, if
credit extended by financial intermediaries to the private sector is small in
relation to GDP), entrepreneurs may not be able to obtain financing to apply
the new knowledge and technology in a new plant. One study of developed
and developing countries from 1975 to 1995 suggests that a country’s annual
growth rate increases by 0.6 percentage point when FDI is undertaken in the
presence of well-developed financial markets.

Governing Justly: Rule of Law and
Government Accountability
A growing body of research shows that the quality of institutions is critical
in explaining differences in growth rates across countries. For example, if
domestic legal institutions cannot or do not enforce contracts, businesses and
individuals will be less likely to commit to long-term commercial relations,
absent informal ties such as family relationships. Government regulation or
bureaucratic indifference that makes it difficult to acquire and retain rights to
property can slow capital formation. Governments that are unresponsive to
their citizens, or that act arbitrarily when making economic decisions, will lose
the trust both of the domestic population and of potential foreign investors.
Consequently, countries seeking to accelerate their economic growth must
promote institutions that allow individuals and firms to respond to market
incentives. The rule of law is one of the most important of these institutions,
because it directly affects the willingness of individuals to save and of
entrepreneurs to undertake commercial activities.
If the rule of law is to provide an environment supportive of growth, it
must encompass not just what is commonly thought of as “law and order,”
but also, more broadly, the protection of property rights, the ability to make
and enforce contracts, and the ability to settle private disputes fairly and
effectively. People must also have reason to expect that the government will
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not intervene in legitimate private transactions by expropriating property,
systematically favoring either debtors or creditors, or supporting one sector of
the economy over another in legal proceedings. Returns on investment have
been found to be higher in countries with strong rule-of-law protections. For
example, one study concluded that rates of return on World Bank-financed
projects over the last several decades were 8 to 22 percentage points higher in
countries where the rule of law was well established than in countries where
it was not. Another study of 115 countries from 1960 to 1980 found that,
on average, income growth was nearly three times as rapid in countries with
greater civil liberties and political freedoms as in countries that were less free.
Enforcement of property rights is an important aspect of the rule of law,
regardless of a country’s income. Legally held assets, legitimate investments,
and profits from legal commercial transactions must be protected against
seizure by criminals—or by governments without compensation. Countries
whose governments do not enforce property rights can be expected to suffer
from slower growth. To see this, consider the economic effects of a government that routinely seizes private resources without legal justification or
adequate compensation. Investors, assessing the risk of expropriation of their
assets, will then require a higher rate of return on any projects they undertake,
and some investment that would otherwise bring economic benefits to the
country—higher income, higher productivity, higher wages—will be forgone.
The poor may be especially hurt by the absence of property rights. Many
of the poor in the developing world lack formal title to what property they
have, which means they cannot use it as collateral to borrow to expand their
informal businesses or establish a new enterprise. In addition, they often
must rely on extralegal means to insure against appropriation of their investment by others, because they cannot rely on the formal legal system to
protect their property.
Institutions that protect property rights are crucial for economic growth.
One study links the successful development outcomes in East Asia over the
past several decades to the quality of institutions and property rights there.
Examining eight countries in the region over the period 1960-94, researchers
found important contributions from just three variables: institutional
quality, initial income, and initial education. Those countries with the weakest
institutions—Indonesia and the Philippines—had the slowest growth.
Inadequate legal protections for passive or minority investors also affect
investment and growth. One reason is that, in countries with weak investor
protection, managers may be able to exploit inside information about their
firms, to the disadvantage of outside investors. Knowing this, investors will
be less willing to commit funds in the first place. A study of individual firms
in 38 developing and developed countries over the period 1988-98 found
that countries with weak protection for outside investors had capital stocks
only half as large as countries with strong investor protections.
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The rule of law is particularly important for the development and efficiency
of the financial sector. For example, banks cannot function effectively without
strong institutions that support the rule of law. Modern banking depends on
the confidence of depositors that banks will safeguard the monies in their trust
and that the government will provide supervision and regulation to ensure the
banks’ soundness. Reforms that strengthen creditor rights, contract enforcement, and accounting practices boost financial development, and with it
economic growth. One study shows that if countries improve the legal protection of creditors, they will have much stronger financial development, which
in turn accelerates long-term growth. Another study found evidence that the
positive impact of capital account liberalization on growth (as described
above) is enhanced through institutions that promote the rule of law.
Of course, the nature of laws and institutions matters—the laws must be
appropriate and the institutions effective. The laws and institutions
governing bankruptcy proceedings provide an example. In a number of
developing countries, the lack of sound bankruptcy law, effective bankruptcy
courts, and other institutions effectively prevents creditors from enforcing
their claims on bankrupt debtors, even when their loans are collateralized.
Without the ability to collect on collateral, financial institutions will require
higher interest rates on any loans they offer, effectively hampering access to
credit for firms throughout the economy. The greatest impact may well be on
smaller firms seeking to grow but unable to finance investment projects
solely from internal cash flow. The importance of bankruptcy institutions is
confirmed in a recent study of 43 countries: researchers found that differences in laws related to investor protection were attributable to the historical
origin of countries’ legal systems (for example, English, French, German, or
Scandinavian), and that these differences had lasting effects. In those countries whose legal systems make it difficult for creditors to seize collateral
secured against bankruptcy, credit extended to private firms was lower as a
share of GDP than in other countries. Reduced availability of credit can be
expected to translate into higher real interest rates in these countries, and
thus lower rates of investment and growth.
When the rule of law is weak, corruption can flourish, and this, too, leads
to slower growth. Corruption affects growth through a number of channels,
including tax evasion, distorted investment decisions, and suppression of
legitimate business. Corrupt officials add to the damage of inefficient regulations, because bribes then determine what economic activity is approved.
Corruption represents a tax on economic efficiency and social progress and is
an enormous barrier to both domestic and foreign investment.
Corrupt individuals in the private sector may conspire with corrupt
officials to avoid taxes, depriving the government of needed revenue. The result
is likely to be higher tax rates on a smaller base, which can cause economic
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distortions. For example, a study of 39 Sub-Saharan African countries covering
the period 1985-96 found that a 25 percent increase in corruption led to a
decrease in tax revenue of 2.1 to 2.8 percent of GDP.
Corruption can harm growth more directly by limiting investment and
entrepreneurial activity. Corruption increases risk and uncertainty, which
reduce the incentives to invest. A further channel for corruption is the diversion of resources intended for public infrastructure to the private
consumption of corrupt officials. This leads to less investment and slower
growth. One study of 57 developing and developed countries found that a
one-third decrease in corruption was associated with an increase in the
investment share of GDP of 2.9 percentage points, and an increase in annual
growth in income per capita of 0.8 percentage point. Corruption can also
retard the development of legitimate business. A study of Ugandan firms
using data from 1995 to 1997 found that a 1-percentage-point decline in the
rate of bribery was associated with an increase in firm growth of about
3.5 percentage points.
The quality of political institutions can also play a role in economic
outcomes. In particular, increasing citizens’ voice in determining political decisions and ensuring the accountability of public officials fosters a more
responsive government and strengthens the rule of law. A responsive and
responsible government will gain the public’s trust and create more incentives
for private investment. One study that attempted to assess the economic
impact of these factors estimated that an increase in a measure of “voice and
accountability” was associated with a marked increase in GDP per capita.
Studies using broader measures of government effectiveness that incorporate
individual freedoms, regulatory quality, and the amount of bureaucracy in a
country have yielded similar results: an increase in a measure of government
effectiveness corresponded to a marked increase in GDP per capita. Strong civil
liberties and overall government effectiveness also have an impact on other
social indicators: countries that score higher on voice and accountability and
on government effectiveness tend to have lower infant mortality and higher
literacy rates.

Investing in People: Health and Education
Investment in human capital is also important for economic growth.
Well-trained and healthy workers are more likely to make the greatest
possible use of the physical stock of capital in any country.
Formal education is a direct way to invest in human capital, and there is
some evidence of a positive relationship between national income and educational attainment. In 2000 the average duration of schooling in low-income
countries was 4.4 years (3.3 years for females), compared with 10 years in
high-income countries (9.8 years for females). In a cross-country analysis of
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98 developing and developed countries covering 1960-85, a 1-percentagepoint increase in the primary school enrollment rate was associated with a
2.5-percentage-point increase in growth in income per capita.
Education is most effective in an environment in which the investment in
time, effort, and money devoted to education leads to higher returns from
increased labor productivity. If a society’s high-paying jobs are awarded based
on political connections or family and ethnic ties, those excluded from such
jobs will have less incentive to pursue their education, which in turn will lead
to slower economic growth. Similarly, if a country’s best-educated young
people find employment in inefficient state-owned enterprises or bureaucracies (as was the case in the centrally planned Soviet Union, for example), the
impact of education on labor productivity will diminish. Empirical results
from research on 12 Asian and Latin American countries over 1970-94 are
consistent with this hypothesis. In particular, the effect of education on
growth was found to be negligible in closed and highly regulated economies;
in countries that had undertaken free market reforms, however, a 5 percent
increase in educational attainment was associated with a 0.9-percentagepoint increase in the annual growth rate.
There are important caveats to the conclusion that higher educational
achievement necessarily leads to faster growth. One difficulty is that the links
between formal education and growth are complex. For example, some
evidence suggests that the positive relationship between education and
growth arises in part because growth leads to increased schooling. This could
happen if the expectation of strong growth in the future leads to an increase
in the demand for schooling today, as individuals sacrifice current earnings
for higher wages in the future.
Education and the development of good institutions can be mutually
reinforcing. Good institutions and policies can lead to higher returns on education and faster growth, and in turn, a well-educated population is an important
element in developing good institutions. An illiterate population, for example,
may be less likely to hold political leaders accountable, because it is hard to
acquire information about poor policies and outcomes if one cannot read. An
educated population is likely to be a well-informed population, and one that can
exert pressure for sound policies and institutions.
Effective health care is also important for improving the quality of the
work force and increasing economic growth. Healthy employees are absent
from work less often, and the resulting higher utilization of capital leads to
lower average costs and faster growth. Healthy workers also tend to earn
higher wages, indeed more so in developing countries, where manual labor
plays a larger role in the economy, than in industrialized and servicesintensive developed countries. One study of 104 countries found direct
evidence linking health and growth, suggesting that increasing average life
expectancy (a standard indicator of a population’s general health) by 1 year
240 | Economic Report of the President

can lead to a 4 percent increase in national income. This result suggests that
countries with severe health problems and lowered life expectancy will have
slower growth than they could otherwise achieve. The problem is particularly
acute in low-income countries that face challenges associated with infectious
diseases such as malaria and HIV/AIDS. (See Box 6-1 above.)
It is well established that countries with higher incomes have longer life
expectancies, lower maternal mortality rates, and higher average birth
weights. Determining the causal link between income and health is difficult,
however, for reasons similar to those for income and education: on the one
hand, countries with higher incomes can devote more resources to health
care, but on the other, better health outcomes improve productivity and raise
growth rates.
Health and education outcomes, of course, can be interlinked. Sick children
are more likely to be absent from school, and this can lead to lower educational
achievement and lower income later in life. For example, school-age children
are especially susceptible to infestation by parasitic worms. Recent estimates
suggest that as many as one in four people worldwide are afflicted with various
types of worms; severe infestations can lead to anemia, malnutrition, and listlessness. A study of a joint public and private project in Kenya found that
treatment with de-worming drugs led to a 25 percent reduction in primary
school absenteeism and was cost-effective: the net present value of increased
wages from increased school participation far outweighed the cost of treating
the children. This suggests that effective programs to invest in people can lead
not only to healthier children, but also to improved participation in schooling
and ultimately to higher wages.

The Administration’s Policies
to Enhance Growth
The discussion thus far has made it clear that creating the right environment
for growth in developing countries requires, above all, actions by those countries themselves. To complement and reward their efforts, the Administration
has put forward three initiatives that will spur growth in developing countries
and elsewhere by helping to create an environment in which incentives can
improve economic opportunities. Trade Promotion Authority will help the
President conclude trade agreements that will further integrate developing
countries into the global marketplace and increase growth. The Millennium
Challenge Account will increase development aid to countries that are pursuing
policies and building institutions that adhere to the principles of good governance. The Administration’s proposals to redirect the funds and priorities of the
multilateral development banks will also help developing countries improve
their growth prospects.
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All three initiatives are consistent with the pro-growth principles that this
chapter has laid out. The Administration’s focus, under TPA, on trade liberalization within a rules-based system is based on the principle of openness to
goods and capital flows, as well as the promotion of legal institutions and the
rule of law. The MCA incorporates all of the principles described above by
integrating them into the criteria used to determine the awarding of grants to
developing countries. Reform of the MDBs will encourage private sector
growth and effective economic management in the countries they serve.

Trade Promotion Authority
The significance of TPA is that it enhances the President’s ability to negotiate
trade agreements, by assuring foreign governments with which the United
States negotiates that the Congress will vote yes or no on those agreements
without amendment. The Congress retains its primary constitutional
authority to regulate foreign commerce, and the Administration will
continue to consult Members of the Congress frequently on matters relating
to the course of trade negotiations.
The agreements made possible by TPA will benefit the United States by
creating new export opportunities and lowering prices for imported goods
and services. But TPA will also foster growth in developing countries by
increasing competition. The rules-based agreements will also promote institutions in developing countries that will help them take full advantage of
trading opportunities.
The increased integration of developing countries into the global marketplace has already brought those countries enormous benefits. Research
suggests that a 1 percent increase in a country’s trade relative to its GDP is
associated with an increase in its income per capita of 3 percent. Moreover,
evidence suggests that it is increased trade that leads to increased income
rather than the reverse. A recent study suggests that the full implementation
of trade liberalization under the Uruguay Round of multilateral trade negotiations, completed in 1994, increased developing countries’ income by
0.8 percent, double the percentage increase accruing to the developed world.
India’s GDP is estimated to have risen an even greater 1.1 percent of GDP as
a consequence of the same liberalization commitments.
Further trade liberalization will continue to raise world income. A recent
World Bank study suggests that the elimination of all tariffs, export subsidies,
and domestic production subsidies on goods would raise annual world
income by $355 billion by 2015, with middle- and low-income countries
receiving 52 percent of that increase. Another study suggests that if world
barriers to trade in agricultural and industrial products and to trade in
services were reduced by one-third, the gains to the United States alone

242 | Economic Report of the President

would translate into additional annual income of $2,500 for the average
American family of four.
The President’s new trade negotiating authority has already resulted in the
successful completion on the substance of free trade agreement (FTA) negotiations with Singapore and Chile. These agreements cover a wide range of
issues, including, among others, the eventual elimination of tariffs, increased
openness to trade in telecommunications and other services, transparency
requirements, protections for foreign investors, and provisions for enforcement of labor and environmental standards. One study suggests that
although the net benefits to the United States from these two FTAs will be
relatively modest (0.05 percent and 0.18 percent of GDP, respectively), the
benefits to Chile and Singapore will be proportionately greater (0.6 percent
and 2.7 percent of GDP, respectively).
TPA will provide an impetus to conclude a number of other trade agreements
currently under negotiation, most of which are with developing countries.
These negotiations include the ongoing discussions with countries in the
Western Hemisphere toward a Free Trade Agreement of the Americas
(FTAA) and the recently inaugurated talks with Australia, Morocco, the
countries of Central America (Costa Rica, El Salvador, Guatemala,
Honduras, and Nicaragua), and the countries of the South African Customs
Union (Botswana, Lesotho, Namibia, South Africa, and Swaziland). The
commitment of the United States to conclude these talks under TPA
reflects the Administration’s determination to advance pro-growth trade
liberalization, especially in the developing world.
The FTAA, in which 34 countries in North, Central, and South America
will participate, is the most complicated and far-reaching of the regional trade
agreements toward which the United States is currently negotiating. One
study suggests that, when the FTAA is in place, the United States could experience a 0.6 percent increase in GDP, and the combined GDPs of the Latin
American participants (excluding Mexico and Chile) could increase by 1.1
percent. The same study suggests that Mexican and Chilean GDP would rise
by 0.8 percent and 2.5 percent of GDP, respectively, as a result of the FTAA.
As with the FTAs with Chile and Singapore, the benefits of these bilateral
and regional agreements are proportionately larger for other countries than for
the United States, although smaller in absolute dollar terms. The reason for
the asymmetric effects is straightforward: the U.S. economy is so large relative
to these trading partners that the economic benefits of FTAs with them will
be small as a share of U.S. economic activity. In addition, U.S. trade barriers
are already low on average, so that the impact at home of further trade
liberalization will be modest. For example, the U.S. economy in 2001 was
151 times larger than the Chilean economy, and trade in goods with Chile
(exports plus imports) amounted to only 0.4 percent of total U.S. trade. U.S.

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tariffs in 2001 averaged 1.6 percent, compared with average Chilean tariffs of
8 percent; thus the costs of current trade barriers fall more heavily on Chile.
However, U.S. exporters of goods and services and U.S. investors will be able
to operate more freely in a fully liberalized Chilean market.
Despite their modest effects in relation to total U.S. output, these agreements
are important to the United States as part of the broader U.S. effort toward
multilateral reduction in trade barriers under the auspices of the World
Trade Organization (WTO). TPA will be especially important for the United
States and developing countries by helping bring the current WTO negotiations to fruition. The importance of further integrating developing countries
into the world trading system is reflected in the name given to these
negotiations: the Doha Development Agenda. (Doha, the capital city of Qatar,
is the site of the WTO ministers’ meeting where the agenda was launched.)
The United States has offered bold proposals in the Doha negotiations for
the reduction of trade barriers on agricultural and nonagricultural goods.
The agricultural initiative proposes to reduce agricultural tariffs, limit
governments’ support of agriculture to 5 percent of the domestic value of
production, and eliminate agricultural export subsidies. The Administration
has also proposed that, by 2010, WTO members eliminate all tariffs on
nonagricultural goods that are currently below 5 percent and sharply reduce
the rest, including those on textiles and apparel. Going further, the
Administration has proposed that all nonagricultural tariffs be eliminated in
all WTO member countries by 2015.
The reduction and eventual elimination of tariffs on goods is but one
aspect of the U.S. trade liberalization agenda in the WTO negotiations. The
United States has put forth over a dozen proposals to reduce barriers to trade
in an array of services industries. In addition, the United States has advocated
greater regulatory transparency, both through general disciplines and through
rules applicable to specific industries, such as financial services. This initiative
reflects the assessment, discussed above, that regulatory quality is key to
economic outcomes.
These liberalization initiatives will bring important benefits to U.S. firms,
workers, consumers, and farmers, both from increased exports and from
lower priced imports. The U.S. agricultural and nonagricultural market
access proposals are of particular importance to developing countries, since
many expect to increase their exports of agricultural goods as well as textiles
and apparel to developed countries if barriers are reduced. However, developing countries can also expect important efficiency gains and faster growth
as they remove their own barriers.
The economic effects of the current WTO negotiations cannot be
examined in detail until the outlines of the final agreement become clearer.
One study provides some sense of the possible outcome, however, by
244 | Economic Report of the President

analyzing a hypothetical 33 percent reduction of trade barriers across all
sectors. In this scenario U.S. GDP rises by 2 percent, that of Europe (the
countries of the current European Union and the European Free Trade Area
combined) by 1.5 percent, and that of Japan by 1.9 percent. The same study
also predicts large increases in GDP in developing countries, including the
Philippines (5.4 percent), South Korea (2.5 percent), Mexico (1.8 percent),
Chile (2.4 percent), the rest of Latin America (1.4 percent), and the Middle
Eastern and North African countries (1.9 percent).
These estimated effects of trade liberalization take into account only its
static impacts, such as a reallocation of resources to more efficient uses and
the benefits accruing to consumers from lower prices. The estimates do not
capture the dynamic effects on growth, such as those arising from greater
economies of scale, productivity gains, and access to improved technologies,
that increased openness would bring. Including these effects could substantially boost the impact of trade liberalization. For example, the World Bank
study previously cited found that, by 2015, world income would increase by
another 134 percent, with 65 percent of that increase going to developing
countries, in response to the multilateral elimination of all trade barriers.
Thus, including dynamic effects increases the impact of liberalization but
also increases the potential benefits accruing to developing countries.
The conventional estimates also typically fail to capture gains in services
trade, in large part because quantifying barriers to such trade can be difficult.
Nonetheless, services are becoming more important to developing countries,
with their average share in GDP rising from an estimated 40 percent in 1965
to 50 percent in 1999. Removing barriers to services leads to lower costs and
greater efficiency in such important sectors as telecommunications,
e-commerce, transport services, professional services, and financial services. A
World Bank study suggests that multilateral liberalization in the services
sector alone would increase combined developing-country GDP by nearly
$900 billion, a gain nearly five times greater than the anticipated benefits of
merchandise trade liberalization.
Of all the trade liberalization initiatives currently on the agenda, the
United States and its developing-country partners stand to gain the most
from completion of the WTO negotiations, but the bilateral and regional
agreements will also bring benefits. For example, a 33 percent cut in all
global tariffs could lead to gains in U.S. and Chilean GDP of $177 billion
and $1.9 billion, respectively, and an increase in world GDP of $612 billion.
The U.S.-Chile FTA would increase U.S. and Chilean GDP by $4.2 billion
and $479 million, respectively.
Some have argued that a focus on regional and bilateral trade liberalization
could undermine the broader process of multilateral trade liberalization and
the WTO as an institution. However, the Administration sees these bilateral

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and regional agreements as part of a strategy of “competitive liberalization,”
that is, as steppingstones to worldwide trade liberalization rather than as a
stumbling block. In other words, the bilateral, regional, and multilateral
prongs of the Administration’s strategy for trade negotiations are intended to
work in concert, to help achieve the broadest possible degree of trade liberalization in the United States itself and among the greatest possible number of
its trading partners.
Trade agreements negotiated by the United States have had, and will
continue to have, other indirect benefits to economic performance. The rulesbased nature of modern trade agreements helps encourage the development of
institutions consistent with the pro-growth principles enunciated in this
chapter. In particular, transparency, rule of law, contract enforcement, and
property rights are all part of recent U.S. rules-based trade agreements. The
introduction of bilateral and multilateral trade and investment commitments
can help transform economies in ways that foster these pro-growth policies.
For example, rules-based trade agreements enhance the transparency of
government actions. Trade commitments must be cataloged, organized, and
made public, not only to trading partners but also, ultimately, to domestic
constituencies. As citizens become accustomed to public transparency and
accountability in trade policy, they may be more likely to demand similar
transparency in other aspects of their country’s public policy. Such accountability limits government’s ability to make arbitrary decisions and thus
ultimately creates better conditions for strong growth. In some respects,
domestic reforms reinforced by the rules-based trading system have already
taken hold in China (Box 6-2).
Trade agreements also encourage the rule of law and the enforcement of
contracts. All such agreements require that governments write down their
rules governing trade, and in most agreements, governments agree to submit
trade disputes to external review by third-party panels. Governments that
know that their actions can be reviewed by external and impartial dispute
settlement bodies may be less likely to enforce laws arbitrarily. Similarly,
foreign firms can resort to a dispute settlement panel if a trading partner fails
to enforce legally binding contracts. As domestic firms and individuals
become more familiar with the legal procedures available to foreigners within
the country, they may pressure their government for similar nonarbitrary
decisions and legal protections in internal matters. Once again, the external
commitment may help with internal reform.
A rules-based system also fosters the development of protection for property
rights, especially through agreements that cover FDI. Many trade agreements,
including the North American Free Trade Agreement and the bilateral FTAs
between the United States and Israel and Jordan, and now Chile and
Singapore, contain protections against uncompensated expropriation by
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Box 6-2. China, the WTO, and the Rule of Law
The accession of the People’s Republic of China to the World Trade
Organization in December 2001 should strengthen and accelerate the
economic reforms launched by the Chinese government over 20 years
ago. These reforms not only have increased trade and investment
dramatically but also have enhanced transparency and decreased state
control over the economy. The benefits of economic liberalization and
reform can be seen in the huge reduction in poverty and dramatically
increased income per capita in China since 1980.
China’s integration into the world economy has been one of the
most dramatic events in the recent wave of globalization. In 1980
China’s total goods exports and imports amounted to only $37.8 billion.
Exports were tightly controlled by the various state bureaucracies.
Foreign direct investment was essentially nonexistent. Beginning in the
early 1980s, China began to move away from formal trade planning
and toward market-based trade incentives. Tariffs and nontariff barriers
replaced quantitative planning, foreign direct investment was
welcomed in many sectors, and encouraging exports became a prime
motivating factor in Chinese economic policies. Although China’s policies remained far from textbook free trade during the early years of
integration (China’s average tariff rate in 1982 was 56 percent), the
dramatic shift in economic policy created far-reaching new economic
opportunities.
By 2001 these reforms had brought enormous changes to the
Chinese economy. Exports of goods had grown to $266 billion, a
14-fold increase since 1980. Imports of goods expanded from less than
$20 billion to $244 billion over the same period. Average tariffs had
fallen to 15 percent by the time of WTO accession. Annual foreign
direct investment flows had risen from $430 million in 1982 to over
$38 billion in 2000. Income per capita had risen from $167 in 1980 to
$824 in 2000.
China’s efforts to gain WTO membership led to external pressure for
extension of the rule of law and more transparent decisionmaking in
the country. For example, during the 1990s the United States informed
the Chinese government that failure to protect copyrighted materials
such as software, films, and other recordings would undercut U.S.
support for China’s membership. China finally agreed to begin to
enforce intellectual property rights laws in 1996, but its enforcement
efforts still need to be strengthened.
China’s formal accession to the WTO will lead to further reform. By
mid-2002 approximately 830 existing laws and regulations had been
repealed, 325 amended, and 118 new laws and legislation adopted in
order to bring China into conformity with WTO rules. With its new WTO

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Box 6-2.—continued
obligations, China has now made a formal external commitment to a
whole range of trade-related reforms. Failure to live up to these
commitments will put Chinese exports at risk in other WTO members’
markets, because members may enforce China’s commitments
through WTO dispute settlement proceedings and may retaliate if
China refuses to cease its actions deemed WTO-inconsistent. For
example, China is adopting regulations for controlling injurious
dumping of imports, as WTO rules allow. Whereas in the past bureaucrats could restrict imports arbitrarily, however, Chinese antidumping
procedures henceforth will be carefully scrutinized by other WTO
members for inconsistency with WTO rules.
China has undergone enormous changes in its economic orientation
over the last 20 years. Membership in the WTO brings with it an
external commitment to this process of reform and makes a return to a
centrally planned economy even more difficult.

governments. As these commitments to U.S. firms become widely known,
domestic firms in those countries may expect similar guarantees.
The United States also extends special benefits to certain low-income
countries through various programs including trade capacity building assistance, the Generalized System of Preferences, the Andean Trade Preference
Act, and the African Growth and Opportunity Act (AGOA). AGOA, which
was signed into law in May 2000, reduces trade barriers for Sub-Saharan
African countries’ products entering the United States below those required
under the multilateral trade commitments negotiated under the WTO.
However, countries in this region do not automatically qualify for lower U.S.
tariffs. To be eligible, a country must have a market-based economy, and its
government must be making efforts to limit its interference in the economy
and must protect property rights. In addition, the government must undertake economic policies that aim to reduce poverty, improve health, and
promote private enterprise. Finally, eligible countries must be taking steps to
combat official bribery and improve labor rights. In short, through AGOA
the United States offers lower trade barriers to poor countries in Sub-Saharan
Africa that are making efforts to pursue good policies and promote good
institutions. The principles behind AGOA are thus very similar to those of
the second major new Administration initiative, the Millennium Challenge
Account, which is discussed next.

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The Millennium Challenge Account
In March 2002 the President proposed a new program designed to
promote growth in developing countries. Over the next 3 years, the
Millennium Challenge Account will increase annual U.S. bilateral development assistance by $5 billion, a 50 percent increase over current levels.
MCA funds will be used to support activities that directly contribute to
economic growth and poverty alleviation. MCA programs will be implemented by the private sector, nongovernmental organizations, and public
sector agencies. The MCA will strive to achieve within recipient countries a
broad coalition around development investments. Because MCA aid will be
in the form of grants, not loans, in accordance with the policy set forth by
the President at the Group of Eight summit in 2001, this development assistance will not increase the debt burden of recipient countries.
The MCA is based on the fact that development assistance is most
effective when funds flow to countries that have already adopted policies and
created institutions that promote growth. In other words, only those countries that have taken concrete steps themselves to improve their condition
will be potential MCA recipients. The MCA approach has the added advantage that, as countries strive to qualify for U.S. grants, they will be
implementing policies that also encourage inflows of private capital and
increased trade, the real engines of sustained economic growth.
Countries receiving MCA assistance must be active partners in the
development programs funded by the MCA. Each country selected for aid
will negotiate and sign a contract with the MCA, which will specify the
following: a limited number of clear, quantifiable goals; concrete benchmarks
that specify the time needed to accomplish the tasks; commitments to financial accountability; and conditions under which the contract would be
terminated. MCA resources are meant to complement and enhance specific
efforts and policies undertaken in the participating countries; indeed, the
MCA program will not impose a development plan designed by others, but
rather recognizes that the countries themselves are in the best position to
evaluate their own needs. In short, MCA recipients must take responsibility
for their own development programs.
Monitoring and evaluation to ensure accountability for results will be an
integral part of every activity for which MCA funds are used. Monitoring
and evaluation will be conducted by the MCA administrative structure or by
third-party contractors, or both. To facilitate such monitoring, all contracts
will include baseline data against which progress can be measured. The U.S.
Government will provide technical assistance to help countries establish
these credible baseline data. Every contract will specify regular benchmarks
for evaluating progress and provide for the corrective actions necessary to

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keep the program on track. All evaluations and all terms of the contract will
be made public in the United States and in the host country.
MCA contracts will fund projects for a limited term and include
provisions for a midterm review. Programs will continue to receive funding
under the terms of the country’s MCA contract unless the country fails to
meet the contract’s conditions for performance. Funding for all or part of a
particular MCA contract may be scaled back or ended for failure to meet
financial standards or specific benchmarks. In addition, a country’s participation in the MCA may be terminated for failure to adhere to the three
fundamental principles laid out earlier in this chapter—economic freedom,
governing justly, and investing in people—as indicated by an absolute
decline in the policy environment. Participation may also be terminated in
the event of material change such as a military coup.
Allocation of MCA resources will be based primarily on quantitative
benchmarks in order to ensure procedural accountability and transparency.
These criteria will focus on the three broad principles just mentioned. Use of
published, quantitative measures will also help countries understand why
they did or did not qualify to receive MCA funds. This knowledge will
enable countries to identify where they need to improve their policies in
order to qualify for future grants. Table 6-2 lists the 16 specific indicators
(and the initial public sources for the data) for the three MCA principles.
These indicators were chosen because of their quality and objectivity, country
coverage, and public availability.

TABLE 6-2.— Millennium Challenge Account Indicators
Principle

Indicator

Source

Economic freedom ...... Country credit rating
Inflation
Budget deficit
Trade policy
Regulatory quality
Days needed to start a business

Institutional Investor magazine
International Monetary Fund
International Monetary Fund, national sources
Heritage Foundation
World Bank
World Bank

Governing justly .......... Control of corruption
Rule of law
Civil liberties
Political rights
Voice and accountability
Government effectiveness

World Bank
World Bank
Freedom House
Freedom House
World Bank
World Bank

Investing in people ...... Public primary education spending as percent of GDP
Primary education completion rate
Public expenditure on health as percent of GDP
Immunization rates: DPT and measles 1

World Bank, national sources
World Bank, national sources
World Bank, national sources
World Bank, national sources

1

Immunization for diphtheria, pertussis, and tetanus and for measles.

Source: Millennium Challenge Account fact sheet, The White House.

250 | Economic Report of the President

As described previously, economic freedom broadly encompasses the
freedom to start a business, hire workers, invest, and make other business and
personal decisions without undue government interference. In the MCA
process, economic freedom will be measured by six publicly available criteria:
country credit ratings, inflation rates, budget deficits, measures of openness to
trade, measures of regulatory quality, and the number of days it takes to start
a business. Country credit ratings are included because they contain useful
summary evaluations by private sector sources of the country’s macroeconomic situation. Inflation rates and budget deficits are included to capture
those aspects of macroeconomic stability so important to growth. Trade policies, including the degree to which imports are subject to tariffs and nontariff
barriers, as well as the extent of corruption in the national customs service,
will measure the extent to which a country’s policy environment allows it to
take advantage of global markets. Finally, regulatory quality and the time it
takes to start a new business provide quantitative measures of the environment
for entrepreneurial activity.
The second principle—governing justly—involves various facets of good
governance and good institutions that help sustain a pro-growth environment. The inclusion of criteria that embody this principle reflects the
important complementary role of the quality of institutions in improving
economic performance. The criteria will measure the extent to which citizens
of a country are able to participate in the selection of governments, the
freedom to develop views and institutions independent of the state, the role
of elected representatives in policy formation, the control of corruption, and
the rule of law. These are important indicators of whether there is political
accountability in the country.
Measures of governing justly will be based on surveys by the World Bank
and Freedom House, a nonprofit, nonpartisan organization. Rankings will be
based on the following criteria: civil liberties, political rights, voice and
accountability, government effectiveness, rule of law, and control of corruption.
Assessment of the rule of law, which, as discussed above, is important to
investor and entrepreneurial confidence, will cover such factors as the effectiveness of the judiciary and the enforceability of contracts. Ratings of political
rights and civil liberties will be determined through a compilation of foreign
and domestic news reports, publications by nongovernmental organizations,
policy center research, and academic and professional analysis.
The third principle—investing in people—involves public commitment to
developing human capital through education and improved health. Here the
quantitative criteria include public spending on primary education as a
percentage of GDP, the share of children who have completed primary
school by the national graduation age, public expenditure on health as a
percentage of GDP, and immunization rates of children under 12 months for
DPT (diphtheria, pertussis, and tetanus) and measles. The importance of
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education in maintaining and improving worker productivity is reflected in
the inclusion of both a public education input (public spending on primary
education) and an education output (the share of children completing
primary school). As noted in the earlier discussion of pro-growth principles,
improved health care is also important to better economic outcomes.
Consequently, public expenditure on health care is included as an MCA
criterion, along with immunization rates for some of the most common
serious childhood diseases worldwide.
Countries must demonstrate commitment to and performance on all
three principles to be deemed a “better performer” and thereby qualify for
possible MCA assistance. Eligibility will be limited to those countries that
score above the median on at least half of the indicators in each of the three
areas. However, countries must score above the median on the corruption
indicator to be considered for grants, regardless of their scores on other
criteria. This requirement reflects the importance that corruption plays in
whether or not development assistance achieves its aims. As noted above,
reducing corruption supports the benefits of other good policies and of
development assistance by building public trust in institutions, encouraging
investment, and helping ensure that aid is put to pro-growth uses.
Candidate countries will be evaluated within one of two income
categories. Initially, only countries with gross national income per capita
below $1,435 (in 2001 dollars) will be eligible for grants. This level was
chosen because it is the historical income threshold for assistance to the
world’s poorest countries from the International Development Association
(IDA), the World Bank affiliate that specializes in assistance to the poorest
countries. In subsequent years, the income threshold for eligibility will be
raised to $2,975, the projected cutoff for the World Bank’s designation for
lower-middle-income countries. However, the two income groups (those
with incomes per capita below $1,435 and those with incomes between
$1,435 and $2,975) will continue to be evaluated separately. This separation
is important because, as discussed above, higher income is associated with
better social and economic indicators. Grouping the countries in this way
will ensure that countries of similar income and economic development
compete with each other. Countries prohibited by current statutory
restrictions from receiving U.S. assistance will not be eligible. Qualifying as a
better performer does not guarantee receipt of MCA funds. The MCA Board
of Directors, composed of Cabinet-level officials and chaired by the Secretary
of State, will make final recommendations to the President.
As already noted, the provision of grants rather than loans will ensure that
the MCA program will not add to countries’ debt burdens. The resources
provided can then be allocated as intended, to development rather than debt
service. Aid in the form of loans causes many heavily indebted poor countries
to accrue even greater debt, which can hinder their growth. One study of
252 | Economic Report of the President

93 developing countries from 1969 to 1998 found that, for a country with
average indebtedness, doubling the debt ratio (either the debt-to-exports
ratio or the debt-to-GDP ratio) reduces annual growth of GDP per capita by
between 0.5 and 1 percentage point.

Reforming the Multilateral Development Banks
The Administration believes that the World Bank and other multilateral
development banks will be more effective in helping countries improve their
living standards if, when distributing aid, they place greater emphasis on
factors that improve productivity. The Administration’s agenda for reform of
the MDBs seeks progress toward better measurement, monitoring, and
management of development assistance. The Administration also has pushed
for an increase in the proportion of MDB assistance to the poorest countries
that is delivered in the form of grants rather than loans.
MDBs will be more effective in reducing poverty if they address the basic
causes of slow growth, including poor business environments and inadequate
education and health care. This means that MDBs should help countries
reduce the impediments that constrain the creation of high-productivity jobs
in the private sector. To this end, the United States has secured agreement on
a change in assistance strategies by the IDA. IDA funds will now include the
distribution of resources to private sector development, in addition to the
public sector uses that have been its traditional focus. This agreement creates
the basis for expanded collaboration between the IDA and the International
Finance Corporation, the World Bank Group’s private sector finance arm.
Such collaboration will help remove the obstacles to private sector-led growth
in the world’s poorest countries.
The Administration also believes that a major priority for the MDBs should
be greater attention to measuring development results. Donor and recipient
countries both benefit from quantifying the outcomes of assistance programs
and understanding the reasons for success or failure. The recent IDA replenishment agreement calls for a fundamental shift of focus within the MDBs
toward measurable results. IDA will also establish a system that tracks specific
results in education, health, and private sector development. These innovations will allow donors to link their contributions to IDA to observable
outcomes. This approach will help direct scarce donor dollars toward those
activities and projects that are demonstrably improving people’s lives.
Furthermore, the Administration’s position is that MDBs should expand
similar results-based operational plans into all of its grant and loan programs.
Consistent with the MCA approach, U.S. leadership has resulted in a
significant expansion of MDB grants for the world’s poorest countries. In July
2001 the President called upon the World Bank and other MDBs to increase
the proportion of their assistance to the poorest recipient countries that is
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provided as grants rather than loans. One year later, the United States finalized
an agreement with other international donors on a substantial increase in
grants. As a result of this agreement, IDA grant assistance for programs
targeting education, HIV/AIDS, health, nutrition, potable water, and sanitation will be increased. U.S. leadership was also crucial in obtaining agreement
on an increase in grants for the recently concluded replenishment of the
African Development Fund. These agreements significantly advance
the Administration’s policy objective of helping poor countries make productive investments without saddling them with ever-larger debt burdens.
The Administration recognizes that countries may sometimes face
economic crises that can lead to sharp net outflows of capital. Countries will
be well served if these crises can be managed effectively. Consequently, in
parallel with MDB reform, the Administration believes that clarifying the
size of official financing packages from the international financial institutions
is essential to increasing predictability in the market, curbing excessive risk
taking, and providing the right incentives for countries to pursue good policies. The Administration has worked to create a more orderly and predictable
process for restructuring sovereign debt, so that the long-term growth of
developing economies is not subverted by short-term crises. In particular, the
Administration has proposed the incorporation of collective action clauses
into sovereign debt contracts to facilitate a more predictable and transparent
resolution of sovereign debt defaults when they do occur.

Conclusion
Economic growth has the potential to improve the lives of millions of
people around the globe, both through higher incomes and through
improvements in social indicators such as health outcomes. This chapter has
laid out three broad principles for promoting growth.
Economic freedom is a critical prerequisite for the harnessing of entrepreneurial
energy to improve productivity and increase growth. Macroeconomic stability,
including low inflation and small fiscal deficits, helps create an economic environment in which people can plan and invest. Governments should avoid
burdensome regulation, distortionary taxes, and nationalization of industries,
because all of these lead to inefficiency and slow growth. Openness to international goods, services, and capital brings with it exposure to world best
practices and generates the competition that leads domestic firms and workers
to enhance their productivity.
Poor institutions, especially those that fail to enforce property rights, promote
the rule of law, and discourage corruption, can subvert good economic policy
decisions. Entrepreneurs will be less willing to commit resources for the long
254 | Economic Report of the President

term if they believe that arbitrary decisions by governments may rob them of
the anticipated returns. Workers will be more reluctant to work hard if they
believe the fruits of their labor will be seized by corrupt officials or criminals.
Ultimately, promoting growth depends on appropriate policies, aimed at both
macroeconomic stability and creating a supportive economic environment.
Investment in people, through improvements in both education and
health, will support a work force that can fully utilize the opportunities
created by sound policies and good institutions. Well-trained workers will be
better able to make productive use of the capital available to them, both the
existing capital stock and new investment. This will lead to higher productivity and enhanced growth. A healthy work force will be less prone to
absenteeism, allowing a higher rate of utilization of capital, and this, too, will
improve the country’s economic prospects.
The Administration’s initiatives—the promotion of openness to the world
economy through trade liberalization, and the new approaches to bilateral and
multilateral development assistance—are intended to complement developing
countries’ own efforts to improve their economic performance. TPA will help
the United States reach agreements that increase trade and thus foster growth
in developing countries. The MCA will provide both financial assistance to
the least developed countries and incentives for them to implement progrowth policies. Reform of the MDBs will complement the MCA initiative
by focusing these institutions’ funds on pro-growth efforts, especially in the
private sector, and assisting the world’s least developed countries through
grants in aid. Through all these programs, the United States will stimulate
worldwide economic development, raising incomes in developing countries
and spreading prosperity both at home and abroad.

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Appendix A
REPORT TO THE PRESIDENT ON THE ACTIVITIES
OF THE
COUNCIL OF ECONOMIC ADVISERS DURING 2002

LETTER OF TRANSMITTAL

COUNCIL OF ECONOMIC ADVISERS,
Washington, D.C., December 31, 2002.

MR. PRESIDENT:
The Council of Economic Advisers submits this report on its activities
during the calendar year 2002 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,
Robert Glenn Hubbard, Chairman
Randall S. Kroszner, Member

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

Position

Oath of office date

Chairman .....................................
Vice Chairman .............................
Acting Chairman ..........................
Chairman .....................................
Member........................................
Vice Chairman .............................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Member........................................
Chairman ...................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Member........................................
Member........................................
Chair ............................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Chair ............................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................
Chairman .....................................
Member........................................
Member........................................

August 9, 1946.........................
August 9, 1946.........................
November 2, 1949 ....................
May 10, 1950 ...........................
August 9, 1946.........................
May 10, 1950 ...........................
June 29, 1950...........................
September 8, 1952...................
March 19, 1953 ........................
September 15, 1953.................
December 2, 1953 ....................
April 4, 1955.............................
December 3, 1956 ....................
May 2, 1955 .............................
December 3, 1956 ....................
November 1, 1958 ....................
May 7, 1959 .............................
January 29, 1961......................
January 29, 1961......................
January 29, 1961......................
August 3, 1962.........................
November 16, 1964 ..................
May 17, 1963 ...........................
September 2, 1964...................
November 16, 1964 ..................
February 15, 1968 ....................
February 2, 1966 ......................
February 15, 1968 ....................
July 1, 1968..............................
February 4, 1969 ......................
February 4, 1969 ......................
February 4, 1969 ......................
January 1, 1972........................
September 9, 1971...................
March 13, 1972 ........................
July 23, 1973............................
October 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.............................
October 3, 1989........................
November 13, 1991 ..................
November 13, 1991 ..................
February 5, 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......................
August 12, 1999.......................
August 12, 1999.......................
May 31, 2000 ...........................
May 11, 2001 ...........................
July 25, 2001............................
November 30, 2001 ..................

260 | Economic Report of the President

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 31, 1958.
January 31, 1959.
January 20, 1961.
January 20, 1961.
November 15, 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 31, 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.
May 1, 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.
August 3, 1999.
March 2, 1999.
July 9, 1999.
January 19, 2001
January 12, 2001
January 19, 2001
November 13, 2002

Report to the President on the
Activities of the Council of Economic
Advisers During 2002
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 Chairman of the Council
R. Glenn Hubbard continued to chair the Council during 2002. Dr.
Hubbard is on a leave of absence from Columbia University, where he is the
Russell L. Carson Professor of Economics and Finance and Co-Director of the
Entrepreneurship Program in the Graduate School of Business and Professor
of Economics in the Faculty of Arts and Sciences. He is a Research Associate at
the National Bureau of Economic Research. He also served as Senior Vice
Dean of the Graduate School of Business at Columbia University.
Dr. Hubbard is responsible for communicating the Council’s views on
economic matters directly to the President through personal discussions and
written reports. He represents the Council at Cabinet meetings, meetings of
the National Economic Council, daily White House senior staff meetings,
budget team meetings with the President, and other formal and informal
meetings with the President. He also travels within the United States and overseas to present the Administration’s views on the economy. Dr. Hubbard is the
Council’s chief public spokesperson. He directs the work of the Council and
exercises ultimate responsibility for the work of the professional staff.

The Members of the Council
Randall S. Kroszner is the other current Member of the Council of
Economic Advisers. Dr. Kroszner is on leave from the University of Chicago’s
Graduate School of Business, where he is Professor of Economics. He is also
on leave from his positions as Editor of the Journal of Law & Economics and
Associate Director of the George J. Stigler Center for the Study of the
Economy and the State at the University of Chicago. Dr. Kroszner is also a
Faculty Research Fellow at the National Bureau of Economic Research. He
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represents the Administration at a variety of international and domestic meetings. The Council’s third Member, Mark B. McClellan, left the Council in
November 2002 upon his appointment by the President to be Commissioner
of the Food and Drug Administration.
The Chairman and the Members work as a team on most economic policy
issues. Dr. Hubbard was primarily responsible for the Administration’s
economic forecast, macroeconomic analysis, budget and taxation policy, and
retirement security. Dr. Kroszner’s responsibilities included international
finance and trade issues for both emerging markets and developed economies,
macroeconomic forecasting, and a number of microeconomic issues, including
those relating to corporate governance, financial markets, energy, environment, transportation, and the costs of regulation.

Macroeconomic Policies
As is its tradition, the Council devoted much time during 2002 to assisting
the President in formulating economic policy objectives and designing
programs to implement them. In this regard the Chairman kept the President
informed, on a continuing basis, of important macroeconomic developments
and other major policy issues through regular briefings. 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. In addition, they prepare weekly discussion and data memoranda for
the Vice President and senior White House staff.
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 Chairman and 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 2002 the Council took part in discussions on a range of macroeconomic
issues, with a particular focus on issues relating to tax policy. The Council
provided analytical support for major fiscal initiatives such as the Job Creation
and Worker Assistance Act of 2002 and the President’s January 2003 proposal
to strengthen the economy. The Council worked closely with the Office of
Management and Budget, the Treasury, the Federal Reserve, and the National
Economic Council, as well as other government agencies, in providing
analyses to the rest of the Administration.
The Council continued its efforts to improve the public’s understanding of
economic issues and of the Administration’s economic agenda through regular

262 | Economic Report of the President

briefings with the economic and financial press, frequent discussions with
outside economists, and presentations to outside organizations. The Chairman
and Members also regularly exchanged views on the economy with the
Chairman of the Board of Governors of the Federal Reserve System.

International Economic Policies
The Council was involved in a range of international economic issues.
Discussions on trade policy matters involved a number of industries as well as
broader trade liberalization initiatives in various multilateral, regional, and
bilateral forums. The Council participated in the development of U.S. positions during the concluding stages of free trade agreements with Chile and
Singapore as well as in ongoing negotiations under the auspices of the World
Trade Organization and with regard to the proposed Free Trade Agreement of
the Americas. The Council participated in international finance discussions
involving a number of emerging market economies. A particular focus of the
Council was in developing an analytical framework for a pro-growth agenda
for emerging markets. The Council participated in the development of the
President’s Millennium Challenge Account, which will increase aid to lowand middle-income countries that have a demonstrated commitment to progrowth policies and institutions.
The Council is a leading participant in the Organization for Economic
Cooperation and Development (OECD), the principal forum for economic
cooperation among the high-income industrial countries. The Chairman
heads the U.S. delegation to the semiannual meetings of the OECD’s
Economic Policy Committee (EPC) and serves as the EPC Chairman as well
as Chairman of the Ad Hoc Group on Sustainable Development. In 2002 Dr.
Kroszner participated in the OECD’s Working Party 3 meeting on macroeconomic policy and coordination, and Council staff participated in the OECD’s
Working Party 1 meeting on microeconomic policies. Dr. Kroszner also
participated in the annual OECD review of U.S. economic policy.
Members regularly met with representatives of the Council’s counterpart
agencies in foreign countries, as well as with foreign trade ministers, other
government officials, and members of the private sector. The Council represented the United States at other international forums as well, including
meetings of the Asia-Pacific Economic Cooperation (APEC) forum. The
Council played a key role in organizing an APEC-led initiative focused on
corporate restructuring, initial results of which were presented at a conference
in Singapore.

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Microeconomic Policies
A wide variety of microeconomic issues received the Council’s attention
during 2002. The Council actively participated in the Cabinet-level National
Economic Council, dealing with issues related to energy, the environment,
homeland security and cybersecurity, technology, telecommunications, and
transportation, among others. Dr. McClellan was extensively involved in
formulating policy concerning health care and various aspects of welfare
policy. Dr. Kroszner participated in a series of discussions on energy and environmental policies, financial market issues, corporate governance reform,
regulation, and numerous issues relating to specific industries including
lumber, steel, and transportation.
The Council participated in discussion on a range of environmental issues
in 2002. A particular focus was on climate change initiatives, including partnerships with other countries and negotiations associated with the Kyoto
Protocol. The Council also played an integral role in regulatory discussions,
including the revision of the OMB Guidelines for the Conduct of Regulatory
Analysis and the Format of Accounting Statements; Dr. Kroszner co-chaired
this process with the Director of the Office of Information and Regulatory
Affairs. This document establishes guidelines for Federal government agencies
on how to undertake economic analysis of proposed regulations.
Corporate governance reform was an important focus of the Council’s
efforts in 2002. Members and staff analyzed various underlying problems in
corporate governance and engaged in discussions within the Administration
and with outside organizations in the United States and other countries about
policies to enhance accountability, disclosure, and enforcement. The Council
was also involved in discussions relating to the Postal Service, Amtrak, the
airlines, government-sponsored enterprises, bankruptcy reform, and a host of
technology-related issues such as cybersecurity, fusion energy initiatives,
computer reservation systems, and issues related to broadband.
The Council participated extensively in discussions related to labor market
and social policies. Issues included prescription drug benefits, reform of the
Medicare system, medical malpractice liability, unemployment insurance, and
the President’s proposal to offer reemployment accounts to certain unemployed individuals. The Council was also involved in discussions relating to
financial institutions, agriculture, and the economic effects of ports disputes.

264 | Economic Report of the President

The Staff of the Council of Economic Advisers
The professional staff of the Council consists of the Chief of Staff, the Chief
Economist, the Director of Macroeconomic Forecasting, the Senior Statistician, eight senior economists, five staff economists, and five research assistants.
The professional staff and their areas of concentration at the end of 2002 were:

Chief of Staff
Phillip L. Swagel

Chief Economist
Douglas J. Holtz-Eakin

Director of
Macroeconomic Forecasting

Senior
Statistician

Steven N. Braun

Catherine H. Furlong

Senior Economists
Cindy R. Alexander............. Industrial Organization, Corporate Finance,
and Regulation
S. Brock Blomberg .............. International Finance
Robert J. Carroll.................. Public Finance
Robert N. Collender............ Regulation, Energy, Finance, and Agriculture
Christopher L. Foote. .......... Macroeconomics
Thomas C. DeLeire............. Labor, Health, and Education
John A. List......................... Environment and Regulation
Michael O. Moore............... International Trade

Staff Economists
D. Clay Ackerly...................
Anne L. Berry......................
Catherine L. Downard ........
Brian H. Jenn......................
Peter H. Woodward.............

Health Care and Labor
Regulation and Industrial Organization
International Finance
Labor, Regulation, and Public Finance
International Finance and Financial Markets

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| 265

Research Assistants
Shelley D. de Alth ...............
Leandra T. DeSilva ..............
Christine L. Dobridge .........
Paul S. Landefeld.................
Adam R. Saunders...............

International Trade
Environment and Regulation
Macroeconomics
Macroeconomics and Public Finance
Macroeconomics, Public Finance, and
Regulation

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 of the President, and verifies statistics in Presidential and Council
memoranda, testimony, and speeches.
Linda A. Reilly .................... Statistician
Brian A. Amorosi ................ Statistical Assistant
Dagmara A. Mocala............. Research Assistant

Administrative Office
The Administrative Office provides general support for the Council’s activities.
This includes financial management, human resource management, and travel,
facility, security, information, and telecommunications management support.
Catherine Fibich.................. Administrative Officer
Rosemary M. Rogers ........... Administrative Assistant
John W. Arnold ................... Information Management Assistant

Office of the Chairman
Alice H. Williams................ Executive Assistant to the Chairman
Sandra F. Daigle .................. Executive Assistant to the Chairman and
Assistant to the Chief of Staff
Lisa D. Branch .................... Executive Assistant to Dr. Kroszner
Stephen M. Lineberry. ......... Executive Assistant to Dr. McClellan

Staff Support
Mary E. Jones...................... Executive Assistant for International
Economics, Labor, Health, Environment,
and Regulation
Mary A. Thomas-Parker ...... Program Assistant for Macroeconomics,
Industrial Organization, and Agriculture
266 | Economic Report of the President

Diana E. Furchtgott-Roth served as Chief of Staff for the first half of 2002
and subsequently as Special Advisor to the Council.
Michael Treadway provided editorial assistance in the preparation of the
2003 Economic Report of the President.
Katherine Baicker, Rex W. Cowdry, John G. Matsusaka, and William B.
Vogt provided consulting services to the Council during 2002.
Student interns during the year were M. Caroline Beasley, Jason P. Brinton,
Alexander Chan, Carol L. Cohen, Brian C. Grech, Laura C. Hanlon, Clarette
S. Kim, David Y. Lin, Matthew Nestorick, Samuel C. Roddenberry, Douglas
A. Smith, Kevin P. Sweeney, Thomas B. Valuk, Peter H. Woodward, and
Aimee C. Zullo. Sarah R. Darley, Evan M. Newman, and Adam R. Sorkin
joined the staff of the Council in January as student interns.

Departures
Diana E. Furchtgott-Roth accepted a position as Chief Economist at the
Department of Labor in early 2003. Douglas J. Holtz-Eakin left the Council
at the end of January 2003 to become the Director of the Congressional
Budget Office.
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. Some of the senior economists who resigned during the year returned to
their previous affiliations. They are Katherine Baicker (Dartmouth College),
Peter M. Feather (U.S. Department of Agriculture, Economic Research
Service), William R. Melick (Kenyon College), and William A. Pizer (Resources
for the Future). Others went on to new positions. They are Jeffrey R. Brown
(University of Illinois at Urbana-Champaign), Carolyn L. Evans (Board of
Governors of the Federal Reserve System), Andrew J. Filardo (Bank for International Settlements), and Wallace P. Mullin (George Washington University).
Staff economists are generally graduate students who spend 1 year with the
Council and then return to complete their dissertations. Those who returned
to their graduate studies in 2002 are Irena I. Asmundson (Stanford University)
and Katherine R. Baylis (University of California, Berkeley). Judson L. Jaffe
accepted a position at Analysis Group/Economics. Those who served as
research assistants at the Council and resigned during 2002 are M. Marit
Rehavi (London School of Economics), Heather C. McNaught (Department
of Justice), and Jason M. Zhao. Mary A. Thomas-Parker, Program Assistant,
retired after nearly 26 years of Federal service, the last 13 years of which were
with the Council.
During 2002 the Council lost a valued colleague. Susan P. Clements, who
served as a Statistician in the Statistical Office, passed away in August 2002;
she had retired in June 2002 for health reasons.
Appendix A

| 267

Public Information
The Council’s annual Economic Report of the President is an important
vehicle for presenting the Administration’s domestic and international
economic policies. It is now available for distribution both as a bound
volume and on the Internet, where it is accessible at 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. The Council’s home page is
located at www.whitehouse.gov/cea/index.html.

268 | Economic Report of the President

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

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C O N T E N T S
Page

NATIONAL INCOME OR EXPENDITURE:
B–1.
B–2.
B–3.
B–4.
B–5.
B–6.
B–7.
B–8.
B–9.
B–10.
B–11.
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.

Gross domestic product, 1959–2002 .................................................
Real gross domestic product, 1959–2002 ..........................................
Quantity and price indexes for gross domestic product, and percent changes, 1959–2002 ................................................................
Percent changes in real gross domestic product, 1959–2002 ..........
Contributions to percent change in real gross domestic product,
1959–2002 .......................................................................................
Chain-type quantity indexes for gross domestic product, 1959–
2002 .................................................................................................
Chain-type price indexes for gross domestic product, 1959–2002
Gross domestic product by major type of product, 1959–2002 .......
Real gross domestic product by major type of product, 1959–2002
Gross domestic product by sector, 1959–2002 .................................
Real gross domestic product by sector, 1959–2002 .........................
Gross domestic product by industry, 1959–2001 .............................
Real gross domestic product by industry, 1987–2001 .....................
Gross product of nonfinancial corporate business, 1959–2002 .......
Output, price, costs, and profits of nonfinancial corporate business, 1959–2002 ..............................................................................
Personal consumption expenditures, 1959–2002 .............................
Real personal consumption expenditures, 1987–2002 ....................
Private fixed investment by type, 1959–2002 ..................................
Real private fixed investment by type, 1987–2002 .........................
Government consumption expenditures and gross investment by
type, 1959–2002 ..............................................................................
Real government consumption expenditures and gross investment by type, 1987–2002 ...............................................................
Private inventories and domestic final sales by industry, 1959–
2002 .................................................................................................
Real private inventories and domestic final sales by industry,
1987–2002 .......................................................................................
Foreign transactions in the national income and product accounts, 1959–2002 ..........................................................................
Real exports and imports of goods and services and receipts and
payments of income, 1987–2002 ....................................................
Relation of gross domestic product, gross national product, net
national product, and national income, 1959–2002 .....................
Relation of national income and personal income, 1959–2002 .......
National income by type of income, 1959–2002 ...............................
Sources of personal income, 1959–2002 ...........................................
Disposition of personal income, 1959–2002 .....................................
Total and per capita disposable personal income and personal
consumption expenditures, and per capita gross domestic product, in current and real dollars, 1959–2002 .................................
Gross saving and investment, 1959–2002 ........................................

276
278
280
281
282
284
286
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302
303
304
305
306
307
308
310
312

313
314

271

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Page
B–33.

Median money income (in 2001 dollars) and poverty status of
families and persons, by race, selected years, 1984–2001 ...........

316

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, 1929–2002 ................................................
Civilian population and labor force, 1929–2002 ..............................
Civilian employment and unemployment by sex and age, 1955–
2002 .................................................................................................
Civilian employment by demographic characteristic, 1955–2002 ..
Unemployment by demographic characteristic, 1955–2002 ...........
Civilian labor force participation rate and employment/population ratio, 1955–2002 ..................................................................
Civilian labor force participation rate by demographic characteristic, 1959–2002 ......................................................................
Civilian employment/population ratio by demographic characteristic, 1959–2002 ......................................................................
Civilian unemployment rate, 1955–2002 .........................................
Civilian unemployment rate by demographic characteristic,
1959–2002 .......................................................................................
Unemployment by duration and reason, 1955–2002 .......................
Unemployment insurance programs, selected data, 1972–2002 ....
Employees on nonagricultural payrolls, by major industry, 1955–
2002 .................................................................................................
Hours and earnings in private nonagricultural industries, 1959–
2002 .................................................................................................
Employment cost index, private industry, 1981–2002 ....................
Productivity and related data, business sector, 1959–2002 ...........
Changes in productivity and related data, business sector, 1959–
2002 .................................................................................................

317
318
320
321
322
323
324
325
326
327
328
329
330
332
333
334
335

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, 1955–
2002 .................................................................................................
Industrial production indexes, market groupings, 1955–2002 .......
Industrial production indexes, selected manufacturing industries,
1967–2002 .......................................................................................
Capacity utilization rates, 1955–2002 ..............................................
New construction activity, 1962–2002 ..............................................
New private housing units started, authorized, and completed,
and houses sold, 1959–2002 ...........................................................
Manufacturing and trade sales and inventories, 1965–2002 .........
Manufacturers’ shipments and inventories, 1960–2002 .................
Manufacturers’ new and unfilled orders, 1960–2002 ......................

336
337
338
339
340
341
342
343
344

PRICES:
B–60.
B–61.
B–62.
B–63.
B–64.
B–65.

Consumer price indexes for major expenditure classes, 1958–
2002 .................................................................................................
Consumer price indexes for selected expenditure classes, 1958–
2002 .................................................................................................
Consumer price indexes for commodities, services, and special
groups, 1960–2002 ..........................................................................
Changes in special consumer price indexes, 1960–2002 .................
Changes in consumer price indexes for commodities and services,
1929–2002 .......................................................................................
Producer price indexes by stage of processing, 1958–2002 .............

345
346
348
349
350
351

272

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Page
B–66.
B–67.
B–68.

Producer price indexes by stage of processing, special groups,
1974–2002 .......................................................................................
Producer price indexes for major commodity groups, 1958–2002
Changes in producer price indexes for finished goods, 1965–2002

353
354
356

MONEY STOCK, CREDIT, AND FINANCE:
B–69.
B–70.
B–71.
B–72.
B–73.
B–74.
B–75.
B–76.
B–77.

Money stock and debt measures, 1959–2002 ...................................
Components of money stock measures, 1959–2002 .........................
Aggregate reserves of depository institutions and monetary base,
1959–2002 .......................................................................................
Bank credit at all commercial banks, 1959–2002 ............................
Bond yields and interest rates, 1929–2002 ......................................
Credit market borrowing, 1993–2002 ...............................................
Mortgage debt outstanding by type of property and of financing,
1949–2002 .......................................................................................
Mortgage debt outstanding by holder, 1949–2002 ..........................
Consumer credit outstanding, 1952–2002 ........................................

357
358
360
361
362
364
366
367
368

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, 1939–2004 ..................................................................
Federal receipts, outlays, surplus or deficit, and debt, as percent
of gross domestic product, fiscal years 1934–2004 ......................
Federal receipts and outlays, by major category, and surplus or
deficit, fiscal years 1940–2004 .......................................................
Federal receipts, outlays, surplus or deficit, and debt, fiscal years
1999–2004 .......................................................................................
Federal and State and local government current receipts and expenditures, national income and product accounts (NIPA),
1959–2002 .......................................................................................
Federal and State and local government current receipts and expenditures, national income and product accounts (NIPA), by
major type, 1959–2002 ...................................................................
Federal Government current receipts and expenditures, national
income and product accounts (NIPA), 1959–2002 .......................
State and local government current receipts and expenditures,
national income and product accounts (NIPA), 1959–2002 ........
State and local government revenues and expenditures, selected
fiscal years, 1927–2000 ..................................................................
U.S. Treasury securities outstanding by kind of obligation, 1967–
2002 .................................................................................................
Maturity distribution and average length of marketable interestbearing public debt securities held by private investors, 1967–
2002 .................................................................................................
Estimated ownership of U.S. Treasury securities, 1991–2002 .......

369
370
371
372

373

374
375
376
377
378

379
380

CORPORATE PROFITS AND FINANCE:
B–90.
B–91.
B–92.
B–93.
B–94.

Corporate profits with inventory valuation and capital consumption adjustments, 1959–2002 .........................................................
Corporate profits by industry, 1959–2002 ........................................
Corporate profits of manufacturing industries, 1959–2002 ............
Sales, profits, and stockholders’ equity, all manufacturing corporations, 1959–2002 .....................................................................
Relation of profits after taxes to stockholders’ equity and to sales,
all manufacturing corporations, 1950–2002 .................................

381
382
383
384
385

273

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Page
B–95.
B–96.

Common stock prices and yields, 1965–2002 ...................................
Business formation and business failures, 1955–97 .......................

386
387

AGRICULTURE:
B–97.
B–98.
B–99.
B–100.
B–101.
B–102.

Farm income, 1945–2002 ...................................................................
Farm business balance sheet, 1950–2001 ........................................
Farm output and productivity indexes, 1948–99 .............................
Farm input use, selected inputs, 1948–2002 ...................................
Agricultural price indexes and farm real estate value, 1975–2002
U.S. exports and imports of agricultural commodities, 1945–2002

388
389
390
391
392
393

INTERNATIONAL STATISTICS:
B–103. U.S. international transactions, 1946–2002 .....................................
B–104. U.S. international trade in goods by principal end-use category,
1965–2002 .......................................................................................
B–105. U.S. international trade in goods by area, 1993–2002 ....................
B–106. U.S. international trade in goods on balance of payments (BOP)
and Census basis, and trade in services on BOP basis, 1978–
2002 .................................................................................................
B–107. International investment position of the United States at yearend, 1993–2001 ...............................................................................
B–108. Industrial production and consumer prices, major industrial
countries, 1979–2002 ......................................................................
B–109. Civilian unemployment rate, and hourly compensation, major industrial countries, 1979–2002 .......................................................
B–110. Foreign exchange rates, 1982–2002 ..................................................
B–111. International reserves, selected years, 1962–2002 ..........................
B–112. Growth rates in real gross domestic product, 1984–2002 ...............

394
396
397

398
399
400
401
402
403
404

274

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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 (1996) 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 1987, 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 through January 28, 2003. In particular, tables containing national income and product accounts (NIPA) estimates reflect revisions released by the Department of Commerce in July 2002.

275

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NATIONAL INCOME OR EXPENDITURE
TABLE B–1.—Gross domestic product, 1959–2002
[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

Gross
domestic
product

Nonresidential
Total

Durable
goods

Nondurable
goods

Services

Total
Total
Total

Structures

Equipment
and
software

Residential

Change
in
private
inventories

1959 ...................

507.4

318.1

42.7

148.5

127.0

78.5

74.6

46.5

18.1

28.4

28.1

3.9

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

...................
...................
...................
...................
...................
...................
...................
...................
...................
...................

527.4
545.7
586.5
618.7
664.4
720.1
789.3
834.1
911.5
985.3

332.3
342.7
363.8
383.1
411.7
444.3
481.8
508.7
558.7
605.5

43.3
41.8
46.9
51.6
56.7
63.3
68.3
70.4
80.8
85.9

152.9
156.6
162.8
168.2
178.7
191.6
208.8
217.1
235.7
253.2

136.1
144.3
154.1
163.4
176.4
189.5
204.7
221.2
242.3
266.4

78.9
78.2
88.1
93.8
102.1
118.2
131.3
128.6
141.2
156.4

75.7
75.2
82.0
88.1
97.2
109.0
117.7
118.7
132.1
147.3

49.4
48.8
53.1
56.0
63.0
74.8
85.4
86.4
93.4
104.7

19.6
19.7
20.8
21.2
23.7
28.3
31.3
31.5
33.6
37.7

29.8
29.1
32.3
34.8
39.2
46.5
54.0
54.9
59.9
67.0

26.3
26.4
29.0
32.1
34.3
34.2
32.3
32.4
38.7
42.6

3.2
3.0
6.1
5.6
4.8
9.2
13.6
9.9
9.1
9.2

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

...................
...................
...................
...................
...................
...................
...................
...................
...................
...................

1,039.7
1,128.6
1,240.4
1,385.5
1,501.0
1,635.2
1,823.9
2,031.4
2,295.9
2,566.4

648.9
702.4
770.7
852.5
932.4
1,030.3
1,149.8
1,278.4
1,430.4
1,596.3

85.0
96.9
110.4
123.5
122.3
133.5
158.9
181.2
201.7
214.4

272.0
285.5
308.0
343.1
384.5
420.7
458.3
497.2
550.2
624.4

292.0
320.0
352.3
385.9
425.5
476.1
532.6
600.0
678.4
757.4

152.4
178.2
207.6
244.5
249.4
230.2
292.0
361.3
436.0
490.6

150.4
169.9
198.5
228.6
235.4
236.5
274.8
339.0
410.2
472.7

109.0
114.1
128.8
153.3
169.5
173.7
192.4
228.7
278.6
331.6

40.3
42.7
47.2
55.0
61.2
61.4
65.9
74.6
91.4
114.9

68.7
71.5
81.7
98.3
108.2
112.4
126.4
154.1
187.2
216.7

41.4
55.8
69.7
75.3
66.0
62.7
82.5
110.3
131.6
141.0

2.0
8.3
9.1
15.9
14.0
−6.3
17.1
22.3
25.8
18.0

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

...................
...................
...................
...................
...................
...................
...................
...................
...................
...................

2,795.6
3,131.3
3,259.2
3,534.9
3,932.7
4,213.0
4,452.9
4,742.5
5,108.3
5,489.1

1,762.9
1,944.2
2,079.3
2,286.4
2,498.4
2,712.6
2,895.2
3,105.3
3,356.6
3,596.7

214.2
231.3
240.2
281.2
326.9
363.3
401.3
419.7
450.2
467.8

696.1
758.9
787.6
831.2
884.7
928.8
958.5
1,015.3
1,082.9
1,165.4

852.7
954.0
1,051.5
1,174.0
1,286.9
1,420.6
1,535.4
1,670.3
1,823.5
1,963.5

477.9
570.8
516.1
564.2
735.5
736.3
747.2
781.5
821.1
872.9

484.2
541.0
531.0
570.0
670.1
714.5
740.7
754.3
802.7
845.2

360.9
418.4
425.3
417.4
490.3
527.6
522.5
526.7
568.4
613.4

133.9
164.6
175.0
152.7
176.0
193.3
175.8
172.1
181.6
193.4

227.0
253.8
250.3
264.7
314.3
334.3
346.8
354.7
386.8
420.0

123.2
122.6
105.7
152.5
179.8
186.9
218.1
227.6
234.2
231.8

−6.3
29.8
−14.9
−5.8
65.4
21.8
6.6
27.1
18.5
27.7

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

...................
...................
...................
...................
...................
...................
...................
...................
...................
...................

5,803.2
5,986.2
6,318.9
6,642.3
7,054.3
7,400.5
7,813.2
8,318.4
8,781.5
9,274.3

3,831.5
3,971.2
4,209.7
4,454.7
4,716.4
4,969.0
5,237.5
5,529.3
5,856.0
6,246.5

467.6
443.0
470.8
513.4
560.8
589.7
616.5
642.5
693.2
755.9

1,246.1
1,278.8
1,322.9
1,375.2
1,438.0
1,497.3
1,574.1
1,641.6
1,708.5
1,830.1

2,117.8
2,249.4
2,415.9
2,566.1
2,717.6
2,882.0
3,047.0
3,245.2
3,454.3
3,660.5

861.7
800.2
866.6
955.1
1,097.1
1,143.8
1,242.7
1,390.5
1,538.7
1,636.7

847.2 630.3
800.4 608.9
851.6 626.1
934.0 682.2
1,034.6
748.6
1,110.7
825.1
1,212.7
899.4
1,327.7
999.4
1,465.6 1,101.2
1,577.2 1,173.5

202.5
183.4
172.2
179.4
187.5
204.6
225.0
255.8
282.4
283.7

427.8
425.4
453.9
502.8
561.1
620.5
674.4
743.6
818.9
889.8

216.8
191.5
225.5
251.8
286.0
285.6
313.3
328.2
364.4
403.7

14.5
−.2
15.0
21.1
62.6
33.0
30.0
62.9
73.1
59.5

9,824.6 6,683.7
10,082.2 6,987.0

803.9
835.9

1,972.9
2,041.3

3,906.9 1,755.4 1,691.8 1,265.8
4,109.9 1,586.0 1,646.3 1,201.6

314.2
324.5

951.6
877.1

426.0
444.8

63.6
−60.3

2000 ...................
2001 ...................
1998: I ................
II ...............
III ..............
IV ..............

8,627.8
8,697.3
8,816.5
8,984.5

5,719.9
5,820.0
5,895.1
5,989.1

666.8
689.3
691.7
725.1

1,675.8
1,697.2
1,716.7
1,744.4

3,377.3
3,433.5
3,486.7
3,519.6

1,528.7
1,498.4
1,538.6
1,589.3

1,422.0
1,457.5
1,469.1
1,513.9

1,074.8
1,099.9
1,098.6
1,131.7

273.2
284.9
283.9
287.5

801.6
815.0
814.7
844.2

347.2
357.6
370.5
382.2

106.7
40.9
69.5
75.4

1999: I ................
II ...............
III ..............
IV ..............

9,092.7
9,171.7
9,316.5
9,516.4

6,076.6
6,195.6
6,299.4
6,414.5

728.7
749.9
765.1
779.9

1,773.1
1,814.4
1,841.3
1,891.7

3,574.8
3,631.3
3,693.1
3,742.9

1,618.0
1,597.8
1,637.9
1,693.2

1,543.3
1,570.1
1,591.1
1,604.3

1,150.0
1,167.7
1,184.5
1,191.9

285.5
283.0
279.9
286.3

864.5
884.7
904.6
905.5

393.3
402.4
406.5
412.5

74.7
27.7
46.8
88.9

2000: I ................
II ...............
III ..............
IV ..............

9,649.5
9,820.7
9,874.8
9,953.6

6,552.2
6,638.7
6,736.1
6,808.0

808.4
799.3
810.6
797.2

1,926.9
1,964.9
1,988.9
2,011.1

3,816.9
3,874.5
3,936.6
3,999.7

1,711.4
1,786.3
1,766.4
1,757.4

1,664.6
1,697.1
1,705.2
1,700.4

1,236.6
1,268.3
1,283.4
1,274.8

299.5
308.5
320.9
328.0

937.1
959.8
962.5
946.8

428.0
428.8
421.8
425.6

46.8
89.2
61.1
57.1

2001: I ................
II ...............
III ..............
IV ..............

10,028.1
10,049.9
10,097.7
10,152.9

6,904.7
6,959.8
6,983.7
7,099.9

816.8
820.3
824.0
882.6

2,031.5
2,044.8
2,044.3
2,044.4

4,109.9
4,094.7
4,115.4
4,172.9

1,671.1
1,597.2
1,574.9
1,500.7

1,698.3
1,654.3
1,635.5
1,597.2

1,258.3
1,210.0
1,188.1
1,149.8

333.7
329.9
332.0
302.3

924.6
880.2
856.1
847.4

440.0
444.2
447.4
447.4

−27.2
−57.1
−60.6
−96.5

2002: I ................
II ...............
III ..............

10,313.1 7,174.2
10,376.9 7,254.7
10,506.2 7,360.7

859.0
856.9
897.8

2,085.1
2,108.2
2,116.9

4,230.1 1,559.4 1,589.4 1,126.8
4,289.5 1,588.0 1,584.6 1,115.8
4,346.0 1,597.3 1,579.7 1,109.8

288.3
275.2
259.4

838.5
840.7
850.4

462.6
468.7
469.9

−29.9
3.4
17.6

See next page for continuation of table.

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TABLE B–1.—Gross domestic product, 1959–2002—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
Federal

Net
exports

Exports

Imports

Total
Total

National
defense

State
and
local

Nondefense

AddenFinal
Gross
dum:
sales of domesGross
domestic
national
tic
purproduct chases 1 product 2

Percent change
from preceding
period
Gross
Gross
domes- domestic
tic
prodpuruct
chases 1

1959 ..........

−1.7

20.6

22.3

112.5

67.4

56.0

11.4

45.1

503.5

509.1

510.3

8.4

8.9

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

2.4
3.4
2.4
3.3
5.5
3.9
1.9
1.4
−1.3
−1.2

25.3
26.0
27.4
29.4
33.6
35.4
38.9
41.4
45.3
49.3

22.8
22.7
25.0
26.1
28.1
31.5
37.1
39.9
46.6
50.5

113.8
121.5
132.2
138.5
145.1
153.7
174.3
195.3
212.8
224.6

65.9
69.5
76.9
78.5
79.8
82.1
94.4
106.8
114.0
116.1

55.2
58.1
62.8
62.7
61.8
62.4
73.8
85.8
92.2
92.6

10.7
11.3
14.1
15.8
18.0
19.7
20.7
21.0
21.8
23.5

47.9
52.0
55.3
59.9
65.3
71.6
79.9
88.6
98.8
108.5

524.1
542.7
580.4
613.1
659.6
710.9
775.7
824.2
902.4
976.2

525.0
542.3
584.1
615.4
658.9
716.2
787.4
832.6
912.7
986.5

530.6
549.3
590.7
623.2
669.4
725.5
794.5
839.5
917.6
991.5

3.9
3.5
7.5
5.5
7.4
8.4
9.6
5.7
9.3
8.1

3.1
3.3
7.7
5.4
7.1
8.7
9.9
5.7
9.6
8.1

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

1.2
−3.0
−8.0
.6
−3.1
13.6
−2.3
−23.7
−26.1
−24.0

57.0
59.3
66.2
91.8
124.3
136.3
148.9
158.8
186.1
228.7

55.8
62.3
74.2
91.2
127.5
122.7
151.1
182.4
212.3
252.7

237.1
251.0
270.1
287.9
322.4
361.1
384.5
415.3
455.6
503.5

116.4
117.6
125.6
127.8
138.2
152.1
160.6
176.0
191.9
211.6

90.9
89.0
93.5
93.9
99.7
107.9
113.2
122.6
132.0
146.7

25.5
28.6
32.2
33.9
38.5
44.2
47.4
53.5
59.8
65.0

120.7
133.5
144.4
160.1
184.2
209.0
223.9
239.3
263.8
291.8

1,037.7
1,120.3
1,231.3
1,369.7
1,487.0
1,641.4
1,806.8
2,009.1
2,270.1
2,548.4

1,038.5
1,131.6
1,248.4
1,384.9
1,504.2
1,621.6
1,826.2
2,055.1
2,322.0
2,590.4

1,046.1
1,136.2
1,249.1
1,398.2
1,516.7
1,648.4
1,841.0
2,052.1
2,318.0
2,599.3

5.5
8.6
9.9
11.7
8.3
8.9
11.5
11.4
13.0
11.8

5.3
9.0
10.3
10.9
8.6
7.8
12.6
12.5
13.0
11.6

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

−14.9
−15.0
−20.5
−51.7
−102.0
−114.2
−131.9
−142.3
−106.3
−80.7

278.9
302.8
282.6
277.0
303.1
303.0
320.3
365.6
446.9
509.0

293.8
569.7
317.8
631.4
303.2
684.4
328.6
735.9
405.1
800.8
417.2
878.3
452.2
942.3
507.9
997.9
553.2 1,036.9
589.7 1,100.2

245.3
281.8
312.8
344.4
376.4
413.4
438.7
460.4
462.6
482.6

169.6
197.8
228.3
252.5
283.5
312.4
332.2
351.2
355.9
363.2

75.6
84.0
84.5
92.0
92.8
101.0
106.5
109.3
106.8
119.3

324.4
349.6
371.6
391.5
424.4
464.9
503.6
537.5
574.3
617.7

2,801.9
3,101.5
3,274.1
3,540.7
3,867.3
4,191.2
4,446.3
4,715.3
5,089.8
5,461.4

2,810.5
3,146.3
3,279.8
3,586.6
4,034.7
4,327.2
4,584.7
4,884.7
5,214.6
5,569.8

2,830.8
3,166.1
3,295.7
3,571.8
3,968.1
4,238.4
4,468.3
4,756.2
5,126.8
5,509.4

8.9
12.0
4.1
8.5
11.3
7.1
5.7
6.5
7.7
7.5

8.5
12.0
4.2
9.4
12.5
7.2
6.0
6.5
6.8
6.8

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

−71.4
−20.7
−27.9
−60.5
−87.1
−84.3
−89.0
−89.3
−151.7
−249.9

557.2
601.6
636.8
658.0
725.1
818.6
874.2
966.4
964.9
989.3

1,181.4
1,235.5
1,270.5
1,293.0
1,327.9
1,372.0
1,421.9
1,487.9
1,538.5
1,641.0

508.4
527.4
534.5
527.3
521.1
521.5
531.6
538.2
539.2
565.0

374.9
384.5
378.5
364.9
355.1
350.6
357.0
352.6
349.1
364.3

133.6 673.0
142.9 708.1
156.0 736.0
162.4 765.7
165.9 806.8
170.9 850.5
174.6 890.4
185.6 949.7
190.1 999.3
200.7 1,076.0

5,788.7
5,986.4
6,303.9
6,621.2
6,991.8
7,367.5
7,783.2
8,255.5
8,708.4
9,214.8

5,874.7
6,006.9
6,346.8
6,702.8
7,141.4
7,484.8
7,902.1
8,407.7
8,933.3
9,524.2

5,832.2
6,010.9
6,342.3
6,666.7
7,071.1
7,420.9
7,831.2
8,325.4
8,778.1
9,297.1

5.7
3.2
5.6
5.1
6.2
4.9
5.6
6.5
5.6
5.6

5.5
2.3
5.7
5.6
6.5
4.8
5.6
6.4
6.3
6.6

628.6
622.3
664.6
718.5
812.1
902.8
963.1
1,055.8
1,116.7
1,239.2

2000 ..........
2001 ..........

−365.5 1,101.1
−348.9 1,034.1

1,466.6 1,751.0
1,383.0 1,858.0

589.2
628.1

374.9
399.9

214.3 1,161.8 9,761.1 10,190.1 9,848.0
228.2 1,229.9 10,142.5 10,431.0 10,104.1

5.9
2.6

7.0
2.4

1998: I .......
II ......
III .....
IV .....

−122.6
−154.9
−165.3
−164.1

974.1
959.2
946.7
979.7

1,096.7
1,114.1
1,112.0
1,143.8

1,501.8
1,533.8
1,548.1
1,570.3

526.1
542.9
539.5
548.4

338.4
348.8
354.7
354.7

187.7 975.8
194.2 990.9
184.8 1,008.6
193.7 1,021.9

8,521.1
8,656.4
8,747.0
8,909.1

8,750.4
8,852.2
8,981.8
9,148.6

8,634.5
8,700.3
8,802.1
8,975.4

7.2
3.3
5.6
7.8

8.0
4.7
6.0
7.6

1999: I .......
II ......
III .....
IV .....

−196.4
959.2
−241.8
970.2
−274.6
996.8
−286.7 1,031.2

1,155.6
1,212.0
1,271.4
1,317.9

1,594.6
1,620.1
1,653.9
1,695.4

550.0
556.1
569.0
584.9

354.0
355.1
368.7
379.5

196.0
201.0
200.3
205.5

1,044.5
1,064.0
1,084.8
1,110.5

9,018.0
9,144.0
9,269.7
9,427.5

9,289.1
9,413.5
9,591.2
9,803.1

9,112.7
9,195.9
9,333.6
9,546.0

4.9
3.5
6.5
8.9

6.3
5.5
7.8
9.1

2000: I .......
II ......
III .....
IV .....

−330.6
−353.2
−384.9
−393.2

1,055.9
1,098.0
1,130.9
1,119.8

1,386.5
1,451.1
1,515.8
1,513.0

1,716.5
1,748.8
1,757.2
1,781.4

575.7
598.5
589.7
592.9

365.5
379.1
375.0
380.0

210.2
219.4
214.7
213.0

1,140.8
1,150.3
1,167.4
1,188.5

9,602.6 9,980.1
9,731.5 10,173.9
9,813.6 10,259.7
9,896.6 10,346.8

9,670.5
9,846.4
9,892.5
9,982.8

5.7
7.3
2.2
3.2

7.4
8.0
3.4
3.4

2001: I .......
II ......
III .....
IV .....

−372.7 1,100.0
−365.7 1,059.7
−312.6 1,005.8
−344.5
971.1

1,472.8
1,425.3
1,318.4
1,315.6

1,825.0
1,858.5
1,851.7
1,896.8

613.3
624.8
627.4
646.9

391.4
395.2
400.3
412.8

221.9
229.6
227.2
234.1

1,211.7
1,233.7
1,224.3
1,249.8

10,038.0
10,081.0
10,109.3
10,188.1

3.0
.9
1.9
2.2

2.1
.6
−.2
3.4

2002: I .......
II ......
III .....

−360.1
977.5
−425.6 1,018.1
−432.9 1,038.6

1,337.5 1,939.5
1,443.7 1,959.8
1,471.5 1,981.1

672.0
688.2
697.7

431.7
442.1
451.2

240.3 1,267.5 10,343.0 10,673.1 10,314.9
246.1 1,271.6 10,373.5 10,802.4 10,356.8
246.5 1,283.3 10,488.7 10,939.1 10,495.3

6.5
2.5
5.1

6.9
4.9
5.2

10,055.3
10,107.0
10,158.3
10,249.4

10,400.8
10,415.5
10,410.4
10,497.4

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

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TABLE B–2.—Real gross domestic product, 1959–2002
[Billions of chained (1996) dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Personal consumption expenditures

Gross private domestic investment
Fixed investment

Year or
quarter

Gross
domestic
product

Nonresidential
Total

Durable
goods

Nondurable
goods

Services

Total
Total
Total

Equipment
and
software

Structures

Residential

Change
in
private
inventories

1959 ...............

2,319.0

1,470.7 .............. ................ ..............

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
1999

...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
..............

2,376.7
2,432.0
2,578.9
2,690.4
2,846.5
3,028.5
3,227.5
3,308.3
3,466.1
3,571.4
3,578.0
3,697.7
3,898.4
4,123.4
4,099.0
4,084.4
4,311.7
4,511.8
4,760.6
4,912.1
4,900.9
5,021.0
4,919.3
5,132.3
5,505.2
5,717.1
5,912.4
6,113.3
6,368.4
6,591.8
6,707.9
6,676.4
6,880.0
7,062.6
7,347.7
7,543.8
7,813.2
8,159.5
8,508.9
8,859.0

1,510.8
1,541.2
1,617.3
1,684.0
1,784.8
1,897.6
2,006.1
2,066.2
2,184.2
2,264.8
2,317.5
2,405.2
2,550.5
2,675.9
2,653.7
2,710.9
2,868.9
2,992.1
3,124.7
3,203.2
3,193.0
3,236.0
3,275.5
3,454.3
3,640.6
3,820.9
3,981.2
4,113.4
4,279.5
4,393.7
4,474.5
4,466.6
4,594.5
4,748.9
4,928.1
5,075.6
5,237.5
5,423.9
5,683.7
5,964.5

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
455.2
481.5
491.7
487.1
454.9
479.0
518.3
557.7
583.5
616.5
657.3
726.7
812.5

................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
................
1,274.5
1,315.1
1,351.0
1,369.6
1,364.0
1,389.7
1,430.3
1,485.1
1,529.0
1,574.1
1,619.9
1,686.4
1,765.1

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
2,379.3
2,477.2
2,546.0
2,616.2
2,651.8
2,729.7
2,802.5
2,886.2
2,963.4
3,047.0
3,147.0
3,273.4
3,395.4

272.9 .............. .............. .............. .............. ............ ..............
272.8
271.0
305.3
325.7
352.6
402.0
437.3
417.2
441.3
466.9
436.2
485.8
543.0
606.5
561.7
462.2
555.5
639.4
713.0
735.4
655.3
715.6
615.2
673.7
871.5
863.4
857.7
879.3
902.8
936.5
907.3
829.5
899.8
977.9
1,107.0
1,140.6
1,242.7
1,393.3
1,558.0
1,660.5

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
856.0
887.1
911.2
894.6
832.5
886.5
958.4
1,045.9
1,109.2
1,212.7
1,328.6
1,480.0
1,595.2

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
572.5
603.6
637.0
641.7
610.1
630.6
683.6
744.6
817.5
899.4
1,009.3
1,135.9
1,228.4

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
224.3
227.1
232.7
236.1
210.1
197.3
198.9
200.5
210.1
225.0
245.4
262.2
258.6

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
360.0
386.9
414.0
415.7
407.2
437.5
487.1
544.9
607.6
674.4
764.2
875.4
975.9

............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
290.7
289.2
277.3
253.5
221.1
257.2
276.0
302.7
291.7
313.3
319.7
345.1
368.3

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
29.6
18.4
29.6
16.5
−1.0
17.1
20.0
66.8
30.4
30.0
63.8
76.7
62.8

2000 ...............
2001 ...............

9,191.4
9,214.5

6,223.9
6,377.2

878.9
931.9

1,833.8
1,869.8

3,524.5
3,594.9

1,762.9
1,574.6

1,691.9
1,627.4

1,324.2
1,255.1

275.5
270.9

1,056.0
988.2

372.4
373.5

65.0
−61.4

1998: I ............
II ..........
III .........
IV .........
1999: I ............
II ..........
III .........
IV .........
2000: I ............
II ..........
III .........
IV .........
2001: I ............
II ..........
III .........
IV .........
2002: I ............
II ..........
III .........

8,396.3
8,442.9
8,528.5
8,667.9
8,733.2
8,775.5
8,886.9
9,040.1
9,097.4
9,205.7
9,218.7
9,243.8
9,229.9
9,193.1
9,186.4
9,248.8
9,363.2
9,392.4
9,485.6

5,576.3
5,660.2
5,713.7
5,784.7
5,851.4
5,932.8
6,000.1
6,073.6
6,151.9
6,198.2
6,256.8
6,288.8
6,326.0
6,348.0
6,370.9
6,464.0
6,513.8
6,542.4
6,609.9

692.5
719.7
727.1
767.3
777.6
804.2
824.1
844.2
879.5
871.3
888.5
876.5
900.6
912.4
922.6
992.0
975.9
980.7
1,032.4

1,656.3
1,680.5
1,693.6
1,715.3
1,736.1
1,756.7
1,767.7
1,799.9
1,809.7
1,831.6
1,840.9
1,853.1
1,863.7
1,862.3
1,868.3
1,885.0
1,921.4
1,920.9
1,925.8

3,228.4
3,262.3
3,295.2
3,307.6
3,343.6
3,379.7
3,417.4
3,440.7
3,477.7
3,508.2
3,541.7
3,570.6
3,576.3
3,589.3
3,597.5
3,616.6
3,642.2
3,666.2
3,687.0

1,543.3
1,516.8
1,559.7
1,612.1
1,640.3
1,620.5
1,663.4
1,717.8
1,727.8
1,798.1
1,770.3
1,755.2
1,661.8
1,583.5
1,562.7
1,490.3
1,554.0
1,583.9
1,598.0

1,431.4
1,471.4
1,485.4
1,531.7
1,560.5
1,587.6
1,610.6
1,622.2
1,673.6
1,700.9
1,701.7
1,691.3
1,682.1
1,633.5
1,615.7
1,578.4
1,576.4
1,572.6
1,571.6

1,099.5
1,132.3
1,136.6
1,175.4
1,197.5
1,220.4
1,243.3
1,252.4
1,297.1
1,329.1
1,340.7
1,329.9
1,311.4
1,261.0
1,241.7
1,206.4
1,188.4
1,181.1
1,178.7

255.7
264.8
263.0
265.1
262.4
258.9
254.7
258.5
267.0
272.3
280.2
282.7
280.4
274.4
276.3
252.7
243.2
231.7
218.2

845.0
868.6
875.1
912.9
939.1
967.1
996.1
1,001.2
1,038.0
1,065.3
1,067.7
1,053.1
1,036.1
989.9
966.4
960.3
953.7
961.4
977.2

333.0
340.5
349.5
357.4
364.1
368.4
369.2
371.7
379.1
376.2
367.2
367.2
374.5
374.0
374.3
371.0
383.6
386.1
387.1

113.1
42.0
71.8
80.0
80.0
31.2
47.6
92.2
45.3
91.5
63.1
59.9
−26.9
−58.3
−61.8
−98.4
−28.9
4.9
18.8

See next page for continuation of table.

278

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ECONO

TABLE B–2.—Real gross domestic product, 1959–2002—Continued
[Billions of chained (1996) 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

Total

Exports Imports

National
defense

Nondefense

Total

State
and
local

Final
Gross
sales of domesdomestic
tic
purproduct chases 1

Addendum:
Gross
national
product 2

Percent change
from preceding
period
Gross
Gross
domes- domestic
tic
prodpuruct
chases 1

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

72.4
87.5
88.9
93.7
100.7
114.2
116.5
124.3
127.0
136.3
143.7

106.6
108.0
107.3
119.5
122.7
129.2
142.9
164.2
176.2
202.4
213.9

661.4
661.3
693.2
735.0
752.4
767.1
791.1
862.1
927.1
956.6
952.5

............
............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

2,317.4
2,378.5
2,435.5
2,569.5
2,683.6
2,844.1
3,008.5
3,191.1
3,288.2
3,450.0
3,555.9

2,377.2
2,417.5
2,471.5
2,626.9
2,734.7
2,883.0
3,079.1
3,292.3
3,382.6
3,555.9
3,664.5

2,332.8
2,391.9
2,448.8
2,598.0
2,710.8
2,868.5
3,051.7
3,248.9
3,330.4
3,489.8
3,594.1

7.2
2.5
2.3
6.0
4.3
5.8
6.4
6.6
2.5
4.8
3.0

7.6
1.7
2.2
6.3
4.1
5.4
6.8
6.9
2.7
5.1
3.1

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

159.3
160.4
173.5
211.4
231.6
230.0
243.6
249.7
275.9
302.4

223.1
931.1
235.0
913.8
261.3
914.9
273.4
908.3
267.2
924.8
237.5
942.5
284.0
943.3
315.0
952.7
342.3
982.2
347.9 1,001.1

............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

3,588.6
3,688.1
3,887.7
4,094.3
4,080.7
4,118.5
4,288.8
4,478.8
4,722.9
4,894.4

3,659.6
3,791.1
4,003.8
4,196.6
4,136.5
4,085.2
4,354.2
4,586.4
4,834.8
4,956.3

3,600.6
3,722.9
3,925.7
4,161.0
4,142.3
4,117.7
4,351.4
4,556.6
4,805.3
4,973.9

.2
3.3
5.4
5.8
−.6
−.4
5.6
4.6
5.5
3.2

−.1
3.6
5.6
4.8
−1.4
−1.2
6.6
5.3
5.4
2.5

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

..............
..............
..............
..............
..............
..............
..............
−156.2
−112.1
−79.4

334.8
338.6
314.6
306.9
332.6
341.6
366.8
408.0
473.5
529.4

324.8
333.4
329.2
370.7
461.0
490.7
531.9
564.2
585.6
608.8

1,020.9
1,030.0
1,046.0
1,081.0
1,118.4
1,190.5
1,255.2
1,292.5
1,307.5
1,343.5

............
............
............
............
............
............
............
597.8
586.9
594.7

..............
..............
..............
..............
..............
..............
..............
450.2
446.8
443.3

............
............
............
............
............
............
............
146.5
138.9
150.5

..............
..............
..............
..............
..............
..............
..............
695.6
721.4
749.5

4,928.1
4,989.5
4,954.9
5,154.5
5,427.9
5,698.8
5,912.6
6,088.8
6,352.6
6,565.4

4,863.8
4,990.0
4,916.6
5,194.1
5,646.6
5,883.1
6,096.2
6,286.2
6,489.5
6,674.6

4,962.3
5,075.4
4,973.6
5,184.9
5,553.8
5,750.9
5,932.5
6,130.8
6,391.1
6,615.5

−.2
2.5
−2.0
4.3
7.3
3.8
3.4
3.4
4.2
3.5

−1.9
2.6
−1.5
5.6
8.7
4.2
3.6
3.1
3.2
2.9

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

−56.5
575.7
632.2
−15.8
613.2
629.0
−19.8
651.0
670.8
−59.1
672.7
731.8
−86.5
732.8
819.4
−78.4
808.2
886.6
−89.0
874.2
963.1
−113.3
981.5 1,094.8
−221.1 1,002.4 1,223.5
−320.5 1,036.3 1,356.8

1,387.3
1,403.4
1,410.0
1,398.8
1,400.1
1,406.4
1,421.9
1,455.4
1,483.3
1,540.6

606.8
604.9
595.1
572.0
551.3
536.5
531.6
529.6
525.4
537.7

443.2
438.4
417.1
394.7
375.9
361.9
357.0
347.7
341.6
348.8

163.0
781.1
166.0
798.9
177.9
815.3
177.3
827.0
175.5
848.9
174.6
869.9
174.6
890.4
181.8
925.8
183.8
957.7
188.8 1,002.4

6,695.6
6,681.5
6,867.7
7,043.8
7,285.8
7,512.2
7,783.2
8,095.2
8,431.8
8,793.9

6,764.9
6,688.4
6,896.4
7,120.6
7,434.2
7,621.8
7,902.1
8,271.7
8,721.3
9,160.2

6,740.0
6,703.4
6,905.8
7,087.8
7,364.3
7,564.0
7,831.2
8,168.1
8,508.4
8,883.7

1.8
−.5
3.0
2.7
4.0
2.7
3.6
4.4
4.3
4.1

1.4
−1.1
3.1
3.3
4.4
2.5
3.7
4.7
5.4
5.0

2000 ..............
2001 ..............

−398.8 1,137.2 1,536.0 1,582.5
−415.9 1,076.1 1,492.0 1,640.4

544.4
570.6

348.7
366.0

195.6 1,037.4 9,121.1
204.4 1,069.4 9,258.4

9,561.2
9,600.7

9,216.2
9,237.3

3.8
.3

4.4
.4

1998: I ...........
II ..........
III .........
IV .........

−180.8 1,003.4 1,184.2 1,456.1
−223.1
993.1 1,216.2 1,482.6
−241.2
987.6 1,228.9 1,489.9
−239.2 1,025.6 1,264.8 1,504.8

515.0
530.1
524.9
531.7

332.0
342.0
346.5
345.8

183.0
188.0
178.4
185.8

8,286.6
8,397.2
8,454.9
8,588.5

8,571.6
8,657.0
8,759.7
8,896.6

8,405.4
8,448.7
8,517.6
8,662.0

6.1
2.2
4.1
6.7

7.9
4.0
4.8
6.4

1999: I ...........
II ..........
III .........
IV ........

−283.2
−319.6
−339.6
−339.5

1,007.5
1,018.1
1,044.1
1,075.6

1,290.7
1,337.7
1,383.7
1,415.2

1,515.9
1,526.7
1,546.5
1,573.2

527.2
530.6
540.1
553.0

341.2
341.0
352.4
360.8

185.9
988.3 8,654.3
189.5
995.7 8,741.0
187.7 1,006.0 8,833.6
192.1 1,019.8 8,946.6

9,002.1
9,076.2
9,204.9
9,357.7

8,755.5
8,801.8
8,906.4
9,071.1

3.0
2.0
5.2
7.1

4.8
3.3
5.8
6.8

2000: I ...........
II ..........
III ........
IV ........

−368.8
−394.6
−413.1
−418.5

1,095.8
1,133.9
1,165.5
1,153.7

1,464.6
1,528.5
1,578.6
1,572.2

1,568.3
1,586.1
1,582.2
1,593.4

533.8
554.0
543.7
546.4

341.3
353.4
347.9
351.9

192.3
200.3
195.6
194.3

1,033.8
1,031.8
1,037.8
1,046.3

9,042.9
9,111.1
9,150.4
9,179.8

9,440.8
9,571.9
9,600.9
9,631.0

9,119.7
9,233.0
9,238.2
9,274.0

2.6
4.8
.6
1.1

3.6
5.7
1.2
1.3

2001: I ...........
II ..........
III ........
IV ........

−404.5
−414.8
−419.0
−425.3

1,135.8
1,098.8
1,048.0
1,021.8

1,540.3
1,513.6
1,467.0
1,447.2

1,615.7
1,638.0
1,633.3
1,674.5

559.0
567.2
568.9
587.2

359.0
361.4
365.5
378.0

199.8
205.6
203.2
209.1

1,056.2
1,070.2
1,064.1
1,087.1

9,243.8
9,234.3
9,230.5
9,324.9

9,604.6
9,577.1
9,575.8
9,645.3

9,241.7
9,224.3
9,199.8
9,283.5

−.6
−1.6
−.3
2.7

−1.1
−1.1
−.1
2.9

2002: I ...........
II ..........
III ........

−446.6 1,030.6 1,477.1 1,697.3
−487.4 1,065.5 1,552.9 1,703.3
−488.0 1,077.7 1,565.7 1,715.6

597.8
608.7
615.1

388.5
395.8
402.5

209.3 1,099.3 9,379.4
212.9 1,094.7 9,377.9
212.7 1,100.6 9,457.2

9,778.2
9,840.8
9,934.7

9,367.5
9,376.7
9,477.9

5.0
1.3
4.0

5.6
2.6
3.9

940.8
952.4
964.7
972.8

1 Gross
2 GDP

domestic product (GDP) less exports of goods and services plus imports of goods and services.
plus net income receipts from rest of the world.

Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–3.—Quantity and price indexes for gross domestic product, and percent changes, 1959–2002
[Quarterly data are seasonally adjusted]
Gross domestic product (GDP)
Index numbers, 1996=100
Year or quarter
GDP
(current
dollars)
1959 ..........................................

Real GDP
(chain-type
quantity
index)

GDP
chain-type
price index

Percent change from preceding period
GDP
implicit
price
deflator

GDP
(current
dollars)

Real GDP
(chain-type
quantity
index)

GDP
chain-type
price index

1

GDP
implicit
price
deflator

6.49

29.68

21.88

21.88

8.4

7.2

1.1

1.1

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

6.75
6.98
7.51
7.92
8.50
9.22
10.10
10.68
11.67
12.61

30.42
31.13
33.01
34.43
36.43
38.76
41.31
42.34
44.36
45.71

22.19
22.43
22.74
22.99
23.34
23.77
24.45
25.21
26.29
27.59

22.19
22.44
22.74
23.00
23.34
23.78
24.46
25.21
26.30
27.59

3.9
3.5
7.5
5.5
7.4
8.4
9.6
5.7
9.3
8.1

2.5
2.3
6.0
4.3
5.8
6.4
6.6
2.5
4.8
3.0

1.4
1.1
1.4
1.1
1.5
1.9
2.8
3.1
4.3
4.9

1.4
1.1
1.4
1.1
1.5
1.9
2.9
3.1
4.3
4.9

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

13.31
14.44
15.88
17.73
19.21
20.93
23.34
26.00
29.38
32.85

45.80
47.33
49.90
52.78
52.46
52.28
55.19
57.75
60.93
62.87

29.05
30.52
31.81
33.60
36.60
40.03
42.29
45.02
48.22
52.24

29.06
30.52
31.82
33.60
36.62
40.03
42.30
45.02
48.23
52.25

5.5
8.6
9.9
11.7
8.3
8.9
11.5
11.4
13.0
11.8

.2
3.3
5.4
5.8
−.6
−.4
5.6
4.6
5.5
3.2

5.3
5.0
4.2
5.6
9.0
9.4
5.7
6.4
7.1
8.3

5.3
5.0
4.3
5.6
9.0
9.3
5.7
6.4
7.1
8.3

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

35.78
40.08
41.71
45.24
50.33
53.92
56.99
60.70
65.38
70.25

62.73
64.26
62.96
65.69
70.46
73.17
75.67
78.24
81.51
84.37

57.05
62.37
66.26
68.87
71.44
73.69
75.32
77.58
80.22
83.27

57.04
62.37
66.25
68.88
71.44
73.69
75.31
77.58
80.21
83.27

8.9
12.0
4.1
8.5
11.3
7.1
5.7
6.5
7.7
7.5

−.2
2.5
−2.0
4.3
7.3
3.8
3.4
3.4
4.2
3.5

9.2
9.3
6.2
3.9
3.7
3.2
2.2
3.0
3.4
3.8

9.2
9.3
6.2
4.0
3.7
3.2
2.2
3.0
3.4
3.8

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

74.28
76.62
80.88
85.01
90.29
94.72
100.00
106.47
112.39
118.70

85.85
85.45
88.06
90.39
94.04
96.55
100.00
104.43
108.91
113.39

86.53
89.66
91.85
94.05
96.01
98.10
100.00
101.95
103.20
104.69

86.51
89.66
91.84
94.05
96.01
98.10
100.00
101.95
103.20
104.69

5.7
3.2
5.6
5.1
6.2
4.9
5.6
6.5
5.6
5.6

1.8
−.5
3.0
2.7
4.0
2.7
3.6
4.4
4.3
4.1

3.9
3.6
2.4
2.4
2.1
2.2
1.9
1.9
1.2
1.4

3.9
3.6
2.4
2.4
2.1
2.2
1.9
1.9
1.2
1.4

2000 ..........................................
2001 ..........................................

125.74
129.04

117.64
117.94

106.89
109.42

106.89
109.42

5.9
2.6

3.8
.3

2.1
2.4

2.1
2.4

1998: I .......................................
II ......................................
III ....................................
IV .....................................

110.43
111.32
112.84
114.99

107.46
108.06
109.16
110.94

102.76
103.02
103.38
103.66

102.76
103.01
103.38
103.65

7.2
3.3
5.6
7.8

6.1
2.2
4.1
6.7

1.1
1.0
1.4
1.1

1.1
1.0
1.4
1.1

1999: I .......................................
II ......................................
III ....................................
IV .....................................

116.38
117.39
119.24
121.80

111.78
112.32
113.74
115.70

104.12
104.52
104.84
105.28

104.12
104.51
104.83
105.27

4.9
3.5
6.5
8.9

3.0
2.0
5.2
7.1

1.8
1.5
1.2
1.7

1.8
1.5
1.2
1.7

2000: I .......................................
II ......................................
III ....................................
IV .....................................

123.50
125.69
126.39
127.40

116.44
117.82
117.99
118.31

106.08
106.69
107.13
107.68

106.07
106.68
107.12
107.68

5.7
7.3
2.2
3.2

2.6
4.8
.6
1.1

3.1
2.3
1.6
2.1

3.1
2.3
1.6
2.1

2001: I .......................................
II ......................................
III ....................................
IV .....................................

128.35
128.63
129.24
129.95

118.13
117.66
117.58
118.37

108.66
109.32
109.92
109.78

108.65
109.32
109.92
109.78

3.0
.9
1.9
2.2

−.6
−1.6
−.3
2.7

3.7
2.5
2.2
−.5

3.7
2.5
2.2
−.5

2002: I .......................................
II ......................................
III ....................................

132.00
132.81
134.47

119.84
120.21
121.41

110.14
110.48
110.76

110.14
110.48
110.76

6.5
2.5
5.1

5.0
1.3
4.0

1.3
1.2
1.0

1.3
1.2
1.0

1 Percent

changes based on unrounded data. Quarterly percent changes are at annual rates.

Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–4.—Percent changes in real gross domestic product, 1959–2002
[Percent change from preceding period; quarterly data at seasonally adjusted annual rates]
Personal consumption
expenditures
Year or
quarter

Gross
domestic
product

Exports and imports of goods
and services

Gross private domestic
investment

Government consumption expenditures and
gross investment

Exports

Imports

Total

Nonresidential fixed
Total

Durable
goods

Nondurable
goods

Services

Total

Structures

Equipment
and
software

Residential
fixed

Federal

State
and
local

1959 ............

7.2

5.6

12.1

4.1

5.2

8.0

2.4

11.9

25.5

0.9

10.5

5.6

7.1

3.5

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

............
............
............
............
............
............
............
............
............
............

2.5
2.3
6.0
4.3
5.8
6.4
6.6
2.5
4.8
3.0

2.7
2.0
4.9
4.1
6.0
6.3
5.7
3.0
5.7
3.7

2.0
−3.8
11.7
9.7
9.3
12.6
8.5
1.6
11.0
3.6

1.5
1.8
3.1
2.1
4.9
5.3
5.5
1.6
4.6
2.7

4.4
4.1
4.9
4.5
6.1
5.3
5.1
4.9
5.2
4.7

5.7
−.6
8.7
5.5
11.9
17.4
12.5
−1.4
4.4
7.6

7.9
1.3
4.5
1.1
10.4
15.9
6.8
−2.5
1.4
5.4

4.2
−1.9
11.5
8.4
12.7
18.3
15.9
−.7
6.2
8.8

−7.1
.3
9.6
11.8
5.8
−2.9
−8.9
−3.1
13.6
3.0

20.8
1.7
5.4
7.5
13.3
2.0
6.7
2.2
7.3
5.4

1.3
−.7
11.3
2.7
5.3
10.6
14.9
7.3
14.9
5.7

.0
4.8
6.0
2.4
2.0
3.1
9.0
7.5
3.2
−.4

−3.0
3.9
8.3
−.3
−1.7
.2
11.3
9.7
.9
−3.3

4.4
6.1
3.0
6.1
6.8
6.7
6.3
5.0
5.9
2.9

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

............
............
............
............
............
............
............
............
............
............

.2
3.3
5.4
5.8
−.6
−.4
5.6
4.6
5.5
3.2

2.3
3.8
6.0
4.9
−.8
2.2
5.8
4.3
4.4
2.5

−3.2
10.0
12.7
10.3
−6.9
.0
12.8
9.3
5.3
−.3

2.4
1.8
4.4
3.3
−2.0
1.5
4.9
2.4
3.7
2.7

4.0
3.8
5.5
4.7
2.2
3.4
4.7
4.4
4.7
3.2

−.5
−.1
9.1
14.5
.8
−9.9
4.9
11.3
14.1
10.0

.3
−1.6
3.1
8.1
−2.1
−10.5
2.5
4.1
11.8
12.6

−1.0
.9
12.8
18.3
2.5
−9.6
6.2
15.0
15.2
8.7

−6.0
27.4
17.8
−.6
−20.6
−13.0
23.5
21.5
6.3
−3.7

10.8
.7
8.1
21.9
9.5
−.7
5.9
2.5
10.5
9.6

4.3
5.3
11.2
4.6
−2.3
−11.1
19.6
10.9
8.7
1.7

−2.3
−1.9
.1
−.7
1.8
1.9
.1
1.0
3.1
1.9

−7.0
−7.1
−2.2
−4.9
−.4
.0
−1.2
1.8
2.6
2.4

2.8
3.2
2.2
2.9
3.6
3.3
1.0
.4
3.4
1.6

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

............
............
............
............
............
............
............
............
............
............

−.2
2.5
−2.0
4.3
7.3
3.8
3.4
3.4
4.2
3.5

−.3
1.3
1.2
5.5
5.4
5.0
4.2
3.3
4.0
2.7

−7.9
1.3
.0
14.9
14.6
9.9
9.1
1.7
5.8
2.1

−.2
1.2
1.0
3.3
4.0
2.7
3.6
2.4
3.2
2.7

1.7
1.5
1.7
4.9
4.2
5.2
3.3
4.3
4.1
2.8

−.1
5.6
−3.7
−1.0
17.6
6.7
−2.7
−.1
5.4
5.5

6.6
7.9
−1.5
−10.4
14.3
7.3
−10.8
−3.6
1.3
2.5

−3.6
4.2
−5.2
5.4
19.5
6.4
2.0
1.7
7.5
7.0

−21.1
−8.0
−18.2
41.1
14.6
1.4
12.0
.2
−.5
−4.1

10.7
1.1
−7.1
−2.4
8.4
2.7
7.4
11.2
16.1
11.8

−6.6
2.6
−1.3
12.6
24.3
6.5
8.4
6.1
3.8
3.9

2.0
.9
1.5
3.3
3.5
6.5
5.4
3.0
1.2
2.8

4.8
4.7
3.6
6.3
3.1
7.6
5.5
3.7
−1.8
1.3

−.1
−2.0
−.1
.9
3.8
5.4
5.4
2.3
3.7
3.9

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

............
............
............
............
............
............
............
............
............
............

1.8
−.5
3.0
2.7
4.0
2.7
3.6
4.4
4.3
4.1

1.8
−.2
2.9
3.4
3.8
3.0
3.2
3.6
4.8
4.9

−.9
−6.6
5.3
8.2
7.6
4.6
5.6
6.6
10.5
11.8

1.4
−.4
1.9
2.9
3.8
3.0
2.9
2.9
4.1
4.7

2.8
1.4
2.9
2.7
3.0
2.7
2.8
3.3
4.0
3.7

.7
−4.9
3.4
8.4
8.9
9.8
10.0
12.2
12.5
8.1

1.5
−11.0
−6.1
.8
.8
4.8
7.1
9.1
6.8
−1.3

.4
−2.0
7.4
11.3
11.9
11.5
11.0
13.3
14.6
11.5

−8.6
−12.8
16.3
7.3
9.7
−3.6
7.4
2.0
8.0
6.7

8.7
6.5
6.2
3.3
8.9
10.3
8.2
12.3
2.1
3.4

3.8
−.5
6.6
9.1
12.0
8.2
8.6
13.7
11.8
10.9

3.3
1.2
.5
−.8
.1
.5
1.1
2.4
1.9
3.9

2.0
−.3
−1.6
−3.9
−3.6
−2.7
−.9
−.4
−.8
2.3

4.2
2.3
2.0
1.4
2.6
2.5
2.3
4.0
3.4
4.7

2000 ............
2001 ............

3.8
.3

4.4
2.5

8.2
6.0

3.9
2.0

3.8
2.0

7.8
−5.2

6.5
−1.7

8.2
−6.4

1.1
.3

9.7
−5.4

13.2
−2.9

2.7
3.7

1.3
4.8

3.5
3.1

1998: I .........
II ........
III .......
IV .......

6.1
2.2
4.1
6.7

5.1
6.2
3.8
5.1

7.0
16.6
4.2
24.0

5.6
6.0
3.2
5.2

4.5
4.3
4.1
1.5

21.6
12.5
1.5
14.4

4.9
14.9
−2.7
3.3

28.0
11.6
3.0
18.4

10.4
9.2
11.1
9.3

.5
−4.0
−2.2
16.3

15.9
11.3
4.2
12.2

−2.5
7.5
2.0
4.1

−9.7
12.2
−3.9
5.3

1.7
5.0
5.3
3.4

1999: I .........
II ........
III .......
IV ......

3.0
2.0
5.2
7.1

4.7
5.7
4.6
5.0

5.5
14.4
10.3
10.1

4.9
4.8
2.5
7.5

4.4
4.4
4.5
2.8

7.7
7.9
7.7
3.0

−4.1
−5.1
−6.3
6.1

12.0
12.5
12.5
2.1

7.6
4.9
.9
2.7

−6.9
4.3
10.6
12.6

8.4
15.4
14.5
9.4

3.0
2.9
5.3
7.1

−3.3
2.6
7.4
9.9

6.5
3.0
4.2
5.6

2000: I .........
II ........
III ......
IV .......

2.6
4.8
.6
1.1

5.3
3.0
3.8
2.1

17.8
−3.7
8.1
−5.3

2.2
4.9
2.0
2.7

4.4
3.6
3.9
3.3

15.0
10.2
3.5
−3.2

13.8
8.2
12.1
3.6

15.5
10.9
.9
−5.4

8.3
−3.0
−9.3
.0

7.7
14.6
11.6
−4.0

14.7
18.6
13.8
−1.6

−1.2
4.6
−1.0
2.9

−13.2
16.0
−7.2
2.0

5.6
−.8
2.4
3.3

2001: I .........
II ........
III .......
IV .......

−.6
−1.6
−.3
2.7

2.4
1.4
1.5
6.0

11.5
5.3
4.6
33.6

2.3
−.3
1.3
3.6

.6
1.5
.9
2.1

−5.4
−14.5
−6.0
−10.9

−3.1
−8.4
2.9
−30.1

−6.3
−16.7
−9.2
−2.5

8.2
−.5
.4
−3.5

−6.0
−12.4
−17.3
−9.6

−7.9
−6.8
−11.8
−5.3

5.7
5.6
−1.1
10.5

9.5
6.0
1.2
13.5

3.8
5.4
−2.3
8.9

2002: I .........
II ........
III .......

5.0
1.3
4.0

3.1
1.8
4.2

−6.3
2.0
22.8

7.9
−.1
1.0

2.9
2.7
2.3

−5.8
−2.4
−.8

−14.2
−17.6
−21.4

−2.7
3.3
6.7

14.2
2.7
1.1

3.5
14.3
4.6

8.5
22.2
3.3

5.6
1.4
2.9

7.4
7.5
4.3

4.6
−1.7
2.2

Note.—Percent changes based on unrounded data.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–5.—Contributions to percent change in real gross domestic product, 1959–2002
[Percentage points, except as noted; quarterly data at seasonally adjusted annual rates]
Personal consumption expenditures
Gross
domestic
product
(percent
change)

Year or
quarter

Gross private domestic investment
Fixed investment
Nonresidential

Total

NonDurable durable
goods goods

Services

Total
Total
Total

Structures

Equipment
and
software

Change
in
priResivate
dential inventories

1959 .......................................

7.2

3.55

0.97

1.25

1.33

2.82

1.94

0.73

0.09

0.64

1.21

0.88

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................

2.5
2.3
6.0
4.3
5.8
6.4
6.6
2.5
4.8
3.0

1.71
1.27
3.10
2.55
3.71
3.91
3.52
1.83
3.48
2.26

.17
−.31
.89
.77
.77
1.06
.73
.13
.92
.31

.44
.53
.90
.59
1.33
1.43
1.46
.42
1.18
.69

1.10
1.05
1.31
1.20
1.61
1.42
1.33
1.28
1.37
1.26

.00
−.10
1.80
1.00
1.25
2.15
1.44
−.76
.89
.90

.13
−.05
1.23
1.07
1.37
1.49
.86
−.28
.99
.90

.52
−.06
.77
.50
1.07
1.64
1.29
−.15
.46
.77

.28
.05
.16
.04
.36
.57
.27
−.10
.05
.20

.24
−.11
.61
.46
.71
1.07
1.02
−.05
.40
.57

−.39
.01
.46
.58
.30
−.15
−.43
−.13
.53
.13

−.13
−.05
.57
−.08
−.12
.66
.58
−.48
−.10
.00

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................

.2
3.3
5.4
5.8
−.6
−.4
5.6
4.6
5.5
3.2

1.43
2.35
3.74
3.05
−.51
1.33
3.67
2.71
2.79
1.57

−.28
.81
1.07
.90
−.61
.00
1.04
.80
.47
−.03

.61
.47
1.11
.82
−.51
.37
1.25
.60
.91
.65

1.09
1.07
1.56
1.33
.60
.96
1.38
1.30
1.41
.95

−1.04
1.66
1.86
1.96
−1.31
−2.98
2.84
2.43
2.06
.60

−.31
1.09
1.80
1.46
−1.04
−1.71
1.42
2.18
1.94
1.01

−.06
−.01
.92
1.50
.09
−1.14
.52
1.19
1.59
1.22

.01
−.06
.12
.31
−.08
−.43
.09
.15
.44
.51

−.07
.06
.80
1.18
.17
−.71
.42
1.04
1.15
.71

−.26
1.10
.89
−.04
−1.13
−.57
.91
.99
.35
−.21

−.72
.58
.06
.50
−.27
−1.27
1.42
.25
.12
−.41

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................

−.2
2.5
−2.0
4.3
7.3
3.8
3.4
3.4
4.2
3.5

−.20
.85
.76
3.49
3.49
3.15
2.71
2.17
2.65
1.76

−.66
.10
.00
1.09
1.15
.81
.78
.16
.51
.18

−.04
.29
.23
.80
.93
.61
.78
.52
.68
.58

.49
.46
.53
1.61
1.41
1.73
1.14
1.49
1.46
1.00

−2.09
1.58
−2.54
1.48
4.62
−.17
−.11
.42
.44
.60

−1.18
.38
−1.21
1.19
2.67
.89
.20
.00
.58
.42

−.01
.73
−.50
−.13
2.04
.83
−.34
−.01
.60
.61

.30
.39
−.08
−.54
.61
.33
−.49
−.14
.05
.09

−.30
.34
−.42
.41
1.43
.50
.16
.13
.56
.52

−1.17
−.35
−.71
1.32
.63
.06
.54
.01
−.02
−.19

−.91
1.20
−1.34
.29
1.95
−1.06
−.32
.42
−.14
.17

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
......................................

1.8
−.5
3.0
2.7
4.0
2.7
3.6
4.4
4.3
4.1

1.21
−.12
1.90
2.24
2.53
2.00
2.14
2.39
3.18
3.30

−.08
−.53
.39
.61
.59
.37
.44
.51
.80
.92

.30
−.09
.40
.61
.79
.60
.60
.58
.81
.91

.99
.50
1.11
1.02
1.16
1.04
1.10
1.29
1.57
1.47

−.49
−1.26
1.12
1.18
1.89
.47
1.37
1.91
1.96
1.15

−.28
−1.00
.86
1.09
1.28
.88
1.39
1.47
1.80
1.29

.08
−.53
.34
.83
.91
1.03
1.10
1.39
1.49
1.01

.05
−.38
−.18
.02
.02
.13
.20
.26
.21
−.04

.03
−.15
.52
.80
.89
.90
.91
1.13
1.27
1.05

−.36
−.47
.52
.26
.37
−.15
.28
.08
.32
.28

−.21
−.26
.26
.10
.61
−.41
−.02
.44
.15
−.15

2000 ......................................
2001 ......................................

3.8
.3

2.94
1.67

.65
.48

.77
.39

1.51
.80

1.08
−1.90

1.03
−.65

.98
−.66

.20
−.05

.78
−.61

.05
.01

.06
−1.24

1998: I ....................................
II ..................................
III .................................
IV .................................

6.1
2.2
4.1
6.7

3.39
3.99
2.56
3.42

.53
1.21
.33
1.74

1.08
1.13
.62
1.03

1.77
1.64
1.62
.66

4.99
−1.18
1.98
2.38

2.85
1.84
.64
2.10

2.45
1.49
.20
1.71

.15
.45
−.09
.11

2.29
1.04
.29
1.61

.40
.36
.44
.39

2.14
−3.02
1.34
.28

1999: I ....................................
II ..................................
III .................................
IV .................................

3.0
2.0
5.2
7.1

3.06
3.72
3.14
3.45

.43
1.09
.81
.81

.94
.93
.51
1.48

1.70
1.70
1.81
1.16

1.25
−.86
1.85
2.32

1.26
1.18
1.01
.53

.95
.97
.97
.41

−.14
−.17
−.20
.18

1.08
1.14
1.17
.22

.32
.21
.04
.12

−.01
−2.04
.84
1.80

2000: I ....................................
II ..................................
III .................................
IV .................................

2.6
4.8
.6
1.1

3.54
2.11
2.54
1.37

1.36
−.30
.63
−.44

.45
.99
.40
.52

1.73
1.43
1.51
1.29

.39
2.92
−1.09
−.55

2.15
1.15
.04
−.41

1.80
1.28
.46
−.41

.40
.25
.37
.12

1.41
1.03
.09
−.53

.35
−.13
−.42
.00

−1.77
1.77
−1.12
−.14

2001: I ....................................
II ..................................
III .................................
IV .................................

−.6
−1.6
−.3
2.7

1.53
.92
.97
4.05

.87
.42
.36
2.45

.45
−.07
.25
.73

.21
.57
.35
.87

−3.65
−3.09
−.81
−2.88

−.38
−1.95
−.72
−1.49

−.71
−1.93
−.73
−1.33

−.10
−.29
.10
−1.12

−.61
−1.64
−.83
−.21

.34
−.02
.02
−.16

−3.27
−1.14
−.09
−1.39

2002: I ....................................
II ..................................
III .................................

5.0
1.3
4.0

2.22
1.22
2.93

−.55
.16
1.74

1.57
−.02
.22

1.20
1.08
.97

2.53
1.16
.55

−.07
−.15
−.03

−.66
−.27
−.08

−.44
−.53
−.62

−.22
.26
.53

.60
.12
.05

2.60
1.31
.58

See next page for continuation of table.

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TABLE B–5.—Contributions to percent change in real gross domestic product, 1959–2002—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
Imports

Services

Total

Goods

Federal
Services

Total
Total

NaNontional
defense defense

State
and
local

−0.41

0.04

−0.02

0.06

−0.45

−0.48

0.03

1.27

0.95

0.29

0.65

0.33

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................

.79
.11
−.21
.24
.41
−.35
−.32
−.23
−.35
−.02

.85
.08
.25
.35
.63
.10
.33
.11
.36
.27

.76
.02
.17
.29
.51
.02
.27
.02
.30
.20

.09
.06
.08
.06
.12
.08
.06
.09
.06
.07

−.06
.03
−.47
−.12
−.23
−.45
−.65
−.34
−.70
−.29

.05
.00
−.40
−.12
−.19
−.41
−.49
−.17
−.68
−.20

−.11
.02
−.07
.00
−.03
−.04
−.16
−.16
−.03
−.09

.00
1.04
1.35
.53
.44
.69
1.93
1.67
.75
−.10

−.39
.48
1.06
−.04
−.22
.02
1.29
1.16
.12
−.42

−.21
.43
.63
−.27
−.44
−.17
1.25
1.19
.18
−.48

−.18
.06
.43
.23
.23
.19
.04
−.03
−.07
.06

.39
.56
.29
.57
.66
.66
.64
.51
.63
.32

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................

.32
−.25
−.20
.92
.85
.89
−.96
−.71
.04
.63

.54
.04
.43
1.21
.67
−.06
.49
.20
.81
.79

.44
−.02
.43
1.01
.46
−.16
.31
.08
.68
.77

.10
.06
.00
.21
.22
.10
.17
.12
.14
.03

−.22
−.29
−.63
−.29
.18
.94
−1.45
−.91
−.78
−.16

−.15
−.33
−.57
−.34
.17
.87
−1.35
−.84
−.67
−.14

−.07
.04
−.06
.05
.00
.07
−.10
−.07
−.11
−.02

−.52
−.43
.03
−.16
.38
.41
.02
.21
.63
.38

−.84
−.81
−.23
−.50
−.04
.00
−.11
.16
.23
.20

−.80
−.90
−.40
−.49
−.17
−.08
−.14
.05
.05
.16

−.04
.10
.17
−.01
.13
.08
.03
.11
.18
.04

.32
.38
.26
.34
.42
.41
.13
.05
.40
.18

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................

1.67
−.16
−.55
−1.34
−1.57
−.44
−.31
.18
.84
.60

.96
.11
−.67
−.21
.65
.20
.52
.81
1.25
1.02

.86
−.09
−.67
−.19
.46
.19
.26
.56
1.04
.80

.10
.20
.00
−.02
.19
.02
.26
.25
.21
.23

.71
−.27
.12
−1.13
−2.22
−.65
−.83
−.62
−.41
−.43

.67
−.18
.20
−1.00
−1.83
−.51
−.82
−.39
−.36
−.37

.04
−.09
−.08
−.13
−.39
−.13
−.01
−.23
−.05
−.05

.39
.18
.31
.70
.72
1.31
1.13
.63
.24
.56

.40
.41
.33
.60
.31
.73
.54
.36
−.18
.12

.24
.37
.47
.47
.35
.60
.46
.35
−.06
−.05

.16
.04
−.15
.13
−.04
.13
.07
.01
−.12
.17

−.01
−.23
−.02
.10
.42
.59
.60
.27
.42
.44

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................
.......................................

.39
.67
−.07
−.61
−.41
.11
−.15
−.29
−1.20
−1.01

.80
.62
.61
.33
.88
1.06
.89
1.35
.24
.37

.55
.48
.48
.21
.67
.86
.68
1.12
.17
.29

.25
.14
.13
.12
.22
.20
.22
.23
.07
.08

−.41
.05
−.68
−.94
−1.29
−.95
−1.04
−1.64
−1.44
−1.38

−.26
.00
−.76
−.85
−1.18
−.87
−.94
−1.43
−1.20
−1.29

−.15
.05
.08
−.09
−.11
−.08
−.09
−.21
−.24
−.09

.65
.24
.10
−.16
.02
.09
.21
.43
.34
.68

.18
−.03
−.14
−.33
−.29
−.20
−.06
−.03
−.05
.14

.00
−.07
−.31
−.32
−.26
−.19
−.06
−.12
−.07
.09

.18
.04
.17
−.01
−.02
−.01
.00
.09
.02
.06

.48
.26
.24
.17
.31
.28
.27
.45
.39
.54

2000 .......................................
2001 .......................................

−.75
−.18

1.04
−.59

.85
−.47

.19
−.13

−1.79
.42

−1.54
.40

−.24
.01

.49
.65

.08
.29

.00
.19

.08
.10

.41
.36

1998: I ....................................
II ...................................
III ..................................
IV ..................................

−1.85
−1.83
−.78
.17

.07
−.46
−.24
1.66

−.02
−.72
.04
1.33

.09
.25
−.28
.32

−1.92
−1.36
−.53
−1.49

−1.51
−1.23
−.39
−1.48

−.41
−.14
−.15
.00

−.43
1.27
.35
.73

−.64
.71
−.24
.32

−.79
.47
.21
−.03

.15
.24
−.45
.35

.21
.56
.60
.40

1999: I ....................................
II ...................................
III ..................................
IV .................................

−1.77
−1.41
−.75
.04

−.78
.43
1.08
1.31

−.72
.33
.94
1.11

−.06
.10
.14
.20

−.99
−1.84
−1.83
−1.27

−1.01
−1.72
−1.64
−1.12

.02
−.12
−.19
−.15

.51
.50
.93
1.26

−.21
.15
.44
.60

−.21
−.01
.52
.39

.00
.16
−.08
.21

.72
.34
.49
.67

2000: I ....................................
II ...................................
III .................................
IV .................................

−1.17
−1.00
−.72
−.23

.82
1.53
1.25
−.46

.51
1.18
1.44
−.60

.31
.35
−.19
.14

−1.99
−2.54
−1.97
.23

−1.56
−2.32
−1.64
.22

−.43
−.21
−.32
.01

−.20
.83
−.18
.51

−.85
.91
−.45
.12

−.86
.54
−.24
.17

.01
.37
−.21
−.06

.65
−.08
.28
.39

2001: I ....................................
II ...................................
III ..................................
IV .................................

.53
−.42
−.24
−.28

−.69
−1.42
−1.94
−.99

−.49
−1.34
−1.49
−.56

−.20
−.08
−.45
−.42

1.22
1.00
1.70
.70

1.21
1.18
1.17
.37

.01
−.18
.53
.33

.99
1.00
−.21
1.85

.54
.36
.07
.80

.30
.10
.18
.54

.24
.25
−.11
.26

.45
.64
−.28
1.05

2002: I ....................................
II ...................................
III ..................................

−.75
−1.40
−.01

.33
1.29
.45

−.23
.99
.28

.56
.30
.17

−1.08
−2.69
−.47

−.40
−2.74
−.40

−.68
.05
−.07

1.04
.27
.56

.47
.47
.29

.46
.32
.29

.01
.16
−.01

.56
−.21
.27

1959 .......................................

Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–6.—Chain-type quantity indexes for gross domestic product, 1959–2002
[Index numbers, 1996=100; quarterly data seasonally adjusted]
Personal consumption expenditures

Gross private domestic investment
Fixed investment

Year or
quarter

Gross
domestic
product

Nonresidential
Durable
goods

Nondurable
goods

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 .......................
1998 ........................
1999 .......................
2000 .......................
2001 .......................
1998: I .....................
II ....................
III ...................
IV ...................
1999: I .....................
II ....................
III ...................
IV ...................
2000: I .....................
II ....................
III ...................
IV ...................
2001: I .....................
II ....................
III ...................
IV ...................
2002: I .....................
II ....................
III ...................

29.68
30.42
31.13
33.01
34.43
36.43
38.76
41.31
42.34
44.36
45.71
45.80
47.33
49.90
52.78
52.46
52.28
55.19
57.75
60.93
62.87
62.73
64.26
62.96
65.69
70.46
73.17
75.67
78.24
81.51
84.37
85.85
85.45
88.06
90.39
94.04
96.55
100.00
104.43
108.91
113.39
117.64
117.94
107.46
108.06
109.16
110.94
111.78
112.32
113.74
115.70
116.44
117.82
117.99
118.31
118.13
117.66
117.58
118.37
119.84
120.21
121.41

Total

28.08
28.85
29.43
30.88
32.15
34.08
36.23
38.30
39.45
41.70
43.24
44.25
45.92
48.70
51.09
50.67
51.76
54.78
57.13
59.66
61.16
60.96
61.79
62.54
65.95
69.51
72.95
76.01
78.54
81.71
83.89
85.43
85.28
87.72
90.67
94.09
96.91
100.00
103.56
108.52
113.88
118.83
121.76
106.47
108.07
109.09
110.45
111.72
113.28
114.56
115.96
117.46
118.34
119.46
120.07
120.78
121.20
121.64
123.42
124.37
124.92
126.20

16.49
16.82
16.19
18.08
19.84
21.67
24.42
26.48
26.90
29.85
30.92
29.91
32.91
37.08
40.91
38.10
38.09
42.95
46.95
49.43
49.26
45.39
45.98
45.98
52.81
60.54
66.52
72.58
73.84
78.11
79.75
79.01
73.79
77.70
84.08
90.46
94.66
100.00
106.63
117.87
131.80
142.58
151.16
112.34
116.75
117.95
124.46
126.14
130.45
133.68
136.94
142.67
141.34
144.12
142.18
146.09
148.00
149.66
160.91
158.30
159.08
167.47

Services

Total
Structures

Equipment
and
software

15.94
16.84
16.74
18.19
19.20
21.47
25.20
28.35
27.95
29.19
31.39
31.22
31.21
34.04
38.99
39.30
35.41
37.14
41.32
47.15
51.88
51.85
54.77
52.72
52.19
61.37
65.49
63.73
63.65
67.11
70.83
71.35
67.83
70.11
76.00
82.78
90.89
100.00
112.22
126.29
136.57
147.23
139.55
122.24
125.89
126.37
130.68
133.13
135.69
138.23
139.25
144.21
147.77
149.06
147.86
145.81
140.20
138.06
134.13
132.13
131.32
131.05

43.65
47.12
47.76
49.91
50.46
55.71
64.59
69.02
67.26
68.21
71.89
72.12
70.94
73.12
79.08
77.43
69.32
71.02
73.97
82.66
93.08
99.23
107.09
105.47
94.53
108.03
115.92
103.43
99.69
100.95
103.42
104.95
93.38
87.70
88.39
89.14
93.39
100.00
109.07
116.53
114.96
122.47
120.43
113.67
117.70
116.89
117.83
116.61
115.09
113.22
114.91
118.68
121.03
124.52
125.63
124.64
121.95
122.82
112.30
108.09
102.97
96.97

9.74
10.16
9.96
11.11
12.04
13.58
16.06
18.61
18.48
19.62
21.34
21.12
21.31
24.04
28.44
29.13
26.35
27.98
32.18
37.09
40.33
38.88
40.52
38.42
40.50
48.40
51.48
52.51
53.37
57.37
61.39
61.63
60.38
64.86
72.22
80.79
90.08
100.00
113.30
129.80
144.69
156.58
146.51
125.29
128.79
129.76
135.36
139.24
143.40
147.69
148.45
153.91
157.95
158.31
156.14
153.63
146.77
143.28
142.39
141.41
142.55
144.88

Total

38.35
38.93
39.64
40.89
41.75
43.80
46.12
48.65
49.42
51.67
53.05
54.32
55.30
57.73
59.62
58.42
59.28
62.17
63.67
66.05
67.81
67.71
68.51
69.17
71.47
74.31
76.33
79.07
80.97
83.55
85.83
87.01
86.65
88.29
90.87
94.35
97.14
100.00
102.91
107.14
112.14
116.50
118.79
105.23
106.76
107.60
108.98
110.29
111.60
112.30
114.35
114.97
116.36
116.96
117.73
118.40
118.31
118.69
119.76
122.07
122.03
122.35

24.90
25.99
27.04
28.38
29.67
31.47
33.15
34.83
36.54
38.42
40.24
41.87
43.46
45.86
48.02
49.07
50.73
53.13
55.48
58.12
59.99
60.99
61.90
62.96
66.06
68.84
72.44
74.86
78.09
81.30
83.56
85.86
87.03
89.59
91.98
94.72
97.26
100.00
103.28
107.43
111.43
115.67
117.98
105.95
107.07
108.15
108.55
109.73
110.92
112.16
112.92
114.14
115.14
116.24
117.19
117.37
117.80
118.07
118.69
119.54
120.32
121.01

21.96
21.95
21.81
24.57
26.21
28.37
32.35
35.19
33.57
35.51
37.58
35.10
39.09
43.70
48.81
45.20
37.20
44.70
51.45
57.38
59.18
52.73
57.59
49.51
54.22
70.13
69.48
69.02
70.76
72.65
75.36
73.01
66.75
72.41
78.69
89.08
91.79
100.00
112.12
125.37
133.62
141.86
126.71
124.19
122.06
125.51
129.73
132.00
130.40
133.86
138.23
139.04
144.70
142.46
141.25
133.72
127.43
125.75
119.93
125.05
127.46
128.59

22.20
22.39
22.32
24.33
26.21
28.74
31.66
33.47
32.84
35.12
37.30
36.51
39.26
43.96
47.97
44.96
40.13
44.08
50.41
56.22
59.37
55.58
56.79
52.81
56.76
66.28
69.77
70.60
70.58
73.15
75.14
73.77
68.65
73.10
79.03
86.25
91.46
100.00
109.56
122.04
131.54
139.52
134.20
118.04
121.34
122.48
126.31
128.68
130.91
132.81
133.77
138.01
140.26
140.32
139.47
138.71
134.70
133.23
130.16
129.99
129.68
129.60

See next page for continuation of table.

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Residential

47.26
43.89
44.02
48.24
53.92
57.05
55.39
50.43
48.84
55.50
57.14
53.73
68.46
80.63
80.11
63.57
55.32
68.34
83.02
88.26
85.03
67.05
61.68
50.45
71.19
81.56
82.67
92.58
92.79
92.32
88.53
80.92
70.57
82.09
88.09
96.64
93.13
100.00
102.04
110.17
117.58
118.88
119.22
106.32
108.68
111.58
114.10
116.22
117.60
117.86
118.64
121.02
120.09
117.21
117.21
119.55
119.39
119.50
118.44
122.44
123.25
123.59

TABLE B–6.—Chain-type quantity indexes for gross domestic product, 1959–2002—Continued
[Index numbers, 1996=100; quarterly data seasonally adjusted]
Exports of goods and
services

Imports of goods and
services

Government consumption expenditures
and gross investment

Year or
quarter

Federal
Total

Goods

Services

Total

Goods

Services

Total
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 ........................
1998 ........................
1999 .......................
2000 .......................
2001 .......................
1998: I .....................
II ....................
III ...................
IV ...................
1999: I .....................
II ....................
III ...................
IV ...................
2000: I .....................
II ....................
III ...................
IV ...................
2001: I .....................
II ....................
III ...................
IV ...................
2002: I .....................
II ....................
III ...................

8.28
10.00
10.17
10.72
11.52
13.06
13.33
14.22
14.53
15.59
16.44
18.22
18.35
19.84
24.19
26.49
26.32
27.87
28.57
31.56
34.59
38.30
38.74
35.99
35.11
38.05
39.08
41.96
46.67
54.17
60.56
65.85
70.15
74.47
76.95
83.83
92.45
100.00
112.27
114.67
118.55
130.09
123.10
114.78
113.61
112.98
117.32
115.25
116.46
119.44
123.05
125.35
129.71
133.32
131.97
129.93
125.70
119.89
116.89
117.89
121.89
123.28

8.41
10.38
10.43
10.89
11.75
13.36
13.43
14.36
14.43
15.57
16.39
18.26
18.18
20.14
24.77
26.73
26.11
27.35
27.71
30.81
34.45
38.55
38.14
34.70
33.70
36.36
37.58
39.51
43.89
52.16
58.74
63.58
68.09
72.73
74.93
82.18
91.97
100.00
114.51
116.90
121.29
134.98
126.97
117.52
114.90
115.06
120.12
117.30
118.64
122.38
126.82
128.89
133.80
139.88
137.33
135.19
129.39
122.89
120.40
119.36
123.84
125.08

7.35
8.13
8.67
9.46
10.06
11.26
12.15
12.85
13.97
14.69
15.59
16.97
17.77
17.70
20.85
24.29
25.91
28.65
30.67
33.10
33.64
35.59
39.32
39.29
38.86
42.62
43.01
48.73
54.38
59.45
65.18
71.73
75.40
78.86
82.07
88.01
93.65
100.00
106.98
109.39
112.13
118.91
114.18
108.32
110.43
108.04
110.78
110.36
111.28
112.56
114.33
117.13
120.28
118.47
119.76
117.91
117.17
112.87
108.77
114.24
117.18
118.87

11.07
11.21
11.14
12.40
12.74
13.41
14.84
17.05
18.29
21.02
22.21
23.16
24.40
27.13
28.39
27.75
24.66
29.49
32.70
35.54
36.13
33.73
34.61
34.18
38.49
47.86
50.95
55.23
58.58
60.81
63.21
65.64
65.31
69.64
75.98
85.08
92.05
100.00
113.67
127.03
140.88
159.48
154.91
122.95
126.27
127.59
131.32
134.01
138.89
143.67
146.93
152.07
158.70
163.91
163.23
159.93
157.15
152.32
150.26
153.37
161.24
162.56

8.82
8.67
8.66
9.94
10.34
11.03
12.59
14.57
15.34
18.51
19.52
20.29
21.99
24.98
26.74
26.00
22.72
27.86
31.25
34.05
34.64
32.06
32.72
31.90
36.24
45.00
47.80
52.70
55.15
57.38
59.80
61.60
61.56
67.26
74.03
83.86
91.43
100.00
114.20
127.59
143.19
162.51
157.18
123.20
126.79
127.94
132.44
135.67
141.12
146.26
149.72
154.59
161.91
167.15
166.40
162.44
158.49
154.54
153.24
154.63
164.44
165.81

22.61
24.38
23.96
25.08
25.06
25.71
26.47
29.83
33.47
34.08
36.22
38.11
37.03
38.54
37.24
37.20
35.59
38.04
39.94
42.78
43.37
42.40
44.85
47.24
51.06
63.86
68.71
68.94
77.64
79.75
81.98
88.23
86.18
82.69
86.60
91.65
95.40
100.00
110.94
124.16
129.42
144.47
143.71
121.62
123.59
125.70
125.73
125.79
127.88
130.86
133.14
139.53
142.76
147.87
147.70
147.81
150.84
141.21
134.98
145.69
144.92
146.02

46.52
46.51
48.75
51.69
52.91
53.95
55.64
60.63
65.20
67.27
66.99
65.48
64.26
64.34
63.87
65.04
66.28
66.34
67.00
69.07
70.40
71.80
72.44
73.56
76.02
78.65
83.72
88.28
90.89
91.95
94.48
97.56
98.69
99.16
98.37
98.46
98.91
100.00
102.35
104.32
108.34
111.29
115.36
102.40
104.27
104.78
105.83
106.61
107.37
108.76
110.64
110.29
111.55
111.27
112.06
113.63
115.19
114.87
117.76
119.37
119.79
120.65

70.91
68.81
71.46
77.38
77.16
75.85
76.00
84.59
92.84
93.69
90.57
84.21
78.24
76.53
72.77
72.47
72.47
71.63
72.89
74.82
76.63
80.31
84.08
87.13
92.61
95.50
102.79
108.45
112.45
110.41
111.88
114.16
113.80
111.95
107.60
103.71
100.92
100.00
99.62
98.84
101.16
102.42
107.33
96.89
99.72
98.74
100.02
99.17
99.81
101.60
104.03
100.41
104.21
102.27
102.78
105.15
106.70
107.01
110.46
112.46
114.50
115.71

National
defense

Nondefense

88.19
86.49
90.02
95.29
92.88
88.86
87.28
99.90
112.64
114.65
109.24
100.03
89.85
85.39
79.86
77.91
76.96
75.35
75.92
76.51
78.69
81.99
86.98
93.46
99.79
104.57
113.32
120.44
126.10
125.15
124.18
124.15
122.80
116.83
110.57
105.28
101.37
100.00
97.40
95.67
97.71
97.66
102.51
92.99
95.80
97.05
96.85
95.57
95.51
98.70
101.07
95.61
99.00
97.46
98.58
100.56
101.23
102.38
105.87
108.82
110.87
112.74

37.04
34.05
34.98
42.21
46.30
50.33
53.82
54.54
53.98
52.60
53.92
53.09
55.19
58.89
58.70
61.78
63.71
64.45
67.14
71.83
72.89
77.39
78.60
74.35
78.03
76.81
80.97
83.47
83.93
79.57
86.22
93.38
95.10
101.89
101.55
100.52
100.02
100.00
104.15
105.29
108.15
112.06
117.10
104.81
107.68
102.21
106.45
106.50
108.53
107.53
110.06
110.14
114.76
112.04
111.31
114.47
117.76
116.40
119.78
119.91
121.93
121.83

Source: Department of Commerce, Bureau of Economic Analysis.

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State
and
local
31.42
32.79
34.81
35.87
38.04
40.61
43.34
46.08
48.37
51.22
52.71
54.21
55.96
57.18
58.84
60.96
62.99
63.62
63.90
66.08
67.12
67.08
65.75
65.66
66.24
68.73
72.44
76.34
78.13
81.02
84.18
87.73
89.73
91.56
92.88
95.34
97.71
100.00
103.98
107.56
112.59
116.52
120.11
105.67
106.96
108.35
109.26
111.00
111.83
112.98
114.54
116.11
115.88
116.56
117.52
118.63
120.20
119.51
122.09
123.47
122.95
123.62

TABLE B–7.—Chain-type price indexes for gross domestic product, 1959–2002
[Index numbers, 1996=100, except as noted; quarterly data seasonally adjusted]
Personal consumption expenditures

Gross private domestic investment
Fixed investment

Year or
quarter

Gross
domestic
product

Nonresidential
Total

Durable
goods

Nondurable
goods

Services

Total
Total
Total

Structures

Equipment
and
software

Residential

1959 ........................

21.88

21.63

41.97

24.60

16.74

28.78

27.72

32.44

18.48

43.15

18.99

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

22.19
22.43
22.74
22.99
23.34
23.77
24.45
25.21
26.29
27.59

22.00
22.23
22.49
22.75
23.07
23.41
24.02
24.62
25.58
26.74

41.77
41.86
42.05
42.20
42.40
42.03
41.83
42.48
43.89
45.10

24.95
25.10
25.30
25.59
25.92
26.39
27.26
27.91
28.98
30.32

17.19
17.51
17.82
18.07
18.40
18.76
19.29
19.86
20.69
21.73

28.92
28.84
28.87
28.78
28.95
29.42
30.03
30.83
31.99
33.51

27.87
27.78
27.81
27.73
27.90
28.39
28.99
29.81
31.02
32.56

32.59
32.41
32.42
32.43
32.60
32.99
33.49
34.36
35.58
37.07

18.46
18.35
18.50
18.67
18.94
19.49
20.19
20.82
21.87
23.31

43.51
43.28
43.08
42.86
42.84
42.91
43.05
44.03
45.24
46.52

19.12
19.15
19.18
19.02
19.18
19.72
20.44
21.15
22.27
23.81

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

29.05
30.52
31.81
33.60
36.60
40.03
42.29
45.02
48.22
52.24

28.00
29.20
30.22
31.86
35.14
38.01
40.08
42.73
45.78
49.83

46.09
47.77
48.28
48.98
52.08
56.84
59.99
62.61
66.20
70.60

31.82
32.80
33.90
36.56
41.82
45.09
46.83
49.61
52.93
58.50

22.89
24.17
25.22
26.37
28.46
30.80
32.90
35.49
38.31
41.43

34.93
36.69
38.24
40.31
44.33
49.80
52.57
56.51
61.15
66.71

33.96
35.69
37.23
39.30
43.18
48.59
51.42
55.46
60.17
65.65

38.82
40.67
42.08
43.71
47.95
54.55
57.59
61.54
65.69
71.07

24.83
26.74
28.68
30.91
35.15
39.34
41.25
44.81
49.15
54.87

48.25
49.73
50.37
51.25
55.08
63.24
67.02
71.02
74.84
79.67

24.58
26.00
27.58
30.03
33.12
36.20
38.53
42.41
47.61
52.95

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

57.05
62.37
66.26
68.87
71.44
73.69
75.32
77.58
80.22
83.27

55.21
60.08
63.48
66.19
68.63
70.99
72.72
75.49
78.44
81.86

76.54
81.62
84.76
86.38
87.58
88.59
89.69
92.21
93.49
95.14

65.31
70.37
72.34
73.89
75.64
77.30
77.01
79.66
82.34
86.26

45.88
50.58
54.81
58.33
61.35
64.36
67.31
70.20
73.61
77.12

73.01
79.77
83.91
83.73
84.40
85.30
87.19
88.86
90.96
93.22

71.83
78.55
82.91
82.81
83.37
84.45
86.51
88.12
90.48
92.76

77.39
84.93
89.69
88.93
88.83
89.57
91.17
92.01
94.17
96.29

59.97
68.31
73.76
71.82
72.42
74.11
75.54
76.72
79.98
83.10

86.58
92.86
96.60
96.91
96.29
96.28
97.92
98.53
99.95
101.45

58.68
63.47
66.87
68.40
70.37
72.18
75.21
78.29
80.99
83.59

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

........................
........................
........................
........................
........................
........................
........................
........................
........................
.......................

86.53
89.66
91.85
94.05
96.01
98.10
100.00
101.95
103.20
104.69

85.63
88.91
91.62
93.81
95.70
97.90
100.00
101.94
103.03
104.73

96.00
97.39
98.28
99.06
100.56
101.06
100.00
97.75
95.40
93.03

90.98
93.76
95.20
96.15
96.83
97.93
100.00
101.34
101.31
103.69

80.95
84.82
88.50
91.57
94.16
97.25
100.00
103.12
105.53
107.81

95.08
96.46
96.32
97.70
99.11
100.29
100.00
99.80
98.77
98.56

94.70
96.14
96.07
97.46
98.92
100.14
100.00
99.93
99.03
98.87

98.23
99.80
99.29
99.81
100.54
100.93
100.00
99.02
96.95
95.53

85.77
87.32
87.29
90.22
93.50
97.39
100.00
104.23
107.72
109.69

102.93
104.48
103.75
103.24
102.98
102.12
100.00
97.32
93.54
91.18

85.54
86.64
87.69
91.24
94.48
97.91
100.00
102.68
105.58
109.59

2000 .......................
2001 .......................

106.89
109.42

107.39
109.56

91.46
89.70

107.59
109.17

110.85
114.32

99.60
100.76

100.00
101.16

95.59
95.73

114.04
119.76

90.11
88.76

114.40
119.09

1998: I .....................
II ....................
III ...................
IV ...................

102.76
103.02
103.38
103.66

102.58
102.83
103.18
103.54

96.27
95.75
95.11
94.49

101.17
100.99
101.36
101.70

104.62
105.26
105.82
106.41

99.07
98.79
98.64
98.57

99.34
99.05
98.90
98.83

97.75
97.13
96.65
96.27

106.84
107.61
107.97
108.45

94.84
93.80
93.07
92.44

104.28
105.06
106.02
106.95

1999: I .....................
II ....................
III ...................
IV ..................

104.12
104.52
104.84
105.28

103.86
104.44
105.00
105.62

93.69
93.23
92.83
92.37

102.15
103.30
104.18
105.12

106.92
107.45
108.08
108.79

98.63
98.59
98.46
98.58

98.90
98.90
98.79
98.90

96.03
95.67
95.27
95.16

108.82
109.30
109.89
110.76

92.04
91.46
90.80
90.44

108.04
109.23
110.11
110.98

2000: I .....................
II ....................
III ..................
IV ..................

106.08
106.69
107.13
107.68

106.52
107.11
107.67
108.26

91.91
91.74
91.24
90.95

106.49
107.28
108.04
108.53

109.76
110.45
111.16
112.03

99.09
99.38
99.81
100.11

99.46
99.78
100.21
100.54

95.33
95.43
95.73
95.86

112.20
113.31
114.58
116.07

90.27
90.10
90.15
89.91

112.88
113.97
114.85
115.90

2001: I .....................
II ....................
III ..................
IV ..................

108.66
109.32
109.92
109.78

109.15
109.64
109.62
109.84

90.68
89.89
89.29
88.95

109.00
109.80
109.42
108.45

113.43
114.08
114.40
115.39

100.62
100.88
100.79
100.73

100.97
101.27
101.22
101.19

95.96
95.97
95.69
95.31

119.01
120.23
120.14
119.66

89.25
88.93
88.60
88.26

117.49
118.78
119.50
120.60

2002: I .....................
II ....................
III ..................

110.14
110.48
110.76

110.14
110.89
111.36

88.00
87.36
86.94

108.52
109.75
109.92

116.15
117.00
117.88

100.35
100.24
99.96

100.82
100.76
100.52

94.82
94.48
94.17

118.56
118.77
118.89

87.93
87.46
87.04

120.61
121.40
121.38

See next page for continuation of table.

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TABLE B–7.—Chain-type price indexes for gross domestic product, 1959–2002—Continued
[Index numbers, 1996=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
Total
Exports

Imports

Total

State
and
local

NaNontional
defense defense

Percent change 2

Gross domestic
purchases 1
Final
sales
of
domestic
product

Total

Less
food
and
energy

Gross
national
product

Gross domestic
Gross
purdochases 1
mestic
Less
prodfood
uct Total and
energy

1959 .........

28.53

20.95

16.99

17.85

17.76

17.64

16.11

21.72

21.41 ............

21.87

1.1

1.1 ........

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.........
.........
.........
.........
.........
.........
.........
.........
.........
.........

28.88
29.29
29.27
29.22
29.42
30.38
31.32
32.56
33.23
34.29

21.15
21.15
20.90
21.30
21.75
22.06
22.57
22.66
23.00
23.60

17.19
17.51
17.97
18.39
18.90
19.41
20.20
21.05
22.23
23.56

17.98
18.25
18.66
19.12
19.75
20.28
20.96
21.60
22.85
24.08

17.86
18.07
18.44
18.90
19.45
20.01
20.66
21.31
22.50
23.72

17.90
18.48
19.05
19.51
20.45
20.85
21.62
22.22
23.67
24.88

16.41
16.79
17.32
17.70
18.06
18.56
19.48
20.56
21.66
23.11

22.03
22.28
22.59
22.84
23.19
23.62
24.30
25.06
26.15
27.45

21.71
21.94
22.23
22.50
22.85
23.26
23.91
24.61
25.66
26.92

............
............
............
............
............
............
............
............
............
............

22.18
22.43
22.73
22.99
23.33
23.77
24.45
25.20
26.29
27.58

1.4
1.1
1.4
1.1
1.5
1.9
2.8
3.1
4.3
4.9

1.4
1.1
1.3
1.2
1.6
1.8
2.8
2.9
4.3
4.9

........
........
........
........
........
........
........
........
........
........

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.........
.........
.........
.........
.........
.........
.........
.........
.........
.........

35.77
36.98
38.17
43.40
53.68
59.24
61.11
63.58
67.48
75.63

25.00
26.53
28.40
33.34
47.70
51.67
53.22
57.92
62.01
72.62

25.44
27.44
29.49
31.67
34.83
38.28
40.72
43.55
46.37
50.28

25.95
28.20
30.81
32.98
35.80
39.41
42.07
45.33
48.20
51.93

25.43
27.69
30.61
32.91
35.82
39.24
42.02
45.15
48.29
52.19

27.36
29.56
31.17
32.94
35.50
39.57
41.88
45.44
47.68
51.01

25.01
26.79
28.38
30.56
33.94
37.26
39.53
42.05
44.83
48.84

28.91
30.37
31.67
33.45
36.43
39.85
42.12
44.85
48.06
52.07

28.37
29.84
31.17
32.99
36.35
39.69
41.93
44.80
48.02
52.26

............
............
............
............
............
............
............
............
............
............

29.05
30.52
31.81
33.60
36.60
40.03
42.30
45.03
48.24
52.25

5.3
5.0
4.2
5.6
9.0
9.4
5.7
6.4
7.1
8.3

5.4
5.2
4.5
5.8
10.2
9.2
5.7
6.8
7.2
8.8

........
........
........
........
........
........
........
........
........
........

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.........
.........
.........
.........
.........
.........
.........
.........
.........
.........

83.32
89.41
89.83
90.24
91.13
88.70
87.33
89.62
94.39
96.15

90.45
95.32
92.10
88.65
87.89
85.02
85.01
90.02
94.46
96.87

55.80
61.30
65.43
68.08
71.61
73.78
75.08
77.21
79.30
81.89

57.45
63.06
67.53
69.95
74.14
75.67
76.10
77.03
78.82
81.12

57.93
63.71
68.44
70.86
75.95
77.24
77.27
78.01
79.65
81.91

56.01
61.22
65.05
67.48
69.25
71.45
73.06
74.58
76.84
79.26

54.32
59.71
63.57
66.39
69.36
72.07
74.10
77.26
79.60
82.41

56.86
62.16
66.08
68.69
71.25
73.55
75.20
77.44
80.12
83.18

57.79 ............
63.05 ............
66.71 65.18
69.05 67.76
71.46 70.26
73.56 72.56
75.22 74.89
77.70 77.46
80.36 80.29
83.45 83.20

57.06
62.38
66.27
68.89
71.45
73.70
75.33
77.58
80.22
83.28

9.2
9.3
6.2
3.9
3.7
3.2
2.2
3.0
3.4
3.8

10.6 ........
9.1 ........
5.8 ........
3.5 4.0
3.5 3.7
2.9 3.3
2.3 3.2
3.3 3.4
3.4 3.7
3.8 3.6

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.........
.........
.........
.........
.........
.........
.........
.........
.........
.........

96.79
98.10
97.82
97.82
98.94
101.29
100.00
98.47
96.26
95.47

99.43
98.93
99.09
98.18
99.12
101.83
100.00
96.44
91.27
91.34

85.16
88.04
90.11
92.44
94.84
97.56
100.00
102.23
103.72
106.52

83.78
87.18
89.83
92.18
94.51
97.21
100.00
101.63
102.63
105.08

84.57
87.70
90.75
92.45
94.48
96.88
100.00
101.41
102.22
104.45

81.96
86.06
87.72
91.58
94.55
97.90
100.00
102.06
103.42
106.29

86.16
88.64
90.28
92.59
95.04
97.77
100.00
102.58
104.35
107.33

86.46
89.60
91.79
94.00
95.97
98.07
100.00
101.98
103.28
104.79

86.85
89.81
92.03
94.14
96.06
98.20
100.00
101.64
102.43
103.97

86.33
89.43
91.90
94.16
96.22
98.44
100.00
101.64
102.76
104.15

86.54
89.67
91.84
94.06
96.02
98.11
100.00
101.93
103.17
104.65

3.9
3.6
2.4
2.4
2.1
2.2
1.9
1.9
1.2
1.4

4.1
3.4
2.5
2.3
2.0
2.2
1.8
1.6
.8
1.5

3.8
3.6
2.8
2.5
2.2
2.3
1.6
1.6
1.1
1.3

2000 .........
2001 .........

96.83
96.10

95.49
92.70

110.65
113.27

108.23
110.09

107.53
109.27

109.55
111.64

111.98
115.01

107.02
109.55

106.58
108.65

106.12
108.05

106.86
109.39

2.1
2.4

2.5
1.9

1.9
1.8

1998: I ......
II .....
III ...
IV ...

97.08
96.58
95.86
95.52

92.58
91.58
90.48
90.43

103.14
103.46
103.91
104.36

102.14
102.43
102.78
103.15

101.92
101.98
102.37
102.59

102.59
103.29
103.57
104.22

103.72
104.05
104.56
105.05

102.83
103.09
103.46
103.74

102.09
102.26
102.54
102.84

102.32
102.59
102.91
103.23

102.73
102.98
103.34
103.62

1.1
1.0
1.4
1.1

.1
.7
1.1
1.2

.9
1.1
1.3
1.2

1999: I ......
II .....
III ...
IV ...

95.21
95.30
95.48
95.88

89.57
90.65
91.94
93.19

105.20
106.13
106.96
107.78

104.35
104.82
105.37
105.78

103.78
104.16
104.67
105.18

105.43
106.09
106.70
106.94

105.71
106.87
107.86
108.90

104.21
104.62
104.94
105.38

103.19
103.72
104.21
104.77

103.62
103.97
104.29
104.72

104.08
104.48
104.80
105.24

1.8
1.5
1.2
1.7

1.4
2.1
1.9
2.2

1.5
1.4
1.2
1.7

2000: I ......
II .....
III ...
IV ...

96.36
96.84
97.04
97.08

94.69
94.96
96.03
96.26

109.46
110.26
111.07
111.80

107.87
108.05
108.48
108.51

107.09
107.27
107.80
107.96

109.34
109.52
109.77
109.58

110.36
111.50
112.49
113.59

106.19
106.81
107.25
107.81

105.72
106.30
106.87
107.43

105.43
105.93
106.33
106.80

106.05
106.65
107.09
107.64

3.1
2.3
1.6
2.1

3.7
2.2
2.2
2.1

2.7
1.9
1.5
1.7

2001: I ......
II .....
III ...
IV ...

96.87
96.46
96.00
95.06

95.66
94.22
89.93
90.97

112.96
113.47
113.37
113.27

109.73
110.15
110.30
110.18

109.03
109.34
109.51
109.21

111.07
111.68
111.80
111.99

114.73
115.28
115.06
114.97

108.78
109.45
110.05
109.91

108.30
108.76
108.72
108.84

107.56
107.92
108.08
108.62

108.63
109.29
109.89
109.75

3.7
2.5
2.2
−.5

3.3
1.7
−.2
.4

2.9
1.3
.6
2.0

2002: I ......
II .....
III ...

94.88
95.58
96.41

90.61
93.03
94.05

114.27
115.06
115.47

112.42
113.07
113.44

111.14
111.71
112.12

114.79
115.61
115.89

115.29
116.17
116.60

110.28
110.62
110.91

109.15
109.77
110.11

109.01
109.42
109.75

110.11
110.45
110.73

1.3
1.2
1.0

1.2
2.3
1.2

1.4
1.5
1.2

1 Gross

domestic product (GDP) less exports of goods and services plus imports of goods and services.
changes based on unrounded data. Quarterly percent changes are at annual rates.
Source: Department of Commerce, Bureau of Economic Analysis.
2 Percent

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TABLE B–8.—Gross domestic product by major type of product, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Goods

Year or
quarter

Change
Final
in
Gross
sales of
pridomestic domesvate
product
tic
product inventories

Total

Total

Final
sales

Durable goods
Change
in
private
inventories

Final
sales

Change
in
private
inventories 1

Nondurable goods

Final
sales

Change
in
private
inventories 1

Services

Structures

1959 ............................

507.4

503.5

3.9

251.7

247.8

3.9

92.4

2.9

155.5

1.1

193.2

62.5

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

............................
............................
............................
............................
............................
............................
............................
............................
............................
............................

527.4
545.7
586.5
618.7
664.4
720.1
789.3
834.1
911.5
985.3

524.1
542.7
580.4
613.1
659.6
710.9
775.7
824.2
902.4
976.2

3.2
3.0
6.1
5.6
4.8
9.2
13.6
9.9
9.1
9.2

258.0
260.7
281.5
293.2
313.6
343.3
381.7
395.3
428.3
457.7

254.7
257.7
275.4
287.6
308.8
334.1
368.0
385.5
419.2
448.5

3.2
3.0
6.1
5.6
4.8
9.2
13.6
9.9
9.1
9.2

95.2
94.5
104.7
111.5
121.2
134.2
150.2
155.3
169.5
180.9

1.7
−.1
3.4
2.6
3.8
6.2
10.0
4.8
4.5
6.0

159.5
163.2
170.7
176.1
187.6
199.9
217.8
230.2
249.8
267.6

1.6
3.0
2.7
3.0
1.0
3.0
3.6
5.0
4.5
3.2

207.5
221.4
237.2
252.8
272.3
292.1
319.6
349.1
383.2
419.3

61.9
63.6
67.8
72.7
78.4
84.7
88.0
89.6
100.0
108.3

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

............................
............................
............................
............................
............................
............................
............................
............................
............................
............................

1,039.7
1,128.6
1,240.4
1,385.5
1,501.0
1,635.2
1,823.9
2,031.4
2,295.9
2,566.4

1,037.7
1,120.3
1,231.3
1,369.7
1,487.0
1,641.4
1,806.8
2,009.1
2,270.1
2,548.4

2.0
8.3
9.1
15.9
14.0
−6.3
17.1
22.3
25.8
18.0

470.3 468.3
496.1 487.9
542.7 533.6
622.0 606.1
670.9 656.9
724.8 731.1
811.4 794.3
890.7 868.4
1,004.5 978.7
1,128.7 1,110.7

2.0
8.3
9.1
15.9
14.0
−6.3
17.1
22.3
25.8
18.0

183.2
190.2
213.0
245.8
262.1
294.7
329.6
374.6
426.2
487.3

−.2
2.9
6.4
13.0
10.9
−7.5
10.8
9.5
18.2
12.8

285.1
297.6
320.6
360.3
394.9
436.4
464.7
493.8
552.5
623.4

2.2
5.3
2.7
2.9
3.1
1.2
6.3
12.8
7.6
5.2

459.6
504.0
550.8
600.6
664.4
743.6
821.3
913.9
1,019.6
1,127.1

109.7
128.4
146.9
162.9
165.6
166.7
191.2
226.8
271.8
310.6

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

............................
............................
............................
............................
............................
............................
............................
............................
............................
............................

2,795.6
3,131.3
3,259.2
3,534.9
3,932.7
4,213.0
4,452.9
4,742.5
5,108.3
5,489.1

2,801.9
3,101.5
3,274.1
3,540.7
3,867.3
4,191.2
4,446.3
4,715.3
5,089.8
5,461.4

−6.3
29.8
−14.9
−5.8
65.4
21.8
6.6
27.1
18.5
27.7

1,207.6
1,362.8
1,354.6
1,452.1
1,637.0
1,702.7
1,758.2
1,853.5
2,000.0
2,175.3

1,213.9
1,333.0
1,369.6
1,457.8
1,571.6
1,680.9
1,751.7
1,826.4
1,981.5
2,147.6

−6.3
29.8
−14.9
−5.8
65.4
21.8
6.6
27.1
18.5
27.7

518.0
564.5
566.1
611.8
686.6
750.0
781.5
809.9
886.4
963.8

−2.3
7.3
−16.0
2.5
41.4
4.4
−1.9
22.9
22.7
20.0

695.9
768.5
803.4
846.1
885.0
930.9
970.2
1,016.5
1,095.1
1,183.8

−4.0
22.5
1.1
−8.2
24.0
17.4
8.4
4.2
−4.3
7.7

1,268.9
1,418.6
1,562.6
1,716.1
1,872.2
2,054.0
2,217.2
2,399.6
2,599.5
2,792.8

319.1
350.0
342.0
366.8
423.6
456.3
477.4
489.3
508.8
521.0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

............................
............................
............................
............................
............................
............................
............................
............................
............................
............................

5,803.2
5,986.2
6,318.9
6,642.3
7,054.3
7,400.5
7,813.2
8,318.4
8,781.5
9,274.3

5,788.7
5,986.4
6,303.9
6,621.2
6,991.8
7,367.5
7,783.2
8,255.5
8,708.4
9,214.8

14.5
−.2
15.0
21.1
62.6
33.0
30.0
62.9
73.1
59.5

2,266.4
2,296.1
2,391.4
2,503.2
2,680.2
2,798.1
2,951.3
3,145.4
3,305.4
3,473.4

2,251.9
2,296.3
2,376.4
2,482.1
2,617.6
2,765.1
2,921.3
3,082.5
3,232.3
3,413.9

14.5
−.2
15.0
21.1
62.6
33.0
30.0
62.9
73.1
59.5

994.3
988.3
1,029.4
1,090.7
1,161.6
1,239.8
1,331.9
1,436.2
1,524.4
1,612.1

7.7
−13.6
−3.0
17.1
35.7
33.6
19.1
33.1
44.6
37.5

1,257.6
1,308.0
1,346.9
1,391.4
1,456.0
1,525.3
1,589.4
1,646.3
1,707.9
1,801.7

6.8
13.4
18.0
4.0
26.8
−.5
10.9
29.8
28.5
22.0

3,010.8
3,203.9
3,416.0
3,593.5
3,782.6
3,985.1
4,191.0
4,442.0
4,678.6
4,947.1

526.0
486.2
511.5
545.6
591.6
617.3
670.9
730.9
797.5
853.8

2000 ............................ 9,824.6 9,761.1
2001 ............................ 10,082.2 10,142.5

63.6
−60.3

3,651.0 3,587.4
3,593.7 3,654.0

63.6 1,690.9
−60.3 1,676.4

44.1
−65.0

1,896.5
1,977.6

19.4
4.7

5,259.2
5,535.1

914.5
953.3

1998: I .........................
II ........................
III .......................
IV ......................

8,627.8
8,697.3
8,816.5
8,984.5

8,521.1
8,656.4
8,747.0
8,909.1

106.7
40.9
69.5
75.4

3,282.8
3,248.7
3,297.1
3,393.2

3,176.1
3,207.8
3,227.5
3,317.8

106.7
40.9
69.5
75.4

1,495.1
1,513.8
1,516.2
1,572.4

66.2
22.0
40.8
49.6

1,680.9
1,694.0
1,711.4
1,745.4

40.5
19.0
28.7
25.8

4,579.9
4,659.0
4,710.5
4,764.8

765.1
789.5
808.9
826.5

1999: I .........................
II ........................
III .......................
IV .......................

9,092.7
9,171.7
9,316.5
9,516.4

9,018.0
9,144.0
9,269.7
9,427.5

74.7
27.7
46.8
88.9

3,406.8
3,420.7
3,483.5
3,582.6

3,332.1
3,393.0
3,436.7
3,493.7

74.7
27.7
46.8
88.9

1,568.6
1,601.9
1,632.4
1,645.5

44.6
12.2
35.4
57.8

1,763.5
1,791.1
1,804.3
1,848.1

30.1
15.5
11.4
31.1

4,841.5
4,902.0
4,982.3
5,062.6

844.4
849.0
850.8
871.2

2000: I .........................
II ........................
III ......................
IV .......................

9,649.5
9,820.7
9,874.8
9,953.6

9,602.6
9,731.5
9,813.6
9,896.6

46.8
89.2
61.1
57.1

3,604.0
3,676.0
3,672.1
3,651.7

3,557.2
3,586.8
3,611.0
3,594.7

46.8
89.2
61.1
57.1

1,684.3
1,695.5
1,708.4
1,675.5

35.7
63.6
33.2
44.0

1,872.8
1,891.3
1,902.6
1,919.2

11.1
25.6
28.0
13.1

5,138.5
5,236.0
5,288.3
5,373.9

907.0
908.7
914.4
927.9

2001: I .........................
II ........................
III ......................
IV ......................

10,028.1
10,049.9
10,097.7
10,152.9

10,055.3
10,107.0
10,158.3
10,249.4

−27.2
−57.1
−60.6
−96.5

3,619.1
3,578.9
3,568.6
3,599.1

3,646.3
3,645.0
3,629.2
3,695.5

−27.2
−57.1
−60.6
−96.5

1,697.3
1,671.5
1,647.9
1,689.1

−37.2
−62.8
−65.2
−95.0

1,949.1
1,973.5
1,981.3
2,006.4

10.0
5.6
4.7
−1.5

5,450.6
5,497.4
5,579.4
5,613.1

958.4
964.6
949.7
940.7

2002: I .........................
II ........................
III .......................

10,313.1 10,343.0
10,376.9 10,373.5
10,506.2 10,488.7

−29.9
3.4
17.6

3,664.2 3,694.1
3,659.1 3,655.7
3,732.7 3,715.2

−29.9 1,641.5
3.4 1,616.8
17.6 1,678.3

−20.3
−4.8
4.8

2,052.6
2,038.9
2,036.9

−9.7
8.2
12.7

5,696.6
5,781.5
5,849.7

952.3
936.3
923.8

1 Estimates for durable and nondurable goods for 1997 and earlier periods are based on the Standard Industrial Classification (SIC); later
estimates are based on the North American Industry Classification System (NAICS).

Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–9.—Real gross domestic product by major type of product, 1959–2002
[Billions of chained (1996) dollars; quarterly data at seasonally adjusted annual rates]
Goods

Year or
quarter

Change
Final
in
Gross
sales of
pridomestic domesvate
product
tic
product inventories

Total

Durable goods

Final
sales

Total

Change
in
private
inventories

Final
sales

Change
in
private
inventories 1

Nondurable goods

Final
sales

Change
in
private
inventories 1

764.7 .............. ............ .............. ............ .............. ............

Services

Structures

1959 ........................

2,319.0

2,317.4

12.1

1,222.2

340.6

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

2,376.7
2,432.0
2,578.9
2,690.4
2,846.5
3,028.5
3,227.5
3,308.3
3,466.1
3,571.4

2,378.5
2,435.5
2,569.5
2,683.6
2,844.1
3,008.5
3,191.1
3,288.2
3,450.0
3,555.9

10.9
9.5
19.6
18.4
15.1
30.6
42.8
31.7
28.4
27.4

777.1
780.6
837.0
866.1
919.2
994.9
1,083.4
1,095.2
1,146.7
1,180.6

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............

1,279.7
1,337.4
1,400.7
1,465.7
1,541.4
1,613.8
1,705.9
1,795.9
1,876.5
1,943.9

337.4
346.8
366.6
391.3
417.7
438.6
439.2
432.7
459.3
465.2

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

3,578.0
3,697.7
3,898.4
4,123.4
4,099.0
4,084.4
4,311.7
4,511.8
4,760.6
4,912.1

3,588.6
3,688.1
3,887.7
4,094.3
4,080.7
4,118.5
4,288.8
4,478.8
4,722.9
4,894.4

4.4
23.9
23.7
35.6
25.0
−9.4
32.5
40.8
44.1
26.1

1,166.5
1,194.3
1,280.1
1,395.0
1,378.5
1,357.9
1,453.8
1,524.1
1,621.8
1,686.1

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

............
............
............
............
............
............
............
............
............
............

1,999.0
2,056.8
2,123.2
2,199.5
2,259.6
2,327.5
2,403.5
2,483.1
2,577.9
2,642.9

445.1
486.4
522.4
533.7
478.4
435.0
475.9
521.1
567.1
582.7

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

4,900.9
5,021.0
4,919.3
5,132.3
5,505.2
5,717.1
5,912.4
6,113.3
6,368.4
6,591.8

4,928.1
4,989.5
4,954.9
5,154.5
5,427.9
5,698.8
5,912.6
6,088.8
6,352.6
6,565.4

−10.5
37.9
−15.6
−9.7
76.1
27.1
9.6
29.6
18.4
29.6

1,677.0
1,753.6
1,678.4
1,754.8
1,941.1
1,990.0
2,057.5
2,136.3
2,255.3
2,379.6

..............
..............
..............
..............
..............
..............
..............
2,112.2
2,239.0
2,353.6

............
............
............
............
............
............
............
29.6
18.4
29.6

..............
..............
..............
..............
..............
..............
..............
837.8
919.1
982.7

............
............
............
............
............
............
............
25.0
23.9
20.6

..............
..............
..............
..............
..............
..............
..............
1,285.3
1,325.4
1,374.2

............
............
............
............
............
............
............
3.1
−6.9
8.7

2,695.2
2,733.9
2,780.7
2,877.3
2,968.4
3,107.7
3,227.9
3,354.6
3,485.3
3,584.9

541.4
533.5
487.8
524.3
595.2
626.1
635.2
631.1
632.8
626.5

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

6,707.9
6,676.4
6,880.0
7,062.6
7,347.7
7,543.8
7,813.2
8,159.5
8,508.9
8,859.0

6,695.6
6,681.5
6,867.7
7,043.8
7,285.8
7,512.2
7,783.2
8,095.2
8,431.8
8,793.9

16.5
−1.0
17.1
20.0
66.8
30.4
30.0
63.8
76.7
62.8

2,404.2
2,372.7
2,455.0
2,548.2
2,708.3
2,813.8
2,951.3
3,145.9
3,332.3
3,510.3

2,391.1
2,375.6
2,441.5
2,528.5
2,647.0
2,782.3
2,921.3
3,081.3
3,254.5
3,445.2

16.5
−1.0
17.1
20.0
66.8
30.4
30.0
63.8
76.7
62.8

1,000.0
976.8
1,018.0
1,076.5
1,144.2
1,231.8
1,331.9
1,457.5
1,585.3
1,714.5

7.9
−14.0
−2.9
17.7
35.9
33.3
19.1
33.4
46.5
39.9

1,394.2
1,403.6
1,427.2
1,454.4
1,504.4
1,551.0
1,589.4
1,624.4
1,671.7
1,736.1

8.6
13.5
20.6
2.0
30.8
−3.6
10.9
30.4
29.6
22.8

3,692.3
3,752.1
3,847.3
3,916.8
4,010.3
4,097.5
4,191.0
4,307.6
4,431.0
4,577.6

614.8
559.5
584.9
602.5
630.7
632.9
670.9
706.9
748.7
777.2

2000 ........................
2001 ........................

9,191.4
9,214.5

9,121.1
9,258.4

65.0
−61.4

3,674.3
3,589.9

3,603.7
3,643.3

65.0
−61.4

1,821.1
1,823.9

46.0
−67.9

1,791.2
1,825.6

19.5
4.8

4,728.9
4,826.4

797.9
797.1

1998: I .....................
II ....................
III ...................
IV ..................

8,396.3
8,442.9
8,528.5
8,667.9

8,286.6
8,397.2
8,454.9
8,588.5

113.1
42.0
71.8
80.0

3,300.7
3,275.1
3,324.4
3,429.0

3,189.1
3,229.9
3,250.2
3,348.9

113.1
42.0
71.8
80.0

1,540.9
1,569.4
1,580.7
1,650.4

69.9
22.5
41.4
52.2

1,650.0
1,662.7
1,671.8
1,702.3

40.9
19.5
30.3
27.5

4,373.4
4,424.8
4,449.3
4,476.7

725.9
744.3
757.0
767.6

1999: I .....................
II ....................
III ...................
IV ..................

8,733.2
8,775.5
8,886.9
9,040.1

8,654.3
8,741.0
8,833.6
8,946.6

80.0
31.2
47.6
92.2

3,441.1
3,453.7
3,522.7
3,623.6

3,361.5
3,420.9
3,470.1
3,528.3

80.0
31.2
47.6
92.2

1,657.4
1,698.8
1,740.9
1,760.8

47.2
14.2
37.2
61.0

1,707.9
1,727.1
1,735.9
1,773.4

32.6
16.9
10.5
31.4

4,518.0
4,550.3
4,598.9
4,643.2

778.3
775.5
771.7
783.4

2000: I .....................
II ....................
III ..................
IV ..................

9,097.4
9,205.7
9,218.7
9,243.8

9,042.9
9,111.1
9,150.4
9,179.8

45.3
91.5
63.1
59.9

3,636.7
3,698.1
3,693.9
3,668.7

3,583.0
3,601.4
3,625.6
3,604.8

45.3
91.5
63.1
59.9

1,811.5
1,826.2
1,840.4
1,806.1

36.1
66.4
35.4
46.2

1,780.1
1,784.5
1,794.9
1,805.4

9.6
25.9
27.9
14.5

4,666.2
4,722.9
4,741.7
4,784.8

803.7
796.5
794.0
797.3

2001: I .....................
II ....................
III ..................
IV ..................

9,229.9
9,193.1
9,186.4
9,248.8

9,243.8
9,234.3
9,230.5
9,324.9

−26.9
−58.3
−61.8
−98.4

3,627.2
3,574.1
3,560.3
3,598.2

3,647.8
3,624.5
3,613.8
3,686.8

−26.9
−58.3
−61.8
−98.4

1,839.0
1,816.8
1,796.1
1,843.8

−38.1
−65.7
−68.5
−99.3

1,817.0
1,814.4
1,821.9
1,849.1

9.8
5.1
4.9
−.8

4,795.6
4,809.7
4,830.9
4,869.1

809.2
806.7
791.8
780.5

2002: I .....................
II ....................
III ..................

9,363.2
9,392.4
9,485.6

9,379.4
9,377.9
9,457.2

−28.9
4.9
18.8

3,670.8
3,674.4
3,754.8

3,693.4
3,663.0
3,728.1

−28.9
4.9
18.8

1,801.6
1,787.6
1,864.6

−20.3
−4.4
5.0

1,890.7
1,874.5
1,870.2

−8.8
9.0
13.6

4,903.2
4,945.5
4,976.4

792.1
774.9
764.0

1 Estimates for durable and nondurable goods for 1997 and earlier periods are based on the Standard Industrial Classification (SIC); later
estimates are based on the North American Industry Classification System (NAICS).

Source: Department of Commerce, Bureau of Economic Analysis.

289

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04:41 Jan 30, 2003

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ECONO

TABLE B–10.—Gross domestic product by sector, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Business 1
Year or
quarter

Gross
domestic
product

Total
Total 1

Nonfarm
less
housing

General government 2

Households and institutions

Nonfarm 1
Farm

Housing

Total

Private
households

Nonprofit
institutions

Total

Federal

State
and
local

1959 ...............

507.4

436.6

417.7

382.1

35.6

18.9

12.4

3.6

8.9

58.4

32.0

26.5

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

...............
...............
...............
...............
...............
...............
...............
...............
...............
...............

527.4
545.7
586.5
618.7
664.4
720.1
789.3
834.1
911.5
985.3

451.3
465.1
500.0
526.3
565.2
613.9
671.0
703.4
766.1
825.4

431.5
445.0
479.8
506.0
546.0
592.1
648.2
681.1
743.4
800.2

392.9
403.6
435.2
458.5
495.8
538.5
591.2
620.3
678.6
730.3

38.6
41.4
44.6
47.4
50.2
53.5
57.0
60.8
64.8
69.9

19.8
20.1
20.2
20.4
19.3
21.9
22.9
22.2
22.7
25.2

13.9
14.5
15.6
16.7
17.9
19.3
21.3
23.4
26.1
29.5

3.8
3.7
3.8
3.8
3.9
4.0
4.0
4.2
4.4
4.4

10.1
10.7
11.8
12.8
14.0
15.3
17.2
19.2
21.7
25.0

62.1
66.1
70.9
75.7
81.3
86.8
97.0
107.3
119.3
130.5

33.2
34.5
36.7
38.6
40.9
42.6
47.4
51.8
56.7
60.5

28.9
31.6
34.2
37.1
40.4
44.2
49.6
55.5
62.5
70.0

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

...............
...............
...............
...............
...............
...............
...............
...............
...............
...............

1,039.7
1,128.6
1,240.4
1,385.5
1,501.0
1,635.2
1,823.9
2,031.4
2,295.9
2,566.4

863.1
935.7
1,030.0
1,156.8
1,250.5
1,356.8
1,521.6
1,702.8
1,937.3
2,174.9

836.9
907.6
997.3
1,107.1
1,203.1
1,308.1
1,475.1
1,655.6
1,882.5
2,110.5

761.9
825.9
908.6
1,010.1
1,097.2
1,193.8
1,350.1
1,516.2
1,726.7
1,934.4

74.9
81.7
88.7
96.9
105.9
114.3
125.0
139.4
155.8
176.1

26.2
28.1
32.6
49.8
47.4
48.8
46.4
47.2
54.7
64.5

32.4
35.6
38.9
43.0
47.1
52.0
57.1
62.4
69.7
77.3

4.5
4.6
4.6
4.8
4.6
4.6
5.4
5.9
6.5
6.4

27.9
31.0
34.3
38.2
42.6
47.3
51.6
56.4
63.2
70.9

144.2
157.3
171.5
185.7
203.4
226.4
245.3
266.2
288.9
314.2

64.7
68.6
73.6
76.4
81.6
89.1
95.6
103.6
111.0
118.7

79.5
88.7
97.9
109.3
121.8
137.2
149.7
162.7
177.9
195.5

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

...............
...............
...............
...............
...............
...............
...............
...............
...............
...............

2,795.6
3,131.3
3,259.2
3,534.9
3,932.7
4,213.0
4,452.9
4,742.5
5,108.3
5,489.1

2,358.8
2,647.3
2,729.8
2,968.1
3,313.9
3,546.8
3,740.9
3,976.0
4,281.2
4,600.9

2,302.7
2,577.4
2,664.6
2,918.9
3,245.3
3,479.7
3,678.0
3,910.9
4,217.4
4,524.7

2,097.6
2,342.2
2,405.2
2,642.2
2,942.8
3,147.4
3,318.9
3,523.9
3,799.0
4,074.5

205.1
235.2
259.4
276.7
302.6
332.3
359.0
387.0
418.4
450.2

56.1
69.9
65.1
49.2
68.5
67.1
63.0
65.1
63.8
76.2

87.1
97.6
108.2
119.2
131.2
141.0
153.7
173.3
195.1
214.6

6.1
6.2
6.3
6.3
7.3
7.3
7.7
7.7
8.3
8.9

81.0
91.4
102.0
112.9
123.9
133.6
146.0
165.6
186.8
205.7

349.7
386.5
421.2
447.7
487.7
525.3
558.2
593.1
632.0
673.6

132.1
148.3
163.1
173.0
194.0
206.3
213.9
224.5
235.9
247.6

217.5
238.2
258.1
274.7
293.7
319.1
344.3
368.7
396.2
426.0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

...............
...............
...............
...............
...............
...............
...............
..............
...............
...............

5,803.2
5,986.2
6,318.9
6,642.3
7,054.3
7,400.5
7,813.2
8,318.4
8,781.5
9,274.3

4,842.0
4,962.4
5,242.1
5,518.0
5,886.6
6,190.1
6,556.0
7,010.5
7,418.0
7,847.7

4,762.4
4,889.2
5,161.6
5,444.4
5,803.0
6,116.9
6,463.8
6,922.2
7,337.4
7,772.5

4,281.1
4,381.3
4,626.2
4,895.5
5,218.3
5,499.4
5,820.9
6,255.6
6,631.8
7,018.9

481.3
507.9
535.4
548.9
584.7
617.5
642.8
666.7
705.6
753.6

79.6
73.2
80.5
73.6
83.6
73.2
92.2
88.3
80.6
75.2

237.9
257.5
279.5
297.0
313.3
330.3
348.6
363.2
383.8
403.1

9.4
9.1
10.1
10.7
11.1
11.9
12.0
12.0
14.0
12.7

228.6
248.4
269.4
286.3
302.2
318.4
336.5
351.2
369.8
390.4

723.3
766.3
797.3
827.3
854.5
880.1
908.7
944.6
979.8
1,023.5

259.7
275.8
282.8
287.0
287.4
286.8
292.0
295.4
298.6
307.6

463.6
490.4
514.5
540.3
567.0
593.3
616.7
649.2
681.2
715.9

2000 ...............
2001 ...............

9,824.6
10,082.2

8,311.4
8,482.7

8,233.6
8,402.1

7,435.9
7,571.1

797.8
831.1

77.8
80.6

431.1
459.6

13.6
11.9

417.5
447.7

1,082.1
1,139.8

323.4
332.8

758.7
807.0

1998: I ............
II ...........
III ..........
IV ..........
1999: I ............
II ...........
III ..........
IV ..........

8,627.8
8,697.3
8,816.5
8,984.5
9,092.7
9,171.7
9,316.5
9,516.4

7,287.6
7,341.7
7,444.5
7,598.0
7,688.5
7,751.5
7,886.0
8,064.8

7,206.1
7,261.1
7,365.1
7,517.2
7,608.9
7,674.6
7,813.7
7,992.9

6,522.5
6,561.5
6,649.9
6,793.2
6,871.8
6,928.0
7,054.1
7,221.7

683.6
699.6
715.3
724.0
737.1
746.6
759.5
771.2

81.4
80.6
79.4
80.9
79.6
76.9
72.4
71.9

375.0
381.3
387.0
391.8
395.8
402.8
401.9
412.1

13.5
14.1
14.3
14.1
13.2
12.7
12.4
12.5

361.5
367.2
372.8
377.7
382.5
390.1
389.5
399.6

965.2
974.3
984.9
994.7
1,008.4
1,017.4
1,028.6
1,039.5

296.0
297.1
299.6
301.5
307.3
307.1
308.3
307.6

669.2
677.2
685.4
693.2
701.1
710.3
720.3
731.8

2000: I ............
II ...........
III .........
IV ..........

9,649.5
9,820.7
9,874.8
9,953.6

8,164.3
8,313.0
8,352.3
8,416.1

8,090.8
8,232.7
8,274.6
8,336.4

7,306.8
7,441.3
7,472.0
7,523.4

784.0
791.4
802.6
813.0

73.5
80.3
77.8
79.7

420.9
426.2
435.4
441.8

13.6
13.7
13.6
13.4

407.4
412.5
421.8
428.4

1,064.3
1,081.5
1,087.0
1,095.7

321.3
328.0
323.1
321.1

743.0
753.4
763.9
774.6

2001: I ............
II ...........
III .........
IV ..........

10,028.1
10,049.9
10,097.7
10,152.9

8,461.6
8,459.5
8,484.6
8,525.2

8,328.3
8,379.9
8,402.7
8,443.7

7,567.1
7,549.3
7,566.4
7,601.5

815.2
830.6
836.3
842.1

79.3
79.7
81.9
81.6

449.2
457.7
465.1
466.6

12.9
12.3
11.6
10.7

436.2
445.3
453.5
455.9

1,117.4
1,132.6
1,148.0
1,161.1

330.5
332.7
333.7
334.3

786.8
800.0
814.3
826.8

2002: I ............
II ...........
III ..........

10,313.1
10,376.9
10,506.2

8,656.2
8,700.1
8,808.6

8,567.6
8,631.5
8,731.3

7,712.8
7,757.5
7,862.0

854.8
874.1
869.2

88.6
68.6
77.4

472.5
481.4
490.5

10.5
10.7
10.8

462.0
470.8
479.7

1,184.4
1,195.3
1,207.1

350.1
354.1
357.7

834.3
841.3
849.3

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.

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TABLE B–11.—Real gross domestic product by sector, 1959–2002
[Billions of chained (1996) dollars; quarterly data at seasonally adjusted annual rates]
Business 1
Year or
quarter

Gross
domestic
product

Total
Total 1

Nonfarm
less
housing

General government 2

Households and institutions

Nonfarm 1
Farm

Housing

Total

Private
households

Nonprofit
institutions

Total

Federal

State
and
local

1959 ...........

2,319.0

1,788.0

1,738.5

1,567.3

167.8

40.2

115.6

22.6

86.1

460.3

250.4

211.1

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

2,376.7
2,432.0
2,578.9
2,690.4
2,846.5
3,028.5
3,227.5
3,308.3
3,466.1
3,571.4

1,827.9
1,868.1
1,988.1
2,079.0
2,209.0
2,362.0
2,520.3
2,572.3
2,699.7
2,783.4

1,775.1
1,815.5
1,938.9
2,029.0
2,163.6
2,314.5
2,478.3
2,525.7
2,657.6
2,740.2

1,593.4
1,624.0
1,734.8
1,814.4
1,938.2
2,076.0
2,227.5
2,263.6
2,384.8
2,455.9

179.2
189.8
202.2
212.7
222.9
235.5
246.9
259.2
269.3
281.4

42.2
42.5
41.7
42.9
41.5
43.8
42.4
45.2
43.7
44.9

123.5
124.4
129.0
132.1
135.9
140.8
146.0
150.8
155.3
160.3

22.8
22.1
21.9
21.6
21.4
20.7
19.9
20.0
19.0
18.0

94.1
96.1
101.0
104.7
108.9
115.0
121.5
126.3
132.2
138.7

476.3
493.3
512.6
527.8
545.7
564.0
599.4
631.5
656.5
673.6

255.3
260.8
271.7
274.1
276.6
278.4
296.8
316.4
322.1
323.5

222.3
233.7
242.3
254.9
270.2
286.6
303.7
316.4
335.4
350.7

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

3,578.0
3,697.7
3,898.4
4,123.4
4,099.0
4,084.4
4,311.7
4,511.8
4,760.6
4,912.1

2,788.7
2,897.9
3,085.6
3,295.5
3,261.1
3,235.1
3,446.7
3,629.7
3,855.5
3,992.1

2,743.0
2,850.0
3,040.7
3,256.4
3,223.9
3,177.1
3,397.0
3,577.7
3,810.5
3,940.8

2,451.5
2,546.7
2,721.5
2,921.0
2,874.6
2,825.8
3,033.3
3,200.8
3,412.5
3,523.2

289.7
301.7
316.6
331.4
349.1
353.1
362.1
373.4
393.4
414.4

46.3
48.4
48.3
48.1
47.0
55.5
53.3
56.0
54.1
58.3

158.8
162.3
166.9
170.9
172.2
177.7
179.8
185.0
188.4
192.5

16.9
16.1
15.6
15.2
13.1
12.3
12.7
12.9
13.3
11.8

138.7
143.3
148.6
153.2
157.1
163.8
165.4
170.4
173.3
179.5

676.4
678.0
677.6
680.5
693.7
704.4
709.9
716.4
729.8
737.2

310.0
296.4
282.9
272.7
271.4
269.5
269.4
269.2
272.3
271.7

366.2
381.2
394.5
408.1
422.9
435.8
441.5
448.3
458.7
466.9

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

4,900.9
5,021.0
4,919.3
5,132.3
5,505.2
5,717.1
5,912.4
6,113.3
6,368.4
6,591.8

3,969.1
4,077.9
3,970.0
4,168.3
4,518.2
4,700.4
4,865.0
5,035.9
5,251.5
5,440.1

3,921.0
4,005.4
3,892.4
4,125.4
4,454.1
4,620.5
4,788.7
4,958.5
5,183.8
5,362.5

3,482.7
3,551.6
3,436.5
3,662.2
3,970.0
4,120.1
4,278.6
4,433.0
4,640.7
4,801.5

441.8
459.3
465.3
468.3
486.4
502.4
511.2
526.3
543.5
561.4

56.5
72.6
75.7
50.5
67.4
80.7
77.5
78.8
70.2
79.5

198.1
202.6
208.4
213.0
218.2
224.9
236.0
247.8
265.5
279.8

10.4
9.7
9.3
9.2
10.4
10.1
10.4
10.2
10.6
11.1

187.0
192.6
199.0
203.8
207.6
214.7
225.5
237.6
254.8
268.6

747.4
751.4
758.6
763.2
772.4
794.3
813.7
831.4
852.8
873.0

275.7
279.8
283.9
290.2
296.5
304.7
309.9
318.0
321.8
325.6

473.2
473.0
476.0
474.1
476.9
490.6
504.8
514.5
532.1
548.5

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

...........
...........
...........
...........
...........
...........
...........
...........
...........
..........

6,707.9
6,676.4
6,880.0
7,062.6
7,347.7
7,543.8
7,813.2
8,159.5
8,508.9
8,859.0

5,523.5
5,475.7
5,668.9
5,838.3
6,111.8
6,295.9
6,556.0
6,881.8
7,208.9
7,542.5

5,440.8
5,391.6
5,575.3
5,753.4
6,013.7
6,210.3
6,463.8
6,778.9
7,107.7
7,434.4

4,869.5
4,806.6
4,976.6
5,154.3
5,392.4
5,574.2
5,820.9
6,130.0
6,443.3
6,743.0

571.8
586.4
599.8
599.5
621.6
636.2
642.8
649.0
664.7
691.9

84.2
85.6
95.7
85.8
100.3
85.5
92.2
103.6
100.3
108.1

291.5
300.9
308.6
319.7
330.9
341.5
348.6
360.5
371.9
379.2

11.4
10.5
11.3
11.7
11.8
12.2
12.0
11.7
13.3
11.7

280.1
290.4
297.3
308.0
319.1
329.3
336.5
348.8
358.6
367.5

895.1
903.6
904.9
906.2
905.6
906.7
908.7
917.3
928.8
939.0

331.4
333.3
326.2
319.7
309.9
299.1
292.0
287.9
286.2
285.2

564.7
571.2
579.4
587.1
596.1
607.7
616.7
629.3
642.5
653.7

2000 ..........
2001 ..........

9,191.4
9,214.5

7,846.8
7,838.3

7,729.2
7,724.7

7,019.1
7,012.9

711.0
712.6

120.5
114.3

388.9
398.7

12.0
10.1

376.9
388.7

958.6
978.5

289.4
291.3

669.0
687.0

1998: I ........
II .......
III ......
IV ......

8,396.3
8,442.9
8,528.5
8,667.9

7,105.2
7,145.7
7,224.7
7,359.8

7,004.5
7,046.4
7,123.1
7,256.8

6,352.5
6,384.3
6,452.3
6,583.9

652.3
662.3
670.9
673.5

100.0
98.1
100.8
102.1

368.7
370.7
373.2
375.1

13.0
13.4
13.5
13.2

355.7
357.3
359.7
361.8

922.9
926.9
931.3
934.0

285.8
285.9
286.5
286.7

637.0
641.0
644.7
647.2

1999: I ........
II .......
III ......
IV .....

8,733.2
8,775.5
8,886.9
9,040.1

7,422.4
7,462.6
7,568.7
7,716.3

7,317.8
7,353.6
7,460.4
7,605.8

6,636.3
6,666.3
6,764.8
6,904.6

682.0
687.7
696.0
701.9

104.0
110.1
108.0
110.3

376.2
377.9
379.7
382.8

12.3
11.7
11.4
11.4

363.9
366.2
368.3
371.4

935.7
936.3
940.3
943.6

287.0
285.1
284.8
283.8

648.6
651.1
655.3
659.7

2000: I ........
II .......
III .....
IV .....

9,097.4
9,205.7
9,218.7
9,243.8

7,761.8
7,860.1
7,872.6
7,892.5

7,645.7
7,742.6
7,752.4
7,776.1

6,940.4
7,035.1
7,040.2
7,060.7

706.2
708.6
713.2
716.2

118.9
120.3
124.6
118.2

386.1
387.6
389.5
392.2

12.2
12.1
12.0
11.7

373.9
375.5
377.6
380.6

952.0
960.9
959.5
962.0

287.6
293.7
288.8
287.7

664.3
667.1
670.6
674.2

2001: I ........
II .......
III .....
IV .....

9,229.9
9,193.1
9,186.4
9,248.8

7,869.2
7,821.3
7,803.4
7,859.4

7,755.0
7,710.8
7,693.9
7,739.2

7,044.4
6,994.0
6,980.8
7,032.2

711.6
717.1
713.5
708.3

114.9
109.5
108.3
124.4

394.9
398.6
400.4
401.0

11.1
10.6
9.8
9.0

383.9
388.1
390.6
392.0

968.0
974.3
982.9
988.9

290.6
291.1
291.6
292.0

677.2
683.0
691.0
696.5

2002: I ........
II .......
III .....

9,363.2
9,392.4
9,485.6

7,966.9
7,989.2
8,075.1

7,849.1
7,876.8
7,961.0

7,140.4
7,157.0
7,252.6

710.9
721.0
711.7

119.8
110.8
112.9

403.4
406.4
409.0

8.7
8.8
8.9

394.8
397.7
400.3

994.3
998.1
1,003.2

294.3
296.0
298.5

699.7
701.7
704.4

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.

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TABLE B–12.—Gross domestic product by industry, 1959–2001
[Billions of dollars]
Private industries
Gross
domestic
product

Year

Based on 1972 SIC:
1959 .........................

Total
private
industries

Agriculture,
forestry,
and
fishing

Mining

TransFiportanance,
Con- Manu- tion Whole- Retail insurstruc- facand
sale
ance,
tion turing public trade trade
and
utilireal
ties
estate

Services

Statis- Governtical
ment
discrepancy 1

507.4

442.1

20.3

12.6

23.6

140.3

45.3

35.7

49.5

65.5

48.4

0.8

65.3

1960
1961
1962
1963
1964

.........................
.........................
.........................
.........................
.........................

527.4
545.7
586.5
618.7
664.4

457.9
472.0
507.6
533.9
573.4

21.4
21.7
22.1
22.3
21.4

13.0
13.1
13.3
13.6
14.0

24.1
25.1
26.9
28.8
31.4

142.5
143.0
156.8
166.2
178.1

47.5
49.1
52.2
55.1
58.6

37.4
38.4
41.0
42.8
46.0

50.7
52.0
55.7
58.2
63.9

70.3
74.7
79.5
83.8
89.5

51.6
55.0
59.4
63.5
69.2

−.6
−.2
.7
−.4
1.2

69.5
73.7
79.0
84.8
90.9

1965
1966
1967
1968
1969

.........................
.........................
.........................
.........................
.........................

720.1
789.3
834.1
911.5
985.3

623.0
681.6
715.5
779.4
841.1

24.2
25.4
24.9
25.7
28.5

14.2
14.8
15.3
16.4
17.3

34.5
37.6
39.4
43.1
48.3

196.6
215.8
221.3
241.8
254.6

62.7
67.6
70.9
76.8
83.1

49.7
54.1
57.5
63.1
68.3

68.4
73.1
78.7
87.1
94.6

96.0
103.9
111.6
121.5
132.3

74.8
82.8
91.0
99.7
111.1

1.9
6.4
4.8
4.3
2.9

97.1
107.7
118.6
132.0
144.3

1970
1971
1972
1973
1974

.........................
.........................
.........................
.........................
.........................

1,039.7
880.7
1,128.6
955.4
1,240.4 1,051.1
1,385.5 1,180.9
1,501.0 1,276.4

29.8
32.1
37.3
55.0
53.2

18.9
19.1
20.0
24.0
37.1

50.9
55.9
62.1
70.2
75.0

249.8
263.2
290.5
321.9
337.1

88.7
97.8
109.0
119.7
130.1

72.0
77.7
86.9
97.8
111.1

100.7
109.7
119.2
131.1
137.0

142.1
157.6
172.0
189.5
206.1

120.9
130.8
145.4
163.7
179.6

6.9
11.3
8.7
8.0
10.0

158.9
173.2
189.3
204.6
224.7

1975
1976
1977
1978
1979

.........................
.........................
.........................
.........................
.........................

1,635.2
1,823.9
2,031.4
2,295.9
2,566.4

1,386.5
1,553.1
1,738.3
1,976.8
2,219.5

54.9
53.7
54.3
63.3
74.5

42.8
47.5
54.0
61.7
71.5

75.5
85.8
94.8
112.0
126.5

354.8
405.8
462.8
517.5
571.0

142.4
161.4
179.4
202.3
219.0

121.1
129.1
142.2
162.1
183.8

153.2
172.7
190.9
214.8
233.5

224.6
248.0
282.2
327.0
369.7

199.5
224.4
256.2
295.1
334.3

17.7
24.5
21.6
21.0
35.7

248.7
270.8
293.1
319.1
346.8

1980
1981
1982
1983
1984

.........................
.........................
.........................
.........................
.........................

2,795.6
3,131.3
3,259.2
3,534.9
3,932.7

2,410.8
2,704.3
2,794.8
3,039.7
3,392.3

66.7
81.1
77.1
62.6
83.8

113.1
152.6
150.4
129.1
135.9

129.8
131.5
130.8
139.8
166.1

587.5
652.2
650.7
693.3
782.5

242.4
274.6
295.4
324.0
357.5

196.9
218.5
224.2
236.9
271.1

245.4
270.6
288.1
322.4
361.9

416.2
467.5
500.7
559.0
619.6

378.9
428.1
474.9
525.5
595.3

33.9
27.5
2.5
47.0
18.6

384.8
427.0
464.5
495.3
540.5

1985 .........................
1986 .........................

4,213.0 3,627.9
4,452.9 3,830.8

84.7
82.4

135.3
88.2

186.3
207.9

804.4
829.5

379.0
395.5

289.1
301.2

394.4
415.2

686.5
750.9

656.5
716.3

11.7
43.9

585.1
622.0

Based on 1987 SIC:
1987 .........................
1988 .........................
1989 .........................

4,742.5 4,081.4
5,108.3 4,401.8
5,489.1 4,735.5

88.9
89.1
102.0

92.2
99.2
97.1

219.3 888.6
237.2 979.9
245.8 1,017.7

426.2
449.0
468.7

308.9
346.6
364.7

434.5
461.5
492.7

829.7
893.7
954.5

789.9
887.9
976.0

3.3
−42.2
16.3

661.0
706.5
753.6

1990
1991
1992
1993
1994

.........................
.........................
.........................
.........................
.........................

5,803.2
5,986.2
6,318.9
6,642.3
7,054.3

4,996.7
5,129.1
5,424.5
5,717.5
6,096.7

108.3
102.9
111.7
108.3
118.5

111.9
96.7
87.6
88.4
90.2

248.7
232.7
234.4
248.9
275.3

1,040.6
1,043.5
1,082.0
1,131.4
1,223.2

490.9
518.3
538.5
573.3
611.4

376.1
395.6
414.6
432.5
479.2

507.8
523.7
551.7
578.0
620.6

1,010.3
1,072.2
1,140.9
1,205.3
1,254.8

1,071.5
1,123.8
1,219.4
1,287.7
1,365.0

30.6
19.6
43.7
63.8
58.5

806.6
857.1
894.4
924.8
957.6

1995
1996
1997
1998
1999

.........................
.........................
.........................
.........................
.........................

7,400.5
7,813.2
8,318.4
8,781.5
9,274.3

6,411.1
6,792.8
7,253.6
7,678.2
8,123.0

109.8
130.4
130.0
128.0
127.7

95.7
113.0
118.9
100.2
104.1

290.3
316.4
338.2
380.8
425.4

1,289.1
1,316.0
1,379.6
1,431.5
1,481.3

642.6
666.3
688.4
732.0
770.1

500.6
529.6
566.8
607.9
645.3

646.8
687.1
740.5
790.4
831.7

1,347.2
1,436.8
1,569.9
1,708.5
1,798.8

1,462.4
1,564.2
1,691.5
1,829.9
1,977.2

26.5
32.8
29.7
−31.0
−38.8

989.5
1,020.4
1,064.8
1,103.3
1,151.3

9,824.6 8,606.9
10,082.2 8,800.8

134.3
140.7

133.1
139.0

461.3 1,520.3
480.0 1,423.0

809.3
819.5

696.8
680.7

887.3 1,976.7 2,116.4 −128.5 1,217.7
931.8 2,076.9 2,226.6 −117.3 1,281.3

2000 .........................
2001 .........................

1 Equals gross domestic product (GDP) measured as the sum of expenditures less gross domestic income.
Note.—For details regarding these data, see Survey of Current Business, June 2000 and November 2001 and 2002.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–13.—Real gross domestic product by industry, 1987–2001
[Billions of chained (1996) dollars]
Private industries

Year

Based on
1987 SIC:
1987 .................
1988 .................
1989 .................

Gross
domestic
product

AgriculTotal ture,
private for- Minindus- estry, ing
tries
and
fishing

TransFiportanance,
Con- Manu- tion Whole- Retail insurstruc- facand
sale
ance,
tion turing public trade trade
and
utilireal
ties
estate

Services

6,113.3 5,212.0 110.3 98.5
6,368.4 5,445.6 101.2 114.5
6,591.8 5,648.2 111.4 102.8

278.4 1,046.3
294.1 1,120.2
296.3 1,111.6

460.4
479.0
500.4

353.5
379.4
399.3

512.1 1,169.1 1,181.0
544.6 1,209.1 1,255.1
562.5 1,234.3 1,313.8

Not
Staallotis- Govern- cated
tical
ment
by
disinduscreptry 2
ancy 1

4.2
−51.8
19.3

938.0 −139.6
961.0 −111.0
984.3 −91.0
1,008.2 −89.5
1,012.1 −100.5
1,015.3 −59.3
1,013.1 −28.3
1,016.0
−2.2

1990
1991
1992
1993
1994

.................
.................
.................
.................
.................

6,707.9
6,676.4
6,880.0
7,062.6
7,347.7

5,736.8
5,707.8
5,880.3
6,043.2
6,314.4

118.5
121.3
130.7
122.6
135.8

105.8
101.1
95.7
101.1
108.1

290.7
268.8
271.7
279.2
297.2

1,102.3
1,066.3
1,085.0
1,122.9
1,206.0

525.0
543.1
555.7
576.3
606.1

395.1
416.6
444.9
452.4
481.6

559.5
554.6
569.7
581.8
617.2

1,250.6
1,270.6
1,297.4
1,328.9
1,347.6

1,361.9
1,352.4
1,391.4
1,418.0
1,458.1

34.9
21.7
47.3
67.5
60.7

1995
1996
1997
1998
1999

.................
.................
.................
.................
.................

7,543.8
7,813.2
8,159.5
8,508.9
8,859.0

6,508.7
6,792.8
7,151.2
7,490.6
7,851.0

123.1
130.4
143.7
145.5
154.6

113.0
113.0
117.0
119.7
114.7

299.6
316.4
324.6
348.9
367.8

1,284.7
1,316.0
1,387.2
1,444.3
1,513.9

634.5
666.3
668.7
683.1
732.2

483.0
529.6
584.1
663.3
708.6

641.4
687.1
745.3
800.0
846.2

1,393.0
1,436.8
1,520.8
1,622.1
1,688.3

1,510.4
1,564.2
1,632.2
1,699.0
1,768.4

27.0
32.8
29.2
−30.1
−37.3

378.0 1,585.4
371.9 1,490.3

781.9
780.5

750.2
748.7

909.2 1,793.5 1,826.0 −121.3 1,088.8 −159.1
951.2 1,843.5 1,843.3 −108.3 1,107.5 −204.4

2000 .................
2001 .................

9,191.4 8,157.8 166.7 101.9
9,214.5 8,189.4 163.9 106.8

1,017.1
1,020.4
1,035.5
1,047.3
1,061.1

9.7
0
−33.3
−48.9
−97.1

1 Equals the current-dollar statistical discrepancy deflated by the implicit price deflator for gross domestic business product.
2 Equals gross domestic product (GDP) less the statistical discrepancy and the sum of GDP by industry of the detailed industries. The value
of not allocated by industry reflects the nonadditivity of chained-dollar estimates and the differences in source data used to estimate real
GDP by industry and the expenditures measure of real GDP.
Note.—For details regarding these data, see Survey of Current Business, June 2000 and November 2001 and 2002.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–14.—Gross product of nonfinancial corporate business, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Net product
Domestic income

Gross
product
of
nonfinancial
corporate
business

Consumption
of
fixed
capital

1959 ........

267.3

23.1

244.2

26.1

218.2

171.3

43.7

43.6

20.7

22.9

10.0

12.9

−0.3

0.4

3.1

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

........
........
........
........
........
........
........
........
........
........

278.0
285.5
311.7
331.8
358.2
393.7
431.4
453.9
501.0
543.9

24.0
24.6
25.5
26.5
27.9
29.9
32.7
35.9
39.7
43.9

254.0
260.9
286.2
305.4
330.3
363.8
398.7
418.0
461.4
500.0

28.4
29.6
32.1
34.1
36.7
39.3
40.5
43.2
49.8
54.8

225.6
231.3
254.1
271.2
293.7
324.6
358.2
374.9
411.5
445.2

181.0
185.2
200.0
210.9
226.5
246.3
273.8
292.2
323.1
358.5

41.1
42.1
49.6
55.5
61.9
72.2
77.0
73.9
78.3
73.5

40.3
40.1
44.9
49.8
56.1
66.3
71.6
67.7
74.1
71.1

19.2
19.5
20.6
22.8
24.0
27.2
29.5
27.8
33.6
33.3

21.1
20.6
24.3
27.1
32.1
39.1
42.1
39.9
40.6
37.8

10.6
10.6
11.4
12.6
13.7
15.6
16.8
17.5
19.1
19.1

10.5
10.1
12.9
14.4
18.4
23.5
25.3
22.4
21.4
18.7

−.2
.3
.0
.1
−.5
−1.2
−2.1
−1.6
−3.7
−5.9

1.0
1.8
4.6
5.6
6.2
7.1
7.5
7.8
7.8
8.2

3.5
4.0
4.5
4.8
5.3
6.1
7.4
8.8
10.1
13.2

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

........
........
........
........
........
........
........
........
........
........

562.0
606.9
673.9
755.6
816.7
883.0
997.1
1,127.8
1,285.0
1,431.5

48.5
513.5
53.1
553.8
58.4
615.6
63.8
691.8
74.7
742.0
89.2
793.8
98.9
898.2
111.0 1,016.9
126.8 1,158.2
147.0 1,284.6

59.0
454.6
64.6
489.1
69.4
546.2
76.6
615.2
81.9
660.1
88.0
705.8
95.9
802.4
104.9
912.0
114.4 1,043.8
123.3 1,161.3

378.1
401.2
445.9
504.5
555.1
578.6
655.0
740.0
851.0
966.2

59.4
69.8
81.1
88.2
76.7
98.5
119.9
141.3
156.5
150.1

58.5
67.3
79.0
99.0
109.6
110.5
137.9
159.2
184.4
197.1

27.2
29.9
33.8
40.2
42.2
41.5
53.0
59.9
67.1
69.6

31.4
37.4
45.3
58.8
67.4
69.0
84.9
99.3
117.3
127.5

18.5
18.5
20.1
21.1
21.7
24.8
28.0
31.5
36.4
38.1

12.8
18.9
25.2
37.8
45.7
44.2
56.9
67.8
80.9
89.4

−6.6
−4.6
−6.6
−19.6
−38.2
−10.5
−14.1
−15.7
−23.7
−40.1

7.4
7.1
8.7
8.8
5.3
−1.4
−3.8
−2.3
−4.2
−6.9

17.1
18.1
19.2
22.5
28.3
28.7
27.5
30.7
36.3
45.0

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

........
........
........
........
........
........
........
........
........
........

1,556.6
1,770.1
1,831.4
1,953.3
2,194.8
2,329.3
2,414.4
2,595.3
2,814.5
2,961.4

169.4
195.9
216.8
225.1
237.3
253.9
270.3
283.8
302.0
322.8

1,387.2
1,574.2
1,614.6
1,728.2
1,957.5
2,075.4
2,144.1
2,311.6
2,512.5
2,638.6

139.5
168.1
169.7
185.3
205.4
219.0
231.2
241.9
256.3
275.9

1,247.8
1,406.1
1,444.9
1,542.9
1,752.1
1,856.4
1,912.9
2,069.7
2,256.2
2,362.7

1,056.9
1,169.9
1,216.1
1,279.9
1,421.4
1,522.3
1,603.8
1,716.3
1,844.1
1,946.6

132.7
164.4
146.3
186.4
242.9
243.7
210.7
248.3
288.6
264.2

183.6
184.2
136.9
160.7
195.3
172.3
147.9
209.5
257.3
235.6

67.0
63.9
46.3
59.4
73.7
69.9
75.6
93.5
101.9
98.9

116.6
120.3
90.7
101.3
121.6
102.3
72.3
116.0
155.5
136.7

45.3
53.3
53.3
64.2
67.8
72.3
73.9
75.9
79.8
104.2

71.3
67.0
37.4
37.1
53.8
30.1
−1.6
40.1
75.7
32.6

−42.1
−24.6
−7.5
−7.4
−4.0
.0
7.1
−16.2
−22.2
−16.3

−8.8 58.1
4.8 71.8
16.9 82.5
33.1 76.6
51.7 87.7
71.4 90.4
55.8 98.4
55.0 105.1
53.4 123.6
45.0 151.8

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

........
........
........
........
........
........
........
........
........
.......

3,096.2
3,150.6
3,288.0
3,457.6
3,737.2
3,945.9
4,159.5
4,435.1
4,707.1
4,981.0

338.4
354.9
369.6
386.4
414.5
437.5
462.7
493.0
523.1
556.2

2,757.9
2,795.7
2,918.5
3,071.3
3,322.7
3,508.4
3,696.9
3,942.1
4,183.9
4,424.9

290.6
313.1
332.0
349.3
382.1
397.3
411.9
431.4
457.4
478.4

2,467.3
2,482.6
2,586.5
2,721.9
2,940.6
3,111.0
3,284.9
3,510.7
3,726.5
3,946.5

2,052.7
2,086.9
2,194.2
2,290.7
2,430.2
2,552.7
2,667.1
2,835.1
3,058.0
3,272.0

258.5
252.8
278.9
325.3
402.5
442.5
509.1
555.6
530.7
518.5

237.2
221.6
258.0
305.8
381.4
422.1
460.2
496.1
460.4
460.1

95.8
85.5
91.2
105.2
128.9
136.7
150.1
158.3
154.6
166.9

141.4
136.1
166.8
200.5
252.6
285.4
310.1
337.7
305.8
293.2

119.2
125.8
135.0
149.3
158.6
179.3
201.9
218.1
242.2
239.2

22.2
10.3
31.9
51.2
94.0
106.0
108.2
119.6
63.6
54.0

−12.9
4.9
−2.8
−4.0
−12.4
−18.3
3.1
8.4
18.3
−4.2

34.3
26.3
23.7
23.6
33.5
38.7
45.8
51.1
52.0
62.6

2000 ........
2001 ........

5,295.0
5,354.2

599.4 4,695.6
652.8 4,701.4

508.9 4,186.6 3,542.1
523.7 4,177.7 3,573.5

461.8
407.4

437.9
328.8

172.4
123.5

265.5
205.3

259.6
278.5

5.9
−73.2

−15.0
5.0

38.8 182.7
73.6 196.8

1998: I .....
II ...
III ..
IV ..

4,596.8
4,658.0
4,756.0
4,817.4

511.8
518.7
526.8
535.2

4,085.1
4,139.2
4,229.2
4,282.2

446.7
451.7
457.5
473.8

3,638.3
3,687.5
3,771.7
3,808.4

2,982.9
3,031.3
3,082.9
3,135.0

526.3
521.2
548.1
527.2

455.4
460.0
476.2
450.1

152.0
154.4
160.8
151.2

303.4
305.6
315.5
298.9

237.8
243.0
241.6
246.5

65.6
62.5
73.8
52.4

20.0
10.3
20.2
22.9

50.9
50.9
51.7
54.2

129.1
135.1
140.6
146.1

1999: I .....
II ...
III ..
IV ..

4,899.9
4,945.1
4,995.0
5,084.2

542.2
549.6
564.0
569.1

4,357.7
4,395.6
4,431.1
4,515.1

467.6
473.1
482.4
490.4

3,890.1
3,922.5
3,948.7
4,024.7

3,213.4
3,240.2
3,283.8
3,350.4

532.8
530.6
504.6
505.9

455.9
467.2
454.7
462.8

165.5
169.9
164.9
167.3

290.4
297.4
289.8
295.4

254.7
242.8
225.3
234.0

35.6
54.6
64.5
61.4

16.0
−2.5
−13.8
−16.6

60.9
65.8
63.7
59.8

143.9
151.6
160.2
168.5

2000: I .....
II ...
III ..
IV ..

5,228.7
5,275.1
5,335.5
5,340.7

581.2
593.7
605.8
617.1

4,647.5
4,681.4
4,729.7
4,723.6

503.2
506.3
510.5
515.8

4,144.3
4,175.1
4,219.2
4,207.8

3,482.9
3,503.6
3,575.3
3,606.4

490.9
490.1
456.2
410.0

463.6
466.0
430.7
391.3

183.8
183.6
169.1
153.2

279.8
282.5
261.6
238.1

252.3
250.4
266.3
269.7

27.6
32.1
−4.6
−31.6

−22.6
−16.4
−8.3
−12.5

49.9
40.4
33.9
31.3

170.5
181.4
187.7
191.3

2001: I .....
II ...
III ..
IV ..

5,318.6
5,340.9
5,365.7
5,391.6

627.6
641.6
684.9
657.0

4,691.0
4,699.3
4,680.8
4,734.6

523.3
529.3
508.0
534.3

4,167.7
4,170.0
4,172.8
4,200.3

3,589.0
3,580.7
3,572.5
3,551.8

384.3
393.1
403.0
449.0

362.8
368.2
349.8
234.3

134.3
136.2
129.4
94.0

228.4
232.0
220.4
140.3

276.7 −48.3
268.3 −36.3
283.8 −63.4
285.2 −144.9

−10.1
−6.2
8.9
27.2

31.7
31.1
44.3
187.4

194.4
196.1
197.3
199.5

2002: I .....
II ...
III ..

5,423.8
5,489.0
5,533.0

670.7 4,753.1
685.1 4,803.8
693.7 4,839.3

539.3 4,213.9 3,570.1
545.6 4,258.2 3,604.4
554.2 4,285.2 3,643.2

452.4
459.3
447.6

289.2
324.4
336.3

119.8
130.8
133.4

169.5
193.6
202.9

293.1 −123.6
280.2 −86.6
275.9 −73.0

1.9
−5.7
−15.1

161.3 191.4
140.6 194.6
126.4 194.3

Year or
quarter

Total

Indirect
business
taxes 1

Corporate profits with inventory valuation and capital
consumption adjustments
Compensation
of
employees

Total

Profits

Inventory
valuation
Divi- Undis- adjustdends tributed ment
profits

Profits after tax
Total

Profits Profits
before
tax
tax liability Total

Capital Net
con- intersump- est
tion
adjustment

1 Indirect business tax and nontax liability plus business transfer payments less subsidies.
Source: Department of Commerce, Bureau of Economic Analysis.

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156.0
143.0
113.3
105.9
107.9
115.8
108.7
120.0
137.7
156.1

TABLE B–15.—Output, price, costs, and profits of nonfinancial corporate business, 1959–2002
[Quarterly data at seasonally adjusted annual rates]

Year or quarter

Gross
product of
nonfinancial
corporate
business
(billions of
dollars)
Current
dollars

Chained
(1996)
dollars

Price, costs, and profit per unit of real output (dollars)
Price
per unit of
real gross
product
of nonfinancial
corporate
business 1

Compensation
of
employees
(unit
labor
cost)

Unit nonlabor cost

Total

Corporate profits with
inventory valuation and
capital consumption
adjustments 3

Consumption
of
fixed
capital

Indirect
business
taxes 2

Net
interest
Total

Profits
tax
liability

Profits
after
tax 4

1959 ...............................

267.3

986.1

0.271

0.174

0.052

0.023

0.026

0.003

0.044

0.021

0.023

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................

278.0
285.5
311.7
331.8
358.2
393.7
431.4
453.9
501.0
543.9

1,018.7
1,041.5
1,128.0
1,194.5
1,278.5
1,384.3
1,480.9
1,519.2
1,615.8
1,680.2

.273
.274
.276
.278
.280
.284
.291
.299
.310
.324

.178
.178
.177
.177
.177
.178
.185
.192
.200
.213

.055
.056
.055
.055
.055
.054
.054
.058
.062
.067

.024
.024
.023
.022
.022
.022
.022
.024
.025
.026

.028
.028
.028
.029
.029
.028
.027
.028
.031
.033

.003
.004
.004
.004
.004
.004
.005
.006
.006
.008

.040
.040
.044
.046
.048
.052
.052
.049
.048
.044

.019
.019
.018
.019
.019
.020
.020
.018
.021
.020

.022
.022
.026
.027
.030
.032
.032
.030
.028
.024

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................

562.0
606.9
673.9
755.6
816.7
883.0
997.1
1,127.8
1,285.0
1,431.5

1,663.3
1,730.0
1,865.8
1,975.4
1,941.2
1,910.5
2,062.3
2,212.7
2,360.3
2,434.2

.338
.351
.361
.382
.421
.462
.484
.510
.544
.588

.227
.232
.239
.255
.286
.303
.318
.334
.361
.397

.074
.078
.078
.082
.095
.108
.107
.111
.117
.130

.029
.031
.031
.032
.038
.047
.048
.050
.054
.060

.035
.037
.037
.039
.042
.046
.046
.047
.048
.051

.010
.010
.010
.011
.015
.015
.013
.014
.015
.019

.036
.040
.043
.045
.040
.052
.058
.064
.066
.062

.016
.017
.018
.020
.022
.022
.026
.027
.028
.029

.019
.023
.025
.024
.018
.030
.032
.037
.038
.033

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................

1,556.6
1,770.1
1,831.4
1,953.3
2,194.8
2,329.3
2,414.4
2,595.3
2,814.5
2,961.4

2,400.4
2,479.5
2,426.6
2,542.0
2,782.4
2,907.9
2,978.9
3,146.6
3,322.1
3,377.5

.648
.714
.755
.768
.789
.801
.811
.825
.847
.877

.440
.472
.501
.503
.511
.523
.538
.545
.555
.576

.153
.176
.193
.192
.191
.193
.202
.200
.205
.223

.071
.079
.089
.089
.085
.087
.091
.090
.091
.096

.058
.068
.070
.073
.074
.075
.078
.077
.077
.082

.024
.029
.034
.030
.032
.031
.033
.033
.037
.045

.055
.066
.060
.073
.087
.084
.071
.079
.087
.078

.028
.026
.019
.023
.026
.024
.025
.030
.031
.029

.027
.041
.041
.050
.061
.060
.045
.049
.056
.049

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................

3,096.2
3,150.6
3,288.0
3,457.6
3,737.2
3,945.9
4,159.5
4,435.1
4,707.1
4,981.0

3,409.2
3,381.9
3,468.4
3,573.8
3,801.5
3,960.1
4,159.5
4,404.2
4,658.1
4,902.1

.908
.932
.948
.967
.983
.996
1.000
1.007
1.011
1.016

.602
.617
.633
.641
.639
.645
.641
.644
.656
.667

.230
.240
.236
.236
.238
.239
.236
.237
.240
.243

.099
.105
.107
.108
.109
.110
.111
.112
.112
.113

.085
.093
.096
.098
.101
.100
.099
.098
.098
.098

.046
.042
.033
.030
.028
.029
.026
.027
.030
.032

.076
.075
.080
.091
.106
.112
.122
.126
.114
.106

.028
.025
.026
.029
.034
.035
.036
.036
.033
.034

.048
.049
.054
.062
.072
.077
.086
.090
.081
.072

2000 ...............................
2001 ...............................

5,295.0
5,354.2

5,148.3
5,141.8

1.029
1.041

.688
.695

.250
.267

.116
.127

.099
.102

.035
.038

.090
.079

.033
.024

.056
.055

1998: I ............................
II ..........................
III .........................
IV .........................

4,596.8
4,658.0
4,756.0
4,817.4

4,551.1
4,616.9
4,703.9
4,760.7

1.010
1.009
1.011
1.012

.655
.657
.655
.659

.238
.239
.239
.243

.112
.112
.112
.112

.098
.098
.097
.100

.028
.029
.030
.031

.116
.113
.117
.111

.033
.033
.034
.032

.082
.079
.082
.079

1999: I ............................
II ..........................
III .........................
IV .........................

4,899.9
4,945.1
4,995.0
5,084.2

4,832.3
4,866.8
4,914.7
4,994.6

1.014
1.016
1.016
1.018

.665
.666
.668
.671

.239
.241
.246
.246

.112
.113
.115
.114

.097
.097
.098
.098

.030
.031
.033
.034

.110
.109
.103
.101

.034
.035
.034
.033

.076
.074
.069
.068

2000: I ............................
II ..........................
III .........................
IV .........................

5,228.7
5,275.1
5,335.5
5,340.7

5,109.2
5,129.2
5,180.2
5,174.4

1.023
1.028
1.030
1.032

.682
.683
.690
.697

.245
.250
.252
.256

.114
.116
.117
.119

.098
.099
.099
.100

.033
.035
.036
.037

.096
.096
.088
.079

.036
.036
.033
.030

.060
.060
.055
.050

2001: I ............................
II ..........................
III .........................
IV .........................

5,318.6
5,340.9
5,365.7
5,391.6

5,131.4
5,125.2
5,121.3
5,189.3

1.037
1.042
1.048
1.039

.699
.699
.698
.684

.262
.266
.272
.268

.122
.125
.134
.127

.102
.103
.099
.103

.038
.038
.039
.038

.075
.077
.079
.087

.026
.027
.025
.018

.049
.050
.053
.068

2002: I ............................
II ..........................
III .........................

5,423.8
5,489.0
5,533.0

5,231.3
5,298.7
5,348.0

1.037
1.036
1.035

.682
.680
.681

.268
.269
.270

.128
.129
.130

.103
.103
.104

.037
.037
.036

.086
.087
.084

.023
.025
.025

.064
.062
.059

1 The

implicit price deflator for gross product of nonfinancial corporate business divided by 100.
business tax and nontax liability plus business transfer payments less subsidies.
profits from current production.
4 With inventory valuation and capital consumption adjustments.
Source: Department of Commerce, Bureau of Economic Analysis.
2 Indirect
3 Unit

295

VerDate Dec 13 2002

04:41 Jan 30, 2003

Jkt 193914

PO 00000

Frm 00027

Fmt 0808

Sfmt 0808

E:\2003_EOP\B15.ER3

ECONO

TABLE B–16.—Personal consumption expenditures, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Durable goods

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
1998
1999

Personal
consumption
expendi- Total 1
tures

Nondurable goods

FurniMotor ture
vehiand
cles house- Total 1
and
hold
parts equipment

Clothing
and
shoes

Food

Services

Gaso- Fuel
line
oil
1
and and Total
oil
coal

Total 1

Electricity
and
gas

Trans- Mediporcal
tacare
tion

318.1
332.3
342.7
363.8
383.1
411.7
444.3
481.8
508.7
558.7
605.5
648.9
702.4
770.7
852.5
932.4
1,030.3
1,149.8
1,278.4
1,430.4
1,596.3
1,762.9
1,944.2
2,079.3
2,286.4
2,498.4
2,712.6
2,895.2
3,105.3
3,356.6
3,596.7
3,831.5
3,971.2
4,209.7
4,454.7
4,716.4
4,969.0
5,237.5
5,529.3
5,856.0
6,246.5

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
181.2
201.7
214.4
214.2
231.3
240.2
281.2
326.9
363.3
401.3
419.7
450.2
467.8
467.6
443.0
470.8
513.4
560.8
589.7
616.5
642.5
693.2
755.9

18.9
19.7
17.8
21.5
24.4
26.0
29.9
30.3
30.0
36.1
38.4
35.5
44.5
51.1
56.1
49.5
54.8
71.3
83.5
93.1
93.5
87.0
95.8
102.9
126.9
152.5
175.7
192.4
193.1
206.1
211.4
206.4
182.8
200.2
222.1
242.3
249.3
256.3
264.2
288.8
319.1

18.1
18.0
18.3
19.3
20.7
23.2
25.1
28.2
30.0
32.9
34.7
35.7
37.8
42.4
47.9
51.5
54.5
60.2
67.2
74.3
82.7
86.7
92.1
93.4
106.6
119.0
128.5
143.0
153.4
163.6
171.4
171.4
171.5
178.7
192.4
211.2
225.0
236.9
248.9
265.2
285.5

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
420.7
458.3
497.2
550.2
624.4
696.1
758.9
787.6
831.2
884.7
928.8
958.5
1,015.3
1,082.9
1,165.4
1,246.1
1,278.8
1,322.9
1,375.2
1,438.0
1,497.3
1,574.1
1,641.6
1,708.5
1,830.1

80.7
82.3
84.0
86.1
88.3
93.6
100.7
109.3
112.5
122.2
131.5
143.8
149.7
161.4
179.6
201.8
223.2
242.5
262.7
289.6
324.7
356.0
383.5
403.4
423.8
447.4
467.6
492.0
515.3
553.5
591.9
636.9
657.6
669.3
697.9
728.2
755.8
786.0
812.2
852.6
898.9

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
185.5
198.9
204.1
208.7
221.9
231.1
240.7
247.8
258.6
271.7
284.8
301.0

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
87.7
97.0
107.3
102.5
104.9
106.6
109.0
113.3
124.2
128.1
114.8
129.3

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
226.5
255.1
287.7
313.0
338.7
370.3
406.8
442.0
476.4
511.9
546.4
585.6
616.0
641.3
666.5
704.7
740.8
772.5
810.5
859.7
912.6

18.7
20.3
21.2
22.4
23.6
25.0
26.5
28.2
30.2
32.4
35.2
37.9
41.3
45.7
50.2
56.0
64.3
73.1
82.7
92.1
101.0
114.2
127.3
143.0
157.6
169.8
182.2
188.9
196.9
208.4
221.3
227.6
238.6
248.3
268.9
284.0
298.1
317.3
333.0
345.6
360.4

7.6
8.3
8.8
9.4
9.9
10.4
10.9
11.5
12.2
13.0
14.1
15.3
16.9
18.8
20.4
24.0
29.2
33.2
38.5
43.0
47.8
57.5
64.8
74.2
82.4
86.5
90.8
89.2
90.9
96.3
101.0
101.0
107.4
108.9
118.6
119.8
122.5
128.7
130.4
128.9
129.9

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
129.9
136.6
141.8
142.8
155.0
166.2
180.9
197.7
214.2
234.4
246.3
259.4

2000 ...............
2001 ...............

6,683.7
6,987.0

803.9
835.9

336.6
361.3

304.8 1,972.9
306.1 2,041.3

955.0
992.4

313.7
315.3

164.4 18.1 3,906.9 960.0
162.1 16.5 4,109.9 1,014.5

386.2
406.3

142.4
154.5

267.8 991.8
271.4 1,072.2

1998: I ............
II ...........
III ..........
IV ..........
1999: I ............
II ...........
III ..........
IV .........
2000: I ............
II ...........
III ..........
IV ..........
2001: I ............
II ...........
III ..........
IV ..........
2002: I ............
II ...........
III ..........

5,719.9
5,820.0
5,895.1
5,989.1
6,076.6
6,195.6
6,299.4
6,414.5
6,552.2
6,638.7
6,736.1
6,808.0
6,904.7
6,959.8
6,983.7
7,099.9
7,174.2
7,254.7
7,360.7

666.8
689.3
691.7
725.1
728.7
749.9
765.1
779.9
808.4
799.3
810.6
797.2
816.8
820.3
824.0
882.6
859.0
856.9
897.8

271.7
288.6
284.3
310.7
305.3
318.7
324.6
328.0
344.4
332.4
341.7
328.1
345.8
349.0
351.0
399.5
365.8
362.1
400.7

259.8
262.6
267.3
270.9
276.6
282.1
288.6
294.8
303.0
305.4
306.0
304.9
304.3
303.9
304.9
311.5
317.1
319.1
319.2

831.7
846.7
858.8
873.1
877.8
891.1
900.7
925.9
937.5
952.7
961.2
968.8
984.2
988.7
993.8
1,002.8
1,025.0
1,023.9
1,024.8

281.6
284.5
284.3
288.5
296.4
301.6
302.1
304.1
308.7
312.1
315.1
318.7
317.9
313.6
312.1
317.4
325.8
323.9
321.0

118.8
113.8
113.5
112.9
110.6
126.4
134.8
145.4
156.2
164.2
167.6
169.5
167.0
175.4
163.6
142.2
142.3
160.7
163.5

338.8
347.8
351.8
344.2
351.0
358.5
367.8
364.3
366.6
382.6
390.3
405.5
416.8
406.7
404.8
396.9
399.2
400.9
406.3

127.2
133.1
132.5
122.8
126.7
129.6
134.9
128.6
127.1
139.1
144.5
158.7
167.2
155.8
151.8
143.1
143.9
144.9
147.4

241.8
245.2
248.0
250.2
254.9
258.0
261.4
263.3
264.8
267.1
268.4
271.0
273.3
273.2
270.1
269.0
273.3
275.6
276.1

13.4
13.7
13.1
12.2
12.5
13.5
13.8
14.4
16.8
17.3
18.1
20.2
19.6
16.2
15.7
14.5
13.9
14.0
14.7

127.0
136.1
144.3
154.1
163.4
176.4
189.5
204.7
221.2
242.3
266.4
292.0
320.0
352.3
385.9
425.5
476.1
532.6
600.0
678.4
757.4
852.7
954.0
1,051.5
1,174.0
1,286.9
1,420.6
1,535.4
1,670.3
1,823.5
1,963.5
2,117.8
2,249.4
2,415.9
2,566.1
2,717.6
2,882.0
3,047.0
3,245.2
3,454.3
3,660.5

Housing 2

...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............

1,675.8
1,697.2
1,716.7
1,744.4
1,773.1
1,814.4
1,841.3
1,891.7
1,926.9
1,964.9
1,988.9
2,011.1
2,031.5
2,044.8
2,044.3
2,044.4
2,085.1
2,108.2
2,116.9

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
11.7
11.9
12.9
12.4
12.2
12.9
13.5
14.1
15.6
15.1
13.1
13.6

Household
operation

3,377.3
3,433.5
3,486.7
3,519.6
3,574.8
3,631.3
3,693.1
3,742.9
3,816.9
3,874.5
3,936.6
3,999.7
4,056.4
4,094.7
4,115.4
4,172.9
4,230.1
4,289.5
4,346.0

839.8
853.0
866.5
879.6
895.7
907.4
918.4
928.7
941.2
953.5
965.9
979.3
993.4
1,007.9
1,021.1
1,035.5
1,051.7
1,066.0
1,078.0

1 Includes other items not shown separately.
2 Includes imputed rental value of owner-occupied housing.
Source: Department of Commerce, Bureau of Economic Analysis.

296

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ECONO

16.4
17.6
18.7
20.8
22.6
25.8
27.9
30.7
33.9
39.2
44.8
50.4
56.9
63.9
71.5
80.4
93.4
106.5
122.6
140.0
158.1
181.2
213.0
239.3
267.9
294.6
322.5
346.8
381.8
429.9
479.2
540.6
591.0
652.6
700.6
737.3
780.7
814.4
854.6
899.0
937.2

886.9
895.8
903.2
910.1
919.9
929.9
943.0
956.0
965.9
982.3
1,000.1
1,019.1
1,042.6
1,064.2
1,079.0
1,103.1
1,119.0
1,139.3
1,158.8

TABLE B–17.—Real personal consumption expenditures, 1987–2002
[Billions of chained (1996) dollars; quarterly data at seasonally adjusted annual rates]
Durable goods

Year or
quarter

Personal
consumption
expendi- Total 1
tures

FurniMotor ture
vehiand
cles houseand
hold
parts equipment

Nondurable goods

Total 1

Clothing
and
shoes

Food

Gasoline
and
oil

Services

Fuel
oil
and
coal

Household
operation
Total 1

Housing 2
Total 1

Electricity
and
gas

Trans- Mediporta- cal
tion
care

1987 .........
1988 .........
1989 .........

4,113.4
4,279.5
4,393.7

455.2
481.5
491.7

242.4
254.9
253.9

133.3 1,274.5
142.3 1,315.1
149.9 1,351.0

664.6
690.7
703.5

182.4
187.8
198.6

112.8
114.9
116.4

14.2 2,379.3
14.7 2,477.2
14.4 2,546.0

644.8
663.4
679.9

238.0
248.2
257.2

106.9
112.3
114.7

164.6 631.0
172.8 659.9
174.6 678.5

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.........
.........
.........
.........
.........
.........
.........
.........
.........
.........

4,474.5
4,466.6
4,594.5
4,748.9
4,928.1
5,075.6
5,237.5
5,423.9
5,683.7
5,964.5

487.1
454.9
479.0
518.3
557.7
583.5
616.5
657.3
726.7
812.5

246.1
211.8
225.7
242.2
255.1
253.4
256.3
264.8
292.0
322.1

150.9
152.7
161.5
177.4
196.3
215.4
236.9
261.9
293.3
335.1

1,369.6
1,364.0
1,389.7
1,430.3
1,485.1
1,529.0
1,574.1
1,619.9
1,686.4
1,765.1

722.4
721.4
725.6
745.1
764.9
777.0
786.0
794.5
819.4
846.8

197.2
197.8
208.8
218.5
231.6
244.3
258.6
271.6
290.4
312.1

113.1
109.4
112.5
115.4
117.4
120.2
124.2
128.1
131.8
136.4

13.1
12.9
13.2
14.0
15.0
15.7
15.6
15.0
14.3
14.7

2,616.2
2,651.8
2,729.7
2,802.5
2,886.2
2,963.4
3,047.0
3,147.0
3,273.4
3,395.4

696.2
709.8
719.3
728.1
749.1
763.7
772.6
787.2
808.7
835.0

259.8
262.9
267.6
282.3
293.0
304.0
317.3
327.4
343.5
358.7

112.8
116.3
115.7
122.2
122.8
125.3
128.7
127.5
130.9
132.3

173.4
164.7
171.1
176.6
189.0
201.0
214.2
226.4
234.7
246.2

2000 .........
2001 .........

6,223.9
6,377.2

878.9
931.9

338.4
361.9

374.0 1,833.8
398.0 1,869.8

879.0
887.0

329.4
337.7

135.7
138.8

14.0 3,524.5
12.6 3,594.9

851.3
866.0

377.8
382.6

137.0
134.5

253.0 900.1
251.1 938.3

1998: I ......
II .....
III ....
IV ....

5,576.3
5,660.2
5,713.7
5,784.7

692.5
719.7
727.1
767.3

274.7
292.7
287.2
313.2

281.3
286.9
297.9
307.2

1,656.3
1,680.5
1,693.6
1,715.3

804.0
816.8
824.0
832.8

286.1
290.6
289.3
295.8

129.5
131.2
133.0
133.4

14.3
14.8
14.3
13.9

3,228.4
3,262.3
3,295.2
3,307.6

800.0
805.8
811.7
817.1

336.5
345.0
350.0
342.7

128.1
134.5
135.3
125.9

230.4
234.2
236.1
238.2

853.6
855.9
859.0
862.4

1999: I ......
II .....
III ....
IV ....

5,851.4
5,932.8
6,000.1
6,073.6

777.6
804.2
824.1
844.2

309.0
322.9
326.9
329.5

317.8
328.6
340.8
353.1

1,736.1
1,756.7
1,767.7
1,799.9

831.9
842.2
847.3
866.0

307.9
311.6
314.1
314.7

134.3
136.8
136.1
138.6

14.6
15.2
14.7
14.1

3,343.6
3,379.7
3,417.4
3,440.7

827.6
833.0
837.7
841.6

349.6
357.8
366.9
360.7

129.9
132.7
137.2
129.5

242.3
244.5
248.0
250.0

867.3
872.1
878.6
884.4

2000: I ......
II .....
III ....
IV ....

6,151.9
6,198.2
6,256.8
6,288.8

879.5
871.3
888.5
876.5

347.3
333.8
343.6
329.1

366.0
372.2
377.1
380.6

1,809.7
1,831.6
1,840.9
1,853.1

870.8
880.5
880.7
883.9

322.3
327.9
332.3
335.1

134.4
135.9
136.1
136.3

13.3
14.2
14.0
14.5

3,477.7
3,508.2
3,541.7
3,570.6

844.7
849.5
853.4
857.5

362.7
377.2
380.8
390.5

127.8
137.2
137.5
145.7

251.7
253.0
253.2
254.2

888.5
896.2
903.2
912.5

2001: I ......
II .....
III ....
IV ....

6,326.0
6,348.0
6,370.9
6,464.0

900.6
912.4
922.6
992.0

345.1
349.5
352.8
400.4

386.0
392.8
399.5
413.6

1,863.7
1,862.3
1,868.3
1,885.0

889.1
887.4
884.3
887.1

334.3
334.7
337.1
344.8

137.6
136.2
139.9
141.4

13.9
12.3
12.2
12.2

3,576.3
3,589.3
3,597.5
3,616.6

862.0
865.1
867.1
869.6

389.4
381.5
381.9
377.7

142.5
133.0
132.4
130.2

253.3
252.5
250.0
248.6

921.4
932.7
944.3
954.9

2002: I ......
II .....
III ....

6,513.8 975.9
6,542.4 980.7
6,609.9 1,032.4

370.0
369.1
407.6

428.2 1,921.4
435.2 1,920.9
441.4 1,925.8

901.4
899.2
897.9

355.8
355.1
355.3

145.1
144.7
145.4

12.4 3,642.2
12.1 3,666.2
12.4 3,687.0

874.0
878.5
882.1

381.3
382.9
384.7

133.5
133.6
135.7

250.9 963.4
250.3 974.7
249.8 984.4

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 1959-86.
Source: Department of Commerce, Bureau of Economic Analysis.

297

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710.9
734.4
765.4
775.4
783.1
797.7
814.4
835.4
857.7
875.6

TABLE B–18.—Private fixed investment by type, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Nonresidential
Structures
Private
fixed
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
1998
1999

Total
nonresidential

Equipment and software

Nonresidential
buildings
including
farm

Total 1

Utilities

Information processing equipment
and software

Mining
exploration,
shafts,
and
wells

Total 1
Total

Computers
and peripheral
equipment 2

Software3

Other

Industrial
equipment

Transportation
equipment

Residential

.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
.......
......

74.6
46.5
75.7
49.4
75.2
48.8
82.0
53.1
88.1
56.0
97.2
63.0
109.0
74.8
117.7
85.4
118.7
86.4
132.1
93.4
147.3
104.7
150.4
109.0
169.9
114.1
198.5
128.8
228.6
153.3
235.4
169.5
236.5
173.7
274.8
192.4
339.0
228.7
410.2
278.6
472.7
331.6
484.2
360.9
541.0
418.4
531.0
425.3
570.0
417.4
670.1
490.3
714.5
527.6
740.7
522.5
754.3
526.7
802.7
568.4
845.2
613.4
847.2
630.3
800.4
608.9
851.6
626.1
934.0
682.2
1,034.6
748.6
1,110.7
825.1
1,212.7
899.4
1,327.7
999.4
1,465.6 1,101.2
1,577.2 1,173.5

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
181.6
193.4
202.5
183.4
172.2
179.4
187.5
204.6
225.0
255.8
282.4
283.7

10.6
12.0
12.7
13.7
13.9
15.8
19.5
21.3
20.6
21.1
24.4
25.4
27.1
30.1
35.5
38.3
35.6
35.9
39.9
49.7
65.7
73.7
86.3
94.5
90.5
110.0
128.0
123.3
126.0
133.8
142.7
149.1
124.2
113.2
119.3
129.0
144.3
161.7
182.7
201.4
206.9

4.9
5.0
4.6
4.6
5.0
5.4
6.1
7.1
7.8
9.2
9.6
11.1
11.9
13.1
15.0
16.5
17.1
20.0
21.5
24.1
27.5
30.2
33.0
32.5
28.7
30.0
30.6
31.2
26.5
26.6
29.5
28.4
33.7
36.7
34.8
34.0
35.8
36.0
36.1
44.2
47.3

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
14.9
17.9
18.5
14.2
17.7
17.4
17.2
21.1
30.1
30.2
22.8

28.4
29.8
29.1
32.3
34.8
39.2
46.5
54.0
54.9
59.9
67.0
68.7
71.5
81.7
98.3
108.2
112.4
126.4
154.1
187.2
216.7
227.0
253.8
250.3
264.7
314.3
334.3
346.8
354.7
386.8
420.0
427.8
425.4
453.9
502.8
561.1
620.5
674.4
743.6
818.9
889.8

4.0
4.9
5.2
5.7
6.5
7.3
8.5
10.6
11.2
11.9
14.6
16.7
17.3
19.3
23.0
26.8
28.2
32.4
38.6
48.3
58.6
69.6
82.4
88.9
100.8
121.7
130.8
137.6
141.9
155.9
173.0
176.1
181.4
197.5
215.0
233.7
262.0
287.3
325.2
363.4
402.3

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
3.6
4.4
5.7
7.6
10.2
12.5
17.1
18.9
23.9
31.6
33.7
33.4
35.8
38.0
43.1
38.6
37.7
43.6
47.2
51.3
64.6
70.9
79.6
84.2
90.4

0.0
.1
.2
.2
.4
.5
.7
1.0
1.2
1.3
1.8
2.3
2.4
2.8
3.2
3.9
4.8
5.2
5.5
6.6
8.7
10.7
12.9
15.4
18.0
22.1
25.6
27.8
31.4
36.7
44.4
50.2
56.6
60.8
69.4
75.5
83.5
95.1
116.5
140.1
162.5

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
54.6
58.9
68.0
71.5
76.4
74.8
81.2
85.5
87.3
87.1
93.1
98.4
106.9
113.8
121.3
129.2
139.2
149.4

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
55.9
60.4
65.2
62.3
58.4
67.6
71.9
74.8
76.1
83.5
92.7
91.5
88.7
92.4
101.8
113.3
128.7
136.4
141.0
147.6
150.4

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
76.1
71.4
75.7
79.5
86.1
98.1
117.8
126.1
138.9
151.4
168.2
194.7

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
234.2
231.8
216.8
191.5
225.5
251.8
286.0
285.6
313.3
328.2
364.4
403.7

2000 .......
2001 .......

1,691.8 1,265.8
1,646.3 1,201.6

314.2
324.5

223.9
216.3

53.7
55.0

29.2
42.7

951.6 446.9
877.1 404.3

93.3
74.2

179.4
180.4

174.2
149.8

164.9
159.0

189.7
165.8

426.0
444.8

1998: I ....
II ...
III ..
IV ..

1,422.0
1,457.5
1,469.1
1,513.9

1,074.8
1,099.9
1,098.6
1,131.7

273.2
284.9
283.9
287.5

194.3
201.6
201.5
208.5

41.9
44.4
45.3
45.3

30.5
32.2
30.7
27.3

801.6
815.0
814.7
844.2

355.0
361.3
362.9
374.3

86.1
84.6
81.0
85.0

132.7
137.7
142.8
147.0

136.3
139.0
139.2
142.3

150.3
147.3
145.4
147.2

160.9
165.8
164.1
181.9

347.2
357.6
370.5
382.2

1999: I ....
II ...
III ..
IV ..

1,543.3
1,570.1
1,591.1
1,604.3

1,150.0
1,167.7
1,184.5
1,191.9

285.5
283.0
279.9
286.3

211.1
206.6
204.2
205.5

45.4
45.7
47.8
50.3

22.5
23.3
21.5
23.9

864.5
884.7
904.6
905.5

385.7
403.7
410.7
409.2

87.9
93.0
92.6
88.1

153.2
161.1
165.9
169.8

144.5
149.6
152.2
151.3

145.2
149.5
153.0
153.9

190.0
190.7
200.0
198.2

393.3
402.4
406.5
412.5

2000: I ....
II ...
III ..
IV ..

1,664.6
1,697.1
1,705.2
1,700.4

1,236.6
1,268.3
1,283.4
1,274.8

299.5
308.5
320.9
328.0

216.2
222.8
227.4
229.1

50.8
52.5
54.7
57.1

25.6
26.2
31.1
33.8

937.1
959.8
962.5
946.8

433.3
449.1
453.3
451.8

90.1
95.7
95.7
91.8

174.5
178.2
182.2
182.5

168.6
175.2
175.4
177.5

159.7
163.2
168.8
167.9

196.4
195.5
190.3
176.5

428.0
428.8
421.8
425.6

2001: I ....
II ...
III ..
IV ..

1,698.3
1,654.3
1,635.5
1,597.2

1,258.3
1,210.0
1,188.1
1,149.8

333.7
329.9
332.0
302.3

231.9
221.3
211.5
200.4

54.9
56.2
54.6
54.4

39.7
45.5
45.1
40.4

924.6
880.2
856.1
847.4

433.2
407.9
390.7
385.5

84.0
75.8
67.6
69.3

183.4
180.7
178.7
178.9

165.8
151.5
144.5
137.3

170.0
161.8
154.3
149.8

169.5
162.7
162.7
168.3

440.0
444.2
447.4
447.4

2002: I ....
II ...
III ..

1,589.4 1,126.8
1,584.6 1,115.8
1,579.7 1,109.8

288.3
275.2
259.4

192.4
182.3
171.1

56.3
53.9
51.5

32.3
31.7
31.0

838.5 388.7
840.7 397.1
850.4 406.9

71.9
72.8
76.8

177.2
181.0
186.3

139.6
143.3
143.8

153.4
150.5
153.3

154.1
145.2
141.7

462.6
468.7
469.9

1 Includes
2 Includes
3 Excludes

other items, not shown separately.
new computers and peripheral equipment only.
software ‘‘embedded,’’ or bundled, in computers and other equipment.

Source: Department of Commerce, Bureau of Economic Analysis.

298

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TABLE B–19.—Real private fixed investment by type, 1987–2002
[Billions of chained (1996) dollars; quarterly data at seasonally adjusted annual rates]
Nonresidential
Structures
Private
fixed
investment

Year or
quarter

1987 .......
1988 .......
1989 .......

Total
nonresidential

Total 1

Equipment and software

Nonresidential
buildings
including
farm

Utilities

Information processing equipment
and software

Mining
exploration,
shafts,
and
wells

Total 1
Total

Computers
Softand pe- ware 3
ripheral
equipment 2

Other

Industrial
equipment

Transportation
equipment

Residential

856.0
887.1
911.2

572.5
603.6
637.0

224.3
227.1
232.7

162.6
166.5
171.4

34.9
33.6
35.4

18.6
20.4
18.4

360.0
386.9
414.0

105.1
116.4
131.3

10.3
11.8
14.4

27.9
32.4
40.1

78.0
83.5
86.8

99.9
104.9
112.4

88.0
93.6
84.9

290.7
289.2
277.3

.......
.......
.......
.......
.......
.......
.......
.......
.......
......

894.6
832.5
886.5
958.4
1,045.9
1,109.2
1,212.7
1,328.6
1,480.0
1,595.2

641.7
610.1
630.6
683.6
744.6
817.5
899.4
1,009.3
1,135.9
1,228.4

236.1
210.1
197.3
198.9
200.5
210.1
225.0
245.4
262.2
258.6

173.6
142.7
129.2
131.7
137.2
147.6
161.7
177.0
188.3
185.5

33.0
38.9
41.8
38.4
36.1
36.8
36.0
35.3
42.7
45.7

21.3
20.8
17.2
20.5
19.8
18.2
21.1
26.2
25.1
21.6

415.7
407.2
437.5
487.1
544.9
607.6
674.4
764.2
875.4
975.9

136.4
142.7
163.0
183.4
206.6
242.8
287.3
349.8
429.3
508.1

14.2
15.4
20.8
26.4
32.6
49.2
70.9
102.9
147.7
207.4

45.9
51.4
58.7
66.8
74.3
82.0
95.1
119.0
147.1
169.3

87.6
86.4
91.5
96.4
104.9
113.1
121.3
129.8
143.5
157.5

105.8
99.0
100.8
109.6
119.6
131.3
136.4
140.0
145.6
147.5

87.4
87.7
92.3
103.4
120.4
128.2
138.9
150.5
168.2
193.2

253.5
221.1
257.2
276.0
302.7
291.7
313.3
319.7
345.1
368.3

2000 .......
2001 .......

1,691.9
1,627.4

1,324.2
1,255.1

275.5
270.9

192.3
178.7

50.4
50.3

27.0
34.0

1,056.0
988.2

583.3
548.5

246.4
239.9

184.4
182.0

187.4
163.9

160.8
153.8

186.6
163.6

372.4
373.5

1998: I ....
II ...
III ..
IV ..

1,431.4
1,471.4
1,485.4
1,531.7

1,099.5
1,132.3
1,136.6
1,175.4

255.7
264.8
263.0
265.1

184.1
189.6
187.5
191.9

40.6
43.0
43.7
43.7

24.9
26.0
25.9
23.7

845.0
868.6
875.1
912.9

404.5
422.5
433.7
456.4

132.7
142.4
147.7
167.7

138.8
144.6
150.0
155.0

138.9
143.0
144.4
147.9

148.7
145.6
143.3
144.8

161.2
166.4
164.2
181.0

333.0
340.5
349.5
357.4

1999: I ....
II ...
III ..
IV ..

1,560.5
1,587.6
1,610.6
1,622.2

1,197.5
1,220.4
1,243.3
1,252.4

262.4
258.9
254.7
258.5

192.1
186.0
182.3
181.7

44.1
44.3
46.2
48.3

20.4
21.9
20.8
23.1

939.1
967.1
996.1
1,001.2

477.3
506.8
522.2
526.1

186.1
209.2
218.8
215.3

160.2
167.8
172.5
176.8

151.1
157.1
160.7
161.2

142.5
146.9
150.1
150.5

188.1
188.6
199.1
196.8

364.1
368.4
369.2
371.7

2000: I ....
II ...
III ..
IV ..

1,673.6
1,700.9
1,701.7
1,691.3

1,297.1
1,329.1
1,340.7
1,329.9

267.0
272.3
280.2
282.7

188.4
192.4
194.5
193.9

48.3
49.3
51.1
52.9

24.5
25.0
28.6
30.1

1,038.0
1,065.3
1,067.7
1,053.1

561.3
585.5
591.9
594.3

226.7
249.2
255.9
253.9

181.8
184.3
185.8
185.6

180.2
188.2
189.1
192.2

156.0
159.3
164.5
163.4

193.9
192.5
186.9
173.0

379.1
376.2
367.2
367.2

2001: I ....
II ..
III ..
IV ..

1,682.1
1,633.5
1,615.7
1,578.4

1,311.4
1,261.0
1,241.7
1,206.4

280.4
274.4
276.3
252.7

193.8
183.2
174.2
163.5

50.6
51.5
49.7
49.3

30.9
34.6
35.9
34.8

1,036.1
989.9
966.4
960.3

578.9
549.8
533.4
531.8

253.0
239.0
224.5
243.3

185.5
181.7
180.5
180.6

180.2
165.7
158.6
151.2

164.8
156.4
149.2
144.7

167.6
161.6
160.0
165.4

374.5
374.0
374.3
371.0

2002: I ....
II ...
III ..

1,576.4
1,572.6
1,571.6

1,188.4
1,181.1
1,178.7

243.2
231.7
218.2

157.1
148.2
139.1

50.8
48.4
45.6

30.2
30.3
29.9

953.7
961.4
977.2

540.4
557.0
575.2

262.1
271.6
297.6

179.0
184.3
189.4

154.1
158.5
159.7

148.3
145.6
147.9

151.5
143.4
141.7

383.6
386.1
387.1

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

1 Includes

other items, not shown separately.
new computers and peripheral equipment only.
software ‘‘embedded,’’ or bundled, in computers and other equipment.
Source: Department of Commerce, Bureau of Economic Analysis.
2 Includes

3 Excludes

299

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TABLE B–20.—Government consumption expenditures and gross investment by type, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Government consumption expenditures and gross investment
Federal
State and local
National defense
Year or
quarter

Total
Total
Total

Nondefense

Gross
investment

Consumption
expenditures

Structures

Equipment
and
software

Total

Gross
investment

Consumption
expenditures

Structures

Equipment
and
software

Total

Gross
investment

Consumption
expenditures

Structures

Equipment
and
software

1959 .......

112.5

67.4

56.0

42.2

2.5

11.2

11.4

9.8

1.5

0.2

45.1

31.1

12.8

1.1

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.......
.......
.......
.......
.......
.......
.......
.......
.......
.......

113.8
121.5
132.2
138.5
145.1
153.7
174.3
195.3
212.8
224.6

65.9
69.5
76.9
78.5
79.8
82.1
94.4
106.8
114.0
116.1

55.2
58.1
62.8
62.7
61.8
62.4
73.8
85.8
92.2
92.6

42.8
44.3
48.3
50.1
50.3
52.4
61.4
71.5
79.0
80.1

2.2
2.4
2.0
1.6
1.3
1.1
1.3
1.2
1.2
1.5

10.1
11.5
12.5
11.0
10.2
8.9
11.1
13.1
11.9
11.0

10.7
11.3
14.1
15.8
18.0
19.7
20.7
21.0
21.8
23.5

8.7
8.9
11.2
12.3
13.9
15.0
15.8
16.9
18.0
19.9

1.7
1.9
2.1
2.3
2.5
2.8
2.8
2.2
2.1
1.9

.3
.6
.8
1.2
1.6
1.9
2.1
1.9
1.7
1.7

47.9
52.0
55.3
59.9
65.3
71.6
79.9
88.6
98.8
108.5

34.0
37.0
39.4
42.4
46.3
50.8
56.8
63.2
71.1
80.2

12.7
13.8
14.5
16.0
17.2
19.0
21.0
23.0
25.2
25.6

1.2
1.3
1.3
1.5
1.8
1.9
2.1
2.3
2.4
2.7

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.......
.......
.......
.......
.......
.......
.......
.......
.......
.......

237.1
251.0
270.1
287.9
322.4
361.1
384.5
415.3
455.6
503.5

116.4
117.6
125.6
127.8
138.2
152.1
160.6
176.0
191.9
211.6

90.9
89.0
93.5
93.9
99.7
107.9
113.2
122.6
132.0
146.7

78.7
79.3
82.3
82.6
87.5
93.4
97.9
105.8
114.2
125.3

1.3
1.8
1.8
2.1
2.2
2.3
2.1
2.4
2.5
2.5

10.9
7.9
9.4
9.2
10.1
12.1
13.2
14.4
15.3
18.9

25.5
28.6
32.2
33.9
38.5
44.2
47.4
53.5
59.8
65.0

21.7
24.4
27.6
29.0
32.9
37.7
40.1
45.5
50.1
54.7

2.1
2.5
2.7
3.1
3.4
4.1
4.6
5.0
6.1
6.3

1.7
1.7
1.8
1.8
2.2
2.4
2.7
3.0
3.7
4.0

120.7
133.5
144.4
160.1
184.2
209.0
223.9
239.3
263.8
291.8

92.0
103.4
113.8
126.9
144.5
165.4
180.1
196.5
214.3
235.0

25.8
27.0
27.1
29.1
34.7
38.1
38.1
36.9
42.8
49.0

3.0
3.1
3.5
4.1
4.9
5.5
5.7
5.9
6.6
7.8

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.......
.......
.......
.......
.......
.......
.......
.......
.......
.......

569.7
631.4
684.4
735.9
800.8
878.3
942.3
997.9
1,036.9
1,100.2

245.3
281.8
312.8
344.4
376.4
413.4
438.7
460.4
462.6
482.6

169.6
197.8
228.3
252.5
283.5
312.4
332.2
351.2
355.9
363.2

145.3
168.9
193.6
210.6
234.9
254.9
269.3
284.8
294.6
300.5

3.2
3.2
4.0
4.8
4.9
6.2
6.8
7.7
7.4
6.4

21.1
25.7
30.8
37.1
43.8
51.3
56.1
58.8
53.9
56.3

75.6
84.0
84.5
92.0
92.8
101.0
106.5
109.3
106.8
119.3

63.6
71.0
71.7
77.4
77.1
84.1
89.0
89.9
88.2
99.1

7.1
7.7
6.8
6.7
7.0
7.3
8.0
9.0
6.8
6.9

4.9
5.3
6.0
7.8
8.7
9.6
9.5
10.4
11.7
13.4

324.4
349.6
371.6
391.5
424.4
464.9
503.6
537.5
574.3
617.7

260.5
284.6
306.8
325.1
349.5
380.5
410.8
439.0
467.9
503.0

55.1
55.4
54.2
54.2
60.5
67.6
74.2
78.8
84.8
88.7

8.9
9.5
10.6
12.2
14.4
16.8
18.6
19.6
21.5
26.0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.......
.......
.......
.......
.......
.......
.......
......
.......
......

1,181.4
1,235.5
1,270.5
1,293.0
1,327.9
1,372.0
1,421.9
1,487.9
1,538.5
1,641.0

508.4
527.4
534.5
527.3
521.1
521.5
531.6
538.2
539.2
565.0

374.9
384.5
378.5
364.9
355.1
350.6
357.0
352.6
349.1
364.3

308.9
321.1
316.9
309.2
301.1
297.5
302.4
304.2
299.7
312.0

6.1
4.6
5.2
5.1
5.7
6.3
6.7
5.7
5.4
5.3

59.8
58.8
56.3
50.7
48.3
46.9
47.9
42.7
44.0
47.0

133.6
142.9
156.0
162.4
165.9
170.9
174.6
185.6
190.1
200.7

111.0
118.1
128.8
133.4
138.6
141.8
142.9
152.7
153.4
159.6

8.0
9.2
10.3
11.2
10.5
10.8
11.1
9.7
11.2
11.6

14.6
15.7
16.9
17.7
16.8
18.4
20.5
23.2
25.5
29.4

673.0
708.1
736.0
765.7
806.8
850.5
890.4
949.7
999.3
1,076.0

545.8
576.1
601.6
629.5
662.6
694.7
726.5
766.4
808.3
864.7

98.5
103.2
104.2
104.5
108.7
117.3
122.5
139.3
142.4
158.3

28.7
28.9
30.1
31.7
35.5
38.6
41.3
44.0
48.6
53.0

2000 ......
2001 ......
1998: I ....
II ...
III ..
IV ..

1,751.0
1,858.0
1,501.8
1,533.8
1,548.1
1,570.3

589.2
628.1
526.1
542.9
539.5
548.4

374.9
399.9
338.4
348.8
354.7
354.7

321.4
344.5
291.6
300.8
301.4
305.0

5.3
5.4
5.6
5.0
5.8
5.1

48.2
50.0
41.1
42.9
47.4
44.5

214.3
228.2
187.7
194.2
184.8
193.7

171.9
184.0
152.6
155.7
148.5
156.7

10.8
10.4
10.7
10.6
11.5
12.0

31.6
33.8
24.4
27.9
24.8
24.9

1,161.8
1,229.9
975.8
990.9
1,008.6
1,021.9

937.9
993.7
792.3
803.2
814.1
823.6

167.4
177.6
136.5
139.6
145.5
148.0

56.5
58.6
47.0
48.1
49.0
50.3

1999: I ....
II ...
III ..
IV ..

1,594.6
1,620.1
1,653.9
1,695.4

550.0
556.1
569.0
584.9

354.0
355.1
368.7
379.5

306.9
303.0
313.4
324.8

5.5
5.5
5.2
5.1

41.6
46.7
50.2
49.6

196.0
201.0
200.3
205.5

158.6
158.6
160.0
161.3

11.7
11.0
11.3
12.5

25.7
31.4
29.0
31.7

1,044.5
1,064.0
1,084.8
1,110.5

836.3
855.6
874.4
892.3

156.9
155.8
156.9
163.8

51.3
52.6
53.6
54.4

2000: I ....
II ...
III ..
IV ..

1,716.5
1,748.8
1,757.2
1,781.4

575.7
598.5
589.7
592.9

365.5
379.1
375.0
380.0

311.9
325.8
321.3
326.5

5.0
5.4
5.8
5.2

48.6
47.9
47.9
48.3

210.2
219.4
214.7
213.0

168.1
175.5
172.8
171.3

11.6
10.8
10.3
10.5

30.6
33.1
31.5
31.2

1,140.8
1,150.3
1,167.4
1,188.5

914.0
930.0
945.4
962.2

172.2
164.5
164.8
168.0

54.6
55.9
57.3
58.4

2001: I ....
II ...
III ..
IV ..

1,825.0
1,858.5
1,851.7
1,896.8

613.3
624.8
627.4
646.9

391.4
395.2
400.3
412.8

338.4
340.0
343.4
356.0

5.5
5.5
5.0
5.7

47.5
49.7
51.9
51.1

221.9
229.6
227.2
234.1

178.8
184.9
184.5
187.5

10.7
9.6
9.8
11.6

32.4
35.0
32.8
35.0

1,211.7
1,233.7
1,224.3
1,249.8

976.2
990.6
1,000.1
1,008.2

177.8
184.6
164.8
183.1

57.7
58.6
59.4
58.6

2002: I ....
II ...
III ..

1,939.5
1,959.8
1,981.1

672.0
688.2
697.7

431.7
442.1
451.2

372.1
382.5
388.9

5.1
5.4
5.4

54.6
54.2
57.0

240.3
246.1
246.5

194.2
198.6
200.9

13.3
12.1
11.3

32.8
35.4
34.3

1,267.5
1,271.6
1,283.3

1,017.7
1,030.6
1,039.6

192.5
184.4
187.4

57.2
56.6
56.4

Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–21.—Real government consumption expenditures and gross investment by type, 1987–2002
[Billions of chained (1996) dollars; quarterly data at seasonally adjusted annual rates]
Government consumption expenditures and gross investment
Federal
State and local
National defense
Year or
quarter

Total
Total
Total

Consumption
expenditures

Nondefense

Gross
investment

Structures

Equipment
and
software

Total

Consumption
expenditures

Gross
investment

Structures

Equipment
and
software

Total

Consumption
expenditures

Gross
investment

Structures

Equipment
and
software

1987 .........
1988 .........
1989 .........

1,292.5
1,307.5
1,343.5

597.8
586.9
594.7

450.2
446.8
443.3

373.2
376.1
372.4

11.2
10.4
8.3

65.7
60.7
62.6

146.5
138.9
150.5

125.4
119.2
129.6

11.6
8.6
8.3

10.6
11.7
13.2

695.6
721.4
749.5

577.3
596.8
617.9

99.9
104.3
106.5

20.3
21.9
26.0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.........
.........
.........
.........
.........
.........
.........
.........
.........
.........

1,387.3
1,403.4
1,410.0
1,398.8
1,400.1
1,406.4
1,421.9
1,455.4
1,483.3
1,540.6

606.8
604.9
595.1
572.0
551.3
536.5
531.6
529.6
525.4
537.7

443.2
438.4
417.1
394.7
375.9
361.9
357.0
347.7
341.6
348.8

369.7
369.5
350.6
336.1
320.5
308.7
302.4
298.5
290.6
295.3

7.7
5.7
6.3
5.7
6.2
6.5
6.7
5.5
5.1
4.8

65.4
62.9
60.0
52.8
49.2
46.8
47.9
43.6
45.9
49.0

163.0
166.0
177.9
177.3
175.5
174.6
174.6
181.8
183.8
188.8

140.1
140.9
150.0
147.8
148.0
145.7
142.9
148.6
146.5
147.6

9.3
10.4
11.6
12.4
11.2
11.1
11.1
9.4
10.6
10.7

14.2
781.1
15.0
798.9
16.5
815.3
17.2
827.0
16.5
848.9
17.9
869.9
20.5
890.4
23.9
925.8
27.0
957.7
31.2 1,002.4

638.9
653.4
667.8
680.4
697.5
711.3
726.5
745.7
771.9
801.2

114.5
118.3
118.7
116.1
117.0
120.9
122.5
134.7
134.0
143.8

28.4
28.1
29.4
31.0
34.6
37.8
41.3
45.4
52.3
58.4

2000 .........
2001 .........

1,582.5
1,640.4

544.4
570.6

348.7
366.0

294.1
308.9

4.6
4.6

50.4
53.0

195.6
204.4

153.7
161.1

9.5
8.9

33.3 1,037.4
35.4 1,069.4

831.1
856.8

145.2
148.6

62.7
65.9

1998: I ......
II .....
III ....
IV ...

1,456.1
1,482.6
1,489.9
1,504.8

515.0
530.1
524.9
531.7

332.0
342.0
346.5
345.8

283.9
292.7
291.8
294.2

5.4
4.8
5.5
4.8

42.7
44.6
49.5
47.0

183.0
188.0
178.4
185.8

147.3
149.0
141.5
148.2

10.2
10.1
10.8
11.3

25.7
29.5
26.4
26.6

940.8
952.4
964.7
972.8

761.7
768.9
775.7
781.3

129.6
132.3
136.5
137.5

49.9
51.6
53.0
54.7

1999: I ......
II .....
III ....
IV ....

1,515.9
1,526.7
1,546.5
1,573.2

527.2
530.6
540.1
553.0

341.2
341.0
352.4
360.8

292.7
287.7
295.9
305.0

5.1
5.0
4.7
4.6

43.3
48.6
52.4
51.7

185.9
189.5
187.7
192.1

148.1
147.0
147.3
148.2

10.9
10.1
10.3
11.3

27.2
988.3
33.2
995.7
30.8 1,006.0
33.6 1,019.8

788.1
796.7
805.9
814.2

144.6
142.0
141.9
146.6

56.3
57.9
59.3
60.2

2000: I ......
II .....
III ...
IV ....

1,568.3
1,586.1
1,582.2
1,593.4

533.8
554.0
543.7
546.4

341.3
353.4
347.9
351.9

286.8
299.0
293.3
297.4

4.4
4.7
5.0
4.5

50.8
50.1
50.1
50.6

192.3
200.3
195.6
194.3

150.4
156.9
154.3
153.3

10.3
9.6
9.1
9.1

32.4
34.9
33.1
32.7

1,033.8
1,031.8
1,037.8
1,046.3

822.0
828.1
834.1
840.1

152.3
143.1
142.0
143.4

60.5
62.0
63.4
64.8

2001: I ......
II .....
III ...
IV ....

1,615.7
1,638.0
1,633.3
1,674.5

559.0
567.2
568.9
587.2

359.0
361.4
365.5
378.0

304.5
304.9
307.2
319.1

4.7
4.6
4.2
4.7

50.1
52.4
54.9
54.6

199.8
205.6
203.2
209.1

157.5
162.0
161.3
163.7

9.2
8.3
8.4
9.9

34.0
36.5
34.4
36.6

1,056.2
1,070.2
1,064.1
1,087.1

843.3
851.4
861.8
870.7

149.9
154.9
137.9
151.7

64.6
65.7
66.7
66.4

2002: I ......
II .....
III ...

1,697.3
1,703.3
1,715.6

597.8
608.7
615.1

388.5
395.8
402.5

326.7
333.9
338.0

4.2
4.5
4.4

58.5
58.2
61.1

209.3
212.9
212.7

164.3
166.5
167.9

11.3
10.2
9.5

34.4 1,099.3
37.3 1,094.7
36.3 1,100.6

875.9
879.4
883.0

159.4
151.9
153.9

65.0
64.6
64.7

Note.—See Table B-2 for data for total Government consumption expenditures and gross investment for 1959-86.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–22.—Private inventories and domestic final sales by industry, 1959–2002
[Billions of dollars, except as noted; seasonally adjusted]
Private inventories 1

Quarter
Total 2

Fourth quarter:
1959 .......................

Farm

Construction,
mining,
and utilities 2

Manufacturing

Wholesale
trade

Retail
trade

Other
industries 2

Nonfarm 2

Final
sales
of
domestic
business 3

Ratio of private
inventories
to final sales of
domestic business
Total

Nonfarm

121.4

30.6

..............

47.7

16.5

20.5

6.1

90.8

36.5

3.33

2.49

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................

125.0
128.2
135.3
137.7
143.1
157.2
173.7
184.0
197.4
215.8

31.4
33.0
34.9
32.2
30.8
35.0
35.4
35.0
38.1
41.2

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

48.7
50.1
53.2
55.1
58.6
63.4
73.0
79.9
85.1
92.6

16.9
17.3
18.0
19.5
20.8
22.5
25.8
28.1
29.3
32.5

21.9
21.3
22.7
23.9
25.2
28.0
30.6
30.9
34.2
37.5

6.1
6.6
6.6
7.1
7.7
8.3
8.9
10.1
10.6
12.0

93.5
95.2
100.5
105.5
112.2
122.2
138.3
149.1
159.3
174.6

37.7
39.5
41.9
44.5
47.5
52.5
55.7
59.2
65.1
69.4

3.31
3.24
3.23
3.09
3.01
2.99
3.12
3.11
3.03
3.11

2.48
2.41
2.40
2.37
2.36
2.33
2.48
2.52
2.45
2.52

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................

222.9
240.6
266.7
322.7
382.3
387.3
419.3
462.7
546.8
644.7

39.6
46.3
56.9
73.4
64.2
68.3
65.1
71.3
95.1
112.1

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

95.5
96.6
102.1
121.5
162.6
162.2
178.7
193.2
219.8
261.8

36.4
39.4
43.1
51.7
66.9
66.5
74.1
84.0
99.0
119.5

38.5
44.7
49.8
58.4
63.9
64.4
73.0
80.9
94.1
104.7

12.9
13.7
14.8
17.7
24.7
25.9
28.5
33.3
38.8
46.6

183.3
194.4
209.9
249.4
318.1
319.0
354.2
391.4
451.7
532.6

73.1
79.6
88.7
97.8
105.8
118.5
130.3
145.6
168.3
187.3

3.05
3.02
3.01
3.30
3.61
3.27
3.22
3.18
3.25
3.44

2.51
2.44
2.37
2.55
3.01
2.69
2.72
2.69
2.68
2.84

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................

710.7
754.9
752.1
769.6
845.5
856.5
839.4
901.0
968.8
1,016.3

112.1
103.2
109.5
104.5
108.0
106.3
94.3
96.6
99.7
101.6

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

293.4
313.1
304.6
308.9
344.5
333.3
320.6
339.6
372.4
390.5

139.4
148.8
147.9
153.4
169.1
175.9
182.0
195.8
213.9
222.8

111.7
123.2
123.2
137.6
157.0
171.4
176.2
199.1
213.2
231.4

54.1
66.6
66.8
65.2
66.9
69.5
66.3
69.9
69.5
70.1

598.7
651.7
642.6
665.1
737.6
750.2
745.1
804.4
869.1
914.7

205.8
223.0
234.2
257.2
279.2
300.2
318.5
336.5
366.0
388.5

3.45
3.39
3.21
2.99
3.03
2.85
2.64
2.68
2.65
2.62

2.91
2.92
2.74
2.59
2.64
2.50
2.34
2.39
2.37
2.35

1990
1991
1992
1993
1994
1995

.......................
.......................
.......................
.......................
.......................
.......................

1,054.5
1,028.0
1,052.0
1,082.8
1,163.0
1,222.4

105.7
94.0
102.4
99.1
102.9
96.3

..............
..............
..............
..............
..............
..............

404.5
384.1
377.6
380.1
404.3
424.5

236.8
239.2
248.3
258.6
281.5
303.7

236.6
240.2
249.4
268.6
293.6
312.2

71.0
70.5
74.3
76.5
80.6
85.6

948.9
934.0
949.5
983.7
1,060.0
1,126.1

406.2
417.5
446.6
470.0
496.8
523.7

2.60
2.46
2.36
2.30
2.34
2.33

2.34
2.24
2.13
2.09
2.13
2.15

1996 .......................
1997 .......................

1,251.5
1,296.5

103.4
107.3

31.1
31.3

421.0
429.7

285.1
303.5

328.7
337.7

82.1
87.0

1,148.1
1,189.1

556.3
590.7

2.25
2.19

2.06
2.01

1998: I ........................
II .......................
III ......................
IV ......................

1,312.3
1,312.9
1,315.3
1,325.6

107.8
101.2
93.9
93.0

30.4
31.8
32.1
33.3

433.8
437.7
439.0
439.3

308.0
308.7
312.0
315.5

345.4
345.9
350.0
354.9

87.0
87.6
88.4
89.6

1,204.5
1,211.7
1,221.4
1,232.6

598.4
608.4
614.6
626.9

2.19
2.16
2.14
2.11

2.01
1.99
1.99
1.97

1999: I ........................
II .......................
III ......................
IV ......................

1,346.6
1,365.0
1,390.4
1,423.5

101.3
101.9
98.7
98.9

33.5
34.8
35.6
35.4

441.1
446.3
455.8
467.7

319.3
322.4
330.6
339.2

360.8
366.3
374.2
385.0

90.7
93.2
95.5
97.2

1,245.3
1,263.0
1,291.7
1,324.6

634.5
643.6
653.3
664.7

2.12
2.12
2.13
2.14

1.96
1.96
1.98
1.99

2000: I ........................
II .......................
III .....................
IV ......................

1,452.7
1,480.6
1,498.8
1,524.8

102.5
100.7
95.9
102.5

36.0
37.1
39.1
40.0

476.4
485.1
492.7
497.3

348.5
354.9
358.7
362.5

388.0
397.5
403.0
411.6

101.3
105.2
109.5
111.0

1,350.3
1,379.9
1,402.9
1,422.3

676.5
685.3
690.9
696.6

2.15
2.16
2.17
2.19

2.00
2.01
2.03
2.04

2001: I ........................
II .......................
III ......................
IV ......................

1,529.5
1,507.7
1,475.5
1,430.1

110.0
107.4
101.2
100.8

44.3
42.7
39.8
39.3

495.5
484.2
470.5
451.9

360.0
357.3
349.3
337.3

407.2
402.8
401.8
388.9

112.4
113.3
112.9
111.9

1,419.4
1,400.3
1,374.3
1,329.4

707.4
709.7
712.1
718.5

2.16
2.12
2.07
1.99

2.01
1.97
1.93
1.85

2002: I ........................
II .......................
III ......................

1,429.4
1,438.1
1,446.9

104.7
104.0
100.1

39.5
41.9
41.3

447.0
445.7
447.9

334.5
335.1
341.2

392.4
398.0
402.3

111.4
113.4
114.1

1,324.7
1,334.1
1,346.8

723.8
724.7
732.6

1.97
1.98
1.98

1.83
1.84
1.84

NAICS:

1 Inventories at end of quarter. Quarter-to-quarter change calculated from this table is not the current-dollar change in private inventories
component of GDP. The former is the difference between two inventory stocks, each valued at its 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 change in private inventories is stated at annual rates.
2 Inventories of construction, mining, and utilities establishments are included in other industries through 1995.
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 farm and by government enterprises.
Note.—The industry classification of inventories is on an establishment basis. Estimates through 1995 are based on the Standard Industrial Classification (SIC). Beginning with 1996, estimates are based on the North American Industry Classification System (NAICS).
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–23.—Real private inventories and domestic final sales by industry, 1987–2002
[Billions of chained (1996) dollars, except as noted; seasonally adjusted]
Private inventories 1

Quarter
Total 2

Fourth quarter:
1987 ............................
1988 ............................
1989 ............................

Farm

Construction,
mining,
and
utilities 2

Manufacturing

Wholesale
trade

Retail
trade

Other
industries 2

Nonfarm 2

Final
sales
of
domestic
business 3

Ratio of private
inventories
to final sales of
domestic business

Total

Nonfarm

1,024.1
1,042.5
1,072.1

110.7
96.5
96.6

............
............
............

361.6
378.5
392.7

228.6
238.5
243.2

239.7
247.4
261.9

81.6
80.4
76.8

911.7
945.4
975.2

422.7
443.0
454.7

2.42
2.35
2.36

2.16
2.13
2.14

............................
............................
............................
............................
............................
............................

1,088.6
1,087.6
1,104.7
1,124.6
1,191.5
1,221.9

99.2
96.9
103.1
95.2
108.1
95.9

............
............
............
............
............
............

401.6
394.9
390.1
393.7
405.8
419.9

252.2
257.3
266.2
273.1
290.2
304.5

260.2
260.8
265.4
280.8
301.4
313.6

73.8
76.8
79.1
81.9
85.9
88.0

989.0
990.4
1,001.1
1,029.8
1,083.3
1,126.0

457.2
457.5
479.7
493.9
512.2
529.7

2.38
2.38
2.30
2.28
2.33
2.31

2.16
2.17
2.09
2.08
2.11
2.13

NAICS:
1996 ............................
1997 ............................

1,251.9
1,315.6

103.7
106.9

28.9
31.6

422.1
436.8

287.4
311.3

327.9
339.9

81.9
88.7

1,148.1
1,208.7

552.8
576.7

2.26
2.28

2.08
2.10

1998: I .........................
II ........................
III .......................
IV .......................

1,343.9
1,354.4
1,372.3
1,392.3

108.5
107.1
107.3
108.4

32.9
34.4
35.5
37.1

446.3
453.0
458.3
464.0

319.7
322.6
329.8
335.2

347.0
347.0
350.3
354.4

89.1
89.9
90.9
92.9

1,235.4
1,247.2
1,264.9
1,283.7

582.9
591.7
595.9
606.7

2.31
2.29
2.30
2.29

2.12
2.11
2.12
2.12

1999: I .........................
II ........................
III .......................
IV .......................

1,412.3
1,420.1
1,432.0
1,455.1

110.7
110.9
107.8
106.5

38.0
37.8
36.9
36.2

467.6
467.9
471.5
478.3

340.1
341.6
347.0
354.2

361.1
365.1
370.3
380.0

94.5
96.3
97.7
98.6

1,301.4
1,309.0
1,323.6
1,347.8

612.0
619.0
626.3
635.2

2.31
2.29
2.29
2.29

2.13
2.11
2.11
2.12

2000: I .........................
II ........................
III ......................
IV ......................

1,466.4
1,489.3
1,505.1
1,520.1

103.0
103.7
103.2
104.0

36.7
35.7
35.5
33.6

482.0
488.3
491.8
495.8

359.9
365.5
369.6
374.1

381.9
390.0
394.8
401.6

101.6
104.7
108.7
109.8

1,362.5
1,384.7
1,400.8
1,415.0

642.3
647.1
650.4
652.4

2.28
2.30
2.31
2.33

2.12
2.14
2.15
2.17

2001: I .........................
II ........................
III ......................
IV ......................

1,513.3
1,498.8
1,483.3
1,458.7

105.4
104.6
105.1
106.0

34.9
37.5
38.9
40.0

491.1
480.7
469.7
459.6

372.9
370.6
364.3
357.6

396.6
392.3
391.5
381.3

111.0
111.3
111.8
112.4

1,406.8
1,393.1
1,377.2
1,351.8

657.0
655.3
654.1
661.4

2.30
2.29
2.27
2.21

2.14
2.13
2.11
2.04

2002: I .........................
II ........................
III ......................

1,451.5
1,452.7
1,457.4

107.6
107.8
107.2

40.4
40.2
39.6

451.7
448.1
447.5

352.6
350.4
352.4

384.7
390.2
394.1

112.4
113.7
114.3

1,343.1
1,344.1
1,349.3

665.3
664.6
670.6

2.18
2.19
2.17

2.02
2.02
2.01

1990
1991
1992
1993
1994
1995

1 Inventories at end of quarter. Quarter-to-quarter changes calculated from this table are at quarterly rates, whereas the change in private
inventories component of GDP is stated at annual rates.
2 Inventories of construction, mining, and utilities establishments are included in other industries through 1995.
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 farm and by government enterprises.
Note.—The industry classification of inventories is on an establishment basis. Estimates for 1987 through 1995 are based on the 1987
Standard Industrial Classification (SIC). Beginning with 1996, estimates are based on the North American Industry Classification System
(NAICS).

See Survey of Current Business, Table 5.13B, for detailed information on calculation of the chained (1996) dollar inventory series.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–24.—Foreign transactions in the national income and product accounts, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Receipts from rest of the world

Year or
quarter

Exports of goods and
services
Total
Total

Goods 1

Services 1

Payments to rest of the world
Imports of goods and
services

Income
receipts

Total
Total

Goods 1

Services 1

Income
payments

Transfer payments
(net)

Total

From
persons
(net)

From
government
(net)

From
business

Net
foreign
investment

1959 .............

25.0

20.6

16.5

4.2

4.3

25.0

22.3

15.3

7.0

1.5

2.4

0.5

1.8

0.1

−1.2

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

30.2
31.4
33.5
36.1
41.0
43.5
47.2
50.2
55.6
61.2

25.3
26.0
27.4
29.4
33.6
35.4
38.9
41.4
45.3
49.3

20.5
20.9
21.7
23.3
26.7
27.8
30.7
32.2
35.3
38.3

4.8
5.1
5.7
6.1
6.9
7.6
8.2
9.2
10.0
11.0

5.0
5.4
6.1
6.6
7.4
8.1
8.3
8.9
10.3
11.9

30.2
31.4
33.5
36.1
41.0
43.5
47.2
50.2
55.6
61.2

22.8
22.7
25.0
26.1
28.1
31.5
37.1
39.9
46.6
50.5

15.2
15.1
16.9
17.7
19.4
22.2
26.3
27.8
33.9
36.8

7.6
7.6
8.1
8.4
8.7
9.3
10.7
12.2
12.6
13.7

1.8
1.8
1.8
2.1
2.4
2.7
3.1
3.4
4.1
5.8

2.4
2.7
2.8
2.8
3.0
3.0
3.2
3.4
3.2
3.2

.5
.5
.5
.7
.7
.8
.8
1.0
1.0
1.1

1.8
2.1
2.1
2.1
2.1
2.0
2.2
2.1
1.9
1.8

.1
.1
.1
.1
.2
.2
.2
.2
.3
.3

3.2
4.3
3.9
5.0
7.5
6.2
3.9
3.5
1.7
1.8

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

69.9
73.4
82.6
115.6
154.6
164.4
181.7
196.6
233.5
299.1

57.0
59.3
66.2
91.8
124.3
136.3
148.9
158.8
186.1
228.7

44.5
45.6
51.8
73.9
101.0
109.6
117.8
123.7
145.4
184.0

12.4
13.8
14.4
17.8
23.3
26.7
31.1
35.1
40.7
44.7

13.0
14.1
16.4
23.8
30.3
28.2
32.9
37.9
47.4
70.4

69.9
73.4
82.6
115.6
154.6
164.4
181.7
196.6
233.5
299.1

55.8
62.3
74.2
91.2
127.5
122.7
151.1
182.4
212.3
252.7

40.9
46.6
56.9
71.8
104.5
99.0
124.6
152.6
177.4
212.8

14.9
15.8
17.3
19.3
22.9
23.7
26.5
29.8
34.8
39.9

6.6
6.4
7.7
11.1
14.6
14.9
15.7
17.2
25.3
37.5

3.6
4.1
4.3
4.6
5.4
5.4
6.0
6.0
6.4
7.5

1.3
1.3
1.4
1.5
1.3
1.3
1.3
1.3
1.5
1.6

1.9
2.3
2.5
2.4
3.1
3.4
3.6
3.3
3.6
3.9

.4
.4
.5
.7
1.0
.7
1.1
1.4
1.4
2.0

4.0
.6
−3.6
8.7
7.1
21.4
8.9
−9.0
−10.4
1.4

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

360.7
398.4
385.0
379.5
426.0
416.1
431.4
488.5
598.7
686.2

278.9
302.8
282.6
277.0
303.1
303.0
320.3
365.6
446.9
509.0

225.8
239.1
215.0
207.3
225.6
222.2
226.0
257.5
325.8
371.7

53.2
63.7
67.6
69.7
77.5
80.8
94.3
108.1
121.1
137.3

81.8
95.6
102.4
102.5
122.9
113.1
111.1
122.9
151.8
177.2

360.7
398.4
385.0
379.5
426.0
416.1
431.4
488.5
598.7
686.2

293.8
317.8
303.2
328.6
405.1
417.2
452.2
507.9
553.2
589.7

248.6
267.8
250.5
272.7
336.3
343.3
370.0
414.8
452.1
484.5

45.3
49.9
52.6
56.0
68.8
73.9
82.2
93.1
101.1
105.2

46.5
60.9
65.9
65.6
87.6
87.8
95.6
109.2
133.4
156.8

9.0
13.4
16.1
17.2
20.3
22.1
24.2
23.4
25.4
26.3

1.8
5.5
6.5
6.8
7.7
8.1
9.0
9.9
10.6
11.4

4.8
4.8
6.1
7.0
9.1
11.1
12.1
10.2
10.3
10.4

2.4
3.2
3.4
3.4
3.5
2.9
3.2
3.4
4.5
4.6

11.4
6.3
−.2
−32.0
−87.0
−110.9
−140.6
−152.0
−113.2
−86.7

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.............
.............
.............
.............
.............
.............
.............
............
............
............

745.5
769.3
787.8
812.5
909.3
1,050.8
1,119.7
1,247.7
1,251.1
1,306.2

557.2
601.6
636.8
658.0
725.1
818.6
874.2
966.4
964.9
989.3

398.5
426.4
448.7
459.7
509.6
583.8
618.4
688.9
681.3
697.3

158.6
175.2
188.1
198.3
215.5
234.7
255.8
277.5
283.6
292.0

188.3
167.7
151.1
154.4
184.3
232.3
245.6
281.3
286.1
316.9

745.5 628.6 508.0
769.3 622.3 500.7
787.8 664.6 544.9
812.5 718.5 592.8
909.3 812.1 676.7
1,050.8 902.8 757.6
1,119.7 963.1 808.3
1,247.7 1,055.8 885.1
1,251.1 1,116.7 930.0
1,306.2 1,239.2 1,045.3

120.6
121.6
119.8
125.7
135.4
145.2
154.8
170.7
186.7
193.9

159.3
143.0
127.6
130.1
167.5
211.9
227.5
274.2
289.6
294.1

26.8
−11.0
34.2
36.8
38.0
34.0
39.8
40.8
44.5
48.9

12.0
13.0
12.5
14.4
15.6
16.5
18.2
21.2
24.3
27.3

10.0
−29.0
16.2
16.7
15.3
9.8
13.6
10.6
11.0
11.4

4.8
5.0
5.5
5.7
7.1
7.7
8.0
8.9
9.2
10.2

−69.2
14.9
−38.7
−72.9
−108.3
−98.0
−110.7
−123.1
−199.7
−276.0

2000 ............ 1,484.5 1,101.1 785.0
2001 ............ 1,351.1 1,034.1 733.5

316.1
300.6

383.4 1,484.5 1,466.6 1,243.1
316.9 1,351.1 1,383.0 1,167.2

223.5
215.8

360.0
295.0

53.7
49.8

29.5
31.1

13.6
9.6

1998: I ..........
II .........
III ........
IV ........

1,264.2
1,252.6
1,225.1
1,262.4

974.1
959.2
946.7
979.7

693.6
673.0
666.7
692.0

280.4
286.2
280.0
287.7

290.1
293.4
278.3
282.7

1,264.2
1,252.6
1,225.1
1,262.4

1,096.7
1,114.1
1,112.0
1,143.8

915.5
928.4
923.2
952.8

181.2
185.7
188.9
191.0

283.4
290.4
292.7
291.8

39.6
40.6
43.1
54.7

22.9
24.3
24.2
25.8

8.1
7.1
9.4
19.2

8.6
9.2
9.5
9.7

−155.5
−192.5
−222.7
−228.0

1999: I ..........
II .........
III ........
IV ........

1,250.6 959.2
1,275.5 970.2
1,321.6 996.8
1,377.1 1,031.2

673.3
680.4
703.1
732.5

285.9
289.8
293.7
298.7

291.4
305.3
324.7
345.9

1,250.6
1,275.5
1,321.6
1,377.1

1,155.6 969.5
1,212.0 1,021.0
1,271.4 1,074.3
1,317.9 1,116.5

186.1
190.9
197.1
201.4

271.4
281.1
307.6
316.3

44.5
46.6
46.7
57.6

26.3
27.2
27.6
28.2

8.3
9.9
8.6
18.7

9.9
9.6
10.5
10.8

−221.0
−264.2
−304.2
−314.7

2000: I ..........
II .........
III ........
IV ........

1,421.1
1,488.5
1,514.4
1,514.2

746.9
778.4
814.5
800.3

308.9
319.6
316.4
319.5

365.2
390.5
383.5
394.4

1,421.1
1,488.5
1,514.4
1,514.2

1,386.5
1,451.1
1,515.8
1,513.0

1,172.4
1,231.6
1,285.7
1,282.6

214.1
219.5
230.1
230.4

344.2
364.7
365.8
365.2

47.2
49.6
52.0
65.9

28.2
29.0
30.0
30.9

8.6
9.5
11.6
24.5

10.5
11.1
10.4
10.5

−356.9
−377.1
−419.1
−430.0

2001: I ..........
II .........
III ........
IV ........

1,464.3 1,100.0 787.3
1,392.2 1,059.7 750.6
1,307.8 1,005.8 708.5
1,240.0 971.1 687.7

312.7
309.1
297.3
283.4

364.2
332.5
302.0
269.0

1,464.3
1,392.2
1,307.8
1,240.0

1,472.8
1,425.3
1,318.4
1,315.6

1,240.1
1,189.9
1,140.6
1,098.3

232.7
235.5
177.8
217.3

354.3
301.4
290.5
233.7

46.7
48.0
49.7
54.6

30.9
30.9
31.8
30.6

6.4
7.7
8.9
15.3

9.4
9.3
9.0
8.8

−409.5
−382.5
−350.8
−363.9

2002: I .......... 1,242.2 977.5 679.8
II ......... 1,294.1 1,018.1 709.4
III ........ 1,325.9 1,038.6 722.6

297.7
308.8
316.0

264.7 1,242.2 1,337.5 1,102.3
276.0 1,294.1 1,443.7 1,202.9
287.3 1,325.9 1,471.5 1,220.9

235.2
240.8
250.6

262.8
296.1
298.2

63.5
51.5
51.8

31.5
31.9
32.9

22.8
10.6
9.7

9.2 −421.7
9.0 −497.2
9.2 −495.6

1,055.9
1,098.0
1,130.9
1,119.8

10.6 −395.8
9.1 −376.7

1 Certain goods, primarily military equipment purchased and sold by the Federal Government, are included in services. Beginning with
1986, repairs and alterations of equipment were reclassified from goods to services.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–25.—Real exports and imports of goods and services and receipts and payments of income,
1987–2002
[Billions of chained (1996) dollars; quarterly data at seasonally adjusted annual rates]
Exports of goods and services

Imports of goods and services

Goods 1
Year or quarter
Total
Total

1987 ......................................
1988 ......................................
1989 ......................................

Nondurable
goods

Durable
goods

Services 1

Income
receipts

408.0
473.5
529.4

271.4
322.6
363.2

154.7
191.9
221.3

123.0
135.6
146.3

139.1
152.0
166.7

161.6
192.6
215.7

......................................
575.7
......................................
613.2
......................................
651.0
......................................
672.7
......................................
732.8
......................................
808.2
.....................................
874.2
......................................
981.5
...................................... 1,002.4
...................................... 1,036.3

393.2
421.1
449.8
463.4
508.2
568.8
618.4
708.1
722.9
750.0

243.0
261.6
280.8
295.2
330.5
378.0
421.7
498.3
513.7
537.5

154.0
163.3
172.7
170.6
178.9
191.0
196.7
209.8
209.2
212.4

183.5
192.9
201.7
209.9
225.1
239.5
255.8
273.6
279.8
286.8

2000 ...................................... 1,137.2
2001 ...................................... 1,076.1

834.7
785.2

607.8
558.3

226.7
226.7

1998: I ................................... 1,003.4
II ..................................
993.1
III .................................
987.6
IV ................................. 1,025.6

726.7
710.6
711.5
742.8

516.8
503.1
505.8
529.3

1999: I ...................................
II ..................................
III .................................
IV ................................

1,007.5
1,018.1
1,044.1
1,075.6

725.4
733.7
756.8
784.2

2000: I ...................................
II ..................................
III .................................
IV ................................

1,095.8
1,133.9
1,165.5
1,153.7

2001: I ...................................
II ..................................
III ................................
IV ................................

Goods 1
Total
Total

Services 1

Income
payments

445.8
463.9
483.4

267.9
279.1
291.2

181.5
188.5
195.9

120.2
123.4
126.9

144.0
169.8
192.0

219.2
188.4
165.1
164.6
191.9
236.5
245.6
276.8
279.3
304.4

632.2 497.9
629.0 497.6
670.8 543.7
731.8 598.4
819.4 677.9
886.6 739.1
963.1 808.3
1,094.8
923.1
1,223.5 1,031.4
1,356.8 1,157.5

299.2
300.9
331.9
370.9
432.2
481.7
533.3
619.8
701.2
801.7

202.7
200.5
215.5
230.8
247.4
257.8
275.1
303.5
330.4
356.2

136.6
133.4
128.0
134.0
141.9
147.7
154.8
171.7
192.2
200.3

186.9
161.1
139.1
139.2
175.2
216.2
227.5
268.0
279.8
279.6

304.1
292.0

359.0
292.0

1,536.0 1,313.7
1,492.0 1,270.5

924.1
865.6

391.6
402.3

223.6
222.4

333.6
269.2

210.0
207.5
205.7
213.4

277.0
282.4
276.3
283.3

284.2
286.9
271.3
274.8

1,184.2
995.9
1,216.2 1,024.9
1,228.9 1,034.2
1,264.8 1,070.6

676.8
693.9
698.6
735.6

319.3
331.3
335.9
335.0

188.2
191.3
194.6
194.6

275.1
281.0
282.3
280.7

519.1
523.6
543.3
564.2

206.2
210.0
213.4
219.9

282.3
284.6
287.9
292.4

282.2
294.2
311.4
329.9

1,290.7
1,337.7
1,383.7
1,415.2

1,096.7
1,140.7
1,182.3
1,210.2

752.2
787.3
819.4
847.8

344.5
353.4
363.1
363.6

194.7
197.9
202.6
206.1

260.0
267.9
291.8
298.6

797.1
827.4
865.0
849.2

577.7
606.4
629.7
617.5

219.2
220.9
235.2
231.6

299.6
307.6
303.0
306.3

344.6
366.7
358.1
366.6

1,464.6
1,528.5
1,578.6
1,572.2

1,249.6
1,308.8
1,351.1
1,345.1

881.6
919.3
949.1
946.4

370.1
391.2
404.0
401.1

216.0
221.0
228.9
228.6

321.8
338.8
337.9
335.9

1,135.8
1,098.8
1,048.0
1,021.8

836.0
800.1
760.0
744.6

605.6
572.0
538.1
517.3

230.2
227.8
221.6
227.1

301.6
299.7
288.7
278.2

336.4
306.0
278.1
247.4

1,540.3
1,513.6
1,467.0
1,447.2

1,313.1
1,281.1
1,249.2
1,238.7

908.4
869.8
845.9
838.2

404.3
408.0
399.9
397.1

228.8
233.5
218.6
208.9

324.2
274.8
264.9
213.1

2002: I ................................... 1,030.6
II .................................. 1,065.5
III ................................ 1,077.7

738.1
765.8
773.5

512.3
536.3
546.6

225.7
229.3
226.7

292.2
299.7
304.0

242.8
251.8
261.3

1,477.1 1,250.0
1,552.9 1,329.2
1,565.7 1,340.3

856.0
912.5
915.5

391.5
414.3
421.7

225.5
224.3
226.0

239.2
268.2
269.5

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

564.2
585.6
608.8

Durable
goods

Nondurable
goods

1 Certain goods, primarily military equipment purchased and sold by the Federal Government, are included in services. Beginning with
1986, repairs and alterations of equipment were reclassified from goods to services.
Note.—See Table B-2 for data for total exports of goods and services and total imports of goods and services for 1959-86.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–26.—Relation of gross domestic product, gross national product, net national product, and
national income, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]

Year or
quarter

Plus:
Income
Gross
receipts
domestic
from
product rest of
the
world

Less:
Income
payments
to
rest of
the
world

Less: Consumption of
fixed capital
Equals:
Gross
national
product

Total

Less:

Equals: Indirect
Net
businaness
Govern- tional tax and
Private ment product
nontax
liability

Business
transfer
payments

Plus:
Subsidies
less
Statis- rent cur- Equals:
surtical
plus of National
disgovern- income
crepan- ment
cy
enterprises

1959 ...........

507.4

4.3

1.5

510.3

54.8

40.2

14.6

455.5

41.9

1.4

0.8

0.1

411.5

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

527.4
545.7
586.5
618.7
664.4
720.1
789.3
834.1
911.5
985.3

5.0
5.4
6.1
6.6
7.4
8.1
8.3
8.9
10.3
11.9

1.8
1.8
1.8
2.1
2.4
2.7
3.1
3.4
4.1
5.8

530.6
549.3
590.7
623.2
669.4
725.5
794.5
839.5
917.6
991.5

56.9
58.5
61.0
63.6
66.6
70.8
76.5
83.1
90.9
99.8

41.8
42.8
44.3
46.0
48.4
51.7
56.3
61.4
67.4
74.5

15.2
15.7
16.7
17.6
18.3
19.1
20.2
21.7
23.4
25.2

473.6
490.8
529.7
559.6
602.8
654.7
717.9
756.4
826.7
891.7

45.5
48.1
51.7
54.7
58.8
62.7
65.4
70.4
79.0
86.6

1.4
1.5
1.6
1.8
2.0
2.2
2.3
2.5
2.8
3.1

−.6
−.2
.7
−.4
1.2
1.9
6.4
4.8
4.3
2.9

.2
1.2
1.4
.9
1.4
1.7
3.0
2.9
3.0
3.5

427.5
442.5
477.1
504.4
542.1
589.6
646.7
681.7
743.6
802.7

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

1,039.7
1,128.6
1,240.4
1,385.5
1,501.0
1,635.2
1,823.9
2,031.4
2,295.9
2,566.4

13.0
14.1
16.4
23.8
30.3
28.2
32.9
37.9
47.4
70.4

6.6
6.4
7.7
11.1
14.6
14.9
15.7
17.2
25.3
37.5

1,046.1
1,136.2
1,249.1
1,398.2
1,516.7
1,648.4
1,841.0
2,052.1
2,318.0
2,599.3

109.1
118.9
130.9
142.9
164.8
190.9
209.0
231.6
261.5
300.4

81.8
89.8
99.4
109.1
126.9
149.1
164.5
184.4
210.7
244.9

27.3
29.2
31.5
33.8
37.9
41.8
44.4
47.2
50.8
55.5

937.0
1,017.3
1,118.2
1,255.3
1,351.9
1,457.5
1,632.1
1,820.5
2,056.5
2,298.9

94.3
103.6
111.4
121.0
129.3
140.0
151.6
165.5
177.8
188.7

3.2
3.4
3.9
4.5
5.0
5.2
6.5
7.3
8.2
9.9

6.9
11.3
8.7
8.0
10.0
17.7
24.5
21.6
21.0
35.7

4.8
4.9
6.1
5.6
4.2
7.7
6.9
9.7
10.6
11.0

837.5
903.9
1,000.4
1,127.4
1,211.9
1,302.2
1,456.4
1,635.8
1,860.2
2,075.6

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

2,795.6
3,131.3
3,259.2
3,534.9
3,932.7
4,213.0
4,452.9
4,742.5
5,108.3
5,489.1

81.8
95.6
102.4
102.5
122.9
113.1
111.1
122.9
151.8
177.2

46.5
60.9
65.9
65.6
87.6
87.8
95.6
109.2
133.4
156.8

2,830.8
3,166.1
3,295.7
3,571.8
3,968.1
4,238.4
4,468.3
4,756.2
5,126.8
5,509.4

345.2
394.8
436.5
456.1
482.4
516.5
551.6
586.1
627.4
677.2

282.6
323.9
357.5
372.7
393.5
422.5
450.8
478.2
512.4
554.0

62.7
71.0
79.0
83.3
88.8
94.0
100.8
107.8
115.0
123.2

2,485.6
2,771.2
2,859.2
3,115.7
3,485.7
3,721.9
3,916.8
4,170.1
4,499.4
4,832.2

212.0
249.3
256.7
280.3
309.1
329.4
346.8
369.3
392.6
420.7

11.2
13.4
15.2
16.2
18.6
20.7
23.8
24.2
25.3
25.8

33.9
27.5
2.5
47.0
18.6
11.7
43.9
3.3
−42.2
16.3

14.5
16.1
18.1
24.3
22.9
20.4
23.6
30.1
27.4
22.6

2,243.0
2,497.1
2,603.0
2,796.5
3,162.3
3,380.4
3,525.8
3,803.4
4,151.1
4,392.1

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

5,803.2
5,986.2
6,318.9
6,642.3
7,054.3
7,400.5
7,813.2
8,318.4
8,781.5
9,274.3

188.3
167.7
151.1
154.4
184.3
232.3
245.6
281.3
286.1
316.9

159.3
143.0
127.6
130.1
167.5
211.9
227.5
274.2
289.6
294.1

5,832.2
711.3
6,010.9
748.0
6,342.3
787.5
6,666.7
812.8
7,071.1
874.9
7,420.9
911.7
7,831.2
956.2
8,325.4 1,013.3
8,778.1 1,072.0
9,297.1 1,145.2

579.5
608.1
642.2
660.1
714.6
743.6
781.9
832.4
884.3
947.3

131.8
140.0
145.3
152.6
160.3
168.1
174.3
180.9
187.6
197.9

5,120.9
5,262.8
5,554.9
5,853.9
6,196.2
6,509.1
6,875.0
7,312.1
7,706.1
8,151.9

447.3
482.3
510.6
540.1
575.3
594.6
620.0
646.2
681.3
712.9

26.1
25.9
28.1
27.8
30.8
33.5
34.4
36.8
38.0
41.5

30.6
19.6
43.7
63.8
58.5
26.5
32.8
29.7
−31.0
−38.8

25.3
21.5
22.4
29.6
25.2
22.2
22.6
19.1
23.5
32.5

4,642.1
4,756.6
4,994.9
5,251.9
5,556.8
5,876.7
6,210.4
6,618.4
7,041.4
7,468.7

2000 ........... 9,824.6
2001 ........... 10,082.2

383.4
316.9

360.0 9,848.0 1,228.9 1,018.0
295.0 10,104.1 1,329.3 1,106.8

210.9 8,619.1
222.4 8,774.8

753.6
774.8

43.7 −128.5
42.5 −117.3

34.1
47.3

7,984.4
8,122.0

1998: I .........
II .......
III ......
IV ......

8,627.8
8,697.3
8,816.5
8,984.5

290.1
293.4
278.3
282.7

283.4
290.4
292.7
291.8

8,634.5
8,700.3
8,802.1
8,975.4

1,048.4
1,062.4
1,079.8
1,097.4

863.6
876.2
891.1
906.4

184.8
186.2
188.6
191.0

7,586.2
7,638.0
7,722.4
7,878.0

666.3
673.6
681.4
703.9

37.0
37.7
38.3
39.0

28.5
−37.2
−81.7
−33.6

19.6
21.6
24.5
28.4

6,874.1
6,985.5
7,108.9
7,197.0

1999: I .........
II .......
III ......
IV ......

9,092.7
9,171.7
9,316.5
9,516.4

291.4
305.3
324.7
345.9

271.4
281.1
307.6
316.3

9,112.7
9,195.9
9,333.6
9,546.0

1,113.8
1,131.2
1,164.1
1,711.5

920.3
934.8
964.9
969.0

193.5
196.4
199.2
202.5

7,998.8
8,064.7
8,169.5
8,374.5

697.8
706.6
717.1
730.3

40.6
40.7
42.0
42.7

−53.3
−56.2
−31.5
−14.1

29.3
32.3
34.0
34.5

7,343.1
7,405.9
7,475.9
7,650.1

2000: I .........
II .......
III ......
IV ......

9,649.5
9,820.7
9,874.8
9,953.6

365.2
390.5
383.5
394.4

344.2
364.7
365.8
365.2

9,670.5
9,846.4
9,892.5
9,982.8

1,194.7
988.7
1,218.2 1,008.6
1,240.8 1,028.0
1,261.9 1,046.5

206.0
209.6
212.8
215.4

8,475.8
8,628.2
8,651.7
8,720.9

745.1
750.3
757.9
761.1

43.4 −138.7
44.1 −86.8
43.5 −164.0
43.6 −124.5

34.3
33.9
34.0
34.2

7,860.2
7,954.5
8,048.3
8,074.8

2001: I .........
II .......
III ......
IV ......

10,028.1
10,049.9
10,097.7
10,152.9

364.2
332.5
302.0
269.0

354.3
301.4
290.5
233.7

10,038.0
10,081.0
10,109.3
10,188.1

1,281.7
1,315.0
1,381.8
1,338.6

217.6
220.0
227.9
224.2

8,756.4
8,766.0
8,727.5
8,849.5

770.6
775.9
772.7
779.9

42.1
42.5
42.6
42.8

−105.7
−112.9
−117.8
−132.6

42.8
49.7
59.1
37.5

8,092.1
8,110.1
8,089.1
8,196.8

2002: I ......... 10,313.1
II ....... 10,376.9
III ...... 10,506.2

264.7
276.0
287.3

262.8 10,314.9 1,363.5 1,136.9
296.1 10,356.8 1,389.8 1,161.2
298.2 10,495.3 1,405.3 1,174.8

226.5 8,951.5
228.6 8,967.0
230.5 9,090.0

786.2
795.1
806.9

43.8 −110.0
43.9 −165.0
44.4 −120.3

37.0
35.1
29.1

8,268.5
8,328.0
8,388.1

1,064.1
1,095.0
1,153.8
1,114.4

Source: Department of Commerce, Bureau of Economic Analysis.

306

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ECONO

TABLE B–27.—Relation of national income and personal income, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Less:

Year or quarter

National
income

Corporate
profits
with
inventory
valuation
and
capital
consumption
adjustments

Plus:

Net
interest

Contributions
for
social
insurance

Wage
accruals
less
disbursements

Personal
interest
income

Personal
dividend
income

Equals:

Government
transfer
payments
to
persons

Business
transfer
payments
to
persons

Personal
income

1959 .....................

411.5

53.7

9.7

13.8

0.0

23.0

12.6

22.9

1.3

394.0

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

427.5
442.5
477.1
504.4
542.1
589.6
646.7
681.7
743.6
802.7

52.3
53.5
61.6
67.6
74.8
86.0
92.0
89.6
96.5
93.7

10.7
12.4
14.1
15.2
17.3
19.7
22.6
25.4
27.2
32.2

16.4
17.0
19.1
21.7
22.4
23.4
31.3
34.9
38.7
44.1

.0
.0
.0
.0
.0
.0
.0
.0
.0
.0

25.6
27.3
30.2
33.0
36.9
40.8
45.3
49.4
54.1
62.3

13.4
13.9
15.0
16.2
18.2
20.2
20.7
21.5
23.5
24.2

24.4
28.1
28.8
30.3
31.3
33.9
37.5
45.4
53.0
58.8

1.3
1.4
1.5
1.7
1.8
2.0
2.1
2.3
2.5
2.8

412.7
430.3
457.9
481.0
515.8
557.4
606.4
650.4
714.5
780.8

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

837.5
903.9
1,000.4
1,127.4
1,211.9
1,302.2
1,456.4
1,635.8
1,860.2
2,075.6

81.6
95.1
109.8
123.9
114.5
133.0
160.6
190.9
217.2
222.5

38.4
42.6
46.2
53.9
68.8
76.6
80.8
95.7
114.5
144.2

46.4
51.2
59.2
75.5
85.2
89.3
101.3
113.1
131.3
152.7

.0
.6
.0
−.1
−.5
.1
.1
.1
.3
−.2

71.5
77.5
84.2
97.6
116.1
128.0
140.5
161.9
191.3
233.5

24.3
25.0
26.8
29.9
33.2
32.9
39.0
44.7
50.7
57.4

71.6
85.2
94.6
108.1
128.4
163.0
176.9
188.7
202.5
226.4

2.8
3.0
3.4
3.8
4.0
4.5
5.5
5.9
6.8
7.9

841.1
905.1
994.3
1,113.4
1,225.6
1,331.7
1,475.4
1,637.1
1,848.3
2,081.5

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

2,243.0
2,497.1
2,603.0
2,796.5
3,162.3
3,380.4
3,525.8
3,803.4
4,151.1
4,392.1

198.5
219.0
201.2
254.1
309.8
322.4
300.7
346.6
405.0
395.7

183.9
226.5
256.3
267.2
309.6
326.7
343.6
361.5
389.4
443.1

166.2
195.7
208.9
226.0
257.5
281.4
303.4
323.1
361.5
385.2

.0
.1
.0
−.4
.2
−.2
.0
.0
.0
.0

286.4
352.7
401.6
431.6
505.3
546.4
579.2
609.7
650.5
736.5

64.0
73.6
76.1
83.5
90.8
97.5
106.1
112.1
129.4
154.8

270.2
307.0
342.3
369.4
378.3
403.1
428.4
447.8
476.1
519.2

8.8
10.2
11.8
12.8
15.1
17.8
20.7
20.8
20.8
21.1

2,323.9
2,599.4
2,768.4
2,946.9
3,274.8
3,515.0
3,712.4
3,962.5
4,272.1
4,599.8

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

4,642.1
4,756.6
4,994.9
5,251.9
5,556.8
5,876.7
6,210.4
6,618.4
7,041.4
7,468.7

408.6
431.2
453.1
510.5
573.2
668.8
754.0
833.8
777.4
805.8

452.4
429.8
399.5
374.3
380.5
389.8
386.3
423.9
511.9
526.6

410.1
430.2
455.0
477.8
508.4
533.2
555.8
587.8
623.3
660.4

.1
−.1
−15.8
6.4
17.6
16.4
3.6
−2.9
−.7
5.2

772.4
771.8
750.1
725.5
742.4
792.5
810.6
864.0
964.4
969.2

165.4
178.3
185.3
203.0
234.7
254.0
297.4
334.9
348.3
328.0

573.1
649.1
729.2
776.5
810.1
860.1
902.4
934.4
955.0
987.2

21.3
20.8
22.5
22.1
23.7
25.8
26.4
27.9
28.8
31.3

4,903.2
5,085.4
5,390.4
5,610.0
5,888.0
6,200.9
6,547.4
6,937.0
7,426.0
7,786.5

2000 .....................
2001 .....................

7,984.4
8,122.0

788.1
731.6

611.5
649.8

701.3
726.1

.0
.0

1,077.0
1,091.3

375.7
409.2

1,037.3
1,137.0

33.0
33.4

8,406.6
8,685.3

1998: I ..................
II .................
III ...............
IV ................

6,874.1
6,985.5
7,108.9
7,197.0

787.4
769.6
781.9
770.8

482.8
513.2
526.0
525.5

611.4
619.1
627.2
635.3

−.7
−.7
−.7
−.7

933.5
967.5
982.6
974.2

349.0
350.1
347.9
346.3

950.7
952.5
956.8
959.8

28.3
28.5
28.8
29.3

7,254.8
7,382.8
7,490.7
7,575.8

1999: I ..................
II .................
III ...............
IV ...............

7,343.1
7,405.9
7,475.9
7,650.1

808.2
802.1
788.0
824.7

509.9
519.4
530.4
546.8

651.7
656.0
662.2
671.7

5.2
5.2
5.2
5.2

948.8
960.8
971.5
995.8

331.7
323.4
324.0
331.1

976.6
983.7
990.6
997.7

30.7
31.1
31.5
32.0

7,655.9
7,722.2
7,807.7
7,960.2

2000: I ..................
II .................
III ...............
IV ...............

7,860.2
7,954.5
8,048.3
8,074.8

807.6
807.3
787.7
749.7

571.3
611.1
624.0
639.6

693.9
694.9
705.7
710.6

.0
.0
.0
.0

1,028.7
1,074.3
1,094.6
1,110.3

350.8
369.3
385.7
397.2

1,011.9
1,032.5
1,043.6
1,061.0

32.9
33.0
33.1
33.2

8,211.6
8,350.2
8,487.8
8,576.6

2001: I ..................
II .................
III ...............
IV ...............

8,092.1
8,110.1
8,089.1
8,196.8

706.5
721.4
687.2
811.4

648.5
648.6
648.3
653.9

725.0
726.4
727.4
725.8

.0
.0
.0
.0

1,108.4
1,097.2
1,086.4
1,072.9

402.5
406.0
411.0
417.3

1,102.3
1,126.0
1,148.9
1,171.0

32.7
33.2
33.6
34.0

8,658.1
8,676.2
8,706.2
8,700.9

2002: I ..................
II .................
III ...............

8,268.5
8,328.0
8,388.1

797.6
785.0
771.0

672.8
678.1
687.6

740.4
746.1
752.5

.0
.0
.0

1,069.9
1,082.3
1,080.7

423.7
430.3
437.3

1,217.4
1,247.7
1,263.1

34.6
34.9
35.3

8,803.4
8,914.0
8,993.3

E:\2003_EOP\B27.ER3

ECONO

Source: Department of Commerce, Bureau of Economic Analysis.

307

VerDate Dec 13 2002

04:41 Jan 30, 2003

Jkt 193914

PO 00000

Frm 00039

Fmt 0808

Sfmt 0808

TABLE B–28.—National income by type of income, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Compensation of employees
Wage and salary accruals

Supplements to wages and
salaries

Government

Employer
contributions
for
social
insurance

Proprietors’ income with inventory valuation and capital consumption adjustments
Farm

Year or
quarter

National
income 1

Total
Total

Other

Total

Other
labor
income

Nonfarm

Total

Proprietors’
income 2

Total

Proprietors’
income 3

Total

1959 ........

411.5

281.0

259.8

46.0

213.8

21.2

7.9

13.4

51.8

10.9

11.8

40.9

40.3

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

........
........
........
........
........
........
........
........
........
........

427.5
442.5
477.1
504.4
542.1
589.6
646.7
681.7
743.6
802.7

296.4
305.3
327.2
345.3
370.7
399.5
442.6
475.2
524.3
577.6

272.8
280.5
299.3
314.8
337.7
363.7
400.3
428.9
471.9
518.3

49.2
52.4
56.3
60.0
64.9
69.9
78.3
86.4
96.6
105.5

223.7
228.0
243.0
254.8
272.9
293.8
321.9
342.5
375.3
412.7

23.6
24.8
27.9
30.4
33.0
35.8
42.4
46.2
52.4
59.4

9.3
9.6
11.2
12.4
12.6
13.1
16.8
18.0
20.0
22.8

14.4
15.2
16.7
18.0
20.3
22.7
25.5
28.2
32.5
36.6

51.9
54.4
56.5
57.8
60.6
65.2
69.6
71.1
75.4
78.9

11.4
12.1
12.1
11.9
10.8
13.1
14.1
12.8
12.8
14.2

12.3
12.9
12.9
12.7
11.6
13.9
15.0
13.7
13.9
15.4

40.4
42.3
44.4
45.8
49.9
52.2
55.5
58.4
62.6
64.7

40.0
42.0
44.1
45.5
49.5
52.2
55.7
58.7
63.4
65.5

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

........
........
........
........
........
........
........
........
........
........

837.5
903.9
1,000.4
1,127.4
1,211.9
1,302.2
1,456.4
1,635.8
1,860.2
2,075.6

617.2
658.8
725.1
811.2
890.2
949.0
1,059.3
1,180.4
1,336.0
1,500.8

551.5
584.5
638.7
708.6
772.2
814.7
899.6
994.0
1,121.0
1,255.6

117.1
126.7
137.8
148.7
160.4
176.1
188.7
202.4
219.8
236.9

434.3
457.8
500.9
560.0
611.8
638.6
710.8
791.6
901.2
1,018.7

65.7
74.4
86.5
102.6
118.0
134.4
159.7
186.4
215.0
245.2

23.8
26.4
31.2
39.8
44.7
46.7
54.4
61.1
71.5
82.6

41.9
48.0
55.3
62.8
73.3
87.6
105.3
125.3
143.4
162.6

79.8
86.1
97.7
115.2
115.5
121.6
134.3
148.3
170.1
183.7

14.3
14.9
18.8
30.7
25.2
23.5
18.7
17.5
21.5
23.7

15.7
16.5
20.5
32.6
27.7
26.9
22.6
21.7
26.3
29.4

65.5
71.2
78.9
84.5
90.3
98.1
115.6
130.8
148.5
160.0

66.6
72.6
79.9
86.6
94.1
99.9
117.2
131.9
149.9
161.4

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

........
........
........
........
........
........
........
........
........
........

2,243.0
2,497.1
2,603.0
2,796.5
3,162.3
3,380.4
3,525.8
3,803.4
4,151.1
4,392.1

1,651.7
1,825.7
1,926.0
2,042.7
2,255.9
2,425.2
2,570.7
2,755.6
2,973.8
3,151.0

1,377.4
1,517.3
1,593.4
1,684.3
1,854.8
1,995.2
2,114.4
2,270.2
2,452.7
2,596.8

261.2
285.6
307.3
324.5
347.8
373.5
396.6
422.2
450.9
479.7

1,116.2
1,231.7
1,286.1
1,359.8
1,507.0
1,621.7
1,717.8
1,848.0
2,001.8
2,117.1

274.3
308.5
332.6
358.5
401.1
430.0
456.3
485.4
521.1
554.2

88.9
103.6
109.8
119.9
139.0
147.7
157.9
166.3
184.6
193.7

185.4
204.8
222.8
238.6
262.1
282.3
298.4
319.1
336.5
360.5

177.6
186.2
179.9
195.5
247.5
267.0
278.6
303.9
338.8
361.8

13.1
20.3
14.4
7.2
21.6
21.5
23.0
29.0
26.0
32.2

20.2
28.6
23.4
16.0
30.2
29.7
31.1
36.9
33.9
40.0

164.5
165.9
165.4
188.3
225.9
245.5
255.6
274.8
312.7
329.6

165.7
161.4
158.9
172.8
200.3
211.2
216.3
239.8
277.4
293.5

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

........
........
........
........
........
........
........
........
........
........

4,642.1
4,756.6
4,994.9
5,251.9
5,556.8
5,876.7
6,210.4
6,618.4
7,041.4
7,468.7

3,351.0
3,454.9
3,644.8
3,814.4
4,016.2
4,202.5
4,395.6
4,651.3
4,989.6
5,308.8

2,754.6
2,824.2
2,966.8
3,091.6
3,254.3
3,441.1
3,630.1
3,886.0
4,192.1
4,475.6

516.8
545.6
567.7
584.9
603.9
622.7
641.0
664.3
692.7
724.2

2,237.9
2,278.6
2,399.1
2,506.8
2,650.4
2,818.4
2,989.1
3,221.7
3,499.4
3,751.4

596.4
630.7
677.9
722.8
761.9
761.4
765.4
765.3
797.5
833.2

206.5
215.1
228.4
240.0
254.4
264.5
275.4
289.9
306.9
323.0

390.0
415.6
449.5
482.8
507.5
497.0
490.0
475.4
490.6
510.2

381.0
384.2
434.3
461.8
476.6
497.7
544.7
581.2
623.8
678.4

31.1
26.4
32.7
30.1
31.9
22.2
34.3
29.7
25.6
27.7

39.2
34.4
40.9
38.2
39.9
30.2
42.1
37.5
33.1
35.8

349.9
357.8
401.7
431.7
444.6
475.5
510.5
551.5
598.2
650.7

323.2
333.0
373.4
401.4
421.7
447.8
476.0
507.2
547.6
589.6

2000 ........
2001 ........

7,984.4
8,122.0

5,723.4
5,874.9

4,836.3
4,950.6

768.9
810.8

4,067.4
4,139.8

887.1
924.3

342.9
353.9

544.2
570.4

714.8
727.9

22.6
19.0

30.2
26.7

692.2
708.8

621.2
621.6

1998: I .....
II ....
III ...
IV ...

6,874.1
6,985.5
7,108.9
7,197.0

4,869.4
4,948.9
5,029.8
5,110.5

4,085.1
4,155.8
4,227.7
4,299.8

680.9
688.6
696.8
704.6

3,404.2
3,467.2
3,530.9
3,595.3

784.3
793.1
802.1
810.6

301.0
304.9
308.9
312.9

483.3
488.2
493.2
497.7

606.9
617.6
627.0
643.8

24.1
24.9
25.4
27.9

31.7
32.4
32.9
35.6

582.9
592.6
601.6
615.8

533.8
543.8
550.3
562.4

1999: I .....
II ....
III ...
IV ...

7,343.1
7,405.9
7,475.9
7,650.1

5,216.8
5,260.3
5,329.0
5,429.1

4,395.0
4,432.0
4,492.7
4,582.7

713.3
719.3
727.7
736.4

3,681.7
3,712.7
3,765.0
3,846.3

821.9
828.3
836.3
846.4

319.3
321.0
323.6
328.1

502.6
507.3
512.6
518.3

659.3
674.2
682.7
697.4

30.1
29.7
25.7
25.4

37.9
37.5
34.5
33.2

629.2
644.5
657.0
672.0

572.3
585.5
594.7
605.7

2000: I .....
II ....
III ..
IV ..

7,860.2
7,954.5
8,048.3
8,074.8

5,627.3
5,670.5
5,773.1
5,822.7

4,757.4
4,790.8
4,879.3
4,917.8

756.2
769.3
772.4
777.9

4,001.2
4,021.5
4,106.9
4,139.9

869.9
879.6
893.8
904.9

339.4
339.6
345.1
347.5

530.5
540.0
548.7
557.4

702.5
718.8
718.6
719.3

22.3
25.0
21.7
21.2

30.1
32.7
29.3
28.8

680.2
693.8
696.9
698.1

612.1
622.8
624.3
625.5

2001: I .....
II ....
III ..
IV ..

8,092.1
8,110.1
8,089.1
8,196.8

5,878.9
5,879.3
5,880.4
5,860.9

4,960.4
4,956.9
4,953.7
4,931.4

795.2
805.8
817.1
825.2

4,165.2
4,151.0
4,136.6
4,106.2

918.5
922.4
926.7
929.4

353.8
354.2
354.3
353.2

564.7
568.2
572.4
576.3

721.2
726.6
732.4
731.3

19.3
18.4
19.3
19.2

26.8
26.0
27.0
27.1

701.9
708.2
713.1
712.1

629.0
634.7
628.8
594.1

2002: I .....
II ....
III ..

8,268.5
8,328.0
8,388.1

5,908.4
5,963.9
6,026.6

4,957.8
4,997.3
5,043.6

840.4
848.4
857.1

4,117.4
4,148.9
4,186.5

950.7
966.6
982.9

359.9
362.5
365.4

590.8
604.1
617.5

748.4
747.5
758.7

21.7
7.5
10.7

30.0
16.1
19.6

726.7
740.0
748.0

612.5
626.9
635.0

1 National income is the total net income earned in production. It differs from gross domestic product mainly in that it excludes depreciation charges and other allowances for business and institutional consumption of durable capital goods and indirect business taxes. See Table
B-26.
See next page for continuation of table.

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TABLE B–28.—National income by type of income, 1959–2002—Continued
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Rental income of persons
with capital consumption
adjustment
Year or
quarter
Total

Rental
income
of
persons

Capital
consumption
adjustment

Corporate profits with inventory valuation and capital consumption adjustments
Profits with inventory valuation adjustment and without
capital consumption adjustment
Profits
Profits
before
tax

Profits
tax
liability

Total

Dividends

Undistributed
profits

Inventory
valuation
adjustment

Total

Profits after tax
Total

Capital
consumption
adjustment

Net
interest

1959 .............

15.2

17.3

−2.1

53.7

53.4

53.7

23.6

30.0

12.6

17.5

−0.3

0.3

9.7

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

16.2
16.9
17.8
18.5
18.6
19.2
19.9
20.4
20.2
20.3

18.3
19.0
19.9
20.5
20.6
21.4
22.4
23.2
23.4
24.3

−2.1
−2.1
−2.1
−2.0
−2.0
−2.2
−2.5
−2.8
−3.3
−3.9

52.3
53.5
61.6
67.6
74.8
86.0
92.0
89.6
96.5
93.7

51.4
51.7
56.9
62.0
68.4
78.7
84.4
81.7
88.5
85.2

51.5
51.5
56.9
61.9
68.9
80.0
86.5
83.3
92.2
91.1

22.7
22.8
24.0
26.2
28.0
30.9
33.7
32.7
39.4
39.7

28.8
28.7
32.9
35.7
40.9
49.1
52.8
50.6
52.8
51.4

13.4
13.9
15.0
16.2
18.2
20.2
20.7
21.5
23.5
24.2

15.5
14.8
17.9
19.5
22.7
28.9
32.1
29.1
29.3
27.2

−.2
.3
.0
.1
−.5
−1.2
−2.1
−1.6
−3.7
−5.9

1.0
1.7
4.6
5.6
6.4
7.2
7.6
7.9
8.0
8.5

10.7
12.4
14.1
15.2
17.3
19.7
22.6
25.4
27.2
32.2

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

20.3
21.2
21.6
23.1
23.0
22.0
21.5
20.4
22.4
24.5

24.6
26.1
27.7
30.1
31.7
32.3
33.0
34.0
38.9
44.5

−4.3
−5.0
−6.1
−7.0
−8.7
−10.3
−11.5
−13.6
−16.5
−20.0

81.6
95.1
109.8
123.9
114.5
133.0
160.6
190.9
217.2
222.5

74.0
87.9
100.7
114.6
108.5
134.3
164.5
193.3
221.2
229.9

80.6
92.4
107.3
134.2
146.8
144.8
178.6
209.0
244.9
270.1

34.4
37.7
41.9
49.3
51.8
50.9
64.2
73.0
83.5
88.0

46.2
54.7
65.5
84.9
95.0
93.9
114.4
136.0
161.4
182.1

24.3
25.0
26.8
29.9
33.2
33.0
39.0
44.8
50.8
57.5

21.9
29.7
38.6
55.0
61.8
60.9
75.4
91.2
110.6
124.6

−6.6
−4.6
−6.6
−19.6
−38.2
−10.5
−14.1
−15.7
−23.7
−40.1

7.6
7.3
9.0
9.4
5.9
−1.2
−4.0
−2.4
−4.0
−7.4

38.4
42.6
46.2
53.9
68.8
76.6
80.8
95.7
114.5
144.2

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

31.3
39.6
39.6
36.9
39.5
39.1
32.2
35.8
44.1
40.5

54.9
66.1
68.0
65.9
68.8
70.3
63.7
68.9
79.1
80.2

−23.6
−26.5
−28.5
−28.9
−29.4
−31.2
−31.5
−33.1
−35.0
−39.7

198.5
219.0
201.2
254.1
309.8
322.4
300.7
346.6
405.0
395.7

209.3
216.3
188.0
223.9
262.0
255.2
250.5
298.4
359.8
360.4

251.4
240.9
195.5
231.4
266.0
255.2
243.4
314.6
381.9
376.7

84.8
81.1
63.1
77.2
94.0
96.5
106.5
127.1
137.2
141.5

166.6
159.8
132.4
154.1
172.0
158.7
136.9
187.5
244.8
235.3

64.1
73.8
76.2
83.6
91.0
97.7
106.3
112.2
129.6
155.0

102.6
86.0
56.2
70.5
81.0
61.0
30.6
75.3
115.2
80.2

−42.1
−24.6
−7.5
−7.4
−4.0
.0
7.1
−16.2
−22.2
−16.3

−10.8
2.7
13.3
30.2
47.7
67.2
50.3
48.2
45.3
35.3

183.9
226.5
256.3
267.2
309.6
326.7
343.6
361.5
389.4
443.1

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

49.1
56.4
63.3
90.9
110.3
117.9
129.7
128.3
138.6
149.1

87.2
96.0
111.4
133.6
157.8
165.4
177.4
178.3
190.3
206.8

−38.1
−39.6
−48.1
−42.8
−47.5
−47.5
−47.6
−50.0
−51.7
−57.6

408.6
431.2
453.1
510.5
573.2
668.8
754.0
833.8
777.4
805.8

388.6
421.1
448.8
506.4
561.0
650.2
729.4
800.8
739.4
757.9

401.5
416.1
451.6
510.4
573.4
668.5
726.3
792.4
721.1
762.1

140.6
133.6
143.1
165.4
186.7
211.0
223.6
237.2
238.8
247.8

260.9
282.6
308.4
345.0
386.7
457.5
502.7
555.2
482.3
514.3

165.6
178.4
185.5
203.1
234.9
254.2
297.7
335.2
348.7
328.4

95.3
104.1
122.9
141.9
151.8
203.3
205.0
220.0
133.6
185.9

−12.9
4.9
−2.8
−4.0
−12.4
−18.3
3.1
8.4
18.3
−4.2

19.9
10.2
4.3
4.1
12.2
18.6
24.6
32.9
38.0
47.9

452.4
429.8
399.5
374.3
380.5
389.8
386.3
423.9
511.9
526.6

2000 .............
2001 .............

146.6
137.9

206.6
204.4

−60.0
−66.5

788.1
731.6

767.3
675.1

782.3
670.2

259.4
199.3

522.9
470.9

376.1
409.6

146.8
61.2

−15.0
5.0

20.8
56.5

611.5
649.8

1998: I ..........
II .........
III ........
IV ........

127.7
136.1
144.2
146.5

178.5
187.5
196.1
199.0

−50.9
−51.4
−52.0
−52.5

787.4
769.6
781.9
770.8

751.8
733.1
743.8
729.2

731.7
722.8
723.6
706.3

239.9
237.8
243.6
234.1

491.8
485.0
480.1
472.2

349.4
350.4
348.3
346.7

142.5
134.5
131.8
125.5

20.0
10.3
20.2
22.9

35.6
36.6
38.1
41.7

482.8
513.2
526.0
525.5

1999: I ..........
II .........
III ........
IV ........

148.9
149.9
145.8
152.0

203.0
205.9
207.7
210.5

−54.1
−56.0
−61.9
−58.5

808.2
802.1
788.0
824.7

760.5
750.5
739.6
781.0

744.4
752.9
753.4
797.6

243.1
246.0
246.3
255.7

501.3
506.9
507.1
542.0

332.0
323.7
324.3
333.5

169.2
183.2
182.8
208.5

16.0
−2.5
−13.8
−16.6

47.8
51.6
48.5
43.7

509.9
519.4
530.4
546.8

2000: I ..........
II .........
III .......
IV .......

151.4
146.7
144.9
143.5

210.5
206.3
205.0
204.6

−59.1
−59.6
−60.2
−61.1

807.6
807.3
787.7
749.7

774.3
784.2
772.3
738.6

796.9
800.5
780.6
751.1

270.8
267.3
257.4
241.9

526.1
533.3
523.2
509.2

351.1
369.7
386.1
397.6

174.9
163.6
137.1
111.6

−22.6
−16.4
−8.3
−12.5

33.4
23.1
15.4
11.1

571.3
611.1
624.0
639.6

2001: I ..........
II .........
III .......
IV .......

137.0
134.3
140.8
139.3

199.4
204.8
206.5
206.9

−62.3
−70.5
−65.6
−67.6

706.5
721.4
687.2
811.4

696.9
714.0
663.2
626.3

707.0
720.2
654.3
599.1

217.3
213.1
196.2
170.6

489.7
507.1
458.1
428.5

402.9
406.5
411.4
417.7

86.8
100.7
46.7
10.8

−10.1
−6.2
8.9
27.2

9.6
7.3
23.9
185.1

648.5
648.6
648.3
653.9

2002: I ..........
II .........
III .......

141.3
153.5
144.1

209.1
221.9
214.5

−67.8
−68.4
−70.3

797.6
785.0
771.0

641.3
652.2
653.4

639.4
657.9
668.5

202.4
213.7
214.7

437.0
444.3
453.8

424.2
430.8
437.7

12.8
13.5
16.1

1.9
−5.7
−15.1

156.3
132.8
117.6

672.8
678.1
687.6

2 Without

capital consumption adjustment.
inventory valuation and capital consumption adjustments.
Source: Department of Commerce, Bureau of Economic Analysis.
3 Without

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TABLE B–29.—Sources of personal income, 1959–2002
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Wage and salary disbursements 1
Private industries
Year or
quarter

Personal
income

Goodsproducing
industries

Total
Total

Total

Manufacturing

Distributive
industries

Service
industries

Government

Other
labor
income 1

Proprietors’ income
with inventory
valuation and
capital
consumption
adjustments
Farm

Nonfarm

1959 ..........

394.0

259.8

213.8

109.9

86.9

65.1

38.8

46.0

13.4

10.9

40.9

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

412.7
430.3
457.9
481.0
515.8
557.4
606.4
650.4
714.5
780.8

272.8
280.5
299.3
314.8
337.7
363.7
400.3
428.9
471.9
518.3

223.7
228.0
243.0
254.8
272.9
293.8
321.9
342.5
375.3
412.7

113.4
114.0
122.2
127.4
136.0
146.6
161.6
169.0
184.1
200.4

89.8
89.9
96.8
100.7
107.3
115.7
128.2
134.3
146.0
157.7

68.6
69.6
73.3
76.8
82.0
87.9
95.1
101.6
110.8
121.7

41.7
44.4
47.6
50.7
54.9
59.4
65.3
72.0
80.4
90.6

49.2
52.4
56.3
60.0
64.9
69.9
78.3
86.4
96.6
105.5

14.4
15.2
16.7
18.0
20.3
22.7
25.5
28.2
32.5
36.6

11.4
12.1
12.1
11.9
10.8
13.1
14.1
12.8
12.8
14.2

40.4
42.3
44.4
45.8
49.9
52.2
55.5
58.4
62.6
64.7

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

841.1
905.1
994.3
1,113.4
1,225.6
1,331.7
1,475.4
1,637.1
1,848.3
2,081.5

551.5
583.9
638.7
708.7
772.6
814.6
899.5
993.9
1,120.7
1,255.8

434.3
457.4
501.2
560.0
611.8
638.6
710.8
791.6
901.2
1,018.7

203.7
209.1
228.2
255.9
276.5
277.1
309.7
346.1
392.6
442.3

158.4
160.5
175.6
196.6
211.8
211.6
238.0
266.7
300.1
335.2

131.2
140.4
153.3
170.3
186.8
198.1
219.5
242.7
274.9
308.5

99.4
107.9
119.7
133.9
148.6
163.4
181.6
202.8
233.7
267.8

117.1
126.5
137.4
148.7
160.9
176.0
188.6
202.3
219.6
237.1

41.9
48.0
55.3
62.8
73.3
87.6
105.3
125.3
143.4
162.6

14.3
14.9
18.8
30.7
25.2
23.5
18.7
17.5
21.5
23.7

65.5
71.2
78.9
84.5
90.3
98.1
115.6
130.8
148.5
160.0

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

2,323.9
2,599.4
2,768.4
2,946.9
3,274.8
3,515.0
3,712.4
3,962.5
4,272.1
4,599.8

1,377.5
1,517.2
1,593.4
1,684.7
1,854.6
1,995.4
2,114.4
2,270.2
2,452.7
2,596.8

1,116.2
1,231.7
1,286.1
1,359.8
1,507.0
1,621.7
1,717.8
1,848.0
2,001.8
2,117.1

472.3
514.5
514.6
527.7
586.1
620.2
636.8
660.1
706.7
732.2

356.2
387.6
385.7
400.7
445.4
468.5
480.7
496.9
529.9
547.9

336.7
368.5
385.9
405.7
445.2
476.5
501.6
535.4
575.1
606.5

307.2
348.6
385.6
426.4
475.6
524.9
579.3
652.4
720.1
778.5

261.3
285.6
307.3
325.0
347.6
373.8
396.6
422.2
450.9
479.7

185.4
204.8
222.8
238.6
262.1
282.3
298.4
319.1
336.5
360.5

13.1
20.3
14.4
7.2
21.6
21.5
23.0
29.0
26.0
32.2

164.5
165.9
165.4
188.3
225.9
245.5
255.6
274.8
312.7
329.6

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

4,903.2
5,085.4
5,390.4
5,610.0
5,888.0
6,200.9
6,547.4
6,937.0
7,426.0
7,786.5

2,754.6
2,824.2
2,982.6
3,085.2
3,236.7
3,424.7
3,626.5
3,888.9
4,192.8
4,470.4

2,237.9
2,278.6
2,414.9
2,500.3
2,632.8
2,802.0
2,985.5
3,224.7
3,500.1
3,746.3

754.4
746.3
765.7
780.6
824.0
863.6
908.2
975.1
1,038.5
1,088.6

561.4
562.5
583.5
592.4
620.3
647.5
673.7
718.4
756.6
782.0

633.6
646.3
680.2
697.3
738.4
782.1
822.4
879.6
948.9
1,020.8

849.9
886.0
969.0
1,022.4
1,070.4
1,156.3
1,254.9
1,369.9
1,512.7
1,636.9

516.7
545.6
567.7
584.9
603.9
622.7
641.0
664.3
692.7
724.2

390.0
415.6
449.5
482.8
507.5
497.0
490.0
475.4
490.6
510.2

31.1
26.4
32.7
30.1
31.9
22.2
34.3
29.7
25.6
27.7

349.9
357.8
401.7
431.7
444.6
475.5
510.5
551.5
598.2
650.7

2000 ..........
2001 ..........

8,406.6
8,685.3

4,836.3
4,950.6

4,067.4
4,139.8

1,163.7
1,142.4

829.4
789.4

1,094.8
1,109.2

1,808.9
1,888.2

768.9
810.8

544.2
570.4

22.6
19.0

692.2
708.8

1998: I .......
II ......
III ....
IV ....

7,254.8
7,382.8
7,490.7
7,575.8

4,085.8
4,156.5
4,228.4
4,300.5

3,404.9
3,467.9
3,531.6
3,596.0

1,021.3
1,032.7
1,042.6
1,057.3

749.4
754.9
757.6
764.3

924.3
939.1
957.8
974.5

1,459.3
1,496.1
1,531.2
1,564.1

680.9
688.6
696.8
704.6

483.3
488.2
493.2
497.7

24.1
24.9
25.4
27.9

582.9
592.6
601.6
615.8

1999: I .......
II ......
III ....
IV ....

7,655.9
7,722.2
7,807.7
7,960.2

4,389.8
4,426.9
4,487.6
4,577.5

3,676.5
3,707.6
3,759.8
3,841.1

1,073.8
1,078.2
1,092.5
1,109.9

773.1
774.8
786.3
793.8

999.7
1,009.9
1,023.1
1,050.4

1,603.0
1,619.5
1,644.2
1,680.9

713.3
719.3
727.7
736.4

502.6
507.3
512.6
518.3

30.1
29.7
25.7
25.4

629.2
644.5
657.0
672.0

2000: I .......
II ......
III ....
IV ....

8,211.6
8,350.2
8,487.8
8,576.6

4,757.4
4,790.8
4,879.3
4,917.8

4,001.2
4,021.5
4,106.9
4,139.9

1,166.9
1,153.1
1,171.8
1,163.0

839.0
822.6
835.8
820.3

1,076.8
1,087.2
1,105.2
1,109.8

1,757.4
1,781.2
1,829.9
1,867.0

756.2
769.3
772.4
777.9

530.5
540.0
548.7
557.4

22.3
25.0
21.7
21.2

680.2
693.8
696.9
698.1

2001: I .......
II ......
III ....
IV ....

8,658.1
8,676.2
8,706.2
8,700.9

4,960.4
4,956.8
4,953.7
4,931.4

4,165.2
4,151.0
4,136.6
4,106.2

1,156.3
1,150.0
1,140.0
1,123.3

807.2
797.1
783.4
769.9

1,115.0
1,112.3
1,110.8
1,098.6

1,893.9
1,888.8
1,885.8
1,884.3

795.2
805.8
817.1
825.2

564.7
568.2
572.4
576.3

19.3
18.4
19.3
19.2

701.9
708.2
713.1
712.1

2002: I .......
II ......
III ....

8,803.4
8,914.0
8,993.3

4,957.8
4,997.3
5,043.6

4,117.4
4,148.9
4,186.5

1,116.9
1,121.3
1,126.0

759.4
765.3
767.0

1,110.1
1,115.3
1,120.3

1,890.4
1,912.4
1,940.2

840.4
848.4
857.1

590.8
604.1
617.5

21.7
7.5
10.7

726.7
740.0
748.0

1 The total of wage and salary disbursements and other labor income differs from compensation of employees in Table B-28 in that it excludes employer contributions for social insurance and the excess of wage accruals over wage disbursements.

See next page for continuation of table.

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TABLE B–29.—Sources of personal income, 1959–2002—Continued
[Billions of dollars; quarterly data at seasonally adjusted annual rates]
Rental
income
of
persons
with
capital
consumption
adjustment

Year or
quarter

Transfer payments to persons

Personal
dividend
income

Personal
interest
income

Total

Old-age,
survivors, Government
disability, unemand
ployment Veterans
health
benefits
insurinsurance
ance
benefits
benefits

Family
assistance 2

Other

Less:
Personal
contributions
for
social
insurance

1959 ....................................

15.2

12.6

23.0

24.2

10.2

2.8

4.6

0.9

5.7

6.0

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................

16.2
16.9
17.8
18.5
18.6
19.2
19.9
20.4
20.2
20.3

13.4
13.9
15.0
16.2
18.2
20.2
20.7
21.5
23.5
24.2

25.6
27.3
30.2
33.0
36.9
40.8
45.3
49.4
54.1
62.3

25.7
29.5
30.3
32.0
33.2
35.9
39.6
47.6
55.6
61.6

11.1
12.6
14.3
15.2
16.0
18.1
20.8
25.5
30.2
32.9

3.0
4.3
3.1
3.0
2.7
2.3
1.9
2.2
2.1
2.2

4.6
5.0
4.7
4.8
4.7
4.9
4.9
5.6
5.9
6.7

1.0
1.1
1.3
1.4
1.5
1.7
1.9
2.3
2.8
3.5

6.1
6.5
7.0
7.6
8.2
9.0
10.2
12.1
14.5
16.2

7.2
7.4
7.9
9.3
9.8
10.3
14.5
16.8
18.7
21.4

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................

20.3
21.2
21.6
23.1
23.0
22.0
21.5
20.4
22.4
24.5

24.3
25.0
26.8
29.9
33.2
32.9
39.0
44.7
50.7
57.4

71.5
77.5
84.2
97.6
116.1
128.0
140.5
161.9
191.3
233.5

74.3
88.2
98.0
111.9
132.3
167.5
182.3
194.6
209.3
234.2

38.5
44.5
49.6
60.4
70.1
81.4
92.9
104.9
116.2
131.8

4.0
5.8
5.7
4.4
6.8
17.6
15.8
12.7
9.7
9.8

7.7
8.8
9.7
10.4
11.8
14.5
14.4
13.8
13.9
14.4

4.8
6.2
6.9
7.2
8.0
9.3
10.1
10.6
10.8
11.1

19.4
23.0
26.1
29.5
35.6
44.7
49.2
52.5
58.7
67.1

22.5
24.7
28.0
35.7
40.5
42.6
46.9
52.0
59.7
70.2

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................

31.3
39.6
39.6
36.9
39.5
39.1
32.2
35.8
44.1
40.5

64.0
73.6
76.1
83.5
90.8
97.5
106.1
112.1
129.4
154.8

286.4
352.7
401.6
431.6
505.3
546.4
579.2
609.7
650.5
736.5

279.0
317.2
354.2
382.2
393.4
420.9
449.0
468.6
496.9
540.4

154.2
182.0
204.5
221.7
235.7
253.4
269.2
282.9
300.5
325.2

16.1
15.9
25.2
26.3
15.9
15.7
16.3
14.5
13.2
14.3

15.0
16.1
16.4
16.6
16.4
16.7
16.7
16.6
16.9
17.3

12.5
13.1
12.9
13.8
14.5
15.2
16.1
16.4
16.9
17.5

81.3
90.2
95.2
103.8
111.0
119.9
130.6
138.2
149.5
166.1

77.2
92.1
99.1
106.1
118.4
133.6
145.6
156.8
176.8
191.6

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................

49.1
56.4
63.3
90.9
110.3
117.9
129.7
128.3
138.6
149.1

165.4
178.3
185.3
203.0
234.7
254.0
297.4
334.9
348.3
328.0

772.4
771.8
750.1
725.5
742.4
792.5
810.6
864.0
964.4
969.2

594.4
669.9
751.7
798.6
833.9
885.9
928.8
962.2
983.7
1,018.5

352.1
382.4
414.0
444.4
473.0
508.0
537.6
565.8
578.1
588.0

18.0
26.6
38.9
34.1
23.6
21.5
22.1
19.9
19.5
20.3

17.8
18.3
19.3
20.1
20.1
20.9
21.7
22.5
23.4
24.3

19.2
21.1
22.2
22.8
23.2
22.6
20.3
17.7
17.0
17.7

187.3
221.5
257.3
277.2
294.0
313.0
327.1
336.3
345.7
368.3

203.7
215.1
226.6
237.8
254.1
268.8
280.4
297.9
316.3
337.4

2000 ....................................
2001 ....................................

146.6
137.9

375.7
409.2

1,077.0
1,091.3

1,070.3
1,170.4

617.2
664.3

20.5
31.9

25.1
26.7

18.3
19.2

389.2
428.3

358.4
372.3

1998: I .................................
II ................................
III ...............................
IV ...............................

127.7
136.1
144.2
146.5

349.0
350.1
347.9
346.3

933.5
967.5
982.6
974.2

979.1
981.0
985.7
989.1

577.5
577.9
579.1
577.8

19.1
19.0
20.0
19.8

23.2
23.3
23.4
23.6

17.0
17.0
17.0
17.1

342.1
343.9
346.1
350.7

310.3
314.2
318.3
322.4

1999: I .................................
II ................................
III ...............................
IV ...............................

148.9
149.9
145.8
152.0

331.7
323.4
324.0
333.1

948.8
960.8
971.5
995.8

1,007.3
1,014.8
1,022.1
1,029.6

584.4
586.6
589.0
591.9

20.5
20.6
20.0
20.0

24.1
24.2
24.3
24.4

17.4
17.6
17.8
18.0

360.9
365.8
370.9
375.3

332.4
335.1
338.6
343.6

2000: I .................................
II ................................
III ..............................
IV ..............................

151.4
146.7
144.9
143.5

350.8
369.3
385.7
397.2

1,028.7
1,074.3
1,094.6
1,110.3

1,044.8
1,065.5
1,076.6
1,094.2

602.3
617.7
621.2
627.7

20.1
19.8
20.3
22.0

25.0
25.0
25.1
25.3

18.0
18.2
18.4
18.6

379.5
384.9
391.6
400.6

354.5
355.3
360.6
363.1

2001: I .................................
II ................................
III ..............................
IV ..............................

137.0
134.3
140.8
139.3

402.5
406.0
411.0
417.3

1,108.4
1,097.2
1,086.4
1,072.9

1,135.0
1,159.1
1,182.5
1,205.0

652.9
660.2
670.1
674.0

24.2
29.2
33.1
41.0

26.0
26.4
26.7
27.7

19.0
19.2
19.3
19.4

413.0
424.1
433.3
443.0

371.1
372.2
373.1
372.7

2002: I .................................
II ................................
III ..............................

141.3
153.5
144.1

423.7
430.3
437.3

1,069.9
1,082.3
1,080.7

1,252.0
1,282.6
1,298.4

690.2
696.3
701.9

52.3
67.3
67.6

28.5
29.3
30.0

19.3
19.3
19.3

461.7
470.4
479.6

380.5
383.6
387.0

2 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.

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TABLE B–30.—Disposition of personal income, 1959–2002
[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Less: Personal outlays

Year or quarter

Personal
income

Less:
Personal
tax and
nontax
payments

Equals:
Disposable
personal
income

Percent of disposable
personal income 1

Personal
Personal Interest transfer
conpaypaid
sumption
ments
by
expendi- persons to rest
tures
of the
world
(net)

Total

Personal outlays
Equals:
Personal
saving
Total

Personal Personal
consumption saving
expenditures

1959 .....................

394.0

42.8

351.2

324.7

318.1

6.1

0.5

26.5

92.4

90.6

7.6

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

412.7
430.3
457.9
481.0
515.8
557.4
606.4
650.4
714.5
780.8

46.6
47.9
52.3
55.3
52.8
58.4
67.3
74.2
88.3
105.9

366.2
382.4
405.6
425.8
463.0
498.9
539.1
576.2
626.2
675.0

339.8
350.5
372.2
392.7
422.4
456.2
494.6
522.3
573.6
622.3

332.3
342.7
363.8
383.1
411.7
444.3
481.8
508.7
558.7
605.5

7.0
7.3
7.8
8.9
10.0
11.1
12.0
12.5
13.8
15.7

.5
.5
.5
.7
.7
.8
.8
1.0
1.0
1.1

26.4
31.9
33.5
33.1
40.5
42.7
44.5
54.0
52.7
52.6

92.8
91.7
91.7
92.2
91.2
91.4
91.7
90.6
91.6
92.2

90.7
89.6
89.7
90.0
88.9
89.0
89.4
88.3
89.2
89.7

7.2
8.3
8.3
7.8
8.8
8.6
8.3
9.4
8.4
7.8

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

841.1
905.1
994.3
1,113.4
1,225.6
1,331.7
1,475.4
1,637.1
1,848.3
2,081.5

104.6
103.4
125.6
134.5
153.3
150.3
175.5
201.2
233.5
273.3

736.5
801.7
868.6
979.0
1,072.3
1,181.4
1,299.9
1,436.0
1,614.8
1,808.2

667.0
721.6
791.7
876.5
957.9
1,056.2
1,177.8
1,310.4
1,469.4
1,642.4

648.9
702.4
770.7
852.5
932.4
1,030.3
1,149.8
1,278.4
1,430.4
1,596.3

16.8
17.8
19.6
22.4
24.2
24.5
26.6
30.7
37.5
44.5

1.3
1.3
1.4
1.5
1.3
1.3
1.3
1.3
1.5
1.6

69.5
80.1
76.9
102.5
114.3
125.2
122.1
125.6
145.4
165.8

90.6
90.0
91.1
89.5
89.3
89.4
90.6
91.3
91.0
90.8

88.1
87.6
88.7
87.1
87.0
87.2
88.5
89.0
88.6
88.3

9.4
10.0
8.9
10.5
10.7
10.6
9.4
8.7
9.0
9.2

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

2,323.9
2,599.4
2,768.4
2,946.9
3,274.8
3,515.0
3,712.4
3,962.5
4,272.1
4,599.8

304.2
351.5
361.6
360.9
387.2
428.5
449.9
503.0
519.7
583.5

2,019.8
2,247.9
2,406.8
2,586.0
2,887.6
3,086.5
3,262.5
3,459.5
3,752.4
4,016.3

1,814.1
2,004.2
2,144.6
2,358.2
2,581.1
2,803.9
2,994.7
3,206.7
3,460.1
3,714.4

1,762.9
1,944.2
2,079.3
2,286.4
2,498.4
2,712.6
2,895.2
3,105.3
3,356.6
3,596.7

49.4
54.6
58.8
65.0
75.0
83.2
90.6
91.5
92.9
106.4

1.8
5.5
6.5
6.8
7.7
8.1
9.0
9.9
10.6
11.4

205.6
243.7
262.2
227.8
306.5
282.6
267.8
252.8
292.3
301.8

89.8
89.2
89.1
91.2
89.4
90.8
91.8
92.7
92.2
92.5

87.3
86.5
86.4
88.4
86.5
87.9
88.7
89.8
89.5
89.6

10.2
10.8
10.9
8.8
10.6
9.2
8.2
7.3
7.8
7.5

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................

4,903.2
5,085.4
5,390.4
5,610.0
5,888.0
6,200.9
6,547.4
6,937.0
7,426.0
7,786.5

609.6
610.5
635.8
674.6
722.6
778.3
869.7
968.8
1,070.4
1,159.1

4,293.6
4,474.8
4,754.6
4,935.3
5,165.4
5,422.6
5,677.7
5,968.2
6,355.6
6,627.4

3,959.3
4,103.2
4,340.9
4,584.5
4,849.9
5,120.2
5,405.6
5,715.3
6,054.1
6,453.3

3,831.5
3,971.2
4,209.7
4,454.7
4,716.4
4,969.0
5,237.5
5,529.3
5,856.0
6,246.5

115.8
118.9
118.7
115.4
117.9
134.7
149.9
164.8
173.7
179.5

12.0
13.0
12.5
14.4
15.6
16.5
18.2
21.2
24.3
27.3

334.3
371.7
413.7
350.8
315.5
302.4
272.1
252.9
301.5
174.0

92.2
91.7
91.3
92.9
93.9
94.4
95.2
95.8
95.3
97.4

89.2
88.7
88.5
90.3
91.3
91.6
92.2
92.6
92.1
94.3

7.8
8.3
8.7
7.1
6.1
5.6
4.8
4.2
4.7
2.6

2000 .....................
2001 .....................

8,406.6
8,685.3

1,286.4
1,292.1

7,120.2
7,393.2

6,918.6
7,223.5

6,683.7
6,987.0

205.4
205.4

29.5
31.1

201.5
169.7

97.2
97.7

93.9
94.5

2.8
2.3

1998: I ..................
II .................
III ................
IV ................

7,254.8
7,382.8
7,490.7
7,575.8

1,034.0
1,055.4
1,083.7
1,108.5

6,220.8
6,327.4
6,407.0
6,467.3

5,912.9
6,018.2
6,095.6
6,189.7

5,719.9
5,820.0
5,895.1
5,989.1

170.1
173.9
176.2
174.7

22.9
24.3
24.2
25.8

307.9
309.1
311.4
277.6

95.1
95.1
95.1
95.7

91.9
92.0
92.0
92.6

4.9
4.9
4.9
4.3

1999: I ..................
II .................
III ................
IV ...............

7,655.9
7,722.2
7,807.7
7,960.2

1,125.5
1,142.0
1,167.2
1,201.8

6,530.3
6,580.2
6,640.5
6,758.4

6,276.4
6,400.3
6,507.2
6,629.4

6,076.6
6,195.6
6,299.4
6,414.5

173.5
177.5
180.1
186.8

26.3
27.2
27.6
28.2

253.9
179.9
133.3
129.0

96.1
97.3
98.0
98.1

93.1
94.2
94.9
94.9

3.9
2.7
2.0
1.9

2000: I ..................
II .................
III ................
IV ................

8,211.6
8,350.2
8,487.8
8,576.6

1,256.3
1,273.0
1,299.6
1,316.7

6,955.3
7,077.2
7,188.2
7,259.8

6,775.9
6,869.8
6,976.7
7,052.1

6,552.2
6,638.7
6,736.1
6,808.0

195.6
202.0
210.6
213.2

28.2
29.0
30.0
30.9

179.4
207.5
211.5
207.7

97.4
97.1
97.1
97.1

94.2
93.8
93.7
93.8

2.6
2.9
2.9
2.9

2001: I ..................
II .................
III ................
IV ................

8,658.1
8,676.2
8,706.2
8,700.9

1,340.6
1,336.1
1,181.9
1,309.7

7,317.5
7,340.0
7,524.2
7,391.2

7,143.9
7,198.5
7,222.0
7,329.6

6,904.7
6,959.8
6,983.7
7,099.9

208.3
207.7
206.5
199.1

30.9
30.9
31.8
30.6

173.7
141.6
302.2
61.5

97.6
98.1
96.0
99.2

94.4
94.8
92.8
96.1

2.4
1.9
4.0
.8

2002: I ..................
II .................
III ................

8,803.4
8,914.0
8,993.3

1,136.8
1,121.8
1,107.3

7,666.7
7,792.2
7,886.0

7,396.3
7,477.9
7,583.0

7,174.2
7,254.7
7,360.7

190.6
191.3
189.3

31.5
31.9
32.9

270.4
314.3
303.0

96.5
96.0
96.2

93.6
93.1
93.3

3.5
4.0
3.8

1 Percents based on data in millions of dollars.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–31.—Total and per capita disposable personal income and personal consumption expenditures,
and per capita gross domestic product, in current and real dollars, 1959–2002
[Quarterly data at seasonally adjusted annual rates, except as noted]
Disposable personal income
Year or
quarter

Total (billions of
dollars)

Personal consumption expenditures

Per capita
(dollars)

Total (billions of
dollars)

Per capita
(dollars)

Gross domestic
product
per capita
(dollars)

Population
(thousands) 1

Current
dollars

Chained
(1996)
dollars

Current
dollars

Chained
(1996)
dollars

Current
dollars

Chained
(1996)
dollars

Current
dollars

Chained
(1996)
dollars

Current
dollars

Chained
(1996)
dollars

1959 ........

351.2

1,623.8

1,983

9,167

318.1

1,470.7

1,796

8,303

2,865

13,092

177,130

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

........
........
........
........
........
........
........
........
........
........

366.2
382.4
405.6
425.8
463.0
498.9
539.1
576.2
626.2
675.0

1,664.8
1,720.0
1,803.5
1,871.5
2,006.9
2,131.0
2,244.6
2,340.5
2,448.2
2,524.3

2,026
2,081
2,174
2,249
2,412
2,567
2,742
2,899
3,119
3,329

9,210
9,361
9,666
9,886
10,456
10,965
11,417
11,776
12,196
12,451

332.3
342.7
363.8
383.1
411.7
444.3
481.8
508.7
558.7
605.5

1,510.8
1,541.2
1,617.3
1,684.0
1,784.8
1,897.6
2,006.1
2,066.2
2,184.2
2,264.8

1,838
1,865
1,950
2,024
2,145
2,286
2,451
2,559
2,783
2,987

8,358
8,388
8,668
8,896
9,300
9,764
10,204
10,396
10,881
11,171

2,918
2,970
3,143
3,268
3,462
3,705
4,015
4,197
4,540
4,860

13,148
13,236
13,821
14,212
14,831
15,583
16,416
16,646
17,266
17,616

180,760
183,742
186,590
189,300
191,927
194,347
196,599
198,752
200,745
202,736

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

........
........
........
........
........
........
........
........
........
........

736.5
801.7
868.6
979.0
1,072.3
1,181.4
1,299.9
1,436.0
1,614.8
1,808.2

2,630.0
2,745.3
2,874.3
3,072.3
3,051.9
3,108.5
3,243.5
3,360.7
3,527.5
3,628.6

3,591
3,860
4,138
4,619
5,013
5,470
5,960
6,519
7,253
8,033

12,823
13,218
13,692
14,496
14,268
14,393
14,873
15,256
15,845
16,120

648.9
702.4
770.7
852.5
932.4
1,030.3
1,149.8
1,278.4
1,430.4
1,596.3

2,317.5
2,405.2
2,550.5
2,675.9
2,653.7
2,710.9
2,868.9
2,992.1
3,124.7
3,203.2

3,164
3,382
3,671
4,022
4,359
4,771
5,272
5,803
6,425
7,091

11,300
11,581
12,149
12,626
12,407
12,551
13,155
13,583
14,035
14,230

5,069
5,434
5,909
6,537
7,017
7,571
8,363
9,221
10,313
11,401

17,446
17,804
18,570
19,456
19,163
18,911
19,771
20,481
21,383
21,821

205,089
207,692
209,924
211,939
213,898
215,981
218,086
220,289
222,629
225,106

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

........
........
........
........
........
........
........
........
........
........

2,019.8
2,247.9
2,406.8
2,586.0
2,887.6
3,086.5
3,262.5
3,459.5
3,752.4
4,016.3

3,658.0
3,741.1
3,791.7
3,906.9
4,207.6
4,347.8
4,486.6
4,582.5
4,784.1
4,906.5

8,869
9,773
10,364
11,036
12,215
12,941
13,555
14,246
15,312
16,235

16,063
16,265
16,328
16,673
17,799
18,229
18,641
18,870
19,522
19,833

1,762.9
1,944.2
2,079.3
2,286.4
2,498.4
2,712.6
2,895.2
3,105.3
3,356.6
3,596.7

3,193.0
3,236.0
3,275.5
3,454.3
3,640.6
3,820.9
3,981.2
4,113.4
4,279.5
4,393.7

7,741
8,453
8,954
9,757
10,569
11,373
12,029
12,787
13,697
14,539

14,021
14,069
14,105
14,741
15,401
16,020
16,541
16,938
17,463
17,760

12,276
13,614
14,035
15,085
16,636
17,664
18,501
19,529
20,845
22,188

21,521
21,830
21,184
21,902
23,288
23,970
24,565
25,174
25,987
26,646

227,726
230,008
232,218
234,332
236,394
238,506
240,682
242,842
245,061
247,387

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

........
........
........
........
........
........
........
........
........
........

4,293.6
4,474.8
4,754.6
4,935.3
5,165.4
5,422.6
5,677.7
5,968.2
6,355.6
6,627.4

5,014.2
5,033.0
5,189.3
5,261.3
5,397.2
5,539.1
5,677.7
5,854.5
6,168.6
6,328.4

17,176
17,669
18,527
18,981
19,626
20,361
21,072
21,887
23,037
23,749

20,058
19,873
20,220
20,235
20,507
20,798
21,072
21,470
22,359
22,678

3,831.5
3,971.2
4,209.7
4,454.7
4,716.4
4,969.0
5,237.5
5,529.3
5,856.0
6,246.5

4,474.5
4,466.6
4,594.5
4,748.9
4,928.1
5,075.6
5,237.5
5,423.9
5,683.7
5,964.5

15,327
15,681
16,403
17,133
17,920
18,657
19,438
20,277
21,226
22,384

17,899
17,637
17,903
18,264
18,724
19,058
19,438
19,891
20,601
21,373

23,215
23,637
24,622
25,546
26,803
27,787
28,997
30,505
31,830
33,234

26,834
26,363
26,809
27,163
27,918
28,325
28,997
29,922
30,842
31,746

249,983
253,253
256,634
260,011
263,194
266,327
269,448
272,687
275,891
279,062

2000 .......
2001 .......

7,120.2
7,393.2

6,630.3
6,748.0

25,237
25,957

23,501
23,692

6,683.7
6,987.0

6,223.9
6,377.2

23,690
24,531

22,061
22,390

34,823
35,398

32,579
32,352

282,128
284,822

1998: I .....
II ....
III ...
IV ..

6,220.8
6,327.4
6,407.0
6,467.3

6,064.5
6,153.6
6,209.9
6,246.6

22,644
22,972
23,191
23,336

22,075
22,341
22,478
22,540

5,719.9
5,820.0
5,895.1
5,989.1

5,576.3
5,660.2
5,713.7
5,784.7

20,821
21,130
21,338
21,611

20,298
20,550
20,682
20,873

31,405
31,576
31,913
32,419

30,563
30,653
30,870
31,277

274,725
275,437
276,269
277,134

1999: I .....
II ....
III ...
IV ..

6,530.3
6,580.2
6,640.5
6,758.4

6,288.4
6,301.0
6,325.0
6,399.3

23,500
23,620
23,763
24,109

22,630
22,618
22,634
22,828

6,076.6
6,195.6
6,299.4
6,414.5

5,851.4
5,932.8
6,000.1
6,073.6

21,868
22,239
22,542
22,882

21,057
21,296
21,471
21,666

32,722
32,922
33,339
33,947

31,428
31,500
31,802
32,248

277,881
278,589
279,449
280,328

2000: I .....
II ....
III ..
IV ..

6,955.3
7,077.2
7,188.2
7,259.8

6,530.4
6,607.6
6,676.8
6,706.2

24,745
25,118
25,447
25,635

23,234
23,451
23,637
23,680

6,552.2
6,638.7
6,736.1
6,808.0

6,151.9
6,198.2
6,256.8
6,288.8

23,311
23,562
23,847
24,039

21,887
21,998
22,150
22,206

34,330
34,855
34,958
35,147

32,366
32,672
32,635
32,640

281,076
281,758
282,476
283,202

2001: I .....
II ....
III ..
IV ..

7,317.5
7,340.0
7,524.2
7,391.2

6,704.3
6,694.8
6,864.0
6,729.1

25,785
25,805
26,387
25,853

23,624
23,537
24,071
23,537

6,904.7
6,959.8
6,983.7
7,099.9

6,326.0
6,348.0
6,370.9
6,464.0

24,330
24,468
24,491
24,834

22,291
22,317
22,342
22,609

35,336
35,332
35,412
35,512

32,523
32,320
32,216
32,350

283,794
284,442
285,154
285,898

2002: I .....
II ...
III ..

7,666.7
7,792.2
7,886.0

6,961.0
7,027.2
7,081.6

26,759
27,144
27,404

24,296
24,479
24,609

7,174.2
7,254.7
7,360.7

6,513.8
6,542.4
6,609.9

25,040
25,271
25,579

22,735
22,790
22,969

35,996
36,147
36,509

32,681
32,718
32,962

286,507
287,072
287,770

1 Population of the United States including Armed Forces overseas; includes Alaska and Hawaii beginning 1960. Annual data are averages
of quarterly data. Quarterly data are averages for the period.

Source: Department of Commerce (Bureau of Economic Analysis and Bureau of the Census).

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TABLE B–32.—Gross saving and investment, 1959–2002
[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

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
1999

.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
........

105.8
110.9
113.9
124.6
132.8
143.0
158.1
169.1
171.1
183.3
199.8
194.3
211.4
241.6
294.6
304.0
298.4
342.7
398.2
481.6
544.9
555.5
656.5
625.7
608.0
769.4
772.5
735.9
810.4
936.2
967.6
977.7
1,015.8
1,007.4
1,039.4
1,155.9
1,257.5
1,349.3
1,502.3
1,647.2
1,704.1

84.2
84.4
91.5
100.4
104.3
117.6
129.4
138.5
150.8
153.7
157.0
174.3
202.6
217.0
256.4
270.7
323.5
344.0
383.1
439.1
487.8
537.8
631.7
681.6
693.8
824.8
833.4
806.5
838.3
943.0
955.1
1,016.2
1,098.9
1,164.6
1,159.4
1,199.3
1,266.0
1,290.4
1,343.7
1,375.0
1,356.1

Personal
saving Total 1

26.5
26.4
31.9
33.5
33.1
40.5
42.7
44.5
54.0
52.7
52.6
69.5
80.1
76.9
102.5
114.3
125.2
122.1
125.6
145.4
165.8
205.6
243.7
262.2
227.8
306.5
282.6
267.8
252.8
292.3
301.8
334.3
371.7
413.7
350.8
315.5
302.4
272.1
252.9
301.5
174.0

Federal

UndisCortribporate
uted consumpcorpotion of
rate
fixed
profits 2 capital

Consump- Current
tion surplus Total
or
of
fixed deficit
(¥)
capital

Noncorporate
consumption of
fixed
capital

Total
Total

State and local

57.7
58.1
59.6
66.9
71.2
77.1
86.6
94.0
96.9
101.1
104.3
104.8
122.5
140.1
153.9
156.4
198.3
221.9
257.5
293.6
321.9
332.2
387.9
419.4
466.0
518.3
550.8
538.7
585.5
650.6
653.2
681.9
727.3
750.9
808.6
883.8
963.6
1,018.3
1,090.8
1,073.5
1,182.0

17.5
16.3
16.8
22.6
25.2
28.6
34.9
37.6
35.4
33.6
29.8
23.0
32.4
41.1
44.8
29.5
49.1
57.3
73.1
82.9
77.0
49.6
64.1
61.9
93.2
124.7
128.3
88.0
107.3
138.3
99.2
102.4
119.2
124.4
142.0
151.6
203.6
232.7
261.3
189.9
229.6

23.7
24.7
25.2
26.2
27.2
28.7
30.8
33.7
37.1
41.1
45.6
50.5
55.4
60.9
66.8
78.5
94.0
104.5
117.5
134.5
156.4
181.1
210.1
233.4
244.4
260.2
280.9
302.1
320.8
344.3
370.6
391.1
411.2
427.9
448.5
482.7
512.1
543.5
581.5
620.2
665.5

16.5
21.6 13.6
17.1
26.5 17.8
17.6
22.5 13.5
18.1
24.2 14.0
18.7
28.5 17.5
19.7
25.5 13.4
21.0
28.8 16.0
22.6
30.7 16.1
24.3
20.3
5.8
26.4
29.6 13.8
29.0
42.8 25.5
31.4
20.0
2.3
34.4
8.8 −9.5
38.5
24.6 −3.8
42.3
38.2
8.3
48.4
33.3
6.4
55.2 −25.1 −47.7
60.0
−1.3 −29.9
66.9
15.1 −20.6
76.2
42.5
−.6
88.5
57.1 16.6
101.5
17.7 −22.8
113.7
24.8 −18.9
124.0 −55.9 −93.1
128.3 −85.7 −131.5
133.4 −55.4 −121.6
141.7 −60.9 −127.9
148.7 −70.5 −139.2
157.4 −27.9 −91.6
168.1
−6.7 −77.2
183.4
12.5 −65.6
188.4 −38.6 −104.3
196.8 −83.2 −142.3
214.3 −157.2 −222.2
211.6 −120.0 −195.4
231.9 −43.4 −130.9
231.5
−8.5 −108.0
238.5
58.9 −51.5
250.9 158.6 33.4
264.2 272.2 132.0
281.8 348.1 203.4

10.4
10.7
11.0
11.6
12.3
12.5
12.8
13.3
14.2
15.1
15.9
16.7
17.4
18.7
19.5
20.2
21.6
23.2
24.6
26.3
28.0
30.9
34.7
39.5
42.4
46.4
49.3
52.9
56.3
60.2
64.4
68.7
73.0
75.4
78.7
81.4
84.0
85.3
86.8
88.2
91.5

3.2
7.1
2.5
2.4
5.2
.8
3.2
2.7
−8.3
−1.3
9.6
−14.4
−26.8
−22.5
−11.2
−13.9
−69.3
−53.0
−45.2
−26.9
−11.4
−53.8
−53.7
−132.6
−173.9
−168.1
−177.1
−192.1
−147.9
−137.4
−130.0
−173.0
−215.3
−297.5
−274.1
−212.3
−192.0
−136.8
−53.3
43.8
111.9

2000 ........
2001 .........

1,807.9 1,372.1 201.5 1,170.5
1,662.4 1,399.3 169.7 1,229.5

152.6
122.7

721.1
789.1

296.8
317.7

435.8 302.8
263.1 170.7

95.9
98.7

1998: I ......
II .....
III ...
IV ...

1,610.0
1,617.2
1,681.7
1,679.8

1,369.0
1,366.0
1,391.8
1,373.4

307.9
309.1
311.4
277.6

1,061.0
1,056.9
1,080.4
1,095.8

198.1
181.4
190.0
190.1

605.1
614.2
625.1
636.2

258.5
262.0
266.0
270.2

241.1
251.2
289.9
306.4

107.0
120.7
154.1
146.1

87.4
87.8
88.5
89.1

19.6
33.0
65.7
57.0

1999: I ......
II .....
III ...
IV ...

1,743.0
1,692.7
1,671.2
1,709.7

1,412.5
1,352.2
1,320.8
1,338.8

253.9
179.9
133.3
129.0

1,158.6
1,172.3
1,187.5
1,209.8

233.1
232.3
217.4
235.6

646.4
657.1
675.0
683.4

274.0
277.7
290.0
285.7

330.5
340.6
350.4
370.9

178.6
203.8
209.4
221.9

89.9
90.9
92.0
93.2

2000: I ......
II .....
III ...
IV ...

1,815.7
1,813.6
1,828.9
1,773.4

1,353.7
1,386.5
1,383.7
1,364.4

179.4
207.5
211.5
207.7

1,174.3
1,179.0
1,172.2
1,156.7

185.7
170.4
144.2
110.2

698.6
714.1
728.9
742.8

290.0
294.6
299.1
303.7

462.0
427.1
445.2
409.0

317.7
292.8
309.7
291.0

2001: I ......
II .....
III ...
IV ...

1,699.0
1,670.6
1,665.6
1,614.4

1,324.1 173.7 1,150.4
1,338.4 141.6 1,196.8
1,535.6 302.2 1,233.4
1,399.0 61.5 1,337.5

86.3
101.9
79.5
223.0

755.9
772.3
835.6
792.6

308.2
322.6
318.2
321.9

374.9 271.5
332.2 243.0
130.0 47.3
215.3 121.1

2002: I ......
II .....
III ...

1,603.2 1,578.3 270.4 1,307.9
1,604.0 1,616.1 314.3 1,301.8
1,573.7 1,596.4 303.0 1,293.4

171.0
140.5
118.6

808.3
826.1
836.1

328.6
335.1
338.7

24.9 −45.2
−12.1 −94.3
−22.7 −98.4

Consump- Current
tion surplus
or
of
fixed deficit
(¥)
capital

8.0
8.7
9.0
10.2
11.0
12.1
12.7
14.6
14.5
15.8
17.3
17.6
18.2
28.4
30.0
27.0
22.7
28.6
35.7
43.1
40.5
40.6
43.8
37.2
45.7
66.2
67.0
68.7
63.7
70.5
78.1
65.7
59.1
65.0
75.4
87.5
99.4
110.4
125.1
140.2
144.7

4.2
4.4
4.7
5.0
5.4
5.7
6.2
6.9
7.5
8.3
9.3
10.6
11.8
12.9
14.3
17.7
20.2
21.3
22.6
24.4
27.4
31.7
36.3
39.5
40.9
42.4
44.7
47.9
51.5
54.9
58.8
63.1
66.9
69.9
73.9
78.9
84.1
88.9
94.2
99.5
106.4

3.8
4.3
4.3
5.2
5.7
6.4
6.5
7.7
7.0
7.5
8.0
7.1
6.4
15.6
15.7
9.3
2.4
7.3
13.1
18.7
13.0
8.8
7.5
−2.3
4.8
23.8
22.3
20.8
12.2
15.6
19.3
2.6
−7.8
−4.9
1.5
8.6
15.3
21.4
31.0
40.7
38.3

206.9 133.0
72.0 92.4

115.0
123.7

18.0
−31.3

134.1
130.5
135.8
160.3

97.4
98.4
100.2
101.9

36.7
32.0
35.6
58.4

88.7
112.9
117.4
128.8

151.9
136.8
141.0
149.0

103.5
105.5
107.2
109.3

48.4
31.3
33.8
39.6

94.5
95.5
96.5
97.2

223.2
197.2
213.2
193.8

144.2
134.3
135.4
118.0

111.5
114.1
116.3
118.1

32.7
20.2
19.2
−.2

97.7
98.6
99.0
99.7

173.8 103.4
144.4 89.2
−51.7 82.7
21.3 94.3

119.9
121.5
128.9
124.5

−16.5
−32.3
−46.2
−30.2

125.9
127.3
128.3

−55.8
−45.1
−52.5

100.6 −145.8
101.3 −195.6
102.2 −200.7

70.1
82.2
75.8

1 Includes

private wage accruals less disbursements not shown separately.
inventory valuation and capital consumption adjustments.
See next page for continuation of table.
2 With

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TABLE B–32.—Gross saving and investment, 1959–2002—Continued
[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates]
Gross investment

Addenda:
Gross
saving
as a
percent
of
gross
national
product

Statistical
discrepancy

Personal
saving
as a
percent
of
disposable
personal
income

Total

Gross
private
domestic
investment

Gross
government
investment 3

............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................
............................................................................................

106.7
110.4
113.8
125.3
132.4
144.2
160.0
175.6
175.9
187.6
202.7
201.2
222.7
250.3
302.6
314.0
316.1
367.2
419.8
502.6
580.6
589.5
684.0
628.2
655.0
787.9
784.2
779.8
813.8
894.0
983.9
1,008.2
1,035.4
1,051.1
1,103.2
1,214.4
1,284.0
1,382.1
1,532.1
1,616.2
1,665.4

78.5
78.9
78.2
88.1
93.8
102.1
118.2
131.3
128.6
141.2
156.4
152.4
178.2
207.6
244.5
249.4
230.2
292.0
361.3
436.0
490.6
477.9
570.8
516.1
564.2
735.5
736.3
747.2
781.5
821.1
872.9
861.7
800.2
866.6
955.1
1,097.1
1,143.8
1,242.7
1,390.5
1,538.7
1,636.7

29.3
28.3
31.3
33.3
33.6
34.6
35.6
40.4
43.8
44.7
44.4
44.8
44.0
46.3
49.4
57.4
64.5
66.4
67.5
77.1
88.5
100.3
106.9
112.3
122.8
139.4
158.8
173.2
184.3
186.2
197.7
215.8
220.3
223.1
220.9
225.6
238.2
250.1
264.6
277.1
304.7

−1.2
3.2
4.3
3.9
5.0
7.5
6.2
3.9
3.5
1.7
1.8
4.0
.6
−3.6
8.7
7.1
21.4
8.9
−9.0
−10.4
1.4
11.4
6.3
−.2
−32.0
−87.0
−110.9
−140.6
−152.0
−113.2
−86.7
−69.2
14.9
−38.7
−72.9
−108.3
−98.0
−110.7
−123.1
−199.7
−276.0

0.8
−.6
−.2
.7
−.4
1.2
1.9
6.4
4.8
4.3
2.9
6.9
11.3
8.7
8.0
10.0
17.7
24.5
21.6
21.0
35.7
33.9
27.5
2.5
47.0
18.6
11.7
43.9
3.3
−42.2
16.3
30.6
19.6
43.7
63.8
58.5
26.5
32.8
29.7
−31.0
−38.8

20.7
20.9
20.7
21.1
21.3
21.4
21.8
21.3
20.4
20.0
20.1
18.6
18.6
19.3
21.1
20.0
18.1
18.6
19.4
20.8
21.0
19.6
20.7
19.0
17.0
19.4
18.2
16.5
17.0
18.3
17.6
16.8
16.9
15.9
15.6
16.3
16.9
17.2
18.0
18.8
18.3

7.6
7.2
8.3
8.3
7.8
8.8
8.6
8.3
9.4
8.4
7.8
9.4
10.0
8.9
10.5
10.7
10.6
9.4
8.7
9.0
9.2
10.2
10.8
10.9
8.8
10.6
9.2
8.2
7.3
7.8
7.5
7.8
8.3
8.7
7.1
6.1
5.6
4.8
4.2
4.7
2.6

2000 ............................................................................................
2001 ............................................................................................

1,679.4
1,545.1

1,755.4
1,586.0

319.8
335.8

−395.8
−376.7

−128.5
−117.3

18.4
16.5

2.8
2.3

1998: I .........................................................................................
II ........................................................................................
III .......................................................................................
IV .......................................................................................
1999: I .........................................................................................
II ........................................................................................
III .......................................................................................
IV ......................................................................................

1,638.5
1,580.0
1,600.0
1,646.2
1,689.7
1,636.5
1,639.7
1,695.6

1,528.7
1,498.4
1,538.6
1,589.3
1,618.0
1,597.8
1,637.9
1,693.2

265.3
274.1
284.1
284.9
292.7
302.9
306.1
317.1

−155.5
−192.5
−222.7
−228.0
−221.0
−264.2
−304.2
−314.7

28.5
−37.2
−81.7
−33.6
−53.3
−56.2
−31.5
−14.1

18.6
18.6
19.1
18.7
19.1
18.4
17.9
17.9

4.9
4.9
4.9
4.3
3.9
2.7
2.0
1.9

2000: I .........................................................................................
II ........................................................................................
III ......................................................................................
IV ......................................................................................

1,677.0
1,726.8
1,664.9
1,648.9

1,711.4
1,786.3
1,766.4
1,757.4

322.5
317.5
317.7
321.5

−356.9
−377.1
−419.1
−430.0

−138.7
−86.8
−164.0
−124.5

18.8
18.4
18.5
17.8

2.6
2.9
2.9
2.9

2001: I .........................................................................................
II ........................................................................................
III ......................................................................................
IV ......................................................................................

1,593.2
1,557.7
1,547.8
1,481.8

1,671.1
1,597.2
1,574.9
1,500.7

331.6
343.0
323.7
345.0

−409.5
−382.5
−350.8
−363.9

−105.7
−112.9
−117.8
−132.6

16.9
16.6
16.5
15.8

2.4
1.9
4.0
.8

2002: I .........................................................................................
II ........................................................................................
III .......................................................................................

1,493.2
1,439.0
1,453.4

1,559.4
1,588.0
1,597.3

355.5
348.2
351.7

−421.7
−497.2
−495.6

−110.0
−165.0
−120.3

15.5
15.5
15.0

3.5
4.0
3.8

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
1998
1999

Net
foreign
investment 4

3 For

details on government investment, see Table B-20.
4 Net exports of goods and services plus net income receipts from rest of the world less net transfers.
Source: Department of Commerce, Bureau of Economic Analysis.

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TABLE B–33.—Median money income (in 2001 dollars) and poverty status of families and persons,
by race, selected years, 1984–2001
Families 1

Persons
below
poverty level

Below poverty level
Year

ALL RACES
1984 .........................
1985 .........................
1986 .........................
1987 3 .......................
1988 .........................
1989 .........................
1990 .........................
1991 .........................
1992 4 .......................
1993 .........................
1994 .........................
1995 .........................
1996 .........................
1997 .........................
1998 .........................
1999 .........................
2000 5 .......................
2000 6 .......................
2001 .........................
WHITE
1984 .........................
1985 .........................
1986 .........................
1987 3 .......................
1988 .........................
1989 .........................
1990 .........................
1991 .........................
1992 4 .......................
1993 .........................
1994 .........................
1995 .........................
1996 .........................
1997 .........................
1998 .........................
1999 .........................
2000 5 .......................
2000 6 .......................
2001 .........................
BLACK
1984 .........................
1985 .........................
1986 .........................
1987 3 .......................
1988 .........................
1989 .........................
1990 .........................
1991 .........................
1992 4 .......................
1993 .........................
1994 .........................
1995 .........................
1996 .........................
1997 .........................
1998 .........................
1999 .........................
2000 5 .......................
2000 6 .......................
2001 .........................

Number
(millions)

Median
money
income
(in
2001
dollars) 2

Female
householder

Total
Number
(millions)

Percent

Number
(millions)

Percent

Median money income (in 2001 dollars)
of persons 15 years old and over with
income 2
Males

Number
(millions)

Percent

Females

All
persons

Yearround
full-time
workers

All
persons

Yearround
full-time
workers

62.7
63.6
64.5
65.2
65.8
66.1
66.3
67.2
68.2
68.5
69.3
69.6
70.2
70.9
71.6
72.0
72.4
73.8
74.3

$42,858
43,518
45,393
46,151
46,285
47,166
46,429
45,551
45,221
44,586
45,820
46,843
47,516
49,017
50,689
51,996
52,310
52,148
51,407

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
7.2
6.7
6.2
6.4
6.8

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
10.0
9.3
8.6
8.7
9.2

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
3.8
3.5
3.1
3.3
3.5

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
29.9
27.8
24.7
25.4
26.4

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
34.5
32.3
31.1
31.6
32.9

14.4
14.0
13.6
13.4
13.0
12.8
13.5
14.2
14.8
15.1
14.5
13.8
13.7
13.3
12.7
11.8
11.3
11.3
11.7

$25,294
25,593
26,372
26,504
27,186
27,425
26,651
25,944
25,292
25,457
25,662
26,025
26,773
27,729
28,732
28,972
29,058
29,134
29,101

$38,920
39,225
39,901
39,759
39,313
39,179
38,058
38,443
38,122
37,490
37,349
37,141
37,674
38,767
39,317
39,912
40,109
39,976
40,136

$11,136
11,324
11,727
12,361
12,774
13,268
13,225
13,278
13,247
13,325
13,547
13,992
14,395
15,071
15,650
16,264
16,640
16,511
16,614

$25,005
25,501
25,954
26,173
26,664
27,073
27,042
26,927
27,317
27,106
27,487
27,426
28,010
28,627
29,126
29,073
29,624
29,936
30,420

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
60.1
60.3
60.2
61.3
61.6

44,890
45,742
47,475
48,259
48,763
49,595
48,480
47,888
47,814
47,410
48,304
49,191
50,275
51,421
53,168
54,411
54,742
54,509
54,067

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
4.8
4.4
4.2
4.3
4.6

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
8.0
7.3
6.9
7.1
7.4

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
2.1
1.9
1.7
1.8
1.9

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
24.9
22.5
20.0
21.2
22.4

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
23.5
21.9
21.2
21.6
22.7

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
10.5
9.8
9.4
9.5
9.9

26,699
26,849
27,829
28,172
28,697
28,762
27,802
27,117
26,467
26,517
26,783
27,562
28,025
28,722
29,984
30,341
30,525
30,629
30,240

40,252
40,314
41,015
40,686
40,635
40,906
39,505
39,231
39,029
38,401
38,327
38,658
39,025
39,724
40,341
41,778
41,476
41,376
40,790

11,267
11,544
11,958
12,677
13,088
13,527
13,549
13,588
13,555
13,591
13,741
14,206
14,559
15,169
15,853
16,318
16,669
16,528
16,652

25,253
25,862
26,352
26,658
27,064
27,394
27,368
27,320
27,633
27,721
28,230
27,988
28,485
29,112
29,613
29,766
30,489
30,787
30,849

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
8.5
8.7
8.8
8.7
8.8

25,020
26,339
27,127
27,428
27,792
27,860
28,135
27,311
26,093
25,987
29,180
29,956
29,792
31,457
31,890
33,755
35,146
34,616
33,598

2.1
2.0
2.0
2.1
2.1
2.1
2.2
2.3
2.5
2.5
2.2
2.1
2.2
2.0
2.0
1.9
1.7
1.7
1.8

30.9
28.7
28.0
29.4
28.2
27.8
29.3
30.4
31.1
31.3
27.3
26.4
26.1
23.6
23.4
21.9
19.1
19.3
20.7

1.5
1.5
1.5
1.6
1.6
1.5
1.6
1.8
1.9
1.9
1.7
1.7
1.7
1.6
1.6
1.5
1.3
1.3
1.4

51.7
50.5
50.1
51.1
49.0
46.5
48.1
51.2
50.2
49.9
46.2
45.1
43.7
39.8
40.8
39.3
34.6
34.3
35.2

9.5
8.9
9.0
9.5
9.4
9.3
9.8
10.2
10.8
10.9
10.2
9.9
9.7
9.1
9.1
8.4
7.9
8.0
8.1

33.8
31.3
31.1
32.4
31.3
30.7
31.9
32.7
33.4
33.1
30.6
29.3
28.4
26.5
26.1
23.6
22.0
22.5
22.7

15,319
16,896
16,676
16,712
17,317
17,383
16,899
16,429
16,153
17,619
17,701
18,462
18,525
19,903
20,955
21,859
22,264
21,939
21,466

27,471
28,198
28,917
29,091
29,786
28,543
28,211
28,680
28,427
28,429
28,834
28,604
30,482
29,582
29,795
32,182
31,748
31,340
31,921

9,994
9,849
10,118
10,355
10,566
10,857
10,937
11,174
10,988
11,470
12,458
12,643
13,224
14,351
14,248
15,690
16,533
16,324
16,282

22,758
22,893
23,059
23,810
24,252
24,637
24,354
24,251
25,048
24,507
24,372
24,314
24,702
25,037
25,882
26,706
26,454
26,469
27,297

1 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–RS.
3 Based on revised methodology; comparable with succeeding years.
4 Based on 1990 census adjusted population controls; comparable with succeeding years.
5 Reflects November 2001 weighting correction.
6 Reflects implementation of Census 2000-based population controls and household sample expansion; 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; 1978, 11.4; 1979, 11.7; 1980, 13.0; 1981, 14.0; 1982, 15.0; and 1983, 15.2.
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.

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POPULATION, EMPLOYMENT, WAGES, AND PRODUCTIVITY
TABLE B–34.—Population by age group, 1929–2002
[Thousands of persons]
Age (years)
July 1

Total
Under 5

5-15

16-19

20-24

25-44

45-64

65 and
over

1929 ..........................
1933 ..........................
1939 ..........................

121,767
125,579
130,880

11,734
10,612
10,418

26,800
26,897
25,179

9,127
9,302
9,822

10,694
11,152
11,519

35,862
37,319
39,354

21,076
22,933
25,823

6,474
7,363
8,764

1940
1941
1942
1943
1944

..........................
..........................
..........................
..........................
..........................

132,122
133,402
134,860
136,739
138,397

10,579
10,850
11,301
12,016
12,524

24,811
24,516
24,231
24,093
23,949

9,895
9,840
9,730
9,607
9,561

11,690
11,807
11,955
12,064
12,062

39,868
40,383
40,861
41,420
42,016

26,249
26,718
27,196
27,671
28,138

9,031
9,288
9,584
9,867
10,147

1945
1946
1947
1948
1949

..........................
..........................
..........................
..........................
..........................

139,928
141,389
144,126
146,631
149,188

12,979
13,244
14,406
14,919
15,607

23,907
24,103
24,468
25,209
25,852

9,361
9,119
9,097
8,952
8,788

12,036
12,004
11,814
11,794
11,700

42,521
43,027
43,657
44,288
44,916

28,630
29,064
29,498
29,931
30,405

10,494
10,828
11,185
11,538
11,921

1950
1951
1952
1953
1954

..........................
..........................
..........................
..........................
..........................

152,271
154,878
157,553
160,184
163,026

16,410
17,333
17,312
17,638
18,057

26,721
27,279
28,894
30,227
31,480

8,542
8,446
8,414
8,460
8,637

11,680
11,552
11,350
11,062
10,832

45,672
46,103
46,495
46,786
47,001

30,849
31,362
31,884
32,394
32,942

12,397
12,803
13,203
13,617
14,076

1955
1956
1957
1958
1959

..........................
..........................
..........................
..........................
..........................

165,931
168,903
171,984
174,882
177,830

18,566
19,003
19,494
19,887
20,175

32,682
33,994
35,272
36,445
37,368

8,744
8,916
9,195
9,543
10,215

10,714
10,616
10,603
10,756
10,969

47,194
47,379
47,440
47,337
47,192

33,506
34,057
34,591
35,109
35,663

14,525
14,938
15,388
15,806
16,248

1960
1961
1962
1963
1964

..........................
..........................
..........................
..........................
..........................

180,671
183,691
186,538
189,242
191,889

20,341
20,522
20,469
20,342
20,165

38,494
39,765
41,205
41,626
42,297

10,683
11,025
11,180
12,007
12,736

11,134
11,483
11,959
12,714
13,269

47,140
47,084
47,013
46,994
46,958

36,203
36,722
37,255
37,782
38,338

16,675
17,089
17,457
17,778
18,127

1965
1966
1967
1968
1969

..........................
..........................
..........................
..........................
..........................

194,303
196,560
198,712
200,706
202,677

19,824
19,208
18,563
17,913
17,376

42,938
43,702
44,244
44,622
44,840

13,516
14,311
14,200
14,452
14,800

13,746
14,050
15,248
15,786
16,480

46,912
47,001
47,194
47,721
48,064

38,916
39,534
40,193
40,846
41,437

18,451
18,755
19,071
19,365
19,680

1970
1971
1972
1973
1974

..........................
..........................
..........................
..........................
..........................

205,052
207,661
209,896
211,909
213,854

17,166
17,244
17,101
16,851
16,487

44,816
44,591
44,203
43,582
42,989

15,289
15,688
16,039
16,446
16,769

17,202
18,159
18,153
18,521
18,975

48,473
48,936
50,482
51,749
53,051

41,999
42,482
42,898
43,235
43,522

20,107
20,561
21,020
21,525
22,061

1975
1976
1977
1978
1979

..........................
..........................
..........................
..........................
..........................

215,973
218,035
220,239
222,585
225,055

16,121
15,617
15,564
15,735
16,063

42,508
42,099
41,298
40,428
39,552

17,017
17,194
17,276
17,288
17,242

19,527
19,986
20,499
20,946
21,297

54,302
55,852
57,561
59,400
61,379

43,801
44,008
44,150
44,286
44,390

22,696
23,278
23,892
24,502
25,134

1980
1981
1982
1983
1984

..........................
..........................
..........................
..........................
..........................

227,726
229,966
232,188
234,307
236,348

16,451
16,893
17,228
17,547
17,695

38,838
38,144
37,784
37,526
37,461

17,167
16,812
16,332
15,823
15,295

21,590
21,869
21,902
21,844
21,737

63,470
65,528
67,692
69,733
71,735

44,504
44,500
44,462
44,474
44,547

25,707
26,221
26,787
27,361
27,878

1985
1986
1987
1988
1989

..........................
..........................
..........................
..........................
..........................

238,466
240,651
242,804
245,021
247,342

17,842
17,963
18,052
18,195
18,508

37,450
37,404
37,333
37,593
37,972

15,005
15,024
15,215
15,198
14,913

21,478
20,942
20,385
19,846
19,442

73,673
75,651
77,338
78,595
79,943

44,602
44,660
44,854
45,471
45,882

28,416
29,008
29,626
30,124
30,682

1990
1991
1992
1993
1994

..........................
..........................
..........................
..........................
..........................

250,132
253,493
256,894
260,255
263,436

18,856
19,208
19,528
19,729
19,777

38,632
39,349
40,161
40,904
41,689

14,466
13,992
13,781
13,953
14,228

19,323
19,414
19,314
19,101
18,758

81,291
82,844
83,201
83,766
84,334

46,316
46,874
48,553
49,899
51,318

31,247
31,812
32,356
32,902
33,331

1995
1996
1997
1998
1999

..........................
..........................
..........................
..........................
..........................

266,557
269,667
272,912
276,115
279,295

19,627
19,408
19,233
19,145
19,136

42,510
43,172
43,833
44,332
44,755

14,522
15,057
15,433
15,856
16,164

18,391
17,965
17,992
18,250
18,672

84,933
85,527
85,737
85,663
85,408

52,806
54,396
56,283
58,249
60,362

33,769
34,143
34,402
34,619
34,798

2000 1 .......................
2001 ..........................
2002 ..........................

282,434
285,545
288,600

................
................
................

................
................
................

................
................
................

................
................
................

................
................
................

................
................
................

................
................
................

1 Data for age groups are available for April 1, 2000: Total, 281,674; under 5, 19,176; 5–15, 45,097; 16–19, 16,215; 20–24, 19,045; 25–
44, 85,190; 45–64, 61,959; and 65 and over, 34,992.
Note.—Includes Armed Forces overseas beginning 1940. Includes Alaska and Hawaii beginning 1950.
Data beginning 2000 are based on the 2000 census.
All estimates are consistent with decennial census enumerations.
Source: Department of Commerce, Bureau of the Census.

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TABLE B–35.—Civilian population and labor force, 1929–2002
[Monthly data seasonally adjusted, except as noted]
Civilian labor force
Civilian
noninstitutional
population 1

Year or month

Employment
Total
Total

Agricultural

Nonagricultural

Unemployment

Not in
labor
force

Civil- Civilian
ian
emlabor ployforce ment/
parpopticipation ulation
rate 2 ratio 3

Thousands of persons 14 years of age and over

Unemployment
rate,
civilian
workers 4

Percent

1929 .............................................................. ................

49,180

47,630

10,450

37,180

1,550 ............

.......... ..........

3.2

1933 .............................................................. ................

51,590

38,760

10,090

28,670

12,830 ............

.......... ..........

24.9

1939 .............................................................. ................

.......... ..........

1940
1941
1942
1943
1944

55,230

45,750

9,610

36,140

9,480 ............

..............................................................
..............................................................
..............................................................
..............................................................
..............................................................

99,840
99,900
98,640
94,640
93,220

55,640
55,910
56,410
55,540
54,630

47,520
50,350
53,750
54,470
53,960

9,540
9,100
9,250
9,080
8,950

37,980
41,250
44,500
45,390
45,010

8,120
5,560
2,660
1,070
670

44,200
43,990
42,230
39,100
38,590

55.7
56.0
57.2
58.7
58.6

47.6
50.4
54.5
57.6
57.9

14.6
9.9
4.7
1.9
1.2

17.2

1945 ..............................................................
1946 ..............................................................
1947 ..............................................................

94,090
103,070
106,018

53,860
57,520
60,168

52,820
55,250
57,812

8,580
8,320
8,256

44,240
46,930
49,557

1,040
2,270
2,356

40,230
45,550
45,850

57.2
55.8
56.8

56.1
53.6
54.5

1.9
3.9
3.9

1947 ..............................................................
1948 ..............................................................
1949 ..............................................................

101,827
103,068
103,994

59,350
60,621
61,286

57,038
58,343
57,651

7,890
7,629
7,658

49,148
50,714
49,993

2,311
2,276
3,637

42,477
42,447
42,708

58.3
58.8
58.9

56.0
56.6
55.4

3.9
3.8
5.9

1950 ..............................................................
1951 ..............................................................
1952 ..............................................................
1953 5 ............................................................
1954 ..............................................................

104,995
104,621
105,231
107,056
108,321

62,208
62,017
62,138
63,015
63,643

58,918
59,961
60,250
61,179
60,109

7,160
6,726
6,500
6,260
6,205

51,758
53,235
53,749
54,919
53,904

3,288
2,055
1,883
1,834
3,532

42,787
42,604
43,093
44,041
44,678

59.2
59.2
59.0
58.9
58.8

56.1
57.3
57.3
57.1
55.5

5.3
3.3
3.0
2.9
5.5

1955
1956
1957
1958
1959

..............................................................
..............................................................
..............................................................
..............................................................
..............................................................

109,683
110,954
112,265
113,727
115,329

65,023
66,552
66,929
67,639
68,369

62,170
63,799
64,071
63,036
64,630

6,450
6,283
5,947
5,586
5,565

55,722
57,514
58,123
57,450
59,065

2,852
2,750
2,859
4,602
3,740

44,660
44,402
45,336
46,088
46,960

59.3
60.0
59.6
59.5
59.3

56.7
57.5
57.1
55.4
56.0

4.4
4.1
4.3
6.8
5.5

1960 5 ............................................................
1961 ..............................................................
1962 5 ............................................................
1963 ..............................................................
1964 ..............................................................

117,245
118,771
120,153
122,416
124,485

69,628
70,459
70,614
71,833
73,091

65,778
65,746
66,702
67,762
69,305

5,458
5,200
4,944
4,687
4,523

60,318
60,546
61,759
63,076
64,782

3,852
4,714
3,911
4,070
3,786

47,617
48,312
49,539
50,583
51,394

59.4
59.3
58.8
58.7
58.7

56.1
55.4
55.5
55.4
55.7

5.5
6.7
5.5
5.7
5.2

1965
1966
1967
1968
1969

..............................................................
..............................................................
..............................................................
..............................................................
..............................................................

126,513
128,058
129,874
132,028
134,335

74,455
75,770
77,347
78,737
80,734

71,088
72,895
74,372
75,920
77,902

4,361
3,979
3,844
3,817
3,606

66,726
68,915
70,527
72,103
74,296

3,366
2,875
2,975
2,817
2,832

52,058
52,288
52,527
53,291
53,602

58.9
59.2
59.6
59.6
60.1

56.2
56.9
57.3
57.5
58.0

4.5
3.8
3.8
3.6
3.5

1970 ..............................................................
1971 ..............................................................
1972 5 ............................................................
1973 5 ............................................................
1974 ..............................................................

137,085
140,216
144,126
147,096
150,120

82,771
84,382
87,034
89,429
91,949

78,678
79,367
82,153
85,064
86,794

3,463
3,394
3,484
3,470
3,515

75,215
75,972
78,669
81,594
83,279

4,093
5,016
4,882
4,365
5,156

54,315
55,834
57,091
57,667
58,171

60.4
60.2
60.4
60.8
61.3

57.4
56.6
57.0
57.8
57.8

4.9
5.9
5.6
4.9
5.6

1975 ..............................................................
1976 ..............................................................
1977 ..............................................................
1978 5 ............................................................
1979 ..............................................................

153,153
156,150
159,033
161,910
164,863

93,775
96,158
99,009
102,251
104,962

85,846
88,752
92,017
96,048
98,824

3,408
3,331
3,283
3,387
3,347

82,438
85,421
88,734
92,661
95,477

7,929
7,406
6,991
6,202
6,137

59,377
59,991
60,025
59,659
59,900

61.2
61.6
62.3
63.2
63.7

56.1
56.8
57.9
59.3
59.9

8.5
7.7
7.1
6.1
5.8

1980
1981
1982
1983
1984

..............................................................
..............................................................
..............................................................
..............................................................
..............................................................

167,745
170,130
172,271
174,215
176,383

106,940
108,670
110,204
111,550
113,544

99,303
100,397
99,526
100,834
105,005

3,364
3,368
3,401
3,383
3,321

95,938
97,030
96,125
97,450
101,685

7,637
8,273
10,678
10,717
8,539

60,806
61,460
62,067
62,665
62,839

63.8
63.9
64.0
64.0
64.4

59.2
59.0
57.8
57.9
59.5

7.1
7.6
9.7
9.6
7.5

1985 ..............................................................
1986 5 ............................................................
1987 ..............................................................
1988 ..............................................................
1989 ..............................................................

178,206
180,587
182,753
184,613
186,393

115,461
117,834
119,865
121,669
123,869

107,150
109,597
112,440
114,968
117,342

3,179
3,163
3,208
3,169
3,199

103,971
106,434
109,232
111,800
114,142

8,312
8,237
7,425
6,701
6,528

62,744
62,752
62,888
62,944
62,523

64.8
65.3
65.6
65.9
66.5

60.1
60.7
61.5
62.3
63.0

7.2
7.0
6.2
5.5
5.3

Thousands of persons 16 years of age and over

1 Not

seasonally adjusted.
labor force as percent of civilian noninstitutional population.
employment as percent of civilian noninstitutional population.
4 Unemployed as percent of civilian labor force.
2 Civilian
3 Civilian

See next page for continuation of table.

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TABLE B–35.—Civilian population and labor force, 1929–2002—Continued
[Monthly data seasonally adjusted, except as noted]
Civilian labor force
Civilian
noninstitutional
population 1

Year or month

Employment
Total
Total

Agricultural

Nonagricultural

Unemployment

Not in
labor
force

Civil- Civilian
ian
emlabor ployforce ment/
parpopticipation ulation
rate 2 ratio 3

Thousands of persons 16 years of age and over

Unemployment
rate,
civilian
workers 4

Percent

1990 5 ............................................................
1991 ..............................................................
1992 ..............................................................
1993 ..............................................................
1994 5 ............................................................

189,164
190,925
192,805
194,838
196,814

125,840
126,346
128,105
129,200
131,056

118,793
117,718
118,492
120,259
123,060

3,223
3,269
3,247
3,115
3,409

115,570
114,449
115,245
117,144
119,651

7,047
8,628
9,613
8,940
7,996

63,324
64,578
64,700
65,638
65,758

66.5
66.2
66.4
66.3
66.6

62.8
61.7
61.5
61.7
62.5

5.6
6.8
7.5
6.9
6.1

1995 ..............................................................
1996 ..............................................................
1997 5 ............................................................
1998 5 ............................................................
1999 5 ............................................................

198,584
200,591
203,133
205,220
207,753

132,304
133,943
136,297
137,673
139,368

124,900
126,708
129,558
131,463
133,488

3,440
3,443
3,399
3,378
3,281

121,460
123,264
126,159
128,085
130,207

7,404
7,236
6,739
6,210
5,880

66,280
66,647
66,837
67,547
68,385

66.6
66.8
67.1
67.1
67.1

62.9
63.2
63.8
64.1
64.3

5.6
5.4
4.9
4.5
4.2

2000 5 ............................................................
2001 5 ............................................................
2002 ..............................................................

209,699
211,864
213,977

140,863
141,815
142,535

135,208
135,073
134,269

3,305
3,144
3,248

131,903
131,929
131,020

5,655
6,742
8,266

68,836
70,050
71,442

67.2
66.9
66.6

64.5
63.8
62.7

4.0
4.8
5.8

1999: Jan 5 ....................................................
Feb ......................................................
Mar .....................................................
Apr ......................................................
May .....................................................
June ....................................................

206,719
206,873
207,036
207,236
207,427
207,632

138,912
138,869
138,679
138,982
139,180
139,358

132,959
132,845
132,899
132,928
133,371
133,415

3,278
3,309
3,276
3,331
3,294
3,361

129,681
129,536
129,623
129,597
130,077
130,054

5,953
6,024
5,780
6,054
5,809
5,943

67,807
68,004
68,357
68,254
68,247
68,274

67.2
67.1
67.0
67.1
67.1
67.1

64.3
64.2
64.2
64.1
64.3
64.3

4.3
4.3
4.2
4.4
4.2
4.3

July ......................................................
Aug ......................................................
Sept .....................................................
Oct ......................................................
Nov ......................................................
Dec ......................................................

207,828
208,038
208,265
208,483
208,666
208,832

139,466
139,455
139,600
139,858
140,038
140,213

133,434
133,616
133,694
134,065
134,299
134,513

3,293
3,229
3,152
3,239
3,345
3,287

130,141
130,387
130,542
130,826
130,954
131,226

6,032
5,839
5,906
5,793
5,739
5,700

68,362
68,583
68,665
68,625
68,628
68,619

67.1
67.0
67.0
67.1
67.1
67.1

64.2
64.2
64.2
64.3
64.4
64.4

4.3
4.2
4.2
4.1
4.1
4.1

2000: Jan 5 ....................................................
Feb ......................................................
Mar .....................................................
Apr ......................................................
May .....................................................
June ....................................................

208,782
208,907
209,053
209,216
209,371
209,543

140,500
140,750
140,718
141,080
140,715
140,837

134,881
135,049
135,055
135,549
134,954
135,235

3,352
3,375
3,339
3,336
3,296
3,361

131,529
131,674
131,716
132,213
131,658
131,874

5,619
5,701
5,663
5,531
5,761
5,602

68,282
68,157
68,335
68,136
68,656
68,706

67.3
67.4
67.3
67.4
67.2
67.2

64.6
64.6
64.6
64.8
64.5
64.5

4.0
4.1
4.0
3.9
4.1
4.0

July ......................................................
Aug ......................................................
Sept .....................................................
Oct ......................................................
Nov ......................................................
Dec ......................................................

209,727
209,935
210,161
210,378
210,577
210,743

140,507
140,831
140,752
141,013
141,215
141,544

134,777
135,016
135,167
135,485
135,573
135,888

3,321
3,339
3,310
3,223
3,202
3,230

131,456
131,677
131,857
132,262
132,371
132,658

5,730
5,815
5,585
5,528
5,642
5,656

69,220
69,104
69,409
69,365
69,362
69,199

67.0
67.1
67.0
67.0
67.1
67.2

64.3
64.3
64.3
64.4
64.4
64.5

4.1
4.1
4.0
3.9
4.0
4.0

2001: Jan 5 ....................................................
Feb ......................................................
Mar .....................................................
Apr ......................................................
May .....................................................
June ....................................................

210,889
211,026
211,171
211,348
211,525
211,725

141,757
141,622
141,869
141,734
141,445
141,468

135,870
135,734
135,808
135,424
135,235
135,003

3,169
3,133
3,163
3,167
3,193
3,044

132,701
132,601
132,645
132,257
132,042
131,959

5,887
5,888
6,061
6,310
6,210
6,465

69,132
69,404
69,302
69,614
70,080
70,257

67.2
67.1
67.2
67.1
66.9
66.8

64.4
64.3
64.3
64.1
63.9
63.8

4.2
4.2
4.3
4.5
4.4
4.6

July ......................................................
Aug ......................................................
Sept .....................................................
Oct ......................................................
Nov ......................................................
Dec ......................................................

211,921
212,135
212,357
212,581
212,767
212,927

141,651
141,380
142,068
142,280
142,279
142,314

135,106
134,408
135,004
134,615
134,253
134,055

3,055
3,126
3,181
3,203
3,154
3,246

132,051
131,282
131,823
131,412
131,099
130,809

6,545
6,972
7,064
7,665
8,026
8,259

70,270
70,755
70,289
70,301
70,488
70,613

66.8
66.6
66.9
66.9
66.9
66.8

63.8
63.4
63.6
63.3
63.1
63.0

4.6
4.9
5.0
5.4
5.6
5.8

2002: Jan ......................................................
Feb ......................................................
Mar .....................................................
Apr ......................................................
May .....................................................
June ....................................................

213,089
213,206
213,334
213,492
213,658
213,842

141,390
142,211
142,005
142,570
142,769
142,476

133,468
134,319
133,894
133,976
134,417
134,053

3,273
3,246
3,126
3,154
3,097
3,110

130,195
131,073
130,768
130,823
131,320
130,942

7,922
7,891
8,111
8,594
8,351
8,424

71,699
70,995
71,329
70,922
70,889
71,366

66.4
66.7
66.6
66.8
66.8
66.6

62.6
63.0
62.8
62.8
62.9
62.7

5.6
5.5
5.7
6.0
5.8
5.9

July ......................................................
Aug ......................................................
Sept .....................................................
Oct ......................................................
Nov ......................................................
Dec ......................................................

214,023
214,225
214,429
214,643
214,819
214,968

142,390
142,616
143,277
143,123
142,733
142,542

134,045
134,474
135,185
134,914
134,225
133,952

3,282
3,188
3,298
3,525
3,357
3,311

130,763
131,286
131,887
131,389
130,867
130,640

8,345
8,142
8,092
8,209
8,508
8,590

71,633
71,609
71,152
71,519
72,087
72,425

66.5
66.6
66.8
66.7
66.4
66.3

62.6
62.8
63.0
62.9
62.5
62.3

5.9
5.7
5.6
5.7
6.0
6.0

5 Not strictly comparable with earlier data due to population adjustments or other changes. See Employment and Earnings for details on
breaks in series.

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.

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TABLE B–36.—Civilian employment and unemployment by sex and age, 1955–2002
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]
Civilian employment
Males
Year or month
Total
Total

16-19
years

Unemployment
Females

20
years
and
over

Total

16-19
years

Males
20
years
and
over

Total
Total

Females

20
16-19 years
years and
over

Total

20
16-19 years
years and
over

1955
1956
1957
1958
1959

....................
....................
....................
....................
....................

62,170
63,799
64,071
63,036
64,630

42,621
43,379
43,357
42,423
43,466

2,095
2,164
2,115
2,012
2,198

40,526
41,216
41,239
40,411
41,267

19,551
20,419
20,714
20,613
21,164

1,547
1,654
1,663
1,570
1,640

18,002
18,767
19,052
19,043
19,524

2,852
2,750
2,859
4,602
3,740

1,854
1,711
1,841
3,098
2,420

274
269
300
416
398

1,580
1,442
1,541
2,681
2,022

998
1,039
1,018
1,504
1,320

176
823
209
832
197
821
262 1,242
256 1,063

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

....................
....................
....................
....................
....................
....................
....................
....................
....................
....................

65,778
65,746
66,702
67,762
69,305
71,088
72,895
74,372
75,920
77,902

43,904
43,656
44,177
44,657
45,474
46,340
46,919
47,479
48,114
48,818

2,361
2,315
2,362
2,406
2,587
2,918
3,253
3,186
3,255
3,430

41,543
41,342
41,815
42,251
42,886
43,422
43,668
44,294
44,859
45,388

21,874
22,090
22,525
23,105
23,831
24,748
25,976
26,893
27,807
29,084

1,768
1,793
1,833
1,849
1,929
2,118
2,468
2,496
2,526
2,687

20,105
20,296
20,693
21,257
21,903
22,630
23,510
24,397
25,281
26,397

3,852
4,714
3,911
4,070
3,786
3,366
2,875
2,975
2,817
2,832

2,486
2,997
2,423
2,472
2,205
1,914
1,551
1,508
1,419
1,403

426
479
408
501
487
479
432
448
426
440

2,060
2,518
2,016
1,971
1,718
1,435
1,120
1,060
993
963

1,366
1,717
1,488
1,598
1,581
1,452
1,324
1,468
1,397
1,429

286
349
313
383
385
395
405
391
412
413

1,080
1,368
1,175
1,216
1,195
1,056
921
1,078
985
1,015

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

....................
....................
....................
....................
....................
....................
....................
....................
....................
....................

78,678
79,367
82,153
85,064
86,794
85,846
88,752
92,017
96,048
98,824

48,990
49,390
50,896
52,349
53,024
51,857
53,138
54,728
56,479
57,607

3,409
3,478
3,765
4,039
4,103
3,839
3,947
4,174
4,336
4,300

45,581
45,912
47,130
48,310
48,922
48,018
49,190
50,555
52,143
53,308

29,688
29,976
31,257
32,715
33,769
33,989
35,615
37,289
39,569
41,217

2,735
2,730
2,980
3,231
3,345
3,263
3,389
3,514
3,734
3,783

26,952
27,246
28,276
29,484
30,424
30,726
32,226
33,775
35,836
37,434

4,093
5,016
4,882
4,365
5,156
7,929
7,406
6,991
6,202
6,137

2,238
2,789
2,659
2,275
2,714
4,442
4,036
3,667
3,142
3,120

599
693
711
653
757
966
939
874
813
811

1,638
2,097
1,948
1,624
1,957
3,476
3,098
2,794
2,328
2,308

1,855
2,227
2,222
2,089
2,441
3,486
3,369
3,324
3,061
3,018

506
568
598
583
665
802
780
789
769
743

1,349
1,658
1,625
1,507
1,777
2,684
2,588
2,535
2,292
2,276

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

....................
....................
....................
....................
....................
....................
....................
....................
....................
....................

99,303
100,397
99,526
100,834
105,005
107,150
109,597
112,440
114,968
117,342

57,186
57,397
56,271
56,787
59,091
59,891
60,892
62,107
63,273
64,315

4,085
3,815
3,379
3,300
3,322
3,328
3,323
3,381
3,492
3,477

53,101
53,582
52,891
53,487
55,769
56,562
57,569
58,726
59,781
60,837

42,117
43,000
43,256
44,047
45,915
47,259
48,706
50,334
51,696
53,027

3,625
3,411
3,170
3,043
3,122
3,105
3,149
3,260
3,313
3,282

38,492 7,637 4,267
913 3,353 3,370
39,590 8,273 4,577
962 3,615 3,696
40,086 10,678 6,179 1,090 5,089 4,499
41,004 10,717 6,260 1,003 5,257 4,457
42,793 8,539 4,744
812 3,932 3,794
44,154 8,312 4,521
806 3,715 3,791
45,556 8,237 4,530
779 3,751 3,707
47,074 7,425 4,101
732 3,369 3,324
48,383 6,701 3,655
667 2,987 3,046
49,745 6,528 3,525
658 2,867 3,003

755
800
886
825
687
661
675
616
558
536

2,615
2,895
3,613
3,632
3,107
3,129
3,032
2,709
2,487
2,467

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

....................
....................
....................
....................
....................
....................
....................
....................
....................
....................

118,793
117,718
118,492
120,259
123,060
124,900
126,708
129,558
131,463
133,488

65,104
64,223
64,440
65,349
66,450
67,377
68,207
69,685
70,693
71,446

3,427
3,044
2,944
2,994
3,156
3,292
3,310
3,401
3,558
3,685

61,678
61,178
61,496
62,355
63,294
64,085
64,897
66,284
67,135
67,761

53,689
53,496
54,052
54,910
56,610
57,523
58,501
59,873
60,771
62,042

3,154
2,862
2,724
2,811
3,005
3,127
3,190
3,260
3,493
3,487

50,535
50,634
51,328
52,099
53,606
54,396
55,311
56,613
57,278
58,555

544
608
621
597
580
602
573
577
519
529

2,596
3,074
3,469
3,288
3,049
2,819
2,783
2,585
2,424
2,285

7,047
8,628
9,613
8,940
7,996
7,404
7,236
6,739
6,210
5,880

3,906
4,946
5,523
5,055
4,367
3,983
3,880
3,577
3,266
3,066

667
751
806
768
740
744
733
694
686
633

3,239
4,195
4,717
4,287
3,627
3,239
3,146
2,882
2,580
2,433

3,140
3,683
4,090
3,885
3,629
3,421
3,356
3,162
2,944
2,814

2000 ....................
2001 ....................
2002 ....................

135,208 72,293
135,073 72,080
134,269 71,530

3,713 68,580 62,915
3,493 68,587 62,992
3,218 68,312 62,739

3,563 59,352
3,396 59,596
3,234 59,505

5,655 2,954
6,742 3,663
8,266 4,523

604 2,350 2,701
660 3,003 3,079
708 3,815 3,743

489 2,212
527 2,551
564 3,179

2001: Jan ............
Feb ............
Mar ............
Apr .............
May ...........
June ...........

135,870
135,734
135,808
135,424
135,235
135,003

72,492
72,348
72,271
72,272
72,131
72,012

3,667
3,582
3,652
3,552
3,433
3,477

68,825
68,766
68,619
68,720
68,698
68,535

63,378
63,386
63,537
63,152
63,104
62,991

3,509
3,517
3,448
3,394
3,388
3,436

59,869
59,869
60,089
59,758
59,716
59,555

5,887
5,888
6,061
6,310
6,210
6,465

3,186
3,154
3,292
3,451
3,393
3,546

637
631
611
630
623
652

2,549
2,523
2,681
2,821
2,770
2,894

2,701
2,734
2,769
2,859
2,817
2,919

499
473
527
515
465
513

2,202
2,261
2,242
2,344
2,352
2,406

July ............
Aug ............
Sept ...........
Oct .............
Nov ............
Dec ............

135,106
134,408
135,004
134,615
134,253
134,055

72,093
71,705
72,177
71,871
71,570
71,577

3,483
3,317
3,481
3,385
3,366
3,301

68,610
68,388
68,696
68,486
68,204
68,276

63,013
62,703
62,827
62,744
62,683
62,478

3,373
3,177
3,364
3,442
3,395
3,273

59,640
59,526
59,463
59,302
59,288
59,205

6,545
6,972
7,064
7,665
8,026
8,259

3,533
3,833
3,774
4,156
4,453
4,399

643
698
665
702
722
687

2,890
3,135
3,109
3,454
3,731
3,712

3,012
3,139
3,290
3,509
3,573
3,860

549
523
531
542
540
584

2,463
2,616
2,759
2,967
3,033
3,276

2002: Jan ............
Feb ............
Mar ............
Apr .............
May ...........
June ...........

133,468
134,319
133,894
133,976
134,417
134,053

71,114
71,457
71,299
71,397
71,894
71,524

3,295
3,300
3,287
3,204
3,247
3,135

67,818
68,157
68,013
68,193
68,647
68,390

62,354
62,862
62,595
62,579
62,524
62,528

3,252
3,275
3,368
3,245
3,187
3,212

59,102
59,588
59,227
59,333
59,337
59,316

7,922
7,891
8,111
8,594
8,351
8,424

4,356
4,228
4,457
4,611
4,521
4,665

640
668
747
707
740
766

3,716
3,560
3,710
3,905
3,781
3,899

3,566
3,663
3,654
3,982
3,830
3,759

612
547
561
592
570
594

2,954
3,116
3,093
3,391
3,260
3,165

July ............
Aug ............
Sept ...........
Oct .............
Nov ............
Dec ............

134,045
134,474
135,185
134,914
134,225
133,952

71,509
71,552
72,004
71,854
71,348
71,173

3,104
3,105
3,293
3,308
3,249
3,138

68,405
68,447
68,711
68,545
68,099
68,035

62,536
62,922
63,181
63,061
62,877
62,779

3,172
3,212
3,345
3,297
3,111
3,128

59,364
59,710
59,835
59,764
59,765
59,652

8,345
8,142
8,092
8,209
8,508
8,590

4,532
4,536
4,476
4,408
4,784
4,680

765
780
714
612
697
648

3,767
3,757
3,762
3,796
4,087
4,032

3,813
3,605
3,616
3,801
3,724
3,910

587
532
522
520
584
557

3,226
3,073
3,094
3,281
3,140
3,353

Note.—See footnote 5 and Note, Table B-35.
Source: Department of Labor, Bureau of Labor Statistics.

320

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ECONO

TABLE B–37.—Civilian employment by demographic characteristic, 1955–2002
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]
White
All
civilian
workers

Year or
month

Black and other

Total

Males

Females

Both
sexes Total
16-19

Males

Females

Black
Both
sexes
16-19

Both
FeMales males sexes
16-19

Total

1955
1956
1957
1958
1959

..........................................
..........................................
..........................................
..........................................
..........................................

62,170
63,799
64,071
63,036
64,630

55,833
57,269
57,465
56,613
58,006

38,719
39,368
39,349
38,591
39,494

17,114
17,901
18,116
18,022
18,512

3,225
3,389
3,374
3,216
3,475

6,341
6,534
6,604
6,423
6,623

3,904
4,013
4,006
3,833
3,971

2,437
2,521
2,598
2,590
2,652

418
430
407
365
362

............
............
............
............
............

..........
..........
..........
..........
..........

..........
..........
..........
..........
..........

..........
..........
..........
..........
..........

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

65,778
65,746
66,702
67,762
69,305
71,088
72,895
74,372
75,920
77,902

58,850
58,913
59,698
60,622
61,922
63,446
65,021
66,361
67,750
69,518

39,755
39,588
40,016
40,428
41,115
41,844
42,331
42,833
43,411
44,048

19,095
19,325
19,682
20,194
20,807
21,602
22,690
23,528
24,339
25,470

3,700
3,693
3,774
3,851
4,076
4,562
5,176
5,114
5,195
5,508

6,928
6,833
7,003
7,140
7,383
7,643
7,877
8,011
8,169
8,384

4,149
4,068
4,160
4,229
4,359
4,496
4,588
4,646
4,702
4,770

2,779
2,765
2,843
2,911
3,024
3,147
3,289
3,365
3,467
3,614

430
414
420
404
440
474
545
568
584
609

............
............
............
............
............
............
............
............
............
............

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

78,678
79,367
82,153
85,064
86,794
85,846
88,752
92,017
96,048
98,824

70,217
70,878
73,370
75,708
77,184
76,411
78,853
81,700
84,936
87,259

44,178
44,595
45,944
47,085
47,674
46,697
47,775
49,150
50,544
51,452

26,039
26,283
27,426
28,623
29,511
29,714
31,078
32,550
34,392
35,807

5,571 8,464
5,670 8,488
6,173 8,783
6,623 9,356
6,796 9,610
6,487 9,435
6,724 9,899
7,068 10,317
7,367 11,112
7,356 11,565

4,813
4,796
4,952
5,265
5,352
5,161
5,363
5,579
5,936
6,156

3,650
3,692
3,832
4,092
4,258
4,275
4,536
4,739
5,177
5,409

574 ............ .......... .......... ..........
538 ............ .......... .......... ..........
573 7,802 4,368 3,433
509
647 8,128 4,527 3,601
570
652 8,203 4,527 3,677
554
615 7,894 4,275 3,618
507
611 8,227 4,404 3,823
508
619 8,540 4,565 3,975
508
703 9,102 4,796 4,307
571
727 9,359 4,923 4,436
579

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

99,303 87,715
100,397 88,709
99,526 87,903
100,834 88,893
105,005 92,120
107,150 93,736
109,597 95,660
112,440 97,789
114,968 99,812
117,342 101,584

51,127
51,315
50,287
50,621
52,462
53,046
53,785
54,647
55,550
56,352

36,587
37,394
37,615
38,272
39,659
40,690
41,876
43,142
44,262
45,232

7,021
6,588
5,984
5,799
5,836
5,768
5,792
5,898
6,030
5,946

11,588
11,688
11,624
11,941
12,885
13,414
13,937
14,652
15,156
15,757

6,059
6,083
5,983
6,166
6,629
6,845
7,107
7,459
7,722
7,963

5,529
5,606
5,641
5,775
6,256
6,569
6,830
7,192
7,434
7,795

689
637
565
543
607
666
681
742
774
813

9,313
9,355
9,189
9,375
10,119
10,501
10,814
11,309
11,658
11,953

4,798
4,794
4,637
4,753
5,124
5,270
5,428
5,661
5,824
5,928

4,515
4,561
4,552
4,622
4,995
5,231
5,386
5,648
5,834
6,025

547
505
428
416
474
532
536
587
601
625

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................
..........................................

118,793
117,718
118,492
120,259
123,060
124,900
126,708
129,558
131,463
133,488

56,703
55,797
55,959
56,656
57,452
58,146
58,888
59,998
60,604
61,139

45,558
45,385
45,710
46,390
47,738
48,344
48,920
49,859
50,327
51,096

5,779
5,216
4,985
5,113
5,398
5,593
5,667
5,807
6,089
6,204

16,533 8,401 8,131
16,536 8,426 8,110
16,823 8,482 8,342
17,214 8,693 8,521
17,870 8,998 8,872
18,409 9,231 9,179
18,900 9,319 9,580
19,701 9,687 10,014
20,532 10,089 10,443
21,253 10,307 10,945

801
690
684
691
763
826
832
853
962
968

12,175
12,074
12,151
12,382
12,835
13,279
13,542
13,969
14,556
15,056

5,995
5,961
5,930
6,047
6,241
6,422
6,456
6,607
6,871
7,027

6,180
6,113
6,221
6,334
6,595
6,857
7,086
7,362
7,685
8,029

598
494
492
494
552
586
613
631
736
691

102,261
101,182
101,669
103,045
105,190
106,490
107,808
109,856
110,931
112,235

2000 ..........................................
2001 ..........................................
2002 ..........................................

135,208 113,475 61,696 51,780 6,270 21,733 10,597 11,135
135,073 113,220 61,411 51,810 5,969 21,852 10,670 11,182
134,269 112,511 60,840 51,671 5,575 21,758 10,690 11,068

1,006 15,334 7,180 8,154
921 15,270 7,127 8,143
877 15,106 7,115 7,991

729
663
630

2001: Jan ...................................
Feb ...................................
Mar ..................................
Apr ...................................
May ..................................
June .................................

135,870
135,734
135,808
135,424
135,235
135,003

113,857
113,779
113,810
113,464
113,173
113,126

61,723
61,699
61,579
61,591
61,364
61,356

52,134
52,080
52,231
51,873
51,809
51,770

6,167
6,165
6,146
6,043
5,848
5,998

21,983
22,005
21,956
21,902
21,909
21,871

10,805
10,710
10,661
10,643
10,617
10,629

11,178
11,295
11,295
11,259
11,292
11,242

1,022
985
941
890
945
906

15,387
15,407
15,341
15,304
15,311
15,330

7,265
7,182
7,110
7,074
7,069
7,071

8,122
8,225
8,231
8,230
8,242
8,259

723
702
689
661
697
679

July ..................................
Aug ..................................
Sept .................................
Oct ...................................
Nov ..................................
Dec ..................................

135,106
134,408
135,004
134,615
134,253
134,055

113,176
112,740
113,147
112,878
112,652
112,388

61,403
61,189
61,490
61,229
60,979
60,947

51,773
51,551
51,657
51,649
51,673
51,441

5,952
5,625
5,972
5,896
5,896
5,746

21,959
21,783
21,949
21,730
21,617
21,655

10,693
10,619
10,788
10,624
10,586
10,613

11,266
11,164
11,161
11,106
11,031
11,042

922
854
898
909
874
836

15,337
15,210
15,339
15,144
15,040
15,122

7,106
7,077
7,227
7,077
7,057
7,123

8,231
8,133
8,112
8,067
7,983
7,999

663
612
651
659
632
591

2002: Jan ...................................
Feb ...................................
Mar ..................................
Apr ...................................
May ..................................
June .................................

133,468
134,319
133,894
133,976
134,417
134,053

111,876
112,632
112,286
112,426
112,563
112,382

60,501
60,874
60,626
60,711
60,950
60,806

51,375
51,758
51,661
51,714
51,613
51,577

5,656
5,639
5,728
5,596
5,522
5,458

21,619
21,724
21,600
21,586
21,696
21,648

10,661
10,633
10,681
10,688
10,794
10,667

10,957
11,092
10,919
10,898
10,901
10,981

891
957
903
845
883
881

15,119
15,131
14,969
15,045
15,168
15,027

7,195
7,141
7,109
7,127
7,239
7,090

7,925
7,990
7,860
7,918
7,929
7,937

619
680
630
617
637
639

July ..................................
Aug ..................................
Sept .................................
Oct ...................................
Nov ..................................
Dec ..................................

134,045
134,474
135,185
134,914
134,225
133,952

112,446
112,844
113,010
112,882
112,562
112,165

60,831
60,970
61,181
61,044
60,854
60,646

51,615
51,874
51,829
51,838
51,708
51,519

5,425
5,437
5,685
5,610
5,586
5,518

21,619
21,835
22,250
22,040
21,656
21,787

10,681
10,743
10,920
10,831
10,491
10,521

10,938
11,092
11,330
11,209
11,165
11,266

845
858
959
978
784
758

14,976
15,142
15,420
15,275
14,974
15,006

7,100
7,133
7,248
7,186
6,919
6,913

7,876
8,009
8,172
8,089
8,055
8,093

575
589
677
702
623
583

Note.—See footnote 5 and Note, Table B-35.
Source: Department of Labor, Bureau of Labor Statistics.

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TABLE B–38.—Unemployment by demographic characteristic, 1955–2002
[Thousands of persons 16 years of age and over; monthly data seasonally adjusted]
White
Year or
month

All
civilian
workers

Total

Males

Black and other

Females

Both
sexes
16-19

Total

Black

Males

Females

Both
sexes
16-19

Total

Males

Females

Both
sexes
16-19

1955
1956
1957
1958
1959

..............
..............
..............
..............
..............

2,852
2,750
2,859
4,602
3,740

2,252
2,159
2,289
3,680
2,946

1,478
1,366
1,477
2,489
1,903

774
793
812
1,191
1,043

373
382
401
541
525

601
591
570
923
793

376
345
364
610
517

225
246
206
313
276

77
95
96
138
128

............
............
............
............
............

...........
...........
...........
...........
...........

...........
...........
...........
...........
...........

..........
..........
..........
..........
..........

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

3,852
4,714
3,911
4,070
3,786
3,366
2,875
2,975
2,817
2,832

3,065
3,743
3,052
3,208
2,999
2,691
2,255
2,338
2,226
2,260

1,988
2,398
1,915
1,976
1,779
1,556
1,241
1,208
1,142
1,137

1,077
1,345
1,137
1,232
1,220
1,135
1,014
1,130
1,084
1,123

575
669
580
708
708
705
651
635
644
660

788
971
861
863
787
678
622
638
590
571

498
599
509
496
426
360
310
300
277
267

290
372
352
367
361
318
312
338
313
304

138
159
142
176
165
171
186
203
194
193

............
............
............
............
............
............
............
............
............
............

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

4,093
5,016
4,882
4,365
5,156
7,929
7,406
6,991
6,202
6,137

3,339
4,085
3,906
3,442
4,097
6,421
5,914
5,441
4,698
4,664

1,857
2,309
2,173
1,836
2,169
3,627
3,258
2,883
2,411
2,405

1,482
1,777
1,733
1,606
1,927
2,794
2,656
2,558
2,287
2,260

871
1,011
1,021
955
1,104
1,413
1,364
1,284
1,189
1,193

754
930
977
924
1,058
1,507
1,492
1,550
1,505
1,473

380
481
486
440
544
815
779
784
731
714

374
450
491
484
514
692
713
766
774
759

235
249
288
280
318
355
355
379
394
362

............
............
906
846
965
1,369
1,334
1,393
1,330
1,319

...........
...........
448
395
494
741
698
698
641
636

...........
...........
458
451
470
629
637
695
690
683

..........
..........
279
262
297
330
330
354
360
333

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

7,637
8,273
10,678
10,717
8,539
8,312
8,237
7,425
6,701
6,528

5,884
6,343
8,241
8,128
6,372
6,191
6,140
5,501
4,944
4,770

3,345
3,580
4,846
4,859
3,600
3,426
3,433
3,132
2,766
2,636

2,540
2,762
3,395
3,270
2,772
2,765
2,708
2,369
2,177
2,135

1,291
1,374
1,534
1,387
1,116
1,074
1,070
995
910
863

1,752
1,930
2,437
2,588
2,167
2,121
2,097
1,924
1,757
1,757

922
997
1,334
1,401
1,144
1,095
1,097
969
888
889

830
933
1,104
1,187
1,022
1,026
999
955
869
868

377
388
443
441
384
394
383
353
316
331

1,553
1,731
2,142
2,272
1,914
1,864
1,840
1,684
1,547
1,544

815
891
1,167
1,213
1,003
951
946
826
771
773

738
840
975
1,059
911
913
894
858
776
772

343
357
396
392
353
357
347
312
288
300

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

..............
..............
..............
..............
..............
..............
..............
..............
..............
..............

7,047
8,628
9,613
8,940
7,996
7,404
7,236
6,739
6,210
5,880

5,186
6,560
7,169
6,655
5,892
5,459
5,300
4,836
4,484
4,273

2,935
3,859
4,209
3,828
3,275
2,999
2,896
2,641
2,431
2,274

2,251
2,701
2,959
2,827
2,617
2,460
2,404
2,195
2,053
1,999

903
1,029
1,037
992
960
952
939
912
876
844

1,860
2,068
2,444
2,285
2,104
1,945
1,936
1,903
1,726
1,606

971
1,087
1,314
1,227
1,092
984
984
935
835
792

889
981
1,130
1,058
1,011
961
952
967
891
814

308
330
390
373
360
394
367
359
329
318

1,565
1,723
2,011
1,844
1,666
1,538
1,592
1,560
1,426
1,309

806
890
1,067
971
848
762
808
747
671
626

758
833
944
872
818
777
784
813
756
684

268
280
324
313
300
325
310
302
281
268

2000 ..............
2001 ..............
2002 .............

5,655
6,742
8,266

4,099
4,923
6,058

2,165
2,730
3,401

1,934
2,193
2,657

805
866
943

1,556
1,819
2,208

789
933
1,122

767
886
1,086

288
321
329

1,269
1,450
1,727

636
731
856

633
719
871

239
271
268

2001: Jan .......
Feb .......
Mar ......
Apr .......
May ......
June .....

5,887
5,888
6,061
6,310
6,210
6,465

4,240
4,364
4,384
4,640
4,541
4,728

2,367
2,359
2,417
2,535
2,495
2,662

1,873
2,005
1,967
2,105
2,046
2,066

815
781
814
819
801
869

1,662
1,571
1,697
1,684
1,663
1,738

817
819
894
903
880
889

845
752
803
781
783
849

318
355
323
324
271
300

1,367
1,253
1,409
1,374
1,333
1,409

655
640
740
746
695
710

712
613
669
628
638
699

274
274
272
290
241
264

July ......
Aug ......
Sept .....
Oct .......
Nov ......
Dec ......

6,545
6,972
7,064
7,665
8,026
8,259

4,810
5,073
5,127
5,628
5,914
6,015

2,617
2,839
2,807
3,178
3,406
3,319

2,193
2,234
2,320
2,450
2,508
2,696

905
902
871
891
920
913

1,719
1,915
1,921
2,035
2,087
2,156

912
1,002
961
997
1,039
1,060

807
913
960
1,038
1,048
1,096

290
307
318
350
347
358

1,348
1,510
1,488
1,604
1,647
1,711

707
799
724
751
793
826

641
711
764
853
854
885

240
264
259
285
299
296

2002: Jan .......
Feb .......
Mar ......
Apr .......
May ......
June .....

7,922
7,891
8,111
8,594
8,351
8,424

5,883
5,840
5,873
6,236
6,179
6,148

3,267
3,176
3,279
3,455
3,432
3,473

2,616
2,664
2,594
2,781
2,747
2,675

932
920
971
908
961
1,006

2,057
2,107
2,266
2,389
2,182
2,273

1,080
1,075
1,203
1,139
1,086
1,194

977
1,032
1,062
1,250
1,096
1,079

319
329
335
385
334
356

1,650
1,616
1,789
1,896
1,718
1,794

827
792
938
873
831
924

823
824
851
1,022
887
870

274
263
282
338
276
276

July ......
Aug ......
Sept .....
Oct .......
Nov ......
Dec ......

8,345
8,142
8,092
8,209
8,508
8,590

6,233
6,075
6,011
6,087
6,149
6,086

3,532
3,467
3,395
3,355
3,588
3,449

2,701
2,608
2,615
2,732
2,561
2,636

1,060
945
911
888
953
867

2,123
2,114
2,077
2,132
2,353
2,458

1,034
1,097
1,087
1,083
1,198
1,233

1,089
1,017
990
1,050
1,155
1,224

292
355
321
241
337
336

1,642
1,611
1,633
1,665
1,846
1,952

750
789
869
856
940
931

892
822
763
810
907
1,021

223
258
259
211
275
288

Note.—See footnote 5 and Note, Table B-35.
Source: Department of Labor, Bureau of Labor Statistics.

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TABLE B–39.—Civilian labor force participation rate and employment/population ratio, 1955–2002
[Percent;1 monthly data seasonally adjusted]
Labor force participation rate
Year or month

All
civilian Males Feworkmales
ers

Both
sexes
16-19
years

Employment/population ratio

White

Black
and
other

Black

All
civilian Males Feworkmales
ers

Both
sexes
16-19
years

White

Black
and
other

Black

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 .............................
1999 .............................
2000 .............................
2001 .............................
2002 .............................
2001: Jan ......................
Feb .....................
Mar ....................
Apr .....................
May ....................
June ...................
July .....................
Aug .....................
Sept ....................
Oct .....................
Nov .....................
Dec .....................

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
67.1
67.2
66.9
66.6
67.2
67.1
67.2
67.1
66.9
66.8
66.8
66.6
66.9
66.9
66.9
66.8

85.4
85.5
84.8
84.2
83.7
83.3
82.9
82.0
81.4
81.0
80.7
80.4
80.4
80.1
79.8
79.7
79.1
78.9
78.8
78.7
77.9
77.5
77.7
77.9
77.8
77.4
77.0
76.6
76.4
76.4
76.3
76.3
76.2
76.2
76.4
76.4
75.8
75.8
75.4
75.1
75.0
74.9
75.0
74.9
74.7
74.7
74.4
73.9
74.7
74.4
74.4
74.5
74.3
74.2
74.2
74.1
74.4
74.4
74.3
74.2

35.7
36.9
36.9
37.1
37.1
37.7
38.1
37.9
38.3
38.7
39.3
40.3
41.1
41.6
42.7
43.3
43.4
43.9
44.7
45.7
46.3
47.3
48.4
50.0
50.9
51.5
52.1
52.6
52.9
53.6
54.5
55.3
56.0
56.6
57.4
57.5
57.4
57.8
57.9
58.8
58.9
59.3
59.8
59.8
60.0
60.2
60.1
59.9
60.3
60.3
60.5
60.1
60.0
60.0
60.0
59.8
60.0
60.0
60.0
60.0

48.9
50.9
49.6
47.4
46.7
47.5
46.9
46.1
45.2
44.5
45.7
48.2
48.4
48.3
49.4
49.9
49.7
51.9
53.7
54.8
54.0
54.5
56.0
57.8
57.9
56.7
55.4
54.1
53.5
53.9
54.5
54.7
54.7
55.3
55.9
53.7
51.6
51.3
51.5
52.7
53.5
52.3
51.6
52.8
52.0
52.2
50.0
47.6
51.7
50.9
51.1
50.4
49.3
50.2
49.8
47.7
49.7
49.8
49.4
48.2

58.7
59.4
59.1
58.9
58.7
58.8
58.8
58.3
58.2
58.2
58.4
58.7
59.2
59.3
59.9
60.2
60.1
60.4
60.8
61.4
61.5
61.8
62.5
63.3
63.9
64.1
64.3
64.3
64.3
64.6
65.0
65.5
65.8
66.2
66.7
66.9
66.6
66.8
66.8
67.1
67.1
67.2
67.5
67.3
67.3
67.4
67.2
66.9
67.4
67.4
67.4
67.3
67.0
67.0
67.1
66.9
67.1
67.2
67.2
67.0

64.2
64.9
64.4
64.8
64.3
64.5
64.1
63.2
63.0
63.1
62.9
63.0
62.8
62.2
62.1
61.8
60.9
60.2
60.5
60.3
59.6
59.8
60.4
62.2
62.2
61.7
61.3
61.6
62.1
62.6
63.3
63.7
64.3
64.0
64.7
64.4
63.8
64.6
63.8
63.9
64.3
64.6
65.2
66.0
65.9
66.0
65.8
65.4
66.3
66.0
66.2
65.9
65.7
65.7
65.8
65.7
66.1
65.6
65.4
65.6

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
59.9
60.2
59.8
58.8
59.0
59.8
61.5
61.4
61.0
60.8
61.0
61.5
62.2
62.9
63.3
63.8
63.8
64.2
64.0
63.3
63.9
63.2
63.4
63.7
64.1
64.7
65.6
65.8
65.8
65.4
64.9
66.0
65.6
65.8
65.5
65.3
65.6
65.3
65.3
65.6
65.2
64.9
65.4

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
64.3
64.5
63.8
62.7
64.4
64.3
64.3
64.1
63.9
63.8
63.8
63.4
63.6
63.3
63.1
63.0

81.8
82.3
81.3
78.5
79.3
78.9
77.6
77.7
77.1
77.3
77.5
77.9
78.0
77.8
77.6
76.2
74.9
75.0
75.5
74.9
71.7
72.0
72.8
73.8
73.8
72.0
71.3
69.0
68.8
70.7
70.9
71.0
71.5
72.0
72.5
72.0
70.4
69.8
70.0
70.4
70.8
70.9
71.3
71.6
71.6
71.8
70.8
69.5
71.5
71.3
71.2
71.1
70.9
70.7
70.8
70.3
70.7
70.3
69.9
69.9

34.0
35.1
35.1
34.5
35.0
35.5
35.4
35.6
35.8
36.3
37.1
38.3
39.0
39.6
40.7
40.8
40.4
41.0
42.0
42.6
42.0
43.2
44.5
46.4
47.5
47.7
48.0
47.7
48.0
49.5
50.4
51.4
52.5
53.4
54.3
54.3
53.7
53.8
54.1
55.3
55.6
56.0
56.8
57.1
57.4
57.7
57.3
56.5
57.9
57.8
57.9
57.5
57.5
57.3
57.3
56.9
57.0
56.9
56.8
56.5

43.5
45.3
43.9
39.9
39.9
40.5
39.1
39.4
37.4
37.3
38.9
42.1
42.2
42.2
43.4
42.3
41.3
43.5
45.9
46.0
43.3
44.2
46.1
48.3
48.5
46.6
44.6
41.5
41.5
43.7
44.4
44.6
45.5
46.8
47.5
45.3
42.0
41.0
41.7
43.4
44.2
43.5
43.4
45.1
44.7
45.4
42.7
39.8
44.7
44.1
44.1
43.2
42.5
43.0
42.5
40.2
42.3
42.2
41.6
40.4

56.5
57.3
56.8
55.3
55.9
55.9
55.3
55.4
55.3
55.5
56.0
56.8
57.2
57.4
58.0
57.5
56.8
57.4
58.2
58.3
56.7
57.5
58.6
60.0
60.6
60.0
60.0
58.8
58.9
60.5
61.0
61.5
62.3
63.1
63.8
63.7
62.6
62.4
62.7
63.5
63.8
64.1
64.6
64.7
64.8
65.1
64.4
63.5
65.0
64.9
64.9
64.6
64.4
64.4
64.3
64.0
64.2
64.0
63.8
63.6

58.7
59.5
59.3
56.7
57.5
57.9
56.2
56.3
56.2
57.0
57.8
58.4
58.2
58.0
58.1
56.8
54.9
54.1
55.0
54.3
51.4
52.0
52.5
54.7
55.2
53.6
52.6
50.9
51.0
53.6
54.7
55.4
56.8
57.4
58.2
57.9
56.7
56.4
56.3
57.2
58.1
58.6
59.4
60.9
61.3
61.6
60.7
59.3
61.7
61.6
61.4
61.2
61.1
60.9
61.0
60.4
60.7
60.0
59.6
59.6

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
53.7
54.5
53.5
50.1
50.8
51.4
53.6
53.8
52.3
51.3
49.4
49.5
52.3
53.4
54.1
55.6
56.3
56.9
56.7
55.4
54.9
55.0
56.1
57.1
57.4
58.2
59.7
60.6
60.8
59.7
58.2
60.6
60.6
60.3
60.1
60.0
60.0
60.0
59.4
59.8
59.0
58.5
58.7

2002: Jan ......................
Feb .....................
Mar ....................
Apr .....................
May ....................
June ...................

66.4
66.7
66.6
66.8
66.8
66.6

73.6
73.8
73.8
74.0
74.4
74.1

59.6
60.1
59.8
60.1
59.8
59.7

47.8
47.8
48.9
47.7
47.7
47.6

66.6
67.0
66.8
67.1
67.1
66.9

65.1
65.4
65.4
65.6
65.3
65.3

65.0
64.9
64.9
65.5
65.2
64.9

62.6
63.0
62.8
62.8
62.9
62.7

69.4
69.7
69.5
69.5
70.0
69.5

56.4
56.8
56.5
56.5
56.4
56.3

40.1
40.4
40.8
39.7
39.6
39.2

63.3
63.7
63.5
63.5
63.6
63.4

59.4
59.6
59.2
59.1
59.3
59.1

58.6
58.6
57.9
58.2
58.6
58.0

July .....................
Aug .....................
Sept ....................
Oct .....................
Nov .....................
Dec .....................

66.5
66.6
66.8
66.7
66.4
66.3

73.9
73.8
74.1
73.9
73.7
73.3

59.7
59.8
60.0
60.0
59.7
59.8

47.1
47.1
48.6
47.7
47.3
46.3

66.9
67.0
67.0
66.9
66.7
66.4

64.7
65.2
66.1
65.6
65.0
65.6

64.0
64.4
65.5
65.0
64.4
64.9

62.6
62.8
63.0
62.9
62.5
62.3

69.5
69.4
69.8
69.6
69.0
68.8

56.3
56.6
56.8
56.6
56.4
56.3

38.7
39.0
41.0
40.8
39.4
38.8

63.4
63.6
63.6
63.5
63.3
63.0

58.9
59.4
60.5
59.8
58.7
58.9

57.7
58.2
59.2
58.6
57.3
57.4

1 Civilian labor force or civilian employment as percent of civilian noninstitutional population in group specified.
Note.—Data relate to persons 16 years of age and over.
See footnote 5 and Note, Table B-35.
Source: Department of Labor, Bureau of Labor Statistics.

323

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TABLE B–40.—Civilian labor force participation rate by demographic characteristic, 1959–2002
[Percent;1 monthly data seasonally adjusted]
White
Year or
month

All
civilian
workers

Black and other or black

Males
Total
Total

16-19
years

Females
20
years
and
over

Total

86.3
86.0
85.7
84.9
84.4
84.2
83.9
83.6
83.5
83.2
83.0
82.8
82.3
82.0

36.0
36.5
36.9
36.7
37.2
37.5
38.1
39.2
40.1
40.7
41.8
42.6
42.6
43.2

16-19
years

Males
20
years
and
over

Total

35.6
36.2
36.6
36.5
37.0
37.5
38.0
38.8
39.8
40.4
41.5
42.2
42.3
42.7

64.3
64.5
64.1
63.2
63.0
63.1
62.9
63.0
62.8
62.2
62.1
61.8
60.9
60.2

Total

16-19
years

Females
20
years
and
over

Total

16-19
years

20
years
and
over

Black and other
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972

.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

59.3
59.4
59.3
58.8
58.7
58.7
58.9
59.2
59.6
59.6
60.1
60.4
60.2
60.4

58.7
58.8
58.8
58.3
58.2
58.2
58.4
58.7
59.2
59.3
59.9
60.2
60.1
60.4

83.8
83.4
83.0
82.1
81.5
81.1
80.8
80.6
80.6
80.4
80.2
80.0
79.6
79.6

55.9
55.9
54.5
53.8
53.1
52.7
54.1
55.9
56.3
55.9
56.8
57.5
57.9
60.1

39.6
40.3
40.6
39.8
38.7
37.8
39.2
42.6
42.5
43.0
44.6
45.6
45.4
48.1

83.4
83.0
82.2
80.8
80.2
80.1
79.6
79.0
78.5
77.7
76.9
76.5
74.9
73.9

55.5
57.6
55.8
53.5
51.5
49.9
51.3
51.4
51.1
49.7
49.6
47.4
44.7
46.0

86.7
86.2
85.5
84.2
83.9
84.1
83.7
83.3
82.9
82.2
81.4
81.4
80.0
78.6

47.7
48.2
48.3
48.0
48.1
48.6
48.6
49.4
49.5
49.3
49.8
49.5
49.2
48.8

28.2
32.9
32.8
33.1
32.6
31.7
29.5
33.5
35.2
34.8
34.6
34.1
31.2
32.3

49.8
49.9
50.1
49.6
49.9
50.7
51.1
51.6
51.6
51.4
52.0
51.8
51.8
51.2

48.7
49.3
49.0
48.8
49.8
50.8
53.1
53.1
53.1
53.5
53.7
54.2
55.2
56.5
56.9
58.0
58.0
58.7
58.3
57.5
58.5
57.9
58.7
59.5
60.4
61.7
62.8
63.5
63.2
62.9
62.0
63.1
63.1
63.4
63.1
63.2
63.6
62.9
62.7
62.8
63.0
62.3
62.6
61.6
62.0
61.2
62.7
61.8
61.6
61.3
61.7
62.3
61.9
62.3
63.3

32.2
34.2
33.4
34.2
32.9
32.9
37.3
36.8
34.9
34.0
33.5
33.0
35.0
37.9
39.1
39.6
37.9
40.4
36.8
33.5
35.2
34.6
36.3
39.8
38.9
39.9
42.5
38.8
39.4
37.4
34.9
39.7
39.1
39.6
39.3
37.9
39.7
37.4
33.1
35.2
37.1
36.8
33.7
32.9
35.7
35.0
38.1
32.7
35.0
33.1
32.8
37.0
34.5
34.5
37.1

51.2
51.6
51.4
51.1
52.5
53.6
55.5
55.4
55.6
56.0
56.2
56.8
57.6
58.6
58.9
60.0
60.1
60.6
60.6
60.0
60.8
60.2
60.9
61.4
62.6
64.0
64.8
66.1
65.6
65.4
64.6
65.4
65.4
65.8
65.4
65.6
66.0
65.5
65.6
65.5
65.6
64.9
65.4
64.4
64.5
63.7
65.1
64.6
64.3
64.1
64.5
64.8
64.6
65.0
65.8

Black
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 .............
1999 .............
2000 .............
2001 .............
2002 .............
2001: Jan ......
Feb ......
Mar .....
Apr ......
May .....
June ....
July .....
Aug .....
Sept ....
Oct ......
Nov .....
Dec .....
2002: Jan ......
Feb ......
Mar .....
Apr ......
May .....
June ....
July .....
Aug .....
Sept ....
Oct ......
Nov .....
Dec .....

60.4
60.8
61.3
61.2
61.6
62.3
63.2
63.7
63.8
63.9
64.0
64.0
64.4
64.8
65.3
65.6
65.9
66.5
66.5
66.2
66.4
66.3
66.6
66.6
66.8
67.1
67.1
67.1
67.2
66.9
66.6
67.2
67.1
67.2
67.1
66.9
66.8
66.8
66.6
66.9
66.9
66.9
66.8
66.4
66.7
66.6
66.8
66.8
66.6
66.5
66.6
66.8
66.7
66.4
66.3

60.4
60.8
61.4
61.5
61.8
62.5
63.3
63.9
64.1
64.3
64.3
64.3
64.6
65.0
65.5
65.8
66.2
66.7
66.9
66.6
66.8
66.8
67.1
67.1
67.2
67.5
67.3
67.3
67.4
67.2
66.9
67.4
67.4
67.4
67.3
67.0
67.0
67.1
66.9
67.1
67.2
67.2
67.0
66.6
67.0
66.8
67.1
67.1
66.9
66.9
67.0
67.0
66.9
66.7
66.4

79.6
79.4
79.4
78.7
78.4
78.5
78.6
78.6
78.2
77.9
77.4
77.1
77.1
77.0
76.9
76.8
76.9
77.1
77.1
76.5
76.5
76.2
75.9
75.7
75.8
75.9
75.6
75.6
75.4
75.1
74.6
75.3
75.2
75.1
75.2
74.9
75.0
74.9
74.9
75.1
75.2
75.1
74.9
74.3
74.6
74.4
74.6
74.8
74.6
74.7
74.7
74.8
74.5
74.5
74.1

60.1
62.0
62.9
61.9
62.3
64.0
65.0
64.8
63.7
62.4
60.0
59.4
59.0
59.7
59.3
59.0
60.0
61.0
59.6
57.3
56.9
56.6
57.7
58.5
57.1
56.1
56.6
56.4
56.6
54.1
50.4
56.1
55.7
55.7
54.8
52.2
54.2
54.2
51.9
54.1
52.6
53.1
51.6
50.1
50.8
51.5
50.3
50.1
49.8
50.2
48.7
51.2
50.2
51.6
50.1

82.0
81.6
81.4
80.7
80.3
80.2
80.1
80.1
79.8
79.5
79.2
78.9
78.7
78.5
78.5
78.4
78.3
78.5
78.5
78.0
78.0
77.7
77.3
77.1
77.3
77.5
77.2
77.2
77.0
76.8
76.6
76.9
76.9
76.7
76.9
76.7
76.7
76.7
76.8
76.9
77.0
76.9
76.8
76.3
76.5
76.3
76.6
76.9
76.7
76.7
76.9
76.7
76.5
76.4
76.1

43.2
44.1
45.2
45.9
46.9
48.0
49.4
50.5
51.2
51.9
52.4
52.7
53.3
54.1
55.0
55.7
56.4
57.2
57.4
57.4
57.7
58.0
58.9
59.0
59.1
59.5
59.4
59.6
59.8
59.7
59.6
59.9
60.0
60.1
59.8
59.6
59.5
59.6
59.4
59.6
59.6
59.7
59.6
59.4
59.9
59.7
59.9
59.7
59.5
59.6
59.7
59.6
59.7
59.4
59.2

48.1
50.1
51.7
51.5
52.8
54.5
56.7
57.4
56.2
55.4
55.0
54.5
55.4
55.2
56.3
56.5
57.2
57.1
55.3
54.1
52.5
53.5
55.1
55.5
54.7
54.1
55.4
54.5
54.7
52.8
51.0
53.9
53.6
53.6
52.7
51.9
53.1
52.9
49.9
52.6
53.2
53.0
52.0
52.3
51.3
52.8
51.1
50.9
50.8
50.8
50.7
51.4
50.9
50.2
49.3

42.7
43.5
44.4
45.3
46.2
47.3
48.7
49.8
50.6
51.5
52.2
52.5
53.1
54.0
54.9
55.6
56.3
57.2
57.6
57.6
58.1
58.3
59.2
59.2
59.4
59.9
59.7
59.9
60.2
60.2
60.2
60.3
60.4
60.5
60.3
60.2
60.0
60.1
60.1
60.1
60.1
60.2
60.2
59.9
60.5
60.2
60.5
60.4
60.2
60.2
60.4
60.2
60.4
60.0
59.9

59.9
60.2
59.8
58.8
59.0
59.8
61.5
61.4
61.0
60.8
61.0
61.5
62.2
62.9
63.3
63.8
63.8
64.2
64.0
63.3
63.9
63.2
63.4
63.7
64.1
64.7
65.6
65.8
65.8
65.4
64.9
66.0
65.6
65.8
65.5
65.3
65.6
65.3
65.3
65.6
65.2
64.9
65.4
65.0
64.9
64.9
65.5
65.2
64.9
64.0
64.4
65.5
65.0
64.4
64.9

73.6
73.4
72.9
70.9
70.0
70.6
71.5
71.3
70.3
70.0
70.1
70.6
70.8
70.8
71.2
71.1
71.0
71.0
71.0
70.4
70.7
69.6
69.1
69.0
68.7
68.3
69.0
68.7
69.0
68.5
68.4
69.6
68.6
68.8
68.4
67.9
67.9
68.1
68.6
69.1
67.9
68.0
68.8
69.3
68.5
69.4
68.9
69.4
68.8
67.3
67.8
69.4
68.6
67.0
66.8

46.3