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PROMOTING ECONOMIC OPPORTUNITY AND
OWNERSHIP
Supported by the pro-growth policies
President Bush and the Congress adopted
during his first term, the U.S. economy is
strong and its fundamentals point to continuing prosperity and expansion. The economy
is creating new jobs; the unemployment rate
is lower than the average of the 1970s, 1980s,
and 1990s; previously discouraged workers
are re-entering the workforce and American
businesses are investing for the future in new
equipment and technology.
The economy’s expansion has been steady
and broad-based, with new investment and job
President George W. Bush participates in a conversation about
growth in virtually all major industries, and
homeownership at the Carpenters Training Center in Phoenix, Arizona,
March 26, 2004.
across all regions of the country. There are
several aspects of this expansion that merit
special attention, including: the current features of our expansion that suggest long-term economic
health; the policies that restored growth to the economy; and the economic policies needed to keep
our economy on a healthy economic path.

The Economy’s Current Condition
As of the fourth quarter of 2004 the
economy had grown 13 straight quarters, and
production and income had grown more than
10 percent. The economy generated over 2.6
million new jobs from August 2003 through
December 2004, the unemployment rate fell
by almost a full percentage point, and a wide
range of indicators point to continued strong
economic growth and improving labor markets
in 2005.
The Administration is forecasting 3.6
percent real GDP growth in 2005 and 3.5
percent growth in 2006, which approximates
the consensus of private-sector forecasters. A
wide range of indicators support this forecast.

Strong Sustained Real GDP Growth
Percent change from year earlier

5
4.5

4

4.4

--------------Projections--------------3.7

3.6
3.0

3

3.3

3.2

3.1

3.1

1.9

2
1

3.5

0.8

0
1999 2000 2001 2002 2003 2004
Note: GDP growth for 2004 is an estimate.

9

2005 2006 2007 2008 2009 2010

10

PROMOTING ECONOMIC OPPORTUNITY AND OWNERSHIP

For example, labor productivity rose at an
average rate of 2.5 percent from the beginning
of 1996 to the end of 2000, significantly faster
than productivity growth over the previous
20 years. Since the business cycle peak in the
first quarter of 2001, productivity has risen
even faster, at a robust 4.2 percent average
annual rate.
Productivity growth has, as
expected, slowed somewhat in 2004, but at
3.1 percent growth over the past 12 months
it continues to grow at historically high levels
that help restrain price pressures, increase
the standard of living, and sustain economic
momentum.

Strong Productivity Growth
Percent change

5
4.2% Average
2001-2004

4
3

---Projections---

2

2.5% Average
1996-2000

1
1.4% Average
1974-1995

0
-1
-2
1973

1979

1985

1991

1997

2003

2009

Note: Productivity growth for 2004 is an estimate.

Strong productivity growth means more competitive companies and
higher paid workers.

Price stability is also an important factor
for strong growth in the economy. Even with a
recent spike in energy prices, overall inflation
remains subdued, helping to sustain business
and consumer confidence in the economy.
Historically low interest rates, in part made
possible by low inflation, also create a positive
environment for growth by helping individuals
make large-scale purchases, such as homes,
or to refinance old loans at lower cost. Low
interest rates have also allowed businesses
to achieve substantial interest cost savings,
strengthen their balance sheets for the future,
and take better advantage of new investment
opportunities.
Major Stock Indexes
October 2002 = 100

180
S&P 500

170
Dow Jones
Industrials

160

Nasdaq
Composite

150
140
130
120
110
100
90
Dec
2002

Apr

Aug

Dec
2003

Apr

Aug

Dec
2004

Low Interest Rates and Low Inflation
Have Helped Restore Strong Growth
Percent

20
30-Year Conventional Mortgage Rate

15
10-Year Treasury Note Yield

10

5
CPI-U (Percent Change)

0
1980

1984

1988

1992

1996

2000

2004

The news on labor markets, output, productivity, inflation, and interest rates all suggest
the economy has moved to a higher plane of
long-term, sustainable expansion. This good
news is reflected in the performance of the
equity markets: stock prices rose sharply
in 2003, and again in the closing months of
2004. All the major stock indices are at or
near their highest levels since September
11, 2001. Increases in equity markets have
added $4 trillion to household wealth since
September 2002, restoring much of the losses
that followed the stock market decline of
2000-2002. Combined with gains in housing
prices, household net worth has risen $8.5
trillion since the third quarter of 2001.

THE BUDGET FOR FISCAL YEAR 2006

11

Data released in the final days of 2004 and in early 2005 reinforce expectations for continued economic strength. Industrial production, which started to slide in mid-2000, began to recover again by
the end of 2001 and reached a new high in December of 2004. Oil prices have fallen from their highs.
And business optimism, as measured by a periodic survey released by the National Federation of
Independent Business, reached a 20-year high in December, driven especially by business plans for
new hiring.

Tax Relief: Why it Worked
The recent economic performance is remarkable considering that the U.S. economy was in a
recession by early 2001, faced a major national emergency in September 2001, and endured the
revelation of major corporate scandals and two wars. Yet the recession of 2001 was relatively
short-lived and shallow, and it gave way to a robust expansion largely because the Congress
responded to the President’s call and enacted tax relief in 2001, 2002, and 2003.
Lower tax rates enacted in 2001 reduced obstacles to growth by increasing the incentives
to work, save, invest, innovate, and start new
businesses. In 2002, the President worked with
the Congress to improve investment incentives,
which reversed a two-year downward trend in
business investment; as of the fourth quarter of
2004, business investment had increased seven
consecutive quarters.

Contributions to Growth in Real Per Capita
Disposable Income
Average annual percent change
6
Taxes
5
Gov't Transfers

4

Total: 2.8

Capital Income
Labor Income

3
Total: 1.7

2
Total: 0.8

1
In 2003, the President worked with the Congress to accelerate the 2001 tax relief. Also in
0
2002, an improvement in the tax treatment of
-1
small business investment helped many entre-2
preneurs put more of their capital to work in
1991-1995
1996-2000
2001:2-2004:3
growing their firms. And the President won sigTaxes went from being an extra drag on the economy in the 1990s to
becoming a powerful stimulus through the President’s program.
nificant reductions in the tax rate on dividends
and capital gains. This added tax relief reduced
distortions arising out of the tax code that unfairly and unwisely subjected some forms of investment income to excessively high tax rates, and fundamentally improved the investment and saving
climate in the United States. Lower dividend and capital gains tax rates also significantly reduced
the incentives that previously drove businesses to rely unduly on debt financing.

POLICIES FOR A STRONGER ECONOMY
The economy has rebounded from its period of weakness, and even with a recent spike in energy
prices and continued weak economic growth among our trading partners, it appears poised for continued strength. An extended economic expansion is far from assured; however, the Administration
will continue to advance policies that promote growth, opportunity, and ownership. These steps will
help America remain the world’s best place to do business and create jobs.

Tax Policy
As outlined above, tax relief was a primary reason for the economy’s rebound. In 2004, the
President signed into law the fourth tax cut in as many years to maintain that tax relief, including

12

PROMOTING ECONOMIC OPPORTUNITY AND OWNERSHIP

the new 10-percent tax bracket, the marriage penalty relief, the increase in the child tax credit,
dividend tax relief, and other provisions that will continue at their current levels in most cases
through 2010. The President has called on the Congress to make this tax relief permanent so that
families and businesses can invest and plan with confidence.
Even with all the positive changes the President has signed into law, the Federal income tax code
still discourages economic growth in many ways. For example, the income tax continues to discourage
saving for many taxpayers, and so the President has proposed Retirement Savings Accounts, which
would replace the complex array of retirement saving incentives currently in the tax code, such as
IRAs, Roth IRAs, and similar saving vehicles. The President has also proposed Employer Retirement
Savings Accounts to simplify the saving opportunities individuals have through their employers.
The President also proposed Lifetime Savings Accounts that would, for the first time, allow individuals to save on a tax-preferred basis for any purpose. While important to all Americans, Lifetime Savings Accounts are especially important to low-income individuals and families who need to
save, but cannot afford to lock up funds for retirement that may be needed for an emergency in the
near-term. The President also proposed Individual Development Accounts that would give extra financial incentive to certain low-income families to set aside funds for major purchases, such as a first
home.
For generations, the tax code has encouraged Americans to spend first and save second. These
proposals would level the incentives to save and consume, thereby promoting a culture of saving in
America that is essential to future prosperity.
These saving proposals would help address one of the tax code’s many flaws, but they cannot address all the problems the tax code presents for the economy. Therefore, the President has called for a
fundamental reform of the Federal income tax system to make it simpler, fairer, and more pro-growth.
The Federal income tax code is not just a complicated mess; it is also a maze of special-interest loopholes that cause America’s taxpayers to spend more than six billion hours every year on paperwork.
Work, entrepreneurship, investment, ownership, and even education are discouraged by our tax system. Businesses routinely make decisions about the deployment of capital not on economic merits
alone, but also on the relevance of certain chapters of our tax code.
The President appointed a bipartisan Advisory Panel on Fundamental Tax Reform to report to the
Secretary of the Treasury by July 31, 2005, on options to reform the tax code. These options will form
the basis of efforts to enact reforms that meet the President’s objectives of simplification, fairness,
and a more pro-growth tax system, while recognizing the importance of homeownership and charity
to American society.

Litigation Reform
The costs of litigation per person in the United States are far higher than in any other major industrialized nation in the world. Lawsuit costs have risen substantially over the past several decades,
and a significant part of the costs go to paying lawyers’ fees and transaction costs—not to compensating the injured parties. The litigation explosion is clogging our civil courts and threatening jobs
across America. Businesses with $10 million or more in revenue bear an average annual cost of
$150,000 from litigation. Small businesses with less than $10 million in revenue bear 68 percent of
business tort liability costs, even though they only take in 25 percent of business revenue.
The President is pushing the Congress to pass legislation that reduces the burden of frivolous
lawsuits on our economy. The President supports enactment of medical liability reform, class action lawsuit reforms, and asbestos litigation reform to expedite fair resolutions and curb the costs of
lawsuits for all Americans.

THE BUDGET FOR FISCAL YEAR 2006

13

Frivolous lawsuits and excessive jury awards are driving many health care providers out of communities and forcing doctors to practice defensive medicine. This reduces access to medically necessary
services and raises the costs of health care for all. The President has proposed proven reforms, such
as common-sense limits on non-economic damages, to make the medical liability system more fair,
predictable, and timely.
The President’s proposed class action reforms seek to limit the abuse of large, nationwide class
action cases and provide justice to the truly injured parties. Class actions are an important and
intrinsic part of the U.S. legal system. However, class actions are heavily abused, which in turn
harms affected parties and undermines the American judicial system. In particular, injured parties
often receive awards of little or no value while lawyers receive large fees. The proposed class action
reform legislation recognizes that large interstate class actions require Federal court jurisdiction
because they typically affect more citizens, involve more money, and raise more interstate commerce
issues than any other type of lawsuit. In addition, the President wants to end the practice of “judge
shopping,” where trial lawyers file cases only in jurisdictions likely to favor plaintiffs. These reforms
do not alter the right of a plaintiff to bring a legitimate claim, or change controlling substantive law,
but provide additional protection and information to class members.
Asbestos cases have generated the longest-running mass tort litigation in U.S. history and have led
to the bankruptcies of at least 74 companies and to more than 50,000 lost jobs. Within the past few
years, there have been sharp increases in the number of asbestos claims filed annually. The current
system is costly to administer, with total projected costs estimated at between $200 and $265 billion.
These costs have driven exposed defendants into bankruptcy and may leave little or no funds to pay
future asbestos victims. The President has stressed the need for reform and urged the Congress to
find a fair and permanent solution.

Regulatory Reform
Excessive regulations can prevent the creation and growth of new small businesses and the jobs
they create; in the first term, the Administration slowed the growth of new rules by 75 percent. The
President wants to streamline regulations further and reduce paperwork to alleviate the burdens
that unduly handicap America’s entrepreneurs and job creators. The Administration is taking action
in several areas to streamline Federal regulations, while still moving forward with crucial safeguards
for homeland security, human health, investor and environmental protection. Regulations should be
analyzed based not just on their benefits, but also on their costs. When regulations are proposed, the
scientific research supporting their enactment must be sound, and subject to careful scrutiny. And
when regulations are out of date, they must be reviewed for relevancy, and to make sure the benefits
they produce are at least equal to their costs.

Health Care Costs
The rapid pace of health care inflation slows job growth, reduces the growth rate of worker wages,
and makes health care less accessible and less affordable for consumers. When employers have to
pay more for health coverage for their workers, they can afford less for worker paychecks. Ultimately,
the increase in overall labor costs to U.S. employers, as a result of rising health care costs, damages
our economy’s global competitiveness.
Some employers, especially small businesses, struggle to provide even basic health insurance
for their employees. State and national rules often prevent small businesses from banding
together to purchase health coverage at the same rates paid by large companies. The President
proposes to address this problem through Association Health Plans, which would permit cross-State
health-purchasing alliances of small businesses and other organizations. In addition, the President

14

PROMOTING ECONOMIC OPPORTUNITY AND OWNERSHIP

would make health care more affordable by offering tax credits for employer contributions to Health
Savings Accounts. These accounts allow employees to save tax-free for their out-of-pocket health
costs, and are paired with high-deductible insurance policies that cover hospitalization and other
major health care costs.
Among the drivers for health care inflation are the out-of-control costs that come from unnecessary medical liability lawsuits. As mentioned previously, the President has an aggressive plan to
reform our medical liability system. These reforms are critical because frivolous lawsuits have already chased many doctors out of the practice of medicine and make health care less accessible for
millions of Americans. And for the doctors who remain, these lawsuits are an ever-present fear. Doctors wary of getting sued practice defensive medicine, ordering more laboratory tests or examinations
than are medically necessary, which ultimately drives up health care costs for everyone. And because
of the number of lawsuits—even those that are dismissed—insurers for doctors and hospitals raise
premiums, and these higher costs of practicing medicine are passed on to consumers. Even if your
doctor has never been sued, and even if you rarely visit the doctor, your health care has become far
more expensive because of the abuse of our medical liability laws. Those States that have adopted
common-sense reforms, such as caps on punitive damages and limits on non-economic damages, have
seen smaller and more manageable increases in doctor’s liability insurance premiums. The President
intends to work with the Congress this year to adopt similar reforms nationally.
The President also supports investments in and accelerated deployment of health information technology that will further help to control rising health care costs. These technologies can reduce medical errors, improve patient care, and save doctors and nurses time, ultimately saving our health care
system dollars.
Another way to control rising health care costs is by closing loopholes that slow the movement
of more affordable generic drugs to the marketplace. The Administration has taken action to improve access to generic drugs by: limiting the time a drug company can delay the marketing of a
generic competitor; instituting rule changes to prevent drug companies from blocking the marketing
of generic versions by using patents on minor features; and tightening the rules on patent applications so that false statements to get a patent result in criminal charges. These actions are bringing
generic drugs to the market more quickly, and will save American consumers $35 billion over 10
years—savings that go not only to the consumers, but also to Medicare and Medicaid programs administered by the States.

Trade
President Bush’s top economic priority is the creation of more jobs for American workers. Free and
fair trade helps create more higher-paying jobs for American workers by opening new markets for
American products and services, expanding choices for American consumers, and attracting foreign
companies to invest and hire in the United States. America is economically stronger when we participate fully in the worldwide economy because 95 percent of the potential customers for American
products live outside the United States.
Trade agreements like the North American Free Trade Agreement and the World Trade Organization (WTO) have generated benefits—lower prices and more choices—totaling $1,300 to $2,000 annually for the typical U.S. family. Lowering barriers to trade by even one-third will boost the world
economy by as much as $613 billion—and the U.S. economy by $144 billion a year. To the typical
family of four, that means an additional $2,000 or more a year in savings.
Exports have reached record levels during the Bush Presidency. President Bush, working closely
with the Congress, won Trade Promotion Authority to enable quicker passage of trade agreements.
This was the first time the Congress approved Trade Promotion Authority in eight years. Using this

THE BUDGET FOR FISCAL YEAR 2006

15

authority, the Bush Administration has completed free trade agreements with 12 countries, including
Australia, Morocco, Bahrain, Chile, Singapore, and Jordan, and is negotiating free trade agreements
with 10 others. In addition, the Administration is in the process of forming a Free Trade Area of the
Americas, which will become the world’s largest free trade area.
The Administration also played a critical leadership role in successfully launching a new round
of global trade negotiations at the WTO, and has developed an aggressive plan to open international markets for U.S. farmers—which helped generate a 10-percent increase in agricultural exports
between 2000 and 2003.
The President recognizes that some communities and some industries face adjustments in the
global economy. That is why he signed a major expansion of assistance to help workers acquire new
skills and find new jobs. The Trade Act of 2002 nearly tripled the Trade Adjustment Assistance program. In 2003 it provided some $1.3 billion in training and income support, with nearly 200,000
workers eligible for assistance. President Bush is ensuring that U.S. trading partners abide by their
international commitments by aggressively enforcing U.S. trade laws. For example, the Administration brought the first-ever WTO case against China for its discriminatory tax treatment against U.S.
semiconductor makers. In July 2004, China agreed to end this unfair practice.

Energy
It is critical to our economy to have affordable, reliable, and secure energy supplies. President Bush
in his first term put forward the first comprehensive,
long-term energy policy in a decade to meet this goal
through conservation, investment in new technology,
and development of new domestic sources of energy.
The Bush Administration has completed, or is in the
process of implementing, nearly 75 percent of the 106
recommendations contained in the President’s comprehensive National Energy Policy, such as filling the
Strategic Petroleum Reserve to capacity.
A hydrogen refueling station at Los Angeles International
President Bush also proposed modernizing the
Airport.
electricity grid by reforming outdated laws, opening
access to the transmission grid, establishing regional
planning and coordination, and establishing mandatory reliability standards to prevent blackouts.
The President has advocated funding for clean coal research, including FutureGen, and increasing
use of clean coal technology; funding for nuclear energy research and development; new efficiency
standards for consumer products; tax incentives for use of renewable sources of energy like wind and
solar power; and the opening of a small area (less than one percent) of the Arctic National Wildlife
Refuge for environmentally responsible oil and gas exploration. The Arctic National Wildlife Refuge
has the potential to provide over one million barrels of oil a day and provides access to one of the
largest known reserves of natural gas in the United States.

President Bush launched a groundbreaking initiative to develop technologies and infrastructure
to produce, store, and distribute hydrogen for use in fuel-cell vehicles, electricity generation, and
other applications. Hydrogen-powered fuel cells hold the potential to power cars, trucks, homes, and
businesses while producing virtually no pollution or greenhouse gases.

16

PROMOTING ECONOMIC OPPORTUNITY AND OWNERSHIP

Innovation and Ownership
In virtually every industry, American
companies and entrepreneurs are exercising
the power of innovation to meet 21st Century
challenges. Invention, commercialization, and
diffusion of new ideas into new products and
services directly affect the pace of productivity
growth and the quality of peoples’ lives.
Innovation lowers costs to consumers and
brings new products to the market.
The greatest incentive for innovation is a
healthy economy that rewards the inventor
and investor. The Administration supports
strong protection of patent rights and research
President Bush talks with an employee at U.S.A. Industries in Bay Shore,
and development, as well as the enforcement
N.Y., March 11, 2004.
of anti-trust laws so that new competition is
always welcomed. The President has laid the foundation for healthy innovation with tax relief that
rewards those who create jobs and invest capital in new ideas. He has also proposed many other
policies to build on this base:
• The President has proposed to make the Research and Experiment tax credit permanent to
encourage technological discovery.
• The President proposes to increase Federal spending on new research and development to $132
billion, an increase of one percent over 2005 and an all-time high.
• He has established programs to accelerate the adoption of hydrogen fuel technology, a new and
promising energy source, which has the potential to reduce our dependence on foreign sources
of energy.
• His proposals would transform health care through the rapid application of new health information technology, thereby reducing medical errors and health care costs.
• The President has called for universal, affordable access for broadband technology by the year
2007.
• The President has placed a priority on nanotechnology, information technology, and scientific
and technological standards.
As our economy continues to expand, the Federal Government will help communities respond to
and prepare for changing conditions, particularly as some industries restructure and new industries
appear. To help workers in poor communities, the President is proposing Opportunity Zones and
other initiatives to provide tax relief, and attract new business, and improve housing and job training. In addition, he has signed legislation and increased funding to support the cleanup of former
industrial sites, which are known as brownfields.
A key element of the Administration’s policy is to promote ownership in America. The Administration has promoted and will continue to support policies that allow individuals to take greater control
over their lives through private ownership. When families have assets, they have a foundation of
stability to help them through difficult periods. A family that saves, owns a home, or invests through
a retirement, health, or education fund is building toward a brighter future and contributing to our
economy’s long-term economic health.
The best place to see these effects is where people live. More Americans own their own homes than
ever before, and the value of those homes is rising at a steady pace. Our strong housing market is

THE BUDGET FOR FISCAL YEAR 2006

17

a testament to the faith that Americans place in their homes as a long-term investment. The President has placed a high priority on promoting further gains in homeownership, particularly among
minorities. Already, minority homeownership is at a record high, and in 2002 the President set an
ambitious goal to add 5.5 million minority homeowners through 2010. Through downpayment assistance programs, financial literacy efforts, tax incentives for building affordable homes, and Individual Development Accounts, the President is promoting the kinds of policies that will strengthen our
neighborhoods and communities and provide more Americans a chance to call something their own.
The same principle applies to other Presidential policies. Health Savings Accounts provide a better way for Americans to control and spend their health care dollars. Lifetime Savings Accounts will
provide a better way for Americans to save for college tuition and other goals. Personal Retirement
Accounts under Social Security will provide a better way for Americans to save for their own retirement, using a portion of their payroll taxes. In all these proposals, personal ownership is the common
feature, because it is the best way to achieve financial independence and prosperity.
During the past four years, this Nation experienced significant economic challenges that tested the
resolve of the American people. But as is now clear, that resolve was never in question. The economic
recovery has now become a strong expansion that is bringing prosperity to more communities across
America. Yet the on-going weakness in other nations’ economies serve as a reminder that the United
States cannot afford to take a strong economy for granted. Effective tax, monetary, labor, regulatory,
environmental, education, trade, and national security policies are all necessary for a strong and
growing economy.
At the same time, all these policies merely complement the effort, ingenuity, and strength of individual workers and companies that comprise our $12 trillion economy. Through the pursuit of
pro-growth policies, our economy is once again growing at a strong and sustainable pace. Through
a growing economy, Federal receipts are once again rising at a steady rate. Combined with spending restraint, rising revenues will reduce the near-term budget deficit. By addressing the near-term
deficit and the long-term imbalances in entitlement programs, America will further reinforce our
prospects for a strong economy in the years ahead.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102