Table Of Content

CONTENTS Page OVERVIEW. 19 CHAPTER I. THE YEAR IN REVIEW AND THE YEARS AHEAD. 31 Developments in 2008 and the Near-Term Outlook. 33 Consumer Spending and Saving. 33 Residential Investment. 39 Business Fixed Investment. 41 Business Inventories. 43 Government Purchases. 43 Exports and Imports. 44 Employment. 45 Productivity. 46 Prices and Wages. 46 Financial Markets. 50 The Long-Term Outlook Through 2014. 53 Growth in GDP over the Long Term. 55 A Perspective on the Past Eight Years. 56 Conclusion. 58 CHAPTER 2. HOUSING AND FINANCIAL MARKETS . 61 Origins of the Crisis. 63 The Global Saving Glut. 63 The Global Credit Boom and the Housing Market. 64 The Credit Crunch. 69 Leverage and Reliance on Short-Term Funds. 71 Macroeconomic Consequences of the Crisis. 72 Banks Reduced Lending to Consumers and Businesses. 73 The Onset of the Crisis. 74 Credit Market Investors Reduced Lending to Businesses. 75 The Effect of the Crisis on the Non-financial Economy. 77 Policy Responses to the Crisis. 79 Policy Responses in 2007. 79 Policy Responses in 2008. 80 Results So Far. 85 Looking Forward. 87 Developing a New Regulatory Structure for Financial Markets.. 87 Unwinding Temporary Programs. 89 11 Modernizing Financial Regulation. 90 The Future of Mortgage Financing and Fannie Mae and Freddie Mac. 93 Conclusion. 96 CHAPTER 3. ENERGY AND THE ENVIRONMENT. 97 U.S. Energy Use and Policy Goals. 98 The Promise of Market-Oriented Policy Approaches. 100 Market-Oriented Environmental Regulation. 100 The Role for Technology Inducement Policies. 101 Increasing Use of Alternative Energy Sources. 103 Generating Electricity. 104 Alternative Transportation Fuels. 106 Harnessing Existing Energy Sources More Responsibly. 109 Increasing Efficiency. 109 Cleaner Use of Fossil Fuels. 112 Removing Regulatory Impediments to Domestic Production .... 116 Overarching Challenges. 116 Balancing Local, Regional and Global Goals. 117 Efficient R&D Support for Alternative Energy Sources. 118 Economically Efficient Regulation under Existing Statutes. 119 Global Action on Climate Change. 123 Conclusion. 126 CHAPTER 4. THE BENEFITS OF OPEN TRADE AND INVESTMENT POLICIES 127 Trade and Investment in the United States. 128 Openness to Trade and Investment Has Substantially Contributed to U.S. Growth. 129 The Benefits of Free Trade. 130 Free Trade Agreements. 132 Reductions in Tariffs. 134 The Benefits of Open Investment. 136 U.S. Investment and Investment Policy. 139 Foreign Investment Policy. 144 Development Assistance Initiatives. 144 Millennium Challenge Corporation. 146 Trade Capacity Building. 146 Investment Promotion Programs. 147 Trade Preference Programs. 148 Trade Policy Going Forward. 149 Conclusion. 150 12 I Economic Report of the President CHAPTER 5. TAX POLICY. 151 Individual Income Tax Reform. 152 Lowering Tax Rates Stimulates Economic Growth. 153 A Record of Tax Reform. 159 Lower Tax Burdens. 161 Pro-Growth Business Tax Reform. 162 Reducing the Double Taxation of Corporate Income. 162 Accelerating Depreciation Allowances. 163 Increasing Small Business Expensing. 164 Tax Credits for Research and Development. 164 International Competitiveness. 165 Future Challenges. 166 Making Tax Relief Permanent. 166 Fixing the Alternative Minimum Tax. 168 Simplifying the Tax Code. 170 Conclusion. 172 CHAPTER 6. THE LONG-RUN CHALLENGES OF ENTITLEMENT SPENDING.. 175 Background Facts about Entitlement Programs. 176 Social Security. 176 Medicare. 177 Medicaid. 178 Major Entitlement Spending Over Time. 180 Social Security. 181 Medicare and Medicaid. 184 Factors That Drive Expenditure Growth Over Time. 187 Demographic Shifts. 187 Increased Health Care Spending Per Beneficiary. 188 The Bottom Line. 189 The Financial Future of Social Security. 189 Addressing Future Solvency. 189 Funding Future Benefits . 190 The Financial Future of Medicare and Medicaid. 192 Conclusion. 195 CHAPTER 7. BALANCING PRIVATE AND PUBLIC ROLES IN HEALTH CARE.. 197 The Health of the U.S. Population. 198 U.S. Health Care Spending. 200 Improving the Effectiveness and Efficiency of Health Care. 202 Health Information Technology. 203 Comparative Effectiveness. 203 Contents | 13 Price and Quality Information Transparency. 204 Pay-for-Performance. 205 Using Market-Based Approaches to Improve Access to Health Insurance. 206 Private Health Insurance. 206 Public Insurance. 210 The Uninsured. 212 Investing in Public Health. 214 Strengthening Community-Based Health Care. 214 Preparing for Public Health Emergencies. 214 Supporting Research. 214 Promoting Global Health Improvement. 215 Conclusion. 216 CHAPTER 8. EDUCATION AND LABOR. 217 Economic Benefits of Education. 218 Primary and Secondary Education. 221 Early Signs of NCLB Success. 221 NCLB Challenges. 223 Higher Education. 225 College Preparedness. 226 Funding Higher Education. 227 Labor Issues: Income Trends, Worker Flexibility, and Pension Reform. 228 Recent Trends in Real Incomes. 229 Worker Flexibility and Training. 231 Retiree Income. 232 Looking Ahead. 235 Income Inequality. 235 Immigration Reform. 236 Conclusion. 237 CHAPTER 9. ECONOMIC REGULATION. 239 Telecommunications and Broadband. 241 New Technologies Permit Greater Competition in T elecommunications. 241 Telecommunications Regulation in an Evolving Market. 243 Spectrum Policy. 244 Tort Reform.;. 247 Corporate Governance Reform. 249 Insurance Against Terrorism and Natural Disasters. 251 Roads. 254 Aviation. 258 Conclusion. 259 14 I Economic Report of the President p APPENDIXES A. Report to the President on the Activities of the Council of Economic Advisers During 2008. 267 B. Statistical Tables Relating to Income, Employment, and Production. 275 LIST OF TABLES 1-1. Administration Economic Forecast. 54 1-2. Supply-Side Components of Real GDP Grow^th, 1953-2014. 56 3- 1. Projected Net Benefits from Selected 2001-08 EPA Clean Air Regulations. 115 4- 1. U.S. Trade and Investment. 128 4- 2. Capital Flows into and out of the United States (Billions of U.S. Dollars). 139 5- 1. Estimated 2008 Effects of Individual Income Tax Relief from the Past 8 Years. 162 5- 2. Statutory Corporate Income Tax Rates, Depreciation Allowances, and Effective Marginal Tax Rates for Selected OECD Countries, 2005. 167 6- 1. Old-Age, Survivors, and Disability Insurance (OASDI) Benefits and Beneficiaries, 1950-2050. 182 7- 1. Uninsurance Rates by Household Income Category. 213 8- 1. Proficiency Levels of Fourth Grader. 222 LIST OF CHARTS 1-1. Oil Prices: West Texas Intermediate. 37 1-2. Real Consumption and Real Wealth. 38 1-3. FHFA versus S&P/Case-Shiller Home Price Index. 40 1-4. Nonfmancial Corporate Sector Net Borrowing by Type. 42 1-5. Output Per Hour in the Nonfarm Business Sector. 47 1-6. Consumer Price Inflation. 48 1-7. Gross Domestic Product and Gross Domestic Purchases Price Indexes. 49 1-8. Corporate Bond Spreads. 52 1- 9. Recessions and Recession Recoveries. 54 2- 1. Home Prices and Owner’s Equivalent Rent. 65 2-2. Privately Securitized Mortgages and Subprime Loans in Mortgage Market. 68 2-3. Single-Family Housing Starts. 69 2-4. Percent of Mortgages 90 Days past Due or in the Process of Foreclosure. 70 2-5. Domestic Banks Tightening Lending Standards. 73 2-6. The TED Spread. 76 Contents | 15 2-7. Consumer Confidence. 78 2-8. Commercial Paper. 86 2- 9. Conforming and Jumbo Mortgage Rates. 87 3- 1. U.S. Wind Power Generation, 1995-2007. 105 3-2. Alternative Fuel Light-Duty Vehicles in the U.S. Fleet. 107 3-3. Emissions Levels Over Time. 113 3-4. Clean Air Act Requirements for New Electric Generating Units, 2004-2022. 120 3-5. Greenhouse Gas Intensity of U.S. Economy, 1990-2007. 123 3- 6. Global CO2 Concentrations. 124 4- 1. Contribution of Net Exports to Real U.S. GDP Growth. 130 4-2. U.S. FTA Progress, 2000-2009. 133 4-3a. U.S. Floldings of Foreign Assets, 2007 (US$ bil). 138 4-3b. Foreign Holdings of U.S. Assets, 2007 (US$ bil). 138 4- 4. U.S. Obligations on Select Development Assistance Initiatives, 2000-2007. 145 5- 1. Real Personal Dividend Income. 158 5-2. Federal Income Tax Relief by Year.. 161 5-3. Combined (Federal and State) Corporate Income Tax Rate. 167 5- 4. Number of Taxpayers Subject to the Alternative Minimum Tax. 169 6- 1. Expenditures as a Percent of GDP. 181 6-2. Changes in Source of Funds for Personal Health Care Expenditures. 184 6-3. Medicaid Enrollees and Expenditures by Enrollment Group, 2007. 185 6- 4. The Population Age 65 or Older as a Percentage of the Total Adult Population. 188 7- 1. Life Expectancy at Birth. 198 7-2. Distribution of Adults by Age Group According to Number of Chronic Conditions, 2005. 199 7-3. Distribution of National Health Expenditures by Type of Service, 2006. 201 7- 4. Prescription Drug Coverage for Medicare Beneficiaries in 2004 and 2006. 212 8- 1. Average Adult Real Earnings by Educational Attainment. 219 8-2. Growth in Educational Attainment, Capital Intensity, and Labor Productivity over Time. 220 8-3. Enrollees and Degrees Conferred. 226 8- 4. Real Hourly Earnings and Real Total Compensation Costs over Time. 230 9- 1. High-Speed Internet Lines in the United State by Type of 16 I Economic Reporr of the President Connection, 1999-2007. 242 9-2. U.S. Tort Costs, 1995-2007. 248 9-3. Terrorism Risk Insurance (TRI) Deductibles and Take-up Rates, 2003-2007. 253 9-4. Highway Expenditures by Revenue Source, 2006. 255 LIST OF BOXES 1-1. The Economic Stimulus Act of 2008. 34 1-2. Different Measures of House Prices. 40 1- 3. Alternate Measures of Productivity Growth. 47 2- 1. Definitions of Select Financial Terms. 67 2-2. Short Sales. 81 4-1. Farm Subsidies. 135 4-2. Sovereign Wealth Funds. 140 4- 3. The Effect of the Current Economic Slowdown on Foreign Investment into the United States. 141 5- 1. Encouraging Human Capital Investment. 154 5-2. Double Taxation Slows Economic Growth. 157 5- 3. Tax Code Complexity. 171 6- 1. Undesirable Consequences of Social Security. 182 6- 2. Long-Term Care and Medicaid. 186 7- 1. Health Savings Accounts: Innovation in Benefit Design. 207 8- 1. The Ensuring Continued Access to Student Loans Act of 2008. 227 8- 2. Trade Adjustment Assistance. 232 9- 1. The Do Not Call List. 244 9-2. The Role of Incentives in Road Investments. 257 JAN 2009