Economic Report of the President 2010

Book Description:

The Economic Report of the President for 2010 is written by the Chair of the Council of Economic Advisers. An important vehicle for presenting the Administration’s domestic and international economic policies, it provides an overview of the nation’s economic progress with text and extensive data appendices. For more than sixty years, the Economic Report has provided a nearly contemporaneous record of how Administrations have interpreted economic developments, the motivation for policy actions, and the results of those interventions. This year’s volume has attempted to stay true to this proud legacy. It provides a detailed economic history of the first year of the Obama Administration. It examines the economic challenges that we face as a Nation, the many policy actions that have already been taken to address these challenges, and the President’s proposals for further action. The economic challenges facing the Nation when President Obama took office were among the greatest in our history. Last January, the American economy was truly in freefall. Real GDP was falling at an annual rate of more than 6 percent and the U.S. economy was losing jobs at the devastating rate of almost 800,000 per month. Our financial markets, having narrowly avoided collapse in the financial panic of the early fall of 2008, were paralyzed with fear, and borrowers of all sorts, from households to small businesses to large corporations, were having trouble accessing the credit necessary for normal economic activity. The threat of a second Great Depression was both genuine and terrifying.

CONTENTS

CHAPTER 1. TO RESCUE, REBALANCE, AND REBUILD ......... 25
Rescuing an Economy in Freefall ............................................ 26
Rescuing the Economy from the Great Recession ........................ 28
Crisis and Recovery in the World Economy ................................ 29
Rebalancing the Economy on the Path to Full
Employment ...................................................................................... 29
Saving and Investment .................................................................. 29
Addressing the Long-Run Fiscal Challenge ................................. 31
Building a Safer Financial System ............................................... 32
Rebuilding a Stronger Economy .............................................. 33
Reforming Health Care ................................................................. 33
Strengthening the American Labor Force .................................... 35
Transforming the Energy Sector and Addressing Climate
Change ............................................................................................ 36
Fostering Productivity Growth Through Innovation and
Trade .............................................................................................. 37
Conclusion ........................................................................................ 38

CHAPTER 2. RESCUING THE ECONOMY FROM THE GREAT RECESSION ................................................................................ 39
An Economy in Freefall ............................................................... 39
The Run-Up to the Recession ........................................................ 40
The Downturn ............................................................................... 41
Wall Street and Main Street ......................................................... 44
The Unprecedented Policy Response ...................................... 46
Monetary Policy ............................................................................. 47
Financial Rescue ............................................................................ 49
Fiscal Stimulus ............................................................................... 51
Housing Policy ............................................................................... 55
The Effects of the Policies ........................................................ 56
The Financial Sector ...................................................................... 57
Housing ........................................................................................... 60
Overall Economic Activity ............................................................. 63
The Labor Market .......................................................................... 68
The Challenges Ahead .................................................................. 72
Deteriorating Forecasts .................................................................. 72
The Administration Forecast ......................................................... 75
Responsible Policies to Spur Job Creation ..................................... 78
Conclusion ......................................................................................... 79

CHAPTER 3. CRISIS AND RECOVERY IN THE WORLD ECONOMY ..................................................................... 81
International Dimensions of the Crisis ................................ 82
Spread of the Financial Shock ....................................................... 82
The Collapse of World Trade ........................................................ 87
The Collapse in Financial Flows ................................................... 89
The Decline in Output Around the Globe .................................... 90
Policy Responses Around the Globe ........................................ 93
Monetary Policy in the Crisis ........................................................ 93
Central Bank Liquidity Swaps ....................................................... 96
Fiscal Policy in the Crisis ............................................................... 98
Trade Policy in the Crisis ............................................................... 100
The Role of International Institutions ................................ 100
The G-20 ......................................................................................... 100
The International Monetary Fund ................................................ 101
The Beginning of Recovery Around the Globe ................... 102
The Impact of Fiscal Policy ............................................................ 104
The World Economy in the Near Term ........................................ 106
Global Imbalances in the Crisis ..................................................... 108
Conclusion ......................................................................................... 111

CHAPTER 4. SAVING AND INVESTMENT ..................................... 113
The Path of Consumption Spending ...................................... 114
The Determinants of Saving .......................................................... 115
Implications for Recent and Future Saving Behavior .................. 117
The Future of the Housing Market and
Construction .................................................................................... 120
The Housing Market ...................................................................... 121
Commercial Real Estate ................................................................. 123
Business Investment ....................................................................... 126
Investment in the Recovery ............................................................ 126
Investment in the Long Run .......................................................... 127
The Current Account ................................................................... 129
Determinants of the Current Account .......................................... 129
The Current Account in the Recovery and in the Long Run ....... 132
Steps to Encourage Exports ............................................................ 133
Conclusion ......................................................................................... 135

CHAPTER 5. ADDRESSING THE LONG-RUN FISCAL CHALLENGE ............................................................................. 137
The Long-Run Fiscal Challenge ............................................... 137
Sources of the Long-Run Fiscal Challenge .................................... 139
The Role of the Recovery Act and Other Rescue Operations ....... 143
An Anchor for Fiscal Policy ...................................................... 144
The Effects of Budget Deficits ........................................................ 145
Feasible Long-Run Fiscal Policies .................................................. 146
The Choice of a Fiscal Anchor ....................................................... 148
Reaching the Fiscal Target ........................................................ 149
General Principles .......................................................................... 149
Comprehensive Health Care Reform ............................................ 150
Restoring Balance to the Tax Code ............................................... 151
Eliminating Wasteful Spending ..................................................... 155
Conclusion: The Distance Still to Go ................................... 156

CHAPTER 6. BUILDING A SAFER FINANCIAL SYSTEM ........... 159
What Is Financial Intermediation? ......................................... 160
The Economics of Financial Intermediation ................................ 160
Types of Financial Intermediaries ................................................. 163
The Regulation of Financial Intermediation in the
United States .................................................................................... 166
Financial Crises: The Collapse of Financial
Intermediation ................................................................................. 170
Confidence Contagion .................................................................... 170
Counterparty Contagion ................................................................ 172
Coordination Contagion ................................................................ 173
Preventing Future Crises: Regulatory Reform ................. 174
Promote Robust Supervision and Regulation of Financial  Firms ..... 175
Establish Comprehensive Regulation of Financial Markets ........ 176
Provide the Government with the Tools It Needs to Manage
Financial Crises .............................................................................. 178
Raise International Regulatory Standards and Improve
International Cooperation ............................................................. 179
Protect Consumers and Investors from Financial Abuse ............ 179
Conclusion ......................................................................................... 180

CHAPTER 7. REFORMING HEALTH CARE .................................... 181
The Current State of the U.S. Health Care Sector ......... 182
Rising Health Spending in the United States ................................ 182
Market Failures in the Current U.S. Health Care System:
Theoretical Background ................................................................. 185
System-Wide Evidence of Inefficient Spending ............................ 188
Declining Coverage and Strains on Particular Groups and
Sectors .............................................................................................. 191
Health Policies Enacted in 2009 ............................................... 196
Expansion of the CHIP Program ................................................... 197
Subsidized COBRA Coverage ........................................................ 197
Temporary Federal Medical Assistance Percentage (FMAP)
Increase ........................................................................................... 199
Recovery Act Measures to Improve the Quality and Efficiency
of Health Care ................................................................................ 201
2009 Health Reform Legislation ............................................... 202
Insurance Market Reforms: Strengthening and Securing
Coverage .......................................................................................... 202
Expansions in Health Insurance Coverage Through the
Exchange ......................................................................................... 205
Economic and Health Benefits of Expanding Health
Insurance Coverage ........................................................................ 206
Reducing the Growth Rate of Health Care Costs in the Public
and Private Sectors ......................................................................... 207
The Economic Benefits of Slowing the Growth Rate of Health
Care Costs ....................................................................................... 210
Conclusion ......................................................................................... 211

CHAPTER 8. STRENGTHENING THE AMERICAN LABOR FORCE
Challenges Facing American Workers .................................. 214
Unemployment ............................................................................... 214
Sectoral Change .............................................................................. 216
Stagnating Incomes for Middle-Class Families ............................ 217
Policies to Support Workers ...................................................... 219
Education and Training: The Groundwork for
Long-Term Prosperity ................................................................... 221
Benefits of Education ..................................................................... 221
Trends in U.S. Educational Attainment ....................................... 222
U.S. Student Achievement ............................................................. 226
A Path Toward Improved Educational Performance ...... 227
Postsecondary Education ............................................................... 228
Training and Adult Education ...................................................... 229
Elementary and Secondary Education .......................................... 231
Early Childhood Education ........................................................... 233
Conclusion ......................................................................................... 234

CHAPTER 9. TRANSFORMING THE ENERGY SECTOR
AND ADDRESSING CLIMATE CHANGE .......................................... 235
Greenhouse Gas Emissions, Climate, and Economic
Well-Being ......................................................................................... 236
Greenhouse Gases ........................................................................... 237
Temperature Change ...................................................................... 238
Impact on Economic Well-Being ................................................... 239
Jump-Starting the Transition to Clean Energy ................. 243
Recovery Act Investments in Clean Energy .................................. 243
Short-Run Macroeconomic Effects of the Clean Energy
Investments ..................................................................................... 246
Other Domestic Actions to Mitigate Climate
Change ................................................................................................. 247
Market-Based Approaches to Advance the Clean
Energy Transformation and Address Climate Change ... 248
Cap-and-Trade Program Basics .................................................... 248
Ways to Contain Costs in an Effective Cap-and-Trade
System .............................................................................................. 250
Coverage of Gases and Industries .................................................. 253
The American Clean Energy and Security Act ............................. 254
International Action on Climate Change Is Needed ....... 255
Partnerships with Major Developed and Emerging
Economies ....................................................................................... 256
Phasing Out Fossil Fuel Subsidies ................................................. 257
Conclusion ......................................................................................... 257

CHAPTER 10. FOSTERING PRODUCTIVITY GROWTH
THROUGH INNOVATION AND TRADE ......................................... 259
The Role of Productivity Growth in Driving Living
Standards ........................................................................................... 261
Recent Trends in Productivity in the United States ..................... 262
Sources of Productivity Growth ..................................................... 264
Fostering Productivity Growth Through Innovation ... 266
The Importance of Basic Research ................................................ 267
Private Research and Experimentation ........................................ 269
Protection of Intellectual Property Rights ..................................... 270
Spurring Progress in National Priority Areas .............................. 272
Increasing Openness and Transparency ....................................... 272
Trade as an Engine of Productivity Growth and
Higher Living Standards ............................................................. 274
The United States and International Trade ................................. 275
Sources of Productivity Growth from International Trade ......... 276
Encouraging Trade and Enforcing Trade Agreements ................ 280
Ensuring the Gains from Productivity Growth
Are Widely Shared ......................................................................... 282
Conclusion ......................................................................................... 284
REFERENCES ............................................................................................. 285