THE CLINTON-GORE ADMINISTRATION: SUSTAINING AMERICA'S PROSPERITY --
HIGHLIGHTS OF THE 2001 ECONOMIC REPORT OF THE PRESIDENT
January 12, 2001
Chapter 1: The Making of the New Economy
This year's Economic Report of the President examines the emergence of a
New Economy, documenting the breadth of this change, and examining its
implications. The Report defines the New Economy by the extraordinary
gains in performance -- including rapid productivity growth, rising
incomes, low unemployment, and moderate inflation -- that have resulted
from a combination of mutually reinforcing advances in technologies,
business practices, and economic policies.
New economic trends. Since 1993, real GDP has grown at an annual
rate 46 percent higher than in the 20 years before 1993. The combination
of this faster growth, more than 22 million new jobs, widespread gains
in real incomes, and moderate inflation has surprised most observers.
In the second half of the 1990s, the U.S. economy grew faster than that
of any other major industrial country.
Widespread improvements in labor productivity. Annual labor
productivity growth has accelerated by 1.6 percentage points since 1995.
Increases in capital per worker explain 0.4 percentage point of this
growth, and faster technological change in the computer sector accounts
for 0.2 percentage point. The majority (1.0 percentage point), however,
stems from technological improvements in the rest of the economy. These
gains have been pervasive and are particularly apparent in services
sectors, such as wholesale and retail trade and finance, which are major
users of information technology (IT).
The innovation system has been transformed. Between 1990 and 1997,
the number of IT firms more than doubled. The supply of new
technologies has been boosted by stronger competition, increased
spending on R&D, and new organizational structures for innovation. Small
firms linked in networks and clusters now play a larger role than
before. Deregulation and international competition have stimulated the
demand for new technologies. Financial innovations, such as venture
capital and stock options, have become increasingly common.
Organizational changes have complemented technological innovation.
New production methods that take advantage of continuous performance
evaluation have been introduced. Inventory and supply chain management
have been revolutionized. Corporate boundaries have been radically
transformed through mergers and acquisitions.
Economic policies have played a crucial role. Fiscal discipline
swung the annual budget balance by nearly $500 billion since 1993.
Surpluses have led to debt reduction, keeping interest rates relatively
low and encouraging investment. Public investments in people and
technologies have helped supply skills and knowledge. Measures to
expand markets at home and abroad have helped spur competition. Social
policies have helped the disadvantaged while maintaining incentives for
work and adaptation.
The fundamental rules of economics have not been repealed in the
New Economy. Policy remains crucial in ensuring non-inflationary
growth, preserving fiscal discipline, nurturing a vibrant private
sector, and creating an economy that works for all.
Chapter 2: Macroeconomic Policy and Performance
This chapter reviews macroeconomic developments during the past year and
offers the Administration's economic forecast. It also examines the
long-term fiscal outlook and the importance of preserving the fiscal
discipline that has been so critical to the expansion.
Another strong year. Economic growth moderated in the second half
of 2000. Nevertheless, real GDP grew at a 4.2 percent annual rate over
the first three quarters of 2000, following 4 consecutive years of
growth in excess of 4 percent. The unemployment rate remained between
3.9 and 4.1 percent through the first 11 months of 2000 without
generating excessive core inflation or inflationary expectations.
Strong productivity growth kept employers' labor costs per unit of
output from increasing, while real compensation per hour rose 1.6
percent between the third quarter of 1999 and the third quarter of 2000.
Effects of the New Economy. Despite the cooling off of the stock
market in 2000, evidence of the New Economy abounds. Reflecting past
growth in stock market wealth, consumer expenditures continued to grow
faster than disposable personal income, driving the personal saving rate
into negative territory. In an investment environment that remained
favorable even without further increases in stock prices, business
investment was strong, especially in information processing equipment
and software. U.S. exports grew robustly in 2000, but imports grew even
more rapidly, reflecting the strong growth in consumption and imported
capital equipment. The large trade and current account deficits can be
attributed to low rates of private saving out of current income and a
high rate of investment that is being financed partly by foreign saving
attracted by the extraordinary New Economy investment opportunities in
the United States.
The Administration forecast. Potential output is expected to
increase at a solid 3.8 percent annual rate in 2001 and 2002, about the
same as its growth from 1995 to 2000. The projected real GDP growth
rate of 3.2 percent per year during 2001 and 2002 is somewhat slower
than the rise in potential output; as a result, the unemployment rate is
projected to edge up 0.3 percentage point per year, unwinding any
tightness in labor and product markets. The current situation of low
core inflation, high productivity growth, and lean inventories points to
a continuation of the expansion -- though growth is definitely expected
to moderate, and more sharply in the short term than anticipated when
the forecast was made.
The importance of fiscal discipline. Over the past 8 years, a
combination of restrained growth in spending and increased revenues
associated with strong economic growth have created a situation in which
the Federal debt held by the public is on track to be eliminated around
the end of the decade, if fiscal discipline is maintained. However, the
course of the budget and the economy in the years ahead remains highly
uncertain, and pressures on the budget will mount as the effects of an
aging population on Social Security and Federal health care spending
begin to kick in. Used wisely, today's surpluses can help prepare for
this demographic challenge by encouraging national saving and investment
that will keep the economy on a robust growth path.
Chapter 3: The Creation and Diffusion of the New Economy
This chapter looks at the sources of performance improvements in plants,
firms, and industries. It traces these improvements to innovation in
information technology (IT), complementary changes in organizational
practices that enhance the productivity of firms using IT, and the
emergence of a more competitive business environment.
How much technology? The rapid growth of the IT sector was one of
the most remarkable features of the 1990s. The last decade saw a rapid
convergence of several key technologies -- processing power, data
storage and transmission, and software -- that translated recent
technological innovations into real performance gains. Domestic revenue
in the IT sector grew by 120 percent during the last decade, while
quality-adjusted prices for computers fell by over 80 percent. The
Internet has recently spawned thousands of new companies and created
billions of dollars in market value. Wireless telephone carriers alone
now employ over 150,000 people in the United States and generate 10
times the annual revenue they posted a decade ago.
Why is the U.S. awash in technology? Several factors in
combination have created a uniquely favorable climate for innovation and
entrepreneurship in the technology sector. Deregulation and open,
competitive markets have created a strong demand for new technologies
among firms. Entrepreneurial ventures have found ample funding. During
the 1980s, venture capital investment grew on average by 17 percent per
year. In the 1990s, the pace doubled. Total venture capital investment
jumped from $14.3 billion in all of 1998 to $54.5 billion in the first
three quarters of 2000. In addition, initial public offerings have
raised over $300 billion since 1993, more than twice the amount raised
in the previous 20 years, even after accounting for inflation. Research
and development spending -- which grew nearly 40 percent faster than the
economy as a whole from 1995 to 1999 -- continues to expand the base of
scientific and technical know-how, and strong legal protection for
intellectual property has rewarded innovators for their R&D efforts.
Why technology matters. The adoption of IT has led to performance
gains in many sectors of the economy. Manufacturing plants and service
firms are increasingly automated, while workers are given more flexible
job assignments and stronger incentive pay, leading to improved
performance. Supplier relationships are becoming more closely
integrated through use of computer systems that coordinate the various
aspects of production and warehousing, allowing firms to reduce
inventories dramatically. Firm boundaries are also shifting, as firms
outsource non-core activities and move toward flexible, collaborative
relationships like strategic alliances with suppliers, customers, and
The challenges ahead. The end result is an economy that has been
unusually vibrant, dynamic, and entrepreneurial, with high rates of
business formation -- and business failure. Innovation is by nature a
risky endeavor: equity values will continue to fluctuate, and the
economy as a whole will continue to experience the rise and fall of the
business cycle, making underlying productivity trends difficult to
discern. It is important that this dynamic, competitive framework be
retained. While government action is often needed to lay out the "rules
of the game," it is important that market participants be allowed to
innovate and experiment.
Chapter 4: The New Economy in a Global Context
This chapter describes how U.S. participation in the global economy has
been critical to the emergence of the New Economy. Improved technology
leads to increased international trade and investment, while deeper
integration into the world economy makes available larger markets and
lower-priced imports that spur innovation and benefit both consumers and
Technology and globalization. The effects of new technologies are
apparent in U.S. international trade. Over 70 percent of U.S. export
growth since 1996 has consisted of capital goods, including items such
as computers, semiconductors, and telecommunications equipment. Exports
of services that reflect the fruits of U.S. innovation, such as
royalties and business and financial services, have likewise grown
faster than other U.S. service exports. Meanwhile, imports -- of which
capital goods are the largest component -- have supported the investment
that underlies our superior economic performance. An example is in
computers, where imports account for more than 60 percent of U.S.
computer purchases, even while U.S. computer exports have grown
rapidly, supported by the availability of low-cost imported components.
This sort of globalization helps all Americans, as consumers gain from
increased competition and lower prices, while firms benefit from global
suppliers and larger export markets.
The role of policy. The Administration's international economic
policy has fostered globalization, thereby providing incentives for
competition and innovation. Openness has been spurred by more than 300
trade agreements, including historic agreements such as the North
America Free Trade Agreement, the Uruguay Round trade agreements,
permanent normal trade relations with China, a moratorium on tariffs on
e-commerce, and market-opening agreements in sectors central to the New
Economy such as telecommunications, information technology equipment,
and financial services. High-tech exports have boomed, with the value
of computer and semiconductor exports growing more than 50 percent
faster than overall exports since 1996. The opening of markets matters
as well for non-technology U.S. exports: for example, shipments of U.S.
oranges to China went from far less than 1 million kilograms in 1999 to
more than 10 million kilograms in the first 9 months of 2000.
Global challenges in the New Economy. Technology raises a number
of issues in the international context, including effects on workers,
the environment, and challenges such as money laundering and tax
evasion. The widened U.S. current account deficit can be related in
part to the effects of the New Economy in spurring U.S. productivity and
thus raising our output growth ahead of our major trading partners.
While annual U.S. labor productivity growth increased after 1995,
productivity growth actually slowed in the six other largest world
economies, including an average annual decline of more than 0.8
percentage point in Japan. Superior U.S. performance has been
reflected in capital inflows, as foreigners have sought to invest in the
United States. The current account deficit -- the counterpart of
capital inflows -- has thus supported rising investment, which has grown
by 4.6 percentage points as a share of GDP from 1992 to 2000. This
contrasts with the experience of 1980-88, when the declining current
account balance was associated with a nearly 1 percentage point decline
in the share of investment in GDP.
Chapter 5: Living in the New Economy
This chapter describes how the New Economy and Administration policies
combined to improve the quality of life for the vast majority of
Americans. A key theme is the continuing need for government
involvement to enable all to share in the benefits of the New Economy.
Good news from the American economy. As a result of a strong
expansion and innovative policies, real median household income reached
a record high ($40,816 in 1999) and the unemployment rate is lower than
it has been in 30 years. Some of the largest gains accrued to the least
well-off groups. African-American and Hispanic households had record
high income levels and record decreases in poverty. The AfricanAmerican
unemployment rate fell from 13.0 percent in 1993 to 7.6 percent
in the first 11 months of 2000. The Hispanic unemployment rate fell
from 10.7 percent to 5.7 percent.
Helping families help themselves. Since 1993 the number of people
on welfare has fallen by 8.3 million, or 59 percent, and many of those
leaving welfare are now working. The transition from welfare to work
has been made easier by policies that make work pay, such as the Earned
Income Tax Credit. Nearly 19 million 1999 tax returns claimed the EITC,
and the credit helped lift an estimated 4.1 million people out of
poverty in 1999. Increases in child care subsidies and efforts to help
custodial parents collect child support have also helped low-income
families. Other programs, such as the Empowerment Zone/Enterprise
Community initiative have targeted impoverished communities. Poverty
rates in central cities fell from 21.5 percent in 1993 to 16.4 percent
in 1999, and the unemployment rate fell from 8.2 percent to 5.3 percent.
Education in the New Economy. In elementary and secondary
education, the Federal government promotes new investments and
innovation, especially for lower-income schools. Federal funds pay for
one-fourth of all new computers in schools, and the Federal E-rate
program provides $2.25 billion per year to subsidize telecommunications
services in schools and libraries. These investments have contributed
to the near-tripling of Internet access in public schools since 1994.
Innovation and access in health care. Recent technological
innovations have enabled better diagnosis and treatment of many
diseases, but they contribute to increases in health expenditures.
Innovations in the health care delivery system, particularly the growth
of managed care, have helped slow the growth of expenditures, but the
system remains imperfect. Rising costs are particularly burdensome to
the 43 million Americans who lack health insurance coverage. Extending
coverage was an Administration priority, as exemplified by the 1997
creation of the State Children's Health Insurance Program.
Building livable communities. The strong economy has brought rapid
growth on the outskirts of many metropolitan areas, with an average of
2.3 million acres of land being developed each year. The chapter
describes efforts to discourage sprawl and encourage smart growth.