2009 economic report of the president

8/9/2019 2009 Economic Report of the President

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F S D, U.S. G P OI: .. P: (0) 800 F: (0) 0

M S: SSOP, W, DC 00000

ISBN: 980098

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ogh whTHE ANNUAL REPORT

of h

COUNCIL OF ECONOMIC ADVISERS

UNITED STATES GOVERNMENT PRINTING OFFICE

WASHINGTON : 009


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C O N T E N T S

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

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

CHAPTER . THE YEAR IN REVIEW AND THE YEARS AHEAD ...........

CHAPTER . HOUSING AND FINANCIAL MARETS .............................

CHAPTER . ENERGY AND THE ENVIRONMENT ................................

CHAPTER . THE BENEFITS OF OPEN TRADE ANDINVESTMENT POLICIES ..............................................................................

CHAPTER . TA POLICY ...........................................................................

CHAPTER . THE LONG-RUN CHALLENGES OF ENTITLEMENTSPENDING ......................................................................................................

CHAPTER . BALANCING PRIVATE AND PUBLIC ROLES INHEALTH CARE ...............................................................................................

CHAPTER 8. EDUCATION AND LABOR ..................................................

CHAPTER 9. ECONOMIC REGULATION .................................................

APPENDI A. REPORT TO THE PRESIDENT ON THE ACTIVITIESOF THE COUNCIL OF ECONOMIC ADVISERS DURING 008 .............

APPENDI B. STATISTICAL TABLES RELATING TO INCOME,EMPLOYMENT, AND PRODUCTION ........................................................

9

9

9

9

* For a detailed table of contents of the Councils Report, see page 11

Page

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ECONOMIC REPORT

OF THE PRESIDENT


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ECONOMIC REPORT OF THE PRESIDENT

To the Congress of the United States:

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C z I A C

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M 009 Annual Report of theCouncil of Economic Advisers. T C Report

A . F

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THE WHITE HOUSE

JANUARY 009


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THE ANNUAL REPORT

OF THE

COUNCIL OF ECONOMIC ADVISERS


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LETTER OF TRANSMITTAL

Council of Economic Advisers Washington, D.C., January 16, 2009Mr. President:

T C E A 009 AR E A 9 F E B G A 98.

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D B. MM


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overview ............................................................................................ 9

chapter 1. the year in review and the years ahead ..................... D 008 NT O ......................

C S S ................................................. R I ............................................................... 9B F I ..........................................................

B I ................................................................... G P ............................................................... E I ................................................................... E ............................................................................... P ................................................................................ P W ........................................................................ F M ....................................................................... 0

T LT O T 0 ........................................

G GDP L T ........................................ A P P E Y ......................................... C ...................................................................................... 8

chapter 2. housing and financial markets ................................... O C ........................................................................

T G S G ............................................................. T G C B H M ................... T C C .................................................................... 9

L R ST F ............................. M Cq C ....................................

B R L C B .............. T O C .............................................................. C M I R L B ............ T E C N E ............

P R C.......................................................... 9P R 00 ........................................................... 9

P R 008 ........................................................... 80R S F .................................................................................. 8L F ............................................................................. 8

D N R S F M .. 8U T P ............................................... 89

C O N T E N T S

P


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chapter 5. tax policy ....................................................................... I I T R .......................................................

L T R S E G .................... A R T R ................................................................. 9

L T B .................................................................... PG B T R ...................................................

R D T C I ................ A D A ........................................ I S B E .......................................... T C R D ...............................

I C ......................................................... F C ............................................................................

M T R P .................................................... F A M T ......................................... 8S T C .......................................................... 0

C ......................................................................................

chapter 6. the longrun challenges of entitlement spending.. B F E P ...............................

S S ............................................................................ M ....................................................................................

M .................................................................................... 8Mj E S O T ......................................... 80S S ............................................................................ 8M M .............................................................. 8

F T D E G O T ...................... 8D S .................................................................... 8I H C S P B ........................ 88T B L ....................................................................... 89

T F F S S ........................................... 89A F S ........................................................ 89F F B ........................................................... 90

T F F M M............................. 9C ...................................................................................... 9

chapter 7. balancing private and public roles in health care .. 9T H U.S. P ................................................. 98U.S. H C S ............................................................. 00

I E E H C ............. 0H I T................................................. 0C E .......................................................... 0


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P Q I T ............................. 0PP ................................................................... 0

U MB A I A HI ............................................................................... 0

P H I ..................................................................... 0P I ......................................................................... 0T U ...........................................................................

I P H ............................................................... S CB H C .......................... P P H E ................................... S R ................................................................... P G H I ....................................

C ......................................................................................

chapter . education and labor ..................................................... E B E ..................................................... 8P S E ...................................................

E S NCLB S ..................................................... NCLB C ......................................................................

H E ............................................................................ C P ..................................................................

F H E ........................................................ L I: I T, W F, PR ................................................................................... 8

R T R I .................................................. 9W F T ................................................. R I ...........................................................................

L A ................................................................................ I Iq ......................................................................

I R .................................................................. C ......................................................................................

chapter . economic regulation .................................................... 9T B ..............................................

N T P G C T .................................................................. T R E M ............

S P ..............................................................................

T R .................................................................................... C G R ........................................................ 9I A T N D ......................... R .............................................................................................. A ........................................................................................... 8C ...................................................................................... 9


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appendixesA. R P A C

E A D 008.......................................... B. S T R I, E,

P ....................................................................

list of tables. A E F ...................................... . SS C R GDP G,

90 ........................................................................... . Pj N B S 0008 EPA C

A R ..................................................................... . U.S. T I .................................................. 8

. C F U S (B U.S. D) .................................................................... 9

. E 008 E I I T R P 8 Y ...........................................................

. S C I T R, DA, E M T R SOECD C, 00 .......................................................

. OA, S, D I (OASDI)

B B, 9000 .................................. 8. U R H I C............. 8. P L F G .....................................

list of charts. O P: W T I .................................... . R C R W .................................... 8. FHFA S&P/CS H P I .............. 0. N C S N B T ......

. O P H N B S .............. . C P I ..................................................... 8. G D P G D P

P I ........................................................................ 98. C B S ...................................................... 9. R R R .................................... . H P O Eq R ......................... . P Sz M S L

M M ................................................................. 8. SF H S ............................................... 9. P M 90 D D P

F ....................................................................... 0. D B T L S ................... . T TED S ..................................................................


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. C C ......................................................... 88. C P ................................................................ 89. C J M R.............................. 8. U.S. W P G, 9900 ........................... 0. A F LD V U.S. F ........ 0. E L O T ................................................ . C A A Rq N E G

U, 000 ................................................................ 0. G G I U.S. E, 99000 ..... . G CO C ................................................. . C N E R U.S. GDP G ..... 0. U.S. FTA P, 000009 ............................................ . U.S. H F A, 00 (US$ ) ................. 8. F H U.S. A, 00 (US$ ) ................. 8. U.S. O S D A

I, 00000 ......................................................... . R P D I ........................................... 8. F I T R Y ....................................... . C (F S) C I T R . . N T Sj A M

T ....................................................................................... 9

. E P GDP ....................................... 8. C S F P H C

E ........................................................................ 8. M E E E

G, 00 ........................................................................ 8. T P A O P

T A P ........................................................ 88. L E B ....................................................... 98

. D A A G A N C C, 00 ................................. 99

. D N H E T S, 00 ........................................................................ 0

. P D C M B 00 00 .....................................................................

8. A A R E E A ..... 98. G E A, C I,

L P T .............................................. 08. E D C ......................................... 8. R H E R T C C

T ............................................................................. 09. HS I L U S T


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C, 99900 ....................................................... 9. U.S. T C, 9900................................................. 89. T R I (TRI) D T

R, 0000 ................................................................. 9. H E R S, 00 ................

list of boxes. T E S A 008 ................................... . D M H P ..................................... 0. A M P G ......................... . D S F T .................................. . S S ............................................................................ 8. F S .....................................................................

. S W F....................................................... 0. T E C E S F

I U S ........................................ . E H C I ............................. . D T S E G .......................... . T C C .......................................................... . U Cq S S ....................... 8. LT C M ............................................ 8

. H S A: I B D ...... 08. T E C A S L A 008.................................................................................

8. T Aj A ................................................ 9. T D N C L........................................................... 9. T R I R I ........................


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F U.S , GDP 008 . T B C D C N B E R D 00, 008. F j j . T , . C 008 A . T C :


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RealGDPlikelydeclinedoverthefourquartersof2008,endinga6-year , q.

Financialdistress,whichfirstbecameevidentinmid-2007inthemarket (MBS), 008 . I j S 008, WW II .

Payroll jobs declined during 2008, having peaked in December of00. E 8,000 8 008, 0,000 . T A . N. I .

Energy prices dominated the movement of overall inflation in the (CPI), J, . C ( ) . 00 .9

008. F .

Nominal hourly compensation increased 2.8 percent during the S 008 ( ), , . I , , . N

. 00.

An economic stimulus was proposed by the President in January and C F, z $ 0 q . T GDP q , .

TheAdministrationsforecastcallsforrealGDPtocontinuetofallin 009, j j q 008 q 009. A T j


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009. A 009 , . T . 009. T 00 j , 0.

C : H F M

I 008, 00 .T q G . C , q, G , . T C : Therootsofthecurrentglobalfinancialcrisisbeganinthelate1990s.

A ( ) US z , . T , . W (, , , ) U S , , q .

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Considerableinnovationsinhousingfinancethegrowthofsubprime . T ,

, . Thedecliningvalueofmortgage-relatedassetshashadadisproportionate

, , . T (


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Vulnerableinstitutionsfailed,andothersnearlyfailed.Theremaining , . T , q , , .

TheU.S.Governmenthasundertakenahistoriceffort toaddress the z . T, j , q, , . T G ; q ; , , ; .

Looking forward,the global financial crisis presents several additional U.S. G. A

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BecauseofinnovativeregulationspromulgatedunderthisAdministration, q . T , , , .

Despite widespread support for using market-based approaches to , z .

Thereisanincreasingneedtoreassesshowwellexistinglawscanaddress . F , , (GHG) .

SubstantialreductionsinglobalGHGemissionswillrequireparticipation ( ).

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, . T U S, , U S .T C : OpennesstotradeandinvestmenthasboostedU.S.economicgrowth.

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ThenumberofU.S.freetradeagreementshasincreasedgreatlyduring A, U.S. .


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PortfolioanddirectinvestmentsintotheUnitedStatesreachedhistoric , , , U.S. U.S. .

TheUnitedStateshasmaintainedanopeninvestmentpolicy,facilitating U S .

U.S.developmentand tradeinitiatives,aswellasU.S.engagementin W T Oz W B, .

Continued commitment to open economic policies throughout the U S .

C : T P

S 8 , q , . L ; , , . T j . T q U.S. . A U S j U.S.

. T C : Taxesalterindividualandbusinessincentivesandthushavethepoten

. T A ; j 8 .

Taxreductionsoverthepast8yearshaveimprovedincentivestowork,, .

Globally, nations compete for businesses and the associated jobs; the

U S .


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Futuregoalsshouldincludepermanentlyextendingthetaxreliefofthe 8 A M T.

C : T LR C E S

F , S S, M, M. T , F , j , j

. A j j . T j j . T C : Federal entitlement spending is on an unsustainable path. Spending

j S S, M, M j

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Theagingpopulationisamajorcauseoftheexpectedincrease,especially S S, , , . C, ; 00, ; , 00, .

Thepay-as-you-gofinancingstructureofSocialSecurity,coupledwith , z , .

Overthepast30years,realpercapitahealthcarespendinghasgrown (GDP) .R M , z , .

Long-term care expenditures for low-income elderly and disabled M .T U S


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U S. T U.S. A q, , . T C : Healthcarespendingisexpectedtogrowrapidlyoverthenextseveral

, ,

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, , .

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. M .

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8 | E R P

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A . A q q . A j q U S. T U S . T :

Educationbenefitsindividualsthroughhigherearnings,anditbenefits . A , N C LB A, , .

Access tohigher educationwasmaintained throughanexpandedPellG Fz .

Despitea smalldecline in realmedianhousehold income,whichhad A , , 8 . M 00. A, .

Income inequality and immigration reform must still be addressed.S . R .


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T G 8 . T : Regulationisappropriatewhen,andonlywhen,thereisanimportant

G.F , A , . C, A q .

WhentheGovernmentintervenestoaddressmarketfailures,it should .T A .I , A .

TheAdministrationhasendeavoredtoensurethat,whenthegovernment , . W 9/, A F , A . B ,

A .


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C H A P T E R

T Y R Y A

F U.S , GDP 008 . P j J, . T , , B CD C N B E R D 00,

008. T U.S. 00 00 q 008. H, , q . T j

j S. T , , : ( E S A 008, F); ( H E R A 008 J); ( E E Sz A 008 O); F A 00

z D 008; T, F R, F D I C(FDIC), q .

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S. A S L B ( ), AIG ( ), WM ( ), , .

I , (CPI) . A . I , U S ( GDP ) .

T 008 A . T : Real GDP likely declined over the four quarters of 2008, ending a

, q.

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Payroll jobs declined during 2008, having peaked in December of00. E 8,000 8 008 0,000

. T A . N. I .

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. 00 .9 008. F .

Nominal hourly compensation increased 2.8 percent during the S 008 ( ), ,


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. I , , . N . 00.

AneconomicstimuluspackagewasproposedbythePresidentinJanuary C F, z $ 0 q . T GDP q , .

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j , 0.

D 008 NT O

D q 008, 00, , 0. . B q 008, , j .

C S SR 008

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0. ) 9 , ( ) . O ( , ) . C q. , F ( B ), , 008.

Box 1-1: The Economic Stimulus Act of 2008

Policymakers moved quickly to address the slowing economy early

in the year. The Federal Reserve cut the target Federal funds rate by

1 percentage points in January (following 1 percentage point of earlier

cuts from August through December of 2007). The economic effects of

monetary policy emerge more gradually then those of tax rebates, and so

some fiscal stimulus from rebates was judged to be useful in supporting

the economy in the short term. The Congress passed and the President

signed the Economic Stimulus Act of 2008 in early February, only a few

weeks after the President proposed it. The Act was designed to placemoney in the hands of those individuals and households who were most

likely to spend it. The amount to be dispensed was about $113 billion, or

about 0.8 percent of GDP. Most of the money was dispensed between

late April and early July, with the bulk of the disbursements ($78 billion)

in the second quarter.

Under this Act, the Treasury mailed checks ranging between $300 and

$600 to taxpayers filing as individuals. Individuals who earned $3,000

(the minimum amount under this Act) received a $300 check; those who

earned between $3,000 and $75,000 received a check for up to $600.The formula phased out the payments at a rate of $50 for every $1000

of income in excess of $75,000. (The figures for those filing as married

couples were doubled.) Social Security and veterans payments were

counted as earned income. The Act also included an allowance of $300

for each child (under the age of 17 as of the end of 2007). Those who did

not qualify for payments based on their 2007 income could qualify based

on their 2008 income, with the benefit to be paid in early 2009.

Some academic studies, however, suggest that individuals would

realize that these checks were a one-time event and that they would

choose to spend this windfall over many years. Other studies suggest

that individuals, especially those who were credit-constrained, would

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spend most of the money as it came in. A macroeconomic model

simulated the expected boost to the profile of real GDP on the estimate

that about 70 percent of the funds would be considered temporaryincome (to be spent over a long time) and the remaining funds would be

regarded as immediately spendable. The profile from that simulation,

which also showed the boost from bonus depreciation (discussed below),

is shown in chart 1-1. The model simulation suggests a 2 percentage

point boost to the annual rate of real GDP growth in the second quarter.

Because many of the rebate checks were delivered late in the second

quarter, however, some of the second-quarter stimulus shown in the

chart was considered likely to spill over into the third quarter.

The Act also authorized businesses to deduct 50 percent of the cost

of investment equipment installed during 2008 from their 2008 taxes,

a policy that is often referred to as bonus depreciation. The Act also

expanded the limits for small business expensing, a policy that was

expected to boost real GDP growth by about 0.2 percentage point during

2008. Bonus depreciation is valuable only to firms with positive profits,


Box 1-1 continued


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Energy ExpendituresR ( , j )

( ) 00 00, . T 00 ,

. A q 008, .

O $ J W T I (WTI) ( ), . T ( C ) . M C. O , Bz, C, C, S, S U N S U.S. M . B D WTI $ .

B U.S. . , $0 $ .H, q 000 ( WTI $ $ ) ( 9 ). T q . T $ J

however, and so the fourth-quarter plunge in output will likely reduce

the ability of firms to take advantage of this program.

Whether or not the fiscal stimulus produced the intended effect cannotbe determined from observed macroeconomic data alone because the

path that GDP would have taken without the stimulus remains unknown.

However, a recent study that examined the nondurable purchases of a

large sample of consumers found that the spending of individuals rose

at the time rebate checks were received. The study concluded that the

stimulus checks had a significant effect on purchases and that these

effects were more pronounced among low-income consumers.

Box 1-1 continued


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00 J 008 $ . T J D, .

Wealth Effects on Consumption and SavingT , ,

008. C , C . T ( ). T . H q 00, . . H q; q 008 ( ), .0 . T O N, ,


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0. q. A , . .

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Projected Consumer SpendingC (

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z . A 0 98 ( , 990). T q . , , q . T, q 008 009. A , , j , . I , 00.

R IR 008.Mj , 0,000 N, . q 00. T 0. GDP,

00 00.H q 00,

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, . (S B ).F

009, . TA , 0 .8 . T , ,

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Box 1-2: Different Measures of House Prices

Both the FHFA purchase-only index and the S&P/Case-Shiller index

have merit and use similar methods, but they cover different types

of mortgages and have different regional coverage. As a result, each

may have advantages in different contexts. Both are based on a meth-

odology of observing pairs of sales of the same house over a span of

years. The FHFA index is limited to homes purchased with conforming

mortgages (that is, mortgages that conform to the maximum size and

minimum downpayment standards set by Fannie Mae or Freddie Mac).

In contrast, the S&P/Case-Shiller index collects data from a sample of

homes that includes nonconforming as well as conforming mortgages.

Each house gets an equal weight in the FHFA index, while more expen-

sive houses are assigned larger weights in the S&P/Case-Shiller index.

Of the two indexes, the FHFA index has the broadest national geographic

distribution, while the Case-Shiller index has no data for 13 States and

incomplete data for another 29 States.



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B F ID q 008, q

. , .8

00. G (. ), q (. ), q ( ), q .0 . I q ( ) , q, .

I , q 008. T 008 , 00 00. N .

The contrasting path of house prices as measured by these two indexes

during the past decade is informative. By relying on conforming mort-

gages only, the FHFA index may provide a more stable picture of houseprices during a period when the mix of mortgages changed toward the

nonconforming types (subprime and jumbo, for example) and then back

again. (This may be relevant if the type of mortgage is correlated with

the price of the house.) On the other hand, the S&P/Case-Shiller index

better illustrates the price path of all houses regardless of mortgage type

and mortgage size. The contrast between the two indexes suggests that

the runup in housing prices may have been larger for homes purchased

with nonconforming mortgages and perhaps with jumbo mortgages.

As the share of nonconforming mortgages fell sharply over the past2 years, the two indexes are likely relying on more similar samples

in 2008, and as a result, the recent larger decline in the S&P/Case-

Shiller index may partly reflect a falling back to earth after having been

temporarily elevated by higher prices for homes purchased with noncon-

forming mortgages. One study suggests that the inclusion of subprime

mortgages in the S&P/Case-Shiller index accounts for a substantial share

of the indexs deeper decline. The larger increase and subsequently

larger decline in the S&P/Case-Shiller index may also reflect larger price

movements among more expensive homes.

Box 1-2 continued


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A 008. T ( , , ) q 00 $.9 ( C ); $. q 008.D , ( $00 , C ) $00 ( C ).T 00 00. H, q 008 j $0, .

B j 009, j .I . T , 008, 009 . L, GDP 009 00 . I , j GDP.


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R S . q 008, . 00.

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B , 008 L A, q. TE U (EU) j U.S.

, . B ,C U.S. , .M 0 ; J, ; C, .

R .9 q 008; 00. T , ,

. D , . O , q. N


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C |

(. q q 008), .

T ( A) .0 GDP q 008, 00 . . T , , .

ET 008,

. T j : j , 8,000 J A, 0,000 S, O, N. N .9 j . T . , . . I 0,000 D, 00

0,000 . J 008

, , . A , 0 j 008. C ,

. T , , j .R . O , 0,000 j N.

C , , . T N, ; 0.9

, .8 , . , .9 . B , AA .


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| E R P

C, . T C . , H . , AA . . B , j . . , . . . T 0.0 N 8. 00. T ( j ) . .

T A j q 009, j . A 00, j ,000 j . I , , . T A j 008 . 009 , 0, .

P

N . 99 ( C ). T . , . ( , 99) . D B . C j, j 0. . T q j

.

P WH 008,

. A (CPI), . J, . 00 (C ). T

. B N, , CPI . . T CPI ( ) , . q, .0 N.


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C |

Box 1-3: Alternate Measures of Productivity Growth

Productivity growth can be projected by extrapolating its behavior

over the recent past. But using which measure? According to the official

index, which measures output from the product-side (spending) compo-nents of GDP, productivity growth picked up slightly from the 19952001

period (2.4 percent) to the 200108 period (2.6 percent at an annual rate),

as shown in the following table. In contrast, an alternative measure of

nonfarm output, derived from the income side of the national income

and product accounts, shows a deceleration in productivity between

the two periods to a 2.1 percent annual rate of increase over the period

200108. The income- and product-side measures of GDP differ by

measurement error only, and the truth is likely to be somewhere in

between. Both measures show a 2.5 percent annual average growth rateover the entire 19952008 interval.



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8 | E R P

Productivity Growth in the Nonfarm Busines Sector:

Income- and Supply-Side Measures

IntervalAverage Annual Percent Change

Product-Side (oicial) Income-Side

1995:Q2 to 2001:Q1 .............................................. 2.4% 3.1%

2001:Q1 to 2008:Q3 .............................................. 2.6% 2.1%

1995:Q2 to 2008:Q3 .............................................. 2.5% 2.5%

Sources: Department o Commerce (Bureau o Economic Analysis), Department o Labor (Bureau o Labor Statistics),income-side calculations by the Council o Economic Advisers.

Box 1-3 continued


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0 | E R P

F . D 0 008, . 00. T , 008, .

G . P . 9 008, . 00.S . G . , 0. 00, .

D (, CPI, GDP ), . O ( RU M ) .

00 , . D.L . . .

F MT W 000 ( ) 9

008, S P (S&P) 00 ( 00

) . T . T W S , 0 N 0, N D. TS&P 008.

Y 0 T 00 .0 0 008 N D. T

q . R F R .


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T A F ( ) N 0, . T z. W , Aj 9 T .9 0 . A , ( , ) 9 T .

T 0 T N 0 .8 .T q . T A 0 , . 9 T 0. M 0 T 0 . A , 0 , . 0 .

O

0 (C 8). T A 00. R q 0 A00. R BAA 00 , (j) .

F . T ( L , LIBOR) T

S. F , 8 j S O N, . T FR .

O q F ( . A 00

0 0. D 008) . T j (


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C |

, (GSE). T F R T .

T LT O T 0

A , D 00, GDP 008. R GDP q.A , A j 008, GDP , q. T j 009, 009 . T , q GDP q GDP, j W W II . T q 008, 009( T ). R GDP, j . 009. T . O CPI j . 009 00, .0 CPI N. P j 009 00. T 009 GDP .

D , ( C 9). M, q . D , GDP , A 00 0. T

00 0 j009 , , 0.


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| E R P

Table .Administration Economic Forecast1

Year NominalGDP

Real GDP

(chain-type)

GDP price

index(chain-type)

Consumer

priceindex(CPI-U)

Uemploy-

mentrate(percent)

Interestrate,

91-dayTreasurybills2

(percent)

Interestrate,

10-yearTreasurynotes

(percent)

Nonarmpayrollemploy-

ment

(averagemonthlychange,

Q4-to-Q4,thou-

sands3

Percent change, Q4-to-Q4 Level, calendar year

2007 (actual)........... 4.9 2.3 2.6 4.0 4.6 4.4 4.6 104

2008........................ 2.4 -0.2 2.5 2.8 5.7 1.4 3.8 -114

2009........................ 2.2 0.6 1.7 1.7 7.7 0.7 4.2 -235

2010........................ 6.6 5.0 1.5 1.7 6.9 2.0 4.6 222

2011........................ 6.5 5.0 1.5 1.8 5.8 3.5 4.9 269

2012........................ 5.1 3.4 1.6 1.9 5.0 3.9 5.1 2612013........................ 4.5 2.7 1.7 2.0 5.0 3.9 5.1 121

2014........................ 4.5 2.7 1.8 2.1 5.0 3.9 5.1 115

1 Based on data available as o November 10, 2008.2 Secondary market discount basis.3 The gures do not refect the upcoming BLS benchmark which is expected to reduce 2007 and 2008 job growth by a

cumulative 21,000 jobs.

Sources: Council o Economic Advisers, Department o Commerce (Bureau o Economic Analysis and Economics andStatistics Administration), Department o Labor (Bureau o Labor Statistics), Department o the Treasury, and Oce oManagement and Budget.


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G GDP L TT A j U.S.

. .(Potential realGDP

.) T GDP j .

O , GDP j .9 ( T ), . . RGDP 0 0, . , j .

T , , , , , . T A GDP T .

O , ( ) j .0 , C B

j. T ( ), 0. 8 , (0. ) j . T j q ( 9 9) . F, 9 008. O ( 00 ) , j

( ).T (), zz GDP 00, j (0. ) j . T ( 8) j , 0 . T j j . P ( 0) j . , ( , ). T GDP ( ) .


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| E R P

A P P E Y

T 8 . T , , . A 00 00, j GDP . I 008, , , , . I

q GDP . . , .

T 000: , GDP q 000 . I , F R J 00. T j

Table .Supply-Side Components of Real GDP Growth, 1953-2014[A ]

Item

1953 Q2to

1973 Q4

1973 Q4to

1995 Q2

1995 Q2to

2001 Q1

2001 Q1to

2008 Q3

2008 Q3to

2014 Q4

1) Civilian noninstitutional population aged 16+1..................... 1.6 1.4 1.2 1.2 1.02) PLUS: Civilian labor orce participation rate............................ 0.2 0.4 0.1 -0.2 -0.3

3) EQUALS: Civilian labor orce2 ............................................ 1.8 1.8 1.4 1.0 0.84) PLUS: Civilian employment rate .............................................. -0.1 0.0 0.3 -0.2 0.2

5) EQUALS: Civilian employment2 .......................................... 1.7 1.8 1.6 0.7 0.96) PLUS: Nonarm business employment as

a share o civilian employment2,3............................. -0.1 0.1 0.4 -0.6 -0.1

7) EQUALS: Nonarm business employment4........................... 1.6 1.9 2.0 0.1 0.88) PLUS: average weekly hours (nonarm business) .................... -0.3 -0.3 -0.2 -0.3 0.1

9) EQUALS: Hours o all persons (nonarm business)4............... 1.3 1.6 1.9 -0.1 0.910) PLUS: Output per hour (productivity, nonarm business)4....... 2.5 1.5 2.4 2.6 2.4

11) EQUALS: Nonarm business output4 ................................... 3.8 3.1 4.3 2.5 3.312) PLUS: Ratio o real GDP to nonarm business output5........... -0.2 -0.2 -0.5 -0.2 -0.4

13) EQUALS: Real GDP ................................................................... 3.6 2.8 3.8 2.3 2.9

1Adjusted by CEA to smooth discontinuities in the population series since 1990.2BLS research series adjusted to smooth irregularities in the population series since 1990.3Line 6 translates the civilian employment growth rate into the nonarm business employment growth rate.4Nonarm employment, workweek, productivity, and output sourced rom the BLS productivity and cost database.5Line 12 translates nonarm business output back into output or all sectors (GDP), which includes the output

o arms and general government.

Note: 1953 Q2, 1973 Q4, and 2001 Q1 are NBER business-cycle peaks.

Detail may not add to total because o rounding.

Sources: Council o Economic Advisers, Department o Commerce (Bureau o Economic Analysis)

and Department o Labor (Bureau o Labor Statistics).


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M 00. T A C EGTRRA (T E G T R R A 00) $ 00 . T 00 , . L , . T 00 S , z . A , , 00 W W II ( GDP q 0. ), q .

T . T , A C JCWAA ( J C W A A), 0 q , JGTRRA( J G T R R A), 0

. JGTRRA .T A . T U.S. , U S, . I U.S. .

L 00, ,

. T , q ,, , . W , . A 00, . H , N 008.

D 00 00,

. T , , . T , 00, .


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8 | E R P

A 008 , GDP . T q S O .

U 008, , 00 , S , z , 00 008 . T 00. E , , GDP q 00.

T , W W II . T GDP . 00 q 00, 9 00.

C

T 008, 008 . C q, S, . B S D, 009, . T S D

009, . T G F R q . T T, E E Sz A, q ( C ).

T , 009.


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B , j GDP . , (.0 ) ( . CPI). E j , . G ( , , , ), . L Report .


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0 | E R P


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C H A P T E R

H F M

I 008, 00 .T , , , . T .

M , , . I , , , q. A , . B j ,

.

T , , , .C z, . TF R A U.S. ; F R j

q , A , E E Sz A 008 (EESA). T .

T : Therootsofthecurrentglobalfinancialcrisisbeganinthelate1990s.

A ( ) U

S z , . T , . W (, , ,


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| E R P

) U S , , q .

Theinfluxofinexpensivecapitalhelpedfinanceahousingboom.House , . E, .

Considerableinnovationsinhousingfinancethegrowthofsubprime . T , , .

Thedecliningvalueofmortgage-relatedassetshashadadisproportionate , , . T ( ) , , ( U S ) .

Vulnerableinstitutionsfailed,andothersnearlyfailed.Theremaining ,

. T , q , , .

TheU.S.Governmenthas undertakenahistoriceffort toaddress the z . T, j , q, ,

. T G ; q ; , , ; .

Looking forward,the global financial crisis presentsseveral additional U.S. G. A

z , , (, )F M F M.


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| E R P

, . . C AAA (q) BAA .(S C 9 C .) W , q. D , , . T , , U S q .

T G C B H M

T , , . A U.S. . D , , . A S&P/CS N I, 00, 00, 00, 00 . T F

H F A (FHFA) , ( , j ), 9 00 9 00 (C ).

M , , . T C . A

000, ( ) . T 98 999, , , .

I , , . A

, .D .


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Excesses in the Primary Mortgage MarketO , , primary mortgage market. S , . F , subprimelending, , ,

.S .

T , . F , . U

, , . I , q


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| E R P

, . F, ; , q ( ) .

P . F , j ( ARM), , , . M ARM z, . D , ARM .

Excesses in the Market for Mortgage-Related AssetsO . T

z, (GSE) F M F M ,

( ) .

F , . Sz mortgage-backed securities(MBS) MBS . (B .) L

MBS MBS, . Sz . B , .

L z , , z z . I , ,

. I , , MBS , , . B , . M, . B


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C |

Box 2-1: Definitions of Select Financial Terms

Asset-backed security (ABS): A security whose cash flows are backed

by the principal and interest payments of a collection of loans, such as

credit cards, automobile loans, and student loans.Auction rate security (ARS): A long-term debt instrument whose

interest rate is reset periodically (typically every 7, 28, or 35 days)

through an auction process.

Collateralized mortgage obligation (CMO): A complex mortgage-backed

security in which cash flows from the mortgage payments are split into

tranches (slices), and each tranche is sold as a separate security.

Commercial mortgage-backed security (CMBS): A mortgage-backed

security backed by mortgages on commercial property.

Commercial paper (CP): Short-term loans issued by corporations.

CP terms range from 1 day (overnight) to 270 days. Asset-backed

commercial paper (ABCP) is commercial paper that is secured by assets.

Commercial paper can be issued by financial institutions as well as non-

financial institutions.

Government-sponsored enterprise mortgage-backed security (GSE

MBS): A mortgage-backed security that includes a credit guarantee from

a government-sponsored enterprise (Fannie Mae or Freddie Mac).

London interbank offered rate (LIBOR): The interest rate at whichbanks offer to lend unsecured funds to other banks. The 3-month LIBOR,

the rate at which banks offer to lend for a 3-month term, is a key refer-

ence rate used for many financial contracts.

Mortgage-backed security (MBS): security whose cash flows are

backed by the principal and interest payments of a collection of mort-

gage loans.

Mortgage-related asset: Any original mortgage loan or MBS.

Non-agency mortgage-backed security (non-agency MBS): A mort-gage-backed security that does not include a credit guarantee from a

government agency or government-sponsored enterprise. Also known

as private-label MBS.

Residential mortgage-backed security (RMBS): A mortgage-backed

security backed by mortgages on residential property.

Secured debt: A loan that is backed by collateral. If the borrower

defaults on repayment, the lender can seize the collateral, sell it, and use

the proceeds to repay the debt.

TED spread: The difference between the 3-month LIBOR and the3-month Treasury Bill rate, a commonly used indicator of financial

market distress.

Unsecured debt: A loan that is not backed by collateral. The loan is

supported only by the borrowers creditworthiness.


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8 | E R P

MBS , . F , , , . T , .

C z ( MBS) . D , . W , MBS, z , .

M , z . A collateralized mortgageobligation (CMO), , (), . T ( ) (q).S


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C | 9

j . T CMO .

A , , .

T C CE,

, . N,

00, q 00, FHFA . I , . T , . T , 00, j (C ).


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0 | E R P

A , q q . S . S , z . I , , . I , z 00, 0 , . B , z 00, 0 .

C q ( 90 ) 00. R (FRM) j (ARM) . Dq ; , q M B A

99.


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C |

L , , .L ( T), .I , 00. W , , , , . D , ( ) . A , .

M . D GSE, GSE. I . P . A 008, $ .

L R ST FT

( , ) . T : leverage short-term funding. L

(), (q), . S .

B , j . T $00 $9 , $ q. I , . S

j . (C , , .)I , j ,

q ( ) q. P ,


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| E R P

, ; , , .D , q , . F , (ARS) (SIV), . B, q, , .

T B S M 008 , , . I 00,B S . B S . I , B S J 00 .

D M 0, 008, q B S, . A , BS , B S q

. I , . H, q , B S ( ) . A ,B S .

O F, M , 008, F R B N Y(FRBNY) B S. H,

FRBNY B S , BS , . O S, M , 008, B S q JP M C, FRBNY.

M Cq C

T W S B S, , , . T


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C |

A , 0() , .T , , . M j.

B R L C B A ,

. M . T FR S L O S B L P

. A C , 00. T , , .


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| E R P

S 00. T , , , .

T O CW 9 S 008,

. O S, S , 008, FH F A (FHFA) FM F M FHFA

F M F M . C FHFA F M F M , , , , , . I FHFA, T D

j $00 ( q ) , F M F M (GSE MBS) , GSE MBS .

O , S, S , 008, L B , , M

L, q B A. B ( ) .

T , T, S , 008, F R ( ) j q A IG (AIG). AIG credit default swap (CDS) MBS.

A derivative . T CDS , MBS, . T CDS ( )


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C |

. I , CDS . E, CDS , CDS .

I AIG, CDS CDS MBS . C AIG CDS qAIG MBS. T AIG , AIG q . T CDS AIG .

C M I R L BF , q.

T q . F ( q), capital markets, , , , ,

S . F , money market. A money market mutual funds( ), . Commercial paper (CP) , (ABCP), . O T repurchase agreements( ),

. A , / .

A T , . F , , q . A C , TED spread

S 008 . T TED London Interbank Offered Rate(LIBOR) T B . LIBOR . T TED .


83/418

| E R P

W , , . C , ABCP , z . L , . I q. W ,

. S ( ) , .

M . P $.00 (NAV). W q

, . I S008, L B L B . O,


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C |

. H, , q . I , $.00 NAV .

T E C NF ET . I

().

The Effect of the Crisis on Households

T , ( C ), , , .

I , . A C , 00.

A S 008, . F , 0 0. O 008 S .8 . C .

C R/U M C B ,

. I , O 008 C B .

The Effect of the Crisis on BusinessesT

, . A ,

q .A , , , , 008.


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8 | E R P

H, . A , . I , , . T

(ABS). L , , . S 008, ABS . T .

B . A

, 008.


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C | 9

P R C

T . T ,

, G q . W G, q .

P R 00 A 00,

A F R q z . I 00, , FR j q : LoweringthetargetfortheFederalFundsrate(theinterestrateatwhich

U.S. )

S 00 D 00 .

ExpandingtheFederalReserveslendingthroughthediscountwindow( ) 90 , T A F (TAF) q . L q.

Establishing reciprocal currency arrangements (swap lines)with theE C B (ECB) S N B (SNB) q j.

T A : In August 2007, theAdministration launched a newprogram at the

F H A (FHA) FHASecure. T FHA

( ) q . T FHASecure j , q, FHA .


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80 | E R P

In August 2007, theAdministration repeated its call forCongress to GSE F M F M.C H E R A 008 (HERA) J 008 GSE.

InOctober2007,HOPENOW,aprivatesectorallianceofmortgage , , , j .

P R 008A 008, A F R , , .

Intervention in Troubled Institutions

T G , . F , F M F M , . E .

Injecting LiquidityT G j q . T FD I C (FDIC) ; , FDIC . A , .

T F R j

q . T F R T A F (TAF).T q , F R . M


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F R B NY . I , F R P DC F (PDCF) , z F R. O 008, F R F F . M, , , , .

Protecting Consumers, Businesses, and Investors

T G ,, . T FDIC , , $00,000 $0,000 . TFDIC , . T T . T S E C

, , , (B ). T F .

Box 2-2: Short Sales

A short sale involves the sale of a stock by an investor who doesnot own it. To deliver the stock to the purchaser, the short seller must

borrow the stock from a broker or from another investor. Later, the

short seller closes out the position by purchasing the stock on the open

market. Short sales are profitable if the stock price declines, because the

short seller can buy the stock at the lower price. But if the price rises,

the short seller will need to buy the stock at a higher price and, therefore,

incur a loss.

Short sales are a part of many useful investment and trading strate-

gies. Short sales are valuable to an investor who believes that the stockprice will fall because the stock is overvalued. In this case, the short sale

is used in the same way that an investor who believes that a security

is currently undervalued will buy the stock. Short sales can be used



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Stabilizing the Housing MarketT A

. T FHA . B FHASecure A 00 D 008, FHA 0,000 , , FHA . I , FHA

by market-makers in response to buyer demand for a stock that they

do not currently own. Market-makers provide liquidity to other market

participants by quoting buying prices (bids) and selling prices (asks) onstocks. They hope to profit on the difference, or spread, between the bid

and ask prices, rather than on any price movement. Thus, short sales

provide the market with an important benefitliquidity. Short sales also

provide the market with a second benefitpricing efficiencybecause

efficient markets are characterized by prices that fully reflect both buying

and selling interests.

Although short selling serves useful market purposes, in some rare

instances it may be used to illegally manipulate stock prices (just as

stock purchases may, in rare instances, be used to manipulate stock

prices). One example is the bear raid in which a trader engages in

heavy short selling in an attempt to drive down prices in the hope of trig-

gering a cascade of sell orders from others that depresses prices further.

The Securities and Exchange Commission (SEC), the primary overseer

of U.S. securities markets, has promulgated many rules to prevent

stock price manipulation and has aggressively pursued abusive short-

selling practices that involve insider trading and other federal securities

law violations.

At the same time, the SEC has adopted a balanced approach in pursuit

of its mission to protect investors; maintain fair, orderly, and efficient

markets; and facilitate capital formation. For example, the SEC has

suspended short sale price restriction rules (for example, the uptick rule,

which requires that a short sale must occur at a price above the most

recent different transaction price) after carefully considering the solid

empirical evidence based on research conducted by the SEC and inde-

pendent academic economists that shows that the purported benefits

of the rules no longer justify the costs. Also, the SEC has enacted rulesthat govern short sales immediately before stock offerings in an effort to

maintain the integrity of the capital-raising process.

Box 2-2 continued


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FHA . I008, FHA 00,000 .T D H U D (HUD) N Sz P S 008, S q .

I S 008, T GSE MBS , z H E R A 008 (HERA). M , F R MBS F M, F M, G M ( HUD) .

I O 008, . T HOPE H , z HERA, FHA. T , , , q . S

. I , q .U, .

T HOPE NOW A N 008

. T S M P . U , , , . T 90 HOPE NOW F M F M. T SM P .

I N 008, HUD R E S P A (RESPA) . I RESPA , J 00, G F E (GFE)


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8 | E R P

, , , , , . T , .

International CooperationT U S

. U.S. G F S F, B C B S, C P S S, IOz S C. S , A F R . F , O 008, FR , . I , 00, U S U.S. q E swap facilities ( swap lines) E ,

B E, E C B, S NB, . A U.S. F R . E E . E F R

. S O 008, FR , $0 Bz, M, S, S .

O N , 008, U S j . T

. T , U S F S F (FSF) 00. (F FSF, L F .)


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Recapitalizing the Financial SectorT G

z . I O 008, C , E E Sz A

008 (EESA), z T D $00 T A R P (TARP) z . U , T D $0 ( ) F C P P (CPP). I , T (

) . B D008, T $. U.S. CPP. T , . I , T , . F , $0 $00 TARP

AIG.

R S F

A , . T ,

, j . O j TARP , .

TARP . G FDIC . A , .

T . A , . I , , O


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8 | E R P

( C ). C . F R q . C 8 . T .

A C 9, . R conforming mortgages, F M F M, F R MBS . R , j ( ), . H, T , , .

I . T . H, 008.


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L F

T . T , , .

D N R S FM

T , . T q . T q .

The Treasury Blueprint for a Modernized Financial StructureI M 00, T

U.S. . I . T


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88 | E R P

M 008, U.S. . T , ; F U.S. ; j . M T .

PWG Initiatives to Strengthen Oversight and the Infrastructure ofthe OTC Derivatives Market

T P W G F M (PWG), S T, C B G F R S, C S E C, C C F TC, over-the-counter . M (OTC), , z . O credit default swap (CDS). (S

T O C CDS .) W CDS , .

O N , 008, PWG j OTC , .T j CDS

CDS .T j OTC , , q , , . T j . F , PWG

j . T j , , U.S. , j OTC .


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Developing Common International PrinciplesL U S j

, ,

. T S F M W E N , 008, W,D.C., . T ( ); ,

, ; q ; ; ; F S F(FSF) .

T F S F z (A, C,

F, G, H , I, J, N, S,Sz, U , U S), ( , I M F WB), . T FSF , , . L N , 008, FSF , , .

U T PT G q

G . S

, .


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90 | E R P

O T S 9, 008. T , S T . I , . T S S 009 .

T F R T C PP (CPP). A F R , , F R . T T 009. I , CPP G j , .T , U.S. T , 9 .

T FDIC 009.T T Lq G P

FDIC . A , , $00,000 $0,000.

Mz F R

T , U S , j . W , .

Addressing Innovation and Restructuring in Financial Markets

F, j . T U.S. , .


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C | 9

D , , F S . L , , .

W , .T j.P q , .

Strengthening Disclosure Requirements

S, , . A , , . T . T , , q. Assets . Liabilities ,

. Equity .

W , q q. I , q . T j. A ,

. F , , structured investment vehicles (SIV) .

SIV , , , . L , SIV

. I , SIV q . I , SIV


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9 | E R P

. M SIV.

T . O , . T .

Addressing the Pro-Cyclicality of Regulatory Capital RequirementsT, q

. D , , , . D , . T , q, .

T , q , q . Mark-to-market . Afair value

.T . A mark-to-model, , , .

S

, . T q.H, , ( MBS), , .M

, .

I . T . T


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