Economic Report of the President

This Report Explains Why You're Not Rich

Economic Report of the President
Shaun Donovan (L), OMB Budget Director, and Jason Furman, Chairman of the Council of Economic Advisers, participate in a briefing on President Obama's FY 2017 budget request, at the White House, February 8, 2016 in Washington, DC. Photo by Mark Wilson/Getty Images

The Economic Report of the President is an annual summary and outlook of the U.S. economy. The President submits it to Congress as part of the Federal budget process. It includes the Annual Economic Report prepared by the President's Council of Economic Advisers (CEA). It provides the economic background that supports the Federal budget for each fiscal year.

You could easily dismiss the Report as one long commercial for the President's policies.

 That's to be expected, since the President hand-picks the group that prepares it.

But the Report is valuable for three reasons. First, it summarizes what's happened to the economy, and what's likely to happen, from some of the most knowledgeable economists in the country. Although you may disagree with their interpretation, you can't argue with their credentials. Second, it's chock-full of useful trend data that's not easy to get elsewhere. Third, it gives you an insight into the President's budget. You'll understand why some areas are priorities, while others are being cut. In other words, it gives you the story behind the numbers.

2016 Report Summary

The first page summarizes why economic growth is slow. It ignored the impact of the strong dollar on exports. It blamed weak international demand for the slowdown in exports. It also blames low oil prices for poor job growth. It failed to mention that a 70% drop in oil prices was partially caused by a 25% increase in the dollar.

 

Instead, the CEA hones in on the "defining challenge of the 21st century" of income inequality. This has been one of Obama's priorities, as he emphasized in the State of the Union. Income inequality worsened since 1979 because those at the very top have benefited from large capital gains from investments.

The report concludes that decreases in capital gains taxes have worsened income inequality. That limits the opportunity for those at lower income levels to reach the top, no matter how hard they work or how smart they are. That then limits social and income mobility for their children. This has become worse in the United States than in other developed countries, like Canada, Germany, and Australia.

The CEA points out that corporate profits have risen since 1997 even though interest rates have remained low. That should not happen in a healthy economy where all capital would migrate toward investments that give the highest return. The CEA adds that many industries now have a high concentration of leaders, leaning toward monopoly power. That makes the returns for the firms at the top six times greater than average. Their returns were only three times greater in 1990.

Entrenched income inequality, lack of opportunity, and monopoly power are just three of the reasons the CEA gives for slow economic growth. The President's policies provide solutions. Three mentioned in the report are higher minimum wages, support for childcare for low-income families, and early learning/preschool programs.

The report gives research that supports the Earned Income Tax Credit increases labor force participation by single mothers.  (Source: 2016 Economic Report of the President.)

2013 - Manufacturing Is a Priority

The Report surprised many by creating a new focus on the manufacturing sector as a cornerstone to restore America's competitiveness in the global marketplace. Government policies to strengthen manufacturing would

  1. Increase research and innovation in new technologies to cut health care costs and provide cleaner sources of energy.
  2. Create more advanced engineering capabilities.
  3. Provide more middle-class jobs.

The Report maintains prior years' priorities of increasing jobs, reducing income inequality, and waiting until the economy has healed before focusing on debt reduction. (Source: 2013 Economic Report of the President)

2012 - Why Is the Recovery So Slow?

The Report blamed the slowness of the recovery on three causes. First, income inequality worsened over the past 30 years. As a result, most middle class families borrowed too much to support their way of life before the recession. Now that credit is restricted, most are borrowing less, paying cash instead, and slowing economic growth.

Second, the recovery was slowed by the absence of homebuilding, and plentiful construction jobs. Housing prices collapsed 30%, more than during the Great Depression. Now that the housing market is recovering, construction jobs are returning and economic growth will speed up. Third, the Federal budget went from surplus and deficit to pay for the Bush tax cuts and the War on Terror.

The Report outlined the following solutions:

  1. Immediately increase disposable income for middle and lower income families, giving them more to spend with and boosting demand.
  2. Lower the debt in the medium-term.
  3. Reprioritize spending to focus on the supports for long-term growth: education, business research and development, clean domestic energy, and infrastructure.

It forecast that the economy would grow 3% in 2012 and 2013, rise to 4.2% in 2015, and then off to settle at a moderate rate of 2.5% in 2020 and beyond. Inflation would remain at 1.09% through 2013, rise to 2% in 2014 and 2015, then increase to 2.1% for 2016 and beyond. The yield on the 10-year Treasury would fall to 2.8% in 2012, then rise to 3.5% in 2013, 3.9% in 2014, 4.4% in 2015, 4.7% in 2016, 5% in 2017, and 5.1% for 2018 and beyond.

The Report predicted that jobs would increase by an average 167,000 a month through 2012, sending the unemployment rate down to 8.9%. The employment situation would improve, adding an average 220,000 jobs per month in 2013 and reducing the unemployment rate down to 8.6%. Employment would grow robustly in 2014 and 2015, adding more than 250,000 jobs a month and reducing the unemployment rate to 6.5% by the end of 2016. After that, jobs would be added at a more moderate rate, and the unemployment level would stabilize at 5.4% by 2019. (Source: Economic Report of the President for FY 2012)

2007 - Did the Report Predict the Financial Crisis?

The President's economic advisers admitted in the 2007 Report that the economy was hitting a "rough patch," that was the end of the Goldilocks economy that the country experienced from 2004-2006. Like other economists, the CEA thought the bank liquidity crisis would not extend past financial markets. However, it admitted that it would crimp consumption and personal wealth. It also said that banks and the Fed were best equipped to deal with the crisis.

However, it predicted growth would continue through 2008, with an upturn towards the end of the year. Unemployment was expected to increase above 5%, which seemed high at that time. It optimistically expected a return in 2009 to robust GDP growth of 3% per year, which would send unemployment back 5% by the end of the year. This mildly optimistic scenario was forecast to continue through 2012.

Why was the CEA so optimistic? It thought that the Bush tax cuts, and the Hope Now mortgage alliance would solve the Subprime Mortgage Crisis. The Report suggested four additional measures to ensure continued economic health:

  1. Continue making free trade agreements, despite the demise of the Trade Promotion Authority and the Doha Trade Talks.
  2. Allow tax deductions for individuals to purchase private health insurance.
  3. Support diversification away from oil, including increased research into alternative fuels.
  4. Impose user fees to support the cost of maintaining infrastructure. Source: White House Web Site, "Fact Sheet: Economic Report of the President")

See The American Presidency Project for all reports since 1947.

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