1997 Federal Budget Document

8/8/2019 1997 Federal Budget Document

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1

THE BUDGET MESSAGEOF THE PRESIDENT


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2 THE BUDGET FOR FISCAL YEAR 1997

THE FEDERAL GOVERNMENT DOLLAR

WHERE IT GOES...

DIRECT BENEFITPAYMENTS FOR

INDIVIDUALS49 %

NETINTEREST

15 %

NATIONALDEFENSE

16 %

OTHERFEDERAL

OPERATIONS5 %

GRANTS TOSTATES

& LOCALITIES15 %

WHERE IT COMES FROM...

OTHER4 %

EXCISETAXES

4 %

CORPORATEINCOMETAXES

11 %

FISCAL YEAR 1997 ESTIMATES

SOCIALINSURANCERECEIPTS

33 %

BORROWING9 %

INDIVIDUALINCOME

TAXES39 %

RECEIPTS, OUTLAYS, AND SURPLUS OR DEFICIT(In billions of dollar s)

1995Actual

Est imate

1996 1997 1998 1999 2000 2001 2002

Receipts ....................... 1,355 1,427 1,495 1,578 1,653 1,734 1,820 1,912Out lays ........................ 1,519 1,572 1,635 1,676 1,717 1,761 1,812 1,868

Su rplu s/Deficit () . ..... 164 146 140 98 64 28 8 44


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3

THE BUDGET MESSAGE OF THE PRESIDENTTo the Congress of the United States:

The 1997 Budget, which I am transmittingto you with this message, builds on ourstrong economic record by balancing the budg-et in seven years while continuing to investin t he American people.

The budget cuts unnecessary and lowerpriority spending while protecting senior citi-zens, working families, and children. It re-forms welfare to make work pay and providestax relief to middle-income Americans and

small business.Three years ago, we inherited an economy

that was suffering from short- and long-term problemsproblems that were createdor exacerbated by the economic and budgetarypolicies of the previous 12 years.

In the short term, economic growth wasslow and job creation was weak. The budgetdeficit, which had first exploded in sizein the early 1980s, was rising to unsustainablelevels.

Over the longer term, the growth in produc-tivity had slowed since the early 1970s and,as a result , l iving standards had stagnatedor fallen for most Americans. At the sametime, the gap between rich and poor hadwidened.

Over the last three years, we have putin place budgetary and other economic policiesthat have fundamentally changed the directionof the economyfor the better. We haveproduced stronger growth, lower interest rates,stable prices, millions of new jobs, record

exports, lower personal and corporate debtburdens, and higher living sta ndards.

Working with the last Congress in 1993,we enacted an economic program that hasworked better than even we projected inspurring growth and reducing the deficit.We have cut the deficit nearly in half,from $290 billion in 1992 to $164 billionin 1995. As a share of the Gross DomesticProduct, we have cut the deficit by more

than half in three years, bringing the deficitto its lowest level since 1979.

While cut ting overall discretionary spending,we also shifted resources to investments inour future. With wages increasingly linkedto skills, we invested wisely in educationand training to help Americans acquire thetools they need for the high-wage jobs of tomorrow. We also invested heavily in scienceand technology, which has been a strongengine of economic growth throughout theNations history.

For Americans struggling to raise theirchildren and make ends meet, we havesought to make work pay. We expandedthe Earned Income Tax Credit, providingtax relief for 15 million working families.And we have given 37 States the freedomto test ways to move people from welfareto work while protecting children.

As the economy has become increasinglyglobal, prosperity at home depends heavilyon opening foreign markets to American goodsand services. With this in mind, we securedlegislation to implement the General Agree-ment on Tariffs and Trade and the NorthAmerican Free Trade Agreement, and wehave completed over 80 other trade agree-ments. Under our leadership, U.S. exportsha ve grown t o an a ll-time high.

With these policies, we have helped pavethe way for a future of sustained economicgrowth, low interest rates, stable prices, andmore opportunity for Americans of all incomes.But our work is not done.

Looking ahead, as I said recently in myState of the Union address, we must answerthree fundamental questions: First, how dowe make the American dream of opportunityfor all a reality for all Americans whoare willing to work for it? Second, howdo we preserve our old and enduring valuesas we move into the future? And, third,how do we meet these challenges together,as one America?

This budget addresses those questions.


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Creat ing an Age of Po ssibi l i ty

I am committed to finishing the job thatwe began in 1993 and finally bringing thebudget into balance. In our negotiations with

congressional leaders, we have made greatprogress toward reaching an agreement. Wehave simply come too far to let this oppor-tunity slip away.

A balanced budget would reduce interestrates for all Americans, including the youngfamilies across the land who are strugglingto buy their first homes. It also wouldfree up funds in the private markets withwhich businesses could invest in factoriesand equipment, or in training their workers.

But we have to balance the budget theright wayby cutting unnecessary and lowerpriority spending; investing in the future;protecting senior citizens, working families,children, and other vulnerable Americans;and providing tax relief for middle-incomeAmericans and small businesses.

My budget does that. It strengthens Medi-care and Medicaid, on which millions of senior citizens, people with disabilities, andlow-income Americans rely. It reforms welfare.It cuts other entitlements. And it cuts deeplyinto discretionary spending.

But while cutting overall discretionaryspending, my budget invests in educationand training, the environment, science andtechnology, law enforcement, and other prior-ities to help build a brighter future forall Americans. We should spend more onwhat we need, less on wh at we dont.

Project ing American Leadership

Across the globe, we live in a time of great opportunity and great challenge. Withthe end of the Cold War, the world looksto the United States for leadership. Providingit is clearly in our best interest. We mustnot turn away.

My budget provides the necessary resourcesto advan ce Americas st ra tegic int erests, carr yout our foreign policy, open markets abroad,and support U.S. exports. It also providesthe resources to confront the emerging globalthreats that have replaced the Cold Waras major concernsregional, ethnic, and na-

tional conflicts; the proliferation of weaponsof mass destruction; international terrorismand crime; narcotics trading; and environ-mental degradat ion.

On the diplomatic front, our successes havebeen numerous and heartening, and theyhave made the world a safer and morestable place. Through our leadership, weare helping to bring peace to Bosnia andthe Middle East, and we have spurred progressin Northern Ireland. We also encouragedthe movement toward democracy and freemarkets in Russia and Central Europe, andwe led a successful international effort todefuse the nuclear threat from North Korea.

On the military front, we have deployed

our forces where we could be effective andwhere it was in our interest to promotestability by ending bloodshed (such as inBosnia) and suffering (such as in Rwanda).We also have used the threat of force toease tensions, such as to unseat an unwelcomedictatorship in Haiti and to stare downIraq when it thr eatened again to move againstKuwait.

This budget provides the funds to sustainan d m odern ize th e worlds st rongest, best-trained, best-equipped, and most ready mili-tary force. Through it, we continue to supportservice members and their families with qual-ity-of-life improvements in the short term,while planning t o acquire t he n ew technologiesthat will become available at the turn of this decade.

Creat ing Opportuni ty and EncouragingResponsibi l i ty

The Federal Government cannotby itselfsolve most of the problems and addressmost of the challenges that we face asa people. In some cases, it must play a

lead rolewhether to ensure the guaranteeof health care for vulnerable Americans, ex-pand access to education and training, investin science and technology, protect the environ-ment, or make the tax code fairer. In othercases, it must play more of a partnershiproleworking with States, localities, non-profit groups, churches and synagogues, fami-lies, and individuals to strengthen commu-nities, make work pay, protect public safety,an d impr ove th e qua lity of education.


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5THE BUDGET MESSAGE OF THE PRESIDENT

To restore the American community, thebudget invests in national service, throughwhich 25,000 Americans this year are helpingto solve problems in communities while earn-ing money for postsecondary education orto repay student loans. We want to createmore Empowerment Zones and EnterpriseCommunities to spur economic developmentand expand opportunities for the residentsof distressed urban and rural areas. Wewant to expand the Community DevelopmentFinancial Institutions Fund to provide creditand other services to such communities. Withthe same goal in mind, we want to transformthe Department of Housing and Urban Devel-opment into an agency that better addresseslocal needs. And we want to maintain ourrelationship with, and the important serviceswe provide to, Native Americans.

In health care, our challenge is to improvethe existing and largely successful system,not to end the guarantees of coverage onwhich millions of vulnerable Americans rely.My budget strengthens Medicare and Medic-aid, ensuring their continued vitality. ForMedicare, i t strengthens the Part A trustfund, provides more choice for seniors andpeople with disabilities, and makes the pro-gram more efficient and responsive to bene-ficiary needs. For Medicaid, it gives Statesmore flexibility to manage their programswhile preserving the guarantee of healthcoverage for the most vulnerable Americans,retains current nursing home quality stand-ards, and continues to protect the spousesof nursing home residents from impoverish-ment. My budget proposes reforms to makeprivate health care more accessible and afford-able, and premium subsidies to help thosewho lose their jobs pay for private coveragefor up to six months. It also invests morein various public health services, such asthe Ryan White program to serve peopleliving with AIDS, and research and regulatoryactivities th at promote public health .

Because Americas welfare system is broken,we have worked hard to fix those partsof it that we could without congressionalaction. For instance, we have given 37 Statesthe freedom to test ways to move peoplefrom welfare to work while protecting children,and we are collecting record amounts of child support. But now, I need the help

of Congress. Together, in 1993 we expandedthe Earned Income Tax Credit for 15 millionworking families, rewarding work over welfare.Now, my budget overhauls welfare by settinga time limit on cash benefits and imposingtough work requirements, and I want usto enact bipartisan legislation that requireswork, demands responsibility, protects chil-dren, and provides adequate resources toget the job done rightwith child care andtraining, giving recipients the tools they need.

More and more, education and traininghave become the keys to higher living stand-ards. While Americans clearly want Statesand localities to play the lead role in edu-cation, the Federal Government has an impor-

tant supporting role to playfrom fundingpre-school services that prepare children tolearn, to expanding access to college andworker retraining. My budget continues thestrong investments that we have made togive Americans the skills they need to getgood jobs. Along with my ongoing investments,my budget proposes a Technology LiteracyChallenge Fund to bring the benefits of technology into the classroom, a $1,000 meritscholarship for the top five percent of grad-uates in every high school, and more CharterSchools to let parents, teachers, and commu-nities create public schools to meet theirown childrens needs.

As Americans, we can take pride in cleaningup the environment over the last 25 years,with leadership from Presidents of both par-ties. But our job is not donenot withso many Americans breathing dirty air ordrinking unsafe water. My budget continuesour efforts to find solutions to our environ-mental problems without burdening businessor imposing unnecessary regulations. We areproviding the necessary funds for the Environ-men ta l Pr otection Agencys opera tin g progra m,for our national parks and forests, for myplan to restore the Florida Everglades, andfor my brownfields initiative to clean upabandoned, contaminated industrial sites indistressed urban and rural communities. Andwe are continuing to reinvent the regulatoryprocess by working collaboratively with busi-ness, rather than treating it as an adversary.


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With science and technology (S&T) so vitalto our economic future, our national security,and the well-being of our people, my budgetcontinues our investments in this crucialarea. To maintain our investments, I amasking Congress to fulfill my request forbasic research in health sciences at theNational Institutes of Health, for basic re-search and education at the National ScienceFoundation, for research at other agenciesthat depend on S&T for their missions,and for cooperative projects with universitiesand industry, such as the industry partner-ships created under the Advanced TechnologyProgram.

To attack crime, the Federal Government

must work with States and communitieson some problems and lead on others. Tohelp communities, we continue to invest inthe Community Oriented Policing Services(COPS) program, which is putting 100,000more police on the street. We are helpingStates build more prisons and jail space,better enforce the Brady bill that helpsprevent criminals from buying handguns, andbetter address the problem of youth gangs.At the Federal level, we are leading thefight to stop drugs from entering the countryand expand drug treatment efforts, and weare stepping up our efforts to secure theborder against illegal immigration while wehelp to defray State costs for such immigra-tion.

For many families, of course, the firstchallenge often is just to pay the bills.My budget proposes tax relief for middle-income Americans and small businesses. Itprovides an income tax credit for each depend-ent child under 13; a deduction for collegetuition and fees; and expanded individualretirement accounts to help families savefor future needs and more easily pay forcollege, buy a first home, pay the billsduring times of unemployment, or pay medicalor nursing home costs. For small business,it offers more tax benefits to invest, providesestate tax relief, and makes it easier toset up pensions for employees. It also wouldexpand the tax deduction to make healthinsurance for the self-employed more afford-able.

Making Governme nt Work

As we pursue these priorities, we willdo so with a Government that is leaner,but not meaner, one that works efficiently,

manages resources wisely, focuses on resultsrather than merely spending money, andprovides better service to the American people.Through the National Performance Review,led by Vice President Gore, we are makingreal progress in creating a Government thatworks better and costs less.

We have cut the size of the Federalworkforce by over 200,000 people, creatingthe smallest Federal workforce in 30 years,and the smallest as a share of the totalworkforce since before the New Deal. We

are ahead of schedule to cut the workforceby 272,900 positions, as required by the1994 Federal Workforce Restructuring Actthat I signed into law.

Just as important, the Government is work-ing better . Agencies such as th e Social SecurityAdministration, the Customs Service, andthe Veterans Affairs Department are providingmuch better service to their customers. Acrossthe Government, agencies are using informa-tion technology to deliver services more effi-ciently to more people.

We are continuing to reduce the burdenof Federal regulation, ensuring that our rulesserve a purpose and do not unduly burdenbusinesses or taxpayers. We are eliminating16,000 pages of regulations across Govern-ment, and agencies are improving their rule-ma king pr ocesses.

In addition, we continue to overhaul Federalprocurement so that the Government canbuy better products at cheaper prices fromthe private sector. No longer does the Govern-ment pay outrageous prices for hammers,ashtrays, and other small i tems that i t canbuy cheaper at local stores.

As we look ahead, we plan to work moreclosely with States and localities, with busi-nesses and individuals, and with Federalworkers to focus our efforts on improvingservices for the American people. Under theVice Pres ident s leaders hip, agen cies are set -ting higher and higher standards for deliveringfaster and better service.


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9

CREATING AN AGE OFPOSSIBILITY


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11

CREATING AN AGE OF POSSIBILITY

We live in an age of possibility. A hundred years ago we moved from farm to factory. Now wemove to an age of technology, information, and global competition. These changes have opened vast n ew opportunities for our people, but th ey have also presented them with stiff challenges.

President ClintonJan uary 1996

The change that we face is both excitingand frightening. For some, it raises hopeof a better, more prosperous, and more secure

life. For others, it transforms the traditionalrules of life and work in unsettling ways.

In this period of change, our challengeis to make the age of possibility one thatwill raise living standards and expand oppor-tunity for all; make our streets safer andour air and water cleaner; and enable Ameri-cans to share the full potential of a newera.

Change of that magnitude comes mainlyfrom the private sector. But a leaner, moreflexible Federal Governmentas the Presidentis creatinghas an important supporting roleto play, working with State and local govern-ments, businesses, schools, churches and syna-gogues, and other organizations. By providinga sense of national purpose, and the fundswhen appropriate, the Federal Governmentcan be an important catalyst for change.

The Government also plays a key rolein creating a climate for strong, sustainedeconomic growth, and higher living standardsnow and in the future. Its tools includea responsible budget policy, an expansivetrade policy, and investments in educationand training, science and technology, andother priorities.

Over the last t hr ee years , the Pr esidentseconomic program has generated much strong-er growth, millions more new jobs, and lowerinterest rates than under the previous Admin-

istration. The program also has producedstable prices and record exports. For thefirst time in a decade, the economy is moving

in the right direction.In this budget, the President proposes to

build on his strong record of deficit reductionand to bring the budget into balance overthe next seven years. His plan includesa balanced mix of deep spending cuts inboth entitlements and discretionary spend-ingdeep enough to allow for a modesttax cut for average Americans and smallbusinesses.

The budget balances the need to cut totaldiscretionary spending with maintaining, andin ma ny cases increasing, the Pr esidentsinvestments in key priorities. A balancedbudget would help set the stage for continuedeconomic growth, low interest rates, andstable prices in the future.

Clearly, the Nation cannot achieve its com-mon goals without strong economic growth.But growth alone is not enough. We mustensure that America is growing together,and that everyone is sharing the benefits.Today, too many Americans are workingharder and harder just to stay in place,

or are actually falling behind. To addressthat problem, the President proposes to helpAmericans get the skills they need to assumehigh-wage jobs in the new economy. Hewould invest in education, from pre-schoolto college; fund training for the workplace;and support science and technology to spurfuture productivity and wage growth.


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As the P resident h as said, th e era of big Government is over. At the same time,the Federal Government must support growthby giving the private sector the tools it

needs. This budget builds on the Administra-tions three-year record of success in establish-ing, and implementing, Governm ents pr operrole in our economy.


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13

1. A VIS ION F OR TH E F U TU RE

This budget helps promote a strong economyfor the future and, with it, helps Americansbuild better lives for themselves and theirfamilies.

To promote a strong economy with sustainedgrowth and low interest rates, the budgetreaches balance in seven years by cuttingunnecessary and lower priority spending. Atthe same time, it invests in education andtraining, the environment, science and tech-nology, and other priorities to help raiseaverage living standards and the quality

of life. The budget protects Medicare andMedicaid, reforms welfare to make work pay,and provides tax relief to middle-income Amer-ican s as well as sm all businesses.

Reaching Balance the Right Way

This budget reaches balance in 2002, agoal to which the President is committed,using t he last available economic and technicalassumptions of the Congressional Budget Of-fice (CBO). It also achieves a surplus of $44 billion in 2002 under the economic andtechnical assumptions of the Office of Manage-ment and Budget (OMB).

The budget embodies the proposal thatthe President put forth in budget negotiationswith the bipartisan congressional leadership

on January 18, 1996. The President andthe leaders have worked hard to find agree-ment on a plan to balance the budget overseven years. While they have not finishedthe job, the President believes strongly thattheir negotiations have been productive, bring-ing the two sides closer together. He iscommitted to doing whatever he can to com-plete the ta sk.

In their talks, the President and the leadershave outlined a variety of proposals. Theminimum amounts of savings that the plans

ha ve in common in th e major budget categories(e.g., $124 billion in Medicare, $297 billionin discretionary spending) provide enoughin total savings to balance the budget andalso provide a modest t ax cut.

The congressional leadership wants biggertax cutsoffset by deeper cuts in Medicareand Medicaid, other mandatory programs thathelp farmers and the poor, and discretionaryspending. But the President believes thosecuts are too deep and would threaten theGovernm ents vital role in guar an teeing health

care to vulnerable Americans and investingin the future. He has proposed that thetwo sides quickly enact the savings theyhave in common and give the Americanpeople a ba lanced budget.

To estimate the deficit for 1996 through 2002 based on assumptions from the CongressionalBudget Office (CBO), the Administration used the most recent assumptions that were avail-ablefrom December 1995.

In March or April, CBO plans to release a new, updated set of economic and technical as-sum ptions. While th e President s budget rea ches balance under CBOs December 1995 assu mp-tions, the n ew assu mpt ions could cha nge th e Presiden ts pat h to balan ce; in 2002, they couldproduce a bigger surplus or a deficit.

In case the new assumptions produce a deficit in 2002, the Presidents budget proposes an im-mediat e adjust men t t o the a nn ua l limits, or caps, on discretionar y spendin g, lowering t hemenough to reach balance in 2002.

The President is committed not only to proposing a budget that reaches balance according toCBO, but r eaching an agreement with Congress to enact such a budget.


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Using the last available CBO assumptions,this budget saves $593 billion over sevenyear s (after a ccount ing for the P residen tstax cuts) by reforming Federal entitlementprograms, cutting deeply into discretionaryspending, and limiting corporate subsidies.

Among its major elements, the budget:

saves $297 billion in discretionary spend-ing, cutting unnecessary spending but in-vesting in education and training, the en-vironment, science and technology, law en-forcement, and other priorities that willraise living standards and improve thequality of American life (see Chapters811);

saves $124 billion in Medicar e, stren gthen-

ing and improving the program and guar-anteeing the solvency of the Part A trustfund for over a decade (see Chapter 6);

saves $59 billion in Medicaid, reformingthe program but continuing the guaranteeof meaningful health and long-term carecoverage for the most vulnerable Ameri-cans (see Chapter 6);

saves $40 billion through real welfare re-form, moving recipients to work while pro-tecting children (see Cha pter 7);

saves $49 billion by reforming a host of other mandatory programs (see the moredetailed explanation in the next para-graph);

saves $62 billion by ending corporate sub-sidies and other tax loopholes, and takingsteps to improve tax compliance (seeChapter 12); and

cuts taxes by $100 billion, providing taxrelief to tens of millions of middle-incomeAmericans and to small businesses (seeChapter 12).

Among the $49 billion in other mandatorysavings, the budget proposes to auction, pri-vatize, or sell, rather than give away, valuablepublic resources, including segments of thebroadcast spectrum, energy resources, mate-rials stockpiles, and other assets. It alsoproposes that Federal agencies fully fundtheir employees retirement costs.

In addition, the budget extends previously-enacted s avings in veteran s benefits; cuts

subsidies to financial institutions that makeand hold student loans (without increasingprogram costs to borrowers); imposes feesto recover the costs of services that theFederal Government provides to private busi-nesses; reforms Federal housing and bankingprograms; and makes other program effi-ciencies a nd improvement s.

The budget also includes a trigger toensure that the budget reaches balance undereither CBO or OMB assumptions. Underthe trigger, most of the tax cuts end after2000 if the deficit is not at least $20billion below CBOs initial estimate for thatyear. If, however, the deficit is at least$20 billion below the estimate, then thebudget distributes the additional savings inthe following order:

first , i t maintains the tax cuts after theyear 2000;

second, it redu ces t he cuts in discretiona ryspending; and

third, it splits any additional savings even-ly among more tax cuts, more reductionsin the discretionary cuts, and more deficitreduction.

If OMBs assumptions prove correct, thebudget would provide tax relief over thenext seven years of $117 billion, and discre-tionary spending cuts of $186 billion.

Maintaining Our Values

Fr om the st ar t, th e Pr esidents economicprogram has emphasized one primary con-cern to ra ise the sta nda rd of living of averageAmericans now and in the future. His budgetpolicy has played a central role.

By cutting the deficit nearly in half inthe last three years, we have reduced Federalborrowing, making more funds available inthe private markets so that businesses caninvest, grow more productive, expand, andcreate jobs. We also have shifted resourcesto education and training, science and tech-nology, and other prioritiesto enable Ameri-cans to get the skills they need to competein the new economy and to help businessesbecome m ore compet itive.

Like the Pr esidents previous budgets, th isbudget maintains his investments in education


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151 . A VISION FOR THE FU TURE

and training, science and technology, environ-mental protection, law enforcement, and otherkey priorities.

These investments include Head Start for

disadvantaged children; the Safe and Drug-Free Schools and Communities program tocreate safe learning environments; Goals 2000,which helps States and school systems extendhigh academic standards, better teaching,and better learning to all students; Ameri-Corps, through which 25,000 Americans areserving their communities this year and earn-ing money for college; direct lending thatmakes it easier to borrow and repay collegeloans; Pell grant scholarships for needy stu-dents; and job training Skill Grants fordislocated workers and low-income adults.

The budget maintains environmental en-forcement; protects national parks and othersensitive resources; and invests in basic andapplied research and technology. It fundsthe Community Oriented Policing Services(COPS) initiative to put 100,000 more policeon the street by the year 2000; more borderpatrol agents to prevent illegal immigrationand more inspections to prevent the hiringof illegal immigrants; and the CommunityDevelopment Financial Institutions Fund tospur growth and create jobs in communities

that have been left behind.In addition, the budget includes funds to

launch the important initiatives that thePresident outlined in his State of the Unionaddress.

To promote educational opportunity, thebudget funds a Technology Literacy Chal-lenge to bring the benefits of technologyinto the classroom; expanded work-studyto help one million students work theirway through college by the year 2000; a$1,000 merit scholarship for the top fivepercent of graduates in every high school;and more Charter Schools to let parents,teachers, and communities create publicschools to meet their own childrens needs.

To promote a secure future for Americanworkers, the budget funds initiatives tomake it easier for small businesses andfarmers to establish their own pensionplans, to encourage these and other em-ployers to established flexible pension

plans that workers can take with themwhen they change jobs, and to help work-ers who lose their health insurance whenthey lose their jobs pay for private insur-ance coverage for up to six months.

To protect our environment, the budgetfunds tax incentives to encourage compa-nies to clean up brownfieldsaban-doned, contaminated industrial propertiesin distressed a reas.

To protect public safety, the budget pro-vides funds for the FBI and other law en-forcement agencies to step up efforts tocombat juvenile crime and gangs that in-volve juveniles.

A Period of Chan geThe Nation has entered a period of profound

changefrom an economy based primarilyon traditional manufacturing to one basedmore heavily on informationthe most pro-found change since we moved from the farmto the factory a century ago. It is a periodof great opportunity and great uncertainty,a period that demands new thinking andnew responses.

In the 19th and early 20th Centuries,and with the American economy assumingthe lead, the economies of the developedworld moved from agriculture to manufactur-ing by way of a pull and a push. Thepull: the explosion of opportunities in manufac-turing. The push: the growth of productivityin agriculture that freed resourcesthat is,both workers and investmentto exploit thenew opportunities.

Now, an explosion of possibilities in theuse of information is drawing workers frommanufacturing, while the rapid growth inmanufacturing productivity has eased thechange. The revolution in information tech-nology has increased productivity by helpingpeople work faster and smarter. It has created

jobs, rewarded entrepreneurs and investors,improved learning, and provided more enjoy-able uses of leisure time. For society atlarge, it is both desirable and inevitable.

As President Clinton said in signing theTelecommunications Act of 1996 into lawon F ebruary 8:


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1 Population growth would have raised the number to roughly16,000, and changes in income definitions in the tax law mighthave raised it slightly higher.

Today our world is being remade yet again byan information revolution, changing the way wework, the way we live, the way we relate to eachother. Already the revolution is so profound thatit is changing the dominant economic model of the age. And already, thanks to the scientific and

entrepreneurial genius of American workers inthis country, it has created vast, vast opportuni-ties for us to grow and learn and enrich ourselvesin body and in spirit.

But the benefits of this revolution arenot sprea d evenly among all Americans.

The Pe ri ls of Change

In 1979, 13,505 taxpayers filed Federaltax returns with incomes of over $500,000.From that year to 1993, the cost of livingroughly doubled. If incomes had just keptpace with inflation over that period, thesame number of taxpayers would have hadincomes of over $1 m illion in 1993. 1

In fact, the number of taxpayers withincomes over $1 million ha d a lmost quintu pledby 1993, to 66,485. Obviously, at the upperend of the income scale, opportunity is aliveand wellas it should be for all Americanswho are working their way up the economicladder.

Opportunity, however, has been absent formany others. Average families in the middlefifth of the income scale had $447 lessin purchasing power in 1992 than in 1979.Those in the bottom two-fifths had evenlarger declines in percentage terms. At thesame time, the income of the top fifthof families grew by 12 percent, and thatof the highest five percent by 17 percent.

More and more, workers entering the labormarket without the requisite skills face worseincome prospects over their working livesthan their predecessors did. Those who didnot invest in their skills, or who investedin skills that have become obsolete, canfind that what were once lifetime jobs aredisappearing. Too often, these workers facelimited prospects for maintaining their in-comes.

Wage trends of 2534 year-old workersmake the point: In 1979, male workers withhigh school degrees who worked full time

and year-round earned, in 1992 dollars, anaverage of about $30,900; by 1992, theirearnings had fallen to $24,400. Their femalecounterparts saw their earnings fall by twopercent, to only $18,900.

On the other hand, the earnings of youngmale college graduates rose two percent,to $40,000, after adjusting for inflation. Fe-male college graduates enjoyed an even largergain, 15 percent (see Chart 11). And yet,though those with college degrees are doingbetter than others, even they have experiencedslower income growth in recent year s.

Nor do these figures begin to explainhow profound economic change has affectedpeoples lives. If economic change shakes

an entire business firm, the retirement secu-rity of th at firms workers can sha ke withit. Young people who cannot get the skillsand training to compete in the informationeconomy risk facing a considerable disadvan-tage for their working lives. And with healthcare often dependent on employment, theabsence of skills or loss of a good jobcan adversely affect family security beyondthe measure of a workers income.

The Nation cannot afford to dismiss anyworkers, to relegate them to the bottomrung of the economic ladder. The stakesare far too high. To build a stronger, morecompetitive economy at a time of increasingglobal competition, we need the contributionsof all Americans. We need everyone to activelypartake in the society at large, rather thanimpose costs on it through crime or depend-ency. As the President often says, We dontha ve a person t o waste.

The Federal Government cannot guaranteeeach, or any, persons success. But it can,and should, help every individual to achievehis or her greatest potential by reducingthe barriers and the risks to building personalskills for a changing, information-based econ-omy.

Education and training are the cornerstoneof the new economy. To help give workersthe skills they need, and the opportunitiesthey deserve, for high-wage jobs, the budgetenha nces the Govern ment s support for edu-cation and training. It protects funding foressential education programs, from Head Start


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drens futur e safer by redu cing existing a rse-nals and ensuring that rogue states andterrorist groups do not acquire these terribleweapons or the materials and technologiesneeded to make t hem.

Other emerging threats know no nationalborders. America must lead in confrontingsuch problems as ethnic and national conflictsthat threaten regional stability; terrorism,international crime, and drug trafficking,which directly threaten our free and opensociety; and large-scale environmental deg-radation.

More than ever, our domestic and foreigneconomic interests are closely intertwined,and mutually reinforcing. Economic and trade

issues are increasingly at the forefront of our diplomacy. We need a strong economyto sustain our military forces and diplomaticstrategy. And we must be global leadersin trade and investment in order to openforeign markets and create the high-wage

jobs that will raise the living standardsof our people.

Our defense capability is what sustainsand supports our diplomacy. We have theworlds str ongest a nd m ost ready m ilitar yforce, one designed to fight successfully twonearly simultaneous regional conflicts. Ourweapons are state-of-the-art, and our militaryis the best equipped, best trained, and bestprepared in the world. And, when necessary,we have sent the men and women of ourmilita ry int o action.

Maintaining Our Edg eAt Home

At home in this time of change, thepublic and private sectors must work together;we cannot rely on just one or the other.Americans of all generations must come to-

gether in the interests of allwhether itis for better schools, safer streets, or acleaner and healthier environment.

As Americans, we should dedicate ourselves

to building a society in which we all havethe opportunity to use our talents to theirfullest potential, and in which we all takeresponsibility for our actions; in which allchildren can learn at safe and stimulatingschools, free from the fear of gangs andguns; in which all fathers and mothers givethe task of raising their children the energyand attention it deserves; and in whichall those who want to work can find good

jobs.

To reach this goal in a time of change,

we need the right kind of Government andthe right kind of policies. We need a Govern-ment that creates opportunity, not bureauc-racy; one that works with State and localgovernments, businesses, and religious, chari-table, and civic associations; and one thatma na ges its resources wisely.

We need a leaner, but not meaner, Govern-ment, one that puts its customersthe Amer-ican peoplefirst by delivering better servicesevery day and not imposing undue burdenson individuals and businesses. And we needa Government dedicated to better performanceand results, rather than to simply dolingout dollars .

Government should not do for individualswhat they can do for themselves. We mustask more of ourselves, expect more of oneanother, and meet the challenges that confrontus together. We must strive to enable allof our people to make the most of theirlives with stronger families, more educationalopportunity, economic security, safer streets,a cleaner environment, and a safer world.


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19

2. TH RE E YEAR S OF P R OGR ES S

As President Clinton took office in January1993, the economy was only then emergingfrom a long period of sluggish growthbeginning with the 19901991 recession andcontinuing through an extremely weak recov-ery, marked by rising unemployment.

The sluggishness exacerbated some seriouslong-term trends. Since the early 1970s, theincomes of most Americans have not grownas much as they once didin fact, notmuch at all. As discussed in the previouschapter, only those atop the income ladder

have enjoyed steady income growth. For oth-ers, the daily struggle to make ends meethas threatened to become a losing battle.For workers with only a high school education,times h ave been especially tough.

The President campaigned on a pledgeto restore widely shared prosperity, and heshaped his economic policies to achieve thisprimary goal. The huge Federal budget deficitwas a major obstacle. Other s included sluggishbusiness investment, slow job growth, andthe overgrown Federal Government, about

which the public had grown deeply cynical.Three years later, our economy is stronger

and the deficit is down even more thanwe had predicted. In dollar terms, the policiesthat we enacted with the last Congresshave cut it almost in half, from $290 billionin 1992 to $164 billion in 1995. As ashare of the economy, we have cut it byover half, to 2.3 percent (see Charts 21an d 22).

But as detailed in Chapter 1, we needfurther action to balance the budget once

and for all.The Administration also has begun to sig-

nificantly change the way that the FederalGovernment works. Under the leadership of the Vice P residents N ational P erforma nceReview, we are working to create a Govern-ment that works better and costs less.

Since January 1993, we have cut thenumber of Federal employees by over 200,000,to its lowest level in 30 years; the Federal

share of the civilian workforce is at itlowest level since the 1930s. We are eliminat-ing 16,000 pages of Federal regulations. Wehave reformed Federal procurement so thatthe Government now buys at the best price;no longer do we read news accounts of $600 hammers. (For more details on howwe are making Government work, see Chap-ters 13 and 14.)

Meanwhile, the Administration has em-ployed Government where it does the mostgoodinvesting in education and training,

protecting the environment and public health,helping people get needed health care,strengthening families by helping Americasneediest children, and rewarding work. Onthe world stage, the President has strength-ened American leadership and advanced Amer-ican strategic and economic interests andvalues.

Still, we have much more to do. Fullyreversing the long-term trends that haveweakened America will take time and enor-mous effort.

This chapter reviews what we have doneto meet the economic and social challengesthat the Administration inherited three yearsago. It describes how the economy and societyhave responded to these initiatives, and theeconomic path that we envision for the future.

WHAT THE ADMINISTRATIONINHERITED

Near-Term Economic Problems

The President inherited an economy thathad nominally escaped from recession, buthad not yet resumed solid and sustainableeconomic growth either for the short termor further down the road.

Unemployment : Unemployment rose sharp-ly in late 1990 with the onset of recession.Though the recession technically ended inearly 1991, growth was so weak for manymonths that unemployment continued to rise.In January 1993, unemployment was 7.1 per-


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1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

0

-50

-100

-150

-200

-250

-300

DOLLARS IN BILLIONS

Chart 2-1. FEDERAL BUDGET DEFICITS

cent, about a quarter-point higher than whenthe 199091 recession ended.

Although the economy created some new jobs in the recovery of 199192, net jobcreation was weak. In the four years beforeJanuary 1993, the economy created just 2.4million net new jobsabout 51,000 a month.Over the same period, the labor force grewby 80,000 people each month. With thenumber of potential workers rising fasterthan the number of jobs, higher unemploymentnecessarily followed.

S l o w G r o w t h : Weakness in the labor mar-ket reflected weak economic activity in gen-eral. The economy was growing, but very slow-ly. From the start of 1991, through the firstquarter of 1993, real Gross Domestic Product,or GDP, grew at well under half the rate of economic recoveries since 1960 that lasted atleast that long.

The Cred i t Crun ch : The U.S. financial sys-tem showed increasing strains in the 1980s.

Individuals and corporations pushed their debtburdens higher and higher, and interest pay-ments absorbed more and more income. Whilethe amount of debt was rising, its quality wasfalling. Savings and loan institutions andbanks made some extremely risky loans, manyof which proved worthless.

As losses to the Governments deposit insur-ance programs mounted, the problems of deteriorating credit quality and failing finan-cial institutions became clear. Bank and thriftregulators began t o close th e failed institu tions

and the surviving ones raised their creditstandards sharply. Many businesses, especiallyin areas with heavy concentrations of badloans, had trouble getting needed credit.

Meanwhile, individuals and businesses re-duced their borrowing to improve their balancesheets and cut the burden of their interestpayments. These steps led to slower consumerspending and less real estate investment.In cities across the country, new construction


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212 . TH REE YEAR S OF PROG RESS

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

+100

0

-100

-200

-300

-400

-500

-600

D E F I C I T

PRE - CLINTON BASELINE

DOLLARS IN BILLIONS

Chart 2-2. THE DEFICIT RECORD UNDER PRESIDENT CLINTON

1997 BALANCED BUDGET

S U R P L U S

came to a halt as developers scrambledto find tenants for empty office buildings.

Long-Term P roblems

The economys cyclical problems were justpart of what the new Administration faced.Underlying those problems were chronic condi-tions that had lasted over a decade. Amongthe most damaging were the Federal budgetdeficit, the fall in private saving, the slowdownin productivity growth, and the increase inincome inequality.

The Budget Def ic i t : The Government hasincurred a deficit every year since 1969, butthe deficit exploded in size in the 1980slargely due to the fiscal policies of 1981 andthe economic conditions of that day.

The Administration and Congress cut in-come tax rates by 23 percent, reducing revenueby over four percent of GDP, and increasedspending on defense. The tax cuts, higherdefense spending, and second recession in

two years combined to send the deficit soaring.By 1983, it had nearly tripled, to $208billion, and since then has never fallen below$149 billion.

Higher and higher deficits brought moreand more debt. From the start of the Republicto 1980, the Government had accumulated

just under $1 trillion in debt. From 1980to 1992, the debt rose to $4 trillion.

To be sure, a big deficit can help tostabilize the economy during a recession.But this deficit was harmful because it wasstructural; it would continue even if theeconomy performed well. Despite numerousattempts to cut the deficit over the nextdecade, i t threatened to reach unsustainablelevels as this Administration assumed office.

A structural deficit is important becauseit affects the Nations pool of saving. Nationsmust set aside funds today to build thefactories and machines that will generateincome for tomorrow; what they set aside


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1975 1977 1980 1982 1985 1987 1990 1992 1995

0

2

4

6

8

10

12

PERCENT OF GDP

NET NATIONAL SAVING

NET PRIVATE SAVING

Chart 2-3. SAVING RATES

is their saving. It has two components: (1)private saving (by individuals and businesses);and (2) public saving (by Federal, State,and local governments).

If the Federal Government borrows fromthat pool to finance its deficit, then theborrowed saving is not available to makeproductive private investment. With its bigdeficits, the Federal Government in the 1980smassively drained our Nations saving pool.Worse, as Federal deficits were rising, privatesaving was falling, making the Nat ions sa vingproblem worse.

P r iva te Sav ing : Private saving averaged13.3 percent of GDP in the 1960s, but droppedto 7.3 percent in the 1980s (see Chart 23).

A fall in private saving affects investment andthe trade balance in the same way as anincrease in the budget deficit. Thus, the fallin private saving exacerbated the economiceffects of the higher budget deficit.

In the 1980s, lower national saving pulleddown investment. To some extent, the dropin investment was offset by more borrowingfrom abroad. But that, in turn, led to otherproblemsincluding a rising trade deficit.Increased foreign borrowing converted theUnited Sta tes from th e worlds lar gest creditorto its largest debtor nation. To service thosedebts, the Nation will have to increase itsexports over its imports for the foreseeablefuture (see Chart 24).

Thus, because of the higher deficits andlower private saving, the 1980s economicexpansion was financed by debt to an unprece-dented degree (see Chart 25). Much of the extra borrowing was not backed by more

assets; thus, the borrowing raised the burdenof debt service without providing a correspond-ing increase in resources to service the debt.High real interest rates, caused by the higherborrowing, further aggravated the problem.


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1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

-10

-8

-6

-4

-2

0

2

4

6

8

10

PERCENT OF GDP

Chart 2-4. U.S. NET INTERNATIONAL INVESTMENT POSITION

1975 1977 1980 1982 1985 1987 1990 1992 1995

80

100

120

140

160

180

200

PERCENT OF GDP

Chart 2-5. NONFINANCIAL DEBT

TOTAL DEBT

NON-FEDERAL


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Chart 2-6. PRODUCTIVITY OUTPUT PER HOURIN THE NONFARM BUSINESS SECTOR

1960-1969 1969-1973 1973-1979 1979-1990 1990-19940

0.5

1

1.5

2

2.5

3

3.5

4

3.1 3.0

1.1 1.0 1.1

PERCENT(average annual growth rates in percent)

1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

0

2

4

6

8

10

12

14

16

18

20

22

PERCENT

THE MISERY INDEX

INFLATION - ANNUALPERCENT CHANGE IN THE

CPI-U

THE CIVILIAN UNEMPLOYMENTRATE PLUS...

Chart 2-7. THE "MISERY" INDEX


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families, the standard of living actually fellfrom 1979 to 1992. Only those at the top con-tinu ed to enjoy substa nt ial income gains.

For families in the bottom 20 percent

of income, real mean income was 14 percentlower in 1992 than in 1973; for familiesin the top five percent, real income was17 percent higher. As a result, the gapbetween the top and bottom incomes widenedto record levels.

The Soc ia l Repercuss ions

Slow productivity growth and widening in-come inequality have effects throughout soci-ety. The difficulties of working families inmaking ends meet have raised the pressures

on them and weakened the social fabric.The consequences have come to light inthe economic and social statistics on poverty,social brea kdown, an d crime.

The sluggish economy of the early 1990swas especially hard on the poor. The officialpoverty rate hit its low point in 1973, afterfalling sharply for most of the previousdecade. Since then, increases in poverty duringrecessions ha ve outpaced redu ctions in povertyduring recoveries.

By 1992, the poverty rate had risen to

nearly 15 percent. That year, more thanone in five of the Nations children werepoor.

WHAT THE ADMINISTRATION HASACHIEVED

To bring the economy back to health,the Administration sought to tackle the budgetdeficit while promoting prosperity by investingin education and training, and science andtechnology; by opening new markets; andby keeping interest rates and inflation incheck.

Budget Po l icy

The President an d th e last Congress enactedthe Omnibus Budget and Reconciliation Actof 1993, designed to reduce the deficits bya combined $505 billion over five years,199498. Because the economy has performedbetter than even the Administration hadpredicted, we now expect those deficits to

fall by $697 billion over the same period,even without further steps to reduce them.

The Presidents 1993 economic plan, whichstill governs U.S. fiscal policy, achieved over

half of its $505 billion of deficit reductionthrough spending cuts ($255 billion), andthe rest through tax measures designed toincrease the progressivity of the tax codeand also raise revenue. It made deep cutsin discretionary spending and entitlementprograms. It extended through 1998 the an-nual limits, or caps, on discretionary spend-ing that Congress first imposed in 1990.(This budget would extend them even further.)In addition, it cut entitlements by $98 billion.

Neverth eless, th e Pr esidents plan also ex-

panded the Earned Income Tax Credit (EITC),which rewards work for those in the lowest-income brackets. The EITC makes work pay.It offers a positive inducement to low-incomefamilies to enter the working world andavoid the cycle of dependency. The planraised the rate of the EITC, expanded itto provide tax relief to more lower-incomeworking families with children, and extendedthe credit to apply, at lower rates, to low-income workers without children.

In the 1993 plan, only one revenue increaseaffected typical American householdsa 4.3cent per gallon increase in the Federal excisetax on gasoline. The change was well timed;it occurred while gas prices were falling,so it imposed little or no extra burdenon households. Moreover, the plan broughtdown interest rates, saving these typicalhouseholds sizable sums on home mortgagesand aut o and other consumer loans.

All told, about 90 percent of the revenueincreases came from households with incomesof over $100,000. To be sure, no one everwants to raise taxes. But this change wasappropriategiven the pressing need to cutthe deficit, and given that high-income familiesprospered so much in the preceding decade.And with the plan at least partly responsiblefor growth in the economy and the stock market since 1993, these people have pros-pered in th e last three years.

Largely due to the Pr esidents plan a ndthe economic growth it helped spur, thedeficit fell from $290 billion in 1992 to


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$164 billion in 1995; we expect it to remainnear this level through 1997. This Nationnow has the smallest deficit, relative tothe size of its economy, of any developedcountr y in th e world except N orway.

At the same time, even with total discre-tionary spending rising far less than inflation,the President has worked with Congressto reallocate funds to programs that investin the future and, thus, spur economic growth.While the private sector plays the lead rolein creating growth, the Federal Governmentmust play a key supporting role.

Among other things, the President andCongress increased funding for Head Start;Goals 2000 educational reforms; college schol-

arships; dislocated worker assistance; researchand technology; environmental protection; thenational forests and parks; Clean Water andSafe Drinking Water revolving funds; commu-nity policing; and the operations of the FBI,the Immigration and Naturalization Service,and Federal prisons.

The President and Congress also createdand funded the Americorps program thatenables students to work in communitieswhile earning funds for college; the CharterSchools program to support public schoolchoice; the School-to-Work Opportunities Actto help young people make a smooth transitionfrom high school to work; and the FederalDirect Student Loan program to make borrow-ing cheaper and more effective, and to easethe burden of repayment.

Economic Achievements

By addr essing the deficit, the Administrat ionhelped resolve the economys short-run prob-lems. The Presidents plan en abled the F ederalReserve to maintain low interest ratesthroughout 1993, and financial markets re-

sponded by lowering long-term rates.For example, the yield on ten-year Treasury

notes fell from 6 3 4 percent in late 1992to 5 3 4 percent by the end of 1993, helpingto end the credit crunch. Interest rates havefluctuated since 1993, but with the fall inthe deficit freeing up resources for privateinvestment, investment has boomed ever since.

Real growth accelerated in 1993, but infla-tion remained firmly in check. Within two

years, unemployment fell below six percent,producing the lowest combined rates of unem-ployment and inflation in three decades (seeCharts 27 and 28).

Job Growth Up , Unemployment Down:Since January 1993, the economy has added7.7 million net new jobs, an average of 214,000a month (see Chart 29). Over seven millionwere in the private sector. Over half of thenew jobs were in the high-paying professionalor ma na gerial categories. The economy createdover a million new jobs in the basic industriesof construction and manufacturing, includingthe bellwether automobile industry.

Economic Growth Up: Also since January1993, real GDP has risen at a 2.6 percent an-

nual rate, roughly triple the average growthrate of the prior three years and faster thansuch economies as J apa ns a nd Germa nys (seeCharts 210 and 211). Since the first quarterof 1993, private sector GDPexcluding govern-menthas grown by 3.2 percent a year.

Inf la t ion Under Control : The ConsumerPrice Index has risen an average of just 2.7percent a year since January 1993, markingthe smallest three-year rise since the mid-1960s (see Chart 212).

In teres t Rates Down: In the Presidentsfirst year, long-term interest rates paid byhome buyers, business investors, and the Gov-ernment fell by over a point. Inflation fearstemporarily reversed that drop in 1994, butinterest rates fell again in 1995 as inflationfears proved unwarranted and chances formore deficit reduction rose. By the end of 1995,long-term rates were down a full point fromtheir levels of January 1993. Aside from a fewmonths in 1993, long-term rates were at theirlowest point since the 1960s (see Chart 213).

Household Weal th Up: Lower interestrates improved the financial standing of house-holds by making home ownership more afford-able and boosting the stock market. The homeownership rate rose to 65.1 percent by the endof 1995, its highest since 1981. Meanwhile, thestock market has given its strong endorsementon the state of the economy. Since January1993, the Dow-Jones Industrial average hasrisen by over 60 percent, with 36 percent of the rise coming in 1995. All other major stock


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1990 1991 1992 1993 1994 1995

-1

0

1

2

3

4

1.5

-1.2

0.3

2.1

3.3

2.6

JOBS IN MILLIONS

Chart 2-9. JOB CREATION

Chart 2-10. ECONOMIC GROWTH(average annual growth rate of real GDP)

Previous 11 Quarters Most Recent 11 Quart0

0.5

1

1.5

2

2.5

3

3.5

0.9

2.6

PERCENT

Most Recent 11 Quarters


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Chart 2-11. COMPARATIVE GROWTH RATES(average annual growth rates of real GDP, Q4/1992 to Q2/1995)

U.S. Japan Germany0

0.5

1

1.5

2

2.5

3

2.4

0.40.3

PERCENT

market indexes were up by correspondingamounts.

Exports Up : U.S. exports of goods and serv-ices have risen at a rapid 7.6 percent annual

rate (after adjusting for inflation) since thefirst quarter of 1993. Merchandise exportshave risen even quicker, at a 9.6 percent rate.The export record is particularly impressivein light of the anemic growth in some of theother m ajor indu stria lized coun tries.

With other economies growing more slowlythan Americas, our imports should havegrown faster than our exports. They did.Consequently, the trade deficit rose throughthe first half of 1995. But, as the gapin economic growth narrowed a bit in thesecond half of the year, so did the deficitit fell between June and December of 1995,from $11.4 billion to $6.8 billion. The bilateraldeficit with Japan dropped from an annualrate of $64.7 billion in the first half of 1995 to $56.3 billion in the second half.

Progres s Against Unfavorable Long-TermTrends

As we have seen, the economy as a wholehas improved markedly in the last three

years. To be sure, we face the ongoingchallenge of addressing the fundamental fac-tors that determine long-term prosperity. Evenfor those, however, various signs of progressappeared in 1994, the last year for whichstatistics are available.

That year, median family income rose whilethe poverty rateand, importantly, the pov-erty rate for childrenfell. Real incomesgrew in all five quintiles of the incomescale for the first time in five years (seeChart 214).

Further improvement may have occurredlast year, given the favorable levels of unem-ployment and growth in real income. ThePresidents program is designed to do evenmore by creating opportunity and encouragingresponsibility (see Chapters 5 through 12)


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Chart 2-12. INFLATION

Dec. 1989-Jan. 1993 Jan. 1993-Jan. 19960

1

2

3

4

5

3.8

2.7

PERCENT(average annual change in the Consumer Price Index, or CPI)

1 For a more det ailed explana tion of th e Administr at ions eco-nomic assumptions, see Analytical Perspectives, Chapter 1.

2 The Government now measures growth on the new basis thatthe Bureau of Economic Analysis introduced in J anua ry 1996.

and providing tax relief to millions of middle-income families (see Chapter 12).

Productivity growth has only begun torise, and the final pay-off of deficit reductionhas not yet arrived. But the fundamentaleconomic changes are in the right direction.

In the coming years, the saving and invest-ment boom of the last three years willgenerate higher incomes by enabling workersto produce and earn more. In the nearterm, the main effect of higher investment

has been to lower unemploymentitself anearly step toward greater prosperity.

A PRUDENT LOOK AT THE ECONOMICFUTURE

In its economic assumptions, the Adminis-tration projects a continuation of currentfavorable economic conditions. The assump-tions are reasonable and conservative. 1

Specifically, they project:

Real GDP growth (on the new chain-weighted basis 2 ) that averages 2.3 percenta year through 2002, in line with privateforecasters and CBOabout a half-point

a year less than what the Administrationhas achieved over the last three years;

The unemployment rate to remain stableat 5.7 percent, close to its current leveland within the range that i t has main-tain ed for over a year ;


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Chart 2-13. LONG-TERM INTEREST RATES(average yield on 10-year Treasury Notes)

Jan. 1990-Dec. 1992 Jan. 1993-Dec. 19950

1

2

3

4

5

6

7

8 7.8

6.5

PERCENT

-1

0

1

2

3

4

5

6

7

PERCENT, ANNUAL RATE

Lowestquintile

Secondlowest

Middlequintile

Fourthquintile

Topquintile

Top5%

Source: Bureau of the Census.

1992-941979-92

Chart 2-14. AVERAGE FAMILY INCOME BY QUINTILE(mean income adjusted for inflation)


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An increase in the CPI of about 2.8 per-cent a year from 1998 to 2002, about thesame as it averaged in the previous threeyears; and

The 10-year Treasury bond rate to fall by1.1 percentage points over the next fouryears as the deficit continues to decline.Over the past year, the rate has fallenby two percentage points.

These economic assumptions presume thatCongress adopts t he P residents pr oposalsmost fundamentally that the President andCongress put the budget on a path to balanceby 2002and that the progress will be evidentto households, businesses, and investors. Forthis reason, the Administration expects tosee declines in interest rates, stimulatingsustained growth a nd investment.


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Table 21 . ECONOMIC ASSUMPTIONS 1

(Calendar year s; dollar a mounts in billions)

1994Actual

Projections

1995 1996 1997 1998 1999 2000 2001 2002

Gross Domest ic Produc t (GDP):Levels, dollar a mounts in billions:

C ur re nt d olla r s .............................................. 6,931 7,254 7,621 8,008 8,417 8,848 9,295 9,772 10,268Rea l, ch ain ed (1992) dolla rs ......................... 6,604 6,742 6,888 7,047 7,212 7,380 7,553 7,730 7,911Chained price index (1992 = 100), annua l

a ver a ge ....................................................... 105.0 107.6 110.6 113.6 116.7 119.9 123.1 126.4 129.8Percent change, fourth quarter over fourth

quar ter :Current dolla rs .............................................. 5.9 4.1 5.1 5.1 5.1 5.1 5.1 5.1 5.1Rea l, cha ined (1992) dollar s ......................... 3.5 1.5 2.2 2.3 2.3 2.3 2.3 2.3 2.3Chained price index (1992 = 100), annua l

average ....................................................... 2.3 2.5 2.8 2.7 2.7 2.7 2.7 2.7 2.7Percent change, year over year:

Current dolla rs .............................................. 5.8 4.7 5.1 5.1 5.1 5.1 5.1 5.1 5.1Rea l, cha ined (1992) dollar s ......................... 3.5 2.1 2.2 2.3 2.3 2.3 2.3 2.3 2.3Chained price index (1992 = 100), annua l

average ....................................................... 2.3 2.5 2.8 2.7 2.7 2.7 2.7 2.7 2.7Incomes, b i l l ions of current dol lars :

P er son al i ncom e ............................................ 5,750 6,104 6,416 6,716 7,025 7,337 7,664 8,031 8,434Wa ges a nd s ala ries ....................................... 3,241 3,420 3,607 3,801 3,995 4,193 4,403 4,629 4,864Corpora t e profit s before t ax ......................... 528 602 650 702 753 800 843 882 917

Consumer P r ice Index (a l l urban) : 2Level (198284 = 100), a nnual a ver age ....... 148.2 152.4 156.6 161.3 165.9 170.5 175.3 180.2 185.2Percent change, fourth quarter over fourth

qua r t er ....................................................... 2.6 2.7 3.1 2.9 2.8 2.8 2.8 2.8 2.8Percent change, yea r over yea r ................... 2.6 2.8 2.8 3.0 2.8 2.8 2.8 2.8 2.8

Unemploymen t ra te , c iv i lian , percent :Four th quar t er level ..................................... 5.6 5.6 5.7 5.7 5.7 5.7 5.7 5.7 5.7Annua l average ............................................. 6.1 5.6 5.7 5.7 5.7 5.7 5.7 5.7 5.7

Federa l pay ra ises , January, percent :Milit ary .......................................................... 2.2 2.2 2.6 3.0 3.1 3.1 3.1 3.1 3.1

Civilian3

........................................................ ............ 2.0 2.0 3.0 NA NA NA NA NAIn teres t ra tes , percent :

91-day Tr easur y bills 4 .................................. 4.3 5.5 4.9 4.5 4.3 4.2 4.0 4.0 4.010-year Trea sury not es . ................................ 7.1 6.6 5.6 5.3 5.0 5.0 5.0 5.0 5.0

NA = Not available.1 Based on information available as of mid-Janu ary 1996.2 CPI for all urban consumers. Two versions of the CPI are published. The index shown here is that currently used, as required by law,

in calculating automatic adjustments to individual income tax brackets. Projections reflect scheduled changes in methodology.3 Percentages for 19941996 exclude locality pay adjustments. Percentages to be proposed for years after 1997 have not yet been deter-

mined.4 Average ra te (bank discount basis) on new issues within period.


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35

PROJECTING AMERICANLEADERSHIP


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37

PROJECTING AMERICAN LEADERSHIP

The age of possibility, about which thePresident has spoken, extends beyond Amer-ican borders to the world at large. Theend of the Cold War and the spread of democracy and free markets across the globeoffer the promise of a safer, more prosperousworld an d a more secur e America.

Nevertheless, the world is not withoutits dangers. Indeed, the Nation faces aninternational arena of unprecedented uncer-tainty, with new dangers that know noborders and that do not fit neatly into

the convenient framework of the Cold War.It is a world in which the line between

foreign and domestic issues is increasinglyblurred. With American standards of livingincreasingly dependent on how well our busi-nesses compete overseas, what we do abroadmatters a great deal for how well we live

at home. Put simply, retreat from the inter-national arena is not an option for theUnited States.

On the diplomatic front, our leadershiphas helped ease tensions, end conflicts, andbring peace in Europe, the Middle East,North Korea, and elsewhere over the lastthree years. And through trade and overseasassistance programs, we are helping spurdemocracy, expand markets, promote our ex-ports, and meet hu manitar ian needs.

When n eeded, we have called on our militaryforcesthe worlds strongest and best pre-paredto promote our interests and sustainthe peace. For 1997 and beyond, the budgetwould ensure that our forces remain readyand obtain the best military technology tocontinue to do their job.


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39

3 . ADVANCING UNITED STATES

LEADERSHIP IN THE WORLD

All over the world, even after the Cold War, people still look to us to help them seek the bless-ings of peace and freedom . . . . The United S tates can and should be the very best peacemaker . . . .

By keeping our military strong, by using diplomacy where we can and force where we must, byworking with others to share the risk and cost of our efforts, America is making a difference for

people here and aroun d th e world.

President ClintonJan uary 1996

The budget provides the resources to supportAmerican diplomatic leadership in defendingour interests and promoting democracy, freemarkets, and peace throughout the world.

The call and the opportunity for Americanleadership have never been greater. At atime when major threats to the United Statesare few, the opportunity to expand the reachof democracy and free markets is great.At the same time, new challenges to ourwell-being and to world peace have arisenfrom regional, ethnic, and national conflicts;to the proliferation of weapons of mass de-struction; to international terrorism and crime,narcotics trading, and environmental degrada-tion.

In this environment, the United Statesis uniquely suited to lead. And, in thisenvironment, the Nation must not foolishly,and shortsightedly, withdraw into isolationismand protectionism and deny ourselves theresources we require to provide that leader-ship.

The President proposes $19.2 billion forinternational affairs, slightly over 1 percentof the budget and 0.25 percent of GrossDomestic Product. Nearly all industrializedcountries spend a greater portion of theirincome on intern at iona l activities.

As America engages overseas, we mustfirst ensure that we promote and protectour interests in regions that are critical

to our security. Over the past three years,our achievements have been heartening.

Spurr ing Fore ign Pol icy Achievements

Through skilled diplomacy, the judicioususe of the worlds finest military force, andthe careful provision of foreign assistance,the United States has promoted peace andreduced threats to our security to a remark-able extent. Though problems obviously re-main in the Middle East, the seeminglyintractable hostility between Arabs and Israe-lis is giving way gradually to a recognitionthat the people of the region can benefitfar more from cooperation than confrontation.We continue to lead in promoting the peaceprocess, particularly between Syria and Israel.

In Europe, U.S. leadership in NATO provedcritical in bringing an end to the longestand bloodiest conflict on that continent sinceWorld War II. American diplomacy, forces,and assistance programs are now offeringhope to Bosnians and others in a regiontorn by struggle for over four years. Ourdecision to lead in ending this conflict hasbrought together a coalition of nations provid-ing forces and assistance to the new Federa-tion.

Nor is Bosnia the only American successin Europe. Though the peace process inNorthern Ireland remains difficult, it hasmade more progress in the past two yearsthan it has in decadesthanks, in part,


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Table 31. INTERNATIONAL DISCRETIONARY PROGRAMS(Budget a uth ority, dollar a mounts in millions)

1993Actual

1995Actual

1996Est imate 1

1997Proposed

DollarChange:1993 to

1997

PercentChange:1993 to

1997

International development and

hu man ita r ian assistan ce .......... 8,900 8,441 7,061 7,472 1,428 16%In tern a tion a l secu r ity assistan ce 6,148 5,670 5,915 5,828 320 5%Con duct of for eign a ffa ir s ............ 4,300 4,061 3,951 4,164 136 3%Foreign information and ex-

ch an ge act ivit ies ........................ 1,247 1,421 1,115 1,162 85 7%In tern a tion a l finan cia l pr ogr ams 599 536 553 567 32 5%

Total , International discre-t ionary programs ............... 21,194 20,129 18,595 19,193 2,001 9%

1 Includes Administra tions pr oposed adjust ment s t o 1996 continuing r esolution levels.

to our leadership in helping to bring theparties together.

In Central Europe, which was at the heartof the Cold War struggle, challenges continue

on the road to democracy and free markets.Yet the amount of change, which our supportand strong leadership helped to spur, istruly amazing. In many cases, Central Euro-pean economies are free and largely privatized.Gradually, these countriesfor example, Po-land, the Czech Republic, and Hungaryare becoming strong U.S. trading and diplo-matic partners and, along with some of Europes other new democracies, are wellon their way to integration with the trans-atlantic community.

While progress is slower in the New Inde-pendent States, U.S. relations with Russiaare strong and vital; in that critical country,the United States has provided unwaveringsupport for the movement to democracy andfree markets. We also have new, strongpartnerships with other key countries inthe region, such as Ukraine.

In Asia, America created an internationalcoalition to end the threat of nuclear prolifera-tion in North Korea. The North Koreanframework agreement continues to move for-ward with international assistance. We main-tain a strong diplomat ic and economic relation-

ship with Japan and are building a better,th ough complex, relat ionsh ip with China .

In our own Western Hemisphere, we havealso led the way in promoting democracy

and healthy trade and investment relation-ships. Most notably, U.S. leadership restoreddemocratic government and freedom to thepeople of Haiti, where the first peacefultransition from one elected president to an-other has just occurred.

Prom oting Our Securi ty Object ives

The budget continues to support our Na-tions critical security objectives.

The budget will provide funding for inter-national security assistance, especially critical

to the Middle East peace process, at $5.8billion (see Table 31). Of this amount,$5.3 billion in military financing grants andeconomic support (about the same as in1996) would help further the peace process.

In addition, the budget proposes to partlyfinance the cost of a squadron of F16aircraft to Jordan, in recognition of therisks that King Hussein is taking to advancethe Middle East peace process. Separately,the Administration has requested funds in1996 to initiate this important program.

The budget proposes to provide foreignmilitary financing grants to our emergingpartners in Central and Eastern Europe under


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413. ADVANCING UNITED STATES LEADERSHIP IN THE WORLD

the P residents Par tn ership for Pea ce initia-tive, which would help these countries meetthe conditions for membership in NATO.Economic support fund grants to countriessuch as Haiti and Cambodia are designedto help consolidate recent democratic gainsin th ose countr ies.

The budget proposes to continue assistanceto support the transition to democracy andfree markets in Central Europe and thepeace process in the Balkans. Specifically,it proposes $475 million for assistance pro-grams in the region. While the budget contin-ues to phase down assistance to northerntier countries, it includes the second $200million installment toward economic recon-struction funding for Bosnia. The Administra-tion has already requested the first install-ment of this program as a supplement tothe 1996 budget.

Burden sharing is especially strong in thisprogram; the United States is providing only20 percent of the bilateral reconstructionassistance that Bosnia will receive. This aidwould help restore municipal infrastructurethat was severely damaged by the war,and would offer financing for small, privateenterprises in order to rapidly boost employ-ment. By 1997, the economic recovery that

this aid should foster would permit a gradualphasedown in huma nitarian a id.

U.S. assistance to the New IndependentStates of the former Soviet Union wouldcontinue at $640 million. Given the potentialfor political and economic change in thisregion, legislative earmarking of the fundsby country and activity is particularly inappro-priate and may frustrate the achievementof objectives it is designed to reach.

Promoting Trade

Americas second major international goalis to promote an open trading system, whichwill contribute to U.S. economic prosperity.We have gone a long way toward layingthe groundwork for sustained, non-inflationarygrowth into the next century, most notablywith implementation of the North AmericanFree Trade Agreement and the multilateraltrade agreements concluded during the Uru-guay Round. In addition, we have moreclosely int egrated the Governmen ts ma ny

trade promotion activities through the TradePromotion Coordinating Committee, creatingsynergy among agency trade programs, signifi-cantly improving American business abilityto win contracts overseas, and creating export-related jobs at home. Consequently, we expectthe recent increases in U.S. exports to con-tinue, leading to major U.S. economic and

job gains.

The budget puts a high priority on programsthat help U.S. exporters meet foreign competi-tion and seize the opportunities that tradeagreemen ts offer.

The Trade and Development Agency makesgrants for feasibility studies of capital projectsabroad, and the Overseas Private Investment

Corporation insures and finances U.S. invest-ment in developing countries. The activitiesof both agencies are designed to help increaseexports, and the budget holds 1997 fundinglevels close to or above the 1996 enactedlevel.

A larger source of support for exportsis the Export-Import Bank, which offers loans,loan guarantees, and insurance for exports,primarily of capital goods. The budget main-tains funding levels for the Banks coreexport financing and insurance programs.

Finally, Commerce Department programspromote U.S. trade, especially through theInternational Trade Administration (ITA) andits U.S. Export Assistance Centers. The budgetproposes a slight increase for the ITA, com-pared to 1996 funding levels.

Bilateral development assistance throughth e U.S. Agency for Inter na tional Development(USAID) and contributions to the multilateraldevelopment banks (MDBs) also support U.S.exports. In the near term, development assist-

ance promotes American exports by financingdevelopment projects abroad which importAmerican goods (such as imports of Americanbulldozers to build a U.S.-financed road).In the longer term, dynamic economies indeveloping countries create strong commercialdemand for U.S. exports (as illustrated byrecipients of development aid in East Asia).For 1997, the budget proposes that USAIDdevelopment assistance grow by four percent,to $1.7 billion.


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The budget proposes that U.S. contributionsto the World Bank and the regional develop-ment banks grow to $1.4 billion, a 24 percentincrease over 1996. Congress cut the Presi-dents MDB budget request by 50 percentin 1996, reflecting a serious misunderstandingof how important MDBs arethey not onlyhelp the United States achieve its economicdevelopment and export promotion objectives,they also leverage our foreign assistancedollars through contributions from other do-nors.

When the World Bank, the first MDB,was established at the end of World WarII, the United States provided nearly allof the international funding. Today, the aver-age U.S. share of annual contributions tothe MDBs is only slightly over 20 percent.Moreover, the MDBs, particularly the WorldBank group, are coordinating multilateraland bilateral assistance programs and provid-ing large-scale funding to countries and re-gions of critical importance to the UnitedStatesthe Middle East, Bosnia, South Africa,the New Independent States, and Centraland Eastern Europe.

Address ing New Threa t s

The third goal of our international leader-ship is to address the new transnationalthreats to U.S. and global security and pros-perity: the proliferation of weapons of massdestruction, drug trafficking and the spreadof crime and terrorism on an internationalscale, unrestrained population growth, andenvironmental degradation.

U.S. diplomacy and law enforcement activi-ties are playing a key role in preventingthe spread of nuclear and other major destruc-tive weapons, particularly to outlaw stateslike Libya, Iraq, and Iran. The DefenseDepartments Nun n-Lugar pr ogram a nd t heSta te Depar tmen ts Nonproliferat ion a nd Dis-armament Fund are important parts of ourcommitment. (For additional information onthe Nunn-Lugar program, see Chapter 4.)

U.S. bilateral assistance programs relatedirectly to solving other transnational prob-lems. For example, assistance programs em-phasize source-country approaches to the waron drugs. The budget proposes $213 millionfor the Sta te Depar tmen ts na rcotics and

anti-crime programs, nearly double the 1996level. In addition, USAID carries out largeand successful programs to improve the envi-ronment, and America is a recognized worldleader in promoting safe and effective familyplanning projects. The budget requests over$700 million to meet the needs in thesetwo sectors.

The United States also plays a key leader-ship role as the world community addressesthese problems. The United Nations andits related specialized agencies, such as theWorld Health Organization and the Inter-national Atomic Energy Agency (IAEA), areimportant mechanisms for such internationalcooperation. In some instances, such as theU.N.s and IAEAs efforts to identify anddestroy Ira qs weap ons of mass dest ruction,international organizations prove an indispen-sable vehicle to help us achieve our nationalinterests.

Meeting Our U.N. Commitmen ts

The United States has provided leadershipto these international organizations for over40 years. Today, that leadership is underattack, threatened by sharp cuts in appropria-tions for U.S. contributions to the organiza-tions. For many of these institutions, member-country contributions are mandated by treaty;when America fails to meet its commitments,it accumu lates arrear s.

For the United Nations, related organiza-tions, and peacekeeping, U.S. arrears havenow grown to roughly $1 billion. The Adminis-tration recognizes the need for serious reformin the United Nations and related organiza-tions and is leading the effort. The budgetseeks full funding for our current obligationsto these institutions, as well as a downpayment on clearing the arrears, linked toaccomplishing needed reforms.

The United States also makes voluntarycontributions to a variety of internationalorganizations principally involved in develop-ment, population, and environmental pro-grams, such as UNICEF, the U.N. Develop-ment Program, the U.N. Population Fund,and the program created under the MontrealProtocol to protect the ozone layer. Becauseour leadership is critical to the success of


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433. ADVANCING UNITED STATES LEADERSHIP IN THE WORLD

these organizations, the budget proposes a14 percent increase in funding.

Providing Humanitar ian Assis tance

Finally, humanitarian and disaster relief remains a major international need, especiallyin areas with regional conflict. The budgetproposes $1.7 billion to continue our globalrole, which has enjoyed bipartisan support,in providing American humanitarian relief for the victims of natural and man-madedisasters.

Disaster relief programs in USAID andhumanitarian feeding under Public Law 480would continue slightly above 1996 spendinglevels. Funding for refugees would fall bythree percent, to $700 million, due to theend of the refugee problem in SoutheastAsia and the expected return of severalmillion refugees and displaced persons totheir homes in Bosnia under the peace settle-ment. The budget proposes to keep large-scale assistance available for the continuingrefugee needs in Africa and the Near East.


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45

4. SUP P ORTING THE WORLDS STRONGEST

MILITARY FORCE

The men

Documents

1997 Federal Budget Document