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The Congressional Budget Office is required by Section 202(f) of the Congressional Budget Act of 1974 (Public Law 93-344) to submit to the Committees on the Budget of the House of Representatives and the Senate an annual report. This year's report examines the state of the economy and analyzes alternative fiscal policy options. In accordance with CBO's mandate to provide objective analysis, the report contains no recommendations.

The report was prepared by George R. Iden, Joan D. Schneider, Frank S. Russek, Jr., Stephen H. Zeller, Robert A. Dennis, Peter M. Taylor, Christopher D. Kask, Marvin M. Phaup Jr., Lawrence E. DeMilner, Joseph A. Ritter, Robert W. Staiger, and John W. Straka, under the direction of William J. Beeman and James E. Annable, Jr.

Robert L. Faherty and Francis S. Pierce edited the manuscript. Debra M. Blagburn, Dorothy J. Kornegay, Kathleen M. Quinn, and Marsha L. Mottesheard typed the many drafts. Art Services, Inc., prepared the graphic figures.
 

Alice M. Rivlin
Director
March 1981
 
 

SUMMARY

CHAPTER I. INTRODUCTION

CHAPTER II. RECENT ECONOMIC DEVELOPMENTS

• Constant-Dollar Production and Sales
• Labor Markets and Price Developments

CHAPTER III. MONETARY AND FISCAL POLICY

• Monetary Policy
• Fiscal Policy

CHAPTER IV. THE OUTLOOK THROUGH 1982 WITH CURRENT BUDGET POLICIES

• Policy Assumptions of the Forecast
• The Outlook

CHAPTER V. ANALYSIS OF TWO FISCAL POLICY OPTIONS

• Analysis of the Two Fiscal Policy Options
• Administration and CBO Projections Compared
• Conclusion

CHAPTER VI. PROFITS AND BUSINESS INVESTMENT

• Long-term Trends in Profitability
• Capital Accumulation, Innovation and Productivity Growth.
• Policy Strategies to Stimulate Investment

In 1980, a combination of rapid inflation, high unemployment, lagging productivity, and record high interest rates battered the U.S. economy. In response to the poor performance of the economy, President Reagan has proposed a dramatic shift in economic policies designed to reduce inflation and increase economic growth. The proposed policies include large tax cuts, a reduction in the growth of federal spending, tight monetary policy, and substantial deregulation of the economy.

Inflation in 1980, as measured by the Consumer Price Index (CPI), remained near the record level of the previous year. Relatively large increases occurred in energy prices and mortgage interest costs; but sharp price increases were more widespread than in 1979, reflecting an acceleration in production costs. The rapid inflation had adverse effects throughout the economy.

The economy experienced a very sharp, though brief, decline in real output in the spring of 1980--the seventh recession since World War II. This was followed by a relatively weak recovery in the second half of the year. Along with the drop in output, the unemployment rate rose abruptly from 6 percent at the end of 1979 to 7.6 percent in May, and declined only slowly thereafter. An unusual factor was the unprecedented swings in interest rates: after hitting record highs early in the year, interest rates dropped sharply as credit demands declined during the recession. But as the recovery gained momentum, credit demands increased and interest rates rose sharply again--reaching new highs by year-end. As the new year began, economic growth, as measured by real gross national product (GNP), accelerated but many forecasters expected a slowing or even a decline during the spring as a result of the high interest rates.

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