$40,000 (1980 prices) and were producing 88 percent of the total value of production or farm sales.

U.S. rangeland is considered to be in its best overall ecological state since the turn of the century. About 80 percent of the area is rated as in stable or improving condition. However, significant work remains to be done to improve the rest. Between 1947 and 1989, the total output of livestock and livestock products rose 1.8 times, while during the same period production per unit of breeding stock rose 2.2 times. The total number of cattle increased to 86 million in 1945 and to 132 million in 1975. Since then, cattle numbers have declined (to 98 million by 1990), reflecting a significant decline in average beef consumption per capita in recent years and greater weight per head of cattle.

COASTAL ZONES

Like many of the land resources described above, U.S. coastal zones are extremely vulnerable to climate change, particularly as it relates to sea level rise. Coasts and oceans contribute significantly to the U.S. economy and to the quality of life of U.S. citizens. Excluding Alaska, U.S. coastal zones support nearly half of the nation's population, while accounting for only 11 percent of the land mass. Between 1960 and 1988, coastal populations rose more than four times the national average. Studies conducted by the U.S. government anticipate a 15 percent increase in coastal population over the next two decades, concentrated in California, Florida, and Texas.

These rapid increases in population have subjected coastal zones to a disproportionate share of the disruptive impacts of human activities. A 1990 federal assessment of 42,956 estuarine coastline kilometers (26,693 miles) and 6,952 ocean coastline kilometers (4,320 miles) revealed that only 56 percent of estuarine waters are swimable and fishable, while 89 percent of ocean coastline is deemed suitable for these activities.

Wildlife Resources

As is true for most other nations, the United States has not conducted a comprehensive, nationwide survey of its wildlife or biodiversity. However, during the past twenty years, evidence of the erosion of the diversity of life at all levels has grown within the United States and worldwide, and the consequences of climate change could lead to significant additional impacts.

In 1991, the U.S. government added 71 domestic

species to the Threatened and Endangered Species List, bringing U.S. species on the list to 668. Some 4,000 species remain candidates for listing. A 1990 assessment of recovery status for listed species revealed that 38 percent are declining, 10 percent are improving, 31 percent are stable, 2 percent are extinct, and 19 percent are of unknown status. Of the U.S. plant and animal species listed as threatened or endangered in 1990, fully 40 percent are plants, and slightly more than 10 percent are mammals, with approximately equal proportions (about 14 percent) of birds, fish, and invertebrates, and a lesser percentage (7.3 percent) of reptiles and amphibians.

Water Resources

The development of water resources has been key to the growth and prosperity of the United States. Water resources have been developed for navigation, irrigation, hydroelectric power, urban and domestic uses, municipal and industrial uses, and recreation. They have enabled urban and agricultural centers to flourish in semi-arid regions of the country. However, potential climate changes, including changes in precipitation and evaporation, may have significant impacts on water resources, leading to limitations on the availability of fresh water, particularly for agriculture, and increases in levels of aridity in some areas. Currently, most of the nation's freshwater needs are met by withdrawals from streams, rivers, lakes, reservoirs, and ground-water aquifers. Even though total withdrawals of surface water more than doubled from 1950 to 1980, withdrawals still remained less than 21 percent of the renewable supply in 1980. However, some areas of the country experience intermittent water shortages during periods of drought.

In the arid sections of the western United States, there is increasing competition for water, not only as drinking water for growing urban populations and American Indian water rights, but also for industry, agriculture, recreation, and support of natural ecosystems. The flows of many streams in this part of the country are fully allocated to current users, limiting opportunities for expanded water use by major new facilities, although recently enacted state legislation adopts a market-based approach to water pricing and allocation, thus offering the potential to alleviate projected shortfalls. Also pertinent are minimum-flow requirements to preserve threatened and endangered species.

The United States of America can be characterized most accurately as a mixed economy. That is, some economic activity is carried out by private decision makers (i.e., companies and consumers) and organized in free markets, and other economic activity is carried out by the federal, state, and local governments of the United States. Moreover, most of the private-sector "market" activity in the U.S. economy is subject to some sort of government action or oversight.

Several principles, institutions, and technical factors have contributed to the evolution of America's mixed economy. The first of these is the respect for individual rights, especially the right to own and use private property to one's own advantage.

The U.S. economic system is also underpinned by a belief that exchange, as opposed to tradition or force, is the most efficient means of organizing economic activity. Put another way, relative prices would ideally be the sole basis on which economic agents within the U.S. economy would make decisions about production and consumption. Combined with a system of well-defined and well-protected private property rights, the price system is expected to lead to an allocation of the resources of the U.S. economy that produces the greatest possible social welfare.

The production of some goods and services creates costs or benefits that are not captured by the price system. In these cases, the price system causes too much or too little of the good or service to be produced to maximize social welfare. Market failures can occur in either of these cases. The U.S. government has frequently intervened to promote the allocation of resources that more closely resembles the welfare maximization allocation in markets characterized by market failure.

The U.S. government intervenes in the market to provide for public goods, such as national defense. Another common reason for government intervention in the market is the presence of externalities, which exist when the social costs of an activity differ from its private costs. For example, only part of the costs of

emissions from motor vehicles accrue to the vehicle owner; the remainder accrue to other members of society and to the environment. As a practical matter, it is very difficult to establish accurately the cost of the externality in order to internalize it by a fee or tax. Government intervention may include regulations to limit the physical quantity of pollution that individuals may produce, or charging polluters a fee for each unit of pollution emitted. Such interventions need to take into account their effects on international competitiveness if other countries do not similarly intervene.

In addition to providing public goods and attempting to mitigate the effects of externalities, the federal government transfers wealth among various members of the U.S. society for social, cultural, or political purposes. Such transfers include commodity support to agricultural producers, and income maintenance and health care provisions for low-income families.

While the role of government in the U.S. economy is large, most government interventions are intended to facilitate or support well-functioning markets. By protecting property rights, reducing externalities, and ensuring a minimum standard of living for all of its citizens, the U.S. government fosters an environment in which market forces can operate.

Finally, attention should also be given to the fact that "government imperfections" exist. It is not true, for example, that in formulating policy one can count on a dispassionate government to intervene flawlessly to correct market imperfections. The government itself is a source of imperfections—as evidenced, for example, by pork-barrel spending, continuation of federal enterprises, price controls, and restrictions on domestic and international trade. Nobel prizes in economics have been awarded in recent years to economists who caution that the public sector itself is a source of imperfections. The choice in practice, of course, is not between imperfect markets and perfect government but between imperfect markets corrected—or possibly made worse by an imperfect government.

Composition and Growth

From 1960 to 1991, the U.S. economy grew at an average annual rate of 2.9 percent, raising real gross domestic product (GDP) from $2 trillion to nearly $5 trillion by the end of the period (including capital consumption adjustment) (Figure 9). In 1991, U.S. per capita GDP amounted to $22,450, which represented a 76 percent increase in real terms above the 1960 amount. Growth generated a 75 percent increase in per capita income, which stood at $19,189 in 1991. During this period, the percentage of GDP devoted to pollution control and abatement expenditures also rose steadily, from 0.97 in 1972 to 2.09 in 1990.

The structural changes of the past thirty years in the U.S. economy are apparent in Figure 10. For three decades, income and employment generated by the service sector have grown substantially, while other sectors have shown only modest growth. In terms of national income, the service sector (which includes communications and public utilities, finance, insurance, and real estate) expanded from 27.1 percent of the economy in 1960 to 41 percent in 1991.

Employment in the service industries nearly tripled over the same period, while employment in the natural resource industries (agriculture, forestry, fisheries, and mining) declined by some 212,000 full-time equivalents (an equivalency measure that takes account of lessthan-full-time positions). Payrolls both in the trade and transportation and in the government sectors nearly doubled since 1960, while manufacturing and constructions jobs grew more slowly.

U.S. real wages have lagged below their long-term growth trend since the early 1970s. In 1991, average

gross hourly earnings in 1982 dollars in private nonagricultural industries were 12.7 percent below the 1973 figure.

The United States earned a surplus in its international merchandise trade accounts throughout the post-World War II period until the 1970s (Figures 11 and 12). Since 1976 it has incurred a yearly balance-oftrade deficit, which peaked in 1987 at $159.5 billion (3.5 percent of GDP). Since then, the trade balance has improved steadily, with a deficit of $73.4 billion in 1991 (1.3 percent of GDP).

While earnings on services and investment income have partly offset the trade deficit, the U.S. balance on current account has also been negative for a number of years. After reaching a high of $160 billion in 1987, the

Sources: CEA 1992a; U.S. DOC 1992a, 1992b

deficit on current account declined to $92 billion in 1990, and to less than $4 billion in 1991. (The 1991 figure was affected by large payments received from other countries in connection with the Gulf War.)

The foreign-exchange value of the U.S. dollar reached a high in 1985 and then declined. In 1991, the Real Exchange Rate Index of the dollar was 29 percent below the 1985 level and 8 percent below the 1980 level. As a result of the large deficits in its international accounts, the net international investment position of the United States fell from a positive figure of $258.5 billion in 1982 to a negative figure of $360.6 billion in 1990, a shift of $619 billion (based on direct investment at market value).

The U.S. government's outlays have exceeded its revenues for thirty-one of the past thirty-three years, resulting, in part, in a threefold increase in the gross federal debt since 1960 (Figure 13). While the trend toward progressively larger federal budget deficits is expected Figure 13

Sources: CEA 1992; U.S. DOC 1992a

to be reversed in the near future, even comparatively optimistic projections suggest that the U.S. government will continue to increase its debt through the end of the century.

An important implication of the federal budget deficit for environmental protection in general, and for measures to address climate change, in particular, is that any measures the government takes should be costeffective. That is, of all the measures that might achieve a given reduction in greenhouse gas emissions, the preferred measure would be the one that maximizes net benefits to the nation.