Message to the Congress Transmitting the Annual Economic Report of the President
To the Congress of the
first Economic Report, issued in 1982 after a year in office, could look only
to the future for encouraging economic news. The task of rebuilding the economy
was just beginning, and hard choices were being made. Inflation had begun to
come down from double-digit rates, but
And the accomplishments are not all in the past. Our policies will continue to contribute to rising standards of living in the years ahead. By enhancing private incentives and opportunities for work, investment, and entrepreneurship, we have laid the groundwork for growth far into the future. To ensure that the renewed energy of the private sector remains a force for growth, we must continue our efforts to bring down the Federal deficit through restraint on spending, to resist the siren song of protectionism, to support policies that foster noninflationary economic growth, and to rein in government when it threatens to make our markets less open, our industries less responsive, or our economy less flexible.
The Economic Expansion
November 1982, the
Employment has increased dramatically, and all demographic groups have benefited. While overall employment has risen about 15 percent since November 1982, employment of blacks has increased by more than 25 percent and employment of Hispanics by more than 40 percent. Correspondingly, unemployment rates -- especially among minorities -- have fallen rapidly, although those rates are still unacceptably high. I believe that all who want jobs should be able to obtain employment commensurate with their skills and abilities.
the unemployment rate has declined by almost one-half, some have claimed that
the new jobs are low-quality, dead-end positions, while others have argued that
booming employment has put us on the verge of another round of inflation.
Neither view is accurate. The facts show that the strongest job growth has been
in the higher paid, high-skill occupations. The bulk of the new jobs created
have been full-time positions in occupations that pay well. While it is true
that the number of jobs in manufacturing has risen more slowly than in the
service-producing sector of the economy, this is a reflection of the innovation
of American business and the skill of American workers, not a sign that the
United States is ``deindustrializing.'' The share of
manufacturing output in total output actually has risen over the course of the
expansion, and it is now above its postwar average. However, rapid increases in
manufacturing productivity have meant slower growth in employment in this sector.
This strong productivity growth, in combination with the downward adjustment of
the dollar's exchange rate, has lifted the competitiveness of our products on
world markets. Around the globe, products ``Made in the
Moreover, I do not believe that our economy has yet reached its full potential, or that our economic growth threatens price stability. Growth can and should continue. With sound and stable economic policies, saving and investment will be encouraged, and the Nation's productive capacity will continue to expand. I remain committed to the goal of price level stability, and I view the decline in inflation during my Administration as a major accomplishment. I would not take lightly the prospect of a resurgence of inflation. But economic growth itself will not lead to a spiral of worsening inflation; only irresponsible economic policies would do that.
economic projections show inflation slowing during the coming years, even as
output grows at a robust average annual rate of 3.2 percent. But continued
economic progress requires that policymakers adhere to forward-looking
principles, pursuing the long-term best interests of the Nation through a
sustained commitment to growth and stability. The prospects for growth in the
immediate future have been diminished somewhat by last year's plunge in the
stock market, as well as by the increase in interest rates and tightening of
monetary policy during 1987. Nevertheless, I anticipate that the
past 5 years have marked an outstanding period of economic growth in the
The Role of Government in the Economy
It is hard to believe that at the beginning of the 1980s the prevailing attitude toward the economy could best be described as despair. Inflation and interest rates had ratcheted higher with each successive business cycle, and, as the economy suffered through its second recession in 2 years, the goal of sustainable growth appeared increasingly elusive. Amid double-digit inflation and unemployment rates, there were calls for the Federal Government to do more and more, thereby compounding the failed policies of the past. Instead, I took government policy back to the basics, and the last 5 years of economic growth testify to the vitality of free markets and the productivity of the American people. Government intrusions in the Nation's economic life have been reduced, and the private sector has responded with an explosion of activity, creating new products and new jobs at a very rapid rate.
The Federal Government has an important role to play in the Nation's economy, but it is a limited role. As a general proposition, economic decisions should be left to the private sector, which has been our economy's strength throughout its history, or to State and local governments when the issues cannot be handled satisfactorily by the private sector. Only in issues truly national in scope is there a role for the Federal Government.
have made efforts to restrain Federal spending, to limit it to only the
government's vital functions, and those efforts have borne fruit. Last fiscal
year, for the first time in 14 years, Federal outlays, after adjustment for
inflation, declined. Government spending on goods and services absorbs
resources that might be used better by the private sector, and any Federal
outlay must be financed eventually by inflation or taxes. Because there is no
free lunch, we must make the hard choices, funding only those programs that are
in the best interest of the Nation, not those that happen to have the most
influential lobbyists. For example, while a strong national defense is rightly
the responsibility of the Federal Government, a continued proliferation of pork-barrel
projects is not.
In the conduct of macroeconomic policies, we have turned away from the stop-and-go policies of the past. My Administration has adopted a long-term view that fiscal policy determines the division of economic activity between the public and private sectors and is not meant to respond to every rise and fall in the economic data. Similarly, monetary policy should provide adequate liquidity for sustained noninflationary growth. Together, these policies create a stable environment in which individuals and businesses can plan for the future and make the most of their economic opportunities.
For too long the Federal Government has interfered unnecessarily in private economic decisions. There is a legitimate, although limited, role for the Federal Government in certain industries -- for example, in ensuring the safety and soundness of the Nation's banking and payments systems. But many government regulations impede the operation of markets, inhibit competition, or impose costs on firms and raise the prices faced by consumers, without providing commensurate benefits. Regulations that interfere with the efficient use of labor, investment, and raw materials ultimately reduce our productive potential, making this country worse off.
While my Administration has been successful in reducing many regulations and intrusions into markets, much remains to be done. We must lessen remaining disincentives to work, diminish the burden of Federal regulations, and dismantle government programs that needlessly subsidize inefficient producers. In particular, we must release financial institutions from outdated legal restraints, eliminate the remaining controls on interstate trucking, deregulate natural gas, and repeal mileage standards for new automobiles. We must resist appeals for even more government intervention that would introduce additional inefficiencies, such as requiring advance notification of layoffs and plant closings. With few exceptions, the private sector is best able to allocate resources to their most highly valued uses, and it should be allowed to do so without excessive paperwork and restrictions. That is why privatization, deregulation, and private sector initiatives have been important elements of my economic program. I believe in the inherent dynamism of the private sector, and I believe that the most constructive thing government usually can do is simply get out of the way.
The International Environment
Administration has been a force for economic change in the
order to enhance growth and economic opportunity, many nations have followed
our lead, undertaking reductions in sky-high tax rates that diminish incentives
to work, save, and produce. In addition, tax reform is becoming a worldwide
movement. Just as in the
continent to continent, the benefits of privatization and deregulation are
becoming appreciated. Even
In those developing countries that encourage investment and private enterprise, the ensuing economic growth should contribute to lessening their debt problems. The debt burden carried by developing countries is not just their problem; we all have a vital interest in finding solutions that promote growth and protect open international financial markets. And we will continue to work with all who display a real determination to deal with this difficult issue.
continue to reap the benefits of an open international trading system, we are
committed to reducing further the barriers that interfere with the free flow of
goods, services, and capital. To this end, the
The Challenges Ahead
American people elected me to this office with a vision of a reinvigorated
economy, and I have watched that vision become reality. The resurgence of
Foremost among our challenges is the continued high level of Federal spending and the budget deficit. Federal receipts last year were $255 billion above their level in 1981; nevertheless, the deficit has nearly doubled since then, bloated by a $326 billion increase in outlays. Although we have succeeded recently in slowing the growth of spending, and the deficit declined by $71 billion in the last fiscal year, the deficit is still too large.
Recent progress in controlling Federal outlays notwithstanding, as a percent of GNP, outlays remain well above the postwar average. The government continues to spend too much, absorbing resources that could be put to better use by the private sector. There are several essential functions of the Federal Government, such as providing a strong national defense and ensuring an appropriate safety net for those in need, but in many areas the government's presence is oppressive and unnecessary.
Tax increases are not the key to eliminating the deficit. Some taxes are unavoidable -- the necessary functions of the Federal Government must be paid for. But tax reform and the cuts that have been instituted in income tax rates represent successful efforts to find less distorting, less burdensome, and more equitable means of financing government. Undoing tax reform through tax increases would affect economic activity adversely by raising uncertainty about government policy and reducing incentives to work and produce. Rather, in coming years we should look to ways to enhance incentives for investment in future productive capacity, including reducing the tax rate on capital gains.
The Gramm-Rudman-Hollings law and our recent agreement with the Congress on a 2-year budget-trimming package have charted the course for additional deficit reduction. Those are steps in the right direction. But the budget process itself remains a major obstacle to eliminating the deficit. And I am not the only one to have noticed that the budget process is a disaster; a recent survey of Members of Congress identified it as a major source of frustration. The process is not working and it must be reformed; discipline and responsibility must be restored.
Current budget practice is to deliver a pair of mammoth bills that must be passed and signed in a matter of hours -- or the government has to shut down. This is not responsible government, and I will not sign another of these behemoths. This budget process does not serve the best interests of the Nation, it does not allow sufficient review of spending priorities, and it undermines the checks and balances established by the Constitution.
So that such massive appropriations bills do not have to be an all-or-nothing proposition, I have asked for the line-item veto, a power that 43 State Governors already have. With a line-item veto, future Presidents could pare away waste and enforce budget discipline. In addition, expanded rescission powers would allow the Executive to cut unnecessary spending on programs that, in many cases, have outlived their usefulness. Finally, to ensure that balanced budgets become a permanent feature of our fiscal landscape, the legislatures of 32 States have asked for -- and I endorse -- a constitutional amendment to force the Federal Government to live within its means. These steps must be taken, because the current budget process is impending budget progress. By its very nature, the democratic process is often messy and unfocused. But we know that democracy works and that tough decisions can be made. We must rise to the challenge again and prove that we can craft sound budgets through a sensible process.
also must resist efforts to push the Nation into protectionism. Our foreign trade
deficit is very large, but it has turned the corner in real terms. Last year
foreign trade contributed significantly to our economic growth. Moreover,
further improvements are on the way. At this point especially, it would be a
tragic mistake to attempt to close the trade gap by closing our markets.
My administration is committed to working diligently with the Congress to draft responsible trade legislation, but if that legislation is not free of harmful protectionist measures, I will veto it. Our goal is to see the trade deficit reduced in an environment of sustained economic growth and low inflation. To this end, we are working with the other major industrial countries to coordinate economic policies that sustain noninflationary economic growth, encourage an orderly reduction of international imbalances, and thereby foster stability of exchange rates.
must maintain the confidence of foreigners and our citizens alike in the
ability of the
our job is not finished. The Federal budget must be controlled in order to
build a solid foundation for future economic growth. And I will not be
satisfied until all Americans share in this prosperity; there are still too
many enmeshed in poverty and without jobs. We must rise to our remaining
challenges, heartened by our triumphs and inspired by the resilience of a
The White House,
Note: The message was not issued as a White House press release.