To the Congress of the United States:
I have long believed that the vitality of the American economy and the prosperity of the American people have been diminished by inappropriate policies of the Federal Government: unnecessary government regulations that discouraged initiative and wasted scarce capital and labor; an inefficient and unfair tax system that penalized effort, saving, and investment; excessive government spending that wasted taxpayers' money, misused our Nation's resources, and created budget deficits that reduced capital formation and added to the burden of the national debt; and monetary policies that produced frequent business cycles and a path of increasing inflation.
I came to Washington to change these policies. The needed reforms are far from complete, but substantial progress can already be seen: the burden of regulation has been reduced, tax rates have been lowered and the tax structure improved, government spending on a wide range of domestic programs has been curtailed, and a sound monetary policy has been established.
Although the full favorable effect of those reforms on our Nation's rate of economic growth will take time to develop, some of the benefit of our economic policies is already visible in the current recovery. The economy's performance in 1983 was very gratifying to me. The 3.2 percent rise in consumer prices between 1982 and 1983 was the lowest rate of inflation since 1967. The recovery produced a sharp drop in unemployment and a substantial increase in the income of American families. The number of people at work increased by more than 4 million and the unemployment rate fell from a high of 10.7 percent in December 1982 to 8.2 percent in December 1983. The 6.1 percent rise in real gross national product (GNP) last year means that real annual income per person in the United States rose $700.
Despite the substantial reduction in unemployment, the number of unemployed workers remains unacceptably high. Continued economic recovery will mean millions of additional jobs in the years ahead and further declines in the rate of unemployment. In 1984 alone, the American economy is expected to add more than 3 million additional jobs. By the end of the decade, we will need 16 million new jobs to absorb a growing labor force. Only a strong and expanding economy can provide those jobs while achieving a progressively lower level of unemployment over the next 6 years.
Although economic growth is by far the most important way to reduce unemployment, special policies to help the structurally unemployed and particularly disadvantaged groups can also be helpful. To assist these individuals in developing job-related skills that will lead to productive careers in the private sector, I proposed the Job Training Partnership Act that I signed into lave in 1982. Last year I proposed additional measures to increase opportunities for training and retraining. Although the Congress has enacted some of my employment proposals, I am still waiting for congressional action on others.
Of particular concern to me is the unemployment among teenagers. Such unemployment is not only a problem in itself, but is also indicative of lost opportunities to acquire on-the-job training and job-related skills. It is widely recognized that the minimum wage law is a substantial barrier to the employment of teenagers, especially minority teenagers. I have proposed that during the summer months the minimum wage for teenagers be reduced to 75 percent of the regular minimum wage. This reform would give many teenagers the opportunity to get a first job and acquire the skills needed to help them with subsequent employment and would not hurt adult employment. With an unemployment rate of nearly 50 percent among black teenagers and with only about 20 percent of black teenagers employed, we must act. The Federal Government must not be the source of barriers to employment.
Inflation and Monetary Policy
Reducing the rate of inflation was my most immediate economic goal when I arrived in Washington. In the preceding 24 months, the consumer price level had increased more than 27 percent. Many people feared the U.S. Government had lost its ability to control inflation. Until inflation was brought under control, a healthy recovery could not get under way.
The inflation rate has declined dramatically over the past 3 years. Between 1982 and 1983, the consumer price index rose only 3.2 percent. Americans can again have confidence in the value of the dollar, and they can save for the future without fearing that the purchasing power of these savings will be destroyed by inflation. I am firmly committed to keeping inflation on a downward path. We must never relax in our pursuit of price stability.
The basic requirement for a continued moderation of inflation is a sound monetary policy. I continue to support the Federal Reserve in its pursuit of price stability through sound monetary policy. Last year was a particularly difficult time for monetary policy because of the substantial changes in financial regulations. I am pleased that, in spite of these difficulties, the monetary aggregates at the end of the year were within their target ranges. I expect that in 1984 the Federal Reserve will expand the money stock at a moderate rate that is consistent with both a sustained recovery and continuing progress against inflation.
There are those who advocate a fast rate of money growth in an attempt to depress interest rates. Experience shows, however, that rapid money growth inevitably leads to an increased rate of inflation and higher interest rates. The only monetary policy that can bring interest rates down, and keep them down, is one that promotes confidence that inflation will continue to decline in the years ahead.
The Dollar and the Trade Deficit
The high interest rates in the United States and our low rate of inflation continue to make dollar securities an appealing investment for individuals and businesses around the world. In addition, the United States has been an attractive place for stock market investment and for direct business investment. The result has been a continued rise in the dollar's exchange value relative to other currencies of the world.
The sharp rise in the value of the dollar since 1980 has made it cheaper for Americans to purchase products from overseas, thereby helping us fight inflation. But the dollar's sharp rise has made it difficult for American businesses and farmers to compete in world markets. The decline in U.S. exports and the substantial rise in our imports has resulted in record trade deficits in 1982 and 1983. The trade deficit has been temporarily exacerbated by the international debt problems and by the more advanced stage of recovery in the United States than in the world at large.
Despite these problems, I remain committed to the principle of free trade as the best way to bring the benefits of competition to American consumers and businesses. It would be totally inappropriate to respond by erecting trade barriers or by using taxpayers' dollars to subsidize exports. Instead, we must work with the other nations of the world to reduce the export subsidies and import barriers that currently hurt U.S. farmers, businesses, and workers.
I am also firmly opposed to any attempt to depress the dollar's exchange value by intervention in international currency markets. Pure exchange market intervention cannot offset the fundamental factors that determine the dollar's value. Intervention in the foreign exchange market would be an exercise in futility that would probably enrich currency speculators at the expense of American taxpayers. A combination of exchange market intervention and expansionary monetary policy could reduce the dollar's exchange value, but only by causing an unacceptable increase in the rate of inflation. The dollar must therefore be allowed to seek its natural value without exchange market intervention.
One of the four key elements of my program for economic recovery is a far-reaching program of regulatory relief. Substantial progress has been made during the last 3 years. The growth of new regulations has been reduced by more than a third. The demands on the private sector of government paperwork have been reduced by several hundred million hours a year. The Congress approved legislation that has led to substantial deregulation of financial markets and intercity bus transportation. The Federal Communications Commission, with our support, has reduced the regulation of broadcasting and of new communications technology, and the Interstate Commerce Commission and the Civil Aeronautics Board have gone far down the path of deregulation of competitive transportation markets. The benefits of these and other deregulation measures are now increasingly apparent to American consumers and businesses.
It is also apparent that substantial further deregulation and regulatory reform will require changes in the basic regulatory legislation. I urge the Congress to act on the several measures that I proposed last year on natural gas decontrol, financial deregulation, and reform of private pension regulation. I remain confident that there is a basis for agreement on measures that would reduce the burden of Federal regulations, while protecting our shared values and not jeopardizing safety.
The final installment of the 3-year personal tax cut took effect in July, giving a helpful boost to the economic recovery. The income tax rate at each income level has been reduced by about 25 percent since 1980. In 1984 a median income four-person family will pay about $1,100 less than it would have without these tax reductions. And, beginning in 1985, the tax brackets will be adjusted automatically so that inflation will no longer push taxpayers into higher brackets and increase the share of their income taken in taxes.
The Economic Recovery Tax Act of 1981 went beyond reducing tax rates to establish important reforms in the structure of the tax system. For businesses, the Accelerated Cost Recovery System increased the after-tax profitability of investments in plant and equipment. The sharp fall in inflation has also increased after-tax profitability. As a result, investment in business equipment has recently been quite strong despite the high real interest rates.
For individuals, the Economic Recovery Tax Act reduced the marriage tax penalty, the estate tax burden, and tax discrimination against saving. The response to the universal eligibility of Individual Retirement Accounts (IRAs) has been far greater than was originally expected. It is estimated that more than 15 million individuals now use IRAs to save for their retirement. Last year, I proposed to expand the opportunity for all married couples to use IRAs fully by allowing them to contribute up to $2,000 each per year to an IRA even if only one has wage income.
Further improvement and simplification of our tax system are sorely needed. The burden of taxation depends not only on the quantity of tax revenue that is collected but also on the quality of the tax system. I have asked the Secretary of the Treasury to develop a plan of action with specific recommendations to make our tax system fairer, simpler, and less of a burden on our Nation's economy. By broadening the tax base, personal tax rates could come down, not go up. Our tax system would stimulate greater economic growth and provide more revenue.
One of my principal goals when I came to Washington was to reverse the dramatic growth of Federal spending on domestic programs and to shift more resources to our Nation's defense. Although many doubted this could be done, both goals are being achieved. We must do everything that we can to avoid waste in defense as in other areas of government. But we must also be willing to pay the cost of providing the military capability to defend our country and to meet our responsibilities as the leading Nation of the free world. Outlays for defense had declined to only 5.2 percent of GNP in 1980, less than one-fourth of total government outlays. By the current fiscal year, defense outlays have increased to 6.7 percent of GNP and 28 percent of total outlays. Real defense outlays have grown 39 percent since 1980. Our spending on defense, however, remains a far smaller percentage of our national income than it was in 1960, when defense outlays took 9.7 percent of GNP.
Real spending has been cut on a wide range of domestic programs and activities. Many wasteful bureaucratic activities have been eliminated and the number of nondefense employees on the Federal payroll has been reduced by 71,000. We have examined every area of Federal Government spending, and sought to eliminate unnecessary and wasteful spending while protecting the benefits needed by the poor and the aged. As a result, total nondefense spending now takes a smaller share of our GNP than it did in 1980. Moreover, under present law, nondefense spending will continue to take a declining share of our GNP in the years ahead.
This reduction has been accomplished without any decrease in existing social security benefits or any change in the medicare benefits for the elderly. Spending on all other nondefense activities and programs has actually declined over 12 percent in real terms since 1980. Even with no further reductions in these activities and programs, their share of GNP in 1986 will be nearly back to the level of 1965.
I am committed to continuing the search for ways to reduce government spending. The budget that I am submitting to the Congress identifies significant savings in entitlement programs and reductions in outlays for other programs that are excessive or that are not the proper responsibility of the Federal Government. The Grace Commission has given us some 2500 ways to reduce wasteful spending that could save billions of dollars in the years ahead.
I have long believed that our Nation's budget must be balanced. A pattern of overspending by the Federal Government has produced a deficit in 22 of the last 23 years. My most serious economic disappointment in 1983 was therefore the failure of the Congress to enact the deficit reduction proposals that I submitted last January in my budget for fiscal 1984. We would be much closer to a balanced budget today if the Congress had enacted all of the spending cuts that I have requested since assuming office, and if the long recession and the sharp decline in inflation had not substantially reduced real tax revenue. In last year's budget I proposed changes in outlays and revenues that could put the deficit on a sharply declining path that, by 1988, would have been less than 2 percent of GNP and on its way to a balance of revenues and outlays.
The unwillingness of the Congress to accept the proposals that I offered has made it clear to me that we must wait until after this year's election to enact spending reductions coupled with tax simplification that will eventually eliminate our budget deficit. But we cannot delay until 1985 to start reducing the deficits that are threatening to prevent a sustained and healthy recovery. I have therefore called on the Democratic and Republican leaders in the Congress to designate representatives to work with the Administration on the development of a "down payment" deficit reduction program.
I believe that this bipartisan group could develop a package that could be enacted this spring which would reduce the deficit by about $100 billion over the next 3 fiscal years. The package could include a number of the less contentious spending cuts that are pending before the Congress plus additional outlay savings based on the proposals of the Grace Commission. Additional revenue could be provided by measures to close certain tax loopholes—measures that the Department of the Treasury has previously said are worthy of support.
These deficit reductions can increase the public's confidence in our economic future and their faith in the ability of the political system to deal satisfactorily with the deficit. The down payment package can be a first step toward full elimination of the remaining deficits. Even with a 3-year $100 billion package, the deficits projected for fiscal 1986 and beyond are totally unacceptable to me. They would be a serious threat to our Nation's economic health and a heavy burden to future generations. I am committed to finding ways to reduce further the growth of spending and to put the budget on a path that will lead to a balance between outlays and receipts. In 1985 I will submit a budget that can achieve this goal. But we must go further and make basic structural reforms in the budgetary process-including the line-item veto and the balanced budget amendment—that will keep spending under control and prevent deficits in the future.
As I look ahead, I am very optimistic about the prospects for the American economy. Substantial progress has been made in reforming the economic policies that will shape our economic future. If we continue to develop and pursue sound policies, our Nation can achieve a long period of strong economic growth with low inflation, and the American people can enjoy unprecedented prosperity and economic security.
February 2, 1984.