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Ronald Reagan: White House Report on the Program for Economic Recovery
Ronald
Ronald Reagan
White House Report on the Program for Economic Recovery
February 18, 1981
Public Papers of the Presidents
Ronald Reagan<br>1981
Ronald Reagan
1981
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I. A Program for Economic Recovery

Today the Administration is proposing a national recovery plan to reverse the debilitating combination of sustained inflation and economic distress which continues to face the American economy. Were we to stay with existing policies, the results would be readily predictable: a rising government presence in the economy, more inflation, stagnating productivity, and higher unemployment. Indeed, there is reason to fear that if we remain on this course, our economy may suffer even more calamitously.

The program we have developed will break that cycle of negative expectations. It will revitalize economic growth, renew optimism and confidence, and rekindle the Nation's entrepreneurial instincts and creativity.

The benefits to the average American will be striking. Inflation—which is now at double digit rates—will be cut in half by 1986. The American economy will produce 13 million new jobs by 1986, nearly 3 million more than if the status quo in government policy were to prevail. The economy itself should break out of its anemic growth patterns to a much more robust growth trend of 4 to 5 percent a year. These positive results will be accomplished simultaneously with reducing tax burdens, increasing private saving, and raising the living standard of the American family.

The plan is based on sound expenditure, tax, regulatory, and monetary policies. It seeks properly functioning markets, free play of wages and prices, reduced government spending and borrowing, a stable and reliable monetary framework, and reduced government barriers to risk-taking and enterprise. This agenda for the future recognizes that sensible policies which are consistently applied can release the strength of the private sector, improve economic growth, and reduce inflation.

We have forgotten some important lessons in America. High taxes are not the remedy for inflation. Excessively rapid monetary growth cannot lower interest rates. Well-intentioned government regulations do not contribute to economic vitality. In fact, government spending has become so extensive that it contributes to the economic problems it was designed to cure. More government intervention in the economy cannot possibly be a solution to our economic problems.

We must remember a simple truth. The creativity and ambition of the American people are the vital forces of economic growth. The motivation and incentive of our people—to supply new goods and services and earn additional income for their families—are the most precious resources of our Nation's economy. The goal of this Administration is to nurture the strength and vitality of the American people by reducing the burdensome, intrusive role of the Federal Government; by lowering tax rates and cutting spending; and by providing incentives for individuals to work, to save, and to invest. It is our basic belief that only by reducing the growth of government can we increase the growth of the economy.

The U.S. economy faces no insurmountable barriers to sustained growth. It confronts no permanently disabling tradeoffs between inflation and unemployment, between high interest rates and high taxes, or between recession and hyperinflation. We can revive the incentives to work and save. We can restore the willingness to invest in the private capital required to achieve a steadily rising standard of living. Most important, we can regain our faith in the future.

The plan consists of four parts: (1) a substantial reduction in the growth of Federal expenditures; (2) a significant reduction in Federal tax rates; (3) prudent relief of Federal regulatory burdens; and (4) a monetary policy on the part of the independent Federal Reserve System which is consistent with those policies. These four complementary policies form an integrated and comprehensive program.

It should be clear from the most cursory examination of the economic program of this Administration that we have moved from merely talking about the economic difficulties facing the American people to taking the strong action necessary to turn the economy around.

The leading edge of our program is the comprehensive reduction in the rapid growth of Federal spending. As shown in detail below, our budget restraint is more than "cosmetic" changes in the estimates of Federal expenditures. But we have not adopted a simple-minded "meat ax" approach to budget reductions. Rather, a careful set of guidelines has been used to identify lower-priority programs in virtually every department and agency that can be eliminated, reduced, or postponed.

The second element of the program, which is equally important and urgent, is the reduction in Federal personal income tax rates by 10 percent a year for 3 years in a row. Closely related to this is an incentive to greater investment in production and job creation via faster tax write-offs of new factories and production equipment.

The third key element of our economic expansion program is an ambitious reform of regulations that will reduce the government-imposed barriers to investment, production, and employment. We have suspended for 2 months the unprecedented flood of last-minute rulemaking on the part of the previous Administration. We have eliminated the ineffective and counterproductive wage and price standards of the Council on Wage and Price Stability, and we have taken other steps to eliminate government interference in the marketplace.

The fourth aspect of this comprehensive economic program is a monetary policy to provide the financial environment consistent with a steady return to sustained growth and price stability. During the first week of this Administration its commitment to the historic independence of the Federal Reserve System was underscored. It is clear, of course, that monetary and fiscal policy are closely interrelated. Success in one area can be made more difficult—or can be reinforced—by the other. Thus, a predictable and steady growth in the money supply at more modest levels than often experienced in the past will be a vital contribution to the achievement of the economic goals described in this Report. The planned reduction and subsequent elimination of Federal deficit financing will help the Federal Reserve System perform its important role in achieving economic growth and stability.

The ultimate importance of this program for sustained economic growth will arise not only from the positive effects of the individual components, important as they are. Rather, it will be the dramatic improvement in the underlying economic environment and outlook that will set a new and more positive direction to economic decisions throughout the economy. Protection against inflation and high tax burdens will no longer be an overriding motivation. Once again economic choices—involving working, saving, and investment—will be based primarily on the prospect for real rewards for those productive activities which improve the true economic well-being of our citizens.

II. The Twin Problems of High Inflation and Stagnant Growth

The policies this Administration is putting forward for urgent consideration by the Congress are based on the fact that this Nation now faces its most serious set of economic problems since the 1930s. Inflation has grown from 1 to 1 1/2 percent a year in the early 1960s to about 13 percent in the past 2 years; not since World War I have we had 2 years of back-to-back double digit inflation. At the same time, the rate of economic growth has been slowing and the unemployment rate creeping upward. Productivity growth—the most important single measure of our ability to improve our standard of living—has been declining steadily for more than a decade. In the past 3 years our productivity actually fell.

The most important cause of our economic problems has been the government itself. The Federal Government, through tax, spending, regulatory, and monetary policies, has sacrificed long-term growth and price stability for ephemeral short-term goals. In particular, excessive government spending and overly accommodative monetary policies have combined to give us a climate of continuing inflation. That inflation itself has helped to sap our prospects for growth. In addition, the growing weight of haphazard and inefficient regulation has weakened our productivity growth. High marginal tax rates on business and individuals discourage work, innovation, and the investment necessary to improve productivity and long-run growth. Finally, the resulting stagnant growth contributes further to inflation in a vicious cycle that can only be broken with a plan that attacks broadly on all fronts.

THE ROLE OF THE GOVERNMENT IN CAUSING INFLATION

Surges of inflation are not unusual in history; there were price explosions after both World Wars, as well as smaller outbursts in the 1920s and late 1930s. Therefore, in spite of the role played by food and energy prices in recent inflationary outbursts, it is misleading to concentrate on these transitory factors as fundamental causes of the inflationary bias in the American economy. Even when prices in these markets have been stable, inflation has continued with little relief.

What is unusual about our recent history is the persistence of inflation. Outbursts of high inflation in the last 15 years have not been followed by the customary price stability, but rather by long periods of continued high inflation. This persistence of inflation has crucially affected the way our economy works. People now believe inflation is "here to stay"; they plan accordingly, thereby giving further momentum to inflation. Since there are important long-term relationships between suppliers and customers and between workers and management, long-term contracts, sometimes unwritten, are often based on the view that inflation will persist. This robs the economy of flexibility which might otherwise contribute to reducing inflation.

The Federal Government has greatly contributed to the persistence of high inflation. Overly stimulative fiscal and monetary policies, on average, have financed excessive spending and thus pushed prices upward. Since government accommodation is widely expected to continue, inflation has become embedded in the economy.

When inflationary outbursts occur, policymakers all too often have made a quick turn toward restraint. Such turnabouts, however, have been short-lived and their temporary nature has increasingly been anticipated by savers, investors, and workers. Subsequent declines in employment and growth inevitably call forth stimulative policies before inflation can be brought under control. Such "stop-and-go" policies have only resulted in higher unemployment and lower real growth.

Finally, but equally important, government policies have increased inflation by reducing the potential of our economy to grow—directly through the increasing burdens of taxes and regulations, and indirectly through inflation itself. The result is a vicious circle. Its force can be measured by the statistics of our productivity slowdown, but it is seen more dramatically in the anxiety and concern of our people.

GOVERNMENT CONTRIBUTES TO THE PRODUCTIVITY SLOWDOWN

Productivity, popularly measured as output per worker-hour, is an indicator of the efficiency of the economy and consequently of our ability to maintain the rate of improvement in our standard of living. Over the past 15 years, the rate of productivity improvement has slowed, and now virtually halted.

Government policies have been a major contributor to the slowdown but they can be an even more important contributor to the cure. The weight of regulation and the discouragement that results from high marginal tax burdens are key factors, but inflation itself also plays an important role. Reduced capital formation is the most important and visible, but not the only, channel by which this occurs.

By increasing uncertainty about the future, inflation discourages investors from undertaking projects that they would have considered profitable but which, with today's inflationary environment, they consider too risky. Inflation also diverts funds from productive investments into hedging and speculation.

Although recent statistics show that the share of our economy's production devoted to investment is high by historic standards, the magnitude is illusory—an illusion fostered by inflation. Accelerating prices, and the high interest rates and shifting economic policy associated with them, have contributed to an unwillingness to make long-lived investments. As a result, our stock of productive plant and equipment depreciates faster, so that more investment is needed simply to stand still.

The regulatory requirements imposed by the government have likewise served to discourage investment by causing uncertainty in business decision-making. In addition, investments to meet regulatory requirements have diverted capital from expanding productive capacity. Some estimates have put regulation-related investment at more than 10 percent of the total level of business investment in recent years. The expanding intrusiveness of the government into the private sector also inhibits innovation and limits the ability of entrepreneurs to produce in the most efficient way.

INFLATION, GROWTH, AND THE TAX SYSTEM

The role of the tax system in reducing our past growth, and its potential for improving the prospects for future growth, deserve special attention. By reducing the incentives for investment and innovation, both by individuals and by businesses, the tax system has been a key cause of our stagnation. Restoring the proper incentives will make a major contribution to the long-run vitality of our economy.

The progressivity of the personal income tax system levies rising tax rates on additions to income that merely keep pace with inflation. Households therefore find that even if their gross incomes rise with inflation, their after-tax real income declines. Some households respond to these higher marginal tax burdens by reducing their work effort. "Bracket creep" also encourages taxpayers to seek out "tax shelters," sources of income that offer higher after-tax returns but not necessarily higher before tax returns than more productive sources, again contributing to economic inefficiency. In the last two decades the Congress has reduced personal income taxes seven times. Nevertheless, average effective tax rates are now about 30 percent higher than their mid-1960's low. Marginal tax rates have climbed in tandem with average rates.

Due to inflation, the rate of return on corporate assets, after tax, and the level of corporate earnings have been seriously eroded over the past decade and a half. That was a major factor stunting capital spending from what it otherwise would have been. The tax treatment of depreciation has been an important contributor to this lowering of returns. We now allow write-offs at the cost of purchase, rather than at more realistic prices. This creates phantom profits upon which taxes are paid.

Finally, unless the Congress takes frequent actions to offset the revenue-generating effect of inflation on the progressive personal tax system, the Congress has available for spending unlegislated increases in funds. Inflation in tandem with the tax system thereby impairs the fiscal discipline of the budget process and facilitates higher levels of government spending than would result if the Congress were forced to vote on each tax increase. This offers further encouragement to inflation.

THE ECONOMY AS A WHOLE HAS SUFFERED

Because past policies have not reduced unemployment, even as they have encouraged rising inflation—the economy as a whole has suffered. Over the past two decades, we have seen the "misery index"—the sum of the inflation and unemployment rates—more than double, rising from 7.3 in 1960 to 17.2 in 1980. While unemployment rates have fluctuated over the business cycle, there has been no long-run tradeoff between unemployment and inflation. The upward movements in inflation have not brought us falling unemployment rates, nor has high unemployment brought lower inflation.

Thus trends of the past are clearly disturbing in that they have sapped our Nation's economic vitality. Of greater significance, however, is the danger we face if the policies of the 1970s are continued.

For the first time in American history financial markets reflect the belief that inflation will not retreat significantly from current high levels. The Nation's economy and financial system are on a dangerous course—one which, if not reversed, would lead to a prolonged stagnation of economic growth and employment, ever higher inflation and interest rates, and potentially a financial crisis. The solution to this growing economic threat calls for bold actions designed to reduce—dramatically and sharply-inflationary expectations. These policies must restore fiscal integrity; increase incentives for saving, investment, and production; attain monetary and financial stability; and enhance the role of the marketplace as the principal force in the allocation of resources.

III. Slowing the Growth of Government Spending

The uncontrolled growth of government spending has been a primary cause of the sustained high rate of inflation experienced by the American economy. Perhaps of greater importance, the continued and apparently inexorable expansion of government has contributed to the widespread expectation of persisting—and possibly higher—rates of inflation in the future.

Thus, a central goal of the economic program is to reduce the rate at which government spending increases. In view of the seriousness of the inflationary pressures facing us, the proposed reductions in the Federal budget for the coming fiscal year are the largest ever proposed.

Despite the tendency to refer to "cutting" the budget, it is clear that an expanding population, a growing economy, and a difficult international environment all lead to the need for year-to-year rises in the level of government spending. Thus, the badly. needed effort to "cut" the budget really refers to reductions in the amount of increase in spending requested from one year to the next.

The magnitude of the fiscal problem facing the United States can be seen when we realize that, despite the $49.1 billion of savings including $5.7 billion in off-budget outlays that is being recommended for fiscal 1982, the total amount of Federal outlays for the year is likely to be $41 billion higher than the current year. (A separate document is being issued by the Office of Management and Budget that outlines the major spending reductions in considerable detail.)

It is essential to stress the fundamental principles that guided the development of that program.

First, and most importantly, all members of our society except the truly needy will be asked to contribute to the program for spending control.

Second, we will strengthen our national defense.

Finally, these fundamental principles led to nine specific guidelines that were applied in reducing the budget:
• Preserve "the social safety net."
• Revise entitlements to eliminate unintended benefits.
• Reduce subsidies to middle- and upper-income groups.
• Impose fiscal restraint on other national interest programs.
• Recover costs that can be clearly allocated to users.
• Stretch-out and retarget public sector capital investment programs.
• Reduce overhead and personnel costs of the Federal Government.
• Apply sound economic criteria to subsidy programs.
• Consolidate categorical grant programs into block grants.

The application of these guidelines has required great care, judgment, and sensitivity. However, we are putting forward over 80 proposals that will carry out these guidelines and affect virtually every segment of our economy except the truly needy. The Administration's insistence on this fundamental principle has meant that programs benefiting millions of truly needy beneficiaries have not been affected by the spending control effort. These programs include social insurance benefits for the elderly, basic unemployment benefits, cash benefits for the chronically poor, and society's obligations to veterans.

The selection of specific reductions has been a difficult task involving the entire Administration as well as much consultation with representatives of business, labor, agriculture, minority groups, and State and local governments.

The spending reduction plan will shift Federal budget priorities so that Federal resources are spent for purposes that are truly the responsibility of the national government. As the table below indicates, our budget plans reflect the increased importance attached to national defense, maintain the Federal Government's support for the truly needy, and fulfill our responsibilities for interest payments on the national debt. The spending reductions will restrain Federal involvement in areas that are properly left to State and local governments or to the private sector.

SHIFT IN BUDGET PRIORITIES

1962 1981 1984

Dollar amounts (in billions):
DOD—Military 46.8 157.9 249.8
Safety net programs 26.2 239.3 313.0
Net interest 6.9 64.3 66.8
All other 26.9 193.2 142.0
Total 106.8 654.7 771.6

Outlay shares (percent):
DOD—Military 43.8 24.1 32.4
Safety net programs 24.5 36.6 40.6
Net interest 6.4 9.8 8.6
All other 25.2 29.5 18.4
Total 100.0 100.0 100.0

Carrying out this program of budget restraint will also halt and begin to reverse the tendency of government to take an ever-larger share of our economic resources. From a high of 23 percent of the gross national product (GNP) in fiscal 1981, Federal outlays are now scheduled to decline to 21.8 percent in fiscal 1982 and to reach approximately 19 percent beginning in 1984.

THE FEDERAL BUDGET AND GNP

Outlays as
Fiscal year percent of
GNP

1981 ------------------------------- 23.0
1982 ------------------------------- 21.8
1983 ------------------------------- 20.4
1984 ------------------------------- 19.3
1985 ------------------------------- 19.2
1986 ....................................................19.0

In conjunction with the tax program that is being proposed, the present excessively high deficit in the budget will be reduced and, in a few years, eliminated. Because of the legacy of fiscal commitments that were inherited by this Administration, balancing the budget will require tough action over several years.

From a deficit of $59.6 billion in 1980—and of a similar deficit this year if past policies had continued—Federal expenditures are now estimated to exceed revenues by $45.0 billion in 1982, and $23.0 billion in 1983. By fiscal 1984—under the policy recommendations presented in this document—the Federal budget should be in balance. And that will not be a one-time occurrence. As shown in the table below, the Federal budget will actually generate a surplus in 1985 and 1986, for the first time since 1969.

FEDERAL REVENUES AND OUTLAYS

[IN BILLIONS OF DOLLARS]

Deficit

Fiscal year Revenues Outlays (-) or

surplus

(+)

1981------------------------------------------ 600.2 654.7 -54.5
1982 ----------------------------------------- 650.5 695.5 -45.0
1983 ----------------------------------------- 710.1 733.1 -23.0
1984 ----------------------------------------- 772.1 771.6 + 0.5
1985------------------------------------------ 851.0 844.0 +7.0
1986------------------------------------------ 942.1 912.1 +30.0

THE FEDERAL BUDGET AND THE ECONOMY

The rewards that the economy will reap with enactment of the spending control plan are many and substantial. In the past, excessive deficit spending has been a major contributor to the initiation and persistence of inflation. Not only have Federal budget deficits at times of expanding private sector activity fueled inflationary pressures, but government's tendency to stop fighting inflation with the first signs of a slackening economy has persuaded firms and workers that they need not fear pricing themselves out of business with inflationary wage and price increases. With the plans for controlling government spending, the Federal budget will become a weapon against inflation, rather than one of its major causes.

During the decade of the 1970s, the Federal budget was in deficit every year. In 1970 the deficit was a relatively modest $2.8 billion; in 1980 it was nearly $60 billion. Outlays soared by almost 200 percent. When this Administration began, the prospect was for a continuation of these alarming trends.

(In billions of dollars)

Fiscal year

Receipts Outlays Deficit

(-)

1970------------------------------------------ 193.7 196.6 -2.8
1971------------------------------------------ 188.4 211.4 -23.0
1972 ----------------------------------------- 208.6 232.0 -23.4
1973------------------------------------------ 232.2 247.1 -14.8
1974 ----------------------------------------- 264.9 269.6 -4.7
1975------------------------------------------ 281.0 326.2 -45.2
1976 ----------------------------------------- 300.0 366.4 -66.4
1977 ----------------------------------------- 357.8 402.7 -44.9
1978 ----------------------------------------- 402.0 450.8 -48.8
1979------------------------------------------ 465.9 493.6 -27.7
1980------------------------------------------ 520.0 579.6 -59.6

Many of the program reductions that are being proposed will contribute to a more efficient use of resources in the economy and thereby higher levels of production and income. No longer will the average American taxpayer be asked to contribute to programs that further narrow private interests rather than the general public interest. In many cases, such services are more appropriately paid for with user charges. By consolidating a variety of categorical grant programs into a few block grant programs, the resources spent will provide greater benefits because the levels of government closer to the people can better recognize their needs than can Washington. And by reducing Federal deficits and off-budget Federal financing we will ensure that Federal borrowing requirements do not crowd more productive private activities out of the market.

The budget that is being proposed will restore the Federal Government to its proper role in American society. It will contribute to the health of the economy, the strength of our military, and the protection of the less fortunate members of society who need the compassion of the government for their support. Many special interests who had found it easier to look to the Federal Government for support than to the competitive market will be disappointed by this budget, but the average worker and businessman, the backbone of our Nation, will find that their interests are better served.

IV. Reducing Tax Burdens

An integral part of the comprehensive economic program is a set of tax proposals to improve the after-tax, after-inflation rewards to work, saving, and investment. Inflation inevitably increases the burden of taxes on individuals by pushing them into higher and higher marginal rates. In businesses, inflation makes the purchase of new equipment progressively more difficult by reducing the amount of cash flow available for capital investment. The tax package addresses both of these problems.

TAX RELIEF FOR INDIVIDUALS

Any increase in nominal income moves taxpayers into higher tax brackets, whether the increase is real or merely an adjustment for higher costs of living. As a consequence, taxes rise faster than inflation, raising average tax rates and tax burdens. In fact, every 10 percent increase in income—real or nominal—produces about a 15 percent increase in Federal personal income tax receipts. An average family requiring a $1,500 cost-of-living increase to maintain its standard of living must have $1,900 in wage increases to keep even after taxes.

Individual tax liabilities rose from 9.2 percent of personal income in 1965 to 11.6 percent last year. The average tax burden would have risen far more had not much of the inflation-related tax increases been offset by periodic tax cuts. Marginal tax rates, however, have been allowed to rise sharply for most taxpayers. In 1965, 6 percent of all taxpayers faced marginal rates of 25 percent of more. Today nearly one of every three taxpayers is in at least the 25 percent bracket.

As taxpayers move into higher brackets, incentives to work, save, and invest are reduced since each addition to income yields less after taxes than before. In the late 1960s and the early 1970s, Americans saved between 7 to 9 percent of personal disposable income. In 1979 and 1980, the saving rate was between 5 to 6 percent. The combination of inflation and higher marginal tax rates is undoubtedly a major factor in the lower personal saving rate.

To correct these problems and to improve the after-tax return from work and from saving, the President is asking the Congress to reduce the marginal tax rates for individuals across the board by 10 percent per year for the next 3 years starting July 1, 1981. This would reduce rates in stages from a range of 14 to 70 percent to a range of 10 to 50 percent effective January 1, 1984. These rate reductions will contribute materially above those which would be attained under present laws. At these higher income levels, the reductions in Federal tax revenues, compared with those which would be obtained under present law, are $6.4 billion in fiscal 1981, $44.2 billion in fiscal 1982, and rise to $162.4 billion in fiscal 1986.

The effect of these tax cuts on a 4-person family whose 1980 income is $25,000 would be a $153 tax reduction this year, and a $809 tax reduction for 1984, assuming no increase in income. If the family's nominal earnings rise to $30,300 in 1984, their tax reduction would be $1,112 in that year.

The Administration's proposals will bring down average individual tax receipts to 10.8 percent of personal income in 1984, still 1.6 percentage points above where it was in 1965. Without these marginal tax rate cuts, however, individual taxes would rise to 14.7 percent of personal income by 1984. Failure to enact these proposals is thus tantamount to imposing a tax increase on the average American taxpayer.

TAX INCENTIVES FOR INVESTMENT

Since the late 1960s the rate of net capital formation (excluding spending mandated to meet environmental standards) has fallen substantially. For the 5 years ending in 1979, increases in real net business fixed capital averaged just over 2 percent of the Nation's real net national product, or one-half the rate for the latter part of the 1960s.

One of the major tasks facing the U.S. economy in the 1980s is to reverse these trends and to promote more capital investment. To combat the decline in productivity growth, to hasten the replacement of energy-inefficient machines and equipment, to comply with government mandates that do not enhance production, we must increase the share of our Nation's resources going to investment. Both improvements in productivity and increases in productive jobs will come from expanded investment.

Inflation and an outdated capital equipment depreciation system have combined to lower the after-tax real rate of return on capital investments by business. High inflation causes a large discrepancy between the historic and the current replacement costs of physical assets of business. Thus, corporate financial records, utilizing historic costs and current dollar sales figures, significantly overstate nominal profits and understate true economic costs.

In 1980 alone, the replacement cost of inventories exceeded by over $43 billion the cost of the inventories claimed for tax purposes. Depreciation charges based on historical cost fell short of the replacement cost of capital assets consumed by another $17 billion. These arose from a failure to record inventory and capital assets at their true replacement cost.

On an inflation adjusted basis, many firms are now paying out more than their real income in the form of taxes and dividends. The result is that real investment in equipment, maintenance, modernization, and new technology is falling further behind the needs of our economy. Clearly, present incentives for business capital formation are inadequate.

As a consequence, the President is asking the Congress to provide for an accelerated cost recovery system for machinery and equipment and certain structures according to the following classes:
• Ten years on an accelerated write-off schedule for long-lived public utility property (with a 10 percent investment credit) and factories, stores, and warehouses used by their owners (no investment credit, consistent with present law).
• Five years on an accelerated write-off schedule (plus 10 percent investment credit) for all other machinery and equipment except long-lived utility property.
• Three years on an accelerated write-off schedule (plus 6 percent investment credit) for autos and light trucks and capital costs for research and development.

In addition, audit-proof recovery periods would be established for other depreciable real estate:
• Fifteen years straight line (and no investment credit) for other nonresidential buildings and low-income housing.
• Eighteen years straight line (and no investment credit) for other rental residential structures.

A 5-year phase-in of the accelerated recovery rates for the 5-year and 10-year classes is proposed, but the effective date would be January 1, 1981, so that no pending investment plans are deferred in anticipation of the new system. These tax changes will make important contributions to raising economic activity above the levels of which would be attained under present laws. At this higher income, Federal tax revenues would be less than those which would be obtained under present law, by $2.5 billion in fiscal 1981, $9.7 billion in fiscal 1982, and $59.3 billion in fiscal 1986.

DIRECT REVENUE EFFECTS OF PROPOSED TAX REDUCTIONS


[IN BILLIONS OF DOLLARS]

(Fiscal years)

1981 1982 1983 1984 1985 1986

Individual:
30 Percent phased rate reduction -6.4 -44.2 -81.4 -118.1 -141.5 -162.4
Business:
Accelerated cost recovery system after
interaction with individual tax -2.5 -9.7 -18.6 -30.0 -44.2 -59.3

Total -8.8 -53.9 -100.0 -148.1 -185.7 -221.7

These changes will simplify accounting after-tax profits of businesses. For example, a manufacturer of glass products that buys new machinery for $100,000 in 1982 will, as a result of these new cost recovery allowances, reduce its tax liability by $1,798 in that year, $2,517 in procedures and raise 1983, and additional amounts in later years. The basic differences between the present accelerated depreciation law and proposed accelerated capital cost recovery new cost recovery system are shown in the following chart:

PRESENT LAW DEPRECIATION AND ACCELERATED COST RECOVERY SYSTEM COMPARISON OF MAJOR FEATURES

Accelerated cost recovery

Item Present law depreciation system

General applicability Option of "facts and circum- Mandatory.
stances" or guidelines (ADR).
Recovery periods:
Tangible personal property Guidelines allow 2 1/2 to 50 years 3 years (autos, light trucks, and
depending on asset type or ac- machinery and equipment
tivity, with optional 20 per- used for research and devel-
cent variance for each. opment), 5 years (most ma-
chinery and equipment), or 10
years (long-lived public utility
property

Real estate Determined by facts and cir- 10 years for owner-occupied fac-
cumstances or by guidelines tories, stores, and warehouses;
ranging from 25 to 60 years 15 years for other nonresiden-
depending on the type of tial and for low-income hous-
building. ing; 18 years for other resi-
dential.

Recovery method:
Tangible personal property Straight line; or for new proper- Accelerated write-off built into
ty, taxpayer may elect declin- tables.
ing balance up to 200 per-
cent, or sum-of-years digits.

PRESENT LAW DEPRECIATION AND ACCELERATED COST RECOVERY SYSTEM—Continued


COMPARISON OF MAJOR FEATURES

Item Present law depreciation Accelerated cost recovery
system

Real estate Same for new residential; up to Same for 10-year property.
150 percent declining balance Straight line for other.
for new, nonresidential; up to
125 percent declining balance
for used residential; straight
line for used nonresidential.

Recapture provisions:
Tangible personal property Ordinary income recapture up Ordinary income recapture up
to prior allowances (section to prior allowances (section
1245). 1245).

Real estate Ordinary income recapture up Same for 10-year real property.
to excess over straight line No recapture for others.
(section 1250).

Asset accounting:
General Vintage accounting Vintage accounting.
First year Rateably, or choice of conven- Half-year convention built into
tions. tables.

Investment tax credit 3 1/3 percent for machinery and 6 percent for 3-year class and 10
equipment written-off or held percent for 5-year and 10-year
for 3-5 years, 6% percent fo eligible property.
5-7 years, 10 percent if
longer.

Carryovers Choice of 20 percent shorter or Extends net operating loss and
longer lives; straight line or investment credit carryover
accelerated methods, where period from 7 to 10 years.
allowed. Deductions may add
to net operating loss which
can be carried over 7 years.

Timing of eligibility When placed in service When placed in service, or for
property with at least a 2 year
construction period, as ac-
quired.

V. Providing Regulatory Relief

The rapid growth in Federal regulation has retarded economic growth and contributed to inflationary pressures. While there is widespread agreement on the legitimate role of government in protecting the environment, promoting health and safety, safeguarding workers and consumers, and guaranteeing equal opportunity, there is also growing realization that excessive regulation is a very significant factor in our current economic difficulties.

The costs of regulation arise in several ways. First, there are the outlays for the Federal bureaucracy which administers and enforces the regulations. Second, there are the costs to business, nonprofit institutions, and State and local governments of complying with regulations. Finally, there are the longer run and indirect effects of regulation on economic growth and productivity.

The most readily identifiable of the costs are the administrative outlays of the regulatory agencies, since they appear in the Federal budget. These costs are passed on to individuals and businesses directly in the form of higher Federal taxes. Much larger than the administrative expenses are the costs of compliance, which add $100 billion per year to the costs of the goods and services we buy. The most important effects of regulation, however, are the adverse impacts on economic growth. These arise because regulations may discourage innovative research and development, reduce investment in new plant and equipment, raise unemployment by increasing labor costs, and reduce competition. Taken together, these longer run effects contribute significantly to our current economic dilemma of high unemployment and inflation.

In many cases the costs of regulation can be substantially reduced without significantly affecting worthwhile regulatory goals. Unnecessarily stringent rules, intrusive means of enforcement, extensive reporting and record-keeping requirements, and other regulatory excesses are all too common.

During this Administration's first month in office, five major steps have been taken to address the problem of excessive and inefficient regulation. Specifically, we have: • Established a Task Force on Regulatory Relief chaired by Vice President George Bush,
• Abolished the Council on Wage and Price Stability's ineffective program to control wage and price increases,
• Postponed the effective dates of pending regulations until the end of March,
• Issued an Executive order to strengthen Presidential oversight of the regulatory process, and
• Accelerated the decontrol of domestic oil.

PRESIDENTIAL TASK FORCE ON REGULATORY RELIEF

Previous efforts to manage the proliferation of Federal regulation failed to establish central regulatory oversight at the highest level. On January 22, the President announced the creation of a Task Force on Regulatory Relief to be chaired by the Vice President. The membership is to include the Secretary of the Treasury, the Attorney General, the Secretary of Commerce, the Secretary of Labor, the Director of the Office of Management and Budget, the Assistant to the President for Policy Development, and the Chairman of the Council of Economic Advisers.

The Task Force's charter is to:
• Review major regulatory proposals by executive branch agencies, especially those that appear to have major policy significance or involve overlapping jurisdiction among agencies.
• Assess executive branch regulations already on the books, concentrating on those that are particularly burdensome to the national economy or to key industrial sectors.
• Oversee the development of legislative proposals designed to balance and coordinate the roles and objectives of regulatory agencies.

TERMINATION OF CWPS'S WAGE-PRICE STANDARDS PROGRAM
The Council on Wage and Price Stability (CWPS) was created in 1974, and like many government agencies, rapidly grew in size and scope. But the CWPS program of wage price standards proved to be totally ineffective in halting the rising rate of inflation.

On January 29, the President rescinded the CWPS's wage-price standards program. As a result, taxpayers will save about $1.5 million, employment in the Executive Office of the President will decline by about 135 people, and Federal requirements that businesses submit voluminous reports will end.

POSTPONING PENDING REGULATIONS

On January 29, the President also sent a memorandum to cabinet officers and the head of the Environmental Protection Agency (EPA), requesting that, to the extent permitted by law, they postpone the effective dates of those regulations that would have become effective before March 29 and that they refrain from issuing any new final regulations during this 60-day period.

This suspension of new regulations has three purposes: First, it allows the new Administration to review the "midnight" regulations issued during the last days of the previous Administration to assure that they are cost-effective. Second, the Administration's appointees now can become familiar with the details of the various programs for which they are responsible before the regulations become final. Lastly, the suspension allows time for the Administration, through the Presidential Task Force, to develop improved procedures for management and oversight of the regulatory process.

THE EXECUTIVE ORDER ON FEDERAL REGULATION

The President has signed a new Executive order designed to improve management of the Federal regulatory process. It provides reassurance to the American people of the government's ability to control its regulatory activities. The Office of Management and Budget is charged with administering the new order, subject to the overall direction of the Presidential Task Force on Regulatory Relief.

The order emphasizes that regulatory decisions should be based on adequate information. Actions should not be undertaken unless the potential benefits to society outweigh the potential costs, and regulatory priorities should be set on the basis of net benefits to society. The order requires agencies to determine the most cost-effective approach for meeting any given regulatory objective, taking into account such factors as the economic condition of industry, the national economy, and other prospective regulations.

As part of the development of any important regulation, the order also requires that each agency prepare a Regulatory Impact Analysis to evaluate potential benefits and costs. The Task Force will oversee this process; OMB will make comments on regulatory analyses, help determine which new and existing regulations should be reviewed, and direct the publication of semiannual agendas of the regulations that agencies plan to issue or review.

DECONTROLLING DOMESTIC OIL PRICES

The President has also ordered the immediate decontrol of domestic oil prices, instead of waiting until October as originally scheduled. This has eliminated a large Federal bureaucracy which administered a cumbersome and inefficient system of regulations that served to stifle domestic oil production, increase our dependence on foreign oil, and discourage conservation.

INTEGRATING THE GOALS OF REGULATORY RELIEF WITH PAPERWORK REDUCTION

Our program to reduce regulatory bur. dens will dovetail with the efforts under the Paperwork Reduction Act of 1980. Lament. ably, present regulations will require Americans to spend over 1.2 billion hours filling out government forms during 1981. This is equivalent to the annual labor input for the entire steel industry.

The Congress responded to the need for consistent management of Federal paper. work and regulatory issues by passing the Paperwork Reduction Act of 1980. The act creates an Office of Information and Regulatory Affairs within OMB with the power to review Federal regulations that contain a record-keeping or reporting requirement and directs this agency to reduce the paperwork burden by 15 percent.

FUTURE TARGETS FOR REGULATORY REVIEW

The program of regulatory relief is just getting under way. Future regulatory reform efforts will be directed not only at proposed regulations, but also at existing regulations and regulatory statutes that are particularly burdensome. This process has already begun: in the first month of the Administration several cabinet departments and agencies—on their own initiative and in coordination with with the Task Force—have taken action on particularly controversial rules. For example, rules mandating extensive bilingual education programs, passive 'restraints in large cars, the labeling of chemicals in the workplace, controls on garbage truck noise, and increased overtime payments for executives have been withdrawn or postponed. The actions taken already are expected to save the American public and industry almost $1 billion annually. The Administration will be reviewing a host of other regulations in the near future.

LEGISLATIVE CHANGES

Not all of our regulatory problems can be resolved satisfactorily through more effective regulatory management and decision making. Existing regulatory statutes too often preclude effective regulatory decisions. Many of the statutes are conflicting, overlapping, or inconsistent. Some force agencies to promulgate regulations while giving them little discretion to take into account changing conditions or new information. Other statutes give agencies extremely broad discretion, which they have sometimes exercised unwisely.

The Administration will examine all legislation that serves as the foundation for major regulatory programs. This .omnibus review, spearheaded by the Presidential Task Force on Regulatory Relief, will result in recommendations to reform these statutes. The Task Force will initially concentrate its efforts on those laws scheduled for Congressional oversight or reauthorization, such as the Clean Air Act.

VI. Controlling Money and Credit

Monetary policy is the responsibility of the Federal Reserve System, an independent agency within the structure of the government. The Administration will do nothing to undermine that independence. At the same time, the success in reducing inflation, increasing real income, and reducing unemployment will depend on effective interaction of monetary policy with other aspects of economic policy.

To achieve the goals of the Administration's economic program, consistent monetary policy must be applied. Thus, it is expected that the rate of money and credit growth will be brought down to levels consistent with noninflationary expansion of the economy.

If monetary policy is too expansive, then inflation during the years ahead will continue to accelerate and the Administration's economic program will be undermined. Inflationary psychology will intensify. Wages, prices, and interest rates will reflect the belief that inflation—and the destructive effects of inflation—will continue.

By contrast, if monetary policy is unduly restrictive, a different set of problems arises, unnecessarily aggravating recession and unemployment. At times in the past. abruptly restrictive policies have prompted excessive reactions toward short-term monetary ease. As a result, frequent policy changes can send confusing signals, and the additional uncertainty undermines long-term investment decisions and economic growth.

With money and credit growth undergoing steady, gradual reduction over a period of years, it will be possible to reduce inflation substantially and permanently. In this regard, the Administration supports the announced objective of the Federal Reserve to continue to seek gradual reduction in the growth of money and credit aggregates during the years ahead. Looking back, it seems clear that if a policy of this kind had been successfully followed in the past, inflation today would be substantially lower and would not appear to be so intractable.

Until recently, the Federal Reserve had attempted to control money growth by setting targets for interest rates, particularly the rate on Federal funds. Experience here and abroad has shown repeatedly that this interest rate management approach is not sufficient to achieve reliable control. Mistakes in predicting movements in economic activity or tendencies on the part of policymakers to avoid large interest rate fluctuations can lead to undesirable gyrations in the rate of money growth.

Under new procedures the Federal Reserve adopted in October 1979, the Federal Reserve sets targets for growth of reserves considered to be consistent with the desired expansion in the monetary aggregates. Interest rates are allowed to vary over a much wider range in response to changes in the demand for money and credit. A number of factors—such as the introduction of credit controls and their subsequent removal and frequent shifts in announced fiscal policies-have contributed to pronounced fluctuations in interest rates and monetary growth over the past year. At the same time, we need to learn from the experience with the new techniques and seek further improvements. The Federal Reserve has undertaken a study of last year's experience. We look forward to the results and encourage them to make the changes that appear warranted.

In that connection, success in meeting the targets that the Federal Reserve has set will itself increase confidence in the results of policy. Otherwise, observers are likely to pay excessive attention to short-run changes in money growth and revise anticipations upward or downward unnecessarily. Without confidence in the long-term direction of policy, such short-run changes may lead to unwarranted but disturbing gyrations in credit, interest rates, commodity prices, and other sensitive indicators of inflation and economic growth.

Better monetary control is not consistent with the management of interest rates in the short run. But, with monetary policy focusing on long-term objectives, the resultant restraint on money and credit growth would interact with the tax and expenditure proposals to lower inflation as well as interest rates.

The Administration will confer regularly with the Federal Reserve Board on all aspects of our economic program. The policies that are proposed in the program will help to advance the efforts of the independent Federal Reserve System. In particular, the substantial reductions of the Federal Government's deficit financing and the achievement of a balanced budget in 1984 and the years that follow should enable the Federal Reserve System to reduce dramatically the growth in the money supply.

To that end, the economic scenario assumes that the growth rates of money and credit are steadily reduced from the 1980 levels to one-half those levels by 1986.

With the Federal Reserve gradually but persistently reducing the growth of money, inflation should decline at least as fast as anticipated. Moreover, if monetary growth rates are restrained, then inflationary expectations will decline. And since interest rate movements are largely a mirror of price expectations, reduction in one will produce reduction in the other.

VII. A New Beginning for the Economy

This plan for national recovery represents a substantial break with past policy. The new policy is based on the premise that the people who make up the economy—workers, managers, savers, investors, buyers, and sellers—do not need the government to make reasoned and intelligent decisions about how best to organize and run their own lives. They continually adapt to best fit the current environment. The most appropriate role for government economic policy is to provide a stable and unfettered environment in which private individuals can confidently plan and make appropriate decisions. The new recovery plan is designed to bring to all aspects of government policy a greater sense of purpose and consistency.

Central to the new policy is the view that expectations play an important role in determining economic activity, inflation, and interest rates. Decisions to work, save, spend, and invest depend crucially on expectations regarding future government policies. Establishing an environment which ensures efficient and stable incentives for work, saving, and investment now and in the future is the cornerstone of the recovery plan.

Personal tax reductions will allow people to keep more of what they earn, providing increased incentives for work and saving. Business tax reductions will provide increased incentives for capital expansion, resulting in increased productivity for workers. Spending reductions and elimination of unneeded regulation will return control over resources to the private sector where incentives to economize are strongest. Stable monetary policy, combined with expanding productive capacity, will bring about a reduction of the inflation rate.

Inflation control is best achieved with a two-edged policy designed both to limit the rate of increase in the money stock and to increase the productive capacity of the economy. Neither policy can be expected to achieve adequate results alone.

A stable monetary policy, gradually slowing growth rates of money and credit along a preannounced and predictable path, will lead to reductions in inflation. At the same time, the effects of supply-oriented tax and regulatory changes on work incentives, expansion and improvement of the capital stock, and improved productivity will boost output and create a "buyer's market" for goods and services.

As a result of the policies set forth here, our economy's productive capacity is expected to grow significantly faster than could be achieved with a continuation of past policies. Specifically, real economic activity is projected to recover from the 1980-81 period of weakness and move to a 4 or 5 percent annual growth path through 1986, as shown in the table below. Concurrently, the general rate of inflation is expected to decline steadily to less than 5 percent annually by 1986 from the current 10 percent plus rate.

ECONOMIC ASSUMPTIONS

(Calendar years)

1981 1982 1983 1984 1985 1986

Nominal gross national product
(billions) $2,920.0 $3,293.0 3,700.0 $4,098.0 $4,500.0 $4,918.0
(Percent change) 11.1 12.8 12.4 10.8 9.8 9.3
Real gross national product
(billions, 1972 dollars) 1,497.0 1,560.0 1,638.0 1,711.0 1,783.0 1,858.0
(Percent change) 1.1 4.2 5.0 4.5 4.2 4.2
Implicit price deflator 195.0 211.0 226.0 240.0 252.0 265.0
(Percent change) 9.9 8.3 7.0 6.0 5.4 4.9
Consumer Price Index,*
1967 = 100 274.0 297.0 315.0 333.0 348.0 363.0

(Percent change) 11.1 8.3 6.2 5.5 4.7 4.2
Unemployment rate (Percent) 7.8 7.2 6.6 6.4 6.0 5.6

* CPI for urban wage earners and clerical workers (CPI-W).

In contrast to the inflationary demand-led booms of the 1970s, the most significant growth of economic activity will occur in the supply side of the economy. Not only will a steady expansion in business fixed investment allow our economy to grow without fear of capacity-induced inflation pressures, but it will also increase productivity and reduce the growth of production costs by incorporating new and more high-efficient plants, machinery, and technology into our manufacturing base. The result will be revitalized growth in the real incomes and standards of living of our citizens and significantly reduced inflationary pressures. As our economy responds to a new era of economic policy, unemployment will be significantly reduced.

The Administration's plan for national recovery will take a large step toward improving the international economic environment by repairing domestic conditions. Improving expectations and slowing inflation will enhance the dollar as an international store of value and contribute to greater stability in international financial markets. As interest rates come down and faster U.S. growth contributes to rising world trade, economic expansion in other countries will also accelerate. This Administration will work closely with the other major industrial countries to promote consistency in economic objectives and policies so as to speed a return to noninflationary growth in the world economy. Finally, rising U.S. productivity will enhance our ability to compete with other countries in world markets, easing protectionist pressures at home and thus strengthening our ability to press other countries to reduce their trade barriers and export subsidies.

The economic assumptions contained in this message may seem optimistic to some observers. Indeed they do represent a dramatic departure from the trends of recent years—but so do the proposed policies. In fact, if each portion of this comprehensive economic program is put in place—quickly and completely—the economic environment could improve even more rapidly than envisioned in these assumptions.

But, if the program is accepted piecemeal—if only those aspects that are politically palatable are adopted—then this economic policy will be no more than a repeat of what has been tried before. And we already know the results of the stop-and-go policies of the past.

Indeed, if we as a Nation do not take the bold new policy initiatives proposed in this program, we will face a continuation and a worsening of the trends that have developed in the last two decades. We have a rare opportunity to reverse these trends: to stimulate growth, productivity, and employment at the same time that we move toward the elimination of inflation.


Note: The report is printed in the document entitled "America's New Beginning: A Pro. gram for Economic Recovery—February 18, 1981." As printed above, the item does not include the illustrative charts which were included as part of the report.
Citation: Ronald Reagan: "White House Report on the Program for Economic Recovery ," February 18, 1981. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http://www.presidency.ucsb.edu/ws/?pid=43427.
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