To the Congress of the United States:
As we enter 1976, the American public still confronts its two greatest personal concerns: inflation and unemployment. As valid as those concerns are, we should not let them overshadow the very genuine progress we have made in the past year. The underlying fact about our economy is that it is steadily growing healthier. My policies for 1976 are intended to keep us on that upward path.
A year ago the economy was in the midst of a severe recession with no immediate end in sight. Exceptionally strong inflationary forces were just beginning to abate, and the prospects for containing unemployment were not bright.
It is now clear that we have made notable progress. The sharpest recession in the post-World War II period hit bottom last spring, and a substantial recovery is now under way. There were 85.4 million Americans at work in December, 1.3 million more than during March of 1975. While the rate of unemployment remains far too high, it is slowly moving in the right direction. There have also been appreciable advances in reducing the rate of inflation. The increase in the consumer price index was 7 percent between December 1974 and December 1975, down from a rate of more than 12 percent during the previous 12 months.
In reviewing 1975 it is also wise to remember the large number of potentially serious economic problems that did not materialize. The financial crisis that some predicted did not occur. The recession did not deepen into a cumulative depression. There was no collapse in international trade and investment. The price of bread never rose to a dollar, nor did the price of gasoline. We did not experience corrosive social unrest as a consequence of our economic difficulties. While I do not regard the events of 1975 as fully satisfactory by any measure, we should find it reassuring that our economic system withstood severe strains and displayed inherent strengths during the year. I am confident that with responsible and appropriate policies we can achieve sustained economic progress in the future.
Unfortunately there is no simple formula or single act that will quickly produce full economic health. It has taken many years for excessive stimulation, combined with external shocks like the quintupling of international oil prices, to create the economic difficulties of 1974 and 1975, and it will take several years of sound policies to restore sustained, noninflationary growth. I will not make promises which I know, and you know, cannot be kept. We must restore the strength of the American economy as quickly as we can; but in so doing we cannot ignore the dangers of refueling inflationary forces, because unchecked inflation makes steady growth and full employment impossible. The events of the past several years have once again convincingly demonstrated that accelerating inflation causes instability and disruptions, increases unemployment, and ultimately precludes real prosperity.
It is often said that we must choose between inflation and unemployment, and that the only way to reduce unemployment is to accept chronic inflation or rigid controls. I reject this view. Inflation and unemployment are not opposites but are related symptoms of an unhealthy economy. The latter months of 1974 illustrate the relationship between inflation and unemployment. Sharply rising prices created a climate of uncertainty and were to blame for part of the massive reduction in the purchasing power of household assets placed in savings accounts and investment securities. In turn, consumers cut back on expenditures; and consequently inventories, already swollen by speculative buying, backed up in distribution channels. By the early months of 1975 there were sharp cutbacks in production and employment. Thus inflation played a significant part in the surge of unemployment, and if we have a new round of inflation it is likely to bring still more unemployment. Chronically high unemployment is an intolerable waste of human resources and entails an unacceptable loss of material production. Clearly, we must attack inflation and unemployment at the same time; our policies must be balanced.
My economic program for 1976 has three parts: First, a long-term continuation of the effort to revive the American economy; second, implementation of the many programs necessary to provide cushions for the unemployed during the transition to a healthy economy; and third, the elimination of Government policies and institutions that interfere with price flexibility and vigorous competition.
I. My key economic goal is to create an economic environment in which sustainable, noninflationary growth can be achieved.
When private spending is depressed, Government can properly absorb private savings and provide fiscal stimulus to the economy. But in the longer run, a viable, steady increase in prosperity is only possible if we have a vigorous private sector. My policies are designed to support the long-term growth of the economy by fostering an environment in which the private sector can flourish.
Increased capital formation is essential to meeting our long-term goals of full employment and noninflationary growth. Although there is no shortage of industrial capacity at the present time, many of our current priorities--to become independent in energy, to improve the environment, to create more jobs, and to raise our living standards--require increased investment. This means that business investment in plant and equipment as a share of gross national product must increase. We must also slow the growth of Federal spending in the years immediately ahead, so that mounting claims by the Federal Government on our economic resources will not prevent an adequate flow of savings into capital investments.
Accordingly, I am recommending that budget savings be refunded to the American taxpayer by means of tax cuts. I have proposed an annual tax cut of $28 billion from 1974 levels, effective July 1, 1976. If we continue in the years ahead to pursue the kind of budgetary restraint which I am recommending, another major tax cut will be feasible by 1979. I strongly believe that the individual wage earner has the right to spend his own money on the goods and services he wants, rather than having the Government increase its control over the disposition of his income.
II. Regrettably, a full recovery of the economy will take time. Overly rapid growth could lead to a renewed increase in inflation that would ultimately be self-defeating. In the interim we must be mindful of those who have lost their jobs or who are in fear of losing the jobs they hold. While the problems of unemployment can be solved only by restoring the basic strength of our economy, the hardships of unemployment and insecure employment require immediate treatment. In December 1974 and in March 1975, I signed into law major expansions in the duration and coverage of unemployment insurance. These changes eased the financial burden of 3.6 million Americans who were unemployed for a part of last year. Programs in my fiscal 1977 budget will also provide 3.6 million Americans with opportunities for training and employment.
These cushions to unemployment should be viewed as only temporary remedies. They are not a substitute for productive jobs in the private sector. The only way that such jobs can be produced is by restoring the vitality of private industry, which today employs five out of six American workers.
III. Success in promoting healthy economic growth and a vigorous private economy depends to a large extent on our eliminating Government policies and institutions which interfere with competition. Traditionally the American system has relied on competition to organize production and to encourage economic progress. The Government, however, has attempted to correct imperfections in competition by regulating prices and the quality of services in many different industries. This attempt has been less than a complete success. Regulation has been useful in curbing the pricing power of certain monopolies and in fostering the growth of new industries, such as air transportation in the 1940s and 1950s. It has also helped to ensure compliance with such publicly determined social goals as clean air and safe working conditions. But in several industries, regulation has been used to protect and support the growth of established firms rather than to promote competition.
Over the years, Government regulation has also had many other undesirable effects. Besides reducing competition in many instances, it has also imposed on complying firms enormous burdens, which raise business costs and consumer prices.
Increasing competition from world markets and the need to maintain and improve the standard of living of a growing population require constant improvement of the American market system. For this reason I have asked the Congress to legislate fundamental changes in the laws regulating our railroads airlines, and trucking firms. The new amendments will free these companies to respond more flexibly to market conditions. I have also urged deregulation of the price of natural gas and sought essential pricing flexibility for the oil and electric utilities industries. We will continue to improve all essential protection. for public health and safety, trying at the same time not to increase unnecessarily the cost to the public. My object is to achieve a better combination of market competition and responsible Government regulation. The programs I have advanced in recent months have sought such a balance, and I will continue this course in 1976.
Striking a new regulatory balance is likely to entail some economic and social costs during a period of transition, and changes must therefore be phased in carefully. In the long run, however, a revitalized market system will bring significant benefits to the public, including lower prices.
While our policies focus primarily on the economy of the United States, we recognize that the range of our interests does not stop at our shores. The other major countries of the world are also recovering from the most serious recession they have experienced since the 1930s. Their first economic priority, like ours, is to put their economies on a sustainable, noninflationary growth path. Success in this endeavor, more than anything else, will help developed and developing countries alike achieve higher standards of living.
In recent years the economies of most nations suffered from extraordinarily high inflation rates, due in large part to the quintupling of the world price for oil, and then moved into a deep recession. The simultaneity of this experience demonstrated once again the strong interdependence of the world's economies. Individual countries have become progressively more dependent on each other as a freer flow of goods, services, and capital has fostered greater prosperity throughout the world. Because of this growing interdependence, however, domestic policy objectives cannot be achieved efficiently unless we also take account of economic changes and policy goals in other countries.
In recognition of our growing interdependence, I have consulted closely with the heads of other governments, individually and jointly. At the Economic Summit at Rambouillet last November, I met with the heads of government of five other major industrial countries. There we laid the foundation for closer understanding and consultation on economic policies. During 1975 we also began discussions on international cooperation with both the developed and the less developed countries. This dialogue will assure a better mutual understanding of our problems and aspirations. Finally, I have agreed with my foreign colleagues that, in order to create the proper conditions for lasting and stable growth, we must take important, cooperative steps in monetary matters, trade, and energy. We have directed our trade officials to seek an early conclusion to the continuing negotiations on liberalization of trade. This month in Jamaica We reached significant agreements on strengthening the international monetary system and providing increased support for the developing countries. We have also begun to cooperate more closely with oil-consuming countries in the effort to become less dependent on imported energy. I intend to consolidate and build upon this progress in 1976.
Of central concern both here and abroad is U.S. energy policy. Without a vigorous and growing industry supplying domestic energy, much of our industrial development in the next 10 years will be uncertain. And unless we can reduce our dependency on Middle East oil, we will not have a sound basis for international cooperation in the development of new fossil fuel and other energy sources.
As an initial step toward greater self-sufficiency, I signed the Energy Policy and Conservation Act in December 1975. I concluded that this act, though deficient in some respects, did provide a vehicle for moving us toward our energy goals. With this mechanism the price of petroleum can be allowed to rise to promote domestic supply and to restrain consumption. At the end of 40 months, under the act, I may remove price controls altogether, and I will utilize the provisions of the act to move toward a free market in petroleum as quickly as is possible and consistent with our larger economic goals. The act offers flexibility, which I have already used to start dismantling price controls and allocation arrangements in fuel markets where no shortages exist. The legislation also establishes a national strategic petroleum reserve which will make our supply of energy more secure and give other nations less inducement to impose an oil embargo.
Measures crucial to our energy future still remain to be enacted, however. Natural gas deregulation is now the most pressing of the issues on energy before the Congress: shortages grow year by year, while the country waits for more testimony on supply and demand, or waits for extremely expensive new synthetic gas plants to replace the natural gas production choked off by price controls. I urge the Congress to make deregulation of new natural gas one of its first objectives in 1976. The legislation I have proposed in order to assure adequate supplies of fuel for nuclear power plants is also critical. If we are to improve our energy situation, these measures are necessary. They will also reinforce our efforts to remove unnecessary and deleterious Government interference in economic activities where the consumer is adequately protected by market forces.
A year ago I said, "The year 1975 must be the one in which we face our economic problems and start the course toward real solutions." I am pleased with the beginning we have made. The course is a long one, but its benefits for all Americans make the journey worthwhile. The year 1976 must be one in which we will continue our progress toward a better life for all Americans.
GERALD R. FORD
January 26, 1976.