The American Presidency Project
John T. Woolley & Gerhard Peters • Santa Barbara, California return to original document
• Jimmy Carter
Annual Message to the Congress: The Economic Report of the President
January 25, 1979
To the Congress of the United States:

Two years ago when I took office our economy was still struggling to recover from the deep recession of 1974-75. Unemployment was widespread, and a substantial part of our industrial capacity stood idle.

Today 7 million more Americans are at work, and factories across the country have regained high levels of output. Family incomes, after adjustment for inflation, have risen handsomely and so have business profits.

The task now confronting us is to manage an economy operating at close to its capacity—to sustain prosperity and extend its benefits more widely among our citizens.

Under the best circumstances, designing economic policies to carry, out that task calls for restraint and careful choices. Developing such policies has been made more complex by the acceleration of inflation last year and the declining growth of productivity that was partly responsible for it.

My economic and budgetary program deals forthrightly with the economic realities we face today. It is based on four principles.

First, reducing inflation must be our top economic priority. Inflation endangers the ,gains in employment and income that we have made during the past 2 years. We must act forcefully and effectively to combat inflation, and we must persist until the battle is won.

Second, government must do its job better. Reducing inflation will require budgetary austerity and moderation of economic growth. With productivity growth at a low ebb, living standards will not rise as fast as they have in the past 2 years. In such a climate, waste, inefficiency, or misplaced priorities are particularly intolerable. It is now more essential than ever that our government, in both its budgetary and regulatory programs, make the best use of the resources at its disposal and seek better, less costly means to achieve our national objectives.

Third, we will not reduce inflation at the expense of the most vulnerable members of our society—the poor, the elderly, and those who have difficulty finding jobs even in a high-employment economy. Ours is a compassionate Nation, dedicated to a sense of fairness. We will not lose sight of those who most need our help.

Fourth, our policies must reflect the fact that the United States is a very important part of a closely related world economy. We will continue to pursue domestic policies and undertake other actions as necessary and appropriate to foster a strong and stable dollar, and we will join with other countries to promote an open and growing world economy.

In the months ahead, I will work closely with the Congress to ensure that the policies adopted by this government are consistent with these four precepts. The budget for 1980 must be very tight, and I intend to make sure that a fiscal policy of firm and measured restraint is maintained. But the budget must continue and strengthen our most essential programs, and I have supported such programs strongly. In order to further the fight against inflation, I will seek prompt adoption of my real wage insurance program and my proposals for hospital cost containment and regulatory reform.

I will continue to seek the cooperation and support of the American people in the fight against inflation. Last October, I proposed to the Nation a program of price and pay standards designed to brake the price-wage spiral that has beset our economy for more than a decade. This program has received substantial support from the American people, and I will make every effort to enlist the broadest possible cooperation with it in the year to come.

The pay and price standards ask every American to exercise restraint. Every American should therefore expect the government to ensure that its own actions will contribute to, not undermine, the voluntary effort to reduce inflation. Steadfast pursuit of fiscal and monetary discipline and limits on the inflationary impacts of other government actions are crucial to the success of the anti-inflation program. Together, the actions of government and the private sector can lay a new foundation for a durable prosperity.

PROGRESS AND PROBLEMS IN 1978

Among my first actions in office were steps to strengthen economic growth and speed the return to a high-employment economy. Those actions paid generous dividends. In 1977 our rate of economic growth increased by nearly a full percentage point over the prior year, and in 1978 the Nation's output of goods and services advanced by a healthy 4 1/4 percent. Today our Nation is using its industrial capacity more fully than. a year ago.

Last year 3 million new jobs were created. A larger proportion of our people is at work now than at any other time in our history. Gains in employment during the past 2 years have been especially strong among women and members of minority groups.

Unemployment declined to less than 6 percent of the labor force during 1978. Nearly 1 1/2-million fewer Americans were unemployed in December 1978 than 2 years earlier. Unemployment among minority groups has also begun to decline from the very high levels that persisted earlier in the recovery, but these groups still bear a disproportionate share of the burden of unemployment.

Gains in employment and output produced strongly rising incomes for most Americans during 1978. Disposable personal income, adjusted for inflation, rose by more than 3 percent over the 4 quarters of last year. The income of our country's farmers, which was severely depressed in 1976 and 1977, showed a marked recovery.

Business profits rose more than 10 percent in 1978, thereby promoting conditions for the continued growth in investment needed for productivity improvement and healthy economic expansion. Business investment in new plant and equipment also strengthened in 1978, raising the proportion of our national output devoted to capital formation to the highest level in 4 years.

On most counts, the prosperity of our Nation rests on a solid base. Our economy at the end of last year was still growing strongly. The momentum of expansion will be sustained early this year by the reductions in taxes on individual incomes and corporate profits that were provided in the Revenue Act of 1978. Last year, as in the earlier years of the recovery, the process of economic expansion remained relatively well balanced. Business inventories are lean. Industrial firms and financial institutions are in good financial condition. Shortages and speculative buying generally are absent. But inflation does pose a serious threat to the Nation's continued economic health. If we make progress in reducing inflation, the prospects are good for a successful transition from a period of economic recovery to a period of moderate but sustained growth.

For more than 10 years, our country, like many other nations, has faced stubborn inflation. During the course of 1978 our inflation problem worsened. Consumer prices rose by about 9 percent, a large acceleration from the 63/4 percent rate of inflation in 1977. Increases in wages also were larger and, since productivity gains declined sharply, costs of production moved up much more strongly.

The anti-inflation effort was given top priority in 1978. In May, I recommended that the Congress reduce by $5 billion and delay 3 months the tax cut that had been proposed earlier. In October, I set forth a strong and comprehensive program to combat inflation. Shortly thereafter, in cooperation with other countries, the Nation undertook a series of measures to strengthen the dollar abroad and further contribute to a reduction of inflation at home.

INFLATION IN 1978

Rising inflation last year stemmed from several sources. Cold winter weather affected food supplies and prices. Depreciation of the dollar in foreign exchange markets added to prices of imports and to prices of goods produced by U.S. firms that compete with imported products. Costs of land and building materials were driven up by exuberant demands for new homes, and the rise of mortgage interest rates added to the costs of buying a home. At the same time, the cumulative effects of government legislation and regulation over recent years gave further impetus to cost pressures.

A large part of the worsening of inflation last year, however, stemmed from poor productivity. Over the past decade or more, the rate of growth in our productivity has been slowing. In late 1977 and throughout 1978, the slowdown in productivity growth reached serious proportions. Last year the productivity of our economy increased by less than 1 percent.

The reasons for the weakening of productivity growth in our country, especially its poor performance last year, are complex and are not fully understood. But the consequences are well known. With slower productivity growth, our living standards individually and as a Nation cannot rise as fast. Slower productivity growth means that the resources available for carrying out governmental programs become scarcer. It means that large increases in wages and other incomes put greater upward pressure on costs and prices. If we ignore the realities of slower productivity growth—if governments continue to press forward with unabated claims on resources, and private citizens continue to demand large gains in money incomes—our inflationary problem will worsen.

DEALING WITH INFLATION

Inflation injures every person in our country. It means that paychecks do not go as far as they once did. It means that savings accumulated for retirement or for a child's education become inadequate. Many poor and elderly persons see prices they pay for food, shelter, and heat rise rapidly while their incomes rise slowly or not at all. These problems are so acute that they demand an all-out effort to reduce inflation. Yet rising prices and costs have additional and very serious effects on our economy as a whole.

Inflation drives up interest rates. It undermines the competitiveness of our industries and the value of our dollar abroad. Confidence of businesses in the future is reduced and investment plans are upset. Consumers' confidence in their own future is sapped. Sooner or later, these effects of inflation will undermine the basis for economic expansion and make sustained prosperity impossible.

Finally, the corrosive effects of inflation eat away at the ties that bind us together as a people. One of the major tasks of a democratic government is to maintain conditions in which its citizens have a sense of command over their own destiny. During an inflation individuals watch in frustration as the value of last week's pay increase or last month's larger social security check is steadily eroded over the remainder of the year by a process that is beyond their individual control. All of us have to plan for the future when we lend or borrow, save for a child's education, change a job, buy a home, or choose a career. The future is uncertain enough in any event, and the outcome of our plans is never fully within our own control. When the value of the measuring rod with which we do our planning—the purchasing power of the dollar is subject to large and unpredictable shrinkage, one more element of command over our own future slips away. It is small wonder that trust in government and in social institutions is simultaneously eroded.

It is for all of these reasons that reducing inflation must now be the primary concern of economic policy.

POLICIES TO CONTROL INFLATION

Firm, sustained and carefully applied fiscal and monetary restraint must be the first element in our effort to reduce inflation. We have entered a period in which the high rate of economic growth that we experienced when the margin of unused resources was larger no longer is appropriate. We will apply the needed restraint and stick with it.

We will not try to wring inflation out of our economic system by pursuing policies designed to bring about a recession. That course of action would be unfair. It would put the heaviest burden of fighting inflation on those who can least afford to bear it. It also would be ineffective. Twice in the past decade inflation has accelerated and a recession has followed, but each recession brought only limited relief from inflation. The underlying pressures behind rising prices and costs continued to be strong, and inflation eventually accelerated again when recovery began. Stop-and-go policies do not work. A successful anti-inflation program must be durable to deal with a long-run inflation problem. Our program meets that test.

When I announced my anti-inflation initiatives last October, I pledged to pursue a restrained budgetary policy in fiscal year 1980. I have kept that pledge. The central element of my fiscal program is tight control over Federal spending:

• Growth in Federal spending will be curtailed. As in 1979, Federal outlays in the next fiscal year will increase in real terms by significantly less than 1 percent.

• The share of the Nation's output accounted for by Federal spending will be reduced to about 21 percent in fiscal 1980, a full year ahead of the schedule that I had earlier announced.

Restricted growth in Federal spending, combined with the revenues yielded by a moderately growing economy, will reduce the budget deficit to $29 billion in fiscal 1980, less than half its size in 'the year before I took office. This course of fiscal policy will exert the measured restraint that is needed. Excessive demands upon the Nation's resources will be avoided. Growth in economic activity will slow to a little below the rise in the Nation's economic potential.

These measures of fiscal policy are being complemented by firm and careful monetary restraint on the part of the Federal Reserve Board. In this way, monetary and fiscal policy are supporting each other to combat inflationary pressures and foster a healthy and stable economy.

OTHER GOVERNMENTAL ACTIONS

I am taking other steps to reduce the inflationary effects of government actions. I have directed the agencies of the executive branch to pay special attention to ensuring that the regulations they issue do, not impose unnecessary burdens on the public, and I shall continue the efforts that got under way in 1978 to improve the regulatory process.

Last year the deregulation of the airline industry brought American consumers the benefits of substantially lower prices and better service. This year I intend to seek congressional approval of legislation to increase the role of competitive forces in the trucking and railroad industries. I will submit to the Congress legislation to reform the process by which regulations are developed by Federal agencies, and to increase the emphasis on a careful balancing of costs and benefits. And I am taking steps to reduce the burden of paperwork imposed by the government on the private sector.

Government must set a clear example in the fight against inflation. For that reason, I ordered last year that the rate of pay increase for Federal workers be held to 5.5 percent and that sharp limitations be imposed on new Federal hiring.

Although these actions by government will not, by themselves, bring inflation to an end, they are indispensable. They can create an environment that encourages voluntary cooperation with the pay and price standards. Without restraint by government, the pressures of an overheated economy easily could render meaningless the best efforts of businesses and workers to reduce price and wage increases. However, it will take broad cooperation from the private sector if the voluntary effort is to succeed in reducing inflation.

VOLUNTARY WAGE AND PRICE STANDARDS

The voluntary wage and price standards call for an average rate of pay increase of 7 percent or less this year. I also have asked businesses to hold their average rate of price increase to at least one-half percentage point below the average rate of increase in 1976-77. Where such price deceleration is not possible, the standards provide for limitations on profit margins.

To meet these standards both workers and businesses must exercise restraint. But they are fair and flexible standards. If they are widely observed, as I believe they will be, we can reverse the momentum of the price-wage cycle and gradually bring down the rate of inflation.

I recognize that cooperation with this program entails uncertainties for workers who comply with the wage standards. They may lose if others do not comply, or if forces beyond anyone's control cause prices to rise unexpectedly. In order to provide them some assurance that those who cooperate will not suffer as a result, and thus to motivate wider observance of the standards, I have proposed to the Congress a program of real wage insurance. Under this program, if inflation increases by more than 7 percent this year, groups of workers that meet the 7 percent pay standard will receive a tax credit at a rate equal to the difference between the actual inflation rate and 7 percent. This credit will insure workers' real wages over a range of inflation as high as 10 percent this year, far higher than is expected to occur.

The elements of my anti-inflation program are mutually supportive and designed to mount a sustainable attack on our long-run inflation problem. Voluntary cooperation with the pay and price standards is essential to reversing the momentum of inflation. Government needs to take strong action to avoid contributing to inflationary pressures in order to ensure that the benefits of voluntary restraint are fully realized. Together, these policies offer our best opportunity to win the fight against inflation.

OUTLOOK FOR 1979

My anti-inflation program will support the health of our economy in 1979 in two respects. First, the rate of inflation should slow this year—to about 7 1/2 percent over the year as a whole, and to somewhat below 7 percent by the end of the year. Second, moderation of inflation will help us avoid a recession and improve the prospects for sustained economic growth in 1980 and beyond.

Over the 4 quarters of 1979, the Nation's output should rise by about 2 1/4 percent, somewhat less than the economy's potential growth. This should create an economic climate in which the wage and price standards have good prospects for success. The labor force will continue to expand strongly and most new workers will find jobs.

Further progress in reducing inflation can be expected in 1980 as the effects of the anti-inflation program begin to cumulate. Moderate growth in the year ahead, combined with substantial progress against inflation, will lay the basis for an enduring prosperity.

In the years beyond 1980, as we are successful in containing the growth in Federal spending and bringing down the rate of inflation, we can look toward reductions in Federal taxes. Rising real income and inflation, even at a reduced pace, push taxpayers into higher tax brackets and thereby raise the average effective tax rate. Both to sustain economic growth and to relieve citizens from unwarranted tax burdens, tax reductions will, from time to time, be highly desirable.

It would be unwise—and, indeed, very dangerous—to commit ourselves now to any mechanical formula for future reductions. No such formula will pass the test of budgetary responsibility. Our knowledge of future economic conditions and developments affecting the rate of inflation is too limited to make such decisions at this time. There is simply no substitute for the difficult process of matching our overall budgetary policies year by year to the economic requirements of the Nation.

POLICIES TO MEET THE NATION'S NEEDS

In a period when the overall growth of budgetary resources must be tightly restrained, budget decisions take on special importance. Some real growth in our defense budget is essential to meet our national security needs and keep our international commitments in the face of the growing military strength of our potential adversaries.

Within the domestic budget I have given special priority to the needs of the poor and the disadvantaged. I have recommended substantial funding for programs that address their needs for assistance in health care, education, employment and training, and basic subsistence. The 1980 budget directs the resources of those programs more carefully toward those most in need. Similarly I have sought to maintain and, in some cases, expand the assistance provided to our financially troubled cities and counties. I have paid particular attention to the need to move ahead with the development of alternative energy sources, including solar energy, and to spur basic research and development, which has been lagging in our country.

We cannot be satisfied with the condition of our economy while many of our disadvantaged citizens, especially among minorities, are unable to find work even in periods of prosperity. In 1978, the Congress enacted with my support the Full Employment and Balanced Growth Act. That act restates and amplifies the responsibilities of economic policy that have faced our Nation in recent decades. The act challenges us to provide the fullest possible opportunities for useful employment, to rely on the private sector as the principal provider of jobs, and to create an environment of price stability that will make it possible to sustain prosperity. These are very ambitious goals that challenge us as a Nation to set our sights high. The act also establishes important new procedures for moving toward the realization of full employment and price stability.

Neither can we rest while large numbers of Americans still live in poverty. This Nation has made a concerted effort to provide for those in our society who are in need. We have assisted the poor to acquire the basic necessities of life. We have taken steps to assure adequate incomes and medical care for the elderly. And we have helped to assure better health care, nutrition, and education for the young. My budget for 1980 continues to respond to the challenge that poverty sets before our Nation.

Each of these challenges calls for action by the government. In a period of inflation, however, our ability to act is limited. We cannot do everything, but we must do what we can and do it well. That is the framework within which I have constructed my budgetary program for 1979 and 1980. This budget provides a carefully balanced spending plan which will ensure that the activities of the Federal Government are well administered and effective, and that we continue to respond to the important needs of the country.

My 1980 budget provides important building blocks for the future in many areas:

• Health programs, which I have expanded substantially during my first 2 years in office, will be maintained at those levels and in some cases increased. In addition, consistent with the development of a National Health Plan, new resources have been provided for the Child Health Assessment Program, which will extend Medicaid benefits to over 2 million low-income children. Funds have also been provided for extending Medicaid coverage to 100,000 low-income pregnant women not now eligible.

• Authority for new spending for education is maintained at the level that I provided in my budget last year. This program will support spending nearly 20 percent greater, in real terms, than 2 years ago.

• Publicly assisted housing will be provided through subsidies for 325,000 new units for families with low or moderate incomes.

• Job-related programs will include funds that will support an average of 546,000 public service jobs, phasing down to 467,003 jobs by the end of 1980. These jobs have been targeted more tightly to serve the structurally unemployed. Another 424,000 training opportunities also will be provided for the structurally unemployed. Programs to provide employment and training opportunities for youths remain a high priority. More private sector job opportunities will be made available through the new private sector initiative and the targeted employment tax credit.

• A welfare reform program, to take effect in 1982, will expand aid to families with dependent children, increase the earned income tax credit for low-wage workers, substantially improve employment opportunities for the Nation's neediest citizens, and provide fiscal relief to State and local governments with severe welfare burdens. Important reforms in the administration of the program will make America's welfare system easier to operate.

• Aid to our cities and counties will continue to be provided through revenue sharing, community development block grants, urban mass transit assistance, and urban development action grants. My budget provides new resources for the National Development Bank and requests funding in fiscal 1979 and 1980 for a new program of special fiscal assistance to cities and counties with severe unemployment problems.

This spending program provides for our Nation's vital needs, while remaining within the constraints required by today's inflationary economy.

THE INTERNATIONAL ECONOMY

Developments last year reminded us once again of the interdependence of our economy and those of other nations around the world. Our trading partners are looking at our ability to deal with our economic problems at home as an indicator of the strength and leadership they can expect from the United States. We will not disappoint them.

Nineteen hundred and seventy-eight was a year of significant progress in the world economy. Real output began to pick up in industrial countries other than the United States. Important initiatives in the international arena occurred in trade policy, in balance of payments adjustment, and in financial markets—all influenced by the cooperation shown at the Bonn Summit.

Late 1978 and early 1979 will mark the culmination of the Tokyo round of Multilateral Trade Negotiations. These historic negotiations—which began in 1975 and were intensified in 1977—should lead to the first comprehensive overhaul of the rules of international trade since the 1960s.

The need for a revamping of the trading system is clear. Our large foreign trade deficit stems in part from a loss of American vitality in world markets. But it has also resulted from the tariff and nontariff barriers of our trading partners. Over the coming years, under a final multilateral trade agreement, barriers at home and abroad will be reciprocally dismantled.

During 1979 I will be working closely with the Congress to adopt the final multilateral trade agreement, along with implementing legislation, that will foster robust export growth and free and fair competition in world trade under rules that are both equitable and economically sensible. These measures will provide a framework for trade that will enhance our living standards in the decade to come.

In recent years, the United States has had a serious balance of payments deficit. Our imports surged as we grew rapidly and drew heavily on imported oil. Our exports lagged because of slow economic growth abroad. These factors contributed to a trade deficit rising from about $10 billion in 1976 to an annual rate of almost $45 billion in early 1978. As a result of the sharp increase in our external deficit and the acceleration of inflation in the United States, the value of the dollar in foreign exchange markets fell substantially last year.

We have taken important steps to correct the deficit:

• In late 1978, Congress enacted the National Energy Act, the first comprehensive legislation for dealing with our energy problems. The effect will be to reduce our oil imports in 1985 by 2.5 million barrels per day.

• In 1978, I announced the first phase of a National Export Policy. By setting up a framework to increase support for exports and reduce disincentives to export, we can begin to increase our share of world commerce. Fundamental improvement in our trade position is critical to a healthy dollar.

• A strong and effective anti-inflation program has been put into place. An integral part of that program consists of monetary and fiscal policies that will moderate the rate of economic expansion. These actions will help reduce our large foreign trade deficit.

These policies were beginning to bear fruit by the end of 1978. Exports today are growing more rapidly than the domestic economy. The merchandise trade deficit declined from a $38-billion annual rate in the first half of last year to about $32 billion in the latter half of the year. Narrowing of the deficit should continue and we foresee a marked improvement in the more comprehensive current account measure.

Nineteen hundred and seventy-eight was also a year of unusual instability in international financial markets. In the fall, movements in the exchange value of the dollar became very disorderly, and its decline became clearly excessive.

On November 1, I announced a series of steps to restore order to the foreign exchange markets and to correct the excessive decline of the dollar. Up to $30 billion in foreign exchange resources were assembled by the United States, to be used in coordination with other countries utilizing their own resources, to protect the dollar's value in currency markets. Domestic interest rates were raised significantly to help reduce inflation and strengthen the dollar in exchange markets. And the United States underlined its commitment to deal with its inflation problem and strengthen its underlying economic position.

These actions have improved the tone of the exchange markets and contributed to a rise in the value of the dollar. More importantly for the longer term, they are helping to create more stable conditions in the exchange markets, in which the value of the dollar can better reflect the fundamental strength of the U.S. economy.

Progress also was made in 1978 in achieving closer economic cooperation among the leading industrial nations. I met in Bonn with the leaders of the six major industrial countries to discuss major economic problems facing us. Out of this came a concerted action program to restore greater balance and confidence in the international economy and in world financial markets. Together, we took the necessary steps to achieve those ends—the United States committed itself to combat inflation and reduce oil imports, Germany and Japan to increase growth and reduce trade surpluses, others to take measures on trade or inflation. Only through continued economic cooperation and sound policies can we attain the goal of full employment and price stability that is our ultimate objective.

BUILDING FOR THE FUTURE

During this coming year, we as a Nation have an opportunity to strengthen our economy and lay the basis for continuing prosperity. The gains of the last 2 years have been notable. We have made great progress at home in recovering from the recession, and we have strengthened the stature of the United States in the world economy. In the year ahead, we can secure and extend those gains by working together to moderate inflation. I am confident that we will rise to the challenge.

JIMMY CARTER
January 25, 1979.

Citation: Jimmy Carter: "Annual Message to the Congress: The Economic Report of the President", January 25, 1979. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http://www.presidency.ucsb.edu/ws/?pid=32712.
 
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