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 30, 1980
To the Congress of the United States:

Last year world oil prices more than doubled. This increase will add some $200 billion to the bill for imported oil paid by consuming nations. Higher oil prices were the major reason for the worldwide speedup in inflation during 1979 and the dimming of growth prospects for 1980.

The United States was severely affected, as were other oil-importing countries. Our share of the additional oil bill will come to almost $45 billion this year. Partly, but not solely, because of higher oil prices, inflation accelerated sharply. The consumer price index rose by over 13 percent. The Nation's output of goods and services, which had been predicted in last year's Economic Report to grow by 2 1/4 percent over the 4 quarters of 1979, rose by less than 1 percent.

Although growth slowed, our economy offered strong resistance to the forces of recession. Despite virtually universal forecasts of imminent recession, output continued to rise throughout the second half of last year. Housing sales and construction held up better than expected until late in the year. By reducing their savings, consumers maintained spending in the face of the multibillion dollar drain of purchasing power from higher oil prices. Because business inventories have been kept remarkably lean, declines in sales did not lead to major inventory corrections. More generally, the economic recovery of recent years has been free of the distortions which, in the past, made the economy sensitive to recessionary forces.

Employment growth held up even better than output, and unemployment remained under 6 percent all year. Unfortunately, the strength of employment gains reflected a sharp decline in productivity-2 percent over the year. This fall in productivity added to costs, and thus bore a share of the responsibility for higher inflation.

While inflation worsened in 1979, a large part of the acceleration was concentrated in a few areas—energy; homeownership and finance; and, early in the year, farm and food products. Elsewhere consumer price inflation was more moderate, as prices rose by 7.5 percent over the year. Wage gains were no higher than in 1978, despite the speedup of inflation. The government's voluntary wage and price standards were widely observed and limited sharply the extent to which inflation spread from oil and a few other troubled sectors to the rest of the economy.


It is my strong conviction that inflation remains the Nation's number one economic problem. 'Energy and housing prices are still moving up rapidly, adding directly to inflation and continuing to threaten a new price-wage spiral in the rest of the economy. Even apart from these special problem sectors, inflation is now running at an 8 to 9 percent rate, compared to 6 or 6 1/2 percent several years ago, in part because of a disappointing productivity performance.

Our immediate objective for 1980 must be to prevent the spread of double-digit price increases from oil and other problem sectors to the rest of the economy. My budget and economic policies have that as their primary goal. We share that same urgent goal with virtually every other oil importing country. Halting the spread of inflation is not enough, however. We must take steps to reduce it.

Each new round of inflation since the 1960's has left our country with a higher underlying inflation rate. Without longterm policies to pull down the current 8 to 9 percent rate, our Nation will remain vulnerable to still further increases. Another sharp rise in oil prices or a worldwide crop shortage could provide the next turn of the ratchet. Failure to lower inflation after the latest episode would strengthen long-run inflationary expectations and erode resistance to even larger wage and price increases. Over the longer term, we will either bring inflation down or it will assuredly get worse.


To fight inflation I propose that we act along four lines. The first and most immediate of these is fiscal and monetary restraint:

• Under the economic conditions that now confront us we must concentrate on reducing the budget deficit by holding down Federal spending and forgoing tax reductions. We cannot afford a permissive economic environment in which the oil-led inflation of 1979 gives rise to a widespread acceleration of wage and price increases in 1980 and 1981.

• To reduce inflation in subsequent years, the budget will have to stay tight. That does not mean that it should fail to respond to changing economic circumstances or that taxes can never be reduced. But compared to an earlier less inflationary era the room for budgetary maneuver has appreciably narrowed.

• Monetary policy will have to continue firmly in support of the same anti-inflationary goals.

The second line of action is restraint by the private sector in its wage and price decisions. Aided by the deliberations of the Pay and Price Advisory Committees appointed last year, we have been updating and improving the voluntary wage and price standards.

As a third line of action we must pursue measures to encourage productivity growth, adapt our economy rapidly to the fact of scarcer oil supplies, and improve our competitive standing in the world economy. By dealing with these fundamental aspects of economic performance, we seek to ensure that the long-term monetary and fiscal restraints needed to curb inflation go hand-in-hand with a healthy growth in output, employment and living standards. These measures will also help us reduce inflationary pressures from the cost side.

Recent history has driven home the lesson that events outside our country—such as worldwide crop shortages or sudden increases in OPEC oil prices—can have major inflationary effects on the domestic economy. The fourth line of action, therefore, must be the use of measures relating to energy and food that reduce our vulnerability to outside inflationary shocks.


We face a difficult economic transition in the next year or two. According to my economic advisers, our economy is likely to undergo a mild recession early this year. Most private forecasters share this view. Consumer purchasing power is being drained away by rising energy prices; moreover, construction of new homes may decline somewhat further because of limited supplies of mortgage credit and high mortgage interest rates.

Since economic growth in recent years has been well balanced, there are no serious distortions in our economy to intensify the forces of recession. An economic downturn, if it occurs, should therefore be brief and mild. By year-end our economy should be growing again, and the pace of expansion is likely to increase in 1981.

Unemployment will probably rise moderately this year. Next year a stronger pace of economic expansion will create more new jobs, and unemployment will begin to come down again.

Inflation has been building in our country for a decade and a half, and it will take many years of persistent effort to bring it back down. This year energy prices will still go up faster than other prices, but less so than in 1979. Some of the other special factors that contributed to inflation last year should do so to a smaller degree, or not at all, in 1980. Enactment of the budget that I have recommended, and continued exercise of reasonable restraint by business and labor in their wage and price decisions should make it possible to lower the rate of inflation from 13 percent in 1979 to close to 10 percent in 1980, and to a range of 8 to 9 percent in 1981. But that accomplishment will still leave inflation running at an entirely unacceptable pace. We cannot, and will not, rest until reasonable price stability has been achieved.


My budget proposals will reduce the Federal deficit by more than half to $16 billion in fiscal 1981. Accomplishing this reduction, despite the effect of slower economic growth on Federal tax revenues, has required severe restraint on Federal spending. Outlays will increase from $564 billion this year to $616 billion in fiscal 1981. Although real defense spending will rise, total Federal outlays, adjusted for inflation, will remain virtually constant. I propose to reduce inflation-adjusted spending outside of defense.

My 1981 budget is based squarely on the premise that bringing an end to inflation must remain the top priority of economic policy. Not only are budget expenditures held to the minimum level consistent with urgent national needs, but tax reductions are forgone. This austere budget policy, accompanied by supportive policies of monetary restraint, is a necessary condition for controlling inflation.

Citizens all across our country are facing rising tax burdens because of increased social security taxes and because inflation pushes individuals into higher income tax brackets. They want, and deserve, tax reductions when cuts can be granted within the framework of a prudent budgetary policy. Businesses need greater incentives to invest in the new and modern plant and equipment that is essential to growth in our productive capacity and to long-run improvement in economic efficiency. If we continue to keep the growth of Federal expenditures under tight rein, tax reductions will be forthcoming. But I could not and did not recommend tax relief this year.

I am aware that a mild recession is widely forecast. Indeed the estimates of revenues and expenditures in my budget assume its occurrence. But forecasts are necessarily uncertain. Our economy has shown remarkable resilience to date, and there is no evidence that a recession has begun. Under those circumstances, to have recommended a tax reduction and a much larger budget deficit would have been a signal that we were not serious in our fight against inflation. It would have increased inflationary expectations, weakened the value of the dollar in exchange markets, and risked the translation of last year's oil-led inflation into a new and higher wage-price spiral in 1980. In recognition of these realities, my budget proposals concentrate on reducing the deficit.

In this uncertain period, of course, economic policy cannot be fixed in place and then forgotten. If economic conditions and prospects should significantly worsen, I will be prepared to recommend to the Congress additional fiscal measures to support output and employment in ways and under circumstances that are consistent with a continued fight against inflation.

Restraint in the 1981 budget has been accomplished while still moving forward with Federal programs and expenditures that address our Nation's critical needs.

• Outlays for defense will increase by over 3 percent in real terms. Both strategic and conventional forces will be strengthened. Our commitment to our NATO allies will be met, and our ability to deploy forces rapidly anywhere in the world will be improved. Recent events in Southwest Asia have underlined the necessity for these actions.

• Expenditures will be raised to expand domestic energy supplies, increase energy conservation, and provide assistance to low-income families least able to pay higher energy prices.

• Support for basic research, enlarged in the past three fiscal years, will be further expanded to a total of $5.1 billion in 1981. Sustained commitment to basic research will assure continued American scientific and technical preeminence.

• A major new initiative, for which $1.2 billion in new budget authority is requested, addresses the serious problem of unemployment among disadvantaged youth.

These programs were made possible within the framework of a tight budget by pruning less essential programs, increasing administrative efficiencies, and reducing fraud and abuse. Legislative proposals to reduce Federal spending will save $5 1/2 billion in fiscal 1981 and even more in subsequent years.


A little more than a year ago, I asked business and labor to join with me in the fight against inflation by complying with voluntary standards for pay and prices. Cooperation with my request was extensive. Last year's acceleration of inflation did not represent a breakdown of the pay and price standards. Skyrocketing energy prices, and rising costs of home purchase and finance lay behind the substantial worsening of inflation. Declining productivity also added to business costs and prices.

The pay and price standards, in fact, have served the Nation well. Although the price standards had only limited applicability to food, energy, and housing prices, in the remaining sectors of the economy, for which the standards were designed, prices accelerated little during the first year of the program. Wage increases were no larger than in 1978, even though the cost of living rose faster. Increases in energy prices did not spill over into wages and the broad range of industrial and service prices.

On September 28, 1979, my Administration and leaders of the labor movement reached a National Accord. We agree that our anti-inflation policies must be both effective and equitable, and that in fighting inflation we will not abandon our effort to pursue the goals of full employment and balanced growth.

As an outgrowth of that Accord, I appointed a Pay Advisory Committee to work together with my Administration to review and make recommendations on the pay standards and how they are being carried out. A Price Advisory Committee was established to make recommendations with respect to the price standards.

The most immediate problem in 1980 is to ensure that last year's sharp increase in energy prices does not result in a new spiral of price and wage increases that would worsen the underlying inflation rate for many years to come. Understandably, workers, business managers, and other groups want to make up for last year's loss of real income, and they may seek to do so by asking for larger increases in wage rates, salaries and other forms of income. Such efforts would not restore real incomes that have been reduced by rising world oil prices and declining productivity, but they would intensify .inflation. Improvements in our living standards can only be achieved by making our economy more efficient and less dependent on imported oil.

Voluntary standards for wages and prices, together with disciplined fiscal and monetary policies, are the key ingredients in a strategy for reducing inflation. During the years immediately ahead, monetary and fiscal policies will seek a gradual but steady lowering of inflation. By itself, restraint on borrowing and spending would mean relatively slow economic growth and somewhat higher unemployment and idle capacity. Effective standards for moderating wage and price increases will lead to greater progress in lowering inflation and thereby reduce the burden on monetary and fiscal policies and provide scope for faster economic growth and increased jobs.


Just before my Administration took office the overall unemployment rate was still close to 8 percent. For blacks and other minorities, the rate was over 13 percent and had shown little improvement since the recovery began in early 1975.

Since then increases in employment have been extraordinarily large, averaging nearly 3 1/2 percent per year. The gains for women were twice as large as for men. For blacks and other minority groups the percentage rise in employment was half again as large as for whites. Aided by a strongly expanded Federal jobs program for youth, employment among black and other minority teenagers grew by over 15 percent. Employment among Hispanic Americans rose by over 20 percent.

Unemployment rates have come down substantially for most demographic groups. Unemployment among black teenagers, however, has not fallen significantly and remains distressingly high.

To address the very serious problem of unemployment among disadvantaged youth, my Administration has substantially expanded funds for youth employment and training programs over the past 3 years. My 1981 budget includes an important new initiative to increase the skills, earning power, and employability of disadvantaged young people.

In 1978 the Humphrey-Hawkins Full Employment and Balanced Growth Act was passed with the active support of my Administration. The general objectives of the act—and those of my Administration-are to achieve full employment and reasonable price stability.

When I signed that act a little over a year ago, it was my hope that we could achieve by 1983 the interim goals it set forth: to reduce the overall unemployment rate to 4 percent and to achieve a 3 percent inflation rate.

Since the end of 1978, however, huge OPEC oil price increases have made the outlook for economic growth much worse, and at the same time have sharply increased inflation. The economic policies I have recommended for the next 2 years will help the economy adjust to the impact of higher OPEC oil prices. But no policies can change the realities which those higher prices impose.

I have therefore been forced to conclude that reaching the goals of a 4 percent unemployment rate and 3 percent inflation by 1983 is no longer practicable. Reduction of the unemployment rate to 4 percent by 1983, starting from the level now expected in 1981, would require an extraordinarily high economic growth rate. Efforts to stimulate the economy to achieve so high a growth rate would be counterproductive. The immediate result would be extremely strong upward pressure on wage rates, costs, and prices. This would undercut the basis for sustained economic expansion and postpone still further the date at which we could reasonably expect a return to a 4 percent unemployment rate.

Reducing inflation from the 10 percent expected in 1980 to 3 percent by 1983 would be an equally unrealistic expectation. Recent experience indicates that the momentum of inflation built up over the past 15 years is extremely strong. A practical goal for reducing inflation must take this fact into account.

Because of these economic realities, I have used the authority provided to me in the Humphrey-Hawkins Act to extend the timetable for achieving a 4 percent unemployment rate and 3 percent inflation. The target year for achieving 4 percent unemployment is now 1985, a 2-year deferment. The target year for lowering inflation to 3 percent has been postponed until 3 years after that.


Achieving satisfactory economic growth, reducing unemployment, and at the same time making steady progress in curbing inflation constitutes an enormous challenge to economic policy.

To lower inflation, we will have to persist in the painful steps needed to restrain demand. But demand restraint alone is not enough. We must work to improve the supply side of our economy—speed its adjustment to an era of scarcer energy, increase its efficiency, improve the workings of its labor markets, and expand its capital stock. We must take measures to reduce our vulnerability to inflationary events that occur outside our own economy. Only an approach that deals with both demand and supply can enable the the Nation to combine healthy economic growth with price stability.


Over the past 3 years I have devoted a large part of my own efforts and those of my Administration toward putting in place a long-term energy policy for this Nation. With the cooperation of the Congress much has already been accomplished or stands on the threshold of final enactment.

The phased decontrol of natural gas and domestic crude oil prices will provide strong, unambiguous signals encouraging energy conservation and stimulating the development of domestic energy supplies. But decontrol of oil, in the face of very high OPEC prices, inevitably generates substantial windfall profits. The windfall profits tax I have proposed will capture a significant portion of these windfalls for public use.

The increased Federal revenues from this tax will make it possible to cushion the poor from the effects of higher oil prices, to increase our investment in mass transit, .and to support programs of accelerated replacement of oil-fired electricity generation facilities and increased residential and commercial energy conservation. I have also proposed incentives for the development of energy from solar and biomass sources, and have asked the Congress for authority to create an Energy Security Corporation to provide incentives and assistance on a business-like basis for the accelerated development of synthetic fuels. Other legislation that I have proposed, which is also now before a Conference Committee of the Congress, would create an Energy Mobilization Board to cut the red tape and speed the development of essential energy projects. I urge the Congress to take the final steps to enact the enabling legislation for my energy initiatives.

These policies will sharply increase the efficiency with which our Nation uses energy and widen the range of economically feasible energy sources. In so doing, they will help make our economy less inflation-prone. They will also drastically cut our reliance on imported oil, and by making our Nation less vulnerable to sudden increases in world oil prices, reduce the probability of sudden inflationary surges.

By the end of this decade, we will be well on the way to completing the transition toward the new world of scarcer oil supplies. In the interim, however, our country still remains dangerously exposed to the vagaries of the world oil market.

I am pursuing measures to deal with this transitional problem. Together with other major oil-consuming countries in the International Energy Agency we are working to devise improved means of matching any future cuts in oil supplies with joint action to reduce oil demand. By avoiding a competitive scramble for scarce oil, we can reduce the chances of further large price increases.

Last year I pledged that our country would never again import more oil than we did in 1977—8.5 million barrels a day. This year I am establishing a lower import target of 8.2 million barrels a day. I am prepared to reduce that target in the event that discussions within the International Energy Agency produce a fair and equitable agreement that requires still lower imports. I will impose a fee on purchases of foreign oil if they threaten to exceed the limit that I set.

While international cooperation is essential, so are measures we can take on our own. In accordance with legislation enacted last year the Administration has developed a standby motor fuel rationing plan to deal with major supply interruptions, defined to be a shortfall in supply of 20 percent or more. This plan will be submitted to the Congress in February. But even smaller supply interruptions can cause severe economic problems. We are therefore considering proposals for standby measures to be applied if lesser, but still significant, disruptions occur. The Strategic Petroleum Reserve (SPR) can cushion the impact of an abrupt cutoff in supplies. My budget provides funds for resuming SPR purchases this year if conditions permit.


The persistence of high unemployment among some groups of workers while jobs go begging and unemployment is low elsewhere is not only a major social problem but a waste of national resources. The lack of skills, the imperfections of the labor market, and in some cases, the discrimination that gives rise to this situation, reduce national productivity and contribute to inflation.

Although our labor market currently works quite well for most people, it does not work well for disadvantaged and minority youth. In recognition of this fact, I have recently sent to the Congress proposals designed to deal with teenage unemployment.

The goals of my proposals are:

• to teach basic skills in the secondary schools to those youths who did not master them in elementary school and who need special help;

• to provide part-time employment and training to dropouts if they participate in long-term training to develop skills that will improve their prospects; and

• to provide intensive long-term training aimed at helping older youths out of school find jobs in the private sector.

The funds will go largely to poor rural areas and central cities, where youth unemployment is particularly high because of inadequate education, and where local resources are insufficient to rectify the problem.

Another segment of the labor force needing special assistance is the working poor. The welfare reforms which I have sent to the Congress will provide training, help in seeking jobs, and work opportunities for poor but employable persons.


Regulation has joined taxation, defense, and the provision of social services as one of the principal activities of the government. Unneeded regulations, or necessary regulations that impose undue burdens, lower efficiency and raise costs.

For the past 3 years I have vigorously promoted a basic approach to regulatory reform: unnecessary regulation, however rooted in tradition, should be dismantled and the role of competition expanded; necessary regulation should promote its social objectives at minimum cost.

Working with the Congress we have deregulated the airline industry. We are now cooperating with congressional committees to complete work on fair and effective legislation that eliminates costly elements of regulation in the trucking, railroad, communications, and financial industries.

Within the executive branch, we are improving the quality and lowering the cost of regulations. The Regulatory Council, which I established a year ago, is helping us comprehend the full scope of Federal regulatory activities and how these activities, taken together, affect individual industries and sectors. A number of regulatory agencies are experimenting with new regulatory techniques that promise to achieve regulatory goals at substantially lower costs.


We do not know all of the causes of the slowdown in productivity growth that has characterized our economy in recent years. But we do know that investment and research and development will have to play an important role in reversing the trend.

To meet the Nation's sharply increased requirement for investment in energy production and conservation, to fulfill its commitment to cleaner air and water and improved health and safety in the workplace, and at the same time to provide more and better tools for a growing American work force, our Nation in the coming decade will have to increase the share of its resources devoted to capital investment.

We took one step in this direction in the Revenue Act of 1978, which provided a larger than normal share of tax reduction for investment incentives. Passage of my pending energy legislation will make available major new incentives and financial assistance for investment in the production and conservation of energy. When economic conditions become appropriate for further tax reduction, I believe we must direct an important part of any tax cut to the provision of further incentives for capital investment generally.

One of the most important factors in assuring strong productivity growth is a continuing flow of new ideas from industry. This flow depends in the first instance on a strong base of scientific knowledge. The most important source of such knowledge is basic research, the bulk of which is federally funded.

Between 1968 and 1975 Federal spending for basic research, measured in constant dollars, actually fell. But since that latter year, and especially during the years of my Administration, Federal support for basic research has increased sharply. In spite of the generally tight economic situation, the 1981 budget I am submitting to the Congress calls for yet another substantial increase in real Federal support for basic research. Even during a period of economic difficulties, we cannot afford to cut back on the basis for our future prosperity.


Because the worldwide demand for food has grown substantially, overproduction is no longer the primary problem in agriculture. Government policies now seek to encourage full production, while cushioning the American economy and the American farmer from the sharp swings in prices and incomes to which the farm sector is often subject. Over the past several years my Administration has created a system of farmer-owned grain reserves to supplement the loan and target price approach to farm income stabilization. In periods of low prices and plentiful supplies, incentives are provided to place grain in the reserves, thereby helping to support farm income. The incentives also work to hold the grain in reserve until prices rise significantly, at which time the grain begins to move out into the market, helping to avoid or to moderate the inflationary consequences of a poor crop.

Over this last year, the reserve has been tested twice. When fears of poor world harvests threatened to drive grain prices to extraordinarily high levels last spring and summer, farmers sold grain from the reserve, limiting the price rise. Since I suspended grain shipments to the Soviet Union this month in response to that country's brutal invasion of Afghanistan, increased incentives to place grain in reserve have been serving as one of our main defenses to protect farmers from precipitous declines in prices.


Other countries besides our own suffered important setbacks in 1979 from the dramatic increase in oil prices. Growth prospects worsened, inflation increased, and balance of payments deficits rose. In such difficult times economic cooperation between nations is especially important. Joint action among oil-consuming countries is needed to reduce the pressure of demand on supply and to restore order in world petroleum markets. Cooperation is necessary to protect international financial markets against potential disruptions arising from the need to finance massively increased payments for oil. And cooperation is also necessary to prevent a destructive round of protectionism.

Because the dollar is the major international store of value and medium of exchange, the stability of international financial markets is closely linked to the dollar's strength. The actions taken in November 1978 by the United States and our allies to strengthen and stabilize the dollar worked well during the past year. That the dollar did well despite accelerating domestic inflation is due in part to a significant improvement in our current account balance during 1979. U.S. exports grew rapidly and thus helped to offset rising payments for oil. During the autumn of 1979, however, the dollar came under downward pressure. The October actions of the Federal Reserve Board to change the techniques of monetary policy helped moderate inflationary expectations which had been partly responsible for the pressure on the dollar. As a Nation we must recognize the importance of a stable dollar, not just to the United States but to the world economy as a whole, and accept our responsibility to pursue policies that contribute to this stability.

The Multilateral Trade Negotiations of the Tokyo Round were successfully completed and became law in the United States during 1979. These trade agreements are a major achievement for the international economy. By lowering tariff barriers both in the United States and abroad, they will help increase our exports and provide Americans with access to foreign goods at lower prices. Perhaps more important, these agreements will limit restrictive and unfair trade practices and provide clearer remedies where there is abuse. They cannot, by themselves, assure smooth resolution of all trade issues. Indeed, the real test will come as we begin to carry them out. Nevertheless the agreements reached last year do represent a clear commitment to the preservation and enhancement of an open system of world trade.


The 1970's were a decade of economic turmoil. World oil prices rose more than tenfold, helping to set off two major bouts of inflation and the worst recession in 40 years. The international monetary system had to make a difficult transition from fixed to floating exchange rates. In agriculture a chronic situation of oversupply changed to one which alternates between periods of short and ample supplies.

It was an inflationary decade. It brought increased uncertainty into business and consumer plans for the future.

We are now making the adjustment to the realities of the economic world that the 1970's brought into being. It is in many ways a more difficult world than the one that preceded it. Yet the problems it poses are not insuperable.

There are no economic miracles waiting to be performed. But with patience and self-discipline, combined with some ingenuity and care, we can deal successfully with the new world. The 1980's can be a decade of lessened inflation and healthy growth.

January 30, 1980.

Citation: Jimmy Carter: "Annual Message to the Congress: The Economic Report of the President", January 30, 1980. Online by Gerhard Peters and John T. Woolley, The American Presidency Project.
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