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 17, 1981
To the Congress of the United States:

Over the next few years our country faces several economic challenges that will test the will of our people and the capability of our government. We must find ways to bring down a stubborn inflation without choking off economic growth; we must channel a much larger share of our national output to investment and reverse a decade-long decline in productivity growth; and we must continue to reduce the Nation's dangerous vulnerability to disruptive changes in the world supply and price of oil.

In this Economic Report I set forth my views on how we can best meet those problems. The following Annual Report of the Council of Economic Advisers discusses the challenges and the policy responses in greater detail. It is useful to start by recognizing that in many respects we approach these challenges from a position of strength, with a record of significant economic progress, and the knowledge that over the past 4 years our people and our government have successfully resolved a number of difficult and potentially divisive economic issues. While it would be folly to close our minds to the stubbornness of the problems we face, it would serve the Nation equally ill to underrate our strengths and our proven ability to handle difficult issues.

STRENGTHS AND ACCOMPLISHMENTS

During the economic turmoil that characterized the decade of the 1970's, and especially during the past 4 years, the American economy succeeded in providing additional jobs for its people on a scale unsurpassed in our history. Employment grew by almost 25 percent over the decade, and by more than 11 percent in the past 4 years alone. Not only were jobs provided for a sharply rising population reaching working age, but job opportunities were opened up by the millions for new second earners, principally women. Neither Europe nor Japan came even close to the job performance of the American economy.

Along with employment, real per capita incomes grew during the past 4 years, despite the losses forced on the Nation by the huge increases in world oil prices and the effects of a slowing growth in productivity. As the year 1980 ended, per capita income, after taxes and adjusted for inflation, was some 8 percent higher than it was in 1976.

We have heard much about American industry losing its competitive edge in international markets and about the "deindustrialization" of America. In fact, during the 3 years prior to the onset of the 1980 recession—and the effects of that recession will be transient—the growth of industrial production in the United States was larger than it was in Germany, France, or the United Kingdom. The volume of American nonfarm exports rose by 35 percent between 1977 and the middle of 1980, and the share of U.S. exports among the total exports of the industrial countries rose by about 1 1/4 percentage points, reversing a declining trend that had been underway since the 1950's.

America's balance of payments is strong in large part because of its superior export performance. Despite a massive $40-billion annual drain of funds to pay for the oil-price increases of 1979 and 1980, our exports of goods and services now exceed our imports. Unlike the situation in most other oil-importing nations, our country's external balance is in surplus.

The dollar is also strong. After a period of weakness in its value abroad, we took decisive action 2 years ago to stabilize the dollar. Since then, in a world of sharply changing circumstances and disruptions of oil supply, the dollar has remained strong, and has risen in value compared to most major currencies.

While it is imperative that our country increase the share of its national output devoted to investment, the reason is not that investment has been weak in recent years. Between 1976 and 1980, real business investment grew almost 6 percent a year, substantially faster than GNP as a whole. Because of that rapid growth the share of business investment in GNP during the past 3 years exceeded that of any other 3-year period in the last three decades.

There are other areas where the Nation has made more progress than we sometimes realize. While we are properly concerned to limit the growth in Federal spending and voice our impatience with the waste and inefficiency that often exist in government programs, we should not forget the good that has been accomplished with these programs. Examples abound. In the early 1960's, for instance, infant mortality in the United States was scandalously high compared to other countries, and most of that high mortality was concentrated among the poor. Due in large part to programs like Medicaid, infant mortality has fallen sharply. More generally, we have dramatically improved access to medical care for the poor and the aged. Through Federal grants we have strengthened the mass transit systems of our major cities and helped our municipalities install critically needed waste treatment plants. We have helped millions of young people, who could not otherwise have afforded it, get a college education, and we have provided job training for workers who needed new skills.

Much attention is now focused on how to reduce the costs and ease the burden of Federal regulation to protect the environment, health, and safety. Concern about excessive regulatory costs is surely warranted, and my Administration has taken a number of specific steps to deal with the problem. In focusing attention on the burden of regulation, however, we should not lose sight of the substantial progress that has been made in enriching our lives, improving our health, and beautifying our country.

TACKLING DIFFICULT ISSUES

During the past 4 years the Nation has taken a series of important and in some cases painful steps to deal with its energy problems. Starting almost 2 years ago, we began to phaseout controls on domestic oil and natural gas prices. We thus moved to end the dangerous practice of holding U.S. energy prices below the world market price, a practice which tended to subsidize wasteful consumption and perpetuate our excessive dependence on oil imports.

Working with the Congress we also put in place the other principal elements of a comprehensive program to increase energy production and conserve energy use. We levied a windfall profits tax to divert the inevitable windfalls from oil decontrol to pay for the National Energy Program initiatives and to reduce the impact of decontrol on the poor.

Partly as a result of these policies we have begun to see dramatic results in both the supply and conservation of energy. There are now 70 percent more drilling rigs in operation than when my Administration took office, and the number of oil and gas wells being drilled has reached a new record. By late 1980 the United States was importing almost 30 percent less oil than it did 2 years ago and our gasoline use had dropped by more than 10 percent over the same period. While some of the reduction in energy use was due to the recession, most of it reflects real energy conservation.

What has happened in energy policy over the past 4 years augurs well for our country's future. Decontrolling domestic oil and gas was painful. It pushed up the prices each of us pay for driving and for heating our homes and added to our immediate inflation difficulties. But we showed that we were willing to take such painful steps when they were necessary in our Nation's longer-run interest. Because we are large-scale producers as well as consumers of energy, the energy problem was potentially a highly divisive issue in our country, involving the redistribution of hundreds of billions of dollars, pitting producer against consumer and one region of the Nation against another. But after prolonged and sometimes heated debate, we arrived at an approach that took account of the legitimate concerns of all groups and at the same time furthered the national interest. Dealing with the Nation's remaining economic problems will also require painful measures and the reconciliation of a number of different interests. Our handling of the energy problem should raise our confidence that we can be successful elsewhere.

We have also had major successes in other fields. After decades of inaction, the past 4 years have seen the elimination of price-propping and competition-deadening regulations in a number of American industries. In these 4 years we witnessed more progress in economic deregulation than at any other time in the century. In the face of great skepticism and initial opposition, the executive branch, the Congress, and some of the independent regulatory agencies have deregulated or drastically reduced regulation in the airline, trucking, and railroad industries, and in banking and other financial institutions. We have also made a promising start in the communications industry. The transportation, communications, and finance industries comprise a triad that links the various strands of our economy together. Better performance in these industries should have effects far beyond their own boundaries.

The gains from deregulation will be substantial. For example, productivity and efficiency will be directly increased as transportation load factors are improved and empty backhauls reduced. One survey of studies estimates that reform in the trucking industry alone will lead to $5 billion in annual cost reductions. Even more important will be the longer-run spur to innovation and the increased flexibility that comes from opening up these industries to the fresh winds of competition.

Population trends will be working to help the country deal with some of its economic problems in the 1980's, whereas in the late 1960's and 1970's these trends required some difficult adjustments. The generation of the postwar baby boom began entering the labor market in the 1960's and the influx of new workers continued during the 1970's. The percentage of the population aged 16 to 24 rose sharply. And as birth rates slowed, women entered the labor force in ever increasing numbers. On average, the labor force became less experienced, and average productivity per worker suffered. The increased proportion of women and young people in the labor force also contributed to an increase in the average unemployment rate because the transition from school or home to job takes time and because these new workers sometimes had periods of unemployment as they explored different career possibilities.

Because of the slowdown in birth rates in the past 15 years, the 1980's will see about half as fast a growth in the labor force as in the 1970's. The proportion of experienced workers will rise, contributing to an increase in productivity, while the proportion of young people will fall, leading to a drop in unemployment.

There are a number of reasons, therefore, to confront with hope the economic challenges that face us. We have a solid record of achievement. In the fields of energy and deregulation we have already laid the foundations on which the future can build. And there are some favorable trends underway that should help raise productivity and reduce unemployment in the years ahead.

UNRESOLVED PROBLEMS

Despite much progress in recent years, we are faced with some serious problems. An inflation that was already bad became worse after the 1979 oil-price increase. Productivity growth, which had been declining sporadically for a decade, virtually ceased in the last several years. And. although we have made substantial progress in adapting our economy to a world of higher oil prices, we remain dangerously vulnerable to serious supply disruptions originating abroad.

These problems are closely related to each other. Our inflation stems in part from our oil vulnerability and our slowing productivity growth. High and rising inflation, in turn, tends to cause economic reactions that depress productivity. As we make progress in one of these areas, we will also make progress in the others.

None of the problems is so intractable that we cannot overcome it. But all are so deep-seated that progress will come slowly, only with persistence, and at the cost of some sacrifice on the part of us all.

INFLATION

In the first half of the 1960's inflation averaged about 1 percent a year, so low as to be virtually unnoticeable. In the past 15 years, however, the underlying rate of inflation has risen sporadically but inexorably and it is now running at about 10 percent a year.

During those 15 years there have been three major episodes in which the rate of inflation surged upward. The first came in the late 1960's, when the Vietnam war and the Great Society programs were financed for a number of years without a tax increase. The consequent high budget deficits during a period of economic prosperity generated strong inflationary pressures as total spending became excessive relative to the Nation's productive capacity. The second inflationary surge, which came in the early 1970's, was associated with the first massive oil-price increase, a worldwide crop shortage which drove up food prices, and an economy which again became somewhat overheated in 1972 and 1973. The third inflationary episode came in 1979 and 1980. It was principally triggered by another massive oil-price increase, but part of the rise in inflation may also have been due to overall demand in the economy pressing on available supply. Throughout the past decade, the slowing growth in productivity has pushed up the increase in business costs, adding its bit to the rise of inflation.

Late in each of the three inflationary episodes monetary and fiscal restraints were applied, and at the end of each a recession took place, with rising unemployment and idle capacity. Inflation did fall back somewhat, but at the end of each recession it had not declined to the level from which it started. And so the inflationary process has been characterized by ratchet-like behavior. A set of inflationary causes raises the rate of inflation; when the initiating factors disappear, inflation does not recede to its starting position despite the occurrence of recession; the wage-price spiral then tends to perpetuate itself at a new and higher level. Instead of an occasional 3 percentage point rise in inflation, which disappeared when the initial causes of the inflation were gone, our basic inflation rate rose first from 1 to 4 percent, then from 4 to 7 percent, and in this latest episode from 7 to 10 percent. It is this downward insensitivity of inflation in the face of economic slack that has given the last 15 years their inflationary bias.

A number of facts that are important for economic policy can be drawn from this history. First, excessive demand in the economy, fed by an overly large Federal budget deficit or excess growth in the money supply, was the major factor in one of the three inflationary episodes and played a subsidiary role in the other two. Second, twice in the last decade the tendency for government to stimulate the economy somewhat too freely during the recovery from recession probably played a role in retarding the decline of inflation or renewing its acceleration. That is why I was so insistent that a tax cut designed for quick economic stimulus not be enacted last year. Third, because the rate of increase in wages and prices did not decline very readily in response to the discipline of budgetary and monetary restraint, that restraint resulted only partly in reduced inflation; it also tended to retard the growth of output and employment. Finally, massive increases in world oil prices have twice in the past 7 years helped trigger a major inflationary episode. While we cannot eliminate our vulnerability to such shocks, a reduction in that vulnerability will improve our chances of avoiding new inflation in the future.

These realities dictate the broad tasks that economic policy must accomplish over the years ahead:

Our monetary and fiscal policies must apply steady anti-inflationary restraint to the economy. The restraint must be strong and persistent enough to convince those who set wages and prices that the government means to stand by its guns in the anti-inflation fight. But it must not be so severe or so restrictive as to prohibit even moderate economic growth and recovery, and thus collapse under its own political unreality.

We must seek means to reduce inflation at a lower cost in lost output and employment. These include measures to increase investment, the reform of regulation, and incomes policies. An increase in investment raises productivity growth which, in turn, tends to slow the rise in business costs and prices. Demand restraint will then produce more reduction of inflation and less reduction in output. Measures to lower regulatory costs and increase competition and flexibility in our economy will also directly lower inflationary pressures and let us have more economic growth without sacrificing our inflation goals. An improved set of voluntary incomes policies can directly influence wages and prices in the direction of moderation, and thereby bring inflation down faster and at lower costs.

Finally, we must build upon the foundations already laid and hasten our progress toward energy conservation and increased domestic energy supplies. We must also work to improve our capability of weathering a severe disruption in foreign oil supplies, since even a highly successful energy program will still leave our economy vulnerable to such disruptions over the coming decade.

Last August I outlined an Economic Revitalization Program that would accomplish the tasks set forth above. The specific economic policies I am recommending to the Congress in my 1982 Budget Message and in this Economic Report incorporate the elements of that revitalization program.

BUDGET AND TAX POLICIES

It is now estimated that the Federal budget for the current fiscal year 1981 will be in deficit by $55 billion, substantially more than I had hoped or planned. In part the size of that deficit reflects the loss of revenues induced by the recession from which our economy is now beginning to recover. Had the unemployment rate remained at the 6 percent level where it stood when I first submitted the 1981 budget last year, the deficit would now be less than $20 billion.

The size of the 1981 deficit also reflects three major factors which have driven up the estimates of Federal spending in the past 12 months. First, higher interest rates since the budget was originally submitted have added about $9 billion. Second, payments under many Federal programs, such as social security, are indexed to the consumer price index, which has proven in recent years to overstate significantly the actual rise in the cost of living because of the way it treats housing and mortgage interest costs. And third, defense spending was increased above original estimates.

As part of a program of anti-inflationary fiscal restraint I am recommending a number of steps that will help to cut the deficit in half, to $27.5 billion in the new budget for fiscal year 1982, and reduce it still further to $8 billion in 1983, despite the substantial increases in defense spending which I find it necessary to recommend for those years:

• Beyond exerting strict control over requests for new appropriations for ongoing programs, my 1982 budget sets forth a detailed list of requests to the Congress for the legislation needed to pare some $9 billion in spending in both fiscal 1982 and fiscal 1983. If enacted, these savings would help make possible a reduction in the share of GNP taken by Federal spending from 23.3 percent in 1981 to 23.0 percent in 1982 and 22.6 percent in 1983.

• The personal tax reductions which I am proposing should take effect on January 1, 1982, rather than at some earlier date in 1981.

• I am renewing my request to the Congress for a modest increase in the tax on gasoline; there is no better way to provide additional revenues for reducing the budget deficit than a measure which simultaneously reduces our imports of foreign oil.

• I still strongly support the national health insurance proposal that I earlier submitted to the Congress, but the need for budgetary restraint to control inflation requires that its introduction be delayed until more budgetary room is available and adequate cost containment is in place.

In order to avoid repetition of the recent situation in which many Federal payments rose too rapidly because they are tied to an index which does not accurately reflect changes in the cost of living, I am recommending that the Congress authorize use of a more representative index. I am informed by the Commissioner that the Bureau of Labor Statistics is now producing an index of this type and that it can quickly be made available on a timely basis.

Although my 1982 budget emphasizes the need for fiscal restraint, and for reduction of the deficit, it also takes the first major step in a long-term program of tax reductions aimed at increasing capital formation.

The causes of the longer-term slowdown in productivity growth are many—and some of them are still unknown. But a major depressing factor has been the failure of the Nation's capital stock to increase relative to its rapidly growing labor force in the past 5 or 6 years. Unlike earlier periods, American workers have not been working with increasing amounts of capital. Improving the trend of productivity growth will require restoring the growth of capital per worker.

Higher investment will also be critically required throughout America's energy-using industries to speed up the replacement of older energy inefficient plant and machinery with newer energysaving capital. In addition, a large expansion of energy-producing industries-both conventional and nonconventional will add further to investment needs.

According to estimates made by my Council of Economic Advisers, the combined tasks of restoring the earlier growth of capital per worker and meeting the Nation's energy needs call for an increase in the share of investment in GNP from its recent 10 1/2 percent to 12 1/2 or 13 percent during the 1980's. This would require an expansion in investment by about one-fifth above the level that might normally be expected. It will not occur without the introduction of policies to make it happen.

To begin this task, my 1982 budget incorporates the two major changes in tax laws that I outlined last August in my Economic Revitalization Program to improve incentives and provide increased sources of financing for business investment. The first and most important proposal is a major liberalization of tax allowances for depreciation. Because tax depreciation is now based on the historic cost of an asset, inflation reduces allowable tax deductions relative to the cost of replacing an asset and thus lowers the profitability of investment. Inflation also distorts the tax treatment of assets with different useful lives. I am proposing a new approach to depreciation worked out by the Department of the Treasury which substantially simplifies depreciation accounting and increases the allowable rates of depreciation by about 40 percent. This approach, unlike some other depreciation liberalization proposals that have been introduced in the Congress, tends to avoid major distortions of economic incentives since it provides approximately equal percentage increases in allowable depreciation rates for each industry.

I also propose that the Congress expand investment incentives by improving the investment tax credit. That credit is now only partially available for short-lived assets; it should be made fully available. Even more importantly, part of the investment tax credit should be made refundable. Firms should be able to claim 30 percent of the value of the credit even if they had no tax liabilities for the year. In this way firms with substantial investment needs but with no current earnings can be supported in their efforts to rejuvenate and expand capital assets. Among these are younger and smaller firms that are just beginning to grow, and larger industries undergoing transition, such as autos and steel. The latter may temporarily be experiencing depressed profitability but still have major investment needs for retooling or for new industrial facilities.

These two proposals would reduce business tax liabilities by $9 billion in calendar year 1981, $15 billion in 1982, and by 1985 the reductions would amount to over $27 billion. We estimate that with enactment of these new incentives business investment should increase 5-10 percent above its normally expected level in 1982, with additional gains thereafter.

While providing additional incentives for business investment, we can also move on a carefully phased basis to reduce other taxes in a way that improves both economic efficiency and tax equity. The Congress should enact an income tax credit for both employers and employees that would approximately offset the scheduled rise in social security payroll taxes that occurred in January of this year. To make the benefits available to lower-income workers who have no tax liability, I also propose an increase in the earned income tax credit. But, as I pointed out earlier in this Report, the critical importance of reducing the budget deficit as part of the fight against inflation has led me to recommend that this reduction take effect at the beginning of 1982, by which time the growth of revenues will make such a reduction consistent with overall budgetary objectives.

At the present time one of the major inequities in our tax system is the so-called marriage penalty. Under a wide range of circumstances a husband and wife, each working, will together pay a higher tax than if they were not married. I propose that this penalty be eased by making a tax credit available to the lesser-earning spouse. The credit should be introduced in two steps, half in 1982 and the other half in 1983.

I also propose that the Congress enact several important tax reforms: income from interest and dividends should be put on an equal footing with wages and other incomes by withholding taxes at the source; the excessive issuance of several types of tax-exempt bonds should be curtailed; and the use of certain commodity futures transactions as a tax avoidance scheme should be prohibited.

The central feature of the tax policies I am proposing is their emphasis on increasing investment. By 1985, an unusually high 45 percent of the tax reductions will be directed toward spurring investment. But even this will not itself be sufficient to raise investment to the levels our country will need in the decade ahead in order to improve its productivity growth and deal with its energy problems. Careful control of Federal spending, however, will create the leeway for additional investment-oriented tax reductions in later years, within the framework of the overall budgetary restraint required to fight inflation. I do not believe that we should now commit budgetary resources to large-scale personal tax cuts which will stimulate consumption far more than investment and thereby foreclose the possibility of meeting the Nation's critical investment requirements.

MONETARY POLICY

Monetary policy is the responsibility of the Federal Reserve System, which is independent of the Executive. I respect that independence. But there are several broad aspects of monetary policy having to do with public perceptions that do fall within the purview of the President in his role as national leader.

Sustained restraint in monetary policy is a prerequisite to lowering inflation. The Federal Reserve exercises this restraint principally by keeping a strict limit on the growth of the Nation's money supply. In October 1979 the Federal Reserve modified its earlier policies and operating procedures to increase sharply the emphasis it gives to controlling the money supply. The Federal Reserve each year sets targets for monetary growth and seeks to hold the growth of the money supply within the targets. Increasingly the public in general and the financial community in particular have come to associate the credibility of the Federal Reserve and its determination to fight inflation with its success in keeping money growth continuously within the preannounced targets. It is very important, however, that public opinion not hold the Federal Reserve to such a rigid form of monetary targeting as to deprive it of the flexibility it needs to conduct a responsible monetary policy.

Temporary fluctuations in monetary conditions can sometimes cause the money supply to overrun or underrun the targets for a short period of time without any damage to anti-inflation objectives. Furthermore, economic developments occasionally occur that may make it appropriate for the Federal Reserve to modify the targets it had originally set, or to deviate from its announced aim of lowering the targets each year. If the public interprets occasional necessary changes in the long-run monetary target ranges or short-run deviations of actual money growth from those targets as evidence that the Federal Reserve has lessened its determination to fight inflation and as a reason to expect higher inflation in the future, the Federal Reserve is confronted with an untenable situation. If it fails to make the adjustment in the monetary targets that is called for by a major change in economic circumstances, monetary policy may produce unwanted results. But if the Federal Reserve does change the targets in the face of public misunderstanding, it risks an impairment of its credibility. The same dilemma exists with respect to allowing short-run deviations in money growth from the target ranges.

Only if the public understands the realities, and the complexities, of carrying out an ant-inflationary monetary policy can the Federal Reserve successfully apply the measured restraint necessary to wring out inflation at minimum cost in production and jobs. On the one hand, the country must face the fact that in a world with a stubborn 10 percent inflation rate, keeping a tight rein on the growth of the money supply inevitably leads to interest rates that average significantly higher than those we were accustomed to in earlier periods of lower inflation. On the other hand, the public and the financial community must not become so obsessed with the mechanics of monetary targeting that any change in targets or any short-run deviation of money growth from those targets is taken as a sign that monetary restraint has been weakened.

Without reasoned and persistent monetary restraint, inflation cannot be licked. Perhaps more than in any other area of economic policy, however, achieving success in monetary policy depends on an informed public opinion.

INCOMES POLICIES

For the past 2 years my Administration has urged business and labor to comply with a set of voluntary pay and price standards. Even though it was introduced at a very difficult time—just before the oil-price explosion of 1979—this voluntary program of wage and price restraint did moderate the pace of inflation. It significantly reduced—although it could not eliminate—the effect of the oil-price rise on the underlying inflation rate.

After 2 years of operation there is general agreement that the current pay and price standards would not continue to be effective in their present form and without additional support. For this reason we have carefully examined the possibility of strengthening a voluntary incomes policy by using the tax system to provide incentives to firms and workers to slow the rate of inflation. This approach has been labeled a tax-based incomes policy (TIP). The detailed results of our review are contained in the accompanying Annual Report of the Council of Economic Advisers.

Broadly, we have concluded that an approach which provided a tax reduction to workers in firms whose average pay increase did not exceed some standard, set as part of a voluntary incomes policy, would be feasible and effective in helping to lower inflation. Two major conditions apply, however. First, such a policy must be a supplement to, not a substitute for, fiscal and monetary restraint. Without such restraint an incomes policy will produce only fleeting reductions in inflation or none at all. Second, a TIP program is likely to be desirable only on a temporary basis. After several years, such a program might cease to be effective and could induce significant distortions into wage relationships throughout the economy. But as an interim device to hasten the reduction in inflation and so shorten the period of reduced output and employment growth, a TIP program could serve the Nation well.

If the growth of Federal spending is restrained, periodic tax reductions will be both feasible and necessary in the years ahead as inflation and economic growth push taxpayers into higher brackets and raise average effective tax rates. Taxbased incomes policies are novel, and most people are unfamiliar with either the opportunities they present or the difficulties they pose. It is therefore highly unlikely that a TIP program could take effect in 1981. But it would be useful for the public in general, and the Congress in particular, to begin now to evaluate the pros and cons of TIP programs so that when the time comes for the next round of Federal tax cuts a TIP program will be seriously considered.

ENERGY

I am once again proposing that the Congress increase the Federal excise tax on gasoline by 10 cents per gallon as an additional incentive to cut petroleum consumption. The need for this tax is, if anything, even greater than it was 7 months ago when the Congress overturned my action to impose a gasoline conservation fee administratively.

We have once more seen a tightening of world oil supplies. The massive inventories built up in late 1979 and early 1980 have been drawn upon to make up for the loss of exports from Iran and Iraq. If that conflict should continue or if exports do not return to normal, the buffer which those record high inventories provided will be exhausted. Even in the last 2 months, we have seen significant escalation in prices charged by some OPEC members. National security requires us to put additional downward pressure on consumption of gasoline and other petroleum products. If we do not, OPEC may do it for us.

Paradoxically, one of the reasons given earlier for rejecting my proposed tax was that it was too small—some would have preferred a tax of 50 cents or even a dollar per gallon. Whether, over time, this Nation should move toward gasoline taxes that are comparable with those of our Western European allies is not a question that has to be answered now. In any event, to do so overnight would shock the economy excessively. At current gasoline consumption levels, a 50-cent per gallon tax would draw approximately $50 billion per year out of consumers' pockets and require excessive adjustments by consumers and industry. It is much more sensible to start with the level I have proposed.

There is other important unfinished business to attend to in energy. The Congress failed to complete work on my proposed Energy Mobilization Board, but events since August of 1979 have only made the case for the Board's . creation more persuasive. It is equally important that we move ahead with the production of substitutes for petroleum. The Synthetic Fuels Corporation is established and operating. Its mission—to encourage commercial-scale production of synthetic fuels through risk-sharing with American industry—is vital.

My program of phased decontrol of domestic crude oil, along with the revamping of natural gas pricing policy contained in the Natural Gas Policy Act, is paying rich dividends. Drilling and seismic exploration have reached nearrecord levels. The Natural Gas Policy Act should be reviewed, however, to ensure that progress toward decontrol of new natural gas is not jeopardized by the increasing gap between oil prices and their natural gas equivalent, since world oil prices are now about twice those assumed in the act.

Our contingency planning to deal with a severe oil-supply disruption needs to be improved, since the authorities upon which many of the existing plans are based will expire at the end of September of this year. We have had underway for some time an examination of which, if any, of these authorities should be extended and what additional authorities might be required. This work should be completed as soon as possible.

Filling of the Strategic Petroleum Reserve must continue. The rate of fill should be at least the 100,000 barrels per day required by the Energy Security Act, and should, beyond that, be as high as can be accommodated without disrupting world oil markets.

INCREASING THE FLEXIBILITY OF OUR

ECONOMY

Energy is not the only area where we must take additional steps to improve the ability of the economy to adjust to the changes that will be demanded of it in the years ahead. To the extent that we can reduce barriers to the flow of labor, capital, and other resources from inefficient to efficient uses, we can reduce inflationary pressures that arise from bottlenecks and economic rigidities and simultaneously speed up the pace of productivity growth.

We should not lose the momentum that has developed over the past 4 years in reducing obsolete and costly economic regulations. The Congress should complete its deliberations and pass legislation similar to that which I suggested last year to complete the task of modernizing our system of telecommunications regulation.

In the broad area of environmental, health and safety regulation, where deregulation is not an appropriate solution, we must expand on the successful beginning that has been made in providing greater flexibility and incentives for firms to meet environmental requirements in more cost-effective ways.

We must also continue our efforts to assure that the Nation's regulatory priorities are sensible. Our Nation can afford a cleaner environment, safer products, and healthier workplaces, but it does not have unlimited resources. Other national goals cry out for attention, and we cannot afford waste in attempting to achieve any of them.

During the coming years, when many of our most important industries will be facing difficult adjustment pressures, we must avoid taking shortsighted actions which block rather than promote this adjustment. Federal policies should indeed cushion the blow when sharp external shocks force an industry, its workers, and the communities within which it is located to undergo massive change in a short period of time. The programs of economic development and trade assistance which exist to meet these needs should be humanely and effectively administered. But such aid must be aimed at facilitating adjustment to change, not preventing it. While we can and should demand that all nations abide by internationally agreed upon rules of trade, we must avoid the temptation to use the discretion open to us to prop up weak industries.

SUMMING UP: THE NEED FOR BALANCE

In the years immediately ahead, our country will be wrestling with two central domestic issues. The first is economic in nature: How can we reduce inflation while maintaining the economic growth that keeps our people employed? The second is even broader: What is the proper role of government in our society as spender of tax revenues and regulator of industry?

I am confident we can successfully come to grips with both of these issues. We would make a costly mistake, however, if we approached these problems with the view that there is some single answer to the economic problem and a single criterion for determining the role of government. The resolution of both of these great issues demands a balancing of many approaches and many considerations. Indeed, the only helpful simple proposition is the one which states that any simple and quick answer is automatically the wrong one.

The approach I have set forth in this Report will successfully meet the economic challenge. But it relies on not one but a number of essential elements. To reduce inflation we must be prepared for a period of sustained budgetary and monetary restraint. But since we know that this also tends to depress the growth of output and employment, we must not conclude that the greater the restraint the better. We want a degree of restraint that takes into account society's interest in employment and production as well as its concern to lower inflation. We can improve our prospects significantly by introducing investment-oriented tax cuts that increase supply and productivity. But the supply response will not be so quick or so great as to constitute an answer in and of itself. And, in particular, it would be very dangerous to make budgetary policy in the belief that the supply response can be so large as to wipe out the need for fiscal prudence and budgetary restraint. We can improve our prospects still further by the use of voluntary incomes policies, strengthened when budgetary resources become available by tax incentives for wage moderation. But, again, incomes policies alone will not do the job. If we try to rely on them excessively, we will do more harm than good. Only with a balance among the various elements, and only with persistence in the realization that sure progress will come gradually, can we have both lower inflation and better growth.

Sorting out the proper role of government also requires us to strike a balance. At times Federal spending has grown too rapidly. But in recent years its growth did not result from the introduction of a host of new government programs by spendthrift politicians or a surge of profligacy by wasteful bureaucrats. It stemmed mainly from two sources: first, increased military spending to meet national security goals that are overwhelmingly supported by the American people; and second, the growth of long established and broadly accepted social security and social insurance programs that are directly or indirectly indexed against inflation or automatically responsive to an increase in unemployment.

There is some waste. There is some abuse. I have instituted a number of reforms to cut it back. I am sure my successors will continue this important effort. But waste and abuse are not the fundamental issues. The essence of the challenge that faces us is how to balance the various benefits that government programs confer on us against their costs in terms of higher taxes, higher deficits, and sometimes higher inflation.

It is my view that we must strike the balance so as to restrict for some time the overall growth of Federal spending to less than the growth of our economy, despite the faster increase of the military component of the budget. As a consequence, in my 1982 budget I have proposed a series of program reductions. I have suggested a delay in the effective date of new programs I believe important. I have recommended improvements in the index we use to adjust Federal programs for inflation.

I think we will do a better job in striking the right balance over the years ahead if we keep two principles in mind: The first is to recognize reality. The choices are in fact difficult, and we should not pretend that all we have to do is find wasteful programs with zero benefits. The second is to act with compassion. Some government programs provide special benefits for the poor and the disadvantaged; while these programs must not be immune from review and reform, they should not bear the brunt of the reductions.

The same general viewpoint is appropriate when we approach the problem of government as regulator, especially in protecting the environment, health, and safety. When we first awoke to the fact of generations of environmental neglect, we rushed to compensate for our mistake and paid too little attention to problems of cost and effectiveness. Sometimes the laws we passed and the deadlines we set took too little account of their economic impact. For 4 years my Administration has been engaged in a major program of finding ways to make regulations more cost-effective and to strike a reasonable balance between environmental concerns and economic costs. A strong foundation has been laid. Much remains to be done. But lasting progress will not come unless we realize that there is a balance to be struck. Those who believe that virtually all regulation is bad and that the best regulation is a dead regulation will come to grips with the real problem no more successfully than the enthusiasts who believe that concern with regulatory costs is synonymous with lack of concern for the environment.

I believe that the government has indeed overregulated and that regulatory reform must continue to be a major objective of the Federal Government, as it has been during my Administration. But I also believe that true reform involves finding better ways to identify and to give proper consideration to gains as well as costs.

My reading of the distant and the nearby past gives me confidence that the American people can meet the challenges ahead. There are no simple formulas. There will be no quick victories. But an understanding of the diverse concerns we have, a pragmatic willingness to bring to bear a varied array of weapons, and persistence in the effort will bring success.

JIMMY CARTER
January 17, 1981.

Citation: Jimmy Carter: "Annual Message to the Congress: The Economic Report of the President", January 17, 1981. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http://www.presidency.ucsb.edu/ws/?pid=44550.
 
© 1999-2011 - Gerhard Peters - The American Presidency Project