Message to the Congress Transmitting the Annual Economic Report of the President

To the Congress of the United States:

For 6 years, my Administration has pursued policies to promote sustained, noninflationary growth and greater opportunity for all Americans. We have put in place policies that are in the long-term best interest of the Nation, policies that rely on the inherent vigor of our economy and its ability to allocate resources efficiently and generate economic growth. Taming the Federal Government's propensity to overtax, overspend, and overregulate has been a major element of these policies.

The Current Expansion

Our market-oriented policies have paid off. The economic expansion is now in its fifth year, and the growth rate of the gross national product, adjusted for inflation, should accelerate to 3.2 percent in 1987. By October, the current expansion will become the longest peacetime expansion of the postwar era.

Since the beginning of this expansion, the economy has created more than 12 million new jobs. In each of the past 2 years, the percentage of the working-age population with jobs was the highest on record. Although I am encouraged by the fall in the overall unemployment rate to 6.6 percent in December 1986, I will not be satisfied until all Americans who want to work can find a job.

Our efforts to reduce taxes and inflation and to eliminate excessive regulation have created a favorable climate for investing in new plant and equipment. Business fixed investment set records as a share of real gross national product in 1984 and 1985, and remains high by historical standards.

Despite the economy's tremendous gains in employment and production, inflation has remained below or near 4 percent for the past 5 years and, in 1986, declined to its lowest rate in 25 years. Although last year's low inflation rate in part reflected the substantial decline in energy prices during 1986, we expect inflation in 1987 to continue at the moderate pace experienced during the first $ years of the expansion. The financial markets have acknowledged our progress in reducing inflation from its double-digit levels, and interest rates declined during 1986, reaching their lowest levels in 9 years. To sustain these developments, the Federal Reserve should continue to pursue monetary and credit policies that serve the joint goals of growth and price stability.

In short, since 1982, we have avoided the economic problems that plagued our recent past—accelerating inflation, rising interest rates, and severe recessions. Production and employment have grown significantly, while inflation has remained low and interest rates have declined. This expansion already has achieved substantial progress toward our long-term goals of sustainable economic growth and price stability.

The Economic Role of Government

Government should play a limited role in the economy. The Federal Government should encourage a stable economy in which people can make informed decisions. It should not make those decisions for them, nor should it arbitrarily distort economic choices by the way it taxes or regulates productive activity. It should not and cannot continue to spend excessively, abuse its power to tax, and borrow to live beyond its means.

The Federal Government should provide certain goods and services, public in nature and national in scope, that private firms cannot effectively provide—but it should not try to provide public goods and services that State or local governments can provide more efficiently. When government removes decisions from individuals and private firms, incentives to produce become dulled and distorted; growth, productivity, and employment suffer. Therefore, to the greatest extent possible, the Federal Government should foster responsible individual action and should rely on the initiative of the private sector.

Tax Reform

My 1984 State of the Union Message set tax reform as a national priority. After more than 2 years of bipartisan effort, we achieved our goal last fall when I signed into law the Tax Reform Act of 1986. Tax reform broadens the personal and corporate income tax bases and substantially reduces tax rates. These changes benefit Americans in at least three ways.

First, by reducing marginal tax rates, tax reform enhances incentives to work, save, and invest. Second, by reducing disparities in tax rates on income from alternative capital investments, tax reform encourages more efficient deployment of investment funds. Investment decisions will now reflect the productive merits of an activity more than its tax consequences, leading to a more efficient allocation of resources, higher growth, and more jobs. Finally, tax reform makes the tax system more equitable. The simpler, lower rate structure will make compliance easier and tax avoidance less attractive. Americans will know that everyone is now paying his or her fair share and is not hiding income behind loopholes or in unproductive shelters. Tax reform will especially benefit millions of working poor by removing them from the Federal income tax rolls.

Remaining Challenges of Economic Policy

We have successfully reformed the tax code, controlled inflation, and reduced government intervention in the economy. The result has been an expansion of production and employment, now in its fifth year, which we fully expect will continue with greater strength in 1987. Although much has been accomplished, we must and will address the remaining challenges confronting the economy. We must continue to reduce the Federal budget deficit through spending restraint. We must reduce the trade deficit, while avoiding protectionism. We must strengthen America's productivity and competitiveness in the world economy. And we must reform our costly, inefficient, and unfair agricultural programs.

Control Federal Spending.—For the first time since 1973, Federal spending in 1987 will fall in real terms. As a result, the Federal budget deficit will decline from its 1986 level by nearly $50 billion. My budget for 1988 continues this process by meeting the Gramm-Rudman-Hollings deficit target of $108 billion.

Deficit reduction must continue and must be achieved by restraining the growth of Federal spending—not by raising taxes, which would reduce growth and opportunity. Large and persistent Federal deficits shift the burden of paying for current government spending to future generations. Deficit reduction achieved through spending restraint is essential if we are to preserve the substantial benefits of tax rate reduction and tax code reform; it is also essential for reducing our international payments imbalances. Finally, spending on many programs exceeds the amounts necessary to provide essential Federal services in a cost-effective manner.

Besides exercising spending restraint, we must reform the budget process to build a check on the Federal Government's power to overtax and overspend. I support a constitutional amendment providing for a balanced peacetime budget, and I ask the Congress to give the President the same power that 43 Governors have—the power to veto individual line items in appropriations measures.

Maintain Free and Fair Trade.—One of the principal challenges remaining for the U.S. economy is to reduce our trade deficit. However, we cannot accomplish this, or make American firms more competitive, by resorting to protectionism. Protectionism is antigrowth. It would make us less competitive, not more. It would not create jobs. It would hurt most Americans in the interest of helping a few. It would invite retaliation by our trading partners. In the long run, protectionism would trap us in those areas of our economy where we are relatively weak, instead of allowing growth in areas where we are relatively strong.

We cannot gain from protectionism. But we can gain by working steadfastly to eliminate unfair trading practices and to open markets around the world. This year, I will continue to press to open foreign markets and to oppose vigorously unfair trading practices wherever they may exist. In addition, I will ask the Congress to renew the President's negotiating authority for the Uruguay Round under the General Agreement on Tariffs and Trade. These talks offer an important and promising opportunity to liberalize trade in areas critical to the United States; trade in services, protection of intellectual property rights, fair rules governing international investment, and world trade in agricultural products.

More remains to be done to end our trade deficit. We must sustain world economic growth, increase productivity, and restrain government spending. For U.S. exports to grow, the economies of our trading partners must grow. Therefore, it is essential that our trading partners enact policies that will promote internally generated economic growth. At the Tokyo Economic Summit last year, the leaders of the seven largest industrial countries continued efforts, begun at the Versailles Economic Summit in 1982, to increase international coordination of economic policies. We must also continue to encourage developing countries to adopt policy reforms to promote growth and restore creditworthiness.

Here in the United States, we must restrain government spending. Our trade deficit in goods and services reflects that, over the past several years, we have spent more than we have produced—and we have spent too much because of the profligacy of the Federal Government. As the Congress reviews my proposed 1988 budget, it should remember that a vote for more government spending is a vote against correcting our trade deficit.

Strengthen Productivity and Competitiveness.—We must work to improve our international competitiveness through greater productivity growth. The depreciation of the dollar since early 1985 has done much to restore our competitiveness. However, we do not want to rely on exchange-rate movements alone. Productivity growth provides the means by which we can strengthen our competitiveness while increasing income and opportunity. Since 1981, U.S. manufacturing productivity has grown at a rate 46 percent faster than the postwar average. This is a solid accomplishment, but still more remains to be done. We must encourage continued productivity growth in manufacturing and in other sectors of our economy.

One way to strengthen our global competitiveness is to free American producers from unnecessary regulation. My Administration has sought to deregulate industries in which increased competition will provide greater benefits to consumers and producers. It has also streamlined the Federal Government's regulatory structure. Americans have benefited significantly from the deregulation of airlines, financial services, railroads, and trucking. I will resist any attempt to reregulate these industries. Our economy will benefit further if we eliminate natural gas price controls, remaining trucking regulations, and unnecessary labor market restrictions. Also, without compromising the Nation's air quality, we should eliminate the bias that exists in current air pollution regulations against cleaner and more efficient new factories and power facilities. Where regulation is necessary, its costs should be balanced against its benefits to ensure that regulatory efforts are applied where they do the most good and to avoid placing American firms at a competitive disadvantage in the world marketplace.

Privatization shifts the production of goods and services from government ownership to the private sector. Privatization can also improve American competitiveness because private firms can produce better quality goods and services, and deliver them to consumers at lower cost, than can government. For these reasons, Americans benefit when government steps aside. Like deregulation and federalism, privatization embodies my Administration's belief that the Federal Government should minimize its interference in the marketplace and in local governance. We must return more government activities to the competitive marketplace by selling or transferring government-owned businesses. In 1986, the Congress authorized the Department of Transportation to sell Conrail in a public offering, which we hope will take place this year. Other businesses suitable for privatization include the Naval Petroleum Reserves, the Alaska Power Administration, and Amtrak.

Reform Agricultural Policies.—Another high priority in 1987 must be to reform our agricultural programs. Besides costing taxpayers $34 billion this year alone, these programs divert land, labor, and other resources from their most productive uses. Most farm programs are costly and unfair because they give literally millions of dollars to relatively few individuals and corporations while many family farmers—who are those most often in need—receive little. In the process, farm programs raise the prices of many food items for all Americans, rich and poor.

Farm income support should not be linked to production through direct subsidies or propped-up prices for agricultural products. My Administration will seek a market-oriented reform package with two goals: gradually separating farm income support from farm production, and focusing that income support on those family farmers who need it most.

Conclusion

The economic policies of my Administration have created greater economic freedom and opportunity for men and women, private firms, and State and local governments to pursue their own interests and make their own decisions. These policies have produced a sustained economic expansion with low inflation, lower tax rates and a simpler tax code, the unshackling of industries from regulation, a surge in investment spending, and more than 12 million new jobs.

The American people demand a sound, productive, growing economy. Therefore, I shall continue to pursue policies to encourage growth, reduce the Federal budget deficit, correct the trade deficit, and strengthen the competitiveness of American producers. The American people will not tolerate a replay of the failed economic policies of the past. Therefore, I shall resist proposals to adopt any economic policy that abandons the accomplishments of tax reform, stymies growth, fuels inflation, perpetuates needless government interference in the marketplace, or fosters protectionism. With the help and cooperation of the Congress, we can sustain and strengthen the current economic expansion, and preserve and extend the economic achievements of the past 6 years.

RONALD REAGAN

January 29, 1987