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

To the Congress of the United States:

My first Economic Report, issued in 1982 after a year in office, could look only to the future for encouraging economic news. The task of rebuilding the economy was just beginning, and hard choices were being made. Inflation had begun to come down from double-digit rates, but America was mired in recession, its second in as many years. Today, however, we can point to real, solid economic progress. The policies of this Administration have spurred and sustained a record economic expansion—the longest in U.S. peacetime. Fifteen million new jobs have been created during this expansion, with strong gains widespread across industries and demographic groups. Real gross national product (GNP) has risen nearly 23 percent during these 5 years of growth.

And the accomplishments are not all in the past. Our policies will continue to contribute to rising standards of living in the years ahead. By enhancing private incentives and opportunities for work, investment, and entrepreneurship, we have laid the groundwork for growth far into the future. To ensure that the renewed energy of the private sector remains a force for growth, we must continue our efforts to bring down the Federal deficit through restraint on spending, to resist the siren song of protectionism, to support policies that foster noninflationary economic growth, and to rein in government when it threatens to make our markets less open, our industries less responsive, or our economy less flexible.

The Economic Expansion

Since November 1982, the U.S. economy has grown without interruption and without a resurgence of inflation. Only twice before in our Nation's history—but never during peacetime—has recorded economic growth continued for so long. During the current expansion a strong increase in employment, combined with low rates of inflation and higher productivity growth, have meant rising standards of living for the American people.

Employment has increased dramatically, and all demographic groups have benefited. While overall employment has risen about 15 percent since November 1982, employment of blacks has increased by more than 25 percent and employment of Hispanics by more than 40 percent. Correspondingly, unemployment rates—especially among minorities-have fallen rapidly, although those rates are still unacceptably high. I believe that all who want jobs should be able to obtain employment commensurate with their skills and abilities.

As the unemployment rate has declined by almost one-half, some have claimed that the new jobs are low-quality, dead-end positions, while others have argued that booming employment has put us on the verge of another round of inflation. Neither view is accurate. The facts show that the strongest job growth has been in the higher paid, high-skill occupations. The bulk of the new jobs created have been full-time positions in occupations that pay well. While it is true that the number of jobs in manufacturing has risen more slowly than in the service producing sector of the economy, this is a reflection of the innovation of American business and the skill of American workers, not a sign that the United States is "deindustrializing." The share of manufacturing output in total output actually has risen over the course of the expansion, and it is now above its postwar average. However, rapid increases in manufacturing productivity have meant slower growth in employment in this sector. This strong productivity growth, in combination with the downward adjustment of the dollar's exchange rate, has lifted the competitiveness of our products on world markets. Around the globe, products "Made in the U.S.A." are becoming more common and more sought after.

Moreover, I do not believe that our economy has yet reached its full potential, or that our economic growth threatens price stability. Growth can and should continue. With sound and stable economic policies, saving and investment will be encouraged, and the Nation's productive capacity will continue to expand. I remain committed to the goal of price level stability, and I view the decline in inflation during my Administration as a major accomplishment. I would not take lightly the prospect of a resurgence of inflation. But economic growth itself will not lead to a spiral of worsening inflation; only irresponsible economic policies would do that.

Our economic projections show inflation slowing during the coming years, even as output grows at a robust average annual rate of 3.2 percent. But continued economic progress requires that policymakers adhere to forward-looking principles, pursuing the long-term best interests of the Nation through a sustained commitment to growth and stability. The prospects for growth in the immediate future have been diminished somewhat by last year's plunge in the stock market, as well as by the increase in interest rates and tightening of monetary policy during 1987. Nevertheless, I anticipate that the U.S. economy will continue to post gains in 1988, as the expansion moves through its 6th year.

The past 5 years have marked an outstanding period of economic growth in the United States. It has been unusual in its longevity, unusual for the fact that inflation has remained subdued, and unusual relative to the performance of other industrial economies. Between 1982 and 1986, American businesses, large and small, created two and one-half times as many new jobs as Japan and the major industrial countries of Europe combined. In 1987 this trend appears to have continued, as the U.S. economy again generated new jobs at a remarkable rate. The U.S. unemployment rate has fallen 5 percentage points, and now stands well below those in most other major industrialized countries, where unemployment rates have yet to recover fully from the last recession. Overall, we have not lost jobs because of foreign trade. Instead, growth-oriented policies of lower and fairer taxes, reduced interference by government, and free and open international trade have been a source of strength for the economy. Indeed, the U.S. economy has flourished, and the outlook is full of promise.

The Role of Government in the Economy

It is hard to believe that at the beginning of the 1980s the prevailing attitude toward the economy could best be described as despair. Inflation and interest rates had ratcheted higher with each successive business cycle, and, as the economy suffered through its second recession in 2 years, the goal of sustainable growth appeared increasingly elusive. Amid double-digit inflation and unemployment rates, there were calls for the Federal Government to do more and more, thereby compounding the failed policies of the past. Instead, I took government policy back to the basics, and the last 5 years of economic growth testify to the vitality of free markets and the productivity of the American people. Government intrusions in the Nation's economic life have been reduced, and the private sector has responded with an explosion of activity, creating new products and new jobs at a very rapid rate.

The Federal Government has an important role to play in the Nation's economy, but it is a limited role. As a general proposition, economic decisions should be left to the private sector, which has been our economy's strength throughout its history, or to State and local governments when the issues cannot be handled satisfactorily by the private sector. Only in issues truly national in scope is there a role for the Federal Government.

We have made efforts to restrain Federal spending, to limit it to only the government's vital functions, and those efforts have borne fruit. Last fiscal year, for the first time in 14 years, Federal outlays, after adjustment for inflation, declined. Government spending on goods and services absorbs resources that might be used better by the private sector, and any Federal outlay must be financed eventually by inflation or taxes. Because there is no free lunch, we must make the hard choices, funding only those programs that are in the best interest of the Nation, not those that happen to have the most influential lobbyists. For example, while a strong national defense is rightly the responsibility of the Federal Government, a continued proliferation of pork-barrel projects is not. America's sense of fair play is violated when hard-earned tax dollars are needlessly turned over to powerful special interests.

In the conduct of macroeconomic policies, we have turned away from the stop-and-go policies of the past. My Administration has adopted a long-term view that fiscal policy determines the division of economic activity between the public and private sectors and is not meant to respond to every rise and fall in the economic data. Similarly, monetary policy should provide adequate liquidity for sustained noninflationary growth. Together, these policies create a stable environment in which individuals and businesses can plan for the future and make the most of their economic opportunities.

For too long the Federal Government has interfered unnecessarily in private economic decisions. There is a legitimate, although limited, role for the Federal Government in certain industries—for example, in ensuring the safety and soundness of the Nation's banking and payments systems. But many government regulations impede the operation of markets, inhibit competition, or impose costs on firms and raise the prices faced by consumers, without providing commensurate benefits. Regulations that interfere with the efficient use of labor, investment, and raw materials ultimately reduce our productive potential, making this country worse off.

While my Administration has been successful in reducing many regulations and intrusions into markets, much remains to be done. We must lessen remaining disincentives to work, diminish the burden of Federal regulations, and dismantle government programs that needlessly subsidize inefficient producers. In particular, we must release financial institutions from outdated legal restraints, eliminate the remaining controls on interstate trucking, deregulate natural gas, and repeal mileage standards for new automobiles. We must resist appeals for even more government intervention that would introduce additional inefficiencies, such as requiring advance notification of layoffs and plant closings. With few exceptions, the private sector is best able to allocate resources to their most highly valued uses, and it should be allowed to do so without excessive paperwork and restrictions. That is why privatization, deregulation, and private sector initiatives have been important elements of my economic program. I believe in the inherent dynamism of the private sector, and I believe that the most constructive thing government usually can do is simply get out of the way.

The International Environment

This Administration has been a force for economic change in the United States and, by our example, in the world at large. Our proven market-oriented policies are being adopted in more and more countries around the globe, as they recognize the high costs of big government and the harmful effects of stifling the entrepreneurial spirit.

In order to enhance growth and economic opportunity, many nations have followed our lead, undertaking reductions in sky-high tax rates that diminish incentives to work, save, and produce. In addition, tax reform is becoming a worldwide movement. Just as in the United States, tax reform abroad promises to end many distortions and inefficiencies, allowing businesses and individuals to make decisions about production and investment in order to increase their economic well-being, rather than simply to reduce their tax bills.

From continent to continent, the benefits of privatization and deregulation are becoming appreciated. Even China, and perhaps now even the Soviet Union, appear to be edging toward freer economic systems. Instead of viewing private enterprise as the adversary, many governments now see it as their best hope for progress and prosperity. Developing as well as industrialized nations are reducing market rigidities and interferences, thereby expanding economic freedom and opportunity for their citizens.

In those developing countries that encourage investment and private enterprise, the ensuing economic growth should contribute to lessening their debt problems. The debt burden carried by developing countries is not just their problem; we all have a vital interest in finding solutions that promote growth and protect open international financial markets. And we will continue to work with all who display a real determination to deal with this difficult issue.

The United States has been a constructive force in the world economy, not only by demonstrating the benefits of private enterprise, but also by our commitment to free trade and international economic cooperation. In addition, this Nation's strong demands for imports helped support output growth abroad during much of this decade. The world economy has become increasingly interdependent, as trade has multiplied and financial markets have become essentially global.

To continue to reap the benefits of an open international trading system, we are committed to reducing further the barriers that interfere with the free flow of goods, services, and capital. To this end, the United States has entered into, and will continue to seek out, bilateral and multilateral agreements to lower impediments to international commerce. The Free-Trade Agreement recently negotiated with Canada is an historic accomplishment. Once the necessary implementing legislation is passed, it will establish the largest international free-trade area in the world. At the same time, in the Uruguay Round of the multilateral negotiations under the General Agreement on Tariffs and Trade, we have been working to lower trade barriers worldwide. In that forum, we have placed special emphasis on eliminating spiraling subsidies to agricultural production and harmful barriers to agricultural imports, on establishing and enforcing adequate protections for intellectual property, on liberalizing trade in services, and on ensuring evenhanded treatment of foreign investment. Through these avenues and others, we will continue to pursue the goal of free and fair trade, which can only expand opportunity and prosperity both at home and abroad.

The Challenges Ahead

The American people elected me to this office with a vision of a reinvigorated economy, and I have watched that vision become reality. The resurgence of America has confirmed my optimism. The accomplishments of the last 7 years should inspire us, but not blind us to the important challenges that remain.

Foremost among our challenges is the continued high level of Federal spending and the budget deficit. Federal receipts last year were $255 billion above their level in 1981; nevertheless, the deficit has nearly doubled since then, bloated by a $326 billion increase in outlays. Although we have succeeded recently in slowing the growth of spending, and the deficit declined by $71 billion in the last fiscal year, the deficit is still too large.

Recent progress in controlling Federal outlays notwithstanding, as a percent of GNP, outlays remain well above the postwar average. The government continues to spend too much, absorbing resources that could be put to better use by the private sector. There are several essential functions of the Federal Government, such as providing a strong national defense and ensuring an appropriate safety net for those in need, but in many areas the government's presence is oppressive and unnecessary.

Tax increases are not the key to eliminating the deficit. Some taxes are unavoidable-the necessary functions of the Federal Government must be paid for. But tax reform and the cuts that have been instituted in income tax rates represent successful efforts to find less distorting, less burdensome, and more equitable means of financing government. Undoing tax reform through tax increases would affect economic activity adversely by raising uncertainty about government policy and reducing incentives to work and produce. Rather, in coming years we should look to ways to enhance incentives for investment in future productive capacity, including reducing the tax rate on capital gains.

The Gramm-Rudman-Hollings law and our recent agreement with the Congress on a 2-year budget-trimming package have charted the course for additional deficit reduction. Those are steps in the right direction. But the budget process itself remains a major obstacle to eliminating the deficit. And I am not the only one to have noticed that the budget process is a disaster; a recent survey of Members of Congress identified it as a major source of frustration. The process is not working and it must be reformed; discipline and responsibility must be restored.

Current budget practice is to deliver a pair of mammoth bills that must be passed and signed in a matter of hours—or the government has to shut down. This is not responsible government, and I will not sign another of these behemoths. This budget process does not serve the best interests of the Nation, it does not allow sufficient review of spending priorities, and it undermines the cheeks and balances established by the Constitution.

So that such massive appropriations bills do not have to be an all-or-nothing proposition, I have asked for the line-item veto, a power that 43 State Governors already have. With a line-item veto, future Presidents could pare away waste and enforce budget discipline. In addition, expanded rescission powers would allow the Executive to cut unnecessary spending on programs that, in many eases, have outlived their usefulness. Finally, to ensure that balanced budgets become a permanent feature of our fiscal landscape, the legislatures of 32 States have asked for—and I endorse—a constitutional amendment to force the Federal Government to live within its means. These steps must be taken, because the current budget process is impending budget progress. By its very nature, the democratic process is often messy and unfocused. But we know that democracy works and that tough decisions can be made. We must rise to the challenge again and prove that we can craft sound budgets through a sensible process.

We also must resist efforts to push the Nation into protectionism. Our foreign trade deficit is very large, but it has turned the corner in real terms. Last year foreign trade contributed significantly to our economic growth. Moreover, further improvements are on the way. At this point especially, it would be a tragic mistake to attempt to close the trade gap by closing our markets. Isolating U.S. markets could only lead to global downward spiral in trade and economic activity.

My administration is committed to working diligently with the Congress to draft responsible trade legislation, but if that legislation is not free of harmful protectionist measures, I will veto it. Our goal is to see the trade deficit reduced in an environment of sustained economic growth and low inflation. To this end, we are working with the other major industrial countries to coordinate economic policies that sustain noninflationary economic growth, encourage an orderly reduction of international imbalances, and thereby foster stability of exchange rates.

We must maintain the confidence of foreigners and our citizens alike in the ability of the United States to generate profitable investment opportunities and to follow responsible economic policies. The vitality of free and open markets, full of opportunity and promise, is the best foundation for investment. We must see to it that our tax structures and regulations do not discourage saving and investing. We must encourage investment not only in plant and equipment, but also in the American people themselves. Education, skills, research and development—these are some of the most fruitful areas for investment; expanded knowledge enhances the productive potential of our most valuable resource, our people.

Conclusion

America is blessed with great gifts—abundant land and natural resources, a diverse and hard-working people, an unshakable tradition of democratic values. My confidence in America has been shown to be well-founded over these past few years. The economy has been revitalized, and the record peacetime economic expansion has brought with it renewed opportunities and enhanced well-being. We set ourselves a formidable task: to reduce and to rationalize the role of government in the economy. That effort has been richly rewarded. During our watch, the U.S. economy again has shown its strength.

But our job is not finished. The Federal budget must be controlled in order to build a solid foundation for future economic growth. And I will not be satisfied until all Americans share in this prosperity; there are still too many enmeshed in poverty and without jobs. We must rise to our remaining challenges, heartened by our triumphs and inspired by the resilience of a resurgent America.

RONALD REAGAN

The White House,

February 19, 1988.