Message to Congress Transmitting the Economic Report of the President

To the Congress of the United States:

The United States enters the 1990s as a prosperous nation with a healthy and dynamic economy. Our living standards remain well above those of other major industrialized nations, and our prosperity is spread widely. Since 1982, American firms and workers have produced the longest peacetime expansion on record and created more than 20 million jobs. The containment of inflation during this long economic expansion is a milestone in postwar U.S. history.

In 1989, we regained our position as the world's leading exporter and retained our position as the world's leading job creator, with the fraction of the population employed reaching its highest level ever. In all, 2 1/2 million jobs were created in 1989. The unemployment rate fell to levels not seen since the early 1970s, as did jobless rates for blacks and teenagers. The unemployment rate for Hispanics was the lowest since 1980, when the United States began regularly reporting it.

We have proven to the world that economic and political freedom works. After years of economic decline, the people of Eastern Europe are turning toward free markets to revive economic growth and raise living standards. I remain strongly committed to aiding the efforts of these brave men and women to transform their societies— and thereby to change the world.

Despite our successes, we cannot be satisfied with simply sustaining the strong record of the 1980s. We must improve on that record, deal with inherited problems, and meet the new challenges and seize the new opportunities before us.

GOALS AND PRINCIPLES

The primary economic goal of my Administration is to achieve the highest possible rate of sustainable economic growth. Achieving this goal will require action on many fronts—but it will permit progress on many more. Growth is the key to raising living standards, to leaving a legacy of prosperity for our children, to uplifting those most in need, and to maintaining America's leadership in the world.

To achieve this goal, we must both enhance our economy's ability to grow and ensure that its potential is more often fully utilized than in previous decades. To these ends, as explained in the Report that follows, my Administration will:

• Reduce government borrowing by slowing the growth of Federal spending while economic growth raises revenue until the budget is balanced, and reduce the national debt thereafter;
• Support a credible, systematic monetary policy program that sustains maximum economic growth while controlling and reducing inflation;
• Remove barriers to innovation, investment, work, and saving in the tax, legal, and regulatory systems;
• Avoid unnecessary regulation and design necessary regulatory programs to harness market forces effectively to serve the Nation's interest; and
• Continue to lead the world to freer trade and more open markets, and to support market-oriented reforms around the world.

In advancing these principles, we must be both ambitious and realistic. There is room to improve, and there is much to be done to prepare for the next century. We must not fear to dream great dreams. But we must not fail to do our homework; the American people are ill-served by promises that cannot be kept.

MACROECONOMIC PROSPECTS AND POLICIES

The economy's performance during 1989, the seventh year of economic expansion, has set the stage for healthy growth in the 1990s. Growth in national output was more moderate in 1989 than the very rapid pace in 1988 and 1987. But, in sharp contrast to most past periods of low unemployment and high capacity utilization, inflation was kept firmly in check. Measured broadly, the price level rose 4.1 percent during 1989, down from 4.5 percent during 1988.

If my budget proposals are adopted, and if the Federal Reserve maintains a credible policy program to support strong noninflationary growth, the economy is projected to expand in 1990 at a slightly faster pace than in 1989. Growth is projected to pick up in the second half of the year and to continue at a strong pace as the level of output rises to the economy's full potential.

Fiscal and monetary policies should establish credible commitments to policy plans aimed at maximizing sustainable growth over the long run. A steady hand at the helm is necessary to produce rapid and continuous increases in employment and living standards.

My budget proposals reflect a strong commitment to the principles of the Gramm-Rudman-Hollings law, which has helped reduce the Federal deficit from 5.3 percent of GNP in fiscal 1986 to 2.9 percent in fiscal 1989. That is why I insisted last fall that the Congress pass a clean reconciliation bill and stood by the sequestration order that resulted from my strict adherence to the Gramm-Rudman-Hollings law.

I have also proposed a fundamental new rule for fiscal policy that would ensure that projected future Social Security surpluses are not spent for other purposes but are used to build the reserves necessary to guarantee the soundness of Social Security. Moreover, it would transform the Federal Government from a chronic borrower, draining savings away from private investment, to a saver, providing funds for capital formation and economic growth by reducing the national debt.

I remain strongly committed to the principles of low marginal tax rates and a broad tax base developed in the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986. Steady adherence to these principles reduces government's distorting effect on the market forces that drive economic growth.

I strongly support the Federal Reserve's goal of noninflationary growth and share with them the conviction that inflation must be controlled and reduced in a predictable fashion. Accelerating inflation not only erodes the value of families' savings, it produces economic imbalances and policy responses that often lead to recessions.

The United States is part of an increasingly integrated global economy, in which domestic fiscal and monetary policies affect the economies of other nations, though the main impacts are on the domestic economy. My Administration remains committed to participating actively in the valuable process of coordinating macroeconomic policies internationally.

ENCOURAGING ECONOMIC GROWTH

As we begin the 1990s, a central focus of my economic policies will be to build on the successes of the 1980s by creating an environment in which the private sector can serve as the engine that powers strong, noninflationary economic growth.

America's continued economic progress depends on the innovation and entrepreneurship of our people. I will therefore continue to press for a permanent research and experimentation tax credit, for increased Federal support of research with widespread societal benefits and that private firms would not have adequate incentives to undertake, for removal of regulatory and legal barriers to innovation, and for a lower tax rate on capital gains.

We must remove impediments to saving and investment in order to enhance the economy's growth potential. The fiscal policy I described earlier will raise national saving. In addition, I have asked the Congress to enact the Savings and Economic Growth Act of 1990, which contains a comprehensive program to raise household saving across the entire income spectrum. This program would help American families plan for the future and, in the process, make more funds available to finance investment and spur productivity, thus raising living standards, enhancing competitiveness, and expanding employment opportunities.

One of my highest legislative priorities this year is to reduce the capital gains tax rate. This tax reform would promote risk-taking and entrepreneurship by lowering the cost of capital, thereby encouraging new business formation and creating new jobs. A capital gains tax cut would stimulate saving and investment throughout the economy.

Government can encourage economic growth but cannot manage it. I remain strongly opposed to any sort of industrial policy, in which the government, not the market, would pick winners and losers. Second-guessing the market is the way to raise government spending and taxes, not living standards.

The growth of our Nation's labor force is projected to slow in the 1990s, and demands for skilled workers are expected to continue to increase. These developments will shift attention away from worries about the supply of jobs that have haunted us since the 1930s and toward new concerns about the supply of workers and skills.

We cannot maintain our position of world leadership or sustain rapid economic growth if our workers lack the skills of their foreign competitors. As I demonstrated last fall at the Education Summit, the Federal Government can lead in improving the inadequate performance of our elementary and secondary schools. Because school systems must be held accountable for their students' performance, the Nation's Governors and I have developed ambitious national education goals. To meet these goals, we must give students and parents the freedom to choose their schools, and we must give schools the flexibility to meet their students' needs.

More disadvantaged Americans must be brought into the economic mainstream, not just to enhance our Nation's economic growth, but as a matter of simple decency. To this end, I have supported legislation to open new opportunities for the disabled, increased assistance to the homeless, helped implement welfare reform, proposed more effective job training programs, and introduced initiatives that will bring jobs and better housing to depressed inner cities. I have proposed substantial increases in spending for Head Start to prepare children from disadvantaged families for effective learning.

Those who cannot read and write cannot participate fully in the economy. Mrs. Bush and I will continue to support the difficult but important struggle to eliminate adult functional illiteracy.

REGULATORY REFORM

The improved performance of U.S. markets that were deregulated during the 1980s showed clearly that government interference with competitive private markets inflates prices, retards innovation, slows growth, and eliminates jobs. But in some cases, well-designed regulation can serve the public interest.

My proposals for reform of food safety regulation and the Clean Air Act follow the two key principles that apply in these cases: the goals of regulation must balance costs and benefits; and the methods of regulation must be flexible and cost-effective. One of my top legislative priorities is to improve the Clean Air Act in a way that preserves both a healthy environment and a sound economy.

When confronted with a threat to the solvency of our thrift institutions, my Administration moved swiftly to resolve the crisis. We must continue to reform the regulation of financial institutions and markets to preserve the soundness of the U.S. financial sector while encouraging innovation and competition.

THE GLOBAL ECONOMY

The 1980s have underscored the increased importance of global economic events in shaping our lives. We have all been touched by the movements toward political and economic freedom in Eastern Europe. We have been impressed by the rapid growth of market-oriented Asian economies. And we have great expectations for the movement in the European Community toward a single, open market by 1992.

Reductions in trade barriers between nations have raised living standards around the world. Investment has become more globally integrated, as citizens of other countries recognize the great strength and potential of our economy, and as Americans continue to invest abroad.

My Administration is strongly committed to supporting the historic efforts of the governments and people of Eastern Europe to move toward market-based economies. Similarly, under the Brady Plan, we will continue to support heavily indebted nations that adopt sound economic policies to revive economic growth. In both cases, reform must be comprehensive to succeed, but the rewards of success will be great.

America will continue to lead the way to a world of free, competitive markets. Increased global competition is an opportunity for the United States and the world, not a threat. But we cannot remain competitive by avoiding competition. My Administration will therefore continue to resist calls for protection and managed trade. To serve the interests of all Americans, we must open markets here and abroad, not close them. I will strongly resist any attempts to hinder the free international flows of investment capital, which have benefited workers and consumers here and abroad. And my Administration will work to reduce existing barriers to international investment throughout the world.

My highest trade policy priority is the successful completion this year of the current Uruguay Round of negotiations, aimed at strengthening and broadening the General Agreement on Tariffs and Trade (GATT). Successful completion of these negotiations will expand the world's gains from free and fair trade and raise living standards in all nations.

LOOKING AHEAD

When I look back on the 1980s, on what the American people have accomplished, it is with pride. And when I look forward to the 1990s, it is with hope and optimism. Our excellent economic health will allow us to build on the successes of the 1980s as we prepare for the next century. Clearly, there is much work to be done. But with the economic principles and policies that I have proposed, I am confident that the United States can enjoy strong, sustainable economic growth and use the fruits of that growth to raise living standards, solve longstanding problems, deal with new challenges, and make the most of new opportunities.

GEORGE BUSH

THE WHITE HOUSE,

FEBRUARY 6, 1990