It's great to be back in California. Right now, I really wouldn't rather be in Philadelphia. [Laughter]

But it was a little more than a year ago -- 13\1/2\ months to be exact -- that I gathered with many of you at the Biltmore Bowl and Los Angeles City Hall to say our goodbyes. I must admit that I was a bit scared. But all of your good wishes and genuine expressions from the heart made me realize that I wouldn't be in the Oval Office alone. And I want you to know how grateful I am for the back-home support that you've given me. Even when we disagree, I know our friendship remains.

Jesse Unruh was even there to see me off that day. [Laughter] There was a smile on his face and a twinkle in his eye that made me wonder if he knew something I didn't. [Laughter]

Of course, I had no illusions about the task ahead. In the months before I left for Washington, America was faced with economic chaos. Inflation had been running at double-digit levels for 2 consecutive years with no relief in sight. Unemployment had reached almost 8 million. The savings rate had plummeted to the lowest among leading industrial nations, and interest rates were going through the roof -- 21\1/2\ percent. Even worse, many Americans had lost hope. Some of our leaders were throwing up their hands, claiming nothing could be done, that can-do optimism so characteristic of America was being replaced with a notion that our greatest days were behind us.

Well, if I was apprehensive before getting on that plane to head east, the grassroots support that I've witnessed since has convinced me that not only is America not licked but that our spirit is alive and well.

With the support of the people and some find bipartisan cooperation in the Congress, we've managed to lay a foundation that will bring better days to America. We targeted those things that had to be done to make lasting economic recovery possible. First on the list was slowing Federal growth. When I arrived there, Federal spending was increasing at an annual rate of 17 percent. With the help of the Congress, we've cut that growth rate nearly in half. And if we get the budget that we've submitted for 1983, it will virtually be cut in half again.

As Federal spending skyrocketed, so had Federal taxes. Uncle Sam's tax haul doubled just between 1976 and 1981. By the time the Federal Government had soaked up its share, there was little left for consumers or for State and local governments and for business to invest and create new jobs.

The solution was as straightforward as it was essential. To get the economy moving again we had to reduce taxes as well as spending. So, we set in place a three-year tax reduction program that will, if we just stick with it, give us stronger growth, more jobs, and the revenues we need to reduce the deficit. And as far as I'm concerned, we're sticking with it.

In the last decade another problem loomed before us. Federal regulation grew from a neighborhood pest into a nationwide monster, preying everywhere on initiative and incentive. Our regulatory relief program under the able direction of Vice President Bush has tackled this bureaucratic quagmire head-on. The number of new pages in the Federal Register, the book which lists new regulations, has been cut by a third. The Federal Register now has 23,000 fewer pages than it had a year ago.

It took a year to do, but we've set in place a program that attacks the basic problems that have stagnated the American economy and demoralized the American people. Already there are signs that, while we have a long way to go, the program is beginning to work. Inflation is down. In fact, it's fallen faster than anyone predicted -- 8.9 percent average for 1981 and only about 4\1/2\ percent for the last 3 months. Savings are up, and the main incentives to save are just coming on line. What does that mean to the American economy? Well, a 1-percent increase in personal savings adds $20 billion to the investment pool of available capital. The prime interest rate, while still too high, has declined by 20 percent. There may be some minor fluctuations now, but the interest rate trend-line is downward.

We believe the economy is poised for recovery, but this time we will not let inflation take off as it did in the past. All this does not ease the economic hurt being felt today from decades of misguided government policies, but it does prove that the medicine is beginning to work.

The deficit, of course, remains a cause of major concern, and it certainly is taking its toll on the nerves of those on Capitol Hill. We've begun to hear a chorus of ad-hoc alternatives to our economic recovery program from some who never muttered a word about deficits over the years, even when past deficits represented a far larger portion of the gross national product than today's do. Let me point out that in the years we were coming out of the 1974 recession, deficits averaged 3\1/2\ percent of gross national product. Our projected deficit, big as it is, will only be 2.7 percent of the gross national product.

Now, no one sympathizes more with the idea of a balanced budget than I do -- you may remember that I've mentioned that a few times over the years. But the deficits we propose are much larger than I would like, but they're a necessary evil in the real world today. And bear in mind, they would not be significantly reduced, if at all, by raising taxes, which is the common element in most of the curb-the-deficit proposals that are being bandied about.

I said yesterday to some people -- and I'll repeat to you -- deficits are not caused by our lowering taxes. Deficits are caused by government spending too much. I believe that decreasing and postponing the tax cut that we originally proposed damaged our chances of nipping this recession in the bud. A tax increase now might well stall recovery further, suppressing tax revenues and ensuring permanently high budget deficits.

There's only one answer to large and growing Federal deficits, and that is, as I said a second ago, to slow the growth of Federal spending. And to that end I'll talk with anyone in or out of Congress with constructive suggestions.

The unprecedented growth of Federal spending of the past two decades did more than precipitate economic stagnation. The expanding Federal monolith undermined the system of checks and balances and the division of power that long protected the freedom of our people. The people, who, after all, were meant to be in charge, are now so far removed from the decisionmakers that they have little say in policies that dramatically affect their lives. And, all too often, those policies don't work. Thomas Jefferson said, ``Were we directed from Washington when to sow and when to reap, we should soon want for bread.'' More and more people realize that things don't seem to work anymore, because too much power flows to too many unaccountable people in Washington, D.C.

A major news columnist recently pointed out that some politicians and pundits don't take the issue of federalism seriously. And he suggested they simply don't realize how fed-up grassroots Americans are with the centralization of power and resources in Washington. And the columnist concluded that it would be a political mistake to brush aside federalism. Well, bless his little typewriter. [Laughter]

I agree, and I would add that those who ignore the federalism debate do so at their peril. This is an issue that transcends party politics. It is an issue that begs to be addressed. And those who don't participate in the debate will be left behind.

As local officials, many of you bear the brunt of the problem. The Federal Government has undercut your local tax base, and in return for some of what it takes, the Federal bureaucracy demands the right to tell local and State authorities how to manage their affairs. That's not representative government; that's not democracy.

Early in the last century, Chief Justice John Marshall likened the power to tax with the power to destroy. Well, that's what's happened. Federal co-opting of tax resources has destroyed the separation of powers that once was the hallmark of our system.

President Calvin Coolidge -- I happen to respect him greatly; he had horses on the White House lawn. [Laughter] He was known more for his silence than his rhetoric. But when silent Cal had something to say, it was usually worth hearing. ``Our country,'' he once said, ``was conceived in the theory of local government. It has been dedicated by long practice to that wise and benevolent policy. It is the foundation of our system of liberty.'' Well, I believe it's time for honest men and women who work in all levels of government to begin a dialog about reversing the power flow and returning some of the authority usurped by the Federal Government.

A starting point for that dialog is the broad proposal that I outlined during my State of the Union address. Briefly, it suggests the transfer of 45 categorical programs to the States. ``Categorical'' -- let me interrupt and say -- means that the Federal Government issues the grant, mandates the program, and then tells you at the local level exactly how you have to run it and what you have to do. And there's no way that people 3,000 miles away can tell every diverse section of this country to abide by the same rules and regulations. Along with the funding sources, flexibility and authority to manage them has gone. Now, this list includes everything from education to community development, from transportation to social services, programs that have traditionally and rightfully belonged at the State level.

Now, what I've described as the centerpiece of the federalism initiative is the almost dollar-for-dollar swap of the two largest areas of welfare. The Federal Government takes on the cost of Medicaid, and in exchange, the States would assume responsibility for Aid to Families with Dependent Children and food stamps. Now, this proposal isn't set in concrete. But we think it is basically on target, or we wouldn't have presented it.

The proposal allows for an orderly transition, and sensitive to your concerns in local government, we include a 100-percent pass-through provision for all those programs that have traditionally shared a Federal-local relationship. That must be a part of the plan.

Now, this plan maximizes State flexibility and minimizes risk. The Medicaid program, for example, is the fastest rising cost to State and local government. AFDC and food stamps, under current law, on the other hand, will grow at only about one-sixth the rate of the cost of Medicaid. I've made this pledge, and I renew it to you today: Our federalism program will have no losers. This is not an attempt to dump anything on the States and local governments. And while there are no losers, the people will be the winners.

In these last few weeks, I've visited city, county, and State officials and was gratified by their sincere desire to discuss this issue. My meeting just last week with the National Association of Counties was amicable and productive. So was my meeting with the Governors. The news media said sparks would fly, but the Governors wanted to cooperate, establish a dialog, and move ahead.

There are some, raised in an era when ``States rights'' was a cover phrase for racism, who are fearful that returning power to the States will result in discrimination. For the record, this administration will not support any legislation returning programs to States that undermines the Federal Government's continuing role of protecting the civil rights of all Americans. The new federalism is not meant to be and will not be permitted to be a step backward in our nation's commitment to civil rights.

Now, there are some who suggest that State and local government can't handle the responsibility. The implication is that State and local governments are filled with heartless incompetents and that all the talent and compassion resides in the halls of bureaucracy in Washington. Well, I've heard all that before, and it doesn't wash.

Our attempt to clean up California's welfare mess received the same shrieking response a few years ago. It was just 11 years ago today at a townhall luncheon in Los Angeles that I unveiled our welfare reform program. My, how the cries and howls filled the air. One rather partisan gentleman claimed if our welfare reform program was enacted, the State would have to legalize begging in the streets and revive State operated poorhouses. Well, as it turned out, our welfare reform program became a model for States all across America.

You know, Will Rogers once said that ``government has never been accused of being a businessman.'' Well, that's for sure, but we can still make it more businesslike. One of the first actions that I took as Governor of California was to conduct a complete survey of the management and administrative practices in all the areas of our State government. I didn't do that personally. Two hundred and fifty or more skilled private sector professionals volunteered to come in and give us recommendations on how to make our State government operate more efficiently. You'll remember there were task forces organized on the basis of their particular knowledge in business and industry and the professions.

Veterans of the hotel industry told us how better to utilize the space in our prison system, how better to run the hotel-keeping functions, the buying of food and so forth. Other business executives showed us how to improve our filing system and cut down on costs at the same time. They gave 117 days full-time as volunteers to this task. It was charged that the State employees would resent this outside interference. But instead, those employees were more than anxious to help, and some said they had never before been asked how to improve efficiency. In all, about 2,000 cost-saving recommendations were made by these task forces, volunteering their time, working with responsible State employees.

We believe those efforts in California can and must be duplicated at the national level. And this morning, I have just met with J. Peter Grace, who will be the new Chairman of the Private Sector Survey on Cost Control in the Federal Government. Mr. Grace is an outstanding businessman, chairman and chief executive officer of W. R. Grace and Company. And he promised me that he and his new team will work like tireless bloodhounds, leaving no stone unturned in their search to root out inefficiency and waste of taxpayer dollars.

Well, my experience in California and in Washington has given me now a unique perspective on the predictions of gloom and doom that always precede needed reform. It also gave me a better understanding of Federal interference and an abiding respect for what can be accomplished at the State and county level when people set out to better manage their affairs.

I've delighted over the years in telling the story about the community that was going to change the height of the signs along its streets, the traffic signs, going to elevate them by 2 feet, from 5 feet to 7 feet. The Federal Government rushed in and said they had a program that would take that over at cost to the Federal Government. They'd lower the streets by 2 feet. [Laughter]

I have faith that given the authority, State and local governments are more capable of handling their own affairs than the bureaucracy in Washington. Well, you've just confirmed the polls that suggest that the American people agree with that, too.

In California and in Los Angeles County, there are numerous examples of creative and innnovative government which reinforce that conclusion. The use of millions of hours of volunteer service is a fine example of what can be accomplished by involving the people with their government.

Over 2 million hours of annual voluntary service are contributed to the libraries, museums, medical clinics, and mental health facilities of Los Angeles County. And there's a new experimental program to attract volunteers, including those retired county personnel who may want to help but didn't know how to get back into the picture. In the sheriff's department, there are 1,783 volunteers giving 417,278 hours of volunteer time per year, saving the county $5 million. The Los Angeles Police Department has a voluntary reserve program that saves the city of Los Angeles $5 million annually. In fact, one of your county supervisors, Mike Antonovich, is a reserve officer in the South Pasadena Police Department and still serves 3 nights a month.

This use of volunteers by the State, county, and city level is an example of government by the people in the truest sense of the word. But methods of saving must go beyond the use of volunteers. County use of prisoners to clean the beaches deserves recognition, as does a program that sounds a bit familiar, the use of able-bodied welfare recipients to perform unskilled but necessary chores.

Los Angeles County government, which has a larger budget than 40 States, is demonstrating that government doesn't need more Federal mandates and more money to be more effective.

Perhaps one of the most innovative of its programs is the contracting out of services with the private sector. Contracting out everything from attorney's duties to maintenance of paramedical equipment, from the collection of debts to doing custodial services, has saved the people of Los Angeles County about $10 million. Translated into real terms, that's what it would cost to build 5 neighborhood health centers or pay the salaries of 320 street patrol officers.

All of this -- the use of volunteers, contracting out of services, the use of welfare recipients and prisoners -- is the kind of innovation that is possible when the Federal Government gets out of the way and lets local and State government do what it's supposed to do.

Ten years ago yesterday I made an appointment of which I've always been proud. There was a seat open on the Los Angeles County Board of Supervisors, and I selected a member of the California Assembly named Pete Schabarum for the position. And as many of you discovered, he's a man of high principle; and, even more, he's tough. [Laughter] And it takes tough leaders like Pete and the other members of the board to make government work.

Two centuries ago, Thomas Jefferson is supposed to have said, ``Eternal vigilance is the price of liberty.'' He didn't just mean vigilance against foreign attack. The greatest threat to freedom, even in today's perilous times, comes from no foreign foe. It comes from a dangerous habit many of our leaders fell into over several generations -- letting the power and the resources that are the basis of freedom slip from the grassroots America into the hands of a remote central authority. Today we have the opportunity to turn that centralization of power around.

I thank you for providing this forum. I assure you once again that in our program of federalism we're depending on State and local officials to work with us on fleshing out that plan and that we intend not only to pass on the responsibility for the programs but the sources of revenue to pay for them.

I look forward to working with you to restore to our countrymen the representative government of the Federal, State, and local level that is every American's birthright.

And, again, God bless you, and thank you very much.

Note: The President spoke at 11:15 a.m. in the Dorothy Chandler Pavilion Auditorium.

Earlier in the day, the President had breakfast with Mr. Grace, his choice for Chairman of the Private Sector Survey on Cost Control in the Federal Government, at the Century Plaza Hotel.

On the following day, the President left Los Angeles for a weekend stay at Rancho del Cielo, his ranch near Santa Barbara, Calif.