Two years ago, I came to Washington with a deep personal commitment to change America's economic future. For more than a decade, the economy had suffered from low productivity growth and a rising rate of inflation. Government spending absorbed an increasing share of national income. A shortsighted view of economic priorities was destroying our prospects for long-term prosperity.

The economic program that I proposed shortly after I took office emphasized economic growth and a return to price stability. My tax proposals were designed to encourage private initiative and to stimulate saving and productive investment. I have supported and encouraged the Federal Reserve Board in its pursuit of price stability through sound monetary policy. My Administration has slowed the growth of Federal regulation, strengthening the forces of competition in a number of economic sectors. And I have worked with the Congress to enact legislation that has reversed or limited the growth of government programs that have become too large or outlasted their usefulness.

Although the full effect of these changes in government policy will take time to develop, some of the benefits have already become apparent. The rate of consumer price inflation between December 1981 and December 1982 was only 3.9 percent, about one-third of the rate in the year before I took office. Interest rates are now lower than when I took office, and have fallen rapidly during the last 6 months.

The Administration will propose many additional measures over the next several years to strengthen economic incentives, reduce burdensome regulations, increase capital formation, and raise our standard of living. It is easy to lose sight of these long-term goals in a year, like 1982, when the economy was in an extended recession. I am deeply troubled by the current level of unemployment in the United States and by the suffering and anxiety that it entails for millions of Americans. The unemployment that many of our citizens are experiencing is a consequence of the disinflation that must necessarily follow the accelerating inflation of the last decade. Allowing the upward trend of inflation to continue would have risked even greater increases in unemployment in the future. In spite of the present high unemployment rate and the accompanying hardships, it is essential that we maintain the gains against inflation that we have recently achieved at substantial cost. Continuing success in restraining inflation will provide a stronger foundation for economic recovery in 1983 and beyond.

Reducing Unemployment

The Federal Government can play an important role in reducing unemployment. I believe, however, that the government should focus its attention on those groups that will continue to face high unemployment rates even after the recovery has begun. By helping them to develop their job-related skills, we will foster productive careers in the private sector rather than dead-end jobs. This emphasis on training and private sector employment is the focus of the Jobs Training Partnership Act that I supported and signed into law in 1982. I am proposing additional steps this year to strengthen Federal training and retraining programs and to help the structurally unemployed find lasting jobs.

It is understandable that many well-meaning members of the Congress have responded to the current high unemployment rate by proposing various public works and employment programs. However, I am convinced that such programs would only shift unemployment from one industry to another at the cost of increasing the Federal budget deficit.

Although programs to help the structurally unemployed are important, only a balanced and lasting recovery can achieve a substantial reduction in unemployment. There are now over four million more unemployed people than there were at the peak of the last business cycle. Nine million new workers are expected to join the labor force by 1988. Only a healthy and growing economy can provide the more than 13 million jobs needed to achieve a progressively lower level of unemployment over the next 5 years.

The Prospects for Economic Recovery

There are now signs that an economic recovery will begin soon. By December 1982 the index of leading economic indicators had risen in 7 of the last 8 months. Housing starts have risen substantially over the last year, and by December 1982 were 39 percent higher than 12 months earlier. Inventory levels have fallen sharply, so that increased sales should translate quickly into increased production and employment. Both long-term and short-term interest rates have fallen substantially. The Administration's economic forecast predicts that the gross national product will begin to rise in the first quarter of 1983 and will then rise more quickly as the year continues. Most private forecasters also predict a recovery in 1983.

Monetary policy will play a critical role in achieving a sound and sustainable economic recovery. If the monetary aggregates grow too slowly, the economy will lack the level of financial resources needed for continued economic growth. But if these aggregates are allowed to expand too rapidly, an increase in inflation and a short-lived recovery will result. I recognize the difficulties that the Federal Reserve has faced and will continue to face in guiding the growth of the money supply at a time when major regulatory changes have made it difficult to rely on old guidelines. I expect that in 1983 the Federal Reserve will expand the money supply at a moderate rate consistent with both a sustained recovery and continued progress against inflation.

Investment and Economic Growth

An economic recovery beginning in 1983 should bring not only a reduction in unemployment but also an increase in business investment over the next several years. A higher level of investment is an important ingredient in raising productivity and economic growth. The Accelerated Cost Recovery System that I proposed and that the Congress enacted in 1981 was designed to encourage a substantial expansion of business investment above the relatively low levels of the 1970s. Since that time the adverse effects of the recession have outweighed the positive effects of the new tax rules. As the economy turns from recession to recovery, however, incentives to invest will become more powerful. But business investment may not grow rapidly unless measures proposed by the Administration to reduce potentially large Federal budget deficits are enacted.

Federal borrowing competes with private investment for available savings. If the government continues to borrow large amounts to finance its deficit, the real interest rate will remain high and discourage private investment. This process of ``crowding out'' will tend to depress private investment in the years ahead unless the budget deficit is progressively reduced.

Fiscal Year 1984 Budget Proposals

It is important to distinguish the cyclical part of the budget deficit from the structural part, which would remain even at the peak of the business cycle. Approximately one-half of the 1983 budget deficit is due to the depressed state of the economy. With earnings and profits reduced, tax receipts have significantly decreased, and expenditures have increased. As the economy recovers, the cyclical part of the deficit will shrink. But cyclical recovery alone will not bring the deficit down to an acceptable size.

In the budget I am now submitting to the Congress, I am proposing the dramatic steps needed to reduce Federal budget deficits in future years. My budget proposals are designed to reduce the deficit by dealing directly with the rapid growth of the domestic spending programs (apart from interest payments) of the Federal Government. In 1970 these programs accounted for 10 percent of the gross national product and 48 percent of Federal spending. By 1980 these programs had grown to 14 percent of gross national product and 63 percent of the budget. I remain committed to the idea that we can reduce budget deficits without increasing the burden on the poor, without weakening our national defense, and without destroying economic incentives by counterproductive tax increases.

Rapid congressional enactment of the budget would provide clear and credible evidence that the Federal Government intends not to place heavy burdens on the capital markets in future years. Such reassurance should hasten the decline in interest rates, especially long-term interest rates on bonds and residential mortgages, and improve prospects for the recovery of the housing, automobile, and capital investment sectors of the economy.

I recognize the special importance of protecting the social security and medicare programs for aged retirees and their dependents. These programs now face very serious financial problems. The bipartisan National Commission on Social Security Reform has recently recommended a series of measures, which I have endorsed, to eliminate the cumulative deficiency of $150 billion to $200 billion projected for the social security system in the years 1983 through 1989. It is critically important at this time to make changes in the social security programs that will protect their solvency and financial viability for the years to come.

The Remaining Burden of Federal Economic Regulation

For many decades, the Federal Government has regulated the price and entry conditions affecting several sectors of the American economy. Much of this regulation is no longer appropriate to the conditions of the contemporary economy. Over time, most of this regulation -- by restraining competition and the development of new services and technologies -- has not served the interests of either consumers or producers. Since deregulation of some markets began several years ago, the experience has been almost uniformly encouraging. My Administration has supported these step-by-step efforts to reduce these regulations in markets that would otherwise be competitive. It is now time to consider broad measures to eliminate many of these economic regulations especially as they affect the natural gas, transportation, communications, and financial markets.

Interest Rates and the U.S. Trade Deficit

The very high levels of real interest rates over the last several years are a principal cause of the sharp rise in the exchange value of the dollar relative to foreign currencies. This rise has reduced the ability of American exporters to compete in foreign markets and increased the competitiveness of imports in the domestic market. Largely as a result, the U.S. merchandise trade balance showed a substantial deficit in 1982.

Our current trade deficit is a reminder of the importance of international trade to the American economy. The export share of U.S. gross national product has more than doubled over the last three decades. American workers, businesses, and farmers suffer when foreign governments prevent American products from entering their markets, thus reducing U.S. export levels. While the United States may be forced to respond to the trade distorting practices of foreign governments through the use of strategic measures, such practices do not warrant indiscriminate protectionist actions, such as domestic content rules for automobiles sold in the United States. Widespread protectionist policies would hurt American consumers by raising prices of the products they buy, and by removing some of the pressures for cost control and quality improvement that result from international competition. Moreover, protectionism at home could hurt the workers, farmers, and firms in the United States that produce goods and services for export, since it would almost inevitably lead to increased protectionism by governments abroad. I am committed to a policy of preventing the enactment of protectionist measures in the United States, and I will continue working to persuade the other nations of the world to eliminate trade distorting practices that threaten the viability of the international trading system upon which world prosperity depends.

Trade in goods and services is only one aspect of our economic relations with the rest of the world. The international flow of capital into the United States and from the United States to other countries is also of great importance. The United States should play a primary role in preserving the vitality of the international capital market. Severe strains on that market developed in 1982 as several nations found it difficult to service their overseas debt obligations. In 1982, the Federal Government worked closely with debtor and creditor nations and the major international lending agencies to prevent a disruption in the functioning of world capital markets. Now, with the cooperation of a wide variety of creditors, countries with especially severe debt-servicing difficulties are establishing economic and financial programs that will permit them to meet their international obligations.

The Years Ahead

We are now at a critical juncture for the American economy. The recession has led to strong pressures from some members of the Congress and from others to abandon our commitment to a policy that is aimed at long-term economic growth, capital accumulation, and price stability. There are many who urge new government spending programs and forcing the Federal Reserve to raise monetary growth rates to levels that would rekindle inflation.

I am convinced that such policies would prove detrimental to the long-run interests of the American people. Our economy, despite the recession, is extraordinarily resilient and is now on the road to a healthy recovery. It is essential in the year ahead that the Administration and the Congress work together, take a long-term perspective, and pursue economic policies that lead to sustained economic growth and to greater prosperity for all Americans.

Ronald Reagan

February 2, 1983.

Note: The President's message is printed in the report entitled ``Economic Report of the President, Transmitted to the Congress, February 1983 -- Together With the Annual Report of the Council of Economic Advisers'' (Government Printing Office, 287 pages).