February 5, 1985
To the Congress of the United States:
In 1981, when I first assumed the duties of the Presidency, our Nation was suffering from
declining productivity and the highest inflation in the postwar period -- the legacy of years of
government overspending, overtaxing, and overregulation.
We bent all of our efforts to correct these problems, not by unsustainable short-run measures, but
by measures that would increase long-term growth without renewed inflation. We removed
unnecessary regulations, cut taxes, and slowed the growth of Federal spending, freeing the private
sector to develop markets, create jobs, and increase productivity. With conviction in our
principles, with patience and hard work, we restored the economy to a condition of healthy
growth without substantial inflation.
Although employment is now rising, business opportunities are expanding, and interest rates and
inflation are under control, we cannot relax our economic vigilance. A return to the policies of
excessive government spending and control that led to the economic ``malaise'' of the late
seventies would quickly draw us back into that same disastrous pattern of inflation and recession.
Now is the time to recommit ourselves to the policies that broke that awful pattern: policies of
reduced Federal spending, lower tax rates, and less regulation to free the creative energy of our
people and lead us to an even better economic future through strong and sustained economic
growth.
Major Economic Developments 1981 - 1984
The Program for Economic Recovery that we initiated in February 1981 had four key
elements:
We did not share this pessimism. It was clear to us that the Nation's economic problems were not
the product of the economic system, but of the onerous influence of government on that system.
The creative potential of the American people, choosing their own economic futures, was more
constrained than helped by the increasingly heavy hand of government. Nor did we share the
negative views that a reduction of inflation would increase long-term unemployment; that
economic growth, by itself, would increase inflation; and that the government had to protect a
``fragile'' market system by regulating oil prices and interest rates.
The primary economic responsibility of the Federal Government is not to make choices for
people, but to provide an environment in which people can make their own choices. The
performance of the economy in the past 2 years under our Program for Economic Recovery fully
justifies our faith in the Nation's basic economic health. In 1983 and 1984 the economy generated
about 300,000 new jobs per month without an increase in inflation. Real gross national product
increased 5.6 percent during 1984, and the unemployment rate declined from 8.1 percent to 7.1
percent. Inflation was steady at its lowest level in more than a decade, and most interest rates are
now lower than a year ago. Yet while the U.S. economy grew rapidly in 1984, it maintains the
potential for continued strong growth. The inventory/sales ratio is low by historical standards, and
capacity utilization rates in most industries are well below prior peak rates.
Economic conditions in 1984 were more favorable than during the second year of a typical
recovery, and we see none of the warning signs that usually precede the end of an expansion. The
temporary showing of economic growth starting in July -- reflecting the combination of a minor
adjustment of consumer spending and inventories and little growth of the basic money supply --
seems to have ended in November. These conditions, plus an expectation that the Federal Reserve
System will maintain sufficient money growth, support our forecast that the present recovery will
continue. The thriving venture capital market is financing a new American revolution of
entrepreneurship and technological change. The American economy is once again the envy of the
world.
The Economic Outlook
For the years 1985 through 1988, we assume real gross national product growth of 4 percent per
year, slowing slightly in 1989 - 90. We know that economic recoveries have not been stable in
either duration or magnitude, in part because monetary and fiscal policies have often been erratic.
We may not be able to eliminate recessions entirely, but a sustained commitment to policies that
promote long-term growth and stability can reduce their frequency and severity. Our forecast that
the unemployment rate, the inflation rate, and interest rates will decline gradually in the years
ahead reflects this commitment to sound, sustainable, and predictable policies.
The Task Ahead: A Program for Growth and Opportunity
Our 1981 Program for Economic Recovery was designed for the long run with priority attention
to the major problems we faced at that time. Our second-term Program for Growth and
Opportunity represents a continuation and expansion of the earlier program, with priority
attention to the major problems we face in 1985 and beyond. Our objectives -- economic growth,
stability of the general price level, and increased individual economic opportunity -- have not
changed. Federal economic policy will continue to be guided by the four key elements of the
earlier program. Our progress in solving the most important economic problems we inherited in
1981, however, has allowed us to refocus our attention on the remaining problems and to shift
our priorities and resources toward their solution.
Several significant problems remain to be addressed. The rate of growth of Federal spending has
been substantially reduced from the rate projected in the budget we inherited in fiscal 1981, but
spending growth continues to outpace the economy. Spending too much has left us with a large
budget deficit that must and will be reduced. In our efforts to reduce the deficit, we must not
forget that the cause of the deficit is increased spending and insufficient growth, not decreased
taxes. Federal tax receipts are now almost the same share of gross national product as in the late
1970s, even after the substantial reduction in tax rates that we initiated in 1981.
Another economic problem demanding resolution is unemployment and its effects on the Nation's
workers and families. Despite significant progress, much remains to be done. More than 6 million
more Americans are now employed than in January 1981, but the unemployment rate is still too
high. We will not be satisfied until every American who wants a job is employed at a wage that
reflects the market value of his or her skills. Another aspect of this problem is that the poverty
rate remains stubbornly high, despite a strong recovery and a continued increase in government
assistance. Also, although the inflation rate has been reduced substantially, it is still higher than
during most of our peacetime history prior to 1965. We will not be satisfied until we have totally
and permanently wrung inflation out of our economy.
Work also remains to be done in the areas of regulatory and monetary policy. Many Federal
regulations still impose a substantial cost to the economy. In addition, we need to strengthen the
commitment to a sound monetary policy that never again retards economic growth, or
reaccelerates inflation.
Our trade deficit, another area of concern, has been caused in large part by a strong dollar.
Investors around the world have bid up the dollar as they have become increasingly confident in
our economy. That confidence is an asset and not a liability. However, the conditions that have
led to the trade deficit have increased the obstacles faced by some important industries.
Agriculture, one of our most productive export sectors, has been harmed by a combination of
rigid and outdated Federal agricultural policies and subsidized foreign competition as well as by
the strong dollar. Some of our import-competing industries, such as steel, have also been hurt by
subsidized foreign competition and the strong dollar. In one respect the trade deficit is like the
budget deficit; both are too large to be sustained, but there are both beneficial and detrimental
ways to reduce them. Our goal is a system of free and fair trade in goods, services, and capital.
We will work toward this goal through both bilateral and multilateral agreements.
Economic conditions during the past 4 years are best characterized as transitional -- from a period
of low productivity growth to a period of high productivity growth; from a period of high
inflation and interest rates to a period of much lower inflation and interest rates; from a period of
economic ``malaise'' to a period of economic opportunity. Our task is to consolidate and extend
these gains.
Federal Spending and the Deficit
The rate of growth of Federal spending has been reduced from 14.8 percent in fiscal 1981 to an
average rate of 9.1 percent in fiscal years 1982 through 1985. During this period, however,
current dollar gross national product has increased at an average rate of 7.6 percent. The
continued growth of the Federal spending share of gross national product and lost revenues from
the recession are the main reasons we are now faced with such large Federal deficits.
The projected Federal deficits are much too large, and they must be reduced. As explained in the
accompanying report, however, the economic consequences of reducing these deficits depend
critically on how they are reduced. A sustained reduction of the growth of Federal spending will
contribute to economic growth, while an increase in tax rates would constrain economic growth.
Federal spending on many programs is far larger than necessary, and far larger than desired by
most Americans.
My fiscal 1986 budget proposal will protect the social safety net and essential programs, such as
defense, for which the Federal Government has a clear constitutional responsibility, and will
reform or eliminate many programs that have proven ineffective or nonessential. With no resort to
a tax increase, this budget will reduce the deficit to about 4 percent of gross national product in
fiscal 1986 and to a steadily lower percentage in future years. Additional spending reductions will
probably be necessary in future years to achieve a balanced budget by the end of the decade.
The problems of excessive spending and deficits are not new. In the absence of fundamental
reform, they may recur again and again in the future. I therefore support two important measures
-- one to authorize the President to veto individual line items in comprehensive spending bills, and
another to constrain the Federal authority to borrow or to increase spending in the absence of
broad congressional support. These structural changes are not substitutes for the hard fiscal
choices that will be necessary in 1985 and beyond, nor for the need to simplify our tax system to
stimulate greater growth; but they are important to provide the mechanisms and discipline for
longer term fiscal health.
The case for a line-item veto should by now be obvious. The Governors of 43 States have used
this authority effectively, and such authority has only once been withdrawn, only later to be
reinstated. For over a century, Presidents of both parties have requested such authority.
The proposed constitutional amendment providing for a balanced budget and a tax limitation
would constrain the long-run growth of Federal spending and the national debt. In 1982 a
proposed amendment to constrain Federal authority to spend and borrow was approved by more
than two-thirds of the Senate and by more than a majority of the House of Representatives; a
balanced budget amendment has also been endorsed by the legislatures of 32 States. Approval of
the proposed balanced budget/tax limitation amendment would ensure that fiscal decisions by
future Presidents and Members of Congress are more responsive to the broad interests of the
American population.
Federal Taxation
The Economic Recovery Tax Act of 1981 was one of the most important accomplishments of my
first term. Individual income tax rates were reduced by nearly 25 percent, effective tax rates on
the income from new investment were substantially reduced, and beginning this year tax brackets
are adjusted for inflation.
But more needs to be done. Personal tax rates should be reduced further to encourage stronger
economic growth which, in itself, is our best tool for putting deficits on a steady downward path.
Our tax system needs basic reform. It is extraordinarily complicated; it leads to substantial
economic inefficiency; and it is widely perceived to be unfair.
At my request, the Treasury Department has developed a comprehensive proposal to simplify and
reform the Federal tax system, one that for expected economic conditions would yield about the
same revenues as the present system. This proposal, by substantially broadening the tax base,
would permit a significant further reduction of marginal tax rates. Shortly, I will be submitting my
own proposal for tax simplification, and will urge the Congress to give serious sustained attention
to tax simplification -- in order to enact a program that will increase fairness and stimulate future
savings, investment, and growth.
Federal Regulation
We have made major efforts in the past 4 years to reduce and eliminate Federal regulation of
economic activity. Executive Office review of new regulations was streamlined. Oil prices were
deregulated by Executive authority early in 1981. New legislation was approved to reduce
regulation of banking and to largely eliminate regulation of interstate bus travel.
Regulatory reform, however, has been painfully slow. The Congress failed to approve our
proposals to further deregulate banking and natural gas prices, and to reform the regulation of
private pensions. In addition, the reauthorization of several major environmental laws has been
delayed for several years.
I urge the Congress to consider further deregulation efforts in several areas. The experience with
deregulation of oil prices makes clear that continued regulation of natural gas prices is not
appropriate. Reform of nuclear licensing requirements also deserves attention. Further
deregulation of the banking system should be paired with a major reform of the deposit insurance
systems. Some changes in the single-employer pension law and an increased premium are
necessary to preserve the pension insurance system. We should also seriously consider eliminating
the remaining Federal regulation of trucking and railroads. Finally, I remain hopeful that the
Administration and the Congress can work together to reauthorize the major environmental laws
in a way that serves our common environmental and economic goals.
Monetary Policy
The Constitution authorizes the Congress ``To coin Money (and) regulate the Value thereof,'' and
Congress has delegated this authority to the Federal Reserve System. The role of the executive
branch is restricted to advising the Congress and the Federal Reserve about the conduct of
monetary policy, and to nominating members of the Board of Governors as positions become
vacant.
During my first term, the Federal Reserve reduced the rate of money growth relative to the high
rates of the late 1970s. This change in policy, assisted by the related strong increase in the
exchange value of the dollar, helped produce a substantial reduction of inflation and market
interest rates. On occasion, however, the rate of money growth has been quite volatile,
contributing to instability in interest rates and a decline in economic activity. The sharp reduction
in money growth through mid-1982, for example, undoubtedly added to the length and severity of
the 1981 - 1982 recession. And a similar reduction in money growth in the second half of 1984
contributed to the temporary slowing of economic growth late in the year.
We reaffirm our support for a sound monetary policy that contributes to strong, steady economic
growth and price stability. Moreover, we expect to cooperate closely with the Federal Reserve in
defining and carrying out a prudent and predictable monetary policy.
Conclusion
The Federal Government has only a few important economic responsibilities. Given a proper
conduct of these important roles, additional Federal intervention is more often a part of the
problem than a part of the solution. We should continue to reduce the many less-important
economic activities of the Federal Government so that individuals, private institutions, and State
and local governments will have more resources and more freedom to pursue their own interests.
Good stewardship of our constitutional responsibilities and the creative energies of the American
people will ensure a future of continued economic growth and opportunity.
Ronald Reagan
February 5, 1985.
Note: The President's message was printed in the report entitled ``Economic Report of the
President, Transmitted to the Congress, February 1985 -- Together With the Annual Report of
the Council of Economic Advisers'' (Government Printing Office, 356 pages).
The success of this program is now obvious -- the U.S. economy is experiencing the strongest
recovery in 30 years:
But the quantitative record alone does not tell the full story. Four years ago, there was a
widespread and growing anxiety about the economy. Many thought that the Nation had entered a
condition of permanent economic decline, and that we would have to live with permanent
double-digit inflation unless we were willing to suffer massive long-term unemployment.