James Pethokoukis

Politics and policy from inside Washington

Obama budget skips pain for now, chooses growth

Feb 14, 2011 18:42 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By James Pethokoukis
U.S. President Barack Obama’s new budget is no Valentine’s Day love note to deficit hawks. The blueprint ignores the cost-cutting ideas of the president’s own deficit panel and will add $2.7 trillion in new debt over the next two years. It’s an economic and political bet that invites a fight with congressional Republicans.

The budget would cut cumulative projected deficits by $1.1 trillion over the next decade. That’s a bit more than 10 percent of the debt likely to be added during that span, according to Congressional Budget Office forecasts. Some two-thirds of the reduction would be achieved by spending cuts — including a five-year freeze on some domestic spending — and one-third by higher taxes.

Those proportions may not be so far away from what Obama’s deficit commission proposed in December. But the scale of debt reduction falls way short. The budget also skips the panel’s recommendations for reforming Social Security and Medicare spending, the biggest drivers of long-term deficits.

To be fair, most Republicans haven’t shown any serious inclination to address those giant problems, either. But the new budget does suggest the White House sees no mileage — economic or political — in austerity for now. After all, the U.S. economy is still generating relatively few new jobs and interest rates remain low, making government borrowing cheap and suggesting bond investors aren’t yet worried about inflation.

Obama’s team might also be keeping an eye on the UK, where big budget cuts are being blamed for a decline in GDP in the fourth quarter of 2010. The economics aside, the president next year is faced with trying to win a second term with unemployment still uncomfortably high. The new budget allows Obama to paint himself as a prudent budget trimmer and hawkish Republicans as reckless hatchet men.

But the GOP’s Tea Party faction has already forced party leaders to advocate deeper cuts in still-evolving 2011 spending. If that pattern continues and Republicans push harder for austerity, the new budget certainly hints that they will face opposition, not cooperation, from the White House. It will take more than flowers and candy to bring the two sides closer.

Why Fannie and Freddie are sticking around

Feb 11, 2011 16:21 UTC

The Obama White House finally has a kinda-sorta housing plan. But here is the thing: Fannie Mae and Freddie Mac, seized by the U.S. government back in 2008, don’t possess the political clout they used to. But the two mortgage finance giants still have a network with shared interests. That lingering influence is a big reason why they — or possibly similar-looking replacements — will be around for a while longer.

The White House and congressional Republicans agree that housing finance, a big contributor to the recent financial crisis, needs a sweeping overhaul. That includes dramatically reducing or eliminating the role of Fannie and Freddie, which have soaked up more than $150 billion in taxpayer aid since the federal takeover. But it looks like President Barack Obama’s team can’t decide on a single plan and will instead offer a menu of options for reducing government’s role in housing. And while the GOP is adamant it wants to wind down Fannie and Freddie as soon as possible, it doesn’t seem ready to start quite yet.

Rash moves are unwise when U.S. housing remains mired in a deep downturn. But all the Washington waffling isn’t a sign of prudence. A reform roadmap is way overdue. Unfortunately, inaction is tempting when pain is near and benefits distant. Democrats and Republicans are also up against an onslaught from the potential losers if the government ends or sharply reduces its support of the residential mortgage market — currently channeled through Fannie and Freddie.

And there are plenty of those folks. Real estate agents and homebuilders, of course, want housing credit to be as widely available as possible. The very existence of mortgage insurers depends on Fannie and Freddie’s requirements. Big banks are used to offloading mortgages via the securitization market which, though currently in the dumps, was formerly greased by the safety and uniformity of the government backstop. Small banks, meanwhile, worry that big banks would dominate a private-sector mortgage market. And mortgage bond investors are fearful of even a gradual removal of government support.

Overall, the real estate industry gave nearly $70 million to candidates in the most recent congressional election cycle, according to the Center for Responsive Politics. Together with the other constituencies, there’s considerable juice to stymie legislation. Sadly, the biggest hole in financial reform may continue to gape at least until the next Congress takes office in 2013.

COMMENT

“Everyone wants to get to heaven, but no one wants to die”

Funny how when it comes to embracing risk the ones who exalt the private sector seem to find a role for government.

Posted by ARJTurgot2 | Report as abusive

Geithner’s odd attack on Toomey debt ceiling bill

Feb 8, 2011 18:53 UTC

All kinds of economic policy ideas are floating around Capitol Hill at any given moment. Very few of their congressional authors receive a direct rebuke from Team Geithner over at the Treasury Department.

So how did Sen. Pat Toomey get so lucky? Well, the Pennsylvania Republican proposed a simple legislative idea: If Congress is unable to quickly agree on a plan to raise the national debt ceiling, Treasury should prioritize U.S. debt payments so America doesn’t slip into default. (Treasury estimates that the limit will be reached between April  5 and May 31. It has already taken steps to avoid a breach and is reducing the amount of money it holds in a special account at the Federal Reserve. As of Jan. 31, the total public U.S. debt stood at $14.1 trillion, or $215 billion below the limit.) Spending would have to be sharply reduced elsewhere until an agreement was reached, one that would hopefully also include deep short-term and long-term spending cuts.

As Toomey puts it:

Certainly, no one should damage the full faith and credit of the United States. In fact, Democrats and Republicans should all agree on at least one thing: Under no circumstances is it acceptable for the U.S. government to default on its debt. Not only are we morally obligaed to honor our debts, but we benefit greatly from the nearly universal conviction that those who lend to us will always be repaid, on time and in full. We should never undermine that conviction.

Timothy Geithner is having none of it, calling the Toomey plan “unworkable” in a letter to Toomey:

In fact, the legislation would be quite harmful if enacted. A simple analogy may help illustrate the problem. A homeowner could decide to “prioritize” and continue paying monthly mortgage payments, while opting to cease paying other obligations, such as car payments, insurance premiums, student loan and credit card payments, utilities, and so forth. Although the mortgage would be paid, the damage to that homeowner’s creditworthiness would be severe.

Geithner’s right hand man, Neal Wolin, also goes after Toomey’s idea on the department’s blog:

While well-intentioned, this idea is unworkable.  It would not actually prevent default, since it would seek to protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment.  Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments.  It would therefore bring about the same catastrophic economic consequences Secretary Geithner has warned against.

Here’s the problem: Geithner and Wolin are mistaken in assigning all U.S. obligations equal weight and importance. Take Social Security benefits, for instance. They’re an obligation to be sure, but the Supreme Court has ruled recipients have no legal right to receive them. And federal budget scorekeepers don’t even include money borrowed from the Social Security trust fund in their debt-to-GDP calculations. Also, back in the winter of 1995-96, a federal shutdown meant government vendors didn’t get paid. But long-term Treasury yields actually declined during that period. It borders on the ridiculous to think international investors would flee Treasury bonds because a government contractor in Virginia was not paid in a timely matter.

Treasury’s analysis, it seems, is at heart a political one — not a financial one. The Obama administration doesn’t want the debt ceiling to be used by Republicans as an effective lever to get large spending cuts. And anything which makes the perceived risk of default less likely — such as Toomey’s bill — undercuts the White House’s scary messaging.

Bondholders may actually favor Toomey’s idea, just like California bondholders are keen on how the Golden State’s constitution makes paying general obligation debt a top priority. The best option is for Republicans and Democrats to quickly agree on spending cuts as a part of a deal to raise the ceiling. And instead of having the limit be an absolute figure in the future, total debt should instead be calculated as a share of the total economy — preferably far less than the 60 percent level recommended by the IMF. That way it would be a fiscal feature rather than a budgetary bug.

Obama tells business to share the wealth

Feb 8, 2011 03:38 UTC

A few thoughts on President Obama’s speech to the U.S. Chamber of Commerce:

1. Would it be too much trouble for him to be more specific about how deeply he wants to cut corporate tax rates? I hope he doesn’t see the OECD average of 25 percent as a floor. Canada’s rate will be dropped to just 15 percent next year. And if he really wants more of company profits to be “shared” with workers, then he ought to propose abolishing corporate taxes altogether since 70 percent of the tax burden is passed along to workers.

2. Would it be too much trouble for him to be a bit more specific about what regulations he wants to cut? The Heritage Foundation has 20 great ones for his consideration. The think tank also has this helpful piece of advice:

Rather than require agencies to identify harmful regulations during the next 120 days, or even to eliminate unwarranted rules, the order [on reviewing federal regulations] merely requires agencies to submit a “preliminary plan” for reviewing regulations sometime in the future, with the goal of making their regulatory program either less burdensome or “more effective.” And despite promises of transparency elsewhere in the order, the results of any regulatory reviews conducted are required to be released online only “whenever possible.”

3. Not surprising that the execs in attendance clapped when Obama talked about “investing” in America. That partly means transferring taxpayer money to Big Business.  And that stuff about a new social contract between government and business? Time for a Milton Friedman break:

But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

COMMENT

If it wasn’t apparent before the 08 elections, it should be painfully clear now that Pres. Obama views business as something that should be tolerated and controlled. He does not believe ENOUGH in the free-market system to let it work. Our economy has been resilient in the past, but Mr. Obama has created incredible uncertainty among businesspeople. He PERSONALLY is probably the number-one factor holding back business investment and hiring. Businesspeople are “people” and they rely not just on financial analyses and market studies to make decisions. They also use their intuition. Intuitively I do not have confidence in Mr. Obama that he will do right by business and he never really does anything to change that feeling. Above all, he is a master (or at least he THINKS he’s a master) at careful selection of words so that an inattentive listener will believe he is making concessions or changing his tune. In reality, he’s the same semi-socialist whom some of you elected. In that (and other) regards, I greatly prefer Mr. Bush.

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When states go bust

Feb 7, 2011 16:54 UTC

That is the headline for my piece in the latest Weekly Standard about letting US states declare bankruptcy. Here’s a taste:

It’s a solution of apparent Alexandrian elegance and simplicity: Empower America’s cash-strapped states to slice cleanly through a strangling knot of debilitating debt and government union cronyism by letting them file for bankruptcy. Long-term liabilities could be restructured, unaffordable labor contracts rewritten, fiscal health restored. No federal bailouts necessary. … Kevin Drum of Mother Jones put it this way: State bankruptcy “promises to become a pretty serious battle. For Republicans it’s got everything: The tea parties will love it, it provides an alternative to raising taxes, and .  .  . it helps defund a key Democratic interest group. What’s not to like?”

Surprisingly, quite a bit—at least among some Republicans and conservatives. In a January 24 session with reporters, House majority leader Eric Cantor brushed off the idea. … A more pointed critique was offered by members of the highly respected free-market Manhattan Institute, Nicole Gelinas and E. J. McMahon, in the op-ed pages of the Wall Street Journal and other papers. Among their many objections to state bankruptcy: It would violate the constitutions of many states; it would damage the balance sheets of banks holding a quarter of a trillion dollars in state and municipal bonds; it might even cause such investor panic as to risk repeating the 2008 financial meltdown. “Bond-market brinkmanship and bankruptcy threats can’t save the states from themselves,” Gelinas wrote in the Boston Globe on January 23.

COMMENT

The states do not need bankruptcy. They can simply default. They can outlaw public sector unions and freeze their pension liabilities. And if they modify their constitutions and their laws the states creditors will have no recourse.

As long as this is done in a roughly even handed way the creditors would not be able to challenge these actions in federal courts.

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Obama’s big shift?

Feb 7, 2011 15:53 UTC

The president told Fox’s Bill O’Reilly that he hasn’t shifted to the center. “I’m the same guy,” Obama says.  Right, he’s the same guy — a guy who will try and push through as much of his left-of-center agenda as he can.  If he had the votes,  for instance,  Obama would certainly be pushing a cap-and-trade energy plan or higher income taxes. But he doesn’t, so it’s time for Plan B.

And at the heart of that plan is winning reelection, a goal Obama apparently believes will be much easier if America’s CEOs aren’t railing against him. Conflicts with Corporate America cuts against the post-partisan mantle is his trying to reclaim.Thus his speech today to some 200 executives at the US Chamber of Commerce.  But here is the thing:

1) Obama should try and make these folks, at least some of them, angry by taking away tax breaks and subsidies in exchange for a lower corporate tax rate.

2) Fundamentally, Obama is skeptical  of markets which is why his way of embracing the private sector is via a grand, corporatist partnership with Big Business who will rent seek with the best of them. Established giants don’t want new competitors. They don’t want a constantly churning, entrepreneurial economy. The status quo is just fine for them, especially regulations that help preserve their advantage. Innovation can be a threat.

3)  When Obama decides to rely on markets rather than government for allocating healthcare resources, then I will acknowledge a shift to the center.

COMMENT

This from the author who thinks Reagan was a conservative. Obama has cut taxes for billioniares, signed a stimulus bill that was over 30% tax cuts, increased defense spending, expanded the War on Terror, surged in Afghanistan, signed a Republican health care bill, made the Too Big to Fail banks whole, proposed off-shore oil drilling, proposed cutting entitlements, frozen government pay, and just hired the CEO of General Electric and a Chief of Staff from JP Morgan Chase. You think he’s “left of center”? Well, perhaps. You think Paul Ryan is moderate.

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Just how badly broken is the U.S. economy?

Feb 4, 2011 19:42 UTC

This bit on the January jobs report from Bankofamericamerrilllynch worries me:

In the Household Survey, the unemployment rate plunged 0.4ppt for the second month in a row bringing it to 9.0% – the lowest since April 2009. The unemployment rate has not dropped this far, this fast since the 1950s. So, we question whether this decline will be sustained. The household measure of employment rose just 117,000 while the labor force participation rate dropped 0.1 ppt to a fresh cycle low of 64.2%. Never before has such a sharp decline in the unemployment rate been predicated on an ongoing drop in the labor force. The participation rate has crumbled 1.5ppts since the recovery began.

This labor force detachment tell us two things that should give even the most bullish of market participants room for pause: (1) structural unemployment is rising and (2) the potential rate of growth in the U.S. is slowing. Perhaps this is one reason why the Treasury market is selling off sharply in the aftermath of today’s report. More structural unemployment and weak potential growth imply less slack in the economy and raise an inflation risk.

And this chart from ITG Investment Research does not make me feel any better:

ITG

Gen. Paul Ryan launches his war on Big Government

Feb 4, 2011 18:44 UTC

In the context of World War II, this was the Doolittle Raid. D-Day still awaits in the future.

I think if House Republicans consisted of Paul Ryan and 241 of his clones, the first round of budget cuts coming out of the House Budget Committee might have been more Rand Paul-esque. Something more in the hundreds of billions of dollars. A grand slam.

But, to mix metaphors, what Ryan did manage is a solid double into the gap, with the runner making it to second base standing up.  Ryan’s plan would save $74 billion relative to the Obama budget, $58 billion in non-security spending and $16 billion below Obama’s request for security spending. Non-security spending would be cut to $420 billion or about $40 billion below current levels with an additional $8 billion added for defense and security needs.

Of course, if these cuts were the end of story, they would be disappointing. But I am sure there will be more to come, hopefully accompanied by proposals to reform entitlements. Not the end of the beginning or the beginning of the end. Just the beginning of the beginning.

COMMENT

General Ryan is typical of career bureaucrats. They talk like Richard Nixon. Their mantra is obfuscation and hundreds of billions for the military gravy train. Then like Reagan they make people believe they won the Cold War which was really over before ‘Bonzo’ became President. If the so-called
consevatives really are serious about cutting the federal budget they need to take low and middle income people off income taxes; cut the military budget to $400 billion; phase out social security and medicare; repeal voluntary military; repeal the Dept. of Domestic Security; cut out agriculture subsidies; create a Dept. of Nutrition to replace all agencies which deal with food; allow medical professionals to prescribe behavioral drugs; fix the national infrasture asap; get freight of the highways and onto the rails; create a national mass transit system run by electricity generated by nuclear power; turn the District of Columbia back to Maryland and move the federal capitol to the Kansas City area; get rid of the Dept. of Interior; get rid of all socialistic federal programs that denigrate the Bill of Rights; make it illegal to receive a federal pension and work in any other job; set up by law a livable annual income which will enable every citizen to achieve individual self-sufficiency; require States to license any and all healthcare professionals; set up a national healthcare system that people can join to get healthcare, drugs and all other medical services to compete with the private system which now causes inflated healthcare costs; get rid of the FDA and the medical professionals who are in cahoots with the pharmaceutical industry. If the pols in DC could pass all of those reforms America would come back if they also dumped the Federal Reserve System which is run by Wall Street and the Judeo-Christian Big Business Coalition of fascist dictators.

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Reagan at 100, Reaganomics at 30

Feb 4, 2011 12:35 UTC

President Ronald Reagan, Feb. 5, 1981:

Good evening.

I’m speaking to you tonight to give you a report on the state of our Nation’s economy. I regret to say that we’re in the worst economic mess since the Great Depression.

A few days ago I was presented with a report I’d asked for, a comprehensive audit, if you will, of our economic condition. You won’t like it. I didn’t like it. But we have to face the truth and then go to work to turn things around. And make no mistake about it, we can turn them around.

I’m not going to subject you to the jumble of charts, figures, and economic jargon of that audit, but rather will try to explain where we are, how we got there, and how we can get back. First, however, let me just give a few “attention getters” from the audit.

The Federal budget is out of control, and we face runaway deficits of almost $80 billion for this budget year that ends September 30th. That deficit is larger than the entire Federal budget in 1957, and so is the almost $80 billion we will pay in interest this year on the national debt.

Twenty years ago, in 1960, our Federal Government payroll was less than $13 billion. Today it is 75 billion. During these 20 years our population has only increased by 23.3 percent. The Federal budget has gone up 528 percent.

Now, we’ve just had 2 years of back-to-back double-digit inflation — 13.3 percent in 1979, 12.4 percent last year. The last time this happened was in World War I.

In 1960 mortgage interest rates averaged about 6 percent. They’re 2\1/2\ times as high now, 15.4 percent.

The percentage of your earnings the Federal Government took in taxes in 1960 has almost doubled.

And finally there are 7 million Americans caught up in the personal indignity and human tragedy of unemployment. If they stood in a line, allowing 3 feet for each person, the line would reach from the coast of Maine to California.

Well, so much for the audit itself. Let me try to put this in personal terms. Here is a dollar such as you earned, spent, or saved in 1960. And here is a quarter, a dime, and a penny — 36 cents. That’s what this 1960 dollar is worth today. And if the present world inflation rate should continue 3 more years, that dollar of 1960 will be worth a quarter. What initiative is there to save? And if we don’t save we’re short of the investment capital needed for business and industry expansion. Workers in Japan and West Germany save several times the percentage of their income than Americans do.

What’s happened to that American dream of owning a home? Only 10 years ago a family could buy a home, and the monthly payment averaged little more than a quarter — 27 cents out of each dollar earned. Today, it takes 42 cents out of every dollar of income. So, fewer than 1 out of 11 families can afford to buy their first new home.

Regulations adopted by government with the best of intentions have added $666 to the cost of an automobile. It is estimated that altogether regulations of every kind, on shopkeepers, farmers, and major industries, add $100 billion or more to the cost of the goods and services we buy. And then another 20 billion is spent by government handling the paperwork created by those regulations.

I’m sure you’re getting the idea that the audit presented to me found government policies of the last few decades responsible for our economic troubles. We forgot or just overlooked the fact that government — any government — has a built-in tendency to grow. Now, we all had a hand in looking to government for benefits as if government had some source of revenue other than our earnings. Many if not most of the things we thought of or that government offered to us seemed attractive.

In the years following the Second World War it was easy, for a while at least, to overlook the price tag. Our income more than doubled in the 25 years after the war. We increased our take-home pay in those 25 years by more than we had amassed in all the preceding 150 years put together. Yes, there was some inflation, 1 or 1\1/2\ percent a year. That didn’t bother us. But if we look back at those golden years, we recall that even then voices had been raised, warning that inflation, like radioactivity, was cumulative and that once started it could get out of control.

Some government programs seemed so worthwhile that borrowing to fund them didn’t bother us. By 1960 our national debt stood at $284 billion. Congress in 1971 decided to put a ceiling of 400 billion on our ability to borrow. Today the debt is 934 billion. So-called temporary increases or extensions in the debt ceiling have been allowed 21 times in these 10 years, and now I’ve been forced to ask for another increase in the debt ceiling or the government will be unable to function past the middle of February — and I’ve only been here 16 days. Before we reach the day when we can reduce the debt ceiling, we may in spite of our best efforts see a national debt in excess of a trillion dollars. Now, this is a figure that’s literally beyond our comprehension.

We know now that inflation results from all that deficit spending. Government has only two ways of getting money other than raising taxes. It can go into the money market and borrow, competing with its own citizens and driving up interest rates, which it has done, or it can print money, and it’s done that. Both methods are inflationary.

We’re victims of language. The very word “inflation” leads us to think of it as just high prices. Then, of course, we resent the person who puts on the price tags, forgetting that he or she is also a victim of inflation. Inflation is not just high prices; it’s a reduction in the value of our money. When the money supply is increased but the goods and services available for buying are not, we have too much money chasing too few goods. Wars are usually accompanied by inflation. Everyone is working or fighting, but production is of weapons and munitions, not things we can buy and use.

Now, one way out would be to raise taxes so that government need not borrow or print money. But in all these years of government growth, we’ve reached, indeed surpassed, the limit of our people’s tolerance or ability to bear an increase in the tax burden. Prior to World War II, taxes were such that on the average we only had to work just a little over 1 month each year to pay our total Federal, State, and local tax bill. Today we have to work 4 months to pay that bill.

Some say shift the tax burden to business and industry, but business doesn’t pay taxes. Oh, don’t get the wrong idea. Business is being taxed, so much so that we’re being priced out of the world market. But business must pass its costs of operations — and that includes taxes — on to the customer in the price of the product. Only people pay taxes, all the taxes. Government just uses business in a kind of sneaky way to help collect the taxes. They’re hidden in the price; we aren’t aware of how much tax we actually pay.

Today this once great industrial giant of ours has the lowest rate of gain in productivity of virtually all the industrial nations with whom we must compete in the world market. We can’t even hold our own market here in America against foreign automobiles, steel, and a number of other products. Japanese production of automobiles is almost twice as great per worker as it is in America. Japanese steelworkers outproduce their American counterparts by about 25 percent.

Now, this isn’t because they’re better workers. I’ll match the American working man or woman against anyone in the world. But we have to give them the tools and equipment that workers in the other industrial nations have.

We invented the assembly line and mass production, but punitive tax policies and excessive and unnecessary regulations plus government borrowing have stifled our ability to update plant and equipment. When capital investment is made, it’s too often for some unproductive alterations demanded by government to meet various of its regulations. Excessive taxation of individuals has robbed us of incentive and made overtime unprofitable.

We once produced about 40 percent of the world’s steel. We now produce 19 percent. We were once the greatest producer of automobiles, producing more than all the rest of the world combined. That is no longer true, and in addition, the “Big Three,” the major auto companies in our land, have sustained tremendous losses in the past year and have been forced to lay off thousands of workers.

All of you who are working know that even with cost-of-living pay raises, you can’t keep up with inflation. In our progressive tax system, as you increase the number of dollars you earn, you find yourself moved up into higher tax brackets, paying a higher tax rate just for trying to hold your own. The result? Your standard of living is going down.

Over the past decades we’ve talked of curtailing government spending so that we can then lower the tax burden. Sometimes we’ve even taken a run at doing that. But there were always those who told us that taxes couldn’t be cut until spending was reduced. Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.

It’s time to recognize that we’ve come to a turning point. We’re threatened with an economic calamity of tremendous proportions, and the old business-as-usual treatment can’t save us. Together, we must chart a different course.

We must increase productivity. That means making it possible for industry to modernize and make use of the technology which we ourselves invented. That means putting Americans back to work. And that means above all bringing government spending back within government revenues, which is the only way, together with increased productivity, that we can reduce and, yes, eliminate inflation.

In the past we’ve tried to fight inflation one year and then, with unemployment increased, turn the next year to fighting unemployment with more deficit spending as a pump primer. So, again, up goes inflation. It hasn’t worked. We don’t have to choose between inflation and unemployment — they go hand in hand. It’s time to try something different, and that’s what we’re going to do.

I’ve already placed a freeze on hiring replacements for those who retire or leave government service. I’ve ordered a cut in government travel, the number of consultants to the government, and the buying of office equipment and other items. I’ve put a freeze on pending regulations and set up a task force under Vice President Bush to review regulations with an eye toward getting rid of as many as possible. I have decontrolled oil, which should result in more domestic production and less dependence on foreign oil. And I’m eliminating that ineffective Council on Wage and Price Stability.

But it will take more, much more. And we must realize there is no quick fix. At the same time, however, we cannot delay in implementing an economic program aimed at both reducing tax rates to stimulate productivity and reducing the growth in government spending to reduce unemployment and inflation.

On February 18th, I will present in detail an economic program to Congress embodying the features I’ve just stated. It will propose budget cuts in virtually every department of government. It is my belief that these actual budget cuts will only be part of the savings. As our Cabinet Secretaries take charge of their departments, they will search out areas of waste, extravagance, and costly overhead which could yield additional and substantial reductions.

Now, at the same time we’re doing this, we must go forward with a tax relief package. I shall ask for a 10-percent reduction across the board in personal income tax rates for each of the next 3 years. Proposals will also be submitted for accelerated depreciation allowances for business to provide necessary capital so as to create jobs.

Now, here again, in saying this, I know that language, as I said earlier, can get in the way of a clear understanding of what our program is intended to do. Budget cuts can sound as if we’re going to reduce total government spending to a lower level than was spent the year before. Well, this is not the case. The budgets will increase as our population increases, and each year we’ll see spending increases to match that growth. Government revenues will increase as the economy grows, but the burden will be lighter for each individual, because the economic base will have been expanded by reason of the reduced rates.

Now, let me show you a chart that I’ve had drawn to illustrate how this can be.

Here you see two trend lines. The bottom line shows the increase in tax revenues. The red line on top is the increase in government spending. Both lines turn upward, reflecting the giant tax increase already built into the system for this year 1981, and the increases in spending built into the ’81 and ’82 budgets and on into the future. As you can see, the spending line rises at a steeper slant than the revenue line. And that gap between those lines illustrates the increasing deficits we’ve been running, including this year’s $80 billion deficit.

Now, in the second chart, the lines represent the positive effects when Congress accepts our economic program. Both lines continue to rise, allowing for necessary growth, but the gap narrows as spending cuts continue over the next few years until finally the two lines come together, meaning a balanced budget.

I am confident that my administration can achieve that. At that point tax revenues, in spite of rate reductions, will be increasing faster than spending, which means we can look forward to further reductions in the tax rates.

Now, in all of this we will, of course, work closely with the Federal Reserve System toward the objective of a stable monetary policy.

Our spending cuts will not be at the expense of the truly needy. We will, however, seek to eliminate benefits to those who are not really qualified by reason of need.

As I’ve said before, on February 18th I will present this economic package of budget reductions and tax reform to a joint session of Congress and to you in full detail.

Our basic system is sound. We can, with compassion, continue to meet our responsibility to those who, through no fault of their own, need our help. We can meet fully the other legitimate responsibilities of government. We cannot continue any longer our wasteful ways at the expense of the workers of this land or of our children.

Since 1960 our government has spent $5.1 trillion. Our debt has grown by 648 billion. Prices have exploded by 178 percent. How much better off are we for all that? Well, we all know we’re very much worse off. When we measure how harshly these years of inflation, lower productivity, and uncontrolled government growth have affected our lives, we know we must act and act now. We must not be timid. We will restore the freedom of all men and women to excel and to create. We will unleash the energy and genius of the American people, traits which have never failed us.

To the Congress of the United States, I extend my hand in cooperation, and I believe we can go forward in a bipartisan manner. I’ve found a real willingness to cooperate on the part of Democrats and members of my own party.

To my colleagues in the executive branch of government and to all Federal employees, I ask that we work in the spirit of service.

I urge those great institutions in America, business and labor, to be guided by the national interest, and I’m confident they will. The only special interest that we will serve is the interest of all the people.

We can create the incentives which take advantage of the genius of our economic system — a system, as Walter Lippmann observed more than 40 years ago, which for the first time in history gave men “a way of producing wealth in which the good fortune of others multiplied their own.”

Our aim is to increase our national wealth so all will have more, not just redistribute what we already have which is just a sharing of scarcity. We can begin to reward hard work and risk-taking, by forcing this Government to live within its means.

Over the years we’ve let negative economic forces run out of control. We stalled the judgment day, but we no longer have that luxury. We’re out of time.

And to you, my fellow citizens, let us join in a new determination to rebuild the foundation of our society, to work together, to act responsibly. Let us do so with the most profound respect for that which must be preserved as well as with sensitive understanding and compassion for those who must be protected.

We can leave our children with an unrepayable massive debt and a shattered economy, or we can leave them liberty in a land where every individual has the opportunity to be whatever God intended us to be. All it takes is a little common sense and recognition of our own ability. Together we can forge a new beginning for America.

Thank you, and good night.

COMMENT

And the Reagan-worship begins…

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