    [Public Papers of the Presidents of the United States: George H. W. Bush (1991, Book I)]
    [February 12, 1991]
    [Pages 134-138]
    [From the U.S. Government Publishing Office www.gpo.gov]

    [[Page 134]]

    Message to Congressional Leaders Transmitting the 1991 Economic Report
    February 12, 1991

    To the Speaker of the House of Representatives and the President
    of the Senate:
        Just over 8 years ago the longest peacetime economic expansion in
    U.S. history began. By the start of the 1990s the unemployment rate had
    fallen to levels not seen since the early 1970s, and inflation remained
    relatively low and remarkably stable when compared with the 1970s. More
    than 20 million new jobs were created by our dynamic and diverse market
    economy--the largest and the most productive in the world. Reflecting
    both the evolving needs and wants of the American people and the rapid
    advance of technology, some industries and regions experienced much more
    robust job growth than others. And, as is normal during economic
    expansions, the rate of growth of the Nation's output varied from year
    to year.
        The events of 1990 were a reminder that even a healthy economy can
    suffer shocks and short-term setbacks. In early August, Iraq invaded and
    occupied its small, defenseless neighbor Kuwait and threatened Saudi
    Arabia. Oil prices rose substantially on the world market, and business
    and consumer confidence plummeted. These shocks hit an economy that was
    already growing slowly for several reasons, including worldwide
    increases in interest rates, tightened credit conditions, and the
    lingering effects of a successful attempt begun in 1988 by the Federal
    Reserve to prevent an acceleration of inflation. U.S. output turned down
    in the fourth quarter of 1990, and it became clear that the economy had
    entered a recession. I know that in some regions of our country, people
    are in genuine economic distress.
        This temporary interruption in America's economic growth does not
    signal a decline in the basic long-term vitality of the U.S. economy.
    Indeed, there were important economic achievements in 1990. Even though
    many analysts had earlier forecast increased inflation, the underlying
    rate of inflation was contained and showed clear signs of declining by
    the end of the year. Low inflation is essential to lower interest rates
    and strong economic growth. The U.S. trade deficit declined for the
    third year in a row, and U.S. firms remained competitive in world
    markets. Exports of American products reached an all-time high in 1990
    and exceeded those of any other nation. Productivity in U.S.
    manufacturing continued to grow impressively. Some regions and
    industries experienced relatively strong job growth.
        My Administration's economic policies are designed both to mitigate
    the current downturn and to provide for a solid recovery and the highest
    possible rate of sustainable economic growth. Because these policies are
    credible and systematic, they reduce uncertainty and pave the way to
    higher growth with sustained job-creating expansions. With these
    policies in place, the current recession is expected to be mild and
    brief by historical standards.
        Economic growth is projected to recover by the middle of this year.
    Inflation and interest rates are expected to decline. With the adoption
    of my pro-growth initiatives, the recovery and ensuing expansion are
    projected to be strong and sustained, and to be accompanied by continued
    progress toward lower inflation.
        As the Nation proceeds into the 1990s, it is important to remember
    the simple secret of America's economic success in the 1980s: a
    government policy that allowed the private sector to serve as the engine
    of economic growth. We must also remember that economic growth is the
    fundamental determinant of the long-run success of any nation, the basic
    source of rising living standards, and the key to meeting the needs and
    desires of the American people.
        The process of growth necessarily involves change. Advances in
    technology, shifts in world market conditions, and changes in tastes and
    demographics have created major new industries and dramati-

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    cally altered the fortunes of existing industries. The lesson of history
    is clear. Attempts to protect special interests by blocking the
    economy's natural, market-driven evolution--through regulation, subsidy,
    or protection from competition--reduce the economy's flexibility and
    impair its ability to grow and to create jobs. Growth and prosperity are
    enhanced by strengthening and extending the scope of market forces, not
    by substituting government dictates for the free choices of workers,
    consumers, and businesses.

    Toward Renewed Growth

        The budget law enacted last fall gives fiscal policy a strong and
    credible medium-term framework. It increases the ability of the fiscal
    system to dampen the impact of the current recession, while providing
    for strong controls to reduce Federal spending as a percentage of our
    gross national product. A major reason that the budget deficit is
    expected to increase this year--before declining steadily thereafter--is
    the increase in payments to those adversely affected by the current
    downturn and the reduction in tax receipts as incomes grow more slowly.
    These automatic responses to the recession will help cushion its
    effects.
        I am committed to maintaining a tax system that will sustain strong
    economic growth. My proposal to reduce the tax rate on capital gains
    would give a needed boost to the economy and set it on a strong course
    of economic growth and job creation for years to come. A lower capital
    gains tax rate would encourage entrepreneurial activity, which plays a
    critical role in creating new jobs, new products, and new methods of
    production. It would reduce the bias in favor of debt financing and
    thereby decrease the financial risks borne by U.S. corporations and
    their workers and shareholders.
        The Federal Reserve's control of inflation throughout the recent
    long expansion has given it the credibility necessary to mitigate the
    current downturn significantly without triggering an increase in
    inflationary expectations. Federal Reserve action in recent months will
    also help to alleviate tight credit market conditions that have hampered
    the economy. It is important that the Federal Reserve sustain money and
    credit growth necessary for the maintenance of sustained economic
    growth, especially during an economic downturn. And, while unwarranted
    risks should be avoided, I believe that sound banks should be making
    more sound loans.
        Comprehensive banking reform will help to alleviate tight credit
    conditions by reducing unnecessary restrictions on the banking sector.
    Healthier depository institutions are essential for a sound financial
    system. Lifting restrictions on interstate banking activities and on the
    ability of banks to combine with commercial and other financial firms
    will increase banks' competitiveness. These changes will enhance banks'
    ability to attract capital and reduce the risk of a contraction in
    lending.
        Some have argued that the government should react to the recent oil
    price shock by reregulating energy markets. They would do well to
    remember the lessons of the 1970s, when regulation worsened the impacts
    of two oil shocks and forced Americans to waste many hours in long and
    unnecessary lines at gas stations. Long-term uncertainties about energy
    prices make it vital that U.S. energy policy be based, in both the short
    run and the long run, on the flexibility and efficiency that only well-
    functioning markets can provide.
        My Administration's National Energy Strategy calls for removing
    unnecessary barriers to market forces so that ample supplies of
    reasonably priced energy can continue to foster economic growth. The
    Strategy also outlines initiatives to enhance the energy security of the
    United States and its friends and allies, to encourage cost-effective
    conservation and efficiency measures, to increase the use of alternative
    fuels, and to continue to mitigate the environmental consequences of
    energy use.

    Supporting Long-Run Growth

        The Federal Government cannot mandate or effectively direct economic
    growth, but it can and should create conditions that encourage market-
    driven growth. That requires reducing barriers to saving, investing,
    working, and innovating. Encouraging growth also requires sustaining and
    expand-

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    ing the role of market forces and, thereby, enhancing the economy's
    flexibility. Attempts to second-guess the market and to direct
    government support to particular firms, industries, or technologies in
    the name of promoting growth are inevitably counterproductive.
        The multiyear Federal deficit reduction package adopted last year,
    the largest and most comprehensive such package in U.S. history, will
    reduce the Federal budget deficit by nearly a half-trillion dollars over
    the next 5 years relative to baseline projections. This substantial
    reduction in government borrowing will raise the national saving rate
    and increase the pool of funds available to finance job-creating private
    investment in new productive capacity and new technology.
        My Administration remains firmly committed to taking additional
    steps to lower the cost of capital and to encourage entrepreneurship,
    saving, investment, and innovation. I have again asked the Congress to
    reduce the tax rate on long-term capital gains and to make the research
    and experimentation tax credit permanent. To encourage private saving,
    my budget again includes Family Savings Accounts and penalty-free
    withdrawals from Individual Retirement Accounts for first-time
    homebuyers. My Administration will seek increased Federal support for
    research that has broad national benefits, and we will make the results
    of government-supported research more accessible to the private sector
    so that they can be brought more quickly to market.
        Strong economic growth will continue to require a sound national
    transportation infrastructure. My Administration's proposals for
    restructuring highway programs, centered around a new National Highway
    System program, would make a substantial contribution to meeting those
    demands.
        Economic growth requires skilled and adaptable workers as well as
    modern capital and new technology. Excellence in education is the key to
    increasing the quality of the U.S. labor force. My Administration is
    strongly committed to making the U.S. educational system second to none,
    so that U.S. workers can continue to compete effectively with their
    peers in other nations. To meet this goal, the performance of U.S.
    elementary and secondary education must be dramatically improved. More
    money will not ensure excellence; America is already a world leader in
    spending on education. Fundamental reform is necessary.
        Government policies should be designed to put power in the hands of
    individuals and families--to give them the tools and incentives to
    improve their own lives. Thus students and their families must be given
    greater freedom to choose among competing schools, and talented and
    skilled individuals must be freed from unnecessary obstacles to entering
    the teaching profession. My Administration will seek enactment of a new
    Educational Excellence Act that would support choice in education,
    alternative certification for teachers and principals, rewards for
    outstanding teachers and for schools that improve their students'
    achievements, and innovative approaches to mathematics and science
    education.
        The Immigration Act of 1990, the first major reform of legal
    immigration in a quarter-century, will substantially increase the
    overall level of immigration, particularly of skilled workers. These new
    workers will contribute to U.S. economic growth, as well as to the
    Nation's social and cultural vitality.
        The Americans with Disabilities Act is the most significant
    extension of civil rights legislation in two decades. It will enable
    more of our citizens with disabilities to enter the economic mainstream
    and thus to better their own lives while contributing to the Nation's
    economic strength.
        Last year important legislation passed that will give power and
    opportunity to individuals. The expansion of the Earned Income Tax
    Credit, the new health insurance credit, and the other child care
    provisions in the 1990s budget legislation will put dollars for child
    care directly in the hands of parents, instead of bureaucracies. The
    Homeownership and Opportunity for People Everywhere (HOPE) initiative in
    the National Affordable Housing Act will expand homeownership and give
    more families a stake in their communities. My Administration strongly
    supported the expansion of medicaid to provide health insurance to
    more pregnant women and chil-

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    dren in low-income families.
        But there is more to be done. My Administration will continue to
    press for the establishment of enterprise zones to encourage
    entrepreneurship, investment, and job creation in distressed
    communities. We will propose initiatives focused on infant mortality,
    preventive measures, and nutrition to improve the health of those least
    able to provide for their own needs.

    Flexibility and Regulation

        The remarkable flexibility of the U.S. economy, which stems from its
    reliance on free markets, is a major national asset. Flexibility enables
    the economy to cushion the effects of adverse developments, such as oil
    price shocks, and to take full advantage of innovations and other new
    opportunities. Indeed, the responsiveness of the economy to new
    opportunities is an important spur to innovation and a source of
    economic dynamism.
        Government regulation generally serves to reduce economic
    flexibility and thus should have a very limited role. Where regulation
    is necessary, regulatory programs should pass strict cost-benefit tests
    and should seek to harness the power of market forces to serve the
    public interest, not to distort or diminish those forces.
        The lesson of the savings and loan crisis, to which my
    Administration responded swiftly, is not that competition and innovation
    are incompatible with safety and soundness in the financial sector.
    Rather, this experience shows that poorly designed regulation,
    inadequate supervision, and limits on risk-reducing diversification can
    combine to produce behavior that undermines creditors' confidence and
    imposes unnecessary burdens on taxpayers.
        We can and must ensure the safety and soundness of our banking
    system and continue to provide full protection for insured deposits
    while allowing competition to improve efficiency and encourage
    innovation. My Administration's proposals for comprehensive reform of
    the regulatory system governing banks will achieve these goals. In
    addition, these reforms will enhance the ability of U.S. banks to
    compete in the global markets for financial services.
        Last year's farm legislation embodied important steps toward a
    market-oriented agricultural policy and away from government domination
    of this vital and progressive sector. Farmers have been given additional
    flexibility in planting decisions, in a way that will both sustain
    farmers' incomes and save taxpayers' money.
        Market-based initiatives can and should play a key role in
    environmental policy as well. In 1989 my Administration proposed
    comprehensive legislation to combat air pollution. This proposal broke a
    logjam that had blocked congressional action for more than a decade, and
    a landmark clean air bill was enacted last year--the most significant
    air pollution legislation in the Nation's history. The centerpiece of
    this bill is an innovative, market-based program for controlling--at the
    least possible cost to the economy--the emissions that produce acid
    rain. All provisions of this legislation will be implemented so as to
    minimize unnecessary burdens on American workers and firms.
        Economic growth and environmental protection are compatible, but
    only if environmental goals reflect careful cost-benefit analysis and if
    environmental regulation provides maximum flexibility to meet those
    goals at least cost. My Administration will continue to be guided by the
    responsibilities of global stewardship; we will seek both to protect the
    environment and to maintain economic growth to give all the world's
    children the chance to lead better lives than their parents.

    Leadership in the Global Economy

        Throughout the postwar period, the United States has led the world
    toward a system of free trade and open markets. The benefits of global
    economic integration and expanded international trade have been
    enormous, at home and abroad. U.S. firms gain from access to global
    markets; U.S. workers benefit from foreign investment in America; and
    U.S. consumers can buy goods and services from around the world.
    Competition and innovation have been stimulated, and businesses have
    increased their efficiency by locating operations around the globe. The
    phenomenal prosperity and vitality of market-oriented economies--and the
    bankruptcy of the socialist model--

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    point the way to future progress and growth.
        My Administration will continue to push aggressively for open
    markets in all nations, including our own, and will continue to oppose
    protectionism. Protectionist trade barriers impose burdens on the many
    to serve the interests of the few and can only reduce the Nation's
    competitiveness. Government attempts to overrule the decisions of the
    international marketplace and to manage trade or investment flows
    inevitably reduce economic flexibility and lower living standards.
        My Administration's top trade policy priority continues to be the
    successful completion of the Uruguay Round negotiations of the General
    Agreement on Tariffs and Trade (GATT). Success in the Uruguay Round
    would open agricultural markets, lower or eliminate tariffs on many
    products, strengthen the GATT system, and extend it to cover important
    new areas--such as services, investment, and intellectual property--
    critical to U.S. economic vitality. These improvements would
    significantly increase the ability of the global economy to raise living
    standards in the United States and around the world. Failure, on the
    other hand, would increase trade frictions and could lead to a
    destructive new round of protectionism.
        In addition, my Administration has moved to pave the way toward a
    hemispheric zone of free trade. We have announced our intention to begin
    negotiations on a free-trade agreement with Mexico. My Enterprise for
    the Americas Initiative promises to fuel growth and prosperity
    throughout this hemisphere by removing barriers to trade and investment.
    This initiative also aims to provide official debt reduction to
    countries engaged in significant economic reforms and thereby to build
    on my Administration's ongoing support for commercial debt reduction.
        America remains a beacon of hope to peoples around the world. Our
    Nation continues to demonstrate by shining example that political
    democracy and free markets reinforce each other and together lead to
    liberty and prosperity. Nations in this hemisphere and the emerging
    democracies of Eastern Europe are eagerly moving to follow America's
    example. The challenges these nations face as they fundamentally
    restructure their economies are enormous. My Administration will
    continue its strong support and assistance for their vital and historic
    efforts.

    Looking Ahead

        In my Economic Report last year I stated that I looked forward to
    the 1990s with hope and optimism. Despite the economic events of 1990,
    we have reason for both hope and optimism in full measure as the Nation
    approaches the next American century.
        Following sound economic policy principles, my Administration seeks
    to achieve the maximum possible rate of sustainable economic growth. We
    must continue to adhere to those principles if we are to soften the
    impacts of the current recession and to strengthen the foundation for
    strong growth in the years to come. Economic growth remains the key to
    raising living standards for all Americans, to expanding job
    opportunities, and to maintaining America's global economic leadership.

                                                                 George Bush

    The White House,
    February 12, 1991.

                        Note: The President's message was printed in the
                            ``Economic Report of the President'' but was not
                            issued as a White House press release. Thomas S.
                            Foley was Speaker of the House of
                            Representatives, and Dan Quayle was President of
                            the Senate.