[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.