Mr. Speaker, Mr. President, distinguished Members of the Congress, honored
guests, and fellow citizens:

Today marks my first State of the Union address to you, a constitutional
duty as old as our Republic itself.

President Washington began this tradition in 1790 after reminding the
Nation that the destiny of self-government and the "preservation of the
sacred fire of liberty" is "finally staked on the experiment entrusted to
the hands of the American people." For our friends in the press, who place
a high premium on accuracy, let me say: I did not actually hear George
Washington say that. But it is a matter of historic record.

But from this podium, Winston Churchill asked the free world to stand
together against the onslaught of aggression. Franklin Delano Roosevelt
spoke of a day of infamy and summoned a nation to arms. Douglas MacArthur
made an unforgettable farewell to a country he loved and served so well.
Dwight Eisenhower reminded us that peace was purchased only at the price of
strength. And John F. Kennedy spoke of the burden and glory that is
freedom.

When I visited this Chamber last year as a newcomer to Washington, critical
of past policies which I believed had failed, I proposed a new spirit of
partnership between this Congress and this administration and between
Washington and our State and local governments. In forging this new
partnership for America, we could achieve the oldest hopes of our
Republic--prosperity for our nation, peace for the world, and the blessings
of individual liberty for our children and, someday, for all of humanity.

It's my duty to report to you tonight on the progress that we have made in
our relations with other nations, on the foundation we've carefully laid
for our economic recovery, and finally, on a bold and spirited initiative
that I believe can change the face of American government and make it again
the servant of the people.

Seldom have the stakes been higher for America. What we do and say here
will make all the difference to autoworkers in Detroit, lumberjacks in the
Northwest, steelworkers in Steubenville who are in the unemployment lines;
to black teenagers in Newark and Chicago; to hard-pressed farmers and small
businessmen; and to millions of everyday Americans who harbor the simple
wish of a safe and financially secure future for their children. To
understand the state of the Union, we must look not only at where we are
and where we're going but where we've been. The situation at this time last
year was truly ominous.

The last decade has seen a series of recessions. There was a recession in
1970, in 1974, and again in the spring of 1980. Each time, unemployment
increased and inflation soon turned up again. We coined the word
"stagflation" to describe this.

Government's response to these recessions was to pump up the money supply
and increase spending. In the last 6 months of 1980, as an example, the
money supply increased at the fastest rate in postwar history--13 percent.
Inflation remained in double digits, and government spending increased at
an annual rate of 17 percent. Interest rates reached a staggering 21.5
percent. There were 8 million unemployed.

Late in 1981 we sank into the present recession, largely because continued
high interest rates hurt the auto industry and construction. And there was
a drop in productivity, and the already high unemployment increased.

This time, however, things are different. We have an economic program in
place, completely different from the artificial quick fixes of the past. It
calls for a reduction of the rate of increase in government spending, and
already that rate has been cut nearly in half. But reduced spending the
first and smallest phase of a 3-year tax rate reduction designed to
stimulate the economy and create jobs. Already interest rates are down to
15 3/4 percent, but they must still go lower. Inflation is down from 12.4
percent to 8.9, and for the month of December it was running at an
annualized rate of 5.2 percent. If we had not acted as we did, things would
be far worse for all Americans than they are today. Inflation, taxes, and
interest rates would all be higher.

A year ago, Americans' faith in their governmental process was steadily
declining. Six out of 10 Americans were saying they were pessimistic about
their future. A new kind of defeatism was heard. Some said our domestic
problems were uncontrollable, that we had to learn to live with this
seemingly endless cycle of high inflation and high unemployment.

There were also pessimistic predictions about the relationship between our
administration and this Congress. It was said we could never work together.
Well, those predictions were wrong. The record is clear, and I believe that
history will remember this as an era of American renewal, remember this
administration as an administration of change, and remember this Congress
as a Congress of destiny.

Together, we not only cut the increase in government spending nearly in
half, we brought about the largest tax reductions and the most sweeping
changes in our tax structure since the beginning of this century. And
because we indexed future taxes to the rate of inflation, we took away
government's built-in profit on inflation and its hidden incentive to grow
larger at the expense of American workers.

Together, after 50 years of taking power away from the hands of the people
in their States and local communities, we have started returning power and
resources to them.

Together, we have cut the growth of new Federal regulations nearly in half.
In 1981 there were 23,000 fewer pages in the Federal Register, which lists
new regulations, than there were in 1980. By deregulating oil we've come
closer to achieving energy independence and helped bring down the cost of
gasoline and heating fuel.

Together, we have created an effective Federal strike force to combat waste
and fraud in government. In just 6 months it has saved the taxpayers more
than $2 billion, and it's only getting started.

Together we've begun to mobilize the private sector, not to duplicate
wasteful and discredited government programs, but to bring thousands of
Americans into a volunteer effort to help solve many of America's social
problems.

Together we've begun to restore that margin of military safety that ensures
peace. Our country's uniform is being worn once again with pride.

Together we have made a New Beginning, but we have only begun.

No one pretends that the way ahead will be easy. In my Inaugural Address
last year, I warned that the "ills we suffer have come upon us over several
decades. They will not go away in days, weeks, or months, but they will go
away . . . because we as Americans have the capacity now, as we've had it
in the past, to do whatever needs to be done to preserve this last and
greatest bastion of freedom."

The economy will face difficult moments in the months ahead. But the
program for economic recovery that is in place will pull the economy out of
its slump and put us on the road to prosperity and stable growth by the
latter half of this year. And that is why I can report to you tonight that
in the near future the state of the Union and the economy will be
better--much better--if we summon the strength to continue on the course
that we've charted.

And so, the question: If the fundamentals are in place, what now? Well, two
things. First, we must understand what's happening at the moment to the
economy. Our current problems are not the product of the recovery program
that's only just now getting underway, as some would have you believe; they
are the inheritance of decades of tax and tax and spend and spend.

Second, because our economic problems are deeply rooted and will not
respond to quick political fixes, we must stick to our carefully integrated
plan for recovery. That plan is based on four commonsense fundamentals:
continued reduction of the growth in Federal spending; preserving the
individual and business tax reductions that will stimulate saving and
investment; removing unnecessary Federal regulations to spark productivity;
and maintaining a healthy dollar and a stable monetary policy, the latter a
responsibility of the Federal Reserve System.

The only alternative being offered to this economic program is a return to
the policies that gave us a trillion-dollar debt, runaway inflation,
runaway interest rates and unemployment. The doubters would have us turn
back the clock with tax increases that would offset the personal tax rate
reductions already passed by this Congress. Raise present taxes to cut
future deficits, they tell us. Well, I don't believe we should buy that
argument.

There are too many imponderables for anyone to predict deficits or
surpluses several years ahead with any degree of accuracy. The budget in
place, when I took office, had been projected as balanced. It turned out to
have one of the biggest deficits in history. Another example of the
imponderables that can make deficit projections highly questionable--a
change of only one percentage point in unemployment can alter a deficit up
or down by some $25 billion.

As it now stands, our forecast, which we're required by law to make, will
show major deficits starting at less than a hundred billion dollars and
declining, but still too high. More important, we're making progress with
the three keys to reducing deficits: economic growth, lower interest rates,
and spending control. The policies we have in place will reduce the deficit
steadily, surely, and in time, completely.

Higher taxes would not mean lower deficits. If they did, how would we
explain that tax revenues more than doubled just since 1976; yet in that
same 6-year period we ran the largest series of deficits in our history. In
1980 tax revenues increased by $54 billion, and in 1980 we had one of our
all-time biggest deficits. Raising taxes won't balance the budget; it will
encourage more government spending and less private investment. Raising
taxes will slow economic growth, reduce production, and destroy future
jobs, making it more difficult for those without jobs to find them and more
likely that those who now have jobs could lose them. So, I will not ask you
to try to balance the budget on the backs of the American taxpayers.

I will seek no tax increases this year, and I have no intention of
retreating from our basic program of tax relief. I promise to bring the
American people--to bring their tax rates down and to keep them down, to
provide them incentives to rebuild our economy, to save, to invest in
America's future. I will stand by my word. Tonight I'm urging the American
people: Seize these new opportunities to produce, to save, to invest, and
together we'll make this economy a mighty engine of freedom, hope, and
prosperity again.

Now, the budget deficit this year will exceed our earlier expectations. The
recession did that. It lowered revenues and increased costs. To some
extent, we're also victims of our own success. We've brought inflation down
faster than we thought we could, and in doing this, we've deprived
government of those hidden revenues that occur when inflation pushes people
into higher income tax brackets. And the continued high interest rates last
year cost the government about $5 billion more than anticipated.

We must cut out more nonessential government spending and rout out more
waste, and we will continue our efforts to reduce the number of employees
in the Federal work force by 75,000.

The budget plan I submit to you on February 8th will realize major savings
by dismantling the Departments of Energy and Education and by eliminating
ineffective subsidies for business. We'll continue to redirect our
resources to our two highest budget priorities--a strong national defense
to keep America free and at peace and a reliable safety net of social
programs for those who have contributed and those who are in need.

Contrary to some of the wild charges you may have heard, this
administration has not and will not turn its back on America's elderly or
America's poor. Under the new budget, funding for social insurance programs
will be more than double the amount spent only 6 years ago. But it would be
foolish to pretend that these or any programs cannot be made more efficient
and economical.

The entitlement programs that make up our safety net for the truly needy
have worthy goals and many deserving recipients. We will protect them. But
there's only one way to see to it that these programs really help those
whom they were designed to help. And that is to bring their spiraling costs
under control.

Today we face the absurd situation of a Federal budget with three-quarters
of its expenditures routinely referred to as "uncontrollable." And a large
part of this goes to entitlement programs.

Committee after committee of this Congress has heard witness after witness
describe many of these programs as poorly administered and rife with waste
and fraud. Virtually every American who shops in a local supermarket is
aware of the daily abuses that take place in the food stamp program, which
has grown by 16,000 percent in the last 15 years. Another example is
Medicare and Medicaid--programs with worthy goals but whose costs have
increased from 11.2 billion to almost 60 billion, more than 5 times as
much, in just 10 years.

Waste and fraud are serious problems. Back in 1980 Federal investigators
testified before one of your committees that "corruption has permeated
virtually every area of the Medicare and Medicaid health care industry."
One official said many of the people who are cheating the system were "very
confident that nothing was going to happen to them." Well, something is
going to happen. Not only the taxpayers are defrauded; the people with real
dependency on these programs are deprived of what they need, because
available resources are going not to the needy, but to the greedy.

The time has come to control the uncontrollable. In August we made a start.
I signed a bill to reduce the growth of these programs by $44 billion over
the next 3 years while at the same time preserving essential services for
the truly needy. Shortly you will receive from me a message on further
reforms we intend to install--some new, but others long recommended by your
own congressional committees. I ask you to help make these savings for the
American taxpayer.

The savings we propose in entitlement programs will total some $63 billion
over 4 Years and will, without affecting social t security, go a long way
toward bringing Federal spending under control.

But don't be fooled by those who proclaim that spending cuts will deprive
the elderly, the needy, and the helpless. The. Federal Government will
still subsidize 95 million meals every day. That's one out of seven of all
the meals served in America. Head Start, senior nutrition programs, and
child welfare programs will not be cut from the levels we proposed last
year. More than one-half billion dollars has been proposed for minority
business assistance. And research at the National Institute of Health will
be increased by over $100 million. While meeting all these needs, we intend
to plug unwarranted tax loopholes and strengthen the law which requires all
large corporations to pay a minimum tax.

I am confident the economic program we've put into operation will protect
the needy while it triggers a recovery that will benefit all Americans. It
will stimulate the economy, result in increased savings and provide capital
for expansion, mortgages for homebuilding, and jobs for the unemployed.

Now that the essentials of that program are in place, our next major
undertaking must be a program--just as bold, just as innovative--to make
government again accountable to the people, to make our system of
federalism work again.

Our citizens feel they've lost control of even the most basic decisions
made about the essential services of government, such as schools, welfare,
roads, and even garbage collection. And they're right. A maze of
interlocking jurisdictions and levels of government confronts average
citizens in trying to solve even the simplest of problems. They don't know
where to turn for answers, who to hold accountable, who to praise, who to
blame, who to vote for or against. The main reason for this is the
overpowering growth of Federal grants-in-aid programs during the past few
decades.

In 1960 the Federal Government had 132 categorical grant programs, costing
$7 billion. When I took office, there were approximately 500, costing
nearly a hundred billion dollars--13 programs for energy, 36 for pollution
control, 66 for social services, 90 for education. And here in the
Congress, it takes at least 166 committees just to try to keep track of
them.

You know and I know that neither the President nor the Congress can
properly oversee this jungle of grants-in-aid; indeed, the growth of these
grants has led to the distortion in the vital functions of government. As
one Democratic Governor put it recently: The National Government should be
worrying about "arms control, not potholes."

The growth in these Federal programs has--in the words of one
intergovernmental commission--made the Federal Government "more pervasive,
more intrusive, more unmanageable, more ineffective and costly, and above
all, more (un) accountable." Let's solve this problem with a single, bold
stroke: the return of some $47 billion in Federal programs to State and
local government, together with the means to finance them and a transition
period of nearly 10 years to avoid unnecessary disruption.

I will shortly send this Congress a message describing this program. I want
to emphasize, however, that its full details will have been worked out only
after close consultation with congressional, State, and local officials.

Starting in fiscal 1984, the Federal Government will assume full
responsibility for the cost of the rapidly growing Medicaid program to go
along with its existing responsibility for Medicare. As part of a
financially equal swap, the States will simultaneously take full
responsibility for Aid to Families with Dependent Children and food stamps.
This will make welfare less costly and more responsive to genuine need,
because it'll be designed and administered closer to the grass roots and
the people it serves.

In 1984 the Federal Government will apply the full proceeds from certain
excise taxes to a grass roots trust fund that will belong in fair shares to
the 50 States. The total amount flowing into this fund will be $28 billion
a year. Over the next 4 years the States can use this money in either of
two ways. If they want to continue receiving Federal grants in such areas
as transportation, education, and social services, they can use their trust
fund money to pay for the grants. Or to the extent they choose to forgo the
Federal grant programs, they can use their trust fund money on their own
for those or other purposes. There will be a mandatory pass-through of part
of these funds to local governments.

By 1988 the States will be in complete control of over 40 Federal grant
programs. The trust fund will start to phase out, eventually to disappear,
and the excise taxes will be turned over to the States. They can then
preserve, lower, or raise taxes on their own and fund and manage these
programs as they see fit.

In a single stroke we will be accomplishing a realignment that will end
cumbersome administration and spiraling costs at the Federal level while we
ensure these programs will be more responsive to both the people they're
meant to help and the people who pay for them.

Hand in hand with this program to strengthen the discretion and flexibility
of State and local governments, we're proposing legislation for an
experimental effort to improve and develop our depressed urban areas in the
1980's and '90's. This legislation will permit States and localities to
apply to the Federal Government for designation as urban enterprise zones.
A broad range of special economic incentives in the zones will help attract
new business, new jobs, new opportunity to America's inner cities and rural
towns. Some will say our mission is to save free enterprise. Well, I say we
must free enterprise so that together we can save America.

Some will also say our States and local communities are not up to the
challenge of a new and creative partnership. Well, that might have been
true 20 years ago before reforms like reapportionment and the Voting Rights
Act, the 10-year extension of which I strongly support. It's no longer true
today. This administration has faith in State and local governments and the
constitutional balance envisioned by the Founding Fathers. We also believe
in the integrity, decency, and sound, good sense of grass roots Americans.

Our faith in the American people is reflected in another major endeavor.
Our private sector initiatives task force is seeking out successful
community models of school, church, business, union, foundation, and civic
programs that help community needs. Such groups are almost invariably far
more efficient than government in running social programs.

We're not asking them to replace discarded and often discredited government
programs dollar for dollar, service for service. We just want to help them
perform the good works they choose and help others to profit by their
example. Three hundred and eighty-five thousand corporations and private
organizations are already working on social programs ranging from drug
rehabilitation to job training, and thousands more Americans have written
us asking how they can help. The volunteer spirit is still alive and well
in America.

Our nation's long journey towards civil rights for all our citizens--once
a source of discord, now a source of pride--must continue with no
backsliding or slowing down. We must and shall see that those basic laws
that guarantee equal rights are preserved and, when necessary,
strengthened.

Our concern for equal rights for women is firm and unshakable. We launched
a new Task Force on Legal Equity for Women and a Fifty States Project that
will examine State laws for discriminatory language. And for the first time
in our history, a woman sits on the highest court in the land.

So, too, the problem of crime--one as real and deadly serious as any in
America today. It demands that we seek transformation of our legal system,
which overly protects the rights of criminals while it leaves society and
the innocent victims of crime without justice.

We look forward to the enactment of a responsible clean air act to increase
jobs while continuing to improve the quality of our air. We're encouraged
by the bipartisan initiative of the House and are hopeful of further
progress as the Senate continues its deliberations.

So far, I've concentrated largely, now, on domestic matters. To view the
state of the Union in perspective, we must not ignore the rest of the
world. There isn't time tonight for a lengthy treatment of social--or
foreign policy, I should say, a subject I intend to address in detail in
the near future. A few words, however, are in order on the progress we've
made over the past year, reestablishing respect for our nation around the
globe and some of the challenges and goals that we will approach in the
year ahead.

At Ottawa and Cancun, I met with leaders of the major industrial powers and
developing nations. Now, some of those I met with were a little surprised
that I didn't apologize for America's wealth. Instead, I spoke of the
strength of the free marketplace system and how that system could help them
realize their aspirations for economic development and political freedom. I
believe lasting friendships were made, and the foundation was laid for
future cooperation.

In the vital region of the Caribbean Basin, we're developing a program of
aid, trade, and investment incentives to promote self-sustaining growth and
a better, more secure life for our neighbors to the south. Toward those who
would export terrorism and subversion in the Caribbean and elsewhere,
especially Cuba and Libya, we will act with firmness.

Our foreign policy is a policy of strength, fairness, and balance. By
restoring America's military credibility, by pursuing peace at the
negotiating table wherever both sides are willing to sit down in good
faith, and by regaining the respect of America's allies and adversaries
alike, we have strengthened our country's position as a force for peace and
progress in the world.

When action is called for, we're taking it. Our sanctions against the
military dictatorship that has attempted to crush human rights in
Poland--and against the Soviet regime behind that military
dictatorship--clearly demonstrated to the world that America will not
conduct "business as usual" with the forces of oppression. If the events in
Poland continue to deteriorate, further measures will follow.

Now, let me also note that private American groups have taken the lead in
making January 30th a day of solidarity with the people of Poland. So, too,
the European Parliament has called for March 21st to be an international
day of support for Afghanistan. Well, I urge all peace-loving peoples to
join together on those days, to raise their voices, to speak and pray for
freedom.

Meanwhile, we're working for reduction of arms and military activities, as
I announced in my address to the Nation last November 18th. We have
proposed to the Soviet Union a far-reaching agenda for mutual reduction of
military forces and have already initiated negotiations with them in Geneva
on intermediate-range nuclear forces. In those talks it is essential that
we negotiate from a position of strength. There must be a real incentive
for the Soviets to take these talks seriously. This requires that we
rebuild our defenses.

In the last decade, while we sought the moderation of Soviet power through
a process of restraint and accommodation, the Soviets engaged in an
unrelenting buildup of their military forces. The protection of our
national security has required that we undertake a substantial program to
enhance our military forces.

We have not neglected to strengthen our traditional alliances in Europe and
Asia, or to develop key relationships with our partners in the Middle East
and other countries. Building a more peaceful world requires a sound
strategy and the national resolve to back it up. When radical forces
threaten our friends, when economic misfortune creates conditions of
instability, when strategically vital parts of the world fall under the
shadow of Soviet power, our response can make the difference between
peaceful change or disorder and violence. That's why we've laid such stress
not only on our own defense but on our vital foreign assistance program.
Your recent passage of the Foreign Assistance Act sent a signal to the
world that America will not shrink from making the investments necessary
for both peace and security. Our foreign policy must be rooted in realism,
not naivete or self-delusion.

A recognition of what the Soviet empire is about is the starting point.
Winston Churchill, in negotiating with the Soviets, observed that they
respect only strength and resolve in their dealings with other nations.
That's why we've moved to reconstruct our national defenses. We intend to
keep the peace. We will also keep our freedom.

We have made pledges of a new frankness in our public statements and
worldwide broadcasts. In the face of a climate of falsehood and
misinformation, we've promised the world a season of truth--the truth of
our great civilized ideas: individual liberty, representative government,
the rule of law under God. We've never needed walls or minefields or barbed
wire to keep our people in. Nor do we declare martial law to keep our
people from voting for the kind of government they want.

Yes, we have our problems; yes, we're in a time of recession. And it's
true, there's no quick fix, as I said, to instantly end the tragic pain of
unemployment. But we will end it. The process has already begun, and we'll
see its effect as the year goes on.

We speak with pride and admiration of that little band of Americans who
overcame insuperable odds to set this nation on course 200 years ago. But
our glory didn't end with them. Americans ever since have emulated their
deeds.

We don't have to turn to our history books for heroes. They're all around
us. One who sits among you here tonight epitomized that heroism at the end
of the longest imprisonment ever inflicted on men of our Armed Forces. Who
will ever forget that night when we waited for television to bring us the
scene of that first plane landing at Clark Field in the Philippines,
bringing our POW's home? The plane door opened and Jeremiah Denton came
slowly down the ramp. He caught sight of our flag, saluted it, said, "God
bless America," and then thanked us for bringing him home.

Just 2 weeks ago, in the midst of a terrible tragedy on the Potomac, we saw
again the spirit of American heroism at its finest--the heroism of
dedicated rescue workers saving crash victims from icy waters. And we saw
the heroism of one of our young government employees, Lenny Skutnik, who,
when he saw a woman lose her grip on the helicopter line, dived into the
water and dragged her to safety.

And then there are countless, quiet, everyday heroes of American who
sacrifice long and hard so their children will know a better life than
they've known; church and civic volunteers who help to feed, clothe, nurse,
and teach the needy; millions who've made our nation and our nation's
destiny so very special--unsung heroes who may not have realized their own
dreams themselves but then who reinvest those dreams in their children.
Don't let anyone tell you that America's best days are behind her, that the
American spirit has been vanquished. We've seen it triumph too often in our
lives to stop believing in it now.

A hundred and twenty years ago, the greatest of all our Presidents
delivered his second State of the Union message in this Chamber. "We cannot
escape history," Abraham Lincoln warned. "We of this Congress and this
administration will be remembered in spite of ourselves." The "trial
through which we pass will light us down, in honor or dishonor, to the
latest (last) generation."

Well, that President and that Congress did not fail the American people.
Together they weathered the storm and preserved the Union. Let it be said
of us that we, too, did not fail; that we, too, worked together to bring
America through difficult times. Let us so conduct ourselves that two
centuries from now, another Congress and another President, meeting in this
Chamber as we are meeting, will speak of us with pride, saying that we met
the test and preserved for them in their day the sacred flame of
liberty--this last, best hope of man on Earth.

God bless you, and thank you.

NOTE: The President spoke at 9 p.m. in the House Chamber at the Capitol.
He was introduced by Thomas P. O'Neill, Jr., Speaker of the House of
Representatives. The address was broadcast live on nationwide radio
and television.