Speech Transcript:

 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 in 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.

From this podium, Winston Churchill asked the free world to stand
together against the onslaught of aggression. Franklin D. Roosevelt
spoke of a day of infamy and summoned a nation to arms. Douglas
MacArthur made an unforgettable farewell to a country he had 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 believe 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, all of humanity.

It is my duty to report to you tonight on the progress we have made
in our relations with other nations, on the foundations we have
carefully laid for our economic recovery and, finally, on a bold and
spirited intiative 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 auto workers in Detroit,
lumberjacks in the Northwest, and steelworkers in Steubenville who
are in the unemployment lines, to black teen-agers 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 are going but at 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, another in 1974, and again in the spring of 1980.
Each time, unemployment has 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 six months of 1980, as an example, the money supply
increased at the fastest rate in postwar history-- 13%. Inflation
remained in double digits and government spending increased at an
annual rate of 17%. Interest rates reached a staggering 21 1/2 %.
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. There was a drop in productivity and the already-high
unemployment rate 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 reduction of the rate of increase in government
spending, and already that rate has been cut nearly in half. But
reduced spending alone isn't enough. We've just implemented the first
and smallest phase of a three-year tax-rate reduction plan designed to
stimulate the economy and create jobs.

Already interest rates are down to 15 3/4%, but they must go still
lower. Inflation is down from 12.4% to 8.9% and for the month of
December was running at an annualized rate of 5.2%.

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 the seemingly
endless cycles 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 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 have come closer to achieving energy independence and helped
bring down the costs of gasoline and heating fuel.

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

Together, we have 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 have begun to restore that margin of military safety
that insures peace. Our country's uniform is once again being worn
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 Americans have the
capacity now, as we've had 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.

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 we have charted.

And so the question: If the fundamentals are in place, what now?

Two things. First, we must understand what is happening at the moment
to the economy. Our current problems are not the product of the
recovery program that is only just now getting under way, as some
would have you believe. They are the inheritance of decades of tax
and tax, 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 common-sense
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 their 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 forecasts, which we are required by law to
make, will show major deficits, starting at less than $100 billion
and declining, but still too high.

More important, we are making progres with 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
the the same six-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 promised the American people to bring their tax rates down and 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 am urging the American people: seize these new opportunities to
produce, save and invest, and together we will make this economy a
mighty engine fo freedom, hope and prosperity again.

The budget deficit this year will exceed our earlier expectations.
The recession did that. It lowered revenues and increased costs. To
some extent, we are also victims of our own success. We have brought
inflation down faster than we thought we could and have thus 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 $3 billion more
than anticipated.

We must cuit our more nonessential government spending and root out
more waste, and we 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 Feb. 8 will realize major savings
by dismantling the departments of Energy and Education, and by
eliminating ineffectrive subsidies for business. We wil 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 six
years ago.

But it would 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 is 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% 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 five 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 chearing 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 three 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 four years and will, without affecting Social 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 Institutes 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 have 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 thus provide capital for expansion, mortgages for home
building 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 have lost control of even the most basic
decisions made about the essential services of government, such as
schools, welfare, roads, and even garbage collection. They are
right.

A maze of interlocking jurisdictions and levels of government
confronts average citizens in trying to solve even the simplest of
problems. They do not 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
grant-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 $100 billion-- 13 programs for energy conservation, 36
for pollution control, 66 for social services and 90 for education.
The list goes on and on. Here in 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 a distortion in the vital functions of
government. As one Democratic governor put it recently: "The national
government should be worrying about "arms control, not pot-holes."

The growth of these federal programs has--in the words of one
intergovernmental commission--made the federal government "more
pervasive, more intrusive, more unmanageable, more ineffective, more
costly, and above all more unaccountable."

Let us 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 finacne them in a transition period of
nearly 10 years to avoid disruption.

I will shortly send 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 responsiblity for Medicare. As part of
a financially equal swap, the states will simultaneously take full
responsibilty for Aid to Families with Dependent Children and food
stamps. This will make welfare less costly and more responsive to
genuine need because it will be designed and administered closer to
the grass roots of 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 four 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 forego the federal grant programs, they can use their trust
fund money on their own, for 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 then be turned over to the
states. They can then preserve, raise or lower 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 insure these programs will be more responsive to both
the people they are 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 are proposing
legislation for an experimental effort to improve and develop our
depressed urban areas in the 1980s and 1990s. 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 these zones will help attract new business,
new jobs, and new opportunity to America's inner cities and rural
towns. Some will say our mission is to save free enterprise. I say we
must free enterprise so that, together, we can save America.

Some will say also our states and local communities are not up to the
challenge of a new and creative partnership. 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 is 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 are 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 Eighty Five Thousand
corporations and private foundations 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
50-state 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--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
are encouraged by the bipartisan initiative of the House and are
hopeful of further progress as the Senate continues its
deliberations.

So far I have concentrated largely on domestic matter. 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 foreign
policy--a subject I intend to address in detail in the near future. A
few words, however, are in order on the progress we have made over the
past year reestablishing respect for our nation around the globe and
some of the challenges and goals we will approach in the year ahead.

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

In the vital region of the Caribbean basin, we are devloping a
program of aid, trade and investment incentives to promote
self-sustaining growth and a better more secure life for our
neighbors to south. Toward those who would export terrorism and
subversion in the Carribean 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 are 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 means will
follow.

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

Meanwhile, we are working for reduction of arms and military
activities. As I announced in may address to the nation last Nov. 18,
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 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 accomodation, the Soviets engaged
in an inrelenting 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 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 is why we have 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 owrld that America would not shrink for 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 is why we have 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 have promised the world a season of truth--the
truth of great civilized ideas: individual liberty, representative
government, the rule of law under God.

We have never needed walls, mine fields and barbwire to keep our
people in. Nor to declare martial law to prevent our people from
voting for the kind of govenment they want.

Yes, we have our problems. Yes, we are in a time of recession. And
it's true, there is no quick fix 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 this year goes on.

We speak with pride and admiration of the 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 can ever forget that night when we waited
for television to bring us the scene of that first plane landing at
Clark Field in the Phillipines---bringing our POWs home. The plane
door opened and Jeremiah Denton came slowly down the ramp. He caught
sight of our flag, saluted, and said "God bless America" then thanked
us for bringing him home.

Just two 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. 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
life--parents who sacrifice long and hard so their children will know
a better life than they have known; church and civic volunteers who
help to feed, clothe, nurse and teach the needy; millions who have
made our nation, and our nation's destiny, so very special---unsung
heroes who may not have realized their dreams themselves but who then
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.

One 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 generation."

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
Preisdent, 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
thier day the sacred flame of liberty--this last, best hope of man on
Earth.