 the President of the United States and the Vice President of the United States. Well, welcome to the White House. I'm delighted you're able to be here. And I know that you'll be meeting with the Vice President, Dave Stockman, and I think Ed Meese. Yes, and as you know, I've transmitted to Congress my revised federalism package, which incorporates four major megablock grants to state and local governments. And these legislative proposals represent a continuation and an expansion of the efforts of the administration to return authority, responsibility, and revenue sources to state and local governments. You and I know that in two decades, between 60 and 80, we saw ever-accelerating encroachment by the federal government on state and local prerogatives. Narrow and restrictive federal grants in aid programs grew in that same period of time from under 50 to more than 500. And such obvious local concerns were covered as rat control and sewer extension and a few other items of international rating. The cost of the programs exploded from over $7 billion in 1960 to $95 billion in 1981. There's no question the federal government had too much control. The programs lacked flexibility and regulations were restrictive. Federal mandates were depleting state and local treasuries. Expenditures were being made for programs that weren't really needed in particular communities and localities. At the same time, state and local officials began calling for a reordering of priorities sorting out of responsibilities among the various levels of government. And I want to thank the NCSL Federalism Negotiating Team and the CSL staff for the many hours of meetings and advice and assistance on this project. The package which has gone forward to Congress incorporates much of the input that we've received from you over the course of the past two years. It'll provide stable and certain funding source for state and local governments by guaranteeing funding for programs at levels enacted for fiscal year 1984. Not a vehicle for budgetary savings. It'll provide you the opportunity to establish at your option your own block grants. It'll provide far greater flexibility to state and local officials. And it will provide a phase in period and transition time to avoid dislocation of state and local governments. And let me say just a few words if I could right now about the economy. Our economic program is starting to pay off. The leading economic indicators are up for eight of the last ten months and the last increase was the highest single increase in 33 years. Inflation is down from double digits to an annual rate of 1.4% for the last six months. Interest rates have been cut in half from the 21.5% level when we took office. They're down to 10.5% now of the prime rate. Auto and steel industry are expanding and housing is skyrocketing and I saw just a tiny little item that didn't seem to get much front page attention that the steel industry has called back 20,000 of their layoffs to work. Perhaps one of the stock market we know is setting new records also. But perhaps the most important real wages are up and were up for 1982 and that was the first time in three years that they had not been going the other way. And we recognize this has been a painful period of economic readjustment and many of your state budgets have been particularly hard hit. But nothing we will do more to create jobs and relieve the fiscal pressures than a strong vibrant economy. And we'll continue to address our energy toward achieving that goal. But that's enough of monologue. I didn't come here really to do much of monologue. We'll have some dialogue so I'll call on your president, Bill Passonati. Thank you, Mr. President. May I, on behalf of the offices of the NCSL and all of the members and the leaders of the NCSL and the staff, thank you once again for meeting with us. We haven't forgotten so that you were the first sitting president that attended one of our national conventions. As a member of the Federalism Negotiating Team, we have spent many hours here in the White House talking to not only you, sir, but members of your staff. We thank you for the opportunity to allow us to express the concerns and the needs and the aspirations and the wants of all of these men and women who are here in this house with you today, sir. I'm not going to speak any further, sir, except if you wish. I will be willing to serve as sort of an impartial moderator and maybe designate some members of the audience who would like to speak and ask your questions. I'd appreciate that very much, really. To start the ball rolling, sir, with regard to our concern concerning the 1984 fiscal budget and its impact upon us in the States, may I ask Deputy Speaker John Bragg of Tennessee to start off by making a statement. Mr. President, we're happy to be here. The leaders of the States are beginning to feel a great concern, sir, in the reduction of the federal income tax. If I can oversimplify, most of the time in most of the States, the feds have leaned on the income tax. We in the state level have leaned heavily on consumption and consumer taxes, and people at the local level have leaned on the profit tax. The reduction of the federal income taxes have, in turn, now turned the federal government's attention to consumer taxes and to consumption taxes. And what we are really concerned about, Mr. President, is that the federal may be invading and taking the barrogative and preempting the taxes which we have normally used in all of the past years, which as you know well know when you were Governor, we had to depend upon the consumption and consumer taxes. And we are afraid that our ability to use those taxes is going to be taken away from us. In addition, we are a little bit concerned that our state sales taxes and our state property taxes, maybe the exemptions we now enjoy in the federal income tax may be taken away from us, which would further hurt us at the local level. I wonder if you'd care to comment on that promise. Well, all I can tell you is that I would be opposed and will oppose and fight any effort to further reduce by taking away as legitimate deductions taxes that are paid at the other level. And I think that a tax on a tax is, it just isn't just. I know that in the talk about simplification particularly of the income tax, which has grown so complicated that I think there is more of a resistance to the income tax from that angle than there is from the amount of tax. And so there has been talk, I know, in this conversation about that an economist saying that we should tax consumption rather than saving and so forth or income. Believe me, I am very conscious and I'm glad that you mentioned this and I will see that we continue to keep this in the forefront, that we should not be invading the areas that are already taken. The federal government has preempted too many of the taxing methods and too much of the taxing that is done. When I was a young man getting my degree in economics, dishonestly I might add, the federal government was only taking less than a third of the tax money. And today it's the other way around. It's taking two thirds and leaving only a third for the states and local governments. And I want to see us reduce our share so that we can get back to the place that there may be at the local level, at the state level, we will in a way have benefited you to the extent that by not preempting too much of the tax dollar there is leeway for you if you find it necessary to raise taxes to do so. So believe me, we'll keep that in mind. Senator? You had someone over there behind you. Maybe you better, yeah, you better come up here where you can see the hands. President Paul Coverdale, Minority Leader, Georgia. Over the years no one has expressed more concern about federal deficits than yourself. And as you know the grave controversy regarding your staunch belief of increased spending in defense. Now we know of your concern for financial restraints. I wonder if you would elaborate for us here the causes for your strong stand on the defense budget. Yes, and when I was campaigning I'd like to call to your attention that I was repeatedly faced with a question, not only from the press but from audiences, that if it came to a choice between deficit spending and national defense which side would I come down on? And I said I would have to come down on the side of guaranteeing the national security. And as I've so often said, that budget isn't determined by us. That's determined by the fellas, the adversaries. They determine what you have to do to guarantee the security of the people which is the number one responsibility of the federal government. Now these out year deficits which we're not happy about, over half of them are the result of the recession which no one anticipated, especially those economists that I mentioned earlier. When we were submitting our plans and our economic plan in January there wasn't a person in the world that believed such a thing was going to happen as that big slump that hit us in July, the furthering of the recession that had started in 1979. But I think we've been making a mistake in talking about the budget, the defense budget in terms of cash. I want to assure you first that the secretary of defense has not been getting credit. In fact I kind of took him on the other day about it. He had, before this year began, he had already found $41 billion in savings over the five year period from the original five year defense plan that we submitted in February of 1981. And this was in part due to the lowering of inflation, in part due to better methods of procurement and better management methods. He's also proposing another $55 billion over the coming five years of savings over our original concept and yet for some it is still too high. But what we must look at the defense budget on is not in terms of dollars. Look at it as a plan for the security of the United States and then say, not are you going to cut it by so many dollars but look at and say which of these things that we're doing can we do without and still be safe? What will you give up in order to reduce the defense budget? And when you look at it that way and look at what our national strategy has to be to guarantee our security all the points in which it is threatened not just here in our own shores but around the world then I think you'll find that we have a fine and workable plan and we'll continue to try and make savings. The thing I started to tell you about of my taking him on the other day was because I said that he really, he wasn't being very understanding of the political process, that if he had $41 million he could save he should have left it in the budget and let the Congress find it. Senator Lomanchal. Mr. President, my name is Harry Michel. I'm President of the Ohio Senate. Two years ago you were gracious not to invite us here to a similar gathering and on that occasion I raised the question to you, sir, that the suggestion that your fiscal policies and your budget might very well devastate the states in the Midwest and Northeast has suggested to you in that time, sir, that if you were going to spend the normal smile money on defense spending that we might suggest targeting some of that defense spending toward the high unemployment areas and the brownfield areas with so many mills that shut down. I come from the city of Youngstown. At that time your response was that you thought that the program would be good, your program would be good for our states, first of all, and secondly that targeting in that fashion would be implying the use of federal programs to implement social policy and you did not agree that it ought to be done. I'm suggesting, sir, to you now that Ohio and other states in that area has been devastated. We have had one of the highest unemployment rates in the country. City of Youngstown, one of the go-getters, had the single highest unemployment rate in the nation. Our state, like so many others, is now being penalized with high interest rates on the cost of money that we're borrowing for unemployment compensation. We'll owe you $282 million by the end of next year on interest alone on 2 billion plus that will have to borrow unemployment compensation. I'll suggest it again two years later as the president is, can we continually target any portion of your jobs program to those areas where we have 12, 14, 15% unemployment or those areas in my hometown that have 20 and 22 and 27%? We have two jobs bills. I just sent the second phase up this morning in legislation to the Hill and I think that some of those do give that consideration. In defense spending it is true that your emphasis really has to be where is the industry that produces the weapon you need and where you are going to be able to get what you need rather than using it in an employment way and yet because of subcontractors we did do as much as we could in that line of trying to take that consideration in. But when you're going to be able to be one bomber or something you have to go where the airplane factories are that build them. In these job programs we've included grants for extension of unemployment insurance, the federal level. We're suggesting some other uses of those funds. We figure that about half of this unemployment is structural. These are people that will never go back to the jobs they had. If you look at some of the metropolitan papers on a Sunday and that they help wanted ads, you can see that in all this time of unemployment there are still employers begging for people to fill vacant jobs and the problem is there aren't people trained for those jobs. So much of our program is going to be aimed at training and at relocation. So we're proposing in one of those measures to work with you the states to maybe you use some of that unemployment insurance as a voucher that a worker can take that voucher to an employer and the employer will receive the money in return for hiring the individual. And of course there'd be protection to see that when that ran out he wouldn't get rid of him to get another one of the same kind to get another voucher. We protect against that. I do know that those particular states like your own and I was there are hit and hit unusually hard because two industries either one of which can cause a recession automobiles and housing were both hit by the high interest rates by the inability to fund a car and the installment plan or to get a mortgage for a home. We're hopeful that as the interest rates have come down that this is what it has made a difference. Housing is now almost back to a point where it was in 1978 new housing starts sale of new houses and so forth. When the automobile industry had its recession that of course translated to steel which was very important in your state well as several others to rubber again important to your state and the fallout spread. We know that unemployment is the last thing to come back as we come out of a recession and yet we have signs last week was the lowest in applications for unemployment insurance that we've had in several years. The drop in the percentage rate that did occur a month or so ago was an indication that at least they're beginning to feel some of the economic comeback. I think that some of the answers to your problems though would be found in those two packages that we have sent up to the hill that we're waiting for and we're well aware of targeting aid which we must do to those particular areas where that are the most hard hit and we'll do what we can. Let's make it with number one. Let's make a culture of New Jersey. How come there's always more hands up than there is time? It was a very short question but about the infrastructure that magic word in the spirit of the new federalism I think the states are very willing and ready to do more for themselves. The question is whether we are able to. The traditional source of funding capital projects was the bond market but the federal deficit is functioning as a pacman sort of gobbling up available credit so it leaves us with a significant problem that must be addressed. Well I haven't commented on and we'll wait to see on that legislation although remember we do have a problem also that pacman that you mentioned we've got a problem with deficits that we've got a curb or pacman will just grow fatter. We have to watch what we can do from that standpoint. I thought the gasoline tax would be of some help and while it is limited to transportation both mass transit highways and airports that that would be able to do something for that. The other thing is the increase because of our own tax cuts the increase in personal savings has added dramatically to the private capital pool that is there for investment and I believe is going to go a long way toward providing money over and above what pacman is going to gobble up for those deficits. So everything that we're trying to do here is aimed at the belief that the quick fixes of the past the artificial stimulus to try and get something going can only lead every time to another recession two or three years down the road and on a chart you will see that every recession and when it was over you started from a worse position than you were before that recession unemployment remained higher inflation was higher and then the next recession it kept on that same thing and we think the answer is and everything we're trying to do is aimed at getting the economy rolling again as the only long-range permanent way of getting us back on track and I know that the federal deficits threaten some of the money that is available bonding I know also that part of your tax problems and our own have been caused by a triumph in reality so much of our taxing benefited from inflation and as we reduced inflation much faster than we ever thought we could everyone's estimates of the tax revenues they were going to get had to go down if it's the sales tax if it's a state income tax even property tax in California while I was still governor I instituted a plan for the state to subsidize local governments that were dependent on property tax because they weren't changing the tax rate but in that booming inflation a tax man was coming around every year and saying to that working man that had a $15,000 home well your home is now worth $75,000 and we're taxing it accordingly and that's what led to Proposition 13 in California but I think it is that's a pain we have to bear because I don't think we want to go back to inflation in fact I dream of the day when inflation becomes even a little bit of deflation I want to see that first day that the prices aren't just only going up a cent and a quarter I want to see the day when they're going down a cent and a quarter and we'll all be better off I know... well I'm sorry about all the hands that are missed this is where we have the press conferences and the same thing happens there I don't feel as bad about missing them as I do about missing them but... President, thank you one more time Thank you very much So you feel properly sorry for me my next appointment is with the dentist