Economic Report of the President

1970s. The proportion of experienced workers will rise, contributingto an increase in productivity, while the proportion of young peoplewill fall, leading to a drop in unemployment.There are a number of reasons, therefore, to confront with hopethe economic challenges that face us. We have a solid record ofachievement. In the fields of energy and deregulation we have alreadylaid the foundations on which the future can build. And thereare some favorable trends underway that should help raise productivityand reduce unemployment in the years ahead.Unresolved ProblemsDespite much progress in recent years, we are faced with some seriousproblems. An inflation that was already bad became worse afterthe 1979 oil-price increase. Productivity growth, which had been decliningsporadically for a decade, virtually ceased in the last severalyears. And although we have made substantial progress in adaptingour economy to a world of higher oil prices, we remain dangerouslyvulnerable to serious supply disruptions originating abroad.These problems are closely related to each other. Our inflationstems in part from our oil vulnerability and our slowing productivitygrowth. High and rising inflation, in turn, tends to cause economicreactions that depress productivity. As we make progress in one ofthese areas, we will also make progress in the others.None of the problems is so intractable that we cannot overcome it.But all are so deep-seated that progress will come slowly, only withpersistence, and at the cost of some sacrifice on the part of us all.InflationIn the first half of the 1960s inflation averaged about 1 percent ayear, so low as to be virtually unnoticeable. In the past 15 years,however, the underlying rate of inflation has risen sporadically butinexorably and it is now running at about 10 percent a year.During those 15 years there have been three major episodes inwhich the rate of inflation surged upward. The first came in the late1960s, when the Vietnam war and the Great Society programs werefinanced for a number of years without a tax increase. The consequenthigh budget deficits during a period of economic prosperitygenerated strong inflationary pressures as total spending became excessiverelative to the Nation's productive capacity. The second inflationarysurge, which came in the early 1970s, was associated with thefirst massive oil-price increase, a worldwide crop shortage whichdrove up food prices, and an economy which again became somewhatoverheated in 1972 and 1973. The third inflationary episodecame in 1979 and 1980. It was principally triggered by another massiveoil-price increase, but part of the rise in inflation may also have