How Little Stimulus Will Be Enough?

Though the Administration has been less than eager to point it out, President Carter's abandonment of his plan for $50-a-person tax rebates left him recommending substantially less stimulus for the U.S. economy this year than had the conservative Gerald Ford. Dropping of the rebate, higher-than-expected tax receipts and a continued failure of Government agencies to spend money as rapidly as planned have combined to reduce the Administration's forecast of the budget deficit in the fiscal year ending Sept. 30 by a startling $19.3 billion. That would make the deficit $48.7 billion --$10 billion less than the one projected in the budget left behind by Ford. An angry Senate Budget Committee last week called Carter's top economic policymakers to explain why they thought so huge a reduction in planned stimulus would not jolt the economy.

It was a difficult task for the Carter men, because the President's reasons for scuttling the rebate were primarily political rather than economic. The rebate faced strong opposition on Capitol Hill since many Congressmen doubted it would be effective, and Carter chose not to fight for it at the same time that he was launching his embattled energy program. An additional embarrassment to the policymakers: shortly before they appeared in front of the committee, the Administration lowered its forecast of economic growth for the year a notch to 4.9% (see chart), and raised its prediction of the 1977 inflation rate to 6.7%. Charles Schultze, chairman of the Council of Economic Advisers, said that both revisions were caused by the abnormal winter cold, which held production down for a while and pushed up prices for food and fuel.

Bright Picture. To the Senators, the Administration witnesses painted a bright picture of an economy rising rapidly on its own steam the rest of the year and inflation moderating to a 5.5% pace. Schultze ticked off "the signs of stronger performance of the private economy": home building is surging (TIME, May 2); consumer spending has quickened generally; to keep pace with sales, businessmen will need to rebuild inventories, and that will require more production. Treasury Secretary Michael Blumenthal added, "There is every indication we will be reaching our unemployment target of less than 7% before the end of the year [The rate was 7.3% in March]. Pulling out the rebate does not leave a gap." Bert Lance, director of the Office of Management and Budget, warned: "I do not think current cir cumstances call for any attempt to make up for the current [spending] shortfall through crash attempts to spend more money in 1977."

Senators fidgeted through the testimony. They are angry in part because they had changed the congressional resolution setting budget targets to accommodate the higher deficit the rebate would have produced--and now Carter is asking them to change it back again. Declared Chairman Edmund Muskie caustically: "These moves have constituted a body blow to the budget process. As of this moment, there is no discipline left in the 1977 budget resolution." But there is also real worry that the Administration is being too optimistic about the outlook.

Some economists share that doubt. Alice Rivlin, director of the Congressional Budget Office, notes that real G.N.P. in the first quarter was only 4% higher, and the unemployment rate only two-tenths of 1% lower, than a year earlier. She cautions, "While we may well see more good news in the immediate future, we have a number of reasons for expecting that growth rates in output will slow after midyear and that the unemployment rate at year end will be little improved from the current quarter."

The biggest uncertainty is whether consumers can or will continue their rapid pace of spending. As Rivlin notes, opinion surveys have shown no great consumer confidence in the outlook. Spending increases have outrun rises in personal income, driving down the savings rate; in the first quarter consumers saved only 5-c- out of each dollar of income, down from 7-c- a year earlier and the lowest rate since 1969. Rivlin worries that consumers may have spent so much, in part, not just by choice but to cover high heating bills. To the extent that consumers were spending involuntarily, now that winter is over they will probably be saving more, and they may save an extra amount to fatten the bank accounts that they could not build up during the winter.

Twice Burned. The Administration's optimism could prove warranted. But suppose it does not, and the economy hits the doldrums again? Will the rebate be resurrected or some other gimmick offered? Administration officials naturally will not answer such a question. Senator Muskie, however, does not intend to get burned twice this year. His committee recommended leaving room for a tax cut or rebate in the latest version of the 1977 budget resolution in case Carter has another change of heart.

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