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Even if Congress cooperates fully, the deficit could grow much beyond $29 billion unless the economy behaves the way that the budget predicts. Deficits are the shakiest figures in any President's budget, and next year's look shakier than most. Warns liberal Economist Arthur Okun: "If I were President Carter, I would not put that $29 billion figure in lights on the Washington Monument."
To keep the deficit from swelling above $29 billion, the economy will have to grow by at least 2.2% this year and 3.2% during 1980. At the same time, inflation will have to subside from more than 9% at present to about 6% by the end of 1980, while unemployment must not climb above 6.2%. It is almost impossible to say whether those goals will be met. Most economists believe that high interest rates are bound to bring at least a mild recession later this year or early in 1980. That would not only cause tax receipts to fall and unemployment payments to rise but might even panic Congress into quickly enacting a stimulative program that would simply increase the deficit.
On the other hand, waiting for the recession could be like waiting for Godot. Figures released last week showed that even at this late stage of one of the longest peacetime expansions, the economy is surprisingly robust. During the final quarter, last year's production of goods and services grew at a high annual rate of 6.1 %. One reason was that the three-year-old surge in home construction still has plenty of life left. Starts of new houses and apartments hit a near record annual rate of 2.1 million. Meanwhile, personal income last month once again rose faster than inflation, meaning that family paychecks, as well as receipts from interest payments, dividends and rents, are growing faster than inflation is eroding their value.
Carter's economic advisers point to the statistics as further support for their forecast that there will not be a recession in 1979. Says one ranking Cabinet member: "The weakness of all these forecasters is that they're using the past to predict the future. No one is yet taking into account the new psychology and behavior that is affecting the economy." The new psychology supposedly is that despite warnings of recession, Americans are continuing to borrow and spend because it is hard for them to stay ahead of inflation by saving and investing. Also, people are saving less than in earlier years because they figure that generous private pensions, Social Security, Medicare, unemployment compensation and other Government programs will take care of them if and when they become aged, ill or jobless. This buy-now psychology is a major reason why the economy continues to grow in spite of rising interest rates and out-of-sight prices for everything from hamburger to houses.
Yet it would be foolish to hope that consumer spending will buoy the economy for another several years.
Capital spending to build, buy or expand factories and machines is vital for healthy long-term growth and the creation of jobs and wealth. Even though much of America's productive machine is old, and some of it is not competitive against Europe's and Asia's, U.S. businessmen have been reluctant to invest. With inflation raging, they have not been able to calculate that a dollar committed to capital spending today will pay for itself several years in the future.