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The CEA report implies that holding down the budget will allow the Federal Reserve to pursue a more stimulative monetary policy without fanning inflation. Spending restraint, the report indicates, will also leave open the option of more or larger tax cuts if the economy needs them, and ultimately shift the use of U.S. output in the direction of more investment rather than consumption. Even so, the CEA says that new incentives for savings and investment will probably be needed if the U.S. is to reach "full employment"—now defined as any jobless rate less than 5%—after 1980. A Commerce Department study endorsed by the CEA concludes that business fixed investment would have to rise to an annual rate of about 12% of G.N.P. between now and 1980—v. less than 9.5% expected for 1976—in order to create the jobs needed for full employment. The alternative would be to scrap present laws that call for significant further improvement in pollution controls, which require large investments. The nation would also have to forget about achieving "relative energy independence"—modestly defined as holding oil imports to the 1973-74 level of 36% of domestic consumption. That will require still more investment.
Short range, the darkest cloud hanging over the CEA'S forecasts is money-supply policy. The Federal Reserve Board has lately been undershooting Burns' own target of a 5% to 7.5% annual rate of increase; the nation's money supply has grown at an annual rate of only 2.7% in the past three months. The CEA report asks: Will money-supply growth be appropriate? Its answer: Yes. But that yes is based on Burns' target, not on actual performance, and some economists at the CEA are afraid that the Federal Reserve will not produce on schedule. That and the possibility of a wage explosion resulting from 1976's major round of labor-contract negotiations are the principal dangers to even the modest recovery the CEA foresees.