The Policy of "Self-Fulfilling Prophecy"

IN his budget and economic messages, President Nixon has formally embraced what his Eisenhower Administration colleague, the late Treasury Secretary George Humphrey, disparagingly called a "spend yourself rich" philosophy. The strategy is to spend nearly every cent that present U.S. tax rates would bring in from an ideal, fully employed economy--far more than the Government has any chance of collecting from the underemployed economy that now exists. The hope is that the flow of dollars from Washington will sharply lift the economy out of the 1970 recession and put at least 1,000,000 jobless Americans back to work.

For the fiscal year beginning next July --fiscal 1972--Nixon set a new rule for spending. Administration economists first calculated how much revenue the tax system would bring in if the U.S. jobless rate were only 4%--the current definition of "full employment"--instead of the present 6%. The figure came out at $229.3 billion, which one top budget drafter concedes may be "overly precise." In any case, that became the guide--after the November elections disclosed the political impact of a soft economy. Nixon declared last week that by proposing spending almost up to that limit but not beyond it, he had designed a budget that is "expansionary but not inflationary." Economists widely accept the idea that deficit financing is not overly inflationary so long as Government outlays do not exceed prospective full-employment revenues.

$20 Billion Error. In fiscal 1971, Nixon now estimates spending of $212.8 billion, revenues of $194.2 billion and a giant $18.6 billion deficit. For fiscal 1972, he predicts spending of $229.2 billion, revenues of $217.6 billion and a deficit of $11.6 billion. Although the President is proposing to shrink the deficit, his new budget is actually far more adventurous than the one he unveiled a year ago. The fiscal-1971 deficit is the unforeseen result of a $20 billion forecasting error; Nixon had originally budgeted a $1.3 billion surplus.* His projections were knocked askew by the recession, which is holding revenues about $8 billion below early estimates and forcing higher spending for such things as unemployment compensation and interest on the national debt. By contrast, the fiscal-1972 deficit will be intentional.

Nixon calls this policy an exercise in "self-fulfilling prophecy: by operating as if we were at full employment, we help to bring about that full employment." The prophecies to be self-fulfilled are decidedly optimistic. In the budget, the President predicts a gross national product for calendar 1971 of $1,065 billion. That would represent a rise of more than 9% from $977 billion last year, an increase that has been achieved only three times in the past 19 years. Personal income is expected to jump from $801 billion to $868 billion, enough to give the average U.S. family $1,300 more in pocket this year. Corporate profits are predicted to soar from $82 billion to $98 billion. The Council of Economic Advisers forecasts that unemployment will average slightly more than 5% during 1971, drop below 5% by the end of the year, and reach "the 41% zone" by mid-1972. The CEA also sees the rate of inflation averaging almost 41% during 1971, but dropping to about 3% at year's end. Its measure is the so-called G.N.P. deflator, the nation's most comprehensive price index, which rose 5.3% last year.

Inside Doubts. Altogether, the Administration is predicting a much better performance than private economists expect. The standard forecast among non-Government economists puts 1971 G.N.P. at $1,045 billion to $1,050 billion, or $15 billion to $20 billion below Nixon's figure. Many economists also are skeptical that the jobless rolls will go down as fast as Washington anticipates. Even within the Government, there appear to be strong doubts. The $1,065 billion G.N.P. forecast was the work of the increasingly powerful George Shultz, director of the Office of Management and Budget, and the Council of Economic Advisers report did not quite endorse it. The well-hedged report said that the standard forecast of private economists is a "possible outcome" but that "it seems more likely" that G.N.P. "could be as high as" $1,065 billion. Early drafts of the report raised serious questions about just what would send the economy up so fast; the CEA heavily edited its analysis to bring it into line with Shultz's notions.

Nixon recognizes that he cannot make the official predictions come true by budget policy alone. The budget message spelled out two other requirements: the independent Federal Reserve must increase the nation's money supply rapidly enough "to provide fully for the growing needs of the economy," and labor and business must show "increased restraint in wage and price decisions." Most private economists would add a third requirement: the consumer somehow must be inspired to start spending a greater share of his income.

Jawboning Everybody. The President is trying his powers of persuasion to meet all three requirements. He will do more jawboning against unions and companies that raise wages and prices excessively. In the economic message, he pledged "to use all the effective and legitimate powers of the Government to unleash and strengthen those forces of the free market that hold prices down."

The President has also been jawboning Federal Reserve Chairman Arthur Burns to pump out money faster, announcing that Burns has assured him that the board will issue as much money as the economy needs. Burns has never confirmed that commitment, and his idea of what the economy needs seems to differ from Nixon's. Some Federal Reserve economists figure that in order to make Nixon's predictions come true, the board would have to increase the money supply at a 9% to 11% annual rate, almost double the 5% to 6% pace of recent months. Burns and his fellow Fed governors deeply fear that so great an increase would be highly inflationary.

Nixon's glowing predictions also constitute a kind of jawboning of the U.S. consumer, urging him to cheer up and spend confidently. The consumer could use some cheer. Seventy-four percent of those questioned in a Gallup poll in early January, for example, said that they expected unemployment to rise this year. The economic news so far has not been the sort needed to produce instant exuberance. Last week the Government reported that consumer prices in December rose at an annual rate of 6%, continuing the average rate that made 1970 the most inflationary year since 1951.

Risk of Overpromising. The economy could fall well short of Nixon's goals and still make 1971 a fairly pleasant year of increasing production, profits and jobs. Nixon's budget strategy is probably the right one for that outcome. The economy definitely needs stimulation, and the level of spending that the President proposes does not seem overly inflationary; prices are now being lifted not by excess demand but by a wage-cost push. A vigorous incomes policy coupled with structural reforms would combat this type of inflation more effectively than a budget hold-down. But Nixon is running a serious risk of making a relatively good year look disappointing by predicting faster improvement than can be realistically expected. That could produce an economic as well as a psychological and political backlash. One reason that consumers are so skeptical now is that they remember earlier Nixon forecasts of noninflationary prosperity --which proved wrong.

* As late as Oct. 23, Commerce Secretary Maurice Stans was declaring: "Estimates of a deficit from $15 billion to $20 billion made by so-called economic experts outside the Administration are highly speculative and, in my opinion, grossly exaggerated."

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