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THE C H A .'PMAN OF THE
C O U N C IL OF E C O N O M IC A D V IS E R S
WASHINGTON

May 19, 1979

MEMORANDUM FOR THE PRESIDENT
From:

James T. McIntyre, J
Charles L. Schultze

Subject:

Economic Assumptions for the
Mid-Session Review

Background
We have to make a final decision, early next week, on
the economic assumptions to be used in our Mid-Session
Review of the budget, which has to be sent to the Congress
this summer. That review must set forth economic projections
and budget estimates through fiscal 1984.
The long-term economic projections in the Economic
Report and the Budget issued in January were consistent
with the economic goals established by the Humphrey-Hawkins
Act — a 4 percent overall unemployment rate and a 3 percent
inflation rate by the end of calendar year 1983. They
were therefore very optimistic. While neither the Economic
Report nor the Budget implied that these goals could in fact
be achieved simultaneously, the estimates and projections
in the Budget were based on these assumptions.
In addition to being unrealistic, the use of overly
optimistic economic assumptions causes serious problems
for long-term budgetary control; it subverts the goals of
our 3-year planning and tracking system. Because both
inflation and unemployment are understated, the future
year outlay totals are misleadingly low. In the case
of receipts, the unrealistica^ly low inflation assumptions
are broadly offset by the unrealistically high projections
of real income growth. Thus future year surpluses —
which are sometimes viewed as budgetary resources available
for program initiatives or tax cuts — are overstated.




- 2-

The unrealistic assumptions also seriously impair
the usefulness and destroy the credibility of long-term
budget plans in the Defense Department and other agencies
with fully-funded programs. Use of Humphrey-Hawkins
inflation assumptions understates the defense request,
and will inevitably lead to what appear to be "cost
overruns" but are in fact a result of unrealistic inflation
assumptions.
The Humphrey-Hawkins Act stipulates that the January
budget be consistent with the medium-term economic goals,
and requires the President to review progress toward those
goals in the 19 80 and subsequent Economic Reports. The
Act permits the President to recommend modification of the
timetable for achieving these medium-term economic goals
in the 19 80 and subsequent Economic Reports, if necessary.
The Act does not explicitly refer to what we must do in
the Mid-Session Review. In theory, the Mid-Session Review
could ignore Humphrey-Hawkins. In practice, this would
violate the spirit and intent of the law.
Our current internal economic forecasts have much
higher inflation and somewhat weaker economic growth for
1979-1980 than the January assumptions. We will need to
modify our 1979 and 1980 public forecast for the Mid-Session
Review in this direction to maintain credibility. A new
forecast will mean that achievement of the 1983 targets
would require even more rapid (and less realistic) declines
in inflation and unemployment, and increases in real growth,
in 1981-83.
The Congress, in developing its budget resolutions,
need not and does not meet the medium-term Humphrey-Hawkins
goals. During the debate on the 19 80 Resolution in the
House, Representative Giaimo inserted into the record a
fact sheet on the economic implications of achieving the
Humphrey-Hawkins goals by 1983. The conclusions of the
fact sheet were:
(1) "A very optimistic economy must be
assumed to reach Humphrey-Hawkins goals by 1983."
(2) "There
are inconsistencies between the unemployment, growth and
inflation objectives that create severe problems accompanying
any effort to reach the Humphrey-Hawkins objectives in
5 years."




-3Economic Assumptions for the Mid-Session Review
Even though the Humphrey-Hawkins Act does not technically
apply to the Mid-Session Review, failure to acknowledge the
Humphrey-Hawkins economic goals would clearly violate both
the intent of the law and Administration support of its
goals. On the other hand, the use of economic assumptions
consistent with Humphrey-Hawkins would — to put it mildly —
require great optimism and would seriously understate the
level of outlays and overstate the potential surplus in
future years.
In order to avoid this dilemma, we are planning to
use alternative economic assumptions for the Mid-Session
Review. The detailed multiyear planning base numbers would
reflect economic assumptions that are more realistic than
the Humphrey-Hawkins goals. The Mid-Session Review would
contain a separate section discussing the Humphrey-Hawkins
goals and present — but only in very aggregate terms —
budget projections consistent with Humphrey-Hawkins.
The strongest proponents of Humphrey-Hawkins both
inside and outside government will object to this change,
arguing that the alternative economic projections we are
recommending dilute the commitment to the Humphrey-Hawkins
goals. We believe that the use of only the Humphrey-Hawkins
assumptions would be extremely costly in terms of sound
budget planning and public credibility. More realistic
assumptions can be defended in the name of conservative
and prudent budgeting, and the commitment to the HumphreyHawkins goals can be at least formally maintained in the
discussion of the alternative Humphrey-Hawkins economic
projections.
Agree
Disagree

cc:

Vice President Mondale
Secretary Blumenthal
Mr. Eizenstat
Mr. Watson





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