Analysis of the Macroeconomic Policies at the Start of the Administration
Forecasts are required in order to formulate macroeconomic policy, but the economic world is not known for behaving according to predictions. All kinds of economic and noneconomic events occur to disrupt the best laid plans and upset the most well-meaning intentions. We have already witnessed how the administration and Congress altered the administration's economic program according to their perceptions of the economic situation facing the nation. Now we will try to understand what actually happened in 1977, after which we can examine the administration's response to reality and what was planned for and achieved in 1978.
After the administration withdrew its rebate and business tax credits, the fiscal stimulus for 1977 was reduced by $14 billion. When Congress passed the Tax Reduction and Simplification Act of 1977, the total stimulus turned out to be just over $6 billion ($17 billion for 1978). Included in the tax act were provisions for a flat personal standard deduction, a nonrefundable employment tax credit for 1977 and 1978 that subsidized firms that hired new workers after the firm's wage bill exceeded 2% over the previous year, extensions of some tax provisions enacted in 1975 and 1976 (including a personal income tax credit, the earned income tax credit, and the reduction in corporate tax rates that reduced the rate on income below $50,000), an increase in countercyclical revenue sharing, and some minor changes in the tax code of 1976. In addition, the public works and job-creating programs were approved as submitted.
With these modifications of the administration's original stimulus package, the effects on the economy are shown in Table 4.1. The results are mixed. The 4.9% real growth rate of GNP, while above its long-term rate,