ECONOMIC

on investment would increase with inflation, thereby adding a risk premiumto the rate of return required to undertake new investment projects. Thusthe cost-price uncertainties which could be associated with high inflationbecause of larger, more frequent, and less predictable changes in relativeprices may eventually discourage business spending. In the long run theeffect of inflation may be negative as market interest rates adjust to offsetthe inflation stimulus and only the negative effect of greater uncertaintyremains.Another factor which will call for moderation at a later stage if theexpansion is to be sustainable is the current uncertainty about the level ofpotential output in the U.S. economy and the likelihood that the potentialhas been growing at a lower rate in the 1970s than during most of the 1960s.There is also some uncertainty about the unemployment rate that shouldbe used to represent a constant degree of tightness in the labor market atfull employment either now or in the future. These uncertainties suggestthe wisdom of proceeding with a greater degree of caution in our returnto full employment than was previously thought necessary. (These and otherfactors that bear on long-run economic growth are discussed more fullylater in this chapter.International considerations provide a further reason for maintaining asteady recovery. If a too rapid expansion at home is accompanied by rapidexpansions followed by bottlenecks in other major industrial countries,inflationary forces can be intensified by worldwide excess demand forstrategic commodities. On the other hand, in a situation where the world'seconomic development is lagging, it is important that U.S. growth shouldnot be so slow as to contribute to sluggishness in world trade. This wouldreinforce rather than alleviate demand deficiencies and increase the risk ofanother recession.FISCAL POLICYECONOMIC POLICY FOR 1977With these general principles in mind, the President has proposed apermanent tax cut for individuals and corporations which will reduce taxliabilities by about $12.5 billion in calendar 1977. The largest part ofthe tax cut, $10 billion, would go to individuals in the form of higher personalexemptions, an increase in the low-income allowance, and lower taxrates. The rest would go to corporations in the form of a 2 percentage pointreduction in the corporate income tax rate. Federal expenditures on anational income and product accounts (NIPA) basis are expected to be$429 billion in 1977. This will yield an actual deficit of $57 billionfor the year and a decline in the full-employment surplus of $13 billionin 1977. As private sector spending continues to expand, it is expectedthat the Federal deficit will gradually diminish to make room for the necessaryprivate savings flows to finance new capital formation.31