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Bush Economic Plan Stimulates Skepticism

January 12, 2003|Peter G. Gosselin and Tom Petruno | Times Staff Writers

WASHINGTON — Internal White House forecasts show that President Bush's new "jobs and growth" package differs from typical postwar economic stimulus plans in saving its most powerful punch for almost a year -- until the midst of the presidential campaign season.

Critics charge the measure's uncharacteristic timing is proof that its chief aim is to help ensure Bush's reelection in 2004.

But the timing is evidence of something else too, economist Kevin A. Hassett said.

"This is not an economic stimulus," said Hassett of the conservative American Enterprise Institute and whose work administration officials cite in touting the plan.

So what is the 10-year, $674-billion bundle of mostly tax cuts?

As economists and analysts sort through the plan announced Tuesday by the president in Chicago, they are finding that the answer is far more complex than it first appears. And the likely effects are even more complicated -- and in some cases, contradictory -- than the White House is willing to admit.

"This is not going to boil down to one line in the tax code. It's not going to be anywhere near as simple as the president's sound bite might make you think," said former Reagan administration tax expert Ronald A. Pearlman.

The stakes for the plan's success rose Friday when the Labor Department reported that American employers unexpectedly sliced payrolls by 101,000 in December, producing the first back-to-back annual job losses since the Eisenhower administration. The new job declines and weak holiday retail sales have left policymakers fearful that American consumers -- whose buying binge kept the economy going through a stock bust, terrorist attacks and a recession -- may be losing steam.

Part of the president's proposal is designed to directly help consumers by sending them an extra $70 billion this year and $300 billion over 10 years by speeding up income tax cuts that are not scheduled to take effect until later this decade.

The problem is that the extra money people would immediately receive is nowhere near the amount they already have collected under the Economic Growth and Tax Relief Reconciliation Act of 2001. Although the earlier sum is widely credited with having kept the economy from sinking any further than it did, it has failed to produce a return to robust, self-sustaining growth.

But the big questions revolve around the centerpiece of the Bush plan, a $364-billion dividend tax cut whose effects almost no one -- even those who had an early hand in it -- seems able to agree on.

"Is this a great counter-cyclical fiscal policy? It's pretty hard to see," said Harvey S. Rosen, who with Bush economic advisor R. Glenn Hubbard worked on a 1992 Treasury study from which the current proposal was largely lifted.

Using measuring methods of the nonpartisan Congressional Budget Office, it appears that the fiscal jolt the White House plan would deliver the economy in its first year would be less than half the average of post-recession tax and spending actions from the 1950s through the early 1990s. The effects would reach the average only in the second year.

That may help explain why the administration's estimates show its proposal would boost economic growth by only 0.4% this year, but 1.1% in 2004. The projections suggest the plan could have a contracting effect of half a point or more in 2005.

The estimates -- and especially the conclusion that the administration'splan would pack its biggest punch in the midst of the presidential campaign in 2004 -- apparently sparked controversy inside the Bush camp. Bush press aides ordered them yanked from a White House Web site only hours after they appeared following the president's Tuesday speech unveiling the package.

Confusion over the new Bush package was not confined to Washington last week; it also was apparent on Wall Street as analysts weighed the potential for mischief in the details.

Among the possibilities: ballooning federal deficits that push up interest rates and dampen the plan's growth-spurring effects; disarray in personal financial planning as rules of the investment game dramatically shift; and new financial burdens for already strapped state governments, prompting new tax hikes at the local level that offset the federal cuts.

The stock market appeared to greet the plan favorably. The Dow Jones industrial average rose 2.1% last week, to 8,784.89, since details of the Bush plan emerged, though the previous week showed greater gain.

But Wall Street professionals were unable to decide whether the proposal is intended as a stimulus to give the economy a quick lift, a tax reform that will bear fruit only over many years, or something else.

"For a stimulus program, you get fairly low bang for the buck," said Ethan Harris, economist at brokerage Lehman Bros. in New York.

"What does this have to do with fiscal stimulus?" asked William Dudley, an economist at Goldman Sachs & Co. in New York.

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