Tonic, Not Cure, Analysts Say of Bush Fiscal Rx

President Bush’s mild new election-year elixir for the ailing economy may serve as a tonic for the country’s immediate recession symptoms, but it contains nothing to deal with the fundamental ills that underlie the slump and threaten the nation’s long-term prosperity, economists and other analysts said Wednesday.

Although some Democrats have sharply criticized the new Bush plan as too weak, there is wide agreement among experts that it is peppy enough to perk up the economy and possibly even bring the unemployment rate down a bit by election time--provided Congress enacts the plan quickly, as Bush has asked.

But analysts warned that the package does not fully address the economy’s more serious problems: the need for massive long-term investment in new plants and equipment that will enable American companies to match the quality and productivity of foreign competitors, or for substantial improvement in education and other components of modern economic strength.

Some analysts also questioned whether the Bush blueprint will appear bold enough to stem the recent erosion of public confidence in his management of the economy or the increasing nervousness about a financial system whose fragility has contributed to the recession and could pose bigger problems in the future.

“What’s wrong with the economy is not something that one speech by any Administration could address--the message was light on that,” said Allen Sinai, economist for the First Boston Co., a New York investment firm.

William C. Melton, economist for IDS Financial Services in Minneapolis, complained that there was “not much in” the package “for stimulating saving or investment or improving the skills of our workers.

“It was perhaps realistic in a political sense,” Melton said, “but still kind of disappointing. I still don’t see that there is any consistent economic strategy involved.”

And Lawrence Kudlow, economist for Bear, Stearns & Co., the New York investment house, pointed out that for all its other merits the new Bush program does virtually nothing to help trim labor costs or increase productivity.

“For the long run, we have to have more capital and we have to have more labor, and they have to be affordable,” Kudlow said. Bush “attacked the capital side,” Kudlow said, “but he left the labor side untouched.”

The Administration itself virtually conceded that the impact of its new program is likely to be mild. Wednesday’s budget documents suggested the package probably will add only a scant 0.6% to economic growth this year, boosting it to 2.2%--only one-third as fast as the rate of growth in a typical recovery.

Analysts said that many elements of the package seem unlikely to provide any substantial kick at all. The changes in withholding-tax rates would provide only $300 a year to the average taxpayer, and that only temporarily because the smaller withholdings would be balanced by smaller refunds at the end of the year.

And the $500-a-child boost in the personal exemption means relatively little to most taxpayers.

Lyle Gramley, economist for the Mortgage Bankers’ Assn., said the most powerful stimulus in Bush’s package may well come from his tax breaks for first-time homebuyers.

Gramley says the faster depreciation writeoffs for businesses also may spur some short-term buying of new facilities and equipment.

The package also contains some dampeners. Although it was not emphasized by the Administration, Bush is proposing a freeze on most domestic spending programs, except for Social Security, and on most federal hiring.

Still, Rudolph G. Penner, an Urban Institute economist, argued that the most encouraging thing about the new package may be that it isn’t more potent. If it had been, Penner said, it probably would have exacerbated the budget deficit--and sent interest rates quickly soaring.

“We don’t need it and we can’t afford it, so it’s just as well,” Penner argued, noting that the impact of a larger stimulus package probably would have come too late anyway.

Even so, analysts warned that there could be some potential adverse side-effects--partly because to hold the budget deficit in line, Bush had to eschew any major new stimulus and rely on shifting spending and tax-collections between 1992 and 1993.

As a result, the changes that Bush ordered in withholding-tax collections may be offset in early 1993 when many taxpayers find they are getting smaller-than-usual tax refunds.

“All that does is bring forward some purchasing power,” said Paul W. McCracken, a former presidential economic adviser in the Richard M. Nixon Administration. “It doesn’t add anything to it for the year.”

McCracken also worried that the extra incentives Bush proposed for home sales may ultimately prove counterproductive by stimulating housing artificially.

Roger Brinner, economist for DRI/McGraw-Hill, a Lexington, Mass., economic forecasting firm, predicted that Bush’s plan could spur spending enough to push the jobless rate down by half a percentage-point by election time, placing it “somewhere in the 6.5%-plus range.”

“But the longer Congress takes to enact the plan, the less that’s likely,” Brinner said.

McCracken, however, is more pessimistic about the impact of the package, predicting only that while the measures “might start the expansion a little sooner and make it a little more vigorous,” they are unlikely to produce a sharp rebound.

Still, Kudlow argued that given the political realities, Bush’s proposal wasn’t all that bad.

“The public is now hearing a much different, expansionary message” than Bush has propounded for most of the past two years, Kudlow said. “I think it’s going to do some good.”

President’s Tax Plan

Some key tax elements in President Bush’s economic plan:

An increase in the personal exemption, now $2,300, by $500 a child. It would save a typical two-child family in the 28% tax bracket $140 when fully in effect in 1993

Lower tax on capital gains--sales of big investments such as homes and stocks--to 15.4% from 28%

$5,000 tax credit and penalty-free withdrawal from individual retirement accounts for first-time home buyers

Use of IRA withdrawals for medical and educational expenses

Repeal of luxury tax on airplanes and boats

Tax deductibility on interest paid on student loans

A package of tax breaks for businesses, including a 15% investment tax allowance

A permanent 20% research and development tax credit

Modified “passive loss rules” for active real estate investors and deductions for losses on personal residences

A cut in the amount of income tax withheld from Americans’ paychecks

What the tax withholding change means

The cut in income withheld from paychecks will amount to an estimated $175 for a single taxpayer over the next year and $345 for a married couple. But it will not be a tax cut; Americans who meet their tax obligations would eventually have gotten the money back as refunds. Under the Administration plan, the change in withholding rates will go into effect automatically as early as Feb. 10--or as soon after that as an employer has a chance to adjust to the new rates.

Employers will have no obligation to notify workers that the rates are being changed.

Internal Revenue Service officials say that if an employee wants to continue having taxes withheld at the current rates, he or she should ask the employer for a new W-4 form and fill in Line 6 to request that withholding be at the higher rates. To determine the amount of extra withholding, take the $175 or $345 difference, whichever is appropriate, and divide it by the number of pay periods (52 if paid weekly, 26 if paid biweekly).

Source: Staff and wire reports