Bypassed Last Chance to Spur Economy : Commerce: The President rejected a priming plan that economic adviser Michael Boskin proposed last year, sources say.

In hindsight, some White House officials now say, it was probably President Bush’s last chance to deal forcefully with the long-ailing economy in time to make a difference for his reelection hopes.

In the fall and winter of 1991, Michael Boskin, Bush’s chief economic adviser, proposed a temporary economic stimulus package containing significant tax cuts, coupled with a long-term deficit reduction plan calling for caps on future government spending.

But the package was scuttled by the President’s other senior advisers, who believed that recovery was just around the corner and who wanted to avoid another bruising tax and budget battle with Congress, according to White House officials who requested anonymity.

So the opportunity slipped away--and with it, perhaps, the President’s final chance to take bold action on the economic issues that have dominated the 1992 presidential campaign.

Boskin’s anti-recession plan would have required the President to officially declare an economic emergency, a dramatic move designed to demonstrate that Bush was taking the nation’s economic woes seriously.

By law, the declaration would have allowed Bush to temporarily suspend some of the rules of the 1990 budget agreement, which restricts the Administration’s ability to cut taxes unless it finds some way to immediately make up for the lost federal revenue.

Liberated from the restrictions of that accord, Bush then could have proposed a major tax cut equal to 1% of the nation’s gross domestic product, or roughly $50 billion to $75 billion a year.

The tax cut was designed to get the economy moving again, but it would have increased the federal deficit in the short term. So Boskin proposed that the Administration tie the tax cut to a multi-year deficit-reduction effort calling for even deeper spending cuts, to take effect automatically in two or three years when the economy was in better shape, sources said.

The package included proposed limits on the future growth of rapidly growing entitlement programs, such as Medicaid and Medicare. Such proposals to cut entitlements would have been highly controversial, but a commitment to long-term deficit reduction would allow Bush to maintain credibility with the financial markets. Any stimulative package that did not address the ballooning national debt could have prompted the markets to drive up interest rates on fears of rising inflation and heavier federal borrowing demands.

Boskin’s plan was never adopted by the Bush Administration. In an interview, he declined to discuss past policy disputes.

But sources said Bush and his other senior advisers dismissed the proposal. Not only were they convinced that the economy would recover in time for the election, but they were also reluctant to reopen their bloody battle with congressional Democrats over the 1990 budget agreement. As part of that controversial deal, Bush had made his fateful decision to renege on his “read-my-lips” campaign pledge not to raise taxes.

Indeed, a major tax cut proposal might not have fared well in Congress last year. At the time, the Democrats seemed more intent on revving up the economy through increased federal spending than through Republican tax reductions. Proposing an aggressive tax-cut stimulus plan might have projected boldness, but it would have come to naught if Congress considered it a partisan ploy.

Still, the Administration’s reluctance to take action throughout 1991 reflects a serious misreading of the economic outlook. Many economists now say that some sort of stimulus program--roughly the size proposed by Boskin--was just the sort of shot in the arm that might have revived the economy. The effects of a stimulative package adopted in the fall of 1991 probably would have begun to kick in by mid-1992, giving Bush badly needed momentum heading into the fall campaign.

“If a stimulus package had been passed late last year, I happen to believe that George Bush would be getting reelected right now,” said Allen Sinai, chief economist of Boston Co. Economic Advisers, a New York research firm. Sinai urged Bush to consider stimulus proposals in a White House meeting last year.

In retrospect, the Administration’s failure to take dramatic action on the economy last year now appears to observers both inside and outside the White House to have been a significant miscalculation.

“It was a lost opportunity,” said David Hale, an economist at Kemper Financial Services in Chicago.

“If Bush had done a stimulus package of about $50 billion, he’d be getting reelected,” noted Rudy Dornbusch, an economist at the Massachusetts Institute of Technology who has endorsed Clinton.

Many economists believe that the idea of adopting a fiscal stimulus package will resurface as soon as the campaign is over. The next president may have to try to jump-start the sluggish economy almost immediately after taking office in January.

Boskin initially promoted his economic recovery plan in the fall of 1991, and again during the budget planning process later in the winter. But it proved too drastic for other Administration officials.

Bush’s top domestic advisers--Treasury Secretary Nicholas F. Brady, White House Chief of Staff John Sununu and Budget Director Richard Darman--thought the recession was ending and that Bush’s triumph in the Gulf War would carry him through the election year.

As a result, they disagreed with Boskin over the need for Bush to change his economic rhetoric and policies, sources said.

In addition, several sources said, the Administration’s bitter battles with Congress over the 1990 budget agreement had left Sununu and Darman wary of doing anything that would require Bush to go back to Capitol Hill seeking major economic legislation. Bush himself was said to be reluctant to go to the mat with the Democrats again.

By the fall of 1991, however, private analysts were becoming increasingly pessimistic about the prospects of recovery, and so was Boskin. Gulf War euphoria had dissipated, consumer confidence was plunging and the Federal Reserve’s long series of interest rate reductions seemed to be having almost no effect on economic activity.

The recession, which supposedly had ended the previous spring, seemed to be rearing its head again on the eve of the 1992 election season. Boskin believed that Bush had to take action quickly.

But to Boskin’s dismay, the grim new developments were not being acknowledged in Bush’s public comments, which remained consistently upbeat.

The President sounded out of touch, telling the American people the economy was on its way back, that good times were just around the corner.

Through the fall, Boskin was blocked each time he tried to get the President’s comments changed to reflect the more somber reality. He found that his personal access to the President had all but evaporated.

Finally, Boskin delivered an ultimatum to Sununu: Either the chief of staff would let him talk privately to the President, or Boskin would resign.

Sununu relented, and Boskin told Bush that the economy was in much worse shape than his senior staff was letting on. And, he warned, 1992 wasn’t going to be much better.

Bush listened, and responded. Almost immediately, his rhetoric was toned down, and phrases were inserted into his speeches that indicated that he recognized that people were hurting, that the economy was still troubled.

Still, Bush was unwilling to move beyond rhetoric, and fiscal policy remained effectively frozen. The White House’s economic strategy continued to rely primarily on the Federal Reserve to boost the economy through lower interest rates.

In early 1992, Bush proposed an economic growth package, but a far more modest one than the plan advocated by Boskin. Unveiled in his State of the Union address in January, the White House package was purposefully small and “deficit neutral” so the 1990 budget agreement would not have to be suspended or renegotiated. That would prevent Congress from savaging the existing budget rules, but it also lessened the potential impact on the economy.

The package was quickly brushed aside by the Democrats in Congress, and hopes for a White House anti-recessionary program soon died.

Ultimately, Bush was forced to launch his reelection campaign without a stimulus program in place to improve the short-term economic outlook.

And that, above all, is the issue on which American voters seem most unforgiving. A recent University of Michigan survey found that public approval of government economic policies is at its lowest level since World War II.

“A fiscal stimulus program would have been good economics, and even more, it would have been good politics,” argued Sinai. “There are not many Presidents who don’t try to fix the economy in time for an election.”