Bush Economic Plan Stimulates Skepticism

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.

Virtually all of the confusion about the package centers on the dividend tax cut and on the administration’s shifting explanations for what it would do -- something that economists can’t agree on, either.

Economists have long criticized the current tax system because they say it taxes dividends twice: first when firms make the money, and again when shareholders get it as income. They repeatedly have proposed ways to fix the problem, most recently in the 1992 Treasury study.

Administration officials cited the study last week as supporting the president’s proposal. But a look at the study reveals it proposed not a net tax cut but only a revenue-neutral change of law. And the study’s authors never claimed the change would boost economic growth, only make the economy run more efficiently.

As one economist put it, “It’s not about increasing the size of the pie, but about improving its sweetness,” said Congressional Research Service analyst Jane G. Gravelle, who worked on the 1992 study.

In the years since then, economists have engaged in an arcane debate over whether a dividend tax cut’s chief effect would be to boost existing stock prices or spark new business investment. In making their case last week, administration officials gingerly sought to come down on both sides of the issue.

Officials denied that the goal of the administration’s dividend tax cut is to prop up sagging stocks, a move that would open them to charges of pandering to the rich and of interfering in what’s supposed to be the most free of free markets.

But they steered reporters to a new study by Macroeconomic Advisers, a St. Louis forecasting firm, that concluded the White House’s proposal could push the market up 8% or more. And they happily accepted outside endorsement of the idea.

“President Bush wants to help the ‘investor class,’ ” said Edward Yardeni, economist at Prudential Securities in New York. “Half the benefits of the [White House] package are aimed at the investor class.”

The general notion behind propping up share prices is that it would boost the confidence of shell-shocked investors after three years of market losses, spur extra consumption and persuade those with cash socked away in money market funds and bank savings account to put it back in stocks.

Yet because so much of the stock held by the general public is in retirement accounts, much of the direct benefit of untaxed dividends would be lost: investors still must pay income tax on funds they withdraw from those accounts. In that sense, the idea that investors would feel richer with a dividend tax cut -- and spend more, helping the economy -- is debatable, some analysts said.

Administration officials also argue that by attracting money back to the market, they can persuade businesses to go back to investing in new plants and equipment.

“We can provide ‘growth insurance’ against the key risk facing the economy: a delay in the recovery of business investment,” said Hubbard, now chairman of Bush’s Council of Economic Advisors.

To Prudential’s Yardeni, the Bush plan, along with the Federal Reserve’s decision last year to push short-term interest rates to 40-year lows, amount to a double-barreled campaign on behalf of the stock market -- that is, an attempt to make stocks more appealing compared with most of the alternatives.

Yardeni said the administration and the Fed are concerned about the huge sums Americans have built up in cash accounts such as money market funds and bank savings accounts since 1999. Trillions of dollars in those vehicles are earning almost no interest, and are effectively a vote of no confidence in the economy and the stock market.

“In a sense, savings accounts are the proverbial money under the mattress,” Yardeni said. “Both Fed Chairman Alan Greenspan and President Bush are working hard to discourage this behavior.”

But attracting Americans back to stocks and investment is a risky proposition. There is no guarantee that the market will perform well over the next decade even if the economy grows. Many analysts who are bearish on stocks say the problem isn’t the underlying economy, but simply that share prices rose so much over the last 20 years.

That long rally pushed stocks far ahead of where they should fairly be based on companies’ fundamental earnings power, market bears say. And the decline of the last three years, they say, hasn’t fixed that problem.