[Bush's $674 Economic Stimulus Plan ]
ANALYSIS
By Jonathan Weisman
THE WASHINGTON POST
Jan. 8 - Mindful of his pending reelection bid and
his father's political mistakes, President Bush is
plowing ahead with an ambitious 10-year, $674
billion economic stimulus plan even as U.S
troops pour into the Persian Gulf region
preparing for war.
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PRESIDENT'S determination to push more tax
cuts as the nation prepares for war has struck some
economists as folly, since the economic shock of war is
likely to dwarf the impact of Bush's stimulus plan.
Moreover, no tax policy at the moment could actually
address what many economists believe to be the greatest
drag on the nation's economy: the uncertainty of war.
TWO-TRACK POLICYMAKING
"Clearing away the clouds over Iraq would open the
paths for expansion, regardless of what the Bush
administration is proposing," said Robert DiClemente, a
managing director at Salomon Smith Barney who has
studied the potential impact of an Iraq war on the U.S.
economy. "That is undoubtedly the biggest obstacle to
expansion right now."
Bush was explicit
about his two-track
policymaking yesterday,
beginning his speech in
Chicago by addressing
the threats of terrorism,
Iraq and North Korea.
He then added, "Even
as we confront these
dangers, you need to
know I know we have needs here at home, especially the
need for a vigorous and growing economy."
But it is becoming increasingly difficult to address those
domestic needs without first confronting the problems
abroad, economists said. The goal of the president's plan is
to inject $102 billion into the economy this year, by
accelerating planned income tax cuts, excluding investment
dividends from taxation, boosting the child tax credit and
speeding tax relief to married couples. The elimination of
dividend taxes alone could boost the stock market by 10
percent, according to White House allies.
But all of that could be undone by a war in the oil-rich
Persian Gulf region, especially if the war were protracted
and led to terrorist attacks and the use of weapons of mass
destruction. Last month, Yale University economist William
D. Nordhaus published an analysis that dramatized the
uncertainties the United States faces. The cost to the
Treasury of a war with Iraq could be as low as $100 billion
over the next decade or as high as $1.6 trillion, he
concluded. Most likely, the economy would take a $391
billion hit in the next two years, Nordhaus predicted, which
would dwarf the cash infusion the president is offering.
"If energy prices spike up, it wouldn't take much to
offset all of this stimulus," said William G. Gale, a tax
economist at the Brookings Institution.
A recent analysis by experts convened by the Center
for Strategic and International Studies predicted that any
war would knock down stock prices by as much as 25
percent, more than undoing the anticipated benefit of the
dividend tax elimination.
Recovery would depend on how a war with Iraq
unfolded. If the war ended swiftly, stocks and the economy
as a whole would recover quickly and grow at a rate faster
than they would if there were no war, thanks to the lifting of
uncertainty, falling oil prices, higher government spending
and rising consumer confidence. In that event, the Bush plan
could end up harming the economy by fueling inflation or
pushing interest rates higher, said Laurence Meyer, a former
Federal Reserve Board governor who convened the CSIS
conference.
WORST-CASE SCENARIO
But if the war lasted even six to 12 weeks, stock prices
would continue to fall, interest rates would rise and
economic growth would slow by 1 ¾ percent, the CSIS
analysis said. A worst-case scenario - in which the war
dragged on for 90 to 180 days, oil supplies were
significantly disrupted, and serious terrorist attacks ensued
- would push the economy back into recession, regardless
of economic policymaking.
In that case, the economic response would probably be
far different from the one Bush is proposing now, Meyer
said. That range of potential outcomes makes policymaking
at this point "treacherous," he said.
"The best policy right now is to wait, to see what
happens ahead, and to plan in the background some
contingency plans, just in case we have an adverse
outcome," Meyer said.
Not everyone is so cautious. DiClemente said the Bush
proposal could provide a buffer for the shocks that would
come from a war. Bruce Bartlett, a conservative economist
with the National Center for Policy Analysis, noted that a
war with Iraq could be long over by the time Congress
passed a stimulus plan. In that case, he said, Bush might as
well get the ball rolling now.
But, for the president's critics, the timing and boldness
of the Bush plan present an irresistible target.
"Whenever the president talks about war, he talks
about a spirit of shared sacrifice," Gale said. "But for rich
people, shared sacrifice appears to be accepting tax cuts,
and for the poor, it seems to be accepting cuts in social
spending. There seems to be a disconnect bordering on the
dishonest."
Fumed Rep. Charles B. Rangel (N.Y.), the ranking
Democrat on the tax-writing House Ways and Means
Committee, "Never in a time of war have we reduced the
tax burden on the most privileged."
Even some of Bush's allies in past tax fights expressed
exasperation yesterday, given the gathering clouds of war.
"I understand you can't just put everything on the back
burner and ignore it," said Sen. John Breaux (D-La.), a key
ally in the battle over the president's 2001 tax cut. "But
what you can do is take modest steps, and $670 billion is
more than modest."
© 2003 The Washington Post Company
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