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January 17, 2003
US Economy: Will Bush’s Plan Work?
Yes, it ought to from all available indications so far.
Yet, there is no dearth of skepticism even among the non-partisan economists about the likelihood of the Bush stimulus package, announced on January 7 at the Economic Club of Chicago, delivering the projected boost to the sluggish economy.
The Democratic leadership has labeled the Bush plan as an “illusion” designed to favor the rich by robbing the public exchequer. It was further accused of pandering to partisan interests instead of catering to the objective needs of the economy.
The economy being in bad shape, the Democrats too came out only a day earlier with a package of their own. But it is of a much smaller size, of $ 136 billion compared with the $674 billion plan of President Bush.
That the economy has been in doldrums and was heading into deflation is indicated by (i) the drop in the stock market for the third consecutive year -the first such drop since the Great Depression, (ii) the reduction of the interest rate to the rock bottom level of 1.25 % - the lowest over the past 40 years- yet its inability to promote investment, and (iii) the unemployment rate crossing the 6% mark -the highest in decades.
To simply survive, businesses were constrained to shed, on an average, some 40,000 job every month. The figure jumped to 80,000 job losses last October and 100,000 in November.
In order to set right the distortions, a really bold and audacious plan was needed. The Democrats’ package, though front-loaded, would have merely tinkered with the economy and served largely as a palliative instead of working as a curative. The size and likely impact of the Bush package, $674 billion, should be considered against the size of the nation’s economy of $10.5 trillion with 30 billion annual increments.
The main objectives of Bush proposals are to buttress and invigorate the stock market and to encourage consumer spending considering its vital role in the economy. Federal Reserve’s Chairman, Alan Greespan had reduced interest rate eleven time in 2001 and once in the following year till it touched the lowest level of 1.25%. He had no more arrows left in his quiver. The usual method of reducing the interest rate to boost the economy had thus proved fruitless. Much bolder measures were needed to be really effective. The package proposed by the President seems to fill the bill. Its main measures are as follows.
¨ Taxes paid by shareholders on dividends will be scrapped.
¨ Income tax cuts originally planned for 2004 and 2006 are brought forward to this year, with the reductions retroactive to 1 January.( This reflects the urgency felt by Bush administration to jump start the economy).
¨ The 10% tax band will be increased to the first $7,000 of income from $6,000.
¨ The child tax credit will increase from $600 to $1,000.
¨ Tax benefits for married couples are to be brought forward to this year.
¨ The amount a small business can write off against investment in new equipment will rise to $75,000 from the current $25,000.
¨ About $3.6 billion will be given to the States to help the unemployed back to work.
It is estimated that these measures would give 92 million taxpayers an average tax cut of $1083 this year.
As for the usual rhetoric about favoring the rich, it ought to be remembered that any cut to prod the enormous economy must largely be a cut for the rich, because they are the one who pay huge amounts in taxes. Usually, the top 20 % of taxpayers pay 65%, the next 20% pay 19.9% and the remaining 15% pay a meager 15%.
Almost half of the package amount, that is $300 billion, will represent the savings accruing to the shareholders as they will not be required to pay any income tax on the profits received by them on their shares.
This would serve as a psychotherapy for a nation that has become in recent years fixated on the stock market. Eighty per cent of the American households own some stocks. The consequent boost to the share market and to consumer spending would spur investment and growth. It would put more money into the hands of the consumers in an economy that relies heavily on consumer spending for growth.
The timing and tilt of the Bush package are, however, not totally free of political considerations.
It is pertinent to recall here that Bush senior, who had emerged as a national hero winning the Gulf war a decade back, lost an election soon afterwards because of the economic recession. Although the economy had started moving up prior to the elections, his opponent, candidate Clinton, had concentrated on scaring the voters with the prospects of a bleaker economy if the Democrats were not allowed to tune it up. He continued to harp on this theme almost incessantly with the result that the voters retained the perception of a bleak economy despite the economy showing an upward trend. Perception usually lags facts; and often perception becomes the reality. Clinton took advantage of this, strengthened the skewed perception, and defeated Bush senior.
Now his son does not want to repeat the mistake. The U.S. economy had grown at an annual rate of 4% during the quarter July-September,2002. Some Republican leaders therefore were in favor of letting the economy alone to follow its own course of growth. But President Bush, learning from his father’s mistake, wanted to accelerate its pace so that the fruits of a thriving economy become available to the voters far ahead of the elections next year. Some view in this context the recent removal of three members of the President’s economic team including the Treasury Secretary, Paul O’Neil and White House economic adviser, Lawrence Lindsey. This conveyed the impression that the President was unhappy with the status quo and was determined to launch measures to turn the economy around.
His economic package would likely become the center-piece of his campaign in next year’s Presidential election. The table would be turned on the Democrats. The meager size of their own plan and its immediate benefits to the voters would not admit of its presentation as a better alternative.
They may harp on the theme of the Bush package favoring the rich and putting the nation much deeper into debt. Such themes would be too obtuse and far-removed in impact to have much effect on the views of voters.
Bush would go to the poll promising to give the people back their own money - nothing wrong with that. Since the rich had paid the most, they would get back the most and hopefully reinvest the windfall. The trickle down effect would bring into play the “compassionate capitalism”. The Bush prescription would fail only if the rich and mighty hoard their pay-back amounts and sabotage the dictates of benevolent capitalism and the candidature of a member of their own class. Such a development is obviously very unlikely.
The only specter haunting the proposals is that of the war in Iraq. The former White House economic adviser, Lawrence Lindsey, had predicted the cost of the war to range between $100 to $200 billion. People at large had started questioning the wisdom of such an enormous outlay at a time when the economy was passing through dire straits. The long-term advantage to an oil-based industrial economy of the control on Iraqi oil wells could hardly be spelled out for fear of aggravating further the sensitivities of a majority of the international community. Lindsey had to be eased out of office and the estimate of war expenditure of $100 to $200 billion was revised to $50-$60 billion. The reduced estimate and the 12- time higher outlay on the proposed economic package make the expenditure on a war in Iraq much less worrisome for the voters. All such calculations would be roiled if the uncertainty surrounding the war takes an ugly turn. The package, otherwise, will be productive of the desired results.
(Arifhussaini@hotmail.com)
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