Stimulate the Economy, Sure. The Question Is How

Negotiations point up big differences on key relief issues

By all accounts, the war against terrorism is beginning well on many of the fronts outlined by President Bush in his ringing address to Congress. The U.S. has assembled a broad coalition of countries pledged to isolate Islamic radical Osama bin Laden and his Taliban protectors. The Pentagon is moving a potent strike force of troops and bombers to the borders of Afghanistan. And with $100 million in suspected terrorist finances already frozen, the Treasury Dept.'s bid to dry up bin Laden's funding is off to a respectable start.

But the most halting part of this multifaceted campaign is the battle to rev up a domestic economy rocked by September 11's terror strikes. Congress and the White House are inching closer in attempts to fashion antirecession relief. But key decisions have eluded negotiators, and talks may stretch for several more weeks. In Washington, this pace is considered sizzling. But to anxious CEOs, 30 of whom huddled with the President in lower Manhattan on Oct. 3 to plead for new tax cuts, the process of shaping a stimulus package is taking a lot longer than many think is prudent.

One reason for the drawn-out process is that George W. Bush is determined to forge a bipartisan consensus for any initiative that erases the budget surplus. Just how determined can be seen by the protests of GOP hard-liners. They complain that Bush is tilting toward Democrats' ideas for progressive tax cuts and social spending while neglecting Republicans' calls for generous business breaks and sweeping rate reductions. The backbench bickering is so intense that editorialists at The Wall Street Journal, who have until now been solidly pro-Bush, warn that a wimpy stimulus plan that neglects big cuts in marginal tax rates may leave the economy vulnerable later, a la George H.W. Bush.

White House and Hill leaders are still leery of any plan veering off into big deficits. But on Oct. 3, Bush signaled he would be willing to wade into a little red ink by accepting $75 billion in new incentives. That's $23 billion more than the latest projection for the fiscal 2002 surplus. CEOs who met with Bush weren't fazed, either. "Sometimes you have to have deficit spending," said Maurice R. Greenberg, chairman and CEO of insurance giant American International Group Inc. He believes it's justified to give the economy "a little shove."

Still, finding just the right formula to propel the economy forward is a complex challenge for policymakers. Any plan must reflect Democratic calls for putting fast cash in consumers' hands and aiding dislocated workers. At the same time, it must heed GOP demands to cut tax rates and give business breaks it was denied in the President's initial $1.35 trillion tax plan. "Bipartisanship," says G.William Hoagland, GOP staff director of the Senate Budget Committee, "can be very expensive."

Here's how the negotiations are shaping up:

Bolstering Business Conservatives feel that in an investment-led slump, business needs special incentives to spur capital spending. But their ideas, such as a capital-gains cut and a permanent reduction in corporate rates, have faded amid doubts about cost and efficacy.

Instead, negotiators are looking at liberalized depreciation and first-year expensing of equipment, ideas that would rapidly boost cash-flow. The latter enjoys the backing of key Senate Democrats, such as Finance Committee Chairman Max Baucus (D-Mont.) and Budget Committee Chairman Kent Conrad (D-N.D.).

Democrats are willing to buy some business cuts, but insist that the breaks phase out fast. "The last thing we should do," says Conrad, "is worsen our budget outlook with permanent tax or spending measures."

Consumer Cash Democrats are winning concessions on pleas for new "demand-side" stimulus. Talks focus on a tax rebate for poor workers who didn't qualify for the first round of refunds. A payroll-tax cut of 1%-2% is also on the table. As a sweetener to Republicans, Democrats may extend the payroll credit to employers, as well.

Expanding the Safety Net In return for supporting a bailout for airlines and other hard-hit businesses, Democrats won a GOP pledge for new worker assistance. Likely elements: The 26-week unemployment insurance benefit will be extended by at least 13 weeks, states will be able to tap disaster-relief funds to help the jobless, and idled workers will get subsidies to continue employer-provided health insurance. Another sure bet: The minimum wage, currently at $5.15 per hour, could be hiked by at least a dollar. "There's a critical mass building for worker relief," says Edward Wytkind, who heads the AFL-CIO's September 11 response team.

Although this consensus-building is slower than many would like, the movement is in the right direction and the desire to keep bipartisanship going is strong. "It's important to keep the sense of unity going," says Democratic pollster Mark Mellman. Adds Princeton University political scientist Fred I. Greenstein: "Clearly, this kind of unity has a half-life. But [Bush] is proving to be very pragmatic."

While the new mood won't last forever, it's still something to be savored. To veterans such as Senator Richard G. Lugar (R-Ind.), quibbling about stimulus details "misses the mark. All kinds of [opposing ideas] have to be put into such a package for the sake of consensus." That's because consensus, as much as any tax credit, seems to be emerging as a key psychological element of the economic rescue drive.

By Lee Walczak and Richard S. Dunham, with Howard Gleckman and Alexandra Starr in Washington, and Heather Timmons in New York

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