How Bush Will Stoke the Engine

Tax cuts are a near-certainty, with business set to score

George W. Bush seems to be drawing two big lessons from his party's thumping Nov. 5 election victory: Voters like his bash-Iraq policy, and they're willing to give the White House a little more time to fix the faltering economy.

With an Iraq invasion likely by early next year, the President has a small window to weigh measures aimed at jump-starting the sputtering expansion. And Corporate America hopes he seizes the moment. "Now is the time to step on the gas," says Pfizer Inc. CEO Henry A. McKinnell. "It's time to start talking seriously about a stimulus package."

Revving the nation's economic engine represents more than an opportunity for a newly empowered President--it's a political imperative. "Republicans now have the ability to do many of the things they wanted to do," says Mark Kvamme, a partner at Sequoia Capital, a Silicon Valley venture-capital firm. "They will have no excuses."

Trouble is, Bush's economists are still debating the details of his 2003 agenda. Treasury Secretary Paul H. O'Neill, worried about the impact of a huge stimulus on the deficit, wants to limit the size of any package. Besides, he believes the nation's economic malaise is limited largely to a few sectors, such as tech and telecom. White House economic adviser Lawrence B. Lindsey, who frets that a sluggish stock market could drag the economy down, wants to aid hard-hit investors and consumers. Council of Economic Advisers Chairman R. Glenn Hubbard, meanwhile, thinks puny investment is the culprit and wants to target tax relief to business. Then there's Bush political guru Karl Rove, who fears the electoral consequences of a bad economy and favors strong measures ASAP. Sighs one top official: "There is no common agreement on what the problem is."

In the end, economic conditions in early 2003 will shape the package. If the economy appears to be slowly gaining momentum, Bush will be tempted to offer just a sprinkling of short-term incentives while pushing aggressive, longer-range tax cuts. But if things start unraveling, turning Federal Reserve Chairman Alan Greenspan's concerns about an economic "soft spot" into a swamp of malaise, the President will push a bigger stimulus plan. Its focus: quick tax relief for individuals and investment incentives for businesses.

No matter which path Bush takes, don't expect a stimulus package that balances tax reduction with the big-time spending favored by some. "You'll see relentless pressure for tax cuts," says Brookings Institution economist William Gale.

If the economy improves on its own, the Administration will cast stimulus as a bundle of initiatives aimed at improving long-term prospects for growth and job creation. The centerpiece: making Bush's 2001 tax cuts permanent. Under this sunnier scenario, the President would also propose making it easier to contribute more money to 401(k)s and Individual Retirement Accounts. To aid the jobless, Bush will agree with Democrats to extend unemployment benefits to out-of-work Americans. The result: lots of lofty talk about boosting the economy, but not much in the way of the emergency fiscal measures that econo-worrywarts favor.

But if growth slows sharply from the third quarter's 3.1%, as many economists predict, the White House will go on red alert. The odds then favor a stronger stimulus package, in the neighborhood of $100 billion or more. Among possible relief measures: accelerated rate cuts for individuals, tax breaks for scorched investors, new incentives for corporations to buy equipment, and cash to states facing budget crises. A slow-to-heal economy, says GOP strategist Ed Gillespie, "is the greatest threat overhanging the Republicans and President Bush for the next two years."

While a weak economy poses long-term risks for Bush, it also presents short-term opportunities. It allows him to market the GOP tax agenda as economic stimulus. And it makes it more likely that Democrats will sign on. Already, key Democrats, including Senator Joseph I. Lieberman (Conn.) and Representative Richard A. Gephardt (Mo.)--both Presidential aspirants--are backing their own versions of tax stimulus. Instead of debating future cuts, "we need one now," says Democratic strategist James C. Carville.

One sign of the new political dynamic in Washington: There could be bipartisan backing for business tax breaks despite the bad aftertaste left by this summer's corporate crime wave. Under the rubric of stimulus, oil-and-gas producers are in line for billions in tax goodies to boost domestic production. But the Administration's focus will be to provide companies with more generous breaks for capital investment. Earlier this year, business got faster write-offs for equipment purchased before Sept. 11, 2004. Administration officials are now considering ways to sweeten those incentives. One possibility: making the depreciation rules permanent. Another: making them more generous for a limited time to encourage companies to speed up purchases.

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By Howard Gleckman and Richard S. Dunham, with Lorraine Woellert, in Washington, and bureau reports

— With assistance by Lorraine Woellert

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