The Economy Needs Quicker Action

Recent weeks have made it clear that the Bush Administration's management of the economy isn't working. Growth is fading, and the economy is in danger of lapsing back into recession. The uncertainties of war in Iraq and what may come afterward is making investors, consumers, and business managers increasingly risk-averse. The possibility of problems with Fannie Mae (FNM ) and Freddie Mac (FRE ), the government-backed mortgage lending giants, is raising fears about what could go wrong in the housing market. And even optimists had to admit shock at the news that payrolls fell by more than 300,000 in February, the biggest decline since the September 11 terrorist attacks.

Of course, the Bush Administration can't be blamed for the economy's ills. Overcapacity remains in many industries and the cold winter is pushing up energy prices (with the impending war sending them even higher). But the White House is having trouble dealing with these problems. President Bush and his advisers have disparaged calls for short-term stimulus as ineffective and unnecessary. Instead, they have pushed long-term supply-side measures -- permanently cutting tax rates on capital to increase the incentives for people to work and for businesses to invest.

These cuts may well be good for the economy in the long term, but they won't do much to spur growth this year. What's more, Bush's big tax reductions threaten to create chronic budget deficits when the Administration should be saving up for a costly fix of the alternative minimum tax, not to mention financing a war and funding Social Security and Medicare programs once the baby boomers start retiring.

Under pressure, President Bush already has backed off from tax-free retirement and lifetime savings accounts. He should also postpone the plan to make most dividends tax-free to individuals. Instead, Bush should press ahead with his plan to speed up income-tax cuts, which would help growth in both the short and long term. A temporary reduction in payroll taxes would immediately put more spending money in the hands of the middle class and working poor. And Bush would also be wise to beef up his bonus depreciation plan, which lets businesses write off a portion of new capital spending immediately. Changing course will be tough for the President, but the fate of the economy requires a flexible, practical approach to fiscal policy.

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