Bush's Big Bet on Growth

Remember the military doctrine of overwhelming power in the first Gulf War? Well, here comes the economic doctrine of overwhelming stimulus following the second Gulf War. The Bush Administration, with help from the Federal Reserve, is advancing on all fronts -- cutting taxes, hiking government spending, nudging the dollar lower, talking corporate bond rates down, helping corporate profits rise, pushing mortgage rates lower, and pumping up the money supply. Rarely in U.S. history have so many spigots been opened so wide to pour so much liquidity into the economy. The goal is to move the stock market higher, spark growth, and expand jobs -- all in time for 2004. The strategy is an entirely appropriate short-term tactic to combat deflation, but it is a risky bet on long-term growth. The President is taking big chances.

His $350 billion plan packs a short-term punch. Thanks to sunset provisions in 2005, the child credit and marriage-penalty breaks are front-loaded for 2003 and 2004. So is federal aid to states, which will be parceled out this year and next. Making big cuts on all brackets of marginal income taxes and stock dividends retroactive to Jan. 1 accelerates their economic impact as well. Expanding depreciation on capital spending to 50%, but only through 2004, should increase investment. And the market is already responding to the big surprise in the package -- the cut on capital gains and dividends taxes, to 15% through 2008, long enough to affect stock (and house) valuations. Investors are realizing they're about to get significantly higher aftertax returns. The falling dollar is pumping up profits and prices, too. In 1985-86, when the dollar fell about 20%, the Standard & Poor's 500-stock index rose 40%. The market crashed in 1987 partly because foreign investors suffered heavy losses on the dollar and split.

The worry is that a similar pattern could emerge again in the years ahead. A weak dollar might turn off foreign investors and reduce critically needed overseas capital. Deep tax cuts could produce deficits so big that interest rates begin to rise, hurting investment and growth. Federal Reserve Chairman Alan Greenspan linked rising budget deficits with higher interest rates in his latest testimony to Congress. The 11-year cost of the $350 billion tax cut will total $1 trillion if the sunset provisions are extended. If the 2001 tax cut is also extended past 2010, the cumulative budget deficit could hit $4 trillion or $5 trillion by the end of the decade.

That's just when the big baby boom generation starts to retire. The Bush Administration is betting that its tax cuts will generate enough additional economic growth to pay for much of this deficit. This is far from certain, as a recent series of economic models using dynamic scoring by the Office of Management & the Budget has indicated. More likely, the boomers will face a choice sometime toward the end of the decade, perhaps around the Presidential election of 2008, between their relatively generous Social Security and Medicare retirement payments or their relatively generous tax cuts. The current Bush Administration economic strategy does not make choices. Short-term, we don't have to. Eventually, we all must.

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