In Bush tax plan, perception is key

When George W. Bush unveiled his latest package of economic measures, he was engaging in what has become a regular feature of the modern presidency: big gestures aimed at stimulating the economy.

Before the Great Depression, government's job was to keep the federal budget balanced and avoid overregulating business. Then economic crisis hit, and President Hoover resisted spending to mitigate the pain. His presidency was deemed a failure. The lesson, heeded by Franklin Roosevelt and most of his successors, was that Washington must be fully engaged in the nation's economic life - even though textbooks say there's little a president can do about the economy in the short-term.

Presidents, working with Congress, have cut taxes and they have raised taxes, cut government programs, and expanded spending. The once-daunting budget deficit morphed into a surplus for two years, and is now back. But through it all, those presidentswho have succeeded politically have convinced the public, and business, that Washington was "on the case."

"Part of it is a perception game," says George Edwards III, a presidential scholar at Texas A & M. "If people think things will be better, businesses will invest and create jobs. What we're in now is a jobless recovery."

The centerpiece of Mr. Bush's plan is the elimination of taxes shareholders pay on dividends, which would account for about half of its cost, expected to be at least $600 billion over 10 years. The administration also wants to speed up tax cuts scheduled for 2004 and 2006, increase immediately the child tax credit to $1,000, and speed up reductions in the marriage penalty.

The plan also includes a grabbag of other measures: extension of unemployment benefits; faster depreciation of new equipment for businesses; larger write-offs for investments in small businesses; aid to the fiscally struggling states; and a new program to help the unemployed get their feet back on the ground.

A subset of the perception game has been the battle over how the public perceives who would benefit. Democrats, who unveiled their own smaller stimulus plan on Monday, assert that the bulk of the benefits go to well-off investors. Republicans have armed themselves with statistics aimed to prove otherwise: 92 million taxpayers will see an average of $1,083 in tax savings this year, and a family of four earning $39,000 could save $1,100, says White House spokesman Ari Fleischer.

Republicans have also brought back echoes of the Reagan years, when supply-side economics reigned. They argue that the plan will lift the economy in general, pulling down the 6 percent unemployment rate and helping everyone. "They're saying the economy will take off like a rocket," says Stan Collender, a budget expert at Fleishman-Hillard Inc. "That's exactly what Ronald Reagan said. Now, they're either going to validate or kill supply-side theories once and for all."

The risk for Bush, if his plan is enacted, is that budget deficit balloons, which could produce higher interest rates. He has also firmly tied his political fate to the economy - the factor that doomed his father's chances for a second term. "The president is really putting his reelection at stake here," says Mr. Collender. "Who's he going to blame if the economy tanks? The Republicans have control of Congress now."

Some economists don't see a risk for Bush in his plan. In part, the president still has a shield from 9/11, which, while producing a spike in government spending for homeland security, has also won him a large reserve of public goodwill.

"You can never pin down whether the program worked or not, because we won't know how things would have been otherwise," says Joel Slemrod, a professor at the University of Michigan's school of business, noting that an expensive war with Iraq could also expand the deficit and affect the economy. But the short-term stimulus is unlikely to have a significant impact, he adds. "All in all, it's a drop in the bucket in a $10 trillion economy."

Another reason that Bush's gambit isn't risky is that the economy is running below capacity, and so there's "slack" in the system, says Rajeev Dhawan, an economist at Georgia State University in Atlanta. "You do have to watch that the deficit does not go on forever. But the economy should recover and the coffers will fill up.... This fiscal policy reduces the danger of deflation, which is a serious risk."

No perfect historical analogies exist for the current situation, but obvious comparisons come from the Johnson and Reagan eras. "President Johnson tried to fight the war on poverty at home and Vietnam abroad, and that eventually put pressure on the budget, causing inflation and lots of other problems," says William Dale, an economist at the Brookings Institution. "Bush is trying to avoid that."

The comparison with Reagan is closer to what's happening now, Mr. Dale says. Reagan had a big tax cut, a big increase in defense spending, and a sour economy. But after the tax cuts of '81, he was willing to raise taxes in '82 and again in '84. No one foresees a tax increase from Bush.