Bush fiscal stimulus: Will it help?

President Bush unveils a plan to spur the weak economy. A key goal: Boost business confidence.

President Bush is about to become the first resident of 1600 Pennsylvania Avenue to propose two economic stimulus packages during his first term in office.

The Bush tax cut, Part 2 - which the president plans to unveil at a Chicago appearance Tuesday - is focused largely on an economic recovery that is still not creating many new jobs. Not exactly the performance a president can use to trumpet strong economic stewardship. The Democrats are already letting Mr. Bush hear about this.

Americans, too, will soon be feeling the effects of state budget woes, either through tax hikes or cuts in services.

The new stimulus plan is also tied closely to a lesson Bush learned from his father: When it comes to the economy, there is no such thing as trying too hard. "He needs to court the American family that has gone through hard times if he is to be reelected," says Fred Dickson, director of research at D.A. Davidson & Co. in Lake Oswego, Ore.

Thus, on Tuesday, Mr. Bush will unveil a new attempt to rewrite the tax laws and give a fiscal kick in the pants to the economy. Unlike his first $1 trillion tax cut, the latest effort will be more targeted, especially to the nervous business and investment community. If the President is to get those new jobs he wants, he'll have to count on businesspeople confident enough about the future to build new plants and hire new workers. And, to get the money they need to build those factories, they will need healthy stock prices - indicating that investors, too, are confident.

Thus, the centerpiece of the stimulus package is expected to be a reduction in the taxes paid on dividends and a temporary opportunity for business to get bigger write downs of equipment purchases. The dividend cut - although controversial - might enable some companies to get their stock prices up by, in essence, giving investors a bigger cut of the profits.

There will be something for the man in the street too: a speedup of a prior rate cut, perhaps a child care tax credit, and an extension of unemployment benefits. And, in an effort to broaden the political appeal of the bill, there might be some help for troubled state budgets. The details, including the cost, will be released when the President addresses the Economic Club of Chicago. But, there are reports it will cost $600 billion over 10 years.

"It's an attempt to make us feel better," says John Silvia, chief economist at Wachovia Securities in Charlotte, N.C. "It says 'We care, we're doing something.' "

But even before the President could detail his new package, Democrats lambasted it and promised to derail it. They called it an effort to help the rich and well-connected. Sen. John Kerry of Massachusetts told the Associated Press that the package is "a stimulus mirage, not a plan for economic growth." President Bush quickly retorted that his critics wanted to make his plan a matter of "class warfare."

Some economists have doubts as well. The first year of the plan might add as much as $50 billion to the economy. But, in an $11 trillion dollar economy, this amount of money might not be enough to get past an asterisk in an economic history book.

"It's just too big an economy for it to make much of a difference," says Barry Bosworth, a senior fellow at the Brookings Institution in Washington.

Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis calls the plan an acceptable "insurance policy. [But] don't expect it to work miracles."

Take the timing, for example. Although Mr. Bush will quickly send his plan to Congress, there will be heated hearings over it. Even with Republican control of both chambers, it might not get to the White House until June. The stimulus will start in the third and fourth quarters when economists believe the economy will already be back on a growth track.

"The economy will be doing quite well and won't need a fiscal stimulus," predicts Mr. Silvia. "Let's be careful about this."

Still, this might not be a normal business cycle, because there is the uncertainty of war with Iraq hanging over the nation. Uncertain about what is going to happen, business is reluctant to make big investments. Firms are postponing hiring. Only consumers seem willing to spend.

"The most important thing the president can do is get the Iraq situation out of the way as soon as possible," says Mr. Sohn. "It would lead to a boost in confidence and a dramatic drop in the price of oil that would be several times as strong as the tax cuts."

Some economists, in fact, have doubts about the efficacy of cutting the tax on dividends. Corporations, pension funds, endowments, and individual 401(k) and IRA accounts hold a significant number of shares of companies that pay dividends. The proposed tax reduction would do nothing for them.

"It's a very limited targeted benefit," says Mr. Dickson.

Other presidents have also made the same suggestion, since dividends are taxed twice: once at the corporate level and then again for the taxpayer. President Carter considered making this tax change only to be surprised when business opposed it. They viewed it as good for the investor, but not necessarily for business. Capital that could be plowed back into their business is spent on attracting shareholders instead.

But, this attitude may be changing. Dan Meckstroth, chief economist at the Manufacturers Alliance/MAPI in Arlington, Va. says the change will help management take a longer view. He says CEOs may not focus so much on quarterly earnings improvement, but will look more closely at their basic business.