President Bush's new economic team will come to Washington with a ready-made package of tax cuts to stimulate the economy and with high expectations that the new team members can prod the economy out of its doldrums.
Barring a hitch, White House officials plan to announce the new economic team tomorrow, just three days after Friday's abrupt resignation of Treasury Secretary Paul H. O'Neill and White House economic adviser Lawrence B. Lindsey. Stephen Friedman, former chairman of the investment bank Goldman Sachs Group Inc., has accepted Bush's offer to replace Lindsey as director of the National Economic Council, officials said.
A senior administration official said O'Neill's successor will be a business executive who can communicate Bush's policies to economic and business elites, as well as to Congress. Another source described the role as "horse whisperer to Wall Street," where executives felt insulted by O'Neill's cavalier treatment.
White House and congressional sources say the shake-up will have little impact on Bush's economic policies. The new team's role will be primarily to communicate policy, not make it, White House officials said. Lobbyists involved in the discussions said the needs of Bush's reelection campaign are already driving administration discussions about the stimulus package.
One of those lobbyists said Bush's senior adviser, Karl C. Rove, was very aware that President George H.W. Bush did not get credit in 1992 for a recovery that was underway, but only began registering with the public after he had lost reelection.
"The most important thing in '04 is to have a year of economic growth under your belt," the lobbyist said. "People have to hear things are getting better for a long time before they really believe it."
To that end, Lindsey met with top Republican leadership and economic aides last week to present the components of a tax cut package that will be presented early next year as an economic stimulus proposal. The goal, Lindsey told them, is to push the economy to a 4 percent growth rate, about where it was in the quarter that ended in September but well above the current level. Many forecasters say the economy will have grown at an anemic 1.5 percent rate in the final quarter of this year.
Opting against dramatic measures to put money into consumers' pockets, the White House is forming a package that will lean heavily toward investment incentives, senior Republican congressional aides say. It will include some reduction of the tax on corporate dividends, an added tax write-off for corporations investing in plants and equipment, and a higher limit on annual contributions to retirement accounts, such as 401(k)s and Individual Retirement Accounts.
For consumers, the administration is expected to accelerate income tax cuts planned for 2004 to 2003, and is still considering whether to speed up the scheduled increase in the per-child tax credit. Last year's 10-year, $1.35 trillion tax cut slowly increases the child credit from $500 to $1,000, but so far, it has been bumped up to only $600. House Republican leaders would like to see it go higher faster, possibly to $1,000 immediately.
The resignations have delayed the announcement of the tax package until January, administration officials said. Bush had planned to announce the proposal in December in the hope that the House would pass part of it before his State of the Union address at the end of January.
While the contours of the plan seem to be set, the officials said the delay will allow the new team to help shape the specifics. And William Kristol, editor of the Weekly Standard, said he believes the shake-up signals that Bush may now offer "a more creative and bolder plan than people are expecting."
Although the final package is not complete, the menu of options is, one senior Senate Republican tax aide said. Treasury Department tax analysts are working out the details of a reduction in the tax on dividends, for instance, drafting rules to ensure that consumers could not game the system by buying stocks just before a dividend payout, then selling them immediately.
"If they're at this level of detail, it's a good bet they're going to do it," the aide said.
Whether any of this will work to boost the economy is anyone's guess, economists say. The problem for an administration geared up only for tax cutting is stark. The tax cuts could be aimed at getting money to consumers in the hope that more spending will boost the economy, but consumer spending has stayed strong and consumer confidence is already on the upswing.
The tax cuts could be aimed at spurring business investment, but if businesses believe the investment binge of the 1990s has left them with too much production capacity, no amount of tax incentives will get them to invest more, said Sen. Jon S. Corzine (D-N.J.), a former chairman of Goldman Sachs. The temporary tax break for business investment that was approved early this year "has done nothing" so far, Corzine said.
"I really think we're in a position where we have [squandered] our advantages," one Democratic tax aide said, "and I don't know where we go from here."
To make matters worse, state governments grappling with deepening fiscal crises will be working at cross-purposes with the administration, raising taxes and cutting spending just as Washington cuts taxes and raises spending, said Raymond C. Scheppach, executive director of the National Governors Association.
Besides, some economists and lobbyists say, the impediments to a robust recovery may be out of the control of the economic team.
"We're facing uncertainties that have never existed before," said Mark A. Bloomfield, president of the American Council for Capital Formation, a business-backed interest group. "You have the uncertainties of the war, the uncertainties of things like terrorism, the uncertainties of corporate governance."
The job of the new team, and especially the new Treasury secretary, is to establish credibility quickly, Bloomfield said.
The Treasury candidates being discussed in Republican circles include Gerald R. Parsky, a Silicon Valley venture capitalist who was chairman of Bush's California campaign.
Charles Schwab, founder of the discount brokerage firm, is identified with small investors and had good rapport with Bush at his economic summit in Waco, Tex., in August. But Schwab is detested by Wall Street executives for taking shots at them in his commercials.
Republicans said Dennis Weatherstone, who was chairman of J.P. Morgan & Co., would be a choice who would not offend any important constituency.
Other names being discussed in GOP circles include John C. Whitehead, a former State Department official and former chairman of Goldman Sachs who is now chairman of the Lower Manhattan Development Corp. Also mentioned was Peter G. Peterson, chairman of the Blackstone Group, the Federal Reserve Bank of New York and the Council on Foreign Relations. His writings have advocated controversial methods for reducing the deficit.