Mindful of his pending reelection bid and his father's political mistakes, President Bush is plowing ahead with an ambitious 10-year, $674 billion economic stimulus plan even as U.S troops pour into the Persian Gulf region preparing for war.
The president's determination to push more tax cuts as the nation prepares for war has struck some economists as folly, since the economic shock of war would likely dwarf the impact of Bush's stimulus plan. Moreover, no tax policy at the moment could actually address what many economists believe to be the greatest drag on the nation's economy: the uncertainty of war.
"Clearing away the clouds over Iraq would open the paths for expansion, regardless of what the Bush administration is proposing," said Robert DiClemente, a managing director at Salomon Smith Barney who has studied the potential impact of an Iraq war on the U.S. economy. "That is undoubtedly the biggest obstacle to expansion right now."
Bush was explicit about his two-track policymaking yesterday, beginning his speech in Chicago by addressing the threats of terrorism, Iraq and North Korea. He then added, "Even as we confront these dangers, you need to know I know we have needs here at home, especially the need for a vigorous and growing economy."
But it is becoming increasingly difficult to address those domestic needs without first confronting the problems abroad, economists said. The goal of the president's plan is to inject $102 billion into the economy this year, by accelerating planned income tax cuts, excluding investment dividends from taxation, boosting the child tax credit and speeding tax relief to married couples. The elimination of dividend taxes alone could boost the stock market by 10 percent, according to White House allies.
But all of that could be undone by a war in the oil-rich Persian Gulf region, especially if the war were protracted and led to terrorist attacks and the use of weapons of mass destruction. Last month, Yale University economist William D. Nordhaus published an analysis that dramatized the uncertainties the United States faces. The cost to the Treasury of a war with Iraq could be as low as $100 billion over the next decade or as high as $1.6 trillion, he concluded. Most likely, the economy would take a $391 billion hit in the next two years, Nordhaus predicted, which would dwarf the cash infusion the president is offering.
"If energy prices spike up, it wouldn't take much to offset all of this stimulus," said William G. Gale, a tax economist at the Brookings Institution.
A recent analysis by experts convened by the Center for Strategic and International Studies predicted that any war would knock down stock prices by as much as 25 percent, more than undoing the anticipated benefit of the dividend tax elimination.
Recovery would depend on how a war with Iraq unfolded. If the war ended swiftly, stocks and the economy as a whole would recover quickly and grow at a rate faster than they would if there were no war, thanks to the lifting of uncertainty, falling oil prices, higher government spending and rising consumer confidence. In that event, the Bush plan could end up harming the economy by fueling inflation or pushing interest rates higher, said Laurence Meyer, a former Federal Reserve Board governor who convened the CSIS conference.
But if the war lasted even six to 12 weeks, stock prices would continue to fall, interest rates would rise and economic growth would slow by 1 3/4 percent, the CSIS analysis said. A worst-case scenario -- in which the war dragged on for 90 to 180 days, oil supplies were significantly disrupted, and serious terrorist attacks ensued -- would push the economy back into recession, regardless of economic policymaking.
In that case, the economic response would probably be far different from the one Bush is proposing now, Meyer said. That range of potential outcomes makes policymaking at this point "treacherous," he said.
"The best policy right now is to wait, to see what happens ahead, and to plan in the background some contingency plans, just in case we have an adverse outcome," Meyer said.
Not everyone is so cautious. DiClemente said the Bush proposal could provide a buffer for the shocks that would come from a war. Bruce Bartlett, a conservative economist with the National Center for Policy Analysis, noted that a war with Iraq could be long over by the time Congress passed a stimulus plan. In that case, he said, Bush might as well get the ball rolling now.
But, for the president's critics, the timing and boldness of the Bush plan present an irresistible target.
"Whenever the president talks about war, he talks about a spirit of shared sacrifice," Gale said. "But for rich people, shared sacrifice appears to be accepting tax cuts, and for the poor, it seems to be accepting cuts in social spending. There seems to be a disconnect bordering on the dishonest."
Fumed Rep. Charles B. Rangel (N.Y.), the ranking Democrat on the tax-writing House Ways and Means Committee, "Never in a time of war have we reduced the tax burden on the most privileged."
Even some of Bush's allies in past tax fights expressed exasperation yesterday, given the gathering clouds of war.
"I understand you can't just put everything on the back burner and ignore it," said Sen. John Breaux (D-La.), a key ally in the battle over the president's 2001 tax cut. "But what you can do is take modest steps, and $670 billion is more than modest."