Stimulating Economic Debate May Define 2004

January 11, 2003

If the many announcements that various Democrats are or are not running for president weren't enough to signal the start of the 2004 campaign, the fight that broke out over competing economic stimulus packages surely was. The differences between the proposals offered by President Bush and by House Democrats provide an early outline of how the 2004 presidential campaign debate may shape up.

Smarting from criticism even from Republican economists that early drafts of his economic plan would have failed to really stimulate the sluggish economy, President Bush "heavy-upped" his proposal, coming in with a $674 billion, 10-year plan that went far beyond anything his economic or political advisers had predicted just a few weeks ago.

Clearly, the White House knows that the public's focus might not always remain on the administration's strong suits, foreign policy and the war on terrorism, for which Bush received 65 percent job-approval ratings in two combined December Ipsos-Reid/Cook Political Report polls. The spotlight could shift to the economy or to other domestic issues, for which Bush's approval ratings are just 51 percent and 50 percent, respectively. Bush may face significant re-election problems if the economy, or the public's perception of his domestic performance, or both don't improve a lot before 2004.

Knowing that the president was preparing to release his economic plan, newly minted House Minority Leader Nancy Pelosi, D-Calif., jumped the line and announced an alternative plan from her caucus. That $136 billion package is considerably more front-loaded for a more immediate stimulus and directs most of its largesse toward working- and middle-class families. The House Democrats' package is remarkably and uncharacteristically restrained, in sharp contrast with the proposals they made in trying to keep up with President Reagan during the tax-cut bidding war of 1981. Today's Democrats are pursuing a strategy of tax cuts aimed at revitalizing the economy immediately and reaching the broadest number of taxpayers (read voters).

Democrats argue that the White House seeks to cut federal taxes of all kinds, particularly taxes on the wealthy, without regard to whether the cuts would be an efficient way to jump-start the economy or what long-term effects they would have on budget deficits.

The White House contends that the fastest way to stimulate the economy is to lower tax rates, particularly for small-business owners. The administration argues that 92 million taxpayers would receive an average tax cut of $1,083 in 2003 under its plan.

The consensus among economists seems to be that the White House is much less able than the Federal Reserve Board to influence an economic downturn and that many of the tools used to stimulate sluggish economies have already been deployed. Thomas Gallagher, a Washington-based political economist with the ISI Group, points out that the federal funds rate is at its lowest ever and, even adjusted for inflation, interest rates are lower than at any other time since the mid-1970s. Adding in the increased federal spending since 9/11, Gallagher figures that the economy has received more fiscal stimulus than during any other recession in the last 40 years, more even than the Reagan defense buildup and tax cut provided. That suggests that little more can be done: The economy will recover when it recovers.

While the president is likely to get pretty much what he wants out of the House, a great deal of compromise will have to occur if he is to persuade the Senate to adopt his stimulus package. The White House starts with just 51 Republicans in the Senate and must fight to hang on to an array of GOP liberals and moderates, plus a handful of mavericks and deficit hawks. And Sen. Zell Miller of Georgia is the lone conservative Democrat who can be depended on to offset any losses from the GOP column. The odds are that the president will get much but not all of what he wants. Senate Democrats have yet to weigh in, and they are much more likely than their House counterparts to have a real role in shaping the final package.

With true philosophical differences being fought over out in the open, this is a political debate worth watching. This fight could well define how both major parties are viewed for the duration of the 2004 campaign.