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Operation Economic Revival


For a President noted for a dogged insistence on getting his way, it was an admission that more than the established world order has changed in the wake of the Iraq war. On Apr. 15, George W. Bush implored Congress to pass a growth package built around "at least $550 billion" in tax cuts -- a far cry from the $726 billion he had sought. And the new reality of yielding ground on the domestic front may not end there. Fueled by worries about the long-term costs of America's foreign intervention, the Senate is inclined to give Bush a maximum of $350 billion in tax reductions, a move that would doom plans to eliminate the dividend tax in 2003.

Although Bush will try parliamentary guile and personal persuasion to raise that number, the fact is he needs a stimulus deal -- any stimulus deal -- fast. Postwar euphoria is fading, revealing an economy still mired in structural problems such as overcapacity, high consumer debt, and weak corporate profits. With reelection looming and new polls showing a sharp divergence between approval ratings for Bush's wartime leadership and his economic stewardship, time for home-front heroics is running short.

That's not to say there aren't positive signs about the expansion. By ending the pall of uncertainty over the war, Bush has set the stage for a growth bounce from the economy's tepid 2% pace. Federal Reserve Chairman Alan Greenspan has done his part, too, by creating a low-interest-rate environment that could spur growth this year. The sharp dip in oil prices -- from a prewar high of nearly $40 a barrel to around $29 now -- will provide a jolt by raising spending power and corporate profits. Allen Sinai, chief global economist at consultants Decision Economics Inc., says the oil price drop is equivalent to a $150 tax cut for each of America's 110 million families.

The economy also could benefit from a postwar revival of investor confidence. Despite a sudden sell-off on Apr. 16, stock prices are still up some 10% from their mid-March lows -- relieving fears of another year of double-digit declines that eat into investors' wealth. Indeed, consumers appear to be shaking off the winter blahs. After stalling out in January and February because of Iraq worries and cold weather, retail sales bounced back in March, rising by 2.1%. Postwar consumer confidence also perked up. The University of Michigan reported on Apr. 11 that its index of consumer sentiment jumped to 83.2 in early April, from 77.6 in March.

The risk remains, however, that a peace dividend could be short-lived. Lynn Franco, who oversees a separate consumer survey for the Conference Board, says the public's new optimism won't last unless it's accompanied by an improvement in the job market. Indeed, confidence rose after the last Iraq war in 1991 only to fall back in subsequent months as the economy staggered through a "jobless recovery."

Twelve years later, the job outlook is again weak. Saddled with overcapacity and made ultra-cautious by tougher accounting scrutiny, CEOs remain reluctant to take on new workers or expand operations. "When the war broke out, our activity level dropped," says Paul F. Walsh, CEO of eFunds Corp., a Scottsdale (Ariz.) supplier of financial debit-card services. "It seems to have come back [to prior levels]. But I haven't seen any burst of new activity."

With unemployment at 5.8% and few signs of new hiring, persistent job worries are a key reason why the economy remains a soft spot for a President who emerged from the war riding high. While more than two-thirds of Americans approve of Bush's overall performance, fewer than half of the electorate is satisfied with his handling of economic matters, according to an Apr. 8-9 Fox News/Opinion Dynamics Poll. Indeed, the economy is now the top concern for Americans. An Apr. 5-6 survey by Winston Group, a GOP polling firm, found that 29% of voters named the economy or jobs as the most important issue in 2004. Only 16% cited national security or terrorism.

That's why Bush, aided by barnstorming Treasury Secretary John W. Snow and Commerce Secretary Donald L. Evans, have launched Operation Economic Revival -- a determined bid to talk up stimulative tax cuts and convince voters that Bush cares about their economic plight. "We need this insurance policy of the President's tax bill," Snow told BusinessWeek on Apr. 14, adding that lower energy prices might not be enough to give a boost to the economy.

Many business leaders agree. "Short-term stimulus would reduce the chances of a double-dip recession," says James Dimon, CEO of Bank One Corp. Adds J.C. Penney Co. CEO Allen I. Questrom: "The tax package is absolutely essential....You've got to create more demand."

For a White House convinced that tax-cutting equals growth, that means some intense arm-twisting for the biggest package that Bush can muscle through Congress. At the moment, the main obstacle is the opposition of a few Senate GOP deficit hawks, among them Senators Olympia J. Snowe (Me.) and George V. Voinovich (Ohio). Unless the President can win some hearts and minds in his own party, the Senate's $350 billion mark could doom the centerpiece of his stimulus plan -- a $396 billion proposal to eliminate individual taxes on corporate profits, including dividends.

To help Bush's cause, conservative groups are pressuring Republican holdouts. But even Bush loyalists doubt that rough arm-twisting will succeed. Mark A. Weinberger, Bush's former assistant Treasury secretary for tax policy and currently vice-chairman for tax services at Ernst & Young, predicts that the final tax cut will be $350 billion unless new offsetting tax hikes or spending cuts can be found.

The prospect of a slimmed-down tax cut has led to a scramble among Republicans. Conservatives want any bill to be built around the dividend tax cut, but GOP leaders are weighing at least three more modest options: Taxing both dividends and capital gains at a rate of 18%; allowing individuals to exclude up to 50% of all dividends from taxation, which Senate Finance Chairman Charles E. Grassley (R-Iowa) likes; or sticking with the full exclusion, but phasing it in to reduce the short-term budget impact.

Even some CEOs wouldn't be crushed if the President deferred the dividend proposal. "The dividend exclusion is an important long-term thing," notes Wilbur L. Ross Jr., chairman of International Steel Group. "I don't think it would be a powerful benefit to the economy in the short term."

With a rewrite of the Bush plan in the offing, lobbyists for heavy manufacturers and tech companies are seeking more generous depreciation write-offs. And techies are pushing a proposal that would sharply cut taxes on foreign-earned income that is returned to a U.S. corporation over the next year. Normally, those earnings would be taxed at the full corporate rate of 35%.

One element of the Bush plan that has broad support is his $150 billion effort to accelerate individual rate reductions slated to take effect in 2004 and 2006. A key disagreement: Some Dems want to freeze cuts for top-bracket taxpayers, an idea that remains a nonstarter for Republicans.

Other popular features would immediately raise the child tax credit from $600 to $1,000 and increase from $25,000 to $75,000 the amount of equipment a small business can write off in the year the gear is bought. Combined, those two provisions would cost $120 billion. The problem: If all such elements are included in a $350 billion package, Congress would have only about $80 billion to satisfy other business demands for tax cuts.

For their part, Democrats have reached consensus on elements of an alternate stimulus strategy, including tax cuts for low- and moderate-income workers; investment incentives, especially for small business; and cash for hard-pressed states. Unlike Bush, most Dems want any tax relief to expire in a year or so to avoid a long-term increase in the deficit.

Of course, a Democratic plan has no chance of becoming law. In the end, the President -- joined by jubilant Republicans and a handful of Democratic defectors -- will appear in the Rose Garden as soon as Memorial Day for a splashy tax-cut signing ceremony. The festivities will momentarily drown out the ominous ticking of an unseen clock, one that tells Bush and his party that, despite all the happy talk about a postwar growth spurt, the time for an economic rebound is rapidly running out. By Richard S. Dunham, Rich Miller, and Howard Gleckman in Washington, with Joseph Weber and Robert Berner in Chicago, Stephanie Anderson Forrest in Dallas, and bureau reports


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