Democrats countered with their own $136 billion plan, which would expand unemployment benefits by 26 weeks, give all workers a refundable income tax rebate of up to $300 per person, and give states about $31 billion for homeland security, transportation, Medicaid and critical needs assistance. Both plans offer small business incentives to encourage job growth and investments and an extension of unemployment benefits. But with the GOP controlling the White House and Congress, the Democrat’s plan is seen as more of a suggestion, Bush’s as a starting point. The President has a lot riding on the success of his proposals. He hopes the plan will boost consumer spending, stock values, economic growth and job creation–and put him in a better position for re-election in 2004. NEWSWEEK’s Jennifer Barrett spoke with Alan S. Blinder, co-director of Princeton University’s Center for Economic Policy Studies and former vice chairman of the Federal Reserve Board and member of President Clinton’s first Council of Economic Advisers, on what the plan’s passage would mean for the average American and for Bush’s Presidential prospects.
NEWSWEEK: What was your initial reaction to the plans proposed by President Bush and by the Democrats?
Alan S. Blinder: Bush’s plan is big in every sense and audacious. Clearly, it’s meant to put him in a bargaining position from which to be bargained down, which is probably smart strategy. The Democrats are in a poor position being in the minority in both houses. I see this as an indication of what they’d like if they were in charge, but realistically the negotiations will start with the President’s plan. The thing that was passed last year under the guise of stimulus was not stimulus in any sense – it was a crummy bill. There are lots of things in both party’s proposals that are an improvement on what we did in 2002. A major problem I have with the President’s plan is its huge size. We’re talking about $670 million in the long-term and $98 billion in the first 16 months. It’s light in first year but awfully heavy in the years after.
The price tag for the GOP plan doubled from original estimates last month. How concerned should we be about the long-term effects this could have on the U.S. deficit?
It is a lot of money. When they talked about bringing the 2001 tax cuts forward, a lot of us thought that was giving away too much in the long run and it ought to be scaled back. But I’m not clear as to whether the accelerated tax cuts would be permanent or would expire in eight years. If they’re permanent, that will have a good deal more effect on the deficit. You’d get a really large number if you maintain the tax cuts into the indefinite future and then enhance that by eliminating the tax on dividends.
How might possible war with Iraq affect Bush’s plan? Do you think that was a factor in some of the long-term proposals?
In terms of whether we need the long-term measures or not, the answer will only be clear after the bombs start falling in Iraq. If things go very smoothly in the war with Iraq–presuming there is one–it could actually be a boost. Oil prices could go down, and confidence could go up. But there is a lot of downside risk involved in waging war on Iraq. If oil prices increase, we could be in for a recession. The cost of the war should really be factored into it. When you layer one on top of the other, you paint a pretty bleak economic picture. I don’t worry about the deficit widening in 2003. There is a prospective war and the case for sizable fiscal stimulus–so, fine, blow the budget for a year. But I get worried about things that do long-term damage. We are desperately short of revenue, and there is no surplus.
The Democrats’ proposal is much smaller.
Yes, it’s a question of timing. Do we need long-term incentives or not?
President Bush says his goals are to increase consumer spending and promote investment by both individuals and businesses to speed up the economic recovery. Will this plan do that?
There’s not a lot in there to boost consumption other than the extension of unemployment benefits (which both parties support with good reason), except for the possible effects on the stock market. To the extent the plan succeeds in boosting the market, it will encourage consumer spending. There are also pieces of the accelerated tax cut that put money into the hands of lower-income earners, who tend to spend it faster than high-wage earners. But I’m one in the upper-income bracket and I don’t think the tax cuts would effect my spending.
But would the $300 tax rebate proposed by the Democrats have any effect on your spending?
No, that wouldn’t do much either. Though I like that even workers who don’t pay taxes can get it, which wasn’t true of the 2001 rebate.
The elimination of the federal tax on dividends is the centerpiece of the GOP plan. Some Republicans are estimating the value of stocks could increase 10 percent of more as result of the cut. Is that realistic?
It struck me as high, but I think it’s anyone guess. Anyone who thinks they can estimate what the cut will do to the stock market is suffering from extreme hubris. I don’t. I think it is reasonable to assume it will boost the market, but how much, I don’t know.
Will the accelerated tax cuts be enough to boost the economy? It sounds like supply-side economic policy.
Yes, that can be enough, but I have a lot of questions on the boost outside of the dividend tax cut. If the stock market behaves anything like they say it will though, you get a reasonable amount of stimulus out of the package in the first year.
What happens if it doesn’t?
This is a big gamble. It won’t look good if Bush’s plan doesn’t boost stock prices. It would take away the biggest chunk for hope for stimulus and make it a lot weaker, and it will look like the GOP gave away tax revenue to people who didn’t need it. Whereas if it lights a fire under the stock market, there will be much more widespread benefits. The lion’s share will go to those who invest, of course, but there will be perceived and actual benefits to many people with a boost to consumer spending.
Were there any surprises in either plan?
Actually there were lots of surprises in Bush’s plan. Up until a day or two ago, I was not expecting Bush’s plan to be anything nearly this large. Bush’s proposed re-employment accounts [$3,000 grants to job seekers] –I’d never heard of that. The acceleration of all the 2001 tax cuts to immediacy–I was not expecting that. There were a lot of surprises.
How much of these proposals do you think we’ll see in the final version?
I’d imagine we’ll see a good deal of them, but I’m very, very doubtful that the 100-percent exclusion on tax on dividends will survive. I think the Democrats will line up against it and some Republicans could peel off as well. There’s likely to be some opposition to the plan. Fundamentally, I think it was an opening bid in what the White House believes will be a negotiation. But the negotiations will start from the Presidents plan. The worrisome thing is that, traditionally, negotiations between the White House (regardless of who is President) and the Congress over tax cut proposals usually end in the tax cuts going higher. It would be scary to think of this one getting larger, rather than smaller, during the negotiations. I hope that does not happen.
