Fri, Jan 31, 2003 page6

• Critics say more needs to be done for US economy

  STIMULUS PLAN While US President George W. Bush and the Federal Reserve have indicated that they believe the economy will pick up, consumers have their doubts

  • NY TIMES NEWS SERVICE
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  By voting unanimously to keep interest rates where they are, US Federal Reserve Chairman Alan Greenspan and the other Federal Reserve policy-makers indicated on Wednesday that they were not overly concerned about the economy's current weakness.

  And in presenting a tax cut plan that will provide only meager economic stimulus this year, US President George W. Bush appears to be signaling a belief that the current stagnation will soon turn to strength.

  This puts both men squarely at odds with American consumers who are quite fearful about the economy, judging by confidence figures released Tuesday that came in at a nine-year low. Stock investors, who are famously positive well before an economic recovery is evident, also seem stuck in a doubting mood, unwilling to bet yet on a turnaround that both Bush and Greenspan seem to be anticipating.

  To be sure, Bush said in his State of the Union address Tuesday night that the sluggish economy was worrisome and evidence that the nation ought to support his tax plan.

  But many economists say that the design of Bush's tax cut may not be enough to keep the economy from faltering in coming months. With an economy this fragile, economists say, both the Fed and the White House should be more aggressive.

  "We needed more from both the Fed and the fiscal side," said Henry Kaufman, an economist at Henry Kaufman & Co in New York. "Against a backdrop of less than 3 percent economic growth, the unemployment rate will rise, tilting perhaps as high as 6.5 percent. Under those circumstances, the Federal Reserve should do more, and fiscal policy should be more responsive to this year."

  Bush wants to eliminate the tax on stock dividends, speed up already scheduled cuts in the income tax rates and increase the amount companies can write off on their equipment purchases, in the hopes of stimulating corporate spending.

  Even if Bush's plan were to sail through Congress, which is unlikely, most of its effects would not be felt until next year. The effects this year of a compromise measure that Bush may be able to push through, economists say, would only total about US$70 billion. That is minuscule in a US$10 trillion economy.

  Because state and local governments will be raising taxes at the same time, there may be little stimulus at all from a federal tax cut.

  "As a general issue, you're not getting that much stimulus in either year compared to the cost to the Treasury," said Ed McKelvey, senior economist at Goldman Sachs. "But it does take a risk if things fall apart fairly quickly. Maybe you ought to have more bang for the buck in fiscal 2003 than later on."

  There are clearly risks to the president waiting to concede just how fragile the economy is. The most significant is that things could become much worse economically before they get better.

  The logic behind designing a plan that focuses more on near-term stimulus, McKelvey explained, would be to get the economy through the current rough spot and allow the American consumer to carry it through next year and beyond. With that in mind, extending tax cuts more broadly among various income levels may have been more effective, he said.

  In addition, a successful plan from Bush is especially crucial now, economists say, because the Fed has been unable to stimulate the economy even after cutting interest rates 12 times since January 2001. Its latest rate cut came last month and brought rates to their lowest levels in more than 40 years.

  But the only part of the economy that has responded to the plunging rates is the housing sector. And unfortunately, growth in housing contributes less to the overall economy now than it did the last time the economy exited a recession.

  What the Fed's interest rate cuts have not been able to do is stimulate demand for the products that corporations make. As a result, corporate profits are desultory, and job cuts keep mounting.

  Many economists think that the unemployment rate will continue to rise in coming months, endangering Bush's popularity. Paul Kasriel, director of economic research at Northern Trust in Chicago, said that he expected the economy to grow 2.25 percent in the first half of this year, a rate that is not nearly fast enough to keep unemployment from increasing. And growth in the money supply has been slowing recently, Kasriel said, "which doesn't augur well for economic activity over the next three to six months."

  All this will put pressure on the president to do more, Kasriel said. And if the stock market keeps on its downward slope, consumer confidence could slip further. He suggested that if Bush lowered marginal tax rates, it would increase the economy's growth potential without setting off inflation.

  A problem for both Bush and Greenspan is that the economy has not yet recovered from the late 1990s boom in which so much capital was misallocated, invested in companies that had no reason to exist. To some degree, only time will allow equilibrium to return to the economy and the stock market.

  "We have just been through the biggest stock market bubble in the history of this country, and along with that bubble we had a lot of ill-advised investment," Kasriel said. "Sometimes you just have to let some of these imbalances that were created run their course. Unfortunately these things don't run smoothly. It's not pleasant, but that's what's going on."
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