Electoral Stimulus Calculus

The White House realists, who have their eyes focused on November 2004, want to buy insurance that the unemployment rate, now 6 percent, will head down well before the 2004 elections. They concede that the economy is likely to grow at a rate of at least 3 percent this year, and more rapidly next, even without the so-called stimulus package, which should bring the jobless rate down. But they want insurance against, among other things, the possible depressing effects of continued high oil prices.

So to them this is indeed a stimulus package, designed to pep up the economy. But they have another reason for sticking the stimulus label on the president’s proposal: Democrats who have been shouting that the economic sky is falling can hardly oppose a stimulus, and are reduced to objecting to the amount and form of the stimulus, rather than to the need for such a shot in the arm to the economy.

The president also has 2004 in mind. But he has also taken advantage of the fact that the truth-in-labeling laws don’t apply to politicians by pasting a “stimulus” label on some of his long-term objectives.

Start with the centerpiece, the proposal to end personal income tax on dividend income that has already been taxed at the corporate level. This provision accounts for about $300 billion of the $670 billion of tax relief projected over the next ten years. If eliminating the personal tax on dividends does increase payouts, as firms such as Oracle hint it might, more funds will be available to whatever enterprises investors find most attractive, rather than being locked into the companies that prefer to retain the money for their own use. Which is why big business has always opposed this change, which will help to revive capital markets as the mechanism that allocates capital among competing enterprises. Shareholders, their money in hand, can decide whether to return it to the corporations that paid it out to them, or to other, more attractive enterprises.

Whether increased dividends will also help to drive up share prices, as the White House contends, is less certain. James Poterba, an economist at the Massachusetts Institute of Technology, says prices might rise by some 5 percent; the White House puts the number at twice that. But even if the White House is correct, and the so-called “wealth effect” cuts in–an effect, one should note, that so far has not made itself noticed as collapsing stock markets and increased consumer spending have gone hand in hand–only some 3-5 cents out of every dollar of increased wealth will be spent, and even that effect will take some three years to make itself felt.

So immediate stimulus is not the reason for this portion of the tax cut. The real objective is the longer-term goal of permanently binding what conservative Republicans believe to be a new class, the shareholding-investor class, to their party. According to a Wall Street Journal/NBC News poll, 62 percent of Republicans and about 50 percent of Democrats have at least $5,000 directly invested in shares or mutual funds. Many more have a stake in share prices through pension and retirement funds. And almost all shareowners vote, whereas many non-shareowners don’t. Studies suggest that some two-thirds of all voters are in the market either directly or through pension plans. Many of the latter already benefit from the sheltering of their dividends, but their owners would certainly appreciate an increase in the prices of the shares in these funds.

Nor is a “stimulus” the main reason for the president’s proposal to send a check for $400 per child to families with children under the age of 16, and with incomes of less than $110,000, and to establish a permanent $1,000 per child tax credit–which, it should be noted, would not go to most single moms, who are too poor to pay taxes, Elizabeth Hurley not being the average unwed mother. Conservative Republicans have long been impressed by studies showing that marriage contributes to the reduction in the ranks of the poor, and believe that tax credits can stimulate family formation. So they don’t worry about other studies that show that one-off $400 checks are more likely to be saved than spent. Their goal is to encourage families, with stimulus a secondary objective.

Another long-term goal of Republican conservatives has been to encourage entrepreneurs. The old-line, Northeastern Republican patricians were comfortable clubbing with big business executives; new, Southwestern Reaganauts prefer self-made businessmen. So the proposed write-off allowance for new investment up to $75,000 will be available to small businesses only.

Finally, and perhaps most important, this new round of tax cuts, and the proposed acceleration of those Bush pushed through earlier, will reduce the flow of funds to the government, and make it more difficult for the Democrats to build new entitlements into the welfare state. Leaving money with the people who earned it, rather than shipping it to Washington to be spent by Democrats (and more than a few Republicans, if truth be told), is a long-standing Bush goal.

The president must find himself conflicted as he follows the economic news. He wants good economic news to show that he is as good at defending the economy as he is at defending the nation from terrorists; yet he needs a string of bad news if he is to persuade a reluctant Senate to give him much of what he wants. But even if he gets most of his package, don’t look for a substantial increase in the economy’s growth rate, which is already likely to be quite satisfactory. This tax package is only tangentially about stimulus; it is really all about fundamental economic restructuring and social engineering, Republican style.

Irwin M. Stelzer is director of regulatory studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.