Economics, US Politics

Understanding The Bush Economic Stimulus Package. W’s getting scared.

I don’t know if I am understanding the package correctly. Most of those throwing their opinions in the ring certainly know American politics a lot better than I do.

Their predominant interpretation of the package is that it is not actually intended to stimulate the US economiy but to get Bush reelected in 2004 – that’s why he is handing out even more cash benefits to wealthy Americans not likely to increase their marginal consumption. The Economist tells us that

“[i]t certainly lays Mr Bush open to the familiar charge that he is favouring the better-off. One study has shown that the average annual benefit for people earning less than $10,000 a year would be $6, while that for those with million-dollar-plus incomes would be more than $45,000. Conventional economics suggests that the richer people are, the less propensity they have to spend each additional dollar of income. America might have a long-term need to boost savings rates, but that will not help stimulate the economy.”

Also check these two links [ 1 , 2 ] to Berkeley economics professor Brad DeLong’s blog, if you want.

It is probably right that Bush had his reelection prospects in mind when designing the tax-cut [ ok, he did not do it himself ;-) ]. But I believe, the package’s design also reveals something else: His team is already getting scared. They’re not too sure they’ll be able to supervise the already announced tax-breaks in 2006 to 2010. So he’s delivering to his constituency now as the promised tax-cuts could be repealed later on. Timing is the keyword here. W clearly remembers the fate of his dad back in 1991. He lost the Presidency to Clinton in 1992 because of the post Desert Storm economic slump. As another Iraq war does seem to become increasingly unavoidable from his team’s hawkish perspective, the US administration realises that it could cost W the presidency in 2004 should the possible war’s timing be unfortunate. If things go “well” (again, from a hawkish perspective), it could be over this summer and economic consequences could be bearable. This is the scenario most strategic planners in financial institutions apparently believe to be the most probable.

However, Murphy’s law looms large over all armed operations and things could very well turn out differently. And there are enough military people in W’s administration to remember good old Murphy. That’s why I think this tax break shows the Bush administration is starting to believe their man could lose in 2004. The big question will be – to whom?