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Will the Bush package make a difference?

S. Balakrishnan

AS this is being written, the US President, Mr George W. Bush, is readying an array of fiscal incentives to get the US economy moving into high gear.

He has cause for concern. About a decade ago, his father won the war with Iraq on Kuwait practically without firing a shot. Yet he lost the election to Mr Bill Clinton and was ridiculed for not realising that the real issue for the people was the economy, made famous by the wisecrack, "it's the economy, stupid".

So what does the son propose to do? On the cards are a wide range of tax cuts and exemptions -- rate reductions, at least part elimination of dividends from tax in the hands of shareholders and breaks for new corporate investment. A rebate to middle class taxpayers as well as aid to financially-strapped States (yes, the US also seems to have a problem of fiscal governance in the States!) are being spoken about as well.

The proponents of the package and Mr Bush's supporters think that it will galvanise the economy and stockmarkets. The latter is the bigger worry. Fundamental to America's economic and financial well-being is the stockmarket's well-being. What the US dreads most is a secular decline in stock prices. Hence, the constant efforts by successive Administrations — Republican or Democrat — to reassure their people that all is well and talk up the market.

The problem here is that the Wall Street has seen an unprecedented boom in the last decade, now being described as the biggest asset bubble in history. In the view of many, even after the collapse of the last couple of years, stocks have not fully corrected taking into account future profits and are still too high. Mr Bush's imperative is to rid investors of this feeling of deja vu.

Will it work? Mr Paul Krugman, the well-known economist, thinks the Bush package will only put more money in the hands of the already rich. In fact, he describes it as a shameless act to make the very wealthy class, from which the President comes, wealthier. The hard-won fights against the fiscal deficits of the eighties and most of the nineties are being frittered away. For their part, the Democrats are rustling up their own stimulus package designed more to help the aged, low-income and middle classes who, they think, will prop up the economy better, if more money is put in their hands. Education and health care, whose costs have spiralled, have received scant attention so far.

As The Economist magazine argues, the issue is not one of a growth stimulus. The US is not in recession (although the economy is well below its full potential). Enduring confidence must return to investors. For this, the war clouds must dissipate (or there should be a quick US victory with Saddam Hussein out of the way). Corporate profitability should improve significantly. Business capital spending must rise. If all these cylinders start firing together, job creation, which is crucial to the quality of the recovery, will improve and result in a real turnaround of sentiment.

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