Monday, January 21, 2008

Republican tax-cutters say President Bush and their party must propose a big, long-term stimulus plan to revive the economy if they are to stop the Democrats from taking the White House in November.

With the economy sending almost daily signs of weakness in the financial markets, corporate earnings and mortgage foreclosures, Republican strategists say it will take more than a short-term stimulus package — such as the one Mr. Bush has proposed — to turn things around before the fall presidential and congressional elections.

“Politics is motion. I don’t think the Republicans can afford to sit idle. We have to figure out some way of putting together the big plan for a stimulus. Inactivity is deadly when it’s in a period of economic weakening. This is the time to be aggressive,” said David Smick, a veteran economic and political strategist who advises Republican policy-makers and global business leaders.

“They need a big package, and they need to make it an issue in the fall,” Mr. Smick said. He is not predicting the economy will fall into a recession when the economy stops growing for two consecutive quarters. “But it’s going to feel like one. Last year’s fourth quarter and the current first quarter will be very weak. They will miss a recession but not by much.”

What has Mr. Smick and party policy-makers worried is the long lag time between economic policy changes and when they are actually reflected in the economic data, plus an additional lag before those improvements are actually felt by most Americans.

The Federal Reserve Board’s interest-rate cuts “have a lag time of at least eight months before the stimulus effect is felt. That probably means the economy will be improving, but it won’t be seen in the data later this year,” he said.

“Bush’s father faced a similar situation in the 1992 presidential election when the economy was beginning to make a comeback, but it wasn’t showing up in the data. I think the Republicans could find themselves in the same situation this time around,” Mr. Smick said.

Republican supply-side tax-cutters were lukewarm toward parts of Mr. Bush’s stimulus package last week. They liked his business investment tax cuts for the cost of new equipment and plant purchases, which they can write off or deduct this year, instead of over a multiyear depreciation schedule.

But they are not enthused by the tax rebate checks that would go to all taxpayers, because they do not think they will do much to stimulate the economy.

“Every dollar that government rebates ’inject’ into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another,” said Brian M. Riedl, budget analyst at the Heritage Foundation.

“Tax rebates aren’t supply-side tax cuts, but they probably help provide a floor under consumer spending,” said political strategist Cesar Conda who was Vice President Dick Cheney’s chief domestic policy adviser.

Another call for a more aggressive stimulus plan came from economist Martin Feldstein, former chairman of the Council of Economic Advisers under President Reagan.

Mr. Feldstein said in an interview with CNBC that he would like to see “a temporary personal tax cut to be enacted now but triggered by what happens to the economy. It could be an across-the-board percentage cut; it could be a flat amount per taxpayer.”

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