That tax-cut measure passed by Congress this week will boost the nation’s gross domestic product by about 1 percent over the next year, welcome news for an economy that has been bumping along at a sluggish growth rate of less than 2 percent in recent months. But economists are divided on whether the $350 billion fiscal stimulus program will be sufficient to get the economy growing fast enough to reverse rising unemployment.
Many economists welcomed passage of the economic growth package, which includes tax cuts, increased deductions for small businesses and direct aid to financially strapped states. “It’s going to have a lot more punch than people realize,” said Jim Glassman, senior U.S. economist for J.P. Morgan Chase. “Most of us thought the economy would be accelerating in the second half of the year. This will just add to it.”
He and other economists pointed out that the package is highly “front end loaded,” meaning that most of its impact will be felt over the next 18 months, even though the cost is estimated over a 10-year period. By September 2005, the program will have added $292 billion to the economy through tax cuts and increased fiscal spending, according to the Joint Committee on Taxation.
Of course that analysis also underscores one of the main flaws of the bill, according to its critics, which is that it vastly underestimates the cost by including “sunset” provisions that future Congresses are likely to extend, based on past experience.
The Center on Budget and Policy Priorities estimated the “true” cost of the bill at $807 billion to $1.06 trillion if Congress extends the existing tax cuts and tax breaks through 2013.
Robert Greenstein, founder and executive director of the center, which focuses on the impact of government policies on low- and moderate-income people, said the long-term harm to the economy from higher deficits would far outweigh the benefit of short-term stimulus.
“I would say given the true cost of this bill … you’ve got to say that the economic gain that it’s likely to produce in the next year or so is pretty small relative to the cost,” he said. “It’s a remarkably inefficient way of doing it.”
Only whispers on Wall Street
Wall Street barely reacted to news that the bill was passed late Thursday, possibly because many traders were on vacation or reluctant to make major moves ahead of the long Memorial Day weekend.
Jan Hatzius, senior economist at Goldman Sachs, said the size of the tax cut was about what most Wall Street analysts had been expecting since early in the year so is unlikely to affect economic forecasts.
“We had already built it into our forecasts — there’s not much new information,” he said. Goldman Sachs is predicting a “bounce” in the third quarter, with GDP growth rising to 4 percent, but then the firm is calling for growth to fade back to 2.5 percent in the fourth quarter and for all of 2004 — well under the 3 to 3.5 percent that is presumed to be needed to keep the unemployment rate steady or falling.
The economy has lost more than 500,000 jobs over the past three months as the jobless rate has risen to 6 percent, matching its highest level in more than eight years.
Hatzius said the just-passed Jobs and Growth Tax Relief Reconciliation Act would add about $150 billion to economic growth in 2003 and 2004.
“It’s a positive, yes, but it’s actually a much smaller positive than last year, and last year the economy was hardly on fire,” he said.
Hatzius estimated that the tax act of 2001 contributed about $200 billion to growth in 2002, when inflation-adjusted GDP grew by a modest 2.4 percent.
But Glassman sees growth of 4 to 6 percent in 2004, far above consensus estimates, and suggested that many economists are gun-shy about boosting projections after years of disappointing economic performance.
“Economists are really beaten down,” he said. “They will change (their forecasts) rapidly when they start to see the numbers. Right now it’s very hard to convince anyone it’s going to happen.”
The tax-cut package is nearly the last piece of a postwar puzzle that is supposed to lead to stronger growth, although so far there has been little evidence of it. Since the end of the Iraq war stock prices have risen, interest rates have fallen and consumer confidence has soared. Energy prices have fallen from their peak, although they have been creeping back up recently, a potentially worrisome sign.
But with so many positive financial conditions, even some generally bearish economists are encouraged.
“I think this tax bill is a very positive element for the economy in the second half and into 2004,” said Paul Kasriel, economic research director at Northern Trust Co. “I’m a born pessimist and really have had my doubts about the second half recovery, but this makes me have more confidence. … By golly, if this doesn’t get the economy going we’re really going to have to get back to the drawing board.”