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Stimulus package focuses on long-term, profs say

President George W. Bush's plan for boosting the slumping U.S. economy may have some long-term benefits, but it will likely provide little stimulus in the near future, Duke economists said this week after the plan's release.

Reacting to slow economic growth and widespread unemployment, Bush called for the elimination of taxes on stock dividends, an extension of unemployment benefits, as well as various other tax breaks for individuals and businesses. Overall, the plan would provide about $674 billion in economic relief, White House officials said.

Democrats proposed a competing plan Monday that offers more modest, temporary tax cuts, as well as some relief to ailing state budgets, all totaling about $136 billion in 2003.

Duke economists stressed that neither plan is likely to escape Congressional negotiations intact, and professors' prescriptions for stimulating the economy varied widely. Most agreed, however, that if the president's plan has an effect on the economy, it will not be felt any time soon.

"The Republican plan appears to be much more of a long-term growth package, where the Democratic plan, from what has been released, is much more of a short-term relief package," said Paul Cowgill, a visiting instructor in economics who specializes in macroeconomic policy.

Citing lack of investment and consumer spending as two of the most pressing economic problems, Cowgill said that eliminating dividends taxes will, over time, increase stock purchases and enable companies to invest more. Moreover, he said, the extension of unemployment benefits-a bipartisan proposal signed by Bush Wednesday-and more tax cuts will provide relief to those most affected by layoffs, encouraging them to spend more.

Other economists echoed many Democrats' comments that Bush's tax cuts are too focused on the wealthy to help those in need or to stimulate the economy. Roy Weintraub, James B. Duke professor of economics, said even though many middle-class Americans, particularly senior citizens, receive stock dividends, they do so through retirement accounts or other tax shelters.

"It's not the right kind of package, not as a stimulus. It's a long-standing agenda to cut taxes for wealthy individuals," Weintraub said. "Taxes on dividends affect very few Americans. It doesn't affect tax-sheltered plans, in which most Americans have their savings."

Cowgill rebutted by suggesting that even if most Americans do not benefit directly from an elimination of dividend taxes, the measure could benefit them because, with higher growth, dividends could increase.

"Maybe the tax implication isn't a big deal for some people, but there would still be a trickle down because businesses would be able to pay larger dividends," he said.

Lori Leachman, associate professor of the practice of economics, said a more effective economic stimulus would focus on tax breaks for members of the lower and middle classes, who would be more likely to spend the money. The passage of extended unemployment benefits would go a long way toward that goal, she said.

"Consumer spending is 65 percent of the economy, and that has been one place where the economy really has been able to hold on," Leachman said.

Still, Leachman and other professors suggested that any plan to increase investment in the economy might be neglecting a key phenomenon of recent years: overinvestment in many sectors of the economy. Until consumption returns to a level that meets companies' supply, they said, there is very little that fiscal policymakers can do to stimulate the economy.

"We have a real big investment hangover--overinvestment in computers and software--and when demand drops, [companies] can't pay for that investment," said Corinne Krupp, visiting associate professor of public policy studies. "We need to work through that."


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