How Bush may boost the economy

NEW YORK (CNNMoney.com) -- Word is that President Bush may propose new measures to boost the economy by the time he gives his State of the Union address later this month.

While he has steadfastly maintained that the economy is fundamentally strong, the fact that the president is considering a so-called fiscal stimulus package is an indication that the Administration is getting worried.

Such a package would aim to ward off a recession, the fear of which has grown stronger in the wake of discouraging data on jobs, rising energy prices and a slowing housing market.

There is also an indication that leading Democrats might be working on a plan of their own. A spokesman for Senate Finance Committee Chairman Max Baucus (D-Mont.) said in an e-mail to CNNMoney.com that Sen. Baucus "already has ideas of his own about the possible need for an economic stimulus package this year and is planning for the Finance Committee to discuss very early in the session what shape such a package might take."

It's not clear what measures the White House is considering, but it is widely believed that tax cuts are among them. In that realm, there are a number of options the president could propose, but all of them carry political costs, economic costs or both.

Temporary tax cut: One option that economist Mark Zandi of Economy.com thinks might help is a temporary tax cut, much like the $300 tax rebate Americans got in the wake of Sept. 11. "It was well-timed and was significant for lower and lower middle-income households," Zandi said, although he acknowledged that not all economists agree about how successful the rebate was.

But a new rebate will likely draw criticism. In 2001, the government had the advantage of a budget surplus. Now it's operating with a deficit, which could raise concerns about the cost of a rebate. "Where's the money going to come from? [A rebate will] take it from some other place in the economy," said Chris Edwards, director of tax policy studies at the libertarian Cato Institute, which advocates for limited government and free markets.

Permanent cuts for the middle class: Zandi thinks it might also make sense to make President Bush's income tax cuts for the middle class permanent, a move that leading Democratic presidential candidates have indicated they'd support. Where they part company with the president, however, is in making those tax cuts permanent for high-income households, too. So if the president did push for an extension of his tax cuts for the middle class, that could undercut his stated goal of making his tax cuts permanent for everyone, Zandi said.

Lower capital gains rates: Zandi would also advocate making the lower rates on capital gains and dividends permanent for everyone. Despite his belief that the federal government should not try to control the short-term performance of the economy, Edwards agrees that such a move could help stabilize the markets by giving investors more certainty about their investment tax bill. It also would reduce any pressure investors might feel to sell their holdings before the investment rate cuts expire.

But the cost of making any of the Bush tax cuts permanent is a sore point for fiscal watchdogs, who contend such cuts are unaffordable in the long term, given the growing budgetary demands of Social Security and Medicare as well as the war in Iraq.

Of course, with any tax-based stimulus, the potential benefit of its short-term effect has to be weighed against its long-term cost, said Clint Stretch, a federal tax policy expert at Deloitte Touche. "[You must consider the net benefit] if you have to turn around to the credit markets and borrow the money to pay for it."

President Bush could also call for measures intended to stimulate the housing market, Zandi said.

Increasing low-cost mortgage availability: Bush has already said Congress should act quickly to pass a number of housing-related legislative proposals that he supports. One key measure would reform the Federal Housing Administration (FHA), which would make the relatively low cost FHA-insured mortgages more readily available to consumers who want to buy homes and to those who want to refinance out of unaffordable subprime loans.

Increasing loan limits: The White House also might consider calling for a temporary increase in the size of mortgages that Fannie Mae (FNM) and Freddie Mac can purchase from mortgage lenders. These two government-sponsored enterprises guarantee the purchase and trading of so-called "conforming" loans, which are those valued at $417,000 or less. Any loans above that amount are considered "jumbo" loans.

An increase in the conforming loan limit would make it easier and less costly for borrowers in high-cost areas to get loans because Fannie and Freddie would guarantee their purchase by investors.

In the past, the Administration has said it would support a temporary increase in loan limits, but only if lawmakers pass legislation that would boost oversight of both Fannie and Freddie, which have been plagued by accounting scandals.