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By Ryan J. Donmoyer
Washington, Sept. 30 (Bloomberg) -- The Bush administration's tax and economic policies will help boost business investment and spur economic growth in the last three months of the year, said Glenn Hubbard, chairman of the White House Council of Economic Advisers.
Hubbard said he doesn't see fears of inflation, a bubble in housing prices and declines in stock prices weighing on the economy because the Federal Reserve has kept interest rates low and Congress passed President George W. Bush's tax cuts last year.
``I come out on balance that the fundamentals do support a business investment recovery,'' Hubbard told the National Association of Business Economics.
The government reported today that U.S. wages, salaries and other personal incomes rebounded by 0.4 percent in August and spending increased 0.3 percent last month for the third straight month.
Personal incomes are 3.5 percent higher than they were last year at this time, giving consumers the wherewithal to spend. That's vital for a sustainable recovery because spending accounts for two-thirds of the economy.
Hubbard said the mix of stable and low inflation with rising incomes spurred in part by the effect of the $1.35 trillion tax cut enacted last year would help consumer confidence.
``The key to transforming recovery into robust growth is the pace of business fixed investment,'' Hubbard said. He declined to make a specific forecast, instead citing low interest rates and a 30 percent tax write-off for certain business investments, which he said would lower the cost of equipment and software.
Confidence Wild Card
Conditions are ``primed'' for investment to begin to recover, he said. ``The wild card, of course, is the timing and pace of recovery, which likely hinges on the extent of business confidence,'' he said.
A Bloomberg News survey of 53 economists last week forecast that U.S. economic growth will accelerate to 3 percent next year as consumer spending holds up and business investment increases.
Hubbard said the U.S. can absorb the cost of a war against Iraq should Bush decide to pursue it.
The 1990-1991 Iraq war cost about $61 billion, much of it was paid for by U.S. allies, including Kuwait, which Iraq had invaded. The U.S. would likely shoulder the cost of a new war alone.
War Cost
``For an economy like the United States, this is an action, should the president decide to pursue it, that the economy could easily afford,'' Hubbard told reporters after his speech. Oil price increases likely would be transitory and investor confidence may sag, he said.
``It really would depend on the scenario and the clarity of the policy,'' Hubbard said. He added that ``uncertainty about action has clouded business investment.''
Another top economic aide to Bush, Larry Lindsey, has predicted an attack on Iraq may cost $100 billion to $200 billion, or as much as 2 percent of annual gross domestic product. White House Budget Director Mitch Daniels has said that estimate is ``likely very, very high.''
U.S. stocks dropped today, driving the Standard & Poor's 500 Index and Dow Jones Industrial Average toward their largest quarterly loses since the 1987 stock-market crash. The drop is attributable in part due to expectations that there will be a war with Iraq, analysts said.