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What Is McCain’s Economic Agenda?

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Opinion pieces and speeches by EPI staff and associates.

[ THIS ARTICLE ORIGINALLY APPEARED IN THE ONLINE ISSUE OF THE AMERICAN PROSPECT ON MARCH 17, 2008.]

What Is McCain’s Economic Agenda?

The man who famously admitted that economics is not his strong suit wants to fundamentally alter the government’s role in the economy by deeply cutting non-defense spending, from discretionary programs to entitlements.

By Jared Bernstein

Next time you catch a John McCain interview, watch for what, at least to my ears and eyes, is a fascinating, albeit subtle, shift. When he’s talking about almost anything other than the economy — foreign policy, the war, Congress, immigration — he exudes the typical confidence of a veteran Washington player. He deftly shifts the question to his turf, he ardently hits his message points … just about what you’d expect, actually.

But when the topic turns to the economy, his whole demeanor changes. His body language becomes uncomfortable; he almost seems to shrink a little. His edgy smile becomes forced, his words a bit — sometimes more than a bit — hesitant. Putting aside your views on his positions and evaluating his performance on form only, when he’s on the other topics, he’s a basketball player driving the lane. On the economy, he’s looking to pass ASAP.

In economic discussions, he makes mistakes, both small and not so small. He famously admitted that economics is not his strong suit, though he assured us that he owns Greenspan’s book. I’ve heard him speak of the “alternate” minimum tax (it’s “alternative” — can you imagine Hillary getting that wrong?). In a recent interview in The Wall Street Journal, he was unaware that his Web site endorsed a different plan regarding Social Security than the one he was touting to the interviewer. It’s hard to imagine a discrepancy like that regarding the war.

He missed the current downturn — though he’s far from alone on that count — by a long shot, stressing the strengths of the economy’s “fundamentals” as recently as January (now he apparently believes we’re in or headed for a recession but still can’t resist the “strong fundamentals” nonsense).

McCain’s answers to questions regarding the policy responses to the current downturn are way off base, far worse than you’d get from say, Secretary Paulson or even Bush. In a recent Wall Street Journal interview, when asked what measures would best deal with the current downturn, he touted making the Bush tax cuts permanent in 2010 and cutting corporate tax rates. Other than Larry Kudlow and The Wall Street Journal’s editorial page, I can’t imagine many folks would be inspired by that plan.

So he isn’t exactly Adam Smith. But I still think there’s a lot for the electorate to consider regarding McCainonomics. Given his predilection to follow the George W. Bush agenda, some critics have labeled him “McSame,” attempting a guilt-by-association strategy. There’s a lot to be said for that strategy. His voting record reveals him to share Bush’s deregulatory zeal, but I don’t think it’s that simple.

In his heart, I think candidate McCain wants to fundamentally alter the economic landscape of government’s role in the economy by deeply cutting non-defense spending, from discretionary programs to entitlements. He gets there not because he’s heartless but because that’s the unforgiving combination of his arithmetic and his ideology.

He’s Not a Mathematician

Perhaps one shouldn’t expect candidates’ numbers to add up. Tally up Clinton and Obama’s expenditures on health care and tax cuts and you will find that they both spend more than they raise. But McCain’s numbers are out of whack by orders of magnitude beyond those of either Democratic candidate.

Here’s the gist of it: Despite his earlier opposition, he now wants to make the Bush tax cuts permanent. Price tag: more than $2 trillion over 10 years. He wants to repeal the alternative minimum tax. Price tag: “up to $2 trillion” according to the Center on Budget and Policy Priorities (CBPP). He wants to keep the war going ad infinitum, at a cost of between $100 billion and $150 billion per year, according to CBO estimates.

Then there is his health-care plan, which ends the employer tax exemption for the cost of covering employees, and uses the proceeds to subsidize the purchase of health coverage in the private market. The costly part has to do with the poor, the old, and the sick. As health economist Jon Gruber noted, “his plan will require huge subsidies he’s not talking about.”

Oh, and did I mention he wants to cut the corporate tax rate too, from 35 percent to 25 percent, and allow businesses to fully write off capital investments as soon as they make them?

Bob Greenstein, the director of the CBPP, is not prone to hyperbole. But he called McCain’s program “one of the most fiscally irresponsible plans we’ve seen by a presidential candidate in a long time.” According to Len Burman of the Brookings Institution’s Tax Policy Center, McCain’s tax cuts would shrink federal revenues by 25 percent over 10 years, at which point they would account for about 15 percent of GDP, compared to 19 percent last year.

Now, I understand that this is absolutely sweet music to the ears of the Grover Norquists of the world—the “starve the beast” contingent. But let’s play all this cutting out a bit further, turning to the spending side of the equation. Note that McCain made the “no new taxes” pledge, though he recently backtracked slightly. (He told The Wall Street Journal, “I’m not making a ‘read my lips’ statement … but I’m not saying I can envision a scenario where I would [raise taxes], OK?”)

For all of his nervousness around economic issues, when McCain moves into “government-waste, spend-cutting mode” he relocates his mojo. He has clearly seen the government waste money over his long tenure, and he clearly doesn’t like it. I don’t either. But the cuts he has articulated don’t even start to begin to commence to fill the budget hole he creates.

His most common target is earmarks — those provisions quietly embedded in legislation to steer funding to some desired project or constituency. But there are two problems here, one big, one little. The big one is that the total earmark bill is much too small to pay for even a tiny fraction of McCain’s agenda. Most estimates score them at around $20 billion per year, though the McCain folks say they can get up to $60 billion. That’s a few months in Iraq, John.

Second, of course it’s the case that there are lots of earmarks that should go, and that the process should be much more transparent. But once it is, we will find out that a number of these projects are important and worthy. McCain himself was cutting up recently about an earmark to do research on bear DNA: “I don’t know if it was paternity issue or criminal, but it was a waste of money.” Problem is, The New York Times pointed out that scientists were doing the research to estimate the bear population, “a prerequisite for sensible administration of the Endangered Species Act.” I’d bet you that for every 10 “bridges to nowhere” there are at least a few of these good earmarks (a friend of mine promotes earmarks for the Special Olympics and cancer research).

So, let’s review. McCain is shaky on economic policy, has quite massive plans to cut taxes while kicking up spending on health care and the war, is loathe to raise taxes, and is articulating only tiny spending cuts. Or is he?

He’s a Deep Cutter

John McCain, along with his top economic adviser, economist Doug Holtz-Eakin, talk a lot about “entitlement reform.” What does this mean?

First, let me say that I am a huge
admirer of Holtz-Eakin, an economist and former CBO director who is congenitally incapable of cooking books or spinning numbers. I suspect that’s one reason why he and McCain appeal to each other (yes, the “straight-talk express” has been off track lately, but I think McCain actually has a pretty low tolerance for economic spin). And both of them must know that they can’t implement their agenda without deep cuts, both on non-defense, domestic spending, and on entitlements, especially Medicare.

As Holtz-Eakin put it a few years ago in an opinion piece for The Washington Post, a serious fiscal approach “should rethink the package of support for old-age medical care, long-term care services and retirement income.”

Much like the material on McCain’s Web site, that sounds innocuous enough. It also has the benefit of being true. Absent a “rethink,” Medicare will swamp the federal budget. This increase in health spending as a share of government spending is itself a symptom of the unsustainable rise in economy-wide health-care costs, i.e., this is not exclusively a “Medicare” or public-sector problem. (Social Security poses less of a fiscal challenge; it can be put on a sound funding basis with a few reasonable changes.)

But here’s the rub: words like “reform,” “rethink,” and “making tough choices” sound a lot different than words like “cut, and cut deeply.” Holtz-Eakin has integrity, and he likes his numbers to add up. He knows that they can’t do what they say they’re planning to do without going after entitlements big time. As he put it the other day in The Wall Street Journal, “You can’t keep promises made to retirees” (to be fair, he also noted that “you can pay future retirees more than current retirees”).

In fact, you can keep those promises. It won’t be easy, and he or she who chooses to do so will need the vision to make the case, along with the political skill and will to make it happen, part of which is about reintroducing competence and faith in government. That means ending the war, raising the revenues needed to meet social needs, and reforming the health-care system with an emphasis on risk-pooling and cost controls.

When it comes to economic stewardship, this election is truly a fork in the road. There are surely those who want to travel McCain’s route, deeply cutting the size and obligations of the federal government in order to pay for tax cuts and war. But I think there are more of us who recognize that this path is a dangerous one.

We’ve seen the outcome of Bushonomics. Its inattention to good government and its deregulatory zeal are evident from Katrina to Iraq to the current recession. Its reverse Robin Hood tax policies have exacerbated market-driven inequalities. Yet, much to some conservatives chagrin, Bush was never willing or able to pursue a true slash and burn approach to fiscal policy. His privatization plans failed, he laid nary a finger on the entitlements (other than to expand Medicare), and his tax cuts will not be made permanent by the time he leaves D.C.

As I see it, McCain wants to change that. He may come across as fumbling in interviews, but to see where he is headed, you have to blend an understanding of his campaign platform, his advisers, and his ideology. What you’re left with is a plan to considerably shrink that part of government that functions to enhance economic security at a time when we arguably need a lot more of it.

Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C.

[ POSTED TO VIEWPOINTS ON MAY 1, 2008. ]


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