- Fri. Sep. 5, 2008
|
Search Sponsor:
|
Not long ago John McCain was almost boasting that he knew little about economics. That kind of candor, a distinctive McCain trait, is likable but has its limits. His days of making jokes about his ignorance appear to be over. Worries about the economy began to dominate public opinion even before the current slowdown was properly under way.
Between now and November, those worries will only mount: The faltering economy is likely to get worse before it gets better. McCain is going to need an economic program, and he had better get used to talking about this subject as though it matters.
He obviously understands that -- but his recent statements and interviews suggest that he still has a lot of work to do. McCain is running as an orthodox fiscal conservative, with heavy stress on low taxes and tight control of public spending. He is pro-trade. He has modified, but not dropped, his support for personal retirement accounts alongside Social Security. On health care, he has a bunch of proposals for better cost control, but no plan that would deserve to be called comprehensive reform. And he is for stronger action on global warming: He aims to curb greenhouse gases with a cap-and-trade system that would oblige emitters to buy licenses for the privilege.
Stated that baldly, the platform looks all right. I think that the lack of any grander ambition on health care is a pity on the merits and a political mistake as well, but as for the rest, each element has plenty to recommend it. The problem is that the fiscal conservative core of the program, as it stands, is just not credible. McCain is promising to extend the Bush administration's tax cuts -- and cut some more. He is also promising to reduce and then eliminate the budget deficit. To do both of those things, McCain would need to make correspondingly savage cuts in spending, and he has not come close to saying how.
McCain famously voted against the Bush tax cuts, arguing that, among other things, they were skewed too much in favor of the rich. That was a good argument, and still is. McCain now says, however, that with the weak economy, the prospect of a tax increase (even if delayed until 2010, when the tax cuts start to expire) would exert too much of a depressing influence. That may be so, but if it is, why not press for changes that would leave overall revenues on the same lower path, but with more of the benefit going to low- and middle-income taxpayers and less to the rich? Such a change, by the way, would improve the efficacy of the cuts in supporting demand in the economy.
Why, in other words, confine the choice to eliminating the Bush tax cuts entirely or preserving them as they stand? Preserve the fiscal impact, if you think that is wise, and redirect the relief for the sake of fairness and countercyclical efficacy.
In addition to extending the Bush tax cuts, McCain also proposes to cut the corporate tax rate from 35 percent to 25 percent. Again, taken at face value and in isolation, this is fine.
McCain is correct that U.S. corporate taxes are now quite high by international standards. The American tax rate has stayed put while many other countries have recently cut their taxes to attract foreign investment. This difference gives rise to concerns that U.S. companies would rather invest abroad rather than at home. Democratic presidential contenders Barack Obama and Hillary Rodham Clinton have both promised to close this "loophole," as they call it, by forcing companies to pay extra tax on the profits they make abroad. But the risk in that approach is that the investment will move overseas regardless, and that American companies will divest their foreign affiliates outright, to escape U.S. taxes altogether. McCain's plan to cut the corporate tax rate to 25 percent is simpler and better, providing a stronger stimulus to investment at home.
But the reduction would cost a lot in revenue -- approximately $100 billion a year. Add that to the cost of extending the Bush tax cuts, throw in abolition of the alternative minimum tax and assorted new tax relief for research and development, and the total revenue reduction gets to more than $400 billion a year. To balance the budget by the end of his first term, as he says he will, McCain would need to find that much and more in spending cuts.
McCain is the scourge of earmarks, and good for him. They are a fiscal scandal -- unfortunately for his arithmetic, however, not a particularly expensive one. If you eliminate them entirely, which is unlikely to happen, you would save only $20 billion a year in new earmarks (more if you take account of old ones that keep paying out). Any savings here would likely be overwhelmed by the additional costs that a McCain administration would incur in a renewed commitment to prosecuting the wars in Iraq and Afghanistan. Even by the most generous interpretation, the hole in McCain's fiscal promises amounts to hundreds of billions of dollars a year.
Another fiscal unknown is the cost of McCain's new plan for Social Security. Previously he advocated partial privatization -- diverting a share of the payroll tax to individual savings accounts, much like the plan proposed by the Bush administration, which Congress and the country roundly rejected. Now McCain talks of a scheme that would operate alongside Social Security, allowing for personal accounts as a supplement rather than a partial replacement. Encouraging such accounts with further tax relief -- how else would they catch on? -- adds to the fiscal shortfall. He would address the eventual deficit in Social Security finances, he says, by curbing the growth of benefits, perhaps by raising the retirement age.
After the experience of the Bush administration, everyone seems to accept that fundamental Social Security reform is a hopeless venture. In fact, I think that McCain is right -- on the economic and social merits, if not as a political calculation -- to persist, and he deserves credit for doing so.
Done right, reforming Social Security could raise the country's savings rate and, more important, give retirees a stake in the economy that most currently lack. Done right, it bears emphasizing, reform is about empowering the less well-off, and improving their sense of self-determination. But the cost of doing it right is not small, whether you provide the necessary incentives through tax relief or through outright subsidy -- and the more you aimed to channel the benefits to the least well-off, of course, the more you would need to provide subsidy rather than tax breaks. Again there is a yawning gap between ends and means.
The most intriguing possible solution to that persistent problem is the revenues that McCain would raise from carbon emissions. In a recent interview with National Journal, McCain's top policy adviser, Douglas Holtz-Eakin, a former head of the Congressional Budget Office, frowned on an explicit carbon tax -- for reasons, I must say, I did not understand.
"In a 'blackboard world,' " he said, "you could write down a carbon tax and a cap-and-trade system that looked the same. Then there is the question of coordinating it internationally, and there are other countries that have gone to cap-and-trade. So there is a moderate plus in that regard. And there is the fact that the environmental community just won't support a carbon tax. So if you want to get something done, you've got to go with cap-and-trade." (See "McCain's Hard Choices," p. 76.)
Perhaps he just means "a tax is politically impossible." It is hard to be sure. Cap-and-trade produces revenues provided that the permits are auctioned, as McCain has indicated they would be, rather than given away. Then the system becomes a carbon tax in all but name (with disadvantages at the margin, in my view, in exchange for better political viability). How much revenue might it raise? The sky, so to speak, is the limit.
McCain's plan could certainly raise most of the required net revenue this way. Holtz-Eakin suggested, without saying so explicitly, that the revenue would be used to pay for tax cuts elsewhere, rather than to finance extra spending. But did he mean tax cuts over and above those McCain has already promised, or those already on the drawing board? Most likely, the candidate himself has not yet decided how much money to raise this way, or what to do with it.
McCain has a reputation as a hawk on public spending, and it is doubtless well deserved. He repudiates earmarks -- while applying that rule to himself as a senator -- and can point to wasteful programs that he has blocked at some political risk. But, unless he applied hundreds of billions of dollars in new revenue from cap-and-trade to the task of balancing his books, the cuts in spending required to do so would be enormous. So far at least, the public accounting of his Democratic opponents -- flawed as it may be -- looks much more honest.
"Wealth Of Nations" offers an international perspective on global affairs and politics as well as world finances and economic development.