SOCIAL STUDIES

For McCain, a 20 Percent Solution

The challenge is to stabilize the country's finances at around 20 percent of GDP in 2030.

by Jonathan Rauch

Sat. May 10, 2008


While the Democrats' bloodletting transfixes the world, Sen. John McCain of Arizona, the presumptive Republican presidential nominee, is developing a hemorrhage of his own. Quietly, slowly, but dangerously, his credibility on fiscal policy is seeping away.

McCain has said of the 2006 elections, "The reason why we lost that election, my dear friends, was because we let spending get out of control." He had a point. Republicans resent President Bush's spending. Independents and Democrats resent Bush's deficits.

This is an issue to which McCain brings solid credentials, having spent years opposing pork-barrel spending, even for his Arizona constituents. He has also opposed Republican tax cuts that he believed were structurally or fiscally unbalanced.

In the last few months, however, McCain has seemed to change direction by proposing large tax cuts. He wants to reduce or repeal a variety of taxes on both individuals and corporations, as well as to make the 2001 tax cuts permanent instead of letting them expire after 2010.

In fiscal 2007, federal taxes were 18.8 percent of the gross domestic product. Spending was 20 percent of GDP. The net effect of McCain's tax proposals, according to Len Burman and Greg Leiserson of the Tax Policy Center, would be to reduce federal revenues to about 16.8 percent of GDP--and this just when retiring and aging Baby Boomers begin straining federal finances.

The mainstream media are hammering him for his apparent reversal. "McCain Tax Cuts Would Bloat Deficit or Take Huge Spending Curbs," ran a Wall Street Journal headline last month. "McCain Promises Billions in Spending," added the Associated Press. "You're left wondering if he is the least fiscally conservative candidate still in the race," wrote David Leonhardt in The New York Times, obviously not wondering at all.

In response, McCain has fallen back on Republican cliches. In an appearance last month on ABC News's This Week, he promised to "cut hundreds of billions of dollars out of wasteful and unnecessary spending in America." But if Congress does not give him the spending cuts he promises, would he hold off on signing the tax cuts? "No, of course not." Nonetheless, "We're going to be on a path to a balanced budget." Big spenders, watch out! "I'm their worst nightmare, my friend."

Whatever this may be, my friend, it is not straight talk. If there were "hundreds of billions of dollars ... of wasteful and unnecessary programs" to be cut, they would be gone already. And if politicians are asked to choose between tax cuts coupled with spending cuts (spinach) and tax cuts alone (ice cream), they will go for the ice cream every time.

McCain is veering toward trouble here. Straight talk is the essence of his persona, and change is on the agenda not just for independents and Democrats but even for many Republicans. As one longtime GOP loyalist recently told The New York Times, "I used to like John McCain, but he's aligning himself too closely with what Bush did, and that's just not what I want for this country."

On the defining issue of Iraq, McCain is committed to continuing Bush's policy. He is McStay and will have to make the best of it. This makes preserving his fiscal credibility all the more important. His trademark is to be different from other politicians. By trafficking in supply-side boilerplate, he is jeopardizing his brand in order to sound like Bush, an odd strategic choice.

So will he be two for two, McSame on both the war and the budget? Or is there a realistic alternative that's consistent with both his conservatism and his independence?

I believe there is, and McCain needn't look far to find it. In fact, next time he visits his campaign headquarters in Crystal City, Va., he can walk down the hall and get it from Douglas Holtz-Eakin, his senior policy adviser.

Holtz-Eakin is a distinguished economist, a former director of the Congressional Budget Office, and a straight shooter and thinker. Laid off when the McCain campaign crashed last summer, he decamped to the Peterson Institute for International Economics. There he drafted a paper called "Meeting the Samuelson Challenge," which he then laid aside, unfinished and unpublished, when he rejoined McCain's reconstituted campaign this year.

Samuelson is Robert J. Samuelson of The Washington Post, who wrote a column last August challenging six think tanks to draw up proposals confronting the country's long-term budget crisis. "I thought, 'Heck, I can do it myself, we don't need six think tanks,' " Holtz-Eakin said in an interview. With the campaign's approval, he provided a copy.

By Holtz-Eakin's estimate, growth in entitlement programs--primarily Medicare and Medicaid--will drive federal spending from today's 20 percent of GDP to almost 26 percent in 2030. Such a large public sector, Holtz-Eakin argues in the paper, would impair economic growth and flexibility, and endanger America's limited-government heritage. The challenge, then, is to stabilize the country's finances at around 20 percent of GDP in 2030.

To meet it, Holtz-Eakin proposes curbing growth in Social Security (by such measures as trimming the inflation adjustment and raising the retirement age), reforming the health care system (for example, by promoting competition and paying for outcomes instead of treatments), and gradually reducing discretionary spending as a share of GDP. He also proposes tax reforms that would be pro-growth but revenue-neutral. He ends up, by his own accounting, balancing the budget at about 19 percent of GDP in 2030.

His reform proposals are all debatable, but what is significant about Holtz-Eakin's paper is that it gets the conceptual framework right. "The far more important goal is 2030 rather than five years from now," says Maya MacGuineas, who directs the fiscal policy program at the New America Foundation.

To date, the political system has failed to get a handle on the long-term problem, partly because no one has offered a clear, comprehensible goal. The lack of such a framework, in turn, has made deficit reduction seem a Sisyphean struggle. Now and then Washington manages to pass an anti-deficit package, but a month or so later the experts are back complaining that the long-term imbalance still hasn't been fixed. The public's natural response is to throw up its hands. Why sweat blood if we're not solving the problem?

Recast as a political promise to balance the budget at 20 percent of GDP in about 20 years--"20 in 20"--the Holtz-Eakin framework might finally break the vicious cycle by bringing the longer term into political view. It sets a clear and comprehensible long-term goal, the sort that could be treated as a national project. And it makes the project do-able. Restraining the growth of entitlements, especially the health programs, is very difficult. But it is much easier over 20 years than over five, and much easier if we start sooner instead of later.

For most candidates in most years, promising long-term fiscal rectitude would be a political loser. But McCain is not most candidates, and 2008 is not most years. To win Republicans, McCain needs to show seriousness about mending Washington's profligate ways; to win independents, he needs to differentiate himself from Bush; to beat the Democrats in a tough year, he needs to preserve his authenticity, which means talking straight instead of pandering.

If he made long-term solvency a predominant theme of his candidacy, instead of treating it as a footnote to tax cuts, McCain could touch all of those bases, a nice trick. "There's a chance here for a really dramatic next chapter," MacGuineas says, "a whole reframing of what the challenges are."

But what about all those McCain tax cuts? Cutting revenues to 16.8 percent of GDP would, of course, rule out fiscal balance at 20 percent of GDP. In fact, it would rule out fiscal balance altogether, because holding spending to less than 17 percent of GDP is a pipe dream. (Federal spending hasn't been that low since 1956.)

Holtz-Eakin replies that McCain is not finished making tax proposals and that judgments of their overall fiscal effect are premature. Stay tuned, he says. So, when all of the pieces are on the table, will McCain propose a revenue-neutral tax package? "Time will tell" was as much as Holtz-Eakin would say.

Just a reporter's hunch, but I interpret "time will tell" as a sign of indecision within the McCain camp, and perhaps within McCain. He has a choice to make, one that will define his candidacy and, should he win, his presidency. He can fold his tax cuts into a larger program of revenue-neutral tax reform and long-term fiscal balance, or he can go with supply-side tax cuts and spending-side evasions. For a candidate whose credibility is in the balance, it shouldn't be a hard call.

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