What did we learn last night about where a President Obama or a President McCain would lead the U.S. economy? Not anything we hadn’t already heard. Senator McCain still won’t budge an inch on his trillions of dollars of tax cuts for the rich, yet still claims he can balance the federal budget in four years by slashing spending. Senator Obama is more willing to acknowledge that some of his longer-term proposals may need to be scaled back in getting back to “living within our means,” but won’t yet explain what and how.
From the transcript (courtesy of CNN), we heard Senator McCain’s version of “I feel your pain”:
[McCain:] …Americans are hurting right now, and they’re angry. They’re hurting, and they’re angry. They’re innocent victims of greed and excess on Wall Street and as well as Washington, D.C. And they’re angry, and they have every reason to be angry.
And they want this country to go in a new direction. And there are elements of my proposal that you just outlined which I won’t repeat.
Bob Schieffer had “outlined” the McCain stimulus proposal as “a $52 billion plan that includes new tax cuts on capital gains, tax breaks for seniors, write-offs for stock losses, among other things.” So perhaps Senator McCain didn’t want to repeat that, because it doesn’t sound like a plan that would help those hurting, angry, middle-class families very much.
And we heard about Senator McCain’s proposal to take over mortgages (you know, the one sprung on us at the last debate), with some of his reasoning behind the proposal:
[McCain:] Now, we have allocated $750 billion. Let’s take 300 of that billion and go in and buy those home loan mortgages and negotiate with those people in their homes, 11 million homes or more, so that they can afford to pay the mortgage, stay in their home.
Now, I know the criticism of this.
Well, what about the citizen that stayed in their homes? That paid their mortgage payments? It doesn’t help that person in their home if the next door neighbor’s house is abandoned. And so we’ve got to reverse this. We ought to put the homeowners first. And I am disappointed that Secretary Paulson and others have not made that their first priority.
And we heard about an Obama four-pronged response of sorts (the four parts emphasized below):
[Obama:] I’ve proposed four specific things that I think can help.
Number one, let’s focus on jobs. I want to end the tax breaks for companies that are shipping jobs overseas and provide a tax credit for every company that’s creating a job right here in America.
Number two, let’s help families right away by providing them a tax cut — a middle-class tax cut for people making less than $200,000, and let’s allow them to access their IRA accounts without penalty if they’re experiencing a crisis.
[Number Three:] Now Sen. McCain and I agree with your idea that we’ve got to help homeowners. That’s why we included in the financial package a proposal to get homeowners in a position where they can renegotiate their mortgages.
I disagree with Sen. McCain in how to do it, because the way Sen. McCain has designed his plan, it could be a giveaway to banks if we’re buying full price for mortgages that now are worth a lot less. And we don’t want to waste taxpayer money. And we’ve got to get the financial package working much quicker than it has been working.
[Number Four:] Last point I want to make, though. We’ve got some long-term challenges in this economy that have to be dealt with. We’ve got to fix our energy policy that’s giving our wealth away. We’ve got to fix our health care system and we’ve got to invest in our education system for every young person to be able to learn.
And of course, we heard about “Joe the Plumber” –well, that was something new!–and the candidates’ different notions of whether “under $250,000″ defines the bulk of small businesses or not (depends on how you define it and whether you count dollars or people):
[McCain:] I would like to mention that a couple days ago Sen. Obama was out in Ohio and he had an encounter with a guy who’s a plumber, his name is Joe Wurzelbacher.
Joe wants to buy the business that he has been in for all of these years…but he looked at your tax plan and he saw that he was going to pay much higher taxes…
I will not stand for a tax increase on small business income. Fifty percent of small business income taxes are paid by small businesses. That’s 16 million jobs in America. And what you want to do to Joe the plumber and millions more like him is have their taxes increased and not be able to realize the American dream of owning their own business…
[Obama:] …the centerpiece of [McCain's] economic proposal is to provide $200 billion in additional tax breaks to some of the wealthiest corporations in America. Exxon Mobil, and other oil companies, for example, would get an additional $4 billion in tax breaks.
What I’ve said is I want to provide a tax cut for 95 percent of working Americans, 95 percent. If you make more — if you make less than a quarter million dollars a year, then you will not see your income tax go up, your capital gains tax go up, your payroll tax. Not one dime…
Now, the conversation I had with Joe the plumber, what I essentially said to him was, “Five years ago, when you were in a position to buy your business, you needed a tax cut then.”…
The last point I’ll make about small businesses. Not only do 98 percent of small businesses make less than $250,000, but I also want to give them additional tax breaks, because they are the drivers of the economy. They produce the most jobs.
On tax cuts, we heard the candidates reiterate their clear philosophical differences–Senator McCain going back to Joe the Plumber as someone who would benefit from the McCain tax cuts, and Senator Obama pointing to his friend Warren Buffett as someone whose tax burden we shouldn’t worry about:
[McCain:] Who — why would you want to increase anybody’s taxes right now? Why would you want to do that, anyone, anyone in America, when we have such a tough time, when these small business people, like Joe the plumber, are going to create jobs, unless you take that money from him and spread the wealth around.
I’m not going to…
Obama: OK. Can I…
McCain: We’re not going to do that in my administration.
Obama: If I can answer the question. Number one, I want to cut taxes for 95 percent of Americans. Now, it is true that my friend and supporter, Warren Buffett, for example, could afford to pay a little more in taxes in order…
McCain: We’re talking about Joe the plumber.
Obama: … in order to give — in order to give additional tax cuts to Joe the plumber before he was at the point where he could make $250,000… look, nobody likes taxes. I would prefer that none of us had to pay taxes, including myself. But ultimately, we’ve got to pay for the core investments that make this economy strong and somebody’s got to do it.
McCain: Nobody likes taxes. Let’s not raise anybody’s taxes. OK?
Obama: Well, I don’t mind paying a little more.
And then we got to the really good question regarding the budget deficit (which I think my friends and colleagues had something to do with):
Schieffer: …We found out yesterday that this year’s deficit will reach an astounding record high $455 billion. Some experts say it could go to $1 trillion next year.
Both of you have said you want to reduce the deficit, but the nonpartisan Committee for a Responsible Federal Budget ran the numbers on both of your proposals and they say the cost of your proposals, even with the savings you claim can be made, each will add more than $200 billion to the deficit.
Aren’t you both ignoring reality? Won’t some of the programs you are proposing have to be trimmed, postponed, even eliminated?
Give us some specifics on what you’re going to cut back.
Senator Obama’s response echoed the sentiment he had expressed in his Monday speech–talking about fiscal responsibility in the broader sense of setting priorities, making sure the benefits of government spending and tax cuts are worth the costs, and getting back to living within our means:
Obama: …there is no doubt that we’ve been living beyond our means and we’re going to have to make some adjustments.
Now, what I’ve done throughout this campaign is to propose a net spending cut. I haven’t made a promise about…
Schieffer: But you’re going to have to cut some of these programs, certainly.
Obama: Absolutely. So let me get to that. What I want to emphasize, though, is that I have been a strong proponent of pay-as-you-go. Every dollar that I’ve proposed, I’ve proposed an additional cut so that it matches.
And some of the cuts, just to give you an example, we spend $15 billion a year on subsidies to insurance companies. It doesn’t — under the Medicare plan — it doesn’t help seniors get any better. It’s not improving our health care system. It’s just a giveaway.
We need to eliminate a whole host of programs that don’t work. And I want to go through the federal budget line by line, page by page, programs that don’t work, we should cut. Programs that we need, we should make them work better.
Now, what is true is that Sen. McCain and I have a difference in terms of the need to invest in America and the American people. I mentioned health care earlier.
If we make investments now so that people have coverage, that we are preventing diseases, that will save on Medicare and Medicaid in the future.
If we invest in a serious energy policy, that will save in the amount of money we’re borrowing from China to send to Saudi Arabia.
If we invest now in our young people and their ability to go to college, that will allow them to drive this economy into the 21st century.
But what is absolutely true is that, once we get through this economic crisis and some of the specific proposals to get us out of this slump, that we’re not going to be able to go back to our profligate ways.
And we’re going to have to embrace a culture and an ethic of responsibility, all of us, corporations, the federal government, and individuals out there who may be living beyond their means…
And Senator McCain eventually got back to his plan for his “hatchet” spending freeze, after discovering that counting them/itemizing wasn’t so easy:
Schieffer: The question was, what are you going to cut?
McCain: Energy — well, first — second of all, energy independence. We have to have nuclear power. We have to stop sending $700 billion a year to countries that don’t like us very much. It’s wind, tide, solar, natural gas, nuclear, off-shore drilling, which Sen. Obama has opposed.
And the point is that we become energy independent and we will create millions of jobs — millions of jobs in America.
OK, what — what would I cut? I would have, first of all, across-the-board spending freeze, OK? Some people say that’s a hatchet. That’s a hatchet, and then I would get out a scalpel, OK?
Because we’ve got — we have presided over the largest increase — we’ve got to have a new direction for this country. We have presided over the largest increase in government since the Great Society.
Government spending has gone completely out of control; $10 trillion dollar debt we’re giving to our kids, a half-a-trillion dollars we owe China.
I know how to save billions of dollars in defense spending. I know how to eliminate programs.
Schieffer: Which ones?
McCain: I have fought against — well, one of them would be the marketing assistance program. Another one would be a number of subsidies for ethanol.
I oppose subsidies for ethanol because I thought it distorted the market and created inflation; Sen. Obama supported those subsidies.
I would eliminate the tariff on imported sugarcane-based ethanol from Brazil.
I know how to save billions. I saved the taxpayer $6.8 billion by fighting a deal for a couple of years, as you might recall, that was a sweetheart deal between an aircraft manufacturer, DOD, and people ended up in jail.
But I would fight for a line-item veto, and I would certainly veto every earmark pork-barrel bill. Sen. Obama has asked for nearly $1 billion in pork-barrel earmark projects…
Schieffer: Time’s up.
McCain: … including $3 million for an overhead projector in a planetarium in his hometown. That’s not the way we cut — we’ll cut out all the pork.
Schieffer: Time’s up.
Note that Senator McCain managed to “take the scalpel” that Senator Obama had brought out in the second debate, but that Senator Obama reminded viewers that it was the Bush Administration’s fiscal profligacy that is forcing us to talk about how we’ll have to “butcher” the budget now:
[Obama:] When President Bush came into office, we had a budget surplus and the national debt was a little over $5 trillion. It has doubled over the last eight years.
And we are now looking at a deficit of well over half a trillion dollars.
So one of the things that I think we have to recognize is pursuing the same kinds of policies that we pursued over the last eight years is not going to bring down the deficit. And, frankly, Sen. McCain voted for four out of five of President Bush’s budgets…
…to which Senator McCain responds, well, I’m still going to balance the budget, even with my plused-up version of the Bush tax cuts (i.e., I’m just going to slash spending to 16-17 1/2 percent of GDP):
Schieffer: Do either of you think you can balance the budget in four years? You have said previously you thought you could, Sen. McCain.
McCain: Sure I do. And let me tell you…
Schieffer: You can still do that?
McCain: Yes. Sen. Obama, I am not President Bush. If you wanted to run against President Bush, you should have run four years ago. I’m going to give a new direction to this economy in this country.
Sen. Obama talks about voting for budgets. He voted twice for a budget resolution that increases the taxes on individuals making $42,000 a year. Of course, we can take a hatchet and a scalpel to this budget. It’s completely out of control.
The mayor of New York, Mayor Bloomberg, just imposed an across- the-board spending freeze on New York City. They’re doing it all over America because they have to. Because they have to balance their budgets. I will balance our budgets and I will get them and I will…
Schieffer: In four years?
McCain: … reduce this — I can — we can do it with this kind of job creation of energy independence…
(Hmmm… there’s that irksome “banana peel” (”largest tax increase in American history”) claim… And I think he got that last line on jobs from his running mate–how ’bout you?…)
So that’s the new stuff on fiscal policy from last night’s debate–not really any new substance, but still a fine show. My position on the candidates’ economic plans, as recently revised in response to the financial crisis, remains the same as a couple days ago in my “partial nationalization” post. It aligns well with Maya MacGuineas’ position in this recent op-ed. Clearly the $700 billion rescue plan represents a substantial amount of new deficit spending (even if less than $700 billion is eventually added to the deficits in our accounting for the costs of the plan)–a level of deficit spending I understand (from listening to our economic policy leaders) is necessary to just keep our economy “alive.” Additional deficit-financed fiscal stimulus (as proposed by the candidates and Congress in the past week) may be deemed necessary to address the broader weakness in the general economy (”Main Street”). But being in “crisis” mode does not justify being indiscriminate in our (even) short-term deficit spending: any stimulus must still satisfy the policy goals set out for the previous fiscal stimulus in that it must be timely, well-targeted, and temporary.
Obviously now that our economy appears to be headed into a prolonged, not short-lived, slump, timeliness isn’t as tight a constraint as it used to be–although we may need it more and sooner now. And with the economic weakness a broader one now, the “targeting” may sound unnecessary, except that the real sense in which targeting matters is (still) in the need to maximize the economy-wide “bang per buck.” Thus, throwing out more tax cuts for the rich, even if designed as temporary “stimulus,” doesn’t make any more sense now than it did before the current crisis. It’s all about opportunity cost; we have to ask whether deficit-financed tax cuts for the rich make more sense as fiscal stimulus than assistance to state and local governments or infrastructure projects or even more tax rebates or other cash infusions to cash-strapped lower-to-middle-income households. And the current need for deficit-financed fiscal stimulus cannot be used as justification for new and permanent deficit spending, because “living beyond our means” is how our entire economy got into this mess in the first place.
After we get through the current crisis, directing our longer-term fiscal policies to encourage economic growth (to increase our and our children’s “means”) will cost real money. We can’t just “snap our fingers” and find our way to an energy-independent society with all those jobs. And we can’t keep borrowing for even those worthwhile investments, or else we’re just eating into the future return. So we can’t abandon fiscal responsibility by mindlessly extending permanent tax cuts for the rich, or mindlessly throwing money at programs that are counterproductive to our longer-term economic goals. Going forward, we don’t have and won’t have the money to waste, and so we can’t afford a President and a Congress who will make policy decisions as if we do. We need a ”sober” and thoughtful President and a “sober” and thoughtful Congress. And that’s how we should vote on November 4th if we care about our economic future.