Last week, while campaigning in Pennsylvania in anticipation of Tuesday's primaries, John McCain unveiled his economic plan with this as the objective:
Today In Pennsylvania, John McCain Outlined A Pro-Growth, Pro-Jobs Strategy To Get Our Economy Back On Track. John McCain's strategy includes taking the near-term actions needed to provide immediate help to American families while also taking the longer-term steps necessary to secure America's economic prosperity and leadership in the world.
The strategy excludes any mention of fiscal responsibility per se, confirming our earlier suspicions that is is not a top line priority. For this transgression, Pete and Stan will have a lot to say in their posts.<!--break-->
My task is to consider the economics of the plan. Presidents don't have a magic wand that creates a growing economy out of thin air with a simple wave. In truth, the best anyone can hope for is to improve the economic environment a bit at a time through sensible changes to policy. The frustrating part of that task is that it takes time for good policies to have an impact. And my conclusion is that time is not on McCain's side.
I'll follow the plan as the McCain campaign laid it out:
1) The High and Rising Cost of Living
The McCain plan proposes three reforms. A summer gas tax holiday, a hiatus in filling the Strategic Petroleum Reserve, and ending ethanol subsidies and other barriers to trade.
a) The summer gas tax holiday is ridiculous. As others have noted, prices are likely to rise in order to make up the difference given the way the oil industry runs at full tilt over the summer months. Besides, in order for this to work as a campaign pledge, McCain would have to win in November and then go back in time to May to remove the tax.
b) If you think you've heard this argument about the SPR before, you have. Then as now, you could file it under "every little bit helps," but by only a little bit at most.
c) I'm not in favor of ethanol subsidies or tariffs or sugar quotas either. These existing policies do not improve the economic environment for growth. They restrict trade or distort it in favor of particular technologies that are themselves unproven. I view just about every departure from free trade as patronage to politically influential domestic interest groups.
2) Housing and Student Loans
There are two elements here. The first is the "HOME Plan," in which mortgage borrowers with a particular combination of characteristics (e.g., non-conventional loan, primary residence, after 2005, in or soon to be in arrears) can switch to a new 30-year fixed rate mortgage. The second is a task force at the Justice Department to investigate abuse by lenders.
I think that the first principle of a bailout--where laws are changed after the fact to ease someone's burden at someone else's expense--should be that the entity being bailed out has all of its equity wiped out. This is to avoid the moral hazard problem in dealing with other borrowers later on in this crisis or the next one. This is why I like Dean Baker's Own-to-Rent plan.
McCain's plan is typical of what Presidential candidates propose: a set of fairly complicated conditions for eligibility and then a limited amount of relief for those who are eligible and apply. It doesn't seem big enough to do much harm or offer much help. Judging this plan versus others requires immersion in the details, which is something of a pointless exercise considering that most of the remaining fallout from the crisis will occur during the 9 months between now and the date it could first be signed into law.
I'm all for investigating bad lending practices, and there were many in this environment.
There is also a statement in the plan about calling on student loan providers and the states that backstop them to anticipate and overcome disrputions to the program in the fall semester. I have often said that if young people voted, student loans would be the third rail of American politics. This is another policy that would require a time machine to work as a campaign proposal.
3) The "Pro-Growth, Pro-Jobs" Tax Agenda
I'll leave most of the heavy lifting on the details of this to Pete. There's a cornucopia of reductions in the tax burden across the economy: AMT relief, personal exemptions, capital expenditures, capital income, corporations, the internet, cell phones, R&D, and Medicare premiums. Suffice it to say that there is absolutely no suggestion that anyone in the economy is going to be taxed at a higher rate.
Stan will point out that this blows an enormous hole in the deficit for years to come. So the question left for me is simply, "Are any of these objectives so important that we should burden taxpayers of the future to pay for them?" In general, my answer is "no." Just about all of these tax reductions are attempts to giver more resources to groups of the population of taxpayers today. Those that do have an impact at the margin (like expensing equipment investment) are not targeted to meet an identified need. If the deficits were for repair of critical infrastructure, then I would be more inclined to support them.
In its particulars, this is a Pro-Today Tax Agenda, not a Pro-Tomorrow Tax Agenda.
There are two other elements of the Tax agenda worthy of comment. First, the proposal to require a 3/5 majority vote in Congress to raise taxes would be better applied to a 3/5 majority vote in Congress to deviate from a responsible budget policy. Second, the notion about tax simplification--that taxpayers should be able to opt into a very simplified tax code--would be okay under the proviso that almost everyone would pay more under the simple code than the current code.
4) Trade and Competitiveness
There is some good stuff here, if like me you are most receptive to the Milton Friedman view of microeconomics.
First, there is a pledge to open up international trade, with the goal of lowering the cost of living for American families. That's the right goal to have. If it can stand up to interest group pressure, that will be a great improvement.
Second, there are pledges to enable parents to have more choice in where they send their children to school. (More from McCain here.) Unfortunately, the federal government has little direct role to play here, since primary and secondary education is the province of state and local governments. If McCain were looking for a better way to make an impact using tools at the disposal of the federal government, he'd make private school tuitions tax-deductible, just like the state and local taxes that fund public schools (or make available a tax credit). More from me on this here.
5) Reforming the Unemployment Insurance System
There is some good stuff here, too. The McCain plan recognizes that the current system of assistance for displaced workers is a patchwork that suffers from both gaps and redundancies. It also borrows the very good idea from some work about a decade ago by Martin Feldstein and Dan Altman about unemployment insurance accounts. The basic idea is to get displaced workers to economize on the time spent unemployed by letting them keep some of the foregone benefits if they find a job sooner rather than later.
6) The Big Omissions
Big Omission #1: In the "plan," health care reform receives only a scant mention at the end. There's more here. In the more detailed version, there is an acknowledgement that health insurance should be portable across jobs. Health security should be decoupled from job security. A candidate who proposed constructive changes in that regard, but almost only in that regard, would get my support.
Big Omission #2: In the "plan," energy reform also receives only a scant mention at the end. That mention does acknowledge the need for reducing consumption, which is a positive sign.
So what can we make of all this? There are some parts of the McCain economic plan that are silly or irrelevant. There are some good points on microeconomics and international trade. But I would be surprised if these got any attention at all, given the enormous fiscal burden that this plan shifts to future generations. Since they cannot vote, I'll turn the blog over to Stan and Pete for their expert commentary.