Putting the Con in Economics

Yesterday, I ended with this overview . . .

We all honor McCain’s service. Or certainly should. But what of the rest?

The fact that he’s likeable (like George W. Bush) – and got mediocre grades (like George W. Bush) and comes from wealth (like George W. Bush) . . . and thinks invading Iraq was the right move (like George W. Bush) and wants to appoint ‘clones’ (his words) of the Justices George W. Bush appointed . . . and can’t keep straight whether Iran is Shiia or Sunni (as Bush couldn’t name the president of Pakistan) . . . and wants to make the tax cuts for the wealthy permanent, like George W. Bush (Dems want to keep them for your first couple hundred thousand in income, but go back to the Clinton/Gore rates for the rest) – does not necessarily make him the best choice to shoulder more responsibility than anyone else on the planet. Unless that is, you want a third Bush term. (May Day! May Day!)

But what of his economics?

Most recently, he proposed waiving the federal gasoline tax this summer, which has been greeted by economists almost universally as trivial (it would reduce the cost of gas barely 5%), wrong-headed (cut a tax dedicated to repairing our deteriorating infrastructure?), symbolically inappropriate (what’s next? should we start subsidizing gasoline to encourage people to drive bigger cars?), and quite possibly counterproductive (if on the margin people are encouraged to do a bit more discretionary driving than they otherwise would have, that would increase demand for gasoline, and, thus, the price).

Yes, one of McCain’s opponents chose not to be outbid for motorists’ affection. (It’s like an arms race – unilateral disarmament is risky.) But I console myself with the thought that it wasn’t her idea – and that she at least signaled the irresponsibility of it all by proposing to pay for it, by shifting the cost to the oil companies.

As to other economic matters, did you see Senator McCain on ABC’S ‘This Week with George Stephanopoulos’ a couple of Sundays ago?

STEPHANOPOULOS: A lot of Americans are angry right now about the economy.

MCCAIN: Sure.

STEPHANOPOULOS: And on Friday, you conceded that Americans are not better off than they were eight years ago, but the Democrats are launching an ad campaign this week where they’re going to try to pin some comments you made during the primary. Take a look.

(BEGIN VIDEO CLIP)

MCCAIN: I think you could argue that Americans overall are better off because we have had a pretty good, prosperous time, with low unemployment, low inflation. A lot of good things have happened, a lot of jobs have been created. I think we are better off overall.

(END VIDEO CLIP)

STEPHANOPOULOS: The theme is going to be, and you know it, you’re out of touch, you just don’t get it. How do you respond?

MCCAIN: Well, I have an economic plan. It’s good. It’s strong. Things have gotten worse in the last several months, as we all know, in our economy. Americans are struggling. American families are sitting around the kitchen table today trying to figure out how they’re going to keep their home, keep their job. Times are very, very tough. And the worst thing you can do, the worst thing you can do is raise taxes. Both Senator Clinton and Senator Obama want to raise taxes. That’s out of touch. That’s out of touch.

[Not on 95% of the people! Only on that portion of your income exceeding $200,000 or so! – A.T.]

Senator Obama says that he doesn’t want to raise taxes on anybody over – making over $200,000 a year, yet he wants to nearly double the capital gains tax. Nearly double it, which 100 million Americans have investments in – mutual funds, 401(k)s – policemen, firemen, nurses. He wants to increase their taxes.

[Putting the long-term capital gains rate back at the Clinton-Gore 20% would raise it by a third, not double it. And not one dime of the money nurses, et al, have in 401(k)s (or IRAs) is subject to capital gains tax. So the ‘100 million’ number is wildly exaggerated.

Even INCLUDING retirement funds, the median family’s stock holdings are only about $25,000. For them, the annual capital gains distribution from a mutual fund would rarely exceed a couple of thousand dollars, on which the difference between a 15% rate and a 20% rate might be $50 or $100. And even that burden could be easily brushed aside – it would be most Democratic to exempt, say, the first $10,000 a year of gains from the higher rate. But what about the $500,000 gains and the $25 million gains? Would it hurt policemen, firemen, and nurses to see the rate on those gains go back to 20%?

It’s the Republicans who are always trying to keep from raising the minimum wage while lowering the tax on billionaires. The Democrats who are always sensitive to the difficulties faced by the working poor and the middle class.

(Did you notice that CEO pay – which was about 40 times as great as the pay of the CEO’s employees in 1980 – is now 433 times as great? AND these guys got huge tax cuts. All hail the Republican plutocracy! These are nice people and we wish them well. No one begrudges John and Cindy McCain their Citation Excel. But c’mon, Senator – get real.) – A.T.]

MCCAIN: And he obviously doesn’t understand the economy, because history shows every time you have cut capital gains taxes, revenues have increased, going back to Jack Kennedy. . . .

[So if we lower the capital gains tax rate to zero, revenues will go through the roof? Again, get real! Economists can debate all day just where the breakeven lies – it depends on so many things, including people’s expectations of possible future changes to the rate that would induce them to take gains or hold off. But clearly, you can’t keep lowering and lowering tax rates and expect revenues to keep rising.

And the same is true of the tax on ordinary income. This makes me so nuts. Of course revenues went up when Kennedy cut the top tax rate from Eisenhower’s 90% to 70%, where it remained, still wildly too high, until Reagan cut it to 50% in his first term, STILL way too high, and then to 28% – which, experience showed, overshot, as deficits grew frighteningly large.

Just 30% of GDP when Reagan took office, our aggregate National Debt will be around 70% of GDP when Bush leaves. This is a $10 trillion debt burden – 85% of it accumulated by Republican administrations – on the shoulders of our children and grandchildren.

Clinton moved the top bracket on ordinary income back up to 39.6% and by the end of his Administration had the budget balanced. Experience showed that THAT rate, coupled with his 20% capital gains rate, was more or less ‘just right’ (to put it in porridge terms). But then Bush went back to cutting taxes, mainly on the rich, and ballooning the debt, weakening the dollar, and all the rest.- A.T.]

We’re going to cut taxes. We’re going to reduce spending. We’re going to put a freeze on discretionary spending. We’re going to make wealthy people pay for their own prescription drugs. We’re going to scrub every institution of government and put them out of business.

[That’s what Reagan and Bush said – they’d cut taxes (which they did, mainly for the rich) and cut out the waste in government, which they didn’t. My sense is that the Al Gore-led Reinventing Government effort was far more effective at getting us more for our taxpayer buck than the ‘heck of a job’ the Republicans have done. The difference, some say, is that Democrats believe in government and want to make it work. Republicans almost seem to want to prove that it can’t. Obviously, we Dems have not always done a good job – and not every Republican-led agency has failed to do a good job. And obviously, there are lots of things government should NOT try to do. But I think a lot of Democrats get that; and certainly have vocal guidance from our friends across the aisle if and when we forget. – A.T.]

☞ There’s much more to the interview, which you can watch in its entirety. But the big thing is that, like Reagan and Bush, he will cut taxes and balance the budget by cutting waste – which somehow they never managed to do. If only we had a Harvard MBA in there – he could do it. (Oh, wait. Sorry.)

I’m not pooh-poohing the desirability of cutting waste. But as Stephanopoulos points out, not every ‘earmark’ is waste – one goes for military housing, another is our aid to Israel, neither of which, the Senator was quick to point out, he planned to cut – and, in any event, the total cost of earmarks, even if you did eliminate them all, is less than 1% of the entire budget and perhaps 5% of the true deficit. (The true deficit is the one that does not ignore our borrowing from the Social Security Trust Fund.) Note, too, that with Dems back in control of Congress, earmarks have been cut sharply.

McCain pledges to wring billions from wasteful military procurement programs, which would be great. But have you noticed how it always seems to be more easily said than done?

He wants to freeze all nonmilitary discretionary spending (which means cutting it 5% or so a year, when adjusted for inflation and population growth). But cutting our investments in people and infrastructure may not be the best way to reinvigorate the economy, let alone get it on track for prosperous generations to come.

There may be a reason the stock market has, historically, done better under Democrats than Republicans. Spread the word.