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McCain’s Economic Agenda

Image has not been found. URL: http://www.washingtonindependent.com/wp-content/uploads/2008/09/mccaincrop.jpgSen. John McCain (Photo by: Lauren Victoria Burke)

Sen. John McCain, the presumed Republican nominee, rose to national prominence in part by taking on his fellow Republicans, particularly on the disgraceful “K-Street” project — a conscious embrace of business lobbyists reminiscent of the Harding administration. More recently, he broke ranks with the party’s libertarian wing by producing a housing rescue plan much like the one sponsored by Rep. Barney Frank, the ultra-liberal Massachusetts Democrat. His renegade stance on economic issues seemed to match his wavering on abortion and stem-cell research.

As a presidential candidate, however, McCain is redefining himself as an avatar of classic Reagan Republicanism — a free-market libertarian in economics; conservative on social issues and decidedly anti-government. The libertarian shift in economics is signaled by his loud support of deep tax cuts, even deeper than President George W. Bush’s, and tilted heavily toward companies and investors.

Debt_5212.jpg
Debt_5212.jpg

Illustration by: Matt Mahurin

If McCain wins the presidency, however, the first, and dominant issue he will face, just like a President Barack Obama, is the drawn-out credit crunch and its attendant economic collapse. This is territory where the split between the Republican libertarian and big-business wings is practically neuralgic. With less than five months before the new president takes office, the crisis is sure to be still in full roar.

The surprise 3.3 percent gross domestic product growth rate reported for the quarter ending in June was a fluke — a compound of tax rebates and a weirdly low official annualized inflation rate of only 1.2 percent. The government wasn’t lying about inflation as many believe; it’s just that its preferred formulas have almost nothing to do with the prices consumers pay.

Consumer income and spending figures for July were dreadful, the housing collapse continues apace. Meanwhile, the last dregs of optimism are slowly bleeding out of consensus forecasts for next year.

Neither candidate has said much about how he will generate a recovery. But Obama, the Democratic nominee, hardly needs to — the debacle itself is such a powerful argument for political change, there’s no need to fuzz it up with programmatic details.

McCain is in a far tougher position. He is the standard bearer of the Republicans, and the credit crash happened on their watch. The recent housing rescue legislation was mostly written by Democrats, but it was strongly backed by Bush and Treasury Secretary Henry Paulson, who made important contributions to the final bill. Still, two-thirds of House Republicans, almost all from the libertarian wing, voted against it.

Paulson himself embodies the Republican conflicts. He came into office determined to reel back Fannie Mae and Freddie Mac for abusing their privileged borrowing status. But once the crisis hit, he reluctantly endorsed a massive increase in Fannie and Freddie lending. As Paulson clearly feared, he found himself the chief engineer of a Fannie and Freddie rescue.

Paulson is a strong figure who has played a weak hand unusually well. A new Republican administration will be in a weaker position still. McCain has a good record of bipartisanship. But if he is elected, he will have to bargain with frustrated and infuriated Democrats, burning for a replay in 2012. Finding a Treasury secretary of the same stature of Paulson, or prevailing on Paulson to stay in office for another year or two, will be of crucial importance.

The split between the two hemispheres of the Republican brain is also glaringly evident in the published McCain economic program. The energy program, for example, in sweep if not in detail, reads almost like a 1990s Democratic “industrial policy” text.

It includes a big push for nuclear power, stricter automobile mileage standards, big investments in clean coal, more stable and permanent tax credits for wind and other fossil fuel alternatives and a crackdown on oil market “speculators.” Bravely, the platform calls for an end to the absurd corn ethanol mandates so beloved by the U.S. grain belt, along with dropping import restrictions on the more energy-efficient sugar ethanol. The main discordant note is the pandering tax holidays for gasoline.

McCain’s health-care proposals are also spiked with statist flavorings. So there is a call for “a new public health infrastructure” and initiatives in early intervention, healthy habits, new treatment models, managing care for chronically ill patients, helping to creating a comprehensive electronic records systems and much else.

But libertarianism still rules. How will all the health-care plans be accomplished? By turning everything over to private markets. The platform proposes making what are effectively cash grants of $5,000 to “every family” ($2,500 to singles) and eliminating the tax advantages for employer-based insurance.

The idea is that every family will go shopping for its own insurance, instead of being stuck with whatever its company offers. Heightened consumer awareness will drive providers toward the high-quality, cost-efficient care that the United States now sorely lacks – in much the same way, presumably, as consumers have insisted on a high quality, cost-efficient automobile industry.

But even with its libertarian tilt, the health proposals are not seriously intended. They will cost money, and the core of the platform is that the government will be starved of financial oxygen. The Bush tax cuts will be made permanent, of course. The Alternative Minimum Tax, which is beginning to bear more heavily on middle-income families, will be eliminated (estimated cost $1.2 trillion in a decade). And then McCain has a long list of new tax cuts all his own.

The virtue of the platform is that it is clear. Whatever the gestures toward government activism, this is a small-government manifesto. The electoral contest on economics is therefore starkly drawn.

Democrats trace the current economic ills directly to the libertarian approach to the economy, especially with respect to financial regulation. Interestingly, by so wholeheartedly adopting Bush’s libertarian economics, McCain seems to suggest that the administration’s incompetence must have been the problem.

Yet if McCain does win the election, his newly-avowed libertarianism could greatly complicate his working with the majority in Congress. He is likely to have a very unpleasant first couple of years.

  • Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”*

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