McCain and Obama Focus on the Economy

Bernanke recognizes Americans are feeling a pinch.

But neither plan might work as well as hoped if it increases the deficit, because excess spending now will need to be paid back later with higher taxes, most economists say. Indeed, a recent University of California-Berkeley study found that simultaneously reducing the federal budget deficit makes tax cuts more effective and tax hikes less harmful. And Burman has doubts whether either McCain's or Obama's economic proposals, which are chock-full of vague spending cuts, would ever put the budget on a path to being balanced. "Some of the proposals just really aren't fleshed out," he says. But based on a straight accounting analysis, which does not consider any impact on economic growth, the Tax Policy Center finds that McCain's plans would increase the national debt by $4 trillion vs. $3 trillion for Obama by the end of 2018 if they are not offset by massive spending reductions.

Those deficits could be a big problem if bond traders think extravagant government spending will lead to even higher inflation—poison for bondholders. In that case, the so-called bond market vigilantes of Wall Street "will send Washington a nasty message," says analyst Gregory Valliere of the Stanford Group, by jacking up interest rates. Spiking interest rates along with spiking gas prices and spiking unemployment? This economy might be ripe for a teardown after all.