McCain and Obama Focus on the Economy

The weak economy is a central focus of the presidential campaign.

Bernanke recognizes Americans are feeling a pinch.

Bernanke recognizes Americans are feeling a pinch.

By + More

No doubt, John McCain and Barack Obama have big differences on economic policy. But there's at least one thing about which McCain and Obama seem in complete sync: The $13 trillion American economy is a "shambles." It's a word that both presidential hopefuls have tossed around while on the campaign trail. Now someone who describes, say, a house as a shambles probably means it needs a big-time, rip-out-the-drywall renovation. Maybe even a complete teardown. So are Obama and McCain right in their harsh economic analysis? And if so, would all their many proposed economic ideas really make things radically better anytime soon?

As to the first question, most Americans these days—watching the value of their homes plummet and spending way more on gasoline and food—would probably answer with a caustic "Gee, ya think?" According to a variety of public-opinion polls, nearly 80 percent of voters believe the country is headed in the wrong direction. Likewise, poll after poll places the health of the economy as the most important issue facing the nation today. Consumer confidence, as measured by the Conference Board, is at a 16-year low. So in one sense, former McCain adviser Phil Gramm did nail it when he said America is suffering from a "mental recession."

Painful times. But clearly, the problems go beyond the psychological to the financial. The unemployment rate has risen from 4.4 percent in March 2007 to 5.5 percent in June, while the top-line annual inflation rate—the one that includes food and energy—is at levels not experienced since the early 1990s, topping 4 percent in seven of the past eight months, including 4.9 percent in June. Gas prices have nearly doubled since the start of 2007. Not only are housing values down some 16 percent since the middle of 2006, according to the S&P/Case-Shiller home price index, but the crumbling mortgage market has created instability on Wall Street with Uncle Sam having already bailed out Bear Stearns and now launching a rescue of Fannie Mae and Freddie Mac. Even worse, all that fiscal stimulus and Federal Reserve easing meant to avoid a recession this year may result in a weak 2009 as the Fed possibly raises the interest rate to fight inflation. "So you might get a double-dip downturn with things muddled at best," says market strategist Jeffrey Saut of Raymond James & Associates in St. Petersburg, Fla.

Now you know why Federal Reserve Chairman Ben Bernanke recently told Congress that "whether it's a technical recession or not is not all that relevant. It's clearly the case that for a variety of reasons, families are facing hardship." Yet it should be noted that the economy is in an ever-so-slight expansion mode thanks in large part to trade, with the nation's gross domestic product expanding at a 0.6 percent annual rate in the fourth quarter of last year, 1 percent in the first quarter of this year, and perhaps 2 to 3 percent in the second quarter, economists say. And even though the unemployment rate has spiked, jobless numbers are still low by historical levels. "It is true that the home-building and autos sectors have been hammered," says economist Robert Stein of First Trust Advisors. "But outside those sectors, the economy is not just healthy but downright strong."

Yet talking about those positives seems strictly off message in the 2008 race for the White House. And right now, both campaigns are adhering tightly to a "We feel your pain" script. How would Douglas Holtz-Eakin, McCain's top economic adviser, describe the focus of McCainomics? "Jobs for America," says Holtz-Eakin, echoing the campaign's current slogan. "You can look at everything McCain is doing through the lens of making sure American workers have a job on which they can build the foundation of their family and their personal goals."

Take McCain's proposal to cut the U.S. corporate tax rate from 35 percent to 25 percent. According to Holtz-Eakin, such a rate cut would make it less likely that companies would off-shore jobs. The same goes for McCain's plan to reduce healthcare costs by injecting more free-market dynamics into the nation's healthcare system, such as using tax credits—$2,500 for individuals, $5,000 for families—to induce consumers to buy their own insurance directly rather than through their employer. That way, McCain's campaign says, workers will more closely watch costs, and companies can focus on their core business. "Look at the cost growth and what it does to our firms' ability to compete internationally, hire people, and give raises to workers," Holtz-Eakin says.