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.
The plan. Among McCain's other economic initiatives: leaving income and investment tax rates at current levels, doubling the personal exemption for dependents, expanding domestic oil drilling to help bring down energy costs, and offering a $300 million innovation prize for developing advanced battery technology.
With the economy weak and unemployment rising, the Obama campaign has subtly switched its focus from reducing income inequality—by raising income taxes on wealthier Americans and giving a $1,000 tax credit for middle-class families—to growing the economic pie. (Probably smart politics. A new Gallup Poll shows that no matter what their income or political affiliation, an overwhelming majority of Americans prefer economic growth over income redistribution as the best way to fix the economy.) Top Obama economic adviser Jason Furman says Obamanomics focuses mainly on one thing. "Creating jobs is at the center of almost every one of Barack Obama's economic policies," Furman says. "[For example], his energy plan would help to create up to 5 million green jobs through investments designed to help make sure that the next set of green industries that we know are coming happen right here in the United States."
That both campaigns are pushing the same basic message—More jobs! Higher incomes! A stronger economy!—during troubled economic times isn't so surprising. Beneath those slogans, however, you'll find key ideological differences. Whereas McCain wants to fix the economy by freeing up the private sector through lower taxes, Obama thinks it's time Uncle Sam opened his wallet to boost job creation and incomes. He wants to invest $150 billion over 10 years to advance clean energy technology, as well as $10 billion per year for five years in a government-run, energy-themed venture capital fund. Obama also wants to spend $60 billion over the next decade on infrastructure upgrades. All this, Team Obama claims, would generate high-paying jobs for middle-class workers and "bottom up" economic growth that would help reverse the perceived inequality of the past decade. "Our current problems are rooted in the squeeze on ordinary Americans," says Obama adviser Austan Goolsbee.
So would Obamanomics or McCainomics help your personal economics? Well, if you're talking 2009, probably not so much, if for no other reason than timing. The year would be more than half over before any major bill passed. Plus, current events are overtaking some campaign proposals. Obama is pushing a $50 billion stimulus plan—a combination of rebates, expanded unemployment insurance, and aid to states—but so are Democrats in Congress right now. Likewise, both McCain and Obama have plans to deal with the housing crisis. But these are really just tweaked versions of the bailout bill currently moving through Congress—the government would refinance mortgages for selected homeowners—and likely to be signed soon by President Bush. Also consider that the best cure for the housing crisis is probably time rather than new housing policy. "There is just a glut of homes," says economist Patrick Newport of Global Insight. "No matter what Washington does, prices have to fall and builders have to cut back."
Future improvement. Instead, voters should focus on whether what McCain and Obama are proposing would help create jobs and raise the U.S. standard of living beyond 2009. Len Burman of the centrist Tax Policy Center thinks the high corporate tax "probably could be lower" to increase U.S. corporate competitiveness. So score 1 for McCain. At the same time, government spending on improving U.S. infrastructure—it needs about $1.6 trillion worth of upgrades, according to the American Society of Civil Engineers—might create a better business climate and thus more jobs down the road. Score 1 for Obama.
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.