The bankruptcy of Lehman Brothers, the sale of Merrill Lynch to Bank of America, the 500 plunge of the Dow, the government takeover of AIG—all these have got the presidential candidates talking about the economy. But both Barack Obama and John McCain have been vague about their solutions. And for good reason. Our economic problems are concentrated in the finance sector, and that's the part of the economy the average voter knows least about.
Moreover, the political blame is widely dispersed. George W. Bush and Bill Clinton and Democrats and Republicans in Congress have all pushed policies to increase home ownership. The problem is that many marginal home buyers were unable to pay their mortgages when house prices fell. Another problem: Under a long-standing regulatory regime, the firms that rated packages of securitized mortgages were paid by the sellers rather than the buyers. Some of those mortgage securities turned out to be worth less than buyers thought.
And strong arguments were made that the biggest dealers of securitized mortgages, the government-sponsored enterprises Fannie Mae and Freddie Mac, were overleveraged. The Bush administration and some Republicans in Congress tried to place limits on the GSEs' investments, but this was successfully resisted by most Democrats and by some Republicans. Strong lobbying prevailed over strong arguments, and Fan and Fred are now in federal conservatorship.
It's hard to make a 30-second spot about all this. It's easy to call for more regulation, but this is a tricky business, and there's a risk of stifling innovation, which has on balance vastly enriched us over the past 25 years. In any case, voters are not very good at analyzing regulatory changes.
So the economic argument may focus on something voters do understand—taxes. Here, Barack Obama can argue that he represents change. He wants higher taxes on high earners and promises "tax cuts" to 95 percent of taxpayers. Actually, they're refundable tax credits, which means cash payments to the 40 percent or so of households who don't pay income tax. But those refundable tax credits are phased out as incomes rise, so his proposal amounts to, as my American Enterprise Institute colleagues Alex Brill and Alan Viard have written, "marginal rate hikes in disguise" on those with incomes as low as $27,000.
Gaining traction. The best argument against higher rates on high earners has come from Sarah Palin in her acceptance speech, in a line obviously not written by her speechwriter. "My sister Heather and her husband have just built a service station that's now opened for business—like millions of others who run small businesses. How are they going to be any better off if taxes go up?" Note that she doesn't say that Heather and her husband will be paying higher taxes themselves. She's arguing that higher taxes will hurt the economy and will hurt the little gal and guy.
That argument may be gaining some traction. The recent Quinnipiac poll in New Jersey, which found Barack Obama leading John McCain by only 3 percentage points in a high-income state carried easily by John Kerry and Al Gore, found that 54 percent of likely voters believe their taxes will go up if Obama is elected. When asked whether they believe Obama when he says that he'll cut taxes for 95 percent of working families, or McCain when he says Obama will raise taxes on most families, 44 percent say they believe McCain, and 40 percent say they believe Obama.
Interestingly, post-convention polls show McCain running at least as well as Bush in 2004 in Michigan and Ohio, where recent state tax increases have signally failed to bolster ailing economies. Gallup shows Democrats with only a 3 percentage-point edge in the generic House vote; it used to be double digits. And the Rasmussen poll shows Democrats ahead only 5 percentage points in party identification. The old rule that economic distress moves voters toward Democrats doesn't seem to be operating.