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Problems with McCain's economic plan

Anthony Randazzo
October 23, 2008, 9:46am

John McCain's website gives limited details about his plan for "helping Americans," but there is enough detail given to show his ideas are going to massively increase the problems our economy and nation are facing. As the election deadline nears, Reason offers this breakdown of McCain's core budget proposals (directly from his website) and a commentary on the out of control madness: Establishing a National Commission on Workplace Flexibility and Choice: McCain wants to modernize labor laws to require employers to offer flexible work arrangements and allow flexible health plans. His plan would promote "telework," create flexible retirement plans, overhaul unemployment, and provide job training assistance to help America be competitive in the world economy. Counter: How about that plan from a supposed fiscal conservative who wants to let "the market operate freely?" Whenever a politician starts talking about requiring firms to do anything, we should instantly be concerned. McCain supported the Family Medical Leave Act in 1993 that forced firms to allow for a leave of absence without penalization to care for a newborn, adopt a child, or take care of a family member. He also co-sponsored the Family Friendly Workplace Act that sought to require employers to provide flexible work schedules to "help employees balance the demands and needs of work and family." On the surface they may sound like good ideas, but they are recipes for disaster in America's job market. When you limit the ability of firms to hire and fire you incur unseen loses. Firms may be less likely to hire someone for fear they couldn't fire them in necessary. Employees can abuse the "rights" given to them to work. Or firms may experience inefficiencies as they hire temporary workers to fill the place of an "on leave" employee. Additionally, these laws show a lack of trust in the American employer. They are intended to keep firms from mistreating their employees, but when you try to regulate away ever potential "injustice" you remove the onus on the employer to act responsibly out of their own interest. Instead the standard becomes just obeying the law and nothing more because the law must be trying to cover every conceivable vice. This is what France has done, dictate extreme measures to the firms on employment, allowing for months of paid leave, mandating a 35-hour work week killing inefficiency, and creating a poor work ethic in the country. They now have skyrocketing unemployment. That's what McCain's economic plan would bring.
Strengthen the dollar while reducing dependency on oil: McCain will enact policies like his summer gas tax holiday plan to reduce prices, while also instructing the Fed to begin taking steps to strengthen the dollar. Counter: Lets start with oil. No matter what plans or ideas McCain has on oil, his summer gas tax plan, which is website boasts broadly about, underscores his simple lack of economic understanding. First, when you lower prices, demand goes up, and when demand goes up, without an increased supply, prices follow. Simple economics. If the gas tax had been dropped by 18.4 cents this summer it would have drastically raised demand for gasoline, pushing refineries to their max, and increasing the price pretty much right back to where it was when the tax was in place. We have limited refineries in America that are always pushing their limits during the summer so our production (supply) couldn't increase with demand to keep the price down. The federal government would have lost a huge source of revenue on this tax cut, which would have increased our deficit, increasing our debt, increasing the interest payments, and just making it worse for future generations. McCain's plan would have potentially made life a bit easier today (though only for a short while as prices caught up) and made it much worse for future generations. Then there are the other issues like increased fossil fuel consumption being encouraged (ahem, global warming), and more money going to the Middle East. Though, you could throw those out and it would still be bad. And when it comes right down to it, how would you feel if taxes were cut, only to be slapped back on again, jacking up the price? And on the dollar, you know, I'm no Ben Bernanke, but I'm just gonna take a stab in the dark here: if the Fed had the tools available to strengthen the dollar AND it was a wise choice to do so, don't you think they would have by now? Just a theory. And if McCain had any special ideas, don't you think he would have given them to the Fed by now? Just a thought.
Help Americans stay in their homes and go to college: McCain believes there is nothing more important than keeping alive the American dream of owning a home. He would provide $300 billion in relief for those facing foreclosure, and promote transparency and accountability to ensure we never face this problem again. He will also provide more federal loans for students wanting to go to college. Counter: I find the hyperbole "nothing more important" a bit upsetting here. Of course I wouldn't accuse McCain of thinking home ownership is more important than fighting terrorism, but what upsets me is the underlying arrogance. It's a systemic problem in America: we think we can have it all. The policies of promoting home ownership in America took a nasty turn when we tried to get more people into homes then actually should have been happening. Traditionally we've had between 60% and 65% home ownership among working individuals in America. That's just a fact and its been ok. But we used subprime mortgages to push that number up 8% to 10% higher than we could sustain. It's the attitude that home ownership is some how a right, or a measure of success. As long as that's the attitude we'll face policies that promote it to our detriment. Bailout out "Main Street" with another $300 billion comes with a whole host of problems. We'll just throw out the classic arguments that its redistribution of wealth, will increase our deficit, is going to cripple us fiscally down the road, is not the role of government, etc. Beyond that, it only encourages misbehavior in the future. The HOME loan program McCain is proposing will not assess the responsibility or culpability of anyone, only the financial qualifications. All you have to do is fill out a form at the Post Office, send it in, and if your mortgage terms match the qualifications, the government will buy your mortgage and refinance it into something you can afford. It doesn't matter if you never should have bought the house in the first place because you had not assets or even if you were just investing in the house. Its just money funding American irresponsibility. If you got a subprime loan and can't pay for it now then you should not have bought a home. You should have assessed your finances, and waited until you had the money to buy a home instead of taking a no down payment, low-interest loan that was going to skyrocket. If you didn't read the fine print then you should not have been owning a home: its called responsibility. If you bought a home with a subprime mortgage to turn a profit on it and got stuck then that's your fault, your risk, your bad investment. This all sounds harsh, but it's the "tough love" needed to break the American arrogance that says "I want it now without working for it."
Invest in new technology: McCain would make the tax credit for research and development investment permanent, creating an incentive to innovate. Counter: Again, on the surface many would think this is a good idea. Even neo-cons like Thomas Friedman back this sort of government "investing" in America. But setting aside the question of role of government (though its important), how will America afford this and McCain's tax credits? They aren't tax cuts, but rather, money given for investing in R&D. So how much will America spend on funding science? And what are they funding? Is that where taxpayer dollars should be going, or can we trust the private sector to move innovation along at the pace it should be? We tried to get more people into houses faster than the market would allow, and created the subprime mortgage bubble. Any government driven innovation, even as simple as broadband internet, carries big risks and increased fiscal weight. Remember, the cost of any government "investment" is the dollar amount, plus the interest our national debt accrues by not using that investment money to pay the debt off, plus the opportunity cost of what the private market would have done in the void created by government inaction. (This is the same critique I have of Obama's technology investment plan)
ON THE FLIP SIDE There is light at the end of the tunnel though. Its confusing because while McCain doesn't understand gas taxes, he won't raise the 35% tax cap and would cut capital gains taxes 10% and phase out the Alternative Minimum Tax. And he pledges to ban Internet taxes and new cell phone taxes. McCain does support free trade, saying he'll "reduce barriers to trade" and says he'll repeal the 54 cent per gallon tariff on ethanol imports, and roll back ethanol mandates skewing market supply and demand and raising food prices. He supports personal security accounts to reform social security, but not the full degree he should. His website also promises to cut Medicare spending, though that measure is unlikely to move anywhere anytime soon. The most important light at the end of the tunnel is McCain's pledge to balance the budget by 2013. Thought that seems impossible (and still leaves our deficit as a big issue), his website promotes a plan to enact a one-year spending freeze on non- discretionary spending for year to start paying down the deficit and comprehensively review all spending programs. He would also cut out earmarks from future budgets and reclaim earmarks from FY2007 and FY2008

Anthony Randazzo is Director of Economic Research


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