John McCain’s Reckless, Inane Economic Agenda
A couple of weeks ago, John McCain gave an address at Carnegie Mellon University that his campaign billed as a major speech outlining the would-be president's vision of economic policy. I meant to say something about it at the time, … Read More
A couple of weeks ago, John McCain gave an address at Carnegie Mellon University that his campaign billed as a major speech outlining the would-be president's vision of economic policy. I meant to say something about it at the time, and with the news out of the Congressional Budget Office today that McCain's budgetary proposals would add trillions to the national debt (and approximately treble the increased debt of his supposedly free-spending opponents' proposals), now is as good a moment as any to attend to the fiduciary disaster McCain's election could entail. (But is a trifling thing like undermining the solvency of the federal government really worth worrying about when the mystery of the missing lapel pin remains unsolved?) Of course, any presidential campaign proposals from any candidate have to be interpreted with a grain of salt; nothing a candidate proposes prior to his or her election will be enacted in unaltered form, and a savvy voter is nothing if not one who can distinguish between the elements of a campaign platform a candidate sincerely believes in, and those that are panders calculated to win votes. Still, candidates' discussions of policy offer a useful window into the way they think through problems, and platforms are a reliable proxy at least for a candidate's broad principles.
What minimally careful attention to the McCain economic programme demonstrates is that the Arizona senator fails to grasp the most basic economic, financial, and decision-theoretic concepts that any potential steward of a ten trillion dollar economy must grasp to be fit for the job. The Bush years have taught us fairly conclusively that it's not enough to have a president surrounded by able, competent cabinet secretaries; the president is, after all, the decider, and a president incapable of distinguishing wise from careless policy is a bad president; whether or not that badness will be expressed in foreign or domestic fiascos is purely a matter of chance.
There were two big-ticket items in McCain's CMU address, one merely silly, confused, and wasteful but basically benign, the other one of the most poorly conceived, most potentially economically devastating ideas since the micro-managed price-fixing of the Nixon administration, and both of them exercises in staggering philosophical incoherence and financial incompetence. McCain's merely silly and confused proposal is something his handlers have led him to believe is a sweeping reform of the tax system. Gone, McCain promises, will be the old, bad, labyrinthine IRS tax code, except for those who want it. In its place, McCain will establish a simple, easy-to-use "flatter tax," though not a flat tax, consisting in two tax brackets and a single tax deduction McCain swears will be "generous." Anyone who wishes for whatever reason to stay in the old system can do so. Everyone else will have a much simpler run-up to April 15. On its face, the idea seems to be a qualified triumph of common sense and freedom of choice.
But the triumph is entirely illusory. There is no mystery to solve about why someone would choose the old income tax over McCain's new one, or vice versa. The only conceivable basis for a rational preference is that one system will save individual taxpayers money against the other, depending on their specific levels of income and the array of deductions available under each system. To find out which tax offers the better deal, a taxpayer would be forced to work through both tax forms — otherwise she could not possibly make a rational decision. Rather than reduce the number of tax brackets from six to two, McCain is increasing it to eight. In other words, McCain is actually selling the American people a more onerous tax season than they presently have the pleasure to experience. And surely, somebody in the campaign knows this, and allowed McCain to appear on national television promoting it anyway. Nor are the glitches in the tax plan confined to McCain's tangled two-step on tax brackets. In outlining his new income tax system, McCain sells the notion that taxpayers can henceforth expect a single "generous standard deduction" instead of the wilderness of deductions and loopholes those without the means to pay for a good accountant have slim odds of successfully navigating on their own. But in the preceding three paragraphs of the speech, McCain proposes, by my count, at least six distinct new tax credits and deductions. If it dawned on him at any point that, not sixty seconds before unveiling what he frames as his signature domestic policy proposal, he thoroughly undermined one of its major attractions, McCain gave no outward display of recognition. (Perhaps all the new deductions will be available exclusively under the old income tax; that would make approximately as much sense as any of the other structural features of his tax proposal.)
At least the damage McCain's tax reform does will be limited to making the process of doing taxes marginally more unpleasant, and — since deductions and credits on the whole increase taxes — marginally more expensive. That can't be said for McCain's other marquee proposal, a mortgage loan bailout scheme that could have scarcely been better designed by a financial prodigy whose explicit purpose was to trick the American people into voluntarily wrecking their economy. In broad outline, the McCain bailout resembles the Dodd-Frank mortgage bailout proposal, itself a gem of short-sighted pandering populism, under which the government could wind up liable for up to $400 billion in insurance payments to lenders on foreclosed real estate. McCain differs from Frank and Dodd by proposing something potentially larger in scope, without offering even perfunctory safeguards against the risk his plan would entail.
The idea is this: Any homeowners in danger of foreclosure (a status which, one hopes, would have to be proven by meeting certain precise conditions) would be eligible to walk to a post office, fill out paperwork, and walk away with a loan renegotiated on terms the borrower can afford, and backed by the US government through the Federal Housing Administration. If a borrower is truly unable to afford payments on a principal amount of 100 percent of her home's current value, the thinking goes, she may still be able to meet a payment pegged at 85 percent. Since lenders would clearly choose to take a small hit and retain 85 percent of some money rather than insist on getting 100 percent of zero, it would be an easy call for lenders to sign off on the program. The problem, in fact, is that the deal is far too sweet for lenders. Eighty-five percent of something is indeed more than 100 percent of nothing, and if the government, in effect, gives away universal protection against credit default, then lenders will be paid off no matter what. The question is, by whom? The intuitive pull of the McCain approach depends upon a picture of a borrower who can't pay against 100 percent but could pay against 85 percent, which is unfortunately an unrealistic portrayal of much of what's actually going on in the housing market. In many typical cases, the subprime borrowers who truly are in dire straits — and they are a small minority of subprime borrowers; subprime credit continues to be a vital ladder to prosperity for working class people — would not find their problems suddenly solved by a 15 percent discount. On the contrary, the reason there is a common perception of a housing crisis is that home prices have cratered and those hardest hit now have negative equity in their homes; hence the typical applicant for McCain's bailout is likely going to require something closer to a discount from a principal of as high 150 percent (in Florida, for example), to perhaps 50 percent or less of her home's value. To put it bluntly, the federal government would not in a thousand years, and could not responsibly make itself liable for a discount on that order. Any legislatively viable bailout along the lines of McCain's proposal would feature a far more modest discount. Therein lies the catch. If the scope of the bailout is as broad as McCain proposes, it would entail a very credible risk of the following nightmare scenario: The government's universally available discount proves inadequate to make it possible for distressed borrowers to keep paying off their mortgages, and FHA winds up holding the tab for literally hundreds of thousands, and potentially, with ruinous luck, more than a million mortgage defaults. The deficits of the Bush era would look like a fond memory compared to the shortfall the federal government would run if it had to pay off a large proportion of the housing market's bad credit. Against the very real risks of fiduciary disaster a President McCain is ready to accept on behalf of all of us, he and supporters of his kind of bailout claim to offer a dream outcome in which squeezed borrowers get just that extra bit of help they need to put their financial affairs in order. The point of course is that such an outcome is just that, a dream. Even if McCain knows no better, his advisors certainly do. What they are presenting to the American public is a brazen effort literally to buy votes — not just at a cost to the government, nor to the ability of responsible prospective borrowers to take out loans (not just for houses, but for school, business, you name it) for the forseeable future, but at a potential cost to the long-term stability of one of the largest and most important sectors of the economy. (And that's to say nothing of the potential fallout of a playing short-run interventionist games with an asset class tied to a global credit derivatives market of some $62.2 trillion — i.e., roughly the combined GDP of every country on earth.) Just as his risible tax reform proposal brings into sharp focus the extraordinary shallowness of McCain's understanding of freedom of choice, his proposed financial Jonestown mortgage bailout makes a farce of the pro-market and pro-trade rhetoric that inundates all his efforts at economic sermonizing. One could scarcely conceive a larger-scale, more intrusive, more potentially perilous concrete offense against market principles than what McCain is trying to sell the American people.
Which is a predictable outcome of McCain's fundamental lack of interest in any aspects of governance outside foreign affairs and war (which are effectively one and the same for him), along with his steadfast adherence to the notion that all political questions are reducible to questions of (his idiosyncratic concept of) honor. To qualify as a "conservative Republican," he realizes, there is a whole package he needs to buy, including economic and social views along with foreign policy; and so, like an opera singer chanting lyrics in a language she doesn't understand, McCain pays ample lip-service to "the free market," to "entrepreneurship," to "tax cuts," without having any meaningful grasp of just what the hell he's talking about. So whenever he perceives the dictates of honor offering him a handhold on policy issues about which he ordinarily couldn't be bothered to care, that rarefied market rhetoric goes missing, and heavy-handed substantive interventionism takes its place.
Since everybody knows the housing crisis is the product of dishonorable conduct — specifically, of the "high risk schemes of a few," at whose "extravagant salaries and severance deals" Americans are "right to be offended" — the government has a duty to fix that breach of ethics. Never mind that the proposed solution is lunatic policy, would represent a shameful betrayal of his avowed economic principles if McCain actually understood the content of his avowals, or that the story he tells of the origins of the housing crisis is a fantasy barely intersecting with the facts of the actual world.
Likewise, since porkbarrel spending, earmarks, and corporate welfare violate McCain's sense of propriety, he proposes doing away with them, and imposing a meager reduction in discretionary spending, to offset the costs of his tax cut plans. Never mind that the savings on McCain's spending cuts are a piddling drop in the bucket; never mind the likely costs of his plans to escalate our current wars and perhaps begin new ones (it would of course be dishonorable, indeed toying dangerously with surrender, to insist on even a modicum of fiscal accountability for military adventures). Just as long as fiscal policy is enacted under the appropriate moral auspices, there are no further questions McCain evinces the slightest interest in posing.
Moreover, as the earmark example shows, even when McCain is right on policy questions, it's only by accident. Earmarks and corporate welfare aren't wrong because they're wasteful. They are indeed wasteful, but they are peanuts compared to the deficits McCain (unwittingly, one hopes) is proposing. Rather, earmarks and corporate welfare are wrong because of the perverse incentives they create. And those are categorically the same sort of incentives that McCain's laundry list of anything-but-market-friendly domestic proposals will promote and expand. Of which none are so starkly moronic as his plan for a temporary lifting of gas taxes to depress gas prices. One might object that suspending gas taxes over three months will save an average driver maybe $50, but could spike demand and thus result in a net increase in gas prices in the long run; or that the revenue from gas taxes is in many cases the sole or primary source of revenue for infrastructure maintenance, and will have to be made back by means McCain never offers, on pain of allowing roads to crumble; or that an artificially-induced spike in fossil fuel consumption plainly entails harmful environmental consequences; or that a gas tax holiday is more or less a naked bribe to voters. But all that sounds like elitist talk.
Which reminds me to spare a word for McCain's unlikely yet fitting comrade in arms, Hillary Clinton, who today latched onto the gas tax holiday and used it to sneer that "my opponent, Senator Obama, opposes giving consumers a break," referring to the only candidate in an election depressingly saturated with pandering, who has passed on this particularly asinine pander. But whereas Clinton's embrace of preposterous populist quasi-bribery underscores just how stupid and gullible she believes her base to be (and she may be right), the evident earnestness of McCain's support for such policies, coupled with his fundamental lack of comprehension of basic economic concepts, make it doubtful that voters can even count on him to propose and promote reckless, inane fiscal policy cynically. The odds are even that McCain really believes in his economic agenda, and that's more than enough reason to keep him far away from the oval office.