New president must be ‘nimble’ on economy fixes

‘08 ISSUES:

The biggest challenge facing the next president will be figuring out how to lead a debt-plagued economy out of its recession, create millions of new jobs and restore America’s shattered confidence in its financial institutions.

With the economy in a steep descent, deepening unemployment, rising home foreclosures, and Wall Street in the grip of a bear market that has crushed worker pension plans by 40 percent or more, the job of nursing the country back to financial health poses a monumental undertaking for whoever wins the White House on Nov. 4.

Both Democratic Sen. Barack Obama and Republican Sen. John McCain have put forward ambitious economic agendas that are not entirely understood by most Americans, and there is deep disagreement in the electorate about whose prescriptions will put the country back on the road to recovery or perhaps make a bad situation worse.

Indeed, some economists are saying the rescue plans the two candidates designed may now be inadequate to deal with what has become a much more critical situation than either of them could have foreseen earlier this year.

“They were written before the financial meltdown of the last six to eight months, and I think it is going to be hard to enact these sets of plans in the form they’ve proposed,” said economist William G. Gale, vice president of the Brookings Institution and director of its Economic Studies Program.

“The financial situation is quite troubling. I’ve never seen an issue change so rapidly, where one day’s unthinkable outcome is the next day’s conventional wisdom. They’ll be facing a dramatically different situation than when they came up with their plans. I think they are going to have to improvise and be very nimble,” Mr. Gale said.

Issues ‘08: The Washington Times takes a close look at an important issue every day before the elections.

Each proposes to cure the economy’s illness from a starkly different direction.

Mr. Obama thinks that renewed economic growth depends first and foremost on income transfers to low- to middle-income people and a raft of government infrastructure and domestic spending to jump-start the economy. His rival thinks that renewed economic growth, job creation and higher incomes will only be fueled by lower taxes to stimulate business expansion, entrepreneurial risk taking and increased capital investment to grow the economy, not the government.

Mr. McCain and his economic advisers charge that Mr. Obama’s tax increases on higher-income Americans, investors and corporations, and his proposed taxes and mandates on small business and trade will stymie growth and job creation.

“The redistribution of wealth is the last thing America needs right now. The goal is not to redistribute wealth, but to create it,” the Arizona Republican said during a campaign appearance in Manchester, N.H.

Mr. Obama and his supporters counter that his rival’s tax cuts for upper-income earners and big business are part and parcel of “the same failed policies of the past eight years” and will do nothing to help struggling low- to middle-income workers.

“The Bush tax cuts give those who earn over $1 million a tax cut nearly 160 times greater than that received by middle-income Americans” who have seen their average incomes fall, Mr. Obama says in his plan.

Economists on the left and the right agree that the government will likely announce on Oct. 30 - four days before the election - that the economy stopped growing in the third quarter and will shrink further in the past three months of the year as consumer spending stalls and business earnings decline, forcing increased layoffs.

“The U.S. has fallen into a sharp recession,” Wall Street economist David Malpass told his clients last week. The economy stopped growing in the past three months and would slow still further in the fourth quarter and into 2009, he said, adding that it is headed into the sharpest contraction since 1980-82 recession.

Short-term fixes

The candidates have laid out short-term recovery plans they would quickly implement to help Americans survive the early stages of the recession. Both would extend unemployment compensation and waive taxes on those benefits now going to nearly 4 million Americans.

Mr. McCain’s plan would temporarily slash the 15 percent capital-gains tax rate in half to 7.5 percent; suspend current rules requiring retirees to begin withdrawing money from Individual Retirement Accounts (IRA) at age 70 that would force them to sell stocks at a deep loss; and increase the amount of capital losses that taxpayers can deduct from their income.

Mr. Obama, in turn, has called for a temporary tax credit for businesses that create new jobs, penalty-free early withdrawals from IRAs and 401(k) plans, a 90-day moratorium on mortgage payments among homeowners facing foreclosure, and using bankruptcy laws to modify troubled mortgages.

But the central focus of the campaign debate has been on their long-term economic recovery plans, principally their opposite positions on taxes:

Believing that lower tax burdens will help lift the economy out of its hole, Mr. McCain would continue all of President Bush’s across-the-board income tax cuts and retain the top 15 percent rate on capital gains and dividends to stimulate investment. He would also cut corporate taxes from 35 percent to 25 percent to help boost their bottom line.

Mr. Obama, however, would raise the two top tax rates on higher-income earners making more than $250,000 and use that money in part to give refundable tax credits to lower-income earners, including the 47 million tax filers who pay no personal income taxes. Individuals would get $500, and working couples would receive $1,000.

Arguing that the tax increases on higher-income people in the top two brackets are needed to make the income tax more progressive, he would increase the top rates from 33 percent to 36 percent and from 35 percent to 39.6 percent - money that he says is needed to help those on the lower rungs of the economic ladder.

“As a broad general rule, Obama tends to lean more toward giving money directly to low- and middle-income people, and McCain leans more toward giving tax relief to business to induce them to hire more people,” said economist Robert E. Litan of the Brookings Institution.

He would also raise the capital gains/dividend tax to 20 percent, keep the corporate tax at 35 percent (the second-highest corporate tax in the world after Japan), but impose higher taxes on many U.S. corporations - including a windfall profits tax on oil companies and higher taxes on any firms that expand their business operations abroad.

He also plans to raise the minimum wage on small businesses and index it to inflation.

Mr. Obama’s economic plan contains a number of other spending initiatives for infrastructure and social welfare goals, and seeks to give organized labor increased powers to unionize businesses. Among them:

c A $25 billion state revenue sharing “to prevent state and local cuts in health, education, housing and heating assistance or counterproductive increases in property taxes.”

c Ending income taxes for all seniors who earn less than $50,000, which would eliminate taxes for 7 million older Americans. Under his full economic plan, “27 million American seniors will also not need to file an income tax return.”

c Create a $60 billion National Infrastructure Bank to directly fund state and local public works and transportation projects for roads, bridges and rail systems - creating an estimated two million jobs.

c Spend $150 billion over 10 years on “clean energy” technology projects to develop biofuels and plug-in hybrid cars that he forecasts would over time create an estimated 5 million jobs.

Scoring their plans

Not surprisingly, there is substantial disagreement among economists and analysts about whose program would yield the most economic growth. Liberals support Mr. Obama’s plans, and conservatives support Mr. McCain’s.

“McCain’s regressive economic agenda would redistribute wealth to the richest Americans during a period of stagnating wages and growing economic anxiety,” says an analysis by the Center for American Progress Action Fund, a liberal advocacy group supporting Mr. Obama.

“The bottom 60 percent of taxpayers would see only 12 percent of the benefit from McCain’s plan to extend the Bush tax cuts, while over 100 million middle-class households would receive nothing from McCain’s proposal,” the analysis said.

“At the end of the day, Obama’s proposals have been scored and he comes out better,” Mr. Litan said. “His proposals are more paid for than those under McCain.

“You are going to have more bang for the buck if you get money into the hands of low- to middle-income people than giving money to businesses and higher income people,” he said.

But a recent analysis by the Heritage Foundation’s Center for Data Analysis concludes that Mr. McCain’s plan would stimulate more economic growth than the Obama plan. Among its chief findings:

“Job growth over 10 years is more than twice as high under McCain’s tax plan than Obama’s. Total employment grows an average of 915,800 jobs under Obama, and by 2.13 million under McCain,” the analysis found

Economic growth, as measured by the country’s gross domestic product, would be “nearly three times higher than under Obama,” and a family of four “would see an average of $5,138 more in disposable income under McCain’s plan, compared with $3,632 more under Obama’s,” according to the study.

A key weakness in Mr. Obama’s income-redistribution tax plan stems from his decision to give lower- to middle-income taxpayers a refundable tax credit (that they can deduct from their tax bill) instead of cutting their tax rates, said Heritage Foundation analyst William W. Beach, who led the study.

“Because Senator Obama relies largely on tax credits to achieve this redistribution, his plan does not find a large economic benefit from lower tax rates, nor a more efficient tax structure,” Mr. Beach wrote.

“This lower economic performance stems in large part from the modest decreases in marginal tax rates on taxpayers earning less than $250,000 and increases in those rates above that level,” he said.

About the Author
Donald Lambro

Donald Lambro

Donald Lambro is the chief political correspondent for The Washington Times, the author of five books and a nationally syndicated columnist. His twice-weekly United Feature Syndicate column appears in newspapers across the country, including The Washington Times. He received the Warren Brookes Award For Excellence In Journalism in 1995 and in that same year was the host and co-writer of ...

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