Sen. John McCain’s presidential run has hit a dry patch, under siege from much of the conservative base over immigration and the subject of speculation over whether his second quarter fundraising will rebound from his anemic first quarter results. This has distracted attention from economic issues that offer McCain greater appeal among conservatives. Clearly happy to feature McCain’s economic record and views, the McCain camp made available to us his top economic adviser, Douglas Holtz-Eakin, for a detailed discussion of the economic policy of a potential McCain presidency.
Dr. Holtz-Eakin was the trustee professor of economics and chairman of the economics department at the Maxwell School, Syracuse University, and for 18 months the chief economist on Bush’s Council of Economic Advisers. Highly regarded by academics and politicians of both parties, he served as director of the Congressional Budget Office, where he championed “dynamic scoring” of the budget — an important tenet of supply-siders, who contend that budget forecasts must take into account the economic stimulus and resulting revenue boosts associated with tax cuts and other economic policies.
In a telephone interview he made clear that McCain stands shoulder to shoulder with fiscal conservatives. However, he also indicated areas in which McCain shows willingness to deviate from current conservative orthodoxy.
Holtz-Eakin confirms that McCain would make the Bush tax cuts permanent and would seek to eliminate the alternative minimum tax as part of an overall effort to revamp the tax code. As for the estate tax, McCain, he says, would settle in the short term for a 15% bracket with a high deductible of $10 million. This would avoid the peculiar phenomenon that will occur when the estate tax is completely eliminated in 2010 and then, unless the Bush tax cuts are extended, revert to pre-Bush rates the following year. Although Holtz-Eakin holds out the possibility the tax might be entirely eliminated, he was clear that for now McCain favors retention of the tax as a “backstop” for revenue. He believes there is a growing consensus that the top corporate rate, the second highest in the world, is too high and adversely affects American competitiveness. He notes that this rate “matters” a lot and should be part of a revamp of the tax code. He describes that within the McCain team there is an “ongoing” discussion of a broader plan to make the tax code flatter and fairer.
As for spending, Holtz-Eakin emphasizes that McCain has championed elimination of earmarks. While acknowledging that earmarks are a relatively small percentage of the overall budget, he stresses their importance in gaining control of federal spending. “Reason #1 is corruption and in some cases criminal corruption,” Holtz-Eakin notes. He believes earmarks undermine “faith in government” and have come to “dominate the budget process.” He reiterates that McCain has pledged to veto any earmarks and pork barrel spending.
As for other discretionary spending, McCain would “scrub the budget” to analyze each and every expenditure and ask is it “something the federal government should do, is it doing it well and is it a top priority?”
McCain will offer a health plan later this summer that includes proposals to lower costs, thereby addressing the growing Medicare budget that threatens to engulf the entire budget. As for Social Security, he advocates a different approach from the failed effort of President Bush. McCain would “deal with solvency first” and, although he favors personal savings accounts, believes the “first challenge is not to make promises we can’t keep.” This approach, of course, stands in stark contrast to some conservatives’ insistence that personal savings accounts be a feature of any Social Security reform package. Holtz-Eakin identifies a host of options including adjustment of COLA rates for more affluent recipients and rate adjustments for new retirees but underscores that McCain has a “first commitment not to raise taxes.” If a tax increase were the last resort? Holtz-Eakin says firmly that McCain “does not think it is necessary.”
McCain sees U.S. competitiveness “as the whole ball of wax” in economic policy, Holtz-Eakin says. With 95% of customers of American businesses outside of the U.S., McCain would “not fall victim to the siren song of protectionism.” He would embrace the “innovation economy” with policies seeking to produce “educated workers, attract risk capital and not place financial markets at a disadvantage.” He would also look to promote research and adjust patent laws to ensure the proper return on investment for intellectual property.
Biggest Mistake to Avoid
What did the Bush administration do poorly? Without directly invoking the President by name, Holtz-Eakin says that we “didn’t control spending and paid dearly for it in 2006.” He vows McCain will not make the same error.
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