Random thoughts on '08 and econ policy

John McCain's 300 Economist statement is already turning into a fiasco. In all likelihood, most of these guys just signed on not because they think McCain's plan is that great (it would continue budget deficit spending, supports a silly gas tax cut concept, etc), but because they think it is better than the alternative (see next paragraph). The interesting thing about McCain's plan is that it makes more sense if you think we're going to be in a worse place economically in 2009 than we are right now. It avoids the things you generally want to avoid doing to exacerbate a recession - raising taxes, enacting protectionist legislation, trying to balance the budget - but that doesn't necessarily make it the best economic policy. If we are in a solid enough economic position that we can raise taxes to close the budget deficit, and the budget deficit is manageable enough to allow for new spending for domestic programs, then Obama's policy would be preferable.

Of course, that's also questionable. If the economy does get worse, doing things like raising capital gains taxes will be a doubly bad idea (first because capital gains taxes are perhaps the one form of taxation that has significant "supply-side" effects) because discouraging capital formation is the opposite of what the US should be doing when it is concerned about bank panics. The other problem is that, as has been pointed out months ago, most economic calculations of the future budget deficit include the Bush tax cuts being phased out. It's still pretty big.

The best case I think you can make for McCain's economic policy is that there will most likely be a strong Democratic Congress no matter what happens in November, which means that he won't be able to extend the Bush tax cuts, pass additional tax cuts, or any domestic spending programs that only Republicans like. He would also likely veto many domestic spending programs, whereas Obama would be under pressure to pass whatever Congress put in front of him.

As far as budget hawks are concerned, I think the current Democratic pretensions of being the real fiscally sensible party are deeper grounded in one-upsmanship than an overriding interest in fiscal restraint. This is not the DLC's party anymore. Obama infamously said he would increase capital gains taxes even if it decreased revenue. The Democrats have made universal healthcare a key campaign issue, and additionally are proposing major federal investment in infrastructure. The one area where Obama will be able to make headway is in spending on Iraq, but probably only after 2010. Even then, there will still be major aid obligations and an escalated effort in Afghanistan to pay for. This is not going to be the next Clinton administration, fiscally (nor would it have been if the other Clinton was going to win).

Ultimately, I'm going to base my economic preference on this - "who will do the least harm?" Both candidates have flawed policies, depending on the economic situation they will face in office. If the economy avoids a recession and improves, it will be largely due to the Federal Reserve and the private sector. I do not think either candidate will be able to easily implement the most fiscally favorable elements of their platforms. McCain will not be able to get away with a corporate tax cut or free trade agreements. Obama will find it very difficult to close the budget deficit by an economically significant amount (which would be an amount that prevents crowding out or inflation). In any case, we'll just have to see what happens. Discussing the full range of possibilities of what the economy could be like leads to a number of potentially contradictory stances. But, as Keynes said, when the facts change, so should our opinions.

Of course, much of economy is out of the President's hands - so we should vote primarily on what the President is most likely to influence... Which is foreign policy.