Today's question: What polices have Obama and McCain presented that would help fix the financial mess? Would any of their plans damage the U.S. economy? Previously, Foster and Kuttner debated the state of the economy and Congress' rejection of the bailout plan.
Obama is no friend of economic growth
Point: J.D. Foster
Neither John McCain nor Barack Obama envisioned campaigning while the financial markets were in meltdown and the economy teetered on the brink of recession. Yet both set partisanship aside to support a difficult plan that could make a real difference. This bipartisanship mirrored laudable efforts by congressional Republicans and Democrats over the past weekend to hammer out a workable compromise. The House of Representatives came a few votes short on Monday, but there is still a chance Congress will pass the plan.
With luck, the next president will take office with the economy ready to rebound. He will then be able to focus on policies to accelerate the recovery and strengthen our economy. Here's where the two candidates differ significantly.
Consider energy prices. They've soared, spotlighting the risks associated with our dependence on foreign oil. We can't break our addiction to it only by drilling for more oil in the United States -- but we can't break that addiction without drilling for more oil either. McCain believes we should take all due care for the environment, even as we tap our abundant resources. Obama has steadily backtracked from stark opposition. He now accepts that some additional drilling may be needed under some circumstances in some locations.
Like President Clinton, McCain believes in free trade. We have the most productive workforce in the world and can compete effectively in many different industries. Where we have an advantage, we should trade; what others produce better, we should import. Obama's more unilateralist view assumes, rather insultingly, that American workers need protection from foreign competition.
McCain believes we shouldn't raise taxes. Indeed, we should reduce them where it would benefit our growing economy the most. Obama's views, by contrast, have been evolving. At one time, he proposed a dramatic increase in payroll taxes. Then he scaled back his payroll tax hike. Then it was scaled back and delayed until sometime in the next decade.
Obama has proposed modest tax cuts for the middle class and a significant increase in the top income tax rates to satisfy his demands for greater wealth redistribution. The proposed cuts are welcome, but they're a type that provides no benefit for the economy. More recently, Obama has said that his tax hikes may need to be postponed if the economy remains weak. This is progress, though, because it means Obama is acknowledging that higher marginal tax rates harm the economy. Admitting as much would complete his migration to McCain's position.
On healthcare, the differences between the candidates could have implications for the future of our economy. Obama has dressed up Hillary Clinton's national healthcare in a new bonnet and a bow, but it remains a system where ultimately the government would decide what care you get. McCain's plan will give you more control, not less, over your healthcare decisions and provides significant tax relief so you can afford to exercise that control.
The economy is very weak today, and it will recover sooner if Congress and the administration take the necessary actions. The candidates' plans are particularly relevant for the recovery and what follows. Excessive government control and redistribution inherently conflict with economic growth. Obama's plans put more emphasis on greater government control; McCain's puts emphasis on economic growth. Therein lies the choice.
J.D. Foster, PhD, is the Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation (heritage.org).
The complete failure of deregulation
Counterpoint: Robert Kuttner
It's charming the way ultraconservatives try to diffuse responsibility for the collapse of private capital markets: Homeowners did it; lenders did it; Wall Street did it. In fact, this crisis had one overarching cause -- the ideology and practice of deregulation.
The ideology disseminated by the likes of the Heritage Foundation held that private markets could do no wrong. It was carried out by conservative Republicans, who either deliberately failed to regulate or neglected to keep up with toxic innovations invented by private players on Wall Street.
Now we are all suffering the results. For the most part, homeowners were the victims of shyster mortgage companies. It is a travesty to try to allocate equal blame to the Wall Street operators who financed these scams and homeowners "who lied on a mortgage application." Many subprime mortgage brokers did not even request credit information.
It is sure hard, even around the Heritage Foundation, to find anyone today who seriously argues that we should just let the free market sort it all out. Government suddenly looks pretty good. If people haven't lost all of their life savings, it is because the Federal Deposit Insurance Corp. still insures them and because the Federal Reserve comes to the rescue as lender of last resort.
It is also diversionary to argue that "regulators also deserve blame." During the Bush years, regulators who actually wanted to regulate were ignored or fired. Bill Donaldson wanted to be a tough chairman of the Securities and Exchange Commission. He was forced out and replaced by Christopher Cox, a regulator so feeble and hostile to regulation that even McCain has called for his head. For years, the late Federal Reserve Board governor, Ned Gramlich, shouted from the housetops that subprime was a disaster in waiting, but then-Chairman Alan Greenspan refused to issue the regulations that had been mandated by Congress in 1994.
If I were from the Heritage Foundation, I would also want to blur responsibility for this catastrophe, but the facts are otherwise. And the effort to change the subject to fiscal issues is sheer diversion too. The Social Security trust fund's 75-year shortfall is projected at about one-half of 1% of the U.S. gross domestic product. When I was in graduate school, that was called a rounding error. If only the books of Goldman Sachs -- and AIG, and Wachovia, and Bear Stearns, and Merrill Lynch -- were in as sound shape as Social Security!
The financial economy surely needs government rescuing -- but not via the gospel according to Paulson. It would be far better to rescue financial markets from the bottom up, for a change. If we resurrected Franklin Roosevelt's Home Owners Loan Corp., every homeowner in America who got scammed by a subprime con artist could get refinancing directly from the government. The government's own borrowing rate is now very low, because Treasury Securities are among the few investments that people trust. If government refinanced these mortgages at 5%, the bondholders could be paid back at 50 or 60 cents on the dollar, same as with Treasury Secretary Henry Paulson's plan. But the direct benefit would be to homeowners.
I guess we are all supporters of a government role in the economy now. I'd like to be the first to welcome the Heritage gang to the club. As the old joke goes, we're just arguing about the details. But let's give the laissez-faire malarkey the decent burial it now deserves.
American Prospect founder Robert Kuttner's new book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."
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Op-eds and editorials on the most important topics of the day.