For the most part, the positions of the presumptive nominees, Republican McCain and Democrat Obama, fall along traditional party lines: Obama leans more toward government involvement in the economy, while McCain's proposals rely on private sector solutions. Both plans, however, would certainly add to already troubling deficits, according to Wharton faculty and economic policy analysts who point to worrisome elements of both candidates' plans.
"It's early in the election cycle. Both candidates have an opportunity to refine -- and rethink -- their economic policies," says Richard Marston. "Both had better do more rethinking before one of them becomes president."
Voters are growing increasingly concerned about the nation's financial situation. More than half of Americans, 56%, describe the country's economic condition as poor, while 33% say the economy is only fair, according to The Pew Research Center for the People & the Press.
"People are very attuned to the economy. In the polls, it has taken precedence over the
The divide between the two major candidates is clear in tax policy. Obama wants to let the Bush Administration's tax cuts expire, as scheduled, at the end of 2010 and provide new tax breaks for low-income workers, senior citizens, students and start-up companies. When McCain launched his campaign, he opposed the tax cuts because he said they favored the wealthy and reduced the availability of government resources during wartime. Now he says the cuts should remain in place because allowing them to expire would amount to a tax increase at a time when the economy is already weak.
McCain also wants to reduce the corporate tax rate from 35% to 25%. Obama supports a corporate tax rate cut as well, but has not specified exactly how large. In addition, Obama would raise capital gains taxes on Americans earning more than $250,000 a year, while McCain would maintain current tax rates on capital gains and dividends.
On the campaign trail, Obama has called Bush "fiscally irresponsible" and said McCain is running to serve George W. Bush's third term -- only more irresponsibly. "When it comes to taxes," Obama has added, comparing McCain to the incumbent president is "not being fair to George Bush." McCain's camp has fired back with charges that Obama's ideas are unrealistic and will result in government intervention that will slow economic growth. Douglas Holtz-Eakin, chief economic aide to John McCain, said Obama's proposals are "like being for kittens, puppies and sunshine."
Voters Need a Clearer Vision
According to Marston, McCain's proposal to extend the Bush tax credits amounts to campaign rhetoric in the current climate. "There is no way all of the cuts will be extended now that the political winds have shifted," he says, adding that McCain has not been able to articulate which of his proposed tax cuts is most important. "Voters need a clearer economic vision."
Obama's tax policy, he suggests, is more refined than those presented by the Democratic candidates in the last two elections. For example, his plan explicitly aims taxes at Americans making more than $250,000 a year. "The thought appears to be that those making less than that will readily approve such tax increases. It remains to be seen whether this is the case, but it's a definite change in strategy." Marston says Obama and his advisors have not addressed the issue of whether higher taxes will have an impact on incentives for businesses to reinvest and create new growth. "Will this affect risk-taking by entrepreneurs who provide the innovation that the country thrives on?" Marston asks. "If so, would other tax increases, say on dividends, be preferable?"
McCain's support for the Bush tax cuts is a mistake because they will continue to deepen the
As for Obama, Pack says his tax and spending policies are more complicated than McCain's, making it more difficult to gauge their impact. "While I like the idea of undoing the Bush tax cuts, Obama's plan is not that simple and it's not exactly clear what the net effect would be." For example, Obama has outlined plans to spend $15 billion a year for 10 years on energy technology funded by revenue collected through a system of trading pollution permits. He also would create an "infrastructure reinvestment bank" that would finance $60 billion in high-speed railways, energy grids and other projects over 10 years.
According to the
"Both sets of policies are bad in that they don't balance the federal budget and they would each run up deficits," says Roberton Williams, principal research associate at the
Touching the 'Third Rail'
Each candidate has already made some statements about Social Security, which is sometimes called the "third rail" of politics because addressing the issue of solvency is likely to rile beneficiaries. Obama wants to eliminate the payroll tax limit, but give an exemption for people making between $102,000 and $250,000 a year. He would also eliminate the income tax on Social Security benefits for people making less than $50,000 a year. He notes that McCain wants to appoint a bipartisan commission to explore changes to the system. Unlike Bush's previous commission, which was handpicked by the White House, McCain will let Democrats pick their own representatives, says Smetters, adding that McCain's commission will likely be composed of members of Congress in order to force the issue on them.
Obama's proposed tax increase on people making above $250,000, who already pay the majority of the nation's taxes, will mean a marginal tax rate on wages of around 65% in high tax states such as
He also points out that Obama's tax reduction on those making below $50,000 essentially defeats the purpose of the Earned Income Tax Credit, which already offsets taxes on the poor.
"However, Obama, being a Democrat, is more likely to be trusted by the public to control the growth rate of benefits, and so he might be more effective at creating overall reform," says Smetters. "McCain will need the commission for cover."
Smetters argues that the best approach to Social Security is to control the growth rate of benefits for richer people at a rate no higher than inflation, while getting some additional revenue by removing the preferential tax treatment on employee benefits that he says encourages over-utilization.
Medicare, he notes, is a much bigger problem and harder to solve equitably. "To McCain's credit, he voted against Bush's disastrous Part D Medicare expansion even though McCain represents one of the most aged population states in the country. That obviously took a lot of guts. I don't see Obama ever taking that type of risk."
McCain and Obama have at least begun to discuss Social Security fairly early in this campaign, perhaps for two reasons, says Smetters. One is that this is the first presidential election in which the Baby Boom generation is entering retirement. The other is that McCain has used the "privatization" label in the past to describe a proposal to allow young workers to earmark Social Security savings in private plans. McCain is polling well with people above age 65 and needs to reassure them that Social Security will be there for them, Smetters says, adding that Obama will probably use the "privatization" label on McCain's plan because that term polls poorly. The candidates are not likely to put forth more extensive plans before the election, because that might require tough medicine for beneficiaries or "gimmicks. Either way you open yourself up to criticism."
Cracking Down on 'Reckless Behavior'
The candidates' economic proposals come against a background of financial instability linked to the subprime credit meltdown and call for greater regulation of credit companies. In a speech before the National Small Business Summit, McCain said Americans "are right to be offended" by the "extravagant salaries and severance deals" of corporate officers who have engaged in "reckless corporate behavior." He vowed that federal prosecutors will go after wrong-doers.
Meanwhile, Obama has come out in support of measures to help homeowners protect themselves against foreclosure and additional oversight of the credit industry. Pack says the current mortgage meltdown is the predictable result of policies created during the Bush and Clinton administrations encouraging homeownership for people who should not have been qualified for mortgages. "It was crazy at the time and the results could have been foretold, but it was a popular policy among certain people."
Marston predicts financial sector regulation will be a major issue after the election, especially following the rescue of Bear Stearns. "The precedent has been set for the Fed to help rescue an investment bank -- not a commercial bank as it has in the past -- so the new president will have to figure out what that means for regulation," he says. "It's a big issue, but we have no idea what Obama or McCain will do about that."
According to Marston, trade is another area of concern. In the
"Obama probably won't reverse previous advances, but we don't know whether his heart will be in new initiatives. McCain will back free trade just as Reagan and every president since then has done, but Obama is a question mark."
Pack says that to pull back on current trade policies would be a mistake. "There's hardly an economist in the world who would argue that expanding free trade is not a good thing. [A pullback] may be popular with unions or some employees, but it is not the way to go. It's really sad to see that after President Clinton pressed for NAFTA and a reduction in tariffs, this is such a big issue. It's pandering." Pack argues that low-income consumers in the
Overseas Views
The trade debate is of interest overseas -- but many economic analysts in key trading-partner nations such as
Yuan Zheng, associate director of the U.S. Diplomacy Research Center of the China Social Science Academy, has suggested that
"You hardly see any Chinese intellectuals with a strong preference [for either of] these two candidates," says Xiao Geng, Director of the
Still, some researchers expect the dollar to get stronger after the election, which could have an impact on trade; a weaker dollar makes Chinese products more expensive in the
In the Indian business magazine Business Today, V.K. Kaul, professor of business economics at
"If one was to look purely from a trade and outsourcing perspective ... McCain seems to be a better choice for
"What are perhaps more important issues are geopolitical stability, the war in Iraq and how to get America back to the intellectual standards that it once had and which have been eroded in recent years," Bapna adds. "In that sense, Obama is much more of a dynamic personality who can really bring back
Yogen Lal, chief operating officer (COO) of the Mumbai-based Unity Infraprojects, one of
Pradeep Mukherjee, who previously worked for Citibank for several years in the U.S and now is CEO of Mumbai-based HR consultancy Potential Unlimited, says that if he had to choose, he would opt for Obama, but not for any business or economic reasons. “I expect Obama to ask the question: ‘Why does the world hate
McCain, he asserts, “is an unknown quantity” in
Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based
“The
Still, Chakrabarti says, he worries about the Democratic Party’s trade stance. “In their election campaigns, the Democrats have been making noises about being more protectionist, less trade oriented, reducing the flow of outsourcing, etc.,” he notes. “Whether it is rhetoric or whether they will actually implement it if they come to power is not very clear. I don’t really believe that they will in fact do any of this if they come to power. However, it seems on the face of it that the Republicans are better for
“Traditionally the Republicans have been more open and less restrictive in terms of trade agreements,” says Ashok Soota, executive chairman of the Bangalore-based software consultancy MindTree Ltd. “Obama, on the other hand, has made some remarks which could be construed as somewhat negative, but that’s more restricted to the NAFTA. My belief is that the forces of globalization are so strong that I don’t think anything fundamental will change with either of them... [However], I believe that we will not see the strong positive thrust that we got with Bush with either McCain or Obama.”
For Latin Americans, says Fausto Hernández Trillo, an economist and researcher at CIDE, the center for research and teaching in
Latin America is not a priority for the
Still, Hugo Macías Cardona, a professor at the
As Macías notes, a fragmented form of integration is emerging in the region, in which Central America and the Caribbean are strengthening their ties with the
Gayle Allard, a professor at the IE business school, points out that McCain has declared his support for the free-trade pact with
Outmoded
On the other hand, Allard notes that American policy toward
Beyond such concrete differences, Allard believes that for the world at large, the impact of a victory by one candidate or the other will mostly be on the image of the
Now that the long primary campaigns have finally ended, Pack says it seems likely both major party candidates will have to sharpen their positions. "We're not really into the season quite yet although [the candidates] started so early it seems like we've been in it for the last five years," says Pack. "They will probably flesh things out more after the conventions, which is too bad because it gives them a long time to speak vaguely."
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