We still see the glass as half full, given likely decent global economic growth, healthy corporate p...
Three Things the Candidates Won't Tell You
08/28/2008 12:00 am EST
The Olympics are over, but as the Democratic national convention ends and the Republican convention begins, we’re in another epic contest: who can waste the most words making the most empty promises while avoiding the most fundamental issues.
This gold medal may be as tough to assign as the one in that great photo finish between Michael Phelps and Milorad Cavic of Serbia.
Both Democratic presidential candidate Senator Barack Obama and the inevitable Republican nominee, Senator John McCain, have spelled out their programs in position papers and on their Web sites. Newspapers, magazines, and online news organizations have examined their stands exhaustively.
But have you ever wondered what these candidates would say if they really spoke their minds? Here’s my own take on what they might think but won’t say out loud about some key issues facing investors.
1. “I can’t really fix the economy.” Each candidate has his own program to spur the economy. Senator McCain wants to cut corporate tax rates and extend the Bush tax cuts for individuals after they expire by 2011. Senator Obama wants another $100-billion-plus stimulus package, aid for financially strapped states, federally sponsored infrastructure projects, and reduced taxes for lower- and middle-income households.
Some of that may help a bit, but with some exceptions, government policies don’t affect the business cycle that much; even the most successful just speed up changes that are already happening in the real economy. Periods of expansion and contraction are part of capitalism. Companies grow in good times and cut back in bad times, and then it starts all over again.
Besides, Congress, the US Treasury Department, and the Federal Reserve have already acted dramatically to address the economy’s biggest problems—housing and the financial crisis. Congress passed a big stimulus package and housing-bailout bill. The Fed has rescued Bear Stearns, cut rates, and added boatloads of liquidity to prevent a systemic meltdown. The Treasury is prepared to keep Fannie Mae and Freddie Mac solvent.
What more can the next president do? Help Merrill Lynch and Citigroup raise capital? Bail out Chrysler again? Guarantee that jobs won’t go overseas in future trade deals? The truth is, presidents don’t create jobs; growing companies do—and that growth depends on a lot of things that are out of any president’s control.
2. “The Bush tax cuts are history.” Senator Obama has pretty much guaranteed this if he’s elected. His plan calls for bigger tax cuts—even rebates—for middle and working-class taxpayers. But for “rich” people earning more than $250,000 a year, the top marginal tax rate would go from 35% to as high as 39.6%, about what it was in the Clinton years.
But surely John McCain has come out strongly for continuing the Bush tax cuts, hasn’t he? Yes, he has, but it was a major reversal of his earlier, equally strong opposition to the tax cuts, which he voted against twice.
And it would take an act of Congress to reintroduce the Bush tax cuts, a tall order when a larger Democratic majority is likely. John McCain, who’s served for a generation in the Senate, surely understands that. That’s why I think as president he’d put up a good fight, win some concessions, but ultimately come away with a face-saving compromise.
So, any way you slice it, the Bush tax cuts for high-income people are toast. You can take it to the bank.
3. “I don’t care about the deficit.” Both candidates claim they believe in fiscal responsibility, and Senator McCain does have a good track record on that issue. But the programs they’re pushing are budget busters on a gargantuan scale.
In addition to making the Bush tax cuts permanent and preserving the 15% tax rate on capital gains and dividends, Senator McCain would cut corporate taxes to 25% from 35%, double tax deductions for dependent children, and reduce the estate tax and the notorious alternative minimum tax (AMT). Total lost tax revenues over the next decade: $4.2 trillion, according to the nonpartisan Tax Policy Center.
Senator Obama, meanwhile, has very big dreams. His health-care plan, which extends coverage to the uninsured, would cost an estimated $65 billion a year, maybe more. Spending on infrastructure, alternative energy, and education would add tens of billions of dollars a year.
And although an Obama Administration would raise taxes on high earners, it would keep or cut them for everyone else. It also would index the AMT for inflation—a good but costly idea. Net net, the Tax Policy Center says, tax revenues would go down $2.8 trillion over the next ten years.
“There is no question that the proposals of either candidate would dramatically worsen the fiscal situation,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told BusinessWeek.
Naturally, both campaigns say those estimates are way out of line because they assume a continuation of the Bush tax cuts—which nobody expects (see above). Senator Obama’s advisors claim getting out of Iraq would save tens of billons of dollars a year, and he has other schemes to raise various sums.
Meanwhile, Senator McCain talks about cutting “earmarks”—pet projects that powerful congressmen stick into spending bills—but how much does that save, really? And good luck to a President McCain getting that one through Congress.
And what about the elephant in the room? Entitlement spending for Social Security, Medicare, Medicaid, and the Medicare prescription drug benefit will balloon as retiring Baby Boomers swell the ranks of program participants. The candidates won’t touch that one with a ten-foot bedpan.
At least Senator McCain is still rhetorically committed to deficit reduction. Senator Obama’s campaign pretty much shrugs it off, pointing out that although the absolute deficit looks staggering (it could hit $500 billion next year), it’s currently only 2.5% of gross domestic product, about half of what it was in 1992.
But as Obama himself told David Leonhardt of the New York Times: “’I probably wouldn’t have been as obsessed with deficit reduction’” as former President Bill Clinton was in 1993. Translation: I’m not too worried about it now, either.
One good reason President Clinton was “obsessed” with deficit reduction: H. Ross Perot had garnered 19% of the popular vote in 1992, enabling Clinton to edge out President George H.W. Bush in the general election. And deficit reduction was a key plank of Perot’s platform.
Also at the time 40% of the American public told pollsters the deficit was the country’s most important economic problem. Today that number is 2%. You can’t really expect politicians to tread where voters don’t want to go—even if smart people like Warren Buffett think this is one of the country’s biggest long-term problems.
I could go on and on about health care, energy, Iraq, and foreign policy, and maybe in future columns I will. But as you watch the conventions and debates over the next few weeks, remember one thing: what you see is not what you’ll get. You can take that one to the bank, too.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily represent the views of InterShow.
Related Articles on MARKETS
Delek U.S. Holdings (DK) is a diversified downstream energy company, with businesses that include pe...
Ultimate Software Company (ULTI) provides a wide range of human capital management (HCM) software th...
The U.S. economy continues to grow, but at a slower rate than in earlier 2018. From currency to emer...