I'm talking to the Economics Society here at UGA tonight. It's a panel
on the economic policies of the Presidential candidates. Oddly, I'm
the only faculty member from the Economics Department (the other two
panelists are Professor Grafstein from the Political Science Department and Professor Fertig from the College
of Public Health). The topics I'll
cover include the tax and trade policies of the two candidates.
I'm tempted to start off the discussion by reading Don Boudreaux's letter to an Obama supporter. As with most of Boudreaux's writing this one has some great lines: "Very few of them [politicians] have any knowledge of the subject [economics], and even fewer of them are courageous enough to speak about it honestly."
If not that, I'd like to make a case for not voting at all, but maybe George Carlin has already done this better than I ever could.
But I think I'll be more PC. Below are my summaries of the candidates stances on taxes and trade as well as some opinions about fiscal policy in general and the chances the candidates will push us into the next Great Depression.
I'm tempted to start off the discussion by reading Don Boudreaux's letter to an Obama supporter. As with most of Boudreaux's writing this one has some great lines: "Very few of them [politicians] have any knowledge of the subject [economics], and even fewer of them are courageous enough to speak about it honestly."
If not that, I'd like to make a case for not voting at all, but maybe George Carlin has already done this better than I ever could.
But I think I'll be more PC. Below are my summaries of the candidates stances on taxes and trade as well as some opinions about fiscal policy in general and the chances the candidates will push us into the next Great Depression.
Tax Policy:
When considering the statutory labor income tax rates proposed by the candidates, McCain is "better" for those at the top of the income distribution, while Obama is "better" for lower and middle income Americans (see the graph on pg 41, here). Still, the marginal tax rates that these low and middle income Americans will face are higher under Obama than under McCain, which means that Obama's proposals are more distortionary (see here). As far as taxes on capital, McCain and Obama differ substantially. McCain wants to keep the current 15% tax on dividends and lower the capital gains tax temporarily to 7.5% (for two years). He also wants to lower the highest tax rate on corporate income from 35% to 25%. Obama wants to raise taxes on capital gains and dividends to 20% (from their 15% levels). I don't think the temporary capital gains tax of McCain will do much, although it could make the baby boomers even more likely to sell off if we see the market rally in those two years. Still when considering the tax increases of Obama and the decreases in capital taxes of McCain, I think its fair to say that McCain is moving in the right direction with respect to increasing the incentive for saving and investment.
Fiscal Policy:
But forget the incentives of taxation for a second and think about the public finance nightmare the US is about to face. Even putting aside the time bomb that is Medicare and later Social Security, we have immediate funding deficiencies. Forecasts are for the US to issue $1.95 trillion in Treasuries next year. This seems crazy when gross fixed private investment (the "I" in C+G+I+NX) was only $2 trillion in 2007. Can we even issue all this debt? Even if we can we need to fund it somehow at some point. Projections made before the whole $700 billion bailout were for McCain to run deficits of about $1 trillion a year. Obama's were projected at about half that. Either way, we are going to see huge increases in government debt. Will China still want to lend the US money when our debt to GDP ratio is over 100%? What will they demand for interest rates given this large amount of debt. Either candidate is going to have tough going once in office and I feel like were are going to have to fire up the printing press sooner rather than later to pay for everything. What worries me about McCain is that he seems his presidency would carry a much higher probability of another armed conflict, which we surely can't afford now.
Trade:
The consensus is pretty clear on two fronts here. Economists are almost unanimous with regard to their support of free trade (in 2006, 87.5% of AEA members said that they would support the elimiation or all remaining tariffs or barriers to trade in the U.S.). Second, in a 2008 survey of the AEA by Scott Adams (the Dilbert guy), McCain was clearly preferred on the issue of trade- 51% of those surveyed thought McCain's trade policies would be better, 26% said Obama's would be better.
Obama has a history of supporting trade restrictions and (my pet peeve) protections and subsidies for American agriculture. For example, in 2005 the Doha Round of meetings for the WTO, resulted in a letter to Bush asking him to cut agricultural subsidies. Obama was a signatory on a letter asking Bush not to agree to such measures. While McCain won't go far enough in his support of free trade (e.g. saying he will cut agriculture subsidies except where they are "needed"), he is well ahead of the protectionist policies of Obama.
The Next Great Depression:
Not part of my talk, but who is more likely to push us there? I've been reading some of FDR's Folly lately and its clear that it wasn't just bad monetary policy that made the Great Depression great. Protectionist policies, tax increases, and increased regulation were all culprits. Clearly, Obama seems more likely to produce all of these negative policies (although I cringe when hearing McCain blame the current financial crisis on "greed"). As Greg Mankiw points out, the Smoot-Hawley Tariff Act of 1930 helped to deepen the Great Depression and make one really worry about Obama's protectionist policies in the current economic environment. Also, the political economy of an Obama presidency makes things much worse. Like FDR, he is an ultra-charismatic and popular figure. He will have both houses of Congress controlled by his party for at least another two year (and likely longer). And what's worse, he actually thinks the government can help. To quote Reagan, "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'"
When considering the statutory labor income tax rates proposed by the candidates, McCain is "better" for those at the top of the income distribution, while Obama is "better" for lower and middle income Americans (see the graph on pg 41, here). Still, the marginal tax rates that these low and middle income Americans will face are higher under Obama than under McCain, which means that Obama's proposals are more distortionary (see here). As far as taxes on capital, McCain and Obama differ substantially. McCain wants to keep the current 15% tax on dividends and lower the capital gains tax temporarily to 7.5% (for two years). He also wants to lower the highest tax rate on corporate income from 35% to 25%. Obama wants to raise taxes on capital gains and dividends to 20% (from their 15% levels). I don't think the temporary capital gains tax of McCain will do much, although it could make the baby boomers even more likely to sell off if we see the market rally in those two years. Still when considering the tax increases of Obama and the decreases in capital taxes of McCain, I think its fair to say that McCain is moving in the right direction with respect to increasing the incentive for saving and investment.
Fiscal Policy:
But forget the incentives of taxation for a second and think about the public finance nightmare the US is about to face. Even putting aside the time bomb that is Medicare and later Social Security, we have immediate funding deficiencies. Forecasts are for the US to issue $1.95 trillion in Treasuries next year. This seems crazy when gross fixed private investment (the "I" in C+G+I+NX) was only $2 trillion in 2007. Can we even issue all this debt? Even if we can we need to fund it somehow at some point. Projections made before the whole $700 billion bailout were for McCain to run deficits of about $1 trillion a year. Obama's were projected at about half that. Either way, we are going to see huge increases in government debt. Will China still want to lend the US money when our debt to GDP ratio is over 100%? What will they demand for interest rates given this large amount of debt. Either candidate is going to have tough going once in office and I feel like were are going to have to fire up the printing press sooner rather than later to pay for everything. What worries me about McCain is that he seems his presidency would carry a much higher probability of another armed conflict, which we surely can't afford now.
Trade:
The consensus is pretty clear on two fronts here. Economists are almost unanimous with regard to their support of free trade (in 2006, 87.5% of AEA members said that they would support the elimiation or all remaining tariffs or barriers to trade in the U.S.). Second, in a 2008 survey of the AEA by Scott Adams (the Dilbert guy), McCain was clearly preferred on the issue of trade- 51% of those surveyed thought McCain's trade policies would be better, 26% said Obama's would be better.
Obama has a history of supporting trade restrictions and (my pet peeve) protections and subsidies for American agriculture. For example, in 2005 the Doha Round of meetings for the WTO, resulted in a letter to Bush asking him to cut agricultural subsidies. Obama was a signatory on a letter asking Bush not to agree to such measures. While McCain won't go far enough in his support of free trade (e.g. saying he will cut agriculture subsidies except where they are "needed"), he is well ahead of the protectionist policies of Obama.
The Next Great Depression:
Not part of my talk, but who is more likely to push us there? I've been reading some of FDR's Folly lately and its clear that it wasn't just bad monetary policy that made the Great Depression great. Protectionist policies, tax increases, and increased regulation were all culprits. Clearly, Obama seems more likely to produce all of these negative policies (although I cringe when hearing McCain blame the current financial crisis on "greed"). As Greg Mankiw points out, the Smoot-Hawley Tariff Act of 1930 helped to deepen the Great Depression and make one really worry about Obama's protectionist policies in the current economic environment. Also, the political economy of an Obama presidency makes things much worse. Like FDR, he is an ultra-charismatic and popular figure. He will have both houses of Congress controlled by his party for at least another two year (and likely longer). And what's worse, he actually thinks the government can help. To quote Reagan, "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'"
