Wither the Economy?
MCCAIN AND OBAMA STAKE OUT DIFFERING VISIONS
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Key Issues
$700-Billion Bailout Tests Candidates
The presidential candidates were placed on the spot by September’s $700-billion bailout of Wall Street, a situation that was still evolving as the Investment Professional went to press in early October. Both McCain and Obama backed the package that ultimately failed to win passage in the House of Representatives. That bill included oversight of the Treasury Department’s use of the funds, a phased release of the funds, a mechanism to recoup taxpayer funds, and limits on executive compensation.
McCain’s backing of the legislation is in contrast to his campaign platform, which opposes increased regulation of the financial system, a component of the failed bailout plan. On September 15, the day of the downfall of Lehman and Merrill, McCain further confused voters by referring to the fundamental soundness of the US economy.
On the other hand, Obama’s views have been fairly consistent with his earlier stated position that bailouts must involve protections for taxpayers and homeowners, an oversight board, limits on CEO pay, and a means by which the government can obtain equity stakes in the companies that avail themselves of funds. Obama has identified lax oversight as the root cause of the crisis, and has proposed policies to fix this problem.
War Spending
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Despite their very different positions on the war in Iraq, neither McCain nor Obama will do much initially to curtail war-related spending. While Obama has said he will immediately begin withdrawing troops from Iraq and will have all combat troops back in the US by the summer of 2010, he has also proposed shifting some troops to Afghanistan and retaining an undetermined number of forces in Iraq to protect the US embassy and strike at al Qaeda bases. These proposals will need to be funded, and his military advisors have said there will likely be no cuts—or no major budget cuts—at least at first. McCain’s plan to retain a large base of forces in Iraq through January 2013 and perhaps much longer will necessitate increased spending throughout his term in office, if he’s elected. (Sources: McCain and Obama campaigns, Reuters, Wall Street Journal.)
Budget appropriations for operations in Iraq and Afghanistan have totaled $691 billion through fiscal year 2008. This spending includes actual operations, support for indigenous security forces, diplomatic operations, foreign aid, and certain veterans’ benefits and services. These appropriations do not include related Defense Department spending, which, if included, would bring the total close to $1 trillion. The Congressional Budget Office predicts that at the current rate of spending, further appropriations will be needed to fund activities through the end of fiscal year 2008. (Source: Congressional Budget Office.)
The Housing Crisis
As foreclosure filings swell across the country, state, city, and federal governments are scrambling to deal not only with affected homeowners but also with collateral damage caused by falling property-tax bases and blighted neighborhoods. The HOPE for Homeowners housing bill, which Bush signed in August, will provide relief for up to 400,000 homeowners by helping them refinance into fixed-rate mortgages from subprime adjustable-rate mortgages. Obama voted for the bill; McCain did not vote for or against. Obama favors increased regulation of the mortgage industry, additional funds to help homeowners avoid foreclosure, and legislation that allows bankruptcy-court judges to modify mortgages for individual homeowners in bankruptcy. McCain favors federal standards for mortgage brokers and supports a limited program to help an estimated 200,000 to 400,000 homeowners avoid foreclosure. (Sources: McCain and Obama campaigns, Wall Street Journal.)
Alternative Minimum Tax
The AMT (alternative minimum tax) has grown from a device designed to prevent upper-income taxpayers from sheltering excessive amounts of income to a growing tax ensnaring taxpayers in various brackets. The AMT is a shadow tax system that eliminates or pares back many deductions, resulting in taxpayers paying a significantly higher amount of tax than they would otherwise. Taxpayers who are married, have high medical expenses, take the standard deduction, have large families, or pay high state and local taxes are more likely than others to be subject to the AMT. McCain proposes to phase out the AMT completely while Obama proposes to adjust it so it won’t impact most middle-class taxpayers. (Sources: The Tax Policy Institute, McCain and Obama campaigns.)
| Tax Rate | 1982–86 | 20% |
| 1987 | 28% | |
| 1988–90 | 28% / 33% | |
| 1991–92 | 28% | |
| 1993–96 | 28% | |
| 1997–2002 | 20% | |
| 2006–08 | 15% | |
| 2009–12 | ||
| Bush Plan | 20% | |
| Obama | 15% (income below $250,000) | 20% (income above $250,000) |
| McCain | 15% | |
Capital-Gains Tax
Capital-gains tax rates reached historic lows in recent years. Obama and McCain take different approaches to this issue, with Obama in favor of lowering rates to pre-Bush levels and McCain in favor of maintaining the current low rate. If left untouched, the Bush capital-gains tax cut will expire January 1, 2009, returning rates to their previous levels. This table shows the top rate on capital gains during the past 20 years, Bush’s expired rates, and Obama’s and McCain’s proposed rates. (Sources: Citizens for Tax Justice, Tax Policy Center, Obama and McCain campaigns.)
Bush Tax Cuts
The two major Bush tax cuts—the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003—have the potential to add significantly to the federal budget deficit without offsetting revenue gains or budget cuts elsewhere. McCain would extend all of the Bush tax cuts, while Obama would extend those that affect taxpayers with incomes of $250,000 or less. (Sources: Obama and McCain campaigns, Wall Street Journal.)
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If the tax cuts passed in 2001 and 2003 were extended into the next presidential administration and beyond, not only would the budget deficit increase, but the government would also have to pay more interest on the debt incurred. Additional possible deficit busters include extending other expiring tax provisions and indexing the AMT for inflation. These Congressional Budget Office projections show the effects of extending these various provisions without offsetting revenue gains. (Source: Congressional Budget Office.)
Trade Issues
During the last several presidential administrations, free trade has been an article of faith. The US has executed a number of free-trade agreements and now has free-trading partners around the globe. However, job losses at home have inspired second thoughts among many politicians about approving such agreements. While McCain supports the approval of further free-trade agreements, Obama is against approval of pending agreements with Colombia, South Korea, and Panama, and would like to see key provisions of current agreements renegotiated. (Sources: Wall Street Journal, Obama and McCain campaigns.)
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Trade Deficit. The ballooning US trade deficit is getting some relief from the decline of the dollar, but is still an issue of concern for many economists. Figures from 2006, 2007, and the first half of 2008 reveal the deficit is gradually narrowing. (Sources: US Census Bureau and the Bureau of Economic Analysis, Department of Commerce.)
US Free-Trade Agreements. The US has current free-trade agreements with Mexico, Canada, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic, Australia, Bahrain, Chile, Israel, Jordan, Singapore, Morocco, Malaysia, and Oman. Updates have been proposed with regard to current agreements with Colombia, South Korea, and Panama. Not all free-trade agreements have the same provisions and some of the pending agreements are revisions of prior agreements.
Energy Issues
Although oil prices headed lower in late summer, skyrocketing gasoline, heating oil, and natural gas prices were still a major worry for consumers during the fall election season. Policy debates revolved around three major issues: oil drilling, carbon emissions, and alternative energy. On the drilling front, Obama opposes offshore oil drilling, a policy that McCain supports, although Obama indicates he would support limited drilling if necessary. Both oppose drilling in the Arctic National Wildlife Reserve.
In terms of carbon emissions, McCain’s initiatives would reduce emissions by 60% by 2050, while Obama’s would reduce such emissions by 80% by 2050. Both goals would be achieved through conservation and a cap-and-trade system.
As far as alternatives to oil go, Obama will seek subsidies for solar and wind energy, while McCain believes such subsidies are ill advised. McCain supports incentives for nuclear power and also favors establishing a nuclear storage facility at Yucca Mountain in Nevada. Obama opposes the Yucca Mountain storage facility and wants more study of nuclear-power storage and safety. Over the summer, McCain proposed a temporary suspension of federal gas taxes to stimulate the economy; Obama opposed such a measure. (Sources: McCain and Obama campaigns, New York Times, Wall Street Journal.)
