An Alternate Reality Version of the Democratic Presidential Debate

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The 2008 Democratic presidential candidates debate in Orangeburg, S.C., last night was as light on content–at least on economic policy–as the websites of the candidates themselves. At one point even John Edwards said, "We've had a lot of discussion tonight, not a great deal of discussion so far about the substance of very specific ideas that each of us have on big issues."

Moderator Brian Williams of MSNBC asked one question about whether hedge funds are good for America, a question about how the candidates would pay for their universal healthcare plans, a question about Wal-Mart...and that was pretty much about it. Nada about Social Security reform, trade, income inequality, globalization, or making American workers and businesses more productive. Now imagine an alternate reality where I, not Williams, had been the moderator. (Also in this somewhat fantastic alternative universe, the Chicago White Sox–not the New York Yankees–have won 26 World Series.) Here are a few of the questions I would have tossed out to the various contenders.

"Senator Obama, in your book The Audacity of Hope, you write that President Reagan's 'central insight–that the liberal welfare state had grown complacent and overly bureaucratic with Democratic policymakers more obsessed with slicing the economic pie than with growing the pie–contained a good deal of truth.'" Yet you have yet to propose any ideas to boost economic growth, productivity, or innovation. Nothing about growing the pie. Do you have any ideas that you wish to share with us or any thoughts at all on the role of government in promoting growth?"

"Senator Clinton, you've called the Kyoto treaty, meant to reduce global-warming emissions, a 'great organizing principle' for a national economy. Two questions: First, do you believe it is the proper role of the government to "organize" the $13 trillion U.S. economy? Second, most economists would say that raising worker productivity is what raises our standard of living over time. Does that goal now come second to dealing with climate change? Must Americans now accept a stagnant standard of living because of global warming?"

"Senator Edwards, you've said that you want wage income and investment income to be treated the same by the tax system. Presumably you mean by raising investment taxes to the level of income taxes rather than cutting income taxes to the level of investment taxes. Given that both the economy and stock markets have boomed after the investment tax cuts in 1997 and 2003–with the Dow passing 13,000 this week–do you worry that your plans would tank the market and sink the economy?"

"Senator Clinton, which parts, if any, of the Bush tax cuts should be kept and not left to expire at the end of 2010? Your husband, after all, also signed a capital-gains-tax cut. And how will you pay for any cuts that you might wish to keep–such as cap gains or child tax credits–since Congress treats tax cuts as revenue losers? Are there any nondefense government programs you would completely eliminate?"

"Senator Obama, also in your book you write that the high marginal tax rates that existed when Reagan took office distorted investment decisions. Would you have voted for the 1981 Reagan tax cuts that slashed top rates from 70 to 30 percent? If not, would you prefer to have the rate back to 50, 60, or 70 percent?"

"Senator Edwards, if the middle class is struggling as you contend, how come American consumers keep spending? Did you know that many economists think government data have overstated the rate of inflation the past 30 years and as a result, the average worker is some 40 percent richer since then rather than doing about the same? Ever hear of this?"

And I would have loved to hear from all of them exactly about tax increases or spending cuts they will propose to make Social Security solvent. But questions about Edwards's $400 haircuts are interesting too, I guess.

Weak GDP Report Masks Strong "You Economy"

Drill down beneath the headline number in today's GDP report–the nation's gross domestic product grew by just 1.3 percent during the first quarter of this year, the worst performance in four years–and there is some good news. The 17 percent annual rate of decline in housing investment knocked nearly a full percentage point from economic growth. So the housing bust is still a big drag, literally. No surprise there. Weak inventories and exports lopped off nearly another point, though many economists see those trends as temporary. But consumption by resilient American shoppers–what I like to call the "You Economy"–continues to fuel economic growth. It grew at a 3.8 percent rate and added 2.7 percent to the GDP figures. And little wonder why. Real disposable income increased by a strong 4.5 percent the past three months. The worrisome part of the report, at least for the Federal Reserve, was the inflation data. Core inflation as measured by the personal consumption deflator–excluding food and fuel–accelerated from 1.8 percent in the fourth quarter to 2.2 percent in the first quarter. Two impacts here: First, the price data make it a bit less likely the Fed will be cutting interest rates anytime soon. Second, the inflation numbers along with the weak GDP numbers are sure to prompt worried cries of "stagflation," the economic malady of the 1970s. Economist Robert Brusca of FAO Economics makes an insightful point about such fears:

"People who are calling this stagflation are confused. While it may seem like stagflation with the GDP growth rate falling and inflation rising, stagflation is not really about rising inflation and slowing growth...Instead, stagflation is about stubbornly high inflation and 'insufficient' growth...The U.S. economy may be losing steam and it may have slowed, but growth is not insufficient. Corporate profits are doing well and [the Dow Jones industrial average] has just made a series of all-time record highs. Other market indices are on six-year highs plus the rate of unemployment is low and has been falling. When unemployment starts to rise and inflation is stubbornly high or rising, we can open this question of stagflation. But let me say this: I have seen stagflation and this is not stagflation. Inflation may be rising, but it is hardly high. The problem with branding this as stagflation is that we have NO 'stag' at all and very little 'flation.'"