If John McCain is elected the 44th president of the United States, the 75th secretary of the treasury just might be Phil Gramm. The deficit hawk former U.S. senator from Texas is currently a vice chairman of UBS Investment Bank and a top economic adviser to McCain. I recently chatted with Gramm, who has done few interviews since leaving office in 2002. (In an earlier post, I questioned Gramm on whether his efforts to deregulate the financial industry contributed to the current subprime crisis.) Excerpts (boldface mine):
Housing bailouts, fiscal stimulus packages, calls for higher taxes to deal with the budget deficit—is the era of big government back?
Well, I don't think in the hearts of the two Democrat contenders for president that the era of big government has ever ended or will ever end. The interesting thing about the economic debate that we are about to have in America is that nowhere in the world can the two Democrat candidates show an example of countries that have succeeded economically by raising taxes, increasing government spending, and instituting protectionist measures.... ...And you don't have to look abroad. Look at American states, look at states that have raised taxes, raised spending, raised the regulatory burden, and look at the states that have kept spending and taxes low and had friendly business environments. In the last 10 years, Michigan has lost jobs, Texas has gained 1.6 million jobs, and some of those jobs are in automaking. I think the strength that Senator McCain will have in the general election is the ability to basically point out that his program is the only program that is working worldwide and is working in America—and that the Democrat proposal has worked nowhere.
The only place socialism is seriously debated in the world is in Washington, D.C.... Nowhere else does anybody seriously consider it as a path to growth. Country after country has adopted our model.... Ireland is a perfect example. Senator McCain's people immigrated from Ireland along with millions of others because they were hungry. Today, Ireland has among the lowest tax rates in the world, one of the best business climates in the world, and as a result they have overtaken Americans in per capita income. So what do the Democrats say with regard to that success story? The Democrats say we can do it the other way—we can have government spend us to prosperity. Well, nobody has ever done that.
So U.S. competitiveness will be a key issue come the fall, then?
There won't be any clearer contrast in the campaigns than how we produce a prosperous, successful America. Senator McCain wants to revitalize our economy to compete in a world where there is only one market and that market is the world, and the Democrats want to try and build a wall around America to protect us from competition.... And in the end, Americans are not going to believe that it is possible to build a wall around America and go hide under a rock somewhere. Senator McCain intends to lead the world, and you can't lead the world and hide from it at the same time.
Why is getting rid of budget earmarks so important to Senator McCain?
If Congress [keeps earmarking], it loses its moral authority to deal with tough issues like entitlements. And earmarks do add up to a lot of money. In 2006 and 2007, they totaled $35 billion, and that is enough to pay for a $1,000 child care tax credit for every child in America. It is not an insignificant amount of money.... We have had an explosion of government spending the last 10 years, and it is reasonable to take stock of where we are and to go back and evaluate each and every program. We are spending [adjusted for inflation] $2,500 more in Washington for every man, woman, and child than we did when Reagan left office. That is an extraordinary increase in government spending, and I don't think that Americans feel they are getting anything like their money's worth. And the reason I have been so strongly in favor of Senator McCain is that he has been the one candidate who is committed enough and strong enough to break the back of this runaway government spending in Washington.
Both Barack Obama and Hillary Clinton want to hike tax rates back to where they were during the ' 90s boom. What is wrong with that?
When [Bill] Clinton took office, the economy was in a boom as the benefits of the Reagan economic program were being fully felt. Today, the economy is weaker, and also our competitors are stronger. One of the points you've got to understand is that what was good enough 25 years ago for America to be No. 1 is not good enough now. We want more growth, not less; more jobs, not fewer jobs.... Senator McCain agrees that we should have more spending on housing, nutrition, education, clothing—the things that American families want. He agrees with the Democrats on that. Where they differ is the question of who should do the spending. The Democrats want government to do the spending. Senator McCain wants families to do the spending.
And let me go back a second. The Democrats like to make a big deal out of how people said that Clinton's increasing the tax rates was going to produce economic problems, but actually it was the overall economic program of Clinton that they said those things about, including having government take over one eighth of the economy in healthcare and a stimulus package where the government was going to fund pork barrel projects all over the country, from alpine slides in Puerto Rico to ice skating warming huts in Connecticut. But the Democrats conveniently forget that because the Republicans were able to defeat the healthcare program and the stimulus package, the Clinton program as he called for it was not implemented.
What's your take on the Bush tax cuts?
There are a lot of things you can say about the Bush tax cuts, but you can't say they didn't work. Those tax cuts clearly were a factor in bringing us out of the 2000 recession at near-record speed.... Anybody who knows anything about the markets will tell you that the one thing that's capitalized in value is the tax rate, and if you raise the capital-gains-tax rate, you are going to affect equity values and you are going to affect people's retirements. And what do they want to raise the tax rate to do? Spend it on a grab bag of programs that are a poor substitute for families having more money to spend themselves.
What will McCain do to fix Social Security?
Both Republicans and Democrats know what needs to be done. They just don't want to be blamed for doing it. Everyone knows Americans are living longer and at some point we have to work longer, and everybody knows we are promising things we can't pay for. It's just who is going to step forward and lead.... I have two sons, they are in their 30s, and I think if you give them 30 years to plan ... to tell them what is obvious to a blind man, that to support themselves and their country, they are going to have to work longer, I don't think that would come as a shock to them. And, quite frankly, I think they would respect someone who did that. But if you tell someone who is 60 years old that, then you are going to do people harm. The key thing is to give people time so that they can plan.
Many conservatives are concerned about McCain's cap-and-trade plan to deal with climate change. Should they be?
The cap-and-trade plan is more market driven than anything else. If you want to discourage carbon use, you have to make it more expensive, but what is crucial is that this be a worldwide program that includes China and India. Senator McCain says it has to, and that will make a big difference in terms of competitiveness.... And environmental problems do have economic costs. I go to Beijing three times a year, and your eyes burn. In Pittsburgh in the 1920s, you would never see the sun at certain times of the year.... If we can have a practical, workable, gradual program that is adopted worldwide, I think it can be made to work. But will it be free? Will we have a better environment for nothing? The answer is no.
But how you do it will determine whether it is a bearable cost or will it infringe on other big goals? Remember, there are a lot of Americans who have not yet gotten a piece of the pie. Maybe you could limp along in France with the policy of the Democrats and just become more and more irrelevant to world trade and less of a competitor, but in America, where we have a growing population and people who want their shot at the American dream, those policies won't work.... We invented this game—this is our game. We can compete and win, but not by rejecting the very policies that made us successful at it.