McCainomics: The Right Reacts

John McCain's top economic adviser, Douglas Holtz-Eakin, didn't much like Wall Street Journal reporter Laura Meckler's recent analysis of his boss's economic plan. Meckler's lede: "Sen. John McCain is proposing tax cuts that would either cause the federal deficit to explode or would require unprecedented spending cuts equal to one third of federal spending on domestic programs." In a response he wrote at National Review Online, Holtz-Eakin outlines a number of problems, including this one:

Meckler presents "independent" sources to back up basic assumptions that are not really independent or relevant at all. The Center for Budget and Policy Priorities is liberal-leaning and the Concord Coalition has largely lost relevancy. Yet, these are the only two sources quoted. Why didn't Meckler reach out to the Heritage Foundation, Cato Institute, or the American Enterprise Institute for a more balanced piece?

OK, I have undertaken the Holtz-Eakin Challenge and attempted to "reach out" to some other sources. First up, Alan Viard of the American Enterprise Institute and a former Bush White House economist:

It's hard to judge at this point whether the plan makes sense—like most plans put forward by candidates, it is not spelled out in detail. The plan certainly includes some very large tax cuts and his talk on April 15 did not give a lot of specific spending cuts. However, McCain has been relatively forceful in stating that painful choices need to be made in Social Security and Medicare. Indeed, in an April 14 Capital Commerce Q&A that you did, Holtz-Eakin suggests that McCain supports switching from wage indexation to price indexation of retirees' initial Social Security benefits. That's a huge spending cut, with a present discounted value of trillions of dollars (if enacted in its pure form). The plan may make sense if these large entitlement cuts can be adopted; otherwise, it would worsen the long-run fiscal imbalance.

And the two cents of Chris Edwards of the Cato Institute:

Indeed, we will need "unprecedented spending cuts" (Meckler) in coming years to deal with entitlement growth, whatever happens on the revenue side. That's a good thing in my view to reverse the "unprecedented spending growth" we have had in recent years. It's also not impossible. The cuts to the defense budget in the early 1990s were huge, and were a remarkable bipartisan political achievement given the power of the military-industrial lobbying complex. (I've got a whole book of proposed spending cuts here including defense.)

A lot of the budget debate moving forward will have to do with the meaning of the current budget "baseline." I think we are in a unique situation where the [Congressional Budget Office] and [Office of Management and Budget] baselines don't reflect reality. To the average taxpayer, their "baseline" is enjoying the Bush tax cuts and [alternative minimum tax] relief. The 20 million taxpayers who threaten to be hit by the AMT have never paid it, so their personal "baseline" is zero AMT tax. Thus, I agree with Holtz-Eakin: "Sen. McCain's chief economic adviser, Douglas Holtz-Eakin, says he doesn't have to find offsetting spending cuts for extending the Bush tax cuts or for eliminating the AMT for middle-class families because those policies are assumed in Washington." For example, the Democratic Congress last year passed AMT relief, without being offset at all, and they probably will this year as well.

I agree with Meckler and other critics that if McCain is positioning himself as a big spending-cutter, then he should tell us where he would cut and/or what budget mechanisms he would put in place to make the cuts happen. McCain can't just talk about earmarks, he needs to propose something big like a spending cap on the overall budget to actually bring it to balance over a period of years. And I think McCain's proposed gas tax cut and expansion in the personal exemption are bad tax policies that do nothing for economic growth.