I just got off a McCain campaign conference call with Douglas Holtz-Eakin and Steve Forbes. I was most interested in hearing what those guys would say about McCain's latest promise to eliminate the budget deficit by the end of his first term. The best I can tell, he plans on doing it through a combo of stronger economic growth, eliminating some unnamed programs, and cutting the growth of discretionary spending. I remain skeptical given the paucity of detail. But here is what I wrote a few months back:
The fiscal knot that a President McCain would have to untie to meet his promise to extend the Bush tax cuts, cut corporate taxes, eliminate the alternative minimum tax, and create an optional two-rate income tax system—while also getting America's fiscal house in order—may seem like one of Gordian difficulty.
1) The Congressional Budget Office will treat all McCain's tax cuts as pure revenue losers—an argument the media will completely buy into. And even the McCain campaign isn't making the argument that his tax cuts would come close to fully paying for themselves through the increased revenue that comes from higher economic growth. (A good thing, since Team McCain doesn't believe much in supply-side effects.) With the corporate tax rate cut, for instance, the campaign thinks it can recoup $30 billion of the $100 billion in lost revenue. So in isolation, McCain's tax-cut proposals would increase the budget deficit, which may be half a trillion bucks or more in 2009.
2) Assuming he isn't going to slash the Pentagon's budget, McCain realistically can't cut nondefense discretionary spending enough to pay for his tax cuts. In 2007, nondefense discretionary spending was $458 billion, or 3.3 percent of gross domestic product. If McCain was able to cut the $160 billion or so in excess spending he says he could find in the budget—whether through eliminating earmarks or other reductions—that would cut spending on education, border security, technology investment, and other discretionary items to around $300 billion, or 2.1 percent of GDP. Now the low point for the past four decades was 3 percent GDP in 1999.
Yet even that skimpy amount of spending would still leave a huge budget gap. Just extending the Bush tax cuts, for instance, would add an average of $280 billion a year to the budget deficit from 2011 to 2018, according to the old-fashioned, static analysis of the CBO. So using the campaign's own economic logic, McCain would pretty much have to eliminate all nondefense discretionary spending to pay for his tax cuts.
Bottom line: The only way this all makes sense is if McCain believes his tax cuts will supercharge the economy in true supply-side fashion, that growth from the tax cuts will more than make up for the loss in revenue from lower rates. If so, this represents a change in philosophy. In the past, Team McCain has not claimed such powerful economic effects from his tax cuts.