I recently interviewed Douglas Holtz-Eakin, John McCain's economic guru, over at McCain HQ. Here is some of what he had to say about the weak economy, high gas prices, and the plunging housing market, with the best bits in boldface:
Me: Is the economy a "shambles" like Senator McCain's campaign commercials say it is?
Douglas Holtz-Eakin: It's fair to say that segments of the economy are in shambles. I think the economy has this sort of very interesting character right now. If you make something in America—except a house—you're hanging in there, and exports in particular are helping you tremendously. But if you finance something in America, you are in a world of hurt, and that's what's happening. So we have some regional distress because of the housing market, some sector distress, and we do have a lack of momentum that we would like to turn around.
Me: The next president is likely to face a huge budget deficit and so-so economic growth. How would those conditions affect McCain's economic initiatives?
Holtz-Eakin: Certainly his focus is creating job growth in America, and that would remain the top priority. And there has never been an era of successful deficit reduction that didn't include growth. That is the foundation on which that will happen, and past that, you look for opportunities to restrain spending. This is not a projection, but suppose you get 4 percent growth. That was the Reagan expansion. That is a lot more than 2.8 percent [that the Congressional Budget Office is forecasting], and that is $500 billion more tax dollars during that period. Growth matters; there is no way around that. But this is an effort to not be the rosy scenario. The feedback effects [on the budget] from good tax policy are assumed to be at most 20 percent from a corporate rate that some people believe will pay for itself.
Me: What is the McCain economic narrative?
Holtz-Eakin: Jobs for America. You can look at everything he's doing through the lens of making sure American workers have a job on which they can build the foundation of their family and their personal goals. The energy proposals are a recognition that we have a great problem in the United States providing adequate job growth over the near term—if we don't expand energy supplies, oil, natural gas, coal electricity, nuclear power—all of which Senator Obama has taken off the table. And in the longterm, we have to get off imported oil because too many times the U.S. economy has been held hostage to international oil markets. This [is] about jobs—and the environment and national security as well.
Or healthcare. Look at the cost growth and what it does to our firms' ability to compete internationally, hire people, and give raises to workers they already have. Got to take care of that. Taxes. Let's cut that corporate rate because we know we are driving too many jobs offshore. These are jobs that have health and retirement benefits, typically. Let's keep them here. Give companies a permanent R&D credit because we know if the R&D is done here, the manufacturing is more likely to be done here, according to the research literature. That's a package about jobs. You can go down the list. Trade. Senator Obama has been just very bad on trade; 25 percent of all jobs are trade related. Don't mess with the economy in that deep way.
And reform unemployment insurance and worker-retraining programs so they are effective and not still built on the model of the 1950s: Things get a little slow, and we'll park you over here and wait for the job to come back. It doesn't. Let's provide incentives to get people back into the workforce quickly. Let's provide effective training programs. But don't make it trade related. Why should it be that if someone loses their job because of trade—a minority of job losses—they get better treatment than someone who loses their job because of advances in technology or consumer shifts? But it is all about how we are going to support American workers.
Me: So how would Senator McCain's Lexington Project affect American energy policy?
Holtz-Eakin: What the Lexington Project does is provide substitutes. What the government can do is get out of the way of allowing substitutes to appear. The substitute for imported oil is greater domestic production, then, you can move toward substitutes for oil entirely. Then, over the long term, you substitute away from liquid fuels toward electricity—renewables, nukes, investing in coal.
Me: Senator McCain says he wants to get energy prices down. But wouldn't his cap-and-trade plan for carbon emission raise energy prices?
Holtz-Eakin: Cap-and-trade is the architecture. You want to get to a place where you can have a cleaner energy portfolio. But cap-and-trade is the long run, 2050. If you look at the modeling, there are all sorts of estimates on energy prices, none of which are dramatic.
Me: Lots of budget experts don't think the McCain budget can be balanced. What are the experts missing?
Holtz-Eakin: I don't know what they are missing, but I know the landscape enough to know the mistakes that you can make. Mistake No. 1 is to pretend somehow that our budget is being presented as a long-term budget fix. It's not. The long-term budget will be balanced as quickly as we can get bipartisan entitlement reform and not a bit before. [What's key] is the overall willingness and commitment and ability of President McCain to work in bipartisan fashion with Congress to slow the growth of spending, and that has been missing for the past eight years... People have forgotten the era that preceded this one where you had a Democratic president and a Republican Congress who did that. The third piece they are missing is the willingness to look hard at defense procurements. In the past, there have been parts of the budget that have been off limits.
Me: Why doesn't Senator McCain offer a specific plan to fix Social Security?
Holtz-Eakin: He is very specific about Social Security. The more specific you are about things you will take off the table or insist upon, they more you will polarize the debate and the less likely you are to achieve a solution. And it is Senator McCain's belief that we cannot one more time fail and kick this issue to the next generation. He wants to get the deal done. Let's not begin by draining the trust fund [as Obama would do]. Let's not raise the payroll tax cap and insist on that when, in fact, none of that money is guaranteed to go into Social Security. And No. 3, let's not have a payroll tax credit at the bottom end so that people get benefits on which they haven't paid taxes and thereby break that link [between taxes and benefits]. Those are all steps in the wrong direction that make it harder to get a deal done.
Me: But if Senator McCain lays out a plan and wins the election, wouldn't he have a mandate to implement that plan?
Holtz-Eakin: "Mandate"—I believe those were the words of George Bush. How successful was that? Senator McCain has a record of getting things done in bipartisan fashion, and that will be a change in Washington.
Me: Quick thoughts on Fannie and Freddie?
Holtz-Eakin: Clearly, in the short term, you cannot let the turmoil at these two institutions spill over into the financial markets and housing markets and further hurt American families. But there is an important dividing line. If taxpayer funds are put into these companies, then you have to do something different. It is not appropriate that private firms are playing with public-sector money.