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April 22, 2008

The John McCain Economic Doozy of the Day
Posted by Michael Cohen

Today, Kevin Drum highlights this nugget from John McCain's recent appearance on This Week:

Asked Sunday where he would find spending cuts, Sen. McCain mentioned ethanol subsidies, sugar-price supports and payments to wealthy farmers. "We're going to scrub every institution of government," he said on ABC's "This Week." "Is there any American that doesn't believe that there's tens if not hundreds of billions of dollars that can be saved?"

The prevarication in this statement is breathtaking. McCain is calling for a $160 billion cut in discretionary spending but as I mentioned a few days ago, he wants to enact a one year pause in discretionary spending that would exempt military spending and veterans benefits. Well since defense spending is 22% of the budget, McCain isn't going to be scrubbing that hard.

What about entitlement programs, they make up 42% of the federal budget, but McCain has no plan for wringing savings out of those programs, indeed, on the part of his website devoted to issues he does not even have a section on Social Security. I had to dig pretty deep to find even this:

John McCain Will Reform Social Security. He will fight to save the future of Social Security while meeting our obligations to the retirees of today and the future without raising taxes. John McCain supports supplementing the current Social Security system with personal accounts – but not as a substitute for addressing benefit promises that cannot be kept. He will reach across the aisle, but if the Democrats do not act, he will. John McCain will not leave office without fixing the problems that threatens our future prosperity.

 That's not a plan, that's a prayer. Indeed on Medicare, McCain says he will limit the growth in spending, but not only doesn't say how, he actually pledges to cut Medicare premiums for seniors.

If you throw in interest on the debt, you're talking about more than 73% of the budget that is either off limits or not seriously addressed by McCain.

So where is he going to find $160 billion in spending cuts? According to the Wall Street Journal, he could start with "the total budget in 2007 for the departments of Education, Energy, Homeland Security, Justice and State." What about earmarks - that's only $18 billion a year. Indeed, McCain doesn't list any of the proposed spending cuts that would get him to $160 billion. Oh and by the way, McCain wants to extend the Bush tax cuts.

Look, I understand that politicians say a lot of crazy things about the budget on the campaign trail, but we are facing a serious budgetary crisis in this country, which threatens to do real damage to our long-term economic competitiveness. But instead of addressing this issue, McCain is actually making things worse by basically deceiving the American people into believing any of this will be easy. Cutting the federal budget means genuine sacrifice, but all McCain is offering are empty platitudes.


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"we are facing a serious budgetary crisis in this country, which threatens to do real damage to our long-term economic competitiveness."

This was equally true in the 1980s, and worry about competitiveness was no less keen then as well. The budget finally balanced in the 1990s and the country ceased to worry about the Japanese, only to find itself again in fiscal trouble since 2001 and looking at China as the new challenger.

These ups and downs mask a more troubling long-term trend. The recovery of the 1990s was partly an effect of policy but was also a result of new technology that generated revenue and employment. Our comparative advantage in this sector may diminish in the years ahead and skill shortages may aggravate the situation as boomers retire. The things the National Academies have warned us about are really capital needs (human capital mostly) to meet long-term requirements. Balancing the budget may not be as important if deficit spending or debt goes to meet these needs effectively. The debate over spending should center on how best to do this.

The policy that was directed at federal deficits beginning in the late 1980s did, in fact, focus on non-defense discretionary spending.

The worst excesses of the 1981 tax bill had been walked back in the tax legislation of subsequent years, but President Reagan made it clear little further progress on deficits could be made in this area. Reagan had actually surrendered to Congressional Democrats on achieving any savings in the major entitlement programs before his first term had expired, and the defense budget was still treated as sacrosanct in the last years of the Cold War.

That left the domestic discretionary budget, on which was imposed a set of restrictions known collectively as Gramm-Rudman-Hollings, after their Senate sponsors. GRH relied heavily on across-the-board freezes and cuts in agency spending to meet deficit targets, an approach that met the political need to avoid crossing the administration's red lines (taxes, defense) as well as those of the Congressional Democrats (entitlements) while also providing a defense against any repetition of the David Stockman-era OMB's effort to eliminate programs and agencies outright. Across-the-board measures remain popular in Congress today, but they are a wretched way to make policy, making no distinction between well and poorly-run agencies or between necessary and marginal programs.

The longer GRH restrictions were in place, and the longer Congress allowed itself to go without any real authority for changing the pattern of discretionary spending, the less interest Congress took in the budgets and operations of domestic discretionary agencies. When to this growing disinterest was added the intense pressure that even legislators in seats previously thought safe to maximize opportunities to tout accomplishments to voters and campaign donors felt after the electoral earthquake of 1994, the stage was set for an explosion of spending done at the specific direction of Congress: earmarks.

Congressmen and Senators, having no stake in the general missions of executive branch agencies and unable to take credit for them back home, felt more and more free to demand that individual projects be inserted into agency budgets -- projects that could be attributed directly to them. Many of these projects represented things the agencies would have done anyway; many others were added by legislators simply because they saw other legislators doing the same thing. Agencies have adjusted as best they can, in various ways, but earmarks are now a central part of an appropriations process still powerfully influenced by decisions made in Congress fully 20 years ago.

Now John McCain wants to bring us full circle, back to where we started trying to address the deficit without raising additional revenue or cutting the programs of greatest political sensitivity. The two Democratic candidates, for whom the deficit is not a concern and who have not been active in Congress on spending issues, are not part of this discussion. That still leaves McCain -- who sometimes seems as if he is still running for the Republican nomination -- in a badly overdrawn position, making general fiscal promises his specific proposals don't, and can't, come close to covering.

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