Jonathan Cohn - The New Republic (www.tnr.com) Sept. 2008

More Radical Than Bush

The full horror of John McCain's economic agenda.

Jonathan Cohn, The New Republic Published: Wednesday, September 24, 2008

John Goodman is a conservative economist who thinks all the fuss over people without health insurance is just hooey. As Goodman explained to a reporter from The Dallas Morning News last week, everybody can get medical care from an emergency room, so why not just stop tallying the uninsured altogether? "Voil à," Goodman quipped. "Problem solved." Like many far-right policy experts, Goodman had said such things before. But, unlike many far-right policy experts, Goodman isn't just some random wonk. As the Morning News noted, Goodman had helped craft McCain's health care plan. In other words, he is a McCain adviser.

Or, at least, he used to be. When Goodman's quote got the attention of reporters, a McCain spokesman issued a terse statement: "John Goodman is not an adviser to this campaign." When that position became untenable--it turns out Goodman had identified himself as an adviser not only to the Morning News but also in a recent Wall Street Journal op-ed, to which the McCain campaign never objected--the official story changed. Yes, Goodman had offered advice to McCain. But it was on an unpaid, voluntary basis, and McCain had since made clear that Goodman's input was not necessary. "John McCain could not disagree more strongly with Mr. Goodman," a spokesman said. "John McCain believes that addressing the problem of the nation's uninsured is one of our most pressing national priorities." (Goodman has been traveling and unavailable for comment.)

It wasn't the first time this campaign season that McCain distanced himself from a conservative adviser over controversial statements. Former Texas senator Phil Gramm, as a top economic adviser, had far more influence than Goodman. Fortune magazine actually called him "McCain's econ brain." But, in June, Gramm told a Washington Times reporter that the economy was stronger than most Americans realized. The real problem, he suggested, was a "mental recession"--that "we have sort of become a nation of whiners." Again, Gramm was offering a refrain common among conservatives, who think the press constantly dwells on bad economic news. But did McCain believe it, too? This time, McCain himself issued a denial. "Phil Gramm does not speak for me," he said. "America is in great difficulty. And we are experiencing enormous challenges." Soon Gramm was told his services, too, were no longer required.

Goodman and Gramm had, of course, committed political crimes. But, while they were guilty of ill-chosen rhetoric, they had also told the truth. Whatever their actual advisory roles, their statements were perfectly consistent with the thinking behind McCain's official economic agenda--a mix of supply-side tax cuts and conservative reforms of health care as extreme as any put forth by the Republicans in modern times. McCain might seem an odd vessel for such radicalism, given his notorious opposition to President Bush's first round of tax cuts and his reputation for bucking the GOP. But that all happened before he started running for president again. This campaign has shown how McCain intends to strike a balance between corralling his political base and actually governing the country. And it's not much of a balance. Hard as it may be to believe, after the mounting debt and rising inequality of the Bush era, McCain has indicated he wants to preserve Bush's conservative legacy on economic policy--and then take it even further.



To understand the absurdity of this proposition, it's important to remember just how awful that legacy is. When Bush took office in 2001, the federal government was running substantial surpluses--that is, it was taking in more money than it was spending. It also had a relatively progressive tax code, meaning that the wealthy paid significantly higher rates than the middle class and poor. During the presidential campaign, Al Gore had proposed putting the government's surpluses aside in order to avoid excessive future borrowing, which might slow down the economy, and to prepare for the retirement of baby- boomers, whose aging would soon strain Medicare, Medicaid, and Social Security. Bush rejected that idea, arguing--as many Republicans did--that the government couldn't be trusted with surpluses (i.e., it might spend the money instead). When Bush took office, he pushed for, and won, massive tax breaks. Even though most of the benefits went to the wealthiest, Bush vowed they would promote a strong economy that would ultimately benefit all Americans.

It was the same argument conservatives had been advancing for more than two decades, ever since Ronald Reagan first made supply-side economics a cornerstone of Republican Party dogma. But, as in the past, the theory didn't turn out so well in practice. Predictions of self-financing tax cuts proved utterly wrong, as the Clinton-era budget surpluses quickly turned back into the deficits we still have now. Today, the government is digging itself into a deeper fiscal hole. If allowed to persist, high deficits could actually hinder growth in the long run, as the government soaks up money that businesses would like to borrow for their needs, while making future entitlement costs less manageable. The short-term picture isn't so pretty either. The economy grew following a recession that hit during Bush's first term, but it was a notoriously anemic expansion. Wealthy Americans made out like bandits, but the typical American's wages did not grow at all relative to inflation, something that hadn't happened in any expansionary period since World War II. Job creation under Bush has been the worst since Herbert Hoover's time, and the percentage of families living in poverty has actually increased.

No, you can't blame all of this on the Bush tax cuts. Economic inequality has been growing on its own, and the deficits reflect, in part, high spending on everything from the war to the new Medicare drug benefit. But, if the Bush tax cuts aren't the only reason for our current economic woes, they are an important one. It's hardly surprising that the poor and middle-class would fall behind just as the tax code started showering more benefits on the rich. Nor is it coincidental that deficits would reappear at the very same time tax revenues declined, relative to the economy as a whole.

When history so clearly refutes your economic doctrine, the intelligent response is to reassess your thinking. A case in point is the Democrats. Even though their policies were pretty successful during the 1990s, particularly compared to the recent Bush record, in the last few years leading Democratic thinkers realized that they could do better still. Precisely because the economy is heading in the direction of inequality--and because, absent other forces, the poor and middle-class will struggle--Democrats today are putting more emphasis on aggressive efforts to protect average Americans, even if that means meddling with the economy in ways they thought unwise a decade ago.

But Republicans have reacted differently. Instead of taking the last few years as a cue that maybe it's time to offer something besides more Bush-style tax cuts, they decided that what the country really needs is ... more Bush-style tax cuts! And McCain's agenda indicates that he agrees wholeheartedly. After extending Bush's tax reductions, which are set to expire in 2011, McCain would trim taxes on corporate income and estates. He's also proposed creating a new, parallel tax system into which any American could opt. While he's been a bit fuzzy on the details, it, too, would cut taxes disproportionately for wealthy Americans.

If all these proposals took effect, according to the independent and highly respected Tax Policy Center, 80 percent of the McCain tax cuts would go into the pockets of the richest quintile of Americans. They would see their after-tax incomes go up by an average of 6 percent. By contrast, somebody in the middle quintile would see his or her income rise by 1.4 percent while somebody in the poorest quintile would realize a yield of just 0.6 percent. To put these statistics in human terms, a multimillionaire--say, a wealthy landowner in Sedona, Arizona--would get enough money to buy a luxury car. (The top 1 percent of taxpayers would reap an average bonus of more than $100,000 per year under McCain's plan.) But a tool-and-die maker working for a Detroit auto supplier would get about $600, maybe enough to cover half a month's mortgage. Somebody in the lowest income quintile--say, a single waitress in rural Virginia--would, with her $65 windfall, get an extra trip or two to the grocery store.

But that's just half the story. Those tax cuts would cost money--a lot of money. McCain has, at times, invoked the thoroughly discredited supply-side argument that his tax cuts can help pay for themselves by generating more growth. Mostly, though, McCain has emphasized his intention to pay for the new tax cuts by slashing wasteful spending. And it's hard to overstate how laughable this is.

McCain may have a strong record of opposing pork-barrel spending, but there simply isn't enough pork in the budget to make up this kind of money. After consulting with budget experts, the Annenberg Public Policy Center's website factcheck.org concluded that McCain would have to cut discretionary spending-- including things like secondary education and veteran's health benefits--by 20 percent just to realize the $100 billion savings he's claimed he could find. And that $100 billion wouldn't even come close to offsetting the enormous tax cuts--which, according to the Tax Policy Center, would cost the federal government around $700 billion per year.

So, if McCain is serious about paying for his tax cuts, he'd have to look elsewhere--to the three big entitlement programs: Medicare, Medicaid, and Social Security. McCain has frequently indicated an interest in doing just that, suggesting that, as president, he'd convene a bipartisan commission on entitlement reform. He's called the present financing of Social Security--which relies on contributions from present workers to pay for present retirees--a "disgrace," even though it's the way the program has always run. McCain has also long supported efforts to privatize Social Security, an initiative that would erode the basic income guarantee that Social Security provides and result in reduced benefits. It may not sound so drastic, given that some Social Security recipients are pretty well-off. But remember that, for about two- thirds of elderly Americans, Social Security represents approximately half of their incomes. Even modest benefit reductions would affect these retirees.

Of course, it's possible McCain wouldn't slash entitlements, perhaps because it'd be politically impossible. But, if he left entitlements intact, he'd simply be reprising Bush's feat--that is, he'd run up more debt. The Tax Policy Center estimates that, absent offsetting cuts, the McCain tax agenda would add more than $8.5 trillion in new debt over the next ten years--more than double what Obama would add. And this would hit the poor and middle-class just as surely as spending cuts today would. Sometime in the future, the sky-high interest payments on that borrowed money (not to mention the depressed tax receipts from reduced growth) would force the government to choose between slashing entitlements for retirees or slashing spending that benefits everybody else. "He hastens the day of reckoning when government resources are too small to sustain current commitments," says Henry Aaron, a Brookings Institution economist. "The right analogy here is the kid who kills his parents and then asks for mercy as an orphan."



The other economic lesson of recent history concerns exposure to financial risk--specifically, the risk of high medical expenses. For the last 30 years or so, the proportion of Americans with health insurance has declined, primarily because insurance has gotten more expensive than either employers or individuals feel they can afford. Even people with insurance have felt the impact of these rising costs in the form of higher premiums, co-payments, and deductibles. But, rather than bolstering public insurance programs for the poor or creating a universal health care system--which is the solution Obama, like most Democrats, now favors--McCain has once again taken a cue from President Bush. His supposed solution to the health care crisis lies in a sweeping--and potentially destabilizing--change in the tax code.

Right now, the government exempts money spent on group health insurance premiums from personal income taxes. McCain would get rid of that exemption and replace it with a tax credit, worth $2,500 to individuals and $5,000 to families, to cover money spent on insurance and medical expenses. The credit would be refundable, which means that, if you were too poor to pay taxes, you'd get the money as a straight subsidy from the government. It's hard to know for sure exactly how the change would play out; among other things, McCain and his advisers have offered contradictory versions of whether they'd also cut the exemption for payroll taxes, too. But it's clear that at least some people who don't presently have health insurance would go out and buy some, thereby increasing their protection from medical expenses. For these reasons, it's easy to conclude--as some commentators have--that McCain's health care proposal is actually progress of a sort.

But what kind of insurance would people be getting? The existing tax break on group health insurance, which has been around since the 1940s, means that, for most workers, one dollar of health insurance from your employer is actually worth more than one dollar in salary. That's a major reason employees have pushed for group health coverage over the years--and employers have provided it. Take away the tax break, and the incentives will change. Fewer people will end up with group health insurance, since group coverage will, in effect, become more expensive.

That's fine if there's a good substitute for group insurance; Obama's universal coverage program, for example, would let anybody buy into a public insurance option or obtain private insurance through the system federal employees use. But McCain creates no such mechanism. As a result, people without group insurance would have to shop for coverage on their own, in the individual market, where it's difficult to find the same sort of protection. Individual coverage is generally available only to those in relatively good health, since when insurers sell policies one-by-one they can, and do, avoid people with pre-existing medical conditions. And the benefits are rarely as comprehensive, mostly because large companies have better bargaining leverage (to buy more protection for the same money) and because offering skimpy benefits for serious illness is yet another way insurers can avoid enrolling too many sick people.

Another seemingly small tweak in McCain's health plans would most likely make this problem even worse. McCain has said he would allow people to purchase coverage across state lines, something they cannot do now. This would reduce the cost of insurance, McCain says, since many states have enacted regulations that drive up the cost of medical care. What McCain doesn't mention is that these regulations are in place to make sure insurers provide certain benefits, price their offerings within certain limits, or abide by certain standards of solvency. Not all of these regulations are sensible--some are the result of lobbying by medical professionals or disease groups--but many of them are. They can require insurers to cover cancer screenings, diabetes care, or mental health treatments, for example. If people could purchase coverage across state lines, most likely the entire insurance industry would relocate to the state with the most lax regulations--and existing regulations in other states would become effectively meaningless--much as the credit card industry relocated to Delaware and South Dakota in the 1970s and '80s. And, again, people would end up with weaker health insurance.



The ultimate question about McCain's agenda, then, is not whether it's deeply conservative but whether he'd really pursue it. He has reportedly admitted he "doesn't really understand economics" and has never shown the kind of passion for it that he has, say, for national security issues. And, while McCain has at times surrounded himself with the likes of Goodman and Gramm, he also has more sensible voices in his orbit. Most notable among them is chief economic adviser Douglas Holtz-Eakin, who gained a (well-deserved) reputation for integrity as head of the Congressional Budget Office by refusing to countenance fiscally irresponsible arguments--even when they came from fellow Republicans. Maybe this is a sign that, if elected, McCain would stop listening to the ideological zealots on economic policy--and start listening to saner, more moderate voices.

It's a comforting theory, but not, ultimately, a convincing one. Whether it's ambivalence, ignorance, expediency, or conviction that has propelled McCain to the right, there's no reason to think his behavior will change after Election Day. Remember, we've seen this all before. In 2000, Bush ran on a deeply conservative agenda of slashing taxes, gutting Social Security, and peeling back health insurance coverage even for middle class Americans. But, despite valiant efforts from writers like Paul Krugman to point this out, both the press and the public fell for the myth that Bush was a "compassionate conservative." And, while McCain will have to confront a more ornery Democratic Congress than Bush did in his first term, McCain's margin for error will also be a lot smaller. Bush was fortunate in that he took office after the Clinton boom, when the federal treasury was relatively flush and a long expansion had fattened people's pocketbooks. Now, the budget is back in the red, and the public is desperate for financial assistance and security. Dismissing McCain's declared agenda as empty rhetoric would be a huge gamble--one this country can ill afford.

Jonathan Cohn is a senior editor at The New Republic. He is also a senior fellow at Demos and the author of Sick: The Untold Story of America's Health Care Crisis--and the People Who Pay the Price.