The Arizona Republic
As a prelude to the 2008 presidential campaign, Sen. John McCain is indicating that, when it comes to economic issues, he may be a work in progress.
In an interview with the Wall Street Journal’s Stephen Moore, McCain acknowledged that while he felt on solid ground on military and foreign policy matters, he still had a lot to learn about economics.
McCain’s behavior has also changed recently. He opposed President Bush’s first-term tax cuts. Nevertheless, he recently supported extending the cut in investment income tax rates. He also has hinted that he could support a compromise on the estate tax being crafted by fellow Arizona Sen. Jon Kyl, which provides a hefty exemption and subjects inheritances above that to the low 15 percent investment income rate.
This willingness to reconsider his position on economic issues is welcome. During the 2000 presidential campaign and Bush’s first term, McCain showed an antipathy toward growth-oriented fiscal policy that is troubling in a Republican senator, much less a presidential standard bearer.
The bet here, however, is that McCain will find a tough go of it.
McCain is an instinctive politician who tends to see the world as a morality play. In his morality play construct, success requires the exhibition of virtue, usually sacrifice to a cause greater than oneself. That’s the unifying theme to McCain the politician.
Sound economic thinking, however, conflicts with McCain’s moral instincts about economic issues.
Take the issue of the budget deficit, for example. A case can be made that budget deficits are in part a growth issue, that they raise private sector interest rates and thus impede private sector growth. And at some level that’s undoubtedly true.
The evidence of the past 25 years, however, suggests that the effect is small and easily overwhelmed by other factors. Interest rates declined as budget deficits were building in the 1980s, stayed pretty steady as surpluses appeared in the late 1990s, and then actually declined as deficits reappeared in this decade.
There is, however, a moral argument about the budget deficit as well, that it consists of this generation living beyond its means and handing the bill to the next generation. Never mind that roughly half the deficit is to build capital projects that will benefit the next generation. In this view, the relatively affluent, who can afford it, should be willing to sacrifice through higher taxes to right the wrong.
Now, there is a moral argument in favor of growth-oriented tax cuts as well, namely that people should be able to keep the fruits of their industry and that high tax rates are a diminution of freedom.
There is also, however, an empirical case. Policies that grow an economy tend to better improve the lot of the poor and the middle class than policies that seek to redistribute wealth through high taxes on the affluent to finance government services.
Investment capital is the fuel that grows an economy. In the United States, participation in the capital markets has been greatly broadened over the last couple of decades. More than half of American families now own stocks or bonds.
Nevertheless, there is an investment class in the United States, consisting of the relatively affluent with some measure of discretionary income or wealth. What these people do with their money is economically very important. Having it taken by government isn’t the option that maximizes economic opportunities for the broader citizenry.
This notion of success through mutual gain conflicts with McCain’s instincts about the superior virtues of sacrifice. But it has been the most important and enduring insight about political economy since Adam Smith.
It also conflicts with McCain’s instincts about the role of government in the economy, which are very Rooseveltian, Teddy that is.
McCain has a famously high regard for Roosevelt, who championed a graduated income tax. Roosevelt’s cadences are often heard in McCain pronouncements on a broad range of topics.
A Rooseveltian heavy hand, however, isn’t what a modern economy needs to grow. It needs resources left at work in the private sector and a steady and sensible regulatory environment.
In other words, it needs governmental restraint. Restraint, thus far, hasn’t been one of the virtues that have captured McCain’s attention.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: email@example.com