How Scary the Economy Would Be in McCain's Hands

About a year ago, I had a memorable chat with a high-ranking Republican operative. The presidential primaries were revving up, and he asked me which Republican candidate I feared the most. Without hesitating, I answered McCain.

My rationale was simple. While he was increasingly out-of-step with the public on the war, so were all the other Republican candidates. But unlike them, McCain had repeatedly stood up to his party on matters economic, especially the Bush tax cuts, and he did so with resonant language.

In 2001, when the richest one percent of households held 18% of all income, he said he could not "in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans."

In 2003, when we had gone through a recession, were waging an expensive war, and the federal budget had flipped from surplus to deficit, he voted against another round of tax cuts for the wealthiest, this time arguing that "At a time of war, at a time of economic stagnation, at a time of rising national debt ... one might expect our national leaders to pursue policies calling for shared sacrifice to achieve shared benefits. Regrettably, that is not the case."

The most recent data show that in 2006, 23% of all income is held by the richest 1%, the highest level on record but for one year: 1928. Spending on the war has not abated, and the budget deficit is on the rise. Middle-class Americans, who allegedly weighed so heavily on McCain's conscience circa 2001, are much more squeezed now than they were then.

The economy is surely in recession. Financial markets are deeply screwed up, and on Friday we learned that the job market contracted by another 159,000 last month, the ninth month of consecutive job losses.

In other words, if the Bush tax cuts didn't make sense in 2001 and 2003, they make a whole lot less sense now.

Yet McCain doesn't merely want to extend these cuts forever. He wants to expand them dramatically, by cutting the corporate tax rate by about a third, at the cost of $735 billion over 10 years, according to the non-partisan Tax Policy Center (TPC). As Biden effectively emphasized in last week's debate, that move delivers $4 billion in annual tax cuts to the Exxon-Mobil's of the world.

What happened? How does McCain's erstwhile good conscience countenance this policy? The answer, or at least the spin, was revealed to me a few weeks ago in a debate I had with his top economist, Doug Holtz-Eakin. When I pointed out that these cuts do nothing to help the middle class, while needlessly raining more wealth on the "haves," Doug disagreed. Based on the fairy dust of supply-side, trickle-down economics, he asserted that these cuts would lead to more jobs and income for middle-class families. Contrary to McCain's position a few years back, the campaign now frames a cut in corporate taxation as their middle-class tax cut.

(Fact check: Data from the non-partisan Congressional Budget Office show that middle class people hold a mere 3% of all corporate income, compared to 88% for the top fifth, and about 60% for the top 1%. In our new State of Working America, we show that an important factor driving the almost unprecedented level of inequality right now is the double whammy of a) the growth of corporate income, like dividends and capital gains, versus labor market income, i.e., earnings, and b) the increased concentration of corporate income among the richest households.)

The only way McCain can implement this fiscal policy without generating unsustainable debt levels is to cut deeply into government spending. His and Palin's hated earmarks won't get you there (in Palin's case, of course, the hatred is newly founded). His promise to freeze certain aspects of discretionary government spending gets you even less savings than the earmarks. They'll have to go after the entitlements, and since Social Security is actually a relatively small problem in this regard, for their plan to work, they have to cut the heck out of Medicare and Medicaid.