Economy Proves Central in McCain-Obama Duel

Voters rate the economy problem No. 1. It's worth knowing the prescription that each candidate has in store.

By Richard Sammon, Senior Associate Editor, The Kiplinger Letter

June 23, 2008

The economy far outranks all other issues on the campaign trail, a fact born out in poll after poll -- in big states and small states -- and it will remain front and center this fall.

It's no wonder, then, that it's already dominating the presidential debate, more than controversial preachers, flag pins and lobbyist connections. Barack Obama and John McCain are each arguing that he would do more to help. Jobs, the economy and related pocketbook issues of gas and food prices are practically central in every stump speech they give now.

Obama wants another stimulus package, a $50-billion injection, including rebates, help for families facing foreclosure and an extension of unemployment benefits.

McCain has a more modest approach, at least as far as short-term fixes go. He backs limited mortgage relief and unemployment relief, but not more rebates. And he wants to suspend the 18.4˘ a gallon federal gas tax for the summer driving season or longer.

The two candidates offer huge differences on long-term tax policy. McCain would extend all of Bush's cuts, double exemptions for families with dependents, end the alternative minimum tax once and for all and slash the top corporate rate from 35% to 25%. On Social Security, he'd push partial private accounts for young workers -- not tax hikes or benefit cuts -- but he acknowledges other fixes will need to be considered at a later date.

Obama would trim taxes for low-income earners by $80 billion a year. But he'd raise them for families with incomes above $250,000 per year. He'd also increase payroll taxes subject to Social Security for those folks. In addition, Obama wants to allow the top tax rate for capital gains and dividends to climb to 20% or possibly higher. He recently indicated he's open to a cut in the corporate tax rate if it's accompanied by an effort to close business loopholes.

McCain argues that Obama really wants to increase taxes overall and that this is the worst thing for a weak economy. He says Obama's proposed hikes would hit a wide swath of Americans, not just the very wealthiest, a claim disputed by Obama.

Obama says Bush's low taxes on the rich failed to create jobs and growth, as the president and supply-side economists promised when the cuts were passed. If that sounds like a traditional Democratic vs. Republican argument over the economy, there's a good reason.

Obama has tapped Jason Furman, a protégé of Robert Rubin, Bill Clinton's former Treasury secretary, as his economic policy director. Furman also worked on the 2004 campaign of Democratic presidential nominee John Kerry as a top economic adviser.

McCain leans on Douglas Holtz-Eakin, who ran the Congressional Budget Office and has been a strong advocate of Bush's tax policies and of lower federal spending.

Both would back a larger federal investment in development of green technology to reduce pollution. Obama would commit more federal outlays. McCain leans more toward using generous tax incentives to spur industry to adopt changes.

McCain wants to expand federal oil drilling in the outer continental shelf in areas that are currently off-limits. Obama endorses more exploration on federal lands already leased for oil and natural gas development. Neither plan would have much of an economic effect for years, although both would boost output of natural resources in times of sustained high global oil prices.

A debate on the economy is likely to help Obama, at least generally. Voters tend to blame Republicans for the current situation and tell pollsters that they have more trust in Democrats when it comes to handling the economy, energy policy, health care and labor issues. McCain's strong suit with voters is foreign policy and national security affairs, both of which will be large issues in November, but perhaps not trumping the economy.

The reality is that a president has only a limited effect on the economy. And Congress will prevent either man from working his will entirely on tax policy or on Social Security. That will be especially true if McCain wins because Democrats are certain to increase their numbers and will have more control over Congress.

If Obama wins, the Republican congressional minority may be even more united and able to use procedural maneuvers and bloc voting to prevent and thwart what GOP leaders may portray as Democratic overreaching on the economy, taxes and business policy.

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