News Release: Faculty Experts, Finance and Economics, Politics

Oct. 9,  2008

Strategic Management

What Would an Obama or McCain Administration Do?

Knowledge@Emory

The fallout from a mortgage meltdown and credit crunch that has already toppled some Wall Street titans has added urgency to the high-stakes showdown between U.S. Senators Barack Obama and John McCain.

Despite that, in their debates on Oct. 7 and Sept. 26, the presidential candidates spent some time sparring about proposals to bail out the struggling financial market and touched on budget issues moving forward, but offered more specific ideas for handling foreign policy.

Much of what they said has already been hashed out on their websites and by their spokesmen. But as the final weeks of the campaign season wind down, faculty at Emory University examined other issues, including the way that the candidates’ approaches would likely affect health care, business and job creation, and the national economy.

Policy bullet points

Each side has plenty of ammunition, says Len Carlson, an associate professor of economics. Each side has also made some gaffes, he adds.

“All candidates and presidents make some statements that make economists cringe, often put into speeches by political advisors unconstrained by economic literacy,” says Carlson, quoting from “Economic Illiteracy on the campaign trail” an article written by Michael Boskin, an adviser to the first President Bush. 

“We have had plenty of examples of this in the campaign,” says Carlson. “The most obvious was the proposal to lift the gas tax last summer by McCain and [Sen. Hillary] Clinton, but not by Obama. As Clinton supporter Paul Krugman [of the New York Times] and others pointed out, this was a silly proposal that would not help.”

Carlson notes that basic economics indicates that a tax cut for a product with very inelastic demand—like gasoline in the short run—would tend to have a negligible effect on price and would encourage more imports of oil.

“Meanwhile, most of the economic gain would flow to the oil companies,” he adds.

Carlson also takes issue with McCain’s energy policies, which generally calls for more oil exploration and for encouraging the use of nuclear power.

“Drilling won’t help much and even then it will only be of benefit in the future,” Carlson observes. “It will also encourage the use of oil, though only to a small degree.”

He agrees that nuclear power is feasible, as France has proved, but says “the problem is the waste and disposing of it safely; and the danger that some terrorist will use the waste to do bad things.”

Obama is in favor of alternative fuel sources, which can work, “but only with a lot of commitment and in the long run,” says Carlson. “But if gasoline gets even more expensive, this will happen eventually anyway.”

The economic argument for pursuing alternative energy sources has to be based on “the spillover effects of the current high price of oil: global warming, dependence on unreliable sources for imports in a time of war, and the fact that the oil revenues are going to [some] countries around the world who are up to no good,” cautions Carlson.

Despite his general agreement with Obama’s energy policies, Carlson leans toward McCain when it comes to international trade policy.

McCain says he favors free trade and less government regulation. Obama wants to renegotiate trade agreements, penalize companies that outsource jobs, and overall wants to see more government involvement in business matters.

“All economists favor free trade, which helps consumers and export industries,” says Carlson. “Arguing against free trade because of jobs is weak since mostly what free trade does is to rearrange where people work. The job-loss argument really is a statement about manufacturing jobs, since overall employment [despite the recent uptick in unemployment] has risen over time.”

He also supports the North American Free Trade Agreement (NAFTA)—a 1994 contract to remove most investment and trade barriers among the United States, Canada, and Mexico. McCain champions NAFTA while Obama has called for changes in the agreement that he says would protect American jobs.

“Unions had pictured NAFTA as a reason for the job losses in manufacturing, but most of the rise in imports is from China, not Canada and Mexico,” observes Carlson. “And again, free trade rearranges jobs. There is a real issue that the jobs available to high-school educated workers have dropped in pay in the past decades, but blaming NAFTA is sheer nonsense.”

A real connection

For some Emory faculty, the connection to the presidential debates is more than theoretical. In a New York Times interview associate law professor Michael Kang, for example, recalls a constitutional law class, taught by Barack Obama, that he took as a student at the University of Chicago Law School.

"He had a lot of discussion, was very objective and even-handed,” says Kang. He tried to get the class to think about things in different ways… [and] wanted us to think from different perspectives, to think critically."

In fact in some respects, the Democrat and Republican positions were reversed during the past 16 years, according to political science professor Alan I. Abramowitz,

“Under the Clinton administration steps were taken to cut the costs of welfare, and the national budget swung to a surplus,” he recalls. “Then the budget ballooned under eight years of the Bush administration and we swung to a deficit. For awhile it looked like the traditional lines between the Democrats and Republicans were getting blurred.”

Now though, the boundaries are clearer.

“We’re talking about some significant differences,” Abramowitz says. “Overall, McCain calls for less regulation of businesses [although in the wake of recent financial center collapses, both candidates have called for more oversight as a condition of any federal bailout].”

Abramowitz predicts an Obama win in November, citing forecasts he has compiled that correctly predicted the popular vote winner within two percentage points or less in every presidential election since 1988.

If Obama captures 54.3% of the vote, compared to 45.7% for McCain, says Abramowitz, “a popular vote margin of this magnitude would almost certainly translate into an overwhelming majority in the Electoral College.”

That would give Obama a mandate to go back to the traditional Democratic approach of encouraging government programs, “but he would also take steps to strengthen market forces,” says Abramowitz.

Interestingly enough, both McCain and Obama’s health care proposals could spark some movement away from the traditional employer-provided health insurance model.

McCain’s health care proposal is designed to encourage individuals to get their own health insurance plans instead of relying on company-sponsored plans.

It would reportedly impose income taxes on the employee-paid portion of health insurance—currently employees currently are generally not taxed on this benefit—and would instead offer tax credits that workers could use to offset the cost of insurance they buy on their own.

McCain says he would also work to eliminate restrictions that currently keep individuals from crossing state lines to buy health insurance policies.

Obama’s approach would move the nation closer to a universal health care system, says Abramowitz.

“It would not be a government-run single-payer model, but it would increase access to just about everyone,” he notes.

Obama also champions more federal economic stimulation, and says he would rescind the Bush tax cuts, replacing them with a broad-based package that would lean more toward low-income individuals and families and increase the tax burden of the wealthy.

“The problem with higher marginal tax rates is that they are likely to have a negative effect on small businesses and the biggest wage-earners, who together represent the most productive segment of the economy,” says economics professor Paul Rubin. He also supports McCain’s health care insurance proposal.

“Since World War II, health insurance benefits have not been taxed, and that has helped to spur a great deal of inefficiencies,” he says. “McCain’s approach would mean the health-care dollars are coming from individuals, giving them more incentive to search for money-saving opportunities. Obama’s proposals would basically be more of the same inefficient policies.””

“As a general rule, markets work better for business and the general population,” says Rubin, who also teaches in Emory’s School of Law. “Government intervention tends to create more rules and bureaucracies. Also, Obama’s protectionist policies are likelier to restrict global trade. McCain has said he will push to expand global trade.”

Break from tradition? 

Perhaps the gap between the candidates’ positions are not as great as they appear to be, observes economics professor  Esfandiar Maasoumi.

“One’s first impression is that Obama and McCain reflect the traditional views of their respective parties,” says Maasoumi. “The Democrats are concerned about the lower tail of income distribution, while the Republicans advocate ‘trickle down economic policies’ that have the potential to benefit everyone.”

But issues like high energy prices and the fragile economy could mean that the next president will be unable to fully follow through on his party’s traditional platform, notes Maasoumi.

“Regardless of who wins the elections, the next president is likely to find that his ambitious plans are limited by the reality of the economy,” he says. “So the promises made by McCain and Obama are likely to differ from what they can actually deliver.”

Maasoumi finds some fault with each candidate’s approach.

“My concern over McCain is that he appears oblivious to the credit crunch that was brought about, in no small part, by big government borrowing. McCain’s proposal to cut taxes is likely to exacerbate the nation’s budget deficit by reducing government revenue.”

Obama, Maasoumi says, does not realize the cost of the social programs he proposes.

“Obama’s health coverage, and more assistance to homeowners are also likely to add to the government’s deficit,” says Maasoumi. “But McCain’s foreign policy, which calls for greater military intervention on a global scale, is likely to drain the economy.”

Turning his attention to domestic affairs, Maasoumi says that in the short run, McCain’s tax policies would be more likely to put money back in the pockets of business owners, and may therefore spur smaller company creation and lead to an increase in hiring, Maasoumi adds. “But Obama’s plan to funnel more money to job training programs could result in more jobs over the long term.”

Even so, he calls Obama “naïve” when it comes to supporting unions and calling for restrictions on outsourcing.

“In general, outsourcing benefits the U.S. economy, says Maasoumi. “At end of the day, Wal-Mart’s ability to capture low pricing as a result of outsourcing knocks about one percent off the rate of inflation.”

In any case, over the long run, wages are likely to rise all over, even in nations that are now low-cost producers.

“Japan illustrates that trend line,” he says. “Japan was once the low cost producer, but now outsources a considerable amount of work to other Asian countries. Open trade ultimately forces efficiencies, eventually driving up wages and income.”

In fact, Maasoumi says that over the next five to ten years “we’re going to find that some of the policy differences between the two parties will not be so great. Both candidates, for example, are now calling for more oversight and regulation in the finance industry, particularly after a taxpayer-financed bailout.”

He also says that the U.S. economy is so huge that its own dynamics often help to dictate policies and outcomes.

“Historically, all that politicians do is to try to tweak the economy,” notes Maasoumi. “But the size of the proposed bailout plan this past few days demonstrates how such concepts as ‘too big to fail’ tend to override desired policies and dictate outcomes that neither party would wish for.”

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