Tomorrow, as you all know, there will be a presidential (and congressional) election in the United States. Barack Obama looks most likely to win considering his consistent lead in the polls, but as polls aren't always completely reliable a victory for John McCain certainly can't be ruled out. What definitely can be ruled out however, is a win for any of the "third party" candidates: Bob Barr
(Libertarian Party), Chuck Baldwin
(Constitution Party), Ralph Nader
(Independent, previously Green Party) and Cynthia McKinney
(Green Party). For them it will be a success to reach just 1% of the vote.
I am not an American citizen and so I cannot vote in the election. But as many of my American readers have asked me what I think about Obama's and McCain's economic plans and since in the current globalized world economy, economic policy in the biggest economy, the United States, affects even those of us who aren't Americans, I will still provide an analysis of the economic plans of the candidates.
Even though none of the "third party" candidates have any chance of becoming president, I'll still briefly discuss them, as many Americans for understandable reasons cannot bring themselves to vote for either Obama or McCain. Nader and McKinney did oppose the Wall Street bailout on egalitarian grounds and they support reducing military spending. But being socialist environmentalists their economic plans can still simply be summarized as awful. Chuck Baldwin is good on monetary policy and advocates abolishing the Fed
and of course also opposed the bailout. He also favors abolishing the income tax. He is however absolutely awful on trade policy, as this page on his campaign web site makes clear
. Bob Barr seems to have the best policy overall, being similar to Baldwin except he doesn't advocate the kind of ultra-protectionist policies that Baldwin favor.
McCain's economic plan looks mostly good. He advocates significant corporate income- and capital gains tax rate cuts
, as well as increase the deductibility of capital expenditure (which in effect amounts to a tax cut) and abolish the Alternative Minimum Tax
. He wants
a one year freeze on non-military, non-veterans spending and advocates various other spending cuts. Given that he has frequently criticized Bush and his fellow congressional Republicans for lack of spending restraint, it would seem that he has some credibility on this issue. However, it should be mentioned that the National Taxpayer's Union claims
that he has also proposed various spending increases, and of course, if he starts a war somewhere (perhaps not likely, but certainly possible) then military spending will increase.
What also sounds good about McCain is that he advocates reduced trade barriers
and allowing increased drilling for oil
as well as allowing more clean coal and nuclear power, all of which will provide a much needed relief in the price of oil and energy. He also proposes lifting the tariffs on foreign ethanol. I do however dislike the widespread use of "tax credits" to benefit various "renewable" energy sources.
McCain's suggestion that the government should start directly take over mortgages from mortgage lenders is certainly a foolish idea and so a negative for him. But then again, that's what the U.S. government directly or through the Fed is actually already doing, so it wouldn't really represent a change for the worse.
is far worse across the line. One thing that looks good is that capital gains taxes for new and small businesses will be eliminated. But even that might not be as good as it first looks since the restriction to new and small business seem to imply that they will be phased out with time and size of business, meaning that they could create negative incentives that prevent small businesses from growing and encourage existing businesses to be closed down.
Perverse or negative incentives are of course also a key problem with his highly touted "middle class tax cut for 95% of working families". As this tax cut comes in the form of a $1000 tax credit which is phased out with rising income, this tax cut will actually increase
the marginal rate of taxation. And that is very bad for economic efficiency and growth. See more on this issue here
. Another problem with this "tax cut" is that it goes to many people who don't pay any tax, making it a welfare scheme more than a tax cut.
And while he strangely doesn't mention it on his campaign web sites, he advocates significant increases in the top income tax rate as well as the taxation of capital gains and dividends, something which is also very bad.
He further argues for countless spending increases on health care, "renewable energy", job training, corporate subsidies and hand-outs to state and local governments and so on. The National Taxpayer's Union claims that these spending increases add up to $300 billion annually. While he has sometime promised to "end programmes that don't work", he has usually been vague about what that' supposed to mean. The few times he has mentioned anything specific, it has relied on the idea that cutting out private suppliers will save money, something which is not always but usually a fallacy, as Robert Murphy points out here
. And while he has pledged to withdraw gradually from Iraq, those savings will go to other military spending projects. In short, we would see a massive expansion of spending under Obama, even if you disregard the welfare hand-out character of many of his "tax cuts".
On trade, he refrains from the kind of explicit protectionism that Chuck Baldwin pushes. But the protectionist message is very clear as he advocates forcing poorer countries to adopt "stricter labor and environmentalist standards". Also, he says he wants to end "tax breaks to companies that shift jobs overseas". In preparing this post, I tried to find out what that means. Has Congress passed a "Tax breaks for companies that shift jobs overseas Act"? No, of course not. I am still not completely sure as to what, if any, tax code this refers to, but I think he means the provisions in the U.S. corporate tax code that is designed to prevent double taxation of profits by foreign subsidiaries of U.S. multinational companies. This kind of practice exist almost everywhere as it otherwise would put a country's multinational companies at a great disadvantage, having to first pay corporate tax in the country it operates in, and then in the country where it is headquartered. This practice means first of all that foreign profits aren't taxed until it is repatriated to the country where the company is headquartered and secondly that a company can deduct taxes it has paid offshore so as to avoid double taxation. If that is what he means by "tax breaks that shift jobs overseas", then doing away with that would greatly damage American multinational corporations, and so also lower stock prices. This together with a proposed "tax credits" for companies that increase domestic operations relative to foreign might perhaps increase the willingness of American companies to move foreign production to America, but the main effect would be to simply damage the competitiveness of these companies as they are forced to choose production alternatives which are less competitive. And as they in effect amount to tariffs on products produced outside America by American companies, they will damage the global economy as a whole and the rest of the world.
Furthermore, on labor issues, Obama wants to pass various laws to raise minimum wages and strengthen unions, which will raise unemployment. On energy issues, he and Joe Biden opposes increased oil drilling, coal production and nuclear power and instead favor massive government subsidies into "renewable energy sources". He also endorses the extreme environmentalist goal of reducing carbon dioxide emissions by 80% by 2050 through the use of government controls.
In short, while McCain's plan is far from perfect, it is significantly better than Obama's.
Another thing that has to be taken into consideration is the fact that the president is after all not all powerful. The president's power is checked by that of the Congress. And congress is likely to see a significantly enlarged Democratic majority. What does that mean for the relative attractiveness of McCain versus Obama.
Well, that means that if McCain is elected, he will, being a Republican, find it very difficult to enact his policies. And that applies both for his good policies and his bad policies. Similarly, with McCain as president, most of the ideas of the Democratic congressional majority will be blocked. This means that if McCain is elected, we won't see much change in U.S. governmental policies.
If Obama is elected on the other hand, then we will indeed as Obama keeps saying, see change. The problem is that it won't be positive change, it will be negative change. With the U.S. in a deep cyclical downturn and with both the White House and Congress controlled by the Democrats, we are likely to see a massive expansion of government power. America will likely see a negative transformation in statist direction, perhaps similar in significance to the transformation we saw after Franklin D. Roosevelt was elected. The Obama policies of higher marginal tax rates across the board, higher government spending, increased regulation and protectionism will seriously damage a already weak U.S. economy, something which will of course also hurt the rest of the world economy.
The above mentioned facts are of course something which my American readers should take into account before voting.