McCain's Big Freeze

I was struck by McCain's supposedly "bold" budget proposal to freeze non-entitlement, non-defense program spending (entitlement programs are Social Security and Medicare - and some people include Medicaid in the count, but that's not as important because Medicaid isn't nearly as big as Social Security or Medicare). WOW! What a bold plan! Let's talk a little about this "bold plan"...

Social Security and Medicare are called "entitlement programs" because once you reach age 65 you have the right to claim them. Your age is your eligibility (of course in the case of Social Security you also have to have paid into it for a certain amount of time, but it is guaranteed to everyone that paid into it). Since these programs are guaranteed, and since people are living longer, healthier lives in the United States than they used to, spending growth in these programs has been tremendous since they began. The future growth in these programs is going to dwarf even the growth to date with the retirement of the baby-boomers.

Defense spending growth hasn't been quite as continuous as entitlement program spending; it went down significantly after the Cold War in the 1990's, but obviously it makes up a nice chunk of our budget now with the War on Terror and the Iraq War.

The other thing that's grown significantly for the last several decades has been interest payments on the national debt. That's right guys, we aren't just indebted to our East Asian creditors - we need to pay them interest on top of the principle just like any other debtor. So all though McCain didn't mention it, I'll throw interest payments in, because my guess is that either Obama or McCain would cut entitlements or defense before they stop paying the interest on our debt (the world has enough doubts about our solvency... don't want to cause any more jitters)!

So, when you take all that out of the budget you have two things: what the CBO calls "other mandatory spending," and "discretionary spending". Discretionary spending includes everything from good old fashioned "bridge to nowhere" pork, to child care subsidies, to the National Science Foundation budget. That's where McCain proposes the spending freeze.

Unfortunately for McCain, he's not being as bold as he thinks he is! Non-defense, non-entitlement, non-interest payment spending has been essentially frozen for YEARS because growth in these programs has been crowded out by the growth in defense, entitlement, and interest spending! Take a look at the chart from the GAO, below, and you'll see what I mean:

OK - this is REALLY hard to see, I know - but the white bar at the top is non-entitlement spending (I believe it actually includes defense in this case!). The red, blue, and green bars are interest payments, Medicare, Medicaid, and Social Security. The dashed line is projected government revenues, and the scale for this is spending as a % of GDP. Terrible picture, I know - I tried to find a better one. But I think it illustrates my point: because of the growth in defense, entitlement, and interest spending there has been no growth in other spending anyway! The freeze is already here! In many programs, spending has actually declined already.

The way to solve our long-term fiscal problem is to cut exactly what McCain proposes to let go: defense, entitlements, and interest... and we really don't have many options even there:

Defense: I'm not too excited about the prospect of cutting defense spending. Bringing a safe and responsible conclusion to the Iraq War will certainly save some money, but I agree with Obama that we're just going to have to move at least a portion of that war effort to Afghanistan. In addition, we need to reinvest in our equipment and defense infrastructure that has been worn down by Iraq, AND we need to provide a higher quality system to serve the veterans that will be returning. So I don't see much prospect of reducing defense spending, and I don't think anybody else does.

Interest: Talking about interest is easy. There are only two things to remember: first, we have to pay it - there's no choice involved. Second, the only way to reduce it is to reduce the debt. Period. [Not entirely true... we could always have our mints crank out currency which will reduce the value of our currency... then we can pay them back in worthless bills. But I don't think we want to go this route!]

Entitlements: The 800 pound gorilla in the room. The fact is, we need to cut entitlement spending or raise entitlement taxes. This isn't a debating point, it is quite simply the only way to regain fiscal responsibility. I've worked with Robert Reischauer, one of the biggest budget wonks out there, for the last two years and through him I've met lots of other big budget wonks. Doesn't matter what party they're associated with, they all agree - the solution to the budget problem is dealing with entitlement spending. Nobody owned up to this in the debate, which was telling about how hard it's going to be. Obama did mention one part of Medicare that could be cut - the Medicare Advantage "subsidy". Ever since 1997, Medicare beneficiaries have had the option of enrolling in privately administered Medicare plans, known as "Medicare Advantage". Fine - the idea was to harness the competitiveness of the private market... I can buy that. The problem is, the government ends up paying around 15% more for those plans than they do for "regular" Medicare plans. That's great - cutting that subsidy to the level of other Medicare plans and making beneficiaries pay the difference if they still want the private insurance sounds like a smart idea to me.

The problem is, even Obama didn't demand fundamental reform. I'm NOT an expert on entitlement programs, but even I could suggest:

- First and foremost, freezing physician payments which is one of the fastest growing components of Medicare.

- Raise the eligibility age for both programs

- Eliminate the FICA tax cap. I'm not sure exactly what it is now, but it's somewhere around $100,000. You have to pay something like 7.5% of your taxable income into Social Security up to $100,000 right now. After $100,000, your income isn't taxed!!! Why is this? This means that the rich actually pay a LOWER tax rate than the poor when it comes to Social Security! Now, I know there are legitimate ethical cases against a progressive income tax... but who in their right minds supports a REGRESSIVE tax??? Raising or eliminating this cap would help things out.

- Cut benefits. Yes - my specific suggestions and expertise end here, and I have to offer the non-descript "cut benefits". Someone more familiar with the program than I can get into the specifics.

We can do this - we need to have the strength to take on the entitlement programs. That will make substantially more difference than any pork-cutting programs that McCain and Obama propose. Nobody embraced this, although Obama made it clear that he was open to reducing some entitlements. I hope he's just holding his tongue because saying "I'm going to cut Social Security" would be the kiss of death on the campaign trail. Perhaps he'll be more energetic on this front than he lead on. But don't be fooled by that little discussion they had on the budget... McCain wasn't being bold at all - he was essentially describing the status quo. And Obama didn't offer a whole lot either.

McCain Transparency

It seems to me that all these things McCain has been pulling:

1. Outrage that Obama called Palin a "pig"
2. Accusing Obama of wanting to raise taxes on working Americans
3. Promoting Palin as someone who "said no to the bridge to nowhere"

and most recently...

4. Dumping Friday's debate to rush to Washington to deal with the financial crisis

are completely insincere and to me completely transparent. I understand that campaigns stretch the truth sometimes... Obama does that when he talks about McCain wanting to stay in Iraq "for 100 years". And there are other instances where McCain simply stretches the truth rather than promoting outright lies. But also prominent in the McCain campaign have been these instances where you just have to think "how can McCain SAY THAT and keep a straight face? There's no way even HE could believe that!"

Am I just being paranoid here? Am I just being cynical? Or is this stuff really as transparent as it appears to be to me?

Such a shame... I've always liked the guy, but there have been SO MANY cheap shots lately. I'm glad Obama said the debate should go on, and that he didn't just cave into McCain's ridiculousness.

Of course we need to work out a solution to this crisis... but that's not a free pass to get you out of a debate.

Alternatives to the $700B Paulson-Bernanke Fund

The Washington Post presents a good summary of other solutions to the Wall Street crisis that have been proposed by economists. This is refreshing. I've confessed my ignorance of what to do before on this blog, but I feel like I know enough to acknowledge a good proposal when I hear one - and I liked all of these (just couldn't come up with them myself!). I especially like the idea of an investment fund that the Post suggests. It's the most similar to the Bush plan, which the president should like. It can be a permanent fixture to help in future crises like this (and issue that Sen. Bayh made a big deal about in yesterday's Senate hearing), and it injects capital without letting banks off the hook for bad loans. Now, that of course opens the possibility that bank failures won't stop with this investment fund - but they should hurt the economy less (I believe that's the right way to think about it...).

In other news, I think Paul Krugman volunteered to be Obama's Treasury Secretary today... still a little hazy on that one.

A Washington Post-ABC poll gives Obama a 9 point lead among likely voters, but because of the Electoral College system, I'm not sure how that translates into his actual changes. The race remains close in several very important states.

One race that is not close is the Virginia Senate race, where Warner leads Gilmore by 30 points!

SOOOOOO stupid

Really stupid criticism raised by the McCain campaign about Obama using the statement "lipstick on a pig"... claiming that he's calling Palin a pig.

How childish can you get? "Like lipstick on a pig" is a very common English idiom. Give me a break. And as the article reports, Obama has been using the phrase in his stump speeches long before Palin came along.

There are some incredibly stupid accusations going back and forth and its getting tiring. It's distracting from the real issues.

"Change"

So I've been listening to back episodes of Jon Stewart and Colbert while I've been working and something really struck me when I got to about 11:15 in this Colbert episode.

Colbert is talking about all the statements about how "the GOP is the party of change in this election", and it made me think: that's REALLY saying something if the Republicans are trying to claim Obama's slogan.

They're also saying "Obama isn't really a 'change'" - and that's expected. It's expected that your opponents will try to debunk your own slogan. But they've been trying to adopt it. Kind of interesting.

Veepstakes

So the BBC is reporting that Obama's VP selection will come within hours. This is smart - it would be crazy for him to miss a day or two of press. Now, all the online news sources will have it on the front page all day, nightly news will have it tonight, and the print news sources will still have to print it front page tomorrow morning, even if the news is "old" by then. Then the convention starts and Obama will get coverage all over again.

Anyway - the other thing the BBC reports is that he says he has chosen someone who will help him to strengthen the economy. That almost certainly means no Biden, which is interesting. Probably safe too - Biden has a lot of baggage. It could definitely mean a Kaine selection. Bacon's Rebellion had a post up today talking about how Obama's economic advisor, Austan Goolsbee (I saw him speak at the Urban Institute) considers Virginia to be a model for modern economic development - a pro-market, pro-business state with a government that is still willing to make strategic investments (except for infrastructure now, it seems). That bodes well too.

But someone like Hillary Clinton - who would also strengthen him on the economy - is also not ruled out by this new announcement. I don't think she's got a snowball's chance in hell, but there has been chatter about her lately, so I have to bring it up.

The other front runner is Indiana Senator Evan Bayh. I don't know much about him, but I looked at some of his background and he has no record that I can tell on the economy.

I think this little tidbit that Obama announced makes Kaine significantly more likely as the VP choice, especially because it will be today.

The Washington Post reports that Obama has no campaign events today - nothing until his appearance in Springfield, Illinois tomorrow where he says he will appear for the first time with his VP. That means Obama spends 48 hours in Virginia, takes a much deserved Friday rest before announcing his VP and then appearing in Illinois with him or her. No visiting Indiana or Delaware in the interim. Interesting...

By the way - I checked Kaine's schedule. Unfortunately I didn't find any clues like "Appearing in Springfield Illinois with Obama"... oh well :)

Well, I've said this before folks. If this happens that means Kaine in the White House, and Webb and Warner both in the Senate. What a boon for Virginia!!!!

I should really work on and write that "Job Flows and Unemployment in the Upper Tidewater" paper... give the Obama team some more insights into Virginia's economy.

VP Thought

So Obama's VP selection sounds like it's iminent... but perhaps could wait until as late as the weekend. Of course I'm pulling for Kaine, but would also be happy with Biden.

I had another thought today... what about a surprise selection of Wesley Clark? Nobody is talking about him anymore, but everyone was very impressed with him previously. He would bring the foreign policy experience that Biden offers, but without the "old politics" sort of baggage that Biden would bring to this ostensibly post-partisan campaign.

Plus he's an old white man - which would reassure some people.

Not sure if this is even on the radar, but Clark is one of those guys I forget about and then happen to see him on TV again and remember how great he is.

Rick Warren and the Candidates

Just listened to the first part of Rick Warren's forum - where he interviewed/questioned Obama and McCain. The first part was Obama. It was really good - I was impressed with both Obama, and also Warren. Warren put to rest all fears that the forum would be inappropriate, or that he would be a demagogue, etc. He asked the regular questions you'd expect him to, but then he also asked some questions that were very personal to him. It was great, because they were questions that won't ever be asked by anyone else - so it was good to hear him ask them.

Here's the link for the first of six videos for the Obama interview. You can follow each subsequent part from there. Obama made a few good jokes... I'm already 3 minutes into McCain, and he's already made two bad jokes. But that's ok! Humor isn't everything :)

.... update

So it's interesting - McCain's style is very different from Obama's here. Obama was conversational, detailed, and "long-winded". Not in a bad way - he just gave more of an essay. McCain was much quicker and forceful with his answers. I guess it sounded more like a traditional debate response for him than for Obama. And that's not bad either. For one thing, it was easier to figure out what McCain's answer was! It will be interesting to see how both those responses play. McCain's is more accessible, but I felt like I didn't hear anything new. You had to pay a little more attention to Obama, but he had some really great, sincere things to say.

... update 2

GAAAAH I thought I was over blogging about South Ossetia. So McCain just finished talking about that. He's so manipulative in how he talks about it. For example: "there's an oil pipeline that goes across Georgia that up until now was not controlled by the Russians, and energy, my friends, is a tremendous lever that the Russians are using against the Europeans"

On one hand this is true - up until now the pipeline was not controlled by the Russians. However, the pipeline is STILL not controlled by the Russians... go figure. And nice mention of Russia playing hardball with Europe's supply of oil. Too bad to date they've been playing hardball with other pipelines that don't even go through Georgia!

He also cites villages being burned in South Ossetia and people being killed... never mind that its the Georgians that are doing the killings inside South Ossetia. Good Lord! I was liking this forum for awhile...

Misleading Washington Times Article

The Washington Times published an article this morning by Stephen Dinan discussing how the campaign has turned nasty - with both candidates trading insults...

What's telling is that in every McCain example, he actually accuses Obama of "playing the race card", and being a lightweight celebrity like Paris Hilton.

And what is the Washington Times' Obama example? "Obama ridiculed McCain for depicting him as a lightweight celebrity". Ridiculed him indeed... what Obama said was:

"So far, all we've been hearing about is Paris Hilton and Britney Spears. I mean, I do, I do have to ask my opponent, is that the best you can come up with? Is that really what this election's about? Is that what is worthy of the American people?"

... not really ridiculing John McCain here, is he? Certainly not in a way that could be construed as an "insult".

The worst thing Obama is catalogued as saying is:

"Nobody really thinks that Bush or McCain have a real answer for the challenges we face, so what they're going to try to do is make you scared of me: You know, he's not patriotic enough. He's got a funny name. You know, he doesn't look like all those other presidents on those dollar bills, you know. He's risky. That's essentially the argument they're making."

But that's not really accusing McCain of anything! He's not saying "you're a racist, McCain", as the McCain campaign suggests he is.

So basically we have a situation where McCain has been running some strange - and I would argue uncharacteristic - negative ads that are heaping insult and name-calling on Obama. Obama is responding and saying they are ridiculous without accusing McCain of anything. When Obama speaks the worst he does is say "McCain called me [blank], and that's wrong". He never says anything like "McCain is [blank]". And yet the Washington Times and lots of other media sources are saying that insults are coming from both sides!

Strange...

I've been amazed at Obama's restraint. I really hope he doesn't go negative.

Obama-Kaine

So the Washington Post is reporting today that Kaine is on Obama's short list... and Bill Kristol is suggesting it as well. As readers may know, I was strongly behind Mark Warner as a potential VP, but I think Kaine would do good as well. Kaine, like Warner, is a centrist Democrat from Virginia with a strong focus on bread and butter issues: balancing the budget, improving transportation, and investing in education. Neither are afraid to stand up to the Republican rank and file who cannot countenance any taxes (I say "rank and file" because the Republican leadership actually agreed with the Warner administration when they raised taxes). But neither pursue "pie in the sky" Democratic platforms like universal health care or same-sex marriage either. And that's not to say that I like taxes, or that I oppose same sex marriage - it's just to say that Warner and Kaine (and Webb, for that matter) take a "first thing's first" approach that is very refreshing.

As most of you probably know, Warner is set to destroy former Republican Governor Jim Gilmore in the race for John Warner's Senate seat. I eventually came around to the logic that a sure-thing Webb-Warner Senate delegation was probably better for Virginians than a toss-up VP bid. Since I've resigned myself to that logic, I'm like this Kaine idea more and more. I honestly don't think Kaine is the "strongest" VP. In many ways someone like Biden would probably be more appropriate. But he is a good leader who brings an "outside the Beltway" perspective. Moreover, I think he could be a much more forceful, charismatic leader like Warner or Webb if he had the chance - and this may be that chance. The excitment around an all-Democratic Virginia Senate delegation and a Virginian working in the White House would be overwhelming. Virginia is already leaning towards Obama in a way that they haven't for any Democratic presidential candidate for decades. I think an Obama-Kaine ticket would push it over the top.

Kaine also appeared at the Brookings Institution's "Hamilton Project" last Friday, at an event I really wanted to attend, but couldn't. The forum was on investment in infrastructure, from "bridges to broadband". I haven't listened to the recording of Kaine's talk yet, but it's encouraging to see him on a national stage with such luminaries as Larry Summers and Robert Rubin.

So who knows - we may see another Virginia Triumvirate in Washington again! I have no illusions that Kaine would have been as strong of a match as Warner or Webb in electoral terms, but I think he would be a brilliant addition to the Obama administration nonetheless. And if the Democrats take Congress this Fall (which they oughta), I can assure you that Warner and Webb will be front and center, pushing Obama's agenda through the Senate.

Election Pet Peeves

OK - I have two election pet peeves I want to put out there:

1. Our obsession with "flip-flopping": Ever since the 2004 election and the rise of YouTube, we have been obsessed with catching candidates who switch positions on an issue. Now, I know the root reason for why we do this. In a lot of cases, chameleon candidates suspiciously shift positions depending on who they're talking to - just to get elected. Candidates who were initially idealists (I think Obama and McCain both fall into this category) may cave to vested interests as they spend more time in Washington, etc. Of course this isn't great and we should call them on it when it happens. But what we've created is an environment in which politicians are afraid to re-evaluate their positions, compromise, and remain open-minded. The most infuriating recent example has been Obama - who has been savaged for suggesting that he would actually listen to advisers when setting a time-table for withdrawal from Iraq!!! First, I think Obama is intelligent enough that even when he supported a swift withdrawal he always would have done it in consultation with the experts. But lets hypothetically say that's not true, and that he was initially naive and would have pursued withdrawal with or without the advice of experts. Isn't it a GOOD thing that he changed that position? Shouldn't that re-evaluation be encouraged? I personally see his supposed "flip-flop" as a clarification of a position he's held all along. McCain is a victim of this as well - his positions have most notably changed on Iraq and taxes. What's going on! We want to encourage flexibility in our politicians, not discourage it!

At least they don't call it "waffling" any more... what a stupid term...

2. "The #1 Issue": OK, so this may be counterintuitive that an economist is frustrated that the economy is supposedly now the #1 issue in the campaign - but I'll tell you why I am. Yes, we're going into a recession, and yes it looks like it will be a fairly painful one. But the economy is cyclical, people - it goes up and down. Plus, recessions perform very important tasks. As people are laid off and investments are withdrawn from certain sectors, they are freed up to be reallocated to growing sectors (health care, "green jobs", IT, etc.). The U.S. is blessed to have such flexible labor and capital markets because it makes our economy more nimble than most European or Asian economies. It's painful - and we need to support the losers - but recessions have come and gone for centuries. It's not the end of the world.

That's not to say that there aren't important economic issues to consider. The problem is that none of the candidates are talking about them! The important economic issues are the long-term problems that we need to start working on now - problems that existed before the recession and are still going to be their once we get back into an upswing. Problems like energy independence; budget deficits; spiraling health care costs; international competitiveness; energy independence decaying infrastructure; the aging of the workforce; have I said energy independence? These are the problems that we need to worry about - not the recession. We do have to act on the recession, but we know how to address it, and we know we'll eventually pull out of it.

One thing that is worth talking about that is related to the current recession is the re-emergence of "stagflation" - the coexistence of inflation and recession. We haven't seen that since the 1970s, and (pardon my French), stagflation can be a real bitch. For those who don't know, economic theory predicts that inflation and recession should NOT occur together. In fact, one usually solves the other! The solution to inflation is to slow down economic growth, and the solution to an economic slowdown is to pump cash into the economy, which has the downside of inflating the currency. So, needless to say it scares economists when the two come together. Well folks, it's happening again. We haven't hit double-digit inflation or double-digit unemployment yet (both of which occured in the 1970s and early 1980s), but who knows - we're not out of the woods yet. This is a serious concern, and you do hear the candidates talking about higher prices - but you don't really hear them talking about the paradox of stagflation and what they're going to do about it. And maybe they shouldn't - maybe this is a job for the Fed and the Treasury Secretary, and economists to look into for the time being.

My number 1 issue(s): Terrorism, the Iraq War, infrastructure, health care costs, the budget deficit, and energy. Nobody shines on all of them, but Obama has a strong lead.