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Economy Returns to Center Stage of Campaign Trail

July 29, 2008 at 6:20 PM EST
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Sens. John McCain and Barack Obama focused their campaigns on the sluggish U.S. economy this week amid voter concerns over economic troubles and a looming record budget deficit. Campaign advisers debate the effectiveness of the rivals' plans.
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JUDY WOODRUFF: With most recent indicators showing a hurting U.S. economy, both presidential candidates are publicly focusing more attention on it. Republican John McCain campaigned today in Nevada, where he slammed Barack Obama’s approach to energy.

SEN. JOHN MCCAIN (R), Arizona: Sen. Obama says he wants energy independence, but he’s opposed to new drilling at home. He’s opposed to nuclear power. He’s opposed to encouraging the invention of an affordable electric car that can run 100 miles or more before it needs to be recharged.

He has said the high cost of gasoline doesn’t bother him, only it rose too quickly. I think it bothers you.

JUDY WOODRUFF: In recent days, McCain has tried to connect the pain people are feeling at the gas pump directly to the country’s broader economic troubles. He’s also airing a new television ad blaming Obama for high gas prices, noting his rival’s opposition to off-shore drilling.

COMMERCIAL NARRATOR: Gas prices, $4, $5, no end in sight, because some in Washington are still saying “no” to drilling in America, “no” to independence from foreign oil. Who can you thank for rising prices at the pump?

CROWD: Obama! Obama! Obama!

JUDY WOODRUFF: Meanwhile, Obama met privately today with Federal Reserve Board Chairman Ben Bernanke and had a phone conversation with Treasury Secretary Henry Paulson. Those talks follow Obama’s meeting in Washington yesterday with his top economic advisers, a group that included Republicans, as well as Democrats.

SEN. BARACK OBAMA (D), Illinois: The economic emergency is growing more severe. Jobs are down. Wages are falling. The financial markets threaten to be engaged in a protracted credit crunch with long-lasting ramifications for investment, job creation, and family incomes.

And this is an emergency that you feel not only just from reading the Wall Street Journal, but from traveling across Ohio, and Michigan, and New Mexico, and Nevada, where you meet people day after day who are one foreclosure notice, or one illness, or one pink slip away from economic disaster.

JUDY WOODRUFF: Obama said he would convene the group periodically over the coming months to address the country’s changing economic situation.

Economic policies of John McCain

For more on how the candidates say they can fix the country's money woes, we are joined by top economic advisers from both campaigns.

We turn first to Nancy Pfotenhauer, here for John McCain. She is the former president of the Independent Women's Forum.

It's good to see you. Thank you for being with us.

NANCY PFOTENHAUER, Adviser, John McCain Campaign: Thank you for having me.

JUDY WOODRUFF: First of all, tell us, when it comes to housing, the credit markets, does Senator McCain believe this housing bill that has just come through Congress, the president is going to sign, is that pretty much going to fix the problem or is there more to be done?

NANCY PFOTENHAUER: What he has said about it is that the bill should be signed into law, that we need to do whatever we need to do right now to keep Fannie and Freddie stable, but he's drawn attention to the fact that the reason we're in this problem, if you will, or this crisis is in part because of the crony capitalism, is what he called it, that's been engaged.

I mean, Fannie and Freddie, if you will, are creations of government. They were given a huge leg up over their competitors. And that's part of why they were able to grow so large, if you will, that they could have -- they could be in a situation where we have to step in right now and put taxpayer dollars at risk in order to keep them stable.

So he sent a strong signal that he expects over time for the government to slowly wean and change the role that they have played with Fannie and Freddie in order to prevent the taxpayers from ever being exposed to this situation again.

JUDY WOODRUFF: Now, tax policy. John McCain has been very clear that he now supports the Bush tax cuts and he wants to see those extended. Why?

NANCY PFOTENHAUER: Well, primarily because we're in a very weak economy and that this is the last time you want to be raising taxes, particularly on capital formation or the engine, if you will, that drives job creation.

So you want to keep the capital gains rate where it is. You want to keep individual income tax rates where they are. You certainly don't want to be popping them up right now. And that's a real difference between Senator Obama and Senator McCain.

He also is marrying those tax -- keeping taxes low with a tremendous focus on spending reduction and free trade. Those three things -- low taxes, low spending, and free trade -- are the recipe for prosperity. And that works whether it's here in this country or whether it's tried in other countries, as well.

What doesn't work is higher taxes, higher spending, and a protectionist approach, which I think is objectively how you could characterize Sen. Obama.

JUDY WOODRUFF: But when it comes to tax cuts, we know they come with a price tag. And you have these new forecasts of the deficit next year going to $500 billion. There's a nonpartisan group out there, the Concord Coalition, saying that Sen. McCain's tax cuts would rise into the trillions over the next decade by the time he left office.

Is that deficit a factor in his thinking about the economy?

NANCY PFOTENHAUER: Well, almost all of these groups that are cited don't take into consideration any spending reductions. They only look at the revenue side.

And, also, they're instruments of Washington or, if you will, animals of D.C. in that they assume that if you keep the taxes at the level they are, that that's somehow a massive tax cut. That is not the way it works operationally for American families or businesses. If you allow them to pop back up, what it feels like and how it looks is that's a tax increase.

The other thing I'd point out is that, over time, revenues as a percent of GDP have been running at about 18.8 percent. That's actually high, according to historical averages, not low. So you can't peg these tax levels with somehow a dramatic falloff in revenues.

What's happening, though, as you look at these new projections is that because the economy is not doing well and because things like -- you have at least one major presidential candidate who has no plan to do anything to lower energy prices in the near term -- you see a softening, if you will, in the economy and you see these revenues starting to dip down.

But the tax rates at their level had been bringing in revenues at about 18.8 percent of GDP.

Barack Obama's energy plans

JUDY WOODRUFF: Energy policy, you've touched on that. We saw the ad where Senator McCain is showing Senator Obama and saying -- essentially saying he's the reason, one of the reasons that gas prices are so high. Is that fair?

NANCY PFOTENHAUER: I think what you need to do is look at -- the ad actually says the reason gas prices could continue to climb is in part because of Senator Obama.

And I think that is completely legitimate, because Harry Reid and Nancy Pelosi are taking their lead from Barack Obama. They've got members of their own party who actively want to increase drilling. And they are pushing to get this moratorium lifted. And Harry Reid and Nancy Pelosi won't do it for one reason: because Barack Obama doesn't want them to.

And in my opinion -- and the markets have supported that -- as soon as you saw Senator McCain start calling for lifting the ban, the president take action, when there started to be some real traction on changing the supply, that affected the market, because when you send a signal to the world market that you're going to change supply, if you will, that's realized immediately in prices.

And I would direct people to Martin Feldstein's wonderful article in the Wall Street Journal, since Barack Obama mentioned the Wall Street Journal, and commend that they look that up and read it, if they're concerned about it.

JUDY WOODRUFF: All right, well, we are going to come back to you in a moment.

But right now, we want to turn to Jason Furman. He's director of economic policy for the Obama campaign and he joins us from Chicago.

Jason Furman, what about Nancy Pfotenhauer's point just now? Let's pick up on energy. She's saying, if you don't drill -- I mean, she's speaking for Senator McCain -- but if you don't drill, if you don't look at nuclear in a responsible way, you are cutting off options for years and years to come for the American people.

JASON FURMAN, Obama Campaign Adviser: Yes, I think she is speaking for Senator McCain. I don't think she's speaking for, for example, the Department of Energy, which looked at this drilling plan, said that we won't see any oil for seven years, we won't see very much oil for another decade or two after that, and it would have an insignificant effect on prices.

What we can't have is these types of distractions, where we have these policies where you go out and you tell people, it sounds good in a poll, it sounds like it's going to bring the price down, but when you actually look at the numbers, look at how it works, it won't work.

And what that does is it crowds out the real solutions. And the real solutions are both in the short run -- what we can do to get rebates in the pockets of families to help them pay those bills, what we can do to try to address some of the speculation in this market, what we could do with some of the excess profits that oil companies are making and get that money re-invested in making energy more affordable -- and then...

JUDY WOODRUFF: So how much...

JASON FURMAN: And then our long-run solutions, as well, which are conservation, investing in alternative fuels, investing in more efficiency. I mean, Barack Obama has a large, robust, comprehensive strategy to deal with energy.

JUDY WOODRUFF: And just quickly, a price tag on that plan?

JASON FURMAN: The plan as a whole would cost $15 billion a year. And it's fully paid for by using just a small portion of the receipts from auctioning off permits for a market-based system to address climate change.

Which plan will reduce the deficit?

JUDY WOODRUFF: OK, two other things I want to come back to. The first is housing, this housing bill just passed by the Congress, the president's going to sign it tomorrow.

Is Senator Obama satisfied that this is going to help those homeowners who need help right now, it's going to turn the corner? Or does he think more is going to have to be done in the near term for those individuals and others that would then support and do something about the credit crunch?

JASON FURMAN: The answer is both. The bill has a lot of really good elements in it. And the most important part is the part that's really focused on homeowners, that's focused on communities, that's focused on foreclosure.

That's something that was held up for months and months in the face of a veto threat, in the face of up until recently opposition from one of the two presidential candidates. And in that time, nearly a million families were foreclosed upon.

Then we saw what happened with Fannie and Freddie and all of a sudden there was just a huge rush. We had to do it really, really quickly. And that rush was good, and that's important that we addressed Fannie and Freddie as quickly as we did. And it's a good thing that we brought those families and those homeowners and that other part of the housing bill forward, put that back on the agenda, and passed it.

But we can't stop here. There's a lot more that needs to be done. And one simple reform, for example, where the candidates differ would be to take our bankruptcy code -- it says, if you go into bankruptcy, you can reduce the mortgage on your summer home, if you can't afford it. You can't reduce the mortgage on your principal residence. That's something that bankruptcy judges should have the power to do to help get out of this problem.

JUDY WOODRUFF: Let me -- I quickly want to raise one other thing before I go back to Nancy and that is the senator's proposal, not only to have a second stimulus plan, but to come up with other spending program that, again, the nonpartisan Concord Coalition said would lead to a huge -- an even larger budget deficit than what the country is already facing. In other words, they're saying Sen. Obama's budget numbers don't add up.

JASON FURMAN: I have a lot of respect for the Concord Coalition and have done work with them over the years. And what you want to do is take these two plans and compare them to what would happen if we continued business as usual, if we keep doing what we've done in Washington for the last eight years, where we've added $4 trillion to the deficit.

And then you say, what does Barack Obama's plan do? And what does John McCain's plan do? And the answer is Barack Obama's plan reduces the deficit.

He pays for all of his proposals. He cuts the deficit from where it is this year and brings it well down from where it would go if we continued with this business-as-usual track.

The nonpartisan Tax Policy Center looked at Sen. McCain's proposals and found that the tax cuts would cost $3.4 trillion. Now, Nancy might object that they didn't look at the spending cuts the senator is proposing. Well, the senator hasn't listed any spending cuts, maybe one or two tiny ones, but nothing coming close to the $3.4 trillion of tax cuts that he has listed, has promised, and campaigns on day in and day out.

JUDY WOODRUFF: All right, well, on that note, let me come back to you, Nancy Pfotenhauer. What about those spending cuts that we heard Jason Furman say the senator has not spelled out yet?

NANCY PFOTENHAUER: Well, first, I'd be happy to walk through some -- the senator's approach, but let's also note for your viewers that the Tax Policy Center does not take into consideration any spending reductions. They are only looking at the tax side. You can't get a deficit projection if you don't look at both. So that's to Jason's point, just so that there's no confusion about this.

The other thing is what he doesn't mention is that the Tax Policy Center has categorized the two different tax plans that are out there. One is promoting economic growth and efficiency; that would be Senator John McCain's plan. The other, progressivity, basically re-slicing the pie, if you will; that would be Senator Obama's.

When you're in an economic downturn, what you want is to create jobs and economic growth. And, again, the recipe isn't Republican or Democrat. It's low taxes, low spending, less regulation, free trade.

JUDY WOODRUFF: And can you spell out any of the cuts?

NANCY PFOTENHAUER: Sure, sure. I'll go to the -- the first one, and it's a big one. It's, if you will, the peace dividend. Because we changed to the surge strategy, because we're now in a position in Iraq and Afghanistan, you have Senator McCain who said now for a couple of months that he expects there to be dramatic troop drawdowns by the end of his first term. That's $150 billion.

A call for fiscal discipline

NANCY PFOTENHAUER: He said, since the war was financed from deficit spending, every penny of that savings should go towards deficit reduction. That's different from Senator Obama.

JUDY WOODRUFF: All right, let's come back to Jason Furman on that very point.

JASON FURMAN: First of all, let's just grant this $150 billion, which I don't see how it would result from continuing with President Bush's policies in Iraq, but for the sake of argument let's grant it.

This is a tax cut that cost $340 billion a year. The Iraq number we just heard was $150 billion. It doesn't come close to paying for this new tax cut, let alone going the extra way and balancing the budget.

There is a real difference on Iraq though, which is Barack Obama does want to take a bunch of that money and re-invest it in ways that would make our country more secure. Some of it he would certainly like to use for deficit reduction, but he also thinks it's important to have a larger standing army, to invest in our special forces, counterterrorism, and international assistance.

So basically, as we responsibly end the war in Iraq, we're going to take some of that money and use it in ways that really enhances our national security.

JUDY WOODRUFF: What about the gap between, he's saying, the gap between the size, the cost of those tax cuts, and the savings that would come from the peace dividend?

NANCY PFOTENHAUER: Well, let me do the recipe really quickly for how we get to a balanced budget. And let's just acknowledge, as Jason has, that Senator Obama doesn't reach a balanced budget, OK? So he's adding spending on, even as he decries the explosion of federal spending that he helped midwife over the last -- the brief period of time he's been here, he just layers new spending on top of that.

But what we do is we cut taxes and we estimate conservatively an economic growth feedback that's relatively conservative, so it's about 0.3 percent to 0.4 percent on economic growth. So you've got a GDP, if you will, kind of...

JUDY WOODRUFF: Well, let's -- OK, I'm just going to ask you in the few minutes that we have remaining to boil this down to what Americans sitting at home watching this program can understand...

NANCY PFOTENHAUER: Sure. Sure.

JUDY WOODRUFF: ... and can say, "All right. That makes sense. That's something that I think would benefit me."

NANCY PFOTENHAUER: OK, but we also have to be accurate. And the way you do this is through embracing policies that bring economic growth.

We have lived through this in the '80s and the '90s. Again, it doesn't matter if it's a Republican or a Democrat. If you do the right policies, you get economic growth. That brings more revenues in. So you do that.

You enforce spending discipline, through things like line-item veto, a year moratorium on discretionary spending, top-to-bottom review of government. You hold the rate of spending to 2.4 percent and you allow some programs to grow higher, like Social Security and Medicare, but you cut and eliminate other spending, $25 billion in defense...

JUDY WOODRUFF: All right, I'm going to...

NANCY PFOTENHAUER: I'm sorry.

JUDY WOODRUFF: I'm going to have to give Jason Furman in the time remaining a chance to respond.

JASON FURMAN: I don't think you're going to get any extra economic growth from continuing the policies of the last eight years. What we really need is a change in those policies.

And we need fiscal discipline. Fiscal discipline begins by leveling with people, by being honest, by paying for all of your proposals, but we also need to make some of the really important investments.

We wouldn't be in the economic problem that we have today if we had had modernized our financial regulation, if we had invested in the types of energy plans Barack Obama was calling for a decade ago, if we had addressed health care, not just the number of uninsured, but also bring the cost down, $2,500 is what Barack Obama is aiming for.

If we'd done all of those years ago and addressed some of our structural problems, we'd be in much better shape today in dealing with our short-run economic problems. We need balanced programs, balanced priorities on the fiscal side, as well.

JUDY WOODRUFF: Well, you won't be surprised to know, Jason Furman, that Nancy Pfotenhauer is shaking her head to what you're saying. I want to thank both of you, though, for being with us, Nancy and Jason. Thank you both very much.