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Election Balance Sheet

10/16/2008 --

Ross professors outline Obama, McCain positions on business issues.

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ANN ARBOR, Mich.—Business and economic issues are at the forefront of the 2008 presidential election, so voters have to sort through a plethora of complicated issues. To help with that, a panel of Ross professors on Oct. 14 mapped the contenders' respective positions on taxes, healthcare, trade, and housing and reflected on the potential effects of each candidate's plans.

Sens. Barack Obama and John McCain are vying for the White House at a time when the financial and credit markets are in unprecedented crisis. The U.S. and other governments have moved to use public money to provide liquidity and shore up banks. With that much at stake, the candidates' positions on money issues are getting extra scrutiny.

"Economic issues have been absolutely paramount in this campaign," said Joel Slemrod, the Paul W. McCracken Collegiate Professor of Business Economics and Public Policy at Ross and the director of the Office of Tax Policy Research at the University of Michigan.

Joining Slemrod on the panel were Ross professors Thomas Buchmueller, Robert Van Order, and U-M economics professor James Levinsohn.

Taxing Questions

Sens. McCain and Obama differ greatly on tax policy. In general, McCain is emphasizing a business tax cut while Obama 's plan would have less tax revenue coming from middle-income taxpayers, Slemrod said.

Both would retain most of the tax cuts enacted by the Bush administration, but with some key changes. McCain proposes a bigger cut in the estate tax, cutting the corporate income tax from 35 percent to 25 percent, eliminating some oil and gas loopholes, and allowing individuals to choose between two different tax systems --- the current one or a simpler one without many of the deductions and credits.

Obama would allow the Bush tax cut to expire for those making more than $250,000 a year and add several new tax credits aimed at low-income people and senior citizens. Obama also proposes to return the capital gains tax back to pre-Bush levels.

Both McCain and Obama recently tacked on new proposals to their respective tax policies due to the financial crisis. McCain has proposed that people aged 59 and older be able to draw money from retirement accounts and only pay a minimal tax rate. He also proposed cutting the capital gains tax from 15 percent to 7.5 percent.

Obama wants to give businesses a $3,000 tax credit for each new full-time job created until 2010 and a lower tax penalty for people drawing cash from their retirement funds.

McCain's tax plan would cut $100 billion more in tax revenue than Obama's, while putting the emphasis on business tax cuts to stimulate economic growth, Slemrod said. Obama's tax policy looks very similar to former President Bill Clinton's, he added.

But there's something missing from both plans.

"There is no sign of fundamental tax reform," Slemrod said, noting that Congress does not appear willing to change its practice of using the tax code as a system for handing out subsidies. "And there's no sign that tax policy would address the serious fiscal imbalance between the promises of Social Security and Medicare and our unwillingness to pay for it."

Due to the shaky economy and the financial crisis, this is no time to raise taxes, he pointed out. But the federal budget outlook has worsened and, over the long term, the country should re-think a tax policy "summed up by tax cuts, tax cuts, tax cuts."

It's not clear that tax credits pay for themselves, nor that tax cuts result in higher economic growth, Slemrod said.

Prescription for Health

When it comes to healthcare, Obama and McCain have fundamental philosophical differences. Obama considers healthcare a right, while McCain characterizes it as a responsibility.

Both Obama and McCain propose to use public funds to subsidize health insurance, but they go about it in a different way, said Buchmueller, the Waldo O. Hildebrand Professor of Risk Management and Insurance at Ross.

McCain wants to replace the tax subsidy for employer-based healthcare with a permanent tax credit that would allow people to purchase their own healthcare coverage. While that could make it harder for people with chronic or pre-existing conditions to find coverage, McCain proposes creating and funding a high-risk insurance pool for them, similar to programs in many states. In theory, creating a separate pool for high-risk patients should lower costs for those buying conventional plans. McCain's plan would allow people to purchase health insurance across state lines.

Buchmueller said McCain's plan is progressive in that it's a move toward correcting the current "inequitable" tax treatment of healthcare. His proposal moves more of the tax credits to people who actually buy insurance.

But Buchmueller cited some concerns about the plan. First, it would end employer-based group healthcare for many citizens, and replace it with individual coverage, which usually means higher premiums, co-pays, and limits on coverage. Over time --- since health care costs typically rise faster than inflation --- the number of uninsured Americans would increase, Buchmueller said.

Skeptics question whether the money McCain proposes for the high-risk pool would be enough to cover the need. Allowing people to buy health insurance across state lines could increase competition and lower costs, but it also could allow insurance companies to bypass state regulations.

Obama's plan is less of a change from the current system, representing a "pragmatic and incremental" approach. Obama may be drawing lessons from the Clinton healthcare reform debacle, Buchmueller said.

In general, Obama would continue the current employer-based system and charge "large" employers that do not offer health insurance a payroll tax. Small businesses that offer healthcare would receive a tax credit.

Obama would expand publicly funded health insurance for children and would mandate that all parents must insure their children, though he hasn't endorsed making insurance for adults mandatory. To cover the uninsured, Obama proposes creating a health insurance purchasing pool with set rules, similar to the one in Massachusetts.

Concerns about Obama's plan tend to center on how it would be funded. The senator says that rolling back the Bush tax cut for people making more than $250,000 a year and cost controls would fund his healthcare proposals. That remains to be seen, said Buchmueller.

Obama also doesn't define what a "large" business is when discussing the payroll tax for not offering health insurance. Most large employers offer health insurance, so it's questionable how much money that proposal would raise, Buchmueller pointed out. It's also unclear what kind of coverage would be available in the healthcare purchasing pool.

The main things to consider when weighing the candidates' competing healthcare proposals are the difference in emphasis on increasing coverage and the methods used to do that, Buchmueller said.

Trade: It Ain't What it Used to Be

There hasn't been as much discussion about international trade in the run-up to the 2008 election, and that's not necessarily a bad thing, said Levinsohn, the J. Ira and Nicki Harris Family Professor of Public Policy at U-M.

That's because the next president doesn't have a lot of tools at his disposal when it comes to trade. The United States is a member of the World Trade Organization, which means the traditional issues of tariffs and quotas are pretty much off the table.

In short, free trade is a reality and is here to stay.

"It's a train that's left the station and is not coming back," Levinsohn said.

There are some nuances, however. Obama has said he would like to amend the North American Free Trade Agreement to better enforce labor and environmental standards among the U.S., Mexico, and Canada. Obama also has lamented the fact that there was never a federal effort to help re-train the thousands of steelworkers who lost jobs in his state.

McCain has said there should be no walls for foreign competition, the United States need not fear competition, and that free trade promotes growth on both sides of the ledger.

"McCain would pass an Econ 101 exam with flying colors on the issue of free trade," Levinsohn said. But he added that it's a tough sell in Ohio, Michigan, and a number of other manufacturing-heavy swing states.

Leaders need a new frame for trade debates, since the old issues of tariffs and barriers are largely irrelevant, Levinsohn said. The focus should be on increasing the competitiveness of the United States and not decreasing the competitiveness of other countries.

"Here, policy really does matter," he pointed out. "Education policy is probably the single most important trade policy we have."

Another important trade issue involves "safety nets" for workers in industries negatively impacted by free trade, Levinsohn added.

Housing in the Headlines

The current financial and credit crisis has its roots in housing. Home values fell at an unprecedented rate and subprime loan defaults soared, which crushed the market for the securities backed by mortgages.

Securitizing mortgages is not new, but the instruments grew more complex and the share of subprime and Alt-A loans --- loans given to borrowers with good credit but with no documentation --- increased in recent years. Since financial institutions are still sorting out their liabilities, they are afraid to lend to each other, literally freezing the credit markets.

The government has moved in a big way, first creating a $700 billion package to buy up toxic mortgage assets, removing them from bank balance sheets. Now the government is looking to buy stakes in banks to shore up their capital structures and boost confidence.

Van Order, a Ross adjunct professor and former chief international economist at Freddie Mac, said the Democrats often say too little government oversight is to blame, while the Republicans contend there was too much government pressure to boost low-income housing. Debate continues as to which side is correct.

"This was very much a private deal," Van Order said, with businesses originating loans to ordinary people. It's possible the situation could have been regulated better, "but by whom?"

Any new regulations should focus on how much equity loan originators keep, Van Order said. Since originators were simply selling off the loans --- which likely would be re-securitized --- not a lot of attention was paid to the quality of the loans. Many of the recent subprime and Alt-A loans failed almost immediately, meaning it wasn't the higher adjustable interest rates that caused defaults. The loans were bad to begin with, possibly because some buyers were purchasing homes for speculation, rather than for living.

Forcing the originators and financial institutions that create the mortgage-backed securities to keep some of the risk would force more to do their homework on loan quality, he said.

Both candidates backed the financial bailout, and both promise oversight of the public money being used. The bailout was the right move, said Van Order.

"If it wasn't needed, then the government will make money," he said. "If it was needed, then it was money well spent."

—Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu