Candidates now focus on financial crisis

Job 1 for the next US president now seems obvious. But how to do it – how to actually get the economy running normally – is the tough part.

From Midwestern assembly lines to high desert construction sites, America faces more than just a recession. It’s the aftermath of a historic debt binge that stretched from Wall Street to Main Street, leaving key parts of the economy now in a tailspin. Even with the extraordinary efforts under way in Washington to stabilize financial markets, the recovery could be slow, economists warn, stretching well past the election.

So what would John McCain and Barack Obama do – and what would their proposals mean for communities like Roseville, Mich., with neat brick bungalows, small shops, and a rising tide of voter anxiety?

In many ways, the candidates offer a classic divergence between Republican trust in private markets and more interventionist Democratic policies.

Senator McCain emphasizes tax cuts and federal spending cuts with targeted tax breaks to spur business investment. Senator Obama is more eclectic, embracing tax cuts for the middle class but also calling for a stronger federal role in a host of areas, from a short-term stimulus spending to programs that redistribute income to low- and moderate-income workers.

Yet the rivals also echo each other on some long-term goals, from fostering high-tech innovation to creating a more skilled work force.

If the next president has a recipe for growth, that’s a change that can’t come too soon for many people here, in the state that leads the nation in joblessness.

“Most of my customers, they’re dispirited,” says Rob Markus, a barber who’s kept his scissors busy for 30 years in this suburb just north of Detroit. “They’re losing their jobs, they’re losing their overtime, they’re losing their extras.... This is about as rough as I’ve seen.”

Roseville is part of Macomb County, an area where so-called Reagan Democrats once helped tilt the electoral landscape toward Republicans. This year, polls show a tight race in Michigan.

Although an automotive slump has hit the region hard, many of the problems here – from foreclosures to tightening credit supply – are squeezing the economy nationwide. “Whether we have a shallow recession or a deep recession, we’re going to have a difficult recovery period,” predicts Robert Litan, an economic policy expert at the Kauffman Foundation in Kansas City, Kan. “We do need to have a growth strategy for the long run.”
In effect, some of the nation’s short-run challenges – getting out of a slump, affording gasoline, getting debt under control – may blend into long-run challenges: nurturing industries of the future, finding new sources of energy, resolving the strain of healthcare costs.

What would McCain or Obama do?

They both say they’ll keep taxes low, but beyond that lies a clear philosophical divide. Where Obama has called for a second stimulus package worth $50 billion plus other new spending programs, McCain is more prone to reduce government spending and rely on the private sector for job creation.

Both men propose new initiatives, but often Obama’s are measured in billions of dollars, McCain’s in millions. McCain stressed this contrast with his rival when he accepted the Republican nomination earlier this month. “I will cut government spending. He will increase it,” he said.

Still, mindful of the weak economy, McCain emphasizes actions beyond tax cuts in making the pitch to voters. In a recent TV ad here, he promised “loans to upgrade assembly lines, tax credits to boost sales of clean vehicles, offshore drilling to reduce the cost of gas and spur truck sales, and financial reforms to protect your retirement.”

Obama has also called for assistance for the auto industry. More broadly, his new stimulus program would pump new money into road repair, schools, and state government relief funds. Some of his longer-term programs, such as investing $150 billion to develop alternative energy over 10 years, would also represent a fiscal stimulus.

Tax cuts, energy plans, healthcare cost-control plans, and proposals on the mortgage crisis are covered in other parts of this series. But it’s noteworthy that both candidates propose the stimulus of big tax cuts, compared with current law which mandates that current income tax rates expire at the end of 2010. If enacted in 2009, the McCain tax cuts would be the most stimulative, leaving $98 billion more in private-sector pockets in that year than under an Obama plan enacted in 2009, according to the Tax Policy Center.

Will the economy start reviving next year? Since the economy’s weak points involve mortgage markets and credit, much will depend on how the nascent banking system rescue goes.

For now, many economists say the nation is either in a recession or may be headed into one. In interviews last weekend on “60 Minutes,” both candidates essentially accepted the “r” word.

The official statistics on gross domestic product show a nuanced picture, with gross domestic product (GDP) up 2 percent last year, about a percentage point below normal. Tax-rebate checks, mailed as part of a federal stimulus package, helped keep growth at a similar rate for the first half of this year.

But central factors in how people feel – the job market, home values, oil prices, the stock market – have moved in the wrong direction. The economy has been losing jobs each month this year. Unemployment has risen to 6.1 percent nationwide and 9 percent here in Michigan.

“The economy is bad,” says Rita Jajokka, front-office manager at a motel along Roseville’s Gratiot Avenue. “Nobody has any money to spend.”

These days, more people call to ask for jobs on a typical day than to reserve a room, says Ms. Jajokka, who grew up in Iraq and came to America 11 years ago.

For Jajokka, Iraq policies are important as she weighs the candidates, but she says economic leadership is the top issue.

She doesn’t think President Bush and Congress achieved much earlier this year when they tried to buoy the economy with the stimulus from tax rebate checks.

The reason: debt. She says most people are trying to pay down loans for everything from houses to credit cards.

It’s a nationwide problem, with record levels of household borrowing matched by big leverage at many corporations, Wall Street firms, and the US government.

Borrowing isn’t necessarily bad. But the large amounts, and the large share of it used not for productive investment but for consumption, are now a burden.

And the financial-sector rescue, by adding to federal deficits, could also make it hard for a President McCain or Obama to implement all campaign promises on tax cuts and spending.

If foreign investors become less willing to hold US Treasury debts, for example, rising interest rates or a weaker dollar could result, putting pressure on the government to control federal deficits.

“Sooner than we think, [annual federal] deficits of 3 to 4 percent of GDP are going to look mild. To me, this is the greatest long-run threat to growth,” says Mr. Litan in Kansas City.

Boosting human and physical capital

Economists say it’s vital for America to have a growth strategy beyond stimulus – some kind of plan that encourages productive investments and makes the most of America’s human capital.

“Smart [federal] investments are important,” says John Austin of the Brookings Institution, advocating that top federal priorities include nurturing research universities and new industries such as alternative energy, building needed infrastructure, environmental restoration of industrial “brownfields,” and improving education.

Yes, states must also develop their own plans to pursue such goals. But, Mr. Austin says, “no state has been able to pay for the infrastructure that made America great.”

In several of these areas, Obama has pledged more dollars than McCain.

On education, some economists like McCain because of his support for vouchers that encourage school choice – a move that proponents say would improve school systems through greater competition.

Many young voters say they’d like more financial assistance on higher education. That’s true for Jajokka, who says some extra assistance could help speed her current studies to become a paralegal.

Both candidates say they’ll provide more federal help for displaced workers to train for new jobs.

For low-income Americans, one obstacle standing between them and better jobs isn’t just training; it’s the cost or length of commutes.

Sitting at a bus stop not far from Markus’s barbershop, Lonnie Calhoun says transportation costs are one reason he moved out of Detroit to Roseville. He doesn’t have a car and wants to find a job with decent pay.

“They’re not in the city,” he says. “They’re way out.”

Obama’s plan includes a boost in spending on a program to connect low-income workers with jobs.

In the Detroit area, even suburban jobs are hard to come by.

Sitting in a barber chair, waiting for his next customer, Markus says his two grown children are leaving Michigan because of the lack of work. He puts part of the blame on the relative strength that labor unions have here, compared with “right to work” states.
On that controversial question, the candidates offer one of their sharpest contrasts. For example, Obama supports the Employee Free Choice Act, which would allow workers to unionize at a company by majority sign-up, rather than by secret ballots. McCain opposes that bill.

Many economists say a key US strength lies in the flexibility of its labor markets, compared with the more unionized workforces of continental Europe. Yet they also concede that in recent decades the gap between the top income earners and the middle or lower tier has been widening.

So the challenge may be not just to revive growth, but also to make it happen in a more balanced way – with benefits of GDP growth more widely dispersed. That could improve the country’s social stability, as well as lift more people up economically. How could this be achieved?

Edmund Phelps, a Nobel Prize-winning economist at Columbia University in New York, has floated the idea of federal “wage subsidies” for lower-income workers.

In this campaign year, Obama comes closest to offering something like that – a “make work pay” tax credit that puts about $500 extra dollars in workers’ pockets for their first $8,000 in earned income.

Some economists say Obama’s backing of labor unions and a higher minimum wage would help reduce inequality.

That resonates with John Klepacz, a retired union worker in Toledo, Ohio, who used to make automobile glass.

“Back in the 1960s when unions were strong, everybody was making money,” he says. Today, he’s grateful to say that his children have found good jobs – one in childcare and another on the police force. But today’s younger generations, in his view, are slipping backward economically.

Part of the challenge is how to keep America competitive in a world where other nations are racing to develop advanced industries. China, with its rush to build top-flight research universities, is just the most obvious case in point.

“We have to have a better set of national innovation policies,” says economist Robert Atkinson, “so that we move up that value chain” of industries, even as other nations are doing so.

Both McCain and Obama have some promising policies on this front, adds Mr. Atkinson, who heads the Information Technology and Innovation Foundation in Washington, D.C. On a number of these issues, they aren’t far apart.

Both would expand the Manufacturing Extension Program to help US firms stay competitive. Both would make permanent the moratorium on taxes on the Internet to promote high-tech growth. And, with some differences, both would try to resolve snarls in the patent system, including more funding for the Patent and Trademark Office.

One important step, many economists say, would be to encourage more of the scientists trained in the US to stay here if they want.

“I would give them a green card automatically, if they graduate with a so-called STEM degree, a science, technology, engineering, and math degree,” says Litan. “This pool of workers ... is likely to generate a disproportionate number of new high-growth businesses.”

The Kauffman Foundation, where he works, studies the important role that entrepreneurs play as generators of high-quality US jobs.

Both McCain and Obama are on that bandwagon to a degree. They voice support for welcoming highly skilled foreign workers. Where McCain’s policies aim to promote R&D and new jobs mainly through tax incentives, some of Obama’s plans would make the government a kind of venture capitalist.

Obama cites as a model a relatively new Michigan program – 21st Century Jobs Fund – that invests seed money in promising startups.

It will take an appropriate balance of policies, and probably some time in debt rehab, to get the economy back on track. And an innovation-driven economy might pay big dividends: more high-skill jobs with good pay and a larger income base to cover that rising national debt.

“I have faith,” Litan says. “We have great entrepreneurial spirit, and as long as our laws do not penalize entrepreneurship, we’ll grow the firms and the jobs.”