Political Economy

The Presidential election campaign this year offers little relief for those of us hoping for sensible economic policy. On one side we have John McCain who has said publicly that he knows little about economics and apparently feels the need to prove it in his campaign proposals. On the other side, we have Barack Obama (I’m going out on a limb here) whose economic policies seem to extend no further than the audience to which he is currently pandering.

Congress recently promised to send $300 billion of our tax dollars to farmers who are suffering through a boom born of the ethanol boondoggle. Ethanol from corn may be inefficient and make the environment worse off, but it pays off handsomely for politicians who genuflect to the Midwest. To his credit, John McCain has refused to endorse current farm policy, but he makes up for it by endorsing a cap and trade system for carbon emissions. Politicians prefer cap and trade because it sounds so much more intelligent than tax and spend but make no mistake, cap and trade is nothing more than a massive carbon tax with the added benefit that it will allow corruption on a previously unknown scale. Obama does McCain one better by endorsing the farm bill, ethanol and the cap and trade system on the theory that if a little government intervention in the market is a good thing, well a lot must be better.

The housing market offers another opportunity for the pols to display their empathy for economically suffering voters. The current plan calls for taxpayers to guarantee mortgages for about 500,000 homeowners who paid too much for their homes and are now underwater on their mortgages. Why prudent citizens should have to bail out citizens who bought houses they couldn’t afford is something that only makes sense to a politician. Other provisions in the bill will offer tax refunds to homebuilders, AMT credits to automakers and tax breaks to encourage alternative energy production. While logical beings might wonder what those items have to do with the “housing crisis”, I’m sure it’s perfectly sensible when viewed through the eyes of a lobbyist. One is also left wondering why home sellers and owners are being favored over potential home buyers who might actually be able to afford a home if prices were to keep falling. I guess renters don’t vote in large enough numbers to warrant their own government program.

Politicians saved their most economically ignorant plans for energy policy. McCain, displaying a complete lack of understanding of the laws of supply and demand, offered a gas tax holiday to buy off November voters. Obama countered with a “windfall” profits tax on oil companies that defines windfall as any profit over and above that which Rep. Maxine Waters could earn running the same oil company. Since taxes are a larger proportion of the price of each gallon of gas than profit, one is left wondering if McCain actually had a good idea. Congress, being full of lawyers, is offering to amend the Sherman Anti-Trust Act to allow the Attorney General to sue OPEC countries for the offense of not managing their energy resources for our benefit. Releasing the hounds of the trial bar on OPEC will surely scare them into pumping a few more barrels. Never mind that our own politicians won’t allow drilling for domestic oil where it is known to exist. They are in favor of energy independence as long as it doesn’t involve actually drilling for oil. Has it occurred to anyone that maybe US oil companies drilling in Alaska or off our coast are likely to do less harm to the environment than say, Hugo Chavez?

On tax policy, there is equally bad news. Obama has proposed raising payroll taxes, income taxes, capital gains taxes and dividend taxes in addition to the disguised cap and trade tax. McCain has said that he would extend the Bush tax rates but if elected is unlikely to have the necessary votes to accomplish the task. Some politicians may be able to say with a straight face that allowing the Bush tax rates to expire is not a tax hike, but that will be hard to prove on April 15th.

Free trade has also taken a beating this campaign season with Obama hinting that he wants to renegotiate NAFTA. Of course, at the same time, his economic policy advisors have let it be known, sotto voce, to the Canadians that he only means that when he is in Ohio, so his real thoughts on free trade must be left to one’s imagination. McCain talks a good game on trade, but he is unlikely to accomplish much with the economic heirs to Smoot and Hawley in charge of the Congress. Republicans and Democrats may not agree on much but that China is more to blame for our economic problems than our own lousy policies is one area on which they find common ground.

None of the policies advocated by either Presidential candidate will result in better economic performance. In fact, many of the proposed policies will only make things worse or prolong the problems we already have. The housing market doesn’t need a bailout and neither do lenders who made loans to subprime borrowers. If you borrowed money on a property that you now can’t afford, there is a mechanism for addressing that. It’s called foreclosure and there are consequences to the borrower and the lender that need to be felt so it is less likely to happen again. Anything that Congress does will merely prolong the time it takes the housing market to find a natural bottom.

We don’t need a farm bill that punishes every consumer for the benefit of a small number of relatively wealthy farmers. We don’t need to be producing ethanol from corn and starving people in the third world so we can feel good about filling our SUVs. If the use of ethanol is part of the answer to global warming, then lift the tariff on imported ethanol. Ethanol produced from sugar cane in Brazil is cheaper and more efficient than corn based ethanol, although it won’t buy votes in Iowa.

If we want to reduce carbon emissions, impose a carbon tax directly rather than through a backdoor called cap and trade. Cap and trade will just allow politicians to determine winner and losers. You can guess who the winners are: campaign contributors. You can also guess who the losers will be: taxpayers.

Election years always produce proposals that don’t make it past inauguration day. Let’s hope that most of these are of that variety. This is one case where we can only hope that the candidates promise more than they can deliver.