Obama vs. McCain. The United States economic growth has slowed and many fear that we are headed toward

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1 Ben Faanunu Econ 430 Obama vs. McCain The United States economic growth has slowed and many fear that we are headed toward a recession. From higher gas prices to failure in the housing sector, Americans are calling for government intervention to curb insecure feelings about the future. The upcoming election has everyone pulling for the candidate they think will help get America out of its economic slump. Barak Obama and John McCain, the two presumptive candidates for the Democratic and Republican parties respectively, are battling over the correct course of action. The two parties have outlined their policies which, for better or worse, will impact the economy. Obama s economic plan focuses on trying to get money back into the hands of taxpayers through rebates, tax cuts, and job protection. He also wants to protect consumers and stabilize the market through education and by regulating industries such as oil, banking, and business. His opponent McCain advocates tax cuts as well as cuts in government spending. McCain also wants to lift the economy by cutting business taxes, giving tax credits, and extending trade. Following in President Bush s footsteps, Obama intends to give an immediate tax rebate of $250 to workers and seniors to encourage consumer spending. A $75 billion rebate would push consumer spending up but by how much is debatable. Since there is no government budget surplus, the $75 billion will need to be borrowed or created. The creation of money would lead to higher inflation rates while borrowing would drive up interest rates. The raise in inflation would drive the value of the dollar down improving the affordability of US goods and services and increasing exports. This reduction in the US dollar purchasing power would temporarily decrease the trade deficit and boost the economy. Higher rates of interest on the other hand would cause business investment to fall impacting GDP negatively. His $500 per person or $1000 per family tax credit will eliminate income taxes for 10 million workers. The implications of this tax credit are the same as the tax rebate but include an Obama promise to make employers pay.

2 Microeconomics theory suggests that wage is equal to the marginal productivity of labor (MPL) which implies that if a laborer s marginal productivity is less than their wage they will become unemployed. This means that some fraction of the 10 million workers whose skills do not exceed the additional cost to the employers, will find themselves unemployed. This unemployment will mean less money in the hands of consumers and a need for more social programs to combat it. This same impact will be a result of pegging minimum wage to the inflation rate. Obama s pledge to create a living wage will increase minimum wage and disallow it to fall below its current purchasing power. Those whose labor does not meet the increased minimum wage benchmarks will find themselves unemployed. Increased costs for business will result in higher costs for consumers. This is the case even when an increase in minimum wage are said to have no effect on employment such discussed in Minimum Wages and Employment: A Case Study of the Fast- Food Industry in New Jersey and Pennsylvania. Although the authors claim that there were no ill effects on employment, they admit that the additional 2% cost because of the minimum wage increase caused a 3% increase in the cost to consumers. Increased costs to consumers mean a lower purchasing power especially for those workers only making a few dollars more than minimum wage. Instead of helping those without much education or training, which tend to be minorities, they become unemployed and experience lower standards of living. To address those with low incomes Obama will expand the Earned Income Tax Credit and Child Tax Credit for low-income workers, doubling funding for after-school programs, and eliminate income tax for senior citizens who make less than $50,000 a year. He will also give a 10% tax credit for mortgage-holders. Most of these tax cuts and credits are relatively easy to implement and don t require much higher government expenditures than what is currently being spent. The danger is in the budget deficit which seems to continue to grow year after year. The additional money needed will need to come from higher rates of taxes some where, the printing of money, or borrowing it form the private sector, all of which have negative consequences on the economy.

3 Another part of Obama s plan is to help small businesses by reducing self employment tax as well as eliminate capital gains tax. These will have similar consequences as indicated in the previous paragraph. Obama wants to protect labor but promote free trade which seems to be contradictory. Whenever we open our market to foreign countries those jobs which we do not enjoy comparative advantage are lost to foreign competitors. This leaves many laborers unemployed and unable to support their families. In economics the most difficult type of unemployment to overcome is structural. This type of unemployment is caused by changes in trade or technology which makes certain skills obsolete. This type of unemployment takes innovation and many times new education and training for the unemployed to recover. The benefit of trade is undeniable. While jobs to foreign competitors might be lost in trade, the fall in prices experienced by both sides brings us to new levels of standards of living. His focus on family implies expanding the Family Medical Leave Act and encourages businesses to have flexible work schedules. This type of regulation on businesses will increase the costs of providing goods and services which as already discussed are past on to the customer. His plan to double federal funding toward research will have the same negative impacts on the economy as tax credits and breaks. The social benefit of having more research though is the knowledge spill over which occurs when the government creates and innovates. Businesses which utilize the new technology gain comparative advantage and makes the first business who implements it the best shot of reaching economies of scale. This means new jobs, more tax revenue, and better products which are cheaper to buy. Part of his plan to protect the consumer is through creating a credit card rating system, bill of rights, and educating them on risk. The rating system would better asses individual credit ratings and the bill of rights would help protect them against interest charges on fees and unilateral changes. The rate of payday loans would be capped at 35% to protect those with low incomes and no alternative means to borrow money. Protecting consumers means keeping more money in their pockets by making it more difficult to get into a situation in which they cannot get

4 out of. Those who tend to be most exposed to exploitation are the poor and the uneducated. Helping them might in the future lead to fewer needed social services which may lead to lower government costs. McCain intends to cut taxes over all while making reform to programs such as social security. Alternative Minimum Tax (AMT) was intended to fall on the wealthy but now costs middle class families nearly $60 billion a year. He also intends to extend the Bush administration tax cuts worth $100 billion a year. Less than a third of the tax cuts will be offset by eliminating tax loopholes which are estimated to be around $45 billion a year. This would again keep more money in the hands of consumers but would only increase the GDP by the amount of their marginal propensity to consume. The grim forecast may cause the marginal propensity to consume to fall, which would indicate to producers to slow production, which would lead to unemployment, which would further perpetuate the cycle and cause a recession. Changing Social Security to add personal accounts which may end the need for Social Security is another great way to put money back into the hands of consumers. Those with greater control and access over their money will be able to invest into that which will give them the greatest return. This means more money available at retirement for families which will lead to fewer social programs and greater spending from the more mature consumers. Reducing government spending to offset tax cuts will help inflation and high rates of interest. Cutting pork-barrel spending and wasteful government spending will save taxpayers an estimated combined amount of $28 billion per year. McCain also intends to drop Congressional earmarks, funds to be spent on specific projects, which are worth about $60 billion per year. Because the effectiveness of government spending is so highly debatable, all we can say that inflation and interest rates will fall. Lower rates of inflation will mean that the purchasing power of Americans increase and allow them to enjoy higher standards of living. Lower interest rates mean more purchases from business investment as well as consumers.

5 McCain wants cut business taxes to combat some of the slow growth of the economy. Allowing business equipment and technology to be expensed, cutting corporate tax rates from 35% to 25%, and giving tax credits equal to 10% of wages spent on research and development would help businesses grow. Combine this potential for American businesses to grow with increased trade agreements from other countries will allow us to be more competitive in the world market. This would allow US companies to grow by allowing them to keep more of their earnings to invest in capital or research and development. That increase in spending by businesses will boost the GDP and cause unemployment to fall. There are many issues facing the Americans this coming election and each candidate have platforms for issues such as environment and health care which are not economic platforms but will none the less greatly effect the economy. It seems as though most of the Barak Obama s plans would increase government spending which would increase government regulation and control. John McCain s plans to cut government spending will only make government smaller and allow the market to function efficiently. While it is important to protect the poor and uneducated, government involvement seems to create more problems than it solves. These problems created by government increase in frequency and severity. Friedrich von Hayek believed that increasing government involvement means fewer freedoms for the individual. Those who in Obama s plan are meant to be helped will receive most of the negative effects of it. His plan seems to head America back into stagflation while McCain s seems to have no real net effect on the economy. While moving forward is preferred to standing still, even standing still is preferred to moving backward.

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