President McCain at Midterm
What if . . .
Nov 8, 2010, Vol. 16, No. 08 • By TOD LINDBERG
The quite liberal House majority had the first crack and wrote quite liberal legislation. The Senate, though overwhelmingly Democratic, had a moderating influence on the total amount of spending but not on its character. The Obama White House would have been perfectly pleased with the House version but also seemed perfectly willing to accept the Senate version, meaning anything Congress could agree to was fine with Obama. Paul Krugman was jumping up and down on the New York Times op-ed page for a bigger package, but the political chances of this were zero. The Three-D House, Senate, and White House forged what amounted to a Democratic consensus on spending.
For our purposes, we will assume that McCain had no coattails and that President McCain would accordingly be doing business with the same Democratic House and Senate majorities Obama has. Even so, a Republican in the White House would have changed the outcome significantly. A McCain administration could have and would have insisted on a mix of spending and tax cuts.
The most likely form of the latter—because most politically palatable to the Democratic congressional majorities—would have been a package of tax breaks for small businesses. Some Republicans favored a Social Security tax holiday, but that would surely have been a deal-breaker for a House in which Nancy Pelosi was speaker. On the spending side, McCain would likely have sought to direct more toward infrastructure projects. With the housing sector at a standstill, adding construction jobs would arguably put underutilized capacity to more productive use. Another advantage of infrastructure projects is that under different circumstances they go by the name of “pork-barrel spending” and “earmarks.” President McCain, based on his long record of opposition to spending of this kind, would have to take a dim view—unless given the opportunity to look the other way in the name of job-creating stimulus. Then, too, each piece of critical infrastructure would be in somebody’s congressional district, which means that the pork barrel would be put to its traditional use in greasing the passage of the legislation. McCain would probably have had some success here, though the final legislation would surely have included some money for left-wing constituencies.
Some Republicans, it’s true, would have opposed any stimulus spending; but it’s likely that enough tax cuts would have been included to mute their opposition. One law of politics is this: Given the opportunity to stimulate, Washington stimulates. The legislation would have had significant bipartisan support and passed with large majorities.
Would it have done more than the legislation we got to stimulate the economy? Probably so, if only because of its indirect effects. Tax incentives for hiring workers and capital investment would work to the usual extent that when you tax something less, you get more of it. And with a little bit of luck, some of the infrastructure spending might have had a longer-term benefit beyond the purely Keynesian proposition of paying Joe to dig a hole and Jane to fill it in. The broader meaning of the legislation, though, would have been its signal to Main Street that the political process was capable of responding with measures that have a real effect on the bottom line of small businesses. That was simply not the message of the Three-D stimulus. To the extent that small businesses have been hunkering down in its absence, it might have hastened the revival of their animal spirits.
What about big business? Here, one must confront the likelihood of a McCain bailout of the auto industry. The stars were aligned in favor of a bailout from the tail end of the Bush administration, and it strikes me as unlikely that President McCain would have hesitated. Bankruptcy for GM would have been too brutal for Washington to sit still for.
That said, the McCain bailout would not have been so lucrative for the United Auto Workers, and it is unlikely that it would have voided the privileged claims of bondholders. Conservative talk radio would have hated the bailout just as much, though, and it would have opened (or widened) a rift between McCain and the GOP base. Note, however, that the Bush administration left the bailout decision-making to the incoming administration. If McCain had been on-deck, the Bush administration (with behind-the-scenes encouragement from the McCain transition) might have been willing to take action on helping Detroit, thus assuming a part of the political burden.