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Economic Advisors to the Candidates


JUDY WOODRUFF: Douglas Holtz-Eakin, Dan Tarullo, thank you both very much for being with us. This general election between John McCain, Barack Obama about to get underway, any yet some are already seeing irony here - John McCain having been one of the most - biggest adversaries in the Republican Party of President Bush; there having been this ferocious battle between Obama and Clinton for the nomination. And now, most analysts are saying they expect John McCain's economic polices anyway would be a continuation of President Bush; Obama's economic policies would be a reprise of the Clinton years.

So Doug, to you first, is that an analysis that makes sense?

DOUGLAS HOLTZ-EAKIN: No, anyone who knows John McCain knows that he is far from a cookie cutter of George Bush. He is not a partisan person. His career is characterized by reaching across the aisle and providing leadership on issues that are important to the nation. That has always been his single-most important objective. When the country needed reforms that would bring us skilled labor and temporary worker programs as well as dealing with the issues of national security, he stood with Ted Kennedy and attempted comprehensive immigration reform, and suffered tremendously from the party on that regard.

And so, John will focus on the issues. We need growth in this economy. We need some jobs for American workers so that they have the security of a paycheck, health insurance that doesn't rise so fast that it eats up that paycheck, opportunities to sell those products, and get prosperity for our children. Those will be the issues on which he'll talk.

MS. WOODRUFF: Dan Tarullo, do you see John McCain as continuing George W. Bush's economic policy?

DAN TARULLO: Well, in some important respects, Judy, I think he's gone back to George W. Bush's economic policy. I mean, so far as I can tell, Senator McCain is about the only person who likes George W. Bush's economic policies more now than he did eight years ago.

In 2001, Senator McCain, I think, quite intelligently said he was opposed to the tax cuts. And yet, now today, he embraces them and indeed wants to extend them. So in the past, he does seem to have had his differences. But this primary season seems to have been about him returning to President Bush's fold.

MS. WOODRUFF: How do you respond?

MR. HOLTZ-EAKIN: Well, you can repeat that as often as you want. But the reality is that he rejected those policies because spending was out of control. He's rejected the entire Bush legacy of out-of-control spending. It is a concern that even today the Democratic Congress, with Barack Obama's support, is going to spend a trillion more dollars. George Bush would sign that. John McCain would veto that.

We need to have some discipline to keep taxes low. And even Barack Obama has said, we don't want to raise taxes because the economy is weak. Well, come January 1st, 2009, this economy is likely to still be weak. The policies that he's proposing would hurt the small businesses that are the sources of jobs.

MS. WOODRUFF: Dan Tarullo, what about the charge that Barack Obama's economic policies would be a reprise of the Clinton administration?

MR. TARULLO: Well, I think there are certainly some respects in which Democratic policies will have continuity between the '90s and today. But there are other respects in which they won't. I think what you are seeing is that there is a broad base of support within the Democratic Party, and I think extending to independents and some Republicans, about the kinds of priorities we need to have. And in many respects, Senator Obama and Senator Clinton shared those priorities. They had some differences in some areas, some differences about how to get there. But if you look at their broad priorities, I think you'll see that that really is the base of the Democratic Party's approach in 2008..

MS. WOODRUFF: The next four years with the sub-prime mortgage crisis with unmet needs across this country, does the United States need more government or less government in the view of John McCain?

MR. HOLTZ-EAKIN: The United States needs effective government. If there's one thing that John McCain has stood for, for 20 years in the U.S. Senate, it's reforming the way government works. It is John McCain who cried out against wasteful spending and earmarks. All of the political establishment has now come to recognize that this is the thing to do. He would veto every bill that has earmarks in it because the American people need to trust the government to do things that are genuinely in the national priorities.

MS. WOODRUFF: What about Barack Obama on this question of whether the country needs more government or less, given what the needs are right now?

MR. TARULLO: Well, I don't think it's a question of more or less government. I think it's a question of what is government doing. And as he has observed for a long time now, what government has been doing has been unfortunately pushing its policies in the direction that certain special interests want and not responding to the needs of the middle class.

MS. WOODRUFF: Right now, Doug Holtz-Eakin, federal government expenditures, as a percentage of the gross domestic product, 19.9 percent. Under John McCain, would that go up or down?

MR. HOLTZ-EAKIN: John McCain would like to see spending go down. In the end, every dollar you spend you have to take from some American family. And we need to keep that number as low as possible. He's dedicated himself to having a temporary freeze of the automatic increase in spending outside of crucial areas, so that we can do a scrub of the federal budget, look at it from top to bottom, and make sure that we're only spending money on those things that actually help American families.

MS. WOODRUFF: What about Barack Obama and this 19.9 percent of the gross domestic product is federal government spending. Up or down under his administration?

MR. TARULLO: Well, what Senator Obama has said is that we need to make the kinds of investments in the American people that are going to provide for shared and sustained growth in the United States. And that includes investments in things like alternative energy sources, education, and health care.

MS. WOODRUFF: John McCain, Doug Holtz-Eakin, has advocated not only extending the Bush tax cuts, he's talked about enacting a number of other tax cuts - cutting the corporate tax rate by 10 percent; repealing the alternative minimum tax without, as far as we can tell, any offsetting revenue pickups; doubling the exemption for dependants. The cost has been calculated at something like $3 trillion by the end of his second term in office - no longer a deficit hawk?

MR. HOLTZ-EAKIN: That plan, when appropriately phased in, as it has always been intended to be, will bring the budget to balance by the end of his first term. The most important things, the judgments that have to be made, are to make sure the economy continues to grow. All of the best success in deficit reduction has taken place when we've had good economic growth.

The second-most important thing is to ensure that that growth helps the American family. We can no longer have a tax system that drives our companies to other parts of the globe. We need to have them here and we need to have those jobs here. We need to have the investment incentives that allow those companies to give our workers the best technologies. And we need to make sure that our families can meet the needs of their children and their housing and not pay taxes that are too high.

MS. WOODRUFF: But you have the Concord Coalition, which is a deficit-watching group. They're not a left-wing crowd. They say the McCain budget numbers don't add up.

MR. HOLTZ-EAKIN: The Concord Coalition and some other groups took a preliminary cut at this based on incomplete information. We have provided groups with complete detailed plans. And we'll see the third parties verify that this is in fact the right way to go.

And this isn't a plan that says, oh, I don't know what's going to happen. This is a plan that says the economy is going to grow; we'll control the spending. Barack Obama, with all due respect, has promised an enormous amount of new spending. And after you're done with taxing the small businesses, putting mandates on them for health care, cutting off the trade, you're going to have a problem making this add up.

MS. WOODRUFF: On McCain's numbers, Dan, do they add up?

MR. TARULLO: We don't see any way that they can add up. I mean, as I recall, when this plan was being put forth a couple of months ago, Senator McCain identified the need for about 160 billion (dollars) in cuts on discretionary spending. If you exclude the military, as I assume he would, then we're talking about one out of every four dollars on discretionary spending, non-military discretionary spending. I don't see where those cuts realistically come from, unless the intention is to go towards entitlements and to make cuts in Social Security and Medicare.

MS. WOODRUFF: Well, let's turn it around. You started to bring up Obama's plan. Does his budget plan - do those numbers hold up?

MR. HOLTZ-EAKIN: It's dedicated to the recent Bush tradition of spending money on everything. And there is, in that plan, nothing that suggests stronger economic growth. Indeed, all of the policies are pushing against that and spending more money. I don't see how it can add up.

MS. WOODRUFF: How do you respond?

MR. TARULLO: Well, in the first instance, a middle-class tax cut, which is providing more money to more than 90 percent of American taxpayers, is something which will increase aggregate demand, put the money in the pockets of the people who need it, and who will spend it. And so that is surely a bit of a prod to economic growth and something that is more sustainable than what we've been doing in the last eight years, which is squeezing the disposable incomes of that same group of people. And not surprisingly, pushing them into greater debt burdens, which obviously is not a sustainable basis for growth.

MS. WOODRUFF: Doug, back on McCain's proposals, he's calling for some sacrifices by the American people in Medicare and some other domestic spending programs. But other than a small increase in what the wealthy pay in their Medicare premium, isn't he asking a lot more of middle-class Americans than he is of the rich who would get these tremendous tax cuts?

MR. HOLTZ-EAKIN: Well, the tax burden on the top is in the end going to be borne in large part by the workers in the small firms who are taxed under the individual income tax. It's a nice piece of political rhetoric to pin this as tax cuts for the wealthy. But the reality is, many businesses that are the crucial engines of growth in the United States are taxed under the individual income tax. Our family farms are, our folks who have a nice rental property, sole proprietorships, partnerships, all of that is under assault as we raise taxes on dividends, raise taxes in the individual income tax rate. Those are the jobs American families need. A tax credit of $1,000 might sound nice. Well, what happens to the rest of the year?

MS. WOODRUFF: And Dan, on the other hand, Barack Obama hardly has any spending cutbacks. But he wants to cut the deficit and he does it mainly by raising taxes?

MR. TARULLO: Well, there are a number of ways in which offsetting revenues can be gained. There absolutely is a component of increasing taxes on the wealthiest Americans. He doesn't propose that for fun; he proposes that precisely because of his belief that you need to identify where you would find the offsetting revenues, number one

Number two, in his foreign policy, the Iraq war will not go on indefinitely and thus over the period of his time in office, there will be savings coming from not having to wage that enormously expensive war at the levels it's being waged right now. Third, in his approach to a cap-and-trade system - in the global climate change initiative that he supports - would be to auction off the trading permits. And that too would be a source of revenue.

MS. WOODRUFF: Let's focus on trade. Dan, Senator Obama, breaking with the policies of the Clinton administration, wants to renegotiate NAFTA. He opposes the Colombia and the South Korean trade deals. He says he's going to get tougher on China. On the specifics, though, if he reopens NAFTA, the Canadians might well want to renegotiate the priority that the U.S. has on Canadian oil. Maybe China would be a better customer, or Mexico would demand more passes to allow its trucks on American road. My question is, could reopening NAFTA turn into a nightmare?

MR. TARULLO: Well, what Senator Obama has said on a number of occasions, and I think there is enormous logic to this, is that he wants to talk with the prime minister of Canada, the president of Mexico upon taking office, and show them that what he is about is putting in labor, environment standards that will be binding on all parties that are not about commercial advantage; what it's about is something that is good for our workers in all three countries and it's good for the environment in all three countries. And he believes, as I do, that that is an achievable goal and something that will appeal to the populations of those countries.

MS. WOODRUFF: Doug Holtz-Eakin, what about the implications for reopening NAFTA?

MR. HOLTZ-EAKIN: I think the Canadians and the Mexicans were scratching their heads when someone running for president of the United States announced unilaterally that it was time to rethink this deal that they thought they had settled with the United States. They were counting on us honoring our international obligations, and it's the kind of judgment that makes one wonder about how he would pursue more broadly in international affairs. This is a country whose international legacy has been damaged by the policies of the Bush administration. There is no question about that. We need at the helm someone who understands the nature of international affairs, has worked with leaders around the globe, and has the judgment not to raise this out of nowhere and startle our international partners.

MS. WOODRUFF: Very quickly.

MR. TARULLO: Well, it's hardly being raised out of nowhere. It is very clear that in order to have international trade policies that are sustainable at home and abroad, we need to do a better job of taking care of those who have not profited from globalization, who have not profited from trade, number one. Number two, there is nothing unilateral about this. He proposes to renegotiate, to add those binding labor and environmental provisions, and what he said from the outset is he's going to do that by talking to the leaders of the other countries.

MS. WOODRUFF: Well, on China - I brought this up - Senator Obama has said the United States should get tough with China. China, though, we know, is one of our largest creditors, why wouldn't China retaliate if the United States tried to crackdown on their exports to the U.S.?

MR. TARULLO: China's current economic policies are not sustainable. They are not sustainable for China, they are not sustainable for the global economy. You can't have a fastest-growing large economy in the world running persistent, indeed growing, current account surpluses, sitting on ever-increasing reserves without creating inflationary forces at home in China and without leading to unbalanced growth in the world. This has got to change. If Senator Obama wants it change because he thinks China can and should be a very productive contributor to world economic growth.

MS. WOODRUFF: What is Senator McCain's view?

MR. HOLTZ-EAKIN: Senator McCain understands that the Chinese relationship has many dimensions. China has a terrible record on human rights in its own country. It is not helpful to the United States interests in North Korea, in Africa, in our negotiations with our partners about Iran. China is about more than just the value of the currency. A steady engagement with the Chinese - threats don't help in this regard - a steady engagement, moving them to both continue to be our third-largest export source.

MS. WOODRUFF: Are you saying this is a threat?

MR. HOLTZ-EAKIN: I think it's unwise to, quote, "get tough" and unilaterally try to impose something on the Chinese. The nature of success of the Chinese is continuous engagement. It's continuing a dialogue, understanding the multi-dimensions of the problem. Senator McCain has been a leader on climate change, understand that the Chinese have a genuine interest in climate change. If you look at China, all of the cities are on the coasts and rivers. They are afraid of sea-level rise. We need to use those potential partnerships to improve our export-performance there. It is our third-largest export source, and get them to honor some of their international commitments.

MS. WOODRUFF: Let's talk about a couple of critical areas on the economy for both of these candidates. Dan Tarullo, rather than outlining what Senator Obama would do on this, do you think when it comes to sub-prime to Wall Street that John McCain would regulate too little?

MR. TARULLO: Well, I think we should let Doug speak to what he would do, and I'm happy to respond to that. I haven't heard from Senator McCain to this point an approach to dealing with the kinds of things that went on in the financial market that produced the sub-prime crisis.

MS. WOODRUFF: From the other perspective, Doug, would your camp say that Senator Obama would regulate too much when it comes to sub-prime?

MR. HOLTZ-EAKIN: What Senator McCain has said again and again is that what we saw in the sub-prime and the credit crunch was a lack of transparency, a lack of accountability. We saw not enough capital-backing loans that were made, not enough capital for people who were involved in investments. And we need to establish a regulation system that has those kinds of incentives. This is cannot be something that is about closing the door now that this has happened; it has to be about making reforms that lead to better behaviors in the future, and that is his commitment.

MS. WOODRUFF: And so -

MR. TARULLO: It's fine to state the goal, but I think that does raise the question of does he believe, for example, that we need to have capital and liquidity requirements for the very large non-bank financial institutions that were at the center of the sub-prime crisis. That is something Barack Obama has said he does favor. Does he believe that we need a process for identifying systemic risks? That is something that Barack Obama says that he favors.

MS. WOODRUFF: Push the clock forward one year into the next presidency. One of these two men is going to have to decide whether to re-nominate Federal Reserve Board Chairman Ben Bernanke to that position. If it were today, what do you think John McCain would do, Douglas?

MR. HOLTZ-EAKIN: He has full confidence in Chairman Bernanke and the Federal Reserve and commends them for their efforts to provide liquidity in a very tough situation and to ensure stable price level and continued employment growth. That is their mandate and he has very much confidence that they're pursuing it.

MS. WOODRUFF: And what about Senator Obama?

MR. TARULLO: Well, Judy, Senator Obama has gotten the nomination. He is not staffing up an administration here. I'm confident that in his appointments to the Federal Reserve, he would, as with his appointments to the judiciary, be looking for people with intelligence, experience, and integrity.

MS. WOODRUFF: Last question to both of you, and I'll come to you, Dan, first on this. What was the better economy for average Americans? Under George W. Bush or under Bill Clinton?

MR. TARULLO: Well, I don't think there is any question it was under Bill Clinton.


MR. TARULLO: Well, because during that period, the wages of the bottom half of Americans were rising, both in absolute and relative terms. We were getting a handle upon our big macroeconomic problems.

MS. WOODRUFF: Douglas Holtz-Eakin, what is better, the economy under Bill Clinton or under George W. Bush?

MR. HOLTZ-EAKIN: John McCain is dedicated to balancing the budget, to spending programs. Barack Obama will not do that. He is dedicated to controlling healthcare costs so that jobs continue to grow and people get the wages that they deserve for those jobs, and that we have the innovation and the kind of productivity boom that we saw in the '90s. That is a good economic environment; that is the John McCain plan.

MS. WOODRUFF: So he is not modeling it after the Bush years, is that what you're saying?

MR. HOLTZ-EAKIN: The only thing that he shares in common with President Bush is the understanding of good tax policy. Sadly, it seems that is all President Bush understood in the economy.

MS. WOODRUFF: Douglas Holtz-Eakin, representing the John McCain campaign; Dan Tarullo, representing the campaign of Barack Obama. Gentlemen, thank you both. We appreciate you talking with us.

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