McCain Must Get a Grip on the Economy

Phil Gramm, former Senator and a prominent conservative surrogate for John McCain, set off a firestorm last week with a Washington Times interview. The Times reported:

You've heard of mental depression; this is a mental recession," he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. "We may have a recession; we haven't had one yet." "We have sort of become a nation of whiners," he said. "You just hear this constant whining, complaining about a loss of competitiveness, America in decline" despite a major export boom that is the primary reason that growth continues in the economy, he said. "We've never been more dominant; we've never had more natural advantages than we have today. You've heard of mental depression; this is a mental recession," he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. "We may have a recession; we haven't had one yet."

The reaction was swift and furious: how dare McCain's advisor tell voters it was all in their heads. By week's end McCain was forced to dump Gramm, letting it be known that he wouldn't be speaking for McCain, (When word later came that Gramm might not be tossed out of the McCain camp permanently, the Obama camp pounced and Gramm resigned as Co-Chair of the McCain campaign.)

On a political level, Gramm had certainly stepped on McCain's lines. In April Barack Obama had quoted him out of context and accused of ignoring economic woes when McCain correctly noted that we had enjoyed macro-economic growth over the last seven years. Since then, McCain has been careful to emphasize that he "gets" that Americans are going through tough economic times. At every turn he notes that Americans "are hurting."

Nevertheless, Gramm may have been right on the facts. Gregg Easterbrook similarly observed last month in the Wall Street Journal that Americans attitudes don't match the real state of the economy:

The case that things are basically pretty good? Unemployment is 5.5%, low by historical standards; income is rising slightly ahead of inflation; housing prices are down, but the typical house is still worth a third more than in 2000; 94% of Americans do not have threatened mortgages, and of those who do, most will keep their homes. Inflation was up in 2007, but this stands out because the 16 previous years were close to inflation-free; living standards are the highest they have ever been, including living standards for the middle class and for the poor. . . Sure, gas prices are up, the dollar is weak and credit is tight -- but these are complaints at the margin of a mainly healthy society.

Easterbrook noted that the nostalgia for the Clinton years is misplaced:

Campaigning in Pennsylvania in April, Hillary Clinton said "We need to go back to the prosperity of the 1990s," a comment that drew loud, enthusiastic applause. Converted to today's dollars, per-capita income in the Keystone State is 23% higher than in 1990. People may think Pennsylvania was more prosperous in the past, but the state is better off today. The same can be said for most (needless to say, not all) parts of the country and most demographics. Most are, right now, the best-off they have ever been.

Yet clearly Americans are in panic -- or depression -- about the economy. And the rash of proposed government bailouts, most recently for Fannie Mae and Freddie Mac, have roiled the markets. Last week's bump in consumer prices (the largest increase in more than a quarter century) reignited a real concern. While the Federal Reserve has been busy with bailouts, trying to cushion an economic downturn and proposing ways to expand its regulatory reach, inflation now looms.

In the presidential race, the economy is indisputably the number one issue for voters. And that creates problems, at least according to many pundits, for John McCain. Certainly history is not on his side.

The incumbent party does not have a track record of retaining the White House when the economy is heading, or perceived as heading, south. In 1980 Ronald Reagan capitalized on Americans' legitimate angst about the Jimmy Carter economy and the deeper sense that America was losing its economic vibrancy. In 1992 Bill Clinton magnified and took advantage of economic woes to unseat George H.W. Bush.

Larry J. Sabato says bluntly: "There simply is no example of a party getting a third White House term with a bad economy and an unpopular President."

The challenge is great for McCain. Polling shows that voters have greater confidence in Obama's ability to manage the economy. And, in some sense, it is easy to see the appeal of Obama's promises to guarantee health care, subsidize college education, shore up social security and bailout homeowners -- all without raising taxes on the middle class. McCain has yet to challenge his opponent on how he will pay for all this. He has not begun to drive home the argument that the result of such an approach would be to worsen our debt problems, or more likely, force Obama to increase taxes on many non-wealthy voters.

Aside from forcing Obama to explain his math, McCain has several tactics at his disposal which might level help the playing field and prevent the voters from taking their economic worries, justified or not, out on him.

First, he has moved energy policy to the front burner. Much of voters' economic woes have centered on gas prices. McCain has done an effective job in not just coming up with a multi-faceted energy program, but painting Obama as Dr. No and indifferent to the immediate needs of voters. If energy prices stay high, Obama sticks to the highly unpopular position of opposing domestic gas drilling voters may perceive that McCain is the more pragmatic of the two in addressing a key pocketbook issue, thereby eroding some of Obama's domestic policy advantage.

But even that may not be enough when broader concerns about housing and unemployment grip most Americans. As Sabato explains, "Energy policy is important but by no means does it rise to the level of the economy for voters."

Second, McCain may try to focus voters on what Obama is actually proposing: lots of income distribution and not much on the growth side. In this regard, McCain may have a receptive audience. Polling shows that voters by a wide margin favor efforts to boost the economy rather than redistribute the wealth. The latter is the overwhelming focus of Obama's pitch, and McCain may make headway by reminding voters that bolstering economic growth is at the heart of his plans.

And McCain has begun to pick up on Obama's record of raising taxes 94 times in his brief tenure in the Senate and attack his plans for multiple new tax hikes. If the economy is bad now, McCain's team argues, than across the board tax hikes, massive re-regulation and Obama's protectionist trade stance (which he is not attempting to tone down) would spell doom for the economy. It is an open question, however, whether Obama will stick to his tax plans (he has already hinted he would be open to lowering corporate tax rates) and continue to provide such a juicy target for McCain.

Third, McCain has still to wrap up his economic plan into a coherent and appealing package. To compete with "change," McCain will need to explain how his grab-bag of ideas (e.g. choice on health care, free trade, tax reduction, and energy independence) fit together. And while McCain loves to talk about his record as fiscal hawk and enemy of earmarks, it is far from clear that "less government" is a winning message these days.

Conservative journalist Yuval Levin has suggested a reform-minded agenda and theme, but McCain has yet to embrace it or fully escape the charge that his administration will be the third Bush term. Others have offered revised tax plans which do more than simply pledge to adhere to the Bush tax cuts. If McCain is to counter Obama's "something for nothing" promises, he will likely have to take some of this advice and construct a responsible and easily understandable package that emphasizes his market, pro-growth approach.

And finally, the economy may be a big, but not the sole, factor in the election's outcome. Pollster and analyst Charlie Cook says that he has "seen a one-dimensional presidential election yet. . . Elections have many moving parts." Put differently, if McCain can convince voters that Obama lacks the knowledge, resoluteness and even character to be president, they may decide that they cannot manage to trust Obama with their economic futures. As Cook says, "this election is about one person, Obama."

So recovering from the Gramm gaffe was the easy part. Crafting a compelling economic agenda and convincing voters not to trust Obama with their economic security are the tougher. But the McCain camp -- with increased focus on the economy and heightened attacks on Obama -- seems to have recognized that helping turn around a losing war and sporting a war hero's resume aren't likely to win him the election.

To do that, he will need to convince voters that he, not his opponent, is the one to calm their economic fears.