Where Is the Economy Headed? A View From the Presidential Campaigns

Event Overview and Logistics

• The Milken Institute hosted a policy discussion between economic advisors for the 2008 presidential candidates, moderated by Peter Purcell.
• Event participants agreed to a format of dialogue rather than a formal debate, with six-minute opening statements followed by rebuttals and a question-and-answer session.
• Specific procedural rules were enforced: all cell phones must be off or on vibrate; no applause, hissing, or catcalls were permitted during the speech segments; and audience questions must be concise, not speeches.
• Upcoming Milken Institute Events:
  • State of the State Conference: October 28 at the Beverly Hilton.
  • Milken Institute Associates Breakfast (Politics): Tomorrow with Frank Luntz.
  • Milken Institute Associates Breakfast: November 13 with former Clinton Chief of Staff Mack McLarty.
  • Forum (Entrepreneurship): November 12 with Sam Wiley, author of A Thousand Dollars and an Idea.

Participant Profiles

• Michael Boskin: Senior fellow at the Hoover Institution; former Chairman of the Council of Economic Advisors (1989–1993); former Chair of the bipartisan commission on the Consumer Price Index (concluded CPI overstates inflation).
• Leo Hendry: Managing partner of Intermedia Partners; former CEO of AT&T Broadband and YES Network; served as economic and trade policy advisor to John Edwards and now Senator Barack Obama.
• Peter Purcell: Moderator and Senior Fellow at the Milken Institute; former economics editor for The New York Times; editor of the Milken Institute Review for 10 years.

Core Economic Disagreements and Policy Positions

Income Inequality and Taxation

• Leo Hendry (Obama Campaign):
  • Cites that the top 0.2% of taxpayers earn 50% of national income, with the bottom 99.8% sharing the remainder.
  • Notes that the bottom 80% of the population has lost $100 billion in real income every three years since 1981.
  • Proposes reverting 2001–2003 tax cuts for individuals earning over $200,000 and households over $250,000, arguing this would raise $120 billion annually.
  • Projects Senator Obama's plan would reduce the federal deficit by $748 billion by 2018; projects Senator McCain's plan would increase the deficit by $750 billion over the same period.
  • Claims 95% of households and 98% of small businesses would pay less under Obama's plan.
  • Argues lower marginal tax rates and "social engineering" (e.g., Fannie Mae/Freddie Mac mandates) contributed to the financial crisis.
• Michael Boskin (McCain Campaign):
  • Disputes Hendry's calculation of corporate tax revenue, noting corporate taxes as a % of GDP are 15% below the OECD average.
  • Argues that increasing the fraction of Americans paying no income taxes from 38% to 48% would cement a political dynamic where a majority of voters consume more government services than they contribute.
  • Warns that moving toward European levels of taxation and regulation would permanently lower the U.S. standard of living by 30%.
  • Attributes income inequality shifts primarily to technological change and global integration, not tax policy.
  • Notes that between 2000 and 2004, the tax code became more progressive, with the top 1% and top 10% paying shares of income taxes that rose faster than their incomes.

Trade and Globalization

• Leo Hendry (Obama Campaign):
  • Highlights a $454 billion cumulative trade deficit with Mexico over 14 years of NAFTA, estimating this cost at least one million U.S. jobs.
  • Points to a $350 billion annual trade deficit with China, citing currency manipulation and subsidies as primary drivers.
  • Argues the U.S. current account deficit of $800 billion annually is unsustainable and requires policy intervention.
  • Criticizes "one-size-fits-all" trade agreements and advocates for trade policies that benefit employees as much as corporations.
• Michael Boskin (McCian Campaign):
  • Describes the expectation of bilateral trade balance as "economically illiterate" in a multilateral world.
  • Argues the current account deficit is primarily driven by low U.S. savings rates and a global savings glut, not unfair trade practices.
  • Claims trade among NAFTA countries has tripled and generally benefits the U.S. and Mexico economies.
  • Suggests that even if all illegal trade practices were eliminated, the impact on the U.S. trade balance would be trivial.
  • Counters that lower prices from imports benefit society, particularly low-income consumers, despite localized job losses.

Financial Crisis and Regulation

• Leo Hendry (Obama Campaign):
  • Attributes the crisis to loose monetary policy by the Federal Reserve, the "privatization" of quasi-governmental institutions (Fannie/Freddie), and a lack of regulation by bank regulators.
  • Estimates total economic losses at $1.5 trillion (absorbed by households and securities).
  • Argues that the $700 billion bailout is insufficient without direct intervention to refinance distressed mortgages.
  • Identifies excess executive compensation (CEOs earning 400x employee wages) as a root cause of "greed" and risk-taking.
• Michael Boskin (McCian Campaign):
  • Rejects the "deregulation" narrative, noting the 1999 Gramm-Leach-Bliley Act extended regulation to parent holding companies, and the 2004 SEC rule allowed investment banks to self-regulate their capital.
  • Argues the crisis was caused by "social engineering" (Fannie/Freddie mandates) and negative real interest rates, not deregulation.
  • Predicts the net cost to taxpayers will be significantly lower than the $1.5 trillion claimed, referencing the Resolution Trust Corporation's historical net cost.
  • Supports "smart, surgical" regulation but warns against creating a vast new bureaucracy.
  • Believes corporate boards, not the government, should determine executive compensation.

Fiscal Stimulus and Housing

• Leo Hendry (Obama Campaign):
  • Supports a $300 billion stimulus, specifically targeting infrastructure, state budget imbalances, unemployment insurance, and food stamps.
  • Proposes a household-centric mortgage solution rather than bailing out financial institutions.
  • Argues that $300 billion in infrastructure spending is the most immediate job-creation tool available.
• Michael Boskin (McCian Campaign):
  • Views the previous fiscal stimulus as having a small impact on consumer spending at a high cost.
  • Expresses skepticism regarding infrastructure spending, doubting its speed of deployment and cost-benefit analysis.
  • Supports extending unemployment insurance but opposes broad, untargeted government spending.
  • Warns that government programs tend to expand and persist, creating long-term fiscal drag.

Specific Q&A Highlights

• Responsibility for the Crisis: Both speakers acknowledged shared blame but emphasized different culprits; Hendry blamed the Fed and Fannie/Freddie, while Boskin blamed monetary policy and social engineering mandates.
• Energy and Consumption: A moderator noted neither candidate explicitly asked for personal sacrifice regarding gasoline use; Hendry cited higher CAFE standards as the structural solution, while Boskin suggested McCain would prioritize entitlement spending cuts.
• Executive Compensation: Boskin argued against direct regulation, favoring market mechanisms and corporate board oversight; Hendry called for tax code changes and shareholder rights to curb excess compensation.
• Trade Costs vs. Benefits: Boskin emphasized that while trade causes job displacement, the primary driver of manufacturing job loss has been technology, not trade; Hendry argued the U.S. has passed a "tipping point" where the cost of lost jobs outweighs the benefit of lower prices.
• Regulatory Competence: Both agreed that better economic education for regulators and legislators is necessary to prevent future crises.