U.S.

Meet McCain's Money Adviser

John McCain has said that economics "is not something I've understood as well as I should." Perhaps he's just more honest than other candidates, or has a better sense of humor. But the remark-and others that McCain has made on the economy-could get him into political trouble. It is Douglas Holtz-Eakin's job to head that off. Director of the Congressional Budget Office from 2003 to 2005, Holtz-Eakin worked part-time on McCain's 2000 campaign and joined the current effort at the start of 2007 as senior policy adviser on economics and other domestic issues. He recently spoke to NEWSWEEK's Jeffrey Bartholet about the candidate's platform and clarified some of his more controversial statements. Excerpts:

NEWSWEEK: You've been working without pay since last summer. That must be kind of tough.
Douglas Holtz-Eakin: Yes. [Laughs] It has its interesting moments.

At what point will the campaign start paying you again?
I truthfully don't know the answer to that. What we're doing at the moment is trying to get the nomination locked down; it's the march to 1,200 delegates. At that point, according to the plan [campaign manager] Rick Davis has outlined, we'll rethink the campaign and move forward. But until that moment we're not going to change anything.

The [Democrats] are raising a lot more money than Senator McCain.
That's true, but I think we've proven that [this race] doesn't depend on money. We didn't have the most money in the primary, [but] we have the best candidate. I think we'll raise more money, and we don't have to match them dollar for dollar to do well.

Senator McCain has given some ammunition to his Democratic rivals, even before the general election begins, by saying that economics is not something he understands as well as he ought to. Does he regret that comment? Do you regret it?
I regret what's been made of it. He is a guy who has a sort of self-deprecating sense of humor, and that's an instance of it that has been bandied about far more widely than I think it merits. He [also] has high standards. He is a leading expert on national security, and I think he expects his economic knowledge to be comparable.

You talk to McCain often about economics. What's your assessment of his knowledge?
He's got great instincts; he's got a lot of experience. So the comment does bother me because it's at odds with the facts.

He said on Jan. 10 that the economic fundamentals of the United States are strong, and he believes they will remain strong. And he indicated that he didn't think the country was heading into a recession. Is that your assessment, and does that remain the assessment of Senator McCain at this point?
He's said several things since then as well. Whether we head into a recession or not doesn't really matter. The fact is that we're growing too slowly. People are feeling the effects of that, and we need to grow more quickly. So our focus should be on those policies that improve the economic growth of the United States.

I believe he [at one point] opposed the [short-term] stimulus package that is designed to give the economy a jolt, preferring instead to cut spending.
I don't think that's quite right. He spent about a year talking about what he thought was the appropriate structure for the tax code when he became president. He first talked about how important it was to keep taxes low ... then he talked about making them fair and simpler, getting rid of the Alternative Minimum Tax, which was never supposed to hit the middle class. Then he talked about making it more pro-growth and competitive by cutting the corporate rate by 25 percent ...

Right, but am I wrong in my understanding that he [originally] opposed the stimulus package?
Let me finish, because I think this was misinterpreted in the way it was rolled out. He then said, "Look, this is what I think should happen. It should be paired with controls on spending." He's made that point again and again. So let's do that. And by the way, if we did it right now, it would help the economy. That wasn't in opposition to what has gone on in Congress, and which the president has now signed. He shared those principles: tax relief for American families, business investment incentives, no wasteful spending. So he voted for the stimulus bill when it came through the Senate. The president signed it. That's good.

You mentioned cutting taxes. McCain, as you know, at one point said he could not support the Bush tax cuts "in which so many of the benefits go to the most fortunate among us at the expense of middle-class Americans who most need tax relief." He's changed his mind on that. To what extent will those words come back to haunt him in a general election campaign?
I don't think they'll come back to haunt him if people look at the record. He ran in 2000 on a tax cut that he had proposed. It was a tax cut that was not as large as the Bush tax cut had promised to be; it was paired with controls on spending and more money spent on defense. I think that looks wise in hindsight. And it put the middle class first in line for the tax cuts. It was a march to a flat tax from the bottom up.

I think you yourself have argued that tax cuts at a time of increases in mandatory spending on entitlement programs are not sustainable. Is that correct?
I am sure I said that we cannot tax our way out of our current situation. I'm sure I've said that tax cuts don't pay for themselves. We've got to bring the long-term mandatory commitments in line with revenues, period. The only way to do that is to really address the growth of those spending programs.

I think you said-correct me if I'm wrong-that a 10 percent individual income-tax cut would result in a $1.24 trillion revenue loss over 10 years.
That was the CBO [Congressional Budget Office] study? ... I don't remember the details of the study, but that certainly sounds about right.

So the basic argument is that you have to do something about the entitlement programs, correct?
Yes.

So what does Senator McCain propose? I don't think he is willing to raise the cap on payroll taxes, or undertake any other major initiatives that would really address the issue. Is that incorrect?
There's Social Security, and then there's the health programs: Medicare and Medicaid. On Social Security he's said that you can fix it, [that] you can fix it without raising taxes, and that the real obstacle is political. He has not put forth a plan, because he doesn't want to somehow make it harder to get the political consensus done. He's going to ask Congress to solve it, and if they don't, he's going to send them a plan and ask for an up-or-down vote.

What kind of a plan?
He hasn't put out a plan, it's true. But if you look at the menu of things that are out there-the thing called "Pozen price indexing," which slows the benefits at the upper end [of the income scale], or if you raise the normal retirement age from 67 to 68 ... a combination of things easily brings the system into balance over the long term. This is not rocket science. There are a lot of options. He knows that, so rather than dictate a solution that will run into political problems, he's saying, "Look, I know we can do this. It's a political issue to get it done. I'll call on the Congress to do it the minute I'm president."

OK. And then on Medicare and Medicaid?
We have a big health-reform plan that includes changes in the Medicare payment system. There are some Medicare payment reforms; there are some insurance market reforms, tax reforms-a $5,000 refundable tax credit. Taken as a package, that will address the growth in health-care spending, which is really the driving issue. We've gotten to where 16 percent of our national income is spent on health care.

So he's saying he can get better care at a lower cost.
I think everyone recognizes this. If you look at a very common procedure-say a cardiac bypass-[there are] enormous variations in cost [in different parts of the country] for the same outcome. So all of the health analysts now recognize that we have big regional differences in cost. There's got to be a way to get those same outcomes with less money.

Would McCain, given his experience with skin cancer, be able to buy an individual private insurance plan under his proposal?
Yes, but he wouldn't be able to do it just on the basis of the tax credit. I really want to emphasize that it's a big mischaracterization to suggest that somehow John McCain's health-care reform [amounts to] "Here, take a $2,500 tax credit and go and solve your health-care problems." You have to change the practice of medicine so it's not based on fee-per-service, but instead spending on making people well. That's step one. Step two, you have to improve the insurance market. The current individual insurance market is terrible.

Just to go back to the specific question: he'd be able to go out, with his record of skin cancer, and be able to buy an individual insurance plan? There would be a company that would be willing to insure him at reasonable rates?
In the post-reform, fully implemented world, yes. That would be the goal.

And how would that happen?
It would require a lot of changes.

But why would a private company want to go out and provide insurance to somebody like him?
In any insurance room, you have to distinguish between people who are potentially high-risk, which is an insurance risk, and people who are simply high-cost, because [a disease has] already happened. John McCain has already had cancer, so it's already happened. That's not a risk issue, it's a cost issue. And higher-cost patients will have to have more money, and the tax credit would be supplemented for high-cost patients. So once it's already happened, it's not a risk that an insurance company has to manage. It's a fact. And you have to pay for it. That should be acknowledged. You also want to lower the cost of care for such patients. That should be part of the goal, so the insurance isn't as expensive, either.

Senator McCain supports government-sponsored personal retirement accounts to supplement Social Security savings. Is that correct?
To supplement Social Security-but he's emphasized that it's not a substitute for coming to grips with the financial problems of the system.

He emphasizes the need to cut government spending. What are the programs in his crosshairs?
The easy place to start is you look at the earmarks. As of about 2006, earmark spending cost about $60 billion. He believes you should simply take that money out. You should allow no new earmarks. Not because that solves your budgetary problems. It doesn't. But because by making it clear that you're no longer taking care of the special interests, you'll be able to do the harder cuts that will be necessary ... You look at the defense side, too. We have a lot of weapons systems that may or may not fit the strategic aims of the United States. We should spend only on those things that match our mission objectives, and certainly we ought to be able to buy them in ways that don't suffer the cost overruns we've seen. And you and I have talked about entitlements. That's a big chunk of the money. You can't ignore that.

Something like 44 percent of federal spending goes to entitlements now?
It's on track within a 10-year window to be more than half of federal spending. You just can't ignore it.

On energy, Senator McCain has promised to make the U.S. "oil independent" within five years. I'd say most if not all experts would regard that as extremely unlikely, if not preposterous.
I think the careful way to say that is [that we should] be independent of the insecurity that comes from importing oil from places like Venezuela, Russia-where the assault on democracy continues-and from the Middle East, which is an unstable region. The goal is to put in place a cap-and-trade program, which has climate objectives but which also will shift the energy demands away from carbon-based petroleum fuels. That should reduce imports. We have to work aggressively at domestic alternatives, and the market will do this if oil is less desirable. And he would allow nuclear energy to happen, alternative fuels, all the renewables.

But do you really think that we could be independent of our need for oil from the Middle East, Russia and Venezuela within five years?
We're spending $400 billion a year [on oil imports]. If we could dramatically change the transportation sector-that's the key.

Sorry, dramatically change the transportation sector?
You're going to have to take a big cut at that. We'll still import oil, but we want to reduce the exposure to these places that really are a threat.

But you don't really think that we'd be independent of them within five years.
No.

So why did he say that?
I think it was in one debate. He said it quickly. There are lots of qualifiers that get left out when you're in a rush.

We've talked a little bit about the political vulnerabilities in some of the things that Senator McCain has said. What are the vulnerabilities on the Democratic side? Where would you criticize economic proposals by Hillary Clinton and Barack Obama?
I think there are lots of places of big disagreement. Number one is their basic outlook for the federal budget. They're promising lots and lots of new spending, and totaling it up will take time. We're trying to add it up now, and I don't have a number yet. But their promises are extraordinary. And so they're going to raise taxes and raise spending at a time when it's clearly detrimental to raise taxes, and we're already spending too much. Their approach to health-care reform really is a heavy government intrusion and doesn't deal with the underlying cost growth, so in the end will not be sustainable. I don't think they're on the right path on trade. The Democratic Party has become the party of protectionism, and that's a route to failure when 95 percent of the world's customers are outside of our borders. We need to be securing access to those customers for our kids and for the global success of the business community. Education will be a big issue, and what I hear them saying is that they'll put more money into failed systems instead of reforming them. So I think there are lots of points of contrast on domestic policy. And the top-line contrast is on foreign policy and national security, where John McCain's the clear expert, the person who's got the experience to do things right. And they've been on the wrong side of most of the issues.

Which of the Democratic candidates in your view is more vulnerable?
We run very well against either. They're a little bit different, but they share enough in common that the same script pretty much holds. In the end, they're both liberal senators, and have records to match.