Paul Wellman

The Libertarian: Lanny Ebenstein, former member of the Santa Barbara School Board and author of Milton Friedman: A Biography, belongs to Economists for McCain. In their first conversation, he and Sam Kornell argued about the Wall Street bailout. This time around, they talk about the candidates.

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When the current economic crisis was first developing, I called Lanny Ebenstein and asked what he thought it meant for the traditional conservative belief that markets self-correct, and that government regulation of finance is bad. I called him again on Thursday, September 25, to ask about the economic plans of John McCain and Barack Obama. Ebenstein, a former member of the Santa Barbara School Board and currently a visiting professor of economics at UCSB, is a member of Economists for McCain and Santa Barbara’s most prominent Libertarian. Last year, Ebenstein published an admiring, well-received biography of Milton Friedman, the most famous and influential economic Libertarian of the 20th century. Below is an edited transcript of this second conversation. The first can be found on The Independent’s Web site.

As Americans watch Wall Street collapse, which future administration should they look to for help—John McCain’s or Barack Obama’s?

We’re looking at a considerably different economic scenario if Obama is elected than if McCain is elected. … If Obama is elected, discretionary domestic spending will rise, military spending will decline, and taxes, particularly on capital gains and on higher income Americans, will increase. I think if McCain is elected the opposite of all those things will occur.

Let’s note that the Obama campaign has never indicated that it would cut military spending. That said, who’s plan do you think would be healthier for the economy?

McCain’s. Raising capital gains rates would be very damaging to the economy. I think raising domestic discretionary spending would be pernicious, and I believe that a nationalized reform of healthcare would also be negative.

I agree that the Democrats’ domestic agenda seems like it may have to be scaled back some. But when it comes to stewardship of the economy, McCain’s philosophy of wholesale deregulation and very large tax cuts for the wealthiest Americans—isn’t that what got us into this mess?

I think there’s something to Obama’s proposal to tax the highest incomes, as well as inheritance taxes. I think Republicans have generally erred in concentrating tax breaks on the top end of the economic spectrum. But you want to have the lowest capital gains tax rate possible to encourage the transfer of assets to continually more productive uses.

I think a lot of Americans look at a statement like “transfer assets to continually more productive uses,” and they see: Let’s make sure that rich Americans who make a lot of money on the stock market get big tax breaks, which they can put to more “productive” uses. How do you explain that to them? Particularly in light of the fact that it looks like they’re going to be picking up the bill for all of these supposedly brilliant Wall Street bankers and their huge salaries?

I think the bottom line is that you want resources to go to the most productive, effective uses, and—

We’ve just seen how productive those tax cuts and deregulation were for Bear Stearns, Lehman Brothers, Fannie and Freddie, and AIG, not to mention virtually every other investment bank on Wall Street. I’m not saying that some drop in the capital gains tax isn’t appropriate, but you can see why there might be some suspicion around this.

Well, earlier Obama talked about raising the capital gains up to 28 percent, but he’s now lowered it to 20 percent, and I think that’s good.

Okay. Capital gains aside, how is McCain’s agenda going to help the average American?

I think McCain would be really serious about limiting domestic spending, would veto earmarks, and would really hold the line on domestic saving. I think—

I’m sick of hearing about earmarks. It’s a political stunt. Earmarks comprise, what, 5 percent of the total federal budget?

I think it’s only one or 2 percent, but it is tens and even hundreds of billions of dollars over time. But it sends a more general message, which is that it would lead to concentration on government spending in general—

But who cares? What kind of message? Is it symbolic, or something? What is John McCain’s economic plan? It seems to me that he’s a classic Reagan Republican. He supports market deregulation, or he did until a few weeks ago, and he supports massive tax cuts for the wealthiest Americans. I think the Reagan message—the market is self-correcting, interference in the economy in the form of regulation is bad, and trickle-down economics works—is not resonating for a lot of Americans right now. I look at McCain, and I see status quo: Reagan and our current president.

I think McCain would be different than George W. Bush in many respects. I think he would keep a reign on federal spending, not just through cutting earmarks, but through a more genuinely traditional, fiscally responsible Republican policy.

During the ’90s, Bill Clinton raised taxes, particularly on the wealthiest Americans, and reduced the deficit and actually managed to turn it into a surplus. The Clinton administration coincided with the most astonishing period of economic growth in American history. During the last eight years we went from having a huge, rapidly growing economy with a government budget surplus to a mediocre economy, a ballooning deficit, and a tax policy that has resulted in the largest transfer of public wealth into private hands in American history. And although the Clinton administration was complicit in some of the banking deregulation, responsibility falls primarily on Republicans and the Republican philosophy of laissez-faire economics. So: What’s the upshot of traditional Republican policy?

Look, I think that if McCain is elected, there will be smoother economic growth, because there will be less policy change, and that’s generally advantageous in the long run. On the other hand, you’re right that the economy did well in the 1990s under Clinton, and if Obama were to pursue policies under those lines, I think those would also be a satisfactory result.

Related Links

• Liberal vs. Libertarian: Is the Market Self-Correcting?

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