Did a TV spot on the Alex Witt Show this afternoon and I thought she posed a useful set of questions. For those of you out running, walking, reading a novel, watching football, baking a cake, or just spacing out, here they are with brief responses.
1) The credit rating agency Egan-Jones downgraded the US credit rating by a notch because they believe QE3 will hurt the economy more than it will help it. You wrote in a column on MSNBC.COM that you thought QE3 would help but not by itself. Explain.
First, I’m not too worried about this downgrade. Over a year ago S&P—a much larger and more influential rating agency–downgraded the credit rating of the US government and it had no effect at all. To the contrary, even with all of our current foibles, we’re still considered by creditors throughout the world to be a safe economic haven.
That doesn’t mean we can afford to neglect our fiscal challenges ahead, which are real and portentous. More on that below.
QE3 (the third round of quantitative easing by the Federal Reserve) and other recent Fed moves are designed to lower interest rates. This latest round targets the mortgage rate by buying bundles of mortgage debt called mortgage-based securities. That could help give a further lift to the housing market, including more home-buying and more refis into loans that cost homeowners less to service (which can be a potent form of stimulus if it’s pervasive enough).
But the cost of credit isn’t what’s holding this economy back. Interest rates, including mortgage rates, are already low, and large firms are sitting on lots of cash they could easily invest if they saw a promising return anywhere. What’s missing is on the demand side of the equation, and that suggests a role for fiscal policy and jobs measures.
2. What about the global economy? How will QE3 affect Europe and Asia?
Monetary stimulus by the Fed adds to the supply of money in circulation, thus lowering interest rates. But those dynamics also tend to lower the value of the dollar in international currency markets (greater supply of dollars, lower “price” for them).
This can lead our exports to be cheaper in other countries’ currencies, giving a boost to our exports, at a cost, however, to their domestic sales and exports. On the other hand, if the Fed helps to accelerate US growth rates, that helps other countries in lots of ways. Our open economy will demand more of their goods, and investments they have here will appreciate faster.
3) The House passed a spending bill on Thursday but they did not act on the looming “fiscal cliff.” Is it possible for them to do so between the election and the end of the year?
It depends on election outcomes, I guess, but I think the probability we go over the cliff is above 50%.
That’s obviously not at all a desirable outcome, but if we can reverse course quickly, it might not be so bad. My hope is that post-election, with the new Congress is in place, they’ll be enough grownups in the room who recognize the utter folly of another self-inflicted economic wound.
4) How might the fiscal cliff affect average folks?
If we go over and stay over, meaning taxes reset higher and the $110 billion in spending cuts all take place next year, the impact on lots of people could actually be pretty direct. Taxes would go up, and would do so in part through increased withholding amounts on paychecks, which also takes a hit from the expiration of the payroll tax cut. So millions will see their after-tax wage—their paychecks—go down a bit, and that’s before inflation.
And as for the spending cuts, if you work for a contractor that does business with the federal government or in a directly related sector, like air-traffic control, national parks, the FBI, even veterans’ services, you could take a hit.
5) Mitt Romney said in his weekly podcast that President Obama is avoiding bipartisan solutions and allowing the country to go over the cliff. The Obama administration says it’s the Republicans who are blocking a solultion. Is there a middle ground that can be reached?
There’s way too much finger pointing going on right now and not nearly enough negotiating and compromise.
And this is particularly true when you consider that both sides agree on most of what should happen here, so yes, there is middle ground.
For example, both sides agree that so-called middle class tax cuts should be extended, and in fact, the President and a majority in the Senate have proposed legislation to that effect, allowing the tax cuts to expire next year only on the top 2%. And many members of Congress agree with the White House that the spending cuts should be phased in gradually and more surgically applied than the across-the-board nonsense of the sequester.
So, there’s no good reason why they can’t agree on these adjustments, locking in a bit of budget certainty for the vast majority, and then go back to squabbling about the rest.
If I were evaluating politicians who want my support right now, one of the main questions I’d be asking them is: are you willing to compromise and negotiate in the interest of finding workable solutions between the parties and the White House or are you more interested in scorched-earth ideology?