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Obama's Midterm Economics

Interviewee: Sebastian Mallaby, Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations
Interviewer: Roya Wolverson, Staff Writer,
September 9, 2010

In response to a slowing U.S. economic recovery, upcoming midterm elections, and worsening poll numbers, President Barack Obama has proposed $180 billion in business tax cuts and infrastructure spending. He also opposes extending the George W. Bush-era tax cuts for the wealthy, which are due to expire at the end of 2010. The moves intensified debate on what policies can boost U.S. job creation and fuel growth after two rounds of fiscal stimulus and extensive loosening of monetary policy.

Business tax cuts are an especially unsure bet, says CFR Senior Fellow Sebastian Mallaby, since large U.S. corporations are already hoarding cash. Mallaby says with interest rates so low, many of these businesses could easily raise more cash by issuing corporate bonds. But there is also no harm in trying the cuts because "it won't have cost the administration anything," Mallaby says, noting Obama "needs to be seen throwing new policy tools at the problem, even if the tools don't actually work."

Mallaby argues the Federal Reserve also has room for more so-called "quantitative easing" but this kind of stimulus risks favoring businesses tied to short-term borrowing, especially banks. However, this could hamper growth in sectors less connected to low, short-term interest rates, he points out, while easy borrowing could create fresh bubbles abroad. Expanding monetary stimulus in response to the U.S. slowdown may "come back to bite down the road," he warns, as other countries weigh whether their economies benefit from remaining open to volatile capital flows. For example, India was initially criticized for its reluctance to rapidly opening its capital markets, but now the country is glad it proceeded cautiously, he says.

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