David Hill: Tapering will hurt Democrats

David Hill: Tapering will hurt Democrats
© Greg Nash

The Federal Reserve is meeting this week, and some think that “tapering” could be on the agenda. 

Without getting into a too-deep explanation, tapering would start to wind down a bond-buying program that has been the core of Chairman Ben Bernanke’s monetary policy, known as “quantitative easing,” which has been used by the Fed to stimulate the economy. 

There are at least two potential consequences of tapering that could have immediate political relevance. One is that interest rates would rise, potentially shutting off some corporate and even consumer borrowing that has been stimulating the economy. Second, the stock market and corporate bond sales could take a hit as investors move in to supplant the Fed in buying U.S. Treasury bonds and Fannie and Freddie mortgage-backed securities. The potential impact on the stock market is perhaps the most relevant politically.

 As you might recall, President Obama and the Democrats broke all the “good times/bad-times” rules of elections in 2012 by getting reelected in spite of the lousy economy and high unemployment rates (which later were discovered to have been low-balled through fraudulent data collection). But Democrats nevertheless continue to hedge against the old rules by maintaining throughout 2012 that times were good economically, citing a relatively robust rise in the stock market. 

So where we are now as we enter another election year? 

As in 2012, the economy and employment are still stumbling along without much growth, but the stock market is still rising. The Dow Jones industrial average is up 21 percent year-to-date, and the NASDAQ index has risen a whopping 33 percent. 

 All this puts the Democrats in a no-win position, in my view. If the president and his apologists at the Fed start tapering and wreck the stock market, Democrats lose their one positive economic talking point. But if they don’t start to do something about the Fed’s money-printing scheme sometime soon, other negative economic consequences will follow, perhaps even before the 2014 election. 

All signs point to the Fed starting the taper in the next year — if not at this last meeting of 2013 — most likely at the end of the first quarter. Could the timing be worse for the Democrats? Probably not. The best they can hope for is that the tapering policy is so gradual that potential consequences like inflation, deflation or a market crash don’t occur before November 2014. 

But what about November 2016, a more important date? Can they forever protect the economy from the reality that monetary policy has become our growth machine, not actual economic and business earnings?

 While we Republicans eat popcorn and watch the drama unfold, we need to think hard about advocating more loudly for consumers than business interests. Frankly, corporations sat on their hands to allow Obama’s reelection largely because of quantitative easing and its promise of cheap borrowing that fueled rising stock values. Let them reap the whirlwind they helped sow. Consumers, meanwhile, still standoffish from the market after the 2008 crash, haven’t been so rewarded. The recovery, such as it is, has benefited wealthy corporate interests far more that suburban Republican families. Republican leaders need to take note of this and the lack of a shared sacrifice.

 If and when the crash comes and interest rates soar, mortgage holders with adjustable rates will pay more every month, students with loan debt will be hurt, new home shoppers and first-time buyers will find financing harder than ever to qualify for, car sales will stall and corporations will lay off workers to protect their profits and shore up share vales. 

Yes, Democrats benefitted from stimulus on the way up. Republicans should make sure we get a political payback on the way down. The old political rules of economic accountability should be reinstated.

Hill is a pollster who has worked for Republican campaigns and causes since 1984.