By 2010, we seemed to turn the corner. The economy added more than a million jobs. Growth returned. The financial markets stabilized. Many forecasters looked to 2011 with real optimism.
Instead, 2011 has been the year of the aftershocks. It’s become clear that no, this is not, in fact, over. Worse, it might not be over for a long time.
The first, and biggest, aftershock has been the crisis in Europe. Before the financial crisis, the euro zone looked like a success story. It was celebrated in books with titles like “Why Europe Will Run the 21st Century” and “The United States of Europe: The New Superpower and the End of American Supremacy.” Germany was thriving. Italy and Spain were actually reducing their debt. With its low corporate taxes and quick growth, Ireland was considered a major free-market success story — during the presidential 2008 campaign, Sen. John McCain said he might make Ireland his first international trip.
The financial crisis changed three things for Europe. First, the market grew more risk-averse, and so began wondering whether Greece, which was deep in debt, could really keep up its payments. Second, rising unemployment meant that revenue dried up even as social spending began to rise, leading to large deficits in nations already overburdened with debt. And finally, the global economy slowed, and so countries that were easily balancing their books when growth was swift found themselves falling deeper into debt as their economies weakened.
This, in turn, forced the euro zone to face some uncomfortable truths. First, that the markets expected Germany and the other strong economies to bail out any laggards. Second, that weak countries in the euro zone couldn’t do what weak countries normally do and devalue their currency to boost exports. They were, instead, stuck with a currency that made their exports uncompetitive and their recovery more difficult. And, finally, that the euro zone had no actual plan for resolving these tensions, and the European Central Bank, to the surprise of many, would not automatically intervene, a la the Federal Reserve, to end a looming financial crisis.
Going into 2012, of course, these tensions remain unresolved, and a chaotic endgame in Europe is the most significant headwind facing the American economy.
But the euro zone isn’t the only major region where the financial crisis has uncovered some deep institutional dysfunctions that threaten growth over the next few years. The United States is in much the same boat.
Periods of extreme economic stress breed extreme political reactions. The tea party is one such example. And in 2010, the tea party led Republicans to win back the House of Representatives.
In order to hold that alliance, however, the Republican Party has had to become significantly more ideological and intransigent. In 2011, House Republicans almost forced a government shutdown, a default on the debt and an expiration in the payroll tax cut and unemployment insurance benefits. In each case, cooler heads eventually prevailed. But consumer confidence data show that the close calls — in particular, the near default — hurt the economy.
Perhaps worse, when Congress isn’t threatening to create unnecessary catastrophes, it’s not doing anything at all. There’s been no serious action to support the recovery or cut the deficit. The American Jobs Act failed, and so too did the supercommittee. Few are confident that Congress could respond swiftly and aggressively to a new economic crisis — as it did, with some bumps, in 2008 and 2009. Indeed, in its first year, this Congress has passed fewer laws than even the do-nothing Congress of 1948. Perhaps that’s why its approval rating is 11 percent — the lowest in the three decades that Gallup has tracked voter opinions of Congress.
If there is good news — and there is — it’s that the American economy has been relatively resilient to these headwinds. It’s added more than 1.5 million jobs, and hasn’t had a single negative month. Exports are strong. Fourth-quarter growth is expected to be about 3.5 percent. Housing starts are up, and talk of a double-dip recession has mostly faded. It’s not enough to say we’re really recovering, but it’s enough to say that there’s clearly some potential to recover if Europe gets its act together and Congress gets out of the way.
Note: This is the second in a week-long series looking back at the major policy stories of 2011. On Monday, Brad Plumer looked at the year in environmental policy. In the days ahead, we’ll also review the year in health care and financial regulation.