There’s a principle in mathematics called “order of operations.” When confronted with an equation stuffed with different calculations to make, you do exponents before you multiply or divide, and you multiply or divide before you add or subtract. Mess up the order, and you risk muffing the answer. The same is true for the economic challenges facing the president in his second term, which present themselves as a series of calculations that Obama and Congress must attack in the correct order if they want to avert another recession.
The first task is to not kill the momentum that the recovery has built over the past several months. Job growth and consumer confidence are rising. Gasoline prices, which had been an impediment to growth, are falling. Economists and financial analysts are cautiously optimistic that headwinds from Europe and China are blowing less fiercely than they had feared. Forecasters predict “modestly stronger” growth next year than originally expected, in the words of the analysis firm MKM Partners. But, as the International Monetary Fund and many on Wall Street continue to warn, a sharp fiscal contraction—or, worse, a default on government debt—would jeopardize that progress.
So the most important economic challenges of Obama’s second term actually begin in the lame-duck session. He and congressional Republicans must defuse the potential recession-inducing effects of the tax increases and spending cuts scheduled for next year. Punting to spring would buy time but not undo the problem. They’ll also need to raise the debt ceiling, preferably without the brinkmanship that rattled consumers and markets in the summer of 2011.
Once that’s done—if that’s done—Obama can move on to a pair of tasks that complement one another: accelerating gross domestic product growth and shoring up the economy’s defenses against another financial crisis. It’s a needle-threading task, but a critical one. The economy simply isn’t growing fast enough to put 12 million unemployed Americans back to work anytime soon, and the longer the slow growth persists, the higher the risk that long-term unemployed workers will become permanently unemployable and drag down the economy for years or decades.
The need for faster growth, coupled with rock-bottom borrowing costs, almost certainly cries out for more fiscal stimulus, such as bridge-repair projects and other infrastructure improvements. Other means to growth might come much cheaper. Obama and federal regulators must finish implementing the Dodd-Frank financial-reform law. The White House and Congress must forge agreements on what role the government should take in the housing market, particularly in the guaranteeing of mortgages. The winning balance will be simple, comprehensive new rules that minimize red tape. Such regulations, if implemented, should help reopen the flow of credit, which continues to constrict the recovery. The president and legislators should also help resolve any “policy uncertainty” that might be causing businesses across the country to delay investment and hiring.
Obama’s last task will be to strengthen the fundamentals of the economy for medium- and long-term growth. That includes improving education, from pre-K to adult job training, to strengthen the workforce and boost American competitiveness. And it means bringing the federal budget into balance and reducing the national debt—which divided government makes more difficult but also more likely. These happen to be the economic issues that Obama and Mitt Romney talked about most in the campaign, and they offer perhaps the most-fertile ground for bipartisan compromise. The president, however, should be wary of skipping straight to austerity before shoring up growth. His second term won’t start in recession, but if he works the equation in the wrong order, he could find himself in one soon enough.