It seems bizarre even to mention this less than two weeks after the vote, but President Obama just won an election that was all about the economy. That’s what six in 10 voters on Nov. 6 told exit pollsters they were most concerned about. Not balancing the budget, reforming the social-safety net, or making the rich pay more in taxes—rather, improving an economy still laboring to find a growth groove more than three years after the Great Recession officially ended. “Our top priority has to be jobs and growth,” Obama said in a press statement on the Friday after the election, and he’s right.
Trouble is, it’s easy to get distracted. The bulk of Obama’s statement that day centered not on a new plan to boost growth right away, but on posturing toward a possible deficit-reduction deal with congressional Republicans. It’s a backward-but-necessary focus, due entirely to a nasty bit of economic timing for which the president and Congress set themselves up during Obama’s first term. A glut of reduced tax rates are scheduled to expire at year’s end, a crude-instrument set of spending cuts is ready to kick in, and the federal government will soon exceed its ability to borrow. If policymakers allow any of these three outcomes to happen, they would deal a contractionary blow to the recovery; all together, the trio would almost assuredly shock the economy back into recession. Resolving this so-called fiscal cliff to minimize the immediate drag on growth would remove one of the biggest anchors that economists identify as weighing down the recovery.
But if Obama wants his second term to be remembered for a new wave of hearty growth—and not as an extension of the anemic “new normal” that marred his first term—he’ll need to address several other forces that helped tug growth downward over the last several years.
Those forces are large and complex: a financial crisis in Europe, a slowdown in China, a bottoming-out domestic housing market, and high and volatile gasoline prices. All of those, to varying degrees, vexed the president in his first term. There is reason to believe that each one could dissipate over the next few years, serving as buoys for renewed growth; that federal policy decisions could influence heavily whether they do; and that smart reforms in how the government taxes, spends, and regulates could, in the absence of those anchors, finally help the economy expand at the pace necessary to put 12 million unemployed Americans back to work.
These are the crucial economic issues facing Obama as he enters his second term.
EUROPE AND CHINA
Fortunately for Obama’s reelection bid, the financial crisis that has crippled the eurozone did not spiral into a full-fledged economic meltdown during the summer or fall. Unfortunately, Europe’s outlook quietly darkened anyway. Recession has again gripped the Continent, and the International Monetary Fund forecasts an essentially flat year of growth there in 2013, with a 1 percent expansion in 2014. Budget-balancing maneuvers in Greece and Spain, both still in austerity free fall, have produced rising unemployment and increased public debt. Even Germany, the big engine of European growth in recent years, is showing signs of sputtering, University of Oregon economist Tim Duy noted this month.
Europe’s woes have hampered American exports (no-growth economies buy a lot less stuff than booming ones), and investors are worried that the financial contagion might spread to American banks.
The U.S. government can’t fix Europe’s problems. But it could do more to help fix them than it is. Today, American officials are mostly advising eurozone leaders on how to manage the crisis. Instead, Washington could start by leveraging a resolution of the Greek debt crisis, ensuring that the country won’t abandon the euro, which would trigger economic disaster in the region.
In a new research paper, Zsolt Darvas, an economist for the Brussels-based think tank Bruegel, contends that the best way to deal with Greek debt is for official lenders—governments, basically—to write it off or to stop charging interest on their loans for eight years. Doing so, Darvas writes, would bring Greece’s debt-to-gross domestic product ratio under 100 percent (from about 190 percent now) by 2020, alleviating the crisis.
U.S. officials could start by pushing the International Monetary Fund, of which America is a critical dues-payer, to lead the interest-free charge. “The IMF has a huge responsibility for taking part in the solution,” Darvas says in an interview. For European and American leaders hoping to avoid a worsening euro crisis, he adds, “the major risk in the short term is Greece. If they’re able to find a solution for Greece in the coming weeks and isolate the problem,” the risk would drop substantially.
Bolstering Europe would, in turn, help shore up the other big weak spot in the global economy: the slowdown in China. While Obama and Mitt Romney sparred in campaign debates over Chinese trade and currency manipulation, the far more consequential economic news from the Far East was that growth in China had decelerated faster than many analysts predicted. Further slowing in China would cut into U.S. exports, so the faster the Europeans can ramp up imports—from China and the United States—the better.
This article appears in the November 17, 2012 edition of National Journal Magazine.