With Europe teetering on a shaky ledge, the Congress needs to stop dodging the fiscal issues with one short-term postponement after another and lay down responsible, definite policies that will give investors confidence for the long term.
January's stock market has been sending good signals for 2012. The Dow Jones average has moved up in an orderly fashion, with none of the wild, three digit daily swings that were almost the norm in 2011. This is because emerging economic news has been encouraging. Forecasters now say that American growth will stay positive throughout the year. That means that we will not be in a recession.
Let us hope that the news stays good or even improves. However, it ignores a potential problem facing us in 2012 which could change everything — the unresolved financial problems in the rest of the world.
Start with Europe. Whatever the latest announcement from the European Central Bank and European leaders may say about the success of the latest negotiations, nothing is really settled. Standard and Poors has downgraded France as a credit risk, the Greek economy continues to contract and Italy, Portugal and Spain have not solved their problems. Angela Merkel, Germany's Chancellor, has said that 2012 will be more difficult for the euro zone than 2011 was. The numbers aren't public yet, but Europe is already in recession.
The question is whether it will be short and shallow, as most economists are predicting, or turn into something much worse and damage the U.S. The Economist magazine calls the present European statistics a "false dawn," and points to the challenges European countries face as they try to roll over the bonds that are coming due. It says, "The recession has been mild so far. But things are likely to get much worse … much will depend on whether financial markets remain calm. With so much ahead that could go wrong, the chances of that are slim."
China's rate of growth is also slowing, as is India's, with ripple effects in South America and elsewhere. Eastern Europe is caught in the negative tide, as is Brazil. Amazingly, all our troubles notwithstanding, by comparison, America is seen as the world's economic bright spot. Investors are still buying our bonds at interest rates so low that their return is negative when compared to inflation.
Even if the optimists are right about America's 2012, this is a bad time for us to have even a small version of last year's nonproductive Congressional battles over the debt limit, taxes and spending levels. What we need, and the world's economy needs, is some certainty about America's fiscal policy. The Congress has instead been giving us a six month extension here, a two month extension there and a solid diet of uncertainty for 2012 and beyond. This alone could turn the rosy forecasts into gloomy ones. Political uncertainty upsets markets as much or even more than economic uncertainty does.
Recoveries from economic downturns are described in alphabet terms: a U shape, where the economy slides down, stays awhile and then glides back up; a V shape, with a sharp decline and a quick rebound; or a W shape, the dreaded "double dip" of one sharp recession after another. What we have seen in Japan and may see in Europe is the L shape, where economic activity goes down and stays there.
Our current recession has been a combination of V and U — down fast, but up slow. With Europe teetering on a shaky ledge, the Congress needs to stop dodging the fiscal issues with one short-term postponement after another and lay down responsible, definite policies that will give investors confidence for the long term. They buy our bonds now because others are in worse shape than we are; they won't keep doing it forever.
Robert Bennett, former U.S. Senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.