“The hard truth is that getting this deficit under control is going to require broad sacrifice.”
President Barack Obama
The United States and much of the developed world escaped the worst of the possible outcomes associated with the 2008 financial crisis. But the United States and other industrial nations still faced high unemployment, unsatisfactory economic growth and a vulnerable economic future. Financial emergencies in several European nations in 2010 demonstrated that parts of the world’s banking system were still on thin ice.
Several conclusions seemed inescapable. Economic globalization, which has linked banking and trade on every continent, enabled the financial market contagion to spread worldwide. Leaders of the United States and other major economies agreed that a new system of financial market supervision and regulation would have to be created to restore investors’ battered confidence in markets and revive investment.
The United States enacted financial reforms in 2010 in order to raise banks’ capital requirements, strengthen consumer protections and empower regulators to take action against major banks that faced risks of insolvency (see the sidebar on financial reform). The legislation left key details up to regulators, however, and their actions would determine the effectiveness of the reforms. Despite the recognition that leading economies should harmonize their bank regulations, there were large gaps in reform achievements internationally at the end of 2010.
One consequence of the emergency measures taken to stimulate the economy and shore up threatened financial institutions is a drastic increase in the federal budget deficit.
A bipartisan National Commission on Fiscal Responsibility and Reform appointed by Obama concluded in 2010 that the nation was on “an unsustainable fiscal path,” forced increasingly to borrow huge amounts to cover shortfalls in revenues. “Since the last time our budget was balanced in 2001, the federal debt has increased dramatically, rising from 33 percent of GDP to 62 percent of GDP in 2010,” the commission reported.
As the 2000s decade proceeded, foreign investors financed an increasing share of U.S. government debt. In mid-2000, this debt totaled $1 trillion. Eight years later, the total was $2.7 trillion, with foreign government-owned banks or “sovereign” investment funds holding the fastest-growing share. Foreign entities used the U.S. dollars flowing overseas for manufactured goods and oil to purchase U.S. Treasury securities and other U.S. government debt. America, in essence, was borrowing from the future to finance current consumption.
“The next crisis will be related to our own federal government’s daunting fiscal challenges,” according to economist Mark Zandi.
The Congressional Budget Office predicted that the fiscal deficit in the year ending September 30, 2011, would surge to $1.5 trillion, about 9.8 percent of gross domestic product, attributable mostly to an extension of 2001 tax cuts that had been scheduled to expire in 2010.
President Obama has stated that “The hard truth is that getting this deficit under control is going to require broad sacrifice.”
After 2010 elections, Republicans resumed control of the House of Representatives, making likely clashes with Obama over how much and where to reduce government spending.
A growing disparity in the distribution of the economy’s rewards raised even higher the political hurdles to achieving both domestic economic reform and international economic cooperation. Scholars have identified a number of possible factors that, taken together, have increasingly concentrated income and wealth gains among a small minority of the U.S. population.
Among them: the decline in higher-paid manufacturing jobs and a shift toward lower-paid service employment, the growing employment disadvantages of less-educated workers in a highly technical economy, and the burden of rising medical care costs for America’s lower- and middle-income families. Because of these and other factors, the average wage of U.S. nonfarm workers has not increased appreciably since 1980, after taking inflation into account.
Immediately following his election to the presidency, Obama began to shape a large-scale federal response to the emergency. The massive economic stimulus plan passed by the U.S. Congress early in his administration distributed federal funding, loans, and tax cuts throughout the faltering economy. It also sought to use federal dollars to fuel a rapid expansion of new, advanced-technology energy and environmental initiatives. These developments, it was hoped, would create new markets at home and overseas for American companies and millions of jobs for workers across a wide range of skill levels.
The Obama administration invested an unprecedented $32 billion in stimulus funds, and billions more in tax credits and loan guarantees, in a wide range of clean-energy research and development initiatives in 2009 and 2010. The ventures spanned many fronts: advanced nuclear reactors, wind and solar generation, advanced storage batteries, “smart” electricity meters and electricity grid-monitoring equipment, biomass, and greenhouse gas sequestration from coal plants. Many projects combined research from U.S. universities and national laboratories and financial backing from private venture investors, accompanying government grants in a characteristic synergy of U.S. innovation.
Some Americans posed philosophical and political challenges to this vision, and longstanding quarrels over the desirability of government intervention in the economy continued.
More optimistic observers noted that America still could bring important resources to bear on the challenge of devising new energy strategies, among them its entrepreneurial culture, the depth and breadth of its educational system and the freedom it afforded capital to seek the highest returns.
Applying these real strengths to the nation’s equally real challenges will be a great test for the current generation of Americans.
But it also is true that Americans have faced and surmounted such challenges in the past, as President Obama reminded the nation in his 2011 State of the Union speech.
“We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world,” Obama said. “We have to make America the best place on Earth to do business. We need to take responsibility for our deficit and reform our government. That’s how our people will prosper. That’s how we’ll win the future.”
In other times of crisis, the country found a way forward despite the fractious aspects of democracy. With much at stake, the new century provides Americans the opportunity to write a new chapter of the nation’s economic story.