I don’t like to overdo the stock-market-as-a-mirror-of-real-life idea, because the market can sometimes seem pretty disconnected from reality, especially over short periods. Remember the tech bubble, when the market told us profits did not matter?
But there are times when the market really seems to sum everything up and I think 2011 was one of those times. When Wall Street closes its books later today, the S&P 500 Index will finish 2011 not very far from where it started – despite all the violent short-term moves that accompanied the political and economic drama of the past 12 months. In short, it was a year in which we seemed to mostly spin our wheels, making a lot of noise but not really going anywhere.
Europe got most of the attention, as its sovereign debt crisis rippled from Greece to Portugal to Spain to Italy to France and finally to the continent’s entire banking sector and to its economic engine, Germany. An endless stream of ministerial and summit meetings has not yet produced any long-term solutions. German Chancellor Angela Merkel’s insistence that the banking sector bear a major share of Greek losses backfired, almost disastrously, because it hammered the market for Spanish and Italian bonds and drove up those governments’ borrowing costs. Yet the Europeans continue to muddle through, mostly because the European Central Bank has been willing to do whatever it takes to prop up the banks even while it refuses to throw a similar lifeline to drowning sovereigns.
We also had plenty of fireworks on our side of the pond. After two years in which Democrats drove the policy train like a scene from the Denzel Washington movie “Unstoppable,” a new Republican majority in the House derailed the Washington agenda. From either side of the policy divide, the results looked like a train wreck. We had impasses over the budget, the debt ceiling (repeatedly), President Obama’s dead-on-arrival American Jobs Act, and finally the extension of the allegedly temporary reduction in Social Security taxes, now revived for a two-month limited engagement that ensures the debate will carry over into the first months of 2012.
Amid all this, federal spending continues to outstrip revenues by more than $1 trillion a year, and the latest fad in Washington is to “pay for” one- or two-year spending initiatives with projected budget savings or revenues that would take 10 years to achieve. Try asking your landlord if it would be OK to take a 40 percent discount on your rent (roughly the percentage of federal spending that comes from borrowed money these days) in 2012 as long as you promise to pay back the difference between 2013 and 2022. This sort of gimmickry is what helped persuade Standard & Poor’s to pull its AAA rating from the U.S. Treasury this year. We may see other rating agencies follow in 2012.
But even a train wreck can have a salutary effect if it means stopping a train that is moving in the wrong direction. There is a certain amount of stability in stasis, and one thing the economy has sorely lacked over the past several years has been policy stability. Things are not getting better very quickly, especially for the huge number of unemployed Americans, but business conditions have largely stopped getting worse. There were encouraging signs in the holiday season data on unemployment claims and retail sales, and there is a lot of pent-up demand waiting to be satisfied once Americans are comfortable that we know where we are going.
The first part of 2012 promises more of the same. It is hard to see how politics can fail to dominate the news for the next couple of months. Republicans start their official nominating process next week with the Iowa caucuses. Soon we will have the State of the Union address, (which will, for all practical purposes, be a closely watched campaign speech), the president’s budget, various state-level fights over redistricting, and, of course, a renewal of that battle over the Social Security tax cut.
But as the year progresses, things will change, as they inevitably do. News will come along that alters perceptions and priorities. The Republican ticket will take shape, probably but not certainly with Mitt Romney at its head. By early summer, the Supreme Court is likely to inject new drama with a potential ruling on the validity of the president’s signature achievement, the 2010 health care overhaul. With this in mind, don’t expect the president to repeat the scene he made two years ago when he used his State of the Union platform to call out the attending justices over their Citizens United decision.
There is a very stark political split in this country. The 2012 elections, more than most, offer the prospect that we will finally resolve our disputes, though certainly not to the satisfaction of the losing side. Social issues have been pushed deep into the background. This election – at all levels – is a contest over the size and role of government, the use of the tax system to raise money and to redistribute it, the priority we will place on economic growth and the types of growth we are willing to permit, and the degree to which government should support organized labor’s effort to remain relevant in the 21st century.
So the political noise at the start of 2012 will sound much like the year that is ending, but I don’t expect the result to be the same. By year-end, with the election behind us, we may finally be able to get some traction and start going places. I hope so.
Have a very happy New Year.