The great economic debate of the past couple years has been the Federal Reserve's attempts to prop up the economy as Congress has gone AWOL. Now, after priming the pump as much as possible, the Fed is offering a cautious vote of confidence in a recovering economy, declaring that the era of quantitive easing will begin to come to an end. Tapering is in. Tampering is out.
The markets are not swooning. Stocks were up on Wednesday as the Dow jumped nearly three hundred points. Instead, they have probably already priced in the move. Bonds remain strong. The dollar is relatively robust, though it has been dropping against the British pound.
But larger and more fundamental questions continue to loom over the country: Is the American dream coming to a close? Who's getting the benefits of the recovery? Can the political system recover from the polarization it's been experiencing?
In the Wall Street Journal, William Galston, who has been writing a column for the paper in recent months, offers a highly insightful look at the problems America faces. Galson notes that America really faces a crisis of confidence. Americans are not confident about many things. A recent Bloomberg survey, he notes, indicated that "individuals do not have an equal chance of getting ahead." His own organization, No Labels, has conducted a poll that indicates that only 38 percent of Americans think the country's best days are ahead of it: "Only 26% believe that the next generation of Americans will be better off than this generation and fully 62% believe the coming generation will be worse off."
These are not sentiments or numbers that can be easily dismissed. President Obama's response has been to focus on inequality without offering a satisfactory plan for how to ameliorate it. Simply further taxing the wealthy is not going to restore prosperity. It will inhibit it. At the same time, the congressional sequester is crimping growth. The Congressional Budget Office estimates that growth would be 1.5 percent higher this year absent the tax hikes demanded by Obama and the budget cuts insisted upon by the GOP.
What's more, warnings of the Federal Reserve's monetary easing policy (which is intended to counter the fiscal drag created by budget cuts) leading to higher inflation have proven false, at least so far. As the Wall Street Journal reported Wednesday, the major worry for the world's central banks is the threat, not of inflation, but its opposite—deflation. Neither America nor Europe wants to end up in the position of Japan, which has battled for over a decade to stymie falling prices and a listless economy.
It is Japan, not Greece, that may be the model that everyone should really fear. Both America and Europe, confronted with aging populations and increasingly onerous entitlement programs (Germany's Angela Merkel has backtracked, or at least wavered, on economic reforms, including lowering the retirement age from 65 to 63 for employees who have paid into social security programs for 45 years), face political choices in coming decades that no politician is even eager to think about facing. For now, a form of intergenerational theft is taking place, in which the elderly displace the young economically. Small wonder that confidence about the economic prospects of future generations is low.
Galston notes that a sense of malaise also prevails when it comes to America's status abroad. Polls, he says, depict a "worried, risk-averse people." This should hardly come as a surprise after the misadventures in Afghanistan and Iraq, where Washington expended great efforts to upend those societies, only to see both remain mired in tribal warfare.
Still, there are several reasons to suspect that even if America's best days are behind it—which is always subject to debate—better ones do loom. Galston himself says that we need leaders who "are able not just to artuclate a vision of a better future, but also to offer a credible strategy for reaching it in this ear of polarized politics." But perhaps the inherent strengths of the American economy will also play as big, if not even a bigger, role than any individual. The prospect of energy independence is one sign of a reviving economy. Technological advances could also play a key role. The biggest boost, however, would be if both political parties began to think harder about stimulating economic growth. Perhaps the very pessimism about America's future will stimulate the country to embark upon a new era of prosperity. There's no reason, after all, not to start dreaming about it.
Image: Flickr/Ivan McClellan. CC BY 2.0.