So all is coming right. Sales of existing homes in the final quarter of last year were 27.2 percent above the 2008 level. Home construction jumped 2.8 percent in January, to its highest level in six months. The mining, manufacturing and utilities sector also grew at satisfactory rates as did retail sales, and several companies reported profit growth in excess of what markets were expecting.

Alas, every silver lining has a cloud. In the case of the U.S. economy, several. For one thing, the fiscal deficit, which is fuelling some of the growth, is clearly unsustainable. Even under the rosy scenario posited by the president -- economic growth at about twice the rate the non-partisan Congressional Budget Office is predicting -- the deficit will still be unsustainably high, and rising, in 2020.

Congress knows this, the president knows this, and the opposition knows this. But the Democrats want to fill the gap by raising taxes, anathema to Republicans, who fear such a move would stifle growth by reducing entrepreneurs’ incentive to create new businesses and jobs. The Republicans want to cut spending, a move the Democrats say would stifle growth by prematurely withdrawing a needed prop from a fragile recovery. Whether the 18-member National Commission on Fiscal Responsibility and Reform established by the president on Thursday can cut this Gordian knot remains to be seen. Insiders are betting it comes up with a proposal for some sort of consumption tax modelled after other countries’ value-added-tax, but are doubtful that it will find ways to cut spending.

Red ink is not all that stands in the way of sustained recovery. Obama is counting on exports to create two million jobs, but has so far made no progress in persuading the Chinese to abandon their policy of keeping their currency undervalued. I say “so far” because there are rumours on Wall Street that the Chinese are about to change course. The authorities, concerned about overheating, have instructed the banks to curtail lending, and might see an upward valuation of the yuan as another economic coolant. My guess is that the regime’s need to create millions of new jobs every year to avoid social unrest will mean taking the growth rate down from around 10 percent to only a few points lower. So, Obama’s hope for an export-led, sustained recovery might flounder on the rock of continued growth in Chinese exports -- not to mention the increase in exports from the EU, with its shrinking euro.

The third factor that stands between the recent recovery and sustained economic growth is the Federal Reserve Board. Not that the Fed is opposed to growth, especially of the non-inflationary sort. It is that some of Fed chairman Ben Bernanke’s board members want him to start unloading the assets that are swelling the Fed’s balance sheet, which is a way of calling in some of the dollars he has injected into the economy. Meanwhile, he is also under pressure not to abort the recovery, lest he strengthen the position of the politicians who are howling for greater control over Fed policy. If he gets it wrong, and acts too soon, the recovery could grind to a halt. But if he continues to inject cash into the system, or even refuses to begin withdrawing it, the inflationary fears created by the red ink flowing out of the White House and the congress could result in a rise in interest rates and an aborted recovery.

Note that much of this discussion is a musing about policy. That’s good news. It isn’t as if we are struggling with a disease epidemic, or some other force beyond the control of man. We are struggling to come up with policies that work, something we have always, sometimes after false starts, been able to do in the past. And there is reason to believe that the prospects for such policy adjustment are better than they were a few months ago.

For one thing, the fiscal crisis is far worse. And everyone knows it. If the budget continues on the trajectory the president has set, investors will drive up interest rates; America’s triple-A bond rating, already under threat, will surely be lost; the role of the dollar as the world’s reserve currency will also be threatened; and future generations will spend a good deal of time cursing their parents and the previous political class.

For another, there is Greece. Now, no one puts the U.S. in a class with Greece, although both countries are running unsustainable budget deficits, both have swollen public sectors, and both have balance sheets that ignore billions in future pension and other liabilities. Greece matters because it has put sovereign balance sheets in play -- no longer are investors comforted by the fact that countries rarely default. So even the U.S. and UK are under rating agencies’ and investors’ microscopes, and can no longer assume that there will be no cost to continued borrowing.

Perhaps even more important, there has been a change in the political atmosphere in the United States. Until recently -- before the Democrats lost gubernatorial elections in New Jersey and Virginia, and a key Senate seat in Massachusetts -- the left-leaning Democrats in congress and the White House had no need to compromise with Republicans who were trying to rein in spending. Now they do: Voters have sent a wake-up call which is being heard in Congress and even by some in the White House. They want the deficit brought under control. And the political arithmetic is such that in the absence of compromise both parties will face angry voters in November, more so the Democrats than the Republicans. The end of a year of one-party rule just might produce a more sensible set of economic policies as newly empowered Republicans, backed by the Tea Party movement, reactivate the checks and balances that have stood the American system in such good stead in the past.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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