In December 2021, most Americans were looking forward to a quiet and prosperous 2022. Covid-19 cases were down, the stock market was up and jobs were abundant. What could go wrong?
Many things did. Geopolitical trauma came first. After a chaotic US military withdrawal from Afghanistan in August 2021, it seemed that US involvement in foreign wars was drawing to an end. Yet on February 24, 2022, Russian President Vladimir Putin invaded Ukraine. The ground battle then morphed into a proxy war between the North Atlantic Treaty Organization and Russia.
US President Joe Biden was quick to declare that US boots would not join Ukrainian soldiers, but he was equally quick to dispatch US armor and Central Intelligence Agency advisers. By the close of 2022, NATO weapons manned by Ukrainians had successfully pushed Russian forces out of the Ukrainian cities of Kharkiv and Kherson, and back toward Ukraine’s eastern border.
But battlefield success was coupled with global economic distress, as energy and food prices soared. The proximate causes were Western sanctions on Russian oil and Russian sanctions on gas exports to Europe. In the United States, elevated oil and gas prices reinforced inflationary forces unleashed by monetary expansion and fiscal stimulus.
Two new flashpoints also emerged in the US cold war against China in 2022. The first was the battle for technology supremacy. The US public, inflamed by leaders in both political parties and by Chinese President Xi Jinping’s assertive actions, became convinced that China was not merely a competitor, but an adversary out to destroy US jobs and push US military forces out of Asia.
Congress’ and the Biden administration’s response was to ensure the United States retained primacy in all forms of advanced technology. One piece of legislation, the CHIPS and Sciences Act, lavished US$76 billion on the semiconductor industry and $170 billion on advanced technologies, ranging from artificial intelligence to quantum computers to materials.
The Department of Commerce also implemented a suite of controls on US technology exports to China and on China’s acquisition of technology companies.
Despite congenial atmospherics surrounding the meeting between Presidents Xi and Biden at November’s Group of Twenty Leaders’ Summit in Bali, all signs indicate further technological decoupling in 2023. Some members of Congress condemn any sourcing of intermediate products from China, while the distinction between civilian and military goods has become blurred.
Inflation that was initially considered transitory seemingly became entrenched. During 2021, the US Federal Reserve ballooned its balance sheet (and the money supply). It went from $4 trillion in December 2019 to nearly $9 trillion in December 2021. This was coupled with fiscal stimulus that distributed more than $2 trillion of outlays in late 2020 and early 2021.
This joint monetary and fiscal expansion coincided with an economy that offered almost two job vacancies for every unemployed worker.
The policy extravaganza came home to roost this year as inflation soared to nearly 8%. The Federal Reserve launched an aggressive monetary tightening campaign that raised the policy rate from near zero in January to a target of 4.25-4.5% in December.
This dampened the stock market and ended escalating house prices. But it did not immediately reduce inflation, as measured by either the Consumer Price Index or the Personal Consumption Expenditures index.
Yet Federal Reserve and White House officials staked their hopes on a “soft landing” – meaning a path to 2% inflation with no recession and only modest unemployment. At the end of 2022, most economists forecast inflation to persist above 2%, a recession to begin in 2023 and unemployment to exceed 5%.
Past midterm congressional election outcomes, coupled with concern about inflation, led pundits to expect Republicans to sweep the US House of Representatives and possibly recapture the US Senate in November. Fortunately for Democrats, Donald Trump loomed large.
Although Trump was not on the ballot, he promoted unpalatable Republican candidates. This, together with the US Supreme Court’s unpopular reversal of Roe vs Wade – a landmark court ruling that guaranteed a person’s constitutional right to abortion – meant that Republicans barely achieved a narrow victory in the House, while Democrats retained control of the Senate.
The United States has accelerated its fight against climate change. Biden’s signature legislative achievement was passage of the misnamed $400 billion-plus Inflation Reduction Act (IRA), a truncated descendant of his administration’s $2.4 trillion Build Back Better proposal.
The IRA was largely a green energy law, providing more than $300 billion for wind, solar and other alternatives to fossil fuels. When implemented, the green projects will continue to lower US carbon emissions.
Although the IRA is ambitious, it will not significantly reduce global carbon emissions. The world continues to exceed its Paris Agreement targets for limiting the rise in average global temperatures to 1.5 degrees Celsius above pre-industrial levels. The United States remains allergic to meaningful carbon taxes. And exploring geo-engineering solutions remains taboo.
At the COP27 gathering in Sharm El Sheikh in November, the United States acceded to undetermined “loss and damage” payments to poor countries impacted by climate disasters. As the calendar turns to 2023, the challenge of climate change looms as large as ever – for the United States, China and everyone else.
Gary Clyde Hufbauer is a non-resident senior fellow at the Peterson Institute for International Economics in Washington, DC.
This article, republished with permission, was first published by East Asia Forum, which is based out of the Crawford School of Public Policy within the College of Asia and the Pacific at the Australian National University.