It's a new year full of new challenges. Many of them will be unexpected. But already from the vantage point of Jan. 2 we can see that a handful of issues will be critical in the year to come. Here are my top five:
1. Can Janet Yellen stay strong in the face of falling unemployment? The unemployment rate has been falling steadily for a while now and there's every reason to expect that trend to continue. Once it drops into the 6–7 percent range, you can expect to hear the cries for the "normalization" of monetary policy to grow stronger. That's especially true because the fracking-driven drop in energy prices we saw in 2013 probably won't reproduce itself this year so the inflationary pressures really will be tougher. Central banking takes guts and courage at times, and in this case that's going to mean the courage to stay the course and keep the inflationiks at bay until broader measures of labor force health (participation, wages) show real signs of improvement.
2. Can America pivot from austerity? The past four years have seen repeated collisions between a Republican Party demanding cuts in domestic spending and an Obama administration demanding higher taxes. Under those circumstances, "compromise" has meant "avoiding a disastrous meltdown." In past episodes of divided government, Democrats and Republicans have come together around the opposite bargain—the GOP gets the tax cuts it craves, and in exchange Democrats get new or expanded programs. That's how Medicaid got repeatedly expanded in the 1980s, it's how we got CHIP in the 1990s, and it's a potentially fruitful path in today's low interest rate environment. But to get there everyone's going to have to stop the obsession with "fixing the debt" and get down to addressing real issues.
3. Can financial reform stick? Implementation of the Dodd-Frank financial regulation bill got surprisingly tough in 2013 as a variety of political circumstances combined to get the Obama administration to drop its good-cop approach. But it's easier to pencil a tough rule in than to actually stand by it when, as is necessarily the case, some concrete interests start getting harmed. In particular, actual bank desire to get on crazy risks has been pretty subdued over the past couple of years thanks to the bad economy. As things recover, the business case for aggressive moves gets stronger and the regulatory game of cat and mouse gets more intense. Will agencies really have the political backing from the top to crack the whip? Will they have the budgetary resources to stay on top of the situation?
4. Will Sprint and T-Mobile merge? America's Japanese-owned No. 3 mobile carrier wants to buy its German-owned No. 4 carrier and bring about a substantial consolidation in the mobile telephone marketplace. Among people I've spoken to with Justice Department and FCC experience, there's substantial disagreement as to whether regulators will or should let this go forward. If they do let it happen, it'll probably be with some kind of strings attached. These kind of policy decisions don't garner much coverage in the political press, but given the central role that mobile computing has played in driving innovation across a whole variety of economic sectors, it's actually extremely important. A very large share of forward-thinking enterprises in America today are, in a sense, built atop the underlying infrastructure of Verizon, AT&T, Sprint, and T-Mobile.
5. Will something get done on immigration? It seems easy to forget these days, but just a few short months ago a bipartisan coalition in the United States Senate passed a comprehensive immigration reform bill that, if enacted into law, would be a boon to America's medium-term growth prospects. If you extrapolate the share of the Senate GOP caucus who voted for the bill to the composition of the House of Representatives, it seems that it could pass the House. But John Boehner hasn't allowed the bill to come to the floor of the House. That, itself, is further evidence that if the bill could get a vote, it would pass. And Boehner hasn't brought any alternative broad immigration measure to the House floor either, fearing that this would simply lead to a conference committee and pressure for a floor vote. Will he change his tune in 2014? Will the Obama administration find ways to use its executive authority and halt deportations to raise the temperature on the issue?