Think Again

Think Again: Obama's New Deal

The president's Republican critics are dead wrong. The stimulus worked.

"Obama's Stimulus Package Was an Epic Failure
That Haunted His Presidency."

No. U.S. President Barack Obama's $787 billion stimulus bill was certainly a political failure. Obama signed it during his first month in office, cutting taxes for more than 95 percent of American workers, while pouring cash into health care, education, energy, infrastructure, and aid to victims of the Great Recession. It was textbook Keynesian economics, using public dollars to revive private demand, but within a year, the percentage of those who thought it had created jobs was lower than the percentage of Americans who believe Elvis is alive. Republicans mocked it as "Porkulus," a bloated encapsulation of everything wrong with the Obama regime, and it helped launch their Tea Party-fueled political revival. The media breathlessly chronicled its silly expenditures, like costumes for water-safety mascots; silly-sounding legitimate expenditures, like a brain-chemistry study of cocaine-addicted monkeys; and fictitious expenditures, like levitating trains to Disneyland. Democrats got so weary of the nonstop ridicule that they stopped using the word "stimulus."

Nearly four years later, Obama's economic recovery bill -- and the tepid economic recovery that followed it -- is at the heart of the debate over his campaign for a second term. To his Republican challenger, Mitt Romney, the stimulus was a big-government boondoggle that blew up the national debt without putting Americans back to work, a profligate exercise in tax-and-spend liberalism, crony capitalism, and airy-fairy green utopianism. Obama doesn't use the s-word today, but he does argue that the bill, formally the American Recovery and Reinvestment Act, saved the country from a second Great Depression, ending an economic nightmare in the short term (the Recovery part) while laying the groundwork for a more competitive and sustainable economy in the long term (the Reinvestment part). Meanwhile, disgruntled liberals complain that the stimulus was far too small, because Obama was far too timid, and that jobless Americans are still paying the price for the president's spinelessness.

When it comes to the Recovery Act, the facts are on Obama's side.

For starters, there is voluminous evidence that the stimulus did provide real stimulus, helping to stop a terrifying free-fall, avert a second Depression, and end a brutal recession. America's top economic forecasters -- Macroeconomic Advisers, Moody's Economy.com, IHS Global Insight, JPMorgan Chase, Goldman Sachs, and the Congressional Budget Office -- agree that it increased GDP at least 2 percentage points, the difference between contraction and growth, and saved or created about 2.5 million jobs. The concept of "saved or created" has inspired a lot of sarcasm -- Obama joked after his 2009 Thanksgiving pardon that he had just saved or created four turkeys -- but it simply means 2.5 million more people would have been jobless without the Recovery Act. The unemployment rate might still be in the double digits.

Of course, as Obama's critics on the left and right correctly point out, the 8 percent U.S. jobless rate is still terribly high. And there's no way to run a double-blind study of an alternative U.S. economy without the stimulus, so there's no smoking gun to prove the stimulus launched a recovery. But the ballistics certainly match. The economy shrank at a Depression-level rate in the fourth quarter of 2008, and job losses peaked in January 2009. After the stimulus bill passed in February, however, output had its second-biggest quarterly improvement in 25 years, and employment had its biggest quarterly improvement in 30 years. The recession officially ended that June. A Washington Post review of Recovery Act studies found six that showed a positive economic effect versus one useful study (by prominent Republican economist John B. Taylor) that concluded the stimulus failed -- and critics noted that Taylor's data just as easily support the conclusion that the stimulus was too small.

Keynesian stimulus has since become a political football, but before Obama took office, just about everyone agreed that when the economy slumps, government can boost growth and create jobs by injecting money into the economy, whether by taxing less or spending more. In early 2008, every Republican and Democratic presidential candidate proposed a stimulus plan -- in fact, Romney's was the largest. And Republicans still use Keynesian pump-priming arguments to push tax cuts, military spending, and other stimulus they happen to support. Of course, the most powerful argument for aggressive stimulus has been the experience of European countries like Britain and Spain that have turned back toward austerity and stumbled back into recession.

Republicans have ripped the Recovery Act's food stamps, unemployment benefits, and other aid to the less fortunate for fostering a culture of dependency, but with a few exceptions (more generous tuition grants for low-income students and tax credits for low-income workers), the handouts were temporary. And there's no doubt that they made an extraordinarily painful time less painful, lifting at least 7 million Americans above the poverty line while making 32 million poor Americans less poor. As a result, the poverty rate increased only slightly during the worst downturn since the 1930s. Homelessness actually declined slightly, largely because an innovative Recovery Act experiment in "homelessness prevention" helped house 1.2 million Americans in crisis. If half of them had ended up on the streets instead, the country's homeless population would have doubled.

Politically, it's awkward for the president to argue that without the stimulus, the bad economy would have been much worse. It sounds lame to point out that recessions caused by financial meltdowns tend to be unusually long and nasty. But it's true.

Jeff Fusco/Getty Images

"But Obama Promised to Keep Unemployment
Below 8%!"

Not really. In early January 2009, the incoming president's transition team did release a politically disastrous report warning that the jobless rate could hit 9 percent without the Recovery Act, while predicting it would stay below 8 percent with the Recovery Act, a gaffe that launched a thousand talking points after unemployment reached 10 percent despite the Recovery Act. The report was cluttered with caveats about "significant margins of error" and such. But nobody remembers caveats. The authors, economists Christina Romer and Jared Bernstein, even included a humdinger of a footnote about the pre-stimulus baseline: "Some private forecasters anticipate unemployment rates as high as 11% in the absence of action." But nobody remembers footnotes. We remember that unemployment still hasn't gotten below 8 percent, because Republicans have never stopped reminding us. And the media have repeatedly cited the report to dismiss the Recovery Act as a failure by the administration's own standards.

Clearly, the 8 percent prediction was a mistake -- an understandable mistake, a marketing mistake, a mistake well below Obama's pay grade, but a mistake. The Romer-Bernstein report was not nearly pessimistic enough. Unemployment passed 8 percent before the stimulus money even started to flow. But that's no reflection on the stimulus. Romer and Bernstein correctly predicted that the Recovery Act would reduce unemployment by a couple of percentage points -- what they underestimated was the pre-stimulus baseline. They knew things were awful, but they had no idea just how awful. Hardly anyone did back then. The Bureau of Economic Analysis initially pegged growth for the fourth quarter of 2008 at a horrific -4 percent, but that was later revised to a beyond horrific -9 percent; at that rate, the United States would have lost more than an entire Canada's worth of output in 2009.

Even at the time, Obama and his advisors understood that the Recovery Act would not restore full employment by itself; as Vice President Joe Biden told me in his quirky way, it was never supposed to carry the whole sleigh. The White House expected the Wall Street bailout, the auto-industry bailout, and its fledgling plan to aid struggling homeowners to provide additional support for the economy. Obama's top economic aide, Larry Summers, has been savaged for keeping Romer's warnings that $1.8 trillion would be needed to close the output gap out of a key memo to the president, but even Romer agrees that's a bum rap. The memo did warn that an $850 billion stimulus would close "just under half of the output gap," insufficient to return the unemployment rate to its "normal, pre-recession level." As one aide told me, whatever you think of Obama, he knows how to multiply by two.

SAUL LOEB/AFP/Getty Images


"The Stimulus Should Have Been Bigger,
But Obama Wimped Out."

Yes and no. While Republicans have been trashing the stimulus as big government run amok, more liberal critics led by New York Times columnist (and Nobel-winning economist) Paul Krugman have dissed it as ludicrously small. And it's true: More stimulus would have closed more of the output gap and replaced more of the 8 million jobs lost in the Great Recession. More tax cuts would have injected more money into the economic bloodstream. More public works would have created more jobs for laid-off construction workers. More aid to states would have prevented America's governors from offsetting the Recovery Act's impact by raising taxes, laying off teachers and other public employees, and slashing Medicaid and other services. Overall, their spending cuts and tax hikes pulled almost as much money out of the economy as the stimulus pushed in, and public-sector employment has shrunk during the Obama presidency.

Even so, the common belief among liberals that pumping inadequate stimulus into the economy was Obama's original sin is ahistoric and unfair. The Recovery Act was still massive -- the latest estimate is $831 billion, larger than the entire New Deal in constant dollars -- and it wasn't Obama's fault it wasn't bigger.

In September 2008, a mere $56 billion stimulus package died in the Senate, with two Democrats voting no. And after the wildly unpopular bank bailout, there was even less congressional appetite for big spending. By late November, as the market's death spiral created a grudging consensus that Congress needed to act, 387 predominantly left-leaning economists -- many of whom later trashed Obama for skimping on stimulus -- signed a letter calling for a package of just $300 billion to $400 billion. Even by January 2009, House Speaker Nancy Pelosi, the heroine of the left, was reluctant to approve anything above $600 billion. The president was way out in front of his Democratic blockers.

Presidents do not have magic wands, and Republicans had decided to oppose the Recovery Act en masse. So unless Obama wanted to start his presidency with an epic failure during an economic emergency, he needed to round up 60 votes in the Senate. Democrat Al Franken was still embroiled in a recount in Minnesota, so Obama needed at least two Republicans to support the stimulus. The three moderate GOP senators -- Olympia Snowe and Susan Collins of Maine, and Arlen Specter of Pennsylvania -- along with conservative Democrat Ben Nelson of Nebraska all agreed that none of them would vote yes unless all of them were satisfied. And all insisted that the stimulus had to be less than $800 billion. Congressional sources confirm that at least half a dozen additional centrist Democratic senators also drew an unpublicized line in the sand at $800 billion. Everyone who was in the room during the congressional horse-trading agrees that Obama got as much as he could have. "There simply wasn't any room for anything bigger," then-Senator Byron Dorgan, a Democrat from North Dakota, told me. "That's representative government."

Some of Obama's progressive critics acknowledge that he couldn't have gotten more stimulus in February 2009, but they complain that he should have gotten more out of Congress once it became clear the initial jolt wouldn't restore a vibrant economy. It's true that some of Obama's advisors vastly overestimated the ease with which they could go back to Capitol Hill. Even Summers, who doesn't make admissions like this often, acknowledged to me that he had been wrong and his rival Krugman, who had warned that inadequate stimulus would give stimulus a bad name, had been right. "At the time, I didn't agree," Summers said. "That was a mistake."

Obama did end up squeezing another $700 billion of stimulus out of an extremely reluctant Congress, through a dozen separate bills. It wasn't easy. Snowe and Collins were the only Republican senators to support an extension of unemployment benefits. Republicans also filibustered a bill to save teaching jobs; Snowe and Collins finally agreed to a shrunken version. (Specter did too, but he had already switched to the Democratic Party after GOP backlash over his stimulus vote.) It took more than two months for Obama to finagle two Republican votes for a $42 billion bill to cut taxes for small businesses. "What could be more Republican than that?" asks former Sen. George Voinovich, an Ohio Republican who defied his party leaders to back the bill. "Instead of doing what was right, partisan politics always came first."

Chip Somodevilla/Getty Images

"Unlike the New Deal, Obama's Stimulus Won't
Leave a Lasting Legacy."

Wrong. This is the biggest misconception about the American Recovery and Reinvestment Act, and it's understandable, because it was marketed as a jobs bill. But it was about reinvestment as well as recovery, long-term transformation as well as short-term stimulus.

For starters, the Recovery Act was the biggest, most transformative energy bill in history, financing unprecedented government investments in a smarter grid, cleaner coal, energy efficiency in every imaginable form, "green-collar" job training, electric vehicles and the infrastructure to support them, advanced biofuels and the refineries to brew them, renewable power from the sun, the wind, and the heat below the earth, and factories to manufacture all that green stuff in the United States. In 1999, President Bill Clinton proposed a five-year $6.3 billion clean-energy bill that was dismissed as unrealistic and quickly shelved. A decade later, during his first month in office, Obama poured $90 billion into clean energy with a stroke of his pen, leveraging an additional $100 billion in private capital. The entire renewable-energy industry was on the brink of death after the 2008 financial crisis, but thanks to the stimulus, Obama has kept his promise to double the generation of renewable power during his first term.

The stimulus was also the biggest and most transformative education reform bill since the Great Society, shaking up public schools with a "Race to the Top" competition designed to reward innovation and punish mediocrity. It was a big and transformative health-care bill, too, laying the foundation for Obama's even bigger and more transformative reforms a year later; for example, it poured $27 billion into computerizing America's pen-and-paper medical system, which should reduce redundant tests, dangerous drug interactions, and fatal errors by doctors with chicken-scratch handwriting. It included America's biggest foray into industrial policy since FDR, the biggest expansion of anti-poverty initiatives since LBJ, the biggest middle-class tax cut since Ronald Reagan, and the biggest infusion of research money ever. It sent $8 billion into a new high-speed passenger rail network, the biggest new transportation initiative since the interstate highways, and another $7 billion to expand the country's existing high-speed Internet network to underserved communities, a modern twist on the New Deal's rural electrification.

Critics often argue that while the New Deal left behind iconic monuments -- the Hoover Dam, Skyline Drive, Fort Knox -- the stimulus will leave a mundane legacy of sewage plants, repaved potholes, and state employees who would have been laid off without it. But it's creating its own icons: the world's largest wind and solar plants, the country's first cellulosic ethanol refineries, zero-energy border stations, a bullet train that will connect Los Angeles to San Francisco in less than three hours. It's also restoring old icons: the Brooklyn Bridge and the Bay Bridge, the imperiled Everglades and the dammed-up Elwha River, Seattle's Pike Place Market and the Staten Island ferry terminal. It's creating an advanced-battery industry for electric vehicles almost entirely from scratch, financing factories that are supposed to boost the U.S. share of global capacity from 1 percent when Obama took office to about 40 percent in 2015. Its only new government agency, ARPA-E, an incubator for cutting-edge energy research modeled on the Pentagon's DARPA, is already producing breakthroughs that will help accelerate the transition to a low-carbon economy.

Its main legacy, like the New Deal's, will be change.

MarkWilson/AFP/Getty Images

  "The Stimulus Was Riddled with Fraud, Pork, and Solyndra-Style Boondoggles."

No. Experts had warned that 5 percent of the stimulus could be lost to fraud, but investigators have documented less than $10 million in losses -- about 0.001 percent. "It's been a giant surprise," Earl Devaney, the legendary federal watchdog who oversaw the stimulus as head of the Recovery Accountability and Transparency Board, told me. "We don't get involved in politics, but whether you're a Democrat, Republican, communist, whatever, you've got to appreciate that the serious fraud just hasn't happened."

The Porkulus attacks are particularly brazen, because the usual definition of "pork" is an earmark for a specific project inserted by a specific legislator, and the Recovery Act was the first spending bill in decades with no earmarks. There were a few quasi-earmarks, most notably the $1 billion FutureGen clean-coal project inserted by Senate Majority Whip Dick Durbin of Illinois, but they paled in comparison to the 6,376 earmarks stuffed into President George W. Bush's last transportation bill. Most of the supposedly wasteful spending singled out by Republicans was never in the stimulus (like "mob museums"), was removed from the stimulus (like "smoking cessation funds"), or wildly distorted something in the stimulus (like an alleged $248 million outlay for "government furniture," which was actually a project to build a new Department of Homeland Security headquarters that would have furniture in it).

Still … Solyndra! The California solar firm that went belly up after receiving a half-billion-dollar stimulus loan has become the Republican Party's one-word response to any stimulus-related achievement. It's supposedly a case study in ineptitude, cronyism, and the failure of green industrial policy. Republicans investigated for a year, held more than a dozen hearings, and subpoenaed hundreds of thousands of documents, but they uncovered no evidence of wrongdoing. "Is there a criminal activity? Perhaps not," the lead Republican investigator, Rep. Darrell Issa, told Politico. "Is there a political influence and connections? Perhaps not."

Solyndra was a start-up that failed. It happens. In early 2009, Solyndra and its revolutionary cylindrical solar panels were the toast of Silicon Valley, raising $1 billion from elite investors like the Walton family of Wal-Mart fame, Oklahoma oil magnate George Kaiser, and British mogul Richard Branson. Kaiser was an Obama fundraiser, but the Waltons were Republican donors; as Issa acknowledged, there was no evidence of any improper political influence. In fact, the Bush administration fully embraced Solyndra and tried to fast-track its loan. The loan program originally had bipartisan support; the goal was to help firms like Solyndra cross the so-called Valley of Death for innovative technologies with major start-up and scale-up costs. Some loans would go bust, but that's why Congress provided loan reserves, enough to cover plenty of Solyndra-sized failures. Several independent reviews have found no danger that taxpayers will be on the hook for more losses.

Solyndra's failure is often described as a failure of the solar industry, but in fact it's just the opposite. Solyndra produced efficient but pricey panels; the company was essentially a bet that solar power would remain expensive. Instead, the price of solar has crashed by more than two-thirds since 2009, partly because of the stimulus but also because the Chinese government dumped $30 billion into its own solar manufacturers. In any case, the collapsing prices that doomed Solyndra reflect an industry on a roll; U.S. solar installations soared from 290 megawatts in 2008 to 1,855 megawatts in 2011, and 7,000 megawatts of new projects were proposed in the two months before Solyndra went bust -- the equivalent of seven new nuclear reactors.

The latest bogus Republican attacks -- obviously in response to accusations that Romney outsourced jobs at Bain & Co. -- have accused Obama of outsourcing jobs in clean-energy industries through the stimulus. In fact, the stimulus insourced jobs. For example, it brought the U.S. wind industry back from the dead, creating manufacturing as well as installation jobs. In 2006, the United States imported 80 percent of the components in its wind turbines; after the stimulus, that fell to 40 percent. Yes, many of those new factories are foreign-owned, but they put Americans to work; it really doesn't matter whose name is on the corporate polo shirts. The Spanish company Iberdrola delayed wind farms in Illinois and Texas after the global economy collapsed in 2008; the day after the stimulus passed, the company announced it would pour $6 billion back into U.S. wind projects.

BRENDAN SMIALOWSKI/AFP/Getty Images

"The Stimulus Shows What Obama Is All About."

Yes. This kind of statement is usually intended as an insult; critics on the right and the left describe the Recovery Act as the essence of Obama-ism. It is, but not in the way they mean.

To Republicans, the "failed" stimulus is a classic Obama exercise in big-government liberalism, fiscal irresponsibility, and incompetence. But those are all bum raps. The Recovery Act included $300 billion in tax cuts, just as Republicans had requested; ARPA-E was its only new government agency, and most of its spending went to priorities (from highways to electric vehicles to unemployment insurance) that had always been bipartisan until they were associated with Obama. The stimulus did increase the deficit -- that's the whole point of Keynesian stimulus -- but its impact on the long-term debt was negligible compared with the Bush tax cuts, the wars in Iraq and Afghanistan, and collapsing revenues during the Great Recession. And the Recovery Act really was an exercise in good government. Not only was it scandal-free and earmark-free, on time and under budget, but it also engineered a quiet bureaucratic revolution, harnessing the power of competition to award tax dollars to the worthiest applicants instead of just spreading cash around the country. The stimulus created dozens of competitive, results-oriented races to the top for everything from lead-paint removal to the smart grid to innovative transportation projects.

Yet somehow, to many liberals, the stimulus exposed the president as a spineless sellout, more interested in cutting deals than chasing dreams, happy to throw his base under the bus, and desperate to compromise with uncompromising Republicans. But progressive purity wouldn't have gotten 60 votes in the Senate. And Obama isn't a progressive purist. In reality, the Recovery Act provided early evidence that Obama is pretty much what he said he was: a left-of-center technocrat who is above all a pragmatist, comfortable with compromise, solicitous of experts, disinclined to sacrifice the good in pursuit of the ideal but determined to achieve big things. It reflected his belief in government as a driver of change, but also his desire for better rather than bigger government. And it was the first evidence that despite all his flowery talk during the campaign, he understood that bills that don't pass Congress don't produce change.

Ultimately, the stimulus was the purest distillation of what Obama meant by Change We Can Believe In. It was about saving the economy from a calamity, but also changing the economy to prepare America to compete in the 21st century. On the trail, Obama often talked about cleaner energy, better schools, health reform, and fairer taxation not only as moral imperatives, but as economic prerequisites for American renewal and leadership. He warned that the United States couldn't afford to let the green industries of the future drift abroad; or fail to prepare children for the information age; or lose control of skyrocketing health-care costs that were bankrupting families, companies, and the country. And the Recovery Act took steps -- in some cases, giant steps -- in all those directions. Nearly four years later, the stimulus has become a punch line, a talking point in a political battle over big government, but it's moving America toward that hopey-changey policy vision he laid out during his last campaign.

In the end, the stimulus didn't live up to the hype, but it made things better. That's the whole point of change.

Jewel Samad/AFP/Getty Images

Think Again

Think Again: The Eurocrisis

Markets are crashing. The euro is hurting. Here's why the continent's financial crisis is even messier than it appears, and how the blowback could hit the United States in the face.

"The Euro Is Heading for a Crackup."

Don't bet on it. Sure, things look bad. The crisis, well into its third year, has forced Greece, Ireland, Portugal, Spain, and now Cyprus into various forms of international financial rescue programs, and it shows no signs of abating. After two years of denial and half-measures, market participants have little faith in the ability of Europe's policymakers to reach a solution. Spanish bond yields are frighteningly wide and those of Italy, the continent's most prolific borrower, are following closely behind. This summer's announcement a fuzzy-at-best plan to recapitalize Spanish banks and create new mechanisms to channel pan-European resources to Europe's stricken financial sector relieved market pressure for all of a few hours. Perhaps most alarmingly, no one seems to have a plan, with British Prime Minister David Cameron warning that the eurozone must either "make up or break up" -- with the implicit threat that the latter is increasingly likely.

But before writing the euro's obituary, let's remember: The driving force behind a European currency union was never purely or even principally financial. It was political -- and these binding forces remain strong. After centuries of bloodshed on the continent culminating in the last century's two world wars, the European Union (EU) and ultimately the euro arose from a deep-seated desire to abolish the risk of state-to-state conflict. A slide back to nationalism is a constant fear in the minds of European political leaders and peoples. And so, in spite of growing concerns about the benefits of sharing a single currency across 17 countries, member states and their publics remain highly supportive of the European project and the euro. While the crisis has caused this support to decline a bit, studies consistently show that Germans, French, and Spaniards favor remaining in the euro. Even upwards of 70 percent of Greeks, who are in their fifth year of recession and looking forward to a decade of grinding austerity, claim that they want to stay in the currency union. They may not get their wish (boundless hope can overcome an awful lot, but not the cold mathematics of Greece's debt burden) but their robust support illustrates the basic fact that the political will to maintain the euro remains strong.

It's true that Europe doesn't yet have a comprehensive plan to balance sensitive and increasingly difficult issues of national sovereignty, financial resources, and disparate economic models and strength among eurozone members. It's also true that this marks a decisive break from the post-World War II trajectory of European integration, which was built on grand visions both successful (the common market and common currency) and less so (the Lisbon Treaty that set the foundation for today's host of supranational European political institutions).

What Europe does have, though, beyond sheer will, is a process, however tortured and painful it may look to those on the outside, to ensure that the euro and the EU hold together. The political and economic costs of a eurozone implosion remain too high and the benefits of maintaining the common currency too real for the countries involved, as self-defeating as they appear at times, to allow a crack up. Europe will likely make steady, halting, and at times apparently counterproductive steps toward a banking union, limited fiscal federalism, and a path to political union. The path from here to there won't be smooth, just as the past two years haven't been -- but it will likely be enough to keep the currency union.

To be clear: We could very well be heading for a deep crisis, and we might even see the exit of one or more member states, with Greece the most likely. But other peripherals won't see a Greek exit as a signal to leave themselves; in fact, measures taken as a consequence may well strengthen their own prospects within the currency union. The likelihood of the eurozone imploding and the reintroduction of national currencies across a broad swath of Europe thus remains exceptionally small.

"It's All Greece's Fault."

Nope. Greece definitely shares a great deal of blame for Europe's current predicament (and, of course, its own). Athens lied about its budget and finances to get into the euro back in 1999, lied about them to stay in the euro in the decade since, and continues to bob and weave as it pretends to comply with the terms of its bailouts, agreeing to absurdly high projections for anticipated growth rates, tax revenues, and privatization revenues. Greece took Europe for a ride, and now both are paying the price.

But Greece's seemingly miraculous overnight transformation from profligate to responsible required willful blindness from European authorities. And the reason that dissimulation was even available to Greece in the first place lay in the faulty construction of the euro itself, in which all eurozone sovereign risk was made to be a thing of the past.

In the pre-euro 1990s, markets widely and correctly assessed Greece as a poor credit risk. As a result, Athens was able to borrow only infrequently, and had to pay high rates to do so. Over the years, when Greece had problems paying back its highly priced debt, it defaulted, devalued, borrowed more, and the cycle continued.

Joining the common currency was assumed to eliminate both Greece's credit risk (that it wouldn't pay back its creditors) and currency risk (that it would pay them back in a different currency worth far less than the one in which they borrowed). These may have been noble aims, but the economic logic rested on assumptions that were faulty at best. Milton Friedman cited these flaws, among others, when he predicted that the euro would be lucky to survive the decade. As he and others warned at the time and is all too apparent now, adopting the euro didn't magically transform countries like Greece into paragons of financial probity. Yet European banks took the elimination of sovereign credit risk at face value and lent Greece huge sums at historically low interest rates, comfortable in the knowledge that the European Central Bank (ECB) would provide virtually instant liquidity for newly issued Greek bonds, so that the lenders could start the whole process again shortly thereafter. And not only did the process continue, but it grew over a decade until the amounts involved became unsustainable, and the crisis as we now know it hit.

The flow of cheap funds was supposed to lead to investment and commerce in Greece and other "peripheral" European countries, which would eventually lead to an economic convergence with the eurozone core. When Greece borrowed money by the truckload, it was doing precisely what the eurozone architects and the ECB intended. Greece undeniably spent its windfall poorly -- taking few steps to fix systemic problems like tax evasion, corruption, and public sector bloat. But the only reason it had money to spend so poorly was due to the overly optimistic (and at times inherently delusional) assumptions that underlay the common currency system. Polonius had it right: "neither a borrower nor a lender be." In Europe, both parties share the blame for ignoring that advice.

"It's all Germany's Fault."

Wrong again. It's easy to blame German stubbornness in preaching austerity, reform, discipline, and penance for the continued metastasis of the crisis. Many fault Germany for helping to create the crisis in the first place, as the ECB was modeled on the Bundesbank and the euro, in effect on the Deutsche mark. German policymakers accepted the single currency zone's incomplete construction and many willingly turned a blind eye to its first decade of tinkered budget numbers in the periphery, which helped them capitalize on a captive export market that benefited German firms enormously. Rhetoric from German politicians about the distressed peripherals too often has been ugly, with some calling for the sale of Greek islands and the Acropolis to help them pay their international debts; even German Finance Minister Wolfgang Schaeuble pointedly reminded the Greeks that "membership in the EU is not compulsory." Perhaps most daunting has been Chancellor Angela Merkel's seeming inability to grasp the direness of the Europe's predicament -- she acknowledges that the eurozone is "in a race with the markets," and then limits how fast Germany will run -- frustrating friends and foes alike.

The truth is, though, that Germany has made an enormous commitment to the European project, and one that has not wavered. From the creation of the European Coal and Steel Community (the EU's forerunner) less than a decade after World War II to the present day, Germany has staunchly supported and even driven a series of steps that have had the net effect of subordinating German power to broader pan-European ends. The EU's godfather Robert Schuman was French, but no country has embraced the spirit of his eponymous declaration more than Germany, and that hasn't changed.

What's more, Germany has over the past year undergone an unbelievably rapid shift in its role in Europe. Casting aside reluctance rooted in its fraught 20th-century history to assert control in Europe, Berlin has assumed the mantle of leadership at a time when it is the only European entity seemingly willing or capable of doing so. To its credit, Germany has shown unforeseen flexibility on a wide array of ideas and initiatives that only a short time ago were completely verboten: multiple relaxation and renegotiation of the conditions required for Greece to receive its rescue funds, direct recapitalization of the Spanish banking system, the creation of European bailout mechanisms like the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), consideration of common eurobonds, banking union, fiscal union, and tacit approval of the ECB's unorthodox market interventions.

Germany receives blame largely because many, in the United States in particular, look to Berlin to play a role akin to the one Washington played in financial crises past: formulating a comprehensive crisis-response plan and committing a substantial amount of money to implement it. Germany can't and won't do this, and its inclination to move incrementally, and only after distressed countries agree to significant reform measures, remains dangerous as the crisis moves exponentially. Overall, however, Germany and Merkel have been far more pragmatic and effective as crisis managers than has been generally acknowledged.

"The Eurozone Crisis Is One Crisis."

Hardly. It's at least four, and possibly more depending on how one counts. Europe's peripheral states have a host of problems, and to some degree demand similar short-term responses. But seeking a one-stop solution by lumping them together (as the "PIIGS," a common acronym for Portugal, Ireland, Italy, Greece, and Spain) ignores the very real differences that separate them and that will over the longer term require different policy interventions. Even referring to a singular eurozone "crisis" is something of a misnomer; the label actually encompasses sovereign debt, banking, growth and competitiveness, and structural crises -- all of which, unfortunately, feed on one another.

Take Ireland, for example, which suffered from a banking crisis in 2010 that became a sovereign-debt crisis. Irish banks financed a real-estate-driven domestic bubble, and when the bubble burst the Irish government moved quickly to nationalize some banks and take the financial risks of others onto its balance sheet. As a result, the Irish debt-to-GDP ratio ballooned from 34 percent to well over 100 percent, crippling Ireland's ability to borrow.

Spain's problems are somewhat similar to Ireland's, but with a twist. Like Dublin, Madrid finds itself confronted with a banking problem born of a real estate bubble. But the Spanish autonomous communities or regions, which under the devolved Spanish federal structure manage their own budgets, systematically over-borrowed and overspent during the past decade, all while apparently lying about it to the center. When the real-estate bubble popped, the regions felt the pinch as much as the banks, and now the Spanish federal government may have to prop up both.

Portugal, by contrast, had and has a competitiveness problem. Lisbon feasted on cheap euro financing and for a while enjoyed the benefits. But instead of investing in its economic future, it plunged its European windfall into an unsustainable services-sector boom that masked, for a time, the need to undertake structural reforms. When economic reality hit and demand for services fell, Portugal's economy was crippled. Its path to competitiveness remains an enormous question mark, though its banks remain generally healthy.

Italy's current predicament likewise stems from structural and competitiveness issues. Italian growth has declined in an almost directly linear fashion for 60 years, from 5 percent in the decade after World War II to a virtual flat line in the 21st century. Corruption is endemic, higher education is mediocre, and antipathy toward reform is high. In spite of its strong and industrious north, Italy's growth prospects as a whole are bleak without structural reforms. The country was the largest issuer of euro-denominated sovereign debt, with total indebtedness of 2 trillion euros placing it at the very edge of what the IMF deems "sustainability." Although the country's annual budget deficit is relatively healthy, without reform the country could find itself unable to fund itself and spiral downwards quickly.

Greece is the closest to a perfect storm of the various gales lashing Europe. It has structural and competitiveness issues, and Athens's serial dishonesty over the state of its finances remains in a class of its own. The country has already undertaken one messy and painful debt exchange and with its second troika program at risk, another may follow. Greek financial institutions only became an issue, however, once the value of their holdings of Greek government bonds was slashed and the downturn crushed economic activity in the country, so much so that recent projections see a nearly 7 percent contraction in GDP this year. In some ways, Greece is a reverse of the Irish situation: a sovereign-debt crisis begat a banking crisis, rather than vice versa. Add to that the ongoing risk that Greece may be the one country that really might be forced to leave the euro, and the country and its banks suffer from almost all that ails the eurozone.

The crises of the eurozone's peripheral countries undoubtedly share commonalities, but that doesn't mean that their causes or potential solutions are the same. What it does mean is that Europe's way out of this morass promises to be even more complicated than it appears.

"The Europeans Have Finally Thrown Big Money at the Problem."

Not if you look closely. Proponents of Europe's response to the crisis point to two acronym-laden rescue funds, the EFSF and the ESM, with combined financial firepower well in excess of $1 trillion -- far more than the U.S. Troubled Asset Relief Program (TARP). These rescue vehicles, they say, represent serious commitments of cold hard cash to eliminate the systemic risk in the European banking system. Sadly, there's relatively little real money being ponied up and the actions of Europe's central bank, the ECB, may have only made things worse.

The EFSF has no actual money. Zero. It's really nothing more than a pool of promises from eurozone countries to pay creditors sometime in the future if there's still no cash in the till. Relying on these promises, the EFSF was supposed to raise its entire funding on capital markets, but it doesn't have a great track record in doing so. As a result, though the EFSF is authorized to borrow up to 440 billion euros, it has only raised around 30 billion euros so far.

With no actual cash and limited investor appetite for their bonds, the EFSF simply declared its own bonds to be as good as cash, and provided them to recipient countries, banks, and investors instead of the real money they couldn't actually raise in the markets. It's anyone's guess how the bonds will ultimately be repaid in the end.

The second vehicle, the supposedly new and improved ESM, is a similar story. For starters, while its money is already being committed, the treaty authorizing it has yet to be ratified in several member states. The all-important German courts have even raised serious questions about its legality. But even assuming the ESM is found to be legal and is ratified, its ostensible 500 billion euros in funding will be mostly a mirage. The ESM is structured so that 80 billion euros will be contributed by eurozone countries over 30 months. The remaining 420 billion euros is supposed to be raised in the capital markets, with investors expected to buy bonds relying on guarantees provided by eurozone countries -- several of which themselves may end up being the recipients of any money that the fund actually ends up raising.

On top of all this, market investors are increasingly concerned that the one entity seen by many observers as the ultimate savior, the ECB, is part of the problem. They fear that the ECB will be able to ensure that it has repayment priority, therefore limiting the prospects for other investors if a country runs into trouble and can't pay on time -- or at all. These concerns are well-founded: that's just what happened in Greece last spring.

So Europe's "rescue" funds are largely unfunded. They are based on hopes that markets will provide enormous amounts of cash on the back of financially engineered government promises not recognized on their sovereign balance sheets, with investors' wariness about their treatment at the hands of the ECB only making matters worse. In an already difficult funding environment, it is hard not to be just a little skeptical that the rescue funds won't necessarily have all the money they need exactly when they need it.

"The U.S. Response to the Crisis Has Been a Failure."

It's complicated. Washington's reaction to the eurozone crisis was almost certainly too slow, too small, and too stove-piped. Not only did U.S. policymakers fail to initially recognize the severity of the crisis, but they focused for far too long solely on purely financial, not strategic considerations. With Treasury taking the lead under Timothy Geithner and in spite of Secretary of State Hillary Clinton's laudable efforts to include economic tools in our foreign policy toolkit, the U.S. approach was purely "economic" without the "statecraft." Some U.S. officials seemed complacent, assuming that the European crisis was not of their making and the impacts likely to remain largely localized on the continent. The Europeans would, as they themselves insisted, figure things out for themselves at the end of the day. As a result, President Obama's personal involvement was not seriously sought until the summer of 2011, and when it did come, it was largely limited to high-level political efforts to cajole his European counterparts to reach a solution. The crisis had by this time evolved, and his interventions were neither universally welcomed nor terribly effective.

But there are mitigating factors that explain, though don't fully excuse, U.S. failures to play a more constructive role in solving the crisis. For one thing, the size of Europe's mess is far larger than anything we have had to help clean up before, and the United States alone simply does not have enough money to lead a robust international response with the vast sums of cash required to backstop Europe. With the U.S. economy recovering slowly from the 2008 financial crisis, the government deeply in debt, and some in Washington increasingly skeptical about U.S. support for international financial institutions, the Obama administration's ability to intervene decisively was hamstrung from the inception of the crisis. That hasn't changed, and in an era of fiscal retrenchment, it won't.

When the Europeans finally dropped their opposition to IMF involvement in May 2010 and agreed to allow the Fund to play a central role in the crisis response, the United States made it clear that it would not be providing more funding to the IMF to boost its war chest. Earlier this year, when the IMF announced an increase in its emergency funding to the tune of some $450 billion, the United States was conspicuous in its absence, arguing both that Europe should use its own resources to solve its own crisis and that the U.S. Federal Reserve has been quietly providing enormous amounts of dollar liquidity to the European financial sector, averting a much worse crisis. All true, but U.S. absence was glaring.

But let's be honest -- the Europeans have been less than eager to accept any U.S help. Certain that their collective wisdom, processes, and minimal financial commitments would be sufficient and mindful of the stigma that supplicant status would bring, Europe has kept Washington at arm's length for most of the last two years. When the United States did finally move publicly and decisively to help broker a solution, at the eurozone finance ministers' meeting in Poland in September 2011, Secretary Geithner was greeted with dismissal (Eurogroup President Jean-Claude Juncker huffily sniffing that Europe would not "[discuss] the increase of expansion of the EFSF with a non-member of the euro area"), ridicule (Austrian Finance Minister Maria Fekter: "I found it peculiar that, even though the Americans have significantly worse fundamental data than the eurozone, that they tell us what we should do") and outright rejection (Belgian Finance Minister Didier Reynders said Geithner should "listen rather than talk"). In private discussions, European ministers were more receptive than the heated rhetoric suggested, but their public rejection sent a clear message: Washington should butt out.

In past financial crises, such as the 1994 Mexican peso crisis, the United States kept publicly quiet and worked behind the scenes to provide necessary financial backstops, while building global coalitions to address the situation at hand. But when Europe began to come apart at the seams, Washington adopted a new strategy: speaking a bit more loudly and hoping that the markets would carry the stick. The United States, perhaps a bit wishfully, believed that expressing public concerns would drive market activity to increase pressure on European leaders for speedier and expeditious action. Europe wanted a quiet and quiescent America that would offer funds; what it got was an America offering lectures. But while it's tempting to pin the ineffectiveness of this approach on U.S. policymakers, they had few other choices; it's a more a sign of the times and the size of the crisis than an outright policy failure.

"The Eurozone Crisis Is a Disaster for the U.S. Economy."

Not yet. The eurozone crisis has undeniably damped economic growth across the globe and helped slow the U.S. recovery. And yes, if the crisis worsens, it could do severe damage to the U.S. economy and President Obama's re-election chances. From early 2010, when Greece shattered the façade of the euro's unshakeable foundations, European instability has driven down U.S. consumer and investor sentiment, reduced spending, and heightened uncertainty for firms, reducing investment. The risks of financial contagion have reduced credit and posed new threats to U.S. banks and other financial actors with significant exposures to Europe. The EU and the United States have the world's largest bilateral trade relationship, and as the continent stagnates or contracts, U.S. exporters may be hit especially hard. This summer's domestic corporate earnings testify to the drag that Europe is exerting on the U.S. private sector.

It's not all bad news, though. First, reduced consumer sentiment and decreased economic activity exerts downward pressure on commodity prices, particularly gasoline. With summer typically the season of peak U.S. energy demand and with the sheer number of geopolitical developments buffeting energy markets -- from U.S. and EU sanctions on Iran to chaos in Syria to instability in Libya and pipeline disputes in Sudan -- the gasoline market could use a little slack. While many analysts predicted prices at the pump to exceed $5 per gallon this summer, prices have dropped to below $3.40 nationwide, and may fall still farther.

Second, Europe's financial turmoil reinforces America's safe-haven status. A lack of alternatives means that investors looking for assets to stuff under the proverbial mattress still outbid one other for blue-chip U.S. Treasuries, keeping interest rates low (even negative in real terms) and inflation manageable. Those same low rates translate into lower borrowing costs for businesses and homeowners.

Finally, as long as Europe appears near (or in) crisis, the United States won't face sustained market pressure over its shaky fiscal trajectory, and thus there's not likely to be market pressure to force action by Congress and the president on difficult decisions like the extension of the Bush tax cuts or softening the automatic spending reductions that hit at year's end -- thus preventing a self-induced hit to the U.S. economy before it is able to recover. While it is obviously necessary that we grapple with our very real fiscal challenges, it is certainly nicer to do so on a timetable of our own, and not one set by markets forcing our hands and risking the onset of a double-dip recession.

RAINER JENSEN/AFP/GettyImages