By TOM RAUM
WASHINGTON (AP) — The U.S. economy is slowly digging out of its deepest economic hole since the 1930s. And if nothing else, the next four years should be better than the last four. But American policymakers, newly re-elected President Barack Obama and a still-divided Congress could either speed that progress or derail it.
The same deep political divisions that bedeviled 2012 — clashes over the scope of government and whether to tame deficits with spending cuts, higher taxes or both — will also dominate the Washington dialogue in 2013 even if the president and Congress defuse a ticking fiscal bomb.
Although America's recession technically ended in mid-2009, recovery has been shallow and bumpy. Since then, economic growth has averaged a shade over a weak 2 percent. Unemployment — 7.7 percent in November — stands near where it was when President Barack Obama took office.
Obama and GOP leaders in Congress struggled toward year's end in search of a compromise to avert a fiscal cliff, a series of year-end mandatory spending cuts and tax increases. But their differences were wide and resolving them not easy.
Elections in this country decisively gave Obama a second term but kept the balance of power in Congress the same as before, with Republicans controlling the House and Democrats the Senate.
Despite these status-quo elections, change was erupting elsewhere in the world.
Israelis and Palestinians remained stuck in their old patterns of hostility, but their neighborhood was quickly changing as the Arab Spring scrambled the dynamics of the Middle East. Violence sprung up in Syria and Egypt. And a belligerent Iran with nuclear ambitions hovered over the region. North Korea successfully tested a long-range missile. As China named new leaders for the next decade, Obama shifted some of his gaze to Asia and became the first president to visit reclusive Myanmar.
Both sides also were paying new attention to America's neighbors to the south as immigration reform jumped to the front burner following the drubbing dealt Republican immigration hard-liners.
Hispanics now make up 10 percent of the electorate, and their percentage is expanding. Vanquished GOP nominee Mitt Romney, who once suggested illegal immigrants "self deport," won only 27 percent of the Hispanic vote to Obama's 71 percent.
It was also the year of Big Money — the most expensive presidential election ever and the first since the "Citizens United" Supreme Court ruling in 2010 opened the floodgates to independent expenditure organizations and super-PACs. In all, a record $6 trillion was spent by presidential and congressional campaigns. Neither Obama nor Romney took strings-attached federal campaign funds, the first time both major candidates declined public financing.
The Supreme Court in June handed the president a key victory by upholding his signature health care overhaul that both sides are now calling "Obamacare." But the ruling had a double edge. It also made the Medicaid expansion, central to the new law, optional for states — an option now complicating deficit-reduction efforts to trim Medicaid entitlement spending.
More presidential debates were staged than ever: some two dozen during the Republican primaries, then three presidential showdowns and one vice presidential debate.
The GOP field began large, including Texas Gov. Rick Perry, former Pennsylvania Sen. Rick Santorum, pizza entrepreneur Herman Cain and Rep. Michele Bachmann of Minnesota — each taking turns briefly outpacing Romney in polls.
That internal party challenge helped push Romney, who governed Massachusetts as a moderate, ever rightward politically. Yet Romney was never completely able to win over conservatives.
And his penchant for saying things that emphasized his wealth and lack of a common touch, from saying that "47 percent" of Americans don't pay income taxes and expect government benefits to his postelection assertion that Obama won by giving "gifts" to key constituencies. Such tin-ear comments helped isolate him from top Republican leaders, who all but disowned him after the election. Except for a private lunch with Obama at the White House in late November, the Romneys ended the year out of the limelight at their home in La Jolla, Calif.
But running mate Rep. Paul Ryan of Wisconsin, a potential 2016 GOP presidential contender, returned as a power in fiscal deliberations as head of the House Budget Committee.
As campaigns droned on — Republicans held their convention in late August in Tampa, Fla., and Democrats in early September in Charlotte, N.C. — Americans could rejoice at the intricate but successful landing of Mars rover Curiosity in a crater near the Martian equator in August, a shot in the arm for a troubled U.S. space program.
Meanwhile, U.S. oil and gas output surged so fast — driven by new drilling methods and the discovery of vast new reserves in North Dakota and elsewhere — that the U.S. was poised to overtake Saudi Arabia as the world's biggest petroleum producer.
U.S. politicians have long called for more energy independence, yet Obama delayed a decision on the proposed Keystone XL oil pipeline between Canada and the U.S. He headed into 2013 under increasing pressure to act from environmental activists and oil producers.
Although stimulus programs sponsored by Presidents George W. Bush and Obama have largely expired, the Federal Reserve was helping to keep the economy growing by holding down short-term interest rates and printing hundreds of billions of dollars to buy Treasury and mortgage bonds to stimulate borrowing, spending and job growth.
But Fed Chairman Ben Bernanke, who coined the term "fiscal cliff," cautioned that if the crisis couldn't be resolved by year's end, "I don't think our tools are strong enough to offset the effects."
The combination of huge tax hikes and spending cuts, while trimming the deficit, would also likely throw the country back into recession, Bernanke and other economists said.
"President Obama does not want to preside over another recession. ... He wants to be treated well in history books," said Sung Won Sohn, an economics professor at Cal State University Channel Islands. "Republicans, coming out of a defeat at the polls, do not want to be viewed as obstructionists destroying jobs."
Both sides were under enormous pressure to strike a deal. And another crisis loomed beyond the cliff as the government yet again neared its borrowing limit.
It will shortly hit the $16.4 trillion debt ceiling. Creative bookkeeping can extend the day of reckoning to February. But absent an agreement, "both sides would be back at the negotiating table in a matter of weeks over a much bigger threat to the economy — the inability of the federal government to pay its bills," said Isabel Sawhill, a senior fellow at the Brookings Institution.
Debt-limit gamesmanship in 2011 led to the first-ever downgrade of the credit rating of U.S. Treasury bonds and rattled financial markets.
Obama asked Congress to raise the borrowing limit unconditionally as part of his end-of-year laundry list of fiscal-policy demands — but Republicans were resisting.
Obama frequently was portrayed as anti-business during his first term. But he's lately courted corporate leaders, many of whom back his call for raising top tax rates, if only to gain more economy certainty.
In the months ahead, watch for Obama to become "an extraordinary cheerleader for business," suggested billionaire investment guru Mario Gabelli.
To Thomas Cronin, a political science professor at Colorado College, the "whole year seemed dedicated to campaigning. And most of it took place in swing states."
Obama "came to Colorado 17 times during his first term. Rarely did he go to states that weren't up for grabs." With both candidates visiting only swing states, "it's a real disincentive to vote for people in the minority party in a state that they know is going the other way," Cronin said.
The deadly terrorist attack on the U.S. diplomatic mission in Bengazi, Libya, on Sept. 11 — and flawed explanations later by the White House and U.N. Ambassador Susan Rice — raised a late-year foreign policy dilemma for Obama, aggravated by the sudden resignation of retired four-star Gen. David Petraeus as CIA director in an extramarital affair.
Obama's quick management of federal relief efforts involving late-season Superstorm Sandy, which devastated a wide swath of the Eastern Seaboard, won applause from both parties.
The year saw droves of congressional departures from defeats and resignations. There will be a dozen new faces in the Senate and 81 in the House.
Elections took a toll on many veterans, including longtime Sen. Richard Lugar, R-Ind., felled in a primary challenge by a tea party supporter who was later defeated. And Sen. Jim DeMint, R-S.C., a favorite of the tea party, resigned in early December to head the conservative Heritage Foundation, insisting he was "leaving the Senate better than I found it."
Also leaving was Rep. Barney Frank, the witty longtime Massachusetts Democrat who served for a time as chairman of the House Financial Services Committee.
"Not running for re-election means I no longer have to be nice to people I don't like," Frank told reporters.