rapidly, which risks inflation. But especially given recent history, it is hard to imagine the public and the Congress sitting by while the Federal Reserve gives, not lends, tens of billions of dollars to banks. If we are fortunate enough that these risks do not materialize or are ameliorated quickly, there is certainly lots of opportunity for the economy to do better than projected. 1) Housing has finally begun to rebound. Although from a smaller base, it is now adding to, rather than subtracting from, growth; 2) fiscal drag from state and local tax hikes and spending cuts has likely peaked; 3) technology revolution has created a boom in domestic oil and gas, which is – “fracking” – generating jobs, incomes, and government revenues. Combined with greater offshore drilling permits, Canadian oil, and the once-unimaginable possible opening up of Mexico’s oil industry to foreign investment, we have the opportunity to dramatically reduce OPEC’s strategic power. This is not just a potential economic revolution, at least, if policy or unsafe development doesn’t kill it, but one of the most important geopolitical shifts in America’s favor in decades. 4) Lots of cash is available on the sidelines, earning virtually nothing in relatively safe assets, on household and corporate balance sheets. Businesses are waiting for more favorable investment and hiring opportunities in a stronger economy and a more favorable expectation of the future tax and regulatory environment. To see just how weak the recovery has been so far, see Figures 1, 3 and 4. Figure 1 demonstrates the economy has made up very little ground on its potential. The output gap is large. This is because the recovery has been so anemic
rapidly, which risks inflation. But especially given recent history, it is hard to imagine the public and the Congress sitting by while the Federal Reserve gives, not lends, tens of billions of dollars to banks. If we are fortunate enough that these risks do not materialize or are ameliorated quickly, there is certainly lots of opportunity for the economy to do better than projected. 1) Housing has finally begun to rebound. Although from a smaller base, it is now adding to, rather than subtracting from, growth; 2) fiscal drag from state and local tax hikes and spending cuts has likely peaked; 3) technology revolution – “fracking” – has created a boom in domestic oil and gas, which is generating jobs, incomes, and government revenues. Combined with greater offshore drilling permits, Canadian oil, and the once-unimaginable possible opening up of Mexico’s oil industry to foreign investment, we have the opportunity to dramatically reduce OPEC’s strategic power. This is not just a potential economic revolution, at least, if policy or unsafe development doesn’t kill it, but one of the most important geopolitical shifts in America’s favor in decades. 4) Lots of cash is available on the sidelines, earning virtually nothing in relatively safe assets, on household and corporate balance sheets. Businesses are waiting for more favorable investment and hiring opportunities in a stronger economy and a more favorable expectation of the future tax and regulatory environment. To see just how weak the recovery has been so far, see Figures 1, 3 and 4. Figure 1 demonstrates the economy has made up very little ground on its potential. The output gap is large. This is because the recovery has been so anemic