Lowballing the prospects for recovery

Kevin Drum gives ten reasons the economic recovery is likely to be weak:

1. This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That’s not going to happen this time. 2. In fact, there won’t be any further stimulus from lower interest rates. They’re already at zero, and Ben Bernanke has made it clear that he doesn’t plan to effectively lower them further by setting a higher inflation target. 3. Consumer debt is still way too high. There’s more deleveraging on the horizon, and that’s going to make consumer-led growth difficult. 4. The financial sector remains fragile and there could still be another serious shock somewhere in the world. 5. There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely. 6. Housing prices are still too high. They’re bound to fall further, especially given rising interest rates combined with the end of government support programs. 7. Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road. 8. The Fed still has to unwind its balance sheet. That has the potential to stall growth. 9. Oil prices are rising. This not only causes problems of its own, but also makes #7 worse. 10. Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.

I'm not sure what we're supposed to make of #1. Yes, this is a "balance sheet" recession, but what recession isn't? One of the main channels through which monetary policy such as Volcker's tightening in 1981 affects the economy is through the balance sheet channel. #2 is a concern. It's true that we've gotten about all the monetary stimulus we're going to get, but that was also true at this time into the 1983 recovery. In that recovery, real interest rates stopped falling at a level much higher than they are now and stayed high through the decade. #3 is certainly true. Over the next decade or so we're not going to be able to count on consumers being the engine of growth the way they were in the 2000s. But for the next year, I think it's quite likely that consumer spending will rise at a strong pace to catch up for some of the lost spending during the recession. Greece is apparently being solved, so I don't see another financial crisis on the horizon (a bubble bursting in China? maybe). We don't need another major fiscal stimulus, I think; I'm concerned that if the Republicans take Congress they will force a fiscal contraction, which would be very bad. #6 doesn't seem like much of a concern. Where's the evidence that housing prices are too high? #7 and #9 are real problems. The answer to #8 is that the Fed will not reduce its balance sheet until the economy is on solid footing. And #9 - yes, unemployment is too high. But that's a symptom of recession, not an impediment to recovery.