US doesn't need to face another malaise (if Obama chooses wisely)

To avoid economic malaise, President Obama will have to choose wealth creation over distribution.

President Jimmy Carter (left) and Republican presidential candidate faced off in Cleveland in a televised debate Oct. 28, 1980. A majority of Americans supported Reagan's economic vision over Carter's in that election. Today, many economists project a lost decade for America. But malaise is not inevitable, if President Obama chooses carefully.

In recent posts I have shared my growing concerns that we may be entering a prolonged recession that could drag on for the next decade.

Well, I may have been too optimistic.

James Pethokoukis pointed to a paper in his blog today by economist Robert Gordon that makes the following economic forecast for the next two decades:

"The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington."

If Gordon's forecast is correct, America could become the latest economic powerhouse to lapse into a prolonged period of stagnation. We may be faced with our own lost decades, just like Japan faced in the 1990s and beyond.

However, all is not lost. A twenty year economic funk is not inevitable. Remember that economists generally forecast forward from the current state as it now exists.

As Pethokoukis points out, we can change direction to hopefully head off what is now being forecast:

"America faced a similar turning point a generation ago. During the Jimmy Carter years, the Malthusian, Limits to Growth crowd argued that natural-resource constraints meant Americans would have to lower their economic expectations and accept economic stagnation -- or worse. Carter more or less accepted an end to American Exceptionalism, but the 1980 presidential election showed few of his countrymen did. They chose growth economics and the economy grew.

"Now they face another choice. Preserve wealth, redistribute wealth or create wealth. Hopefully, President Barack Obama will choose door #3. Investing more in basic research (not just healthcare) would be a start, as would slashing the corporate tax rate. A new consumption tax would be better for growth, but only if it replaced the current wage and investment income taxes. Real entitlement reform would help avoid the Reinhart-Rogoff scenario. The choices made during the next few years could the difference between America in Decline or the American (21st) Century."

Part of door #3 needs to be a shift in policy to help entrepreneurs. We cannot burden them by expecting them to pay for an ever expanding government with higher tax rates. And we should not regulate them into oblivion because of the past sins of corporate America.

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