The dumb, willfully blind optimists who dominated the late boom have been evicted—and the ardent declinists, the bears and the prophetic historians have moved in. They've come armed with copies of Gibbon and Malthus, and with data. If this is the typical financial-crisis-induced recession, economists Carmen Reinhart and Ken Rogoff conclude, unemployment could spike to double digits through 2011, and the housing and stock markets won't rebound until the end of 2010.
As the government steps up its involvement with the financial sector, there's widespread concern that the U.S. may be losing some of its capitalistic essence. At Davos, Niall Ferguson, a brilliant young Oxford-educated, Ivy League–employed (Harvard) historian, said the U.S. isn't in a Great Depression. Rather, it's in the grips of a "Great Repression," in deep denial of its problems. The go-go Age of Leverage is over, and a go-slow Age of Big Government has begun. High levels of debt, imperial overreach and heightened government influence in the economy means the U.S. is in for a Japan-style lost decade, in which it could struggle to chart growth of 1 percent, Ferguson argued.
Economic prognostication is hamstrung by a tendency to extrapolate from recent trends endlessly into the future. It happens at the top of a cycle—the Dow is going to 36,000! Housing prices never fall!!—which helps explain how we find ourselves in this particular pickle. And it happens when we fall into a ditch.
History may not repeat itself. But it sure does rhyme. Historians rhyme, too. Twenty-two years ago, another young, Oxford-educated, Ivy League–employed (Yale) historian argued that America's best days were behind it, thanks to imperial overreach, excessive debt and an epic financial bust. Paul Kennedy's "The Rise and Fall of the Great Powers" was a bestseller when it was published in 1987—and went into paperback just as the U.S. was beginning to emerge from the Cold War as the world's only superpower and the hub of a global integrated trading system.
The cry of creeping socialism has likewise echoed (falsely) through the decades. In 1935, the day after Franklin Roosevelt delivered a fireside chat about the need for Social Security and other regulations, a U.S. Chamber of Commerce official accused Roosevelt of trying to "Sovietize America." The medical profession—and Ronald Reagan—swore up and down that the passage of Medicare and Medicaid would transform the United States into an English-speaking version of the U.S.S.R.
Those who fret about an era of slow-growth socialism presume that our government is incapable of learning from mistakes and crafting intelligent policies. The prospect of an enhanced safety net wasn't incompatible with growth in the 1930s and 1960s, and it isn't now. And today, state ownership and control of private enterprise is a temporary last resort, not an enduring governing strategy. In Europe's social democracies, CEOs frequently welcomed government involvement because it protected them from competition. By contrast, U.S. managers can't wait to get out from under the government yoke. Goldman Sachs and Morgan Stanley have already started talking about how they plan to pay back the bailout money before the end of this year—so they can pay out humongous bonuses next January.
America has a way of turning socialists into capitalists, not the other way around. The last serious socialist in American electoral politics was Henry Wallace. Wallace, who was FDR's third-term vice president, was dq'd as commerce secretary in 1946 because he was seen as too soft on communism. But Wallace was also an entrepreneur. In 1926 he had founded a seed company, Pioneer Hi-Bred. In 1999, the company was sold to DuPont, a company founded by some of America's first capitalists, for $7.7 billion. Wallace's heirs still own 15 percent of the company.
It's difficult at this moment to see the light at the end of the tunnel. In the early 1990s, as a recession lengthened and executives took huge paychecks while firing thousands of workers, Americans began to lose faith in the capitalist system. No economist or historian stood up and said that globalization, intelligent fiscal and monetary policy and this thing called the Internet would launch the U.S. into an unprecedented era of growth, prosperity and rising asset prices.
Every mutual fund or investment product comes with the caveat that past performance is no guarantee of future performance. But when it comes to the economy at large, nearly 400 years of American history have shown that it can be a pretty good guide.