A Darker Future For Us

We Americans are progress junkies. We think that today should be better than yesterday and that tomorrow should be better than today. Compared with most other peoples, we place more faith in "opportunity" and "getting ahead." We may now be on the cusp of a new era that frustrates these widespread expectations. It is not just the present financial crisis and its astonishing side effects, from bank rescues to frenzied stock-market swings. The crisis coincides with a series of other challenges—an aging society, runaway health spending, global warming—that imperil economic growth. America's next president takes office facing the most daunting economic conditions in decades: certainly since Ronald Reagan and double-digit inflation, and perhaps since Franklin Roosevelt and 25 percent unemployment.

It's fair to note that the U.S. economy has a long record of defying pessimistic predictions. Our national culture, with its pervasive ambition and its proven capacity for innovation, favors expansion. These are powerful forces. But it's equally true that economic progress has periodically stalled. The Great Depression lasted a decade; unemployment in the 1930s averaged 18 percent. The insistent inflation of the 1970s arrested living standards and the stock market (it was no higher in 1982 than in 1965). By 1979, inflation hit 13 percent, and "no other issue could rival [it] as a pressure on the American mind," as the political writer Theodore H. White later noted. Americans do not have a divine right to rapid economic growth.

Could the economy now be at one of these historic inflection points, when its past behavior is no longer a reliable guide to its future? That is the central question confronting the next president. Only the most hardened among us cannot have been rattled by recent events that were scarcely conceivable two years ago. Government has taken over mortgage giants Fannie Mae and Freddie Mac. The Treasury has made investments in many of the nation's major banks. The Federal Reserve is pumping out $1 trillion to stabilize credit markets. U.S. unemployment is at 6.1 percent, up from a recent low of 4.4 percent, and headed toward 8 percent, by some estimates.

The great project of the next president is to improve the economy's stability without subverting its vitality. The good news is that even if the present slump deepens (an 8 percent peak jobless rate would make it the third-worst recession since World War II), the odds are that it won't approach the Great Depression in severity or suffering. Too much attention is being paid: the Fed and the Treasury have frantically supported the financial system—exactly the opposite of what happened in the 1930s when two fifths of the nation's banks were allowed to fail. And Congress is already contemplating a second "stimulus" package up to $300 billion or perhaps more; some private economists want $500 billion.

The bad news is that recovery, though boosting employment, may prove unsatisfying. Our new economic era may lapse into a state of "affluent deprivation." That's an unfamiliar term. It doesn't mean poverty. The United States will remain a wealthy society. Rather, "affluent deprivation" signifies a state of mind. People feel poorer, because their sluggish income gains get siphoned off into higher taxes, energy costs and health spending. Though these all involve benefits, they don't pay everyday bills or cover people's routine pleasures. There's an approaching collision between private and public wants—government spending for everything from retirement benefits to defense to the repair of roads and bridges.

To some observers, we are so materialistic that we can easily make sacrifices. Do we really need fancier grills or more flat-screen TVs? Of course, there's waste and personal extravagance. But what this argument ignores is psychology. "Luxuries" quickly become "necessities"—cell phones being a recent example. "Getting ahead" feeds people's optimism, and an upbeat society shows more "tolerance of diversity, social mobility [and a greater] commitment to fairness," as Harvard economist Benjamin Friedman argued in a recent book. Economic growth has anchored our national self-esteem; slower growth suggests a grumpier and more contentious America.

Unfortunately, slower growth seems probable. What the new president, and everyone else, needs to understand is that the present crisis marks the end of an economic era. For roughly a quarter century, the U.S. economy benefited from the expansionary side effects of falling inflation—lower interest rates, greater debt, higher personal wealth—to the point now that we have now overdosed on its pleasures and are suffering the hangover. In our zeal to identify the villains of the present economic debacle, we ought to recognize that the larger causes lie in this prolonged prosperity and the permissive attitudes and practices it inspired.

Largely unrecognized, the dominant economic event of the past half century was the rise and fall of double-digit inflation. On the way up, starting at about 1 percent in 1960, inflation destabilized the economy. There were four recessions between 1969 and 1981. Unemployment peaked at 10.8 percent in late 1982. That last devastating recession, imposed by the then Fed chairman Paul Volcker with Reagan's backing, purged the worst inflationary psychology. By 1984, inflation had dropped from double digits to less than 4 percent; by 2001, it was 1 percent. This declining inflation—disinflation—bolstered the economy