The dumb, willfully blind optimists who dominated the late boom have slunk into exile. They've been replaced by the ardent declinists, the bears, and the prophetic historians, armed with copies of Gibbon and Malthus and wielding reams of data. There are economists predicting double-digit unemployment through 2011, with the housing and stock markets reeling through 2010. Historians, meanwhile, warn that the United States may be losing some of its capitalistic essence as the government increases its involvement in the financial sector. At Davos, Niall Ferguson, a brilliant, young, Oxford-educated, Ivy League-employed historian (Harvard), said the United States isn't in another Great Depression but rather 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 mean the United States is in for a Japan-style lost decade, in which it could struggle to chart growth of 1 percent.
Economic prognostication is hamstrung by a tendency to extrapolate from recent trends far into the future. It happens at the top of a cycle—the Dow is going to 36,000! Housing prices will never fall!—and it happens when we plunge into a ditch.
But haven't we heard some of this before? Twenty years ago, another young, Oxford-educated, Ivy League-employed historian (Yale) argued that America's best days were behind it, thanks to imperial overreach, excessive debt, and an epic financial bust. Paul Kennedy's Rise and Fall of the Great Powers was a best-seller when it was published in 1987—and went into paperback just as the Unites States was beginning to emerge from the Cold War as the world's only superpower and the hub of a globally 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 USSR. Those who fret about an era of slow 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.
Things have been going downhill in America since the very beginning: Imagine the economic forecasts made in Plymouth in the bitter winter of 1619. In the early 1990s, a recession lengthened, executives took huge paychecks while firing thousands of workers, and Americans began to lose faith in the capitalist systems. No economist or historian stood up and predicted that globalization, intelligent fiscal and monetary policy, and this thing called the Internet would launch the United States 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.
A version of this article appeared in Newsweek.
Correction, Feb. 12, 2009: This article originally misspelled the last name of President Ronald Reagan. (Return to the corrected sentence.)
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