The stock market's surge last week could almost make you think that the go-go years are coming back. But listening to Obama administration officials and business leaders over the last few weeks, I drew a less rosy picture of our economic future. Our recovery is likely to be a "V" shape so wide it looks like an "L," gradually sloping upward as America recovers from the long, debt-fueled boom that began in the 1980s.
It's an economy in rehab, you might say, working off the excesses and imbalances that created the crash of 2008. Savings rates will remain high, as people try to protect themselves and their families from another market collapse; the chronic trade imbalances of the past several decades will ease, as Americans reduce their consumption of everything, including foreign imports. It's a postbinge economy, cautious and careful — with a lower tolerance for risk and correspondingly lower rewards.
Some people hope that as the economy recovers, life will return to the way it was before the downturn. That enthusiasm was evident in last week's push of the Dow Jones Industrial Average above 9,000. Perhaps investors imagine that the bad dream is over and we will wake up in a highly leveraged world of rapid growth and big returns. A heady thought, but I don't think it's going to happen.
What's more likely is that as the economy begins to grow again, there will also be some automatic brakes. Taxes and interest rates will rise, to pay off our debts. Returns on investment will be lower than what we have seen over the past several decades, and this will further suppress the appetite for risk.
People will still make good money in this rehab economy. But the wealth accumulation of the past 30 years, when people came to expect annual stock market returns in excess of 10 percent, isn't likely. Growth will be slower. The ups won't be so extreme, but neither will the downs.
The rehab economy will also be more collectivist, with a greater public role in health care (not to mention in our banks and auto companies) and a corresponding diminution in private laissez- faire. Income distribution will be more egalitarian, with more protection for the poor and more constraints on the rich. Conservatives will say these changes are making America socialistic, but in fact they will reflect a return to the patterns that prevailed for much of the 20th century.
If you want a portrait of America's future, look at a historical chart of the Dow Jones average. From the late 1950s until the early '80s, the Dow stayed in a fairly narrow band, bumping up and down mostly in a range between 750 and 1000. The great spike came later.
This slower-growth world isn't all bad: People remember nostalgically the period that began in the late '50s as the era of postwar prosperity. For the average American, it was a period when a new kind of middle-class life became possible. It was the heyday of what John Kenneth Galbraith called the "new industrial state." Labor unions were strong; corporate management was solid, epitomized by the proverbial "man in the gray flannel suit." Workers and managers didn't live quite so much on the knife-edge of the market.
The danger with this comfortable, slow-growth world was that it didn't adequately reward innovation and risk-taking. And that's the worry I have about our rehab economy. Without big incentives, will innovators come up with the world-changing ideas, and will capital markets be resilient enough to finance them?
It's a good rule never to bet against America, and in the long run it's a certainty that America will innovate, grow and prosper. But over the next few years, America is likely to have stubbornly high unemployment, rising interest rates and disappointing investment returns in many sectors.
I keep reminding myself that the rehab economy is good for us: Higher saving, less debt, lower imports, less risky financial behavior. But we should be honest about the drawbacks of this new paradigm, and where possible, ameliorate them.
The politics of an L-shaped economy helped elect Barack Obama. He was a reassuring presence when the markets seemed to be in free fall. But now it's time to pay the piper. It will be Obama's job to call for patience and sacrifice. That's never a popular message.
David Ignatius' e-mail address is [email protected]
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