U.S. Economic Boom: On Its Last Legs or Priming for Another Race?

“The Coming Global Boom.”

Now there’s a magazine headline that hasn’t been shouting at you from newsstands lately.

And no wonder. Given all that’s gone wrong in the world this year--Asia’s financial morass, Japan’s continuing economic slide, Russia’s collapse, global stock markets’ late-summer dive--who would climb out on such a seemingly thin limb and predict rampant prosperity ahead?

Yet the backdrop was hardly more encouraging in October 1989, when that headline in fact dominated the cover of the Atlantic, a monthly news and literary magazine.

This was the story summary in the magazine’s table of contents: “The prevailing intellectual atmosphere in the United States seems to be one of unrelieved gloom. The world creaks beneath hopeless burdens of debt and deficits. Japan is destroying the world trading economy.

“Nevertheless, a small but growing group of economists makes a strong case that the world and the United States are really on the threshold of a long-term economic boom.”

Nine years later, with the U.S. economic expansion of the 1990s on the verge of tying the Reagan-era expansion for longevity (92 months), that article appears to have been astonishingly prophetic.

And on this holiday morning, although most investors should be counting their blessings instead of their portfolio winnings, the story is a reminder that while economies and free markets forever face challenges, they also tend to overcome them--and usually with surprising speed.

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The Atlantic article, written by Charles R. Morris, then a principal at a financial consulting firm, appeared when the Dow Jones industrial average was around 2,500--still below the 1987 peak of 2,722 that preceded that year’s market crash.

An investor trusting Morris’ view at the time, and making a buy-and-hold commitment to stocks for the ‘90s, has since ridden a 270% gain in the Dow through Thursday’s close of 9,217.99. In the annals of market history, that is rich indeed.

Yet Morris didn’t foresee the Berlin Wall falling, which occurred just a month after his piece was published. He didn’t foresee the end of the Soviet Union, the rise of the Internet or the Asian currency devaluation crisis.

He did, however, nail some of the trends that have become hallmarks of the ‘90s: falling interest rates worldwide, the global spread of capitalism, a technology-driven surge in worker productivity and a dramatic increase in the global output of goods and services.

The story also included some equally prophetic prose about then-booming Japan, which in 1989 was viewed by itself, and by many outsiders, as an invincible economic and market force.

Morris quoted economist Gary Shilling as arguing that the United States stood a very good chance of regaining much of the industrial competitiveness that appeared to be lost in the 1970s and ‘80s.

“Japan may actually have a tougher time than the United States” going forward, Shilling told Morris, “because of demographics [i.e., an aging population] and excess capacity.”

Why was Morris’ optimism about the ‘90s world economy overall, and particularly the U.S. economy, so on the mark?

Morris relied on the teachings of an Austrian economist named Joseph Schumpeter, who died in 1950. Schumpeter argued that free markets and economies were troubled by, yet also benefited enormously from, what he called “the perennial gale of creative destruction.”

As Morris noted, Schumpeter believed that “economies progress in fitful starts and stops, interspersing long periods of economic dislocation with stretches of sustained growth and development.

“The driving forces behind Schumpeter’s cycles of boom and bust are the pace of industrial innovation and the diffusion of new technology.”

The dislocation of the 1970s, with its oil price and inflation shocks, had given way to innovation that set the stage for a “new industrial golden age,” Morris argued, on behalf of the economy’s optimists in 1989.

Certainly it didn’t feel like that in the United States in the early ‘90s, as the economic recovery progressed slowly and many pessimists argued that job creation would never return to, let alone surpass, the heyday of the 1980s.

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Today, of course, the major labor story in the U.S. is the fight to find, and keep, workers in an economy that continues to surprise with its dynamism and resiliency.

Does that mean this boom is un-interruptible? Of course not. Morris, while unaware at the time that a recession was around the corner, warned that they would still arrive periodically, even in the context of a long-term boom.

Understandably, some Wall Street veterans today worry that the U.S. economic and market boom, after nine years, is on its last legs--just as Japan’s boom turned out to be in 1989, when everything seemed to be going perfectly.

Maybe. But turning again to Schumpeter’s work, the great strength of the American economy, and of its workers, is the willingness to engage in (or, for some, to simply put up with) “creative destruction.”

We let dying industries fall by the wayside so that new industries can arise. We have investors who are perpetually willing to step up and fund new industries, knowing full well that the risk of loss is great. And we have workers who are willing to move 3,000 miles for a better job--unheard of in many other developed countries, especially in Europe.

America embraces change. Japan, in too many ways, still fights change. Those brief sentences explain a lot about the ‘90s.

This week, America Online, one of the symbols of the Internet’s rise as a major force in the U.S. economy and our individual lives, was chosen by Standard & Poor’s Corp. to replace Venator--the old Woolworth company--in the blue-chip S&P; 500 stock index.

Out with the old, in with the new.

Does America Online deserve the gigantic market value ($63 billion) investors have accorded it? Perhaps not. But the valuations of Internet stocks are less important, in the long run, than what they say about the American economy’s continuous morphing into something different--and, we hope, better--than what was before.

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Recessions? Bear markets? They happen. But in the modern era, they tend to be short in duration--while the booms tend to last far longer.

Americans today are highly optimistic about the future. The stock market reflects that optimism. Maybe it’s all misplaced. But I don’t think so.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.