I'm Not A Polyanna: The Economy Is Going To 'Rebound'

05/30/2010 05:12 am ET | Updated May 25, 2011

Pessimism has a strong intellectual hold among many political activists, and 60% of the respondents in the Huffington Post poll about my book "Rebound: Why America Will Emerge Stronger from the Financial Crisis" think I must have my head in the sand if I think that our economy is going to be rebound any time soon.

People have sold America short before in the recent past and have been proven wrong. Remember in mid-1980s when it was fashionable to say that Japan was about to become the world's leading economic power and that a combined Europe would surpass America as well. Remember when Ross Perot in 1992 predicted that there would be a "great sucking sound of jobs leaving America" if NAFTA passed. Instead, Japan's bubble burst leading to a ten-year slide, Europe has had intermittent periods of reasonable and slow growth, and America added 22 million new jobs in the 7 years after NAFTA passed.

Over the past 150 years, America has been the most successful economic system that the world has ever seen; at the center of this success has been a thriving middle class. According to the most definitive study on comparative living standards, our major competitors were significantly behind the U.S. level: Britain (−24%), Japan (−25%) Germany (−27%), France (−29%), and Italy (−35%). Further, two Swiss research groups have rated the US one of the top three "most competitive" countries for the last 20 years.

We've done this by having the most open economy, bar none. People are encouraged to find their own path to success. But, for those who don't find good jobs or are laid off due to the winds of change, America does not provide nearly as much support as Western European countries.

So even during prosperity, many people are just scraping by. In the 1990s, the availability of public assistance was curtailed as people demanded greater personal responsibility from those getting help with basic necessities. And obviously, more people experience difficulties since the onset of the severe recession brought on by the popping of the housing bubble and the crazy actions of the financial sector: unemployment is high; long-term unemployment is very high by American standards; and many people have lost their homes while others in the foreclosure process.

Crises like this were very common in America from 1850 to 1950. This crisis feels so bad because the period from 1945 to 2007 had mainly short and shallow recessions. While this downturn is longer and deeper, it is not 1929. If history is any guide, we should expect a rebound and it is incumbent on those arguing otherwise to prove what's different now.

Many authors tell us that the American middle class has been left behind over the past 30 years (which Robert Kuttner calls "a silent depression"). This is overly pessimistic. At the same time many people think that capitalism is self-correcting and call for limited government and few if any regulations.

My book carefully refutes both of these extreme positions. I describe the financial crisis as one of "brilliant idiocy" caused by the collective mistakes of many actors: e.g., mortgage brokers who convinced people to take totally inappropriate loans, mortgage originators who loosened their lending rules, credit-rating agencies that issued AAA ratings on questionable instruments, institutional purchasers who bought bonds without knowing their true risks, regulators who saw no problems, and financial leaders who orchestrated a system that generated tremendous rewards for themselves. Everyone was confident that they were pursuing a rational path and underestimated the downside risks.

Even though I do think that people learn from their mistakes and that few institutional buyers are going to purchase bonds of such poor quality in the future, I propose ten principles for new financial regulations. This is needed because finance is fundamentally different from any other industry in three ways: it deals primarily with other people's money, it deals with valuations based on future worth with lots of uncertainty and wild swings, and it is at the center of the crucial process of allocating capital to firms, governments, and individuals.

Over the last several years, I have been at the center of a debate on the state of the middle class. In my book, I refute many of the common dire claims on income inequality (rising but not as much as often claimed), shrinking middle class (because more people have moved up), quality of jobs, the effects of international trade and rise of China and India, personal debt, savings, and the availability of health insurance.

As several people who have read my book have noted, I say things that will annoy both liberals and conservatives. My real message is that while this downturn has hurt many people, perhaps permanently, our economy is robust and we have the resources to find ways to help those people and the responsibility to regulate the financial markets.

Because the pessimists think that our social problems are much greater, they call for a "new New Deal" based on an expanded public sector. This position is doomed to fail because middle class Americans view their situation much more positively and because of the unique American wariness towards "big government."