When this expansion started in 1991, the U.S. was thought by most experts to be a mature, or even aging, economy, suffering from too much debt, not enough savings, and too little long-term planning. The dominant view was that of "declinists" such as Paul M. Kennedy, author of the best-seller The Rise and Fall of the Great Powers, who argued that the era of U.S. economic and military supremacy was over. The future held mediocrity, at best.
Yet the declinists turned out be very wrong. Americans have prospered beyond what anyone would have imagined 10 years ago. Here are the lessons of the long expansion:
-- Innovation is essential. With the Internet Revolution in full swing, this may seem obvious--but it was not a view shared by most economists in 1991. The consensus then was that the great era of innovation was over, and that the only way to grow was the steady but slow route of prudent savings. The boom has since shown that, both in the U.S. and elsewhere, only an emphasis on technological and business innovation and creativity can produce rapid rates of productivity growth.
-- Good policy matters. Federal Reserve Chairman Alan Greenspan has been justifiably lauded for balancing anti-inflation monetary policy with a willingness to let the country grow. And despite partisan squabbling, Republicans and Democrats in Washington also deserve a lot of credit for a spectacular string of good policy decisions in the late 1980s and early 1990s: agreeing on the savings and loan bailout, the passage of two free-trade measures, deregulation, the combination of spending caps and tax increases that helped balance the budget, and welfare reform. Without these measures, it is unlikely that the expansion would have been as long and as prosperous.
-- Recognize the importance of the financial markets. Historically, economists have focused on productivity growth as something that happens within companies. But one of the biggest advantages of the U.S. economy in the 1990s has been the depth and flexibility of its capital markets. The strong venture-capital and initial public offering markets have enabled innovative companies to receive funding at an unprecedented rate. Meanwhile, mutual funds and 401(k) plans have spread the stock market wealth more widely. That's not just an economic issue; it's politically important as well. Not everyone can be the CEO of a dot.com, but anyone can buy stock in one.
-- Don't get complacent. It is tempting to believe that the U.S. has entered an era of permanent prosperity. Yet the experiences of the past decade show just how fast things can change and just how often the consensus view was wrong. In 1990, Japan was supposed to be the economy to beat. Instead, it only managed to produce a decade of stagnation. Something similar could happen to the U.S. as well.
Rather than simply celebrating the record expansion, America needs to stay focused on the policies that helped bring it about. That means continuing to keep inflation and the budget deficit under control, encouraging innovation and education, and letting the financial markets flourish with a combination of enlightened regulation and openness. That's the best way of ensuring that the boom keeps going as long as possible.