NEW YORK (CNN/Money) -
After living through the Summer of Love, disco, punk, the Reagan years and the Internet boom, the United States apparently has reverted to the 1950s -- which might not be such a bad thing, economically speaking.
In a research note released Monday, Merrill Lynch senior economist Gerald Cohen pointed out some of the surprising similarities between the United States in the 1950s and the 2000s and suggested that the robust economic growth that followed the '50s could happen again in the '00s.
"No two periods are ever identical, and we don't expect cars to sprout fins, but we do think that there's a good chance that many of the favorable economic trends of the 1950s will re-emerge in the years immediately ahead," Cohen wrote.
Not only are business-friendly Republicans in control of Congress and the White House for the first time since 1954-56, there are other 1950s-era trends that already have re-emerged in the new century that could be a boon to the economy.
Maybe the most important similarity between the two eras is the strength of productivity, a measure of worker output per hour. In the '50s, thanks to modern marvels such as the interstate highway system, productivity grew an average of 2.8 percent a year, a rate that continued through the 1960s.
Productivity growth dropped below 2 percent from 1970-95, but a wave of technological innovations in the 1990s -- the Internet, fiber optics -- pushed annual productivity growth back to more than 2.5 percent, on average, since 1996.
"Although we cannot know with certainty until the books are closed, the growth of productivity since 1995 appears to be among the largest in decades," Federal Reserve Chairman Alan Greenspan said in testimony before Congress last week.
Greenspan also said he wasn't sure how long such productivity growth would continue, but the longer it goes on, the better-off the economy will be.
Productivity helps the economy by letting companies make more products with fewer resources. That keeps consumer prices low, which encourages people to buy more goods and improves their living standards, which makes them want to buy even more stuff, which makes companies hire more workers to produce that stuff, which makes consumer demand go even higher, which ... well, you get the picture -- it's good.
Meanwhile, inflation, the beast that menaced the economy in the 1970s and 1980s, has been reduced to a shadow of its former self. The annual percent change in the consumer price index (CPI), the Labor Department's closely watched gauge of consumer inflation, averaged just 2.46 percent between 1997 and 2001, the lowest five-year stretch since the early 1960s.
Inflation is so low, in fact, that some economists have started to fret about the prospect of deflation, or falling prices, which might bring shoppers into stores, but can be murder for corporate profits. The last time the economy might actually have seen deflation was in 1955, when CPI shrank 0.4 percent.
Still, as scary as deflation can be -- witness the United States during the Great Depression and modern-day Japan -- the super-low inflation of the '50s and '60s was accompanied by rip-roaring economic growth.
Growth in gross domestic product (GDP), the broadest measure of economic strength, averaged 4.1 percent per year in the '50s and 4.4 percent per year in the '60s -- more than a full percentage point better than the average rate of growth in the '70s, '80s and '90s.
"With high productivity and low inflation, [expectations of] long periods of prosperity are very reasonable," said Anthony Chan, chief economist at Banc One Investment Advisors.
But Chan said he doubted the economy would grow quite as well in the next decade as it did in the '50s and '60s, mainly because of consumer debt. While consumers gobbled up debt in the '50s like it was going out of style, borrowing up to 60 percent of their income, they don't hold a candle to modern-day consumers, who tend to actually borrow more than they make.
"The consumer credit-to-disposable income ratio is much higher than it was in the '50s, so you can't argue that there is as much excess capacity on the borrowing side as there was in the '50s," Chan said.
Low interest rates
But the cost of all that borrowing is low, too, just like it was in the '50s. Low inflation has helped the Fed keep its target for the federal funds rate, a key short-term interest rate, at the low level last seen in the '50s and early '60s.
"You get people saying the Fed's out of ammunition because rates are at 40-year lows, but the fact that rates are at those lows suggests that some aspects of the economic landscape are beginning to resemble those seen 40 years ago, and inflation is one of those," said former Fed economist Wayne Ayers, now chief economist at Fleet Boston Financial.
The Fed cuts short-term rates to lower the cost of borrowing, putting more money in consumers' hands and fueling economic growth. The Fed raises rates to fight inflation; but, with inflation apparently vanquished, the Fed has been free to keep rates low to fight the 2001 recession, the Sept. 11 terrorist attacks and other woes.
Low inflation expectations have also kept long-term interest rates low -- since long-term bond investors want to make sure the yield they get on the bond will at least keep up with inflation -- meaning mortgage rates also have been at record lows.
Low mortgage rates have fueled a housing boom, with sales of new and existing homes hitting record levels and drawing comparisons with the post-World War II housing boom that was fueled by the GI Bill.
Finally, low rates also can encourage investment in the stock market, and Wall Street is likely hoping that this decade will be similar to the 1950s in that regard -- according to Cohen of Merrill Lynch, the Standard & Poor's 500 index grew 13.6 per year, on average, from 1950-59.
"Wouldn't it be nice to see a repeat of that?" Cohen asked.