While the process by which the stock market returns from bubble levels to an appropriate valuation of 5,000 on the Dow Jones Industrial Index or 600 on the S&P 500 Index is inexpressibly painful, once we have got there, we will enjoy certain pleasures that we haven’t had for many years. In these financially unhappy times, it’s worth contemplating what they are and how we can maximize them.

It depends very much, of course, how long we take to reach the bottom, and what happens when we get there. There is little positive to be said about the U.S. 1930’s or the Japanese 1990’s, in both of which decades policy mistakes by government compounded market woes to produce a poisonous economy, blighting the lives of many for a decade or more and seriously hampered their ability to achieve their life goals.

One possible effect of a prolonged depression that is not inevitable is a decline in productivity, or even a marked slowing in its growth. In Japan, in 1990-2000, output per hour in manufacturing increased by 3.6 percent per annum, very little slower than the 4.1 percent per annum of the booming Japanese 1980’s or the 3.9 percent per annum of the booming U.S. 1990’s.

Of course, capital employed in output increased hugely in the U.S. in 1990-2000, while increasing only marginally in Japan over that period, so it is likely that multi-factor productivity in Japan even increased more rapidly than the U.S.’s fairly unimpressive rate of around 1.0 percent per annum.

In the U.S. 1930’s, the picture was rather different. Over the period 1929-40, U.S. real Gross Domestic Product increased from $791 billion in chained 1992 dollars to $941.2 billion, while employment decreased marginally, from 47.6 million to 47.5 million (population growth, as well as labor force growth, were at historically low levels during the decade, because of negative net immigration, while unemployment, over the whole period, moderately increased).

Labor productivity, therefore, increased approximately 1.6 percent per annum during that 11-year period. However, as discussed below, the capital used in production declined, or at most increased very slowly, so that multi-factor productivity may have increased in line with its 1948-2000 average of 1.3 percent per annum.

The 1929-40 period covered two distinct periods, a very sharp drop in productivity in 1929-33, in which total factor productivity fell 18 percent from its 1929 level (and labor productivity fell 30 percent) and a solid recovery in 1933-40.

According to a 2001 study by Lee Ohanian, of the Federal Reserve Bank of Minneapolis, the principal source of the decline in total factor productivity in 1929-33 was disruption, of normal production, distribution, marketing and inventory plans. This is likely to have arisen from three sources: the actual decline in output itself, the Smoot-Hawley tariff of 1930, which caused international trade to fall much more sharply than even U.S. output (from 5.7percent of U.S. GDP in 1929 to 3.6 percent in 1933, climbing back only to 4.7 percent of GDP in 1940), and the sharp increase in government spending, which began in 1929-33 (from 9.1 percent of GDP in 1929 to 15.4 percent in 1933) and continued throughout the 1930’s at this higher level (14.9 percent of GDP in 1940). The productivity decline in 1929-33 thus reversed itself in 1933-40, as the output fall reversed itself, and industry became accustomed to the new trade patterns, and to the higher level of government spending.

Contrary to popular beliefs, there is thus no reason to suppose that U.S. productivity growth potential, and thus its potential to produce a good life for its inhabitants, must decline precipitously in a period of low stock prices. In order to avoid such a decline, it will however be essential to avoid destroying the market for new stock and bond issues. In the low stock market period of 1921-23 (after the 1920 recession) the volume of new stock issues for U.S. and Canadian companies averaged $500 million per annum. In the bull market of 1927-30, it peaked at an average of $2,994 million, six times as much. However, the decline in the 1930’s was much more severe; in 1933-36, the volume of new stock issues averaged $148 million, less than a third of the 1921-23 volume. After a brief blip in 1937 to $408 million, at the top of the 1937 bull market still less than the depressed 1921-23 average, it then dropped again to a mere $118 million in the 1938-41 period, well after the depths of the Great Depression. Even if corporate bonds are included, the volume of new issues in 1933-6 ($489 million per annum) or 1938-41 ($764 million per annum) was far below the 1921-23 average of $2,247 million per annum.

The fact that stock issue volume in 1938-41 averaged less than in 1933-36, and less than a quarter of that in 1921-23 is significant. The securities legislation of the 1930’s, splitting commercial banks from investment banks, imposing onerous (at first) disclosure requirements on issuers, and heavily regulating investment companies, resulted in a precipitous drop in bond and share issue volume, with a corresponding sharp reduction in the ability of the U.S. economy to accommodate change.

The most attractive feature of a period of low stock prices, paradoxically, is the high returns it grants to investors, primarily in the form of dividends. In the late 1990’s dividend yields on the S&P 500 index fell towards 1 percent; consequently, the entire return that a late 90’s investor could expect to receive came from finding a “greater fool” who would buy the stock at an even more outrageously inflated price. In a period of low stock prices, dividends matter, and a period when stocks carried a dividend yield of 5 percent or so would make it very much easier for the baby boomers to finance their retirement, and be sure that they would not outlive their income. If the return on your retirement portfolio comes entirely from capital gains, you are left without money to live on in a period of stock market decline. If the return comes primarily from dividends and interest, from good quality stocks and bonds, you can safely rely on the income from your investments for living expenses, using any capital gains to finance extras such as foreign vacations and other luxuries.

Of course, the cost of capital to U.S. industry in a period of low stock prices is correspondingly higher, but this is not necessarily a disadvantage to the economy as a whole. The period of almost free capital that we saw in the late 1990’s produced, it is now clear, an unprecedented wave of poor quality capital investment, unjustifiable takeovers and just plain fraud. A prolonged period when corporate capital is expensive, and has to be husbanded carefully, would greatly increase the efficiency of U.S. resource allocation, and thus of the economy as a whole. It would also, by reducing the ability of high-rolling top management to skim unearned increment from the shareholders, usefully reduce the U.S. economic inequality that has grown in such a troubling fashion in recent years. Heaven forbid that the U.S. should attain Scandinavian standards of economic equality and social conformism, but Brazilian level gaps between the rich and poor are also to be avoided, and in the late 90’s the U.S. approached dangerously close to Latin America, both in economic inequality and, it is now clear, in the unfairness and corruption of the economic system as a whole.

It must be clear from the above discussion that in order for a period of low stock prices to be pleasant and productive, two factors are necessary. First, regulation of the capital markets, and penalties for misjudgment and failure, must not be increased to such an extent that capital raising is choked off. The 1930’s statistics show it to be more than possible for government to kill the capital markets. Legislating in a panic, such as that currently, following the Enron and WorldCom bankruptcies, brings a high danger of repeating this mistake. In particular, with initial stock offerings being more difficult, and investors looking to dividends for their returns, it is essential that the venture capital industry be allowed to recover from its excesses of 1997-2001, so that it can continue financing new companies before they can come to the public markets. Venture capitalists will have to operate in a very different way than they did in the 1990’s; they will have to hold on to their investments longer, and their returns will probably be lower, but their existence remains vital to the functioning of a modern entrepreneurial economy.

Second, government spending must be kept under control, so that it does not absorb all the extra resources that the economy produces and thus kill the chances of renewed economic growth. Periods of low stock prices, and high capital costs, are those when “crowding out” of private investment by wasteful government bond financing is all too possible. Again, this danger is currently very great.

Finally, there are social and aesthetic benefits of an economy with low stock prices. Fewer nouveaux riches, so fewer vulgar displays of ostentation, in cars, housing or luxury goods generally. Fewer labor shortages, so fewer demands by industry to bring yet greater and greater floods of immigrants to the U.S. It is politically incorrect to say so, but the slower population growth and more complete immigrant assimilation to U.S. society that would be produced by lower immigration would be greatly welcomed by the majority of the population, including the immigrants already here, however displeasing it might be to tech billionaires and those politically committed to multiculturalism. Technological change would not necessarily slow — as I showed a few weeks ago, it was at its fastest in the first, not the last quarter of the 20th century — but change in the sense of job-hopping, new businesses, new housing developments, etc. would all slow, which would also be appreciated by those of us who are not 25 year old gadget freaks.

My colleague Alex Cukan wrote disparagingly last week of the slow pace of change in the upper Hudson Valley, compared to the high-tech centers of California and indeed northern Virginia. For the middle aged, like myself, the Hudson Valley remains an extremely attractive place to live, with its beautiful, weathered, reasonably priced housing, its long established, reliable local businesses and its unspoiled scenic vistas. In a low stock market environment, maybe more of the U.S. will resemble the Hudson Valley and less will resemble the frenetic, overcrowded, high-tech Northern Virginia. For many of us, that will be an attractive trade-off.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.