With an unpopular war, a deepish recession, an irresistibly growing public sector, excessively rapid money supply growth that may spark off inflation, a dangerously large payments deficit and a workforce excruciatingly vulnerable to international competition, the United States is today in a similar position to that of 1970-71. The current objective must surely be to produce an explosively expanding new technology, declining inflation with complete market confidence in the Fed, a budget approaching balance, a moderate payments deficit and a workforce of immense international competitiveness and spiraling remuneration – in other words, roughly the position of 1995.

So how do we reproduce a quarter-century of history in a few years?

Going the other way, from 1995 to a reproduction of 1970, was quite easy and took only 14 years. The explosively expanding new technology became an infinite source of investor losses through the magic of the IPO market in the late 1990s, plus a small number of established new companies such as Amazon.com, E-Bay and Google. Inflation was suppressed by the forces of globalization which reduced costs through empowering low-cost emerging market competitors. However once those competitors entered fully into the world economy, their own costs began to rise and inflation returned. Once again, the US is mired in an unpopular war.

Market confidence in the Fed remained absolute for a decade, outlasting the retirement of Fed Chairman Alan Greenspan in 2006, but under his successor Ben Bernanke has begun to waver. The budget was balanced only briefly, and the public sector is once again bloating uncontrollably. The US balance of payments deficit has quadrupled, not producing a currency crisis since we are no longer on the Bretton Woods fixed parity system, but an endlessly declining dollar. The US workforce is no longer particularly competitive against emerging markets labor, and its remuneration even at the top is spiraling downwards rather than upwards.

2009 is not 1970; there are a number of important differences, but it would take a brave man to claim that the US economy was definitively better positioned today than in 1970. Its position is clearly vastly inferior to that of 1995. It is thus instructive to look at how the United States moved from its 1970 situation to its 1995 situation, and see which factors could be replicated today.

First, and perhaps most important, was a reduction beginning around 1973 in the uncertainty of business’s regulatory environment. The late 1960s and early 1970s were a period of extraordinary government activism, much of which forced costly new mandates onto business, particularly in the areas of human resources and environmental controls. Notable examples of the latter were the Clean Air Act of 1970, the Environmental Policy Act of 1970 and the Corporate Average Fuel Economy legislation of 1975. In addition, the antitrust environment of the time was highly arbitrary, with major antitrust cases being instituted against General Motors in 1959, General Electric in 1960, IBM in 1969 and AT&T in 1974. Railroad, trucking and airline businesses were highly regulated, with government bodies setting prices.

The recessions of 1970, 1974 and 1980-82, with their accompanying bankruptcies brought a realization that business could not continue to be loaded with ever-increasing costs and regulations. From the late 1970s, businesses could be increasingly confident that they would not be subject to further major government depredation.

Second, also beginning around 1970, there was a steady increase in the economic returns for education, entrepreneurial activity and hard work. Part of this came from the reductions in top income tax rates in 1981 and 1986, but there was also a substantial widening in income differentials between the highly skilled and the unskilled. At the bottom of the scale, rapid immigration following the 1965 Immigration Act reduced the power of unionized labor, which declined from almost 30% to around 10% of the private sector workforce. Immigration also placed substantial downward pressure on real incomes for the unskilled. Thus the real income of adult male workers with only a high school qualification declined by a quarter between 1970 and 1995, while female workers barely broke even. Even overall, real male median personal incomes in 1995 were 6% below those of 1970, although real female personal incomes rose 50% during the period. GDP per capita increased by two thirds, a huge proportion of which went to capitalists and the most highly skilled, while the wage pressure on low-skilled labor increased US competitiveness.

A third change that has been underrated was the increasing ease of raising venture capital. The first modern venture capital company, American Research and Development was founded in 1946 and had its first big success with Digital Equipment in 1957, but in 1970 the industry was still in its infancy. By 1995, venture capital was readily available for almost any new idea in the tech sector – indeed the next five years were to produce a venture capital glut. The 1978 reduction in capital gains tax assisted the development of this industry, but did not cause it.

Finally, the great achievement of the 1970-95 period was the conquest of inflation, achieved by a decade of tighter money than had ever been thought either desirable or politically possible. The elimination of inflation focused capital on those enterprises that were truly profitable, eliminating illusionary inflation-produced gains. It also reduced nominal interest rates, increasing the ability to restructure corporations that had grown flaccid.

A few of these forces are still present. The tax system is probably not going back to 1970, either in top marginal income tax rates or in capital gains tax rates. The ending of the Vietnam War, which reunited society and released resources for civilian uses, will probably be matched by a winding down of the wars in Iraq and Afghanistan.

However most of the other factors that produced improvement between 1970 and 1995 have reversed. Since the collapse of the dot-com bubble, the venture capital business has gone into a deep funk. During the 2003-07 boom the money pools that would previously have supplied venture capital were diverted into private equity funds and hedge funds, neither of which have economic value-added commensurate with their current enormous size. Further, “alternative investments” as an asset class have been deeply tainted by the excessive fees charged by managers and by such excrescences as the Madoff scandal. Hence raising capital for new ventures is likely to be more difficult in the next decade than it has been since at least the downturn of 1973-74.

Fiscal and monetary policies are also likely to be much less helpful than in the 1980s. Real interest rates remain substantially negative, which will cause a resurgence of inflation and a diversion of resources from productive investments into asset- and commodity-based investments that add little economic value. The public sector is growing at an appalling rate, and its deficits are exploding. Those deficits will divert increasing percentages of a capital pool that is likely to be much smaller than in recent years. Recent political developments suggest fiscal expansionism is likely to last for several years, although there must be some hope of reversing monetary profligacy by replacing Ben Bernanke at the Fed. Nevertheless, substantial progress towards the 1995 fiscal and monetary nirvana seems unlikely before 2015 or so at the earliest.

A third and very disquieting development has been the sharp increase in regulatory uncertainty. Existing systems of regulation have been discredited by the financial collapse, while government has shown in the last few months that it is capable of behaving entirely arbitrarily, spending $150 billion to rescue the house of cards at AIG and guaranteeing $300 billion to rescue Citigroup, badly run and a repeated flirter with disaster, while allowing Lehman Brothers, without a stain on its reputation, to crash into bankruptcy. With a new administration and a heavy Democrat congressional majority the urge to regulate will be almost uncontrollable, and both healthcare reform and global warming regulations are likely to impose huge new costs on the US economy.

There are also additional negative factors today that were not present in either 1970 or 1995. With the explosion in global communications capability, US workers now face competition from emerging markets workers who are generally younger, often better educated and have through competing internationally acquired capabilities equal to their own. As I have written, global living standards are likely to equalize to a large extent over the next few decades, and the well-paid US workforce will be major victims of this. The leveling tendency will not be limited to the lower-skilled – though mass immigration, if permitted, will make their lives especially miserable – but will extend up to the PhD level in many fields. After all, an Indian IT worker with an advanced degree and five years experience is likely to be fully as capable and productive as his US counterpart. The miserable, niggardly advances of the last four decades in most Americans’ living standards may come to seem like a lost Nirvana to the unfortunate workers forced into the full rigors of global competition.

Finally, the decline in transparency in the investment area and business generally appears to have caused a rise in corruption. For example, the U.S. score on Transparency International’s Corruption Perceptions Index has declined from 7.8 to 7.3 between 1995 and 2008. In the political field, this datum is confirmed by the doubling in the number of Washington lobbyists since 2000 and the 10-fold increase in spending “earmarks” since 1995. The Madoff scandal, as well as demonstrating criminality’s enormous costs to society, also symbolizes the poisoning of established social networks by modern finance – Madoff’s old college friends were more likely to be swindled by him, not less likely as would traditionally have been expected. Increased corruption represents a deadweight cost to the economy, both through the wealth siphoned off directly and through the increased legal and policing costs necessary to surmount it.

The chance of a transition from 1970 to 1995 thus appears small, whether over a short period or even over the 25 years it took the first time around (though we must bear in mind that even five years may make a huge change in the most entrenched of political and economic realities.) On the other hand, 1970 was by no means the worst period in US history; a similar analysis would fortunately show that we are also unlikely to regress from our current 1970 to a renewed 1932.

Instead, we appear to be heading towards a new destination, at present obscure. That destination need not represent a deterioration from our current position. However ensuring that it doesn’t will require us to secure the low innovation taxes and tight money of the 1980-2000 period, while minimizing any added burdens of regulatory uncertainty, runaway public spending and new social and environmental programs. If those policy requirements are not met, the rigors of competing in a fully globalized economy will impose a grievous cost on US living standards.

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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.)