America’s Budding 1995 Nostalgia

For the millions in the United States’ blue-collar workforce, the year 1973 was the end of the great post-war productivity surge.

In hindsight, it deserves to be remembered with the greatest affection. It was the last year before their living standards and employability began an inexorable decline that has lasted to this day.

Since then, university graduates in the United States have done quite well — and most bankers have made out like bandits.

However, the high-school graduates (and even high-school dropouts) — who before 1973 could count on the American dream of a house in the suburbs and gradually improving living standards at a level far above those enjoyed in any other country or at any other period of history — have found their employability eroded and their living standards decimated.

It was only for a few years during these decades, notably during the late 1990s, that the rising tide did manage to lift all boats.

For the current generation of U.S. workers, 1973 is becoming a bit remote as a lost nirvana. After all, anybody now under 40 has only read about it in textbooks. So we need another year as a mark to refer to economically as an example of youthful perfection — and one to which everybody longs to return.

I suggest that the year 1995 is well-qualified to fill that role. For the U.S. economy as a whole, 1995 was not a perfect year. Wall Street had already begun its metamorphosis into a rent-seeking trading behemoth. The derivatives scandals of Proctor and Gamble, Gibson Greetings, Orange County and the collapse of the London merchant bank, Barings, all happened in a 12-month period in 1994-95.

Culturally, we Americans were also well down the road to perdition — just recall that 1995 was the year of the OJ Simpson trial.

1995 was also the beginning of three changes in U.S. government, of which one petered out in disappointment, a second has continued to be modestly useful — and the third haunts us to this day. The first was the new Republican Congress, the first in over 40 years, inaugurated on January 4 under the leadership of House Speaker Newt Gingrich.

It appeared at the time that this would genuinely reform many of the economically dysfunctional features of U.S. politics. Among the promising proposals was to give the president a line-item veto, thus slowing the growth of the economic deadweight of pork-barrel spending.

However, the promised reforms were derailed — or were never even attempted (with the exception of the 1996 welfare reform legislation). Even the farm subsidies, reduced in 1996, were to be restored in 2002. The promised movement to a freer U.S. market simply never took place.

The second change was the launch on January 1, 1995, of the World Trade Organization. This is about the only international body that is on balance genuinely helpful to the global economy.

It acts as a witches' chorus against protectionism, taking advantage of fleeting moments of support for free trade to push forward a barrier-lowering agenda that has produced much of the genuine increase in prosperity that most of the world has enjoyed since 1995.

It also whacks the United States and other governments around the head with a 2×4 when they indulge in genuinely silly protectionism, like the U.S. anti-dumping action against Chinese tires.

The third was the change in U.S. monetary policy announced by then-Fed Chairman Alan Greenspan in an admittedly elliptical fashion before the Senate Finance Committee on February 23, 1995. Since that date, M3 money supply has increased by about two-thirds faster than nominal U.S. GDP. As a result, Americans have had asset bubble after asset bubble, in stocks, housing and commodities.

The world has also experienced a perpetual U.S. payments deficit and greatly accelerated outsourcing to developing countries, as the natural U.S. advantage in capital costs has been negated by all the money sloshing around the globe.

The net effect of this change has been thoroughly destructive to U.S. industry, financial markets and, most importantly, U.S. living standards. And it's getting worse.

The first stage of the first great asset bubble also happened in 1995. In that year, the Standard & Poor's 500 share index rose by 34.1%, breaking decisively above the gradually rising trend of the previous decade and soaring into the stratosphere.

By December 1996, Fed Chairman Alan Greenspan was babbling about "irrational exuberance" — and he was at least six months late in noticing it.

Nevertheless, the 1995 phase of that bull market took place before the Fed's funny money policies had time to take effect. Its cause was not cheap money in itself, but an astonishing burgeoning of the technological possibilities of the U.S. economy — yes, and the world economy, but the nexus of the revolution was in the United States.

By far the best-publicized technological advance of 1995 was the advent of Microsoft's Windows 95 operating system on August 24. This was to become the best-selling operating system of all time and would drive other competitors out of business. A little-known additional feature, included as an optional extra initially but as standard from November onwards, was Microsoft's first web browser, Internet Explorer.

The World Wide Web had been invented in 1992, the Mosaic web browser had been introduced in 1993 (it was succeeded as market leader by Netscape Navigator the following year), and Amazon.com was founded in 1994.

However, the explosive growth of the Internet was centered on 1995. Traffic on Internet backbones had been roughly doubling each year, reaching 16.3 terabytes/month in December 1994.

Then, over the next two years, usage exploded, reaching 1,500 terabytes/month in December 1996, thus multiplying almost ten-fold in each of 1995 and 1996 (growth slowed again to a mere doubling in 1997). The number of websites in existence rose from 10,022 in December 1994 to 100,000 in December 1995, but that 1,000% growth slowed to a mere 650% in 1996.

There were estimated to be 30 million Internet users by the end of 1995. The number of online service provider subscribers (AOL and the like) doubled during the year, from 5.8 million to 11.5 million, but only during 1995 did a substantial percentage of OSP subscribers (20% by year-end) start using the OSP to reach the Internet, as distinct from merely sending e-mail.

Of the Internet services we use today, Yahoo was founded in March and e-Bay in September (admittedly, Google didn't start until 1998). What's more, the first great Internet fortune was made with the Netscape IPO, which took place on August 9, soaring from $28 to $75 per share on the first day of trading.

Oh, and the DVD was launched in September.

In summary, 1995 was not only a year of rare political promise, it was also the central year of, by far, the greatest technological innovation of its generation — an innovation that is still changing the world year by year. That innovation was mostly generated within the United States, and its initial gigantic surge of wealth creation was overwhelmingly dominated by U.S. companies and entrepreneurs.

In 1995, it was still possible to believe that not only was the United States the leading world economy, but that it would go on being so far into the future. Indeed, that belief seemed more rational in 1995 than it had a decade earlier, as in the intervening decade communism had died and Japan had slumped into its never-ending recession.

Even more than the nostalgia for 1914, 1929 and 1973, nostalgia for 1995 is for Americans entirely rational. It's even intellectually productive — by seeing what changed around that time, we can identify the tendencies that need to be reversed in order for that lost nirvana to be, at least partially, regained.

With the right policies, we can hope that in some future year we will stand at the cusp of another great technological leap forward — with Americans leading the way. Or perhaps not.

Martin Hutchinson is the co-author of “Alchemists of Loss” (Wiley, May 2010).

Editor's note: This feature has been adapted from an article that first appeared on “The Bear's Lair,” published on the website Prudentbear.com.