At home, the economy soars and Americans Let The Good Times Roll. Meanwhile, Iraq Burns.

by Niall Ferguson

IT'S A THEME OF nearly all the great post-Vietnam movies. In "Taxi Driver" and "The Deer Hunter," Robert De Niro plays a veteran who is dismayed, if not unhinged, by homecoming. From the mean streets of New York in the former to the Pennsylvania mining town in the latter, the folks back home just don't get it about the war.

I imagine that some American soldiers returning from tours of duty in Iraq might get an even stronger feeling of alienation if they were to visit, as I have in the last seven days, those quintessential American playgrounds, Las Vegas and Palm Beach. From the casinos of Nevada to the condos of Florida, the good times are rolling, regardless of events in the Middle East.

It's hard to believe, as you walk past the thronged roulette tables and inanely burbling slot machines of Vegas, that this is a country at war. As for that eye-catching billboard "For the Injured" on Interstate 95, I'm afraid it has nothing to do with the war wounded of Operation Iraqi Freedom. It's just another ambulance-chasing lawyer, brazenly advertising his readiness to sue someone if you trip on the sidewalk.

At least vets who came back in the 1970s found that home was pretty messed up too. By contrast, those returning home today must feel like latecomers to a gold rush.

On Wednesday, fueled by seemingly limitless liquidity and reports of strong corporate earnings, the Dow Jones industrial average hit a record 13,000. The financial markets seem to have shrugged off their recent anxieties about so-called subprime mortgages, focusing instead on the megabucks being made at the other end of the income distribution scale. A survey by Alpha magazine revealed that three American hedge-fund managers earned more than $1 billion last year.

Meanwhile, on the other side of the world, Iraq burns. More than 3,100 Americans have died there, the equivalent of 100 Virginia Techs. Nearly 25,000 have been wounded in action, many of them gravely. And that's nothing compared to the number of Iraqis who have been killed as the country has slid into civil war. Fatalities among the civilian population are running about 3,000 a month. The Brookings Institution's latest Iraq survey carried one statistic that froze my blood: According to a recent poll, one in four Iraqis has personally experienced or witnessed the murder of a family member as a result of violence since the U.S.-led invasion. Dow 13,000, meet Iraq 13,000. That's approximately the number of Iraqis killed so far this year.

Last week, Army Gen. David Petraeus, the U.S. commander in Iraq, tried to explain to his fellow Americans that stabilizing Iraq would require "an enormous commitment."

"This effort may get harder before it gets easier," he told reporters at a Pentagon briefing. Real stability might be "years down the road."

UNFORTUNATELY, this is not what anyone wants to hear these days, least of all Democratic lawmakers. Even before Petraeus returned to his unenviable post in Baghdad, the House narrowly passed a bill that would require the administration to start withdrawing troops Oct. 1 and to end all combat operations by late March of next year. The Senate passed its version the following day.

President Bush has promised to veto the bill. But it is significant that only one presidential candidate — Republican John McCain — is sticking by the president's policy of a surge to bring Baghdad under control as a first step toward stabilization. Yet according to opinion polls, his "Straight Talk Express" is lagging behind his "Hot Air Balloon" rivals. That strikes me as another sign that Americans don't want to face the reality that they are at war — and about to admit defeat.

Let's just remind ourselves that there is a precedent for this myopia. It took a long time for American investors to acknowledge that there might be an economic as well as a strategic downside to failure in Vietnam. The Dow hit 1051.70 on Jan. 11, 1973. By Dec. 6, 1974, it had fallen by nearly half. It did not regain the heights of January 1973 until November 1982.

What went wrong in the 1970s? Clearly, it was more than just the loss of South Vietnam, which turned out not to matter much (to the United States, that is). More significant were the economic consequences of President Lyndon Johnson's attempt to have both guns and butter: war in Vietnam plus the Great Society welfare program. What were, by today's standards, quite modest deficits and quite minor balance-of-payments problems translated into a creeping inflationary pressure, not least because of the strength of organized labor and the weakness of the Federal Reserve. When the Middle East blew up in 1973, sending oil prices skyrocketing, the United States was swept into an inflationary spiral that none of Johnson's successors — Richard Nixon, Gerald Ford or Jimmy Carter — was able to halt.

Sometimes I wonder if the '70s might be making a surreptitious comeback. At the hedge-fund conference that took me to Las Vegas, a clear majority of managers said they anticipated higher inflation in the year ahead. But a majority also didn't expect the Fed to tighten monetary policy further. That makes me nervous. If McCain is right and the Middle East does blow up some time after an American exit from Iraq, oil could end up at $100 a barrel. Then what?

Well, how about higher inflation, a dollar slide and a stock market sell-off? Pretty soon we could all find ourselves wearing bell-bottoms, consuming three-martini lunches and disco dancing to K.C. and the Sunshine Band.

Let's just hope that — as in the '70s — there will at least be some good movies to watch.

Niall Ferguson is Professor of History at Harvard University, Senior Research Fellow of Jesus College, Oxford, and Senior Fellow of the Hoover Institution, Stanford.

© 2007 The Los Angeles Times