What would a real stock market meltdown do to the economy and, not incidentally, to the presidential campaign?
The market has long been poised for a correction. Internet stock expectations were outlandish. Even the broader market has been experiencing inflated ratios of stock prices to company earnings not seen since 1929.
All it took for air to come out of the market were some moderate storm clouds: higher oil prices, which gave us a whiff of wider inflation; reduced corporate earnings; weakness and instability in the world's second-most-important currency, the euro; portents of war.
But it would take a much worse market collapse before the real economy would be seriously affected. Consider these factors:
A good deal of air has already come out of the market. The technology-heavy NASDAQ has declined from its March 2000 peak by more than 40 percent. Even if the Dow were to decline to, say, 8000, investors would still have more than tripled their money over the past decade.
It's true that some of the red-hot economy reflects what economists call wealth effects of the soaring stock market. If somebody has $100,000 in the stock market and it is suddenly worth $400,000, that somebody feels a lot richer. He or she may buy an SUV or redecorate a house.
Those purchases, in turn, create company profits and other paychecks. Let the market plummet and people will feel less free with discretionary purchases.
All of this would remove a source of stimulus from the economy. But don't forget, the underlying source of economic growth is not the booming stock market or even giddy consumer spending but increases in productivity. And there is no sign that the technological revolution is slacking. The underlying strength of the economy is so prodigious that it would take a real Wall Street catastrophe to sandbag general prosperity.
Indeed, the Federal Reserve has repeatedly applied the brakes to keep the economy from growing too fast for fear that excessive growth rates would generate inflation. The Fed could more than compensate for the effects of reduced stock prices just by letting interest rates subside. That would not necessarily pump air into the stock market (which is overdue for a timeout), but it would keep a bear market from mauling the real economy.
It's true that a down market would be bad for some start-ups of new companies. But this is also a trend that has gotten out of hand. If anything, too many harebrained virtual companies have attracted too much capital from too-credulous get-rich-quick investors. Too much euphoria today equals bankruptcy tomorrow.
So in all likelihood we are in for a more normal and less euphoric stock market, not for a serious recession. Even so, a swooning market would have some effects on the presidential campaign. It's not clear who would gain.
In Bush's favor, a weak market sends one more signal that Bill Clinton is a magician and Al Gore isn't. Rightly or wrongly, it takes some of the glow off the miracle economy of the past eight years. Subtly, it undermines the general economic optimism that ordinarily cuts in favor of the incumbent administration.
On the other hand - barring a real catastrophe - economic turbulence often signals voters to stick with experienced leaders. It's harder to imagine George W. Bush as captain of the ship in real turbulence. The prospect of a somewhat softer economy also undercuts the wisdom of Bush's claim that we can afford both massive tax cuts, new health benefits, and a rescue of Social Security. Moreover, a weak stock market underscores Gore's criticism of Bush's proposal to let younger workers play the market with Social Security reserves.
Depending on how steep is the stock market decline and how it interacts with other imponderables, such as deepening conflict in the Middle East, either candidate could gain. On balance, my own view is that these events slightly favor Gore because Bush's biggest weakness as a candidate is the lingering feeling on the part of voters that the governor is a man somewhat out of his depth. You could trust him to skate through normal times but not in a serious crisis.
In any case, the next president is likely to face an economy with more bumps thanthe remarkable one of the past eight years. In retrospect, Bill Clinton was either a bizarre genius or the luckiest man alive. Whatever Gore's talents, he is no Clinton. Who was that masked man, anyway?