Why a Downturn Now Is Good for Dubya

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Stockbroker Quincy DeFreitas watches stock quotes on his computer

Oh, things are bad, the worst in years.

With just five trading days left in the year, the Dow is down 10 percent, the biggest annual drop since 1977. The S&P 500 is off 14 percent, the most since 1974. After coughing up another 7 percent Wednesday, the NASDAQ's losses have hit 43 percent, which makes 2000 quite simply the tech index's worst year ever. For tech stocks, we're not talking bear, we're talking crash — a steady slide that started in March and is only picking up speed at year's end. All fall, traders talked about the need for "capitulation"; now they're calling it panic, and it's going around Wall Street like an Asian flu.

'Scuse me, but cry me a river.

For five straight years until this one, NASDAQ has averaged 42 percent gains. The Dow has averaged 25 percent annually. And all that happened in 2000 was that tech stocks, from networkers like Cisco Systems to software makers like Microsoft to e-tailing paper tigers like Amazon.com, have at long last confronted the reality of reality. The Internet Utopia, a world of limitless investors, limitless infrastructure, limitless customers and limitless productivity gains, is on a slower timetable than we hoped.

Take the tech stocks out, and a funny thing happens. The S&P is down only 4 percent for 2000. The Dow, without year-old components Microsoft and Intel, is up 12 percent for the year. And the NASDAQ? Well, it's all tech stocks. But if you got in six years ago, you're still up 170 percent. The great tech crash of 2000 is just a little off the top.

Now that that's settled...

America is a what-have-you-done-for-me-lately kind of a place, and we're spoiled to boot. Alan Greenspan, who's made all the right moves for at least eight years now and sold Bill Clinton on the deficit-reduction plan that turned inflation into Rip Van Winkle during this unprecedented expansion, got roundly booed by the markets for lowering interest rates only in his mind Tuesday. And the easily scared — politicians, mostly, and a few Wall Street pessimists — are screaming that a spring recession is nigh.

Did Greenspan, who hiked interest rates six times to head off wage pressures and inflation, do his job too well? The Commerce Department on Thursday revised third-quarter economic growth Thursday down to 2.2 percent, the lowest since 1996 and a far cry from Q2's 5.6 percent. And barring a Christmas retail-sales miracle this weekend, Q4 isn't looking much better. Consumer confidence is down. Auto sales are down. Everything is down, except unemployment.

Before the New Economy showed up, 2.2 percent growth wasn't shabby at all; now it's dire news. The Tech Decade didn't just produce Greenspan's "irrational exuberance," it produced his "wealth effect," in which fat portfolios make for long shopping lists. Consumer spending kept us afloat while the world sank, and now that the engine of our recent prosperity is misfiring, wallets are closing all over America.

The Internet business looks to be on a natural catch-its-breath break, waiting for efficiencies to move outside the office and wired-everything technologies to mature. It happened after the Industrial Revolution, too. But when tech turns human, we're an ordinary economy, and one in an old-fashioned business-cycle global downturn at that. Tech has not been around to prop up America this fall, and so the rest of the world is sinking too. Rate cuts are coming in the spring — maybe sooner — but the NASDAQ is drowning in its own dashed expectations. Greenspan won't be able to save it until it saves itself.

What, Bush, worry?

Not a great time to be a president who needed 35 days and 350 lawyers to win the election — but not a bad time to be a Republican. "We are going to play the hand we are dealt," Bush said Wednesday after naming ALCOA chief, old government hand (and longtime Greenspan buddy) Paul O'Neill to be his treasury secretary/tax-cut salesman in the coming storm.

Expect to hear that refrain a lot — in fact, the budding Bush team is already under some fire from the current White House for "talking down their own economy for short-term political positioning," as Gene Sperling put it. But political positioning is done for a reason — it works.

Bush's father ran into recessionary trouble for two reasons — his people antagonized Greenspan by shouting too loud for interest-rate cuts, and he wouldn't point to Reagan as the source of some of his economic troubles. But George W., though the successor to a wildly popular Democratic economic legacy, has been lucky enough to see that legacy start fraying long before November. He can lower expectations without taking any of the blame, and with the mood as it is now he'll get credit for merely pulling out of the nascent tailspin, presumably with Greenspan's help.

It's also a good time to be an old-economy guy. As the newfangled tech folk wallow in the remnants of their self-inflated bubble, Bush the oilman is primed to talk about old-fashioned Republican virtues like reduced government regulation, cheaper energy, smaller government and increased privatization — and, of course, a $1.3 trillion tax cut. It's all aimed at increasing the flow of capital and putting more spending money in American wallets.

Anything recession-esque that happens this spring will be Bush's mandate to loosen things up a little. Any complaints Bush had about the Clinton years look practically prescient now, and unlike Gore he'll be free to find further fault if he needs excuses. And he won't get the blame unless it lasts all year.

Good-bye wealth effect

Which it might. This could be the real thing — if not a recession, then at least some extended humdrums of 2 to 3 percent growth. Even if the tech sector can bottom out soon and adjust its expectations accordingly, there'll be no 43 percent runup in 2001, and no gold rush to go with it. And with no "wealth effect" for consumers and no market magnet for international investment, America's imperviousness to global slowdowns should be greatly reduced.

Greenspan will do what he can, which is cut interest rates, and it's likely to work. He can't bring back the tech sector to its former glory, and neither can Bush, but a few interest-rate cuts might juice up the Dow and put some money back in the system for business borrowers. For Bush, the prospect of a big across-the-board tax cut is more attractive than it's been in years, but he'd better make sure it's fiscally sound enough get a few kind words from Greenspan, who got the inflation-hawk bond markets behind deficit reduction by calling Clinton's first budget "credible" and "serious." Bush's must be worthy of similar praise.

The careers of Bush's chosen treasury secretary and vice-president and his inherited Fed chairman all date back to the Ford years. For a new millennium in which the U.S. economy must learn to play without its superstar of the past eight years, some knowledge of the old problems — high energy prices, dispirited consumers, international uncertainty — could come in handy. The new Republican president remembers the Reagan tax cut. His advisers remember stagflation. As long as somebody remembers Gingrich, Clinton and the virtues of sound fiscal policy, a little spring turbulence could work out for all concerned.

Unless Greenspan really has lost his touch, in which case we're all screwed.