July 30, 2003

I was listening to Bush's press conference on TV this morning. He mentioned at least twice that the stock market started its fall in March, 2000. Did the market and the economy really turn down then?

Look at a graph comparing the NASDAQ Composite, S&P 500, S&P 100, and Dow Jones Industrial indices.

Yes, the NASDAQ did fall starting in March, 2000, after a huge run-up in 1999. That brought it back in line with the other indices. You were probably better off at the beginning of 2001 (when Bush took office) than at the beginning of 1999. On the day of Bush's inauguration, the NASDAQ was 15% *higher* than it had been 2 years earlier. The DJIA was up 13% over the same period. Anything you lost in 2000 was likely to be a paper gain that you thought you had during 1999. That money never really existed, and any attempt by a large number of people to realize that gain was certain to cause the prices to fall back in line.

The DJIA and S&P 500, on the other hand, did not start to fall until after Bush came into office in 2001. Here is an expanded graph showing just the last 5 years.

This correction in NASDAQ prices was exactly what the Fed wanted due to its concern about the overvaluation of stocks. In fact, the Fed increased interest rates in both February and March, 2000. Stock prices were among the factors they listed. They stated in their March, 2000, minutes that, "While the associated capital investments undoubtedly had contributed to the acceleration in productivity, some members expressed concern that the historically elevated valuations of many high-tech stocks were subject to a sizable market adjustment at some point. That risk was underscored by the increased volatility of the stock market." In February, 2000, they talked about the need to keep interest rates high to restore balance to the economy and sharp increases in stock market wealth. They argued, "Accelerating productivity, although adding to the growth of the economy's potential output, also had induced expectations of rapidly accelerating business earnings that in turn had generated sharp increases in stock market wealth and lifted the growth of purchasing power and spending above that in incomes. Relatively high real interest rates that reflected the increased productivity and damped the rise in asset values would be needed to help restore balance." As late as November 15, 2000, the Fed acknowledged "tightening conditions in financial markets" but still saw more risk of inflation than of weakness in the economy: "Nonetheless, to date the easing of demand pressures has not been sufficient to warrant a change in the Committee's judgment that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

Bush wants us to think that the market downturn and the economic downturn started under Clinton. He wants us to think that it was just his bad luck to come in just as everything got bad. The reality is that the economy was good when Bush was elected. The Fed said it was good. Consumer confidence said it was good. Even tech stocks were still up compared to two years earlier. Tech stocks had soared out of control and had merely been brought back in line. The economy really turned bad only when consumer confidence fell in December, 2000, after the Bush team talked down the economy because they feared that they needed to lower expectations in order to have any chance of being perceived as successful in office. The reality is that this Administration has been a terrible failure on the economy, on education, on homeland security, on human rights, on foreign policy, on the environment, on absolutely everything.

Richard M. Mathews

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