Rainy Days?

PERHAPS one reason this year's election is eliciting such tepid response is that Americans have come to take prosperity for granted. They assume that everything will keep rising: home values, salaries and, of course, stock prices.

Given these good times, the two men running for president assume a budget surplus running into the trillions. The only apparent debate is how best to spend the money.

It's an understandable reflex for candidates and individual investors alike. The 10-year bull market has been punctuated by occasional free-falls, only to recover and then rise to greater heights. This time should be no different, say the boosters. That means plenty of tax revenues from capital gains or stock options, which Washington can add to its already rich coffers.

But unlike those sporadic stock shocks of the '90s, today's economy is under duress. Soaring oil prices are the most worrisome news, but there are other warning signs: disappointing earnings, a slowdown in the once-invincible telecommunications sector, the prospects of a slower Christmas season, a "wait-and-see" attitude among many commercial developers, and an all-time low savings rate. Add to that the Middle East crisis as another question mark, especially if there's political instability in the oil-rich Arab nations.

Certainly, it's possible we're in the midst of just one more false alarm and that six or 12 months from now, oil prices will stabilize at a manageable $30 a gallon, or less. Continued spending by consumers, who have contributed mightily to the prosperity, would help ease current fears.

But what if those same consumers cut back? What if the U.S. is indeed nearing a recession that could wipe out the entire budget surplus? What if government is unexpectedly called upon to offer financial relief for those who have lost their jobs?

Several economists, including Business Week's Michael Mandel, present a more ominous possibility: that the technology sector could badly falter, thus reducing productivity growth -- the main reason prices have stayed in check these last few years. A drop in productivity would cause inflation to accelerate and intensify any slowdown, no matter what the Federal Reserve does. It's only a theory. But it's a reasoned one.

It would be refreshing to see the presidential candidates at least acknowledge the possibility of an economic dark cloud. Instead, they're mostly trumpeting upbeat budget assumptions that have little resemblance to reality --just as elected officials bemoaned a ballooning deficit a few years ago. The one certainty about the current numbers is that they will change, making irrelevant the current diatribe about tax cuts and prescription drug programs.

The pity is that while politicians ignore these dangers, a disquieting number of Americans live well beyond their means. For most of the '90s, their spending has been fueled by rising stock and housing prices, not rises in personal income. But the problem with relying on loans from asset appreciation is that it creates massive debt. Forbes magazine recently estimated that Americans owe $4.5 trillion on their home mortgages, up from $2.5 trillion 10 years ago, and $1.4 trillion on their autos, credit cards and student loans, up from $811 billion for the same period.

And that's during the longest economic expansion in history. Imagine what would happen if these borrowers faced a serious recession?