Shaky Economies, Shaky Presidents

Throughout Bill Clinton’s presidency, the steadily rising stock market has both symbolized and sustained a powerful resurgence in broad-based optimism about the nation’s direction and economic future.

That optimism, in turn, has bolstered Clinton’s popularity--even amid the most damaging scandal of his presidency--and strengthened incumbents in both parties heading into November’s midterm election.

Now, analysts say, the threat of an extended decline in the Dow Jones industrial average (which fell 512 points Monday) could rattle that economic confidence--and all the political calculations that rest on it.

“The average American with small holdings doesn’t worry the way traders do. But if we have a very significant downturn in the Dow, when an increased number of people own stocks or mutual funds, it can be a much more politically potent thing than, say, the crash of 1987,” says Andy Kohut, research director of the Pew Research Center, an independent polling organization.

At most immediate risk is President Clinton, who could see his high approval rating--which has been his strongest defense against any threat of impeachment--decline if a falling stock market darkens voter assessments of the economy.

Economy, Clinton Linked Together

In some ways, the Dow has been Clinton’s most reliable supporter, rising an astonishing 6,082 points from the day before his inauguration in 1993 to its record high of 9,338 on July 17. But the sharp decline since then couldn’t come at a much worse time for the president, who is struggling to regain his balance after acknowledging an inappropriate relationship with former White House intern Monica S. Lewinsky.

With doubts about his character widening, Clinton may be more dependent than ever on economic good news to keep his head above water. In a Pew Research Center survey last week, the president’s job approval remained at a robust 62%--even though 62% of those polled said they didn’t like Clinton as a person.

When asked why they continued to support Clinton despite their personal doubts about him, more voters cited the state of the economy than anything else. “He doesn’t have the base of personal popularity . . . to support a major setback in the condition of the country,” Kohut says.

Anxiety over the stock market also could add a new element of uncertainty to campaigns for candidates across the ballot, as well as reshape the dynamic in Washington on several key issues--from taxes and spending to conservative hopes of partially privatizing Social Security.

On Monday, for instance, Treasury Secretary Robert E. Rubin immediately used the market decline to increase pressure on the Republican-controlled Congress to approve new funds for the International Monetary Fund. House conservatives have blocked the administration’s request for $18 billion in new funding for the agency, which provides loans to financially troubled countries such as Indonesia and Russia. Funding the IMF, insisted one White House official Monday night, “is the only concrete step that Congress and the president can take to address the fundamental causes of the current [market] situation--which is the problem overseas.”

Falling stock prices also may mean rising political hurdles for advocates of privatizing Social Security. The Dow’s seemingly relentless ascent had boosted proposals on Capitol Hill to restructure the retirement system by partially diverting the payroll tax into individual investment accounts that workers could use to invest in stocks and bonds.

Debate Over Funding Social Security

But, as Congress gears up for a debate over Social Security next year, the pointed reminder that stock prices can fall as well as rise will give new ammunition to opponents who argue that it’s too risky to fund Americans’ retirement through the market.

“The traction for privatization schemes will be much harder to establish,” says Lawrence Mishel, research director of the Economic Policy Institute, a Washington-based group opposed to Social Security privatization.

The market’s gyrations also could affect pending negotiations over federal taxes and spending. In recent weeks, both the White House and congressional Republicans have raised the specter of another government shutdown as they maneuver toward a confrontation over the 13 appropriations bills required to keep the federal government operating, as well as GOP hopes of a tax cut.

But the fear of further unsettling the markets could increase pressure on the two sides to resolve their differences without a shutdown, just as the 1987 stock market crash led then-President Reagan to convene a bipartisan summit to break that year’s deadlock over the budget.

Predicting the broader political effect of the market decline is a hazardous business--partly because no one knows whether Wall Street will recover before November, and partly because the market has declined so rarely since stock ownership broadened in the last decade.

Politically, the big question is whether stock ownership has become so common that a market decline, by itself, is felt widely enough to shake the widespread confidence now shaping the electoral landscape. In a Los Angeles Times Poll last month, a majority of Americans in every income bracket said they believe the country is moving in the right direction. That general contentment is the foundation not only of Clinton’s popularity, but of the strong leads most incumbents are enjoying this year.

It’s clear that many more families now have a stake--directly and indirectly--in the stock market than a decade ago. Today, about 40% of U.S. families own stock, either directly or through pension investments and individual retirement accounts, according to the Federal Reserve Board. That’s about double the level of the 1980s.

“The Dow is no longer either an esoteric or elitist bellwether,” says independent pollster John Zogby. “It speaks for lots and lots of people. You’ve now got guys in baseball caps talking about their mutual funds.”

Dow’s Decline Could Erode Confidence

Still, stock ownership remains much more common among upper-income than working-class voters, notes Mishel of the Economic Policy Institute. “Less than a third of households have more than $5,000 worth of stock, and most of that is held indirectly” in retirement plans, he says. That means relatively few families will find their immediate economic prospects significantly affected by the Dow’s decline, Mishel says.

But a decline in the market may frighten more than the families with large sums on the table, experts note.

As Kohut says, “The Dow has become a very good indicator of the country’s well-being to average Americans,” and a steeper fall could erode confidence even among those who are not heavily invested themselves.

That could create unexpectedly anxious moments for incumbents in both parties now cruising placidly toward reelection.