So far, neither the falling market nor the record debt levels seem to be turning off consumption or halting investment. Still, bad news, day after day, eventually takes its toll. Just as spending soared, a pullback could be equally excessive. History offers more than a few examples of irrational exuberance followed by irrational pessimism. Prosperity is not the only thing at stake.
Political reputations are also in play.
Clinton administration officials insist that their policies turned a rising economy into a booming one. They argue that the 1993 tax increase, coupled with the president's decision to hold back on public spending, pleased bond traders holding out to them the prospect of a disappearing deficit and less inflationary pressure. As the economy boomed, bond traders did not insist on pushing up interest rates in expectation of rising inflation. And Alan Greenspan, the Federal Reserve chairman, gambled successfully that the economy could expand more rapidly than in the past without more inflation. So he let the boom proceed without raising rates.