In the 2000s, just as in the 1970s, the 1930s and the 1890s, a tough bear market and its aftermath could be what brings about an economic, governmental and regulatory overhaul. A serious stock-market decline always serves as a political as well as financial indicator. Brother bear--the Ursa Major of economic disillusionment--has been the power behind populist and progressive booms from William Jennings Bryan through Franklin D. Roosevelt. Say what you will about the old bruin, he's been the most reliable reformer in U.S. history.

Let's begin with the surging wealth issue. For weeks now, voters have been hearing from Federal Reserve Chairman Alan Greenspan and others about the "wealth effect" that is forcing up interest rates. But rising awareness of the perils of the wealth buildup of the top 1% is also generating proposals to address it, ranging from wealth taxes to stiffer stock-market regulation.

As for tax sensitivity, it's a given in April. Middle-class and upper-middle-class breadwinners, just filing their 1999 income tax returns--after infuriating experiences with phased-out exemptions, eroding itemized deductions and brutal self-employment taxes--have already figured out a potentially explosive truth: Many, particularly two-income couples, are paying at higher marginal rates than $20-million-a-year corporate CEOs or the insta-millionaires of the Internet. The idea of tilting more tax cuts toward the top 1% of Americans, the centerpiece of Texas Gov. George W. Bush's campaign, would be one of the first delusions gored by any major bear rampage.

Barring some firestorm such as war with China over Taiwan, the possibility of a major stock-market rout--it's still premature to call it a probability--is the biggest "x-factor" in year 2000 politics and economics alike. Over the last four years, as stock averages rose faster than Jack's beanstalk, Americans lost the economic nervousness they had felt from 1991 to 1994. They were willing to tolerate old gripes--about the unfairness of the tax system and the top 1% of Americans grabbing the biggest gains--as long as mutual funds were booming and a high-tech "new economy" seemed at hand. But these psychologies, too, would be clawed by any bear market.

Greenspan has had a lot to say about wealth in recent months, and the "effect" he's warning against is that of soaring stock markets stimulating inflationary spending by the public, especially by the Dow-dazzled top 10th of the population. But he is also mindful of another wealth effect: The U.S. budget has been balanced over the last three or four years principally because of soaring federal-tax receipts from stock-related capital gains, especially executive stock options.

The share of U.S. wealth in the hands of the top 5%--and specifically the top 1%-- has reached levels not seen since 1929 and expanded by more than $1 trillion. New data show corporate CEOs now receiving 475 times as much in annual compensation as the average blue-collar worker, an all-time record disparity. But the rich have had to share this cornucopia with the Internal Revenue Service as well as with yacht dealers and hedge funds so that, even at low tax rates, it's been the key source of deficit reduction.

The reverse could be true with a bear market. The budget could go back into the red in a year or so, putting pressure on popular spending programs, scotching GOP arguments for top-bracket tax cuts and increasing pressure for new revenue from tax increases just when current economic data are profiling the top 1% or 2% of Americans as the fattest financial geese in the history of the republic.

Meantime, the political radar screen is ping-pinging with wealth-effect warnings in almost every sector. On the tax front, when Donald Trump was a possible presidential candidate, he proposed a onetime 15% levy on the wealth of those who counted it in the millions. Meanwhile, Sen. John McCain (R-Ariz.) opposed the huge tax cuts proposed by Bush because they were too favorable to the wealthy.

Favoritism to the rich, both in the United States and the rest of the world, is also edging into the U.S. political debate. This week's demonstrations in Washington against the World Bank and the International Monetary Fund include protests against their role as global bailout mechanisms for rich investors. In late March, Treasury Secretary Lawrence H. Summers, citing new evidence that the Latin American rich-poor gap increased during the 1990s, called for the Inter-American Development Bank to raise interest rates charged its richest customers and devote a larger portion of its resources to poverty programs.

The race for the Democratic nomination for New Jersey's U.S. Senate seat is turning into a wealth-effect barometer. Half-billionaire Jon S. Corzine, a retired Wall Street investment chief executive, has been making the extraordinary boast that his company's policies helped local businesses create or maintain 700,000 jobs. Meanwhile, his rival, former New Jersey Gov. Jim Florio, brandishes studies that show the rich-poor gap in New Jersey is widening, and he blames policies that favor big money.

But Greenspan's talk about the wealth effect is most important because it is now clear that his too-easy monetary policies helped create the "irrational exuberance" and speculative-wealth bubble he has been warning against. Published summaries of Greenspan's inept 1996-99 official analyses reveal his misjudgments of economic growth rates, the same strength now producing sharp inflation in New York City and San Francisco-Silicon Valley real-estate markets and threatening to spill over into what could be the first "trickle-down" inflation in U.S. history. It's obvious that the oil-price hawks of the Organization of Petroleum Exporting Countries were also motivated to share in the U.S. wealth effect.

Some who worry about wealth excesses would prefer to target the speculators who do much of their buccaneering on borrowed money, the margin accounts that let stock buyers borrow as much as 50% of the money they invest. As of late March, total margin debt was more than $200 billion, up 87% from a year earlier. As was true in 1929, these margin accounts have been responsible for some of the extreme tech-stock volatility, and curbing the borrowed-bucks speculators could help cool the wealth effect.

The wealth angles of current U.S. tax policy are sort of like the Caribbean in April 1492. You know Christopher Columbus and the political explorers will arrive by fall, but for now, Bush and Vice President Al Gore have little to say. However, the direction in which the tax debate will head if and when a bear market enters the picture is clear, as millions of Americans just finishing their Form 1040s for 1999 will understand.

The basic thrust of U.S. tax policy since the early 1980s has been threefold. First, to increase massively the tax burden on wage and self-employed labor through FICA (Social Security and Medicare) tax increases while reducing the burden on corporations, whose share of total federal tax payments has plummeted. Second, to reduce to 20% the rate on capital gains, which make up roughly half the reportable income of most of the big moneymakers. Third, to make sure, through a series of phase-outs and self-employment levies, that the highest marginal rates concentrate on middle- and upper-middle-class Americans rather than the truly rich. What's extraordinary is that voters stand for it.

Consider: a two-worker professional couple with $160,000 a year could be in the 40%-42% marginal rate group when you allow for Social Security, Medicare and self-employment taxes, all income-based, on top of the 31% basic rate, together with such silent middle-class fiscal killers as the phasing out of exemptions and itemized deductions as certain income levels are reached. This is in marked contrast to the 20% marginal (capital gains) rate paid by the typical corporate CEO on his top dollars from stock options or the same rate paid by a 28-year-old Internet tycoon. If some experts are correct in saying that the United States is the only major nation with such a skewed rate structure, the tax politics of the next downturn should see pressure to raise the rates on corporations and the rich.

The "wealth effect" isn't just some Federal Reserve jargon. Broadly construed, it stands to emerge as a central issue of U.S. politics. *

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