In its simplest terms, an economic bubble is a sustained and ever-heightening increase in the price people are willing to pay for something -- beyond its natural and sustainable value. The ever-higher prices seem reasonable even to normally rational purchasers. For mysterious reasons or quirky events, the moment comes when -- suddenly -- purchasers are disabused of their delusions and refuse to pay the irrationally high prices. The mania ends, and prices begin to go down until -- for whatever reason -- the markets decide that the level of real value has been reached. At that moment the bottom of the down side of the burst bubble has been reached, and regular economic activity can recommence.

The question of the moment is whether stock, real estate and other inflated prices have returned to that natural point -- or if they have further to go down. And if they have further to go down -- how much further? The greatest danger of such a process is that as prices for such inflated assets go down, they may induce a general deflation of the value of the currency, which tends to have a contracting and deadening effect on most economic activity. The two most conspicuous examples of a burst bubble leading to deflation and contraction of the economy are the Great Depression of the 1930s and Japan's contraction, which is now entering its second decade. These examples are imperfect comparisons to the present conditions, but are suggestive of what may be in store for us -- though one hopes at a much lower magnitude of economic pain.

Whether this actually happens cannot yet be known. But Federal Reserve Bank Chairman Greenspan's announcement last week that deflation is at least a possibility puts the question on the table. And his concern is punctuated by the consistently overly optimistic economic predictions of both the government and most private sector economic panels over the last many months, as well as by the gloomy assessment of leading CEOs that they anticipate continuing further layoffs and cost cutting -- rather than new capital investment -- for the foreseeable future. Tax cuts are almost always a good idea. They would be particularly useful during a deflation. But President Bush would be wise not to overpromise a growing economy soon as a result of his tax cut plan. If we are in for an economic storm, tax cuts may help keep us afloat, but are unlikely to be strong enough to bring us quickly to safe harbor. Neither Republicans nor Democrats seem prepared yet to propose the policy or play the politics of deflation.