tears, shedding light | Finding
the Middle in Middle East
We teach peace
Professor of economics
In a few
harrowing hours on Sept. 11, our world changed.
sense of security was replaced first with horror, then rage, and, finally,
a sort of cautious determination to overcome. If we ever regain our earlier
feeling of invulnerability, it won't be any time soon.
though those of us thousands of miles from ground zero may feel pangs
of guilt for returning to "business as usual," return we must.
have the attacks on the World Trade Center and the Pentagon precluded
a return to normality by ushering in a period of stagnation and decline?
Or will the terrorists ultimately fail in their attempt to crush our economic
well-being along with the physical symbols they attacked on that Tuesday?
the post-Sept. 11 world requires a quick review of what we faced before
8:45 that morning. It was not terribly positive. The long expansion, based
initially on private investment spending and then, in its waning months,
on consumer-led, debt-financed purchases could not be sustained indefinitely.
A significant portion of the spending was on durable items, which do not
need to be replaced often, but at the same time household debt (as a percentage
of household income) was rising to unprecedented levels. At some point,
families were going to decide that it was no longer prudent to add new
debt, or financial institutions were going to make that decision for them.
by the second quarter of this year it was clear that consumer spending
was on the decline. Coupled with the fact that unemployment had risen
to 4.9 percent, this led to a fall in consumer confidence and an increasing
likelihood that the major factor underlying our expansion was going to
be pulled out from under us.
the other two most likely agents for stimulative expenditures -- the trade
balance and the federal budget balance -- were continuing to be net drains
on economic activity. Some prominent forecasting centers said we were
already in recession. We were certainly close, with the Bush tax rebates
the only clearly positive sign for the future (and at that, most economists
thought they would be insufficient). And then came the attacks.
going to be a recession now? Yes. There was going to be one anyway; the
terrorists just dictated the timing.
confidence is bound to dip further, continuing to erode the foundation
of our recently deceased economic boom, and the volatility and depression
of stock prices since the market's reopening are evidence that business
confidence has been shaken. Furthermore, the fear that something else
might happen, as loathe as we may be to say it out loud, will be there
for some time to come, preventing us from putting this episode completely
the impact on airlines and the travel industry has been immediate and
devastating. From rising insurance costs and the need to meet new federal
safety regulations, to mass cancellations of conventions and a general
decline in tourism, they have been hit with a simultaneous rise in their
costs and decline in their revenue. They have responded with their only
apparent option: layoffs. This is bound to have multiplier effects, and
taken in combination with the downturn we were already experiencing we
will see higher unemployment. The Levy Economic Institute in New York
estimates that it may reach 7 percent next year, a number we have not
seen since 1993. Another certain impact will be a ratcheting up of costs
in air travel and transport, which may cause inflationary pressures in
the rest of the economy (though likely minor).
But not all
the news is bad. Though I admit to being biased by an optimistic nature,
I would argue that there is more economically to look forward to than
to dread. To begin, the actual physical damage was very localized and,
in terms of our national ability to produce goods and services, incidental.
Ours is still the largest and most productive economy in the world and
it would take many times what happened on Sept. 11 to change that.
for the time being our supplies of oil seem to be reasonably safe -- we have
no need to fear oil-shock inflation.
the rebuilding of the devastated areas and the need to add new safety
measures and increase military readiness will create employment exactly
at a time when we need it.
most important, the primary driver behind all this will be the only sector
in a position to restart our economic engine: the government. Entering
the fall of 2001, there was some debate over which was more important -- avoiding
recession through increased government spending or preserving the federal
government's budget surplus. As of Sept, 11, that debate ended.
well for the future. The key problem in a modern capitalist economy is
finding sufficient work for all willing bodies. Just as during the Great
Depression, we have the productive capacity to feed, clothe and shelter
everyone -- the trick is finding them something to do that will justify them
a share of (i.e., give them the income necessary to purchase) those goods
the 1930s our real problem was a psychological one. We, as a nation, were
unable to justify to ourselves the level of government spending in the
economy that was necessary to solve the problem. Pearl Harbor solved our
dilemma, in dramatic fashion. Overnight, the Depression was over because
jobs were created in abundance.
In the second
week of September 2001, an economic slowdown that was already under way
was combined with confidence-shattering terrorism. In the days and months
following, we cannot expect the entrepreneurs of the private sector to
be forthcoming with job offers for the millions who now and soon will
stand unemployed. They cannot afford it. But from the problem emerges
part of the solution. Like Dec. 7, 1941, the debate over the proper role
of government is moot. In fact, given the speed with which the government
is already spending to shore up defenses and relieve the plight of those
directly affected, it appears that our emerging recession might even be
shorter than it would have been without the World Trade Center and Pentagon
attacks. I doubt that was the terrorists' intention.
Harvey is a professor of economics. He was awarded the Dean's Award for
Distinguished Teaching in 1998. E-mail him at email@example.com.