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Reflections on the Economy: Before and After 911

As the dot-com companies and stock market bubble collapsed and deflated in 2000, consumption and construction spending kept the U.S. economy from entering a recession. The failure of energy policies from Sacramento to Washington, D.C., defective Firestone tires and Ford Explorers, and increased gasoline prices were a few of the prominent economic news stories during the last year. However, there is excess capacity and inventories of everything from computers to steel, sluggish economic growth in Asia and Europe, large corporate mergers resulting in smaller corporate payrolls, and substantial layoffs across the economy. Economic pundits kept hoping that consumers would keep spending, but failed to recognize that laid-off workers have drastically less income and employed workers’ confidence has been shattered. As the stock market deflated, any wealth associated with stock appreciation disappeared.

In 2001, economic policy makers employed monetary policy to save the economy. The Fed lowered short-term interest rates beginning in January 2001, but 10-year Treasury notes declined from 6 percent to 5 percent during 2000, reflecting the lagging economy. The Fed was following, not leading. Chairman Alan Greenspan knows that lower interest rates will not stimulate business spending given the magnitude of excess capacity and inventory levels. Plus, consumers will not spend if they are laid off. It was an attempt to restore consumer and business confidence and try to catalyze a recovery.

What about fiscal policy and the rebate checks? Initially they were marketed as necessary to return the surplus to the public. When this was questioned, rebates were pushed as Keynesian economics to stimulate the economy. In California most of those checks—and more—were routed to a set of energy companies in Texas. Elsewhere, consumers tended not to spend their checks, and high-income households shifted them to financial markets in New York. There they merely bought existing securities, and little new investment was created. A slowing economy and ineffective monetary and fiscal policy failed to reduce excess capacity, restore consumer confidence, prop up the stock market, or stimulate the economy.

With the non-social security budget surplus dissipated by ineffective tax cuts, there are no federal budget resources available to meet minor emergencies, and certainly nothing available to fund a protracted war. This means shifting the social security surpluses today to the defense and security sectors, and increasing taxes tomorrow to repay the social security trust fund. Many economic experts do not discuss the future economic difficulties, but request that things go back to normalcy. Former General Electric CEO Jack Welch, Wall Street money guru Warren Buffet, and former Secretary of the Treasury David Rubin, who has deep ties to the NY financial sector, all appeared on television Sunday, September 16, to ensure that investors remain in the stock market for the long term and not undertake rash investment decisions. However, they and others will not follow that advice but instead will recommend to their clients to sell airline, insurance, and travel industry stocks as fast as possible and invest them in the defense and security sectors. They are patriotic on Sunday but will be seeking profits on Monday. Later, other financial experts will testify before Congress that airlines and insurance companies have been “hard-hit” and recommend that taxpayers provide direct and indirect subsidies to those corporations. The airlines failed to protect the public on 9-11, and now the airlines will call 911 asking for a public bailout.

In Manhattan, displaced workers will relocate to empty office space, and those who lost their lives may be replaced by those unemployed. Funds from Washington and the private sector will rebuild destroyed buildings and devastated corporate balance sheets. No one knows what the “911” wartime economy will look like, but some pictures are clear. A deteriorating economy cannot pay the bills, and tax increases will be required to pay for expanding defense and security expenditures. U.S. military intervention in the Middle East and Central Asia will result in death to innocent people, disrupt international markets, and increase oil prices. This will result in a blowback of terrorist acts to the U.S. All of this will mean less goods and services for the non-defense sector, labor directed to a military draft, and inflation. The economy between the Bush Sr. and Bush Jr. presidencies—even with the adjustments costs to a peacetime and post-Cold War economy in the 1990s—will be remembered as “golden.” Both Kennedy and Clinton will receive high marks for economic policy and terrible marks for setting the stage for war—Vietnam and the “911” war.

The economic lesson from all of this? U.S. failures in national security, politics, and international relations are—and will be—incalculably expensive in terms of human lives and require costly economic adaptations.

Barney Hope, Chair, Department of Economics