TERROR ATTACK WILL PUSH UNITED STATES INTO RECESSION
By Laura D'Andrea Tyson
Laura D'Andrea Tyson headed the Council of Economic Advisers for U.S.
President Bill Clinton and is now dean of the Haas School of Business
at the University of California, Berkeley. She spoke with Global Economic
Viewpoint editor Nathan Gardels on Sept. 17.
GLOBAL ECONOMIC VIEWPOINT: Does this terror attack threaten to
push a weakening U.S. economy into recession?
LAURA D'ANDREA TYSON: Yes, it certainly does. The likely effect of
this kind of attack is to undermine consumer confidence. That is what
we saw with the Gulf War. Americans felt patriotic but, at the same time,
lacked confidence. Confidence then, too, was on the way down, as it is
now. The immediate impact of the terror attacks will be to push the United
States into negative growth for the fourth quarter. It doesn't take much
since we were almost there already. This is the short-term issue. In the
longer term some of the recovery spending being talked about can reverse
negative growth. That will be next year.
GEV: What is the impact on the world economy?
TYSON: It was the slowdown in the U.S. economy
that rippled out into the rest of the world that caused the weakening
of the global economy. Since Japan has not been able to operate as a source
of growth for the global economy, the United States was taking that on.
There was a hope that Europe might be an alternative demand, but that
hasn't happened. If we tip fully over into recession, then that will increase
the downward pressure on the rest of the world.
To reverse this will require a multilateral effort. And today (Sept. 17),
the European Central Bank did reduce rates. If Europe joins the multilateral
effort against terrorism, it can introduce more demand into its economies.
Some states have been looking for a way to get out of the tight Maastricht
fiscal caps. This emergency might provide them with a good excuse that
will fly politically.
GEV: What is different now from when the United States went to
war with Iraq?
TYSON: Then, the United States had a real deficit problem and couldn't
run a stimulative fiscal policy. In fact, what the previous Bush administration
had to do then was work out a deficit-reduction package and tax increase
that broke George Bush's campaign promise of "read my lips, no new
taxes.'' He had to fund that war in a fiscally contractionary condition.
This time around we have a large surplus. It is true that the majority
of that surplus is currently earmarked for Social Security. But it makes
eminent sense that, since the economy is weak and we have this pressing
need to rebuild and reinforce our security infrastructure, we dip into
that surplus. The American economy has the room to both stimulate the
economy and do the right thing for security. One of the reasons not to
have a deficit is so that discretionary spending is available when it
GEV: What, specifically, would you recommend?
TYSON: An immediate, emergency appropriation to infuse additional
spending into the U.S. economy. We have an additional tax cut coming in.
Putting $40 billion into the economy for reconstruction and to help the
victims is the right thing to do. I would advise that we monitor the economy
in the coming months, perhaps determining that this is a down payment
to be supplemented when appropriate.
Some of this might be conducted in conjunction with salvaging the airline
industry. The damage to the airline industry and air traffic -- a major
infrastructure of our modern, mobile economy -- needs to be addressed
as a national policy. An emergency loan or compensation package to help
the airlines is essential. On a large scale, money must be spent on airport
security. All of this stimulates the economy as a national law enforcement
GEV: Doesn't all this imply a new level of government intervention
in the economy that the Bush team is not sympathetic with?
TYSON: It has long been a proposal for the government to fund airport
security, but that proposal has gone nowhere because it was supposedly
going to be up to the private-sector airlines to handle that. The fact
that this is necessary now brings up a larger question. The United States
has underinvested in many of the public infrastructure mechanisms on which
the marketplace rests -- including in security and the modernization of
intelligence. U.S. government discretionary spending as a percentage of
GDP is at its lowest level ever.
GEV: Can a weakening American economy afford the kind of war President
Bush is talking about?
TYSON: If we are about to enter a war that requires sacrifice and
long-term commitment, then we have to recognize that wars must be paid
for. That means something must be given up. Coming out of the Great Depression
into World War II, we did not have to give up much because we had a huge
amount of underutilized resources and capacity. Today's economy in the
United States, even though we've been focusing on its weakness of late,
is a heavily employed economy. There is not a lot of slack. If we are
going to wage a war over many years while also rebuilding our security
system, that is going to have to be paid for. We are going to have to
rethink whether we can have a $2 trillion tax cut over the next 10 years.