Economy in a retreat, but big rebound seen

‘We’re about to get a domestic stimulus package that would have been inconceivable before.’

By: Jeff Milgram
   The American economy, weakened before the Sept. 11 terrorist attack on America, will get worse before it gets better — but once the slide ends, it will come back strongly, a panel of Princeton University economists concluded Thursday.
   And it will cost $100 billion to help rebuild the shattered World Trade Center and the Pentagon, to bail out the nation’s airlines and for the federal government to take over responsibility for security at airports and at municipal reservoirs, said Paul Krugman, nationally known columnist and professor of economics and international affairs at the Woodrow Wilson School of Public and International Affairs.
   "We’re about to get a domestic stimulus package that would have been inconceivable before," Dr. Krugman said later.
   Speaking at a panel discussion on the economic and financial impact of the terrorist attack on the World Trade Center and the Pentagon, the experts agreed that uncertainty about a recession and the American military response is prompting investors to sell stocks and consumers to cut back on their spending and avoid air travel.
   The panel made clear that the terrorist attack was a human, not an economic, tragedy.
   Several experts agreed that to stimulate the economy, President Bush’s tax cuts should be reworked so that more of them kick in sooner.
   "The silver lining is that it is a statistical regularity … that in losses of this kind that the faster you fall, the quicker you come back," said Alan Blinder, former vice chairman of the Federal Reserve and now professor of economics at Princeton. "It’s better than a 50-50 bet that after a catastrophe we’ll come back stronger."
   Saying he’s "cautiously, cautiously optimistic," Dr. Blinder said the economy will show signs of recovery by next year.
   Peter Kenen, professor of economics and international finance, said he is "moderately pessimistic about the U.S. economy in the short term." He predicted the economy would not recover until the middle of 2002.
   But in the short run, Economics Professor Jose Scheinkman said, stock prices could come down more and "if you’re particularly risk-adverse, I feel you should get out (of the stock market)."
   He said the economic impact of the terrorist attack would have been much worse if the Federal Reserve, the European Central Bank and the Bank of Japan had not pumped between $150 billion and $200 billion into the world’s economy after the attack. The economic damage also was limited by steps banks took to safeguard their data during the Y2K computer scare.
   While the banks were criticized for spending the money to pay for backup systems they didn’t need, "They did use it this time," Dr. Scheinkman said.
   Economics Professor Alan Krueger predicted that U.S. airlines will lay off 100,000 employees and that another 200,000 workers in hotels and vacation destinations will lose their jobs.
   Dr. Scheinkman estimated that insurance companies would pay out between $30 billion and $40 billion in claims.
   Dr. Krueger said the terrorist attack will make the federal government re-evaluate its immigration policies and America’s borders will be tightly controlled.
   "The U.S. will become a less hospitable place," he said.
   From an economic standpoint, Dr. Blinder said, the best American military response would be limited to strikes against Afghanistan. A wider conflict that involves Iraq, Iran and Syria could disrupt oil supplies and possibly bring about an embargo by oil-producing countries, he said.
   Oil embargoes in 1973-1974 and 1979-1980 led to severe recessions in this country, and a cutoff of imports would cause major economic damage to the United States, Dr. Blinder said.
   "We just do not know where oil prices will go," said Dr. Kenen.
   He predicted tourism in England, the Mediterranean and Latin America will suffer, as will the economies of Canada, Mexico, Japan, Korea, Taiwan, Singapore and Malaysia.
   By comparison, Wall Street will be stronger than most other stock markets, he said.
   Dr. Blinder proposed the government adopt a tax policy that would stimulate consumer spending. He suggested the following:
   *payments to the 35 million low-income households that did not get tax rebate checks because they did not pay income taxes;
   *a temporary reduction in state sales taxes, with the revenue being made up by reimbursements from the federal government; and
   *a "cash-for-clunkers" program that would pay more than the market value for gas-guzzling and polluting derelict cars.
   Dr. Krugman suggested an investment tax credit, a cut in the Social Security payroll tax and permitting businesses that change hands to carry forward their tax losses.
   Dr. Blinder said "the largest group of financial detectives" ever assembled are investigating reports that the terrorists, believed to be controlled by the Afghan-based Islamic militant Osama bin Laden, made money by selling short on stocks before the terror attack.
   "Short-selling leaves a paper trail," he said.
   Dr. Blinder said there is nothing the United States could have done to guard against the economic impact of terrorism.
   "You can never prepare for something like this," he said.
   "Once you get over the hard times," he added, "you reload the monetary and financial cannons" by building up big budget surpluses.