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The Washington Quarterly 25.1 (2002) 43-52



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Economic Warriors against Terrorism

Murray Weidenbaum


Prognosticators are generally revising both their short-term and long-term economic expectations--usually downward--after the terrorist attacks on September 11. Under the circumstances, some perspective is needed.

The United States remains the world's economic and financial superpower. This nation possesses an unparalleled array of resources to support its goals and objectives. Moreover, even during the terrorist attacks, the basic infrastructure--electric and gas utilities, radio and telecommunications, banking, and so forth--of the immediate region and the country continued to function effectively.

The direct damage that the attacks caused was dramatic and substantial (an estimated $40 billion in the vicinity of New York City's World Trade Center alone) but localized. The initial effects were readily contained, with the exception of air travel. Most U.S. citizens maintained their regular activities. In striking contrast, the indirect repercussions of the unprecedented attack on the United States continue to reverberate. One measure of those reverberations is that the U.S. gross domestic product (GDP) for the year 2001 is likely to be about 1 percent lower than it otherwise would have been (a reduction of approximately $100 billion). Some, but not all, of the subsequent economic impacts and challenges are psychological; others are structural. The questions now are, What effects will last, or emerge; and what policies should be put in place to defend the U.S. economy, particularly U.S. economic expectations, against terrorism? [End Page 43]

Macroeconomic Policies

In view of the long-term nature of the struggle against terrorism, maintaining the capacity of the economy to function at a high level and in an increasingly competitive global marketplace, while supporting the expensive new commitments involved, is vital. Given the high degree of globalization that the world market has achieved in recent years, the effects of a weak U.S. economy are quickly transmitted around the globe. Reductions in U.S. imports and in new overseas investments mean that the already vulnerable economies in East Asia and Latin America will be hit particularly hard.

The short-term economic effects of the September 11 events did not arise in a vacuum. The outcome was superimposed on an economy that already was on the brink of recession, if not in actual decline. The negative impact did not have to be substantial in order to tip the economy into the actual downturn that occurred. Consumer spending had been the mainstay of the economy before September 11, and the new uncertainties unleashed by the attack (including questions about what the U.S. military response would be, as well as how terrorists might strike again) were sufficient to deter enough postponable consumer purchases to turn the economy downward immediately.

Fortunately, the key financial agencies of the federal government--the Federal Reserve System (the Fed), the Treasury Department, and the Securities and Exchange Commission--responded quickly and with an unusual display of cooperation. Thus, the Fed injected ample supplies of liquidity into the financial system, while investors learned that the regulatory authorities were closely monitoring the status of the stock exchanges and other key mechanisms of the financial market. Simultaneously, government policymakers in the United States, Western Europe, Canada, and Japan were closely coordinating their activities, notably all reducing their interest rates at about the same time.

This timely display of intergovernmental coordination was especially helpful in view of the unfortunate coincidences of economic weakness that had been occurring in many parts of the world, including Europe, Japan, Korea, and Southeast Asia, as well as throughout the Western Hemisphere. In the absence of an obvious engine of economic growth, one can expect weak economic conditions to linger at least through the middle of 2002.

The major continuing uncertainty facing economic decisionmakers, in both the public and private sectors, relates to the nature of the U.S. response [End Page 44] to the terrorist attacks. Normally, a major military operation provides an economic stimulus, in the form of new production contracts for a host of goods and services plus an expansion in the size...

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Additional Information

ISSN
1530-9177
Print ISSN
0163-660X
Pages
pp. 43-52
Launched on MUSE
2001-12-01
Open Access
No
Archive Status
Archived 2009
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