Operation Adds Pressure for Economic Relief Package

The start of military action in Afghanistan added new uncertainty to a fragile U.S. economy but raised the likelihood that Democrats and Republicans soon will agree on a new package of spending and tax relief to ignite growth, analysts said Sunday.

Previous military conflicts have helped stoke key sectors of the economy. But the war against terrorism, with no clear enemy, will not necessarily be accompanied by the usual buildup of war-related industries that boosted the economy in such conflicts as the Vietnam War.

Likewise, though the stock market rallied at the start of the Persian Gulf War in 1991, the unpredictable course and extent of the conflict that has just begun will have uncertain effects on American consumers and investors, analysts said.

Will terrorists continue to target the United States? How will the Muslim world react to the new hostilities? The answers to such questions will go a long way toward determining the economic effect of the war on terrorism.

Sunday’s bombings “will make us feel better for the first 30 seconds,” said Robert E. Litan, director of economic studies at the centrist Brookings Institution in Washington. “But there’s been so much warning about terrorist retaliation and the other shoe dropping that Americans have to worry what will happen next.”

The commencement of war seemed likely to add even more pressure for Congress to pass a new plan to stimulate the economy, which most economists agree has been in recession since the Sept. 11 terrorist attacks and possibly even before.

“My suspicion is that we’ll get a stimulus package sooner than we would have otherwise,” Litan said. “It will not be good for [politicians] to be seen fighting while the hostilities are commencing.”

Senate Majority Leader Tom Daschle (D-S.D.) conceded Sunday, “Basically, Republicans and Democrats agree on a lot. We agree that there ought to be more tax cuts.”

A Bipartisan Agreement Sought

Said Treasury Secretary Paul H. O’Neill, “The rhetoric is sometimes steamy, but in the private meetings that I’ve been having, you can’t tell Republicans from Democrats.

“I think they’re united. . . . This is not a time when we should be divided by partisanship,” he said on CBS’ “Face the Nation.”

With the September attacks, Congress promptly enacted $40 billion in relief for the cleanup and a $15-billion bailout for the hard-hit airline industry.

Now the Bush administration and Congress are wrestling over the shape of further stimulus, with the administration supporting $60 billion in additional tax cuts and congressional Democrats pressing for a combination of spending increases and tax cuts.

Administration officials said Sunday that their plan was appropriate for the economy’s needs and would gain widespread support on Capitol Hill.

“People can say this is a balanced package,” said Lawrence B. Lindsey, President Bush’s top economic aide, on “Fox News Sunday.” “It’s one that the economy needs. And it’s one that members of both parties can support.”

Daschle called the White House proposal a “good start.”

“Without a doubt, there’s a need for tax cuts. I think there’s also a need for a real serious commitment by this government to the array of challenges” faced by the country and the economy, he said on “Face the Nation.”

Still, he pressed for some realignment of priorities in the White House package, with more of the tax cuts aimed at the less affluent and more spending targeted at the problems of terrorism, rising unemployment and the millions of Americans without health insurance.

Reaching for a bipartisan note, Daschle said, “There are some good ideas that [Bush] has laid out, but there’s a lot more we can do, and we want to work closely with him to make that happen.”

As for the stock market, Brookings’ Litan said he was not sure whether the war will lead to a new plunge or a “patriotic rally.”

Others maintain that the start of military action at least put to rest any questions about America’s determination to answer the Sept. 11 attacks with force.

“There was beginning to be some doubt about our resolve, and . . . that was a bit of a negative for the markets,” said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., a Chicago investment bank.

‘Stock Market Shot Up’

Wall Street pros vividly remember how stocks surged at the start of the Persian Gulf War.

On Jan. 17, 1991, the first day of trading after the U.S. began to bomb Iraq in Operation Desert Storm, the Dow Jones industrial average soared 114.60 points--at the time, its largest gain in years. In a similar surge of confidence that day, the price of oil plunged by more than $10 a barrel.

“The minute the bombs started to fall, the stock market shot up, and my belief is the stock market will do very well in Europe and the United States” this time as well, Wesbury said.

But analysts note that stocks plunged for several months after the Japanese attack on Pearl Harbor in December 1941 drew the United States into World War II. Stocks began to revive in the spring of 1942 when the war in the Pacific began to turn in favor of U.S. forces.

On Asian stock exchanges today, the initial reaction to Sunday’s attacks was negative.

Japanese markets were closed for a holiday, but smaller Asian markets were lower across the board.

Hong Kong’s main stock index was down 2.7% in afternoon trading, though it had been down as much as 3.6% early in the day.

The main index in Indonesia was down 3.6% in midday trading, while Taiwan’s market was down 1.9% and the Philippine market slid 3.7%.

U.S. stocks rebounded in the last two weeks after plummeting when trading resumed following the Sept. 11 attacks on New York and the Pentagon.

The Dow, which closed Friday at 9,119.77, has recouped about two-thirds of the losses it sustained in the aftermath of the attacks. The U.S. market overall remains sharply below its peaks reached in early 2000. Stock prices began to slide even before the economy weakened last year, and the now 18-month-long “bear market” on Wall Street ranks as the worst since 1973-74.

Lindsey, head of the National Economic Council in the White House, made an unusual admission Sunday, saying, “We don’t know what the effect of [the terrorist attacks] is going to be on the economy. We really don’t.” But he added that the effects would last only for a period of months, and that the economy was “fundamentally strong.”

He predicted that “next year is going to see a return to normal growth,” which he described as “3-plus percent.”

“I think as time goes on,” he said, “as people realize that the United States is fundamentally healthy, that we are going to see a return to prosperity.”