As Markets Reopen, U.S. Seeks to Prop Up Economy

As Wall Street held its breath over today’s resumption of stock trading, Washington signaled Sunday that it will pull out all the economic stops to keep the country from being shoved into recession by last week’s terrorist attacks.

In an unusual joint appearance, House Speaker J. Dennis Hastert (R-Ill.) and Minority Leader Richard A. Gephardt (D-Mo.) told “Fox News Sunday” they are assembling bipartisan proposals designed to revive growth, which was flagging even before Tuesday’s suicide airliner attacks and now threatens to drop sharply.

Among the proposals are new spending programs and tax cuts that might drive the government back into deficits, but also could help keep consumers buying and the economy percolating.

“We’re talking about things now that we’re going to have to do to sustain our markets, to make sure there’s confidence, both consumer confidence and confidence in our market system,” said Hastert.

Leaders acknowledged Sunday that the economic fallout from the attacks is proving even more complex than initially anticipated. Vice President Dick Cheney said that administration officials are scrambling to help the airline industry, which has been financially battered by the shutdown of air traffic in the wake of the attacks and a sharp contraction of ridership.

Independent analysts said a bailout in the form of direct aid, low-interest loans and government assumption of some industry expenses may be in the offing.

“We’re very interested in finding ways to make certain . . . there’s no sort of permanent damage to our civil aviation capacity,” Cheney told NBC’s “Meet the Press.”

In a remark that captured policymakers’ peculiar bind--trying to revive economic ebullience even as they say they are preparing for military action--Cheney called on Americans to do their patriotic duty by continuing to shop.

“I would hope the American people would, in effect, stick their thumbs in the eye of the terrorists and say that they’ve got great confidence in the country, great confidence in our economy, and not let what’s happened here in any way throw off their normal level of economic activity,” he said.

The vice president’s comment reflects growing worry among economists that the attacks and their somber aftermath will convince consumers, who were already slowing their purchases, to pull back sharply in a move that could drive the country into a substantial downturn.

A recent University of Michigan survey found consumer confidence, which influences how much people buy, slipping to an 8 1/2-year low in early September even before the assaults. However, a new Los Angeles Times poll conducted in the wake of the attacks found Americans still strikingly upbeat.

Asked about the overall state of the economy, fully 71% of 1,561 respondents said they thought it is doing “very” or “fairly well.” Asked about their own plans for the upcoming holiday season, 59% said they would spend the same on presents for families and friends as last year, while 26% said they would spend less. Finally, asked what the effects on the economy would be of the global stock declines that followed the attacks, fully 73% said they would be only a “temporary setback.”

Global economic policymakers are ready to act swiftly to ensure that the attacks’ effects on financial markets are only temporary. Policymakers with the Federal Reserve, the Bank of England, the European Central Bank and others are prepared to cut interest rates and intervene to defend the dollar if the U.S. stock market has trouble reopening this morning after a nearly unprecedented four-day shutdown.

Some analysts predict that major U.S. stock indexes will plunge as much as 10%, citing similar drops of foreign indexes that have continued to trade in the wake of the attacks. However, others said that the market could remain stable, or even rise, if investors decide to buy in a show of patriotism or to ride out the uncertainty.

“There have been just too many changes in the economic calculation: Airlines are on the edge of bankruptcy. Additional security costs and time costs are going to reduce productivity in the near term. There is no way I can imagine the profit potential of U.S. corporations is anywhere but down from where it was a week ago,” said Brian S. Wesbury, chief economist with Griffin, Kubik, Stephens & Thompson in Chicago.

“I just can’t imagine us seeing a long-term rally. If we do have some kind of patriotic rally, it’s not going to last long,” Wesbury said.

“A lot will ride on what happens” today, added Chris Varvares, an economist with Macroeconomic Advisors Inc. in St Louis. “If we get a patriotic rally, I think that will be a shot in the arm to consumer confidence,” he said.

Once the nation gets over the hump of reopening its markets, analysts say the big question will be whether the economy can dodge recession.

A growing number of forecasters has concluded that the economy was already contracting before the attacks, and is likely to shrink even further now. The issue could be decided in part Friday when the government revises its growth estimate for the April-through-June quarter, the latest period for which numbers are available. Many expect the already minuscule 0.2% growth rate for the quarter to be cut to zero or lower.

Until now the burden of trying to keep the economy afloat has fallen almost entirely on the Fed, which has slashed interest rates dramatically since the start of the year in an effort to revive growth by lowering borrowing costs.

But an unexpected side effect of the terrorist attacks may be to bring the White House, Congress and Washington’s tax-and-spending powers into the fray.

“We’re in a new world, and we have to think anew; we have to open our minds to new ideas and try to find the right answers,” Gephardt, the House Democratic leader, told Fox News.

Central to the new thinking of both political parties is a willingness to consider deficit spending, even if that means breaking into the until-now, sacrosanct surplus for Social Security.

Cheney said past promises to keep Social Security surpluses in a fictional “lock box” are now moot, noting that President Bush has said he was prepared to spend those funds in the event of war or recession.

Right now, he said, the country faces the prospect of both.

“We clearly have a war against terrorism,” Cheney said on NBC’s “Meet the Press.” And if the economy contracts for two consecutive quarters, which now appears possible, “that would qualify as a recession,” he added.

The vice president said he considered the lock-box debate “a little bit fallacious,” because the government is obligated to pay future Social Security benefits no matter how today’s surplus is used.

“We’ve never defaulted on a debt since Alexander Hamilton was the Treasury secretary, so that’s never really been an issue,” he said.