Market Cringes, but Stands
The American economy is amazingly resilient. In the past century, it weathered the Great Depression, the oil shocks of the 1970s, the stock market crash in 1987 and a recession in the early 1990s before roaring for 10 boom years. But it has never had to deal with a physical attack on its financial nerve center. The terrorists who crashed into the two World Trade Center towers were trying to take American capitalism along with them.
They didn’t come close. The New York Stock Exchange, which had been shut down for the longest period since the Depression, witnessed less than one-third the percentage drop of Oct. 19, 1987. The market climbed back slightly at the end of the day. The system worked. Everything was orderly and calm.
Credit has to go to President Bush, Treasury Secretary Paul O’Neill, Federal Reserve Chairman Alan Greenspan and big investors such as Warren Buffet, who went on CBS’s “60 Minutes” to declare that he “wouldn’t be selling anything.” Despite the relief on Wall Street, the bigger question that the administration and Congress will have to confront remains: Where is the economy headed? Does a recession beckon? Or will the measures the administration has taken--including $40 billion in emergency spending--be enough to avert a lasting recession?
The economy was plenty shaky before the terrorist attacks. Consumer confidence fell in September to its lowest point since August 1993. The unemployment numbers hit a four-year high of 4.9% in August and the Gross Domestic Product rose at an anemic 0.2% annual rate in the second quarter. None of these figures is cause for immediate alarm. But they testify to how soft the economy was on the eve of the attack.
The consequences for the airline industry can hardly be exaggerated. Air carriers lost an estimated $2 billion as a result of being grounded for a week; overall losses for the year are projected at $5 billion. Congress may pass legislation giving the airlines $2.5 billion in aid and $12.5 billion in loan guarantees. The insurance industry faces claims of $20 billion or more. Hotels, resorts and cruises will suffer losses. There are some sections of the economy that will do well, including defense contractors and security and construction companies--the cost of rebuilding lower Manhattan could be as high as $30 billion.
In its cheerleading for the economy, the Bush administration has followed the right course because consumer confidence is fragile, and a key to keeping the economy going (remember how the administration badmouthed the economy early on to justify tax cuts?) But dangers now lurk in higher inflation as a result of deficit spending. The administration should tell House Republicans that no further tax cuts will be passed, especially rollbacks of the capital gains tax, a pure sop to the rich.
More positive efforts include encouragement of free trade and new free-trade zones, particularly with Latin America. The administration’s ability to steer the economy may be limited, but it should grab every chance to buoy U.S. and global markets.
