‘New Economy’ Is a Thing of the Past

For a little over a decade following the fall of the Berlin Wall, America lived without serious threat. The result was a U.S. economy that could devote itself single-mindedly to churning out better video games, bigger houses, wild start-ups and improved lives.

But a growing number of economists have concluded that much about those happy times will prove to be casualties of the mid-September airliner attacks on New York and the Pentagon.

The “new economy,” already tattered before the assaults, is dying. In its place will emerge a shadow war economy.

Many of these analysts see government, whose role waned in the last decade, returning with a vengeance as warrior, regulator, economic manager, big spender. The private sector, whose entrepreneurial enthusiasms defined the passing age, will become more corporate and controlled. And the new economy--the deregulated, wired, just-in-time, globalized new economy of the ‘90s--will be gone.

“We were blessed for 10 years; we lived in a world without bad guys,” said Neal Soss, a former senior Federal Reserve official who is chief economist with Credit Suisse First Boston Corp. in New York. “Now the bad guys have found us, we’re going to have to spend an awful lot of money to guard against them.

“It’s necessary,” Soss said. “But it’s dead weight on the economy.”

Such views are substantially different--and darker--than those heard in the first days following the Sept. 11 attacks. Then, most analysts compared the terrorist assaults to natural disasters such as the Northridge earthquake: terrible in their human toll, but of only minimal cost to the overall economy.

Most assessments were cast in the up-or-down language that represents economic business-as-usual: Would the stock market tank or bounce? Would consumers buy more or less? Would the economy shrink or expand?

The pressing question confronting government was how much of its fiscal and monetary power it would employ to ensure growth continued, and especially whether it might be willing to go back to deficit spending to prop up the nation’s faltering expansion.

But all this was before the full extent of the calamity became clear, and before President Bush called the nation to arms. The president’s decisive action will do more than simply push the economy up or down; it will send it off in a drastically different direction than the bubbling, borderless, consumerist one in which it once had been headed.

“It’s going to cause some pretty serious structural changes,” said William C. Dudley, chief U.S. economist with Goldman Sachs & Co. in New York.

The full sweep of these changes are unknown, but such powerful players as the president and Federal Reserve Chairman Alan Greenspan recently have insisted they need not be large or unsettling.

But many independent analysts discount these official assessments as little more than economic cheerleading and predict that the changes will be both deep-running and deeply felt by average Americans.

“Greenspan is totally wrong that this will have no effect on long-term prospects,” said Roger M. Kubarych, a former Fed official who is now senior economic advisor to HVB Americas Inc., the U.S. arm of Germany’s HypoVereinsbank.

“The costs of moving from a peacetime economy to war footing alone will kill productivity,” Kubarych predicted of the key measure of an economy’s ability to provide rising living standards.

Less than two weeks after the attacks, signs of big economic change abound.

Toyota Motor Corp. was forced to shut its huge Georgetown, Ky., car factory and two other U.S. facilities after supplies that are usually shipped overnight from Canada became snarled at the border because of a jump in security checks. Major U.S. car makers General Motors Corp. and Ford Motor Co. temporarily shut plants in the U.S., Canada and Mexico for similar reasons.

Cell phone giants such as Cingular Wireless warned they may not be able to gain control of airwaves now held by the military and considered crucial for the next generation of wireless devices, and may not be able to raise the money needed to roll out the new technology.

Major air carriers warned they could be forced to seek bankruptcy protection because of the shutdown of air travel after the attacks, a sharp drop in ridership and possible liability lawsuits. The president is backing a huge bailout of the industry.

Many analysts say developments such as these could send an already depressed stock market still lower and nudge the economy into recession.

The Dow Jones industrial average finished its worst week in almost 70 years Friday as investors slashed it by 1,369.70 points, or 14.3%, in five days of trading. That was the index’s worst weekly decline since 1933.

Analysts say the economy probably already was shrinking last spring, something that will become clear when the government issues its revised gross domestic product figures for the second quarter Friday.

With the unemployment rate up in August and industrial production and consumer confidence down, many say it also was shrinking this quarter even in advance of the attacks. Many predict it will continue shrinking through year end and at least into the early part of next year.

What happens next--and why--are matters of deep dispute among economists, with some predicting the country will roar back by spring because of Fed interest rate cuts, expected tax cuts and new federal spending, while others see no clear comeback in sight. Whoever turns out to be correct, the economy that finally does emerge from recession could well be very different from the one that went in.

Deregulation

A couple of years ago, when it looked as if the economy would grow indefinitely, many economists sought to explain why by pointing to a two-decade-old effort by the federal government to get out of the way of the private sector.

First in airlines, trucking, rail and finance, and later in telecommunications and energy, Washington and the states sought to pare their regulations and leave private participants to choose the rules under which they would operate.

The pendulum already had begun to swing back before Sept. 11 because of California’s disastrous experience with electricity deregulation. But some economists believe that what had been a small shift could turn into a rout. “The idea that private industries can regulate themselves when it comes to public goods like airport security is going to come in for considerable scrutiny,” Goldman Sachs’ Dudley said. “The whole movement toward deregulation is in for big change.”

In the case of the airlines, much of the pressure for greater government involvement is coming from the industry itself. Major carriers want Washington to assume responsibility for security, and to permit them to reduce both flights and competition to cope with huge financial losses.

Many analysts expect at least some re-regulation of airlines, trucking, financial services, telecommunications and energy to occur. And that may prove to be the least of the expansion in Washington’s powers.

Government spending, which shrank substantially in the 1990s on everything besides benefit transfers such as Social Security and Medicare, probably will expand in the coming decade. Certainly, defense spending will, after having contracted to less than 3% of gross domestic output in 2000 from 5.2% in 1990.

With it probably will come a shift in the balance of power between the public and private sectors, this time in favor of the public.

Wired

Of all the economic changes credited for the spectacular growth of the 1990s, none has gained greater praise--or produced more hype--than the telecommunications and information technology revolutions.

Economists have treated the combination of the Internet, cell phones and fiber-optic networks as the “x” factor that prodded the country into operating more productively after decades of stubbornly refusing to do so. And they have attributed most of the technological innovation to entrepreneurs.

No one is suggesting the end of innovation with the coming of a shadow war economy. The siege on terror envisioned by the president could produce an entirely new generation of high technology, from nano-cameras to communications-tracing computer software.

But the principal technological actors and their primary aims could get turned on their heads. The upshot would be an economy that looks a lot more like the Cold War ‘50s than the new economy ‘90s.

One result, according to Philip L. Verveer, the former Justice Department lawyer who spearheaded the government’s breakup of the AT&T; telephone monopoly, will be a reemergence of the “bigger-is-better argument.”

Verveer said that both AT&T; and the Pentagon argued Washington could better protect national security through one large phone company than scores of smaller, competing ones.

Just-in-Time

The just-in-time distribution practices adopted by U.S. business over the last two decades seem to be about little more than how big a backlog of parts and products a company must keep.

But they have turned out to be much more important than that. They have goaded companies to run more efficiently and forced the economy as a whole to operate in greater sync.

“The whole concept of just-in-time delivery is going to have to be reevaluated,” said transportation specialist Satish Jindel, president of SJ Consulting Group Inc. in Pittsburgh. From auto makers to supermarkets, no one can be sure of on-time deliveries after the attacks. “There is just unpredictability,” he said.

One result is likely to be that companies build more warehouses and stockpile more goods on the chance of new disruptions. Another is that they become more reluctant to rely on foreign, and often less-expensive, suppliers for fear of border closings.

“Just-in-time,” said Soss, the Credit Suisse First Boston economist, is going to become “just-in-case” as companies grow more cautious in the wake of the attacks.

Globalization

Nothing so captured American confidence in the wake of Communism’s collapse as the expansion of global trade and the flood of U.S. investment into developing nations in the ‘90s. And nothing may dry up so quickly in the wake of the attacks.

A report out last week predicted that the flow of private funds from the U.S. and other developed nations to Latin America, Asia, Eastern Europe, the Middle East and Africa will fall by more than a third this year. And in the 10 days after the attacks, the market value of stocks in non-U.S. markets plunged about $1.5 trillion.

The turmoil is still largely invisible to Americans, whose attention has been consumed by the attacks and their tragic aftermath. But it is unlikely to remain so as the U.S. seeks international allies and prepares for military action.

“The administration’s strategy is having a tremendous effect on the rest of the world,” Harvard economist Jeffrey D. Sachs said. “It’s causing a calamitous loss of confidence in the global economic framework.”

But such reverberations are what’s to be expected in a globalized economy whose creation was, at least until recently, considered one of the crowning achievements of the last decade’s growth.