The economy now seems headed for serious recession. How to fight a shadowy enemy is necessarily Topic A, but rescuing the economy is not far behind.
The economy is plummeting for several interrelated reasons. The stock market was already falling sharply before Sept. 11. The speculative excess of the late 1990s financed trillions of dollars of investments that will never return profits. Once investors grasped that, the market headed south. So this is not just a blow to investor psychology; the economic blow is real.
A second source of weakness is consumer spending. Even before Sept. 11, there had been tens of thousands of layoffs and the unemployment rate had risen sharply, to 4.9 percent. Now, several key industries such as insurance, airlines, hotels, and financial services have felt the effects of the attack directly, and consumers are spending less money generally. This intensifies the squeeze on corporate profits and investments.
Earlier this year, continued consumer spending, fueled by increased borrowing, was the one thing keeping the economy rolling. But with layoffs mounting, and a national mood of patriotism mixed with anxiety, it just doesn't feel like the right time to re-do that kitchen or take that trip.
A third problem is the risk of inflation. This seems improbable in economic free-fall. But the complication is the weakening dollar. A strong dollar has allowed the Federal Reserve to keep cutting interest rates without fear of inflation, as long as foreigners kept sending money to American financial markets. But the combination of a weak economy and a wartime footing will lead many overseas investors to park money in Europe, weakening the dollar and raising the cost of imports. A further risk to inflation is a disruption in the Middle East supply oil.
If all of this isn't a perfect economic storm, it's close.
What to do? The Fed keeps cutting interest rates. This is necessary but not sufficient. Lower rates won't make frightened consumers spend or nearly bankrupt companies invest.
Congress and the White House are pursuing an economic stimulus package, but they are thinking too small.
US Representative Barney Frank last Thursday bravely broke ranks and declared that the Bush tax cut and the politics of endless surplus were no longer sacrosanct. Frank proposed repealing the cut in the highest income bracket, and to use the money for public spending.
We could go even further and repeal all the portions of the tax cut that affect only the wealthiest 2 percent of Americans. These largely take effect after 2004, and thus have no effect on economic activity during the current downturn. This trillion dollars could be reprogrammed to stimulate the economy right now.
There is no shortage of worthy candidates. The country will need tens of billions of additional dollars for an antiterrorism and security buildup. New York alone needs at least $40 billion to rebuild. Working families could use tax relief.
State budget reserves are plummeting, and several states are considering tax increases - the worst medicine in a recession. Under welfare reform, millions of needy people will soon lose their benefits, in a recession. Congress should pump billions into state economies through general revenue sharing and an increase in unemployment compensation and social aid.
Before Sept. 11, Congress was debating education and prescription drug benefits. The Bush administration wanted to spend less, not more, to finance yet another tax cut for the affluent, this time on capital gains. But a capital-gains cut in a plunging stock market won't do much because there are mainly capital losses. Forget the capital-gains cut. Instead, these public outlays should be increased, not slashed.
Congress has just approved a $15 billion rescue package for the airlines. Some relief is surely necessary. But the broader need is for a coherent transportation policy, not just a bailout. With longer security delays, fewer flights, and tight restrictions on Washington's National Airport, the preferred travel mode on the Northeast corridor is now Amtrak. It needs a massive infusion of public funds now and over the next decade, to improve the tracks and allow true high-speed trains.
One heartening side effect of the Sept. 11 attack is a sudden moratorium on trashing government. Those magnificent New York police, firefighters, and EMT heroes are all public employees. It was a privatized and contracted-out airline security system on the cheap that failed America. And it will be a new burst of collective resolve and public purpose that once again redeems our economy and our country.
