Economics Of War Essay Research Paper THE

Economics Of War Essay, Research Paper

THE ECONOMICS OF WAR

by C. Fred Bergsten, Director

Institute for International Economics

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Op-ed for the Los Angeles Times

Syndicate International

September 2001

? 2001 Institute for International Economics

As the United States forges an international military and political coalition to counter the heinous attacks of September 11, it is equally important to mount a coordinated response to the economic dimension of the crisis. Acceptance of a financial meltdown or global recession would represent as great a defeat as a failure to punish the perpetrators of the bombing itself and their protectors.

The case for a multilateral economic strategy is compelling. Even prior to the attacks, the world was experiencing its first synchronized turndown in decades. Growth had slowed sharply almost everywhere and turned negative in a number of countries. There was genuine risk of a global recession and the latest, pre-attack US data underscore that possibility here.

The terrorist actions will depress economic activity further for at least a while. More importantly, the shock to confidence could lead American and other consumers into more cautious spending patterns for months or even longer. A worldwide downturn is all too possible.

A synchronized policy response is thus required. The key central banks have already taken the first essential steps by pumping sizable amounts of liquidity into the markets to prevent cash shortages that could disrupt commerce, and by making initial cuts in interest rates. The OPEC countries have also made a major contribution by announcing that they will maintain oil production at levels that will avoid exacerbating the problem. Much more is needed, however.

The next move should be a further, coordinated reduction in interest rates by the central banks, especially our own Federal Reserve and the European Central Bank that manages the euro. (The Bank of Japan’s interest rates are already near zero.) Given the urgent need to restore confidence and provide the maximum stimulus to reviving economic activity, the world’s monetary authorities should continue to act together in a rapid and decisive manner.

All three of the chief economic areas, including Japan as well as the United States and Europe, should also adopt expansionary fiscal measures. Strangely, the major European countries and Japan have been contemplating spending cutbacks, in the face of recession or sharp slowdown, to meet pre-planned budget targets. This would be akin to the Hoover economics that helped bring on the Great Depression in the 1930s, making a bad situation much worse. The arbitrary deficit ceilings targeted by Prime Minister Koizumi in Japan and the Stability Pact in Europe should be relaxed immediately to cope with the global crisis.

The United States has already cut taxes modestly and will be increasing government spending to respond to the humanitarian and security implications of the terrorist attacks. However, we must not slip into our own brand of Hoover economics by regarding the fictitious Social Security “lock box” as a deterrent to deploying our large budget surplus. We should promptly implement a significant chunk of the cut in personal income taxes that has already been agreed for later years, or simply repeat the rebates of the recent past, injecting another $100 billion or so of purchasing power into the economy over the next few months.

The success of such measures will be determined largely by their impact on the psychology and confidence of consumers and investors. These crucial intangibles will be steered importantly by developments outside the economic sphere, especially the effectiveness of our leadership in responding to the direct security effects of the attacks. But the impact of the economic steps themselves can be greatly enhanced if they are taken quickly, decisively and especially through a coordinated multilateral approach that demonstrates that the authorities of the leading countries are ready to couple their military alliance with effective economic collaboration.

Such cooperation can best be displayed through highly visible international meetings. The most obvious is the session of the finance ministers and central bank governors of the Group of Seven industrial countries (US, Japan, Germany, France, UK, Italy and Canada) on October 6 than can announce the economic component of the war strategy. It is unfortunate that the annual conclave of the International Monetary Fund that was scheduled for September 29-30 was cancelled, as it could have been used to broaden and reinforce support for the multilateral strategy.

The community of nations can also display unity in responding to the destruction of the World Trade Center by moving forward together on world trade. The ministerial meeting of the World Trade Organization in November should proceed as scheduled, especially as it is to be held in Qatar on the Persian Gulf. The quibbles that have raised doubts about the participants’ ability to launch a new round of multilateral negotiations should be set aside in light of the new circumstances, just as the Cold War allies traditionally overcame their petty trade disputes in the face of overriding security imperatives. The similar quibbles that have kept the Congress from enabling our own President to participate in such negotiations since 1994, let alone lead them, should also be set aside with early passage of Trade Promotion Authority if we want to convince the world that we are serious about responding effectively to the events of September 11.

The economic dimension of the terrorist attacks has naturally been overshadowed during these first few days by the human tragedy and by the quest to restore a secure America. As life returns toward normal, however, the everyday concerns of jobs and business will resume their traditional primacy for most people, here and around the world. It is thus essential that the economic front of the conflict be handled with as much priority, skill and international cooperation as the security front. We can achieve victory over the terrorists only with a vibrant recovery of our economies along with a destruction of their ability to ever commit such atrocities again.