SYNOPSIS: We need a quick burst of government spending to beat the bad stock market to the punch
In late 1997, when South Korea suddenly found itself in economic crisis, there was a great upsurge of patriotism. Women offered their gold jewelry to the government, to help rebuild its vanished reserves of foreign exchange; millions of people cut back on their spending, feeling that it was irresponsible to buy themselves luxuries when the nation was in danger.
Of course, this willingness to make sacrifices for the national good made things worse: the drop in consumer spending was one of the factors that pushed South Korea into an extremely nasty recession.
I mention this piece of recent history for the obvious reason: although CNN may be calling this "America's new war," at least so far the economic effects of the Sept. 11 terrorist attack look very little like those we usually associate with war, and very much like those we saw in the Asian financial crisis. After a terrible week in the financial markets, it's clearer than ever that the usually helpful instincts of a nation under attack — the desire to give up some pleasures in honor of the victims, the feeling that having too good a time would be in bad taste — are actually worsening the situation.
So what's the answer? There have been some efforts to convince people that it is their patriotic duty to spend money. But I don't think that's going to work: it goes too much against the grain of human nature, against the feeling that tragedy demands sacrifice rather than self-indulgence. And the grass-roots campaign that took place before the market reopened, urging people to buy stock as a gesture of faith in America, has already backfired: anyone who patriotically purchased stocks got caught up in a market plunge that wiped out more than $1 trillion in wealth, while short-selling hedge fund managers who didn't let sentimentality get in the way of business did very well, thank you.
So this isn't the kind of problem that can be solved by voluntary action. It's up to the government to ensure that America's sorrow and nervousness don't turn into an economic disaster.
A first step would be some realistic rhetoric. I don't fault the Bush administration for initially using the language of war and revenge; an angry and grieving public would not have accepted anything less. Eventually, however, officials will have to make more strongly than they have the point that this is not going to be war as we usually understand it: there will probably be little impact on daily life for most people, few dramatic events and quite possibly no real catharsis.
A second step would be to accelerate the flow of government spending into the economy. One of the lessons of the Asian crisis, declared the I.M.F.'s Stanley Fischer, was that "Keynesianism is alive and well" — increased government spending does help the economy. And the additional spending that will take place as a result of the attack — $45 billion approved so far, much more to come — will eventually give our own economy a significant lift. But there is now a risk that the "wealth effect" from last week's market plunge, the adverse effects of stock losses on consumer spending, will beat the fiscal stimulus to the punch. Let's get the government spending underway, please.
True, Alan Greenspan cautioned us last week that "it is far more important to be right than quick." I'm not sure what he meant by that, so I'm not sure I agree. If he means that it's very important not to respond to the economy's weakness with a so-called stimulus package that locks in another round of permanent tax cuts, I definitely agree. As Mr. Greenspan pointed out, one risk to the economy is that a worsening long-run budget prospect will drive up long-term interest rates; that's the last thing we need. To limit that risk I would suggest the general rule that Congress shall make no laws in the heat of this crisis that affect either revenue or spending beyond next year.
But in terms of immediate action, it may be more important that the money already in the pipeline be spent quickly than that it be spent well.
A final, optimistic thought: South Korea's recession lasted less than a year; by 1999 the economy was rapidly recovering. We ought to be able to do better.
Originally published in The New York Times, 9.23.01