The Economics of War
C. Fred Bergsten is director of the Institute for
International Economics and a long-time proponent of mulilateral economic
Washington - 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
All three of the chief economic areas, including Japan as well as the
US 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 US 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 an immediate session of the finance ministers
and central bank governors of the Group of Seven industrial countries
(US, Japan, Germany, France, UK, Italy and Canada) to announce the economic
component of the war strategy. It is unfortunate that the annual conclave
of the International Monetary Fund 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 the early period 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.
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