From the Washington Post on fear and the recession.
By Sebastian Mallaby
Monday, October 1, 2001; Page A21
In ordinary times, there would be no point in asking President Bush to undo part of his tax cut, which stands as his central political achievement. Nor would it be right to ask that he rein in his Treasury secretary, whose forthright manner he values. But these are not ordinary times. The terrorist attacks have harmed the economy in ways that demand unusual remedies.
The war against recession, more than the war on terrorism, is psychological. The forces of recession lurk in the shadows. They mount brief, spectacular attacks on our society -- wiping out $1 trillion of savings in the stock market, thrusting more than 100,000 airline workers out of their jobs. But mostly the forces of recession seek to frighten us. If they can destroy our confidence, scare us into spending and investing less, then they will succeed in upsetting our prosperity.
This psychological struggle transcends the headline arguments about the economy -- about the design of the airline bailout or the content of the stimulus package. To be sure, helping people feel safe in the air is a key to boosting confidence, and a fiscal stimulus is a good idea too. But a stimulus of $100 billion, the amount that Congress now contemplates, could turn out to be peanuts next to terror-induced swings in public sentiment.
Consider first the psychology of consumers. Families that own stock have lost a chunk of savings, which will make them less inclined to spend. Others may feel vulnerable to job losses and decide to start saving. This points to a reversal of the trend that saw the household savings rate fall from 7.8 percent in 1988 to 1.1 percent earlier this year. If the savings rate recouped just half that decline, annual spending would collapse by something like $240 billion -- swamping the $100 billion stimulus that Congress plans.
Then there is the psychology of businesses, whose investment spending also influences the strength of the economy. Executives are canceling sales trips or enduring two-hour waits at airports. Their assistants are missing phone calls as they abandon their desks to escort visitors from the expensive new security detail camped out in the lobby. Their supplies have been held up by new checks on the Canadian border. Their insurers are yanking terrorism coverage for their buildings. Everything seems uncertain. Unless something can be done to bolster their confidence, businesses will delay investment and so compound the likely decline in consumption.
If the war over the economy is primarily psychological, what else follows? The new conventional wisdom -- that we have returned to an era of big-government activism -- should be treated cautiously. Government may be throwing money at the airlines, but their fate will be determined by the psychology of travelers who will choose whether to fly. Congress may be working on a stimulus, but this may be swamped by a decline in consumer confidence. The new government activism is less striking than the limits to what it can achieve.
Moreover, because government's power is limited, its efforts to shape public sentiment are all-important. Bush has tried to bolster confidence by urging Americans to return to life as usual, by making a big point of going out to a Tex-Mex restaurant, by sending his transportation secretary on a commercial flight to Chicago. But he could do more than that in two areas.
First, Bush needs to recognize that one reason why financial markets are wobbly -- and therefore why consumers and investors are skittish -- is that his huge 10-year tax cut has made the long-term budget outlook worrying. The fear that inflation may return toward the end of this decade pushes up long-term interest rates, which contribute to stock market weakness. By proposing a slower phase-in of the tax cuts, the Bush administration could fix this problem. At a time when a fiscal stimulus and other policy levers seem uncertain, it would be folly not to grab this opportunity to bolster markets and hence confidence.
Second, Bush needs to recognize that, because public psychology is all-important, the reputation of his senior officials is crucial. Alan Greenspan, the Fed chairman, has a reputation so exalted that his mere presence at the central bank boosts public confidence. But Paul O'Neill, the Treasury secretary, is something of an anti-Greenspan. He has made a series of wild remarks on subjects ranging from the dollar to Argentina and recently the stock market. When Wall Street reopened a fortnight ago, O'Neill declared that the market would be approaching all-time highs in the next 12 to 18 months. The Dow Jones Industrial Average promptly experienced its worst week since the Depression.
Recently, when Congress has wanted to consult a Treasury secretary, it has sometimes called in Robert Rubin, a Clinton-era figure whose reputation on Wall Street is impeccable. The fact that Rubin, who is now a private banker, has emerged as a powerful influence in this crisis tells you something about the limits to the power of a newly active government. But it also should remind the president to keep a wary eye on his man at Treasury.
The writer is a member of the editorial page staff.
© 2001 The Washington Post Company
-------------------------------------------------------------------------------- |
