America At War:
War and Economy
With Steven Pearlstein
Washington Post Staff Writer
Monday, Oct. 29, 2001; 3 p.m. EST

What is the economic cost of the terrorist attacks on New York and Washington?

Steven Pearlstein, Post Business staff writer, was online Monday, Oct. 29 at 3 p.m. EST, to talk about the change in economy in times of war.

"Nations also don't get rich by racking up more debt to pay for everyday operating costs. That's what the federal and state governments may have to do to cover the added expenses of war, homeland security and unemployment benefits that result from the Sept. 11 attacks. And in the private sector, a parallel process will take place as laid-off workers dip into their savings and companies dip into their retained earnings to get them through the economic downturn." Read Pearlstein's article Attacks' Toll Elusive As Money Shifts From Sector to Sector (Post, Oct. 28, 2001).

A transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Reston, Va.: As with every war the U.S. has played a role in, the economic impact has its unique properties. How will this war and its coinciding dip in consumer confidence due to other factors such as the anthrax scare impact the U.S.'s economy? How long will the hiring freeze last? What's the probability of a depression taking place?

Inquisitive Mind

Steven Pearlstein: The probability of a depression is still pretty low in part because consumer confidence continues to prove pretty resilient. But business investment, which led the 1990s expansion, remains very depressed and its hard to see how we can have a robust rebound without a pickup in investment in plant and equipment, particularly of the high tech variety. As for the labor market, they take even longer to recover than sales, profit, stock prices and investment. So if there's a hiring freeze, don't look for it to be lifted any time before late spring.

Tampa, Fla.: The economy is headed for a crash!

Bush will regret the 1.3 trillion dollars he gave "to the rich", that by law was supposed to pay the debts, and provide for the common defense and general welfare--Article I, Section 8, Number 1.

Steven Pearlstein: The economy is headed for a rough patch, particularly over the next four months. Crash, I'm not sure. And don't worry too much about the tax cuts. Its a mistake to think that nobody will tamper with a 10 year tax cut. Reagan's cut was altered in Year 2 and I would expect this one would to, as elections change the political landscape and elected officials respond to changing economic conditions. The tax cuts didn't cause the problems with the economy, however ill advised you consider them to be, and if they are a threat to economic well being, our democracy is pretty good at changing course to alleviate that threat.

South Bend, Ind.: We have heard that truth is one of the first casulties of war.

I would add a second:so-called free market or "efficient" market economic doctrines.

Would you agree that much of the Republican economic platform has been overtaken by events?

Steven Pearlstein: This is obviously not a time of celebration for advocates of less government. Wars never are. But don't be quick to make the same mistake the conservative ideologues do and jump to too sweeping conclusions about the inadequacy of markets. There are market failures all over the place, in good times and bad. The question is whether the world is better off if government tries to correct for those failures. Most of the time, it isn't. But in times like these, the risks of doing nothing are sometimes greater than the risks that government might not get it right. That was Phil Gramm's conclusion as he reluctantly agreed last week to go along with a plan for the government to backstop the private insurance industry in the matter of terrorism insurance. His instinct was that investment in real estate and business generally would not collapse if terrorism insurance were not available, or was expensive, but in the current context he wasn't willing to take what he considered the small risk to prove it. What you fear in situations like this is a cascading effect of lots of things going wrong, one after another. And if you can prevent that kind of negative momentum from building up, its probably worth it while we all keep our eye on the big prize, which is winning the war against terrorism.

Washington, D.C.: I believe the attacks on the US Postal Service will have a positive impact on the online billing/ paying services. Do you see growth in online services in general as a result of the attacks?

Steven Pearlstein: Maybe a small impact. It was happening anyway. Maybe because of the disruption in postal service, more people will switch earlier than they would have otherwise. But don't assume that the postal service will be out of commission all over the country for very long. By now the terrorists are probably already onto another trick.

Washington, D.C.: What is the best outlet to invest in that would not only be profitable for the investor, but to also to be of aid to our economy.

Steven Pearlstein: Sorry I can't answer your question directly. I don't like giving investment advice and even if I did it would only be worth as much as you're paying for it, which is zero.

Elkins, W. Va,: Can you describe the war's effect on the "other than defense dept." spending in the FY 2002 federal budget?

Steven Pearlstein: The biggest impact will be in homeland security areas, public health, law enforcement. For a year or two, these increases can be financed by additional debt but over the long term, we're either going to have to raise taxes to pay for them or reduce other spending.

Minnesota Point: Steven Pearlstein: You mention more jobs may be created by the new, Homeland Security agency to supplement the loss of other cut-backs.
Will the majority be minimum wage positions? Will the training be sufficient to justify a living wage---and if not, what will be the quality of those 'security employees' making decisions that may limit our civil liberties?

Homeland security with all its overt powers, will not be more favorbly received, or capture the public's ardor as a new 'job category', in the light of the attendant loss of or diminished civil liberties?

Steven Pearlstein: FBI agents, public health officials, coast guard and border guard men and women in uniform--those aren't lousy jobs. I suspect that we'll hire the people we need to hire to get the job done and pay them what the market requires to attract and retain them. This is not mostly about airport screeners, who may in fact continue to be relatively low paid and lightly trained. But you can bet their supervisors will now be of a higher caliber.

Dallas, Texas: What's the reasoning behind the Republican's Billion dollar tax breaks to the top ten businesses in America? How would it it help, or would it at all?

Steven Pearlstein: There is some question about how stimulative the House package will really be. As a general rule, tax breaks that go to rich people will mostly end up in savings and brokerage accounts. Tax breaks that go to poor people will be spent on food, health care, restaurant meals and clothing and electronic equipment (most of those last two will be imported and is of little stimulative value). Tax breaks that go to corporations may induce them to lay off fewer people or invest in more equipment, particularly among businesses without easy or affordable access to outside financing, although some of it will also go to increased bonuses to executives and cash reserves. To my mind, the best way to stimulate the economy now is to give businesses a big tax break for investing in new plant and equipment over the next 9 months. I know that doesn't sit well with some of the liberals among you, who don't like corporations and think they don't deserve any more tax breaks. We're not talking about deserve here, however. We're talking about spending a dollar now to get two dollars back quickly by keeping the economy from developing a bad dynamic that feeds on itself. The reason you do it is because its good for everyone--the corporations are simply the vehicle through which it is accomplished. If they happen to enjoy some extra benefit in addition, well, I can live with that. Of course better than a tax break would be some form of coupon good only for purchase of American-made equipment. But that might get a bit cumbersome.

Alexandria, Va.: How much, if at all, do you think the U.S. auto industry is mortgaging its future? Their 0% financing plan is moving the vehicles, but at what price? It seems that the Amazon.com business plan of selling a buck for 90 cents can't work for America's largest manufacturing industry. Can it?

Steven Pearlstein: Good point. The auto industry is desperate not to lose any more market share than they have already lost in recent years. They also have very expensive and restrictive labor contracts which probably make it even more expensive not to produce cars than to produce them at a slight loss. They also know that by selling this many cars now, they are only borrowing from future sales that would otherwise be more profitable. I'm sure its a complex calculation they have had to make, driven in part out of concern that if they don't do what their competitors are doing, they will fall behind. Marx once predicted the demise of capitalism because of such ruinous competition. I doubt it will get to that but at some point I think these auto companies are going to have to focus on financial viability.

Arlington, Va.: There was an article in I think the Atlantic Monthly a few years back arguing that GDP is a poor measure of the economy because things that are clearly bad--like a hurricane--actually goose the numbers because the rebuilding effort is measured as output. By that logic shouldn't the rebuilding effort in NY and here artificially inflate our output numbers, for better or worse? Thoughts?

Steven Pearlstein: As I pointed out in the piece, the rebuilding may raise output higher than it otherwise would have been, but it will reduce wealth at the same time. So its a good and a bad. But if your question is, Are we collectively better off with the destruction and reconstruction than we would have been if no destruction had occurred, the answer is unambiguous: NO.

Boulder, Colo.: Without the attack and the war, what do you think would have happened to our economy over the next year or so? Who will the recent events change that?

Steven Pearlstein: The economy was headed to recession anyway. The attacks will make it deeper and longer by some amount. It will also make us all, collectively, less well off because of a one-time hit to wealth. Is it more of a factor than the recessionary dynamics that were already in place? No.

Fairfax, Va,: Beside the obvious defense contractor in wait, who are the likely long term winners to come out of this economic retreat?

Steven Pearlstein: There are no long term winners, really, only short term.

Burke, Va.: Can you explain to this non-economist the theories behind the new GOP tax cut proposal? Is it that the government will somehow see the money later in new revenue? I'd be the first to admit that I know next to nothing about economics, but I can't see the sense of "giving away" money now, when short term needs have sky-rocketed and any recouping of the revenue will be sometime in the future.

Steven Pearlstein: What's going on in a recession is that demand for goods and services falls below the supply. So if there is some way to goose up demand to match supply, and in the process wring out the psychological component that causes consumers and investors to hold back, in the long run even the government may be better off. Spend a dollar now, get two dollars more down the line. Since the government finances this by borrowing--redirecting money from long-term investments to short-term consumption--it boosts demand for goods and services more than there otherwise would have been. There's not doubt it works. The only question is whether it works fast enough.

Rockville, Md.: Yes, but who ARE those that will gain some benefit, although briefly?

Steven Pearlstein: You can probably figure that out as well as I can. Makers of security equipment, vaccines and antibiotics, guided missiles, security consultants, providers of security services, risk management consultants. But remember, we have a pretty supple and flexibile economy and by the end of the year I wouldn't be surprised if there weren't so many new entrants in each of these industries that they create an oversupply that drives down prices and profits for everyone. In that case, I'm not sure they will really benefit. Those who will will be those with skills, knowledge, patents that cannot be quickly or easily replicated.

Steven Pearlstein: That should do it for today. Thanks for reading, responding and all that. Let's do it again soon. Cheers.

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