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09/24 10:04P (WJ) WSJ(9/25) UPDATE: War On Terrorism Won't Help
Economy
Story 7430 (G/DEF, G/USG, N/DJN, N/DJWI, N/JNL, N/CRM, N/DJPF,
N/DJWB...) By
Greg Ip and John D.
McKinnon
Staff Reporters of The Wall Street
Journal
WASHINGTON -- As in previous wars, the U.S. is gearing up to spend
billions of dollars on its war against
terrorism. But unlike past conflicts, this
one isn't likely to pump
up economy.
While earlier conflicts occurred overseas, terrorism damages
Americans' sense of
well-being, hurting the civilian economy in ways that purely
military engagements like the Vietnam or Persian
Gulf wars
didn't.
Successfully attacking a military target as prominent as the Pentagon
would have had great symbolic value, but
little economic impact, says
Alberto
Abadie, an economist at Harvard's Kennedy School of Government. By
contrast, he said, the destruction of
the World Trade Center affects "the spinal cord of
any favorable business environment" -- the ability of business and workers
"to meet and communicate effectively without
incurring
risks."
Most economists expect the terrorist attacks to drive the U.S.
into
recession -- albeit a short one. Even Treasury Secretary Paul O'Neill,
who initially played down
the economic impact of the attacks, said yesterday
they had hit the economy in a "resounding
way," though the underlying future of the U.S.
economy is "very good." Indeed, most economists expect growth to
resume in the first quarter of 2002,
helped by aggressive interest rate cuts and a big boost in federal
spending.
That is unless, of course, there are more terrorist attacks.
President Bush has warned of a prolonged
fight, raising the risk of more attacks. If that
is the case, the experience of other countries
suggests business investment and
economic growth could be hurt for some time to come, though how much is
hard to
measure.
After the separatist group ETA began an intense terrorist campaign
targeting business in Spain's Basque region in the
mid-1970s, the region's per capita
income fell 10% from what it otherwise would have been, according to a
study co-written by Prof. Abadie.
Investors aren't likely to abandon the U.S.
as they did the Basque
region, he said. Still, when civilian business
activities are targets, Prof. Abadie said,
terrorism is "likely to create lower private
investment" while boosting security
costs.
Because of its global scale and long-term nature, the war on
terrorism
probably will cost more than the Persian Gulf War, which totaled about
$80 billion in constant
fiscal-year 2002 dollars. The Vietnam War, by
contrast, cost $572 billion in
2002 dollars. U.S. government spending as a percentage
of gross domestic product peaked at 43.7% in 1944
during World War II and was
only 20.5% at the height of the Vietnam War in 1968. It is currently
about
18%.
"In relation to the size of the overall economy, the increase
[in governmentspending] this time will not be sufficient to compensate for
the dampening effect of the threat itself,"
said Loren Thompson, chief operating
officer with the Lexington
Institute, a military think tank in Arlington, Va.
"On balance, I
think this is an economic negative rather than a
positive."
Furthermore, the money expected to be spent as a result of the
attacks overstates the stimulative impact of
fresh government spending, since much of it will simply go to
replace lost incomes, notes UBS Warburg economist
Maury
Harris.
Overall, the economic spinoffs from direct spending related to the
conflict are likely to be quite small.
Some security activities might even
drain
economic energy by slowing commerce and discouraging travel.
Some
high-technology activities -- such as cracking encryption devices to
track down terrorists and their assets --
could produce considerable new skills and technology, but they
might not translate readily to a bigger
market.
One of the big costs will be intelligence-gathering on the
whereabouts of terrorists and
their assets. Government spending for security measures
also will soar, not only for
airlines and buildings but also for telecommunications
infrastructure and computers. "It's also a war against cyberterrorism,"
said David E. Baker, managing director,
Schwab Washington Research
Group.
The effects of a prolonged terrorist campaign may prove difficult
to
measure. When the Irish Republican Army launched several bombings in
London'sfinancial district between 1991 and 1994, "it led to fears that were
uttered quietly, that London would lose
business to other European locations,"
said Brendan O'Leary, a political
scientist at the London School of Economics
who has studied the Northern Ireland
conflict. "Almost by definition these things
are impossible to quantify. But there's not much doubt that it was a
factor affecting policy makers'
thinking."
Israel's growth has come to a standstill in the past year, hit by
a combination of
the Palestinian intifada and the Nasdaq collapse, which
has hurt Israel's high-tech sector.
The security response has added to
costs
everywhere, said Ephraim Kleiman, professor of economics at Hebrew
University in Jerusalem and a visiting
professor at the Massachusetts Institute
of
Technology. Even coffee houses now post guards at their entrances, he
said. But over the years
Israelis have learned to live with both the
constant threat of
terrorist attack and the intrusiveness of extreme security
measures. Once the initial horror of the Sept. 11
attacks wears off, the same is likely to be
true of Americans, Prof. Kleiman
said.
(END) DOW JONES NEWS
09-24-01
10:04
PM
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