Terrorist attacks and corporate crime shocked the nation, but through it all America's political and economic systems held steady

From Sept. 11, 2001, to Sept. 11, 2002, it has been a gut-wrenching year for Americans. An unprecedented series of shocks--terrorism, hate hurled at the U.S. from overseas, the downdraft of a bursting tech bubble, corporate corruption, a dramatic decline in equities and personal wealth--has unmoored people, making them feel unsafe and uncertain about the future. The anniversary of the most horrendous of these events, the destruction of the World Trade Center towers, offers us the opportunity to step back and assess the year as a whole. We should take it.

A balanced and reasonable analysis will show two things. First, the system worked.

The resiliency, flexibility, and strength built into the American political and economic systems carried the country through its darkest months since the attack on Pearl Harbor in 1941.

The worst fears, the direst predictions of a terrorist-racked, depression-ridden nation spiraling out of control never materialized. Despite our anxieties, the other shoe never dropped.

Just as important, the system changed. The very process of dealing with the military, business, and financial shocks over the course of the year changed America, bringing it to a new inflection point in its history. Without our truly recognizing it, the country is embarking on a very different path from the one it has been on for many years.

In his first inaugural address in 1981, President Reagan announced that "government is not the solution to our problems. Government is the problem." And for 20 years, this has been America's mantra, both at home and abroad. It set in motion a long cycle where public opinion and government policy favored free markets, deregulation, and private enterprise over big government. Last year, the mantra changed. Post-September 11, the government's size, reach, and authority expanded sharply. It grew as a consequence of protecting U.S. citizens not only from terrorists from across the seas but also from unethical CEOs, accountants, and Wall Street bankers threatening their financial well-being at home.

The simple truth is that public demand brought back government in its traditional role as guardian of the country's safety. The forces favoring bigger government that were unleashed by September 11 were amplified by the corporate crime wave that followed in the year. People turned to government for help, and the Bush Administration complied. This was an historic turn.

Over the past 12 months, America has seen the largest one-year increase of government spending on national defense as a percentage of GDP since 1982. It has seen more regulation, more legislative oversight, and more government intervention in business and the economy than at any time since the late 1970s. Remember: In acting to protect the public over the past 12 months, Washington not only destroyed a government halfway around the world in Afghanistan, it effectively killed a company, Arthur Andersen LLP, for its accounting sins and reprimanded an entire generation of CEOs for their overreaching arrogance and greed. Think about it. When was the last time Washington acted so forcefully on as many fronts as that?

President Bush took it upon himself to admonish the CEO class on television to act more ethically. Historians, no doubt, will find it ironic that the fiercely free-market, anti-big government Administration of George W. Bush has presided over this turning point in American history. But the past year's momentous events have clearly trumped ideology, as they would under any President.

The weight of government on the economy and society may well increase for years to come. How much, we do not yet know. In the long sweep of American history, events have periodically conspired to expand and contract the size and scope of government. As historian Arthur Schlesinger Jr. points out in his 1986 book Cycles of American History, the pendulum has swung back and forth approximately every 20 to 30 years between laissez-faire and greater government. The cycles alternate "between times when voters see private action as the best way of meeting our troubles and times in which voters call for a larger measure of public action." This is clearly one of those moments when people are voicing their request for more government to secure both their personal and financial lives.

Americans and American policymakers have not lost their faith in the primacy of free markets. They just realize that in these troubled times, a recalibration of the relationship between government and society is in order. The challenge ahead is to get the calibration right. In the economy, government must act quickly to restore a sense of trust and safety to investors. The goal is for the current wave of regulatory reform to quickly level the playing field once again and return fairness to investing. This should be a one-time event that keeps government involvement in the economy to a minimum. A constant drip of regulation and legislation could threaten to hurt the animal spirits of Corporate America and the people who run it, crimping economic growth in the long run.

Getting the balance right for the military is crucial as well. Remaking military doctrine to fight fast, flexible, high-tech wars, as in Afghanistan, would allow a significant buildup of our defense capabilities without requiring huge new resources. If Defense Secretary Donald H. Rumsfeld's proposed military reforms along these lines are adopted, the defense burden on the economy could remain small.

The danger, of course, is that the government could go too far. By regulating too heavily, it could increase friction in the markets. By bloating up its defense and security spending, it could shift too much capital away from productive enterprise. By enticing high-tech companies to depend on fat defense contracts, it could reduce corporate efficiency and competitiveness. There is even a danger that the budget deficit could grow to such an extent that interest rates are hiked, hurting consumers and businesses alike.

Getting the balance right on the global scene will be difficult as well. From the end of the Cold War to September 11, 2001, U.S. foreign policy was focused almost exclusively on trade and business. The goal was to open borders to the free flow of people, goods, and capital, to the benefit of U.S. corporations and the underlying economy. The North American Free Trade Agreement embodied that position.

Terrorism has transformed that policy, making geopolitics a priority. Mexico and immigration were at the top of the foreign policy list when President Bush took office. But Afghanistan and terrorism supplanted them after September 11. The Mexicans are still miffed. But the Russians, the Indians, and the Chinese are not. The war against terrorism is realigning the global scene, as the U.S. seeks new allies in its battles. In this fight, Russian President Vladimir V. Putin is Bush's closest ally, next to British Prime Minister Tony Blair. India has become, after decades of distant neutrality, a friend. China, once a potential adversary in the eyes of the Bush Administration, has become an important resource in Asia. Even Europe, furious at the unilateralism of the Bush Administration's foreign policy, is now beginning to back a regime change in Iraq.

Such a change could have big consequences for the recalibration now under way in America. Washington is just beginning a serious debate on how far it will go in redirecting America's foreign policy. A foreign policy based on a Pax Americana, proposed by some advisers in the Bush Administration, could significantly increase government's impact on the economy.

As the images of planes plunging into the World Trade Center and the Pentagon are endlessly replayed on TV, it may be difficult for Americans to take any solace in the past year. After all, anxieties remain. The markets are still weak, corporate and Wall Street scandals are still being uncovered, and we don't even know if Osama bin Laden is dead or alive.

As Year One ends and Year Two of our post-September 11 lives begins, much remains to be done. Congress has yet to act on establishing a Homeland Security Dept. or protecting pension plans. The rebuilding of downtown New York hasn't begun. Allies abroad remain nervous about a U.S. move against Iraq.

But there is, in fact, much to celebrate. The institutions and values that structure and define American society held up remarkably well amid the turmoil of last year. The markets punished the corporate ne'er-do-wells viciously, reestablishing traditional norms for risk and valuation. Congress passed fiscal, corporate governance, and accounting oversight legislation in record time. Regulators, after a late start, came down hard on transgressors. Corporate miscreants were led away in handcuffs. The military won a fast and devastating victory against the enemy in Afghanistan.

In this year of fear, we have learned that we can cope with the very worst of the unexpected. The turning point America now faces offers great opportunities to secure the well-being of millions of people at home and abroad. We should seize the moment.

By Bruce Nussbaum

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