September 11's Economic Legacy
September 11. Just saying it—or even reading it—brings up memories of that awful day five years ago. The collapse of the World Trade Center towers, the attack on the Pentagon, the crash of Flight 93. Images of police, firefighters, ironworkers, and other ordinary men and women commiting extraordinary acts to try to save lives.
The economic outlook at the time was gloomy. Before the attacks, both the economy and the stock market had been reeling from the sudden collapse of the dot-com boom. The plunge of the NASDAQ erased trillions of dollars in the value of high-tech stocks. Earnings of companies in the Standard & Poor's 500 stock index were heading down. After September 11, the economy spiraled even lower, and profits in a number of industries cratered, including airlines. The subsequent wars in Afghanistan and Iraq also took a toll on business and consumer confidence, as well as the fiscal purse.
Nevertheless, five years later the economy is in remarkable shape. In the immediate aftermath of the terrorist assault, with dark clouds of dust enveloping New York City and the New York Stock Exchange shuttered until Sept. 17, who would have guessed that great prosperity would follow?
Who would have believed that housing prices would eventually climb to record levels and that a higher percentage of households than ever would own their homes? That U.S. interest rates would drop to dirt-cheap levels and the stock market would climb by about a third, despite a ballooning federal budget deficit?
That business would continue reaping strong efficiency gains from investing in technology and reorganizing the workplace, even as the unemployment rate dropped to 4. 7%? That China, India, and a handful of other developing nations would emerge as global economic powerhouses, yet would pour their mounting savings into the U.S.? That the economy would expand at an average annual rate of some 3% and that corporate profits would swell despite a near tripling in the price of oil and gasoline?
To be sure, there is growing concern from the marbled headquarters of the Federal Reserve to the newly furnished urban condo that the recent housing market slowdown portends a steep downturn. A number of Wall Street economists are raising alarms about the decelerating U.S. economy, and a handful of professional prognosticators are proclaiming a recession is in the cards. Maybe yes. Maybe no. But even if the worst of these fears are borne out, they would be the normal swings of the business cycle. There is nothing that screams the post-September 11 economy.
TOO MUCH SECURITY?
Except perhaps one thing. Today, the war on terror threatens to undermine both the openness to global integration and the policies of economic liberalization that underwrote so much wealth creation at home and abroad with the end of the Cold War—and laid the foundation for today's robust economy.
Yes, we must fight terror, here and abroad. But we shouldn't confuse sound economic policy and the principles of globalization with the circumstances that made it possible for terrorists to enter our country. And there is a genuine risk that the rise of the national security state and the politics of fear will eventually erode the economic vibrancy that depends on openness to globalization. "Geopolitical concerns, including international tensions and the risk of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future," said Federal Reserve Chairman Ben Bernanke in a recent speech at a conference in Jackson Hole, Wyo.
Communism's collapse and the embrace of freer markets by much of the developing world drove huge increases in global commerce, international investment, and immigration flows. The information revolution and plunging costs of transportation forged strong links between nations, companies, and peoples. A global middle class emerged, one that shares similar values about education and citizenship. Global investors pressured companies everywhere to open their books, and multinational corporations transferred knowledge across national borders.
With a few notable exceptions such as North Korea and Cuba, governments everywhere embraced the policies of economic liberalization and followed sound macroeconomic rules. Impatient youth from Silicon Valley to Shanghai broke free from the hierarchies of their parents, transforming themselves into entrepreneurs eager to make their mark in new businesses and new technologies while still young. Behind all these changes and more lay one unifying idea: openness.
A political and economic policy of openness supports the entrepreneurial optimism, the trust, the risk-taking, the faith that the future will work out. Barriers, fear, and an aversion to risk all mount when we turn away from openness. Case in point: the recent backlash against immigrants. Newcomers to these shores have jump-started economic growth in the U.S. for the past quarter century or more. Our universities and leading high-tech companies are full of immigrants. Yet in the wake of September 11 it has become harder for foreign students to come here. The political turmoil over undocumented workers, much of it discusssed within the framework of Homeland Security, also represents a dangerous turning away from immigrants.
Even more important, although much further down on the average citizen's list of concerns, is the recurrent failure of the Doha round of multilateral trade talks. The 1990s was a decade of trade treaties, from the creation of NAFTA to the establishment of the World Trade Organization. The momentum has clearly slowed as China, India, and other emerging nations are demonized as "unfair" traders.
RISING WAR COSTS.
And even though the U.S. economy has shown far more strength than anyone expected during the past several years, it still is a fragile thing. Companies continue to downsize and outsource jobs of all kinds. Real wages are down for the anxious survivors. Income inequality is increasing in a nation where equality, especially equality of opportunity, ranks among the central tenets on which the country was founded.
What are our policymakers doing? Instead of coming up with solutions that will benefit those who are losing out from globalization, politicians are feeding those fears by demonizing immigrants, dissing international treaties, and nurturing an "us vs. them" mindset. For instance, among many commentators the popular topic is how global politics will be dominated by the clash of civilizations, a view first put forward by Samuel Huntington, professor of government at Harvard University.
Meanwhile, the cost of war in Iraq keeps mounting. Nobel Laureate Joseph Stiglitz and Harvard University lecturer Linda Bilmes estimate that the cost of the Iraq war launched in 2003—including the economic value of people injured and lives lost—could top $2 trillion. The Congressional Budget Office estimates the military cost of the Iraq and Afganistan ventures could hit $600 billion by 2010. Even if one goes by the more conservative estimate, the cost is staggering. And much of the American public remains unconvinced of any genuine link between September 11 and Iraq.
It seems the U.S. economy is at a tipping point. Sad to say, much of our political leadership is betting that feeding fear will translate into votes and power. The long history of globalization shows that government policy is critical to accelerating or blocking progress in trade and integration.
It has happened before. In the latter part of the 19th century there were massive movements of goods, capital, and labor across national borders—what we now call globalization. Yet protectionist barriers were being erected even before World War I, according to research by Harvard University professor Jeffrey Williamson. Let's hope that the past doesn't repeat itself, and that openness triumphs over fear.