Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

Op-ed

The Economics of War

by C. Fred Bergsten, Peterson Institute for International Economics

Op-ed for the Los Angeles Times Syndicate International
October 2001

© Los Angeles Times Syndicate International


As the United States forges an international military and political coalition to counter the heinous attacks of September 11, it is equally important to mount a coordinated response to the economic dimension of the crisis. Acceptance of a financial meltdown or global recession would represent as great a defeat as a failure to punish the perpetrators of the bombing itself and their protectors.

The case for a multilateral economic strategy is compelling. Even prior to the attacks, the world was experiencing its first synchronized turndown in decades. Growth had slowed sharply almost everywhere and turned negative in a number of countries. There was genuine risk of a global recession and the latest, pre-attack US data underscore that possibility here.

The terrorist actions will depress economic activity further for at least a while. More importantly, the shock to confidence could lead American and other consumers into more cautious spending patterns for months or even longer. A worldwide downturn is all too possible.

A synchronized policy response is thus required. The key central banks have already taken the first essential steps by pumping sizable amounts of liquidity into the markets to prevent cash shortages that could disrupt commerce, and by making initial cuts in interest rates. The OPEC countries have also made a major contribution by announcing that they will maintain oil production at levels that will avoid exacerbating the problem. Much more is needed, however.

The next move should be a further, coordinated reduction in interest rates by the central banks, especially our own Federal Reserve and the European Central Bank that manages the euro. (The Bank of Japan's interest rates are already near zero.) Given the urgent need to restore confidence and provide the maximum stimulus to reviving economic activity, the world's monetary authorities should continue to act together in a rapid and decisive manner.

All three of the chief economic areas, including Japan as well as the United States and Europe, should also adopt expansionary fiscal measures. Strangely, the major European countries and Japan have been contemplating spending cutbacks, in the face of recession or sharp slowdown, to meet pre-planned budget targets. This would be akin to the Hoover economics that helped bring on the Great Depression in the 1930s, making a bad situation much worse. The arbitrary deficit ceilings targeted by Prime Minister Koizumi in Japan and the Stability Pact in Europe should be relaxed immediately to cope with the global crisis.

The United States has already cut taxes modestly and will be increasing government spending to respond to the humanitarian and security implications of the terrorist attacks. However, we must not slip into our own brand of Hoover economics by regarding the fictitious Social Security "lock box" as a deterrent to deploying our large budget surplus. We should promptly implement a significant chunk of the cut in personal income taxes that has already been agreed for later years, or simply repeat the rebates of the recent past, injecting another $100 billion or so of purchasing power into the economy over the next few months.

The success of such measures will be determined largely by their impact on the psychology and confidence of consumers and investors. These crucial intangibles will be steered importantly by developments outside the economic sphere, especially the effectiveness of our leadership in responding to the direct security effects of the attacks. But the impact of the economic steps themselves can be greatly enhanced if they are taken quickly, decisively and especially through a coordinated multilateral approach that demonstrates that the authorities of the leading countries are ready to couple their military alliance with effective economic collaboration.

Such cooperation can best be displayed through highly visible international meetings. The most obvious is the session of the finance ministers and central bank governors of the Group of Seven industrial countries (US, Japan, Germany, France, UK, Italy and Canada) on October 6 than can announce the economic component of the war strategy. It is unfortunate that the annual conclave of the International Monetary Fund that was scheduled for September 29-30 was cancelled, as it could have been used to broaden and reinforce support for the multilateral strategy.

The community of nations can also display unity in responding to the destruction of the World Trade Center by moving forward together on world trade. The ministerial meeting of the World Trade Organization in November should proceed as scheduled, especially as it is to be held in Qatar on the Persian Gulf. The quibbles that have raised doubts about the participants' ability to launch a new round of multilateral negotiations should be set aside in light of the new circumstances, just as the Cold War allies traditionally overcame their petty trade disputes in the face of overriding security imperatives. The similar quibbles that have kept the Congress from enabling our own President to participate in such negotiations since 1994, let alone lead them, should also be set aside with early passage of Trade Promotion Authority if we want to convince the world that we are serious about responding effectively to the events of September 11.

The economic dimension of the terrorist attacks has naturally been overshadowed during these first few days by the human tragedy and by the quest to restore a secure America. As life returns toward normal, however, the everyday concerns of jobs and business will resume their traditional primacy for most people, here and around the world. It is thus essential that the economic front of the conflict be handled with as much priority, skill and international cooperation as the security front. We can achieve victory over the terrorists only with a vibrant recovery of our economies along with a destruction of their ability to ever commit such atrocities again.


RELATED LINKS

Book: Responding to Financial Crisis: Lessons from Asia Then, the United States and Europe Now October 2013

Policy Brief 13-21: Lehman Died, Bagehot Lives: Why Did the Fed and Treasury Let a Major Wall Street Bank Fail? September 2013

Op-ed: Misconceptions About Fed's Bond Buying September 2, 2013

Op-ed: A Dose of Reality for the Dismal Science April 19, 2013

Op-ed: Five Myths about the Euro Crisis September 7, 2012

Working Paper 12-7: Lessons from Reforms in Central and Eastern Europe in the Wake of the Global Financial Crisis April 2012

Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012

Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012

Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012

Book: Sustaining China's Economic Growth after the Global Financial Crisis January 2012

Testimony: A New Regime for Regulating Large, Complex Financial Institutions December 7, 2011

Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011

Policy Brief 10-24: The Central Banker's Case for Doing More October 2010

Policy Brief 10-3: Confronting Asset Bubbles, Too Big to Fail, and Beggar-thy-Neighbor Exchange Rate Policies February 2010

Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis November 2009

Speech: Rescuing and Rebuilding the US Economy: A Progress Report July 17, 2009

Testimony: Needed: A Global Response to the Global Economic and Financial Crisis March 12, 2009

Testimony: A Proven Framework to End the US Banking Crisis Including Some Temporary Nationalizations February 26, 2009

Speech: Financial Regulation in the Wake of the Crisis June 8, 2009

Paper: World Recession and Recovery: A V or an L? April 7, 2009

Op-ed: Stopping a Global Meltdown November 12, 2008

Book: Banking on Basel: The Future of International Financial Regulation September 2008

Book: Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies August 2004