t remains to be
seen if George W. will follow in his father’s footsteps by winning
a war, seeing his popularity soar, and losing his reelection bid because
of criticism of his handling of the economy.
Right now
it appears that he will win a major war. The president’s popularity
rating, reaching 90% approval now, is up sharply from 55% a few
weeks ago. It is a timely fight and one worth making. American honor
requires that we retaliate; more people were killed at the World
Trade Center on September 11 than those that America lost on D-Day.
But what if
we win the war against terrorism but lose the battle against recession?
The terrorist
attacks are likely to cause at least two quarters of negative economic
growth in the U.S. Reduced consumer retail spending will certainly
push us into the red for the third quarter, which ends next week,
and there is a high probably of negative results in the fourth quarter
as well.
Also, consumer
and business reluctance to travel will hurt related sectors, including
the airlines, hotels, and restaurants. In addition, lack of confidence
may well dent home, large appliance, and furniture sales.
A Bush Recession
is on the horizon. How long and how deep the slide is may determine
if George W. prevails against terrorism but loses his reelection.
To stave off
the worst, the administration, Alan Greenspan, and congressional
leaders will negotiate the contents of an economic stimulus package.
There is no agreement yet on any of the particulars — including
the size of any package, its contents, or when it will take effect.
No doubt the economic data collected by government economists in
the days ahead will influence all of the particulars of the package.
Economy watchers
are waiting to see if American consumers and businessmen are snapping
out of their depression and getting on with their lives. One byproduct
of any recession is higher federal spending and lower federal receipts.
It then follows that the unemployed fall into safety nets and draw
on unemployment insurance, food stamps, supplemental security income,
and housing assistance.
Meanwhile,
the unemployed stop paying federal income taxes and payroll taxes,
and their reduced spending cuts corporate profits.
The combined
effect is to cut deeply into projected surpluses. So far, Congress
has agreed to $45 billion in new spending to respond to the terrorist
attacks: $20 billion to fight the war, another $20 billion to pay
for collateral domestic costs, and another $5 billion in direct
aid to the airline industry. More spending is likely to aid other
damaged parties.
Since all
three types of fiscal responses — countercyclical to help the
unemployed, revenge and restitution to help the injured, and fiscal
stimulus to shorten the recession — all reduce the federal
budget surplus in the short run, the federal government is on its
way to running a cash deficit for fiscal year 2002.
As supply
siders, this doesn’t bother us. However, after the war-crisis environment
lifts, the press will be left with the twin themes of recession
and debt. The president’s response may determine if the Bush White
House is the last building to fall because of terrorism.
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