The Bush administration's deliberate, disciplined and studied approach to military and diplomatic responses to the Sept. 11 attacks on New York's World Trade Center and the Pentagon has been admirable, and one can only hope that expected results will be achieved. On the economic front, it has been a whole different matter. The tragedy provoked the worst in government -- competition for spending, more spending and even more spending.
For sure, the very first intervention was extremely beneficial and effective. Alan Greesnpan, chairman of the Federal Reserve, reacted with alacrity and pumped billions of dollars of liquidity into the banking system. He convinced his European counterparts to support U.S. efforts to maintain liquidity and followed with a 50 basis point rate cut on the day stock markets reopened for business. His comments were measured, reassuring even as he admitted that no one could really fathom, much less understand, the full impact the attacks would have on the U.S. and world economies. He followed up with another 50 basis point cut this week.
Things were and remained somewhat more confused on the fiscal front. It began when Paul O'Neill, the Secretary of the Treasury, in his usual diffident and clumsy manner predicted a quick return to business as usual. He spooked markets for his seeming naivete and worried observers began to fret about his department's ability to handle the challenges ahead. Congress dealt Treasury a more damaging blow by convening Alan Greenspan, presidential advisor Lawrence Lindsay and former treasury secretary Robert Rubin, not Paul O'Neill, for consultations on a recovery package. Meanwhile, staunch Republican supporters began to push their dormant agenda of capital gains rate cuts and abolition of corporate income tax. With so many pushing in so many different directions, the Washington rumour mill inevitably began to speculate about Mr. O'Neill's imminent ouster, his poor standing with the Wall Street crowd that so dominates New York and his weak support on Capitol Hill. Who would lead the Bush economic team? Who would devise a deliberate, effective response to the economic challenges ahead?
There is no doubt that Alan Greenspan is playing a dominant role in forging a recovery strategy. He has made it clear that as long as the central bank anticipates weakness, it will support liquidity needs and provide monetary stimulus. On the fiscal front, his advice is unequivocal: 'It is better to be right than quick,' and in this view he is supported by Mr. Rubin and a wide number of observers who fear that too many bailouts, ill-conceived spending and tax packages and pork-barreling will endanger the U.S. economy's longer-term prospects. Somewhat surprisingly, George W. Bush, the President, threw some support to these views last week when he warned that short-term actions should not ignore potential repercussions on long-term interest rates. Panic seemed to be taking a back seat to effective responses.
Granted, monetary stimulation will not suffice to ensure sustained recovery and the request for a US$75-billion fiscal boost appears reasonable. The challenge is to formulate measures that will rapidly entice consumers to spend and investors to invest. Tax relief should slowly bring consumers back or, at the very least, prevent a further slump in confidence provided the perception of political and military success prevails. Investment is rather more complicated given the excess capacity that plagues most sectors. Specific targeted measures for technology investments, accelerated depreciation and abolition of alternative minimum taxes may help. Likewise, effective infrastructure spending could stimulate demand as well as provide a supply-side boost to productivity in years ahead.
In a similar vein, progress last week in the House of Representatives toward granting the President greater trade promotion authority ahead of the planned World Trade Organization meeting is key to promoting world economic growth. In an odd turn of events, countries, such as India and Pakistan, that had opposed a new trade round seem to have softened their stance. Some moderate Democrats are also beginning to see the light and while a new trade round will not yield immediate tangible benefits, it will go a long way to revive confidence.
Just as in the military arena, the battle will be long and sustained -- there are no real quick economic fixes. There is, however, a wrong path, which is the bailout and profligacy, and a right route, which seems to be the more deliberate approach favoured by most members of the Bush team -- provided Congress can resist the temptation of attaching more ill-conceived handouts to every bill.