Economics of War :: Economics Essays

As the United States forges an international military and political coalition to counter the flagitious attacks of September 11, it is equally important to mount a coordinated response to the economic dimension of the crisis. Acceptance of a financial meltd profess or orbiculate 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 mont hs 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 reside rates. The OPEC countries have also made a major contribution by announcing that they will maintain oil production at levels that will avoid alter 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 japans interest rates are already near zero.) Given the urgent need to reestablish confidence and provide the maximum stimulus to reviving economic activity, the worlds monetary authorities should continue to act together in a rapid and important manner. All three o f 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.