March 3, 2003
by Irwin Stelzer
An edgy mood pervades New York and Washington. But there is an important difference between these twin centers of news generation in America.
Last week in New York, all talk was of a possible terror attack. Perfectly sensible friends are avoiding the subway during rush hours, on the theory that a terrorist will want to strike when trains are jammed with commuters. Everywhere we went we were queried about the timing of the start of the war to disarm Iraq. After all, since we had come from Washington, it was assumed that we have inside information on President Bush’s plans. It was impossible to steer the conversation to other subjects.
Washington, too, is tense, and friends here have designated rendezvous points for their families should there be an attack. But whereas largely liberal, Democrat New Yorkers are convinced that the administration is not competent to cope with the dangers we face, and that those dangers are a result of Bush’s bellicosity and obsession with unseating Saddam Hussein, most Washingtonians see things differently. They worry, but in the end they have faith that the government is doing all that can be done to minimize the success and consequences of any attempted terror attack. Besides, unlike New Yorkers, most Washingtonians, many of them administration backers and their families, agree with the President that war is necessary and in the long-run interest of the country.
But it is New York, and not Washington, that is this country’s business capital. So it is the mood in that city, dominated by massive layoffs in its key financial services industry and constant reminders that the World Trade Center is no more, that matters for the economy. And that mood is described by Business Week as “CEO Funk,” a condition, it says, that is not relieved by a dating service poll that shows that 49 percent of respondents find CEOs of public companies the most attractive dates—ahead of lawyers (42 percent) and car salesmen (11 percent).
CEOs are not the only ones in a funk. Consumer confidence is at a nine-year low, as a weak job market, constant talk of war, and oil prices that have soared to $2 per gallon are combined with record snowstorms to make life seem, well, difficult. A few hours shoveling one’s car out of a drift in order to drive to a gas station and pay some 50 cents more per gallon than a few weeks ago, while listening to news that the alert level has been raised from yellow to orange (the next-to-highest alert level), isn’t designed to make anyone happy with the way things are going in America.
No matter that consumers continue to spend, or that the latest report on durable goods sales shows a robust 3.6 percent increase in January for the non-defense category, or that once the first bombs are dropped in Iraq we are likely to see a repeat of our experience in the last Gulf War. Remember: consumer confidence took a dive when Iraq invaded Kuwait, and rebounded quickly when that conquest was reversed. So the rosy scenario goes like this: Uncertainty will dissipate, oil prices will drop by at least $10 per barrel, consumers and CEOs will emerge from their funks, there will be a “relief rally” on the world’s stock exchanges, a weakening dollar will whittle away at the trade deficit, and the underlying strengths in the economy will reassert themselves.
Those strengths were best encapsulated in a story told to us at a private dinner party given for a leading French intellectual and academic and some of his colleagues, guests of their sprawling embassy here. Twenty years ago, he said, his best students wanted to join the French civil service. Ten years ago, they wanted jobs in the media, advertising, and other service sectors. Now, they want to emigrate, many to America, adding to our pool of risk-taking entrepreneurs.
High taxes and the massive amounts of red tape facing any entrepreneur are simply too daunting for France’s best and brightest. In Germany things are even worse, with mighty Deutschebank considering transferring operations to London or New York to escape the strangling tax and regulatory environment, and chancellor Schroeder attempting to conceal the bankruptcy of his economic policy behind a barrage of anti-American rhetoric. That speaks volumes about America’s continuing comparative advantage over countries that have now positioned themselves as this nation’s rivals.
None of this is to say that all will be clear sailing for the American economy once Saddam is captured or “otherwise dealt with,” to borrow the President’s description of the fate of numerous terrorists in recent months. There is still the matter of developing a coherent economic program. The administration is set on wringing more tax cuts from a reluctant Congress, while at the same time introducing a host of new spending programs.
Although the projected deficit is manageable at less than 3 percent of GDP, a level appropriate to an economy that some experts say could use a shot in the arm, there are mounting fears that the red ink will continue to flow even when the economy is operating at full tilt. That would drive up interest rates says Federal Reserve Board chairman Alan Greenspan, contradicting administration economists, who deny the existence of a link between budget deficits and interest rates.
Perhaps America’s consumers and voters have it right. According to the latest Gallup poll, a mere 1 percent of Americans rate economic conditions as excellent, and only 17 percent think they are good; 48 percent rate conditions as only fair, and 34 percent as poor. But then Americans’ innate optimism comes into play. Asked to look ahead to next year at this time, 64 percent say they expect to be better off, 12 percent expect their financial condition to be the same, and only 20 percent anticipate being worse off. If the war with Iraq goes as well as administration spokesmen expect, that cheery consensus view of 2004 should prove correct.
This article appeared in London’s Sunday Times on March 2, 2003, and is reprinted with permission.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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